Instructure Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2023

There are 13 speakers on the call.

Operator

And gentlemen, thank you for standing by, and welcome to Instructure's 4th Quarter and Fiscal Year 2022 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that this conference is being recorded. I would now like to turn the conference over to your first speaker, April See, Investor Relations.

Operator

April, please go ahead.

Speaker 1

Good afternoon, and welcome to Instructure's 4th quarter and full year 2022 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With Mirror and Structures' Chief Executive Officer, Steve Daley and Chief Financial Officer, Dale Bowen. Before we begin, I'd like to remind you that today's conference and our results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release other reports and filings we file from time to time with the Securities and Exchange Commission.

Speaker 1

All of our statements are made as of today based on information available to us Today, and except as required by law, we assume no obligation to update any such statements. During the call, we will also refer to both GAAP and non GAAP financial measures. You can find the reconciliation of our GAAP to non GAAP measures included in our press release, which is posted to the Investor Relations section of our website. With that, let me turn the call over to Steve.

Speaker 2

Thank you, April, and good afternoon, everyone. Thank you all for joining us for our 4th During today's call, Dale and I will provide details on our 4th quarter results And provide Q1 and full year 2023 guidance. Instructure delivered another strong quarter in Q4, exceeding our previously guidance ranges across our core guidance metrics of revenue and adjusted EBITDA. At Instructure, we take great pride in serving the vital global community of educators And students, throughout the COVID pandemic and its aftermath, we have played a critical role in supporting educators, students, parents and leaders as they navigated unprecedented challenges. This unwavering commitment to customer satisfaction has resulted in consistent quarter to quarter performance and high retention rates.

Speaker 2

As we move into 2023, we are committed to growing these relationships and further expanding our impact on the educational landscape, We are confident we can continue to deliver balanced growth and profitability. Our strong 4th quarter financial performance capped off a truly outstanding year for Instructure. Sure. 4th quarter GAAP revenue was $124,700,000 up 12.8% year over year. Alligated combined receipts or ACR was also $124,700,000 up 11.9% year over year.

Speaker 2

Full year 2022 GAAP revenue was $475,200,000 up 17.2% year over year, while ACR was $476,100,000 up 14.8%. Foreign exchange pressured top line results by approximately 1% for the Q1 and roughly 0.5 percentage point for the year. Thanks to our focused investment approach, 4th quarter adjusted EBITDA grew 16.7 percent year over year to $48,600,000 a 39% margin. Full year 2022 adjusted EBITDA increased 22.4 percent to $179,600,000 Total customers grew 7.6 percent year over year to 7,436 at the end of 2022, which highlights the continued growth opportunity in our customer base. I now want to talk about 5 key highlights from the quarter today: Continued success with new logos, the power of our platform strategy, wins in nontraditional education, How M and A is advancing our strategy and continued operational efficiency.

Speaker 2

First, our focused go to market and expanded set of offerings driving continued strength and bringing new logos onto the platform. Our new logo win rates increased in the second half of twenty twenty two from an already very healthy rate As higher education and K-twelve institutions in the U. S. And across our major international markets continue to choose Instructure solutions because they solve real meaningful challenges across the teaching and learning landscape. In higher education, we hold a 40% market segment share and continued to see high competitive win rates during the Q4 as we help institutions face a challenging enrollment landscape with students exploring non traditional learning options.

Speaker 2

Both existing and new customers are choosing Instructure's learning platform to meet this challenge while supporting their traditional students. Our cloud native platform continues to displace legacy systems given its ease of use, scalability, flexibility and superior user experience. During the quarter, the University of Louisiana System selected Canvas and Impact due to improved functionality, Consistency of user experience, alignment with other state university systems and greatly enhanced 20 fourseven technical support for end users. Looking ahead, we expect the North American higher education growth opportunity to remain strong as nearly 40% of higher education institutions in the U. S.

Speaker 2

Still use legacy LMS systems providing plenty of opportunity. In USK12, Canvys as the foundation of their digital transformation. We continue to hear from K-twelve decision makers that the digital transformation of education is a long term investment and that our solutions are more critical than ever. Because of our investment, both organic and inorganic, we are well positioned to capitalize on Selected Canvas in a competitive RFP during the quarter. This decision was driven by the power of our integrations with instructional materials and other third party tools, Our superior scale and reliability and our best in class service.

Speaker 2

The initial contract includes 4 Instructure products, Canvas LMS, Canvas Studio, MasteryConnect and Impact. Looking ahead, the pipeline for new logos is robust. Win rates remain high. The funding environment remains favorable and Confident we will continue to gain share due to the essential role we play in the post pandemic classroom. International remained the fastest growing part of our business in Q4 with several large wins during the quarter, including a 5 year multimillion dollar win with the University of Santo Tomas in the Philippines that included Canvas LMS and Canvas Studio.

Speaker 2

Their in-depth evaluation process solicited feedback from teachers, Students and administrators and Canvas was the preferred LMS by all stakeholders. In a familiar refrain, They told us the choice was clear due to overall ease of use, simple well designed mobile experiences optimized for student and instructors, broad support for outcomes and the sheer breadth of integratable third party tools. This and other examples validate our platform as the best approach to solving problems and aligning with stakeholders' internal investments. We also continue to see success with our channel partner program, which allows potential partners to generate revenue not just by reselling, but also through implementation, training and support services. During the quarter, we had several notable wins, including Nihon University, the largest higher education institution in Japan, This College of Science and Technology will be driving adoption across other colleges in 2023.

Speaker 2

In addition, Prefectural Kumamoto University, which is part of the 90 university public system in Japan, is providing a use case scenario to other Prefectural Universities in Japan to drive adoption. 2nd, I wanted to talk about our platform strategy and our foundational role in driving the next wave of EdTech Innovation. Since our technology touches 90% of all the workflows in teaching and learning, Our customers look to us and rely on us to continue automating and simplifying more and more of the teaching and learning workflows. These integrations will continue to come from both our own products and our partners. Our own products now represent a $1,000,000,000 opportunity due to the success our success in selling Canvas and through our organic and inorganic addition of products.

Speaker 2

Our efficient go to market, focus on the whole customer journey and expanded set of platform offerings is driving higher penetration of products across our customer base, With 43% of our customers having 2 or more products in 2022. This has been particularly noteworthy in K-twelve where we continue to see a Strong cadence of existing customers adding additional seats or new products, including Marion County Public Schools, which added catalog during the quarter. We also have over 800 partners on our platform, a year over year increase of nearly 40%, resulting in 10,500,000,000 launches of partner apps in the last 12 months. Our platform is so powerful that partners like eLumen are building businesses that exist solely because of the Instructure Learning platform. ELumen is taking the power of Canvas outcomes and adding core tools like curriculum mapping, advanced assessment planning and juried assessment for accreditation to create more sustainable assessment and more valuable insights about student learning.

Speaker 2

Our strong platform helps create loyalty and retention with our existing customers and provides a strong referenceable and powerful ecosystem effect that improves our win rates and is a key to creating our stable and durable business. 3rd, our strategy also unlocks new opportunities and allows us to win in segments that have different expectations. We've talked in prior calls about the opportunity that exists in non traditional education environments. During the quarter, we won a large 3 year deal with The City and Guilds of London Institute. CNG is the largest awarding body for continuing education in the UK and Ireland.

Speaker 2

They work with over 8,000 continuing education colleges and training providers in the UK and touch roughly 250,000 students nationwide. Following a multiyear procurement process, CNG chose Instructure as its instructional learning technology partner for the future growth of their organization. They are initially rolling out Canvas and Impact to their community and are already evaluating how credentials may support their vision for the future. 4th, we continue to use strategic M and A to increase our TAM and rapidly expand our learning platform capabilities. LEARN platform, Our 6th acquisition since 2019 extends the capabilities of our platform by providing stakeholders across the educational landscape with real time meaningful data on the effectiveness of their tools and evidence based insight into inventory compliance, Procurement and usage.

Speaker 2

I want to take a minute to discuss how each of these 6 acquisitions fits into our platform strategy increases the durability of our model. Together, they create an unmatched value proposition in the EdTech ecosystem. Kimono, EZSoft and Learn platform, married with the open and extensible integrations with Canvas, will enable partners that join the Instructure ecosystem to integrate, Receive feedback on usage, directly reach end users to address adoption issues, improve efficacy in the learning process. We believe this drives great value for our partners, helps our customers optimize their EdTech investments and creates long term network effects that drive durable growth and retention. Concentric Sky and our organic development and catalog studio in Canvas give us the unique ability to offer in person, Hybrid and remote learning for both traditional and non degree seeking learners on the same platform.

Speaker 2

This enables us to win Apportioned share of the market for non traditional opportunities, which opens up a new market of students to drive our long term growth. The partnerships with Thunderbird 100,000,000 learner program and PeopleCert last quarter as well as our win this quarter with CNG demonstrate our growing traction in this exciting new market. Mastery and Certica provide a standards based way to assess students' progress along their learning journey that complements the quizzing and assessment solutions native to Canvas. As we integrate broad support of standards, outcomes, competencies and skills Across the portfolio and align them with our credential solutions from Concentrix Sky, we are poised to support the market as it moves towards competency based education. This is another long term trend that will provide durable growth.

Speaker 2

Finally, Instructure continues to run an efficient focused business. Our best in class margins enable us to make disciplined investments that expand our platform and drive long term growth. We are always looking for ways to drive efficiency and continue to identify areas where we can lower costs, increase velocity and expand productivity. For example, investment in our infrastructure have allowed us to continue to improve our gross margins, which in turn enabled us to increase our R and D and sales capacity by more than 20% this last year, while improving our adjusted EBITDA margins. We are confident we can continue to deliver a healthy balance of growth and profitability with continued investment in innovation.

Speaker 2

This coupled with our strong free cash flow and conservative balance sheet allow us to capitalize on additional opportunities to expand our platform through M and A as seller valuations expectations continue to adjust to current markets. Through our focus and discipline, we have multiple avenues to drive long term sustainable growth, both organically and through M and A. Looking into 2023 beyond, we believe the Instructure Learning platform is uniquely positioned to help educational institutions and developers solve the complex challenges that the new post COVID normal demands. We expect that our work over the last few years at creating a healthy, profitable business will allow us to capitalize on opportunities to accelerate our strategy and create durable growth in the coming years. We continue to see strong RFP activity in U.

Speaker 2

S. Higher Education. As we win in these competitive procurements, Stakeholders share with us that they see real value in a platform and partner community that are purpose built to help them reach more learners In more places, in more ways. More and more of our core customers are looking for us for the solutions They need to meet the demands of non traditional learners. Our opportunities with them alongside new and growing ones with vocational providers and training organizations provide another vehicle for us to grow the business in the year ahead.

Speaker 2

Our K-twelve customers, in addition to scaling quality teaching Through the use of learning and assessment technologies, one help knowing what works in their classrooms. Our insights and Elevate family of products Focused on the empowering use, visualization and safe exchange of data are foundational to the modern classroom. This all becomes even more compelling with our acquisition of LEARN platform. It gives us access to more budgets in K-twelve as we help schools know that each dollar spent Meeting students' needs is achieving the right outcomes. And our ability to service the other half of this market, enabling the EdTech providers to demonstrate their value, will only become more important in the future.

Speaker 2

In our area of highest growth, international, customers are increasingly seeing what North America already knows, The Canvas can anchor their teaching and learning strategies and grow with them as they add additional capabilities. We continue to invest in growing our direct go to market In focused geographies, our Lighthouse wins offer us the referenceability the education market demands. And as we outlined earlier, the signal from our channel investments We've made to address the breadth of the international opportunity are positive. All these factors give us confidence in our guidance for 2023 and position us to continue to drive durable growth in each of our segments. We are uniquely positioned in the EdTech ecosystem to help our customers In summary, I couldn't be more excited to lead Instructure as we evolve into the Most comprehensive teaching and learning platform worldwide.

Speaker 2

I would like to thank our customers, our partners, our employees and shareholders for your ongoing support. Before I turn the call over to Dale to talk about our financial results and the ongoing momentum we're seeing in the business, I want to welcome Chris Ball, Instructure's new President and Chief Operating Officer. Chris will continue to evolve our focus on the whole customer journey, further enhancing Our opportunity set and the durability of our model. Chris is a deeply experienced and mission driven executive who helped write the growth and platform story for Several other successful significant companies. I also want to acknowledge the contributions of Frank Melet and his capacity as Chief Revenue Officer.

Speaker 2

As you know, Frank will step down effective February 15th now that we have Chris Ball aboard. We are confident there will be a seamless transition. Now I will turn

Speaker 3

it over to Dale. Thank you, Steve, and thanks again to everyone for joining us today. Before discussing our detailed financial results, I'd like to point out that in addition to our GAAP results, I'll be discussing certain non GAAP results. Our GAAP financial results, along with a reconciliation between GAAP and non GAAP results, can be found in our earnings release, which is posted in the Investor Relations section of our website. In the Q4, we continue to show a combination of strong top line growth and expanding adjusted EBITDA margins.

Speaker 3

For the full year, we expanded adjusted EBITDA margin by 2 40 basis points. We expect to expand on our industry leading margins as we deliver durable profitable growth in the years ahead. As Steve mentioned, we generated 4th quarter 2022 total GAAP revenue and ACR of $124,700,000 up 12.8% and 11.9% year over year, respectively. Subscription and support ACR accounted for 92% of our Q4 revenue at $114,600,000 up 12.5% year over year, primarily as a result Of the continued momentum within our core Canvas LMS products, both domestically and internationally, in addition to the strong upsell and cross sell of our other products. Professional services and other revenue accounted for 8% of our 4th quarter revenue at $10,200,000 up 6.3% year over year.

Speaker 3

Deferred revenue at the end of the 4th quarter was $289,400,000 up 13.2% year over year. Remaining performance obligations or RPO were $760,100,000 at the end of the 4th quarter, up 9% year over year. We expect to recognize revenue on approximately 75% of our RPO over the next 24 months. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results and share count are on a non GAAP basis. Please note that when I refer to margins in the upcoming comments, I'm referring to margins calculated as a percentage of ACR.

Speaker 3

Our strong gross margin profile was supported by our optimized cloud architecture and flexible support model that scales to meet seasonal customer demand. In the Q4, gross profit was $96,700,000 representing a 77.5 percent gross margin, up from 77.1% in the Q4 of 2021. We couldn't be more pleased with our enhanced operating model and continued leverage on the gross margin line. Turning now to operating expenses. Sales and marketing expenses for the Q4 were $24,100,000 or 19.4 percent of ACR, up from 19.2% in the Q4 of 2021.

Speaker 3

Research and development expenses for the 4th quarter were $16,300,000 or 13.1 percent of ACR compared to 12.0% in the Q4 of 2021, as we invested to pursue our robust product roadmap. General and administrative expenses for the 4th quarter were $9,700,000 or 7.8 percent of ACR, down from 9.4% in the Q4 of 2021. Non GAAP operating income for the Q4 was $46,500,000 representing a 37.3% operating margin, From 36.5 percent in the Q4 of 2021, 4th quarter adjusted EBITDA was $48,600,000 representing a 39.0 percent adjusted EBITDA margin, up from 37.4% in the Q4 of 2021. Non GAAP net income for the Q4 was $28,400,000 or $0.20 per share compared to $31,000,000 or $0.22 per share a year ago. Normalized for the newly added tax effective adjustments, non GAAP net income performance would have been $40,000,000 or $0.28 per share.

Speaker 3

Turning to the balance sheet and cash flow statement. We ended the Q4 with $190,300,000 in cash, cash equivalents and restricted cash and $490,500,000 of long term debt net of discount resulting in a one point 7 times net debt to trailing 12 months adjusted EBITDA ratio. Full year 2022 GAAP operating cash flow was 140 point $3,000,000 compared to $105,100,000 in the prior year. Full year free cash flow was $134,000,000 compared to $100,900,000 in the prior year. Adjusted unlevered free cash flow, which adjusts for the impact of transaction costs, sponsor costs, impaired leases and other non recurring costs paid in cash was $173,500,000 a 2.9% year over year increase from $168,700,000 in 2021.

Speaker 3

Adjusted unlevered free cash flow for 2022 was lower than expected primarily due to delayed collections. I will now conclude the call by providing guidance for Q1 and for the full year of 2023 for revenue and adjusted EBITDA. We have provided additional guidance details in our earnings press release. For the Q1 of fiscal 2023, we expect revenue in the range of $126,500,000 to $127,500,000 For the full year, we expect revenue to be in the range of $519,400,000 to $523,400,000 We will no longer be providing ACR guidance as GAAP revenue and ACR will now converge based upon the adoption of ASU 2021-eight. We expect 1st quarter adjusted EBITDA in the range of 47 $1,000,000 to $48,000,000 representing an adjusted EBITDA margin of 37.4 percent at the midpoint of the range.

Speaker 3

For the full year, we expect adjusted EBITDA in the range of $198,000,000 to $202,000,000 representing an adjusted EBITDA margin of 38.4 percent at the midpoint of the range. For the full year, we expect adjusted unlevered free cash to be in the range of $200,000,000 to $204,000,000 In summary, 2022 was an incredible year for Instructure. We executed at a very high level, exceeding our guidance in every quarter, And we are leading the digital transformation of education from our position at the center of teaching and learning. And financially, we offer a rare combination of double digit growth and best in class margins. We couldn't be more pleased about our momentum in the marketplace and look forward to updating you on our progress throughout 2023.

Speaker 3

With that, Steve and I are happy to take any of your questions.

Operator

Thank you. Our first question will come from the line of Josh Baehr with Morgan Stanley. Please go ahead.

Speaker 4

Great. Thanks for the question. I think last quarter you were talking a little bit about some challenges in K-twelve just around Staffing priorities focus, could you talk about the environment in K-twelve over the last quarter? Are you still seeing a weakness there or maybe some improvement?

Speaker 2

Yes. Thanks for the question, Josh. What we've seen is that in our K-twelve markets, we've kind of seen it normalize a bit. So we feel good about the pace of deal That we're seeing to start the year. I don't know that necessarily magically the challenges have gone away, but Our customers are recognizing that 2 things.

Speaker 2

1 is that they've got to continue Under a new normal, and they've got to continue to make that investment in their digital transformation strategies, and that Technology can actually help with some of these challenges that they're facing. And so, yes, so we feel good about the activity we're seeing In K-twelve, start in the 1st 6 weeks of the year.

Speaker 4

Great. And then one more if I can. Talked about the increase in win rates in the back half of twenty twenty two. Just wondering if you could provide a little more context, wondering if it's More related to changes in your competition like sort of external or internal related to improvements in Product or platform or go to market? Thank you.

Speaker 2

Yes. I think the I think it's evidence that the platform strategy is working for us. As we get more and more Technology, as we bring more products, as we're able to talk with our customers about a bigger platform strategy and digital transformation and what that looks like for the 5 years, we have a much more robust set of products to offer, and that The success begets success as well, right? This is a very referential sale and we're finding that Our kind of world class customer base, the customers that we do have on board really are providing us with It's good momentum in the marketplace as we compete against our competition. I wouldn't say necessarily that the competition has changed.

Speaker 2

I would say it's more our position.

Speaker 5

Thanks, Joe. Thank you.

Operator

And our next question will come from Noah Herman with JPMorgan. Please go ahead.

Speaker 6

Hey, guys. Thanks for taking the questions. Just two questions on our end. First, Was there any revenue contribution from the Learn platform acquisition? And I think last quarter you outlined about $750,000,000 across selling opportunities and I think I heard this quarter that got bumped up to $1,000,000,000 Can you just maybe unpack that a little bit for us?

Speaker 6

Thanks.

Speaker 3

Sure. Noah, so we're really excited about Learn platform, but it Has a de minimis impact to our P and L looking into 2023. However, longer term the impact is much, much more substantial. In terms of unpacking the expansion of our cross sell opportunities to $1,000,000,000 this is a function of continuing to grow base as well as adding new products and functionality, both organically as well as through our acquisitions.

Operator

And our next question will come from Fred Havermaier with Macquarie.

Speaker 7

Hey, thank you.

Speaker 5

Yes, thank you. I think there's a lot of positive points to Honestly, I have a couple of conversations here about, but I wanted to perhaps begin just by asking about Chris. So with Chris Ball coming on board, He brings, it looks like a very strong enterprise software and software sales background. I wanted to ask, is there any sort of change in go to market strategy or This is generally Instructure's philosophy on how it's structuring its sales under Chris' leadership. Yes.

Speaker 5

Hey,

Speaker 2

Fred. Good to hear from you. Yes, the impetus part of the impetus With bringing Chris in was that we recognized that we had an opportunity to kind of unify The way that we interact with our customers, so bring together customer success with our sales teams. I don't know that the motion necessarily changes as much as we get tighter with our customers and we kind of leverage The power that we have, I think I've shared with it on multiple occasions that when I started here, every customer told me, look, the way you work with me is better than any other company I work with. Don't change that.

Speaker 2

And so, we've I work with don't change that. And so we feel like there's an opportunity for us to be able to leverage that across 1st contact all the way through renewal and to be able to better serve them, engage our sales teams more actively With existing customers, not just new customers, and keep that continuity of experience. And ultimately, we believe it will help our Ability to cross sell. So we think it's a good move to kind of continue to drive that growth and really Have success with existing customers.

Speaker 5

Thank you. I'm looking forward to seeing that play out. And then Perhaps, Dale, a question and frankly also a complement, with adjusted EBITDA margins Coming in again much stronger than expected this year and looking into next year guiding to a little over 38% adjusted EBITDA margins. Just how should we be thinking overall about Instructure's potential for adjusted EBITDA margin expansion? And generally, you Consistently have shown us nice magnitudes of beats.

Speaker 5

Just have you at this point taken some of the low hanging fruit of adjusted EBITDA margin Off the table, so to speak, or how should we generally think about your potential to deliver margin going forward?

Speaker 3

Thanks, Fred. This is the whole business is operating efficiency With efficiency and looking for more. I would say that we've got, I mean there was low hanging fruit Probably 3 years ago. Now it's all about refining the business. We continue to Expand our sales and marketing headcount, we mentioned that here in the prepared remarks, 20 plus percent year over year.

Speaker 3

Some of that has to do with finding lower cost locations for people to work, but we're getting more out of our team members and everybody's aligned in trying to find efficiencies. So Where do we see that going in the next couple of years? As we've discussed in the past, we see adjusted EBITDA margins could grow to the 40% mark. And we've got confidence that we could get there while continuing to invest in the business.

Speaker 8

Thank you both very much.

Operator

Our next question we'll come from Brian Peterson with Raymond James. Please go ahead.

Speaker 3

Hey, gentlemen. Thanks for taking the question.

Speaker 9

So I wanted to hit on pricing, I think which It's my favorite topic.

Speaker 2

But I'd be curious to know

Speaker 9

what you've seen from a pricing perspective and anything on renewals that are coming up and And how that may be impacting things competitively, if at all?

Speaker 10

Yes.

Speaker 2

I'm glad you asked that because You're at least you're consistent, Brian, when it comes to pricing. So we have I would say I wouldn't it hasn't necessarily changed. We still are never the kind of low cost leader When we go into these RFPs, we still never won a deal and been the lowest price when it comes to a deal. So That dynamic hasn't changed, but we continue to sell on value. Our win rates, Like I said, we're actually above kind of what we've historically seen in the second half versus the rest of The previous average win rates.

Speaker 2

So we feel like the strategy is paying off. We continue to gain market share, Both in Higher Ed and K-twelve and internationally. So we feel good about where we are, Again, from a value proposition and how we can combat kind of the low cost competitors.

Speaker 9

It's good to hear. And Steve, maybe a follow-up just on international. You mentioned a couple of large wins this quarter. In terms of your Footprint, partner distribution strategy, I'd love to just kind of understand what is your level of confidence in attacking some of these international opportunities Now versus maybe a

Speaker 8

few years ago. Thanks guys.

Speaker 2

Yes. Compared to a few years ago, I feel really good. As we've mentioned in the past, in 2020, 2021 timeframe, we really went through And looked at each market individually rather than kind of lumping international as a whole. We've made investments. We continue to see those pay off in our direct In the markets where we want to go direct, we continue to add sales capacity in those areas.

Speaker 2

We're about almost a year into our channel investment. So we're starting to see good Signal there, but it's still early until we start to see kind of a material impact on the growth, but the early signs are I feel good about where we're at and our focus in the channel and the investments that we're making there.

Speaker 7

Good year. Thanks, Steve.

Operator

And our next question will come from Terry Tillman with Truist Securities. Please go ahead.

Speaker 10

Thank you. Hey, good afternoon, Steve and Dale. Solid job on the quarter. I just had two questions. And I don't even think there's a bunch of multi partners, so you're going to be in good shape today with me.

Speaker 10

When we see a new sheriff in town, we have a new President And COO, sometimes people wonder, could they break things or could there be disruption or maybe some short term pain, long term gain. I don't know if that's directly related to the idea of more closely aligning customer success with sales. But what I'm wondering about kind of glass half full standpoint, If you can better align those teams, is there a greater or more expediency in terms of driving Up selling or cross selling of the expanded product set. Maybe you could just share a little bit more about trying to bring these teams together and what that could do in the numbers?

Speaker 2

Yes. That's you hit it spot on, Terry, as usual. The opportunity here is to make We had a customer interaction that was sales heavy when we won a deal, Then we'd hand it off to CX and they would go run with it. This allows us to have relationships that kind of span. There aren't these awkward handoffs And then sales is engaged throughout helping our customers understand not only how to get the most out of what they just bought from us, but also What else we can do for them?

Speaker 2

So we do believe this will ultimately be an accelerant to our business. It will allow us to better cross sell, Better upsell into our existing customer base. And it's not something that we said, oh, this is the sales process is broken. We got to make a change. This was really a strategic move to do something that we thought would actually Improve our the durability of our revenue growth over the next 5 to 10 years.

Speaker 10

Okay, got it. And thanks for the kindness. I don't think I've been spot on anything in years, but thank you. That sounded nice. And then just the follow-up question, Maybe just relates to 9.7% growth is the midpoint, roughly speaking.

Speaker 10

Is there anything you can share Just at a high level on relative growth rates across the 3 major kind of segments. Thank you.

Speaker 2

Yes. We continue To see that kind of the domestic market between K-twelve and Higher Ed will be kind of that high single digit grower for us. There's it's a those are good markets. They're solid growers in higher ed. We do have More opportunity in K-twelve from a cross sell perspective.

Speaker 2

And then international, international still be our fastest Growing. We are seeing some headwinds from currency in there. So we included in our guidance is that This should be a grower in kind of the low teens. On a as reported basis, it would be high teens in a constant currency basis. So we will see a little bit of that headwind from a currency basis that we didn't really see in 'twenty two, it will hit us in 'twenty three.

Speaker 10

That's great color. Thank you.

Operator

And our next question will come from Matt VanVliet with BTIG. Please go ahead.

Speaker 7

Good afternoon. Thanks for taking the question. Obviously, a lot of talk about cross selling success and a nice Large opportunity ahead of you. Curious on how you're thinking about that impacting the seasonality of the model? Should we think about a little more of that potentially coming Throughout the year, a little less reliant on the Q2, or does it just kind of make deals bigger when you do get those Larger deals closed at the end of the school year?

Speaker 2

Yes. I wish the cross sell Would have an impact on seasonality, but it will I don't know that it will have a big We may align more of the cross sell to our renewals, which the majority happened in Q3. Kind of Q2, Q3 will still be our biggest quarters. What will change our over time, what will change the seasonality is our international business because it tends to be more heavily weighted towards Q4. So we may see some kind of normalizing of that across From a seasonality perspective, but don't expect cross sell to drive that change in seasonality.

Speaker 7

Okay, helpful. And then thinking about the channel program, obviously, only about a year old, but are you looking to potentially push that into any newer markets So you haven't addressed quite yet or conversely, maybe in addition, do you need some additional leadership as that continues to grow, Maybe people with significant channel experience elsewhere, whether or not inside the education room?

Speaker 2

Yes. We did bring when we started this investment, we brought in a seasoned exec. Jack Jackson just won an award by the way for Channel Chief. But so we brought him in Specifically to help us craft this strategy, as of right now, Matt, we have we are targeting the right geos For our channel, and as you know, when it comes to channel, there's a lot of kind of enablement, there's ramping, there's And so most of our focus right now is on making sure that those partners that we brought in over the last 9 to 12 months are Enabled or ready to sell or able to deploy, are able to support the products The countries that we've targeted. So that's where most of our investments going right now.

Speaker 7

All right, great. Thank you.

Operator

And our next question will come from Stephen Sheldon with William Blair. Please go ahead.

Speaker 8

Thank you. Just one for me, I guess, on Canvas credentials, you gave some good commentary there, but just curious how much of a priority does it seem like universities Are kind of placing now on including some type of credential in degree pathways, especially as I think more about the eventual employability of Graduates, it seems like we're still in the very early innings there and do you think it will become a much bigger priority by universities as we think about the next few years?

Speaker 2

Yes, that's a great question, Stephen. And very much the top of mind of That we're talking to within our existing as well as new customers that we talk to. It's in every conversation that we have. I would In the traditional university environment, not everybody is the same, But there's definitely pockets that are very much leaning into it. I'm thinking of community colleges, Some of those types of educational institutions are leaning in.

Speaker 2

But everybody is looking at what their strategy is How they're going to do this, how they're going to implement this over time. I think the other thing that we're seeing is it's opening up a lot of conversations with Non traditional like City and Guilds, right, which is not your traditional university, but is or PeopleCert that we announced last You're right. It's doing a lot of retraining, certification, that kind of work. So it does there are a lot of conversations going on. And when you combine this with the investments we've made in our catalog product, when you look at the Things that we've done with our Portfolium set of products around portfolios, it creates this whole product solution That allows us to allow the university to build, to issue, to store and verify their credentials in a way that, 1, attracts new students to them, but also provides a currency for finding new jobs, as you mentioned.

Speaker 2

So yes, it's very good. It's early days, but great signal.

Speaker 8

Makes a lot of sense. Thank you.

Speaker 2

Thanks, Steve.

Operator

And our next question will come from Brett Friel with Jefferies. Please go ahead.

Speaker 11

Hey guys. Hey, guys. This is David Loughford on for Brad. Appreciate you taking the questions. I wanted to double click on the cross sell comment.

Speaker 11

I believe you guys said 43% of your customers are on 2 plus products. Maybe if we could dig in a little bit of that, I'll ask a few questions and As to which everyone makes sense, but is there any watermark you think as compared to last year 2021? What was that more than More than one product, maybe talk about the dynamics of 2 plus products in K-twelve versus higher ed, if there's any differential there? And then Just thinking forward, on the cross sell opportunity, obviously, you guys are bigger in higher ed, but if you just think about from the product standpoint, is there a more cross From a product standpoint in higher ed versus K-twelve, appreciate if you could just touch on any of those dynamics.

Speaker 2

Sure, David. So year over year, Our tax rate was for 2 or more products in 2020 As we left 2021, it was about in the high 30s percent attach rates. So we're up 5 or 6 points, 600 basis points from an attach rate perspective. The other statistic, I think, that Dale shared was that 60% of our New deals had more than one product. So, we're seeing that we're landing bigger.

Speaker 2

We continue to land bigger, when we get a new logo. And so, and then as we think about how we look at the Cross sell opportunity between higher ed, K-twelve. The ARPU stacks are about the same for each of those. We land bigger In Higher Ed, and we have about a 50% ARPU uplift from the LMS. And in K-twelve, we land smaller on the LMS, but we have a 2 to 3 times cross So the absolute dollars are bigger in K-twelve for cross sell, but the overall Opportunity is similar from a revenue per student perspective.

Speaker 11

Got it. That's really helpful color. Appreciate it. And one more if I can. Just as you guys think about your conversations with K-twelve and higher end institutions, has there been any commentary around the budgets around them and maybe if they're getting more constrained?

Speaker 11

I think Most folks, I think probably K-twelve is pretty defensible, especially with what they have going with the ESSER funding That continues to aid growth there, but maybe any commentary just around what you're hearing from customers around their budgets?

Speaker 2

Yes. I think, I would say they're like everybody else, they're being Very judicious in how they're spending their money and where they're spending their money. The In K-twelve, you're right, there still is a lot of stimulus dollars, only about 30% has been spent to date. There's plenty of money out there, but they are being very thoughtful about how they're spending that money. What we like about that is that Our technology is critical infrastructure.

Speaker 2

It's the foundation for their digital transformations. So, we feel good that And we've been told that regardless what happens to budgets, the money that they earmarked for our part of the digital transformation process Is durable and they expect to be able to fund those going forward. So We're seeing good signal there.

Speaker 11

Appreciate it guys. Thanks.

Speaker 5

Thanks, Steve.

Operator

And our final question will come from Steve Enders with Citi. Please go ahead.

Speaker 12

Hi, great. Thanks for taking the questions. I guess just want to follow-up on the last point around the outlook For K-twelve, how are you thinking about the EASR opportunity at this point? And I guess the pipeline opportunity there, I mean, does this feel like That's something that might kind of continue to question to 2024 or is there an opportunity as you kind of see it today for Maybe this has become a little bit more of a 'twenty three opportunity?

Speaker 2

The dollars have to be committed before The end of September in 2024. So, there's enough money out there that, I don't think they're going to wait till July of 2024 to start committing these dollars. There's a couple of things that we see going on here though, Steve. The first is that, again, they're being thoughtful. So they're not just going out and spending like drunken sailors Type of thing.

Speaker 2

They're making sure that they can get a return on that investment. And there are a number of required Proofs, if you will, when a school or a district invests in educational technology that they have to show Efficacy of what they've invested in, which for us, part of the investment thesis for Our for LEARN platform was that LEARN is one of those technologies that can provide evidence That the technology is working in the environment. It's going to be something that becomes much more top of mind, much more important. In addition, There are regulations that require proof of efficacy anyway. So we feel good that The dollars that are earmarked for ESSER will create for us some enduring demand, not just In the spending of those dollars, but also in then after those technologies get deployed, how does a school Prove efficacy.

Speaker 2

And so again, we feel like there's a long term kind of tailwind here for us Because these extra funds are coming into the system.

Speaker 12

Okay. No, that's helpful context there. And maybe for Dale, just want to touch on the RPO number in the quarter. I know 4Q usually isn't that Isn't that big of a bookings quarter for you all, but just anything to call out there on sequential Sequential decline there and is there kind of any FX impact or anything we should be thinking about that would be impacting the number there?

Speaker 3

It's a great question. We're pleased with where our RPO landed. You may remember last quarter, we signaled that it was going to come down from where we landed in Q3, 3, in part because there's a lot of factors that play into where RPO goes, including some seasonality of contracts And timing of renewals and there's a host of things we're seeing that are contributing to that. However, we've got great confidence In our RPO where it is now and where it's headed over the next 4 or 5 quarters and it gives us great Confidence in the 2023 guidance that we've provided on this call.

Speaker 12

Okay, great. Appreciate the questions here.

Speaker 2

Thanks, Steve.

Operator

And that will conclude today's question I would now like to turn the call back over to CEO, Steve Daley for closing remarks.

Speaker 2

Great. Thanks, operator, and thank you everybody for joining So we're very pleased with our results, not only in Q4, but throughout the year, and we are very well positioned for a stellar 2023. Our business will continue to grow with best in class margins, and our position in the education ecosystem affords us Ample opportunity for growth for years to come as we execute on our learning platform strategy. So I just wanted to thank our customers, our employees, our partners And our investments for your support in this really important endeavor that we're all going on together. And I look forward to sharing our continued momentum with you Next quarter.

Speaker 2

So thank you very much.

Operator

And that will conclude today's conference. Thank you for your participation and you may now disconnect.

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Earnings Conference Call
Instructure Q4 2022
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