Instructure Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2023

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Instructure's First Quarter 2023 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 Q1 2023 earnings conference call. We'll be discussing the results announced in our press release issued after the market closed today. With me are Instructure's Chief Executive Officer, Steve Daley and Chief Financial Officer, Dale Bowen. Before we begin, I'd like to remind you that today's conference call will include forward looking statements based on the company's current expectations. These forward looking statements are subject to a number of significant risks And our results may differ materially.

Speaker 1

For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release In other reports and filings, we file from time to time with the Securities and Exchange Commission. 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 non GAAP measures included in our press release, which is posted on the Investor Relations section of our website.

Speaker 1

With that, let me turn the call over to Steve.

Speaker 2

Thanks, April. I'm delighted to welcome everyone to Instructure's Q1 2023 earnings call. During today's call, Dale and I will share the details of our Q1 results and provide guidance for Q2 and the full year 2023. Q1 2023 results exceeded our previously commuted guidance range for revenue and adjusted EBITDA, fueled by our efficient go to market organization and unyielding dedication to customer satisfaction. 1st quarter revenue was $128,800,000 up 13.6% year over year, including an 80 basis point headwind from foreign exchange.

Speaker 2

1st quarter adjusted EBITDA grew 10.8% year over year to $48,300,000 a 37.5 percent margin. The strength of our Q1 performance demonstrates the power of our business model. I'll next share 5 areas that contributed to our continued success: strong new logo sales, the power of our platform strategy, Our wins in nontraditional education, traction from acquired businesses and continued operational efficiency. First, our new logo win rates remain strong across all of our markets. Success is being driven by our focused go to market engine, best in class customer experience, Expanded set of offerings and our ability to solve real world challenges across the teaching and learning landscape.

Speaker 2

In one win this quarter, we scored a perfect 100% in our RFP response in categories such as vision and innovative power, completeness of the solution and problem solving power. These are areas above and beyond our features and functions of our product where Instructure consistently shines and that helps us to drive our growth. In North American Higher Ed, we have a greater than 40% market share and we continue to see RFP activity in line with our expectations. We win a very high percentage of new deals as customers recognize the value we offer. During the quarter, we had a significant win with Amherst, which shows the Instructure learning platform based on positive feedback from students and faculty during a successful pilot engagement.

Speaker 2

UMass Amherst wanted a common experience for all their students and faculty, whether they were engaged in a traditional, in person, online or non traditional education. They chose to partner with Instructure as their platform for the future. They were able to replace multiple LMS vendors with Canvas And also incorporates Studio Catalog and Impact. We're proud to partner with UMass Amherst in providing an exceptional learning experience for their students and faculty. In North American K-twelve, our platform and tailored services continue to drive success And continue to support our market leading position with nearly 30% share according to ListEdTech.

Speaker 2

The green shoots we mentioned during our last quarterly call resulted in Strong bookings for Q1 as K-twelve decision makers continue to recognize our products as mission critical. We are particularly pleased with the traction in assessments. During Q1, we won a competitive RFP for Sioux Falls School District, which included 7 products: Canvas LMS, Studio and the full suite of Mastery products. In doing so, we displaced the LMS and AMS incumbents due to our comprehensive solution, Our customization capabilities and our ability to migrate the district's benchmark data to MasteryConnect. Looking ahead, we feel great about our prospects in K-twelve as we continue to focus on multi product suites and increasing deal sizes.

Speaker 2

International remained the fastest growing part of our business during the quarter, excluding the impact from FX, with strong performance from both our direct business and our channel partner program. We secured a direct win with CVOGENT, a continuing education school in Belgium, to replace an outdated LMS. The customer chose Instructure in part because no other vendor can meet the extensive requirements in its RFP. Underscoring their high level of satisfaction with our platform, we've already received multiple referrals as a result of our relationship. Separately, we had our largest channel deal to date in APAC, highlighting the ongoing success of our channel partner program.

Speaker 2

2nd, our success in the education technology industry continues to be driven by our platform strategy and our ability to stay ahead of the curve in terms of innovation. We estimate that our current product lineup represents over a $1,000,000,000 cross to our existing customer base and we continue to see strong success capturing this opportunity as customers take advantage of the breadth of our solutions. Our pipeline is strong and we see we are seeing positive trends in cross selling as our customers look to expand their use of our products to improve teaching and learning outcomes. We are also proud to report a higher penetration year over year of our products across our customer base. Fueling the higher penetration rate are deals like Green Bay Area Public School District.

Speaker 2

This district added MasteryConnect and assessments, catalog and credentials. Comparing our current contract with our new contract with them, we saw an increase of over 8 times the contract value. In another win, we closed our largest credentials deal since the Concentric Sky acquisition highlighting the potential for growth in this area. And the power of our platform strategy extends beyond our products. The platform allows us to elevate our partners and uniquely meet our customers' challenges together.

Speaker 2

These robust partnerships help drive our above average win rates and demonstrate the power of our platform and ecosystem. The Soofar wins, for example, included a partner product that helped us set us apart from our competition. We were also able to win the Dutch Institute For Public Safety, NIPV, during the quarter since the Unstructured learning platform's openness allowed Dream to seamlessly integrate their software products to provide a complete solution for NIPB's educational needs. 3rd, our non traditional capabilities have helped drive growth for our company, and we are committed to providing innovative solutions that meet the evolving needs of our customers. Our current focus on lifelong learning and vocational training has resulted in a number of exciting wins, including a multiyear deal with Deltion College in the Netherlands this quarter, which we completed against 4 other competitors in a rigorous EU tender process.

Speaker 2

With this partnership, Canvas will be made available to 18,000 students for continuing education, company training courses and more. Additionally, a large existing K-twelve customer purchased Canvas catalog to enable teachers to access professional development training on demand by self enrolling in courses. Finally, an update on one of our large nontraditional deals. PeopleCert is now fully operational after less than 2 quarters. This is a significant milestone as Canvas will now be used to train and certify 250,000 PeopleSERIT learners worldwide.

Speaker 2

We believe that this partnership demonstrates the power of our platform to address non traditional educational paths, and we're excited to see how it will drive growth for our company in the years to come. We are confident we will continue to unlock new opportunities and drive value for our customers in the dynamic education technology space. 4th, we are seeing strong results from our M and A strategy, with the recent LEARN platform acquisition exceeding expectations for the quarter. The strong uptake and pipeline growth for Learn Platform has revealed significant untapped potential from both new and existing customers. K-twelve decision makers are recognizing value in Learn Platform's ability to manage and evaluate their full suite of education technology tools.

Speaker 2

Learn Platform's evidence based capabilities are top of mind with PartWare Partners, given the proof of efficacy required by regulators. As we further integrate Learn platform into our go to market motion, we believe we can capitalize on this meaningful growth opportunity. We believe that our plan to continue to enhance our platform through organic and inorganic means will keep us at the forefront of the education technology space. Finally, I want to highlight our continued profitable growth. Our best in class margins have enabled us to make disciplined investments that expand our platform And drive long term growth, including investments in embedded analytics for Canvas administrators, a new data access platform to extend the Instructure learning platform and making progress with new quizzes during the quarter.

Speaker 2

In addition to these product investments, we are also able to up level our go to market engine under the leadership of Chris Ball. We believe we can maintain a healthy balance of growth and profitability, while maintaining flexibility to invest in high return opportunities. In conclusion, our impressive Q1 results and expanding impact on education position us as a clear leader in the education technology space, and we look forward to continuing to drive value for our customers and shareholders in the months years ahead. Now I will turn it over to Dale to provide further details on our Q1 financial performance and guidance for the Q2 and the full year 2023. Dale, please go ahead.

Speaker 3

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 Q1, we continue to show a combination of strong top line growth and best in class EBITDA margins. As Steve mentioned, we generated Q1 2023 total GAAP revenue of $128,800,000 Subscription and support accounted for 92% of our Q1 revenue at $118,500,000 up 14.5% 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 up selling cross sell of our other products.

Speaker 3

Professional services and other revenue accounted for 8% of our first $7,000,000 up 14.2 percent year over year. Remaining performance obligations or RPO were $703,700,000 at the end of the Q1, up 5% year over year. We expect to recognize revenue on 76% 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. Our strong gross margin profile was supported by our Optimized cloud architecture and flexible support model that scales to meet seasonal customer demand.

Speaker 3

In the Q1, gross profit was $100,400,000 representing a 77.9% gross margin, down from 78.4% in the Q1 of 2022. Turning now to operating expenses. Sales and marketing expenses for the Q1 were $26,900,000 or 20.9 percent of ACR, up from 19.7% in the Q1 of 2022. Research and development expenses for the Q1 were $17,000,000 or 13.2 percent of ACR compared to 12.6% in the Q1 of 2022 as we invested to pursue our robust product roadmap. General and administrative expenses for the first Quarter were $9,400,000 or 7.3 percent of ACR, down from 8.8% in the Q1 of 2022.

Speaker 3

Non GAAP operating income for the Q1 was $47,200,000 representing a 36.6 percent operating margin, down from 37.3 percent in the Q1 of 2022. 1st quarter adjusted EBITDA was $48,300,000 representing a 37.5 percent adjusted EBITDA margin, down from 38 2% in the Q1 of 2022. Non GAAP net income normalized for the newly added tax effective adjustments was $27,900,000 in the Q1 or $0.19 per share compared to $28,900,000 or $0.21 per share a year ago. Turning to the balance sheet and cash flow statement. We ended the Q1 with $109,100,000 in cash, cash equivalents and restricted cash and $489,500,000 of long term debt, net of discount, resulting in a 2.06 times net debt to trailing 12 months adjusted EBITDA ratio.

Speaker 3

Free cash flow for the quarter was negative $82,200,000 compared to negative $67,300,000 in the prior year, in line with our expectations. Adjusted unlevered free cash flow, which adjusts for the impact of transaction costs, sponsor costs, impaired leases and other non recurring Cost paid in cash was negative $63,400,000 a 5.2% year over year decrease from negative $60,300,000 in the year ago quarter.

Speaker 2

I will now conclude the

Speaker 3

call by providing guidance for Q2 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 Q2 of fiscal 2023, We expect revenue in the range of $128,500,000 to $129,500,000 For the full year, we expect revenue to be in the range of $521,300,000 to $525,300,000 We expect 2nd quarter adjusted EBITDA in the range of $48,500,000 to $49,500,000 representing an adjusted EBITDA margin of 38.0 percent at the midpoint of the range. For the full year, We expect adjusted EBITDA in the range of $199,400,000 to $203,400,000 representing an adjusted EBITDA margin of 38.5 percent at the midpoint of the range. For the full year, we expect adjusted unlevered free cash In summary, the Q1 provided a great start to 2023.

Speaker 3

We executed at a very high level and exceeded our guidance and While continuing to deliver 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. With that, Steve and I are happy to take any of your questions.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Josh Bair of Morgan Stanley. Please go ahead.

Speaker 4

Hey, guys. It's Matt Salson on for Josh Baer. Thanks for taking the question. It's nice to hear that Q1 bookings were strong in K-twelve. I'm just curious if there's any kind of qualitative commentary that you guys can provide around what you're seeing there.

Speaker 4

I know last year You guys have noted there are some staffing shortages and a few other issues that were pushing deals out. So I'm curious if those have resolved or Potentially, the multi product adoption is what is creating that uplift or potentially both. Just any kind of additional commentary there would be helpful. Thanks.

Speaker 2

Yes, happy to. So in our last call, we talked about seeing a lot more activity in the K-twelve space In particular, and that continued throughout the quarter. So a couple of things that are happening there. First of all, The teacher shortage hasn't been resolved. So they're still dealing with that.

Speaker 2

But what they've Starting to recognize is that technology can play a role in helping deal with this on a longer term basis. And so, We can free up some teacher time. We can help with subs. There's a lot of things that technology can help with to solve that problem. The other piece was that from an administrator perspective, we are seeing more cycles spent, more activity, more interest And figuring out how to accelerate the digital transformation and recognizing that while the second half of last year, They were kind of hunkering down that they need to be ready for fall start come 2023.

Speaker 2

And so, really those are the Two things two differences, I would say, in Q1 versus what we saw in the second half.

Speaker 4

Got it. Thanks. That's helpful.

Operator

Your next question comes from the line of Fred Happenmire with Macquarie. Please go ahead.

Speaker 5

Hey, thank you very much and congratulations on a very strong quarter here. I would love to ask, As you're looking at the shape of deals in the K-twelve landscape and with ESSER funds still flowing this year, just kind of a 2 parter here. Firstly, are you seeing or how are you seeing the pipeline build throughout this year and as you're going into the certainly the K-twelve purchasing cycle? And then Secondly, are you seeing ESSER funds, how are you seeing them being deployed? And is it something that's perhaps helping you and your ability to get some of these deals across the line, perhaps in the implementation side?

Speaker 2

Yes, those are good questions, Fred. Good to hear for you. Thank you. So from a pipeline build we're seeing along with that Increased activity that we saw coming into the 1st of the year here, we're seeing the pipeline build nicely, and we're seeing a lot of interest, a lot of Activity going into, as you mentioned, the end of the budget here, this quarter and then the start of the new investment Going into July. So the pipeline is looking good.

Speaker 2

We've got good coverage for the quarter. We're seeing good out pipeline build as well. So we've got Well, we're on track to where we think we should be at this point of the year for the rest of the year. I would say, from an ESSER funding perspective, this is always The question we get asked and a couple of things I would say. First of all, it's really it's difficult for us to tell Directly, are these ESSER funds that are being used or not?

Speaker 2

But I would say, what it's creating is a nice background, in macro condition In K-twelve, at least for the next 18 months, where there are still a lot of dollars in the system, we make sure in the sales process that we're working with Our sponsors, we're working with local legislatures to ensure that the funding is enduring And then we've got durable funding for our solutions as they are kind of the foundation of digital transformation and strategies that are multi year. And so I would say it's more of a kind of a tailwind from the perspective of kind of that macro lots of dollars in the system. What we are seeing is that a lot of these dollars are coming with this With a couple of things. So legislatively show efficacy of tools that are being purchased with these dollars, and That's driving a lot of interest and pipeline build for the LEARN platform technology that we had acquired, as well as, as we've kind of exploded in the number of apps Being used in K-twelve, we're getting a lot of demand around help us rationalize that, help us Get visibility on what's being used. Is it being used well?

Speaker 2

Is it having the outcomes that we expected? And so we expect that to be some Enduring demand for our products, again, indirectly related to the fact that a lot of these tools were bought during this time Of rich funding through Esser. So that's how I would characterize the impact that Esser is having on our overall business, Fred.

Speaker 5

Thank you very much for that context. And let's ask another question actually about market share, which you had called out and Quite robust market share in higher ed. And I think there comes a time where there's some concerns that are raised about what has a company reached market share saturation. So I just wanted

Speaker 2

to ask with respect to

Speaker 5

higher ed, can you just also provide some context about how you're seeing pipeline build specifically there, Whether you think that you've hit a point of market saturation and generally what your kind of expanding platform strategy means for the company in general as you Have this already robust market share?

Speaker 2

Yes. Yes. It is a question that we've gotten a number of times, Fred. You're right. I would say that, 1st of all, we have, looking at the latest data, about 44% By an enrollment perspective, about 36% by institution perspective, still 40% of institutions in the U.

Speaker 2

S. In higher ed Are using Blackboard and Moodle. And so there's still a lot of room to run from a market share perspective. And as those renewals are coming up For coming up for renewal within those existing arrangements, We're there through the RFP process or through whatever process they use for purchasing. And so I still think there's a lot of room for us To run from a market share perspective in U.

Speaker 2

S. Higher Ed and not too worried and not really seeing a slowdown, If you will, in the interest as people are looking for what's their digital transformation strategy for the future. I would add also that our market share were much Lower penetration internationally, on average across all of the markets that we play in, it's the high single digits. So there's still A lot of room for us to run from a market share perspective in international as well.

Speaker 5

Thank you very much.

Operator

Your next question comes from the line of Joe Ruwink with Baird. Please go ahead.

Speaker 6

Great. Hi, everyone. You gave this interesting example with UMass Amherst where Canvas Sort of becomes, I guess, it's an omni channel learning platform. Is that a typical scope in RFPs you're now seeing where an institution wants to consolidate all of their offerings on to Tushin wants to consolidate all of their offerings onto 1 platform, 1 vendor. And when you made the comment that RFP activity is in line with your expectations in terms of higher ed.

Speaker 6

Is that Quantity of RFPs, I guess, embedded in that question, are the dollar opportunities getting Larger even if the number of opportunities is maybe in line?

Speaker 2

Yes. Good questions. So on the first one, yes, absolutely is the short answer to your question about omni channel. So With UMass Amherst in particular, right, they had a system and a whole process that they set up for online students. They had a different system with different processes that they've used for their matriculating or Traditional on campus and they're saying, look, this is changing, right?

Speaker 2

Students are going to be both at some point in their learning journey. And so we're happy to we need to bring that together and we're that was part of our strategy As a university, we are seeing that across the board and more and more thinking about this differently, whether they're an existing customer who now wants bring their online program in line with the traditional matriculating students or not. So I do think that will be a key driver. It is a key driver from our sales perspective. From the second part of your question, around what are we seeing from an RFP perspective, So we are seeing deal sizes are varying.

Speaker 2

We are seeing some big deals like UMass, Amherst. I think By virtue of the fact that we are very successful in the existing R1s and some of the bigger ones, Some of these deal sizes are a little smaller than they have Been in the past, but we're seeing with the dollar perspective, It's very consistent as far as the dollar amount from an RFP perspective. Volume is up more than the dollar Amount is. So when we talk about that kind of consistent with our expectations, I was really referring to that dollar figure rather than the volume figure.

Speaker 6

Okay. Okay, great. And then I guess just on the updated EBITDA outlook, I think the forecast entails Higher margin, something probably 39% or better EBITDA margins in the back half. Anything you can touch on just in terms of the second half, first half improvement that's embedded in the outlook?

Speaker 3

Yes, sure. We do have, so Q1 margins had a little bit of noise Associated with timing of some services. But as you've seen with the guidance that we provided and some sequential growth In our margins from Q4 of 2022, we've had confidence in where we have leverage in our business to expand our margins In the second

Speaker 7

half. Okay, great. Thank you.

Operator

Your next question comes from the line of Brian Peterson with Raymond James. Please go ahead.

Speaker 8

Congrats on the strong results guys. So just starting on international, Steve, I'd love to understand how the pace The pipeline development there is working. And would you say maybe there is more strength with the direct or indirect in certain regions? Maybe if you could Kind of double click on how that movement to the pipeline is working in some of these international markets.

Speaker 2

Sure. Thanks, Brian. Yes. So, I would say we are still in the pipeline build from a Channel perspective, as we're into new markets there, we're about almost a year into our development of the channel program. So, our maturity, if you will, in the direct is much further ahead than in indirect.

Speaker 2

So from that perspective alone, We're seeing good direct pipeline build. Now, at the same time, we track different metrics with our channel program, including enablement And selling capability, support capability, those types of things. And we're seeing really good progress from a channel build perspective from that in that space. Now, our channel, I would say, our channel efforts are going well in Latin America and APAC. Those are the more Earlier, we've had some longer term channel partners in EMEA.

Speaker 2

And so EMEA's channel may be a little bit ahead of those others too. But We're pretty we've seen pretty good progress across the board, across geo. And I would say, in summary, that the direct is probably a little bit ahead of The international just from a maturity perspective.

Speaker 8

Got it. Thanks for the color there, Steve. And maybe a follow-up. It sounds like if you're looking at the K-twelve pipeline, there might be more interest in people buying multiple products at the same time. Is that Is it a recent phenomenon or is that something that's been building?

Speaker 8

I know you have a lot more products you can sell. I just I'd love to understand if people are really coming in with kind of this multi product mentality More so now than they

Speaker 5

did in the past. Thanks guys.

Speaker 2

Yes. So I think this has clearly been a focus from a Strategy perspective for us for a while. I think part of it is our maturing in our solution selling and our platform as we've added more pieces And we've integrated them more tightly in the process. We've also came out with some packaging models And ways for us to sell this better. So I would say, the need hasn't changed, right?

Speaker 2

With coming out of the pandemic, the need to assess learning loss, all those things Have been top of mind for our K-twelve customers. I think our ability to sell has gotten better. But I also think, again, Second half of last year, we just saw a general kind of slowdown and now it's picking back up. The interest in the activity has picked back up in the Q1. So, it's as much a market need As it is, our ability to deliver on the integration of the platform and the strategy and the selling motion.

Speaker 5

Thanks, Steve.

Operator

Your next question Sorry, your next question comes from the line of Terry Tillman with Truist. Please go ahead.

Speaker 9

Hey, good afternoon, Steve and Dale and congrats from me. I had two questions. First on the Learn platform side, evidence as a service seems like an emerging market and very timely given the ESSER funds. What I'm curious about is anything you can share in terms of the contribution of that acquisition and where do you see the bigger revenue synergies? You just giving it care and feeding And driving a lot more evidence as a service deals, because I do know that they had a monetization strategy or you all really driving K-twelve And all the platform products you have into maybe their installed base or who they were engaging with?

Speaker 9

And then I had a follow-up.

Speaker 2

Yes. So I would say, yes, you're absolutely right, very timely. It was part of our investment thesis that the need for evidence and evidence as a service was going to be much more important over time. There's a couple of things where we feel really good about our ability to kind of accelerate the business after the acquisition. Again, we're starting we saw a good pipeline build in Q1.

Speaker 2

We believe that impact will happen kind of later in the year into 2024 to drive growth, which is, as we mentioned, we expect a kind of de minimis impact in 2023 From the LEARN platform acquisition, but really there's a couple areas where we are uniquely positioned to help LEARN The biggest is probably in the provider business. We have an ecosystem of 600, 700 partners that are already integrated into the Instructure learning platform. It's by combining it with Some of the technologies that we already had through some of our other acquisitions like Kimono and with Certica, some of the technologies they had, We now have a much more robust solution to take to the ISV community, the EdTech community. And so It's adding to our ability from a go to market and just our reach perspective to go a lot faster. And that was a Part of their business that was very new when we bought them, right?

Speaker 2

They'd only been operating about a quarter, selling to providers. And that's where we believe a lot of that acceleration will come. In addition, we have a number of we have a lot of state level contracts That we're taking learn into, we're using those to leverage our existing contracts. There's a lot of things that we can do to kind of grease the skids from a purchasing perspective within the state purchasing or the LEAs Within K-twelve as well. So a lot of good synergies that we believe we can leverage over the next 3 to 4 quarters.

Speaker 9

Got it. That's helpful. And I guess on the Chris Ball side, I was going to ask about, I'm assuming he's still in the honeymoon phase, but he's got several quarters under I don't know if the Wisconsin School District deal kind of is some of his work, but 8 times contract increase or contract value increase is impressive. What are some of the early kind of low hanging fruit areas that CRISPROL is having an effect? Thank you.

Speaker 2

Yes. Great question, Terry. As always, you do great questions, Terry. Chris has been on the job for 90 days. So I don't want to over sensationalize the impact.

Speaker 2

What I will say is he has had a big impact On our focus on solution selling, on how to sell that whole suite. And so, yes, there's a definitely, I would say, He had an impact on that deal in particular. But really what he's done a really good job at And is bringing 2 teams together, right, the sales, marketing and the customer success teams. So he's really they're excited, they're energized, they're really leaning in on how do we make sure that that customer journey is seamless, how do we ensure that we're able to find more opportunities to help In more ways with our customers, marrying the customer success manager with the seller, and we believe ultimately, which will drive A much better cross sell and allow us to help our customers much more deeply than just 1 or 2 products. And So good.

Speaker 2

I'm really pleased with the progress so far that Chris has made, and I'm excited about What we'll be able to share with you in the coming quarters as he starts to really put his fingerprints on our go to market motion.

Speaker 9

It's good to hear. Thanks.

Operator

Your next question comes from the line of Matt Van Vliet of BTIG. Please go ahead.

Speaker 10

Yes, thanks. I appreciate taking the question. Good afternoon. I guess first on All the platform commentary and multi product selling, curious if we could get much of an update on how the catalog product Is driving demand, especially in higher ed there? Is it still something that a number of Schools are looking at either revamping or launching their own online programs and you're going to help them with that or Maybe just any commentary around the demand environment today versus 6 or 12 months ago?

Speaker 2

Yes. I'm going to address that in the context of really how do we help a school either go online or Kind of bring that kind of omni channel experience, right, online or in the classroom. And the short answer is yes, we see a lot of demand. The pipeline has been building for a while. It's been the last 2 years, we've made a concerted effort and an increase in our investment In catalog, but also with the acquisition of Concentric Sky marrying that with now the credentials, the badging, the ability to map programs for online Students that lead to a credential or a badge is a whole product now That really is starting to pay off for us.

Speaker 2

It's doing a couple of things for us. One, it's really a differentiator as we go into a deal like UMass Amherst where We have a robust solution on both sides of the offering as well as It's giving us a lot of good cross sell opportunity and ability to kind of again be much more of a Solution provider for existing customers. So yes, that is a key part of the overall solution for delivering that kind of omni channel experience for universities and it's creating a nice It's creating a nice differentiation for us.

Speaker 10

Okay, very helpful. And then I guess as you look out towards A number of those Blackboard or Moodle renewals and higher ed that you mentioned still maybe 40% of the market. How often are you meeting sort of a I'm not sure we're going to do anything kind of no decision, kick the can down the road for another year or 2? Is that Already starting to happen or have we gotten to the point now where schools understand that they need to upgrade to something more modern and it's just a matter of Kind of setting the right calendar, figuring out which year is best to implement it and they're sort of making vendor selections even if they haven't signed the contract yet?

Speaker 2

Yes. It's much more the latter. It's we saw more of that behavior, say, I'm just going to renew kind of when we were closer to the Right. And they weren't sure what was going to happen and they had something in place. So now is not the time for me to make a change.

Speaker 2

But we're A lot of activity and it has been, this isn't a new phenomenon, but a lot of activity is trying to figure out, okay, what is my next Platform for the next decade or 2, right? And so a lot of these that haven't moved, are right, are very they've been very long term customers of these Existing Technologies, but again, the recognizing it's time to change and I think you articulated it right in that question, Matt, was that it's not we're just kicking the can down the road, but we're being very deliberate about how do we plan this out, How are we going to do change management and we'll either sign either they're signing now or in the near future for again This kind of staged rollout and deployment of the technology over time.

Speaker 10

All right, great. Thank you. Very helpful.

Operator

Your next question comes from the line of Stephen Sheldon with William Blair. Please go ahead.

Speaker 7

Hey, thanks. Another question here on LMS market share in higher ed, and maybe falling off that last question. As you think about on legacy or lower end LMS solutions and the potential of stepping or replace them. Do you have much visibility into the pace of renewals Over the next few years and if so, how does that look? Will there be steady opportunities kind of near term for market share gains relative to the 40% you have right now.

Speaker 2

Yes. I mean, we have a reasonable view Into those renewals and it's part of the sales motion. Everybody in their territory is out Mining for those renewals. So it is we expect it to be a fairly steady kind of deliberate move. We don't I don't see everybody's going to do it next year, for instance, but it will be a measured kind of Gain in market share, similar to what we've seen over the last year.

Speaker 2

I think we're kind of in kind of more of a steady state than we did coming right out of the pandemic when there was a bunch of activity.

Speaker 7

Got it. That's great. And then just as a follow-up, would love an update on assessment adoption in K-twelve. When you win new customers on that side, is it mainly greenfield wins? How much different does that look between bigger and smaller school districts?

Speaker 7

And is there any way to frame how quickly assessment solutions are growing across your platform? And Do you think this will be an outsized area of growth over the next few years given what you're seeing?

Speaker 2

Yes. I would say this There is a move to try to consolidate on a Number of vendors as well as a platform. And so when we go into a sales opportunity, really the value That we sell with our assessment solutions is that integration with the LMS and the fact that you can get a closed loop look At a student and how well they're doing, not only what's being taught, who's engaging with the content, but then how are they doing against the standards and closing the loop that way. And so that really is where the value accrues. It is a combination of moving people off of pen and paper, as well as One of the deals we talked about in the script, we displaced an existing assessment management system that was there Already.

Speaker 2

So it is a little bit of a combination of those 2. But again, really, the opportunity is that We have a very tightly integrated solution that closes the loop, Helps teachers understand whether some of those remediations that they're putting in place to address learning loss are working and get that feedback In near real time, so that they can make changes and address the individualized teaching that they're doing for each of the students. So a lot of Still a lot of opportunity to cross sell. It was I believe it was our fastest growing product in K-twelve this last quarter. So Do believe that that will be a growth contributor to us for a while, Stephen.

Speaker 7

Great to hear. Thank you.

Operator

Your next question comes from the line of Brent Thill with Jefferies. Please go ahead.

Speaker 11

Hey, good afternoon, guys. This is Dave Locksberg on for Brent. Sorry if these have been addressed, I'm just getting off another call where They said that another Education Tech call where they said that AI has become a headwind to the story. And I don't I think of AI as having too much of an impact on you guys, but maybe potentially some opportunities, right, to plug AI into the LMS and maybe Cut down on some of the teachers' time and help improve the efficiencies of teachers. Just and again, sorry if this has been asked, but at a high level, how are you guys thinking about The impact of AI and is there anything that potentially you guys can do with it?

Speaker 11

And then I had a follow-up.

Speaker 2

Yes. I think, David, you answered the question The reality is Yes. We share your opinion, right? We think that AI is an opportunity for us. It's not it doesn't really replace Anything that we do in the environment, but when you marry this with the LMS, we think there's a number of areas That are really interesting that we're exploring.

Speaker 2

So you mentioned one of them, helping teachers get better at the manual tasks, simplifying some of their Whether it's course creation, authoring, whether it's, assessments and how do they generate Those questions on their quizzes, those types of things, we think all of that will help teachers. And when we integrate it in as part of The ongoing workflow that they're engaged in and used to in the LMS, it makes their life much easier. There's also The opportunity to do things like virtual tutoring built into the LMS, and because of the way that the technology It's designed by integrating it with the LMS, for instance, give institutions, give school districts The ability to control kind of the scope of that tutoring, so and they can limit it because of the LMS. And then the third is also, We think there's going to be a big opportunity in accelerating the ability for universities or high schools With students that are going directly into the workforce, to address skilled based workforce training and re skilling, allowing institutions to map Their coursework to skills much more easily and simply use the technology to map them against taxonomies, for instance. So We do think it will actually accelerate competency based or skills based education going forward.

Speaker 2

All of those, again, we believe By integrating amenity LMS, to your point, right, it's an opportunity for us and it's also an opportunity, I mean, it's a unique opportunity For LMS providers because of the relationships we have with teachers and learners and the technology to manage the whole process of delivering Good morning. So we are excited about the opportunity and working on things, Already working on things.

Speaker 11

Super helpful. Thanks for the color there. And then shifting gears a little bit, I don't think this is how We would normally phrase it, but if I kind of break down the business, right, and think like core LMS and then everything else you have, right, and assessments in K-twelve Just mentioned is your fastest growing product in K-twelve. But if I take out the LMS and look at the business, talk a little bit about how Those businesses are growing and is growth accelerating? Are you seeing really strong commitments there?

Speaker 11

Would you be super Interesting to talk about like the non LMS part of the business because obviously LMS tends to get the most focus. But now you guys are doing some interesting stuff As it relates to assessment and other things, so it would be great to hear any color you can provide there.

Speaker 2

Sure. I think We've been pretty consistent in that we're not breaking out those specifically to different types of products, the different areas That we are cross selling. I would say that cross selling is improving. We continue to add both On the initial sale with new logos, the number of deals that have more than one product, as well as the number of customers that have more than One solution from us. We I think the biggest growers assessment is a huge opportunity right now, And we're seeing that acceleration.

Speaker 2

Addressing the nontraditional learner opportunity It is a great growth opportunity for us in 2 ways. 1 is in cross selling to existing learning institutions that we already have relationships with, As well as the non traditional educators like a people cert that we talked about in the script that is training outside of what you would traditionally consider Higher Ed Institution. And so we do think those 2 are probably the biggest growth drivers and the ones that we're seeing the most growth in Contributing the most to our growth in the near term.

Speaker 11

Super helpful. Appreciate it, guys.

Speaker 2

Thanks, Dave.

Operator

Your next question comes from the line of Steve Enders with Citi. Please go ahead.

Speaker 12

Okay, great. Thanks for taking the question here. I guess I do want to ask a little bit on the guide and the revenue outlook in particular. I guess, good beat and raise if we're looking at 1Q, 2Q. But how should we be thinking about the second half of the And what you're guiding to here, is there, I guess, any change in the seasonality of the business that we should be thinking about here?

Speaker 12

Is there an added level Of conservatism, as you think about the second half in particular here?

Speaker 2

Yes. I don't think there's anything outside

Speaker 3

of what we've already talked about in the second half of the year that we're looking for the guide. We do put out numbers that we feel confident in achieving. And as Steve talked about, we had a great Q1, A little bit of over performance there in our bookings. And so, we feel good about the targets that we've shared with you and our ability to hit them.

Speaker 12

Okay. I guess as we think about the funding environment in K-twelve, I think there's been reports of Esser funding coming in at 75% plus at this point. So I guess how do we think about how much is still kind of left out there for you to go after and And how you're thinking about maybe the pace of that funding environment as that begins to close in the next 6 quarters or so?

Speaker 2

Yes. The way that we think about it, Steve, is that, it creates a nice kind of macro backdrop for us In that, the schools are still flush with cash. They still have The appetite to make these investments, the reality is, First of all, it's hard for us to kind of really break down when we close the deal, was that ESSER funds or was were ESSER funds in the background? But I will say that what we're seeing is an interest in digital transformation, the recognition that the technologies that we provide around Particularly in K-twelve around LMS and assessment management, our core infrastructure for digital transformation, they're a must have in there. And so a lot of these conversations, again, when we're working with our decision makers as well as the funding sources at the state level, is that we are ensured that these are durable funding sources.

Speaker 2

We still have 18 months left to spend the existing dollars that are out there. So, we do think that this background It's still a favorable macro backdrop for us. We do expect that this will be we'll still have a lot of activity for the Next 18 to 24 months.

Speaker 12

Yes, perfect. Appreciate you taking the questions.

Operator

Your next question comes from the line of Noah Herman with JPMorgan. Please go ahead.

Speaker 13

Hey, guys. Thanks for taking the question. Just one on our end. Sort of coming back to the more so the nontraditional or non university customer opportunity, the PeopleSERP feel Coming more into fruition after 2 quarters, that seems like a really strong bright spot in data point. I mean, How do you sort of see the opportunity with non traditional customers really growing at this point?

Speaker 13

And how do you sort of see that acting as another lever for durable

Speaker 2

Yes. I'm glad you asked that question because when we talk about nontraditional, we have a A whole installed base of institutions that are trying to figure out how do they dress not just your traditional student, but also that non traditional. But we do believe that there is A market that we haven't we're just starting to tap into. The PeopleSERD is one of those. Citibankild is another one.

Speaker 2

We talked about CVOGENT on the call today in Belgium, are all about Those non traditional institutions, not just non traditional students. And so, we do think that this is an emerging opportunity for us. It's a market That we haven't addressed in the past, so it opens up a nice, TAM for us, to address, and we're still early days in tapping into that market. So it gives us a lot of confidence in our ability to drive double digit growth, Top line growth for the foreseeable future. And we're really pleased with the early traction that we've gotten.

Speaker 2

And again, the PeopleCert quick turnaround, up and running, Reference customer, well known in the market and kind of one of those lighthouse accounts to help us drive that ongoing growth.

Speaker 13

Great. Thank you so much.

Operator

There are no further questions at this time. I will turn the call back to CEO, Steve Daley.

Speaker 2

Thank you, operator, and thank you, everybody. As you heard today, our commitment to innovation, customer And disciplined investments in our platform will continue to unlock new opportunities like this non traditional space and drive value for our customers and shareholders In this dynamic market that we're playing in with the educational technology, we're early days still. We feel in our growth as a company, we're also seeing a lot of opportunity to drive Digital transformation across education. And so we're very excited about the future. We look forward to continuing to drive That top line growth, but also world class margins in the months years ahead.

Speaker 2

So thank you for your time, and we look forward to talking to you in another quarter. Thanks everybody.

Operator

This concludes today's conference call. You may now disconnect your line.

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Earnings Conference Call
Instructure Q1 2023
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