Instructure Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Instructure's second quarter 2021 earnings call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to our first speaker today, April C., Investor Relations. April, please go ahead.

Good afternoon and welcome to Instructure's second quarter 2021 earnings call. We will 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 uncertainties, and our actual results may differ materially. For discussion of factors that could affect our future financial results in business, please refer to the disclosure in today's earnings release and the other reports and filings we file from time to time with the Securities and Exchange Commission. All 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 the website. All of our non-revenue financial measures we discussed today are non-GAAP unless we state that the measure is a GAAP measure. With that, let me turn the call over to Steve.

Thank you, April, and good afternoon, everyone. Thank you all for joining us on our first earnings call following our recent IPO. I will say that I have been looking forward to this call and the chance we have to share the tremendous momentum we have in the business. During today's call, Dale and I will provide details on our Q2 results, as well as share Q3 and 2021 guidance. We will also cover the business, market, and opportunity, as many of you may be newer to the Instructure story. But first, I'll kick this off with a few highlights from our financial results. Q2 gap revenue was $93.6 million, up 52% year over year, while total allocated combined receipts, or ACR, was $95.9 million, up 28% year over year. We think HCR is the best way to look at the business because it gives investors better visibility into the underlying health of our business. Importantly, we delivered these results while continuing to drive operating leverage across the business, with Q2 adjusted EBITDA margins of 33%, up over 1,400 basis points year over year. I couldn't be prouder of the team and would like to acknowledge all of the Instructure employees for all their hard work in the first half of the year. Instructure provides a SaaS platform for teaching and learning called the Instructure Learning Platform that is built around the Canvas Learning Management System, or what's commonly called an LMS. The Instructure Learning Platform is a 100% cloud-native hub that connects educators, students, administrators, parents, and partners, and is used for in-person, online, or hybrid modes of learning. We are the North American LMS market share leader in both higher education and among paid K-12 solutions. And we have an international presence with over 6,000 customers and over 30 million contracted Canvas LMS users globally. We continue to successfully sell into established institutions with massive opportunities remaining both domestically and internationally. The past year has been highly transformative for our business, both from an operational and from an industry perspective. We have reentered the public market as a fit-for-purpose learning platform leader, focused exclusively on the immense education opportunity and well-positioned for long-term, durable growth. Operationally, we simplified our organizational structure by divesting our corporate LMS business bridge, streamlined our cost structure, implemented a strong focus on efficient capital allocation, and realigned our sales and marketing motion to be more efficient and effective than ever before. The education technology market is at a critical inflection point. During 2020, when we were a private company, digital transformation accelerated meaningfully, one of the greatest and quickest digital transformations in any industry. As a result, we've seen long-lasting adoption of our technology. This has changed how educators and students participate in the learning process, and it further cemented Canvas as a mission-critical learning platform for our customers. We are deeply embedded in the world's educational workflows. We believe the change is here to stay. Technology-enhanced models are now as standard in education as video conferencing is in business communication. Industry research and direct engagement with customers indicate that K-12 districts will maintain There are LMS subscriptions post-COVID. In fact, according to a third-party study, more than 80% of K-12 educators view the LMS as the main platform for instruction and expect usage to remain at elevated levels. We believe our market opportunity now is greater than ever, and Instructure is in prime position to emerge as the platform leader across higher education and K-12 institutions. The education technology market that we address is large and rapidly growing. Global expenditures on educational technology have accelerated and are expected to grow to $404 billion in 2025, according to Holon IQ. We estimate our total market opportunity is approximately $30 billion, comprised of an LMS market opportunity of approximately $5 billion, a market opportunity for our non-LMS products of approximately $10 billion, and new market expansion opportunities approximately $15 billion. Our key differentiators, usability, reliability and scalability, and our broad open platform give us confidence in our ability to continue winning. Let's briefly touch on these differentiators. First is usability. Educators and administrators spend nearly 90% of their working hours logged into the LMS, and students now spend a significant portion of their week on activities that are touched by the LMS. It's important that they love the experience, and when they use Instructure, they do. While legacy technology was built with a focus on administrators, Canvas was built with the teachers and learners in mind. Those teachers and learners are a vibrant online Canvas community of more than a million members. And according to third party research, our satisfaction is 50% higher than the number two competitor in higher ed and 60 to 70% higher than the number two competitor in K-12. Because this is such a highly referential sale, these happy customers are some of our best salespeople. Second is reliability and scalability. Learning platforms are mission critical systems for education providers and students and must be reliable, available, enterprise grade, and scalable. The ability to handle the usage, fluctuating demand, and changing workload patterns while maintaining high availability is a critical differentiator. We guarantee 99.9% uptime through service level agreements and have been able to scale up dynamically and dramatically amidst abrupt changes in usage during COVID. In contrast, COVID highlighted deficiencies of our competitors whose legacy systems struggled to scale and remain available. At the institutional level, we provide solutions that can manage entire learning environments of any size, from a single school district to a large multi-entity state or countrywide deployment. This scalability drives very high win rates and helped us win 11 out of 12 state K-12 RFPs last year. Third is our broad, open platform. Our learning platform is much more than just the LMS. We are a SAS learning platform that has the ability to span across all areas of teaching and learning. Canvas is the core, complemented by assessment solutions from our Mastery Connect and Certica acquisitions that allow educators to assess student learning and make plans that guide an individual approach for each learner and their outcomes. Since our technology touches 90% of all the work to be done 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, including analytics, online education, and managing video learning experiences. Since we are an open architecture, we also extend through our ecosystem of more than 500 partners, with over 1 billion launchers of those partner tools from our platform last year. Our partners include some of the world's largest technology companies as well as niche points solutions. They span content and hardware providers, collaboration and productivity tools, and publishers. Looking ahead, we have multiple vectors of growth. Let's touch on those vectors in more detail. In higher education, Canvas holds the leading LMS market share in North America based on number of institutions with a meaningful opportunity to increase market share internationally. Our growth strategy in higher education includes ongoing efforts to replace legacy LMS systems, strategically targeting international markets, and taking advantage of a land and expand strategy to both upsell and cross-sell. In K-12, when counting districts, Canvas has emerged as the market share leader of paid LMS in the US and has a meaningful international opportunity. We are seeing incredible growth in technology investments due in part to increased funding for digital transformation projects, which is driving more districts to move from free solutions to enterprise class LMS. As a result, there is a meaningful opportunity to secure greenfield wins in districts that aren't currently using a paid LMS. We will also continue working to secure state-level deals in large districts and expand our footprint as we upsell and cross-sell additional modules of our learning platform. In international markets, we are focused on countries that have the best connectivity and student-to-device ratios. Our goal is to disrupt these markets like we disrupted the US markets 10 years ago, and we are using a proven playbook to do it. Internationally, the markets are highly fragmented with many institutions using legacy open source and sluggish constrained on-premise systems. We are seeing strong interest in replacing these legacy systems with a modern learning platform. And over time, we expect our international business to be at least as large as our U.S. business. We also have a strong land and expand motion. We are still in the early innings here, and we believe the opportunity is immense, with our current product portfolio representing three-quarters of a billion dollars in cross-sell opportunity in our existing customer base alone. Since 90% of instructional workflows are facilitated by an LMS, we are well-positioned to cross-sell other modules that we continue to add to through organic innovation and M&A. I would note that we are going after these opportunities with a substantially improved go-to-market model that includes a single outbound sales motion. And these efforts have resulted in the number of customers that have more than one product to increase from 24% to 34% in the last 18 months. We still have much room to grow in our cross-sell business. As of the end of Q2, only 34% of our customers had purchased two or more of our solutions, and only 9% had purchased three or more of our 11 available solutions. Finally, we have a robust organic and inorganic product expansion roadmap that we expect to continue to expand our TAM and feed our land and expand motion. One recent example of our organic innovation engine is the way we enhanced our platform to meet the needs of our youngest learners. The result was Canvas K5, which we developed side by side with teachers who were yearning for a more native experience to deliver instruction. Canvas K5 is an easy to use, simple user interface that is suited to the demands of a primary school environment. Over a quarter of our customers have already activated these new features. and in the first few weeks of release, and reviewers are using superlatives like stunning and game changer. An example of recent inorganic expansion was our acquisition of EasySoft, a Netherlands-based provider of SaaS experience management solutions for education that we acquired in Q2. While we expect minimal impact to our 2021 financial results from EasySoft, we believe these solutions will provide growth in 2022 and add approximately $500 million in available TAM. These both are great examples of the rich innovation and M&A opportunities available to expand our platform and our available markets for years to come. In summary, I've never been more confident and optimistic about our business than I am today. We are well positioned for durable growth and expanding profitability, and I will now turn the call over to Dale to talk about our financial results and the exciting momentum we are seeing in the business.