Instructure Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Instructure's fourth quarter and fiscal year 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's 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. April, please go ahead.

Good afternoon and welcome to Instructure's fourth 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 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 results may differ materially. For a discussion of factors that could affect our future financial results in business, please refer to the disclosure in today's earnings release and 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 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.

Thank you, April, and good afternoon, everyone. Thank you all for joining us for our fourth quarter and full year 2022 earnings call. During today's call, Dale and I will provide details on our fourth quarter results and provide first quarter and full year 2023 guidance. Instructure delivered another strong quarter in Q4, exceeding our previously communicated 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. As we move into 2023, we are committed to growing these relationships and further expanding our impact on the educational landscape, and we are confident we can continue to deliver balanced growth and profitability. Our strong fourth quarter financial performance capped off a truly outstanding year for Instructure. Fourth quarter gap revenue was $124.7 million. up 12.8% year-over-year. Allegated combined receipts, or ACR, was also $124.7 million, up 11.9% year-over-year. Full-year 2022 GAAP revenue was $475.2 million, up 17.2% year-over-year, while ACR was $476.1 million, up 14.8%. Foreign exchange pressure top line results by approximately 1%. for the first quarter and roughly half a percentage point for the year. Thanks to our focused investment approach, fourth quarter adjusted EBITDA grew 16.7% year over year to $48.6 million, a 39% margin. Full year 2022 adjusted EBITDA increased 22.4% to $179.6 million. Total customers grew 7.6% 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 five key highlights from the quarter today. Continued success with new logos, the power of our platform strategy, wins in non-traditional education, how M&A is advancing our strategy, and continued operational efficiency. First, our focused go-to-market and expanded set of offerings are driving continued strength and bringing new logos onto the platform. Our new logo win rates increased in the second half of 2022 from an already very healthy rate as higher education and K-12 institutions in the U.S. and across our major international markets continue to choose and structure solutions because they solve real meaningful challenges across the teaching and learning landscape. In higher education, we hold a 40% market segment share and continue to see high competitive win rates during the fourth quarter as we help institutions face a challenging enrollment landscape with students exploring non-traditional learning options. 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 display 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 24 by 7 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 US still use legacy LMS systems, providing plenty of opportunity. In US K 12 canvas became the market segment share leader in the fourth quarter with 33% of all K 12 districts using canvas and the instructor learning platform as the foundation of their digital transformation. We continue to hear from K 12 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 new opportunities that emerge as K-12 systems settled into post-COVID normalcy. For example, Charles County, a large Maryland public school district, 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. The initial contract includes foreign structured products, Canvas LMS, Canvas Studio, Mastery Connect, and Impact. Looking ahead, the pipeline for new logos is robust. Win rates remain high. The funding environment remains favorable, and we're 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 five-year multi-million dollar win with the University of Santo Tomas in the Philippines that included Canvas LMS and Canvas Studio. 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, whose College of Science and Technology will be a driving adoption across other colleges in 2023. 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. Second, I wanted to talk about our platform strategy and our foundational role in driving the next wave of ed tech 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 billion cross-sell opportunity due to our success in selling Canvas and through our organic and inorganic addition of products. Our efficient go-to-market, focused 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 two or more products in 2022. This has been particularly noteworthy in K-12, 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 10.5 billion 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. 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. Third, 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 three-year deal with the City and Guilds of London Institute. CNG is the largest awarding body for continuing education in the UK and Ireland. They work with over 8,000 continuing education colleges and training providers in the UK and touch roughly 250,000 students nationwide. Following a multi-year 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. Fourth, we continue to use strategic M&A to increase our TAM and rapidly expand our learning platform capabilities. Learn Platform, our sixth 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. I want to take a minute to discuss how each of these six acquisitions fits into our platform strategy and increases the durability of our model. Together, they create an unmatched value proposition in the EdTech ecosystem. Kimono, EasySoft, 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, and prove 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 in Catalog Studio and 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. This enables us to win a disproportionate 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 Million 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 Concentric 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. 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 examples, investment in our infrastructure have allowed us to continue to improve our gross margins, which in turn enabled us to increase our R&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 and innovation. 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&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&A. Looking into 2023 and 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.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 nontraditional 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. Our K-12 customers, in addition to scaling quality teaching through the use of learning and assessment technologies, want 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-12 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 ed tech providers to demonstrate their value, will only become more important in the future. In our area of highest growth, international, customers are increasingly seeing what North America already knows. that 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 accelerate their digital transformation. In summary, I couldn't be more excited to lead in structure as we evolve into the most comprehensive teaching and learning platform worldwide. 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 Maylett and his capacity as Chief Revenue Officer. 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 it over to Dale.