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spk06: Ladies and gentlemen, thank you for standing by, and welcome to Instructure's second quarter 2023 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, David Banks, Vice President, Investor Relations. David, please go ahead.
spk04: Thank you, Josh. Good afternoon. and welcome to Instructor's Q2 23 Earnings Conference Call. We will discuss results announced in our press release issued after market closed today. With me are Instructor'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 affect our future financial results in business, please refer to the disclosure in today's earnings release and other reports and filing we make from time to time with the Securities and Exchange Commission. All of our statements are made as of today, July 31st, 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 nations. You can find the reconciliation of our GAAP to non-GAAP majors included in our press release, which is posted in the investor relations section of our website. With that, let me turn the call over to Steve. Thanks, David. I'm delighted to welcome everyone to the structure's Q2 2023 earnings call. During today's call, Dale and I will share the details of our Q2 results and provide guidance for Q3 and the full year 2023. Q2 results exceeded our previously committed guidance range for revenue and adjusted EBITDA, fueled by our efficient go-to-market organization and unyielding dedication to customer satisfaction. Q2 revenue was $131.1 million, up 14.4% year-over-year, impacted by a constant currency headwind of 160 basis points. Q2 adjusted EBITDA over 29% year-over-year to $51.3 million, driving a 39.1% margin. We believe the strength of our Q2 performance demonstrates the effectiveness of our business model. Before we delve into highlights from the second quarter, I want to provide some takeaways from our InstructureCon conference that took place in Denver a few days ago. The first such event was held in person since 2019. We had nearly 2,000 customers, over 100 partners, and more than 2,300 attendees at the sold-out event. It was gratifying to find the Instructure community is as vibrant as ever. We unveiled enhanced and expanded Instructure learning platform innovations centered around core teaching and learning, advanced analytics, lifelong learning, and platform integration. We believe these new solutions will save educators time, personalized learning experiences for students, and simplify complex tasks for administrators. We also previewed some of our AI strategies and are excited by the feedback from our customers as we move forward with that. Now I will share highlights from the quarter, including four key drivers, strong new logo sales, cross-sell uplift, the power of our platform strategy, and how we are leveraging our business model. First, our new logo win rates remain strong across all of our markets. Success there is driven by our ability to solve real-world challenges across the teaching and learning landscape. Our focus on lifelong learning and vocational training resulted in a win with Duke University. Duke made a significant investment in the entire instructor learning platform with the implementations of Canvas LMS, Impact, Canvas Studio, and Canvas Credentials. Duke's Office of Teaching and Learning spearheaded this transition to bolster their ambition of being a frontrunner in lifelong nontraditional education. We now serve all of the top 10 universities in the United States with Canvas. Also in North American Higher Ed, we had a significant win with Ohio University. After 20 plus years on a legacy provider, OU chose Canvas for a 10-year contract. We won because of the strength of the Canvas community, our presence in other flagship institutions in Ohio, our overall market leadership, and our ability to deliver a value-based comprehensive solution. In North American K-12, our platform continues to support our market-leading position. The green shoots we mentioned during our last quarterly call resulted in strong bookings in Q2, as K-12 decision-makers continue to recognize our product as mission-critical. Cincinnati Public Schools joined the Canvas universe in the quarter. A longtime user of a competitive solution, Cincinnati ran a lengthy process seeking feedback from parents, teachers, and students. Their strategy was to implement a new LMS that would deliver best-in-grade results. Canvas was far and away the winner as our LMS clearly matched the district's innovative approach to education. Our reputation for consistent uptime Big feature releases, unmatched service and support, and unrivaled student experience allowed them to confidently displace the incumbent provider with Canvas. Among the new international deals in Q2, we secured a direct win with the University of Continuing Education Krems in Austria, the leading public university for continuing education in Europe. Krems serves a changing demographic with an increasing average retirement age and a skills gap between the workforce and graduates. They saw Canvas as a way to address the needs of their student population, allowing them to serve both traditional and non-traditional students. Similar to other institutions in Europe, Crems has strict privacy standards that must be met by their partners. Our global privacy strategy centers on safeguarding student data and reducing our customers' regulatory burden allows parents to comply with rigorous privacy standards in the region, which gratifies to see our customers responding positively to our unwavering dedication to privacy. Second, we continue to drive growth with existing customers, both through cross-sell and up-sell, where we see a billion-dollar-plus opportunity. Internationally, we secured a meaningful upsell with GlobalPro, one of the largest registered training organizations, or RTOs, in Europe, making them our largest customer by user number in Europe. This also demonstrates our ability to serve the needs of non-traditional learning institutions. CrossHell was fueled by deals such as Charlotte Mecklenburg Schools, a longtime Canvas and Mastery Connect customer. After a multi-vendor evaluation, the district chose our assessment concept because of the rigor and accuracy of the solution that gives better insight into student growth. This further validates our platform strategy and the strength of our suite of products. This platform strategy, our third key driver, thrives on innovation and partnerships. During InstructureCon, Sheridan Beecher-Singham, our Chief Product Officer, provided a glimpse into many new product initiatives designed to shift the education paradigm enhance teacher efficiency, and foster student success. Among the most important partner-driven deals in the quarter, we won a contract with one of the preeminent technology companies in the world that wanted to conduct research to prove the efficacy of handheld devices. We created a proposal that examined the impact of math intervention on both student outcomes and teacher outcomes. In addition to expanding a great partnership with a large technology business, the wind also has garnered the attention of large districts that are looking to participate in the research. And we are thinking big about partnerships. Also at InstructureCon, we announced that we are teaming with Con Academy, bringing together our structured learning platform with Con's AI-powered student tutor and teaching assistant, Con Vigo. Through this partnership, we are offering world-class content from Con Academy with the industry's most widely used commercial LMS, leveraging generative AI to empower educators to meet students where they are in their educational journey. We are committed to bringing AI to the teaching and learning process with intent, safety, and equity. To that end, we also announced the Emerging AI Marketplace last week, which gives educators visibility and access to the AI solutions that are integrated into the instructional learning platform. We have worked with our customers to define privacy and security standards to ensure AI solutions are safe, and each partner in the marketplace is committed to these standards. in just the last two years we have nearly doubled our partner base truly our investment in the construction learning platform gives our customers access to innovation across the ed tech wide state and finally our results are indicative of our ability to drive leverage in the business because of our disciplined investments we've been able to deliver best in class margins that in turn allow us to invest in our platform and drive long-term durable growth. Our business model permits us to continue to drive strong top-line results without sacrificing margins and profitability. As evidence of this, we saw record renewals in Q2 as customers that came on during the COVID-19 pandemic continued to see value in a more normalized environment. With adjusted gross margins approaching 80% and adjusted even though margins nearly 40%, We expect to continue to produce free cash flow that will allow us to reinvest both organically and through M&A to drive long-term durable growth. In conclusion, we believe our impressive Q2 results and expanding impact on education position us as a clear leader in the education technology space. And we look forward to the opportunity to continue to drive value for our customers and shareholders in the months and years ahead. now i will turn it over to dale to provide further details on our q2 financial performance and guidance for q3 and the full year 2023. dale please go ahead 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 gap results i will be discussing certain non-gap results our gap financial results along with the reconciliation between gap and non-GAAP reports can be found in our earnings release, which is posted in the investor relations section of our website. In Q2, we continue to show a combination of strong top-line growth and best-in-class suggested EBITDA margins. As Steve mentioned, we generated total gap revenue of $131.1 million. Subscription and support accounted for 90% of our Q2 revenue at $118.6 million, up 15% year-over-year, driven by healthy growth across all of our key markets, with particular emphasis in K-12 and with cross-sales. Professional services and other revenue accounted for 10% of our Q2 revenue at $12.5 million, up 7% year-over-year. Deferred revenue at the end of Q2 was $330.7 million, up 17% year-over-year. We ended Q2 with remaining performance obligations, or RPOs, of $853.6 million, up 9% year-over-year. We expect to recognize revenue on approximately 73% 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 profit margin profile was supported by our optimized cloud's architecture and flexible support model that scales to meet seasonal customer demand. In Q2, gross profit was $104.1 million, representing a 79.5% gross margin, up from 77.6% in Q2 of last year. Turning now to operating expenses. Sales and marketing expenses for Q2 were $27.6 million, or 21% of revenues. down slightly from 21.5% of revenue in Q2 of 2022. Research and development expenses for Q2 were $16.6 million, or 13% of revenue, compared to 14% in Q2 of 2022. General administrative expenses for Q2 were $9.8 billion, or 8% of revenue, down from 9% in Q2 of last year. Non-GAAP operating income for Q2 was $50.2 million, representing a 38.3% operating margin, up from 33.7% in Q2 of 2022. Q2 adjusted EBITDA margin was $51.3 million, representing a 39.1% adjusted EBITDA margin, up from 34.6% in Q2 of last year. Non-GAAP net income was $28 million in Q2, or 19 cents per share, compared with $23.8 million, or 17 cents per share, a year ago. 32-Value Sheet Cash Flow Statement. We ended Q2 with $129.8 million in cash, cash equivalents and restricted cash, and $488.4 million of long-term debt, net of discount, resulting in a 1.83 times net debt to travel 12 months adjusted human salary scale. Free cash flow for the quarter was $23.5 million compared to $6.6 million in the prior year, up more than 250%. 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 $37.1 million, a 129% year-over-year increase from $16.2 million in the year-ago quarter. Note that our free cash flow was quite strong this quarter due chiefly to accelerated collections. We expect that these will normalize as we move through the balance of the year. I will now conclude the call by providing guidance for Q3 and the full year of 2023 for revenue and adjusted EBITDA. We have provided additional guidance details to our earnings press release. We expect revenue in the range of $132 million to $133 million. For the full year, we expect revenue to be in the range of $524 million to $528 million, about $2.9 million at the midpoint, compared with the annual guidance that we provide in May. We expect Q3 adjustment EBITDA in the range of $52.5 million to $53.5 million. representing an adjusted EBITDA margin of 38.8% at the midpoint. For the full year, we expect adjusted EBITDA in the range of $203.5 million to $207.5 million, representing an adjusted EBITDA margin of 39% at the midpoint. For the full year, we expect adjusted unlevered free cash flow to be in the range of $207 million to $211 million. for an adjusted sun liver tree cash flow margin of 39.7% at the midpoint. In summary, we believe that our first half results put us in great position to drive an even better 2023 than originally expected. We executed at a very high level, exceeding our guidance and continuing to deliver a rare combination of double digit growth and best in class . 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.
spk06: At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Josh Baer with Morgan Stanley. Your line is open.
spk01: Great. Thanks for the question and congrats on a strong quarter. I was hoping to get an updated view on growth expectations across K-12, higher ed, and international. Sometimes you give kind of ranges there. And I wanted to ask just to get also a sense for the gross margins or EBITDA margins or contribution margins across those segments, thinking about how to assess the impacts from mix shift growth. presumably to faster-growing international, maybe to K-12, how that could impact margins too. Thanks.
spk04: Yeah. Thanks, Josh. Appreciate the question. We provided some growth expectations in general terms for North America, K-12, and North America high-end group being the highest single digit and international to be in the low-level digits. And that's how we look at the business moving forward. And in terms of margins, we've not broken out margins by any of those different segments that we've talked about. However, I will say that we're very confident in our operating model that we can get very good and positive contribution margins in each of the areas where we participate. Josh, as we've made investments, for instance, in our channel program, that were negative margins, frankly, as we began making those investments, and we've still been able to improve our margins in the process. So that's the model that we're taking is that we'll continue to see those improvements, even as we see the next shift between those.
spk01: Okay. That's helpful. Thanks. And then any change in the competitive landscape across those end markets, or is it the same story? Thank you.
spk04: Yeah, we're seeing, you know, similar competitive dynamics across, yeah, across K-12 higher ed and international. So no change there, Josh.
spk06: Your next question comes from the line of Steve Enders with Citi. Your line is open.
spk10: Okay, great. Thanks for taking the question here. I guess I did want to start on, you know, asking about takeaways from the conference. And I know there are a lot of product announcements, but I guess what's kind of been the early feedback on some of the AI initiatives from, you know, the customers that you've talked to? And I guess how should we be thinking about, you know, the potential for that to layer into the model here over the next few years?
spk04: Yeah, it was good to see you there, Steve. We, you know, the feedback was generally very positive. So, you know, we had taken time before. For basically the last 18 months, we've worked with some customer user groups. We were very, you know, pragmatic and really spent time with them understanding where were areas that they'd like us to make investments. And so, you know, investments like our, you know, using artificial intelligence to help create pages within, you know, within Canvas that create, that creator experience using AI, use language, you know, regular language to do that was very, you know, was very well received. And some of the stuff that we showed in the labs in the educational moments of the future room, they were very, very excited about. Global search being one of those, some of the things we did, recognizing sentiment within a remote environment, as well as some of the other pieces that we highlighted. We had a lot of signups, if you will, for customers that want to be part of the early adopter program. we work through some of the details on these so uh in general very positive um yeah i'd say you know it's still early days as far as what impact this is going to have on the business model long term and we're working through those with our customers as we we work to understand you know which which of this functionality you know the value that it's bringing results and changes in pricing or you know what the cost structure looks like so it's a little early to to be building anything into the models steven
spk10: Justin Delacruz- Okay, no perfect no that's a that's helpful there, I guess, to follow up it's good good renewal activity and good good bookings here in the quarter, are you feeling about the kind of current budget environment and kind of what's the view into. Justin Delacruz- You know pipeline opportunity going into going into three Q.
spk04: yeah the you know we feel good about where pipeline steps going into the second half, I would say, you know you've read all the headlines about you know the. Some of the challenges that higher ed is facing you know what we're finding is you know, in general, those are good, you know that we help them deal with a lot of those challenges, so we feel it's a good long term backdrop for us and so. Things like vendor consolidation that we're starting to see happen. Customers have told us that they want to standardize around a few strategic platforms, ours being one of those. The work that we've been investing in over the last two years to really ensure that we give solutions to address non-traditional students, the work that we've done to really go after those non-traditional education institutions, all are good backdrops for us long-term durable growth. So we feel good about where we're sitting. Going into the second half as well is really long-term from a growth perspective.
spk10: Okay, perfect. Thanks for taking the question.
spk04: Thanks, David.
spk06: Your next question comes from the line of Fred Habermeyer with Macquarie. Your line is open.
spk04: Thank you very much, and congratulations on the quarter. I would like to just begin by asking a little bit about international as well, too. Just generally, certainly we saw you highlighted the Austria win. How do you think about that opportunity going into, and throughout the balance of this year, of course, into next year? Just how far along do you feel you are with your international partner go-to-market program? And just how confident are you in the international opportunities? Yeah, it's a good question, Fred. We feel really good about our positioning for international. So as we highlighted in the script, the wins with Krems was in Austria. Part of the value proposition that we bring to particular European customers, but even across the board, is the work that we've done really to put in a very robust privacy and security framework. And so we feel good that demonstrates the value of those, particularly when you're dealing with some of the regulatory environments that each of the regions is dealing with. So feel good about there. Moodle is still 70% of the market there. We believe in the opportunity to continue to grow. It's still our fastest grower. And we can drive a big business over time. know still feel similar to as we've talked about the past spread about the opportunity there uh and particularly about our position to be able to win uh channel investment is still continuing uh and we're starting to see some some progress in the channel um but again it's that's probably something that occurs a little bit later in time as far as having a meaningful impact on the top line thank you there and i i think is another one just we've seen um you know Canvas is performing well, your product is absolutely solid, but of course you've been building a broader portfolio of solutions too. So I'm curious if you can add a little more context also and just where you're seeing adoption of outside of core Canvas solutions and how that's trending throughout this year. Yeah. So we saw particular success in K-12 with assessments. So the Mastery brand of products, whether it's the Mastery Connect, the assessment management system, or the content that rides along with that. So good quarter from that perspective. We're seeing a lot of pickup with our catalog and credentials as we help either higher ed institutions address the non-traditional, or as we go to you know, we go after some of those non-traditional, those RCO organizations, like we talked about in the script. So those two have been particularly successful from a cross-selling perspective, those two areas. And then, you know, we're seeing good success with our learned platform acquisition. So from a, you know, the ability to sell to both sides of the network, either the educational institution as well as selling services to the partners and providers has been, it's met our expectations in which the pipeline has grown and nearly doubled since we did the acquisition. So we're feeling good.
spk03: Thank you very much.
spk04: Thanks, Fred.
spk06: Your next question comes from the line of Steven Sheldon with William Blair. Your line is open.
spk08: Hey, guys. Thanks for taking my questions. The first one here, just great to see renewal trends supporting the step up in RPO. So if you went through this heavy renewal period, did anything surprise you either positively or negatively in terms of things like renewal rates, deal lengths, pricing, upselling, et cetera? Are there any trends that you saw consistently, such as maybe longer term or longer duration contract renewals? Just any detail on the renewal activity.
spk04: Yeah, thanks for pointing out the RPO, Steven. We're really pleased with it. What we did call out is this is a historic number for us on RPO. I'm really pleased with the renewal team. So I would say that the one constant thing that we're seeing out of this group is that we had a lot of customers come on board three years ago in the beginning stages of the pandemic, and they're finding value still today with learning platform, and they're building around learning platform. And so very, very high retention rates. We are seeing some deal length, contract length, extending mainly in the high-end space. And the other thing that I would say, those renewals are now coming with additional products that we have out of our portfolio. So really good things coming out of this strong, equal quarter.
spk08: Good to hear. Appreciate that. As a follow-up, it seemed like there was a lot of focus at the user conference last week on credentialing in higher ed. Looks like that was included in the Duke win. So how frequently are you seeing that being included in conversations with new and existing higher ed customers? Is this going to be something that practically every university will need to be thinking about to be relevant over the medium term in your view? And what could that mean for your financial opportunity with these types of solutions?
spk04: yeah this is uh this is a conversation that we're having with almost every institution right they're they're looking at how do they meet the needs of the uh you know of the workforce of the future how do they demonstrate uh skills along the way rather than just you know just just pointing to a diploma uh at the end of their educational journey so it is absolutely a a point of conversation. It's in almost every conversation that we're having from a selling perspective. It is my belief that over time, every institution will have to figure out how to deal with this. And the customer panels, not just the one that we had together, but also others are kind of confirming that this really is an opportunity for higher education to really ensure that
spk03: enrollments go up and they're addressing the skills-based economy going forward.
spk08: Great. Thank you.
spk03: Next quarter. Thanks.
spk06: Your next question comes from the line of Joe Ruink with Baird. Your line is open.
spk11: Great. Hi, everyone. Maybe I'll go back quickly to the last discussion on RPO. Is it possible to translate what you just saw in terms of a financial metric like net retention rates and maybe how the recent renewal cohorts are evolving relative to, I think you've talked about 105 to 110% in the past. Is that changing for better or worse just in terms of your recent activity?
spk04: I would say, Joe, that RPO number is really noisy. And the main driver for that is the multi-year engagement with our customers. And so I don't know that I would over-index on that particular number to translate to any of the metrics. I would say this, though. We have, on this quarter, we saw really good growth in . We saw good growth in our RPO, and we had really good On NRR, there's a couple of things that we would also point to, which would be some of the growth that we saw with adding other products to it and some price increases. So that does come through in the NRR numbers. I think, Joe, I think it would be tough to read through on the RPO numbers to extrapolate what NRR is going to be. We're still holding to our guidance on NRR where we think that's the end of the year.
spk11: Okay. That's helpful. And then I wanted to ask about guidance. So it looks like the forecast for the second half of the year entails revenue growth dipping into the high single-digit range. How much of that is just reflecting some of the bookings trends you were discussing and in the latter part of last year. And then on the flip side, as I just look at this quarter's RPO number and think about maybe RPO billings, it does seem like there's been an improvement in growth rates, kind of back to the low double-digit range. Is this all maybe just a matter of the timing of when RPO gets deployed and low double-digits as feasibly a better expectation, but maybe the earlier part of next year?
spk04: Joe, so the second half growth really follows the guidance that we provide. That really follows the normal seasonal pattern that we see in line to North America's fall start in school systems, where we have most of the red has already built into our plan. But we always provide guidance that we're confident in delivering. The stable customer base gives us that confidence that we can hit those 70 cents. And we'll get back to 2024 numbers in our Q4 call, Joe.
spk11: Okay. Fair enough. Thank you.
spk06: Your next question comes from the line of Bryan Peterson with Raymond James. Your line is open.
spk13: Hey, gentlemen, congrats on the quarter. It was great to see you last week. So two on the cross-sell that you guys referenced this quarter. So just on the cadence, you know, I'd love to understand if that's more of a renewal dynamic and you're seeing that as part of contracts coming up, or is that actually happening kind of outside of that traditional negotiation cycle, maybe with that outside of the RFPs? I'd love to maybe unpack that a little bit.
spk04: Yeah, you know, Brian, I mean, it's a little bit – um it's a little bit tough to kind of break it out because we you know this is our you know the kind of june july august time frames are our biggest renewal months uh and we did see we did see good cross-sell motion in this uh in this quarter so yes that helps uh it's always good to intercept a renewal when it comes to cross-sell We don't, you know, but we still do cross-sell outside of renewal cycles. So it isn't tied necessarily to the renewal, but absolutely the renewal helps when it comes to being able to intercept budgets and things like that.
spk13: Understood. And maybe just a follow-up. No, it does. But I guess maybe for Dale, as we're thinking about cross-sell in some of the newer products, How do we think about like a dollar booked to a dollar going live for revenue? Is that much shorter than the LMS or does it matter by product? I'd love to just understand as we think about that diversification of the booking stream, how does that flow into revenue? Thanks, guys.
spk04: Yeah, it's a good question. What we're finding is that if we're able to capture what a solution for a customer that has an issue and show them value in our product, they will buy it. prior to a contract renewal. And we see that with some of the products we have, like the LB products are a good example of that impact. And then what happens, Brian, is that usually we see like an upsell at the time of renewal when they expand that to a large part of their student base. And so it happens all the time. And so it's hard for me to tell you after a booking, when that's going to start because it just happens all the time and it's based upon the customer's needs.
spk03: Understood. Thanks, guys.
spk06: Your next question comes from the line of Terry Tillman with Truist Securities. Your line is open.
spk02: Hey, Steve, Dale, and David. Not to worry. I still have some questions left, so you're not getting out of this that simple. I know credentials and catalogs have been asked like four times, but I thought I'd ask a fifth time. When I was talking to customers just on an ad hoc basis at the conference, it actually was coming up regularly, and I've attended your conferences for many years, whether virtually or in person. And I'm curious, though, credentials and catalogs, how do they stack up now in terms of kind of the mix of new bookings coming from those add-on products versus maybe some of the other products? And it's basically just kind of,
spk04: related to that where are we in the adoption cycle for those two modules because it was coming up on a pervasive way thank you and then i follow up yeah you know terry we don't we don't break out between the different products as far as uh percentage of bookings that kind of thing but um To your point, it is top of mind for most institutions. We are still early days. So a lot of conversations, a lot of strategies, some pilots, you know, pilots or customers rolling out pilots, some like Duke that are committing to it right up front. But, you know, from a revenue contribution perspective, it's still a pretty small contribution. We're still kind of early in it.
spk02: Okay. Got it. Understood. And I guess this is the follow-up question is, you know, it was striking in terms of the commentary and the narrative around lifelong learning. You all talked about now over a couple of quarters, you know, some of these non-traditional kind of educational institutions and where it's kind of like re-skilling opportunities. What I'm curious about is, you know, where are we in terms of how much that's starting to kind of shake out in the pipeline of some of this kind of more emerging kind of business? Because I'm not suggesting we're going to have a new segmentation, another segment. Dale doesn't, you know, want to have to deal with that. But How much is this starting to proliferate, the new deal activity, these deals that are outside of the, you know, the traditional four-year academic institutions?
spk04: You know, we won't, we don't break that out again, Terry, as far as that level of detail. But I would, you know, I mean, we've been intentional as we've included these deals in our transcripts for the last, you know, several quarters because we are seeing a lot more activity in this RTO, further education, you know, those non-traditional education institutions. So we do believe that's a, that's a, it'll be a long-term driver for growth for us, right? It'll be an important offset for existing customers as far as enrollments go. And, you know, it will be a driver for our upsell and our cross-sell over the long term. But again, On both sides of those, whether it's existing institutions, traditional institutions, or non-traditional, we're still early innings as far as its contribution to our overall results.
spk02: Got it. And I guess, though, on that kind of emerging part of the business, does Chris Ball need to do anything different with go-to-market, or do existing sales reps kind of get opportunistically on those deals? Anything you can share about the go-to-market, if it needs to be any different?
spk04: Yeah, that's a great question. We do believe that we can go faster if we put dedicated reps on that non-traditional learner group. It does require a little bit different messaging, positioning, packaging, those types of things. So historically, we have addressed those with our existing higher ed sales team. Over time, I think that'll segment out from a selling perspective.
spk03: Thanks for taking my questions.
spk04: Thanks, Terry.
spk03: That was only three questions this time.
spk06: Your next question comes from the line of Matt VanVleet with BTIG. Your line is open.
spk00: All right. Thanks for taking the question, guys. Nice job on the recorder. I guess when you look at some of the conversations with prospective customers, how much, especially in higher ed, is starting maybe to be driven by some of these credentialing or non-traditional components as they're looking at using technology to really kind of jump into that environment and then you're going to follow up on maybe the more traditional Canvas LMS deals, or is it still almost all driven by at least LMS being a major part of it.
spk04: Yeah, it's, you know, it's interesting, Matt, because there's a, the non-traditional is definitely an interest point within the selling process in most institutions that we're talking to. The other big trend that's kind of related to this is that institutions are recognizing that historically the way they've tried to go after these is, you know, with a, you know, maybe it's a continuing education team, which is separate from the team that's worried about, you know, how does the on-campus experience look? And what they're recognizing is they want one platform to drive across all modalities, right? And all, we call that omni-channel, right? They want one experience, whether you come on campus full-time, whether you're fully remote, whether you're doing this to reskill, or you're coming for a degree, or you're just for credentials. So, That's the bigger driver of the discussions. And then, you know, the use of catalog, you know, which is organically built into the Canvas platform, the addition of credentialing, those things are, you know, are the natural, you know, progression of the sales call is, okay, you need these in order to address that part of your overall platform strategy. Does that make sense?
spk00: Okay, very helpful. Yeah, no, that's great. And then maybe one more on this topic. Obviously, it was very, very front and center at the conference and has been for a little while in your commentary. But have you done much work internally or that you'd be willing to share in terms of how much sort of addressable market expansion all of this provides? Or is some of this maybe offsetting potential other declining factors in particularly higher ed and You know, it's a good backfill, but maybe not as additive as it seems at the moment.
spk04: Yeah, you know, we think this is a big opportunity for us as far as the number of dressable students and the revenue drivers. So, we've sized the nontraditional space with about a $5 billion market opportunity. Um, you know, some of that is included in our calculation of the, you know, existing $1 billion cross-sell that we, you know, we've shared with you, uh, in the past. Um, but, but a lot of that is incremental, uh, and, you know, and, and much bigger than the kind of traditional LMS market. So we don't, we believe it will be a grower, uh, you know, our long-term durable growth versus a, you know, a replacement for declining revenues in other places.
spk00: All right, great. Thank you for taking the questions.
spk06: Thanks, Ben. Your next question comes from the line of Devin Au with KeyBank Capital Markets. Your line is open.
spk09: Great. Thanks for taking my question. The first one I have is, you know, congrats on the new lands at Duke and Ohio. I definitely encourage you to see new lending larger with multiple products attached. Also, I don't think you've highlighted multiple new wins in U.S. higher ed in your remarks for quite some time. So I just want to maybe double-click on the strength in that market specifically. Do you attribute kind of the strength there just from overall increasing priority from these institutions looking to add more solutions, or would you attribute the strength to just, you know, overall better execution from your side?
spk04: Yeah, I think, you know, we tend to do very well in North America in higher ed, particularly particularly in the enterprise segment of that market. And so we have had some good big wins over the last several quarters. This is just continuing on that momentum. And it's a part of the market that we started in. It's part of the market where we have 44% market share now in terms of enrollments. And so what we're seeing in those discussions is our position, the market our you know our lighthouse accounts and references that we can bring to the table uh the fact that you know we have a scalable platform that has scaled up rapidly during the pandemic and that they can rely on it to scale to their needs those are all coming into decision factors in addition to you know just around a you know a typical feature function sort of discussion You know, the other thing that we are seeing is that many of these institutions are either, as I talked about earlier, trying to, you know, want a single platform for across all of the different opportunities that they have to reach students, but also that they're trying, really trying to, you know, now that they've gone through that explosion that happened during the pandemic, trying to consolidate around a few, you know, strategic vendors. And that's pending in our favor, particularly as we are able to not only offer the you know, the LMS, but also as was noted in the Duke wind credentialing and catalog and those other consists across sports.
spk03: So it really is a continuation of the strength that we've seen, you know, with our position within North American higher ed.
spk09: No, that's great to hear. And thanks for the details. One quick follow-up I have is just on the gross margin and the quarter, you know, really impressive 79.5%. Any additional color you can offer on, you know, what drove, a higher margin there, and could we expect gross margin to grind higher in the year?
spk04: That's a good question. So, Dalen, we're really pleased with the gross margin figures that we had in Q2. And this is part of just our regular model of expanding margins over time. However, I would say that Q2, we did see some higher margins, largely by timing of some revenue. However, we expect that future quarters will normalize back to that steady, consistent expansion that you're seeing over the last eight quarters. So to be clear, we have set long-term targets to have gross margins in the upper 70s, and we're making progress.
spk06: Your next question comes from the line of Ryan McDonald with Needham & Company. Your line is open.
spk12: Hi, thanks for taking my questions. I wanted to start on the K-12 space. You know, last week at the conference, there was quite a bit of interest in demand for the Learn platform functionality now that you're rolling that in and integrating that in for customers. Just curious as you think about how you think about the cross-sell opportunity there and then, you know, given the demand in the K-12 space, your funding for more analytical solutions. Is there an opportunity to lead with those types of assets and then sort of get your foot in the door and then sort of cross-sell in LMS over time? Thanks.
spk04: Yeah. Yes. Let me start with the first question about cross-selling a learned platform. So learned platform, you know, as we did when we did the acquisition earlier this year, right, what we recognized was that K-12 is dealing with a massive ecosystem of ed tech providers. So they're looking for help in rationalizing what's working, what's not working in those environments. So we really have two sides of the network with Learn Platform. One are the schools and districts, the state education authorities that are looking at it as a tool to really drive questions of what's being used, how often is it being used, as well as TAB, Mark McIntyre, Is what is what's being used in the environment doing doing what what they claim to do. TAB, Mark McIntyre, Likewise, on the other side of the network is the providers and they're you know they're also wanting to understand it and demonstrate that what they're what they're providing is is is is working right and getting the outcomes that they. That they're they're trying for it, and so we do think that this is going to be a great cross opportunities on both sides of those networks. Right, which on the district and state level, you know we're seeing good pipeline build we're seeing good integration points with canvas you know we we announced that we the. You know the overall usage reports will be integrated in campus for free, so that you can start to see some of that data. And we expect that to drive a lot of interest and continue to generate lead gen for us to go sell across the whole product. We're seeing a really rapid pipeline build and great success selling to the providers as well. That evidence as a service is growing, the pipeline's growing pretty dramatically. So to your first question, yes. it absolutely is a key driver for us and we believe it's going to you know if we're reaching a point where it's going to be very really important for districts and we think it'll be a big growth driver for us in the future um on the analytics side you know we we drive with a platform strategy when we drop you know when we have these conversations with the um with our customers and our prospects and so Yes, this is a key part of that landing strategy for us. We think that it's a key differentiator against our competitors in this space, and we'll continue to use it as that. But again, with the idea that this is about a platform and a platform for teaching and learning that they're working to. So I think to answer your second-party question, yes, it can be a good part of our land strategy in addition to the expand part of our cross-sell.
spk12: Excellent. And maybe just one follow-up. Just on the international partner channel, obviously you started to see some success with that with some deals in AsiaPAC last quarter. Just curious how that is progressing as sort of the pipeline builds for the international solutions there. Thanks.
spk04: Yeah, we are seeing good pipeline build. We're focused on the channel partners that we believe are going to be our best bet in those space. We're training them up. We're helping them with lead generation. We're helping them with deployments. So we're very optimistic about the progress we're making there. Again, we'll probably see that the benefits start to really occur next year. as those investments pay off, you know, and as we ramp those channel partners. But good progress, particularly in some of the Asian geographies and Latin Americas, where we've seen the most success so far.
spk12: Excellent. Thanks for taking my questions.
spk06: Thanks, Brian. Your next question comes from the line of Noah Herman with JP Morgan. Your line is open.
spk03: Hey, guys. Thanks for taking our questions. For the first one, have you seen any change in the pace of consolidation compared to what maybe you've seen before in the last year or so at the higher ed or K-12 level? Thanks.
spk04: Yeah, I would say in the last year or so, more of the conversations have been about how do I get a common platform across each of the modalities, whether it's a continuing education department versus the in-person traditional campus experience. So yes, those conversations have been more common. I would say the bigger conversations around vendor consolidation and how do we reduce the number of suppliers, those are fairly Those are in the last quarter or two is where those started to happen more and more.
spk03: Got it. And then just a quick follow-up. Some of these new features are being layered more into the platform. Do you see any reason to change the sales compensation structure going forward as part of the go-to-market strategy?
spk04: um you know no we've we've played we we are um we've changed the comp model you know each year things get tweaked on it um i don't know that we'll see any major um changes that happen in the coming you know coming years as far as um how we compensate for for instance new new features or you're really talking about cross cell and some of the products that layer on top of Canvas, I think, in that question. So we do have, you know, in the existing structure, we do have tiered comp models, depending on which products you sell. We move those around occasionally based on what we want to invent. But the fundamental structure, there won't be a massive change in our comp strategy in the future.
spk03: Got it. Thank you.
spk06: Our final question comes from the line of Brent Thill with Jefferies. Your line is open.
spk07: Hey, thanks for speaking, guys. It's David Lussberg on for Brent. I wanted to ask, or rather drill in on assessments. I appreciate some of the commentary earlier, but I think last quarter you guys said it was the fastest growing product within K through 12. I was just curious if you could provide an update on maybe if that held true in Q2 and And more broadly, how should we be thinking about the durability of growth in this offering? Is it more so with everyone catching up and assessing where learning loss from the pandemic is? Is that why maybe it's hotter now and maybe it's not as durable? And on top of that, can you just remind us of the ARPU there? I think in the past you said it's maybe two to three times larger than LMS, but appreciate any color you could add there. Sorry, I know that's a lot.
spk04: yeah no it's uh uh and great to hear from you david um the uh this weather it would continue to be our fastest growing um segment in k-12 um from a durability of growth perspective uh this is you know this is a um you know this is a kind of digital transformation that um that will happen and it's not it's you know some of the catalyst is learning loss but the idea of being able to provide a teacher with you know real-time feedback in the classroom of how how a student is doing against those you know the standards that they'll be tested against at the end of the year that's you know that's something that's going to endure and having a solution in place to be able to address that is is going to be just as important as it is to have a learning management for a digital transformation strategy. So I absolutely believe it's going to be, you know, it is going to drive durable growth for us. It's not going to be a flash in the pan, and it's going to be an important part of anybody's digital transformation strategy and the platform that supports it. You know, you're right. If they buy the whole stack from us in the assessment space, including the content, as well as the assessment management system, then it can be two to three times the average selling price of the candidates implementation. So it does create for us a long-term growth opportunity. We're still got low penetration, low double digit penetration into the existing base with our assessment solution. So there's still a lot of room to grow from a growth perspective there.
spk07: Super helpful. And then maybe one brief follow-up before I let you guys wrap it up. On the LMS and K-12, obviously half of the market is still unvended, right, using free, lightweight solutions. I wanted to get your view on what's the catalyst that gets that, you know, these districts to really start paying for a premium LMS? Is it Is it maybe that some of these, just to continue to, can always use these free lightweight solutions? Or maybe is it some of these S or dollars start to get towards back half of 24, use it or lose it? Is that maybe a good driver there? And maybe, again, is there any percentage that you think just will forever remain unpaid? Yeah.
spk04: There's an interesting dynamic and a little bit of everything that you talked about. I do think the ESSER funding creates a good backdrop as far as making decisions about when to start through a true digital transformation. That's really the driver for a district that wants to make an investment in a commercial LMS like ours or uh you know and and it really it it takes time for and it takes maturity within the district to be ready for for something like that and so they tend to be very planful uh take time what will drive them is they want a more enterprise features right they want that more integrations with the ecosystem they want better visibility across the entire district not just in a classroom or or in a school they'll want better analytics for instance integrated into those solutions. All those will be kind of the drivers where they really want to take that step in their digital transformation. So I do think, again, as I said earlier, ESSER is a good backdrop for this. And we feel good about that pace of conversion from free to paid. Whether or not there's a portion that, you know, that doesn't ever lose to an enterprise, you know, eventually everybody's going to need to at some level. You know, maybe if it was a school with, you know, 30 or 40 kids in it, that might not be, but everybody at some point is going to need to visually transform that experience in the classroom.
spk06: There are no further questions. I'd like to turn the call back to CEO Steve Daley for closing remarks.
spk04: Great. Thank you. Thank you again for the insightful questions as always. As you've heard today, we believe our commitment to innovation, customer success, and disciplined investments in our platform will continue to unlock new opportunities and to drive value for our customers and shareholders in the dynamic education technology landscape. We're excited about the future. We look forward to continuing to drive that combination of top-line growth as well as profitability in the months and years ahead. So thank you for your time and participation. I look forward to speaking with you again.
spk06: This concludes today's conference call. You may now disconnect.
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