Instructure Holdings, Inc.

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.

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.

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.