Instructure Holdings, Inc.

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 2023 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 Daly, and Chief Financial Officer, Peter Walker. 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 our annual report on Form 10-K as well as 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 the website. All of the 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 thank you all for joining us for our fourth quarter and full year 2023 earnings conference call. With the successful close of Parchment acquisition in early February, I'm also delighted to extend a warm welcome to our newest team members. Parchment will maintain separate operations in 2024 as we align go-to-market strategies and resources to ensure a seamless transition for our customers. In the interim, we are extremely excited to begin executing the opportunities Parchment offers for driving growth and fostering innovation. I'd like to begin today's earnings call by reflecting on the key milestones and achievements that shaped Instructure's journey in 2023 and set the stage for our future growth. We continue to strengthen our executive leadership team, bringing in four new leaders, each with more than two decades of experience leading scaled organizations. President and COO Chris Ball to unite our go-to-market and accelerate our platform and cross-sell efforts, CFO Peter Walker to elevate our public market expertise, CTO Michael Lycett to expand our web-scale technology platform, and Chief Customer Experience Officer Rachel Orsten to grow our customer success programs efficiently and deepen our strategic relationships with our customers. We also continue to innovate across our platform, including developing artificial intelligence solutions with our customers that we believe are safe, cost effective, and can provide immediate value. Several of our AI solutions entered beta in Q4, and feedback has been positive as we continue to refine where our investments will have the highest impact for teachers, students, and leaders. We further strengthened our competitive moat and amplified the power of network effects, ending 2023 with more than 8,000 customers, up roughly 9% year-over-year, as we continue to win important new logos. More than 900 partners, up nearly 20% year-over-year, as other EdTech providers recognize the power of our massive customer base, and over 2 million Instructure community members, up nearly 20% year-over-year, further enhancing a feedback loop to drive innovation product development, and user engagement. We continue to expand our leading market share position in both higher education and K-12 according to Edutechnica and List EdTech data. We executed our M&A strategy to expand our served markets to gain access to new budgets and buyers and accelerate our roadmap serving the credentials market through the acquisition of Parchment. We published our inaugural environmental, social, and governance report live now on our website highlighting our commitment to ESG principles and our dedication to fostering a sustainable future that delivers enduring value for all stakeholders. We surpassed the long-term margin targets we established in 2021, demonstrating best-in-class operational efficiency and financial discipline. And overall, we continue to execute on the promises we made when we IPO'd, demonstrating an unrelenting dedication to our mission and highlighting the strength of our model. We could not be more pleased with this progress and the opportunity that we have heading into 2024 and beyond. I will now provide a high-level review of the fourth quarter and full year 2023 results, discuss the drivers of these results, and outline our 2024 priorities. Peter will then detail our results and provide guidance for the first quarter and full year 2024. In the fourth quarter, the company delivered $135.4 million in revenue, up 88.5% year-over-year, including subscription growth of 9.5%. At the same time, we drove 270 basis points of adjusted EBITDA margin expansion to 41.7%, ahead of our long-term target and demonstrating the leverage we have in our business model. Continued exceptional results were driven by our increasing competitive advantage from our comprehensive platform strategy, strong execution, and the formidable cash flow we generate and reinvest behind high-growth initiatives. From a macro perspective, our end markets remain resilient and durable. As we mentioned last quarter, we continue to see an elongation of sales cycles in higher education markets around the world. This is temporarily impacting growth, but in the long term, we believe our customers have an opportunity to educate more students by serving nontraditional learners, and they are looking to us to help fill this need. This long-term trend toward nontraditional learning is expected to significantly expand our available market and result in accelerating growth in higher education in the years to come. K-12 markets continue to be resilient as stimulus funding is available this buying season. We have seen increased interest in our ed tech management solutions anchored by our Learn platform and EasySoft acquisitions as districts actively evaluate their software investments and demand positive outcomes from them. Our suite of solutions and key position in the classroom will continue to drive durable growth in this market segment. Now we'll share highlights from the quarter, including four key drivers. Key competitive wins in new logo acquisitions, continued progress driving cross-sell and increasing take rates of our platform offerings, the expansion of our platform strategy, and how we continue to drive increased operational efficiency. First, we continue to bring in important new logos. winning more than our fair share of competitive bake-offs due to the breadth and strength of our portfolio offerings. As a result, we have been able to continue driving growth. During the quarter, we achieved a significant new logo win with George Mason University, the largest public university in Virginia, renowned for its dedication to educational modernization. This competitive takeaway followed a rigorous RFP process and underscores the positive network effects and structure derives from focusing on the lifelong learning journey. Instructors established presence in other Virginia, Maryland, DC institutions, and the high percentage of GMU students and professors already familiar with Canvas helped secure the win. Internationally, we continue to replace outdated legacy systems with our cutting edge platform during the quarter, including our win with the University of Manchester, the UK's largest physical university, ranked in the top 50 globally for academics. Our ability to offer the university a comprehensive platform solution that could position them as a leader in flexible lifelong learning enabled us to displace a 10 plus year relationship with an entrenched competitor. This win also illustrated how we are landing larger, in this case with a full platform sale. This win will also be a lighthouse for other universities in the region, given their size and reputation. Second, We continue to drive growth with existing customers. During the quarter, we saw a 49% year-over-year increase in cross-sell bookings. We estimate that excluding parchment, cross-sell opportunities could reach $1 billion in our existing customer base alone. Instructure is well-positioned to cross-sell additional platform modules into our huge installed base of 8,000-plus global customers, since 90% of instructional workflows are facilitated by an LMS. During the quarter, we won the largest higher education credential deals in our history with the Louisiana Board of Regents, which represents the entire public university system in Louisiana. This system includes 31 campuses across four university systems. Their purchase of a unified digital credentialing contract aligns with their target of having 60% of all working age adults in Louisiana hold a degree or higher value credential by 2030. The win showcases our strengths in serving nontraditional learning and reflects a broad industry trend toward credentialing, with global enterprises prioritizing skills proficiency and easing degree requirements for some roles. Although this is an instructor credentials deal, it also helps validate the meaningful parchment opportunity we see ahead. We also had a significant K-12 win with Cabarrus County Schools in North Carolina, this longtime Canvas customer began evaluating Learn Platform during the first half of 2023 and chose Instructure during the quarter to help them comply with EdTech and data privacy legislation from the state of North Carolina. We're able to win with Cabarrus due to a tailored approach that helps streamline their compliance with North Carolina state legislation. This win will be a pivotal reference for other North Carolina schools as each addresses the new legislation over the next few months. Third, The power of our platform strategy continued to progress in 2.4 through acquisition, partnerships, and innovation. Our acquisition of Parchment was announced in 2.4 and closed at the beginning of February, bolstering our instructor learning platform scale and reach as we engage learners throughout their lifelong learning journey. Our combined solutions will facilitate evidence of learning and streamline the educational process for educators and learners during key transitions. In addition to accelerating our strategy to reach non-traditional learners, Parchment's relationships with new buyers also bring fresh opportunities into our traditional customer base, with an estimated $2 billion expansion of our total addressable market and a high-quality revenue stream with significant growth potential. As mentioned earlier, our partner ecosystem continues to grow to more than 900 partners at the end of 2023, up nearly 20% year-over-year, and it is a key differentiator for us in the selling process. Our recent case study with Clemson University and Praxis AI Virtual Tutor demonstrates the power of the Instructure Learning Platform ecosystem to bring new technologies like AI to our customers quickly and safely. We continue to expand our platform capabilities through organic innovation, including the launch of AI-based capabilities to select customers during the second half of the year that help with course and content creation, semantic search, and natural language-driven learning analytics. We also had a big win in K-12 during the quarter with a prominent nonprofit organization that needed to replace their homegrown solution with a more adaptable, comprehensive platform that could enhance and accelerate their ability to support accessibility, enable customization, integrate important third-party applications, and modernize assessment. Simply put, Instructure's learning platform enabled them to innovate on Canvas through integrations and development, putting Instructure at the core of teaching and learning across their schools. And finally, our results this quarter once again demonstrated our ability to drive operating leverage in the business. We've delivered best-in-class margins and strong cash flow conversion, which Peter will discuss in more detail shortly. With adjusted gross margin approaching 80% and adjusted EBITDA margins exceeding 40%, our free cash flow generation should enable us to continue investing both organically and through M&A to drive long-term, durable growth. As we look ahead to 2024 and beyond, we have unwavering confidence that the instructional learning platform's unique advantages address the intricate challenges posed by today's educational landscape. Our strategic focus will remain centered on several key growth pillars. First, harness our enhanced go-to-market function to propel platform growth and foster cross-selling opportunities. Second, accelerate our efforts to displace legacy technology in international markets. Third, assist new and existing customers to meet the needs of nontraditional learners. Fourth, leverage our platform technology to create new revenue opportunities and further embed in structure as critical infrastructure for teaching and learning. And finally, remain at the forefront of AI and other innovations to drive student success both inside and outside the classroom. Deploying these strategies, we believe we will increase our moat within EdTech ecosystem and help ensure durable growth across all segments. In summary, I am confident and optimistic about our business as we head into 2024 and beyond. We will talk much more about our roadmap and long-term financial model during our March 12th Investor Day, and we hope you will join us for this discussion. I will now turn the call over to Peter to talk about our financial results and guidance.