Instructure Holdings, Inc. (NYSE:INST) Q3 2023 Earnings Call Transcript

Instructure Holdings, Inc. (NYSE:INST) Q3 2023 Earnings Call Transcript October 30, 2023

Instructure Holdings, Inc. beats earnings expectations. Reported EPS is $0.25, expectations were $0.2.

Operator: Ladies and gentlemen, thank you for standing by and welcome to Instructure’s Third Quarter 2023 Earnings Conference 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. And 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. Mr. Banks, please go ahead.

David Banks: Thank you. Good afternoon and welcome to Instructure’s Q3 2023 earnings conference call. With me are Instructure’s Chief Executive Officer, Steve Daly; Chief Financial Officer, Dale Bowen; and also Peter Walker, who will assume the role of CFO of Instructure on November 13th. We will discuss our Q3 2023 earnings results, as well as the signing of a definitive agreement to acquire Parchment, the world’s leading academic credentialing platform. We will provide an overview of the transaction, as well as an initial view into their financial, based on due diligence conducted to date. 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 discussion of factors that could affect our future financial results and business, please refer to the disclosure in today’s earnings release and other reports and filings we make from time-to-time with the Securities and Exchange Commission. All of our statements are made as of today, October 30th, 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 on the investor relations section of our website.

Note that we have also included supplemental materials under the events and presentations header on the investor relations section of our website. In association with the purchase of Parchment, we are unable to provide a reconciliation of expected parchment adjusted EBITDA or expected combined net leverage ratio without unreasonable efforts. With that, let me turn the call over to Steve.

Steve Daly: Thanks, David. I’m delighted to welcome everyone to today’s call. We’re excited to announce and share details of our acquisition of Parchment. In addition Dale and I will be reviewing our Q3 results and providing guidance for Q4 and the full year 2023. Before I discuss the quarterly results, let me provide some of the details of the very exciting announcement of our pending acquisition of Parchment. I will explain what Parchment does, how this acquisition fits strategically, discuss the business model, and provide details about the transaction. Parchment is the world’s leading academic credentialing program with integrated enrollment solutions to support learner mobility. Parchment has more than 15,000 customers, primarily in North America with a presence in several key international markets and has exchanged north of 165 million credentials over two decades.

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Q&A Session

The company’s Parchment Award product is a leading credentialing platform, issuing transcripts, diplomas, certificates, verifications, and badges to more than 15,000 customers. Parchment Pathways, their enrollment solution helps more than 1,000 institutions efficiently process incoming transcripts, recruit students, support dual enrollment, and enable course sharing across systems. Strategically, this acquisition will accelerate the scale and reach of the Instructure Learning Platform. At Instructure, our goal is to help provide rich learning experiences that elevate student success and amplify the power of teaching. Parchment’s goal is to provide evidence of learning through credentials of all types and to connect those credentials to opportunity.

As we bring these two companies together on the Instructure Learning Platform, we can engage a learner throughout their lifelong learning journey, providing evidence of their learning and remove the friction for educators and learners at key transition points. Whether those transition points are for the high school senior applying to college or the workforce, the college student transitioning to the workforce, or the lifelong learner wishing to upskill or reskill, the Instructure Learning Platform will be their companion in that journey. In addition to the powerful strategic fit, we expect Parchment to bring Instructure important relationships with new buyers in our traditional customer base, a significant expansion of our total addressable market, and a high quality revenue stream with meaningful and profitable organic growth opportunities.

In higher education, Parchment has relationships with both registrars and admissions offices, which we expect will become much more important as the integration of traditional and non-traditional learners continues. Additionally, these relationships open up an estimated $2 billion TAM opportunity for Instructure as we become integral to the demonstration of learning. Based on our due diligence, Parchment’s high quality revenue is approximately 95% recurring with strong gross retention in the mid to high 90s and multiple avenues for future growth. Importantly, Parchment is a very profitable company today with high cash flow conversion and we expect to achieve incremental cost synergies as we integrate the businesses into Instructure. As we have consistently communicated, M&A is an important part of our strategy to drive long-term durable growth.

We have a strong track record of successfully integrating acquired companies, completing six integrations in the last four years. We have confidence we’ll execute similarly with Parchment. The all-cash transaction is valued at $795 million net of a $40 million tax asset, or approximately 16 times Parchment’s expected 2024 adjusted EBITDA, inclusive of anticipated run rate cost synergies. We expect to finance the deal with cash and incremental debt under our existing credit facility. Parchment is expected to generate approximately $115 million in revenue in 2024 and is expected to grow in the low double-digit range. We remain committed to managing our strong balance sheet and cash flow through this acquisition. Once completed, the combined company’s net leverage is expected to be approximately 4 times net debt to adjusted EBITDA.

We expect to de-lever rapidly as we continue to grow adjusted EBITDA and generate cash flow. Pending regulatory approval and other customary conditions, we expect the deal to close in the first quarter of 2024. Turning now to our financial results. Q3 results exceeded our previously commuted guidance range for revenue and adjusted EBITDA, fueled by our efficient go-to-market organization and unyielding dedication to customer satisfaction. Q3 revenue was $134.9 million, up 10.2% year-over-year, impacted by a currency headwind of 60 basis points. Subscription and support revenue of $123.1 million grew 12.2%. Q3 adjusted EBITDA grew 22% year-over-year to $58.2 million, driving a strong 43.2% adjusted EBITDA margin. We believe the strength of our Q3 performance demonstrates the effectiveness of our business model.

With the onset of the new school year in North America, August and September remain the most active time of year for use of our platform. This year was no exception, as our Canvas usage volumes again spiked to more than 4 million concurrent users per day in early September, consistent with our utilization during the COVID era. The resiliency of our platform was evident during this period as we delivered more than [three nines] (ph) of availability. Now I will share highlights from the quarter, including four key drivers: strong new logo sales, continued progress in cross-sell, 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 as evidenced by our continued market share gains.