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

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We continue to see to enhance our channel offerings as well. Philippines-based C&E Adaptive Learning Solutions, our most successful channel partner in Asia, enabled us to ink a deal with RMMC, a higher ed institution serving the largest region in the Philippines, including the highly populated island of Mindanao. C&E is behind our largest global channel deals to date, having invested in our partner program and is enabled to implement Canvas and support our APAC customers. As we’ve discussed in prior quarters, artificial intelligence continues to be of significant interest to our existing customers and in our selling conversations. We continue our work to elevate the industry dialogue around best, safe, and ethical practices for development, deployment, and use of AI to better serve students and teachers.

Our partners with existing and new providers are growing as the Instructure Learning Platform serves as our customer’s central point of access to their tools for teaching and learning. During the quarter, we delivered our own AI-based capabilities into beta to select customers. These customers are providing early feedback and will continue to shape our efforts around course and content creation, semantic search, and natural language-driven learning analytics. And finally, our results this quarter once again highly indicative of our ability to drive operating leverage in the business. Because of our disciplined investments, we’ve been able to deliver best-in-class margins, which, this quarter started with a four handle. This allowed us to invest in our platform, make strategic acquisitions like Parchment, and drive long term durable growth.

Our business model permits us to continue driving strong top-line results without sacrificing margins and profitability. With adjusted gross margins approaching 80% and adjusted EBITDA margins exceeding 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 strong Q3 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 Q3 financial performance and guidance for Q4 and the full year 2023.

This will be Dale’s final earnings call with Instructure as he is retiring from the company effective November 12th. Dale has made great contributions to Instructure during his four years with the company. He helped us successfully navigate important transitions, including our 2020 shift from the public to private markets and our return to the public markets in 2021. During his tenure, he also established a strong culture of transparency and consistency and built a strong foundation for our next leader. He has agreed to provide transition services through March 2nd, 2024. Dale, please go ahead.

Dale Bowen: Thank you, Steve, and thanks to everyone for joining us today. Before discussing our detailed financial results, I would like to point out that in addition to our GAAP results, I’ll be discussing certain non-GAAP results. Our GAAP financial results, along with the reconciliation between GAAP and non-GAAP results can be found in our earnings release, which is posted in the Investor Relations section of our website. In Q3, we continued to show a combination of growth and best-in-class adjusted EBITDA margins. As Steve mentioned, we generated total GAAP revenue of $134.9 million, up 10.2% and impacted by a currency headwind of approximately 60 basis points. Subscription and support accounted for 91% of our Q3 revenue at $123.1 million, up 12.2% year-over-year, impacted by a currency headwind of approximately 60 basis points.

Professional services and other revenue accounted for 9% of our Q3 revenue at $11.8 million compared with $12.7 million in Q3 of last year. This change was not unexpected as there was a slight pull through in Q2. Deferred revenue at the end of Q3 was $347.1 million, up 8% year-over-year. We ended Q3 with remaining performance obligations, or RPO, of $862.9 million, up 9% year-over-year. We expect to recognize revenue on approximately 75% 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 gross margin profile was supported by our optimized cloud architecture and flexible support model that scales to meet seasonal customer demand.

In Q3, gross profit was $105.6 million, representing a 78.3% gross margin, up from 77.8% in Q3 of 2022. Turning now to operating expenses. Sales and marketing expenses for Q3 were $23.7 million or 17.6% of revenue, down 210 basis points from 19.7% of revenue in Q3 of 2022. Research and development expenses for Q3 were $15.1 million or 11.2% of revenue compared to 12.7% in Q3 of 2022. General and administrative expenses for Q3 were $9.7 million or 7.2% of revenue, down from 7.6% in Q3 last year. Non-GAAP operating income for Q3 was $57 million, representing a 42.3% operating margin, up from 37.7% in Q3 of 2022. Q3 adjusted EBITDA was $58.2 million, representing a 43.2% adjusted EBITDA margin, up from 38.9% in Q3 of last year. Non-GAAP net income was $35.8 million in Q3 or $0.25 per share compared with $29.5 million or $0.21 per share a year ago.

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