Q2 2021 Instructure Holdings Inc Earnings Call
Please be advised that today's conference is being recorded.
I would now like to turn the conference or Whats your first speaker today email Investor Relations email. Please go ahead.
Good afternoon, and welcome to instruct your second quarter 2021 earnings call, we will be discussing the results announced in our press release issued after the market closed today with me are in structures, Chief Executive Officer, Steve Daly, and Chief Financial Officer, Dale Boeing before we begin I'd like to remind you that today's conference call will include forward looking statements based on the <unk>.
Companys current expectations. These forward looking statements are subject to a number of significant risks and uncertainties and our actual results may differ materially.
For a discussion of factors that could affect our future financial results and business. Please refer to the disclosure in today's earnings release and the other reports and filings we file from time to time with the Securities and Exchange Commission. All 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 our non revenue financial measures. We were we discuss 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 good afternoon, everyone. Thank you all for joining us on our first earnings call. Following our recent IPO I will say that I've been looking forward to this call and the chance we have to share the tremendous momentum we have in the business.
During today's call Dale and I will provide details on our Q2 results as well as share Q3 in 2020. One guidance. We will also cover the business market and opportunity as many of you may be newer to the instructor story, but first I'll kick this off with a few highlights from our financial results.
Q2, GAAP revenue was $93.6 million up 52% year over year, while total allocated combined receipts or ACR was $95.9 million up 28% year over year. We think ACR is the best way to look at the business because it gives investors better visibility into the underlying health.
Our business.
Importantly, we delivered these results while continuing to drive operating leverage across the business with Q2, adjusted EBITDA margins of 33% up over 1400 basis points year over year I couldn't be prouder of the team and we'd like to acknowledge all of the instruction employees for all their hard work in the first half of the year.
In structure provides a SaaS platform for teaching and learning called the <unk> structure learning platform that is built around the canvas learning management system or what's commonly called an L. M S.
The instructor learning platform is 100% cloud native hub that connects educators students administrators parents and partners and is used for in person online or hybrid modes of learning.
We are the North American LMS market share leader in both higher education, and among paid paid K 12 solutions.
And we have an international presence with over 6000 customers and over 30 million contracted canvas LMS users globally.
We continue to successfully sell into established institutions with massive opportunities remaining both domestically and internationally.
The past year has been highly transformative for our business both from an operational and from an industry perspective, we have reentered the public market as a fit for purpose learning platform leader focused exclusively on the immense education opportunity and well positioned for long term durable growth operationally, we simplified our.
Additional structure by divesting, our corporate LMS business bridge streamlined our cost structure implemented a strong focus on efficient Cao capital Act was allocation and realigned our sales and marketing motion to be more efficient and effective than ever before.
The education technology market is at a critical inflection point during 2020, when we were private company digital transformation accelerated meaningfully.
One of the greatest and quickest digital transformations in any industry as a result, we've seen long lasting adoption of our technology.
This is changed how educators and students participate in the learning process and it further cemented canvas as a mission critical learning platform for our customers. We are deeply embedded in the worlds educational workflows. We believe the changes here to stay technology enhanced models are now is standard in education as video.
Sing is in business communication.
Research and direct engagement with customers indicate the K 12 districts will maintain their LMS subscription is post COVID-19 in fact, according to a third party study more than 80% of K 12 educators view the LMS as the main platform for instruction and expect usage to remain at elevated levels.
Yeah.
We believe our market opportunity now is greater than ever and its structure is in prime position to emerge as the platform leader across higher education, and K 12 institutions.
The education technology market that we address is large and rapidly growing.
Global expenditures on educational technology have accelerated.
And are expected to grow to $404 billion in 2025, according to a whole loan IQ we.
We estimate our total market opportunity is approximately $30 billion comprised of an LMS market opportunity of approximately $5 billion market opportunity for our non LMS products of approximately $10 billion and new market expansion opportunities approximately $15 billion.
Our key Differentiators usability reliability, and scalability and our broader open platform give us confidence in our ability to continue winning let's briefly touch on these differentiators first is usability.
Educators and administrators spend nearly 90% of their working hours logged into the El en masse and students now spend a significant portion of their week on activities that are touched by the LMS.
It's important that they loved the experience and when they use and structure. They do while legacy technology was built with a focus on administrators canvas was built with the teachers and learners in mind.
Those teachers and learners are vibrant online campus community of more than 1 million members and according to third party research our satisfaction is 50% higher than the number two competitor in higher Ed and 60% to 70% higher than the number two competitor in K 12.
Because this is such a highly referential sale. These happy customers are some of our best salespeople.
Second is reliability and scalability learning platforms are mission critical systems for education providers in students and must be reliable available enterprise grade and scalable the ability to handle the usage fluctuating demand and changing workload patterns, while maintaining high availability is a critical differentiate.
We guarantee 99.9% uptime through service level agreements and have been able to scale up dynamically and dramatically amidst abrupt changes in usage during COVID-19.
In contrast, COVID-19 highlighted deficiencies of our competitors, whose legacy systems struggled to scale and remain available at the institutional level. We provide solutions that can manage entire learning environments of any size from a single school district to a large multi entities date or countrywide deployment. This scalability.
Drives very high win rates and helped US win 11 out of 12 state K 12, Rfps last year.
Third is our broad open platform our learning platform is much more than just the LMS. We are a SaaS learning platform that has the ability to span across all areas of teaching and learning canvas is the core complemented by assessment solutions from our mastery connect and surgical acquisitions that allow educators to assess students.
Learning and make plans that guide an individual approach for each learner and their outcomes.
Since our technology touches 90% of all the work to be done in teaching and learning our customers look to us and rely on us to continue automating and simplifying more and more of the teaching and learning workflows, including analytics online education and managing video learning experiences.
We are an open architecture, we also extend through our ecosystem of more than 500 partners with over 1 billion launches of those partner tools from our platform last year. Our partners include some of the world's largest technology companies as well as niche point solutions, they span content and hardware providers collaboration and productivity tools.
And publishers.
Looking ahead, we have multiple vectors of growth, let's touch on those vectors in more detail in higher education canvas holds the leading LMS market share in North America based on number of institutions with a meaningful opportunity to increase market share internationally, our growth strategy and higher education includes ongoing efforts to replace.
<unk> legacy LMS systems strategically targeting international markets, and taking advantage of a land and expand strategy to both upsell and cross sell.
In K 12, when counting districts canvas has emerged as the market share leader paid LMS in the U S and has a meaningful international opportunity.
We're seeing incredible growth and technology investments due in part to increased funding for digital transformation projects, which is driving more districts to move from pre solutions to enterprise class LMS.
As a result, there is a meaningful opportunity to secure greenfield wins in districts that aren't currently using a paid LMS. We will also continue working to secure state level deals and large districts and expand our footprint as we upsell and cross sell additional modules of our learning platform and.
In international markets, we are focused on countries that have the best connectivity and students to device ratios.
Our goal is to disrupt these markets like new disrupted the U S markets 10 years ago, and we are using a proven playbook to do it internationally. The markets are highly fragmented with many institutions using legacy open source and sluggish constrained on premise systems. We are seeing strong interest in replacing these legacy systems with a modern learning plan.
Form and overtime, we expect our international business to be at least as large as our U S business.
We also have a strong land and expand motion.
We are still in the early innings here and we believe the opportunity is immense with our current product portfolio, representing three quarters of a billion dollars in cross sell opportunity in our existing customer base alone.
Since 90% of instructional workflows are facilitated by an LMS, we are well positioned to cross sell other modules that we continue to add to through organic growth innovation and M&A.
I would note that we are going after these opportunities with a substantially improved go to market model that includes a single outbound sales motion and these efforts have resulted in the number of customers that have more than one product to increase from 24% to 34% in the last 18 months, we still have much room to grow in our cross sell business.
As of the end of Q2, only 34% of our customers had purchased two or more of our solutions and only 9% had purchased three or more of our 11 available solutions.
Finally, we have a robust organic and inorganic product expansion roadmap that we expect to continue to expand our Tam and feed our land and expand motion. One. Recent example of our organic innovation engine is the way we enhanced our platform to meet the needs of our youngest learners.
The result was canvas K, five which we developed side by side with teachers, who were yearning for a more native experience to deliver instruction canvas K five as an easy to use simple user interface that is suited to demand demands of the primary school environment over a quarter of our customers have already activated these new features and in the <unk>.
<unk> in the first few weeks of release and reviewers are using superlatives like stunning and game changer.
An example of recent inorganic expansion was our acquisition of EZ soft a Netherlands based provider of SaaS experience management solutions for education that we acquired in Q2, while we expect minimal impact to our 2021 financial results from easy soft. We believe these solutions will provide growth in 2022 and <unk>.
Approximately 200 or $500 million in available Tam.
These both are great examples of the rich innovation and M&A opportunities available to expand our platform and our available markets for years to come.
In summary, Ive never been more confident and optimistic about our business than I am today, we are well positioned for durable growth and expanding profitability and I will now turn the call over to Dale to talk about our financial results and the exciting momentum we are seeing in the business.
Thanks, Steve and thanks, again to everyone for joining us today.
Since this is our first earnings call I will start by providing a brief overview of our financial model and then I will go through our second quarter results in detail before moving onto guidance for the third quarter and full year 2021.
Also before discussing detailed financial results I'd like to point out that in addition to our GAAP results I will 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 on the Investor Relations section of our website.
To begin in structures financial profile is characterized by a unique combination of both strong organic growth and best in class margins in the first half of 'twenty 'twenty. One we were a rule of 66 company with first half ACR growth of 33% in first half adjusted EBITDA margins of 33%.
Great execution from the team and continue to show that we can invest for strong growth and expect to continue to deliver impressive adjusted EBITDA margins and Unlevered free cash flow conversion as a more efficient and highly focused company.
As Steve mentioned, we generated second quarter 2021, total GAAP revenue of $93.6 million up 52% year over year, and ACR of $95.9 million up 28% year over year.
Let's dive into our financial model a bit more in detail starting with the components of revenue subscription.
And in support revenue consists of software as a service fees from customers accessing our learning platform and from customers purchasing additional support beyond the standard support included in the basic SaaS fees, we sell multiyear contracts, which typically range between one and five years subscriptions and support are generally non.
Cancel and are billed in advance on an annual basis. This gives us high visibility into future revenue performance and also creates very favorable cash flow dynamics, which I'll talk about shortly.
Subscription and support revenue accounted for 90% of our second quarter revenue at $84.3 million up 50% year over year, primarily as a result of continued momentum with our core canvas LMS product both domestically and internationally. In addition to strong upsell and cross sell of our other products.
Especially assessments.
Professional services and other revenue consistent training implementation services and other types of professional services professional services and other revenue accounted for 10% of our second quarter revenue at $9.3 million up 78% year over year, primarily as a result of strong implementation and training services delivery.
Cross, both our K 12, and Hyatt businesses.
As we mentioned ACR was $95.9 million in the second quarter up 28% year over year.
ACR reverses the fair value adjustment to acquire unearned revenue related to the take private transaction in March of 2020, and the <unk> acquisition in December 2020, when accounting for both the pro forma circa acquisition at the end of 2020 and the bridge divestiture in February of this year ACR grew 30%.
Year over year.
Deferred revenue at the end of the second quarter was $257 million up 40% from the second quarter of 2020 rim.
Remaining performance obligations or RPE old were $667 million in the second quarter up 29% year over year, and we expect to recognize revenue on approximately 78% of our rpms 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.
Please note that when we refer to margins, we calculate our margins based upon ACR.
Our margin profile is very strong and we maintained healthy margins through our optimized cloud architecture that is designed to scale to meet customer demands.
In the second quarter, our gross profit was $77 million, representing a gross margin of 74%. This compares to a gross margin of 72% in the second quarter of 2020.
Turning now to operating expenses in 2020, we were able to make targeted adjustments to our cost structure to make our business more profitable more efficient and more resilient without sacrificing any of our growth momentum.
By spending smarter, we have improved margins, while increasing our capabilities in sales and marketing to extend to expand our market reach and in research and development to extend our technology platform in.
Waiting our operating expenses. Please note that a year ago. The year ago period includes expenses for bridge the corporate LMS business unit, we divested during Q1 of this year.
Sales and marketing expenses for the second quarter were $19.8 million or 21% of ACR down from 27% in the second quarter of 2020, as we continue to better leverage our sales organization and increase the efficiency of our go to market efforts as a reminder, in 2020, we optimized our sales.
<unk> organization under one sales and marketing leader and discontinued investment in noncore products and low ROI international regions.
In Q2, we continue to see improved bookings per rep increased sales tenure and reduce sales cycles.
Research development expenses for the second quarter were $13.2 million or 14% of the ACR down from 19% in the second quarter of 2020, even though we have more engineers focusing on the development of our product roadmap than before the take private by Thoma Bravo.
As a reminder, in 2020, we took a close look at our engineering base and found that we would be better served by offshoring a portion of our R&D talent to lower cost International engineering hubs and this continues to drive meaningful efficiency and incremental capacity.
General and administrative expenses for the second quarter were $7.2 million or 7% of ECR down from 10% in the second quarter of 2020.
As a reminder, in 2020, we examined our global office footprint and removed high cost office locations that were not additive to our revenue growth and profitability goals.
Non-GAAP operating income for the second quarter was $34 million, representing a 32% operating margin up from 16% margin in the second quarter of 2020.
In the second quarter, adjusted EBITDA was $31.2 million, representing a 33% adjusted EBITDA margin up from 18% in the second quarter of 2020.
This result was better than our expectations and reflective of both our strong topline growth and efficiencies across all departments.
We are pleased with the over 1500 and over 1400 basis point improvement, respectively in operating margins and adjusted EBITDA margins.
Demonstrating the power and efficiency of our model.
Non-GAAP net income for the second quarter was $27 million or net income of 16 <unk> per share compared to $13.9 million or <unk> 11 per share a year ago.
Turning to the balance sheet and cash flow statement, we ended the second quarter with $70.2 million in cash and cash equivalents. This is down $12.8 million from the end of the first quarter driven largely by the cash payment related to our acquisition of EZ soft.
We raised net proceeds of $233.1 million in our July IPO, which are not reflected in our second quarter balance sheet.
Operating cash flow in the second quarter was $6.4 million compared to negative $58.3 million in the second quarter of 2023.
Free cash flow was $5.2 million in the second quarter compared to negative $58.3 million in the second quarter of 2020, while Unlevered free cash flow was $21.8 million in the second quarter compared to negative $7.6 million in the second quarter of 2020.
It's worth noting that we have very strong free cash flow conversion driven by a favorable billing terms low capital expenditures and our accumulated tax assets, which we expect to shield us from meaningful cash taxes for the next several years.
I will now conclude the call by providing guidance for Q3 and for the full year of 2021 for both ACR and adjusted EBITDA.
We have provided additional guidance details in our earnings press release.
For the third quarter of fiscal 2021, we expect ACR in the range of $101.3 million to $102.3 million or a growth rate of 15% to 16%.
We expect adjusted EBITDA in the range of $32 million to $33 million, representing an adjusted EBITDA margin of 32% at the midpoint of the range.
For the full fiscal year 2021, we expect ACR in the range of $404 million to $402.4 million or a growth rate of 23% to 24%.
We expect adjusted EBITDA in the range of $133 million to $132.3 million, representing an adjusted EBITDA margin of 32% at the midpoint of the range.
We don't provide quarterly guidance for Unlevered free cash flow, but since this is our first earnings call. We would like to share that we anticipate unlevered free cash flow to be roughly $140 million for the year based.
Based upon our adjusted EBITDA guidance of $131.3 million at the midpoint. This represents an adjusted EBITDA to Unlevered free cash flow conversion of 107%.
Please note that our Unlevered free cash flow definition does not include adjustments for restructuring transaction and sponsored cost paid in cash.
How do we adjusted for those costs, our adjusted Unlevered free cash flow guidance would be roughly $152 million for the year, which represents an adjusted EBITDA to adjusted Unlevered free cash flow conversion of 116%.
With that Steve and I are happy to take any of your questions.
Thank you.
I'd like to ask a question at this time. Please press Star then the number one on your telephone keypad.
We would like to withdraw your question.
Your first question comes from the line of Fred Meyer with Macquarie. Your line is open.
Thank you.
Kidney function firstly.
Welcome to the public markets.
Certainly.
Really want to own some SKU count the Congress.
And.
Expanding structure's adjusted EBITDA margins were also down to Bruce essentially ECR group is really quite beautiful for those who are not.
Scramble to company during its prior iteration.
I wanted to begin with here in terms of in terms of just kind of a backdrop of questions also.
How are you thinking about the $122 billion Miracle Gros coupon ASUR funds that are coming online about that came online in March 2021 that will be available through I believe September 23 in terms of your growth prospects.
That means also for just generally the K 12 market in particular for those schools in EMEA.
Got it.
Access to let's say education technology, more robust technological budget to afford them.
Yeah, that's a that is a.
Well first of all thank you.
We're excited about the about the results we're excited about the momentum in the business.
It was a lot of work as that's gone into this over the last 18 months up from our employees.
Everybody involved and it's good to see the fruits of our labor.
If you would.
When we think about.
The K 12 market first of all K 12.
Did astoundingly well for us this last quarter, we were up.
We were up just over 50% year over year end.
We attribute a lot of this to you know with the with Covid.
It's forest K 12 districts to really think about what was their strategy. When it came to digital transformation and so they you know they've made the they've started to make that investment and recognize that when they do get our our technology deployed it really it really is integral to the entire teaching and learning.
Workflows, whether it's remote or in person or hybrid and so.
We're it's still in the early innings of that digital transformation.
And when we look at.
Where the growth is coming from we see it pretty.
Pretty pretty strong growth in our LMS business, we see strong growth in our assessment businesses as teachers are coming back into the classroom trying to assess where students on their learning pads, what kind of learning losses are banned.
And.
And it's really hard to pin down is that where does that money exactly coming from because of the way of the essar funds or are allocated but what we do believe is that.
The debt that those funds are being used for digital transformation projects and we're the beneficiary of that of that spend and so we do see this as a multi year trend for us and we do see it in a backdrop that really drives us for.
Durable growth in that K 12 segment of our business.
Thank you.
As a as a quick follow up question here.
Certainly what we're seeing with your mutual platform expansion here into assessments is it seems like it's indicative of what you're calling your structure learning platform at this point.
Generally how do you think about the opportunities.
Adding more products into the portfolio do you think about these as individually.
Items that bolstered your value proposition or is more of a total addressable market or pricing extensive opportunities. Thank you.
Yes.
It's an area of our business our growth plan.
That will be a key growth driver into the future. So the way we look at it Fred is that we.
We have come into the education.
Teaching and learning process and what we are core technology, the LMS touches 90% of all instructional workflows, there's a lot more around us for us to be able to automate those workflows and our customers are asking us for that and so we see this as an opportunity for us to do two things one.
This increase the share of wallet the average revenue per student that we're getting in our existing accounts as well as increase the stickiness of our solutions and the importance of our solutions for our customers and delivering on those teaching and learning.
Coals and so.
It it serves those two functions and it really is a key growth driver for us long term in this business.
Great. Thank you Steve. Thank you I appreciate it.
Okay.
Your next question comes from the line of Sterling Auty with J P. Morgan Your line is open.
Yeah, Thanks, Hi, guys.
And let me Echo welcome back to the public markets. It seems like just yesterday that you were here.
I'll.
I'll start with <unk>.
I do apologize if this was part of the last question I had some connection issues, but you know you talked about the statewide wins, which you did so well last year can you give us an update in terms of what the pipeline of state statewide deals looks like here for 2020 one.
Sure.
And we were really pleased with the.
With the wins that we had our win rate was obviously very high.
<unk>.
As we look going into 'twenty, two and forward.
Our strategy is to focus on kind of winning key districts within key states and then we develop.
Advocates for us within the State then then we can drive and have those conversations at the state level.
The the the reality is those state deals.
We're starting to see upsell and cross sell into those deals and so we're feeling really good about the momentum that we're seeing it from a state deal perspective, this year and going into next year in particular.
Alright that sounds good and then one follow up I don't know.
That would be something you can quantify it but.
I just dropped my daughter off.
College for freshman year and what's notable is the number of students that took a GAAP year last year in our energy and colleges. It almost feels like were getting two years of student entry versus one is there any sense, what kind of tailwind that get you to your higher education business.
Yes.
Hey.
Uh huh.
Astute observation I think I noticed that you when my daughter was telling me he or she just started school as well.
The amount of students that are there are engaged in their classes is seems to be higher.
The the research would tell us that they expect growth in enrollments.
I don't have a good way sterling take to quantify it as far as tailwind to our business. What I will say is we're seeing we're seeing growth across all of our segments. So like I said before K 12 was growing about 50%. This last year, but higher it grew in the mid teens international was growing in the high 20 percents.
So we.
We do believe there is as people are coming back into.
Into school, both K 12 is higher Ed that it is a.
As a tailwind for us for several years to come.
That makes sense. Thank you guys.
Thanks Sterling.
Your next question comes from Josh Baer with Morgan Stanley. Your line is open.
Great. Thanks for the question and congrats on a really strong first quarter.
In the last few years.
We've seen portfolio, Matt mastery.
Added to the portfolio are really.
Really helping to contribute to the cross sell opportunity.
Questions on M&A strategy as we look to continue leveraging your leading LMS market share.
How do you think about building products yourselves.
Versus buying looking for just wondering about your framework for assessing potential acquisitions.
Yeah, No I'm glad you asked that because M&A is a key part of our growth strategy.
The way that we approach it Josh is we kind of we look first at what our customers are using what their use cases, where there.
They're asking us for help and then we look at our platform and because we have 500 plus partners on our platform. We've got visibility into what people are using how often they're using it when they're using it that kind of telemetry. It gives us a good.
And it gives us a good kind of heat map. If you will of areas that we want to go after and then and then from there we will look at it and.
And basically asked two questions. One is is this something that should be part of the core platform or is this something that we would sell on top of the platform and then and that informs a make versus buy for US and then we also look at what technologies in the market, how how long would it take us to develop it in <unk>.
<unk> versus bring it into house do we hit there are people that have proved kind of product market fit in this area that would accelerate our go to market and so those are kind of the criteria that we use when we're looking at whether we should build or buy into.
Into a into a new market.
If I could sneak one more just wondering on on some of your.
Mega cap tech partnerships and integration thinking about Google and Microsoft.
If you could expand on those relationships.
Now.
How are those partnerships trending and if you think about this strategy from their perspective like where is their focus within our within the.
Education market. Thank you.
Yep Yep.
Would love to talk about that our partner program, particularly with Google Some of the key strategics, Google Microsoft Apple.
Google and Microsoft.
<unk> bought both came to us over the last 18 months and.
Offered to do some work to integrate more tightly into our platform.
The you know you'd have to ask them about their strategy, but what they really care about is eyeballs on their technology in and to get people using their technology as early as they can and so they came to US and said we see you as you know.
Great way for us to get more eyeballs on our R. R G suite or office and so.
Google came in and asked to do some integrations that are deeper than the traditional LTI integrations that everybody does standards, Microsoft came in and said Hey, let us integrate teams viewer and some of the teams technology.
You can use that as you know default viewer for for some of your your your institutions and so.
Really what we're seeing is that their motivation is to is to get eyeballs on their technology and they see us as a great way for them to do that in a 4000 of our 6000 customers are using G suite and that's what they ultimately care about Apple on the other hand sees us as as you know with the momentum in the market.
And the share that.
Way for them to to get their content into more more people's hands. So they you know we're the exclusive provider of all their swift developer content on the on the canvas platform and so.
Different reasons, but again, all coming back to the momentum that they see us having in the market and the share.
And the eyeballs that we have.
Perfect. Thank you.
Thanks, Josh.
Your next question comes from Brent Thill with Jefferies. Your line is open.
Alright, thanks for the question.
Hi, sorry. This is avi on for Brian. Thanks for the question and congrats on your first quarter I was hoping you could talk a little bit about sales and marketing capacity more broadly you talked about improving efficiency retention. So just given the massive opportunity in K 12, given the relatively low penetration rate do you feel like you have the resources to execute on the wireless market.
Yes, it's a it's an area that we're really proud of the work that we've done over the last 18 months there's been.
We really have focused on our go to market and streamlining it.
We were able to reduce a lot of overlay, we really we really have great talent in our sales organization and we focus them on winning new business and so we spend a lot of time.
Asking the question that you just asked about quota capacity and where is it deployed.
And our models have all been built.
To fund that capacity, so we feel good about our our quota bearing reps a lot of the restructuring that we did over the last 18 months.
Where to areas outside of quota bearers, so we'd been able to maintain that quota capacity, we expect to be able to hire.
Another 10% quota carriers before the end of the year and we have quota capacity increases.
Over.
Over the model horizon. So we are looking.
King at capacity internationally as we go into new markets as areas, where we're hiring.
And we feel that we've got really good coverage.
In the K 12 space and the reputation in K 12 as well.
Got it thanks for the color and maybe just as a quick follow up any updates on that K 12 paid penetration number you've pointed to that 41% metric throughout the process any updates there have you seen the pace of adoption accelerate at all or it's been relatively steady.
We don't have any official data that says you know what that penetration is you know anecdotally I would say we're seeing we're seeing good growth as you know our K 12 business grew up pretty dramatically over the last Q2 so.
Anecdotally I would say, we're seeing good uptake of people of districts moving from free free tools to an enterprise grade LMS.
Got it thank you.
Your next question comes from Joseph <unk> with Baird.
Your line is open.
Great Hi, everyone.
I wanted to start with higher Ed and just the discussion.
Current RFP environment was there any indication that maybe potential new implementations were put on hold in 2020, and so now you have not only 2020 backlog, but just the incremental organic activity as institutions want to be competitive in and weighing on an LMS out the <unk>.
RFP activity and higher Ed should actually pick up going forward.
Yes, the short answer is yes.
When we talk to customers there were a number that just said during the pandemic look we're just going to hunker down with what we got.
It may not it may not be what we need long term, but it doesn't make sense for us to change horses, right now and so we're starting to see those rfps come.
Come to market now and really into 2022 is where we're seeing we're seeing those pick up.
I will add that.
A big portion of our business is not driven by those rfps.
Just over half of our business is upsell and cross sell which typically don't have to go to RFP. We also have a number of.
Deals in place with consortia or key partners that already have.
You know agreements in place with institutions, where where we wouldn't have to go through an RFP process in that case. So so short answer is yes.
But there's also a lot of business that happens outside of that RFP that we're seeing we're seeing good traction in.
Okay, Great and then just.
Another question on the K through 12 funding backdrop, particularly with the.
The stimulus coming online.
I I appreciate it's hard to kind of figure out in 10 client stimulus funding translates to thus far on structure, but in terms of just the magnitude of funding earmarked around the topic of learning loss and the fact that you are an investor investing in and out.
Now you have <unk> are you seeing demand for the <unk> portfolio ultimately track above maybe what your expectation would have been I don't know 12 to 18 months ago and do you think that stimulus is behind it or are there other initiatives are drivers, which which would lead you do it.
Inclusion that.
Is it greater longevity likelier to stick around above and beyond what funding may Brian.
Yeah. It is.
It's an area where.
Frankly, when we made the <unk> acquisition.
We.
We we thought that this would that this would happen we thought that once we got through the pandemic.
There would be a real need to understand learning loss it would be a real need to understand where students are in their personal learning journeys.
And so so.
And the answer is yes, as you've as you pointed out stimulus funds at call out specific funds that are targeted for learning loss and so we're seeing really really nice pipeline generation and I would say, yes. It's ahead of where we expected a year ago.
Even a little bit ahead of where we expected.
Six months ago, when we did the <unk> acquisition.
Now whether or not that's driven by stimulus funds you know the challenge with the stimulus funds are allocated at a state level and then.
And then districts are given their budgets and they don't really know how much of that was due to stimulus or how much was due to just normal state funding. So it really is hard to kind of.
Tease that out, but what what what we do see is there's there's multi years of that funding available.
And what we're finding is when they implement our technologies what they recognize is okay, if I'm going to.
Put in a M S N and let's say I'm doing it I'm trying to assess learning loss coming out of the pandemic. What they recognize is why would I ever go back to.
Going to my four generic file cabinet pulling out a quiz making copies handing it out collecting it and grading it why wouldn't I do that online.
And so once that technology gets installed into their environment. It becomes embedded in the way that they do teaching and learning and frankly, it's a godsend for teachers right at it automates a lot of those manual processes.
Teachers have to do but it is not the reason they went to went into education right. They want to be with the students they want to be.
They want to be mentoring and so so.
We firmly believe that debt.
Whether stimulus funding plays a role in the initial purchase of our technology. It is an enduring technology that will that is part of the fabric of how teaching and learning has done long term. So we expect that to endure just like we're seeing with the LMS today.
That's great. Thank you very much.
Thanks, Joe.
Your next question comes from Matt Vanvliet with BPI to your line is open.
Yeah. Thanks for taking the question and nice job on the quarter. So wanted to maybe digging a little bit in terms of how COVID-19 has potentially impacted the overall K through 12 buying process and maybe how the stimulus has impacted that to the last point you made see that.
Some of the budgets, just sort of trickled down to the district level, but thinking about that differently. What has been the trend over the last couple of years and maybe has that accelerated at all in terms of states taking over.
A little bit more control and a centralized buying process.
And sort of through that how those statewide deals might ultimately impact your growth rate.
Just sort of longer term as you look at that trend.
Sure.
Yes so.
The.
The stimulus funds.
Covid, forcing everybody to have to do remote teaching.
It all really accelerated digital transformation process that was already happening just albeit at a little slower pace.
But what happened is.
We got to the point, where teachers that had 20 years of lesson plans in four door file cabinets in the back of their classroom.
They had to put those online and they had to they had to do something for a remote teaching and know that it's there. They recognize that there is a lot of.
There's a lot of benefit to our technology not just in remote learning, but also in person and hybrid learning and so.
So from that perspective.
What I think it did with Covid did was it kind of it it did two things at work.
It accelerated.
How districts, where thinking about their digital strategies.
And I kind of brought it to the forefront and it also gave some funds to kick start that process.
That debt.
Is now.
And theres going to be multi years of that stimulus funding to help kick start that process.
To your second question about the you know the state at the state level.
What we're seeing at the state level is.
What drove some of these state deals was the need to provide equitable access.
If if everybody was going remote.
The rural district that couldn't afford an enterprise grade LMS was.
Going to not have as great access as you know the more wealthy districts that could afford it and so it was it was a lot of a lot of it was driven by by that you know some of those.
Desires from an equitable access perspective.
We're seeing we're seeing that.
The states are continuing to.
Drive that they're continuing to drive adoption.
In many of the state deals they bought for to start with a subset of of the districts in the state. So we do see upsell opportunity in those accounts and then we're also seeing cross sell particularly.
Assessment solutions, where they also want to provide equitable access to those.
To those.
As assessment solution. So we think there is there is there is an enduring growth here and it's not it hasn't tapped out.
The mine if you will there's still a lot there's still a lot more room for us to grow in those state deals.
Very helpful. And then when you look at the international opportunities you know I think.
<unk> portion of the last year, plus has been sort of narrowing and focusing on where you have the most near term opportunity.
But as you look kind of the success you've had.
What will be the incremental driver to try to enter new markets.
In new regions over the next couple of years.
Yes.
We created a rubric that we use in evaluating all of the markets around the world that looks at what is the.
You know what is the.
Cloud infrastructure, what is the student to device ratio how much dollars per student is being spent what's the cultural acceptance of cloud solutions.
So what really drives it for us is.
There were there were more countries on the list.
We could have gone after that we chose not to just from a focus perspective and not spreading ourselves too thin. So we have a roadmap that has.
Those countries that that meet that criteria that will just continue to expand in overtime as we see success in the countries that we're in.
Great. Thank you.
Thanks, Matt.
Your next question comes from Brian Peterson with Raymond James Your line is open.
Good evening and thanks for taking my question. So wanted to follow up to Joe's question on what's kind of going on the higher Ed space.
At least for LMS, but Steve you mentioned in your prepared remarks, I think about the opportunity to accelerate some sales cycles, maybe away from the RFP process in the higher Ed space is that a dynamic that we're seeing or are we still seeing that kind of traditional ERP process or decision, making might might go into 2022.
Yeah.
Yes, it's a good question.
There is still an RFP there as you know whenever it's a.
A public.
Public University.
You know in the deals of a certain size. Then then we will usually see an RFP. So there's still that dynamic when we're winning new for instance, LMS deals.
The way that we go in to deal we structure the deals in a way that.
When we need to cross and upsell to more seats to an existing customer we don't have to go through an RFP process when we cross sell into.
Into those existing customers, we don't have to go through an RFP process. So what we're seeing is that there is a there's a portion of the business, which cross sell upsell was over half of our business. This last quarter.
We don't have to go through that RFP process, and so I think you'll see us over time, you'll you'll see us rely less and less on that our RFP flow for overall business momentum.
Got it thanks, Steve maybe one for you just in the <unk>. It looks like it was up $98 million sequentially I know, it's a seasonally strong quarter.
That's a much better than we've seen the last few years. If you kind of had a rank what really drove that as we're thinking about the 2021 selling season.
Highlights that you would shed light on thanks, guys.
Sure Great question, Brian So the main driver of that was the massive amount of billings. We had in Q2, we build over more than a $180 million in that quarter alone and I think as you know that's our highest seasonal quarter of bookings, but it's also the highest we've had in terms of our history and so vast.
The main driver for this.
And you're right, it's super strong RPM growth that gives us the visibility into the future in terms of what are our revenue is going to be for years to come.
Thanks Bill.
Your next question comes from Terry Tillman with <unk>. Your line is open.
Hey, Good afternoon, Hi, Steve deal in April Congrats on a going public a lot of interest in the story, sometimes the calls would be 30 minutes or so we've got an hour long call today. So congrats on a strong result.
Maybe since you've put me in I'm going to ask two quick questions. The one thing is about kind of realigning the sales and marketing side I'd be curious about benefits youre seeing in terms of the installed base sales side in terms of the non LMS products, what seems to be popping more right now in terms of selling and propensity to buy and then I had a follow up.
Yes.
I'd love to talk about the.
The realignment of the sales and marketing perspective.
Organizations I'm really proud of that organization you know a lot of change over the last 18 months, we've really.
A lot of that work was around making sure that we got really clear on roles rules of engagement, we defined territories very tightly we de layered it took over out overlay across the.
Across the sales team so that there was clear ownership and so we the way that we approach kind of the selling is is twofold. One is.
There's a set of the products that that everybody can sell and then we you know we we focus our selling efforts based on territories and sizes size of customer and then with our <unk>.
Assessment tools, we have a.
Dedicated sales team for four selling assessment into the K 12 space.
Because it's such a big opportunity in.
And we we thought it was worth it.
The dedication there and so that's how we're approaching going after those non LMS markets.
Our products. We also did a number of things just operationally around.
Being able to provide white space reports for the reps that they know what's in the what's in an account and what's available still to go after them.
Them, some competitive intelligence those types of kind of tactical things to improve our cross sell capability.
Great. Thanks, Thanks for that and I guess, an easy soft.
Another non LMS opportunity, but it really kind of to fortify usage I guess developments I'd like to learn a little bit more about is this kind of like a product analytics angle or digital kind of experience platform angle and you know what kind of signals did you get from customers.
Willing to add this to the mix in terms of what they're using from you all thank you.
Yeah, no that's it.
I'm excited to talk about it because that is a product that our sales teams are really excited about that that we're very excited about.
So.
Like I said earlier, we have you know.
We know what customers are using based on based on the integrations into our platform. It and we saw we saw some good uptake of the easy soft product, albeit small. This is you know this is a classic <unk>.
Sickly.
Synergistic acquisition for us they have really good technology that they've proven market fit and they had three salespeople based out of Amsterdam and so.
So we're seeing we're seeing early pipeline build we're seeing good as we integrated into Kansas more tightly.
The way to think about it is what this product does is one it gives it gives.
The institution really good visibility into what's being used in their environment.
What tools and how often and by who and then it also gives them a channel to communicate directly with those those users of the products and so they can go in and if they want to do flasher surveys for customer satisfaction or they want to target training messages to try to improve.
Usage of those of.
Of those tools. This gives them the infrastructure to do that so it's it's it's a key part of the overall LMS experience, but it's different enough that they expected to pay for it in addition to the in.
In addition to the platform and that's how we're that's how we're targeting it with our customer base.
Alright. Thanks.
Your last question comes from Stephen Sheldon with William Blair. Your line is open.
Hey, guys. Thanks.
So it sounds like Youre seeing really strong demand trends for transfer assessment solutions in K 12 for sort of a master connect can you remind us of what the adjusted gross margin implications. There are as you continue to see increased adoption of your assessment offerings.
Sure Stephen So we have.
We had acquired at the end of 2020, we built that into our models and so.
I think at the time, we did this we knew that <unk> had some higher gross margins in the in the area that we are moving towards towards the higher seventy's and so and that works its way down through the P&L. So that's part of the forecast that we put together and we have.
A high amount of confidence that six months into this that it is.
Providing those same level of margins that we had expected from the outset. So we're really pleased with it it continues to be something that our customers really want and is really accretive to our P&L.
Got it that's good to hear and then just wanted to see.
See if you had any updated thoughts on the international K 12 market at what point would you consider putting more resources to work yet on that opportunity or is that kind of not on the road map at this point.
It's a question that we ask ourselves all the time.
The reality Steven is that we are selling into some areas like Australia for instance, we're starting to see some traction in K 12.
And so what we're treating it opportunistically right now and then.
If we see that there is you know if the trends favor.
Again cloud based and they're willing to accept that theres good connectivity and.
And we're seeing purchasing behaviors like we're used to in K 12 in North America, where we're adding those to the list as we as we move forward no no coordinated strategy as of yet.
Does that makes sense.
Got it makes sense and congrats.
Thank you Steve.
There are no further questions at this time I will now turn the call back to CEO, Steve Daly for closing remarks.
Well, thank you everybody for joining us today.
Just like to say on a personal note that this is this has been fun and rewarding IPO process as well as this call. It's good to catch up with everybody and I want to thank all of our employees, our customers and partners for helping us to get here.
<unk> been a mission driven company from the beginning which means we only succeed when we help our customers improve educational outcomes for students all over the world.
We are built to scale profitably, we're built to last and we're confident in our long term ability to drive durable growth and have a positive impact on education. So thank you for your interest in and structure and we're looking forward to taking his journey with you and we look forward to talking with you on our next call.
This concludes today's conference call you may now disconnect.
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