Q2 2022 Instructure Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by.
Welcome to infrastructure is a second quarter 2022 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, Denise Garcia Investor Relations Denise. Please go ahead.
Thank you good afternoon, and welcome to instruct your second quarter 2022 earnings call, we will be discussing the results announced in our press release issued after the market closed today with me are instructors Chief Executive Officer, Steve Bailey, and Chief Financial Officer Gill Bowen before we begin I'd like to remind you that today's conference call will include forward looking.
<unk> based on the company's current expectations. These forward looking statements are subject to a number of risks 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 other reports and filings we filed 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 a reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted to the Investor Relations section of our web.
With that let me turn the call over to Steve.
Thank you Denise and good afternoon, everyone. Thank you all for joining us for our second quarter 2022 earnings call. During today's call Dale and I will provide details on our second quarter results and provide third quarter and updated full year 2022 guidance.
It has been a little over a year since in structure reentered the public markets and before discussing our second quarter results I would like to take the opportunity to reflect on our progress over the last 12 months we.
We have exceeded our financial guidance every quarter since our IPO and the full year 2022 financial metrics will be guiding to today are all significantly higher than consensus estimates, where when we went public.
We've advanced our structured learning platform strategy through record R&D investment and three acquisitions and our K 12 assessment solutions are growing significantly faster than the corporate average.
Our focused international strategy.
Also the and profitable growth across all of our major regions and the channel partner program. We implemented this year is enabling enabling us to cost effectively enter new international markets. We have deleveraged significantly and continued to generate robust free cash flow, which leaves us with many options to create further shareholder value.
Going forward looking.
Looking ahead, we are confident in the resilience of our financial model, including solid top line growth and strong margins.
Turning to Q2 results and structure delivered another strong quarter exceeding our previously communicated guidance ranges across all metrics second quarter GAAP revenue was $114 6 million up 22% year over year, while allocated combined receipts, our ACR was $114 9 million.
Up 20% year over year, we think ACR, which adds back the impact of fair value adjustments to acquired unearned revenue gives investors better visibility into the underlying growth of our business.
We achieved non-GAAP gross margins of 77, 6% in Q2 up 390 basis points year over year, which demonstrates our ability to continuously expand our gross margins as we scale and focus on operational efficiencies second quarter. Adjusted EBITDA grew 28% year over year to $39 8 million.
It's a 45% margin as we demonstrated further operating leverage on both gross margin and adjusted EBITDA lines.
Higher education, and K 12 institutions in the United States and across our major international markets continued to choose Kansas.
Next generation LMS solution.
Beyond the LMS are in structured learning platform strategy gained further traction during the quarter as we continue to land large deals and grew ACR from assessment project products at a strong double digit rate, we expect to continue investing in the platform through organic development and strategic M&A as we strive to connect every aspect of <unk>.
And learning and capture an increasing share of our $30 billion market opportunity.
I now want to talk about four key highlights from the quarter.
First.
In Q2, we saw again strength in each of our key markets U S higher education, K 12 and international <unk>.
Higher education institutions across the country continue to choose canvas for its ease of use scalability flexibility and superior UX. According to a recent report from the edgy technica.
<unk> continued to gain share in the U S higher education LMS market over the past year as of this spring 42% of U S higher education institutions use canvas up from 39% last year. The data also show that over 40% of U S. Higher education institutions continue to run on legacy LMS system.
Which provides us with a significant growth opportunity in the coming years.
During the quarter, Northern Arizona University.
<unk> selected canvas to replace incumbent LMS provider after a rigorous 10 month evaluation process.
<unk> review and selection process, which are available on the university's website demonstrated clear preference among students and instructors for candidates over the competition.
<unk> purchased included three and structure learning platform products canvas LMS studio and catalog catalog will support Nau's online programs by enabling the university quickly and efficiently publish any Kansas course through an online catalog.
Construction is focused on innovation and ability to creatively address opportunities in the online sphere are clearly resonating with U S higher education institutions as we build out being a structured learning platform, we expect our competitive differentiation in this market market to increase further.
K 12 districts are also excited by our instruction learning platform product and vision.
Demand for our portfolio of higher value assessment solutions remains robust as educators seek to support the increasing need for innovative standard blind interim and formative assessments to improve learning outcomes and mitigate pandemic related learning loss with an average revenue per user of two to three times the K 12 LMS.
Our assessment solutions also represent a significant growth opportunity fund structure during the quarter during the quarter Nina Joint School District, which serves over 6700 students across 14 schools in Wisconsin chosen structure as its next generation LMS solution in the case of <unk> our unique ability.
<unk> to bundle, our leading mastery connect assessment management system with canvas LMS as well as tight integration between the two solutions wrapped with districts decision to partner with and structure.
<unk> also basis decision on the excellence of our support organization, which is a hallmark of instructions culture and a key competitive advantage.
International remains the fastest growing part of our business in Q2.
During the quarter, we signed an agreement with Brazilian college of radiology, and diagnostic imaging, our CBR to power their digital transformation.
CBR selected in structure, because we are able to offer them a tightly integrated solution, which included canvas LMS studio and catalog.
<unk> proved to be an especially strategic asset in the deal as CVR like many higher education institutions worldwide looks to expand its online offering.
Course offerings online catalog that not only provides a customizable storefront for institutions online portion program offerings, but it integrates into most payment systems, our ability to provide CBR with a payment gateway solution for the Latin American region was a key factor in winning this business. In addition, we continue to broaden our channel program.
To cost effectively expand our international footprint with our international higher education LMS market share in the single digits. We expect this segment to remain our fastest growing segment in the years ahead.
Our focus go to market an expanded set of offerings are resulting in higher penetration of products across our customer base through both cross sell opportunities and new logo deals during the quarter Dekalb County schools in existing canvas LMS customer purchase studio impact and services to improve the adoption of technology in the class.
And advanced digital learning your processed 94000 student district, as a reminder, impact healthy administrators.
Administrators evaluate the impact of educational technology, while helping faculty and students generously navigate new platforms.
Third we are making disciplined investments to expand our platform and drive long term growth.
Our high gross margin strong sales execution productive R&D investment and low capital requirements allow us to reinvest in the business pursue strategic M&A and deleverage, while maintaining industry, leading margins our enterprise software business model and vertical focus provides us with excellent visibility into our near term revenue.
Due to our long term noncancelable contracts and the educational verticals minimal sensitivity to macroeconomic volatility we expect the rule of 50 outcome for the full year on adjusted EBITDA basis, driven by our double digit revenue growth.
Continued strong margins in spite of the deteriorating macroeconomic environment, we continue to invest in R&D and sales head count this year, and our appetite and capacity for accretive M&A opportunities remains unchanged. We expect to continue investing in our business to drive consistent long term profitable growth.
Fourth we continue to use strategic M&A with the goal of increasing our Tam and expanding our structured learning platform capabilities. During the second quarter, we advanced our instruction learning platform strategy through the acquisition of concentric sky and the rollout of canvas batches and Kansas credentials to the market.
Canvas credentials enables higher education institutions to use digital batching to increased student enrollment and retention rates, while providing a seamless way for learners to record and share their validated scales and achievements with future employers, we look forward to partnering with higher education institutions to establish and grow their non traditional online programs.
<unk> foundational technologies from and structure a significant Tam.
Spansion opportunity with our strong free cash flows and conservatively capitalized balance sheet. We believe we are in an excellent position to take advantage of inorganic growth opportunities that may arise as seller expectations of just with the current market environment. Our M&A pipeline remains robust and we expect to continue to pursue strategic acquisitions with.
The goal of expanding our Tam and enhancing the value of the structure and learning platform, yeah educational institutions and their students.
Turning to stimulus funding the vast majority of the $190 billion appropriated for K 12 schools under the elementary and secondary secondary school emergency relief are ASUR funds remains unspent.
According to the department of education as well as at the end of May 141 billion or 74% of investor funds have yet to be invested.
<unk> a data aggregator reports that over 25% of <unk> III funds have been earmarked for technology spending Dekalb County schools are cross sell example, I mentioned earlier utilized essar funds to help finance, it's additional investment in the structured learning platform. We expect many other forward thinking canvas LMS.
Customers like the <unk> County schools to generate significant incremental demand in our K 12 segment using gas or funds over the next few years.
Last month, we were thrilled to host over 12000 registrants at instruction on 2022 in North America.
Many of our 600, plus and structure Ed Tech collective partners.
Hosted virtual Bliss with partners, such as Google, Microsoft and Jim delivering virtual sessions at the conference. During the event, we unveiled our updated brand architecture supported by four brand pillars canvas for learning management solutions mastery for assessment tools and content.
<unk> for data and analytics and impact for Ed Tech adoption engagement. We also highlighted product improvements that make the structured learning platform even more powerful in 2022, we look forward to hosting three additional structure cons later this year for Latin America, EMEA and the Asia.
Asia Pacific regions.
Looking to the remainder of 2022 and beyond our pipeline for North American higher education, RFP opportunities continues to build as many institutions, which delayed major purchasing decision during the pandemic look to upgrade their infrastructures in summary, I am encouraged by our strong second quarter financial results, which exceeded our guidance ranges and <unk>.
All metrics, we expect the favorable trends that drove our second quarter outperformance to continue for the balance of the year, which was reflected in our revised 2022 guidance I would once again like to thank our customers partners employees and shareholders for your ongoing support with that I will now turn the call over to Dale to talk about our fine.
Actual results and the ongoing momentum we are seeing in the business.
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 GAAP results I'll be discussing certain non-GAAP results, our GAAP financial results along with a 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 the second quarter, we continued to show a combination of strong topline growth and expanding adjusted EBITDA margins building on the consistent gross margin improvement. We have delivered in recent quarters Q2, non-GAAP gross margin expanded by 390 basis points year over year to 77, 6%.
As Steve mentioned, we generated second quarter 2022, total GAAP revenue of $114 6 million.
Up 22% year over year at ACR of $114 9 million up 20% year over year subscriptions.
Subscription and support ACR accounted for 90% of our second quarter revenue at $103 2 million up 19% year over year, primarily as a result of the continued momentum within our core canvas LMS product both domestically and internationally. In addition to the strong upsell and cross sell of our other products, especially <unk>.
Settlements.
Special services, another ACR accounted for 10% of our second quarter revenue at $11 7 million.
Up 24% year over year, driven by strong implementation and training services delivery and our high end business.
Deferred revenue at the end of the second quarter was $283 3 million up 13% year over year.
Remaining performance obligations or <unk>.
Were $783 $7 million at the end of the second quarter up 17% year over year, and we expect to recognize revenue on approximately 74% of our RP 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.
non-GAAP basis. Please note that when I referred to margins in the upcoming comments im referring to margins calculated as a percentage of ACR.
Our strong gross margin profile as supported by our optimized cloud architecture and flexible support model to scale to meet seasonal customer demands in the second quarter gross profit was $89 2 million, representing a 77, 6% gross margin up from 73, 7%.
In the second quarter of 2021.
Couldnt be more pleased with our enhanced operating model and continued operating leverage on this gross margin line.
Turning now to operating expenses sales.
Sales and marketing expenses for the second quarter were $24 7 million.
Or 21, 5% of ECR compared to 27% in the second quarter of 2021.
Research and development expenses for the second quarter were $15 5 million or.
13, 5% of ACR down from 13, 8% in the second quarter of 2021.
We continue to invest in engineering head count to pursue our ambitious product roadmap, while leveraging offshore talent to drive ongoing R&D efficiencies.
General and administrative expenses for the second quarter were $10 4 million or 9% of ACR up from seven 5% in the second quarter of 2021, driven largely by the addition of public company costs.
non-GAAP operating income for the second quarter was $38 7 million representing.
Representing a 33, 7% operating margin up from 31, 7% in the second quarter of 2021.
Second quarter, adjusted EBITDA was $39 8 million.
Representing a 34, 6% adjusted EBITDA margin up from 32, 5% in the second quarter of 2021.
non-GAAP net income for the second quarter was $35 $9 million or 25 per share on a fully diluted basis compared to $27 million or <unk> 16 per share a year ago.
Turning to the balance sheet and cash flow statements.
We ended the second quarter was $87 6 million in cash cash equivalents and restricted cash and $492 5 million of long term debt net of discounts, resulting in a 244 times net debt to trailing 12 months adjusted EBITDA ratio.
As a reminder, the timing of cash collections is highly seasonal in our business with the vast majority of annual license fees Invoiced in the second and third quarters and collected during the third and fourth quarters. As a result, our cash balances and cash flows are lower during the first half of the year and build significantly during this.
Half of the year.
Operating cash flow was $8 6 million during the second quarter and $100 $2 million over the last 12 months.
Free cash flow was $6 $6 billion during the second quarter and $94 $2 million over the last 12 months.
Adjusted Unlevered free cash flow was $16 $2 million during the second quarter over the last 12 months adjusted Unlevered free cash flow was $134 2 million.
As a reminder, our strong free cash flow conversion was driven by our favorable billing terms low capital expenditures and our accumulated tax assets, which we believe will act as a tax shield for the next several years.
We will now conclude the call by providing guidance for Q3 and revised guidance for the full year of 2022 for HCR adjusted EBITDA and adjusted Unlevered free cash flow.
For the third quarter of fiscal 2022, we expect ACR in the range of $118 5 million to $119 5 million.
We are raising our fiscal 2022, ETR guidance by $4 million and we now expect ACR in the range of $465 8 million to 400.
Third $69 8 million.
Normalizing for the bridge divestiture, our full year ETR guidance growth rate is 14% at the midpoint.
As a reminder, on February 26, 2021, resold bridge, our corporate LMS business, which contributed approximately $4 million ACR during the first quarter of 2021.
We expect third quarter adjusted EBITDA in the range of $42 1 million to $43 1 million representing.
Representing an adjusted EBITDA margin of 35, 8% at the midpoint of the range for the full year. We now expect adjusted EBITDA in the range of $167 5 million to $171 5 million.
Representing an adjusted EBITDA margin of 36, 2% at the midpoint of the range our increased fiscal year 2022, adjusted EBITDA guidance reflects higher ACR growth and stronger gross margins as we continue to optimize our third party technology costs.
We are also increasing our full year 2022, adjusted Unlevered free cash flow guidance and we now expect adjusted Unlevered free cash flow in the range of $185 5 million.
The $189 5 million.
In summary, we are pleased to have exceeded our second quarter guidance ranges and raising our full year 2022 guidance ranges across all metrics.
We are executing at a high level as we continue to displace legacy LMS competitors and gained wallet share with our instruction learning platform solutions.
We believe that there is no other company, that's better positioned than its structure to lead the digital transformation of education, and we've only scratched the surface of this $30 billion market opportunity.
<unk> profile is compelling with solid topline growth best in class margins and superior adjusted Unlevered free cash flow conversion, we look forward to updating you on our progress throughout the remainder of 2022.
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.
First question comes from the line of Josh Baer with Morgan Stanley . Your line is open.
Great. Thanks for the question and congrats on a really strong quarter.
Now I think almost two and a half years post the onset of Covid really changed the landscape and the opportunity in K 12, So I was hoping to get an update on the competitive environment.
What portion of K 12, do you see as penetrated as far as a paid LMS perspective, where do you see that going over the next several years and what's the latest on your competitive momentum versus the alternatives and K 12.
Yes, Thanks, Josh.
And.
Yes, I think youre right. When you when you talked about the change that happened with Pandemics and K 12, recognizing the need for digital transformation strategy, we still see a lot of interest as.
As we mentioned on our last call.
K 12 system has been under a lot of pressure, particularly administrators with.
Due to shortages.
Sure.
I think they were happy to go into the summer and get a little bit of a break but but the strategic priority remains high for digital transformation.
And the recognition that an enterprise class LMS is needed in order to really be a foundation for that so we continue to see that.
Good demand in our K 12, the pipeline.
Continues to build.
We've had some really we mentioned a couple of cross sell opportunity. So it's not just.
The LMS, but also the other products that make up the structure learning platform.
We don't have an update on the breakout between paid or unpaid our last data says that sales is about 40% to 45% of the market that's unpaid.
And we expect that.
While the pace over the last year since we've come out of.
Pandemic in some sense.
The slower than it was during the pandemic, we expect it to continue to kind of March forward at that.
Got.
Increased penetration of our paid for LMS.
Our win rates are still world class, we continue to win more than our fair share of the deals in that in that space.
<unk>.
And we do it without having to.
Drop price is still still havent been the lowest cost in any deal that we've lost so we feel good about our competitive position.
As we have in the past few quarters.
Great. Thank you.
Your next question comes from the line of Greg <unk> with Macquarie. Your line is open.
Alright, Thank you and I think I'd like to reiterate the sentiments congratulations on the strong quarter here.
I wanted to ask considering that and structure virtu.
<unk> software as a service addressing the education market just about the macro backdrop considering that this is something that has been top of mind with all of the every other company in software I really wanted to ask.
How do you interpret the macro environment through the lens of your education customers and is this something that you tend to see the larger risk.
Recessionary potentially recessionary or just inflationary impacts pressuring your model are pressuring any of your customers or is this something you are generally deleverage Trump.
Yes. It is.
Good question, Brett and very apropos, obviously, because the headlines that are out there.
The edge is the education market, particularly higher Ed tense.
Tended in the past to be kind of countercyclical.
We will get laid off they go back to education.
So.
And then K 12.
Is funded by property tax receipts are and we see.
The need to the need to continue that digital transformation and K 12.
The number of students isn't going to change because there is because there is a potential for a recession. So we tend to be.
Insulated from some of these macro trends that we see in the market today just from the margins that we planned.
And I Wouldnt I don't want to overstated to say, we're completely immune to them, but as you can see from the results. It is much.
Much more muted we're much more insulated.
De Levered as you said from those from those set so we feel good about where we're going into our position and that digital transformation.
To happen.
Yes.
As the education system.
Transforms and the next.
Decade.
Thank you for that and then just a follow up question. We've seen certainly in the headlines of all the reports coming out recently about higher education enrollment trends.
Showing that enrollments were declining I wanted to ask has hasnt structure seen this showing up in any of those conversations higher education institutions or has this been acting as to any sort of a headwind for your model.
With institutions thinking about potentially re sizing deployments or is this something that is less consequential for and structure as a whole.
Yes. It is.
This trend any enrollment declines it's been for a couple of years.
Throughout the pandemic.
David would show that enrollments have been down.
Are the institutions that we serve.
Are responding with.
With moves into online non traditional right. So while enrollments may be going down it doesn't.
It doesn't necessarily translate to those students still want to get a credential or they want to get some sort of training maybe it's not a degree.
And so we are.
By being in that online non traditional with our catalog product with our acquisition of concentric sky.
A little bit we're hedged against enrolment declines for traditional four year degree seeking students. In addition.
Our business is.
Is not completely reliant on U S higher education, and so less than half of our business is from U S higher education, so the diverse nature of our revenue streams.
Any kind of changes in any one market and then because we are really <unk> sort of business model deals.
Dealing directly with the institutions.
With multiyear contracts that are noncancelable.
We don't see a huge impact so.
There has been.
Been a de Minimis impact in our business based on the last two years of enrollment to clients for those reasons.
Thank you.
Your next question comes from the line of Joe <unk> with Baird. Your line is open.
Great Hi, everyone I guess I'll stay with the same topic, Steve you brought up <unk>.
<unk> data earlier I think that shows you are still growing your student enrollment in U S higher Ed by 10% rate give or take.
When you think about 2022 2023 participating in more bake offs and Kansas is.
It may be one of the only vendors participating that is still growing students are you getting some kind of positive feedback positive re forsman institutions kind of looking to on structure for tips on maybe how it.
Of course, correct, what could be a more challenging trend just within their institution and so breed success for you in these RFP processes.
The short answer.
Thanks, Joe Good to talk with you again, yes. The short answer is yes, we are at particularly as institutions look for ways to address those non traditional students.
They're asking us how.
What should they do how have we seen it done and.
And to your point, it's kind of one of those network effects that helps us in the RFP process. In addition to a traditional strength of ours, which has been.
Our customer success relationships that we have those combined.
I think in the script, we talked about that being one of the Differentiators in Atlanta.
So again, yes that is a network effect that we're starting to see that we are seeing help us to get those kind of world class one thanks.
Okay, Great and then.
Just to go back, bringing up that I think since the IPO and structure has exceeded.
Revenue forecast by three or 4%.
On average each quarter.
Where has.
Some of the best Upsides, then San just over that stretch of time and as you look forward like you mentioned how much of the K through 12 stimulus is still left remaining.
Would you maybe expect some of the sources of upside to just shift to other areas of the business. So the magnitude of potential upside maybe stays consistent but youre getting it from different areas than you have over the past 12 months.
Yes.
Yes, I think Youre right I think.
As we look at.
Look at the stimulus funding not a lot of it has really impacted our business, we're starting to see it.
We've talked about the Calvin using <unk>, but it's still a minority of our deals were where they pointed essar funds as the source of that so yes.
Yes, we see strength across the business lines.
Driven by the trends that we've talked about increased RFP and higher Ed the move away from little in international markets in the K 12.
<unk>.
The K 12.
Digital transformation, that's happening, but I do think over the next couple of years, you'll see those contributors to those to that over achievement.
Shift between those three but again, we saw strong growth in all of this this quarter and we expect that to continue.
Okay, great. Thank you very much.
Thanks, Joe next.
Your next question comes from the line of Alex Sklar with Raymond James Your line is open.
Thanks, Steve I wanted to ask you about international demand.
Prior questions hit on the macro concerns, but they do seem to be impacting kind of international markets a bit more acutely are you seeing any changes in demand broadly internationally.
We have not.
That continues to be our fastest growing markets.
And.
And so we haven't seen any.
Yes.
We haven't seen any big changes in demand is the short answer Alex.
The need for a <unk>.
Enterprise class learning management system the need to.
For educational institutions to address changing needs and it is in their education.
The students and the student demand.
<unk> is one of those.
Drivers.
I think transcends some of the macro concerns in those markets.
Okay.
Okay helpful. And then Dale just following up on Joes question, maybe ask it slightly differently, but how should we be thinking about the setup into 2023 from a pipeline perspective, I know you talked about a greater number of deals coming in the pipeline that were delayed during the pandemic, but in terms of your overall ability to support double digit growth.
Yes.
It's a good question Alex we've got a couple of ways that we look at that first of all we had mentioned are very high. So we have it's a record opioid number that we have that helps us have visibility into revenue for the next two to three years. So you take that and layer on top of it.
<unk> ability that we have into rfps and that strong pipeline there gives us tremendous visibility into the top line.
Growth in direction that we see the business moving forward.
Sure.
Okay. Thanks, and nice went into cab counties in my backyard.
Good to see a good cross sell there as well.
We could have used it.
Your next question comes from the line of Terry Tillman with Truest Securities. Your line is open.
Yeah, Hey, Steven Dale Congrats from me as well and I guess for Alex.
And Tony neighbors, So I guess congrats for the cap County.
I just had a couple of questions. The first question is I mean, it is striking that there is 40% legacy.
I think you said U S higher Ed.
LMS out there.
I think I have that right.
As you know we're in an inflationary environment. There's no question about it gets costly to maintain these on Prem solutions or just where you are managing infrastructure do you see some sort of kind of looming event or kind of potential.
More notable uptick in activity as it just gets too costly to maintain these old systems and what I'm getting at is like how do you think about kind of building on prior questions about the the RFP activity and the volumes of shots on goal in U S higher Ed over the next couple of years, maybe potentially even building more and then I'll follow up.
Yes.
The activity is.
We've talked about.
Frankly this year next year.
Visibility into a lot of the activity.
Yes.
The major driver for that was the pandemic kind of pointed out the difficulty in maintaining your own technology stack in the hardware and everything around that.
To your point, it's going to become much more costly for.
For institutions to do that on the road I think the other factor that plays in there Terry.
The tight labor market.
And the ability to find.
Talent to manage that so I think those are all.
So those are all the good that's a good fact pattern for us right to encourage an increasingly see.
<unk>.
The move away from those legacy systems onto onto the canvas, Florida.
So.
Short short answer I think is yes, we do see those as catalysts.
And I think it's already showing up in our pipeline data that shows that RFP activity is up.
Significantly from 2021.
Okay got it and Dale I mean, you called it out, but it's worth mentioning again, it's impressive year over year gross margin expansion.
How much more is left in the tank in terms of in the second half any more incremental opportunities or just even how do you think about over the next couple of years, because it seems like you're really optimizing things right now thank you.
It's a great question, Terry we're really pleased with our gross margin numbers.
This really is the result of the work the team has done over the past couple of years.
It is.
Engineering teams with our hosting environment. It is our customer support team and the variable nature of that to make sure that we are addressing customers like quest.
They have and the timing that they have.
As we've said in the past, we expect our gross margins to be in the upper <unk> and we maintain that there's still room for us to expand there but.
Yes, we're really pleased with where we are at this point again.
Your next question comes from the line of Matt Van Vliet with BTG. Your line is open.
Hey, good afternoon, guys. Thanks for taking the question and nice job on the quarter I guess.
Following on <unk> question, a little bit maybe from a the opposite angle of.
I'm curious on how youre looking at assessments in K through 12, or maybe studio and catalog in higher Ed.
Potentially pulling pulling projects forward, bringing rfps to market.
Maybe you were scheduled for another one or two years out.
But are now sort of bigger catalyst to say look we have this demand for these additional features additional functionality and now we need to make that LMS upgrade because we want to have.
Those add on modules or are we still in the factor that the.
<unk> is driving the bus, but the decision to choose canvas in the structure. Overall is that you have these additional add ons.
Yes.
Yes.
It's interesting as I as I've gone out and talked to customers Matt.
When we're in a new logo opportunity.
The entire platform is a definite benefit and the selling process right. The fact that the.
LMS, which tends to be foundational core technology.
Has these other.
<unk>.
<unk> differentiated in the market is a contributor to our high.
High win rate.
But we still are very.
We are still very low penetration as far as you know about I think just over a third of our customers that more than one product from us. So so that opportunity to cross sell into the existing base is going to be a growth driver for.
For quite some time for us as we as we kind of optimize ourselves and go to market motions around.
Cross selling into existing accounts so.
It really contributes to both in both areas for Us Matt.
Alright, very helpful and then.
I guess digging in on the international side, a little bit obviously, the partner program seems to be off to a great start and you announced.
Another great partner in the Indian market is it changing.
What youre thinking about or maybe the roadmap for various markets being direct versus partner.
Maybe leaning even more into the partner program are you still pretty confident in sort of the identified markets as direct being large enough in an economically viable enough to do that.
Lean on the partners, where its maybe less so.
Yes, I think I would characterize it.
We've got a tremendous.
There's opportunity in the international markets. Some of them were going to go after direct and that lifts hasnt changed and we still believe.
We as we look at the market share potential in each of those many of those markets. We're still very lowly penetrated I think that the.
Most penetrated we are at 20% in one of our markets. So we've been in for a while so still a lot of growth to come out of our direct efforts.
This is the channel is incremental opportunity for us to grow the business.
It opens up markets.
We would not do business in immediately just because of the investment that's required but channel partners that have existing relationships existing contracts, we do business with with government entities.
Is just for us.
Incremental opportunity on top of what we're doing from a direct perspective.
So I don't think its either or and I don't and channel definitely it's not a catch all for those opportunities that happened to come by.
That arent in our direct markets.
Alright, great. Thank you.
As a reminder, if you would like to ask a question at this time. Please press star followed by the number one on your telephone keypad.
Your next question comes from the line of Stephen Sheldon with William Blair. Your line is open.
Hi team. This is this is Pat mckelvey on for Steven Tonight.
So I know you had mentioned that the use of stimulus was clear in a minority of your deals, but I just wanted to ask as you work through the peak selling season can you provide an update on how you've seen that support used.
If there've been any specific products that seem to have benefited from that and if you've seen that spend pick up at all as we worked through the allocation window for those funds.
Yeah.
<unk>.
There are there are there aren't a lot of deals that we can point to yet where the where we are.
The district knows that those funds came from master funds. So.
It's a function of two things one is a lot of them just haven't spent the funds and the other is that a district will get.
Funds from the state and its not theyre not always clear to the district, what where those funds came from its just here's a bucket where you would expect so there is a little.
It is a little clouding in figuring.
A an accurate kind of detailed response to your question Pat.
But what I would say is.
B B.
The funds are available that theyre looking at them.
The digital transformation of education, K 12 space is a very high priority strategically for each of these districts in each of these states and so.
So we feel confident that this will be a tailwind for us for the next couple of years.
In the last budget year that just ended.
This quarter Q2.
We haven't seen a lot of it yet flow through so there is still.
There's still a lot of dry powder. If you will for the next couple of years, we believe.
Got it and then as a follow up you touched on some of the cross selling success during the quarter, but wanted to ask is as you continue to build out your product set.
Are you able to provide an update on how reception of some of your more recent product additions like canvas credentials for example has been.
<unk>.
So just how your ability to attach those additional modules at signing has trended.
Yeah.
<unk>.
Ah.
Couple of examples that I used in my prepared remarks, each of those we were able to attach.
Additional products.
Studio catalogue and.
And impacts being the most commonly attached and a new logo.
Sales, it's still early days from a canvas credentials perspective, whats the concentrix side acquisitions, but the pipeline is growing nicely and it's a.
And the customers are excited about it.
And again our strategy has always been we've got we've got really strong customer base that is that knows how to address a.
Traditional degree seeking students every one of those institutions wants to go address the reskilling market or the Prudential market the certificate market and provide us.
Statements that maybe will never come on campus for a four year degree the opportunity to interact with the education institution. So the catalog and credentials investments that we're making.
I expect to be big growth drivers in the future for us as is the education landscape.
Against the shift.
Got it thats great to hear thank you and congrats again on the strong quarter.
Thank you.
Your next question comes from the line of Brent Thill with Jefferies. Your line is open.
Thanks.
Outline the international drivers kind of what are the top two or three markets that you are finding great traction now and maybe you can just talk to the build out of <unk>.
How that's going.
Sure.
We're seeing strength across the markets, we serve a particular strength in APAC and Latin America, both of those markets performed very well for us.
This past.
This past quarter, and we know that.
We are we are targeting primarily higher education institutions in those markets. The K 12 market is very fragmented and whereas in the higher education, it's easier to address.
And that K 12 market. So we are we feel good about the progress that we're making in those markets. We had good growth across EMEA.
Latin America and <unk>.
And APAC this past quarter, but those two stood out as exceptionally strong growth quarters.
Just kind of assessment is there a baseball reference in terms of their ending year end or what.
What whole Youre on the golf course, I don't know, which way he could you kind of describe where FMC. Zack can you give us a flavor of where where do you think youre at and then maybe kind of what what brings us to the next level, but what is what's the what's the piece that you can.
Supercharge that that continued cross sell.
Yeah, I would say we're still early innings I think we are in the <unk>, maybe the second or third inning.
From an assessment perspective, and there's kind of two things that are driving that one is.
There is a move in.
Basically in the education.
World.
To recognize that.
Waiting until the end of the year to do an assessment.
Is fraught with risk.
As far as.
If you are trying if you if your success is really measured by the number of students that they have.
Mastered.
<unk> concepts and so.
More and more institutions are looking at a way to predict that throughout the year and give teachers the tools to be able to assess whether or not a student is on track to do to show mastery at the end of the semester.
In order to do that that requires it's really hard if if youre doing it with pen pencil and paper and bubble sheets and things like that so having a.
Having that automated through an online system that is integrated with your learning management system.
One of those.
One of those technologies that you have to have in place to be able to do that well. So we're seeing good like we mentioned in the remarks.
From a product line perspective, we're seeing great growth in our assessment business as part of that digital transformation is not just where any management, but also integrating assessment vantage net.
As we see that continue.
We think the uptake in each interim informative assessments, it's going to be.
They accelerate so again I think we're early innings.
As we get penetration of technologies like our mastery assessment management system that will be kind of the early indicator that.
We'll see.
From faster growth in that space.
Thank you.
Yes.
There are no further questions I'd like to turn the call back to CEO , Steve Daly for closing remarks.
Well I just wanted to again, thank our customers our partners employees and our shareholders for your ongoing support we're proud of our performance during our first year as public company.
We look forward to continuing to execute on our strategy and building a growing and highly profitable vertical software business that has a significant impact on the digital transformation of education. So thank you for joining us today and we'll see you next quarter.
This concludes today's conference call you may now disconnect.
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