Q3 2022 Instructure Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to instructors third 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 call.
<unk> over to your first Speaker April Investor Relations April . Please go ahead.
Good afternoon, and welcome to instructors third quarter 2022 earnings call, we will be discussing the results announced in our press release issued after the market close today with me are instructors 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 Companys.
Current expectations. These forward looking statements are subject to a number of significant risks and uncertainties and our actual results may materially may differ materially for a discussion of the 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 file from time to time with the Securities and Exchange Commission all of our statements are.
Made as of today based on information available to us today, and except as required by law, we assume no obligation to update any such statements. During the call. We will also refer to both GAAP and non-GAAP financial measures you can find a reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted in the Investor Relations section of the website all of our non revenue financial.
As we discussed today are non-GAAP , unless we state that the measure is a GAAP measure with that let me turn the call over to Steve.
Thank you April and good afternoon, everyone.
Thank you all for joining us for our third quarter 2022 earnings call.
During today's call Dale and I will provide an overview of company results for the third quarter and provide fourth quarter and updated full year 2022 guidance.
And structure delivered another strong performance in the third quarter exceeding our guidance across all metrics as we benefit from the digital transformation of education.
Europe .
A favorable federal funding dynamics are strong reputation for innovation and leading market positions.
Third quarter quarter, GAAP revenue was $122 4 million up 14, 2% year over year, while allocated combined receipts or ACR was $122 5 million up.
Up 12, 8% 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 delivered this growth while continuing to demonstrate the strength of our business model with our non-GAAP gross margin of 77, 8% in the third quarter up roughly 90 basis points year over year as we optimize our third party technology costs and improve the efficiency of our support operations third.
Third quarter adjusted EBITDA grew 15, 4% year over year to $47 $6 million or 38, 9% margin of ACR as we further demonstrated operating leverage on both the gross margin and adjusted EBITDA lines.
I am proud of these results and excited about the future and want to thank our employees for their continued dedication.
I'd now like to review three things our results across the K 12, higher education and international markets.
Continued evidence that our platform strategy is working.
And our progress penetrating non traditional education opportunities.
Across our K 12, higher education and international businesses, our focus go to market an expanded set of offerings are driving continued strength and bringing new logos onto the platform.
Starting with North American K 12.
Market research firm lift AD Tac reported last month that 33% of all districts are using canvas displacing Google classroom as the share leader in this segment of the market. We are proud of this achievement and continue to see high win rates, our pipeline remains very healthy and budgets for digital transformation projects are robust.
Ever with 70% of Essar funds, yet to be invested according to the department of education.
However record teacher retirements and strained capacity.
Our slowing decision, making and impacting K 12 sales cycles near term on the other hand, we continue to hear from K 12 decision makers that instructor products are more critical than ever. This validates the long term demand for our platform and we expect the funding environment to remain favorable for the foreseeable future. We remain confident we will continue to gain share in K 12.
Because of the central role the instructor learning platform plays in the classroom in the post pandemic era. For example, we converted 600 student pilot program with Wichita Public schools are large K 12 district to a district wide implementation of canvas with a plan already in place to expand the instructor learning platform further once.
Canvas is live now.
Now turning to North American higher education.
Canvas as a leading learning management platform with more than 40% market share win rates remain high as higher education institutions continue to select canvas for ease of use scalability flexibility and superior user experience during the quarter the University of Texas, San Antonio selected canvas as its LMS replace.
A long term relationship with one of our larger competitors Utsa was already using our impact product and after a long evaluation process decided to migrate to Kansas because of our engaging learning platform and the power of combining canvas studio catalogue and impact.
Looking ahead, we expect North American higher education growth opportunity to remains strong.
That's nearly 40% of higher education institutions in the U S still use legacy LMS systems, providing plenty of opportunity.
Finally international remains the fastest growing part of the business during the third quarter up 21, 5% year over year, our international market focuses on a narrow group of markets, where we go direct like Ireland, where there's strong connectivity of high student to device ratio and a propensity to spend on education during the quarter the University of Galway selected.
Structure learning platform after a lengthy evaluation process due to its world class user experience and unrivaled interoperability.
As you know we also launched the channel program in January of this year and that enables us to cost effectively enter new international markets and address the next year of growth and we are gaining momentum, adding 13 value added resellers looking ahead, the international higher education LMS market share.
That we have is in the single digits. We expect this segment to remain our fastest growing segment in the year ahead.
We believe the international business will continue to drive durable growth as institutions continue to upgrade from legacy open source and sluggish on premise systems.
Second I want to talk about the growing success of our platform strategy.
During the quarter, our and structure learning platform strategy gained further traction with strong success with both cross sell and upsell since.
Since 90% of instructional workflows are facilitated by an LMS, we are well positioned to cross sell additional modules during the quarter. We saw several examples including the Providence School district, which after a competitive RFP process added elevate and mastery connect onto an existing canvas base due to our ability to scale assessments.
Curriculum across the district, we also saw meaningful win with the Iowa Department of education, including implementations for more districts and also adding studio to their state contract. Looking ahead, we are still in the early innings on cross sell and see meaningful opportunity.
Our current product portfolio alone represents roughly a $750 million cross sell opportunity in our existing customer base. We expect to continue investing in the platform through organic development and M&A as we increasingly connect every aspect of teaching and learning and expand our addressable market.
Finally, I wanted to update you on successes with non traditional education opportunities.
We believe our investments will contribute to long term durable growth and we are excited about the early traction we are seeing canvas when combined with catalog studio and credentials increasingly allows universities to address not only individuals within the four walls, but also those beyond it.
We are also seeing strong interest from innovative institutions that are looking to us to harness non traditional education opportunities that expand their addressable market.
Our focus on innovation and our ability to creatively address opportunities in a changing higher education landscape drove several wins during the quarter, including Arizona State University.
ASU has been a longtime strategic customer and has now chosen canvas to power ASE is Thunderbird school of management 100 million learners Global initiative.
This initiative aims to offer online global education in 40 different languages to learners across the globe, 70% of whom will be women. We believe this advances Thunderbirds mission to empower and influence global leaders in advanced equitable and sustainable prosperity worldwide and in structure, we share <unk> mission to improve the world through.
Education, and we are proud to power. This initiative, which is one of the many ways. We are advancing our strategy to address the estimated 5 billion non traditional online market opportunity.
We also had a large win with people start a leading provider of professional assessments certifications that does the majority of its business outside the U S. As part of their digital transformation and business growth strategy people searches canvas as a learning management system that will deliver training to its 250000 learners on their journey to serve.
Vacation people searches, Kansas due to our ability to scale their worldwide application and this partner partnership helps us cost effectively enter new international markets in summary, I am confident and optimistic about our business even with the challenges. Our K 12 customers are facing we believe the diversification of our business.
Higher education, and K 12, with leading shares in North America, and growing market share across the world positions us for long term durable growth. In addition, we believe our focus on continuous improvement will drive enhanced profitability versus our already industry, leading margins and will now turn the call over to Dale to talk about our third.
Quarter financial results.
Thank you, Steve and thanks, again to everyone for joining us today.
Before discussing 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.
The structure continues to display a unique combination of both strong organic growth and best in class margins for the third quarter of 2022, we remained a rule of 50 plus company with 12, 8% ACR growth and 38, 9% adjusted EBITDA margins further validating the underlying quality of our business.
As Steve mentioned, we generated third quarter 2022, total GAAP revenue of $122 4 million up 14, 2% year over year, and ACR of $122 $5 million of 12, 8% year over year.
As a reminder, ACR adds back the impact of fair value adjustments to acquired unearned revenue. So it provide investors better visibility into the underlying health of our business.
Subscription and support revenue accounted for 89, 6% of our third quarter revenue at $109 $7 million up 14, 1% year over year, primarily as a result of the continued momentum within our core canvas LMS product, both domestically and internationally.
In addition to strong upsell and cross sell of our other products.
Professional services and other revenue accounted for 10, 4% of our third quarter revenue at $12 7 million up 14, 9% year over year, driven by strong implementation and training services delivery in our higher education business.
Deferred revenue at the end of the third quarter was $329 million up 11, 8% from the third quarter of 2021.
Remaining performance obligations or our Poe were $792 $6 million in the third quarter up 16% year over year and.
And we recognize revenue on approximately 75% 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-GAAP basis. Please note that when I refer to margins in the upcoming comments, we calculate margins based upon ACR.
Our gross margin profile remains very strong.
With our optimized cloud architecture, and flexible support structure that scales to demand to meet customer demands in the third quarter. Our gross profit was $95 3 million representing a gross margin of 77, 8%. This is compared to a gross margin of 76, 9% in the third.
Order of 2021.
Turning now to operating expenses sales and marketing expenses for the third quarter were $24 $1 million or 19, 7% of ECR up from 18, 7% in the third quarter of 2021 research and development expenses for the third quarter were $15 6 million or 12.
<unk>, 7% of ACR up from 12, 3% in the third quarter of 2021, as we invested in engineering head count to pursue our ambitious product roadmap.
General and administrative expenses for the third quarter were $9 3 million or seven 6% of the ACR down from eight 8% in the third quarter of 2021.
non-GAAP operating income for the third quarter was $46 $2 million, representing a 37, 7% operating margin up from 37, 2% margin in the third quarter of 2021 in.
In the third quarter, adjusted EBITDA was $47 $6 million, representing a 38, 9% adjusted EBITDA margin up from 38.0% in the third quarter of 2021. This result was better than our expectations and reflective of both our strong topline growth and disciplined management of our <unk>.
Cost structure.
We're pleased with the roughly 90 basis point improvement in operating margins and adjusted EBITDA margins, demonstrating the power and efficiency of our model.
non-GAAP net income for the third quarter was $42 $4 million or net income of <unk> 30 per share compared to $33 7 million or.
Or 25% per share a year ago.
Turning to the balance sheet and cash flow statement.
We ended the third quarter with $263 $4 million in cash cash equivalents and restricted cash and 491 $5 million of long term debt net of discounts, resulting in a one three 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 grow significantly during the second half of the year.
Operating cash flow in the third quarter was $179 9 million compared to $161 $2 million in the third quarter of 2021.
Free cash flow was $178 $3 million in the third quarter compared to $160.0 million in the third quarter of 2021.
Our adjusted Unlevered free cash flow was $187 $6 million in the third quarter compared to $174 $3 million in the third quarter of 2021.
As a reminder, our strong free cash flow conversion is driven by a favorable billing terms low capital expenditures and our accumulated tax assets, which we believe will act as a shield for the next several years.
I will now conclude the call by providing guidance for the fourth quarter and updated guidance for the full year of 2022 for ACR Unlevered free cash flow and adjusted EBITDA.
We have provided additional guidance details in our earnings press release.
We expect fourth quarter 2022, ACR in the range of $127 million to $121 7 million or growth rate of eight 8% at the midpoint of the range.
We are raising our full year fiscal 2022, ACR guidance to $472 $1 million to $473 $1 million.
Our growth rate of 14% at the midpoint of the range and a $4 $8 million increase versus our prior guidance.
Normalizing for the bridge divestiture, our full year ACR guidance growth rate is up 15% at the midpoint.
As a reminder, in February of 2021 we sold bridge, our corporate LMS business.
<unk> contributed approximately $4 million of ACR during the first quarter of 2021.
We expect fourth quarter adjusted EBITDA in the range of $43 8 million to $44 8 million.
Representing an adjusted EBITDA margin of 36, 6% at the midpoint of the range for.
For the full fiscal year 2022, we expect adjusted EBITDA in the range of $174 8 million to $175 8 million, representing an adjusted EBITDA margin of 37, 1% at the midpoint of the range and a $5 $8 million increase versus the prior guidance.
Our increased fiscal year 2022, adjusted EBITDA guidance.
Reflects higher growth and stronger gross margins as we continue to optimize our third party technology costs were.
We are also adjusting our full year 2022, adjusted Unlevered free cash flow guidance down to a range of $1 81, 5 million to $182 5 million.
To summarize the strength of our international business, our industry, leading efforts in non traditional education and the exceptional dedication of our team allowed us to deliver balanced growth and profitability again in the third quarter. We are particularly proud of the topline performance in the current teaching and learning backdrop, where higher Ed Stu.
Since returning to class less quickly than anticipated and decision making has slowed in K 12, the diversification.
<unk> of our business is helping to offset this and as highlighted by our increasing market share you are gaining momentum as a platform of choice. This positions us well to win a disproportionate share of business, both now and when the educational backdrop improves in.
In addition, we believe our focus on continuous improvement will drive enhanced profitability versus our already industry leading margins.
With that Steve and I are happy to take any of your questions.
At this time, if you'd like to ask a question simply press star followed by the number one on your telephone keypad to withdraw your question Press Star One again, our first question will come from the line of Josh Baer with Morgan Stanley . Please go ahead.
Great. Thanks for the question.
And the question is on M&A and the platform strategy just wondering when you think about all the potential.
Spend per student budget dollars up for grabs which areas are most attractive outside of the current portfolio and then how.
What are you seeing in the current M&A environment, if you could touch on valuation and willingness to sell that.
That would be great. Thanks.
Yes, great great questions Josh.
There are a couple of areas that are very interesting to us from an M&A perspective.
I'll start first with your second question, which was what is the current environment look like.
The.
It's it's still pretty active so we've got a lot of activity going on we're engaged with a lot of different companies I would say valuations are not necessarily coming down.
Expectation isn't coming down as quickly as we've seen in the public markets. So there's still a little bit of.
A little bit.
Across more frothy.
Expectations I would say, but there is still a lot of a lot of opportunities and like I said, we're very busy and we're really excited that.
We've got such a.
Our balance sheet is in such a good position to be able to react and.
And to those opportunities now the areas, where we're interested in is we still think there are some things that we can do within assessment to kind of broaden our our reach and assessments.
And in K, 12, and higher Ed.
We are we're still looking in online and non traditional.
Areas that we can continue to build we are building a lot there, but that we can add to that student success as a new area that we don't have a lot of <unk>.
Technology and today that where we think there's an opportunity to buy in and then we're always looking for platform Tech tuck ins like a couple that we've done in the last six or nine months to help us kind of build out that platform, even more quickly. So a lot of opportunity and we feel really good about our position to be able to tap.
Act on those thanks.
Okay.
Great. Thank you.
Yeah.
Your next question will come from the line of Fred <unk> with Macquarie. Please go ahead.
Thank you and congratulations on reporting a strong quarter here.
I wanted to ask there's been some shifts and some of the players in both the K 12, and higher education market and I'd love to get some context from what Youre seeing there.
Ed Moto certainly, noting some.
Mining for certain levels of shutdown in the K 12 market and we're about a year after the anthology and.
Blackboard merger. So Im wondering has these dynamics shifted at all some of the conversations youre, having in the market opened up additional market share or offered any disruption points.
Yeah, good to hear from you Fred.
Yes, I would say that.
Within K 12, we see you know Ed.
At Moto was.
Not a huge factor in the U S.
You know had some had some position outside of the U S I wouldn't say.
Based on their position, it's really changed a lot the dynamics within that K 12 space we're still.
We're still in there.
Talking about digital transformation, we're still talking about.
The bigger picture of how how our platform can help that and so so I wouldn't say, there's been a big change as far as the conversations go as we mentioned in the remarks, we're seeing.
You know still a focus on digital transformation a lot of a lot going on in K 12, right now and they are dealing with a lot of things outside of these kind of platform installations, but I wouldn't say, there's any change there anthology is interesting.
And in higher education, you know, it's been a while for since.
Since blackboard was acquired by anthology.
We've seen we saw kind of a pickup in our RFP activity, we still see that in the pipeline for.
For next year as well.
And.
The main competitors that we're replacing or either modal or blackboard and so we feel we feel good about our success and the wins that we've been having and the activity in the pipeline.
Against against against that oncology.
The oncology portfolio so.
Feel pretty good about where we sit competitively haven't seen a ton of change in the dynamics over the last three months to six months.
Thank you and just a follow up on on Essar funding in general here I'm curious.
Could you just contextualize, how youre seeing.
K 12 schools and your clients deploying usher funding and where that might be focused and how that can continue to play out.
Yeah good.
Good question.
Go ahead.
If its assessment of its LMS, if theres any particular product focus.
Yeah.
It's interesting as we as we dig in and you know theres been a lot of press about this.
The K 12 districts are really dealing with a lot right now they're dealing with Ts.
Teacher shortage is theyre dealing with administrators are having this hub in classes they are.
They're they're dealing with collective bargaining agreements, there's just there's a lot going on right now.
And so.
The answer the Essar funds are budgeted there.
Plans have been.
They've been submitted to the federal government they've been approved they're.
They are not getting spent as fast as we thought they would get spent.
Because of a lot of these other competing.
Priorities, but.
We still see LMS is the foundation for a digital transformation strategy and we're seeing success.
As you know this is demonstrated in our market leading share now.
Assessment is a big opportunity for us we're still early innings.
But a big part of of where money is starting to go Fred is in and addressing learning loss right. That's a huge deal and.
And it's going towards things like tutoring, but but ultimately.
The districts are needing to prove is what I'm doing working right and that's where the assessment technologies come in and play a critical role so.
Again. This is this is a long term trend and we've got another couple of years of Essar funds before they expire. So we do think that that's going to be a key part of that.
Those strategies in the future.
Thank you.
Mhm.
Your next question will come from the line of Joe <unk> with Baird. Please go ahead.
Okay.
Great Hi, everyone.
<unk> go back to your comment on sales cycles and K through 12.
The second quarter as the biggest selling period and I think the quarter ago sounded fine is this all.
New development post the peak season, and then how does this end up manifesting in your model because guide.
Guidance looks good RPM looks good.
The case that K through 12 is behind plan, but we're just seeing higher Ed and international more than offset it.
Yeah, I would say.
Joe the sales I mean, we talked in our last earnings call about kind of sales cycle.
Fact that Essar funding wasn't being spent right there was a lot of competing.
Priorities for.
For <unk>.
Digital transformation in the current environment.
That has continued.
We continue to see.
They just are struggling with the capacity to make decisions.
As you said you know we're pleased with our performance this quarter, where we're we're confident in our guidance for <unk>.
For next quarter.
But we do see this as kind of a transient.
Kind of near term challenge is getting the money kind of freed up in the K 12 system to buy technologies.
In the classroom and so.
We are we are we still feel good about the long term growth of that of that part of the business and and we also feel good about where we are from a higher Ed continues to be kind of the.
The foundation and consistent performer for us and our international markets are our successful so.
I feel good about where we are and the fact that we were able to raise guidance and.
And the confidence we have in that guidance.
Okay, Great and then just a quick one for Dale why is the free cash flow guidance.
Going down.
Yeah.
So Mr. Joe as you know Unlevered free cash flows a bit of a noisy number there's a lot of things that go into this metric in a number of ins and outs. So let me just hit a.
Just with a few highlights.
First Steve mentioned this the K 12 has got some longer sales cycles. Another element is hi, Ed.
We're really performing well there some of our wins are competitive take downs that begin next year. So youll see that evidenced in our RP O, but not necessarily the current unlevered free cash flow and then last one is just keep in mind that we've got some currency.
Changes impacting the international business, but overall, we're just really pleased with our unlevered free cash flow.
Conversion remains 100% as we guide to the end of the year.
Yeah.
Okay. Thank you very much.
Your next question will come from the line of Brian Peterson with Raymond James. Please go ahead.
Hi, and thanks for taking my question. So Steve I appreciate all the commentary on sales cycles I should focus on maybe a little bit more about pipeline and where do you feel like that is strongest.
Into 2023.
Love to get any thoughts there.
Yeah.
So.
Yeah. Thanks for the question, Brian and we are we're right in the middle of our planning for 2023. So we're not going to give you any guidance, even if you're asking what the sneaky pipeline question, but I'll do my best.
Yes, I know you always do.
That's why we love you.
The pipeline is building is building nicely you know what.
What we're seeing more in in K 12 is that.
Deals deal.
Deal lengths are lengthening right. So the.
Time to close is lengthening so.
The deals aren't going away they're there.
There is still there. It's just a question of the capacity to be able to.
To close those deals, but we feel we feel good about where our pipeline is right now.
Got it and maybe a follow up how are you guys thinking about investing in the business in the current macro and I think we're all aware of that.
Your in market is much less immune to the macro but we're also seeing a lot of talent become available in certain areas and it's a very high margins I just didn't know what you were.
Philosophy your thoughts on kind of investing in the business have changed over the last couple of quarters, but any thoughts on that thanks guys.
Yeah no it is.
To your point I would say the the labor market for us it's been.
You know, it's been a little easier to hire in the recent months. We we have a a very focused kind of investment strategy. We're looking.
We've made we've made a number of investments you'll look at our R&D spending.
We've had a lot of engineers over the last two years, our quota capacity, we continue to invest in quota capacity. So we're going to continue to make those investments.
It'll be very targeted we feel you know.
Based on our disciplined investment approach right and what we know in.
In the business, we can continue to make the right investments to continue to you know that durable top line growth.
I'll still being able to expand our margins. So we don't we don't feel like we're we're impinging on our growth, while still being able to expand those margins.
Okay.
Your next question.
Line of Terry Tillman with Chili's Securities. Please go ahead.
Hey, guys. This is Joe Meares on for Terry Thanks for taking the question.
I'm just trying to hit the.
The higher Ed K 12 international question from a bit of a different angle to the growth in international is great 21, 5% this quarter.
ACR grew 13% could you just give us maybe qualitatively, whether or not K 12, or higher Ed grew greater or less than that 13% and then kind of what are your expectations over the medium term for these three portions of the business in terms of growth rates. Thank you.
Yeah. So we're pleased with the growth that we're seeing across the board.
And we continue to see success in each of our markets our win rates are still trending above 70%.
We're now number one market share in higher Ed and K 12.
Higher Ed continues to be kind of a consistent performer and more importantly.
That's the foundation for future growth, reaching into that non traditional like the announcement really weighed with ASU. So.
So we feel good about those overall.
R R.
K 12 sales cycles are lengthening as we've talked about it's not really related to macro it's really our capacity to spend and.
And we are we are seeing some currency headwinds.
And higher in the international market. So we still expect international will be our fastest growing market.
And we still feel in the long term, that's the right way to be thinking about it.
And as we as we talked about last time, we think kind of the north American market between the two as is.
High single digit to low double digit grower and that mix between which is growing faster slower is going to change.
Change on a you know almost quarterly basis, but.
But that's the way I would think about it long term for our for our business Joe.
Super Helpful. And then just as a follow up on the international business.
I mean, given the macro is there any slowdown in rfps or it's just the fact that you guys still.
We still have I think you said low single or single digit market share that the growth trajectory. There is still so much white space that youre not having to worry about the macro as much.
Yeah, I would say you know.
Again, our business.
Is less impacted by kind of macroeconomic trends right I think the labor shortage has obviously been a challenge in K 12 for us but.
Traditionally and historically when we go into an uncertain economic.
Time higher Ed actually enrollments.
Increases during those times and so so we do think we're going to be kind of <unk>.
Insulated against those things I think the biggest challenge for US just from an international perspective is what everybody else is saying, which is currency right and the strength of the U S. Dollar.
It's putting pressure on those on those growth rates in the short term.
So congrats on displacing Google Thanks, guys.
Yes. Thank you. Thank you.
Your next question will come from the line of Matt Van Vliet with BPI. Please go ahead.
Hey, good afternoon. Thanks for taking my question I guess digging into the K through 12 market a little deeper curious if you're seeing much of a difference in a propensity to spend from some of your existing customers looking at either expansion or cross sell deals relative to.
Net new customers just sort of how those are <unk>.
Regressing it sounds like the net new were probably slow, but curious if the cross sell is seeing any better traction.
Yeah.
It's a good question.
The.
Youre right with the net new.
And some of our examples that we use demonstrated kind of cross sell right and selling into the existing base, which is always easier I think it's balanced with them.
With the fact that when where we're short on teachers right. There's a reluctance to kind of introduce new things into the classroom at this point.
Right and so they don't want to kind of disrupt what the what the teachers are trying to do so so it's pretty it's pretty across the board, where we're seeing we're seeing that kind of lengthening cycles as they try to deal with with some of these teacher shortages and.
Collective bargaining agreements or trying to get through now and all that kind of stuff.
Okay, and then as we look towards the midterm elections here.
Next week do you feel like any of the issues, whether it's on a state by state basis or some of the more national.
Level issues and potentially switching of party and troll of Congress will make any difference in some of these sales cycles, either opening up or projects, maybe getting pushed forward at the state level.
Anything that you're monitoring closely that we should be aware of.
Yes.
Well I think I think the just having some clarity alright, and just getting through it and having some stability.
You know more.
It really comes down to the what what the districts are focused on right now and so if we can get more more stability, we can get more.
Teachers in the classrooms, we can regard.
Regardless of what happens with the parties empower that's going to be the biggest determinant of sales cycle and how quickly. These answers funds can get.
Can get spent and you know frankly from a political party.
Perspective outcome student outcome is is as you know everybody can get behind good student outcomes.
So we don't we do not see anything related spin.
Specifically to the midterms.
One way or the other.
Alright, great. Thank you.
Thanks, Matt.
Your next question comes from the line of Stephen Sheldon with William Blair. Please go ahead.
Hey, thanks.
First wanted to ask about gross retention rates.
Kind of what they look like heading into the new school year any major changes relative to what.
You've seen historically in either higher Ed or K through 12 as contracts came up for renewal just given.
It was a heavier renewal quarter, just just any.
Any detail there.
Yeah.
Stephen we've.
We were pretty proud of our reputation and the investment that we make in our customer success teams and they're really they're really plugged in and really.
Take good care of our customers.
<unk>.
We haven't seen any substantial changes in kind of gross retention.
Sure.
And the higher Ed with reduced enrollments.
Our business model the way, we contract and a big B to B type of fashion kind of mutes any dramatic changes there. So you know while we while we may see some downgrades, it's not it's not been a massive.
And we expect that to continue.
And you know in the K 12 space.
We are we've been through renewal cycles on some of the state deals, they're renewing and so we haven't seen anything.
Change dramatically on the on the gross retention side.
Got it good to hear I wanted to follow up on the international side, just given that it sounds like it continues to perform outperform your expectations and it sounds like the channel partnerships. We're working them. All so just given that success is there more you can do to feed that traction in terms of building even more partnerships expanding direct sales capacity in select for.
<unk> just how are you thinking about that.
Yeah.
The plan that we put in place was a plan that we felt that we could execute.
There is a.
There is a limit you can't just keep throwing dollars at it right.
You get a marginal return so we feel like the investments that we're making the quota capacity that we're adding for those direct.
Those direct countries that we're going after we've got the right. We've got the right amount of quota capacity and then.
The international perspective, I mean from a channel perspective, we feel good about the partners that are signing up the number of partners that we're signing up.
You know I've said this from from the first quarter right is this is a 24 month investment.
Before we really start to see those pay off with deep in.
Ed.
Training and enabling our channel partners to be able to sell and but we feel good.
Pipelines building, we've already seen some bookings come through our channel partners. So we're pleased with our progress so far.
Great to hear thank you.
Okay.
Your next question will come from the line of Brent Thill with Jefferies. Please go ahead.
Hey, guys. This is Dave loss will go on for Brian Thanks for taking my questions.
Wanted to ask a little bit about the impacts of higher enrollment. We saw the recent report of a 1% decline in higher enrollment. Obviously, you guys have contracts from one to five years right.
Annual basis. It is paid upfront noncancelable. So just talk about how enrollment declines might impact the model into 'twenty three and then obviously thinking.
Central recession in 2023, which should potentially be good for highway enrollments like just talk about how that impacts your ability to grow revenue that'd be helpful.
Yeah.
It's it's a good question David and.
And good to hear from you. It's it's so the way the way to think about it is you are right, where we are insulated to a certain extent dampened as probably a better word right. We won't see the massive swings when when enrollments were down 4% last during the pandemic.
1% is actually.
You know a little bit better than what was.
Everybody was thinking the decline enrollments was going to be this year.
So it does it does roll into our guidance that we've given you.
Going into Q4.
We've taken all that those downgrades into account I think.
The important thing though is that.
The number of people that are seeking education isn't going down right. What we're seeing is a reduction in kind of traditional degree.
Degree seeking enrollments and our investments in non traditional.
The going to market with somebody like an ASU or like people search right is addressing a whole new set of students that isn't included in that enrollment data so long term for us.
It's a net.
It doesn't matter, which.
Which where learners are we will meet the learners wherever they're at and so we.
We do feel good.
Good about our growth prospects.
In higher Ed longer term, just because of that.
That's helpful and maybe just one more for me if I may on.
On cross sell I think in the past you guys have said the average customer always thought excuse me about 30, maybe it's high <unk> customers are using more than one product today I know you guys called it a $750 million cross sell opportunity just talk a little bit about the different products you have in cross sell what's doing badly I think you pointed out assessment.
Ultimately as we look forward how many products do you think you can realistically sell into some of these different districts and schools that'd be helpful.
Yeah, we're going to sell hundreds in.
David but we are we're there theres a lot of opportunity we have we have four or five products today.
That we can cross sell whether it's higher Ed or K 12.
As we've talked about in the past or are you.
Our assessment solutions carry.
Big.
Average selling prices so has kind of an outsized impact on revenue as we get success there.
Still we're still early days in that cross sell and you are right. It's in the.
30 30.
37%.
Across the board that have more than one product.
And yes.
We're seeing we're seeing an increase so the number of cross customers grew.
This quarter. So we're seeing success, there, but again, there's still a lot of opportunity to come to sell more of those products.
Great. Thanks, guys.
Your next question will come from the line of Steve Enders with Citigroup. Please go ahead.
Oh, great. Thanks for thanks for taking the question here.
I just want to ask you about the investments that you are making in R&D.
Higher engineering, there and I guess, what's kind of the biggest area that youre focused on in terms of the product roadmap.
Where that could potentially.
Go and how it fits into that.
The current portfolio.
Yeah.
So one area that we've been investing in over the past couple of years, we will continue to is that non traditional space.
So investment.
Products like studio in catalog.
Impact our newly acquired.
Concentrix Sky, our badges and our certifications those are areas, where we're continuing to make.
Organic investments for growth.
And feel really good about the progress again with you now.
The deal, we just signed with <unk> with our purple people saw certain deal right a lot of that is because we are.
We're investing to address that non traditional.
We continue to make investments in integration and the platform and how we bring the solutions together.
With the idea that as you marry the learning management system with the assessments.
You now have a rich set of data to help teachers be able to.
To teach to student by student and and so that's another big area for Us is integration.
And the platform and then.
We're making we're continuing to make investments in our core canvas.
And.
Within higher Ed and K 12, but to again continue to advance those make it easier to use making more intuitive.
Allow us allow us to differentiate.
Against.
Our competition, but really to address the evolving needs of both our higher Ed and K 12 customers.
Okay great.
That's helpful and maybe just on the margin profile.
Good good leverage that showed here.
In the quarter and the guide, but how.
How much more room is there to <unk>.
Can you kind of kind of driving driving that up.
What are kind of the key areas that maybe we should be thinking about it where we could see some incremental opportunity there.
You cut out just you said maybe thinking about a.
Yes, just in terms of the margin profile and the leverage that you're showing what are some of the areas that maybe we could see some incremental opportunity too.
And drive a little bit more there.
Yeah. So.
Thank <unk>.
There's there's still room in our gross margins.
With the the operations and engineering teams are very focused on continuing to kind of optimize.
Our infrastructure to reduce our hosting costs and our third party providers, we continue to.
Make program and and systems investments in and customer support to help drive down our cost to support our customers as well.
We have room will we continue to get leverage.
In our.
And our sales and marketing spend again as we as we gain as we gain.
As we gain.
Market share is we're the leader Yeah. This is such a referential sale that there's kind of this virtuous cycle that happens and we get much more efficient and effective in how we go to market and.
And we get looks at all that you know all the deals that they come along and then.
Our channel investment, we believe is a good way to scale.
Scale, the business without adding a bunch of direct cost into the model. So so there's a there's a number of areas in the P&L, where we believe we can get more leverage from a profitability perspective.
Okay perfect. Thanks for taking the questions.
Mhm.
There are no further questions at this time I will turn the call back over to Steve Daly CEO for closing remarks.
Alright, well. Thank you everybody for joining us today. So we are super excited about the future of its structure, we're happy with our performance.
And I just wanted to thank our employees, our partners and our customers for the important work.
That you all do and helping bring education of the world, We're confident in our ability to grow both our revenue and our margins in the future.
And we look forward to continuing to share our success with you all so thank you.
Ladies and gentlemen that does conclude today's meeting. Thank you all for joining you may now disconnect.
Please wait the conference will begin shortly.
[music].
Okay.
Yes.
[music].
Yeah.
[music].
Yes.
[music].