Q2 2023 Instructure Holdings Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to instruct your second quarter 2023 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.

I'd like to turn the conference over to your first Speaker, David Banks, Vice President Investor Relations. David. Please go ahead.

Thank you Josh.

Afternoon, and welcome to instructors Q2, 'twenty three earnings conference call.

We'll discuss results announced in our press release issued after market close today.

With me are instructors, Chief Executive Officer, Steve Daly, and Chief Financial Officer Dale.

Before we begin I would 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 results may differ materially.

For a discussion of factors that affect our future financial results and business.

Please refer to the disclosure in today's earnings release, and other reports and filings we make from time to time with the Securities Exchange Commission.

All of our statements are made as of today July 31.

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 in the Investor Relations section of our website.

With that let me turn the call over to Steve.

Thanks, David I'm delighted to welcome everyone to the structures Q2, 2023 earnings call during today's call Dale and I will share the details of our Q2 results and provide guidance for Q3 and the full year 2023.

Q2 results exceeded our previously commuted guidance Street range for our revenue and adjusted EBITDA fueled by our fishing motor market organization and unyielding dedication to customer success section.

Total revenue was $131 $1 billion.

Up 14, 4% year over year impacted by a constant currency headwind of 160 basis points.

Adjusted EBITDA grew 29% year over year to $51 $3 million driving a 39, 1% margin.

Believe the strength of our Q2 performance demonstrates the effectiveness of our business model before we do that.

That'll be the highlights from the second quarter I wanted to provide some takeaways from our construction ACOG conference that took place in Denver, a few days ago. The first such investments held in person since 2019.

We had nearly 2000 customers over 100 partners and more than 2300 10 exist. The sold out event. It was gratifying defined restructure community is as vibrant as ever.

We unveiled enhanced and expanded structure at lighting platform innovation centered around core teaching and learning advanced analytics lifelong learning platform integration.

We believe these new solutions will save educators time.

What are your experiences for students and simplify complex tasks for administrators. We also previewed some of our AI strategy and are excited by the feedback from our customers as we move forward with that now.

Now I will share highlights from the quarter included four key drivers strong new logo sales.

Cross sell up lists the power of our platform strategy and how we are leveraging our business model.

First.

Our new logo win rates remained strong across all of our markets success. There is driven by our ability to solve real world challenges across the teaching and learning.

Okay.

Our focus on lifelong learning vocational training resulted in Atlanta with Duke University.

We've made a significant investment in new tire and structured learning platform with new implementations of Kansas, Alabama impact, Kansas studio and Kansas credentials.

This is Gino earnings spearheaded this transition to ultra their ambitions.

And lifelong nontraditional education, we now sort of all of the top tier universities in the United States with canvas.

Also the north North American higher Ed we had a significant win with Ohio University. After 20 plus years on the legacy provider chose canvas for a 10 year contract. We won because of the strength of the <unk> community our presence in other flagship institutions and while our overall market leadership and our ability to deliver a value based.

And as a solution.

In North American K, 12, where platform continues to support our market leading position.

The Green shoots we mentioned during our last quarterly call resulted in strong bookings in Q2 as scheduled decision makers continue to recognize our products as mission critical.

Generic public schools joined against universe in the quarter, a long time user of a competitive solution Cincinnati ran a lengthy process seeking feedback from parents teachers and students.

Their strategy was to implement a new elements that will deliver best in breed results.

And this was part of later winner as our LMS clearly best in districts innovative approach to education, our reputation for consistent uptime.

A feature releases unmatched service and support and unrivaled student experience allows us to confidently displaced incumbent provider channels.

Although the new international deals that GTA, we secured a direct with the University of continuing education trends in Austria, leading public University for continued execution in Europe .

<unk> serves a changing demographic with an increasing average retirement age and a skill gap between workforce graduates they saw Kansas as a way to address the needs of their student population, allowing them to serve both traditional and nontraditional students.

Similar to other institutions in Europe transient strip presence there does it lessen that lender partners, our global pricing strategy that centers on safeguards in payments and reducing our customers' regulatory burden allows clients to quote to comply with rigorous privacy standards as a region. It's gratifying to see our customers responded positively.

Two our unwavering dedication to privacy.

Second we.

Continue to drive growth with existing customers, both through cross sell and up sell or we see a $1 billion plus opportunity internationally, we secured a meaningful upsell of global growth one of the largest registered training organizations for Rps in Europe , making them, our largest customer by user number in Europe .

Also demonstrates our ability to serve.

The needs of non traditional where institutions cross sell it's deal by deal such as Charlotte Mecklenburg schools, a longtime qantas domestic jet customer after a multi vendor evaluation with district chose our assessment cockpit because of the rigor and accuracy of the solution that gets better insight.

No.

This further validates our platform strategy and the strength of our suite of products.

Platform strategy, our third key driver.

On innovation and partnerships. During this structure shared with you just singer our chief product officer provided a glimpse into many new product initiatives designed to shift the education paradigm enhanced feature efficiency and foster student success. Among the most important part partner driven deals in the quarter, we won a contract with one of the preeminent.

Technology companies in the World and wanted to conduct research to prove the efficacy of handheld devices.

<unk> created a proposal that examine the impact of math intervention in both student outcomes to teacher.

In addition to expanding a great partnership with a large technology business win also has garnered the attention of large districts that are looking to participate in research and.

And we are taking big about partnerships.

Also added structure Cod, we announced that we are teaming with Khan Academy, bringing together a structure and brand platform with AI powered student tutor a teaching assistant can we go through this partnership we are operating World class project from Comcast with the industry's most widely used commercial LLS leveraging generative AI empowered educators.

To meet students where they are in their educational journey, we are committed to bring AI to the teaching and learning process with the safety and equity does that and we also announced the emerging AI marketplace last week, which gives educators visibility access and the AI solutions that are integrated into the construction lending platform.

We have worked with our customers to define privacy.

And security standards to ensure AI solutions, our stake each partnering marketplaces COVID-19.

Standards.

The last few years, we've nearly doubled our partner base truly our debt and investment in the construction lending platform gives our customers access innovation across the Ed Tech landscape.

And finally, our results are indicative of our ability to drive leverage in the business because of our disciplined investments we've been able to deliver best in class margins that in turn allow us to invest in our platform and drive long term durable growth our business model permits us to continue driving strong top line results without sacrificing margins and profit.

As evidence of this we saw record renewals in Q2 as customers that came on during the COVID-19 pandemic.

In a more normalized environment with.

With adjusted gross margins approaching 80% and adjusted EBITA margin nearly nearly 40% we expect to continue to produce free cash flow that will allow us to reinvest organically and through M&A to drive long term durable growth.

In conclusion, we believe our impressive Q2 results and expanding impact on education position us as the clear leader in the education technology space.

Look forward to the opportunity to continue to drive value for our customers and shareholders in the months and years ahead now let me turn it over to Dale to provide further detail on our Q2 financial performance and guidance for Q3 and the full year 2020.

Please go ahead.

Thank you Steve.

Thanks, again to everyone for joining us today.

Forward to discussing our detailed financial results I'd like to point out that in addition to our GAAP results I will be discussing certain non-GAAP results.

GAAP financial results, along with a reconciliation between GAAP and non-GAAP results can be found in our.

Our earnings release, which is posted in the Investor Relations section of our website.

In Q2, we continued to show a combination of strong topline growth and best in class adjusted EBITDA margins.

We generated total GAAP revenue of 131 4 million subscriptions.

Subscription and support accounted for 90% of our Q2 revenue at 118 kind of $6 million up 15% year over year.

Driven by healthy growth across all of our key markets with particular emphasis in K 12, and with cross sell.

Professional services and other revenue accounted for 10% of our Q2 revenue at $12 $5 million up 7% year.

Deferred revenue at the end of Q2 was $337 million of.

17% year over year.

Yet in Q2 with remaining performance obligations or <unk> of 853 $6 million up 9% year over year, we expect to recognize revenue on approximately 73% of our appeal 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.

Our non-GAAP basis.

Our strong gross profit margin profile.

Supported by our optimized cloud architecture, and flexible support model at scale to meet seasonal customer and the customer demand in.

In Q2 gross profit was $104 1 million representing.

Representing a 79, 5% gross margin up from 77, 6% in Q2 of last year.

Turning now to operating expenses.

Sales and marketing expenses for Q2 were $27 6 million or 21% of revenue down slightly from 21, 5% of revenue in.

Q2 of 2022.

Research and development expenses for Q2 were $16 6 million.

<unk> or 13% of revenue compared to 14% in Q2 of 2022.

General and administrative expenses for Q2 were nine $8 billion or 8% of revenue down from 9% in Q2 of last year.

non-GAAP operating income for Q2.

$50 2 million Rep.

Representing a 38, 3% operating margin up from 33, 7% in Q2 of 2022.

Q2, adjusted EBITDA margin was $51 3 million representing.

A third nine 1% adjusted EBITDA margin up from 34, 6% in Q2 of last year non.

non-GAAP net income was $28 million in Q2, or <unk> 19 per share compared with $23 8 million or <unk> 17 per share a year ago.

Turning to the balance sheet cash flow statements.

We ended Q2 with $129 8 million cash cash equivalents and restricted cash and.

$488 $4 million of long term debt net of discount, resulting in a 183 times net debt to trailing 12 month adjusted EBITDA ratio.

Free cash flow for the quarter was $23 5 million.

$6 $6 million in the prior year of more than 250%.

Adjusted Unlevered free cash flow, which adjusts for the impact of transaction costs sponsor cost impaired leases and other nonrecurring costs paid in cash was $37 1 million a 129%.

From $16 2 million.

A year ago quarter.

Note that our free cash flow was quite strong this quarter.

Two accelerated collections, we expect that things will normalize as we move through the balance.

I will now conclude the call by providing guidance for Q3.

The full year of 2023 for revenue and adjusted EBITDA.

We have provided additional guidance detail to our earnings pressure in our earnings press release.

For the third quarter of fiscal 2023.

We expect revenue in a range of $132 million to.

133.

For the full year, we expect revenue to be in the range of $524 million to 528.

Up $2 9 million.

Compared with the annual guidance that we provided.

We expect Q3 adjusted EBITDA in the range of $52 5 million to $53.

Representing an adjusted EBITDA margin of 38, 8% at the midpoint.

The full year, we expect adjusted EBITDA in the range of $203 5 billion.

207.

Representing an adjusted EBITDA margin of 39% estimate.

For the full year, we expect adjusted Unlevered free cash flow to be in the range of $207 million.

The $211 million for an adjusted Unlevered free cash flow margin of 39, 7% at the midpoint.

In summary, we believe that our first half results put us in great position to drive an even better 2023 than originally expected.

We executed at a very high level exceeding our guidance and continually continuing to deliver a rare combination double digit growth and best in class one we.

We couldnt be more pleased about our momentum in the marketplace and look forward to updating you on our progress throughout 2023.

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 strong quarter.

I was hoping to get an updated view on growth expectations across K 12, higher Ed International sometimes you give kind of kind of range is there and I wanted to ask just to get also a sense for the gross margins or EBITDA margins or contribution margins across the segments thinking.

How to assess the impacts from mix mix shift.

<unk>.

Presumably it's a faster growing international and maybe it's a K 12, how that could impact margins too.

Thanks.

Yes.

Thanks, Josh.

I appreciate the question.

We have provided the growth expectations in general terms.

And Thats, how we look at the business moving forward.

Our gross margins.

Not broken out margins by any of those different segments that we've talked about however, I will say that we're very confident in our operating model that we can get very good.

Okay.

Positive contribution margins in each of the areas, where we were.

Where do you anticipate.

Jonathan.

We've made investments for instance in our channel program.

That were negative margins frankly, as we began making those investments that we've still been able to improve our margins in the process.

It's a model that protects against that will continues to improve.

Improvements, even as we see the bitch.

A mix shift between those.

Okay. That's helpful. Thanks, and then any change in the.

The competitive landscape across those end markets or is it the same story. Thank you.

Yes.

Similar competitive dynamics across yes.

K 12, higher Ed International So no change there Josh.

Your next question comes from the line of Steve Enders with Citi. Your line is open.

Okay, great. Thanks, Ron Thanks for taking the question here.

I guess I just want to start on asking about takeaways from the conference.

I know there are a lot of product announcements, but I guess, what's kind of in the early feedback on some of the AI initiatives from.

From the customers. They can talk to you and I guess, how should we be thinking about the potential for that to layer into the model here over the next few years.

Yes.

Good to see you there Steve.

We.

We did that.

The feedback was.

We're generally very positive so we had taken time before.

Basically the last 18 months, we've worked with some customer user groups we were very.

Pragmatic and really spend time with them understanding where were areas that they'd like us to make.

So investments like our.

Using artificial intelligence to help create pages within.

Dan candidates.

Create a creator experience using AI use.

Language regular language to do that was very it was very well received and some of the stuff that we showed in the labs.

In the educational moments in the future.

We're very very excited about mobile search being one of those some of the some of the things we did recognizing.

Intimate within a remote environment as well as some of the other pieces of it.

Yes.

Highlighted we had.

We've had a lot of sign ups. If you will for customers that want to be part of the early adopter program as we worked through seven details on me so.

General very positive.

I would say, it's still early days as far as what impact. This is going to have on the business model long term and we're working through those with our customers as we work to understand.

This functionality the value that it's bringing results and changes in pricing or what the cost structure looks like so it's a little early to be building anything into your models Steven.

Okay perfect.

That's helpful. There.

I guess the follow up.

Good good renewal activity and good good bookings here in the corner or have you thought about kind of current budget environment and kind of what's the view into.

The pipeline opportunity going into <unk>.

Yes.

Yes.

We feel good about where our pipeline.

Going into the second half I would say you've read all the headlines about.

Yes.

Some of the challenges that higher Ed spacing, what we're finding is in.

In general though.

Yes.

We help them deal with a lot of those challenges. So we feel it's a good long term backdrop for us.

Things like better consolidation that we're starting to see happen.

Customers have told us.

They want to standardize around a few strategic platforms are as being one of those.

Work that we've been investing in over the last few years to really ensure that we get.

Solutions to address non traditional students the work that we've done to really go after those non traditional education institutions.

All our good backdrops grossberg long term durable growth. So we feel good about where we're sitting going into the second half as well as really long term perspective.

Okay perfect. Thanks for taking the questions.

Thanks, David.

Your next question comes from the line of Greg <unk> with Macquarie. Your line is open.

Thank you very much and congratulations on the quarter.

I would like to just begin by asking a little bit about international as well too.

Certainly we saw and you highlighted the Austria wind, how do you think about that opportunity going into and.

Throughout the balance of this year of course into next year, just how far along do you feel you are with your international go to market program.

Constant and arguably international opportunities.

Yes, it's a good question Brad.

We we feel really good about our positioning for international so as we highlighted in the script.

Wins with credits was in was in Austria part is part of the value proposition that we branches, particularly our European customers, but even across the board as the work that we've done related to put in a very robust privacy and security framework.

So we feel good.

It demonstrates the value of those particularly when youre dealing with some of the regulatory environments in each of the regions is dealing with so.

Good about their model is still 70% of the market there.

We believe in the opportunity to continue to grow and so our fastest grower.

And then.

It can drive we strive to big business over time so.

Still feel similar to that as we've talked about in the past spread about the opportunity there.

And particularly about our position to be able to win channel investment is still continuing.

Starting to see some progress in the channel.

But again that's.

Something that occurs a little bit later and tightened as far as having some impact on the top line.

Thank you there.

<unk> is another one just we've seen.

Canvas is performing well.

<unk> is absolutely solid and of course, if you're building a broader portfolio of solutions to so.

I'm just curious if you can add a little more context also in just where youre seeing adoption.

Outside of core canvas solutions, and how thats trending throughout this year.

Yes. So we saw particular success in K 12 with.

So the masteries branded products, whether it's the match and connect.

Assessment management system or the content that drives along with that.

Good quarter from that perspective, we're seeing a lot of.

A lot of pickup with our catalog and credentials.

As we help.

Either higher Ed institutions address the non traditional or as we go to you.

We go after some of those non traditional this artino organizations like we talked about it so.

Those two have been particularly successful cross selling perspective, those two areas and then.

We're seeing good.

This success with our learning platform acquisition and so from a.

The ability to sell to both sides of the network either.

Education institutions, as well as selling services to the partners and providers has been.

It's met our expectations and with the pipeline has grown nearly doubled since we did the acquisition. So we feel good.

Thank you very much.

Thanks, Brett.

Your next question comes from the line of Stephen Sheldon with William Blair. Your line is open.

Hey, guys. Thanks for taking my questions.

First one here just great to see renewal trends supporting the step up in RPM.

So we went through this heavy renewal period did anything surprise, you either positively or negatively in terms of things like renewal rates deal length pricing upselling et cetera.

Are there any trends that you stop consistently such as maybe longer term.

Longer duration contract renewals, just any detail on the renewal activity.

David We're really pleased with what we did call out the.

Historic number for us are really pleased with.

On the renewables.

I would say that the what causes that.

In the beginning stages of the pandemic and.

And they are finding value still today with learning platform and they are building around <unk> platform. So very very high retention rate, we are seeing some yodlee.

Contract lengths, extending maybe even higher space.

And the other thing that I would say those renewals are now coming with additional products that we have out of our portfolio. So really good.

Really good things coming out of a strong result.

Quarter just closed.

Good to hear and I appreciate that.

Follow up it seemed like there was a lot of focus at the user conference last week on Credentialing in higher Ed. It looks like that was included in the Duke win how frequently are you seeing that being included in conversations with new and existing higher Ed customers is this going to be something that practically every university will need to be thinking about to be relevant over the medium term in your view.

And what could that mean for your financial opportunity with these types of solutions.

Yes.

This is a conversation that we're having with almost every institution.

We're looking at how do they meet the needs of that.

The workforce of the future how do they demonstrate.

Along the way rather than just.

Just pointing to as a format.

The end of their educational journey, so it's absolutely a.

Point of conversation, it's in almost every conversation that we're having from a selling perspective.

It is my belief that over time.

Every institution will have to figure out how to deal with this.

As the customer panels.

Not just the one that we had together but also.

Our our kind of confirming that this is really as an opportunity.

For higher education to really ensure that.

Enrollments go up they are addressing the skills based economy going forward.

Great. Thank you for that quarter.

Thanks.

Your next question comes from the line of Joe <unk> with Baird. Your line is open.

Great Hi, everyone, maybe I'll go back quickly to the last discussion on RPI.

Is it possible to translate.

What you just saw in terms of finance of.

<unk> financial metrics like net retention rates and maybe how the <unk> renewal cohorts are evolving relative to.

I think you've talked about 105% to 110% in the past is that changing for better or worse just in terms of your recent activity.

I would say.

Joe that <unk> number is really noisy.

And the main driver for that is a multi year.

Management's business.

And so.

I don't know that I will over index on that particular number.

Translates to any of the metrics I would say this dose we have.

This quarter, we saw really good growth.

We saw good growth.

Our IPO and we had.

Really good.

Sure.

Bookings.

No.

On the NRI Theres couple of things that we would also.

Which would be up.

Some of the growth that we saw with adding other products to it.

The price increases and so so that does come through and hit our numbers.

I think Joe.

I think it would be tough to read through on the RVO number to extrapolate what <unk> is going to be.

We're still we're still holding to our.

Our guidance.

Where we picked us and for the year.

Okay.

That's helpful and then I.

I wanted to ask about the guidance it looks like the forecast for the second half of the year.

Intel's revenue growth dipping into the high single digits.

<unk> how much of that is just reflecting some of the bookings trends you were discussing.

The latter part of last year, and then on the flip side as I just look at this quarter's IPO number and think about maybe RP O billings. It does seem like there's been an improvement in growth rates kind of back to the low double digit range is this all maybe just a matter of.

The timing of when <unk> gets deployed.

Low low double digit says.

Seasonally a better expectation, but maybe the earlier part of next year.

Tom.

Joe it's sort of a second half growth really follows the guidance that we provided for that really follows the normal seasonal pattern that we see it aligns to North America as Paul started school systems, where we have most of the revenue.

Built into our plan.

We always provide guidance that we're confident in delivery.

The stable customer base gives us that confidence that we can hit those numbers.

And we will guide to 2024 numbers in our Q4 call Joe.

Okay fair enough. Thank you.

Your next question comes from the line of Brian Peterson with Raymond James Your line is open.

Hey, gentlemen, congrats on the quarter or it was great to see so you last week. So I'll hold Q1 on the cross sell that you guys referenced this quarter. So just on the cadence.

Love to understand if that's more of a renewal dynamic and youre seeing that as part of contracts coming up or is it.

That actually happening kind of outside of that traditional negotiation cycle, maybe with that outside of the Rfps I'd love to maybe unpack that a little bit.

Yes, Brian .

It's a little bit.

It's a little bit.

Just to kind of break it out because.

This is our.

They kind of June July August timeframe.

<unk> renewal months and we did see we did see good cross sell motion in this in this quarter. So yes that helps and it's always good to interceptor renewal when it comes to cross sell.

<unk>.

But we still do cross sell outside of the renewal cycle. So it is it isn't tied necessarily to the renewal, but absolutely. The renewal helps when it comes to intercept budgets despite that.

Understood and maybe just a follow up.

But I guess maybe for Dale.

As we're thinking about cross sell.

Some of the newer products.

How do we think about like a dollar books to $1 going live for revenue is that much shorter than the LMS.

Does it matter by product I'd love to just understand as we think about that diversification of the booking stream how does that flow into revenue. Thanks guys.

Yes, it's a good question.

What we're finding is that it.

If we're able to capture what our solution for a customer that has an issue and show the value in our products they will buy it prior to a contract renewal.

We see that some of the products we have like.

LP products are a good example of that impact.

And then what happens Bryan is that usually we see.

Upsell at the <unk>.

Time of renewal, where they expand that to a larger part of their student base.

It happens all the time and so it's hard for me to tell you.

After a booking when thats going to start given COVID-19.

It just happens all the time based upon their customers.

Okay.

Understood. Thanks, guys.

Your next question comes from the line of Terry Tillman with Truest Securities. Your line is open.

Okay.

Hey, Steve Dale and David not to worry I still have some questions left so youre not getting out of this that simple.

I know credentials and catalogs been asked four times, but I thought I'd ask it this time.

I was when I was talking to customers just on an AD hoc basis with conference. It actually was coming up regularly and I've attended drugs conferences for many years, whether virtually or in person and I'm curious the credentials and catalog how do they stack up now in terms of kind of the mix of new bookings coming from those add on products versus maybe some of the other.

And it's basically just kind of related to that where are we in the adoption cycle for those two modules because it was coming up on a pervasive what thank you and then a follow up.

Yes, Terry I mean, we don't break out between the different products as far as percentage of bookings that kind of thing but.

To your point. It is it is top of mind for most institutions. We are still early days. So a lot of conversations lot of strategies a pilot test.

Our customers rolling out pilots some ideas that are committing to it right upfront.

From a revenue contribution perspective, it's still it's still a pretty small contribution we're still kind of early units.

Okay got it understood and I guess as a follow up question is what's.

What's striking in terms of the commentary in the narrative around lifelong learning.

You all talked about now over a couple of quarters. Some of these non traditional kind of educational institutions, and where it's kind of like reskilling opportunities. What I'm curious about is where are we in terms of how much that's starting to kind of shake out in the pipeline of some of this kind of more emerging kind of business.

I'm not suggesting we're going to have a new segmentation. Another segment doesn't want to have to deal with that but how much is this starting to pull up rate. The new deal activity. These deals that are outside of the traditional four year academic institutions.

Yes.

We well, we don't break that out.

Terry.

As far as that level of detail, but I would I would.

We've we've been intentional as we've included these deals in.

And our transcripts for the last several quarters, because we are seeing a lot more activity.

In this RTL further education those non traditional education institution. So we do believe that's a.

That's a it'll be a long term driver for growth for us right it'll be important offset for existing customers.

As far as enrollments go.

It will be a driver for upsell or cross sell over the long term, but again on both on both sides of the dose whether it's existing institutions get a traditional institution or non traditional we're still early innings as far as its contribution to our overall results.

Got it and I guess, though on that kind of emerging part of the business does Chris ball need to do anything different with the go to market or to existing sales reps kind of opportunistically on those deals anything you can share about like the go to market if it needs to be any different.

Yes, that's a great question.

We do believe that we we have not we can go faster if we if we put.

Dedicated reps on that nontraditional learner.

Group.

It does require a little bit different messaging positioning packaging those types of things so.

Historically, we had we have address those with our existing higher Ed sales team.

Over time, we think that will that.

<unk> segment out from a selling perspective.

Thanks for taking my questions.

Thanks, Terry there was only three questions. This time.

Your next question comes from the line of Matt Van Vliet with BTG. Your line is open.

Alright, thanks for taking the question guys.

During the quarter.

I guess when you when you look at some of the conversations with prospective customers.

How much especially in higher Ed is starting maybe to be driven by some of these credentialing or non traditional components as theyre looking at.

Using technology to really kind of jump into that environment, and then youre going to follow up on maybe the more traditional canvas LMS deals or is it still almost all driven by it.

At least all of them as being a major part of it.

Yes.

It's interesting that because.

Yes.

<unk>.

Non traditional is definitely an interest point within the selling process is.

Most institutions that were talking to you.

Other big trend, it's kind of related to this is that institutions are recognizing that historically the way they've tried to go after these is.

With a maybe its continuing education team, which is separate from the team that is worried about.

How does the on campus experience look what theyre recognizing us they want one.

<unk> platform to drive across all modalities right and all we call that Omnichannel right. They want one one experience whether you come on campus full time, whether you are fully remote whether youre doing this re skill or youre coming toward a degree or are you just are credentials. So.

That's the bigger driver of the discussions and then.

They use it.

Catalog.

Which is organically built into the canvas platform.

Mission of Credentialing. Those things are are are the natural.

Progression of the sales call is okay in order to address that part of the.

Of your overall platform strategy.

That makes it very very helpful.

Yes, no that's great and then maybe one more on this topic, obviously, who is very very front and center at the conference and has been for a little while and your your commentary, but have you done much work internally or that you'd be willing to share in terms of how much sort of addressable market expansion.

All of this provides or is some of this maybe offsetting potential other declining factors in particularly higher Ed in.

It's a good backfill, but maybe not as additive as it seems at the moment.

Yes, we think we think this is a big opportunity for us as far as the <unk>.

Number of addressable students and.

The revenue drivers so we've sized the non traditional space is about a $5 billion.

Market opportunity.

Some of that is included in our calculation of the existing $1 billion cross sell that.

We've shared with you.

Yes.

But a lot of that is incremental.

And much bigger than the credit traditional LMS market. So.

And we believe it will be a grower.

While our long term durable growth versus a replacement for declining revenues in other places.

Alright, great. Thank you for taking my questions.

Thanks, Matt.

Your next question comes from the line of Kevin <unk> with Keybanc capital markets. Your line is open.

Great. Thanks for taking my question the.

The first one I have.

The new line to Duke in Ohio, I am definitely encouraged to see youre, adding larger multiple products attached.

No I don't think you've highlighted multiple new wins in U S higher Ed in the prepared remarks for quite some time. So just wanted to maybe double click on the strength in that market specifically.

You attribute kind of the strike there just from overall increasing priority from these institutions looking to add more solutions or would you attribute the strength to just overall better execution from your side.

Yes, I think.

I think.

We tend to do very well in North American higher Ed and particularly in the enterprise segment of that market.

So we have had some good big wins over the last several quarters.

This is just continuing on that momentum.

It's been a it's a part of the market that we started and thats part of the market awareness.

Yes.

44% market share now in terms of enrollments and so.

What we're seeing is in those discussions as.

Our position.

In the market.

Sure.

Our lighthouse.

Counts and references that we can bring to the table.

Back that we have a scalable platform that has scaled up rapidly during the pandemic.

They can rely on it some scale to their needs those are all.

Coming into decision factors in addition to.

Just around <unk>.

A typical feature function sort of discussion.

The other thing that we are seeing is that many of these institutions are either as I talked about earlier trying to wanted a single platform for us all of the different opportunities that they have to reach sits but also that they are trying to really trying to now that the adoption that explosion that happened during the pandemic trying to consolidate around.

A few strategic vendors.

Yes.

Turning in our favor, particularly as we are able to not only offer the.

The LMS, but also.

As noted in the vehicle to do wind Credentialing.

Catalog of those other consists across sports. So it really is a continuation of the strength that we've seen.

With our position within North American higher Ed.

That's great to hear and thanks for the detail is one quick follow up I have is just on the gross margin in the quarter really impressive 79, 5%.

Additional color you can offer on what drove the higher margin there and two we expect gross margin decline higher.

We entered the year.

So good question. So so again, we're really pleased with the gross margin figures that we had in Q2.

Yes. This is part of just a regular model expanding margins over time, However, I would say that Q2, we did see some higher margins driven license largely by timing of some.

Revenue.

However, we expect that that future quarters will normalize back to that steady consistent expansion that you've seen in this COVID-19 last eight quarters. So.

To be clear, we have set long term targets to have.

Gross margins in the upper <unk>.

And we're making progress.

Okay.

Your next question comes from the line of Ryan Macdonald with Needham <unk> Company. Your line is open.

Hi, Thanks for taking my questions I wanted to start on the K 12 space.

Week at the conference there was quite a bit of interest and demand from our <unk> platform functionality now that youre rolling that in and integrating that and for customers. Just curious as you think about how you think about the cross sell opportunity there and then.

Given the demand in the queue.

You are funding for more analytical solutions is there an opportunity to read with those types of assets and then.

It put your foot in the door, and then sort of cross sell and LMS overtime. Thanks.

Yes.

Yes.

Let me start with the first.

Question about cross selling a third platform so.

<unk> platform.

As we did when we did the acquisition earlier this year when we recognized was it.

K 12 is dealing with a massive ecosystem Ed tech providers, and so theyre looking for help and rationalizing what what's working what's not working in those environments. So we really have two sides of the network with learned platform what are the schools and districts.

Education authorities.

They're looking at it as a tool to really drive.

Questions of what's being used how often to being years as well as is what is what's being used in the environment doing doing what they claim that.

Likewise on the other side of the network as the providers. There Theyre also wanting to understand it and demonstrate that what they're what they're providing.

As.

Is working right and getting the outcomes to date.

They are trying for it and so we.

We do think that this is going to be a great cross sell opportunities on both sides of those networks right, which.

The district.

State level.

We're seeing good pipeline build we are seeing good integration points with Kansas, We announced it.

<unk>.

Overall usage reports.

There will be an integrated campus for free.

We're going to see some of that data and we expect that to drive a lot of interest in continued.

Generate lead Gen for us to go sell cross sell that product we're seeing.

Really rapid pipeline building and great success, selling to the providers as well evidenced as a service.

<unk> is.

As growing the pipeline has grown pretty dramatically so.

As to your first credit to your first question, yes. It absolutely is a key driver for us and we believe it's going to.

We're reaching a point, where it's going to be really important for districts and we think it'll be big drove growth driver for us in the future.

On the analytics side.

We drive with a platform strategy will be dropped when we have these conversations with the.

With our customers and our prospects and so.

Yes.

This is a key part of that landing strategy for US we think that is a key differentiator against our competitors in this space.

We will continue to use it at that.

But again with the idea that this is about a.

Platform as a platform for teaching and learning.

They're they're working Sir.

So I think I think to answer second question, yes. It can be a good part of our planned strategies. In addition to the expand part of our cross sell.

And maybe just one follow up just on the international partner Channel. Obviously, you started to see some success with that with some deals in Asia Pac last quarter. Just curious how that is progressing as sort of the pipeline builds for for the international solutions. Thanks.

Yes, we are we are seeing.

We're seeing we're seeing we're seeing good pipeline build.

We're focused on that the channel partners that we believe are going to.

B, our best bet those space, we are training them up we are helping them with Li.

Lead generation, we're helping them with deployments.

So we're very optimistic about the progress we're making there.

And we will probably see that the benefits start to really occur next year.

And as those investments pay off.

And as we've ramped up those channel partners.

Good progress, particularly in some of the Asian geographies with Latin Americas, where we've seen the most success.

Excellent. Thanks for taking my question.

Thanks, Brian .

Your next question comes from the line of Noah Herman with Jpmorgan. Your line is open.

Hey, guys. Thanks for taking our questions. So the first one.

<unk> seen any change in the pace of consolidation compared to what <unk> seen before in the last year or so at the higher writer Keith 12 level. Thanks.

Yes, I would say I would say in the last year or year or so.

More of the conversations have been about halfway how do I get a common platform across each of the modalities.

Continuing education department versus the.

Ian person traditional campus experience so.

Yes, those conversations have been more common.

Pete.

I would say.

The bigger the bigger conversations around vendor consolidation and what can how.

How do we reduce the number of suppliers those are those are fairly.

New for us in the last quarter or two as where those who started to happen.

<unk> Board.

Got it and then just a quick follow up some.

Some of these new features are being layered more and so the platform do you see any reason to change the sales compensation structure going forward as part of the go to market strategy.

No.

We are.

We've changed the comp model.

Each year things get tweaked on it I don't know that we'll see any major.

Comp changes that happened in the coming coming years as far as.

How we compensate for for instance.

New features.

Talking about cross sell and some of the.

Products that layer on top of Kansas.

And that question.

We do have in the existing structure, we do have.

Tier comp models, depending on which products and so we move those around the occasional rate base.

Based on what we want it.

The fundamental structure.

There won't be massive change in our cost strategy.

In the future.

Got it thank you.

Our final question comes from the line of Brent Thill with Jefferies. Your line is open.

Hey, Thanks for sneaking me in guys, it's David I'll I spoke on for Brian .

Wanted to ask I would really rather drilling on assessments I. Appreciate some of the commentary earlier, but I think last quarter. You guys said it was the fastest growing product within K through 12 I was just curious if you could provide an update on maybe if that held true in Q2 and and more broadly.

How should we be thinking about the durability of growth in this in this offering is it more so.

Everyone catching up and assessing where weighing loss from the pandemic is that why maybe it's hard to know and maybe it's not as durable.

And on top of that can you just remind us of the IP I think in the past you've said, it's maybe two to three times larger than.

Allomap, but appreciate any color you can add there sorry, I know thats a lot.

Yes.

<unk>.

And great to hear from me David.

<unk>.

This weather was continued to be our fastest growing segment in K 12.

From a durability of growth perspective. This is this is a.

This is a kind of digital transformation that.

That will happen and it's not.

Some of the catalyst is learning loss, but yes.

Being able to provide a teacher with real time feedback to the classroom.

Our students doing against those standards that there'll be tested against at the end of the year, that's that's something thats going to endure and having a solution in place and be able to address that.

<unk> is going to be just as important as it is to have a learning management system in place.

Digital transformation strategy, so absolutely I believe it's going to be it is going to drive durable growth for us.

Going to be.

A flash in the Pan.

And it's going to be important part of anybody's digital transformation strategy is a platform that supports it.

Youre right.

They buy the whole stack from us to the assessment space, including the content as well as the assessment management system. Then it can be two to three times the average selling price of the Kansas implementation. So it does it does create for us.

Our long term growth opportunity and we are still.

Low penetration low double digit penetration into the existing base.

With our <unk>.

System solution, so theres still a lot of room to grow.

Second there.

Super Helpful. And then maybe one follow up before I, let you guys wrap it up.

On the LMS in K through 12, obviously half of the market is still on vendors who are using between lightweight solutions. He wanted to get your view on what's the catalyst that gets that these districts to really start paying for premium Allomap is it is it may be that some of these just may continue.

<unk> lightweight solutions or maybe is it some of these ASUR dollar they start to get towards.

Back half of 'twenty for use it or lose it is that is that may be a good driver there.

Maybe again is there any percentage that you think just forever we remain unpaid.

Yeah.

It is.

It is it is.

There's an interesting dynamic.

A little bit of everything that you've talked about I do think that.

<unk> funding is a.

<unk> creates a good backdrop as far as making decisions about when to when to start through a true digital transformation.

That's really the driver for us.

A district that wants to make an investment in our commercial elements like ours are.

And it really is.

It takes time and it takes maturity within the district to be ready for something like that and so they tend to be very plant will take time, we'll drive them as they want.

More enterprise features right, they want that or integrations with ecosystem they want that.

Better visibility across the entire district.

In the classroom or in a school.

They want better analytics for instance, integrated into those solutions all of those will be kind of the drivers.

They really are.

Want to take that step in their digital transformation. So I do think again as I said earlier answers good good backdrop for this.

And.

And we feel.

We feel good about that pace.

Pacer.

Conversion.

Free to paid.

Whether or not there is a portion that.

It does ever moves to an enterprise eventually everybody's going to detailed at some level.

Maybe that was the slowest 30 reported kitchen.

That might not be but everybody at some point is going to is going to need to digitally transform that experience.

In the classroom.

There are no further questions I'd like to turn the call back to CEO , Steve Daly for closing remarks.

Great. Thank you. Thank you again for the insightful questions as always as you've heard today, we believe our commitment to innovation customer success and disciplined investments in our platform will continue to unlock new opportunities and to drive value for our customers and shareholders in the dynamic education technology landscape. We're excited about the future we look for.

We continue to drive the combination of topline growth as well as profitability in the months and years.

For your time and participation and look forward to speaking with you again.

This concludes today's conference call you may now disconnect.

Please wait the conference will begin shortly.

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