Q3 2023 Instructure Holdings Inc Earnings Call

Please standby were about to begin.

Ladies and gentlemen, thank you for standing by and welcome to in structures third quarter 2023 earnings Conference 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 and please be advised that this conference is being recorded I would now like to turn the conference over to your first speaker.

David <unk>, Vice President Investor Relations with Keybanc. Please go ahead.

Thank you good afternoon and welcome to instructors Q3 2023 earnings Conference call with me are instructors Chief Executive Officer, Steve Daly, Chief Financial Officer, Dale Bowen and also Peter Walker, who will assume the role of CFO and structure on November 13th.

We will discuss our Q3 2023 earnings results as well as the signing of a definitive agreement to acquire parts of.

The worlds, leading academic Credentialing platform.

We will provide an overview of the transaction as well as an initial view into their financials based on due diligence conducted to date.

Before we begin I'd like to remind you that today's conference call will include forward looking statements based on the company's 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 could 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 and Exchange Commission.

All of our statements are made as of today October 30 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 on the Investor Relations section of our website.

Note that we have also included supplemental materials under the events and presentations header on the Investor Relations section of our website.

In association with the purchase of apartments.

We are unable to provide a reconciliation of expected parkman adjusted EBITDA or expected combined net leverage ratio without unreasonable efforts with that let me turn the call over to Steve.

Thanks, David I'm delighted to welcome everyone to today's call. We're excited to announce and share details of our acquisition of parchment. In addition to Dale and I will be reviewing our Q3 results and providing guidance for Q4 and the full year 2023.

Before I discuss the quarterly results, let me provide some of the details of the very exciting announcement of our pending acquisition of parchment.

I will explain what parchment does how this acquisition fits strategically discuss the business model and provide details about the transaction.

<unk> is the world's leading academic Credentialing program with integrated enrollment solutions to support learner mobility.

Parchment has more than 15000 customers, primarily in North America with a presence in several key international markets and as exchange North of 165 million credentials over two decades. The company's parchment award product is a leading credentialing platform issuing transcripts diplomas certificates.

Verifications and badges to more than 15000 customers.

Parchment pathways their enrollment solution helps more than 1000 institutions efficiently process incoming transcripts recruit students support dual enrollment and enable course sharing across systems strategically.

Strategically this acquisition will accelerate the scale and reach of the instruction learning platform at.

That and structure. Our goal is to help provide rich learning experiences that elevates student success and amplify the power of T. J parchment goal is to provide evidence of learning through credentials of all types and to connect those credentials to opportunity as we bring these two companies together on the structure learning platform. We can engage you learn.

Throughout their lifelong learning journey, providing evidence of their learning and remove the friction for educators and learners a key transition points, whether those transition points are for the high school senior applying to college or the workforce. The college students transitioning to the workforce or the lifelong learner wishing to upskill and reskill the structured learning platform.

We will be their companion in that journey.

In addition to the powerful strategic fit we expect parchment to bring in structure important relationships with new buyers and our traditional customer base a significant.

<unk> expansion of our total addressable market and a high quality revenue stream with meaningful and profitable organic growth opportunities.

Higher education parchment has relationships with both registrars and admissions offices, which we expect will become much more important as the integration of traditional and non traditional learners continues.

Additionally, these relationships open up an estimated $2 billion Tam opportunity for and structure as we become integral to the demonstration of learning.

Based on our due diligence parchment high quality revenue is approximately 95% recurring with strong grocery tensions in the mid to high <unk> and multiple avenues for future growth importantly, parchment is a very profitable company today with high cash flow conversion and we expect to achieve incremental cost synergies as we <unk>.

Great the businesses into and structure.

As we have consistently communicated M&A is an important part of our strategy to drive long term durable growth. We have a strong track record of successfully integrating acquired companies completing six integrations in the last four years, we have confidence we'll execute similarly with parchment.

The all cash transaction is valued at $795 million net of a $40 million tax asset are approximately 16 times parchment as expected 2024, adjusted EBITDA inclusive of anticipated run rate cost synergies.

We expect to finance the deal with cash and incremental debt under our existing credit facility parchment is expected to generate approximately $115 million in revenue for in 2024 and is expected to grow in the low double digit range, we remain committed to managing our strong balance sheet and cash flow through act through this acquisition.

Once completed the combined company's net leverage is expected to be approximately four times net debt to adjusted EBITDA, We expect to Delever rapidly as we continue to grow adjusted EBITDA and generate cash flow.

Pending regulatory approval and other customary conditions, we expect the deal to close in the first quarter of 2024.

Turning now to our financial results.

Q3 results exceeded our previously commuted guidance range for revenue and adjusted EBITDA.

Fueled by our efficient go to market organization, and unyielding dedication to customer satisfaction.

Q3 revenue was $134 9 million up 10, 2% year over year impacted by a currency headwind of 60 basis points.

Subscription and support revenue of $123 $1 million grew 12, 2%.

Q3, adjusted EBITDA grew 22% year over year to $58 $2 million driving a strong 43, 2% adjusted EBITDA margin. We believe the strength of our Q3 performance demonstrates the effectiveness of our business model.

With the onset of the New school year in North America August and September remained the most active time of year for use of our platform. This year was no exception as our canvas usage volumes against spiked to more than 4 million concurrent users per day in early September consistent with our utilization during the Covid era, the resiliency of our platform.

<unk> was evident during this period as we delivered more than three nines of availability now.

Now I will share highlights from the quarter, including four key drivers strong new logo sales continued progress in cross sell 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 as evidenced by our continued market share gains.

And its 11th annual LMS data update issued in early October edgy Technica illustrated that in structure is the only LMS market participant in higher education that continues to gain share with canvas LMS, leading by more than double its nearest competitor by both number of institutions and enrollments.

While we continue to win more than our fair share of competitive bake offs, we have seen a slowdown in the timing of deal close in higher education, both domestically and overseas are strong.

Competitive position and industry, leading platform give us confidence in the long term durable growth of our business and higher education. We continue to see great success in adding new institutions as state systems look to standardize around the and structured learning platform.

The Montana University system was looking to consolidate all of its 16 higher Ed and one K 12 school onto one platform to drive ease of use.

Better content sharing with canvas comments and provide students a consistent experience across its different campuses hence.

10 schools within the system chose to move off of two competitors products and onto canvas.

In North American K 12, the Pasadena Independent School District took advantage of instructors growing suite of K 12 solutions choosing canvas studio mastery connect mastery item bank and training portal.

With nearly 50000 students Pasadena Isd signed a 10 year contract whereby in structural replace its current classroom solutions because districts leaders understood that canvas is the goto system for large district like theirs. They saw in structure is best suited to handle both curriculum and assessment needs for all their stakeholders.

When their teacher saw mastery connected demanded to have it in the words of our customer during the kickoff call.

CFR E. A private independent education company based in Germany selected canvas and credentials to aid in its focus on non traditional students across vocational higher education and further education with 18 brands in more than 30000 students in Germany CFR. He selected a platform based on quality.

Of delivery and user experience.

Second we continue to drive growth with existing customers, both through cross sell and upsell, where we see a $1 billion plus opportunity. We had a very successful set of customer upsells in Q3, demonstrating our continued momentum in serving non traditional education providers AWS renewed and expanded its partnership with <unk> structure.

By extending its user base for AWS Academy.

Our partner within structure since 2019, the AWS Academy is one of the largest canvas users and is continuing to scale rapidly our ability to scale with best in category uptime convinced AWS to expand with <unk> structure.

Our relationship that started as a pilot in 2019 to several hundred users will expand to $1 2 million users in 2024, and $1 4 million users in 2025 under our contract.

South College in Knoxville, Tennessee, as an example, we see often in our existing customers starting with initial core cohort of users viral usage of canvas and a growing student body resulted in a significant upsells, we doubled the number of licenses across campus.

Within North American K 12 in a strong cross sell the Nevada Department of Education added Master connect coupled with its multi year renewal with canvas.

A customer since 2020 canvas and now mastery connect will be available to Nevada as diverse set of school districts with nearly half a million students statewide they will use master connect and the mastery item bank to support formative assessment practices and classrooms to provide teachers with real time standard the wind data at <unk>.

<unk> can use to personalize the needs of each student individually.

The power of our platform strategy, our third key driver thrives on innovation and partnerships and those were evident again in Q3.

In September we announced an exclusive partnership with <unk> solutions in the industry leader for content and data migration and integration extending access to a powerful archiving solution for all canvas customers.

And this revenue sharing agreement canvas archiving powered by <unk> 16 solutions gives canvas users.

Simple way to control access to sensitive data and backup all student and of course data with the click of a button.

Our expanded arrangement with the Alabama, Alabama Community College system Accs represented yet. Another example of a maturity path, we've seen with many higher Ed institutions as part of a broader statewide initiative by Alabama's governor to Reskill and transform the quality of the states workforce.

Accs saw the value of the structured learning platform.

The system not only opted to standardize on canvas across its 24 community and technical campuses statewide a competitive displacement of 12, new campuses in favor canvas. They also will add studio impacting credentials as a seamless way to digitally transform the state's broader workforce enhancement initiatives.

We continue to see it to enhance our channel offerings as well.

<unk> based see any adaptive learning solutions, our most successful channel partner in Asia enabled us to anchor deal with our M. M C. A higher Ed institutions, serving the largest region in the Philippines, including the highly populated island of Mindanao CNA.

CNA is behind our largest global channel deals to date, having invested in our partner program and has enabled to implement canvas and support our APAC customers.

As we've discussed in prior quarters artificial intelligence continues to be a significant interest to our existing customers and in our selling conversations.

We can we continue our work to elevate the industry dialog around best safe and ethical practices for development deployment and use of AI to better serve students and teachers.

Our partners with existing and new providers are growing as the structured learning platform serves as our customer central point of access to their tools for teaching and learning during the quarter, we delivered our own AI based capabilities capabilities into data to select customers. These.

These customers are providing early feedback and we'll continue to shape our efforts around course and content creation semantic search and natural language driven learning analytics.

And finally, our results this quarter once again highly indicative of our ability to drive operating leverage in the business.

<unk> of our disciplined investments, we've been able to deliver best in class margins, which this quarter started with a four handle.

This allowed us to invest in our platform make strategic acquisitions like parchment and drive long term durable growth.

Our business model permits us to continue driving strong topline results without sacrificing margins and profitability.

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

In conclusion, we believe our strong Q3 results and expanding impact on education and position us as the clear leader in the education technology space and we look forward to the opportunity to continue to drive value for our customers and shareholders in the months and years ahead.

Now I will turn it over to Dale to provide further details on our Q3 financial performance and guidance for Q4 and the full year 2023.

This will be <unk> final earnings call within structure as he is retiring from the company effective November 12th Dale has made great contributions to and structure. During his four years with the company. He helped us successfully navigate important transitions, including our 2020 shift from the public to private markets and a return to the public markets in 2021.

During his tenure he also establish a strong culture of transparency and consistency and built a strong foundation for our next leader. He has agreed to provide transition services through March 2nd 2020 for Dale. Please go ahead.

Thank you Steve and.

And thanks to everyone for joining us today.

Before discussing our detailed financial results I would like to point out that in addition to our GAAP results.

I'll be discussing certain non-GAAP results, our GAAP financial results along with a reconciliation between GAAP and non-GAAP results can be found in our earnings release, which is posted in the Investor Relations section of our website.

In Q3, we continue to show a combination of growth and best in class adjusted EBITDA margins as Steve mentioned, we generated total GAAP revenue of $134 9 million up 10, 2% and impacted by a currency headwind of approximately 60 basis points.

Subscription and support accounted for 91% of our Q3 revenue at $123 1 million up 12, 2% year over year impacted by a currency headwind of approximately 60 basis points.

Unknown Executive: Please stand by, we're about to begin. Ladies and gentlemen, thank you for standing by and welcome to Instructure's third quarter, 2023 Earnings Conference Call.

Professional services and other revenue accounted for 9% of our Q3 revenue at $11 $8 million compared with $12 $7 million in Q3 of last year. This change was not unexpected as there was a slight pull through in Q2.

Unknown Executive: At the time, all participants are in the list in the limo.

Unknown Executive: After the speaker's presentation, there will be a question and answer session. And please be advised that this conference is being recorded.

David Banks: I would now like to turn the conference over to your first speaker, David Banks, Vice President and Vector Relations. Mr. Banks, please go ahead. Thank you.

Deferred revenue at the end of Q3 was 347 $1 million up 8% year over year.

David Banks: Good afternoon and welcome to Instructure's Q3 2023 Earnings Conference Call. With me are Instructure's Chief Executive Officer, Steve Daly, Chief Financial Officer, Dale Bowen, and also Peter Walker, who will assume the role of CFO of Instructure on November 13th. We will discuss our Q3 2023 Earnings Results as well as the signing of a definitive agreement to acquire parchment, the world's leading academic credentialing platform. We will provide an overview of the transaction as well as an initial view into their financial based on due diligence conducted to date.

We ended Q3 with remaining performance obligations or our Po of $862 $9 million up 9% year over year, we expect to recognize revenue on approximately 75% of our <unk> over the next 24 months.

In discussing the remainder of the income statement. Please note that unless otherwise stated all references to our expenses operating results and share count are on a non-GAAP basis.

Our gross margin profile was supported by our optimized cloud architecture and flexible support model that scales to meet seasonal customer demand.

David Banks: Before we begin, I'd like to remind you that today's conference call will include forward-looking statements based on the company's current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties, and our results may differ materially. For discussion of factors that could affect our future financial results in 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 and Exchange Commission. All of our statements are made as of today, October 30th, based on information available to us today, and except as required by law, we assume no obligation to update any such statements.

In Q3 gross profit was $105 $6 million.

Representing a 78, 3% gross margin up from 77, 8% in Q3 of 2022.

Turning now to operating expenses sales and marketing expenses for Q3 were $23 7 million or 17, 6% of revenue down 210 basis points from 19, 7% of revenue in Q3 of 2020 to research and development expenses for Q3 were 15.

$1 million or 11, 2% of revenue compared to 12, 7% in Q3 of 2022.

David Banks: During the call, we will also refer to both GAP and non-GAP financial measures. You can find the reconciliation of our GAP to non-GAP measures included in our press release, which is posted on the Investor Relations section of our website. Note that we have also included supplemental materials under the events and presentations header on the Investor Relations section of our website in association with the purchase of parchment. We are unable to provide a reconciliation of expected parchment-adjusted EBITDA or expected combined net leverage ratio without unreasonable efforts.

General and administrative expenses for Q3 were $9 7 million or seven 2% of revenue down from seven 6% in Q3 last year non.

non-GAAP operating income for Q3 was $57 million, representing a 42, 3% operating margin up from 37, 7% in Q3 of 2022.

Q3, adjusted EBITDA was $58 2 million, representing a 43, 2% adjusted EBITDA margin up from 38, 9% in Q3 of last year.

Steve Daly: With that, let me turn the call over to Steve. Thanks, David.

Steve Daly: I'm delighted to welcome everyone to today's call. We're excited to announce and share details of our acquisition of parchment. In addition to Dale and I will be reviewing our Q3 results in providing guidance for Q4 and the full year 2023. Before I discuss the quarterly results, let me provide some of the details of the very exciting announcement of our pending acquisition of parchment. I will explain what parchment does, how this acquisition fits strategically, discuss the business model and provide details about the transaction, parchment is the world's leading academic credentialing program with integrated enrollment solutions to support learner mobility, parchment has more than 15,000 customers primarily in North America with a presence in several key international markets and has exchanged north of 165 million credentials over two decades.

non-GAAP net income was $35 $8 million in Q3, or <unk> 25 per share compared with $29 5 billion.

We're 21 cents per share a year ago.

Turning to the balance sheet and cash flow statement.

We ended Q3 with 308 million $8 $6 million in cash cash equivalents and restricted cash and 487 $4 million of long term debt net of discount.

<unk> and a 0.88 times net debt to trailing 12 months adjusted EBITDA ratio.

Free cash flow in our historically strong third quarter was $188 million compared with $178 3 million in.

Steve Daly: The company's parchment award product is a leading credentialing platform, issuing transcripts, diplomas, certificates, verifications and badges to more than 15,000 customers. Stimmers, parchment pathways, their enrollment solution helps more than 1000 institutions efficiently process incoming transcripts, recruit students, support dual enrollment, and enable core sharing across systems. Strategically, this acquisition will accelerate the scale and reach of the Instructure Learning Platform. At Instructure, our goal is to help provide rich learning experiences that elevate student success and amplify the power of teaching.

In the prior year up 1% due primarily to timing recall it in our Q2 free cash flow growth was very strong.

Adjusted Unlevered free cash flow, which adjust for the impact of transaction costs sponsor cost impaired leases and other nonrecurring costs paid in cash was $200 1 million up six 6% year over year from $187 $6 million in the year ago quarter.

Our collections activity normalize this quarter, so the year over year increase reflected that.

I will now conclude the call by providing guidance for Q4 and for the full year of 2023 for revenue and adjusted EBITDA. We have provided additional guidance details in our earnings press release.

Steve Daly: Partsman's goal is to provide evidence of learning through credentials of all types and to connect those credentials to opportunity. As we bring these two companies together on the Instructure Learning Platform, we can engage your learner throughout their lifelong learning journey, providing evidence of their learning, and remove the friction for educators and learners at key transition points, whether those transition points are for the high school senior applying to college or the workforce, the college student transitioning to the workforce, or the lifelong learner wishing to upskill or re-skill, the Instructure Learning Platform will be their companion in that journey.

For the fourth quarter of fiscal 2023, we expect revenue in the range of $133 3 million to $135 $3 million for the full year, we expect Rev.

Revenue to be in the range of $528 million to $530 million up $2.8 million at the midpoint compared with the annual guidance. We provided on our Q2 call in July.

Steve Daly: In addition to the powerful strategic fit, we expect parchment to bring Instructure important relationships with new buyers in our traditional customer base, a significant expansion of our total addressable market, and a high quality revenue stream with meaningful and profitable organic growth opportunities. In higher education, parchment has relationships with both registrars and admissions offices, which we expect will become much more important as the integration of traditional and non-traditional learners continues. Additionally, these relationships open up an estimated $2 billion Tam opportunity for Instructure as we've come integral to the demonstration of learning.

Yeah.

We expect Q4 adjusted EBITDA in the range of $53 million to $55 million.

Representing an adjusted EBITDA margin of 42% at the midpoint.

For the full year, we expect adjusted EBITDA in the range of $211 million to $213 million, representing an adjusted EBITDA margin of 41% at the midpoint.

For the full year, we expect adjusted.

Unlevered free cash flow to be in the range of $207 million to $211 million for an adjusted Unlevered free cash flow margin of 39, 5% at the midpoint.

Steve Daly: Based on our due diligence, parchment's high quality revenue is approximately 95% recurring with strong growth retention in the mid to high 90s and multiple avenues for future growth. Importantly, parchment is a very profitable company today with high cash flow conversion, and we expect to achieve incremental cost synergies as we integrate the businesses into Instructure.

In summary, our Q3 and year to date results were very strong as once again, we exceeded our guidance we continue to execute at a high level to deliver growth best in class margins and strong free cash flow.

Steve Daly: As we have consistently communicated, MNA is an important part of our strategy to drive long-term, durable growth. We have a strong track record of successfully integrating acquired companies, completing six integrations in the last four years. We have confidence we'll execute similarly with parchment. The all cash transaction is valued at $795 million net of a $40 million tax asset, or approximately 16 times parchment's expected 2024 Adjusted EBITDA, inclusive of anticipated run rate cost synergies.

As I depart in structure.

I want to say, thank you to all of my colleagues and to our investors and analysts as well.

I am grateful for the opportunity to have been CFO for the last four years and I'm delighted to leave the business in such a great financial position.

Have utmost confidence in this company and the ability of its people to continue executing.

As I step away from and structure in the near term I'm delighted to share that I'll be leveraging the canvas learning platform as a substitute math teacher in the Salt Lake area Middle schools.

Steve Daly: We expect to finance the deal with cash and incremental debt under our existing credit facility. Parchment is expected to generate approximately $115 million in revenue for in 2024, and is expected to grow in the low double digit range. We remain committed to managing our strong balance sheet and cash flow through the acquisition. Once completed, the combined company's net leverage is expected to be approximately four times net debt to Adjusted EBITDA. We expect to de-lever rapidly as we continue to grow Adjusted EBITDA and generate cash flow. Pending regulatory approval and other customary conditions, we expect the deal to close in the first quarter of 2024.

I wish Peter well as he assumes his role this role I'm certain you will all enjoy meeting him working with him if you haven't already.

With that I'll turn it back to Steve. Thank you Dale and thanks again for your service to its structure. We all appreciate that you've left the business in such great shape financially I have every confidence that we will continue to execute and carry on the great track record you've established it's now my pleasure to introduce our incoming CFO Peter Walker Peter has 15.

Years of executive experience, including more than 10 years as the CFO. He is currently the CFO of Sterling Check Corporation, and we'll start at in structure on November 13th Peter.

Steve Daly: Turner, turning now to our financial results. Q3 results exceeded our previously commuted guidance range for revenue and adjusted EBITDA, fueled by our efficient go-to-market organization and unyielding dedication to customer satisfaction. Q3 revenue was $134.9 million, up 10.2% year over year, impacted by a currency headwind of 60 basis points. Subscription and support revenue of $123.1 million grew 12.2%. Q3 adjusted EBITDA, grew 22% year over year to $58.2 million, driving a strong 43.2% adjusted EBITDA margin.

Thank you, Steve I'm thrilled to be in structures next CFO you and your team have built a market leading global technology business from startup to scale in just 15 years with a mission driven culture and people I knew immediately we are a great fit with my values and aspirations.

My significant experience in executive roles as both CFO and Chief strategy Officer for global public companies and prior P&L ownership responsibility.

Adapt to instructors leadership team.

My success in designing and leading strategies that grow organic and inorganic revenue improve customer experience and reduce costs will be impactful as we move into the next phase and then structures growth.

Steve Daly: We believe the strength of our Q3 performance demonstrates the effectiveness of our business model. With the onset of the new school year in North America, August and September remained the most active time of year for use of our platform. This year was no exception. As our Canvas usage volumes against bike to more than 4 million concurrent users per day in early September, consistent with our utilization to the COVID era. The resiliency of our platform was evident during this period as we delivered more than three nines of availability.

From a half billion in revenue to $1 billion plus and beyond.

I am excited to create value for and structure stakeholders as we continue to grow the business and expand profitability.

Ticket passionate about Investor Relations one of my first priorities is our investor engagement roadmap building on all the great work that has been done.

I'm also passionate about leading and developing and structure strong finance team.

Steve Daly: Now I will share highlights from the quarter, including four key drivers. Strong new logo sales, continued progress and cross sell, the power of our platform strategy, and how we are leveraging our business model. First, our new logo win rates remain strong across all of our markets as evidenced by our continued market share games. In its 11th annual LMS data update issued in early October, edu technica illustrated that in structure is the only LMS market participant in higher education that continues to gain share.

Will attend the Raymond James Conference in New York in early December with Steve and look forward to meeting more of the Investor community there.

That concludes our prepared remarks at this time operator, please open up the line for questions.

Thank you ladies and gentlemen, just a reminder, any questions. Please press star one if you find that your question has already been addressed you can remove yourself from the queue by pressing star one again.

First this afternoons to Stephen Sheldon William Blair.

Okay. Thanks, and then it's been great working with you Dale and look forward to working with you Peter.

Steve Daly: With Canvas LMS leading by more than double its nearest competitor by both number of institutions and enrollments. While we continue to win more than our fair share of competitive bakeoffs, we have seen a slowdown in the timing of deal close in higher education, both domestically and overseas. Our strong competitive position in industry leading platform give us confidence in the long term durable growth of our business. In higher education, we continue to see great success in adding new institutions as state systems look to standardize around the instructor learning platform.

Firstly on the Parkman deal it sounded like you are expecting a low double digit growth there, but do you think there is an opportunity to accelerate that growth rate, especially with any benefit from <unk>.

Cross selling between the two businesses and maybe just any detail on what cross selling opportunities there could look like.

Yeah.

Yeah. Thanks, Thanks for the question Stephen.

We have been.

Really excited about this acquisition I think the way that it connects are what we do in the classroom with the evidence of what's the learning that's happened and the ability to demonstrate that that the learners can demonstrate their skills in there.

Steve Daly: The Montana University system was looking to consolidate all of its 16 higher ed and one K-12 school onto one platform to drive ease of use, better content sharing with Canvas comments, and provide students a consistent experience across its different campuses. Ten schools within the system chose to move off of two competitors products and onto Canvas. In North American K-12, the Pasadena Independent School District took advantage of instructors growing suite of K-12 solutions, choosing Canvas, Studio, Mastery Connect, Mastery Item Bank and Training Portal.

Accomplishments.

Is what one the industry needs and it's also really accelerates our strategy.

The debt.

The reality is we've been appropriately conservative I think in the modeling as we've done is we've you know guidance as we built the models around this.

There are areas, where we believe that there are.

Topline synergies overtime, we havent built those into into our models today, but particularly as we think about students as they cross those transition points so dual enrollment.

Steve Daly: With nearly 50,000 students, Pasadena ISD signed a tenure contract whereby instructional will place its current classroom solutions because districts leaders understood that Canvas is the go-to system for large districts like theirs. They saw in structure as best suited to handle both curriculum and assessment needs for all their state- Colors. When the teachers saw mastery connect, they demanded to have it in the words of our customer during the kickoff call. CFRE, a private and independent education company based in Germany selected canvas and credentials to aid in its focus on non-traditional students across vocational higher education and further education with 18 brands in more than 30,000 students in Germany CFRE selected a platform based on quality of delivery and user experience.

Ability to share.

Sure courses across across campuses works really well with R.

Our catalog product.

The badges work that we're both doing the comprehensive learning record over time, we do believe that those will all be.

Creative growth drivers for us, we just haven't modeled those yet into the into the businesses or the guidance.

Got it makes a ton of sense.

And maybe with this deal you're also moving a little beyond the scope of what you've done historically in the higher Ed software stack by getting into admissions enrollment. So curious have you seen more opportunities on that front and move into new areas and just generally has your thinking changed at all about how broad of a software platform do you want to be in higher Ed.

Steve Daly: Second, we continue to drive growth with existing customers both through cross cell and upsell where we see a billion dollar plus opportunity. We had a very successful set of customer upsells in Q3 demonstrating our continued momentum in serving non-traditional education providers, AWS renewed and expanded its partnership with Instructure by extending its user base for AWS Academy. A partner with Instructure since 2019, the AWS Academy is one of the largest canvas users and is continuing to scale rapidly.

Yes.

It's a question that I think you've asked this before as well.

What I would say is as we look at where the Adjacencies are to our current business around teaching and learning.

We're looking for those areas, where there is an overlap in the Venn diagram, if you will so where we see.

That debt parts of what we're doing in the classroom are very applicable to the things that maybe in <unk>.

Steve Daly: Our ability to scale with best and category uptime, convinced AWS to expand with Instructure. Our relationship that started as a pilot in 2019 to several hundred users will expand to 1.2 million users in 2024 and 1.4 million users in 2025 under our contract. South College in Knoxville, Tennessee is an example we see often in our existing customers starting with initial cohort of users, viral usage of canvas and a growing student body resulted in a significant upsell as we doubled the number of licenses across campus within North American K 12 in a strong cross cell, the Nevada Department of Education added mastery connect coupled with its multi year renewal of canvas.

New parts of the institution may be using and this was one of those.

One of those areas, where it made a lot of sense for us to kind of combine the two organizations learn platform.

The last acquisition, we did was very similar on the K 12 side, where we we address some new buyers, but theres still a lot of overlap with our existing users and our buyers. So you can expect us to continue to look for opportunities just like this.

Sure.

They're close Adjacencies open us up to new budgets open us up to new new new experiences new relationships and yes, I do think it is.

It provides.

Nice fertile ground for us to continue both organically and inorganically expanding that that platform.

Steve Daly: A customer since 2020 canvas and now mastery connect will be available to Nevada's diverse set of school districts with nearly half a million students statewide. They will use mastery connect and the mastery item bank to support formative assessment practices in classrooms to provide teachers with real time standard of line data that teachers can use to personalize the needs of each student individually.

Great to hear thanks.

Thank you the next now to Josh Baer at Morgan Stanley.

Great. Thank you for thank you for the question.

Dale It was great working with you and good luck ahead.

First Steve I was hoping you could talk a bit about the process for finding the next CFO what were some of the things that you were looking for and ultimately what led you to Peter and then one for Peter what attracted you most too to infrastructure and so this opportunity.

Steve Daly: The power of our platform strategy our third key driver thrives on innovation and partnerships and those were evident again in Q3. In September, we announced an exclusive partnership with case 16 solutions and industry leader for content and data migration and integration, extending access to a powerful archiving solution for all canvas customers. In this revenue sharing agreement canvas archiving powered by case 16 solutions gives canvas users a simple way to control access to sensitive data and backup all student and course data with a click of the button.

Yes, great great. Thank you for asking that question Josh. So so this was a process that we took.

It was a.

It was a very deliberate process we were looking.

Aye.

<unk> had some conversations with Dale about what he wanted to do when where he wanted to do those things and so.

Steve Daly: Our expanded arrangement with the Alabama Community College system ACCS represented yet another example of a maturity path we've seen with many higher ed institutions. As part of a broader statewide initiative by Alabama's governor to reskill and transform the quality of the state's workforce ACCS saw the value of the instruction learning platform. The system not only opted to standardize on canvas across its 24 community and technical campuses statewide a competitive displacement of 12 new campuses and waiver canvas.

We approached it as you know we wanted to look for somebody that had great experience.

The public markets, we were looking for somebody that has worked.

And in the model in models of companies that have had p/e ownership that know how to drive growth that are very good at articulating growth strategies to the street and being able to help help our investors understand the levers within growth.

And we took we took a while to do this you know it was it was a fairly long process.

Steve Daly: They also will add studio impact and credentials as a seamless way to digitally transform the state's broader workforce enhancement initiative. We continue to see to enhance our channel offerings as well. Philippines-based C&E Adaptive Learning Solutions are most successful channel partner in Asia, enabled us to an ink a deal with RMMC, a higher ed institution serving the largest region in the Philippines, including the highly populated island of Mindamau. C&E is behind our largest global channel deals to date, having invested in our partner program and is an able to implement Canvas and support our APAC customers.

We.

We have engaged our recruiters, we met with a lot of different.

A lot of different people, what what really kind of sealed the deal for me with with Peter was.

Good cultural fit we felt like he would work well with the team he could get very passionate about the mission.

You know a long tenure working with the public markets I really like the way that he approached his investors in the.

The way that he helped them understand the key the key drivers of the model long term.

And explaining.

How those how those that would affect our our results going forward.

And felt like he he brought a lot of good experience in the end.

Steve Daly: As we've discussed in prior quarters, artificial intelligence continues to be of significant interest to our existing customers and in our selling conversations. We continue our work to elevate the industry dialogue around best, safe and ethical practices for development, deployment, and use of AI to better serve students and teachers. Our partners with existing and new providers are growing as the infrastructure learning platform serves as our customer's central point of access to their tools for teaching and learning.

And detailed understanding of of how you know how.

How a business like ours would work so.

Again it was a.

It was a very rigorous.

Pretty long process to find the right person.

Peter do you want to share.

Yes happy to jump in so I'd say I was first attracted by the mission of end structure always been extremely passionate about education and what that can do for people on a global basis, and so thats what brought me in.

Steve Daly: During the quarter, we delivered our own AI-based capabilities into data to select customers. These customers are providing early feedback and will continue to shape our efforts around course and content creation, semantic search, and natural language driven learning analytics.

And then once I got interested I have pretty diligent process of first starting with <unk>.

How large is the Tam.

The company operates in how fast is that Tam growing suicide learned that information about in structure was really excited about the large tam and significant growth rate. There next I look for a company who is number one or number two in the market clearly and structures number one in the market say play then I look at ownership.

Steve Daly: And finally, our results is quarter once again highly indicative of our ability to drive operating leverage in the business. Because of our disciplined investments, we've been able to deliver best in class margins, which this quarter started with a forehandle. This allows us to invest in our platform, make strategic requisitions like parchment and drive long term durable growth. Our business model permits us to continue driving strong top line results without sacrificing margins.

The company found it very interesting that.

Great for Mike It's John.

With the company, but also the company is public.

And then once I get through that it really goes to the people and the culture and Thats what sealed the deal for me.

Steve Daly: With adjusted growth margins approaching 80% and adjusted EBITDA margins exceeding 40%, we expect to continue to produce free cash flow that will allow us to reinvest both organically and through M&A to drive long term durable growth.

From the first time I met with Steve and the rest of the management team. It was just a great and very natural fit from day. One so really excited about this opportunity and excited about all the value we're going to create going forward.

Steve Daly: In conclusion, we believe our strong Q3 results in expanding impact on education, position us as the clear leader in the education technology space. And we look forward to the opportunity to continue to drive value for our customers and shareholders in the months and years ahead.

Great. Thank you very much.

Thank you we'll go next to George <unk> at Citi.

Thanks for taking the question I'm on for Steve.

Great where continue over the year sale, maybe to start with on the parchment deal.

Dale Bowen: Now, I will turn it over to Dale to provide further details on our Q3 financial performance and guidance for Q4 in the full year 2023.

You disclosed 15000 customers.

Maybe if you could give a little color on what does that footprint look like and how much overlap is there with the existing customer base.

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

Yeah.

We will so as I look at the overall customer base, obviously with our footprint in higher Ed in parchment, leading market share in higher Ed as well there is some overlap within the customer base.

The.

The exciting part is that the relationship we expand our relationships within those even even when we are when we have those joint customers and so we.

Dale Bowen: Dale, please go ahead. Thank you, Steve. And thanks to everyone for joining us today. Before discussing our detailed financial results, I would like to point out that in addition to our gap results, I'll be discussing certain non-gap. Results. Our gap financial results along with the reconciliation between gap and non-gap results can be found in our earnings release, which is posted in the investor relations section of our website. In Q3, we continue to show a combination of growth and best in class suggested EBITDA margins.

We will kind of will disclose that as we as we get further closer to close as we get as we close this deal we'll be able to.

To show, you, a little bit better where that overlap.

Is but just.

Just know that we feel good about that.

The relationships that parchment has the the the.

Reputation that they have with those customers is similar to the one that we feel like that we have with our customers.

And.

There is a there is a significant opportunity for us to share share customer lists and be able to expand our customer base on the instruction of learning platforms.

Dale Bowen: As Steve mentioned, we generated total gap revenue of $134.9 million, up 10.2% and impacted by a currency headwind of approximately 60 basis points. Subscription in support accounted for 91% of our Q3 revenue at $123.1 million, up 12.2% year over year, impacted by a currency headwind of approximately 60 basis points. Professional services and other revenue accounted for 9% of our Q3 revenue at $11.8 million, compared with $12.7 million in Q3 of last year.

That makes sense.

And then in structure clearly had some credentialing capabilities in our platform today, maybe you could just help us understand where kind of the real level ups in terms of features and functionality that parchment brings.

Yes.

There's a couple of areas where I see.

Some some level up to use your words right.

No.

First of all when it comes to.

The that transition that students are making what we are seeing more and more.

Dale Bowen: This change was not unexpected as there was a slight pull through in Q2. Deferred revenue at the end of Q3 was $347.1 million, up 8% year over year. We ended Q3 with remaining performance obligations or RPO of $862.9 million, up 9% year over year. We expect to recognize revenue on approximately 75% of our RPO over the next 24 months. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results, and share count are on a non-gap basis.

Particularly since the pandemic is that learners are much more mobile and they're there they're.

Much more willing to kind of mix and match if you will their educational experiences.

And they're looking forward to do that in a way that's most convenient for their lifestyle, whether they're working or they're willing to go full time to school and so theres a number of technologies that parchment have around.

The ability to dual enroll.

Whether when they are in high school be able to get college credit while there while they are completing their high school diploma.

There is there is technology around allowing institutions in our system to be able to share courses. So that a student can decide you know when they are living at home. They can go to local community college, but maybe they're going to the state University during the fall and the winter and that ability to kind of transfer of those.

Dale Bowen: Our gross margin profile was supported by our optimized cloud architecture and flexible support model that scales to meet seasonal customer demand. In Q3, gross profit was $105.6 million, representing a 78.3% gross margin, up from 77.8% in Q3 of 2022.

The credits to share those courses is an area, where we think we can get a acceleration in both our <unk>.

Our roadmap as well as our footprint within.

Dale Bowen: Turning now to operating expenses. Sales and marketing expenses for Q3 were $23.7 million, or 17.6% of revenue, down 210 basis points from 19.7% of revenue in Q3 of 2022. Research and development expenses for Q3 were $15.1 million, or 11.2% of revenue compared to 12.7% in Q3 of 2022. General and administrative expenses for Q3 were $9.7 million, or 7.2% of revenue, down from 7.6% in Q3 last year. Non-gap operating income for Q3 was $57 million, representing a 42.3% operating margin, up from 37.7% in Q3 of 2022. Q3-adjusted EBITDA was $58.2 million, representing a 43.2% adjusted EBITDA margin, up from 38.9% in Q3 of last year.

Our customer.

And that ability to transfer those credits in that process.

The other piece that we're.

We're early in our development is around the comprehensive learner record and being able to provide rich data.

Of a record and our portfolio for four students where they've they've got a lot of work done that we feel we can we can leverage to grow much faster on our roadmap in that area. So.

A few really exciting areas that we think it's going to drive.

Long term for us is going to drive our roadmap and drive ultimately long term growth.

Awesome, Thanks for taking the questions.

Thanks George.

Thank you the next now to Joe for a week at Baird.

Yes, hi, everyone.

Just starting out that switches today will end.

Kind of makes me want to be back end.

Have a great deal is going to be two changes to get that.

Thanks.

But.

<unk>.

Maybe just to go to the one comment you made about.

Slowness and deal closings and higher Ed I guess my question is what's your take on why this is happening now.

Dale Bowen: Turn into the balance sheet cash flow statement. We added Q3 with $308.6 million in cash, cash equivalence, and restricted cash, and $487.4 million of long-term debt, net of discount, resulting in a 0.88 times net debt to trailing 12-month-adjusted EBITDA ratio. Free cash flow in our historically strong third quarter was $180.8 million compared with $178.3 million in the prior year, up 1%, due primarily to timing. Recall that in our Q2 free cash flow growth was very strong.

And then in the past.

You've kind of talked about the RFP activity and higher Ed should be elevated in 2023 and 2024 is it still elevated and this is just a delay in closing or are you starting to maybe recalibrate on the RFP environment into next year as well.

Yes, yes. Thank you for that question Joe.

It.

So I'll just start with the with the you know.

With the overall market.

I've never felt better about our competitive position.

Of our portfolio is really in the momentum in our business, we continue to gain share.

Dale Bowen: Adjusted unlevered free cash flow, which adjusts for the impact of transaction costs, sponsor costs, impaired leases, and other non-recurring costs paid in cash, was $200.1 million, up 6.6% year over year, from $187.6 million in the year ago quarter. Our collections activity normalized this quarter, so the year over year increased reflected that.

In the market per the edgy technica.

Data shows that canvas LMS is the only one gaining share in an north American higher Ed.

So from that perspective, I feel really good at what we're seeing is.

It's interesting because we.

We are seeing our activity is good in fact.

And again don't over index on RFP, because it's about 30% to 40% of our business, but in the RFP space I think we had the highest RFP activity in.

Dale Bowen: I will now conclude the call by providing guidance for Q4 and for the full year of 2023 for revenue and adjusted EBITDA. We have provided additional guidance details in our earnings press release. For the fourth quarter of fiscal 2023, we expect revenue in the range of $133.3 million to $135.3 million. For the full year, we expect revenue to be in the range of $528 million to $530 million, up $2.8 million at the midpoint, compared with the annual guidance we provided on our Q2 call in July.

In the last six years and North American higher Ed.

But across the world, we're seeing that the pace of deals have slowed and they are deferring some of these projects and when we asked our customers about what they are really telling us is look.

I mean, it's not a surprise right I mean, we've been talking about all of the macro trends in higher education rate declining enrolments budget challenges.

The removal in the U S federal stimulus funding.

Where we feel it a little more acutely in North America, but we feel across higher Ed around the world is still dealing with some of these bigger challenges and so what they are telling US is look we've got to work through and they are being very thoughtful about this we're trying to work through our what is our strategy and what is our digital transformation strategy. How do we go gain new revenue streams, how do we go address that <unk>.

Dale Bowen: We expect Q4 adjusted EBITDA in the range of $53 million to $55 million, representing an adjusted EBITDA margin of 40.2% at the midpoint. For the full year, we expect adjusted EBITDA in the range of $211 million to $213 million, representing an adjusted EBITDA margin of 40.1% at the midpoint. For the full year, we expect adjusted EBITDA in the range of $207 million to $211 million for an adjusted EBITDA margin of 39.5% at the midpoint.

Traditional students and so as that mix starts to shift they're they're they're they're hitting the pause button on projects until they get their strategy has figured out now from our perspective, where I feel really good about that because we're very well positioned to address it whether it's a traditional or non traditional students as our portfolio of.

Next we have today through both organic and M&A has really grown to be able to address those over the last several years and the fact that we're at the table having these conversations with them. We are that trusted adviser it bodes well for us long term and I believe we're going to continue to be able to drive long term growth in this space.

Dale Bowen: In summary, our Q3 and year-to-date results were very strong. As once again, we exceeded our guidance. We continue to execute at a high level to deliver growth, best in class margins, and strong free cash flow.

It is a temporary slowdown that we're seeing.

Dale Bowen: As I depart in structure, I want to say thank you to all of my colleagues and to our investors and analysts as well. I'm grateful for the opportunity to have been CFO for the last four years, and I'm delighted to leave the business in such a great financial position. I have utmost confidence in this company and the ability of its people to continue executing.

Again, not in the activity because again, that's been really active it's more in the in the the pace that we're seeing of the deals close.

That's great and then just a related follow up is there any kind of guidance or assistance you can give just in terms of the financial implications of those particular comment because.

Dale Bowen: As I step away from structure, in the near term, I'm delighted to share that I'll be leveraging the Canvas learning platform as a substitute math teacher in a Salt Lake area middle school. I wish Peter well as he assumes his role. This role. I'm certain you will all enjoy meeting and working with him if you haven't already.

Yes, I think Steve Youre alluding to this if you just look at your RPI developments or kind of what the implied bookings are that seems really bad and so is it the case that infrastructure because you are taking share and youre not.

Totally web higher Ed like Youre ultimately delivering on your growth with maybe a more difficult backdrop.

Steve Daly: With that, I'll turn it back to Steve. Thank you, Dale. And thanks again for your service to Instructure. We all appreciate that you've left the business in such great shape financially. I have every confidence that we will continue to execute and carry on the great track record you've established.

I guess I am trying to get to maybe.

An expectation for how does this can manifest in 2024 numbers.

Yes.

Steve Daly: It's now my pleasure to introduce our incoming CFO, Peter Walker. Peter has 15 plus years of executive experience, including more than 10 years as a CFO. He is currently the CFO of Sterling Check Corporation, and we'll start at Instructure on November 13th.

Joe.

We're not guiding to 2024.

But you are really good at it.

Those kind of questions right try to get me to guide 2024, what I'll, what I will tell you Joe is.

It is like.

Like I said right, we're seeing a slowdown a lengthening of those deals.

Peter Walker: Peter. Thank you, Steve. I'm thrilled to be Instructure's next CFO. You and your team have built a market leading global technology business from startup to scale and just 15 years with a mission driven culture and people I knew immediately were a great fit with my values and aspirations. My significant experience and executive roles as both a CFO and chief strategy officer for global public companies and prior piano ownership responsibility will adapt to Instructure's leadership team.

Peter Walker: My success in designing and leading strategies that grow organic and a half billion in revenue to a billion dollars plus and beyond. I'm excited to create value for Instructure stakeholders as we continue to grow the business and expand profitability. I particularly passionate about investor relations. One of my first priorities is our investor engagement roadmap building on all the great work that has been done. I'm also passionate about leading and developing Instructure's strong finance team. I will attend the Raymond James Conference in New York in early December with Steve. I look forward to meeting more of the investor community there.

We do feel like we're very well positioned but we do think this will be this will be a temporary slowdown in the near term.

The business.

And again, the long term growth prospect as prospects are really good, particularly as these institutions start to work through their strategic long range plans.

Okay I'll leave it there thank you very much.

Thanks, Joe.

We'll go next to Fred have a myer at Macquarie.

Hi, Thank you firstly Dale it has been an absolute pleasure working with you sorry to see you go but.

Honestly I'm, a little envious that you have a substitute teacher gateway lined up already thats fantastic.

And Peter I'm really looking forward to working with you.

So just for this quarter Im, particularly interested in a competitive win that you called out in your press release, Montana, and passing on higher education, and K 12, respectively.

Curious to hear you call out some of the aspects that led to this when I'm quite curious to hear a little more qualitative qualitatively and deliberately here what drove those competitive wins what are the differentiating factors for and structure.

Yeah, It's a great question.

Unknown Executive: That concludes our prepared remarks.

Bread.

Unknown Executive: At this time operator, please open up the line for questions. Thank you, ladies and gentlemen. Just a reminder, any questions, please press star one. And if you find your question has already been addressed, you can remove yourself from the queue by pressing star one again.

It's the.

We're seeing more and more.

This trend towards.

<unk>.

Particularly education systems that are looking at how do we better address.

Sheldon: Google first this afternoon to Steve and Sheldon at William Blair. Hey, thanks.

This change in kind of the student expectation right. The student is much more mobile they want is they want to be able to move through their learning journey right Bye bye picking and choosing right. It used to be I applied I went to University I went there for four years I got my degree it's much more mobile nowadays and so what we're seeing is that.

Steve Daly: And it's been great working with you Dale and look forward to working with you, Peter. First year on the parchment deal, it sounds like you're expecting low double digit growth there, but do you think there's an opportunity to accelerate that growth rate, especially with any benefit from cross selling between the two businesses and maybe just any detailed bread on what cross selling opportunities there could look like. Yeah. Thanks. Thanks for the question, Steven.

The systems are starting like like Montana, Alabama Community College system right. They are starting to look at this and say what's the.

Best way for us to provide a student experience that is best in class and consistent across that and so.

Steve Daly: We have been really excited about this acquisition. I think the way that it connects our, you know, what we do in the classroom with the evidence of what's, you know, the learning that happened and the ability to demonstrate that that the learners can, you know, demonstrate their skills and their accomplishments. Is what won the industry needs and it's also really accelerates our strategy. You know, the reality is we've been appropriately conservative.

So what we saw particularly with Montana was this they looked at somebody like California Community College system.

Has standardized on canvas. They said they looked at that and said, okay. We want that kind of student experience, we want the ability for students to be able to share courses <unk>.

Interestingly enough as part of that deal.

They had quarterly which is part of the.

Whereas the parchment.

The portfolio in there.

And so we see them and we see them looking at how do we make that transition from K 12 systems within Montana make that easier and more and simpler so.

Steve Daly: I think in the modeling is we've done is we've, you know, guidance is we've built the models around this. There are areas where we believe that there are top line synergies over time. We haven't built those into into our models today, but particularly as we think about. Students as they make the cross those transition points so dual enrollment, you know, the ability to share. Chair courses across across campuses works really well with our, our catalog product, the badges work that we're both doing that the comprehensive learning record over time. We do believe that those will all be a creative growth drivers for us. We just haven't modeled those yet into the into the businesses or the guide.

I would say for us the advantage was that we have the market leading position in both K 12, and higher Ed which was a key key decision factor. The fact that we have demonstrated our ability to to scale to large implementations across the system that we had some of the stuff that we've been working on with cat.

Along with some of the technologies to address non traditional really well.

<unk> was good for them and then the fact that we have.

We have strategic relationships that we have a community.

Of institutions that have done similar things that they can share and talk with each other all of those things added in on top of the fact that market, leading LMS, but a much broader platform than we had even three years ago.

Steve Daly: Got it, makes a ton of sense. And maybe with this deal, you're also moving a little beyond the scope of what you've done historically in the higher ed software stack by getting into admissions and enrollment. So curious if you see more opportunities on that front to move into new areas. And just generally has your thinking changed at all about how broad of a software platform you want to be in higher ed.

That has all the pieces that help them address that both the traditional and non traditional what we've what we've referred to in the past is omnichannel.

It was a really big decision factor for them.

Steve Daly: Yeah, it's, it's, it's, you know, it's a question that I think you've asked us before as well. What I would say is as we look at where the adjacencies are to our current business around teaching and learning, you know, we're looking for those areas where there is an overlap in the bend diagram, if you will. So where we see that that parts of what we're doing in the classroom are very applicable to the things that maybe in, you know, new parts of the institution, maybe using, and this was one of those areas, you know, one of those areas where made a lot of sense for us to kind of combine the two organizations learn platform, you know, the last acquisition we did was very similar on the K 12 side where we, we addressed some new buyers, but there's still a lot of overlap with our existing users and our buyers.

Thank you for that.

Thank you we'll go next to Brian Peterson at Raymond James.

Thanks for taking the question Dale I've really enjoyed working with you you're definitely taught me a lot of math over the years. So maybe that's enjoying Joe out there in each offer some remedial lessons.

And Peter look forward to meeting.

So just on <unk>, you guys mentioned that $2 billion incremental Tam $115 million in revenue is there anything that you can share about some of their products are part of the platform that are maybe a head in the adoption curve and what products have the most white space.

Yeah.

It's a good question.

Question, We will we will plan a much more fulsome review of this when we do our when we give you our 2024 guidance. After this deal is closed but let me just give you a high level Brian.

Steve Daly: So you can expect us to continue to, you know, look for opportunities just like this where, you know, they're close adjacencies open us up to new budgets open us up to new, you know, new experience. There are new experiences, new relationships, and yes, I do think it provides, you know, nice fertile ground for us to continue both organically and organically expanding that platform.

As you look at the overall revenue.

That that Tam breaks down.

Unknown Executive: Great to hear. Thanks. Thank you.

Between the awards product, which is a lot of the credentialing pieces and the.

And the pathways product.

Within the credentials.

Part of their business is around transcripts and diplomas.

A good steady grower.

Josh Baer: The next now to Josh bear at Morgan Stanley. Great. Thank you for, thank you for the question.

What we're seeing in that space is that the mix and amount of credentials that an individual student is requesting is increasing.

Steve Daly: Dale was great working with you and good luck ahead. One for Steve was hoping you could talk a bit about the process for finding the next. CFO, what were some of the things that you were looking for and ultimately what led you to Peter and then one for Peter what attracted you most to to instruct you into this opportunity. Yeah, great, great. Thank you for asking that question, Josh. So, so this was the process that we took, you know, it was a, you know, it was a very deliberate process.

So with this mobility that students are expecting right there they need to make more requests of these transcripts. So from that perspective, we see growth.

Through just the number per per student that we're seeing in addition, as those transcripts get get.

More.

Get broader right as you start to think about it in the context of Badging as you think about it as a portfolio that will be there.

It will be an outsized grower in our in our opinion on the pathway side.

Steve Daly: We were looking. I had had some conversations with Dale about what he wanted to do when where he wanted to do those things. And so we, we approached it as for, you know, we wanted to look for somebody that had great experience in the public markets. We were looking for somebody that has worked in the model in models of companies that have had PE ownership that know how to drive growth that are very good at articulating growth strategies to the streets and being able to help help our investors understand the levers within growth.

It's still it's still early days when we talk about kind of dual enrollment in crush course, sharing it's becoming a much more.

It's much more a topic of conversation in the selling process. So so that that area will show outsized gross growth versus the rest of the business as well.

That makes sense.

Thanks, Brian.

Brian Let me just add they have a very small footprint in international.

They bought a company that was based internationally based out of Australia. We believe that there is there is.

Steve Daly: And, and we took, you know, we took a while to do this, you know, it was it was a fairly long process. We, you know, we engaged recruiters, we met with a lot of different, a lot of different people, what really kind of sealed the deal for me with with Peter was, you know, good cultural fit. We felt like he would work well with the team. He could get very passionate about the mission long, you know, a long tenure working with the public markets.

An opportunity to grow international.

Above the.

Average growth rate for the company as we kind of leverage our infrastructure worldwide.

Steve Daly: I really liked the way that he approached his investors and the way that he helped them understand the key, the key drivers of the model long term and explaining, you know, how those, how those would affect our results going forward. And, and, and felt like he he brought a lot of good experience and, and, and detailed understanding of how, you know, how a business like ours would work. So, again, it was a, it was a very rigorous and, you know, pretty long process to find the right person.

Understood and maybe just following up to some prior questions just on the elements activity. This year, let's Steve would you say, it's more of a budget dynamic or is it more of a priority other priorities dynamic.

As you kind of look at the lens of non traditional learning and those ambitions. There I'd be curious what your existing customers are doing there and how they may be leveraging canvas versus what some of your non customers are struggling with is is there any insight would be going to from from there. Thanks guys.

Yeah, no. It's a good question I think I think.

<unk> and priority are they both come into play.

No the budgets have been tight in higher education and part of that is the enrollment decline they need to find new revenue streams right.

And so so it's it's a little bit of that and a little bit of.

Peter Walker: Peterson, Peter, you want to share? Yeah, happy to jump in. So I'd say I was first attracted by the mission of Instructure, always been extremely passionate about education and what that can do for people on a global basis. And so that's what brought me in. And then once I got interested, I have a pretty diligent process of first starting with how large is the time that the company operates in, how fast is that Tam growing?

Of the prioritization and we've got to figure out what we're going to do for the future our existing customers are.

Are grappling with the same challenges right a lot of our conversations are about how do we extend the canvas environment outside of the four walls outside of the traditional.

Learning experience.

How do we create this omni channel experience for learners that are either all remote or hybrid or all in person.

Peter Walker: So as I learned that information about Instructure was really excited about the large Tam and significant growth right there. Next, I look for a company who is, you know, number one or number two in the market, clearly, Instructure is number one in the markets they play. Then I look at ownership, you know, who owns the company, found a very interesting that, you know, a great firm like Toma Bravo is still involved with the company, but also the company is public.

And we're getting a lot of.

A lot of energy if you will around then how do we demonstrate.

His skills, how do we demonstrate that two two.

For the student as Theyre looking to go out into the workforce and so.

Our customers are asking for the same thing.

<unk>.

Theyre also because our solutions are so sticky, though our renewal rates.

Peter Walker: And then once I get through that, it really goes to the people in the culture. And that's what sealed the deal for me, you know, from the first time I met with Steve and the rest of the management team. It was just a great and very natural fit from day one. So really excited about this opportunity and excited about all the value we're going to create going forward. Great. Thank you very much.

We just went through a massive renewal rate cycle over the last two quarters right.

Unknown Executive: Thank you.

We saw improvement year over year on renewal rates. So they're there they're also double doubling down on our on our platform as the platform to really address those opportunities.

Okay.

George Kurosawa: We look now to George Corosala at city. Thanks for taking the questions.

Thank you the next now to Terry Tillman.

Yes, Thanks for fitting me in here congrats on the Parkman acquisition.

Steve Daly: I'm on for Steve and on a great working to you over the years, Dale, maybe to start with on the parchment deal. If you, you know, you disclose 15,000 customers, maybe if you could give a little color on what does that footprint look like and how much overlap is there with the existing customer base. Yeah, you know, we will. So as I look at the overall customer base, obviously with our footprint in higher ed and parchment's leading market share in higher ed as well, you know, there is some overlap within the customer base.

<unk> congratulations to you on your retirement, I Hope, you and amazing teacher, and congratulations Peter and looking forward to.

I was going to actually follow up a couple of prior questions on parchment first and then I had a follow up.

And I'm sorry in advance that the first question might be a multi parter on parchment.

If I look at the $115 million in the 2 billion Tam and I know this is way over simplifying it but it is like a 6% market share that seems pretty small at this point and then it sounds like I think Steve You said awards is probably the biggest component and theres. Some other really fast growing small pieces, but.

Steve Daly: We, you know, the, the, the exciting part is that the relationship we expand our relationships within those even even when we are, you know, we have those joint customers. And so we will kind of will disclose that as we, as we get further closer to close as we get as we close this deal, we'll be able to to show you a little bit better where that overlap is, but just know that we, you know, we feel good about the, you know, the relationships that parchment has the reputation that they have with those customers is similar to the one that we feel that we have with our customers. And, you know, there is a, there's a significant opportunity for us to share, share customer listen and be able to expand our customer base on the instructor learning platform. That makes sense.

If we look at like the biggest part awards are there legacy share donors in this market or that folks try to both their own kind of Credentialing system I'm, just kind of curious where we are in terms of greenfield brownfield et cetera, as you all work to monetize.

<unk> opportunity.

Yes.

The primary shareholders in this space are NFC, the national student clearinghouse and parts of it.

And in our in our.

Our diligence.

The.

The feedback came back very positive on from on parchment as far as the view of the technology or the view of the relationship that they have with their customers and so.

From that perspective, when you look at kind of.

The.

The transcript and diploma side of the business. So that's it really is.

Steve Daly: And then, you know, instructor clearly has some credentialing capabilities in the platform today. Maybe you could just help us understand, you know, where kind of the real level ups in terms of features and functionality that that parchment brings. Thanks. Yeah, you know, the, there's a couple areas where I see, you know, some, some level up to use your words, right? So first of all, when it comes to, you know, the, that transition that students are making, what we're seeing more and more.

It is those two right.

And that is pretty stable business that has very very high.

Grocery task and it's in that mid to high <unk> gross retention. So so.

So from that perspective, very very predictable very.

Very very strong market share.

The where the where the opportunity is and which is a bit of greenfield as is.

The Credentialing right the Badging us is new opportunity.

Steve Daly: Particularly since the pandemic is that learners are much more mobile and they're, they're, they're, they're much more willing to kind of mix and match, if you will, their educational experiences. And they're looking for to do that in a way that's most convenient for, for their lifestyle, whether they're working or they're willing to go full time to school. And so, there's a number of technologies, the parchment have around. The ability to dual enroll students, whether when they're in high school, you know, be able to get college credit, you know, while they're, while they're completing their high school diploma.

Comprehensive learner record those pieces are where we will be able to drive growth.

And again more of a greenfield type of sale than it is than it is.

Our market share.

And then when it comes to the pathways product the dual enroll the crush.

Of course sharing pieces of it that is all that is all greenfield that's a new market that is.

Is really starting to emerge and like I said, we've had a number of conversations about it.

It's one of the reasons that we were interested in parchment is is because historically, we haven't had solutions to those to those problems so that.

Steve Daly: There's, there's technology around allowing institutions in a system to be able to share courses so that a student can decide, you know, when they're living at home, they can go to local community college, but maybe they're going to the state university. And that ability to kind of transfer those, the credits to share those courses is an area where we think we can get an acceleration in both our road map as well as our footprint within a customer and that ability to transfer those credits in that process.

Those are kind of the key areas that we see where we can drive growth in.

Sure got it thanks for that yeah. Thanks, I guess a follow up question is just related to international maybe Dale could you actually share what the revenue was in the percentage growth year over year and.

Does it feel like this business.

Is it being impacted by the same amount as North America, higher Ed or does it a bit more resilient.

Yes.

So Terry the international growth was 11% on a constant currency basis 2014 will drop the Q here in the next couple of days, we'll give you a little more detail on that but.

Steve Daly: The other piece that where, you know, we're early in our development is around the, the comprehensive learner record and being able to provide rich data of a record and a portfolio for, for students where they've, they've, they've got a lot of work done that we, we feel we can, we can leverage to go much faster on a road map in that area. So, you know, a few really exciting areas that we think it's going to drive, you know, long term for us is going to drive our road map and drive ultimately long term growth. Thanks for the technical questions. Thanks George.

International is still our fastest growing segment.

Of all of that we talked about so we're pretty pleased with it.

And the second part of your question you sneaked in there Terry.

We do see we do see the.

The similar headwinds.

Unknown Executive: Thank you.

In higher Ed, maybe not as acute and not to the same level that we see in North America, but all all higher Ed institutions R.

We're asking these questions I just spent a week in Australia. Many of the same questions about where do we find new revenue streams, how do we address this non traditional student how do we meet students where they are at those are all things that everybody is trying to is grappling with from a strategy perspective, and long term digital transformation strategies.

Joe Vruwink: The next now to Joe Vruwink at Beard. Yeah, hi everyone. Um, just, you know, starting out those wishes to Dale and kind of makes me want to be back in whatever grade Dale's going to be teaching just to get that.

Thank you all.

Thanks Terry.

Yes.

The next map to Devin al at Keybanc.

Steve Daly: But, um, you know, maybe just to go to the one comment you made about, uh, slowness and in deal closings and higher ed. I guess my question is, what's your take on why this is happening now? Um, and then in the past, you know, you've kind of talked about the RFP activity in higher ed should be elevated in 2023 and 2024. Or is it still elevated and this is just a delay in closing or are you starting to maybe recalibrate on the RFP environment since the next year as well.

Great. Thanks for fitting me in here Dale it's been a pleasure working with you and Peter Congrats and looking forward to working with you more.

Maybe just one question from my end.

Wanted to ask about K 12, nice to see the continued large wins in that market.

Unlike higher Ed.

Which you called out some weakness in cell cycle have you seen any sort of uptick in deal closing within K 12, or perhaps any uptick in RFP in that segment, just given the whole essar funding deadline starts approaching.

Yes. Thank you.

Yes.

Darren.

The activity has been we've talked about in the last couple of quarters right Theres been a lot of activity in K 12, Youre right Theres still.

Steve Daly: Yeah, yeah. Thank you for, for that question, Joe. Um, it's, uh, it, so, so I'll just start with the, you know, with the overall market. We, you know, I've, I've never felt better about our competitive position. Again, you know, the breadth of our portfolio is really in the momentum in our business. We continue to gain share in the market, you know, per the edge of technical data shows that can this LMS is the only one gaining share in in North American higher ed.

Depending on the estimate a third to half of all the essar funds that haven't been committed yet and so.

We do see we do see some.

We do see we do see some good activity, where we're seeing probably the greatest activity in K 12 is around assessment, we're seeing good cross sell indicate 12.

Steve Daly: So from that perspective, I feel really good. What we're seeing is, um, it's interesting because we are seeing, you know, our activity is good. In fact, you know, and, and again, don't over index on RFP because it's about 30 to 40% of our business. But in the RFP space, I think we had the highest RFP activity in the last six years in North American higher ed. But across the world, we're seeing, you know, that the pace of deals have flowed and they're deferring some of these projects.

This last quarter and will we think that Nevada was an example of our cross selling of Master connect.

So we expect that we will we expect that will continue.

Through this next buying season, when the Essar funds are finally expire.

Great. Thanks for the color.

Yes.

Thank you the next now to Ryan Macdonald Needham.

Hi, Thanks for fitting me in and congrats on a nice quarter, Steve maybe just starting on K 12, Im curious what youre seeing with the <unk> platform and your ability to start to cross sell that in a bit more I know you were sort of launched some of that functionality for free at the user conference and it sounded like the interest was pretty high in it but just sort of interested in.

Steve Daly: And when we ask that, you know, our customers about it, what they're really telling us is, look, I mean, it's not a surprise, right? I mean, we've, we've been talking about all of the macro trends in higher education, right, declining enrollments, budget challenges. The removal in the US of federal stimulus funding, where we feel it a little more acutely in North America, but we feel across higher ed around the world is still dealing with some of these bigger challenges.

What youre seeing there post the event.

Yes.

What we're seeing is a lot of we've seen a lot of activity. So.

Steve Daly: And so what they're telling us is, look, we've got to work through and they're being very thoughtful about this. We're trying to work through our, what is our strategy and what is our digital transformation strategy. How do we go gain new revenue streams? How do we go address that non-traditional student? And so as that mix starts to shift their, their, their, they're hitting the pause button on projects until they get their strategies figured out.

As as we made that acquisition.

We put it into the hands of our sellers to be able to start carrying those conversations forward we've seen some good.

Good pipeline growth and so as I as I look at kind of the.

Learn platform interest.

It's extremely high.

Steve Daly: Now from our perspective, we're, you know, I feel really good about that because we're, we're very well positioned to address it, whether it's a traditional or a non-traditional student. You know, as our portfolio of products we have today through both organic and M&A has been, has really grown to, to be able to address those over the last several years. And the fact that we're at the table having these conversations with them, you know, we are that trusted advisor.

We continue to see a need.

Our.

Our our customers are telling us as we think about all of this technology that was deployed during the pandemic.

We're seeing that it's it's.

They're trying to rationalize what that looks like and.

Our pipeline has more than doubled since we did the acquisition and we and we see we see real interest in this so I expect that we talked about contribution being de Minimis in 2023, but as we go into 2024, I feel pretty confident about the level of interest and the activity that's.

Steve Daly: It both well for us, you know, long term and, and I believe we're going to continue to be able to drive long term growth in the space. It is a, it is a temporary slowdown that we're seeing. Again, not in the activity because again, that's been really active.

Steve Daly: It's more in the, in the, the pace that we're seeing of the deals close. That's great.

That's going on with.

Learn and as you talked about part of that seeding strategy is just starting to take hold.

Joe Vruwink: And then just a related follow up on this. Is there any kind of guidance or assistance you can give just in terms of the financial implication of this particular comment because, you know, I think if you're alluding to this, if you just look at your RPO development, or kind of what the implied bookings are, that seems really good. And so is that the case that Instructure because you're taking share and, you know, you know, you're not totally well to higher ed, like you're ultimately delivering on your growth with maybe a more difficult backdrop.

In our customer base.

That's going to drive even more pipeline.

Super helpful color and then maybe just one on parchment.

Noticed from sort of looking at the company website that they have got a connection into the workforce industry organizations and enterprise organizations. Just curious if you think that this acquisition can help kind of close the loop on this strategy for canvas student pathways in sort of bringing those those.

Non traditional learners upskilling them, and then sort of validating those credentials as they as they go back into the workforce or try to find a new role.

Joe Vruwink: I guess I'm trying to get to maybe an expectation for how this can manifest in 2024 numbers. Yeah, and we are, you know, Joe, we're not, we're not guiding to 2024. But you are really good at it, you know, those kind of questions, right, try to get me to the guys 2024. What I will tell you, Joe is, you know, it is like, like I said, right, we're seeing a slow down that a lengthening of those deals, we do feel like we're very well positioned but we do think this will be, you know, this will be a temporary slow down in the near term. For the business. And again, you know, the long term growth prospectus prospects are really good, particularly as these institutions start to work through their strategic long range plans.

We should think about maybe that a portion of this acquisition moving forward.

That is exactly how you should think about it Ryan.

It does give us.

We talked about deeper relationships within the institutions that we play today, but it also creates.

Actions with inside the workforce so over time that that will become much more important part of the strategy that'll become the opportunity for us to connect learning through the comprehensive record with outcomes.

And.

<unk> opportunity for the students long term. So yes, we're we're very excited about.

Those relationships.

Great. Thanks for the color.

Unknown Executive: Okay, I'll leave it there. Thank you very much. Thanks, Joe.

And we will go next Matthew Matt Van Vliet at BTG.

Fred Havemeyer: We'll connect now to Fred, have a Meyer at Macquarie. Hi, thank you.

Hey, good afternoon, thanks for taking the question and.

Unknown Executive: And firstly, Dale, it has been an absolute pleasure working with you. Sorry to see you go, but I honestly am a little envious that you have a substitute teacher geek lined up already. That's fantastic. And Peter, I'm really looking forward to working with you.

It's been better pleasure.

With you over the last couple of years, maybe maybe the last question just a little follow up on there how.

How much of the conversations with customers, whether it was around catalog or some of the other.

Steve Daly: Just for this, for this quarter, I'm particularly interested in the competitive wind that you called out in your press release Montana and Pasley in a higher education and K12 respectively curious to hear. You call out some of the aspects that led to those winds and quite curious to hear a little more qualitative, qualitatively and deliberately hear what drove those competitive winds, what were the differentiating factors for infrastructure. Yeah, it's a great question, Fred.

Omni channel type of approaches that you've been having Steve.

Catalyze the need to maybe get the parchment deal done now or highlighting maybe some of the product gaps that you had on the roadmap, but this helped accelerate.

Yeah.

Matt I don't.

I'm not sure it change necessarily the urgency of getting the deal done.

This is these are.

We have a very active M&A roadmap, we have an active.

Steve Daly: It's, you know, that we're seeing more and more this trend towards, you know, particularly education systems that are looking at, how do we better address this change in kind of the student expectation. Right, that the student is much more mobile. They wanted, they want to be able to move through their learning journey, right, by, by picking and choosing, right, it used to be. I applied. I went to a university. I went there for four years.

Engagement with a lot of different companies.

We've had conversations with parchment for over a year and a half as far as just understanding their business seeing if theres partnering opportunities.

But in order in order to get a deal done both parties have to be ready for it and so it's more of a more of a function of them being ready I think than necessarily us feeling a need to Phil Phil.

Steve Daly: I got my degree. It's much more mobile nowadays. And so what we're seeing is that. The systems are starting like like Montana Alabama Community College system, right. They're starting to look at this and say, what's the best way for us to provide a student experience that is best in class and consistent across that. And so, so what we saw, particularly with Montana was this, you know, they looked at somebody like California Community College system, you know, that is standardized on canvas.

Fill a hole now I will say that from my perspective.

From the management team's perspective, the conversations that we've had.

Probably in the last nine months the conversations we had at and structure Con really have ramped up.

This concept of I've got to go figure out how to address these these non traditional students. So I think the timing from that perspective is perfect because.

We're hitting it at a time when the need is front of mind. The need is the pain is front of mind for for our customer base. So I think.

Steve Daly: They said, they, they looked at that and said, okay, we want that kind of student experience. We want the ability for students to be able to share courses. Interestingly enough, as part of that deal, they, they had quote, quote, which is part of the, of the parchment. Portfolio in there. And so we see them, you know, and we see them looking at how do we make that transition from K12 systems within Montana, make that easier and more and simpler.

It's.

It is it is a great time for us to do this deal from just from a market timing perspective.

Very helpful. And then just quickly one other follow up on some of the longer sales cycles.

If you were to try to.

Make your best estimate on when some of these deals that you're already working on eventually close does this is this starting to feel like it's again sort of the next summer buying cycle.

Steve Daly: So, you know, I would say, you know, for us, the advantage was that we have, you know, the market leading position in both K12 and higher ed, which was a key, you know, key decision factor. The fact that we, you know, we've demonstrated our ability to scale to large implementations across the system that we had some of the stuff that we've been working on with catalog with some of the technologies to address nontraditional really well was, was good for them.

It is more likely or some of these sort of happened in the interim.

As you push forward and maybe the catalyst of some of those non traditional opportunities gets us over the goal line before the next big buying season.

Yeah. That's that's a that's a tough one to try to call right now.

In International this is our big quarter.

So we'll see how how deals matriculate, we'll have a better view kind of as we as we meet again in Q1 to talk about 2024.

Steve Daly: And then the fact that, you know, we have, we have a strategic relationships that we have a community of institutions that have done similar things that they can share and talk with each other, all of those things added in on top of the fact that, you know, market leading LMS, but a much broader platform. You know, then we had even three years ago that that has, you know, all the pieces that help them address that both the traditional and the non traditional what we, what we've referred to in the past is omnichannel. It has been was a really big decision factor for them. Thank you.

I would say.

We still feel good about the deals that are getting done we're winning right and we continue to gain share.

And then we'll have to see as we go as we go forward whether this.

Decide to do these now there is a lot of impetus for them to kind of time. These around their budget cycles around the school school year in North America for instance, so.

Well I don't.

Don't have.

No.

Our Crystal ball right now, Matt as far as when these will close but.

But I do again I do feel good about when they do come where we are in a great position to win them.

Brian Peterson: We go next to Brian Peterson at Raymond James. Thanks for taking the question.

Yes.

Alright, great. Thank you.

Steve Daly: Dale, I've really enjoyed working with you. You've definitely taught me a lot of math over the years and maybe I've enjoyed Joe out there and used to offer some of the video lessons. Peter, look forward to meeting you at the conference. So to see, just on parchment, you guys mentioned a $2 billion incremental tam, $115 million in revenue. Is there anything you can do? Anything that you can share about some of their products or part of the platform that are maybe ahead in the adoption curve and what products have in those white space.

Thank you. We'll go next now to no impairment at J P. Morgan.

Okay.

Hey, Thanks, guys for getting me in here, it's been great working with detail really appreciate it and look forward to working with you as well Peter.

Just wanted to touch a little bit on the international go to market partner program, just how far along are you on that and how are you thinking about portion of Atlanta into that strategy. Thanks.

Yes. So it is you know we've had some good wins from a partner program perspective, and we continue to kind of refine that model as we move forward.

Steve Daly: Yeah, you know, it's a good question. We will, you know, we will plan a much more full sum review of this when we do our, you know, when we give you our 2024 guidance after this deal has closed. But let me just give you a high level, Brian. As you look at the overall revenue, that, you know, that tam breaks down, you know, between the awards product, which is, you know, a lot of the credentialing pieces and the, and the pathways product.

We do have some targeted countries that were going after you know Philippines is one of those and we've talked about the deal that we just won in the Philippines, We've talked about some some in Japan as well so I expect that to be again, it's we're right now we're really focused on enabling we're in it focused on the ability of our.

Our our partners to support customers in region.

Steve Daly: Within the credentials, you know, part of their business is around transcripts and diplomas. That's a good steady grower. What we're seeing in that space is that the mix and amount of credentials that an individual student is requesting is increasing. And so with this mobility that students are expecting, right, they need to make more requests of these transcripts. So from that perspective, we see growth through just the number per person that we're seeing.

And that's where a lot of our focus is.

And I suspect that.

Well the growth the growth will be good the dollars are small still in that space and will.

We'll see that grow over time.

So I think thats.

The other thing that the other thing that I would add is that it does it does open up new markets for us It does give us an opportunity to address some areas that.

We've had some limitations so for instance in the Philippines, We go direct and channel.

Steve Daly: In addition, as those transcripts get, get, you know, more, where get broader, right, as you start to think about it in the context of badging as you think about it is support folio. That will be, that will be an outsized grower in our, in our opinion. And on the pathway side, you know, it's still, it's still early days when we talk about kind of dual enrollment and cross core sharing is becoming a much more.

But it gives us access to government contracts and relationships that we don't have so we will continue to use that as a key growth driver long term for us.

And believes it will it's an integral partner part of our our international strategy.

From the parchment perspective.

We haven't modeled in any acceleration due to the part they are doing to do channel partners.

Steve Daly: It's much more topic of conversation in the selling process. So, so that that area will will show outsized growth versus the rest of the business as well. That makes sense. No, that doesn't. Brian, let me just add, you know, they have a very small footprint in international. They bought a company that was based internationally based out of Australia. We believe that there's, you know, there's an opportunity to grow international, you know, above above the, you know, average growth rate for the company as we kind of leverage our infrastructure worldwide.

It's an area that as we get into the integration as we get into really digging in with them together on the integration plans, we'll evaluate that at that time.

But again not built into any of our guidance or our.

Our models frankly.

Thank you and we'll take our final question from Brent Thill at Jefferies.

Hey, Thank you this is David on for Brian.

Talk around the nontraditional learner I know this is probably.

Tough question to give super clear answer on but maybe.

Steve Daly: Understood. And maybe just following up to some prior questions just on the element activity this year. Let's see, would you say it's more of a budget dynamic or is it more of a prior or other priority dynamic and, you know, as you kind of look at the lens of non traditional learning in those ambitions there. I'll be curious what your existing customers are doing there and how they may be leveraging canvas versus what if some of your non customers are struggling with is, is there an insight to be going from from there.

Does it help I guess theres a helpful way to frame what percent of the business today comes from this nontraditional learner, assuming it's still fairly small and where do you expect that that can get to if we look at 10 years over time.

Yes that is.

That is a great question, David and you know, we don't break out different the different segments per se.

Steve Daly: Thank you. Yeah, no, it's a good question. You know, I think I think budget and priority are, you know, they both come into play. We know the budgets have been tight in higher education. And part of that is, you know, the enrollment decline they need to find new revenue streams, right. And so, so it's, it's a little bit of that and a little bit of of the prioritization, right. And we got to figure out what we're going to do for the future.

I will say is.

The the nontraditional learner.

Learning is still happening right and what's changed over the last since really since the pandemic as debt.

Learners have become much more.

Engaged in the pathways that they wanted that they want to follow and pursue an hour.

And their learning journey and so we're seeing this is.

An opportunity to continue to drive growth across the business, it's an opportunity for our existing customers to address more students than historically they have.

Steve Daly: Our existing customers are grappling with the same challenges, right. A lot of our conversations are about how do we extend the canvas environment outside of the four walls outside of the traditional learning experience. You know, how do we create this omnichannel experience for learners that are either all remote or hybrid or all in person. And we're getting a lot of, you know, a lot of energy, if you will, around then how do we demonstrate, you know, skills, how do we demonstrate that to to, you know, for the student as they're looking to go, you know, out into the workforce.

A lot more students than they historically have.

And.

And it will be.

Long term growth driver for us as they as they worked through their strategy. So we will it is a growing mix.

Still early days as you mentioned.

But we will as we kind of turned the corner into 2024 and as we.

As we.

We'll get back to you with more details about parchment more details about our long term growth and update our growth models in 2024.

Gotcha, and maybe if I could just sneak in one more just quickly on the AI beta if you just bring us.

Steve Daly: And so our customers are asking for the same thing, you know, the, they're also, you know, because our solutions are so sticky, you know, our renewal rates. We just went through a massive renewal rate cycle over the last two quarters, right. And we saw improvement year over year on renewal rate. So they're, they're, they're also doubling down on our, on our platform as the platform to really address those opportunities. Thank you.

My desk coming up to speed on what you guys are experimenting with as it relates to AI and just any early feedback would be helpful. Thanks, So much guys.

Yeah. So this is an exciting we're getting we're getting real time feedback from our customers. Those that are involved in those early betas.

A few areas that we're focused on so one is.

Of course content and creation, so we have <unk>.

Natural language models that will allow for instance teachers to be able to create courses inside of canvas that allows us to be able to.

Terry Tillman: It was the next now to Terry Tillman, and I'm sure it was. Yeah, thanks for fitting me in here. Congrats on the parchment acquisition.

Use natural language for instance, I wanted to have two columns.

Dale Bowen: Dale, congratulations to you and your retirement. I hope you're an amazing teacher. And congratulations Peter and looking forward to knowing you. I was going to actually follow up on a couple of prior questions on parchment first and then I had to follow up. And I'm sorry in advance that the first question might be a multi-parter on parchment. You know, it's, if I look at the 115 million dollars in the two billion, and I know this is way over simplifying it, but it is like a 6% market share.

My course, and I want these headers and that kind of stuff as well as use it to create content like quiz questions and things like that the second piece is around what we call semantic search that is the ability to be able to for students and teachers to be able to search across all content of course content.

And be able to do it in a way that they don't have to know exactly what.

Dale Bowen: That seems pretty small at this point, and it sounds like I think Steve, you said awards is probably the biggest component and there's some other really fast growing small pieces, but if we look at like the biggest part awards, are there legacy share donors in this market, or did folks try to boil? Their own kind of credentialing system, just kind of curious where we are in terms of greenfield, brownfield, et cetera, is you all work to monetize this interesting opportunity.

What they're looking for so for instance, the example, we used it and structure Con was.

Student says Hey, I remember my teacher talking about.

Mandel in and.

And they didn't really they talked about the violin a painting by Picasso was able to kind of sort through using artificial intelligence to sort through and deliver a result from that perspective without having to use all the boolean logic and all that kind of stuff and then the third is to be able to use natural language processing for.

Dale Bowen: Yeah, you know that the primary shareholders in this space are NSC, the national student clearinghouse and parchment, you know, in our, in our diligence, you know, the feedback came back very positive on parchment as far as the view of the technology, the view of the relationship that they have with their customers. And so, from that perspective, when you look at kind of the, the, you know, the transcript and diplomacy to the business, those, that's, it really is, it is those two.

Analytics, so that so that administrators and teachers can can naturally go in and say, hey, I want to see which did sort of struggling with this it's able to create org.

Organize the data in a way that they can use it for that show.

Show me all the students that have that are have missed four assignments that kind of engagement.

The goal really here is to make lives simpler and easier for teachers is where we start.

As well as make it more intuitive.

Dale Bowen: And that is a pretty stable business, that's very, you know, very high growth retention, it's in the mid to high 90s growth retention. So, from that perspective, very, very predictable, very, very, very strong market share, where the, where the opportunity is, and which is, is a bit of greenfield is, is the credentialing, right, what the badging is, is, is, is new opportunity, the comprehensive learner record, those pieces are where we'll be able to drive growth.

For administrators and learners as well so those are the areas that we're really experimenting in right now David.

Yes.

Thank you and that is all the time, we have for questions. This afternoon, Mr. Daly I'd like to hand things back to you for any closing comments.

Well, thank you for joining us everybody and Peter once again welcome to the team as our incoming CFO we're excited about.

Adding parchment to instructor, we believe it's going to help drive new growth and opportunity.

While matching our improving our profitability over time.

Combined with another solid quarter of execution. We continue to believe we are unlocking the value of technology and education for teachers and learners likes.

Dale Bowen: And again, more of a greenfield type of sale than it is, then it is a market share takeaway. And then when it comes to the pathways product, the dual and roll across share, core sharing pieces of it, that is all, that is all greenfield, that's a new market that is, is really starting to emerge. And, and like I said, we've, we've had a number of conversations about it. It's one of the reasons that we were interested in parchment is, is, you know, because historically we haven't had solutions to those, to those problems.

We will continue to drive balanced growth and profitability for you our investors and we look forward to connecting with you next quarter. Thanks, everyone.

Thank you Mr Daly, ladies and Joe Matt will conclude instructions third quarter 2023 earnings call I'd like to thank you all so much for joining us and wish you all a great remainder of your day Goodbye.

Dale Bowen: So, so that those are kind of the key areas that we see where we can drive growth. And share. Got it. Thanks for that. Yeah, thanks for that. I guess the follow-up question is just related to international maybe Dale. Could you actually share what, what the revenue was in the percentage growth year by year? And does it feel like this business? You know, is it being impacted by the same amount of North America higher ed, or does it seem a bit more resilient?

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Dale Bowen: Thank you. Yeah, so Terry, the international growth was 11% on a currency basis, 14. We'll drop the queue here in the next couple of days and we'll give you a little more detail on that, but international still our fastest growing segment out of all that we talk about. So, we're pretty pleased. And to ask the second part of your question, you sneak in there, Perry, we do see, we do see the, you know, the similar headwinds in, in higher ed, maybe not as acute and not to the same level that we see in North America, but all, all higher ed institutions are, you know, are asking these questions, I just spent a weekend in Australia, many of the same questions about, you know, where do we find new revenue streams?

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Dale Bowen: How do we address this non-traditional student? How do we meet students where they're at? Those are all things that everybody is, is grappling with from a strategy perspective and long term digital transformation strategies. Thank y'all. Thanks, Jerry.

Devin Au: We're next now to Devin Au at Keybank. Great, thanks for fitting me in here. Dale, it's been a pleasure with you and Peter, congrats and looking forward to working with you more.

Steve Daly: Maybe just just one question from I end. I wanted to ask about K-12, nice to see, to continue large wins in that market, unlike higher ed, which you called out some weakness in cell cycle, have you seen any sort of uptick and deal closing within K-12, or perhaps any uptick and RFP in that segment, just given the whole S or funding deadlines staff approaching. Yeah, thank you. Yeah, you know, during the activity has been, you know, we've talked about in the last couple quarters, right?

Steve Daly: There's been a lot of activity in K-12. You're right, there's still, you know, depending on the estimate, a third to half of all the S or funds that haven't been committed yet. And so we do see, you know, we do see some, you know, we do see some good activity where we're seeing probably the greatest activity in K-12 is around assessment. We're seeing good cross cell into K-12 this last quarter, and we'll, you know, we think that, you know, Nevada was an example of, you know, our cross cell and mastery connect. So we expect that we'll, you know, we expect that we'll continue through this next buying season when the S or funds are finally expire. Great, thanks for the color.

Ryan McDonald: Thank you for the next now to Ryan McDonald that need them.

Steve Daly: Thanks for fit me in and congrats on the next quarter. Steve, maybe just starting on K-12, you know, curious what you're seeing with the Learn Platform and your ability to start to cross cell that in a bit more. I know you were, you've sort of launched some of that functionality for free at the user conference and that sounded like the interest was pretty high in it, but just sort of interested in what you're seeing their post event.

Steve Daly: Yeah, we, you know, we've, you know, what we're seeing is a lot of, we've seen a lot of activity. So, you know, as we made that acquisition and we, we put it into the hands of our sellers to be able to start carrying those conversations forward. We've seen some good, good pipeline growth. And so as I look at the kind of the Learn Platform interest, it's extremely high. We continue to see a need our, you know, our customers are telling us, you know, as we think about, you know, all of this technology that was deployed during the pandemic.

Steve Daly: We're seeing that it's, you know, they're trying to rationalize what that looks like. And, you know, our pipeline is more than doubled since we did the acquisition and we, and we see, you know, we see real interest in this. So I expect it, you know, we've, we talked about contribution being the minimum in in 2023, but as we go into 2024, I feel pretty confident about, you know, the level of interest and the activity that's that's going on with Learn. And as you talked about part of that seeding strategy is just starting to take hold in our customer base. And we believe that's going to drive even more pipeline.

Steve Daly: Super helpful caller, and maybe just one on parchment. I noticed from sort of looking at the company website that they've got a connection into the workforce, you know, industry organizations and enterprise organizations. Just curious if you think that this acquisition can help kind of close the loop on the strategy for, you know, Canvas student pathways and sort of bringing in those, those, you know, non-traditional learners upskilling them and then sort of validating those credentials.

Steve Daly: As they, as they go back into the workforce or try to, you know, find a new, new role is how we should think about maybe that a portion of this acquisition moving forward. That is exactly how you should think about it, Ryan. It does give us, you know, we talked about deeper relationships within the institutions that we play today, but it also creates connections with inside the workforce. So over time that that will become much more important part of the strategy that will become the opportunity for us to connect learning through the comprehensive learning record with, you know, outcomes and opportunity for the students long term. So yes, we're, we're very excited about the, you know, those relationships. Yes.

Unknown Executive: Great.

Unknown Executive: Thanks for the color.

Matt VanVliet: And we'll go next now to Matt VanVleet at BTIG. Good afternoon. Thanks for taking the question and the old's been been a pleasure working with you over the last couple of years. Maybe, maybe the last question just a little follow up on there. You know, how much of the conversations with customers, whether it's around catalog or some of the other omnichannel type approaches that you've been having Steve catalyze the need to maybe get the parchment deal done now, or, you know, highlighting maybe some of the product gaps that you had on the roadmap, but this helped accelerate.

Matt VanVliet: Yeah, you know, Matt, I don't, I'm not sure it changed necessarily the urgency of getting the deal done, you know, this is a, these are, you know, we have a very active M&A roadmap, we have an active engagement with a lot of different companies, we've, you know, we've, we've had conversations with parchment for over a year and a half as far as just, you know, understanding their business. You know, seeing if there's partnering opportunities, you know, but, you know, in order, you know, in order to get a deal done, both parties have to be ready for it.

Matt VanVliet: And so it's more, more of a function of them being ready, I think, then necessarily us feeling a need to fill fill a hole. Now, I will say that from my perspective, you know, from the management team's perspective, the conversations that we've had, you know, probably in the last nine months, the conversations we had at InstructureCon really have ramped up this concept of I've got to go figure out how to address these non traditional students.

Matt VanVliet: So I think the timing from that perspective is perfect because I, you know, we're hitting it at a time when the need is front of mind, the need is, you know, the pain is front of mind. And for our customer base. So I think, you know, it's, you know, it is, it is a great time for us to do this deal from just from a market timing perspective.

Matt VanVliet: Very helpful.

Matt VanVliet: And then just quickly one other follow up on some of the longer sales cycles. If you were to try to, you know, make your best estimate on when some of these deals that you're already working on eventually closed, is this starting to feel like it's again, you know, sort of the next summer buying cycle is more likely or some of these sort of happen in the interim. As you push forward and maybe the catalyst of some of those nontraditional opportunities gets these opportunities over the goal line before the next big buying season.

Matt VanVliet: Yeah, you know, that's, that's a tough one to try to call right now, you know, in international, this is our big quarter. And so we'll see how, you know, how deals matriculate, we'll have a better view kind of as we, as we meet again in Q1 to talk about 2024. I would say, you know, we still feel good about the deals that are getting done. We're winning, right? And we continue to gain share.

Matt VanVliet: And then, you know, we'll have to see as we go, as we go forward, whether this, you know, they decide to do these now, you know, there is a lot of impetus for them to kind of time these around their budget cycles around the school, you know, school year in North America, for instance. So we'll, we'll, you know, I don't, I don't have a, you know, you know, crystal ball right now, Matt, as far as when these will close, but. But I do, again, I do feel good about when they do come where, you know, we're in a great position to win them.

Unknown Executive: All right, great, thank you.

Noah Herman: Thank you, we're going to have to know a hermit at JP Morgan. Thanks, guys, for bringing me in here. It's been great working with you, Dale, really appreciated and look forward to working with you as well, Peter.

Steve Daly: Just wanted such a little bit on the international go to market partner program, just, you know, how far along are you on that? And how are you thinking about parchment learning to that strategy? Thanks. Yeah, so it is, you know, we've had some good wins from a partner program perspective, and we continue to kind of refine that model as we move forward. We do have some targeted countries that we're going after, you know, Philippines is one of those and we talked about the deal that we just won in the Philippines.

Steve Daly: We talked about some some in Japan as well. So, you know, I expect that to be again, it's where right now we're really focused on enabling. We're in a focus on the ability of our partners to support customers in region. And that's where a lot of our focus is. And, you know, I suspect that while the growth, the growth will be good, the dollars are small still in that space, and we'll, we'll, you know, we'll see that grow over time.

Steve Daly: So, so I think that's the other thing that, you know, the other thing that I would add is that it does, it does open up new markets for us, it does give us an opportunity to address some areas that. You know, that we, we've, you know, had some limitations. So, for instance, in the Philippines, we go direct and channel, but it gives us access to, you know, government contracts and relationships that we don't have.

Steve Daly: So we'll continue to use that as a, as a key growth driver, long term for us and believe that it'll, it's an integral partner part of our, our international strategy from the, from the parchment perspective. You know, we haven't modeled in any acceleration due to the part they're doing to do channel partners. It's an area that as we get into the integration as we get into really, you know, digging in with them together on the integration plans will evaluate in that, at that time. And so, but again, not built into any of our guidance or our, our, our models, frankly.

Steve Daly: Thank you.

David Lustberg: We'll take our final question from Brent Bill at Jeffries. Hey, thank you. This is David on for Brent. You know, a lot of talk around the non-traditional learner. I know this is probably a tough question to give, you know, a super clear answer on, but maybe, you know, if there's a help, if there's a helpful way to frame, you know, what percent of the business today comes from this, you know, non-traditional learner, assuming it's still fairly good.

Steve Daly: Really small. And would you expect that that can get to if we look at, you know, 10 years over time? Yeah, that is a great question, David. And, you know, we don't break out different, you know, the different segments per se. What I will say is the non-traditional learner, I mean, learning is still happening. Right. And what's changed over the last, you know, since really since the pandemic is that. Learners have become much more engaged in in the pathways that they wanted that they want to follow and pursue in our in their learning journey.

Steve Daly: And so we're seeing this is, you know, an opportunity to continue to drive growth across the business. It's an opportunity for our existing customers to address more students and historically they have, you know, a lot more students and they historically have. And, and it will be a long term growth driver for us as they as they work through their strategies.

Steve Daly: So, you know, we will it's growing mix spill early days, as you mentioned will, you know, but we will as we kind of turn the corner into 2024 and as we, you know, as we, we will get back to you with, you know, more details about parchment, more details about our long term growth and update our growth models in 2024. Gotcha. And maybe if I could just sneak in one more just quickly on the AI beta, if you just bring us, you know, my does bring us up the speed on on, you know, what you guys are experimenting with as it relates to AI and just, you know, any early feedback would be helpful. Thanks so much guys. Yeah.

Steve Daly: So this is exciting. We, you know, we're getting, we're getting real time feedback from our customers, those that are involved in those early beta's. There's a few areas that we're focused on. So one is course content and creation. So we have natural language models that will allow, you know, for instance, teachers to be able to create courses inside of canvas that allows us to be able to, you know, use natural language.

Steve Daly: You know, for instance, I wanted to have two columns on my, in my course, and I want these headers and that kind of stuff, as well as use it to create content like, you know, quiz questions and things like that. The second piece is around what we call semantic search. That is the ability to be able to, for students and teachers to be able to search across all content, all course content.

Steve Daly: And be able to do it in a way that they don't have to know exactly, you know, what, you know, what they're looking for. So, for instance, example, we used it in structure con was a student says, Hey, I remember my teacher talking about a mandolin and, and they didn't really they talked about the violin of painting by Picasso, it's able to kind of sort through using artificial intelligence to sort through and deliver a result from that perspective.

Steve Daly: Without having to use all the, you know, Boolean logic and all that kind of stuff. And then the third is to be able to use natural language processing for analytics so that so that administrators and teachers can can, you know, naturally go in and say, Hey, I want to see which students are struggling with this. It's able to create, create, organize the data in a way that they can use it for that show me all the students that have, you know, that are, you know, have missed four assignments, you know, that kind of engagement. Again, the goal really here is to make lives simpler and easier for teachers is where we start as well as make it more intuitive for administrators and learners as well.

Steve Daly: So those are the areas that we're really experimenting in right now, David.

Unknown Executive: Thank you, that is all the time we have questions this afternoon. Mr. Daly, I'd like to hand things back to you for your closing comments. Well, thank you for joining us everybody and Peter, once again, welcome to the team as our incoming CFO, you know, we're excited about adding parchment to Instructure, you know, we believe it's going to help drive new growth and opportunity. While matching or improving our profitability over time, combined with another solid quarter of execution, we continue to believe we are unlocking the value of technology and educational teachers and learners alike.

Unknown Executive: So we will continue to drive balanced growth and profitability for you, our investors, and we look forward to connecting you with you next quarter. Thanks, everyone. Thank you, Mr. David. Ladies, you, Joe Matt will conclude Instructure's third quarter 2023 earnings call. Thank you all so much for joining us and wish you all a great remainder of your day. Goodbye. Please wait.

Unknown Executive: The conference will begin shortly.