Q4 2023 Instructure Holdings Inc Earnings Call

Operator: www.instructure-hldg.com Ladies and gentlemen, thank you for standing by, and welcome to Instructure's fourth quarter and full year 2023 earnings call. At this time, all participants are in a listen-only mode.

Okay.

Ladies and gentlemen, thank you for standing by and welcome to in structures fourth quarter and full year 'twenty two 'twenty three earnings call.

At this time all participants are in a listen only mode.

Operator: After the speaker's presentation, there will be a question and answer session. Please be advised that this conference is being recorded. I would now like to turn the conference over to your first speaker, April See. Investor Relations, April, please go ahead. Good afternoon, and welcome to Instructure's fourth quarter and full year 2023 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me are Instructure's Chief Executive Officer, Steve Daley, and Chief Financial Officer, Peter Walker.

The speaker's presentation, there will be a question and answer session. Please be advised that this conference is being recorded I would now like to turn the conference over to your first Speaker April see Investor Relations April. Please go ahead.

Good afternoon, and welcome to your instructors fourth quarter and full year 2023 earnings call. We will be discussing the results announced in our press release issued after the market closed today with me are restructured Chief Executive Officer, Steve Daly, and Chief Financial Officer, Peter Walker before we begin I'd like to remind you that today's conference call will include forward looking statements based on the comps.

April See: 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 actual 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 our annual report on Form 10-K, as well as other reports and filings we file from time to time with the Securities and Exchange Commission. All of our statements are made as of today, based on information available to us today, and, except as required by law, we assume no obligation to update any such statement. During the call, we will also refer to both GAAP and non-GAAP financial measures. You can find the reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted in the investor relations section of the website. All of the non-revenue financial measures we discussed today are non-GAAP unless we state that the measure is a GAAP measure.

<unk> current expectations. These forward looking statements are subject to a number of significant risks and uncertainties and our actual results may differ materially for a discussion of factors that could affect our future financial results and business. Please refer to the disclosure in today's earnings release, and our annual report on Form 10-K, as well as other reports and filings we file from time to time with the Securities and Exchange Commission.

All of our statements are made as of today based on information available to us today and except as required by law, we assume no obligation to update any such statements. During the call. We will also refer to both GAAP and non-GAAP financial measures you can find a reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted to the Investor Relations section of our website all of the non revenue financial.

As we discussed today are non-GAAP, unless we state that the measure.

Steve Daley: With that, let me turn the call over to April. Thank you, April, and thank you all for joining us for our fourth quarter and full year 2023 earnings conference call. With the successful close of the parchment acquisition in early February, I'm also delighted to extend a warm welcome to our newest team members. Parchment will maintain separate operations in 2024 as we align go-to-market strategies and resources to ensure a seamless transition for our customers.

Is that a GAAP measure.

Let me turn the call over to Steve.

Thank you April and thank you all for joining us for our fourth quarter and full year 2023 earnings conference call.

With the successful close of parchment acquisition in early February I'm also delighted to extend a warm welcome to our newest team members parchment will maintain separate operations in 2024, as we aligned go to market strategies and resources to ensure a seamless transition for our customers in the interim we are extremely excited to begin.

Steve Daley: In the interim, we are extremely excited to begin executing the opportunities Parchment offers for driving growth and fostering innovation. I'd like to begin today's earnings call by reflecting on the key milestones and achievements that shaped Instructure's journey in 2023 and set the stage for our future growth. We continue to strengthen our executive leadership team, bringing in four new leaders, each with more than two decades of experience leading scaled organizations. President and COO Chris Ball will unite our go-to-market and accelerate our platform and cross-sell efforts.

Executing the opportunities parchment offers for driving growth and fostering innovation.

I'd like to begin today's earnings call by reflecting on the key milestones and achievements that shaped instructions journey in 2023 and set the stage for our future growth. We continued to strengthen our executive leadership team, bringing in four new leaders each with more than two decades of experience, leading scaled organizations, president and COO Chris ball.

All to unite our go to market and accelerate our platform and cross sell efforts CFO.

Steve Daley: CFO Peter Walker to elevate our public market expertise; CTO Michael Lycett to expand our web-scale technology platform; and Chief Customer Experience Officer Rachel Orsten to grow our customer success programs efficiently and deepen our strategic relationships with our customers. We also continue to innovate across our platform, including developing artificial intelligence solutions with our customers that we believe are safe, cost-effective, and can provide immediate value. Several of our AI solutions entered beta in Q4, and feedback has been positive as we continue to refine where our investments will have the highest impact for teachers, students, and leaders. We further strengthened our competitive moat and amplified the power of network effects, ending 2023 with more than 8,000 customers, up roughly 9% year over year, as we continue to win important new logos. Additionally, more than 900 partners, up nearly 20% year over year, as other edtech providers recognize the power of our massive customer base. And over 2 million Instructure community members, up nearly 20% year over year, further enhancing a feedback loop to drive innovation, product development, and user engagement.

CFO, Peter Walker to elevate our public market expertise.

CTO, Michael likes it to expand our web scale technology platform and chief customer experience officer, Rachel Austin to grow our customer success programs efficiently and deepen our strategic relationships with our customers.

We also continue to innovate across our platform, including developing artificial intelligence solutions with our customers that we believe are safe cost effective and can provide immediate value.

Several of our AI solutions entered beta in Q4 and feedback has been positive as we continue to refine where investments will have the highest impact for teachers students and leaders. We further strengthened our competitive moat and amplify the power of network effects, ending 2023 with more than 8000 customers up roughly 9% year over year.

As we continue to win important new logos.

More than 900 partners up nearly 20% year over year as other Ed Tech providers recognize the power of our massive customer base and over 2 million in structure community members up nearly 20% year over year further enhancing a feedback loop to drive innovation product development and user engagement.

Steve Daley: We continue to expand our leading market share position in both higher education and K-12, according to EduTechnica and ListEdTech data. We executed our M&A strategy to expand our served markets to gain access to new budgets and buyers and accelerate our roadmap serving the credentials market through the acquisition of parts. We published our inaugural Environmental, Social, and Governance (ESG) report, live now on our website, highlighting our commitment to ESG principles and our dedication to fostering a sustainable future that delivers enduring value for all stakeholders.

We continue to expand our leading market share position in both higher education and K 12. According to edgy Technica enlisted tech data, we executed our M&A strategy to expand our served markets to gain access to new budgets and buyers and accelerate our roadmap serving the credentials market through the acquisition of parchment.

We published our inaugural environmental social and governance report live now on our website, highlighting our commitment to ESG principles and our dedication to fostering a sustainable future that delivers enduring value for all stakeholders.

Steve Daley: We surpassed the long-term margin targets we established in 2021, demonstrating best-in-class operational efficiency and financial discipline. And overall, we continued to execute on the promises we made when we IPOd, demonstrating an unrelenting dedication to our mission and highlighting the strength of our model. We could not be more pleased with this progress and the opportunity that we have heading into 2024 and beyond. I will now provide a high-level review of the fourth quarter and full year 2023 results, discuss the drivers of these results, and outline our 2024 priorities. Peter will then detail our results and provide guidance for the first quarter and full year 2024. In the fourth quarter, the company delivered $135.4 million in revenue, up 88.5% year-over-year, including subscription growth of 9.5%.

We surpassed the long term margin targets, we established in 2021, demonstrating best in class operational efficiency and financial discipline and overall, we continue to execute on the promises we made when we IPO demonstrating an unrelenting dedication to our mission and highlighting the strength of our model, we could not be more pleased with this progress and the opportunity that we.

Heading into 2024 and beyond.

I'll now provide a high level review of the fourth quarter and full year 2023 results discuss the drivers of these results and outline our 2024 priorities. Peter will then detail our results and provide guidance for the first quarter and full year 2024.

In the fourth quarter, the company delivered $135 $4 million in revenue up 88, 5% year over year, including subscription growth of nine 5%.

Steve Daley: At the same time, we drove 270 basis points of adjusted EBITDA margin expansion to 41.7%, ahead of our long-term target and demonstrating the leverage we have in our business model. Continued exceptional results were driven by our increasing competitive advantage from our comprehensive platform strategy, strong execution, and the formidable cash flow we generate and reinvest in high-growth initiatives. From a macro perspective, our end markets remain resilient and durable.

At the same time, we drove 270 basis points of adjusted EBITDA margin expansion to 41, 7% ahead of our long term target and demonstrated the leverage we have in our business model.

Continued exceptional results were driven by our increasing competitive advantage from our comprehensive platform strategy strong execution in the formidable cash flow, we generate and reinvest behind high growth initiatives.

From a macro perspective, our end markets remain resilient and durable as we mentioned last quarter. We continued to see an elongation of sales cycles and higher education markets around the world. This is temporarily temporarily impacting growth, but in the long term, we believe our customers have an opportunity to educate more students by serving nontraditional learners and they're looking to us.

Steve Daley: As we mentioned last quarter, we continue to see an elongation of sales cycles in higher education markets around the world. This is temporarily impacting growth, but in the long term, we believe our customers have an opportunity to educate more students by serving nontraditional learners, and they are looking to us to help fill this need. This long-term trend toward nontraditional learning is expected to significantly expand our available market and result in accelerating growth in higher education in the years to come. K-12 markets continue to be resilient as stimulus funding is available this buying season.

To help fill this need this long term trend toward non traditional learning is expected to significantly expand our available market and result in accelerated growth in higher education in the years to come K 12 markets continued to be resilient as stimulus funding is available. This buying season, we have seen increased interest in our Ed Tech management solutions anchored by our learned plaque.

Form an easy soft acquisitions as districts actively evaluate their software investments and demand out positive outcomes from them our suite of solutions in key position in the classroom, we're continuing to drive durable growth in this market segment that we will share highlights from the quarter incurred including four key drivers key competitive wins and new low.

Steve Daley: We have seen increased interest in our EdTech management solutions, anchored by our Learn platform and EasySoft acquisitions, as districts actively evaluate their software investments and demand positive outcomes from them. Our suite of solutions and key position in the classroom will continue to drive durable growth in this market segment. Now, we'll share highlights from the quarter, including four key drivers, key competitive wins and new logo acquisitions, continued progress driving cross-sell and increasing take rates of our platform offerings, the expansion of our platform strategy, and how we continue to drive increased operational efficiency. First, we continue to bring in important new logos, winning more than our fair share of competitive bake-offs due to the breadth and strength of our portfolio offerings. As a result, we have been able to continue driving growth.

<unk> acquisitions continued progress driving cross sell and increasing take rates of our platform offerings. The expansion of our platform strategy and how we continue to drive increased operational efficiency.

First we continued to bring in important new logos, winning more than our fair share of competitive bake offs due to the breadth and strength of our portfolio offerings. As a result, we've been able to continue driving growth during the quarter. We achieved a significant new logo win with George Mason University, the largest public University in Virginia renowned for its dedication.

Two educational modernization.

This competitive takeaway followed a rigorous RFP process and underscores the positive network effects and structure derives from focusing on the lifelong learning journey and structure is established presence in other Virginia.

Maryland D C institutions and the high percentage of G. M use students and professors already familiar with canvas helped secure the win.

Steve Daley: During the quarter, we achieved a significant new logo win with George Mason University, the largest public university in Virginia, renowned for its dedication to educational modernization. This competitive takeaway followed a rigorous RFP process and underscores the positive network effects Instructure derives from focusing on the lifelong learning journey. Instructure's established presence in other Virginia, Maryland, and D.C. institutions and the high percentage of GMU students and professors already familiar with Canvas help secure the win.

Internationally, we continue to replace outdated legacy systems with our cutting edge platform during the quarter, including our win with the University of Manchester The Uk's largest physical University ranked in the top 50 globally for academics, our ability to offer the university a comprehensive platform solution that could position them as a leader in flare.

<unk> lifelong learning enabled us to displace a 10 plus year relationship with an entrenched competitor.

This win also illustrated how we are landing larger in this case with a full platform sale. This win will also be a lighthouse for other universities in the region given their size and reputation.

Steve Daley: Internationally, we continue to replace outdated legacy systems with our cutting-edge platform during the quarter, including our win with the University of Manchester, the UK's largest physical university, ranked in the top 50 globally for academics. Our ability to offer the university a comprehensive platform solution that could position them as a leader in flexible, lifelong learning enabled us to displace a 10-plus year relationship with an entrenched competitor. This wind also illustrated how we are landing larger, in this case with a full platform sail.

Second we continue to drive growth with existing customers during the quarter, we saw a 49% year over year increase in cross border Cross sell bookings, we estimate that excluding parchment cross sell opportunities could reach $1 billion in our existing customer base alone in structure is well positioned to cross sell additional platform modules in <unk>.

Our huge installed base of 8000, plus global customers since 90% of instructional workflows are facilitated by an LMS.

During the quarter, we won the largest higher education credential deals in our history with the Louisiana Board of rate regions, which represent the entire public University system in Louisiana.

Steve Daley: This wind turbine will also be a lighthouse for other universities in the region, given their size and reputation. Second, we continue to drive growth with existing customers. During the quarter, we saw a 49% year-over-year increase in cross-sell bookings. We estimate that, excluding parchment, cross-sell opportunities could reach $1 billion in our existing customer base alone. Instructure is well positioned to cross-sell additional platform modules into our huge installed base of 8,000-plus global customers since 90% of instructional workflows are facilitated by an LMS. During the quarter, we won the largest higher education credential deal in our history with the Louisiana Board of Regents, which represents the entire public university system in Louisiana. This system includes 31 campuses across four university systems.

This system includes 31 campuses across four University systems there.

And their purchase of a unified digital credentialing contract in aligns with their target of having 60% of all working age adults in Louisiana hold a degree or higher value credential by 2030.

The wind showcases our strengths in serving nontraditional learning and reflects a broad industry trend towards credentialing with global enterprises prioritizing skills proficiency and easing degree requirements for some roles.

Although this isn't an structure credentials deal. It also helps validate the meaningful parkman opportunity we see ahead.

We also had a significant K 12 win.

With Cabarrus County schools in North Carolina, This long time.

Canvas customer began evaluating learn platform during the first half of 'twenty twenty-three and chosen structure during the quarter to help them comply with Ed Tech and data privacy legislation from the state of North Carolina, we're able to win with Kibera due to a tailored approach that helps streamline their compliance with North Carolina state legislation.

Steve Daley: Their purchase of a Unified Digital Credentialing Contract aligns with their target of having 60% of all working-age adults in Louisiana hold a degree or higher value credential by 2030. The wind showcases our strengths in serving nontraditional learning and reflects a broad industry trend toward credentialing with global enterprises prioritizing skills proficiency and easing degree requirements for some roles. Although this is an Instructure Credentials deal, it also helps validate the meaningful parchment opportunity we see ahead. We also had a significant K-12 win with Cabarrus County Schools in North Carolina.

This win will be a pivotal reference for other North Carolina schools as each addresses the new legislation over the next few months.

Third.

The power of our platform strategy continued to progress in Q4 through acquisition partnerships and innovation our acquisition of parchment was announced in Q4 and closed at the beginning of February bolstering our instructor learning platform scale and reach as we engage learners throughout their lifelong learning journey, our combined solutions will facilitate.

Steve Daley: This long-term Canvas customer began evaluating Learn Platform during the first half of 2023 and chose Instructure during the quarter to help them comply with edtech and data privacy legislation from the state of North Carolina. We were able to win with Kiberis due to a tailored approach that helped streamline their compliance with North Carolina state legislation. This win will be a pivotal reference for other North Carolina schools as each addresses the new legislation over the next few months. 3rd

Evidence of learning and streamline the educational process for educators and learners. During key transitions. In addition to accelerating our strategy to reach non traditional learners Christmas relationships with new buyers also bring fresh opportunities into our traditional customer base with an estimated $2 million expansion of our total addressable market.

In our high quality revenue stream with significant growth potential.

As mentioned earlier, our partner ecosystem continues to grow to more than 900 partners at the end of 2023 up nearly 20% year over year and it is a key differentiator for us in the selling process.

Steve Daley: The power of our platform strategy continued to progress in Q4 through acquisition, partnerships, and innovation. Our acquisition of Parchment was announced in Q4 and closed at the beginning of February, bolstering our Instructure Learning Platform's scale and reach as we engage learners throughout their lifelong learning journey. Our combined solutions will facilitate evidence of learning and streamline the educational process for educators and learners during key transitions.

Our recent case study with Clemson University, and Praxis AI virtual tutor demonstrates the power of the <unk> structure learning platform ecosystem to bring new technologies like AI to our customers quickly and safely.

We continue to expand our platform capabilities through organic innovation, including the launch of AI based capabilities to select customers. During the second half of the year that help with course in content creation semantic search and natural language driven learning analytics. We also had a big win in K 12 during the quarter with a prominent nonprofit organization.

Steve Daley: In addition to accelerating our strategy to reach non-traditional learners, Parchment's relationships with new buyers also bring fresh opportunities to our traditional customer base, with an estimated $2 billion expansion of our total addressable market and a high-quality revenue stream with significant growth potential. As mentioned earlier, our partner ecosystem continues to grow to more than 900 partners at the end of 2023, up nearly 20% year over year, and it is a key differentiator for us in the selling process. Our recent case study with Clemson University and Praxis AI Virtual Tutor demonstrates the power of the Instructure Learning Platform ecosystem to bring new technologies like AI to our customers quickly and safely.

They needed to replace a homegrown solution with a more adaptable comprehensive platform that could enhance and accelerate their ability to support accessibility enable customization integrate important third party applications and modernize assessment simply put in structures lending platform enabled them to innovate on canvas through integrations.

And development, putting its structure at the core of teaching and learning across our schools.

And finally, our results this quarter once again demonstrated our ability to drive operating leverage in the business. We've delivered best in class margins.

And strong cash flow conversion, which Peter will discuss in more detail shortly with adjusted gross margin approaching 80% and adjusted EBITDA margins exceeding 40% our free cash flow generation should enable us to continue investing both organically and through M&A to drive long term durable growth as we look ahead to 'twenty 'twenty four and beyond.

Steve Daley: We continue to expand our platform capabilities through organic innovation, including the launch of AI-based capabilities to select customers during the second half of the year that help with course and content creation, semantic search, and natural language-driven learning analytics. We also had a big win in K-12 during the quarter with a prominent non-profit organization that needed to replace their home-grown solution with a more adaptable, comprehensive platform that could enhance and accelerate their ability to support accessibility, enable customization, integrate important third-party applications, and modernize assessment. Simply put, Instructure's learning platform enabled them to innovate on Canvas through integrations and development, putting Instructure at the core of teaching and learning across their school.

And we have unwavering confidence that the instruction learning platforms unique advantages address the intercom challenges posed by today's educational landscape. Our strategic focus will remain centered on several key growth pillars first harness our enhanced go to market function to propel platform growth and foster cross selling opportunities.

Can accelerate our efforts to displace legacy technology in international markets third assist new and existing customers to meet the needs of non traditional learners fourth leverage our platform technology to create new revenue opportunities and further embed in structure as critical infrastructure for teaching and learning and finally remain at the forefront of AI and other innovations to draw.

Student success, both inside and outside the classroom.

Deploying these strategies, we believe we will increase our moat within Ed Tech ecosystem and help ensure durable growth across all segments in summary, I am confident and optimistic about our business as we head into 2024 and beyond we will talk much more about our roadmap and long term financial model during our March 12th.

Steve Daley: And finally, our results this quarter once again demonstrated our ability to drive operating leverage in the business. We've delivered best-in-class margins and strong cash flow conversion, which Peter will discuss in more detail shortly. With adjusted gross margin approaching 80% and adjusted EBITDA margins exceeding 40%, our free cash flow generation should enable us to continue investing both organically and through M&A to drive long-term, durable growth. As we look ahead to 2024 and beyond, we have unwavering confidence that the Instructure Learning Platform's unique advantages address the intricate challenges posed by today's educational landscape.

Yesterday, and we hope you will join US for this discussion I will now turn the call over to Peter to talk about our financial results and guidance.

Thank you, Steve and good afternoon, everyone before discussing detailed financial results I'd like to point out that in addition to our GAAP results I'll be discussing certain non-GAAP results, our GAAP financial results along with a reconciliation between GAAP and non-GAAP results can be found in our earnings release, which is posted in the Investor Relations section of our web.

Steve Daley: Our strategic focus will remain centered on several key growth pillars. First, harness our enhanced go-to-market function to propel platform growth and foster cross-selling opportunities. Second, accelerate our efforts to replace legacy technology in international markets. Third, assist new and existing customers to meet the needs of nontraditional learners.

Right.

During 2023, we set a new company record for annual revenues of $532 million. This was an 11, 6% increase over 2022, which was impacted by a currency headwind of 80 basis points. We're very proud of these results, which we deliver due to continued share gains as the platform.

Steve Daley: Fourth, leverage our platform technology to create new revenue opportunities and further embed Instructure as critical infrastructure for teaching and learning. And finally, remain at the forefront of AI and other innovations to drive student success both inside and outside the classroom. By deploying these strategies, we believe we will increase our moat within the edtech ecosystem and help ensure durable growth across all segments. In summary, I am confident and optimistic about our business as we head into 2024 and beyond. We will talk much more about our roadmap and long-term financial model during our March 12th Investor Day, and we hope you will join us for this discussion. I will now turn the call over to Peter to talk about our financial results and guidance. Thank you, Steve, and good afternoon, everyone.

Of choice for institutions around the world.

We also achieved a new company record for adjusted EBITDA of $214 2 million or 19, 3% increase over 2022.

We expanded adjusted EBITDA margin 270 basis points, delivering our full year 2023, adjusted EBITDA margin of 44%.

2023, adjusted Unlevered free cash flow was $225 5 million or 29, 9% increase over 2022.

This exceeded our expectations, partially driven by approximately $12 million of early collections related to 2024.

Turning now to Q4, we continued to deliver a combination of strong revenue growth and best in class margins as Steve mentioned, we generated fourth quarter 2023 total revenue of $135 4 million. This was an eight 5% increase year over year impacted by a minor foreign currency headwind.

Peter Walker: Before discussing the detailed financial results, I'd like to point out that, in addition to our GAAP results, I'll be discussing certain non-GAAP results. Our GAAP financial results, along with the 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. During 2023, we set a new company record for annual revenues of $530.2 million. This was an 11.6% increase over 2022, which was impacted by a currency headwind of 80 basis points. We're very proud of these results, which we deliver due to continued share gains as the platform of choice for institutions around the world. We also achieved a new company record for adjusted EBITDA of $214.2 million, a 19.3% increase over 2022. We expanded the adjusted EBITDA margin by 270 basis points, delivering a full year 2023 adjusted EBITDA margin of 40.4%. 2023 Adjusted Unlevered Free Cash Flow was $225.5 million, a 29.9% increase over 2022.

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Subscription and support revenue accounted for 93% of our fourth quarter revenues at $125 4 million up nine 5% year over year, which was impacted by a 30 basis point headwind from currency.

Professional services and other revenue accounted for 7% of our fourth quarter revenue of $10 million down one 7% year over year, which was impacted by 10 basis points of currency headwinds. The decline was primarily driven by lower international services revenue as we evolve our channel distribution and international growth.

Kits.

Deferred revenue at the end of fourth quarter was $302 7 million up four 6% year over year remaining performance obligations or our P. O at the end of the fourth quarter were $833 5 million up 10% year over year, and we expect to recognize revenue on approximately 75% of <unk>.

P O over the next 24 months the higher RPM growth rate is driven by deals with later start date, so will benefit future billings and revenue.

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

Peter Walker: This exceeded our expectations, partially driven by approximately 12 million early collections related to 2024. Turning now to Q4, we continue to deliver a combination of strong revenue growth and best-in-class margin. As Steve mentioned, we generated fourth quarter 2020-23 total revenue of $135.4 million. This was an 8.5% increase year over year impacted by a minor foreign currency headwind. Subscription and support revenue accounted for 93% of our fourth quarter revenues at 125.4 million, up 9.5% year over year, which was impacted by a 30 basis point headwind from currency. Professional services and other revenue accounted for 7% of our fourth quarter revenues at $10 million, down 1.7% year-over-year, which was impacted by 10 basis points of currency headwind. The decline was primarily driven by lower international services revenue as we evolve our channel distribution and international growth markets.

Our gross margin profile remains very strong given our efficient cloud architecture at our flexible support structure the scales to meet customer demand in the fourth quarter. Our gross profit was $105 7 million, representing a gross margin of 78, 1% up 60 basis points year over year.

Our operating leverage in the business remains strong, allowing us to continue expanding margins as we scale total operating expenses were $50 3 million approximately the same as prior year.

Operating expenses as a percent of revenue were 37, 2% an improvement of 310 basis points over prior year.

non-GAAP operating income for the fourth quarter was 506.

Hi, Phil.

$55 4 million, resulting in a 49% operating margin an improvement of 360 basis points over prior year adjusted.

Adjusted EBITDA for the quarter was $56 5 million, resulting in a 41, 7% adjusted EBITDA margin an improvement of 270 basis points over prior year. These results demonstrate the power and efficiency of our model.

Peter Walker: Deferred revenue at the end of the fourth quarter was $302.7 million, up 4.6% year-over-year. Remaining Performance Obligations, or RPO, at the end of the fourth quarter were $833.5 million, up 10% year-over-year, and we expect to recognize revenue in approximately 75% of our RPO over the next 24 months. The higher RPO growth rate is driven by deals with later start dates, which will benefit future billings and revenue. In discussing the remainder of the income statement, please note that, unless otherwise stated, all references to our expenses, operating results, and share counts are on a non-GAAP-based basis.

non-GAAP net income in the fourth quarter was $33 2 million or non-GAAP net income of 23 cents per share compared to $28 4 million or <unk> 20 per share a year ago.

Turning to the balance sheet and cash flow statement, we ended fourth quarter with $344 2 million in cash cash equivalents and restricted cash. This is an increase of $153 9 million over prior year. Our strong cash generation is driven by a favorable billing terms and low capital expenditures we ended the year.

With net leverage of 0.7 times net debt to adjusted EBITDA, a full point lower than year end 2022.

Operating cash flow in the fourth quarter was $36 7 million compared to $17 million in the fourth quarter of 2022.

Peter Walker: Our gross margin profile remains very strong given our efficient cloud architecture and our flexible support structure that scales to meet customer demand. In the fourth quarter, our gross profit was $105.7 million, representing a gross margin of 78.1% of 60 basis points year-over-year. Our operating leverage in the business remains strong, allowing us to continue expanding margin as we scale. Total operating expenses were $50.3 million, approximately the same as the prior year.

Free cash flow was $35 5 million in the fourth quarter compared to $15 7 million in the fourth quarter of 2022.

Our adjusted Unlevered free cash flow was $51 3 million in the fourth quarter compared to $29 3 million in the fourth quarter of 'twenty two.

As Steve mentioned, we closed our acquisition of Parkman parchment, as a profitable company with high quality recurring revenue and strong cash flow conversion as we have consistently communicated M&A is an important part of our strategy to drive long term durable growth.

Peter Walker: Operating expenses as a percent of revenue were 37.2%, an improvement of 310 basis points over the prior year. Non-GAAP operating income for the fourth quarter was $55.4 million, resulting in a 40.9% operating margin and an improvement of 360 basis points over the prior year. Adjusted EBITDA for the quarter was $56.5 million, resulting in a 41.7% adjusted EBITDA margin, an improvement of 270 basis points over the prior year. These results demonstrate the power and efficiency of our model. Non-GAAP net income in the fourth quarter was $33.2 million, or non-GAAP net income of $0.23 per share compared to $28.4 million or $0.20 per share a year ago. Turning to the balance sheet and cash flow statement. We ended the fourth quarter with $344.2 million in cash, cash equivalents, and restricted cash.

We have a strong track record of successfully integrating acquired companies completing six integrations in the last four years and we have confidence we'll execute similarly with parchment.

We financed the acquisition with cash and incremental debt of 685 million under our existing credit facility. Our net leverage ratio at year end 'twenty 'twenty four is expected to be approximately 3.4 times net debt to adjusted EBITDA, We expect to Delever rapidly as we continue to grow adjusted EBITDA in January.

Our cash flow our capital allocation priorities remain unchanged since our IPO investing in organic revenue growth pursuing M&A and maintaining a healthy balance sheet.

I will conclude the call by providing guidance for Q1 and for full year 2024, we have provided additional guidance details in our earnings press release, given the timing of when parchment closed our first quarter 'twenty 'twenty four guidance includes two months of parchment results and our full year guidance includes 11 months of Parkman results.

For the first quarter of 'twenty 'twenty four we expect revenue in a range of $153 8 million to $154 8 million a growth rate of 19, 8% at the midpoint, we expected adjusted EBITDA in the range of $57 3 million to $58 3 million.

Peter Walker: This is an increase of $153.9 million over the prior year. Our strong cash generation is driven by our favorable billing terms and low capital expenditures. We ended the year with net leverage of 0.7x net debt to adjusted EBITDA, a full point lower than year-end 2022. Operating cash flow in the fourth quarter was $36.7 million, compared to $17 million in the fourth quarter of 2022. Free cash flow was $35.5 million in the fourth quarter, compared to $15.7 million in the fourth quarter of 2022. Our adjusted unlevered free cash flow was $51.3 million in the fourth quarter, compared to $29.3 million in the fourth quarter of 2022.

Representing an adjusted EBITDA margin of 37, 4% at the midpoint.

For full year 'twenty 'twenty four we expect revenue in the range of $655 million to $665 million or a growth rate of 24, 5% at the midpoint.

It's important to note the pro forma annual recurring revenue for the combined in structure in parts of that business grew in the high single digits 2022 to 2023 and we expect similar high single digit growth 2023 to 'twenty 'twenty four we view annual recurring revenue is the best predictor of future revenue.

Peter Walker: As Steve mentioned, we closed our acquisition of Parchment. Parchment is a profitable company with high-quality recurring revenue and strong cash flow conversion. 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, and we have confidence we'll execute similarly with Parchment. We financed the acquisition with cash and incremental debt of $685 million under our existing credit facility.

We expect full year adjusted EBITDA in the range of $266 5 million to $271 5 million, representing an adjusted EBITDA margin of 48% at the midpoint expanding margins by 40 basis points year over year.

We expect full year adjusted Unlevered free cash flow in the range of $259 5 million to $264 5 million a growth rate of 16% at the midpoint.

This growth rate is 28, 3% when adjusted for the $12 million of collections in 2023 related to 'twenty 'twenty four that I mentioned earlier, we expect the seasonality of 'twenty 'twenty four adjusted Unlevered free cash flow to be slightly different than prior years due to the acquisition of parchment.

Peter Walker: Our net leverage ratio at year-end 2024 is expected to be approximately 3.4 times net debt to adjusted EBIT. We expect to de-lever rapidly as we continue to grow adjusted EBITDA and generate cash flow. Our capital allocation priorities remain unchanged since our IPO, investing in organic revenue growth, pursuing M&A, and maintaining a healthy balance sheet. I will conclude the call by providing guidance for Q1 and for full year 2024. We have provided additional guidance details in our earnings press release. Given the timing of when Parchment closed, our first quarter 2024 guidance includes two months of Parchment results, and our four year guidance includes 11 months of Parchment results. For the first quarter of 2024, we expect revenue in the range of $153.8 million to $154.8 million, a growth rate of 19.8% at the midpoint. We expect adjusted EBITDA in the range of $57.3 million to $58.3 million, representing an adjusted EBITDA margin of 37.4% at the midpoint.

The first half of 'twenty 'twenty four should be 4% higher in the second half of 'twenty 'twenty four should be 4% lower when compared to 'twenty twenty-three patterns. It's.

As Steve mentioned, we have all of you will join us at our inaugural Investor Day on March 12, we will update you on our future business and share new midterm financial targets.

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

Thank you if you would like to ask a question. Please press star followed by the number one on your telephone keypad will pause for a moment to compile the Q&A roster.

Your first question comes from the line of Joe <unk> from Baird. Please go ahead.

Okay.

Great. Thank you for taking my question, maybe just a clarification to start.

The impacts on growth that youre discussing in kind of the longer deal cycles is that still centered primarily within the higher Ed business and should we think about K through 12, ultimately growing faster and really not seeing a commensurate slowdown.

Peter Walker: For full year 2024, we expect revenue in the range of $655 to $665 million, or a growth rate of 24.5% at the midpoint. It's important to note the pro forma annual recurring revenue for the combined Instructure and Parchment business grew in the high single digits from 2022 to 2023, and we expect similar high single-digit growth from 2023 to 2024. We view annual recurring revenue as the best predictor of future revenue. We expect full-year adjusted EBITDA in the range of $266.5 million to $271.5 million, representing an adjusted EBITDA margin of 40.8% at the midpoint, expanding margins by 40 basis points year-over-year. We expect full-year adjusted unlevered free cash flow in the range of $259.5 million to $264.5 million, a growth rate of 16% at the midpoint.

Yeah, Joe It's a good question those comments were specifically about higher Ed globally.

And to your point, we we feel what we feel good about the backdrop in K 12 is particularly in this buying season, when there's still a lot of essar dollars out there.

And so so.

Yes is the short answer to your question that the higher Ed slowdown that we're seeing is is entirely in a N a.

In higher Ed.

Okay.

Okay. That's helpful. And then you also made the comment that you think coming out of it as higher Ed growth can be actually faster growth can accelerate and that's a reflection of how the platform has evolved and how your survey more non traditional learners are today.

When you talk about faster growth and acceleration can you maybe put some guardrails around that I think in the past you frame kind of the all in North America business as being a high single digit grower.

Peter Walker: This growth rate is 28.3% when adjusted for the 12 million collections in 2023 related to 2024 that I mentioned earlier. We expect the seasonality of 2024 Adjusted Unlevered Free Cash Flow to be slightly different from prior years due to the acquisition of parts. The first half of 2024 should be 4% higher, and the second half of 2024 should be 4% lower when compared to 2023. As Steve mentioned, we hope all of you will join us at our inaugural Investor Day on March 12th, where we'll update you on the future of business and share new midterm financial targets. That concludes our prepared remarks. At this time, Operator, please open the line for questions. Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad.

You're saying given how the platform has evolved and certainly the incorporation of parchment.

It should be something better in the future.

Yeah, It's it's a it's a good question I'm going to.

Part of my answer is going to punt on this one Joe till our Investor Day, where we'll go into a lot more detail about the segments and where we're at just as far as what's driving the growth what I would what the the tenor of those comments is that as we as higher Ed today is dealing with you know a few macro challenges.

Like declining enrollments.

The number of available learners is much larger than traditionally they have addressed through traditional education and so it is a much larger tam it's a much it's growing a lot faster.

And that's kind of the backdrop that we've you know that we feel we feel good about the ability to kind of accelerate growth in higher Ed worldwide not just in North America, but we'll we'll go into a lot more detail in our Investor day.

Operator: We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Joe Vruwink from Baird. Please go ahead.

Steve Daley: Great. Thank you for taking my question. Maybe just a clarification to start, the impacts on growth that you're discussing and kind of the longer deal cycles, is that still centered primarily within the higher education business? And should we think about K through 12 ultimately growing faster and really not seeing a commensurate slowdown? Yeah, Joe, it's a good question. Those comments were specifically about higher education globally.

I can give you a little more context for that.

And I would say that she.

As Steve pointed out will cover more detail at Investor day, but we believe that long term, we will continue to be a high single digit to low double digit grower.

Grower in terms of revenue.

Okay.

Great I will stick around wanting more and look forward to that update in a few weeks thanks very much.

Your next question comes from the line of Stephen Sheldon from William Blair. Please go ahead.

Hey, Thanks for taking my questions. Firstly can you walk through what you've layered into the guidance for PARP Schmidt powertrain as I think you noted that you expect high single digit revenue growth for both parchment ampere and structure Standalone. This year. So is that fair and then and then how should we think about the adjusted EBITDA and locations for partially for the year.

Steve Daley: And to your point, we feel good about the backdrop in K-12, particularly in this buying season when there's still a lot of ESSER dollars out there. And so, yes, that is a short answer to your question. The higher education slowdown that we're seeing is entirely in higher education. Okay, that's helpful.

Yeah.

Sure. Thanks for the question Stephen.

Steve Daley: And then you also made the comment that coming out of this higher ed growth, there can actually be faster growth and acceleration, and that's a reflection of how the platform has evolved and how you're serving more non-traditional learners today. When you talk about faster growth and acceleration, can you maybe put some guardrails around that? I think in the past you framed kind of the all-in North America business as being a high single-digit grower. Do you think, given how the platform has evolved and certainly the incorporation of parchment, that it should be better in the future? Yeah, it's a good question.

So what we shared with you is approximately 25% revenue growth rate year over year, and we've not broken that out between inorganic and organic as we've and because M&A is a critical part of our growth strategy and really pointed you to D. A R. Our growth rate and the fact that the combined growth growth rate for the.

Two businesses within the high single digits in 'twenty, three and we will continue to be in the high single digits in 2024, so affirming our long term view of this as a high single digit low double digit grower.

Peter Walker: I'm going to, part of my answer is going to punt on this one, Joe, till our Investor Day, where we'll go into a lot more detail about the segments and where we're at just as far as what's driving the growth. The tenor of those comments is that as higher ed today is dealing with a few macro challenges like declining enrollments, the number of available learners is much larger than they traditionally have addressed through traditional education. And so it is a much larger TAM, it's much, it's growing a lot faster, and that's kind of the backdrop that we, you know, that we feel good about the ability to kind of accelerate growth in higher education worldwide, not just in North America.

And then in terms of your margin question, we are expanding expanding margin year over year by 40 basis points.

The parchment model assumed synergies and G&A were executing on those synergies this year and that will provide additional margin expansion in 2025, one says synergies have been fully executed.

Got it okay.

And then I guess, just as a follow up it sounds like you're continuing to see good wins with learn platform in K through 12, how are you thinking about the potential to expand its capabilities and potentially roll that out to the higher Ed.

Peter Walker: But we'll go into a lot more detail in our Investor Day and give you a little more context for that. And I would just add, as Steve pointed out, we'll cover more detail at Investor Day, but we believe that, long term, it will continue to be a high single-digit to low double-digit grower in terms of revenue. Great, I will stick around wanting more and look forward to that update in a few weeks, so thanks very much.

Is that an opportunity that you are thinking about over the next few years getting the traction and success you've seen in K through 12.

Yeah, It's it's a it's a great question and it's a question of out of our higher Ed customers have been asking us as well. So there is demand there.

As you can imagine, particularly as they're looking at there that the software the states that have grown almost exponentially over the last couple of years. So yes. It is there's demand there. There are plans, we expect to be in beta with a solution in the second half of this year.

Steve Daley: Your next question comes from Stephen Sheldon from William Blair, please go ahead. Hey, thanks for taking my questions. First, can you walk through what we've layered into the guidance for parchment and Instructure, as I think you noted that you expect high single-digit revenue growth for both parchment and for Instructure standalone this year. So is that fair?

To be able to go after that opportunity in the over the next couple of years Steven.

Peter Walker: And then and then, how should we think about the adjusted EBITDA? Sure. Thanks for the question, Stephen. So, what we shared with you is approximately a 25% revenue growth rate year over year, and we've not broken that out between inorganic and organic because M&A is a critical part of our growth strategy, and really pointed you to the ARR growth rate and the fact that the combined growth rate for the two businesses was in the high single digits in 23, and will continue to be in the high single digits in 20 So, affirming, you know, our long-term view of this as a high single digit, low double digit grower. And then, in terms of your margin question, we are expanding margin year over year by 40 basis points. The parchment model assumed synergies in G&A.

Great. Thank you.

Your next question comes from the line of Terry Tillman from Truest Securities. Please go ahead.

Oh, great. Thanks for taking the question. This is <unk> on for Terry.

I wanted to start with one of the growth pillars, you've mentioned international so it seems like international performance as Phil fare pretty well I'm just curious on how you plan to.

I guess first on both a direct seller channels and the partnership channels. This year and maybe how we should think about market share gains internationally. It's a growth driver this year.

Yeah.

Theres cover there's a few dynamics going on there that that you brought up first of all you know we.

We are we feel really good about our position, particularly when we're taking out legacy technology and the need for a next generation platform that a lot of institution internationalist.

Steve Daley: We're executing on those synergies this year, and that will provide additional margin expansion in 2025 once those synergies have been fully implemented. Got it. OK. And then, I guess just as a follow-up, it sounds like you're continuing to see good wins with Learn Platform and K-12. How are you thinking about the potential to expand its capabilities and potentially roll that out to the higher education market? Is that an opportunity that you're thinking about over the next few years, given the traction? Yeah, it's a great question.

International institutions need all our you know the the University of Manchester.

A case that we talked about on the prepared remarks direct has been very successful.

We have market leading share in.

Both the Australia, New Zealand as well as the U K and Ireland markets and in a dominant position in the Nordics.

We are.

We are we're seeing some success with the channel and so per our earlier comments, the where we're doubling down we're going with a few.

Steve Daley: And it's a question a lot of our higher ed customers have been asking us as well. So there is demand there, you know, as you can imagine, particularly as they're looking at the software of the states, which have grown, you know, almost exponentially over the last couple of years. So yes, it is, there's demand there. There are plans, and we expect to be in beta with a solution in the second half of this year to be able to go after that opportunity over the next couple of years, Stephen. Great, thank you. Your next question comes from the line of Terry Tillman from Truist Securities. Please go ahead. Great, thanks for taking the question. This is Conor Passarella on for Terry.

Fewer partners and going deeper with them.

We've actually brought in some new leadership for our channel program take it to the next level and we expect that to be.

Our growth driver, particularly in some of the emerging markets that we're playing in.

There is the dynamic there is in the short term.

The as the services shift from our own direct services and international over to these.

Over to the channel partners in those emerging markets Youll see a shift in between recurring and services and will actually depressed that growth rate a little bit in the short term.

Steve Daley: I just want to start with one of the growth pillars you've mentioned, international. So it seems like international performance has fared pretty well. I'm just curious about how you plan to, I guess, work on both the direct seller channels and the partnership channels this year, and maybe how we should think about market share gains internationally as a growth driver this year. Yeah, there's a few dynamics going on there that you brought up. First of all, we feel really good about our position, particularly when we're taking out legacy technology and the need for a next-generation platform that a lot of international institutions need, a la the University of Manchester case that we talked about in the prepared remarks. Direct's been very successful.

But is the right thing for long term growth.

Great helpful. And then just a quick follow up wanted to jump on something that was actually before around the non traditional learners.

In terms of your conversations with customers are most administrators looking to refine their strategies for this and more I guess the immediate term or will we continue to have some first movers. There there are more sophisticated to implement before we kind of get to the broader cohort of institutions that are on board.

Yeah, it's it's a.

It's a great question.

Where where were at early days of that kind of early majority in my opinion. So we've seen the early adopter some of our longtime customers like Arizona State University that really have shown the ability to reach those non traditional learners and grow those at exponential rates.

Steve Daley: We have market-leading shares in both Australia and New Zealand, as well as the UK and Ireland markets, and a dominant position in the Nordics. We're seeing some success with the channel. And so, as per our earlier comments, we're doubling down.

And now we're starting to see it a lot.

A lot more.

It's coming up in almost every conversation we have now so I expect that we you know as they worked through these strategies and as they make their decisions about what that long term platform looks like.

Steve Daley: We're going with fewer partners and going deeper with them. We've actually brought in some new leadership for our channel program to take it to the next level. And we expect that to be a growth driver, particularly in some of the emerging markets that we're playing in. The dynamic there is, in the short term, as the services shift from our own direct services in international over to the channel partners in those emerging markets, you'll see a shift between recurring revenue and services, and we'll actually depress that growth rate a little bit in the short term, but it's the right thing for long-term I'm going to jump on something that was mentioned before about nontraditional learners. I guess, in terms of your conversations with customers, are most administrators looking to refine their strategies for this in the more immediate term, or will we continue to have some first movers there that are more sophisticated to implement before we kind of get to the broader cohort institutions that get on board? Yeah, it's a great question. We're in the early days of that kind of early majority, in my opinion.

It will be it'll be a growth driver. The next couple of years, we ought we ought to start to see some.

Good kind of early market growth.

Great really helpful. Thank you.

Your next question comes from the line of Ryan Macdonald from Needham and company. Please go ahead.

Alright, Thanks for taking my question, Steve Correct me, if I'm wrong, but in your comments, maybe it sounds like you're talking about a little bit of lower growth than expected from parchment. This year.

As I think about maybe what could be the drivers of that we know that theres, obviously been sort of delays with the new faster forms this year and perhaps that's that's causing some delays and applications are financial decisions is is that impacting the parchment business at all that that's maybe something new there versus your prior expectations.

Hey, Ryan Thanks for the questions. Peter So maybe just to go back to what we shared in terms of growth rate the.

Steve Daley: So we've seen the early adopters, some of our longtime customers like Arizona State University that really have shown the ability to reach those non-traditional learners and grow them at exponential rates. And now we're starting to see it a lot more. It's coming up in almost every conversation we have now.

A R ours, what we would focus on in terms of growth rate and our view is that's a double digit growth rate for the combined businesses in 'twenty, three and 'twenty 'twenty four we only have 11 months of Parkman versus 12 in 2024, and our bonds are not created equal.

Steve Daley: So I expect that as they work through these strategies and as they make their decisions about what that long-term platform looks like, it'll be a growth driver. In the next couple of years, we ought to start to see some good early market growth. Great, really helpful. Thank you. Your next question comes from the line of Ryan McDonald from Niederman Company. Please go ahead. Thanks for taking my question. Steve, correct me if I'm wrong, but in your comments, it sounds like you're talking about a little bit of lower growth than expected from Parchment this year. As I think about maybe what could be the drivers of that, we know that there's obviously been some delays with the new FAFSA forms this year, and perhaps that's causing some delays in applications or financial decisions.

So what I would say to you is parchment in terms of revenue growth is in line with where we expected it to be based on what we shared with you on Q3 call.

Alright isn't clear.

Yes, just to clarify when Peter said high single digit for the Aero growth correct that double digit yeah.

Okay. So high single digit growth for IRR for the combined business. Okay, alright. Thank you.

Yes in terms of interest in terms of K 12, you.

You mentioned Essar funding, obviously, having a bit of a benefit there are you seeing any re prioritization of budgets as we're going into the final I guess now seven months for that spending to be allocated in is that shifting conversations maybe on the prioritization on core LMS in K 12 down the pecking order all in favor of maybe.

Peter Walker: Is that impacting the Parchment business at all, that that's maybe something new versus your prior expectations? Hey, Ryan, thanks for the question. It's Peter.

<unk>.

Areas of spend that is being more directly allocated for with those as our funds are you finding that sort of early conversations in 2004.

Peter Walker: So maybe just to go back to what we shared in terms of growth rate, the ARR is what we would focus on in terms of growth rate. And our view is, you know, that's a double-digit growth rate for the combined businesses in 23 and 2024. We only have 11 months of parchment versus 12 in 2024, and all months are not created equal.

Yeah.

It's yes, it's a question that we've actually seen a trend over the last probably six months.

That a lot of these funds.

Because they recognize that the the cliff is coming at the end of the federal fiscal year. This year.

They're they're allocating a lot of these towards <unk>.

Non recurring and so we see it going towards implementation.

Peter Walker: So what I would say to you is, you know, parchment in terms of revenue growth is, you know, in line with where we expected it to be based on what we shared with you on the Q3 call. Just to clarify, um... Yeah, just to clarify what Peter said when he said, high single-digit for ARR growth, correct, not double-digit. Yeah. Okay, so high single-digit growth for ARR for the combined business? Okay. All right. Thank you. That's right.

Training professional development efforts. So what we what we see is it's actually creating a nice kind of backdrop is removing any barriers to implementing something like a new LMS.

Although when we go through the process with them, we're really making sure that their enduring long term appropriations from the state legislatures to ensure that they have the money to pay for these in the future, but we are seeing.

We are seeing it as a as a nice.

Backdrop for Us I would say the other thing that's happening there is that we're seeing.

Peter Walker: In terms of K-12, you mentioned ESSER funding obviously having a bit of a benefit there. Are you seeing any reprioritization of budgets as we're going into the final, I guess, now seven months for that spending to be allocated? And is that shifting conversations maybe on the prioritization of core LMS in K-12 down the pecking order at all in favor of maybe..., areas of spend that are being more directly allocated for with those ESSER funds? How are you finding that sort of early conversation in 24?

They're starting to try to get ahead of <unk>.

Recognizing that there they're going to have to do something when those dollars go away and so we're.

We're seeing a lot of interest in our Ed Tech management solutions like learn.

And impact.

Because theyre looking at it and saying, Okay. We got to rationalize some things in the longer term and so we are we are seeing some dollars going towards those types of technologies.

Steve Daley: Thanks. Yeah, it's a question that we've actually seen a trend over the last probably six months that a lot of these funds, because they recognize that the cliff is coming at the end of the federal fiscal year this year, are allocating a lot of them towards non-recurring. And so we see it going towards implementation, training, and professional development efforts. So what we see is it's actually creating a nice kind of backdrop.

Like learn platform and an impact.

I appreciate the color. Thanks.

Uh-huh.

Your next question comes from the line of Josh Baer from Morgan Stanley. Please go ahead.

Great. Thank you one for Steve one for Peter Steve I'm, just wondering if you could revisit the elongated sales cycles and higher Ed and just talk about what is giving you the confidence that those impacts are more temporary or not like an <unk>.

Steve Daley: It's removing any barriers to implementing something like a new learning management system. Although when we go through the process with them, we're really making sure that they're getting long-term appropriations from the state legislatures to ensure that they have the money to pay for these in the future. But we are seeing it as a nice backdrop for us. I would say the other thing that's happening there is that we're seeing schools start to try to get ahead of recognizing that they're going to have to do something when those dollars go away, and so we're seeing a lot of interest in our edtech management solutions like LEARN and IMPACT because they're looking at it and saying, okay, we've got to rational I appreciate the color, thanks.

<unk> or demand.

Broader longer lasting demand issue. Thank you.

Yeah, Great question I'm glad you asked it Josh.

So when we look at the pipeline for higher Ed and particularly when we look at RF, our RFP activity.

This year the.

The year that we just concluded.

We had the highest our RFP activity since 2020, so so theres a lot of conversations that are happening in those conversations are around you know how what is that next generation platform going to look like so.

So we feel good about the state of the pipeline. It's you know, it's just that the deal cycles are stretching out in there.

The close dates or pushing out on those but they're not going away and and.

And we continue to win.

Win market share.

Operator: Mm-hmm. Your next question comes from Josh Baer from Morgan Stanley. Please go ahead. Great, thank you. One for Steve, one for Peter.

Marketshare reports show that we gained share again this year. So so we feel good about how we're positioned.

In the.

In the market for those.

As those deals start to close.

Josh Baer: Steve, just wondering if you could revisit the elongating sales cycles in higher education and just talk about what is giving you the confidence that those impacts are more temporary and not like an execution or demand, broader, longer-lasting demand. Yeah, great question. I'm glad you asked it, Josh. So, when we look at the pipeline for higher ed, and particularly when we look at RFP activity, this year, or the year that we just concluded, we had the highest RFP activity since 2020. So, there are a lot of conversations that are happening, and those conversations are around, you know, what that next generation platform is going to look like. So, we feel good about the state of the pipeline. It's, you know, it's just that the deal cycles are stretching out, and the closed dates are pushing out on those, but they're not going away.

Okay, Great and then Pete.

Peter just just wondering like your <unk>.

Coming into this company that's already <unk>.

Efficient talking about 40% to 41% margin. So just wondering where you see some of the largest sources of leverage from here. Thank you.

Sure. So thanks for the question, Josh I would say, we have a disciplined approach to capital allocation that prioritizes investing in the long term.

Turbo revenue growth and allows for us to expand margins.

So I'm coming in with definitely a framework around how we're going to continue to execute against that going forward in terms of specifically, whereas margin expansion come from in the future I think there's probably two opportunities you can think about I think first would be.

Optimization of our hosting platform and that would be in terms of scale and efficiency as Steve mentioned, we have a new CTO on board and Michael is already focused on both of these kind of opportunities in the hosting platform and then the second is really our opportunity to continue to expand our footprint.

Steve Daley: And, you know, we continue to win market share. The latest market share reports show that, you know, we gained share again this year. So, we feel good about how we're positioned in the market for those deals as those deals start to close. Okay, great.

Peter Walker: And then, Peter, just wondering, like, you're coming into this company that's already very efficient, talking about 40, 41 percent margin, so just wondering where you see some of the largest sources of leverage from here. Thank you. Sure, so thanks for the question, Josh. So I'd say we have a disciplined approach to capital allocation that prioritizes investing in long-term durable revenue growth and allows us to expand margins. So, you know, I'm coming in with definitely a framework around how we're going to continue to execute against that going forward. In terms of specifically, you know, where margin expansion will come from in the future, I think there are probably two opportunities you can think about. I think the first step would be the optimization of our hosting platform, and that would be in terms of scale and efficiency.

In lower cost geographies, we've had great success with this and good Apache and it's really early days for us in terms of what the opportunity is here.

Got it thank you very much.

Thanks, John next.

Your next question comes from Tonight comes from the line of Devin Oh from Keybanc capital markets. Please go ahead.

Great. Thanks for taking my questions. I also have another question on the longer deal cycle and higher Ed.

Maybe just to clarify did you see the selling environment get more challenging in the deal cycle has stretched out even more more so in the last quarter and are you kind of expecting that.

Difficult selling environment, and 10%, perhaps deteriorate in 'twenty four.

Yeah.

We saw it was similar as far as what we saw last quarter, we got a little more.

Fidelity in that Q4 tends to be our large quarter for international So we saw that the international higher Ed was exhibiting similar.

Peter Walker: As Steve mentioned, we have a new CTO on board, and Michael is already focused on both of these kind of opportunities in the hosting platform. And then the second is really our opportunity to continue to expand our footprint in lower cost geographies. We've had great success with this in Budapest, and it's really early days for us in terms of what the opportunity is here.

Similar characteristics, but it hasn't it hasn't gotten worse, but we we are seeing it in Q1, we still see those kind of be long elongated sales cycles.

Got it that's helpful. And then just one on loan platform. It seems like that business is gaining traction could you just give us an update on how that business kind of finish in 'twenty three and when we look at 'twenty four could we see loan platform driving a more meaningful contributions to revenue or is that more of a 25 and beyond.

Peter Walker: Thanks, Josh. Your next question comes from the line of Devin O. from KeyBank Capital Markets. Please go ahead.

Steve Daley: Great, thanks for taking my questions. I also have another question on the longer deal cycle in higher education. Maybe just to clarify, did you see the selling environment, you know, get more challenging, and did the deal cycle stretch out even more, more so than last quarter? And are you kind of expecting that?

Thank you.

Yes.

Yes, the business is performing well, we've been able to kind of put it into the sellers bag as they're out selling and we're seeing good pipe. We saw good pipeline build and we saw we started to see some deals close.

Steve Daley: difficult solving environment to kind of persist or perhaps deteriorate in 24. Yeah, you know, we saw it was similar as far as what we saw last quarter. We've got a little more Fidelity in that, you know, Q4 tends to be our large quarter for international. So we saw that, you know, international higher education was exhibiting similar characteristics, but it hasn't gotten worse, but we, you know, we are seeing it in Q1, we still see those kind of elongated sales cycles. Got it. That's helpful. And then just one on the Learn Platform.

In 2023, so we do expect that to continue to be one of our growth areas.

We saw a cross sell was our fastest area of bookings growth in 2023.

And as we mentioned in the prepared remarks in Q4, we saw it even accelerating with 40.

<unk>, 49% growth in cross sell bookings. So that's you know this this is just one of the products that contributes to that above.

Above the overall company growth rate.

Steve Daley: Seems like that business is gaining traction. Could you just give us an update on how that business kind of finished in 23? And when we look at 24, could we see Learn Platform driving a more meaningful contribution to revenue? Or is that more of a 25 and beyond time frame?

Your next question comes from the line of Frederick Haver Meyer from Macquarie. Please go ahead.

Hey, Thank you very much I wanted to revisit the higher education landscape as well here.

Yeah.

Around the deals that Youre seeing are there any impacts at all from enrollment trends or just generally how are you seeing enrollment trends higher education, playing out through higher education institutions in their overall demand.

Steve Daley: Thank you. Yeah, so yes, the business is performing well. We've been able to kind of put it into the seller's bag as they're out selling, and we're seeing good, we saw a good pipeline build, and we started to see some deals close in 2023. So we do expect that to continue to be one of our growth areas. You know, cross-sell was our fastest area of bookings growth in 2023, and as we mentioned in the prepared remarks in Q4, we saw it even accelerate with 49% growth in cross-sell bookings. So that's, you know, this is just one of the products that contributes to that above the overall company growth rate. Your next question comes from the line of Frederick Havermeyer from Macquarie. Please go ahead.

For all of our platforms.

Yeah.

It's good to hear from me Fred.

The what we're seeing I mean, the enrollment trends.

Had been down, whereas they've been down for for years.

And what we're seeing really from our perspective is we haven't seen.

A change in our retention rates or retention rates remain on trend they.

They they they're good you know world class retention so.

We feel good about that part of the enrollment dynamics, what it is really.

Is really a catalyst for universities and institutions to really look at how do they how do they reach more students right and recognizing that the student that's gonna planned to come on on campus and receive a degree.

Operator: Hey, thank you very much. I wanted to revisit the higher education landscape as well here. Around the deals like you're seeing, are there any impacts at all from enrollment trends? Or, just generally, how are you seeing enrollment trends in higher education playing out through higher education institutions and their overall demand for a Telstra platform?

It is declining where where do we go get more revenue as an institution. So that's that really is a big driver for the discussions that we're having.

The driver for some of the longer conversations because this is a bigger long term opportunity.

Steve Daley: Yeah. It's good to hear from you, Fred. What we're seeing, I mean, enrollment trends have been down. They've been down for years.

For for the institutions to again draw.

<unk> growth into their business model.

And ultimately into our business model.

Thank you very much for that and on the K 12 landscape I wanted to revisit assessments as well.

Steve Daley: And what we're seeing, really, from our perspective, is we haven't seen a change in our retention rates. Our retention rates remain on trend. They're good, world-class retention rates.

With with them beyond the Astro landscape, where have you seen assessments and mastery here ranking in terms of your K 12 priorities and how are you viewing that into 2024 as an area for potential growth.

Steve Daley: So we feel good about that part of the enrollment dynamics is really a catalyst for universities and institutions to really look at how do they reach more students, right? And recognizing that the student that's gonna plan to come to campus and receive a degree is declining. Where do we go to get more revenue as an institution? So that really is a big driver for the discussions that we're having. It's a driver for some of the longer conversations because this is a bigger long-term opportunity for the institutions to, again, drive growth into their business models and ultimately into our business models. Thank you very much for that.

Yeah, we continue to be bullish on the assessment opportunity.

We you know we want to ultimately we want to own the assessment management platform and the delivery of all assessment content across and integrate that tightly with our learning management system to the teachers have a real time view and get real time feedback on how they're doing from a both from a delivery of education as well as.

Learners are receiving that education and so we believe that's still a long term growth opportunity for us it's part of.

Steve Daley: And on the K-12 landscape, I wanted to revisit assessments as well, with and beyond the ESSER landscape. Where have you seen assessments and mastery ranking in terms of your K-12 priorities, and how are you viewing that into 2024 as an area for potential growth?

What contributed to that out.

Outsized growth and cross sell this year and we and we've we've taken some of the key learnings from 'twenty to 'twenty three that led to that growth and we're applying them to our go to market model and Chris will go into that in more detail at the.

Steve Daley: We continue to be bullish on the assessment opportunity. Ultimately, we want to own the assessment management platform and the delivery of all assessment content across and integrate that tightly with the learning Management System so teachers have a real-time view and get real-time feedback on how they're doing both from a delivery of education as well as from learners receiving that education. And so we believe that's still a long-term growth opportunity for us. And it's part of what contributed to that outsized growth in cross-sell this year. And we've taken some of the key learnings from 2023 that led to that growth, and we're applying them to our go-to-market model, and Chris will go into that in more detail at Investor Day to continue to drive that outsized growth in cross-sell. So we are believers in the assessment business in K-12 and ultimately believe we can apply a lot of those learnings to higher ed, particularly as higher ed moves to more competency So we do believe it's a long-term driver of growth for our business. Thank you very much.

At the Investor day to.

To drive continue to drive that outsized growth in cross sell so we are we are.

We are believers in the in the assessment business in K 12, and ultimately believe we can apply a lot of those learnings to higher Ed, particularly as higher Ed moves to more competency based.

And and outcomes based learning over time, so we do believe it's a long term.

The driver of growth for our business.

Great. Thank you very much and I'm looking forward to seeing at the Investor day.

Great. Thanks.

Thanks Fred.

Your next question comes from the line of Brent Thill from Jefferies. Please go ahead.

Okay.

David Let's move on to grant I wanted to ask about some of the AI solution, but I think you guys mentioned doing data.

I guess it would be helpful. If you could talk through the offerings that you have in beta.

Any early feedback you've received on these.

On the launches and more broadly how do you guys think about monetizing AI over time is this something that you think is more kind of plugged into the platform and it's something you can use to justify raising prices in the future or do you think youre going to charge specifically for AI skews things.

Steve Daley: And I'm looking forward to seeing you at investor day. Great. Thanks, Fred. Your next question comes from the line of Brent Thiel from Jefferies. Please go ahead. This is David Luxbergarn for Brent.

Yeah.

Well, it's great questions, David and we got pretty far on the call before we get into AI question. So good on you for bringing it up.

Steve Daley: I wanted to ask about some of the AI solutions that I think you guys mentioned are in beta. I guess it'd be helpful if you could talk through the AI offerings that you have in beta, any early feedback you've received on these launches, and, you know, more broadly, how do you guys think about monetizing AI over time? Is this something that you think is kind of plugged into the platform, and it's something you can use to justify raising prices in the future? Or do you think you're going to charge specifically for AI? Yeah, they're great questions, David, and we got pretty far in the call before we got an AI question, so good on you for bringing it up.

<unk>.

So so there are a number of features that end product so.

Around and I mentioned in the prepared remarks search natural language analytics course creation work that were doing theres, a number of others that we've.

We've previewed, but we expect to go into beta in the first half.

I would say we are we are learning as we go along David as far as where can we monetize this and where is it going to be you know core innovation that again helps us win more as well as retain and retain and get price increases.

Steve Daley: So, there are a number of features and products around, and I mentioned in the prepared remarks search, natural language analytics, and course creation work that we're doing. There are a number of others that we've previewed, but we expect to go into beta in the first half. I would say we are learning as we go along, David, as far as where we can monetize this, and where is it going to be core innovation that, again, helps us win more as well as retain and get price increases. I do believe that the analytics piece that we're baiting now will be a charge for add-on, but again, we're working through all of those questions.

I do believe that the analytics piece that we're that we're bidding now will be a charge for add on.

But again, we're working through those.

Through all of those questions. In fact, we've made significant progress in this last in this last six months on understanding the cost models and how we can do this most cost effectively so we don't hammer our gross margins the underlying privacy architecture, that's necessary in in education and the revenue potential for each of these.

Again, we will go into a little more detail in our.

In our Investor day in a couple of weeks.

So hopefully you can make a david.

Yes.

And maybe just.

Second question, if I may be thinking about.

Steve Daley: In fact, we've made significant progress in the last six months on understanding the cost models and how we can do this most cost effectively so we don't hammer our gross margins, the underlying privacy architecture that's necessary in education, and the revenue potential for each of these. So, again, we'll go into a little more detail at our investor day in a couple weeks. So hopefully you can make it, David, yeah, we'll do that, and maybe just, um, you know, the second question I'm thinking about: The CrossSell opportunity. You guys will sometimes get some color on different products that are performing well on CrossSell. I think maybe it was last quarter or maybe two quarters ago you talked about assessments being the fastest growing product. Just wondering if there's any incremental color you guys can add on what you're seeing on CrossSell and any, you know, specific product drivers that are maybe having an outsized impact. Thanks, guys.

The cross sell opportunity you guys will sometimes give us some color on like you know different products that are performing well on cross sell I think maybe it was last quarter or maybe two quarters ago, you talked about assessments being the fastest growing product.

Wondering if there's any incremental color you guys can add on what you're seeing on cross sell in any specific product drivers that maybe.

Maybe having an outsized impact that would be great. Thanks, guys.

Yeah, I think I would.

What I would say is look we have growth, we talked about 49% increase in bookings in Q4 of of.

Cross sell.

That's actually we were kind of in the mid Twenty's kind of growth of cross sell books for the bookings.

Bookings for the year, so we're seeing acceleration going out out of the year.

And part of that we attribute to some of the changes that Chris has been making these piloted some ideas as far as how do we marry our customer success, and our and our sellers together to get better opportunities and then and do better from a cross sell perspective so.

Steve Daley: Yeah, I think I would, you know, what I would say is, look, we've grown, we talked about a 49% increase in bookings in Q4 of CrossSell. We've, that's actually, we were kind of in the mid-20s kind of growth of CrossSell books for the year, bookings for the year, so we're seeing acceleration going out of the year. And part of that can be attributed to some of the changes that Chris has been making.

We'll share will share some of those details with you.

And in the Investor day, but but I will say, we're pretty we're pretty optimistic and pretty bullish about that cross sell opportunity and our ability to.

To solve more problems for our customers longer term.

Got it.

A few weeks.

Your next.

Steve Daley: He's piloted some ideas as far as how we marry our customer success and our sellers together to get better opportunities and then do better from a CrossSell perspective. So we'll share some of those details with you at investor day, but I will say we're pretty optimistic and pretty bullish about that CrossSell opportunity and our ability to solve more problems for our customers over the long term.

Question comes from the line of William Mcnamara from BT I G. Please go ahead.

So on for Matt and Thanks for taking my question you know when Youre going in and competing for these deals such as the recent announcement with the <unk>.

Montana University system.

Well, what do you say customers are the most interested in that you're kind of able to win them with like set you apart from the competition.

Steve Daley: I'll see you guys in a few weeks. Thanks. See ya.

Steve Daley: Your next question comes from William McNamara from BTIG. Please go ahead. When you're going in and competing for these deals, such as the recent announcement with the Montana University system, what would you say customers are most interested in that you're kind of able to win them with that, you know, like set you apart from the competition? Yeah, there's a couple things.

Yeah, there's a couple of things.

One is one.

One is just our footprint and the fact that we have a footprint both in K 12, and higher education.

Steve Daley: One is just our footprint and the fact that we have a footprint both in K-12 and higher education. So, particularly when you're talking about state systems, there are really a lot of conversations about how do we keep students as they go from high school into higher education, and how do we make that transition as simple as possible? Specifically, in the Montana University system, Parchment had some technology that was integrated with Canvas that made that transition much more seamless and easier for them.

So, particularly when you're talking about state systems, there really there's really a lot of conversations about how do we keep students as they go from high school into higher Ed how do we make that transition as simple as possible.

Specifically in that Montana University system parchment had some technology that is integrated with canvas that made that transition much more seamless and easier for them and so they they really they really like we went in and actually joined sold in that in that case, and so as we bring that into our portfolio.

Steve Daley: And so they really liked it; we went in and actually joint sold in that case. And so as we bring that into our portfolio, we think that's going to be an accelerant for us as far as winning more of those types of deals long-term and as we get even tighter integration as one company going forward. So it really is about our footprint, about our ability to manage some of those transitions seamlessly. And then in Montana, in the Alabama Community College system, we already had landed in some of those institutions.

We think that's going to be an accelerant for us as far as winning more of those types of deals long term.

As we get even tighter integration as a as a.

As one company going forward. So it really is about our footprint about our ability to match.

Manage some of those seamless.

Some of those transition seamlessly and then you know.

And eat in in Montana, and the Alabama Community College system.

We already had landed in some of those institutions and so the experience that they had both from a user experience as well as the.

Steve Daley: And so the experience that they had, both from a user experience as well as the number of integrations that are there, our large partner ecosystem, the community that they were able to join and how massive that was, all of those played into the decision when they decided which of the incumbents that have a position in those systems to go with. It made Canvas the easy choice. Great, thanks for taking my question. Your next question comes from the line of Noah Herman from J.P. Morgan. Please go ahead.

The number of integrations that are there are large partner ecosystem the community that they were able to.

To join in that and how massive that was all of those played into the decision when they decided which of the which are the incumbents that has a position in those in those systems to go with it made canvass the easy choice.

Great. Thanks for taking my question.

Your next question comes from the line of Noah Herman from J P. Morgan. Please go ahead.

Steve Daley: Hey guys, thanks for taking the question. Just sticking with international a little bit, I mean, what do you really see here now going into this year as the biggest white space opportunity to really expand the international percentage of total revenue? I know it's sort of sort of reached a little bit above that 20% mark that you referenced pretty frequently, but how should we think about the levers for momentum and growth going forward here? Thanks.

Hey, guys. Thanks for taking the questions.

Sticking with international a little bit I mean, what do you really see here now going into this year is the biggest white space opportunity to really expand the expansion with international as a percentage of total revenue.

Sort of reached a little bit above that 20% Mark that you referenced pretty frequently but.

How should we think about the lasers for additive much anything's game changer here.

Steve Daley: Yeah, you know, we've made some investments in some of the developed markets, particularly the Benelux region, Spain and Europe, the Philippines, and some of the Southeast Asian countries. So those will provide us with, you know, those will be one growth driver. I think the biggest growth driver for us will continue to be the channel. And so we have, you know, investments that we're making in Japan and India, in some of the public markets in Southeast Asia. Latin America is almost entirely a channel.

Yes.

We've made some investments in.

And some of the developed markets.

Particularly the Benelux region, the Spain and in Europe, the Philippines, and some other southeast Asian countries.

So those will those will provide us.

Those will be one one growth driver I think the biggest growth driver for us will continue to be in the channel and so we have we have investments that we're making in Japan, and India, where we are in.

In some of the public markets in South East Asia.

Latin America is.

Steve Daley: So those are probably the areas where we'll see the most growth in the next couple years, particularly as we kind of refine our strategy there and put a little more wood behind the arrow around a few of our key partners. And as we are sort of thinking about the guidance philosophy for 2024, I mean, any change there relative to the prior years? And are you layering in any extra conservatism in the model at all?

Almost entirely channel. So those those are probably the areas, where we will see.

The most growth.

In the next couple of years, particularly as we kind of refine our strategy there and.

Put a little more wood behind the arrow around a few of our key partners.

Great.

Sort of thinking about the guidance philosophy for 2024, I mean any change there relative to prior years.

Are you Larry in any extra conservatism in the model at all thanks.

Peter Walker: Thanks. Yeah, so I appreciate the question there. I would say the guidance philosophy is relatively consistent with prior years. I would point you to kind of the midpoint of the range as our expectation for performance.

Yes. So I appreciate the question there I would say guidance philosophy is relatively consistent with prior years I would point you to kind of the midpoint of the range.

As our expectation for performance.

Operator: And we have no further questions in our queue at this time. I will now turn the call back over to Chief Executive Officer Steve Daley for closing remarks. Well, thank you, everybody, for joining us today. You know, our exceptional fourth quarter and full year 23 results were driven by our increasing competitive advantage, our strong execution, and our formidable cash flow we generate and reinvest in high growth initiatives. And we head into 2024 with meaningfully enhanced scale, a broader portfolio, and access to new buyers through the parchment acquisitions. And so I've never personally been more excited about our ability to elevate teaching and learning and drive results for our shareholders. And we'll share a lot more about our journey and the roadmap ahead at our March 12th Investor Day. So we look forward to and hope to see all of you there. So, thanks. This concludes today's conference call. Thank you for your participation, and you may now disconnect. Please wait; the conference will begin shortly. Please wait; the conference will begin shortly.

And we have no further questions in our queue. At this time I will now turn the call back over to Chief Executive Officer, Steve Daly for closing remarks.

Well, thank you everybody for joining us today.

Our exceptional fourth quarter and full year 'twenty three our results were driven by our increasing competitive advantage, our strong execution and our formidable cash flow, we generate and reinvest behind high growth initiatives and.

And we head into 2024 with meaningfully enhanced scale, a broader portfolio and access to new buyers Theres, a parchment acquisitions and so I've I've never personally been more excited about our ability to elevate teaching and learning and drive results for our shareholders.

And we'll share a lot more about our journey in the roadmap ahead in our March 12th Investor Day. So we look forward to and hope to see all of you there. So thanks.

This concludes today's conference call. Thank you for your participation and you may now disconnect.

Please wait the conference will begin shortly.

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