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Edited Transcript of INST earnings conference call or presentation 1-May-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Instructure Inc Earnings Call

Salt Lake City May 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Instructure Inc earnings conference call or presentation Monday, May 1, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Erin Kasenchak

* Joshua L. Coates

Instructure, Inc. - CEO and Director

* Steven B. Kaminsky

Instructure, Inc. - CFO

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Conference Call Participants

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* Andre Benjamin

Goldman Sachs Group Inc., Research Division - VP and Lead Analyst

* Benjamin J. McFadden

Pacific Crest Securities, Inc., Research Division - Research Analyst, Business Services Software

* Brian Jeffrey Schwartz

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Brian Lee Essex

Morgan Stanley, Research Division - Equity Analyst

* Corey A. Greendale

First Analysis Securities Corporation, Research Division - SVP

* John Stephen DiFucci

Jefferies LLC, Research Division - Equity Analyst

* Justin Allen Furby

William Blair & Company L.L.C., Research Division - Research Analyst

* Scott Randolph Berg

Needham & Company, LLC, Research Division - Senior Analyst of SaaS, Application Software, Human Capital Management

* Terrell Frederick Tillman

Raymond James & Associates, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to Instructure's First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Erin Kasenchak. Please go ahead.

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Erin Kasenchak, [2]

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Thank you, operator. Good afternoon, everyone, and thank you for joining us on today's quarterly earnings conference call. Today's call is being hosted by Josh Coates, CEO; and Steve Kaminsky, CFO.

Before we begin, I would 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 a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release and other reports and filings we may file from time to time with the Securities and Exchange Commission. All our statements are made as of today based on information available to us as of today, and except as required by law, we assume no obligation to update any such statements. The content of today's conference call is Instructure's property and cannot be reproduced or transcribed without our prior written consent.

During the call, we may 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 our non-revenue financial measures we will discuss today are non-GAAP unless we state that the measure is a GAAP measure.

Now I'd like to turn the call over to Instructure's CEO, Josh Coates.

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Joshua L. Coates, Instructure, Inc. - CEO and Director [3]

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Thanks, Erin, and welcome, everyone, to our Q1 2017 Earnings Call. As usual, I will provide some highlights from the quarter and then turn the call over to Steve for a recap of our financials before taking your questions.

We had a strong first quarter with revenue of $34 million, up 46% year-over-year. Additionally, our focus on operational efficiency resulted in another quarter of substantial year-over-year improvements in operating margin. Before we get into the details of the financials, let me share with you a few of our key customer wins from this past quarter, starting with our corporate product, Bridge. Throughout Q1, we continued to enhance the features and functionality of Bridge and as a result, witnessed strong customer adoption across [industries]. Let me highlight just a few of our successes.

Sony Music Entertainment had a strong bias against traditional LMS software and was looking for a solution that functioned practically for today's learners. Bridge's simple UI and compelling feature set was exactly what they were looking for. Sony will use Bridge to support their onboarding, training and continuous learning efforts for their 4,000 employees across their music labels.

Southern Glazer's Wine and Spirits, the largest distributor of wine and spirits in the country, chose Bridge as their learning and training platform for their field distributors and brand partners. Bridge will enable their 30,000 team members in the field to stay educated on their vast and diverse product lines.

And Timex Group USA, the iconic timepiece maker, selected Bridge as their training solution for their employees across the globe. Prior to Bridge, Timex utilized instructor-led training at their corporate offices with international personnel participating via conference calls. Now with Bridge, international employees are able to fully participate in Timex' training program from any location at any time and on any device.

In Q1, we added the innovative feature, Bridge Retain, a tool to increase the long-term retention of learning. Studies have shown that learners forget 70% of what they learn within 24 hours. Bridge Retain provides retention exercises, which improve recall of training material. Bridge customers using Retain such as 1-800-Contacts and others are already seeing improved ROI on their training investment with employees achieving about 200% gains in knowledge retention. Bridge Retain is just one example of how we will out-innovate our competitors just as we have done with Canvas.

Speaking of Canvas, let me share some of our customer wins in K-12 and higher ed. Within K-12, we brought onboard the Austin Independent School District, which encompasses 130 schools and over 80,000 students. And in the higher ed market, Florida State University, one of Florida's preeminent universities with 39,000 students, selected Canvas to replace Blackboard. Florida State University was impressed by the rich feature set of Canvas and ease of integration with their student information system and other third-party tools. And the University of Southern Mississippi also chose Canvas for their 13,000 students because of its compelling features, high reliability, straightforward pricing.

Turning to international. The University of Sydney, Australia's first and highly prominent university, bought an LMS solution that better met their goals of enabling a more interactive and collaborative learning environment for their 44,000 students. Canvas was selected due to its strong capabilities to support collaborative learning and its ease of use.

And UNINETT, the government-owned organization responsible for Norway's National Research and Education Network, selected Canvas as a preferred supplier for their members, allowing Norwegian schools to easily select Canvas without a formal RFP. Already, 3/4 of all higher ed universities in Norway representing over 100,000 students have signed up for Canvas.

The first quarter was a great start to the year, and we're encouraged by the opportunities we see throughout 2017. I'm particularly excited as I think about our product road-map for the year. We have great new features lined up. And as I mentioned on our last earnings call, we'll introduce 2 new revenue generating products, 1 for Bridge and 1 for Canvas later this year. I look forward to updating you on those plans as the year progresses.

I'd also like to invite you all to our upcoming seventh annual user event, InstructureCon. It's being held July 25 through 27 in Keystone, Colorado. Last year, we had over 2,000 attendees from about 900 institutions join us for the event. It's a great time for our customers to connect with us and with each other, and I hope you'll be able to join us for it.

Now I'll turn it over to Steve to share with you our financial highlights.

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Steven B. Kaminsky, Instructure, Inc. - CFO [4]

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Thanks, Josh, and thanks, everyone, for joining us. I'm going to change things up a bit this quarter. Instead of reading the numbers that you can find in the press release, I'll talk about the results and provide a bit of color commentary around how we achieved them. Of course, you can refer to the press release for all the details.

In Q1, revenue grew 46% year-over-year to $34 million, and subscription revenue was $30.5 million, up 48% year-over-year. The growth in revenue was driven not only by new customer additions but also our continued net revenue retention of over 100%.

In Q1, we continued to see strong customer adoption in our important investment areas, international and Bridge. In fact, we saw triple-digit year-over-year growth in revenue for both of these markets. Q1 revenue was slightly better than our expectations, primarily due to early starts within the quarter. As a reminder, early starts in a quarter positively impact the quarter in which it occurs but does not have an impact to future quarters. For example, when a deal we have forecasted to start in April starts in February, we see extra revenue in February and March. Starting in April and going forward, the revenue is exactly what we expect with no incremental upside.

Billings on a rolling 12-month basis was up 42% year-over-year to $138.9 million. As you've heard me highlight before, given the seasonality of our business, we calculate billings growth on a rolling 12-month basis, which provides a more consistent perspective for growth, and I'd encourage all of you to view billings growth in this manner as well. For the remainder of my commentary, unless otherwise noted, I will discuss non-GAAP results.

Gross margin was 72.4% for Q1, representing a 310 basis point improvement year-over-year and was attributable to the overall scaling of revenue as well as continued AWS cost savings. This is the sixth consecutive quarter of more than 200 basis point improvements in gross margin as we continue to move even closer to our long-term target of 75% gross margin for the business. Looking ahead, we expect more modest year-over-year improvements in gross margin as we approach that long-term target.

Turning to our operating expenses. Total operating expense in Q1 grew 23% year-over-year to $34 million, while we grew revenue a healthy 46%. During the quarter, we realized continued leverage across all of our operating expenses. We saw year-over-year improvements in our CAC ratio in both Canvas and Bridge. This is a particularly encouraging sign that our investments in Canvas and Bridge growth are paying off.

Operating loss for Q1 '17 was $9.4 million. The overall scaling of the business as well as the operational efficiencies I just discussed resulted in a nearly 2,200 basis point improvement year-over-year in operating margins.

Net loss for non-GAAP EPS calculation was $9.4 million and a $0.09 year-over-year improvement on a per common share basis. GAAP net loss for the first quarter was $12.7 million and a $0.06 year-over-year improvement on a per common share basis.

Turning to the balance sheet. Our ending balance for cash and cash equivalents and marketable securities for March 31, 2017, was $38.3 million; free cash flow of negative $31.2 million, both in line with our expectations. Our business has a good deal of seasonality, so I think it's helpful to remind everyone how this seasonality is reflected in cash flow.

As you can see from our historical financials, Q1 is our highest cash use quarter, followed by Q4 and then Q2 in order of magnitude. Q3 is a significant cash generating quarter. Given this and our expectations for the rest of 2017, we remain confident that we will be cash flow positive in the second half of this year, extending into the full year of 2018, where the cash generated in Q3 will be larger than the use of cash for quarters 1, 2 and 4 combined. With this as a backdrop, we remain confident in the health of our balance sheet, and as I mentioned early last year, we do not foresee the need to return to the capital markets to fund our ongoing operations.

Let me conclude with a discussion around our expectations for the second quarter and full year 2017. For the second quarter, we expect revenue in the range of $36.8 million to $37.4 million, non-GAAP net loss of $10.5 million to $9.9 million, non-GAAP net loss per common share of $0.36 to $0.34.

For the full year 2017, we believe we'll achieve approximately 36% year-over-year top line growth with expected revenue in the range of $150.7 million to $152.2 million. We expect non-GAAP net loss of $37.7 million to $36.7 million and a non-GAAP net loss per common share of $1.29 to $1.26. Calculating EPS, we expect our shares to be 29 million for the second quarter of 2017 and 29.2 million for the full year.

2017 is off to a good start, and we're quite pleased with our performance in Q1 as well as our outlook for the remainder of the year. We are realizing significant improvements in operational efficiencies while growing the top line at one of the highest growth rates among publicly traded SaaS companies. I look forward to updating you on our progress next quarter, and with that, let's open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Andre Benjamin with Goldman Sachs.

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Andre Benjamin, Goldman Sachs Group Inc., Research Division - VP and Lead Analyst [2]

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The first question I have, to make sure I understood the prepared comments properly, was all of the positive variance versus your own guidance for the first quarter due to the early starts? Or were there also other wins and other stuff embedded in there? And then any color on kind of where those early starts or beats were, whether it was Canvas or higher ed, K-12 or Bridge, would be great.

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Steven B. Kaminsky, Instructure, Inc. - CFO [3]

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Yes. So the short answer is it was almost exclusively early starts. I don't really have a breakdown for you of which part of our market it came from, but as you know, we get the most money out of high ed domestic followed by international high ed and then K-12. So it probably followed a pattern similar to that, but there was virtually nothing that would meaningfully impact the rest of the year.

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Andre Benjamin, Goldman Sachs Group Inc., Research Division - VP and Lead Analyst [4]

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Great. And I think last time I spoke to Steve, we had talked a bit about how Instructure's now going after more share from Moodle. I think you talked about that on the last call as well. Could you maybe give us the latest thoughts on how that initiative is going and how we should think about the impact on growth going forward?

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Joshua L. Coates, Instructure, Inc. - CEO and Director [5]

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Well, I think as far as the growth impact, it's sort of baked into our expectations of how growth's going to be for the year. As far as the specific program to target Moodle schools, that's under way. It's not going to be an immediate win for us. We won't see results in the next quarter. The sales cycles are still very long, and it's underway. And we're seeing a lot of positive feedback from large Moodle campuses as we've kind of gone in and started to court them. Internationally, we're seeing quite a bit of movement. We regularly win Moodle-based schools internationally, and now we're really doubling down on those efforts.

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Operator [6]

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We'll go next to John DiFucci with Jefferies.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [7]

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So Josh, triple-digit growth, I think you said for both Bridge and international or maybe Steve said it, which is sort of -- that's great to hear. I'm just curious. As we've been looking closely at that, you've established yourself in the academic world, and nobody really questions that. It's a matter of how you can move into other areas, and in both international and Bridge are those areas. I guess, when might we expect to get more granular data on that, like how big they are today? Or anything you can give us tonight would be great on the size of those businesses and when we might get more granular data on a regular basis.

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Steven B. Kaminsky, Instructure, Inc. - CFO [8]

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So John, this is Steve. The -- it'll probably be quite some time to be honest about it. We actually did an analysis of companies that are $500 million or less who break out revenue into different buckets and don't just show it as 1 single line item like we do. And there were 4 of them. And the only reason they did it is because they had a slow moving market and a very, very fast-moving market. That's not true for us. All of our markets are very fast moving and very fast growing. So it'll probably be some time. What we're trying to do is give you as much color around relative growth rates and that it's growing very, very quickly; triple digits. We're trying to give you color around the types of clients that we're picking up, and they're fairly large names. We had another good roster this quarter. And when we can give you more anecdotal data, we certainly will, and we're anxious to do that. But we're going to wait until the time is right.

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Joshua L. Coates, Instructure, Inc. - CEO and Director [9]

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Yes, pretty much what Steve says.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [10]

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And if I might, Steve, I do have a follow-up, too. And by the way, thanks for that color on cash flow and billings. That's really helpful to remind us on some of that stuff. But I know I'm going to get some questions around this, just anticipating a little bit anyway, and it's really on the deferred revenue line. It's more than we modeled, and maybe we just modeled -- didn't model it appropriately. But can you tell us -- because I know there's always such times -- it -- the deferred revenue line -- the aggregate billings look fine. Everything looks good. But that line just looks a little funky, and I just wonder if there's anything we should be thinking about with that line.

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Steven B. Kaminsky, Instructure, Inc. - CFO [11]

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Yes. So I think -- and we've seen this in several of the models on the sell side. There seems to be a discrepancy on exactly how the billings come in and how the cash collections come in, and that all has an impact on deferred revenue. It was absolutely in line with what we expected internally. There were no surprises for us. We're very happy with pretty much, across the board, both the P&L and the balance sheet, how they came out at the end of the quarter. So I think this is a common problem. And by giving the color commentary around the seasonality, we're trying to help you guys all sort of solve the puzzle a little bit because we recognize we don't guide to cash and we don't guide to deferred revenue. We don't guide to billings. And so hopefully, some of the color commentary can help clarify some of that. But we always try and reference folks back to the historical financials because we think that is, by far, the best indication of what's likely to happen.

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Operator [12]

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We'll take the next question from Brian Essex with Morgan Stanley.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [13]

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Josh, I was wondering if you could talk a little bit about the backlog and how you feel about Canvas versus Bridge and specifically, I guess, as it relates to Bridge, how you're lining up against some of the peers in enterprise market, where you see yourself winning. I think, last quarter, you talked -- or maybe it was the quarter before that, talked about learning to win in that market and maybe if you have any indications of how you've progressed there and how that outlook looks rest of the year.

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Joshua L. Coates, Instructure, Inc. - CEO and Director [14]

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When you talk about backlog, you're not talking about like the financial backlog. You're talking...

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [15]

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(inaudible) the pipeline, I guess.

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Joshua L. Coates, Instructure, Inc. - CEO and Director [16]

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Oh, the pipeline, sure, yes. Well, I mean, as you know, the Canvas pipeline is very well understood and very predictable, and our win rates are very steady. On Bridge, it's not the case, right? And I mean, we are still learning a lot, as you can tell with Sony and Timex. And there's a bunch of great names of accounts that we continue to win, and we're winning more named accounts as every quarter goes on. So we are getting better at this, and the product is continuing to improve. And so our win rates are increasing. The deal sizes are increasing, and the number of clients that we have using Bridge are growing very quickly. Without going into a lot of detail around the metrics, I can just qualitatively tell you that we're pleased with the progress that Bridge is making, and it is very different, of course, than the Canvas market.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [17]

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And relative to the competition, I mean, is it, I guess, more intuitive functionality or maybe not as elaborate functionality that maybe (inaudible) aren't paying for that you're...

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Joshua L. Coates, Instructure, Inc. - CEO and Director [18]

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Yes. What we hear consistently is just ease of use. That -- I mean, that's the reason we win. It's better software. It's easier to use. It's as effective or better than the competition and software that's -- meets the mark but it's easier to use and more elegant, tends to win. And that's what we're seeing in Bridge. We're seeing the feature gap really just close up now. I mean, we -- sure, we occasionally lose because of a lack of feature, but that's a less common case now. The market's a very large fragmented market. So the reasons for losing are varied all over the place, and the people -- the companies we're losing to are also varied. So it's not, again, like Canvas, like it's just Blackboard. That's the competition. That's pretty much it. Whereas on -- with Bridge, it's -- gosh, it could be one of dozens of competitors.

The thing we watch for really is the consistency in improved metrics quarter-over-quarter. And we're seeing that, and we're pleased with the progress. As you know, we'll be releasing another module for Bridge this year that we'll talk about soon, which will -- we anticipate a dramatic impact on Bridge sales, and we're really excited about that as well.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [19]

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Maybe if I can sneak one more in -- that's helpful, so thank you. So you've mentioned some pretty nice large enterprise wins in the past or last quarter, PwC and McKesson Canada. I know it's early days. But have you had any instances yet of expanding within those customers that you landed in? Are you big enough to do that yet? And maybe get a sense of how many Bridge customers you have at this point.

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Joshua L. Coates, Instructure, Inc. - CEO and Director [20]

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Sure. I think there's a really positive relationship between deals we've closed and being able to upsell. In fact, last quarter, our 5 largest deals that we closed, 4 of those had already purchased products and services or plan to before the end of Q2. So we're seeing a lot of double dipping with our customer base around Bridge, which is part of our strategy, especially going out after some of these larger enterprise deals where we just get a piece of the business. It's critical that we're able to upsell. And yes, we've been seeing that just in the last couple of quarters.

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Operator [21]

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We'll go now to Brian Schwartz with Oppenheimer.

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Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [22]

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My question is on the ed tech business and the higher ed tech business. I'm trying to understand better what the legacy vendors, the Blackboard, the Desire2Learns, what they're doing with all their different platforms that they have in the market. And I'm just wondering to what extent, as they move more aggressively to force their customers to move over to SaaS platforms in the near term, if you're seeing any signs or any new strategies from them that could cause even more disruption and create additional opportunities for Canvas. For instance, when you look at the pipeline expansion in higher ed, I'm wondering if it's getting any sort of boost by what the legacy vendors are doing.

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Joshua L. Coates, Instructure, Inc. - CEO and Director [23]

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Well, there's not an acute moment where we can see a shift in the market. I mean, everything moves relatively slowly for our legacy competitors because of the situation they're in. So we've been observing it in slow motion over the last 4 years. Both Blackboard and Desire2Learn have been, again, in slow motion trying to consolidate their user base on a stable SaaS type of platform. But it's very slow. It's very complex, and it's very messy. And that's what they've been, I think, really preoccupied with since 2012. So we don't see a specific shift in that regard.

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Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [24]

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Okay. Follow-up question, Josh. I had one more for you before moving on to Steve. The guidance to me looks very strong. Looks like you're raising the outlook here more than the beat or more than the upside you had from the faster go-lives in the quarter. The question I wanted to ask you really is about the reverse and if there's any concerns that you might have about your services or your implementation capacity from where it stands today in regard to deploying the backlog here in a timely manner because it looks like it was a strong bookings quarter over there.

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Steven B. Kaminsky, Instructure, Inc. - CFO [25]

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Yes. So Brian, this is Steve. I'll take this one. So the short answer is no. The revenue split in Q1 was 90-10, which was exactly what it was in Q4. So we're in a good spot in terms of making sure we get everybody implemented. We spent a lot of energy ramping up the staff in the first half of the year, getting ready for the big season, which is really Q3. That's where a lot of the implementations are well underway or at least gets finalized before the fall term. We've done this for 6 years now. We really understand the pattern. It's very well understood. Bridge is not that complex, so that won't create any wrinkles for us. So I think we're in a really good spot. I don't think there's any concern that we have regarding getting the services work done in a timely manner.

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Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [26]

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And last question that I have for you, just in regards to the operating margin guidance here for the year. I think you talked about this a little bit in your introductory comments that the second half of the year should show less margin improvements compared to the first half. You talked a little bit about the expectation on the gross margin trend. But I'm just wondering on the operating expenses, if there are any additional expenses that you have in the second half of the year that we should expect and just plan for in our model.

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Steven B. Kaminsky, Instructure, Inc. - CFO [27]

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Yes -- no -- the -- sure, of course. Yes, so we had 2,200 basis point improvement or nearly a 2,200 basis point improvement in Q1-over-Q1. For full year, we're guiding to just under a 1,400 basis point improvement across the board on operating expenses. And so you'll see that, that obviously will not lever quite as fast. The particular comment in the prepared remarks was around gross margin. Obviously, we can't continue to improve at that rate. We'll run out of -- we'll get to 75% way ahead of schedule. And we may do that, but it probably -- it won't be this year.

And so I expect the -- I think if you look at the full year guidance, you can sort of figure out how the rest of the year is going to play out or get a good sense to it. With respect to anything unusual, nothing really. Instructure comps in Q3. It was in Q3 last year, so there's was nothing weird about that. But it is a big number, and it is a short-term anomaly in terms of what happens to the sales and marketing spend. Other than that, it's going to be business as usual.

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Operator [28]

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We'll go next to Scott Berg with Needham.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst of SaaS, Application Software, Human Capital Management [29]

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Congrats on a good quarter. I've got 2 questions here. First of all, Josh, on the higher ed side, you guys had some crazy high win rates last year in 2016. And while it's early in '17 here, do you see a meaningful deviation off what you saw last year into this year?

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Joshua L. Coates, Instructure, Inc. - CEO and Director [30]

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We don't anticipate a meaningful deviation. It's -- we'll probably be within, plus or minus, some relatively small number of that win rate. We do know that heading into the late majority of the market, the behavior's a little different than the early adopters, but so far, we really haven't seen a significant impact in our win rate.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst of SaaS, Application Software, Human Capital Management [31]

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Great. And then my follow-up question is, as you started getting through Q1, how are you looking at your sales investments for the other growth areas of the company. The metrics that Steve provided are pretty strong, triple-digit growth in a couple of them. But do you feel like you need to pivot any of those sales resources maybe to capture some opportunities that weren't there 3 to 6 months ago?

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Joshua L. Coates, Instructure, Inc. - CEO and Director [32]

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Yes. So I -- we talked a little bit about this over time, Scott. We're pretty fully staffed for domestic Canvas, right? We've got that market well covered. We're in good shape, so there's not a lot of incremental expense as we continue to pursue that market. When we talk about international, obviously, it's a region-by-region story. And now what's getting interesting is we're thinking about how to expand Bridge internationally. And of course, Bridge, just sort of globally, is going to be one of our fastest growing and probably our longest-term growing sales investments -- sales and marketing investment because the markets for Bridge literally by -- in every country is meaningfully bigger than it is in the education space for Canvas. So the way that we think about it is the fast growing markets are getting the incremental investment and domestic Canvas isn't getting a whole lot.

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Operator [33]

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For the next question, we'll go to Ben McFadden with Pacific Crest Securities.

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Benjamin J. McFadden, Pacific Crest Securities, Inc., Research Division - Research Analyst, Business Services Software [34]

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Josh, I wanted to start with a question on Bridge. I mean, you mentioned the fact that you think the functionality gap is closing between you and some of the competing offerings out there. Just curious as far as whether you're seeing any significant shift relative to when you're selling in greenfield versus rip and replacing a potential competing solution.

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Joshua L. Coates, Instructure, Inc. - CEO and Director [35]

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It's still generally around 50-50 as far as greenfield versus rip and replace for Bridge.

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Benjamin J. McFadden, Pacific Crest Securities, Inc., Research Division - Research Analyst, Business Services Software [36]

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Okay. And then, Steve, I just -- a question here on the guide. I mean, your Q1 came in ahead of expectations due to the early starts, and your Q2 guide looks good. Relative to the back half of the year, it seems like there's some implied slowdown in there relative to where we saw growth rates; year-over-year, of course, last year as well. I'm just curious how much of this is sort of conservatism based upon the fact of how much of the billing cycle comes in, in Q3 or whether there's a broader shift in seasonality. And if it's based upon the Q3, can you give us an update of kind of what the visibility you have to date into potential that sales cycle is today?

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Steven B. Kaminsky, Instructure, Inc. - CFO [37]

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Sure. So the short answer is, we have visibility pretty clear -- I mean, certainly for the rest of this quarter and pretty well into Q3. When you get into Q4, visibility declines to some degree. But in terms of general seasonality, now this year looks very similar to prior years. And in terms of how the growth rate operates quarter-over-quarter, as you move through the year, I think that's also -- I think if you look at the historicals, you'll see a fairly consistent pattern that it just tends to be higher in the beginning of the year and lower at the end of the year. So there's nothing really unusual going on here. We started the year with about 35% -- approximately 35% growth. We're now just over 36% growth. So as we overachieve and as we feel a little bit stronger about the year, we'll continue to update you on that, but there's nothing unusual.

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Operator [38]

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We'll go next to Terry Tillman with Raymond James.

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Terrell Frederick Tillman, Raymond James & Associates, Inc., Research Division - Research Analyst [39]

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I'm assuming you're saving the best for last.

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Joshua L. Coates, Instructure, Inc. - CEO and Director [40]

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Obviously.

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Steven B. Kaminsky, Instructure, Inc. - CFO [41]

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There might be somebody after you, Terry -- just saying.

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Terrell Frederick Tillman, Raymond James & Associates, Inc., Research Division - Research Analyst [42]

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So anyways, on the prepaids -- and Steve, I usually don't delve deeply into the financial statements in the initial earnings release, but it looked like the prepaids -- was there something that's like a larger vendor payment that occurred? Because the deferred was off a little bit, like somebody else mentioned, but it looks like there was a bigger variance on OCF or at least from our expectations. And I'm curious, was there something notable on the prepaid side that won't repeat itself?

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Steven B. Kaminsky, Instructure, Inc. - CFO [43]

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Yes. So normally, I don't go into these details. But Terry, you're very special, so we're going to do it for you. We had a fairly large prepaid for Amazon this quarter, and that helped us achieve a higher level of discount from them. And we thought that was money well spent. So that's probably what's driving that number.

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Terrell Frederick Tillman, Raymond James & Associates, Inc., Research Division - Research Analyst [44]

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Okay. And in terms of -- in some of the prior questions, trying to drive into some of these newer growth engines and they're definitely exciting. But if we look at the end of '17 or maybe into '18, would you guys see a notably different size international business versus your corporate business? Or would they be comparable, you think?

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Joshua L. Coates, Instructure, Inc. - CEO and Director [45]

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Oh, that's an interesting question.

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Steven B. Kaminsky, Instructure, Inc. - CFO [46]

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Well, so here's the way I would think about it. They're kind of the same. They're just several years apart, right? So if you ask me, will Bridge in 2020 look like international in 2018, yes, maybe, something like that, maybe even a little bit better. But I think the big difference between them is that international had a 2-year head start on Bridge, and so -- but we're really pleased obviously with the international growth. you could -- you'll see in our Q that'll be on file in a couple of days what the international numbers are, and I believe we're around 12% now of the total. So we're really happy with that. And similarly, we're really happy with the triple-digit growth that we talked about for Bridge.

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Terrell Frederick Tillman, Raymond James & Associates, Inc., Research Division - Research Analyst [47]

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Okay. And just the final question, as it relates to new products, Josh, you talked about that, and so this is for either you or Steve. What is baked in, if anything, in terms of kind of your internal assumptions or even the revenue guidance as it relates to meaningful impact from either of these 2 products?

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Joshua L. Coates, Instructure, Inc. - CEO and Director [48]

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It's pretty well baked in. We're going to see relatively little impact on revenue in 2017 with these new product announcements. They're really going to be something that will take off in 2018. But yes, it's pretty well baked in.

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Operator [49]

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We'll go now to Corey Greendale with First Analysis.

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Corey A. Greendale, First Analysis Securities Corporation, Research Division - SVP [50]

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I don't know if I'm last either, but I'll hope if I am that you saved me for last for good reason. So just a couple of quick questions. So on the product side, I realize you're not going to talk about products you haven't announced yet. But next week at the GSV, I think we're going to be seeing companies doing various things with like machine learning, and I think you've got great data on learning. So are you doing anything now with machine learning with your data? Is that a glimmer in your eye? Or how are you looking at that?

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Joshua L. Coates, Instructure, Inc. - CEO and Director [51]

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Really interesting question. Short answer is, no, we are not doing anything with machine learning. I'll take a minute here to just tell you what I think of machine learning. I think it's really interesting and exciting. I think it's been really interesting and exciting for the last 15 years also. And it continues to make progress, but we don't make big bets on the market with regards to sort of speculative, cutting-edge type of technology that we've seen before over and over and over again. Machine learning fits in this category.

We obviously keep an eye on interesting startups that are doing innovative things with machine learning in the education space. But it's -- if you've followed machine learning or artificial intelligence for any number of years, then you'll know what I'm talking about. It's -- there's a lot of hype, but it's something you definitely have to proceed with caution. And so yes, GSV, we'll hear a lot about machine learning and artificial intelligence but we're being cautious.

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Corey A. Greendale, First Analysis Securities Corporation, Research Division - SVP [52]

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And with that, I realize -- given a whole bunch of things, I assume you're not kind of in the big M&A business. But would you consider, as you're more comfortable, you're getting to cash flow positive, would you do like a little acqui-hire or something in that area or anything else?

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Joshua L. Coates, Instructure, Inc. - CEO and Director [53]

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Well, maybe. I don't know about that area. I mean, we have a very active M&A team here at Instructure, and we review deals, oh gosh, every other week, we're reviewing deals. But we're also very cautious on that. As we said before, our bias is to grow TAM organically with our R&D department here in-house. We have, in the past, done some acqui-hires, and those are, of course, the most interesting things just to acquire engineering talent. But as far as products in new markets, we look at those as well, but I wouldn't anticipate any significant financial acquisition. That's something we don't really feel like we have the appetite for because there's so much growth opportunity with what we have on our plate today. And like you said, we are definitely -- we have our eye on the ball with respect to profitability.

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Operator [54]

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(Operator Instructions) We'll take our next question from Justin Furby with William Blair.

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Justin Allen Furby, William Blair & Company L.L.C., Research Division - Research Analyst [55]

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Steve, can you provide -- can you provide a little more color, Steve, around the acquisition cost improvement that you highlighted? I think you highlighted it both with Canvas and Bridge. But I guess specific to Bridge, what sort of improvement have you seen? And then from a development standpoint, can you give a sort of a rough sense of what your spend is towards the corporate space? Is it 20%? Is it 40%? And I've got one follow-up for Josh.

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Steven B. Kaminsky, Instructure, Inc. - CFO [56]

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So Justin, we don't break it out by market. What we have said historically and what I can repeat today is that it is much better in higher ed. In fact, it's below 1 for higher ed, and for Bridge, it's a meaningful single-digit number. And then it's everything in between. But what we can tell you, what's really important to understand is that we have now watched 3 markets migrate. When I say 3 markets, I'm talking about higher ed domestic, K-12 domestic and international, to comfortable numbers, right? And we're watching Bridge do the exact same thing.

So the point of all of that is this is a well-worn path for us. We're very comfortable on how to make this happen. We understand this concept of starting folks at lower quotas and raising them, so you increase productivity meaningfully. On the sales side, we understand how to take a lead-gen machine and make it more efficient over time. We understand how to do event spending and make that more efficient, et cetera.

So across the board, we're very comfortable with starting with higher CACs, if you will, and lowering them over time. Collectively, the CAC for the quarter was just a smidge over what it was last quarter at 1.6. Last time, it was like 1.59. It went up literally 30 basis points. And so it's a really well-under-control process. And as we continue to see those improvements, we just continue to validate the business model that we have. When we enter new markets, we know how to take something that's expensive in the beginning and then make it very cost effective and efficient over time.

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Justin Allen Furby, William Blair & Company L.L.C., Research Division - Research Analyst [57]

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Got it. That's helpful. And then does what you're seeing with the progression on Bridge, Steve, in terms of the improvement, does that mimic what you've maybe seen on the international side with higher ed? Is it very different? Or what does it look like when you kind of go back in time?

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Steven B. Kaminsky, Instructure, Inc. - CFO [58]

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I don't honestly have the answer on that. I haven't done that exact analysis because we tend to just focus on the trend. And without digging in -- because the dynamics are always different. The U.S. for higher ed domestic is one kind of homogenous market. International is a series of regions, and so where you may -- we may be and are very efficient in places like the U.K. and Sydney -- where we've been the longest, we're extremely inefficient in LatAm, right? But at a blended rate, it's moving in the right direction. Bridge domestically looks the same as the Canvas market in terms of its homogenous market, but Bridge internationally won't, right?

So you really got to get into the weeds to figure that out. And for us, I'm not sure it's that helpful, so we think staying at the sort of market level makes the most sense. Now if we saw something weird or something moving in the wrong direction, of course, we would dig in to understand what was going on there. But yes, so those dynamics probably are a little too detailed even for us.

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Justin Allen Furby, William Blair & Company L.L.C., Research Division - Research Analyst [59]

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Got it. That makes sense. And then, Josh, just lastly for you. In terms of the build-out of trying to go to the systems integrators and the third-party influencers in the corporate space, can you just give an update in terms of where you are with that and where you hope to be in, say, 6 to 12 months?

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Joshua L. Coates, Instructure, Inc. - CEO and Director [60]

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Well, we still are very much focused on selling direct in the corporate market, and I anticipate 6 to 12 months from now we will fill the vast majority of all our sales, and Bridge will be direct. I think the opportunity for resellers and partnerships in the corporate market are significantly greater than in the education side of the business. But I think for the first few years of being in a market, I think it's important to be direct and really understand the market, really understand your product, how to sell it and understand the market dynamics before you really engage in a reseller partnership. And so we're following that path. But over the next year, we'll be coming up on our third year in the market, and I anticipate we'll have probably 1 or 2 interesting reseller relationships at that point in time. But we're very much focused on direct for now.

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Operator [61]

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That concludes today's question-and-answer session. At this time, I'll turn the conference back to Mr. Josh Coates for any additional remarks.

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Joshua L. Coates, Instructure, Inc. - CEO and Director [62]

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All right, guys, that's a wrap for Q1, and we'll see you guys next quarter and talk about Q2. You guys have a great May day, and we'll see you next time.

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Operator [63]

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This does conclude today's conference. Thank you for your participation. You may now disconnect.