Q2 2023 Instructure Holdings Inc Earnings Call
Participants
Dale E. Bowen; CFO; Instructure Holdings, Inc.
David Banks
Stephen M. Daly; CEO & Director; Instructure Holdings, Inc.
Brian Christopher Peterson; Senior Research Associate; Raymond James & Associates, Inc., Research Division
David Marshall Lustberg; Equity Associate; Jefferies LLC, Research Division
Devin Au; Associate; KeyBanc Capital Markets Inc., Research Division
Frederick Christian Havemeyer; Senior Analyst; Macquarie Research
Joseph D. Vruwink; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
Joshua Phillip Baer; Equity Analyst; Morgan Stanley, Research Division
Matthew David VanVliet; Director & Application Software Analyst; BTIG, LLC, Research Division
Noah Ross Herman; Research Analyst; JPMorgan Chase & Co, Research Division
Ryan Michael MacDonald; Senior Analyst; Needham & Company, LLC, Research Division
Stephen Hardy Sheldon; Analyst; William Blair & Company L.L.C., Research Division
Steven Lester Enders; Research Analyst; Citigroup Inc., Research Division
Terrell Frederick Tillman; Research Analyst; Truist Securities, Inc., Research Division
Presentation
Operator
Ladies and gentlemen, thank you for standing by, and welcome to Instructure's Second Quarter 2023 Earnings Call. (Operator Instructions) Please be advised that this conference is being recorded.
I would now like to turn the conference over to your first speaker, David Banks, Vice President, Investor Relations. David, please go ahead.
David Banks
Thank you, Josh. Good afternoon, and welcome to Instructure's Q2 '23 Earnings Conference Call. We will discuss results announced in our press release issued after market close today. With me are Instructure's Chief Executive Officer, Steve Daly; and Chief Financial Officer, Dale Bowen.
Before we begin, I'd like to remind you that today's conference call will include forward-looking statements based on the company's current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties, and our results may differ materially.
For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release and other reports and filings we make from time to time with the Securities and Exchange Commission. All of our statements are made as of today, July 31, based on information available to us today. And except as required by law, we assume no obligation to update any such statements.
During the call, we will also refer to both GAAP and non-GAAP financial measures. You can find the reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted in the Investor Relations section of our website.
With that, let me turn the call over to Steve.
Stephen M. Daly
Thanks, David. I'm delighted to welcome everyone to Instructure's Q2 2023 Earnings Call. During today's call, Dale and I will share the details of our Q2 results and provide guidance for Q3 and the full year 2023.
Q2 results exceeded our previously committed guidance range for our revenue and adjusted EBITDA, fueled by our efficient go-to-market organization and unyielding dedication to customer satisfaction. Q2 revenue was $131.1 million, up 14.4% year-over-year, impacted by a constant currency headwind of 160 basis points. Q2 adjusted EBITDA grew 29% year-over-year to $51.3 million, driving a 39.1% margin. We believe the strength of our Q2 performance demonstrates the effectiveness of our business model.
Before we delve into highlights from the second quarter, I want to provide some takeaways from our InstructureCon conference that took place in Denver a few days ago, the first such event we've held in person since 2019. We had nearly 2,000 customers, over 100 partners and more than 2,300 attendees at this sold-out event. It was gratifying to find the Instructure community is as vibrant as ever.
We unveiled enhanced and expanded Instructure Learning Platform innovation centered around core teaching and learning, advanced analytics, lifelong learning and platform integration. We believe these new solutions will save educators time, personalize learning experiences for students and simplify complex tasks for administrators. We also previewed some of our AI strategies and are excited by the feedback from our customers as we move forward with that.
Now I will share highlights from the quarter, including 4 key drivers: strong new logo sales, cross-sell uplift, the power of our platform strategy and how we are leveraging our business model. First, our new logo win rates remain strong across all of our markets. Success there is driven by our ability to solve real-world challenges across the teaching and learning landscape.
Our focus on lifelong learning and vocational training resulted in a win with Duke University. Duke made a significant investment in the entire Instructure Learning Platform with the implementations of Canvas LMS, Impact, Canvas Studio and Canvas Credentials. Duke's Office of Teaching and Learning spearheaded this transition to bolster their ambition of being a frontrunner in lifelong nontraditional education. We now serve all of the top 10 universities in the United States with Canvas.
Also in North American higher ed, we had a significant win with Ohio University. After 20-plus years on a legacy provider, OU chose Canvas for a 10-year contract, one, because of the strength of the Canvas community, our presence in other flagship institutions in Ohio, our overall market leadership and our ability to deliver a value-based comprehensive solution.
In North American K-12, our platform continues to support our market-leading position. The green shoots we mentioned during our last quarterly call resulted in strong bookings in Q2 as K-12 decision-makers continue to recognize our products as mission critical. Cincinnati Public Schools joined the Canvas universe in the quarter. A long-time user of a competitive solution, Cincinnati ran a lengthy process, seeking feedback from parents, teachers and students. Their strategy was to implement a new LMS that would deliver best-in-breed results. Canvas was far away the winner as our LMS clearly matched the district's innovative approach to education. Our reputation for consistent uptime, [big] feature releases, unmatched service and support and unrivaled student experience allowed them to confidently displace the incumbent provider with Canvas.
Among the new international deals in Q2, we secured a direct win with University of Continuing Education Krems in Austria, the leading public university for continuing education in Europe. Krems serves a changing demographic with an increasing average retirement age and a skill gap between the workforce and graduates. They saw Canvas as a way to address the needs of their student population, allowing them to serve both traditional and nontraditional students. Similar to other institutions in Europe, Krems has strict privacy standards that must be met by their partners. Our global privacy strategy, which centers on safeguarding student data and reducing our customers' regulatory burden, allows Krems to comply with rigorous privacy standards in the region. It's gratifying to see our customers responding positively to our unwavering dedication to privacy.
Second, we continue to drive growth with existing customers, both through cross-sell and upsell, where we see $1 billion-plus opportunity. Internationally, we secured a meaningful upsell with [Global Pro], one of the largest registered training organization, or RTOs, in Europe, making them our largest customer by user member in Europe. This also demonstrates our ability to serve the needs of nontraditional learning institutions.
Cross-sell is fueled by deals such as Charlotte-Mecklenburg Schools, a long-time Canvas and MasteryConnect customer. After a multi-vendor evaluation, the district chose our assessment content because of the rigor and accuracy of the solution that gives better insight in student growth.
This further validates our platform strategy and the strength of our suite of products. This platform strategy, our third key driver, drives on innovation and partnerships. During InstructureCon, Shiren Vijiasingam, our Chief Product Officer, provided a glimpse into many new product initiatives designed to shift the education paradigm, enhance teacher efficiency and posture student success.
Among the most important partner-driven wins in the quarter, we won a contract with one of the preeminent technology companies in the world and wanted to conduct research to prove the efficacy of handheld devices. We created a proposal that examined the impact of [MAP] intervention on both student outcomes and teacher outcomes. In addition to expanding a great partnership with a large technology business, [the win] also has started to pay attention to large districts that are looking to participate in research. And we are thinking big about partnerships.
Also at InstructureCon, we announced that we are teaming with Khan Academy, bringing together our Instructure Learning Platform with Khan's AI-powered student tutor and teaching assistant, Khanmigo. Through this partnership, we are offering world-class content from the Khan Academy with the industry's most widely used commercial LMS, leveraging generative AI to empower educators to meet students where they are in their educational journey. We're committed to bringing AI to the teaching and learning process with intent, safety and equity.
To that end, we also announced the Emerging AI Marketplace last week, which gives educators visibility and access to the AI solutions that are integrated into the Instructure Learning Platform. We have worked with our customers to define privacy and security standards to ensure AI solutions are safe, and each partner in the marketplace is committed to the standard.
In just the last 2 years, we have nearly doubled our partner base. Truly, our investment in the Instructure Learning Platform gives our customers access to innovation across the (inaudible) landscape.
And finally, our results are indicative of our ability to drive leverage in the business. Because of our disciplined investments, we've been able to deliver best-in-class margins that in turn allow us to invest in our platform and drive long-term durable growth. Our business model permits us to continue to driving strong top line results without sacrificing margins and profitability.
As evidence of this, we saw record renewals in Q2 as customers that came under the COVID-19 pandemic continue to see value in a more normalized environment. With adjusted gross margins approaching 80% and adjusted EBITDA margins nearly 40%, we expect to continue to produce free cash flow that will allow us to reinvest both organically and through M&A to drive long-term durable growth.
In conclusion, we believe our impressive Q2 results and expanded impact on education position us as the clear leader in the education technology space. And we look forward to the opportunity to continue to drive value for our customers and shareholders in the months and years ahead.
Now I will turn it over to Dale to provide further details on our Q2 financial performance and guidance for Q3 and the full year 2023. Dale, please go ahead.
Dale E. Bowen
Thank you, Steve, and thanks again to everyone for joining us today. Before discussing our detailed financial results, I'd like to point out that in addition to our GAAP results, I will be discussing certain non-GAAP results. 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.
In Q2, we continue to show a combination of strong top line growth and best-in-class adjusted EBITDA margins. As Steve mentioned, we generated total GAAP revenue of $131.4 million. Subscription and support accounted for 90% of our Q2 revenue at $118.6 million, up 15% year-over-year, driven by healthy growth across all of our key markets with particular emphasis in K-12 and with cross-sell. Professional services and other revenue accounted for 10% of our Q2 revenue at $12.5 million, up 7% year-over-year. Deferred revenue at the end of Q2 was $330.7 million, up 17% year-over-year.
We ended Q2 with remaining performance obligations, or RPO, of $853.6 million, up 9% year-over-year. We expect to recognize revenue on approximately 72% of our RPO over the next 24 months.
In discussing the remainder of the income statement, please note that unless otherwise stated, all reference to our expenses, operating results and share count are on a non-GAAP basis. Our strong gross profit margin profile was supported by our optimized cloud architecture and flexible support model that scales to meet seasonal customer demand. In Q2, gross profit was $104.1 million, representing a 79.5% gross margin, up from 77.6% in Q2 of last year.
Turning now to operating expenses. Sales and marketing expenses for Q2 were $27.6 million or 21% of revenue, down slightly from 21.5% of revenue in Q2 of 2022. Research and development expenses for Q2 were $16.6 million or 13% of revenue compared to 14% in Q2 of 2022. General and administrative expenses for Q2 were $9.8 million or 8% of revenue, down from 9% in Q2 of last year.
Non-GAAP operating income for Q2 was $50.2 million, representing a 38.3% operating margin, up from 33.7% in Q2 of 2022. Q2 adjusted EBITDA margin was $51.3 million, representing a 39.1% adjusted EBITDA margin, up from 34.6% in Q2 of last year. Non-GAAP net income was $28 million in Q2 or $0.19 per share compared with $23.8 million or $0.17 per share a year ago.
Turning to the balance sheet and cash flow statement. We ended Q2 with $129.8 million of cash, cash equivalents and restricted cash and $488.4 million of long-term debt, net of discount, resulting in a 1.83x net debt to trailing 12-month adjusted EBITDA ratio. Free cash flow for the quarter was $23.5 million compared to $6.6 million in the prior year, up more than 250%.
Adjusted unlevered free cash flow, which adjusts for the impact of transaction costs, sponsor costs, impaired leases and other nonrecurring costs paid in cash, was $37.1 million, a 129% year-over-year increase from $16.2 million in the year ago quarter. Note that our free cash flow was quite strong this quarter due chiefly to accelerated collections. We expect that these will normalize as we move through the balance of the year.
I will now conclude the call by providing guidance for Q3 and the full year of '23 for revenue and adjusted EBITDA. We have provided additional guidance details in our earnings press release.
For the third quarter of fiscal 2023, we expect revenue in the range of $132 million to $133 million. For the full year, we expect revenue to be in the range of $524 million to $528 million, up $2.9 million at the midpoint compared with the annual guidance that we provided in May. We expect Q3 adjusted EBITDA in the range of $52.5 million to $53.5 million, representing an adjusted EBITDA margin of 38.8% at the midpoint.
For the full year, we expect adjusted EBITDA in the range of $203.5 million to $207.5 million, representing an adjusted EBITDA margin of 39% at the midpoint. For the full year, we expect adjusted unlevered free cash flow to be in the range of $207 million to $211 million for an adjusted unlevered free cash flow margin of 39.7% at the midpoint.
In summary, we believe that our first half results put us in a great position to drive an even better 2023 than originally expected. We executed at a very high level, exceeding our guidance and continuing to deliver a rare combination of double-digit growth and best-in-class [margin]. We couldn't be more pleased about our momentum in the marketplace and look forward to updating you on our progress throughout 2023.
With that, Steve and I are happy to take any of your questions.
Question and Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Josh Baer with Morgan Stanley.
Joshua Phillip Baer
Congrats on a strong quarter. I was hoping to get an updated view on growth expectations across K-12, higher ed and international. Sometimes you give kind of ranges there. And I wanted to ask just to get also a sense for the gross margins or EBITDA margins or contribution margins across those segments, thinking about how to assess the impacts from mix shift, presumably to faster-growing international and maybe to K-12, how that could impact margins, too.
Dale E. Bowen
Thanks, Josh, and I appreciate the question. We've provided some growth expectations in general terms for North America K-12 with North America high ed being in the high single digits and international to be in the low double digits. And that's how we look at the business moving forward.
Now in terms of margins, we've not broken out margins by any of those different segments that we've talked about. However, I will say that we're very confident in our operating model that we can get very good and positive contribution margins in each of the areas where we participate.
Stephen M. Daly
Josh, we've made investments, for instance, in our channel program that were negative margins, frankly, as we began making those investments, and we've still been able to improve our margins in the process. So that's the model that we're taking, is that we'll continue to see those improvements even as we see the mix shift between those.
Joshua Phillip Baer
Okay. That's helpful. And then any change in the competitive landscape across those end markets? Or is it the same story?
Stephen M. Daly
Yes. We're seeing similar competitive dynamics across K-12, higher ed and international. So no change there, Josh.
Operator
Your next question comes from the line of Steve Enders with Citi.
Steven Lester Enders
I guess I did want to start on asking about takeaways from the conference. And I know there are a lot of product announcements, but I guess what's kind of the early feedback on some of the AI initiatives from the customers that you've talked to? And I guess how should we be thinking about the potential for that to layer into the model here over the next few years?
Stephen M. Daly
Yes. It was good to see you there, Steve. We -- the feedback was generally very positive. So we had taken time before -- for basically the last 18 months, we've worked with some customer user groups. We were very pragmatic and really spent time with them understanding where were areas that they'd like us to make investments. And so investments like using artificial intelligence to help create pages within Canvas, that creator experience using AI -- use regular language to do that was very well received, some of the stuff that we showed in the labs -- in the educational moments of the future room.
They were very excited about [global] search being one of those, some of the things we did, recognizing sentiment within a remote environment as well as some of the other pieces that we highlighted. We had a lot of sign-ups, if you will, or customers that want to be part of the early adopter program as we work through some of the details on these.
So in general, very positive. I'd say it's still early days as far as what impact this is going to have on the business model long term, and we're working through those with our customers as we work to understand which of this functionality, the value that it's bringing result in changes in pricing or what the cost structure looks like. So it's a little early to be building anything into the models, Steven.
Steven Lester Enders
Okay. Perfect. No, that's helpful there. I guess to follow up, it's good renewal activity and good bookings here in the quarter. How are you feeling about the kind of current budget environment? And kind of what's the view into pipeline opportunity going into 3Q?
Stephen M. Daly
Yes. We feel good about where our pipeline sits going into the second half. I would say you've read all the headlines about some of the challenges that higher ed is facing. What we're finding is, in general, those are good -- we help them deal with a lot of those challenges. So we feel it's a good long-term backdrop for us. And so things like better consolidation that we're starting to see happen. Customers have told us that they want to standardize around a few strategic platforms, ours being one of those.
The work that we've been investing in over the last 2 years is to really ensure that we give solutions to address nontraditional students, the work we've done to really go after those nontraditional education institutions, all are good backdrops for us for long-term durable growth. So we feel good about where we're sitting going into the second half as well as really long term from a growth perspective.
Operator
Your next question comes from the line of Fred Havemeyer with Macquarie.
Frederick Christian Havemeyer
Congratulations on the quarter. I think I would like to just begin by asking a little bit about international as well, too. Just generally, certainly, we saw you highlighted the Austria win. Just how do you think about that opportunity going into -- throughout the balance of this year and, of course, into next year? Just how far along do you feel you are with your international go-to-market program? And just how confident are you in the international opportunities?
Stephen M. Daly
Yes. It's a good question, Fred. We feel really good about our positioning for international. So as we highlighted in the script, the wins with Krems was in Austria. Part of the value proposition that we bring to particularly our European customers but even across the board is the work that we've done really to put in a very robust privacy and security framework. And so we feel good that demonstrates the value of those, particularly when you're dealing with some of the regulatory environments each of the regions is dealing with.
So feel good about -- Moodle is still 70% of the market there. We believe in the opportunity to continue to grow, still our fastest grower and that we can drive big business over time. So still feel similar to as we've talked about in the past, Fred, about the opportunity there and particularly about our position to be able to win.
Channel investment is still continuing, and we're starting to see some progress in the channel. But again, that's probably something that occurs a little bit later in time as far as having a meaningful impact on the top line.
Frederick Christian Havemeyer
And I think just another one. Just we've seen Canvas is performing well. Your product is absolutely solid, but of course, you've been building a broader portfolio of solutions, too. So I'm curious if you can add a little more context also on just where you're seeing adoption of just outside your core Canvas solution and how that's trending throughout this year.
Stephen M. Daly
Yes. So we saw particular success in K-12 with assessments. So Mastery-branded products, whether it's the MasteryConnect, the sentiment management system or the content that rides along with that. So a good quarter from that perspective. We're seeing a lot of pickup with our catalog and credentials as we help either higher ed institutions address the nontraditional or as we go to -- we go after some of those nontraditional, those RTO organizations like we talked about in the script. So those 2 have been particularly successful from a cross-selling perspective, those 2 areas.
And then we're seeing good success with our LearnPlatform acquisition. And so from the ability to sell on both sides of the network, either the educational institution as well as selling services to the partners and providers has been -- it's met our expectations and where the pipeline has grown and nearly doubled since we did the acquisition. So we're feeling good.
Operator
Your next question comes from the line of Stephen Sheldon with William Blair.
Stephen Hardy Sheldon
First one here, just great to see renewal trends supporting the step-up in RPO. So if you went through this heavy renewal period, did anything surprise you either positively or negatively in terms of things like renewal rates, deal lengths, pricing, upselling, et cetera? Are there any trends that you saw consistently such as maybe longer-term -- longer-duration contract renewals? Just any detail on the renewal activity.
Stephen M. Daly
Yes. Thanks for pointing out the RPO, David (sic) [Stephen]. Really pleased with it. What we did call out is a historic number for us on RPO, and really pleased with the renewals team.
So I would say the one constant thing that we're seeing out of this group is that we have a lot of customers come on board 3 years ago in the beginning stages of the pandemic, and they're finding value still today with the learning platform. And they're building around the learning platform. And so very, very high retention rate.
We are seeing some deal length -- contract length extending mainly in the high ed space. And the other thing that I would say is those renewals are now coming with additional products that we have out of our portfolio. So really good things coming out of a strong renewal quarter we just closed.
Stephen Hardy Sheldon
Good to hear. I appreciate that. As a follow-up, it seemed like there was a lot of focus at the user conference last week on credentialing in higher ed. It looks like that was included in the Duke win. So how frequently are you seeing that being included in conversations with new and existing higher ed customers? Is this going to be something that practically every university will need to be thinking about to be relevant over the medium term in your view? And what could that mean for your financial opportunity with these types of solutions?
Stephen M. Daly
Yes. This is a conversation that we're having with almost every institution, right? They're looking at how do they meet the needs of the workforce of the future, how do they demonstrate skills along the way rather than just pointing to the diploma at the end of their educational journey. So it is absolutely a point of conversation. It's in almost every conversation that we're having from a selling perspective.
It's my belief that, over time, every institution will have to figure out how to deal with this. And the customer panels, not just the one that we have together, but also others, are kind of confirming that this really is an opportunity for higher education to really ensure that enrollments go up and they're addressing the skills-based economy going forward.
Operator
Your next question comes from the line of Joe Vruwink with Baird.
Joseph D. Vruwink
Maybe I'll go back quickly to the last discussion on RPO. Is it possible to translate what you just saw in terms of financial metric like net retention rates and maybe how the recent renewal cohorts are evolving relative to -- I think you've talked about 105% to 110% in the past. Is that changing for better or worse just in terms of your recent activity?
Dale E. Bowen
I would say, Joe, that RPO number is really noisy. And the main driver for that is the multiyear engagement business with our customers. And so I don't know that I would overindex on that particular number as it translates to any of the metrics. I would say this though. We have -- in this quarter, we saw really good growth in deferred revenue. We saw good growth in our RPO, and we had really good bookings growth.
On NRR, there's a couple of things that we would also point to, which would be some of the growth that we saw with renewals adding other products to it and some price increases. So that does come through in the NRR number.
Stephen M. Daly
I think, Joe, I would -- I don't -- I think it would be tough to read through on the RPO number to extrapolate what NRR is going to be. We're still holding to our guidance on NRR, where we think that's going to be end of the year.
Joseph D. Vruwink
Okay. That's helpful. And then I wanted to ask about guidance. It looks like the forecast for the second half of the year, Intel's revenue growth dipping into the high single-digit range. How much of that is just reflecting some of the bookings trends you were discussing in the latter part of last year? And then on the flip side, as I just look at this quarter's RPO number and think about maybe RPO billings, it does seem like there's been an improvement in growth rates kind of back to the low double-digit range. Is this all maybe just a matter of the timing of when RPO gets deployed and low double digits as feasibly a better expectation but maybe the earlier part of next year?
Dale E. Bowen
So the second half growth really follows the guidance that we provided. It really follows the normal seasonal pattern that we see. It aligns to North America's fall start, school systems where we have most of the revenues already built into our plan. But we always provide guidance that we're confident in delivering. And the stable customer base gives us that confidence that we can hit those numbers (inaudible).
Stephen M. Daly
And we'll guide to 2024 numbers in our Q4 call, Joe.
Operator
Your next question comes from the line of Brian Peterson with Raymond James.
Brian Christopher Peterson
Congrats on the quarter, and it was great to see you last week. So 2 on the cross-sell that you guys referenced this quarter. So just on the cadence, I'd love to understand if that's more of a renewal dynamic and you're seeing that as part of contracts coming up. Or is that actually happening kind of outside of that traditional negotiation cycle maybe with that outside of the RFPs? I'd love to maybe unpack that a little bit.
Stephen M. Daly
Yes. Brian, I mean, it's a little bit tough to kind of break it out because this is our -- the kind of June, July, August time frames are our biggest renewal months. And we did see good cross-sell motion in this quarter. So yes, that helps. It's always good to intercept a renewal when it comes to cross-sell.
We don't -- but we still do cross-sell outside of renewal cycles. So it isn't tied necessarily to the renewal, but absolutely, the renewal helps when it comes to being able to intercept budgets and things like that, if that makes sense.
Brian Christopher Peterson
Understood. And maybe just a follow-up -- no, it does. But I guess maybe for Dale, as we're thinking about cross-sell in some of the newer products, how do we think about like $1 booked to $1 going-live revenue? Is that much shorter than the LMS? Or does it matter by product? I'd love to just understand as we think about that diversification of the booking stream, how does that flow into revenue?
Dale E. Bowen
Yes. It's a good question. What we're finding is that if we're able to capture what -- a solution for a customer that has an issue and show them value in our product, they will buy it prior to a contract renewal. And we see that in some of the products we have. Like the LP products are a good example of that. Impact is a good example of that.
And what happens, Brian, is that usually we see like an upsell at the time of renewal when they expand that to the large part of their student base. And so it happens all the time, and so it's hard for me to tell you after a booking when that's going to start because it just happens all the time and it's based upon the customers' needs.
Operator
Your next question comes from the line of Terry Tillman with Truist Securities.
Terrell Frederick Tillman
Steve, Dale and David, not to worry, I still have some questions left, so you're not getting out of this that simple. I know credentials and catalog has been asked like 4 times, but I thought I'd ask a fifth time. I was -- when I was talking to customers, just on an ad hoc basis at the conference, it actually was coming up regularly. And I've attended [drills and] conferences for many years, whether virtually or in-person.
And I'm curious, the credentials and catalog, how do they stack up now in terms of kind of the mix of new bookings coming from those add-on products versus maybe some of the other products? And it's basically just kind of related to that. Where are we in the adoption cycle for those 2 modules? Because it was coming up on a pervasive way. And then I have a follow-up.
Stephen M. Daly
Yes. Terry, we don't break out between the different products as far as percentage of bookings, that kind of thing. But to your point, it is top of mind for most institutions. We are still early days. So a lot of conversations, a lot of strategies, some pilot -- customers rolling out pilots, some like Duke that are committing to it right up front. But from a revenue contribution perspective, it's still a pretty small contribution. We're still kind of early innings.
Terrell Frederick Tillman
Okay. Got it. Understood. And I guess just the follow-up question is it was striking in terms of the commentary and the narrative around lifelong learning. You all talked about now over a couple of quarters some of these nontraditional kind of educational institutions and where it's kind of like reskilling opportunities.
What I'm curious about is, where are we in terms of how much that's starting to kind of shake out in the pipeline of some of this kind of more emerging kind of business? Because I'm not suggesting we're going to have a new segmentation, another segment. Dale doesn't want to have to deal with that. But how much is this starting to proliferate the new deal activity, these deals that are outside of the traditional 4-year academic institutions?
Dale E. Bowen
We don't break that out, again, Terry, as far as that level of detail. But we've been intentional as we've included these deals in our transcripts for the last several quarters because we are seeing a lot more activity in this RTO, further education, those nontraditional education institutions.
So we do believe that's a -- it will be a long-term driver for growth for us, right? It will be an important offset for existing customers as far as enrollments go, and it will be a driver for our upsell and cross-sell over the long term. But again, on both sides of those, whether it's existing institutions, traditional institutions or nontraditional, we're still early innings as far as its contribution to our overall results.
Terrell Frederick Tillman
Got it. And I guess though on that kind of emerging part of the business, does Chris Ball need to do anything different with the go-to-market? Or do existing sales reps kind of get opportunistically on those deals? Anything you can share about like the go-to-market, if it needs to be any different?
Stephen M. Daly
Yes. That's a great question. We do believe that we have an -- we can go faster if we put dedicated reps on that nontraditional learner group. It does require a little bit different messaging, positioning, packaging, those types of things. So historically, we have addressed those with our existing higher ed sales team. Over time, I think that will segment out from a selling perspective.
Operator
Your next question comes from the line of Matt VanVliet with BTIG.
Matthew David VanVliet
Nice job in the quarter. I guess when you look at some of the conversations with prospective customers, how much, especially in higher ed, is starting maybe to be driven by some of these credentialing or nontraditional components as they're looking at using technology to really kind of jump into that environment and then you're going to follow up on maybe the more traditional Canvas LMS deals? Or is it still almost all driven by at least LMS being a major part of it?
Stephen M. Daly
Yes. It's interesting, Matt, because there's a -- the nontraditional is definitely an interest point within the selling process in most institutions that we're talking to. The other big trend that's kind of related to this is that institutions are recognizing that historically the way they've tried to go after these is with a -- maybe it's a continuing education team, which is separate from the team that's worried about how does the on-campus experience look. And what they're recognizing is they want one platform to drive across all modalities, right? And all -- we call it omni-channel, right?
They want one experience, whether you come on campus full time, whether you're fully remote, whether you're doing this to reskill or you're coming for a degree or just for credentials. So that's the bigger driver of the discussions. And then the use of catalog, which is organically built into the Canvas platform, the addition of credentialing, those things are the natural progression of the sales call, is, okay, you need these in order to address that part of your overall platform strategy, if that makes sense.
Matthew David VanVliet
Yes. No, that's great. And then maybe one more on this topic. Obviously, it was very, very front and center at the conference and has been for a little while in your commentary. But have you done much work internally or that you'd be willing to share in terms of how much sort of addressable market expansion all this provides? Or is some of this maybe offsetting potential other declining factors in particularly higher ed and it's a good backfill but maybe not as additive as it seems at the moment?
Stephen M. Daly
Yes. We think this is a big opportunity for us as far as the number of addressable students and the revenue drivers. So we've sized the nontraditional space. It's about a $5 billion market opportunity. Some of that is included in our calculation of the existing $1 billion cross-sell that we've shared with you in the past. But a lot of that is incremental and much bigger than the kind of traditional LMS market. So we don't -- we believe it will be a grower -- or long-term durable growth versus a replacement for declining revenues in other places.
Operator
Your next question comes from the line of Devin Au with KeyBanc Capital Markets.
Devin Au
The first one I have is congrats on the new lands at Duke and Ohio. Definitely encouraged to see you're getting larger and multiple products attached. Also, I don't think you've highlighted multiple new wins in U.S. higher ed in your prepared remarks for quite some time. So I just wanted to maybe double-click on the strength in that market specifically. Do you attribute kind of the strength there just from overall increasing priority from these institutions looking to add more solutions? Or would you attribute the strength to just overall better execution from your side?
Stephen M. Daly
Yes. I think we tend to do very well in North American higher ed, particularly in the enterprise segment of that market. And so we have had some good big wins over the last several quarters. This is just continuing on that momentum. And it's been a -- it's a part of the market that we started in. That's a part of the market where we have 44% market share now in terms of enrollment. And so what we're seeing is in those discussions is our position in the market, our lighthouse accounts and references that we can bring to the table, the fact that we have a scalable platform that has scaled up rapidly during the pandemic and that they rely on it to scale to their needs, those are all coming into decision factors in addition to just around a typical feature, function sort of discussion.
The other thing that we are seeing is that many of these institutions are either, as I talked about earlier, trying to want a single platform across all of the different opportunities that they have to reach students, but also that they're trying -- really trying to -- now that they've gone through that explosion that happened during the pandemic trying to consolidate around a few strategic vendors. And that's tending in our favor, particularly as we are able to not only offer the LMS, but also as was noted in the Duke win credentialing and catalog and those other consists across sports. So it really is a continuation of the strength that we've seen with our position within North America and higher ed.
Devin Au
That's great to hear. One quick follow-up I have is just on the gross margin in the quarter. Really impressive, 79.5%. Any additional color you can offer on what drove the higher margin there? And should we expect gross margin to climb higher reminder of the year?
Dale E. Bowen
It's a good question. So Devin, we're really pleased with the gross margin figures that we had in Q2. And this is part of just a regular model of expanding margins over time. However, I would say that Q2, we did see some higher margins driven largely by timing of some revenue. However, we expect that future quarters will normalize back to that steady, consistent expansion that we've seen over the last 8 quarters. So to be clear, we have set long-term targets to have gross margins in the upper 7s, and we're making progress.
Operator
Your next question comes from the line of Ryan MacDonald with Needham & Company.
Ryan Michael MacDonald
I wanted to start on the K-12 space. Last week at the conference, there was quite a bit of interest in demand for the LearnPlatform functionality now that you're rolling that in and integrating that in for customers. Just curious as you think about -- how you think about the cross-sell opportunity there. And then given the demand in the K-12
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funding for more analytical solutions, is there an opportunity to lead with those types of assets and then sort of get your foot in the door and then sort of cross-sell in LMS over time?
Stephen M. Daly
Yes. Let me start with the first question about cross-selling of LearnPlatform. So LearnPlatform, as we -- when we did the acquisition earlier this year, right, what we recognized was that K-12 is dealing with a massive ecosystem of edtech providers. So they're looking for help in rationalizing what's working, what's not working in those environments.
So we really have 2 sides of the network with LearnPlatform. One are the schools and districts, the state education authorities that are looking at it as a tool to really drive questions of what's being used, how often is it being used as well as what's being used in the environment, doing what they claim it can do.
Likewise, on the other side of the network is the providers. And they're also wanting to understand it and demonstrate that what they're providing is working, right, and getting the outcomes that they're trying for.
And so we do think that this is going to be great cross-sell opportunities on both sides of those networks, right, which on the district and state level, we're seeing good pipeline build. We're seeing good integration points with Canvas. We announced that the overall usage reports will be integrated in Canvas for free so that you can start to see some of that data. And we expect that to drive a lot of interest and continue to generate lead gen for us to go sell or cross-sell the full-blown product. We're seeing a really rapid pipeline build and great success selling to the providers as well. That evidence as a service is growing. The pipeline has grown pretty dramatically.
So to your first question, yes, it absolutely is a key driver for us. And we believe it's going to -- we're reaching a point where it's going to be really important for districts, and we think it will be a big growth driver for us in the future.
On the analytics side, we drive with a platform strategy when we have these conversations with our customers and our prospects. And so yes, this is a key part of that landing strategy for us. We think that it's a key differentiator against our competitors in this space, and we'll continue to use it as that, but again, with the idea that we're -- this is about a platform and a platform for teaching and learning that they're working to. So I think the answer to your second part of question, yes, it can be a good part of our land strategy in addition to the expand part of our cross-sell.
Ryan Michael MacDonald
Excellent. And maybe just one follow-up, just on the international partner channel. Obviously, you started to see some success with that with some deals in Asia Pac last quarter. Just curious as how that is progressing as sort of the pipeline builds for the international solutions there.
Stephen M. Daly
Yes. We are seeing -- we're seeing good pipeline build. We're focused on the channel partners that we believe are going to be our best bet in those space. We're training them up. We are helping them with lead generation. We're helping them with deployments. So we're very optimistic about the progress we're making there. But again, we'll probably see the benefits start to really occur next year as those investments pay off and as we ramp those channel partners. But good progress, particularly in some of the Asian geographies. But Latin America is where we see the most success with our partners.
Operator
Your next question comes from the line of Noah Herman with JPMorgan.
Noah Ross Herman
For the first one, have you seen any change in the pace of consolidation compared to what maybe you've seen before in the last year or so at the higher ed or K-12 level?
Stephen M. Daly
Yes. I would say in the last year or year or so, more of the conversations have been about how do I get a common platform across each of the modalities, whether it's in continuing education department versus the in-person traditional campus experience. So yes, those conversations have been more common. I would say the bigger conversations around better consolidation and what can -- how do we reduce the number of suppliers, those are fairly new for us. Those are -- in the last quarter or 2 is where those have started to happen more and more.
Noah Ross Herman
Got it. And then just a quick follow-up. Some of these new features are being layered more into the platform. Do you see any reason to change the sales compensation structure going forward as part of the go-to-market strategy?
Stephen M. Daly
No, we play -- we are -- we've changed the comp model -- each year, things get tweaked on it. I don't know that we'll see any major comp changes that happen in the coming years as far as how we compensate for, for instance, new features. You're really talking about cross-sell and some of the products that layer on top of Canvas, I think, in that question. So we do have -- in the existing structure, we do have tiered comp models depending on which products you sell. We move those around occasionally based on what we want to incent. But the fundamental structure, there won't be a massive change in our cost strategy in the future.
Operator
Our final question comes from the line of Brent Thill with Jefferies.
David Marshall Lustberg
It's David Lustberg on for Brent. I wanted to ask -- well, rather, drill in on assessments. I appreciate some of the commentary earlier. But I think last quarter, you guys said it was the fastest-growing product within K-12. I was just curious if you could provide an update on maybe if that held true in Q2. And more broadly, how should we think about the durability of growth in this offering? Is it more so with everyone catching up and assessing what learning loss from the pandemic is? Is that why maybe it's harder now and maybe it's not as durable? And on top of that, can you just remind us of the ARPU there? I think in the past, you said it's maybe 2 to 3x larger than LMS, but I appreciate any color you could add there. So I know that's a lot.
Stephen M. Daly
Yes. No, it's -- and great to hear from you, David. The -- whether it would continue to be our fastest-growing segment in K-12, from a durability of growth perspective, this is a kind of digital transformation that will happen. And it's not -- some of the catalyst is learning loss, but the idea of being able to provide a teacher with real-time feedback in the classroom of how a student is doing against those -- the standards that they'll be tested against at the end of the year, that's something that's going to endure. And having a solution in place to be able to address that is going to be just as important as it is to have a learning management system in place for a digital transformation strategy.
So I absolutely believe it's going to be -- it is going to drive growth for us. It's not going to be a flash in the pan, and it's going to be an important part of anybody's digital transformation strategy and the platform that supports it. You're right, if they buy the whole stack from us through the assessment space, including the content as well as the assessment management system, then it can be 2 to 3x than the average selling price of the Canvas implementation. So it does create for us a long-term growth opportunity. We still got low penetration, low double-digit penetration into the existing base with our assessment solution. So there's still a lot of room to grow from a growth perspective there.
David Marshall Lustberg
Super helpful. And then maybe one brief follow-up before we -- I let you guys wrap it up. On the LMS and K-12, obviously, half of the market is still unvended, using free lightweight solutions. I wanted to get your view on what's the catalyst that gets that -- these districts to really start paying for premium LMS. Is it maybe that some of these -- just continue to -- can always use these free lightweight solutions? Or maybe is it some of these ESSER dollars start to get towards back half of '24, use it or lose it? Is that maybe a good driver there? And maybe, again, is there any percentage that you think just will forever remain unpaid?
Stephen M. Daly
Yes. It is -- it isn't -- there's an interesting dynamic and a little bit of everything that you talked about, Brent (sic) [David]. I do think the ESSER funding is -- creates a good backdrop as far as making decisions about when to start a true digital transformation. That's really the driver for a district that wants to make an investment in a commercial element like ours or -- and really, it takes time for -- and it takes maturity within the district to be ready for something like that. And so they tend to be very planful, take time.
What we're driving is they want more enterprise features, right? They want more integrations with the ecosystem. They want better visibility across the entire district, not just in a classroom or in a school. They'll want better analytics, for instance, integrated into those solutions. All of those will be kind of the drivers where they really want to take that step in their digital transformation.
So I do think, again, as I said earlier, ESSER is a good backdrop for this, and we feel good about that pace of conversion from free to paid. Whether or not there's a portion that does ever lose to an enterprise, eventually, everybody is going to need to at some level. Maybe it was a school with 30 or 40 kids and that might not be. But everybody at some point is going to need to digitally transform that experience in the classroom.
Operator
There are no further questions. I'd like to turn the call back to CEO Steve Daly for closing remarks.
Stephen M. Daly
Great. Thank you. Thank you, again, for the insightful questions, as always. As you've heard today, we believe our commitment to innovation, customer success and disciplined investments in our platform will continue to unlock the opportunities and drive value for our customers and shareholders in the dynamic education technology landscape. We're excited about the future, and we look forward to continuing to drive that combination of top line growth as well as profitability in the months and years ahead. So thank you for your time and participation and look forward to speaking with you again.
Operator
This concludes today's conference call. You may now disconnect.
