Instructure announces strong earnings and acquisition

Nowadays, every sub-industry needs a software as a service player. The business model is powerful and the long term economy is an investor’s dream. The education sector has a bona fide leader in Instruct (NYSE: INST). The company has a cloud platform for educational institutions called Canvas; a tool for measuring student progress in real time, called a Gauge; a platform for employers to educate their workers, called Bridge; and a video learning tool, called Arc.

Fourth quarter results showed solid revenue growth and one new acquisition. But more importantly, the company has demonstrated remarkable leverage, giving investors hope that profitability could come sooner than expected.

Image source: Getty Images.

Instructing the profits: the raw numbers

Let’s first look at the company’s performance in the fourth quarter from a high level.

Metric Q4 2018 Q4 2017 Growth
Returned $ 56.3 million $ 44.8 million 26%
EPS * ($ 0.01) ($ 0.20) N / A
Free movement of capital ($ 22.4 million) ($ 30.0 million) N / A

Data source: Instructure. * BPA presented on a non-GAAP basis.

Recurring revenue, which negates low-margin service revenue from integrating schools and businesses with Instructure’s cloud, also increased 26% to $ 51 million.

What’s really impressive is this: While revenues increased by 26%, operating expenses only increased by 7%. Under the leadership of new CEO Dan Goldsmith, Instructure focused on streamlining spending decisions and reducing costs. These decisions have clearly borne fruit. Sales and marketing spend, for example, only increased by 8% after the cancellation of stock-based compensation, demonstrating impressive leverage in attracting customers.

One area to watch is research and development spending. R&D only increased by 1% compared to last year. While cutting expenses is a good thing, shareholders don’t want Instructure to negotiate future growth potential – which needs R&D dollars to grow – for short-term profitability gains.

That said, Goldsmith outlined the key growth initiatives for the coming year that will no doubt help address these concerns. More on that in a moment.

Perhaps most importantly, net income retention remained above 100%. This means that schools and businesses that join Instructure’s platform stay with it. It’s sticky and reliable, and represents a growing divide around the business.

Discover the latest Instructure earnings call transcript.

What else happened during the quarter?

While this list is not exhaustive, Instructure has announced a number of client signings of note. For the Bridge platform, these included:

  • Software company ETQ, which will use Bridge to help train more than 100,000 customers.
  • Pet supply company Chewy, which will use Bridge Learn for more than 10,000 employees.
  • Pacific Financial, which has committed to using Bridge Learn and Practice for 3,000 representatives and clients.
  • Harvard Medical School, which will use Bridge Practice for training in clinical research programs.

The Canvas platform also announced a number of new customers, including:

  • The University of California-San Diego and its 34,000 students.
  • Tecnologia de Monterrey in Mexico and its 200,000 students.
  • Two Australian colleges with a combined enrollment of 80,000 students.
  • Our Lady of Fatima in the Philippines, with over 70,000 students.

Management has made it clear, however, that new customer bookings for Canvas in the United States are becoming increasingly difficult to secure as Instructure increasingly seizes the market.

Instructure also announced the acquisition of Portfolio. The company has been a partner of Instructure for several years, so the two know each other quite well. Portfolio focuses on presenting student work through an “ePortfolio” network. Clearly, it’s a more comprehensive way to demonstrate what a student is possible beyond grade point averages or test scores.

The deal has not yet been officially concluded. But when it does, Portfolio will bring in the 4.6 million students; 40,000 educators; 3,600 high schools, colleges and universities; and more than 200 partner institutions with which it works.

Look ahead

Goldsmith announced that the company has six major growth initiatives to undertake in 2019. It is willing to share just three.

  1. Continue to make the link between the world of education and the professional world. The portfolio is the backbone of this strategy.
  2. An analysis, data science and artificial intelligence (AI) tool called DIG. While details are scarce, Goldsmith said that by using the data Instructure collected and feeding it through AI, DIG could potentially double the company’s entire addressable market in education.
  3. Two new products for Bridge, which has already added a number of new products over the past two years. No details on the two products were given.

And if you want the hard numbers, Instructure has provided the following tips for the quarter and year ahead.

Time limit Income (middle) EPS (non-GAAP midpoint)
First quarter 2019 $ 57.2 million ($ 0.15)
Year 2019 $ 258 million ($ 0.62)

Data source: Instructure.

To put these numbers into perspective, sales for the first quarter and full year are expected to grow by 19% and 23% respectively. First-quarter profits, on the other hand, are expected to show losses reduced by 30%, while losses for the full year will be essentially the same.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

About Marjorie C. Hudson

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