The leading provider of software as a service in education, Instruct (NYSE: INST), once again reported strong earnings on Monday. The company continues to show double-digit growth and gain market share from its competitors.
But perhaps most interesting to investors was the fact that Instructure remains on track to be financially sustainable. Despite two fairly large acquisitions this year, management still believes the company will be in breakeven free cash flow for the year. With Instructure’s shrinking $ 48 million war chest, that should be music to Wall Street ears.
Instructing profits: the raw numbers
Before we get into the details, however, let’s review the headline numbers.
|Metric||Q2 2019||Q2 2018||Change|
|Income||$ 63 million||$ 50 million||26%|
|EPS *||($ 0.16)||($ 0.24)||Loss reduced by 33%|
|Free movement of capital||($ 17 million)||($ 25 million)||Loss reduced by 32%|
Subscription service revenues – where the real long-term growth is – grew 27%, faster than overall revenues. But what was really impressive was the leverage that Instructure continued to show. While revenues jumped 26%, operating expenses only increased by 14%. This is why management is so confident that the business can break even in terms of free cash flow for the year. Huge investments in software and infrastructure have been made. Now, adding each additional customer costs the business next to nothing.
Also of great importance was that CFO Steve Kaminsky said net income retention was above 100% as well. This means that the existing customer base from a year ago was providing more income This year. By filtering out the effect of new customers, we find that not only do customers stay, but also pay more over time. This is a key sign that Instructure benefits from high change costs: As schools and businesses become more familiar with Instructure, they are reluctant to change. It costs a lot of money, requires the training of huge staff, and is generally a headache.
What else happened during the quarter?
With its recent acquisitions, Instructure now has several platforms to report on. First, we’ll cover Canvas, which is the basic learning management system for schools. During the quarter, Instructure added:
- Rowan University in New Jersey and its 50,000 students.
- Two large K-12 districts, with a combined membership of 41,000.
- The Universities of Cincinnati and Alabama and East Carolina University, with a total enrollment of 79,000. All three have abandoned Blackboard to use Canvas.
- Internationally, Canvas has won contracts at schools in Australia, the Netherlands, Germany, Northern Ireland, France and Sweden, with over 75,000 learners in the group.
- A higher education institute in Brazil has also moved from Blackboard to Canvas.
On the Bridge platform – which offers employers a way to educate and develop their workforce – there have been several wins, including contracts or expansion with:
- Mutual of Omaha.
- A big, unnamed animation studio.
- American Express, with 10,000 trainees.
- TELUS International – and an expansion that opens Bridge to an additional 40,000 people.
- Tulane, Colorado State, and Western Governors Universities have also added Bridge to their existing Canvas subscriptions.
Finally, the company’s two new platforms also offered customers some notable additions:
- MasteryConnect added two K-12 districts – in Tennessee and Virginia – with more than 100,000 students.
- Portfolio added two colleges in California and North Carolina.
As previously indicated, management remains confident that Instructure will end the year with a free cash flow. So far this year, the company has lost $ 55 million in free cash flow, so it expects to earn at least that much over the next six months. This timing is not too surprising, as schools normally pay for their subscriptions at the start of the academic years.
Management also proposed non-GAAP (adjusted) revenue and profit forecasts. The midpoints of the third quarter outlook showed estimates of $ 68 million and a loss of $ 0.19 per share, respectively. If the company hit those numbers, it would represent 23% revenue growth with a 27% loss.
For the full year, management expects revenue to reach a midpoint of $ 259 million with a loss of $ 0.61 per share. That would represent 23% full-year sales growth, with the loss of the business virtually flat.
But by far the most important thing for investors to watch is whether Instructure can generate the required $ 55 million in free cash flow over the next six months.
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