Investing in software-as-a-service (SaaS) companies takes patience: companies need to invest millions of dollars to build a platform and win customers. But once these customers are acquired, the costs of running such a business are largely fixed. This leads to impressive recurring cash flows.
Structure (NYSE:INST) provides a platform, Canvas, which helps teachers and administrators communicate with students, and another, Bridge, which helps companies train their employees. It also offers a video learning tool called Gauge to measure student growth, and a video platform, Arc.
The company released its second-quarter 2018 results on July 30, just ahead of management’s guidance for the final quarter, and continues to forecast distant profitability and solid revenue growth.
Profit from Instructure: the raw numbers
Before we dive into the weeds, here’s how the company made the headlines:
|Metric||Q2 2018||Q2 2017||Growth|
|Income||$50 million||$39 million||30%|
|Non-GAAP EPS||($0.24)||($0.23)||Loss increased by 4%|
|Free movement of capital||($25 million)||($16 million)||The loss increased by 56%|
Because Instructure’s SaaS business model is based on recurring revenue, it’s no surprise to see management’s predictions coming to fruition. very close to the actual results. Even if new customers sign, after all, revenue from these contracts is accrued over the course of a year.
What else happened during the quarter?
For this reason, it is much more instructive to pay attention to the company’s consumption habits and its new customer acquisitions. On the expense front, operating expenses rose 29% to $44.4 million after the elimination of stock-based compensation; expenses roughly matched revenue growth. Deferred revenue, which represents cash Instructure has already collected but has not yet recognized as profit, rose 27% to $133 million.
For new customer acquisition, Instructure highlighted the following education “wins”:
- Cornell University and its 22,000 students have signed up to use Canvas.
- The state of Arizona and its 90,000 students have also signed up to use Canvas.
- Public Schools in Florida’s Collier County — which includes the city of Naples — purchased Canvas and Arc for its 48,000 students.
Internationally, the company has Canvas contracts with the University of Toronto (80,000 students) and two Norwegian school districts with 29,000 students combined.
Finally, in terms of getting corporate clients to use Bridge, Instructure has agreements with Bacardi (5,000 employees) and Holiday Retirement, a retirement home company. The latter has 10,000 employees and will use both Arc and Bridge’s three services: Learn, Perform and Practice.
Speaking on the July 30 earnings conference call, CEO Josh Coates said the Practice tool has attracted many enterprise customers and introduced them to the Bridge ecosystem. According to Coates, Practice has helped Instructure get a foot in the door of more and more corporate clients.
For the third quarter, management expects revenue to come in (in the middle of its projected range) at $53.9 million, which would represent growth of 26% over the prior year quarter. The company also expects non-GAAP earnings per share to post a loss of $0.24, a slight improvement from a loss of $0.27 per share in the same quarter of 2017.
While the decline in growth might be a bit of a concern, Coates showed no sign of pessimism on the call. Instead, he reiterated that sales cycles for new products like Gauge can be particularly long and that the company is aggressively investing in its Bridge platform due to industry demand. While new deals may not surface in the next quarter, management remains very optimistic that these investments will be able to bear fruit over the next two years.
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