Okay. Hi, everyone. Thanks for joining us. I'm Joe Vruwink. I cover vertical software at Baird. Our next presentation comes from Instructure. Instructure is the leading software provider for K - 12 and higher education when it comes to learning management and activity in the classroom. Joining us from the company today is Peter Walker, CFO. This is gonna be a fireside chat format, so if there's questions from the audience, you can raise your hand or email sessionthree@rwbaird, and I'll read those off the iPad. But maybe to begin, Peter, we can get an intro from you on Instructure and an overview of the investment case. Yeah. Nice to join you today. So in Instructure, our vision is to be the ecosystem that powers learning for a lifetime and creates outcomes, skill-based outcomes. Our signature marquee product is Canvas. Many of you may have used it in your education experiences. Canvas is a LMS learning management system, and a system that scales globally. And we have large operations in North America, but also internationally, and then other sets of growth products within our portfolio. Maybe to level set just around financial expectations, there was an Investor Day recently where you framed organic growth over the next many years in the 9%-11% range. Can you maybe give a sense of the variables that build you up to that level of growth? Yeah, sure. So, when I took this job about 6 months ago, I was anxious to dig into kind of the story behind the story and what I was hearing from investors, and I think that there was maybe an overindex to the North American LMS business kind of being all of the business of Instructure. And it just wasn't true, but we hadn't shared with investors the facts to get them comfortable. So a new framework that we disclosed at Investor Day was our core products, which we expect to grow at about 5%-10% growth rate on an ARR basis, and then our growth products, which we expect to grow 10%-15%. Then what we're able to do in that is frame up, if we looked at 2023 ARR, about $660 million, about $300 million of that is in the core business, growing at 5%-10%, and the remaining, you know, $360 million is in these growth businesses, which is made up of five growth businesses. And so when you take the combination of core and growth, that gets you into the 9%-11% organic growth rate we expect to perform kinda medium term. What we shared on our Q1 call is that pro forma ARR for Parchment and Instructure for the quarter grew year-over-year high single digits, and we provided guidance for full year that we expected to grow high single digits. So our 2024 performance really sets the stage for what we expect to perform in 2025, being that 9%-11% range. Even though I... You just said, you know, investors focus on North America LMS. I guess I'm gonna start asking questions on North America- That's good. LMS. So that's the business. As you said, everyone kinda knows and loves. Yeah. You have a very unique user community. A lot of times you have teachers, parents, students, that are advocating for Canvas as, as part of a selection process. It's also the heritage business, so it's been doing this for the longest time, and I think the biggest question, which was implicit in your remarks, is maybe that's nearing saturation, and so the growth rate is about to slow. I guess, where does the incremental growth come from at this point for a business that does have dominant market share and is pretty well known? Yeah, so, you know, Blackboard, maybe we talk about higher education and K-12 separately. Sure. So if we look at higher education, which almost all higher education institutions in the United States have an LMS, Blackboard was the market leader prior to us entering the space with an innovative native cloud product. Blackboard, at the height of their performance, had 80% of the higher ed market in the United States. We're, you know, north of 40 right now, so we're firm believers that this is a winner-take-all market. When we compete competitively through RFPs, 7 out of 10 times we win in the market space. So we believe there's still opportunity to capture market share within higher ed, be it that, you know, most people have a solution today. When you move over to K-12, little different dynamics, right? Our market share is north of 30%, and about 35% of that market is unvended today. So there is much more of an opportunity to capture that unvended market. People are using freemium solutions in that unvended market. I'll use a quote that Steve, our CEO, says all the time: "You know, these freemium LMS solutions, they're like a free puppy," right? Everybody thinks it's free until you realize what the total cost of ownership is. So that's where we've been very effective, being able to sell into the unvended market in K-12. In the 3 out of 10 times where you happen not to win, what typically is the deciding factor? Yeah, so, you know, our two commercial competitors are different within each space. So I'd say our commercial competitor within higher ed is Brightspace or D2L. In those instances, and then we'd say PowerSchool would be our commercial competitor in K-12. I'd say price is typically the leading reason why we don't win. Price is not the primary decision-making factor in the purchase. The purchase is really all about, ease of usability, and as you talked about, you know, we have a very strong community, behind us. This is a highly referenceable sale, especially within higher ed, right? If Harvard's using Canvas, then Stanford wants to use Canvas. By the way, we have all the Ivy Leagues today. So, so that really builds a momentum for us. But if we lose, it's on price, and, we don't believe on competing on price. Okay, great. 5%-10% as a range is fairly wide. Now, I think you've been very open with higher ed has had its own unique challenges recently from a macro standpoint. You know, there's been issues on deal timing. I guess when you step back and you look at RFP, the status of RFPs, kind of the signals you're getting from your pipeline teams, is there an indication that that's maybe improving? Is it stable? How would you kinda characterize the current macro just within higher ed? Yeah, so great question. So what we shared on the Q1 call and similar Q4 call is that we are seeing these extended decision-making processes within higher ed in North America and internationally. So it's really a global phenomenon. Two things going on, right? There's a set of macro things hitting institutions, whether it's the economy, whether it's disruption on campus from the wars, et cetera. So you do have some distraction happening. I think on the other side, we are also showing up with a larger sale. You know, typically, if we're showing up with an RFP around an LMS or a Canvas solution, we're also proposing to them a set of bundled products for a non-traditional solution, 'cause that is an opportunity for these universities to expand and grow more revenue. So you've got those two things at play. In terms of the number of RFPs, what we shared on the last two earnings calls is they're at similar levels we saw in COVID being, you know, really high and robust levels. So the question really is: when does the dam break, right? Yeah. Is it a breaking dam? Is it a stream, et cetera, right? You know, all TBD. What our guidance does imply this year is that the macro that we saw last year in higher ed, in terms of a slower decision-making process, continues this year. And so, you know, we're in the middle of buying season. Obviously, I can't update you on where- Sure ... we're at till our next call. But, but that's what guidance considers and kind of what we're looking at in the current macro. Maybe taking the flip side and focusing on K through 12, so slightly different challenges in that, K through 12 is contemplating the end of stimulus. And you've been very clear that Instructure, and I think really most of edtech software, hasn't benefited from the stimulus just because a school administrator thinks of stimulus as one time and wants to line that up with one-time spending. So easier to pay a bonus than it is to lock in a three-year, you know, recurring software agreement. That being said, it's still reconfiguring the budgets around, you know, what needed stimulus, what now needs to get right-sized. Does that process just inject a certain, I don't know, pause in decision-making at your end because people need to figure this out before they make their next round of software commitment? We've not shared publicly that we've seen that pause in K-12. I mean, we're obviously going into the sales season right now. I mean, what I can share with you is that we view our solutions as mission critical. They are funded out of operational budgets, not out of stimulus budgets. And so obviously, the ESSER funds, I think in general, when there's a lot of money sloshing around the system, right, it's helpful for things like K-12 services and other things like that. But in terms of our recurring products, they're mission critical. It's also, right, if you think about what we're bringing to K-12, we're bringing the value of digitization, and the idea is to make teachers' lives easier, to help administrators deal with the fact that there are teacher shortages, right? Because you can digitize many things that used to have to be done manually, by teachers and others. So, again, we just think there's a lot of tailwinds for the products. Going back to where you started, so Canvas is this great product, but Instructure has really built out this ecosystem- ... around Canvas, around what is happening in terms of instruction and learning. So, and this has been going on since, I think, 2019, to the point where there's 11 different products that are available, and a lot of that constitutes your growth portfolio that you were talking about. What needed to happen, you know, 'cause we're hearing more about this strategy, and the growth portfolio is contributing in a big way, but there was some effort needed just around, I think, the go-to-market- ... and getting the right mix of products together. Are there certain things that come to mind that really needed to be taken care of in that 2019 through 2023 timeframe to ready the growth strategy that you're now talking about going forward? Yeah, yeah, great question. So, you know, we sit in this very unique position where we have visibility into what tools and what needs educators have through our platform, right? So as we've done the acquisition since 2019, it's been very informed about, you know, let's use assessments, for example, MasteryConnect, which is one of our assessment products, right? We knew what how much in demand that product was. And so we strategically made that acquisition 'cause we knew it'd be very complementary to our offering. What happened through those acquisition processes is we picked up sales teams who knew those products really well, but we weren't necessarily able to scale that sales effort across the go-to-market function of Instructure. So what we did about a year and a half ago was we brought in a new President and COO, Chris Ball, who's got significant experience in scaled vertical SaaS companies. We've redone our go-to-market, and really the focus on that is ensuring that all of our sellers have in their toolkit all the products to sell that could be solutions for customers, whether that is on a landing a new customer or expanding with a current customer, and then setting up the infrastructure around that. So where products have unique knowledge is needed to sell the product, we actually have a center of excellence that's part of our new go-to-market strategy, and those experts sit within that center of excellence, yet there are sales reps out on the street who are selling the products but can connect back into the center of excellence. So, so think about it as we've scaled our go-to-market motion to match the ecosystem company that we are today. ... So when you share the stat that I think 80% of your customers use two or fewer products, you would say that's purely a reflection of the go-to-market strategy and the fact that there's been a lot of new, but it's still fairly young in getting the proof points behind it? That's exactly right. I mean, what we shared at Investor Day is we have a $2.4 billion cross-sell opportunity, and you really have to think about that in four pieces, right? There's Instructure products into Instructure's base, there's Parchment into Parchment's base, and then there's a cross-sell Parchment products to Instructure, and vice versa. So very enthusiastic about that opportunity, and we have structured the go-to-market function so that we can, you know, harvest that opportunity as much as possible, all with the focus of the goal is to make the student experience better, the outcome better, and the teacher's life easier, as well as the administrator. Let's say on Parchment, 'cause I think that's the biggest of the individual growth areas- ... just in terms of the current ARR, and it's also expected to be very fast-growing going forward. I think initially, and Parchment has a great brand, a great asset, great founder and leadership team. For sure. but I think initially the question was: Why does Instructure need to do credential management? How do you kind of see the portfolio logic- ... of that being a part of your learning platform? Yeah, great question. So I think the big picture here is we're focused on the lifelong journey of the learner, right? So the idea is that somebody's first introduced to an Instructure product in K-12, that's most likely Canvas, and then maybe it's a MasteryConnect assessment product, et cetera. And then that individual is with us from K-12 through their college education, maybe through their PhD, and then they're with us as a lifelong learner through non-traditional. And what's so critical about it, that is not only are they getting the experience of learning through the Instructure products, but what they're getting from Parchment is the credentialing of learning, right? So if I was to go out and look for a job, I wasn't just going to the market with, "Oh, I have an MBA from NYU, you know, this is my credential," but I can also pull in from the LMS experience, "Hey, this is a major, you know, set of initiatives that I did when I was in business school." And so when I'm going to an employer, I have a portfolio to present of what are my skills base- ... along with my education base. So that's the big picture, I would say, view of it. I'd say the click down of it now, kind of the here and now, is if we think about this non-traditional opportunity- Yeah ... right? And the non-traditional opportunity, the bundle of products that we are selling is the LMS system in the non-traditional use case, the catalog, which is what are the offerings available to us, and then credentialing, being what's the evidence that I actually completed the course. We have a credentialing product within Instructure today, but is nowhere near the scale or the sophistication of the Parchment product. So as we pointed out at Investor Day, we see global non-traditional as a significant growth area for us. So Parchment is not only, you know, very successful as their own individual business, but there's lots of cross-pollination between other products that we have. The buyer of that non-traditional LMS, is that the same buyer of Parchment? Are we now talking about, like, a registrar's office where these decisions are getting made? Yeah, great question. So today, the LMS is sold into, call it the CTO or the Provost office versus, Parchment is sold into the Registrar's office. Those offices really need to work together in order to effectuate a non-trad program, and so it, it really helps us bring those two offices together, to help the overall university sell the non-traditional program, which, at the end of the day, in a world that's changing, where four-year enrollment is not what it used to be- Right ... but the learning environment is more robust than ever, this gives the institution the software they need and the credentialing they need to support that. Just on that last point, so your product typically is priced relative to the students that are gonna be using it? Have you seen declining users in your model, or have you just pivoted so that there's multiple channels of users that's not maybe traditional on campus, but it's just a greater variety, and so you're still seeing that grow? Yeah, so, a couple things. I mean, I would say that the changes in enrollment, so the higher ed contract is based on FTEs. FTEs is provided by IPEDS- Okay ... which is an external data source, and the changes in users only get changed at renewal. So typically, for the life of contract in higher ed, which is 3-5 years, the number of FTEs is locked, and then we've got the ability to take price increase. The enrollments themselves, right, and there's lots of headlines about enrollment cliffs, but in actuality, it's about 1% a year that we're losing in enrollments. So maybe just to cover that piece of the question. Then, in terms of, you know, what we're looking at, I'd say with more of our innovative clients today, is enterprise-type agreements- Right ... that are focused on traditional and non-traditional, and they're using users as that, enterprise agreement versus the FTEs that's traditionally been used. There's really no different in financial construct or margin profile, whether we're talking about Canvas on campus versus non-traditional? That, that's correct. I mean, we're thrilled that, you know, our recurring margins are greater than 80%. Today, it's a very strong margin profile, and we continue to price the business to support that. ... Any questions from the audience? Okay, I'll start with my AI questions now. So, AI, particularly after recent weeks, hearing a lot of anecdotes pop up where different industries are maybe putting spending on pause just to figure out AI and where they wanna take their AI strategies. You hear a lot of separate pundits say that when they think about, you know, you listen to Jensen at NVIDIA, you listen to the public cloud providers, where they think the greatest AI opportunity is gonna be, education pops up as one of those things. Are you seeing customers pause and think about what they wanna do in AI, and so there's a period you have to work through? Or, how has been the conversation with customers, and I guess you could say higher ed and K through 12, on how they would like to deploy AI into what they're doing going forward? Yeah, so, we do think there's significant opportunity in AI. We are being very thoughtful about it, right? Introducing AI into the classroom, especially in the K-12 classroom, could have, you know, unintended consequences that you wanna be very thoughtful to. So we are working directly with educators in higher ed and K-12 in terms of kind of what's the highest and best use of AI, where would it be accepted, and where would they be willing to pay for AI? So, you know, a little advertisement, we are having InstructureCon the first week after July fourth in Vegas, and we'll be rolling out more information about upcoming AI tools there. But yes, we do think it has benefits externally. We think there's also benefits to running the business with AI internally. As we have more to share, we will. Okay. Thousands of teachers in Vegas in July, it will not be fun at all. I'm sure everyone's gonna be very, very conservative. No, I did wanna... So, the thing about InstructureCon last year is you debuted this roadmap, and I think it's still online, so anyone can go and see how Instructure is planning around their AI strategy for the next couple of years. I guess, in the initial round of feedback, have you gotten some indication that, higher ed or K -12 is gonna be the faster mover when it comes to AI deployment? I think just in general, higher ed is always the faster mover, right? Because they're, you, you know, in general, they're servicing an adult clientele, right? And the competitive dynamics of higher ed are higher than they are in K-12. Okay. Okay. The second thing, and you touched on this at the beginning, because a lot of classroom solutions have to integrate into Canvas, a lot of times you have a heads-up on things that are actually really getting good traction. Yeah. I would think that AI is gonna be this as well. Does that change how you think about M&A in the near term, and maybe that being a source of capital deployment because there'll be a lot of AI startups that you could maybe look to add to Canvas? Yeah, so it's a great point because of the way our platform operates. We have visibility into what's working well, so M&A is a potential route for us to enter AI capabilities. Okay. Okay. Last kinda main topic I wanted to discuss is just what's happening on the international front and Canvas has very good market share here. Traditionally, there's been a strong competitor abroad. Maybe let's start there, and kind of the competitive dynamics to consider, and are there structural things about, not international blanket term, but individual countries that you need to tackle before you have a high probability kinda path to market? Yeah, so I often get questions about kind of how scalable is the platform globally. So I think important just to point out that there's over 40 languages in the LMS Canvas today, and adding language capability is very straightforward because we are a cloud native, very scalable platform. Sometimes there could be pedagogy differences in different countries, and so we can do some custom dev related to that. But overall, the system's highly scalable to go internationally. Today, as you mentioned, there is, you know, call it a freemium solution available that really is the dominant market share international. We see this very similar to how Blackboard dominated the higher ed North American market and how we were able to become market leaders so quickly. You know, we've got a specific strategy really focused on how do we gain market share from the current incumbent today. The share abroad is mid-single digits, typically? That's fair. When you talk about, look, North America's at 40%, but we know 80% has been seen in the past, how would you frame international in similar terms? I mean, you know, the current incumbent has 70% market share, right? So I think, the way... We haven't, we haven't shared kinda what do we think our midterm market share target is, but I'd say in general, we believe that LMS market is winner takes all market share. Okay. Okay. Last thing is just the profitability of the business. So maybe we can start going back to the investor day, the framework you shared and what your expectations are for the next three years. ... Yeah, so I mean, you know, incredibly profitable business today with margins north of 40%, and what we shared in Investor Day, medium-term targets, adjusted EBIT margins, kind of, you know, mid-40s. And that allows us to not only expand margins, but allows us to invest in the organic growth initiatives of the business. We've got to nurture the business if we expect the 9%-11% annual growth every year. But we would feel really good about our ability to hit those targets. How does M&A change that framework, if at all? You know, I think with Parchment, you shared that initially it, it's hard to acquire a business as profitable as Instructure. So initially there's dilution, but do you have an M&A framework in place where the track record at this point is, within a certain amount of time, these assets typically reach corporate levels of profitability? We do. And I would say that M&A continues to be an opportunity for us to expand the business. I mean, I would—you're spot on that when you've got a business that is, you know, so profitable, generates so much cash flow, you're not really interested in taking on businesses that you need to improve to get them to that same level. That being said, we would definitely do that to acquire specific capabilities we would need. Okay. Other side of margins is, it does seem like there's some incremental cost considerations. Like a lot in the edtech community are very focused on cybersecurity, and there's also a compliance element to all of these products, and you, you've seen those levels of investment step up. Are there things like that which you have already factored into the model, and so there's some underlying leverage happening at the same time? Correct. We, you know, we have considered the need to fund those initiatives, and they are a part of the model. Okay. Okay. Any, any questions from the audience? I guess, the final thing is just on the pricing strategy, and so you can take this, a few different ways. One is, if institutions are becoming a little more guarded in maybe their outlook, does that cause any pushback on the traditional pricing model that you walk through? The second thing is, and I appreciate, AI strategies are very early, but do you have any early views on how you might look to monetize those offerings? Or is it really gonna end up being a strategy where if you drive higher gross retention into your core products, that creates the ability to cross-sell, and so AI becomes a feeder, but it's actually the other stuff that ends up driving the economics over time? Yes, so fair question. I mean, you know, we've got a market leadership position. You know, we believe we've got the best product to sell within the marketplace, and our, you know, sell for new logo or our price uplift each year is really a value focused, right? In terms of what features have been added to the product that justify the price that we're selling it at, or the price increase that we're asking for. And I would tell you that we're thinking about AI the same way, right? In terms of there's gonna be some level of AI capabilities that I think are gonna be expected, especially in the LMS, that you're not gonna charge for. And then I think there's gonna be another set of capabilities that are truly creating unique value for the users, and those are gonna be our ability to monetize. So that's our high-level thought around it today, and as you know, we get further down the AI path and how we're gonna monetize, happy to share with you. Okay. Okay. We're at time, so I think we can leave it there, but please join me in thanking Peter.