Heather Erickson - VP of Communications Josh Coates - Chief Executive Officer Steve Kaminsky - Chief Financial Officer.

Scott Berg - Needham and Company Terry Tillman - Raymond James John DiFucci - Jefferies Andre Benjamin - Goldman Sachs Brian Essex - Morgan Stanley Brian Schwartz - Oppenheimer Corey Greendale - First Analysis.

Good day and welcome to the Instructure's Q2 2016 Earnings Conference Call. Today's conference is being recorded. At this time I'd like to turn the conference over to Ms. Heather Erickson. Please go ahead..

Thank you, operator. Good afternoon, everyone, and thank you for joining us on today's earnings conference call to discuss Instructure's Q2 2016 results. Today's call is being hosted by Josh Coates, CEO; and Steve Kaminsky, CFO.

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 actual 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 the other reports and filings, we may file from time-to-time with the Securities and Exchange Commission.

All our statements are made as of today, based on information available to us as of today and except as required by law, we assume no obligation to update any such statements. The content of today's conference call is Instructure's property and cannot be reproduced or transcribed without our prior written consent.

During the call, we will also refer to both GAAP and non-GAAP financial measures. You can find a reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted on the Investors section of our website.

All of the non-revenue financial measures we discuss today are non-GAAP, unless we state that the measure is a GAAP measure. Now, I'd like to turn the call over to our Instructure CEO, Josh Coates..

ease of use, mobile learning, customer service and our ease of integration. One recent integration worth mentioning is our partnership with lynda.com, a leading online learning company. This integration allows Bridge users to seamlessly access Lynda's full catalog of more than 4,000 courses within Bridge's platform.

With the steady growth of our Bridge business and continued product enhancements, we remain positive about the progress we are making in the corporate space. We are also experiencing positive traction in our international markets. Our methodical approach to international expansion has been steadily building momentum.

In Q2, we signed on the University of Wolverhampton in the U.K., who chose Canvas for their more than 20,000 students, because of the software's look and feel, native cloud, and ease of use. Oslo National Academy of Arts in Norway and Melbourne High School in Australia, both selected Canvas as their LMS, because of its ease of use also.

Before I close my comments, I am really excited to talk to you about Instructure Con, our annual user conference in Keystone, Colorado. This year, we had over 2,000 people from 870 institutions and 110 business partners join us for three days in the mountains. It was super amazing to watch our customers interact with each other.

They are a passionate group of people who are engaged with the product. They packed out sessions about mobile and quizzes, spent time with us in user sessions and took time with each other to share ideas they could bring back to their institutions.

We also announced our official partnership with Microsoft at the conference, and the reaction from attendees was very positive. This partnership is a deep integration, delivering a seamless experience with Office 365 on the Canvas platform, and we are excited to be working with them. In summary, we had a strong second quarter.

We are encouraged by our sales momentum across our segments and the positive feedback we are hearing from our customers about our product offerings. We are pleased with the solid results for the first half of the year. So now I will turn the call over to our CFO, Steve Kaminsky, to discuss the financial details.

Steve?.

Thank you, Josh, and thanks again to everyone for joining us today. Q2 2016 was another solid quarter for Instructure, with continued strong year-over-year top line growth, as well as substantial improvements in margin, as we delivered our strongest quarter of non-GAAP gross margins in our operating history.

As Josh mentioned, total revenues for the second quarter of 2016 were $25.9 million, representing a solid year-over-year increase of 63%. Subscription and support fees, which we view as recurring revenue contributed to $22.4 million, an increase of 68% from the prior year second quarter.

Professional Services revenue, which is comprised of implementation, training and other consulting services, and we think of as non-recurring, was $3.5 million, an increase of 37% from the second quarter of last year.

Our net revenue retention rate continues to be greater than 100%, as we remain focused on retaining and expanding our current relationships. Billing, on a 12 month basis as of June 30, was $122.2 million, up 74% from the prior year's billing, also calculated on a rolling 12 month basis.

As you have heard me highlight for several quarters now, given the seasonality of our business, we calculate billings growth on a rolling 12 month basis, which provides a more consistent perspective for growth, and I'd encourage all of you to view billings in the same way.

For the remainder of my commentary, unless otherwise noted, I will discuss non-GAAP results. As I highlighted earlier, gross margin was particularly strong in Q2 at 71.6%. This compares to 65.6% in the same quarter of last year, and represents a 600 basis point improvement.

As we continue to realize cost savings related to AWS and some improvement in our operating efficiencies from our support organization. Total operating expense was $30.6 million compared to $22.9 million in Q2 of 2015.

Operating loss in Q2 of 2016 was essentially flat year-over-year at $12.1 million, a result we are very pleased with, considering we delivered 63% revenue growth. We realized substantial improvements in operating margins year-over-year, as we continue to gain greater scale and execute against our plan for realizing operational efficiencies.

Operating margin for the second quarter of 2016 was negative 47% compared to negative 79% for the same quarter last year, representing a 3,200 basis point improvement.

Net loss for non-GAAP EPS calculations for the second quarter of 2016, was $12.1 million or a loss of $0.44 on a per common share basis, compared to a net loss of $12.5 million or a loss of $0.59 on a per common share basis for the second quarter of last year.

GAAP net loss for the second quarter of 2016 was $14.6 million or a loss of $0.53 on a per common share basis. This compares to a net loss of $14 million or a loss per share of $2.21 for the second quarter of 2015.

Weighted average shares outstanding for the second quarter of 2016 were $27.6 million as compared to $6.3 million for the second quarter of last year. Turning to the balance sheet, we ended Q2 with $62 million in cash and cash equivalents. Speaking of cash, we wanted to address the topic of cash flow and profitability.

As many of you know, Josh and I share a philosophy of responsible growth. For the past several years, we have been primarily focused on growth, but we have always kept our eye on our path to profitability.

We continue to invest for growth, while making significant progress in delivering meaningful improvements for our operating margins as demonstrated in this quarter's results.

While we are not currently disclosing the details of our path to free cash flow generation and profitability, our plan is effectively the same one we had at the time of our IPO, with no material changes in amounts or timing.

And most importantly, it’s a plan that does not require us to return to the capital markets for more cash, before we reach cash flow breakeven. Stay tuned in the upcoming quarters for more details. Let me close today's prepared remarks with a brief discussion on our expectations for the third quarter and full year of 2016.

For the third quarter of 2016, we expect revenue in the range of $29.9 million to $30.5 million; non-GAAP net loss of $11.9 million to $11.4 million and non-GAAP net loss per common share of $0.42 to $0.40. We are again raising our full year 2016 guidance.

We now expect revenue in the range of $110.8 million to $112 million up from our prior guidance of $108 million to $110 million. Non-GAAP net loss of $49 million to $47.5 million, up from $52 million to $50 million and non-GAAP net loss per common share of $1.75 to $1.70, up from $1.87 to $1.81.

For calculating EPS, we expect our shares to be 28.1 million for the third quarter and 27.9 million for the full year of 2016. We are extremely pleased with our results for the second quarter of 2016, as well as the progress we are making, not only on our growth strategy, but also on our long term operating plan.

Operator, please go ahead with our first question..

[Operator Instructions]. And we will take our first question from Scott Berg from Needham and Company..

Hey Josh and Steve, congrats on some excellent results here in the quarter. Couple of brief ones for me..

Yeah, thanks Scott..

First of all, on the Microsoft partnership, that was in full view at Instructure Con as I saw a couple of weeks ago, but wanted to see if there is anything more or possibly more with that partnership? Don't know if there is any sales opportunity or something else from an integration platform that you guys are looking at over the -- maybe next six to 12 months to do it?.

Well Microsoft is a big company with lots of technology and services and integrations with lots of different partners. So obviously, over the next year or two, we will be continuing to deepen our relationship with them with integrations for Canvas. The first step obviously was their Office 365 product. But we don't have any announcements queued up.

The big byte right there is just Office 365. So yeah..

Fantastic. And then I wanted to talk about the billings growth in the quarter, there is an acceleration in deferred revenue and acceleration in your trailing 12 month billing metric.

Obviously, talked about the strength of the business, but wanted to see, is the strength there driven by maybe a larger number of large deals in the quarter, or do you think it was driven by just the larger number of brand new logos that you brought? Just wanted to try to maybe understand the composition and mix there well?.

Yeah actually Scott, the answer is neither. What has driven a lot of the -- what we will call, better than, what we -- how we thought it was going to play out, results, is that we had some early renewals.

And when you have a renewal in June instead of July, it really doesn't have an immediate impact on revenue, but it has an immediate impact on billings, because, it will show up in deferred. So that's really what drove a good chunk of that. We had a great quarter, which -- that we expected.

So that part was -- did not necessarily modify the numbers in a meaningful way..

Fantastic. Then the last question for me, you guys highlight your Ohio state win in the quarter. At the conference, I spoke to another top five, top six, U.S. higher ed institution based on student population size. You guys are clearly having some great momentum on the large end domestically.

Wanted to see if you can talk about some of your strengths or highlights that you have been able to see recently, and large deals internationally, or is most of the international opportunity more mid-sized type customers today?.

Well, Wolverhampton is quite large. It was a large contract. It was a big school. So that's probably the biggest one that we just announced recently. Oslo, much-much smaller school as well as Melbourne High School. But yeah, Wolverhampton is quite large, they have over 20,000 students, very large six figure contract..

I also think that if you start to look at our history, we have University of Birmingham, we have some large schools in Australia. We don't see any reason that the mix internationally will look any different than what it does domestically. We think we are equally playable to large, medium and small institutions..

Great. That's all I have. I will jump in the queue. Thanks..

Thanks..

We will go ahead and take our next question from Terry Tillman with Raymond James..

Hey, good afternoon gentlemen. Great job on the quarter.

Can you all hear me okay?.

Yes. Hey Terry..

Hey guys. So Josh, I guess the first question is, it is nice to see concrete examples in the logos, in the press releases, Broward County, huge K-12 school district, obviously, that's not the biggest part of your business, but a growing part.

What I am curious about, and I know I am getting a little bit in the weed, in Florida, you all had some really good success recently, University System of Florida gave you all the nod.

Does it help with those large big urban school districts, do they take the lead off of some of the big higher ed institutions or school systems? And in that case, did it help at all?.

Well, it honestly is difficult to say. There is definitely influence regionally in this market, and occasionally, I believe that influence crosses from K-12 to higher ed. Typically though, it’s regionally within a particular market.

The largest school in the region will have heavy influence over some of the smaller schools, within the higher ed or within the K-12. But I think, with some of the largest institutions, I think it does crossover from K-12 to higher ed, and again, it's difficult to say, because there are so many factors involved, but it certainly helps..

Okay. And I guess, as we have talked to investors over the last three or four quarters, I mean, the business -- majority obviously higher ed and then K-12, and you don't want to hear this probably, and it’s the wrong characterization, but the corporate learning was kind of a like a sideshow, and it's now more than a sideshow.

I think earlier in the year, you talked about some really strong, just contract value activity.

Could you give us an update though about materiality or when we could start seeing this? And again, your definition of materiality might be different than someone else, but where we are in materiality or how can we frame that corporate learning business? Because I am assuming it's not really a sideshow anymore?.

Yeah, so that's a fair question Terry. So the way -- the best we can do right is sort of talk about this qualitatively. But the way we think about it is, it's going to be somewhat de minimis this year for 2016, largely because, when you sell a contract in that year, you don't always get a lot of revenue in that year.

Obviously to sell in January, you get a lot more than if you sell in December. But on average, you don't get that much. I think it's going to start showing up. Certainly on our side, we will start looking at, and say, hey this is becoming pretty meaningful next year.

But I think from your perspective, it may be as late as second half of 2017 or into 2018, before it starts showing up on your dials, on your channel checks, that type of thing. So I think qualitatively, that might be the best way to think about it..

So I guess, to summarize Steve, you are saying maybe second half 2017 materiality on the income statement could be something that comes to the fore?.

Yeah. And again, to your point, it depends on what your definition of material is. But -- look, we think it's going to be an interesting business on our P&L next year. It may not, because the other numbers are so large, it may not appear that way to you guys. We are not going to break it out, so we won't have the details to talk about.

But in terms of your experience in the market, talking to clients, who is using the product, how easy it becomes to do channel checks for Bridge. I think, that will start showing up in a year or so from now, and then certainly by 2018, it should be pretty prevalent..

Okay.

And my last question is just on sales capacity; maybe give us a reminder, in terms of coming into 2016, what kind of capacity additions you'd have, maybe from a percentage growth standpoint, and how do we frame it over the next couple of years, is it more targeted or is there still quite aggressive investments and/or where the priorities would be? Thanks a lot..

Sure. So we don't give specific numbers on how many quota-carrying reps we have. It's about a 50% growth in 2016 over 2015, so it's pretty substantial. To your point about targeting, it has always been targeted.

When we think about our sales force, first, it’s divided by market, we have [higher] [ph] domestic -- K-12 domestic/international in Bridge, and they don't cross paths. They find a deal in somebody else's neighborhood, they hand it off. And then within that, we have two levels of inside guys and field guys.

So we have always been very specific in who we hire for which position, and how we are thinking about attacking that part of the market. So the philosophy hasn't changed, and we will continue to apply that philosophy, as we think about how we are going to grow our 2017 sales force..

Thanks..

We will take our next question from John DiFucci with Jefferies..

Thank you. A question for Steve and then for Josh; Steve, you said the billings growth was driven, at least, partially, by early renewals, but you also said you had a good quarter.

Can you remind us of two things; one, how early do renewals come when they come early? Are you talking about renewed, a year early or something like that, and two, can you refresh us on the timing of when you typically start recognizing revenue on the income statement for new deal? Let's say you sign a new deal, is it automatic -- I mean, do you start recognizing revenue at that point, or do you -- is there an implementation period and then you start those two things?.

Yeah, on the first question, the renewals, the early renewals, it's months.

It’s two or three months typically; and a lot of times it has more to do with somebody having budget money [indiscernible] and they don't want to risk whether they will have it next year or not, or whether they will squeeze something else on the budget line item, and so they will just send us a check early.

They will sign the paperwork and send us a check right away. But it’s a relatively short period of time. We are not signing anybody up this year, for like a 2017 renewal. On your second question, the typical timeframe is somewhere between two and three months of signing a contract to turning into revenue.

Now, what we saw in Q2 is we saw that a lot of people accelerated that and shrunk the time. It was somewhat unusual and it was different than what we had expected, it's all positive, but it actually has an impact on how the revenue shows up.

So when somebody starts earlier than you think, what happens is, you get a little bit more revenue in that quarter that you didn't necessarily expect. It doesn't change the following quarter, because you were expecting to get the revenue in that quarter any way.

But what it does, is it adds revenue to the quarter you are in, and it also adds revenue to the year, by the exact same amount. So we did see that a little bit or more than we expected in Q2. But typically, it's about a two to three month window..

Okay. Great. And then just the point on the early renewals, I know that's something we talked about since you were private and becoming public that billings might not be a great gauge for you guys because of these early renewals and the timing of it. So you typically, you have them, and it happens with you guys.

I am just curious, should we -- when we look at it, like past seasonality, should we be thinking that there was more early renewals in this quarter than there normally would be in the second quarter? In other words, is this going to have a negative effect on billings next quarter? Should we anticipate that?.

Well, so to the degree that it happens, that's exactly what happens, right? You have more billings in Q2 and then that deprives Q3 of something, because of [ph] some game with billings. So yes, I mean, if you are trying to model that out, you should think about it conceptually, that way..

But would it be similar to past years, or this year was more than --.

When we do our internal model, we are always looking at our history and trying to gauge, based on our history, what we think will happen. And so in this case, it happened more than we thought..

Okay, great. Okay that's helpful. And I guess Josh, when we were out at Instructure Con a couple of weeks ago, we noticed a lot of higher ed customers using Bridge to train their employees, which I guess, shouldn't have been a surprise to us, it seems like a natural extension for you and the customer.

But how is Bridge adoption doing outside the academic community? I mean, you mentioned the Starz Entertainment deal here, and you guys just talked about it a little bit, how you expected to progress.

But right now, given your expectations, and I know you don't give specifics, but how is it doing relative to your expectations outside the academic community?.

So the vast majority of our bridge customers are corporations. We actually have very few academic institutions using Bridge, and candidly, I was surprised -- I was pleasantly surprised, but I was a bit surprised that the Bridge tent at Instructure Con was packed.

And so, we are excited about that, we think it's great, but we have primarily been targeting corporations for a little over, I guess, about a year and a half that Bridge has been in the market. And so, we actually only have a handful of academic institutions..

And by the way, John, we have talked about this before, that was on purpose. We didn't want our Bridge salespeople just going after our existing clients. We needed to learn how the corporate market worked, and the best way to do that is to go in and just hustle through that process of selling to corporations.

So it's only recently that we started to open up the door, and said okay, now that we have some understandings of the Bridge in the corporate market, let's go ahead and leverage our existing client base. We didn't have anything like the Bridge Demo we built last year at Instructure Con..

So is that -- well, we were surprised too; and has that -- as you open that door, are people rushing through it or --.

It seems like it. It has only been a couple of weeks. But year, I mean, we expect the second half of this year to have significantly more academic institutions signing up for Bridge as we did in the first half. Of course, we weren't going after them in the first half, so we really only had a few.

But yes, I think, Instructure Con, we always learn a few new things every Instructure Con, and this year we learned, oh wow, schools are pretty pumped about Bridge. Cool. Yeah, we'd much rather sell Bridge to them than have them purchase from Cornerstone or Saba or SumTotal..

Great. Okay, thanks a lot guys..

Hey, sure thing..

Next question comes from Andre Benjamin with Goldman Sachs..

Thanks. Good evening.

My first question is, another question on the nature of the 2Q beat on revenue, is there any way that you can tell us how much of that was from this early renewal phenomenon of the existing customers versus the new logos that had gone to the system past there? And to the extent that someone renews early, is it fair to say the only way that drives upside to estimates, is if they are agreeing to greater price increases, adding more add-ons or more students than you expected, because otherwise, they'd just be ruling into something that was more expected?.

So in a rare case, I can actually give you an exact number of how much daily renewals affect the Q2 revenue, and the answer is zero. An early renewal only helps billings, it doesn't help revenue, because we are still -- we can't recognize revenue until the original contract expired, and then we will start recognizing on the renewal part of it.

So that didn't have the impact. What did have the impact though, is this early start phenomenon that I discussed a few minutes ago, right? So that did drive Q2 revenue higher than it would have maybe otherwise been.

So in the two to three month window that I said that typically occurs, it was more like one to two months in Q2, right? And so, we did see a lot of incremental revenue showing up, which again, is all goodness. But, when you are looking at sequential quarters, it starts tweaking the numbers a little bit, and make them look a little funny..

And then, I guess, in terms of the Bridge ones, that you did get, seems to be mostly smaller customers, 2,000 in total, which has been more of a sweet spot.

I guess, could you give us a sense of how the conversations with some of the larger customers may be going, and I know you are kind of lurking your way up market, but just want to confirm that's still a market that you plan to go out there?.

Yeah if you recall, the target market for Bridge is single digit thousand size companies. So a thousand employees, 5,000 employees, may be 10,000, I think we have a couple, like 10,000 employee companies. But that's kind of where we are going to spend our time with Bridge for the foreseeable future.

Obviously, over the next few years, opportunistically, we will engage with some much larger clients. But really, that midmarket is working well for us. So that's sort of by design..

I was more just differentiating between one to twos, between like say five to 10, it seemed like they were more in that lower end of that range. But seems --.

Yeah, yeah, fair enough. I mean, Better Business Bureau has a little over 1,000 employees. Jet.com, a little over 1,000. So yeah, the example for this quarter, we are on the smaller end of that scale..

But one thing, like using Jet as an example, they are going to grow really fast. So clearly, they are thinking about Bridge, not just for the current 1,000, but for the next 1,000 and the 1,000 after that. And so they are obviously looking at them and saying, yeah, this can grow with us..

Sounds good..

All right. Thanks Andre..

And we will next move to Brian Essex with Morgan Stanley..

Hi, good afternoon. Thanks for taking the question..

Thanks..

Thank you..

I was wondering if you could speak a little bit on margins. I know that, we were kind of aware, obviously, going through the process, through the IPO process that you guys have this relationship with Amazon, that you can generate better scale.

But I was wondering if you could dig in and talk about maybe the -- it seems as though, there is a pretty nice uptick in the quarter in terms of margins, particularly on the subscription side of the business.

How do we think about that going forward? Is that a new runway? Is there an amount of variability, and what were the primary triggers of a better margin in the quarter?.

So the triggers were basically the same plan that we have been executing against Amazon, for the last several years which is, how do we make this much more efficient, how do we optimize their platform to work with our software in the best way possible.

And we have an ongoing process for doing that, where we meet once a month, we put some targets down about ways we could save money. We execute against those targets, and we continue to just shave the basis points off the cost. So there is really nothing new that we did.

The earlier starts help a little bit, it drives up revenue without driving up a lot of Amazon costs. So we do see some benefit from that. But we also have some improvement on the non-occurring [ph] side as well, and that's just a little bit of optimization on the support. So really came from both. In terms of run rate, I wish I could help you.

All I can say is, we don't see anything meaningfully changing in terms of deteriorating from that standpoint. But we don't guide on margin. And so, unfortunately, I can't give you a lot of help there..

Okay, that's at least helpful color. And then, I just wanted to ask on, maybe on the sales and marketing side; I know, you are not giving quota-bearing rep counts, but any counter to -- I know you previously mentioned that quotas are relatively low.

How do you feel about the maturity of your sales force, the hiring pace and any outlook throughout the remainder of the year, where you might adjust the quotas?.

Well, so we typically don't have adjust quotas into a year. But what I can tell you that might be of interest is, we talked about CAC from time to time, client acquisition costs, and we have measured it on a rolling 12 month basis, due to the seasonality of our business.

And we have been talking, I think last quarter, it was around 1.6, well now it's just under 1.5, and we -- I think we had actually said, it will float around 1.5 give and take.

What we are starting to see and why that's occurring, is for the most part, we are starting to see even greater efficiencies in our more mature markets, which are basically our domestic markets, and that is helping drive CAC back down to just sub 1.5. And so, we are really pleased with sort of the progress.

We are starting to see some really very-very early signs of some improvement as well in efficiencies in [indiscernible] Bridge. It’s a little too early to tell if it's going to be consistent, but we are optimistic that it’s headed in the right direction..

And that better CAC, I mean, is that something that we can infer from subscription and support? I mean, is there onboarding costs in there, are you more efficiently onboarding customers or is this just a general, the way you deliver the product, once it's up and running?.

Well no, it's actually the cost to get to client, is the way we think about it, right? And so it's all the sales and marketing costs, that's the numerator, and then the denominator is gross margins on the bookings.

The problem is, you don't have the bookings number, but you could probably do some inferences to guesstimate what the bookings look like, and so you could probably get pretty close. And again, we do it on a rolling 12 month basis, because, if you try and do it based on the seasonality, you will get numbers that move around like crazy..

Right. Okay, very helpful, thank you..

Sure..

Thanks Brian..

Next question comes from Brian Schwartz with Oppenheimer..

Yeah hi. Thanks for taking my questions here this afternoon. Josh, I wanted to build upon the employee training, the corporate learning opportunity within the install base. It's coming up as a top act. It sounds like the word is out bad, you have got interest within that vertical.

I don't think it's something that we thought of, when you became public, the opportunities of corporate training into the install base.

The question I wanted to ask you, because that carries a lot of benefits long term for CAC and customer lifetime value and vendor familiarity; are you thinking about doing anything on the resources side or the investment side to maybe even accelerate faster, the adoption of the corporate learning within the install base, the ed tech install base?.

Well I guess the type of investments that we would make to accelerate that would really just be shifting a portion of our lead generation towards our current customer base. And so, it's not much of a divestment, because we have very strong relationships with our current academic customers.

So wouldn't be affecting the financials much or cost of customer acquisition. But yeah, definitely, especially after the Instructure Con, it kind of opened our eyes to how exciting the opportunity is, to connect our current base.

And so yeah, we will be spending it this quarter, next quarter, exploring that and seeing how we can leverage our relationships..

Great. And the one follow-up question I had for you Josh, really more of a strategic philosophy question; it sounds like the business -- we can see that the business trends and the momentum is really strong right now. I mean, by my calculations, your billings is up, accelerated by about 13 points here at least on the subscription side.

We see your guidance, we see the commentary, and we have even validated the good secular spending and learning management in SaaS as well as this rapid product adoption for Canvas in the market right now.

The question I wanted to ask you on that is, does it make any sense to slow down the margin improvements progression that you are showing in today's results, that you have promised to The Street and maybe invest more in the business now to gain that market share, and at even faster pace, given the strong positioning that you have in the market, in the growth trends that the business is showing today? Thanks..

That's a great question, and it is very strategic. It's really -- it’s a balancing act, it is more art than science, I think, to try to figure out how to balance -- getting to profitability versus continuing to invest in what seems to be a growth market. I think as Steve mentioned earlier, we are going to keep kind of balancing those two things.

We are sticking to our plans, to get to cash flow breakeven and then to profitability, because we think it's prudent. We think that's an important characteristic of a healthy growing tech company, is getting to profitability. But we are still spending a lot of money, as you could see, on that growth.

So I think you will continue to see us kind of thread the needle on that, and hopefully, over the next couple of years, you will be able to see that we have been successful at balancing both of those items..

Thank you..

All right. Thanks..

[Operator Instructions]. We next move to Corey Greendale with First Analysis. Please go ahead..

Hey. Good afternoon Josh and Steven, congratulations..

Thanks Corey..

So, first thing I wanted to ask you about -- I don't know if I am kind of going too far with this, but the way you talked about the Starz Entertainment, when the integration with the existing telemanagement system, that strikes me as potentially, pretty meaningful in terms of being able to sell Bridge more effectively kind of inside the enterprise, and not just to the extended enterprise.

So could you just talk a little bit about kind of where the product is at and how you are feeling about ability to integrate with core ECM systems versus six months ago?.

Well obviously it’s more able than six months ago to integrate with different types of HR systems. And it's just going to continue going up another ride, as far as its ability to do these integrations. And instead of boiling the ocean on these integrations, we are having to really do a piecemeal.

Every quarter, as new opportunities come up with deals, we keep grooming the list of which systems to develop integrations with. And then of course, there is some baseline functionality of the system that will generically integrate with any system. But the true integrations are obviously more efficient and more optimized.

But yeah, I mean, Bridge is a very agile product. We continue to use the Agile methodology, just like we do with Canvas, and so we are releasing new software every couple of weeks, and continuing to add new features, fix bugs, and also to do more integrations..

Great. Then I asked something related to this question last quarter, but I will ask again; if you looking at kind of the comps and when the selling season – it’s not 100%, like if you weren't giving guidance, I wouldn't necessarily think, oh, growth is going to decelerate from 63% to 45% in Q3.

So can you just talk a little bit about, just maybe some backdrop, why is that a reasonable assumption and how much conservatism is built into that?.

So Corey, we give the guidance that we are comfortable in giving, because as a young public company, the most important thing for us is to do what we tell you we are going to do.

What I can tell you, that may distort the numbers a little bit is, Q3 of last year, we had -- that's when we signed on North Carolina, the entire state for K-12, that was a whopper deal, and may skew the Q3 historical number a little bit or some amount.

But in terms of the number that we -- the guidance that we gave for Q3, again, it's important to us that we do and execute what we tell you we are going to do, and that's how we come up with our guidance..

Okay. That's helpful.

And Steve, kind of one more, and if this is too much in the weeds, you can follow-up offline, but the -- how does the commission structure flow through the income statement? And part of why I am asking this is, the growth in sales and marketing expense decelerated pretty meaningfully in Q2 from Q1, and it’s well below the change in headcounts? I know there is some fixed costs, but I am trying to figure out, what would cause that kind of deceleration, if that's a good sign and it’s a 100%, because the CAC is getting better, or if it means that it's not as much, new businesses sign up, just what that means?.

So the -- the first question you had, the commissions are expensed as incurred. That will change under ASC 606, but for now, that's how we book our commission expense. In terms of the improvement in the sales and marketing costs – it’s basically the things that we have been talking about.

We had a little bit of extra revenue this quarter, that always helps every line item on the P&L, in terms of -- as a percent of revenue. We are seeing greater efficiencies in our more mature markets, primarily in domestic campus, and that has been helping quite a bit too.

The other thing, if you look Q2 over Q2, you will note that Instructure Con last year was in Q2 and this year was in Q3. So there is a shift of some costs from quarter-to-quarter, just because of when we had Instructure Con last year as compared to this year..

That is good to know. Thanks very much..

Okay..

And with no further questions in queue. I'd like to turn the conference back over to management for closing remarks..

All right everyone. Thanks for joining the call today, and we are really excited of our continued business momentum into the second half of this year. And we look forward to updating you on our progress, and hope to see many of you at the conferences and NDRs [ph] during this quarter and next. All right. Have a good one everyone. Bye-bye..

Ladies and gentlemen, that does conclude today's conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day..