Heather Erickson - VP of Communications Josh Coates - CEO Steve Kaminsky - CFO.

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

Good day and welcome to Instructure's Q3 2016 Earnings Conference Call. Today's conference is being recorded. At this time I'd like to turn the conference over to Heather Erickson. Please go ahead..

Thank you, operator. Good afternoon, everyone, and thank you for joining us on today's earnings conference call. 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 to the Investors section of our website.

All of the non-revenue financial measures we will 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..

Thanks, Heather, and thanks everyone for joining us on our Q3 2016 earnings call and happy Halloween. As usual, I will provide highlights from the quarter and then turn the call over to Steve, for a recap of our financials and then we'll take questions.

In Q3, our revenue was $30.1 million, which is up 44% year-over-year and we meaningfully exceeded our expectations for non-GAAP net loss. I also want to give an important update on our path to profitability. I am pleased to announce that we expect to reach cash flow breakeven during the second half of next year.

More from Steve on this in a few minutes but let me first give you some highlights from the quarter. During Q3, we made continued progress expanding our Canvas customer base in the K-12 and higher Ed markets.

Within K-12 we brought on Kent school district, Washington state's fourth largest district, Kent chose Canvas over Schoology and Moodle, primarily for its ease of integration with their existing tools, content and school administrative software.

They also felt our relationship with local colleges such as the University of Washington and several technical and community colleges could increase student success and college readiness. Additionally, the ninth largest school district in the U.S. Orange County public school district in Florida selected Canvas for their 200,000 students.

Orange County chose Canvas to replace blackboard because of our ability to elegantly integrate with third-party software systems and they’ll also use Canvas for teacher professional development. Additionally our relationship and reputation with institutions throughout Florida, including UCF was a key factor in their decision to select canvas.

Looking at the higher Ed market a few new customer contracts for Q3 include Brigham Young University which loved our cloud-based scalable platform.

Bridgepoint Education, the for-profit education service that owns Ashford University and the University of the Rockies, selected Canvas for their 50,000 students because of our open platform and mobile accessibility. The University of Nebraska UNL was looking for a best-of-breed LMS to replace blackboard.

Internationally we continue to make steady progress with clients in over 40 countries and we're quite excited about our long-term opportunity around the globe..

During Q3 our compelling feature set and third-party integrations were among the reasons Canvas was selected by TS in the Netherlands, the Business School of Tilburg University, the Australia and New Zealand school of Government and also Brisbane Grammar School in Australia.

Now turning to our corporate market, the responsive platform designed of Bridge allows access across devices, robust real-time analytics and it appeals to companies across a variety of verticals from retail to manufacturing.

In Q3, we had particular success in finance, manufacturing and healthcare industries with new customers like Delta Dental of Washington and Movement Mortgage. Now a few words on innovation on the Canvas product, an important part of our growth strategy is to continually innovate and extend our product offering.

During Q3, we released an annotation feature in Canvas, the industry's first mobile annotation feature. This feature simplifies the assignment process for both students and educators, what is normally a 20-step process to distribute and complete assignments can now be completed in just three easy steps.

This streamlined approach saves students and educators time and money. We're already receiving very positive feedback from customers using this feature like Region 11 Education Service Center in Texas, which supports schools in 10 counties in Northern Texas. And just last week, we publicly released Arc our video platform for interactive learning.

We're excited about the positive feedback we received from customers already using the product, like Northwestern University and Colorado Nursing School and Northwest Georgia Regional Education Service Agency, which serves 17 different school districts. Last week, we also announced a new member to our Board of Directors.

We welcome Jim Steele, President and Chief Revenue Officer at InsideSales and who many of you likely know from his time at salesforce.com. We're excited to bring to our Board Jim's expertise in high growth businesses. I'd also really like to thank Adam Marcus from OpenView for all his support on the Board for the last two years.

Let me wrap up my thanking all of the amazing employees, which make Instructure such a great place to work. It's because of these great individuals, Instructure was recently ranked the second highest rated public cloud company to work for by Glassdoor.

Instructure received an overall company rating of 4.6 out of 5, a 92% positive business outlook rating and I'm obviously quite pleased with our 98% CEO approval rating. We made good progress this quarter and I'm excited about our long-term opportunities in both the academic and corporate LMS markets. Now I'll turn it over to Steve..

Thank you, Josh and thanks again to everyone for joining us today. We're quite pleased with the strong improvements to margins and the bottom line that we continue to realize while also delivering healthy topline results. As Josh mentioned, total revenues for the third quarter of '16 were $30.1 million representing a year-over-year increase of 44%.

Subscription support fees, which we view as recurring revenue contributed $25.8 million, an increase of 47% from the prior year's third quarter.

Professional services revenue, which is comprised of implantation, training and other consulting services and is considered nonrecurring was $4.3 million, an increase of 32% from the third 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 client relationships. Billings on a rolling 12-month basis as of September 30 was $128.2 million up 47% from the prior year's billing, also calculated on a rolling 12 month basis.

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 Q3 at 72.2% and represents a new all-time high for the company.

This compares to 67.9% in the same quarter last year and represents a 430 basis point improvement as we continue to realize cost savings related to AWS and some improvement in operating efficiencies from our support organization. Total operating expense was $31.2 million compared to $23.3 million in Q3 last year.

This represents a 34% increase year-over-year, while delivering revenue growth of 44% and reflects our continued focus on scaling the business as we make progress on our path to profitability. Operating loss in Q3 '16 was $9.5 million as compared to $9.1 million in the same quarter a year ago.

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 third quarter of '16 was negative 31% compared to negative 43% for the same quarter last year, representing approximately 1200 basis point improvement. Net loss for non-GAAP EPS calculations for the third quarter of 2016 was $9.5 million or loss per share of $0.34 on a per common share basis.

This compares to a $9.2 million loss or loss per share of $0.43 for the third quarter of '15. GAAP net loss for the third quarter of 2016 was $12.3 million or a loss per share of $0.44 on a per common share basis. This compares to a net loss of $10.2 million or loss per share of a $1.60 for the third quarter 2015.

Weighted average shares outstanding for the third quarter of 2016 were $28.1 million as compared to $6.4 million for the third quarter last year. Turning to the balance sheet, we ended the quarter with $83 million in cash, cash equivalents and marketable securities.

Free cash flow was seasonally strong at $20.1 million and we anticipate the seasonal patterns of substantial variations between Q3 and Q4 free cash flow will continue in Q4 of this year as they have each year of our operating history.

Let me end my remarks with a brief discussion around our expectations for the fourth quarter of 2016 and some high-level commentary around 2017. For the fourth quarter of 2016, we expect revenue in the range of $30.4 million $31 million, non-GAAP net loss of $12.4 million to $11.9 million and non-GAAP net loss per common share of $0.44 to $0.42.

What this means for the full year 2016 is a modest revision to our topline expectations. We now expect revenue of approximately $109.7 million to $110.3 million as compared to our prior guidance of $110.8 million $112 million.

However we are raising our guidance for non-GAAP net loss to $45.6 million to $45.1 million from prior guidance of $49 million to $47.5 million and also raising our non-GAAP net loss per common share to $1.64 to $1.62 from prior guidance of a $1.75 to $1.70.

For calculating EPS, we expect our shares to be 28.3 million for the fourth quarter of 2016 and 27.8 million for the full year. Given that we revise expectations for full-year 2016, we thought it would be prudent to share some of our thinking around 2017.

As we evaluate our performance across our markets, we find we are quite successful in winning new opportunities, particularly in our domestic academic markets. For example a recent report by MineWires indicates that in 2015, 77% of all LMS implementations in North America were Canvas.

While this is a great achievement, it came sooner than we anticipated. Because there are certain number of contracts that come up for renewal every year, this means that our year-over-year growth rate for new domestic Canvas business will naturally begin to slow.

So while the timing of this may have been a pleasant surprise for us, we have planned for it, which is why we began investing in international markets in 2013 and launched Bridge early last year and continue to innovate with new product offerings. These investments and Bridge and international are fueling the growth as anticipated.

However it will take time for this to impact the overall growth rate of the business as revenue from our domestic Canvas market is a dominant percentage of our overall revenue. Taking all this into consideration, we believe we can provide an early view into next year.

Our current thinking is that we will have year-over-year topline growth of approximately 35% for 2017 and as Josh highlighted at the beginning of the call, we've been making great progress on our path to profitability and given the trajectory we see for 2017, we anticipate we'll be cash flow positive beginning in the second half of '17 and that trend will continue for the full fiscal year 2018 and beyond.

With that let's open it up for questions. Operator, please go ahead with our first question..

[Operator Instructions] We'll take our first question from John DiFucci with Jefferies..

Thank you. The first question just has to do with the near-term guidance Steve. In this particular quarter, your subscription was little better than we modeled, while your professional services was a little bit lower and I assume you have a lot of visibility into what I consider the more important subscription line.

I guess I am just trying to figure out if the reduction guidance for this year, is it from lower professional services or is it from lower subscription and if it is subscription, does it have to do with what you're talking about with the slowdown in new domestic business.

Is it slower than you thought this soon?.

We don't -- John as you know, we don't really guide at that level of detail but what I can tell you is it's a little bit of both generally speaking and what we saw in Q3 is really what's impacting Q4 and the adjustment to guidance.

We saw the reverse of what exactly we saw in Q2, which was in Q2 as you may recall we saw client signing on earlier and we saw them starting earlier as well as they prepared for the fall term. We're seeing almost the exact opposite.

We saw more of the backend loading to the quarter where clients signed on later in the quarter and they're starting their contracts a little bit later. It's not material, it's not like six month kind of later.

It's two or three months, but they're starting later in Q4 and as early and summer starting early in Q1 and that created a slight shift in revenue out of Q4 if you will. But getting to your original questions, it's a mix of both recurring and non-recurring..

Okay.

And I guess if I might just to follow-up maybe for Josh and it's on Arc, we don't expect much on that early, maybe some modest impact in 2017 but how is that going to affect financials? Do you expect that to -- is it just a module that's going to add to existing customers? Is it likely to help you gain share because you have it now or is a little bit of both?.

So Arc's a great product for us because we're going to be able to not only up-sell to our current academic customers by joining Arc with Bridge as a separate line item that will increase revenue from as well as with corporate customers with Bridge and then at some point we probably offer Arc completely independently as a standalone item, but it'll increase revenue across all our segments.

We're starting now on the academic side. So we've gotten some new customers on the higher Ed side, that's where we're really making the most progress on. We launched Arc at EDUCA Conference just this last week. Great reception there and like you said, we'll see certainly in bookings what will have a nice slug of bookings next year for Arc.

We'll actually have a little bit this year but it won't materially affect revenue probably till '18..

John, I'll just add a little bit to what Josh said, I think the way we think about it at least in the near-term is that Arc will be more about enhancing our net revenue retention, which I mentioned a few minutes ago continues to be over 100% and probably won't be a primary revenue driver for quite some..

Okay. Great. Thank you..

We'll go next to Andre Benjamin with Goldman Sachs..

Thanks. My first question is as we look at the revenue versus net income and EPS guidance, how much of the net income increase is about cash costs, which would show up in the EBITDA line versus stuff that's below that line? T.

The vast majority of it Andre is going to be above the -- what we use net operating income, not EBITDA as you may recall, but yes vast majority of it and it basically reflects continued leverage of the business.

You saw it across the board in all of the operating lines, but I talked about in the prepared remarks about how operating income -- our operating expense, pardon me, is growing more slowly than revenue..

Okay.

And then I guess you talked about hitting positive free cash flow in the second half of 2017, in terms of just big picture, I know you're not going to give multiyear guidance here, but should we expect to continue to march up in a similar trajectory going forward or should we assume more of a lingering at that level because you're reinvesting in other projects once you get to that just above positive free cash flow level?.

Yes I think you hit the nail on the head. We really don't want to give guidance beyond what we've said, but we do expect it to begin in the second half of '17 and continue for full-year '18 and beyond..

Andre we like the idea of making money, so we're going to follow our plan towards that direction..

Nice you think that way..

We'll go next to Alex Paris with Barrington Research..

Hi, this is Chris Howe sitting in for Alex Paris. Good afternoon..

Hi Chris..

Just had a question, just about successes you had in the quarter in regards to the higher education K-12 schools, the international and corporate. You had mentioned you replaced Schoology and Moodle within the Kent school district and you replaced -- you also replace Blackboard in a deal.

In the remainder of the deals who did you replace or where these deals I guess starting from scratch?.

Well that's a long laundry list. All of them were replacements of some type of the system and just as a rule of thumb the vast majority of the wins we have are blackboard replacements. Occasionally they'll be some strange proprietary system that's homegrown, but we see that less and less in the academic side of the business suite.

We do see that quite often though on the corporate side. So that's some general guidance on that. Specifically I think I mentioned University of Nebraska, that was Blackboard nine replacement, Australia and New Zealand School of Government, that was also a Blackboard nine replacements. The Brisbane Grammar School, we replaced desire to learn.

So we're always ripping and replacing is what typically happens..

And more specifically if I may, who exactly did you replace at Bridgepoint..

Let's see here Bridgepoint oh yeah, yeah that's eCollege. So eCollege has a tiny footprint.

It's one of the oldest learning management systems that's still out there and eCollege really had a niche in for-profit schools and we've got a handful of for-profit schools that are customers of ours and most of the time that is an eCollege replacement and that was the case with Bridgepoint..

Okay. And this is the last one for me and then I'll jump back in the queue.

I am not sure if you mentioned how many employees were at Delta Dental and Movement Mortgage?.

We did mention the size of their employee base is probably available on their website I would think. I can remind you that we typically target between 1,000 and 10,000 employee sized companies that's what we consider midmarket and so that's sweet spot where Bridge does well..

Okay. Thank you..

Well take our next question from Brian Schwartz with Oppenheimer and Company..

Yes hi, thanks for taking my questions this afternoon.

Josh can you talk about sales productivity transit generally across the business and then maybe comments on what you're seeing between your three different segments, the K-12, higher Ed and the corporate side?.

Sure so generally speaking sales productivity is doing quite well. Our win rates continue to be certainly far above average on the academic side and on the corporate side, they are continuing to increase and generally strong levels of productivity. In the more mature market, it's very routine, very predictable.

On the emerging markets, specifically some segments of international where we're new and then certainly in corporate, we get our custom bruises through learning through these new markets, but we're winning deals and the win rates are continuing to increase..

So Brian just to add to that, we talk about CAC quite a bit and we talk about our target rate for CAC being about 1.5 think about as a payback and margin dollars of new business against sales marketing expense to get that new business and so currently CAC is running just over about 1.6. It was about 1.5 last quarter. It was like 1.6 a quarter before.

So we're right in the neighborhood of where we want to be with it and we are pleased that we are making progress as Josh mentioned, that as the win rate continue to get better specifically in some of our international markets of Bridge, that, that CAC will continue to decline and will bring the overall CAC for the business down..

Thanks and building on the question and specifically to Bridge and opportunities improved win rates are moving forward here.

So kind of looking out Josh, I was wondering if you step back and you think about what could be the biggest tailwind here for the Bridge business over the next year maybe the next 12 to 24 month, do you think it's mostly reference ability having more customers live in production.

Is it something on the functionality side, adding video like you have done or is it scaling the sales force, our partner channel focusing on specific industries.

I am just saying if there's anything that you're doing today internally that could potentially boost the pace of Bridge booking here over the next year?.

Yeah, I think of three primary movers. The first one is just increasing number of referenceable customers, that is such an important part of doing business and being the new guys into a very fragmented market, it's going to take time for us to build that up.

We have some great references, but in some senses it's spit in the ocean and it's going to take time to build up a really strong referenceable base and so that's something that will continue to be a tailwind. The other thing I think about is on the academic side of the market up-selling to our current academic customers.

Those sales cycles of course are a little bit longer than the normal corporate customers for Bridge, but we're making great progress on the academic side and we'll continue to see up-sell opportunities for Bridge in 2017.

And then finally the feature set of Bridge, we are at a very strong regular cadence with the Bridge development team, continuously putting out new features that our current customers are thrilled about and prospects are really demanding to see so they can check their checkboxes on their list and we can continue to be more competitive against some of the more established players in some of the larger accounts that demand a greater feature set.

So those are kind of the three ways I think about upside opportunity in the future with Bridge..

Last question for me and then I'll hop back in the queue, is we had a little discussion on the call in terms of Arc, in terms of the video, but I was hoping to maybe step back here and just look at from the big picture here at the monetization opportunity with Arc because when I think about the corporate side with video, I think it's very intriguing because we've already seen the next generation SaaS company like Higher View they've had a lot of success reimagining video used cases for talent assessment and the recruiting process.

So do you see similar opportunity here for new used cases for video in corporate learning, thanks?.

Yeah, quite simply absolutely. I think 10 years ago, video was something that was cool, but not ubiquitous at least in the corporate environment. Nowadays it's something that is very natural and expected especially by the young and employee base that's in the workforce today.

And so absolutely I think Arc is a game changer in corporate learning and corporate training and so we're excited to see what Arc can do in that market.

Even though we're starting Arc out on the academic side, very shortly we'll be making some announcements around Arc with Bridge integration because I think there's really exciting synergies between learning and then learning with interactive not just video, but interactive video..

We'll go to our next question from Scott Berg with Needham & Company..

Hi Josh and Steve, thanks for taking my questions, two hopefully quick ones. On the first one I wanted to back up to an answer that you give John DiFucci or earlier, the sales being a little bit more backend loaded in the quarter here at least expectation.

Josh could you maybe give us a little bit more color about that, trying to understand the reasons why maybe those purchasing decisions are being delayed and it sounds like it's probably more than a single contractor too.

Just trying to understand maybe any commonality from those deals that are out there?.

That's totally a CFO question. I am going to give that to Steve..

Hey Scott. So the short answer is it was an anomaly. We didn't expect it this quarter. It's different than what we've seen in our past three or four years of our operating history in terms of Q3 cadence. We're not assuming anything weird is going on, but project that you can project into the future, but we're watching it very closely.

One possible theory is that as we move into the market and get a little bit more towards the -- more conservative fire, you're going to find people who want to buy earlier, implement earlier because it's safer and then the next group, the next cohort coming in is the folks that are going to implement around January 1 give-or-take right, for the winter spring term.

But that's just a theory. We don't have any proof points on that and we're just going to watch it very closely. The promise we have to wait another year to get another data point. So stay tuned and as soon as we learn another Q3 cadence, we'll fill you guys in..

Sure, that's helpful. And then lastly I wanted to talk about any traction you guys got could be in your later technology conference today, your booth I thought traffic wise was relatively busy.

All met you on the edge seat and have maybe the greatest location, but traffic was pretty consistent there, the several times I walk by it, wanted to see what you got in terms of maybe leads or lesion relative to your expectations there..

We'll I think our expectations were relatively modest. We're the new guys at that conference.

We were pleased with the amount of traffic, the number of leads we got, the number of partnership opportunities that came out of that conference and so obviously we'll continue our attendance every year at that conference and hopefully increase our footprint and presence in the market.

But it takes time, but we were really happy how it went because it was very successful..

Great. That's all I have. I'll jump in the queue. Thank you..

[Operator Instructions] We'll go next to Brian Essex with Morgan Stanley..

Hi. Good afternoon and thank you for taking the question. Josh, I was wondering if you talk a little bit about expectations for Bridge as you wrap up the quarter. How those ran versus your expectations and maybe as you head into the fourth quarter and then I have a follow-up on pricing..

We'll I think you've probably heard us say this before, we measure how Bridge is doing based on how Canvas the first couple of years it was in the market and I can say that it's keeping pace with what Canvas did the first couple of years, which we think is really good.

And so we're happy with how it's been doing and I think one thing that we've taken stock of over the last year or so is that the incredible pain that higher education had been suffering under a world made up of Blackboard products, the corporate side is different.

The corporate side is as you know it's a much more fragmented market and so the pain, the pain isn't as acute and so it's a different sales process, it's a difference cultural impact that we have on that market. In spite of that difference we've continued to be really successful with Bridge.

We just know we've got many more years -- it'll take a long time for us to make a deep impact into that market frankly right because it's a larger market, whereas with Canvas we made a huge impact within the first 12 months significant smaller markets.

So there is definitely some differences between the two, but quantitatively they're tracking reasonably well..

Got it. Okay.

And then I guess on a pricing side, one thing that was really evident both in Canvas as well as Bridge as we did due diligent part of the IPO the value proposition that you have on a platform and I wondering if you can walk through any pricing power you might have, what you've done for pricing increase today and how you might look at that opportunity going forward?.

Sure Brian, this is Steve. So we've talked about this reasonable amount. We have been successful in raising our list price every year.

It's not by giant amount, it's 5% to 10% type price increases, but that helps us a lot in terms of generating a little bit of extra new business as well as the renewal time we have some leverage to ramp some of those clients who sign on several years ago to a higher price point, but I will say despite the fact that we're gaining meaningful market share and we're the darling of certainly the high Ed market domestically, we don't ever intend to use that pricing power as like extreme leverage of our system clients.

We never want to get to a point where we are forcing them to either choose a much higher price point or switch because we want these companies -- we want these institutions to stay with us for many, many years and we think we can get a decent price for our product that's fair to both sides and so we're going to continue to operate with that thinking..

Okay.

And then have you had those conversations this year with both Canvas and Bridge or you not that far along on Bridge yet where you think that the functionality can you justify it by its increase?.

No, we're not -- we're definitely not there with Bridge and yes we had -- we've had these conversations on the Canvas side for several years at this point because we've been doing renewals for quite some time, but they've been meaningful for the last two or three years.

So those conversations go on all the time and by the way, we don't jam them up and if there is a 25% difference between what they were paying on their existing contract and what we would want them to pay on the renewal, we don't force them to move all the way up, but we encourage them and we try and get as much as we can.

But again we're trying to be reasonable partners, that's really important..

How does that conversation go in a Canvas side and how do you get them up the pricing curve, is it just offering incremental functionality or having them expand functionality and broaden the suite of the platform..

No, it's actually a super simple conversation. The way it works is hey you're paying X and now the comp price is Y and whatever the gap is and if they say yes that's fair then we just sign the deal. If they start debating with us, the reason is very simple. It says we'll just compare the product today to what it was three years ago right.

There is a lot more functionality. We continue to make large investments in the product and you see that in all the features that have been coming out over the past X years and at that point everybody agrees and now you're just negotiating what the price is..

Got it and one quick housekeeping, did you say and I apologize if I missed it, but did you state the renewal rate in the quarter?.

No, what we did say is that the net revenue retention continues to be north of 100%..

Perfect. Thank you very much..

Thanks..

We'll go next to Corey Greendale with First Analysis.

Hey, good afternoon. happy Halloween. So couple questions.

So first of all on the higher Ed side could you just talk about, did you think Blackboard as they re-architect is getting somewhat more competitors and how much does the competitive dynamic play to be the market perhaps slowing somewhat as you're talking about?.

Good question. It's hard to answer because Blackboard's relatively opaque.

There was a report that recently came out I believe it's Edutechnica did some analysis on how Blackboard's doing with their Ultra product and I believe it was something like 100 or 200, it was that sort of order of magnitude of their customers are ultra enabled, which was a little unclear what that means if they're using Ultra or they could opt into Ultra, but it was like 100 or 200.

It may have several thousand institutions, so it's a very tiny percentage of their customer base that they're still really baby stepping Ultra and we certainly haven't seen anything in the market competitively that would give us an indication that it's having an effect but we're not naïve enough to think that at some point we'll start seeing some hesitation from customers being confused by Blackboard and what direction they're going.

We think ultimately of course is to our advantage, as Blackboard pushes the upgrade cycle to their current base that will allow these institutions to have an opportunity to evaluate the overall element strategy and that will give us an opportunity to get in on that deal and we know when we compete against Blackboard head to head the vast majority of the times we win.

So ultimately we think that's where it's going to end up, but right now we just continue to see rumor and little bits of data about Ultra being here or there and it seems like a relatively small impact at this stage..

Okay. So the commentary around there were more adoption this year, so accelerated, so maybe slowing next year, your expectation within that 35% revenue growth target is that your win rate will be -- will not change it's just there is a fewer number of opportunities..

Yeah. It really looks like we've achieved maximum win rate in the market in higher Ed domestic. We just simply don't think it's reasonable to assume we're going to win more than 77% of all invitations across the country. So we think we're maxed out there.

So next year and the year after we anticipate having similar levels of win in the market, but of course the corresponding result of that is the growth rate slows down and we just stick to a regular cadence of consuming market share.

We're depending on which report you believe we're somewhere around 17% to 20% of the market domestically in higher education and so we've got 10%, 20%, 30% more percent to consume over the next few years and that's what we'll be seeing and I think we're going to consume that at the current rate that we are consuming it and that's somewhere around 77% implementation rate..

Okay. And then I had one management philosophical question for you which is that you increased the guidance for profitability. At least relative to my model your cash flow came in better than I expected.

Given that why allow that to happen? Why not reinvest the outsized performance on profitability into initiatives that will drive more topline growth as opposed to allowing yourself to be more profitable you might have expected?.

Well, yeah, that is a philosophical question. We have had a plan even before we went public last year. We had a plan in mind to balance growth and profitability and we've been following that plan, plus or minus a little bit here there.

We're on track and so now is the time where we're looking at cash flow breakeven second half of next year and we were a little more profitable this year as far as our earnings go and so everything is on schedule. Now we're going to continue to maintain that balance.

If something comes up in the market strategically where we see an opportunity to make a trade-off that we think will help us in the long run, we'll evaluate that we'll make what we think is the right decision. But it's basic a moderate balance between the two.

We want to stay in high growth category, but we don't want to stay there at the expense of profitability. So the balance that we have right now we think is the right one for the business..

And just add to that Corey we could very easily say throw 50 people at the corporate market and I guarantee you, we would get better numbers than what we were getting with our current corporate sales staff, but it would be incredibly inefficient and we're just not willing to do that.

So it's always been our plan to think through what are going to get for the next dollar we invest and we've been operating that way since I walked in the door over four years ago and we're going to continue to operate that way. So we're not going to ever grow at any cost. That's never going to be something that want to do hear..

And kind of apply to R&D as well some building of products that more quickly or more robustly, but I understand. Thank you and we'll follow up..

Great. Thanks..

We'll go next to Terry Tillman with Raymond James.

Hey guys I am so anxious to get these questions out. The first one easy and then I've two really hard question. The first one easy one for the CFO, Steve when you talk about cash flow positive, as we get into '18 for the full-year, you're talking about free cash flow positive right or operating cash flow positive..

It will actually be all three..

Okay.

And then Josh in terms of the market share data and it's going to vary according to the source, but we try this stuff really closely and in fact had a report out today, talk about market share update and the trends are going in your direction, but when I look at the numbers though, our '17 number and I think the street numbers are definitely meaningfully off from what you're all talking about with this initial year on '17.

You all have 15% to 20% market share, this company that is the legacy guided struggle mightily has double your market share.

We're lowering our numbers are you all saying that maybe the total pie that you're going to take or capture is smaller or is the cycle to replace that going to be more elongated? I was trying to understand a little bit more on that..

Yeah I think well let me take a piece at a time. So the pie that we're going to take, anticipation of that site has not changed at all. We frankly see us really essentially flipping trading places with Blackboard as far as market share goes over the next three or five years and so we still believe that's deadly the case.

As far as how long it will take to get there our consumption of the market share seems to be consistent. Again there Edutechnica, there is Campus Computing, there is MineWires. All these different reports none of them are consistent. None of their numbers match up.

We think they're all directionally accurate though and you we're glad that people are doing research on it, but you have to take it with a big grain of salt on how they independently do their research. And so we think that that market consumption will probably be the same pace that it's been over the last few years.

Now we're transitioning I think it's interesting to understand that we are transitioning kind of away from the earliest adopters toward the late adopters and the laggards eventually.

So we're definitely -- the more cropping the chasm model, we're definitely across the chasm and so the type of customer that we're engaging with now is a little different than they were three years ago, it's a different type of approach, a different culture of a customer, but we see no indications that the sales cycle is increasing and we see no indication that the win rate is decreasing.

We believe we've maxed out on the win rate and we're going to continue to march forward and i.e. anticipate that a year from now when we're having this conversation, it will be pretty linear as to the amount of market we've consumed a year from now..

Okay. And my final question is and there is pun with it, so sorry about this ahead of time but Bridge is going to be important to bridge sustained growth for many years going forward.

And so what I'm trying to understand just strategy wise, if I looked out 12 to 18 months, on the corporate side, is this still going to be mostly a one trick pony with an LMS or in 12 to 18 months is this going to be a broader suite. Thank you..

Yeah, Terry I think the trick there is we want to keep expanding, but we just don't want to go a bridge too far. Seriously we're going to keep adding modules to Bridge and each of those models there is going to be a new revenue stream.

As I said before every 12 to 18 months we'll be producing a new products and software to offer to our current and adjacent markets and I think the last time we just announced our I can tell you next year we're going to make some exciting announcement related to Bridge and new product offering.

And so yes we will continue moving forward in these human capital management space with products related to Bridge that will continue to reinforce it and be complementary to it and allow us to increase the total addressable market. So we're really excited about where we're working on there..

And that reference I got it. Thank you..

All right. Thanks then..

We have no further questions at this time. I would like to turn the conference back to management for additional or closing remarks..

All right. Well thanks again for everyone for joining us and hope you guys have a really great Halloween with your family and friends. And we look forward to talking to you guys again in three months. All right, happy Halloween and have a good one, thanks..

And ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect..