Erin Kasenchak - IR Josh Coates - CEO Steve Kaminsky - CFO.

Andre Benjamin - Goldman Sachs John DiFucci - Jefferies Brian Essex - Morgan Stanley Brian Schwartz - Oppenheimer Scott Berg - Needham Ben McFadden - Pacific Crest Securities Terry Tillman - Raymond James Corey Greendale - First Analysis Justin Furby - William Blair.

Good day and welcome to Instructure First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Erin Kasenchak. Please go ahead..

Thank you, Operator. Good afternoon everyone and thank you for joining us on today's quarterly earnings conference call. Today's call is being hosted by Josh Coates, CEO and Steve Kaminsky, CFO. Before we begin, I would 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 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 may 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 our non-revenue financial measures we will discuss today are non-GAAP, unless we state that the measure is a GAAP measure. Now, I would like to turn the call over to Instructure CEO, Josh Coates..

Thanks Erin, and welcome everyone to our Q1 2017 earnings call. As usual, I will provide some highlights from the quarter and then turn the call over to Steve for a recap of our financials before taking your questions. We had a strong first quarter with revenue of $34 million up 46% year-over-year.

Additionally, our focus on operational efficiency belted in another quarter of substantial year-over-year improvements operating margin. Before we get into the details of the financials, let me share with you a few of our key customer wins from the past quarter. Starting with our corporate product, Bridge.

Throughout Q1 we continued to enhance the features and functionality of Bridge and as a result we witnessed strong customer adoption across [indiscernible]. Let me highlight just a few of our successes.

Sony Music Entertainment had a strong bias against traditional LMS software and was looking for a solution that functioned practically for today's learners. Pretty simple UI and compelling feature set was exactly what they were looking.

Sony will use Bridge to support their on-boarding, training and continuous learning efforts for their 4000 employees across their music labels. Southern Glazer's Wine and Spirits, the largest distributor of wine and spirits in the country chose Bridge as their learning and training platform for their field, distributors and brand partners.

Bridge will enable their 30,000 team members in the field to stay educated on their vast and diverse product lines. And Timex Group USA, the iconic time peacemaker selected Bridge as their training solution for their employees across the globe.

Prior to Bridge, Timex utilized Instructure led training at their corporate offices with international personnel participating via conference calls. Now with Bridge, international employees are able to fully participate in Timex's training program from any location at any time and on any device.

In Q1, we added the innovative feature Bridge Retain, a tool to increase the long-term retention of learning. Studies have shown that learners forget 70% of what they learned within 24 hours. Bridge Retain provides retention exercises which improve recall of training material.

Bridge customers using Retain such as 1800 contacts and others are already seeing improved ROI on their training investments, with employees achieving about 200% gains in knowledge retention. Bridge Retain is just one example of how we will out innovate our competitors, just as we have done with Canvas.

Speaking of Canvas, let me share some our customer wins in K-12 and Higher Ed. Within K-12, we brought onboard the Austin Independent School District which encompasses 130 schools and over 80,000 students.

And in the Higher Ed market, Florida State University one of Florida's preeminent universities with 39,000 students selected Canvas to replace blackboard. Florida State University was impressed by the rich feature set of Canvas and ease of integration with their student information system and other third-party tools.

And the University of Southern Mississippi also chose Canvas for their 13,000 students because of its compelling features, high reliability, straightforward pricing.

Turning to International, the University of Sydney Australia's first and highly prominent University thought an LMS solution that betterment their goals of enabling a more interactive and collaborative learning environment for their 44,000 students.

Canvas was selected due to its strong capabilities to support collaborative learning and its ease-of-use. And UNINETT, the government owned organization responsible for Norway's National Research and Education Network selected Canvas as a preferred supplier for their members allowing Norwegian school to easily select Canvas without a formal RFP.

Already, three quarters of all Higher Ed universities in Norway representing over 100,000 students have signed up for Canvas. The first quarter was a great start to the year and we're encouraged by the opportunities we see throughout 2017. I'm particularly excited as I think about our product roadmap for the year.

We have great new features lined up and as I mentioned on our last earnings call, we will introduce two new revenue-generating products one for Bridge and one for Canvas later this year. I look forward to updating you on those plans as the year progresses. I'd also like to invite you all to our upcoming seventh annual user event, InstructureCon.

It's being held July 25 through 27 in Keystone, Colorado. Last year we had over 2000 attendees from about 900 institutions joining us for the event. The great time for our customers to connect with us and with each other and I hope you'll be able to join us it. Now I'll turn it over to Steve to share with you our financial highlights..

Thanks Josh, and thanks everyone for joining us. I’m going to change things up a bit this quarter. Instead of reading the numbers that you can find in the press release, I'll talk about the results and provide a bit of color commentary around how we achieve them. Of course you can refer to the press release for all the details.

In Q1, revenue grew 46% year-over-year to $34 million and subscription revenue was $30.5 million up 48% year-over-year. The growth in revenue was driven not only by new customer additions but also our continued net revenue retention of over 100%.

In Q1, we continue to see strong customer adoption in our important investment areas International and Bridge. Fact, we saw triple digit year-over-year growth in revenue for both of these markets. Q1 revenue was slightly better than our expectations primarily due to early starts within the quarter.

As a reminder, early starts in a quarter positively impact the quarter in which it occurs but does not have an impact to future quarters. For example, when a deal we have forecasted to start in April starts in February, we see extra revenue in February and March.

Starting in April and going forward, the revenue is exactly what we expect with no incremental upside. Billings on a rolling 12 month basis was up 42% year-over-year to $138.9 million.

As you've heard me highlight before, giving the seasonality of our business we calculate Billings growth on a rolling 12 month basis which provides more consistent perspective for growth and I would encourage all of you to view Billings growth in this matter as well.

For the remainder of my commentary unless otherwise noted, I will discuss non-GAAP results. Gross margin was 72.4% for Q1 representing a 310 basis point improvement year-over-year and was attributable to the overall scaling of revenue, as well as continued AWS cost savings.

This is the sixth consecutive quarter of more than 200 basis point improvements in gross margin as we continue to move the impulse to our long-term target of 75% gross margin for the business. Looking ahead, we expect more modest year-over-year improvements in gross margin as we approach that long-term target.

Turning to our operating expenses, total operating expense in Q1 grew 23% year-over-year to $34 million, while we grew revenue a healthy 46%. During the quarter, we realized continued leverage across all of our operating expenses. We saw year-over-year improvements in our CAC ratio in both Canvas and Bridge.

This is a particularly encouraging sign that our investments in Canvas and Bridge growth are paying off. Operating loss for Q1 '17 was $9.4 million. The overall scaling of the business, as well as the operational efficiencies I just discussed resulted in a nearly 2200 basis point improvement year-over-year and operating margins.

Net loss for non-GAAP EPS calculation was $9.4 million and a $0.09 year-over-year improvement on a per common share basis. GAAP net loss for the first quarter was $12.7 million and a $0.06 year-over-year improvement on a per common share basis.

Turning to the balance sheet, our ending balance for cash and cash equivalents and marketable securities for March 31, 2017 was $38.3 million, free cash flow of negative $31.2 million both in line with our expectations. Our business has a good deal seasonality so I think it's helpful to remind everyone how this seasonality is reflected in cash flow.

As you can see from our historical financials, Q1 is our highest cash use quarter followed by Q4 and then Q2 in order of magnitude.

Q3 is a significant cash generating quarter given this in our expectations for the rest of 2017, we remain confident that will be cash flow positive in the second half of this year extending into the full year of 2018, where the cash generated in Q3 will be larger than the use of cash for quarters 1, 2 and 4 combined.

With this as a backdrop, we remain confident in the health of our balance sheet and as I mentioned earlier last year, we do not proceed a need to return to the capital markets to fund our ongoing operations. Let me conclude with a discussion around our expectations for the second quarter and full-year 2017.

For the second quarter, we expect revenue in the range of $36.8 million to $37.4 million, non-GAAP net loss of $10.5 million to $9.9 million, non-GAAP net loss per common share of $0.36 to $0.34.

For the full year 2017, we believe we will achieve approximately 36% year-over-year topline growth with expected revenue in the range of $150.7 million to $152.2 million. We expect non-GAAP net loss of $37.7 million to $36.7 million and a non-GAAP net loss per common share of $1.29 to $1.26.

Calculating EPS we expect our shares to be $29 million for the second quarter of 2017 and $29.2 million for the full-year. 2017 is off to a good start and we're quite pleased with our performance in Q1, as well as our outlook for the remainder of the year.

We are realizing significant improvements in operational efficiencies, while growing the topline at one of the highest growth rates among publicly traded task companies. I look forward to updating you on our progress next quarter and with that let's open it up to questions..

[Operator Instructions] And we'll take our first question from Andre Benjamin with Goldman Sachs..

Thanks, good evening. The first question I have, to make sure I understood the prepared comments properly, was all of the positive variance versus your own guidance for the first quarter due to the early starts or were there also other wins and other stuff embedded in there.

And then any color on kind of where those early starts or bits were, whether it was Canvas or Higher Ed K-12 of Bridge, that will be great..

Yes, so the short answer is it was almost accessibly early starts. I don't really have a breakdown for you of which part of our market it came from but as you know we get the most money out of higher domestic filed by international High Ed and then K-12.

So, you know it probably followed a pattern similar to that but there was virtually nothing that would meaningfully impact the rest of the year..

Great. And I think last time I showed this Steve, we had talked a bit about how Instructure is now going after more share from little. I think you talked about that on the last call as well.

Could you maybe give us the latest thoughts on how that initiative is going and how we should think about the impact on growth going forward?.

Well, I think as far as the growth impacted, it's sort of baked into our expectations of how growth is going to be for the year. As far as the specific program to target Moodle school, that's underway. It's not going to be an immediate win for us. We won't see results in next quarter.

The sales cycles are still very long and it's underway and we’re seeing a lot of positive feedback from large little campuses as we've kind of gone in and started to quote them. Internationally, we are seeing quite a bit of movement. We regularly win Moodle base schools internationally and now we are really doubling down on those efforts..

Thank you. We'll go next to John DiFucci with Jefferies..

Thank you. So Josh, triple digit growth I think you said for both Bridge and International, maybe Steve said it, which is that's great to hear.

I'm just curious, as we've been looking closely at that you've established yourself in the academic world and nobody really questions that, it's a matter of how you can move into other areas in both International and Bridge those areas.

When might we expect it to get more granular data on that, like how big they are today? Is there anything you can give us tonight would be great, on the size of those businesses and when we might get more granular data on a regular basis..

So John, this is Steve, it quite be some time to be honest about it. We actually did an analysis of companies that have $500 million or less, who breakout revenue and you know in the different buckets and showed us one single line item like we do.

And there were four of them and the only reason they did is because they had a slow-moving market and a very, very fast-moving market that's not too for if all our markets are very fast-moving and very fast growing.

So it will probably be some time what we're trying to do is give you as much color around you know relative growth rates and now that it's going very, very quickly triple digits, we are trying to give you color around the types of clients that we're picking up in their fairly large names we had another good roster this quarter.

And you know while we can give you more anecdotal data, we certainly well and we're anxious to do that but we're going to wait until the time is right..

Okay, thanks guys. And if I might see that I do have a follow-up too and by the way, thanks for that color on cash flow and billings, that's really helpful to remind us on some of that stuff. But I know I’m going to get questions around this just anticipating a little bit anyway and it was truly on the deferred revenue line.

It's more than we model and the way we didn't model it appropriately but a key - tell us because I know there's always times - the deferred revenue line, the aggregate billings look fine, everything looks good but that line just looks little funky and I just wonder if there's anything we should be thinking about with that line..

Yes, so I think and we've seen this in several of the models on the sell side, there seems to be a discrepancy on exactly how the billings come in and how the cash collections come in and that all has an impact on deferred revenue. It was absolutely in line with what we expected internally, there were no surprises for us.

We're very happy with pretty much across the board both the P&L and the balance sheet, how they came out at the end of the quarter.

So, I think this is a common problem and by giving the color commentary around the seasonality we’re trying to help you guys all to solve the puzzle little bit because we recognize we don't got guide the cash and we don’t t guide the deferred revenue, we don’t guide the billings and so hopefully some of our core commentary can help clarify some of that but we always try and reference both back to historical financial because we think that is by far the best indication of what's likely to happen..

Okay, thank you very much Steve. Thanks Josh..

We’ll take our next question from Brian Essex with Morgan Stanley..

Hi, good evening and thank you taking the questions. Josh I was wondering if you could talk a little bit about the backlog and how you feel about Canvas versus Bridge and specifically I guess as it relates to Bridge, how you're lining up against some of the peers in enterprise market. Where you see yourself winning.

I think last quarter you talked maybe this quarter before that, talked about learning to win that market and maybe if you have any indications of how you have progressed there and how that outlook looks like for the rest of the year..

When you talk about backlog, you’re not talking about like the financial backlog..

The '16 pipeline I guess..

The other pipeline, sure, well as you know the Canvas pipeline is very well understood and very predictable and our win rates are very steady.

On Bridge, it's not the case, right, I mean we are still learning a lot, as you can tell Sony and Timex, there is a bunch of great names of accounts that we continue to win and we're winning more named accounts as every quarter goes on.

So we are getting better at this and the product is continuing to improve and so our win rates are increasing but the deal sizes are increasing and the number of clients that we have by using Bridge are growing very quickly.

Without going into a lot of detail around the metrics I can just qualitatively tell you that that we're pleased with the progress that the Bridge is making and it is very different of course than the Canvas market..

And relative to the competition, is it more intuitive functionality or maybe not as elaborate functionality that maybe….

Yes, what we hear consistently is just either view that's the reason we win. It’s better software, it's easier to use, it's as effective or better than the competition and software that meets the mark but it's easier to use and more elegant tends to win and that's what we’re seeing in Bridge. We're seeing the featured gap really just close up now.

I mean we - sure we occasionally lose because of the lack of feature but that less common case now. The markets are very large fragmented market and so the reasons for losing are varied all over the place and the people that the company's were losing too are also varied.

So, it's not again like Canvas, like it's a black or that's competition, that's pretty much yet, with Bridge it's, gosh, could be one of dozens competitors. The thing we watch for really is the consistency and improved metrics quarter-over-quarter and we're seeing that and we’re pleased with the progress.

As you know, we will be releasing another module for Bridge this year that will talk about soon which we anticipate a dramatic impact on Bridge sales, and we're really excited about that as well..

Maybe if I can sneak one more and that’s helpful, so thank you. You've mentioned some pretty nice large enterprise win in the last quarter PWC in Canada.

I know it's early days but have you had instances yet of expanding with those customers that you ended in or you big enough to do that yet and maybe get a sense of how many Bridge customers you have at this point?.

Sure. I think there is really positive relationship between deals we closed that be upsell effect. Last quarter our five largest deals that we closed for those had already purchased products and services or plan to before the end of Q2.

So we’re seeing a lot of double dipping with our customer base around Bridge which is part of our strategy especially going after some of these larger enterprise fields where we just get a piece of the business, it's critical that we're able to upsell and yes we've been seeing that just in last couple of quarters..

Helpful color. Thank you so much..

We’ll go now to Brian Schwartz with Oppenheimer..

Yes, thanks for taking my questions today. Josh, thank you so much for the color on the corporate business, it's certainly topical. My question is on the Ivy Tech business and higher Ivy Tech business.

I’m trying to understand better what's the legacy vendors, the Blackboard, the desire to learns, what they're doing with all the different platforms that they have in the market. I’m just wondering to what extent as they move more aggressively to force their customers to move over the SaaS platforms in the near term.

If you're seeing any signs or any new strategies from them that could cause even more disruption and create additional opportunities for Canvas.

For instance when you look at the pipeline expansion and Higher Ed, I'm wondering if it's getting any sort of boost by what the legacy vendors are doing?.

Well there's not a acute moments where we can see a shift in the market. I mean everything moves relatively slowly for our legacy competitors because of the situation they’re in.

So we've been observing this in slow-motion over the last four years both Blackboard and desire to learn have been again in slow-motion trying to consolidate their user base on a stable, SaaS type of platform but it's very slow, it's very complex and it's very messy, and that's what they have been I think really preoccupied with - sends 2012.

So we don't we see a specific shift in that regard..

Okay. One more question Josh I had one more for you for moving on to Steve. The guidance to me looks very strong, looks like you're raising the outlook here more than the beater or more than the outside you had from the faster go lives in the quarter. The question I want to ask you really is about the reverse.

And if there's any concerns that you might have about your services or your implementation capacity from where it stands today in regards to deploying the backlog here in a timely manner, because it looks like it was a strong bookings quarter over there..

Brian, this is Steve, I’ll take this one. So the short answer is no. The revenue split in Q1 was 90:10 which was exactly what it was in Q4. So we are in a good spot in terms of making sure we get everybody implemented.

We spent a lot of energy ramping up the staff in the first half of the year, getting ready for the big season which is really Q3 that's where a lot of the implementation are well under way or at least get finalized before the fall term. We've done this for six years now. We really understand the pattern, it's very well understood.

Bridge is not that complex so that won't create any wrinkles for us. So I think we're in a really good spot. I don’t think there is any concern that we have regarding, giving the services worked on in a timely manner..

Thank you, Steve and last question that I have for you. Just in regard to the operating margin guidance here for the year, I think you talked about this little bit in your introductory comment at the second half of the year should show less margin improvement compared to the first half.

You talked a little bit about the expectation on the gross margin trend. But I’m just wondering on the operating expenses, if there are any additional expenses that you have in the second half of the year that we should expect and just plan for in our model thanks for taking my question..

Yes sure of course yeah so we had a 2,200 basis point improvement or nearly 2,200 basis point improvement in Q1-over-Q1.

For full year we’re guiding to just under 1,400 basis point improvement across the board on operating expenses and so you'll see that that obviously will not lever quite as fast the particular comment in the prepared remarks was around gross margin.

Obviously we can't continue to improve at that rate we’ll run out of patient we’ll get 75% way ahead of schedule and we may do that it won't be this year. And so I expect the I think if you look at the full year guidance you can sort of figure out how the rest of the year is going to play out to get a good sense to it.

With respect to anything unusual nothing really and structure kind of in Q3 it in Q3 last year. So there's nothing weird about that, but it is a big number and then there is a short-term anomaly in terms of what happens from sales and marketing spend. Another then that it’s going to be business as usual..

That’s real helpful thanks for taking my questions this afternoon..

We will go next to Scott Berg with Needham..

Josh and Steve, congrats on a good quarter I have got two questions here? First of all Josh on the higher lead side you guys had some crazy high [indiscernible] last year in 2016 and whilst it’s early in 2017 do you see a meaningful deviation off what you saw last year and of this year?.

We don’t anticipate a meaningful deviation it will probably be within plus or minus some relatively small number of that win rate. We do know that heading into the late majority of the market the behavior is a little different than the early adopters, but so far we really haven't seen a significant impact in our win rate..

And then my follow-up question is as you starting getting to Q1 how you’re looking at your sales investments for the other growth areas of the company the metrics that Steve provided pretty strong digit growth and in a couple of them but do you feel like you need to pivot any of those sales resource maybe to capture some opportunity that went there three to six months ago?.

So we talked about this overtime Scott we we’re pretty poised staff with domestic campus right we got that market well covered we’re in good shape. So there's not a lot of incremental expenses this week as we continue to pursue that market.

When we talk about international obviously it's a region-by-region story and now it's getting interesting as we think about how to expand Bridge internationally and of course Bridge is just sort of globally as you know is going to be one of our fastest growing and probably our longest term growing sales investment, sales and marketing investment.

Because the markets for Bridge literally in every country is meaningfully bigger than it is in the education space for campus. So the way that we think about it is the fast growing markets are getting the incremental investment and domestic canvas isn’t getting a whole lot..

Got you, that’s all at the moment. Thanks for taking my questions..

Our next question will go to Ben McFadden with Pacific Crest Securities..

I wanted to start with question on Bridge you mentioned the fact that you think the functionality gap is closing between you and some of the competing offerings out there just curious as far as whether you're seeing any significant shift relative to when you're selling in Greenfield versus written replacing potential competing solution?.

It still generally around 50-50 as far as Greenfield versus written replace for Bridge..

Okay and the Steve and just question on the guide your Q1 came in ahead of expectations through the early start and your Q2 guide looks good relative to the back half of the year it seems like there is some implied slowdown in their relative to where we saw growth rates of year-over-year growth of course last year's as well.

I am just curious as how much of this is sort of conservatism based on the fact that how much of the billing cycle comes in Q3 or whether there is a broader shift in seasonality and if it’s based upon the Q3 can you give us an update of kind of what the visibility you have to-date into potential that sell cycle is today?.

Sure so the short answer is we have visibility pretty clear I mean certainly for the rest of the quarter and pretty well under the Q3. When you get into Q4 the visibility declines to some degree, but in terms of general seasonality now this year looks very similar to prior years.

And in terms of how the growth rate operates quarter-over-quarter as you move through the year I think that’s also I think if you look at the historicals you'll see a fairly consistent pattern that at this time to be higher in the beginning of the year lower at the end of the year.

So there's nothing really unusual going on here We started the year with about approximately 35% growth we’re now just over 36% growth. So as we know over achieve and as we feel a little bit stronger about the year we’ll continue to update you on that, but there's nothing unusual..

Thank you very much..

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

Hi, good afternoon gentlemen I'm assuming you're saving the best for last obviously..

There might be is somebody after you Terry your fan..

So any ways on the prepaid and Steve I usually delve deeply into the financial statements in this earnings release but its looks like the prepaid.

Was there something that’s like a larger vendor payment that occurred because the deferred was off a little bit like somebody else mentioned but it looks like there was a bigger variance on OCF release from our expectations and I am curious was there something notable on the prepaid side that won't repeat itself?.

So normally I don't go into these details but Terry you're very special so we’re going to do it today. We had a fairly large prepaid for Amazon this quarter and that helped us achieve a higher level of discount from them and we thought that was money well spend so that's probably what's driving that number..

Okay. And in terms of the in some of the prior questions trying to drive into some of these newer growth engines and they're definitely exciting.

But if we look at the end of 2017 or maybe into 2018 would you guys see a notably different size international business versus your corporate business or would they be comparable you think?.

That’s a interesting question..

And so here the way I would think about it they’re kind of the same there is just several years apart right. So if you ask me will Bridge in 2020 look like international and 2018 yeah maybe something like that maybe even a little bit better. But I think the big difference between them is that international in two year head to start to Bridge.

But we’re really pleased obviously with international growth you'll see in our Q that will be filed in a couple days what the international numbers are and I believe we’re around 12% now up to total. So we’re really happy with that and similarly we’re really happy with the triple digit growth that we talked about for Bridge..

Okay. And just final question as it relates to new products Josh you talked about that and so this is for either you or Steve what is baked in if anything in terms of kind of your internal assumptions or even the revenue guidance as it relates to meaningful impact from either of these two products? Thank you..

It’s pretty well baked in we’re going to see relatively little impact on revenue in 2017 with these new product announcements they’re really going to be something that will pickup in 2018 but yeah it’s pretty well baked in?.

Thank you..

We’ll go now evolving will go now to Corey Greendale with First Analysis..

I don’t know if I am last either but I’ll hope if I am that you saved for the last for good reason. So just a couple of quick questions so on the product side I realized you’re not going to talk about products you haven’t announced yet but next week at GCP I think we’re going to be seeing companies doing various with like machine learning.

And I think you've got great data on learning so are you doing anything now with machine learning with your data is that a glimmer in your eye or how you’re looking at that?.

Really interesting question, short answer is no we are not doing anything with machine learning I’ll take a minute here to just to tell you what I think of machine learning I think it's really interesting and exciting I think it's been really interesting and exciting for the last 15 years also.

And it continued to make progress, but we don't make big bets on the market with regards to sort of speculative cutting-edge type of technology that we've seen before over and over and over again. Machine learning fits in this category.

We obviously keep an eye on interesting start-ups that are doing innovative things with machine learning in the education space, but if you followed machine learning and our artificial intelligence for any number of years. Then you'll know what I'm talking about there’s a lot hype but it's something you definitely have to proceed with caution.

And so yeah GSP will hear a lot about machine learning in artificial intelligence, but we’re being cautious..

And with that I realized given whole bunch of things I assume you’re not kind of any big M&A business but you consider as you’re more comfortably you’re getting the cash flow positive but you do like a little Aqua hirer or something in that area or anything else?.

Maybe I don’t about that area and we have a very active M&A team in Instructure and we review deals oh gosh every other week we’re reviewing deal but we’re also very cautious on that as we said before our bias is to grow TAM organically with our R&D department here in-house.

We have in the past done some aqua hirers and those are of course the most interesting thing just to acquire engineering talent.

But as far as products in new markets we look at those as well, but I wouldn't anticipate any significant financial acquisition that something we don't really feel like we have the appetite for because there's so much growth opportunity with what we have on our plate today.

And like you said we are definitely we have our eye on the ball with respect to profitability..

Great, that’s all I had. Thank you..

[Operator Instructions] We’ll take our next question from Justin Furby with William Blair..

Steve, can you provide a little more color to around the acquisition costs improvement that you highlighted I think you highlighted both with canvas and Bridge but I guess specific to Bridge what sort of improvement are you seeing and then from a development standpoint can you give sort of a rough sense of what your spend is towards the corporate space is it 20% is it 40% and I’ve got one follow-up for Josh?.

So Justin we don't break it out by market what we have said historically and what I can repeat today is that it is much better in higher Ed in fact it’s below one for higher Ed. And for Bridget it’s a meaningful single-digit number.

And then it's everything in between but what we can tell you what's really important to understand is that we have now watched three markets migrates when I say three market I am talking about higher domestic, K-12 domestic and international to comfortable numbers right. And we’re watching Bridge do the exact same thing.

So the point of all that is this is a well-worn path for us. We’re very comfortable on how to make this happen we understand this concept of starting folks with low quotas and raising them so increase productivity meaningfully. On the sale side, we understand how to take a lead gen machine and make it more efficient over time.

We understand how to do event spending and make that more efficient et cetera. So across the board we’re very comfortable with starting with higher caps if you will and lowering them over time collectively the caps for the quarter was just a smidge over what it was last quarter at 1.6 last time it was like 1.59 it went up literally 30 basis points.

And so it’s really well under control process and as we continue to see those improvements we just continue to validate the business model that we have but we enter new markets we know how to take something that expenses in the beginning and then make it very cost effective and efficient over time..

Got it, that’s helpful.

And what you’re seeing with the progression on Bridge Steve in terms of the improvement does that mimic what you may be seen on the international side with higher Ed and it very different or what does it look like when you kind of go back in time?.

I don't honestly have the answer on that I haven't done that exact analysis because we tend to just focus on the trend but I’ll keep digging in because the dynamics always different. The U.S.

for higher domestic is one kind of homogenous market, international is a series of regions and so where you may, we may be and are very efficient in places like the U.K. and Sydney, where we have been the longest, we're extremely inefficient in LatAm, right. But at a blended rate it's moving in the right direction.

Bridge domestically looks the same as the Canvas market in terms of its homogenous market but Bridge internationally won’t. So, you really got to get in the weeds to figure that out and for us I'm not sure it's that helpful, so we think staying at the sort of market level makes the most sense.

Now we saw something weird, something moving in the wrong direction and of course we’ll dig in to understand what was going on there but yes, so those dynamics probably are little too detail in for us..

Got, that makes sense. And then Josh just lastly for you. In terms of the build-out of trying to go to the systems integrators and the third-party influencers in the corporate space, can you just give an update in terms of where you are with that and where you hope to be in say six to four months. Thanks..

Well we still are very much focused on selling direct in the corporate market. And I anticipate six to 12 months from now we will till the vast majority of all our sales and Bridge will be direct.

I think the opportunity for resellers and partnerships in the corporate market are significantly greater than in the education side of the business but I think for the first two years of being in a market, I think it's important to be direct and really understand the market, really understand your product, how to sell it and understand the market dynamics before you really engage in a reseller partnership.

And so we're following that path but over the next year we will be coming up on our third year in the market and I anticipate we'll have probably one or two interesting reseller relationships to that point in time but we're very much focused on direct for now..

Got it. Thanks very much..

That concludes today's question-and-answer session. This time I'll turn the conference back to Mr. Josh Coates for any additional remarks..

All right guys, that's a wrap for Q1 and we'll see you guys next quarter and talk about Q2. You guys have a great May Day. And we’ll see you next time..

This does conclude today's conference. Thank you for your participation. You may now disconnect..