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

Thomas Robb - Morgan Stanley John DiFucci - Jefferies Brian Schwartz - Oppenheimer Scott Berg - Needham Terry Tillman - SunTrust Robinson Humphrey Ben McFadden - KeyBanc Capital Markets Brian Peterson - Raymond James Corey Greendale - First Analysis Eduardo Finkler - FK Capital Management.

Good day and welcome to Instructure Q2 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I'd 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 of 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 Investor Relations section of our Web site.

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'd like to turn the call over to Instructure CEO, Josh Coates..

Thanks Erin and welcome everyone to our Q2 2017 Earnings Call. The second quarter was another strong quarter for Instructure with 47% year-over-year growth in revenue, an additional quarter of operating margin improvements and continued strong adoption by customers around the globe.

We now have over 3,000 customers across 50 countries, which we support in 18 different languages. As I do each quarter, let me share with you just a few of our key customer highlights from Q2, starting with our corporate product, Bridge.

The Hartsfield-Jackson International Airport in Atlanta, the world's busiest airport, will utilize Bridge to train more than 11,000 of their employees and contractors. Additionally, Atlanta-Hartsfield will also be using Arc, our video platform for public service announcements, weather updates and security announcements.

We also had good success in upselling and expanding our relationship with existing Bridge clients. For example, one of our large enterprise customers added 17,000 additional employees to the platform, more than doubling their user base.

Turning to K12, we had a very successful quarter, bringing onboard the Montgomery County Public schools in Maryland, the 17th largest district in the U.S., with over 200 schools and 150,000 students.

Additionally, our strong reputation within the industry was a key factor in winning the largest school district in Iowa, the Des Moines independent community school district. The district, with 37,000 students chose Canvas to reduce Moodle as their LMS.

And the Clarksville-Montgomery County school district in Tennessee, serving 35,000 students, chose Canvas to replace Schoology as their LMS. Moving to the higher ed space, the University of Minnesota was the largest higher ed Moodle installation in the U.S.

Yet they desired an LMS with greater ease of use for their 71,000 administrators, educators and students. They selected Canvas to help them achieve these goals. And finally, both Temple University and Iowa State chose Canvas to replace Blackboard as their LMS for their respective 30,000 students.

Turning to international, we saw continued success across many regions.

In just 12 months, we have seen more than 35% of the universities in Netherlands select Canvas, and specifically in the second quarter, we replaced Blackboard at Erasmus University, Rotterdam, for their 23,000 students, and at the University of Twente for their almost 10,000 students.

In the Philippines, we brought onboard 50,000 learners through a consortium win of three different universities, which are collaborating on joint research and share a vision around digital literacy.

And in Germany, the top rated business school, Mannheim Business School, and Frankfurt School of Finance and Management, selected Canvas to replace Blackboard, and their own internal system, respectively.

Let me move on to discuss the work we have been doing on the product side, as we continue to focus on additional features and functionality for both Canvas and Bridge.

During the second quarter, we announced the integration of Bridge and Arc, our online video platform, which will help organizations add a new level of engagement and increase collaboration to their training efforts. Arc isn't simply just videos, but rather allows for increased interactivity, with social components and deep analytics.

And last week, we held our annual user conference Instructurecon in Colorado. It was a busy and an exciting week, with over 2,300 attendees, representing over 1,300 institutions. That's a 40% increase in institutions over last year.

The event is always a great opportunity for us to continue to connect with our customers and also showcase new enhancements and features. This year, we were excited to announce among other things, our new assessment management platform, Gauge, which is aimed at the K12 market.

Gauge provides schools with a simple, easy-to-use assessment platform, that delivers timely and actionable data educators can use to improve their instruction. We believe this new product could add an additional $300 million to our K12 TAM, essentially doubling it.

We are very excited about the positive feedback we have already received from customers using Gauge, like Broward County, Clarksville-Montgomery County, and Alexandria City Public School District. And looking forward, we are still on track to release a new Bridge module, to further enhance our HCM suite at the HR Tech Conference in October.

I look forward to sharing additional details with you o our Q3 call. Now, I will hand it over to Steve to go through the financial highlights for the quarter..

Thanks Josh and thanks everyone for joining us today. As Josh mentioned, we had a strong second quarter. In Q2, revenue grew 47% year-over-year to $38 million and subscription revenue was $32.7 million, up 46% from last year.

The growth in revenue was driven not only by new customer additions, as Josh mentioned, we are now over 3,000 customers; but also, our continued net revenue retention of over 100%.

As Josh highlighted, in Q2, we continued to see strong customer adoption in international and with our corporate product, Bridge; and we are pleased with the robust growth in revenue for both markets. Q2 revenue was slightly better than our expectations, primarily due to an increase in non-recurring revenue, which was 14% of the total.

As a reminder, non-recurring revenue was 10% of total revenue in the past two quarters. By its nature, non-recurring revenue tends to fluctuate during the year from between 10% to as much as 15% or 16% of revenue. It's important to remember, that a spike in non-recurring revenue is a one-time event that does not impact future quarters.

Also, adding to the solid revenue performance, were several early starts similar to what occurred in Q1. As I explained last quarter, early starts impact the quarter in which it occurs, but does not impact future quarters.

Just to emphasize the point, a deal that starts in April instead of June, only affects the current quarter, but has no impact on Q3 and beyond. Billings on a rolling 12 month basis were up 35% year-over-year to $164.7 million.

As you have heard me highlight before, 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 growth in this manner as well.

For the remainder of my commentary, unless otherwise noted, I will discuss non-GAAP results. Gross margin for the quarter was 72%, representing a modest year-over-year improvement. Gross margin came in just slightly less than our expectations, due to a onetime increase in AWS usage during the quarter. And in fact, we saw usage normalize in June.

As I mentioned for the past several quarters, we expect more modest year-over-year improvements in gross margin, as we approach our 75% long term target for the business, and we are pleased with our gross margin results for the first half of 2017.

Turning to our operating expenses, total operating expense in Q2 grew 20% year-over-year to $36.8 million, which is less than half our revenue growth rate. During the quarter, we realized continued leverage across all of our operating expenses. Operating loss for Q2 2017 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 year-over-year improvement in operating margins.

While we don't guide the operating margin, we expect the second half improvements in operating margins to somewhat near net income improvements, which, based on our guidance, we are now forecasting to be over 200 basis points better than our expectations at the beginning of the year.

Net loss for non-GAAP EPS calculations was $9.4 million and a $0.12 improvement year-over-year on a per common share basis. GAAP net loss for the second quarter was $13 million, and a $0.08 year-over-year on a per common share basis.

Turning to the balance sheet, our ending balance for cash and cash equivalents and marketable securities for June 30, was $25.7 million, and free cash flow was a negative $15.7 million. As a reminder, we are heading into our busy season and Q3 is historically a large cash generating quarter.

In fact, we are on track to collect more in July than in all of Q2. This is more evidence of why we feel good about our cash position throughout the remainder of the year and the health of our balance sheet. Additionally, in Q2, we further strengthened our balance sheet by increasing our line of credit to $35 million.

We have no current plans to utilize our line of credit, but given the attractive economics, we felt it was a prudent way to further improve our overall financial help. To reiterate what we have been saying on our prior calls, we remain confident that we will be cash flow positive in the second half of this year, and also, for the full year of 2018.

Let me conclude with a discussion around our expectations for the third quarter and full year 2017. For the third quarter, we expect revenue in the range of $40.2 million to $40.8 million; non-GAAP net loss of negative $9.4 million to negative $8.8 million and non-GAAP net loss per common share of negative $0.32 to negative $0.30.

For the full year 2017, we believe we will achieve approximately 38% year-over-year top line growth, with expected revenue in the range of $152.9 million to $154.1 million. Included within this guidance is our expectations around revenue generated from new products, including Gauge and our new HCM product to be launched at HR Tech in October.

On that note, I'd like to remind everyone, that it takes time to introduce new products into these markets, as pipelines take time to build and sales cycles are multiple months long.

While we are excited about the TAM expansion opportunities these products represent, we are taking a judicious approach, as we think about the near term contributions to the top line. I'd encourage all of you to do the same.

We expect non-GAAP net loss of negative $36.8 million to negative $35.8 million, and a non-GAAP net loss per common share of negative $1.26 to negative $1.23. For calculating EPS, we expect our shares to be $29.5 million for the third quarter of 2017 and $29.2 million for the full year.

In conclusion, we are quite pleased with our Q2 performance as well as our outlook for the back half of the year. We are confident in the financial health of the business and excited about the progress we are making in our important investment areas of international and corporate.

I look forward to updating you on our progress next quarter, and with that, let's open it up to questions..

We will take our first question from Thomas Robb with Morgan Stanley..

Hi guys. Thanks for taking the question. I am on for Brian Essex.

I was just wondering if you guys could talk about how you are growing the Bridge salesforce and kind of the traction you guys are seeing there, and maybe kind of compare in contrast that to the growth you are seeing in Canvas, and specifically international part of that?.

Well, the Bridge growth and the Canvas international growth are actually very similar and that they are growing very quickly. We don't comment specifically on size of salesforce, so I am not going to comment on that. But yes, they are both going up into the right.

Obviously, they are very different markets and we have been in the international market longer than the Bridge market. We have a larger team internationally, and it's large enough internationally that we are actually reporting some of those numbers, and we are really happy where that growth is going.

As far as Bridge goes, it's primarily been domestic sales. We have done a little bit of work internationally, but it's still very much primarily domestic..

Thanks. And then maybe a quick follow-up, I think before you guys first launched, you had to include some discounting there, just because of the functionality. Can you kind of give us an update on how that functionality compares to your competitors, and where you want to be and how that pricing has kind of changed over that time? Thanks..

Yeah. I mean, we are still dealing with discounting in different parts of the market. We are primarily sort of mid-market, between 2,000 and 10,000 employees, and we will probably continue discounting it against tough competition over the next few years.

As far as the product goes, the product, I'd say is pretty much parity with who we are competing with in the mid-market. Looking towards the enterprise out of the market, there is definitely still a gap between Bridge, where it currently is, and where the big enterprise competitors are.

Although, we are winning some six figure deals with some larger enterprises, and so we are optimistic about closing that gap in the relatively near future. But yeah, we have been -- as far as midmarket goes, feature parity for about a year now..

Great. Thank you very much..

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

Hi, thank you. Steve, you hit this in the prepared remarks, but I just want to get a little further clarification. I mean, the top line metrics this quarter, regardless of how you look at them, look really strong.

But operating cash flow was more negative than a year ago, and it was more negative than we anticipated, and I think the Street, and primarily due to accounts receivables.

Was this quarter more back-end loaded than usual, and if it was, I'd expect that you'd collect those receivables and you have talked a little bit about that in this September quarter, which is, as you point out, typically a strong quarter for cash flow.

But to me, it looks like, given those receivables, it could even be better this year, than at least that I had modeled prior.

Is that the right way to think about it?.

I think the short answer is yes, John, that's exactly how to think about it. And the modeling challenges you have are pretty pervasive, most people have them, where they thought there'd be more cash coming into Q2 than in Q3. And it's because of a phenomenon that occurs here.

I think I may have described this to you, but let me just talk about it very briefly. A lot of times, if a client signs up for something in January or February, what they will do is, they will stick a stub period into the contract, to align it with their fiscal year, which usually begins in July.

And so what they will do, is they will put a four or five month stub period in there, and then they will start with 12 month cycles thereafter.

And so what happens is, a lot of deals that get done in the first part of the year, the latter part of the prior year, from a cash collection standpoint, get pushed to the middle of the year, and then that's the cycle that they go from that point.

And so what that does is, when you first sign the deal, it looks like the cash comes in, in Q1 or maybe in early Q2 phase, and then what ultimately happens, is the contract shifts and the cash starts coming in, in either late Q2 or Q3.

And so that befuddles almost everybody, right, because you don't have those details, and it wouldn't be appropriate for us to disclose things at that level. So essentially, it's a shift between Q2 and Q3. So if you model the little heavy cash in Q2 and a little lighter in Q3, shifting that might make sense..

Great. Okay. That's helpful. And then Josh, I want to go back to, when you -- some of the questions on Bridge.

When I look at what you did this quarter, and I look at first the international academic market, and I see that's 50,000 students and then the consortium in the Philippines, I am like -- I mean, that certainly validates your ability to scale in the international academic market.

And as you point out, you are right now leased in the mid-market, but looking to sort of move up.

Are there any -- I know you have gotten some 10,000 seats and are there any like very large seats in the pipeline, can we start to expect to see something of this magnitude in the corporate e-learning market at some point in the near future?.

Well, we have got a number of customers that are north of 10,000. This last quarter, we closed a 17,000 employee company, a 30,000 employee company, that's the number of seats with Bridge. So you are going to continue to see this.

We are going to continue to announce some of these larger customers, over the next 12 to 24 months, are going to continue to go up in [indiscernible], as far as the size of Bridge customers. But I am still -- the balance, as far as numbers go, of our customers, are in the single digit thousand range, as far as employees.

We are just starting to consume some of these north of 10,000 opportunities, and starting to more frequently take out some of the bigger competitors. We actually won a contract from -- we've replaced Oracle. We replaced another cornerstone on-demand. So this is happening more and more often.

It's exciting, it's the direction we are going, and we are seeing those results..

That sounds like it's heading the right direction. Thank you..

Yes..

We will take a question from Brian Schwartz with Oppenheimer..

Yeah, hi. Thanks for taking my questions this afternoon. Josh, you highlighted a win in the ed tech sector at the University of Minnesota and I think you alluded to that there is a -- or there has been a very strong Moodle developer community, as part of that university. And that's pretty consistent with what we were hearing too.

The question I wanted to ask you is, since you have won -- maybe it's too early already.

But since you have won that university, are you starting to see any increased awareness or interest levels from the developer community, now that you have won that university?.

Well, a couple of thoughts on that. One is, it's -- the full public official announcement is relatively recent. So it's going to take a little bit of time for that to really sink in. And second, the developer community is difficult to keep tabs on. So kind of gauging their reaction, is not something we have invested a lot of energy into.

I think that's something that we are just going to see gradually over the next year or two, I think what we will see is, sort of a slow, sort of -- I don't know, decrease in energy around the Moodle platform. Internationally, most of the wins that I named in today's call, were Moodle takeaways.

In the U.K., there is half a dozen schools we just took away from Moodle. I mean, it's really -- Moodle's was a great stop gap between Blackboard and Instructure.

But we have been in the market long enough, that I think the market is realizing, ah, okay, this is the right and permanent direction to go in, and so I think, the heyday of Moodle is starting to fade off into the sunset..

And Brian, from a modeling perspective as we think about it, we are pretty conservative in the way we think about capturing the Moodle market, because it's a slow game of dominos. And we just have -- Minnesota is a nice big domino that's fallen, but it's going to take some time..

Appreciate that color.

One follow-up question I just wanted to ask you, Steve -- for Steve is, what you are seeing so far here in Q3 in regards of the customer starts or the implementation schedules, what your backlog is telling you, the reason I ask is, if you remember last 3Q, the customer base kind of surprised us that, they took a little longer to deploy the products.

And if you look at the setup, you have a similar setup here, the bookings were very strong in Q2 of last year.

The datapoints here look like the bookings were very strong again here in Q2, and I am just wondering, if -- how one month into Q3, how the implementation schedule is in the backlog, and just how you are thinking about this 3Q in consideration what happened last year?.

Yeah. So we usually don't comment sort of inter-quarter about how things are going. I mean, we have given the guidance, the guidance was based on, how we think things are going to play out.

But what I can tell you Brian, is that, we have tried to prepare for the possibility that we could have a repeat of last year's Q3, and the way we did that, is we did a lot of derisking in the model.

So two things we did in particular for Q3 and Q4 as a matter of fact, is instead of assuming that clients would start July, sign in July and start in July, which happened in the proceeding four years prior to 2016. We didn't make that assumption. We assume there would be a normal two to three month start time from sign date.

In addition, instead of assuming that a bunch more business was going to show up in July than in September, we didn't do that either. We modeled that we are going to have more of a backend loaded quarter.

So to some degree, we are a little indifferent to how the actual deals come in and when they start, because we feel like we have protected ourselves against a downside scenario. So you know, might there be upside? Sure that's possible, but we wouldn't expect there would be downside, like there was last year..

That's real helpful Steve. Good job on the quarter over there. Thanks a lot..

Thank you..

Thanks..

Thank you. We will next go to Scott Berg with Needham..

Hi Josh and Steve. Congrats on a good quarter. I have got two quick questions here. The first one is on the K-12 market, you announced another large win in that market, after a large top six school district last year.

Now that you have more proof points in some of these larger deals, is that market getting easier to sell into, given your market awareness is improving?.

Well, I mean, yes and no. I have always said the K12 market is a challenging market, because it's not strictly a replacement market, like in the higher ed market, which makes it quite easy for us. The K12 market, there is still a lot of education, so to speak, going on with teaching them about learning management systems and the value of them.

I think what we are seeing is, what the larger school districts are understanding the value of an LMS to run these large school districts.

So we are seeing a lot of success, continued success in the larger districts, that have budget, and really have at the administrative level, a need to manage -- these are hundreds of thousands of students in these districts, and they need a system in place that has really been proven to work well.

And so yeah, we are definitely gaining some traction there, because of market awareness. But, at the same time, I want to caution that, there is still a lot of unknowns in the K12 market.

It's still a little squirly, but we continue to win our unfair share of that market, and win rates are increasing, and also of course, with the announcement of the Gauge product, we are really doubling down on our ability to offer compelling products to this market, with the Assessment Management Platform that dramatically increases the total addressable market in K12, and so we anticipate that will be even more attractive to the larger districts, which really honestly are the most interesting districts out there.

It's technologically challenging and interesting, and I think there is a lot of value that we create with the large districts. So we just get excited about the larger districts. Of course, we have smaller schools too, but the large ones are the -- those are the fun deals to close. And you should see more of these over the next few quarters..

Just to add on to what Josh said and what I said in the prepared remarks, I want to just make sure everybody is clear regarding Gauge. What we are really excited about, and it's a very cool product. Scott, you may have seen the demo at Instructurecon last week? It's a pretty compelling product. But these things have natural buying cycles.

A lot of these school districts are under contracts with other vendors. This takes time to get the stuff into the market. So we just want to make sure everybody is clear, that this isn't some instant [indiscernible] hit pending. We expect a lot of good things out of it, but it will take some time..

Got it.

That actually leads into my follow-up question is [ph], how are you guys thinking about upsells into your current install base, and I asked the question because, you started bringing out more product the last couple of years, more meaningful products, selling into an existing customer is certainly different than going out and hunting for new one.

Just wanted to understand kind of your flash [indiscernible] around those account managers, their capacity to be able to upsell some of these new products and with this new release, does that maybe change any of your investments in those areas, in the back half of the year?.

Scott, we are supportive of the idea of upselling products to current customers. And that's what we have been working on for the last year or two. Like you said, we did a whole bunch of new products that we have, that were coming out. And for years, we have said, hey our strategy is to create new products.

Ever 12 to 18 months, we will release a flagship product, and then in between that, we will release one or two kind of second tier product. And it's really about satisfying the demand that we have from our happy customers, to give them more software, increase the wallet share in the market that we have captured.

So is it different than going out and getting new contracts? Yes. But we have a massive customer success department, and we are managing our customers very directly.

We are talking to them multiple times per week about how they are feeling about their current products, what their current needs are, and our customer success department is linked very closely with our sales department. And we have started to, add these new products to new contracts that we have won.

And we are starting to get a cadence, a rhythm with these upsells. So I think -- we certainly haven't hit our stride, I don't think on any new product that has come out in the last 24 months.

I don't think a single new product that has come out in the last 24 months, has sort of reached their maximum penetration of our customer base, but we are ramping up. So I think there is definitely some upside that we will see over the next year or two, as we get really good at this.

But it's something that's absolutely part of the strategy that we have been executing on, and so far, things are going really well..

And I think Arc is a really good example of that. The numbers are relatively small, but we are exceeding our expectations for Arc for this year. And that tells us a couple of things, one is that, when we build these second tier products, and if we do it correctly, that the market will want them.

But also, that our customers are anxious to buy more stuff from us. So that certainly spurred us on I think, and one of the thing he kept on [ph] saying, well what else can we do, and obviously Gauge is another one that's going to have -- be of high interest in the K12 market, and then give us an opportunity to go back to those existing clients.

But we want to keep coming up with more of these. That's smart business..

Great. Helpful. Thanks for taking my questions..

We will take another question from Terry Tillman with SunTrust Robinson Humphrey..

Hey Josh, Steve and Erin, can you hear me?.

We can..

Yes, how are you doing Terry?.

Doing well. Nice job on the quarter. I first want to mention -- I think Josh, you mentioned about Atlanta's airport being the busiest in the world. I am here right now, and I can confirm it's really busy..

Good. That's great. I am glad I am not a liar..

And I am asking all the employees about the usability of Bridge. So will give you an update on that later, offline. So the first question just relates to, with Bridge it was nice in the past in terms of a nice balance at greenfield versus replacement.

Are you still seeing about 50% of the time, it's replacing on-site training or feature based training, so that's the first question?.

You know. It's still roughly about 50-50 greenfield versus rip and replace. Like I mentioned earlier, the only really interesting thing is, we are starting to occasionally replace some of the bigger players. But we still see a lot of green business in the mid market.

I think as we start seeing more and more of the big enterprise play, then I think we are going to see less greenfield. But for now, it's still roughly 50-50 on green versus replaced..

Okay.

And I guess, Steve, just a question in terms of -- as we think about the back half of this year and then through the next couple of years, if you had to look at both R&D and sales and marketing, do you see one or the other providing more leverage than the other, or is it going to be pretty balanced in terms of leverage coming from both? Thanks..

No. I think there is going to be more leverage coming out of sales and marketing than R&D. We want to continue to invest pretty heavily in R&D. some of the fluctuations that you would see, between for example last quarter and this quarter, really had to do with capitalized R&D, as we are inventing and releasing new stuff.

That increases the amounts of capitalization required under the accounting regs. And so that number moves around a little bit. If you dig deep enough into the filing, you can figure all the stuff out. It's buried in the cash flow statements. So that's going to move the number around a little bit.

But generally speaking, the level of investment, we want to keep our foot pretty heavy on the gas pedal for R&D. And sales and marketing is just going to leverage naturally, because we don't have to grow the salesforce nearly as quickly as the topline has been growing. So that's going to move in a nice direction, and a faster pay for R&D..

Okay. Thanks a lot..

We will take the next question from Ben McFadden with KeyBanc Capital Markets..

Hey guys, thanks for taking my question. I want to start with just Blackboard, you had a strong showing at your conference last week, Blackboard also had a conference last week.

So curious whether you picked up any change in the competitive dynamics there, in regards to win rate, and as we look towards Q3, with your seasonally stronger billings number, just curious whether you are picking up more opportunities up for grabs from churn, less in line, kind of how that dynamic looks domestically, specifically, as it relates to Blackboard?.

As far as the competitive landscape against Blackboard and win rates, it's still steady. We continue to have an incredibly high win rate against Blackboard.

The confidence that they had last week, sort of the headlines out of that, was the same as last year and the same as the year before that, and I think the same as the year before that, which is, Ultra, is delayed. And so, we haven't seen that have an effect in the market at this point.

We don't doubt, that at some point, Ultra will be released, but there was no good news for Blackboard fans at the conference, with respect to Ultra..

And just a little bit more detail, we actually signed a couple of guys down there and they let them in, which we are grateful for. Incidentally, Blackboard had a booth in Instructurecon, which is a little --.

Yeah, we are partners with Blackboard..

We are pretty open about that. In any event, couple of things, first, they are very apologetic. Once again, as Josh mentioned about Ultra, but this time they were kind of overtly apologetic.

We heard estimates, that we are approximately 18 months out before Ultra will be ready for primetime, which means that, they will definitely miss the next buying season, and maybe even the buying season after that, but maybe it's close enough to that point, that they might squeeze into that buying season.

But we are now talking about the buying season for 2019, not 2018. And just backing up a little bit, that's a good way to think about these conferences in general. This is more about next year's buying season than anything happening this quarter or next quarter..

I just want to also speak to, I mean, writing really high quality, feature rich, fast software, true cloud software, is incredibly difficult. It's very easy to talk about. It's very difficult to execute and deliver to millions and millions and millions of users. And that barrier is just really-really tough to get through.

We respect Blackboard as a competitor. But we are not surprised -- I mean, this is the first time they have done this, and it is not going well for them. It's tough, it's very difficult and I am grateful for that barrier.

We have seen many new startups try to get into our space and fail over the last seven years that we have been in the market, and so it's not surprising.

But we continue to take this opportunity to not sit on our laurels and really double down on in enriching our feature set, digging deeper into the market, and continue to be really-really competitive, while we still have the opportunity to be competing against Blackboard's old outdated software..

And for any of those of you who saw Mitch Benson's presentation last week, you know exactly what we are talking about. There is a long list of stuff that got oohs and aahs from the audience, which doesn't typically happen at these kind of conferences, about all the stuff that we have either built or are in the process of building..

Great. And I wanted to ask a question on Gauge; just curious, how you get to that $300 million opportunity, because that's actually fairly large for the K12 market, all things considered. I know you started with Broward, which is a larger school district.

So any color you can kind of provide on how pervasive that could potentially be throughout K12, would be great?.

Yeah. Working up to that number is relatively straightforward. I mean, K12 school districts throughout the country have requirements to do assessments, and it's very difficult to do large scale assessments without software infrastructure to facilitate that.

And also the pricing related to assessment management systems is very similar to learning management system pricing in the K12 market. And so, estimating somewhere around $200 million, $300 million, maybe more of total addressable market for the assessment management space is a reasonable approach.

I think over the next 12 to 24 months, we are going to have a pretty good idea of how easy it is to sell, what the leadtimes look like, we will have a lot more to report. But we are very optimistic. It's a beautiful product.

I don't know if you got the chance to see the preview at Instructurecon, when we made the announcement, but it's great technology, very-very cool, very easy to use, gives a lot of insight into individual students' abilities and what they need to work on. It's great software. And also, there is an opportunity in the higher ed market as well.

It's not mandated in the higher ed space, like it is in K12, so we are sort of discounting that opportunity in the higher ed market. But just full disclosure, there is an opportunity to sell for large scale testing in that market as well..

Great. Thanks for taking my questions..

Our next question comes from Brian Peterson with Raymond James..

Thanks guys and congrats on the quarter. So just a follow-up on that, as it relates to Gauge.

And it's maybe early, but can you talk about customer buying patterns in that market? Do customers typically purchase an AMS in conjunction with an LMS, or do they have more flexibility timewise to potentially purchase that at a different point in a school year? And in coming to market, is this typically an RFP type of product, or would you have to educate client for that Gauge?.

Well, right off the bat, yes, it is generally an RFP type of purchase. We have seen it combine in LMS RFPs, but we have also seen it in standalone RFPs. This is just sort of what we have observed over the last couple of years as we have been developing Gauge.

But I am not speaking from a wide breadth of experience in selling AMS, because we have just gotten started. However, because we are very involved in the RFP world and K12, we are very aware of the number of RFPs that are out there. So yes, schools are using technology.

There are current incumbents that have contracts with schools, and we have done our homework, and we know that most of these systems simply -- sadly, not surprisingly, it's just not good software. And so we are optimistic that we will be disruptive in this space, similar to how we were with Canvas back in 2011..

And just a little bit more on that, testing has been around for much longer than LMS has been available in the cloud to K12, which is sort of what enabled the whole market.

So there is competitors like [indiscernible] who have been selling it as a standalone item, not connected to an LMS, and then there is competitors like Schoology, who connect the two. So schools buy this in every way you can imagine, and obviously, you need Canvas. As we've talked about, you need Canvas to run Gauge, so we will be selling it together.

But there -- schools can buy it together or independently, and then try and link it. We think it's way more powerful when the two things are connected..

Got it.

And maybe a follow-up, just on the LMS market overall, particularly just in the higher ed space, how big of a year is this, in terms of bookings opportunity, and if we think about 2018 and 2019, do you see any bigger years to potentially gain share versus your competitors?.

Well, you're asking the holy grail question, which is, when are all the contracts up? The fact of the matter is, we don't know. Now, obviously we have a pretty good beat on how 2017 is going to turn out, because of the length of the sales cycle, and we know what our pipelines look like for the rest of the year.

Unfortunately, we don't comment on those details, but when we look forward to 2018, it could be a bigger year than this year, it could be a smaller year than this year, it could be the same, we honestly don't know. We would love to figure that out. If you have that magic list, we will pay handsomely for it. But it has been difficult.

And in some cases, schools don't even know. You call them and you ask them, and even if they want to tell you though, that's in the contract buried somewhere, I don't know. And then of course, when it gets closed, they figure it out. So it's pretty hard to predict..

Understood. Thanks guys..

Our next question comes from Corey Greendale with First Analysis..

Hey, good afternoon. Congratulations on the quarter.

Actually wanted to follow-up on the point, that you were just discussing, which is obviously, there is good news in delays to Ultra from a competitive standpoint, but is there some risk to it in that, as you get past the early adopters, that you may have more and more receipts waiting for the release of Ultra, before they come back to markets? You may have a bit of a down year, as that approaches?.

People have been waiting for Ultra for several years now, and we haven't seen it impact the market, even with the lay majority of the market.

I am not saying that that's not something that can come up, as time goes on, but this isn't our first rodeo with respect to Ultra delays, and so we have a reasonable idea of how the market is going to react for the third and fourth time that we have had delays.

The further we get into the late majority of the market, the more we become accustomed to, how they buy and how they implement, as opposed to the early adopters. And there is a difference, we definitely have seen the difference.

But it's not a dramatic difference, but we are very, I think, firmly in the middle of the late adopter, the late majority of the market at this stage in the game..

By the way, we are not sitting idly by either and just seeing what's going to happen.

We have -- and I think we have talked about this before, we have programs where, if we know that the contract is up next year, we are happy to sign them up, give them a little bit of free Canvas, even up to a year, because it doesn't cost us hardly anything to do that. And that's a great marketing investment for us.

So we are working hard to get those deals off the street, the minute we realize there is any potential to do so..

Yeah. If there is any CIOs listening, that's waiting for Ultra, just shoot me an email, I am josh@instructure, I will totally hook you up..

And also the thing that Steve said about, like not costing anything, that's not true at all. Actually, there is a bunch of effort and expense that goes into, so just be aware of that when you are looking at pricing..

We appreciate that..

Good. So I am going to jump around to a couple other topics.

On Bridge or on the corporate market, I don't know if there is a way to quantify this, but what's your sense of the market, like how many RFPs there are for standalone LMS at this point? So where I am going is, as you add another product, obviously that expands the TAM, but does it -- is it more than one plus one equals two, that there is just going to be more RFPs that you can participate in, when you have a second component to the HCM suite?.

That's a great question. Our current contacts that we are operating in, is one where we are not really replying to a lot of RFPs in the corporate space. The mid-market tends to not do a lot of RFPs and the RFPs that do come out, we tend to not participate in those.

Usually, there were the much larger companies and the breadth of the enterprise feature set is beyond where we are right now. As we increase our product line to match more of the HCM suite offerings that are out there, the opportunities open up quite a bit. Now, I don't know if adding a second module will more than double our opportunities.

Maybe a third or fourth module, then we start getting to the point where, hey, you know what, this really is looking like an HCM suite, and I think our opportunities are multiplied a heck of a lot more than just a few modules at that point.

Will we get there when we make our new module announcement this year? I think the number of opportunities will certainly double. Will it be more than double like you are asking? I don't know. Fingers crossed, maybe. Maybe there will be some synergies there.

But I think where the real upline comes in is, when we get more third or fourth module, and so we can really, with a straight face say, hey, we actually do have an HCM suite..

All right. Appreciate that color. And then I have two just quick number questions, this is probably nitpicky, but given the commentary, I think Steve, you were talking about the investment in R&D. R&D dollars were actually down sequentially on a non-GAAP basis in Q2, which is not intuitively expected to happen.

I assume that's just kind of a blip, and we should expect it to keep stepping up sequentially in future quarters?.

It's really a blip in capitalized [ph] software. So if you dig into the cash flow and you add it back, I think you will find a different story..

All right. Fine. Got it. And then the other question is, I know -- and apologies if you commented on this and I missed it. I know you don't give guidance on billings. Looking at it on a trailing 12 month basis, you had a really tough comp.

In Q2, comps get easier, Q3, Q4, does that suggest all else equals, we should expect the growth could accelerate in Q3 and Q4, anything you are willing to provide on that front?.

Yeah. So the only thing I can tell you on that Corey, because you are right, we don't guide to that is, my earlier commentary about sort of what happens with these clients that sign up in late prior year or Q1 or maybe early Q2 of the current year, and how they try and readjust their contracts to structure payments towards the middle of the year.

That obviously affects billings..

Okay. All right. I appreciate it. Thank you..

[Operator Instructions]. We will go to Eduardo Finkler with FK Capital Management..

Hi. Thank you for taking my question.

Could you please provide an update on your average contract length, and also I wanted to ask, if you have any specific territory, where you are focusing for the international expansion?.

Yeah Eduardo. So we only talk about average contract length at the beginning of each year, and we gave that information out on our Q4 call, I believe; might have been Q1 call, I can't remember. But that event was just over three years, slightly higher than it was the prior year, which was also just over three years. But there was a slight increase.

In terms of where we are expanding, we really don't give out our roadmap. We can tell you what's new for us. LatAm is about a year plus old. We are looking at Central and Southern Europe now, with entrance into DACH, which we consider to be Germany, Austria and Switzerland, as well as putting a rep or two in Spain.

And you know, we have got a roadmap for other territories, but we usually don't provide that information in advance..

Okay. Thank you..

That concludes today's question-and-answer session. At this time, I will turn the conference back to Josh Coates, CEO for any additional and closing remarks..

Thanks everyone for joining us today. We are really pleased with our performance for the first half of the year, and of course, we look forward to talking to you throughout the next quarter or two, and also, keep an eye out for our big Bridge announcement this fall. All right. Thanks everyone. Bye-bye..

That concludes today's conference, and thank you for your participation..