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

Justin Furby - William Blair and Co John DiFucci - Jefferies Scott Berg - Needham Terry Tillman - SunTrust Robinson Humphrey Brian Essex - Morgan Stanley Brian Peterson - Raymond James Koji Ikeda - Oppenheimer Corey Greendale - First Analysis.

Good day, everyone. Welcome to Instructure Q3, 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 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'd like to turn the call over to Instructure CEO, Josh Coates..

Thanks Erin. And welcome everyone to our Q3 2017 earnings call. As usual, I'll provide some customer highlights from the quarter and a few additional highlights before turning the call over to Steve for recap of our financials. At the end of his remarks, we'll take your questions.

We had a strong third quarter with revenue of $42.9 million, up 42% year-over-year. Additionally, our continued focus on developing innovative, easy to use software resulted in the newest addition to the Bridge platform Bridge Perform, our performance management module. I'll talk more about Bridge Perform in a few minutes.

Now let me share with you a few of our key customer wins from this past quarter starting with our corporate product Bridge. Discovery Communications provider of the Discovery channel, TLC and Animal Planet with billions of viewers globally shows Bridge Learn to replace their current LMS, SumTotal.

Discovery will use Bridge for on-boarding compliance and job specific training for their workforce of 7,000 employees. In Brazil, Banco BTG Pactual, a global financial company that specializes in investment banking, wealth management and asset management replace the local Brazilian LMS with Bridge Learn and Arc for their 2,800 employees.

Bridge's authoring tools as well as the platform's reliability and ease of use were key factors in their decision to select Bridge. And finally Clemson University, one of our many Canvas users will use Bridge Learn and Arc for compliance training for their 3,500 faculty and staff, as well as professional development.

Clemson love the platform's ease of use and the ability to create content tailored to their specific needs. Turning to K-12. We saw several districts switch to Canvas to support statewide initiative for centralized delivery of curriculum and content.

UTEN, the Utah Education and Telehealth Network chose Canvas in a statewide deal for all public K-12 school districts and charter schools. Our partnership with UTEN provides statewide access to Canvas for an additional 500,000 students and teachers for a total of approximately 650,000 users.

Public schools in UTEN now have a consistent LMS experience for grades K - 20, Canvas makes cross district collaboration, as well as sharing content and resources across the state possible.

Additionally, our strong reputation with University of Wyoming and several local school districts was a key factor in winning the statewide Canvas deal with Wyoming.

Over the next 12 to 18 months, Wyoming Department of Education will be replacing Blackboard with Canvas as the statewide LMS for over 100,000 grade K- 20, Wyoming plans to use Canvas at 48 school districts, five community colleges and the University of Wyoming.

And finally just a few metro staffs away from blackboard headquarters is Arlington Public School in Virginia, a long standing user of Blackboard, the district felt they needed an upgrade for their 25,000 students when a new Virginia law spark to move in for blended learning across the district.

The switch to Canvas will allow greater parental involvement and access to collaborative resources for the entire district. We are offering free customer support for all Blackboard employees that have chosen in the district.

Additionally, Canvas was named the best K-12 learning management for 2017 as part of the Annual Software and Information Industry Association Coty awards beating out five other finalists. Moving to the higher education space.

Tufts University chose Canvas to serve their over 11,000 students, replacing [Skai] and homegrown LMS customized for their health science curricula. Canvas provides stuff with modern, full service cloud based LMS that enables customization, scalability and reliability.

Additionally, both the Georgia Institute of Technology and the University of Colorado Boulder chose Canvas as their LMS for their 25,000 and 29,000 students, respectively. Turning to International. We saw continued success across many regions.

The Swinburne University of Technology in Australia previously used Blackboard but was looking for an LMS that would support the university's digital transformation effort for their 24,000 students.

The Pontifical Catholic University of Minas Gerais, one of the top private universities in Brazil and one of the largest Catholic universities in the world, replaced Moodle with Canvas for their entire e-learning department of 16,000 students.

Also in Brazil the Centro de Integração Empresa-Escola or CIEE chose Canvas for their 36,000 learners because of its robust feature set. And finally in Switzerland, IMD, a top ranked international business school chose Canvas for their 7,000 students after a successful rollout for their executive MBA program in 2016. And now let's turn back to Bridge.

Earlier this month at HR Tech we launched our new performance management model Bridge Perform. Bridge Perform facilitates healthy manager and employee relationships through continuous feedback while capturing valuable employee performance data.

Complimenting Bridge Learn, Bridge Perform is the newest addition to the Bridge platform as we build out our human capital management suite. We believe this new product could add as much as $4 billion to our corporate TAM.

We are really excited about the positive feedback we've received from customers using Bridge Perform like Southern Blazers, Golden Nugget and Pack Size. I also want to update you on the status of our sales leadership. We've recently announced that Mark Maloy, our EVP of Worldwide Sales resigned.

Mark accepted a position with another [best] company in the Bay area. He has been a strong contributor to our success so far and we wish well in his new role. We also mentioned that we commenced a search for a Chief Revenue Officer early in Q3.

That search was launched to position Instructure for continued scale through our next growth phase as we move towards $500 million in revenue and beyond. Now I'll 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 third quarter. In Q3, revenue grew 42% year-over-year to $42.9 million and subscription revenue was $37.4 million, up 45% from last year.

The growth in revenue was driven not only by new customer additions, but also our continued net revenue retention of over 100%. As in Q2, Q3 revenue was better than our expectations, primarily due to an increase in non-recurring revenue, which was 13% of the total.

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 and Q2. This also represents a one time increase to revenue.

Billings on a rolling 12 month basis were up 37% year-over-year to $175 million. As you have heard me highlight before, given the seasonality of our business, we calculate billings 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 and all EPS numbers are in per common share basis. Gross margin was 71.8% for Q3 which was essentially flat to last year.

Gross margin came in just slightly less than our expectations, due to higher cost related to fall start and higher than expected non-recurring revenue. As I mentioned for the past several quarters, we expect modest year-over-year improvements in gross margin, as we approach our 75% long term target for the business.

Turning to our operating expenses, total operating expense were $39.1 million during the quarter as we realized continued leverage across all of our departments. Operating loss for Q3 2017 was $8.3 million.

The overall scaling of the business, as well as the operational efficiencies I just discussed, resulted in an over 1,200 basis point year-over-year improvement in operating margins. GAAP net loss for the third quarter was $12.4 million and $0.02 EPS improvement year-over-year.

Non-GAAP net loss was $8.1 million and $0.07 EPS improvement year-over-year. Turning to the balance sheet, our ending balance for cash and cash equivalents and marketable securities for September 30th was $66.8 million, and cash flow was a seasonally strong $33 million.

As we look to 2018, we reiterate that we will be cash flow positive give or take for the full year. Let me conclude with a discussion around our expectations for the fourth quarter and full year 2017.

For the fourth quarter, we expect revenue in the range of $41 million to $41.6 million; non-GAAP net loss of $8.8 million to $8.2 million and non-GAAP EPS of negative $0.29 to negative $0.27.

For the full year 2017, we believe we will achieve approximately 41% year-over-year top line growth, with expected revenue in the range of $156 million to $156.6 million. As we discussed last quarter, included within this guidance is our expectations around revenue generated from new products, including Gauge and Bridge Perform.

To reiterate, it takes time to introduce new products into these markets as pipeline 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 our near term contributions to the top line.

I'd encourage all of you to do the same. For the full year 2017, we expect non-GAAP net loss of $35.6 million to negative $35 million, and non-GAAP EPS of negative $1.21 to negative $1.19. For calculating EPS, we expect our shares to be 29.9 million for the fourth quarter of 2017 and 29.3 million for the full year.

And now I'd like to talk a little bit about 2018. While we don't have any numbers for you today in part because we are in the process of recruiting our new CRO who should have an opportunity to review the plan. I can give you some insights into how we are building the 2018 model.

As you know, and as we've been talking about all year, our out performance for the first three quarters has been largely driven by two key factors. Early start and outsized non-recurring revenue. Both of these items created better than expected performance within the quarter but have no impact on future quarters or years.

Specifically, we estimate that the impact of this one time revenue bumps for the first three quarters of year was approximately $3 million with more than half coming from ProServ. So for 2018, as we did for 2017, we will continue to de-risk the model. This means that our plan will not assume any early start.

In addition, we will assume that non-recurring revenue will not exceed 11% of the total. In the event that early start do occur and/or we have higher than expected non-recurring revenue that should present an opportunity for upside in any given quarter.

We wanted to share this with the investment community to provide a greater level of transparency into our thoughts in the 2018 plan which we'll discuss in greater detail on our next quarterly call. In conclusion, we are pleased with our Q3 performance as well as our outlook for the rest of 2017.

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

[Operator Instructions] We will hear first from Justin Furby with William Blair and Co..

Hi, guys. Thanks for taking the questions and congrats on the quarter. I guess several questions. Maybe to start for you Steve on the guidance for Q4. I know you don't guide subscription and services but it just seems a bit odd that you are calling for total revenue to come down quarter-over-quarter. I don't think that's ever happened.

So what would drive that? And I am assuming you would expect subscription revenue to increase quarter-over-quarter in Q4, is that right?.

Yes. That is accurate Justin for -- without giving a lot of details we do expect subscription revenue to go up. But in Q3 there was a little bit of early starts as we talked about and so to a degree that those were in Q3 and I don't have an exact number for you. I was trying to give you some framework for what's been happening throughout the year.

But I don't have exact numbers for Q3. So there is a lot bit of that but there is also quite a bit of non-recurring that is outsized for the quarter. And to the degree that doesn't happen again in Q4 that would account for what would look like an overall revenue decline but we do expect recurring to grow. .

That's helpful. And maybe Josh for you. The billings numbers has a lot of moving parts in it.

So maybe you could just talk high level about new bookings performance in Q3 versus sort of how you -- what you expected and then are you still on track for sort of I think low double digit growth and new ACB on the higher running K-12 side domestically? Thanks. .

Well, as you know, we don't really report on bookings or billing on a quarterly basis. So I am not sure there is anything I can really comment on that.

Do you have another question?.

Yes. I guess maybe if you look out to next year I think it comes to Steve's guidance.

Steve is there any reason to think the 30% numbers that you guys have talked about, is it risk just based on all the moving parts? And I guess you didn't really give us the answer but what can you -- can you give us any thoughts on the 30% numbers you look out for next year? Thanks. .

Sure. It's our continued goal but as I mentioned in the prepared remarks, we are really not in a position yet to comment on what the growth rate will look like for 2018. We got a lot of moving parts including recruiting the new CRO.

So we just need little bit more time to flush things out but I did want to give everybody some transparency into how we are thinking about the model and we had some really strong performance this year but it's almost completely driven by these non competitive events if you will..

We will hear next from John DiFucci with Jefferies..

Thank you. Thanks. My first question is for Josh. Josh it's great to see you build out the Bridge platform recently with performance you mentioned in addition to Learn.

But can you talk about your go-to-market plans to address this corporate opportunity within the context of e-learning but also the greater context of talent management especially given the recent changes you talked about with Mark leaving. And I guess I mean he is gone right so can you just help us out a little bit the results look really good.

Can you talk to us about what's being done right now to sort of take over forward he was doing?.

Well, okay, there are few things there. One is I guess he is effectively gone. I think his last days in a week or two and so it's been a pretty orderly transition to his secondary lieutenants to kind of manage the store. But as you know, we've been pursuing a CRO process within outside recruiting firm for several months.

We are actually we anticipate making an announcement before the end of November on who that CRO is. So we don't -- we are not really having a blip as far as management over sales and marketing. Obviously doesn’t feel like it.

How that sort of bleeds into Bridge, we are super excited about the HCM finally getting the module from Learn, Perform, we are overlapping our development to come out with the third and fourth module in the future here. And the preliminary feedback from our customer base is super positive. We really think of it is a talent management suite.

We are really focused on individual employees and on making managers to be able to manage much easier and to be having the real connection with the employees as opposed to 1 through 5 rating at the end of the year, something really meaningful and substantial to really help that good to grade transition in our businesses culture.

So, yes, we are super pumped about that and new the CRO whoever he or she maybe is going to have a really exciting opportunity to build on everything Mark's built.

And we are really excited about 2018 been able to go market with an additional module and as well as continuing to test and develop and partner with potential customers for the third module that we are working on as well. .

Great. And that's helpful and the results indicate that it hasn't -- those lieutenants seems to be doing pretty well here. I guess while we wait for that new CRO and ask him some questions when he comes but I guess Steve just a quick follow up and we appreciate the color around your thoughts for 2018 that is helpful as we look to model out.

But just I think I know the answer to this but just to be clear, non-recurring revenue that's professional services right? There is not something in that subscription line that is non-recurring is there?.

No, that's correct, John. It's actually made up of three pieces. Implementation fees which are amortized over the life of the customer which is typically the life for the initial term of the contract.

Training which is pretty moderate by size pieces and then professional services which is the real needle mover because that's the one that can fluctuate more meaningfully quarter-to-quarter. So but those are the components. There is no recurring fees and non-recurring and vice versa. .

Thanks. We will move next to Scott Berg with Needham..

Hi, Josh and Steve. Congrats on good third quarter. I have a couple of quick ones.

First of all, Josh, as you look at the new CRO, what type of background are you looking for in the individual? I understand that you are probably close to making a hire but does this individual maybe bring more strength in the HCM side than what the prior individual did purely because that seems to be a broader component of what your long term future, our product plans are?.

I think it's a fair question. I think we are mostly looking for someone who is really good at sales and marketing. I am kidding. .

Those would be great skill set to have in that position..

Look we are actually down to two candidates. So we are really close. Instead of describing this particular candidates' background, I can generally tell you that we didn't specifically look for someone who has a background in the HCM industry.

More than half our business for at least the next few years is definitively going to be on the edu side and as you know we've never really looked for expert in edu. What we try to do as a company strategically is just really focused on software expertise.

Sales, marketing, development all really software and so we continue to do the same thing with the CRO search. So the candidates that we have and that we interviewed all have really excellent background in software sales specifically SaaS. We are getting little more narrow in SaaS.

But really the important factor for us was to find people that have had experience with numbers $0.5 billion in revenue and above, that next big level where we need to get to over the next few years is what was the most important thing for us.

Industry specific that's a bonus but frankly the operational and leadership expertise around those big numbers, that's where we need to move to next. And so that's what we've really been focused on.

Does that help? Does that answer your question?.

So I can summarize that by saying you are not going to interview me for the position because I don't have sales and marketing experience. I think that's a great strategy, it's very fair. .

You were on the list but you were on the long list, you got cut off man, you got cut off. .

That was super helpful, thank you. Last question for me was on the K-12 side. You won a couple of state wide deal this quarter. I think part of the story that's not maybe well understood or appreciated by industry is the strength you had in K-12 over the last 12 to 18 months.

Can you maybe talk about some of the competitive dynamics in that end market that are driving this I'd say accelerate win rate over the last year and half or so?.

Well, I mean let me moderate that a little bit. I mean I think we have a strong win rate in K-12. I believe we have the highest win rate out of any of the competitors in the space. And I think that's been relatively constant at least the last few years. And we anticipate it to continue to be that way.

The recent state deals we won I think just show that we can be very competitive with the large consortium deals all the way up to the state level. So, yes, we are definitely enjoying a lot of great wins. As far as the landscape goes, it's still very hairy. I referred to the K-12 market is kind of wild west; its still is very much the case.

And what I mean by that is you have a lot of buyers that are first time buyers for LMS. They are very high stake especially with these large consortium, they don't have a lot of experience in working with LMS vendor so things can get little squirrelly it's not as predictive.

Also you have a lot of new start-ups that are involved in the K-12 space because its lot easier to get into this Greenfield market than it is the higher end where you really have these barriers of entry.

In K-12, the barriers are much lower but once we do get a contract, we keep those customers and so but the Greenfield is what we are really fighting over and so far we are wining the war but it continues. .

We move next to Terry Tillman with SunTrust Robinson Humphrey..

Hi, good afternoon, gentlemen. I have a question with six parts each and does look like we had --.

And you have exactly three minutes, Terry.

How are you doing, Terry?.

It does looks like we have more trick -- pretty good, it looks we have more tricks than treats this year so or treats than tricks, I don't know even what I just said. So I'll just shut up and start with questions. .

Should I start seeing in Monster Mesh?.

Of course, no, I am done doing that enough, so that's funny. So anyways, one of the questions is as we look over the last 12 months, you just have another year under your belt just watching activity in that higher Ed business which is still the largest business.

Have you seen kind of a better trend in terms of the same number of RFPs out there as we go into next year versus coming into this year? Do you see any kind of change and just the volume of opportunities you see? Obviously you have a high win rate but is there anything you can say about what are you seeing on one year out, two year out in terms of contract opportunity up for grab in the higher Ed business?.

Yes. So, Terry, I will take this one. As we talked about this year, we talked about slowing in the growth rate, the domestic Canvas business is large right that includes K-12 and higher ed. We don't really have a good deed on it for next year yet.

We probably will talk in more depth about that in our Q4 call but we don't see anything that's going to reverse that trend at this point. So I'd expect the growth rate next year of new business to be even lower than it was this year. And we talked about low double digit this year so it could easily get into the single digit territory.

There is still quite a bit of market to go after. That's not really the issue. It's just about how many contracts come up for renewal and despite for being more effective to keeping our clients and things like that. So short answer is we don't know yet when the process of assessing it, we'll probably talk a little bit more about that on the next call..

Just to note on that. I mean I think an important takeaway is that we are not seen significant change in our win rates against Blackboard. So, yes, we'll see this -- over time we will see the cycle sort of settle to a static level of regular renewals in the market. But so far Blackboard seems to -- they haven't got out of the quarter, they are in yet.

We are not seen any signs of that. .

Okay. In terms of de-risking the model like you talked about last year de-risking the model.

I am just trying to understand the level of de-risking this year versus last year maybe that's another way to try to ask about 2018 but if you have this new Chief Revenue Officer coming onboard is that something that's playing in here to the level of de-risking and how does it look versus last year's de-risking?.

Yes. So last year the de-risking was really focused on the early starts because that's what earned us in Q3. And so we are obviously incorporating that thinking again because we think that's prudent.

But what we saw this year is some pretty strong performance on the non-recurring side that we didn't expect, all good news right but it's not necessarily reliable from a repeatable standpoint.

So when we talk about de-risking we are just trying to take a more difficult to forecast variable out of model and so this year we are just adding that one element. It really doesn’t have anything to do with the CRO.

We do want him or her to actually review the plan before we rollout to the street, but as Josh mentioned earlier, we got a line of VPs under that worked for Mark that were basically of in-charge of running their individual businesses for higher domestic K-12 domestic, international and Bridge and all those people are here and doing well and functioning and we expect them to continue to do so.

So short answer is it's not -- the de-risking doesn't really have anything to do with the CRO, it has more way to do with the activities we've seen this year and trying to figure out how we want to build the plan for next year. .

Okay. I think it's probably 2.15 seconds left, so if could just ask one more quick, Josh. .

That's funny; I thought it was seconds, but okay, what you've got, Terry?.

Thank you. That's my Halloween treat, thank you.

So anyways with -- Josh this is for you in terms as you all had learnings with Bridge Learn and now you have Bridge Perform, is there anything you can about the learnings you have that could actually help the second product maybe have traction at faster clip than the first product you introduced in the corporate market. Thank you..

Well, obviously coming in with second module in the same platform in the same market, we are going to build on what we've learned. I think the biggest difference between Learn and Perform that will have really positive effect on our business. I think there are two things.

One is currently the industry is experiencing some pretty major disruption in the concept of employee performance management. And that sort of a secular trend that we are able to take advantage of. It's something people are talking about. It's something that is very emotional and personal to every employee in this company.

And so that's really allows us to have a dramatic effect when we are able to present this new technology for how to deal with it.

I think the second thing is that the market fortunately for performance management allows us to have significantly higher pricing and that's just the market difference between employee performance management tools and learning management systems.

So those are the two things I think are really going to propel the business further quicker than Bridge Learn in addition to of course just getting better at being in this market. So I think that's why we are optimistic about 2018 as we move in with its new module and we continue to be excited about the third module that we are working on right now. .

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

Great, thank you, thank you for taking the questions. I guess first question for Steve.

As we look at just trying to project out where we are with renewals and new billings, can you touch on what the renewal rate was in the quarter from a net revenue retention perspective and any changes in terms of how the renewal market is whether it's K-12, higher ed or I guess you probably wouldn't see any on Bridge yet but whether it's pricing, duration or what have you?.

And so Brian we don't -- as you know we don't talk about that in detail but it was over 100% again. I believe the local retention rate actually notched up a tiny bit over last quarter. So the renewal rate was -- it's good and better than we expected. So we continue to do extremely well on the local retention rate.

We saw few extra dollars of price increases or new product on top of that and we get to the net revenue retention of over 100%. So it's continuing to chug along at the rate of spend which has been very, very high. .

Great and then maybe Josh you've talked about in previous quarters about I guess learning to sell in the enterprising market and getting better as a quarters move along. In terms of your win rate in that market and I understand you kind of carved out this 2,000 and 10,000 seat segment of the market.

What is your experience in terms of how you win in that space? I mean big deal or 10,000 plus seat deals notwithstanding in your core kind of sweet spot market, what is it about what you provide that would I guess puts you over the hurdle rate for your customers against some of the larger competitors that are larger SaaS in incumbent. .

Yes. I think the advantage, the unfair advantage that we have is the quality and innovation in our software. Obviously, we are not resting on 10 years of experience selling into the space so certainly our selling expertise which we are getting much better at and it's not our name right.

People don't know Instructure in this market nearly as well as they know in the edu side. So really it's our software and luckily that's -- we are putting all the wood behind that arrow and the innovation that we created in the Bridge platform is what wins over in these deals.

And we are seen increased deal sizes, we've seen increased sales productivity numbers, things, the metrics are looking very positive so we continue to make excellent progress and we are super excited about 2018 and where we are going.

And it's early days for Perform, we've only been selling it for just a couple of months, got a handful of data, customers signed up but already the results we are seeing Perform are getting is pretty excited. .

And any crossover potential into the academic market on that side?.

Oh, yes, absolute. I mean we've already sold Bridge across on the academic side to a number of universities and I think Perform will just make that easier. We are still primarily focused on the corporate market but we do have a small subset of our sales team that is focused on cross selling and really up selling to our customer base. .

And from Raymond James we will move to Brian Peterson..

Thanks for taking the questions guys and congrats on the quarter.

So I wanted to understand are there any commonalities in what drove the early customer go-lives this year? And is that solely a higher Ed Canvas dynamic or does that pertain to Bridge as well? And as we think about the pro services upside, is that actually correlated to the early go-lives or we should think about those are two separate dynamics?.

So, Brian I would answer the very last part of your question first. I would think about them separate because we think that the pro serve key driver and this is a theory we don't have proof. These things are quite hard to prove.

But we think it has more to do with the middle of the year being Q2, Q3 timeframe where there is just a ton of activity in terms of go-live and that just when it's more likely to occur right. But it's not really associated with early starts.

And the early starts is a phenomenon that of course we love but it's completely unpredictable and that happens all of the time throughout the year. We just can't measure the quantity and certainly rely on for forecasting purposes which is why we took out the 2017 model and we are going to do that in again 2018.

So there is not again not rhymer reason I think sometimes schools get jammed up in terms of timing and so they are like, oh, jeez, we need to hurry up and get this implemented faster than we thought because the contract process took longer. Sometimes they are just aggressive and want to start right away.

It's a variety of reasons and but I can tell you that none of those reasons are driven by us. We never push a client to try and faster. It's always driven based on their time schedule and their capacity and they are willingness to move more quickly or less quickly.

So and these are all reasons why we don't like to forecast because they are really unpredictable. And we don't completely -- and there is no one unified reason right why it happened..

Got it, thanks Steve. And maybe for a follow up just on the international strength. A lot of strong commentary on Brazil.

Any help and I will get in queue and so I can wait on that but any help on what the international growth is this quarter? And as I think about Bridge and I compare that to Canvas what would you think would have a quicker international ramp? I know it's early days but I am just trying to think about how you think about that international opportunity over the long term? Thanks guys.

.

Yes, well the short answer is we think a lot about it. And so I can tell you the revenue, the non domestic revenue in the Q would be 15% versus 14% last quarter versus 12% few quarters earlier and 9% last year and so you are getting an idea of how fast that's growing.

But we are very bullish on the international opportunity but just like the domestic market at some point we'll run out of gas with Canvas but it's hard to imagine where the end of the road is for Bridge.

And we've already beefed up as we talked about our Bridge international sales force; we are in the process of doing that, these are still relatively small numbers, single digit kind of growth on headcount for Bridge sales people. But if this is ahead of schedule and so we are -- we feel very strongly about what the potential for Bridge is globally. .

And we will go next to Brian Schwartz with Oppenheimer..

Oh, this is Koji on for Brian. Congrats on the quarter and thanks for taking my question. I just want to dig on the Gauge opportunity out there. My wife is a public elementary school teacher and I actually have the opportunity to take a look at her and its application at her school.

I got to admit it was a pretty time consuming and painful thing to see so. I got to say thank you for trying to make it this process easier for all those school teachers out there. I know she would appreciate a new and a system for sure, but just to dig on the Gauge opportunity. It's been out for few months now.

I guess how is the initial reaction been from the customers and prospect for the product and I know you mentioned earlier that it seems like it's kind of the wild west out there in the K-12 LMS.

I mean is that similar to what you are seeing for the Gauge product 2? Is it mostly a Greenfield replacement opportunity or you kind of going after replacement opportunity there too?.

Well, in a sense it's a replacement opportunity because a lot of testing that goes its paper. So there is a lot of TAM that is transforming from analog to digital so to speak. But a lot of the AMS opportunity for us isn't going to be replacing an incumbent technology. It will be replacing a process that isn't really leveraging an AMS.

But there will be opportunities to displace some technical folks out there as well. But Gauge is -- there is a decent size length to the sales cycle. It's not a quick sale. It's an RFP process generally speaking.

So been a couple of month into it, all we know is that there are customers love the ease of use, love the reporting, it's breath of fresh air, we are learning a lot about features and functionality that we are going to have to add over the next year to penetrate deep into the market.

But early returns are positive, we won't have I would say significant bookings off of Gauge till end of next year I would think. We will be able to report a lot more because we'll have gone through a couple of RFP cycles by then. .

We will hear from Corey Greendale with First Analysis..

Hi, good afternoon. Congratulation on the quarter. Hey, so it's a couple of questions.

So first of all, Josh in response to an earlier question you were talking -- I think you said something about overlapping development on the HCM suite, so I'd sort of operating on the assumption that you would have like normal cadence like you launch one module a year, sound like they may accelerate, could you just elaborate on that?.

Oh, sure. Yes, I mean we tend to pipeline our development especially with our corporate products because we can see -- we can really see far ahead about what we need to do next. So pipeline need a significantly easier than just doing raw innovation like on the edu side. So, yes, I can tell you we are definitely overlapping our development.

We are starting the product validation process for the next module of Bridge right now. We are meeting with customers. We are showing them prototypes and designs and getting feedbacks. So that's all happening right now.

As far as the cadence goes what I said in the past and I'll just simply reiterate it, we intend to put out new flagship products every 12 to 18 months. And what I mean by that is a product it's really going to drive revenue over time in a significant type of way. And I think I put the Perform module in that category.

Now but let me caution you though of course it will take years before because these numbers are getting quite large with the overall business, it will take years to have a big impact.

But putting now new products every 12 to 18 months we are going to build out a significant portfolio and over the next 3 to 5 years that compounded revenue strength I think is really going to propel the business up to where we want it to be which again leads back to why we need to up level and prepare ourselves and marketing to hit those $0.5 billion number and beyond.

So that's how it all kind of fits together..

All right, I appreciate that. So I have one more for you and I have one for Steve. I have a question for you Josh is I know you said about no change relative to Blackboard, I had seen some data that suggest that D-12 win rate has been improving.

Can you just comment and what are you seeing and if anything changed from D-12?.

Yes, no, I mean like D-12 is, I'll tell you where they do well. We occasionally lose to them on large complex deal that requires a lot of customization. We are simply not willing to turn our company into a software shop custom development. That's not just our business.

We do have some professional services but it's just not an important part of our business. D-12, they have been willing to really go above and beyond and do enormous amount of custom work, at least promising to do that. And we just won't go there. So, yes, on occasion we lose. Your bread and butter, standard deals, yes, the win rate is incredibly high.

It's even higher than our win rate against platform. So that's been the case for last couple of years. .

So one of the wins there I heard about was Southern New Hampshire which I think is consistent at least they are large institution, I don't now how much customization they needed but I think that's consistent with what you are saying. .

Yes, yes, I mean there are some big deals we wish we would have won but usually these big deals are very screw deals and our business is healthy and we don't want to get involved with screwball deals because they usually don't turn out well anyway.

Honestly, about a year or two after we lose a deal like that, they come back to us and it's -- there is a right way to do things and right wrong to do things. And we just-- we are confident in the right way to do it. And sometimes the right way to do it is not what our customers think the first go around until they learned a little bit.

But for 99% of the market they are in right line with us and it works well. .

Got it. I just have one quick clarification from Steve.

I am trying to make sure I understand you said $3 million impact of the non-recurring and the timing for the first three quarters of 2017, did I hear that right?.

Yes, you did, that's correct. .

So is that -- since it's timing thing I think you had the biggest beat in Q3 any of the quarters, does that suggest -- and I know you are giving guidance for 2018, you are probably not going to give quarterly guidance but as we are thinking about it disproportionately the impact would be in Q3 since it seems there is more out performance in Q3?.

Yes. I think that's true. We also have fairly sizeable beat in Q2 and smaller beat in Q1 and I think that has more to do with sort of the cadence of how many starts occur because starts both drivers starts obviously and when there is just more stuff going on that can also drive the non-recurring fees.

So I think that has more to do with sort of timing of the edu deal than anything else. .

And hear no one, so there are no other questions. .

Okay, great. Well that concludes our Q3 2017 earnings call. We appreciate all of you participating and listening in. And we will talk to you in I believe February. We have one more call should we take it, we should not take it. Okay, all right, look we are going to talk to you guys in February for our Q4 call. And Happy Halloween..

And that does conclude today's conference. Again thank you all for joining us..