Erin Kasenchak - Investor Relations Josh Coates - Chief Executive Officer Steve Kaminsky - Chief Financial Officer.

Howard Ma - Jefferies Brian Essex - Morgan Stanley Brian Peterson - Raymond James Sarah Hindlian - Macquarie Brian Schwartz - Oppenheimer Eric Lemus - SunTrust Robinson Humphrey Peter Levine - Needham & Company Corey Greendale - First Analysis.

Good day, everyone. Welcome to the Instructure Q4 2017 Earnings Conference. Today’s conference is being recorded. At this time for opening remarks and introductions, 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 the 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 the 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’s CEO, Josh Coates..

Thank you, Erin and thank you everyone for joining us on our Q4 and full year 2017 earnings call. As usual, I will provide some highlights from the quarter and the year and then turn the call over to Steve for a recap of our financials before we take your questions. We had a strong finish to 2017.

Revenue of $43.8 million for the quarter and $158.8 million for the year represented healthy 39% and 43% year-over-year growth respectively. At the same time, we continue to deliver improvements in our operating margin. Steve will go into greater details in a few minutes, so let me share with you some of our customer highlights.

During Q4, we continued to expand our domestic campus customer base in both higher Ed and K-12 markets. The University of Wisconsin system which serves more than 120,000 students across 26 different campuses selected Canvas to replace desire to learn.

Canvas’ adaptability and open platform will enable new opportunities for cross-campus collaboration and interaction. As part of our state university system of Florida relationship, the last two universities, Florida A&M and Florida International University made the switch from Blackboard to Canvas this quarter.

With addition of these two schools, the students at all 12 public universities in the state university system of Florida will now use Canvas. Wayne State University in Michigan selected Canvas for their 24,000 students based on our outstanding uptime and reliability performance.

Within our K-12 market, Canvas was chosen to replace Blackboard by the Central Bucks School District, the third largest school district in Pennsylvania. Canvas’ robust offering and ease-of-use perfectly met their needs for factually professional development, classroom management and centralized communication.

Moving to international, in Q4 we continue to see great demand for our products and revenue for the quarter reached 16% of total revenue. We know have customers in over 65 countries and on every continent, except Antarctica. In Q4, the University of Sussex chose Canvas and Arc to replace Moodle for their 18,000 students and faculty.

Canvas was selected for its easy implementation, integration and ease-of-use. This implementation will be one of our largest Moodle migrations in Europe to-date. Similar to our deal with Norway’s UNINETT in Q1, the Swedish University Computer Network or SUNET selected Canvas as a preferred supplier for their member schools.

Already 12 universities in Sweden representing almost 80,000 students have signed up for Canvas. France’s INSEED, one of the world’s leading and largest graduate business schools, selected Canvas for their global students, faculty and executives participating in their executive education programs.

This great customer win rounds out our portfolio of top tier international business schools including Mannheim Business School, IMD and the London Business School. Turning to the corporate side, Bridge had an excellent fourth quarter with triple digit year-over-year growth in revenue.

We ended the year with healthy momentum as we surpassed over 500 Bridge customers globally. Let me share with you some of the great Bridge customer wins we had during the fourth quarter.

We entered into a partnership with Paychex, a leader in payroll, HR and benefits outsourcing which allows Paychex to offer Bridge Learn to their more than 0.5 million customers, representing about 6 million users nationwide.

This is the first such partnership with the payroll provider and we are excited about the potential for additional opportunities like this. Scripps Networks Interactive, owner of HDTV, Food Network, Cooking Channel and the Travel Channel selected Bridge as the LMS for their 6,000 employees.

Scripps will utilize Bridge Learn and Arc for compliance training and tracking. Vivint, a provider of Smart Home technology will replace Cornerstone on demand and will rollout Bridge Learn perform and Arc to their sales reps in retail locations across the country.

Later this year we are hopeful we can expand our relationships across their 10,000 employees. And finally a large California aerospace company replaced their home grown LMS with Bridge Learn for their 7,000 employees. Bridge is easy to use platform will be used by the company for on-boarding compliance and career development.

On the product side 2017 was a very productive year. In addition to releasing numerous improvements in functionality for both Canvas and Bridge throughout the year, we successfully delivered on our promise of introducing two new revenue generating modules with the introduction of Gauge for Canvas in July and the Bridge Perform in October.

Given our focus on continuous products expansion and improvement, 2017 was the heavy investment year in both our R&D efforts and sales and marketing. We plan to continue to invest significantly in these areas in 2018 and beyond.

This investment can come via headcount growth or we can look externally for interesting opportunities to expand our HCM suite as we did with Practice. And let me just spend a few minutes discussing our recent acquisition of Practice.

For those of you who may not have seen our press release announcing the deal, Practice is a video learning and assessment module that’s focused on continuous learning and coaching. We have got a smooth integration and a great deal of early success, so let me just share a few customer highlights.

Pacific Gas & Electric, PG&E which has the strong on-boarding process for employees selected Practice to make learning an ongoing and continuous focus. PG&E will implement Practice for their sales and customer service groups and we are hopeful that we will be able to expand our relationship across their organization.

TELUS International, the global arm of the Canadian telecommunications firm is a leading player in the business process outsourcing industry with over 30,000 people in customer experience centers across the globe.

TELUS chose Practice to help them prepare for internal leadership forms as well as for continuous learning for a geographically dispersed sales organization. Also a multibillion dollar global industrial company selected Practice for one of their leadership programs as a compelling and cost effective alternative to live trainings.

Consistently at the forefront of leadership development, the company’s training programs aligned with Practice’s pedagogical model. We are very pleased with the results we have been seeing from Practice in such a short period of time.

This success gives us confidence to continue to look for additional opportunities to expand and enhance our corporate product. I am quite proud what we accomplished in 2017, it was a busy year on many fronts and we executed well against our plan. Looking ahead, I am excited by our prospects for 2018 and beyond.

Now I will turn it over to Steve to take you through the numbers..

Thank you, Josh and thanks again to everyone for joining us today. 2017 was a very successful year for Instructure. Here are a few highlights, in addition to growing total 2017 revenue 43% year-over-year. We grew our recurring revenue base slightly faster than 44% over 2016 adding nearly $43 million to the base.

Our international business expanded from 10% of total revenue in Q4 ‘16 to 16% of revenue in Q4 ‘17. And as Josh highlighted, we launched two new revenue generating products Bridge Perform and Gauge. And with Practice we successfully completed our first product acquisition enhancing our Bridge portfolio of products.

Now, let me provide some additional details on the quarter and year. In Q4, total revenue grew 39% year-over-year to $43.8 million. Subscription revenue was $39.3 million, also up 39% year-over-year. For the full year 2017, total revenue was $158.8 million, of which $139.9 million was subscription revenue.

As you have heard me remark on the last several earnings calls, our outperformance versus our guidance for both the quarter and the year has been driven primarily by strong revenue retention, which continues to be greater than 100%, early starts and higher-than-expected nonrecurring revenue.

12-month rolling billings at the end of Q4, was $186 million, up 38% from the fourth quarter of ‘16 also calculated on a rolling 12-month basis. For the remainder of my commentary, unless otherwise noted, I will discuss non-GAAP results and all EPS numbers are in a per common share basis. Gross margin in Q4 was 70.9%.

For the full year, gross margin was 71.7%, a year-over-year improvement of 40 basis points. As we have noted before, we expect improvements in gross margin to moderate going forward as we get closer to our long-term target of 75% gross margin. Q4 total operating expense was $39.4 million, a 21% year-over-year increase.

For the full year of ‘17 total operating expenses was $149.4 million, an increase of 22% over last year or slightly over half of our revenue growth rate of 43% for the same period. During the year, we drove significant operational efficiencies in both G&A and sales and marketing as a percent of revenue.

As planned, we continued to invest in R&D to drive future growth and this investment will continue in 2018 and beyond. Operating loss for Q4 was a $8.3 million, an improvement of $1.5 million year-over-year. For the full year 2017, operating loss was $35.5 million.

The overall scaling of the business as well as the operational efficiencies I just discussed resulted in over 1,600 basis point improvement in operating margins year-over-year. GAAP net loss for Q4 was $11.7 million, an improvement of $0.07 per share year-over-year. GAAP net loss for 2017 was $49.8 million and a $0.23 per share improvement.

Non-GAAP net loss for Q4 was $8.2 million, an improvement of $0.08 per share year-over-year. For the full year 2017, non-GAAP net loss was $35 million and a $0.36 per share improvement over last year. Turning to the balance sheet, we ended the year with $41.4 million in cash and cash equivalents and marketable securities.

Free cash flow for the fourth quarter of ‘17 was negative $30 million. As a reminder, we typically use cash in Qs 1, 2, and 4 and have a large cash influx in Q3 as the new academic year and budget start for many of our clients.

Looking forward to 2018 and as we have discussed in prior quarters, if we assume normal business operations, we anticipate ending the year with approximately the same cash balance give or take as we finished within 2017. Backlog grew 34% year-over-year to $387 million at the beginning of ‘18.

This is comprised of $103 million of deferred revenue, which you can find on our year end balance sheet and $284 million of off balance sheet revenue under contract. Additionally, our average contract length continues to be greater than 3 years. Let me end my remarks with a discussion around our expectations for the first quarter and full year 2018.

But before doing that, I would like to highlight the impact of our adoption of the new accounting standard, ASC 606. When we report our financial statements in Q1 2018, we will be required to report under ASC 606. Therefore the guidance we provide today follows this new standard.

For ease in year-over-year comparisons, we have added a schedule on our press release that discloses the 2017 quarterly results as if reported under ASC 606. Additional detail will be provided in our 10-K which we will be filing shortly.

Now to our outlook, for the first quarter of 2018, we expect revenue in the range of $46.8 million to $47.4 million, non-GAAP net loss of $7.4 million to $6.8 million and non-GAAP net loss per common share of $0.24 to $0.22. For the full year 2018, we expect revenue in the range of $203.5 million to $209.5 million.

We expect non-GAAP net loss of $32.3 million to $30.3 million and the non-GAAP net loss per common share of the $1.03 to $0.97. For calculating EPS, we expect our shares to be 31 million for the first quarter of 2018 and 31.4 million for the full year.

In summary, we are quite happy with our performance across the business in 2017 and excited about our prospects for 2018. We feel we are well positioned to succeed and continue to target about 30% revenue growth in 2018.

We see a tremendous opportunity ahead of us and we are pleased to be making the investments now to drive growth in the years to come. With that let’s open up it up for questions.

Operator?.

Thank you. [Operator Instructions] We will hear first today from John DiFucci with Jefferies..

Hi. Thanks. This is a Howard Ma on for John. Congratulations to a strong finish for the year.

I have one question for Josh and also one for Steve, so first for Josh, could you provide some additional color on the Paychex partnership, so for example I was wondering did Paychex – were they looking for a supplemental LMS product and did they approach you guys or was it kind of it’s going to be other way around and also does that mean that Bridge Learn is now available as part of Paychex’ salespeople’s basket for them to sell and that they can make commissions off of that?.

Well, I can tell you a little bit about the Paychex deal. It’s a pretty standard white label reseller type relationship where Paychex will now be able to offer the Bridge platform to their customers. So we will get more of our software being by more businesses. So that obviously is a great channel for us.

And they will be able to have a new thing to sell to their customers and add value to the customers they already have captured. So it’s definitely a win-win type relationship with Paychex..

Okay. Thanks.

And then for Steve, I have actually have – I have two questions, the first one is quick, why does 2017 revenue change under the 606, is that primarily due to delayed contract starts?.

Yes. That’s exactly right Howard. So in our case the biggest impact of ASC 606 is on implementation revenue which previously we had recorded which was prorated over the life of the customer and now under 606 gets accelerated.

So when we take a retrospective view, we have to take into account all of that implementation revenue that was getting deferred effectively and would now be recognized in earlier period. So there is a table at the end of the press release that walks you through the reconciliation between 606 and 605 for 2017, so you can see where the impact is..

Okay. Thanks.

And then I had one follow-up which is so when we think about your two business units that are growing disproportionately higher than the rest of the company, so it’s really Bridge and sales of Canvas internationally, could you comment on your expectations for their relative contributions to new business bookings for this year?.

On that specifically, we can’t give you numbers, but we can tell you a couple of things that might be helpful. So first, as you know our revenue as a percent of the total has grown yet again for international. You can actually calculate what the historical growth of that has been since it’s in our filings.

And I will tell you that it will still be one of the two fastest growing segments in 2018. On the Bridge side we don’t give very many numbers, but I can share a little bit more detail with you today.

In that for 2018 we expect Bridge to be somewhere in the range of 15% to 20% of our total bookings for the year, so that will give you some idea of how much it’s contributing to the new business side of the growth..

Okay great. Thanks a lot for that number..

We will hear next from Brian Essex with Morgan Stanley..

Hi, good afternoon. Thank you for taking the question. Congrats on the quarter, so nice way to end the year again.

So I guess maybe could you talk about maybe Josh where you are on the sales force side and what kind of progress you made through the end of 2017, I understand you have been spending quite a while building out the enterprise sales force, is that done and how you anticipate driving leverage on the sales and marketing side in 2018?.

Hi, Brian. It’s Steve. We really aren’t growing the Bridge sales force very much in 2018 and we have sort of been talking about that for quite some time. We are doing some incremental ads to the domestic sales force for Practice, because we think it’s worthwhile to ramp it up just a little bit, but it’s a tiny handful.

And the focus on the domestic team is really around quota expansion. And so the key for 2018 is let’s get a lot of leverage of the existing sales force that we have for the domestic Bridge team. When we talk international, it’s a different story, because as we have said over and over, the international story is literally country by country.

And as we think about expanding into more countries internationally with Bridge that immediately requires us to add Ed to the Bridge sales team for Heather and her team offshore. So, we are going to do a little bit of that in 2018.

She has come back several times asking for more people and we have gradually been giving her more heads and we will continue to do that as we see fit. I think the next conversation is due in May and we will see if she asks for more and what we decide to do, but that is where primarily the growth for Bridge will come from..

And now, I will answer any questions you have about 606..

Nice.

I guess maybe just to follow-up on the pricing side, so maybe if you are going to give us a sense on Bridge, where your average deal size looks like it’s shaking out, how is pricing run relative to both Canvas and peers and where incremental revenue per customer or overall incremental growth on the Bridge side is expected to come from kind of outside of adding additional accounts?.

Well, I can tell you a little bit about Bridge pricing. We have discussed in the past about how we are currently discounted to our competitors. As time goes on, that discount will diminish. The deal sizes, they are five figures we have an occasional 6-figure deal.

The trend is the deal sizes are getting larger, as we expect them to, as we continue to move upmarket. Comparing those to Canvas deal sizes, for the Canvas deal sizes, I mean, we obtained 7-figure deals regularly with Canvas. There is really no comparison at this stage with Canvas versus Bridge on the deal sizes.

But our expectation if the trends continued to go in the direction they are going is that the deal sizes will continue to get larger as we move upstream. And in addition to that, they will grow larger, because we will be selling more modules. Every 12 to 18 months, we are adding modules to Bridge.

And as we do them, we have got a larger basket to be able to pile on to these larger enterprises that are interested in a broader solution. So, lots of different drivers are pushing the deal sizes to increase. So, that’s what we are seeing and that’s our strategy..

Yes, just to add to what Josh add if we just compare the beginning of last year to the beginning of this year, last year, there was Bridge Learn. This year, we have Bridge Learn which is a more robust version, a lot more features and functions. We integrated Arc in April of last year. So, that added.

Then we introduced Perform in October and finally we bought Practice in November. So, if compare what’s on the truck effectively for the salespeople to sell at this time versus this same time last year, it’s a pretty dramatic difference..

Right.

Only a partial quarter, but any early read on Perform and Practice attach rates?.

Well, Practice is very early okay, but we mentioned some of these really fantastically large enterprises that are really excited about Practice that we named.

For Perform, it’s early, but we have got some great wins with Vivint Smart Home, Southern Glazer’s, Golden Nugget, these are early Perform customers and we expect next quarter to report some additional Perform wins..

Good stuff. Thanks a lot..

Yes..

We will hear next from Brian Peterson with Raymond James..

Hi, guys. Congrats on the quarter and thanks for taking the questions.

So, just one for me in 70 different parts, but I wanted to talk about Practice a little bit, so given that it’s more of a feedback-based product relative to kind of the existing Bridge Learn solution, does that have synergies as you go to market to maybe talk about with customers both Learn and Perform? And I also wanted to think about the product cadence, you had new – two new products last year, does Bridge potentially push that out for additional HCM modules going forward?.

Well, let me tackle the first part of your question. There is absolutely synergies between Learn, Perform and Practice. I mean Learn is about educating your employee base, getting a baseline form them. Perform is really figuring out if they learn what they needed to learn and if they are actually doing their job correctly.

If they are not you send them over to the practice module and you say what, let me see what you can do, let me understand what you understand and then they can also of course observe their peers. They can watch videos of their peers giving a pitch or talking to a hypothetical customer or tackling a hard management situation.

And then they can improve and they go right back into Learn and kind of take that next level on. So it’s just the Bridge is becoming just a really tightly integrated synergistic for platform.

And so as we add more modules they are all going to feed back on to each other just makes the platform so much more valuable and more powerful to be larger enterprises.

Now your second part of your question, tell me that?.

So just can’t understand if Bridge maybe takes the place of the cadence of one to two modules being added to the platform in ‘18?.

If Bridge takes the play, I am not sure I follow you?.

Are you talking cadence of more product introductions…?.

Right.

When are we going to see more like the next module for HCM…?.

Yes. Still, obviously we don’t have anything to announce this quarter, but the cadence of 12 months to 18 months for new module will continue. Now, we had Perform release last year. So 12 months from there is probably a good guess as to when you are going to see another module. We may announce it before in beta or some type of prerelease or maybe later.

So again 12 months to 18 months, that’s we are sticking, so that’s what you should expect, unless of course we find a really interesting acquisition that sort of preempts our development schedule. But yes, we are sticking to the 12 months to 18 months..

Got it. Thanks guys..

And from William Blair we will move to Bhavan Suri..

Hey, guys. This is actually [indiscernible] on for Bhavan.

Two quick questions for me, some big wins in the higher Ed side as well, I just want to sort of understand what’s the make of the higher Ed institutions with left or then that will put within the broader replacement cycle, are these smaller schools that are left to sort of move on out of Blackboard, etcetera, these larger ones, anything there will be helpful? And then I have got a follow-up too?.

Yes. It’s really a mix. I mean there are still very large institutions that are still on Blackboard that have yet to hit their contract renewal. And then there is of course a lot of mid-size schools and then a lot of small ones. We tend to have a bias towards tackling the larger ones and that’s we have been doing since 2011.

However, there – I mean there is still a lot of market out there for us to tackle if you read the analyst reports you will see guesstimates somewhere were in the mid-20% of penetration of institutions. And so we have got a little more ways to go. Blackboard is I think last I checked somewhere in the mid to low-30s.

I think we will cross paths probably over the next 12 months to 24 months. But yes there is a lot of larger institutions left for us to – for us to go after..

Got it. Perfect guys, helpful.

And then just a follow-up on the corporate side, are you going up against Cornerstone, Saba or some totals anymore than you were before, so if you could maybe characterize it as 10% or 15%, how often are you seeing them in deals today, is there any comment you can give on win rates?.

Well, okay, so let me tell you about what we are seeing with Cornerstone. We are seeing more wins against Cornerstone. We had more wins against Cornerstone in the last six months than I think we have had in the last 2 years, it’s just off the cuff. I would have to look at the numbers, but that’s what it feels like.

So we are winning a lot more often against Cornerstone. As far as seeing them competitively, yes, of course we see them all the time. We see a ton of competitors as you know the market is fragmented. There is two or three dozen different vendors out there all competing for this decent sized market and we see them all. But we don’t see them consistently.

So I couldn’t tell you every single deal we are seeing Cornerstone or every single deal we are seeing Saba, it just doesn’t work that way, it’s more intermittent. And I think that’s because the market is so large that no one has full coverage of opportunities..

Got it.

And I just want to squeeze one last one for Steve on ASC 606, you are obviously going to get some leverage on the sales and marketing side, but organically what are the drivers for margin in 2018, is there anything to point out?.

Well, I already mentioned one, which is on the Bridge sales team. Domestically, we are looking towards quota expansion and we are talking meaningful numbers. We are talking 70%, 80% quota expansion. So these are very significant, which gave us a lot of leverage.

We continue to as the deal sizes get bigger and we get more effective in the sales process, just everything gets better and as we get a little more brand awareness in the marketing side, the lead cost goes down. So we are going to continue to push hard on the Bridge side. Canvas, domestically for sure is not as efficient as it gets.

We are fully covered on the sales side. And then of course, international, if we are in a country longer, that country starts getting very, very cost effective and very efficient. And it’s the new countries that tend to cost us more and drive cap up.

But we are seeing the sales and marketing leverage pretty much across the board with the lowest impact for sure from Canvas domestic. But certainly, that the high growers are leveraging quickly..

Got it, perfect, that’s it from me. Thanks..

We will go now to Sarah Hindlian with Macquarie..

Hi, great. Thank you so much. And great – good year guys..

Thanks..

I want to dig into international a little bit more with you, so you are seeing these tremendous results growth there, so how much of it is really your go-to-market strategy and what can you attribute to that and how much of that is going to see some sort of network effect within the various countries you are moving within, because it sure looks like there is one once you start to see some declining within a country.

And then a quick follow-up I want – I have which is you have done your first product acquisition and you have clearly done some integrating there, some cross-selling is that you are – how you are going to about M&A going forward, because it sounds a little bit like you will be looking for the right HCM pack and I just want to know is that the fair assessment?.

Well, let me first with – speak to the international question. The general strategy of international really has been to go after the large TAMs. So it’s relatively straightforward, you make a list of different regions around the world, you will find out how much money they are spending on students and the educational infrastructure.

And the list pretty much sorts itself out and then you go after the fat part of the list. Obviously, English speaking was a bias at first, but now I think Canvas is translated in a dozen and half languages and we actually have several different languages for our support infrastructure as well.

And so and as Steve mentioned earlier, what we find is once we are in a country for about 2 years things start to really pick up, it’s really a success in region as a function of time in region. And so as we expand internationally, we really just pick off the regions that are next on the list as far as the size of the opportunity.

And so it’s important to understand the reason we are not investing a lot in India is not because of not a large country and not because that has a potentially large TAM, it’s just because they don’t spend nearly as much on educational infrastructure as say a significantly smaller country like the UK.

So that’s really been our strategy international wise. And so we have continued to be very successful, it’s the second highest growth segment in our business today. Now your second question was about M&A..

Yes.

Just on the M&A?.

Yes. So I can tell you just our general strategy of M&A. We have always had a bias towards organic growth of addressable markets through R&D and we continue to have that bias. We spend a significant amount of resources on our R&D. We know how to build products. And we have a vision for where we are going in the market. So we – we bet on ourselves.

However, we do have a very active M&A team and they look at a lot of deals. We just don’t buy it, very many of them. This Practice acquisition was great, the integration has been great, everything about it has been great.

And so I think maybe that’s moved the meter a little bit towards more interest in M&A, but we still remain largely biased towards organic growth.

But over the next year or two, there maybe opportunities for us to acquire more and if we did – there is opportunities on the Canvas side, there is also opportunities on the Bridge side, but we are going to be very cautious and prudent about these acquisitions, don’t expect some massive super-expensive type of acquisition.

Really, we like the smaller ones, they are easier to digest. They are very specific. They solve us specific problems. So, let’s keep our fingers crossed on Practice, but so far it’s been a fantastic acquisition for us..

Alright, great. That was very helpful. Appreciate it and congratulations..

Thanks..

We will hear now from Brian Schwartz with Oppenheimer..

Yes, hi. Thanks for taking my questions and real nice set of results here. I have got some follow-up questions to kind of the topics of the call.

So, first Josh, on the deals and on the corporate side, on the deal activity, what I want to ask you is when these customers are buying your products and you are winning these deals, are they mostly just going clean sheet here where they are deciding to embark on a learning management strategy with a fresh SaaS implementation? So, they are going all cloud, but start with scratch with learning, were they starting to look at learning plus multiple products like Perform and some of the Arc and video that have you added on.

So, I am just kind of curious where this market is today, but still land and expansion or if you are seeing any trends here towards multiple products on initial deal sale?.

Well, it’s – I guess, it’s a complex question and it’s got a complex answer. We are right now in the mid-market 1,000 to 10,000 employees. That’s where we are. As we stated, we continue to push further upstream.

I can tell you in our current place in the market, we are seeing about half of our customers are Greenfield, where they haven’t contemplated having a real software solution towards employee training. And I couldn’t tell you if that’s a general market-wide fact or if it’s really just a function of us being in the mid-market.

So I couldn’t tell you that I don’t know, but that’s where we are right now. As we continue to move up-market, I can tell you that we are seeing more and more interest in the larger suite and we are displacing solutions that they have with multiple modules and now that we offer multiple modules we are a little more comparable.

And I think that will continue as we move upmarket I suspect we will be see greenfield, we will be see more suites and that that’s what I suspect will happen as we move upmarket, but where we currently are like you said about half are just completely greenfield, whether we are replacing PowerPoint slides and in-person training sessions, pieces of paper and pencil that sort of thing..

And then Steve, I just want to follow-up on your question about the slowing down the pace of the domestic Bridge sales hiring and just want to be clear that the reason you are doing that is really to digest the sales team expansion and harvest the efficiency gains as they are scaling the productivity curve versus any challenges out there in terms of on-boarding the right sales reps for that segment?.

No, Brian, 100% the former zero the latter. This is all about gaining efficiencies for a staff that we built. Now – and again as I walk through the progression of Bridge throughout 2017, we have the opportunity to go back to these sales guys and say look, there is a lot more stuff on the truck to sell. So, you should have a much, much bigger quota.

So, we want to digest all of that and we think that’s the important next step. There is – I don’t know that there is a practical limit to how many Bridge salespeople we can have globally, because there are literally hundreds of thousands of companies or divisions of companies that we can sell the Bridge products too.

So, it’s unclear to me where the end of that train actually is. So yes, it is completely about let’s take advantage of the assets that we have and see if we can make it much more efficient..

Last question from me, back to Josh wanted to ask you one more on the Ceridian partnership, very exciting news that you announced here today? The two questions that I had on the partnership is one who ultimately owns the customer, so just thinking about up-selling in the future and the renewals etcetera.

And then number two, can you talk about the enablement with Ceridian, maybe how long you expect to be able to train and enable that organization to selling your product?.

You are referring to Paychex right?.

Paychex – I am sorry, Paychex..

Yes, so the Paychex guys own the customer right. It’s a white label to Paychex product we are of course powering the back end. I don’t think there is really the intent of the partnership is not for us to be able to directly up-sell to their customers.

And for good reason by design, their customers tend to be relatively small, their SMB customers and those aren’t really the customers that we are really cutout for. We are cut out for the larger enterprises. That’s even the smallest schools that we sell to have thousands and thousands of users that’s what Instructure is really does well.

So, we don’t want to own those customers. That’s the great thing about this deal. We want Paychex to own them, but they have so many customers. There is a great revenue opportunity for us. So that’s the nature of that partnership.

Does that make sense?.

Just real quick follow-up on that, is there an exclusivity? Does this partnership somehow prevent Instructure from adding future service bureau partners in future? Thanks..

No exclusivity..

Right. Thanks for taking my questions..

Thanks a lot, Brian..

[Operator Instructions] We will move next to SunTrust Robinson Humphrey’s Eric Lemus..

Hi, guys. Thanks for taking the question.

Question for you Steve, looking at the guidance methodology for 2018 and relative to previous years, what’s your level of conservatism versus how you give guidance in entering the year the past couple of years?.

So, it’s – I would say it’s really similar to 2017 and I don’t know that I consider to be conservatism.

We put a model together and then we figure out what guidance should look like and it’s based on what we think we have a very, very high competence level of delivering, but I will say as in prior years we are assuming that there will be basically no early starts in the model to the degree they occur that could be beneficial, but we are not anticipating them.

They are too unpredictable for us to rely upon. And then we have also given some help around the area of nonrecurring revenue that we think for 2018 a good run-rate is around the 11% range give or take.

So, to the degree that we have an outsized amount of professional services, primarily in particular quarter that could increase some potential for upside, but there is other things that could happen, that could create downside as well. So, we try and make sure that we take a pretty balanced approach to the guidance that we provide..

Okay, great. That’s helpful.

And Josh, a question on the tough competitive environment, obviously, there has been some issues as far as timing of the launch of the new Blackboard cloud product, have you guys seen or witnessed any sort of change in RFP activity driven by frustration with Blackboard schools that have been holding out for the new cloud product?.

It’s just steady as she goes. I mean, it seems like every quarter the same thing, it’s everything is just the way it all was this, same number of RFPs come out. Our win rate is stellar. People kind of mutter about the new Blackboard thing, but nothing shows up, another quarter goes by and it keeps doing that for, I don’t know, what about 3 years now.

So, same as usual, I have got nothing interesting to report..

Okay, great. Thanks guys..

We will go now to Peter Levine with Needham & Company..

Hi, great. Thanks guys for taking my questions here. So, just two quick ones.

I guess I will jump to the educational side on Gauge, how does that product change your competitive positioning within that market and forgive me if you have previously disclosed the metric, but I know you have 70% plus run-rates in higher Ed markets, so does the K-12 market share those similar metric and if not does Gauge kind of help drive that?.

Well, so let me tackle the second part of your question first. We don’t disclose win rates, but there are many analysts out there that do track that and we can just say we are supportive of their methodologies. And so you can look those up in there probably of pretty good guess about where we are.

We have a significantly – well, a significant win rate in higher Ed domestic and in K-12 I am not sure off the top of my head that there is a lot of analysts that track win rates in K-12. I can tell you that we win more deals than any other vendor in K-12 and it’s been that way for quite a while. We are very competitive in K-12.

The first part of your question about Gauge, what Gauge does for us is it allows us to respond to more RFPs than we could before. A lot of RFPs had a requirement in them to provide a solution for testing and we simply couldn’t play.

Now that we have Gauge, we can play, so that really opens up a lot more opportunities for us, not just obviously with the testing market, but with the LMS market as well, because some schools, some opportunities really pair those together. So it’s a great opportunity for us, it opens that market up a lot more for us in the K-12 space..

Great. Last question, is this an update on your new CRO search, I know I think last two quarters I think you had two candidates in the pipeline, but just any updates would be great? Thank you..

Yes. I was overly optimistic it turns out. I was hoping, we could close one of them at the end of November, but those two fish got away. One went to take a President role at a start up. The other one stayed where he was. We have not lowered the bar. The bar for this position is still very high. And so we continue to engage with very qualified candidates.

And I guess all I can say is we will let you know when we make the hire. In the interim of course things are going well, in sales we have got our VP of Bridge sales is sort of managing the domestic – the greater domestic sales team and Heather Kane runs international, largely independent well of everyone frankly.

But those are steady, but we will definitely benefit significantly when we get that CRO in the door. So that’s all I can say on the topic I think..

Great.

And if I can squeeze one more in, on the Paychex’s partnership, is there any formal sales quota or if you could talk about the integration efforts?.

Well, I can tell you there is minimum. So it’s a revenue generating deal, even if it’s largely unsuccessful, but because we have been, but the minimums are high. We are both very optimistic about generating business together.

And so yes, we are excited and we will be able to report, we hope at the close of this year that we have had significant success with the partnership..

And the integration efforts?.

Yes. We have been working on integration actually before we closed the deal. We have been working very closely with them. So we don’t see that’s not a big obstacle to starting to generate revenue..

Great. Thank you, guys..

We will hear now from Corey Greendale with First Analysis..

Hi, good afternoon.

I just had a few quick follow-ups on topics that have been raised already, Josh in talking about Blackboard, you said basically nothing changed, same RFP I just want to dig into that, if you look at kind of the dollar amount of contracts coming up for renewal in 2018 and compared to 2017, I guess it’s about the same addressable opportunity?.

Well, I mean, I would just be guessing, right. I mean we don’t have a magic list of all contracts that are coming out. So I mean which we did, but we don’t. You just – I can just tell you subjectively it feels the same. So if there is a negative affect on Blackboard, because they have delayed, so often it’s not incredibly obvious to us.

It certainly, it’s probably not good for them, but we haven’t seen a big uptick in RFPs, it’s pretty much static..

Okay. Let me ask you differently, the guidance assumes a similar sort of opportunity set in U.S.

higher Ed in ‘18 as in ‘17?.

Yes, we have not assumed significant up-tick. I mean there has been rumors in the market that one might occur. We haven’t noticed it yet, it’s possible, it can show up in the next 60 days, but it’s not obvious.

And by the way we don’t know it’s why, it could just be a natural cycle, if there were an up-tick it could be a natural cycle, but more contracts coming up for renewal this year than last. It could have something to do with Blackboard. It could have something to do with something else.

We oftentimes cannot, we usually pin down when we win, why we win, we had always pin down why we got RFP..

Got it.

And Steve I just had two quick ones for you, I think you said that you expect 10% to 15% of bookings in ‘18 to be from Bridge?.

Yes. So that’s the new portion, right. So if all the new business we get on an ATV value in 2018 that Bridge will make up 10% to 15% of that total..

Okay.

Tell us what that percentage was in ‘17?.

Yes..

Okay.

And then the other question is this maybe a fine point, but I am talking about building the sales, I think you said?.

Corey, it’s 15% to 20%, not 10% to 15%, it’s 15% to 20%..

Sorry if I misstated..

Yes..

Thank you.

In talking about the sales force I think you mentioned that you might add some people for practice and this may be a fine point in which case don’t worry about it, but I would have thought that structurally that you just have a single sales force for the whole product, the entire suite, so is that kind of one-off until Practice is integrated you have separate reps for them or…?.

Josh Coates:.

beep 0133 beef:.

Okay. Thank you for the clarification..

Alright, okay. Well I think that’s the end of the show today. Thank you for joining us for our Q4 2017 earnings call. And we look forward to reporting on our 2018 Q1 call in just a couple months. Alright, thanks everyone..

And that will conclude today’s conference. Again, thank you all for joining us..