Ladies and gentlemen, thank you for standing by, and welcome to Instructure's First Quarter 2022 Earnings Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that this conference is being recorded.

I would now like to turn the conference over to your first speaker, Denise Garcia, Investor Relations. Denise, please go ahead..

Thank you. Good afternoon and welcome to Instructure's first quarter 2022 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me are Instructure's Chief Executive Officer, Steve Daly; and Chief Financial Officer, Dale Bowen.

Before we begin, I'd like to remind you that today's conference call will include forward-looking statements based on the company's current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially.

For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release and other reports and filings we 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 today, and except as required by law, we assume no obligation to update such statements. During the call, we will also refer to both GAAP and non-GAAP financial measures.

You could find the reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted to the Investor Relations section of our website. With that, let me turn the call over to Steve..

Thank you, Denise, and good afternoon, everyone. Thank you all for joining us for our first quarter 2022 earnings call. During today's call, Dale and I will provide details on our first quarter results and provide second quarter and updated full year 2022 guidance.

Instructure delivered another strong quarter in Q1, exceeding our previously communicated guidance ranges across all of our guidance metrics. First quarter GAAP revenue was $113.5 million, up 21% year-over-year, while allocated combined receipts, or ACR, was $114 million, up 15% year-over-year.

Normalizing for the Bridge divestiture, GAAP revenue and ACR were up 26% and 20% year-over-year, respectively. We think ACR, which adds back the impact of fair value adjustments to acquired unearned revenue, gives investors better visibility into the underlying growth of our business.

We achieved a record non-GAAP gross margin of 78.4% in Q1, up 580 basis points year-over-year as we continue to improve the efficiency of our IT infrastructure and support operations.

First quarter adjusted EBITDA grew 34% year-over-year to $43.6 million, a 38% margin as we further demonstrated operating leverage on both the gross margin and adjusted EBITDA lines. Canvas continues to displace legacy LMS competitors in the United States and across our major international markets.

Beyond the LMS, our Instructure Learning Platform strategy gained further traction during the quarter as we continue to land large deals and grew ACR from our assessments product at a strong double-digit rate.

We expect to continue investing in the platform through organic development and strategic M&A as we strive to connect every aspect of teaching and learning and capture an increasing share of our $30 billion market opportunity. I now want to talk about five key highlights from the quarter.

First, in Q1, we once again saw strength in each of our key markets, U.S. higher education, K-12 and international. Higher education institutions across the country continue to choose Canvas for its ease of use, scalability, flexibility and superior UX.

Our highly-engaged Canvas community of 1.6 million users is also often cited as a key deciding factor when institutions select Instructure as their long-term strategic partner. Higher education institutions collaborate and share best practices, especially within the same school system.

And we find that wins within a school system tend to beget more wins. For example, our first Canvas adoption in the California State University system was in 2013. Since then, more and more CSU universities have adopted Canvas.

We couldn't be more pleased to announce that as of Q1, all 23 CSU universities with a combined enrollment of over 485,000 students are contracted with Instructure. Beyond Canvas LMS, CSU universities use a number of other Instructure Learning Platform solutions, including Studio, Impact and Pathways.

As the only provider with significant higher education and K-12 LMS market share, Canvas benefits from network effects as purchasing decisions increasingly factor in the continuity of teaching and learning experience.

In addition to collaborating amongst themselves, higher education institutions, especially community colleges, collaborate with K-12 schools to better understand the needs and preferences of the incoming student population.

Last quarter, Prince George's Community College, or PGCC, in Maryland, selected Instructure over the legacy incumbent in a four product deal. Instructure had been on PGCC's radar since Prince George's K-12 district joined the Canvas community 18 months ago.

PGCC wanted to ensure a seamless transition for students first enter in college, especially first-generation students. As the largest provider of K-12 and higher education offerings, Canvas was uniquely positioned to serve PGCC's needs.

As more K-12 districts adopt enterprise-class solutions and the digital transformation of K-12 education experience continues, we expect our competitive advantage to increase as the network effect created by offering an LMS solution to both the higher education and K-12 markets grows even stronger.

This network effect works both ways, as evidenced by the competitive win last quarter with Spring Branch Independent School District in Houston. Spring Branch ISD chose Canvas to serve the 33,000-plus K-12 students enrolled across its 47 school district.

For Spring Branch ISD, continuity with regional higher education institutions as well as Canvas' strong reputation in the wider Texas education community were key factors in its decision to go with Canvas.

In addition to Canvas LMS, Spring Branch ISD purchased Canvas Studio, which allows teachers to integrate asynchronous video content into their lesson plans to modernize the teaching and learning experience across their district.

International remained the fastest-growing part of the business in Q1, and we continue to believe international can be at least as large as our U.S. business over time. During the quarter, we signed an agreement with UCAM, a private university in Spain, to replace their open source system.

After a rigorous multi-year review, UCAM selected Canvas over a competitive product priced at a steep discount. With 90% of the time in the classroom spent on instructional workflows enabled by the LMS, educational institutions understand the fundamental importance of selecting the right LMS partner.

They chose Canvas because we offer a superior LMS solution, a strong product portfolio and ecosystem of over 650 partners, an exceptional level of customer support and a host of other factors. The decision rarely comes down to price alone.

Second, our focused go-to-market and expanded set of offerings are resulting in higher penetration of products across our customer base through both cross-sell opportunities and new logo deals.

During the quarter, Nebo School District, an existing Canvas LMS customer, selected our MasteryConnect assessment management system and the Navigate Item Bank formative assessment content we acquired with Certica over competitive solutions.

We are helping K-12 districts like Nebo School District transition to a teaching model based on more frequent benchmark digital assessments, which proactively identify learning loss and enable earlier interventions.

Addressing learning loss is a key social priority with 20% of the $122 billion of ESSER III funds appropriated under the American Rescue Plan earmarked for pandemic-related learning loss.

Assessments represent a significant customer level growth opportunity for Instructure as the ARPU of our K-12 assessment solutions is two to three times greater than the ARPU of our K-12 LMS solution. Third, we are making disciplined investments to expand our platform and drive long-term growth.

Our high gross margins, strong sales execution, productive R&D investment and low capital requirements allow us to reinvest in the business, pursue strategic M&A and deleverage while maintaining industry-leading margins.

Our updated 2022 guidance, which Dale will discuss in greater detail later in the call, reflects our expectation for further adjusted EBITDA margin expansion this year.

Our higher full year 2022 adjusted EBITDA margin outlook is driven by faster ACR growth and stronger gross margins than previously expected without any change to our planned increases in R&D and sales headcount. We will continue to invest in our business to drive long-term profitable growth.

Fourth, we continue to use strategic M&A with the goal of increasing our TAM and expanding our Instructure Learning Platform capabilities. On April 14, we announced the acquisition of Concentric Sky, whose Badgr technology serves as the default micro-credentialing tool within Canvas LMS.

Badgr’s stackable digital credentialing technology enables millions of non-traditional learners to demonstrate to potential employers the skills and achievements they have earned from over 25,000 organizations in 160 countries.

We expect our rebranded Canvas Badges and Canvas Credentials offering to advance our strategy to address the $5 billion non-traditional online market opportunity. We are excited to support our higher education customers in their efforts to serve this rapidly growing segment of their student populations.

Our M&A pipeline remains strong, and we'll continue to pursue strategic acquisitions with the goal of expanding our TAM and enhancing the value of the Instructure Learning Platform to educational institutions and their students. Fifth, our international business continues to grow rapidly and gain market share.

International remained our fastest growing segment in Q1 with strength in each of our major regions. With international higher education LMS market share in the mid-single digits, we expect international to remain our fastest growing segment in the years ahead.

Last quarter, we discussed our strategy to cost effectively expand our international footprint through a new channel partner program. While still early, the program is off to a strong start with bookings and pipeline ahead of plan.

We have signed 72 new value-added resellers and have distribution coverage in a hundred percent of emerging markets globally. We are thrilled to announce that Tech Data, the world's largest IT distributor will be supporting us across all of Latin America and in APAC.

We look forward to expanding and deepening our relationships with channel partners as we seek to turbocharge our international growth. Turning to stimulus funding, the vast majority of the $190 billion appropriated for the K12 schools under the American Rescue Plan Elementary and Secondary School Emergency Relief, ESSER fund, remains unspent.

According to Capstone, a leading government policy and regulatory consulting firm, as of the start of Q2, roughly $150 billion of ESSER funds had to be invested, which assuming the funds are deployed over a three- to five-year period, represents a roughly 50% average annual increase in K12 discretionary spending.

This is because approximately 90% of K12 district spending, which totaled $769 billion in fiscal year, 2019 according to the National Center for Education Statistics, consists of recurring non-discretionary expenditures, such as salaries, benefits, janitorial services, and capital outlays, which are seldom considered to be appropriate use of stimulus funds.

We continue to expect ESSER funds to drive significant incremental demand in our K12 segment in coming years.

Looking to the remainder of 2022 and beyond, our pipeline of North American higher education RFP opportunities continues to build as many universities which delayed major purchasing decisions during the pandemic, look to upgrade their infrastructures.

With competitive win rates in the 70% range market share gains represent a substantial ongoing growth driver Instructure. Our M&A pipeline remains robust, and we continue to explore ways to leverage our strong balance sheet and free cash flows to accelerate our Instructure Learning Platform strategy.

We are highly confident in our strategic vision and the ability to execute and look forward to continued momentum in the coming years. In summary, I am encouraged by our strong first quarter financial results, which exceeded our guidance range on all metrics.

We expect the favorable trends that drove our first quarter outperformance to continue for the balance of the year, which was reflected in our revised 2022 guidance. I would once again, like to thank our customers, partners, employees, and shareholders for your ongoing support.

With that, I will now turn the call it to Dale to talk about our financial results and the ongoing momentum we are staying in the business..

Thank you, Steve. And thanks again to everyone for joining us today. Before discussing our detailed financial results I'd like to point out that in addition to our GAAP results, I will be discussing certain non-GAAP results.

Our GAAP financial results, along with the reconciliation between GAAP and non-GAAP results can be found in our earnings release, which is posted in the Investor Relations section of our website. In the first quarter, we continued to show a combination of strong top line growth and expanding adjusted EBITDA margins.

Building on the consistent gross margin improvement we have delivered in recent quarters, first quarter non-GAAP gross margin exceeded 78%, a new record for Instructure. As Steve mentioned, we generated first quarter 2022, total GAAP revenue of $113.5 million up 21% year-over-year and ACR of $114 million, up 15% year-over-year.

Normalizing for the Bridge divestiture, first quarter GAAP revenue and ACR grew 26% and 20% year-over-year, respectively.

Subscription and support ACR accounted for 91% of our first quarter revenue at $104 million, up 14% year-over-year or 20% normalizing for the Bridge divestiture, primarily as a result of the continued momentum within our core Canvas LMS product both domestically and internationally, in addition to strong upsell and cross sell of our other products, especially assessments.

Professional services and other ACR accounted for 9% of our first quarter revenue at $10 million up 29% year-over-year or 35% normalizing for the Bridge divestiture. Driven by strong implementation and training services delivery in our K12 business. Deferred revenue at the end of the first quarter was $189 million, up 22% year-over-year.

Remaining performance obligations or RPO were $668.6 million at the end of the first quarter, up 17% year-over-year. And we expect to recognize revenue on approximately 75% of our RPO over the next 24 months.

In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results and share count are on a non-GAAP basis. Please note that when I refer to margins in the upcoming comments, I’m referring to margins calculated as a percentage of ACR.

Our strong gross margin profile is supported by our optimized cloud architecture and flexible support model that scales to meet seasonal customer demand. In the first quarter, gross profit was $89.4 million, representing a 78.4% gross margin, up from 72.6% in the fourth quarter of 2021.

We couldn’t be more pleased with our enhanced operating model and continued operating leverage on the gross margin line. Turning now to operating expenses. Sales and marketing expenses for the first quarter were $22.4 million or 19.7% of ACR, compare to 19.7% in the fourth quarter of 2021.

Research and development expenses for the fourth quarter were $14.4 million or 12.6% of ACR down from 13% in the first quarter of 2021. We continue to invest in engineering headcount to pursue our ambitious product road map, while leveraging offshore talent to drive ongoing R&D efficiencies.

General and administrative expenses for the first quarter were $10.1 million or 8.8% of ACR up from 7.2% in the first quarter of 2021, driven largely by the addition of public company costs. Non-GAAP operating income for the first quarter was $42.5 million representing a 37.3% operating margin, up from 32.6% in the first quarter of 2021.

First quarter adjusted EBITDA was $43.6 million representing a 38.3% adjusted EBITDA margin, up from 33% in the first quarter of 2021. Non-GAAP net income for the first quarter was $40.3 million or $0.28 per share on a fully diluted basis compared to $23.7 million or $0.19 per share a year ago.

Turning to the balance sheet and cash flow statement, we ended the first quarter with $105.3 million in cash, cash equivalents and restricted cash, and $493.5 million of long-term debt net of discount resulting in a 2.46 times net debt to trailing 12 months adjusted EBITDA ratio.

As a reminder, the timing of cash collections is highly seasonal in our business with the vast majority of annual license fees, invoiced and collected during the third and four quarters at contract renewal or inception.

As a result, our cash balances and cash flows are lower during the first half of the year and build significantly during the second half of the year. Operating cash was negative $65.9 million during the first quarter and $97.9 million over the last 12 months.

Free cash flow was negative $67.3 million during the first quarter and $92.8 million over the last 12 months. Adjusted unlevered free cash flow was negative $60.3 million during the first quarter. Over the last 12 months adjusted unlevered free cash flow was $143.1 million, a 25% year-over-year increase.

As a reminder, our strong free cash flow conversion is driven by our favorable billing terms, low capital expenditures and our accumulated tax assets, which we believe will act as a tax shield for the next several years.

I will now conclude the call by providing guidance for Q2 and revised guidance for the full year of 2022 for ACR adjust EBITDA and adjusted unlevered free cash flow. For the second quarter of fiscal 2022, we expect ACR in the range of $110.5 million to $111.5 million consistent with typical Q2 seasonality.

We are raising our fiscal 2022 ACR guidance, and now we expect ACR in the range of $461.8 million to $465.8 million. Normalizing for the Bridge divestiture, our full year ACR guidance growth rate is 13% at the midpoint. As a reminder, on February 26, 2021, we sold Bridge our corporate LMS business.

Bridge contributed approximately $4 million of ACR during the first quarter of 2021. We expect second quarter adjusted EBITDA in the range of $37 million to $38 million, representing an adjusted EBITDA margin of 33.8% at the midpoint of the range.

For the full year, we now expect adjusted EBITDA in the range of $164.8 million to $168.8 million, representing an adjusted EBITDA margin of 36% at the midpoint in the range. Our increased fiscal year 2022 adjusted EBITDA guidance reflects higher ACR growth and stronger gross margin as we continue to optimize our third-party technology cost.

We are also increasing our full year 2022 adjusted unlevered free cash flow guidance by $2 million. And we now expect adjusted unlevered free cash flow in the range of $185 million to $189 million. A couple of quick points on adjusted unlevered free cash.

First, as a reminder, during Q1 we made incremental prepayments to vendors of approximately $25 million to $30 million to secure more favorable terms, which impacted year-over-year comparisons for the quarter. These prepayments will reduce our cost structure and improve our gross margins over time.

Second, in the earnings release and 8-K we filed today, we have provided a quarterly reconciliation of adjusted unlevered free cash flow for the first nine quarters – for the last nine quarters to facilitate historical financial comparisons of this metric.

In summary, we are pleased to have exceeded our first quarter guidance ranges, and to be raising our full year 2022 guidance ranges across all metrics. We are executing at a very high level as we continue to displace legacy LMS competitors and gain wallet share with our Instructure Learning Platform Solutions.

There’s no company better position than Instructure to lead the digital transformation of education. And we’ve only scratched the surface of this $30 billion market opportunity. Our financial profile is compelling with double digit top line growth, best-in-class margins and superior adjusted unlevered free cash flow conversion.

We look forward to updating you on our progress throughout the remainder of 2022. With that, Steve and I are happy to take any of your questions..

[Operator Instructions] Your first question comes from the line of Brent Thill with Jefferies. Your line is open..

Hey guys, this is David on for Brent. Thanks so much for taking the question. Two, if I can. For the first one, I believe you said the international business remains the highest growing business. Could you maybe just provide a little bit more color around the U.S. higher-ed, U.S.

K-12 and international? Any color on the growth rates there would be helpful?.

Yes. We don’t break out the guidance David by those segments. But we will say, they all grew double digits this last quarter and we expect them to continue to grow double digits with the International segment being the fastest grower of those three..

Understood. No, that’s helpful. And then as a second question, thinking about the K-12 market, I was hoping you could help us understand how you guys are penetrating that market.

Is it, are you guys seeing an outside of growth in that market coming from displacement cycles of some other vendors in the space? Or is it you guys are gaining wins with K-12 districts that aren’t using a paid LMS or more of a lightweight solution?.

Yes, it’s a good question, David. We see the latter. So there is we estimate about half the market that still is using free tools is unvended and so most of our wins are coming from those school districts as they look to digitally transform. And they’re looking for an enterprise grade LMS that’s where most of the activity is from a sales perspective..

Got it. That’s super helpful. Thanks guys. Appreciate it..

Thanks, David..

Your next question comes from the line of Josh Baer with Morgan Stanley. Your line is open..

Great. Congrats on the quarter. And thanks for the question. Appreciate all the color or the color on the competitive win rates. I was just wondering if you could maybe remind me given the nature of your academic customers.

Are all of your wins coming through a competitive process? Or is there kind of part of the business mix that comes through easier ways.

And then also just wondering any context for how those win rates have trended? Or what the metric that you mentioned today was versus 2020 or pre-pandemic?.

Yes. So yes, thanks for the question, Josh. So we are – we’ve – we do – just under a little less than half of our business comes through RFPs. Now, most of the selling processes are competitive in the fact that we have to prove the value within that selling process.

But again, less than half of them come through RFPs, rest come through, for instance, a cross-sell or an upsell would not have to go through an RFP traditionally and those types of things. So we’re encouraged by activity, the activity that we see in higher-ed. But again, it’s less than half of the total business.

Win rates, we see continue to be strong. We’re in the 70% range. That’s higher than it was – a little bit higher than it was pre-pandemic.

And so we continue to see people recognizing and institutions recognizing the importance of an enterprise solution that is proven in the market that scales that is flexible for their needs and meets the needs of the digital transformation that’s happening. So I feel really good about where our win rates are..

Really helpful. Thanks. And then just wanted to ask obviously results are better than expected, so there’s no weakness showing up.

But I did want to check in on the kindergarten, like first, second grade portion of K12, originally maybe there were some concerns that there could be a higher churn there just given the nature of those students and the engagement as we move forward in the pandemic. So just want to check in on that segment of the market.

What you’re seeing there, and you would expect to see?.

Yes. It’s a good question, Josh because historically pre-pandemic that was an area that maybe didn’t look to an LMS. During the pandemic, everybody had to really adopt an LMS.

And what they’re finding is that the LMS continues to provide value, even as we return into the classroom, as it’s much more efficient for a teacher not to have to go make copies of assignments, hand them, collect them or quizzes or tests or things like that. And so we’re seeing usage continue to be above pre-pandemic levels.

We recognize that the experience required for a K5 kind of experience is much different than junior high or high school. And so last year we released a different UI for that segment of early learners. That’s really based on a classroom centric and much more graphical for those early readers that needed a different interface.

And so, because of that new and expanded UI for that, we have not seen downgrades in that space as we’ve gone back into in-person. So I feel really good about the investment we made, as well as the importance of the LMS in that segment going forward..

Excellent. Thank you..

Your next question comes from the line of Fred Havemeyer with Macquarie. Your line is open..

Hey, thank you. Firstly, I wanted to check on the higher education competitive landscape. Kind of a follow-on to a prior question, but really it’s – I think it’s been about eight months now since one of your larger competitors was acquired.

Have you seen any changes in how schools or higher education institutions are approaching LMS selection, which is generally their transition planning considering the shifting market, I’m curious, especially as we’re going into budgeting season?.

Yes. Hey Fred, good to hear from you. Yes, we have seen – as we mentioned, we’ve seen a pretty nice increase in RFPs in the pipeline for 2022 and 2023. In some cases, well, in every case, it’s a displacement. In some cases, it’s some of the open source competitors, in some cases, it’s some of our paid for competitors like the one you mentioned.

So we do see organizations really trying to decide, what does the future look like for my institution? How am I going to re-platform for the next 20 years? And so much of that RFP activity is people starting to think about, okay, I’ve got renewals coming up in the next couple years.

Let’s start the process now and make sure we have a nice seamless transition..

Okay. Thank you for that. And regarding M&A, it seems like some of your recent acquisitions have emphasized both open technologies and integrating ecosystems.

Is there a theme in the acquisitions you’re making that are building on or effectively developing a network effects around Instructure’s platform? And what do you think is the importance for the open technology and network initiatives that have been championed by Concentric Sky?.

Yes. You were a little bit quiet there, but I think the question Fred was, our strategy around the acquisitions that we’ve made, they’ve been kind of tech tuck-in-ish and what’s our feeling about kind of the open initiative that’s Concentric Sky is a big part of.

There is a strategy around our M&A and it really is about how do we create a platform within the learning environment that does two things. One [indiscernible] becomes very extensible, allows partners to really innovate on top of our platform.

So acquisitions like Impact or the EesySoft acquisition, the Kimono acquisition really were targeted about some of the platform components as well as how do we help our institutional customers extend out and address a whole new population of students, which is those students that are non matriculating nontraditional, may never come on campus for a degree, but want to get skilled up or reskilled and those types of things.

And so the Concentric Sky acquisition really was targeting, how do we help our customers address that online opportunity, which is a $5 billion market opportunity for us. And this acquisition really helps us extend our solutions outside of the four walls within an institution.

We’re really about the support that Concentric Sky has and really the kind of foundational support that they’ve provided to some of the open initiatives that are out there. We’ve always been very much about an open platform. We help define some of the early LTI standards. We completely support them.

We sit on the board and this is just extends it to a different part of the technology stack. And we expect to continue to make those investments that Concentric Sky was making and supporting those initiatives..

Hey, well, then my headset wasn’t working, but you got it perfectly there. So thank you for the questions and congratulations on the quarter..

Thanks, Fred..

Your next question comes from the line of Joe Vruwink with Baird. Your line is open..

Great. Hi, everyone. I maybe wanted to start with the outlook for 2022. Obviously good to see guidance moving up when it comes to revenue and ACR. I think a lot of the increase seems to be just moving forward the 1Q upside.

So I guess the question is what maybe is informing kind of the views 2Q through 4Q and anything that might have changed from your original views at the start of the year in terms of sequencing for this year?.

Yes. As we look at….

Go ahead, Dale..

Sorry, Steve. So Joe, one of the things that, of course, we had great performance in Q1, and we’re really proud of the performance we had there. Some of that over performance or the strong performance we had in Q1 is timing related. We had some favorable timing which will balance out in Q2, Q3, and Q4.

But if you take a look at the guidance that we’ve provided, particularly in the full year for adjusted EBITDA, we’ve got expanding margins there. And we’ve talked about operating as a rule of 50-company and that’s where you’ll see that expansion happening over time above what we had guided in the first quarter..

Okay. That’s great. And then I wanted to ask maybe at more of a strategic level, when you engage with customers and prospects.

Does it seem like Instructure is maybe playing more of a strategic role in how an institution might be approaching their learning, approach in strategy for the next several years? I look at your long-term RPO and that’s increasing really nicely.

Then you have these anecdotes where K-12 and or higher-ed, you’re getting those wins because you are like complement one segment or the other.

It just seems like maybe the potential for deal sizes to be getting much larger, but maybe besides the financials, just kind of how you’re seeing customers think differently and how Instructure participates in that?.

Yes. I think it’s a – I think you read through, you read between the lines there and you picked up on the trend that we’re really excited about, which is yes, the company Instructure is viewed as more than just Canvas, more than just learning management systems, we’re seeing a lot more engagement upfront.

And so, in Q1, I think it was about, it was over 40% of our new deals, new logo deals had more than one product in them. So from a – just from an average revenue per user share wallet, that’s going up. We’re also seeing the deal size in our cross sell increase year-over-year.

And so, yes, we’re involved in bigger conversations around the strategic digital transformation that’s happening within education.

And with the LMS touching 90% of all instructional workflows, there is a lot of room for us to continue to help our customers grow not only within the traditional, but also expanding into that market that we’ve talked about in the past that online non-traditional learner..

Okay. Thank you very much..

Thanks, Joe..

Your next question comes from the line of Alex Sklar with Raymond James. Your line is open..

Thanks. Steve, I want to ask you about that $5 billion non-traditional online market opportunity referenced. That’s a fairly notable TAM expansion. I’m curious within that how much of it is addressable today with kind of solutions in place and clearly that’s not just Concentric Sky.

So I’m curious what else that includes in terms of Canvas or in terms of Instructure solutions today?.

Yes. And it’s a good question. No, it’s not, that whole $5 billion market isn’t opened up by Concentric Sky, but we’ve talked in the past. We are making a number of organic investments in our catalog product is included in that $5 billion cam number.

In addition to the badging and some of the stuff that comes with our Badgr acquisition in addition to Canvas licenses that end up going into that – into those address, those types of – those learners.

So it's a combination of technologies that that we're bringing together and including some of the impact technologies that we will integrate into that as well. So it is a combination of technologies, both organic and M&A that open up that $5 billion opportunity for us..

Your next question comes from the line of Terry Tillman with Truist Securities. Your line is open..

Great. Hi everyone. This is Robert on for Terry. Congrats on the quarter, and thanks for taking the question. I just had one on statewide deals. So excellent to hear about traction with the virtual Virginia contract last quarter, and now expansion in California.

I'm curious to get both an update there and some additional color into the possibility for additional statewide deal going forward? Thanks..

Yes. We continue to engage both at the statewide level as well as at district levels. Many of the activity that happened during the pandemic is the states kind of stepped in to help. We still see – we still see some of that activity continuing, so there are a couple of deals in the pipeline that we're still working from an LMS perspective.

We're seeing a pick-up in the cross sell into those state deals that we signed in the last 24 months for the LMS. And so we're continuing to see success there. We won 11 of the 12 that were led during the pandemic. But we also continue to see activity at the district level, so it's kind of a combination..

That's great. Thank you..

Your next question comes from the line of Matt VanVliet with BTIG. Your line is open..

Yes. Thanks for taking the question guys and nice job on the quarter. I guess Steve wanted to follow up a little bit on some of the commentary you made around catalog.

I know that's been something that has been one of your bigger cross sell opportunities in the last few quarters, so curious where kind of Badgr or Concentric Sky sort of fits in with that? Is that something that you were using as part of the, or as an add-on to the catalog or partnering around on the catalog product? Or what you were using before and kind of how that expands the offering from here forward?.

Yes. No, it's a good question, Matt. Thank you for asking it. There was an integration that we already had with Badgr inside of Canvas. And so we were – we were very familiar with the product. Work very closely with the team. Saw the traction that it was gaining in our customer base and that's part of the rationale for doing the acquisition.

As you think about the non-traditional student, right, we've got a well defined path to how do you get to a degree, right? You know, which – what classes you need to take, what skills you need to gain in that process. When you start to look at the non-traditional student there's a much – it's much more kind of a mix and match.

And so the technology that Badgr brings and the pathways program within the CSky portfolio, it allows institutions to group classes or courses together to create micro credentials. And so that becomes a key part of that that overall what the institution presents to that non-traditional student, and they use the catalog as the portal for that.

And so much of that technology will kind of underpinning the background, how students pull together stacks of credentials to create our micro credentials, and then how they stack those along to eventually get to degrees over time.

So that's how they kind of nest together and a lot of the technology was kind of a lightweight version that was integrated into Canvas as kind of a free offering to get people familiar with the technology, and we have an opportunity to go then cross sell into premium services..

Okay. Very helpful.

And then as we look at the overall inflation going through the economy and you guys are coming up on kind of your biggest renewal period ahead, what are those discussions looking like with your customers? How much is sort of protected by the COPPA provisions in some of your contracts versus having to kind of negotiate a specific rate and how should we think about you guys using price increases to protect your margins moving ahead?.

Yes. So we expect a 3% to 5% price increase on average that's a combination of some that will be higher than that, some that are protected by consortium agreements or things like that with negotiated price. But it's safe to assume that we'll kind of be in that 3% to 5% range again this year from an overall price increase..

Right. Great. Thank you..

Your next question comes from the line of Steven Sheldon with William Blair. Your line is open..

Hey, guys.

I wanted to ask specifically about cross-sell opportunity in higher ed, you talked about the strong RFP environment, clearly seeing good traction, winning new customers, but with existing products, what has uptake of additional modules beyond the LMS look like across the client-base and how are you thinking expanding it over time?.

Yes. Within the higher-ed specifically we have – we have a stack of add-on products that's – that it creates about another 50% increase in the ARPU available in our higher-ed customers. And that's through a variety of products, whether it's impact that just added technology from Concentric Sky or Catalog product, our studio product.

We have varying penetration rates of those, but the – the sales teams are very much focused on cross-selling those products into the existing customer base, in addition to including them in our new logo wins as part of a bigger deal of which over 40% of our new logo deals in the last 12 months have had more than one product in them.

So really excited about the opportunity to drive durable growth with these – through both cross sell as well as increasing our new logo deal sizes..

Got it. That's helpful. And then a follow-up just kind of a numbers question and apologies if I missed it.

Guessing it's small, but what assumptions have you made in the guidance for the Concentric Sky, Badgr acquisition in terms of revenue and adjusted EBITDA for the year?.

That's a good question, Steven. We are really excited to have Concentric Sky Technology as part of the Instructure Learning Platform and the team there with us too. But Concentric Sky is small and we expect that it'll contribute less than 1% of our full year 2022 ACR, and be roughly neutral to our EBITDA for the year.

The durable growth from this acquisition happens in future periods, future years. But that's the impact, so we're pretty excited about the opportunity here, but it has a de minimis impact on 2022..

Great. Thank you..

There were no further more questions. This does conclude today's conference call. Thank you for participating. You may now disconnect..