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Instructure (NYSE:INST)
Q3 2019 Earnings Call
Oct 28, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to Instructure's Q3 2019 earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker today, Natalia Kanevsky, VP of investor relations. Please go ahead. Thank you.

Natalia Kanevsky -- Vice President of Investor Relations

Good afternoon, everyone, and thank you for joining us on today's quarterly earnings conference call. Today's call is being hosted by Dan Goldsmith, CEO; and Steve Kaminsky, CFO. 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 the other reports and filings we may file from time to time with the Securities and Exchange Commission. All our statements are made as of today based on information available to us as of today, and except as required by law, we assume no obligation to update any such statements. The content of today's conference call is Instructure's property and cannot be reproduced or transcribed without our prior written consent. During the call, we will also refer to both GAAP and non-GAAP financial measures.

You can 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. All of the nonrevenue 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's CEO Dan Goldsmith.

Dan Goldsmith -- Chief Executive Officer

Thank you, Natalia, and good afternoon, everyone. During today's call, we will update you on our progress toward our business goals, expand on our ongoing effort to manage cost and share more details around our strategic planning and upcoming analyst day. Q3 was a solid quarter for Instructure. We delivered $68.3 million in revenue, representing 24% year-over-year growth, and we exceeded our previously issued guidance for non-GAAP net income by $2.9 million.

Now I would like to share details on how key areas of our business are performing. Domestic Canvas is progressing nicely, on track to deliver results in line with our outlook for the year. So while some analysts have been reporting a sharp slowdown in higher ed LMS switches, we are not seeing that trend in our domestic Canvas bookings. In fact, our high ed domestic bookings are on track to be up this year over last year.

At the same time, internationally, we are seeing delays in a number of opportunities that are pushing some bookings into 2020. For example, in U.K. and Australia, a set of large public tenders planned for this year have been pushed out beyond 2019. Globally, win rates remain strong for Canvas.

So by continuing our expansion into markets such as Spain, France and Southeast Asia, we are confident in our ability to drive growth and manage pipeline risk. MasteryConnect and Portfolium are both delivering the results we anticipated at the time of acquisition and improving our overall competitive position with Canvas. And while Bridge bookings continue to grow, especially with our Employee Development solutions introduced over the summer, it's still not delivering at the level I want it to be at. Increasing our focus and efforts on Employee Development opportunities where we are seeing higher win rates, attach rates and larger deals will help us drive growth moving forward.

On past earnings calls, we have outlined a list of customers who have chosen Canvas and Bridge during the quarter. We have heard from many of you that it is better to have a few select examples on earnings calls that demonstrate progress in the market rather than a comprehensive list of wins. We will publish a list of key customer wins on our Instructure blog following each earnings call. Princeton University is the most recent Ivy League institution to join the Instructure family.

The university was looking to move to a more intuitive and robust learning management platform that could support faculty teaching goals, expand learning activities and improve assessment strategies. Canvas was selected as the best choice after an extensive evaluation process that included input from students, faculty and staff. With the addition of Princeton, we are happy to announce that Canvas has now been adopted by all Ivy League schools. Hillsborough County is the third K-12 district with approximately 200,000 students in Florida that has selected Canvas.

The school board valued Canvas' ability to meet the needs of students while also offering powerful tools for administrators and teachers. This key win solidifies our presence in large school districts in Florida and better positions us to win other districts in the future. I recently attended our CanvasCon event in Barcelona and met with customers and prospects from across the region. It was nice to see everyone was excited about the new capabilities we are introducing as part of our Learning Management Platform.

Canvas is already the solution of choice at all top 10 U.S. business schools, and we are excited to see similar progress with the international business schools. When ESIC Business and Marketing School, one of the most prestigious institutions in Spain, decided to switch from Moodle, they ran two competing pilots simultaneously. In the end, ESIC chose Canvas not only because it is the best technology platform but also because they value the community and Canvas team that will guide them.

Interestingly enough, ESIC is also looking to use Canvas for student engagement postgraduation. We are excited that ESIC joins the ranks of other top universities in EMEA using Canvas, such as INSEAD in France and Oxford Said in England. In Southeast Asia, at the Technological Institute of the Philippines, management, academic leadership and faculty selected Canvas for both campuses, covering senior high school to graduate school. This is another great example of our ability to establish anchor schools in markets around the world.

At the EDUCAUSE Conference just two weeks ago, we announced Portfolium is now seamlessly integrated into the Canvas user experience. Students will have lifelong access to their Folio where they can organize learning assets, connect with other Folio users and curate content to help showcase their skills to potential employers. Their personal Folio will follow them throughout their academic and professional lives, serving as an expanded resume. In addition, educators can now access integrated Portfolium capabilities for institutions directly from the Canvas Learning Management Platform.

With deeper integration, it is now easier for institutions to procure Canvas and Portfolium together. Our CanvasCon events in Sydney and Barcelona yielded good interest for Portfolium in EMEA and APAC regions with a number of customers already asking to implement Portfolium in the coming year. On the Employee Development side, we recently announced the addition of Bridge Connect to our Bridge Employee Development Platform, which offers employees the ability to more easily connect with coworkers, join skill communities and identify potential mentors. Skullcandy, a consumer electronics company, attended our BridgeCon event in June.

They selected Bridge seeing the value of our Employee Development solution to address their need to transition from annual to quarterly reviews, enable monthly career development discussions between managers and employees and build stronger onboarding programs for new hires. Our third-quarter results are solid, and despite some of the headwinds with international Canvas and Bridge, we are pleased with our progress. Now Steve will talk through the financials, and following his remarks, I will provide details on our December analyst day and strategic planning work.

Steve Kaminsky -- Chief Financial Officer

Thanks, Dan, and thanks, everyone, for joining us today. As Dan mentioned, we delivered another solid quarter in Q3 with healthy year-over-year revenue growth and improvements to the bottom line. Total revenue grew 24% year over year to $68.3 million, of which subscription revenue was $61.9 million. The year-over-year revenue growth is a result of customer growth and continued net revenue retention of over 100%.

While we are pleased with our revenue growth in the quarter, currency headwinds from GBP and AUD had a larger impact relative to prior periods. The Q3 impact was approximately $300,000, which is equal to the total foreign exchange impact for the first half of this year. For further context, in 2018, the impact was less than $100,000. As a percent of total, international revenue was 19% growing 25% year over year.

As a reminder, our total revenue for the third quarter includes the contribution from our two acquisitions, which is almost entirely domestic revenue. 12-month rolling billings at the end of Q3 was $272.4 million, up 20% from third quarter of 2018, also calculated on a rolling 12-month basis. If we exclude the billings contribution from acquisitions, billings on a rolling 12-month basis was $252.8 million, up nearly 12% from last year. For the remainder of my commentary, unless otherwise noted, I will discuss non-GAAP results, and all EPS numbers are on a per common share basis.

Gross margin in Q3 was 72.2%, essentially flat year over year and up 91 basis points as compared to last quarter. Q3 total operating expense was $53 million. This represents, as a percent of revenue, a decrease of 500 basis points compared to last year. Excluding the impact of acquisitions and the change in compensation policy, 149 basis points of that decrease was related to controlling costs.

Our operating loss was $3.7 million as compared to $5.7 million in the same period a year ago. GAAP net loss for Q3 was $20.9 million as compared to $11.5 million in the same period a year ago. Non-GAAP net loss for Q3 was $4 million, which is $2.9 million or $0.08 per share better than our previous expectations. Turning to the balance sheet.

We ended the quarter well with $127.2 million in cash, cash equivalents and marketable securities. Free cash flow for the third quarter of 2019 was $79.7 million. Let me end my remarks around our expectations for the fourth quarter and full year. For the fourth quarter, we expect revenue in the range of $67.8 million to $68.8 million.

In Q4, we expect a larger currency impact than we saw in Q3 of approximately $400,000 to $500,000, which is included in today's guidance. We anticipate non-GAAP net loss of $6.4 million to $5.4 million and non-GAAP net loss per common share of $0.17 to $0.14. For the full year, we expect revenue in the range of $257.1 million to $258.1 million, down from our previous guidance of $258 million to $260 million. This change is driven both by business performance that Dan mentioned earlier and the cumulative effect of foreign exchange impact of approximately $1 million for the year.

We expect non-GAAP net loss of $20.5 million to $19.5 million, an improvement to previously stated guidance of $24 million to $21.5 million, and a non-GAAP net loss per common share of $0.56 to $0.53 as compared to previously stated guidance of $0.65 to $0.58. For calculating EPS, we expect our shares to be 37.7 million for the fourth quarter and 36.9 million for the full year. The improvements to our Q4 and 2019 bottom line will be driven primarily by our continued focus on managing costs. We also expect a decrease of 2019 stock-based compensation expenses from previously stated $60.3 million to $57.5 million.

Our cash position is healthy, and our free cash flow forecast has improved. We now expect to reach positive free cash flow by year-end. On a personal note, I want to take this opportunity to update everyone on discussions I have been having with Dan regarding my intent to retire. It has been something I've been contemplating for some time.

While there is no set timetable, Dan and I have started the conversation regarding a succession and transition plan. Let me now turn it back to Dan for closing comments and a look at our upcoming analyst day.

Dan Goldsmith -- Chief Executive Officer

I would like to thank Steve for his more than seven years of service to Instructure. Steve has been integral to the growth and success of Instructure since its starting days. On behalf of the board and our employees, I want to express appreciation for his dedication and his passion for our business, teams and how we are transforming education. Steve has built a tremendous finance team and program, and I am grateful that he's willing to stay with us through this transition.

Since taking on the role of CEO earlier this year, I have worked to get my arms around Instructure's business, challenges and opportunities. While it takes time to understand the company, it also takes time to define the right strategy and then time to implement change. Instructure has an incredible business built over the last decade with Canvas. However, the organization has not evolved in the right way to support a company going from start-up to IPO to scale.

Over the past months, my focus has been on establishing a strong team and managing the business well while at the same time, determining the strategic plan for the future of the company. I, along with our management team and board, have worked closely with external advisors on our strategy, and we have met with large investors representing over 40% of our stock base, seeking input on Instructure's future. During our analyst day, on December 3, we will share details on our strategic plan. The agenda will include presentations from our management team and how we will run the company moving forward, financial goals and focus areas for growth.

We will share how sales, marketing and product teams will be more effective and efficient tied to metrics such as attribution and customer acquisition cost, and you will hear from our board regarding governance updates and changes. In the meantime, I would like to share some updates on our strategic planning work and preview some of our progress we are already making. First, I would like to address stock-based compensation. Based on investor input and our business review, we recognize that the compensation policy put in place for this year has not yielded the benefits we expected nor has it been well received by investors.

As a result, we are making a meaningful shift in our stock-based comp approach. As Steve mentioned, we'll be better than expected on SBC for 2019. Additionally, we have built our plan for next year based on managing share issuances in order to limit overall share count growth to no more than 2.5%. This will also result in the absolute SBC dollars coming down significantly year over year.

We are advancing our strategy by increasing our focus on education. Canvas as a platform provides a fantastic opportunity for us to expand greatly within our existing customer set. We will capitalize on our unique ability to introduce add-on products and new offerings and education to drive revenue growth, TAM expansion, high attach rates and lower customer acquisition cost. Portfolium and MasteryConnect are examples of this, and we are already realizing the benefits of these solutions being connected to Canvas.

During our analyst day, you will hear more about Instructure's bigger opportunities and plans to ignite growth moving forward in education. Turning to Bridge. We are engaged in a strategic review of the business. We've begun to take steps to reorganize our teams such that Bridge operates independently from our education business.

Bridge will be able to operate with a streamlined cost structure appropriate to the stage of the business, and the management team can increase its focus more on Canvas and our growth opportunities in education. Lastly, we are working on finalizing our 2020 budget and our strategic plan. This year, our strategic planning process included deeper detailed financial modeling with a multiyear view. The process has allowed us to set financial goals for Instructure that are both near term and long term supported by a clear plan for execution.

On December 3, we will share details on our strategic plan, including a number of value creation initiatives. We will share our financial status and goals with clear milestones and target dates specifically focused on profitability and growth for Canvas, Bridge and Instructure overall. We will walk through our cost realignment plan, which aggressively shifts Instructure's operations to deliver a cost profile for gross margin, sales and marketing, research and development, and G&A, targeting best-in-class SaaS company benchmarks, and we will talk about the many exciting opportunities to drive growth in the coming years. There has been much work this year to get Instructure on the right path operationally, financially and strategically.

I have set a priority not only to drive ambitious and healthy goals for Instructure but also to make sure that we commit to those goals with a well-thought-out plan and approach. Thank you, and I look forward to seeing many of you on December 3. Now let's open it up for questions.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from Ryan MacDonald with Needham. Your line is open.

Ryan MacDonald -- Needham and Company -- Analyst

Thanks for taking my questions. Just wanted to start, I guess, first on the Canvas business and what you're seeing internationally. You mentioned some delays, I think, in the U.K. and Australia.

Could you talk about what's causing those delays and perhaps an expected time line of when you expect some of those delays or those deals to be closed in 2020?

Dan Goldsmith -- Chief Executive Officer

Ryan, good to hear from you. Welcome. Sure, we can comment on some of the international headwinds and some of the delays that we've seen. We've seen this across a few areas, specifically and more acutely in the U.K.

and in Australia, New Zealand. In particular, in the U.K., as an example, there were 12 public tenders for LMS switches, large public tenders that were scheduled to come to market this year. Out of those 12, only four of them actually came to market. The other eight were pushed and delayed beyond 2019.

Of the remaining four, we won three. And we advise the fourth one, and we're working with that institution to move that process out because they needed to go about it a slightly different way.

Ryan MacDonald -- Needham and Company -- Analyst

Got it. Thank you. And then I guess just switching over to Bridge. It sounds like you're clearly making some nice progress in terms of the Employee Development and it's contributing in a positive manner.

However, it's clearly not sort of performing quite to your expectation. Where do you think the shortfall is coming from given sort of the changes you've undergone within that business over the past year?

Dan Goldsmith -- Chief Executive Officer

Hey, great question. It's primarily around getting to sort of the enterprise customers. We knew coming into this year that we'd have elongated sales cycles. We replaced our -- I'm sorry, we released our Employee Development platform capabilities earlier this summer.

So we now have over 50 customers that are on the Employee Development platform utilizing many of the solutions across the suite that were released in the summer, so we see good progress. However, with the enterprise customers, they're taking a little bit longer than we had hoped, and most of them are starting with a division or a subgroup within the organization and then ramping up over time. So that's what's causing some of the slower-than-expected ramp-up on bookings.

Ryan MacDonald -- Needham and Company -- Analyst

Got it. Thank you very much.

Operator

Your next question comes from Brian Peterson with Raymond James. Your line is open.

Brian Peterson -- Raymond James -- Analyst

Hi, and thanks for taking my questions. So Dan, the first one on Bridge. You had some new products out this year. I know there was some optimism that those would be well received by customers.

Maybe any update there? How much time do you need to really see how well those will do in the market?

Dan Goldsmith -- Chief Executive Officer

So Brian, good to hear from you again. Thanks for joining. The -- so we're already seeing good signals around Employee Development. So we're pleased with the uptake.

When we say the uptake, it really is how many Employee Development deals are happening that we wouldn't have had a chance at previously if we were just focused on LMS, how many of our customers are moving from sort of LMS only and upgrading, if you will, to the Employee Development suite, and then how is the Employee Development suite making us more competitive in general in all of the deals. As you remember, we've been talking throughout this year around some key metrics, win rates, attach rates and significant deals, and we see progress on every single one of those metrics. So as we look at coming out of the summer months with the introduction of the Employee Development suite, we're seeing really good, positive momentum and attention there. The challenge for us, moving forward, is really getting the enterprise pipeline full and progressing those deals forward.

We learned a lot over the past few months of what it takes to get Employee Development embedded in the enterprise, and there's about five key sort of product-oriented and go-to-market-oriented elements that we think will help to propel Bridge forward.

Brian Peterson -- Raymond James -- Analyst

Thanks, Dan. And maybe just a follow-up on the domestic Canvas bookings, I think the comment that the higher ed bookings are on track, be up this year, that's better than I expected. Can you confirm if that's an organic comment? Or does that include Portfolium? And are there any large deals for the rest of the year that could swing that figure one way or the other?

Dan Goldsmith -- Chief Executive Officer

So that is 100% an organic number. I can't speak to the rest of the industry, but as you and others have been indicating, you were seeing a short of sharp slowdown in LMS switches this year. When we look at our domestic higher ed Canvas bookings, we are forecasting being up in bookings year over year, which we're pretty excited about. Now our win rates remain pretty high, and we're happy with our win rates.

And I don't know if we're just winning more of our share or whether there's more coming to market. But what we're also doing, and I mentioned this on, I think, the last two earnings calls, we're not standing still. We're being very proactive going to market, which means that in addition to sort of the RFP demand coming in the market, we're also creating demand. There's a handful of deals and we'll see more through Q4 that are coming in to market, not going to RFP, and we're moving the business onto Canvas.

In terms of the last question you had with regard to sort of significant deals remaining throughout the end of the year, obviously anything can happen. We're working hard on our plan, working hard to deliver in Q4. There's both risk and upside.

Brian Peterson -- Raymond James -- Analyst

Thanks, Dan.

Operator

Your next question comes from Brad Zelnick with Credit Suisse. Your line is open.

Bhavin Shah -- Credit Suisse -- Analyst

Hi. It's Bhavin on here for Brad. Good to see the increased focus on education. Can you just provide us with an update on the acquisitions of MasteryConnect and Portfolium and how they have performed relative to expectations? And then just in particular just interested in hearing more quantitatively about if the combination with Canvas is creating cross-sell opportunities or increasing pipeline.

Dan Goldsmith -- Chief Executive Officer

Bhavin, so good to hear from you. A couple things. So I think on the first question on MasteryConnect and Portfolium and how they're performing, as we went through those acquisitions earlier in the year, we set a plan and an expectation for bookings this year. That plan and expectation of bookings was a combination of what Portfolium and MasteryConnect were already expecting to do this year, plus some incremental expectations for being attached to Instructure and Canvas as the mothership.

And we're pleased to be on track with the outlook that we had earlier in the year at the time of acquisitions. Two is we're seeing some really good uptake and attachment rates with Canvas. So we're seeing the benefits, as you had asked about, around Canvas and Portfolium attached to Canvas. That's both making Canvas and Portfolium more competitive, as well as making sort of Canvas plus Portfolium and MasteryConnect more competitive.

Two other points around Portfolium and MasteryConnect. We are sort of just finishing the operational integration of the teams. So in addition to having a much more sort of coordinated multi-bag go-to-market effort, as well as better integrated technologies, we can start realizing some of the synergies that we had anticipated with those acquisitions as well. And then lastly, as I mentioned in the prepared remarks, at our CanvasCon events in Barcelona and in Sydney, we were very pleased to see the interest level for Portfolium, and we've increased the pipeline now internationally for Portfolium as well and hope to see some really positive results going into 2020 and beyond.

Bhavin Shah -- Credit Suisse -- Analyst

Thanks. That's very helpful. Just following up on Bridge. What changes are Frank or yourself making to help accelerate growth here? And then just how can we ensure that with the increased focus on profitability that, that won't hinder Bridge's ability to grow?

Dan Goldsmith -- Chief Executive Officer

Well, the -- there's no more changes. First of all, we're leaning much heavier into the Employee Development side of the business now that we've had it in market for a quarter. We can now start looking at some reoccurring patterns, what works and doesn't work in terms of win/loss. We're looking at our teams and sort of what's working in individual reps and different organizations.

Our marketing team has done a phenomenal job building out an ICP, an ideal customer profile, that helps us be laser focused on the right types of customers where our value proposition will resonate. So really the story with Bridge is all about focus at this point now that we're learning what is working and what is not. With regards to our moves toward profitability and improving our bottom line and overall margin, Bridge will help with that. We have an aggressive plan that we've laid out for the next few years that gets us to some really healthy metrics across the business.

We're looking at metrics broken down by our Canvas business and looking at sort of our success and what makes us successful in Canvas and Bridge, attaching products, as well as overall as the company. You'll hear more about this on December 3. And one of the things I tasked the team with is to really focus on each of these businesses and what is going to more aggressively get us to success, both on the top line and bottom line.

Bhavin Shah -- Credit Suisse -- Analyst

Thanks. Very helpful.

Operator

Your next question comes from Stephen Sheldon with William Blair. Your line is open.

Stephen Sheldon -- William Blair -- Analyst

Hi. Thanks for taking my questions. First, you talked over the last quarter or two about significant hiring for, I believe, engineers and developers for Canvas. So can you provide some more detail on where you're deploying those resources? And specifically, is it mainly focused on improvements or tweaks to the core product? Or are many of these looking at building out new solutions or modules that you could roll out over time?

Dan Goldsmith -- Chief Executive Officer

So Stephen, good to hear from you. Thanks for joining. The -- so it's a variety of things. As we look at our strategic plan, and we'll share more on December 3, we need to think about a few factors.

First, how do we continue to retain and please our existing customers? Our customers, and I think any good SaaS company, will continue to deliver ongoing innovation to their existing customer set, and that's how we stay ahead of the curve. Two is we need to deliver more sort of capabilities and innovation into our existing products that we can cross sell and upsell into and sort of expanding our presence. And then third is really development of new products. We've talked about our work that we're doing in machine learning and AI, which continues to be a focused effort for us.

A lot of innovation opportunities and growth opportunities for Portfolium and especially for MasteryConnect where we're just scratching the surface of the work that we can do in assessments. Additionally, as we've been doing our strategic planning effort, we see more and more opportunities in education driving into the online space and fulfilling our mission and really working closely with teachers and students to help drive student success and the overall effectiveness in education leveraging technology. It takes engineering effort in R&D. We've been reconfiguring our R&D and engineering and product teams.

In fact, we made a key organizational change over the past couple months to move more into a line of business model. That line of business model helps sort of focus engineers and product resources on the products in a way that can move at the right sort of pace and speed that is appropriate for those individual markets. We're doing a considerable amount of hiring and growth and work out of our Budapest location, which obviously gives us a really healthy cost profile. And the talent there is phenomenal.

We're very pleased with the output from our Budapest team. They've become sort of seamlessly integrated into the overall fabric of Instructure. And then obviously, we continue to work across our offices capturing talent with different skill sets that we need across each of our offices.

Stephen Sheldon -- William Blair -- Analyst

Got it. That's helpful. And then on Canvas, on the K-12 side, I know they're good sources out there for LMS market share trends in higher ed. But just wanted to ask, can you talk maybe about rough market share in K-12 and maybe how that's qualitatively trended over the last few years?

Dan Goldsmith -- Chief Executive Officer

So I think we've continued to be really strong in our adoption. We bring more business into sort of Canvas LMS in K-12 than any other provider in the market right now in terms of dedicated LMS. You have to remember, in the K-12 space, there's both sort of LMS switches that can happen. But a lot of the K-12 space is actually moving from sort of a non-LMS school to a school that's ready to advance and adopt in LMS.

So we continue to make strong strides in that area year over year. With the addition of MasteryConnect, it makes us even more competitive and sort of spreads out our surface area within that segment. Domestic K-12 is our primary focus, even though we do a considerable amount of work outside of North America in K-12 as well. They're just fundamentally different markets.

Stephen Sheldon -- William Blair -- Analyst

Great. Thank you.

Operator

Your next question comes from Brian Schwartz with Oppenheimer. Your line is open.

Brian Schwartz -- Oppenheimer -- Analyst

Yeah, hi. Thanks for taking my questions this afternoon. Dan, just want to follow up on a couple of your answers. You were talking about some of the initiatives that you've put in place to improve the sales productivity here of the domestic ed tech business, and you walked us through those initiatives to keep that improvement going here over time.

I just wonder if I could pin you down if there's anything else that's going on to sort of remove some of the overhead that could further help the domestic ed tech productivity metric?

Dan Goldsmith -- Chief Executive Officer

Yeah. So, Brian, good to talk to you. Are you referring to some of the changes that we made in the domestic Canvas focus and some of the synergies of MasteryConnect and Portfolium?

Brian Schwartz -- Oppenheimer -- Analyst

Yeah. Well, you talked a little bit about that, so I think you gave us good discussions on that. I'm just wondering if you're doing anything in terms of either the enablement or the ramping of the sales capacity or if there's anything else really more on -- that could remove overhead to continue to improve the domestic ed tech productivity measure.

Dan Goldsmith -- Chief Executive Officer

Yeah. And I think, Brian, great question. Now I understand. The -- it's not just about moving overhead.

It's around looking where we can be more efficient with our sales efforts. I'm very happy to have Frank Millett join the team. He's been here about seven weeks now, and you can already see the tangible impact that he's making. So although we're continuing to make strong progress with Canvas domestically, we know we can do more and more.

Our sales teams can to continue to be more efficient and more focused on how we can penetrate in the market. I've talked a little bit about proactively going in a market and generating demand. Some of the other things that Frank is working on with the team, we've brought in a sales enablement leader who is absolutely tremendous, and he is going to significantly advance what we go to market with, what our value proposition, our mechanics of sales and sales execution. We're also reevaluating our sort of territory plans this year.

Frank came in at exactly the right time because we're finalizing our 2020 plan for next year, and that's inclusive of just about everything, looking at our comp plans and quotas, looking at what motivates reps, looking at our support team for reps. We're also building a key account program that will allow us to work with both existing key customers and key prospects in a way where we can drive innovation, and that will create more early adopter opportunities and faster uptake of Canvas as well. So there's a lot of positive things that Frank is bringing the table as he's come onboard. We'll start seeing the effects of those things, the positive effects of those things a little bit through the end of this year, mostly in 2020, as we build toward sort of greater sales excellence.

Brian Schwartz -- Oppenheimer -- Analyst

Thanks for that color. And then, Steve, just a quick question on just the math on the guidance revision. It looks like the midpoint on the year, it's about $1.9 million. I think you said $1 million of that is just negative currency.

So the other $900,000, is it weighted at all between Bridge and the international deals that got pushed out?

Steve Kaminsky -- Chief Financial Officer

It's probably a little more international than Bridge.

Brian Schwartz -- Oppenheimer -- Analyst

OK. And then last question, Dan. Just trying to maybe just try to get at the changes in the HCM business and pushing out what possibilities could be out there for the shift. Again, is it -- it doesn't -- it sounds like this is mostly just execution and focus.

I just want to make sure that, that's right it. It's not that there's anything competitive out there or anything changes in the market with suddenly these organizations want to bundle financials with HM, HCM. And I know you guys have a strong sense of what's going on, and you're saying it's mostly focused on execution. But sometimes the execution can be linked to other things that are more exogenous variables.

So just thought I'd try to pin you on it one last time. Thanks for taking the questions.

Dan Goldsmith -- Chief Executive Officer

No, no, it's a good question. I don't think it's just execution. I think the market conditions are continuing to improve. If anything and if you read about what Josh Bersin is saying out there in the market, the market conditions are moving in a direction where we are already at.

Josh has commented before about how comprehensive the Bridge suite is in terms of learning experience and employee experience platform more than just about anything else that's out there in the market. As we launch Bridge Connect as one of the final pieces for our Employee Development platform, that's resonated very well in the markets. So as we look at what we're doing in Bridge and where we see the market trend, the market trend's moving toward school communities and mentoring and career growth. We're seeing sort of the age of the employee-centric enterprise really come to bear, and that'll only create tailwinds for Bridge.

We have to get our execution well in order and understand how to sort of execute well against the enterprise. We've had sort of a quarter of execution now with the Employee Development solutions since introducing it over the summer and there's definitely a lot of execution learnings from there that we can take forward. The other thing that's unique in a SaaS market, in the market like the ones we're serving is reference selling is a huge element to success moving forward. So the more we win great customers like Skullcandy, which we announced today, and our blog will go out with some more of our wins, the easier it is to sort of reference and develop those patterns to share with the market that will drive confidence in moving to Bridge over time.

Brian Schwartz -- Oppenheimer -- Analyst

Thank you.

Operator

Your next question comes from Corey Greendale with First Analysis. Your line is open.

Corey Greendale -- First Analysis -- Analyst

Hey, good afternoon. So also on the Bridge topic, firstly, Dan, I wanted to maybe follow up on a couple of your prepared remarks about the Investor Day at the risk of you saying stay tuned. But first of all, on the Bridge operating independently, I guess I thought it was largely independent. So maybe you could just give us a sense of how much dependence there is and how transformational that effort is going to be versus more marginal.

Dan Goldsmith -- Chief Executive Officer

So we believe it's going to be pretty transformational as over the past months we've been doing a review of our business and sort of our strategic planning, it's become more acutely obvious around Bridge being more in that sort of start-up growth phase and Canvas obviously being more in that mature product phase. And when we were a sort of Canvas plus Bridge company, that's the way we were. And I think it was a little bit hard to see in previous years the forest through the tree. So as part of our strategic planning work that we've been doing over the past months with our management team, with our employees, with analysts, with the board, etc., there are -- a few things happen.

One is recognizing that Bridge needs to operate almost as an independent sort of subsidiary within the business and have the proper attention it needs to spread its wings and focus and execute more at the size of company and stage of maturity that it's at. And so we're making some organizational changes and shifts. We've already started putting those in place. And of course then there's sort of fixing the cost equation with Bridge as well and giving it more focus.

So those are all things that are pretty fundamental shifts in what we're doing. But the other sort of chapter, the other side of that story is we've done some deep analysis in what other opportunities there are in education. So while historically, Instructure may have thought there was not a lot left to do in education, what we've been able to derive from our customers and from the market is that they're asking us to take a strategic seat at the table and help these institutions innovate and move forward in much different ways, whether it be what we're doing right now with Portfolium and MasteryConnect, what we're doing with analytics and machine learning and AI soon around student retention and graduation rates and effective teaching and learning or institutions moving more into the online space and beyond. So by creating some more autonomy for Bridge within our organization, it both serves Bridge well and it frees up more time for our senior leaders and management team to really be focused on elevating Canvas LMS and accelerating it, as well as navigating our way into more educational spaces.

Corey Greendale -- First Analysis -- Analyst

And I got to ask, since you just said that, and maybe you'd say no, nothing's off the table, but talking about helping institutions go online, it sounds like the OPM space. Is that something you're considering?

Dan Goldsmith -- Chief Executive Officer

Look, we work closely with a lot of OPMs right now. The OPM space is a broad space. In fact, many of the OPM companies out there are more sort of content and services companies, and there's a gap for technology. So we view our role already playing a significant -- as a significant player in the infrastructure of education in traditional, blended models and online models today is we can serve institutions, we can serve OPMs, we can serve a lot of different modalities and players within the market.

With our partner program that's now over 350 partners, we're already seeing our ability to connect the dots, create much of an integrated and online experience for institutions. The nice thing about this is it gives us -- is that institutions are immediately looking to us to help create sort of this broader framework and leverage of their offerings across traditional, blended and now online. We've had Catalog in market for quite some time, which is really the marketplace for online learning, the storefront for online learning, so we see opportunities to expand what we're doing there and capture a big piece of the market that's high growth right now.

Corey Greendale -- First Analysis -- Analyst

And I think it makes a lot of sense given your place in that market. My last question is just there are some that could read between some lines, and I don't if they should or not, so I'll just ask the question overtly, which is, in the way you're talking about Bridge and engaging in a strategic review and management, enhancing focus on Canvas and education, it sounds like, one could say between the lines, that you would consider selling or carving out Bridge. Is that on the table? Or how does what you're doing enhance your focus -- management's ability to focus on education?

Dan Goldsmith -- Chief Executive Officer

Yeah. I mean, look, the -- Bridge is an important part of our business, but it's at a different stage right now as I mentioned. It needs different attention, and we're working on the strategy and organizing the team and again, recognizing there's more opportunity in edu. Like I mentioned, we continue to sort of do a strategic review in the business as we organize the team moving forward and create more of that focus.

Look, what we want mostly right now is for Bridge to be in a path that can best deliver its mission of helping employees grow and develop every day. We see a lot of opportunities in general with Bridge, whether it be through partnership or focus moving forward that can accelerate that mission. For us, nothing is off the table. The focus for us is really making Bridge successful, making Bridge financially beneficial and accretive and healthy and then continuing to grow over time.

Corey Greendale -- First Analysis -- Analyst

Great. And if I can just throw in, Steve, thank you for all your help over the years. I'm looking forward to seeing what comes next.

Steve Kaminsky -- Chief Financial Officer

Thank you.

Operator

Your next question comes from Eric Lemus with SunTrust Robinson Humphrey. Your line is open.

Eric Lemus -- SunTrust Robinson Humphrey -- Analyst

Hey, guys. Thanks for taking my question. I wanted to follow up, Dan, on something you were talking about on the past question about data and analytics. Can you give us any sort of update on the progression you're doing with the strategic initiative around DIG? And should we expect to hear some new products coming out in the next year or two around data analytics and the DIG initiative?

Dan Goldsmith -- Chief Executive Officer

Yes. We -- DIG is a codename we've used. We're making very good progress. There are about 15 to 20 institutions now that are working in sort of pre-pilot mode.

We'll move into pilot and early customer mode here shortly, and expect us to have something in the market at least in that sort of early customer phase in 2020. Now that'll be an early offering that comes out of this initiative, and we anticipate a variety of offerings over time in the space of analytics, ML, AI and predictive insights.

Eric Lemus -- SunTrust Robinson Humphrey -- Analyst

OK. Great. And then I wanted to add a question on international. You talked about in your prepared remarks some things got pushed out.

But looking at overall investments in international market, how are you feeling around sales coverage in certain areas? Is that an area of investment as we go into the new year?

Dan Goldsmith -- Chief Executive Officer

It's an area of shift. We've been -- I think this is how Instructure started off. Just like many U.S.-based technology companies sort of take that first step into what feels familiar, English-speaking countries in these regions, Australia, New Zealand and the U.K. And if you look at the patterns for many American software companies, they struggle when they have to go beyond sort of those English-speaking markets.

It creates a little bit of a blind spot. This has been an area of focus for me through 20 years of my career. So it's -- think of it a little less as sort of incremental investment. Think of it as a reassessment and reallocation of focus and resources.

We're making some good, early movements into Spain. I talked about ESIC on the call, INSEAD in France. We're working with a number of institutions now in the Philippines, and we have some opportunities across the broader Asia-Pac region. So we'll be reallocating resources and adjusting the teams, so we can capitalize more broadly on the regional opportunities.

Now what's nice about that is as we move more broadly with Canvas, we're finding that our approach and tactics, while there are nuances within these local markets and we need to be aware of them like government influence and tender processes, in general, our value prop and our product stands very strong in these markets and gives us an opportunity to sort of repeat the pattern and recipe for growth. It's just something that we have to get after a little more aggressively.

Eric Lemus -- SunTrust Robinson Humphrey -- Analyst

OK. Great. Thank you.

Operator

Your next question comes from Rishi Jaluria with D.A. Davidson. Your line is open.

Hannah Rudoff -- D.A. Davidson -- Analyst

Hi, guys. This is Hannah on for Rishi today. First off, with the introduction of Engage and Career earlier this year at BridgeCon, could you talk about any notable changes in deal sizes that you've seen so far?

Dan Goldsmith -- Chief Executive Officer

Hannah, good to talk to you. Thank you. So in addition to Engage, we also launched our Career product, and we expanded recently with Bridge Connect. Engage is definitely one of the most intriguing products as we go in a market with the Employee Development solution.

Engage is competitive into investing -- in existing market of employee sentiment and voice. And being in markets since June, we're just going through some of the earlier iterations. What's nice about Engage and being able to get that employee sentiment and voice is that it's actually helping to demonstrate the benefits and the results of Bridge as an Employee Development solution. So I think it's going to take another couple of months and cycles for us to be able to talk to case studies and release those in the market.

But we are seeing larger deal sizes come through. Now it's not quite tripping the enterprise bucket as much, but we have many more six-figure deals executing and happening in the pipeline than we ever have before, including a number of deals that maybe were in the $10,000 to $20,000 range, for example, that have now been upgraded to the $100,000-plus range where they were LMS before and now they're moving forward with Engage in the Employee Development suite.

Hannah Rudoff -- D.A. Davidson -- Analyst

Great. That's helpful. And then just on the topic of foreign currency headwinds, is virtually all of your international revenue priced in local currency?

Steve Kaminsky -- Chief Financial Officer

Yeah, the vast majority of it is. Yes, that's correct.

Hannah Rudoff -- D.A. Davidson -- Analyst

And then just last question, Steve and Dan, could you talk about what you're thinking about for top quality do you hope Steve's successor will possess?

Dan Goldsmith -- Chief Executive Officer

The top qualities --

Steve Kaminsky -- Chief Financial Officer

Ouch, Hannah.

Dan Goldsmith -- Chief Executive Officer

So well, it's relatively -- Steve and I have been talking about this for some time. He's been thinking about retirement for some time as well. Steve was gracious enough to sort of stay on this year as I've joined and sort of been getting my feet solidly on the ground, and I really appreciate the time and the partnership with Steve. We have not written the job req yet.

We are still working on things, but look, we have a lot to tackle moving forward. We need to really become truly a successful multiproduct company. We need to be successful executing in multiple international geographies, and we need to be financially disciplined such that we're achieving considerable metrics moving forward in all areas of our business. I referenced cost benchmarks against sales and marketing, R&D, G&A and gross margin, but we're also targeting overall margin metrics for each of our areas of the business.

I've talked to my team and I'm asking each of the leaders in my team to be mindful of what we're doing so we can reach those benchmarks, as well as growth benchmarks. We're looking at being a strong Rule of 40-plus company not too long from now, and these are serious goals. So having someone step in that role that is familiar with how to sort of manage those dynamics of a company in the public space is very important to me.

Hannah Rudoff -- D.A. Davidson -- Analyst

All right. Thank you, guys.

Operator

Your next question comes from Alex Paris with Barrington Research. Your line is open.

Chris Howe -- Barrington Research -- Analyst

Good afternoon, Dan and Steve. This is Chris Howe sitting in for Alex Paris. Thank you for all the color and commentary you've given so far. I still have several questions here, but for the sake of time, I'll just go through a few.

You've mentioned Skullcandy as a key win for Bridge Learn. As we look kind of outside the box for Bridge Learn, are there any other opportunities, whether it be a joint venture, partnering with a for-profit, that you could envision longer term as part of your strategy to increase penetration within these corporate accounts?

Dan Goldsmith -- Chief Executive Officer

Yeah. You're referring to like another -- like an HCM organization and partnering that way where we become almost the white labor or the OEM capability for the employee experience, and there's an HCM organization that handles more of the back-office capabilities. We see a lot of opportunities to that. We're still early stage with Bridge.

We have a very mature partnership program with Canvas, and we would like to establish a similar partnership program with Bridge. We started experimenting with that a little bit with some of the different HCM players out there, and we see a lot of opportunity. One of the nice things about Bridge being a true native cloud platform is we've been able to penetrate markets around extended enterprise and sort of extended use with a complex and wide audience for sort of our customers' customers, and Bridge is uniquely capable of delivering to those needs. So pivoting that into a strategic partnership strategy and having that be a mechanism to drive and accelerate bookings and revenue is something that's part of our consideration moving forward.

Chris Howe -- Barrington Research -- Analyst

Great. And then one more question. Understanding that these are tenders, the 12 tenders that you mentioned internationally, eight of them pushed, and you won three out of four. On a relative basis and generally speaking, can you comment on the dynamics between the eight that pushed versus the three out of the four that you won recently?

Dan Goldsmith -- Chief Executive Officer

Sure. So couple of things just to be clear. Those 12 were only in the U.K., so that was just an example. There are other tenders, for example, that pushed in Australia and New Zealand.

Others -- these are public tenders. The dynamics underneath that pushed, we don't know exactly why. Your guess is as good as mine in terms of political climate in some of these markets and whether that had an effect or not. I'm sure you guys hear about Brexit till -- to no end about that potentially having an impact on business.

And while we have no way of drawing a line from what the conditions in the U.K. to these eight tenders that pushed out, we know that there's definitely some delays happening in an unusual form. Now we can't count on it, but we're hoping that those eight tenders pushed out beyond 2019 will end up coming to market and decision next year in 2020, and we can have a really good, solid quarter end -- or a solid year next year in 2020 with those tenders hopefully coming into market. We're not banking on that though.

We need to both be excellent in the U.K. and across the region in EMEA. Of the remaining four, to be clear on that as well, only three of them went to decision. All three of those went to Canvas as a decision.

The fourth one, we're working with the institution on sort of a revision of the process and the approach as well, so it should come into market in 2020. There was just not enough time left in 2019 to really get that process back on track.

Chris Howe -- Barrington Research -- Analyst

Thank you so much for the color, and I'll be watching the blog for any other announcements. Thanks.

Dan Goldsmith -- Chief Executive Officer

That's great. Chris, thank you.

Operator

Your next question comes from Brett Knoblauch with Berenberg Capital. Your line is open.

Brett Knoblauch -- Berenberg Capital -- Analyst

Hi, guys. Thanks for taking my question, and congrats to Steve on retiring. Given the analyst day's a little more than a month out, I was just wondering if the new CFO will, I guess, really have any input into the strategic and financial plans that you guys are going to set forth on that day.

Dan Goldsmith -- Chief Executive Officer

Yeah. So Brett, this is relatively new news and new decision on Steve. Steve has assured me that he's 100% committed on working with me and with the team through the transition as we find the next CFO for Instructure and being really generous with his time on the transition. After close to eight years of Steve spending time, helping Instructure get where it is today, he wants to see the torch passed into good hands and success moving forward.

With regards to the analyst day being on December 3, that's not far from now. So we have some thinking to do in terms of how we want to present some of the information and the strategic planning work that we're doing and what that means vis-a-vis bringing in a new CFO.

Brett Knoblauch -- Berenberg Capital -- Analyst

OK. Great. Thanks, guys.

Dan Goldsmith -- Chief Executive Officer

Thank you.

Operator

There are no further questions at this time. I will now turn the call back over to Dan.

Dan Goldsmith -- Chief Executive Officer

Yup. So in closing, I just want to thank our employees, our customers, our partners, investors and others. It's been a good Q3. We're pleased with our results, solid quarter for Instructure.

And with that, we'd like to close the call for today. Thank you.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Natalia Kanevsky -- Vice President of Investor Relations

Dan Goldsmith -- Chief Executive Officer

Steve Kaminsky -- Chief Financial Officer

Ryan MacDonald -- Needham and Company -- Analyst

Brian Peterson -- Raymond James -- Analyst

Bhavin Shah -- Credit Suisse -- Analyst

Stephen Sheldon -- William Blair -- Analyst

Brian Schwartz -- Oppenheimer -- Analyst

Corey Greendale -- First Analysis -- Analyst

Eric Lemus -- SunTrust Robinson Humphrey -- Analyst

Hannah Rudoff -- D.A. Davidson -- Analyst

Chris Howe -- Barrington Research -- Analyst

Brett Knoblauch -- Berenberg Capital -- Analyst

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