Image source: Instructure.

What happened

Instructure Inc. (NYSE:INST), a software-as-a-service company that creates online learning tools, reported third-quarter earnings on Oct. 31. after the market closed. Today the market punished the stock, which as of 11:30 a.m. EDT was down a full 25%.  

So what

During the quarter, Instructure grew top-line revenue 44% year over year, and increased gross margin from 67.5% to 72.3%. While those numbers look really good for the relatively young company, which has only been public for less than a year, what seems to have worried Wall Street is that the company's net loss increased 20%, from $10.2 million in Q3 2015 to $12.3 million in the same period this year.  

The reason for the growing revenue but widening loss is that Instructure's costs, particularly in marketing and research and development, have soared. Instructure management noted in the earnings release that thanks to these kinds of expenses, the company was able to make some big gains during the quarter, including being selected as the provider of the learning management system (LMS) for Brigham Young University and the University of Nebraska, as well as various important K-12 school systems in the United States. The company also boasted a few new international clients. 

Now what

Another reason that investors may have been spooked is that Instructure updated its guidance for full-year 2016 results, including a slight downward revision in total sales, from $110.8 million-$112 million to $109.7 million-$110.3 million, even though it revised its net loss guidance for the better, from $49 million-$47.5 million to $45.6 million-$45.1 million. 

Instructure is clearly more focused on long-term demand creation and new-product development than it is concerned about meeting short-term earnings expectations. The company's high-growth sales and new contracts internationally look encouraging. "We continue to enjoy strong adoption of Canvas [flagship LMS] across the globe and are encouraged by the positive response to Bridge [up-and-coming LMS]," said CEO Josh Coates in the earnings release. "We remain focused on product innovation to bring even more value to our customer base, attract new customers and grow our total market opportunity." 

Seth McNew has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.