Please ensure Javascript is enabled for purposes of website accessibility

Instructure Inc. Delivers Solid Results, but Profitability Is Still a Way Off

By Brian Stoffel - Updated Feb 14, 2018 at 8:54AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's why shareholders will continue playing a waiting game for profitability.

While many investors have shied away from investing in the educational industry -- and for good reason -- Instructure (INST) has been a breath of fresh air. Instead of offering up diplomas, the company provides a software-as-a-service (SaaS) platform to make the sharing of educational materials, feedback, and student data easier and more efficient.

After a stellar start to the school year, the company reported fourth-quarter earnings this week, and the report showed continued strong growth in sales. For those hoping for a quicker path to profits, however, there might be some hand-wringing. Continued investment in the company's platform and winning over customers will remain the focus in the year ahead.

Let's untangle the moving parts.

Three students looking at the same laptop screen.

Image source: Getty Images.

Instructure earnings: The raw numbers

Before we dive into the weeds, let's look at the company's performance on the headline numbers.

Metric Q4 2017 Q4 2016 Change
Revenue $43.8 million $31.5 million 39%
Non-GAAP EPS ($0.27) ($0.35) Loss Narrowed by 23%
Free cash flow ($36.9 million) ($28.6 million) Loss Expanded by 29%

Data source: Instructure.

Diving into the company's income statement, we find a few very positive trends. Management stated that revenue came in ahead of expectations for three big reasons: Revenue retention came in ahead of 100%, there were more early starts to contracts than management expected, and non-recurring revenue was higher than expected -- which is probably the result of earlier-than-expected starts. 

There have also been noticeable improvements in leverage. While revenue grew 39%, sales and marketing and general and administrative costs grew just 18% and 16%, respectively. Research and development costs, on the other hand, continued to grow briskly -- up 33%. 

That, however, is a crucial area for investment as it helps ensure that the company can keep up with competition over time. On the other hand, investors should take comfort in knowing that expenses didn't increase as rapidly here as revenue did.

On the other hand, gross margins contracted slightly -- by 141 basis points -- as stock-based compensation and the company's continued investment in the subscription platforms took a toll.

What else happened during the quarter?

There were a number of announcements when it came to Instructure's three big products: Canvas, for schools; Bridge, for businesses; and Arc, a video platform.

  • The University of Wisconsin state system, with 26 campuses and 120,000 students, signed up for Canvas.
  • Central Bucks School System -- the third-largest K-12 system in Pennsylvania with about 18,400 students -- signed up for Canvas.
  • The University of Sussex and its 18,000 students signed up for Canvas.
  • Two huge businesses signed on to use Bridge to train employees: Scripps Networks Interactive and Vivint Smart Home. 
  • The company signed a contract with Paychex, whereby Paychex will be offering a Bridge-type product to train customers on its system, with Instructure powering the solution.

The company also announced the relatively major acquisition of Practice, which is a "video microlearning solution." Basically, the acquisition will fit into the Bridge suite of products, with Learn being the tool to train employees, Perform being an evaluative tool, and Practice functioning as a relearning tool.

Looking ahead

Management was not shy about the company's prospects. On the Canvas (K-12 and higher education) side, CEO Josh Coates said that Instructure's market share is in the mid-20% range, with competitor Blackboard in the mid-30% range. He said that he sees them crossing paths -- with Instructure taking the lead -- within one to two years.

That being said, the two major growth drivers will come from international K-12 and higher education clients, as well as institutional customers for the Bridge platform.

Management sees revenue growing to a midpoint of $206.5 million in the year ahead, which would represent 30% growth. For the first quarter, revenue is expected to come in at a midpoint of $47.1 million, representing 39% growth.

The 2018 non-GAAP loss per share is expected, at the midpoint of the estimate, to contract by 16% to $1.00. For the first quarter, the midpoint of guidance for earnings is for a loss of $0.23 per share, a 30% contraction from the first quarter of 2017.

In all, the important metrics are moving toward an eventual shift to profitability. And as long as Instructure continues to keep revenue retention above 100% -- signifying a wide moat via high switching costs -- investors should have patience with management laying the groundwork for long-term dominance within the niche.

Editor's note: This article has been corrected to note that gross margin contracted in the quarter. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Instructure Stock Quote

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.