Investing in Software-as-a-Service (SaaS) companies requires patience: Companies need to invest millions of dollars to build out a platform and win over customers. But once those customers are acquired, the costs of running such a business are largely fixed. This leads to impressive recurring cash flows.

Instructure (NYSE:INST) provides one platform, Canvas, that helps teachers and administrators communicate with students, and another, Bridge, that helps businesses train their employees. It also offers a video learning tool called Gauge to measure student growth, and a video platform, Arc.

 Multiethnic group of four men using smartphone, laptop computer, digital tablet together with copy space on blue wall

Image source: Getty Images

The company released second-quarter 2018 earnings on July 30 that came in just ahead of management forecasts from last quarter, and it continued to forecast far-off profitability and solid revenue growth.

Instructure earnings: The raw numbers

Before diving into the weeds, here's how the company performed on headline numbers:

Metric Q2 2018 Q2 2017 Growth
Revenue $50 million $39 million 30%
Non-GAAP EPS ($0.24) ($0.23) Loss expanded 4%
Free Cash Flow ($25 million) ($16 million) Loss expanded 56%

Data source: Instructure Inc. 

Because Instructure's SaaS business model is based on recurring revenue, it's not surprising to see management's forecasts come in very close to actual results. Even if new customers sign on, after all, the revenue from those contracts is recognized over the course of a year.

What else happened during the quarter?

For that reason, it's much more instructive to pay attention to the company's spending habits and its new customer acquisitions. On the spending front, operating expenses increased 29% to $44.4 million after backing out stock-based compensation; expenses were roughly in line with revenue growth. Deferred revenue, which represents cash Instructure has already collected but has yet to recognize as earnings, grew 27% to $133 million.

For new customer acquisition, Instructure highlighted the following "wins" in the education field:

  • Cornell University and its 22,000 students signed on to use Canvas.
  • Arizona State and its 90,000 students also signed on to use Canvas.
  • Collier County Public Schools in Florida -- which includes the city of Naples -- purchased Canvas and Arc for its 48,000 students.

Internationally, the company closed Canvas contracts with the University of Toronto (80,000 students) and two Norwegian school districts with 29,000 combined students.

Finally, in terms of corporate customers signing on to use Bridge, Instructure clinched deals with Bacardi (5,000 employees) and Holiday Retirement, a senior living company. The latter has 10,000 employees and will be using both Arc and all three of Bridge's services: Learn, Perform, and Practice.

Speaking on the July 30 earnings conference call, CEO Josh Coates said the Practice tool has attracted many corporate customers and introduced them into the Bridge eco-system. According to Coates, Practice has been helping Instructure get its foot in the door of more and more corporate clients.

Looking ahead

For the third quarter, management expects revenue to come in (at the midpoint of its projected range) at $53.9 million, which would represent growth of 26% from the prior-year quarter. The company also expects non-GAAP earnings per share to register at a loss of $0.24, a slight improvement from a loss of $0.27 per share during the same 2017 quarter.

While the down-tick in growth may be a little concerning, Coates didn't show any signs of pessimism on the call. Instead, he reiterated that the sales cycles for new products like Gauge can be especially long, and that the company is investing aggressively in its Bridge platform because of industry demand. While new deals might not surface in the next quarter, management remains very optimistic that these investments will bear fruit over the next two years. 

Brian Stoffel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.