[Financial Highlights and Business Overview](index=1&type=section&id=Financial%20Highlights%20and%20Business%20Overview) [Q4 & Full Year 2023 Performance Summary](index=1&type=section&id=Q4%20%26%20Full%20Year%202023%20Performance%20Summary) The company achieved record full-year 2023 revenue of $530.2 million and Adjusted EBITDA of $214.2 million - Expanded scale and reach by acquiring Parchment, the world's leading credentialing platform[1](index=1&type=chunk) Full Year 2023 Financial Highlights (vs. FY 2022) | Metric | FY 2023 | YoY Change | | :--- | :--- | :--- | | Revenues | $530.2M | +11.6% | | Net Loss | ($34.1M) | Slight improvement | | Adjusted EBITDA* | $214.2M | +19.3% | | Adjusted EBITDA Margin* | 40.4% | +270 bps | | Cash Flow from Operations | $164.0M | +16.9% | | Adjusted Unlevered Free Cash Flow* | $225.5M | +29.9% | Fourth Quarter 2023 Financial Highlights (vs. Q4 2022) | Metric | Q4 2023 | YoY Change | | :--- | :--- | :--- | | Revenues | $135.4M | +8.5% | | Net Loss | ($5.8M) | Comparable | | Adjusted EBITDA* | $56.5M | +16.1% | | Adjusted EBITDA Margin* | 41.7% | +270 bps | | Cash Flow from Operations | $36.7M | > +100% | | Adjusted Unlevered Free Cash Flow* | $51.3M | +74.8% | [Management Commentary](index=2&type=section&id=Management%20Commentary) Management highlights strong Q4 performance exceeding guidance, driven by strategic execution and the Parchment acquisition - Q4 results **exceeded the high end of guidance** for Revenue, Adjusted EBITDA, and Adjusted Unlevered Free Cash Flow[5](index=5&type=chunk) - The acquisition of Parchment is expected to **meaningfully enhance scale**, broaden the product portfolio, and provide access to new buyers[5](index=5&type=chunk) [Balance Sheet and Cash Flow Summary](index=2&type=section&id=Balance%20Sheet%20and%20Cash%20Flow%20Summary) The company maintained a strong balance sheet with $344.2 million in cash and a net leverage ratio of 0.7x Balance Sheet and Leverage (as of Dec 31, 2023) | Metric | Amount | | :--- | :--- | | Cash, Cash Equivalents & Restricted Cash | $344.2M | | Total Debt | $491.3M | | Net Leverage Ratio (Net Debt to Adj. EBITDA) | 0.7x | Full Year 2023 Cash Flow Performance (vs. FY 2022) | Metric | FY 2023 | YoY Change | | :--- | :--- | :--- | | Cash Flow from Operations | $164.0M | +16.9% | | Adjusted Unlevered Free Cash Flow | $225.5M | +29.9% | [Financial Guidance](index=1&type=section&id=Financial%20Guidance) [Q1 2024 Guidance](index=2&type=section&id=Q1%202024%20Guidance) For Q1 2024, the company anticipates revenue between $153.8 million and $154.8 million First Quarter 2024 Guidance | Metric (in millions) | Guidance Range | | :--- | :--- | | Revenue | $153.8 - $154.8 | | Non-GAAP Operating Income* | $55.9 - $56.9 | | Adjusted EBITDA* | $57.3 - $58.3 | | Non-GAAP Net Income* | $20.0 - $21.0 | [Full Year 2024 Guidance](index=1&type=section&id=Full%20Year%202024%20Guidance) The company expects full-year 2024 revenues between $655.0 million and $665.0 million Full Year 2024 Guidance | Metric (in millions) | Guidance Range | | :--- | :--- | | Revenue | $655.0 - $665.0 | | Non-GAAP Operating Income* | $260.5 - $265.5 | | Adjusted EBITDA* | $266.5 - $271.5 | | Non-GAAP Net Income* | $105.5 - $110.5 | | Adjusted Unlevered Free Cash Flow* | $259.5 - $264.5 | - The company is unable to provide a reconciliation for forward-looking non-GAAP measures to GAAP measures without unreasonable effort due to the difficulty in forecasting certain items[2](index=2&type=chunk)[10](index=10&type=chunk) [Consolidated Financial Statements (GAAP)](index=6&type=section&id=Consolidated%20Financial%20Statements%20(GAAP)) [Consolidated Balance Sheets](index=6&type=section&id=Consolidated%20Balance%20Sheets) Total assets were $2.16 billion as of December 31, 2023, with a significant increase in cash and cash equivalents Key Balance Sheet Items (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $341,047 | $185,954 | | Goodwill | $1,265,316 | $1,266,402 | | Intangible assets, net | $399,712 | $542,679 | | **Total Assets** | **$2,157,978** | **$2,153,489** | | **Liabilities & Equity** | | | | Deferred revenue (current) | $291,784 | $275,564 | | Long-term debt, net | $486,400 | $490,484 | | **Total Liabilities** | **$872,486** | **$877,362** | | **Total Stockholders' Equity** | **$1,285,492** | **$1,276,127** | [Consolidated Statements of Operations](index=7&type=section&id=Consolidated%20Statements%20of%20Operations) Full-year 2023 revenue grew 11.6% to $530.2 million, while the operating loss improved to $3.2 million Statement of Operations Summary - Full Year (in thousands) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Subscription and support revenue | $485,516 | $430,661 | | Total revenue | $530,210 | $475,194 | | Gross profit | $343,895 | $302,900 | | Total operating expenses | $347,113 | $319,380 | | Loss from operations | ($3,218) | ($16,480) | | Net loss | ($34,078) | ($34,242) | | Net loss per share, basic and diluted | ($0.24) | ($0.24) | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities for 2023 increased to $164.0 million, up from $140.3 million in 2022 Statement of Cash Flows Summary - Full Year (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $164,016 | $140,271 | | Net cash used in investing activities | ($5,890) | ($115,291) | | Net cash used in financing activities | ($5,697) | ($1,714) | | Net increase in cash | $153,942 | $21,113 | [Non-GAAP Financial Measures and Reconciliations](index=3&type=section&id=Non-GAAP%20Financial%20Measures%20and%20Reconciliations) [Definitions of Non-GAAP Measures](index=3&type=section&id=Definitions%20of%20Non-GAAP%20Measures) The company defines non-GAAP measures used to evaluate operating performance and enhance comparability - The company uses non-GAAP measures to provide **consistency and comparability** with past financial performance and other companies[15](index=15&type=chunk) - Key non-GAAP measures defined include: - Non-GAAP Operating Income - Non-GAAP Net Income - Adjusted EBITDA & Adjusted EBITDA Margin - Adjusted Unlevered Free Cash Flow - Non-GAAP Gross Profit & Non-GAAP Gross Profit Margin - Net Debt[18](index=18&type=chunk)[19](index=19&type=chunk)[20](index=20&type=chunk) [Reconciliation of GAAP to Non-GAAP Measures](index=9&type=section&id=Reconciliation%20of%20GAAP%20to%20Non-GAAP%20Measures) This section provides detailed reconciliations of GAAP results to non-GAAP measures for key financial metrics [Reconciliation of Non-GAAP Operating Income](index=9&type=section&id=Reconciliation%20of%20Non-GAAP%20Operating%20Income) Reconciliation of GAAP Loss from Operations to Non-GAAP Operating Income (in thousands) | Description | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | **Income (loss) from operations (GAAP)** | **$224** | **($3,780)** | **($3,218)** | **($16,480)** | | Stock-based compensation | $10,575 | $10,856 | $44,196 | $39,779 | | Amortization of acquisition-related intangibles | $35,731 | $34,520 | $142,965 | $136,710 | | Transaction costs | $5,857 | $4,206 | $15,512 | $9,123 | | Other non-recurring costs | $2,956 | $630 | $10,162 | $3,365 | | **Non-GAAP operating income** | **$55,377** | **$46,511** | **$209,764** | **$173,882** | [Reconciliation of Adjusted EBITDA](index=9&type=section&id=Reconciliation%20of%20Adjusted%20EBITDA) Reconciliation of GAAP Net Loss to Adjusted EBITDA (in thousands) | Description | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | **Net loss (GAAP)** | **($5,767)** | **($5,723)** | **($34,078)** | **($34,242)** | | Interest on outstanding debt | $11,382 | $8,257 | $42,022 | $24,591 | | Income tax (benefit) expense | $459 | ($1,013) | ($4,258) | ($8,132) | | Depreciation & Amortization | $1,305 | $1,348 | $4,788 | $4,498 | | Stock-based compensation | $10,575 | $10,856 | $44,196 | $39,779 | | Amortization of acquisition-related intangibles | $35,731 | $34,520 | $142,965 | $136,710 | | Other adjustments | $5,789 | ($1,331) | $22,588 | $16,385 | | **Adjusted EBITDA** | **$56,473** | **$48,624** | **$214,213** | **$179,591** | [Reconciliation of Free Cash Flow](index=11&type=section&id=Reconciliation%20of%20Free%20Cash%20Flow) Reconciliation to Adjusted Unlevered Free Cash Flow (in thousands) | Description | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | **Net cash provided by operating activities** | **$36,715** | **$17,003** | **$164,016** | **$140,271** | | Less: Purchases of property and equipment | ($1,232) | ($1,342) | ($5,940) | ($6,321) | | **Free cash flow** | **$35,491** | **$15,663** | **$158,126** | **$133,993** | | Adjustments (Interest, stock comp, transaction costs, etc.) | $15,802 | $13,682 | $67,363 | $39,552 | | **Adjusted unlevered free cash flow** | **$51,293** | **$29,345** | **$225,489** | **$173,545** | [Reconciliation of Non-GAAP Net Income](index=11&type=section&id=Reconciliation%20of%20Non-GAAP%20Net%20Income) Reconciliation of GAAP Net Loss to Non-GAAP Net Income (in thousands) | Description | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | **Net loss (GAAP)** | **($5,767)** | **($5,723)** | **($34,078)** | **($34,242)** | | Stock-based compensation | $10,575 | $10,856 | $44,196 | $39,779 | | Amortization of acquisition-related intangibles | $35,731 | $34,520 | $142,965 | $136,710 | | Other adjustments & tax effects | ($7,307) | ($11,273) | ($28,247) | ($31,602) | | **Non-GAAP net income** | **$33,232** | **$28,380** | **$124,836** | **$110,645** | | **Non-GAAP net income per share, diluted** | **$0.23** | **$0.20** | **$0.86** | **$0.77** | [Other Information](index=3&type=section&id=Other%20Information) [Forward-Looking Statements](index=5&type=section&id=Forward-Looking%20Statements) The report contains forward-looking statements regarding financial guidance and strategy, subject to various risks - The press release includes forward-looking statements concerning **financial guidance for Q1 and FY 2024**, company growth, and business strategy[25](index=25&type=chunk) - Important risk factors cited include: - Continued economic uncertainty (inflation, high interest rates, recession concerns) - Reduced customer spending - Geopolitical instability - Failure to continue recent growth rates - Changes in government funding for education institutions[26](index=26&type=chunk) [Conference Call Information](index=3&type=section&id=Conference%20Call%20Information) A conference call was held to discuss Q4 and full-year 2023 financial results on February 20, 2024 - A conference call was held on **February 20, 2024**, at 5:00 PM Eastern Time to discuss the financial results[11](index=11&type=chunk) - A live audio webcast and a replay are available on Instructure's investor relations website[12](index=12&type=chunk)[13](index=13&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 001-40647 Instructure Holdings, Inc. (Exact name of registrant as specified in its charter) (State or other juris ...

PART I. FINANCIAL INFORMATION (Unaudited) [Item 1. Condensed Consolidated Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) This section presents Instructure Holdings, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, with detailed notes [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets increased slightly to **$2.181 billion** at June 30, 2023, driven by higher accounts receivable, while cash decreased and total liabilities rose due to deferred revenue | Metric | Dec 31, 2022 (in millions) | Jun 30, 2023 (in millions) | Change (in millions) | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Cash and cash equivalents | $185.954 | $126.003 | $(59.951) | -32.2% | | Accounts receivable—net | $71.428 | $208.366 | $136.938 | 191.7% | | Total current assets | $285.036 | $384.242 | $99.206 | 34.8% | | Total assets | $2.153 billion | $2.181 billion | $27.899 million | 1.3% | | Deferred revenue (current) | $275.564 | $317.439 | $41.875 million | 15.2% | | Total liabilities | $877.362 | $906.271 | $28.909 million | 3.3% | | Total stockholders' equity | $1.276 billion | $1.275 billion | $(1.010) million | -0.1% | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) Total revenue increased by **14%** for both Q2 and YTD 2023, but the company reported a net loss of **$11.0 million** for Q2 and **$22.8 million** for YTD 2023 | Metric (in millions) | Q2 2023 | Q2 2022 | YoY Change (Q2) | % Change (Q2) | YTD 2023 | YTD 2022 | YoY Change (YTD) | % Change (YTD) | | :-------------------- | :------ | :------ | :-------------- | :------------ | :------- | :------- | :--------------- | :------------- | | Total Revenue | $131.070 | $114.577 | $16.493 | 14.4% | $259.913 | $228.039 | $31.874 | 14.0% | | Gross Profit | $85.781 | $72.179 | $13.602 | 18.8% | $168.792 | $144.630 | $24.162 | 16.7% | | Loss from Operations | $(2.078) | $(6.628) | $4.550 | -68.6% | $(7.992) | $(10.315) | $2.323 | -22.5% | | Net Loss | $(10.973) | $(12.919) | $1.946 | -15.1% | $(22.830) | $(18.464) | $(4.366) | 23.6% | | Net Loss Per Share | $(0.08) | $(0.09) | $0.01 | -11.1% | $(0.16) | $(0.13) | $(0.03) | 23.1% | [Condensed Consolidated Statements of Stockholders' Equity](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Stockholders' equity slightly decreased to **$1.275 billion** at June 30, 2023, primarily due to a **$22.830 million** net loss, partially offset by increased additional paid-in capital | Metric (in millions) | Dec 31, 2022 | Jun 30, 2023 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total Stockholders' Equity | $1.276 billion | $1.275 billion | $(1.010) million | | Accumulated Deficit | $(300.902) | $(323.732) | $(22.830) million | | Additional Paid-In Capital | $1.575 billion | $1.597 billion | $21.809 million | - **Net loss** for the six months ended June 30, 2023, was **$22.830 million**, contributing to the accumulated deficit[15](index=15&type=chunk) - **Stock-based compensation** for the six months ended June 30, 2023, was **$21.511 million**, increasing additional paid-in capital[15](index=15&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities improved slightly to **$55.8 million** for YTD June 30, 2023, while investing activities used significantly less cash due to no acquisitions, and financing activities shifted to a net cash outflow | Cash Flow Activity (in millions) | Six months ended Jun 30, 2023 | Six months ended Jun 30, 2022 | Change | | :-------------------------------- | :---------------------------- | :---------------------------- | :----- | | Net cash used in operating activities | $(55.760) | $(57.540) | $1.780 | | Net cash used in investing activities | $(2.865) | $(22.863) | $19.998 | | Net cash provided by (used in) financing activities | $(2.277) | $1.138 | $(3.415) | | Net decrease in cash, cash equivalents, and restricted cash | $(60.445) | $(81.556) | $21.111 | | Cash, cash equivalents, and restricted cash, end of period | $129.821 | $87.596 | $42.225 | - The decrease in cash used in investing activities was primarily due to **no business acquisitions in 2023**, compared to **$19.5 million** for acquisitions in 2022[159](index=159&type=chunk) - Financing activities shifted from providing cash to using cash, driven by **$3.0 million** in shares repurchased for tax withholdings (vs. $1.7 million in 2022) and **$2.5 million** in debt repayments (vs. $1.3 million in 2022)[161](index=161&type=chunk)[162](index=162&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed disclosures and explanations for the condensed consolidated financial statements, covering business description, accounting policies, net loss per share, assets, liabilities, revenue, and other financial commitments [1. Description of Business and Basis of Presentation](index=9&type=section&id=1.%20Description%20of%20Business%20and%20Basis%20of%20Presentation) Instructure Holdings, Inc. is an education technology company offering a cloud-based learning platform via a Software-as-a-Service (SaaS) model, operating in a single segment - Instructure is an education technology company providing a next-generation learning management system (LMS), assessments, analytics, and content through a **SaaS business model**[24](index=24&type=chunk) - The company operates in a **single segment**: cloud-based learning management, assessment, and performance systems[28](index=28&type=chunk) [2. Summary of Significant Accounting Policies](index=10&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) No significant changes occurred in the company's accounting policies during the six months ended June 30, 2023, and recent ASU adoptions had no material impact - No significant changes to accounting policies during the unaudited six months ended June 30, 2023[29](index=29&type=chunk) - Adoption of ASU No. 2021-05 (Leases), ASU No. 2021-01 (Reference Rate Reform), and ASU No. 2021-08 (Business Combinations) in January 2022 did not materially impact the condensed consolidated financial statements[30](index=30&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk) [3. Net Loss Per Share](index=10&type=section&id=3.%20Net%20Loss%20Per%20Share) Instructure reported basic and diluted net losses per common share of **$(0.08)** for Q2 2023 and **$(0.16)** for YTD 2023, with potentially dilutive shares excluded due to anti-dilutive effects | Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :------------------------------------------ | :------ | :------ | :------- | :------- | | Net loss per common share, basic and diluted | $(0.08) | $(0.09) | $(0.16) | $(0.13) | | Weighted-average common shares outstanding—basic | 143,647 | 141,534 | 143,381 | 141,244 | - Potentially dilutive share equivalents (RSUs and ESPP shares) were excluded from diluted net loss per share calculations because their effect would be **anti-dilutive** due to net losses incurred[35](index=35&type=chunk) [4. Property and Equipment](index=11&type=section&id=4.%20Property%20and%20Equipment) Total property and equipment, net, increased to **$12.836 million** at June 30, 2023, driven by higher capitalized software development costs, leading to increased amortization expense | Metric (in millions) | Jun 30, 2023 | Dec 31, 2022 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total property and equipment, net | $12.836 | $12.380 | $0.456 | | Capitalized software development costs | $10.804 | $8.585 | $2.219 | - Amortization expense for capitalized software development costs increased to **$0.6 million** (Q2 2023) from $0.3 million (Q2 2022) and to **$1.1 million** (YTD 2023) from $0.6 million (YTD 2022)[36](index=36&type=chunk) [5. Acquisitions](index=12&type=section&id=5.%20Acquisitions) In 2022, Instructure acquired Concentric Sky for **$21.3 million** and LearnPlatform, Inc. for **$94.0 million** to enhance its learning platform, with neither acquisition materially affecting revenue or earnings for the reporting periods - Acquired Concentric Sky (Canvas Credentials) on April 13, 2022, for **$21.3 million** to build an integrated teaching and learning platform[38](index=38&type=chunk)[39](index=39&type=chunk) - Acquired LearnPlatform, Inc. on December 15, 2022, for **$94.0 million** to accelerate the impact of the Instructure learning platform by adding evidence-based insights[40](index=40&type=chunk)[41](index=41&type=chunk) - Neither acquisition had a **material effect on revenue or earnings** for the presented periods[38](index=38&type=chunk)[40](index=40&type=chunk) [6. Goodwill and Intangible Assets](index=14&type=section&id=6.%20Goodwill%20and%20Intangible%20Assets) Goodwill remained stable at **$1.266 billion**, while net intangible assets decreased to **$471.186 million** at June 30, 2023, primarily due to increased amortization expense | Metric (in millions) | Jun 30, 2023 | Dec 31, 2022 | Change | | :-------------------- | :----------- | :----------- | :----- | | Goodwill | $1.266 billion | $1.266 billion | $0 | | Intangible assets, net | $471.186 | $542.679 | $(71.493) | - Amortization expense for intangible assets was **$35.7 million** for Q2 2023 (up from $34.2 million in Q2 2022) and **$71.5 million** for YTD 2023 (up from $67.9 million in YTD 2022)[44](index=44&type=chunk) - Estimated future amortization expense for the remainder of 2023 is **$71.5 million**, and **$142.4 million** for 2024[45](index=45&type=chunk) [7. Credit Facility](index=15&type=section&id=7.%20Credit%20Facility) Instructure's credit facilities include a **$500.0 million** Senior Term Loan and a **$125.0 million** Senior Revolver, with **$493.8 million** outstanding on the Term Loan at June 30, 2023, and the agreement amended to replace LIBOR with SOFR - Refinanced credit facilities in October 2021, consisting of a **$500.0 million Senior Term Loan** and a **$125.0 million Senior Revolver**[47](index=47&type=chunk) - As of June 30, 2023, **$493.8 million** was outstanding on the Senior Term Loan (bearing **7.85% interest**), and no borrowings were outstanding on the Senior Revolver[52](index=52&type=chunk)[154](index=154&type=chunk) - Amended the credit agreement on June 21, 2023, to transition from LIBOR to SOFR for U.S. Dollar denominated borrowings, effective July 5, 2023[50](index=50&type=chunk)[153](index=153&type=chunk) [8. Revenue](index=16&type=section&id=8.%20Revenue) Total revenue increased by **14%** for both Q2 and YTD 2023, reaching **$131.1 million** and **$259.9 million** respectively, primarily driven by subscription and support from new and existing customers, with **20%** from international markets | Revenue (in millions) | Q2 2023 | Q2 2022 | YoY Change (Q2) | % Change (Q2) | YTD 2023 | YTD 2022 | YoY Change (YTD) | % Change (YTD) | | :--------------------- | :------ | :------ | :-------------- | :------------ | :------- | :------- | :--------------- | :------------- | | Subscription and support | $118.569 | $102.905 | $15.664 | 15.2% | $237.049 | $206.397 | $30.652 | 14.8% | | Professional services and other | $12.501 | $11.672 | $0.829 | 7.1% | $22.864 | $21.642 | $1.222 | 5.6% | | Total Revenue | $131.070 | $114.577 | $16.493 | 14.4% | $259.913 | $228.039 | $31.874 | 14.0% | - International markets contributed **20% of total revenue** for both the three and six months ended June 30, 2023[55](index=55&type=chunk) - Approximately **$853.6 million** of revenue is expected from remaining performance obligations, with **73% recognized over the next 24 months**[57](index=57&type=chunk) [9. Deferred Commissions](index=17&type=section&id=9.%20Deferred%20Commissions) Deferred commissions decreased to **$30.3 million** at June 30, 2023, from $32.2 million at December 31, 2022, with amortization expense increasing to **$5.3 million** for Q2 2023 and **$10.1 million** for YTD 2023 | Metric (in millions) | Jun 30, 2023 | Dec 31, 2022 | Change | | :-------------------- | :----------- | :----------- | :----- | | Deferred commissions | $30.349 | $32.171 | $(1.822) | - Amortization expense for deferred commissions was **$5.3 million** for Q2 2023 (up from $3.8 million in Q2 2022) and **$10.1 million** for YTD 2023 (up from $7.2 million in YTD 2022)[60](index=60&type=chunk) [10. Stock-Based Compensation](index=17&type=section&id=10.%20Stock-Based%20Compensation) Total stock-based compensation expense increased to **$11.9 million** for Q2 2023 and **$21.9 million** for YTD 2023, with **2,560 thousand RSUs** granted and **$106.2 million** in unrecognized compensation cost | Metric (in millions) | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :-------------------- | :------ | :------ | :------- | :------- | | Total stock-based compensation | $11.856 | $9.387 | $21.866 | $18.863 | - **2,560 thousand RSUs** were granted during the six months ended June 30, 2023, with a weighted average grant date fair value of **$25.11 per unit**[68](index=68&type=chunk) - Unrecognized compensation cost for unvested RSUs was **$106.2 million** as of June 30, 2023, to be recognized over a weighted average period of **3.2 years**[69](index=69&type=chunk) [11. Income Taxes](index=19&type=section&id=11.%20Income%20Taxes) The income tax benefit decreased by **$1.0 million** for Q2 2023 and **$1.3 million** for YTD 2023, primarily due to foreign tax rate changes given the company's net operating loss carryforward position | Metric (in millions) | Q2 2023 | Q2 2022 | YoY Change (Q2) | % Change (Q2) | YTD 2023 | YTD 2022 | YoY Change (YTD) | % Change (YTD) | | :-------------------- | :------ | :------ | :-------------- | :------------ | :------- | :------- | :--------------- | :------------- | | Income tax benefit | $0.672 | $1.710 | $(1.038) | -60.7% | $2.797 | $4.063 | $(1.266) | -31.1% | - The decrease in income tax benefit was mainly due to **foreign tax rate changes**, given the company's net operating loss (NOL) carryforward position[141](index=141&type=chunk) [12. Fair Value of Financial Instruments](index=19&type=section&id=12.%20Fair%20Value%20of%20Financial%20Instruments) The company's financial instruments measured at fair value include **$3.308 million** in money market funds at June 30, 2023, and the Senior Term Loan's fair value was estimated at **$488.4 million** using Level 2 inputs | Asset (in millions) | Jun 30, 2023 (Level 1) | Dec 31, 2022 (Level 1) | | :------------------- | :--------------------- | :--------------------- | | Money market funds | $3.308 | $3.383 | - The fair value of the Senior Term Loan was **$488.4 million** as of June 30, 2023, determined using Level 2 inputs[78](index=78&type=chunk) [13. Leases](index=20&type=section&id=13.%20Leases) Instructure's total lease costs were **$1.880 million** for Q2 2023 and **$4.089 million** for YTD 2023, with a weighted average remaining lease term of **3.3 years** and a discount rate of **8.21%** | Lease Metric (in millions) | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :-------------------------- | :------ | :------ | :------- | :------- | | Total lease costs | $1.880 | $1.892 | $4.089 | $3.970 | | Cash paid for operating lease liabilities | $2.200 | $2.000 | $4.400 | $4.200 | - As of June 30, 2023, the weighted average remaining lease term was **3.3 years**, and the weighted average discount rate was **8.21%**[83](index=83&type=chunk) [14. Commitments and Contingencies](index=21&type=section&id=14.%20Commitments%20and%20Contingencies) The company has non-cancelable purchase obligations for cloud infrastructure totaling **$98.6 million** through 2025, with **$3.8 million** in outstanding letters of credit, and management believes current legal proceedings will not materially impact financial position | Non-cancelable Purchase Obligations (in millions) | Remainder of 2023 | 2024 | 2025 | | :----------------------------------------------- | :---------------- | :------ | :------ | | Cloud infrastructure and business analytic services | $2.200 | $48.400 | $48.000 | - Outstanding letters of credit were **$3.8 million** as of June 30, 2023[85](index=85&type=chunk) - Management believes current legal proceedings will not have a **material adverse effect** on the company's financial position, results of operations, or liquidity[86](index=86&type=chunk) [15. Related-Party Transactions](index=21&type=section&id=15.%20Related-Party%20Transactions) Instructure incurred **$0.2 million** in Q2 2023 and **$0.4 million** in YTD 2023 for advisory services from Thoma Bravo, LLC, and the Chief Strategy Officer's spouse received **$0.2 million** in base salary for YTD 2023 | Related-Party Costs (in millions) | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :--------------------------------- | :------ | :------ | :------- | :------- | | Thoma Bravo advisory services | $0.200 | $0.100 | $0.400 | $0.300 | - Spouse of Chief Strategy Officer received **$0.2 million** in base salary for the six months ended June 30, 2023[88](index=88&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=23&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Instructure's financial condition and results for Q2 and YTD June 30, 2023, covering business overview, performance drivers, detailed financial analysis, liquidity, and non-GAAP measures [Overview](index=23&type=section&id=Overview) Instructure is a leading education technology company providing a cloud-native learning platform, including LMS, assessments, analytics, and content, to over 7,000 global customers in Higher Education and K-12 - Instructure is the **LMS market share leader** in Higher Education and paid K-12, serving over **7,000 global customers** in more than 100 countries[90](index=90&type=chunk) - The company's platform is **cloud-native**, built on open technologies, and scalable, integrating various tools for an accessible, engaging, and modern learning environment[90](index=90&type=chunk) - Recent acquisitions (Eesysoft, Kimono LLC, Concentric Sky, LearnPlatform) aim to expand platform functionality, including impact evaluation, data syncing, digital credentialing, and usage management[90](index=90&type=chunk) [Recent Developments](index=24&type=section&id=Recent%20Developments) Macroeconomic conditions, including high inflation and rising interest rates, pose potential risks to Instructure's business, with the Senior Term Loan interest rate increasing to **7.85%**, though all Silicon Valley Bank deposits remain accessible - Macroeconomic conditions (inflation, slower growth, high interest rates, currency fluctuations) pose potential risks to business and customer spending[94](index=94&type=chunk) - Interest rate on the Senior Term Loan increased from **6.12%** (Dec 31, 2022) to **7.85%** (Jun 30, 2023), impacting debt costs[96](index=96&type=chunk) - All deposits with Silicon Valley Bank are **fully accessible**, despite broader banking system uncertainties[95](index=95&type=chunk) [Key Factors Affecting Our Performance](index=24&type=section&id=Key%20Factors%20Affecting%20Our%20Performance) Instructure's performance is driven by increasing cloud-based software adoption in Higher Education and K-12, expanding its customer base in North America and internationally, and cross-selling additional solutions to existing clients - Increase market adoption of cloud-based applications and infrastructure by Higher Education and K-12 institutions, driven by digital transformation and remote education needs[97](index=97&type=chunk) - Grow customer base by replacing legacy systems in North America (Higher Education) and monetizing broad capabilities for K-12 customers, supported by targeted sales and marketing[98](index=98&type=chunk) - Expand revenue by cross-selling additional solutions (assessments, analytics, student success, etc.) to existing Canvas LMS customers[99](index=99&type=chunk) [Key Components of Results of Operations](index=25&type=section&id=Key%20Components%20of%20Results%20of%20Operations) Instructure's revenue primarily derives from subscription and support (SaaS fees) and professional services, with associated costs including cloud hosting, personnel, and amortization, while operating expenses cover sales & marketing, R&D, and G&A - Revenue sources: (1) subscription and support (SaaS fees, additional support) and (2) professional services (training, implementation, consulting)[100](index=100&type=chunk) - Subscription and support revenue is recognized ratably over contract terms (typically **1-5 years**), billed annually in advance[101](index=101&type=chunk) - Professional services revenue is recognized over time as services are rendered, using an efforts-expended input method[102](index=102&type=chunk)[104](index=104&type=chunk) - Cost of subscription and support includes cloud hosting, third-party services, employee costs, and amortization of capitalized software development and acquired technology[105](index=105&type=chunk) - Operating expenses include sales and marketing (personnel, commissions, marketing programs, acquisition-related amortization), R&D (personnel, capitalized software development), and G&A (executive, finance, legal, HR, IT personnel, professional fees)[107](index=107&type=chunk)[108](index=108&type=chunk)[109](index=109&type=chunk) [Results of Operations](index=27&type=section&id=Results%20of%20Operations) Instructure reported a **14%** increase in total revenue for both Q2 and YTD June 30, 2023, driven by subscription and support growth, but net loss widened for the six-month period due to higher operating expenses and increased interest expense | Metric (in millions) | Q2 2023 | Q2 2022 | YoY Change (Q2) | % Change (Q2) | YTD 2023 | YTD 2022 | YoY Change (YTD) | % Change (YTD) | | :-------------------- | :------ | :------ | :-------------- | :------------ | :------- | :------- | :--------------- | :------------- | | Total Revenue | $131.070 | $114.577 | $16.493 | 14.4% | $259.913 | $228.039 | $31.874 | 14.0% | | Gross Profit | $85.781 | $72.179 | $13.602 | 18.8% | $168.792 | $144.630 | $24.162 | 16.7% | | Loss from Operations | $(2.078) | $(6.628) | $4.550 | -68.6% | $(7.992) | $(10.315) | $2.323 | -22.5% | | Net Loss | $(10.973) | $(12.919) | $1.946 | -15.1% | $(22.830) | $(18.464) | $(4.366) | 23.6% | [Revenue](index=29&type=section&id=Revenue) Subscription and support revenue increased by **$15.7 million (15%)** for Q2 2023 and **$30.7 million (15%)** for YTD 2023, driven by expanded use among new and existing customers, while professional services also saw increases | Revenue (in millions) | Q2 2023 | Q2 2022 | Change (Q2) | % Change (Q2) | YTD 2023 | YTD 2022 | Change (YTD) | % Change (YTD) | | :--------------------- | :------ | :------ | :---------- | :------------ | :------- | :------- | :----------- | :------------- | | Subscription and support | $118.569 | $102.905 | $15.664 | 15% | $237.049 | $206.397 | $30.652 | 15% | | Professional services and other | $12.501 | $11.672 | $0.829 | 7% | $22.864 | $21.642 | $1.222 | 6% | - Revenue from new customers increased by **$8.4 million** (Q2) and **$17.4 million** (YTD), while revenue from existing customers increased by **$7.3 million** (Q2) and **$13.3 million** (YTD)[118](index=118&type=chunk)[120](index=120&type=chunk) [Cost of Revenue](index=30&type=section&id=Cost%20of%20Revenue) Total cost of revenue increased by **$2.9 million (7%)** for Q2 2023 and **$7.7 million (9%)** for YTD 2023, driven by higher web hosting, amortization, and personnel costs in both subscription and professional services | Cost of Revenue (in millions) | Q2 2023 | Q2 2022 | Change (Q2) | % Change (Q2) | YTD 2023 | YTD 2022 | Change (YTD) | % Change (YTD) | | :----------------------------- | :------ | :------ | :---------- | :------------ | :------- | :------- | :----------- | :------------- | | Subscription and support | $38.377 | $35.868 | $2.509 | 7% | $77.187 | $71.414 | $5.773 | 8% | | Professional services and other | $6.912 | $6.530 | $0.382 | 6% | $13.934 | $11.995 | $1.939 | 16% | | Total cost of revenue | $45.289 | $42.398 | $2.891 | 7% | $91.121 | $83.409 | $7.712 | 9% | - Subscription and support cost of revenue increased due to **$1.5 million** in web hosting costs (Q2), **$0.6 million** in acquisition-related intangibles amortization (Q2), and **$0.5 million** in third-party contractor costs (Q2)[123](index=123&type=chunk)[125](index=125&type=chunk) - Professional services cost of revenue increased due to **$0.6 million** in salaries, wages, and payroll-related benefits (Q2) and **$1.5 million** (YTD)[124](index=124&type=chunk)[126](index=126&type=chunk) [Operating Expenses](index=31&type=section&id=Operating%20Expenses) Total operating expenses increased by **$9.1 million (11.5%)** for Q2 2023 and **$21.8 million (14.1%)** for YTD 2023, driven by significant increases in sales and marketing and research and development expenses | Operating Expenses (in millions) | Q2 2023 | Q2 2022 | Change (Q2) | % Change (Q2) | YTD 2023 | YTD 2022 | Change (YTD) | % Change (YTD) | | :-------------------------------- | :------ | :------ | :---------- | :------------ | :------- | :------- | :----------- | :------------- | | Sales and marketing | $52.159 | $45.885 | $6.274 | 14% | $103.009 | $89.206 | $13.803 | 15% | | Research and development | $21.482 | $18.669 | $2.813 | 15% | $45.184 | $35.870 | $9.314 | 26% | | General and administrative | $14.218 | $14.253 | $(0.035) | 0% | $28.591 | $29.869 | $(1.278) | -4% | | Total operating expenses | $87.859 | $78.807 | $9.052 | 11.5% | $176.784 | $154.945 | $21.839 | 14.1% | [Sales and Marketing](index=31&type=section&id=Sales%20and%20Marketing) Sales and marketing expenses increased by **$6.3 million (14%)** for Q2 2023 and **$13.8 million (15%)** for YTD 2023, primarily due to higher salaries, third-party contracting, and amortization of acquisition-related intangibles - Q2 2023 increase driven by salaries (**$1.4 million**), third-party contracting (**$1.4 million**), acquisition-related intangibles amortization (**$1.1 million**), commissions (**$0.9 million**), marketing expenses (**$0.8 million**), and stock-based compensation (**$0.7 million**)[128](index=128&type=chunk) - YTD 2023 increase driven by salaries (**$4.2 million**), acquisition-related intangibles amortization (**$2.6 million**), commissions (**$1.9 million**), third-party contracting (**$1.7 million**), and travel expenses (**$1.1 million**)[129](index=129&type=chunk) [Research and Development](index=31&type=section&id=Research%20and%20Development) Research and development expenses increased by **$2.8 million (15%)** for Q2 2023 and **$9.3 million (26%)** for YTD 2023, primarily due to higher salaries, wages, payroll-related benefits, and stock-based compensation - Q2 2023 increase primarily due to salaries, wages, and payroll-related benefits (**$2.6 million**) and stock-based compensation (**$0.8 million**)[131](index=131&type=chunk) - YTD 2023 increase primarily due to salaries, wages, and payroll-related benefits (**$6.0 million**), stock-based compensation (**$1.4 million**), and third-party contractor costs (**$1.8 million**)[132](index=132&type=chunk) [General and Administrative](index=32&type=section&id=General%20and%20Administrative) General and administrative expenses remained relatively flat for Q2 2023, with increases in salaries and consulting offset by decreases in insurance and software, while YTD expenses decreased by **$1.3 million (4%)** due to lower insurance and contractor costs - Q2 2023 expenses were stable, with increases in salaries (**$0.6 million**) and third-party consulting (**$1.0 million**) offset by decreases in insurance (**$0.5 million**) and software (**$0.1 million**)[134](index=134&type=chunk) - YTD 2023 decrease of **$1.3 million** driven by lower insurance (**$1.0 million**) and third-party contractor costs (**$0.8 million**), partially offset by increased stock-based compensation (**$0.5 million**)[135](index=135&type=chunk) [Other Income (Expense), Net](index=32&type=section&id=Other%20Income%20(Expense),%20Net) Other income (expense), net, increased to an expense of **$9.6 million** for Q2 2023 and **$17.6 million** for YTD 2023, primarily driven by significantly higher interest expense on the Senior Term Loan | Other Income (Expense), Net (in millions) | Q2 2023 | Q2 2022 | Change (Q2) | % Change (Q2) | YTD 2023 | YTD 2022 | Change (YTD) | % Change (YTD) | | :----------------------------------------- | :------ | :------ | :---------- | :------------ | :------- | :------- | :----------- | :------------- | | Total other income (expense), net | $(9.567) | $(8.001) | $(1.566) | 20% | $(17.635) | $(12.212) | $(5.423) | 44% | - Q2 2023 increase in expense due to **$5.7 million** higher interest expense on Senior Term Loan, partially offset by **$3.8 million** foreign currency gains and **$0.3 million** higher interest income[137](index=137&type=chunk) - YTD 2023 increase in expense due to **$10.6 million** higher interest expense on Senior Term Loan, partially offset by **$3.8 million** foreign currency gains and **$1.6 million** higher interest income[138](index=138&type=chunk) [Income Tax Benefit](index=33&type=section&id=Income%20Tax%20Benefit) The income tax benefit decreased by **$1.0 million (61%)** for Q2 2023 and **$1.3 million (31%)** for YTD 2023, primarily due to foreign tax rate changes given the company's net operating loss carryforward position | Income Tax Benefit (in millions) | Q2 2023 | Q2 2022 | Change (Q2) | % Change (Q2) | YTD 2023 | YTD 2022 | Change (YTD) | % Change (YTD) | | :-------------------------------- | :------ | :------ | :---------- | :------------ | :------- | :------- | :----------- | :------------- | | Income tax benefit | $0.672 | $1.710 | $(1.038) | -61% | $2.797 | $4.063 | $(1.266) | -31% | - Decrease in income tax benefit driven mainly by **foreign tax rate changes** due to the Company's net operating loss (NOL) carryforward position[141](index=141&type=chunk) [Liquidity and Capital Resources](index=33&type=section&id=Liquidity%20and%20Capital%20Resources) Instructure's liquidity includes **$129.8 million** in cash and a Senior Term Loan, which management believes are sufficient for the next 12 months, with **$330.7 million** in deferred revenue as a significant future cash source - Principal liquidity sources as of June 30, 2023, were **$129.8 million** in cash, cash equivalents, and restricted cash, and the available balance of the Senior Term Loan[142](index=142&type=chunk) - Management believes existing liquidity and cash from operations will be **sufficient for at least the next 12 months**[143](index=143&type=chunk) - Deferred revenue was **$330.7 million** as of June 30, 2023, with **$317.4 million** expected to be recognized as revenue in the next 12 months[146](index=146&type=chunk) - Cash flows are subject to seasonality, with higher cash flow, accounts receivable, and deferred revenue balances typically in the **second and third quarters** due to customer fiscal year-ends[148](index=148&type=chunk) [Credit Facility](index=34&type=section&id=Credit%20Facility) Instructure's Senior Secured Credit Facilities include a **$500.0 million** Senior Term Loan and a **$125.0 million** Senior Revolver, with **$493.8 million** outstanding on the Term Loan at June 30, 2023, and the agreement amended to replace LIBOR with SOFR - Senior Secured Credit Facilities consist of a **$500.0 million Senior Term Loan** and a **$125.0 million Senior Revolver**[150](index=150&type=chunk) - As of June 30, 2023, **$493.8 million** was outstanding on the Senior Term Loan, and no borrowings were outstanding under the Senior Revolver[154](index=154&type=chunk) - The credit agreement was amended on June 21, 2023, to replace LIBOR with SOFR for U.S. Dollar denominated borrowings, effective July 5, 2023[153](index=153&type=chunk) [Operating Activities](index=35&type=section&id=Operating%20Activities) Net cash used in operating activities for YTD June 30, 2023, was **$55.8 million**, a slight improvement from the prior year, influenced by net loss, non-cash adjustments, and a **$96.0 million** decrease in deferred revenue and accounts receivable due to seasonality | Operating Activities (in millions) | YTD Jun 30, 2023 | YTD Jun 30, 2022 | Change | | :---------------------------------- | :--------------- | :--------------- | :----- | | Net cash used in operating activities | $(55.760) | $(57.540) | $1.780 | - Net cash used in operating activities for YTD 2023 was influenced by a net loss of **$22.8 million**, non-cash adjustments including **$21.3 million** in stock-based compensation and **$73.8 million** in depreciation and amortization[156](index=156&type=chunk) - Working capital changes included a net decrease of **$96.0 million** in deferred revenue and accounts receivable, reflecting business seasonality[156](index=156&type=chunk) [Investing Activities](index=35&type=section&id=Investing%20Activities) Net cash used in investing activities for YTD June 30, 2023, significantly decreased to **$2.9 million** from **$22.9 million** in the prior year, primarily due to no business acquisitions in 2023 | Investing Activities (in millions) | YTD Jun 30, 2023 | YTD Jun 30, 2022 | Change | | :---------------------------------- | :--------------- | :--------------- | :----- | | Net cash used in investing activities | $(2.865) | $(22.863) | $19.998 | - The significant decrease in cash used was due to **no business acquisitions in YTD 2023**, compared to **$19.5 million** for the acquisition of Canvas Credentials in YTD 2022[159](index=159&type=chunk) - Purchases of property and equipment were **$2.9 million** in YTD 2023, compared to **$3.4 million** in YTD 2022[159](index=159&type=chunk) [Financing Activities](index=35&type=section&id=Financing%20Activities) Net cash used in financing activities for YTD June 30, 2023, was **$2.3 million**, a shift from cash provided in the prior year, driven by increased share repurchases for tax withholdings and debt repayments | Financing Activities (in millions) | YTD Jun 30, 2023 | YTD Jun 30, 2022 | Change | | :---------------------------------- | :--------------- | :--------------- | :----- | | Net cash provided by (used in) financing activities | $(2.277) | $1.138 | $(3.415) | - Cash used in YTD 2023 included **$3.0 million** for shares repurchased for tax withholdings on RSUs (vs. $1.7 million in 2022) and **$2.5 million** in long-term debt repayments (vs. $1.3 million in 2022)[161](index=161&type=chunk)[162](index=162&type=chunk) - Proceeds from issuance of common stock from employee equity plans were **$3.3 million** in YTD 2023 (vs. $4.1 million in 2022)[161](index=161&type=chunk)[162](index=162&type=chunk) [Critical Accounting Estimates](index=35&type=section&id=Critical%20Accounting%20Estimates) There have been no material changes to Instructure's critical accounting estimates compared to those described in its 2022 Form 10-K - No material changes to critical accounting estimates compared to the 2022 Form 10-K[164](index=164&type=chunk) [Recent Accounting Pronouncement](index=36&type=section&id=Recent%20Accounting%20Pronouncement) For information on recent accounting pronouncements, refer to Note 2. "Summary of Significant Accounting Policies—Recent Accounting Pronouncements" in the notes to the condensed consolidated financial statements - Refer to Note 2 for information on recent accounting pronouncements[165](index=165&type=chunk) [Non-GAAP Financial Measures](index=36&type=section&id=Non-GAAP%20Financial%20Measures) Instructure uses non-GAAP financial measures, including Non-GAAP Operating Income, Free Cash Flow, and Adjusted EBITDA, to supplement U.S. GAAP results and provide a clearer view of operating performance and liquidity - Non-GAAP measures (Non-GAAP Operating Income, Free Cash Flow, Adjusted EBITDA) are used to evaluate operating performance and liquidity, providing consistency and comparability[166](index=166&type=chunk) - Non-GAAP Operating Income excludes stock-based compensation, transaction/sponsor/non-recurring costs, amortization of acquisition-related intangibles, and fair value adjustments to acquired unearned revenue[167](index=167&type=chunk) - Adjusted EBITDA further adjusts EBITDA to exclude interest income, foreign currency effects, and fair value adjustments to acquired unearned revenue[174](index=174&type=chunk) [Non-GAAP Operating Income](index=36&type=section&id=Non-GAAP%20Operating%20Income) Non-GAAP operating income increased to **$50.2 million** for Q2 2023 and **$97.3 million** for YTD 2023, excluding significant non-cash and non-recurring items like stock-based compensation and amortization of acquisition-related intangibles | Non-GAAP Operating Income (in millions) | Q2 2023 | Q2 2022 | Change (Q2) | % Change (Q2) | YTD 2023 | YTD 2022 | Change (YTD) | % Change (YTD) | | :--------------------------------------- | :------ | :------ | :---------- | :------------ | :------- | :------- | :----------- | :------------- | | Non-GAAP operating income | $50.155 | $38.669 | $11.486 | 29.7% | $97.342 | $81.166 | $16.176 | 19.9% | - Key adjustments include stock-based compensation (**$11.9 million** Q2, **$21.9 million** YTD) and amortization of acquisition-related intangibles (**$35.7 million** Q2, **$71.5 million** YTD)[168](index=168&type=chunk) [Free Cash Flow](index=38&type=section&id=Free%20Cash%20Flow) Free cash flow for Q2 2023 was **$23.5 million**, a significant increase, while YTD 2023 free cash flow was negative **$58.6 million**, an improvement from the prior year, calculated as net cash used in operating activities less capital expenditures | Free Cash Flow (in millions) | Q2 2023 | Q2 2022 | Change (Q2) | % Change (Q2) | YTD 2023 | YTD 2022 | Change (YTD) | % Change (YTD) | | :---------------------------- | :------ | :------ | :---------- | :------------ | :------- | :------- | :----------- | :------------- | | Free cash flow | $23.529 | $6.551 | $16.978 | 259.2% | $(58.625) | $(60.919) | $2.294 | -3.8% | - Free cash flow is defined as net cash used in operating activities less purchases of property and equipment and intangible assets, net of proceeds from disposals[172](index=172&type=chunk) [Adjusted EBITDA](index=38&type=section&id=Adjusted%20EBITDA) Adjusted EBITDA increased to **$51.3 million** for Q2 2023 and **$99.5 million** for YTD 2023, excluding various non-cash and non-recurring items to provide a clearer view of core operating results | Adjusted EBITDA (in millions) | Q2 2023 | Q2 2022 | Change (Q2) | % Change (Q2) | YTD 2023 | YTD 2022 | Change (YTD) | % Change (YTD) | | :----------------------------- | :------ | :------ | :---------- | :------------ | :------- | :------- | :----------- | :------------- | | Adjusted EBITDA | $51.260 | $39.808 | $11.452 | 28.8% | $99.518 | $83.362 | $16.156 | 19.4% | - Key adjustments include interest on outstanding debt, taxes, depreciation, amortization, stock-based compensation, transaction/sponsor/non-recurring costs, foreign currency effects, and amortization of acquisition-related intangibles[176](index=176&type=chunk) [Forward-Looking Statements](index=40&type=section&id=Forward-Looking%20Statements) This section contains forward-looking statements regarding future events, financial performance, growth, and strategies, which are subject to various risks and uncertainties, including macroeconomic conditions, platform usage, and competition - Forward-looking statements are based on management's beliefs and assumptions, subject to future events, risks, and uncertainties beyond control[180](index=180&type=chunk) - Key risks include continued economic uncertainty (inflation, interest rates, recession), ability to acquire/retain customers, platform usage, profitability, market development, acquisitions, competition, and international operations[181](index=181&type=chunk)[183](index=183&type=chunk) - The company undertakes no obligation to update or revise any forward-looking statement unless required by law[185](index=185&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=42&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Instructure is exposed to market risks primarily from fluctuations in foreign currency exchange rates and interest rates, but does not use financial instruments for trading or hedging - Primary market risk exposures are **foreign currency exchange rates** and **interest rates**[186](index=186&type=chunk) - Foreign currency risk arises from operating expenses denominated in non-USD currencies (e.g., Euro), though most sales are in USD; a hypothetical **10% change** in foreign currency rates would not have a material impact[187](index=187&type=chunk) - Interest rate risk is mainly from the variable-rate Senior Term Loan (**$493.8 million** outstanding at June 30, 2023), with the applicable rate increasing from **6.12% to 7.85%** between Dec 2022 and June 2023[189](index=189&type=chunk) [Foreign Currency Exchange Risk](index=42&type=section&id=Foreign%20Currency%20Exchange%20Risk) Instructure faces foreign currency risks from operating expenses in non-U.S. dollar currencies, primarily the euro, but most sales are in USD, and a hypothetical **10%** change in rates would not materially impact financial statements - Foreign currency risks are related to operating expenses denominated in currencies other than the U.S. dollar, primarily the euro[187](index=187&type=chunk) - Most sales are denominated in U.S. dollars, so revenue is not significantly exposed to foreign currency risk[187](index=187&type=chunk) - No hedging arrangements are in place for foreign currency risk; a hypothetical **10% change** in exchange rates would not materially impact financial statements[187](index=187&type=chunk) [Interest Rate Risk](index=42&type=section&id=Interest%20Rate%20Risk) Instructure's interest rate risk primarily stems from its variable-rate Senior Term Loan, with **$493.8 million** outstanding at June 30, 2023, and the interest rate increasing from **6.12% to 7.85%** since December 2022 - The Senior Term Loan, with **$493.8 million** outstanding at June 30, 2023, bears a variable interest rate (**7.85%** at June 30, 2023, up from **6.12%** at Dec 31, 2022)[189](index=189&type=chunk) - Cash and cash equivalents are held in short-term money market accounts, and the company does not use derivative financial instruments to manage interest rate risk[188](index=188&type=chunk) [Item 4. Controls and Procedures](index=43&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that Instructure's disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting, acknowledging inherent limitations - Disclosure controls and procedures were evaluated and deemed **effective** as of June 30, 2023, ensuring timely and accurate reporting[191](index=191&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[192](index=192&type=chunk) - Internal control systems have inherent limitations and can only provide **reasonable, not absolute, assurances**[193](index=193&type=chunk) [Evaluation of disclosure controls and procedures](index=43&type=section&id=Evaluation%20of%20disclosure%20controls%20and%20procedures) The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2023, ensuring timely and accurate recording, processing, summarizing, and reporting of information for SEC reports - Management, including CEO and CFO, concluded that disclosure controls and procedures were **effective** as of June 30, 2023[191](index=191&type=chunk) - Controls are designed to provide reasonable assurance that required information is recorded, processed, summarized, and reported within SEC specified time periods[191](index=191&type=chunk) [Changes in internal control over financial reporting](index=43&type=section&id=Changes%20in%20internal%20control%20over%20financial%20reporting) There were no material changes in Instructure's internal control over financial reporting during the quarter ended June 30, 2023 - No material changes in internal control over financial reporting during the quarter ended June 30, 2023[192](index=192&type=chunk) [Inherent limitation on the effectiveness of internal control](index=43&type=section&id=Inherent%20limitation%20on%20the%20effectiveness%20of%20internal%20control) The effectiveness of any internal control system is subject to inherent limitations, including judgment in design and operation, and the inability to completely eliminate misconduct, thus providing reasonable, not absolute, assurances - Internal control systems are subject to inherent limitations, including judgment and the inability to eliminate misconduct[193](index=193&type=chunk) - Any system of internal control can only provide **reasonable, not absolute, assurances**[193](index=193&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=44&type=section&id=Item%201.%20Legal%20Proceedings) Instructure is involved in various legal proceedings in the normal course of business, but management does not believe any current claims will have a material adverse effect on its financial position or operations - The company is involved in various legal proceedings and claims arising in the normal course of business[196](index=196&type=chunk) - Management does not believe any current legal proceedings would individually or in aggregate have a **material adverse effect** on the company's financial position, results of operations, or liquidity[196](index=196&type=chunk) [Item 1A. Risk Factors](index=44&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes in the risk factors previously disclosed in the company's 2022 Form 10-K - No material changes in the risk factors included in the 2022 Form 10-K[197](index=197&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=44&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities and use of proceeds to report[198](index=198&type=chunk) [Item 3. Default Upon Senior Securities](index=44&type=section&id=Item%203.%20Default%20Upon%20Senior%20Securities) This item is not applicable for the reporting period - Not applicable[198](index=198&type=chunk) [Item 4. Mine Safety Disclosures](index=44&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable for the reporting period - Not applicable[199](index=199&type=chunk) [Item 5. Other Information](index=44&type=section&id=Item%205.%20Other%20Information) No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2023 - No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2023[200](index=200&type=chunk) [Insider Trading Arrangements](index=44&type=section&id=Insider%20Trading%20Arrangements) No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2023 - No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2023[200](index=200&type=chunk) [Item 6. Exhibits](index=45&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including corporate documents, credit agreement amendments, certifications, and XBRL data files - The exhibit index includes corporate documents (Certificate of Incorporation, Bylaws), First Amendment to Credit Agreement, Section 302 and 906 certifications, and Inline XBRL data files[203](index=203&type=chunk) [SIGNATURES](index=46&type=section&id=SIGNATURES) The report was signed on August 2, 2023, by Dale Bowen, Chief Financial Officer of Instructure Holdings, Inc., as the duly authorized officer and Principal Financial Officer - The report was signed by Dale Bowen, Chief Financial Officer, on August 2, 2023[208](index=208&type=chunk)

[PART I. FINANCIAL INFORMATION (Unaudited)](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION%20(Unaudited)) This section presents Instructure's unaudited condensed consolidated financial statements and management's discussion for Q1 2023 [Item 1. Condensed Consolidated Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) This section presents Instructure's unaudited condensed consolidated financial statements and detailed notes for Q1 2023 [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of Instructure's financial position at March 31, 2023, and December 31, 2022 | Metric (in thousands) | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $104,758 | $185,954 | | Total current assets | $229,954 | $285,036 | | Total assets | $2,065,870 | $2,153,489 | | Total current liabilities | $254,321 | $334,057 | | Total liabilities | $789,891 | $877,362 | | Total stockholders' equity | $1,275,979 | $1,276,127 | - **Cash and cash equivalents decreased by $81.2 million** from December 31, 2022, to March 31, 2023[10](index=10&type=chunk) - **Total assets decreased by $87.6 million**, while **total liabilities decreased by $87.5 million** over the quarter[10](index=10&type=chunk) [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) This section details Instructure's financial performance, including revenue, gross profit, and net loss for Q1 2023 and Q1 2022 | Metric (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Total revenue | $128,843 | $113,462 | | Gross profit | $83,011 | $72,451 | | Loss from operations | $(5,914) | $(3,687) | | Net loss | $(11,857) | $(5,545) | | Net loss per common share, basic and diluted | $(0.08) | $(0.04) | - **Total revenue increased by 13.6% year-over-year**, from **$113.5 million** in Q1 2022 to **$128.8 million** in Q1 2023[12](index=12&type=chunk) - **Net loss more than doubled**, increasing from **$5.5 million** in Q1 2022 to **$11.9 million** in Q1 2023, resulting in a higher net loss per common share[12](index=12&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) This section outlines changes in Instructure's stockholders' equity for the three months ended March 31, 2023 | Metric (in thousands) | December 31, 2022 | March 31, 2023 | | :-------------------- | :---------------- | :------------- | | Common Stock, $0.01 Par Value (Amount) | $1,429 | $1,435 | | Additional Paid-In Capital | $1,575,600 | $1,587,303 | | Accumulated Deficit | $(300,902) | $(312,759) | | Total Stockholders' Equity | $1,276,127 | $1,275,979 | - **Total stockholders' equity remained relatively stable**, decreasing slightly from **$1,276.1 million** at December 31, 2022, to **$1,276.0 million** at March 31, 2023[15](index=15&type=chunk) - The accumulated deficit increased by **$11.8 million**, primarily due to the net loss incurred during the quarter[15](index=15&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents Instructure's cash flows from operating, investing, and financing activities for Q1 2023 and Q1 2022 | Cash Flow Activity (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(80,918) | $(65,945) | | Net cash used in investing activities | $(1,321) | $(1,311) | | Net cash provided by financing activities | $766 | $2,813 | | Net decrease in cash, cash equivalents, and restricted cash | $(81,172) | $(63,853) | - **Net cash used in operating activities increased by $14.9 million**, from **$65.9 million** in Q1 2022 to **$80.9 million** in Q1 2023[18](index=18&type=chunk) - **Net cash provided by financing activities decreased significantly** from **$2.8 million** in Q1 2022 to **$0.8 million** in Q1 2023[18](index=18&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations of Instructure's accounting policies and specific financial statement line items [1. Description of Business and Basis of Presentation](index=8&type=section&id=1.%20Description%20of%20Business%20and%20Basis%20of%20Presentation) This note describes Instructure's business as an education technology company and its financial statement presentation basis - Instructure is an education technology company providing a cloud-based learning platform (SaaS model) focused on elevating student access, amplifying teaching, and inspiring learning[24](index=24&type=chunk) - The company operates in a single operating segment: cloud-based learning management, assessment, and performance systems[28](index=28&type=chunk) [2. Summary of Significant Accounting Policies](index=9&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines Instructure's key accounting policies and recent accounting pronouncement adoptions - **No significant changes to accounting policies** occurred during the three months ended March 31, 2023[29](index=29&type=chunk) - Recent accounting pronouncements adopted in January 2022 (ASU 2021-05, 2021-01, 2021-08) did not have a material impact on the financial statements[30](index=30&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk) [3. Net Loss Per Share](index=9&type=section&id=3.%20Net%20Loss%20Per%20Share) This note details the calculation of Instructure's basic and diluted net loss per common share | Metric (in thousands, except per share) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(11,857) | $(5,545) | | Weighted-average common shares outstanding—basic and diluted | 143,112 | 140,952 | | Net loss per common share, basic and diluted | $(0.08) | $(0.04) | - Potentially dilutive shares (RSUs and ESPP shares) were excluded from diluted EPS calculation for both periods as the company incurred net losses, making their effect anti-dilutive[35](index=35&type=chunk) [4. Property and Equipment](index=10&type=section&id=4.%20Property%20and%20Equipment) This note provides a breakdown of Instructure's property and equipment, including capitalized software development costs | Category (in thousands) | March 31, 2023 | December 31, 2022 | | :---------------------- | :------------- | :---------------- | | Computer and office equipment | $5,581 | $5,528 | | Capitalized software development costs | $9,344 | $8,585 | | Total property and equipment, net | $12,249 | $12,380 | - Amortization expense for capitalized software development costs increased from **$0.3 million** in Q1 2022 to **$0.6 million** in Q1 2023[36](index=36&type=chunk) [5. Acquisitions](index=11&type=section&id=5.%20Acquisitions) This note details Instructure's strategic acquisitions of Concentric Sky and LearnPlatform to expand its offerings - In April 2022, Instructure acquired Concentric Sky (rebranded to Canvas Credentials) for **$21.3 million** to enhance its integrated teaching and learning platform[38](index=38&type=chunk)[39](index=39&type=chunk) - In December 2022, Instructure acquired LearnPlatform for **$94.0 million** to add evidence-based insights into inventory, compliance, procurement, and usage for educational organizations[40](index=40&type=chunk)[41](index=41&type=chunk) - Goodwill generated from these acquisitions is primarily attributable to expected synergies and assembled workforce values[41](index=41&type=chunk) [6. Goodwill and Intangible Assets](index=12&type=section&id=6.%20Goodwill%20and%20Intangible%20Assets) This note presents the carrying values of Instructure's goodwill and various intangible assets | Intangible Asset (in thousands) | March 31, 2023 (Net) | December 31, 2022 (Net) | | :------------------------------ | :------------------- | :---------------------- | | Trade names | $86,811 | $90,164 | | Developed technology | $141,433 | $157,700 | | Customer relationships | $278,641 | $294,765 | | Non-compete agreements | $45 | $49 | | Total Intangible Assets, Net | $506,930 | $542,679 | - Goodwill remained constant at **$1,266.4 million** from December 31, 2022, to March 31, 2023[43](index=43&type=chunk) - Amortization expense for intangible assets was **$35.7 million** for Q1 2023, up from **$33.7 million** in Q1 2022[44](index=44&type=chunk) [7. Credit Facility](index=14&type=section&id=7.%20Credit%20Facility) This note describes Instructure's Senior Term Loan and Revolver, including outstanding balances and compliance - The company refinanced its credit facilities in October 2021, establishing a **$500.0 million** Senior Term Loan and a **$125.0 million** Senior Revolver[47](index=47&type=chunk) - As of March 31, 2023, **$495.0 million** was outstanding on the Senior Term Loan, bearing interest at **7.85%**, and there were no outstanding borrowings under the Senior Revolver[51](index=51&type=chunk) - The company was in compliance with all applicable covenants pertaining to the Senior Secured Credit Facilities as of March 31, 2023[53](index=53&type=chunk) [8. Revenue](index=16&type=section&id=8.%20Revenue) This note provides a breakdown of Instructure's revenue by geographic region and remaining performance obligations | Geographic Region (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | United States | $102,596 | $90,107 | | Foreign | $26,247 | $23,355 | | Total revenue | $128,843 | $113,462 | - Approximately **$703.7 million** of revenue is expected to be recognized from remaining performance obligations, with **76%** expected within the next 24 months[57](index=57&type=chunk) - Deferred revenue was **$215.7 million** as of March 31, 2023, with **$203.2 million** classified as current[140](index=140&type=chunk) [9. Deferred Commissions](index=16&type=section&id=9.%20Deferred%20Commissions) This note details Instructure's deferred commission balances and related amortization expenses | Metric (in thousands) | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------- | :---------------- | | Deferred commissions | $31,200 | $32,200 | - Amortization expense for deferred commissions increased to **$4.8 million** in Q1 2023 from **$3.4 million** in Q1 2022[60](index=60&type=chunk) [10. Stockholders' Equity and Stock-Based Compensation](index=16&type=section&id=10.%20Stockholders'%20Equity%20and%20Stock-Based%20Compensation) This note outlines Instructure's stock-based compensation expenses and equity activity, including RSU grants - Total stock-based compensation expense was **$10.0 million** in Q1 2023, up from **$9.5 million** in Q1 2022[68](index=68&type=chunk) - The company granted **2,539,452 RSUs** to employees in Q1 2023, with an aggregate fair value of **$63.7 million**[67](index=67&type=chunk) - Unrecognized compensation cost related to unvested RSUs amounted to **$120.0 million** as of March 31, 2023, expected to be recognized over a weighted average period of **3.4 years**[70](index=70&type=chunk) [11. Income Taxes](index=20&type=section&id=11.%20Income%20Taxes) This note explains Instructure's income tax benefit and potential limitations on net operating loss carryforwards - The company's income tax benefit decreased by **$0.2 million** in Q1 2023, mainly due to an increase in pretax book loss, net of valuation allowance[135](index=135&type=chunk) - Utilization of net operating loss carryforwards and credits may be subject to annual limitations due to ownership changes[74](index=74&type=chunk) [12. Fair Value of Financial Instruments](index=20&type=section&id=12.%20Fair%20Value%20of%20Financial%20Instruments) This note presents the fair value measurements of Instructure's financial assets and liabilities | Asset (in thousands) | March 31, 2023 (Level 1) | December 31, 2022 (Level 1) | | :------------------- | :----------------------- | :-------------------------- | | Money market funds | $3,417 | $3,383 | - The fair value of the Senior Term Loan was estimated at **$489.5 million** as of March 31, 2023, determined by Level 2 inputs[80](index=80&type=chunk) [13. Leases](index=22&type=section&id=13.%20Leases) This note details Instructure's lease costs, cash payments, and weighted average lease terms and discount rates | Lease Cost (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Operating lease cost, gross | $1,786 | $1,796 | | Variable lease cost, gross | $710 | $536 | | Sublease income | $(287) | $(254) | | Total lease costs | $2,209 | $2,078 | - Cash paid for operating lease liabilities was **$2.3 million** in Q1 2023, slightly up from **$2.2 million** in Q1 2022[84](index=84&type=chunk) - The weighted average remaining lease term was **3.5 years** as of March 31, 2023, with a weighted average discount rate of **8.21%**[87](index=87&type=chunk) [14. Commitments and Contingencies](index=24&type=section&id=14.%20Commitments%20and%20Contingencies) This note outlines Instructure's non-cancelable purchase obligations, letters of credit, and legal proceedings - Non-cancelable purchase obligations for cloud infrastructure and business analytic services total **$2.2 million** for the remainder of 2023, **$48.4 million** for 2024, and **$48.0 million** for 2025[88](index=88&type=chunk) - The company had **$4.3 million** in outstanding letters of credit as of March 31, 2023[89](index=89&type=chunk) - A class action lawsuit related to the Take-Private Transaction was dismissed in full on January 6, 2023, with the appeal time expired[91](index=91&type=chunk) [15. Related-Party Transactions](index=24&type=section&id=15.%20Related-Party%20Transactions) This note discloses Instructure's transactions with related parties, including advisory services and board memberships - The company incurred **$0.2 million** in Q1 2023 for financial and management advisory services from Thoma Bravo, LLC[92](index=92&type=chunk) - Payments to Internet2 and 1EdTech for services in the ordinary course of business totaled **$26.0 thousand** and **$0.1 million**, respectively, in Q1 2023, with a company officer serving on their boards[94](index=94&type=chunk)[95](index=95&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Instructure's financial condition and results for Q1 2023, covering business, macroeconomic factors, and liquidity [Overview](index=25&type=section&id=Overview) This section provides a high-level summary of Instructure's business, platform, and key financial highlights for Q1 2023 - Instructure is a leading education technology company, providing a cloud-native learning platform (LMS, assessments, analytics, content) to over **7,000 global customers** in Higher Education and K-12 across more than **100 countries**[97](index=97&type=chunk) - The company has expanded its platform through strategic acquisitions like Impact, Elevate Data Sync, Canvas Credentials, and LearnPlatform to enhance functionality and integrate solutions[97](index=97&type=chunk) | Metric (in millions) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :------------------- | :-------------------------------- | :-------------------------------- | | Revenue | $128.8 | $113.5 | | Net loss | $(11.9) | $(5.5) | | Adjusted EBITDA | $48.3 | $43.6 | | Operating cash flow | $(80.9) | $(65.9) | | Free cash flow | $(82.2) | $(67.3) | [Recent Developments](index=26&type=section&id=Recent%20Developments) This section discusses recent macroeconomic conditions and their potential impact on Instructure's business and financial position - Adverse macroeconomic conditions, including high inflation, slower economic growth, and high interest rates, could impact business and customer spending[102](index=102&type=chunk) - The interest rate on the Senior Term Loan increased from **6.12%** as of December 31, 2022, to **7.85%** as of March 31, 2023, impacting the cost of debt[104](index=104&type=chunk) - The company transferred most cash deposits from Silicon Valley Bank following its closure, with remaining amounts fully accessible, but market uncertainty regarding banking system stability persists[103](index=103&type=chunk) [Key Factors Affecting Our Performance](index=26&type=section&id=Key%20Factors%20Affecting%20Our%20Performance) This section outlines the primary drivers of Instructure's performance, including market adoption and growth strategies - Growth is driven by increasing adoption of cloud-based software by Higher Education and K-12 institutions, accelerated by post-pandemic needs for remote and hybrid learning solutions[105](index=105&type=chunk) - The company aims to grow its customer base by replacing legacy systems in North America and expanding internationally, particularly in K-12 by monetizing demand for its broad capabilities[106](index=106&type=chunk) - Future revenue growth relies on cross-selling additional solutions (assessments, analytics, student success, etc) to existing Canvas LMS customers[107](index=107&type=chunk) [Key Components of Results of Operations](index=26&type=section&id=Key%20Components%20of%20Results%20of%20Operations) This section explains the main components of Instructure's revenue, cost of revenue, and operating expenses - Revenue is primarily generated from subscription and support (SaaS fees) and professional services (training, implementation, consulting)[108](index=108&type=chunk) - Cost of subscription and support revenue includes cloud hosting, employee costs, and amortization of capitalized software and acquired technology[113](index=113&type=chunk) - Operating expenses are categorized into Sales and Marketing (including deferred commissions and acquisition-related amortization), Research and Development (including capitalized software development), and General and Administrative[115](index=115&type=chunk)[116](index=116&type=chunk)[117](index=117&type=chunk) [Results of Operations](index=29&type=section&id=Results%20of%20Operations) This section provides a detailed comparative analysis of Instructure's revenue, expenses, and net loss for Q1 2023 versus Q1 2022 | Metric (in thousands) | March 31, 2023 | March 31, 2022 | Change Amount | Change % | | :-------------------- | :------------- | :------------- | :------------ | :------- | | Total revenue | $128,843 | $113,462 | $15,381 | 14% | | Total cost of revenue | $45,832 | $41,011 | $4,821 | 12% | | Gross profit | $83,011 | $72,451 | $10,560 | 15% | | Total operating expenses | $88,925 | $76,138 | $12,787 | 17% | | Loss from operations | $(5,914) | $(3,687) | $(2,227) | 60% | | Net loss | $(11,857) | $(5,545) | $(6,312) | 114% | - Subscription and support revenue increased by **$15.0 million (14%)** due to expanded use by new (**$9.0 million**) and existing (**$6.0 million**) customers, with international markets contributing **20%** of total revenue[125](index=125&type=chunk) - Sales and marketing expenses increased by **$7.5 million (17%)**, driven by higher salaries, acquisition-related amortization, travel, bonuses, and severance[130](index=130&type=chunk) - Research and development expenses increased by **$6.5 million (38%)**, primarily due to increased personnel costs, severance, stock-based compensation, and contractor costs[131](index=131&type=chunk) - Other income (expense), net, increased by **$3.9 million (92%)** in expense, mainly due to a **$4.9 million** increase in interest expense on the Senior Term Loan[133](index=133&type=chunk) [Liquidity and Capital Resources](index=35&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses Instructure's ability to meet its short-term and long-term obligations using available cash and credit - As of March 31, 2023, liquidity sources included **$109.1 million** in cash, cash equivalents, and restricted cash, and available capacity on the Senior Term Loan[136](index=136&type=chunk) - The company expects existing liquidity and cash from operations to be sufficient for at least the next 12 months[137](index=137&type=chunk) - Cash flows are subject to seasonal fluctuations, with higher cash flow, accounts receivable, and deferred revenue typically in the second and third quarters due to customer fiscal year-ends[142](index=142&type=chunk) | Cash Flow Activity (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(80,918) | $(65,945) | | Net cash used in investing activities | $(1,321) | $(1,311) | | Net cash provided by financing activities | $766 | $2,813 | [Non-GAAP Financial Measures](index=38&type=section&id=Non-GAAP%20Financial%20Measures) This section presents Instructure's non-GAAP financial metrics, including operating income, free cash flow, and Adjusted EBITDA | Non-GAAP Metric (in thousands) | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :----------------------------- | :-------------------------------- | :-------------------------------- | | Non-GAAP operating income | $47,187 | $42,497 | | Free cash flow | $(82,239) | $(67,256) | | Adjusted EBITDA | $48,258 | $43,553 | - Non-GAAP operating income increased by **$4.7 million**, reflecting adjustments for stock-based compensation, transaction costs, sponsor costs, other non-recurring costs, and amortization of acquisition-related intangibles[160](index=160&type=chunk)[161](index=161&type=chunk) - Adjusted EBITDA increased by **$4.7 million**, providing a measure of operating results that excludes certain non-cash and variable charges[166](index=166&type=chunk)[168](index=168&type=chunk) [Forward-Looking Statements](index=41&type=section&id=Forward-Looking%20Statements) This section highlights Instructure's forward-looking statements and the inherent risks and uncertainties associated with them - The report contains forward-looking statements regarding future events, financial performance, costs, expenditures, cash flows, and growth, which are subject to risks and uncertainties[172](index=172&type=chunk) - Key risks include continued economic uncertainty (inflation, interest rates, recession), ability to acquire and retain customers, impact of increased platform usage, and the company's history of losses[174](index=174&type=chunk) - Other risks involve potential acquisitions, market competitiveness, sales cycle unpredictability, international operations, reliance on management, and compliance with various laws and regulations[174](index=174&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=43&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details Instructure's exposure to market risks from foreign currency and interest rate fluctuations - The company is exposed to foreign currency exchange risk due to operating expenses denominated in currencies other than the U.S. dollar, particularly the euro, though most sales are in USD[179](index=179&type=chunk) - Interest rate risk arises from interest-earning instruments and variable-rate debt (Senior Term Loan), with the applicable interest rate on the Senior Term Loan increasing to **5.10%** as of March 31, 2023[180](index=180&type=chunk)[181](index=181&type=chunk) - A hypothetical **10%** change in foreign currency exchange rates would not have had a material impact on financial statements for the periods presented[179](index=179&type=chunk) [Item 4. Controls and Procedures](index=44&type=section&id=Item%204.%20Controls%20and%20Procedures) Management confirms effective disclosure controls and procedures as of March 31, 2023, with no material changes to internal controls - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2023, ensuring timely and accurate reporting of information[184](index=184&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2023[185](index=185&type=chunk) - The effectiveness of any internal control system is subject to inherent limitations, providing reasonable, not absolute, assurances[186](index=186&type=chunk) [PART II. OTHER INFORMATION](index=45&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides additional information not covered in the financial statements, including legal, risk, and exhibit details [Item 1. Legal Proceedings](index=45&type=section&id=Item%201.%20Legal%20Proceedings) Instructure is involved in various legal proceedings, with no material adverse effects expected; a class action lawsuit was dismissed - Management does not believe current legal proceedings would have a material adverse effect on the company's financial position, results of operations, or liquidity[188](index=188&type=chunk) - A class action lawsuit filed in February 2021 concerning the Take-Private Transaction was dismissed in full on January 26, 2023, with the time to appeal having expired[189](index=189&type=chunk) [Item 1A. Risk Factors](index=45&type=section&id=Item%201A.%20Risk%20Factors) No material changes to the company's previously disclosed risk factors were reported - No material changes to the risk factors were reported compared to those in the 2022 Form 10-K[190](index=190&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=45&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered sales of equity securities or use of proceeds were reported for the period - No unregistered sales of equity securities or use of proceeds were reported[191](index=191&type=chunk) [Item 3. Default Upon Senior Securities](index=45&type=section&id=Item%203.%20Default%20Upon%20Senior%20Securities) No defaults upon senior securities were reported for the period - Not applicable, indicating no defaults upon senior securities[191](index=191&type=chunk) [Item 4. Mine Safety Disclosures](index=45&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Mine safety disclosures are not applicable to the company's operations - Not applicable, indicating no mine safety disclosures[192](index=192&type=chunk) [Item 5. Other Information](index=45&type=section&id=Item%205.%20Other%20Information) No other material information was reported for the period - No other information was reported[193](index=193&type=chunk) [Item 6. Exhibits](index=45&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including organizational documents and certifications - Exhibits include the Second Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Employment Agreement with Chris Ball, Consulting Agreement with Frank Maylett, and various certifications (Sarbanes-Oxley Act)[197](index=197&type=chunk) - The filing also includes Inline XBRL Instance Document and Taxonomy Extension files for financial data[197](index=197&type=chunk) [SIGNATURES](index=47&type=section&id=SIGNATURES) This section contains the required signatures for the Form 10-Q, confirming its submission by Instructure Holdings, Inc - The report was duly signed on May 3, 2023, by Dale Bowen, Chief Financial Officer of Instructure Holdings, Inc[202](index=202&type=chunk)

Financial Data and Key Metrics Changes - First quarter revenue was $128.8 million, up 13.6% year-over-year, including an 80 basis point headwind from foreign exchange [11][16] - First quarter adjusted EBITDA grew 10.8% year-over-year to $48.3 million, representing a 37.5% margin, down from 38.2% in the first quarter of 2022 [11][31] - Deferred revenue at the end of the first quarter was $215.7 million, up 14.2% year-over-year [17] - Remaining performance obligations (RPO) were $703.7 million at the end of the first quarter, up 5% year-over-year [17] - Free cash flow for the quarter was negative $82.2 million compared to negative $67.3 million in the prior year [25] Business Line Data and Key Metrics Changes - Subscription and support accounted for 92% of first quarter revenue at $118.5 million, up 14.5% year-over-year, driven by momentum in core Canvas LMS products [21] - Professional services and other revenue accounted for 8% of first quarter revenue at $10.4 million, up 3.9% year-over-year [17] - The Learn platform acquisition exceeded expectations for the quarter, revealing significant untapped potential from both new and existing customers [9][10] Market Data and Key Metrics Changes - In North American K-12, the company holds nearly 30% market share, with strong bookings driven by recognition of products as mission critical [7] - The international market remains the fastest-growing part of the business, with strong performance from both direct business and channel partner programs [72] Company Strategy and Development Direction - The company aims to enhance its platform through organic and inorganic means, maintaining a leading position in the education technology space [10] - Focus on multi-product suites and increasing deal sizes in K-12 and higher education markets [66] - The strategy includes leveraging existing contracts to accelerate the Learn platform's growth [115] Management's Comments on Operating Environment and Future Outlook - Management noted that the teacher shortage persists, but technology is increasingly recognized as a solution to help alleviate this issue [46] - The pipeline is strong, with good coverage for the quarter and positive trends in cross-selling [49] - The company expects continued double-digit growth driven by the integration of AI into its LMS offerings [85][91] Other Important Information - The company ended the first quarter with $109.1 million in cash and $489.5 million of long-term debt, resulting in a 2.06 times net debt to trailing 12-month adjusted EBITDA ratio [18] - The company anticipates adjusted EBITDA for the full year to be in the range of $199.4 million to $203.4 million, representing an adjusted EBITDA margin of 38.5% at the midpoint [27] Q&A Session Summary Question: What is the outlook for EBITDA margins in the second half? - Management indicated confidence in expanding margins in the second half due to operational leverage [35] Question: What qualitative insights can be shared about K-12 bookings? - Management noted that while staffing shortages persist, there is increased recognition of technology's role in addressing these challenges [46][47] Question: How is ESSER funding impacting the business? - Management stated that while it is difficult to directly attribute deals to ESSER funds, the funding environment creates a favorable macro condition for K-12 sales [53][54] Question: Is there market saturation in higher education? - Management indicated that there is still significant room for growth in higher education, with many institutions still using legacy systems [55][56] Question: How is the Learn platform contributing to revenue? - Management highlighted that the Learn platform is expected to drive growth through its integration with existing contracts and the demand for evidence-based solutions [114][115]

Part I [Business](index=4&type=section&id=Item%201.%20Business) Instructure is a leading education technology company providing its Canvas LMS to 7,436 global customers via a SaaS model, emphasizing customer growth and product innovation - Instructure's mission is to elevate student success and amplify the power of teachers through its learning platform[14](index=14&type=chunk) - The company is the U.S. market share leader in both Higher Education and paid K-12 LMS, with **7,436 global customers** in over 100 countries as of year-end 2022[15](index=15&type=chunk)[50](index=50&type=chunk) - The business operates on a Software-as-a-Service (SaaS) model, providing customers with regular updates and guaranteeing 99.9% uptime[20](index=20&type=chunk)[24](index=24&type=chunk) - Key growth strategies include expanding the customer base in Higher Education and K-12, cross-selling additional solutions to the existing LMS customer base, and innovating the platform[27](index=27&type=chunk)[29](index=29&type=chunk) - As of December 31, 2022, the company employed 1,466 people and had over 750 ecosystem partners[58](index=58&type=chunk)[55](index=55&type=chunk) - The company is subject to various data privacy and security laws, including GDPR in Europe, CCPA in California, and federal regulations like FERPA and COPPA for student data[74](index=74&type=chunk)[76](index=76&type=chunk)[78](index=78&type=chunk) [Risk Factors](index=22&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from economic uncertainty, net losses, intense competition, data security, AWS reliance, substantial debt, and concentrated voting power - Economic uncertainty, including high inflation and interest rates, could lead to reduced IT spending by customers, harming business operations[87](index=87&type=chunk)[89](index=89&type=chunk) - The company has a history of net losses, reporting a **net loss of $34.2 million** for the year ended December 31, 2022, and anticipates continued losses for the foreseeable future[87](index=87&type=chunk)[97](index=97&type=chunk) - The business is highly dependent on acquiring new customers and renewing existing contracts, and a failure to do so would harm future revenues[99](index=99&type=chunk) - Significant competition exists from established companies like Blackboard, D2L, and Moodle, as well as potential new entrants[117](index=117&type=chunk)[118](index=118&type=chunk) - A breach of security measures could lead to unauthorized access to customer data, resulting in reputational damage, litigation, and financial liabilities[145](index=145&type=chunk) - The company relies on Amazon Web Services (AWS) for its cloud computing infrastructure, and any disruption with AWS could significantly impact service delivery[139](index=139&type=chunk) - As of December 31, 2022, Thoma Bravo held **approximately 85.4% of the voting power**, making Instructure a 'controlled company' and giving Thoma Bravo significant influence over corporate decisions[214](index=214&type=chunk)[217](index=217&type=chunk) - The company has substantial indebtedness, with **approximately $496.3 million in term loans outstanding** as of December 31, 2022, which could adversely affect business and growth prospects[202](index=202&type=chunk) [Unresolved Staff Comments](index=55&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[241](index=241&type=chunk) [Properties](index=55&type=section&id=Item%202.%20Properties) Instructure's corporate headquarters are in Salt Lake City, Utah, with additional leased offices globally, all deemed adequate for current needs - The corporate headquarters are in Salt Lake City, Utah, with leases expiring in 2025 and 2027[242](index=242&type=chunk) - Additional international offices are located in London (international headquarters), Sydney, Sao Paulo, and Budapest[242](index=242&type=chunk) [Legal Proceedings](index=55&type=section&id=Item%203.%20Legal%20Proceedings) The company is subject to various legal proceedings, including a class action lawsuit related to the Take-Private Transaction that was **dismissed in full** in January 2023 - A class action lawsuit, Oklahoma Law Enforcement Retirement System v. Goldsmith et al., was filed in February 2021 concerning the Take-Private Transaction[244](index=244&type=chunk) - On January 6, 2023, the court **dismissed the plaintiff's complaint in full**[245](index=245&type=chunk)[585](index=585&type=chunk) [Mine Safety Disclosures](index=56&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's business - Not applicable[246](index=246&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities](index=57&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholders%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Instructure's common stock trades on the NYSE under 'INST', with 96 record holders, and the company has never paid cash dividends, repurchasing shares for tax withholding obligations - The company's common stock began trading on the NYSE under the symbol 'INST' on July 22, 2021[249](index=249&type=chunk) - As of February 13, 2023, there were approximately 96 holders of record of the common stock[250](index=250&type=chunk) - The company has never declared or paid cash dividends and does not plan to in the foreseeable future[251](index=251&type=chunk) Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share (USD) | | :--- | :--- | :--- | | October 2022 | — | $ — | | November 2022 | — | $ — | | December 2022 | **74,873** | **$ 25.89** | | **Total** | **74,873** | **$ 25.89** | [Reserved](index=58&type=section&id=Item%206.%20Reserved) This item is reserved and contains no information [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=59&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In fiscal year 2022, Instructure achieved 17% revenue growth to $475.2 million, significantly narrowed its net loss, and maintained strong liquidity Key Financial Results (2022 vs. 2021) | Metric (in thousands USD) | FY 2022 | FY 2021 | Change % | | :--- | :--- | :--- | :--- | | Total Revenue | $475,194 | $405,361 | 17% | | Gross Profit | $302,900 | $235,496 | 29% | | Loss from Operations | $(16,480) | $(46,948) | (65%) | | Net Loss | $(34,242) | $(88,679) | (61%) | Key Business Metrics (as of Dec 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Number of Customers | 7,436 | 6,908 | | Net Revenue Retention Rate | 106% | 109% | | Remaining Performance Obligations (RPO) | $760.1M | $698.0M | - Revenue growth of **$69.8 million** in 2022 was driven by a **$39.0 million** increase from new customers and a **$23.9 million** increase from existing customers[303](index=303&type=chunk) - The company completed two acquisitions in 2022: Concentric Sky (rebranded as Canvas Credentials) for **$21.3 million** and LearnPlatform for **$94.0 million**[499](index=499&type=chunk)[501](index=501&type=chunk)[502](index=502&type=chunk) Non-GAAP Financial Measures (FY 2022) | Non-GAAP Metric (in thousands USD) | FY 2022 | | :--- | :--- | | Non-GAAP Operating Income | **$173,882** | | Free Cash Flow | **$133,993** | | Adjusted EBITDA | **$179,591** | - As of December 31, 2022, the company had **$190.3 million in cash**, cash equivalents, and restricted cash, and **$496.3 million outstanding** on its Senior Term Loan[317](index=317&type=chunk)[328](index=328&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=84&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risks from foreign currency exchange rates, interest rates, and inflation, with interest rate risk increasing due to a variable-rate Senior Term Loan - The company's primary market risks are foreign currency exchange, interest rates, and inflation[388](index=388&type=chunk) - Foreign currency risk is limited as most revenue is denominated in U.S. dollars, though operating expenses are subject to fluctuations[389](index=389&type=chunk) - The interest rate on the Senior Term Loan is variable and increased from **3.25%** as of December 31, 2021, to **6.12%** as of December 31, 2022, due to rising federal funds rates[391](index=391&type=chunk) - The company does not believe inflation had a material effect on its business in 2022[394](index=394&type=chunk) [Financial Statements and Supplementary Data](index=87&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for fiscal year 2022, including an unqualified auditor's opinion and notes - This item includes the audited consolidated financial statements and the report from the independent registered public accounting firm, Ernst & Young LLP[396](index=396&type=chunk)[397](index=397&type=chunk) - The auditor's report expresses an unqualified opinion on the financial statements and on the effectiveness of internal control over financial reporting as of December 31, 2022[401](index=401&type=chunk)[412](index=412&type=chunk) - The auditor's report identifies the allocation of revenue in contracts with multiple performance obligations as a Critical Audit Matter, due to the judgment required in identifying distinct performance obligations and estimating standalone selling prices[405](index=405&type=chunk)[406](index=406&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=133&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports that there have been no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - None[592](index=592&type=chunk) [Controls and Procedures](index=133&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, excluding a recent acquisition - Management concluded that disclosure controls and procedures were effective as of December 31, 2022[594](index=594&type=chunk) - Management concluded that internal control over financial reporting was effective as of December 31, 2022[595](index=595&type=chunk) - The assessment of internal control over financial reporting excluded the acquisition of LearnPlatform, Inc., which was completed in December 2022[596](index=596&type=chunk) [Other Information](index=133&type=section&id=Item%209B.%20Other%20Information) This item is not applicable - Not applicable[600](index=600&type=chunk) [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=133&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) This item is not applicable - Not applicable[601](index=601&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=134&type=section&id=Item%2010.%20Directors,%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding the company's directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the Registrant's definitive proxy statement for the 2023 Annual Meeting of Shareholders[603](index=603&type=chunk) [Executive Compensation](index=134&type=section&id=Item%2011.%20Executive%20Compensation) Information detailing the compensation of the company's executives is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[604](index=604&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=134&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership by certain beneficial owners and management is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[605](index=605&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=134&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions,%20and%20Director%20Independence) Information concerning related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[606](index=606&type=chunk) [Principal Accountant Fees and Services](index=134&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information detailing fees paid to and services provided by the principal independent accountant is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[607](index=607&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=135&type=section&id=Item%2015.%20Exhibits,%20Financial%20Statement%20Schedules) This section lists the financial statements, schedules, and exhibits filed with the Form 10-K, with schedules omitted as information is included elsewhere - This item lists the financial statements and exhibits filed with the Form 10-K[610](index=610&type=chunk) - Financial statement schedules are omitted because they are not applicable or the information is already included in the financial statements or notes[610](index=610&type=chunk) [Form 10-K Summary](index=137&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable - Not applicable[618](index=618&type=chunk)

Instructure Holdings, Inc. (NYSE:INST) Q4 2022 Earnings Conference Call February 13, 2023 5:00 PM ET Company Participants April Scee - Investor Relations Steve Daly - Chief Executive Officer Dale Bowen - Chief Financial Officer Conference Call Participants Joshua Baer - Morgan Stanley Noah Herman - JP Morgan Frederick Havemeyer - Macquarie Brian Peterson - Raymond James Terry Tillman - Truist Securities Matthew VanVliet - BTIG Stephen Sheldon - William Blair David Lustberg - Jefferies Steven Enders - Citi O ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Delaware 84-4325548 (State or other jurisdiction of incorporation or organization) FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2022 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 001-40647 Instructure Holdings ...

Instructure Holdings, Inc. (NYSE:INST) Q3 2022 Earnings Conference Call November 1, 2022 5:00 PM ET Company Participants April Scee - IR Stephen Daly - CEO & Director Dale Bowen - CFO Conference Call Participants Joshua Baer - Morgan Stanley Frederick Havemeyer - Macquarie Joseph Vruwink - Robert W. Baird & Co. David Lustberg - Jefferies Steven Enders - Citigroup Brian Peterson - Raymond James & Associates Matthew VanVliet - BTIG Joseph Meares - Truist Securities Stephen Sheldon - William Blair & Company Op ...

PART I. FINANCIAL INFORMATION (Unaudited) [Condensed Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements%20%28unaudited%29) Q2 2022 revenue grew 22.5% to $114.6 million, net loss improved to $(12.9) million, total assets $2.15 billion [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Balance Sheet Highlights (in thousands) | Account | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $83,234 | $164,928 | | Goodwill | $1,203,979 | $1,194,221 | | Total assets | $2,145,171 | $2,133,782 | | Deferred revenue (current) | $269,655 | $240,936 | | Long-term debt, net | $492,506 | $493,263 | | Total liabilities | $870,683 | $859,397 | | Total stockholders' equity | $1,274,488 | $1,274,385 | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) Statement of Operations Highlights (in thousands, except per share amounts) | Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $114,577 | $93,567 | $228,039 | $187,547 | | Gross profit | $72,179 | $52,593 | $144,630 | $100,939 | | Loss from operations | $(6,628) | $(11,965) | $(10,315) | $(36,499) | | Net loss | $(12,919) | $(21,693) | $(18,464) | $(54,764) | | Net loss per share, diluted | $(0.09) | $(0.17) | $(0.13) | $(0.43) | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(57,540) | $(52,367) | | Net cash provided by (used in) investing activities | $(22,863) | $28,405 | | Net cash provided by (used in) financing activities | $1,138 | $(52,457) | | Net decrease in cash | $(81,556) | $(76,419) | | Cash, cash equivalents, and restricted cash, end of period | $87,596 | $74,534 | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Key notes detail the 2021 IPO, recent acquisitions, credit facility refinancing, revenue segmentation, and stock-based compensation - On April 13, 2022, the company acquired Concentric Sky, Inc. for a total purchase consideration of **$21.3 million**, which was rebranded to 'Canvas Credentials', adding **$9.8 million** to goodwill[44](index=44&type=chunk)[45](index=45&type=chunk) - In October 2021, the company entered into a new credit agreement for a **$500.0 million** senior secured term loan and a **$125.0 million** senior secured revolving credit facility, with **$498.8 million** outstanding as of June 30, 2022[58](index=58&type=chunk)[62](index=62&type=chunk) - For the six months ended June 30, 2022, **100%** of revenue was generated from Education customers, with **21%** from outside the United States[65](index=65&type=chunk) - As of June 30, 2022, the company expects to recognize approximately **$783.7 million** of revenue from remaining performance obligations, with about **74%** expected over the next 24 months[67](index=67&type=chunk) - Total stock-based compensation expense was **$9.4 million** for Q2 2022 and **$18.9 million** for the six months ended June 30, 2022[81](index=81&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=24&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses H1 2022 revenue growth, narrowed net loss, increased Adjusted EBITDA, and liquidity management [Results of Operations](index=27&type=section&id=Results%20of%20Operations) Revenue Change (in thousands) | Period | 2022 Revenue | 2021 Revenue | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Three months ended June 30 | $114,577 | $93,567 | $21,010 | 22% | | Six months ended June 30 | $228,039 | $187,547 | $40,492 | 22% | - Revenue growth was driven by an increase in new customers, growth from existing customers through upselling and cross-selling, and contributions from recent acquisitions[136](index=136&type=chunk)[138](index=138&type=chunk) - Gross margin for the six months ended June 30 improved to **63%** in 2022 from **54%** in 2021, with the cost of subscription and support revenue decreasing by **$4.6 million**[139](index=139&type=chunk)[142](index=142&type=chunk) - Operating expenses for the six months ended June 30, 2022 increased across all categories compared to the prior year, mainly due to higher personnel-related costs[146](index=146&type=chunk)[149](index=149&type=chunk)[152](index=152&type=chunk) [Liquidity and Capital Resources](index=33&type=section&id=Liquidity%20and%20Capital%20Resources) - As of June 30, 2022, principal sources of liquidity were cash, cash equivalents, and restricted cash totaling **$87.6 million**[161](index=161&type=chunk) - The company believes existing cash, its Senior Term Loan, and cash from operations will be sufficient to meet working capital and capital expenditure needs for at least the next 12 months[162](index=162&type=chunk) - Net cash used in operating activities was **$(57.5) million** for the first six months of 2022, compared to **$(52.4) million** in the same period of 2021, with cash flows subject to seasonal fluctuations[165](index=165&type=chunk)[166](index=166&type=chunk)[175](index=175&type=chunk) - In October 2021, the company entered a new credit agreement for a **$500.0 million** Senior Term Loan and a **$125.0 million** Senior Revolver, with **$498.8 million** outstanding on the term loan as of June 30, 2022[170](index=170&type=chunk)[173](index=173&type=chunk) [Non-GAAP Financial Measures](index=36&type=section&id=Non-GAAP%20Financial%20Measures) Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Loss | $(12,919) | $(21,693) | $(18,464) | $(54,764) | | Adjustments... | ... | ... | ... | ... | | **Adjusted EBITDA** | **$39,808** | **$31,198** | **$83,362** | **$63,758** | Free Cash Flow (in thousands) | Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $8,619 | $6,365 | $(57,540) | $(52,367) | | Purchases of property and equipment | $(2,082) | $(1,196) | $(3,415) | $(1,607) | | **Free cash flow** | **$6,551** | **$5,184** | **$(60,919)** | **$(53,950)** | [Quantitative and Qualitative Disclosures About Market Risk](index=40&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks are foreign currency fluctuations and interest rate changes on its Senior Term Loan, with no derivative hedging - The company has foreign currency risk related to operating expenses denominated in currencies like the euro and Australian dollar, but most sales are in U.S. dollars[206](index=206&type=chunk) - Interest rate risk stems from the **$498.8 million** outstanding on the Senior Term Loan, which bears interest at **2.75%** plus a variable applicable rate (**0.52%** at June 30, 2022)[208](index=208&type=chunk) - A hypothetical **10%** change in foreign currency exchange rates would not have had a material impact on the condensed consolidated financial statements for the periods presented[206](index=206&type=chunk) [Controls and Procedures](index=41&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective as of June 30, 2022, with no material changes in internal control over financial reporting - The CEO and CFO concluded that as of the end of the quarter, disclosure controls and procedures were effective at a reasonable assurance level[210](index=210&type=chunk) - There were no changes in internal control over financial reporting during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, internal controls[211](index=211&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=42&type=section&id=Item%201.%20Legal%20Proceedings) The company faces a class action lawsuit from February 2021 regarding its Take-Private Transaction, alleging breach of fiduciary duties - A class action lawsuit was filed in February 2021 against Instructure Holdings, LLC, Thoma Bravo entities, and certain former directors and officers concerning the Take-Private Transaction[215](index=215&type=chunk) - The complaint alleges breach of fiduciary duties and aiding and abetting such breaches, seeking unspecified damages, which the company believes lack merit[215](index=215&type=chunk)[216](index=216&type=chunk) [Risk Factors](index=42&type=section&id=Item%201A.%20Risk%20Factors) No material changes have occurred in the risk factors from those detailed in the 2021 10-K - No material changes have occurred in the risk factors from those detailed in the 2021 10-K[217](index=217&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=42&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered sales of equity securities or use of proceeds to report [Default Upon Senior Securities](index=42&type=section&id=Item%203.%20Default%20Upon%20Senior%20Securities) No default upon senior securities to report [Mine Safety Disclosures](index=42&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) No mine safety disclosures to report [Other Information](index=42&type=section&id=Item%205.%20Other%20Information) No other information to report [Exhibits](index=42&type=section&id=Item%206.%20Exhibits) The report includes corporate governance documents, CEO/CFO certifications, and Inline XBRL data files as exhibits - Filed exhibits include corporate governance documents, CEO/CFO certifications (Sections 302 and 906), and XBRL financial data[223](index=223&type=chunk)