Instructure(INST) - 2022 Q4 - Annual Report

Part I Business 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] - 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][50] - The business operates on a Software-as-a-Service (SaaS) model, providing customers with regular updates and guaranteeing 99.9% uptime[20][24] - 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][29] - As of December 31, 2022, the company employed 1,466 people and had over 750 ecosystem partners[58][55] - 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][76][78] Risk Factors 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][89] - 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][97] - The business is highly dependent on acquiring new customers and renewing existing contracts, and a failure to do so would harm future revenues[99] - Significant competition exists from established companies like Blackboard, D2L, and Moodle, as well as potential new entrants[117][118] - A breach of security measures could lead to unauthorized access to customer data, resulting in reputational damage, litigation, and financial liabilities[145] - The company relies on Amazon Web Services (AWS) for its cloud computing infrastructure, and any disruption with AWS could significantly impact service delivery[139] - 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][217] - 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] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[241] Properties 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] - Additional international offices are located in London (international headquarters), Sydney, Sao Paulo, and Budapest[242] Legal Proceedings 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] - On January 6, 2023, the court dismissed the plaintiff's complaint in full[245][585] Mine Safety Disclosures This item is not applicable to the company's business - Not applicable[246] Part II Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities 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] - As of February 13, 2023, there were approximately 96 holders of record of the common stock[250] - The company has never declared or paid cash dividends and does not plan to in the foreseeable future[251] 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 This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations 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] - The company completed two acquisitions in 2022: Concentric Sky (rebranded as Canvas Credentials) for $21.3 million and LearnPlatform for $94.0 million[499][501][502] 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][328] Quantitative and Qualitative Disclosures About Market Risk 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] - Foreign currency risk is limited as most revenue is denominated in U.S. dollars, though operating expenses are subject to fluctuations[389] - 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] - The company does not believe inflation had a material effect on its business in 2022[394] Financial Statements and Supplementary Data 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][397] - 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][412] - 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][406] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 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] Controls and Procedures 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] - Management concluded that internal control over financial reporting was effective as of December 31, 2022[595] - The assessment of internal control over financial reporting excluded the acquisition of LearnPlatform, Inc., which was completed in December 2022[596] Other Information This item is not applicable - Not applicable[600] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Not applicable[601] Part III Directors, Executive Officers and Corporate Governance 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] Executive Compensation 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] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] Certain Relationships and Related Transactions, and Director Independence 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] Principal Accountant Fees and Services 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] Part IV Exhibits, Financial Statement Schedules 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] - Financial statement schedules are omitted because they are not applicable or the information is already included in the financial statements or notes[610] Form 10-K Summary This item is not applicable - Not applicable[618]