Instructure(INST) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION (Unaudited) Item 1. Condensed Consolidated Financial Statements (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 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 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 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] - Stock-based compensation for the six months ended June 30, 2023, was $21.511 million, increasing additional paid-in capital[15] Condensed Consolidated Statements of Cash Flows 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] - 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][162] Notes to Condensed Consolidated Financial Statements 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 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] - The company operates in a single segment: cloud-based learning management, assessment, and performance systems[28] 2. Summary of Significant Accounting Policies 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] - 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][31][32] 3. Net Loss Per Share 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] 4. Property and Equipment 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] 5. Acquisitions 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][39] - 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][41] - Neither acquisition had a material effect on revenue or earnings for the presented periods[38][40] 6. Goodwill and Intangible Assets 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] - Estimated future amortization expense for the remainder of 2023 is $71.5 million, and $142.4 million for 2024[45] 7. Credit Facility 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] - 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][154] - 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][153] 8. Revenue 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] - Approximately $853.6 million of revenue is expected from remaining performance obligations, with 73% recognized over the next 24 months[57] 9. Deferred Commissions 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] 10. Stock-Based Compensation 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] - 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] 11. Income Taxes 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] 12. Fair Value of Financial Instruments 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] 13. Leases 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] 14. Commitments and Contingencies 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] - Management believes current legal proceedings will not have a material adverse effect on the company's financial position, results of operations, or liquidity[86] 15. Related-Party Transactions 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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] - Recent acquisitions (Eesysoft, Kimono LLC, Concentric Sky, LearnPlatform) aim to expand platform functionality, including impact evaluation, data syncing, digital credentialing, and usage management[90] Recent Developments 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] - Interest rate on the Senior Term Loan increased from 6.12% (Dec 31, 2022) to 7.85% (Jun 30, 2023), impacting debt costs[96] - All deposits with Silicon Valley Bank are fully accessible, despite broader banking system uncertainties[95] Key Factors Affecting Our Performance 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] - 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] - Expand revenue by cross-selling additional solutions (assessments, analytics, student success, etc.) to existing Canvas LMS customers[99] Key Components of Results of Operations 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] - Subscription and support revenue is recognized ratably over contract terms (typically 1-5 years), billed annually in advance[101] - Professional services revenue is recognized over time as services are rendered, using an efforts-expended input method[102][104] - Cost of subscription and support includes cloud hosting, third-party services, employee costs, and amortization of capitalized software development and acquired technology[105] - 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][108][109] Results of Operations 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 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][120] Cost of Revenue 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][125] - 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][126] Operating Expenses 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 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] - 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] Research and Development 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] - 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] General and Administrative 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] - 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] Other Income (Expense), Net 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] - 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] Income Tax Benefit 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] Liquidity and Capital Resources 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] - Management believes existing liquidity and cash from operations will be sufficient for at least the next 12 months[143] - 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] - 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] Credit Facility 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] - 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] - 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] Operating Activities 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] - Working capital changes included a net decrease of $96.0 million in deferred revenue and accounts receivable, reflecting business seasonality[156] Investing Activities 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] - Purchases of property and equipment were $2.9 million in YTD 2023, compared to $3.4 million in YTD 2022[159] Financing Activities 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][162] - Proceeds from issuance of common stock from employee equity plans were $3.3 million in YTD 2023 (vs. $4.1 million in 2022)[161][162] Critical Accounting Estimates 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] Recent Accounting Pronouncement 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] Non-GAAP Financial Measures 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] - 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] - Adjusted EBITDA further adjusts EBITDA to exclude interest income, foreign currency effects, and fair value adjustments to acquired unearned revenue[174] Non-GAAP Operating Income 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] Free Cash Flow 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] Adjusted EBITDA 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] Forward-Looking Statements 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] - 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][183] - The company undertakes no obligation to update or revise any forward-looking statement unless required by law[185] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - 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] - 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] Foreign Currency Exchange Risk 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] - Most sales are denominated in U.S. dollars, so revenue is not significantly exposed to foreign currency risk[187] - No hedging arrangements are in place for foreign currency risk; a hypothetical 10% change in exchange rates would not materially impact financial statements[187] Interest Rate Risk 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] - 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] Item 4. Controls and Procedures 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] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[192] - Internal control systems have inherent limitations and can only provide reasonable, not absolute, assurances[193] Evaluation of disclosure controls and procedures 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] - Controls are designed to provide reasonable assurance that required information is recorded, processed, summarized, and reported within SEC specified time periods[191] Changes in internal control over financial reporting 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] Inherent limitation on the effectiveness of internal control 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] - Any system of internal control can only provide reasonable, not absolute, assurances[193] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] - 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 3. Default Upon Senior Securities This item is not applicable for the reporting period - Not applicable[198] Item 4. Mine Safety Disclosures This item is not applicable for the reporting period - Not applicable[199] Item 5. Other Information 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] Insider Trading Arrangements 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] Item 6. Exhibits 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] 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]