As Instructure Revenue Grows, Questions Emerge Over Bridge Corporate Learning System
Instructure’s third quarter performance left some investors beaming, but the company’s long term strategy appears more muddy.
For one, the CEO of the learning management system provider didn’t shirk away from a possible sale of its corporate LMS, Bridge, which launched in 2015. “Nothing is off the table,” Dan Goldsmith told investors in response to a question about a sale or spinoff of Bridge, according to a transcript of the company’s earnings call Monday.
He continued: “But the focus for us is really making Bridge successful, making Bridge financially beneficial and accretive and healthy and then continuing to grow over time.”
Goldsmith promised more details at an investors event Dec. 3 at the company’s Salt Lake City headquarters. But until then, here are some highlights from the earnings call and how analysts have reacted.
Good quarter, lower guidance
Perhaps best known for its Canvas LMS for K-12 and higher education, Instructure bested Wall Street expectations for the quarter that ended Sept. 30. The company reported $68.3 million in revenue for the quarter, a 23 percent increase year over year. Most of that revenue came from subscriptions and support services. Instructure has more than 4,000 customers, which includes learning institutions and companies.
Still, the company slightly lowered its expected revenue for the year to between $257.1 million and $258.1 million. Before this latest report, Instructure’s leadership expected a range of $258 million to $260 million. The decrease is mostly due to longer-than-expected implementation of contracts won in the U.K., Australia and New Zealand, Goldsmith told investors Tuesday.
As an example, he said that eight deals in the U.K. are delayed beyond 2019 and expressed uncertainty over whether the holds are related to Brexit, the ongoing discussions of how the U.K. plans on leaving the European Union. International sales accounts for about 20 percent of total revenue for Instructure, which was founded in 2008.
Investment bank Barrington Research published a report that highlighted the switch of Spain’s ESIC Business and Marketing School from Moodle to Canvas. “This represents a key international win as it demonstrates the efficacy of the Canvas platform versus its main international competitor.”
Goldsmith, who joined Instructure in January, said he expects the company to see positive cash flow this year and not break even as previously forecasted. He expects the company to report a net loss of between $19.5 million and $20.5 million, also an improvement from previous reports.
A bridge too far?
Even with the addition of new business customers like headphone seller Skullcandy and salon chain Drybar, Goldsmith was candid about his disappointment in his company’s foray into corporate learning.
He told investors that customers have reacted positively to an employee development platform feature launched in the summer. But enterprise customers have taken longer than expected to roll the Bridge LMS out companywide, preferring instead to implement it within a division or group.
“While Bridge bookings continue to grow, especially with our employee development solutions introduced over the summer, it is still not delivering at the level I want it to be at,” he said.
Goldsmith said Instructure has reorganized to give Bridge employees more autonomy to operate as a subsidiary, while he and his team concentrate on upselling opportunities with Canvas. He said he’s open to partnerships with companies focused on employee development and management, and even an outright sale of Bridge. He promised more details at its December event for investors.
“What we want mostly right now is for Bridge to be on a path that can best deliver its mission of helping employees grow and develop,” he said.
While the corporate learning management market is larger than its education counterpart (three times the size, reports SunTrust Robinson Humphreys), the corporate space is more competitive than higher education.
At least two analyst reports speculated on the possibility of a Bridge sale. “A strategic alliance or an outright sale of Bridge, particularly given Bridge’s small size relative to the total, and lack of near-term profitability and re-focusing on the Canvas platform for [total addressable market] expansion and growth, could add to the shares’ appeal,” according to a report from Barrington Research.
“We believe this will only fuel recent speculation that [management] could be looking to divest the Bridge business, which has been a drag on overall profitability ...,” according to a report from Raymond James. “The analyst day should give investors a better sense of Bridge's overall revenue/margin profile, which should help improve transparency.”
Goldsmith also acknowledged an opportunity in the market to help higher-ed institutions create and offer online degree programs, a service known as online program management (or OPM).
“Many of the OPM companies out there are more sort of content and services companies and there is a gap for technology,” he said, later adding: “We can serve institutions, we can serve OPMs, we can serve a lot of different modalities and players within the market.”
And the mysterious DIG project that Instructure has teased at, which aims to use predictive analytics to predict student success in their courses, is in a pre-pilot phase, Goldsmith said. About 20 institutions are trying out the product, but it will not go to market until 2020.
Goldsmith told investors that while he has seen industry reports on a slowdown in the rate of universities changing to new LMS products, Canvas is an exception. Canvas bookings by U.S. universities are expected to increase year over year.
“While some analysts have been reporting a sharp slowdown in higher ed LMS switches, we are not seeing that trend in our domestic Canvas bookings,” he said.
Education industry analyst Phil Hill published a response to Goldsmith’s comments. He said he stands by his data showing a market slowdown. He said Instructure may have masked any declined interest in the core LMS market by counting as wins its upsells and clients brought in through buying new companies.
For example, the company appears to have rebranded some of the revenue generating portions of Portfolium, a startup it acquired in April that provides a platform for online portfolios and digital credentials and matches students with employment opportunities. This calls into question how much growth Canvas has seen from its LMS features and how much growth it has seen thanks to newly acquired companies, said Hill.
“I believe it is misleading to describe year-over-year changes in Canvas without clarifying how the definition might have changed,” he said. “It’s all well and good that Instructure is expanding its product line and generating new business, but we need to have clarity around the core LMS market trends.”
In an email, Hill said executives’ focus on education offerings over corporate offerings is an opportunity for educators.
“This executive team was largely hired to grow Bridge while also maintaining Canvas growth, but now their top priority appears to be on Canvas itself,” he said. “This should be good news to institutions in terms of management focus and internal investments. At the same time, Canvas has become a broad platform brand, so institutions should also expect to see more upselling and cross-selling than in previous years.”