Why I bought Instructure (INST)

In 2017, I have written up several company summaries for the board:

Talend in February: http://discussion.fool.com/tlnd-32598219.aspx
Wix in April: http://discussion.fool.com/my-new-position-wix-32677125.aspx
Teladoc in June: http://discussion.fool.com/teladoc-32753167.aspx
Alarm.com in August: http://discussion.fool.com/my-thoughts-on-alarmcom-32813166.aspx…

I hope these are improving, and I rely on your questions and feedback to hone them and figure out what else I need to look at. What follows is a write-up on the latest addition to my portfolio.

Instructure (INST)

Summary and History

Instructure is a cloud-based learning management platform for academic institutions and companies across the world. Their platform enables virtual learning, and they’ve gotten so good at it in the education context (since they started in 2008) that they’re now (actually since early 2015) offering it in a business context as well. Their classroom product is called Canvas, and their business solution is called Bridge.

Instructure IPO’d in November 2015 at $16/share. It is currently trading at roughly $30/share.

They are constantly signing school districts and businesses to expand their reach to hundreds of thousands of new users. In the most recent quarter:

Instructure continued to expand its customer base in the second quarter. A few highlights include:
US Higher Education and K-12 Schools – Canvas was selected by Montgomery County Public Schools, the 17th largest school district in the U.S. with over 200 schools and 150,000 students, and by the Des Moines Independent Community School District for its 37,000 students. Within the U.S. higher education market, Canvas was chosen by the University of Minnesota, the 7th largest public university in the U.S., serving over 70,000 learners. Additionally, Temple University and Iowa State University chose Canvas for their respective 30,000 students.
International – Canvas was chosen by Erasmus University Rotterdam for their 23,000 students and by the University of Twente for their almost 10,000 students. Additionally, Canvas was selected by a consortium of three universities, serving 50,000 students in the Philippines. These universities are collaborating on joint research and share a common vision around digital literacy.
Corporate – The Hartsfield-Jackson International Airport in Atlanta, the world’s busiest airport, will utilize Bridge to train more than 11,000 of their employees and contractors.

That’s pretty impressive, and that’s just the last 90 days.


Revenue (in millions)
          Mar     Jun     Sep     Dec
2015:      15      16      21      22
2016:      23      26      30      32
2017:      34      38

Revenue Growth
         Mar     Jun      Sep      Dec
2016:    59%     63%      44%      45%
2017:    46%     47%

             Mar      Jun      Sep      Dec
2015:                                  -.43
2016:       -.42     -.44     -.34     -.35
2017:       -.33     -.32

Mkt Cap: ~0.9B
PS Ratio: ~6.5 (compare to TLND – a company of similar size with PS of 9. And INST is maybe growing even faster)
PE Ratio: N/A

as of 2016
88% of revenue is recurring
Deferred Revenue: 76M
Backlog: 213M (future non-cancellable amounts to be invoiced under agreements)
Great Investor Presentation: https://ir.instructure.com/investors/events-and-presentation…

As of June 2017 deferred revenue is up to 103M!


For the third quarter ending September 30, 2017, Instructure expects revenue of approximately $40.2 million to $40.8 million, a non-GAAP net loss of ($9.4) million to ($8.8) million, and non-GAAP net loss per share of ($0.32) to ($0.30) per common share.

For the full year ending December 31, 2017, Instructure expects revenue of approximately $152.9 million to $154.1 million, up from previously stated guidance of $150.7 million to $152.2 million, non-GAAP net loss of ($36.8) million to ($35.8) million, up from ($37.7) million to ($36.7) million, and non-GAAP net loss per share of ($1.26) to ($1.23) per common share, up from ($1.29) to ($1.26).


They seem to have a large increase in AR during Q2 each year. Last year it was 35M, and this year it was 60M. But typically in Q3 each year, AR comes down quite a bit.

They did briefly address this on the CC:

A lot of times, if a client signs up for something in January or February, what they will do is, they will stick a stub period into the contract, to align it with their fiscal year, which usually begins in July. And so what they will do, is they will put a four or five month stub period in there, and then they will start with 12 month cycles thereafter. And so what happens is, a lot of deals that get done in the first part of the year, the latter part of the prior year, from a cash collection standpoint, get pushed to the middle of the year, and then that’s the cycle that they go from that point.

I’d welcome anybody’s thoughts on if the high AR is a potential problem or not. For now, I choose to believe they know what they’re doing.


I’ve taken a mid-sized position (just under 5%), which started small a week or two ago, but has increased as I’ve learned more about the company. I also really feel the value proposition is especially great right now. Still:

  1. It is a very small company, less than a $1B mkt cap, and there’s just not as much information out there about it as many others (even the similarly sized Talend, which at least Bert has written about).
  2. It is a new position for me. I like to build my position as I learn about a company. As much as I like the value here, I have to remember not to let it get too big too fast.

Thanks for reading, and in advance for any feedback!


PS Again, can’t recommend enough checking out these slides: https://ir.instructure.com/investors/events-and-presentation…


Here are some random thoughts :slight_smile:

INST is an LMS - learning management system/software, also known as a CMS - course management system/software. (online learning, distance learning, etc are other monikers)

There are lots of LMSs out there:
In-house LMSs developed years ago are disappearing?
Moodle - free/open source
Blackboard - at one time had 90% of the CMS market- IIRC.
Desire2Learn, D2L, now called Brightspace - at one time had 8 or 9% of the CMS market -IIRC.

Google ‘course management software’… there are many to peruse.

In addition, the big textbook publishing companies are vigorously developing their e-resources for the instructors: powerpoint, testing/quizzing, study support, electronic/online lab exercises, 3D study tools, etc.

The online testing options include drag-and-drop labeling, labeling, multiple choice quizzes, multiselect quizzes, short answer, long answer/essay, and others.

Instructors, once they ‘learn’ to use a system do NOT like to change. In addition, a source that provides a deep pool of electronic/online resources that do much of the ‘prep work’ for the instructor is very appealing.

Pearson Publishing https://www.pearson.com/us/ (the largest text book publisher in th world?) has a massive online resource for many disciplines - at all levels from K-12 through Higher Education, College and University - the MyLab and Mastering X resources, where X = biology, chemistry, math, physics, etc.


Most of the stand alone CMS/LMSs say that incorporating online resources from the textbook publishers is ‘easy’… but in my experience, there is a bit to be desired?

Schools are bound by privacy laws - therefore, a program such as Pearson’s that is administered by Pearson, not the school, is less ‘privacy secure’ than a program bought by the school, such as Blackboard, and administered by the school?

The school/college/university that buys the LMS must have servers, staff and infrastructure in their budget. The online offerings from the textbook publishers are paid for by the student.

ok, I’ve spilled all the beans I have at this time :slight_smile:


Hey, Bear,

I read something about Bridge maybe a couple months ago but the story wasn’t about the company and had more to do with learning and teaching. I can’t find it now since my pc’s are acting up and had to be put in time out, so my browsing history is … well, history.

First thoughts:

it is a very small company, less than a $1B mkt cap, and there’s just not as much information out there about it as many others

Since you like their growth story (and numbers) this shouldn’t be too much of a problem. In fact it could well be a huge advantage IMO (if they are successful longer term) because no one knows much more about them than you. What I wouldn’t give to have caught many companies at that very stage…NFLX, MSFT, SHOP, AMZN, INTC, etc., etc. Yes, if you have enough cash to invest with, one might still get rich owning NFLX. But the folks who ponied up even $5k at the earliest stages and kept the shares, are truly rich and may have started with nest to nothing. Personally I don’t have a big war chest, so I’m shooting with the “Buy early” strategy (but never early enough to hit it really big.)

It is a new position for me. I like to build my position as I learn about a company. As much as I like the value here, I have to remember not to let it get too big too fast.

Ah, heck, quit complaining and let it grow fast! :slight_smile: I find it a lot easier to follow and learn about a company while owning it than watching from afar. Plus, if we watch from afar and the company is wildly successful, we also get to watch the price shoot skyward without us on board. Been there done that may times, never could afford the t-shirts.

They seem to have a large increase in AR during Q2 each year.

Yes, that’s a possible problem, but only if clients start to back out of the deals in meaningful numbers, so it bears watching closely IMO. Otherwise, “sales is sales” and sales are good. Might pay to follow up on their precise terms when someone signs on the dotted line. Is it refundable, and under what conditions, etc.? And how many do back out?

I don’t know much about the company (I will though.) :slight_smile: Otherwise, I like the way you approach new-to-you companies and without crunching the numbers, could consider some of your negatives to be very much positives. Be aware I’m likely biased as this is pretty much the way I learn and earn too.

Always appreciate your sharing, but maybe even more than usual now, as I’m sitting on a pile of cash and you know how I hate to have money that isn’t working for me.




Thanks for bringing this to our attention. I sent some time in their statements and the slides as well, and my observation in regards to the AR is that many of their customers are universities and school systems and so they tend to introduce a new platform such as Canvas in the 3rd quarter when the school year begins. The 3rd quarter is also when their fiscal year begins. Management appears to account for this with the stub periods.

Instructure management expects to be cash flow positive in the 2nd half of this year, and not a moment too soon, as their cash on hand is dwindling. In fact, that may be the greatest risk with this company. If they don’t achieve their cash flow goals this year, they may need to acquire more cash to hold them over. And that could be costly for investors. But they are winning clients at an impressive clip, and are introducing a new product as well- Gauge. It’s an assessment management system for school systems. If successful, Gauge is likely to deepen their relationship with clients and make school systems even more reluctant to switch to a competitor.



Hi Bear,

The revenue growth looks great. But I am wondering what is the hook behind this company and what makes it different. It seems that, according to Ralph’s post, the competition in the field of LMS is severe.



Hi Bear,
Interesting and I had been looking at INST. It all looks pretty good and you d a good job of summarizing. My question would be around earnings. I know they are still growing, etc., but even with the large revenue increases it seems like the earnings growth has been pretty stubborn in even moving much in the direction of going positive. Have you looked at gross margins or how fast the sales and marketing is growing relative to revenues?



Hello Ralph,

Thanks for the post.

The school/college/university that buys the LMS must have servers, staff and infrastructure in their budget. The online offerings from the textbook publishers are paid for by the student.

Why would an institution that goes with INST’s Canvas have to have their own servers and IT staff
for that LMS? I thought it was all in the cloud?

Best regards,


Hi Mike
You are correct! As I understand it, the servers are in the cloud.

The institution must have a budget to pay the fees associated with the package bought -
which includes use/rent of the server/s. If the institution grows, then it needs more server space, therefore more money paid out for the institution.

So, I guess a question would be - what is the cost of INST vs the cost of the competitors?

The LMSs are sort of a ‘middle man’ between the school and the textbook (content providers) which allows the school or other institution to meet the privacy requirements mandated by law.

Schools are continually trying to cut costs. Shifting the cost from the school via an LMS to the student paying a fee to a publishing company for the publisher’s LMS seems a low hanging fruit?

All at the same institution - I saw professors using the system all kinds of ways. Some used the publisher’s online site for all the content management and only input final scores into the school’s LMS, others used a combination with some content (notes, lab work, study quizzes) delivered from the publisher and other content (lab’s, quizzes and tests/exams) managed on the school’s LMS, and other professors jumped though hoops to get the publisher’s content loaded into the school’s LMS. This last group would typically have to jump through the hoops EVERY year, if not every semester due to product upgrades by the publisher.

Personally, I think AI is going to impact the teaching area immensely. The big publishers will have the resources to support the AI. I don’t know how that will transfer to the LMSs.


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Great write up, Bear!

For what it’s worth, I see that in August, they also just signed my neighbor, Georgia Tech (25,000 students) to Canvas (http://www.prnewswire.com/news-releases/canvas-by-instructur… as well as The Glasgow School of Art (https://www.canvaslms.com/news/press-releases/Glasgow-School…).

I think the international school roster is impressive, and seems like it could be a real place for growth. The Georgia Tech news is especially interesting because they chose Instructure after a two year search process. If they can win that kind of competition, at that kind of technical university, I think that says a lot about their “win rate” to me. They are killing their own, in-house LMS ‘T-Square’ to go with Canvas. (http://www.news.gatech.edu/2017/08/21/t-square-being-phased-…).


FWIW, UVM med school is phasing out lectures. Not sure if this is a trend or fad, and not sure how it may (or may not) affect INST


Thanks for the “shout out” to my alma mater (I went ungrad, not medical). I hope that business schools start adopting a lighter lecture model as well.

Hey guys,

I go to Northwestern University, and we use canvas. It’s really awesome software. My friend who goes to Harvard also told me Harvard uses Canvas as well. I can explain more about the student side of the product if people want, but I personally believe eventually every college in the country (and potentially many high schools) will end up using canvas. It really is that good. For that reason alone I think I will invest, as I cannot run numbers as well as a lot of others but my advantage is knowing the products that target my age group.



I have a kid at Iowa State University. They are switching from Blackboard to Canvas in January 2018. I have to believe that it is somewhat painful to make the switch so there must be compelling reasons to make the move. I also saw that Instructire added Des Moines public schools as a client and I am sure that the school performed adequate due diligence prior to making the commitment. Just thought I would share this first hand information from my little corner of the world. I purchased a starter position in INST.


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Probably the biggest hurdle to overcome is educating the teachers on how to use the product. Professors hate technology when it comes to this sort of stuff and they don’t want to learn how to use a new software for issuing assignments/grades.


Hi Bear,

Thanks for sharing your decision to invest in Instructure. It got me interested. So I took a quick look at the latest earnings release.

Gross margins are great, and the COGS are going up a bit slower than Sales, resulting in a GAAP gross margin of 71.1% in the latest quarter vs. 70.5% in the same quarter last year.

The operating cash flows are negative. You pointed out the jump in receivables (60MM vs. 35MM YoY), which is the primary culprit. This was somewhat mitigated by a jump in deferred revenue (49MM vs. 35MM YoY). At the rate they’re growing and the lumpiness of the 1st payment payment schedule, this could go on for quite a while. As the customer base gets bigger and as growth slows this will stop.

Accounts receivable jumped (73MM vs. 18MM Dec '16).

The cash position has deteriorated quite a lot (26MM vs. 62MM YoY). There is about 2 quarters worth of operating expenses in cash based upon the Oper in the most recent quarter.

If they don’t collect the cash they should for the sales they made, they’ll need to come up with cash in some other way to run the business. Perhaps they’ll have to dilute shareholders. Given their customer base, at least the customers they announced, they should get their money.

For me, I really like the gross margin and the apparent lock-in effect of the business. If they grow modestly and ratchet down marketing, they could become profitable in a relatively short period of time. Did anybody listen to the latest earning call? Was there any discussion about the expected timing for this?

What I don’t like is that it is in the education industry. I don’t know it, and I suspect that it is fickle. When I studied, the fees were high, the price of text books was high and the student services were mediocre. My last university class was 21 years ago. But I can imagine that this can be said today as well. Perhaps I should see how their products add value or help schools deliver a better service that makes them glad to spend their money on the solutions. Apparently, they do business with corporations too. This makes the company more interesting to me.

I think I will buy a really small position and monitor it to see if it warrants more attention.

Thanks a lot for bringing this to our attention.



It is helpful to read about how the different universities ended up choosing to work with Canvas. Here is the report from The Ohio State University (http://resourcecenter.odee.osu.edu/sites/default/files/execu…) and (http://odee.osu.edu/sites/default/files/lms_eval_recommendat…) that talks about their process.

They chose Canvas over Blackboard and D2L. It specifically says:

In the surveys and subsequent committee deliberations, Canvas stood out as superior in every feature, except for recording and calculating grades; and was rated by committee members far above both Blackboard and D2L on ease of use and clarity of interface throughout, inspiring prospects for teaching and learning, functionality on mobile devices, collaboration and communication features, and overall integration.

That is from 2015, and they are just now fully implementing it in 2017. The Georgia Tech research said basically the same thing. Its like a 2 year process for these schools to choose to use Canvas, so once they actually do, it definitely won’t be easy to switch. I actually don’t think they can without starting another two year process. I would put the fear of canceling or refunds at almost zero.

My questions:

How many universities are already in the middle of this two year search period and will be committing to Canvas in the next 24 months?

A two year sales process is extremely slow, but how fast does recurring income make up for it?

Does it take that long of an evaluation process to choose Bridge for corporate clients?

A little more digging led me to this article about how the University of Missouri made the switch in 2015-2016 from Blackboard to Canvas. (http://lmsevaluation.teachou.net/wp-content/uploads/2016/02/…)

Some highlights:
Financial Analysis
Canvas is the least expensive at $12.16 per student, followed by Brightspace at $13.62 per student, and then Blackboard at $17.17 per student. Without including conversion costs, moving to any of the options will likely save us money over our current locally hosted instance of Blackboard, with Canvas possibly saving us the most over a five year period.

Faculty Survey: Choice of Preferred LMS?
Canvas 89%
Blackboard 10%

Total costs for a conversion:
Temporary Additional Staff Members
Estimated Canvas license and hosting for two years.
This would be in addition to hosting Blackboard during that same time period of conversion, and could be funded out of one time monies available in the MU Information Technology Fund reserve fund.

Total $1,003,014

The University of Missouri has 30,000 students (as of 1/2015). Their pricing shows $272,000 per year for the base system on a five-year contract. Total contract: $1,361,145 .
When you add in annual support costs and other premium features, they agreed to a five-year contract worth $1,875,875 ($375,175/year)

This came in cheaper than D2L ($2,101,545) and Blackboard ($2,650,300) and the faculty (unaware of the pricing) actually preferred it 9 to 1 over Blackboard.

Hope some of this helps. I do recommend reading the University of Missouri report.

It seems that people like it better, it is cheaper, and it is sold in five-year contracts. Looks good from here.


A little more digging led me to this article about how the University of Missouri made the switch in 2015-2016 from Blackboard to Canvas. (http://lmsevaluation.teachou.net/wp-content/uploads/2016/02/…)

Epictetus, I don’t know how you found that, but that’s amazing! And it makes Canvas sound really, really good. And I also loved hearing the first hand knowledge from

Holy crap guys (and gals). Thank you all. Honestly, this little thread (less than 24 hours after it was started) might be the best single source of information on this little company on the entire internet. Actually, I’m almost sure it is, because as I said in the original post, there’s not a lot of info out there…though I guess you guys are proving me wrong on that. What a resource this board is!

To anyone who asked questions, they’ve probably been answered here…Randy, I think I saw the gross margin issue addressed (it’s improving!) – check out those slides I linked to twice. FourthStooge, you asked if they said anything on the CC about profitability. Yes, the CFO said they would be FCF positive in 2018:

To reiterate what we have been saying on our prior calls, we remain confident that we will be cash flow positive in the second half of this year, and also, for the full year of 2018.

Hope that helps. Keep posting any new findings, everyone!

Gratefully, and with a few more shares of INST than I had yesterday,


One more thing that I found this afternoon that I think you might find very interesting. This is an article about LMS penetration and how Blackboard has been like a glacier with such a dominant marketshare that is now melting: (https://techcrunch.com/2016/09/02/the-lms-market-glacier-is-…)

This quote stood out to me though:

It’s true that Blackboard still has greater market share than any other technology player in higher education. But Instructure’s Canvas LMS won almost 80 percent of new higher education implementations this year — a shift that may reflect the growing influence of faculty, rather than institutional, priorities in LMS purchasing. Consider this: While the LMS reached a saturation point among colleges and universities around 2003, it is only in the past 3-4 years that the vast majority of courses or faculty members routinely used an LMS.

80% of all new LMS contracts last year went to Canvas and Instructure?


Saul likes to quote Talend talking about their “ridiculously high win rate”, I would think that an 80% win rate would be able to get your attention.


Excellent write up and dialogue.

However, I have been burnt more than once with next gen education stocks. Private education universities, Blackbaud, K12, Two You… everything looks good in the beginning but something always comes up and breaks the stock down.

I will pass this one.

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Just so everyone understands what Canvas is…

Canvas is like Shopify where it creates a platform for school professors (instead of small businesses) to put their material (instead of store) on.

Basically it’s like a website for a class that I assume is easy to set up and good for students because it’s all in one place.

For example, say I enroll in “Economics 101”.

My professor emails me saying “Welcome to Economics 101, the class is now up on canvas”

I log into my canvas account(through my university) and Econ 101 is already in my dashboard without any need for me to do anything (it must be tied to registration somehow). I can click on that class and it will bring me to like a table of contents for that class. I can read a quick overview, check my assignments, hand in online assignments, check my grades, read the syllabus, etc. Almost every class I take uses Canvas (especially good for seeing your grades in a 400+ student class).

NO CLASS MATERIALS (aka textbooks) are related at all to Canvas.

Hope that helps understanding the product side of Canvas.