INST - Instructure Holdings Is Well-Positioned For Further Growth

2023-05-03 15:27:35 ET

Summary

• Instructure Holdings, Inc. recently reported its Q1 2023 earnings, beating revenue but missing earnings estimates.
• The firm provides learning management software solutions worldwide.
• Instructure Holdings has produced revenue growth and is near operating breakeven while generating plenty of free cash flow.
• My outlook on Instructure Holdings, Inc. is a Buy at around $26 per share.

A Quick Take On Instructure

Instructure Holdings, Inc. ( INST ) recently reported its Q1 2023 earnings , beating revenue but missing consensus earnings estimates.

The firm provides learning management system software to various education markets worldwide.

INST has performed well in the recent past and the digital transformation trends in education will likely continue.

My outlook on Instructure Holdings, Inc. is a Buy at around $26.00 per share.

Instructure Holdings Overview

Salt Lake City, Utah-based Instructure Holdings, Inc. was founded to develop a learning management system for global learning administration to create learning efficiencies for both K-12 and higher education & continuing education markets.

The company originally went public in 2015, was taken private by Thoma Bravo in 2020 and went public again in July 2021.

Management is headed by Chief Executive Officer Steve Daly, who has been with the firm since July 2020 and was previously CEO of Landesk/Ivanti, an IT management and security software company.

The company’s primary offerings include:

• Canvas LMS

• Canvas Studio

• Canvas Catalog

• Assessments

• Portfolium

• Canvas Network.

The firm seeks customer relationships with schools and school districts in the U.S. and core international markets.

Instructure’s Market & Competition

According to a 2022 market research report by Beyond Market Insights, the global market for e-learning services was an estimated $236 billion in 2022 and is forecast to reach $649 billion by 2030.

This represents a forecast CAGR of 13.5% from 2023 to 2030.

The main drivers for this expected growth are continued technological innovation and growing Internet usage worldwide.

Also, the COVID-19 pandemic acted as a forcing function for many users to pursue their education in an online environment, likely increasing the industry's growth prospects despite the waning of the pandemic. In 2022, the United States dominated the e-learning market in terms of market share, accounting for approximately $109 billion. E-learning is expected to grow in the U.S. by a CAGR of 11.0% through 2030, reaching an estimated $250 billion by the end of the decade.

Major competitive or other industry participants include:

• 2U, Inc. ( TWOU )

• D2L

• Blackboard

• Moodle

• Skillsoft

• Cornerstone OnDemand.

Instructure’s Recent Financial Trends

• Total revenue by quarter has grown per the following trajectory:

• Gross profit margin by quarter has trended higher in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have fallen in certain recent reporting periods:

• Operating income by quarter has surpassed breakeven and fallen below it recently:

• Earnings per share (Diluted) have approached breakeven:

(All data in the above charts is GAAP.)

In the past 12 months, INST’s stock price has risen 36.43% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) drop of 4.55%, as the chart indicates below:

For the balance sheet , the firm ended the quarter with $104.8 million in cash and equivalents and $489.5 million in total debt, of which only $4.0 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $119 million, of which capital expenditures accounted for $6.3 million. The company paid $35.4 million in stock-based compensation, or SBC, in the last four quarters, the highest it’s been in the last eleven quarters.

Valuation And Other Metrics For Instructure

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

INST’s most recent Rule of 40 calculation was 45.9% as of Q1 2023’s results, so the firm has performed well in this regard, per the table below:

(Source - Seeking Alpha.)

Commentary On Instructure

In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023’s results, management highlighted success with new logo customers, its platform strategy, higher non-traditional education penetration and acquisition traction.

Leadership said the firm ended the quarter with 40% market share in North American higher education and nearly 30% in K-12.

The firm’s international segment produced the highest growth rate outside of Forex headwinds.

Management did not disclose any company or customer retention rate metrics, making it difficult for investors seeking visibility into its sales & marketing efficiency.

Total revenue for Q1 2023 rose 13.6% year-over-year and adjusted EBITDA totaled $48.3 million.

SG&A as a percentage of revenue was slightly higher year-over-year while operating income fell back into negative territory.

Looking ahead, management guided full-year 2023 revenue to be $523.3 million at the midpoint of the range (10.12% growth rate) and an adjusted EBITDA margin of 38.5% at the midpoint

The company's financial position is reasonably strong, with ample cash, some long-term debt but strong positive free cash flow.

Regarding valuation, the market is valuing Instructure Holdings, Inc. at an EV/Sales multiple of around 8.7x.

The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 5.5x on April 27, 2023, as the chart shows here:

So, by comparison, INST is currently valued by the market at a substantial premium to the broader Meritech Capital SaaS Index, at least as of April 27, 2023.

The primary risk to the company’s outlook is a macroeconomic slowdown, which may produce slower sales cycles and reduce its revenue growth trajectory.

In the past twelve months, the firm's EV/Sales valuation multiple has grown from 7.14 to 8.46, or an 18.5% multiple expansion, as the chart from Seeking Alpha shows below:

While Instructure Holdings, Inc. has performed well over the past year, I see further upside ahead with continued educational transformation to digital not slowing down.

With the U.S. Federal Reserve likely near the end of its rate hiking cycle, the downward pressure on Instructure Holdings, Inc.'s valuation multiples should continue to abate.

My outlook on Instructure Holdings, Inc. is a Buy at around $26.00 per share.

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