INST - Instructure: Reiterate Buy Rating As Growth Momentum Remains Sound And Strong

2023-08-15 06:02:54 ET

Summary

• 2Q23 results reinforced its growth momentum, with solid subscription revenue growth of 15% YoY.
• Despite a 10% revenue guidance increase, EBITDA guidance increased by only 2%, suggesting a focus on continuous reinvestments for growth.
• INST's Catalog and Credentials offerings are well-positioned to drive the adoption of skills-based learning and micro-credentials in the education industry.

Summary

Instructure's ( INST ) Canvas is the top Learning Management System [LMS] available, primarily due to its superior win rates and dominant market share in North America's Higher Education and K-12 sectors. Readers may find my previous coverage via this link . My previous rating was a buy, as I believed INST would continue to capture share by converting schools that are still using legacy LMS systems. I am reiterating my buy rating as 2Q23 results reinforced my view of INST growth momentum and that comments around renewals were especially encouraging as they indicate the strength of INST products and how sticky they are.

Financials/Valuation

INST reported solid 2Q23 results, with revenue of $131.1 million being estimated, driven by 15% y/y growth for subscription revenue. Note that this 15% growth is an acceleration from the 14% y/y growth in 1Q23. Adj. EBITDA margins of 39.1% also beat consensus by 100bps, largely due to the revenue outperformance as well as gross margin expansion.

Based on my view of the business, INST should be able to grow as per guidance in FY23, followed by an acceleration in growth rates back to historical levels. The 2Q23 results clearly show that INST has a strong product offering (as seen by the renewal rate), increased module adoption, and duration extension. All these bode well for the INST growth runway. While I believe margins would expand accordingly, I am staying conservative as I expect to continue reinvesting in the business for growth. Note that INST increased revenue guidance by 10% but EBITDA only by 2%, suggesting continuous reinvestments, in my opinion.

Comments

While INST's performance was solid across the board in 2Q23, I believe record RPO thanks to robust renewals and bookings best exemplified the quarter. As INST passed the 3-year anniversary of their covid, a large number of renewals occurred during the quarter, resulting in RPO of $853.6 million. The fact that INST was able to renew their contracts is significant because it demonstrates the product's stickiness and the value it provides to customers. Moreover, customers are choosing to adopt more INST products because of the value they have received from the platform thus far and because of consolidation trends that are causing customers to select just one or a small number of long-term strategic vendors. In addition to buying more, current customers are also renewing their contracts for longer.

I think the 2Q23 earnings call also painted a very positive picture of the growth runway ahead of INST. In particular, for Higher education institutions, I am now a lot more positive about it.

So good quarter from that perspective, we're seeing a lot of pickup with our catalog and credentials as we help either higher ed institutions, address the non-traditional or as we go to -- we go after some of those non-traditional verse RTO organizations, like we talked about in the script." 2Q23 earnings

In my opinion, a growing number of universities will likely adopt skills-based learning, which calls for a radical departure from the conventional "X number of years to graduate" curriculum, and this will be to the benefit of Canvas Catalog and Credentials. In light of declining enrollment and mounting pressure to ease students' financial loads, it is imperative that universities diversify their revenue streams by offering non-degree credentials that are increasingly valued by employers. Furthermore, universities that adopt skills-based learning will be able to attract a wider variety of students - thereby increasing the profit pool. With its Catalog and Credentials offerings, INST is well positioned to facilitate the adoption of micro-credentials and skills-based learning by enabling clients to design course material and establish organized educational routes.

I don't anticipate any major obstacles that could slow the company's expansion in the near future. The fact that management raised their revenue guidance by 10.5% at the midpoint (new range: $524 million to $528 million) is a clear sign that July has been a good quarter, so 3Q23 should not be much of an issue either. With the rise in revenue, EBITDA guidance was raised as well, from a range of 201.4 to 205.5 million (a 2% increase) for a 39% margin at the midpoint.

Conclusion

In conclusion, INST remains a buy as its growth trajectory continues to demonstrate resilience. The 2Q23 results underscore my confidence, with robust subscription revenue growth, elevated EBITDA margins, and remarkable renewals showcasing the enduring value of INST's products. As the education landscape shifts towards skills-based learning and micro-credentials, INST's Catalog and Credentials offerings are strategically positioned to drive adoption and innovation.

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