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IH

INSTRUCTURE HOLDINGS, INC. (INST)·Q2 2024 Earnings Summary

Executive Summary

  • Solid Q2 top-line and profitability, with revenue $170.4M (+30.0% YoY) and Adjusted EBITDA $73.4M (43.1% margin; +400 bps YoY). Non‑GAAP net income was $34.4M ($0.23 diluted), while GAAP EPS was $(0.14) due to materially higher interest expense from Parchment-related debt .
  • Management did not host an earnings call and withdrew guidance amid a definitive agreement to be acquired by KKR (announced July 25, 2024), stating prior FY24 guidance should no longer be relied upon .
  • Relative to the company’s May 8 guidance for Q2, actuals were above the ranges across revenue ($170.4M vs $166.5–$167.5M), Non‑GAAP operating income ($72.0M vs $66.0–$67.0M), Adjusted EBITDA ($73.4M vs $67.5–$68.5M), and Non‑GAAP net income ($34.4M vs $28.0–$29.0M) .
  • Balance sheet levered up for Parchment: total debt $1.24B, net debt $1.10B, net leverage 4.3x (vs 0.7x at 12/31/23). Cash from operations was $(8.2)M in Q2, primarily due to higher interest expense .

What Went Well and What Went Wrong

  • What Went Well

    • Outperformance vs prior Q2 guidance across all guided metrics; revenue $170.4M, Non‑GAAP op income $72.0M, Adj. EBITDA $73.4M, Non‑GAAP net income $34.4M all above the May 8 ranges .
    • Sustained operating leverage: Non‑GAAP gross margin 79.3% (vs 79.5% LY) and Non‑GAAP operating margin 42.2% supported Adjusted EBITDA margin expansion to 43.1% (+400 bps YoY) .
    • RPO rose to $934.9M (+9.5% YoY), indicating solid backlog despite elongated higher-ed decision cycles previously noted on calls .

  • What Went Wrong

    • GAAP losses widened (Q2 GAAP net loss $(20.9)M; margin −12.3%), with interest expense jumping to $26.4M on higher debt incurred for Parchment (net leverage 4.3x) .
    • Cash generation softer: operating cash flow $(8.2)M) vs $25.1M LY, primarily due to higher interest expense; Adjusted Unlevered FCF $25.7M vs $37.1M LY .
    • Investor transparency reduced near term: no Q2 call and FY24 guidance withdrawn following the KKR agreement, limiting forward visibility .

Financial Results

MetricQ4 2023Q1 2024Q2 2024
Revenue ($M)$135.376 $155.455 $170.444
GAAP EPS ($)$(0.04) $(0.15) $(0.14)
Non-GAAP Diluted EPS ($)$0.23 $0.22 $0.23
Adjusted EBITDA ($M)$56.473 $64.944 $73.420
Adjusted EBITDA Margin (%)41.7% 41.8% 43.1%
GAAP Gross Margin (%)64.7% 65.0% 65.7%
Non-GAAP Operating Income ($M)$55.377 $63.494 $71.996
Non-GAAP Operating Margin (%)40.9% 40.8% 42.2%

Segment revenue breakdown:

Revenue ($M)Q4 2023Q1 2024Q2 2024
Subscription & Support$125.357 $144.657 $157.569
Professional Services & Other$10.019 $10.798 $12.875
Total Revenue$135.376 $155.455 $170.444

Key KPIs and balance sheet:

KPIQ4 2023Q1 2024Q2 2024
RPO ($M)$833.5 $820.4 $934.9
Cash, equivalents, restricted & customer funds ($M)$344.208 $89.255 $145.167
Total Debt ($M)$491.3 $1,173.3 $1,240.3
Net Debt ($M)$147.042 $1,084.002 $1,095.097
Gross Leverage (x)2.3x 5.1x 4.9x
Net Leverage (x)0.7x 4.7x 4.3x
Cash from Operations ($M)$36.715 $(92.553) $(8.160)

Context and drivers:

  • YoY growth: revenue +30.0% and Adjusted EBITDA margin +400 bps, aided by operating scale; GAAP profitability pressured by higher interest expense tied to Parchment financing .
  • Mix remained healthy with 92%+ subscription & support revenue; Non‑GAAP recurring gross margin remained >82% in the quarter .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($M)Q2 2024$166.5–$167.5 N/A (quarter completed; no call/guidance update) N/A
Non-GAAP Operating Income ($M)Q2 2024$66.0–$67.0 N/A (quarter completed; no call/guidance update) N/A
Adjusted EBITDA ($M)Q2 2024$67.5–$68.5 N/A (quarter completed; no call/guidance update) N/A
Non-GAAP Net Income ($M)Q2 2024$28.0–$29.0 N/A (quarter completed; no call/guidance update) N/A
Revenue ($M)FY 2024$655.0–$665.0 (set 2/20) $656.5–$666.5 (raised 5/8) Raised in Q1
Non-GAAP Op Income ($M)FY 2024$260.5–$265.5 $265.0–$268.0 Raised in Q1
Adjusted EBITDA ($M)FY 2024$266.5–$271.5 $271.0–$274.0 Raised in Q1
Non-GAAP Net Income ($M)FY 2024$105.5–$110.5 $123.0–$127.0 Raised in Q1
Adjusted Unlevered FCF ($M)FY 2024$259.5–$264.5 $262.0–$265.0 Raised in Q1
All FY24 GuidanceFY 2024As aboveWithdrawn/“should no longer be relied upon” (8/2) Withdrawn in Q2 8‑K

Note: On Aug 2, the company stated it would not host a call or provide guidance given the KKR transaction; prior FY24 guidance should not be relied upon .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q‑2: Q4’23; Q‑1: Q1’24)Current Period (Q2’24)Trend
AI/technology initiativesQ4: “several AI solutions entered beta in Q4” with positive feedback . Q1: “AI‑enabled solutions… early indications from beta positive; showcase at InstructureCon” .No Q2 call; 8‑K forward‑looking mentions include AI references .Progressing; no new color in Q2 due to no call.
Higher‑ed sales cycles/macroQ4: elongated cycles in higher ed; K‑12 resilient . Q1: RFP activity high; decisions elongated but seen as temporary .No Q2 call update .Unchanged narrative; elongated but stable.
K‑12 demand/ESSER & EdTech effectivenessQ4: ESSER supporting K‑12; interest in LearnPlatform/Impact . Q1: rationalization of edtech sprawl; LearnPlatform momentum, HE beta planned H2 .No Q2 call update .Supportive backdrop; product momentum.
Parchment integration & cross‑sellQ4: deal closed early Feb; G&A synergies planned; deleveraging path outlined . Q1: Parchment exceeded expectations; pro forma ARR high single digits .Q2 8‑K shows higher debt/interest; no call .Integration ongoing; leverage and interest elevated.
Guidance/IR cadenceQ4 & Q1 provided guidance and raised FY outlook on 5/8 .Withdrawn guidance; no call due to KKR agreement .Reduced forward visibility near term.

Management Commentary

  • “Our first quarter results exceeded all guided metrics and demonstrate the durability, operational scale, and breadth of the Instructure platform.” — Steve Daly, CEO (Q1 press release) .
  • “We also continue to innovate across our platform, including developing artificial intelligence solutions… Several of our AI solutions entered beta in Q4, and feedback has been positive.” — Steve Daly, CEO (Q4 call) .
  • “We financed the [Parchment] acquisition with cash and incremental debt… Our net leverage ratio at year-end 2024 is expected to be approximately 3.4x… We expect to delever rapidly as we continue to grow adjusted EBITDA and generate cash flow.” — Peter Walker, CFO (Q4 call) .

Q&A Highlights

  • Higher‑ed cycles and K‑12 resilience: Management reiterated elongated higher‑ed cycles with K‑12 supported by ESSER funding in near term . They view the elongation as temporary given elevated RFP activity .
  • Parchment outlook and integration: Combined ARR growth expected high single digits; G&A synergies the initial margin lever; revenue contribution in line with plan .
  • International/channel strategy: Focus on displacing legacy tech in developed markets and deepening select channel partners in emerging markets; near‑term services mix shifts as channel expands .
  • AI roadmap and monetization: Multiple AI features in beta (search, natural‑language analytics, course creation), with analytics expected as a paid add‑on; careful attention to privacy/cost models .
  • EdTech effectiveness & rationalization: K‑12 vendor sprawl rationalization driving LearnPlatform interest; higher‑ed beta targeted for H2 .

Estimates Context

  • S&P Global consensus estimates for Q2 2024 were unavailable via our data connection for INST; as a result, a standardized beat/miss analysis versus Wall Street consensus cannot be presented. Values would have been retrieved from S&P Global if available.
  • Relative to the company’s prior Q2 guidance (issued May 8), actual results exceeded the guided ranges for revenue, Non‑GAAP operating income, Adjusted EBITDA, and Non‑GAAP net income, but management subsequently withdrew all FY24 guidance on Aug 2 due to the KKR agreement .

Key Takeaways for Investors

  • Fundamentals remained strong in Q2: revenue $170.4M (+30% YoY) and Adjusted EBITDA margin 43.1% highlight durable operating leverage even as GAAP losses reflect elevated interest on acquisition debt .
  • Execution outpaced the company’s May guidance; outperformance across all guided Q2 metrics underscores conservative planning and momentum post‑Parchment .
  • Near‑term disclosure is limited: no call and guidance withdrawn due to the KKR agreement, shifting the stock narrative from fundamentals to deal dynamics in the short run .
  • Balance sheet leverage is the principal risk to monitor: net leverage 4.3x and negative operating cash flow this quarter were primarily driven by higher interest expense; management targets deleveraging as cash flow scales .
  • Backlog and mix are supportive: RPO reached $934.9M and subscription revenue continues to dominate, supporting margin durability .
  • Medium‑term drivers intact: AI feature development, cross‑sell within a large installed base, and Parchment integration remain strategic levers once the M&A process resolves and guidance reinstates .
  • Watch Q3 seasonality and cash conversion: the prime selling season and any updates on deleveraging/interest costs will be critical to validating the trajectory into 2025 .

Supporting details and footnotes:

  • Q2 2024 8‑K results and non‑GAAP reconciliations .
  • Q1 2024 8‑K results and guidance (May 8) .
  • Q4 2023 8‑K results and 2024 initial guidance (Feb 20) .
  • Q1 2024 and Q4 2023 earnings call transcripts for qualitative themes .