It's common knowledge that Instructure has shifted its focus to place more emphasis on its growth in corporate learning markets than in the educational markets that have fueled the company growth to date. We covered the initial news about their introduction of the corporate learning LMS, Bridge, four years ago.
While Instructure has excelled on maintaining product focus and simplicity of user experience, this move outside of education raises the question about whether they can maintain company focus. The corporate market is very different than the education market - different product needs, fragmented vendor market, different buying patterns. Many companies have tried to cross over between education and corporate learning, but most have failed. Blackboard, D2L and Moodle have made a footprint in the corporate space using one product for both markets. Instructure's approach is different.
As noted, the other Big Four LMS vendors are also targeting corporate learning (or professional ed, or workplace, pick your name). D2L and Blackboard are using the same platforms in both markets (Brightspace for D2L, Learn and Open LMS for Blackboard), while Moodle released Workplace, a set of plugins on top of core Moodle. Instructure, however, has different products for educational and corporate markets.
That is old news. What is more interesting is to understand Instructure's emerging strategy given the new executive team. Thanks to the nature of Instructure being a publicly-traded company, we are getting more insight that should set expectations for educational customers. As CEO Dan Goldsmith said during an investor conference a week ago:
We really changed the company, as I came in nine months ago and then took over as CEO January 1st of this year. We're initiating the second chapter in the journey of Instructure.
I should first note that the audience for these calls is the investment community, so naturally Instructure executives focused more on financial performance and projections that they would in academic meetings. But there is a lot to learn here.
In some ways, the changes to operations of Instructure are welcome and are already helping them manage corporate finances. In other ways, however, that second chapter reads a lot like Blackboard. Moving beyond the LMS, willing to bet on corporate acquisition, expecting big focus on data and analytics, and continuing challenges in completing products.
One of the ongoing criticisms of Instructure, particularly by their competitors, is that they continue to lose money and are buying growth. While these observations are accurate, as long as Instructure keeps growing, they have never been at risk of running out of money or having their losses significantly impact their operations. Under the new leadership, Instructure has been much more aggressive in managing expenses, with a big milestone described on the conference call by CFO Steve Kaminsky [emphasis added].
Turning to the expense side. With our focus on operational excellence during the second half of 2018, we've changed the mindset of our leadership team and the entire organization about how we approach the business and fund investment. We focused on disciplined investments for balancing profitable growth has been put in place and is reflected in the outlook we provided today. On the cash side, we have a strong cash position to support our important strategic objectives for both Canvas and Bridge. And looking forward to 2019, we anticipate being approximately free cash flow neutral for the full year.
Beyond simple finances, we have seen some operational changes for international operations as well. The global regions (EMEA, Latin America, APAC) all have more autonomy now, including control over country-specific marketing and product management. The non-US operations have moved beyond being regional sales and support offices into more aggressive engines of growth. In Europe and other regions, the management team has more autonomy is deciding which countries are worth investment for expanding markets, and when. From the Feb 25th investor presentation:
With the improving operations, Instructure has reduced their operating losses from 57% of revenue to 10% of revenue in the past three years.
Moving Beyond the LMS
On the same day as Instructure's earnings call and release of FY2018 financial results, the company announced the acquisition of Portfolium for $43 million, a small startup focusing on "ePortfolio network, student-centered assessment, job matching capabilities, and academic and co-curricular pathways". We interviewed Instructure staff the same day as the earnings call and noted a different message. In our initial call, the Portfolium acquisition was positioned primarily as a way to improve how Instructure can handle structured assessments in the education market - think CBE, mastery learning, with ePortfolios not as the goal but as the necessary infrastructure. During the earnings call, however, the positioning was more about bridging educational and corporate markets and expanding total addressable market (TAM).
Today, we've taken a great stride towards enabling that transition with our expected acquisition of Portfolium, a successful long time Canvas partner. Portfolium vision is to help each person realize their full potential by connecting learning with opportunity, through e-portfolios, program and course level assessments, career pathways and by matching students to job opportunities. Portfolium will join Instructure with a wealth of shared customers, such as Virginia Tech, Santa Clara University and Swinburne University in Australia. This acquisition is a great match in vision and culture and represents our first major step into the Student Success market. And while Portfolium's current offerings provide an excellent solution, more importantly, they establish the first Bridge between academia and the corporate world that aligns precisely with Instructure’s vision.
Instructure now views itself as a company with a suite of products, and they are much more open to using corporate M&A to build this portfolio.
Emphasis on Data & Analytics
The second initiative announced on the earnings call was DIG, a strategic move with data and analytics.
I am also pleased to share with you an early insight into our second growth initiative focused on analytics, data science and artificial intelligence. The code name for this initiative is DIG. And this technology platform combined with the most comprehensive SaaS database on the educational experience uniquely positions us to deliver meaningful value to our customers. And from a growth perspective, DIG has the potential to double our TAM in education.
Instructure started ramping up their data and analytics efforts (again) about a year ago, although the focus was described at the time as being about internal analytics - that is, making Canvas a better and more valuable LMS product. From what I have heard the product validation for DIG are consistent with this message - dashboards, surfacing useful data within a workflow, etc. But that was not how DIG is being sold during the conference call [emphasis added].
We've been working on the scaffolding for [DIG] for well over a year now. I mentioned in our remarks that we already have product validation towards out there in the market. We have instructors and students consuming output from some of the initial experiments with DIG. And we anticipate later this year obviously to make more announcements around specific products and offerings and how we bring them into the market. DIG ultimately is a platform first and foremost based upon machine learning and artificial intelligence. I believe that any multi tenant SaaS company born in the cloud has the opportunity once they hit a certain market share. And in fact, it may even be incumbent upon those organizations to partner with the industry and evolve that industry with new insights and predictive modeling using AI and ML. That's what DIG is at its heart.
This is brand new behavior for Instructure as a company. Previously the company was reticent to talk much about non-released products, but now they are talking not just about a new initiative, they are touting buzzwordy machine learning and artificial intelligence and predictive modeling well before any of those capabilities exist or are in customer hands. Goldsmith further clarified the DIG plans during the investor conference discussion [starting at 9:00, emphasis added].
We already have analytical capabilities in our Canvas platform. I want to be really clear and delineate the difference between an analytics and reporting capability, and a machine learning and AI platform. [snip]
We have the most comprehensive database on the educational experience in the globe. So given that information that we have, no one else has those data assets at their fingertips to be able to develop those algorithms and predictive models.
Goldsmith then described an example of predicting a student's expected performance in a class and how that prediction reliability goes up over time. Then we get the vision.
What's even more interesting and compelling is that we can take that information, correlate it across all sorts of universities, curricula, etc, and we can start making recommendations and suggestions to the student or instructor in how they can be more successful. Watch this video, read this passage, do problems 17-34 in this textbook, spend an extra two hours on this or that. When we drive student success, we impact things like retention, we impact the productivity of the teachers, and it's a huge opportunity. That's just one small example.
Our DIG initiative, it is first and foremost a platform for ML and AI, and we will deliver and monetize it by offering different functional domains of predictive algorithms and insights. Maybe things like student success, retention, coaching and advising, career pathing, as well as a number of the other metrics that will help improve the value of an institution or connectivity across institutions. [snip]
We've gone through enough cycles thus far to have demonstrable results around improving outcomes with students and improving student success. [snip] I hope to have something at least in beta by the end of this year.
Wow. Robot tutor in the sky - meet the new kid on the block.
The most generous interpretation I have is that they are being sloppy in their terminology and casually throwing out machine learning and AI to eager investors, while the reality could be more mundane but useful sharing of useful data to help instructors or administrators.
If I had to guess, however, I would suggest that Instructure has its sights set on additional corporate acquisitions over the next year or two to try and back up these expectations. I hope they realize they are not the first company to believe that AI on top of their best-in-world data will deliver success for all.
The message is also clear that Portfolium and DIG are intended to increase TAM. This means separate product categories with separate pricing in addition to Canvas. Either that or offering Canvas at different pricing levels to include add-on product bundles.
Challenges in Completing Products
We noted the modernization efforts behind Quizzes.Next, the next generation quizzing and test engine for Canvas, as well as the big schedule miss. In short, Quizzes.Next was announced at InstructureCon 2016 as being available within a few months. 12 months later at InstructureCon 2017 it entered limited beta, and at InstructureCon 2018 it entered general availability. But the story is not over. Quizzes.Next is still not at feature parity with the original quiz engine, as noted by Indiana University.
Instructure has released a new quizzing tool for Canvas called Quizzes.Next. Quizzes.Next offers several new features and question types, but is missing many features from the current Quizzes tool on which many instructors depend. Both tools will continue to be available until Quizzes.Next has achieved feature parity with Canvas Quizzes. The original Canvas Quizzes tool will eventually be retired, but Instructure has not yet announced the timeline.
If you read the Canvas Community page comparing features, it is clear that feature parity is not imminent. The transparency is impressive, however, and from what we are hearing customers are still giving Instructure some leeway because of trust. But Quizzes.Next and its delivery is a continuing problem, not least of which is the reduction in R&D spending growth for Canvas, described by CFO Steve Kaminsky on the call.
Regarding the R&D investment, we don't really break that out. But what we can tell you qualitatively is while we are doing some incremental investments on the Canvas side and DIG is a good example of that, the lion share of the growth in R&D is going into Bridge.
What to Expect
Instructure is at a crossroads. While they continue to grow, especially in education markets, and while they report improving financial performance, Instructure is entering uncharted territory (for them) in this second chapter. It is remarkable that they have not lost a major educational LMS customer in the 8+ years since Canvas was first selected by the Utah Education Network, but there are some warning signs that should not be ignored and some risky expectations being set.