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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to Instructure's Q3 2019 Earnings Conference Call. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Natalia Kanevsky, VP of Investor Relations. Please go ahead. Thank you.
Good afternoon everyone and thank you for joining us on today’s quarterly earnings conference call. Today's call is being hosted by Dan Goldsmith, CEO; and Steve Kaminsky, CFO.
Before we begin, I'd like to remind you that today's conference call will include forward-looking statements based on the company's current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release and the other reports and filings we file from time to time with the Securities and Exchange Commission.
All our statements are made as of today based on information available to us as of today, and except as required by law, we assume no obligation to update any such statements. The content of today’s conference call is Instructure’s property and cannot be reproduced or transcribed without our prior written consent.
During the call, we will also refer to both GAAP and non-GAAP financial measures. You can find a reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted to the Investor Relations section of our website. All of the non-revenue financial measures we will discuss today are non-GAAP unless we state that the measure is a GAAP measure.
Now, I’d like to turn the call over to Instructure’s CEO, Dan Goldsmith.
Thank you, Natalia, and good afternoon everyone.
During today's call, we’ll update you on our progress towards our business goals, expand on our ongoing effort to manage costs and share more details around our strategic planning and upcoming Analyst Day.
Q3 with a solid quarter for Instructure, we delivered $68.3 million in revenue representing 24% year-over-year growth and we exceeded our previously issued guidance for non-GAAP net income by $2.9 million.
Now I would like to share details on how key areas of our business are performing. Domestic Canvas is progressing nicely, on track to deliver results in line with our outlook for the year. So while some analysts have been reporting a sharp slowdown in Higher ED LMS switches we are not seeing that trend in our domestic Canvas bookings. In fact our high ED domestic bookings are on track to be up this year over last year.
At the same time internationally, we are seeing delays in a number of opportunities that are pushing some bookings into 2020. For example in U.K. and Australia a set of large public tenders planned for this year have been pushed out beyond 2019. Globally win rates remain strong for Canvas, so by continuing our expansion into markets such as Spain, France and Southeast Asia, we're confident in our ability to drive growth and manage pipeline risk.
MasteryConnect and Portfolium are both delivering the results we anticipated at the time of acquisition and improving our overall competitive position with Canvas. And, while Bridge bookings continue to grow, especially with our Employee Development solutions introduced over the summer, it is still not delivering at the level I want it to be at. Increasing our focus and efforts on Employee Development opportunities, where we are seeing higher win rates, attach rates, and larger deals will help us drive growth moving forward.
On past earnings calls, we have outlined a list of customers who have chosen Canvas and Bridge during the quarter. We have heard from many of you that it is better to have a few select examples on the earnings calls that demonstrate progress in the market rather than a comprehensive list of wins. We will publish a list of key customer wins on our Instructure blog following each earnings call.
Princeton University is the most recent Ivy League institution to join the Instructure family. The university was looking to move to a more intuitive and robust learning management platform that could support faculty teaching goals, expand learning activities, and improve assessment strategies.
Canvas was selected as the best choice after an extensive evaluation process that included input from students, faculty, and staff. With the addition of Princeton, we are happy to announce that Canvas has now been adopted by all Ivy League schools.
Hillsborough County is the third K-12 district with approximately 200,000 students in Florida that has selected Canvas. The School board valued Canvas' ability to meet the needs of students while also offering powerful tools for administrators and teachers. This key win solidifies our presence in large school districts in Florida and better positions us to win other districts in the future.
I recently attended our CanvasCon event in Barcelona and met with customers and prospects from across the region. It was nice to see everyone was excited about the new capabilities we are introducing as a part of our Learning Management Platform.
Canvas is already the solution of choice at all top 10 U.S. business schools, and we are excited to see similar progress with the international business schools. When ESIC Business and Marketing School, one of the most prestigious institutions in Spain, decided to switch from Moodle, they ran two competing pilots simultaneously.
In the end, ESIC chose Canvas not only because it is the best technology platform but also because they valued the community and Canvas team that will guide them. Interestingly enough, ESIC is also looking to use Canvas for student engagement post-graduation. We are excited that ESIC joins the ranks of other top universities in EMEA using Canvas such as INSEAD in France and Oxford Said in England.
In Southeast Asia at the Technological Institute of the Philippines, management, academic leadership and faculty selected Canvas for both campuses covering senior high school to graduate school. This is another great example of our ability to establish anchor schools in markets around the world.
At the Educause Conference just two weeks ago we announced Portfolium is now seamlessly integrated into the Canvas user experience. Students will have lifelong access to their folio where they can organize learning assets, connect with other folio users, and curate content to help showcase their skills to potential employers. Their personal folio will follow them throughout their academic and professional lives, serving as an expanded resume.
In addition, educators can now access integrated Portfolium capabilities for institutions directly from the Canvas Learning Management Platform. With deeper integration, it is now easier for institutions to procure Canvas and Portfolium together. Our CanvasCon events in Sydney and Barcelona yielded good interest for Portfolium in the EMEA and APAC regions with a number of customers already asking to implement Portfolium in the coming year.
On the employee development side, we recently announced the addition of Bridge Connect to our Bridge Employee Development Platform, which offers employees the ability to more easily connect with co-workers, join skill communities, and identify potential mentors.
Skullcandy, a consumer electronics company, attended our BridgeCon event in June. They selected Bridge seeing the value of our employee development solution to address their need to transition from annual to quarterly reviews, enable monthly career development discussions between managers and employees, and build stronger onboarding programs for new hires.
Our third quarter results are solid and despite some of the headwinds with International Canvas and Bridge, we are pleased with our progress.
Now Steve will talk through the financials, and following his remarks, I will provide details on our December Analyst day and strategic planning work.
Thanks, Dan, and thanks everyone for joining us today.
As Dan mentioned, we delivered another solid quarter in Q3 with healthy year-over-year revenue growth and improvements to the bottom line. Total revenue grew 24% year-over-year to $68.3 million, of which subscription revenue was $61.9 million. The year-over-year revenue growth is a result of customer growth and continued net revenue retention of over 100%.
While we are pleased with our revenue growth in the quarter, currency headwinds from GBP and AUD had a larger impact relative to prior periods. The Q3 impact was approximately $300,000 which is equal to the total foreign exchange impacts for the first half of this year. For further contacts, in 2018 the impact was less than $100,000. As a percent of total international revenue was 19%, growing 25% year-over-year.
As a reminder our total revenue for the third quarter includes the contribution from our two acquisitions which is almost entirely domestic revenue. 12-month rolling billings at the end of Q3 was $272.4 million, up 20% from third quarter of 2018, also calculated on a rolling 12-month basis.
If we exclude the billings contribution from acquisitions, billings on a rolling 12-month basis was $252.8 million, up nearly 12% from last year. For the remainder of my commentary unless otherwise noted I would discuss non-GAAP results and all EPS numbers are on a per common share basis.
Gross margin in Q3 was 72.2%, essentially flat year-over-year, and up 91 basis points as compared to last quarter. Q3 total operating expense was $53 million, this represents as a percent of revenue a decrease of 500 basis points compared to last year. Excluding the impact of acquisitions and the change in compensation policy 149 basis points of that decrease was related to controlling costs.
Our operating loss was $3.7 million as compared to $5.7 million in the same period a year ago.
GAAP net loss for Q3 was $20.9 million as compared to $11.5 million in the same period a year ago. Non-GAAP net loss for Q3 was $4 million, which is $2.9 million or $0.08 per share better than our previous expectation.
Turning to the balance sheet, we ended the quarter well with a $127.2 million in cash, cash equivalents and marketable securities. Free cash flow for the third quarter of 2019 was $79.7 million.
Let me end my remarks around our expectations for the fourth quarter and full year. For the fourth quarter, we expect revenue in the range of $67.8 million to $68.8 million. In Q4, we expect a larger currency impact than we saw in Q3 of approximately $400,000 to $500,000 which is included in today's guidance. We anticipate non-GAAP net loss of $6.4 million to $5.4 million, and non-GAAP net loss per common share of $0.17 to $0.14.
For the full year, we expect revenue in the range of $257.1 million to $258.1 million, down from our previous guidance of $258 million to $260 million. This change is driven both by business performance that Dan mentioned earlier, and the cumulative effect of foreign exchange impact of approximately $1 million for the year.
We expect non-GAAP net loss of $20.5 million to $19.5 million an improvement to previously stated guidance of $24 million to $21.5 million. And a non-GAAP net loss per common share of $0.56 to $0.53 as compared to previously stated guidance of $0.65 to $0.58. For calculating EPS, we expect our shares to be $37.7 million for the fourth quarter and $36.9 million for the full year. The improvements to our Q4 and 2019 bottom line will be driven primarily by our continued focus on managing costs.
We also expect a decrease of 2019 stock-based compensation expenses from previously stated $60.3 million to $57.5 million. Our cash position is healthy and our free cash flow forecast has improved. We now expect to reach positive free cash flow by year end.
On a personal note, I want to take this opportunity to update everyone on discussions I've been having with Dan regarding my intent to retire. It has been something I have been contemplating for some time. While there is no set timetable, Dan and I have started the conversation regarding a succession and transition plan.
Let me now turn it back to Dan for closing comments and a look at our upcoming Analyst Day.
I would like to thank for Steve for his more than seven years of service to Instructure. Steve has been integral to the growth and success of Instructure since its starting days. On behalf of the board and our employees, I want to express appreciation for his dedication and his passion for our business teams and how we are transforming education. Steve has built a tremendous finance team in program and I'm grateful that he is willing to stay with us through this transition.
Since taking on the role of CEO earlier this year, I've worked to get my arms around Instructure’s business challenges and opportunities. While it takes time to understand a company, it also takes time to define the right strategy and then time to implement change.
Instructure has an incredible business built over the last decade with Canvas. However the organization has not evolved in the right way to support the company going from start-up to IPO to scale, over the past month my focus has been on establishing a strong team and managing the business well, while at the same time determining the strategic plan for the future of the company.
I along with our management team and board have worked closely with external advisors on our strategy and we've met with large investors representing over 40% of our stock base seeking input on Instructure’s future.
During our Analyst Day on December 3, we will share details of our strategic plan. The agenda will include presentations from our management team and how we will run the company moving forward, financial goals and focus areas for growth.
We will share how sales marketing and product teams will be more effective and efficient tied to metrics such as attribution and customer acquisition costs and you will hear from our board regarding governance updates and changes.
In the meantime I would like to share some updates on our strategic planning work and preview some of our progress we are already making. First I would like to address stock-based compensation, based on investor input and our business review, we recognize that the compensation policy put in place for this year has not yielded the benefits we expected nor has been well received by investors as a result, we are making a meaningful shift in our stock based comp approach, as Steve mentioned, we will be better than expected on SBC for 2019.
Additionally we have built our plan for next year based on managing share issuances in order to limit overall share count growth to no more than 2.5%. This will also result in the absolute SBC dollars coming down significant year-over-year, we are advancing our strategy by increasing our focus on education, Canvas as a platform provides a fantastic opportunity for us to expand greatly within our existing customer set. We will capitalize on our unique ability to introduce add-on products and new offerings in education to drive revenue growth, TAM expansion, high attach rates, and lower customer acquisition cost.
Portfolium and MasteryConnect are examples of this and we are already realizing the benefits of these solutions being connected to Canvas. During our analyst day you will hear more about Instructure's bigger opportunities and plans to ignite growth moving forward in education.
Turning to bridge we are engaged in a strategic review of the business. We've begun to take steps to reorganize our team such that Bridge operates independently from our education business. Bridge will be able to operate with a streamline cost structure appropriate to the stage of the business and the management team can increase its focus more on Canvas and our growth opportunities in education.
Lastly we are working on finalizing our 2020 budget and our strategic plan. This year our strategic planning process included deeper detailed financial modeling with a multiyear view. The process has allowed us to set financial goals for Instructure that are both near term and long term supported by a clear plan for execution.
On December 3 we will share details on our strategic plan including a number of value creation initiatives. We will share our financial status and goals with clear milestones and targeted specifically focused on profitability and growth for Canvas, Bridge, and Instructure overall.
We will walk through our cost realignment plan which aggressively shifts Instructure's operations to deliver a cost profile for gross margin, sales and marketing, research and development, and G&A targeting best in class SaaS company benchmarks. And we will talk about the many exciting opportunities to drive growth in the coming years.
There has been much work this year to get Instructure on the right path operationally, financially, and strategically. I have set a priority not only to drive ambitious and healthy goals for Instructure, but also to make sure that we commit to those goals with a well thought-out plan and approach. Thank you. And I look forward to see many of you on December 3rd.
Now let's open it up for questions.
[Operator Instructions] Your first question comes from Ryan MacDonald with Needham. Your line is open.
Just wanted to start I guess first on the Canvas business and what you're seeing internationally? You mentioned some delays I think in the U.K. and Australia. Could you talk about what's causing those delays and perhaps unexpected timeline of when you expect some of those delays or those deals to be closed in 2020?
Ryan, good to hear from you, welcome. Sure we can comment on some of the international headwinds and some of the delays that we've seen. We've seen this across a few areas specifically and more acutely in the U.K. and in Australia, New Zealand.
In particular in the U.K. as an example there were 12 public tenders for LMS switches, large public tenders that were scheduled to come to market this year. Out of those 12, only four of them actually came to market, the other eight were pushed and delayed beyond 2019; of the remaining four we won three and we advised the fourth one and we're working with that institution to move that process out because they needed to go about it a slightly different way.
And then I guess just switching over to Bridge, it sounds like you're clearly making some nice progress in terms of the employee development and that's contributing in a positive manner. However it's clearly not sort of performing quite your expectation. What do you think the short fall is coming from given sort of the changes you’ve under gone within that business in over the past year?
It's primarily around getting to sort of the enterprise customers we knew coming into this year that we'd have a long dated sales cycles. We were pleased - replaced our - I'm sorry, we released our employee development platform capabilities earlier this summer. So we now have over 50 customers that are on the employee development platform utilizing many of the solutions across the suite that were released in the summer. So we see good progress.
However, with the enterprise customers, they're taking a little bit longer than we had hoped, and most of them are starting with a division or a subgroup within the organization and then ramping up over time. So that's what's causing some of the slower than expected ramp up on bookings.
Your next question comes from Brian Peterson with Raymond James. Your line is open.
So Dan, the first one on Bridge, you had some new products out this year, I know there were some optimism that those would be well received by customers, maybe any update there, and how much time do you need to really see how well those will do in the market?
So Brian, good to hear from you again. Thanks for joining. So we're already seeing good signals around employee development. So we're pleased with the uptake. When we say the uptake, it really is how many employee development deals are happening that we wouldn't have had a chance at previously if we were just focus on LMS. How many of our customers are moving from sort of LMS only and upgrading if you will to the employee development suite, and then how is the employee development suite making us more competitive in general in all of the deals.
As you remember, we've been talking throughout this year around some key metrics win rates, attach rates, and significant deals. And we see progress on every single one of those metrics. So as we look at coming out of the summer months with the introduction of the employee development suite, we're seeing really good positive momentum and attention there.
The challenge for us moving forward is really getting the enterprise pipeline full and progressing those deals for. We learned a lot over the past few months of what it takes to get employee development embedded in the enterprise. And there's about five key sort of product oriented and go-to-market oriented elements that we think will help to propel Bridge forward.
And maybe just a follow-up on the domestic Canvas bookings. I think the comment that the higher ed bookings are on track to be up this year but that's better than I expected. Can you confirm if that's an organic comment or does that include Portfolium? And are there any large deals for the rest of the year that could swing that figure one way or the other? Thanks, guys.
So that is 100% an organic number. You know I can't speak to the rest of the industry but as you and others have been indicating you are seeing us sort of sharp slowdown in LMS switches. This year when we look at our domestic higher ed Canvas bookings, you know we are forecasting being up in bookings year-over-year which we're pretty excited about.
Now our win rates remain pretty high and we're happy with our win rates. And I don't know if we're just winning more of our share whether there's more coming to market. But what we're also doing and I mentioned this on I think the last two earnings calls we're not standing still. We're being very proactive going to the market which means that in addition to sort of the RFP demand coming in the market, we're also creating demand. There's a handful of deals and we'll see more through Q4 that are coming into market not going to RFP and we're moving the business onto Canvas.
In terms of the last question you had with regard to sort of significant deals remaining throughout the end of the year, obviously anything can happen. We're working hard on our plan, working hard to deliver in Q4. There's both risk and upside.
Your next question comes from Brad Zelnick with Credit Suisse. Your line is open.
It's Bhavin on here for Brad. Good to see the increased focus on education. Can you just provide us with an update on the acquisitions of MasteryConnect and Portfolium and how they have outperformed relative to expectations? And then just in particular just interested in hearing more quantitatively about - if the combination of Canvas’ creating cross-sell opportunities or increasing pipeline?
Bhavin so good to hear from you. The couple of things. So I think on the first question on MasteryConnect and Portfolium and how they're performing. As we went through those acquisitions earlier in the year we set a plan and an expectation for bookings this year. That plan and expectation of bookings was a combination of what Portfolium and MasteryConnect were already expecting to this year, plus you know some incremental expectations for being attached to Instructure and Canvas as the mothership. And we're pleased to be on track with the outlook that we had earlier in the year at the time of acquisitions.
Two is we're seeing some really good uptake and attachment rates with Canvas. So we’re seeing the benefits as you had asked about around Canvas and Portfolium attached to Canvas that move those making Canvas and Portfolium more competitive as well as making sort of Canvas plus Portfolium and MasteryConnect are more competitive.
Two other points around Portfolium and MasteryConnect, we're sort of just finishing the operational integration of the teams. So in addition to having a much more sort of coordinated multi-bag go-to-market effort, as well as better integrated technologies we can start realizing some of the synergies that we had anticipated with those acquisitions as well.
And then, lastly, as I mentioned in the prepared remarks, at our Canvas Con events in Barcelona and in Sydney, we were very pleased to see the interest level for Portfolium. And we've increased the pipeline, now internationally, for Portfolium as well and hope to see some really positive results going into 2020 and beyond.
Just following up on Bridge, what changes are Frank or yourself, making to help accelerate growth here? And then, just how can we ensure that with the increased focus on profitability that that will hinder Bridge’s ability to grow?
Well, the - those number changes. First of all, we're leaning much heavier into the employee development side of the business, now that we've had it in market for a quarter. We can now start looking at some recurring patterns, what works and doesn't work in terms of win/loss. We're looking at our teams and sort of what's working in individual reps and different organizations.
Our marketing team has done a phenomenal job, building out an IECP and ideal customer profile that helps us be laser focused on the right types of customers where our value proposition will resonate. So, really the story of the Bridge is all about focus at this point, now that we're learning what is working and what is not.
With regards to our moves towards profitability and improving our bottom line and overall margin, Bridge will help with that. We have an aggressive plan that we've laid out for the next few years that gets us to some really healthy metrics across the business. We're looking at that metrics broken down by our Canvas business and looking at sort of our success, and what makes us successful in Canvas, in Bridge, attaching products as well as overall as the company.
You'll hear more about this on December 3rd, and one of the things I attached the team with is to really focus on each of these businesses and what is going to more aggressively get us to success both on the top line and bottom line.
Your next question comes from Stephen Sheldon with William Blair. Your line is open.
First, you talked over the last quarter or two about significant hiring for, I believe, engineers and developers for Canvas. So can you provide some more detail on where you're deploying those resources? And specifically, is it mainly focused on improvements or tweaks to the core product? Or are many of these looking at building out new solutions or modules that you could roll out over time?
So Stephen good to hear from you. Thanks for joining. So it's a variety of things. As we look at our strategic plan and we'll share more in December 3rd, we need to think about a few factors, first, how do we continue to retain and please our existing customers, our customers and I think any good SaaS company will continue to deliver ongoing innovation to their existing customer side, and that's how we stay ahead of the curve. Two is we need to deliver more sort of capabilities and innovation into our existing products that we can cross-sell and upsell into and sort of expanding our presence.
And then the third is really development of new products. We've talked about our work that we're doing in machine learning and AI which continues to be a focus effort for us. A lot of innovation opportunities and growth opportunities for portfolio and especially for MasteryConnect where we're just scratching the surface of the work that we can do in assessments.
Additionally as we've been doing our strategic planning effort we see more and more opportunities in education driving into the online space and fulfilling our mission of really working closely with teachers and students to help drive students’ success and the overall effectiveness in education, leveraging technology. It takes engineering effort and R&D. We've been reconfiguring our R&D and our engineering and product teams. In fact, we made an - a key organizational change over the past couple of months to move more into a line of business model.
That line of business model helps sort of focus engineers and product resources on the products in a way that can move in the right sort of pace and speed that is appropriate for those individual markets. We're doing a considerable amount of hiring and growth and work out of our Budapest location, which obviously gives us a really healthy cost profile, and the talent there is phenomenal.
We're very pleased with the output from our Budapest team. They've become sort of seamlessly integrated into the overall fabric of Instructure. And then, obviously, we continue to work across our offices, capturing talent with different skillsets that we need across each of our offices.
And then on Canvas, on the K-12 side, I know they're good sources out there for LMS market share trends in higher ed. But just wanted to ask, can you talk maybe about rough market share in K-12 and maybe how that's qualitatively trended over the last few years?
So, I think we continue to be really strong in our adoption. We bring more business into sort of Canvas, LMS and K-12 than any other provider in the market right now in terms of dedicated LMS. You have to remember in the K-12 space, there's - those are LMS switches that can happen, but a lot of the K-12 space is actually moving from sort of a non-LMS school to a school that's ready to advance and adopt in LMS.
So, we continue to make strong strides in that area year-over-year with the additional MasteryConnect it makes us even more competitive and sort of spreads out our surface area within that segment. Domestic K-12 is our primary focus even though we do a considerable amount of work outside of outside of North America in K-12 as well. They're just fundamentally different markets.
Your next question comes from Brian Schwartz with Oppenheimer. Your line is open.
Dan I just want to follow up on a couple of your answers. You were talking about some of the initiatives that you've put in place to improve the sales productivity here of the domestic ed tech business. And you walked us through those initiatives that to keep that improvement going here over time. I was just wondering if I could pin you down if there's anything else that's going on to sort of remove some of the overheads that could further help the domestic ed tech productivity metric.
Yes. So Brian good to talk to you. And are you referring to some of the change that we made into the domestic Canvas focus in some of the synergies with MasteryConnect and Portfolium?
Yes. Well you talked a little bit about that I think you gave us good discussions on that. I'm just wondering if you're doing anything in terms of either the enablement or the ramping of the sales capacity or if there's anything else on really more on that could remove overhang to continue to improve the domestic ed tech productivity again.
Yes, and I think you know Brian great question now I understand. It's not just about moving overhead it's around looking at where we can be more efficient with our sales efforts. I'm very happy to have Frank Maylett join the team he's been here about seven weeks now and you can already see the tangible impact that he's making. So although we're continuing to make strong progress with Canvas domestically we know we can do more and more.
Our sales teams can continue to get more efficient and more focused on our, you know how we compete and trade in the market. I’ve talked a little bit about proactively going in the market and generating demand, some of the other things that Frank is working on with the team we brought in a Sales Enablement leader who is absolutely tremendous, and he's going to significantly advance what we go to market with, what our value proposition our mechanics of sales and sales execution. We're also reevaluating our sort of territory plans this year. Frank came in at exactly the right time because we're finalizing our 2020 plan for next year, and that's inclusive of just about everything.
Looking at our comp plans and quarters looking at what motivates reps, looking at our support team for reps. We’re also building a key account program that will allow us to work with both existing key customers and key prospects, in a way where we can drive innovation, and that will create more early adopter opportunities and faster uptake of Canvas as well.
So there's a lot of positive things that Frank is bringing the table as he has he's come onboard. We'll start seeing the effects of those things the positive effects of those things, a little bit through the end of this year mostly in 2020 as we build towards sort of greater sales excellence.
And then Steve just a quick question on just the math on the guidance revision, it looks at the midpoint on the year it's about $1.9 million, I think you said a $1 million of that is just negative currency. So the other $900,000 is a weighted at all between the Bridge and the international deals they got pushed out?
It's probably a little more international than Bridge.
And then last question, Dan just trying to maybe just add, try to get out the changes in the HCM business and pushing out what possibilities could be out there for this year. Again is there - it doesn’t sound - it sounds like this is mostly just execution and focus, and I just want to make sure that that's right and it's not that there's anything competitive out there or anything changes in the market, what suddenly these organizations want to bundle financials with HM, HCM. I know you guys have a strong sense of what is going on and you're saying it's mostly focus and execution, but sometimes the execution can be linked to other things that are more exaggeration and it’s very bold, so just though I’d try to pin on it one last time. Thanks for taking the question.
No. You think your question - I don't think it just execution. I think the market conditions are continuing to improve if anything and if you read about you know what Josh person is saying out there in the market.
The market conditions are moving in a direction where we are already at. Josh commented before about how comprehensive the Bridge suite is in terms of learning experience and employee experience platform more than just about anything else that's out there in the market. As we launch Bridge Connect as one of the final pieces for our employee development platform that's resonating very well in the market.
So as we look at what we're doing in Bridge and where we see the market trends, the market trends moving towards skill communities and mentoring and career growth. We're seeing sort of the age of the employee and our employee centric enterprise really come to bear and that'll only create tailwinds for Bridge. We have to get our execution will in order and understand how to sort of execute well against the enterprise.
We've had sort of a quarter of execution now with the employee development solutions and introducing it over the summer and there's definitely a lot of execution learnings from there that we can take forward. The other thing that's unique in a SaaS market in a market like the ones we're serving is reference selling Serving as referenced selling is a huge element to success moving forward.
So the more we win great customers like Skullcandy which we announced today and our blog will go out with some more of our wins. The easier it is to serve reference and develop those patterns to share with the market that will drive you know confidence in moving to bridge over time.
Your next question comes from Corey Greendale with First Analysis. Your line is open.
Also on the bridge topic, see Steve and Dan I wanted to maybe follow-up on a couple of your prepared remarks about the Investor Day at the rest of your things stay tuned, but first of all on the bridge operating independently I guess I thought it was largely independent, so maybe you could just give us a sense of how much dependence there is and how -- you know how transformational that effort is going to be versus a more marginal?
So we believe it's going to be pretty, pretty transformational, as over the past months, we've been doing a review of our business and our strategic planning. It's become more acutely obvious around the bridge being more in that sort of start-up growth phase and Canvas obviously being more in that mature product phase and then when we were a sort of Canvas plus Bridge company, that's the way we were and I think it was a little bit hard to see in previous years the forest through the trees.
So as part of our strategic planning work that we've been doing over the past months with our management team, with our employees, with analysts, with the board et cetera, there were few things happened. One is recognizing that bridge needs to operate almost as sort of an independent sort of subsidiary within the business and have the proper attention it needs to spread its wings and focus and execute more at the size of company and stage of maturity that it’s at and so we are making some organizational changes and shifts.
We have already started putting those in place and of course then there is sort of fixing the cost equation with Bridge as well and giving it more focus. So those are all things that are pretty fundamental shifts in what we're doing but the other sort of chapter, the other side of that story is we've done some deep analysis and what other opportunities there are in education.
So while historically Instructure may have thought there was not a lot left to do in education what we've been able to derive from our customers and from the market is that they're asking us to take a strategic seat at the table and help these institutions innovate and move forward in much different ways, whether it would be what we're doing right now with Portfolium and MasteryConnect, what we're doing with analytics and machine learning in AI, soon around student retention and graduation rates and effective teaching and learning or you know institutions moving more into the online space and beyond.
So by creating some more autonomy for Bridge within our organization it both serves Bridge well and it frees up more time for our senior leaders and management team to really be focused on elevating Canvas LMS and accelerating it as well as navigating our way into more educational spaces.
And I got to ask that since you just said that and maybe you would say no, nothing is off the table but talking about helping institutions go online, it sounds like the OPM space is that something you're considering?
Look we work closely, we have a lot of OPMs. Right now you know the OPM space is a broad space. In fact many of the OPM companies out there are more sort of content and services companies and there is a gap for technology.
So you know we view our role already playing a significant, as a significant player in the infrastructure of education in traditional, blended models and online models today is we can serve institutions, we can serve OPMs, we can serve a lot of different modalities and players within the market. With our partner program that's now over 350 partners we're already seeing our ability to connect the dots create much more of an integrated and online experience for institutions.
The nice thing about this is it gives us is that institutions are immediately looking to us to help create sort of this broader framework and leverage of their offerings across traditional blended and now online. We've had catalog and market for some time which is really the marketplace for online learning to storefront for online learning. So we see opportunities to expand what we're doing there and capture a big piece of the market that's a high growth right now.
And I think can make a lot of sense given your place in that market. My last question is there are some that could read between some lines and I don't know if they should or not, so I’ll just ask the question overtly which is in turn we are talking up Bridge and engaging in a strategic review and management enhancing focus on Canvas and education. It sounds like one could say between the lines that you would consider selling or carving out Bridge is that on the table or you know or how does what you're doing enhance your focus management's ability to focus on education?
Yes, I mean look the Bridge is an important part of our business but it's at a different stage right now as I mentioned in these different attention. And we're working on the strategy and organizing the team and again recognizing that there's more opportunity in edge like I mentioned we continue to sort of do a strategic review in the business as we organize the team moving forward and create more of that focus.
Look what we want mostly right now is for Bridge to be in a path that can best deliver its mission of helping employees grow and develop every day we see a lot of opportunities in general with Bridge whether it would be through partnership or focus moving forward that can accelerate that mission you know for us nothing is off the table. But the focus for us is really making Bridge successful, making Bridge financially beneficial and accretive and healthy and then continuing to grow over time.
And if I just throw in Steve thank you for your help over the years and looking forward to seeing what comes next?
Your next question comes from Eric Lemus with SunTrust Robinson Humphrey. Your line is open.
I wanted to follow-up Dan on something you were talking about on the past question about data and analytics. Can you can you give us any sort of update on the progression you're doing with the strategic initiative around DIG and you know should we expect to hear some new products coming out in the next year or two year around data analytics in the DIG initiative?
Yes we you know DIG is the code name we've used, we're making very good progress. There are about 15 to 20 institutions now that are working in sort of pre-pilot mode. We will move in to pilot in early customer mode here shortly, I don’t expect us to have something in the market at least in that sort of early customer phase in 2020. Now that'll be an early offering that comes out of this initiative and we anticipate a variety of offerings over time in the space of analytics, ML, AI and predictive insights.
And then I wanted to ask a question on international, you know you talked about in your prepared remarks some things got pushed out but looking at overall investments in international markets. How are you feeling around sales coverage in certain areas, is that an area of investment as we go into the New Year?
It’s an area of shift. You know, we’ve been - you know, I think this is how Instructure started off just like many U.S.-based technology companies sort of take that first step into what feels familiar. English speaking countries in these regions Australia, New Zealand and the U.K. And you know if you look at the patterns from many American software companies, they struggle when they have to go beyond sort of this English speaking markets, it creates a little bit of a blind spot. You know, this has been an area of focus for me through, you know, 20 years of my career.
So it's an - think of it a little less sort of incremental investment, think of it as a reassessment and reallocation of focus and resources. We're making some good early, early movements into Spain. I talked about ESIC on the call, INSEAD in France where we're working with a number of institutions now in the Philippines and you know we have some opportunities across the broader Asia-Pac region. So we'll be reallocating resources and adjusting the teams so we can capitalize more broadly on the regional opportunities.
Now what's nice about that is as we move more broadly with Canvas, we're finding that our approach in tactics, while there are nuances within these local markets we need to be aware of them like our in influence and in tender processes. In general, our value prop and our product stands very strong in these markets and gives us an opportunity to sort of repeat the pattern recipe for growth. It's just something that we have to get after a little more aggressively.
Your next question is from Rishi Jaluria with D.A. Davidson. Your line is open.
This is Hannah on for Rishi today. Thanks for taking my questions. First off with the introduction of Engage and Career earlier this year at Bridge Con, could you talk about any notable changes in deal sizes you've seen so far.
Hannah, good to talk to you. Thank you. So, in addition to engage we also launched our carrier product and we’ve expanded recently with BridgeConnect. And Engage is definitely one of the most intriguing product as we go into market with the employee to own development solution, Engage is competitive into investing in existing market of employee sentiment and voice.
And being in market since June, we're just going through some of the earlier iterations. What's nice about Engage and being able to get that employee sentiment and voice is that it's actually helping to demonstrate the benefits and the results of Bridges as an employee development solutions. I think it's going to take another couple of months and cycles for us to be able to talk to case studies and release those in the market. But we are seeing a larger deal sizes come through.
Now it's not quite tripping the enterprise bucket as much but we have many more six figure deals executing and happening in the pipeline than we ever have before including a number of deals that maybe were in the $10,000 that $20,000 range for example that have now been upgraded into the $100,000-plus range where they were LMS before and now they are moving forward with Engage and the Employee Development suite.
And then just on the topic of foreign currency headwinds, is virtually all of your international revenue priced in local currency?
Yes. The vast majority of it is. Yes, that's correct.
And then just last question Steven, Dan, could you talk about your - what you're thinking about the top qualities you hope the successor will possess?
The top qualities - so well, it's relatively Steve and I've been talking about this for some time. He's been thinking about retirement for some time as well. Steve was gracious enough to sort of stay on this year as I've joined and sort of - and getting my feet solidly on the ground and I really appreciate the time and the partnership with Steve, we have not written the job rack yet, we are still working on things but look we have a lot to tackle moving forward.
We need to really become truly a successful multi-product company, we need to be successful executing in multiple international geographies, and we need to be financially disciplined such that we're achieving considerable metrics moving forward in all areas of our business.
I referenced cost benchmarks, against sales and marketing, R&D, G&A and gross margin but we're also targeting overall margin metrics for each of our areas of the business. I've talked to my team and I'm asking each of the leaders in my team to be mindful of what we're doing, so we can reach those benchmarks as well its growth benchmarks.
We're looking at being a strong role of 40 plus company not too long from now and these are serious goals. So having someone step in that role that is familiar with how to sort of manage those dynamics of a company in the public space is very important to me.
Your next question comes from Alex Paris with Barrington Research. Your line is open.
This is Chris Howe sitting in for Alex Paris. Thank you for all the color and commentary you've given so far. I still have several questions here but for the sake of time, I'll just go through a few. You mentioned Skullcandy as a key win for Bridge Learn, as we look kind of outside the box for Bridge Learn are there any opportunities whether it would a joint venture partnering with a for-profit that you could envision longer-term as part of your strategy to increased penetration within these corporate accounts.
Yes. You’re referring to like another - like an HCM organization and partnering that way where we become almost the white labor of the OEM capability for being a sport and play experience. And there is an HCM organization that handles more of the back office capabilities. We see a lot of opportunities to that. We're still early stage with Bridge. We have a very mature partnership program with Canvas and we would like to establish a similar partnership program with Bridge.
We've started experimenting with that a little bit with some of the different HCM players out there and we see a lot of opportunity. One of the nice things about Bridge being a true native cloud platform is we've been able to penetrate markets around extended enterprise and sort of extended use with a complex and wide audience for some of our customers' customers and Bridge is uniquely capable of delivering to those needs.
So pivoting that into a strategic partnership strategy and having that be a mechanism to drive and accelerate bookings and revenue is something that's part of our consideration moving forward.
And then one more question. Understanding that these are tenders the 12 tenders that you mentioned internationally eight of them pushed and you won three out of four. On a relative basis and generally speaking, can you comment on the dynamics between the eight that pushed versus the three out of the four that you won recently?
Sure. So a couple of things just to be clear those 12 were only in the U.K. So that was just an example. There are other tenders for example that pushed in, in Australia and New Zealand. Now is these are public tenders. You know the dynamics at eight that pushed we don't know exactly why you know your guess is as good as mine in terms of the political climate and some of these markets and whether that had an effect or not.
I’m sure you guys hear about Brexit to no end about that potentially have any impact on business and what we have no way of drawing a line from what the conditions in the U.K. to these eight tenders, that pushed out, we know that there is definitely some delays happening in an unusual form.
Now we can count on it but we're hoping that those eight tenders pushed out beyond 2019 wind up coming to market and decision next year in 2020 and we can have a really good solid quarter or a solid year next year in 2020 with those tenders hopefully coming into market. We're not banking on that though. We need to both the excellent in the U.K. and across the region in EMEA.
Of the remaining four, to be clear on that as well, only three of them went to decision. All three of those went to Canvas as a decision. The fourth one we're working with the institution on revision of the process and the approach as well. So it should come into market in 2020. There is just not enough time left in 2019 to really get that process back on track.
Thank you so much for the color, and I'll be watching the blog for any other announcements. Thanks.
That's great. Chris, thank you.
Your next question comes from Brett Knoblauch with Berenberg Capital. Your line is open.
Congrats to Steve on retiring. Given the Analyst Day's a little more than a month out, I was just wondering if the new CFO will, I guess, really have any input into the strategic and financial plans that you guys are going to set forth on that day.
Yes, so Brett this is relatively new news and a new decision on Steve, Steve has assured me that he's 100% committed and working with me and with the team through the transition as we find the next CFO for Instructure and really being generous with his time on the transition. After close to eight years of Steve spending time helping Instructure get where it is today, he wants to see the torch passed into the good hands and success moving forward.
With regards to the Analyst Day being on December 3, that's not far from now. So we have some thinking to do in terms of how we want to present some of the information and the strategic planning work that we're doing and what that means vis-à-vis bringing in a new CFO.
There are no further questions at this time. I will now turn the call back over to Dan.
Yes. So in closing, I just want to thank our employees, our customers, our partners, investors and others. It's been a good Q3. We're pleased with our results, solid quarter for Instructure. And with that, we'd like to close the call for today. Thank you.
This concludes today’s conference call. You may now disconnect.