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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.
Good afternoon. My name is Jessie, and I will be your conference operator today. At this time, I would like to welcome everyone to Instructure's Q4 Full Year 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions] Thank you.
Erin Kasenchak, you may begin your conference
Thank you, Operator. 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 would 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 may 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 Web site. 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, Erin. And thank you everyone for joining us on our Q4 and full year 2018 earnings call. At Instructure, our vision is to help people learn, develop and engage from their first day at school to their last day of work. 2018 has been an exciting and productive time for the company, and the business has performed well. At a high level, we grew full year revenue 30% year-over-year, enhanced our operating structure and defined and launched our growth initiatives.
Our strategy is aligned around three key objectives; drive growth, both near and long-term through clear and impactful initiatives; execute well to deliver both strong financial results and customer success; and get profitable through continued focus on operational excellence.
Let me start with our focus on growth. Coming into 2019, we have six defined growth initiatives that will broaden our product offerings, and meaningfully expand our TAM. Today, we will talk specifically about three of these. Our first growth initiative will drive the connection between the academic and professional worlds, initially by launching an essential Student Success platform. The true value of education is realized only when students can leverage their academic experience and achievements to transition successfully into the workforce.
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.
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. We are already well on our way to completing our initial product validation tours and solidifying customer use cases. DIG demonstrates our commitment to continuous innovation in the education space. And I look forward to sharing additional details, including launch plans in progress over the course of this year.
Now, let's turn our attention to Bridge as our third growth initiative. We continue to establish and expand the category of employee engagement and development by broadening our offerings and establishing Bridge as an essential solution for all employees and companies across the globe. The changes in product positioning strategy introduced in 2018 are already resonating in the market and we see our customers sharing in our long term vision around employee engagement and development. Looking forward, we are poised for strong execution this year. We have strengthened the foundation for our Bridge go to market strategy with key strategic hires and continued investment in our platform.
We are on track to release two new Bridge products in the coming months, which will further expand our TAM within the corporate space. We will formally launch these offerings at our Bridge conference in June where business, HR and talent leaders from around the country will join us to learn about our vision for employee engagement and development. I would encourage all of you to attend.
With a strong vision, expanding suite and a solid go-to-market strategy, we are increasingly able to go after a larger enterprise opportunities, resulting in larger deals and cross selling opportunities with Bridge. As excited as we are about these growth initiatives, we must also execute well by leveraging our existing product portfolio to deliver growth today. Let me spend a few minutes sharing our success across the globe with both Canvas and Bridge during the fourth quarter of 2018.
Within the domestic higher education market, win rates remain high across the country from UC San Diego, to Wilmington University, to the Vermont State College system. And we're excited to announce that Harvard Medical School selected Practice in support of their global training for clinical research programs.
Looking at our International markets. We made significant headway in Lat-Am, winning deals throughout Peru, Mexico, Brazil and Ecuador, predominantly replacing Blackboard and Moodle. Most notably, Tech de Monterrey in Mexico selected Canvas for their 200,000 learners. Key leadership hires and a deep understanding of the international regions has led us to this success and we will continue this pattern for our international expansion.
In the APAC region, the prestigious University of Melbourne and the University of Technology Sydney replaced Blackboard with Canvas for their collective 80,000 learners. It is exciting to see Canvas being used by the four largest universities in Australia. And our expansion story in APAC region continues with Our Lady of Fatima University in the Philippines selecting Canvas for over 70,000 users. And in Europe, the world's leading provider of wine education, the Wine and Spirit Education Trust, will use Canvas to present a more modern and accessible LMS for their face-to-face programs, consisting of 30,000 passionate wine and spirit professionals and enthusiasts.
Turning to Bridge, our focus on large enterprise deals and vertical use cases delivered meaningful key wins in Q4. ETQ, a leading provider of quality and compliance management software selected Bridge Learn to train their over 100,000 customers. Internationally, Deloitte España who will be using Bridge Learn not only for internal employees but also to deliver cyber security training to their clients. In Canada, lululemon athletica selected Bridge Learn and Arc to assist them with employee training and development.
Sales enablement and customer service training are use cases where we have found particular success. And in Q4, we saw Henry Schein, a solution's company for healthcare professionals, select Bridge Learn and Practice for these efforts. The Pacific Financial Group shows Bridge Learn and Practice to help measure the effectiveness of live training for their 3,000 financial representatives and clients. And Regency Furniture selected Perform to assist sales managers and staff with their performance management needs. Chewy, the online retailer chose Bridge Learn for their customer success team of 10,000 employees. Additionally, a financial services company with more than 2 million clients and over $815 billion in assets under management selected practice for on-boarding and development for their call center representatives.
Looking forward to 2019 and beyond, Instructure's focused on strong execution against our plan for growth. I talked about three of those growth initiatives today; bridging the gap between academia and corporate with student success; machine learning and AI and education with DIG; and our Bridge expansion strategy. I look forward to updating you on our additional growth initiatives over the course of this year. If growth is one side of the strategic coin, the flip side is delivering operational excellence.
Adding additional depth and knowledge to our executive team is important for Instructure as we focus on executing our 2019 plan. We recently brought aboard Marta DeBellis as our Chief Marketing Officer. Marta is an exceptional Senior Marketing Executive with extensive global experience, including in region roles in both Europe and in Asia. Most recently, Marta ran enterprise marketing for Adobe's digital experience business. Prior to Adobe, she spent time on the agency side with MRM McCANN and held a variety of corporate solutions and partner marketing roles at Intel. Her focus on driving growth across marketing disciplines will be a tremendous asset for infrastructure.
As we discussed last quarter, our focus on operational excellence continues. We have identified a number of cost saving initiatives and implemented a number of efficiency measures across the organization. The results of those efforts are reflected not only in our strong Q4 year-over-year operating margin improvements but also in our achievement of total cash flow positive. I will let Steve to provide more detail in a moment. The near-term benefits of these efforts are meaningful. But even more importantly, they allow us to invest in both organic and inorganic growth. With a strong management team in place and a clear focus on growth and operational excellence, Instructure is well positioned for success in 2019 and beyond.
Now, let me turn it over to Steve to take you through the financials.
Thank you, Dan. And thanks everyone, for joining us today. 2018 was a successful year for Instructure. Here are a few highlights. In addition to growing total 2018 revenue 30% year-over-year, we grew our recurring revenue base slightly faster adding over $44 million. Our international business expanded from 15% of revenue in 2017 to 19% in 2018. As Dan alluded to, we demonstrated significant leverage in our operating margin and importantly our cash position is quite strong. Let me provide some additional details on the quarter and year.
In Q4, total revenue and subscription revenue both grew 26% year-over-year to $56.3 million and $51 million respectively. For the full year 2018, total revenue came in at the top-end of our guidance at $209.5 million, of which $188.5 million was subscription revenue. Rolling 12 month billings at the end of Q4 was $228.6 million, up 22% from the fourth quarter of last year, also calculated on a rolling 12 month basis. With the remainder of my commentary, unless otherwise noted, I will discuss non-GAAP results and all EPS numbers on a per common share basis.
Gross margin in Q4 was 71.3% and for the full year, gross margin was 72.2%. As we have noted before, we are approaching our long term target of 75% gross margin and expect improvements to continue to moderate going forward. Total operating expense for the fourth quarter was $41.1 million, a 7% year-over-year increase as compared to a revenue growth of 26% during the same period. For the full year of 2018, total operating expenses was $173.1 million, an increase of 20% over last year. As Dan mentioned earlier, our cost savings initiatives implemented in the second half of the year led to dramatic improvements in our operating margin and we delivered over 1,200 basis points of year-over-year improvements in Q4.
For the fourth quarter, we realized approximately $1.3 million in efficiencies as a direct result of these efforts, a few examples include; leveraging, hiring in our new Budapest office; optimizing our investments in our facilities globally; streamlining our enterprise software spend; and reducing third-party recruiting costs. Operating loss for Q4 was $1 million, an impressive year-over-year improvement of $5.3 million. For the full year 2018, operating loss improved over 700 basis points year-over-year to $21.9 million. GAAP net loss for Q4 was $7.6 million, an improvement of $0.10 per share year-over-year. GAAP net loss for 2018 was $43.5 million, representing $0.20 per share improvement over the prior year.
In Q4 on a Non-GAAP basis, we realized a small net loss of $300,000, which is a substantial improvement over the prior year. This is partly due to our cost savings initiatives as mentioned above and is partly due to a change in compensation philosophy, which essentially aligns management's incentives with that of our stockholders. Specifically, during the quarter, all 2018 executive bonuses were given in stock as opposed to cash. This resulted in about $1.8 million improvement in our non-GAAP net income. For the full year, non-GAAP net loss was $20.7 million, a $0.36 per share improvement over last year.
Turning to the balance sheet. I am particularly pleased to report that we achieved our goal of being total cash flow positive slightly in 2018. This is a very important milestone for Instructure. Our ending cash balance for 2018 was marginally higher than the balance at the end of 2017 after adjusting for our $110 million equity raise last year. Our cost savings initiatives along with strong collections resulted in a balance of $153 million in cash and cash equivalents and marketable securities.
Free cash flow for the quarter was a negative $22.4 million. Backlog grew 19% year-over-year to $466 million at the beginning of 2019. This is comprised of $121 million of deferred revenue, which you can find on our year-end balance sheet and $345 million of off balance sheet revenue under contract. Additionally, our average contract length continues to be greater than three years.
I'll end my remarks with a discussion around our expectations for the first quarter and full year 2019. For the first quarter, we expect revenue in the range of $56.9 million to $57.5 million, non-GAAP net loss of $5.6 million to $5 million and non-GAAP net loss per common share of $0.16 to $0.14. For the full year 2019, we expect revenue in the range of $256 million to $260 million. We expect non-GAAP net loss of $23.5 million to $21.5 million. And a non-GAAP net loss per common share of $0.65 to $0.59. For calculating EPS, we expect our shares to be $35.5 million for the first quarter of 2019 and $36.1 million for the full year.
Let me provide some context around these expectations. On the revenue side, our win rates for domestic Canvas remains best in class and we continue to capture market share. However, as we've previously discussed, we see muted new bookings growth for the domestic Canvas market. While we are quite optimistic about our longer term opportunities for TAM expansion and strong revenue growth, DIG and Portfolium being two examples. It is appropriate to balance those expectations in the near-term. These efforts require time and market and therefore we are assuming minimal impact for 2019.
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.
In summary, we have a strong plan for execution with a focus on balancing growth and profitability. There's a great deal of hard work to do but I'm confident that the investments we're making today will position Instructure well for strong growth and expansion in 2019 and beyond.
With that, let's open it up for questions. Operator, please go ahead with our first question.
Your first question comes from Brad Zelnick with Credit Suisse. Your line is open.
It's Bob in on for Brad, congrats on the quarter. Can you just dive into to just the synergy opportunities with Portfolium? How much overlap do you guys have with your current install base? And how many schools within the Canvas space don't have a solution like portfolio?
The Portfolium is a pretty strategic initiative for us. We've been contemplating and looking into student success market for some time now. And we've been talking about our vision from first day of school to last day of work. So the student success market and Portfolium specifically is a great first step to connecting the dots between those two worlds. Portfolium is still at the early stages. And so part of the acquisition is based upon their feedback that we’ve received from common customers and organizations out in the market, but there's still a huge opportunity moving forward to expand. Portfolium works across a number of academic institutions both Canvas customers and non-Canvas customers.
So just to add a tiny bit more color to that. Portfolium has hundreds of clients. Several of them overlap with ours while we have thousand. So there is a lot of headroom for us in terms of going to our install base for folks who don't yet have Portfolium, and it gives us an opportunity to sell them new product.
And then just any sense of financials or the deal and does your guidance include Portfolium?
The guidance does include Portfolium, we are not going to break it out. We don't have a history of doing that. And we can't really discuss any other details. The deal has not yet closed. We believe that is imminent. And once it closes, there'll be a little bit more information that comes out.
Your next question comes from Brian Essex with Morgan Stanley. Your line is open.
Dan, I was wondering if you could give us a little update on Bridge, and some of the initiatives that you've had, particularly on the sales force side this year. And maybe as a housekeeping item, just where we stand in terms of contribution from Bridge, not just on revenue but on bookings as well, given that you've targeted at 15% to 20% bookings from Bridge?
So on Bridge, as you recall, we talked through 2018 about getting ready for 2019, and laying a lot of the foundation for further growth and execution in 2019. We entered the year this year with a clear objectives, clear goals for the year, actually loaded within our own instance of our Bridge product with all the employees to see. In terms of the scaling and growth of Bridge, we continue to scale our sales team, bringing in additional talent into the team. And that will continue through 2019 and beyond as we expand within the market. Execution with Bridge continues to be strong. Through fourth quarter, we're very pleased with how the pipeline has grown. We're pleased with the size of the deals that are coming through the pipeline. But as we put emphasis on enterprise deals, we also see longer sales cycles as well.
So we expect to see more and more uplift for Bridge as we move forward through this year and into 2020. But early indications are good. As you recall, some of the things we talk about when monitoring Bridge are the significant and large deals. So significant being key marquee deals with large customers where we have a lot of opportunity to expand within those customers or large sized deals. We look at in rates within Bridge as well, which continue to move in the right direction. And then we look at average number of customers per product, which helps indicate whether we're being successful with the Bridge suite story. So let me let me turn it over to Steve to talk a little more about financials.
So one of the things that we did last year as we talked about Bridge relative to the total, we actually don't think that makes sense anymore. So we're not going to give that comparison. Canvas is still, globally, is still moving very, very rapidly and where we have new initiatives like the portfolio acquisition that will hopefully enhance that to some degree. And so it becomes unfair to Bridge to compare it to Canvas, and it's better to look at Bridge as standalone. But saying all that, we are still not in a position where we're ready to break Bridge out in any level of detail.
And then maybe, Dan, just to touch on go to market as a follow up. How are you in terms of feature parity, pricing parity with the competition? And where do you see the most, I guess effective penetration rate in terms of deal size?
There's three ways to think about that, and answer that question. First and foremost, recognize that we're going after the market as a suite of capabilities. So, we're not solely focused on the corporate elements area and domain in market per se, although, Bridge Learn obviously touches on that market. With Bridge Learn, Perform with Practice. And then obviously, we're working with early customers and beta customers in the market around the upcoming product releases. The Bridge suite story continues to get stronger and stronger. So in terms of just attractiveness within the market, we're seeing more and more multi product sales with bridge and we're happy with those results, and we're being very successful with our beta.
In terms of feature parity, we're strong in competitive and we've seen winds across all of our competitors in the market around the learning space. And we continue to see a lot of open white space where we're clearly differentiated with some of our innovative products like Practice. So it's a little hard to pin down on feature parity. We have a lot of room to grow and we're going to continue to invest in R&D, but a lot of that investment will go towards that Bridge suite story more so than just feature parity.
Your next question comes from Scott Berg with Needham. Your line is open.
It's Josh in for Scott. So how are you thinking about the partner strategy for Bridge in 2019? You had a lot of success with your partner network just [Technical Difficulty] business? And what are some of the dynamics that might be different for those two?
In terms of our strategy for Bridge we're on track with where I want to be at this stages in our partner strategy. Obviously, Canvas has a 10 years track record to call upon and building of that partner network in education that's been a strong point for us a little [Technical Difficulty] in the market. With regards to Bridge, our strategy is to start with leading spot leaders and analysts, and we're getting a lot of good coverage with spot leaders and analysts. And we're starting to work with various consultancies large and small. Additionally, we're getting more and more interest from technology partners as well with Bridge, and we're adding more and more overtime. So we're still in the early stages of establishing that partner program. But as we go through 2019, you'll see more and more partners added to the Bridge side of it.
And then just one follow-up question, Dan. You mentioned that international revenues of about 18% of revenue. What uses we plan and make the greatest investments internationally in 2019?
The question I think was where do we intend to make the greatest investment internationally…
Josh, could you go on mute please? Because there is ton of static coming through…
So apologies, we're having static on the line. But let me try and the answer the question here around where our investments are for international. So international -- there's really three prongs of our international approach. We had the expansion with our education market, which the education market with Canvas is country-by-country. And we continue to execute this with a common playbook across each of their markets and we're seeing success, I highlighted that success in the earlier remarks TAM versus similar success in Europe and Asia-Pac as well, embedded in that international expansion. We're also starting to focus on some of the larger markets as well as in terms of volumes. So you will hear more of that moving forward as we continue to expand into new countries and markets on the education market.
Additionally, with international, we will be focusing more and more at Bridge. We've made strategic hires with Bridge as well and anticipate more [Technical Difficulty] with Bridge, so in Europe, Asia-Pac and Lat-Am. What is advantageous for us around bridge is we can focus on some of the core markets, like Australia or the UK, or Germany for example or France and that will automatically take us into a number of multinational deals easily into other countries as well. So those are three prongs to our strategy for international. And with the solid foundation and the new D&GM structure we introduced in 2018, we feel very ready for execution and we're already seeing results in our pipeline.
Your next question comes from Brian Peterson with Raymond James. Your line is open.
So just wanted to start, the international success you had this quarter, probably a little bit better than I expected. How many deals are out there that can contribute 50,000 plus type of students? And is that still an incremental opportunity for you guys over the next few years?
So when we talk about international, there is still a lot of very sizable deals out there in the market and I assume you're alluding to the education side. There is still a lot of sizable deals out there. So I wouldn't call it just incremental growth. I think it can be pretty monumental growth with some of those large deals. That being said, the market is pretty bifurcated into larger deals and in a number of smaller caps, or smaller deals as well hurting cats and dogs out there in the market. The other dynamic that we're shifting this year as well is recognition that the international markets still focus a lot on the open source and the perceived freebie model as well with Moodle
And so we've introduced a value engineering capability with maturity models and ROI models, specifically to help advance our position and help our prospects and customers make the business case to switching over to Canvas. What's great about that is for wins that we've had against Moodle, we get feedback constantly about the fact that from a total cost of ownership, Canvas is equal or even better than what many of these organizations typically experience with their legacy platforms. So large deals still out there as well as a number of cats and dogs and smaller deals, the large deals exist across all geographies and we're selling with strategic intent through 2019 and beyond to capture those deals and accelerate the pipeline.
And maybe just pivoting to the domestic hire at segment for a bit, my checks have indicated that that slowed in the back half of the year. I'm just curious how should we think about the pipeline of opportunities in 2019?
So I think we said that we talked about that a little bit in the prepared remarks that we expect a muted growth rate. I think we're looking at the year as somewhat consistent to last year. So if there is upside that would be great. But we're just assuming it's going to run about the same.
One thing to bear in mind is we're not resting on our laurels with that either. We've talked about this previously. So we're working actively. We've made some strategic hires. And the place of dialogs we're having with institutions that wouldn't have engaged with us previously, we're wording very proactively, we're engaging in those dialogs and we're creating business cases ideally to move organizations ahead of our FTEs to move over to Canvas and create demand.
Your next question comes from Corey Greendale with First Analysis. Your line is open.
First, just a quick clarifying questions. U.S. higher ad when you say consistent. Do you mean you expect flattish billings or flattish new billings?
So Corey, when we talk about that, we're talking about new business.
So it's just a grow, it's just the new business is growing…
Yes, absolutely. No, there's definitely growth from a billings perspective. This is about new business.
And then Dan, the six growth initiatives, you mentioned three. I just want to be clear, the other three, you're just not discussing it all or you can mention what they are but you're just not elaborating on this call?
We're not elaborating right now. We're not discussing at this time. One of the areas that the leadership team worked on last year is we were getting ready for 2019 was this concept of layering in growth initiatives. This was a fundamental strategy that I've employed in previous companies is to make sure that we not only are doing the things near-term to drive growth of the company, but we're laying the groundwork and planting the seeds for growth in the med and long-term as well. Obviously, as the law of large numbers continues to create headwinds for large percentage growth rates, we need to consider elements for growth as early as possible. So those six grow businesses actually are spread out pretty nicely and layered in, it can be very beneficial from the strong position we are within education, as well as connectivity over the corporate -- expansion in corporate as well. So over the next few quarters, I'll talk more about the remaining three growth initiatives.
The reason why we're not talking about them now is there are more in intubation and startup phase of things. And so as we calibrate those markets and the growth potential of those initiatives and we lay the foundation for the team to execute that, we'll talk more specifically on what those are and what they can do for our business.
But I can't say that our guidance includes all the effects of all the growth initiatives that we believe will take place in 2019.
It's primarily cost not a revenue contribution?
No, you should not assume that. In fact, several things Dan talked about earlier where revenue generating but that doesn't mean it all happen in '19. These are medium for long range plans, so they're not like one hit wonders.
And then the three we haven't heard about, I'd assume they won't be a big revenue contribution but maybe that’s wrong?
We're not planning for those to be major revenue contributors this year, but it's still early in the process.
And just one last one on the same topic, the DIG initiative, potentially doubling TAM education sounds like potentially a big deal. And I understand it's at a high level. Is there any more you can say about what that looks like or what the product might look, just anything?
And actually this is not something that's new. We've been working on the scaffolding for date 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.
So we've established the core engine, the core platform. Now, it's a matter of scaling that engine and building application use cases. We already have a handful of use cases we're working with. Around student success, for example, where we have some predictive algorithms around students in courses even before they even step foot into the course and how we can advise and guide instructors to help drive improvements and success, as well as other algorithms that will help steer students to be more efficient in their studies and more up to speed with the things that they need to focus on to be successful through their academic experience and beyond.
So just to add to that, Corey. One way to think about this is when you think about LMS, we're somewhat constrained on our pricing model, because of legacy pricing that's been established for a couple of decades. When we think about things like DIG and the impact it could have on student retention and knowing that the success rate of a mentoring freshman is about 50% to get to a graduation level, to finish with a bachelor's degree. And you think average tuitions are 40-50 grand a year. When you start adding that up, what's the impact to a school to retain, to get the 50% to 55%. If we can help them do that with things like DIG, there is huge value. And since this is a relatively new market, we have an opportunity to price this more on value than on legacy. So there's how you get to a point where you could imagine 1.2 billion or whatever TAM associated with student retention.
Your next question comes from Terry Tillman of SunTrust Robinson. Your line is open.
This is Eric Lemus on for Terry. I wanted to ask you guys about your thoughts on the K-12 market. In the past it's been a little bit more of a difficult market to penetrate given the unique dynamics there. But when we look into 2019 and your guidance, how do you think about the growth in the K-12 market and availability of resources to go after that market?
So you’re correct. I mean K-12 is not as large of a market or opportunity for us as high for example but it continues to be important market where we are experiencing very high win rates. And we’ll continue to hammer away at that market and move forward. We anticipate growth globally for K-12 this year, building on last year's momentum. But I can't really say more than that.
And on a similar topic on Gauge, you’ve talked about in the past product readiness wasn’t exactly correct when you first went to market. So can you just give an update on where the Gauge product stands in terms of product availability and readiness for the market?
So the AMS market continues to represent a significant opportunity for us. And we're getting very good reception. As we mentioned, we pulled back in 2018 after going out in the market and recognizing that we had some gaps in the product. We entered 2019 with an upgraded version and enhanced version of Gauge that can capture a significant amount of the K-12 market. We started building pipeline late in the 2018 year, and now we're in the middle of a variety of sales cycles. So, so far indicators are green around our ability to grow. We put in some conservative estimates around the contribution through the AMS market with Gauge this year as we continue to prove out the product. But that's a long-term play for us in that AMS market given the size and our penetration with the K-12.
Your next question comes from Brian Schwartz with Oppenheimer. Your line is open.
Dan just wanted to ask you on the Bridge on the corporate side, as you're moving on market here with Bridge. Are you making any changes or maybe no change to the type of sales rep that you're hiring for the Bridge group, or really the Bridge sales organization in general entering this year?
So yes, we absolutely are. We've been upgrading the team in a variety of ways. And that actually started with the hiring of Mark Landwehr early in 2018, and continued with hiring a number of additional sales people and sales managers into that team. We now have two mid market teams that are focusing on Bridge and we continue to expand those teams where we had one last year. And we have an enterprise team that's growing very rapidly. To the talent that we're bringing in is talent that has deep experience in the software space and proven success for selling SaaS based software across a variety of environments, as well as a number of members of the team that have experience specifically in learning and employee development markets as well. So we still have work to do there. There's still number of hires that we'd like to meet and we anticipate making it in this quarter and the next quarter. But we bring on new reps that have domain experience, both in software and relevance through the functional domain and they hit the ground running pretty quickly.
One thing I would add to that is we're in a position now where we can actually recruit higher caliber sales reps, because we have more stuff on the truck to sell. And so when they think about for example a year and a half ago just learn now it's the suite that's growing. And they look at that and say, I think I can hit my quota or beat my quota and make a lot of money here, because you've got plenty of stuff to sell. So that has changed the game for us on the recruiting side in a positive way.
And then Steve, two real financial questions for you separately. I apologize if you gave it already, if you gave the 4Q revenue retention metrics, they came and above 100% again. And then the second financial question, just wanted to ask you about stock comp. Really helpful all the commentary on the philosophy, I think we totally get it on that. My question I just wanted to ask, how we should think about the trend modeling out the trend on the stock comp. Should we think about it looking in the future more as a percentage of revenue close to 2019 or 2018, or maybe somewhere in between? Thanks.
So first on the net revenue retention, we did not mention it but it is still over 100%. And we see that as a ongoing trend. For stock based comp, I think you see in the tables in the press release that it's getting closer or maybe around 20% is what we're forecasting for 2019. It's slightly elevated as a result of the way that the Senior Executive team was handled, because instead of getting annual refresh grants, we got one effectively four-year grant. We won't get one in 2020 or 2021 and that's a sizable amount of money. So that will help SBC moderate in 2020 and beyond. But it's probably I don't know, I haven't looked at a forecast but I would suspect going into 2020 and beyond, it'll probably be somewhere between '18 and '19.
Your next question comes from Justin Furby with William Blair & Company. Your line is open.
Maybe just to start, Steve, on the guidance for this year. I think you're guiding for 19% growth in Q1 and closer to 22% for full year. And I guess I assume the acceleration in that guide, Steve, is just driven by the acquisition, or is there something else when you think about the guidance in Q1 versus the other quarters?
So it's not the acquisition. We're not going to give specifics about that but that's nominal. First of all, on Q1 over Q1, we have a tough comp, and it comes from non-recurring. Recurring is growing nicely Q1 over Q1 but non-recurring is essentially flat in our numbers. So that creates, because the high non-recurring from Q1 of last year, that that creates a tough comp. But the growth initiatives that Dan talked about, which do not include Portfolium per se, are really the drivers of the full year looking a little bit better than Q1.
And then I guess in terms of Bridge, is there a point when, Steve, you think you'll break that out in terms of a trigger point, whether it's 10% of revenue or whatever it is. And then can you give us update on how much of your development spend today is been allocated towards Bridge? I think I have in head a couple of years ago, it was around a third of development and my sense is probably higher now. So just any update here will be helpful? Thanks.
What was the first question again?
Just that there is a trigger point where you think you'll break it out…
Yes, there is. It's a qualitative trigger point not a hard number trigger point. It's when we believe that the numbers are moving consistently in the same direction over a long enough period of time and we believe that it's big enough where most of the volatility is removed. We think that is the biggest issue with reporting numbers now, because it's a relatively small base certainly compared to Canvas that it will appear volatile and we would hate for people to think them one or two data points is a trend when in fact it may just be an anomaly of a particular quarter. So when we see stability is when we'll probably start reporting more detail. 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.
And then if I could sneak one more in and I might have missed this. But I think you're moving away from talking about bridge in terms of ACD mix. But can you just say how you did in 2018 versus your stated target 15 to 20? Thanks.
We didn't quite get there, but we got very, very close. And it was effectively one deal that slipped into 2019.
Your next question comes from Alex Paris with Barrington Research. Your line is open.
This is Chris Howe sitting in for Alex. Good afternoon, everyone. I had a few topics here to cover. You had mentioned your wins against Moodle the way you’ve highlighted value engineering, the total cost of ownership being equal or better. Can you perhaps add some additional color on what you're seeing when you go up against Moodle? Has there been a regression in their product versus yours? Or has it been just the advancement of your product versus yours? And just what you're seeing in that free environment competitive space?
So, it's still early days for us around value engineering. That's something that we initiated and started building at the end of 2018 and we'll still in the progress of introducing that more solidly within the market. You'll see more of that as we come towards Instructure con, which is in July this year in the U.S. With regards to the product differentiation, I don't think it's as much -- I mean, we continue to advance our product and that's natural for us to innovate more efficiently and with greater investment in our Canvas products. So from product differentiation perspective, it's very, very strong. I think that naturally happens with Moodle as well. We see not necessarily regression in the product, but some stagnation in terms of the product and their ability to compete on that front.
A lot of the organizations though, although, the product functionality and capabilities are a meaningful data point in terms of decision like this. There needs to be a compelling value case. So the financials need to work with them, which is much harder to unearth and unravel from an organization where you're not dealing with the subscription piece in the same way. And an organization needs to be ready for change and so some of those things take time. Again, with the value engineering initiative that will help them both of those fronts. We continue to win over Moodle. There's a sales execution element to this as well. Again, moving internationally -- by the way, the Moodle phenomena is primarily International. Part of it is us just continuing to penetrate market-by-market as well.
The other dynamic with education is as we go into individual countries they're our anchor customers if you will as we go into those countries that help more and more risk reference selling. So we do that in a market like Germany or Spain, for example. Then it will help other companies build confidence around their ability to move from Moodle to Canvas, for example.
And one more topic. Staying on the international fronts, you've mentioned and highlighted the wins with the Deloitte and lulu. Should I think of this as gaps that were geographic specific? Or is there the potential to expand these company opportunities across borders? And as it relates to your product extensions within Bridge Learn, how would you characterize where you are on the timeline as far as, you mentioned the two new products coming this month. How many more could there be as far as the product is concerned?
So let me address both questions. The first one was around regional needs or gaps, it's absolutely not the case that that's local. And in my experience I've worked at multinational companies extensively over my career, and these are healthy signs where a global company will start in one particular region or function within their organization and use that almost as a pilot and prove case. So in fact in many of the situations where we're starting in a particular pocket within a customer, we're already having dialogs almost in parallel as we start up those dialogs with those customers. So Deloitte with Deloitte España is a great first step. Deloitte is a global organization, but they're also a franchise organization as well. So they're decision makers in different markets, but they tend to be strong references across Deloitte globally.
And then lululemon, obviously, in Canada, we have the opportunity to expand as we work across their organization. Those are just two examples of customers in the bridge side that will have global and international expansion opportunities. When it comes to the brief product and product launches, first let me correct something. We will announce within the coming months, not the coming month the new products and then we will formally launch those at our Bridge event here in the U.S. in June. The phase we’re in right now with both of those products is our beta phase.
We have customers actively using those products out in the market, and it gives us a lot of good feedback that's a very healthy way for SaaS companies to introduce products. So we can work out some of the kings and we can flush out our product roadmap moving forward, as well as our value proposition in the market. And doing so in a way that is controlled and it makes it easier to scale with confidence over time. So those will be announced within the next two or three months, and it will be formally launched in the June timeframe at Bridge. So stay tuned for that.
[Operator instructions] The next question comes from Rishi Jaluria with D. A. Davidson. Your line is open.
Dan, let me let me start with a comment you made about seeing a little bit of a lengthening of sales cycles on the Bridge side with larger deals. Can you give a little bit more color on this? When you say larger deals, are you talking about targeting larger initial deployments by seat, more modules, or just going after customers that are bigger in terms of the opportunity? And why are you seeing lengthening sales cycles, because you're replacing more products, because it's a higher price tag you're going after? Some color there would be helpful, and then I have a follow-up for Steve.
So really none of the above, actually, the elongation sales cycles is quite simple. We're working on opportunities with larger companies and larger deals. And larger companies tends to take longer to do evaluations and make decisions there's committees, there’s approval processes, et cetera that they need to work through. So there's nothing different about the product mix and the number of products being replaced, it's just frankly the anatomy of larger companies making decisions. And that's not unique to us. I experienced that in all of my previous careers selling large deals and we experienced a similar dynamic here. If anything, the Bridge suite is creating a much more compelling story and we're opening up opportunities.
The interesting factor is as we go to market and we're seeing there's a lot in Europe right now, and we tell the employee development engagement story. We're seeing a lot more tailwinds coming to the sales cycle and driving buyers' interest, starting from the acquisition rather than starting from a corporate LMS position. So that also tells us that strategy is working. That does also contribute the elongation of deals, because the customers may not always be naturally looking for a change in the existing system they have.
And just alongside those larger deals. Is that something, given maybe a higher amount of complexity that we should expect to see higher services attached rates tan maybe we have seen with Bridge in the past?
Yes, I don't think it will be mis-proportionate but you'll see a services demand on those deals.
Yes, I don't think you'll see that reflected in the financials in our recurring versus non-recurring revenue breakout, just because there's so much volume and the mountain is very tall for what we have so far on recurring.
And Steve, just from a financial perspective. What if we see a decline in subscription gross margins in the quarter, both sequentially and year-over-year? Was that driven by mix shift, geography, or anything that you could call out there?
It was actually driven by something that was positive in the long run, which is how we account for discounts for Amazon Web Services. So there was an adjustment in the fourth quarter that without that, it would have been basically flat to prior quarters.
And that's all the time that we have questions for today. I turn the call back to Dan Goldsmith, CEO for any closing remarks.
Yes. So I just want to thank everyone for joining us today. I'd also like to take this opportunity to thank our passionate customers, our amazing partners and our dedicated and talented employees for contributing success in 2018. I am super excited for our plans for growth in 2019, and look forward to updating all of you next quarter. So thank you.
That concludes today's conference call. You may now disconnect.