Instructure Holdings (INST): A Foundational Technology System For Education

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Since we began recording the history of humans, some have known the importance of educating our young children so they can be prepared to advance and improve our culture well into the future. How we undertake this arduous task has evolved, sometimes in nice linear progression and sometimes by taking huge steps of regression in this process where we must start anew with our efforts.

The word technology is not a new word in our lexicon as it can be traced back to 330 BC when Aristotle coined the Greek term technologia and divided scientific knowledge into three parts: theoretical science, practical science, and productive science (technology). When applying this term to our educational process for teaching our students, one of the first tools of technology was the creation of what we call, a blackboard. Such a tool of learning can be traced back to ancient Babylonia and Sumeria, where students inscribed their lessons on clay tablets.

In recent years we have seen the use of blackboard, evolve into greenboard, chalkboard, and now the smartboard. I’m not advocating, nor suggesting, that we will ever see some semblance of a “board” type device not being used in our classrooms. But today, it is imperative that we change the complete structure of how we educate our young learners and even our college students so they can keep the United States competitive in an ever-changing world.

The Future for How We Will Educate Our Students:

The point of this new SA article is to introduce my readers to an investment opportunity found in a company known as Instructure Holdings, Inc. (NYSE:INST), listed on the NYSE. Instructure is a Salt Lake City, Utah-based company, created by two graduate students in 2008. The company is a technology-based company that provides clients and their students (K-12 and higher education institutions) the following platforms for 7,000 global customers located in more than 100 countries:

  • Learning Management System
  • Assessment for Learning
  • Actionable Analytics
  • Engaging Content
  • Online Programs – Professional Development

Basically, what Instructure provides its clients is a structure that is an all-inclusive system where the instructor/teacher/student has the delivery tools for introducing the concept, modeling the concept, practicing the concept, and eventually assessing if the student has gained proficiency with the concept.

There is also a platform option (Professional Development) that allows a school district or a company to organize and manage their staff development needs for their new hires or new elements of their job for existing employees.

Each aspect of Instructure’s platforms is readily available to be retrieved from where it is stored on a cloud storage system. Their system has near flawless results for users being able to successfully complete their tasks in a timely manner.

The point is that without an educated citizenry we are putting our nation at risk. The most recent national test scores in reading and math reflect the following dismal assessment achievements of our 13-year-old students:

The reading and mathematics scores of 13-year-old students fell between 2012 and 2020—the first time in the almost 50-year history of the National Assessment of Educational Progress (NAEP) long-term trend (LTT) assessment—according to results released today by the National Center for Education Statistics (NCES). The performance of 9-year-olds remained the same in both subjects compared to 2012.”

In a recent LA Times article, a Stanford University mathematics professor shared the fact that in 2021, Google (GOOG) (GOOGL), Apple (AAPL), and Intel (INTC) hired 10,000 new employees who had the skills and working knowledge of the applicable jobs that these cutting edge and high wage-paying technology-based companies needed. What is unique about this massive hiring need, all 10,000 of these new workers came from other countries – not the United States of America! Using just the data for California, the most recent testing results show that only 40% of their students are proficient in math. Looking at the world as a whole and how each country is performing in the critical subject of math, the United States ranked 37th in 2018. We are ahead of Ukraine by only five countries. Estonia ranks 8th on the list, besting us by 29 countries. When we consider reading, math, and science as being critical for skill knowledge to perform job tasks in the field of technology, we rank well down the list of the world’s countries.

For the last two-plus years, we have seen the massive dismantling of any semblance of our public and private education system functioning properly. If we have learned one thing from Covid-19 and the new offspring variants is that basically, since 2020, our education system has practically been non-existent in providing the needed instruction to students. Even before Covid-19 began to spread around the world, the profound issues in our educational system began to impact our ability to properly produce literate students.

What was a trickle of education woes where teachers were leaving the workforce, is now spreading, and growing where it includes all phases of the education workforce – cafeteria workers, bus drivers, teachers, principals, superintendents. Finding substitute teachers is practically impossible when you consider that most substitute teachers were former full-time teachers that left their jobs because of the issues they faced.

The Foundation of What Instructure Represents for the Future of How We Should Educate our Student Population:

The education industry is one of the largest and most important sectors of the global economy. Success in education is a primary driver of economic well-being, quality of life, geopolitical competitiveness, and societal advancement. As such, the education market is massive and commands high spending from governments and private institutions worldwide. According to U.S. Census Bureau and the National Center for Education Statistics, in the U.S. alone, there are 70 million students enrolled across 137,000 schools. According to UNESCO, approximately 1.4 billion students worldwide were learning from home as of March 2020. According to CB Insights, the U.S. spends over $1.6 trillion annually on education, representing one of the highest government spending categories. According to HolonIQ, global spending on education stands at almost $6 trillion. The overwhelming majority of educational spending goes toward traditional instruction – teachers, classrooms and classroom tools, student and teacher support services, and administration. A key component of broader education spending is funding directed to education technology. According to HolonIQ, global spending on education technology was $163 billion in 2019 and will increase at a compound annual growth rate of 16% between 2019 and 2025.

Technology is Disrupting Every Aspect of Education:

Technology has fundamentally transformed the way education is delivered and consumed – creating the ability to democratize education and improve the quality of instruction for everyone. From traditional classroom teaching to fully online learning, technology has brought disruptive tools to improve teaching efficiency, elevate student performance, enhance peer collaboration, and enable greater personalization. With technology, schools can provide equitable access to learning for lifelong development, build communities around education – including students, teachers, parents, and content providers – and scale quality education to bring best-in-class experiences to students at any time or place. Technology also enables blended learning environments, enhancing both face-to-face and online experiences by using data and analytics to inform instruction and enrich learning experiences outside of school hours.

Latest Financial Data For Instructure:

Fourth Quarter Financial Highlights:

  • GAAP Revenue of $110.6 million, an increase of 26% year over year.
  • Allocated Combined Receipts, or ACR, of $111.4 million, an increase of 23% year over year.
  • Operating loss of $5.4 million, or negative 4.9% of revenue, and Non-GAAP operating income of $40.7 million, or 36.5% of ACR.
  • GAAP net loss of $20.7 million and Adjusted EBITDA* of $41.7 million, or 37.4% of ACR.
  • Cash flow from operations of negative $3.7 million and Adjusted Unlevered Free Cash Flow* of $4.0 million.

The Full Year 2021 Financial Highlights:

  • GAAP Revenue of $405.4 million, an increase of 34% year over year ACR* of $414.7 million, an increase of 28% year over year.
  • Operating loss of $46.9 million, or negative 11.6% of revenue, and Non-GAAP operating income of $143.7 million, or 34.7% of ACR.
  • GAAP net loss of $88.7 million and Adjusted EBITDA* of $146.7 million, or 35.4% of ACR.
  • Cash flow from operations of $105.1 million and Adjusted Unlevered Free Cash Flow* of $168.7 million.

Projections For 1st Q-2022 and Full Year 2022 Financials As Stated in Recent Annual Report Conference Call:

  • For the first quarter of fiscal 2022, the company expects ACR in the range of $109.1 million to $110.1 million.
  • Normalizing for the Bridge divestiture, the first quarter ACR guidance growth rate is 16% at the midpoint.
  • For the full year, Instructure expects ACR in the range of $456.7 million to $460.7 million. Normalizing for the Bridge divestiture or full-year ACR guidance, the growth rate is 12%, at the midpoint.
  • In February of 2021, Instructure sold Bridge, our corporate LMS business. Bridge contributed approximately $4 million of ACR during the first quarter of 2021.
  • They expect the first-quarter adjusted EBITDA in the range of $37.9 million to $38.9 million, representing an adjusted EBITDA margin of 35% at the midpoint of the range.
  • For the full year, Instructure expects adjusted EBITDA in the range of $162.1 million to $166.1 million, representing an adjusted EBITDA margin of 35.8% at the midpoint of the range.
  • The company anticipates full-year 2022 adjusted unlevered free cash flow to be between $183 million and $187 million.

Caveats For Potential Investors:

The number of educational software systems is vast and growing on a constant basis. However, for the completeness of full options for a Learning Mastery System – LMS, I have opted for Instructure being the optimal company for an investment opportunity. Nevertheless, for potential investors looking for an investment option or comparison model in the educational market I would suggest you look at PowerSchool Holdings (PWSC). They currently have a revenue obtainment greater than Instructure, but there is a key factor that reveals this data point as being an issue of concern. PowerSchool was created 20 years ago, whereas Instructure was initially created in 2008. But it was 2011 before they have a fully developed product being marketed to the schools. The fact being is simply Instructure in a shorter time span is quickly reaching the revenue levels that PowerSchool has obtained. Furthermore, it might be of note that the current group of market analysts that follow Instructure is projecting that in the current year (2022) they will be achieving a positive earnings stream. Currently, Charles Schwab’s Equity Rating system has the stock rated a B with a Percentile Ranking –12 (Buy- Outperform). A two-point decline to 10 will improve the Buy ranking to an A – (Strongly Outperform). I prefer buying a stock before the superlative rankings become common knowledge to the public investors. Also, it is my opinion that Instructure offers a more diverse product line that addresses the student’s and teachers’ needs in managing their learning experience.

But it never hurts for potential investors to check out the competition in the given market they are giving consideration for their investment funds.

Conclusions:

The information the Stanford professor shares about who is filling our jobs where math and science requirements are critical skills for the work, and they are coming from foreign countries – this should be a concern of all parents who think their student will be the next rocket scientist or medical doctor. I think we all can agree – we need to improve the productivity and accountability we are currently seeing in our nation’s student population. Our future for competing in a world economy will depend on it!

Good luck with your future investment decisions. I’m not a professional stock analyst or a market maven with a crystal ball. Use my article as a starting point for creating interest and willingness for you to apply your personal criteria where you can do your due diligence on the related stock. I highly recommend that before investing in Instructure, visit their corporate website and view the extensive array of data, professional articles, and full scope of their product offerings.