The Remarkable Turnaround in Instructure’s Position on Future Growth
//The Instructure sales process 1Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research. has devolved into a public battle between Instructure and Praesidium, a large Instructure investor. As described in early January, Bloomberg reports that up to a third of Instructure investors are against the Thoma Bravo acquisition at $47.60 per share, and this is apparently significant enough that Instructure has come out with new message that essentially says they’re in trouble if the sale doesn’t go through.
Fighting Back
On January 13th, the lead independent director of Instructure, Lloyd “Buzz” Waterhouse, wrote a public letter directly attacking “dissenting investors” and specifically calling out Praesidium as “an activist investor” [emphasis in original].
However, we believe a certain activist investor is attempting to deprive all Instructure stockholders of the opportunity to realize this substantial return by deliberately perpetuating a false and misleading narrative about the Board’s deliberations, intentions and strategic transactions process, despite having publicly pushed for a sale process. The Board urges our stockholders to reject the opportunistic tactics being employed by this investor to derail the Thoma Bravo transaction by voting your shares in favor of the $47.60 per share Thoma Bravo merger proposal at the February 13, 2020 Special Meeting of Instructure stockholders.
I was surprised with this tactic, as it risks alienating those investors who agree with Praesidium’s argument but do so based on their own research. The letter is worth reading in full.
Today Instructure released an investor presentation that argues the same point but with lots of graphics.
The presentation even goes so far as attempting to refute Praesidium claims, point by point. See slides 16 – 18 to see the arguments and counter-arguments.
Shareholder Value
There was one other quote in the letter that surprised me with its direct and off-putting tone.
The Board of Directors has one priority: maximizing value for our stockholders.
I get the point that Waterhouse is arguing to other shareholders that the board has their back, but what about the message to Instructure clients? This trend of Instructure harming its brand by its consistent focus on monetization and shareholder value is concerning, despite some the recent blog post by the CEO.
A Reversal of Arguments
The second big point being emphasized in both of these public releases is that Instructure has reversed their narrative on the company’s growth prospects. On October 29th, I wrote about Instructure’s public counterargument to the LMS market slowdown described independently by us and by Raymond James analyst Brian Peterson. CEO Dan Goldsmith started the Q3 earnings call with this statement [emphasis added]:
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.
Reading that paragraph above, the overall sentiment is that the Canvas business is strong and growing. “we are not seeing that trend in our domestic Canvas bookings”
Now, Instructure is arguing what appears to me as the opposite case, that Instructure’s growth is rapidly declining and they face some real challenges if the Thoma Bravo sale does not go through.
From the Waterhouse letter:
There is significant ongoing risk to Instructure’s core business and its long term prospects, and the price offered by Thoma Bravo exceeds what our Board, in consultation with its financial advisors, believes can be achieved on a stand-alone basis at this time.
The investor presentation today goes even further with this argument, describing “serious headwinds” should Instructure remain a publicly-traded independent company.
Slides 6 – 10 of the presentation flush out this argument even further. I do have a real disagreement with Instructure’s claim that “we had been warning the market” about the slowdown. It is true that the company’s guidance for future years included slower growth, and that the annual report quoted in the slide mentioned a slowdown, but their narrative and statements described a strong and growing Canvas business without “serious headwinds”.
The LMS Market Slowdown is Real
The obvious goal of the new Instructure argument is to influence investors to fear the alternative to the Thoma Bravo acquisition, and to get them to vote on Feb 13th to close the deal. Michael Feldstein wrote about an alternative possibility (based on long-term market potential and not based on share price) here – it’s worth a read, including the comment thread.
However, it is good to have Instructure acknowledge what we have been writing about. The growth of their education business, which is predominantly built on the Canvas LMS, is slowing. And this “rapid deceleration” is largely based on the LMS Market Slowdown. The data below is an update from the MindWires LMS Market Analysis service with our partners at LISTedTECH.
The Future is Coming Fast
There is obviously some real concern at Instructure that the shareholder vote to accept the Thoma Bravo acquisition is not a done deal. Feb 13th, 2020 will be a big event to watch, although I have no real insight beyond reading the Bloomberg article on which way the vote will go.
Beyond the shareholder vote and whether or not Bravo buys Instructure, this news will likely impact the LMS market in other ways that are more important to schools. I will admit to having too much of a recent focus on corporate finances, and in the next LMS post I’ll describe how much of the recent news is pointing to a new era for the LMS market, with new dynamics.
Update 22 Jan 2020: Changed description of Praesidium from “activist private equity investment firm” to “large Instructure investor. While Instructure calls them an activist investor, the company self-describes as “a value-oriented investment firm that applies a private equity approach to investing in the public markets”. The private equity label was a mistake on my part.
Disclosure: Instructure is a subscriber to the MindWires LMS Market Analysis data service (as are many of their competitors), and we have a number of investment firms who are also subscribers to the service and pay for in-depth market data and research.
Phil – There you go again. You should stop writing about things you have no idea about. You are trying to prove your point because you feel threatened by the fact that you have been saying slowdown and someone (with real data) actually disagrees with you. I have taught economics and investing for years. Slowdowns in business revenue growth happen due to the the cumulative effect of the denominator getting larger. Instructure could continue to add the same amount of LMS business for years and at a fixed rate of change, their YoY growth rate would slow down. That is not the same as the LMS market slowing down. Also, if you look at the financial reports, their billings were up showing a sign of growth, not decline. And, yes Boards of public companies have to prioritize shareholder value. That is how the markets have been for decades and you translating that to the integrity of the company is just ignorant. Instructure’s CEO has a fiduciary duty, but that does not mean he sacrifices customers or broader values of the company. You are a smart and talented person. Do you homework, listen instead of trying to be the first one out with a “story”, and you will get much more respect from people. Also, the fact that investors are pushing back on the deal is because they believe the company is in better shape and has a more promising future, so either way it is a win win for Instructure.
F – I am fine with disagreement, but please keep this civil. I’ll ignore your imaginations on why I write some posts and the integrity comment.
Like you, I understand denominators, but that is not what our data say is the issue. If you’ll notice the chart I shared, the data are in total values, not percentages. No denominator. What Instructure’s data show is a slowdown well beyond the effect of a larger denominator (Canvas revenue or billings). Going from 40% yoy organic rev growth to 16% in two years is not primarily due to the denominator effect you describe. And the narrative that Instructure chose to use is most of what I shared – it is very different than three months ago.
If you read the text above, you’ll see that the problem with the Waterhouse statement is the board having “one priority”. Nothing about value to customers, nothing about public good being in the education space, nothing else. This statement is not a one-off, as it matches the messaging we are seeing over the past three months, ignoring the impact on customers and the market in general. In my opinion that sole focus on shareholder value is harming the company’s brand and is detrimental to the health of the market.
I appreciate that you have an optimistic take on the company and that you disagree with some of my points. In the future, please keep your critiques to what is stated, or at least back up your points. Thanks for reading and commenting.
Phil, great analysis, per usual. LMS market is bound to shrink for one simple reason: colleges are closing, rapidly. The entire higher education “market” as measured by number of institutions is simply shrinking at an alarming rate. This is a MUCH bigger problem than LMS saturation debate. Good god men, the entire planet is imploding! With a declining birthrate of school-age kids, the implosion is natural, irreversible (in the short run) and will profoundly impact all-thing-higher-ed. Yes, yes, I know corporate training will absorb some of this loss of student enrollments, but that’s a different story.
Thanks. I agree about enrollment declines as a big story, although I think other factors continue to be at play here.
Colleges are closing but they are relatively few and small institutions and have no effect on the LMS sales growth. The simple fact is the HE market is saturated and there are far fewer schools that don’t have an LMS. The cost of acquiring a new customer now includes taking it from your competition (discounts?), migrating courses and data to the new system (costs) and training the faculty on the new system.
One other small but impactful change is that large institutions are consolidating their eLearning activities onto one LMS. Going are the days when there could be 3-4 different LMS licenses at one large school.
Hi Phil,
As an Instructure client I would like to address the following statement from the above piece, “but what about the message to Instructure clients?” I think that is more or less a fair question. If it is okay, I would like to help out by answering it. First off, I think BoDs should have the stockholders best interest in mind, it is a big part of their job. Please don’t think I am naïve enough to not be aware that it is also a self-serving interest. As a publicly held company, the BoDs have a few different client-vendor relationships they have to keep in mind when they make decisions, and finance is obviously at the top. What I’d like to address is the client-vendor relationship my school district and I have had with Instructure over the past four and a half years. When we first started our relationship with Instructure, I definitely had a, “let’s see where this is going to go” mentality. I was impressed with their LMS platform (Canvas) and how easily it would integrate with our SIS and how simple rostering would be. They did not let us down on any of this. Yet still, I was waiting for the first failure with their system, because that is what platforms do, they fail. The engineers at Instructure even worked with our district tech team and with the engineers at our SIS to create a “passback” system so grades could move from Canvas into our SIS and teachers would not have to double enter grades. This passback feature wasn’t built out, but Instructure did everything they could to make sure we had the Canvas instance that would best work for our district’s teachers and our IT department. Still, no failures. A lot has happened since our initial contract with Instructure. They have grown as a company, and we have grown as a district. The Canvas platform has allowed our district to not only go 1:1 but to also dive head first into Blended Learning, and most recently into Online Learning. Both our Sales Rep and our Customer Success Manager have been side-by-side with us along the way, and in some instances they were even leading the way for us. Four and a half years later and I am no longer waiting for a failure, because if it was going to happen, it would have happened.
When I first heard of the possibility of the sale of Instructure, I was mortified. We have put a great deal into the development of our Canvas instance, I immediately called my rep and she assured me that there would be no lapse in service, and there hasn’t been. I don’t believe that the BoDs statement of “maximizing value for our stockholders” sends a bad message to us, the clients, I believe it is truly what their first priority should be. The main thing is that the customer service end of Instructure is doing what they should be doing, and that is, maximizing value for the users. It’s what they have done in the past, what they do now, and I truly believe it is what they will continue to do.
Thanks for your time and if you feel you need any specifics on this post, please email me. Have a wonderful evening!
Jim, thanks for thoughtful comments and sorry for slow reply (family travel).
My concern with BoD and company messaging is not that shareholder value is a top priority, it is that for general messaging it has been the only priority (see text of letter). Prior to 2018, Instructure knew how to balance their messaging and communication with clients. Over the past year, the situation has changed, definitely in public and in many cases for individual clients. I am glad to hear that your school district has solid communication and service from them.
I’ll also note that Instructure has ramped up their client messaging over the past few weeks.
Thank you Phil for your thoughtful analysis. I agree, and I’m shocked at the lack of civil discourse. My view is simple – next generation LMS systems will move us from PowerPoint to streaming learning… Strut Learning is an unknown, that has started to gain traction – it feels like 1999 all over again. As SNHU and WGU grow exponentially – the establishment could choose to do nothing, or understand that Student Experience Management is the key to growth. The fog of disruption grows thicker, with InsideHE’s article titled, Marketing for a Massive Online University. It leaves the impression that growth is simple a function of increased marketing spend. Clearly, it doesn’t hurt to spends a lot on marketing, but that’s only part of their growth story. But I digress. Again, great analysis Phil!