Instructure Holdings Inc

NYSE:INST

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Instructure’s Fourth Quarter and Fiscal Year 2021 Earnings Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that this conference is being recorded. I would now like to turn the conference over to your first speaker, Denise Garcia, Investor Relations. Denise, please go ahead.

[Denise Garcia, Managing Director-ICR, Inc.]

Thank you, Mel. Good afternoon and welcome to Instructure’s fourth quarter and full year 2021 earnings call. We will be discussing the results announced in our press release issued after the market closed today. With me are Instructure’s Chief Executive Officer, Steve Daly; and Chief Financial Officer, Dale Bowen. 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 today’s – to the disclosure in today’s earnings release and other reports and filings we filed from time to time with the Securities and Exchange Commission. All of our statements are made as of today based on information available to us today, and except as required by law, we assume no obligation to update any such statements. During the call, we will also refer to both GAAP and non-GAAP financial measures. You can find the reconciliation of our GAAP to non-GAAP measures included in our press release, which is posted to the Investor Relations section of our website. With that, let me turn the call over to Steve.

[Steve Daly, Chief Executive Officer]

Thank you, Denise, and good afternoon everyone. Thank you all for joining us for our fourth quarter and full year 2021 earnings call. During today’s call, Dale and I will provide details on our fourth quarter results and provide first quarter and full year 2022 guidance. Instructure delivered another strong quarter in Q4, exceeding our previously communicated guidance ranges across all of our guidance metrics. Fourth quarter GAAP revenue was $110.6 million, up 26% year-over-year, while allocated combined receipts, or ACR, was $111.4 million, up 23% year-over-year. We had our best fourth quarter bookings in the history of the company as we continue to execute on the go-to-market strategy we introduced last fall. Full year 2021 GAAP revenue was $405.4 million, up 34% year-over-year; while ACR was $414.7 million, up 28% year-over-year. We think ACR, which adds back the Impact of fair value adjustments to acquired unearned revenue gives investors better visibility into the underlying growth of our business. Thanks to our focused investment approach, fourth quarter adjusted EBITDA grew 57% year-over-year to $41.7 million, a 37% margin. Full year 2021 adjusted EBITDA more than doubled to $146.7 million and we converted 115% of full year adjusted EBITDA to adjusted unlevered free cash flow. Total customers grew 14% year-over-year to nearly 7,000 at the end of Q4 as Canvas gained share across each of our key markets. Net revenue retention was 109% in 2021, which highlights the continued growth opportunity in our customer base. Our strong fourth quarter financial performance capped off a truly outstanding year for Instructure. We look forward to building on our success in 2022 and beyond as we continue to enhance our Instructure learning platform, while remaining focused on driving profitable growth and maintaining our industry-leading margins. I now want to talk about five key highlights for the quarter. First, in Q4, we once again saw strength in each of our key markets, U.S. higher education, K-12 and international. In higher education, our cloud native and extendable platform continue to displace legacy systems. During the quarter, Walden University selected Canvas for its 40,000 student population because of its superior user interface and flexibility at scale, while providing data access and a robust API. The deal also included impacts to help accelerate Walden’s transition from Blackboard to Canvas, while providing continuity with previous functionality. We are seeing strong uptake of impact in higher education as well as K-12 as educational institutions seek to better understand how edtech tools are being used in their environment. We have also been very pleased by how impact has been received in the K-12 markets since we announced the availability of the solution last fall, and we expect the impact to further differentiate us from our K-12 competitors while expanding our total addressable market. In K-12, more broadly, we continue to take share from both unpaid and paid legacy LMS systems during the quarter. In Q4, Hartford County Public Schools selected Canvas LMS and Canvas Studio after the incumbent, a paid LMS vendor, terminated its legacy system. Hartford chose us because of our strong product features and our expertise in migrations and change management services. International remained our fastest-growing part of the business in Q4, and we continue to see and believe international can be as large as our U.S. business over time. In Australia, we signed a deal with Australian Catholic University, or ACU, to replace their Moodle system. After a comprehensive competitive tender process, ACU selected Canvas and Impact as the foundation for the next-generation digital ecosystem to underpin ACU online, the university’s recently launched fully online education portfolio. Second, our focused go-to-market and expanded set of offerings are resulting in higher penetration of products across our customer base through both cross-sell opportunities and new logo deals. In 2021, 43% of new wins involve more than one product, up from 33% in 2020. During the quarter, Newport News Public Schools took advantage of the statewide Virtual Virginia contract, which allows districts to use Canvas as a procurement vehicle to purchase MasteryConnect, our K-12 student assessment management system. Found with better sales tools, our dedicated K-12 assessment sales team is having great success cross-selling our suite of assessment management solutions, including MasteryConnect and Certica into our customer and Canvas installed base. Third, we are making disciplined investments to expand our platform and drive long-term growth. Our high gross margins, strong sales execution, productive R&D investment and low capital requirements allow us to reinvest in the business, pursue strategic M&A and deleverage, while maintaining industry-leading margins. For example, the full year 2022 guidance we are providing today, which Dale will discuss in greater detail later in the call, takes into account meaningful increases in R&D and sales headcount, expanding our sales capacity, while delivering the expected 36% adjusted EBITDA margin, well ahead of consensus 2022 estimates for our edtech peers. Fourth, we have a strong track record of value creation through M&A. With Canvas at our core, we are uniquely capable of improving the performance, accessibility and reach of acquired software solutions. Our technical integrations have gone smoothly and ahead of schedule, while – which has allowed our sales teams to rapidly incorporate newly acquired products into their conversations. As a result, we’ve been very successful in adding products we acquired over the last 12 months to our existing Canvas base. Fifth, as our international business continues to grow rapidly and gain market share, we’re looking at ways to turbocharge growth. Last month, we announced the launch of a new channel partner program, which is expected to spur growth in APAC, EMEA and LatAm markets. The new program offers potential partners additional ways to generate revenue beyond reselling products with opportunities such as implementation, training and support services. Early feedback has been positive and we are optimistic about the cost-effective expansion of our international footprint through channel partners. Turning to stimulus funding. Last month, the Department of Education announced that every state education agency received approval of their American Rescue Plan Elementary and Secondary School Emergency Relief, or ESSER, planned before the end of 2021, resulting in the distribution of $41 billion of additional funding, which had been contingent on state plan approval. With only $26 billion of the $190 billion of ESSER funds used as of November 2021, we expect the funding environment to remain favorable for years to come. Looking to the remainder of 2022 and beyond, we believe the Instructure learning platform is uniquely positioned to help educational institutions and developers solve the complex challenges presented by the proliferation of edtech tools. For educational institutions, these challenges include a fragmented user experience, siloed data, unclear ROI, security risks and difficulties in evaluating, implementing and managing applications. For edtech tools tool developers, accessing education markets and navigating procurement processes are significant hurdles. Our 2022 product roadmap includes investments to expand the capabilities of our platform as we address an even larger share of our $30 billion total market opportunity. In our core North American higher education business, we expect the number of RFP opportunities to significantly increase in 2022 relative to 2021 as universities look to upgrade their infrastructures. Our growing pipeline includes large universities with legacy LMS systems, which simply cannot scale to meet the demands of millions of concurrent users. We are highly confident in our competitive position and look forward to continued momentum in the coming years. In summary, I couldn’t be more excited to lead Instructure through our evolution into the most comprehensive teaching and learning platform worldwide. I would like to thank our customers, our partners, our employees and shareholders for your ongoing support. With that, I will now turn the call over to Dale to talk about our financial results and the ongoing momentum we’re seeing in the business.

[Dale Bowen, Chief Financial Officer]

Thank you, Steve, and thanks again to everyone for joining us today. Before discussing our detailed financial results, I’d like to point out that in addition to our GAAP results, I will be discussing certain non-GAAP results. Our GAAP financial results, along with the reconciliation between GAAP and non-GAAP results can be found in our earnings release, which is posted in the Investor Relations section of our website. In the fourth quarter, we continued to show a combination of strong top line growth and expanding adjusted EBITDA margins. For the full year, we expanded adjusted EBITDA margin by 1,350 basis points. We expect to maintain our industry-leading margins as we deliver durable, profitable growth in years ahead. As Steve mentioned, we generated fourth quarter 2021 total GAAP revenue of $110.6 million, up 26% year-over-year; and ACR of $111.4 million, up 23% year-over-year. Subscription and support ACR accounted for 91% of our fourth quarter revenue at $101 million, up 27% year-over-year, primarily as a result of the continued momentum within our core Canvas LMS products, both domestically and internationally, in addition to the strong upsell and cross-sell of our other products, specialty assessment. Professional services and other revenue accounted for 9% of our fourth quarter revenue at $9.6 million, up 22% year-over-year, driven by strong implementation and training services delivery in our K-12 business. Deferred revenue at the end of the fourth quarter was $255.7 million, up 25% year-over-year. Remaining performance obligations, or RPO, were $698 million at the end of the fourth quarter, up 60% year-over-year. We expect to recognize revenue on approximately 76% of our RPO over the next 24 months. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results and share count are on a non-GAAP basis. Please note that when I refer to margins in the upcoming comments, I’m referring to margins calculated as a percentage of ACR. Our strong gross margin profile was supported by our optimized cloud architecture and flexible support model that scales to meet seasonal customer demand. In the fourth quarter, gross profit was $86 million, representing a 77.1% gross margin, up from 68.3% in the fourth quarter of 2020. We couldn’t be more pleased with our enhanced operating model and continued operating leverage on the gross margin line. Turning now to operating expenses. Sales and marketing expenses for the fourth quarter were $21.4 million or 19.2% of ACR, down from 22.1% in the fourth quarter of 2020. Research and development expenses for the fourth quarter were $13.4 million or 12% of ACR compared to 11.5% in the fourth quarter of 2020 as we invested in engineering headcount to pursue our ambitious product road map. General and administrative expenses for the fourth quarter were $10.5 million or 9.4% of ACR, up from 6.7% in the fourth quarter of 2020, driven largely by the addition of public company costs in the second half of 2021. Non-GAAP operating income for the fourth quarter was $40.7 million, representing a 36.5% operating margin, up from 27.9% in the fourth quarter of 2020. Fourth quarter adjusted EBITDA was $41.7 million, representing a 37.4% adjusted EBITDA margin, up from 29.3% in the fourth quarter of 2020. Non-GAAP net income for the fourth quarter was $48.2 million or $0.34 per share compared to $17 million or $0.13 per share a year ago. Turning to the balance sheet and cash flow statement. We ended the fourth quarter with $169.2 million in cash, cash equivalents and restricted cash; and $493.3 million of long-term debt, net of discount, resulting in a 2.2 times net debt to trailing 12-months adjusted EBITDA ratio. Full year 2021 GAAP operating cash flow was $105.1 million compared to negative $20.2 million in the prior year. Full year free cash flow was $100.9 million compared to negative $22.4 million in the prior year. Full year 2021 unlevered free cash flow was $156.6 million, a 124% year-over-year increase from $69.9 million in 2020, while adjusted unlevered free cash flow, which adjusts for the impact of restructuring, transaction and sponsor-related cost paid in cash was $168.7 million, a 69% year-over-year increase from $99.7 million in 2020. As a reminder, our strong free cash flow conversion is driven by our favorable billing terms, low capital expenditures and our accumulated tax assets, which we believe will act as a tax shield for the next several years. I will now conclude the call by providing guidance for Q1 and for the full year of 2022 for ACR, adjusted EBITDA and adjusted unlevered free cash flow. We have provided additional guidance details in our earnings press release. For the first quarter of fiscal 2022, we expect ACR in the range of $109.1 million to $110.1 million. Normalizing for the Bridge divestiture, our first quarter ACR guidance growth rate is 16% at the midpoint. For the full year, we expect ACR in the range of $456.7 million to $460.7 million. Normalizing for the Bridge divestiture or full year ACR guidance, growth rate is 12%, at the midpoint. As a reminder, in February of 2021, we sold Bridge, our corporate LMS business. Bridge contributed approximately $4 million of ACR during the first quarter of 2021. We expect 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, we expect 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. We anticipate full year 2022 adjusted unlevered free cash flow to be between $183 million and $187 million. Please note that moving forward, we plan to use adjusted unlevered free cash flow as our primary free cash flow metric because it provides a better measure of our ongoing cash generation. A couple of quick points on seasonality. First, as a reminder, ACR is typically roughly flat between our first and second quarters, and we expect this trend to repeat itself this year. Second, we expect our adjusted unlevered free cash flow seasonality to look a little different this year. By leveraging our scale and strong balance sheet, we’ve been able to secure favorable terms with our vendors, thereby reducing our cost structure and improving our gross margins over time. We’re able to do this by making incremental prepayments for vendors in the order of $25 million to $30 million, which will impact adjusted unlevered free cash flow year-over-year comparisons for the first quarter. In summary, 2021 was an incredible year for Instructure. We reentered the public markets and executed at a very high level, exceeding our guidance in every quarter. From our position at the center of teaching and learning, we are leading the digital transformation of education. And financially, we offer a rare combination of double-digit growth and best-in-class margins. We couldn’t be more pleased about our momentum in the marketplace and look forward to updating you on our progress throughout 2022. With that, Steve and I are happy to take any of your questions.

[Operator]

Thank you. [Operator Instructions] We have the first question comes from the line of Josh Baer of Morgan Stanley. Your line is now open. You may ask your question.

[Josh Baer, Morgan Stanley]

Great. Thanks for the question and congrats on the finish to a strong year. And I guess I want to ask, with adding 800 customers and 109% retention rate, really like what does the pipeline look heading into 2022? If you could kind of give any context on across higher ed, K-12 and international segments, please?

[Steve Daly, Chief Executive Officer]

Thanks, Josh. What we are seeing a continued momentum in the marketplace. The pipeline is looking good. We mentioned in the prepared remarks that we’re seeing increased RFP activity in the U.S. higher ed space, so that is up significantly from 2021 to 2022. So we continue to see good pipeline build in frankly, 2022 and 2023 in the U.S. higher ed business. So we feel really confident about where the pipeline is starting this year.

[Josh Baer, Morgan Stanley]

Okay. Great. And then on the new international channel partner program, how should we think about the contribution from that this year or in the coming years? Thank you.

[Steve Daly, Chief Executive Officer]

Yes. So this is an important part of our overall long-term growth strategy. And are continuing to drive international as the fastest-growing segment of our business, as we’ve talked about in previous calls, we really have put a focus on our direct sales teams. We’ve identified those countries that we believe are best suited for a direct sales engagement, and we’re still investing very heavily in those markets as evidenced by the recent win with Australian Catholic University. We’re seeing good momentum. The channel program allows us to address those markets that we looked at and said, okay, if we went in direct, they wouldn’t necessarily break even in the first 12 months, but this is a much more efficient way to address those countries. So it’s going to expand our addressable market in the international space. So the way to think about it, Josh, is that it really is a driver of growth for the next two to three years. And we’re starting to – we’re getting really good feedback on the program, and we’re just starting to sign up channel partners and expect it to be, again, something to drive that durable growth in our international markets over the next two to three years.

[Operator]

Thank you. Next question, we have the line of Sterling Auty of JPMorgan. Your line is now open. You may ask the question.

[Drew Glaeser, JPMorgan]

Hi, this is Drew on for Sterling. Given that the K-12 district budget votes are happening over the coming months, do you have any preliminary sense of spending on Instructure solutions in the upcoming budget cycle?

[Steve Daly, Chief Executive Officer]

Yes. Thanks for the question, Drew. We have a pipeline that we’re managing. We feel very confident in the guidance that we’ve given you that the pipeline will support those numbers. As we mentioned, this is an area that’s been going through digital transformation. COVID was really a catalyst and the starting point for that digital transformation. So as particularly as we amass a portfolio more than just the LMS, but the assessment part of the business and the impact products that we’re adding. And we have a lot of products that apply to this digital transformation. So we feel very good about where we’re sitting from a pipeline perspective for our K-12 business.

[Drew Glaeser, JPMorgan]

Okay, great. Thank you.

[Operator]

Thank you. Next question, we have the line of Fred Havemeyer of Macquarie. Your line is now open. You may ask the question.

[Fred Havemeyer, Macquarie]

Hi, thank you and congratulations on the quarter. I wanted to really dig into what Instructure is able to do at the moment to help address learning loss and specifically as it relates to the K-12 environment and MasteryConnect. As you’re looking out at the U.S. domestic K-12 marketplace, what appetite you find schools have for more assessment capabilities, more insights and essentially what MasteryConnect is able to deliver. And further, how are schools thinking about tackling the problems of learning loss that have accrued throughout and really continue to accrue throughout the stop and go learning cycles during the pandemic. Thank you.

[Steve Daly, Chief Executive Officer]

Okay. Thanks, Fred. Good to hear from you. And it’s a great question. This is a big challenge for the K-12 system. There were funds specifically targeted within the ESSER stimulus funding to address learning loss. And you’ve hit it on the head. The main tool that we have to help schools address learning loss is through our all of our assessment solutions, both MasteryConnect as well as the Certica products that we acquired at the beginning of last year. And our approach is a little bit different than traditionally has been done in assessment, which has been high stakes end-of-year kind of testing, whereas our solutions are really targeted at real-time feedback to the teachers on how students are doing against the standards, against where they should be in their educational journey. And so we announced the Mastery review products last year that really are, again, these lightweight, quick hitting, psychometrically sound ways to test how students are doing along their journey rather than waiting till the end and seeing how they did. So this is a big part of the overall learning assessment. And then with the LMS, we also have the ability – again, teachers have a 360-degree view on how our students are going, what are they teaching. And they’re able to look at how they can adjust their teaching for students as they get that feedback from the assessment solutions, so a lot of good stuff that we provide in the classroom for the teachers to be able to get that real-time feedback on how students are doing.

[Fred Havemeyer, Macquarie]

Okay. Thank you. And then, you know I wanted to ask….

[Operator]

Okay, just got disconnected. [Operator Instructions] We have a question from Brent Thill of Jefferies. Your line is now open. You may ask your question.

[Brent Thill, Jefferies]

Good afternoon. I’m curious on the higher ed as colleges have come back into session. Any change in behavior or any observations you have in some of these engagements? And then for K-12, I’m curious where you believe that over time the mix settled out as it relates to the overall mix of the business in terms of customers and revenue and any other observations on the K-12 side just from a metric perspective you could offer. Thanks.

[Steve Daly, Chief Executive Officer]

Yes. From an engagement perspective, you specifically asked about U.S. higher ed, what we’re seeing is utilization on our platform is at about the same level that it was during the pandemic. So as we’ve gone back to more in-person, the engagement still – what is being recognized is that this has become core infrastructure for delivering on teaching and learning, whether it’s in-person fully remote or hybrid environment, it is the glue that they use to make sure that there’s a seamless experience across each of those teaching methods. And so we see good engagement, continued on the platform and higher than it was pre-pandemic, frankly. From K-12, the reality is we have a really strong business in our U.S. higher ed, it’s very sticky, very low churn. We’ve never lost a fully deployed four-year higher education institution. That mix is going to change very slowly. So we’re just over one-third of our business right now is K-12. I don’t expect that to change more than a few points over the next several years, again, because of the durability of that U.S. higher ed business that we’re seeing.

[Brent Thill, Jefferies]

Great. Thanks.

[Operator]

Thank you. We have now the line again of Mr. Fred Havemeyer of Macquarie. Your line is now open. You may ask the question.

[Fred Havemeyer, Macquarie]

I’m back with my follow-up. I wanted to just ask about the competitive landscape. I know that you highlighted some competitive wins this quarter in the higher ed space, and there’s certainly been quite a bit of activity there as well with some consolidation in the market. And I wanted to ask, as you are looking at the RFPs that are out there and as you’re looking at the competitive landscape in higher ed, how do you see things progressing? And do you see any sort of shift that is potentially favoring Canvas? Thank you.

[Steve Daly, Chief Executive Officer]

Yes. It’s a good question, Fred, and welcome back. We have – the competitive situation is as it’s been, although we’re seeing – it was dynamic during the pandemic, where a lot of higher education institutions already had something in place that kind of hunkered down and said we’re just going to get through this with what we have. What they recognized was that the open source or on-prem solutions just didn’t scale, and they didn’t meet the demands. And so now they’re looking at it’s time to re-platform and decide what we’re going to do for the next decade. And so as we’re coming out of the kind of panic situation that we had in 2020, they’re starting to open up and look for the next generation. And that goes very well for us from a competitive perspective. As we have – we scaled up dramatically during the pandemic. We stayed up. Whereas some of the open source like Moodle fell down the – some of the legacy technologies that they’re just in scale. And so that’s a primary driver that we see right now is looking for that digital transformation, what’s going to be the technology to take them into the next 10 to 20 years. And again, bode really well for us. Our win rates are around 70%. So we continue to see high win rates in those opportunities.

[Fred Havemeyer, Macquarie]

Thank you. Appreciate the context.

[Operator]

Thank you. We have the next question comes from the line of Brian Peterson of Raymond James. Your line is now open. You may ask the question.

[Brian Peterson, Raymond James]

Good evening gentlemen. Thanks for taking the question. So I wanted to follow up on K-12. I think there’s been some debate on the rate of adoption. I know you guys mentioned the funding backdrop. But I’m curious, where do you see the penetration of K-12 today? And I’d also be curious, as you look at markets like assessments, where is that, right? I know maybe that’s hard to peg today, but like I think we’re trying to think about the incremental opportunity in K-12. So anything that you can share there would be really helpful.

[Steve Daly, Chief Executive Officer]

Yes. It’s – in the K-12 space, we think we’re still – the last time we did this study, it was about 40% penetrated with paid for LMS. I suspect when we get the latest data, it will be more around 50% of the market that’s penetrated with paid for LMS, and we still are the market share leader in paid for. We’re still seeing – as districts put together their plans, as they figure out ways to use the stimulus funds, as they’re looking at the digital transformation that’s going on, there’s still a lot of room for us greenfield opportunity in those districts that don’t have it paid for LMS yet. The penetration of the LMS is, frankly, we don’t know exactly on assessments, but I believe it’s ahead of where the assessment penetration is, especially when it comes to these interim assessments that we’re talking about and the automation of those processes. So I think we’re still early days from an assessment – use of an automated assessment management system in order to do these formative and interim assessments. So we’ve still got a lot of runway there.

[Brian Peterson, Raymond James]

Good to hear, Steve. And Dale, maybe a follow-up for you. Just on the 800 customers or new customers, in any rough sense on how those compare across the three buckets. And I’d also be curious, the 109% NRR, how do we think about that metric going forward? Thanks guys.

[Dale Bowen, Chief Financial Officer]

Sure. So we don’t break down the customers – the growth customers in those different segments. But we’re really pleased with the growth of customers and what we’ve been able to acquire during this past year. So let me transition over to your second question, Brian, on the 109% NRR. We’re also really excited about that 109 number of our net revenue retention. It landed right where we expected it to be. And it’s really based upon that strong GRR that we have, that gross revenue retention that is best-in-class at mid-90s. We add on top of that the annual growth rate with our price increases and then the cross-sell on top of that. It’s just – we’re really happy with it. What that number is not including though, is the progress that we’ve made in our landing larger with our new logos. Steve mentioned this in his opening remarks that we are adding more products when we land with new logos than we did last year. That’s something that’s not captured within this NRR number, but it’s also an expansion against all those customers that you opened your question with of adding 800 year-over-year.

[Brian Peterson, Raymond James]

Thanks, Dale.

[Operator]

Thank you. We have the next question comes from the line of Terry Tillman of Truist. Your line is now open. You may ask your question.

[Terry Tillman, Truist]

Hey, good evening, Steve and Dale, congrats from me as well. My first question is on the – we’ve talked about assessments here and you talked about momentum there. And I know there’s a variety of SKUs that would fall under that whole kind of theme of assessment. But anything more you can share about just the size or the scale of that in relation to the broader business. And we see our guidance for 2022. But is assessment something that is going to grow at multiples or anything you can share about its relative growth rate? And then I have a follow-up.

[Steve Daly, Chief Executive Officer]

Yes. So we don’t break down between products where the revenue is broken down. But this is one of those areas where it is growing faster than the core business, and we expect it to continue to grow faster than the core business. We’re really pleased with the sales motion. And as we’ve talked about in the past, when Frank came in, he put into place some discipline around how we talk about the product, how we talk about the platform. We’ve seen some great uptake on those products. So we feel good about that business and that will be a driver – it will continue to be a driver over and above the traditional or the core business growth rate. And we’ve seen also an increase in deal size with those cross-sell in 2021 as well. So a good driver for growth longer term for us, Terry.

[Terry Tillman, Truist]

Yes. That sounds good. And also, Steve, I’m excited to hear that you’re excited about the uptick. I think you said significant RFP activity increase in U.S. Higher Ed. I mean, that’s great to hear. What I’m curious about is any more color in terms of what the kind of composition is made of? Are there some really larger state schools? Or is it kind of smaller private institutions? Or just what’s the flavor of what some of the opportunities are looking like? And I know Dale gave the 12% ACR growth for the year. Depending on how this pipeline plays out and hopefully gets converted at a very high win rate, could that end up being one of the areas where there’s conservatism because some of this business flows through in 2022? Or should we think more of 2023? I think that was like five questions. So I feel like with all of that. Thank you.

[Steve Daly, Chief Executive Officer]

Okay. Thanks, Terry. Just keep me on [indiscernible]. So yes, I am excited about the RFP activity. As we’ve talked about with you before is 2020 – 2021 was really kind of a little bit slow in the higher ed space from an RFP activity. We see good pipeline build for 2022 and 2023. The breakdown is – it’s across the board. So there are a number of large institutions that have been on long-term contracts with some of our competitors that are coming up as well as just across, I’d say, Terry, there’s no real – it’s not trending towards one size of customer over the other, but we see it across the board. As we look at that as a driver of growth, we are – we feel really good about the guidance. We feel confident that we can hit that guidance that we’ve given you. And this is an area where a lot of these decisions are going to be made over the next two years, and I think it’s going to be a driver of growth for the Higher Ed business for the next two to three years. So that’s – I guess that’s how I characterize what we’re seeing build in the pipeline, Terry.

[Terry Tillman, Truist]

That’s great. You actually answered all the question. That’s really nice. That’s an A plus. Thank you.

[Operator]

Thank you. [Operator Instructions] We have the next question comes from the line of Matt VanVliet of BTIG. Your line is open. You may ask the question.

[Matt VanVliet, BTIG]

Yes, thanks for taking the question guys. Nice job in the quarter. I guess, I wanted to dig in a little bit more on the new channel strategy internationally. Can you help us maybe better understand who some of these channel partners are? Are they already selling in the ad tech space? Are they selling your competitors? Are they larger consulting organizations that just happen to be looking to break into the edtech market? Any, I guess, additional details in sort of size and scope of some of the partners that you’re looking at?

[Steve Daly, Chief Executive Officer]

Yes. It’s a good question. The way that we’ve targeted the program is we want a presence in countries where we may not go all in on a direct sales team and the associated customer success and all that. So we were looking for partners that have significant presence in country, have the investment and they’re big enough to be able to support our customers in the way that our customers are accustomed to, be able to provide the services surrounding those. So in a lot of cases, there, we’re targeting either some of the larger multinational kind of value-added distributors that have resellers in country. We’re targeting consulting groups that already have presence within the edtech space. In fact, almost exclusively our, the partners that we are working with already have presence in edtech. So that really is the profile that we’re looking for. And again, we’re looking for scale. We’re looking for a significant presence, local presence, and in many cases, partners that could span multiple countries for us.

[Matt VanVliet, BTIG]

Okay. And then on the federal stimulus funding, you mentioned a very low percentage has actually been kind of put to use to this point. Do you have much sort of line of sight into the timing of when or some of those projects might come up that seem to be earmarked with the additional budget out there. Obviously, there’s a time line around when it needs to be spent per se, but I’m curious if those conversations have been very explicit in saying we’re pulling forward Project X because we now have a surplus in the budget.

[Steve Daly, Chief Executive Officer]

Yes. In most cases, the dollars are allocated at the state level. So as we get down to the district level and the buyers of our technologies, they don’t always know exactly where this from stimulus funds or from general state funds, all they know is they have this amount. So we don’t have great visibility into whether they’re using these funds specifically for our technology or not. But as we’ve talked about in the past, this is – this money is earmarked to be committed by 2024, and that means you could sign a three year deal in 2024 and the dollars are committed by the government to the state. And so we do expect that this is a multiyear catalyst in this market for us.

[Matt VanVliet, BTIG]

Okay, great. Thank you.

[Operator]

Thank you. Next question we have from the line of Joe Vruwink of Baird. Your line is now open. You may ask your question.

[Peter Arment, Baird]

Great. Everyone, this is actually Peter on for Joe Vruwink. I wanted to ask again about assessments. Clearly, the momentum has continued there. And you guys keep talking positively about it. It also seems like there’s other entities maybe moving into the assessment space. So I wanted to ask, has the competitive environment changed? Or who are you seeing, is anyone in from a competitive perspective in these deals?

[Steve Daly, Chief Executive Officer]

Yes. The competitive landscape hasn’t necessarily changed. There’s always been players that have been in this space. And so it’s the usual players that we’ve seen in there. What we – where we focus, Peter, in our sales engagement, our sales motion is around really the advantage that a secure or a district can get in having a tightly integrated assessment and learning management system, so that they can see, they can have great visibility into what they’re teaching, how there are teaching it and get real-time feedback about how the students are then doing against those lesson plans that they’re creating. And so really, our focus competitively is better together. We can give you a lot more insights. We can give you a lot better insights by having these tight integrations between the assessment solutions and the learning management system. So again, not necessarily new players. We feel like our competitive positioning is much better than it’s ever been as Mitch and team have really created some tight integrations between the solutions that we had and that we acquired through Certica.

[Peter Arment, Baird]

Okay. Sounds good. And I wanted to ask in the past couple of quarters, you’ve given directional growth rates for K-12, Higher Ed international. Would you mind providing those? And then also, if you have anything to say on how that should look going to next year with the guidance? Thanks.

[Steve Daly, Chief Executive Officer]

Yes. We – as we look at our guidance for next year, we’re – we are – we feel really good about what we’ve guided to from a top line growth. In general, we continue to expect our international business to grow the fastest of the three segments. We are super happy about our Higher Ed business and our K-12 business. We continue to see them growing. All of our segments growing kind of in the double digits plus space. So the other piece I would add in the guidance is that we do expect our subscription and our services to grow slightly faster than the overall in the guidance that we’ve given you.

[Peter Arment, Baird]

Awesome. Thank you very much.

[Operator]

Thank you. We have question from the line of Stephen Sheldon of William Blair. Your line is now open. You may ask your question.

[Stephen Sheldon, William Blair]

Hey, thanks. Nice results in guidance here. I know a lot of K-12 school districts are dealing with issues related to teacher turnover and burnout. So I guess, how do you think about Instructure’s current ability to make teachers lives easier with Canvas and some of the assessment capabilities you talked about? And is there even more that you could do to use your tech suite to reduce the burden teacher space as you think about your product development road map and the potential for M&A over the next few years?

[Steve Daly, Chief Executive Officer]

Yes, it’s a great question. It’s a huge problem in K-12. As you rightfully pointed out there, there’s couple of things that we do to help address that. The first off, I met with one of our customers just about a month ago. And his feedback to me was Canvas can make teaching cool again. The fact that it’s next generation, it eases a lot of the manual processes that a teacher has to go through so that they can focus on the exciting part of their job, which is inspiring, and leading students and mentoring students. And so by having the systems in place, we take a lot of those manual processes away from the teachers. We also, by having that system of record in the classroom, we also helped the district and that as we have turnover or we have absenteeism for – as we see teachers that are out sick for a variety of reasons, that all lesson plans, the content, it’s all there for the substitute or from whoever is taking over from that teacher. So having that common infrastructure makes it much easier for them as they’re trying to manage the workforce. We believe that areas from an M&A, you mentioned areas of engagement around ways to help teachers assess the social emotional learning of the students, anything we can do to help them, better address the needs of their students and do it in an automated way is going to make their lives easier and better, make it more fun to be a teacher and anything we can do to help increase in engagement, looking again, both organically and inorganically is going to help in that realm as well.

[Stephen Sheldon, William Blair]

Got it. Yes. That’s really helpful. And then just as a follow-up. It sounds like you’re planning to ramp R&D headcount get into 2022. So curious what you’re seeing in terms of the hiring environment for tech talent – and how much success, I guess, you’ve had on the hiring and retention side there?

[Steve Daly, Chief Executive Officer]

Yes. I wish I could say that we weren’t facing the same labor challenges that everybody else is. It is a very, very competitive market out there. And we do have a couple of advantages, in that we have a really important mission. The fact that we are doing – we are addressing a lot of really important challenges that can help society or and help educate the world’s students, helping teachers become more effective in their ability to teach helping bring together parents and teachers and students and administrators and allowing them to all to learn together. The mission is a great – is really helpful in us being able to attract and retain talent. In addition, going public this year allowed us to now also have the additional ability to offer equity and other ways to attract and retain talent. So we feel really good about our ability to hire. We were very successful in the second half of the year, in particular last year. We go into this year with more significant number, more heads in R&D than we started last year, and we’ll continue to add to those. So we feel good about our ability to hit the ramp that we’ve built into our investment plan.

[Stephen Sheldon, William Blair]

Good to hear. Thank you.

[Operator]

Thank you everyone. There are no more questions. And ladies and gentlemen, that concludes today’s conference call. Thank you all for participating. You may now disconnect.