The Remarkable Turnaround in Instructure’s Position on Future Growth
The Instructure sales process 1 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.
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].
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.
There was one other quote in the letter that surprised me with its direct and off-putting tone.
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]:
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:
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.
1 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.
The post The Remarkable Turnaround in Instructure’s Position on Future Growth appeared first on Phil Hill & Associates.