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Learning goes Public
A look into Coursera's S-1
Coursera needs no introduction. Personally, I really like their offering. I’ve tried a number of different edutech companies and I find Coursera to be the most professional with one of the best catalogs of courses and university partnerships. Coursera filed their S-1 earlier this month and here's a summary of what to expect.
My first impression - I expected better.
I’m actually a little puzzled that Coursera doesn’t have better numbers. For a company that’s been around for almost 10 years, with such a great offering I really think they should have achieved more revenues. I also think they should’ve been well on their way to generating profits.
Founded in 2011 by Andrew NG and Daphne Koller, both Stanford Professors
Coursera website launched in 2012
Currently one of the largest offering catalog of MOOC (Massive Open Online Course) providers - 4500+ courses, 26 degree programs
11 rounds of funding for a total of $443.1m; last in Jul 2020. Est. Valuation $5b
S-1 filed on March 05, 2021; will trade with the ticker symbol COUR on NYSE
Y2020 Revenue: $293.5m (59% growth); EBITDA: $(39.8m); Net Loss: $(66.8m); Free Cash Flow $(26.9m);
Y2020 Total Assets: $418m; Total Cash: $285m; No Debt
The Case for Investment
TAM of $16 billion at a minimum by the year 2026 globally
Solid business model with strong partnerships with over 200 universities, many of them very well renowned (including Ivy Leagues) offering over 4000 courses
Stackable learning programs to master a skill or lead to a degree certification
Enrollments are sticky - Coursera saw a 59% growth in revenues in 2020 driven by people staying at home due to the pandemic and lockdowns. However, once people see the benefits of online learning, it’s likely that they will stay on. While the company will see fewer new registrations, the value of online learning will stay with people enough for the company to capitalize on.
What to look out for:
Conversion and Retention: The key to Coursera’s success will be in converting a higher percentage of free customers to paying customers and retaining customers for further courses. While retention doesn’t seem to be a problem, Coursera’s conversion to paid is abysmal. Only 4.68% of their 76.6 million subscribers paid for a course in 2020!
Enhancing and Promoting Coursera Plus Subscriptions: Subscription services are enormously popular but what I gathered was that the Company has only one offer - a yearly subscription of USD 399. While this gives you access to 3000+ courses, it’s still a significant amount to pay in one go for many people. If they decide to offer a monthly pricing, I think the offering will be hugely successful.
Pushing more Enterprise and Degree solutions which are better margin products.
Costs need to come under control: R&D and Selling & Marketing expenses need to reduce as a percentage of sales.
In my opinion, the disconnect lies in their offering for Individuals. Coursera allows you to take courses for free and you only have to pay if you want a certificate. Personally, I’ve taken a number of courses but never paid for a certificate. However, if I were asked to pay a small subscription charge for the courses I have taken, I probably would pay because they are well worth it.
Still, I think the Company has great long-term potential and I’ll definitely be putting it on my watchlist. For the full analysis, dive in below. ⇩
Deep Dive: Coursera’s S-1
The Company uses the value creation flywheel to illustrate their business model:
The business model is quite simple. The Company offers online learning courses in partnerships with educational institutions and industry leaders. But what’s most impressive is their catalog of courses:
Three Sources of Revenue
Freemium offering with trial periods. Individuals can sign up for free courses and pay only if they want to receive a certificate. “Our model of learning is ‘stackable,’ meaning incremental completion of standalone courses can count as progress towards a broader program of study for a more advanced credential.” Certifications are from premium educational institutions and industry partners.
In the year ended December 31, 2020, over 30.2 million new learners registered on Coursera, representing a 65% year-on-year increase from the approximately 46.4 million learners who were registered as of December 31, 2019. The total number of registered learners were 76.6 million from over 190 countries. 84% of these new learners originated through organic channels.
The Company retains a good number of customers. The graph below shows that some customers who had signed up in 2012, still remain cash contributing customers. However, Coursera admits that the cash receipts drop after the first year.
The key to Coursera’s success will be to increase their conversion rate from registered to paid customers. As of 2019, the 6.25% of registered customers were paid users and number dropped further in 2020 to 4.68%.
Enterprise revenue is derived from the sale of subscriptions to institutional customers. Coursera employs a direct sales team who market to these institutions. This is a predictable income stream as it is subscription based and generates monthly recurring revenues. These include:
Coursera for Business
Coursera for Campus
Coursera for Government
Coursera delivers fully online bachelor’s and master’s degrees in partnership with global institutions. The students are admitted by the universities, who in turn pay a percentage of the fee to Coursera for the online delivery channel. As of Dec 2020, Coursera offered 26 degree programs in partnership with 13 universities. The key to growing this revenue will be to grow the number of partnerships and offer more subjects. Degrees revenue is lucrative as the direct cost for this segment is zero. Growing this revenue stream can significantly uplift the Company’s Gross Margins.
Andrew NG still remains as Chairman of the Board. The board and the top management all have very strong educational backgrounds.
The President and CEO is Jeffrey N. Maggioncalda, since June 2017. He previously served as CEO of Financial Engines, Inc. (Nasdaq: FNGN), a provider of financial advisory services, from August 1996 until December 2014, and served as a consultant until June 2015.
The CFO is Kenneth R. Hahn since May 2020. He was the Chief Financial Officer of CollectiveHealth, Inc., a private healthcare SaaS company, from March 2017 until May 2020. Prior to that, he was also the CFO at QuinStreet, Inc. (Nasdaq: QNST), Borland Software Corporation (Nasdaq: BORL), and Extensity, Inc. (Nasdaq: EXTN)
The Company has an Audit Committee, a Leadership, Diversity, Equity, Inclusion & compensation Committee, and a Nominating & Corporate Governance Committee.
While online learning is still not regarded as highly as classroom or instructor-led learning, attitudes are quickly changing. The world is moving to a skills-based system and edutech companies play a key role in upskilling and reskilling people.
The process has simply been accelerated because of Covid-19 and the levels of unemployment that economies face. Not only are individuals taking this opportunity to improve themselves but employers also see the need to ensure that employees are more efficient. Here are some facts:
Online Education Market will reach US$ 350 Billion by 2025, globally due to the introduction of flexible learning technologies in the corporate and education sectors. (Source)
SMBs have limited financial resources, so the online learning method is more cost-effective as it allows multiple employees to be trained in a less cost-intensive way. (Source)
The global massive open online course (MOOC) market was valued at USD 6.8billion in 2020, and it is expected to reach almost USD 19billion by 2026, with an estimated CAGR of 18.13%. (Source)
Global Corporate Training Market to garner $417.21 billion by 2027 (Source: Allied Market Research)
Clearly, Coursera has a massive TAM (Total Addressable Market) and plenty of room to grow. The question is whether they can efficiently monetize their offering.
The competitive landscape for Coursera is fierce. If you consider the broader universe of online learning, there’s been a massive explosion of people trying to share their knowledge. All you need is a website and you’re good to go.
In the narrower sense of more structured learning, things are no better. The market for MOOCs as mentioned earlier is massive and growing, with a number of strong players out there who have a mix of free and paid options - Khan Academy, Udacity, Udemy, LinkedIn Learning, edX to name just a few.
However, Coursera still comes out on top with their massive offering of accredited certifications from leading institutions.
Coursera generated 51% of their revenues from outside the US, which is not a surprising statistic. Outside the US, the largest market is Europe, Middle East and Africa at 28%. This is understandable as many of the countries in these regions have limited access to high quality training and the credentials Coursera provide come off as more valuable, in my opinion.
Competitive Advantage (Moat):
According to the Company, their competitive advantage lies in:
“A Catalog of High-Quality Content and Credentials...with a stackable offering”
I think this is their strongest advantage. Their online course offering is unparalleled. Most of their competitors cover one aspect or the other, but don’t have the catalog that Coursera does.
“Content Developed by Leading University and Industry Partners” - Fully agree.
“Data and Machine Learning Drive Personalized Learning, Effective Marketing, and Skills Benchmarking” - I’m not very certain that this works very well in practice. I think they need to improve their algorithms when it comes to this area which is surprising seeing as how Andrew Ng is a guru of ML.
“Technology Delivers a Personalized Learning Experience at Scale… high-quality content at low cost, and allows employers to help employees develop the right skills to be competitive in the marketplace” - Small Businesses could very well use Coursera to train their staff. In fact, Coursera is also teaming up with Governments to provide upskilling courses for the public sector.
The S-1 only shows us 2 years of financial results since they are a emerging growth Company and don’t need to provide more under the JOBS act. However, certain information has been provided for 4 years but this is limited. The financial statements are audited by Delloite & Touche.
Growth & Revenue
2020 was certainly a good year for Coursera and the entire online learning universe. As people stayed home because of the lockdowns, they made good use of their time by taking courses. Coursera capitalized on this and offered a combination of free and low cost incentives to increase their customer base. They added 30.2 million new users in Y2020 alone, a growth of 65% in the number of users. They also mention: “In 2020, approximately 50% of our new Degrees students were previously registered Coursera learners and over 30% of our Coursera for Enterprise leads were sourced from our Consumer platform.”
“Rule of 40”
This turns out to be a good time for them to go public with the revenue growth numbers they’ve achieved. Unfortunately, their profitability at the EBITDA level hasn’t improved much.. I applied the “Rule of 40” adding the Revenue Growth and the EBITDA margin, and 2020 was the first year, they actually crossed 40.
A few other highlights from the income statement (2019 vs. 2020)
Gross Margins improved from 51% to 53% driven by a growth in the enterprise and degrees segments which have segment margins of about 70% and 100%, whereas consumer segment margins are around 55%.
Net loss margins are decreasing although the dollar value of net loss increased from $(46m) to $(67m).
R&D is at a decent level of 26% in 2020 and the R&D margin has actually decreased from 30% in the previous year, as it should.
I have a problem with the Sales & Marketing costs.
While I realize that the Company has a sizable direct sales team to acquire Enterprise clients, I’m wondering how justifiable this cost is. In fact, if you compare let’s say 70% of the sales and marketing costs to just enterprise sales, it’s 106%. In fact, Sales & Marketing expenses have increased by 87% YoY with the margin increasing from 31% to 37% in 2020. To contrast, sales grew 59%.
As of Dec 2020, Coursera’s cost of new customer acquisition was about $3.5, while the additional revenue earned from these customers was $3.6. The Company is still spending too much money acquiring customers that don’t pay enough.
Balance Sheet & Cash Flows
Coursera has a relatively small balance sheet, as expected for an emerging growth company. They carry a fair amount of cash and marketable securities (mostly US T-Bills). They have no debt but they do have lease obligations (total $29.4m) in terms of renting office space and purchase obligations (total $27.6m) for related to 3rd-party cloud infrastructure over the next 4 years. These amounts are not significant.
The Company recently purchased Rhyme Software LLC, an interactive web-based platform for learners to access hands-on short-form training and demonstrations. The total cost was $8.6m and no goodwill was recorded.
Net Long term assets are about $18m. Internal-use software of $21.5m is the primarily long-term asset on the Company’s books and is amortized over a 2-year period. Other long-term assets include computer equipment, furniture and fixtures and leasehold improvements. Net carrying value of intangible assets is about $10m and includes workforce, content and technology.
Cash Flows are still negative. In July 2020, the Company raised $139m in a Series F funding round. Cash flows need to be better and as I've been saying, they need to convert more users to paid customers.
Lock-up Periods & Stock Options
Coursera will have the usual lock up period of 180days from the date of the prospectus or 3rd trading day from the second quarter’s earnings report, with the following provisions:
25% of the outstanding stock, vested restricted stock and stock options may be sold 5 trading days after the first quarter earnings.
Another 25% may be sold at the time, provided their stock price is 33% higher than the IPO price for 10 out the 15 consecutive trading days, preceding the earnings release.
I’m sure we will get actual dates once trading begins.
As of Dec 31, 2020, Coursera had 32,458,408 shares of common stock stock options at a weighted-average exercise price of $4.60 per share, and 3,276,600 shares of common stock subject to outstanding Restricted Stock Units. As of Feb 17, 2021, there were 15,400,000 shares reserved for future issuance under the 2021 Plan.
I didn’t want to do extensive ratio analyses. Instead, I decided to do a comparison between Coursera and a few companies that IPO’d recently. I know this isn’t a fair comparison since they are all in different industries with very different product offerings. Nevertheless, they are all tech-based companies and I thought it would be interesting to see how the margins and other parameters compare.
The reason I wanted to do this comparison was mainly to look at the level of R&D and Sales & Marketing Expenses. I felt that the levels were high, particularly the Marketing expenses, and this comparison shows that to be true.
The last known valuation I could find for Coursera was $5billion. That’s roughly 17x their 2020 Sales. Doing DCF valuations on companies like this is very challenging, I still did a few scenarios and came to a range of $52 to $97 per share. All things considered, that’s not too bad.
I can’t tell you whether you should buy the stock. But, I hope I’ve left you with a flavor of what the Company looks like and what you could look forward to if you do decide to buy the stock. I’d encourage you to do your own homework.
I like the Company and I will be adding it to my watchlist because I see long-term potential because I like story behind the numbers.
A word of caution: Prices will be volatile when Coursera starts trading so I urge you to exercise caution.
Disclaimer: Nothing on this website or in my newsletters should not be construed as investment advice. Everything I write is my personal opinion and not recommendations to trade or invest. Investors should conduct their own due diligence and make their own decisions about investing. I may have long or short positions in any stock or companies mentioned.