CL Educate Limited (CLEDUCATE) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the CL Educate Q2 FY '22 Earnings Conference Call. My name is Arjun Wadhwa. I'm the CFO of CL Educate, and I'll be your host this evening. Let me start by wishing all of you and your families a very happy and prosperous Dhanteras. Joining me on this earnings conference call today is the senior leadership team of CL Educate; Mr. Satya Narayanan, the Chairman of CL Educate and CEO of our Test Prep business. Mr. Nikhil Mahajan, Executive Director Finance and Group CEO of our Enterprise Business; and Mr. Gautam Puri, our Vice Chairman and Managing Director. This call is always will be recorded and archived and will be made available in the investor zone on our website within 48 hours. I'd like to start by inviting Satya to take you through the early part of the presentation, following which Nikhil will run you through to the end. There will be an opportunity for you to ask questions after the presentation concludes. Satya, Nikhil, Gautam and I will be happy to answer any and all of your queries towards the end of the session. Over to you, Satya.

Thank you, Arjun. I hope I'm audible Arjun? All right. Thank you. Yes, I wish you all a very, very happy and a very prosperous week of Diwali, beginning today, which is Dhanteras, which is celebrated a lot more in North and then it moves into Deepavali. So the part that I'm going to take today is it's a one slider, but it might be a very important 5-, 7-minute thing, wherein we have tried to respond to some very valuable and insightful feedback or feedback in the form of request from a bunch of investors that we have met over the last quarter. And we thought that this might be a good place to do a 7-minute tutorial. And the request was, could you help us understand so that we can model the business on our own. So I'm going to do that crash 5-, 7-minute thing before Nikhil takes over and runs us through the business and finance updates. We could move into the slide. In college, these were called tutes. I don't know if you're familiar with it. Tutorial, the short form was tute, so I'm doing that. You see the listed entity is an EdTech business, which primarily has 3 revenue streams, and that's what you can see on your screen. Number 1, is coaching, which is the primary revenue, which is a value-added service, which is offered in online or offline or a blended format. There is nothing in today's sense called offline. But when we say offline, we've been predominantly offline, there would be 100, 200, 500 hours of face-to-face coaching, which will come back post COVID. Online would mean it's 100% online and then the blended will be a good mix of these 2. That is the primary revenue stream. The second revenue stream within consumer business is content or publishing revenues. This could be digital content or it could be physical content. Material is purchased by student by going to the e-center or he can subscribe for our digital content in the form of a sachet or pouch that we keep talking about. The nonstudent revenue within the EdTech business is -- we are calling it as a platform monetization, where all the digital as well as physical assets of CL are seen as valuable by different other marketing organizations or institutions, and we make revenue out of it. This is the way you could look at this, and I'll help quickly going through it. The second one is Kestone, it's a Mar-Tech company. It has either digital revenues or omni revenues, as you know. Moving forward, the 2 ways to cut this is what are the Indian revenues and what are the international revenues, 92 and 8 is for a EdTech, 85 and 15 is for international. And while India will continue to be a very, very important part for the next 3 to 5 years because of higher realizations, different -- a few other different business reasons, the percentage contribution from international will increase over the next 3 years. Moving a step further, especially those of us who are always believe that if I can model it on the Excel, then modeling it on the ground is still more believable. The way to look at our EdTech or the coaching business is to say that, it is primarily a partner business wherein CL gives R&D, technology, content, LMS platform, training certification. A local partner, he deploys his capital, his know-how, he builds his team and he makes revenues. The INR 100 that he makes comes into CL box and 25% to 30% of it is paid out to the partner. That's the way to model it, okay? How do you model the content and platform revenues? You could simply consider it as 6% to 8% of row #1 or 10% of row #1. So non-coaching revenues could contribute between 16% to 18%, and they bring us higher EBITDA. And the way we look at it is it almost pays for our entire go-to-market expenses in some way. Coming to the Kestone, the Mar-Tech business. It's very simple like any other SaaS company that you know or a software company you know, what's the pipeline of clients? How is it growing? What is the ARPU and how is the ARPU per client growing? That's -- in the first part of this tutorial of mine is how to understand this. Any more subordinate or subsequent questions if you have, you could feel free to reach to one of us, and we'll be happy to take you through that. I'll go to the second part on -- and this is primarily about modeling the EdTech business at the next level. Look at the 5 important parameters, cities and centers. How much of revenue accrues to us? What does it leave us with in terms of an operating profit margin, plus or minus 2% that happens, there's a range of 4% we have taken here. What does it entail in terms of CapEx? And what's the product portfolio there? What product basket we are talking about? If you look at the current numbers, out of the 103 locations that we are talking about, currently we run center -- 13 centers in 3 cities in India, and 5 centers in 2 cities in the GCC countries, in the Middle East. Those are all 100% owned by us. And when you go down, the -- all INR 100 comes to us as a top line, and it stays with us. And this makes 16% to 20% of operating profit margin. The -- every new center, you can look at it as -- you have to put your CapEx and it costs you INR 10 lakhs to 15 lakhs. And currently, we are -- we pick up any of the products that are relevant depending upon the local geographies. That's how the own business runs. The partner side, there are 100 locations, 155 centers. 25% is retained by us, 75% goes back to the partner. Out of this 25%, 16% to 20% face put as our OPM. So in terms of margins of the net revenue, this gives us 60% to 75% margin here, and this is a negative CapEx model. Product portfolio remains the same. The partner chooses what works for him or her in his or local geography. Okay? Now when you look at this, there is a reason why the mix of numbers, number of cities that we want to run is essentially as a proof of concept, giving confidence to the partners so that we can guide them and help them grow. But if you leapfrog or jump forward 3 years from now and look at the 2 columns you'll find that the number of cities that we will run on our own is not going to grow dramatically. It's literally increasing the number of centers in these 5 cities that we are in. However, the partner locations could grow 5x in the next 3 to 4 years' time. There will be slightly improved OPMs. CapEx remains the same, and we are looking at adding more products and especially in the undergrad segment, where there are large market opportunities where we are still not there, we will add them. And one important caveat for thing to note is that we don't work as we go into the future and the way you've seen in the last 18 months, we don't -- look at the fact that every product has to be built and then taken to the market by us. We could -- we also have taken products built by somebody else, but through a brand alliance, and we take it into our network, and we focus on increasing the network expansion by pooling and increasing the basket of products. Okay? So this is the summary of it. We thought -- this has come up for discussions quite often. And this is a distilled version of it. I'll pause there. And maybe any questions that you have about this kindly hold on to it. Let's run through the rest of the presentation, which is business and finance and corporate updates with Nikhil and then pick it up in the Q&A itself. Over to you, Nikhil.

Hi, and good afternoon, everybody. I'll take you through the business update briefly before coming to the financial updates. This presentation has been uploaded in the investor zone along with all the financial statements which have been filed with the regulatory bodies. So you can have a detailed look if some of you have not had a chance to look at the presentation. I'll try to keep it pointed and brief. If you look at the student-based revenues, our coaching business, the net billing has grown 18%. Our Mar-Tech Corporate Services revenues has grown by about 11%, our platform monetization revenue, which had slowed down last year and also in Q1 because of the second wave of COVID in Q2 as the new sign-ups and the repeat client business started to flow in again post more or less normal situation on ground has grown by 78% in Q2. Publishing business has also been in to show signs of revival as colleges and universities are reopening. The demand for published content, either physical books form or digital form is beginning to make way. And going forward, we see as more and more universities open up physically. We hope to see this positive trend continue into H2. Arjun, can you get into the next slide? This is the very brief number summary of revenues and profitability. I will want you to focus on first H1 FY '22 to H1 FY '21. If you look at that, you would see a 14% growth in revenues from INR 57 crores to INR 66 crores, resulting in a PBT growth of about 175% from INR 4.8 crores to INR 13.1 crores. The revenue growth in the Mar-Tech business, as I stated earlier, have also been about 11%. And the profit growth at PBT level has been about 400%, growing from INR 0.6 crores to INR 2.8 crores. Slightly more details on how our EdTech business is shaping up at a slightly granular level. The most important thing is the student revenues are up about 15%. The more important thing is that the product mix and our ARPUs for our programs are now beginning to return to almost pre-COVID levels. So is on ARPUs are on more or less determined by what is the mix of product, which is getting sold, whether it is the high-value premium products or the low value sachet and the pouch products. So the needle has again begun to move towards the higher value premium products. As a result, average ARPU has gone up by around 40%. Product-wise segment billing in MBA is up about 19%, law billing is up 34% and after 12 products, which is IPM, BBA and similar products, the billing is up 44%. Another important thing is the partner business billing has grown by a whopping 36% on an H1 to H1 basis. This is just about lower than what we did in H1 in FY '20, but we expect that we should more or less hit billing in H2 to almost similar levels what was achieved in H2 or FY '20. We also added 10 new partner locations as compared to 6 in the similar period last year. And the partner sign up has also shown a favorable movement in the last 60-odd days and we expect more sign-ups coming in the coming 2 quarters. As I stated earlier, a significant number of colleges and universities have now reverted to physical on-ground classes and the intake and the admission cycle for the FY '21 season is still going on in a significant number of colleges. We expect that by end of this quarter, the admission cycles would have been closed. We expect that in the coming academic year, will probably go back to the normal admission cycle and the new academic season in FY '22 will start as usual in July or August FY '22. Important thing is our average client billing has increased by about 62% quarter-on-quarter. So we are doing more focus platform monetization to the segment of customers. Our repeat customer sign-up is also close to 100%. So I think the business in this platform monetization thing is moving in a positive direction. In the Mar-Tech business, our international business has grown by over 40%. India business growth has been slower or has been lower predominantly because Q1 large parts of India were shut down and a lot of corporates have only started their actual business outreach for the current financial year from Q2, and we expect the business uptick to begin happening in Q3 and Q4. If you look at the last 2 points, the new client sign-up is looking pretty healthy. And the repeat clients were coming back with the business is a phenomenal -- is phenomenally up by about 50%. Arjun, can you move to the next slide? In the last quarterly update, I had given you a brief update on the virtual events platform, which was an enterprise version which we had launched last year, which had generated about $1.2 million of revenue in the first 10 months of its launch. That product is doing reasonably well, and we expect the overall revenues from that platform to grow over 100%. We have almost done about $1 million in the first 6 months of the current fiscal year, almost equaling the revenues, which we did in the entire last year. There are 2 new products from the same family catering to a very distinct segment of customers, while the product, which was launched at first was the enterprise version aimed at larger corporates. We are now launching 2 variants. One is that do-it-yourself variant, which is going to be for smaller events, individual-based events where smaller SME customers, which you don't need a corporate or a back-end support from our side to be able to run an event. And this product will predominantly be focusing on the market of U.S. and with the kind of customer experience and the data analytics, which we are able to provide, we are hopeful that this will do well. We are aiming for an end year or early next year launch of this product. The webinar product has -- we have already done a soft beta launch in the month of September end in India. This product is again extremely customizable and the experiential benefit it gives to the customer for any webinar is far superior as compared to equivalent products like Zoom and Microsoft Teams and comes at a significant price advantage as compared to either of the 2 products. This is something which there has been -- as of now, we have been doing beta and soft launch to customers in India, has been received pretty well. And we expect to do a formal market launch by the end of this year or early next year for the same. Yes, Arjun, please proceed. Some of the key financial indicators, which I would want you to focus is as compared to the last full year of a loss of INR 11 crores, we have reported a PAT of INR 6.2 crores in H1. Our annualized EPS is 8.6% as compared to a negative 8.5% as last year. Net cash I'll come to that in the cash flow, cash position slide. Our ROE and ROC figures on an annualized basis are around 4.4 and 7.4. Yes, these figures continue to be slightly lower on the -- for a service company like ours. However, I think with the business beginning to pick up and the merger, which will optimize and rebalance our balance sheet, knocking off all the investment, resizing it, will result in this figure also beginning to move into double digits by the end of this fiscal. I think we have covered all of this. The revenue in H1, the revenue growth has been about 9%. EBITDA growth has been about 228 -- has been about 63% with an operating EBITDA growing by about 228 and PAT growing almost tenfold as compared to last year. A brief snapshot of the cash. Our gross cash position as compared to March '21 has increased by approximately INR 5 crores, while our net cash position has improved by about INR 9 crores. As we are paring down our both short-term and long-term borrowings, we are -- our cash position will continue to get healthier over the next 4 quarters. And we are working towards a goal of being a 0 debt company by December '22, which is in about 5 quarters from now. A brief update on the corporate, in the last 90 days, we have been able to monetize 2 land parcels, which have generated INR 9.5 crores. One more land parcel is expected to get monetized in the current quarter, releasing a further INR 3.3 crores. As shared in our last investor update, we have stated that the fundraise into independent business subsidiaries of the EdTech and Mar-Tech. So in Kestone, the Mar-Tech subsidiary, the potential investor engagements are currently underway. And I think it's still about 90 days before we will be able to come back and give a concrete update on that. In CL, there are a few conversations which are currently underway. We have also posted an update on our investor zone along with this presentation. Stating, we had received a definitive investment offer from one of the investors. However, the terms, conditions and the evolution of those significant -- though about 50% higher than our consolidated market cap at this point of time, we felt that it was still not reflective of the true value and the worth of the shareholding for which it was being diluted. So we are giving it a pass at this point of time. The UPSC acquisition, which we had talked about in the last quarter, we had initiated the diligence in the month of early October. However, that is currently paused at the other party's request. And as and when any further development takes place, we'll update you appropriately. One of our investments, which we have made in another Chennai-based EdTech company, where we had invested about INR 5 crores in 2017 and '18 based on the investment, which they recently raised, our CCPS has been converted into equity. And our total holding is close to about 12% with a fair market value of over 12.4%. And we hope that in the coming years, the investment will appreciate further. And at an appropriate time, we will be able to monetize that investment. I think that brings us to an end of this presentation. If there are any questions, happy to take them. Thank you.

Thanks, Satya. Thanks, Nikhil. I request the participants to please post their questions in the chat window. And over the next 15 minutes, we'll do our best to answer as many as we can.

There's a question from Harsh, Arjun. I'll pick it up.

Yes, please, Satya.

Okay. Thanks, Harsh. Two responses from my side. One is more from a big picture perspective, we believe that the EdTech has come of age. And we are in a very envious position at least from one perspective, if not at least two. One is that we are a well-known brand. We have a tremendous legacy and fast in our favor. And most importantly, I would like to believe that we are already listed as an entity, and we have gone through all the hard yards. And if there are going to be 3 to 5 very valuable EdTech assets, which are going to scale over the next decade, I would like to see that CL is there among the top 2, top 3, top 4 in the next 5 years. That's one way to respond to your question, where do we see ourselves 5 years from now. And the other way for me to look at is, can we focus on sustained 25% growth of top line EBITDA PAT plus in the organic business. And top it up with some very opportunistic additions through investments, acquisitions, et cetera, into other areas where CL is not present. I would look at these 2 should tell us significant part of our story of where we will reach in the next 5 years. Nithya, do you plan to make more acquisitions in the EdTech space? Yes, we would like to believe that EdTech expansion Nithya, and if you actually go back and look at our journey over the last 10, 15 years also, is that there are niche opportunities, and there are large opportunities, okay? And for different reasons, both the entrepreneurs or businesses who have cracked either of these 2, they are necessarily not equipped to take it to a national level across 100 locations or 500 locations. And that is what we have looked at. For instance, our law prep is an acquisition that we made in a creeping way over a 2, 3 years period. Our entry into GATE currently in which we hold about 60% is an acquisition of a small entrepreneurial company based out of Ahmedabad. Yes, acquisition-led model is always very integral to it when we look at the opportunity; however, it need not be an acquisition of equity in the new era that we are seeing post-COVID, it could also be partnership-led models where we've become the go-to market partners for an established brand and we join forces and then the revenue that comes that can be shared between the 2 partners. So these are the 2 things that I would see as the way for EdTech's growth in addition to growing our core business at a 20%, 25% clip year-on-year. Arjun, which is the next question that you can see that we can pick up.

There's a question from Neeraj asking us to elaborate more on the EdTech company, 361DM?

Okay. So maybe I'll take that up and give a couple of points, and you or Nikhil can chip in if something I have missed out, Arjun, Nikhil. This is a company called 361 Degree Minds, and it operates in 2 segments where CL is not present. One is it helps a mainstream university like the Annamalai University to go digital and offer their B.Com, B.Sc kind of programs on the 361 Degree platform without investing in the technology, learning pedagogy and so on. So in short, they enable universities to go and capture the market using their digital platform. The other one that we focus on is more to do with the new era skills, which are needed for upskilling yourself as a professional. And CL is not present in either of these 2. So we have known this team as a very competent team, and that's why we have taken an equity position. We will keep observing it, and it could lead to certain steps as we move into the future and as they grow successfully after having done this next level of fund raise.

Thanks, Satya. I'll just add on the valuation part of the question. The valuation is based on external funding that 361DM has raised. So on that valuation, our CCPS has been converted into equity shares. The next question...

Arjun, I just want to add, our CCPS has been converted at a mutually agreed discount to the current valuation, which was because we invested 4 years earlier. So there was an 18% IRR discount annually to the investment value, and we have been -- that -- so the current valuation, has been suitably adjusted for that IRR better.

Yes. Thanks, Nikhil. Satya, the next question I see is from Rohit. How do you see conventional coaching centers business for the next 3 to 5 years, especially in Tier 2 or 3 cities?

Yes. Sure, Arjun. Thanks, Rohit. And as I mentioned, Rohit, I think our focus is going to be more and more in the undergraduate entrance exams, which is kids who are graduating out of Class 12. That means the preparation is happening during their 10th, 11th and 12th periods. And that can take us arguably to every district headquarters in the country. And that's what we are currently focused on over the next 3- to 5-year period, where any local entrepreneur can build a 200, 300 people student center by taking any of the 5, 6 products that we have, including engineering, medicine, law, IPM, what else do we have, MBA. You take any of the undergraduate programs or even many of these places even coming to Delhi, CUCET is going to be a very big play. So these 5 products, you can take any city that has 20 to 25 schools becomes an opportunity for this. For example, 75 districts of UP can have one center each, if not more. That's all we see coaching business, primarily driven by local entrepreneurs and CL becomes the platform and the brand play for them and the revenue goes 75, 25. Any other questions do you see Arjun?

Yes, a question from Vikram asking us how we plan to scale the UPSC business given the acquisition is on hold?

I think we have actually enough on our platter even without the UPSC. So if you ask me in the next 12 to 24 months, unless this acquisition comes in, we will keep that as a slow thing, our focus on IBM, CUCET, engineering, medical will take a lot more of our attention without spreading ourselves too thin.

I'm just running through the questions Satya to make sure that they're not repetitive. Do you plan to make more acquisitions in the EdTech space? And what is your 5-year vision on Kestone...

We covered that. Maybe if you could take this one, Arjun that I see here. What will be the revenue share between online and offline coaching now, now that everything is opening up? Do you see online completely taking the revenue share? I'll give my 2 pens, whose question is this? This is -- again, Nithya. Is that Nithya's? Okay. Yes. So we don't -- we actually see a very healthy mix of online and offline staying in a blended way for a long time to come. And customer segments are very, very distinct with very clear needs. There's a segment which says I have constraints, I cannot travel for such and such reasons, and I want flexibility for such and such reasons, can I do everything online because the rest of it I can manage through discipline, I'm fairly focused. That's one segment, for them, online is the answer, and we will give it to them without trying to convert them into offline. On the other hand, there are a large chunk of students. And if I were -- if you were to force me to pick a figure, I would say maybe 60% of them given an option will gravitate back to a blended place where they said, for the sake of my own discipline and for the sake of social, emotional interactions and benefits that happen when you meet friends, meeting the faculty face-to-face in person, the movement towards a more premium offline will also happen and it has begun to happen already. Like Nikhil mentioned, most of the Tier 2, Tier 3 locations are already at the 2020 or even 2019 levels -- 2019 levels, 2020 financial year, '19, '20 academic year levels. So what we are always committed to is to not force consumer behavior, rather to stay in step and innovate on what will make it better for them. So I don't see it becoming a zero one or one zero in favor of online, offline in any situation.

Okay, there's a question from Yajath, what's the approximate number of new students that have enrolled or availed our services in the last 90 days, the answer would be about 20,000 to 25,000. Sridhar asked do you have plans of digitizing other aspects of student admissions value chain like one touch admission form filling to multiple universities of building AI-based solutions for universities to collect and sort, fill-in admission forms?

So some parts of those are automated with us. And that's the one that's the third, the platform monetization, that's the model. But the inching forward there will be done gradually. We don't intend to pour a lot of money in automation without monetizing it. So we build those additional features in discussions with our business team and customers. But yes, that's going to be a very important part of -- we call it as the new media plus new admissions mechanism where a lot of it will be seamless, integrated and one touch carrying forward of the customer journey from pre-decision of which college to go to, to preparing for the college. And then career launch kind of an organization, while it facilitates these 2 stages, at the third stage, there is a handshake in a rule-bound manner for universities to begin to interact with the customers and the handing over happen in a win-win manner. We see that happening. It will get more and more automated over the next couple of years.

Satya, Deepak has asked what is our aspirational double-digit ROE, ROC over the next 3 years?

I think the entry ticket into a respectable room is 15%, 20% in my view, 15, ROE, 20 ROC. I think that's the first thing we have to go. But beyond that, there are legends ahead of us inspiring companies ahead of us from where we have to learn a lot and it can be double of that as well, but we have to undo some of the things that we have done in the past. And we're getting there, the 15 and 20, I would say, is the first gate for ourselves.

Thank you, everyone, for your good wishes and your general remarks and love and respect that you have expressed in your comments. I don't see any more questions. If that's it, we'll wrap up here for today.

Sure, Arjun.

Right. Once again, thank you, everyone, for joining in and wish you all and your families a very, very happy Diwali. We look forward to catching up with you again in January or early Feb. Thank you so much for joining in.

Thank you, Arjun. Thank you, everybody. Wishing you all a very happy Diwali.