Coursera, Inc. (COUR) Earnings Call Transcript & Summary

My name is Josh Baer, software analyst here at Morgan Stanley. We have the pleasure of having Jeff Maggioncalda, CEO of Coursera, today. Have a couple of disclosures. First from our end, please see Morgan Stanley, www.morganstanley.com/researchdisclosures, or ask your sales representative if you have any questions. And from Coursera side, in today's discussion, the company may make forward-looking statements based upon current expectations. Actual results could differ materially due to a number of risk factors. For more information, please refer to Coursera's IR website for the latest SEC filings and Safe Harbor statements. All right. I think that covers it.

Jeff, it would be great to start high level. I was hoping you could dig into some of the biggest challenges and changes occurring broadly in education and lifelong learning and how Coursera is positioned to address them.

Yes. I mean, I'll try to keep my -- I'll try to go with short answers because I love to have long answers. But we'll get to some of the fundamentals. I think the reason why I think Coursera is in such a good position is the fundamental need for lifelong learning, which is driven by a rate of change in the world. Globalization, technology are creating new jobs, new skills, new ways of doing business. And for individuals who don't get those skills, their employment opportunities will be a lot lower. For businesses who don't have those skills, their competitiveness will be lower. And so it's not that everyone just decided, it's time to be a lifelong learner, it's that the world is changing quickly, and new skills and technologies are making that learning required. Another piece of it, which has radically changed with COVID, is not just the introduction, the kind of the forced experiment of online learning for 1.6 billion students who saw their schools close during COVID. But now this emerging world of not only remote work, where suddenly, someone who learned skills has a job opportunity in regions that otherwise might not have been available to them. So if you will, the ROI of learning goes up when I can have access to jobs that are anywhere in the world. And then the other thing that's happening is some people call the great resignation. I've been calling it the great upgrade. Upgrade your skills, upgrade your job, upgrade your life. People are looking for more job flexibility. People are looking for better pay. And so there is a hunt for a better career. And most people are realizing, to get a better career, I need to learn new skills and I need to earn credentials that signal to an employer that I have those skills. It's not just the content, it's credentials as well, and we're pretty good at that.

Great. If someone were to look at your financial statements, they'd see 3 different segments. But I was hoping you could touch on how those different segments really are part of 1 platform and how each sort of helps with the efficiency of the other.

Yes. So I've been at Coursera for about 5 years. But when I first got there, I was the CEO before that for 18 years at a company called Financial Engines. And I remember, when I was trying to raise money back in 1996, Van Auken from Mayfield Fund said, "Most start-ups die from indigestion, not starvation. They try to do too much." And we took on a lot. There were about 300 employees at the time. We said we're going to have a consumer business, which we already had, a global learner base. We had just launched an enterprise business, selling to companies and the governments. We'd not yet launched Coursera for Campus. And we also had not just open content but degrees. We had 1 degree. And we just thought, me, the Board, the exec team, we thought, "You know what? This is going to be a scale play. If we have common assets and global distribution, we should be able to monetize -- amortize the cost across the global distribution and monetize the content across a global learner base." So there's a segment called Consumer, which is anyone in the world coming to coursera.org buying -- either taking courses for free and not getting a credential, or buying courses and getting a course certificate, a professional certificate. Enterprise has 3 pieces to it. There's Coursera for Business, for businesses upskilling their employees. There is Coursera for Government, which has really been accelerating, post-pandemic, where governments are upskilling and reskilling their public sector employees and their citizens. And then in October of 2019, literally 4 months before the global pandemic, we launched Coursera for Campus. We realized that we had got 2 of the institutions covered, which is business and governments, but there's another type of institution that might want to buy university content, and that would be other universities around the world. So there's about 20,000 degree-granting institutions around the world. And we thought, "Well, like a modern textbook, what if we sold this content to those universities?" And so we have those 3 pieces of the Enterprise business. And then the final piece, which I kind of alluded to is degrees. So that was almost 40 degrees now, master's degrees and bachelor's degrees from the top university in the world. Fully online, generally at about half the cost had you gone to the campus. And so we see big promise there as well.

Great. So I want to dig into all 3 of those different areas. But first, maybe touch on content and partnerships. If you can talk about sort of where the content comes from. Why are partners choosing Coursera's platform?

Yes. The content comes from 175 universities, and these are generally 175, but probably the top 200 ranked universities in the world. So they're the most elite universities globally. And we have universities in India, in Chile, in Australia, U.S., Europe, et cetera. And then we also have industry partners. So these are companies like Microsoft and AWS and Google, IBM. And the reason that they create content on Coursera is they want to be able to teach the world. For different reasons, they want to be able to teach the world. So for universities, a lot of it is brand and accessibility. They also want to recruit students in the degree programs who come from a global basis. Also older learners who maybe are working, have families and can't quit their job and come to campus. So how do you serve the adult population who cannot come back to a campus? And we have great global reach there. And then we also have some what we call guided projects, which are hands-on projects created by a network of subject matter experts. And that really is kind of a hands-on complement to the online courses. So that's really where it comes from. To date, there's about 5,300 courses; about 260,000 lecture videos; over 500,000 assessments. And that we have a really exciting new collection of content we call entry-level professional certificates, which are for people with no college degree or background in an entry-level job, digital job, where they can get trained up and get a certificate to do that entry-level job.

Great. Wanted to stick with content and ask one on content strategy. Are there -- is there a strategy, in order to reach new geographies or a broader set of learners, to try to drive content in new domains, new languages? If we could talk about your content strategy, that'd be great.

Yes. So it kind of gets back to your first question on amortization. We want to try to basically build a lot of scale and amortize our cost over as many domains and monetizing learners and institutions as possible. That means serving learners in different regions is important. And there's a question of, well, what needs to be regionalized? Ideally, most of your assets are global and can be used to multiple audiences. Some elements need to be localized. In terms of localization, there's localization of language. We do have universities around the world authoring in different languages, in Spanish, in Chinese -- in Mandarin, in Arabic, et cetera. We also use a lot of machine learning to do translations. And what we found, and we think this really favors our branded catalog of content credentials, is that increasingly, machines can do a very good job at translating transcripts. And I expect that they will do an increasingly good job of translating images and frames. And they will probably also do an increasingly good job of text to speech. And they may also end up being pretty good at even doing sort of deepfakes, where someone can appear to be speaking a different language, even though they didn't natively record it in that language. So language is one big thing. I mentioned the subject matter experts. We'll often have -- the catalog will be big branded institutions with credentials, usually in English, often translated, increasingly by machines. But then we have these guided projects that are created by subject matter experts all around the world. Those are usually local people speaking in the native language with local context. And they can be created much less expensively than a 10-hour course. So it's a little bit of a dual strategy, where the theoretical content and the credential comes from a branded, well-known institution like a company or a university. And then the hands-on piece is more localized.

Great. So digging in maybe first to the Consumer segment, that is a segment that saw pretty rapid acceleration during 2020 and COVID. But then in '21, you've been able to grow pretty nicely off those tough comps. I was hoping you could dig into what's really underlying that growth in the Consumer segment.

Yes. I think one of the challenges with any consumer content company generally is content generally goes to commodity pretty fast unless there's something distinctive about it. I do think that the brands and the quality of not just the content, but the credentials matter, where a credential is something that signals that somebody knows something. It gets issued by an institution, not by an individual. So I'd say whether our platforms, where there's kind of a peer-to-peer marketplace, it's a little bit harder to distinguish the content and credentials than one where -- like with Coursera, where we have institutions creating that. But we really have seen, in the Consumer segment, we sort of were riding a few waves. I mean, we -- it's impossible to know where the world is really heading. So a lot of what you need to do is to say, what are you really good at? Where is the market opportunity? And where might you catch a wave? We happened to be at the right time at the right place when COVID broke out in terms of global population, Coursera for Campus and Coursera for Government and Business. And now there's another major secular trend that's driving consumers, which is this great resignation. Now people are looking for different jobs all around the world, and we happen to have a growing catalog of these entry-level professional certificates. They are not one course that's 30 minutes. They are usually 4 or 5 courses that are 10 hours each authored by Google and IBM and Salesforce and Intuit, big, branded companies. And they're purpose-built for helping someone with no credential like a college degree or no prior experience who might have a LinkedIn, trained up and be able to prove to an employer, "I can do this job. Give me a shot." So that's a lot of what's been driving the Consumer business, is this long-form reskilling credentials that we have on the platform.

Great. I think you've added over -- or nearly 50 million registered learners in the last 2 years. Over that period of time, how has the engagement changed from the learners? Like have you seen a change now that economies have been reopening?

The changes are really dependent on cohorts and context, if you will. So when we started 2020, we had about 47 million registered learners. During 2020, when the lockdown happened, it jumped by another 30 million. So we ended at 77 million. I mean, that was -- a lot of that 50 million came in 2020. A lot of those folks were actually not necessarily pursuing careers. I mean, they were in lockdown. We have a lot of content on Coursera around mental health, well-being. There's a great course called Science of Well-Being by Dr. Laurie Santos from Yale. There's a great course called Finding Purpose and Meaning in Your Life from Dr. Vic Strecher at University of Michigan. So some of those -- Learning How To Learn by Barb Oakley. Some of these titles just really kind of went viral. Those are not necessarily the career learners. So some of that has slacked off. But now what we're seeing is those learners coming for these entry-level professional certificates, I mean, they're gunning to get a job and they really want that certificate. So we've seen more intense usage, and we've seen, frankly, better conversion rates on that population, monetization rates, than what we've seen in 2020.

Great. I think let's shift over to Enterprise.

Okay.

The scale and the growth there has been -- I mean, I think close to 70% growth in 2021, and that was up from 47% in 2020. In our expectations, I think Enterprise could be the largest segment as you go out maybe to 2025. So I was hoping you could dig into there in the Enterprise segment. What are some of the core growth drivers? And how should investors think about the durability of that more rapid growth?

Yes. Well, I think the recognition that gave rise to the launch of the Enterprise segment, and it wasn't I, it was Rick Levin, my predecessor, who launched Coursera for Business, well, the team there at the time. But the recognition is that, even though the way we started at Coursera is allowing every individual to come directly to Coursera is a great friction-free way to build an audience, create demand for content, a lot of people will learn in institutions. I mean, learning is hard work, and most people learn in institutions during the course of their lives. One institution is the business. And what's nice about businesses is they have increasingly an urgency to make sure that they have enough trained computer scientists, enough trained data scientists, that they have -- their software is in the cloud, they're creating better digital experiences. They have good cybersecurity. They have the ability to manage global remote teams. Businesses are completely changing the way they operate and the skills that are needed and the jobs that are needed to make a business successful. So the recognition that businesses need to upskill people led to the launch of Coursera for Business. That's been the most mature piece. It's been growing quickly. It's the biggest. But we launched Coursera for Government. And frankly, before the pandemic, it was mostly upskilling public sector employees, looked a lot like Coursera for Business. You have these workers, they need to learn things and so to do their jobs well. They are a public sector employee, they can get skilled up. What the pandemic really did is it opened up what, apparently so far, is a much bigger opportunity, which is government's upskilling citizens. So being an intermediary for what we've been doing through B2C saying, "Hey. If you want to get employed." Governments really focus on unemployment, obviously, especially youth unemployment. So a lot of unemployed youth is not a good thing. And so the pandemic has created an ability now -- well, a need to train young people. But also because of the pandemic, they -- all the governments had to stop their face-to-face training, so they embraced virtual training. And now they've realized, wow, virtual training is way more accessible. It's much more current. I can reach far more people at a much lower cost. This virtual training is a great way to do my workforce development. And there's a lot of budget dollars out there to do workforce development. So we've seen really big uptake there. They also love university brands. They love quality. Governments want to make sure that there's high quality stuff. The third piece is Coursera for Campus. And Coursera for Campus is the version of Coursera for Universities. And since they were all shut down, they've also had to completely embrace online learning. And they, too, are realizing, if they want to attract students, usually, students go to the university because they want to get a good job. If that university doesn't have the capability to teach data science or teach Java or teach Internet of Things or teach blockchain or like MLOps. Name the list of skills that employers are looking for in graduates and then ask yourself, how many universities in Africa, in India and Latin America and Europe, even in the U.S., have the actual faculty who could teach those things? Not many and increasingly fewer because of the way -- because everything is accelerating. So now what universities is doing is they're licensing this cutting-edge content from other universities to integrate into their curriculum to make their students more employable. And this is something that we've also seen really take off since the pandemic. It's interesting. People often talk about competition. I won't go through all the details unless you ask, but there's a very different level of competition in Coursera for Business versus Coursera for Government versus Coursera for Campus because the buyers are looking for different things and some of those really play to our advantages.

Yes. I mean, that's a great question. I think I'd love to hear the answer to that. Yes.

I'm really trying to have short answers, so I'm just giving you the chance. Yes. Well, so here's what it comes down to, is businesses are really looking for ways to essentially fight the war on talent -- I mean war for talent. There are not enough computer scientists in the world. There are not enough data scientists in the world. Now if you are a Salesforce, Netflix, Apple, whatever, you have massive gross margins, you pay super high salaries, and everybody wants to work for you because you're a great brand, you have a great tech stack. It's very modern. If you are not one of those companies, you cannot afford to pay the same amount, you have a legacy tech stack, so -- which has -- is a double-edged sword. There's 2 things -- not a double-edged sword, it's bad for 2 reasons. Number one is you have legacy technology. Number two is it's really hard to hire really good technologists because they don't want to work on that stuff. So it's a bit of a Catch 22. So what we're finding is a lot of companies are now saying, "I need to build my own computer scientist. I need to build my own data scientist. I'm having trouble recruiting them, I'll have to find people who have maybe lost out and train them up. And then for my more expert ones, they're getting picked off. I need to retain my talent. So I need to build internal talent pipelines to keep up." So there's more competition there with us because companies are less interested in credentials. The employees are already working at that company. The company's like, "Look. Well, what if they get a certificate or whatever?" Like, "I just need to know that my people are making good progression and skill development." So this is where we have skill sets and sort of skill measurement dashboards, that's how we differentiate ourselves in the workplace, less so on the credentials. But in government and in campus, where the credentials really matter because you need to prove to some employer that you learned these skills, the brands and the credentials matter. The long-form content really matters. You can't learn how to be a data scientist by watching a bunch of 15-minute videos unless they were coherently built as a training program to teach somebody how to do deep learning or how to do MLOps or some of these things that take a lot longer time. It's really hard to build 80 hours of content. Like usually, individual authors aren't going to sit down and build 80 hours of content. They usually also don't have the range of skills to do it. So this is where institutions, as authors, can often do a better job. So the content, form, quality and credentials, the brands, really play in the government and campus space. And notably in campus, universities have a real affinity for other universities. So if you're a university in Peru, chances are you would not mind offering a course from Princeton on algorithms. It's from Princeton. Of course, it's going to be really good. Would you want to offer a course for credit to your students from a local subject matter expert? Maybe. Maybe not. The students might feel like, "Why am I paying for this degree if I'm just learning from this person that I could get it on YouTube or some other platform?" So I think that the content advantage is considerable and the brands are considerable in Coursera for Campus.

Great. So I wanted to dig in maybe more on the business side to start as far as competition. I guess, how often are you the primary platform that a business is using for learning and upskilling? How important is it to be that platform that the Chief Information Officer or Head of Learning Development is going to versus being used for content sitting alongside other vendors? And then along the kind of the lines of differentiation, what are some of the things from assessments and projects and other enterprise features that helps with that differentiation?

And again, across the 3 products, Business, Government and Campus, it's going to be a slightly different answer. But what we have really seen is that the -- on the Business side, it is what we call SkillSets and Academies and LevelSets, those are the assessments that appeal slightly differently from the L&D buyer and the functional buyer. Learning and development usually have a lot of different people they need to satisfy. So they're looking for wide-scope portfolios of content, and they're looking for generally lower price. They do want to show some kind of ROI. So increasingly, a basis of competition is you can't just offer content. You've got to be able to talk about what skills are being taught, measure the skills being taught and ideally benchmark the skills being taught, ideally credentialize the skills being taught. So on the Enterprise, I'd say that the whole skills platform that sits on top of the content that is wired into the 500,000 assessment questions in the courses on Coursera are a huge part of it. So a lot of people don't realize that among those 5,000 courses, the authors, the professors, they build assessments into every course. Now a lot of the competitive platforms don't have assessments built in, they're kind of tacked on afterwards. But because we have almost 100 million learners and we're watching them all take these assessments, we can actually say how well does this person score on questions about Java compared to how well does this person? Or this population compared to this population? We also say what does the proficiency of this population look like now compared to 5 months ago or a year ago? So the ability to be intentional about saying, "I want these jobs to learn these skills and measure the skill development over time and benchmark the skill development," is a major differentiator. To your point, though, in L&D, most of the companies that we work with have multiple providers on the L&D side. On the functional side, it's a little bit different. Usually, the functional buyers are looking to build the skills to do a job. And that's generally going to be more rigorous content, a little bit more job-specific, and they often want more advanced stuff. And so we have these Academies. We have a data analytics academy. We have a tech academy. We have a leadership academy. We have a marketing academy. We have a finance academy. These are all collections of skill sets associated with jobs in finance or marketing or tech, and we sell to the functional buyer. Now there's lots of functional buyers, which is kind of nice because we can kind of, with L&D, hit a broad swath of people. But then we can go into each function and say, "If you're trying to fill this role, recruit and train these kinds of people. Here is a learning program for that kind of job." When it comes to government and Coursera for Campus, it's a different ball game. I would say, I think, very few governments are working with multiple online providers. It's really kind of brand new. And most of what they're looking for is skilling for entry-level digital jobs. And I would say we have the best. We have the best. Of course, I'm biased. But we have the best brands, we have long-form content, we have credentials. And so we see not so much sharing of the budget across multiple online providers. And on Coursera for Campus, it's pretty similar. The campuses, they still buy textbooks. But for the most part, this is pretty new. Now it will take a while to ramp up, we think, for campuses to understand, like how do I really buy and integrate this stuff? But we see a lot less competition, and very rarely do I see another online player at our customers buying Coursera for Campus who are doing something similar to us. It's really in the enterprises.

That's great context. I'll ask a few on the degree segment, and then we'll see if anyone has any questions. So you announced the volume-based discounts on the degree side. And I think that says a lot about your vision and confidence there as far as how big degrees can get. And so I want to ask a couple with that lens. And so the first is on scale. To unlock the lowest revenue share in sort of the volume-based discounts, I think you need to exceed $50 million in revenue from a single partner. So what needs to happen to get to that type of volume?

It's basically -- I mean, in the multiplication, it would be how many students and how much is their tuition? And those students could be in one degree program, they could be across multiple degree programs. I mean, we do decide that we are going to play -- or put an incentive out there for economies of scope. Where universities, when they do degree programs, typically, a university does not say, "Hey. For the whole university, this is the online provider that you should do -- use to do online degrees." Even within a school like, say, a school of computer science, they will often have 1 degree program with 1 provider and another 1 with another provider. What we're trying to do is -- well, first of all, we believe that there are both economies of scale and economies of scope. Obviously, if you have more students and you take the fixed cost of building the content, plus you get more efficient with scale, the economics get more attractive as the scale increases by number of students. So we want -- and our marginal costs are a lot lower than the universities. So we want to share more of the economic rents at scale by having a tiered model. And whether that's over multiple programs or one, that's fine. In terms of economies of scope, there's an ability on Coursera to reuse components of courses. You can either use full courses and remix them or you can even take pieces of courses and have them linked so that you update one asset and it updates across all the different courses. A good example is University of Michigan. They announced a Master's of Applied Data Science. That's live, it's going great. They have a Master's of Public Health. Those are fairly different degrees, but now they've launched a Master's of Population Science. Population science is kind of a combination of data science and public health. The new content required to create the third degree was vastly smaller than the content to create the first 2. So this is where the economies of scope, and frankly, switching costs come in. We believe that with scale, we'll be able to provide great economics. Our rev share is far lower than the traditional kind of OPM model. And when you start hitting scale and scope, it gets even more attractive. I mean, to a large degree, we think that the real competition is do-it-yourself degrees where universities want to try to build it themselves. We want to make sure that they can bet big on Coursera and still feel like there's a really attractive economic return at scale.

Great. That was my next question. On the gap in the revenue share versus some of the traditional OPM vendors. Like what parts of online program management are you finding universities are capable of in-housing and doing themselves? And what does Coursera typically do in a degree partnership?

It really depends on the type of university, kind of where they are in the digital maturity curve. I'd say on a spectrum, we often say there's kind of do it yourself, which is the university tries to do everything, which includes building the content, running all the IT, doing all the hands-on labs in the cloud, doing all the recruitment, doing admissions, doing student servicing, doing career services. I mean, there's a pretty full stack, which, by the way, almost always has scale economies to it. But most of these programs run by elite schools are generally pretty small. And if they don't all coordinate on a single platform, then they won't realize some of those scale benefits. So at the one end is do-it-yourself. And I would say that we're still seeing how the dust settles. But after the pandemic, I think a lot of universities were like, oh, online degrees? That's a hobby. Let's just have somebody else do it. We'll make a little bit of extra revenue. They can do everything kind of turnkey, and we'll give them a lot of everything. Once the pandemic came through, I think everyone now realizes that a lot of students are going to be earning degrees online from every university, even the top ones. University said, "We can't outsource this. Like this is something that we need to be able to do ourselves. And we probably will be doing it at a scale where we can't do it ourselves." Now they're still all trying to figure out, like do we want to do it totally ourselves? Do we want to outsource it? Or what we call ourselves in the middle, is sort of an enablement platform, where what we do is provide all the tools to the authoring. We do all the hosting. We bring all the technology to bear. We do all the recruitment, or a substantial amount of the recruitment. They do the admissions. They do the student touch, but using systems. We have an implementation of Salesforce where every university get their own instance of Salesforce, but it's on one integrated system for scale, which you can never do, obviously, if everybody had their own instance of Salesforce. And we increasingly have hosted the applications. And we're starting to do a little bit more in career services. So I think that -- we'll see. Different universities will settle out in different regions. I think it'll be -- I think fewer and fewer will say, "We're going to outsource the whole thing," which is more of the traditional model. They're much more, I think, cost-sensitive and competency-sensitive, like we've got to get good at this. I think in early days, there are people who are going to be trying to do it themselves, and we'll see how they do. And chances are, there will be some blending. But I think for the top schools, it will be kind of more on the -- the university will do more of it than they used to do back in the old days.

Great. One more for me is, as degrees scale, one of the big efficiencies for you is being able to source students from the massive registered learner base. So as degrees scales, how do you think your ability to find those students from your learner base will trend?

Well, a lot of that depends on where are the degree-seeking students? A huge part of our -- probably obvious, but in case -- if no one is like connecting the dots, Coursera for Campus is not only a great source of revenue. Those are students all over the world getting master's degrees. Many of them are going to go get master's degrees. If we can have a really strong Coursera for Campus as a revenue source and engage students who are the ones getting bachelor's degrees and not yet master's degrees, we have a great pool for top of funnel for master's degrees. Gateway certificates, these entry-level professional certificates, are for people who don't have college degrees. Well, now we've created degree pathways where they get academic credit towards bachelor's degrees if they take these entry-level professional certificates. So a lot of what we think about and when we think about building up the degrees businesses, where are the learners for bachelor's degrees? Where are the future purchasers of master's degrees? And we want to make sure we have nice pipelines coming in, where it's not all just free, we actually earn revenues, and then also perhaps an upsell if at some point later in their life, they want to get a bachelor's degree; or at some point later in their life, they want to get a master's degree; or both.

Awesome. I think we're out of time. Really appreciate it, Jeff. Thank you.

Good. My pleasure. Thanks for coming.