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

All right. Thank you all for joining the last session of the day. We're lucky to have Ken Hahn, the CFO of Coursera, with us today. Thank you, and welcome, Ken.

Thank you, Josh. Hi.

Great. Before we begin, of course, some disclosures from the MS side. The views expressed or represented by non-Morgan Stanley speakers during Virtual Global EdTech Conference 2022 do not represent the views of Morgan Stanley or Morgan Stanley Research. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And from Coursera, 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. Please refer to Coursera's IR website to the latest SEC filings and safe harbor statements. All right. Ken, thank you.

Today, throughout the day, we've talked about a lot of themes in education, talked about digital transformation, shift to online learning, skilling, global access to high-quality credentials. What are the secular trends that most impact your business at Coursera? And how are you positioning to capitalize?

From a secular trend standpoint, it varies by our different segments. But most importantly, we think is more of a consumer focus on ROI, both the business and the consumer, but the consumer affects both our Consumer and our Degrees business and the modularization, if you will, of learning for ROI. I'd say those are the two biggest thematic secular changes that we're looking at.

Okay. Got it. And you mentioned different segments. If one were to look at the financials, they'd see the three reporting segments. Could you talk a little bit about how these different segments are connected? What's the value, the efficiency, the platform that one -- each segment provides for each other?

Sure. And it's a big deal, Josh. It's a really important question, and it's important to understanding us in our business model. So hopefully, we don't complicate it too much. We do our best not to internally and what we're driving as much as anything. But at the core of it, Coursera began with the Consumer business. The Consumer business is really important to us in the way in and of itself, firstly for us, from a business standpoint and for what we do, we're a B corporation, so it's important for what we're accomplishing. But it was the origin of the company and it's the basis of a lot of the economics around our other businesses and what makes them exciting. So core to that consumer -- and the consumer comes in through all its great content, that has really great SEO rankings because a lot of it's back linked to the best education institutions in the world. Our branded university and industry partner content is incredibly important for us as it relates to attracting new users. Those new users then end up helping us in the other business as top of funnel, as a freemium model, they convert, of course, also on the Consumer side, which is our biggest business. But over time, the bigger businesses are both Enterprise and ultimately, Degrees. On the Enterprise side, we get roughly, depends on the quarter, 15% to 30% of our leads that come through for Enterprise come from the Consumer base, come from our registered learner base, which numbered at the end of last quarter, 113 million, the largest by far in the industry. And these are very long-term -- some of them I will talk a little bit later maybe about how we monetize, but some of that happens over years. So they helped fill the marketing ranks for the Enterprise side. Very importantly, on the Degrees side where marketing costs to find Degrees students for your clients, the universities are expensive. It's very high. Half of our new Degrees students come in through our registered user base. They have a relationship with Coursera that's trusted. They are at a different point in their career than when they interacted with us early on. Some convert directly as they're looking for when they come. And then they end up converting again, filling half of our cohorts depending on the year for our degree partners, which gives us huge economic advantage. The other thing that the registered user base does for us is -- so it's a channel. It's a channel for our own product, for our university partners, but it's also a channel for the industry partners and the university partners on the content side. So having the largest user base matters, we help them monetize most effectively. And it's one of the things, especially on the industry partner side, where people are looking to expand their brand and their reach as much as anything, not to just generate education revenue, it makes our reach, it makes us as a channel particularly important for them, especially a premium-branded channel.

That's helpful. Speaking of content, what is the strategy looking forward? You have this massive scale as far as registered learners. Like how does the content strategy help to expand that registered lender base?

Sure. So the content strategy and as we expanded over time, we came from a history of data, some business, engineering, so more tech-oriented. As we move forward and we look at opportunities around education broadly, we're looking at doing more health care. So one of the things as we expand the course offerings and continue to do what we do, which is associated with the best brands in the industry, it tends to give us a lot more consumer flow in our website in these different topic areas. So part of it is doing more of exactly what we're doing. Part of it is expanding content to new areas of learning and part of it is expanding internationally as well, including localizing and -- yes.

Great. We'll dig into the financials a little bit later. But while on the topic of content, I did want to ask around the economics of some of the different types of content, depending on the partner and the relationship. If you could just talk a little bit about that dynamic and also what it means for the bottom line, if there's different revenue share agreements, then that means you have different things that you must take on yourself. So what does it mean after considering your own expenses?

Yes. So that's an important question, and it highlights a little bit on the financial side, what those shares or what those economics look like. So since we've been public, we've enjoyed relatively steady increases in our gross margin line. A lot of that being driven by a larger consumption of content of industry partners. These are these certificates that teach people to be project managers, Meta front-end engineers, Intuit bookkeepers, IBM has a few. We've done very well there. And those started to really move for us during the pandemic and after has made great success. And so we delved down and we sought more true experts, the best brands in their individual fields, and we've continued to build upon that. Our historic and still important content partners, the university partners, they're more in the business of education. And so revenue share was very important. We had rev share in our consumer business, which we also do on our Enterprise business, it's the same content that gets consumed. But the industry partners are less focused on -- they're doing other things. They want their brand spread. They want the goodwill. It's very important from a brand and a presence. So some -- so they are lower rev -- by and large, they are lower revenue share, but they're supported below the line from a distribution standpoint, from a promotion and distribution. So part of that increase in gross margins has come with some increase on the sales and marketing side, particularly because it is promotion. And the EBIT impact is not as extreme as the improvement in gross margin. So from an overall economic standpoint, ignoring the geography on the P&L, they are relatively similar to the historic university relationships.

Great. That's helpful. So I want to take a couple of minutes and dig into each segment. Starting with Consumer, just wondering how engagement, consumer spending and behavior habits have really changed within the base over the last, say, year post the heart of COVID.

Yes. So it's interesting. Each on the Consumer side, each of the cohorts that come in have their own characteristics, and we've found the team does an excellent job on the data analysis, their business. It's how that business needs to be refreshed on an ongoing basis, and so they do a nice job operating. And so they're very focused on these different cohorts. And you can understand relatively early on what the broad patterns are going to be. So during the COVID cohort, we had a lot of registered learners hop on. It was historic highs, but not as many monetize and we had shorter retention periods. And that was the COVID cohort, the height of COVID, was a bit of a unique cohort. It monetized on an overall basis very well, but proportionately, it didn't monetize as much as users coming in purely to learn. There's a little bit more of an edutainment, if you will, people have run out of Netflix, and so they were taking online education, some of them, and they didn't monetize or stay as long. But again, overall, still a nice acceleration in the business, and we added a lot to the registered user base who, again, we tend to monetize years later, which is interesting. So -- and then it faded from there to, again, a lot of focus on the industry partner content, people looking to reskill and upskill with a lot of the changes that we believe with a lot of the changes that COVID drove, right? They drove away from on-site, a great -- away from bricks and mortar towards more Tech A, not 100%, but if you're talking about a trend more towards Tech. It displaced jobs requiring less education and emphasized ones with new skills. And by the way, emphasize one with new skills that change quicker. So the rate of change to remain relevant for many jobs has ticked up since COVID. And we believe that's a very important driver of what we're seeing and including some of the disaggregation, if you want to think about it that way, of online learning, right? It doesn't have to be a degree anymore. People are seeking these modularized, increase my human capital or my individual ROI quickly and as job markets tighten, we expect we're going to see more of that. And we've started to see some of that in Europe already. And so that's kind of the current state. But it's an excellent question. As you see, pre-COVID, the shift for us during COVID and now post-COVID in a tougher economy and what may likely be a tougher employment market, depending which part of the world you're at.

Got it. That's helpful. So just to drill in on that, some of the strength recently with the attractive job market has been the professional certifications. If that job market cools off, would you expect the Pro Cert business to see decelerating demand and anything else on the consumer side that would step in, thinking about kind of the countercyclicality of academics?

Yes. So we're talking kind of rate of growth, right, so it's trending. On the -- I think the tougher the labor market is, the more of a boost it gives to those industry partners and people wanting to reskill. When you get close to full employment, there's people are fully employed, they don't need to go seek new employment or try to increase -- but the -- I think what we will see in the current environment, assuming the economy rinsed off and we'll say that we're not economists. I think you will start to see improvement across Degrees' landscape, not just for us, but I think particularly for what we do, which is much more focused on higher ROI. There's been a bit of a change in the strategy around our education, around our degree sector, where we've moved to more mainstream and a little bit more ROI. We're early. There's great partners for closing currently. The growth was slow as again, the reason I mentioned it was tough across the space for new student enrollment, and it made us look really hard at the ROIs and where we stand. So we're feeling a lot better about where we are. We're not saying there's going to be enormous growth quickly, but we think that will benefit certainly during a countercyclical time as it has historically. I think the piece that people, as they think about cyclicality and how it affects our different businesses, but education, of course, is not one thing. There's a big difference between this modularized offerings that are very specific and a degree -- well, many degrees, a CS degree versus a liberal arts degree, there's just vast differences in the way consumers and then they have the business cycle itself. So what -- or the business -- the enterprise segment itself. And if you look at what we do, again, the consumer base, we think, is somewhat countercyclical with the employment market. The Enterprise business, we think we have a couple of offerings there are subsegments, but we believe, and we talked about this on the last call in some detail on the call before that. But the Coursera for Business, selling to enterprise, that will be a little bit more cyclical with the economies is what we believe, it's a discretionary spend. The budgets are tightening. We talked about this again on the last call. Whereas in the Coursera for Government, the reskilling of whole populations, that demand has remained strong in tougher economies and relevant with -- if employment starts to increase. So we've continued to see tailwinds, we believe, there. Coursera for Campus, we're sorting out how it fits in the other offerings. It's growing depending on the region, smallest part of the Enterprise business. But that within itself has different cyclicality and it depends on if you're talking about cyclicality of the economy or the employment market, which for the first time, I think, in history, at least in the United States, has diverged. They used to be in lockstep. So it's important to talk which cycle are you talking about, to understand which cycle you're talking about. And then lastly, the Degrees segment is famously countercyclical. That's the traditional education market as people think about it.

Perfect. I wanted to come back to something you've mentioned a couple of times, which is the monetization of learners over the long term, which is why I think you focus on the number of total learners and not just paid. Any qualitative or quantitative metrics to sort of talk about the conversion to paid learners or the loyal -- or like repeat business from the learner base and how to think about the right way to approach that.

Sure. And there's a couple of different aspects on that front. The -- sorry. The -- I'm sorry, the last part you asked was what?

Well, just the focus on the disclosed metric is the 113 million registered learners and that's...

Sorry. The [indiscernible] of time. Yes. Sorry. So firstly, I was linking it backwards to your discussion of how the different businesses affect each other. And this is probably the strongest what enables our Degrees. If you go back to the S-1, we put a graph in there. I wouldn't recommend you necessarily do that. Of the new degree students and the sourcing, the cohorts where they came in, and it was half of the new degree students, which was roughly 8,000 that year, the year before we went public. So the half was roughly 4,000, and we strike it by cohort on that graph when we attracted the registered learner. And what was amazing, it wasn't a huge number, but 1/4 of those students or 1,000 of the 4,000 had come from 7, 8 and 9 years previously. And to me, that was amazing. You [indiscernible] to learner, it's a trusted relationship. They've changed where they are in the world and the relevance of a degree, and they've come back to Coursera as a source. And the economics around that for the Degrees is incredibly important, right? It's the biggest cost on the Degrees offering side is attracting those student cohorts. So they do monetize over very long periods of time. It was funny around the S-1. We almost had a couple of questions as we're putting together like isn't that a vanity metric that $180 million, whatever it was, do you really get business value? And the answer is no, we track this because it's very important to us. It's core to the business. So we also market to it as we have new consumer offerings as well. And then again, it provides 15%, depending on the quarter, 15% to 30% of the leads in any given quarter for the Enterprise business. And so super important across the board. As far as trending, a different aspect to your question, the retention rates have increased a bit over time. Some of that was product positioning. We offered a subscription product that we first -- an all you can eat for the consumer subscription product that has tended to do very well with the industry partner content as consumers have wanted, been interested to consume different industry partner content and figure out which ones they want to do, they gravitated to this all-you-can-eat monthly charge. Typically, the subscription type they have better longevity, better retention rate than individuals. And so that was something we did. We've talked about it on our earnings calls. We ramped that from 0 on the consumer side to between 30% and 40% of the business. We don't discuss it specifically. We don't want to overfocus. And we probably -- I'm not sure I say maxed out, but we're at a good steady state now. And so we've done that to increase the retention. And then generally, the industry partner content has also increased the retention levels because they tend to be longer form courses. So those certification courses oftentimes look like a college semester, right, 3 or 4 real, call it, double courses and so they take 6 to 9 months. So a lot of it is dependent on the type of content. Part of it has been product and packaging, but we have enhanced fairly significantly over the last 1.5 years, retention, monetization retention rates with our learners.

Great. Really helpful. I want to move on to the Enterprise segment and maybe double-clicking on Coursera for Business. I was hoping you could dig into -- like macro aside, how businesses are thinking about learning and development today, how that's maybe changed over the last several years? And then considering macro, like what is the bottom line as far as how Coursera will fare? I mean, are there instances where you could benefit as a consolidator of budget spend? Or is that kind of consolidation theme more of a risk?

Yes. So most of the training, right, from a business standpoint, there's a couple of different things that businesses might seek, and there's some where we're more advantaged than others where we're not. And then we talked a little bit about Coursera for Business and Coursera for Government, which is a similar enterprise sale, but oftentimes with different reasons for the buying. Businesses are wanting to do one of two things, and there is a little bit by geography. Some -- they all want to train their workforce and make them more productive, right? But some of them focus and particularly the U.S., it's considered an employee benefit at the same time as some companies have done with even more significant education like degrees for frontline workers, right, which is something over time, we can also become involved in. But some of them offered [indiscernible] employee benefit. Some of it when you're selling into an operating part of the organization is focused on what kind of productivity and skill set. That is where we do particularly well. We are focused on skill sets. That's how we sell. We enable, and we have benchmarks of skill sets versus different positions, which by the way we get from a registered user base, right? So that's another way it's valuable, the data and the understanding. It's how we position, how we think about how we evaluate our content. And we have -- our content has tests within it to determine those skill sets to measure it, and it's something starting from an academic background. It's something that was naturally built into the course work. So we have some real advantage as how we sell well, that's what we do well is help companies think about required skill sets for positions. And so that's one reason the others benefits where we participate sometimes but not as much. And then on the Coursera for Government portion of it, that is all about employability and retraining. And you can imagine that whether there's unemployment, you can imagine -- it's states, it's whole countries across the world in particularly developing countries where there's lots of interest, in the Middle East where they're shifting from fossil fuel-based economy towards newer economies. Those are both all-important places.

Excellent. Maybe moving on to Degrees. I think the near-term outlook for Degrees has changed at least over the last several quarters. So the question is, what are some of the headwinds that are impacting the business today. But really more importantly, has your long-term view of the potential of Degrees and the scale changed?

So in the -- so the first answer is, I'll talk about the short term, a little bit directly in the long term and the opportunity, we're as confident as we went -- when we went public in that market. We think it's a huge market. We think we're a natural winner in that market. It's complicated. And we have not performed as we would have wanted to. We performed then a lot since we went public 1.5 years ago. We did not on the Degrees segment. This last year has been a headwind across the space for new student enrollment with increasing employment with record level of historic employment levels. So that's everybody. But also, there's been a little bit more -- we've been focusing more on economics and ROI and building out some lower cost programs. We've been expanding in -- with some best institutions in the world, in India and in LatAm. And over time, as we think pricing starts to come down in the Degrees segment, we've shifted more of that direction. We saw some great premium brands that have amazing graduate-level programs. So -- which is most of our business today, just the way the model works. And those will still be important to us, don't get us wrong, especially because it's a source of amazing content. It's what we do. It helps on the Enterprise side. But we think the larger market is in more ROI-based learning, a little bit as we talked about the disaggregation before around the industry partners and the more modularized ROI-based learning. We think we're going to see a little bit of the same thing on the Degrees side, especially as some of the lower-ranked institutions start to struggle financially, which is not what we've seen necessarily ourselves, not with because we have a different premium brand, our premium group of -- but some of the lower-ranked ones are having problems economically has been pretty widely published. And we think some of that adaptation towards larger scale and lower price is how that market expands, and we're doing what we can to support that. Part of that will include making all the processes easier to do it at scale, to make admissions easier. Admissions, and we're doing some of this today, by the way, that have courses, you can take ahead of time within -- which if you succeed, you'll be qualified for admission to the institution, which makes sense. You prove it by doing it that you'd be a good student as opposed to the whole application process. So we're working with some of our partners today to do that, to increase that throughput and also the aggregate or the use of content and getting accreditation for that content that's a little bit more job specific. So one of the things we've done with our industry partners is we've helped on the number of these programs, get accreditation and university is offering that as part of their curriculum, which is attractive to them because, of course, employment and employability matter to them. It's how they fight some of this headwinds where things are constricting around them. So we think there's a lot that's changing more so than it's probably changed historically in that entire space. And that's how we're positioned. We think there's a lot of things we do uniquely because of where we came from, how we've built the business where we can help make that happen at scale, as universities are interested to do that. And again, through our partners, not Coursera, right? Coursera, you, I don't think you'll be seeing anytime, probably anytime ever, but anytime soon for sure.

Excellent. Really helpful context. The last minute or two, I want to touch on financials. Where are your investment priorities looking ahead? And with that in mind, how should investors think about the path to free cash flow positive?

Yes, which is something we think about. We're in the middle of our budgeting season now, so we're very focused on that. You know the way we've run the company and [indiscernible] hasn't heard it, we're painfully perhaps consistent in describing how we run the model, which, as we said, an EBITDA target as a percentage of revenue, this is how we think about leverage and then we maximize for growth during that particular year. Now we may change what this parameter is going to look like the next year, but one of the things we've said from day 1 is you should expect us to continue to show increased leverage. On this last call, we said we're focused on leverage, look for us as we give our guidance in '23 to have a little bit more of a view into what that looks like. So I think we'll, as we finish our plans, disclose some more. Nobody is really giving '23 guidance for good reason and neither are we. But we hinted that we were pretty direct that you should look for more leverage in the model. And then whatever that target is, we'll operate within that target. We have a lot of cash on the balance sheet, which is important. The most important thing, we think, is that we win in these markets. They are huge markets. But growth multiples have compressed, companies are being awarded for profitability. That's not necessarily how we choose to run the business, but it's also indicative of future growth opportunity in the near term to which you want to rightsize and building a strong company for the long term means getting leverage and thinking in terms of leverage and building leverageable businesses. And so you'll see us continue to get better on that over time. Again, we've essentially what we said on the last call is expect some more emphasis on that side. But we're doing that in the context of wanting to grow and win in these markets because we do believe they're very large markets, and we are the best competitor. So that's how we think shareholders will get paid. But we'll be responsible at the same time. We are not going to burn a lot of cash, right? I think people have spent time over -- since we've been public in that 1.5 years, 1.75 years, I think, understand that we're running it as a real business, and you'll continue to see leverage from us.

Perfect. I think that's a great way to end it. Ken, thank you very much. Really appreciate your time. And that is a wrap for the first Morgan Stanley Virtual Global EdTech Conference. So thanks again, Ken, and all the executives and the investors that participated today. Please do not hesitate to reach out to myself and other research analysts for a follow-up after the conference. Thank you all very much. Have a great day.