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

All right. My name is Josh Baer, software analyst at Morgan Stanley, and we have Ken Hahn, CFO of Coursera, with us today. First, some research disclosures. 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. Ken, thank you so much for joining us.

Thank you, Josh.

Awesome. So we're already a couple of months into 2023, I think, a month past earnings. So just wanted to get an update on demand trends. So maybe to start with the Enterprise segment, what you're seeing out there around macro and demand in the business segment?

Sure. And we talked a little bit about this, of course, in the last call we had with a forward look to the coming year where we gave our broader guidance for overall revenue. We have 3 segments, as I'm sure most people here are familiar with. And when we give our annual guidance at the beginning of the year, we'll also give a little bit of color around the growth in the different segments, just to help people do their modeling. And so our forward look for the Enterprise segment was 20% to 25% growth this year, moderating from about 50% this previous year. It's a slower economy, it's cyclical. Enterprise spend is the way our Enterprise business looks not...

What is it that's really driving the deceleration in growth outlook for this year, if you think about new logos, new business from existing customers expansion? What trends are you seeing in business?

Sure. So the new logos -- so the pullback has been general Enterprise spend. We were -- 50% was a nice growth rate last year. We have very good visibility, of course. It's about the bookings and then from a rev rec standpoint, of course. These are tend to be 6 figures. It's a regular Enterprise contract, 6-figure, 7-figure multiyear contracts, so you land them and then you recognize your revenue after the implementation, which is usually pretty quick. But over -- so that's the model. So the assumption in the slowdown is primarily newer business coming in. You'd expect renewals, there's budget pressure broadly, we're not the leader to look to. It's not our largest business, but obviously, we understand what's happening from a trending standpoint. You'd expect tightness around renewals as well. But we don't think that it's going to be so material to us. It's just a smaller portion in a growing business, of course. So it's -- really it's new logos that we'll see on the business side. And again, it's fairly cyclical versus the economy, that business, which is L&D spend, as you referenced.

Great. And then similar line of questioning on the Degrees side, a smaller business for you, but an important one, I think. Historically, academic education has been countercyclical. So first, wondering if you are seeing any indicators of those trends in the current environment of increased enrollments or something to benefit the Degrees business. And then also wanted to talk through some of the puts and takes in the forward outlook for 2023 for Degrees.

Absolutely. So from cyclicality, it depends on what you're talking is the measure, right? So if you're talking about economy, I'd say are -- back to Enterprise, we're cyclical with the economy. Higher education, people have tended to consider it being countercyclical to the employment market. They'd say economy, but it's because the 2 always travel in tandem or I guess, in opposing directions. So that's not been the case. It's been a funny year, funny economy, which I won't pretend to be expert on. But -- so with employment, again, the Degrees market tends to be countercyclical. The -- and we are seeing more interest from a student standpoint, famously across the board. I think in higher education, we saw this with community colleges, enrollments were hugely off with essentially full employment in the U.S. And the majority of that revenue for us at least, but in general, is U.S. and Western Europe. So they were -- it slowed down for everybody. We are seeing better rates in fulfilling our cohorts. It's such an early business for us. It's our smallest segment by far, but it's really important going forward. We've been spending a lot of time working on programs that are more cost effective for the value they deliver, earnings potential to the student. We're pretty excited about what that looks like for the end of the year. We've been talking about that. It's been a bit of a shift for us. The revenue -- that revenue cycle is slower than Enterprise even, which has the extended SaaS-like rev rec. But that -- it's even slower, is yet to fill the cohorts on the Degrees side. But we're feeling very good, and we have really good visibility there. Our guidance was that we'd continue to shrink for the first half of the year in that we'd be at 10% plus for the whole year, which implies pretty good growth rates for Degrees towards the end of the year. Again, it's our smallest segment. But it's a really important segment. It's the biggest market we think over time and the one that we think will change the most, and we like our position. So not to get too far ahead, but that -- the guidance we gave certainly indicates an acceleration at the end of this year. And hopefully, at that point, as we get to this year, we're talking about these new programs and the success we have filling the cohorts. It's unknown today. And we want to show it before we start talking about it. But hopefully, by the end of this year, we're excited about Degrees and its potential. It's a really -- don't just view it as our smallest segment is what I'd recommend, understand it because there's a lot of value to Coursera and approach.

Great. We'll cover more on Degrees assuming we have time. I wanted to turn over to one of the more topical areas following last earnings, which was the change in economics around a large industry partner agreement, basically a shift in expenses from OpEx to COGS, partner wanted a more standard revenue share agreement. Can you review some of those dynamics? What happened? And what are the impacts?

Sure. So it was one of our industry partners, as you said, our largest industry partners, how we talk about it. And we had a relationship historically where they didn't need revenue. They weren't as interested in revenue, but we were spending money, and it evolved over time. And with great success, there was more focus on the program. The program grew extraordinarily well. So it was jointly highly successful. And we went from not spending a lot on it towards as it started to accelerate the partner being interested in us contributing towards the success of the program, which made a ton of sense for us, of course. So we contributed whether it was joint marketing efforts, some product. It depended -- we worked with the partner to figure out where they wanted the spend. As we came to the very end of this past year, the contract was up for renewal essentially. And they talked about wanting to have a relationship that looked more like our other industry partners where they received revenue. So as a rev share payment. So essentially, what happened is we took -- and this is all in rough terms, there's nuances that aren't worth the time. But from a material sense, you took us supporting spending money towards this program in OpEx, and we talked about this as our margins improve, by the way, over the last year that we had this difference with the industry partners and shifted that to a rev share. So we essentially took those core economics, moved them from OpEx to rev share with a corresponding forecast of this coming year, 1,000 points less of gross margin. Again, just a flip in geography from P&L. And so that was the impact. Additionally, for this transition period, we're continuing to support the program in the OpEx side, more budgeting than anything else, to the tune of $25 million $6.25 million quarterly is how we're going to spend it in the fashion that we used to spend to support the program. So it's a onetime transition to make sure the program continues to grow the way it has, which again, has been a good success for both companies to say the least. As we go to a more normalized -- you want to take back from a contribution standpoint moving forward in 2024. So -- and we did that, it's important to note, we made changes in our cost structure this year before that contract was renegotiated. And we just gave the negative 500 basis points guidance. We guide from a profitability standpoint, as you know well, Josh, right, to a target percentage guide or adjusted EBITDA margin. And then if we grow faster, we'll spend more if there's opportunity to spend down to the target. If we come short as we did in Q2 of last year, we reduce the workforce to still get to the target. And we've hit -- we're going to share this. We've an Analyst Day, as you again know well, this coming Thursday, which is 10:00 Eastern Time. And we'll talk a little bit more about the model. But we'll talk about as we're getting ready for that, the progress on EBITDA. We have continued to say since we're public -- we've only been public 2 years, but this is how we ran the company beforehand, prepublic, is that we will always show improving leverage in the model. It's just how you build a business. If you're building it increasingly unprofitable, you might not have a business you're really building. And so there's no excuse between growing. It's a matter of how quickly does that rate flip positive, which, of course, is what people are interested in. And again, we'll talk a little bit more on Thursday about the longer-term model, but those are the important components as we move towards profitability at some point.

Great. So one follow-up on the large industry partner. Is there a risk of other partner relationships changing that will change the economics of...

There's not really a material risk. We talked a little bit about this on the call. So our -- the relationship with our largest industry partner was unique, I think was the word we used. The others aren't structured in that fashion. There are some differences, as we've talked, a number of industry partners had a little bit of a different relationship depending what they're doing. And each we tailored a little bit more to what the industry partner wanted, some we supported by paying for content on the front end. Those relationships are more exclusive. In general, our relationships aren't exclusive. The economics, we tend to be the best channel for content. And so we tend to get the really strong content partners. So in any event, the -- some of them are different, but the nature of it, they're more evergreen in contracts and none of them are of the size of our largest industry partner definition like, right? And so if -- I think the way to think about it is even if one of the other ones wanted to change, we would not be talking about it. It wouldn't be -- we'd absorb it elsewhere in the business and figure it out. And again, given the relative economics and the different relationships, I don't have any concern that it's in mess, but even if we did have another 1 or 2, you wouldn't notice from a materiality standpoint.

Got it. Two follow-ups on the EBITDA margin guidance and sort of margin philosophy. So I believe the guidance for '23 is looking for about 200 basis points of improvement. So is the way to think about -- and that -- and you announced the restructuring. So is the way to think about it that the restructuring was -- is sort of part of your annual margin improvement? I guess the question is, like why wouldn't we see more improvement following a restructuring announcement?

Well, there's puts and takes, right? So as we finished our restructuring and then rolled into a negotiation that ended up with a $25 million incremental cost, we weren't aware of that as we entered it. So yes, the guidance improved 200 basis points. Without the renegotiation, would it have improved more? Most certainly, it would have. So it's a onetime feature, if you will, this year. And then we'll have an outlook. Again, we'll talk a little bit more about this coming Thursday in depth when we share with everybody. But it's important for us to constantly improve. And the cycle is we look to the forward year and the growth opportunity and the more growth opportunity that we can spend to. We're early, and we think we're in a really good position in a very big market. So we want to continue to spend growth. We get it that we need to move towards profitability. We're pretty fundamental the way the business is run. So I wouldn't worry about that. It was -- somebody asked essentially on the call without that, would you have been profitable? The answer is yes, mathematics, so that's not -- the fact that the 2 are essentially equal is not coincident. So -- but it's a onetime transition. And again, in the big scheme of things, actually kind of nice given the alignment and the similarity now across the business after we've absorbed the initial impact.

Got it. And then the other question, the way that you manage to the annual margin target is the takeaway for investors there that you shouldn't expect material deviation from that target, like we shouldn't be expecting that to improve throughout the year end?

Yes. The way -- philosophically, the way we run that, we would not want anyone to expect this beating. If we beat on the top line, that's all goodness. If we beat on the bottom line from a percentage standpoint, it's because either: one, things became too good, too quick, and we couldn't adequately spend it, right? We're not going to waste money ever for sure. But that we couldn't spend it quickly enough or we -- in the event of a downside scenario, we adjust cost again to make sure we continue to improve. But yes, we don't aim to beat the EBITDA. We aim to manage the company to maximize growth, again, believing we're early in a very big market and really well positioned to win.

That makes sense. Just want to shift into some segment-specific questions. One, we haven't talked about yet Consumer. So maybe to start, where are we in the adoption of the Consumer subscription? And what does that mean from an economic standpoint to the business?

Yes. So we're pretty far along on the Consumer subscription, which we call Coursera Plus. It's where people can consume everything. You get better utilization. It tends to be a pretty good business model, all you [indiscernible]. It's a closer relationship with the learner. Once again, we have lots of advantages from having these learners on platform. It's not just about Consumer revenue. New learners are very important for Consumer revenue. But the reason we talk about it is our top of funnel, not just for Consumer, but for Degrees down the line, for data around Enterprise. So the learner is really important to us broadly across the company. They're also a prime contributor to new revenue. And so the levers on our Consumer business, which is a business that's run with a fair amount of rigor, the levers are new consumers coming in and how often they monetize. It's also, of course, re-monetizing if you want to use -- if you want to talk about monetization of consumers, re-monetizing existing learners on the platform. But those are the 3 levers that you use to manage the revenue stream. We introduced Coursera Plus a little bit more than 2 years ago. We've had some salutary effects around having a more recurring model, it tends to keep the consumers longer. Again, it also develops the learner metrics are better with a deeper focus and a better relationship, which is super important to us. We've talked about that being in the range of 30% to 40% of that Consumer revenue, but that we weren't planning to discussing on an ongoing basis. We've also discussed historically that we felt like that was a reasonable share of the Consumer revenue, depending what else we're doing. We're going to talk a little bit more in the Investor Day again in a couple of days, in a few days about what it looks like from what percentage is essentially subscription versus not. But by and large, we think that's relatively stabilized. We've received a lot of the benefit, and we continue to look at other things we're doing around Consumer today. And we did forecast that at a 10%-plus growth rate for the year as our largest segment for this coming year. And we've tended to be more conservative because there's less visibility there than there is in Enterprise and Degrees just given the revenue model.

That makes sense. And with that deceleration from '22 to '23, are you -- like are you currently seeing shifts in Consumer spending or behavior?

Yes, we're feeling good about the Consumer. The -- yes, we've done a good job of hitting our top. We missed Q2 of last year, which was terribly disappointing. We don't like to do that. And so we aim to set targets that make sense that we think we have enough visibility to -- so we don't disappoint people. So hopefully, that's what we've done in our last planning cycle and our guidance. And so we feel pretty good about the Consumer. There's nothing to us that's disappointing on the Consumer side right now.

Great. Shifting to Enterprise. I really want to dig in a little more on competition and differentiation in Coursera for Business. There are a lot of different ways to bring learning content into an organization. So what is it about Coursera's platform that makes Coursera win? What is your differentiation?

Yes. So our focus is branded and it tends to be longer-form content, deeper learning things. That space -- Enterprise space is the most of our segments, most competitive. There's a competitor out there who is larger than us and doing very well and growing well. They have a different content approach, which is user-generated content. Each content engine, if you want to call it that, has different advantages and disadvantages in the go-to-market and how you run the company. Both are valuable as you look at it. It's just a different approach. We, with the branded longer-form content -- and there's also a job-ready element that comes with our Consumer business, that tends to serve us really well in Coursera for Government on the Enterprise side. On the Business side, we're doing some things to adjust to the market. Again, a forward growth rate of 25% isn't bad. It's just a lot lower than we had the previous year. And we continue to feel good about that market. It's just challenged economically. We like our content position for what it is. There's merit to both of them, and there's -- it's a good market, and there's plenty of room to compete is how we think about the Enterprise market generally.

That's helpful. So moving to Degrees -- back to Degrees, a few follow-ups there. You briefly mentioned the cost of programs on the Degrees side. Could you expand on the bigger picture strategy when it comes to not just cost, but also scale, geography, how you're trying to address that big market?

Absolutely. So we do think one of the big unlocks there is price versus value delivered, value delivered in human potential, right? Economic earnings capacity, particularly as it relates to the numbers when you're financing these hugely expensive educational experiences. We do see that changing. And they're more of an emphasis, if you want to call it, bang for the buck economically. We've been working with partners and emphasizing for some time now. And we don't want to get too far ahead of ourselves, but we do think this is where the industry needs to go over time is lower price Degrees that confirm a lot of economic earnings potential, which are -- it's a subject matter where we're good and we have strength with our industry content partners as well as our -- which we're increasingly bringing into the academic world and obviously, the top-notch universities. Coursera is known for its brand quality from a content partner perspective. And so we think the ability to offer degrees at a respected, at lower price points, which we've been working with some of our partners on is what's going to be a bigger unlock in that as opposed to higher-priced ones. We think that it addresses a lot of the issues we're seeing with around student debt and problems like that, which don't affect us directly, but do affect these institutions, of course. It's become a bigger deal. And so we're excited about that and what that means from a market expansion standpoint. It's also exceptional, of course, for the learner, the way we can pull it off and us doing what we do with our technology allows, it reduces the cost to serve. So approach the right way with the right scale, which -- that was your word, right, that's important. With the right scale, you can bring the cost of these programs down. So we'll see. I think we'll finally get the opportunity to use the technology to get some leverage there on top of what we do from helping figure out what the different programs can be and then bringing in the students cost effectively go reference back to the learners, half of the new degree programs of -- which get filled from that consumer base we have, which gives us a nice advantage for us and for our partners from an economic standpoint, which is why we have the really low rev share in the entire group because we just do it differently. And again, for different purposes, we're not really quite -- we don't compete necessarily with the OPMs. It's a little bit of a different market.

That makes sense. And I think parts of your -- that answer might also answer this next question, but I want to let you -- want to ask it, the recent Department of Education letter regarding some of those issues around the classification of OPMs and third-party service providers, does that impact your business?

Yes. So a lot of that with the letter in the department has been focused around -- some of the reason for that is angst around the value of degrees being delivered, expensive degrees, they don't confer much economic power is why this has kicked up and become an issue. There were issues many years ago, people familiar with the old for-profit education where you had these recruiting firms using Title IV debt to convince students who aren't really qualified to enter these programs. And there was a lot of regulation from which exceptions were written, including this letter, this dear colleagues letter to say that if you do essentially what we're doing, but it's not subject to the same sets of rules. That's being revisited. We believe our offering is less in conflict, let's say, is not in conflict with the objectives of what they're trying to get to. So we believe our offering is not offensive, I guess, is what I would say. And I have spent time. We feel pretty good about our position. It's a regulatory process, so -- a regulatory process is a regulatory process. But we feel like we've talked to the right people and we have a good understanding and are a little less concerned that it will have massive effects, but it's a government process. So it's hard to say.

Great.

I don't know. I'm inexpert, I will tell you.

I'll ask one more on Degrees and then see if there's any questions in the audience. The trajectory of Degrees has maybe taken a different path than originally expected around IPO in part in the function of the job market and the impacts there. Has your long-term view on the potential of that business changed?

So that's a great question. And of course, you were with us on the IPO launch of this Morgan Stanley Goldman Sachs deal. So you remember the story well, what we told investors we believed in the market. And Degrees has been slower to grow than we expected, certainly. It's been the one disappointment. There's lots of bright spots where we've done particularly well. The Consumer, the job-ready piece, I think the phenomenal new learner metrics we continue to post. That's been great. The sore point has been the Degrees business, exactly the point. At the time, we talked about the Degrees business as likely being the largest market in which we participated. I believe that's still true. We've talked with investors, and we've been very open and honest as we figure this out. But we still believe it's the largest opportunity where we're going to effect the most change. We've been slower to get there. We've had to iterate. It's a tough market to figure out to sort -- but the economics, we think, are great and the opportunity is huge. It would be very easy for us, and we've had these conversations once again, with investors who say, hey, it's our smallest segment. You're right, don't pay as much attention to it. It's been slower growing. That's not what we're saying to people. We're saying, watch what happens as we start to have some of these new degrees we come out with. It takes a long time to see the revenue build. If you look at the guidance we gave just recently for the forward look, there's an acceleration, still relatively small numbers at the end of the next year. But it's a big market that, in theory, hockey sticks once it starts to work. And I hate the word hockey stick, and I use it intentionally. We feel like we're on a good trajectory, but we don't want to get ahead of ourselves. So I'm pretty hopeful that we get to the end of this year and we start to talk a lot more about Degrees and where it's going. But right now, we need to execute, and we need to show that the tweaks and the strategy are working. But I would not deemphasize Degrees in any way when you look at Coursera and our future. It's critical to the long-term outcome.

Great. We have about a minute left. Are there any questions? The one in the front.

Can I ask about the industry partner renewal just in terms of -- obviously, I think we can kind of guess who it is and what they bring to the table, but from your perspective, what you bring to the table, how you can defend your position, why they didn't ask for more?

Sure. So we do all kinds of great things in that partnership. We -- it's what we do and the fact that we compete in the 3 segments is super helpful. We've helped bring this partner -- and this partner, any of these partners who're that big, they can do whatever they want. They have more money than God, right? All of these big tech -- all the big tech players. They could, if they wanted to. But where we're expert and it takes a long time. Firstly, we're a huge channel. We have these learners, which are amazingly valuable over time we developed with the consumer. So firstly, we're just the biggest channel, number one. There's value in the channel. Number 2 is we are experts in all things education. If you look at we structure the data, if you look at how it gets served. So we amplify what they do. We led on the front end with all of our industry partners to getting college credit and bringing this into the Degrees program some of which they are now trying to replicate with community colleges and they can go do that. Again, they have huge resources, but being associated with what we do and how we fit in, brings them into the bigger picture. And I think that's appreciated. The -- again, likewise, I think we'll learn from them in this coming year as they become more revenue focused around exactly this. But there's a lot we do. Even if any of them were to decide to do -- none of these are proprietary relationships. I shouldn't say none. There's a couple of exceptions, but we don't really even think about that. They could do a platform if they wanted. There's no reason not to also do Coursera. And I do think, especially this has been -- there's been focus on the economics because it's a relationship that we've restructured and restructured twice with worse economics for a transitory year that gets back to what it used to look like even though it's better aligned. There's been focus. We've been focused. Of course, it affects the economics. But at the end of the day, it's a pretty important relationship, I think, for both parties, and there's a lot of goodness that we enable for them. At the same time, they enable for us. The job-ready piece is important to us and for what we're doing from a mission standpoint on top of commercially. So again, I think we help them achieve some things where they can't focus because it's not what they do day to day, where we're naturally experts, and we bring them in on the Enterprise side, it's another thing that they tend not to do. So there are some reasonable things that we -- I expect there's a good reason to be a long-term partner for many iterations even after this multiyear contract is complete.

Excellent. We're out of time. Ken, thank you very much. Really appreciate it.

Yes. Thanks, Josh.