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

[Audio Gap] Software here at RBC. I'm delighted to have with me, from Coursera, Ken Hahn, who is the CFO. Ken, welcome. Thanks so much for being here again.

Thanks, Rishi. Good to be here.

All right. Maybe let's start with just a little bit of a quick overview of what Coursera is for the generalists in the room and kind of the 3-pronged strategy that you're still famous for?

Sure. So Coursera, what we do is we take partner content, partner learning, and we distribute that to learners around the world in a couple of different forms into each of our business segments. So one is the consumer platform, which is our biggest and where we started. Coursera, for those of you who don't know, is the original MOOC, and if you don't know that for parlance of MOOC, because you're a generalist investors don't worry about it. But these massive online courses, Coursera was the one originated that. So the consumer is our largest business. We'll talk a little bit more about that. We've had a great run lately. We have enterprise learners as well, which we sell directly to companies, L&D leaders. And finally, we have a degree segment, which is us providing degrees alongside our partners. And that's the area where we have the most innovation currently.

Yes. That sounds great. One thing that I think has been surprising a lot of us is just seeing this consumer business continue to accelerate. I think there was the thought of MOOC had their day in the sun and then COVID happened and that was a temporary benefit, and you've kind of proven that to not be the case, right, that this is an ongoing thing. Why are we seeing consumer revenue now accelerating again?

Why is it so good? These are good questions. I like this. So our consumer business, thank goodness, has done extraordinarily well, very exciting. Interestingly, you go back to COVID, which was -- we went public in March of 2021. So kind of post a lot of the COVID effects or was still ongoing. And so there were lots of questions. I'll tell you one thing around the consumer business as we're going out that was a bit of a concern is did we and the rest of the industry see this boost in consumer essentially for edutainment reasons, people were trapped at home and they're so board, they'll even learn, and that was not the case. What really happened, as we've had more time to absorb and reflect over time. The real change in COVID for education companies was a change in the rate of the pace of differentiation of change for consumers themselves, what's required to remain relevant. And because everything moved online, it didn't go back offline and the pace of change accelerated. And the one thing at the core of it, education is driven by change in pace. So if there's more change happening, people need more education to remain relevant. And that was the more enduring effect of COVID, which we think continues to this day. That, combined with a recipe that worked really well for us, which are these industry partner credentials where we see the unit of learning kind of breaking down, right? So it used to be -- what does education look like for most of us here is we went to some kind of high school, preliminary school. And then we did this monolithic 4-year degree, right? Everybody goes after they graduate from high school, maybe or maybe not, you do a graduate degree after. But that's what you do. That's the extent of your education. Do you do any training? Maybe do a little corporate thing if you have an L&D department that makes you do it and your boss follows up because he's getting pressure that people haven't followed up. But that's the extent of your education. What we believe is going to be the case permanently now going forward is the breakdown of these units to be more relevant to the immediate term and what people -- and again, this is all around rate of change. And so these industry partnerships that came across where it takes people with no need for no previous education requirement, you'll have to have a college degree. And it trains them up from scratch to some job-relevant position, could be managing the Google IT suite as an example. We did those, and we actually have ads on BBC, if anybody watches BBC ever, it's kind of fun. But it described -- but we have close to -- we said we were hoping to see 50 by the end of the year. They've been wildly successful, more successful than we ever thought. But again, to me, what it's done is it's captured that, what's the right learning in the right blocks at the right time. And by the way, we expect those people who are completing these courses, they're in the work world. Often, it's first generation and we'll see them attending college, hopefully through Coursera, as well down the line. But it's really -- it's broken down, and that's what's happened in consumer, much to our benefit.

Yes. Yes. Got it. That's really helpful. Maybe let's start with a couple of macro questions. I guess, first, on the macro side, are macro trends getting better?

I like -- I'm not an economist. This is my opinion. You should ask an economist because I think it'd be rather arrogant, on my part, to describe what I think is happening in the world and tell you what we're seeing…

Macro trends for Coursera, yes.

Yes. Well, for how I see where our business is going to go in the near term, there are some cyclicality and counter-cyclicality in the business. And then there's the rate of change in society that drives education companies overall. So for the consumer, just to close on that because we're just talking about it, I think AI is going to once again increase the rate of change in a way that I still don't think is fully grasped by everybody. It's going to create tremendous demand for people wanting to understand what this is, especially as they try to remain relevant or to reskill for their existing jobs. I think that's going to be -- and it's in the early stages, an important driver of the enterprise business as companies -- and the training isn't out there right now, to be clear, for anybody from anybody either. But I think that's going to evolve over time, to be very specific, to the job role. That's what's going to be hard about AI, to be job role specific, and we're working on content to address that in the near term. I think we'll see things rolling out in the next couple of quarters. But that's where we see that going. And it's going to demand tremendous change and the companies that do that are going to be more efficient, more productive and more on-strategy. And it's hard. There's not an easy playbook. And so everybody figuring that out is not going to work really well. And then -- and that, from a macro trend standpoint, if you want to talk about economic cycles, our enterprise business is cyclical with the economy. So it's been tough times for L&D spend broadly. It's considered more discretionary in a lot of budgets than, say, SaaS-es. And it looks a lot like a SaaS model. It's hundred -- multi-hundred thousand dollar deals, $1 million deals sold by a direct sales force and instead of SaaS, it's selling learning to L&D. And unlike SaaS, where you're deeply embedded, I think all -- I've done this, and I think 98% of the CFOs, if you ask them today, have gone through an exercise where you've listed all your SaaS providers and the licensing and how can you -- it's one of the first places to cut because slowly, out of time, it gets out of control. We cut maybe 20%, 25%, and the rest is sticky. You can't get rid of it. The problem with corporate learning and L&D is nobody dies that year if you cut it off. And so it's been a place where we've seen budget shrink. And so when the economies come back, I think that will be good for us. And what I just described, we have 3 verticals within our Enterprise segment. That's the Coursera for business side, just on regular. We've done particularly well lately and continue to, in this environment, do well in Coursera for government, which is, we believe, countercyclical with employment. And it's not just employment, but it's, like, straight employment because if you read the headlines, we have the best the best employment history ever right now. That's not true. If you know people who are unemployed. There are a lot of people who are underemployed and frustrated and differentiating themselves and having different skills is increasingly important. That applies to governments as well. And we've done well there in the C4G vertical within enterprise across the world, particularly in the Middle East as they're looking to retrain for changes, right, in their energy businesses. And then last are C4C. And what I'm describing here, again, is the breakdown of our -- which is our second biggest segment, our enterprise unit, the 3 verticals within that. The last is C4C, Coursera for Campus, so it's Coursera for Business, Coursera for Government, Coursera for Campus. On Coursera for Campus, we compete there uniquely because it's selling to the universities, which we have other business with universities, both on the supply side for content as well as on the degree side, so we're pretty close to them. But it's selling that same product into them. And what we found is the use case that's worked particularly well. We're pretty open about how we see our business growing and how we're thinking about things. We were talking about C4C. If you go back a year, might have been on stage with you once before. You'd Have to look at the transcript. You'd probably remember and I don't. But talking about where C4C is going. And at the time we were talking about C4C, it was still like -- it wasn't small. It wasn't nascent. It was $1 million plus. It's millions of dollars a quarter, but we were still sorting product market fit, which a lot of people don't like to talk about. So these might all go away, right? We've got it wrong, we're experimenting. It might not be sustainable, the use cases. We feel very good. We've landed on the exact right use case, which is for students for credit. So if you're going to a university and the university buys C4C, and we have lots of examples of this, you as a student can use and take and get these job-relevant credentials, which is really helpful, because that's probably the reason you're going to school. The schools like it for that reason, because there's -- they have to be a little bit more focused on job outcomes. So bolstering that helps them. And there's a little bit, depending on how they do it, of unit economic arbitrage, which is they charge more for their units than we're charging them for their learning units, for their credit units. And so C4C has continued to do really well and is a little bit -- it's anticyclical, if you will. It's just a new thing in a new space. So that's the enterprise, a little bit complicated. There's a lot going on, but the biggest part, kind of tough in the current macro, hopefully that changes and the other 2 businesses, pretty well suited because we're at the right place with the right product.

Yes, absolutely. Maybe I'll just dive straight into some of the generative AI questions. It's really important.

Trends and gen AI.

Maybe I -- I want to think about -- I'll ask a much longer-term question first, because I think this is what's most interesting is it feels like there's going to be this big societal disruption as a result of generative AI, what it does to people's jobs and everything like that. How are you thinking about Coursera's opportunity, especially the consumer business, Coursera for Government, et cetera. to be positioned to, I guess, help with that, right, and to help mitigate that disruption? And how do you think that impacts your business at the end of the day?

Well, we're here for that transformation. And I think for us and anybody in education, the opportunity around AI is massive. I think it's going to drive a whole new wave of innovation in the space and just drive the business in the space broadly. If you come back to the rate of change concept, as the rate of change, pace to change increases in society, the need for education, and so we'll benefit from that. Others in the space will benefit from it. And I think we play a pretty important role, right? If we do this well, we'll be the ones along with others in the space, teaching people how to adapt, right, which is -- it's everything. It's bewildering. People don't know what to do with AI, and this is at the individual level. I think people will do it. As far as looking at just from a general interest, you should know what's going on around AI if you're a member of society because it's such a massive trend, and we'll have such -- and I think that's going to become increasingly obvious to people over time, and so we'll be there to educate the consumer. On the corporate side, it's going to be all-important as people need to reskill. Otherwise, we're going to see people going away altogether. If you look at the -- there's been the horror shows that AI is going to kill everybody and take over humanity, right? We'll have Hal talking to us through the speakers in this room someday. I think people are somewhat getting off that now. And at the same time, they were talking about, essentially, no one is employable anymore. That's not really the way it's working out. It's an enhancement by and large. Will there be fewer jobs in certain areas? Yes, there will be fewer jobs. But most importantly, there'll be retooled jobs. And that retooling, and we're pretty good at AI internally because we're very focused, because it's a critical part of our business. Everybody should be given how profound the impact is going to be on society and for their businesses and for their entities. But figuring out kind of on a roles basis what we're starting to work on internally and how to figure out how an AP account -- typically, it's not going to take away a job, but it might change 30% of your job. Maybe over time, you'll have fewer AP clerks as my example. But understanding how they do that job and how they leverage. And you only get that by experience with it and experimenting with it and figuring it out. And it's something that's not obvious or intuitive, so there's a whole layer on that to understand, but it's going to be businesses that don't adapt to that, they're going to lose to their competition. They're going to disappear. You don't have a choice. And it's going to drive a lot of revenue for us and others in the space as it becomes more mainstream. And again, my surprise a little bit is -- and this might sound silly, it's not as mainstream as it should be. I think there's a lack of understanding of exactly what we're going to say.

Yes. I totally agree. I mean -- and you bring up an interesting point, right, which is I think everyone is focused on AI replacing jobs, but it's more likely that there's going to be AI-enabled jobs and non-AI-enabled jobs. And maybe to that end, how do you think about your ability to actually have gen AI content across your segments? And is that something that you're already working on, you're already starting to see some benefits on? Is that something that we should expect over the next year or 2 years? How should we be thinking about that?

Yes, yes, yes. Of course, it's just -- based on what I just said, right, which is -- it's not my sense alone within the company, we're very focused on this, including the content. One of the nice things is we were founded by AI experts essentially, right? Andrew Ng is our Chairman, Co-Founder of the company. And he's -- I think -- I don't think many people would argue if you say he's the world's expert in AI. He had an AI for Google and Baidu, who were the first real users of AI at scale because it affected their economics in a profound way, actually, not to overuse the word but he was with them in understanding what an AI-enabled company. He's got AI for everybody, which I'd recommend, it's free if you want to go get it. If you want a certificate, you have to pay $30 as part of the advertisement, but -- and not joking. It's just very interesting to hear him talk about what an AI-enabled company looks like. He's talking about that with how he guided about that from his experience, helping guide Google and Baidu on it and why it's important. And while that's not the most interesting use case, economically, it was a big deal, which is why those 2 companies were -- so for search, it affected at a very fundamental level, the economics as everybody [ who ] understand searches understands. So we've been pretty focused on, from a content, we have things in the consumer, we have offerings in the consumer category today. We're working on more. Thank goodness, that's where we started. And so all the deep learning courses were out there before people were super focused on AI. It's just what Andrew does. And he has an AI fund now on the side and a separate AI company who's been running for a while. He's been gone day-to-day operationally for some number of years. But incredible opportunity there. And I think across the board for business, we're developing role-specific AI teachings. And I think at the end of the day, that's where the rubber hits the road. It's not these generalized -- it needs to be role-specific, here's what you do, and here's how you think about it and here's the skills you need and here's how you might implement it. And there's been studies that I won't parrot back where it's used, but it goes from the very obvious ones like customer support, where you're fulfilling things on a regular basis. So prime knowledge users, I mean, we're inserting -- because we have our own sandbox, we're inserting our documents around our disclosures and our thoughts and what we're doing within the company around our objectives in the next year and asking ChatGPT what it thinks about it. And it's kind of amazing. It comes up with some shocking ideas. We do a little thing just to enhance that. And what I'm describing now is the piece you can't put your hands on immediately and say I'm going to do this and automate this because this report will be generated before you even think about it and your customer can -- it's beyond that because those smart people can put together. But it's the part where you say load these things up, what's the answer and how you look at it and then the ability to have the right prompts to understand that. I think the value there is just as high. And I think we're going to see waves and iterations of this as it starts. But it can be part of strategy. It can be -- the uses are -- and I think those are the things that I don't think very many people are thinking about today.

Yes. Maybe on that, right? I mean you've talked about a few different use cases. What's like a big gen AI use case that either you're contemplating or thinking about long term that no one is really talking about right now?

I do think there's this soft skill back to my previous comment, soft skill understanding how to interact and create new things with AI. And that's -- as I watch what's happened across our company, and I'm out of my mind too busy. So I'm not the one doing this, to be clear, but watching people watching my CEO, Jeff, iterate on this is fascinating. But it's the understanding, it's the enablement of thinking around new applications for AI. So what's the application no one's thought about, the ability to think of new applications for AI. It's a generalized understanding and set of soft skills that lets you think about providing toolkits to automate jobs, and to think through prompt engineering, among other things. There are some fascinating stuff there that I think is not well understood yet. And all this will happen, I think, pretty soon. But we're at really formative stages still.

Yes. Yes. That makes a lot of sense. All right. Maybe let's go down now to -- we talked about consumer. We talked about enterprise. Let's talk a little bit about degrees. So it's still small, still relatively early interactions. But maybe can you talk about some of the recent highlights that we've seen. And more importantly, what are your major initiatives within degrees over the coming years?

Yes. So for degrees, the biggest -- so we've shifted our strategy a little bit since we've been public and it hasn't grown the way we'd like it to, to just start things off. We're feeling pretty good about our strategy right now, but we need to prove it out. And we've moved away. We have some great degrees on platform that are amazing from top institutions. We like those. We closed Dartmouth and UC Berkeley over the last couple of quarters. So we love those no kidding, right, as a friend of mine used to say. And -- but where we've been focused on is doing it more at scale with these admission processes that are streamlined for students and dropping -- doing it around degrees and subject matter where there's a huge increase in human capital and earnings potential versus the cost. And working with the schools, we have UC Boulder rolling out this quarter. We're fulfilling cohorts right now. Their example, they've taken a degree, an engineering degree down from, I think it was $23,000 or $24,000 a year to $15,750. And they're doing that, using some of the courses online, using their core curriculum as the majority of it. They're streamlining admissions so that if you can take in these open courses that anybody here could go take right now, if you pass to those with a B or better, you're admitted. So instead of application process designed to figure out if you'll do well in a program, how about you take 2 courses from the program and do well as an indicator you might do well in the program? So it's those kinds of things. And increasingly, we're pushing for the schools, for our partners, we're being pretty selective how we're figuring out who we can work with. They have to buy in this philosophically, is doing that with our industry partners. And there are 2 reasons for that. One, as a university, it's a good thing for you to add some kind of job relevance. It's a good thing for the learner to have some kind of job relevance associated with their degree. Not that there isn't today. But if you can -- in addition to UC Boulder, also put that you have a Google blah, blah, blah or a Meta Back-end Engineering or -- it's just another good indicator from an employability standpoint. Schools are becoming increasingly focused on that. So it's about fast tracking these admissions. It's about right pricing for things that create human value essentially. And to some degree, changing the automation, where, essentially, the content can be consumed by more people, more cheaply. And so we think that's the answer over time. A lot of the traditional schools below the top 50, like, read the paper. Things are tough economically for them. Students are going and pursuing college degrees, high school graduate at a slower rate. I think part of it is, like we talked about before, the breakdown in the unit of learning. And I think the whole with student debt, right? It's been a huge societal issue. I think 17-year-olds today are thinking now about I'm going to take all this debt. I don't think people thought about that 4 or 5 years ago. And so all these things, we think, are going to contribute to the universities who are going to excel below the true elite are going to be the ones who do much more pragmatic cost-effective job training, I guess, is what I'm describing. and which is why people will -- well, used to go to university to the inlet. So that's the degree segment. It's our largest market, by the way, as I started the conversation, we have underperformed. So I don't love saying it's our largest market. We've underperformed. But it's the reality of what Coursera's opportunity is. And we think we have the strategy right. And if there's another iteration to happen, there is. But if you want to understand the story and the stock, that's what we believe. And we believe it's a massive opportunity that also changes society.

How -- kind of -- you've done some changes in kind of pricing and packaging with the degrees program over the past couple of years. How have those been received?

Yes. Those have worked out fine. And the primary difference -- the primary thing we did is we reduced the pricing. So if you go -- and we're -- we don't compete with the OPM players, for those of you who are familiar with the space, it's not what we do. That tended to be the model, which was around for a long time, was higher priced degrees. They received a huge portion of the tuition. Ours because -- and a lot of what they were funding was their ability to market and to go fund new degree students, which is really expensive to do, high-dollar item, the media is extraordinarily expensive to go buy, because it's worth a lot, right? These people are worth a lot. And so that was always the problem with. And with us, half of our degree of students come into the consumer platform. And we'll see if that remains the same as we evolve and we expand it. But to some degree, we have a very fundamentally different economic proposition when we do it. In light of that, one of the things we did a couple of years ago is we rolled out new pricing, tiered pricing that dropped our tuition rev share, where we would take 40% of the school's tuition as payment for what we did, which was primarily recruiting students and providing the back-end technology so they could have this -- they could record and host these classes and do the testing and automate that process, make it available remotely. But -- so we dropped our pricing from 40% to a tiered model that range from 25% to 40%. And people at the time, when there's less focus on it, would ask about, and again, we don't even think of ourselves in terms of OPM, but would say, why did you do that when there's this umbrella in the industry that's 60% to 70%? And the answer was because we can, right? Because we can fulfill. And this is what makes it attractive to the schools over time. And it's interesting, especially -- because it is volume based, so the idea was to encourage them to increase their volume over time. It probably helped us keep one of them over time, because the difference is when you go from one program that you view as ancillary and give up 70% of your revenue or even 40% to adopting it in a larger sense, you're talking about your revenue as an entity. And you're talking -- you have Boards of regions saying, we're going to give up what percentage of our tuition is how they think about it. And so dropping it down to levels we thought would enable expansion in the space. So -- we've been trying to think through the fundamental economics. And again, a lot of this change now in our approach has been around helping the overall offerings, including those from our partners, be the right mix from the unit economics or from an economic standpoint for the students, for the learner.

That makes a lot of sense. Maybe let's talk international. So there's been, clearly, a really big opportunity internationally, especially if we look at your registered learners, where they may be. How are your monetization efforts progressing there? And maybe how are your efforts to try to localize content for some of those geos going?

So that's going to pull together a couple of different things we've already talked about, and it's topical because we're finishing off our budget right now and figuring out how we look at international and some of the investment there versus other geos and other spending thoughts. So there's a lot of near-term opportunity for us. There's payments that -- and this is across the whole business on the consumer side, particularly, enabling that more. And this is just like block-and-tackle kind of traditional consumer Internet playbook. That's how I think about it. So we're at the stage where we need to make the payment systems easier. We've done localized pricing, but there's more we can do around that, currency, letting users be able to buy our product. Oh, by the way, buy our product that's translated into the language they speak, so we're doing a lot on the translation front. And the reason that part comes full circle is because it's AI-enabled. The translation ability, it's unbelievable how much it's changed. And we've obviously been very close to it. We've had larger enterprise deals where you're selling to foreign countries and you have to translate a certain amount of that content. So on really big deals, there was a review cycle, would we agree to fund certain translations. And we've gone from translations costing $10,000 to $15,000. The translations can mean a lot of things, by the way, but I won't get into that, to $20 a course. And so the point where we believe we're going to be this year is we're just going to translate the whole catalog into multiple languages. I'll make up the number every 2 quarters, maybe it's every 3, maybe it's every quarter, but it's cost effective enough, and it's getting better. So the quality will be better and better and better. If it's fundamentally what we sell and enables these other markets, it's worth every nickel for us. So that's a huge breakthrough, by the way, created by AI and really deeply changes the user experience. And again, it just enables us, so a whole population we couldn't serve them more.

Absolutely. All right. In the minute we have left, I'm going to ask an open-ended compound question. What's the biggest decision you will have to make as a management team over the next 3 years? And what is the single biggest item that excites you about the future of Coursera?

I'll answer the last first. What excites me the most presently is the change that AI is going to create in the world and our ability to support that. I think secondarily, it's changing the degree model across the world to make it more accessible and affordable to people so they can do it. And how that relates to trade-offs or challenges, so how we think about it, I think the big challenge is going to be resource allocation as we think about putting [ bets ] in those strategic areas versus other things we could be doing. It's all about allocation of resources and focusing to make things happen versus the risk that occurs, especially with a lot of change, right? I think the other thing we're going to see, AI, you mentioned it, and I think everybody is mentioning, this is going to create a lot of societal change. We're at a point in -- both in the U.S. and worldwide, where there -- at least in my career, there's the most unrest and dissatisfaction, disagreement we've ever seen. So we're in an environment with a lot of -- there will be surprises going forward. So allocating resources and capital to best -- in a changing -- a rapidly changing environment toward these evolving trends is our biggest challenge and our greatest opportunity, I think.

I think that's a great place to jump off. Ken, thank you so much. Thank you, everyone, for being here. Thank you.