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

So, yes, I'm pleased to be hosting this meeting with Coursera CFO, Ken Hahn. Coursera is a leader in online education, serving individuals, businesses and working with universities to help them offer online degrees. It's a very global company, spanning most of the globe and is increasingly mixing towards more recurring revenue. Next quarter is expected to be the company's first breakeven quarter on adjusted EBITDA on the way to profits next year. So Ken, why don't you give us an introduction on yourself and also a quick overview of the company, fill in the gaps on the vision, where do you think the company is going?

Great. Sure. So I'm Ken Hahn, Coursera's CFO. I've been with the company about 3.5 years. We took it public when I was there less than a year. So March, we actually closed in April of 2021, which was a very nice market, as you might remember. It feels like a long time ago. And what we do, what Coursera does relative size for the year, midpoint of our guidance of $630 million top line, we are going to be EBITDA. I'm not updating guidance, this is reiterating just what we said last -- on our last earnings call. This quarter, we're going to be EBITDA breakeven with .

It's an estimate.

Exactly, the next one to be reported.

Yes, exactly.

All right. So we'll talk about that in February. But the -- so -- which is a good accomplishment. We like that. We can talk a little bit how we manage the company and the bottom line, but telling you about what we do, I think, is a lot more interesting. And so what we do is we take content, we take learning from world-class institutions, both at the university and the corporate side, we just talk a little bit more about that in our consumer business. And it's fascinating what we've done with some of these industry partnerships and what it means on top of the economics, just the effect it has is pretty nice. By the way, we're a public benefit Corp or a B Corp, as most people refer to it, but that's the marketing arm. It's public benefit Corp. from a corporate governance standpoint. So what we provide the world is actually part of our charter and part of our governance. It happens also coincide with building a large company that's profitable so that we maximize the reach. So there's a bit of a virtuous circle, if you will. It doesn't get in the way of shareholder value or at least we intend for it not to get in the way of shareholder value. But we -- what we do is we take this content and we deliver it through multiple channels is the way to think about it, whether that's the consumer channel, which is where we started or our enterprise channel, which serves corporations across the world or through our degrees business, which is our largest market, but our smallest segment today. I'm going to talk a little bit about that. Some of the trends there are pretty amazing. But it's -- the strategy has been evolving. We talk a little bit maybe about where we are versus where we were when we went public. But in a nutshell, that's what Coursera does. We've been growing rapidly since we went public. I went and reviewed and this was before your time when we went public with the -- with our analyst models, which you're allowed to share with the analysts before you're public. And we've hit all our numbers and became profitable quicker than we expected. So there's been a lot of water under the bridge between here and there, but it was kind of nice to see. But that's Coursera in a nutshell, and there's lots going on. Let's talk about.

Yes. Maybe let's get into the different segments first. You touched on them a little bit, but you started off with the consumer segment, that's the majority of your revenue. But [indiscernible] lot of resilience lately. Maybe you can touch on why you think that is.

Yes. So, Consumer has done really well, even since we've been public, I'd say it surpassed our expectations at that time. And the key is these job-ready industry certifications. And so what these are, it's on a specific topic, one, for instance, is Google Project Management. We have ones by Meta around back-end and front-end engineering in iOS and then even advertising on the Internet, which Meta knows a thing or 2 about. And so we work with our industry partners and some of the universities where all of our original content came from that's evolved over the years. And these are these hands-on courses that don't require any background. There's no prerequisites. You don't have to have a degree. But it trains these entry-level jobs. It trains people to go from nothing to -- they're essentially a college level course for a full quarter, semester, multiple months to complete it. But when you're done, you're qualified, you're certified -- the certificate from this company in this particular realm of expertise, which carries weight with employers. And so we were starting that around the time we went public, and it's worked unbelievably well. The outcomes -- we're getting to the point where we can measure outcomes and the number of people who have experienced career success or new jobs is impressive. So it's been of great value to consumer. And as a result, it's been of great value to us. We've extended those and we've worked with some of our universities, some of our degrees partners to get ACE recommendation for credit. So a lot of these are being put into schools as well for -- which is great for the schools because they're talking increasingly about outcomes and about -- and just from a student standpoint of being job-ready and more employment oriented. So it's worked great for the students. It's been a ton of value. So connecting those 2 segments and our segments are all intertwined, and we can talk a little bit more about that. But that's one particularly interesting area. So it's these entry-level professional certs that have just helped us exceed external and internal expectations over the past few years and are pretty important source of our offerings across each of our channels.

How important is the adding of new certs to performance in particular area like the old certs continue to perform well and grow? Or what's kind of the way we should think about that?

Yes. We talked on the last call about hoping to have 50 by the end of this year, 40 and some change at the end of last quarter when we were talking about that. Adding new ones is important because we continue to expand the type of content relative to the same thing geographically. So these are companies that are recognized in their regions as being -- they should be good at these certain things. That's why it's an employment indicator and why it's popular with people. There is lots of opportunity to continue. It's -- this will not run out for a long time. So it's important for hygiene as much as anything else. It's worked really well, signing up new ones is relatively nothing easy when you're talking about partnerships, but relatively easy for us because we can point to all these amazing success stories with millions, millions of consumers educated, doing great things for the brands of those industry partners that do this with us. And again, we're extending that now increasingly towards health care, and we're doing it internationally as well with international brands instead of it just being U.S.-based. And so from a revenue standpoint, it doesn't matter here and now, what we sign up every quarter. Are we going to miss in a quarter if we don't sign up enough? No. But it's something that we're working through as a process to continue to add. And should -- I've had people ask, should you go from $50 million to $200 million -- or are you good where you are? Should you go from $50 million to $75 million over the next 2 years? And the answer is $50 million to $200 million because there's no reason not to do it. There will be opportunities if you just think about how you'd map that out, that is the direction that it's no -- I'm making up numbers, but maybe see if I should do that, but you tell me.

Maybe, I make up numbers, but it's okay to imagine a little bit just clear.

Discussed strategically what we're doing.

Yes, yes. Okay. So you did have a big change in that segment at the beginning of this year with how you work with your biggest partner, impacted certain of your cost, where the recognized on the balance sheet, but also had some onetime costs. And maybe you can confront people once again, those are onetime costs that go away at the end of this year. And then also talk about why the change and what benefits you're seeing from it? And if you want to say who it is, feel free if not.

Yes. I think most people can find our largest industry partners for the sake of the relationship, I won't say anything, but they're pretty happy to talk about it, too. So anyway, a large, very large Internet company, you might know, is our largest industry partner that I might have mentioned before in passing because they have some of our most important programs. They're a really important partner. And what they do through their programs is educating a lot of people and creating a lot of good. We have evolved that relationship mutually over time. It's interesting, part of it being -- I wouldn't call it a victim because I like where we've ended up with it, frankly. But an evolution and when you have something of size like that a partner of size and you have changes in terms, it affects an organization. So it was a big deal. We talked about it in our MD&A with our 10-Q that we filed. So it's important. And on the front end was something we took deadly seriously because of the effects where the numbers are. But what happened with that business the way most of our business works is there's a rev share. On the consumer side, it's generally 50-50 that originated way back one with our university partners and continues to this day with virtually with 99% of our revenue, 99%, 98% goes through the standard contract terms, which is roughly 50% -- it's a 50% revenue split. And when we started with our largest industry partner with them, they didn't want any money because it was really about them doing this and creating job opportunities for people. That's what was important for them. It was part of the government affairs efforts amongst a couple of other things. That's where we reported in the organization. And over time, as it became bigger, they were supporting all the costs. They had large budgets. We didn't have large budgets. They were very demanding, and they didn't want to make cost an issue. But at the point where we really started accelerating at a lot of volume, appropriately, they came back and said, we're spending all this money to support it and you get all the revenue strikes us as that's not particularly fair. So we agreed with them to do a chair where we supported the programs. They still didn't want revenue because the revenue didn't matter to them, where we supported through costs and the lower part of the P&L below the gross margin line instead of being a cost of sale instead of being a direct revenue share around marketing, around engineering, actually, in almost every organization, this was a pretty high-volume things, so they wanted to support it across the different parts of the org. So that's what we did on roughly the same industry terms just in a different part of the P&L. This is why we're talking about it in the 10-Q as you look at MD&A. And so what we did in this last year as I think a lot of the tech companies have been under pressure and revaluing relationships and how it works and squeezing things so they can focus their resources on where they get the greatest growth, which is what everybody should do for their companies. We had the discussion about maybe rev share works out for us. And so believe it or not, because you're talking about your gross margin, which I'm particularly sensitive to as people think about leverage. And we were very open throughout, as we always are on our call discussing that relationship and that it looked different than the others and here's the effect on the P&L. So good news when we did that, it wasn't as dramatic when we brought down the gross margins. The better news is it served us really well from a partner standpoint, from an operations standpoint because now this company, which most people argue, is the best company in the world at figuring out how consumers go through workflows and experiences and remain engaged or aren't engaged, are now in the business with us of generating revenue and have internal targets on that revenue, which are big targets, of course, because it's a big company, which has helped drive us and teach us and make us better in serving our consumer and continuing these relationships and keeping people engaged as they finish these learnings, which further their job prospects and their careers and drive revenue for us and bring good to the world. So it has all worked out really well. There was a lot of stress around the holidays for a couple of years for those involved in it. But yes, it's an important thing to understand where you look at the P&L. And the good news is as we get into 2024, we won't have to talk about it anymore because we'll have lapped it on a year-over-year basis. But actually, a fairly important thing to understand about the company, I think teases out some of these important industry relationships and what they mean to us.

Right. And you expect the basis of the learnings you've had from that relationship changed to kind of filter actually the rest of the segment over time, right?

Absolutely. Absolutely. Yes. They have taught us things. And as I tortured myself because I was pretty heavily involved in the negotiation in the back of my head because I had a pretty thorough Internet consumer background was, this will be good for us actually in a number of ways. So it's already proving to be so.

Got it. And then let's talk to the Enterprise segment. The second big segment, I mean about what 30% of revenue, right?

Yes. Yes. Roughly.

So last quarter, I think you said something like we're awaiting more clarity on corporate learning budgets. When do you think you might have that clarity? And then kind of what are the prospects for -- about your question 4Q, kind of what's in your guidance?

Yes. So the Enterprise business, we actually have 3 different verticals within the Enterprise segment. And it's Coursera for Business, which is the way most people think about the space, which is primarily selling to L&D leaders, learning and development leaders, sometimes directly to the operating teams, essentially as an enterprise sale. So it looks like the model is a SaaS model, enterprise software model where you have a go-to-market effort with reps who are out in the field, direct selling, 6-figure deals, sometimes 7 figures, especially on the government side, 7-figure deals, selling direct. So that's what that business is. It's been -- in the other 2 segments. So that part of the business has been flattish. We haven't spent lots of time discussing it, makes up a bit more than half of that segment. The other 2 verticals, Coursera for Government, Coursera for Campus, which roughly equally split the difference are growing pretty well, actually. We've been really happy. And what those are is the government vertical is really just an industry sector split like you do in SaaS, frequently. A lot of people have government [indiscernible] because it's specialized procurement and all that. We compete very well there because it's about brand, which we have the best branded content in the industry because of the way our content engine works. And there's others in the space who have good content engines, but they're just different. So it just looks a little bit different. So -- but we do particularly well because people care about the brands and the job-ready aspects referenced the whole previous conversation around what we've done with our industry partners. And so we're a very nice fit for Coursera for Government that grows pretty well. And Coursera for Campus is something we've evolved over the last couple of years, kind of a new thing since we went public and ties in well with our University segment, with the Degrees segment. And what that is, is us selling to the schools themselves, and we used to describe this going back, let's say, a year where it's not insignificant. It's millions of dollars a quarter, but we're still figuring out product market fit, which most people don't talk about their businesses like that because that means it might go to 0 because we're just experimenting right now, which is what we were doing. So again, we're pretty open about these things as we develop them. And we've figured out pretty good product market fit in one instance that we think is sizable, which is selling to the universities on a per-student selling to students for credit. And so what that is, and a lot of these -- and we're getting ACE accreditation, as I mentioned before, in the background around these programs. It's the schools offering some of this world-class content, a lot of it industry partner, which is job relevant to their students for credit as part of their degree, and it's done particularly well. Again, it's roughly 1/4, a little bit less than that of the total thing. It's not a big, big deal, but we're pretty excited about it. It plays in well with our degree strategy, which is our biggest market over time. I'm not forgetting the part that's not going as well in the current environment, which is Coursera for Business. Coursera for Business, it's an enterprise sale. It's caught in those budget cycles. And so like I said, it's been flattish. It's probably a little bit more discretionary than SaaS. So look to what people are saying in the SaaS space and think about the fact that a lot of times they're deeply embedded. A lot of -- what's happened as corporate budgets have tightened as a lot of companies have done -- what we've done is you have a list of all your SaaS providers. You understand the licenses, you find, you've been inefficient even if you measure it fairly frequently. You've been inefficient because you have multiple licenses from different places or the use case for -- with costs doesn't matter anymore, and you just haven't reviewed it enough, cut those. We save probably 15%, 20% in doing that effort ourselves over this past year. I'm sure everybody is doing the same thing. So the problem with corporate learning is it doesn't have to happen right now, it's not, whereas a lot of times, again, you're baked in. So I think it's been others in the space, some have talked about being difficult. Some of them are performing pretty well, which is nice and a good indicator, and I think is good from an opportunity standpoint for us. I don't think we're going to see any budget flush. I'm not sure anybody should bet on budget flush anywhere in this economy is hard to say. But from what we're seeing, I don't expect it. To me, the real question is going to be with people for those on calendar years, which is the vast majority of companies, as they're setting their budgets for their next years, where do budgets go next year. And so I think that's the big unveil. I think people will start to see as we get into -- most people being cautious about giving guidance for next year, -- but that's the thing to look for.

Yes. And that kind of -- my next question, which is kind of what is the percentage you see for that segment next year? Do you think -- what do we need to see to have it, we accelerate, stabilize, continue to slow down? What's kind of the thought process there, in fact you gave us in September.

Yes. I'll tell you what I know, and I won't pretend to be expert type from what we see internally is -- I don't see it changing to the negative. It feels like we're stable. It feels like people have an understanding of the world. What could go wrong, the world could destabilize further, we've got the election next year and politics aren't awesome no matter what your beliefs are about it. They're not awesome in this country, and that creates some instability with what's going on in the rest of the world, particularly. So that's risk globally for everybody everywhere, but of course, that's part of the answer is that is as big as anything as a downside. On the upside, and we're actually pretty excited about this. We think AI from a learning perspective, assuming people can come with the right product and which is what we're trying to do right now as are others in the space. I can't imagine that's not a very real driver of top line for people in the learning space next year. And that's particularly on the enterprise side.

Got it. And then the final segment is Degrees. That is your smallest one. As you said, though, it is your largest potential market. It did accelerate this year from last year, but last quarter was a little bit of a hiccup. It's a little better than it had been before, but not as much as I think maybe people were hoping for. I guess, what parts of Degrees performed the plan? What parts caused kind of the reevaluation of the growth trajectory? And then I heard at least 2 university programs delayed out of 3Q. When do you expect them to kind of get going? What's the prospects for getting to that 25% growth? You had been talking about before for next year. There's a lot of things there.

Yes, yes, yes. I'm trying to connect all the -- so there's a lot of tactical to the answer, which is the exact right set of questions and what we're tackling now. So there's a strategic context around degrees that we're working on. And again, we've been pretty open about this on our calls and how we think about it. If you look back to that original revenue model that we did for the analyst before we went public, again, you're newer to the story, but not that new, but it was something different. We have exceeded on consumer and not done as well as we would have liked on both Enterprise and Degrees. I mean Degrees, in particular, has been a little bit frustrating. We needed a strategy change. We realized as things were evolving there. And I'll tell you, we're feeling pretty good that we have that strategy right, but proving it out is what we're going to require before we start talking about it in any kind of bullish fashion. We continue to talk about it, maybe ad nauseam, if anyone wants to vomit about it, because it's our biggest segment and because it changes the world, which is important, potentially. It's our biggest market opportunity for sure. And us getting it right, we shall see, to your point, potentially. We're feeling pretty good about where we are, and we can talk a little bit more about strategically what that looks like. But there is the historic business we've had, which makes up almost all the revenue and then what we're doing now strategically, which we have some proof points that are happening now and going live. So tactically, everything that's happening is what you're seeing in the revenue. We had a couple of programs delay. It's hard to predict when schools launches. It's the one thing I've learned about the space over time, and it is a little surprising, honestly, even if you think you've seen it all, is universities operate on a different clock and something that might be important that you ignore in the business for, they don't ignore. And probably for the good, if you -- but it's not -- it makes it less predictable. So we've had a couple -- we announced last quarter, we announced Berkeley, which was amazing. But Berkeley, we thought we'd be announcing a year ago. And so as one example. And we've learned just to be patient, but it makes it a little harder to forecast near term. And so again, it's that big on the total revenue, but it's important more how we're developing the ones that are a fit with the newer strategy, which is about degrees that are lower cost in subject matter that delivers a lot of human capital or increase in human capital, earnings potential, right, more bang for the buck. And so we've worked with a couple of partners. You see Colorado Boulder is one we've talked about, and this is very public. We're fulfilling those student cohorts right now for the first one. That had pushed back a quarter, by the way, to that previous conversation and is on track and moving today. But what that's about is they have a data science and computer science degree, 2-year degree that -- for which they charge $15,750, used to be $23,000 to $24,000, so much cheaper where they have admissions that are enabled through open content. So they have those courses. Most of Coursera's content by the way, we have the same content in consumer and enterprise. It's the exact same content. And you can see almost all of it for free, if you go on right now and go look it up. If you want a certificate around it, certainly, if you want a degree, you have to pay, but you can see what it looks like. So their open content, if you take it and get the certificate of completion, which costs, I think, $30, and you pass 2 of those with a B or better because they're graded, then you're admitted into the program. So it eases admissions. If you think about admissions that emissions process, you have to take a standardized task in SAT or Graduate -- GRE and you have to sell an application, you might have to get recommendations. It is daunting for most people to go get a graduate degree, especially because you're probably working and busy you might have a family on top of it. So it's something that what I just said, I don't know, 5% or 10% of people are willing to continue forward and deal with that torture as they figure out what it is. How about instead of an admissions process that's geared -- well, firstly, that historically has been geared to reject a lot of people as a sign of quality. But even ignoring that, that's changing is geared to understanding whether someone will succeed. How do you just have the courses of the program and see people are successful there, as an indicator they might succeed in the program because you don't want a student who's going to fail in your school. So anyway, a number of these more forward-looking schools have agreed that's a good idea or doing that. The next step, which we don't yet have, but we have with a different partner that hasn't been announced yet. And we're discussing that with UC Boulder right now is to take some of these industry partners we have and do the same thing with that content, which if you think about it from a top of funnel standpoint, is amazing, right? You can do it at real scale, which is how these programs are designed to work. So that is our new -- is our strategy around it. I say new, but we've been working at this for about a year with essentially that strategy intact, executing it takes a long time. We're about to see the results of some of the first those. It takes a while for revenue to show nothing's going to change. So we're caught to now circle back on your specific question, which I think I just covered both the tactical what's happening now with revenue as we end Q4 is we're going to look a little bit into the beginning of the new year versus where we're going with the vertical, which is why I continue to talk about it ad nauseam because it is very important for our success. And so we haven't shied away from it when it's been painful. It's something that's really difficult. I think strategically, we've sorted it and hopefully, it works because it will make a big difference from the standpoint of future revenue growth, 5 and 10 years down the line and really changing the way higher education works for a lot of people across the globe. And that's just the U.S. that we're talking about. There are other efforts in India, which is fascinating from a market standpoint. But that's -- I wouldn't say degrees in a nutshell, but degrees in a balloon. I don't know, you tell me. I am the CFO.

And I think to this approach should bring more people into the ecosystem, but doesn't have the big bang revenue impact of a full enrollment on day 1, where someone is paying.

That's right. It takes longer to build. It will take longer to build. It's a lower price point by definition, as we just discussed. But at the end of the day, we think there's enormous volume here. And especially when a lot of the higher education institutions are struggling financially, that's become something that's more obvious, I think it's in the press, at least once a week, you'll see something. And this is something that helps change the way it's delivered if you think about it in a fashion that I think will work a lot better for some of these schools over time. So that's what we're working on. It doesn't require that many because it's a scale to make it work.

So I have a couple more questions, but I do want to open up for anybody from the audience to ask anything if you have.

[indiscernible] demographic cliff, is that a concern going forward in the educational part of the business?

Yes. The demographic cliff that is coming our way in the United States, is that a concern is the question just for anybody listening. It will definitely affect higher education is the answer I don't think it will affect -- it has a marginal because there's less volume coming through. So not that it doesn't have any effect. But that's not what we're doing. To some degree, this addresses some of the problems it will create, and I think, capture more of that audience, more of those potential students than you would do otherwise. I think the schools, and there's a lot of data out there, it's already affected the industry. If you look at community colleges and their enrollments, it's been brutal, including all the way up to the best institutions. So it certainly had some effect on the margin. As it relates to us, this is -- you have to believe what we're doing that it matters about the ability to deliver cost effectively certificates, if you want diplomas that make people more valuable than what they've spent on it, which has been the fundamental problem, right? That's the bigger problem we're facing because a lot of those degrees just don't -- they don't pay for themselves. And they're very expensive, and we could talk about all the wise, the biggest one is you can finance it with subsidized debt or guaranteed debt that if someone were doing it by the government, of course, that if someone were doing it from a private, it doesn't make sense, right? That's why it's not done by private entity. So it's interesting to look back to that, this UC Boulder degree, there's no financial aid for that. It has to pay for itself. And I think that will probably become pretty common for the other ones we put on our platform if we achieve. And not every potential partner, in fact, the vast majority won't start interacting on that front because they want to keep their prices where they are. But that's part of the problem. That's part of what isn't going to work. And beyond like the really elite institutions, which I personally suspect will be able to charge what they want for a long time to come and probably forever just because it's a totally different experience and get different things out of it than just skill sets. I think beyond the truly elite universities, I think most are going to have to come to terms with that reality that what they deliver isn't worth it. So it's -- I think it will be an interesting change.

All right. I think we're out of time. I want to go into margins and the balance sheet, capital allocation, but I think we got to wrap things up here. So Ken, appreciate your time. Great.

Thanks, Robert.