Coursera, Inc. (NYSE:COUR) Q4 2022 Earnings Call Transcript

Coursera, Inc. (NYSE:COUR) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Coursera’s Fourth Quarter and Full-Year 2022 Earnings Call. At this time, all participants are in a listen-only mode and please be advised that this call is being recorded. After the speakers’ prepared remarks, there will be a question-and-answer session. And at this time, I’ll turn things over to Cam Carey, Head of Investor Relations. Mr. Carey, you may begin.

Cam Carey: Hi, everyone, and thank you for joining our Q4 earnings conference call. With me today is Jeff Maggioncalda, Coursera’s Chief Executive Officer; and Ken Hahn, our Chief Financial Officer. Following their prepared remarks, we will open the call for questions. Our press release, including financial tables, was issued after market close and is posted on our investor relations website located at investor.coursera.com, where this call is being simultaneously webcast and where versions of our prepared remarks and supplemental slides are available. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP measures to the most directly comparable GAAP measure can be found in today’s press release and supplemental presentation, which are distributed and available to the public through our investor relations website.

Please note, all growth percentages refer to year-over-year change unless otherwise specified. Additionally, all statements made during this call relating to future results and events are forward-looking statements based on current expectations and beliefs. These forward-looking statements include, but are not limited to, statements regarding the potential impacts of trends affecting our industry and uncertainties in the current economic and educational environment; our ecosystem, platform, content, and partner relationships, our anticipated plans, and the anticipated benefits thereof; our strategy and priorities; and our business model, mission, opportunities, outlook, and future intentions. Actual results and events could differ materially from projections due to a number of risks and uncertainties discussed in our press release, SEC filings, and supplemental materials.

These forward-looking statements are not guarantees of future performance or plans, and investors should not place undue reliance on them. We assume no obligation to update our forward-looking statements. And with that, I’d like to turn it over to Jeff.

Jeff Maggioncalda: Thanks Cam, and welcome everyone. It’s great to be with you all. I’ve been a CEO for over 25 years. And in that time, I have witnessed many economic cycles, societal challenges, and technological leaps that required individuals and institutions to embrace how to learn, change, and grow. The past year has proven to be one of those times. Organizations are exercising caution given the macroeconomic uncertainty. Students are demanding an education system that is more affordable, accessible, and relevant. And as the year came to a close and ChatGPT mesmerized the world, we were all reminded of the transformative power of technology to change the way we teach, learn, and work. Despite the dynamic environment, I am inspired by our team and confident in our ability to deliver on our long-term strategy.

We grew revenue 26% over the prior year, with total revenue of $524 million. We rapidly expanded the Coursera ecosystem, welcoming new learners, educators, and institutions around the globe. And we deepened the advantages of our three-sided platform. The structural trends reshaping our world are not slowing down. Let’s discuss the latest on each, starting with digital transformation. The forces of technology and globalization have been accelerating the transformation of every institution in our society. And the rise of remote work has led to a globalization of talent that is reshaping the supply and demand for jobs, no longer confined to a specific city, state, or country. Over the course of my career, I have seen how eras of disruptive technology, be it the internet, cloud computing, social media, or mobile, have helped advance the world and create opportunity.

But they’ve not been without consequences, including dislocation and job losses. I believe that AI is ushering in the next major inflection point, with implications that go beyond the traditional boundaries of automation. It appears that AI will impact the future of learning and the future of work more quickly and more profoundly than many of us had been expecting. This brings me to my second major trend, which is skills development. Employers are rapidly digitizing work processes and jobs that are repeatable and predictable. But generative AI has the potential to impact an entire new class of knowledge workers, unleashing a new wave of reskilling imperatives. We believe that generative AI will require businesses to retool systems, processes, and talent, while harnessing these new technologies to improve their customer offerings, increase productivity, and stay competitive.

It will push universities to enhance their curriculums and the learning experience to make quality education more affordable, interactive, and relevant. It will drive governments to deliver job training programs at the speed and scale needed to keep pace with job dislocation and unemployment challenges. And it will push every individual, in every job, to keep learning in order to stay relevant. This leads me to the third trend driving our business, the transformation of higher education and adult learning more broadly. In a world where machines are increasingly capable of producing content at scale, we believe that trusted institutions will play an increasingly valuable role in education. The growth in online learning has provided more equitable access to learners around the world.

But the design of traditional systems of higher education have not kept pace with the changing skill requirements that have been driven by technology and automation. These higher education institutions must meet this challenge with rapid speed and scale, evolving to better serve the needs of students, graduates, and communities in an increasingly digital and distributed labor market. And this is why I’m excited to share that Coursera has partnered with the University of Texas System. This is a three-year, system-wide initiative. Students and faculty at all 8 UT campuses have access to the Coursera catalog, including our entry-level Professional Certificates that have been created by some of the world’s best-known industry brands. Many of these industry micro-credentials come with ACE Credit Recommendation, and several universities have recently begun integrating content on Coursera into their for-credit curriculum, including UT Arlington, El Paso, San Antonio, and Tyler.

We believe students will benefit not only from learning skills, but also from earning industry microcredentials that complement the degree they earn from their local campus. And the University of Texas System will be preparing the next generation of talent to meet the state’s workforce and industry demands. Historically, collaboration between industry and academia has been slow and piecemeal. By integrating industry expertise into university curriculum, at the scale of entire systems of higher education and government, we are beginning to witness what our platform and our ecosystem can make possible. Coursera is increasingly becoming the platform through which institutions are able to drive powerful collaboration to better meet the needs of our digital world.

We believe our platform has three distinct advantages that allow us to compete differently. First, our leading educator partners who have created a broad catalog of branded, high quality content and credentials. Second is our global reach and distribution. And the third is the data and technology that powers our unified platform. Let’s discuss our recent progress for each of these. First, our educator partners. Universities play a prominent role in society, fostering education, research, and knowledge, while teaching durable skills like critical thinking, communication, and collaboration. And the curriculum can be complemented by practical, hands-on learning from industry partners, who are better equipped to keep pace with the fast-changing skills landscape and evolving job requirements.

Coursera’s learning ecosystem includes a powerful combination of 300 university and industry partners, and we welcomed many new partners to our platform over the last year. This includes top-tier universities around the globe, like Georgetown University, Indian Institute of Science, and King Abdullah University of Science and Technology, as well as industry leaders in the fields of technology, business, and health. This includes Accenture, Mayo Clinic, Nvidia, PwC India, and SAP. And these partners continue to expand the Coursera catalog. We announced 14 new degree programs in 2022, including two recent additions since our last call. We welcomed the first liberal studies degree on Coursera from Georgetown University. This is a bachelor’s completion program that offers an affordable, flexible way for adult learners to finish their degree.

Additionally, we announced our first degree from West Virginia University. It’s a Master of Science in Software Engineering and is offered at an affordable price for students around the world. Next, we are rapidly expanding our catalog of entry-level Professional Certificates, adding new partners, job roles, and language translations, while creating stronger connections to career and degree pathways. A year ago, we had 18 of these certificate training programs. Today, we have 38 that have been announced, more than doubling the catalog with titles from new and existing partners. Recently, we announced the first entry-level Professional Certificates from two new industry partners, including SAP Technology Consultant and Goodwill Career Coach and Navigator.

We believe that industry microcredentials will be a critical component of the transformation of higher education. They offer learners with no college degree or prior work experience, an affordable, flexible way to start or switch into a digital career. They provide a turnkey solution for campuses, or entire systems of higher education, to upgrade their curriculum with career electives and produce graduates who have the skills and capabilities that employers are looking for. And they enable businesses and governments to deliver workforce and talent development at scale. Our second major advantage is the global reach of our platform. We have a large, growing learner base that attracts educators looking to teach individuals and institutions around the world.

Our freemium model, paired with the world-class brands of these universities and industry partners, allows us to grow our top-of-funnel, attract learners at low cost, and serve them at a range of price points. This year, we added nearly 22 million new registered learners, growing our global learner base to 118 million by the end of December. Learner growth continues to be broad-based, with double-digit percentage increases in all regions. We also grew the number of Paid Enterprise Customers to more than 1,000, including new business, campus, and government customers. As the reach of our ecosystem continues to grow, the data generated by our learner base, including catalog performance, learner assessments, and feedback from institutional customers, allow us to identify and prioritize sourcing opportunities, deliver skillset insights to our Enterprise customers, and create products, features, and pathways that deliver more value to our learners, educators, and customers.

And this brings me to our final advantage, the ongoing product innovation on our unified platform. My first update focuses on the learner experience. Coursera is increasingly becoming a global destination for learners seeking job-relevant skills and recognized credentials that can unlock the next phase in their education or career. Our team has been focused on creating strong connections between our open content and career and degree pathways, and this begins with the discovery experience. As part of our Career Academy launch last year, we began surfacing credentials through the lens of career pathways, helping learners better understand the job roles, number of openings, median salary information, and in-demand skills associated with our entry-level Professional Certificates.

This quarter, we focused on degree pathways, and started rolling out enhancements to our catalog’s search and discovery, with €œCredit Eligible€ filtering and badging that allows learners to more easily identify content and credentials that can count as credit towards a college degree. This is tied directly to my second update on the American Council on Education, also known as ACE, which offers credit recommendations. From our campus survey in 2022, we learned that more than half of students want to earn a Professional Certificate that counts as credit towards their degree, and we have continued to pursue credit recommendations across our catalog. These credit recommendations provide learners with the opportunity to earn academic credit towards a degree program, typically at a much lower cost.

Photo by Wes Hicks on Unsplash

And universities can consider offering credit for these industry microcredentials, which can complement traditional curriculum with job-relevant skills, or what we like to refer to as €œcareer electives.€ This quarter, we secured ACE credit recommendations for two additional entry-level Professional Certificates, with a total of 14 now recognized for academic credit. We believe more of our Professional Certificates have the potential to receive this distinction in the future and we are pursuing similar credit recommendations from accreditation agencies in additional regions around the globe. Now, my final update is for institutions. Our Academies product is a complete skills development solution. It offers personalized, skills-first approach to enterprise learning for the most critical job roles.

Today, we offer six Academies spanning technical and non-technical domains. Customers tell us that stronger leadership, change management, and human skills are needed across their organizations, not just at the executive level, particularly with the unique challenges that remote work and hybrid work are presenting. We recently created a new Leadership Academy with a targeted, more selective portion of the catalog, including 11,000 Clips, 500 courses, and 70 Guided Projects. This has been designed for buyers looking to offer high-quality leadership training at scale for all levels of the organization. As AI accelerates change and puts more jobs at risk, one job appears to be more important and less at risk than ever, the job of the leader. Leaders are responsible for managing people through change, which is more important now, but also more difficult than ever.

Leadership requires human skills and an awareness of change and context that AI will likely never replace. We are seeing strong demand for Leadership Academy and believe that tailwinds will increase demand for this kind of workplace training. Before I turn the call to Ken for a closer look at our financial performance and outlook, let me remind you of several key priorities we are focusing on in the years ahead. We’re focused on growing our Enterprise segment across business, government, and campus customers, seeking to address their needs in this changing environment. We’re expanding our portfolio of degree programs, especially those tailored to meet the unique needs of working adults, including flexibility, affordability, and stronger pathways from open content and industry microcredentials into degrees.

We are broadening our entry-level Professional Certificate catalog, expanding with new roles, new partners, new languages, and credit recommendations. We are focused on deepening our advantages while driving more scale and leverage across our platform. And we see exciting possibilities for the use of generative AI across our business model. And now, I’d like to turn it over to Ken. Ken, please.

Ken Hahn: Thanks Jeff, and good afternoon everyone. We are pleased with our fourth quarter results, which reflect the diversification inherent in our business model, including broad exposure to the needs of individuals, businesses, governments, and campuses, a global footprint, and the ability to serve learners at every stage of their career. In Q4, we generated total revenue of $142.2 million, which was up 24% from a year ago, driven by strong growth in our Consumer and Enterprise segments. Over the course of 2022, we closely monitored the changing economic environment. This included our partners’ and customers’ priorities, as well as the implications for our own business as we navigate lower growth rates in the near-term. We implemented a series of actions to pace our investments and resources with our revised growth forecast, most recently reducing the size of our global workforce and sharpening our focus on key investments.

Please note that for the remainder of the call, all non-GAAP measures have been adjusted to reflect one-time charges related to our workforce restructuring actions of approximately $10 million, which is reconciled in our financial tables and supplemental slides. Gross profit was $88.9 million, up 24% from a year ago, and a 63% gross margin, which was in-line with the prior year period. As a reminder, there are two components of costs of services: non-content costs that serve all three segments and the content costs paid to our educator partners. Our non-content costs have been largely consistent over time at approximately 10% of total revenue. The second component, our content costs paid to educator partners, will vary based on the revenue mix amongst our three segments, as well as the content margin rate of each segment.

Given the strong growth in our entry-level Professional Certificates, we have seen a large, positive variance in our consumer content margin rate, associated with the increased consumption of industry partner content, which tends to have lower-than-average content costs depending on the partner’s goals. As we’ve discussed, some industry partners have prioritized additional spend that is included primarily as part of our operating expense to promote their brands, reach, or social impact initiatives, as opposed to a higher revenue share. In conjunction with securing a multi-year contract extension of our strategic relationship as we began this new year, our largest industry partner has chosen to receive a more standard revenue share in the future.

This will result in higher content costs and lower operating expense going forward, and I will provide more detail in the discussion of our financial outlook. Total operating expense for Q4 was $99.7 million, or 70% of revenue, compared to 83% in the prior year period. Sales and marketing expense represented 38% of total revenue, down from 44%. Research and development expense was 20% of revenue, down from 24%. And general and administrative expense was 13% of revenue, down from 15%. Net loss was $6.5 million, or 4.6% of revenue, and adjusted EBITDA was a loss of $5.8 million, or 4.1% of revenue. For the full-year, our adjusted EBITDA loss as a percentage of revenue was 7.1%, a 150 basis improvement over the prior year. We aim to show ongoing leverage in our operating model, while also pursuing growth opportunities in our large and early markets.

As a reminder, our annual operating framework with regards to EBITDA margin has been consistent. At the beginning of the year, we set an annual EBITDA margin target, and we work within that plan based on the trajectory of our business, which we again demonstrated with our reset growth expectations and disciplined expense management in the second half of 2022. Now, turning to cash performance and the balance sheet. Free cash flow was a use of $7.9 million during the quarter, compared to a use of $1.9 million a year ago. This included cash payments of $4.8 million in Q4 related to the restructuring charges, with the remainder to be paid out in the first quarter of this year. We ended the year in a strong cash position. As of December 31, we had approximately $780 million of unrestricted cash, cash equivalents, and marketable securities, with no debt.

We believe the strength of our balance sheet, in combination with the modest cash requirements for operating needs, is an asset that provides us the stability and the strategic flexibility to execute on our long-term strategy. Next, let’s discuss each of our business segments in more detail. Consumer revenue was $79.8 million, up 21% from the prior year. Segment gross profit was $58.2 million, or 73% of consumer revenue, compared to 69% a year ago. And we added another 5.2 million new registered learners, despite Q4 being our historically lightest seasonal quarter for top-of-funnel activity. Our strong consumer performance continues to be driven by our expanding catalog of entry-level Professional Certificates, along with the growing adoption of our Coursera Plus subscription offering.

As Jeff highlighted, we believe our focus on world-class brands and job-relevant credentials has made Coursera a natural destination for learners looking to start or switch careers. Enterprise revenue was $50.5 million, up 41% from a year ago on growth across all three of our customer verticals, businesses, campuses, and governments. Segment gross profit was $33.5 million, or 66% of Enterprise revenue, compared to 68% a year ago. The total number of Paid Enterprise Customers increased to 1,149, up 43% from a year ago. And our Net Retention Rate for Paid Enterprise Customers was 108%. While we benefit from multiple channels of distribution within our enterprise segments, we are seeing customers, particularly businesses, exercise caution in their spending priorities amidst increased macroeconomic uncertainty.

And finally, our Degrees segment. Degrees revenue was $11.9 million, down 11% from a year ago on lower student enrollments, consistent with our forward-looking commentary on recent calls, as Degrees growth in 2022 was challenged by enrollment headwinds associated with U.S. master’s degree programs where our revenue is concentrated today. The total number of Degrees students grew 12% from a year ago to 18,103. As a reminder, there is no content cost attributable to the Degrees segment, so Degrees segment gross margin was 100% of revenue. Before I turn to our financial outlook, I’d like to provide some additional detail with regards to a recent, multi-year contract extension we secured with our largest industry partner in this new year. As we’ve discussed previously, in lieu of a higher revenue share, some industry partners prioritize additional spend to promote their brand, global reach, and social impact initiatives, which is included as part of our operating expenses, primarily as sales and marketing efforts and content production.

The effect of these partners’ success has driven large, positive variances in our gross margin, most pronounced in our Consumer segment margin, while also increasing our operating expenses. In consideration of the long-term, strategic relationship, as well as the changing economic environment, our largest industry partner has chosen to receive a more standard revenue share arrangement as part of the recent contract negotiations. We are excited about the opportunities this renewed commitment provides, and I want to be clear about how this change will affect our financial outlook in 2023. First, the transition to a more standard revenue share will result in a geography shift within the P&L of an estimated 10 percentage points of total revenue, from operating expense to cost of revenue.

We now expect both total gross margin and our Consumer segment margin to be approximately 52% this year. Second, we will incur expenses of $25 million in 2023, which will be similar in nature to our historic spend for the program, including sales and marketing efforts, content production, and product development. These payments will be spread evenly across the coming four quarters and will not recur after 2023. As we work through these near-term impacts, we believe the multi-year contract extension is better aligned with our mutual priorities, reaffirms our strategic partnership, and allows us to best serve our learners and customers in years to come. Now, onto our financial outlook. For Q1, we are expecting revenue to be in the range of $136 million to $140 million.

For adjusted EBITDA, we are expecting a loss in the range of $12.5 million to $15.5 million, inclusive of the $6.25 million related to the industry partner contract change. For full-year 2023, we anticipate revenue to be in the range of $595 million to $605 million, representing approximately 15% growth at the midpoint of the range. For adjusted EBITDA, we’re expecting a loss of $26 million to $34 million, or a negative 5% adjusted EBITDA margin at the midpoint of the revenue and EBITDA guidance ranges, inclusive of the $25 million impact related to the industry partner contract change. On a quarterly basis, we expect an adjusted EBITDA loss in the first half of the year and anticipate positive EBITDA by our fourth quarter. Additionally, for the first time, we thought it would be helpful to provide our expectations around free cash flow for the year.

We expect a use of $12 million to $18 million, compared to a use of $52 million in 2022. Finally, as we enter a new year, we like to provide some color on the composition and pace of the business, particularly given the varying impacts of the changing environment across our platform. This includes one-time, segment-level annual growth expectations to help you better understand how we plan to deliver on our overall guidance. For Consumer, we believe that learner demand for our branded, industry credentials will continue, with our initial outlook anticipating more than 10% growth. For Enterprise, it is clear that businesses are being more cautious with their spending priorities, and we expect growth of approximately 20% to 25% as we monitor the environment closely.

And for Degrees, we anticipate a return to growth in 2023 of approximately 10%, with modest declines at the start of the year that inflect as we enter the second half. We are confident that the structural trends driving our business have not changed, and look forward to providing an updated view of our long-term strategy, key initiatives, and financial targets at the March Investor Day. We enter 2023 in a position of financial strength and are committed to driving sustainable growth, with our outlook reflecting an increased focus on scale and leverage to position us for the future. I’ll now turn the call back to Jeff for closing comments.

Jeff Maggioncalda: Thanks, Ken. Growth in online learning, in combination with remote work, digital jobs, and broadband connectivity, is reshaping the supply and demand for jobs globally. For many companies, human capital is their most important asset, and they now find themselves competing on a global stage for in-demand skills. This presents a challenge, but possibly a larger opportunity. Remote work provides direct access to sources of the best talent in the world, no matter where it resides in the world. And online learning can build the next generation of talent with the skill sets needed for future . I want to wrap up today’s remarks with a Coursera for Business customer example that is drafting a blueprint for how forward-thinking companies are managing their holistic talent needs.

Sanofi, one of the world’s largest pharmaceutical and healthcare companies, has been a Coursera customer since 2017. And over the years, our partnership has deepened and scaled. Early on, Sanofi focused on providing high-quality training around the latest data, digital, and IT skills. Later, this expanded into a broader talent development solution that reached more of their organization and demonstrated their commitment to employee well-being. And recently, their ambition extended beyond the confines of their organization as they looked to make direct investments in marginalized communities and to grow a future pipeline of diverse healthcare professionals. As part of this effort, our partnership now includes an eight-year initiative to offer 20,000 training licenses for Career Academy.

By leveraging Coursera as the delivery platform, they are broadening access to job-relevant training and enabling new career and degree pathways to learners in their company and in their communities as well. This is a complete talent solution: Advancing training for cutting edge skills. Learning as a benefit for broader organizational needs. And future talent pipelines, with diverse representation and a commitment to the communities in which they live and work. I’ve said many times that Coursera’s mission is what inspires our team members and attracts our partners, but it is also what enables our customers to fuel their human capital needs and improve lives through learning. With our Coursera community, encompassing leaders in higher education, government, and business, we are working together so that talent, and opportunity, can rise from anywhere in the world.

Now, let’s open the call for questions.

See also 15 Dividend Stocks That Also Beat the Market and 16 Largest Photography Companies in the World.

Q&A Session

Operator: Thank you Mr. Maggioncalda. We’ve take our first question this afternoon from Stephen Sheldon of William Blair.

Stephen Sheldon: Hey thanks. First, just wanted to ask about enterprise trends. As you talked about seeing more caution from business customers there, can you give some more detail about €“ on what that looks like? Are you seeing customers reduce the scope of contracts much or just being cautious about expanding, and also curious if you’ve seen any changes in gross retention, especially for some of your smaller customers?

Jeff Maggioncalda: Hi, Steve, this is Jeff. We, obviously going into Q4, we’re sure exactly how the year was going to finish up. It was pretty solid. We felt pretty good about it. To your point, there’s definitely, especially in certain regions, increase sensitivity on budgets, certainly budgets have tightened. In some cases, that has led to people saying, hey, I want to pull back on the scope . So that is not a total churn, but we saw pressure among many accounts and that did put some pressure on the NRRs, but we actually felt pretty good. In terms of the NRR, we saw that generally in emerging markets where you, sort of early markets like Coursera for campus and Coursera for government, especially Coursera for campus, which is still kind of in the early stages of higher education learning, have to incorporate these types of services, it was generally lower in more mature markets, like Coursera for business, it was a little bit better.

So, I would say that we feel pretty good coming into this year, and that doesn’t obviously mean that we didn’t see some pressure though.

Stephen Sheldon: Got it. That’s helpful. And then on this, the kind of the large partner, the extension and kind of the change in the contract there, just to make sure I understand, does that have any impact on total revenue or how much, kind of €“ or is it just more about, you know, what €“ it sounds like it might be a shift in expenses from, you know, out of OpEx in the core and cost of revenue, but then also maybe a total increase. I guess just can you walk through that one more time just to make sure we understand?

Jeff Maggioncalda: Yes, sure. And we wanted to be very clear about the seasons, Ken, of course. It was a shift in geography primarily from operating expense to cost of sales affecting margin of course. There is also for 2023 only roughly $25 million that will remain in operating expenses, incremental total expense if you want to think about it that way. So, there’s a transition period where there’s OpEx expense, but the majority of it is simply as you referenced a shift in geography from OpEx to cost of sales.

Stephen Sheldon: Okay, got it. And that will not continue in 2024. So, if we kind of looked at the €“ I guess, if we looked at the guidance and strip that out, then you’d be more or less I guess, yep, please.

Jeff Maggioncalda: Yeah. More or less is the answer. Yes. You understand it perfectly.

Stephen Sheldon: Okay. Great. Thank you.

Operator: Thank you. We’ll go next now to Josh Baer of Morgan Stanley.

Josh Baer: Great. Thanks for the question. Jeff, you outlined some of your key priorities for this year coming up. I was hoping we could like fast forward to Q4 2023 earnings where you’ll be reviewing 2023. Like what would a great and highly successful year for Coursera look like in your eyes?