Coursera, Inc. Q3 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to Coursera Third Quarter 2023 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 speaker’s prepared remarks, there will be a question-and-answer session. I’d like to turn the call over to Cam Carey, Head of Investor Relations. Mr. Carey, you may begin.

Hi, everyone. And thank you for joining our Q3 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 where this call is being simultaneously webcast. 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. 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 business, the anticipated benefits and impact of our strategic assets and platform advantages, our ecosystem, platform, content and partner relationships, our anticipated plans, our strategy and priorities, our share repurchase program, cash and capital allocation, and our vision for the future. Actual results could differ materially from those expressed or implied in these forward-looking statements due to various risks and uncertainties. We assume no obligation to update our forward-looking statements except as required by law. And with that, I’d like to turn it over to Jeff.

Thanks, Cam, and good afternoon, everyone. It’s great to be with you all. I am pleased to share that we delivered another strong set of results. We grew revenue 21% over the prior year, driven by 27% growth in our Consumer segment. We welcome 6.5 million new learners to our platform, our highest third quarter since the pandemic tailwinds of 2020. And once again, we are raising our outlook on revenue and adjusted EBITDA as our business model scales. We are delivering these results against the backdrop of a dynamic macro environment, which has reinforced my confidence in our vision for the future of higher education, the strategic assets that differentiate our ecosystem with quality, trust and world-class branded credentials and the global need for a platform like Coursera. We have a lot to cover today, so let’s jump in, starting with the long-term trends that are driving our business. The first trend is digital transformation. For many years, the combined forces of technology, globalization, and automation have been accelerating the transformation of every institution in our society. More recently, the explosive adoption of generative AI is demonstrating how profoundly this new technology will reshape how we live, learn, and work. A McKinsey global survey on AI published in August showed that nearly 80% of respondents reportedly had some exposure to generative AI, either for work or outside of work. Ultimately, we believe increased demand for education will be driven by an unprecedented rate of change as every facet of our society, including businesses, governments, and academic institutions, grapples with the need to improve their productivity and human capital in this new world of generative AI. This change in our society brings me to the second major trend which is skills development. The rapid adoption of new technologies creates an urgent need for organizations and individuals to remain competitive. The McKinsey survey found that high-performing organizations expect to re-skill more than 30% of their workforces over the next three years as a result of AI adoption. For businesses, learning and development leaders will play a crucial role in building organizational agility. This will include rapidly deploying new technologies, adapting to change, and unlocking new talent. But businesses are not alone; governments will need to deliver job training programs at the speed and scale required to keep pace with job dislocation and changes in unemployment. Academic institutions will also adjust to meet the needs of graduates and the employers who hire them. Arguably, generative AI will have a larger impact on higher education than COVID did. A recent study assessed the impact of generative AI on over 800 job roles and concluded that 11 of the top 13 most impacted roles are college professors in post-secondary education. This leads me to the third trend, the transformation of higher education. Our vision requires cross-sector collaboration to meet the needs and pace of a fast-changing economy. In past quarters, I’ve discussed our growing partnerships with international institutions. This quarter, I am excited to share a blueprint for reimagining higher education in the Texas state system. Coursera has partnered with the University of Texas System for a comprehensive micro-credential program. This quarter has expanded into a system-wide project providing access to over 240,000 learners. Our partnership integrates over 40 entry-level professional certificates into the curriculum. We designed Career Academy to be a scalable solution for our customers and the value of this offering is continuously enhanced every time we launch a new certificate. Our partnership with Texas brings together the vision of Coursera’s ecosystem, including broad access to high quality education, collaboration with industry experts, and innovation at the scale of an entire state. Now let’s cover some of our recent progress for each of these categories. First, educator partners. In a world where machines can produce content at scale, we believe trusted institutions will continue to play a critical role in education. Coursera is the steward of over 300 of the world’s top university and industry brands. Today we have 44 entry-level professional certificates live on the platform, including new titles from Microsoft and Tableau. Our relationship with AWS seeks to serve our learners at every stage of their career, providing foundational skills for a cloud career with existing advanced content already available on Coursera. Now let’s discuss degrees. We announced four new degree programs in Q3 from new and existing partners. The college degree needs to be more accessible, affordable, and relevant. We have spent much of this year laying the groundwork for how our platform can address the needs of working adults. Coursera is pioneering a new type of degree we call Pathway Degrees, designed to meet the needs of working adults. These degrees incorporate credit pathways from our open content on Coursera into college degree programs. One example is our degrees with Illinois Tech where over 10 pathways from our industry content are being created. So that recaps our progress with our catalog, now let’s move to our second major advantage, the global reach of our platform. We increased the number of Paid Enterprise Customers to over 1,300, with many recent additions driven by momentum in our campus vertical. Growth continued with double-digit percentage increases across all regions. This year, we have been investing in strategic priorities focused on enhancing the localized learner and customer experience on Coursera, including our AI-powered language translation initiative. We believe education should be accessible to learners regardless of language. We set an ambitious target this year to deliver more than 2,000 full course translations. I am pleased to share that we launched more than 4,000 full course translations in multiple languages. Feedback has been favorable, and we are working on a human-in-the-loop process for quality improvements. Additionally, we are pursuing ACE credit recommendations for our popular certificates, achieving European Credit recommendations for 12 professional certificates. Finally, we continue to integrate generative AI into our product experience with improvements in personalized learning. In summary, key priorities for the future include enhancing our catalog, sourcing new degree programs, growing our Enterprise segment, and harnessing AI technologies. I’d now like to turn it over to Ken.

Thank you, Jeff, and good afternoon, everyone. I am pleased to report another strong quarter of performance for Coursera. Our diversified platform continues to serve us well, providing multiple growth opportunities and producing financial and operational leverage. This is leading us to raise our revenue and adjusted EBITDA margin targets for the full year. Our third quarter performance is highlighted by durable demand, solid execution, and increased confidence in our Consumer segment. We believe we are in the early stages of a long-term trend in education where learning units are becoming more affordable and relevant credentials that can unlock jobs or lead towards college degrees. In Q3, we generated total revenue of $165.5 million, up 21% from a year ago, driven by double-digit increases across all segments, particularly in consumer. Gross profit was $84.9 million with a 51% gross margin. Operating expenses were down overall, with net loss of $2.1 million or 1.3% of revenue. Free cash flow was $15.6 million during the quarter, compared to $1.3 million a year ago. We ended the quarter with approximately $721 million of unrestricted cash with no debt. Additionally, we continue to make progress on the share repurchase program. In Q3, we bought back approximately 300,000 shares at an average price of $12.67 per share. Our capital allocation priorities remain unchanged, focusing on both investments in organic growth and the resilience provided by a strong balance sheet. Next, let’s discuss the performance of our segments in detail. Consumer revenue was $99 million, up 27% from the prior year. Demand remained strong for our portfolio of entry-level professional certificates. Segment gross profit was $51.8 million or 52% of consumer revenue, reflecting impacts from the industry partner contract extension. The strategic focus on high-quality credentials has distinguished our Consumer segment. Now, let’s move to Enterprise. Enterprise revenue was $54.9 million, up 14% from a year ago, with a total number of Paid Enterprise Customers increasing to 1,315, up 21% from a year ago. Our Degrees segment revenue was $11.7 million, up 13% from a year ago with a total number of Degrees students growing 15%. For Q4, we expect revenue to be in the range of $161 million to $165 million. We are increasing our outlook for both revenue and adjusted EBITDA. We now anticipate revenue to range from $628 million to $632 million, representing about 20% growth. We aim to be EBITDA positive for the full year 2024. We are excited about our long-term strategy and the opportunity to transform the education market. I will now turn the call back to Jeff for closing comments.

Thanks, Ken. To conclude, I’d like to highlight a partnership that demonstrates how our platform is impacting the next generation. Coursera for Government has partnered with the Nevada Department of Employment to launch a program that provides free job training to unemployed Nevadans. The program aims to equip young adults, ages 18 to 24, with skills to unlock well-paying careers. We are excited about the inclusion of our entry-level professional certificates designed for learners with no college degree. The first phase launched in Clark County in September and will expand statewide. This is another example of how Coursera partners with organizations to deliver impact to their communities. Now, let’s open the call for questions. Thank you.

Thank you. We will take our first question from the line of Stephen Sheldon with William Blair.

Hey. Thanks. Great results here. First, I just wanted to ask about generally how you are thinking about the resiliency of Consumer revenue growth. Do you think there could be some slowdown, especially if industry job openings pull back? So, generally, how do you think about the consumer segment heading into 2024?

Yeah. Hey, Stephen. This is Jeff. We agree. Consumer has been very strong. It seems these professional certificates resonate with people who are looking for better job opportunities. If there were fewer job openings, it could impact interest, but we don’t see a reason for slowdown in this demand. The growth in North America and Europe across these professional certificates remains solid.

Great. Yeah. That’s really helpful. And then, great to see the progress on translating courses into other languages. Curious what feedback you are getting about the quality from learners that have engaged with it so far.

We have been able to look at the quality ratings from translation providers. Certain language pairs, such as English to Spanish, are translating very well while some others, like English to Thai, need improvement. Overall, feedback has been positive, and we are implementing a human-in-the-loop process where learners can provide feedback on translations. We aim to continuously enhance quality as new models improve.

We see increasing demand and likely faster development cycles due to generative AI, which will make content building quicker and cheaper. This growth in professional certificates is anticipated to continue.

Great to hear. Appreciate the color.

We will take our next question from Josh Baer with Morgan Stanley.

Great. Thank you for the question and congrats on the outperformance in the quarter and Consumer acceleration. I did want to ask on Degrees. If you could talk through any changes you are seeing regarding Degree performance?

Yes. We are seeing good progress in our Degrees strategy, but growth has been a bit more variable than expected. Our Q4 guidance suggests mid-single-digit growth for Degrees, which is not where we anticipated at the start of the year.

When we look at different populations of Degree programs, those with pathways show better recruitment results. However, traditional Degree programs without pathways face headwinds amid a tight labor market.

Got it. Very helpful. And then on Consumer with just the impressive growth. Is there any need to moderate expectations on that trajectory of growth?

We are pleased with Consumer growth and will provide overall guidance in the coming quarter. The momentum continues, and we remain optimistic.

The underlying reasons for the growth are associated with job seekers looking for affordable, flexible ways to switch careers. As such, we don’t see this changing. We are also seeing returns from paid media fairly positively, which helps to sustain this growth.

We will take our next question from Jeff Silber with BMO Capital Markets.

Thanks so much. Your growth has been strong. Do you have the infrastructure specifically to continue this strong growth?

During the pandemic, we learned that a remote-first structure allowed us to be productive and draw from a diverse talent pool. We are seeing no major constraints on talent recruitment, and I foresee that continuing into the future.

We will take our final question from Taylor McGinnis with UBS.

Can you talk a little bit more about how budget discussions are going and some of the competitive dynamics? Do you see a line of sight to stabilization?

It’s competitive out there, especially in Coursera for Business. While we’ve seen improvement in some areas, there remain challenges. It’s early to declare stabilization, but we do see some positive signals.

Generative AI is causing a shift in interest from companies to develop their workforce. This is leading to emerging discussions about skills training that could also positively impact our business.