Earnings Call Transcript - COUR Q2 2021

Operator, Operator

Thank you all for joining us for Coursera's Second Quarter Fiscal Year 2021 Earnings Call. I would now like to hand the call over to Cam Carey, Head of Investor Relations. Mr. Carey, please proceed.

Cam Carey, Head of Investor Relations

Hi, everyone and thank you for joining our Q2 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 your 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. Additionally, downloadable versions of our prepared remarks and supplemental slides have also been made 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 located at investor.coursera.com. Please note that all growth percentages refer to year-over-year change unless otherwise specified. Additionally, I’d like to remind you that all statements made during this call that relate to future results and events are forward-looking statements based on current expectations. Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our press release, SEC filings and supplemental materials. These forward-looking statements are not guarantees of future performance or plans and therefore, investors should not place undue reliance on them. We assume no obligation to update our forward-looking statements. And with that, I would like to turn it over to Jeff.

Jeff Maggioncalda, CEO

Thanks, Cam and good afternoon everyone. We appreciate you joining today’s call. Coursera’s number one goal has been and always will be to serve learners. Working closely with our educator partners, we are working towards a world where anyone anywhere has the power to transform their life through learning. A year ago at this time, our platform served a critical role during one of the most challenging moments of the pandemic, as schools and offices closed and learning and work shifted online; both individuals and institutions turned to platforms like Coursera. And today, I am really excited to talk about unlocking the next phase of opportunity, the transformation of higher education and adult learning more broadly. For our Q2 results, I am pleased to report another strong quarter. We grew quarterly revenue 38% year-on-year to $102.1 million, crossing the $100 million mark for the first time. Performance was strong across the business with sustained momentum in each of our segments: consumer, enterprise and degrees. Institutions, including business and governments, are using Coursera to launch large-scale reskilling efforts, and individual learners are coming to the platform to upskill for high-demand digital roles. In particular, we continue to see strong interest in our growing portfolio of professional certificates, which are redefining the opportunities people have to get fast growing digital jobs. These credentials, created by some of the greatest global brands, including Google, IBM, Facebook and others, allow a learner with no college degree or prior industry experience to develop the skills required for an entry-level digital job fully online in less than a year. But a career pathway isn’t the only option. In addition to these career pathways, we are collaborating with universities to offer degree pathways that enable learners who finish Professional Certificates to earn academic credit towards a college degree if they want to continue with their education. This kind of institutional collaboration, among universities, industry and governments, enabled by Coursera’s three-sided platform, makes higher education more flexible and affordable. We believe greater flexibility, accessibility and job relevance is the future of higher education and adult learning. As we look to the future of learning and work in a world reshaped by the pandemic, technology continues to emerge as the primary driver of both cause and effect. Technology is accelerating change and transformation around the world, destroying jobs and creating new demands for knowledge and skills. It is also the means by which society is adapting to this accelerated change. Online learning has the potential to enable anyone anywhere to access a new world of educational opportunities and remote work has the potential to enable anyone anywhere to access job opportunities if only they have the knowledge and skills required to perform them. I would like to take a few minutes to discuss in more detail the fundamental forces we see at play. First, our world is accelerating, driven by technology and globalization. This force of technology, especially the Internet, cloud computing and AI continues to transform industry after industry. Over the last year, we have been fast-forwarded to a new normal of online learning, digital skills, digital jobs and remote work. The pandemic is ushering in a new world of remote work which is fundamentally changing not only how companies work, but also who they can hire as employees. The pandemic has amplified the criticality of technology and digital tools in the way that we all work. By separating work from place, the pandemic and remote work have opened new opportunities for companies to build more diverse distributed workforces. We believe that companies that harness the potential and the power of a truly global talent pool, not just those fortunate enough to live near the corporate offices, will gain access to greater talent at lower cost than those companies who do not. Individuals who harness the power of online learning to acquire in-demand knowledge and skills will be rewarded with a growing selection of job opportunities as more remote jobs become available around the world. We believe technology is both lowering the cost and increasing the benefit to education. In this sense, technology is increasing the return on investment of education on a global scale. This leads me to a second trend. As the world becomes more digital, jobs that are repeatable and predictable are being automated by technology. Recently, a McKinsey Global Business Executive Survey found that 67% of employers have accelerated automation and AI deployment during the pandemic. The jobs most at risk of being automated, like freight movers, retail clerks, and waiters, are typically held by lower skilled workers making lower wages. These are also the jobs that have been most impacted by COVID-19, leading to businesses and governments around the world looking to upskill people so that they have the knowledge, skills, and credentials to enter digital jobs. In June, Coursera published our 2021 Global Skills Report, which draws on the performance data of millions of learners on the Coursera platform to benchmark skills proficiencies across business, technology, and data science domains for over 100 countries. These insights provide us with a glimpse into what our post-pandemic world might look like. First, the pandemic created a complex economic landscape that threatens to leave millions of workers unprepared for the digital future. In the report, there was a stark contrast between the hardest hit sectors, such as tourism, retail, and construction, and positive job growth in industries like technology and finance. These shifts in the economy are expected to persist, employing a difficult uphill climb for displaced workers. But on a positive note, our research shows that the top skills needed for entry level jobs of the future are more accessible than commonly thought. Our data suggests that these digital skills are attainable and can be learned in as little as 35 to 70 hours, not years of online learning. The impact did not stop at low-skilled roles. Our data also shows that the pace of change is requiring every person in every job to keep learning throughout their life to stay relevant as organizations evolve and business models adapt to a changing economy. This is particularly important for learners that pursue careers in fast-moving domains like technology and data science. In these disciplines, the median half-life of a skill or the number of years it takes for a skill to reach half of its value in the labor market is about seven years shorter than the half-life of a skill outside of these domains. Our Global Skills Report points to a growing divide between countries. For example, high-skilled countries' skill proficiency on Coursera is associated with superior performance on the Global Innovation Index, higher labor force participation, reduced concentration of wealth, and increased economic output. During the pandemic, Coursera offered our global workforce recovery initiative to help governments stabilize their workforce and boost their economies' resilience through job-relevant training. We expect this need to continue in the coming years with governments undertaking large reskilling initiatives. In many ways, the pandemic has accelerated trends that have been at play for decades. We believe this moment presents a unique opportunity to build a more inclusive, modern, and scalable education system, which brings me to my third dynamic at play here, the digital transformation of higher education. Higher education, one of the largest industries in the world at $2 trillion, has seen relatively little innovation. We believe the world needs high-quality education to be more accessible, and the need for this kind of change has never been more urgent. Traditional college degrees are not affordable to many people. Their episodic structure doesn’t meet the needs of continued lifelong learning, and they do not provide the flexibility previously desired, but not required, by working professionals who do not want to quit their job or relocate to get a college degree. As our Q2 results demonstrate, the Coursera platform is playing an increasingly important role in enabling the digital transformation of higher education. Unlike other platforms, we are an enabler, not a disruptor. We work directly with leading universities, businesses and governments to equip them with the technology, skills and insights they require to better serve the needs of learners. Let me share some updates on the progress that we have been making to expand and enhance the value of the Coursera platform. The Coursera platform centers on three primary advantages: first, the leading educator partners that are attracted to Coursera by our global reach; second, the quality and breadth of the content and credentials that they have created; and third, the technology and data that powers this global platform. First, our expanding ecosystem of educator partners continues to attract a large growing learner base and global reach. We now have 87 million total registered learners on the platform, with the vast majority coming from outside of North America. These learners are served by a growing list of more than 200 university and industry partners. As I shared on the last call, we announced 10 new university partners in conjunction with our Coursera conference held in April. We are also collaborating with a number of new industry partners in recent weeks, including Intuit, Infosec, Tencent, and Blue Prism. For industry partners, the development of these high-quality branded courses and credentials is becoming a business imperative. Coursera’s skill and reach allows them to build a global community of developers and users critical to growing their ecosystems. Additionally, it allows them to specifically address the growing job displacement that their technology, automation, and platforms have been creating in the pursuit of economic progress and efficiency. With their job-focused credentials and career pathways, our industry partners are increasingly becoming part of the solution, helping to develop in-demand skills that prepare learners for career changes and advancement. This brings me to our second strategic advantage, our broad catalog of world-class content and credentials created by these educator partners. Our stackable system of branded high-quality freemium content enables us to attract learners at low cost and serve them at a range of price points. Learners come to Coursera for our freemium content and bite-sized learning, including hands-on projects and short courses, enabling us to grow our top of funnel and attract registrants. As these learners look to progress in their careers by earning more valuable credentials, we aim to maximize lifetime value with the premium credentials from our partners including specializations, professional certificates and fully accredited Bachelor’s and Master’s degrees. Our catalog continues to grow. In the past two months, we announced new certificates from our university and industry partners, including four certificate programs in the high-demand fields of business, strategy, marketing, and product management from our new university partner, the Indian Institute of Management, Kozhikode. We have also added new entry-level professional certificates, including the bookkeeping professional certificate from Intuit and a marketing analyst professional certificate from Facebook. For degrees, we announced global masters in English language teaching leadership from Tomsk State University in Russia, which, in addition to the five-degree programs announced at the Coursera Conference in April, brings our total portfolio to 31 degree programs, 19 of which are outside the United States. Now, on to our third major advantage, which is our platform. This world-class content is delivered on a system of technology and data that underpins the Coursera learning platform. We continue to enhance the experience of our learners, institutions and educator partners as well as the scalability of our model. For learners, we recently expanded the availability of Coursera Plus as a monthly subscription, offering unlimited access to more than 3,000 courses and all of our guided projects for one all-inclusive accessible price per month. We see early evidence that Coursera Plus is improving retention of paid learners. Additionally, we are investing to localize the learner experience in fast-growing economies like India, including payments, pricing, partnerships, and content discoveries. These localization efforts appear to be improving conversion rates in our consumer segment. For institutions, we launched three academies earlier this year, the Data and Analytics Academy, the Cloud & IT Academy and the Software Engineering Academy. These academies offer companies a skills-first approach to enterprise learning, focusing first on the critical roles that need skilling, then specifying the skills and proficiency levels needed for those roles, and then finally, linking the skills to content that teaches those skills at the appropriate proficiency level. We believe our broad catalog and our skills graph that connects roles to skills to content makes Academies and SkillSets a differentiated offering and they appear to be resonating in the marketplace with more than 70 enterprise customers using them in Q2. For educators, we are making it easier to bring their content to Coursera. In June, we announced general availability of our new learning content ingestion solution. This feature allows educators to more quickly migrate large amounts of online content between a learning management system and Coursera and currently supports content ingestion from edX, Canvas, Blackboard, Moodle, and others. Individually, our ecosystem of partners, world-class content, and technology are strategic advantages. But the real power is the way that these assets are reinforced by and leveraged across our single unified platform. There is a flywheel effect as a growing selection of content and credentials attracts more individuals and institutions, which in turn motivates our educator partners to create more content on the platform. This growing content, technology, and data allow us to better meet the needs of learners, educators, and institutions. That, in turn, fuels our business, increasing scale, reducing our acquisition cost, and ultimately maximizing the lifetime value of learners on Coursera. We believe the transformation of higher education is only in the early innings. Before I turn it over to Ken for a closer look at our financials, let me remind you of some of the key priorities we are focused on to drive long-term sustainable growth. First, we continue to invest in our enterprise sales force using a land-and-expand strategy to acquire new customers while growing our relationships with existing customers. In Q2, we increased the total number of paid enterprise customers to 584, a 109% increase over the prior year that included customers from all of our institutional categories. Large customers like Go1 in the UK and PwC ProEdge in the U.S. expanded programs with Coursera for Business, integrating Coursera into their digital upskilling enterprise products. Others like Pernod Ricard, a leading beverage company based in France, are using Coursera to upskill their technology talent in cutting-edge digital skills. Additionally, with Coursera for government, we launched large scale nation and state-wide reskilling programs including the government of Barbados National Transformation Initiative, the U.S. Tennessee Department of Labor and Workforce Development, and an expanded partnership with the Commonwealth of Learning serving 54 member nations. Finally, we are seeing strong adoption of Coursera for Campus with leading public and private universities worldwide. In one example, the Morocco Ministry of Education approved a Coursera for Campus deal, covering 13 leading universities in Morocco, reaching 80,000 students across the country starting with L'Université Hassan II de Casablanca. We are only in the early stages of our degree business and look forward to growing the number of students in our current programs while increasing the number of degree programs offered on our platform. The expansion of our program catalog includes the types of degrees offered, Bachelor’s and Master’s degrees, a greater variety of subject matters, as well as programs for more regions. We will continue to scale the Coursera platform, investing in growing our rich learner base, increasing our network of educator partners and their content and credentials, and expanding our reach into more countries and learners around the world. And now I would like to turn it over to Ken.

Ken Hahn, CFO

Thanks, Jeff and good afternoon everyone. We are pleased to report strong results in our June quarter. In Q2, we generated total revenue of $102.1 million, which was up 38% from a year ago, with consistent strength across all three of our business segments. This growth was on top of the 61% year-over-year growth delivered in the year-ago quarter, which was our first full quarter impacted by the COVID-19 pandemic. So we grew quite well over a tough comp. As Jeff mentioned, we have witnessed a global trend of learners, educators, and institutions looking to Coursera to provide the job-relevant skills required to compete in a post-pandemic digital economy. Given our broad catalog of world-class branded content and credentials, we’re able to meet their needs whatever the stage of their learning journey. Please note that for the remainder of the call, I will discuss key operational metrics as well as non-GAAP financial metrics, excluding pro forma adjustments unless otherwise noted. These non-GAAP adjustments remove only stock-based compensation and related payroll tax, nothing else. Gross profit was $61.8 million, up 60% from a year ago and 60.6% of revenue that is gross margin, which was approximately 810 basis points higher than the year-ago quarter. As a reminder, there are two components of our cost of services. The first is our content costs, which varies based on the revenue mix amongst our three businesses as well as the content margin rate within each segment. For example, our higher-margin Enterprise & Degree segment accounted for 39% of our overall revenue mix in Q2 compared to 32% in the prior year period. This long-term mix shift is key to our structurally expanding margins over time. Additionally, we see changes in the segment content margin rates, which continued to be a positive variance in the second quarter, particularly for our consumer business. Our consumer segment content margin rate increased from 54% in the prior year to 66% this quarter as learners consumed a larger proportion of content with lower-than-average content costs. The second component of our cost of services is our non-content costs, margins for which were roughly flat on a year-over-year basis at 9.6% of total revenue. Before moving to operating expenses, I’d like to remind you from our last call that we expected a large stock-based compensation charge associated with restricted stock units, for which amortization began with the completion of our IPO. This is typical for companies that make the IPO an RSU-vesting-trigger, which is a now-common practice due to employee tax considerations. As previously mentioned, the non-GAAP income statement measures that follow exclude stock-based compensation and related payroll tax, but I didn’t want to gloss over that GAAP expense. Total operating expense was $68.2 million or 67% of revenue compared to 66% in Q2 of last year. Sales and marketing expenses represented 32% of total revenue, slightly down from prior 33%. We continue to expect our overall sales and marketing spend in 2021 to represent a similar percentage of total revenue as in full year 2020. Research and development expense was 22% of revenue in line with the year-ago period. We expect our overall R&D expense in 2021 to represent a similar percentage of revenue as this quarter. General and administrative expenses were 13% of revenue versus 11% in the prior year, given incremental costs associated with being a public company. We expect this higher expense as a percentage of revenue to continue throughout 2021. Net loss was $6.9 million or 6.8% of revenue, and our adjusted EBITDA loss was $2.9 million or 2.8% of revenue. This is a very strong quarter for EBITDA margin, but importantly, I want to remind you of our consistent messaging on this metric and how we’re managing the business. In a brief time as a public company, and consistent with our operating framework before the IPO, we plan to deliver annual EBITDA margin improvement over the long term. As you’ll hear shortly in our outlook discussion, we continue to see 2021 as an investment year and our forward EBITDA guidance reflects this focus. We intend to invest our strong performance this quarter over the remainder of the year to: one, pave the way for future growth initiatives; and two, secure leadership in our large and rapidly evolving markets. This includes growing our learner base, customer base, expanding our partnerships and content offerings, and delivering new innovation on our platform. We believe that deepening our competitive moat and further defining our leadership position utilizing the strategic advantages Jeff articulated is the right answer for the benefit of all our constituents. That overarching comment made though, we plan to demonstrate scale and increased leverage over time, once again, targeting ongoing improving EBITDA margins on an annual basis. Free cash flow was a use of $8.5 million compared to $8.3 million provided a year ago. Turning to the balance sheet, we ended Q2 in a strong cash position. As of June 30, we had over $800 million of unrestricted cash, cash equivalents, and marketable securities with no debt. Combined with the strong performance in the business, this allows us to invest confidently in our future. Let me get into more detail on each of the business segments, starting with Consumer. Consumer revenue was $62 million, up 23% from the prior year. In particular, we saw strong demand from our career-oriented Professional Certificates targeted at entry-level digital jobs. As Jeff highlighted earlier, we continue to expand on these offerings with new and existing industry partners, building a wider portfolio of products aimed at the global reskilling opportunity. Additionally, we’re seeing increased adoption of Coursera Plus following the general availability of a monthly payment option for the subscription offering. Segment gross profit was $40.7 million or 66% of consumer revenue as we benefited from a lower content cost rate during the quarter. In addition to its financial contribution, our consumer business is a strategic asset, serving as a top-of-funnel source for our Enterprise and Degrees segments, and we added another 5 million new registered learners during the quarter for a total base of 87 million as of June 30. Next is Enterprise. Enterprise revenue was $28.2 million, up 69% from a year ago on a combination of strong renewals and growth in new customers. All three of our Enterprise customer categories, Businesses, Governments, and Campuses saw strong growth. The total number of Paid Enterprise Customers increased to 584, up 109% from a year ago, and our net retention rate for Paid Enterprise Customers was 114%. Segment gross profit was $19 million or 67% of Enterprise revenue, which was slightly lower on a percentage basis than the prior year period due to a large mix of indirect customers utilizing the Coursera platform in Q2 a year ago. Finally, our Degrees segment. Degrees revenue was $11.9 million, up 78% on skilling of prior cohorts and newly launched programs. Our total number of degree students reached 14,630, up 81% from a year ago. Segment gross margin was 100% of degrees revenue; students pay tuition directly to the university, and the university pays us a fee based on the tuition amount. Therefore, there is no content cost attributable to the degree segment. Now on to our financial outlook. As a reminder, we have fairly good visibility into revenue on a quarterly basis in both our enterprise and degree segments, so significant variance to expectations is most likely to occur in our consumer segment. Additionally, the Consumer segment is where we can experience seasonality. For example, last year, we saw a lower Q4 following a strong Q3. For the upcoming third quarter, we’re expecting revenue to be in the range of $105 million to $109 million. This represents a growth rate of 29% compared to last year at the midpoint versus Q3 of 2020. For adjusted EBITDA, we’re expecting a loss in the range of $7.5 million to $10.5 million, which translates to an adjusted EBITDA margin of negative 8.4% at the midpoint. For full year 2021, we anticipate revenue to be in the range of $402 million to $410 million, representing approximately 38% growth compared to last year at the midpoint of the range. As Jeff discussed earlier, this reflects the sustained structural demand we’re seeing for online learning as businesses, government, and individuals seek the skills required to compete in this economy. For adjusted EBITDA, we’re expecting a loss of $38 million to $44 million, or an adjusted EBITDA margin of negative 10.1% at the midpoint. This outlook for full year 2021 reflects ongoing investments in personnel-related costs, sales and marketing, product development, and general and administrative costs associated with being a public company. As a reminder, we do not optimize performance for any single quarter and will strategically invest for the long-term sustainability of our business. In 2020, this included substantial investments in our fourth quarter. We manage our business on an annual cadence for expenses and adjusted EBITDA. As I said earlier, we intend to demonstrate scale and leverage over time as our business grows. Before Jeff’s closing comments, I want to leave you with three important reminders about our long-term framework. First, our freemium model, global scale and singular unified platform allows us to attract new registered learners at low acquisition costs that support our high-margin businesses. Second, we expect to have clear forward visibility on our top line in the years ahead as our mix of revenue evolves, particularly our degrees business, which naturally and predictably builds over time. Third and finally, in addition to our rapid growth, we expect ongoing structural gross margin expansion over the long term, driven by revenue mix shift and our skilling platform. We see an enormous opportunity ahead of us. The impact of the pandemic was not temporary. It has accelerated both the pace of change and automation while amplifying the importance of digital skills and tools. This is a permanent acceleration and shift, requiring people to regularly enhance their human capital through lifelong learning. With our unique assets and skillable platform model, we’re well positioned to capture this growth while addressing the global need for high-quality education in collaboration with our partners. And with that, I’ll turn it back to Jeff.

Jeff Maggioncalda, CEO

Thanks, Ken. As a public benefit corporation, we have a legal duty to balance shareholder needs with the needs of society more broadly. At Coursera, we embrace this responsibility wholeheartedly. Before we open the call for questions, I want to share one of the most encouraging insights coming out of our Coursera Global Skills report. The dual impact of the pandemic and automation have disproportionately impacted women. Globally, women are more affected by job losses than men, and the total employment loss for women stands at 5% in 2020 versus 3.9% for men. In the U.S., despite an exodus of women from the labor market amidst the pandemic, there was also a sign of hope.

Operator, Operator

And with that, let’s get to Q&A. Could you please introduce the first question? Thanks.

Stephen Sheldon, Analyst

Thanks for taking my question. Really impressive results here. One of the financial metrics that really stands out this quarter is the gross margin in the Consumer segment. I believe this is the first time it surpassed 60% in a blue path that level. So you talked about some, but how should we think about the factors driving that between the source of content being consumed with I assume a benefit from more corporate versus university content being utilized and the impact of the subscription plans. Just any detail there and the potential sustainability of consumer gross margins at this level as we think about the next few years?

Jeff Maggioncalda, CEO

Great. Thanks, Stephen. Yes, this is Jeff. We definitely saw some strong performance in consumer, especially with the segment margin there. As Ken said, it’s basically a lower content cost on some of the content, and that content mostly at the Professional Certificates from industry partners, has had a disproportional uptake as people—some people are calling it the great resignation. A lot of people are thinking about switching careers and how they can get into a new digital career. It turns out that a lot of the content that our industry partners have been putting on is really relevant to those career switches who maybe don’t have a college degree. Often, the industry partners for various reasons have decided that the content cost would be a little bit lower. So it’s mostly a mix shift associated with the educator partners. In terms of the persistence, it’s really hard to say. It depends on how many people are coming to consume the content and from which educator part of the content is created. We’re at this point, when we think about our planning internally, we are not going to build in the persistent effect of this margin expansion that we see in consumer. At the same time, if the factors that have driven Q2 continue to persist in terms of people looking for this kind of content and consuming this content the way they have been, there is no reason that it should not persist, but we’re not counting that. It’s pretty early days and frankly, this was not something that we were anticipating in Q1. So, we will just have to see how this plays out.

Stephen Sheldon, Analyst

Got it. Makes sense. As a follow-up, it seems like you have more flexibility to strategically reinvest than you had originally planned, and there has been strong traction we’re seeing across businesses. So curious if you can give any more detail about where you might be ramping investments more than you had assumed when you last provided guidance?

Jeff Maggioncalda, CEO

Yes. I mean this is a story as the CEO; you really want to be thinking about: first, where the growth opportunities are; second, the confidence, magnitude, and immediacy of any potential growth that you get from an expenditure; and then whether it’s recurring or not because, obviously, recurring is a cost that’s a little bit hard to adjust. I think we have a lot of growth opportunities. Generally speaking, we typically look at things from a three-year perspective. On a three-year perspective, things aren’t changing that much. We’re mostly going to be investing along the lines of what we’ve talked about—really investing in our enterprise sales force, investing in product improvements, and helping to bring partners on board. I don’t think that you should expect any major difference in where we allocate the money. We might do it at a slightly quicker pace. But again, we want to make sure that we don’t outpace the growth that we’re seeing on the top line. We’re going to kind of take it quarter-by-quarter. As Ken said, we try to hit some targets on an annual basis for both revenue growth and expanded adjusted EBITDA margin, but no substantial differences in the way that we’re planning to allocate our growth investments.

Stephen Sheldon, Analyst

Great. Thank you and congrats on the results.

Ken Hahn, CFO

Thank you, Stephen.

Tom Singlehurst, Analyst

Good evening. Tom here from Citi. Thanks very much for taking my question. Maybe just on the consumer growth, I mean, obviously, a fabulous number both year-on-year and sequentially. I’m just wondering whether alongside the Professional Certificate impact that you highlighted, there was any sort of notable impact in international from ongoing lockdowns that might sort of give a temporary benefit as consumers or learners are stuck at home with less to do. That was the first question. I’ve got a follow-up with that. Okay, thank you.

Jeff Maggioncalda, CEO

Yes. So on that one, Tom, if you look at where the traffic is coming from and you look at the conversion rates and therefore, you look at some of the revenue coming in, it does not seem to be disproportionately associated with other countries going through successive waves of lockdown. Even as the U.S. is now looking at a successive wave, I mean the delta variant is obviously a bit different than the variants we encountered earlier. We think that it is less of an international thing than it is kind of a digital job reskilling thing. Plus, part of it too is a growing portfolio. The size of these Professional Certificate portfolios a year ago was maybe two or three; it’s now, I think, at 14, and we continue to get lots of interest from other industry partners wanting to build these entry-level on-ramps to new digital careers. But I would say it’s not really attributed to international.

Tom Singlehurst, Analyst

That’s very clear. And the second question actually linked to that is, I mean, historically, you’ve talked about roughly 1%, maybe slightly over, of total learners sort of becoming paying users in any particular period. I’m just interested whether this supernormal growth is a function of the number of paying users going up or just the amount paid by users going up, if that makes sense. So is the delta a bigger number of learners paying or just individual learners paying a lot more.

Jeff Maggioncalda, CEO

It’s a combination. As we grow this portfolio, I think there is something to meet more people’s needs. IBM has a cybersecurity analyst professional certificate, Intuit just put out a bookkeeping professional certificate, Salesforce just put out a sales operations specialist certificate. There is a growing number of career opportunities that you can skill for on the Coursera platform. I think that’s appealing to a wider audience. We have been seeing a bit more higher conversion rates than historically into these. There is a little bit of a conversion bump that we’re seeing. As Ken mentioned, on the Coursera Plus, some of our retention numbers are looking pretty good too. So it’s a combination of factors. And Ken, would you add anything to that answer?

Ken Hahn, CFO

No, nothing to add. That was quite clear.

Jeff Maggioncalda, CEO

It’s not a price increase. I’ll tell you that. It’s not that people are paying a higher price for what they are consuming.

Ken Hahn, CFO

It’s not a price increase, and it is not a surge in international. It’s better conversion, as you stated.

Tom Singlehurst, Analyst

Well, listen, thank you very much, and congratulations on the result. Appreciate it.

Ken Hahn, CFO

Thank you.

Rishi Jaluria, Analyst

Thanks. This is Rishi Jaluria from RBC. Your line is open. Let me only add to the impressive results that you put up. Wanted to first maybe ask going back to the government opportunities that you highlighted, some of the deals that you had both domestically and internationally. But longer term, how should we be thinking about the opportunity with governments, especially Federal and State and local here, given the accelerated migration and adoption of digital transformation efforts with those? And then I have got a follow-up.

Jeff Maggioncalda, CEO

Yes. I think that, Rishi, it’s kind of interesting. Our content catalog two years ago, three years ago, when we sold into Coursera for government, it didn’t have a lot of these entry-level Professional Certificates that don’t require a college degree. It was mostly like advanced machine learning and much more advanced topics in data science, computer science, etc. I do think in the last 24 months, the relevance and attractiveness of the content to governments looking to get people employed in new careers has gone up, and that’s one of the factors. I think another thing that in the U.S., but this is also true internationally, government training programs have historically not been online. It was largely the pandemic; a lot like universities that had to close their campus and were forced to go online. Governments obviously could not conduct face-to-face training and were forced to go online. I think there is a confluence of government saying, hey, we can get more scale at lower cost if we do this online, which we have now tried because we were forced to. The relevance of the content is pretty high because these are digital jobs, and we are learning digital skills, and you can do that on a digital platform. I would say that we are still in the early stages of adoption. A lot of governments tried this during 2020 when we did our workforce recovery initiative. It was a free version for government. We are getting wins. I mentioned the Coursera deal with Morocco, where the Ministry of Education did a deal for the universities in Morocco. It’s kind of a government university institutional collaboration. They are trying to up-level their entire higher ed system; that will be pretty interesting because it plays to two of our big strengths in government and in campus. I think for governments upskilling their own civil service workers, that will come along. And then for trying to get people reemployed, again, I think this entry-level certificate portfolio that we are developing with these industry partners is looking attractive. I would say it’s kind of lumpy; it’s early days. We think we are pretty well positioned, and we think the future will look a lot different than the past in terms of how governments go about this.

Rishi Jaluria, Analyst

Alright. Great. That’s helpful. Thanks. Then just any comments on changes in the competitive environment, especially with 2U's acquisition of edX, just how should we be thinking about that, especially given the fact that they are also in a number of segments that you also play in? Thanks.

Jeff Maggioncalda, CEO

Yes. The competitive environment, I guess, there are a few things that sort of in which region, for which products, and where do we have the advantages. I also think that in the case of 2U and edX, both of those players were in the market. Now they are one entity, before they were two different entities. But it's not really the introduction of a new entrant. We are seeing a lot of new entrants. Everyone kind of knows this, but the VC's are definitely funding a lot of EdTech around the world—in China, in India, in Latin America, in the U.S., etc. I would say that the competitive environment is definitely reflecting the size of the opportunity. I feel better about our competitive position now than I probably have in the last four years since I’ve been here. We are feeling pretty good. We do think we keep on saying the same things in the script about our competitive advantage. But we are a little single-minded about this. We have built this three-sided model over the last four years. It’s all organic. We have been really integrating all these pieces so that benefit in one segment of our business will basically turn into an advantage in another segment. Those are starting to click pretty decently. So, I love the model. More people will be adopting our kind of a model, and we are pretty well ahead. We have designed in a way that the pieces really reinforce each other. So, I am liking where we are right now.

Rishi Jaluria, Analyst

Alright. Wonderful. Thank you so much.

Josh Baer, Analyst

Thanks for the question. A lot of focus on consumer, which is definitely was a highlight in the quarter, but I want to ask one on degrees. I was hoping you could unpack what’s going on in that segment a little bit. Of the 31 degrees, any context for how many are fully ramped? If we look at the student growth, is there a way to break down that enrollment growth coming from new degrees, ramping degrees, or like a same-store sales like enrollment looking at programs that were in place?

Jeff Maggioncalda, CEO

Yes. Great. Thanks for the question, Josh. I’ll take a first crack and then turn it over to Ken. Today, we have about 31 degrees that have been announced, 16 are live. Last quarter, 16 were live. A year ago, Q2, 12 were live, and 20 were announced, 12 were live. We have really been building up the pipeline and the announcements, and these degrees are not in production, but many of them are not yet live. To answer your question, a lot of this learner growth is coming from the expansion of cohorts in existing programs, more so than new programs. Even in an existing program, some of it is an expansion of a given cohort. Over a two-year program, you’ll actually have new cohorts starting for two years until it hits a steady state. It is more filling up cohorts and for a given degree program that’s already launched, it’s getting to sort of a steady-state maturity than it is new students coming into new programs. The difference between 31 announced and 16 live means that a lot of them are going to be going live. I think we will see more of a contribution from new degree programs. But that’s not really what’s being reflected in the degree revenue numbers right now.

Ken Hahn, CFO

So I agree generally. We haven’t, Josh, released that kind of data on what’s fully ramped and what’s contributing. It’s a small minority that’s fully ramped. So to take one step further on what Jeff was saying, there are new ones that have been signed but have yet to be implemented. As you understand from your question, then you have to ramp all the cohorts until you get to a full two-year degree, a full set of two-year cohorts. We have not disclosed that. The business is just too early. I do believe we are going to add additional color going forward, but we are going to wait until the business is a little bit bigger to start creating a lot of that detail. But it’s a bit more than a handful that are fully ramped. It’s very early for our degree business.

Josh Baer, Analyst

That’s very helpful, even just seeing all the different kinds of vectors of growth within the existing programs. And just as a follow-up, just wondering if you are seeing any changes as far as your ability to source students from your registered learner base, maybe with some of the different geographies becoming more back to normal related to COVID, and wondering how that ability to find those students might change as you scale?

Jeff Maggioncalda, CEO

Yes. I think it’s going to be a combination. On the one hand, as we develop the registered learner base, while they are a bigger pool, the selection will facilitate acquisition of degree students. At the same time, I think there will be a continuing competition. There are definitely more universities putting degrees online. There are other players. We really like our model a lot. If you look at the expected percentage of sales and marketing going towards revenue, it’s down a bit on some good top line growth in Q2. We’re not seeing anything that suggests at this stage of the game that this model is going to lose the leverage that we have been seeing so far. We think about how many registered learners come from unpaid sources. We consider customer acquisition cost per degree student. We look at sales and marketing as a percentage of revenue. All indicators are feeling good, and we are confident in the model.

Josh Baer, Analyst

Thank you.

Operator, Operator

We have our last question coming from the line of Terry Tillman with Truist. Your line is open.

Joe Meares, Analyst

Hi guys. This is Joe Meares on for Terry. Thanks for taking the question. Could you please expand a little bit on that recent blog post you guys have on a North American transaction?

Jeff Maggioncalda, CEO

Ken or Cam, you said North American transaction.

Ken Hahn, CFO

Yes. Is this number of customers and the customers we announced in June?

Joe Meares, Analyst

I believe so, yes.

Jeff Maggioncalda, CEO

Cam or Ken, don’t you try to get that back and then I will take another question.

Ken Hahn, CFO

Yes.

Joe Meares, Analyst

I just had a follow-up on the Degrees business. Is there anything delving into seasonality in the June quarter? I think it was down slightly quarter-over-quarter. Is there anything specific going on there or is that just kind of more of a lumpy business right now because it’s new?

Jeff Maggioncalda, CEO

Yes. We definitely see a seasonality in terms of when students are enrolled in the program and when they are paying tuition. So, in the summer months, sometimes it lightens up a little bit. That’s probably what we are seeing.

Joe Meares, Analyst

Great. If I could just follow-up with a question about investing in the business. How should we think about investing for growth going forward versus operating leverage into the second half of ‘21 and beyond?

Jeff Maggioncalda, CEO

Yes. Ken, you touched on this a little bit, but you want to take a crack at that?

Ken Hahn, CFO

Yes, sure. To break down the numbers a little bit, if you look at the guidance we gave for the year in the last earnings call, the midpoint of the range had a negative 13.1% EBITDA margin. The new guidance has it at negative 10.1%. We are definitely dropping some of it to the bottom line. We are not in a hurry to get to profitability. We are not burning much cash. We think the opportunity is amazing, and we have a bunch of opportunities to invest into these moats in this competitive advantage that we think. The more we do that, the better it’s going to be for all of our constituents—certainly, shareholders included but learners as well with our success. We are seeing some additional leverage. It’s going to drop down. We have committed to increasing profitability on an annual basis from here on out. It’s going to come a little bit sooner because we have taken another 300 basis points of EBITDA margin this year for the full year. Everything else we are trying to invest as quickly as we can for growth for the future. Does that help?

Joe Meares, Analyst

It’s very helpful. Thanks so much, guys. Appreciate it.

Jeff Maggioncalda, CEO

Sure.

Operator, Operator

We have our last question coming from the line of Jason Celino with KeyBanc Capital. Your line is open.

Jason Celino, Analyst

Great. Thanks guys for taking my questions. First one, 105 net new enterprise customers quarter-over-quarter, a new high watermark from a net adds perspective. It’s the second quarter in a row of acceleration for the Enterprise segment. How much of the strength is from maybe some of the sales investments that you made at the end of 2020 versus just the overall uptick in skilling trends?

Jeff Maggioncalda, CEO

Yes, Jason, thanks for the question. I would say the number of paid customers is indicative, but certainly not perfectly reflective of what’s really going on. I wouldn’t put a ton of emphasis on that because some of those might be bigger deals, some of those might be lower deals, smaller deals, etc. The revenue growth has been pretty decent year-on-year. Enterprise is up 69% in Q2 2021 versus last year. So, where is that revenue growth coming from? It’s a combination. Clearly, we are ramping up our sales team around the world. As they ramp up, they can go out to market and hit their quotas and all that stuff. We are also really trying to advance the platform and have products and services for businesses that are skills-oriented and for governments that have the right portfolio. Our ability to position the product has improved. I feel like we are seeing pretty strong growth on a number of different dimensions, none of which fully explains the story. I feel like it’s pretty balanced, and I’m happy with that level of balance.

Jason Celino, Analyst

Great. And then you mentioned a few country examples, but where are we in terms of international localization efforts?

Jeff Maggioncalda, CEO

Still fairly early days; we have created a global team because we want to have one platform. When you localize, you want that to be a set of configurations, so that the code could support different localizations. We have a global team, a dedicated centralized team that’s building localization capabilities. We are working on those and turning those things on in certain regions first. The first region we are focused on is India. I mentioned in the script that we are doing a lot on payments, currency wallets, and different forms of billing. We are in the early stages, but it’s a good investment for us to make anywhere. We think that we are just scratching the surface of some pretty simple things: show different content, different credentials, and offer different prices in different currencies to improve conversion rates in different regions. Looking good.

Jason Celino, Analyst

Excellent. Thank you.

Operator, Operator

We have our last question coming from the line of Ryan MacDonald with Needham. Your line is open.

Ryan MacDonald, Analyst

Hi. Thanks for taking my question. Congrats on an amazing quarter. Jeff, you talked a bit earlier on the degrees business about the number of announced degrees versus the 16 live today. As we think about the additional 15, can you talk to the expected cadence of those going live? Are the majority of these expected to hit sort of in the fall semester here versus 2022? As a follow-up to that, how is the pipeline of online degree programs looking right now as you think about out to 2022? What are you seeing in terms of mix versus grad versus undergrad or domestic versus international? Thanks.

Jeff Maggioncalda, CEO

Good. Alright. Let me see if I can give you a high-level helpful answer to that. In terms of the kind of overall pipeline of when does an interesting opportunity turn into cohorts of student paying revenues, I would say that overall, at the top of the funnel, we see continued international interest in universities wanting to move things online. They are realizing there are risks to not having online because of the pandemic. The capacity is much greater, the cost can be much lower, and you can appeal to working professionals. I think the pandemic has forced universities to go online, and now they are realizing there are a lot of benefits to doing this. We continue to build up our team to do that, and I think that's going to bode well for the out-years. Among those announced degrees, which are public information, the number of live degrees can be seen on our website, which is why I feel okay stating there are 31 announced, with 16 live. Many of those we announced quite some time ago. We will see a reasonable amount of growth from currently announced but not live degrees.

Cam Carey, Head of Investor Relations

That wraps the Q&A today. A replay of this webcast will be available on our Investor Relations website, along with a transcript in the next 24 hours. We appreciate you joining us. Thanks.

Operator, Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.