$COUR Coursera IPO | S1-Breakdown

Briefly

Coursera is an online education platform that serves over 20M registered learners by partnering with 140 of the world’s best universities and education institutions.

Key Points

1. Coursera grew from 46 million total registered users in 2019 to 77 million in 2020, boosted from a typical 20% YOY growth to 67% by covid.
2. Last year the Degrees business of Coursera grew from $6 million to $12 million
3. Coursera did $293 million in revenue in 2020, and the Cost of revenue was $138 million. This cost of revenue is mostly paying universities their cut for their content. Universities are getting slightly less than half the revenue generated for the non degree courses on Coursera.
4. 86% of user acquisition is organic for Coursera, but they don’t list a channel breakdown unfortunately
5. They had a net loss of $67 million in 2020 and a similar loss each year before. However they spent $76 million on R&D in 2020 and their business fundamentals are strong. Their gross profit is at around 50%

• Founded Date: 2021 by Andrew Ng, Daphne Koller
• Total Raised: $443.1M + private transactions

Founding Traction

• Series A — 2012 at val. n/a, $.096 pps
• Series B — 2013 at val. $360M, $4.9 pps
• Series C — 2015 at val. $405M, $5.09 pps
• Series D/D1–2017 at val. ~$800M, $7.5 pps
• Series E — 2019 at val. ~$1.3B, $12 pps
• Series F — 2020, at val. ~$2.5B, $17 pps (source)

Coursera’s biggest institutional shareholders are New Enterprise Associates (18.3% of company stock), G Squared (15.9%) and Kleiner Perkins (9.2%).

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• The company is growing rapidly as a result of secular trends as well as the Covid-19 pandemic.
• It is operating in a huge addressable market that is likely to grow for the foreseeable future.
• Coursera enjoys many competitive advantages, among them a large, existing user base, price-to-cost advantages, and the ability to personalize content as a result of its trove of data.
• Given its scale, and competitive advantages, the company should win an outsized share of its market opportunity.
• However, because the company has not turned a profit, there is a chance that its stock may be too volatile in the near term. Buying when the company turns a profit is the safer bet.

The Mountain View, California-based company offers individuals access to over 4,000 Massive Open Online Courses (MOOCs) from 200 educational institutions and corporations. The company also offers over two dozen degree programs at prices lower than what a learner would pay at a traditional, in-person institution. As the company grows its offering, it will be able to compete head-to-head with other “online program management” (OPM) providers, such as 2U ($TWOU), which is already publicly traded, and Noodle Partners.

Ng’s shareholder letter in the S-1 articulated clearly just what the company is about:

“We believe that education is the source of human progress. In today’s economy in which the skills needed to succeed are rapidly evolving, education is becoming more important than ever. As automation and digital disruption are poised to replace unprecedented numbers of jobs worldwide, giving workers the opportunity to upskill and reskill will be crucial to raising global living standards and increasing social equity. Online education will play a critical role, enabling anyone, anywhere, to gain the valuable skills they need to earn a living in an increasingly digital economy.”

That strategy seems to be working. Coursera has more than 77 million students, more than most of its rivals. The company’s Coursera for Campus attracted 4,000 tertiary institutions from across the world. At the end of 2020, 130 of these institutions were premium subscribers. 2,000 businesses (including 25% of Fortune 500 companies) and 100 government agencies are also paying for Coursera’s enterprise offerings.

Unsurprisingly, that traction is reflected on the top line. In 2020, Coursera generated $293 million in revenue, up 59% from the previous year. Year-on-year user growth came in at 65%. However, the company extended free courses and features throughout the pandemic to gin up traffic. That led to higher costs and a loss of $66.8 million in 2020, up from $46.7 million in 2019. Free cash flow was -$26.9 million over the course of the year.

Operation

The company earned $293 million in revenues for the fiscal year ended December 31, 2020, up 59% from 2019. Net losses widened by about $20 million year-on-year, reaching $66.8 million in 2020. Revenues shot up as a result of the Covid-19 pandemic’s effect on traditional education. In tandem with rising demand, operating costs associated with the company’s services rose, largely driven by the freemium content and marketing expenses. Coursera added over 12,000 new degree learners across the two years ended December 31, 2020 at an average acquisition cost of just below $2,000. The number of registered users rose by 65% year-on-year in 2020. Coursera’s accumulated deficit since its founding stood at $343.6 million as of December 31, 2020. The company does not expect to turn a profit in the foreseeable future.

Product Stuff

The Strategy and Market Opportunity

Coursera is one of the most disruptive firms in the world. It has a flywheel approach to value creation, with significant price-to-cost advantages versus its competition. The company reported that about half of its new degree students in 2020 had been previously registered with Coursera and that its average student acquisition cost was less than $2,000. Its average student acquisition cost is lower than the industry standard. The edu-tech platform is able to efficiently acquire learners at scale because of the huge number of free, high-quality courses that it offers in partnership with top educational institutions and corporations; its ability to personalize content based on its wealth of data; the strength of word-of-mouth promotion by learners; the profitability of its affiliate paid marketing channel.

The platform offers a number of education tracks, for example:

• Specializations: A learner can pay between $39 and $99 a month for job-specific content across over 500 categories.
• MasterTrack Certificates: For a quarter to a year, a learner can earn a certificate issued by a university-issued certificate. Prices range from $2,000 to $6,000.
• Bachelor’s or Master’s Degrees: Fees range from $9,000 to $45,000.
• Coursera for Enterprise: Through this platform, businesses, educational institutions and governments can deploy content to their learners.

In response to the Covid-19 pandemic, Coursera partnered with over 330 government agencies across 30 U.S. states and cities and 70 countries as part of its Coursera Workforce Recovery Initiative, which gave governments the chance to offer unemployed workers free access to thousands of business, data science, and technology courses from companies such as Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL).

The company has 77 million registered learners, as well as over 2,000 businesses (including 25% of Fortune 500 companies) and 100 government agencies who paid for its enterprise offerings. The majority of its revenue (51%) was earned outside of the United States. Converting only a fraction of its 77 million registered users into paid users would change the economics of customer acquisition. The company’s present scale is a huge competitive advantage in the market.

A learner’s curriculum is designed to be “stackable”, which is to say that a learner can go through a domain in an incremental fashion. The company is able to leverage the huge volume of data it has accumulated from its over 220 million enrollments to personalize content. So, for example, Coursera’s Skills Graphs can suggest paths for job skills.

Coursera uses technology to drive down distribution costs, make content more affordable, extend access to less economically-endowed regions, help learners keep abreast of emerging skills, and grow its market opportunity. The Covid-19 pandemic has only accelerated secular trends towards the use of technology in education.

The size of the addressable market is massive and it’s easy to see why. An August 2020 study by the United Nations demonstrates the degree of disruption brought on by the Covid-19 pandemic: of the 1.6 billion students in 190 countries covered in the report, or 94% of the world’s students, were prevented from going to school because of Covid-19 pandemic related school closures.

• In 2017, the World Bank indicated that of the 200 million college students in the world, many do not have job-specific skills.

The Covid-19 pandemic and prior secular trends suggest that the future of education is in blended classrooms, job-specific education and continuous, lifelong education. Online learning platforms like Coursera will be the primary means through which educational content is delivered.

Globally, spending on higher education in 2019 was $2.2 trillion, according to HolonIQ. Spending on online degrees was $36 billion and is predicted to reach $74 billion by 2025.

With a huge, existing learner base; a strong brand; and the significant advantages detailed above, Coursera is likely to grab a significant amount of the market’s growth. Of the scenarios for the future of education, it seems that Coursera will continue to grow.

Coursera for Enterprises

In addition to its direct-to-consumer offering, Coursera provides Enterprise-level access to organizations so that their employees / members can use the platform for learning & development or enjoy it as a perk. Alongside the features available in the core consumer product, the Enterprise offering provides additional features such as:

• Private Authoring — the ability for all Enterprise customers to author courses and projects that are specific to and accessible only by the learners in their institution
• Custom Course Collections — surface specific, curated collections of courses to specific learner populations
• Academies and SkillSets — identify target skill proficiencies required for specific job roles and provide personalized learning paths to develop these skill proficiencies
• Dashboards — enable administrators to deliver tailored learning programs to specific learner groups, measure and track progress in skill development, and benchmark learner skill proficiency

Coursera segments its Enterprise customers into the categories of Coursera for Business (corporations), Coursera for Campus (academic institutions), and Coursera for Government.

• Coursera for Business — launched in 2016 and as of Dec. 2020 counted over 2,000 organizations, including over 25% of the Fortune 500, as paying customers. Coursera earns revenue on a seat license subscription basis on Enterprise Plans ranging from 1–3 years. In a 2020 company-commissioned report by IDC, customers reported that they expected to achieve an estimated 3-year ROI of approximately 700% (on average) due to a considerable reduction in employee attrition (-38% on average), lower spending on training costs (-24%), and increased worker productivity (+25%) as employees effectively utilize skills learned
• Coursera for Campus — launched in Oct. 2019 and as of Dec. 2020 counted over 130 colleges and universities as paying customers. Coursera earns revenue on a fixed contract basis based on number of student enrollments or licenses. Over 93% of students who responded to an outcomes survey from October to December 2020 reported that Coursera for Campus allows them to acquire a new skill, and 60% reported that Coursera learning improves their applications, prepares them for internships, and / or prepares them to be successful in getting a job
• Coursera for Government — customers represent national, state, and local government agencies and organizations from 33 countries and states including the United Arab Emirates, Saudi Arabia, Uruguay, and the State of New York. Again, Coursera earns revenue on a fixed subscription per licensed user per year. Over 100 government agencies and organizations were paying customers as of Dec. 2020

Growth Strategy

To go after the large and growing online learning market, Coursera lays out the following key elements of its growth strategy moving forward:

Continue to invest in growing Enterprise channels.

• Continued penetration of the Enterprise market, both with new logos and land-and-expand of existing clients, growing from departmental deployments to multi-department and org-wide utilization

Drive adoption and conversion of freemium Enterprise offerings.

• Converting free customers to paid, especially those gained through recent pandemic-response initiatives such as the Campus Response Initiative, Workforce Recovery Initiative, and Employee Resilience Initiative.

Expand the number of online degrees and the number of students in Degrees programs.

• The company sees substantial opportunity to increase the number of bachelor’s and master’s programs in new and existing academic disciplines

Continue to grow learner base and build the brand.

• Continue to invest in increasing the number of registered learners on Coursera and increasing awareness of the Coursera brand, driving the network flywheel of large learner base and brand -> increasing value to educator partners -> incentive for them to author additional content and credentials -> enhances the appeal of Coursera to learners -> grows the consumer learner base. A larger learner base also drives organic growth of other business lines by generating leads for Degree and Enterprise users.

Grow content and credentials catalog and network of educator partners.

• Continue to invest in growing the catalog of projects, courses, Specializations, certificates, and degrees across a broad range of topics and expanding the network of educator partners.

Improve conversion, upsell, and retention of paid Consumer learners.

• Continue to improve customer lifetime value through continuous engagement -> higher ARPU and better retention; in 2020, over 50% of Consumer revenue came from learners who were registered on the platform as of December 31, 2019 (i.e., pre-2020 cohorts represented over half of 2020 revenue)

Continue global expansion.

• Approximately 51% of 2020 revenue came from learners outside of the United States. The company sees a large opportunity to help emerging economies that lack the ability to absorb the large and growing influx of adult students by delivering education in a scalable and affordable way

Competition

The market for global adult online learning is highly fragmented and rapidly evolving. Coursera expects alternative modes of learning to continue to accelerate as players in this industry introduce new and more competitive products, enhancements, and bundles.

The company names the following categories and competitors:

• Direct-to-consumer, online education companies: 2U, edX, Eruditus, FutureLearn, Udemy, upGrad
• Corporate training companies: A Cloud Guru, Degreed, LinkedIn Learning, Pluralsight, Udacity
• Providers of free educational resources: Khan Academy, The Wikipedia Foundation, YouTube
• Internal online degree platforms: Online degree programs developed in-house by universities

Coursera believes it has a number of competitive advantages over these competitors, including:

• a trusted global brand;
• a base of approximately 77 million registered learners;
• a freemium consumer model that creates a price-to-cost advantage;
• a broad catalog of branded, high-quality content and credentials;
• job-relevant, hands-on projects and industry certificates;
• a network of over 200 leading university and industry educator partners;
• a multi-channel Enterprise model serving more than 6,000 institutions; and
• rich data analytics and Skills Graph.

Financials and Key Metrics

Summary P&L

Sales and growth

Coursera grew revenue at a 32% CAGR from 2017–2020. Growth doubled in 2020 to 59% from 30% in 2019 with help from the pandemic stay-at-home measures, which drove consumers to explore new hobbies and personal development. As you can see from quarterly results, growth surged in Q2 ’20 and has moderated since then. The last quarter of 2020 was basically flat q/q and while there does seem to be some seasonality, I expect the next quarter or two will be important indicators of Coursera’s post-covid growth potential.

Revenue, growth, and gross margin by segment

The Consumer segment accounted for 66% of total revenue in 2020, though Enterprise and Degree segments are growing rapidly, up from 8% and 3% of revenue in 2017 to 24% and 10% in 2020, respectively. While Consumer and Degree segments clearly benefitted from covid lockdowns, the pandemic and associated economic uncertainty may have posed a headwind to Enterprise sales, so it will be interesting to see the growth rate of this segment moving forward.

It’s worth noting the material differential in gross margins across the three segments. Coursera reports ‘Segment Gross Profit’ (shown above) as revenue less content costs, though this excludes other costs of revenue such as customer support, hosting, and payment processing. These expenses represented 10% of revenue in each of 2019 and 2020.

Content costs only apply to Consumer and Enterprise offerings; there is no content cost attributable to the Degrees offering given it is a direct revenue share from university partners. Content costs as a percentage of revenue are lower for Enterprise offerings due to a lower effective percentage payable to educator partners compared with sales to Consumer customers. For these reasons, continued mix shift toward higher margin offerings should support margin improvement over time and it seems reasonable for the company to reach 60%+ blended gross margins as it reaches maturity.

Profitability

The company has steadily improved gross margins over time as a result of both increasing economies of scale on content costs as well as favourable revenue mix shift toward higher margin Enterprise and Degree offerings.

The company had been gaining operating leverage and working toward EBIT breakeven leading up to covid, but now appears to be investing again in sales & marketing (up 110% y/y in Q4 ’20) and research & development (up 50%) to drive continued growth amidst industry tailwinds.

While Coursera will benefit from continued operating leverage in G&A and R&D expenses as it scales, I expect sales & marketing to be a significant percentage of revenue for some time as the Consumer business demands continuous new customer acquisition to grow. As you can see from the cohort analysis below, Coursera will need to continue to grow its Enterprise and Degree businesses or find new ways to retain and monetize its Consumer segment (such as through its Coursera Plus subscription offering) in order to increase efficiency in this expense category and reach meaningful profitability.

Customer retention

As you would expect, the Consumer and Enterprise businesses lines exhibit very different customer retention curves. While more detailed cohort analysis was not disclosed, you can see from the chart on left that revenue from Consumer cohorts decays somewhat strongly from year to year (though this has varied over time). Conversely, the Enterprise segment achieved net revenue retention rates of 106% and 114% in 2019 and 2020, in line with median enterprise saas metrics, and the cohort stack shows solid expansion from year to year.

Similarly, Degrees revenue as measured by program cohort shows expansion from year to year. While this isn’t fully recurring revenue and it is dependent on the actual flow-through of students in the partner programs, it does appear to be highly predictable and expanding on a cohort basis.

Customer acquisition costs and sales efficiency

Coursera did not disclose disaggregated sales and marketing spend by segment to be able to evaluate customer acquisition costs and unit economics. It is mentioned that customer acquisition costs for Degree students was under $2,000 over 2019 and 2020, which would imply a roughly 1.5x one-year payback based on that segment’s revenues and users.

It’s also worth noting that 50% of new Degree students and 30% of Enterprise leads in 2020 were sourced from the Consumer learner base, implying some baseline level of organic growth, which is favourable from a sales efficiency perspective.

While it is highly variable, the company achieved an average SaaS magic number of 1.09 and 1.57 in 2019 and 2020, respectively. Magic number is defined as the annualized increase in quarterly revenue (increase in quarterly revenue x 4) divided by the previous quarter’s sales & marketing expenses. Essentially, how many dollars of annual revenue did the company get for each dollar of sales & marketing spend. Notwithstanding a clear covid bump and the less recurring nature of revenues here vs. a saas business, this efficiency is in line with top-performing peers.

The Company Valuation

As with other pre-profit consumer and technology companies, Coursera will be valued based on a multiple of next twelve months (NTM) revenue. While I don’t think anyone feels comfortable calling valuations in this market, I’ve picked a few comparable companies that make sense to me and provided an indicative valuation range depending on where consensus estimates land for future revenue growth. Based on Coursera’s growth trajectory prior to covid, as well as differing growth rates across segments, I would estimate consensus to land at high 20s to low 30s revenue growth over the next 1–2 years.

While I anchored on the previous rounds of financing and comps that make most sense to me, this range is likely conservative based on recent ‘IPO pops’ and the premium multiples that high-growth companies are trading at currently, notwithstanding recent volatility. Here’s my bold prediction that will most likely be dead wrong — the IPO will price at $30–35 and will jump to the $50s on the first day; it will hang around here until Q4, when the company reports slowing growth as life returns to normal, at which point the share price will revert to the high 30s / low 40s. That being said, I have high hopes that the Coursera team will surprise by finding novel ways to drive continued growth, monetize its massive user base, and continue to be a success story for the edtech category.

Risks

Coursera’s S-1 lists several potential risks that investors should be aware of. However, I believe some are more noteworthy than others and Coursera may have missed some key risks.

Competition, for one, is something the team could have elaborated on further. Coursera is far from the only online education provider. In fact, many of its rivals including Skillshare, Gumroad, Khan Academy and Udemy have more recognizable brands.

Khan Academy is particularly noteworthy because many of the courses it offers are free. That, in my opinion, is another key risk for Coursera and perhaps the entire EdTech space. While higher education is a luxury service in North America, it’s free in places like Germany. Much of the world would prefer a low-cost or free model to develop talent and plug the skills gap. College in India, for instance, costs $5,000 a year on average. Coursera isn’t profitable at its current average pricing of $9,000 to $25,000 per degree course. Lower costs in the rest of the world could make profitability a bigger challenge.

Coursera could potentially overcome these challenges by recruiting lower-cost education providers in emerging markets, convincing students to pay a premium and differentiating its courses by partnering with elite universities and recruitment channels.

About the Author

Victor Koch

Mr. Koch — a serial entrepreneur and late-stage investor specializing in secondary shares.

Previously: Twilio, Xiaomi, iQiyi, Tilray, Livongo, Bandwidth.

Currently: Robinhood, Grab, Toss, Coursera, Epic Games, Chime, and other companies.

Contact — here, If you are a startup building in this space — email or DM me to be included on this article.

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