Coursera $COUR Buy
Investment highlights:
Coursera increased revenue across all revenue verticals in the high double digits. Total revenue increased to 88.4M, a 64% increase y/y. Coursera is guiding revenue for Q2FY21 to 89–93M and full year guidance for FY21 to 369–381M.
Revenue Verticals:
Consumer:
Coursera added 5 million registered learners this quarter to increase the registered learner count to 82M, up from 46.4M or 77% y/y. Revenue from this vertical increased 61% y/y from 32.3M to 51.9M. The gross margin of this revenue vertical increased to 57% from 54% “due to greater revenue generated from sales of subscriptions with no associated content costs.”. This vertical has a direct to consumer strategy, in which Coursera offers a “freemium” experience where registered learners can view content but must pay in order to get a license or certificate.
Enterprise:
Coursera added 60 enterprise partners bringing the total count to 479 enterprise partners up 84% y/y. The company had a few notable wins, including a partnership with Microsoft to prepare new engineers to work in Microsoft Azure. Coursera also noted expansion of contracts with notable companies such as Salesforce, IBM and Intuit. The land and expand business strategy has produced a net revenue retention rate of 113%, up from 108% y/y. The enterprise revenue vertical has a gross margin of 68%. This revenue vertical is based on the selling of licenses and seats, in which companies, governments and universities pay Coursera for the right to access their suite of educational content excluding degree material.
“ARR in [the enterprise vertical] is growing strongly, with customer cohort growth [that increases revenue] predictability overtime. This includes earlier customers, along with the layering of new customer cohorts as we sign multi-year contracts.”
Degrees:
Revenue from the degrees segment increased 81% y/y to 12M. The number of degree students increased 88% y/y to 13,493 students. Coursera is currently partnered with over 160 universities, however there are only 30 degrees being offered via 20 of the university partners. This quarter Coursera added 5 more degree offerings with its first degree programs from universities in Brazil and India. Coursera’s degree business is fee based, in which universities hire Coursera to help them develop online bachelors and masters programs. Coursera takes a fee based on the tuition charged for the student. This revenue vertical has a gross margin of 100%. “We believe that there is a big opportunity for many more university partners to offer degree programs on Coursera.”
“Our degrees business has [the best revenue predictability], given that we fill student cohorts from one academic year to the next and the revenue naturally and predictably builds.”
Improving Margins:
Coursera’s gross margin and EBITDA margin are going to improve as a result of the acceleration of higher gross margin revenue verticals as a percentage of total revenue. The degree revenue vertical grew the fastest y/y and has the highest gross margin. The enterprise revenue vertical is growing the second fastest and has the second highest gross margin. The growth of these two revenue segments will structurally improve gross margins.
Both the enterprise and degree verticals are extremely attractive to investors. These verticals have an almost SAAS-like model where revenue from these verticals provide “clearer forward visibility to the top line as the revenue mix evolves.”
Competitive Moats:
Freemium: A fantastic sales funnel
Coursera currently has over 5,000 courses. These courses are free to view and serve as the top of the sales funnel as well as a foot in the door with customers.
The company has built a sort of virtuous cycle, in which people interested in learning a subject land on the website, take a free course, and then get cross-sold on any one of the 550 specializations, 40 certificates or 30 degrees currently offered.
“In 2020, over 50% of [total] cash receipts from the consumer [revenue vertical] came from individual learners who were registered on our platform as of December 31, 2019 and approximately 50% of our new degree students were previously registered Coursera learners,” quantifiably proving the success of the freemium sales pipeline to convert free users into paying customers.
An international school:
The new university degree offerings in India and Brazil will be a major catalyst for growth and margin improvement for Coursera.
“The top five countries represented by registered learners on Coursera as of December 31, 2020 were (1) the United States, with 15.0 million registered learners, (2) India, with 10.6 million registered learners, (3) Mexico, with 4.1 million registered learners, (4) Brazil, with 3.2 million registered learners, and (5) China, with 3.1 million registered learners.” Approximately over 80% of the registered learners were outside of the United States.
In both 2019 and 2020, international customers “generated 51%” of total revenue. The expansion of degree offerings to India and Brazil drastically increased the TAM of Coursera’s most profitable business unit, likely leading to a boom in top-line and bottom line results.
Macro Catalysts:
The Delta variant of the COVID-19 virus was developed in India and has run rampant across the country, leaving many of the quarantine ordinances in place that have been lifted in other countries where the Delta variant hasn’t taken as large of a toll. This further serves as a catalyst for robust growth in the Degree revenue vertical and total gross margin improvement.
Valuation:
Coursera currently trades at a stock price of $38.81, or 13.24X CY21 EV/Revenue. Our new price target of $50.00 represents a 17.06X CY21 EV/Revenue. This target price guidance is in line with peers and industry competitors.
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