Coursera’s S-1 dropped last Friday, giving us a glimpse of the financial impact that COVID-19 had on a large edtech company.
We worked through the numbers on the day the filing happened, but here are the core data points: Coursera’s 2020 revenue came to $293.5 million, up 59% from the year prior. During the same period, Coursera had a net loss of nearly $67 million, up 46% from the previous year’s $46.7 million net deficit.
The company is still unprofitable, despite the pandemic’s general lift to its business and customer base. But does it have a path to profits? Piggybacking from our Coinbase S-1 analysis piece, let’s ask five questions concerning Coursera’s S-1 that we’ll answer as we go.
- Has the company’s freemium push been worth it? The freemium model is a popular strategy used by edtech companies to get a large top-of-funnel pool of free users, but the true test as a business is whether you can convert those costly unpaid users into paid customers. Coursera’s historical performance provides key insights into how much this strategy, which edtech companies heavily relied on during the pandemic, costs and creates.
- Will nonconsumer revenues bolster its business health? Consumer revenue can be notoriously volatile, so we’ll explore how Coursera’s other offerings play into its overall business, and whether there is growth potential to be found.
- Does its work with universities to point to future profits? A big question for edtech founders is whether they should try to empower — or erase — colleges. Coursera launched a campus product during the pandemic to help colleges offer online instruction, but now we can understand if the company is too dependent on it as a revenue generator.
- Did the pandemic create enough momentum for online education to stay relevant? This is a question poised to never be fully answered, but we’ll explore how one risk factor that Coursera outlined indicates its sentiment on its market’s future, and what trust needs to be built between consumers and businesses.
- Will international revenue prove to be a big opportunity for Coursera? It’s well known that consumer edtech spending in international markets such as China and India outpaces that of the United States. We’ll see if Coursera’s business shows that, or if there are shifting tides on the willingness of people within the States to spend on education.
Our work will help us grok not just Coursera’s performance, but the health of other companies in the edtech space as well. So let’s get into the numbers and work toward better comprehension of one of the most active categories in the startup world, that of turning technology to bear on the global education market.
Has the company’s freemium push been worth it?
Coursera has two freemium lines of business, one targeted at consumers, and the other at a portion of its enterprise business, namely “Coursera for Campus.” In the case of the latter, Coursera made parts of its enterprise offering free to use during the pandemic.
We had two questions: First, can we track the impact of rising freemium usage on Coursera’s growth? And can we weigh that growth against the costs of the service to compare the two? The answer to both is yes.
Regarding the impact of freemium on consumer usage, we can intuit from a sharply rising “registered learner” count in recent quarters that offering a free tier was useful in filling the top of Coursera’s funnel during COVID. Here’s the data: From 2018 to 2019, Coursera’s registered learner count grew from 37.3 million to 46.4 million. Then from 2019 to 2020, it shot to 76.6 million. The accelerated growth was aided by the pandemic, but made possible in part by the fact that there was no cost (no barrier to entry) to sign up for the company’s mass-market offering.
On the enterprise side, we can track the growth of its university-facing work somewhat easily. Enterprise revenue — which encompasses Coursera for Campus, the product that added a free tier in 2020 — has grown in recent years. From 2018 to 2019, the top line from the segment grew from $26.8 million to $48.3 million. Then from 2019 to 2020, it expanded further to $70.8 million. And from 2019 to 2020, the number of paid enterprise customers grew from 240 to 387.
Here, it’s harder to parse the possible impact of the freemium effort. From the numbers, you might wonder where the freemium model might have had an impact; Coursera added around $22 million in enterprise revenue during both 2019 and 2020, so can we find a bump at all?
It’s probably yet to come. The company notes in its S-1 filing that its “Campus Response Initiative [i.e., freemium move] enabled over 4,000 institutions globally, including approximately 10% of all degree-granting institutions, to tap into ready-made, high-quality digital curricula from leading universities with minimal upfront costs.” Coursera goes on to note that it intends to convert those customers as part of its growth plan.
Summarizing: On the consumer side, we can see rapid adoption, and on the enterprise side, we see the potential to accelerate future growth.
That set of mostly good news was not cheap; the company’s sales and marketing costs rose from 31% of revenue in 2019 to 37% in 2020. The company explained it spent $9.2 million more in 2020 than it paid in 2019 to host and support new, free users.
However, given that the company’s full-year revenue was more than 30 times that amount, the expense seems to fit neatly next to the company’s rapidly growing consumer user base that we feel was boosted by having a freemium offering; whether the enterprise side of the coin will convert is not yet clear, but having an option on future high-margin, low-churn revenues is likely attractive for Coursera and its potential investors.
A key question for edtech startups in the wake of the pandemic is whether a temporary increase of use will actually lead to long-term impact on adoption. Giving your platform away for free can always feel like a question mark; but in edtech, that organic, limitless consumer growth can help it land key enterprise deals eventually and a good reputation. For example, only 3% of Duolingo’s users pay, but they are worth $180 million in bookings.
Coursera’s general success with a freemium business model shows that top-of-funnel edtech, which is good for widespread adoption, can be a lucrative route for founders to consider.
Does the company’s work with universities point to future profits?
Coursera’s business doesn’t sport software-like gross margins. Instead, it generates what we might call infrastructure-level margins, the sort of mid-50s results that we more expect from Twilio than an edtech unicorn. Still, there’s a wrinkle to the company’s revenue mix and gross margin makeup that’s worth our time because it could point to future profits.
Meet Coursera’s “Degrees” incomes. While the company’s consumer offerings generated a 55% gross margin in 2020 and its enterprise offerings a more attractive 69%, its Degrees product clocked in at 100%.
Here’s how the company explains the differential between the categories:
Content costs only apply to the Consumer and Enterprise segments as there is no content cost attributable to the Degrees segment. Instead, in the Degrees segment, we earn a Degrees service fee based on a percentage of the total online student tuition collected by the university partner. Given that content costs are the largest individual cost of our revenue, and contractually vary as a percentage of revenue between our Consumer and Enterprise offerings, and the fact that no content costs are payable in our Degrees offering, shifts in mix between our three segments is expected to be a significant driver of our overall financial performance and profitability.
In plain English: Content still costs Coursera a lot of money, and its Degrees offering is the best way to repackage existing content and make even more money off of it. Today, the Degrees segment of the company is not only its highest gross margin — and, therefore, its most economically attractive — but also its fastest growing.
While consumer revenues grew by 59% in 2020 and enterprise top line by 47% in the same year, Degrees revenue scaled 97%, nearly matching its 2019 growth rate of 104%.
To early-stage startups, this means a few things. One, content is increasingly commoditized (even within companies), so startups that can make it smarter or more engaging are in a good spot. For example, Newsela, a new edtech unicorn, aggregates third-party content such as articles, videos and documentaries to create content packets around subjects taught in class to replace textbooks. Its revenue has grown 81% with this as its flagship offering, and other companies such as Top Hat have similarly seen tailwinds for interactive content.
With Coursera’s Degrees product, we can see how compelling it is for a company to not just produce content, but shape-shift it.
So, if Coursera wants to pitch a path to profits, its Degrees product might be such an avenue.
Will other nonconsumer incomes bolster its business health?
Consumer revenues are famously churn-oriented, and we’ve just shown that the company’s third business, its Degrees effort, remains a big player in its larger revenue mix. So, what about enterprise revenues? Can they provide the sort of lift that Coursera needs to become self-sufficient?
Maybe. Coursera considers its enterprise revenue as any revenue coming from its offerings in campus, government and business. As noted before, the company’s enterprise revenues are higher gross margin than its consumer efforts, but slower-growing. Indeed, the 47% growth that enterprise revenues managed at Coursera in 2020 came in last place among its business segments.
So we have something of an unknown ahead of us. If Coursera can upsell in 2021 the host of universities that it brought aboard using its freemium product in 2020, then the company could boost its growth rate and revenue quality in a single effort.
For more color on why Coursera might want to pull this off, look at another massive open online course provider, Udemy. The business, eyeing a public debut in the near future, hit $200 million in ARR for its enterprise product, which is 7,000 customers mixed between businesses and teams. Udemy’s new president, Greg Brown, told TechCrunch that Coursera is a competitor, but doesn’t match Udemy in terms of customized, employer-designed education programs.
“Coursera is doing a lot out there preparing for their IPO,” Brown told TechCrunch in February. “We see them, but we’re not seeing them in every deal, and we’re not even seeing them in every other deal.”
The question of whether the company’s freemium efforts were worth it takes on a slightly larger scale when we consider its future enterprise revenue growth not merely as something that could validate a pandemic-era business decision, but perhaps improve the company’s aggregate economics. Or not, if it doesn’t.
So, a bit like with our question mark at the end of our freemium inquiry, future enterprise revenues remain opaque, but how they land will help drive — or delay — any future profitability at Coursera.
How other online schools could impact Coursera’s importance
One risk factor that Coursera noted in its S-1 is that negative media attention about for-profit online higher education could fuel “skepticism” and hurt the company’s online offerings.
Some for-profit online school operators have been subject to governmental investigations alleging the misuse of public funds, financial irregularities, and failure to achieve positive outcomes for learners, including the inability to obtain employment in their fields. These allegations have attracted significant adverse media coverage and have prompted legislative hearings and regulatory responses. These investigations have focused on specific companies and individuals, as well as entire industries in the case of recruiting practices by for-profit higher education companies. Even though we do not market our solutions to these institutions, this negative media attention may nevertheless add to the skepticism about online higher education generally, including our solutions.
While Coursera didn’t name names, there have been a slew of investigations into how online tech boot camps and virtual schools can be predatory or painful for students (more here). While the company says that these investigations, and subsequent regulatory response, could hurt Coursera’s reputation just by association, it’s also clear that incentives continue to be a hard nut to crack in edtech.
Jomayra Herrera, an investor at Cowboy Ventures who backs the future of work and education businesses, told TechCrunch that some businesses — such as a reskilling program for a population that needs significant support — don’t scale and nor should they. In other words, if the incentives are for a company to grow as fast as possible and as cheaply as possible, it might not make sense when it comes to something as emotional and raw as education.
“If it’s expensive to serve your population of students … and it takes a lot of time and it shouldn’t be rushed like a three-month or six-month or a nine-month process, you shouldn’t be venture backed,” she said last year. “And that’s totally fine.”
Even though massive open online courses (MOOCs) such as Coursera have enjoyed a boom, it’s clear that this isn’t a replacement for effectiveness. There’s still a lot of work when building consumer trust.
Edtech isn’t a sector that has been saved by the pandemic, and it still has a lot of work to do when building consumer trust. In order to win post-pandemic, and perhaps in the public markets, companies like Coursera need to keep innovating beyond content and explore delivery and testing of that content.
Will international revenue be a big opportunity for Coursera?
Part of Coursera’s future will be reliant on its ability to expand to international markets, which have long been known to outpace the United States when it comes to consumer spending in edtech.
In its S-1, Coursera said that it generated 51% of its revenue outside the United States during both 2019 and 2020. Put differently, Coursera’s international revenue hasn’t outpaced its domestic revenue just yet, despite the large regions of underserved learners. Coursera says that it will continue to work on its international operations to increase momentum, especially in its enterprise offerings.
When we caught up with CEO Jeff Maggioncalda in October 2020, he said that India is “by far the largest and fastest-growing market” for the Campus product, as well as Nigeria and Egypt. The United States, he says, is moving comparatively slowly when it comes to university partners coming to them for online for-credit solutions.
“Some of these countries have gross enrollment ratios, or the percentage of students who started education after high school,” he said. Maggioncalda explained that India’s ratio might be 25% compared to the United States, which is 36%. If India’s government wants to get its ratio up to 33% within five years, he sees Coursera as a solution.
“They cannot build [universities] fast enough, so delivering online for-credit learning is a way to expand their capacity,” Maggioncalda said. “Just lowering the cost of delivering for-credit learning is another big reason that universities are leaning into this.”
TL;DR
Coursera has work to do, but ample opportunity to bolster its growth. The pandemic didn’t answer every question for the company, but it did help it accelerate its mission and offer up users that could lead to long-term value for the business.
Now, it’s up to the public markets to speak up and value its trajectory toward future profitability as either wishful thinking or a matter of inevitability.
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