Earnings Roundup: How Public Edtech Companies Fared Following the Outbreak

May 12, 2020

It’s often said that education is counter-cyclical to the market, especially during times of economic downturns. When jobs are scarce, people turn to schools and services to reskill and prepare themselves for the rebound.

But not all sectors of the market follow that rule, says Jeff Silber, a managing director at BMO Capital Markets who follows the education industry. For instance, education companies that rely on corporate customers may take a hit, as those clients look to cut costs.

This pandemic has taken the notion of economic downturn to new levels, closing not just businesses but also schools and colleges. “I do think the outbreak has increased the appreciation for quality online education,” says Silber. “Many schools, parents and students are realizing that you can’t just press a button and learn.”

While COVID-19 hit at the tail end of the first quarter, some publicly traded education companies already reported an impact on their Q1 2020 earnings. And they are all bracing for an uncertain fall, with school and college reopenings still up in the air.

Chegg

The bottom line: Chegg’s first quarter delighted investors. Its Q1 2020 revenue hit $132 million, a 35 percent increase from the same period last year. The company closed the quarter with a little over $1 billion in cash and investments.

Fueling that growth is Chegg Services, which brought in just over $100 million in revenue last quarter, a 33 percent increase over Q1 2019. This business is a subscription-based suite of online services that include homework help, tutoring and writing assistance tools that made up more than 80 percent of the company’s overall revenues last year. It now claims 2.91 million subscribers, which is also a 35 percent bump from the same period last year.

That growth offset declines in advertising revenues, said Chegg’s chief financial officer, Andy Brown in prepared remarks for an earnings call.

Market reactions: Growth in Chegg’s direct-to-consumer businesses beat analyst expectations, and BMO’s Silber expects the demand for its services will stay steady as many students continue to learn from home. The company’s stock jumped more than 30 percent after its earnings report on May 4, reaching $61.91 at Tuesday’s close.

What’s ahead? The company also owns an online coding bootcamp, Thinkful, which it acquired for $80 million last year. It did not share details on its performance, only saying Thinkful is expanding its curriculum and adding an expert Q&A and chat-based tutoring services.

Chegg expects to see continued momentum in the short term, providing a revenue guidance between $135 million to $137 million for Q2 2020. It hesitated to make projections beyond that, citing uncertainties over how the fall school year will proceed.

“There are many unknowns such as full start dates, enrollment trends and whether schools will be taught on-campus, online or both,” Brown acknowledged in his remarks. “As such, it is difficult to predict how much, if any, of Chegg's first half momentum will continue.”

K12 Inc.

The bottom line: Overall revenue for K12’s fiscal Q3 2020, which ended March 31, hit $257.2 million, a little higher than the $253.3 million from the same period last year. Its core business—managed online public school programs—saw revenues of $228.3 million, up 2.6 percent over the first quarter of last year.

Overall student enrollments were up 2.2 percent, to nearly 135,000 students.

The company reported cash and cash equivalent of $151.5 million, a decline of more than $60 million over the previous quarter. The company attributed that to its all-cash, $165-million acquisition of coding bootcamp Galvanize in January.

Market reactions: Company stock took a slight dip after its April 27 earnings report and has inched higher afterward. It is at $23.41 at Tuesday’s close.

What’s ahead? As K12 operates virtual schools for public districts, it is preparing for the possibility of budget shortfalls that many are anticipating for the 2020-21 school year. CEO Nathaniel Davis said on the earnings call that there was a surge of web traffic and enrollment inquiries in February and March, and expressed optimism federal and state governments can step in and fill education funding gaps left by depressed local tax revenues.

For the rest of the current school year, “we do not anticipate changes in funding for public schools as a result of COVID-19,” Davis said on the call.

2U

The bottom line: Q1 2020 revenue for 2U hit $175.5 million, marking a 44 percent increase from the same period in 2019.

Revenue from its main business—helping colleges run online graduate programs—reached $118.5 million, up 14 percent of Q1 2019. Its other offerings—short-term courses from GetSmarter and its Trilogy line of bootcamps, reported a 216 percent revenue increase, to $57 million, over the same period.

At the same time, the company reported a net loss of $60.1 million last quarter—nearly triple the $21.6 million figure in Q1 2019. The increase was attributed to costs associated with the Trilogy bootcamp business, which 2U acquired for $750 million last April.

Across all its program offerings, 2U currently works with 73 higher-ed partners.

Market reactions: Trading at $23.75 on April 30, when it published its Q1 2020 earnings report, 2U’s stock has steadily climbed since, reaching $30.23 at Tuesday’s close.

2U’s stock took a precipitous nosedive last summer after the company lowered its business expectations and revenue guidance. But its share value has since rebounded and is approaching pre-summer 2019 levels, which were in the $30-40 range.

What’s ahead? Last week, the company announced it is working with an existing client, Simmons University, to create a fully online undergraduate program. In April, 2U also launched a “pop-up” offering, called Studio in a Box, to make it easier for faculty to record videos and build courses from their home.

“As online learning becomes the norm now and into the fall, we believe that prospective students will increasingly view online programs as attractive alternatives to campus-based programs,” 2U CEO Chip Paucek said on the earnings call.

Kahoot

Kahoot is based in Norway, but its tools have a sizable footprint in North America, which makes up more than half of its 16.8 million active users. Kahoot is listed on the Oslo Stock Exchange.

The bottom line: The Norwegian company reported that Q1 2020 revenue grew to $6.4 million, up 220 percent from the same period in 2019.

As of March 31, Kahoot had more than 202,000 total paying subscribers. About 93,000 of them are businesses that use the tool for internal training, and roughly 91,000 are users in schools. There are also about 18,000 subscribers to DragonBox, a suite of math games it acquired last May.

The company claims it saw more than 100,000 daily new signups in the days following its decision to make paid subscriptions available for free to teachers and schools in late February.

The company is currently cash flow positive. In Q2, Kahoot CEO Eilert Hanoa forecasts $8 million in revenues and $2 million in free cash flow.

Market reactions: Shares of Kahoot on the Oslo Stock Exchange closed at NOK 80.00 on Tuesday, up 7 percent from NOK 74.50 May 7, when it published its Q1 2020 earnings.

What’s ahead? Kahoot CEO Eilert Hanoa says his team is adding a new feature that will enable closer integration with Microsoft Teams. (Microsoft is an investor in Kahoot.) The company is also rolling out new flashcard tools for students to study by themselves.

“The changes we’ve seen in just the past two months will continue to impact businesses,” says Hanoa. “Any company should prepare for several waves of changes—both downturns and spikes in business. Summer will be a time for planning for different scenarios.”

How Did Traditional Publishers Fare?

While traditional textbook publishers have been shifting their focus to digital offerings for years, much of their businesses still rely on print and physical operations. Unsurprisingly, those parts took a hit.

“Once school closings became widespread due to the pandemic, we experienced a significant disruption in operational activity from our customers,” said Houghton Mifflin Harcourt’s chief financial officer, Joe Abbott, on an earnings call on May 7. “This affected purchase decision-making which was, in many cases, delayed as well as our customers’ ability to receive shipments from us for purchases they had already made, as district and school employees transitioned to a work-from-home environment.”

For HMH, billings and net sales in Q1 2020 were down 2 percent and 15 percent, respectively, from the same period last year. The company posted a net loss of $346 million last quarter, versus a loss of $117 million in Q1 2019.

In its unaudited Q1 update, Pearson reported a 5 percent revenue dip in Q1 2020, driven in part by a continuing decline in its U.S. higher education courseware business. In states where Pearson administers tests, and which have cancelled standardized testing, the company has already seen an impact on its bottom line. “To date, there have been test cancellations which impact 2020 operating profit by around £15m after mitigating actions. There is a risk of further state test cancellations which could have a similar impact on profit,” it noted in a SEC filing.

However, publishers did report a boost in digital revenue. Pearson said revenues from its global online divisions, which operate virtual schools and online higher-ed programs, increased 6 percent over the Q1 2019. McGraw-Hill, coming off a cancelled merger with Cengage, said Q1 2020 billings from digital products were up more than 18 percent over the same period.

These increases were not enough to offset losses in their print businesses. But “hopefully this will help accelerate their migration to digital,” notes Silber of BMO Capital Markets.


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