Online learning platform Coursera (NYSE:COUR) reported Q2 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 23.2% year on year to $153.7 million. Guidance for next quarter's revenue was also optimistic at $158 million at the midpoint, 2.68% above analysts' estimates. Coursera made a GAAP loss of $31.7 million, improving from its loss of $49.3 million in the same quarter last year.
Coursera (COUR) Q2 FY2023 Highlights:
- Revenue: $153.7 million vs analyst estimates of $146.2 million (5.13% beat)
- EPS: -$0.21 vs analyst estimates of -$0.29 (26.7% beat)
- Revenue guidance for Q3 2023 is $158 million at the midpoint, above analyst estimates of $153.9 million
- The company lifted revenue guidance for the full year from $605 million to $620 million at the midpoint, a 2.48% increase
- Free cash flow was -$11.5 million, down from $1.53 million in the previous quarter
- Gross Margin (GAAP): 51.9%, down from 62.9% in the same quarter last year
- Paying Users : 129 million, up 22 million year on year
Founded by two Stanford University computer science professors, Coursera (NYSE:COUR) is an online learning platform that offers courses, specializations, and degrees from top universities and organizations around the world.
The company’s founders wanted to make education accessible to everyone, regardless of location or finances. Coursera addresses two consumer pain points of learning: access and convenience. First, taking courses and especially earning degrees can be financially out of reach for many. Second, learning traditionally involved a teacher and his/her students meeting in the same physical space at the same time.
Coursera digitizes learning and enables affordable, flexible, and self-paced learning. There is a free tier that gives access to select courses, but there are no assignments and certificates upon completion. There are multiple paid tiers that unlock additional courses, assignments, and access to degrees and certifications upon successful completion.
The largest source of revenue for the company is subscriptions for courses. However, Coursera’s revenue isn’t just from the busy working mom completing a statistics degree. Coursera may provide Nike with a social media advertising course to its incoming marketing employees. Nike pays for the courses, and the employees earn credentials. Another example is the Master's in Computer Science program offered by the University of Illinois on Coursera. It allows students to earn a Master's in computer science entirely online at a fraction of the cost of a traditional program.
Consumers today expect goods and services to be hyper-personalized and on demand. Whether it be what music they listen to or what movie they watch, or finding a date, online consumer businesses today are expected to delight their customers with simple user interfaces that magically fulfill demand. Subscription models have increased usage and stickiness of many online consumer services.
Competitors offering online legal or document services include Udemy (NASDAQ:UDMY), Microsoft’s LinkedIn Learning (NYSE:MSFT), and Skillsoft (NYSE:SKIL).Sales Growth
Coursera's revenue growth over the last three years has been very strong, averaging 32.6% annually. This quarter, Coursera beat analysts' estimates and reported decent 23.2% year-on-year revenue growth.
Guidance for the next quarter indicates Coursera is expecting revenue to grow 15.8% year on year to $158 million, slowing down from the 24.1% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results, analysts covering the company were projecting sales to grow 12.5% over the next 12 months.
Usage Growth
As a subscription-based app, Coursera generates revenue growth by expanding both its subscriber base and the amount each subscriber spends over time.
Over the last two years, Coursera's users, a key performance metric for the company, grew 22.3% annually to 129 million. This is strong growth for a consumer internet company.
In Q2, Coursera added 22 million users, translating into 20.6% year-on-year growth.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Coursera because it measures how much the average user spends. ARPU is also a key indicator of how valuable its users are (and can be over time). 
However, the company's ability to continue increasing prices while steadily growing its users shows that users still find value in its platform. This quarter, ARPU grew 2.19% year on year to $1.19 per user.
Pricing Power
A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Coursera's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 51.9% this quarter, down 11 percentage points year on year.
For internet subscription businesses like Coursera, these aforementioned costs typically include customer service, data center and infrastructure expenses, and royalties and other content-related costs if the company's offering includes features such as video or music services. After paying for these expenses, Coursera had $0.52 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
Despite declining over the last 12 months, Coursera's average gross margins of 57.6% are still around that of a typical consumer internet business. These unit economics suggest that Coursera has a decent business model and competitive products and services mixed with some potential pricing pressure.
User Acquisition Efficiency
Consumer internet businesses like Coursera grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).
It's very expensive for Coursera to acquire new users as the company has spent 67.7% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates a highly competitive environment with little differentiation between Coursera and its peers.
Profitability & Free Cash Flow
Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.
This quarter, Coursera's EBITDA came in at negative $2.85 million, resulting in a -1.86% margin. The company has also shown rather mediocre profitability for a consumer internet business over the last four quarters, with average EBITDA margins of -3.67%.
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Coursera burned through $11.5 million in Q2, increasing the cash burn by 263% year on year.
Coursera has burned through $16.5 million of cash over the last 12 months, resulting in a negative 2.76% free cash flow margin. This below-average FCF margin stems from Coursera's continuous need to reinvest in its business to penetrate the market.
Key Takeaways from Coursera's Q2 Results
Although Coursera, which has a market capitalization of $2.01 billion, has been burning cash over the last 12 months, its more than $716.9 million in cash on hand gives it the flexibility to continue prioritizing growth over profitability.
We enjoyed seeing Coursera exceed analysts' revenue expectations this quarter. We were also glad that next quarter's revenue guidance came in higher than Wall Street's expectations. Overall, we think this was a really good quarter that should please shareholders. The stock is up 7.85% after reporting and currently trades at $14.02 per share.
Is Now The Time?
When considering Coursera, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Coursera is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been impressive, though we don't expect it to maintain historical growth rates. But while its growth in users has been strong, the downside is that its sales and marketing spend is very high compared to other consumer internet businesses and its ARPU is growing slowly.
Coursera's price/gross profit ratio based on the next twelve months is 5.2x. In the end, beauty is in the eye of the beholder. While Coursera wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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