CLU are releasing their quarterly tomorrow, so I figured it was a good time to take another look at this.
I've simplified the model into something that is hopefully a bit more normal - I set a fixed cost and then a gross profit margin. Most of the variables they should give in their reports, but will be in the next quarterly as this is the first quarter of the half (half of the half?).
Feel free to have a play around with this model. https://docs.google.com/spreadsheets/d/1b-u9V95AbhRbqTxVAt7gGpwY-KUwzGmaXgyoRQNHyXM/edit?usp=sharing
I also took a very brief look at the UK market and the competition there looks significantly stronger than Australia, but still extremely fragmented.
Current thoughts at the moment is that I would avoid this stock unless I see new students increasing substantially (or other major changes in metrics). Even then, I'd want to see they were going to replicate that in the UK market, else they just won't make money and will probably lose a lot. Might need to update my straw at some point.
Camply is an online English tutoring app. On the podcast, founder Sameer Sharrif talks about the challenges and rewards he has found in setting up the business.
What echos with the Cluey discussion is the recruitment of quality tutors and matching of styles between the student and tutor. This sounded like one of the biggest hurdles they have overcome and it wasn’t until they achieved a sizable scale that this became possible.
I don’t follow the space but this podcast may be of interest to those that do.
Hey guys,
I had a bit of a go at putting together a valuation and report for Cluey. I'd love your feedback on any part of this report - trying to learn how to analyse shares. I'm a teacher by trade and have run my own tiny tutoring business (with student contractors) for a few years, so have some insight into the industry, but not amazing depth in it.
General
Cluey is a startup online tutoring centre. At prospectus they offered tutoring to students aged 2-12 in mathematics and English, and Chemistry in years 11-12. In my experience, ~40% of tutoring is in English, 50% in maths, 10% in science, and 5% other stuff (GST included).
They have ~80 full time staff and ~620 tutors (think this was prospectus), somewhere around 10-15k of active students, with 61% of these from Government schools.
Cluey’s price for customers last year was $80 for the 1:1 offering, and $45 for the small group offering. Customers' perception in my experience is that $80 is expensive, but $55 is very reasonable.
Thoughts
The gross profit margins of Cluey aren’t fully useful for calculating scalability. The gross profit is basically subtracting the cost of tutors from the revenue generated, but obviously as they increase in size, there are going to be a lot of other costs generated. I don’t disagree with them that their product will scale well, but suspect that costs may rise more than implied as their revenue increases.
Strengths
Demonstrated ability to grow revenue very quickly from a small base.
Educational and curriculum support setup looks decent.
Revision set outside of tutoring hours will help a lot with improving student outcomes.
Cluey’s tutors can work from anywhere, which will make it a good deal for them and reduce recruiting costs. It’s genuinely significantly cheaper to offer tutoring from home.
This has the potential to be a really good deal for tutors.
Average number of sessions per student was 1.4.
Everything is being driven by marketing, and not much by word of mouth at the moment. Word of mouth takes time to develop, but could add into their customer acquisition. Customers will also come back after finishing tutoring.
Weaknesses and threats
Australia’s tax situation with GST means that small players with <75>
Entering the UK market may prove more difficult than the Australian
Online competition for market share is nasty as much of it is driven by google auctions.
Most people find tutors through google, and google makes it very hard for one player to be completely dominant. Even were these guys to become the major player, I think achieving a market share of >10% would be very difficult.
I’m not convinced that online group tutoring will be terribly effective.
A recession may crush this business.
Tutor screening appears weak, though they are getting many more applicants than positions. (they do phone screens, video submission reviews, and interviews, though is suspect the interviews are skype based - I’m not convinced this is enough to maintain quality control, though they may have training that weeds more out).
They say they are trying to fill 50% of tutors capacity at any one time. This could cause problems with tutor retention.
It seems like it is very flexible and that they don’t book students in for long periods of term (ie., during a term or something), this is potentially problematic.
Cluey’s cost of acquisition is bad, but potentially okay if it can be maintained at large scale. They have reduced this from $815 in Q1FY20 to $514. I am not sure how much of this marketing spend is being spent on things like SEO, which will net long term returns. The company is expecting this to decrease over time, I’m not convinced.
The Australian tutoring association have been trying to set themselves up as a regulatory body. Cluey seems aware of them, but I have not noticed any ATA branding on their website. The ATA accredits tutors, but this is entirely ATA imposed and expensive. This could potentially make Cluey more expensive.
Empire building
The CEO has previously run a large education group and their recent acquisition of Code Camp was… interesting. I can see some synergies, particularly with cross marketing, but it seems strange given they are still establishing their core business. The CEO may have larger ambitions than implied in the prospectus.
I’m not sure whether this is a good thing or a bad thing.
Management
I haven’t done much research here yet, sorry. Judging by their online offering and quick growth, they seem competent.
Key Metrics to Watch
I don’t know whether this business is going to scale as management seems to think it will. I think there are a few key metrics to keep an eye on.
Revenue expansion
When will the company reach the end of normal avenues for growth through online marketing? What market share can they attain in Australia (which should theoretically apply to the UK) IF they currently have ~15k active students (This figure is fuzzy and I think it’s slightly less on a month by month basis) and assuming Australian students in tutoring of 400 000, this would indicate a market share of 3.75%. I expect that Cluey will reach at least 8.75% estimated market share in Australia.
New students
Estimated Lifetime revenue/value per student - How much can the business make out of a single student - Are they able to improve this with their quality control, which they say has a lot of data feeding into it.
Costs
The question here is how much the cost is going to increase as the revenue increases.
Cost of sales (ie., only the cost of the tutor) is unlikely to change significantly compared to revenue in the long term, but is worth watching. One metric to keep an eye on here is:
Percentage of tutoring sessions in group sessions - These have the potential to be significantly higher margin.
The company labels revenue minus the costs of sales/the tutor as “gross profit.” The potential problem with this is that there are a number of other costs that are going to increase significantly as student numbers increase. Whether this business is profitable or not will significantly depend on how much these costs are going to rise with the increase in student numbers. The key metrics to watch here are:
Marketing costs including:
Customer Acquisition Cost - is the business able to continue reducing the CAC, or are l imits of the market size going to force this up? A part of the CAC is included in employee benefits under sales (learning advisors).
Administration expenses - this should theoretically be highly scalable, will this play out?
Employee benefits - This is theoretically quite scaleable, but I have questions given the nature of different curriculums in the UK, the need to develop further tech in a rapidly developing area, and the fact that 25% of the staff (not by cost) were in Sales (learning advisors), and 13.5% in operations + customer care.
Valuation
This company is speculative and highly leveraged to differences in margin, market share, actual addressable market size and participation (I’m not sure if I’ve estimated these accurately), and the state of the economy. Please read the full assumptions below valuation because there are many and this is really a best guess.
Current Market cap is 188.49 mil at a price of 1.425 with 132.3m shares on issue according to ASX (a google search lists market cap as 133m???) with . Compounding this at 10% for 5 years, we get ~302m, factoring in dilution of 10%, we get 333.9 mil needed for a price of $2.294 for a 10% return pa. Tax rate assumed is 30%.
Assuming an addressable market of 15.08 mil students, with 1.508 mil of these in tutoring, with a margin of 20% for future growth based on 2020/21 financial figures there are a few scenarios that might play out. I’ve made estimations.
Option 1 - 10% - Company leverages their tutoring to effectively turn themselves into a fast growing education conglomerate. Estimated market share 20%, with PE of 30. (Ceo seems to have big plans…) Estimated market cap 1253 mil, price per share 8.64.
Option 2 - 20% - Company is very successful and attains 15% market share, while maintaining margins at Market cap at PE of 25 is 712 mil, price per share of $4.91.
Option 3 - 20% - Company is successful and attains 10% market share, while maintaining a 20% margin. Estimated PE is 20 and market cap 303 mil, price per share $2.094.
Option 4 - 20% - Company is moderately successful, but levels off around 8.75% market share (which is the lower end of what I think they will achieve in Australia, barring current figures just being a covid bump). Estimated PE is 15 and market cap 178mil. Price per share $1.227.
Option 5 - 30% - Recent growth proves to just be a covid bump, the company fails to launch into UK, or the company proves not able to scale effectively. Company goes to zero, or manages to set up some sort of viable business, but loses most of its market cap. Estimated market cap 20 mil, share price ~14c.
Averaging this all out (0.1 * 8.64 + 0.2*4.9 + 0.2*2.094 + 0.2* 1.227 + 0.3 * 0.14) this gives an expected value of $2.55 if 5 years time.
Undoing the 10% compounding rate, this gives a target price of $1.583, but there are no adjustments for risk and it’s only an 11.1% margin of safety from the current price.
Cluey Learning is highly leveraged to a few key metrics, so if these go well, the value of this company could change quickly, even if the price does not. I wouldn’t put any substantial amount into this company until I either see the share price drop or the key metrics improve.
Assumptions listed below, see forum post for more details. There is a link to the model I have here:
https://docs.google.com/spreadsheets/d/1b-u9V95AbhRbqTxVAt7gGpwY-KUwzGmaXgyoRQNHyXM/edit?usp=sharing
Assumptions
There are so many assumptions built into my model for this company.
A few key ones are those that contribute to the margin. I have made estimates that the following costs increase as a percentage of new revenue at these rates:
Cost of sales - 40% of new revenue
Marketing expenses - 20% of new revenue
Occupancy expenses - 1% of new revenue
Administration - 4% of new revenue
Employee benefits (including sales employees) - 15% of new revenue
Total - 80% of new revenue
True margin for new revenue - 20%
The implication for this is that the breakeven point for the business is ~81 million revenue.
My other key assumption is the market size. I haven’t calculated this precisely yet, but am estimating that there are ~15 mil students across AUS, the UK, and NZ, and estimated 10%, 1.366 mil of these in tutoring at any one time. (I don’t think the Middle East is worth considering) I am not certain of both these figures.
Unanswered Questions
What is the total addressable market actually?
What is the true gross profit margin here? Will they make 25% of revenue, will they make 15% of revenue? This really determines what the go is.
Is it actually possible for these guys to get more than 10-15% of market share given the highly fragmented market?
Can they expand into NZ and UK and maintain their margins and pricing? (I suspect prices for tutoring in NZ and UK are slightly lower)
Can Cluey leverage their position of having access to so many students? It seems like they are aiming towards it with the acquisition of code camp.
Can Cluey expand into the USA market long term? I note players like KME have not (though they recently bought tutorfly).
What is the actual churn of Cluey’s students and what would the cumulative drop off graph look like? (My experience in tutoring tells me that there is a high drop off rate in the first 0-15 session, a moderate rate up to about ~30-40, but after this a very long tail of long term customers). I’ve worked out an average of ~ 32 sessions per student, which is reasonable. With ~10 sessions per active student per half, I’m estimating a churn of 1/3? per half year.
Who are their competitors? What is their possible impact? The UK market also seems fragmented into directories and physical tutoring centres, but I am unsure what other online competition exists.