Q1 FY22 results are out and despite $9M in operating cash, netting 7,411 additional students equating to ~ 22k students, revenues were only $7.9M for the quarter. Furthermore, staff cost increased which is defined by Cluey as "payments to tutors for their service in the provision of online tutoring". Hence, despite growth in students, they need more tutors to handle student growth. If Cluey was a pureplay tech platform this cost should not grow. The company is looking more like a tutoring business instead of a technology business. Actual technology would be to build an AI tutor that behaves like a tutor and teach multiple classes at once. It cuts costs and scales to many users. However, we all know that is not going to happen. While Cluey collect data points do they have the technical expertise to build an AI tutoring agent? They would require hiring machine learning scientists from Google or Facebook.

This quarter was meant to be the blowout quarter as they are one of 4 Covid ILSP providers. My estimate was that each provider gets around 72k students. However, with ~ 7k net students, I am not sure if Cluey made arrangements to win students as part of the program. We are also not shown the breakdown of student cohorts like are they in Year 3 or most in Year 8? For instance, if the majority of students are in Year 11, Cluey will need to reacquire new students in the early years since Year 12 is the last year before they disappear in revenues.

The quarterly report has more questions than answers, especially on customer churn. They talk about lower CAC which actually make sense when you read the 4C (they spent less on marketing this quarter than previous). However, the next quarter is when we see parents hold back spending on tuition. It, therefore, lead to sizeable cash outflow. The Code Camp programs will start soon but I doubt we see meaningful growth since they are still integrating. Even if they are lucky and get the camps ready for the holiday season I doubt they will make up the lost revenue in Q2FY22.

In summary, I am removing Cluey from the portfolio and would buy back early next year when the school season restart. It's a seasonal business so I will trade it as such.

Questionable rationale for the $8M acquisition of Code Camp and I do not like it. I do not understand why the market like it. They are clearly overpaying. 

• Transaction details:
  • $1.3M upfront cash and $6.7M via issuance of shares. To cover the acquisition cost, Cluey is raising $14M with added working capital.
• What I hate about the acquisition
  • Slide 11 is misleading. Cluey making generalised assumption that besides English and Maths, coding is the next largest subject that parents are willing to pay. The only problem is that coding is hardly integrated in the curriculum &it is based on 2018 Cluey survey with sample size of 74. The data is not only outdated but misleading. 
  • Slide 12 is terrible reasoning of the acquisition. The main reason for the acquisition is to offset Cluey's cyclic nature of revenues?? You have got to be kidding me. It would be a good reason if the company they are acquiring can grow through recurring revenues but Code Camp is more services business than high margin software. They make money during holiday camps which in itself is difficult to predict revenues. Especially during a pandemic... 
  • Slide 16 shows Code Camp losing revenue in FY20 & FY21 due to the pandemic. The "camps" are not digital so for the life of me I don't know why you overpay to acquire a company with infrequent revenues. The student volumes are unpredictable & we don't even know if Code Camp have loyal repeat customers.  
• Next steps: 
  • Hate to say it but they plan on acquiring more companies to build tutoring capability for (arts, languages, health&wellness and life skill academy). I also note they are planning to enter UK/NZ market through acquisition route. 
  • It is turning into Bigtincan 2.0 with the most concerning aspect on the aggressive spending into digital marketing. It kills future profitability if they can't retain students in the platform. 
  • More capital raises and more dilution to come, the only beneficiaries are the brokers like Cannacord. 
• Need to rethink the thesis, especially whether the company can sustain revenue growth without increasing marketing spend?
  • My early valuation assumed next 3 years Cluey will obtain positive operating margins, but that is no longer possible as I don't know if they will ever stop spending?? 
  • Tech companies have gone for growth at all costs and that includes profitability but it has increased "value" in the form of market cap. 
    • The market cap of Cluey is around $130M which is not overly expensive from a tech valuation. I will be more concerned if it gets to $400M+ market cap even with triple digit revenue growth. The losses are accelerating while the company is growing - taking a leaf out of the Wisetech, Bigtincan and Afterpay playbook. 

In saying that, Q3 should be a great quarter especially during lockdown and HSC exams coming up. 

Here's more information piggy backing on my previous straw. The link shows that the program was announced in 10 November 2020. So the $337M program was nothing new, but only now we realise who the providers are. I know Cluey and Kip Mcgrath are providers but who are the other 2? I need to do further research. The providers chosen for the contract had to go through rigorous testing and pilot programs before the approval.

For Cluey they did their pilot on Term 4 2020, which means revenues for Q3 FY21 (last quarter) must include revenues from the Covid ILSP program. I guess they had to be tight lipped by the NSW government. The obvious question would be how many of the new 5848 students they acquired last quarter are part of the Covid ILSP program?? I doubt many investors would be asking that question let alone mainstream finance media outlets.  

In the announcement "tutoring program will roll out to high priority schools in Term 3 to provide ongoing support following disruptions to the 2020 school year". The question remains how many students/schools does it affect? What are the high priority schools? These students are covered by the government so how much will Cluey get? There was no mention on contract pricing with the NSW government. All we know is that the NSW government allocated $337M from their budget to provide support to schools disrupted by Covid.   

Here are the term dates for NSW as I am no longer in primary school :D 

• Term 1 = Wednesday 27 January 2021 to Thursday 1 April 2021

• Term 2 = Monday 19 April 2021 to Friday 25 June 2021 (we are nearing the end of Term 2) 

• Term 3 = Monday 12 July 2021 to Friday 17 September 2021

• Term 4 = Tuesday 5 October 2021 to Friday 17 December 2021  

Term 3 starts in July 12, so the September quarterly or (Q1FY22) should be an explosive quarter for Cluey. The government is spending $337M, with $30M going towards "non-government schools with the greatest levels of need to provide small-group tuition".

Rough and very wrong maths (no joke do your due diligence - 100% wrong);

• My thinking is that if there are 295,000 students covered by the program represented by the $337M budget. Assuming that majority of the budget are for providing funding for more casual teachers, part-time, full-time staff for schools. Give or take $120M remaining to provide financial support covering parents with free tutoring from 4 prvoiders. Since we have 4 providers it's most likely a 4 way even split each provider get around $30M each. That's about 60,000 students each which is around the same ball park with my previous straw of ~ 72k students each.

I am looking at significant growth in revenues with the contract announcement, where the tutoring costs are subsidized by the NSW government. Hence parents in theory do not pay for tutoring as the government is doing that for schools that are hard hit by covid. Cluey did $5M of cashflow last quarter, I would not be surprised by further exponential growth in Q1FY22 -> this would be for Term 3. Although we do not know if Term 2 was also exponential, it could be the case, but we'll have to wait and see in the FY21 report. 

Like everyone, I am learning more and more each day :) The chess pieces are coming together, the contract is looking more meaningful as I dive into further research. 

NSW Budget - $337M Program

Cluey is one of 4 providers selected by the NSW Government for its $337 million COVID intensive learning support program (ILSP). What is remarkable about this startup is the people running it. They are all veterans in the education sector (public and private) with a proven track record. The leadership team developed and are implementing their curriculum based on NSW education requirements. Plus they have an incredible Educational Advisory Board. 

In the announcement they made an important statement "The financial impact cannot be stated at this point in time as it is dependent on take-up." This is true considering tutoring for all providers is seasonal - please refer to my last straw. Hence, it is extremely difficult to know ahead of time what the future take up look like. The only guarantee you can make is that Cluey will generate revenues in cycles. 

As this straw is based on the recent contract, here is what I know (would love to know more about the $337M package): 

• The COVID ILSP, will provide schools with funding to employ additional educators who will deliver small group tuition for students who need it most.

• The program will start during Term 1, 2021 and run throughout the school year. This is a joint effort between The NSW Department of Education, Catholic Schools NSW (CSNSW) and The Association of Independent Schools of NSW (AISNSW).

• Around 290,000 students across NSW, including students at every government school, will be supported. (New detail and it is great for Cluey - As of 1H FY21 year they had 10,311 active students. During the last quarter they won 5,848 new student enrollments. Unfortunately you can't add that to the active students number as we don't know how many new students from last quarter is retained on the platform. 290,000 students is more than what they have but since the agreement mentioned 4 providers, you could argue an even split? Cluey takes a quarter, Kip Mcgrath takes the other quarter etc.. That would be around 72,000 students each. My logic is certainly flawed with this assumption, does anyone have a better clue? Happy to know more in the forum) 

• NSW COVID ILSP - Where I got the information from

Most of you are wondering why Cluey went up and Kip Mcgrath didn't? Both are great companies, Kip gives you a dividend - so there you go Kip is better than Cluey :) Although, if there is another lockdown guess which company remains fully operational? Hence, you are comparing apples to oranges but to me this startup has more room to grow and can survive & thrive during covid shocks. The key risks to Cluey would be a cybersecurity attack or a global internet blackout -> We would be living in the dark ages.    

Finally, management themselves are serial entreprenuers with a proven track record. If the past is to repeat itself, then most likely a very large international educational player would buy the business (thinking of Chegg). In saying that, they could also be acquired by a local player like Rudi Filapek's favourite IDP Education. Bottom line, there is an exit strategy if the business does not make it and we have seen in the past, that management is happy to be bought out by larger players for a premium.   

Currently the market is valuating Cluey at $100M. Let's see how they fare during high volaitility this year. You cannot deny that Cluey is a very interesting business for further due dilligence.      

See Valuation section. 

Range of possible outcomes considering the risk. I think changing operating margins should be considered, as we do not know how sustainable the margins would be long term.  

Highlighted in yellow are my assumptions for a valuation of $185M or $2.25 per share. 

The curious case of Cluey, an up and coming edtech building a brand for online tutoring. This company has been in my watchlist and it fits well in my edtech investing theme. Plus, no one put a straw on Strawman, and Cluey is a worthy company for future research.  

Cluey founded in 2017 aims to deliver personalised online learning (in simple words tutoring conducted online). What attracts me is the management team, they have wealth of experience and have proven success record with Think Education Group and Open Colleges.  

Cluey is classified as a growth company since revenues grew exponentially from $3K (2018) to $5M (2020) aswell as the operating loss from $6M (2018) to $16M (2020). Founders and early inside owners control ~ 30% of the shares which is a meaningful amount.

They listed in ASX for 2 reasons: 

• Access to outside capital for future capital raises. Remember the part of burning cash to generate revenues, they have to do it until the business can generate money itself. 
• Provide liquidity to existing shareholders. The founders and other early investors (e.g. VC's) might want to liquidate their holding to exit the business. 

Cluey claims their platform along with traditional classroom learning can help students build necessary reading, writing and mathematical skills. I mean, that's why tutoring colleges exist as you will not have exposure to the best teachers in every school.

Their product aims to be holistic: 

• Live online learning - tutoring through live sessions by skilled tutors. 
• Practice & Revision - Tutors can revise previous sessions with students as the sessions are recorded. What is valuable about the platform is that the parent/student can rewatch the session for quality assurance. I don't see tutoring colleges offer this. 
• Learning Insights - Comprehensive feedback between tutor and student. It uses data analytics to measure student and tutor performance. There are many tutoring colleges that measure student performance but not tutor performance. The current system for measuring tutor performance is biased and is based on word-of-mouth, not based on the actual tutoring session. 
• Comprehensive learning program - The syllabus is laid out for the student to follow and since it is personalised, the tutor can see where the student is struggling and excelling. More attention towards problem areas makes these sessions personalised. I did tutoring before, and it was hard for me to know when a student truly understand a concept. Sometimes, even they do not know. 

Unit Economics   

To value the business you need to understand the drivers of the business. From my research, the key drivers are number of new students learning on the platform and how many sessions they conduct while on the platform. You can measure user attention through time in platform as well as average revenue per session. If prices go up and sessions go up, you are looking at a company with pricing advantage. 

Cluey grew students exponentially from a very low base of 618 students (H1 FY19) to 10,311 students (H1 FY21). The student growth correlate with session growth from 3,731 (H1 FY19) to 58,020 students (H1 FY21).

I just spat out some numbers but what does it mean?     

The business model of tutoring is: 

1. Attract students
2. Provide service
3. Retain students
4. Repeat step 1 

Tutoring is a seasonal business as if you have kids or if you are a kid you know that summer holidays are summer holidays. Who would be willing to do tutoring during the school breaks (probably the gifted students :P).

In Cluey's business it impacts their top line, you can clearly see the sharp drop in session volumes due to summer holidays. It then picks up again for the new semester. Another interesting trend on Cluey's business is the longer a student stays on the platform, the more sessions they are willing to do. Which means, parents will pay more :D Although, I have talked to parents and they don't mind spending more especially their child's education.

I didn't scam ok :D My rate was $30/hr for maths tutoring and I saw some private tutors charge $100/hr. Plus, I did extension 2 maths and I was too dumb at the time to not target kids doing general maths or 2 unit maths. I could have made a fortune jacking up the prices for those kids. 

Financials 

Anyways, in terms of the financials revenues grew exponentially from $184K (1H FY19) to $6.5M (1H FY21). Now that is quite a meaningful jump from a company making penies to a company that is building a serious business. This would not be possible for an inexperienced management team. Also, the gross margins improved from 13% to 53%. It is starting to plateau, so I am guessing long term it could hover around 50% to 60% range as the business scale. 

Their guidance for the 2H FY21 is expected to be $9M in revenues which means $15.5M for FY21. If they get there that is quite extraordinary for a company exisiting for 3 years. Remember that they are competing with likes of Talent 100, North Shore Education, Pre Uni and Matrix Education. To get 16k students away from those guys would be a major achievement. 

Why would Cluey be an interesting investment proposition? The prime reason is that there are many students and online tutoring will complement their studies in the classroom. According to Cluey, in Australia 2M students are under penetrated by tutoring institutions which is roughly half of total students in Australia. Online learning scales with volume unlike traditional classroom based approaches. Guided learning is still important but most of it will happen online through convenience.  

Another reason is the macro conditions in educations.  Paraphasing Elon, who's perspecitive is that "school is no longer a place to go for learning, it's to make friends and have fun. You can learn everything online." He makes a good point and can be seen in the classroom. The classroom has not changed, the learning styles has not changed therefore the learning outcomes will not change. Australia dipped below the world in learning outcomes. The gap between Australia and the top 5 countries has been increasing. One of the reasons you could say is not enough teachers, and teachers want more pay from the government. I remember when I was in highschool where there were days of teacher strikes. Mainly pushed by unions to increase pay for teachers. With a growing student population, teachers have to manage more students. It's a macro outcome that will not get solved by the government, it has to come from private companies. 

The management team is stellar, with the Chairman, CEO and CFO all held positions from Think Education and Open Colleges. The CEO especially, Mark Rohald previously Co-founded both Think Education and Open Colleges. Both companies were sold off to large US players.

Open Colleges sell off       

Think Education Sell off, do not know how much Strategic Education paid for Think Education