A key moment in Openlearning's story with the introduction of vulture capitalists to the register. They are now the largest shareholder of the company. The firm takes a position in OpenLearning of up to 19.9%. The total capital raised of up to $5.96 million through the placement to ATL and rights issue will be used to position OpenLearning for a step-change in growth.

The material terms and conditions of the subscription agreement with ATL are set out below:

• In consideration for the payment by ATL of $2.9 million, the Company will issue:
• 31,182,796 shares to ATL at an issue price of $0.093 per share;
• 2,150,537 shares to certain nominees of ATL at a nil issue price per share (ATL will not be entitled to these shares and will not acquire a relevant interest in these shares by virtue of their issue to ATL nominees); and
• 6,422,908 options (exercisable at $0.093 on or before 30 September 2022) at a nil issue price per option;
• for so long as ATL has a relevant interest in at least 10% of the issued shares in the Company, ATL is entitled to appoint one person nominated by ATL, and acceptable to the Company acting reasonably, as a non-executive director of the Company; and
• ATL will provide an undertaking to the Company, pursuant to which it will undertake that it will not acquire a relevant interest in excess of 19.9% of the issued shares in the Company as a result of its participation in the rights issue and to the extent that an application by ATL would result in ATL acquiring a relevant interest in excess of 19.9%, its application will be reduced to the extent required to ensure it holds a relevant interest of no more than 19.9%.

Basically, this agreement can either work well or be disastrous for shareholders. The people who are making calls have M&A experience. My feeling is that the company is positioning itself for a takeover offer. It is very similar to another classic tech stock $DTS (dragontail system) acquired by Yum Brands. Eldrige Capital bought 20% of Dragontail and made a 50% gain on the investment (1/2 bagger).

I have a sneaky feeling the vultures are going to pitch the company to Coursera and have it sold for $100M (that's if the pitch works). Otherwise, it could be like dragon tail with a 50% capital gain = $20M sale. Really hope the buyer is willing to pay $100M for the business. Hence, the company from my perspective no longer in the hands of Adam but a takeover target for an educational institution.

Hence, the only thesis that makes sense is that someone is willing to pay a multiple to acquire the business. All "we" (investors) should focus on is buying at a low valuation and fingers crossed the company gets acquired. Not ideal, but I'll take it.

Openlearning recently released the quarterly report. Here is a summary of the main points:

Program Delivery

• A vital cog in their growth strategy for FY22.
• The initial UNSW TPO program netted $409K in program delivery revenue. Assuming the range per student is $6K - $9K the first cohort ranged between (45-68) students. After the pilot, the TPO is now adopted in 6 universities; 4 in the UK, 1 in NZ (I think University of Auckland) and 1 in Aus (UNSW).
• August and September intakes attracted 73 students in total which resulted in $847K of cash but they had to pay the license fee of $550K to UNSW. If you do the math, it would mean the average revenue per student was $11.6K which is higher than $9K. However, you have to deduct the UNSW license and the actual revenue per student is $4K. UNSW took a 65% cut in the program fee.
• Hence, Openlearning must find a way to increase students for the program to run profitably. Otherwise, the main beneficiary is the university.
• The next program they are starting is Computer Science 101. It has attracted 50 learners paying ~ $1,500 = $75,000 which does not affect revenues. Although, it is an interesting program for big tech companies like Microsoft, Alibaba and Canva. I also find that Australian tech companies can benefit by pooling talent from this program.

Platform Subscription

• Interesting note where the number of SaaS grew to 196 but the ARR decreased to $1.41M. In all honesty, these numbers are peanuts and they must find a way to grow to $10M ARR quickly. They can't stay in startup land forever.
• One strategy Openlearning are implementing involve usage-based pricing. If successful, it would drive revenue per user without adding incremental cost. Although, my spidey senses tell me that they would need sales support staff which is an added expense.

Overall, they are still a startup clawing through contract negotiation to win customers. The founder is still there which is a big plus. The company gaining traction with high profile names like Canva & Afterpay to support these learning programs -> necessary for the tech industry.

From an ethical standpoint, I argue they are quite honest with what they present and fit inside ESG frameworks. However, an ARR of ~ $1.5M growing 10% QoQ does not cut it in public equities. Although, I am surprised that it is not a $100M market cap company maybe they need to add buzzwords or set up a cryptocurrency course to increase the valuation :D It's still a high-risk investment as it requires exceptional execution to generate ARR. I am happy to back them but like before, it's not for everyone. It's very much VC investing.

After considering the risks, current execution and previous assumptions on revenue growth/pricing etc... The thesis must be reworked. 

According to Openlearning, they have 4 revenue drivers:

• UNSW Transition Program Online (UNSW TPO)
• OpenCreds (lifelong learning micro-credential framework)
• SaaS contracts with large customers like Afterpay and UoW. 
• Build their own courses (vertically integrate). The most interesting pilot is their version of Computer Science 101. It would contribute more margins but success depends on learner adoption. It's also part of the Opencreds framework.  

The very nature of a startup means that the business model can quickly change in a matter of months. They can pivot fast based on customer preference.

• Since the last update - over 5 months ago, we saw Openlearning shift away from Marketplace revenues and into platform SaaS revenues. 
• Marketplace revenue involved successful recruitment of learners to accredited courses in the Openlearning platform. It was not only costly but the likelihood of converting learners to paid customers is not profitable without brand equity. 
• Resources are now geared towards SaaS contracts but more importantly partnership programs like the UNSW TPO. The aim is to scale the same program to other universities. Hence, more scalable program delivery model than the timing consuming & resource-intensive traditional silo model. 

The original thesis involved revenue growth through platform revenues with a slight influence from the UNSW TPO. I did not consider that multiple intakes & multiple universities could multiply revenues YoY. To highlight why it is meaningful; consider the number of students for each intake ~ 100 you are looking at ~ $600k per intake (Openlearning's revenue share is between $6k to $9k per student. Let's assume the lower part of guidance = $6K). Given 3 sessions we expect $1.8M but since they have the capability to offer the program via 5 sessions, it would be $3M (from one university). 

• That is a bear case scenario where the program struggles to gain traction and remain stable at 100 students.
• Openlearning have rolled the same program internationally to 5 other universities from UK and NZ. Therefore, if you make the same assumptions that would mean $15M of revenue. 
• UNSW TPO could significantly generate revenue growth because they transitioned the program delivery away from a white-labelled silo solution to a platform. The program only needs to be build once and the cost to ensure functionality is maintenance cost.  

The revised thesis: Openlearning can grow revenues quickly through program delivery partnerships. Hence, there is a pathway for meaningful revenue growth using their existing customers.

The market is grossly undervaluing the revenue potential despite the execution risk. Happy to double down, but it's not for everyone... 

Open learning laid out their strategy and their focus for the next 2 years. Ironically, being an online digital education platform, lockdowns have dented their revenue growth. They serve large universities (Openlearning's key customers). 

Put my hand up and admit that I made a big mistake going too early investing in Openlearning. Their revenue growth is too reliant on lockdown lifting. In the worst scenario for Openlearning is the case where lockdowns are lifted but then follows a sharp inflow of vaccinated patients succumbing to covid. Governments will make the risk-averse call and lock us down again. The universities lose out on revenue and cut expenses. 

Luckily, Openlearning has enough cash to survive till the next financial year. Although, if the share price remains low they will struggle to raise capital without diluting a lot of shareholders including themselves. Key executives own a fair amount of shares. 

Overall, it's still a startup and its success/failure is entirely based on execution. Could they grow fast, raise capital and then do the hard part of making money without using outside capital? 

This is a left field announcement that have me guessing on the revenue potential. 

The key term is this: 

• The agreement has an initial term of one year with SaaS fees payable based on the number of learners in Afterpay’s courses. No minimum fees are payable under the agreement.
  • Who will take part in those courses? Would it be Afterpay employees, merchants or customers?
  • Afterpay has more than 75,000 merchants and 13 million active customers globally.
• Adam Brimo adds
  • OpenLearning’s experience gained over many years working with top tier education providers to deliver high quality online courses provides the scale and track record to enable leading companies such as Afterpay to deepen their relationships with their customers. The customers could be merchants or consumers.  

The SaaS hosting fee for a corporate like Afterpay. Afterpay made no announcement on their end. This is a very interesting move from Afterpay to help local startups like Openlearning.  

• A$26,400/year (tiered pricing available for larger deployments). It will be a large deployment depending on how many learners are on the platform. 
• 5,000 maximum learners (I wonder what the pricing would be for 12M learners? :D)
• Learning design (from $1,100/day)

Institution Pricing Agreement

Found this cheeky pricing proposal from Openlearning to Higher Education Providers. I assume the document was sent December 2019 as they had 1.7m students in the platform. 

Key terms 

• Minimum 3 year term contract with locked pricing 
• Platform (Pricing per student) 
  • 0-1000 students - $9.90 per student (incl.GST) (The starting cost is $9,900 p.a. (incl.GST) for the first 1,000 licenses)
  • 2500 students - $8.80 per student (incl.GST)
  • 5000 students - $7.70 per student (incl.GST)
  • 10,000 students - $7.15 per student (incl.GST)
  • Expansion Portals are charged at $5,500 (incl.GST)
  • Normally the annual SaaS license fee is due upfront; however, Openlearning are offering the option of quarterly payments instead. 
• Services
  • Learning Design
    • For 3 days = $3,750 + GST
    • Daily pricing = $1,375 (incl.GST) 
  • Graphic Design
    • Daily pricing = $1,375 (incl.GST) 
  • Multimedia Production 
    • Daily pricing = $1,750 (incl.GST) 
• Marketplace (Learner Recruitment)
  • Openlearning takes 30% share of revenue per enrolment. That's if they successfully recruit learners into courses.  
• Currently, Openlearning has 167 customers. Receipts for the previous quarter was $737K broken into  
  • Platform - $380K
  • Learning services - $106K 
  • Marketplace - $251K
• I did an Excel calculation on the platform revenues based on the institution pricing and got this: 
  • Assume 1st year annual licence revenue of $9,000 = $2,500 quarterly. Then multiply by 167 platform customers and you get $375K per quarter. It is very close to the actual platform revenue ($380K).
  • I understand that I am wrong as some customers either pay upfront or pay quarterly. Also, we are not sure if new platform customers are institutions but instead a combination of different customers with different pricing (Very likely). 

Assumptions 

• Let's take the platform revenue assumption to the max where each institutional customer have 10,000 students on the license. It would mean ARR = $71,500 which is $17.8K quarterly corresponding to $2.9M quarterly revenue for 167 platform customers. An 8 fold increase in quarterly revenues. The calculation assumptions:
  • Assumes all 167 current customers can manage 10,000 students each. 
  • Assumes all 167 customers are institutions (obviously wrong, but we are not given a breakdown)  
• Marketplace revenues - Openlearning takes 30% cut for enrolling students. Last quarter it was $251K. There were 4.41M- 4.238M = 172K new enrollments for the quarter.
  • Assume Openlearning nets $250 per enrollment for 1K enrollments gives $250K for the quarter. Very low digital marketing penetration rate (0.6%).    
• Learning services 
  • Very rough maths show that new customers would have requested learning service fees. 24 new customers for the quarter * $3,750 = $90K very close to the actual amount for the quarter. 
  • So I assume when a new customer (higher education) come on to the platform, they will request learning services. 

Guestimating 

• Looking at my last year valuation I forecasted $20M in 2025. 
  • With the latest information, the pricing metrics assume a 5% QoQ growth on total number of customers. That would be 443 customers by end of 2025. I took the screenclipping up to end of 2024, otherwise I would squash the text making it hard to read.
  • I also randomly added numbers in the orange cells for sensitivity analysis.      
  • Regardless, my forecast is very conservative, Openlearning has grown faster than 5% QoQ, however they are approaching the TAM for universities. By their estimates, there is a total of 300 universities/high education providers in Australia and Malaysia. My forecast of 443 by 2025 assume moderate penetration into new education markets like VET, Corporate and Industry Associations.    
• Thanks to the institution pricing document, investors have a pricing framework to forecast revenues. I will be wrong with the forecast but I can atleast pinpoint where my errors were as oppose to guessing. 
• The pricing document are for insitituion customers, and as you can tell from Openlearning's pricing structure in the screenshot below they have; Individual, Team, Enterprise and Institution. These are the questions I would ask before making future forecasts:
  • How many of the 167 customers are individuals, teams, institutions and Enterprise?  
  • In the pricing structure for institutions, are majority of them under 1000 students and do they have capacity to reach 10,000 quickly? 
  • How many insitutions opt in for the expansion portal?
  • What percentage of new enrollments come from Openlearning's marketing efforts and what is the typical enrollment fee a student pay?  
  • Have all new customers opt in for Learning Services ($3,750 for 3 days)?  

Finally, I don't know why I spent a lot of time trying to predict revenues for an early stage company. My reason is that there aren't many brokers covering the company and the revenue uncertainty is very high. However, the payoff could be huge if you get semi close with the forecast. I did not include the revenue agreements with UNSW and UQ, will have to aggregate them and tally up to make the final forecast.   

Q4 FY20 update 

• Openlearning's ARR has grown to $1.345M which is a 42% YoY growth but 10% QoQ growth. Very slow quarter for sales for the business, hence the steep fall in market value or share price. Currently, the market sentiment portrays Openlearning as a slow-growing business that might be worth something long term. Hence, the market is very impatient and knocking the business down as it is not growing faster than other comparable businesses. 
• Openlearning grew their customers this quarter from 143 to 167 (17% QoQ growth). It is not outstanding from an investor perspective since by definition: "Platform SaaS Customers are customers that pay >$500/year". If the majority of those customers were enterprise like $10,000/year, then the quarterly growth would be more meaningful. However, we are not given that information from the quarterly. Thus, we cannot conclude if the 24 net customers that Openlearning won during the quarter would increase their spending on the platform.    
• The most important metric on the business is the number of users. Openlearning has around 2.7M users, the user base is plateauing but it is still meaningful for the business long term. They are a startup and have not made meaningful revenues yet, but we should not be critical on management as they only introduced new business segments last year (like launching Opencreds). 
• The metric to look at when analysing the value proposition of the platform is the number of enrollments. Prior to 2020, Openlearning had 2.5M enrollments, but in 2020 they did 1.9M enrollments. The platform is approaching scale with utility expected to grow exponentially on a year on year basis. The big question I have is 'how come enrollments not correlate to customer receipts?' i.e. Enrollments growing exponentially while receipts growing linearly.  
• Opencreds framework update 
  • It is a cross-sector micro-credentialing framework designed for Australia and Malaysia. 
  • Deakin has launched 6 Opencreds amongst other short courses for domestic and international students. Deakin is a strategic customer as they are a global leader in Microcredentials. 
  • Openlearning launched the OpenCreds Investment Fund to develop OpenCreds on a revenue-share basis with 8 higher education providers to build 26 OpenCreds. 
  • Signed agreement with Open Universities Australiato to jointly support the development of 30 OpenCreds on a revenue share basis. 
• UNSW Transition Program Online update 
  • The program remains on track to commence in March 2021. It is designed to provide the same outcomes for international students as UNSW Global’s existing face-to-face Transition Program.  
  • OpenLearning expects to net revenue of between $6,000 and $9,000 for each student in the program after fees paid to UNSW Global and based on the estimated enrolment fee per student. 
  • Best thing about the program is that UNSW Global is responsible for the marketing, curriculum, content, quality assurance and certification. While Openlearning is responsible for managing the student lifecycle: application > teaching > assessment (i.e. establishment, design and delivery). Openlearning does not need to spend marketing which is a large cost to the business. 

Overall, there is a solid business being built with new contracts, software upgrades and new frameworks. Current revenues do not capture the long term value Openlearning is providing to the education sector. Openlearning is nimble at targeting specific niches in tertiary education to enhance the core platform offering. They have correctly isolated pain points in the current education delivery through opencreds. I see the project still being day 1 of a tectonic shift away from fixed bachelor degrees. The pandemic is the catalyst that universities need to change how they deliver education.        

This is my understanding of how the program works: 

• The new transition program is 4 months and targets international students who want to study at UNSW. 
• The program is now delivered digitally using the Openlearning platform. It was originally, in-person but now thanks to COVID, it is digital. 
• Openlearning is expected to net $6k - $9K per student after paying fees to UNSW Global.  
• The program starts on 1st March 2021 and ends 1st March 2026 (this is the 5-year agreement)
• The really interesting part is that "OpenLearning will be responsible for undertaking the process of enrolling eligible students in the Transition Program, including taking payment of all fees payable by eligible students for delivery of the Transition Program". So what that tells me is that Openlearning will have to spend more money to increase staff. UNSW Global is letting Openlearning take care of everything. That's why Openlearning did the $6M capital raise as $1.5M will be spent on working capital.
• Here is where it gets juicy for shareholders 
  • On their slide deck, they showed that around 440K international students enrolled in 2019, now in August 2020, it is 400K. Surprisingly, I was expecting enrollments to fall further. This is the total market. 
  • From the Openlearning slide deck, the top 10 universities had around 196K international students in 2019. UNSW had 24,852 international students last year.
    • In 2018, it was 23,148
    • In 2017, it was 20,204      
    • In 2016, it was 16,686 
  • UNSW has historically grown international students, and I believe post-COVID, it will grow steadily. On average, roughly 2K more international student come every year. 
  • Applying this to Openlearning, they get revenues when an international student enrols in the New transition Program. After 4 months, they can study at UNSW. 
    • If you take the really bearish case assuming Openlearning can attract 200 international students on average per year. That would mean revenue = $6K (per student assuming the lower number) * 200 students = $1.2M in revenue
    • If you take the base case, assuming Openlearning can capture 400 international students on average per year. That would mean $6K * 400 = $2.4M in revenue.
    • If you take the bull case, assuming Openlearning capture 600 international students on average per year. That would mean $6K * 600 = $3.6M per year. Instead of $6K if it was $7.5k that means $4.5M per year.   
• I think enrollments would start at around 100 international and end up growing in the next 5 years. On average, it could end up being the bull case.  
• This is a material contract for Openlearning as any sort of outperformance in enrollment uptake will drive revenues. 
• Although, in saying that COVID would have made a huge dent on the international students number across the major universities. We are unsure what the current enrollments are and we have to wait for the annual reports across universities, especially UNSW. 
• The market is currently pricing the company at $28M market cap and before the announcement, it was $23M. So the market believes the contract is worth $5M to the business. In other words, I think the market is pricing the contract correctly. Hence 23% gain in share price make sense.    

OpenLearning have multiple contracts in arrangement. This straw is a summary for all significant ongoing contracts in place. 

1. 19 March 2020 (Alibaba Cloud) - Partnership with internet giant Alibaba Cloud enable OpenLearning to offer students in mainland China high-speed access to online courses. Over 10,000 unique learners in mainland China have taken courses on OpenLearning. OpenLearning is solving a critical problem for universities and colleges globally, they have found that most platforms are substantially slower in speed, the partnership provide OpenLearning with high-speed delivery. This is a strong competitive advantage in the China market. Alibaba’s DNS Acceleration service was implemented for OpenLearning within just one week with zero downtime to existing users. The service speeds up access to OpenLearning via a direct fibre optic cable connection that runs from across specific regions in Asia. 
2. 27 March 2020 (High Resolves) - Operate in (Australia, USA, Canada, Mexico and Brazil). It is OpenLearning’s first SaaS client to utilise the platform for high school students. The non-profit entity provide social justice, freedom type courses. High Resolves have engaged over 350,000 students. The agreement also includes the potential for High Resolves to act as a reseller of the OpenLearning platform to its partner high schools. High Resolves is OpenLearning’s first SaaS client to utilise the platform for K-12 students. There are 100's of schools as partners (no exact number). Under the agreement, High Resolves will pay OpenLearning an annual SaaS fee ranging from A$50k (15,000 students) to A$90k (30,000+ students) depending on usage of High Resolves across all school portals. High Resolves’ sales force will work to convert each school into a paying SaaS customer in exchange, OpenLearning pays High Resolves 30% of the estimated SaaS fee of A$3,000 per school. This reseller arrangement has the potential to reach up to 1,000 schools.
3. 29 April 2020 (Heriot-Watt University (Malaysia)) - Heriot-Watt is one of the UK's leading universities with five campuses across the world (Edinburgh, Dubai, Malaysia, Orkney and the Scottish Borders) as well as 53 Approved Learning Partners and over 29,000 students studying both online and offline. Heriot-Watt Malaysia will pay OpenLearning a one-off Learning Services fee of A$289k (ex GST) for the development of 10 courses, which will be carried out in Q2 and Q3 2020. The agreement includes a 1-year licence of the OpenLearning platform should the program continue in 2021.The services fee would be paid to OpenLearning in line with the delivery of the project in 4 equal instalments and subject to standard termination provisions including insolvency, and fundamental breach of agreement clauses. Approximately 200 to 250 students enrol to take Foundation Studies each semester at the Putrajaya campus, which has a total of approximately 2000 students.
4. 4 June 2020 (Australian Catholic University) - ACU will use OpenLearning’s platform to deliver short courses, micro-credentials and internal professional development programs for its employees. ACU has over 35,000 students across its nine campuses and is expanding its online offering with a particular focus on health and education, two rapidly growing sectors in Australia. Minimum fees payable by ACU to OpenLearning under the agreement is $33k (inc GST) p.a. The agreement builds on an existing partnership formed when ACU made a A$1 million cornerstone investment in OpenLearning’s Initial Public Offering (‘IPO’) in 2019. The terms of the agreement with ACU are similar to large universities. Fees will be renegotiated if the number of unique learners exceeds the upper limit of 20,000 during the term of the agreement.
5. 14 July 2020 (Open University Australia) - OpenLearning have signed agreements with Open Universities Australia (OUA), Australia’s largest online higher education marketplace with 21 university partners. Under the agreements, OUA will utilise OpenLearning’s platform to deliver micro-credentials from Australian universities, which will be promoted through the OUA marketplace. OpenLearning will receive a fixed usage-based SaaS fee for each enrolment on the platform or a percentage of enrolment fees for courses jointly developed under the agreements. The agreements have an initial term of 3 years and there are no minimum fees payable under the agreements. 
6. 14 July 2020 (DeakinCo.) - OpenLearning have signed a platform agreement with DeakinCo., part of Deakin University and a global leader in micro-credentials. The agreement with DeakinCo. has an initial term of 1.5 years and is seen as strategically important to OpenLearning, however, the minimum fees payable under the agreement are not currently material. 

Just to highlight the uncertainty in my valuation, Openlearning recently appointed Spiro Pappas as an Executive Director. 

"Spiro will help OpenLearning’s senior executive team to commercialise its technology in large corporate and financial institutions, leveraging the Company’s higher education partnerships to provide industry-relevant training and micro-credentials." 

When I read this, I immediately thought of Jannison's Learning business. Openlearning is going after the corporate training market. I see 3 ASX technology companies going after this market (Janison, Openlearning and Retech). Retech has operations in both China and Australia but they primarily focus on training English (students and corporates). Janison have customers in this market but recently, they lost 2 (Rio Tinto and Kinross). Those miners found Janison's Academy platform did not tailor to the mining industry. Maybe Openlearning can be flexible with their platform to provide holisitic learning experience for corporates.

Just some thoughts on what I think was an interesting turn of events in the edtech space.