Keypath Education International Inc

ASX:KED

Earnings Call Transcript 2023-Q1

[Operator]

Thank you for standing by, and welcome to the Keypath Education International Q1 FY '23 Report and Appendix 4C Investor Briefing.

[Operator Instructions] I would now like to hand the conference over to Steve Fireng, Global CEO.

Please go ahead.

[Stephen Fireng, executive]

Well, thank you very much. And again, I'm Steve Fireng, Founder and CEO of Keypath Education. I'm joined here today with Peter Vlerick, our Chief Financial Officer.

Well, the transformation to online learning certainly continues. You're living in a post-COVID world with strong employment. And some economic uncertainty has continued to evolve students' choices on where they want to go to school and how they continue their education, but one thing we do know is that students choosing online education is continuing to be very strong. And why are we well positioned? Well, Keypath is clearly a leader with the 15 universities going online. We continue to build our key strengths where we are differentiated while staying a leader in the online space. Our focused investments with launches within complex in-demand programs such as clinical health care and STEM programs have given us a very large share in these markets. We were also the first to launch OPM in Southeast Asia. And that early-mover advantage is similar to being an early adopter in Australia, which we know is highly successful. And lastly, Keypath is investing in many technologies and platforms to maintain our competitive advantages in clinical placement, marketing, student enrollment and course delivery.

Well, the next slide, we'll talk about the diversity of our offerings. If you look at the revenue chart on the left-hand side, you'll see that Keypath's 2 largest regions, APAC and North America, both have grown revenue over 30% from Q1 FY '19 to Q1 FY '23, illustrating a strong macro trend and Keypath's ability to capture its share. Q1 growth rate slowed as we experienced decline in our legacy vintages and a tough comp compared to Q1 FY '22 where growth was impacted positively due to the stay-at-home mandates due to COVID.

Today, we have 102 programs in Healthcare, which includes both nursing and social service programs, approximately 52% of total revenue. Combining this with our recent signings, we feel we're building a network of high complex programs and a network of health care affiliates that universities need continued support with. And because of our long-term university partnerships, our 7- to 10-year contracts at the program level and that 94% of our programs are not up for renewal until 2025 and beyond, we continue to have revenue visibility.

Well, let me talk about Keypath's multiple growth options. As we discussed, we are in a transition year with our investments in newer vintages. In Q1, we saw a decline in our legacy programs as expected and then noted in our year-end, especially in the business vertical. This has been offset slightly by our newer vintages and investments in health care programs. We continue to add new programs and partners, and in Q1 FY '23, we added 2 new partners and 7 new programs.

We also continue to see a strong pipeline of both new and existing partners, illustrating the strong need to expand online quickly. The FY '23 vintage is sold. And the FY '24 vintage pipeline is ahead of pace, with 17 of 18 programs signed within Healthcare. And lastly, we are adding new products and diversifying our Healthcare and STEM verticals to ensure we have a strong portfolio of programs for long-term sustainable growth.

Well, let me dive a bit deeper into our Healthcare platform. Well, we continue to be a leader in health care education, and the need for health care professionals have never been greater. In addition to the stats on this page, a recent survey done by Aon said that 83% of hospitals indicated they're ramping up their clinical job hiring. This is compared to 40% in just 2021. And 79% of hospitals have seen higher turnover among clinical positions. What we're doing is important. And as you can see, our Healthcare vertical is making up an increasingly large proportion of our revenue, which we feel provides a strong underpinning of long-term growth and is a real competitive advantage.

Well, let me speak to the progress state. As we mentioned in the prior slide, there's a significant shortage of health care workers. And educating these workers are difficult to deliver because of the need to have a clinical experience as part of the academic program. Keypath has developed technology and processes allowing it to address the difficulty of obtaining this experience, which we believe both drive growth in the establishment of online clinical programs and ensure a more defensible market share. This investment in clinical placements and the investment in new products will drive much of our growth in the future, as evidenced of 17% revenue growth in Q1 FY '23 within Healthcare.

Well, let's shift gears to our unit economic model. We have spoken several times about how our programs follow this unit economic model. Our mature vintage programs that start in FY '19 or prior prove that -- this economic model with a strong contribution margin. In addition to this, we continued to show positive company contribution margin at 19.6% even with the FY '21, '22 and '23 vintages being the largest in our history; and investing $3.4 million in Q1 to launch our most recent vintages.

Well, let me talk to you about our FY '23 results. The results here were in line with expectations to achieve our full year FY '23 guidance. As we mentioned during our last quarter, we are experiencing a decline in revenue and enrollments with our legacy vintages, offset by our health care programs where much of our launch activity has occurred.

We have 185 programs, 102 of those in Healthcare, and 41 partners, adding 7 new programs and 2 new partners in Q1 FY '23. Our course enrollment is up 1% from last year to just over 33,000 enrollments. And as discussed, the growth rate was lower due to the decline of mature vintages, certainly offset a bit by Healthcare, and a tough comp compared to Q1 FY '22 as we benefited by the stay-at-home mandate due to COVID.

Our revenue growth in Q1 was up 3.4% year-over-year and 7.7% on a constant currency basis. Healthcare revenue growth was up 17% during the quarter, over last year. Contribution margin was $6.2 million, down $2.7 million. And adjusted EBITDA was minus $3.4 million versus positive $1.1 million in Q1 FY '22.

Let me turn it over to Peter, who will give you more details on our financial results.

Peter?

[Peter Vlerick, executive]

Thanks, Steve.

As Steve mentioned earlier, our Q1 revenue was $31.4 million, which is up almost 8% on a constant currency basis year-over-year. This growth was despite the expected softening of enrollments, primarily in our mature business vertical and the tough comparison Steve mentioned to Q1 fiscal '22, where Australia was still experiencing COVID-related enrollment increases.

Regarding currency movements. As a reminder, our functional currency is the U.S. dollar. Our largest foreign currency conversion is the Australian dollar. One way to think about the Australian dollar-to-U.S. dollar conversion impact on our business is for every 1 point -- 100 basis point movement in the Aussie dollar-to-U.S. dollar rate, for example, going from $0.63 to $0.64, our revenue would increase by approximately $800,000, while adjusted EBITDA would increase by approximately $200,000.

Looking at our contribution margin and adjusted EBITDA. Both were in line with our expectations for the quarter, declining $2.7 million and $4.5 million, respectfully. The revenue dynamic noted above, as well as the investments we are making in our newer vintages, systems, people and our Southeast Asia operations drove these declines. As a reminder, looking toward our mid-year reporting cycle, our second quarter is typically the lowest-revenue quarter of the year given December holidays across the globe and related shortened enrollment terms. Given our cost structure, this typically results in second quarter adjusted EBITDA being lower than the first quarter.

Regarding our cash position. We ended our first quarter with $40.7 million of cash and no debt. We used $15 million of cash in operations, which included approximately $3.5 million paid out for our fiscal 2022 performance bonuses. In addition, we used $2 million in the quarter to settle legacy cash awards made to certain key executives. This settlement was made at 50% of the full value noted in our prior disclosures.

Regarding the seasonality of cash flows. As we've discussed in the past, Q1 and Q3 are typically lower cash receipt quarters, as our largest student enrollments are typically in these quarters.

Moving on to investing cash flows. We used $1.4 million of cash, primarily related to capitalized wages and contractor costs related to building and refreshing program content. Finally, $1.4 million of cash was used in financing activities related to the net share settlement of employee stock-based compensation awards. All of the above cash flow changes are in line with our expectations, and we remain confident that we are fully funded to and through cash flow breakeven.

Let me now turn it back to Steve, who will wrap up the presentation portion of the discussion.

[Stephen Fireng, executive]

Well, thank you, Peter.

We've spoken about FY '23 being a transition year. We expected our legacy vintages to decline, mostly as Peter noted in our business verticals. And we've been allocating more resources and investment to our newer vintages and launch where we see the greatest demand, particularly in Healthcare and STEM. As you saw from our revenue mix shift and the number of launches in Healthcare, the shift is occurring, but it will take time as our newer vintages move through the unit economic model.

As a reminder and as we spoke at our year-end results, there are 3 keys to our transition. One -- first one is to continue investment in health care programs and selectively look for opportunities in business and STEM within APAC. Number two, we want to reallocate investments from some of our mature vintages where we see less demand to accelerate growth in our newer vintages and new launches. And number three is maintain a strong cost focus and focus on profitability, starting in second half of FY '24. And as Peter mentioned, this will influence growth rate in our mature vintages in the short term but feel this investment in the newer vintages gives us better long-term growth and aligning to where demand is today. As demand or any economic changes, we will continue to invest where we see the greatest opportunities to support and grow our student base.

Keypath is well positioned to handle the changing landscapes and position us for long-term sustainable growth. What we do know, as evidenced from our strong university signing, the interest is strong. And the universities believe they need a partner to capture the online growth; and as our clinical placement function and academic delivery we are building will give us very large, competitive position for years to come. Very few can match our scale within clinical placement.

Based on this quarter results and what we see from our programs, we remain confident in our FY '23 guidance for revenue in U.S. dollars of $125 million to $130 million on a constant currency basis and adjusted EBITDA of negative $7 million to negative $9 million on a constant currency basis. We also continue, as Peter said, to be confident in our adjusted EBITDA being positive from second half of FY '24 and have a strong balance sheet.

Lastly, thank you for allowing us to share our story, and we're looking forward to speaking to many of you in the coming days. And we'll take some time for questions if we have any.

[Operator]

[Operator Instructions] The first question today comes from Tim Lawson from Macquarie.

[Tim Lawson, analyst]

Just on the cash flow and that you obviously still providing that comment around sort of target breakeven and the timing. Can you just talk about -- and you've given some additional sort of color around the trends and the sort of quarterly seasonality, but can you just provide your thoughts on sort of what's currently in place to sort of achieve those targets versus sort of the new investments and the timing of such? What can either get that breakeven earlier or at risk of delaying it?

[Stephen Fireng, executive]

Well, let me -- maybe, Tim, I'll maybe take it. And then I'll turn it over to Peter to maybe provide some more specifics, but I think the thing we've said in each quarter as we kind of think about the number of launches that we've had, starting with the kind of FY '21 -- launches that happened in FY '21 being the largest in our history, and that, if you look at FY '21 and you look at that vintage today, it's positive contribution. And so what we believe is that, as you kind of launch in FY '22 and you launch in FY' 23, if you follow the unit economic model, and we feel like we're on track of achieving those goals, is that profitability is in sight, where we'll have majority of our programs not in a high-investment early launch period.

And so we feel like the launches that we've had have been where we thought they were going to be. We thought the timing of the launches are where we want to be because obviously timing on investment capital is really important. And so we certainly just have to continue to execute against our launches over the next 12 to 18 months. And that's why we feel really a lot of confidence around kind of the profitability in the back half of FY '24, but Peter, maybe there's some additional color you'd like to add.

[Peter Vlerick, executive]

I think you covered it all, Steve. I mean one thing to keep in mind, Tim, is -- and when you see our -- at the midyear, you're going to see our vintage breakdown that we've been doing both on the revenue as well as contribution margin. When you get out into our -- the breakeven timing that we're talking about in the back half of '24, to Steve's point, the majority of the revenue in FY '24 is coming from FY '23 and prior vintages. And we already have many of the programs for FY '24 sold, so it's not like we have to go sell a bunch of programs, incremental programs, to hit our timing for next year. It really is all just about, as Steve noted, execution. And we've sold programs in the verticals that we think are going to be successful. We have a high degree of confidence in that. And now it's just all about executing on our plans, which we're -- we've obviously got a long history of doing just that, so...

[Tim Lawson, analyst]

Yes. Just maybe a quick follow-up on that. In terms of the sort of quarterly volatility around sort of cash flow and the sort of breakeven comments you've made, just sort of how much buffer of working capital do you need? And do you think you'd need a working capital facility? Or you think there's enough sort of cash buffer in your planning that any sort of quarterly volatility can be managed?

[Peter Vlerick, executive]

Yes. Well, I think, as you know -- go ahead, Steve. Sorry.

[Stephen Fireng, executive]

Well, I think what we [indiscernible]. [ Go ahead ] [indiscernible].

[Peter Vlerick, executive]

Well, okay. Sorry. Well, I was just going to say we obviously haven't put out cash flow projections for FY '23 and into the future other than just our cash flow breakeven timing and EBITDA breakeven timing in the back half of '24. As you know, I think that -- you and other analysts have put out projections of cash into the marketplace. We feel comfortable with what you guys have put out there. That has us with a very healthy cash position at the end of this year. We don't feel there's a need for any working capital bridge. We feel like we're fully cash funded through and past our breakeven timing, so...

[Stephen Fireng, executive]

Yes. The other thing just to add onto that is just maybe one quick comment. I mean bear in mind, we do control the spending into the programs. And so while -- I completely agree with Peter, we feel a lot of confidence that our projections and the cash that we're using is -- we're in good position and have enough buffer. But bear in mind, we always have -- the marketing spend and the costs we invest into this program are at our discretion. And so we can certainly be mindful, as we continue to invest to launch and manage these programs to make sure that we're optimizing on the type of investments that we think is appropriate both to hit the long-term revenue goals and the growth goals but also to kind of manage our cash position.

[Tim Lawson, analyst]

And I guess, last question on this topic for me. There's obviously a sort of market view on cash buffer, but do your partners start to ask on your sort of financial capability to do the marketing to get the programs? Or is cash [ sort of or sort of ] financial position of Keypath a question you get in your RFPs or whatever you call them?

[Stephen Fireng, executive]

No. I think, from our -- if you look at our last year of programs that we've signed, I think we signed about 9 university partners and just over 40 programs across the last year. And I can't think of any conversations we've had with universities about the concerns of our ability to invest. And in fact, as we continue to launch, they're pretty -- they're obviously pleased with the type of enrollments and the types of starts and the type of new students that we've been able to generate, which they know that that's kind of the investments that we're making into these programs, so yes, there is certainly -- there's not a discussion about our financial profile or our cash position. I think they trust that, what we say we're going to do, we do. And that's certainly been our history at Keypath.

[Operator]

[Operator Instructions] The next question comes from Kieran Harris from E&P.

[Kieran Harris, analyst]

Just a question on the revenue-generating programs added in the quarter. It looks like about 19. And at the full year result, you said that this year's pipeline was sold out, probably looking to target something like 32 launches, so just interestingly, that is looking to be quite first half weighted, when typically you have been more second half weighted in the past. So I guess the question is, is there scope to increase, I guess, that rollout for this current year. Or are you sticking with that, let's call it, 32 number?

[Stephen Fireng, executive]

I have to check with Peter in terms of the 32 number, but maybe I'll give a high level -- I mean certainly -- we're certainly managing the timing of our launches and we're certainly -- because we have such a large pipeline. We -- and you want to get those in market as soon as you can in order to generate the revenue. And we certainly have a lot of interest and a lot of launches going on at the same time.

And I think that's -- when you get those out there, that's why you want to have that revenue as you kind of carry into FY '24 and beyond to kind of give you that maximum revenue basis, but in terms of how it compares -- and maybe Peter has how it compares what we've kind of disclosed before the number of programs. I think we're pretty much on track of what our expectations are and the timing -- of the timing of launches and certainly our expectations of kind of how fast they would ramp. I don't know, Peter. Is there anything else, additional color on that?

[Peter Vlerick, executive]

No. I think that's right. I mean what I would say, Kieran, is -- and we've talked about this in the past, is it -- from year to year, vintage to vintage, the timing of when those vintages -- when the programs are generating revenue, to your point, can vary between vintages. If you recall, FY '21 was more weighted to the first half of the year, the fiscal year. FY '22 was the back half.

And now to your point, FY '23, it's more weighted to the front half. And so that can affect. And obviously if you have more programs, size of the programs being equal, let's say, you're going to get more revenue if it launched in the first half versus the second half. All of that, given our sales cycle, these were all contemplated, the timing and whatnot. It was all contemplated in our guidance because we had sold them. Some of them were in market when we're putting our guidance out in terms of marketing and whatnot, so that's all been fully -- there's no new news, I guess, is the way to characterize that, so...

[Kieran Harris, analyst]

Yes. No, that's great. And I guess, for '24, appreciating you can't give any specific guidance around it, but you expect the -- I guess, the cohort to deliver a similar size to '23, just generally speaking.

[Peter Vlerick, executive]

Yes, I think what we've said is that the way to think about it isn't necessarily the program count itself. I mean it's a data point. And I know you guys, for modeling, like to look at it, but it really just gets back to what we expect these vintages to do in steady state once they work their way up the unit economic curve. And I believe we disclosed last -- at year-end that we're expecting these newer vintages '21, '22, '23, '24, et cetera to get up into that 25 million to 40-some million range in steady state; and that still feels about right.

[Stephen Fireng, executive]

Yes. I think the one thing that I would say just maybe to add onto that, just last, is that I think we talked about that we have 17 of our 18 programs in Healthcare already signed for FY '24. And what that does -- really gives you a long time to be able to kind of ramp into these programs. And so I think, in terms of the mix, which we really think is an important aspect of the size of these vintages, we think that FY '24, at least at the stage right now, is really looking like a strong, really strong vintage based on the kind of the number of programs in Healthcare.

[Kieran Harris, analyst]

Yes. And just on that, with your clinical placements network, are you confident that you have the capacity to meet your current pipeline just given it is becoming so heavily skewed towards Healthcare? Or do you foresee the need to kind of grow out your number of [ contacts ] and the number of systems you have onboarded?

[Stephen Fireng, executive]

Yes. I mean we're continuing to grow out of it. I mean I think as -- we think we have about 14,000 health care affiliates. What is interesting about the Healthcare clinical platform that we're building is it actually gets better and better. As you think about it, when you're doing a clinical placement for the first time or you're dealing with a clinical faculty member for the first time -- and so you have to kind of build that relationship. And you have to build the contracts and all of the things that have to do with the first time.

As you kind of mature, what happens is we get a lot of repeat clinical faculty who maybe kind of taught a student before and now are ready to do another one. And the speed of actually placing that student is much faster. And so we actually think, yes, we're continuing to build that, but we actually think, over time as we get more placements, the actual speed of placements, the -- and the ease of placement actually gets better because you're not having to go rebuild the first time every time in these clinical placements. So I would actually argue it's harder the first several and it gets easier and easier as you get scale because you actually build these relationships with those faculty.

[Kieran Harris, analyst]

Yes, that makes sense. And just the last one for me, in terms of, I guess, the broader competitive landscape. Given the softer outlook you've mentioned for some of those traditional online programs such as business-type courses, are you seeing a noticeable shift in the OPM market, targeting those kind of health care, STEM-type verticals?

[Stephen Fireng, executive]

Not -- I mean -- honestly, I mean, there certainly is folks probably in more of the post-grad health care area, that there've been -- there certainly are some folks in that area, but I think, when you look at certainly in Australia, we're the only ones really doing clinical placements in the Australian region, so we don't really see a ton of competitive -- in the U.S., because we're one of the few that offer the accelerated bachelor's degree in nursing, which is the pre-licensure, which is basically I have a bachelor's degree in some unrelated field and I want to go be a nurse -- and we take them through a 12- to 15-month-long program to become a full-fledged practicing nurse. There's very few that are in that market. And we've -- over the last couple years, we now have 11.

Think about it. There's 11 of these accelerated bachelor's degree programs in the U.S. and Keypath works with 9 of them. And so we really do a pretty incredible job of owning that bachelor's degree in -- the accelerated bachelor's degree in nursing programs. And so yes, there are certainly people out there, but we feel like we have a really, really strong position to kind of get the number of programs and universities we need for our growth.

[Operator]

Thank you. At this time, we're showing no further questions. I'll hand the conference back to Mr. Fireng for any closing remarks.

[Stephen Fireng, executive]

Well, thank you again for all the support in Keypath.

As we mentioned here today, we really feel like -- in this transition period that, in terms of the interest level in working with Keypath and certainly the OPM space, it's really never been stronger. And so we feel really good about the future and the interest and bringing in university partners. And as we transition more of our programs into these nursing and social work and health care programs, we feel really great about kind of our long-term growth prospects. And we feel like we're in really, really good position to capture and really solve a massive challenge and filling really capable people into these health care professions. We feel not only great about our growth prospects. We also feel great about what we're doing with society and helping fill really a massive shortage in health care professionals.

So thank you very much for your support. And we look forward to seeing and talking to you many -- soon.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.