Keypath Education International Inc

ASX:KED

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Thank you for standing by, and welcome to the Keypath Education International Q1 FY '24 Report and Appendix 4C Investor Briefing. [Operator Instructions] I'd now like to hand the conference over to Mr. Steve Fireng, Global CEO. Please go ahead.

[Stephen Fireng, executive]

Thank you very much, and welcome to Keypath Education's Q1 Fiscal Year 2024 Results Presentation. I am Steve Fireng, Founder and Global CEO. And with me today is Peter Vlerick, our CFO. We are pleased to present the strong progress we have made throughout the first quarter of this fiscal year 2024 and the confidence we have in our outlook.

First, I want to give a reminder of what we do at Keypath Education. At Keypath Education, we're pioneering the transformation of education by leading the charge in online learning. Through strategic partnerships with renowned universities, we deliver high-quality programs to meet the demand in critical fields. Along with our global presence, we tackle skill gaps with a focused approach on high-growth markets such as health care and the Asia Pacific region. Backed by a strong financial position, we are on track for sustained profitability. Keypath is shaping the future of education, propelling both educators and learners towards unparalleled greatness.

Let's turn to how our goals are driven by our long-term priorities. We are laser-focused on our key drivers of growth, profitability and returns, namely by optimizing our portfolio and investments by reallocating capital to enhance mature vintage contribution margins, while executing growth plans for newer vintages.

In addition, we are executing from partnerships or programs that do not align with Keypath's and the university's mutual success. In addition, we continue our health care expansion by growing existing products, such as nursing and broadening our health care education platform to include new offerings. This includes expanding clinical health programs in Australia.

Also, we're going to grow APAC region, leveraging established enterprise relationships to establish offerings across online education platforms, while continuing to seek new partnerships in Southeast Asia for further growth.

And finally, our path to profitability, which is maintaining a strong focus on cost management, aiming for the ongoing adjustment (sic) [ adjusted ] EBITDA profitability starting in H2 FY '24. These strategies ensure our commitment to growth, profitability and financial sustainability while aligning to our mission.

Our strategy prioritizes markets with strong growth potential, where our expertise can make significant positive impact. In the U.S., we concentrate on leading innovation and delivery within the health care sector. This is a $12 billion market globally with persistent skill shortages. This is not a demand issue. 78,000 qualified nursing applications were not offered a place at nursing schools in 2022. We need to have more programs and clinical field placement spots to fill shortages within health care.

For example, in nursing, there is expected to be over 193,000 openings for registered nurses each year for the next decade. We have made great progress over the last few years now, partnering on 100 health care programs and have delivered over 21,000 clinical placements through our relationships with over 500 health care systems.

Now turning to our strategy in the APAC region. In a growing APAC region, we continue to excel in online higher education innovation, leveraging our strengths in student acquisition, a proven economic model and strong partnerships, we are expanding existing programs and exploring new offerings, including in our high-demand health care vertical. We are also driving innovation models like platforms and student pathway initiatives.

These strategies allow us to focus on markets where we can make a meaningful difference using our strengths to create positive transformation. Now I'm going to hand it over to Peter, who's going to go through our Q1 results. Peter?

[Peter Vlerick, executive]

Thanks, Steve, and good morning to all. As Steve mentioned earlier, we are very pleased with our first quarter fiscal 2024 operational and financial performance. We saw improved growth in enrollments driven by our strategic focus on the health care vertical and the APAC market.

Revenue grew 15% year-over-year on a constant currency basis. This revenue growth supports the confidence we have in our full-year guidance and longer-term growth prospects, and we believe further validates our continued health care focus and APAC strategy. Contribution margin increased 71% year-over-year to $10.6 million, while adjusted EBITDA was positive for the quarter and improved by $5.6 million year-over-year.

These results further validate our focus on U.S. health care and the APAC market as the underlying larger vintages with improved unit economics and return profiles work through our proven unit economic model. We ended the first quarter of fiscal 2024 with $32.9 million of cash on hand, which we expect to fully fund us to cash flow breakeven.

Turning to our results in more detail. As Steve mentioned, our strong contribution margin reflects the large recent vintages progressing through our proven unit economic model to maturity, offsetting the large number of programs we had signed recently that are in their deepest investment phase and the fiscal 2021 through fiscal 2025 vintages being very large vintages in terms of size and investment as well as expected steady state revenue of $25 million to $35 million.

Adjusted EBITDA improvements reflect our continued growth, strategic focus, cost efficiency and leverage. One demonstration of this is that our investment of $3.3 million in the quarter toward our new larger vintages was essentially flat year-over-year. Net cash used in operating activities in the first quarter of fiscal 2024 was $12 million, reflecting the timing of collections, employee costs and direct marketing required to procure, develop and manage new programs ahead of their launch.

Q1 and Q3 are typically lower cash-receipt quarters as our largest student starts and enrollments are in these quarters with a relatively high cash outflow versus cash inflow. Quarterly cash flow is also impacted by the timing of launches and therefore, spending on new programs. The use of cash in the quarter was expected and is in line with our plan for the full year.

Now let me turn it back to Steve, who will discuss our strong financial foundation and outlook.

[Stephen Fireng, executive]

Thanks, Peter. As highlighted throughout the presentation, Keypath stands on a solid financial ground and possesses a promising outlook. Based on our Q1 results, we are well positioned to maintain our role as a leading, growing and soon to be profitable on an ongoing basis, online education company.

Our robust balance sheet with $32.9 million in cash is expected to fund us through cash flow breakeven. We continue to expect future vintages to be larger than early vintages and as Peter mentioned, achieve $25 million to $35 million revenue at maturity, driving our expectations of mid-teens revenue growth in the medium-to-long term.

We are strategically expanding our offerings through revenue and margin-enhancing online education platforms. Our diverse portfolio is both noncyclical, which is a focus on health care and countercyclical, especially in business and STEM fields.

Our Q1 results provide us confidence in our FY '24 guidance ranges of $130 million to $135 million in revenue and negative $1 million to negative $3 million in adjusted EBITDA, both on a constant currency. We are targeting adjusted EBITDA breakeven from the second half of fiscal year 2024. I want to thank you all for participation and we're now open for Q&A.

[Operator]

[Operator Instructions] Your first question today comes from [ Andrew Tan ] from Canaccord Genuity.

[Unknown Analyst]

Just 2 quick ones for me, please. Just to understand that investment is flat PCP at $3.3 million on these new vintages. But just was curious, is there any further incremental direct marketing costs? And I guess what sort of pressures or tailwinds are presenting here, if any?

[Stephen Fireng, executive]

Yes. I'll -- maybe I'll just say a couple of things, and then I'll turn it over to Peter. No. I mean I think we're -- we actually feel really good about our launches and the programs that we've launched recently. As we've mentioned, we're launching programs in speech pathology and in counseling and social work and nursing, and feel really good about the efficiencies that we're getting in those new launches. So I think no, we -- we're not seeing any sort of increase there. But Peter, is there anything else to add?

[Peter Vlerick, executive]

No, I'd say exactly. I mean I think that, kind of to Steve's point, the investment that we're looking at, the $3.3 million, I mean, the biggest cost, as we've talked about in the past, is marketing that's in there. And so seeing that we're flat year-over-year, it just goes to the point Steve was just making. We're not really seeing a whole lot there. So...

[Unknown Analyst]

That's helpful. Maybe just one more for me. Around cash burn and breakeven, I suppose, what else needs to happen here to get there? Is it just business as usual into the second half of '24?

[Stephen Fireng, executive]

Yes. I mean I think -- yes, I mean, I think the short answer is we've been -- we're really confident with -- obviously, with our revenue that we've seen in Q1. And while there are timings that we see kind of quarter-to-quarter on revenue, we feel really, really confident in our -- as we've mentioned, our guidance range, which we'll drive to the profitability.

The launches that we've had, the investments we've made are in place. So we have a lot of confidence in there. And I think our staffing that we have invested, we feel really good about the staffing levels that we have to achieve our revenue and profitability goals. So yes, I don't think there's anything that has to happen that's unique or different than what currently already occurred in Q1.

[Peter Vlerick, executive]

Yes, Andrew, the only thing I'd add to that is it just gets back to -- yes, it's just our unit economic model playing out and as these vintages, the large ones that we keep talking about, 2021 forward, as these continue to mature, it just drives the contribution margin as you've seen in the past, and therefore, the bottom-line earnings as well as cash flow. So yes, we're just continuing to do what we do and are confident in our projections here.

[Operator]

[Operator Instructions] Your next question comes from Julian Mulcahy from E&P.

[Julian Mulcahy, analyst]

Steve, just one question from me. Given you made EBITDA profit of $2 million in the first quarter, and you're saying you're on track for a breakeven in the second half in FY '24. What happens from here? Do you dip into big losses in the next 2 quarters and then you [ emerge ] a different sort of trajectory?

[Stephen Fireng, executive]

Well, I mean, I think -- and Peter can comment on this. I mean, I think, yes, I mean, there's certainly -- as you know, there is timing elements based on our quarters and our starts of kind of how our start flows occur and the large mess that we have, kind of our starts in Q1 and Q3.

So yes, I think it does kind of ebb and flow in terms of where we see that year. But I think as you kind of seen in our past quarters, I think it runs in a very, very similar fashion. And I think as we said, we're really confident kind of with our guidance that we've given and feel really good about the strength kind of in those numbers. I don't know, Peter, is there's anything else to add?

[Peter Vlerick, executive]

Yes. Yes. I mean the only thing I'd add to that, Julian, is if you go back and look historically, Q2, to your point, is a typical loss period for us as we're scaling this business. And the main reason for that is like we've talked about with the holiday season, it's just a shorter enrollment period. So lower revenue, you've got the similar cost structure. And so that's the main thing that goes on. So yes, we expect that same pattern to occur this year as well. So...

[Julian Mulcahy, analyst]

Does it mean you took out losses -- you took out costs in the business in the last year so that's got you to like a strong improvement quarter-on-quarter or first quarter on first quarter. So it's going to be, I think, much less of a loss in the sort of second quarter. So I mean, your guidance looks very conservative.

[Stephen Fireng, executive]

Well, I mean, at this point, we're 1 quarter in. And obviously, as you can see, we feel really, really confident and we had a great first quarter. Yes, certainly, we want to continue to balance making investments into our growth to maintain the growth that we have and launching new products and programs and initiatives. But no, I mean, as you can see, we feel really good about where we started in Q1, and we'll see how that progresses. But we feel really -- obviously, as we said earlier, we feel really confident in our earlier guidance that we've given, and we can reflect any sort of changes in that as it reflects throughout the year.

[Julian Mulcahy, analyst]

And just one more, you seem to drop one partner off. When was that?

[Stephen Fireng, executive]

Yes. I mean I think as we said in our year-end, we had 7 partners that we are in some element of transition. Those were mostly in our Canadian and our U.K. operations as we've exited those regions. And so our -- certainly, our guidance and our projections the rest of the year kind of reflects that. And we just think that this business has to be a win-win in both us and the partner, and we're making those changes. But as we've mentioned in our last -- our year-end, we have 7 partners that are in various levels of transitions.

And so you will see, as we continue to add partners, as you've seen, we -- over the next 1 to 2 years, we're beginning to transition these partners back into their -- kind of out of our portfolio.

[Peter Vlerick, executive]

Yes. And Julian, these are in the -- I'm this goes to support our U.S. health care focus primarily outside of the APAC region. Those are the programs, so that once any partner exits a program, they're in the -- like Steve said, in the Canadian or U.K. market or in a non-health care kind of setting where there's just not strategic growth opportunities there. So...

[Operator]

As there are no further questions at this time. I'll now hand the conference back over to Mr. Fireng for any closing remarks.

[Stephen Fireng, executive]

Well, thank you very much for the questions. And obviously, I want to say, first of all, thank you all for the support in the company. We're very, very pleased with our Q1 results. We're really pleased with the progress that we've made in the company. I cannot say enough thanks to the Keypath employees across the globe. It is an amazing group of professionals who think about this company and the students and the universities every day, and I cannot be more proud to lead that group of professionals.

We are really excited about our FY '24, but also even more excited about our FY '24 and beyond results and expectations. So I want to thank everybody for your support and guidance and make it a great day. Thank you.

[Operator]

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