Keypath Education International Inc

ASX:KED

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by, and welcome to the Keypath Education International Q3 FY '23 Report and Appendix for the Investor Briefing. [Operator Instructions]

I would now like to hand the conference over to Mr. Steve Fireng, Global CEO. Please go ahead.

[Stephen Fireng, executive]

Well, thank you, and hi, all. Welcome to our Q3 FY '23 results webcast. Joining me here today is Peter Vlerick, our CFO. We'll talk about Keypath.

Keypath is a global ed tech company, leading transformation of education to online, with the mission to unlock greatness in educators and individuals. We do this by partnering with leading universities to offer high-quality online programs across the most in-demand disciplines globally.

Keypath is positioned to leverage our global presence and solve global skill in an evolving market. Our platform supports universities through online education within large and growing markets within health care and Asia Pacific markets. We continue to grow our revenue while having good traction to achieve profitability.

To put this in context, let me talk about some metrics on Keypath. Keypath is a growing global business with an attractive market with strong underlying fundamentals today. We have 43 global university partners, 240 active programs, which continues to grow, showcasing universities who want to expand online in a partnership model. And really, all of this is done because of our 800 dedicated employees around the globe.

We certainly are proud of our culture, and it's recognized with Best Place to Work awards in Australia, Canada and the U.S. And our employees and their commitment to our mission is what drove our financial performance.

Our financial performance in Q3 year-to-date FY '23 revenue was $91.7 million, up 9% on a constant currency basis, driven by our 22% growth rate in our Healthcare and Social Science programs. Peter will go into our Q3 FY '23 financial results shortly. But before, let's turn to how these results reflect our longer-term priorities.

We are laser-focused on key drivers of growth and profitability and returns. Number one, we're optimizing our portfolio by reallocating investments in capital to drive mature vintage contribution margins while also executing growth plans on our exciting new recently launched [ Science ] programs. And as I've mentioned before, we're looking at options to optimize our partner and program portfolio to focus on regions and verticals where we see the most opportunities for Keypath and our partner.

And number two, a really exciting part is our growing our Healthcare business, and we're doing this by growing in 3 areas. First of all, expanding our existing product such as Nursing, Social Work and Counseling; Second is growing our Clinical Health programs in Australia. And lastly, introducing new products such as Occupational Therapy, Speech Pathology and several others.

Our third priority is obviously expanding in APAC via our enterprise relationships, growing offerings across online education platforms while also growing with existing and new partners in Southeast Asia. And finally, we continue to be hyper-focused on cost as we continue down the path of profitability with adjusted EBITDA profitability from H2 FY '24. These long-term priorities are all in the context of a market undergoing growth, transformation and transition.

As we've seen, online education is transforming Higher Education by providing more access to individuals to acquire new skills or reskill to adapt to global changes. We continue to believe online education and university partnering with providers will continue to fuel this access and growth.

And why do we focus on health care? Well, Keypath continues to be a leader in Healthcare Education, and the need for health care professionals has never been greater. We feel Keypath is well positioned with our investments in clinical placements and Healthcare courseware to solve shortages within Nursing and Social Science field. As you can see, our Healthcare vertical is making up an increasingly large proportion of our revenue, which we feel provides a strong underpinning to our long-term growth and is a real competitive advantage.

Now let's turn to how we've built our market-leading momentum in online education within Healthcare. When we launched our Healthcare platform, we wanted to build something that universities could leverage to create scale and grow and build something that is very hard to replicate as a single university. And I do believe we've accomplished that goal. 28 of our 43 university partners have Healthcare programs, and 20 of them use our clinical placement function and network where we place students for practical hands-on component of their Healthcare degree.

In that short time, we've built a network of over 15,000 clinical and field placement relationships with approximately 350 health care systems in our global placement network. This investment in clinical placement and in new products will drive much of our growth in the future, as evidenced by the fact that our Healthcare revenue is now 54% of total revenue. And today, we're growing the Healthcare platform of the future.

From this compelling offering and head start, Keypath is excited about building the Healthcare Education platform of the future. We will have more to say about this at our Investor Day later in May. Our vision for Healthcare Education is to create a platform for all health care stakeholders to maximize access and choice to Healthcare Education. The results are to address skill shortages in health care that no other university partner can create on their own.

And now turning to the other area where we're driving significant evolution of online education, and that's our APAC region. In APAC, Keypath has proven track record of partnering with leading universities to maximize their reach by turning their on-campus programs into online versions and also developing new online programs for them in new and complex areas such as Healthcare, Social Science, Business and STEM. We have 10 partners in Australia, and we're making great progress with our diversified offering as well as expanding in new offerings within short courses for accelerators and degrees, adapting to students looking for short skill-based training.

More broadly, our Southeast Asia expansion is progressing well with us having partnerships with 2 leading private institutions: Sunway in Malaysia and SIM in Singapore. There is more to come in Southeast Asia as we continue to execute on our strategy of building on 2 enterprise-level partnerships with online education platforms across the partners.

Through our landmark partnership, Melbourne Business School, is in market today, enrolling students for our first intake in July. The online programs of MBS will be offered as a platform concept for increased market reach and impact beyond our standard post-graduate programs, which includes short courses and career accelerators. Both Southeast Asia and MBS are in line with expectations, and we continue to see long-term sustainable growth.

We are continuing our market leadership in APAC in developing online education platforms for our partners in key verticals as business and regions such as Southeast Asia. This will maximize the reach to students to meet them where they are in their life journey and with their life goals while also keeping Keypath to drive revenue growth from expanding addressable markets and platforms from new courses, enhanced conversions and cross-selling.

Well, now let me turn it over to Peter Vlerick.

[Peter Vlerick, executive]

Thanks, Steve, and good morning to all. As Steve mentioned previously, we saw continued growth in programs with our focus in the U.S. health care market and big wins in the APAC market. Of the 7 programs added in the quarter, 6 were in Healthcare segment in both the U.S. and Australia. Course enrollment growth continued to moderate, as expected in the quarter, given the challenging comp to fiscal 2022, which benefited from the COVID enrollment lift, particularly in the APAC market. We expect that exiting Q3, this challenging comp should normalize.

For the quarter and year-to-date periods, revenue grew over 10% and 9%, respectively, on a constant currency basis. This growth was primarily driven by our improving portfolio mix. For the 9 months of fiscal 2023, contribution margin decreased, as expected, by $1.2 million to $16.8 million. This expected decline reflects the challenging comparison to fiscal 2022 due to lingering COVID benefits in 2022. In addition, contribution margin felt the impact of the expected softening of enrollments in our mature businesses, which are more heavily weighted to the business vertical.

For the 9 months of fiscal 2023, adjusted EBITDA declined, as expected, by $2.6 million. This decline was due to the contribution margin decline I just noted. In addition, year-over-year foreign currency impacts, as well as increased travel-related expenses exiting COVID, contributed to adjusted EBITDA declining year-over-year. As noted in prior presentations, we do expect to get material leverage on our indirect costs over the coming years.

Turning to our cash position as of the end of Q3, we ended the quarter with $36.8 million of cash on hand and no debt. This is in line with our expectations and reflects the seasonality of our business. As a reminder, Q1 and Q3 are typically lower cash receipt quarters as our largest student starts and course enrollments are typically in these quarters, with a relatively high cash outflow versus cash inflow in these quarters. We remain confident we are fully funded to cash flow breakeven.

Now let me turn it back to Steve, who will discuss our fiscal 2023 progress and our outlook.

[Stephen Fireng, executive]

Thanks, Peter. As we've discussed throughout the presentation, Keypath has strong financial foundations and outlook and is well positioned to continue being a leading, growing and soon profitable online education company.

We have already sold 40 programs from our future vintages, of which 35 are in Healthcare. We are maximizing the breadth of our offerings through revenue and margin-enhancing online education platforms, including our MBS partnership. Our portfolio is well diversified with partners in various regions, programs in different verticals, along with strong macro trends in online growth within Education.

We are reconfirming our FY '23 guidance of USD 125 million to USD 130 million revenue and negative USD 7 million to negative USD 9 million adjusted EBITDA, both at a constant currency, and our target for adjusted EBITDA breakeven of second half of fiscal '23. We are looking forward to going to detail on our strategy and growth and profitability initiatives at our virtual Investor Day on 18th of May, with registration details available in an ASX announcement from March 22, 2023. Thanks for all joining, and we're happy to open it up for Q&A. Thank you.

[Operator]

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

[Tim Lawson, analyst]

I might just actually ask Peter, just to sort of talk through the sort of cash flow seasonality between now and your sort of second half '24 cash flow breakeven target. You sort of touched on some of that, but maybe sort of thinking about how that seasonality affects that cash profile over the next sort of 12 months.

[Peter Vlerick, executive]

Yes. I think our next year, we didn't talk about cash flow, we're talking about profitability from the second half of 2024. But yes, from a cash flow perspective, specifically, as we've seen in the past, and I mentioned Q1 and Q3 are going to be our big burn quarter, and that will continue to be where you see more outflows than inflows typically in those quarters.

And that will continue going forward, just because of the seasonality and the nature of our intakes won't change with the underlying business. But yes, from there, I mean, we're feeling, as I mentioned, that we're fully funded through cash flow breakeven. So we expect to continue to burn into FY '24 and then leveling now at some.

[Stephen Fireng, executive]

And Tim, the only thing I would add to that -- sorry, Tim. Can I just maybe just jump in real quick? I think the thing that, also, about our business we talked about is we're continuing to get leverage on our indirect costs. So if you kind of look at our indirect costs over this period of time and you kind of continue to grow revenue into the future, and we don't -- we feel like we've built and invested in our indirect costs where we're not going to see a substantial amount of increased costs there, so we're getting continued leverage there.

And then as I said in my comments, we're hyper-focused on our costs. We're obviously, as we talked about, we're evaluating opportunities with our partners and doing everything we can, obviously, to make sure that we're maximizing the greatest opportunities for Keypath and our partners.

[Tim Lawson, analyst]

Yes. That's great. And Peter, just in terms of the -- I appreciate your first quarter and third quarter, a big cash burn, and you're talking about sort of a profitability breakeven. But we still should see some improvement aligned with that on the cash flow side as well.

[Peter Vlerick, executive]

Sure. I think -- I mean, obviously, the burn mitigating otherwise, we'll run out of cash right? So this all tied next. I mean, as we talked about in the past, the reason that you're not seeing material improvement in cash outflow, if you were to look at the cash flow from operations last year for the quarter versus this year, the reason that's not maybe much is because of all the large vintages that we're going to, which as those mature, as we've talked about, that's where the profitability comes, that's where the cash flow comes and whatnot. So these are the large vintages running through our P&L as well as the Asia launching our start-up operations over there. So that all mitigates over time.

[Operator]

[Operator Instructions] Your next question comes from Jules Cooper from Shaw and Partners.

[Jules Cooper, analyst]

I just wanted to touch on the sort of the pivot and focus on the more profitable vintages and your back book. You do comment in the release that you're seeing continued pressure there. Is that really you just sort of highlighting, I guess, what you've already communicated as being an impact for this year, which, I think, was around about a 15% decline in those earlier vintages? Or are you sort of just highlighting that, that is sort of an ongoing pressure in that area and would like to -- just an update on how you're seeing that mature vintages progress would be helpful.

[Stephen Fireng, executive]

No, no. I don't think there's any sort of change to the growth rate on our mature or, you call it, our back book vintage. We've previously have talked about that, about a 15% decline kind of in our mature vintage. And just to remind you and everybody, part of it, we saw some decline just based on the market dynamic. Most of these programs, they're in decline, were in the kind of the business vertical that have a kind of countercyclicality to it.

In addition, we took -- because of that decline, we took -- and we had large vintages in 2021, '22 and '23. We took investments in marketing dollars from there and reallocated those to where we think the longer-term growth pattern is going to be. So we -- those wouldn't decline to 15% if we wouldn't have taken some investments out of those, but that we needed that to fund these very, very large recent vintages.

But no, to simply ask your question, no, there's no material change in our mature vintages that are basically tracking what we thought they were going to be. And obviously, but it does put pressure when your back book is what drives a lot of your contribution margin. It obviously puts a little bit of pressure on your near-term year-over-year contribution margins.

[Jules Cooper, analyst]

Got it.

[Peter Vlerick, executive]

Yes. The only thing I'd add to that, Joel, is that, as we've said in the past, and this is still the case today, is that we expect that mature vintage decline to moderate going into '24 and beyond. So it's not like we're going to continue to decline 15% in perpetuity here. So...

[Jules Cooper, analyst]

Yes. Okay. So we should really be -- I know you haven't sort of providing guidance or anything. But if we just think through the logic here with that mature vintage impact being less and moderating into next year, plus the growing Health business and the size of that, overall, we should see pretty strong solid top line growth into '24.

[Stephen Fireng, executive]

Yes. I mean just -- I'd take you to one that I think why we feel good about it. If you look at course enrollments being relatively flat year-over-year from kind of -- looking at our course enrollments, but you look at our revenue being on a constant currency, 8% or 9%, and I think that is really an illustration that our portfolio is actually getting stronger, is that our course enrollments continue to drive better return, drive better revenue per student.

And so as we make this shift, we're shifting not only to what we think that the market is going to, we're actually shifting to our portfolio that has, I'd say, better unit economics in terms of the revenue per student. Again, they take a lot of investment to get up and running. That's why our recent vintages dragged so much contribution margin. But we think, long term, and if you just look at course enrollments and you look at the revenue, we think that that's -- it's a good indication that the transition is working fairly well.

[Operator]

Thank you. There are no further questions at this time. I'll now hand the conference back to Mr. Fireng.

[Stephen Fireng, executive]

Well, thank you very much for listening to our Q3 results. We are proud of the results since being a listed company. It's a great company to be at. I'm really proud to lead a bunch of just real, real professionals in this education industry.

Also, remind everybody to certainly join our Investor Day coming up in May. And we're excited about sharing more details on our Healthcare platform, more details on our Education platforms and really kind of our drivers for growth. So thank you. Thank you very much, and have a great day.

[Operator]

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