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Keypath Education International Inc
ASX:KED

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Keypath Education International Inc
ASX:KED
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Earnings Call Analysis

Summary
Q3-2024

Keypath Education Reports Strong Growth and Announces Acquisition Offer

In Q3 FY 2024, Keypath Education reported a 14% revenue growth year-over-year, driven by a strategic focus on healthcare and the APAC markets. Enrollment increased 6%, despite a net reduction of three partners due to exiting certain markets. Adjusted EBITDA for the year-to-date was a positive $2.7 million, an improvement of $10.5 million from the previous year. The company now expects full-year revenue to be between $137 million to $139 million and adjusted EBITDA to be between $2 million to $4 million. Additionally, Sterling Partners has offered $0.87 per share to acquire all remaining shares, representing a significant premium for current stockholders.

Earnings Call Transcript

Earnings Call Transcript
2024-Q3

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Operator

Thank you for standing by, and welcome to the Keypath Education International Q3 FY '24 Results Investor Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Steve Fireng, Founder and Global CEO. Please go ahead.

S
Stephen Fireng
executive

Well, thank you very much, and welcome to the Keypath Education results presentation for our third quarter fiscal year 2024 results. I am Steve Fireng, Founder and Global CEO. With me today is Diana Eilert, Keypath's Chair, who will take you through the recommendation offer from Sterling, our main shareholder, to buy securities of the unaffiliated stockholders of Keypath, which we also announced earlier today.

Let me first remind you that today's call and remarks made today include forward-looking statements. These statements are based on assumptions and contingencies that are subject to change without notice and are not guarantees of future performance. They involve known and unknown risks, uncertainty and other important factors, many of which are beyond the control of Keypath, its director and management. These risks and uncertainties include, but are not limited to, those factors identified in Keypath's periodic and continuous disclosure announcements lodged with ASX in its general form of registration of securities on Form 10 and in filings with the SEC. Except as expressly required by applicable security laws, Keypath undertakes no obligation to update those factors or any forward-looking statements to reflect future events, developments or changed circumstances or for other -- any other reason.

In addition, today's remarks refer to non-GAAP financial measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The investor presentation that accompanies today's call contains financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures and is available within our Investor Relations page of Keypath's website.

Now a quick overview of our Q3 FY '24 results, and I'm going to start on Slide 10. We are very pleased with our Q3 results, both operationally and financial performance. We saw enrollments grow 6% driven by our strategic focus on health care vertical and the APAC market. This was despite our partner count having a net reduction of 3 partners primarily as a result of previously discussed exit from Canada and U.K. markets and transitioning non-health care programs and the U.S. partners that offer those programs.

Revenue grew 14% year-over-year on a constant currency basis, we believe further validates our continued health care focus and APAC strategy. Contribution margin increased 66% year-over-year to $27.2 million or a margin of 26.5%. If we normalize contribution margin for the impact of transition programs, it improved to 23.3% versus 17.9% in the prior corresponding period.

Q3 year-to-date adjusted EBITDA was positive $2.7 million and [ improved ] by $10.5 million year-over-year. On a constant currency basis, our adjusted EBITDA was $3.1 million. As a result of our performance on the top and bottom line, we have recorded approximately $1.5 million of incremental bonus expense in FY '24 that will not reoccur in FY '25.

We ended third quarter fiscal year 2024 with $41.2 million of cash on hand. When adjusted for onetime cash spend of approximately $1.2 million in the quarter associated with the previously discussed SEC registration, we generated $700,000 of cash in the quarter versus a burn of $14.7 million in Q3 fiscal 2023.

On a year-to-date basis after adjusting $2.2 million of onetime SEC registration spend, overall year-to-date cash burn was $3.4 million. This further supports that we're approaching our overall cash flow breakeven in the near term and continue to be expected to be fully funded through cash flow breakeven.

As mentioned earlier, our contribution margin reflects the large recent vintages progressing through our unit economic model to maturity. We expect these vintages to each reach steady-state revenue of $25 million to $35 million. Adjusted EBITDA improvements reflect our continued growth, strategic focus, cost efficiency and leverage, and the impact of previously disclosed transition programs. One demonstration of that is our investment of $3.7 million in the quarter into new, larger vintages was approximately 8% lower than third quarter of fiscal year 2023.

Net cash provided in operating activities in the third quarter was $1.4 million, reflecting the timing of collection, employee costs and direct marketing required to procure, develop and manage new programs ahead of our launches. Q1 and Q3 are typically lower cash receipt quarters as our largest student starts 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 a full year.

Now let's turn to our outlook. We are positioned as a leading growing online education company profitable on an online -- an ongoing basis. Driven by these results, we are raising FY '24 revenue guidance range to $137 million to $139 million and raising our FY '24 adjusted EBITDA guidance range to positive $2 million to $4 million and expect continued improvements in positive adjusted EBITDA into FY '25. As previously disclosed, guidance includes revenue and adjusted EBITDA from transition programs. FY '24 is expected to have USD 8.4 million of revenue and $4.7 million of adjusted EBITDA, including the $1.9 million of adjusted -- additional bonus expense contributed by transition programs. There will also be some impact on FY '25. However, FY '25 impact is expected to be at a lower level than FY '24.

I will now hand it over to Diana, who will take you through the offer made by Sterling Partners, our majority shareholder, which has been recommended by an independent committee of the Board, which Diana chairs. Diana?

D
Diana Eilert
executive

Thank you, Steve, and hello to those who have joined today's call. I am Diana Eilert, and I'm the Chair of Keypath Education as well as Chair of the Special Committee of the Keypath Education Board. I'll refer everyone to the disclaimers that Steve has already iterated and are set forth in our presentation. Thank you.

As Steve mentioned, in addition to our Q3 FY '24 results, earlier today, we also announced an agreement with an entity affiliated with Sterling Partners, our controlling investor, to acquire all of Keypath's shares not currently held by Sterling and its affiliates for $0.87 cash per share in a merger transaction. That agreement has been approved by a special committee consisting of members of our Board who are independent and not affiliated with Sterling as well as by our full Board.

After a careful review of the proposal and a thorough negotiation, the Special Committee and Board recommend our stockholders approve the merger agreement. Among other conditions, the merger is subject to approval by a majority vote of our stockholders who are not affiliated with Sterling, rollover stockholders or directors or officers, which I will now refer to as unaffiliated stockholders as well as to the approval of the holders of a majority of all of our outstanding stock.

It is important to note that Keypath is a Delaware company subject to Delaware law. As such, the transaction will be governed by the laws of the State of Delaware and not the Australian Corporations Act. The process and documents are somewhat different to those of an Australian-domiciled company. As Chair of the Special Committee, I'd like to take you through the transaction overview and recommendation, the transaction process and reasons it is an attractive offer to unaffiliated stockholders, the terms and conditions and the indicative timetable and next steps.

So turning now to the transaction overview and recommendation. Keypath has entered into a definitive merger agreement whereby Sterling Partners will acquire all of the outstanding shares of Keypath common stock not currently owned by sterling Partners and its affiliates as well as certain members of management that are rolling for $0.87 cash per share. The Special Committee has carefully considered the advantages and disadvantages of the proposed transaction and believe the offer price of $0.87 cash per share represents the best option.

We believe the lack of liquidity caused by low trading volume is a significant impediment for existing Keypath investors as well as potential new investors and also raises concerns about the company's ability to incentivize and retain management. The proposed cash offer represents an attractive value and provides an immediate opportunity to stockholders to realize value at a significant premium to the market in what is an otherwise illiquid stock.

While Keypath has achieved considerable success in the U.S. health sector and Asia Pacific region, we acknowledge there remains potential for future growth. But this has to be balanced with the industry and the business as well as the market risks that Keypath stockholders face remaining as a publicly listed company given the investors' liquidity challenges. In considering the merits of the proposed transaction, the Special Committee has been guided by our overarching responsibility to consider the interest of all the Keypath stockholders, in particular, those not affiliated with Sterling.

Now turning to some background on the transaction process and the reasons we believe it is an attractive offer to stockholders. The Special Committee has engaged in a robust review process with the assistance of legal advisers. We also evaluated Keypath's alternatives as a publicly listed company. After an initial offer of $0.65 per share on February 23, the Special Committee was able to negotiate the price ultimately to $0.87. And part of this transaction, Sterling has indicated 2 things: firstly, it is a long-term holder and is not willing to sell shares at any price; and secondly, this is the only transaction it is prepared to support.

Due to this, the Special Committee does not have confidence that liquidity in Keypath CDIs will improve and therefore, have associated difficulties in adequately incentivizing and retaining employees who are key to our ongoing success. As one example, we had no market trading on 52 out of our 123 trading days in the 6 months to 23 May 2024.

With the substantial premium being offered by Sterling Partners, we believe the merger represents a favorable outcome for unaffiliated stockholders. Specifically, the basis for this recommendation and the reason why the Special Committee believes it's an attractive offer is, firstly, provision of liquidity. The transaction provides liquidity to the unaffiliated stockholders in an otherwise illiquid stock, and Sterling Partners is not willing to be a seller provided of liquidity through a sell-down.

This transaction represents a significant premium. The transaction consideration represents a premium of 88% to Keypath's 6-month VWAP of $0.46 and a 63% premium to Keypath's closing price of $0.53 on May 23, 2024, being the last trading day prior to the announcement of the proposal.

Thirdly, we believe there's certainty of value. This is a 100% cash offer and provides Keypath's unaffiliated stockholders with certainty of value and the opportunity to realize investment in full for cash.

Fourthly, there's limited conditionality. The transaction is subject to conditions customary for transactions of this type and is not conditional on finance or due diligence. The Special Committee also thought it was important to take into account that unaffiliated stockholders will have the ability to vote on the transaction at an official meeting with approval required by a majority of the votes held by unaffiliated stockholders.

Now we turn to the terms and conditions and the indicative timetable. A copy of the merger agreement, which sets out the terms and conditions of the agreement and associated matters was also released on the ASX today. In summary, the conditions for consummation include approval by the holders, including through CDI in 2 votes: a majority of shares held by Keypath's unaffiliated stockholders [ being in summary ] common stockholders other than Sterling Partners, rollover stockholders and Keypath executive officers and directors and any of their associates or affiliates; and secondly, a majority of shares held by all of Keypath stockholders; the absence of a material adverse effect with respect to Keypath and certain other customary closing conditions.

In terms of the indicative timetable and next steps, Keypath stockholders do not need to take any action at this time. A copy of the merger agreement, which sets out the terms and conditions of the transaction and associated matters was also released today and will be filed with the U.S. SEC. As mentioned earlier, stockholders do not need to do anything today. Keypath intends to call and hold a special meeting of stockholders for the purpose of voting on the merger agreement and other matters relating to the transaction. That special meeting is expected to be held in or around September 2024.

Keypath is preparing a proxy statement containing information relating to the transaction, reasons for the Keypath Special Committee unanimous recommendations and other details of the special meeting. That proxy statement, which is subject to review by the ASX and SEC, will be sent to Keypath stockholders when complete, and we expect this to be in or around August 2024.

In closing, I'd like to reiterate that the Special Committee believes this is a strong offer and an opportunity for investors to exit an illiquid stock at a large premium to current pricing. We believe it is important to now bring this to shareholders for consideration.

I'd like now to see if there are any questions from the call.

Operator

[Operator Instructions] There are no questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.

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