Coursera Inc

NYSE:COUR

Earnings Call Analysis

Solid Financial Performance with Continued Growth Expectations

Coursera reported strong Q2 results with a 12% increase in Consumer revenue, largely driven by new certificates from prominent tech partners and AI course enrollments. Enterprise revenue grew by 8%, while Degrees revenue saw a 14% rise. The company projected Q3 revenue between $171 million and $175 million and reaffirmed its 2024 revenue guidance of $695 million to $705 million. Adjusted EBITDA for Q3 is expected to range from breakeven to $4 million, targeting an annual margin of 4%. Coursera also highlighted substantial free cash flow and significant share repurchases.

Solid Q2 Performance Amid Growth Strategy

Coursera reported total revenue of $170.3 million in Q2 2024, marking an 11% increase year-over-year. This growth stems from the company's focus on diverse educational customers, from individual learners to large institutions. The company managed to maintain strong operational discipline, resulting in a gross profit of $92.3 million and a gross margin of 54%.

Operating Expenses and Profitability

Coursera's total operating expenses were $86.8 million, or 51% of revenue, which shows a 7 percentage point improvement from the previous year. The reduced expenses came from ongoing efforts in R&D and G&A functions. Coursera achieved a net income of $13.8 million, translating to 8.1% of revenue, with an adjusted EBITDA of $10.4 million, about 6.1% of revenue. These results indicate an operational leverage that supports the company's growth initiatives.

Strong Cash Flow and Share Repurchase Strategy

The company generated free cash flow of approximately $17 million, a robust performance that includes over $2 million in capitalized content asset purchases. Coursera completed share repurchases totaling approximately $31 million in Q2. The quarter ended with about $709 million in unrestricted cash, indicating a strong financial position with no debt.

Consumer Segment Shows Robust Growth

Coursera's Consumer segment revenue reached $97.3 million, a 12% increase due to heightened demand for entry-level professional certificates and generative AI courses. The segment's gross profit was $52.4 million, with the number of registered learners soaring by about 7 million, which includes a notable increase from non-North American regions.

Impressive Performance in Enterprise and Degree Segments

The Enterprise segment generated revenue of $58.7 million, up 8% with a net retention rate of 93%. The Degrees segment also saw growth of 14%, resulting in $14.3 million in revenue, driven by an increase in new students and the scale of recent programs. Notably, total Degrees students grew by 19% to 22,600.

Guidance and Outlook for Future Growth

Looking ahead, Coursera forecasts Q3 revenue to be between $171 million and $175 million, with adjusted EBITDA expected to range from breakeven to a positive $4 million. For the full year 2024, the company reaffirms expectations of $695 million to $705 million in revenue and an adjusted EBITDA between $24 million and $28 million. These targets reflect confidence in maintaining a solid performance amid evolving market and educational trends.

Addressing Market Challenges and Opportunities

Despite stabilization in the corporate learning market, Coursera recognizes the pressing need for skills development, particularly in the face of generative AI trends. The company emphasizes launching a record number of entry-level professional certificates, aiming to cater to diverse learner needs. Coursera is also focused on refreshing existing content to remain relevant to evolving job markets.

Strategic Investments and Future Directions

Coursera's capital allocation remains focused on growth opportunities, with management expressing the intent to address shareholder dilution through a price floor for future employee grants. The company continues to explore M&A opportunities, leveraging its strong cash position to seize strategic investments that align with emerging technological advancements in education.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Coursera's Second Quarter 2024Earnings Call. [Operator Instructions] Please be advised that this call is being recorded. [Operator Instructions] I'd now like to turn the call over to Cam Carey, Head of Investor Relations. Mr. Carey, you may begin.

[Cam Carey, executive]

Hi, everyone, and thank you for joining us for Coursera's Q2 2024 Earnings Conference Call. With me today is Jeff Maggioncalda, Coursera's Chief Executive Officer; and Ken Hahn, our Chief Financial Officer. Following their prepared remarks, we will open the call for questions.

Our earnings press release, including financial tables was issued after the market close and is posted on our Investor Relations website located at investor.coursera.com, where this call is being simultaneously webcast and were versions of our prepared remarks and supplemental slides are available. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP measures to the most directly comparable GAAP measure can be found in today's earnings press release and supplemental presentation on our Investor Relations website.

Please note, all growth percentages refer to year-over-year change unless otherwise specified. Additionally, all statements made during this call relating to future results and events are forward-looking statements based on current expectations and beliefs. Actual results and events could differ materially from those expressed or implied in these forward-looking statements due to a number of risks and uncertainties, including those that are discussed in our earnings press release, supplemental presentation and our most recent SEC filings.

And with that, I'd like to turn it over to Jeff.

[Jeffrey Maggioncalda, executive]

Thanks, Cam, and good afternoon, everyone. It's great to be with you all.

I'm pleased to share that we delivered a solid set of operating and financial results as we execute on our growth initiatives. We surpassed more than 2 million enrollments in our generative AI catalog of courses, credentials and hands-on projects. We welcomed nearly 7 million new learners to our platform, one of our highest quarterly increases since 2020.

We launched more entry-level professional certificates in any single quarter in our history. In fact, more than the entirety of 2022 with new titles coming from leading partners like Google Cloud, IBM Meta and Microsoft. We have made significant strides in introducing and enhancing AI-powered product innovations, including Coursera Coach, Course Builder, Generative AI Academy for teams and a new suite of academic integrity features. And importantly, we are reaffirming our full year 2024 outlook ranges for revenue and adjusted EBITDA.

Now I'd like to begin with a brief overview of how the landscape is evolving before focusing on how we're executing to address the evolving opportunity in education. As we discussed, Coursera's platform sits at the intersection of several long-term secular trends. The digital transformation of every institution in our society, the urgent need for skills development and the evolution of higher education to better meet demands of a changing economy, shifting demographics and the globalization of talent. Navigating these trends is not an easy task.

As the generative AI revolution unfolds, individuals are anxious about displacement and job security and businesses are struggling to adapt. And we see this outlined in almost every study to date. Microsoft and LinkedIn recently published their 2024 Work Trend Index annual report. They found that nearly 80% of leaders agree that their company needs to adopt AI to stay competitive but 60% worried that their organization's leadership lacks a plan and vision to implement AI.

And these dynamics are affecting their talent strategy. 66% of leaders say they wouldn't hire someone without AI skills and 71% said that they would rather hire a less experienced candidate with AI skills with a more experienced candidate without them.

This leads to the second trend, the need for skills development. In June, we published Coursera's sixth Annual Global Skills report, drawing on data and insights from our global learning community. Several of the key findings reaffirm the Microsoft report. First, AI literacy has emerged as a global imperative and employees are not waiting for their employers to catch up. Recent trends in our learner demand demonstrates how they are taking skilled development into their own hands.

For example, in 2023, our generative AI content saw 1 enrollment per minute. In 2024, it has quadrupled 24 enrollments per minute. Second, learners are increasingly turning to industry micro credentials to gain essential digital skills for jobs. And third, regional skill adoption is not occurring at an equal pace with countries facing the risk of being left behind.

Access to a more affordable, relevant and flexible system of higher education can help ensure that anyone anywhere has equal access to the skills, credentials and job opportunities to compete in our fast-changing world.

And this brings me to the final trend, the transformation of higher education. Academic institutions acknowledge their need to evolve. In June, we convened nearly 100 higher education leaders from over 20 countries, including campus and government customers as well as university and industry partners at our headquarters for our annual future of Higher Education Summit.

We asked them what was their institution's biggest challenge in the coming year. And there were 3 top responses that focus on: one, modernizing curriculum to meet the needs of learners; number two, adapting quickly to emerging skill demands from employers; and number three, embracing new technology to bolster their teaching and learning.

As university decision-makers, workforce development leaders and industry experts, their feedback continues to reinforce my conviction in our vision for the future of higher education, the strategic assets that differentiate our ecosystem with quality and trust and the global need for a platform like Coursera.

Now let's discuss how we are executing on this vision with the recent progress across each of Coursera's platform advantages. The first advantage is our educator partners and the premium credentials that they create. When Courseras founders put their first course online, the global receptivity they experienced was driven by 2 important elements. First, Andrew and Daphne were professors at Stanford University, a trusted institution with global authority and brand recognition. And second, they provided expertise and skills development in emerging technologies that were desired by the labor market.

Over a decade later, the same value proposition continues to power Coursera's content engine with many of our educator partners focused on ensuring equitable access to critical skills in order to thrive in today's digital economy. Across our catalog from short hands-on projects to longer forms of studying credentials, including a new degree from Clemson University, generative AI is being infused into the curriculum so that every learner no matter the stage of their journey can acquire the skills necessary and the branded credentials necessary to acquire, retain and advance their career.

Now let's discuss highlights for several of our recent announcements, starting with the entry-level professional certificates. It was a record quarter for our content engine. In Q2, we added 15 new certificates from leading technology brands like Google Cloud, IBM Meta and Microsoft. The programs are designed for learners looking to start or switch into high-demand careers like cloud support cybersecurity, data analysts, Javascript developer, product manager, project manager and many more. We now offer more than 60 entry-level professional certificates with a strong pipeline of additional titles coming later this year.

But our efforts to enhance this catalog are not solely focused on new launches. Recently, we announced that 8 certificates from IBM, Meta and Microsoft have been upgraded with job-specific generative AI content. This is the start of a broader initiative to enhance our existing certificate catalog, ensuring that these credentials keep pace with transforming job roles and emerging skill requirements.

As the industry experts that develop and deploy these technologies, our partners are uniquely positioned to help individuals navigate a rapidly evolving labor market. and ensure businesses are equipped with the tools and training to transform their technology and their talent. And we are leveraging new capabilities like Course Builder to dramatically reduce the time and cost of content production without sacrificing quality.

Next, we now have more than 250 generative AI courses and guided projects. Short-form content plays an important role in introductory learning as well as rapid skill development. However, we know that individual institutions also value longer forms of study to build a deeper level of expertise earn academic credit with verified learning and critically important, stand out to employers in order to retain or secure a job. This is the value of a branded credential.

Our generative AI catalog started with high-quality short-form content, but we are excited about a growing selection of generative AI credentials that can create more value for our learners and enterprise customers. Recently, we announced several new specializations and certificates from top partners like DeepLearning.AI, Vanderbilt University, the University of Michigan and the University of Colorado Boulder.

Additionally, we launched the third pillar of our Gen AI Academy offering, GenAI for Teams. Our earlier programs focused on foundational AI literacy for all employees as well as executive education to help leaders formulate NII strategy. But GenAI for Teams curates the use of generative AI to specific job roles and functions, offering real-world applications and secure hands-on practice right inside the courses. We are starting with the software and product data and marketing teams as these functions are estimated to have outsized initial benefits from the innovation unlock and productivity gains created by integrating generative AI into their daily operations.

Individuals and institutions are looking to harness the potential of emerging technologies, and these new course offerings are the initial stages of a strategic initiative to help our educated partners create a broad portfolio of generative AI credentials. We are creating a leading destination for learners looking to discover, develop and demonstrate generative AI skills for career advancements and for businesses looking to transform their talent.

This brings me to our second major advantage, the global reach of our platform. As I referenced earlier, we added nearly 7 million new registered learners growing our global base to 155 million by the end of June. We grew the number of paid enterprise customers by nearly 20% to over 1,500 with recent additions coming from all verticals, especially businesses.

And to serve the broad needs of a rapidly expanding ecosystem, we continue to invest in our platform's third advantage, which is product innovation. Our innovation efforts continue to be focused on how we can uniquely leverage generative AI across our platform, including content, data, technology and marketing.

For today's updates, I'd like to start with Coursera Coach. Earlier this month, we were pleased to announce the general availability of Coach for our paid consumer learners and all enterprise customers. We also unveiled an updated visual identity for Coach, along with a redesigned more integrated user experience. As a reminder, Coursera Coach is our interactive AI-powered guide that is tailored to learners' unique goals and anchored in expert content on Coursera.

To date, Coach has been used by more than 700,000 leavers and concurrently respond in 21 languages supported by the underlying large language models. Today, Coach enables learners to ask questions to clarify material and stay on track, summarize key takeaways for better notetaking, practice for quizzes and tests to solidify knowledge and gaps, and explore how they're learning aligns with current or future career goals. In the future, we expect Coach will play an increasingly prominent role throughout Coursera's platform from personalized learning and discovery to career counseling and guidance.

Next is Course Builder, which we introduced to our enterprise customers earlier this year. Our AI-assisted authoring tool allows any business, government or campus customer to easily and quickly produce high-quality courses at scale. Additionally, Course Builder can blend learning modules from our catalog of university and industry partners with internal content, training and expertise in order to create custom private courses that are tailored to the unique needs of each organization. We have a number of enhancements planned for the coming quarters, but I'm excited about the positive early feedback we are receiving from the nearly 100 institutions that have started using Course Builder.

And for my final product update, I'd like to discuss our recent advancements in AI-powered academic integrity. Online learning has become a powerful tool for institutions to better prepare students for a rapidly changing world, and it plays an important role in both affordability and accessibility. However, universities must ensure that it meets the rigorous standards required for academic credit. While generative AI introduced new risk for student misconduct and cheating, it also provides unprecedented opportunities for universities to enhance academic integrity at scale.

Our platform is utilized by universities in several ways as educator partners, campus customers and degree providers which is why I was particularly excited to announce a new suite of generative AI-powered features designed to help scale assessment creation and grading, strengthen academic integrity and enhanced learning and evaluation. The features included broad capabilities like AI assistant grading, assessment generation, automated peer review, proctoring, plagiarism detection, viva exams and more.

This launch builds on our recent recognition as the first online learning platform to receive the American Council on Education's Authorized Instructional Platform Designation, helping ensure student outcomes genuinely reflect their effort, mastery of course, material and their skills. These are major steps in protecting the reputation and value of online learning and industry micro credentials, making it easier for universities to recognize them for academic credit and for employers to validate a candidate's qualifications for employment. It also helps individuals and institutions everywhere benefit from trusted verified learning on Coursera.

To wrap up my opening remarks, A reminder of the most important initiatives we are focused on in the second half. First, we are broadening our catalog of entry-level professional certificates, including new launches and upgrades to existing titles. Second, we're focused on growing our enterprise segment, helping our business, government and campus customers keep pace with gentive AI and labor market demands. And third, we're focused on scaling our degree programs with a focus on flexibility, affordability and credit pathways from our consumer catalog. Finally, we are investing in product innovation that can deliver more value and a differentiated experience for the millions of learners coming to Coursera every quarter.

I'd like to now turn it over to Ken. Ken, please go ahead.

[Kenneth Hahn, executive]

Thank you, Jeff, and good afternoon, everyone. I'm pleased to report solid second quarter results for Coursera. In Q2, we generated total revenue of $170.3 million, which was up 11% from a year ago. Our platform's ability to address diverse needs of customers around the world from individual learners to large institutions continues to serve us well as we navigate the trends reshaping higher education.

In addition to providing a broad global lens, this approach allows us to target our growth opportunities with a common set of assets and shared investments, including content, product, data and marketing. And this creates operating leverage in our model, which we continue to demonstrate with the strong bottom line and free cash flow performance we delivered once again this quarter.

Please note that for the remainder of this call as we review our business performance and outlook, I'll discuss our non-GAAP financial measures unless otherwise noted. For the second quarter, gross profit was $92.3 million, a 54% gross margin, up from 53% in the prior year. Total operating expense was $86.8 million or 51% of revenue, an improvement of 7 percentage points from the prior year period on continuing operating discipline in our R&D and G&A functions.

Net income was $13.8 million or 8.1% of revenue and adjusted EBITDA was $10.4 million or 6.1% of revenue. While we do not optimize for EBITDA in any single quarter, our first half performance has continued to demonstrate the leverage inherent in our model. and provided us with a strong start toward achieving our 2024 adjusted EBITDA margin target of approximately 4%.

Now let's discuss cash performance. We generated strong free cash flow of approximately $17 million, which I'll remind you, is inclusive of more than $2 million in purchases of content assets which we now treat similarly to the other categories of capital expenditures, effectively lowering our free cash flow computation. As Jeff mentioned, partner receptivity to this type of strategic content arrangement has been exciting, particularly due to the important role we believe trusted brands and verify credentials will play in the future of learning, skill development and career advancement.

Moving to the balance sheet. In Q2, we repurchased 2.7 million shares of our common stock for approximately $31 million, excluding commissions. This was inclusive of the $16 million we bought back in April, which I discussed on our prior call, as well as the remaining $15 million we expected to complete in the weeks that followed. This resulted in us ending the quarter with approximately $709 million of unrestricted cash and cash equivalents with no debt.

And over the past year, we returned $95 million to shareholders through stock repurchases while preserving the primary focus of our capital allocation strategy, which emphasizes growth. We believe that our strong financial position is an asset that provides resilience and strategic optionality, which is particularly valuable during a period of rapid technological change. and the focus on prioritizing growth in terms of our capital allocation strategy has not changed.

But we also believe it is important to address future dilution concerns of our investors. So management has recommended with the compensation committee approval, the introduction of a price floor of $10 per share for all future employee grants, effectively eliminating the number of shares issued for dollar-denominated stock-based compensation. This action, along with our completed repurchase program are a direct reflection of the value we place on shareholder equity. As we navigate near-term trends to better position ourselves for future growth opportunities we remain focused on executing our long-term strategy to lead our large, early and dynamic markets.

Now let's discuss the performance of our segments in more detail, starting with Consumer. Consumer revenue was $97.3 million, up 12% from the prior year on growth in Coursera Plus, driven by ongoing demand for entry-level professional certificates and generative AI courses and credentials. Segment gross profit was $52.4 million or 54% of Consumer revenue, up from 52% in the prior year period. And our top of funnel activity remained robust, with approximately 7 million new registered learners this quarter, which did include a higher mix coming from regions outside of North America.

I was pleased by our execution in Consumer this quarter, particularly the number of high-quality branded credentials we launched, including several that were created under our new content production arrangements that can include more favorable revenue share economics and in many cases, exclusivity.

Moving on to our Enterprise segment. Enterprise revenue was $58.7 million, up 8% from a year ago on growth across our business, campus and government verticals, including some signs of stabilization in the corporate learning market. Segment gross margin was $39.9 million or 68% of enterprise revenue compared to 71% a year ago. As a reminder, Q2 of last year was slightly higher than expected due to a onetime benefit of a contract amendment with one of our educator partners which has the effect of increasing our enterprise segment margin by 4 percentage points for that historic quarter.

Removing the onetime variance, enterprise segment margin would have been up slightly year-over-year. The total number of paid Enterprise customers increased to 1,511, up 17% from a year ago. And our net retention rate of paid Enterprise customers was 93% as we continue to work through some government partnerships with more transitory budgets.

And finally, our Degrees segment. Degrees revenue was $14.3 million, up 14% from a year ago on growth in new students and scaling of recent programs. The total number of Degrees students grew 19% from a year ago to 22,600. As a reminder, there's no content costs attributable to the Degrees segment, so Degrees segment gross margin was 100% of revenue.

Now on to our financial outlook. For Q3, we're expecting revenue to be in the range of $171 million to $175 million. For adjusted EBITDA, we're expecting a range of breakeven to positive $4 million. For the full year 2024, we are reaffirming our ranges. We anticipate revenue to be in the range of $695 million to $705 million. For adjusted EBITDA, we're expecting a range of $24 million to $28 million, maintaining our adjusted EBITDA margin annual target of approximately 4%. We have a strong record of successfully managing the annual adjusted EBITDA margin target we commit to at the beginning of the year. and I've been pleased by our ongoing discipline demonstrated by the strong operating leverage we delivered in the first half of 2024.

I'll now turn the call back to Jeff for closing comments.

[Jeffrey Maggioncalda, executive]

Thanks, Ken. Increasing equitable access to high-quality learning is the reason why we were founded and it is also the reason why many leading companies choose to join us in our mission. One of these important partners is Microsoft, and I'm thrilled with how our relationship continues to deepen and grow. In addition to announcing their latest certificates in May, we are thrilled to share that Coursera has partnered with Microsoft in a community organization called Women in Cloud to launch the universal access to Microsoft skill scholarship. This scholarship open to everyone, provides 5,000 recipients access to all Microsoft specializations and professional certificates on Coursera.

Learners who successfully complete a professional certificate through the scholarship will be awarded a complementary voucher for the industry-recognized Microsoft certification exam. It is part of our shared commitment to providing equitable access to the essential skilled and branded credentials that can empower learners to start switch or advance their careers, while also filling critical skill gaps in the evolving economy.

Generative AI can act as both a disruptor and an enabler, whether it widens or narrows the opportunity gap depends on our ability to make education and skills equally accessible on a global scale. Leading partners like Microsoft, who are creating the next generation of technology tools and services that will fundamentally reshape work in the labor market more broadly are embracing their collective responsibility to harness the potential of generative AI, turning it into an engine of opportunity for everyone.

We are proud of Coursera's role and especially our partners who we work with in recognizing the importance of turning this threat into an opportunity through education. Now let's open up the call for questions. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of Josh Baer with Morgan Stanley.

[Josh Baer, analyst]

Congrats on the upside in Q2. I had a few or a couple on guidance for the rest of the year, one on revenue. Just trying to understand why revenue would decelerate so much in Q3 and then reaccelerate back from like 4.5% growth in Q3 to double digits in Q4, just that set up as far as the seasonality there? And then on the expense side, if you could talk a little bit about what expenses were pushed from Q2 into the back half of the year? And ultimately, understanding how you keep the annual margin guidance and that framework, but how EBITDA margins are, why they would deteriorate so much in the back half. And like just given your OpEx base here in how can you even spend that much in the back half, like why wouldn't margins move higher?

[Kenneth Hahn, executive]

Josh, this is Ken. With regards to the revenue, the forecast we do at an individual level across the different segments in light of product introductions, content introductions, and based on that and the significant content introductions, we released this past quarter, which we'll start to see through the rest of the year and which we expect to release during the rest of the year. it's a forecast based on those numbers. So that's how we came up with Q3 versus rest of the year split.

As it relates to expenses and EBITDA, we beat pretty handily. As you know, this has been the cadence we've used since the day we went public. In fact, since long before we were public, where we target at year-end. We have beat our annual guidance 1 year. We try to spend down to it to optimize for growth. It's too early to predict anything on the front end now, but we're spending towards opportunity for the second half of the year. We won't waste money. So if we can't spend it, you'll see upside there, but it's not what we're presently forecasting. But again, similar to the exact same approach we've had for the last 5 years.

[Operator]

[Operator Instructions] Your next question comes from Stephen Sheldon with William Blair.

[Stephen Sheldon, analyst]

First, I just wanted to ask what you're seeing in terms of the budgetary environment for Enterprise L&D. I think Ken, in your prepared remarks, you noted some stabilization in corporate learning, and we've been hearing at least some similar commentary from a few other providers in recent months. So could you provide some more detail on what you're seeing there? And when do you think we could move beyond stabilization and back to better growth?

[Jeffrey Maggioncalda, executive]

Stephen, this is Jeff. I'll take a first crack, and then Ken, feel free to chime in. So the 2 markets, the regions where we've seen Coursera for Business hit the most has been in Europe and to some degree in North America. And that's kind of where we're seeing that were stopped seeing some signs of stabilization. This is the case across many different variables. It's retention of contracts, it's NRR, it's bookings that are all looking a bit healthier.

Hard to say exactly why I still think that part of what we're dealing with is hangover from COVID. When businesses closed their offices the training budgets that were traditionally used for people in live sort of sessions, I think, got shifted a bit. And we saw a little bit of the pullback of that spend out of online and back to in-person in the years following COVID reopening.

And I think we're starting to see a little bit of a stabilization for that reason. We are seeing most of the stabilization in Europe and North America, where we had originally seen most of the weakness. And to your question around when we think it might open up again, it's hard to say for sure, but this generative AI, I think, continues to evolve and take shape. My view of this is everybody knows is important.

There's a lot of risk and uncertainty. So companies are trying to figure out the right way to move through it. But the technology is going to afford opportunities in different dimensions to different companies. There is definitely this question of how might a company use generative AI to create value for customers. And Coursera has tried to really jump on this with language translations with Coach, with Course Builder, with Academic Integrity. We've read through a bunch of those.

But in addition to using the technology to create value, and frankly, many companies are struggling to figure out how to do that in their business models, at least that's what I'm hearing. There is that productivity piece, which is to what degree can generative AI unlock productivity gains. And this is going to be different based on different teams and job roles. So the role that generative AI might have in making a software developer more efficient could be different than the role that generative AI has in making marketers more efficient and more effective in the marketing.

I think companies are just starting to see now that this technology can both create value and create efficiency. And with the generative AI Academy for Teams, we're pretty excited that we now have team-specific training from the biggest brands, Microsoft, Google, Amazon, Meta, et cetera, on how to use generative AI to unlock productivity. And that's what I think we're going to start seeing budgets open up a bit more is when there is a clear ROI associated with either value created or productivity unlocked by using this technology for specific job roles. And we're pretty optimistic still that we will be one of the winners, not losers because of generative AI. And perhaps part of what we're seeing here in the bookings strength is some indication that generative AI is going to be a real opportunity for Coursera. Ken, anything you'd add to that?

[Kenneth Hahn, executive]

No, I think it was quite thorough, and it's exciting to be talking about it actually rebound given that this is where enterprise slowed down first a couple of years ago.

[Stephen Sheldon, analyst]

Got it. Yes, that's all very helpful, Jeff. I appreciate all the commentary. And just as a quick follow-up. In Consumer, what are you seeing in terms of free-to-pay burner conversion? I know that was one component that you called out that drove the slowdown or expected to address the slowdown in consumer. So is that playing out to your expectations? Any signs of stabilization improvement thereafter being a drag, as you called out last quarter?

[Jeffrey Maggioncalda, executive]

Yes. We are actually seeing a little bit better than stabilization. So it certainly has not gotten worse and we're seeing some positive indications there. Obviously, it goes hand in hand with the content launches as well. I mean content that is valuable new in demand by learners and especially, we're excited about this job, the job specific credentials. We're getting the credential we hope, anticipate, that if learners in -- especially emerging markets, are interested in winning new types of job opportunities because they know how to generative AI, the credential will help in developed economies like Europe, North America.

Learning the skills and having exponential says, "I know how to do my job with AI, and I can do it productively and effectively." We think that, that will be something that becomes a real value proposition and it could also help with conversion rates. But we're excited that generative AI and the team specific job-specific titles and credentials will be effective in continuing to see stabilization improvement of the conversion rate.

[Kenneth Hahn, executive]

Jeff and I might chip in that we've seen some particularly nice performance internationally and -- which is a little bit further to the discussion earlier with Josh. On the product side, [indiscernible] growth in India, promotions, some of the geo price content. So we're starting to see the results of some of the product innovation we've had, particularly outside namer because a lot of that has been focused on international.

[Operator]

Your next question comes from the line of Jeffrey Silber with BMO Capital Markets.

[Jeffrey Silber, analyst]

That's close enough. You had mentioned in your prepared remarks about -- I think you called it a new content production arrangements with potentially more favorable revenue share and potentially some exclusivity. Can we get a little bit more color, maybe some examples and any more framework around the different economics would be great?

[Jeffrey Maggioncalda, executive]

Sure, Jeff. Let me talk a little bit about the strategy. Ken, you could talk about the financials and economics. So the generative AI is a big deal. The moment I touched it, I was like, this is going to change a lot of things. It's going to change jobs. It's going to change the skills required to do jobs. It's going to have an impact with task automation. It's going to change the way that we learn in a far more personalized way, and it will also change the way we create content, we being like the world.

So when we talk about Course Builder, we're not just talking about tools for our customers to use. These are tools that we're using internally as well. And as we look at the rate of launch of new content, it really requires a few things. First, there has to be demand in the market for these types of titles, we're seeing the demand. Second, partners have to want to launch titles and credentials with their brands on them. And we're seeing, I would say, unprecedented interest among industry partners who are saying that this next wave of technologies, generative AI, is going to feel a little bit like the cloud wars, where it's not just about building the technology. It's about training people on how to use it, credentializing people who learn how to use it and making sure that the labor markets understand who's got the skills to really take advantage of this technology.

So we're seeing a lot of interest from industry partners saying we want to be training people on our foundation models. We want to do that not only in a general way, but in a job specific way. But a lot of these industry partners don't necessarily have the expertise and capacity to build out the content and the credentials in the way that we know how to. So we are basically teaming up with our partners to help them produce this content, and we're using a whole lot of generative AI tools to do it.

So it is still humans producing the content, our partners are the ones who are branding it, but Coursera is taking on a bigger and bigger role in the production of this partner branded content. And what this does is it causes us to invest certain money that gets capitalized and it also causes us to be able to create different economic arrangements. And maybe, Ken, you could talk a little bit about the resources we're putting into this as an investment and the way that the incremental rev share might be different on these types of Coursera-produced partner-branded titles?

[Kenneth Hahn, executive]

Absolutely. And your description, of course, on what those represent means they're some of our best brands, right? These are important companies who are doing this with. We don't disclose the specifics, of course, for the individual relationships out of respect for our partners. But what we've done is we've invested in this automation, obviously, in a transaction which we take on the production cost, we take on all the risks, which makes a lot of sense because we're the experts here.

And again, importantly, doing so with minimal out of pocket, we have some pretty significant technological capabilities now with product we've built to build this product. It makes it easy for us to invest very profitably on these. We talked about this as part of a change actually technically in definition around free cash flow a couple of quarters ago because we were including this in the free cash flow calculation, which is a negative to us. And we wanted people to understand what that was, which is a tremendous opportunity, we think, to strategically build the business and create better economics.

And so we've allocated $20 million of budget this year. We spent, as I mentioned in my prepared remarks, a couple of million dollars this past quarter, and it's highly attractive, both strategically and financially. So I think you will continue to hear about progress here and success.

[Jeffrey Maggioncalda, executive]

And Ken, any kind of way of thinking about -- or I don't want to use the word guidance, but the incremental economic sharing that happens when the titles get consumed in the Consumer segment?

[Kenneth Hahn, executive]

Well, we -- because of the relationship, of course, we have better economics from a rev share standpoint. It varies client by client, but it's pretty specific, but it is a significantly higher margin with us taking all the risk and funding it entirely.

[Operator]

Your next question comes from Brian Peterson with Raymond James.

[Brian Peterson, analyst]

Congrats on the strong quarter. It's nice to see the acceleration in Degrees. I know you mentioned the ramp-up in new students, and new partnerships. I'm curious on your level of visibility there. And any sense on how we should be thinking about the medium-term growth rates for that segment?

[Jeffrey Maggioncalda, executive]

Yes, Ken, we typically give guidance at the beginning of the year. I don't know if there's anything in addition by segment that you want to say or not?

[Kenneth Hahn, executive]

We haven't provided any updated guidance across the board. We've done that historically when we had radical changes, but I wouldn't assume anything different. Otherwise, we'd provide some guidance just to be helpful with people in their models. But nothing of -- the 10%, which we reiterated last year. for the year.

[Jeffrey Maggioncalda, executive]

Yes. And I guess what I might add, just as a little bit of texture on the segment. We have been moving more and more towards this notion of what we call Pathway Degrees, the idea that you can start a college degree on Coursera in open content without -- you can start at any time. You don't have to go through the admissions process. It's a lot more flexible and affordable. And if you earn credit by taking the open content, then you can finish your degree faster and more inexpensively. Like that basic model, we think, is going to be the model for a lot of degrees all around the world.

So we're excited about that model because it really plays to this whole idea that you can blend industry content with higher education, and you can do online at any time, even as you have it count towards a more structured traditional higher education degree. So we're seeing signs in the Pathway Degrees strategy from learners that this is really the kind of flexibility, affordability, ROI that they're looking for and we're going to be continuing to do more of that.

And a key enabler of this is these credit recommendations from American [ Calcine ] Education and ECTS which is the European Credit Transfer System. We have 30 certificates now that our ACE recommended 15, which are ECTS recommended, and this really helps us unlock this Pathway Degrees kind of opportunity.

[Operator]

Your next question comes from the line of Taylor McGinnis with UBS.

[Taylor McGinnis, analyst]

You mentioned the record number of entry-level professional certificates launched in the quarter, and it seems like that was a key driver of the outperformance. So as we look ahead, how much of the expected 3Q rep slowdown and like the inflection in 4Q might be tied to expected certificate launches? And so was there some for instance, like certificates that might have been launched earlier than expected that maybe benefited 2Q and might be weighing on 3Q?

[Jeffrey Maggioncalda, executive]

Yes. Taylor. So maybe, Ken, you could talk a little bit about the financial piece. I'll just say that with respect to the titles that we're launching, we have really seen, as I said, a step-up in interest among partners and an increase in efficiency and I think quality on the production side. So that certainly has had an impact on Q2. By the way, among these titles at these professional certificates, we had 4 from IBM, 4 for Microsoft, 2 from Google Cloud, 1 for Meta, 1 from AWS and 1 from ADP. So these are big brands doing lots of search.

They certainly influence our sense that there's going to be good supply of this type of content and credential and we are optimistic there's going to be healthy demand we don't want to get ahead of ourselves though, on demand. I mean North America still is not what it was last year in terms of the traffic and conversion that we were seeing in the consumer segment. There's still some uncertainty around how these titles are going to perform. We have pretty good confidence that we're going to be continuing to launch a whole lot of these things in the coming 6 months. But we're not really sure exactly what the appetite is going to be.

And Ken, I don't know if you want to link any of the content that was delivered in Q2 or expected in Q3, Q4 against the guidance on the consumer -- on the overall revenue segment, the overall revenues for the rest of the year.

[Kenneth Hahn, executive]

Sure. Well, as it relates to Q3 and the content titles specifically One of the things was we had a tough compare in 2023, Q3 of 2023. We had a blockbuster release without too much detail related to cybersecurity, which really moves the revenue. And so year-over-year for that new launch, we're offsetting that partially in mitigating somewhat with the 15 certificates launched in Q2 that we'll see coming. But that was the reason is we had a blockbuster a year ago. And so in the year-over-year comparison, we don't see quite the same growth.

[Taylor McGinnis, analyst]

Got it. That's really helpful. And then for my second question, Ken, could you just maybe break out the uptick in like expense growth that you guys are expecting in the back half? Could you maybe just talk about the drivers of that? And how much of that might be tied to like investments around content?

[Kenneth Hahn, executive]

Yes. A lot of the content to be clear, is -- hits the balance sheet as we can find the opportunities to fund those. We'll have continued spend in R&D. We've actually done a pretty nice job of continuing to bring down the OpEx as a percentage of spend. And then where there's more marketing opportunity cost effectively, we'll be spending there as well. We'll continue to monitor through the course of the year. Again, we try to get to an annual guide, which we set is 4% at the beginning of this year and work within that -- but if we can't spend it effectively, we'll let more drop down. We're just in the process of -- as we look to growth opportunities for next year, making sure we can fully fund those.

[Operator]

Your next question comes from the line of Rishi Jaluria with RBC.

[Unknown Analyst]

This is [ Chris Found ] on for Rishi Jaluria. I wanted to ask about your large cash balance. Can you just remind us how you're thinking about the primary use of the cash in the near term within your capital allocation strategy?

[Jeffrey Maggioncalda, executive]

Yes. Thanks, Chris. Let me take a higher level view. And Ken, I don't know if you want to talk anything about Q2 and some of the sort of uses of cash that hit the adjusted EBITDA reconciliation. But at a really high level and certainly not just Ken and me and the management team, also the Board. I mean we have a Board and a leadership team that frankly thanks than what we're about to see with generative AI as it transforms economies around the world, there's going to be significant opportunities.

EdTech, as we all know, has been a tough place in the last few quarters. that creates certain opportunities for companies with a lot of distribution and a really healthy balance sheet like Coursera. I don't know what the capabilities of say, GPT5 are going to be or the next version of Gemini Ultra. But at any moment, we can potentially see some nonlinear capabilities hit the market and maybe there will be some start-ups or some other companies, perhaps more mature companies that find something that is dramatically more valuable than what people have experienced before.

In those instances, having both a global platform, a great brand and a house of many other great brands, a big balance sheet that could take a breakout kind of technology and pump it through a global distribution system like we think that that's not completely unlikely. And so we do like the optionality of being able to make moves like that if we want to. We've been pretty intensely investigating opportunities.

And so what we -- in conversation with our Board have decided is, there's some really interesting times coming, and we think that our position in this landscape that's changing rapidly as an online educator is pretty attractive and will put us in the driver seat in many ways. Ken, I don't know if you want to talk a little bit about Q2 and sort of how you're thinking about balance sheet.

[Kenneth Hahn, executive]

Yes, sure. So the -- at the highest level, you just hit the most important point, which is the strategic focus and the belief that holding cash for strategic opportunities is what the team and Board are aligned around. I would say further on that topic, and you mentioned it, we've been pretty active without anything to talk about concrete that's closed we can see in our EBITDA reconciliation this time for the first time, M&A-related costs on a transaction that didn't close that were pretty significant we achieved our EBITDA target for the quarter, and again, we will, for the year, regardless of that [indiscernible].

I think it points to the efforts we're making and expect to continue to make it was a $3.4 million charge. And when you're spending that much on a potential M&A transaction, that means it's a significant size. So we're hard at work continuing to look at other opportunities. But that, I think, is a further little bit of insight into how we're thinking about capital allocation and timing.

[Operator]

Your next question comes from the line of Ryan MacDonald with Needham & Company.

[Ryan MacDonald, analyst]

Congrats on a nice quarter. I wanted to double-click on Brian's question earlier about the degree segment. Last quarter, you talked about that degrees would be growth in that segment would be a bit more back half weighted into the year. Just curious if this is still sort of the expectation given the strong 14% growth that you put up in the second quarter here. And perhaps what are you seeing on a cohort basis as we head towards the fall with the existing programs you've gotten? How comfortable are you feeling about the trajectory of that business segment?

[Jeffrey Maggioncalda, executive]

Yes. I guess what I would say is -- as we saw it, was it today or yesterday, there is a sea change that's happening in the U.S. around the way online degrees to get managed and who manages them who create them and how they come to market, what the business models are. And so what I would say is -- we really like our basic strategy of these Pathway Degrees. We think it's pretty much unique to us, and we think it's going to be something that learners frankly really want. That being said, there's a lot that's changing. And so we want to be thoughtful and somewhat cautious about how it's going to be to navigate these.

So I would say no real update from our previous guidance that was a while ago on the Degrees segment kind of revenue growth. And we think we've got the right general design pattern for a degree that's going to work for working adults globally, but there's still quite a bit to figure out. And so we're on our journey to redefining this $2 trillion market called the college degree.

[Ryan MacDonald, analyst]

And maybe as a follow-up, just talked about the consumer segment. Can you give us a sense of maybe timing within the quarter of the [ Pro Cert ] launches and perhaps the magnitude of upside from consumer that came from these new launches like in second quarter relative to maybe more of a knock-on effect or positive impact from these new launches that we should expect in the back half of the year?

[Kenneth Hahn, executive]

Sure, Ryan. We haven't specifically broken out the guidance by what's coming from new content they were released throughout the quarter, but toward the back part of it, so you'll expect more impact in this quarter than last quarter. I think that's about as much color as it would make sense to provide. Is that helpful?

[Ryan MacDonald, analyst]

Very helpful.

[Jeffrey Maggioncalda, executive]

And by the way, the other thing that we're not sure about, I mean a lot of this really is the world is shaping up in certain ways. And we're definitely launching a lot of new titles, but there was a part of the script where we talked about refreshing existing titles. I mean, we have a whole obviously thousands of courses on the platform, and whether it's how you negotiate or how you manage people or how you do data analysis, we truly believe that virtually everything is going to change because of generative AI. It will certainly be the creation of new content that we think can feed the engine -- the growth engine.

But we're also quite optimistic about the relevance of our existing content if we upgrade it with our partners to include what's the generative AI way of doing that. Of course, that will be changing rapidly, but that will also really stimulate a sort of a refresh cycle, and I think a novelty among learners to say, hey, when the next major advance in generative AI comes out. Now what do I need to learn about how to do my job well.

And so we think there's a really broad field for not only launching new titles but refreshing existing titles that makes them newly relevant to a wide audience, I mean, almost like everybody who has a job, like this is what we're really shooting for. We really want to try to redefine the target market to essentially every working person in the world who's got the retool the way they do their jobs.

[Operator]

Our final question comes from Devin Au with KeyBanc Capital Markets.

[Devin Au, analyst]

Jeff, Ken, congrats on the strong results here. I want to ask about Enterprise, specifically NRR, which has downticked slightly again, and I think you called out some challenges under the government segment. Could you just elaborate more on that front? Is that kind of similar dynamics to what you saw last quarter? And how many of these, I guess, similar types of customers were facing transitory budgets are likely to come up for renewals this year?

[Jeffrey Maggioncalda, executive]

Yes. Thanks, Devin. Yes, this is Jeff. I'll give you a high level. And I said this in the past, which I hope is somewhat helpful. I realize it's not as crystal clear as you might like. But the NRRs are really different by business versus campus versus government. On the government side, which we mentioned, some of these deals are multimillion dollar deals, and they really can have an outsized effect if 1 or 2 end up having been funded by a transitory budget that does not renew, so say COVID-era money that is not then available.

And so there is a bit of of work through that we have to do. And we did mention that there is -- that a substantial way a drag on NRRs came from certain big gut-related deals that did not have the persistence of budget that we had hoped would be there. I will say that vis-a-vis previous quarters, Coursera for Business actually helped bump up the NRR overall. So it's one of these things where certain segments are doing better than others. It's kind of helpful to diversify at the same time. The CPG has -- the Coursera for government has some big whales in it. And when some of those don't persist in the budgeting frame, it hurts.

We do expect that -- well, I'd say our targets are NRRs of 120%. And within our business, in terms of the buyers and the learners -- we do see pockets where the NRRs are large and healthy. And what we're trying to do is basically identify those use cases put more effort and attention towards selling and supporting those, find those use cases that might shake loose because the budgets were a little bit more transitory and don't do those as frequently going forward. Ken, anything you would add to that?

[Kenneth Hahn, executive]

Thanks for asking. Materially, there's nothing incremental to add. I think that's about -- that covers it all in detail. I hope it was helpful.

[Cam Carey, executive]

All right. Well, thank you, Devin. That wraps today's Q&A session. A replay of this webcast will be available on our Investor Relations website. Thank you for joining us and take care.

[Operator]

This concludes today's conference call. Thank you for your participation, and you may now disconnect.