Education Markets and Deals Roundup — 1st Edition
The last two years have been tough for the EdTech sector, especially in India, as it has faced significant losses and funding cuts.
Layoffs have continued to haunt the sector, with approximately 10,000 people losing their jobs across 22 companies in India. Some market experts feel that tough times will continue for the sector and it will be a while before it gets revived. Building EdTech conglomerates has not brought success, on average, for students or EdTech companies.
EdTech major BYJU’S has faced challenges during this crisis period. It reportedly laid off 1,000 employees and encountered financial difficulties, including missed interest payments on a Term Loan B (TLB) and a lawsuit against a US-based investment management firm.
The challenges faced by the companies are reflecting in the market sentiment, with a divergence between the public markets in rationalized valuations, and private markets in slow down in late stage funding + increased M&A frequency.
Edtech markets are really in a ‘Fool me once, shame on you. Fool me twice, shame on me’ situation right now. Profit making companies have been rewarded with +ve share performance, and loss-making companies have been hit with the good ol’ sell. Certain companies such as Chegg have seen generative AI hit them hard, while IDP had to recover from a major market shock event due to an update in Canada.
1. B2C — Global Companies:
Rapid Round Up:
a) Duolingo: The company remains sturdy despite the cloud brought over by generative AI over app-driven education businesses. Why? The business has always been an evolving AI business. Duolingo has introduced a new subscription tier called “Max” that incorporates OpenAI’s GPT-4 technology.
The Max subscription unlocks two AI-powered features: Roleplay and Explain My Answer.The Roleplay feature allows users to practice real-world conversation skills with AI chatbots, receiving feedback on the accuracy and complexity of their responses. The Explain My Answer feature provides explanations and examples to help users understand why their answers were right or wrong.
b) IDP: The Canadian government announced that it will accept four new English tests for student visas in addition to IDP Education’s IELTS, leading to an estimated loss of around 30% of IDP Education’s Canadian Student Direct Stream volumes. Brokers suggest that while the Canadian government’s decision is a negative development, it was anticipated and represents the last step in opening the Canadian market. They believe that IDP Education’s underlying growth prospects remain positive, driven by post-COVID recovery, digitization benefits, and long-term demand for international education. Adjustments to price targets have been made by various brokers, but the consensus remains above the current share price.
c) Chegg: The homework assistance company saw its shares plunge to half, and now it plans to cut about 4% of its workforce, amounting to approximately 80 employees. The move is in response to the impact of OpenAI’s ChatGPT, which is increasingly being used by students for homework assistance.
Chegg aims to position itself better by executing its AI strategy and creating long-term sustainable value for students and investors. The company expects to incur charges of around $5–6 million for severance payments, employee benefits, and related costs.
d) 2U: 2U is facing declining enrollments, revenue contraction, limited cash reserves, high debt, and a challenging growth outlook, raising major concerns about its survivability.
2. B2B — Global Companies:
Rapid Round Up:
a) Software companies such as PowerSchool and Instructure are enjoying higher valuations of 6.7x and 8.1x Revenue each. The confidence of investors in SaaS tools, and the recurring nature of B2B revenue remains strong.
b) Skillsoft: Continues to struggle, down 87% from its listing price. The company is seeing decline in its instructor led programs, down 18% YoY.
3. Indian Education Companies:
Rapid Round Up:
a) Aptech: Remains the poster child of Indian EdTech businesses. The institutional business is expected to significantly improve in FY24, with a target of around 250 crore rupees and potentially another 20–30 crore rupees on top of that. The high-margin retail business is a growing segment for the company, contributing approximately 83% to the bottom line and aiming to achieve revenue of around 700 crore rupees, representing a 60–70% growth. Future growth will involve a focus on expansion, including digital initiatives and a blended model in tier III and tier IV cities.
b) Veranda Learning: As the company gobbled up seven education businesses in Q1’FY24, its Q4’FY23 net loss almost doubled to ₹39 crore. The company has provided financial support to its subsidiary companies in the form of recoverable loans, considering them to be recoverable and fully recoverable despite the subsidiaries’ losses and eroded net worth.
c) NIIT Ltd: NIIT Ltd has completed the demerger of its corporate learning business, transferring it to NIIT Learning Systems, while focusing on its Skills & Careers business. The share price drop is owing to this: each shareholder of NIIT Limited will receive one share of NIIT Learning Systems (NLSL) for each share of NIIT Limited held by them on the Record Date, which was set as June 8, 2023. The demerger is expected to unlock value for shareholders and provide separate market visibility for the Skills & Careers business and the Corporate Learning Business.
Private Markets — India
April to May 2023: While Byju’s is speculated to be close to raising a $1 billion round from ADQ and Oaktree, most companies struggle to raise late-stage rounds. On the contrary, prized edtech companies in India have had to resort to massive layoffs to continue surviving. Byju’s is close to laying off another 1,000, Teachmint with 70, FrontRow laying off 90% staff (and looking to get acquired), Unacademy slashed 12% of its staff.
Rapid Round Up:
a) Investors continue to bet on innovators in the space, albeit with a lot more financial scrutiny. A lot less participation by marquee Indian VCs, as they limit their exposure to the EdTech ecosystem in India.
2. Mergers & Acquisitions
Rapid Round Up:
a) As the market got crowded and funds dry up, bigger companies are finding lucrative opportunities to acquire companies to consolidate their positions and enter new markets/segments.