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Education Markets and Deals Roundup — 3rd Edition

Education Markets and Deals Roundup — 3rd Edition

Adoption of generative AI to provide personalized offering continue to trend as companies like Duolingo and Pearson PLC introduce AI powered personalized learning solutions. While established Indian startups like LEAD and CueMath are working on launching new AI based offerings, early stage startups are rebranding themselves as “AI powered”. At the same time, some companies are using AI to enhance cost-efficiency which has given hope for a new lease of life to cut spending and become self-reliant in the funding-strapped ecosystem.

The recent Q2 financial results brought about volatility in the prices of publicly traded education companies, with those exceeding expectations experiencing sharp increases, while underperformers saw declines.
In the private markets, early-stage edtech companies focusing on cutting-edge technologies such as AI-driven personalized learning and VR-based education continue to secure funding from investors, highlighting investor appetite for innovative education solutions, and affirming the sector’s dynamism and potential for growth.

Public Markets

The global mean EV/EBITDA ratio for publicly traded education companies rose from 11.3 to 12, whereas in the case of listed Indian companies, it saw a substantial increase from 8.5 to 12.4, which could be a hint of steady revival of edtech in India.

B2C — Global Companies

Rapid Round Up:

a) Chegg: The company has partnered with Scale AI, a data infrastructure provider for AI, to develop proprietary large language models (LLMs) that will enhance Chegg’s personalized learning assistant. This new initiative, set to launch over the next two semesters, aims to combine generative AI with Chegg’s high-quality educational content to improve student outcomes. The upcoming Chegg experience promises a simpler conversational interface, personalized learning, deeper content, and the automatic transformation of content into study tools like practice tests and flashcards.
Their goal is to use AI advancements to reduce the high dropout rate in higher education. Chegg and Scale have already tested a successful pilot of the AI experience for students.

b) Duolingo: The company has introduced two new features, ‘Explain My Answer’ and ‘Roleplay,’ powered by GPT-4. ‘Explain My Answer’ offers detailed explanations to learners about the correctness of their answers, aiding in identifying and rectifying mistakes. ‘Roleplay’ provides an AI conversation partner for practicing language skills.
These features are part of the Duolingo Max subscription model, which enhances the learning experience. Additionally, Duolingo has created ‘Birdbrain,’ a custom ML model that assesses learner knowledge levels and predicts material difficulty, enhancing personalization.

c) 2U: Company released its 2022 Transparency & Outcomes Report. They reached 73 million global learners, partnered with 230+ institutions, and offered over 4,000 digital courses. Impressive retention and completion rates of 90% and 73% were noted. They also played a significant role in tech talent development and healthcare education. The report emphasizes 2U’s mission to provide high-quality, accessible online education to meet evolving workforce needs.

d) Stride: The Company saw a 9% increase in its stock price after beating earnings estimates. Fiscal 2023 GAAP EPS of $2.97 exceeded analyst expectations by $0.14, and revenue of $1.84 billion surpassed estimates by $20 million. While the company hasn’t annouced any development on AI front, it addressed concerns about the impact of AI in education. CEO emphasized that AI can positively transform K-12 education, enabling personalized learning experiences for students and assisting teachers in administrative tasks.

2. B2B — Global Companies

Rapid Round Up:

a) Pearson Plc: Company is incorporating generative AI-based study tools into its Pearson+ and Mastering platforms for personalized learning. These tools, inspired by ChatGPT, offer real-time support, including video summarization and AI-assisted problem-solving. Pearson aims to enhance the learning experience and integration between eTexts and AI chatbots, emphasizing the importance of generative AI for the company’s future. The move reflects a broader trend of businesses leveraging generative AI for cost savings and operational efficiency in various industries.

b) PowerSchool: The company has pledged to join the ‘K-12 Education Technology Secure by Design’ pledge initiative by CISA and the U.S. Department of Education. They are committing to enhance cybersecurity in education by offering free and subsidized security resources to U.S. schools. PowerSchool’s CEO highlighted their cybersecurity efforts, securing over 80% of U.S. school districts, and announced additional support, including webinars and partnerships with cybersecurity companies. They also emphasized compliance with privacy regulations and certification standards, reinforcing their commitment to data security.

c) Instructure Holdings: Company’s latest financials reported a significant growth with revenue reaching $131.1 million, a 14.4% increase year over year. The operating loss improved notably, decreasing to $2.1 million from $6.6 million in Q2 2022. Non-GAAP operating income stood at $50.2 million, equivalent to 38.3% of revenue, marking an $11.5 million increase from the previous year. Adjusted EBITDA grew to $51.3 million, representing 39.1% of revenue, up $11.5 million. Additionally, cash flow from operations and Adjusted Unlevered Free Cash Flow increased substantially, and the company achieved its best-ever Remaining Performance Obligations (RPOs) at $853.6 million, driven by successful renewals.

d) Lincoln Educational Services: Company has outperformed expectations in Q2 2023 with an EPS of $0.57, exceeding the projected $0.02. The company attributes its success to a strategy focused on preparing students for high-demand careers and helping address the skills gap. They’ve experienced significant growth in revenue from Campus operations, an 18% increase in student starts, and a tripled net income. The company’s hybrid teaching model, marketing programs, and centralization of the financial aid process have contributed to this growth.

3. Indian Education Companies

Rapid Round Up:

a) CL Educate: Company’s board approved a buyback of its fully paid-up equity shares worth up to Rs 15 crore at a maximum price of Rs 94 per share through the open market route. The company also reported its highest-ever quarterly revenue of Rs 92.2 crore for the quarter ending in June 2023, marking a 30 percent YoY growth. At the operational level, EBITDA increased by 23 percent YoY to Rs 11.1 crore, with a 12 percent margin. Net profit for the same quarter grew by nearly 20 percent to Rs 5.5 crore.

b) Navneet Education Limited: Company reported a net profit of Rs 144.94 crore for the April-June quarter, representing a 4.84 percent YoY decline from the previous year. However, revenue from operations for the same period saw a healthy growth of 14.04 percent YoY, reaching Rs 791.45 crore. EBITDA margins decreased by 357 basis points from 30.82 percent in previous quarter to 27.25 percent in the current quarter.

Equity Financing

Rapid Round Up:

Edtech funding increased by approximately 66% QoQ, reaching around $330 million, and rose by 27% MoM, amounting $93 million. We continue to witness the trend of investors supporting early-stage innovative companies employing cutting-edge technologies.

Indian edtech firms are turning to AI as a solution to their financial challenges. Facing mounting losses and investor pressure, these companies are using generative AI to boost efficiency and reduce costs. Some are even undergoing rebranding to position themselves as AI-focused entities. AI is becoming a driving force for cost optimization, giving these edtech startups a chance to innovate and adapt to achieve profitability in a challenging ecosystem.

Mergers and Acquisitions:

Rapid Round Up:

With Majority of the past M&A activity being driven by the likes of BYJU’s, UpGrad, Unacademy who are facing funding crunch, M&A activity has slowed down. However, due to economic downturn many ed-techs are finding it difficult to scale but possess technological moats, which present significant opportunities for synergistic partnerships, making them a compelling strategic investment.

LoEstro Advisors — The best advisor to education leaders in India