5 November 2020 Initiation of Coverage OpenLearning Limited Education Services Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX) The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and all the companies and securities that are the subject of this report discussed herein. Rating SPECULATIVE BUY Price Target A$0.50 OLL-ASX Price A$0.33 Market Data 52-Week Range (A$) : 0.14 - 0.39 Avg Daily Vol (M) : 0.9 Market Cap (A$M) : 53.7 Shares Out. (M) : 162.6 Dividend /Shr (A$) : 0.00 Dividend Yield (%) : 0.0 Enterprise Value (A$M) : 44.3 FYE Dec 2019A 2020E 2021E 2022E Sales (A$M) 1.6 2.3 5.4 8.7 Gross Profit (A$M) 1.2 1.8 4.4 7.3 EBITDA (A$M) (4.6) (4.6) (3.7) (2.2) EBIT (A$M) (4.6) (4.7) (3.8) (2.6) Net Income Adj (A$M) (4.6) (4.6) (3.8) (2.6) EV/Sales (x) 12.6 20.1 10.0 6.6 Net Debt (Cash) (A$M) (8) (9) (11) (9) 0.4 0.35 0.3 0.25 0.2 0.15 0.1 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 OLL Source: FactSet Priced intraday 4 November 2020 OLL was founded in 2012 seeking to solve the problem of limited access to quality online education. It has developed a technology platform that is utilised by higher education providers to deliver online courses ranging from short courses to degrees. Canaccord Genuity (Australia) Limited has received a fee as Lead Manager to the OpenLearning Limited Initial Public Offering in November 2019. Canaccord Genuity (Australia) Limited has received a fee as Lead Manager to the OpenLearning Limited Capital Raising announced 23 October 2020. Allan Franklin | Senior Analyst | Canaccord Genuity (Australia) Ltd. | afranklin@cgf.com | +61 3 8688 9178 Changing the game - taking universities online Investment Recommendation OpenLearning (OLL) has built a scalable online learning platform for education providers looking to offer their courses online, and a marketplace for accredited and non-accredited courses, micro-credentials and online degrees. The business continues to evolve its offering, with several recent partnerships demonstrating the product reach and scope for adoption across Australia and South East Asia, in our view. The COVID-19 situation has thrown the education sector into disarray (The Australian, 18 April 2020. Financial Review, 28 April 2020), and we believe traditional learning models and funding backdrops are being brought into question due to increased interest in alternative study locations, online education technology and concern around existing face-to-face learning modes. We believe OLL is well placed to capitalise on demand growth for online delivery of education as well as an increased demand for job reskilling, evidenced by the Australian government’s university funding changes and reskilling objectives (The Australian, 19 June 2020). In our view, OLL’s offering is scalable across multiple regions, is differentiated from its competitors, solves for current customer pain points in the market and has multiple use cases that are in the early stages of monetisation. We initiate on OLL with a SPECULATIVE BUY rating and a $0.50/share price target. UNSW Global Transition Program a highly strategic and accretive agreement: In October 2020, OLL signed a five-year license agreement with University of New South Wales Global (UNSW Global) to deliver its established Transition Program (a university pathway program) online for international students. We view the agreement as highly strategic and accretive. OLL expects to receive net revenue of between $6,000 and $9,000 for each enrolment. Capitalising on demand for short courses and microcredentialing: OLL enables education providers to design and deliver courses in a blended face-to-face and online or online-only setting. Open online courses, short courses and microcredentialing have become prominent education enablers in recent years. We believe OLL is well placed to capitalise on an increased demand for reskilling as well as the demand-related shocks emanating from COVID-19-related restricted travel and a stronger emphasis on online learning. Key risks: We see the key risks for OLL as being: (i) slower-than-expected uptake of OL Platform and OpenCreds; (ii) contract renewal and churn; (iii) reliance on demand for cloud-based learning; (iv) increasing competition and technology advancements; (v) brand damage from technology-related issues; and (vi) reliance on key personnel. Potential catalysts include: (i) OpenCreds launch and demand validation (2H20E and FY21E); (ii) strong execution on OL Platform SaaS demand growth; (iii) new partnership arrangements and reseller agreements in existing and new market verticals; (iv) broad market uptake of microcredentials and short courses; (v) and further product adaption (e.g. offering revenue share on delivery of online higher education qualifications). Valuation and recommendation: Our 12-month price target for OLL is $0.50/share. This is based on a DCF valuation that incorporates a WACC of 11.4% (11.4% cost of equity, 0.0% debt-to-equity and terminal growth of 3.0%). We have set out three scenarios within this report, exploring the valuation impact from differing revenue and earnings growth rates over the coming five-year period, the base case being our current forecasts, our bear case which suggests a $0.33/share valuation and our bull case which suggests a $0.74/share valuation. For important information, please see the Important Disclosures beginning on page 36 of this document. 2 Figure 1 : Financial summary Source: Company reports , Canaccord Genuity estimates OpenLearning (OLL) Share Price $0.33 Year end 31 December Profit & Loss ($m) 2019A 2020E 2021E 2022E Valuation Ratios 2019A 2020E 2021E 2022E Sales revenue 1.6 2.2 5.3 8.6 EV/revenue (x) 12.6 20.1 10.0 6.6 Total revenue 1.6 2.3 5.4 8.7 EV/EBITDA (x) -4.4 -9.7 -14.3 -25.8 Gross profit 1.2 1.8 4.4 7.3 EV/EBIT (x) -4.4 -9.5 -13.8 -21.8 EBITDA -4.6 -4.6 -3.7 -2.2 EPS ($) (NPAT) nmf -0.03 -0.02 -0.01 Depreciation -0.1 0.0 0.0 -0.1 P/E (x) (NPAT) nmf -11.6 -16.6 -24.9 EBITA -4.6 -4.6 -3.7 -2.3 DPS ($) 0.00 0.00 0.00 0.00 Amortisation 0.0 -0.1 -0.1 -0.3 Dividend yield (%) 0.0% 0.0% 0.0% 0.0% EBIT -4.6 -4.7 -3.8 -2.6 CFPS ($) -0.03 -0.03 -0.02 -0.01 Net interest 0.0 0.1 0.0 0.0 Price / CFPS (x) -11.9 -13.2 -17.9 -32.3 Other 0.0 0.0 0.0 0.0 Capital Structure 2019A 2020E 2021E 2022E Pre-tax profit -4.6 -4.6 -3.8 -2.6 Enterprise value ($m) 20.2 44.3 52.7 56.4 Tax expense 0.0 0.0 0.0 0.0 Net Debt (cash) ($m) -7.7 -9.4 -10.6 -9.4 NPAT (reported) -4.6 -4.6 -3.8 -2.6 Net debt / equity (%) nmf nmf nmf nmf Cash Flow ($m) 2019A 2020E 2021E 2022E Net debt / EBITDA (x) nmf nmf nmf nmf Operating EBITDA -4.6 -4.6 -3.7 -2.2 NTA / share ($) 0.05 0.05 0.05 0.04 Interest and tax 0.0 0.1 0.0 0.0 Price / NTA (x) 4.1 6.6 6.7 8.0 Working capital/other 0.7 0.4 0.1 0.2 Shares on issue (m) 139.7 162.6 191.7 195.6 Operating cashflow -3.9 -4.1 -3.5 -2.0 Growth Ratios 2019A 2020E 2021E 2022E Capex -0.1 -0.2 -1.0 -1.2 Sales revenue (%) -9.2% 37.3% 140.5% 62.4% Free cashflow -4.0 -4.3 -4.6 -3.2 Gross profit (%) -8.1% 50.2% 140.3% 65.2% Acquisitions 0.0 0.0 0.0 0.0 EBITDA (%) 1.1% 0.0% -19.4% -40.4% Equity issued 10.7 5.9 5.8 2.1 EBIT (%) 1.6% 1.4% -18.6% -32.1% Borrowings 0.0 0.0 0.0 0.0 NPATA (%) 1.6% 1.4% -18.2% -32.1% Other 0.0 0.0 0.0 0.0 EPS (NPATA) (%) 1.6% 1.4% -30.2% -33.4% Net cashflow 6.7 1.7 1.2 -1.2 DPS (%) 0.0% 0.0% 0.0% 0.0% Opening cash 1.1 7.7 9.4 10.6 Interim P&L ($m) 1H19A 2H19A 1H20A 2H20E Closing cash 7.7 9.4 10.6 9.4 Sales revenue 0.8 0.8 1.0 1.2 Balance Sheet ($m) 2019A 2020E 2021E 2022E Gross profit 0.6 0.6 0.9 1.0 Cash 7.7 9.4 10.6 9.4 EBITDA -2.3 -2.3 -2.1 -2.5 Receivables 0.6 0.5 0.7 0.7 EBIT -2.3 -2.3 -2.2 -2.5 Inventories 0.0 0.0 0.0 0.0 Pre-tax profit -2.3 -2.3 -2.2 -2.4 PPE 0.1 0.1 0.3 0.5 NPAT (reported) -2.3 -2.3 -2.2 -2.4 Intangibles 0.5 0.5 1.2 1.8 EPS ($) (NPAT) 0.00 0.00 0.00 0.00 Other assets 0.6 0.3 0.3 0.3 DPS ($) 0.00 0.00 0.00 0.00 Total assets 9.4 10.8 13.1 12.8 Valuation Borrowings 0.0 0.0 0.0 0.0 DCF Payables 0.8 0.9 1.2 1.5 Cost of equity 11.4% Beta 1.4 Other liabilities 1.3 1.3 1.3 1.3 Cost of debt 5.5% WACC post tax 11.4% Total liabilities 2.1 2.2 2.5 2.8 Terminal growth rate 3.0% DCF (A$/share) $0.50 Net assets 7.3 8.6 10.6 10.0 Board of Directors Shareholders Shares % Kevin Barry Non-Executive Chairman Magna Intelligence SDN BHD 11.0 6.8% Adam Brimo Executive Director & CEO Clive Mayhew 8.3 5.1% Spiro Pappas Executive Director Adam Brimo 6.5 4.0% Beverley Oliver Non-Executive Director Top 20 shareholders 71.5 37.3% David Buckingham Non-Executive Director Maya Hari Non-Executive Director OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 2 3 Table of Contents Executive summary .................................................................................. 4 Company overview ................................................................................... 6 Investment considerations ......................................................................... 8 The OpenLearning Platform .......................................................................12 COVID-19 impact on education delivery ......................................................17 Understanding the market and competition .................................................20 Case study: 2U, Inc. ................................................................................26 Case study: FutureLearn ..........................................................................27 Financial commentary ..............................................................................28 Valuation and scenario analysis .................................................................31 Peer group comparison.............................................................................33 Risks .....................................................................................................34 Board and key management .....................................................................35 OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 3 4 Executive summary A scalable online learning platform OLL has built a scalable online learning platform for education providers looking to provide their courses online. The OpenLearning Platform (OL Platform) has latency to extend to multiple different use cases where the average annual revenue per active user can be scaled depending on OLL’s level of involvement in course development. A marketplace is also available within the platform for accredited and non-accredited courses, microcredentials and online degrees. The result is what the company believes is an all-in-one solution that enables education providers to move online. Offering access to quality online education OLL has attracted over 2.6m unique registered users since inception and currently has active learners in 165 countries accessing c.4,000 active courses. The educational expertise and course content within the OL Platform are typically delivered by education providers that need a platform to reach current and prospective students, employees and members in a secure, reliable and user- friendly system. The quality of education providers and course content is vetted by education professionals within OLL, which OLL believes safeguards its quality online education setting. Capitalising on demand in short courses and microcredentialing, which we believe is strengthening partly as a result of COVID-19 OLL enables education providers to design and deliver courses in a blended face-to- face and online or online-only setting. Open online courses, short courses and microcredentialing have become prominent education enablers in recent years. For instance, universities are using OLL’s platform to offer courses that market their capabilities in order to attract future on-campus study from both domestic and international students. With the onset of COVID-19, the Australian government has sought to support the higher education sector and Australian workforce more broadly through a scheme to rapidly develop short courses. This entails a discounted course fee for short course study in fields of national priority at 18 selected universities. Additionally, the Australian government has made provisions for over $900m of additional funding over four years in its recent budget release for more university and short course places. We believe OLL is well placed to capitalise on an increased demand for reskilling as well as the demand-related shocks emanating from restricted travel and a stronger emphasis on online learning. OLL is in the early stages of monetisation The company is in its second year of business model monetisation following conclusion of a freemium model and launch of a SaaS and services-based model. SaaS customers at 30 September 2020 totalled 143 and annualised recurring revenue (ARR) totalled $1.2m, growing 55% over the prior corresponding period. OLL listed on the ASX in December 2019 with the intention to expand sales and marketing teams and to fund the growth strategy more broadly. Notable recent updates to the strategy point to OLL’s intention to drive average active revenue per user higher through revenue share arrangements with new customers. The launch of this revenue model, initially unde r OLL’s internally developed microcredentialing framework, OpenCreds, commenced in the current half. We expect monetisation of OLL’s OL Platform will accelerate over the coming three years, but we caution this is highly subjective and accordingly have provided three different growth scenarios for investors to consider. OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 4 5 UNSW Global Transition Program a highly strategic and accretive agreement for OLL, taking the company into a new market vertical In October 2020, OLL signed a five-year license agreement with the University of New South Wales Global (UNSW Global) to deliver its established Transition Program (a university pathway program) online for international students. We view the agreement as highly strategic as it takes the company into a new market vertical, Online Program Management, where the tuition value and fee structure can be very beneficial to the online course operator. Where OLL has been earning c.$20.00 per learner from its OL Platform SaaS offering, it can earn between $6,000 to $9,000 per enrolment under this UNSW Global agreement. The agreement comes at a time when students are by and large residing in their home countries and unable to come to Australia to undertake their studies. Combined with an existing brand and agent network that understands UNSW Global’s proposition, we believe the ramp -up profile will be rapid and forecast an initial $1.5m of revenue in FY21E. Partnerships and agreements display scope for broad-reaching product adoption OLL has signed multiple partnerships and agreements that, in our view, confirm both a market need for its products as well as the broad environments in which OLL can add value for customers. Of note, multiple agreements have been signed between OLL and Open Universities Australia (OUA). OUA is Australia’s largest online higher education marketplace . It has enrolled over 440,000 students since inception and currently offers over 400 degrees from 21 Australian universities. OLL and OUA have agreed to jointly fund the setup and learning design costs of up to 30 OpenCreds courses, the purpose of which is to grow the microcredential market in Australia. Our price target is $0.50/share, but our bull/bear scenarios provide context for alternative outcomes Our 12-month price target for OLL is $0.50/share. This is based on a DCF valuation that incorporates a WACC of 11.4% (11.4% cost of equity, 0.0% debt-to-equity and terminal growth of 3.0%). We have set out three scenarios within this report, exploring the valuation impact from differing revenue and earnings growth rates over the coming five-year period, the base case being our current forecasts, our bear case which suggests a $0.33/share valuation and our bull case which suggests a $0.74/share valuation. Potential catalysts and risks Upcoming potential catalysts include the OpenCreds launch and demand validation (2H20E and FY21E), OL Platform SaaS demand growth, new partnership arrangements and reseller agreements in existing and new market verticals, broad market uptake of microcredentials and short courses, and further product adaption (e.g. offering revenue share on delivery of online higher education qualifications). Risks to our view include slower-than-expected uptake of OL Platform and OpenCreds, contract renewal and churn, reliance on demand for cloud-based learning, increasing competition and technology advancements, brand damage from technology-related issues and reliance on key personnel. OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 5 6 Company overview OLL was founded in 2012 seeking to solve the problem of limited access to quality online education. It has developed a technology platform that is utilised by higher education providers to deliver online courses ranging from short courses to degrees. The offering that has been built encompasses a platform, a marketplace, microcredentialing tools and learner portfolios. OLL is seeking to drive revenue growth through: A purpose-built platform: Growing SaaS revenue by enabling education providers to move courses online and deliver quality online education through its purpose-built platform and learning services division. Microcredentials and short courses: Becoming a leader in the market through its OpenCreds and the OpenCreds Investment Fund. An agreement with Open Universities Australia provides a strong initial position. Strategic partnerships: Pursuing partnerships with companies that offer complementary products that fit into OL L’s ecosystem as well as resellers in new markets or sectors in which the company does not currently operate. The business moved from away a freemium model in March 2019 and has since been building its cohort of paying B2B SaaS customers (143 as at 30 September 2020) and learners (2.6m unique registered users as at 30 September 2020). OLL has signed dozens of large private education providers, corporates, government entities and universities in Australia and Malaysia. A subset of customers is included in Figure 2. OLL listed on the ASX in December 2019, raising $8.0m, with the intention to expand sales and marketing teams and to fund the growth strategy more broadly. Education expenditure in key existing target markets of Australia and Malaysia totals c.$68.0bn, as detailed below. University and other higher education: c.$47.0bn (TEQSA (2018), PwC (2020)) Technical and vocational education (VET): c.$10.0bn (IBISWorld, 2020) Corporate training and professional development: c.$6.0bn (IBISWorld, 2020) Industry associations: $5.0bn expected (IBISWorld, 2020) Further expansion into new markets across South East Asia is likely in coming periods, in our view. OLL has multiple customers in Singapore and has recently signed seven universities in Indonesia. Figure 2 : Example OL Platform customers Source: Company reports OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 6 7 The OL Platform (detailed here) enables education providers to move online and has been built around the following revenue-generating areas: OL Platform SaaS; OL Marketplace; and OL Services. In recent months, a revenue sharing model with education providers has been proposed by management as a key adaptation of the revenue model. Related to this, OLL has introduced a framework for microcredential learning, known as OpenCreds. The company will jointly support development of 65 courses on a revenue share basis with a formal launch expected during 2H20E. In our view, this is a highly prospective opportunity on a medium-term view. OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 7 8 Investment considerations Monetisation and revenue model progression continues apace OLL is seeking to capitalise on what it considers are fundamental changes in the higher education sector. The company believes its scalable learning platform enables a new online-first model for higher education providers. Evidence of customer demand and uptake has been apparent for its OL Platform SaaS and OL Marketplace offerings over the past two years. We expect continued strong customer and revenue growth from these offerings in the coming five years, as detailed in the Financials section. Importantly, OLL believes a much larger opportunity set is attainable through revenue share agreements with education providers. The company has discussed its intention to target such agreements through its OpenCreds framework (short course microcredentials) and in more recent months through qualifications (higher-value and longer-tenure courses such as degrees). We expect revenue contributions from revenue share agreements to commence in FY21E. The average revenue per active user is substantially different under the OL Platform SaaS and revenue share business models (Figure 3). Whilst OLL can benefit from increased usage by SaaS customers (Figure 4), the potential leverage from student growth is not as well captured, in our view. We believe a deeper level of engagement and upfront cost investment in the revenue share models is required by OLL. In effect, OLL helps fund the set-up costs of a course offering in return for an agreed revenue share. A brief case study on a business that has successfully executed on revenue share agreements has been included in the Case Study section. Figure 3 : Average OLL revenue per active user in Australia by business model Source: Company reports 1. Calculated based on the sum of monthly active users in Australia in 1H20 divided by Australian reve nue in 1H20. 2. OLL estimate based on the expected average revenue share and the average enrolment fees for OpenCreds funded courses. 3. OLL estimate based on the expected average revenue share between OpenLearning and an education provider to design and d eliver an online qualification. $0 $100 $200 $300 $400 $500 $600 Platform SaaS and Services (started 2018) Revenue share on OpenCreds (launch this half) Revenue share on qualifications (in planning) $20 1 $75 2 >$500 3 Summary of structure under each business model Platform SaaS and Services: c ustomer pays SaaS fees, funds setup costs and keeps all revenue. Revenue share on OpenCreds: OLL provides platform and funds set - up costs of that course. Revenue share on qualifications : OLL provides platform and funds set - up costs of that c ourse. OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 8 9 Figure 4 : Case study : increasing OL p latform usage at a top - tier Australian university showing a doubling in SaaS fees on higher usage Source: Company reports We expect incremental updates on the revenue sharing initiatives over the coming 6-12 months, with revenue ramp-up commencing in earnest from 2H21E and thereafter. An initial focus on Australia and Malaysia with scope for expansion across SE Asia OLL primarily operates in Australia (77% of 1H20 revenue) and Malaysia (23% of 1H20 revenue). Australia is a world-leading higher education market and the fifth-largest recipient of international student enrolments, with an 8% global market share in 2019 (UNESCO). Malaysia is a large source market for international students and is an emerging higher education hub, hosting 10 foreign university branch campuses (e.g. Herriot Watt University and Monash University). South East Asia holds scope for expansion in future periods, in our view. OLL has a presence in Singapore and additionally has OL Platform SaaS clients in 12 different countries globally. Figure 5 : Target industries and provide numbers Number of providers Number of learners Est imated market revenue S ource Australia University and other higher education 176 1.48m $37.9bn TEQSA, 2018 Technical and vocational education training 4,675 4.06m c.$ 10 .0bn NCVER, 2018 IBISWorld, 2020 Malaysia Higher education, technical and vocation education training 672 1.3m c.$5.0bn Kooperation International, 2014 . PwC, 2020 South East Asia Higher education, technical and vocation education training n.d. n.d. c.$60.0bn Parthenon - EY, 2015 Source: As noted in table, Canaccord Genuity The Australian university outlined in this case study grew from 10 courses and 951 learners in 2018 to 25 courses and 7,079 learners in 2019. A revenue model progression towards revenue share arrangements on new courses, built and funded by OLL, could meaningfully shift the scope for revenue over time , in our view For example, if OLL was to garner a revenue share of $500 per learner for a given course, then the addition of every 100 learners equate s to $50,000 of incremen tal revenue. OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 9 10 We believe there is also a large market opportunity in corporate training, professional development and industry associations that service learners in particular fields. We understand OLL will continue to engage with providers in these markets, however higher education and VET markets are the primary focus in the near term. Education demand is being driven by technological change and skills shortages globally. A survey by PwC in 2020 found that over 60% of Australian respondents were worried about automation, yet only 23% were upskilling through their employer. Partnerships and agreements confirm the market need and underscore the latency of the OLL business model, in our view OLL has signed multiple partnerships and agreements that, in our view, confirm both a market need for their products as well as the broad environments in which OLL can add value for customers. Some notable examples are included below. UNSW Global (October 2020) OLL signed a five-year license agreement with the University of New South Wales Global (UNSW Global) to deliver its established Transition Program online for international students. OLL will design and deliver the program with UNSW Global promoting the program globally. The four-month program runs multiple times a year and enables international students to gain entry into UNSW, a world top 50 university. A revenue share arrangement will see OLL earn between $6,000 and $9,000 per enrolment. Open University Australia (July 2020) Multiple agreements have been signed between OLL and Open Universities Australia (OUA), including a Memorandum of Understanding, a Platform SaaS and Course Distribution Agreement, and a Services Agreement. The core purpose is to grow the microcredential market in Australia. OUA is Australia’s largest online higher education marketplace and has enrolled over 440,000 students since its inception in 1993. It currently offers over 400 degrees and more than 2,000 subjects from 21 Australian universities. OLL and OUA have agreed to jointly fund the set-up and learning design costs of up to 30 OpenCreds courses through the creation of the Open Microcredential Development Grant. A value of $0.75m has been attached to this fund, with OLL offering a $0.45m in-kind contribution for learning design services. The $0.3m balance will be contributed by OUA in cash to universities to help fund set-up costs. DeakinCo. (July 2020) A platform agreement has been signed with DeakinCo., part of Deakin University. DeakinCo. considers itself a global leader in microcredentials focused on workforce capabilities. OLL is working with DeakinCo. to setup several courses on OL L’s platform for delivery in Australia and international markets. DeakinCo. is expected to be an early adopter of OpenCreds and provided valuable feedback to OLL in its consultation process with the market earlier this year when setting its framework for OpenCreds courses. Australian Catholic University (June 2020) A three-year usage-based platform agreement has been signed with Australian Catholic University (ACU). ACU is utilising OLL’s platform for the delivery of short courses, microcredentials and internal professional development programmes, initially focusing on the health and education sectors. OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 10 11 Heriot-Watt University Malaysia (April 2020) Heriot-Watt University is a leading UK university with over 29,000 students and campuses in Edinburgh, Dubai, Malaysia, Orkney and the Scottish Borders. OLL was contracted to redesign the university’s Foundation Studies programme into a quality online learning experience. The project has been delivered with students now taking the programme in an online setting. High Resolves (March 2020) OLL signed a SaaS and reseller agreement with High Resolves, a not-for-profit entity that offers services to hundreds of schools across Australia, Brazil, Canada, Mexico and the US. This is OLL’s first significant expansion into t he K-12 schools sector. High Resolves has offered its partner schools one year of free access to the OL Platform through to March 2021. OLL will receive a usage-based annual SaaS fee from High Resolves with the scope to earn further SaaS fees from schools that elect to continue using the OL Platform beyond March 2021. As of July 2020, OLL had onboarded 36 schools in Australia. Alibaba Cloud (March 2020) OLL entered into a partnership with Alibaba Cloud, a subsidiary of Alibaba Group, enabling high-speed and compliant access to its online courses in China. At the time, OLL had over 10,000 unique learners. We consider the agreement akin to a gateway, whereby education providers seeking access to learners in China can implement courses on OLL’ s platform to better target those students whilst they remain in their home country. OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 11 12 The OpenLearning Platform The OL Platform has been built to incorporate educational foundations, a social learning environment and a high-quality experience. Figure 6 : OL P latform : the interaction of technology, education providers and learners creates a strengthening network effect over time, in our view Source: Company reports The OL P latform is typically utilised by education providers to deliver their courses to learners under a B2B2C model. Additional elements and design features include : • A single global cloud platform used by both education providers and learners. • The education provider ’ s logo is prominent, driving a stronger relationship with the end consumer (learner). • Learners can browse the marketplace for other educational content and may opt - in to receive information about new courses. • Every learner has a pro file that aggregates evidence of learning that incorporates badges, certificates and course progress. All elements of education delivery are built into the online learning experience incorporat ing : • Scalable end - to - end online education delivery, accessib le worldwide. • A g lobal marketplace where education providers are able to promote their online courses to learners worldwide. • The OL S ervices division is available to redesign a providers courses and upskill staff to create quality online courses. OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 12 13 OLL believes its approach solves pertinent challenges facing education providers and generates significant value for its partners across a range of use-cases and markets: Online delivery of accredited and non-accredited courses to both domestic and international students via a scalable cloud-based learning platform. Diversification of revenue streams through delivery of branded short course and microcredentials offerings for working professionals aiming to bridge skills gaps. Improved access to, and engagement with, international students through sourcing via OLL’s database of learners ; and offering online foundation year, language and other programs to students whilst offshore, or in-country through partners. OL Platform SaaS – the core tenet behind OLL’s revenue model over the past two years The OL Platform SaaS offering is made available to education providers, who offer their courses to learners through the OL Platform, on a usage-based tiered pricing model. The table below provides example pricing structures and market sizing for the Australian market. In recent months, OLL has adjusted this structure but the gist of the revenue model and pricing tiers remains. Offerings for Malaysia, Singapore and other international markets that follow the same pricing mechanisms are also available. Figure 7 : Australian OL Platform SaaS pricing tiers Personal Institution Enterprise Online trainer, teacher, lecturer Vocational college, private higher education , CPD provider, i nternal corporate training University, large corporate, g overnment $600/year Tailored pricing >$4,8 00/year Tailored pricing (Usually >$30,000/year) Up to 250 learners From 5 00 to 5,000 learners From 5,000 learners Market size >10m individuals , >500 ,000 SMEs Market size >10 ,000 providers Market size >1,000 large providers Source: Company reports , Canaccord Genuity We calculate the average SaaS ARR per customer to be c.$10,000. This metric has been contracting on mix shift towards a higher number of smaller customers over the past 12 months. OLL has built a global community with over 2.6m unique registered learners, 143 customers (education providers in 12 countries including nine Australian universities) and nearly 4,000 courses (c.3,700 private courses, c.300 public courses). Around 900,000 active learners used the OL Platform over the 12 months to 30 September 2020. Growth in recent quarters has continued apaceas depicted below. OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 13 14 Figure 8 : Customer count (+1 60 % 3Q 20 year - on - year) a nd SaaS ARR (+ 55 % 3Q 20) continue to build nicely... Figure 9 : ...as are unique users (+ 59 % 3 Q20) and enrolments (+ 77 % 3 Q20) Source: Company reports , Canaccord Genuity Source: Company reports , Canaccord Genuity OL Marketplace – drives a network effect within the OL Platform The OL Marketplace contains all publicly accessible courses that are delivered by the OL Platform. These courses must meet OLL’s quality guidelines and are run by education partners. OLL monetises its OL Marketplace in two ways: 1. Directly: OLL may receive a percentage of revenue from courses sold through the OL Platform. The percentage ranges from 0% for B2B SaaS customers to up to 65% for courses where OLL has provided its design services on a revenue share basis. 2. Indirectly: An increase in the number of enrolments in courses may lead to higher SaaS revenue from education providers (if the arrangement is based on the number of learners taking a course). OLL regularly promotes courses to its userbase and views the OL Marketplace as way for education providers to increase their brand awareness and acquire new students. OLL believes its OL Marketplace drives a network effect with the OL Platform and is a key differentiator relative to some competitors in the market. Revenue generated through OL Marketplace is not meaningful at present ($0.3m FY20E) but we expect strong growth in coming years and forecast this business to comprise 14% of revenue by FY24E ($2.5m). OL Services – the expertise to build new course content OLL generates revenue by providing professional services to education providers, and in doing so assist them in designing courses. In some cases, an agreement is struck whereby OLL is entitled to earn a revenue share from courses sold through the OL Marketplace. Services are provided to customers in Australia. Historically they were also provided to customers in Malaysia, however, this offering ceased in 1H20. Revenue generated through OL Services comprised c.40% of total revenue in 1H20. We expect the relative importance of this business to decline in coming years and expect it to comprise 13% of total revenue by FY24E ($2.4m). 0 20 40 60 80 100 120 140 160 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 SaaS ARR ($'000) B2B SaaS customers 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Cumulative Unique Users ('000) Cumulative Enrolments ('000) OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 14 15 OpenCreds – building the new Australian microcredential market OpenCreds is an initiative developed by OLL with the intention of enabling education providers and industry to create stackable courses that lead towards a measurable learning credit for the learner. A microcredential will be gained based on the hours worked and competency earned. OLL is seeking to define the industry standard through its framework, and given it is exclusive to OLL, management expects this initiative will accelerate adoption of its OL Platform. The offering is designed to become a study pathway for international students and the workforce more broadly. Figure 10 : OpenCreds framework : enables the transfer of credit between industry and the higher education sector Source: Company reports The agreement struck with Open Universities Australia (OUA) in July 2020 is a very important early vote of confidence in the initiative in our view: OUA is the largest higher education marketplace in Australia, with 21 university partners and 440,000 alumni. OUA has selected OLL as its platform for short courses and microcredentials. OLL and OUA will jointly support the development of 30 OpenCreds, to be delivered on a revenue share basis. Separate to the above, OLL has launched an investment fund (OIF) initiative whereby it will fund the set-up costs of an OpenCred offering with approved education providers. An initial $0.35m, half of which will be in-kind, has been provided to create 35 OpenCreds. In exchange for this, OLL will receive a meaningful share (between 35% and 50%) of the revenue generated from fees paid by learners. The intention of the OIF is to accelerate interest and growth outside of the university sector by supporting higher education providers, registered training organisations, industry associations and professional bodies to move their training programs online. The grants provided to successful applicants are 50% cash and 50% in-kind in the form of learning design from OLL’s learning services team. OLL and the education provider will each market the courses at their own expense. OpenCreds clearly define evidence of learning through indicative hours of learning which can between 2.5 hours to 150 hours of learning across seven levels to support stack - abili ty. OpenLearning Limited Initiation of Coverage Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 15 16 To date, 26 OpenCreds have been allocated to eight providers (Catalyst Education, EduVidd, Laneway Education, Le Cordon Bleu Australia, ParentTV, Redhill Education Limited, Switch Education for Business, and The Growth Network). OLL has also launched OpenCreds in Malaysia, which is based on the Australian framework but tailored to the M