Initiation of Coverage OpenLearning Limited 5 November 2020 Education Services Allan Franklin | Senior Analyst | Canaccord Genuity (Australia) Ltd. | afranklin@cgf.com | +61 3 8688 9178 Rating Price Target SPECULATIVE BUY A$0.50 Changing the game - taking universities online Price OLL-ASX A$0.33 Investment Recommendation OpenLearning (OLL) has built a scalable online learning platform for education Market Data providers looking to offer their courses online, and a marketplace for accredited and 52-Week Range (A$) : 0.14 - 0.39 non-accredited courses, micro-credentials and online degrees. The business continues Avg Daily Vol (M) : 0.9 to evolve its offering, with several recent partnerships demonstrating the product Market Cap (A$M) : 53.7 reach and scope for adoption across Australia and South East Asia, in our view. Shares Out. (M) : 162.6 Dividend /Shr (A$) : 0.00 The COVID-19 situation has thrown the education sector into disarray (The Australian, Dividend Yield (%) : 0.0 18 April 2020. Financial Review, 28 April 2020), and we believe traditional learning Enterprise Value (A$M) : 44.3 models and funding backdrops are being brought into question due to increased interest in alternative study locations, online education technology and concern FYE Dec 2019A 2020E 2021E 2022E around existing face-to-face learning modes. Sales (A$M) 1.6 2.3 5.4 8.7 Gross Profit 1.2 1.8 4.4 7.3 We believe OLL is well placed to capitalise on demand growth for online delivery (A$M) of education as well as an increased demand for job reskilling, evidenced by the EBITDA (A$M) (4.6) (4.6) (3.7) (2.2) Australian government’s university funding changes and reskilling objectives (The EBIT (A$M) (4.6) (4.7) (3.8) (2.6) Australian, 19 June 2020). Net Income (4.6) (4.6) (3.8) (2.6) Adj (A$M) In our view, OLL’s offering is scalable across multiple regions, is EV/Sales (x) 12.6 20.1 10.0 6.6 differentiated from its competitors, solves for current customer pain points Net Debt (Cash) (A$M) (8) (9) (11) (9) 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 0.4 $0.50/share price target. 0.35 UNSW Global Transition Program a highly strategic and accretive agreement: 0.3 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 0.25 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 0.2 $9,000 for each enrolment. 0.15 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 0.1 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 May-20 Nov-20 Aug-20 Sep-20 Mar-20 Feb-20 Apr-20 Jun-20 Oct-20 Jan-20 Jul-20 capitalise on an increased demand for reskilling as well as the demand-related shocks OLL emanating from COVID-19-related restricted travel and a stronger emphasis on online Source: FactSet learning. Key risks: We see the key risks for OLL as being: (i) slower-than-expected uptake of Priced intraday 4 November 2020 OL Platform and OpenCreds; (ii) contract renewal and churn; (iii) reliance on demand OLL was founded in 2012 seeking to solve the for cloud-based learning; (iv) increasing competition and technology advancements; (v) problem of limited access to quality online brand damage from technology-related issues; and (vi) reliance on key personnel. education. It has developed a technology platform Potential catalysts include: (i) OpenCreds launch and demand validation (2H20E and that is utilised by higher education providers to FY21E); (ii) strong execution on OL Platform SaaS demand growth; (iii) new partnership deliver online courses ranging from short courses to degrees. arrangements and reseller agreements in existing and new market verticals; (iv) broad market uptake of microcredentials and short courses; (v) and further product adaption Canaccord Genuity (Australia) Limited has received a fee as Lead Manager to the OpenLearning Limited Initial Public (e.g. offering revenue share on delivery of online higher education qualifications). Offering in November 2019. Valuation and recommendation: Our 12-month price target for OLL is $0.50/share. Canaccord Genuity (Australia) Limited has received a fee as This is based on a DCF valuation that incorporates a WACC of 11.4% (11.4% cost of Lead Manager to the OpenLearning Limited Capital Raising equity, 0.0% debt-to-equity and terminal growth of 3.0%). announced 23 October 2020. 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. 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. For important information, please see the Important Disclosures beginning on page 36 of this document. OpenLearning Limited Initiation of Coverage Figure 1: Financial summary 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 Source: Company reports, Canaccord Genuity estimates 2 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 2 OpenLearning Limited Initiation of Coverage 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 3 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 3 OpenLearning Limited Initiation of Coverage 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 under 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. 4 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 4 OpenLearning Limited Initiation of Coverage 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. 5 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 5 OpenLearning Limited Initiation of Coverage 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 OLL’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 6 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 6 OpenLearning Limited Initiation of Coverage 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. 7 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 7 OpenLearning Limited Initiation of Coverage 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 Summary of structure under each business model $600 Platform SaaS and Services: >$500 3 customer pays SaaS fees, funds $500 setup costs and keeps all revenue. Revenue share on OpenCreds: OLL $400 provides platform and funds set-up costs of that course. $300 Revenue share on qualifications: OLL provides platform and funds set-up $200 costs of that course. $100 $75 2 $20 1 $0 Platform SaaS and Services Revenue share on Revenue share on (started 2018) OpenCreds qualifications (launch this half) (in planning) Source: Company reports 1. Calculated based on the sum of monthly active users in Australia in 1H20 divided by Australian revenue 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 deliver an online qualification. 8 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 8 OpenLearning Limited Initiation of Coverage The Australian university outlined in this Figure 4: Case study: increasing OL platform usage at a top-tier Australian university showing a doubling in SaaS fees on higher usage 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 equates to $50,000 of incremental revenue. 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 Number of Estimated Source providers learners market revenue 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 672 1.3m c.$5.0bn Kooperation International, education training 2014. PwC, 2020 South East Asia Higher education, technical and vocation n.d. n.d. c.$60.0bn Parthenon-EY, 2015 education training Source: As noted in table, Canaccord Genuity 9 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 9 OpenLearning Limited Initiation of Coverage 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 OLL’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. 10 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 10 OpenLearning Limited Initiation of Coverage 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 the 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. 11 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 11 OpenLearning Limited Initiation of Coverage 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 Platform: the interaction of technology, education providers and The OL Platform is typically utilised by learners creates a strengthening network effect over time, in our view 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 profile that aggregates evidence of learning that incorporates badges, certificates and course progress. All elements of education delivery are built into the online learning experience incorporating: • Scalable end-to-end online education delivery, accessible worldwide. • A global marketplace where education providers are able to promote their online courses to learners worldwide. • The OL Services division is available to redesign a providers courses and upskill staff to create quality online courses. Source: Company reports 12 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 12 OpenLearning Limited Initiation of Coverage 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, University, large corporate, government CPD provider, internal corporate training $600/year Tailored pricing >$4,800/year Tailored pricing (Usually >$30,000/year) Up to 250 learners From 500 to 5,000 learners From 5,000 learners Market size >10m individuals, Market size >10,000 providers Market size >1,000 large providers >500,000 SMEs 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. 13 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 13 OpenLearning Limited Initiation of Coverage Figure 8: Customer count (+160% 3Q20 year-on-year) and Figure 9: …as are unique users (+59% 3Q20) and SaaS ARR (+55% 3Q20) continue to build nicely... enrolments (+77% 3Q20) $1,400 160 4,500 $1,200 140 4,000 120 3,500 $1,000 3,000 100 $800 2,500 80 $600 2,000 60 1,500 $400 40 1,000 $200 20 500 $0 0 0 Mar-19 Jun-19 Sep-19 Dec-19Mar-20 Jun-20 Sep-20 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 SaaS ARR ($'000) B2B SaaS customers Cumulative Unique Users ('000) Cumulative Enrolments ('000) 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). 14 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 14 OpenLearning Limited Initiation of Coverage 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 OpenCreds clearly define evidence of industry and the higher education sector learning through indicative hours of learning which can between 2.5 hours to 150 hours of learning across seven levels to support stack-ability. 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. 15 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 15 OpenLearning Limited Initiation of Coverage 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 Malaysian market and its qualifications system. Notably, OLL is also planning to directly fund set-up costs for selected high- value online qualifications on a revenue share basis. This could be longer dated courses such as degree programs that have a much higher course value and hence revenue share potential. UNSW Transition Program – the first of its kind In October 2020, OLL signed a five-year license agreement with UNSW Global to deliver its established Transition Program online for international students. UNSW is a pioneer of foundation studies and pathway programs, having educated >30,000 students across its pathway programs. Details of the agreement: 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. The online delivery model relies on activity-based learning, personalised coaching, portfolio-based assessment and interviews instead of exams. This will be undertaken through OLL’s platform. The market opportunity behind this program is significant, in our view. There were in excess of 440,000 international students in Australia in 2019 (Department of Education). Roughly 25,000 of these were studying at UNSW Global. As detailed in the following sections, COVID-19 has had a meaningful impact on universities, their academic delivery and students’ perceptions of value. Australia’s handling of COVID- 19 has made it a more attractive study destination (Navitas, 2020). The first online cohort is expected to commence in March 2021, being run in tandem with UNSW Global’s existing face-to-face Transition Program, which will continue to be delivered on campus. Importantly, UNSW Global will be responsible for marketing the program and providing curriculum, content, quality assurance, and certification. This allows OLL to leverage the UNSW Global brand and existing agent network. 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. OLL noted that the online Transition Program is well positioned to provide a reasonably priced online pathway into UNSW’s on-campus degrees. We note that UNSW Global’s on-campus offering costs A$22,800 (UNSW Global) for a four-month program. We have assumed that OLL’s online offering is priced at a discount to the on-campus offering. 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. We have assumed OLL will generate $1.5m of revenue from this agreement in FY21E, building to $2.6m by FY25E and continuing thereafter for another five-year term. 16 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 16 OpenLearning Limited Initiation of Coverage COVID-19 impact on education delivery The company believes COVID-19 is likely to lead to fundamental and long-lasting changes to the higher education sector. This includes an accelerated shift to online education and increased flexibility in ensuring solutions cater for customer requirements. We see this as having a mixed effect for OLL, driving new demand and use cases whilst causing a level of uncertainty and slower decision making by some customers. On balance, we envisage a continuation of strong sales growth into the medium term. Traditional education has been thrown into disarray in recent months... The COVID-19 situation has thrown education 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. Figure 11: QS survey (2020): “Has the coronavirus Figure 12: Australian university funding expected to take affected your plans to study abroad?” years to recover 100% 14 12% 24% 23% 21% 21% 21% 12 29% 80% 10 13% 12% 12% 12% 8 14% 60% 16% 6 61% 4 40% 2 62% 65% 67% 67% 67% 55% 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 20% 27% 0% Domestic International February March April May June July August Domestic (Government committed) International (with 2021 intake) Yes No Don't know International (no 2021 intake) Source: QS Source: Mitchell Institute estimates, Commonwealth DET actuals, Canaccord Genuity Modelling from the Mitchell Institute shows a $2bn hit in tuition fees for semester two (2020) and cumulative losses of up to $19bn over the next three years depending on the extent of border closures. Considering ABS data that every $1 spent on tuition results in another $1.15 spent in the general economy, we estimate this is closer to a $40bn impact to the economy directly related to international students. …with Australian universities being particularly impacted… Australia’s universities have used international students as a source of growth over the past decade (both from a value and volume perspective), with a relatively flat growth profile from domestic students in real terms (Figure 14). A large proportion of revenue, close to 50% of tuition fees in some cases (Figure 13), has been threatened due to the withdrawal of international students from Australia, as has the education experience for all students. Universities started to implement cost cutting measures earlier this year (The Australian, 28 April 2020) and deeper cuts seem likely to us if the international student intake in 2021 is not meaningful. 17 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 17 OpenLearning Limited Initiation of Coverage Figure 13: Universities with >50% of student revenue Figure 14: Group of Eight real growth in revenue by type from international students (relative to 2008 revenue) International 350% student revenue % of total 300% The University of Sydney $884.7m 57.2% 250% The University of New South Wales $712.5m 56.4% 200% The University of 150% Melbourne $879.3 56.2% 100% Monash University $852.0m 54.4% 50% Federation University Australia $127.7m 50.7% 0% The University of 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Queensland $572.7m 50.6% Total revenue Government education provision Research income International students Source: Mitchell Institute Source: Mitchell Institute, Commonwealth DET The education experience and cost of learning are also key considerations emanating from COVID-19 (QS, 2020). Figure 15: QS survey (2020), university perspective: “How Figure 16: QS survey (2020), student perspective: “If you do you expect teaching to take place when the next were to start your studies online until you're able to academic year begins?” travel for face-to-face teaching, do you think this should affect tuition fees?” 1% 2% Yes, they should be All online 12% discounted 8% 23% Mostly online with 8% No, they should stay some face-to-face the same An equal split between 35% online and face-to-face Unsure Mostly face-to-face with some online 32% 79% All face-to-face Other Source: QS Source: QS …and a flow on effect to job reskilling and vocational education In June 2020, the Australian government announced the most significant change to university funding in more than a decade (The Australian, 19 June 2020). This saw a recalibration on the fee schedule with areas such as maths, teaching and nursing becoming more affordable and commerce, law and management becoming more expensive. This forms part of the government’s reskilling objectives which, in our view, has been accelerated by the onset of COVID-19. 18 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 18 OpenLearning Limited Initiation of Coverage The Mitchell Institute has released a position piece discussing the vocational education system Australia requires to develop the right skills for economic recovery. It acknowledges that VET is a key component of Australia’s education and training system but caution that it is not equipped well enough to respond to the heightened uncertainty brought on by COVID-19. Their recommendations for the government and industry canvas 10 areas of focus. This includes a fairer funding system, development of a national quality framework, faster response to industry needs and a national platform for sharing information on careers. In light of the above commentary, we perceive there to be a backdrop for structural change within the education sector and workforce participation more generally and deem this to be supportive for OLL on a medium-term view. 19 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 19 OpenLearning Limited Initiation of Coverage Understanding the market and competition Sizing up the Australian market The tertiary education market in Australia (higher education, vocational learning, English language and related educational services) generates around $48.0bn in revenue per year, broadly split two-thirds domestic and one-third international (IBISWorld (2020), TEQSA (2018), NCVER (2018)). University and other higher education courses service c.1.5m learners per annum through c.175 providers, 40 of which are universities with 10,000 students or more. Approximately 27% of the student cohort are international students (Universities Australia, 2019). International student growth has been very strong in recent years, with 2019 recording a 9.7% increase in enrolments and a 7.6% increase in commencements. As at August 2020, international student numbers were 4.9% below the pcp (Department of Education). Figure 17: December YTD enrolment growth; long-term Figure 18: …with large cohorts from China and India, and growth from higher education and VET has been evident… very strong growth from India and Nepal in 2019 450,000 Students 0 100,000 200,000 300,000 375,000 China 300,000 2% 225,000 India 34% 150,000 Nepal 75,000 34% 0 Brazil 1% Vietnam 7% Higher Education VET Schools ELICOS Non-award 2018 2019 Source: Department of Education, ABS, Canaccord Genuity Source: Department of Education, ABS, Canaccord Genuity Nationality mix has shifted meaningfully in recent years towards China (27.3% of total student enrolments, +2.3% on pcp), India (15.1% of total, +34.0% on pcp) and Nepal (7.2% of total, +33.5% on pcp) with the top three comprising close to 50.0% of total enrolments. The reliance on international students has caused meaningful concern in recent months, in our view, with top Australian universities having significant exposure (Figure 13 and Figure 14). Two surveys of agents, who work on behalf of international students, were undertaken by Navitas Insights in May and July 2020. The following graphics were particularly interesting, showing improved interest levels and reputation for Australia, Canada and New Zealand. 20 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 20 OpenLearning Limited Initiation of Coverage Figure 19: To what extent do you agree with the following statement: “Over the past two months, the reputation of this country as safe and welcoming for international students has improved.” Source: Navitas Insights Figure 20: To what extent do you agree with the following statement: “Over the past two months, there has been more interest in this country as an education destination compared to other countries.” Source: Navitas Insights 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. 21 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 21 OpenLearning Limited Initiation of Coverage Sizing up Malaysia and South East Asia Malaysia is both a large source market for international students and a growing education hub for international students. In 2015, the country set a target of hosting 200,000 international students by 2020 and 250,000 by 2025. In 2019, this target was well behind with c130,000 students in the country in March 2019 (thepienews.com). For context, Australia had in excess of 420,000 higher education international students in 2019 (Department of Education). PwC considers Malaysia to be a growing higher education market and forecasts a 4.5% CAGR through to 2024, resulting in market size of c.RM17bn (c.A$5.5bn). It sees academic reputation, employment prospects and cost as the top three drivers to education provider selection. Affordability of overseas study is a challenge for international students and one that has become more pronounced in the current economic environment (Choudaha, ojed.org, 2020). Importantly, the rankings of local Malaysian universities are improving (QS, 2020). Five of Malaysia’s universities are ranked in the top 200 of QS’ world rankings. Further, Malaysia has 10 branch campuses for foreign universities such As Heriot Watt University and Monash University. South East Asia is also seen to be a key market for OLL going forward. Locations such as Indonesia and Singapore are markets where OLL has existing customers, winning multiple new agreements in Indonesia in recent months. Other large markets in the region are Thailand and Vietnam. Analysis by Parthenon-EY defined a c.$60.0bn private education spend across South East Asia in 2015. Affordability, English proficiency and urbanisation were categorised as key drivers of growth within the region. Categorising the players within EdTech The global EdTech industry is forecast to reach US$404bn by 2025, a 16.3% CAGR (HolonIQ, 2020). Despite this strong growth, it is expected to only make up 5.2% of global education expenditure by 2025 ($7.3tn). It can be broken down by sector target (e.g. pre-kindergarten, kindergarten to year 12, higher education and workforce) or by use-case (e.g. digital content, international education, learning management systems, online learning, tutoring and so on). OLL’s platform saddles multiple sector verticals within the higher education sector and has optionality outside of this, particularly in workforce, in our view. For simplicity, we discuss the following sector verticals to help explain the industry drivers and landscape. Learning Management Systems (LMSs). Massive Open Online Courses (MOOCs). Online Program Managers (OPMs). OLL’s offerings interact with and cross over each of these vertical business models. LMSs: A cornerstone of education technology LMSs operate in formal education and training settings. They are software applications that administer, document, track, report and deliver educational courses. There are multiple global operators of scale in the LMS market. A survey (insidehighered.com) of the higher education LMS market in Canada and the US in 2017 found that 87% of institutions relied upon four vendors (Blackboard, Canvas, Moodle or D2L Brightspace). 22 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 22 OpenLearning Limited Initiation of Coverage Docebo, Inc. (DCBO-TSX: C$52.64 | BUY, C$70.00 TP | Robert Young, Canaccord Genuity Corp, Canada), a cloud vendor of enterprise employee, partner and customer training software, also sits within the LMS category. Over CY20 to date, the company has experienced an acceleration in demand as customers have sought to implement remote learning platforms. Figure 21: The LMS landscape has changed meaningfully over time Source: e-Literate The proposed benefits of LMSs include: The reduction of manual tasks, travel and personal training sessions; Allowing training and development to be undertaken anytime and anywhere; Facilitating formal and informal training; and Increasing engagement through provision of more collaborative materials. We understand that newer technologies have a stronger focus on interaction and educational outcomes as opposed to what could be considered ‘file management’ functions. This is one reason, in our view, that Canvas has seen such strong uptake in recent years (Figure 21). Instructure Inc., owner of Canvas, was taken private in 2019 for roughly US$2.0bn. The business delivered US$209.5m in 2018. OLL indirectly competes with LMS platforms and forms part of the ‘newer technology’ landscape that seeks to provide better educational outcomes through its online platform offering. 23 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 23 OpenLearning Limited Initiation of Coverage MOOCs: The driver behind short courses and microcredentialing Massive Open Online Courses (MOOCs) offer free online courses as well as paid short courses and microcredentials. They are open for anyone to enrol in, tend to provide a passive learning experience and are a flexible way to deliver educational experiences at scale. Courses are typically offered on behalf of universities seeking to engage large audiences with intentions to earn income away from the initial course. Key MOOC providers are highlighted in the figure below. Their business models are generally premised on revenue share arrangements with universities for those courses that attract a fee. Figure 22: Estimated size and location of leading MOOC platforms Source: Company reports According to ClassCentral, demand for courses has grown from infancy in 2012 to over 80m students in 2018. Around 800 universities were offering over 9,000 courses at that time. Figure 23: Growth in MOOC course offerings Figure 24: MOOC course distribution by subject Technology - 20% Business - 19% Social Sciences - 11% Science - 10% Humanities - 10% Education - 9% Health - 7% Engineering - 7% Art & Design - 6% Source: ClassCentral, 2018 Source: ClassCentral, 2018 24 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 24 OpenLearning Limited Initiation of Coverage MOOCs have experienced a strong increase in demand in recent months. According to HolonIQ, they attracted nearly 500m visits from learners in the 30 days to 26 June 2020, 2.5x the level experienced in January 2020. A key element of MOOCs is the bite-sized education ‘specialisations’ that are earned through completion (better known as microcredentialing). There is a strong trend toward microcredentialing in Australia (ACODE, November 2019) given it is a way to fill skills gaps and for self-learning without a significant time and financial impost. ACODE believe microcredentialing is becoming a more meaningful consideration for employers when seeking candidates and for universities looking to expand or supplement their business models. OLL’s platform has a strong crossover with the MOOC market, enabling education partners to offer a wide range of courses online and allowing learners to earn microcredentials through their study. The launch of OLL’s OpenCreds framework further strengthens the company’s intention to earn a revenue share from education provider partnerships. OPMs: A new area of focus for OLL Online Program Managers (OPMs) work with education providers to take new courses online. These courses are typically longer in nature than those offered by MOOCs and can be high value undergraduate and post-graduate degrees. OPMs offer a suite of services including market research, student recruitment and enrolment, course design, and technology platforms. In return, they typically seek a meaningful revenue share of tuition fees. HolonIQ defines this market to be a US$7.0bn in size, growing to a $15.0bn market by 2025. Further, it believes COVID-19 will accelerate the trend towards private- public-partnerships for education content. The OPM market is a significant opportunity for OLL, in our view, and one that is only recently being positioned as a growth driver by the company. The agreement with UNSW for delivery of its Transition Program in an online setting is a good example of OLL leveraging their expertise into a new market vertical. We believe this is a logical next step for the company following the scaling up of its customer and learner base. This strategy will run in parallel to other offerings. 25 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 25 OpenLearning Limited Initiation of Coverage Case study: 2U, Inc. 2U, Inc. is an education technology company that offers a SaaS platform, coursework design, infrastructure support and capital to universities and non-profit colleges seeking to offer their services online. The business was founded in 2008 and is a leading OPM. 2U does not confer degrees but rather provides the services and technology to be able to deliver the service in return for a revenue share of the course fees. 2U works with 75 universities globally and had in excess of 66,000 full course equivalent enrolments as at 30 June 2020. The business delivered 2Q20 revenue of US$182.7m (+18% on pcp) and an adjusted EBITDA loss of US$2.1m. Further information of the business model and its metrics are provided below. Figure 25: “2U is positioned across the entire spectrum of higher education” Source: 2U, Inc. Figure 26: 2U, Inc. consolidated revenue growth Figure 27: 2U, Inc. graduate program full course equivalent enrolments and revenue per enrolment 160 60% 50,000 $2,850 $2,800 50% 40,000 $2,750 120 $2,700 40% 30,000 $2,650 80 30% $2,600 20,000 $2,550 20% $2,500 40 10,000 $2,450 10% $2,400 0 0% 0 $2,350 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 Graduate Program Alternative Credential Graduate Program enrolments Organic consolidated growth Graduate Program revenue / enrolment Source: 2U, Inc. Source: 2U, Inc. 26 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 26 OpenLearning Limited Initiation of Coverage Case study: FutureLearn FutureLearn is a leading MOOC learning platform, founded in December 2012 and jointly owned by The Open University (12 UK based university partners) and SEEK Ltd. The business uses technology and partnerships to create “enjoyable, credible and flexible short online courses and microcredentials, as well as undergraduate and postgraduate degrees”. Partners include universities and organisations such as Accenture, the British Council, CIPD, Raspberry Pi, Founders4Schools and Health Education England. The company is also involved in government-backed initiatives to address skills gaps such as The Institute of Coding and the National Centre for Computing Education. In April 2019, SEEK invested £50.0m (c.A$92.0m) in the company, for a 50% stake. In the same month, SEEK also invested c.A$50.0m as part of a US$103m funding round for Coursera, another leading MOOC, valuing it at over US$1.0bn. As at June 2020, FutureLearn had 175 partners and 12.5m users in the UK and internationally. As early as 2016, the platform was allowing learners to earn credits towards a university degree (Financial Times). Key subject areas include: Business & Management; Creative Arts & Media; Healthcare & Medicine; History; IT & Computer Science; Language; Law; Literature; Nature & Environment; Politics & Society; Psychology & Mental Health; Science, Engineering & Maths; Study Skills; and Teaching. A core component of FutureLearn’s experience is social learning. This forms part of the pedagogic approach and in its view results in an active learning experience through engagement and social interactions (replying, liking, finding, bookmarking and following other student and their work). Though analysis of its data, FutureLearn found social learners viewed 37% more content on average over the duration of their course. Figure 28: Do social learners look at more content than other learners? Blue dot = average for social learners (made one or more comment) Pink dot = average for all other learners X-axis = a course live for enrolment Y-axis = percentage of content viewed Source: FutureLearn We see similarities between FutureLearn’s business model and that of OLL. FutureLearn is a competitor in the Australian market. In November 2019, FutureLearn had nine Australian education provider clients. 27 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 27 OpenLearning Limited Initiation of Coverage Financial commentary OLL reported gross sales of $1.5m (+52%), total revenue of $1.1m (+33%) and customer cash receipts of $1.7m (+56%) in 1H20. OL Platform ARR grew by 71% to $1.1m. Operating costs in 1H20 remained broadly in line with 1H19 and 2H19 at $3.2m and resulted in an EBITDA loss of $2.1m and a PBT loss of $2.2m. OLL revenue has been impacted by a Figure 29: Historical profit & loss statement: operating losses have remained contraction in OL Services, which fell broadly flat in recent years from $1.2m in FY18 to $0.6m in FY19. This is partly due to a decision to stop 2018A 1H19A 2H19A 2019A 1H20A offering OL Services in Malaysia. Total revenue ($m) 1.8 0.8 0.8 1.6 1.1 Growth -3.6% -18.0% -11.5% 32.6% The quality of revenue has improved, with OL Platform SaaS representing 49% of revenue in 1H20, up from 21% in Web hosting & COGS -0.5 -0.2 -0.2 -0.4 -0.2 FY18. Employee -4.4 -2.4 -2.2 -4.6 -2.1 Marketing -0.2 -0.0 -0.1 -0.1 -0.2 Professional services -0.2 -0.1 -0.2 -0.2 -0.4 Gen admin -1.0 -0.4 -0.7 -0.8 -0.3 Total Operating Costs ($m) -6.3 -3.1 -3.3 -6.2 -3.2 Growth 26.8% -14.0% -2.1% 1.6% EBITDA ($m) -4.5 -2.3 -2.5 -4.6 -2.1 D&A 0.0 0.0 0.0 -0.1 -0.1 Net interest 0.0 0.0 0.0 0.0 0.0 PBT ($m) -4.5 -2.3 -2.5 -4.6 -2.2 Source: Company reports, Canaccord Genuity OLL currently reports its financials into three business units. OL Platform SaaS COVID-19 has had a dual impact of slowing decision making for some clients whilst increasing new inquiry levels. Net net, 81% revenue growth was delivered in 1H20 yoy. Following the December 2019 IPO, a stronger focus has been placed on expanding sales, marketing and customers success teams within this business. OL Marketplace Gross sales increased 84% yoy in 1H20. A transition has been underway, away from a revenue share model within Marketplace towards a subscription-based model, which benefits OL Platform SaaS and broader adoption of the Platform. As a result, the gross- to-net sales margin for Marketplace contracted markedly in 1H20 (from 34% to 12%). OL Services Services revenue 1H20 was broadly flat relative to the pcp. OLL has stopped offering Services in Malaysia and as a result, there was a headwind to revenue from this dynamic in 1H20. Malaysia generated $0.5m of Services revenue in FY18 and $0.3m in FY19. It was close to full run-off in 2H19 and so will not impact FY20E to any significant extent. 28 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 28 OpenLearning Limited Initiation of Coverage We have tabled historical and forecast segment data below. Notably, we have included three new revenue lines for the future monetisation of OpenCreds and Qualifications revenue share models as well as the UNSW Transition Program. Figure 30: Segmental revenue; FY19 impacted by a sharp fall in OL Services revenue and masked 91% revenue growth from OL Platform SaaS. Our FY21E and FY22E forecasts benefit from the introduction of new revenue lines (December YE) 2018A 2019A 2020E 2021E 2022E 2023E 2024E Revenue by Segment OL Platform SaaS $m 0.4 0.7 1.1 1.7 2.5 3.7 5.6 OL Marketplace $m 0.2 0.2 0.3 0.6 1.0 1.8 2.5 OL Services $m 1.2 0.6 0.8 1.0 1.5 2.0 2.4 UNSW Transition Program $m 0.0 0.0 0.0 1.5 1.9 2.3 2.5 OpenCreds $m 0.0 0.0 0.0 0.4 0.8 1.5 1.9 Qualifications $m 0.0 0.0 0.0 0.2 1.0 2.0 3.5 Total revenue $m 1.8 1.6 2.3 5.4 8.7 13.3 18.4 Growth -11% 42% 134% 61% 53% 38% Growth ex-revenue share -11% 42% 48% 52% 50% 40% Source: Company reports, Canaccord Genuity estimates The figure below provides a broader financial summary. Figure 31: Financial summary; we forecast a strong revenue growth trajectory with EBITDA break even in FY23E (December YE) 2018A 2019A 2020E 2021E 2022E 2023E 2024E Total Revenue $m 1.8 1.6 2.3 5.4 8.7 13.3 18.4 % Growth -11% 42% 134% 61% 53% 38% Web hosting & COGS $m -0.5 -0.4 -0.5 -1.0 -1.4 -2.0 -2.8 Employee $m -4.4 -4.6 -4.8 -6.1 -7.2 -8.1 -8.8 Marketing $m -0.2 -0.1 -0.3 -0.5 -0.7 -0.9 -1.0 Professional services $m -0.2 -0.2 -0.5 -0.5 -0.5 -0.5 -0.5 Gen admin $m -1.0 -0.8 -0.8 -1.0 -1.1 -1.2 -1.3 EBITDA $m -4.5 -4.6 -4.6 -3.7 -2.2 0.6 4.1 % Growth 2% 0% -19% -40% -127% 596% % Margin -245% -282% -198% -68% -25% 4% 22% D&A $m 0.0 -0.1 -0.1 -0.1 -0.4 -0.6 -0.9 Net interest $m 0.0 0.0 0.1 0.0 0.0 0.0 0.0 Tax $m 0.2 0.0 0.0 0.0 0.0 0.0 -1.0 NPAT (reported) $m -4.3 -4.6 -4.6 -3.8 -2.6 -0.1 2.2 NOCF $m -4.5 -3.9 -4.1 -3.5 -2.0 0.5 2.9 Capex $m -0.3 -0.1 -0.2 -1.0 -1.2 -1.4 -1.6 FCF $m -4.9 -4.0 -4.3 -4.6 -3.2 -1.0 1.3 Share price (end of period) $ 0.20 0.33 0.33 0.33 0.33 0.33 Shares on issue m 139.7 162.6 191.7 199.5 199.5 199.5 Market capitalisation $m 27.9 53.7 63.3 65.8 65.8 65.8 Net debt (cash) $m -7.7 -9.4 -10.6 -9.4 -8.4 -9.7 Enterprise value $m 20.2 44.3 52.7 56.4 57.4 56.1 EV/revenue times 12.6 20.1 10.0 6.6 4.3 3.1 EV/EBITDA times nmf nmf nmf nmf 98.4 13.8 Source: Company reports, Canaccord Genuity estimates 29 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 29 OpenLearning Limited Initiation of Coverage At a high level, our forecasts assume: OL Platform SaaS: a five-year revenue CAGR of 50% with revenue stepping up from $0.7m in FY19 to $5.6m in FY24E. OL Marketplace: a five-year revenue CAGR of 59% with revenue stepping up from $0.2m in FY19 to $2.5m in FY24E. OL Services: a five-year revenue CAGR of 31% with revenue stepping up from $0.6m in FY19 to $2.4m in FY24E. UNSW Transition Program: OLL reaches 330 active learners with an average revenue share of $7,500.0 during FY24E, leading to $2.5m of revenue for that period. OpenCreds: OLL reaches 25,000 active learners with an average revenue share of $75.0 during FY24E, leading to $1.9m of revenue for that period. Qualifications: OLL reaches 7,000 active learners with an average revenue share of $500.0 during FY24E, leading to $3.5m of revenue for that period. A summary of the key revenue and cost items is provided below. Figure 32: Revenue breakdown: continuing growth from Figure 33: Cost breakdown: we forecast costs will more than OL Platform SaaS with a ramp up in revenue share double between FY19 and FY24E, resulting in an EBITDA models in FY21E and beyond margin of 22% in FY24E 21.0 2019A 2020E 2021E 2022E 2023E 2024E 0.0 18.0 -2.0 15.0 -4.0 12.0 -6.0 9.0 -8.0 6.0 -10.0 -12.0 3.0 -14.0 0.0 -16.0 $m 2019A 2020E 2021E 2022E 2023E 2024E $m Web hosting & COGS Employee OL Platform SaaS OL Marketplace Marketing Professional services OL Services OpenCreds Gen admin Qualifications UNSW Transition Program Source: Company reports, Canaccord Genuity estimates Source: Company reports, Canaccord Genuity estimates OLL reported cash of $4.7m as at 30 September 2020. We forecast 2H20E underlying cash burn of $2.5m, greater than that delivered in 1H20 ($1.8). Following the recently completed capital raising, we expect a cash balance of $9.4m for 31 December 2020. The company has 36.9m options on issue with exercise prices of $0.20 (31.9m options) and $0.30 (5.0m options). We have assumed all these options will be exercised during FY21E ($5.8m) and FY22E ($2.1m) and believe this forms an important part of OLL’s future funding profile. 30 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 30 OpenLearning Limited Initiation of Coverage Valuation and scenario analysis Valuation 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%). A valuation sensitivity for our DCF is tabled below. Figure 34: DCF valuation sensitivity WACC $ 0.50 12.4% 11.9% 11.4% 10.9% 10.4% Terminal Growth 2.0% 0.40 0.43 0.46 0.49 0.53 2.5% 0.41 0.44 0.48 0.51 0.56 3.0% 0.43 0.46 0.50 0.54 0.58 3.5% 0.44 0.48 0.52 0.56 0.61 4.0% 0.46 0.50 0.54 0.59 0.65 Source: Canaccord Genuity estimates For reference, at our target price, OLL would trade on a FY22E EV/revenue of 10.5x and 6.9x FY23E. Scenario analysis We have set out three scenarios below, exploring the valuation impact from differing revenue and earnings growth rates over the coming five-year period. Base case ($0.50/share): The current assumptions underpinning our forecasts and 12-month price target. OLL delivers $18.4m revenue in FY24E (a 63% revenue CAGR). We allow for strong cost leverage, resulting in a FY24E EBITDA of $4.1m, a margin of 22%. EBITDA margin peaks at 50% in FY30E. Bear case ($0.33/share): Requires strong sales execution and cost leverage but below that of our base case scenario. OLL delivers $13.7m revenue in FY24E (a 53% revenue CAGR). We assume OLL achieves EBITDA break even in FY23E and steps to FY24E EBITDA of $2.3m, a margin of 17%. EBITDA margin peaks at 43% in FY30E. Bull case ($0.74/share): Requires strong sales execution and cost leverage above that of our base case scenario. OLL delivers $23.9m revenue in FY24E (a 71% revenue CAGR). We allow for strong cost leverage, resulting in FY24E EBITDA of $6.5m, a margin of 27%. EBITDA margin peaks at 55% in FY30E. 31 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 31 OpenLearning Limited Initiation of Coverage Figure 35: Scenario analysis: outcomes range from $0.33/share to $0.74/share (December YE) 2018A 2019A 2020E 2021E 2022E 2023E 2024E Base Case (5-year revenue CAGR 63%) Total revenue $m 1.8 1.6 2.3 5.4 8.7 13.3 18.4 EBITDA $m -4.5 -4.6 -4.6 -3.7 -2.2 0.6 4.1 Margin nmf nmf nmf 4% 22% EV/revenue x 20.1 10.0 6.6 4.3 3.1 EV/EBITDA x 98.4 13.8 DCF Valuation $ $0.50 Upside vs current price 50% Bear Case (5-year revenue CAGR 53%) Total revenue $m 1.8 1.6 2.3 4.6 7.0 10.3 13.7 EBITDA $m -4.5 -4.6 -4.6 -2.8 -1.8 0.0 2.3 Margin nmf nmf nmf 0% 17% EV/revenue x 20.1 11.4 7.9 5.4 4.0 EV/EBITDA x 1364.7 23.9 DCF Valuation $ $0.33 Upside vs current price -1% Bull Case (5-year revenue CAGR 71%) Total revenue $m 1.8 1.6 2.3 6.3 10.6 16.8 23.9 EBITDA $m -4.5 -4.6 -4.6 -4.5 -2.4 1.5 6.5 Margin nmf nmf nmf 9% 27% EV/revenue x 20.1 8.7 5.6 3.6 2.4 EV/EBITDA x 40.1 8.8 DCF Valuation $ $0.74 Upside vs current price 124% Source: Canaccord Genuity estimates 32 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 32 OpenLearning Limited Initiation of Coverage Peer group comparison OLL’s evolving business model and product offering lends itself to comparisons against businesses across a range of sectors. For the purpose of this comparison, we have excluded other sector verticals (such as software and technology) and positioned OLL against listed education peers only. Figure 36: Peer group summary: OLL is currently trading on 10.0x FY21E EV/revenue, broadly in line with the top quartile of International Education peers and at a significant premium to Australian Education peers EBITDA EBITDA Revenue Company Name Ticker Price Market Cap EV/revenue EV/EBITDA margin CAGR CAGR ($m) 2020 2021 2020 2021 2021 2019-2022 2019-2022 OpenLearning Ltd. OLL 0.33 54 20.1x 10.0x nmf nmf nmf nmf 75% Australian Education IDP Education Ltd. IEL 19.28 5,366 8.7x 9.3x 36.8x 49.2x 19% 22% 10% 3P Learning Ltd. 3PL 1.24 172 2.7x 2.0x 10.1x 4.8x 37% 7% 5% Janison Education Ltd. JAN 0.38 80 3.1x 2.3x 27.6x 26.3x 9% 40% 18% Kip McGrath E.C. Ltd. KME 1.28 67 3.6x 3.1x 11.9x 10.1x 31% 18% 16% ReadCloud Ltd. RCL 0.40 40 5.0x 2.7x nmf 42.2x 13% nmf 52% Redhill Education Ltd. RDH 0.57 29 nmf nmf nmf 6.1x 6% nmf (7%) Mean 4.6x 3.9x 21.6x 23.1x 19% 22% 16% Median 3.6x 2.7x 19.8x 18.2x 16% 20% 13% International Education TAL Education Group TAL 66.46 39,898 8.7x 6.1x 155.1x 48.9x 12% 72% 38% GSX Techedu, Inc. GSX 66.42 15,829 14.7x 8.2x nmf nmf 1% 81% 113% Chegg, Inc. CHGG 73.44 9,460 14.9x 12.0x 46.1x 35.7x 34% 39% 32% 2U, Inc. TWOU 36.85 2,656 3.6x 3.0x nmf 75.0x 4% nmf 22% Afya Limited Class A AFYA 24.00 2,232 10.1x 7.5x 22.9x 17.5x 45% 38% 32% Arco Platform Ltd. Class A ARCE 34.08 1,962 10.3x 8.2x 34.9x 26.0x 34% 36% 37% Docebo, Inc. DCBO 53.38 1,522 17.6x 12.1x nmf nmf (1%) nmf 39% Mean 11.4x 8.2x 64.7x 40.6x 18% 53% 44% Median 10.3x 8.2x 40.5x 35.7x 12% 39% 37% Source: FactSet, Canaccord Genuity Figure 37: Valuation versus growth comparison: we believe OLL is well placed relative to peers on the proviso that revenue growth remains elevated over the coming two years 120.0% GSX 100.0% 2019A-2022E revenue CAGR OLL 80.0% 60.0% RCL TAL ARCE DCBO 40.0% AFYA TWOU JAN 20.0% CHGG IEL 3PL KME 0.0% 0.0 3.0 6.0 9.0 12.0 15.0 2021E EV/revenue Source: FactSet, Canaccord Genuity 33 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 33 OpenLearning Limited Initiation of Coverage Risks The risks to our investment thesis include: Brand damage from technology-related issues: With the OL Platform operating services across multiple end-user touch points, service levels and uptime performance are critically important. The OL Platform is hosted on Microsoft Azure infrastructure. Any incident affecting third-party services could negatively impact the availability and reliability of the platform. Similarly, data security breaches as a result of cyberattacks, data theft or human error could impact brand reputation and customer demand. Contract renewal and churn: OLL’s ability to retain and attract new customers is a critical risk factor to consider. Our forecasts are sensitive to the rate of churn, upsell and new customer growth. Demand for cloud-based learning. OLL’s success is heavily reliant on demand for cloud-based education technology solutions. Adoption of the OL Platform requires education providers to shift away from their traditional education approaches. The rate at which this plays out and the extent to which providers expand their relationship with OLL will impact the growth rate. Increasing competition or technology advancements: The business operates in competitive and fast-changing markets. The relevance of products and services, product pricing, customer relationships and brand reputation should be monitored. Reliance on key personnel: OLL is a founder-led business with a small team of key executives. Changes to this dynamic, especially relating to Adam Brimo, Cherie Diaz and David Collien, would warrant caution, in our view. Failure to attract, train and/or retain adequately skilled employees could have an adverse impact on the business going forward. Slower-than-expected uptake of OL Platform and OpenCreds: OLL has a limited financial history, taking a freemium approach in early years and launching a SaaS offering in March 2019. The rate of growth of OL Platform revenue and the monetisation of the OpenCreds framework are key assumptions driving our forecasts and valuation. Predictability of future cash flow requirements is difficult at this stage in the company’s development. 34 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 34 OpenLearning Limited Initiation of Coverage Board and key management Board of Directors Kevin Barry – Non-Executive Chairman Kevin has over 24 years’ experience in law, property finance and funds management. He has worked at KPMG, Blake Dawson, Norton Rose and Zurich Capital Markets. Kevin is currently a director of TCAP Australia and Thakral Capital Holdings and is the Chairman of ICS Global. Adam Brimo – Executive Director and Chief Executive Officer Adam co-founded OpenLearning in 2012 with David Collien (current CTO) and Professor Richard Buckland. He was recognised in Forbes’ 2017 30 under 30 in Asia Consumer Technology and has been added to the Pearcey Foundation Tech Entrepreneur Hall of Fame. Adam previously worked at Macquarie Bank as a Software Engineer in the Fixed Income, Currencies and Commodities Group and at Westpac Institutional Bank as a Senior Software Engineer. Beverley Oliver – Independent Non-Executive Director Beverley brings significant education experience. She has led innovations in digital education with her most recent role as Deputy Vice-Chancellor Education and Alfred Deakin Professor at Deakin University. Beverley has been recognised with numerous awards and is a Principal Fellow of the United Kingdom’s Higher Education Academy. David Buckingham – Independent Non-Executive Director David has extensive experience in education, finance and telecommunications. He was most recently Group CEO and Managing Director of Navitas, where he oversaw its $2.3bn sale to BGH Capital. David held the roles of Chief Financial Officer and Chief Executive Officer of iiNet between 2008 and 2015. Maya Hari – Independent Non-Executive Director Maya has two decades of technology and digital lifestyle experience. She has worked at Google, Conde Nast, Samsung, Microsoft and Cisco. Maya is currently Twitter’s VP and MD for Asia Pacific and serves as the president of TiE in Singapore. She brings diverse business experience having led functions in sales, marketing and product management. Spiro Pappas – Executive Director Spiro is a former senior executive of NAB, having spent almost 10 years in leadership roles including Executive General Manager of Global Institutional Banking, CEO of Asia and Executive General Manager of International and Innovation. Prior to NAB, Spiro worked at Deutsche Bank and ABN AMRO/RBS. He is currently the Chairman of Atlas Iron and Splitit and Cognian Technologies. Other key management Cherie Diaz – Managing Director, Australia Previously Head of Education Delivery at AICD, Director Customer Success at Scentia, Head of College at Study Group. David Collien – Chief Technology Officer David is a co-founder of OpenLearning. Previously AI researcher at National ICT Australia, Teaching assistant at UNSW Sydney, Developer at the Adaptive eLearning Research Group. Huat Koh – Chief Financial Officer Previously Head of Finance at Parkson Retail Asia Ltd and Head of Finance at Mulpha International. Sarveen Kandiah – Managing Director, Malaysia Previously Manager at CIMB Group, VP Investments at Malayan Traders Capital. 35 Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 35 OpenLearning Limited Initiation of Coverage Appendix: Important Disclosures Analyst Certification Each authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) the recommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the research, and (iii) to the best of the authoring analyst’s knowledge, she/he is not in receipt of material non-public information about the issuer. Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons of Canaccord Genuity LLC and therefore may not be subject to the FINRA Rule 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Sector Coverage Individuals identified as “Sector Coverage” cover a subject company’s industry in the identified jurisdiction, but are not authoring analysts of the report. Investment Recommendation Date and time of first dissemination: November 04, 2020, 14:31 ET Date and time of production: November 04, 2020, 14:17 ET Target Price / Valuation Methodology: Docebo Inc. - DCBO Our price target is based on 18x 2021E EV/sales. OpenLearning Limited - OLL 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%) Risks to achieving Target Price / Valuation: Docebo Inc. - DCBO Docebo faces macro, micro, and economic risks as well as competitive threats which could cause our estimates to be incorrect and the value of Docebo shares to decline. For a full list of relevant risk disclosures please see Docebo's most recent filings. OpenLearning Limited - OLL Brand damage from technology-related issues: With the OL Platform operating services across multiple end-user touch points, service levels and uptime performance are critically important. The OL Platform is hosted on Microsoft Azure infrastructure. Any incident affecting third-party services could negatively impact the availability and reliability of the platform. Similarly, data security breaches as a result of cyberattacks, data theft or human error could impact brand reputation and customer demand. Contract renewal and churn: OLL’s ability to retain and attract new customers is a critical risk factor to consider. Our forecasts are sensitive to the rate of churn, upsell and new customer growth. Demand for cloud-based learning. OLL’s success is heavily reliant on demand for cloud-based education technology solutions. Adoption of the OL Platform requires education providers to shift away from their traditional education approaches. The rate at which this plays out and the extent to which providers expand their relationship with OLL will impact the growth rate. Increasing competition or technology advancements: The business operates in competitive and fast-changing markets. The relevance of products and services, product pricing, customer relationships and brand reputation should be monitored. Reliance on key personnel: OLL is a founder-led business with a small team of key executives. Changes to this dynamic, especially relating to Adam Brimo, Cherie Diaz and David Collien, would warrant caution, in our view. Failure to attract, train and/or retain adequately skilled employees could have an adverse impact on the business going forward. Slower-than-expected uptake of OL Platform and OpenCreds: OLL has a limited financial history, taking a freemium approach in early years and launching a SaaS offering in March 2019. The rate of growth of OL Platform revenue and the monetisation of the OpenCreds framework are key assumptions driving our forecasts and valuation. Predictability of future cash flow requirements is difficult at this stage in the company’s development. Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 36 OpenLearning Limited Initiation of Coverage Distribution of Ratings: Global Stock Ratings (as of 11/04/20) Rating Coverage Universe IB Clients # % % Buy 546 62.83% 55.68% Hold 162 18.64% 38.89% Sell 9 1.04% 33.33% Speculative Buy 130 14.96% 78.46% 869* 100.0% *Total includes stocks that are Under Review Canaccord Genuity Ratings System BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months. HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months. SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months. NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer. “Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the designated investment or the relevant issuer. Risk Qualifier SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the stock may result in material loss. 12-Month Recommendation History (as of date same as the Global Stock Ratings table) A list of all the recommendations on any issuer under coverage that was disseminated during the preceding 12-month period may be obtained at the following website (provided as a hyperlink if this report is being read electronically) http://disclosures- mar.canaccordgenuity.com/EN/Pages/default.aspx Required Company-Specific Disclosures (as of date of this publication) OpenLearning Limited and Docebo Inc. currently are, or in the past 12 months were, a client of Canaccord Genuity or its affiliated companies. During this period, Canaccord Genuity or its affiliated companies provided investment banking services to OpenLearning Limited and Docebo Inc.. In the past 12 months, Canaccord Genuity or its affiliated companies have received compensation for Investment Banking services from OpenLearning Limited and Docebo Inc. . In the past 12 months, Canaccord Genuity or any of its affiliated companies have been lead manager, co-lead manager or co- manager of a public offering of securities of OpenLearning Limited or any publicly disclosed offer of securities of OpenLearning Limited or in any related derivatives. Canaccord Genuity acts as corporate broker for OpenLearning Limited and/or Canaccord Genuity or any of its affiliated companies may have an agreement with relating to the provision of Investment Banking services. Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to receive compensation for Investment Banking services from OpenLearning Limited and Docebo Inc. in the next three months. OpenLearning Limited Rating History as of 11/03/2020 AUD0.40 AUD0.35 AUD0.30 AUD0.25 AUD0.20 AUD0.15 AUD0.10 Jan 16Apr 16Jul 16Oct 16Jan 17Apr 17Jul 17Oct 17Jan 18Apr 18Jul 18Oct 18Jan 19Apr 19Jul 19Oct 19Jan 20Apr 20Jul 20Oct 20 Closing Price Price Target Buy (B); Speculative Buy (SB); Sell (S); Hold (H); Suspended (SU); Under Review (UR); Restricted (RE); Not Rated (NR) Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 37 OpenLearning Limited Initiation of Coverage Docebo Inc. Rating History as of 11/03/2020 I:B:C$19.00 B:C$20.00 B:C$28.00 B:C$32.00 B:C$70.00 10/28/2019 11/13/2019 05/13/2020 06/15/2020 08/07/2020 C$80 C$70 C$60 C$50 C$40 C$30 C$20 C$10 Jan 16Apr 16 Jul 16 Oct 16Jan 17Apr 17 Jul 17 Oct 17Jan 18Apr 18 Jul 18 Oct 18Jan 19Apr 19 Jul 19 Oct 19Jan 20Apr 20 Jul 20 Oct 20 Closing Price Price Target Buy (B); Speculative Buy (SB); Sell (S); Hold (H); Suspended (SU); Under Review (UR); Restricted (RE); Not Rated (NR) Past performance In line with Article 44(4)(b), MiFID II Delegated Regulation, we disclose price performance for the preceding five years or the whole period for which the financial instrument has been offered or investment service provided where less than five years. Please note price history refers to actual past performance, and that past performance is not a reliable indicator of future price and/or performance. 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Copyright © Canaccord Genuity LLC 2020 – Member FINRA/SIPC Copyright © Canaccord Genuity (Australia) Limited. 2020 – Participant of ASX Group, Chi-x Australia and of the NSX. Authorized and regulated by ASIC. All rights reserved. All material presented in this document, unless specifically indicated otherwise, is under copyright to Canaccord Genuity Corp., Canaccord Genuity Limited, Canaccord Genuity LLC or Canaccord Genuity Group Inc. None of the material, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to any other party, without the prior express written permission of the entities listed above. None of the material, nor its content, nor any copy of it, may be altered in any way, reproduced, or distributed to any other party including by way of any form of social media, without the prior express written permission of the entities listed above. Speculative Buy Target Price A$0.50 | 5 November 2020 Education Services 40
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