ACE Investors

Reading Time: 5 Mins

By Team Ace Investors

Company Overview

Keypath (“KED” or the “Company”) is a leading education technology (EdTech) company that partners with universities globally, to deliver market-led, technology-enabled online higher education programs (online programs) Supported by Keypath’s end-to-end technology and data platform Keypath EDGE. Keypath provides bundled online program management (OPM) services to its university partners, including the design, development, launch, and management of online programs. This includes services such as program design, market research, student recruitment, and student support. Keypath partners with universities to design, develop, launch, and grow online programs that aim to deliver career-relevant education to individuals seeking to up-skill or re-skill in an increasingly knowledge-based economy and to prepare them for the future of work. Keypath is a trusted partner to 32 universities and currently delivering 140 active programs to approximately 85,000 students globally. Keypath earns revenue from a share of tuition fees paid to its university partners by students undertaking the online programs delivered by Keypath. Tuition shares are agreed upon by Keypath and its university partners for each program before launch, with Keypath's share typically ranging from 40% to 60% of tuition fees. Revenue is underpinned by long-term university partner contracts (which have a length of between 7 to 10 years with a current weighted-average contract length of 8.8 years) and a strong student retention rate (78% to 80% on average depending on the program). Key strategies that Keypath intends to deploy to drive growth in the future are as follows (i) Grow enrolments and improve retention in current programs (ii) Expand market share through a broader portfolio of offerings (iii) Add new programs with existing university partners (iv) Sign new university partners in existing markets (v) Expand into new markets, and (vi) Execute targeted mergers and acquisitions.

Investment Rationale

Building on its track record of growth in partners, programs, and products

Keypath has a strong track record of building partner relationships and adding new programs. Since launching its first program in 2015, Keypath has grown to become a trusted partner to 46 universities in Australia, the U.S., Canada, the U.K., and Malaysia. From June 2018 (FY18) to the financial year-end (FY23), the number of university partners increased from 12 to 46 while the number of active programs increased from 55 to 212 over the same period. During FY23, Keypath added 34 programs from the North American and APAC regions, with 23 from healthcare. Keypath’s focus is on offering programs in disciplines it considers to be in high demand, high growth, or that address skill shortages, particularly where specialization in complex areas can generate competitive advantages. Its program disciplines include business, nursing, STEM, health and social services, education, and others. While Keypath offers a variety of disciplines, it derived ~52% of FY23 its revenue from healthcare. Keypath’s customer concentration has lessened over time as new partners and programs have been added and Keypath has gained scale.

Undertaken several initiatives to capitalize on the emerging trends in the healthcare and APAC region

Healthcare expansion:

Programs: university partners added 23 new Healthcare programs with Keypath, the highest annual increase to date
Products: Keypath continued innovating across healthcare online higher education by adding new products in healthcare specialties such as Occupational Therapy, Medical Science Leadership, Social Work, and Women's and Children's Health
Clinical placements: Keypath's clinical placement capacity continued to expand while the number of students it placed in a clinical setting for its programs increased to over 18,000
Students graduated: the number of students who graduated from Keypath partnered Healthcare programs increased to over 4,500. These figures are expected to accelerate in future years as more Healthcare programs are added and more reach maturity
Revenue: Healthcare revenue contributed more than 50% of its global revenue for the first time in FY23 (at 55%). The trend of increasing revenue contribution from the large and in-demand Healthcare vertical is expected to continue
Keypath Connect launch: Launched a new and innovative platform of capabilities to enable hospitals to reduce staff costs, time, and turnover. Keypath Connect will allow hospitals to focus on improving the quality of care and clinical outcomes to build a sustainable, long-term solution that will transform nursing workforce development

APAC:

Partners and programs: Continued growth in partners in APAC adding three new partners including Melbourne Business School ("MBS"), HELP University in Malaysia, and UNSW College, and 13 new programs, of which three were in healthcare

MBS:

Launched their #1 ranked MBA online for the first time with enrollments exceeding expectations; eight online executive education programs were also launched
Launched as an online education platform to maximize reach, impact, and economics for MBS and Keypath

Southeast Asia:

Keypath’s partners increased enrollments across the Keypath-supported programs with Singapore Institute of Management and Sunway University
Added a new partner in HELP University
Continued innovation in Southeast Asia with UniFastTrack, a pathway program with UNSW College facilitating international student entry into Australian universities, building on its core capabilities in the region.

Continued focus on investment driving growth, profitability, and strong cash management

For the financial year ended on 30 June 2023, Keypath delivered a 4.9% YoY growth in revenue to US$124.2 million (9.1% higher on a constant currency basis). The company reported a 5.2% YoY growth in Contribution margin to US$23.1 million, reflecting the recent vintages progressing through its proven unit economic model to maturity, and the large number of programs signed recently that are in their deepest investment phase and the FY21-FY24 vintages. Adjusted EBITDA was US$(9.4) million for FY23 (including adjustments for one-time restructuring and SEC registration costs), within its FY23 guidance range (at US$(8.4) million in its guidance exchange rates) showing improvements in profitability as recent vintages progress through its proven unit economic model and despite investments in the new vintages noted above, and continued investment in its Southeast Asia operation. Keypath's strategic focus and continued expansion in Healthcare and the APAC region are providing the foundation for its sustainable future growth. Keypath is confident of continuing to innovate with its partners to drive growth and impact and has already signed 39 programs from its FY24 vintage, seven from the FY25 vintage, and two from the FY26 vintage. Keypath remains confident in its FY24 target of adjusted EBITDA profitability from H2 FY24 and expects longer-term annual revenue growth rates to be in the mid-teens. Keypath expects to deliver revenue of US$130 million – US$135 million on a constant currency basis and Adjusted EBITDA: US$(1) million – US$(3) million on a constant currency basis for FY24. As of June 30, 2023, Keypath had US$46.8 million cash (no debt) on its balance sheet.

Keypath continued to see strong demand for programs in the North American region in healthcare and more broadly in APAC. Keypath’s pipeline of new programs continues to be strong, underpinning its confidence in the longer-term growth prospects of the Company. Keypath continued to deliver strong revenue growth with Q2 FY24 revenue growing 14.9% to US$31.4 million (15.2% growth on a constant currency basis) and H1 FY24 revenue growing 14.0% to US$66.9 million (15.2% growth on a constant currency basis). Contribution margin for Q2 FY24 increased by US$4.4 million to US$7.5 million and for H1 FY24 increased by US$8.7 million to US$18.1 million, reflecting the large recent vintages progressing through its proven unit economic model to maturity, offsetting the large number of programs signed recently that are in their deepest investment phase and the FY21-FY25 vintages and expected steady-state revenue of US$25 million – US$35 million. Adjusted EBITDA for Q2 FY24 increased by US$3.1 million to US$0.0 million and for H1 FY24 increased by US$8.9 million to US$2.3 million, reflecting its continued growth, strategic focus, and cost efficiency and leverage. The company closed the quarter with a strong cash position of US$41.7 million (no debt) as of 31 Dec’2023.

ACE’s Recommendation:

Keypath remains focused on driving the evolution of online higher education to the benefit of students, and universities whilst creating long-term value for its shareholders. Keypath's continued investment in Healthcare and APAC businesses is providing the foundation for continued revenue growth and accelerating profitability. In FY22, the company outlined its strategic focus on transitioning investment into newer vintages where the programs show improved growth, unit economics, and higher returns. These two areas of focus are Healthcare and the APAC region. The huge skills shortages that exist globally in healthcare continue to increase, driven by social and economic factors. Keypath is also building on its strong foundations in the APAC region by expanding access to partners and programs in Singapore and Malaysia. Keypath has undertaken several initiatives to capitalize on the emerging trends in the healthcare and APAC region. For the financial year ended on 30 June 2023, Keypath delivered a 4.9% YoY growth in revenue to US$124.2 million (9.1% higher on a constant currency basis). The company reported a 5.2% YoY growth in Contribution margin to US$23.1 million, reflecting the recent vintages progressing through its proven unit economic model to maturity, and the large number of programs signed recently that are in their deepest investment phase and the FY21-FY24 vintages. Adjusted EBITDA was US$(9.4) million for FY23, within its FY23 guidance range. Keypath is confident of continuing to innovate with its partners to drive growth and impact and has already signed 39 programs from its FY24 vintage, seven from the FY25 vintage, and two from the FY26 vintage. Keypath remains confident in its FY24 target of adjusted EBITDA profitability from H2 FY24 and expects longer-term annual revenue growth rates to be in the mid-teens. We believe that initiatives undertaken in the healthcare space and APAC region to drive growth going forward. The stock closed the day above its 50-day EMA at A$ 0.480/share today, we would like to recommend a SPECULATIVE BUY rating on the stock.

Disclaimer: Ace Investors Pty Ltd (ABN 70 637 702 188) authorized representative of Alpha Securities Pty Ltd (AFSL No.330757). Ace Investors has made all efforts to warrant the reliability and accuracy of the views and recommendations articulated in the reports published on its websites. Ace Investors research is based on the information known to us or which was obtained from various sources which we believed to be reliable and accurate to the best of its knowledge. Ace Investors provides only general financial information through its website, reports and newsletters without considering financial needs or investment objectives of any individual user. We strongly advocate that you seek advice, with your financial planner, advisor or stock broker, the merit of each recommendation before acting on any recommendation for their own specific financial circumstances and realize that not all investments will be suitable for all subscribers. To the scope permitted by law, Ace Investors Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Ace Investors Pty Ltd hereby limits its liability, to the scope permitted by law to resupply of the services. The securities and financial products we study and share information on, in our reports, may have a product disclosure statement or other offer document associated with them. You should obtain a copy of these before making any decision about acquiring any security or product. You can refer to our Financial Services Guide.