IPO Watch: Cluey – 'leading the edtech revolution'

For this week's IPO Watch we're speaking to Mark Rohald, who is the CEO of Cluey, which is an online learning and tutoring business which teaches students from grades two to 12, English, maths and chemistry for years 11 and 12. Like most IPOs we've been looking at, Cluey has also found an opportunity during COVID lockdowns with many students around Australia requiring extra tuition given the disruption to schools in the face of lockdowns and the impact that's had on their learning.

Mark reckons this shift to educational technology is similar to what's happening in the online shopping space and COVID has accelerated the need for online learning. So Cluey is really going for growth at the moment, hence the IPO, and the funds are going to be used to grow its student base.

They're seeking to raise $30 million at $1.20 per share, equating to a market cap upon listing of $143.5 million, and the offer closes on November 23.

Here's Mark Rohald, the CEO of Cluey.

Table of contents:
COVID impact on education
Online tutoring compared to in-person
Role of technology in Cluey's service
Competition
Addressable market
International market
Retention rate
Revenue model & pricing
Prospect of profitability 
Cash position
Government funding of tutoring

Thanks for joining us, Mark. Would you say that similar to what's happened in the online shopping space, online learning has benefited from accelerated adoption during COVID lockdowns?

Yeah, so I think we've seen a transformational shift to online learning occurring in post-schooling education, certainly long before COVID set in. And more recently, we saw that move to online by K-12 (kindergarten-year 12) students. With COVID, we saw this accelerate dramatically and it accelerated, you know, June, July last year, and then Jan, Feb this year and then in March we saw COVID hit and we saw a very big acceleration again.

Could you explain to us what Cluey has experienced during the past six months as schools shut down? Were students struggling more with their work and then as a result, increasingly turning to tutors to stay on top of their workload?

Prior to COVID we saw a very significant shift to the use of tutoring and test prep as a key form of learning support and I think with COVID we saw an acceleration of this probably 10 or 15 per cent acceleration. This is a trend that we've seen emerge globally over the last 10, 12, 15 years and we've seen this start to really take a foothold in the Australian market in the last three or four years, so it’s not new.

Could you explain what you think is behind it, why are students preferring an online tutoring experience as opposed to face-to-face tutoring?

Yeah, so if you think about the way in which students and parents would engage in tutoring services previously, they really had two choices – they could go to a private tutor or a private tutor could come to their home. We call that the pay and pray model. They pay and they pray. They have no real idea of what that tutor is doing with their child and they hope to see an improvement in the next report card. Or alternatively, they would choose to send their children to a learning centre, which typically has fewer students, a good teacher, really focusing on the curriculum, what would call a better version of the classroom.

But when you think about how you deliver optimal teaching and learning, our view is it's not just about the tutor and the student. There is a real opportunity to harness the power of technology, big data and learning analytics, and integrate that with the best of the human interface to deliver a teaching and learning experience that is simply far superior to one that is just being delivered by an individual tutor.

It seems that technology is a big focus for you, as you mentioned, the data analytics that you take from each learning session. Could you explain how that actually helps enhance the experience going forward for tutors and students?

Sure. The way we think about it is we want to continuously optimise the teaching and learning experience using big data and learning analytics to support the human element in delivering an outstanding teaching and learning experience and the way we do it is as follows. We record around 100,000 data points in every single tutoring session that occurs and we use this data to improve the quality and performance of all our students and our tutors at scale. To give you some idea of how we do this, we record all the audio tracks separately, the video tracks separately, we track the use of content, the sequence of that content, what questions they got right, what questions they got wrong, the order in which they got them right or wrong, the extent to which the student was able to solve the problem on their own, the extent to which they require the support of the tutor.

Then we convert all of that data into a visual representation of an hour of tutoring so we can actually see exactly what happened in that tutoring session and that's all done by parsing the data through our learning analytics and our AI platform and then we can click at any single point in that learning session and see exactly what happened live in the recording. We use this to quality assure more than 20,000 learning sessions a month. We then transpose that data and that gives us a visual representation of the level of mastery and coverage of the syllabus at each granular level.

So we know exactly what to focus on next for the student in terms of those areas that they require the most support and finally, we would use this data as well to monitor and ensure the quality of the delivery of the service by our tutors. We make sure the ratio of student talk, tutor talk, participation by the student, participation by the tutor, we get the students to give us feedback on the tutors and we actually then are able to deliver a performance score rating for each tutor. Finally, we combine all this data and we provide feedback to the parents, the students and the tutors in the form of detailed reporting with qualitative feedback from the tutors, and quantitative feedback from the data and learning analytics.

And so as a result, how are you able to quantify or measure success? Are you looking at an improvement in results that the students have at school, or what's the measure?

Yeah, so a lot of people ask me, do we test the students on the way in and do we test them regularly? And the answer is definitely not. The last thing that a student wants to do is come to Cluey in the late afternoon, after having experienced six or seven hours of classroom instruction and sit and do another test. What typically happens is certainly for our primary school students at the commencement of their learning program, we do a calibration session to make sure they're doing the right learning content. It's aligned to their syllabus and the curriculum that they're covering in class and we're able to ascertain are they catch up, keep up, or excel students.

Then what happens is we work through the learning programs with the students and we can recalibrate at any point in time. We have asked the parents to give us feedback on their experience with Cluey and 82 per cent of all parents surveyed indicated that they'd seen an improvement in the academic results of their kids since starting tutoring with Cluey. I think it's also worth pointing out that not every parent chooses to send their kids to Cluey purely to get improved academic results. For many parents, what they want to see is improved confidence and self-esteem with their children that then moves into improved academic performance.

By the sounds of things, Cluey is meant to complement that primary or secondary school education rather than replace it. Who are you competing with in this area? Because I've heard of a few other companies such as Go1 Learning and Ed App, but I think they're more focused on workplace training. Is there much competition in this education technology sector?

It's very interesting when we first came up with idea of Cluey delivering targeted, online tutoring, learning, and test prep support for school students in 2017, there were no providers in that space and in fact, even globally, there were very few providers in that space. When we look at the ed tech landscape today, four of the top 20 ed tech companies globally are all in K-12 tutoring and test prep. This market has exploded globally. In terms of the local market, up until the commencement of COVID we had hardly any, if any competition of any significant scale. With COVID learning centres were shut down, individual tutors were unable to go into people's homes and they were forced to move to delivering some form of online tutoring or test prep. In the main, when we look at it, they've simply tried to replicate the offline experience in an online manner.

And what we know in education is that that does not work very effectively the way to deliver great teaching and learning online is to build it bottom-up for online learning. We see a lot of fragmented competition, a lot of mum and pop operators, some of the learning centre operators have gone online, but their pedagogical model and their teaching and learning frameworks still feel very regimental and try and replicate what happens in a learning centre, which is certainly not optimal and I'm not aware of anyone in the local market, that's using big data to power the learning and optimise the learner experience.

You touched on it just briefly there, but could you elaborate on that addressable market in Australia in terms of the number of school students that you estimate are wanting to access tutoring?

Yeah. This is how we look at the market. There are approximately 4 million children in Australian schools. Our research indicates that approximately 1.6 million students used tutoring in the past 12 months or are considering using it in the next 12 months. That's about 40 per cent of the market. Then there are an additional 2 million students who consume or are considering consuming other forms of learning support. And I think that's really important to understand what we mean by learning support. Tutoring and test prep is one form of learning support, the consumption of online learning content, worksheets, additional reading materials, et cetera, would constitute other forms of learning support.

We see Cluey really as leading the edtech revolution in learning support of which tutoring and test prep is the main component of what we do today. But over time, we will augment our services to add a broader range of learning support services to the core so that we can deliver the right learning support to the right student at the right point in time in their learning journey. That gives you a sense of the size of the market and the parts that we play.

You mentioned mainly the Australian market, but have you actually looked into the demand for the service globally? Is that something on your mind for the future – expanding into international markets?

Yeah, we built all our platforms fully cloud-based, multilanguage, multicurrency and even when we built our curriculum, we built it as a body of knowledge, and then we can scope and sequence the blocks that make up that content depending on the syllabus or the curriculum that we're applying it to. We think it would be relatively easy for us to deliver our services into other English-speaking markets, particularly the United Kingdom, where the education system is very similar. It is a big opportunity, but one that we are not keen to go after too soon. We want to strengthen our core opportunity here in Australia. We hold a very small piece of the market today. We know that if we just go harder, faster and stay very focused, we can capture a significant component of the local market, which is big. And at some point in the future, we will look to move offshore probably 12 months down the line.

You offer English and maths for grades two to 12, and then chemistry for years 11 and 12. What demographic are you mainly working with? Is it a mix of private and public school children or is it kind of just, you're really aiming for that broad base?

It's definitely the broad base. We built out our curriculum from years two to 12. We didn't see ourselves as purely providing the test prep for those students who are going to be completing their schooling in the VCE/HSC, et cetera. We see the opportunity as being able to cater to a very broad demographic and when we look at the data of where our students come from, they almost identically represent the ABS data. Around 50 per cent of our students are in primary school, which means we can extract significant lifetime value from those students as they remain customers of Cluey for many years to come.

What gives us great comfort is we have two variants of our service. We have the small group version, which is $45 a week for the service and then we have the one-on-one version of our service, which is $80 a week. And when we look at the ability to reach a broad market segment, 61 per cent of our current students are in public schools they are not from the private schools and the wealthier independent schools. That gives us comfort that we've achieved the right spread on pricing and service configuration to be able to deliver our services across all of Australia and we even cater to, 16 per cent of our students are in regional and remote areas where access to tutoring and learning support is very limited for them.

What's your retention rate? You say you're getting students signing on in primary school. How often is it that they will stay with you all the way through to year 12 potentially?

We're only two and a half years old, so it's very difficult to extend the life beyond the two and a half years, but this is the way we think about it. We enrol students in cohorts, each month is a new cohort and we measure the number of sessions and the revenues that we generate from each cohort in month one, two, three, four, five, et cetera, that gives us our lifetime value. What we know today is that after 12 months we are still generating 34 per cent of the revenue from that cohort that we did in the first month and after 24 months, we're still generating 23 per cent of the revenue from that cohort as we did in the first month. Now we still need further time to play out, to see how sticky the service remains after 24 months. But indications are when we look at our retention rates that it's much stickier once students are with us longer. So typically, the tail of retention of the 24 months is almost static. We lose very few students.

How does it work in terms of your revenue model? Do tutors get a cut of that weekly subscription type of payment, or are tutors paid separately?

We are not a marketplace. It's not just about matching the right tutor with the right students and then saying, off you go into the platform and do the teaching and learning. Every tutor goes through a very rigorous selection process, they're interviewed, they do video-based interviewing. They then do our online tutoring program to be approved to tutor on the Cluey platform. We then allow them to deliver their first session that is fully reviewed and then we can open up to additional sessions for those tutors and by the way, every session is recorded. We have full quality assurance of every session. Our tutors come from two core categories, either current or retired school teachers or university students. In the main, we prefer university students. Then we relate to the students in a more casual and informal manner, which is probably preferable for most of our students who don't want another classroom experience in the afternoons.

We typically pay our uni students around $31-32 per tutoring session, that includes their super, et cetera, and we pay teachers a slight premium to that. They would typically earn on average, $33-34 per tutoring hour, and we charge either $80 for the one hour session for one-to-one or we have four students in a small group and we charge $45 for each student in a small group.

And then what's your margin in terms of each one of those?

If you work it out, the one-on-one session would be $80 including GST. So it's $72 after GST and we pay the tutor $33-34, so it's a 54 per cent margin and in the small group version, we would charge $180, 4 times 45, less some GST and we pay the tutor around $35. The small group variant is around a 75 per cent margin business. We only launched small group at the beginning of this year, after 15 months of working out how to solve for it and we did that by delivering and developing four different content layers for the students in the groups, all running simultaneously at the same time. We'll be rolling out small group to senior students from January next year as well, so we expect to see that add further contribution our margin.

And your forecast financial year 2021 revenue is expected to be, I think it’s around more than triple what this year's was. So where will that place you in terms of profitability? Do you have a time in mind of when you might turn a profit or is the focus solely on growth now?

Of course, we want to move closer and closer to profitability. Our unit economics are now such that for every additional student that we recruit, we add more to revenues than to costs. And so think about it as investing in the customer acquisition, that then generates an annuity stream of income over time. We are moving closer and closer to break even as we are scaling. The big investment comes in the pace at which we scale. In the first quarter of next year, of the calendar year, which is a big growth period, we invest much more heavily in customer acquisition that then brings the revenue streams in down the line. We are seeing, we are currently delivering 52,000 sessions in the first quarter of this year. We're delivering around 20,000 sessions a month. We've seen that scaling month on month. It's nearly 400 per cent growth on the prior quarter, the previous year and we've seen this trend continue. Provided the trend continues, we'll be moving closer and closer to profitability, post FY21.

And you've done a number of capital risings, including you did that $20 million earlier this year, and then another $20 million last year, plus the $30 million for the IPO. Could you explain what sort of cash position that leaves you in post IPO and what the funding will be used for?

Post-IPO and post all the IPO costs we will be sitting with around $40 million of cash on our balance sheet. That is certainly more than what we require to get us to break even, significantly more than what we require. We see the ability for us to deploy this additional capital to really do four or five things. Firstly, to go harder and go faster, to increase our market penetration. We think it's going to be a winner takes most market. The demand is there and we want to deploy our capital to grow the core business even faster.

We see an opportunity to invest in delivering a broader product suite, and we want to add additional subjects and service configurations. The third element is to start to build out other customer acquisition channels. Today we're a B2C business and we're pretty good at B2C. We've always felt that we wanted to be B2C, those are the most valuable edtech companies. And we like to own the relationship directly with the customer, but increasingly we've been approached by schools and government departments to come in and help them support their teaching and learning requirements.

We certainly would need to do some investment in that area to scale the business even faster. Then there's the international piece which we've spoken about and finally, we've identified some acquisition opportunities in the broader learning support space that we think would augment our core services and enable us to grow the business even faster and that's why we require the additional capital.

The Victorian government recently announced a $250 million investment to recruit over 4,000 tutors next year, for students whose education was disadvantaged by COVID. Is that something that you're expecting to benefit from?

A similar initiative has now also been announced in New South Wales. Obviously, we are delighted with this because for the first time ever, we've seen government departments and en masse endorsing tutoring as being one of the most effective ways of addressing the individual learning needs of students. And this kind of dovetails in with the work that the Grattan Institute’s done, where they recommended small group tutoring as being probably the most powerful way of addressing learning needs. We're in active discussions with the Education Departments. We remain well-placed to help in these efforts using our technology and data, and more particularly our ability to deliver services at scale in regional and remote areas.

We are currently running a pilot program with the New South Wales Department of Education. In selective schools, where there are identified teaching and learning gaps. We're well positioned to continue to support the schools going forward. All up, we think it is an enormously positive message that's coming out. This gap in learning is not something new COVID has accelerated awareness of it. Now it's become clearer and clearer to the parents of the students that there are these gaps, the schools can only do so much in filling them. We're ideally positioned to come on board and help support these initiatives and help deliver part of the solution.

And just finally, Mark, before I let you go, what should potential investors be looking out for from Cluey over the next 12 months, once you’ve listed?

We will be resolute in our focus in trying to capture more and more of the core market. We know it's big, we know it's open, we're going to go harder and faster than what we previously wanted to do now that we have the access to additional capital. We are not going to be moving into multiple segments and deviating from our core proposition. We've reached the level of scale where we've delivered over 150,000 online sessions, more than any other provider in this country and we're in a position now to really optimise the teaching and learning, scale, grow and stay focused. That's what it's all going to be about over the next 12 to 18 months.

Thanks very much for your time, Mark.

My pleasure. Thank you very much.

That was Mark Rohald, the CEO of Cluey.