Chit Chat Stocks - Fundamental Analysis: PluralSight (PS)

Episode Date: May 21, 2020

On this show we discuss PluralSight. --- Support this podcast: https://anchor.fm/chit-chat-money/support Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the fundamental analysis show on chitchat money. My name is Brett Schaefer. And as always, I'm here with Ryan Henderson, and we're talking a small cap stock tech stock, as usual, education based, haven't heard of it before, but pretty interesting. It's called plural site. So just two words combined there. And Ryan, you want to get into what they do and the history of the stock? Yeah, so it's Pluralsight. And I stumbled across this from a guy named Christian. It's either Reshuft or Reshaft or something like that. I think he's German. He had a sub stack and he wrote about it and it was really interesting. So you can go ahead and check that out for more info. But Pluralsight is a cloud-based technology skills platform.

So it primarily trains businesses and enterprises how to function in the digital age. So some of the skills that are really in high demand are cloud, data, big data, machine learning, that kind of thing. And so they offer a large variety of video training courses for software developers, IT administrators, and creative professionals. Pluralsight runs a subscription business model, and they pay their course authors a royalty of that subscription. I think there's even some, I think I saw a feature on the website where authors can like teach from Pluralsight. They obviously have to get it like checked, but you can teach even if you don't work for Pluralsight.

So it's like people with expertise in the field can create these courses or tutorials to teach people about it. So for enterprise businesses, it's $779 per user per year. so like uh i'm blanking on what the number would be per month uh and that is for a course so that's exams projects interactive courses that kind of thing um and so that's kind of their subscription per user thing that's their pricing and then you can expand from that that's why we'll talk about it they have a revenue uh retention rate that's above 100 that's because they can expand into other products a little bit about the history plural site was founded in 2004 as a classroom

training company. They would send an instructor to a business or training event. But in 2007, they shifted their emphasis to online video training. But there wasn't a whole lot of history besides that. Their CEO is Aaron Sconard or Sconard. And he was one of the co-founders in 2004, but I couldn't find who the other co-founder was. So they are founder-led if that's important to you. Yeah. And then I forgot the IPO two years ago, I think. So i i don't have the exact date here but i believe it was two years ago right okay and then for reference they have two different sets of courses so one of it is called flow and that's a little different than the training the flow is for enterprises to monitor software engineers

and then it's the same thing so you pay per uh seat per year so per user say you have 12 software users you're monitoring them their their flow i guess um that's kind of getting to the nitty gritty, but that's sort of a different way. And then they have another avenue for growth there, but I'll get into the valuation. Some of the financials, they have a market cap of 1.96 billion, ticker PS, price of $19.66 as of May 20th, 2020. EV to sales is six, no dividend as you probably would expect as a new company, fairly high stock-based compensation. We're looking at 4.6% share dilution at the current price. So we're using that on a revenue basis. So like they spent around 27% of the revenue on stock-based compensation. And then you have to divide that

out by their EV to sales. And then that's how much share dilution you're going to have. And that's based on the current quarter. So that can change, but right around 4.6%, which is a little high, but not terrible. Margin adjusted price to sales of 22.17, which is fairly low. Again, we always say this, but margin adjusted price to sales is price to sales divided by sales growth and gross margin taking into all those growth metrics for unprofitable companies. Average we typically have is about 48. So 22 is pretty low. And that's typically what you would expect from companies that are less well known, not the brand names like Pluralsight, net debt, $70 million, cash flow positive, but not profitable.

And they have almost $500 million in convertible senior notes due in 2024, 0.375% interest rate on that, which seems like a good deal. But the strike price is $38.76 on the conversion rate, which means that once it goes through, could be a lot of share dilution down the line they have over 200 million dollars in working capital right now and they may need to raise money depending on what happens with the next few years here with the current economic climate but uh they are cash flow positive so if that continues they should be okay yeah they're not they're not totally damaged by the coronavirus so it's not like they are pressed for liquidity it like their entire business model is shutting down or anything and they need as much cash as

they can although they go so far so far right and they actually saw they've seen an increase and a lot of that was due to this free April thing that they offered which I'll talk about after the break but I'll get into the earnings their first quarter billings increased 16% year-over-year to ninety point three million eighty point five million of that was from business customers and and those grew 20% year over year. So that other 10 million, I don't know what percent that is, that's individuals.

Individuals can do this as well, except I believe it's more lucrative for them to attract these business or enterprise customers because it's A, it's more expensive, and they're willing to pay more, and you need everyone on the same system, so that's why they're able to pay more. Revenue was 92.6 million for the quarter,

up 33% year over year. 79% gross margins versus 76% last year. Their net revenue retention rate was 120%. Really solid number there. And that kind of talks about the liquidity quality that we talked about with Brett Bivens, which was... Yeah, you got to include that in here now, huh? I know.

And now it sort of has more importance for me when I see a number like that. They were profitable on a cashflow basis. Operating cashflow of 18.3 million or 20% operating cashflow margins. 2.7 million in free cashflow for the quarter, which was a slight increase from last year. However, operating income was negative 42 million for the first quarter. Operating margin is trending in the right direction, but it is pretty bad. I think it was like negative 46%. Last year

was like negative 49. If I'm remembering that correct, you might want to look at it on your own. They are spending a ton on sales and marketing as well as tech and content. I think tech and content is your equivalent to R and D which is basically that's the spend for the courses which is kind of their product, if you will. And then they are a sales, it's a sales business. So sales and marketing and spend makes up 67.3% of overall revenue. That's a lot, but we're also usually comparing that to strictly software businesses where it's not always sales So this does have a sales focus. And then I think I might have mentioned this, but they have over $556 million in cash and investments as of March 31st. Okay, next up, digging trenches, and that is the moat rating. So what do you think? Plural site, it's got to be pretty low, right?

well it depends so uh i their biggest competitor is in-person training from the product maker themselves and the ceo touched on that i would say as far as online education tools for this for the tech space they are the leader um the only other place is youtube but anyone could go to youtube anyone has access to that it's not as informative it's not like interactive courses A lot of businesses want that interactive course. And I think Christian mentioned it on his sub stack. A CTO is not going to go say, Hey, we need you to learn this. Go look up some YouTube tutorials.

You know, they're going to pay for the courses and allow their employees a structured education on the product. So it's a useful business. It's niche. I guess I'm going to go 1.5 kind of right in the middle. it's there's not a ton of competitors but uh that doesn't necessarily give them a moat yeah biggest competition is probably youtube maybe lambda school potentially but with the weird or different netflix like revenue model that they have where you have the user and then they can do

all the different courses if i'm reading that correctly it gives them an advantage where you use it once and then you're like okay i'm gonna just have my enterprise team if i'm a manager be signed up to this stuff and keep using it and then they can expand throughout the businesses which seems like a good model but further reading was i getting that correct is that are they able i'm we should probably check that because i'm not sure if they get access to over all the courses if they just subscribe i guess i think i did read that where it's it's it's 800 bucks per user per year okay and it just depends on how much you use that revenue retention rate would come from more businesses signing on more users right okay makes sense yeah that would make

more sense all right further reading what do you got um how many businesses prefer this over in-person training because there are a lot of business but i worked for a business last summer and they really wanted they their whole it department had like a training day and they had someone come in and people appreciated the hands-on training um so i'm curious the percentage of businesses that prefer that because if that's always going to be something that's taught in person, that's going to be a struggle for a plural site. Um, but obviously that's, that's the question that everyone's asking. So, uh, yeah, that, that would be what I'm looking at. What about you? Yeah. The, okay. That makes sense. Mine would be how big does a company have to be

if they want to use a plural site and it to be viable slash productive for them. So for example, on the conference call, they mentioned that Home Depot, Caterpillar, a lot of other large businesses have increased their tech learning programs. But my question is, what about the small and medium-sized businesses? Do you need like 100 employees for this to be viable because it costs so much per user? They also mentioned though on the conference call

that they are only in 8% to 9% of the tech organization market right now. I wonder what the minimum size company is that hits that barrier. But it also shows that within that market itself, they still have a lot of room to run. So I guess I kind of answered my own question where it might not matter if they go to small businesses,

but that would help them expand their addressable market. Yeah, no, I get what you're saying. And part of it is just there's not necessarily pricing options for startups. There are like individuals, but they do pay per user per year. And it was kind of one price, which is obviously going to be more tailored to the larger businesses since they have more capital to throw at it. um so yeah i would be interested in how how harmful uh paying a lot for these courses is for

smb uh future growth opportunities what do you have okay well i guess this is more of a broader one it's the potential disruption of traditional education there's a lot of moving parts right now with schools going all online because of the coronavirus and there was already the trend where people were complaining about how much school costs the administrative stuff you know it's going way more increasing in cost than inflation, but the trends seem to be going away from normal college right now. If it's ever so slow, obviously most people still go to normal college. If that continues to happen where less and less people go to college, even if it's a slow trickle, I think that will help Pluralsight improve because if less people are getting a

traditional degrees and or traditional software degrees i think plural site has a lot of demand there that they could potentially get yeah expansion into traditional education would be very interesting um especially with sort of the tailwinds that are going on around well i'm saying like they're taking if someone's drops doesn't go to college anymore but they still want to have the skills, Pluralsight can offer that for a lot cheaper. Yeah, very true. So mine is kind of chasing these COVID tailwinds that have come. And so obviously a lot of people are working from home right now. So there's not really as much in-person training like a lot of IT departments would have. So Pluralsight made their 7,000 course library accessible to anyone globally free of charge

during the month of April. Wish I would have known that because I was looking at some of the courses and they're pretty interesting um and it feels sort of like the zoom move which is free k through 12 uh zoom for all those uh institutions that are k through 12 and it's basically to get that brand awareness up and it's expensive to do that initially just to offer all these like you're obviously not making as much money if you're giving all these courses away for free but it's the right thing to do if you have the money to do it because it's going if you get retention so let's say let's say i'm like halfway through a javascript course and i'm really enjoying it and it was free and i'm like all right well i'm really learning i'm gonna pay for may and i'm an

individual i mean that that's that's sort of the zoom like move and so i think they're going to be able to do that they mentioned that they had 1 million new users sign up during april because of this and they for reference they had 1.3 million b2b users altogether before that so almost doubled almost doubled that count uh through april because of the free courses yeah hopefully those can at least a good percentage of those can convert to paying subscribers even if it's less than 10 that would still be solid yeah uh highlights and lowlights what do you have okay big highlights for me 120 expansion rate is strong for the businesses. So from the existing customers, they're getting 20% in revenue growth, which is

more than half of their total revenue growth. So it looks like they're not getting much headway into new customers, or it's a little slower than people might expect. They do have industry tail winds more profitable than you would think because of the stock-based compensation expense. So the cashflow is looking solid, although you're going to have some share dilution. Lowlights though, they are going to yet a price in that share dilution that's coming down the line. It seems like they're very SBC happy. They're not a household name at all. I never heard of them before this. And like you said, if I would have known that some of these were free in April, I think I would have gone on there and at least checked it out. They were going to need to spend

a ton on marketing because again, they're not a household name. So that's S or not SBC sales and marketing spend as a percentage of revenue is going to continue to stay high, which will hurt their operating margins. And then if companies have more people unemployed, if they have lower headcount, that's going to equal lower revenue for Pluralsight. So maybe the expansion rate will slow down here if unemployment stays as high as it is for the next year or even longer. Yeah, I could have made this my further reading, but I'm interested in the margins of enterprise customers versus individual customers. Cause I'll bet those 1 million new users, a lot of them were probably individual customers just trying to learn something in quarantine. So that it'd

be interesting to get numbers on that. My highlights though, B2B software services is a rapidly expanding market. So, I mean, we've done tons of shows on them and there's so many different systems and stuff that people are trying to learn, trying to use. And so they get to ride the tailwinds of that. Also, COVID is sort of accelerating the inevitable, which is the switch to online learning. And so they're also riding the tailwinds of that. It feels like it might be a perfect storm to put the business in the right direction. And I think they took advantage of that, making their service free. I think that's really going to help with brand awareness um not to mention there's already that existing liquidity quality that we talked about

which is there goes again yeah i know which is up obviously the enterprise customers that they've locked in like it enough to be paying more than last time and they're getting new users on the system that is a huge vote of confidence for any other clients that they're trying to get on low light is they are spending a ton of money 67 of revenue on sales and marketing is a ton so they are an unprofitable business there are some concerns which which make me think what's to stop let's say teams teams is a bad one but alter x or something like that and you want the it or data dog even what's to stop data dog from doing this themselves and putting their own tutorials on their website or once they get a customer or whatever that's a db you know right

another one like that. There's quite a few. Yeah. Yeah. So that's kind of the big concern, but if people, if, if this is their specialty, if people like going to courses, I mean, it's not easy to build an interactive course with tests and that kind of thing. So maybe it's better that Pluralsight does it. I don't know that, that that's kind of the uncertainty for me there. Right. And for reference that 67% revenue, uh, 67% marketing spend on of their revenue whatever you know what i mean yeah they're only getting 33 revenue growth from that which is not great yeah exactly i think it might have been coming down i'm not sure uh but pay attention to that as a percentage of revenue because you don't want operating margins going the wrong direction

right and yeah if you if someone is spending a ton of marketing you expect a higher revenue growth rate just because those two should go hand in hand right all right what's your rating for the stock it's gonna be solid it's it's on the watch list for sure gonna do some more research it's not a household name like we've mentioned so i think without giving it just a seven i'll give it like a six five it's okay uh not something i think i'd you know make my top 10 or 12 though no least you know from first glance here i'm i'm actually gonna go pretty bullish on this and i I think part of it is because of the article I read from, once again, I think it was Christian Reshoof.

Go look up his Twitter handle and you'll be able to find his sub stack. And it made me feel pretty bullish. And then also, I think they are writing a lot of positive tailwinds. And I think coronavirus is helping them actually in terms of online learning. So I'm going to go 7.9. It's going on the watch list. I'm going to have to do a little more digging. I wish stock-based compensation was a little lower and I have to maybe figure out some of

that stuff with the industry. So do companies like Datadog and MongoDB, do they do the tutorials themselves, that kind of thing? Yeah, I would not think, I don't think that's a concern at all. Okay. I'm going to go 7.9. Okay. Well, sounds good. Ryan's a little bullish, me a little less, but that's going to do it. Thank you guys for listening. As always, give us email recommendations, chitchatmoneypodcast at gmail.com. Follow us on Twitter at chitchatmoney for any show recommendations and updates. Like we said in the last episode, we do have to take a pause this summer, which we will probably mention on every episode here on out. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Thank you

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