Description

Thinkific is a Canadian-listed microcap that operates a platform for users to create and sell courses. As with many tech IPOs, the business overinvested in growth that did not materialize. Management has taken steps to reduce cash burn, including significant cost cutting measures over the last one-and-a-half years, including a 35% reduction in workforce. While the business is currently unprofitable (whether you include or exclude the burden from SBC), they have a clear path to profitability through normalized growth in customers, as well as growth in their payments offering. Peers trade from anywhere from ~1.5-3x revenues, representing 25-100% upside as the company achieves profitability (including the burden from SBC).

Business Description

Thinkific is a platform where users can create and sell courses. The business generates revenue via various subscription offerings (operating under a freemium model), as well as their payments/checkout offering where they take a split of every payment they process. The software is generally used by small individual creators / influencers as sales per paying customer is ~$12k. The breakeven for a paying customer is low, only requiring the sale of ~1 course/month for the lowest tiered paid plan, so the platform does not face significant churn risk beyond the high churn generally associated with being a micro SMB-focused platform.

Example of a Thinkific Dashboard

Payments

The company offers a built-in payments processor, which is enabled by default in the US, Canada and the UK. It is effectively a white labelled version of Stripe, but enables Thinkific to take ~2.9% of every transaction (after all remittances, gross margins are 25-30%). While the fee is high, Thinkific’s customer base is generally smaller customers (GMV/paying customer is $12.4K/year) and the checkout is enabled by default, so net take rates in the 70-90bps range are sustainable. The net take rate is not out of line with other micro SMB software businesses, with EverCommerce’s net take rates in the ~90bps range.

There is a lot of whitespace for Thinkific to improve payments penetration as evidenced by Shopify (which is 58% penetrated despite a greater number of enterprise customers). For comparison, Thinkific stands at ~30% (up 400bps QoQ).

Subscription ARPU Expansion

Thinkific also has a few products to expand subscription revenue among it’s existing customer base – including premium priced plans (which offer better support and other features – e.g. more administrators or rooms per community) or branded app solutions (Thinkific creates an app for an influencer for $199/month).

ARR/Paying Customer has historically increased at ~1-2%/year, excluding Q1 to Q2 2022, which was influenced by a price increase. Continued upsell opportunities as customers increase in size (GMV/customer has increased by ~5-6%/year) should drive a similar level of growth in the future.

Near-Term Revenue Drivers

Launching BNPL (35-40% uplift in their trials)

On August 1^st, Thinkific launched a Buy Now, Pay Later offering (partnering with Affirm, Klarna and Afterpay). In trials, the company has seen a 35-40% uplift in transaction size. The uplift provided by the BNPL offering does not seem to be captured in the valuation and should result in an inflection in GMV in Q3 and Q4 of this year.

Global Interest in AI Courses

No matter what you think about AI, a flood of new courses focused on ChatGPT and similar topics is inevitable. Udemy has already reported that they have seen 1.4 million enrollments on >1000 courses on the platform related to AI. Demand seems to be resilient (as per Google Trends), so continued interest should result in an increase in the number of paying customers for Thinkific.

Management

Greg Smith, CEO (who is also the founder) owns ~32% of the company, or ~45% of the vote via his multi-voting shares. Minority shareholders only have ~4% of the vote, so you need to trust management’s allocation of capital. So far, management seems to have made the right decisions as they reduced their workforce by ~35% when expected growth did not materialize. Management’s economic interest should represent a hedge against poor capital allocation, but it still represents a risk.

Valuation / Reaching break-even

Thinkific should reach adj EBITDA breakeven by mid-2024 as BNPL should help drive outsized revenue growth over the next year. EBITDA breakeven incl SBC burden (roughly ~10-15% of revenues for 2023) will take until early-to-mid 2026 to achieve.

The large cash balance largely mitigates the negative operating income (the numbers above include SBC). Given the minimal cash burn over the next few years, Thinkific is trading at ~1x revenues. Valuation seems attractive vs peers, one of which, Teachable, was acquired for ~10x revenues in March 2020. Other Edtech-peers trade at 1-3x revenues, despite having lower gross margins (Coursera/Udemy) or issues with debt (2U). At ~1x revenues, there is little downside, but significant upside if the stock re-rates closer to peer valuations.

Risks

• Management does not continue to adjust the cost base downwards if revenue growth slows
• Management performs an acquisition using cash-on-hand

Catalyst

• BNPL results in significant growth in GMV
• Company becomes cash flow breakeven