Coursera, Inc. (COUR) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following section discusses the financial condition and results of operations of Coursera, Inc. and its subsidiaries (“Coursera”, the “Company”, “we”, “us”, or “our”) and should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K (“Form 10-K”). This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special Note Regarding Forward-Looking Statements" in this Form 10-K. You should review the disclosure under the heading "Risk Factors" under Part I, Item 1A in this Form 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Organization of Information
Management’s discussion and analysis provides a narrative on our financial performance and condition that should be read in conjunction with the accompanying consolidated financial statements. It includes the following sections:
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Overview
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JOBS Act Transition Period
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Expense Reduction Initiative
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Initial Public Offering
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Factors Affecting Our Performance
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Impact of COVID-19 and Other Macroeconomic Conditions
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Components of Results of Operations
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Results of Operations
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Liquidity and Capital Resources
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Key Business Metrics and Non-GAAP Financial Measures
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Critical Accounting Estimates
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Recent Accounting Pronouncements
In this section of the Form 10-K, we discuss our financial condition and results of operations for the years ended December 31, 2022 and 2021. Our financial condition and results of operations for the years ended December 31, 2021 and 2020 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Form 10-K for the fiscal year ended December 31, 2021 filed with the United States Securities and Exchange Commission (“SEC”) on March 3, 2022.
Overview
Coursera is one of the largest online learning destinations in the world, connecting an ecosystem of learners, educators, organizations, and institutions with a platform of high-quality content and credentials, data, and technology.
As shifts to the digital economy are increasing the need for new skills, Coursera’s online learning offerings can meet this global demand and provide access to world-class education to learners, organizations, and institutions worldwide. We partner with over 300 leading global university and industry partners to create and distribute content that is modular, stackable, flexible, and affordable. As of December 31, 2022, approximately 118 million learners are registered on our platform to engage with a wide range of offerings from industry microcredentials, including entry-level Professional Certificates, to bachelor’s and master’s degree programs.
Coursera serves learners where and how they want to learn—in their homes, through their employers, through their colleges and universities, and through government-sponsored programs. We provide a range of stackable learning content and credentials, including Clips, Guided Projects, Specializations, courses, and certificates that can build towards a broader course of study such as a degree or postgraduate diploma. Our go-to-market strategy centers on efficiently attracting learners to our platform and connecting them to stackable content and degree programs tailored to them, after which our data-driven learner experience identifies potential Enterprise prospects, complemented by our direct sales team, which finds and engages with potential business, academic, government, and other institutional customers.
For the years ended December 31, 2022 and 2021, we generated a net loss of $175.4 million and $145.2 million, which included stock-based compensation expense of $110.8 million and $91.2 million, and a net loss margin as a percentage of revenue of 33% and 35%, respectively.
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JOBS Act Transition Period
As of June 30, 2022, the last business day of our most recently completed second fiscal quarter, our aggregate worldwide public float was greater than $700 million. As a result of exceeding this threshold and meeting the time and reporting requirements established by the SEC, we became a large accelerated filer and no longer qualify as an emerging growth company as of December 31, 2022. Accordingly, we are no longer eligible for the emerging growth company provisions of the JOBS Act.
Expense Reduction Initiative
We are undertaking a plan to reduce our expenses, focus our efforts, and prioritize investments in key initiatives that are expected to drive long-term, sustainable growth. In connection with this effort, on November 9, 2022, we enacted a plan to reduce our global workforce to better align our cost structure and personnel needs with our business objectives, growth opportunities, and operational priorities.
As a result of this reduction, we recognized restructuring charges, within operating expenses, of $10.1 million mainly related to personnel expenses, such as employee severance and benefits costs, and made cash payments of $4.8 million in the year ended December 31, 2022. As of December 31, 2022, $5.1 million of the incremental expenses relating to this reduction remained unpaid and were included in the consolidated balance sheet as accrued compensation and benefits, substantially all of which are expected to be paid during the year ended December 31, 2023. We will also have a reversal of stock-based compensation expense of approximately $6 million, the majority of which will be recognized in the first quarter of 2023, when the forfeiture of RSUs and stock options will occur.
Initial Public Offering
On April 5, 2021, Coursera, Inc. completed its initial public offering of common stock, in which 14,664,776 shares were sold and certain selling stockholders sold 1,065,224 shares (the “IPO”). The shares were sold at a price to the public of $33.00 per share for net proceeds of $452.5 million to us after deducting underwriting discounts and commissions of $31.5 million. Additionally, offering costs incurred by us were approximately $6.4 million. Net proceeds to the selling stockholders were $32.9 million after deducting underwriting discounts and commissions. We did not receive any of the proceeds from the sale of our common stock by the selling stockholders. Upon the closing of the IPO, all outstanding shares of our redeemable convertible preferred stock automatically converted into 75,305,400 shares of common stock on a one-for-one basis.
On April 19, 2021, the underwriters exercised in full the right to purchase 2,359,500 additional shares of common stock from us, resulting in additional net proceeds of $72.8 million after deducting underwriting discounts and commissions of $5.1 million.
Factors Affecting Our Performance
We believe that the growth of our business and our future success are dependent upon many factors. While each of these factors present significant opportunities for us, these factors also pose challenges that we must successfully address in order to sustain the growth of our business and enhance our results of operations.
Ability to attract and engage new learners, Enterprise customers, and Degrees students. In order to grow our business, we must attract new learners, Enterprise customers, and Degrees students efficiently and increase engagement on our platform over time. Our Consumer learners are the most important source of our overall learner base, as they contribute to our Enterprise and Degrees revenue.
Ability to source in-demand content from our educator partners. We believe that learners and enterprises are attracted to Coursera largely because of the high quality and wide selection of content provided by our educator partners. Continuing to source in-demand content and credentials from our educator partners—from courses to degrees—will be an important factor in attracting learners and increasing our revenue over time.
We believe that our reach, scale, and reputation provide an attractive value proposition for leading organizations and institutions to partner with Coursera to develop and distribute content and credentials. To be the platform of choice for educator partners, we continue to invest in increasing the size and engagement of our learner base, developing a suite of academic integrity features (e.g., identity verification and anti-plagiarism detection), improving recommendation and personalization features, developing marketing capabilities that drive higher conversion into paid offerings, and improving the analytics tools available for learners, educators, organizations, and institutions.
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Impact of mix shift over time. Our mix of business amongst our Consumer, Enterprise, and Degrees segments shifts from time to time, and these shifts will affect our financial performance. We incur content costs generally in the form of a fee paid to our university and industry partners, determined as a percentage of total revenue generated from their content. We incur no content costs for our Degrees offerings, since our university partners pay us a percentage of learner tuition.
Ability to convert free learners to paid learners. New learners to our platform typically begin to engage with our free courses, which serve as a funnel to grow our total learner base and drive referrals to our other offerings, including our paid offerings. Through both our on-platform and off-platform marketing efforts, we engage our free learners by highlighting key features that encourage conversion to our paid offerings, including paid subscriptions. These efforts include campaigns targeting existing learners, personalized recommendations, and performance marketing across leading social media platforms.
Ability to expand our international footprint. We see a significant opportunity to expand our offerings into other regions, particularly in regions with large, underserved adult learning populations. We have invested, and plan to continue to invest, in personnel and marketing efforts to support our international growth as part of our strategy to grow our customer and learner base.
Ability to retain and expand our Enterprise customer relationships. Our efforts to grow our Enterprise segment are focused primarily on business, academic, government, and other institutional customers. We believe a significant opportunity exists for us to expand our existing customers’ use of our platform by identifying new use cases to increase the size of deployments. Our business and results of operations will depend in part on our ability to retain and expand usage of our platform within our existing customer base.
Our measured investment in growth. We are actively managing our investments to support the future growth of our business using a measured approach. With indications of a global economic slowdown, we are focusing our investments in select markets, offerings, and technologies that we believe will provide the best opportunity to grow our revenue and improve our operating results in the long term.
Impact of COVID-19 and Other Macroeconomic Factors
Our business and financial conditions have been, and may continue to be, impacted by adverse macroeconomic factors. In addition, the COVID-19 pandemic has resulted in significant global, social, and business disruption, beginning in January 2020, and accelerated the need for online-delivered education. Individuals, organizations, and institutions relied and are continuing to rely on online learning to navigate change and disruption. The full extent to which the COVID-19 pandemic, including any new variants, may continue to directly or indirectly impact general market conditions or our business, results of operations, cash flows, and financial condition remains uncertain.
We expect general macroeconomic headwinds combined with tight labor markets in certain geographies to cause our future revenue growth to be lower than in prior years. In our Degrees business, we experienced a slowdown in new student growth during the year ended December 31, 2022, which is consistent with National Clearinghouse Data regarding graduate enrollments in the U.S., and we believe is likely influenced by tight U.S. labor markets that could persist in future periods. Global and regional, macroeconomic, and geopolitical conditions have impacted overall student engagement and may continue to have a lingering impact on total student enrollments.
Components of Results of Operations
Revenue
We derive revenue from contracts with customers for access to the learning content hosted on our platform and related services. We derive our revenue from three sources: Consumer, Enterprise, and Degrees.
Consumer and Enterprise revenue both consist primarily of subscriptions with terms varying from 30 days for certain Consumer subscriptions to one to three years for Enterprise license subscription contracts. Consumer subscriptions are paid in advance. Enterprise subscriptions are generally invoiced in advance in annual or quarterly installments. Access to our platform represents a series of distinct services, as we continually provide access to, and fulfill our obligation to, our customers over the contract term. As a result, revenue is recognized ratably over the contract term.
We are generally the principal with respect to revenue generated from sales to Consumer and Enterprise customers as we control the performance obligation and are the primary obligor with respect to delivering access to content.
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Degrees revenue is generated from contracts with university partners to host and deliver their online bachelor’s and master’s degrees or postgraduate diplomas. We earn a service fee that is determined as a percentage of the total tuition collected from Degrees students, net of refunds. University partners generally collect the tuition from Degrees students. We have a stand-ready obligation to perform services continually throughout the period that the degree content is hosted on our platform. Service fees are paid by the university partner for each university term. As a result, revenue generated from each term is recognized ratably from the start of a term through the start of the following term.
There is no direct contractual revenue arrangement between Coursera and Degrees students, who contract directly with our university partners. University partners typically have additional performance obligations to the Degrees students in the form of designing the curriculum, setting admission criteria, real-time teaching, making admissions and financial aid decisions, independently awarding credits, certificates, or degrees, and academic or career counseling. For these reasons, the university partners control the delivery of degrees, and postgraduate diplomas hosted on our platform.
Cost of Revenue
Cost of revenue consists of content costs in the form of fees paid to educator partners and expenses associated with the operation and maintenance of our platform. These expenses include the cost of servicing both paid learner and educator partner support requests, content translation and captioning, hosting and bandwidth costs, amortization of acquired technology, internal-use software and content assets, customer payment processing fees, depreciation, and facilities costs.
Content costs only apply to Consumer and Enterprise offerings; there is no content cost attributable to our Degrees offering. Content costs as a percentage of revenue for Enterprise and Consumer vary based on the content mix of each segment.
Operating Expenses
Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs are the most significant component of our operating expenses and consist of salaries, stock-based compensation expense, payroll taxes, commissions, bonus, and benefits. Our operating expenses also include marketing and advertising expenses, consulting and services expenses, office expenses, depreciation and amortization, and facilities costs.
Research and development. Our research and development expenses consist primarily of personnel and personnel-related costs, including stock-based compensation expense, and costs related to the ongoing management, maintenance, and expansion of content, features, and services offered on our platform. We believe that continued investment in our platform is important to our future growth and to maintain and attract partners and learners to our platform. As a result, we expect research and development expenses to increase in absolute dollars. In addition, we expect research and development expenses as a percentage of revenue to vary from period to period but generally decrease over the long term.
Sales and marketing. Our sales and marketing expenses consist primarily of personnel and personnel-related costs, including stock-based compensation expense, as well as costs related to acquiring learners, customers, and educator partners, support efforts, and brand marketing. Sales and marketing expenses also include hosting and bandwidth costs. We expect sales and marketing expenses to decline in absolute dollars for the year ending December 31, 2023. In addition, we expect sales and marketing expenses as a percentage of revenue to vary from period to period but decline in 2023 and generally decrease over the long term.
General and administrative. Our general and administrative expenses consist primarily of personnel and personnel-related costs, including stock-based compensation expense, and costs related to our legal, finance, and human resources departments, as well as certain indirect taxes, professional fees, and other corporate expenses.
We have incurred and expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for insurance and professional services. We expect general and administrative expenses to increase in absolute dollars as our business grows. In addition, we expect general and administrative expenses as a percentage of revenue to vary from period to period but generally decrease over the long term.
Restructuring charges. Our restructuring charges consist primarily of personnel expenses, such as employee severance and benefits costs as well as stock-based compensation expense related to the reduction of our global workforce in the year ended December 31, 2022.
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Interest Income
Interest income consists primarily of interest income earned on our cash, cash equivalents, and marketable securities. It also includes amortization of premiums and accretion of discounts related to our marketable securities. Interest income varies each reporting period based on our average balance of cash, cash equivalents, and marketable securities during the period and market interest rates.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of foreign exchange (losses) gains.
Income Tax Expense
Income tax expense consists primarily of income taxes in foreign jurisdictions in which we conduct business. We have a full valuation allowance against our U.S. federal and state deferred tax assets as the realization of the full amount of these deferred tax assets is uncertain, including net operating loss carryforwards and tax credits related primarily to research and development. We expect to maintain this full valuation allowance until it becomes more likely than not that the deferred tax assets will be realized.
Results of Operations
The following table summarizes our results of operations, which are not necessarily indicative of results to be expected for future periods.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Revenue | $ | 523,756 | $ | 415,287 | $ | 293,511 | ||||||
| Cost of revenue(1) | 192,277 | 165,818 | 138,846 | |||||||||
| Gross profit | 331,479 | 249,469 | 154,665 | |||||||||
| Operating expenses: | ||||||||||||
| Research and development(1) | 165,134 | 135,410 | 76,784 | |||||||||
| Sales and marketing(1) | 227,676 | 179,337 | 107,249 | |||||||||
| General and administrative(1) | 105,900 | 77,785 | 37,215 | |||||||||
| Restructuring charges(1) | 10,149 | — | — | |||||||||
| Total operating expenses | 508,859 | 392,532 | 221,248 | |||||||||
| Loss from operations | (177,380 | ) | (143,063 | ) | (66,583 | ) | ||||||
| Other income (expense): | ||||||||||||
| Interest income | 9,144 | 320 | 1,163 | |||||||||
| Other (expense) income, net | (2,401 | ) | (346 | ) | 120 | |||||||
| Loss before income taxes | (170,637 | ) | (143,089 | ) | (65,300 | ) | ||||||
| Income tax expense | 4,720 | 2,126 | 1,515 | |||||||||
| Net loss | $ | (175,357 | ) | $ | (145,215 | ) | $ | (66,815 | ) |
(1) Includes stock-based compensation expense as follows:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||
| (in thousands) | |||||||||||
| Cost of revenue | $ | 3,089 | $ | 2,092 | $ | 516 | |||||
| Research and development | 48,779 | 42,783 | 6,960 | ||||||||
| Sales and marketing | 30,092 | 25,992 | 4,097 | ||||||||
| General and administrative | 28,703 | 20,316 | 5,234 | ||||||||
| Restructuring charges | 122 | — | — | ||||||||
| Total stock-based compensation expense | $ | 110,785 | $ | 91,183 | $ | 16,807 |
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The following table summarizes our results of operations as a percentage of revenue:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Revenue | 100 | % | 100 | % | 100 | % | ||||||
| Cost of revenue | 37 | 40 | 47 | |||||||||
| Gross profit | 63 | 60 | 53 | |||||||||
| Operating expenses: | ||||||||||||
| Research and development | 32 | 32 | 26 | |||||||||
| Sales and marketing | 43 | 43 | 37 | |||||||||
| General and administrative | 20 | 19 | 13 | |||||||||
| Restructuring charges | 2 | — | — | |||||||||
| Total operating expenses | 97 | 94 | 76 | |||||||||
| Loss from operations | (34 | ) | (34 | ) | (23 | ) | ||||||
| Other income (expense): | ||||||||||||
| Interest income | 2 | — | 1 | |||||||||
| Other (expense) income, net | — | — | — | |||||||||
| Loss before income taxes | (32 | ) | (34 | ) | (22 | ) | ||||||
| Income tax expense | 1 | 1 | 1 | |||||||||
| Net loss | (33 | )% | (35 | )% | (23 | )% |
Comparison of the Years Ended December 31, 2022 and 2021
Revenue
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Revenue: | ||||||||||||||||
| Consumer | $ | 295,583 | $ | 246,187 | $ | 49,396 | 20 | % | ||||||||
| Enterprise | 181,284 | 120,429 | 60,855 | 51 | % | |||||||||||
| Degrees | 46,889 | 48,671 | (1,782 | ) | (4 | )% | ||||||||||
| Total revenue | $ | 523,756 | $ | 415,287 | $ | 108,469 | 26 | % |
Revenue for the year ended December 31, 2022 was $523.8 million, compared to $415.3 million for the year ended December 31, 2021. Revenue increased by $108.5 million, or 26%, compared to the year ended December 31, 2021. The increase was primarily driven by a 22% increase in registered learners, which resulted in more paid learners and Degrees students, and by the addition of 346 Paid Enterprise Customers, partially offset by lower revenue per student from our Degrees students.
For the year ended December 31, 2022, total Consumer revenue increased by $49.4 million, or 20%, compared to the year ended December 31, 2021. New learners that registered after December 31, 2021 contributed $96.7 million to total Consumer revenue of $295.6 million for the year ended December 31, 2022. The remaining Consumer revenue in the year ended December 31, 2022 of $198.9 million is attributable to learners that were registered on our platform as of December 31, 2021, thus retaining 81% of the revenue from those registered learners.
For the year ended December 31, 2022, total Enterprise revenue increased by $60.9 million, or 51%, compared to the year ended December 31, 2021. Approximately $29.7 million of the increase in revenue was attributable to new customers, and the remaining increase of $31.2 million was attributable to growth from existing customers.
For the year ended December 31, 2022, total Degrees revenue decreased by $1.8 million, or 4%, compared to the year ended December 31, 2021. The $1.8 million decrease in revenue was primarily attributable to a decrease of $9.3 million due to lower revenue per student, partially offset by $7.5 million in revenue from an increase in the number of Degrees students.
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Cost of Revenue, Gross Profit, and Gross Margin
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Cost of revenue | $ | 192,277 | $ | 165,818 | $ | 26,459 | 16 | % | ||||||||
| Gross profit | $ | 331,479 | $ | 249,469 | $ | 82,010 | 33 | % | ||||||||
| Gross margin | 63 | % | 60 | % |
Cost of revenue for the year ended December 31, 2022 was $192.3 million, compared to $165.8 million for the year ended December 31, 2021. Paid learner usage on our platform increased, resulting in an $8.6 million cost increase for hosting fees, support services, and credit card processing fees. The increase in revenue combined with improved content costs as a percentage of revenue resulted in a net increase of $12.1 million in costs related to partner fees. Amortization expense, primarily from internal-use software, increased $3.9 million, and partner content translation costs increased $1.9 million.
Content costs for the Consumer and Enterprise segments were $81.3 million and $54.7 million, respectively, for the year ended December 31, 2022 compared to $84.7 million and $39.2 million, respectively, for the year ended December 31, 2021. Content costs as a percentage of revenue for the Consumer and Enterprise segments were 27% and 30%, respectively, for the year ended December 31, 2022 compared to 34% and 33%, respectively, for the year ended December 31, 2021.
Gross margin was 63% for the year ended December 31, 2022, compared to 60% for the year ended December 31, 2021. The increase in gross margin was driven by a lower revenue content cost rate in both our Consumer and Enterprise segments.
In January 2023, we extended a multi-year agreement with our largest educator partner, who will start earning typical content fees, whereas we had historically supported their program primarily through marketing and content production efforts. Additionally, we will incur $25 million of expense evenly throughout 2023 to support the partnership, such as sales and marketing efforts, content production, and product development. Overall, the change in this agreement's structure is expected to result in a prospective shift of expenses from operating expenses to cost of revenue of approximately 10% of revenue for the year ending December 31, 2023.
Operating Expenses
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | $ | 165,134 | $ | 135,410 | $ | 29,724 | 22 | % | ||||||||
| Sales and marketing | 227,676 | 179,337 | 48,339 | 27 | % | |||||||||||
| General and administrative | 105,900 | 77,785 | 28,115 | 36 | % | |||||||||||
| Restructuring charges | 10,149 | — | 10,149 | nm | ||||||||||||
| Total operating expenses | $ | 508,859 | $ | 392,532 | $ | 116,327 | 30 | % |
Total operating expenses for the year ended December 31, 2022 were $508.9 million, compared to $392.5 million for the year ended December 31, 2021.
Research and development expenses for the year ended December 31, 2022 were $165.1 million, compared to $135.4 million for the year ended December 31, 2021. The increase was primarily due to headcount growth, which contributed to higher personnel-related expenses of $19.6 million and higher stock-based compensation expense of $6.0 million. In addition, content creation fees increased $7.9 million, software related expenses increased $1.4 million, and a one-time impairment charge of $1.5 million was recognized due to a partial sublease of our office space, partially offset by a decrease in consulting expenses of $1.8 million.
Sales and marketing expenses for the year ended December 31, 2022 were $227.7 million, compared to $179.3 million for the year ended December 31, 2021. The increase was primarily due to higher personnel-related expenses of $27.0 million driven by headcount growth and stock-based compensation expense of $4.1 million, as well as marketing and advertising expenses of $14.1 million. In addition, travel-related costs increased $2.7 million, software related expenses increased $1.9 million, and we recognized a one-time impairment charge of $1.2 million resulting from a partial sublease of our office space.
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General and administrative expenses for the year ended December 31, 2022 were $105.9 million, compared to $77.8 million for the year ended December 31, 2021. The increase was primarily due to headcount growth contributing to higher personnel-related expenses of $21.3 million, including stock-based compensation expense of $8.4 million. During the year ended December 31, 2022, we recognized a non-recurring impairment charge of $2.9 million relating to deferred partner fees that we do not expect to recover associated with content from Russian educator partners whose content we removed from our platform. In addition, we had increases of $2.1 million in indirect taxes and $1.7 million in software-related expenses.
Restructuring charges for the year ended December 31, 2022 were $10.1 million, mainly consisting of personnel expenses, such as employee severance and benefits costs, related to efforts to reduce our expenses, focus our efforts, and prioritize investments in key initiatives that are expected to drive long-term, sustainable growth. There were no restructuring charges in the year ended December 31, 2021. Refer to Note 16, Restructuring Charges, in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial and Supplementary Data” for further information.
Other Income (Expense), Net
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Interest income | $ | 9,144 | $ | 320 | $ | 8,824 | 2,758 | % | ||||||||
| Other expense, net | (2,401 | ) | (346 | ) | (2,055 | ) | 594 | % | ||||||||
| Total other income (expense), net | $ | 6,743 | $ | (26 | ) | $ | 6,769 | nm |
Total other income (expense), net for the year ended December 31, 2022 primarily reflected interest income earned on cash, cash equivalents, and marketable securities offset by unrealized net foreign exchange losses. Interest income was higher during the year ended December 31, 2022 compared to the year ended December 31, 2021 due to a rise in interest rates and our average rate of return on investments in U.S. Treasury securities. Other expense, net was higher during the year ended December 31, 2022 compared to the year ended December 31, 2021 due to unfavorable foreign exchange rates resulting from the strengthening of the U.S. dollar to other currencies. Our operating expenses are typically denominated in the local currencies of the countries in which our operations are located and are subject to fluctuations due to changes in foreign currency exchange rates. We also hold cash and cash equivalents in foreign currencies, primarily in our foreign entities to support their ongoing operations.
Income Tax Expense
| Year Ended December 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Income tax expense | $ | 4,720 | $ | 2,126 | $ | 2,594 | 122 | % |
For the year ended December 31, 2022, we recognized income tax expense of $4.7 million, compared to $2.1 million for the year ended December 31, 2021. Income tax expense for the years ended December 31, 2022 and 2021 was primarily related to our foreign operations.
Liquidity and Capital Resources
Overview
Since our inception, we have financed our operations primarily through proceeds from our IPO, issuance of redeemable convertible preferred stock, and cash generated from our business operations. In April 2021, we received cash proceeds of $525.3 million from our IPO net of underwriting discounts and commissions but before deducting other offering expenses. As of December 31, 2022, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $780.5 million. Our investments consist of U.S. Treasury securities.
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Our principal uses of cash in recent periods include the funding of our business operations and investments in our internal-use software. We believe that our existing cash, cash equivalents, and marketable securities and our expected cash flows from operations will be sufficient to meet our cash needs for at least the next 12 months. Over the longer term, our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our sales and marketing and research and development expenditures, the continuing market acceptance of our offerings, and any investments or acquisitions we may choose to pursue in the future. In the event that we need to borrow funds or issue additional equity, we cannot assure you that any such additional financing will be available on terms acceptable to us, if at all. In addition, any future borrowings may result in additional restrictions on our business and any issuance of additional equity would result in dilution to investors. If we are unable to raise additional capital when desired and on terms acceptable to us, our business, results of operations, and financial condition could be materially and adversely affected.
Contractual Obligations and Commitments
Our estimated future obligations as of December 31, 2022 include both current and long term obligations. Under our operating leases, as described in Note 7, Leases, to the consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, we have a current obligation of $8.7 million and a long-term obligation of $5.8 million.
Our operating leases obligations as of December 31, 2022 were approximately $15.3 million, which consist of payments related to lease facilities under operating lease agreements expiring through 2025. We have office facility operating leases in the U.S., Canada, the United Kingdom, India, Bulgaria, and the United Arab Emirates.
Our purchase obligations as of December 31, 2022 were approximately $41.0 million, which primarily consisted of our commitments related to purchase of services. As described in Note 12, Commitments and Contingencies, to the consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, we have a current obligation of $12.6 million and a long-term obligation of $28.4 million. In situations where we have received delivery of the services as of December 31, 2022 under the purchase obligations outstanding as of the same date, such amounts are reflected in the consolidated balance sheet as other accounts payable and accrued expenses and are excluded from the $41.0 million.
In March 2021, we entered into a five-year agreement with a cloud hosting provider pursuant to which we committed to spend $50.0 million over the next five years.
Capital Expenditures
Our capital expenditures primarily include investments in property, equipment, and software and capitalized internal-use software costs. We currently expect our capital expenditures for the year ending 2023 to be relatively consistent with the year ended 2022.
Cash Flows
The following table summarizes our cash flows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Net cash (used in) provided by operating activities | $ | (38,051 | ) | $ | 1,746 | $ | (14,991 | ) | ||||
| Net cash used in investing activities | (234,024 | ) | (51,609 | ) | (101,442 | ) | ||||||
| Net cash provided by financing activities | 12,234 | 550,156 | 139,014 | |||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | $ | (259,841 | ) | $ | 500,293 | $ | 22,581 |
Operating Activities
Cash used in operating activities mainly consists of our net loss adjusted for certain non-cash items, including stock-based compensation expense and depreciation and amortization, as well as the effect of changes in operating assets and liabilities during each period.
Our main source of operating cash is payments received from our customers. Our primary use of cash from operating activities is for personnel-related expenses, partner fees, marketing and advertising expenses, indirect taxes, and third-party cloud infrastructure expenses.
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For the year ended December 31, 2022, net cash used in operating activities was $38.1 million, primarily consisting of our net loss of $175.4 million, adjusted for non-cash charges of $135.6 million and net cash inflows of $1.7 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were a $20.6 million increase in accounts receivables due to the growth of our Enterprise business, a $18.3 million increase in prepaid expenses and other assets due to timing of recoupable advances paid to educator partners and an increase in deferred commissions and prepayments to vendors, resulting from business growth, offset by a $20.3 million increase in deferred revenue, resulting primarily from our Enterprise business growth, and a $17.9 million increase in accounts payable and accrued expenses due to timing of payments.
For the year ended December 31, 2021, net cash provided by operating activities was $1.7 million, primarily consisting of our net loss of $145.2 million, adjusted for non-cash charges of $106.0 million and net cash inflows of $41.0 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were a $17.8 million increase in deferred revenue, resulting primarily from our Enterprise segment growth, a $16.3 million increase in accounts payable and accrued expenses and a $7.7 million increase in accrued compensation and other liabilities mainly due to our business growth, and a $5.9 million decrease in accounts receivable due to timing of billings, partially offset by a $5.7 million increase in prepaid expenses and other assets primarily due to increase in deferred commissions.
Cash used in operating activities increased by $39.8 million during the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to increased spending to support business growth, and timing of invoicing and cash collections.
Investing Activities
For the year ended December 31, 2022, net cash used in investing activities was $234.0 million, primarily as a result of purchases of marketable securities, capitalized internal-use software costs, capital expenditures of property, equipment and software, and purchases of content assets, partially offset by proceeds from maturities of marketable securities.
For the year ended December 31, 2021, net cash used in investing activities was $51.6 million, primarily as a result of net purchases of marketable securities, capital expenditures of property, equipment, and software, capitalized internal-use software costs, and purchases of content assets.
Financing Activities
For the year ended December 31, 2022, net cash provided by financing activities was $12.2 million, primarily as a result of proceeds from issuance of common stock from employee stock option exercises and proceeds from the employee stock purchase plan, offset by employee payroll taxes paid for vesting of restricted stock units and payment of deferred offering costs.
For the year ended December 31, 2021, net cash provided by financing activities was $550.2 million, primarily as a result of net proceeds from our IPO, proceeds from issuance of common stock following employee stock option exercises and proceeds from the employee stock purchase plan, offset by payment of deferred offering costs and employee payroll taxes paid for vesting of restricted stock units.
Key Business Metrics and Non-GAAP Financial Measures
We monitor the key business metrics and non-GAAP financial measures set forth below to help us evaluate our business and growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. These key business metrics and non-GAAP financial measures are presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP, and may differ from similarly titled metrics or measures presented by other companies. A reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is provided in “Non-GAAP Financial Measures” below.
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Key Business Metrics
Registered Learners
We count the total number of registered learners at the end of each period. For purposes of determining our registered learner count, we treat each customer account that registers with a unique email as a registered learner and adjust for any spam, test accounts, and cancellations. Our registered learner count is not intended as a measure of active engagement. New registered learners are individuals that register in a particular period. We believe that the number of registered learners is an important factor in the growth of our business and future revenue trends.
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||
| (in millions, except percentages) | |||||||||||
| New Registered Learners | 21.5 | 20.8 | 30.6 | ||||||||
| Total Registered Learners | 118.1 | 96.9 | 76.6 | ||||||||
| Total Registered Learners year-over-year ("YoY") growth | 22 | % | 26 | % |
Number of Degrees Students
We count the total number of Degrees students for each period. For purposes of determining our Degrees student count, we include all the students that are matriculated in a bachelor’s, master’s, or postgraduate diploma and who are enrolled in one or more courses in such a degree program during the period. If a degree term spans across multiple quarters, the student is counted as active in all quarters of the degree term. For purposes of determining our Degrees student count, we do not include students who are matriculated in the degree but are not enrolled in a course in that period. We believe that the number of Degrees students is an important indicator of the growth of our Degrees business and future Degrees segment revenue trends.
The Degrees student count is affected by the seasonality of the school class cycles, combined with the underlying growth interacting with those trends. The number of Degrees students fluctuates in part because the academic terms for each degree program often begins and/or ends within different calendar quarters, and the frequency with which each degree program is offered within a given year varies.
| 2022 | 2021 | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | ||||||||||||||||||||||||
| Number of Degrees Students | 16,481 | 17,460 | 17,723 | 18,103 | 13,439 | 14,630 | 16,068 | 16,204 | |||||||||||||||||||||||
| YoY growth | 22 | % | 19 | % | 10 | % | 12 | % |
Paid Enterprise Customers
We count the total number of Paid Enterprise Customers that are active on our platform at the end of each period. For purposes of determining our customer count, we treat each customer account that has a corresponding contract as a unique customer, and a single organization with multiple divisions, segments, or subsidiaries may be counted as multiple customers. We define a “Paid Enterprise Customer” as a customer who purchases Coursera via our direct sales force. For purposes of determining our Paid Enterprise Customer count, we exclude our Enterprise customers who do not purchase Coursera via our direct sales force, which include organizations engaging on our platform through our Coursera for Teams offering or through our channel partners. For the year ended December 31, 2022, approximately 88% of our total Enterprise segment revenue was generated from our Paid Enterprise Customers. We believe that the number of Paid Enterprise Customers and our ability to increase this number is an important indicator of the growth of our Enterprise business and future Enterprise segment revenue trends.
| December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2022 | 2021 | ||||||
| Paid Enterprise Customers | 1,149 | 803 | |||||
| YoY growth | 43 | % |
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Net Retention Rate for Paid Enterprise Customers
We disclose Net Retention Rate for Paid Enterprise Customers as a supplemental measure of our Enterprise revenue growth. We believe Net Retention Rate for Paid Enterprise Customers is an important metric that provides insight into the long-term value of our subscription agreements and our ability to retain and grow revenue from our Paid Enterprise Customers.
We calculate annual recurring revenue (“ARR”) by annualizing each customer’s monthly recurring revenue (“MRR”) for the most recent month at period end. We calculate “Net Retention Rate” as of a period end by starting with the ARR from all Paid Enterprise Customers as of the 12 months prior to such period end, or Prior Period ARR. We then calculate the ARR from these same Paid Enterprise Customers as of the current period end, or Current Period ARR. Current Period ARR includes expansion within Paid Enterprise Customers and is net of contraction or attrition over the trailing 12 months but excludes revenue from new Paid Enterprise Customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at our Net Retention Rate for Paid Enterprise Customers. Our Net Retention Rate for Paid Enterprise Customers decreased to 108% as of December 31, 2022 from 110% as of December 31, 2021. Our Net Retention Rate for Paid Enterprise Customers is expected to fluctuate in future periods due to a number of factors, including the growth of our revenue base, the penetration within our Paid Enterprise Customer base, expansion of products and features, and our ability to retain our Paid Enterprise Customers.
Segment Revenue
Our revenue is generated from three sources: Consumer, Enterprise, and Degrees, each of which is an individual segment of our business.
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||
| (in thousands, except percentages) | |||||||||||
| Consumer revenue | $ | 295,583 | $ | 246,187 | $ | 192,909 | |||||
| YoY growth | 20 | % | 28 | % | |||||||
| Enterprise revenue | $ | 181,284 | $ | 120,429 | $ | 70,784 | |||||
| YoY growth | 51 | % | 70 | % | |||||||
| Degrees revenue | $ | 46,889 | $ | 48,671 | $ | 29,818 | |||||
| YoY growth | (4 | )% | 63 | % | |||||||
| Total revenue | $ | 523,756 | $ | 415,287 | $ | 293,511 | |||||
| YoY growth | 26 | % | 41 | % |
Segment Gross Profit
We monitor segment gross profit as a key metric to help us evaluate the financial performance of our individual segments. Segment gross profit represents segment revenue less content costs paid to educator partners; segment gross margin is the quotient of segment gross profit and segment revenue. Content costs apply only to the Consumer and Enterprise segments as there is no content cost attributable to the Degrees segment. Instead, in the Degrees segment, we earn a Degrees service fee based on a percentage of the total online student tuition collected by the university partner. Given that content costs are the largest individual cost of our revenue, and contractually vary as a percentage of revenue between our Consumer and Enterprise offerings, and the fact that no content costs are payable in our Degrees offering, shifts in mix between our three segments is expected to be a significant driver of our overall financial performance and profitability.
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||
| (in thousands, except percentages) | |||||||||||
| Consumer gross profit | $ | 214,305 | $ | 161,510 | $ | 106,509 | |||||
| Consumer segment gross margin % | 73 | % | 66 | % | |||||||
| Enterprise gross profit | $ | 126,573 | $ | 81,253 | $ | 48,972 | |||||
| Enterprise segment gross margin % | 70 | % | 67 | % | |||||||
| Degrees gross profit | $ | 46,889 | $ | 48,671 | $ | 29,818 | |||||
| Degrees segment gross margin % | 100 | % | 100 | % |
Consumer segment gross margin increased to 73% in the year ended December 31, 2022 from 66% in the year ended December 31, 2021 due to a greater proportion of Consumer revenue generated from subscription sales with no associated content cost. Enterprise segment gross margin increased to 70% from 67% when comparing the same periods due to a higher proportion of Enterprise revenue generated from subscription licenses where learners enrolled in content with no associated content cost.
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Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we have included non-GAAP gross profit, non-GAAP net loss, Adjusted EBITDA, Adjusted EBITDA Margin, and Free Cash Flow, which are non-GAAP financial measures, because they are key measures used by our management to help us analyze our financial results, establish budgets and operational goals for managing our business, evaluate our performance, and make strategic decisions. Non-GAAP financial measures are not meant to be considered in isolation or as a substitute for, or superior to, comparable GAAP financial measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Our presentation of these non-GAAP financial measures may not be comparable to similar measures used by other companies. We encourage investors to carefully consider our results under GAAP, as well as our supplemental non-GAAP information and the GAAP-to-non-GAAP reconciliation to more fully understand our business.
Non-GAAP Gross Profit and Non-GAAP Net Loss
We define non-GAAP gross profit and non-GAAP net loss as GAAP gross profit and GAAP net loss excluding stock-based compensation expense, restructuring charges, and payroll tax expense related to stock-based activities. We believe the presentation of operating results that exclude these non-cash items provides useful supplemental information to investors and facilitates the analysis of our operating results and comparison of operating results across reporting periods.
The following tables provide a reconciliation of GAAP gross profit and GAAP net loss, the most directly comparable GAAP financial measure, to non-GAAP gross profit and non-GAAP net loss:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Gross profit | $ | 331,479 | $ | 249,469 | $ | 154,665 | ||||||
| Stock-based compensation expense | 3,089 | 2,092 | 516 | |||||||||
| Payroll tax expense related to stock-based activities | 28 | 64 | — | |||||||||
| Non-GAAP gross profit | $ | 334,596 | $ | 251,625 | $ | 155,181 |
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Net loss | $ | (175,357 | ) | $ | (145,215 | ) | $ | (66,815 | ) | |||
| Stock-based compensation expense | 110,663 | 91,183 | 16,807 | |||||||||
| Restructuring charges | 10,149 | — | — | |||||||||
| Payroll tax expense related to stock-based activities | 1,120 | 1,643 | 258 | |||||||||
| Non-GAAP net loss | $ | (53,425 | ) | $ | (52,389 | ) | $ | (49,750 | ) |
Adjusted EBITDA and Adjusted EBITDA Margin
“Adjusted EBITDA” and “Adjusted EBITDA Margin,” which are non-GAAP financial measures, are key measures used by our management to help us analyze our financial results, establish budgets and operational goals for managing our business, evaluate our performance, and make strategic decisions.
We define Adjusted EBITDA as our net loss excluding: (1) depreciation and amortization; (2) interest income; (3) other expense (income), net; (4) stock-based compensation expense; (5) restructuring charges, (6) income tax expense; and (7) payroll tax expense related to stock-based activities. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue.
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The following table provides a reconciliation of net loss, the most directly comparable GAAP financial measure, to Adjusted EBITDA:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands, except percentages) | ||||||||||||
| Net loss | $ | (175,357 | ) | $ | (145,215 | ) | $ | (66,815 | ) | |||
| Depreciation and amortization | 18,503 | 14,757 | 9,585 | |||||||||
| Interest income | (9,144 | ) | (320 | ) | (1,163 | ) | ||||||
| Other expense (income), net | 2,401 | 346 | (120 | ) | ||||||||
| Stock-based compensation expense | 110,663 | 91,183 | 16,807 | |||||||||
| Restructuring charges | 10,149 | — | — | |||||||||
| Income tax expense | 4,720 | 2,126 | 1,515 | |||||||||
| Payroll tax expense related to stock-based activities | 1,120 | 1,643 | 258 | |||||||||
| Adjusted EBITDA | $ | (36,945 | ) | $ | (35,480 | ) | $ | (39,933 | ) | |||
| Net loss margin | (33 | )% | (35 | )% | (23 | )% | ||||||
| Adjusted EBITDA Margin | (7 | )% | (9 | )% | (14 | )% |
Free Cash Flow
“Free Cash Flow” is a non-GAAP financial measure that we calculate as net cash (used in) provided by operating activities, less cash used for purchases of property, equipment, and software and capitalized internal-use software costs as we consider these capital expenditures necessary to support our ongoing operations.
We consider Free Cash Flow to be a liquidity measure that provides useful information to management and investors in understanding and evaluating our liquidity and future ability to generate cash that can be used for strategic opportunities, including investing in our business and strengthening our balance sheet, but it is not intended to represent the residual cash flow available for discretionary expenditures.
The following table provides a reconciliation of net cash (used in) provided by operating activities, the most directly comparable GAAP financial measure, to Free Cash Flow (in thousands):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Net cash (used in) provided by operating activities | $ | (38,051 | ) | $ | 1,746 | $ | (14,991 | ) | ||||
| Less: purchases of property, equipment, and software | (1,578 | ) | (1,554 | ) | (3,099 | ) | ||||||
| Less: capitalized internal-use software costs | (12,299 | ) | (12,090 | ) | (8,819 | ) | ||||||
| Free Cash Flow | $ | (51,928 | ) | $ | (11,898 | ) | $ | (26,909 | ) |
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.
We believe that of our significant accounting policies described in Note 2, Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, the critical accounting estimates, assumptions, and judgments that have the most significant impact on our consolidated financial statements are described below.
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Revenue Recognition
Determining whether we are the principal or agent in our revenue transactions requires significant judgment. We consider a range of indicators, including, but not limited to, who is primarily responsible for fulfilling the service, who has economic risk as a result of investing resources in advance of a sale transaction (“inventory risk”), and who has pricing discretion. As we control the performance obligation and are the primary obligor with respect to delivering access to course content for Consumer and Enterprise contracts and have inventory risk through recoupable advances paid to educator partners, we are the principal in such transactions. Conversely, for Degrees, the university partner controls the delivery of their degrees hosted on our platform, and we are the agent in these transactions recognizing only the service fee we receive from the university partner.
Our Degrees services revenue is determined based on a fee percentage applied to the total tuition collected from Degrees students, net of refunds, by the university partner. As a result, the revenue earned by us is dependent upon the number of learners enrolled and the tuition charged by the university partner. This is a form of variable consideration. We estimate the amount of revenue, using an expected value method, that we expect to be entitled to in return for performance of the Degrees services, subject to the assessment of the significant future reversal constraint. These estimates are continually evaluated until such time as the uncertainties are resolved, generally at the time the final term enrollment report is provided by the university partner.
Stock-Based Compensation Expense
We measure and recognize compensation expense for stock-based awards granted to employees, directors, and nonemployees based on the estimated grant date fair value. Stock-based awards include restricted stock units (“RSUs”), stock options, and restricted stock awards as well as stock purchase rights granted to employees under our employee stock purchase plan (“ESPP Rights”).
The fair value of RSUs and restricted stock awards is based on the fair value of our common stock on the grant date. We estimate the fair value of stock options and ESPP Rights using the Black-Scholes option-pricing model, which requires the use of the assumptions described below:
Fair Value of Common Stock— Prior to the IPO, the fair value was determined by our Board of Directors. The Board of Directors considered numerous objective and subjective factors to determine the fair value of the common stock at each meeting in which awards were approved. The factors considered included, but were not limited to: (i) the results of contemporaneous independent third-party valuations of the common stock; (ii) the prices, rights, preferences, and privileges of the redeemable convertible preferred stock relative to the common stock; (iii) the lack of marketability of the common stock; (iv) actual operating and financial results; (v) current business conditions and projections; (vi) the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company, given prevailing market conditions; and (vii) precedent transactions involving the common stock. Subsequent to the IPO, the fair value of Coursera, Inc.’s common stock is determined on the grant date using the common stock's closing price.
Expected Term—The expected term represents the period that our stock-based awards are expected to be outstanding. For option grants considered to be “plain vanilla,” we determine the expected term using the simplified method. The simplified method deems the term to be the average of the time to vesting and the contractual life of the options. For ESPP Rights, the expected term represents the term from the first day of the offering period to the purchase date.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the expected term of the stock option or ESPP Rights.
Expected Volatility—Since we do not have a sufficient trading history of our common stock, the expected volatility is derived from the average historical stock volatilities of several unrelated public companies, within our industry, that we consider to be comparable to our business over a period equivalent to the expected term of the stock option or ESPP Rights.
Dividend Yield—The expected dividend was assumed to be zero as we have never paid dividends and have no current plans to do so.
We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates, which could materially impact our future stock-based compensation expense.
Recent Accounting Pronouncements
Refer to Note 2, Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data”, for a discussion of recent accounting pronouncements.
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