Note to management: throw out the $1b bogey; it’s not helping you, and your math is wrong
Holy capoly. We wanted to leave this one well alone. Like your mother yelling at you as a kid when you tried to touch a dead raccoon lying in the gutter. ‘Leave it alone, don’t touch it, it’s dead’. But some smart fans of HedgeyeTech urged us to take another look…
First on the math…to get from Pluralsight's current 924k B2B user base to the projected 2.75m user base by year end 2022 implies an acceleration from ~34% y/y in 2Q19 (41% in 4Q18) to ~37% CAGR over the next 3.5 years, not a deceleration to 31% as the CFO claims. C'mon James, you are the CFO. Also, both 4Q18 and 2Q19 have this in common: PS added exactly 235k B2B Users year over year, and at this rate PS will get to 1.75m by the end of 2022 barring a significant acceleration in the rate of B2B Users growth. So…is this a layup? A foregone conclusion? Nope.
Now onto the rest…if you see the slide above it says it all: $200m of geographic expansion against the ~$141m of Billings from International geographies in 2019 implies a 34% International CAGR. Can they do it? Maybe. But content may have to be created in new languages or with different authors to trigger growth in new geographies and companies internationally may prefer to pay via consumption models. The forecast implies that 3 additional years of growth internationally will more than double the existing footprint. Exciting? Maybe. But that’s not a forecast to stand up in front of investors and seems completely wishful from this side.
If you back out Gitprime’s 100% CAGR through 2022, International at 34%, and B2C @3%, you are left with core domestic B2B implied CAGR of 43% growth which bakes in the creation of a $50m consulting business and a ~$250m cloud and SI business. Without the creation of the consulting and Cloud/SI business, the global B2B is forecast at ~22%, implying about 5% price CAGR (already built into contracts) and ~16-17% adoption rates. We think that is plausible but that removes about ~$300m of billings. There is one other critical and embarrassing math error in the analyst day slides...but we'd rather tell you in person ( for those who must know).
Net - if the CFO is telling his organization they can organically hit $1b in billings, he will support them with a ~$750m cost structure to reach the stated 22%+ OPM%...but if our math gets organic growth to $700-800m...where are the profits? OOPS. AND, with Author payouts coming down from 15% to 11-12% but revenue growth decelerating...when do Authors begin to pushback on the PS model?
Where this leaves us
We see fair value in the ~$12-25 zone based on a range of optimistic and realistic outcomes on 2022. And this is what keeps us on the Short Bench. We would recommend to interested Longs to wait until numbers are reset and expectations for 2020-2022 growth have been relinquished. People should be thinking mid-teens adoption/content/engagement growth plus a 5% annual price kicker in Enterprise, plus GitPrime, plus B2C. Pluralsight will need some serious M&A to get anywhere near the $1b target.
We do it differently here.
Ami Joseph
Managing Director
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