The following discussion of Coursera, Inc’s and its subsidiaries’ (“Coursera”, the “Company”, “we”, “us”, or “our”) financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included in Item 1 of Part I of this report, and together with our audited consolidated financial statements and the related notes and the discussions under the heading “Management’s Discussions and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2021 included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 3, 2022.
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements in this report other than statements of historical fact, including statements identified by words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions, are forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
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trends in the higher education market and the market for online education, and expectations for growth in those markets;
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the acceptance, adoption, and growth of online learning and credentialing by businesses, organizations, governments, educational institutions, faculty, learners, employers, accreditors, and state and federal licensing bodies;
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the demand for, and market acceptance of, our platform;
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the potential benefits of our solutions to partners and learners;
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anticipated launch dates of new partner programs;
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our business model;
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our future financial performance, including our expectations regarding our revenue and expenses, and our ability to achieve and maintain future profitability;
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our ability to expand the content and credentialing programs available on our platform and our ability to develop new platform features;
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our ability to manage or sustain our growth and to effectively expand our customer base and operations, including internationally;
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our ability to acquire new partners and expand program offerings with existing partners;
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our ability to acquire prospective learners and to affect or increase learner enrollment and retention;
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our growth strategies, plans, objectives, and goals;
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our ability to compete and the future competitive landscape;
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our ability to attract and retain key employees;
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the scalability of our platform and operations;
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our ability to develop and protect our brand;
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the increased expenses, including regulatory compliance costs, associated with being a public company;
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the size of our addressable markets, market share, and market trends;
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the affordability and convenience of our platform;
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the effect of COVID-19 on our business and operations, including the demand for online learning following the COVID-19 pandemic;
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our ability to obtain, maintain, protect, and enforce our intellectual property and proprietary rights and successfully defend against claims of infringement, misappropriation, or other violations of third-party intellectual property;
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the availability of capital to grow our business;
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our ability to successfully defend any future litigation brought against us;
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our ability to implement, maintain, and improve effective internal controls;
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potential changes in laws and regulations applicable to us or our partners and our partners’ ability to comply therewith; and
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the amount of time for which we expect our cash balances and other available financial resources to be sufficient to fund our operations.
In addition, any statements contained herein that are not statements of historical facts are deemed to be forward-looking statements. These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this report and are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our forward-looking statements. These risks and uncertainties include, but are not limited to, those risks discussed in Part II, Item 1A “Risk Factors” of this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We qualify all of the forward-looking statements in this report by these cautionary statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.
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 in 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 250 leading global university and industry partners to create and distribute content that is modular, stackable, flexible, and affordable. As of March 31, 2022, approximately 102 million learners are registered on our platform to engage with a wide range of offerings from Guided Projects to bachelor’s and master’s degree programs.
Coursera serves learners in their homes, through their employers, through their colleges and universities, and through government-sponsored programs. We provide a broad range of learning offerings: Guided Projects, Specializations, courses, certificates, degrees, and postgraduate diplomas. Our go-to-market strategy centers on efficiently attracting learners to our platform and connecting them to 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 three months ended March 31, 2022 and 2021, we generated a net loss of $38.3 million and $18.7 million, respectively, which included stock-based compensation expense of $22.0 million and $5.3 million, respectively, and a net loss margin as a percentage of revenue of 32% and 21%, respectively.
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.
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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, and that continuing to source in-demand content and credentials from our educator partners-from courses to degrees-will be an important factor in attracting free and paid customers 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, 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.
Impact of mix shift over time-Our mix of business amongst our Consumer, Enterprise, and Degrees channels is shifting, and this shift will affect our financial performance. We incur content costs 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. If either our Enterprise or Degrees revenue grow faster than our Consumer revenue, which we presently expect, our overall margins will benefit from this shift in revenue mix.
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. 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 and expand our international operations as part of our strategy to grow our customer and learner base, particularly among our Enterprise customers.
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 in additional departments and divisions and increasing 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 investment in growth-We are actively investing in our business to support our future growth and expanding set of offerings. We anticipate that our operating expenses will increase as we continue to build our sales and marketing efforts, expand our employee base, and invest in our technology. The investments we make in our platform are designed to grow our revenue opportunity and to improve our operating results in the long term.
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, generally after a 7-day free trial period. Enterprise subscriptions are generally invoiced in advance in quarterly or annual installments. Access to our platform represents a series of distinct services, as we continually provide access to, and fulfill our obligation to, our customer over the contract term. As a result, revenue is recognized ratably over the contract term.
We are 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.
Degrees revenue is generated from contracts with university partners for the delivery of online bachelor’s and master’s degrees or postgraduate diplomas awarded by the university. We earn a Degrees 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; however, in the
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case of some MasterTrack Certificate offerings, this obligation can be our responsibility. We have a stand ready obligation to perform degree 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. Although some MasterTrack Certificate learners are required to accept our terms and conditions prior to tuition payment, our core performance obligations remain similar to the services provided to university partners for their online bachelor’s and master’s degrees or postgraduate diplomas. For these reasons, the university partners control the delivery of degrees, postgraduate diplomas, and MasterTrack Certificates hosted on our platform. As a result, we recognize Degrees revenue as the service fee we earn from our contracts with university partners.
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, hosting and bandwidth costs, amortization of acquired technology, internal-use software and content assets, customer payment processing fees, allocated 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 are lower for our Enterprise offerings due to a lower effective percentage payable to educator partners compared with sales to Consumer customers. We expect Enterprise and Degrees to become a larger portion of the overall business, and to the extent our mix changes as we expect, content costs will decrease as a percentage of total revenue.
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, bonus, payroll taxes, benefits, and commissions. Our operating expenses also include marketing and advertising expenses, consulting and services expenses, office expenses, depreciation and amortization, and allocated costs of facilities. Although our operating expenses may fluctuate from period to period, we currently expect our operating expenses to increase in absolute dollars over time as we continue to grow the business.
Research and development. Our research and development expenses consist primarily of personnel and personnel-related costs, including stock-based compensation 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 and costs related to learner and partner acquisition, support efforts, and brand marketing. Sales and marketing expenses also consist of hosting and bandwidth costs and support costs related to the provisioning of services to free learners. We expect sales and marketing expenses to increase in absolute dollars as our business grows. In addition, we expect sales and marketing expenses as a percentage of revenue to vary from period to period but 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 and costs related to our legal, finance, and human resources departments, as well as 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.
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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, Net
Other expense, net consists primarily of foreign exchange gains (losses).
Income Tax Expense
Our income tax provision consists primarily of income taxes in certain 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
(1) Includes stock-based compensation expense as follows:
Total stock-based compensation expense $ 21,978 $ 5,284
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The following table summarizes our results of operations as a percentage of revenue for each of the periods indicated:
Comparison of the Three Months Ended March 31, 2022 and 2021
Revenue for the three months ended March 31, 2022 was $120.4 million compared to $88.4 million for the three months ended March 31, 2021. Revenue increased by $32.1 million, or 36%, compared to the three months ended March 31, 2021. The increase in revenue was primarily driven by a 25% increase in registered learners, which resulted in an increase in paying Consumer customers, the addition of 438 Paid Enterprise Customers, and an increase in the number of Degrees Students.
For the three months ended March 31, 2022, total Consumer revenue increased by $16.2 million, or 31%, compared to the three months ended March 31, 2021. The new learners that registered after March 31, 2021 added $31.6 million in revenue to the total revenue of $68.1 million for the three months ended March 31, 2022. The remaining Consumer revenue in the three months ended March 31, 2022 of $36.5 million is attributable to learners that were registered in our platform as of March 31, 2021, thus retaining 70% of the revenue from those registered learners.
For the three months ended March 31, 2022, total Enterprise revenue increased by $14.6 million, or 59%, compared to the three months ended March 31, 2021. Approximately $12.5 million of the increase in revenue was attributable to new customers, and the remaining increase of $2.1 million was attributable to growth from existing customers.
For the three months ended March 31, 2022, total Degrees revenue increased by $1.3 million, or 11%, compared to the three months ended March 31, 2021. The increase in the number of Degrees students added $2.6 million in revenue, which was partially offset by a decrease of $1.3 million attributable to a decrease in revenue per student per quarter.
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Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue for the three months ended March 31, 2022 was $42.8 million compared to $38.8 million for the three months ended March 31, 2021. We experienced an increase in usage by paid learners on our platform which resulted in a $2.1 million cost increase from support services, hosting costs, and credit card processing. There was an increase of $1.2 million in amortization expense mainly related to internal-use software. The increase in revenue combined with improved content costs as a percentage of revenue resulted in a net increase of $0.7 million in costs related to partner fees.
Content costs for the Consumer and Enterprise segments were $19.8 million and $11.1 million, respectively, for the three months ended March 31, 2022 compared to $22.3 million and $7.9 million, respectively, for the three months ended March 31, 2021. Content costs as a percentage of revenue for the Consumer and Enterprise segments were 29% and 28% for the three months ended March 31, 2022, respectively, compared to 43% and 32% for the three months ended March 31, 2021, respectively.
Gross margin was 64% for the three months ended March 31, 2022, compared to 56% for the three months ended March 31, 2021. The increase in gross margin was due to a shift in revenue mix toward Enterprise and Degrees and a lower revenue content cost rate for our Consumer segment revenue.
Total operating expenses for the three months ended March 31, 2022 and 2021 were $114.8 million and $67.9 million, respectively.
Research and development expenses for the three months ended March 31, 2022 were $38.0 million compared to $22.1 million for the three months ended March 31, 2021. The increase was primarily due to higher personnel-related expenses of $13.0 million driven by additional headcount and stock-based compensation expense of $7.7 million. There was also an increase of $1.3 million in consulting fees. Other research and development expenses including recruiting fees, and facilities costs increased by $1.5 million.
Sales and marketing expenses for the three months ended March 31, 2022 were $51.7 million compared to $32.6 million for the three months ended March 31, 2021. The increase in sales and marketing expenses was primarily due to higher personnel-related expenses of $11.7 million driven by additional headcount and stock-based compensation expense of $4.9 million. Marketing and advertising expenses increased by $6.0 million. Other increases in sales and marketing expenses including general overhead expenses, office expenses, and an increase in recruiting fees of $1.3 million.
General and administrative expenses for the three months ended March 31, 2022 were $25.2 million compared to $13.1 million for the three months ended March 31, 2021. The increase in general and administrative expenses was primarily due to higher personnel-related expenses of $7.4 million driven by additional headcount and stock-based compensation expense of $3.6 million. We recognized an impairment loss of $1.9 million relating to deferred partner fees associated with content from Russian educator partners that we do not expect to recover. Insurance expense increased by $1.3 million. Other general and administrative expenses including consulting and services expenses, office expenses, recruiting fees, and facilities costs increased by $1.4 million.
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Total other income (expense) for the three months ended March 31, 2022 and 2021 primarily reflected interest income earned on invested cash balances offset by net foreign exchange losses. Interest income was higher during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to an increase in investments in marketable securities. Other expense, net was higher during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to unfavorable foreign exchange rates.
Income tax expense for three months ended March 31, 2022 and 2021 was $1.0 million and $0.4 million, respectively, primarily related to foreign taxes.
Liquidity and Capital Resources
Overview
Since our inception, we have financed our operations primarily through proceeds from our redeemable convertible preferred stock issuances, as well as from cash generated from our business operations. In April 2021, we received cash proceeds of $525.3 million from our initial public offering (“IPO”), net of underwriting discounts and commissions, but before deducting other offering expenses. As of March 31, 2022, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $780.4 million. Our investments consist of U.S. government Treasury bills.
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
Except as discussed in Note 11, Leases, and Note 12, Commitments and Contingencies, in the notes to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, there were no material changes outside of the ordinary course of business in our commitments and contractual obligations for the three months ended March 31, 2022 from the commitments and contractual obligations in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, set forth in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 3, 2022.
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The following table summarizes our cash flows for the periods indicated:
Cash used in operating activities mainly consists of our net loss adjusted for certain non-cash items, including stock-based compensation 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.
For the three months ended March 31, 2022, net cash used in operating activities was $38.3 million, primarily consisting of our net loss of $38.3 million, adjusted for non-cash charges of $28.8 million and net cash outflows of $28.8 million used in changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were a $20.0 million increase in accounts receivables due to timing of invoicing for Enterprise and Degrees customers, a $11.5 million increase in prepaid expenses and other assets due to the timing of license subscription renewals and advertising services, a $6.7 million decrease in accounts payable and accrued expenses due to timing of payments, a $1.8 million decrease in accrued compensation and other liabilities due to payout of accrued compensation, offset by $11.5 million increase in deferred revenue, resulting primarily from our Enterprise business growth.
For the three months ended March 31, 2021, net cash used in operating activities was $4.3 million, primarily consisting of our net loss of $18.7 million, adjusted for non-cash charges of $8.5 million and net cash inflows of $5.8 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were a $8.1 million increase in deferred revenue, resulting primarily from our Consumer business growth, a $5.0 million decrease in accounts receivable due to timing of invoicing and cash receipts from Enterprise customers, partially offset by a $4.3 million decrease in accrued compensation and other liabilities resulting primarily from payout of accrued compensation, and a $3.0 million decrease in accounts payable and accrued expenses due to timing of vendor payments.
Cash used in operating activities decreased by $33.9 million during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to timing of invoicing and cash collections as well as timing of license subscription renewals and advertising services.
Investing Activities
For the three months ended March 31, 2022, net cash used in investing activities was $185.1 million, primarily as a result of purchases of marketable securities and capital expenditures to develop internal-use software.
For the three months ended March 31, 2021, net cash provided by investing activities was $78.0 million, primarily as a result of proceeds from maturities of marketable securities, offset by capital expenditures to develop internal-use software.
Financing Activities
For the three months ended March 31, 2022, net cash provided by financing activities was $4.0 million, primarily as a result of proceeds from issuance of common stock following employee stock option exercises, offset by employee payroll taxes paid for vesting of restricted stock units.
For the three months ended March 31, 2021, net cash provided by financing activities was $4.5 million, primarily as a result of proceeds from issuance of common stock following employee stock option exercises, partially offset by payments of deferred offering costs related to our IPO.
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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.
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 indicator of the growth of our business and future revenue trends.
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.
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 three months ended March 31, 2022, approximately 87% 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.
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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 109% as of March 31, 2022 from 113% as of March 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.
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 only apply 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.
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Consumer segment gross margin increased to 71% in the three months ended March 31, 2022 from 57% in the three months ended March 31, 2021 due to a greater proportion of Consumer revenue generated from sales of subscriptions with no associated content cost. Enterprise segment gross margin increased to 72% from 68% when comparing to the prior year due to a higher proportion of Enterprise revenue generated from subscription licenses where learners enrolled in content with no associated content cost.
Non-GAAP Financial Measures
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 the impact of stock-based compensation 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.
Payroll tax expense related to
Payroll tax expense related to
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 budget 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, net; (3) stock-based compensation; (4) income tax expense; and (5) payroll tax expense related to stock-based activities. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue.
The following table provides a reconciliation of net loss, the most directly comparable GAAP financial measure, to Adjusted EBITDA.
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“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.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these unaudited condensed 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.
There have been no material changes to our critical accounting policies and estimates as compared to those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 3, 2022.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding recently issued accounting pronouncements.
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We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of certain accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our unaudited condensed consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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