Pluralsight’s S-1 Shows Growing Revenue, Expanding Growth Bets, Widening Losses

Today, subscription-based online technology learning provider Pluralsight filed to go public. The news comes on the heels of coding school General Assembly’s $413 million sale, notably, making the online learning space two for two today.

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The Pluralsight S-1 is not a surprise. It has been known for some weeks that the company, which specializes in corporate-scale continuing-education, intended to go public.

Pluralsight’s S-1 document lists a $100 million placeholder figure for its potential IPO fundraise. The company which calls itself a “technology learning platform” is low on cash, has high operating losses, and nine-figure, largely-recurring revenue.

In its private life, Pluralsight raised over $190 million. Let’s explore its operating results, prod its SaaS-ish metrics, and figure out where it stands.

Expensive Growth

Pluralsight recorded 2015 revenue of $108.4 million, $131.8 million in 2016, and $166.8 million in 2017. Those gains work out to year-over-year growth rates of 21.6 percent and 26.5 percent. So, the company has managed to accelerate its growth pace recently from a higher revenue base.

That would normally be quite encouraging, but Pluralsight paid for the growth quite dearly. Indeed, the company’s net loss (disregarding accretion of non-cash costs relating to Series A shares) ballooned from $20.6 million in 2016 to $96.5 million in 2017. Inclusive of “accretion of Series A redeemable convertible preferred units” the company’s net loss grew from a higher $26.9 million in 2016 to a simply staggering $160.3 million in 2017.

Regardless of which set of numbers you decide to trust (the less-tragic are probably ok as they are closer to the firm’s operating loss metrics), the company’s lack of profitability greatly expanded in 2017, the same year that it managed to re-ignite growth.

And it’s not hard to find the connection between the two. Indeed, Pluralsight more than doubled its sales and marketing spend from 2016 ($51.2 million) to 2017 ($103.5 million). Notably, that massive gain was not triggered by a surge in share-based compensation for the sales team. In 2017, Pluralsight spent just $2.6 million in “equity-based compensation” in its sales and marketing line item.

Pluralsight is a business that sells subscriptions. That tells us that it will often expend cash to buy recurring revenue, something that isn’t a sin. It’s perfectly fine for a SaaS or SaaS-ish company to spend cash up front to bring in new customer cohorts that then expand over time.

Quarterly Results

For the sake of the numbers kids out there, here’s the firm’s recent quarterly results:

As you can see, the company is spending around three times as much on sales and marketing as it was, with only around 50 percent more revenue on deck, looking from the first quarter listed to the last. And the company’s pace of net losses has indeed dramatically risen in just the last few quarters.

Yeesh, perhaps. But, again, that’s up to investors.

Dollar-Based Net Retention Rate (Kinda)

Being a company that wants to talk about cohorts and the like, Pluralsight reports its dollar-based net retention rate, which is a fun way of saying “how big our customers grow over time.” It helps investors understand how quickly $1 in new revenue will expand over time.

That growth, of course, is why SaaS works; buy a customer today that pays you $1 per year, and next year that customer is worth $1.15, and $1.32 the year after. If you have a 115 percent yearly dollar-based net retention rate, that is. (You can run the math with various compounding rates, which is a good exercise if you want to better understand why SaaS is supposed to work!)

It’s a simple enough concept until companies yank stuff out of their dollar-based net retention rates, making them look better than they really are. So, let’s peek at how Pluralsight defines its own, and then we can better understand its costs. If the company’s dollar-based net retention rate is strong, and not full of shit, then its huge sales and marketing spend in 2017 is more reasonable. If the company is being tricky with the digits, we can scowl a bit.

Here’s the S-1 riff:

Our dollar-based net retention rate compares our subscription revenue from the same set of customers across comparable periods. We calculate our dollar-based net retention rate on a trailing four-quarter basis. To calculate our dollar-based net retention rate, we first calculate the subscription revenue in one quarter from a cohort of customers that were customers at the beginning of the same quarter in the prior fiscal year, or cohort customers. We repeat this calculation for each quarter in the trailing four-quarter period. The numerator for dollar-based net retention rate is the sum of subscription revenue from cohort customers for the four most recent quarters, or numerator period, and the denominator is the sum of subscription revenue from cohort customers for the four quarters preceding the numerator period. Dollar-based net retention rate is the quotient obtained by dividing the numerator by the denominator. Our dollar-based net retention rate for the year ended December 31, 2017 was 117%.

At first blush, 117 percent sounds quite good. For every dollar of recurring revenue that Pluralsight buys through its sales and marketing process, it will generate $1.17 the next year. Taking out customers that churn, it seems. If we’re reading the above correctly, it seems that Pluralsight is being a bit generous with its math.

But all this will fall to investors to decide. If public-market investors decide that Pluralsight is not being profligate in its pursuit of growth, the Utah-based company could do just fine in its debut. But, if those same investors deem its growth a bit pricey, the company could find its flotation a bit choppy.

For us, here’s another IPO looking to cook. Let’s see what it does next.