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Pluralsight IPO | S-1 Breakdown

By 

Alex Clayton

Apr 23, 2018

Company Overview

Pluralsight, the leading provider of a cloud-based technology skill development platform, filed for a $100M IPO. The company plans to trade on the Nasdaq under the ticker “PS” and Morgan Stanley is leading the IPO. Pluralsight is the 9th SaaS or B2B software company to file this year behind DocuSign, Carbon Black, Smartsheet, Pivotal, Dropbox, Zscaler, Zuora, and Ceridian. Pluralsight states they’re an “enterprise software company committed to closing the global technology skills gap”. The company offers a learning and development platform with a focus on IT generally and offers subscriptions to content that is created by their network of over 1,350 authors. The company identifies subject matter experts and offers their independent author network revenue-share agreements on the content. Since 2013, Pluralsight has added an average of 80+ new courses every month with an average of 230+ new hours of video per month. In aggregate they have over 6,500 on-demand and online courses. Pluralsight sells subscriptions to both individuals and enterprises for access to the content and had ~15K business customers and ~700K total users as of the end of 2017. Pluralsight was founded in 2004 but in 2011 shifted their business model from offering in-person training to an entirely cloud-based delivery model. The company has 825 FTEs (full-time-employees) and is based in Farmington, UT.

Company Timeline Output

Source: S-1

Summary Metrics and GTM

The company did $166.8M in revenue in CY’17, up 27% YoY from $131.8M and accelerated revenue growth from the prior year from 22% YoY. They don’t break out subscription vs. professional services/other revenue since almost all the revenue is subscription-based. The company ended 2017 at $189.6M of implied ARR (quarterly subscription revenue * 4), up 38% YoY. While Pluralsight has been increasing growth, losses are expanding — the company had a (31)% non-GAAP operating margin in 2017, which is down from a (0)% non-GAAP margin in 2016. Their GAAP operating margin was (50%) in 2017. Pluralsight actually had a 2% free cash flow margin in 2015, but has increased spend over the past few years (in what appears to be for growth and more enterprise customers) and in 2017 had a (12)% free cash flow margin. Below are other relevant stats from the S-1;

  • Pluralsight had 695,000 users across 150 countries and 14,463 business customers at the end of 2017.
  • Business customers represented 82% of total billings in Q4'17, which is up from 75% the year before. The average implied ACV for a business customer was $10,704 for Q4'17.
  • Dollar-based net retention rate for the year ended Dec-2017 was 117%.
  • For the year ended Dec-2017, ~26% of revenue was derived from self-serve subscriptions without any direct interaction with their sales team.
  • 65% of revenue was generated from customers in the United States in 2017.
  • As of Dec-2017, Pluralsight had 270 employees in their technology and content organization.
  • Of the over 1,350 authors, 750+ have produced more than one course, and over 550 authors have produced a course in 2017.
  • The number of authors on Pluralsight’s platform has increased from 100+ as of Dec-2012 to over 1,350 as of Dec-2017. Since 2012 the company has expanded their course library by a 32% CAGR.
  • On average, from the day Pluralsight decides to create a course, they can identify and sign a new author who meets specifications in ~65 days and that author can publish a new course on the platform within ~120 days.
  • Of surveyed Pluralsight users, 84% reported that they used the skills they learn on the platform within 6 weeks and 55% report that they used their new skills within one week.
  • According to a 2015 survey, 80% of Pluralsight users report using Pluralsight during work, 88% outside of work hours, and 25% during commute and travel times. Moreover, 86% of skill development managers have seen more positive ROI with Pluralsight compared to other online offerings.

Pluralsight sells subscriptions to business customers primarily through their direct sales team and website, and also sell subscriptions to individual customers through self-serve. They offer free trials too. Subscriptions to the product for business customers generally range from 1 to 3 years, with the majority being 1 year. The company recently began offering subscriptions for more than a year. Subscriptions for individuals range from 1 month to 1 year. 45% of billings from individuals for 2017 were derived from annual subscriptions, so while part of the business is self-serve / individuals, almost half pay annually.

They offer 3 subscription tiers; Individual, Professional, and Enterprise, which vary by features. Pricing ranges from $499 — $699 per user/year for business subscriptions and individual subscriptions range from $29-$299 per user/year. Assuming the 695,000 users the company cites are all paying, their average user pays ~$272 per user/year (implied ARR / total users).

Featured Offerings

Source: S-1

Product

Pluralsight’s product offers a wide range of tools and is powered by “Iris”, which is their proprietary machine-learning skill assessment algorithm and recommendation engine. While the solution is focused on technical subject matter, it can be used by anyone and they offer a wide range of courses from beginner to advanced skill levels. The product is used to train software developers, IT professionals, data scientists, data engineers, technical engineers, business users, and tech executives. There are four main pillars of the product;

  • Skill Assessments: Their assessment tool uses machine learning and algorithms to measure a user’s skills, benchmark that user against others in the industry, and recommend courses. It can provide an assessment with 20 questions in under 10 minutes.
  • Course Library: Their course library includes over 6,500 on-demand and online courses across a range of technology subject areas, including cloud, mobile, security, IT, and data. Pluralsight has built their exclusive course library primarily by engaging subject matter experts in revenue share agreements.
  • Learning Paths: Based on either an assessment or a user’s goals, their learning paths are curated to take users through a set of courses designed to help master a particular subject area.
  • Business Analytics: The analytics product suite helps companies track and evaluate progress, look at trends and quantify the impact of Pluralsight for their business.
Source: S-1

Market Opportunity

Pluralsight cites $359B is spent on corporate training and initiatives, according to Training Industry. While the majority of the spend is in person and on legacy solutions, they believe the market will move towards their online-focused model. Evans Data Corporation estimates there are over 102M members of technical teams globally, and Pluralsight derives a $24B TAM number that is addressable to them based on their current and expected opportunity.

Competition

Pluralsight’s learning and development market is large but highly fragmented across many different offerngs from not only in-person models, but also from free content available online. The company states they compete in 4 segments 1) instructor-led training vendors like Global Knowledge, General Assembly (which was just acquired for $413M by Adecco) and New Horizons 2) legacy e-learning services from Skillsoft and Cornerstone OnDemand 3) individual-focused e-learning services like LinkedIn Learning, Udemy and Udacity and 4) free services like YouTube.

Investors and Ownership

According to Pitchbook, the company has raised $238.4M to date from investors including Insight, ICONIQ, Sorenson, Felicis, and others. 5%+ pre-offering VC shareholders include Insight (46.1%) and ICONIQ (8.1%). Aaron Skonnard, CEO and co-founder, is at a 13.4% pre-offering stake. The company raised their last large round of $135M from Insight on Aug-2014 at a $1B post-money valuation, according to Pitchbook.

Financials and other Metrics Outputs

Pluralsight has been accelerating their growth but losses are expanding significantly. Their implied ARR grew 38% YoY in Q4'17, up from 30% in Q3'17 and 18% in Q2'17. Billings grew 55% YoY in Q4'17. With that said, the company is really spending to increase growth; for example from Q4'16 → Q4'17, billings increased by 1.6x and sales and marketing increased 2.2x. Billings from business customers increased 2.4x though.

The focus has clearly been to move further up market and gain more business customers, which have larger ACVs and presumably much lower churn. While they don’t break out quarterly revenue from businesses or individuals, assuming the same percentage of billings, their average ACV for a business customer has grown 1.4x from Q1'16 and was $10.7K last quarter. Dollar-based net retention was 117% in 2017 but they don’t disclose any churn figures. It would have been nice to see retention, particularly broken out by individual and business customers. It will be interesting what the company targets for a long-term gross margin given GAAP gross margin has stayed at ~70% for the past 8 quarters and they need to pay authors for their content. Pluralsight has also acquired 8 other businesses in their company history. Outputs of other financials and metrics are below.

Annual Historical P&L & Metrics (000's)

Source: S-1

Quarterly Revenue ($M)

Source: S-1

Quarterly Billings and % Business Customers ($M)

Source: S-1

Implied Ending ARR ($M)

Pluralsight has recently accelerated their ARR growth and has increased their YoY ARR growth 3 quarters in a row. The company has added $52.5M of net new ARR over the past year.

Source: S-1

Ending Customers and Average Business Customer ACV (Annual Contract Value)

Pluralsight has almost 15K business customers and assuming the same percentage of ARR as billings from business customers, we can derive an average ACV for business customers (they don’t disclose total customers). The average ACV is increasing while net new logos have stayed relatively flat for each of the past 4 quarters, more evidence of the company focusing on larger deals.

Source: S-1

Billings Mix — Business Customers vs Individuals

Pluralsight is moving their billings towards enterprise customers.

Source: S-1

Billings Year-over-year Growth Rates

Clearly the business customers are driving the growth in the business. See the chart below which has the YoY growth rates for each segment.

Source: S-1

Non-GAAP Operating Expense % of Revenue

Pluralsight has been significantly increasing their spend on sales and marketing relative to other operating expenses. See the various OpEx line items as a percentage of revenue.

Source: S-1

GAAP Margins

As expected, operating and net income margins have come down significantly with the increased investments in growth.

Source: S-1

CAC (Customer Acquisition Cost) and Payback Periods

Given they disclose a quarterly business customer count, we can derive a CAC and an implied payback period. While they only disclose business customers, the below is overly punitive but the trend is probably in line.

Source: S-1

Fortune 500 Billings

Pluralsight has 300 of the 2017 Fortune 500 as customers and they have been expanding their spend over time. The company states “billings from our business customers that were included in the 2017 Fortune 500 list, including new 2017 Fortune 500 customers that we acquired after 2013, increased in the aggregate by 9.1 times from the billings we generated from those same companies in 2013.”

Source: S-1

Cohorts Disclosure

Pluralsight discloses billings from business customers in historical cohorts. The expansion is impressive and billings from business customers for the 2013 cohort, 2014 cohort, 2015 cohort, and 2016 cohort in 2017 represent an increase over each cohort’s initial aggregate billings by 2.8x, 2.0x, 1.5x, and 1.1x, respectively.

Source: S-1

Annual Cash Flows (000's)

Source: S-1

Quarterly P&L / Metrics (000's)

Source: S-1

Valuation

Pluralsight is most likely to be valued on a forward revenue multiple like other high-growth SaaS companies that are unprofitable. The table below uses NTM (next-twelve-months) revenue as a proxy using a range of growth rates. Unlike some other high-growth SaaS companies at IPO, Pluralsight is actually increasing their YoY revenue growth quarter-over-quarter, so while they grew revenue 27% in 2017, revenue grew 38% in Q4'17 YoY. The table also has an ARR multiple range based on current high-growth SaaS companies.

Note: Enterprise value ranges and growth rates are illustrative

Pluralsight is an impressive business and yet another example of a SaaS company selling into the enterprise but also having a significant self-serve, freemium business for individuals that helps feed the top of the funnel for the enterprise segment. The market for training is massive and it’s certainly moving towards a Pluralsight model (cloud-based self-serve content rather than in-person training) and their focus on IT broadly is also a fast-growing and strategic market segment. With that said, the company’s operating margins have decreased materially since they focused more on growth and they’re low on cash with $28.5M. The public markets will certainly want to see a plan for continued growth and improving margins over time. It will be exciting to watch them trade and congrats to the Pluralsight team on building a great company.

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