October 21, 2021: Last week, D2L Desire2Learn filed its preliminary prospectus as it filed to list on the TSX Index.  This week, the company filed an amendment in which it announce preliminary pricing details. Desire2Learn aims to raise $200M by issuing between 9,523,810 and 10,526,316 Subordinate Voting Shares. The shares expected to be priced between $19-21 per share and will trade under the symbol "DTOL". 

Desire2Learn will be the second online learning platform to go public in 2021. The other one was Thinkific (TSX:THNC) which has been relatively flat since it IPO'ed back in April. 

Assuming an offering price of $20.00, D2L will have 27,948,978 Subordinate Voting Shares and 27,390,588 Multiple Voting Shares if the over-allotment option is exercised in full. This would value D2L at $1.11 billion.

We know that online learning is booming and was accelerated by the pandemic. We now find ourselves in the midst of new working and learning environments and platforms such as D2L will be key to leading this transformation. Complete side bar - when I (Mat) did my MBA a number of years ago, D2L was our learning platform and the University still uses the platform today. 

Which is a nice segway into the company's customer pace. In Fiscal 2021, D2L grew its customer bas by 33% and has managed a 107% net retention rate - a feat it also managed in 2019 and 2020. Maintaining a rate above 100% is a good sign as it means that retention rates are high and customers are adopting new products. It doesn't mean that 100% of customers are back, but is likely a mix of high customer retention + expanded services/products to existing customers. The ARR Expansion by Cohort helps explain this. 

The company is already one of the more established in the space (founded in 1999 and transitioned to cloud in 2002), so its growth isn't as flashy as some of the competition. However, it is maintaining double growth in an industry that is "is expected to more than triple from $13.6 billion in 2019 to $43.0 billion by 2025, a CAGR of 21%."

The company's approach to growth is pretty standard. This includes expanding the customer base, expanding ARR per customer through new products/services and expanding its own platform. It is also seeking further international expansion and currently, approximately 20% of revenue comes from outside of North America.

The last and unproven area for growth is what the company deems "Market Convergence". This is the bridge between education and the workforce and the upskilling/reskilling through micro degrees and credentialing. They are early stages in this area and continue to determine where or not it will generate significant revenue. 

The company's revenue mix includes higher education (60%), corporate (20%) and K-12 (20%) and has managed to grow revenue at a 20% clip over the last twelve months - 89% which is recurring. 

 Over the last twelve months (period ending July 31, 2021) ,the company has booked $138M in revenue which is a 21% increase over the same period a year ago. It also achieved positive EBITDA of $2M vs a loss previously and generated $8M in free cash flow. Once again, this compares to negative FCF last year. The company is showing increasing rates of return and has set the following mid-term targets through 2025. 

Assuming the company can achieve these targets, it is looking at forward revenue of ~$144M and adjusted EBITDA of $7.2M if it can reach the low end of EBITDA Margin targets next year. That gives it a valuation of 7.6 times forward sales and 152 times EBITDA. We aren't so concerned with EBITDA here as the company is generating some pretty strong free cash flow margins. 

In comparison, companies like Docebo (TSX:DCBO) and Thinkific are trading at ~29x and ~25x forward sales and neither are generating positive EBITDA. This is where judgement will have to come into play. Both of those companies are growing at a much faster clip than D2L so an argument can be made that they deserve to trade at a premium.

On the flip side, D2L's profitability and FCF are certainly standouts and is thus a more defensive play in the industry. It is still not without risk, but paying under 8x forward sales for a profitable company growing at a 20-25% clip is quite respectable. I'm expecting the company to price at the higher end of expectations here.