Why Byju's is in trouble? Complete story

It took a while for Byju to release their yearly report, but it's finally out. It wasn't what people were expecting, however.

The company originally projected revenues worth ?4,400 crores.

But in reality, revenues remained flat at around ?2,500 crores, and losses surged to ?4,500 crores, 20 times higher than in FY20.

At this point, you could turn around and ask, "How?"

How did this happen? If the expectation was that Byju's would post a higher top-line figure and better earnings figure, where did it go wrong?

To understand this discrepancy, you must first look at Byju's income streams.

Byju's make money in threeway.

1. Course fee — income made from live tutoring. Session by session
2. Streaming fees — revenue earned when students stream pre-recorded courses
3. Revenue from tablets and SD cards involves offline course materials and tests. The target audience here is typically people from lower-income families who don't have access to high-speed internet.

But here's the thing— Byju's makes most of its money selling hardware—the tablets. So they will contend that they're a product-first company.

And revenue recognition here is rather straightforward. Companies record revenues when they ship a product, or the customer accepts delivery. But Byju's tablet isn't worth all that much without the content inside, and the content can be consumed over several years. So if you recognize the total revenue when the sale is made, it might be misleading, considering the service is rendered over a longer time frame.

What if the customers default or don't pay up or cancel the course after making a down payment? What happens, then?

Should you still recognize all the revenue upfront? Or should you take a less aggressive approach and recognize the revenue over a longer time frame?

Their auditor seems to have taken the more conservative approach, and as a consequence, Byju's has had to defer or postpone recognizing 40% of the revenue for FY21.

But they're also some confusion on the expense side.

Byju has?had a habit of "capitalizing" expenses.

What does that mean?

Well, think of it this way. If you spend a bunch of money marketing your service, you should ideally tally it on the expenses side. Then, deduct it from the top line and calculate earnings. But occasionally, you could argue that these marketing spends create long-term benefits, and the value accrues to you over time. And if you could support it with evidence, you could treat some of this expense as an intangible asset. An asset that creates long-term value.

And if you do that, you could cut down your marketing expense and redistribute it across multiple years, which would translate to?a material profit improvement for the current year. However, this practice is generally shunned, and auditors are wary of capitalizing on such expenses.

But some companies do it nonetheless.

For instance, "In March 2020, Byju's total salary expenses were about Rs 900 crore. But the company transferred Rs 526 crore of this expense as intangible assets to the balance sheet and eventually recorded only Rs 420 crore as expense in the profit and loss account. More than 60% of the expense was capitalized."

This year, Deloitte hasn't let the company capitalize on a large part of its expense, and it's safe to say this probably has impacted the bottom line.

But that's only just the tip of the iceberg.

Byju has many other issues.

For instance, there were rumors about a possible listing a while ago. The company had plans to go public in the US and raise money from investors to legitimize its claim as the world's biggest ed-tech company. The company was expected to go public at a $40 billion valuation. But then, the funding winter arrived. There wasn't enough money going around anymore and investor interest tapered. Byju's probably decided to defer the listing plans, considering the sentiment.

We haven't heard much about the IPO since.

Then, there was the famous $300 million acquisition of WhiteHat Jr just four months into the pandemic. Byju paid a pretty penny for the company. But it seems that the acquisition hasn't worked out all too well. 30% of Byju's losses can be attributable directly to WhiteHat Jr.

That is harsh.

Also, the company's investors seem to be asking more pointed questions.

The company borrowed some $1.2 billion in November by issuing bonds. However, according to a report in the Financial Times, the bonds are now available at a 30% discount (according to data collected last week).

So even the borrowers aren't all that enthused about Byju's prospects.

Bottom line — Byju's has a tough road ahead of it. The complaints aren't going away, and investor skepticism is rising. And the company's financials don't inspire much confidence.

Can the enigmatic founder Byju Raveendran turn the ship around?

Tell your opinion in comment.