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Schrole: The job marketplace for international teachers (SCL.AU)

Updated: Nov 14, 2020

Schrole Group (ASX:SCL) is a provider of SaaS recruitment technology for the global education market. Schrole’s current offerings include an international schools recruiting platform (ISS-Schrole Advantage), background screening technology (Schrole Verify), a platform for filling temporary teaching roles (Schrole Cover) and a training and development business (Schrole ETAS).


Market Structure

Schrole is a specialized recruiting platform for international teachers. The two sides on the Schrole platform are international schools (demand) and teachers (supply). Schrole’s main competition consists of countless headhunters and agencies specializing on recruiting teachers, school websites advertising for jobs and another vertical platform. Schrole’s value proposition to schools relative to incumbents runs along the following lines:

  1. Better access and visibility into a far larger candidate pool

  2. More streamlined and comprehensive hiring processes, including background screening services (Schrole Verify)

  3. Annual platform subscription fee per school of $10,000 AUD is far cheaper than existing offerings (typically at least $4,000 AUD per hire), particularly for larger schools

Candidates on the other hand pay a $110 AUD annual fee to see job listings from a far greater number of schools than they would have seen from a headhunter.


Schrole is shifting the job market for international teachers from an opaque system driven by headhunters’ personal connections to a transparent marketplace where demand and supply are aggregated and both sides have full visibility. While Schrole currently only has about 3.5% of international schools signed up as customers, they have the opportunity to become the leading platform in this narrow and fragmented vertical over the next two years. At their current fee rate to schools and candidates, I estimate a narrow TAM of roughly 110 million AUD. However, this ignores the potential for further services and entering additional verticals.


Its largest competitor is Searchassociates who works with about 750 schools (6.9% market share). While Searchassociates currently has more schools signed up, Schrole's offering has a more robust set of features and is cheaper for schools that recruit more than three teachers per annum (most schools). Searchassociates charges an initial fee of around $3,000 AUD plus $3,000 AUD per candidate hired).


The ISS-Schrole JV

In early 2018 Schrole launched a 50/50 JV with International Schools Services (ISS). ISS was created as a not-for profit organization dedicated to assisting international and American schools around the world. ISS is very well-known among international schools and host two annual job fairs for international teachers. By entering into a JV with ISS, Schrole was able bring over 400 schools onto its platform.

While the ISS-Schrole JV led to a meaningful jump in both schools and users, growth has begun stalling out as Schrole converted the majority of ISS core customer base. To continue its growth momentum, Schrole began looking for additional partners.


The Faria Deal

In Faria, Schrole has found one such partner to bring about the next stage of growth. Faria is an online education platform that powers curriculum planning, student applications, extra-curricular management and payments for international schools. Faria currently has over 3,000 international school customers (and another 8,000 US domestic schools) who subscribe to their software solutions. As there are only about 11,000 international schools in total the Faria deal gives Schrole the opportunity to bring over a quarter of the international school market onto its platform.


If Schrole is able to reach this size, it will be difficult for other aggregators to reach Schrole’s scale and replicate the broad selection of candidates and schools on Schrole’s platform. At that point I would expect Schrole to continue gaining market share due to the flywheel effects that kick in between supply and demand when online marketplaces gain scale.


The screenshot is taken from Faria’s website shows the offerings they currently provide to schools. Upon completion of the integration (expected by end of October 2020) Schrole Advantage will show up as Faria’s teacher recruitment module on their front page, enabling an easy cross-sell to Faria’s school client base. The Schrole Faria partnership is highly complementary as Faria' software offering is focused on students (teaching, admissions, tuition) whereas Schrole's is focused on teachers (recruiting, background screening, professional development).

A single-sign on integration has already been completed. Faria users can log into Schrole without creating a new account and seamlessly move between Faria and Schrole offerings. Schrole Advantage and Schrole Verify will also be marketed to schools alongside Faria’s other products in their marketing campaigns.


To ensure alignment, Faria has bought a 19.9% stake in Schrole through the placement of a $2.9 million AUD at-the-money convertible note. After the first 12 months of the partnership Faria will also receive a revenue share that is “commensurate with Faria’s role as an app store provider”. While exact details around this arrangement have not yet been released I assume this means somewhere between 15-30% of revenues originated through the Faria partnership. Given that Faria will introduce 3,000 more potential international school customers to Schrole, it is not difficult to see how the Faria deal can help power both very high growth rates and meaningful operating leverage for several years to come.

As the Faria partnership's app store-like take rate was incompatible with the ISS-Schrole JV’s 50/50 revenue sharing agreement, Schrole is winding down the ISS JV by June 2022. While Schrole was able to benefit from ISS’ strong brand in the international school space in the past, the partnership no longer offers further growth prospects or benefits commensurate with its costs. Faria is simply the better partner going forward.


I don’t expect large customer attrition when the JV winds down in June 2022 as ISS does not have a comparable platform offering to Schrole. For those schools that remain with Schrole, they will be recapturing the sales margin that was previously shared with ISS.


Other businesses: Cover and ETAS

Schrole’s other two business are Schrole Cover and Schrole ETAS. Cover is an app that allows schools to quickly find temp teachers to cover for staff when they call in sick last minute. Cover’s client base is made up entirely of Australian schools as the value proposition here is really finding a temp teacher ASAP which requires very high local density.


Schrole ETAS provides customised accredited training solutions to clients. The ETAS business is bringing in about $1 million AUD in annual revenue, has been growing at a decent clip and contributing to the bottom line. The Cover business is difficult to expand beyond Australia (and management currently has no plans of doing so) and ETAS does not have the attractive platform economics of ISS-Schrole Advantage and Verify. Management is therefore rightfully focused on bringing Advantage to its full potential and building an ecosystem around it.


Beyond 2020

Schrole fits Andreesen Horowitz's description of a Deep Job Platform very closely.




Looking at Schrole's current offering, it already fulfills the following functions described in the left hand chart: Job Matching and Discovery (Advantage), Training (ETAS), Vetting (Verify) and Community (Bi-Annual Job Conferences). However, there is room for further deepening of its product offering.


Schrole has meaningful opportunities to expand its product offering beyond Advantage, Verify, Cover and ETAS. Staff onboarding and offboarding, as well as further staff management modules represent further opportunities for Schrole to expand into. Streamlining these workflows is value additive for schools as it reduced their administrative burden and differentiates Schrole from pure job boards and headhunters.

Two additional untapped areas of growth for Schrole consist of insurance and training: Schrole could act as an originator for travel and professional liability insurance once a candidate has found a job at an international school. In return it would receive an origination fee from a partner insurance company.


The larger opportunity lies in building out a marketplace for continuing education and skill enhancement. While Schrole already does some of this inhouse via ETAs, it could integrate third-party professional development providers into its platform. Coming from a family of educators, I can assure you that continuing education and skill enhancement training sessions are central to the life of a teacher. They are used both as a getaway from the everyday travails of the job, as well as a means of differentiation versus other job candidates. By allowing credentialing from third-party providers on its platform, Schrole would integrate itself deeper into the teaching ecosystem and give teachers another way to use the Schrole platform to differentiate themselves. Schrole could eventually turn this into an opportunity for new revenue streams by building out a second platform focused on continuing education for teachers.


Valuation

When Schrole initiated its partnership with ISS, they achieved almost complete penetration of the ISS core client base within two years. With the new Faria partnership Schrole could start signing several hundred new schools per year. Assuming a sign-on rate of 500 new school customers per year over the next 3 years Schrole would have a total of 1,900 of international school customers signed onto its platform by year 3 (implying roughly 50% penetration of the Faria client base by Year 3). At $10,000 AUD per school that would mean $19 million in annual recurring revenue.


Add in another $600,000 AUD in revenue from premium candidates each paying $110 AUD (historically the ratio of premium candidates/schools has been around 3.3 to 1) and $1-2 million in revenues from Verify, ETAS and Cover and Schrole could be making well north of $21 million in total revenues by 2023 mainly driven by growth from the Faria deal. A 5x revenue multiple on $21 million of sales should be justifiable, likely even conservative for a quickly-growing SaaS business that is also the leader in its specialty recruiting niche. With a $30 million AUD market cap ($32.9 million after accounting for the Faria convertible) Schrole is still meaningfully undervalued relative to its newly improved growth prospects. At 5x 2023 sales of $21 million the market cap would be $105 million AUD.

While Schrole could be cashflow breakeven as early as this year, the bulk of operating leverage will start kicking in after the termination of the ISS-JV in 2022. It is a little early to make concrete projections (the exact fee split with Faria is not even disclosed yet) but given their current cost structure Schrole is a business that could be capable of producing 30-40% operating margins post the ISS JV.


Note the above estimates don’t give Schrole any credit for pricing increases or further product offerings. At this point they’re really just meant to be rough estimates of what Schrole could look like in the future based on unit economics. If Schrole was a US business it would probably be a startup somewhere between its Series B and Series C round. The business is very fast moving and making accurate operating projections for a 3 year period is extremely difficult, as such the above should be seen as at best an attempt at illustrating the longer-term potential of the business.


I believe investors have an opportunity here precisely because non US markets for startups are less competitive and because public market investors tend to have more of a 'show me first' attitude as opposed to US VC investors who will happily value a business today based on the percentage of TAM it can unlock five years from now.


While there are still lots of risks and unknowns, the Faria deal has turned Schrole largely into an execution story. The market is likely to only slowly give Schrole credit as it converts Faria's customer base but that is fine with me. There is upside optionality both from introducing additional product categories such as insurance and continuing education, as well as additional partnerships like the Faria partnership.


Risks

The high dependency on Faria, their largest customer acquisition channel, is the primary risk factor here. They are a 19.9% shareholder and are clearly interested in Schrole. So far they have shown themselves to be fair partners.

In addition, international schools may have limited interest in conversations about recruitment for the duration of pandemic. This is reflected in Q2 numbers which saw the first drop in school subscribers (-9, down from 397). Any multi-year growth projections clearly embed an inherent assumption that the pandemic is controlled and international schools eventually return to a pre-pandemic business as usual state.


Disclosure: Long Schrole

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