Last evening, Byju’s, the world’s most valuable edtech startup, released its financial statements for the year ended March 2021, after a delay of one- and-half years. This was after months of working with its auditor Deloitte to get a sign-off. In interviews with The Economic Times and Moneycontrol, its co-founder and chief executive officer (CEO) Byju Raveendran said the last six months have been difficult for the company and that he has had sleepless nights as a result of all of the critical media reports that have raised many concerns about the operations of India’s most valuable startup. In June, The Ken first reported that Deloitte had held off from approving Byju’s financial statements over its revenue recognition practices.The year ended March 2021 ought to have been a good year for the Sequoia Capital- and General Atlantic-backed company. It was a year when the pandemic became the tailwind that propelled edtechs. Byju’s has raised US$2.5 billion since the beginning of the pandemic, sending its valuation soaring from US$8 billion to US$22 billion. In this brief period, between 2020 and 2021, its users grew from 64 million to 110 million. But Byju’s revenues had little to show for it. The company’s consolidated revenue from operations grew a mere 4% to Rs 2,280 crore (~US$287 million), while losses ballooned 15X to about Rs 4,500 crore (US$566 million) due to a significant increase in employee-benefit expenses and promotional expenses—Byju’s has been sponsoring India’s cricket team since 2019.(Figures in Rs cr) | i Total income = Revenue from operations + [J Other income {§ Total expenditure FY20 THE KEN Graphic by Ais 1) Cash flow from operations Bi Loss FY21 Rs 1 cr = ~US$125,800 ya V; 14 Sep, '22 Source: Company filingThe financial statements mark a turning point in Byju’s fate as it has been forced to change how it records revenue. The firm, which sells multi-year products, recognised its revenue upfront, which made Byju’s seem bigger than it was. “Revenue recognition is part of CEO training in all global companies,” the founder of a global edtech tells The Ken. “That’s because the CEO and the CFO (chief financial officer) can collude and engage in intellectual dishonesty,” he adds. “It is not blatant fraud because it’s not stolen money or anything of that sort, but it is wrong to represent that view of the revenues of a company to a bunch of people that are not insiders to your industry.” But all that changed this year.Even though Byju’s released its 2021 financial statements, they are yet to appear on the ministry of corporate affairs’ website, where financial statements are made public. The Ken accessed the recent consolidated financial statements through a source to find that it had new sources of revenue, new expenses, new fines, and a new burden. Not everything made it to the top line One of the most notable changes in Byju’s financials for the year ended March 2021 is to do with how it books its revenue. Edutech products—mainly tablets and memory cards—accounted for more than 80% of its revenue in this period. And, as in the previous year, it recorded the entire sale value of these products when the customer bought them.But it took a different approach for the revenue it got from the streaming of educational content. Whatever a learner was charged for the content, it would now be booked through the period they availed of it. So, if the learner paid, say, Rs 10,000 (US$126) for Byju’s content over two years, it would be divided equally between the two years instead of being captured entirely in the first year’s financials. Then there is Byju’s revenue from customers who borrowed to pay for a Byju’s course. This is what happened till the previous year: the customer would make a down payment to Byju’s, and the lender would pay Byju’s the rest after deducting the interest. Byju’s would add this to the finance cost and book the entire revenue. But in the year ended March 2021, it decided to deduct this interest payment from its revenue. These changes to the streaming revenue and interest payments knocked 8% off Byju’s consolidated revenue of Rs 2,380 crore (US$300 million) in the vear ended March 2020.Odd and fami expense i: a new revenue source and a new While this is not surprising, there’s a revenue source that makes an entry in the latest financials.The anomaly Course fee, a sizeable revenue source in FY21, doesn't show up in FY20 % share of revenue sources Streaming , services ‘Streaming services 93 31 Sale of Edtech products Sale of Edtech products FY20 FY21 THE KEN Graphic by Aishwarya V; 14 Sep, '22 Source: Company filinYou can see that “course fee”, which contributed 14% to Byju’s revenue in the year ended March 2021, didn’t exist in the previous year. Even though a quick look at the financials for the year ended March 2020 shows an income of Rs 144 crore (~US$18 million) from “tuition fee”. It’s not clear why Byju’s chose not to include it in the latest statement. So, while the company’s revenue just from streaming services and edutech products may have declined 10% in the year ended March 2021, Byju’s top line from its operations rose 4% after the addition of “course fee”. What's interesting, though, is that Byju’s applied the same rule to course fee as it did to streaming services. The fee is “recognised proportionately based on the number of class [sic] availed vs total number of class [sic] expected to be availed”, Byju’s said.A former business development manager at Byju’s told The Ken that there was often great disparity between the number of classes opted for by students at the beginning and the number of classes they eventually took. “Especially in the live-classes segment, many parents withdrew admissions as the quality expectations they were promised weren't met,” they add. Byju’s rivals Unacademy and Vedantu don’t use this method of recognising revenue.The hard sell Business promotion expenses, up 2.5X, are a third of Byju's total expenses Expenses (in Rs er’) 7,028 —{ Teachers’ fees: —{ Employee benefits ) Cost of edtech products Legal ang professional feos _{ Other admin and [operating expenses 2020 2021 "Rs ter= “US$i26800 GTHE KEN Graphic by Adhithi Priya R, 18 Sep 22 Source: Company ilCourse fee is not the only item that makes a grand appearance in Byju’s latest financials. Byju’s paid its teachers nearly Rs 300 crore (USS37.5 million) —ronghly 3% of its overall expenses. But “teachers’ fee” was not broken out as a separate expense in the previous year. It could be because ‘it was part of employee-benefit expenses if the teachers were full-timers, or captured in miscellaneous expenses if the tutors were not on the company’s ros. Deferment makes the revenue grow dearer ‘The one number that could have made all the difference to Byju’s in the year ended March 2021 is Rs 1,156 crore (~US$145 million). This is the revenue that Byju’s could not book during the period. And this was roughly half its reported revenue, That's because Byiu's said this revenue comes from deferred payment terms, and the company did not meet the criteria to record it that financial year. ‘Raveendran, in an interview with Business Standard, said: “A good part of the FY21 (the year ended March 2021) revenue got deferred on account of revenue recognition changes, across the period of consumption as well as collection. Around 40% of the revenue got deferred. Otherwise, the ‘growth would have been 60.65%. ‘Raveendran also reasoned that along with the revenue that got pushed, the expenses too were already accounted for in the period, resulting in an increase in the loss.But the financial statements show that those expenses only amounted to Rs 109 crore (—USS13.7 million), not enough to make a dent in the Rs 4,564 crore (US$574 million) loss it registered. ‘The company was also vague about what it would take to book this deferred revenue. It said that it would recognise this when it gets all the money or when its deferred payment terms with the customer expire because of defaults, among other reasons If the revenue deferment was a letdown for Byju’s, an even bigger disappointment came in the form of its prized acquisition, WhiteHat.r. WhiteHat Jr or white elephant? WhiteHat Jr, the four-year-old coding-for-kids startup that Byju's acquired in 2020 for US$300 million, is now weighing the company down. From the date of acquisition, WhiteJat has pulled in Rs 327 crore (US$41 million) in revenue, But its losses were 5X that. WhiteHat contributed around a third of Byju’s consolidated losses in the year ended March 2021. One reason is likely its high customer acquisition costs. The Ken reported earlier that WhiteHlat was spending as uruch as US$2,000 to acquire a customer in the US, its second-largest market.WhiteHat may have served the purpose of helping raise Byju's valuation from $12 billion in 2020. But now, with Byju’s looking to pull the plug on the brand, its time may well be coming to a stop, “You gotta pay me more for all the extra hours!” ‘There is such a thing as making an auditor work too hard, Auditors charge based on the amount of work it takes to audit a firm, If the daca is straightforward to reconcile, it may not make a big deal of it. But in the case of Byju's, Deloitte's statutory audit fee included Rs 3.5 crore (USS440,000) to account for “the additional effort incurred in the audit consequent to material weaknesses observed in internal controls” Inall, Byju’s ended up paying Deloitte Rs 5 crore (UUS$0.6 million)—more than 4X of what it had paid in the previous year. Taxing times Its not just the auditor, even the enforcement agency under the ministry of finance, responsible for fighting tax evasion, came after Byju’s in the year ended March 2021, but for the books it supplied between July 2017 10 October 2020—the years when it was a hype machine, It paid a toral goods and services tax of Rs 139 crore (USS17.4 million), which included the tax, the interest, and the penalty. This helped Byiu’s chase inialiaatain the sky As the pandemic gains via online learning began to wear off, the company realised the wind was blowing towards offline learning and made an audacious buy. Of the $2.5 billion it has spent on 13 acquisitions, its biggest buy was when it said it would pay a billion dollars for Aakash Educational Services in a cash-and-stock deal in April 2021. Of the Rs 6,820 crore (USS860 million) it needs to shell out, 70% is in cash, and the rest is via equity. While the equity allotment is done, Byju’s had to pay the owners of Aakash roughly Rs 1,980 crore (US$250 million) in June 2022, This has now been deferred to 23 Seprember 2022. For Aakash, this has caused distress, The delay in payments, funding issues, and other controversies surrounding Byju’s have also slowed down the original expansion plan for centres. A centre head ar Aakash-Byju’s says compared to last year, 50% fewer centres have opened this year. A conscious decision to keep the involvement of Byju's management to a minimum in running the centres has been taken too. “It has also been made clear that Byju’s is not going to interfere in ‘Aakash’s system,” they add.Byju’s own ber at offline teaching—the opening up of Byju’s Tuition Centres for class 4 t0 10 students—has hardly played out the way it had hoped. The edtech company said it expected to open 500 centres across 200 cities by the end of this year. However, hardly 100 centres have opened so far, says a teacher at rival Physieswallah’s offline centre in Kora. Raveendran confidently stated that the financials for the year ended March 2022, which should ideally be filed by the end of Seprember, would see them record an (unaudited) reventie of Rs 10,000 crore (~US$1.2 billion), shored up by all the acquisitions it has made, Raveendran told the media that after the gruelling last six months: “Now the good news is that that's over But it may not be so, In the post-pandemic edtech era, where online learning began fading back into the background and the companies that Byju’s bought line up for their payments, yet another story may play out through the financials, With additional inpue from Anand Kalyanaraman (Lead image credits: Willgard/Pixabay)