IDP Education

IDP Education is a business with a strengthening competitive advantage that we added last year during COVID-19. In this article, we explore the emerging characteristics of its business model that present potential upside for investors as well as some of the potential issues that we continue to assess.

IDP is a major player in the international education market with two distinct businesses. It operates a student placement platform that places students from around the world into key education institutions in predominantly Australia, UK, Canada and the USA. It is also the distributor of the IELTS test which is the gold standard high stakes English language test for students and immigrants around the world.

While these are separate businesses, the two naturally fit together to provide a full-service offering for international students and combine to give IDP the reputation of one the most highly respected institutions in International education. In this article, we will focus predominantly on the student placement business.

We believe IDP’s student placement business is evolving into a platform with the potential for marketplace network effects. As we have discussed in a previous article, not all network effects are the same, so we explore the attributes that are applicable to IDP.

Local Network Effects Vs Cross Border

Network effects can be local or cross-border. A classic example is the micro-network of Uber vs the globalised network of Airbnb. Analysts of network effects rightly point out that Uber’s local network effect is more at risk of competition from local competitors. Whereas Airbnb can create more value over time as the network effect is much more difficult to replicate at scale across borders.

This is not to say this is always the case. Realestate.com.au has captured extraordinary value through the national network effect advantage it enjoys. This is largely due to other strengths including differentiated supply and a vendor pays market structure.

IDP’s business has evolved over time. Originally, it was much more of a pipeline business that serviced students predominantly from India and China who wanted to study in Australia. However, in the past 6 years since IPO, management has grown its multi-destination offering, with a broader demand side (students from more countries) and a broader supply-side (wider breadth of education institutions in different countries).

This multi-destination shift has helped reduce the impact of COVID-19. The impact of closed Australian borders has been offset by other destinations that are opening back up.

Having a more diverse student base increases the attractiveness of IDP’s platform to universities. Similarly, having a wider breadth of choice of institutions increases the likelihood that a student will find an institution that meets their needs.

While this network effect is attractive, it is not irreplicable as universities are motivated to deal with multiple providers, or risk IDP aggregating too much bargaining power. Therefore we need to look further into the supply side.

Commoditized Supply?

Network effects are stronger when the supply-side is not commoditised. Using our Uber/AirBNB comparison, Uber drivers are commoditised. A rider does not value one driver over another, they are more concerned about the number of drivers vs who they are.

Airbnb on the other hand has differentiated supply, where each individual dwelling is unique and traveller preferences are diverse. Therefore there is value in the number of options as well as what the options are. It is much more difficult for competitors to gain scale of differentiated supply.

IDP’s supply side appears to be differentiated. Students care about which universities they can get into. They value quality, ranking, on-campus experience and the country among other things. While this bodes well for the company’s business model, the number of institutions listed is not so large that its offering is hard to replicate.

Canadian company Applyboard is aggregating demand through smaller agents and is actively growing its connected institutions. Its offering will give smaller agents the breadth of choice that can compete with IDP.

IDP however, will continue to differentiate its offering for both students and Institutions. Having an integrated agent model gives it advantages because it controls the end-to-end student experience and can better work with institutions to promote their value proposition.

Student Experience

• Integrated counsellor model: This allows IDP to better serve students through the journey. It matches students with counsellors to help with course selection, application advice, host events, manage visas, migration services and access student essentials such as health cover, accommodation and banking.
• Student content: They have a broad range of material to help students understand their decisions. IDP’s expertise can also improve the chances of a student being accepted into their school of choice.
• Hotcourses is also a point of differentiation: IDP acquired Hotcourses in 2017. As the leader in digital education search, Hotcourses allows IDP to engage with students much earlier in the study journey making it the number one place to go to search for international education. Being the top of the funnel, IDP can harvest leads before competing agents, allowing it to take market share.

University Experience

• Data analytics: Having a large scale student placement business opens up the opportunity for data analytics. IDP can provide universities with valuable data insights on the market. These include student preferences by country, course demand and competing offerings.
• Student population demographics: Creating a more bespoke service for universities, IDP’s scale will allow it to help universities solve diversity requirements by allowing them to tailor their recruitment criteria to attract the most desired student population mix.
• University listings products: Advertising on IDP’s digital properties can provide universities with a cost-effective method of communicating their value proposition to students who are actively searching for international study. Similar to REA’s premium listing products.

In Combination, IDP’s platform has the potential to introduce a dynamic take rate to Universities willing to pay more for more prominent marketing to students and diversity of student intakes.

Attractive Revenue Model

Business models where the supply side is paying for the service provided to the demand side (decision maker) are attractive. This is because it creates less friction and less price sensitivity.

IDP’s student placement business follows a similar revenue model. It takes a percentage of the students first-year tuition, paid by the university as a commission. This means that there is little friction for a student’s decision to use an agent as it does not cost them anything. The university is willing to pay the fee as it is a relatively cheap cost of customer acquisition. It also reduces the student management burden on the university.

Other company’s with this revenue model attribute include Afterpay, Xero and Realestate.com.au. This feature can also be widely found in Healthcare where the doctor and patient interaction is funded by an insurer after the event.

What About COVID-19?

COVID-19 has severely affected the entire industry as borders around the world closed, disrupting students’ ability to travel. We do not have an edge on predicting when new normal materialises, however, we are less concerned given:

1. There is evidence of a recovery.

• IELTS english language tests are recovering.
• UK remains open to international students and accommodative.
• Canada has signalled its intentions to reopen.

2. Student surveys indicate demand remains strong.

3. Government appetite for immigration is increasing in order to return to growth.

• UK recommitted to 600k target by 2030.
• Canada targeting 400k new migrants pa through to 2023.
• Australia to release new international education strategy in FY22.

A Quality Franchise

When assessing a quality franchise we look at all aspects of a business. This article has focused on some of the more attractive attributes of IDP’s business model. While the strength of any network effects are unclear for IDP, its “top of funnel” digital marketing model combined with its full service agent offering is driving meaningful market share gains.

Finding unique attributes such as network effects and a strong revenue model can be a source of sustainably higher returns on capital that the market is unwilling to pay for, delivering a strong source of alpha.

The article has been prepared by ECP Asset Management Pty Ltd (ECP). ECP is a funds management firm based in Sydney, Australia. For further information, visit www.ecpam.com. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial advice. ECP and the analyst own shares in IDP Education. ABN 26 158 827 582, AFSL 421704, CAR 44198.