Did Byju's bite off more than it could chew?

Byju Raveendran, the founder and CEO of India’s highest valued start-up Byju’s, will be relieved that the past six months are behind him and his company. In an interview he gave to Business Standard after revealing his company’s FY21 financials, Raveendran said that now, the company was prepared. Asserting that this kind of thing happens only once, he said the edtech giant was strengthening the finance function and would hire a global CFO soon. 

Raveendran also said the company is now prepared not only for the next year but also to live the life of a public company, whenever it decides to cross that bridge. 

However, the FY21 financials don’t paint a pretty picture. The company’s operational revenue on a consolidated basis grew just 4% year-on-year to Rs 2,280 crore. And the losses jumped 20 times, to Rs 4,589 crore. BYJU’s FY20 loss was adjusted to Rs 232 crore.

But why have the company’s revenues remained flat despite Raveendran claiming significant business growth during the fiscal? This was due to a new revenue recognition practice adopted in FY21. This change was sought by its audit firm Deloitte Haskins and Sells. 

BYJU’s started recognising streaming revenue over the period of consumption, which was previously recognised fully on the commencement of the contract. Credit and EMI sales will also get recognised after complete collection. This meant that revenue from sales made under deferred payment terms totalling 1,156 crore rupees was not recognised because, according to the auditor, “BYJU’s did not meet the criteria that it was probable it will collect the consideration to which it is entitled”. 

Deloitte further highlighted difficulties in the auditing process. Under normal circumstances, the fee paid to Deloitte for statutory audit would have grown from 73 lakh rupees in FY20 to 1 crore rupees. 

However, Deloitte said it charged Rs 3.5 crore extra as statutory audit fees because of “the additional effort incurred in the audit consequent to material weaknesses observed in internal controls” 

Owing to the pandemic, the auditor said BYJU’s faced hardships not only in terms of business operations but also in implementation and operating effectiveness of certain internal controls over financial reporting. 

As BYJU’s diverted its effort toward integrating and streamlining the operations of the various entities it acquired post the end of the financial year, it resulted in delays in the preparation of the financial statements for FY21. 

As a consequence, BYJU’s could not comply with certain provisions of the Companies Act. Ultimately though, it received a clean audit report from Deloitte, notwithstanding the complexities involved in reworking the numbers based on the new revenue recognition model.

It’s interesting to note that the share of India in BYJU’s total revenue went down from 73% to 43%. Meanwhile, Middle East’s share jumped from 11% to 22% and US’s share increased from 16% to 35%. 

WhiteHat Jr, which the startup acquired in August 2020, has played spoilsport in BYJU’s financials. Raveendran said bringing down high customer acquisition costs at WhiteHat Jr is the only business challenge he has. From the date of acquisition, Whitehat Jr has contributed just Rs 326.66 crore to total revenue of BYJU’s but Rs 1,548 crore to the loss before tax from operations.

Shriram Subramanian, Founder and MD, InGovern Research Services says embedding of processes has not kept pace with BYJU’s break-neck speed of growth. Evidence suggests that the worst is not behind for BYJU’s. Reputational hit will make raising money more tough amid difficult funding environment.

The string of bad news that has followed Byju’s has also had an impact on the brand.

Christopher Roberts, Founder & Managing Director, Engaged Strategy, says negative word of mouth from customers, employees damaging Byju's brand. The worst is not behind for BYJU’s if it does not change aggressive sales strategy. BYJU’s needs to take frontline staff on board regarding policies and processes

Citing unaudited data, BYJU’s said its sales for FY22 grew more than four-fold to almost Rs 10,000 crore. In the ongoing fiscal, it said revenue is expected to increase more than 50% after clocking an income of 4,500 crore rupees in the first four months. But the reputational damage has already been done. If BYJU’s is not able to bring in the right internal processes and remedy the mounting criticism from customers, the worst is definitely not behind it.