Why is 22-billion-dollar ed-tech company Byju's facing a financial crisis?

The financial troubles of ed-tech company Byju’s do not seem to be ending anytime soon. The company valued at approximately $22 billion is defaulting on its payments to lenders. The trouble which started soon after Byju's released its financial statement of FY21 after a 18-month delay in September 2022, has snowballed into a big crisis and has badly affected the company's image.

The company has now refused to make further payments on a $1.2 billion loan after a dispute with the lenders, TLB. According to a report by Bloomberg, the company on June 5 in a statement said that it won’t be paying any further amount and interest to the lender TLB till the dispute is decided by the New York Court, where it has registered the case.

The company had earlier sought to restructure the loans with TLB as its finances took a major hit after online education in India saw decline after the Covid-19 pandemic was over. But the creditors refused to have any sort of negotiations with the company and pressed for accelerated payment from Byju’s.

Founded by former teacher Byju's Raveendran in 2015, the ed-tech company’s finances skyrocketed in the initial years in online education as smartphones and internet penetration increased in India.

However, the company missing deadlines of filing financial statements brought it under the lens of suspicion by lenders as well as agencies in India. 

How Byju’s got into this mess

The company had a very good growth after Covid-19 pandemic as it made several breakthroughs in acquisitions. 

Some of the big investments during this period were: $300 million WhiteHat Jr deal in August 2020, $1 billion acquisition of Aakash Educational Services in January 2021, $150 million deal with Toppr, $2.5 billion investment in buying with Scholr and $600 million acquisition of Singapore headquartered Great Learning.

However, Byju’s business took a hit after two years of phenomenal growth and the effect was seen when it started laying off employees.

It’s E-learning startup Toppr, laid off around 1200 employees in June 2022. Among these 300-350 were permanent employees while another 300 were told to tender resignations.

In October 2022, Economic Times reported that Byju’s might lay off 2,500 employees in a rationalization bid.

However, a Byju's employee who spoke to dailyO, said that layoffs in the company are a routine thing and the company hires the number of people it lays off. Speaking on the condition of anonymity, he said that there is absolutely a high pressure of selling the product to a customer, but that is a norm everywhere. 

Financial troubles begin

When Byju's filed the financial statement of FY21 after a 18 month delay in September 2022, it showed a loss of Rs 4,589 crore. The statement revealed that the company in 2021 saw the revenue fall by 30% to Rs 2,428 crore.

Byju’s was also struggling to pay lender Blackstone Rs 1,983 crore for the Aakash deal it had done in the beginning of 2021.

Auditing firm asks from Byju’s to make changes

Byju's audit firm Deloitte Haskins and Sells sought changes in the company’s finances. First, it wanted a change in the manner of revenue recognition of the company. Secondly, it wanted to change the accounting of interest paid by Byju's to lending partners.

The company said that Byju’s should not recognize a revenue upfront in a subscription and must record it over the period of the contract. For example, if you opt for a software service for two years, at Rs 20,000, which have to be paid yearly, the company cannot record this revenue of Rs 20,000 in the first year only. It must record each of the payments of Rs 10,000 separately over two years.

Recognizing revenue in this manner gives a clear position of the company. However, Byju’s had recorded a significant portion of its subscription revenue in the current year, which had inflated its numbers significantly.

Secondly, Deloitte asked Byju’s to adjust the interest it paid to lending firms under revenue items and not finance. Since, the customers may not be able to pay for the products, Byju’s arranges to finance its customers through lenders. In order to protect the lending partners from losses, Byju’s offers a certain amount of payment to lenders in case of default.

Moreover, it was also observed that an increase in employee cost also has resulted in huge losses for the company. Its employee cost went up from Rs 420 crore in FY20 to 1,943 crore in FY21, a jump of more than 460 percent.

What’s next for Byju’s?

At present, Byju’s top priority would be to make the payment to Blackstone for the Aakash deal as well as settle down its score with TLB lenders in a New York court.

The coming days could be crucial for the ed-tech giant as its product has taken a massive hit and its revenues might also shrink. If that happens, there might be more layoffs in the company.