Online education platform, 2U (NASDAQ:TWOU) missed analysts' expectations in Q2 FY2023, with revenue down 8.02% year on year to $222.1 million. 2U made a GAAP loss of $173.7 million, down from its loss of $62.9 million in the same quarter last year.
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2U (TWOU) Q2 FY2023 Highlights:
- Revenue: $222.1 million vs analyst estimates of $234.2 million (5.15% miss)
- EPS (non-GAAP): -$0.18 vs analyst estimates of -$0.07
- The company reconfirmed revenue guidance for the full year of $990 million at the midpoint
- Free Cash Flow was -$27.2 million, down from $26.3 million in the previous quarter
- Gross Margin (GAAP): 65%, down from 71.3% in the same quarter last year
"2U's platform strategy is thriving and delivering sustainable double-digit margins driven by content velocity, product innovation, marketing effectiveness and operational efficiency," said Christopher "Chip" Paucek, Co-Founder and CEO of 2U.
Originally named 2tor after the founder's dog Tor, 2U (NASDAQ:TWOU) provides software for universities and colleges to deliver online degree programs and courses.
The overwhelming trend of moving work, life and consumption of content online is starting to catch up with the education sector that has until recently stuck to providing courses and degrees in the same way as they did decades ago - in person. The COVID pandemic massively accelerated adoption of online education and has forced institutions to invest in creating digital courses, which drives demand for the software that enables it.
Sales Growth
This quarter, 2U's revenue was down 8.02% year on year, which might disappointment some shareholders.
Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 10.9% over the next 12 months.
The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. 2U's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 65% in Q2.
That means that for every $1 in revenue the company had $0.65 left to spend on developing new products, sales and marketing, and general administrative overhead. 2U's gross margin is poor for a SaaS business and it's deteriorated even further over the last year. This is probably the opposite direction that shareholders would like to see it go.
Key Takeaways from 2U's Q2 Results
With a market capitalization of $355.5 million, 2U is among smaller companies, but its more than $53.3 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.
We struggled to find many strong positives in these results. It was unfortunate that 2U's revenue missed analysts' expectations, free cash flow turned negative and gross margin declined. Overall, this was a mediocre quarter for 2U. The company is down 11.5% on the results and currently trades at $3.78 per share.
2U may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.
The author has no position in any of the stocks mentioned in this report.