2U (NASDAQ:TWOU) Reports Q3 In Line With Expectations But Gross Margin Drops

Radek Strnad /
2022/11/07 4:09 pm EST

Online education platform, 2U (NASDAQ:TWOU) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue flat year on year at $232.2 million. On the other hand, guidance for the full year slightly missed analyst expectations with revenues guided to $960 million at the midpoint, or 0.25% below analyst estimates. 2U made a GAAP loss of $121.6 million, down on its loss of $60.1 million, in the same quarter last year.

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2U (TWOU) Q3 FY2022 Highlights:

  • Revenue: $232.2 million vs analyst estimates of $232 million (small beat)
  • EPS (non-GAAP): -$0.05 vs analyst estimates of -$0.03
  • Free cash flow was negative $33.6 million, down from positive free cash flow of $25.2 million in previous quarter
  • Gross Margin (GAAP): 65.5%, down from 72.1% same quarter last year

"We completed our strategic realignment and accelerated 2U's transition to a platform company under the edX platform during the quarter," said 2U Co-Founder and CEO Christopher "Chip" Paucek.

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

As you can see below, 2U's revenue growth has been mediocre over the last two years, growing from quarterly revenue of $201 million in Q3 FY2020, to $232.2 million.

2U Total Revenue

This quarter 2U's revenue was flat year on year, before the earnings results were announced Wall St analysts covering the company were estimating revenues to decline 0.72% over the next twelve months.

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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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 65.5% in Q3.

2U Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.65 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.

Key Takeaways from 2U's Q3 Results

With a market capitalization of $461 million 2U is among smaller companies, but its more than $170.1 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

We struggled to find many strong positives in these results. On the other hand, revenue growth stalled and gross margin deteriorated. Overall, this quarter's results were not the best we've seen from 2U. The company is up 1.88% on the results and currently trades at $6.5 per share.

2U may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.