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2U (NASDAQ:TWOU) Reports Sales Below Analyst Estimates In Q2 Earnings


Radek Strnad /
2022/07/28 4:09 pm EDT
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Online education platform, 2U (NASDAQ:TWOU) fell short of analyst expectations in Q2 FY2022 quarter, with revenue up 1.79% year on year to $241.4 million. 2U made a GAAP loss of $62.8 million, down on its loss of $21.8 million, in the same quarter last year.

Is now the time to buy 2U? Access our full analysis of the earnings results here, it's free.

2U (TWOU) Q2 FY2022 Highlights:

  • Revenue: $241.4 million vs analyst estimates of $254.2 million (5.03% miss)
  • EPS (non-GAAP): -$0.10 vs analyst estimates of -$0.17
  • The company dropped revenue guidance for the full year, from $1.07 billion to $960 million at the midpoint, a 10.2% decrease
  • Free cash flow of $25.2 million, up from negative free cash flow of $1.83 million in previous quarter
  • Gross Margin (GAAP): 65.7%, down from 70.6% same quarter last year

"We are taking significant action to accelerate 2U's transition to a platform company under the edX brand and unify our product and marketing strategy to create the world's leading free-to-degree online learning marketplace," 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 unremarkable over the last year, growing from quarterly revenue of $237.2 million, to $241.4 million.

2U Total Revenue

2U's quarterly revenue was only up 1.79% year on year, which would likely disappoint many shareholders. But the revenue actually decreased by $11.8 million in Q2, compared to $9.7 million increase in Q1 2022.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 15.2% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. 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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 65.7% in Q2.

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. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Key Takeaways from 2U's Q2 Results

With a market capitalization of $774.5 million 2U is among smaller companies, but its more than $220.8 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

It was good to see 2U improve their gross margin this quarter. That feature of these results really stood out as a positive.  On the other hand, it was unfortunate to see that 2U's revenue guidance for the full year missed analysts' expectations and its revenue this quarter also missed analysts' expectations. Overall, this quarter's results could have been better. The company is down 3.18% on the results and currently trades at $10.02 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.

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 70% 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.