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2U's (NASDAQ:TWOU) Posts Q1 Sales In Line With Estimates


Kayode Omotosho /
2022/05/05 4:08 pm EDT
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Online education platform, 2U (NASDAQ:TWOU) reported results in line with analyst expectations in Q1 FY2022 quarter, with revenue up 8.97% year on year to $253.3 million. On the other hand, guidance for the full year missed analyst expectations with revenues guided to $1.07 billion at the midpoint, in line with analyst estimates. 2U made a GAAP loss of $125.7 million, down on its loss of $45.5 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) Q1 FY2022 Highlights:

  • Revenue: $253.3 million vs analyst estimates of $252.9 million (small beat)
  • EPS (non-GAAP): -$0.24 vs analyst estimates of -$0.26
  • The company reconfirmed revenue guidance for the full year, at $1.07 billion at the midpoint
  • Free cash flow was negative $1.83 million, compared to negative free cash flow of $19.3 million in previous quarter
  • Gross Margin (GAAP): 64.2%, down from 71.4% same quarter last year

"Today, 2U's mission is not just about showing it's possible to create high-quality online programs at scale, but also increasing access to high-quality education for everyone, everywhere, at every stage of life," said Christopher "Chip" Paucek, Co-Founder and CEO of 2U. "As we transition to a platform company under the edX brand, our partnerships help make institutions sustainable and help individuals unlock the livelihoods they want now and in the future.

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 year, growing from quarterly revenue of $232.4 million, to $253.3 million.

2U Total Revenue

2U's quarterly revenue was only up 8.97% year on year. The growth did slow down a little compared to last quarter, as 2U increased revenue by $9.7 million in Q1, compared to $11.2 million revenue add in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 14.1% over the next twelve months.

There are others doing even better than 2U. Founded by ex-Google engineers, a small company making software for banks has been growing revenue 90% year on year and is already up more than 150% since the IPO last December. 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 64.2% in Q1.

2U Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.64 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 Q1 Results

With a market capitalization of $784.5 million 2U is among smaller companies, but its more than $216.6 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.

This was an ok quarter for 2U, in line with estimates. The company is flat on the results and currently trades at $9.35 per share. The company is flat on the results and currently trades at $9.35 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.