11565

2U's (NASDAQ:TWOU) Posts Q4 Sales In Line With Estimates, Growth To Accelerate Next Year


Anthony Lee /
2023/02/02 4:16 pm EST
Add to Watchlist

Online education platform, 2U (NASDAQ:TWOU) reported results in line with analyst expectations in Q4 FY2022 quarter, with revenue down 3.1% year on year to $236 million. Guidance for the full year was also close to analyst expectations with revenues guided to $990 million at the midpoint. 2U made a GAAP loss of $11.8 million, improving on its loss of $67.2 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) Q4 FY2022 Highlights:

  • Revenue: $236 million vs analyst estimates of $234.7 million (small beat)
  • EPS (non-GAAP): $0.23 vs analyst estimates of $0.21 (12.1% beat)
  • Management's revenue guidance for upcoming financial year 2023 is $990 million at the midpoint, in line with analyst expectations and predicting 2.79% growth (vs 1.89% in FY2022)
  • Free cash flow of $9.39 million, up from negative free cash flow of $33.6 million in previous quarter
  • Gross Margin (GAAP): 64%, down from 71.8% same quarter last year

"Platforms are the future of education and we are becoming increasingly confident in our platform strategy," 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 two years, growing from quarterly revenue of $215.2 million in Q4 FY2020, to $236 million.

2U Total Revenue

But this quarter 2U's revenue was down 3.1% year on year, which might be a disappointment to some shareholders.

For the upcoming financial year management expects revenue to be $990 million at the midpoint, growing 2.79% compared to 1.83% increase in FY2022.

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 64% in Q4.

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 Q4 Results

With a market capitalization of $730.7 million 2U is among smaller companies, but its more than $167.5 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 were impressed that 2U guided for revenue growth to accelerate next year. That feature of these results really stood out as a positive. On the other hand, revenue growth is still quite weak and gross margin deteriorated. Overall, this quarter's results could have been better. The company is up 0.5% on the results and currently trades at $9.9 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.