No Surprises In 2U's (NASDAQ:TWOU) Q3 Sales Numbers, Gross Margin Improves

Adam Hejl /
2021/11/09 4:45 pm EST
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Online education platform, 2U (NASDAQ:TWOU) reported results in line with analyst expectations in Q3 FY2021 quarter, with revenue up 15.5% year on year to $232.3 million. 2U made a GAAP loss of $60.1 million, down on its loss of $52.5 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) Q3 FY2021 Highlights:

  • Revenue: $232.3 million vs analyst estimates of $232.3 million (in line)
  • EPS (non-GAAP): -$0.23 vs analyst estimates of -$0.25
  • The company reconfirmed revenue guidance for the full year, at $945 million at the midpoint
  • Free cash flow of $25.9 million, up from negative free cash flow of -$27.09 million in previous quarter
  • Gross Margin (GAAP): 72.1%, up from 68.8% same quarter last year

"Our strong third quarter results were led by continued growth in our degree business, including increasing demand for our expanding portfolio of undergraduate offerings," said Christopher "Chip" Paucek, 2U's Co-Founder and Chief Executive Officer.

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 for a long time resisted the change and insisted on providing the courses and degrees in the same way as they did decades ago. This shift was massively accelerated by the Covid pandemic that often made in-person education not possible and further forced institutions into investing in creating digital courses, and that drives demand for software that enables them to do so.

Sales Growth

As you can see below, 2U's revenue growth has been strong over the last year, growing from quarterly revenue of $201 million, to $232.3 million.

2U Total Revenue

This quarter, 2U's quarterly revenue was once again up 15.5% year on year. But the revenue actually decreased by $4.83 million in Q3, compared to $4.73 million increase in Q2 2021. The management is guiding for the decline in sales to continue in the coming quarter.

Analysts covering the company are expecting the revenues to grow 15.1% over the next twelve months, although estimates are likely to change post earnings.

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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 72.1% in Q3.

2U Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.72 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is around the lower average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market so it is important to track.

Key Takeaways from 2U's Q3 Results

With a market capitalization of $1.98 billion 2U is among smaller companies, but its more than $934.3 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, revenue growth is overall a bit slower these days. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is flat on the results and currently trades at $26.79 per share.

Should you invest in 2U 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.