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2U (NASDAQ:TWOU) Reports Sales Below Analyst Estimates In Q4 Earnings, Stock Drops 19.5%


Full Report / February 12, 2024

Online education platform, 2U (NASDAQ:TWOU) fell short of analysts' expectations in Q4 FY2023, with revenue up 8.3% year on year to $255.7 million. Next quarter's revenue guidance of $196.5 million also underwhelmed, coming in 5.7% below analysts' estimates. It made a non-GAAP profit of $0.48 per share, improving from its profit of $0.23 per share in the same quarter last year.

2U (TWOU) Q4 FY2023 Highlights:

  • Revenue: $255.7 million vs analyst estimates of $281.4 million (9.2% miss)
  • EPS (non-GAAP): $0.48 vs analyst expectations of $0.64 (24.7% miss)
  • Revenue Guidance for Q1 2024 is $196.5 million at the midpoint, below analyst estimates of $208.4 million
  • Management's revenue guidance for the upcoming financial year 2024 is $810 million at the midpoint, missing analyst estimates by 7% and implying -14.4% growth (vs -1.7% in FY2023)
  • Free Cash Flow of $12.4 million is up from -$30.35 million in the previous quarter
  • Gross Margin (GAAP): 77.6%, up from 71.2% in the same quarter last year
  • Market Capitalization: $65.2 million

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.

There is a growing demand for online courses; however, the poor completion rate of online classes shows that creating a successful online course is hard and requires more effort than just uploading a recording of the lecture online.

While universities are experts in teaching, they struggle to create engaging online courses. As the COVID pandemic makes it difficult for students to learn on-campus, there is a need for platforms that make it possible to replicate the offline learning experience.

2U provides schools with software as a service that helps them create online courses that are engaging and successful with students. The cloud-based software works as an operating system that the whole course runs on and includes all the user-facing technology for students to engage with their courses and behind the scenes infrastructure to host and administer engaging video content.

Using the software, schools can create instructor-led live classes, track student engagement and learning outcomes, and also provide a social network to connect students and other faculty. 2U also offers expert services to train universities on how to create engaging classes and insights on courses that are most likely to perform well.

Courses are available on the web and mobile platforms, which means they can be accessed from any location at all times. 2U generates revenue by taking a cut from tuition paid by students to schools. While it started by enabling some of the world’s top universities such as UC Berkeley and Yale to offer degree programs, it has since expanded into delivering boot camps, short courses, and professional programs to people trying to advance their careers.

Education Software

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.

Competitors in the online learning space include Stride (NYSE:LRN), Adtalem Global Education (NYSE:ATGE), Arco Platform (NASDAQ:ARCE), Strategic Education (NASDAQ:STRA), and schools that develop their online courses in-house.

Sales Growth

As you can see below, 2U's revenue growth has been unimpressive over the last two years, growing from $243.6 million in Q4 FY2021 to $255.7 million this quarter.

2U Total Revenue

2U's quarterly revenue was only up 8.3% year on year, which might disappoint some shareholders. However, we can see that the company's revenue grew by $25.96 million quarter on quarter, re-accelerating from $7.61 million in Q3 2023.

Next quarter, 2U is guiding for a 17.6% year-on-year revenue decline to $196.5 million, a further deceleration from the 5.9% year-on-year decrease it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $810 million at the midpoint, declining 14.4% year on year compared to 1.8% drop in FY2023.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 77.6% in Q4.

2U Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.78 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, 2U's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. 2U's free cash flow came in at $12.4 million in Q4, turning positive over the last year.

2U Free Cash Flow

2U has burned through $41.89 million of cash over the last 12 months, resulting in a negative 4.9% free cash flow margin. This low FCF margin stems from 2U's poor unit economics or a constant need to reinvest in its business to stay competitive.

Key Takeaways from 2U's Q4 Results

We were impressed by 2U's strong gross margin improvement this quarter. That stood out as a positive in these results. On the other hand, its revenue missed analysts' expectations, driven by poor performance in its Degree Program and Alternative Credentials segments. Furthermore, its full-year 2024 revenue and EBITDA guidance were below expectations, suggesting a slowdown in demand. Lastly, on January 3rd, Andrew Hermalyn was appointed President of the Degree Program segment and Aaron McCullough was appointed President of the Alternative Credential segment. Overall, this was a mediocre quarter for 2U. The company is down 19.5% on the results and currently trades at $0.74 per share.

Is Now The Time?

When considering an investment in 2U, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for everyone who's making the lives of others easier through technology, but in case of 2U, we'll be cheering from the sidelines. Its , and analysts don't see anything changing. And while its strong gross margins suggest it can operate profitably and sustainably, unfortunately, its growth is coming at a cost of significant cash burn.

Wall Street analysts covering the company had a one-year price target of $3.78 per share right before these results (compared to the current share price of $0.74).

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