What Happened:
Shares of online education platform, 2U (NASDAQ:TWOU) fell 42.8% in the morning session after the company reported fourth-quarter results with revenue falling below analysts' expectations, driven by poor performance in its Degree Program and Alternative Credentials segments. Notably, the company called out "lower enrollments in coding boot camp offerings." Looking ahead, its full-year 2024 revenue and EBITDA guidance were below expectations, suggesting a slowdown in demand. In light of the recent performance, the company made some leadership changes. On January 3, 2024, 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.
Following the results, Needham downgraded the stock's rating from Buy to Hold. The firm highlighted " concerns over 2U's ability to manage its substantial debt obligations in light of its recent performance." This is a more dire situation than just poor performance, as high debt levels amid declines in performance could lead to eventual bankruptcy if the ship is not righted. The stock is certainly trading like it is reflecting this major risk.
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What is the market telling us:
2U's shares are very volatile and over the last year have had 90 moves greater than 5%. But moves this big are very rare even for 2U and that is indicating to us that this news had a significant impact on the market's perception of the business.
The biggest move we wrote about over the last year was 3 months ago, when the stock dropped 14.7% on the news that the company reported third quarter results and provided full-year revenue guidance that missed analysts' expectations. Management said its coding boot camps and some of its higher-priced degree programs did not perform well due to lower demand. As a result, 2U is planning to exit some of these programs with its partners. This puts a dent in one of the bull cases for 2U as a facilitator and beneficiary of demand for STEM education products. 2U also announced plans to improve its liquidity and financial position in the coming months to shore up its balance sheet. Specifically, 2U said it is in talks with noteholders to refinance some of its debt. It also expects to receive over $100m in payments from institutions buying back their programs. Lastly, the company announced a 12% headcount reduction in Q3'23, resulting in an expected annualized cost savings of $55 million. In terms of new product launches, 2U announced it will create 80 new degree programs in 2024, which are expected to add $120 million in incremental annual revenue once ramped. While the future initiatives may be tailwinds, it was a disappointing quarter for 2U, highlighting several challenges.
2U is down 59.3% since the beginning of the year, and at $0.48 per share it is trading 95.7% below its 52-week high of $11.13 from February 2023. Investors who bought $1,000 worth of 2U's shares 5 years ago would now be looking at an investment worth $7.24.
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