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Completes Strategic Realignment
Expects to Reduce Annual Operating Expense by $70 Million
Increases 2022 Adjusted EBITDA Guidance
LANHAM, Md., Nov. 7, 2022 /PRNewswire/ — 2U, Inc. (Nasdaq: TWOU), a leading online education platform company, today reported financial and operating results for the quarter ended September 30, 2022.
Results for Third Quarter 2022 compared to Third Quarter 2021
Non-GAAP Results for Third Quarter 2022 compared to Third Quarter 2021
“We completed our strategic realignment and accelerated 2U’s transition to a platform company under the edX platform during the quarter,” said 2U Co-Founder and CEO Christopher “Chip” Paucek. “We realigned our organization around a single platform, streamlined our cost structure and implemented a new, more efficient marketing framework. We believe these structural changes will not only strengthen our bottom line, but also supercharge our ability to match millions of learners with accessible, best-in-class learning experiences from top institutions that help them advance their careers and transform their lives.”
Paul Lalljie, 2U’s Chief Financial Officer, added, “Our third quarter results demonstrate early returns from our platform strategy and execution of our Strategic Realignment Plan. We delivered record adjusted EBITDA of $32.5 million, a 121% increase versus the prior year driven by improvements from both segments. As a result, we are increasing our adjusted EBITDA outlook for 2022 and remain committed to delivering further profitability improvements and positive free cash flow in 2023.”
Discussion of Third Quarter 2022 Results
Revenue for the third quarter totaled $232.2 million, which was flat when compared with $232.4 million in the third quarter of 2021. Total revenue includes $9.3 million from legacy edX offerings. Revenue from the Degree Program Segment decreased $10.6 million, or 7.1%, due to a 5.9% decrease in average revenue per full course equivalent (FCE) enrollment and a decrease in FCE enrollments of 1.3%. Revenue from the Alternative Credential Segment increased $10.4 million, or 12.3%, primarily due to legacy edX offerings and an increase in FCE enrollments of 14.6%, partially offset by an 8.2% decrease in average revenue per FCE enrollment.
Costs and expenses for the third quarter totaled $336.5 million, a 22.0% increase from $275.9 million in the third quarter of 2021. This increase includes $79.5 million of non-cash impairment charges in our Alternative Credential Segment. The company determined that the recent decline in its market capitalization triggered an interim goodwill impairment review, which led to a non-cash write down of certain goodwill assets and indefinite-lived intangible assets. Of note, third quarter expense includes $17.0 million of operating expense related to edX, which was acquired in the fourth quarter of 2021, and a $6.2 million increase in restructuring costs. These increases were partially offset by a $26.5 million decrease in paid marketing costs in connection with the platform strategy and a $10.7 million decrease in personnel and personnel-related expenses primarily relating to the Strategic Realignment Plan.
As of September 30, 2022, the company’s cash, cash equivalents, and restricted cash totaled $185.2 million, a decrease of $64.8 million from $249.9 million as of December 31, 2021. Cash used in operations was $1.4 million, cash used in investing activities was $54.0 million and cash used in financing activities was $4.7 million. Unlevered free cash flow was a use of $1.3 million for the twelve months ended September 30, 2022 and compares with unlevered free cash flow of $11.5 million for the twelve months ended June 30, 2022.
Business Outlook for Fiscal Year 2022
The Company affirmed its revenue guidance provided on July 28, 2022 and updated its guidance for net loss and adjusted EBITDA as follows:
Update on 2022 Strategic Realignment Plan
In connection with our previously announced Strategic Realignment Plan, during the quarter the company i) implemented a portfolio-based marketing framework to drive traffic to the edX marketplace and decreased paid marketing costs by $18.7 million when compared with the second quarter, ii) consolidated its real estate footprint and iii) reduced employee headcount. The company expects to generate approximately $70 million in operating expense savings on a 12-month basis from this plan.
Business Highlights
Non-GAAP Measures
To provide investors and others with additional information regarding 2U’s results, the company has disclosed the following non-GAAP financial measures: adjusted EBITDA (loss), adjusted EBITDA margin, unlevered free cash flow, adjusted net income (loss), and adjusted net income (loss) per share. The company has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. The company defines adjusted EBITDA (loss) as net income or net loss, as applicable, before net interest income (expense), other income (expense), net, taxes, depreciation and amortization expense, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, certain litigation-related costs, consisting of fees for certain non-ordinary course litigation and other proceedings, impairment charges, losses on debt extinguishment, and stock-based compensation expense. The company defines adjusted EBITDA margin as adjusted EBITDA divided by revenue. The company defines unlevered free cash flow as net cash provided by (used in) operating activities, less capital expenditures, payments to university clients, certain non-ordinary cash payments, and cash interest payments on debt. The company defines adjusted net income (loss) as net income or net loss, as applicable, before other income (expense), net, acquisition-related gains or losses, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, certain litigation-related costs, consisting of fees for certain non-ordinary course litigation and other proceedings, impairment charges, losses on debt extinguishment, and stock-based compensation expense. Adjusted net income (loss) per share is calculated as adjusted net income (loss) divided by diluted weighted-average shares of common stock outstanding for periods that result in adjusted net income, and basic weighted-average shares outstanding for periods that result in an adjusted net loss. Some of the adjustments described in the definitions of adjusted EBITDA (loss), unlevered free cash flow, and adjusted net income (loss) may not be applicable in any given reporting period and they may vary from period to period.
The company’s management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, to understand cash that is generated by or available for operational expenses and investment in the business after capital expenditures, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate the company’s financial performance. Management believes these non-GAAP financial measures reflect the company’s ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in the company’s business as they exclude expenses that are not reflective of ongoing operating results. Management also believes that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating the company’s operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.
The use of adjusted EBITDA (loss), unlevered free cash flow, adjusted net income (loss), and adjusted net income (loss) per share measures has certain limitations, as they do not reflect all items of income and expense that affect the company’s operations. The company compensates for these limitations by reconciling the non-GAAP financial measures to the most directly comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP. Further, these non-GAAP measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited. Management encourages investors and others to review the company’s financial information in its entirety and not rely on a single financial measure.
Conference Call Information
What:
2U’s third quarter 2022 financial results conference call
When:
Monday, November 7, 2022
Time:
4:30 p.m. ET
Live Call:
(888) 330-2446
Conference ID #:
1153388
Webcast:
investor.2U.com
About 2U, Inc. (Nasdaq: TWOU)
For more than a decade, 2U, Inc. has been the digital transformation partner of choice to great non-profit colleges and universities delivering high-quality online education at scale. As the parent company of edX, a leading global online learning platform, 2U provides over 46 million learners with access to world-class education in partnership with more than 230 colleges, universities, and corporations. Our people and technology are powering more than 4,000 digital education offerings — from free courses to full degrees — and helping unlock human potential. To learn more: visit 2U.com.
Cautionary Language Concerning Forward-Looking Statements
This press release contains forward-looking statements regarding 2U, Inc.’s future business expectations, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this press release, including statements regarding future results of operations and financial position of 2U, including financial targets, business strategy, and plans and objectives for future operations, are forward-looking statements. 2U has based these forward-looking statements largely on its estimates of its financial results and its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs as of the date of this press release. The company undertakes no obligation to update these statements as a result of new information or future events. These forward-looking statements are subject to a number of risks, uncertainties and assumptions that could cause actual results to differ materially from the results predicted, including, but not limited to:
These and other potential risks and uncertainties that could cause actual results to differ from the results predicted are more fully detailed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, and other SEC filings. Moreover, 2U operates in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for 2U management to predict all risks, nor can 2U assess the impact of all factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements 2U may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this press release may not occur and actual results could differ materially and adversely from those anticipated.
Investor Relations Contact: [email protected]
Media Contact: [email protected]
2U, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
September 30,
2022
December 31,
2021
(unaudited)
Assets
Current assets
Cash and cash equivalents
$ 170,165
$ 232,932
Restricted cash
14,985
16,977
Accounts receivable, net
97,164
67,287
Other receivables, net
31,009
29,439
Prepaid expenses and other assets
81,538
47,217
Total current assets
394,861
393,852
Other receivables, net, non-current
21,007
21,568
Property and equipment, net
45,513
48,650
Right-of-use assets
74,175
76,841
Goodwill
732,586
834,539
Intangible assets, net
569,408
665,523
Other assets, non-current
72,006
68,033
Total assets
$ 1,909,556
$ 2,109,006
Liabilities and stockholders’ equity
Current liabilities
Accounts payable and accrued expenses
$ 133,385
$ 164,723
Deferred revenue
127,597
91,926
Lease liability
13,286
13,985
Accrued restructuring liability
13,551
1,735
Other current liabilities
95,252
61,138
Total current liabilities
383,071
333,507
Long-term debt
928,197
845,316
Deferred tax liabilities, net
359
1,726
Lease liability, non-current
102,221
98,666
Other liabilities, non-current
1,792
636
Total liabilities
1,415,640
1,279,851
Stockholders’ equity
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued
—
—
Common stock, $0.001 par value, 200,000,000 shares authorized, 77,845,436 shares issued
and outstanding as of September 30, 2022; 75,754,663 shares issued and outstanding as
of December 31, 2021
78
76
Additional paid-in capital
1,683,860
1,735,628
Accumulated deficit
(1,168,129)
(890,638)
Accumulated other comprehensive loss
(21,893)
(15,911)
Total stockholders’ equity
493,916
829,155
Total liabilities and stockholders’ equity
$ 1,909,556
$ 2,109,006
2U, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited, in thousands, except share and per share amounts)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022
2021
2022
2021
Revenue
$ 232,238
$ 232,376
$ 727,031
$ 702,058
Costs and expenses
Curriculum and teaching
31,558
30,869
96,933
98,805
Servicing and support
36,110
33,898
112,795
101,947
Technology and content development
43,976
43,106
140,649
128,539
Marketing and sales
94,311
118,300
341,643
346,181
General and administrative
39,388
44,341
131,146
137,128
Restructuring charges
11,632
5,395
29,172
7,214
Impairment charges
79,509
—
138,291
—
Total costs and expenses
336,484
275,909
990,629
819,814
Loss from operations
(104,246)
(43,533)
(263,598)
(117,756)
Interest income
269
474
767
1,188
Interest expense
(15,913)
(16,945)
(43,709)
(33,014)
Loss on debt extinguishment
—
—
—
(1,101)
Other income (expense), net
(1,845)
(425)
(4,242)
22,730
Loss before income taxes
(121,735)
(60,429)
(310,782)
(127,953)
Income tax benefit
59
319
474
448
Net loss
$ (121,676)
$ (60,110)
$ (310,308)
$ (127,505)
Net loss per share, basic and diluted
$ (1.57)
$ (0.80)
$ (4.03)
$ (1.72)
Weighted-average shares of common stock outstanding,
basic and diluted
77,692,911
74,691,521
77,013,180
74,266,999
Other comprehensive income (loss)
Foreign currency translation adjustments, net of tax of $0
for all periods presented
(5,637)
(4,268)
(5,982)
(2,096)
Comprehensive loss
$ (127,313)
$ (64,378)
$ (316,290)
$ (129,601)
2U, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
Nine Months Ended
September 30,
2022
2021
Cash flows from operating activities
Net loss
$ (310,308)
$ (127,505)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash interest expense
9,929
28,278
Depreciation and amortization expense
95,070
77,577
Stock-based compensation expense
62,740
74,745
Non-cash lease expense
16,507
13,518
Restructuring
9,523
4,845
Provision for credit losses
6,129
5,712
Loss on debt extinguishment
—
1,101
Gain on sale of investment
—
(27,762)
Impairment charges
138,291
—
Other
4,660
2,100
Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts receivable, net
(36,253)
(54,689)
Other receivables, net
(2,867)
(24,598)
Prepaid expenses and other assets
1,973
(6,639)
Accounts payable and accrued expenses
(12,964)
24,249
Deferred revenue
43,252
21,960
Other liabilities, net
(27,124)
(16,028)
Net cash used in operating activities
(1,442)
(3,136)
Cash flows from investing activities
Purchase of a business, net of cash acquired
5,010
—
Additions of amortizable intangible assets
(50,155)
(45,179)
Purchases of property and equipment
(8,777)
(5,397)
Purchase of investment
—
(1,000)
Proceeds from sale of investment
—
38,762
Advances made to university clients
(310)
—
Advances repaid by university clients
200
200
Other
(17)
56
Net cash used in investing activities
(54,049)
(12,558)
Cash flows from financing activities
Proceeds from debt
530
469,595
Payments on debt
(5,313)
(2,203)
Payment of debt issuance costs
—
(10,259)
Tax withholding payments associated with settlement of restricted stock units
(2,320)
(14,543)
Proceeds from exercise of stock options
1,083
6,101
Proceeds from employee stock purchase plan share purchases
1,282
1,773
Net cash (used in) provided by financing activities
(4,738)
450,464
Effect of exchange rate changes on cash
(4,530)
(2,312)
Net (decrease) increase in cash, cash equivalents and restricted cash
(64,759)
432,458
Cash, cash equivalents and restricted cash, beginning of period
249,909
518,866
Cash, cash equivalents and restricted cash, end of period
$ 185,150
$ 951,324
2U, Inc.
Reconciliation of Non-GAAP Measures
(unaudited)
The following table presents a reconciliation of adjusted EBITDA to net loss for each of the periods indicated.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022
2021
2022
2021
(in thousands, except share and per share amounts)
Revenue
$ 232,238
$ 232,376
$ 727,031
$ 702,058
Net loss
$ (121,676)
$ (60,110)
$ (310,308)
$ (127,505)
Stock-based compensation expense
15,967
25,022
62,740
74,745
Other (income) expense, net
1,845
425
4,242
(22,730)
Amortization of acquired intangible assets
9,187
10,376
42,516
31,408
Income tax benefit on amortization of acquired
intangible assets
(326)
(251)
(1,201)
(845)
Impairment charges
79,509
—
138,291
—
Loss on debt extinguishment
—
—
—
1,101
Restructuring charges
11,632
5,395
29,172
7,214
Other*
343
1,688
5,025
3,820
Adjusted net loss
(3,519)
(17,455)
(29,523)
(32,792)
Net interest expense
15,644
16,471
42,942
31,826
Income tax expense (benefit)
267
(68)
727
397
Depreciation and amortization expense
20,126
15,792
52,554
46,169
Adjusted EBITDA
$ 32,518
$ 14,740
$ 66,700
$ 45,600
Adjusted EBITDA margin
14.0 %
6.3 %
9.2 %
6.5 %
Net loss per share, basic and diluted
$ (1.57)
$ (0.80)
$ (4.03)
$ (1.72)
Adjusted net loss per share, basic and diluted
$ (0.05)
$ (0.23)
$ (0.38)
$ (0.45)
Weighted-average shares of common stock outstanding,
basic and diluted
77,692,911
74,691,521
77,013,180
74,266,999
*
Includes (i) transaction and integration expense of $0.0 million and $0.8 million for the three months ended September 30, 2022 and 2021, respectively, and $3.4 million and $2.6 million for the nine months ended September 30, 2022 and 2021, respectively, and (ii) stockholder activism and litigation-related expense of $0.3 million and $0.8 million for the three months ended September 30, 2022 and 2021, respectively, and $1.6 million and $1.2 million for the nine months ended September 30, 2022 and 2021, respectively.
2U, Inc.
Reconciliation of Non-GAAP Measures
(unaudited)
The following table presents a reconciliation of adjusted EBITDA (loss) to net loss by segment for each of the periods indicated.
Degree Program Segment
Alternative Credential Segment
Consolidated
Three Months Ended
September 30,
Three Months Ended
September 30,
Three Months Ended
September 30,
2022
2021
2022
2021
2022
2021
(in thousands)
Revenue
$ 137,242
$ 147,795
$ 94,996
$ 84,581
$ 232,238
$ 232,376
Net (loss) income
$ (4,620)
$ (21,675)
$ (117,056)
$ (38,435)
$ (121,676)
$ (60,110)
Adjustments:
Stock-based compensation expense
8,989
17,146
6,978
7,876
15,967
25,022
Other (income) expense, net
441
129
1,404
296
1,845
425
Net interest expense (income)
15,710
16,514
(66)
(43)
15,644
16,471
Income tax expense (benefit)
(38)
75
(21)
(394)
(59)
(319)
Depreciation and amortization expense
13,770
13,837
15,543
12,331
29,313
26,168
Impairment charges
—
—
79,509
—
79,509
—
Restructuring charges
10,295
5,260
1,337
135
11,632
5,395
Other
360
1,639
(17)
49
343
1,688
Total adjustments
49,527
54,600
104,667
20,250
154,194
74,850
Total adjusted EBITDA (loss)
$ 44,907
$ 32,925
$ (12,389)
$ (18,185)
$ 32,518
$ 14,740
Adjusted EBITDA margin
32.7 %
22.3 %
(13.0) %
(21.5) %
14.0 %
6.4 %
2U, Inc.
Reconciliation of Non-GAAP Measures
(unaudited)
The following table presents a reconciliation of adjusted EBITDA (loss) to net loss by segment for each of the periods indicated.
Degree Program Segment
Alternative Credential Segment
Consolidated
Nine Months Ended
September 30,
Nine Months Ended
September 30,
Nine Months Ended
September 30,
2022
2021
2022
2021
2022
2021
(in thousands)
Revenue
$ 434,499
$ 439,884
$ 292,532
$ 262,174
$ 727,031
$ 702,058
Net (loss) income
$ (25,890)
$ (20,746)
$ (284,418)
$ (106,759)
$ (310,308)
$ (127,505)
Adjustments:
Stock-based compensation expense
34,624
50,566
28,116
24,179
62,740
74,745
Other (income) expense, net
1,688
(27,554)
2,554
4,824
4,242
(22,730)
Net interest expense (income)
43,144
31,929
(202)
(103)
42,942
31,826
Income tax expense (benefit)
(127)
225
(347)
(673)
(474)
(448)
Depreciation and amortization expense
41,273
41,096
53,797
36,481
95,070
77,577
Impairment charges
—
—
138,291
—
138,291
—
Loss on debt extinguishment
—
1,101
—
—
—
1,101
Restructuring charges
21,236
6,687
7,936
527
29,172
7,214
Other
4,316
3,482
709
338
5,025
3,820
Total adjustments
146,154
107,532
230,854
65,573
377,008
173,105
Total adjusted EBITDA (loss)
$ 120,264
$ 86,786
$ (53,564)
$ (41,186)
$ 66,700
$ 45,600
Adjusted EBITDA margin
27.7 %
19.7 %
(18.3) %
(15.7) %
9.2 %
6.5 %
2U, Inc.
Reconciliation of Non-GAAP Measures
(unaudited)
The following table presents a reconciliation of unlevered free cash flow to net cash (used in) provided by operating activities for each of the twelve-month periods indicated.
Twelve Months Ended
September 30,
2022
June 30,
2022
March 31,
2022
December 31,
2021
(in thousands)
Net cash (used in) provided by operating activities
$ (16,378)
$ 12,765
$ (25,766)
$ (18,074)
Additions of amortizable intangible assets
(65,522)
(65,533)
(63,814)
(60,546)
Purchases of property and equipment
(13,168)
(12,555)
(10,716)
(9,788)
Payments to university clients
6,775
7,025
7,150
6,800
Non-ordinary cash payments*
30,812
25,229
23,943
22,193
Free cash flow
(57,481)
(33,069)
(69,203)
(59,415)
Cash interest payments on debt
56,175
44,532
35,082
25,537
Unlevered free cash flow
$ (1,306)
$ 11,463
$ (34,121)
$ (33,878)
*
Includes transaction, integration, restructuring-related, stockholder activism, and litigation-related expense.
2U, Inc.
Reconciliation of Non-GAAP Measures
(unaudited)
The following table presents a reconciliation of adjusted EBITDA guidance to net loss guidance, at the midpoint of the
ranges provided by the company, for the period indicated.
Year Ending
December 31, 2022
(in millions)
Net loss
$ (315)
Stock-based compensation expense
79
Other expense, net
4
Amortization of acquired intangible assets
50
Impairment charges
139
Restructuring
33
Other
2
Adjusted net loss
(8)
Net interest expense
65
Income tax benefit
(1)
Depreciation and amortization expense
60
Adjusted EBITDA
$ 116
2U, Inc.
Key Financial Performance Metrics
(unaudited)
Full Course Equivalent Enrollments
Degree Program Segment*
The following table presents FCE enrollments and average revenue per FCE enrollment in the company’s Degree Program Segment for the last eight quarters.
Q3 ’22
Q2 ’22
Q1 ’22
Q4 ’21
Q3 ’21
Q2 ’21
Q1 ’21
Q4 ’20
Degree Program Segment FCE
enrollments
57,092
60,303
62,609
58,967
57,842
60,429
60,007
58,425
Degree Program Segment average
revenue per FCE enrollment
$ 2,404
$ 2,373
$ 2,462
$ 2,585
$ 2,555
$ 2,420
$ 2,431
$ 2,234
Alternative Credential Segment**
The following table presents FCE enrollments and average revenue per FCE enrollment in the company’s Alternative Credential Segment for the last eight quarters.
Q3 ’22
Q2 ’22
Q1 ’22
Q4 ’21
Q3 ’21
Q2 ’21
Q1 ’21
Q4 ’20
Alternative Credential Segment FCE
enrollments
23,128
23,443
22,664
21,153
20,174
23,679
21,078
22,190
Alternative Credential Segment average
revenue per FCE enrollment
$ 3,850
$ 3,891
$ 4,012
$ 4,312
$ 4,193
$ 3,843
$ 4,108
$ 3,821
*
FCE enrollments and average revenue per FCE enrollment include enrollments in edX degree offerings and revenue from these offerings of $3.4 million and $8.9 million for the three and nine months ended September 30, 2022, respectively.
**
FCE enrollments and average revenue per FCE enrollment exclude the impact of enrollments in edX offerings and the related revenue of $5.9 million and $21.3 million for the three and nine months ended September 30, 2022, respectively.
SOURCE 2U, Inc.
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