2U Tempers 2019 Guidance on Soft Enrollments

2U Inc. (TWOU -8.15%) announced impressive first-quarter 2019 results on Tuesday after the market closed, but you wouldn't know it from the market's reaction. Shares of the online education specialist fell more than 20% on Wednesday after its solid start to 2019 was eclipsed by its decision to reduce full-year revenue guidance.

So let's take a closer look at what drove 2U over the past few months, then tackle the reasons behind its tempered outlook.

2U results: The raw numbers

DATA SOURCE: 2U, INC. GAAP = generally accepted accounting principles.

IMAGE SOURCE: GETTY IMAGES.

What happened with 2U this quarter?

• On an adjusted (non-GAAP) basis, which excludes items like stock-based compensation and acquisition costs, 2U's net loss was $8.6 million, or $0.15 per share, compared to an adjusted net loss of $6.1 million, or $0.12 per share in the same year-ago period.
• These results compared favorably to 2U's guidance provided in February, which called for an adjusted net loss per share of $0.18 to $0.19 on revenue of $121.5 million to $122.1 million.
• 2U generated an adjusted EBITDA loss of $3.2 million -- also above guidance for a loss of $4.2 million to $4.6 million -- compared to a $1.5 million adjusted EBITDA loss in last year's first quarter.
• In February, 2U announced a new online Master of Science in social administration program with Case Western Reserve University.
• In early April, 2U announced two new hybrid degrees for healthcare and medical professionals with Arcadia University.
• On April 7, 2019, 2U announced a $750 million cash-and-stock deal to acquire Trilogy Education, a leader in skill-based technology courses also known as tech "boot camps."
• As of today, 2U has changed the name of its Short Course segment to the Alternative Credential segment to more accurately reflect its nondegree offerings.

What management had to say

"2U delivered another strong quarter," stated 2U co-founder and CEO Chip Paucek. "Our business is transforming and diversifying in exciting ways that further cement 2U's market-leading position and allow us to better meet the demands of lifelong learners, all while delivering sustainable growth and great outcomes in shared alignment with our partners."

Looking forward

For the second quarter of 2019, 2U expects revenue of $124.3 million to $125.0 million, an adjusted EBITDA loss of $12.6 million to $13.1 million, and an adjusted net loss per share of $0.35 to $0.36.

For the full year of 2019, 2U revised its outlook to call for revenue of $534 million to $537 million (down from $546.6 million to $550.8 million previously), positive adjusted EBITDA of $12.5 million to $14.3 million (up from $11.8 million to $14.2 million before), and an adjusted net loss per share of $0.31 to $0.34 (up from its prior guidance range of a per-share loss of $0.33 to $0.37).

During the subsequent conference call, Paucek explained that 2U's five largest programs are expected to see enrollments decline around 20% this year from their average in 2017. At the same time, he noted those old averages were well above the high end of 2U's target enrollment range of 300 to 500 new students per program and are only now falling closer to the company's original expectations.

Paucek elaborated:

Looking at the top 15 programs by new student enrollments, the average in 2019 is actually projected to be 3% higher than the 2017 average. So we believe that the average will go up even with the decline in our largest programs. In fact if you exclude the top five programs from the calculation, enrollments for six through 15 are projected to be up 32%. So we continue to see programs across the portfolio scale toward our target ranges for new student enrollments. We still firmly believe in our runway of 250 DGPs. Pipeline for those programs is strong. We've got a bunch of announcements coming, but that's for another day.

Assuming the softer enrollments of 2U's largest programs don't become an extended problem with the rest of its portfolio -- and keeping in mind the company's current pipeline aims to roughly double its DGP base to 100 by 2021 -- 2U still has a long way to go before it realizes its 250-DGP goal. And that's not to mention the promise of international graduate program expansion and incremental contributions from its newly dubbed Alternative Credentials business.

Given this near-term revenue guidance reduction, however, the market obviously isn't pleased. And for now, 2U stock is flirting with fresh 52-week lows as a result.