2U Stock Plummets After Company Slashes Launch Plans

Judging by Wednesday's 60%-plus plunge, you'd think 2U's (TWOU +0.00%) second-quarter 2019 results were an absolute disaster. To the contrary, the online education platform leader technically enjoyed a solid end to the first half, delivering healthy revenue growth, closing an enormous strategic acquisition, and striking a number of encouraging new partnerships.

But 2U also tempered full-year guidance for its core business for the second time in as many quarters. And this time, rising competition and a steep moderation in 2U's new program launch cadence is to blame.

Let's look closer, then, for a better idea of what 2U accomplished in the second quarter, and what investors can expect in the quarters ahead.

2U results: The raw numbers

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

IMAGE SOURCE: GETTY IMAGES

What happened with 2U this quarter?

• Adjusted for items like stock-based compensation and acquisition expenses, 2U's (non-GAAP) net loss was $25.8 million, or $0.43 per share, widening from an adjusted net loss of $10.3 million, or $0.19 per share in the same year-ago period.
• By comparison, 2U's guidance provided in May called for an adjusted net loss per share of $0.35 to $0.36 on lower revenue of $124.3 million to $125 million.
• 2U incurred an adjusted EBITDA loss of $15 million, below guidance for a loss range of $12.6 million to $13.1 million and widening from a $5.6 million adjusted EBITDA loss in the same year-ago period.
• 2U completed its previously announced $750 million cash-and-stock acquisition of tech "boot camp" specialist Trilogy Education Services on May 22.
• 2U announced a number of new partnerships for Trilogy-powered boot camps at multiple institutions including the the University of Connecticut, the University of Western Australia, the University of Birmingham, the University of Adelaide, the University of Manchester, Johns Hopkins Whiting School of Engineering, the University of Texas at San Antonio, and Butler.
• 2U also announced an expanded partnership with UC Davis and a 10-year contract extension with the University of Cape Town for new short courses.

What management had to say

2U co-founder and CEO Chip Paucek touched on the reason for today's enormous plunge (emphasis mine):

With the close of our Trilogy acquisition, 2U's business is evolving to better meet marketplace demand and the transforming needs of our university partners and lifelong learners. As we deliver our full portfolio of educational offerings to new and existing partners, we are also setting 2U on a defined path to profitability by tempering short-term growth projections and leveraging our scale to drive greater operational efficiencies across the business.

During the subsequent conference call, Paucek elaborated that as more schools adopt other online-education options -- particularly in the form of competing regional platforms -- 2U is adjusting its expectations to account for smaller average program sizes. Perhaps most notably, in the near term, and in order to manage operating expenses and drive toward positive free cash flow, 2U is moderating its graduate program launch cadence for 2020 and 2021.

Looking forward

Paucek declined to offer specifics for now, saying instead the plan is "still a work in progress" and pledging to provide more color during the company's Investor Day in early November. But he did suggest the number of graduate programs launched in 2020 will "be substantially fewer ..., probably less than half" than the company's previous goal of 21 launches.

In the meantime, for the third quarter, 2U expects revenue of $147.6 million to $152.6 million, an adjusted EBITDA loss of $18.4 million to $15.4 million, and an adjusted net loss per share of $0.53 to $0.49. Note that after adding back purchase accounting adjustments on deferred revenue from the Trilogy acquisition, that top-line range would have been closer to $153.6 million to $158.6 million.

For the full year of 2019, 2U now sees revenue arriving at roughly $565.7 million to $575.7 million (or $576.9 million to $586.9 million after adding back Trilogy adjustments), implying growth of roughly 39% at the midpoint. 2U's full-year adjusted EBITDA loss is now expected to range from $28 million to $22 million, and its adjusted net loss per share will range from $1.25 to $1.16.

Paucek was clear that, excluding the financial impact of Trilogy, this new guidance "implies a step down in revenue expectations for the rest of the business."

That's not to say 2U's long-term story is broken; the company can continue to grow its core graduate program base, albeit much more slowly than before. And it still enjoys enormous diversification and growth potential as it builds on its existing short-course and boot-camp businesses.

But as the company makes a hard pivot toward managing costs and slowing its launch pace, this also requires that investors effectively recalibrate their near-term expectations for 2U. And the stock is responding accordingly.