Why 2U Stock Fell Despite Its "Strong" Quarter

2U (TWOU -4.84%), a leader in online education platforms, announced better-than-expected third-quarter results on Tuesday after the market closed. But while shares initially rallied as much as 19% on Wednesday morning in response, investors' mood quickly soured as they digested the nuances of the company's revised 2019 guidance and a lack of clarity surrounding its drastically tempered growth strategy.

With shares down more than 5% in Wednesday's trading, let's start with a closer look at how 2U's third quarter shaped up relative to the same year-ago period:

Data source: 2U. GAAP = generally accepted accounting principles. 

Image source: Getty Images.

Breaking down 2U's solid quarter

For perspective, 2U's widened GAAP loss includes the impact of items like restructuring costs, stock-based compensation, and acquisition expenses. Excluding those items, the company's non-GAAP net loss was a more modest $26.3 million, or $0.41 per share, compared with a loss of $0.01 per share in the same year-ago period. 2U's adjusted EBITDA arrived at a loss of $10.7 million, versus positive adjusted EBITDA of $4.7 million a year earlier.

But these results compare favorably to 2U's latest guidance -- provided in late July -- which called for lower revenue in the range of $147.6 million to $152.6 million, a wider adjusted EBITDA loss of $18.4 million to $15.4 million, and a larger adjusted net loss of $0.53 to $0.49 per share.

Digging deeper into 2U's top line, revenue from its core graduate-program segment grew 15% year over year to $103.4 million -- though management noted during the subsequent conference call that the segment's growth would have been closer to 25% had it not been for enrollment headwinds at its single largest graduate program.

Meanwhile, revenue from its newer alternative credential segment nearly tripled to $50.4 million. The outsize growth of the segment was primarily driven by the inclusion of $29.2 million in revenue from Trilogy Education, 2U's $750 million acquisition of which closed in May. 

"Our strong top-line growth and recent pipeline wins, bolstered by the success of our strategic [mergers and acquisitions], validate our position as a leader in the digital transformation of higher education," said CEO Chip Paucek. "2U's expanding portfolio of 72 top-tier universities and over 300 offerings are testaments to the ongoing strength of our partnership model and to the quality of the student outcomes we deliver."

On guidance, waiting for elaboration on 2U's growth strategy

2U also revised its full-year 2019 guidance to call for revenue to increase 38% to 40% from 2018 to a range of $570 million to $575 million, narrowed from its old outlook for $565.7 million to $575.7 million. On the bottom line, that should translate to an adjusted net loss of roughly $1.18 to $1.28 per share, down from its prior target range for a per-share loss of $1.16 to $1.25. 2U also reaffirmed its adjusted EBITDA outlook, however, for a loss ranging from $22 million to $28 million.

Also during the call, CFO Paul Lalljie stressed that 2U will be "more disciplined in the programs we select and how we deploy investment capital to develop and market those programs." 

During the Q&A portion with analysts, Paucek said that 2U will provide more details on its growth strategy and how it thinks about returns on invested capital at the company's upcoming Investor Day.

That Investor Day was initially slated for Nov. 6. But in order to give Lalljie -- who started as CFO in mid-October -- the "opportunity to review and contribute to the company's long-term strategic planning initiatives," it has been rescheduled to shortly after 2U files its annual 10-K with the Securities and Exchange Commission. Judging by the timing of last year's 10-K filing, that could mean we'll need to wait until either late February or early March of next year for the Investor Day.

The market hates being told to hurry up and wait -- particularly when it means learning more about the details of 2U's core growth strategy. So until 2U can provide more concrete information to that end, I suspect the stock will remain depressed regardless of how the company performs relative to its quarterly guidance.