2U Beats Guidance, Announces First International Graduate Program

2U announced fourth-quarter results on Monday after the market closed. 2U beats the revenue, net income and adjusted EBITDA guidance set on 7th November 2017, when releasing third-quarter results.

Source: 2U, Inc. Reports Third Quarter 2017 Financial Results

Source: 2U, Inc. Reports Fourth Quarter and Full-Year 2017 Financial Results

Revenue and Cost Distribution
2U updated a guidance for FY2018 and the first quarter. As I mentioned in Buy 2U (NASDAQ:TWOU), I concern most about the growth in DGPs in terms of the number of students enrollment and number of DGPs launched. Therefore, I will not go through the revenue and net income in this quarter results release. 2U also provides a revenue and cost distribution model. 46% of revenue will come in the first half and the remaining 54% will arrive in the second half. For the second half year, 49% of revenue will arrive in the third quarter. Due to cost seasonality, the second quarter will have the highest expenditure, while the fourth quarter will have the lowest expenditure.

Growth in DGPs and Short Courses

Source: Q4 2017 Earnings Presentation

2U provided a list of top 15 programs list and Chip, the CEO, stated in the conference call that the top 10 programs have more than 300 annual students enrolled and the top 7 programs have more than 500 annual students enrolled. Three DGPs in top 10 (MSW@Simmons, MBA@Syracuse and Business@American) are launched less than 4 years. This indicates an early reach in optimal enrollment or a further increase in enrollment number. Either way is a good news for 2U.

Instead of looking at the top 15 program list, the growth in students enrollment can also be examined in graduate program full-course equivalents. The yearly growth rate decreases from 43.7% in 4Q’15 to 24.9% in 4Q’17. Despite this, I expect a higher growth rate in the future because of the aggressive launch in 2017 and 2018. As shown in the last blog post, the first class size would be a lot fewer than the later one. Therefore, I am positive on growth in DGPs.

Source: Q4 2017 Earnings Presentation

Short courses from GetSmarter are growing. The FCE increases from 4079 in the third quarter to 6751 in the fourth quarter, the revenue per student increases from $1232 to $1777. The growth mainly comes from the United States and the United Kingdom. Expanding into two new markets with higher purchasing power drives the growth. Since GetSmarter is still a small subsidiary and has a small short courses portfolio, I expect GetSmarter will still grow. 2U still did not provide the profitability data of GetSmarter short courses and therefore GetSmarter is still not included in the valuation.

First IGP Announced
As stated in 2017 Analyst Day, 2U will have its first international graduate program (IGP) in 2019 and this is confirmed in the fourth quarter release. 2U announced an MBA with University College London School of Management, a business school ranked 3th in the United Kingdom [1]. The MBA@UCL will be the first online MBA offered by UCL. I am delighted that 2U can continue partnering with the top university when expanding internationally and keep the tuition fee (£50,000) as high as that in DGPs. Given the unknown difference between a DGP and IGP, IGP is still not included in my valuation. I would suspect that more IGPs will come in the future, given the relationship between GetSmarter and London School of Economics and Political Science. But as Chip stressed the patience of launching new IGPs, it would be still too early to include IGP in the valuation.

Risk: Cash Management

Source: Q4 2017 Earnings Presentation

2U currently holds $223.4 million in cash and generated $8.1 million cash from operations. Despite these, the cash flow is still risky. An annual CapEx of $27.3 million and $23.8 million cash spent on intangible are highly unsustainable unless 2U raised funds from share issuance again. This is unfavourable to investors because of the share dilution. Therefore the cash flow is required to be monitored carefully.

The recent announcement confirms that 2U is still growing according to the plan. New DGPs are growing in program size. Graduate program full course equivalents are growing at an acceptable level. Short courses are growing by expanding into new markets with higher tuition fees available. The international graduate program will be launched in 2019. Cash flow is still a concern. Everything mentioned above is no difference with stated in Analyst Day 2017 and my last blog post. Therefore 2U is still a Buy for me.

I hold 2U shares when posting this blog. Information about my present holdings can be found under About. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this investment thesis may include forward-looking statements, expectations, and projections. You should assume these types of statements, expectations, and projections may turn out to be incorrect. Use of this investment thesis is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered here, including, but not limited to, the suitability of any transaction to your risk tolerance and investment objectives and consult your own tax, financial and legal experts as warranted.

[1]: https://www.thecompleteuniversityguide.co.uk/league-tables/rankings?s=Business%20%26%20Management%20Studies

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