2U, Inc. Reports Second Quarter 2019 Financial Results
LANHAM, Md., July 30, 2019 /PRNewswire/ -- 2U, Inc. (Nasdaq: TWOU), a global leader in education technology, today reported financial and operating results for the second quarter ended June 30, 2019.
Second Quarter 2019 Results
-- Revenue was $135.5 million, an increase of 39% from $97.4 million in the
second quarter of 2018, despite the $3.3 million unfavorable impact from
a deferred revenue fair value purchase accounting adjustment in the
second quarter of 2019.
-- Net loss was $(28.0) million, or $(0.46) per share, compared to $(18.3)
million, or $(0.33) per share, in the second quarter of 2018.
-- Adjusted net loss was $(25.8) million, or $(0.43) per share, compared to
$(10.3) million, or $(0.19) per share, in the second quarter of 2018.
-- Adjusted EBITDA loss was $(15.0) million, compared to $(5.6) million in
the second quarter of 2018.
"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," Co-Founder and CEO Christopher "Chip" Paucek said. "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."
Recent Developments
2U recently announced the following:
-- July 30, 2019: 2U today announced a 10-year contract extension with the
University of Cape Town to deliver new short courses across the
university.
-- July 30, 2019: 2U today announced a new partnership with Butler
University to deliver a Trilogy-powered data analytics boot camp.
-- July 29, 2019: A new partnership with the University of Texas at San
Antonio to deliver a Trilogy-powered coding boot camp.
-- July 18, 2019: A new partnership with Johns Hopkins Whiting School of
Engineering to deliver a Trilogy-powered coding boot camp.
-- July 2, 2019: A new partnership with the University of Manchester to
deliver a Trilogy-powered coding boot camp.
-- June 26, 2019: A new partnership with the University of Adelaide to
deliver a Trilogy-powered coding boot camp.
-- June 21, 2019: 2U was named a top workplace by The Washington Post for
the fifth consecutive year.
-- June 13, 2019: A new partnership with the University of Birmingham to
deliver a Trilogy-powered coding boot camp. It is the first coding boot
camp in the UK to be offered by a university.
-- June 3, 2019: 2U announced Ebony Lee would join the company as its
managing director for graduate programs to oversee the execution and
growth of the graduate program business.
-- May 22, 2019: The completion of 2U's acquisition of Trilogy Education
Services, Inc., a workforce accelerator that empowers the world's
leading universities to prepare professionals for high-growth careers in
the digital economy. The combined company will expand 2U's offerings
across the career curriculum continuum.
-- May 16, 2019: A new partnership with the University of Western Australia
to deliver a Trilogy-powered coding boot camp.
-- May 14, 2019: A new partnership with the University of Connecticut
School of Engineering to deliver a Trilogy-powered coding boot camp.
-- May 8, 2019: An expansion of a partnership with UC Davis Graduate School
of Management to deliver two online short courses in leadership and
strategic negotiations.
Financial Outlook
Based on information available as of today, 2U is issuing the following guidance for the third quarter and full-year of 2019. This guidance assumes foreign currency exchange rates as of June 30, 2019 remain constant, including the U.S. dollar/South African rand and the U.S. dollar/British pound.
3Q 2019
FY 2019
(in millions, except per share
amounts)
Revenue
$147.6 - $152.6
$565.7 - $575.7
Net loss
$(69.3) - $(66.3)
$(157.5) - $(151.5)
Net loss per share
$(1.10) - $(1.05)
$(2.57) - $(2.47)
Adjusted net loss
$(33.8) - $(30.8)
$(76.9) - $(70.9)
Adjusted net loss per share
$(0.53) - $(0.49)
$(1.25) - $(1.16)
Weighted-average shares of common stock outstanding, basic 63.2 61.3
Adjusted EBITDA (loss)
$(18.4) - $(15.4)
$(28.0) - $(22.0)
Stock-based compensation expense
$18.9 - $19.9
$56.0 - $58.0
The revenue reflected in this guidance includes a deferred revenue fair value purchase accounting adjustment related to the Trilogy acquisition. Adding back revenue eliminated as a part of purchase accounting, our revenue guidance ranges would be $153.6 million to $158.6 million and $576.9 million to $586.9 million for the third quarter and full year, respectively.
In giving third quarter and full-year guidance, the Company's expectations for the fourth quarter are implied. Note that the cost seasonality driven by reduced marketing spend during the holiday period in the fourth quarter typically improves margins in that quarter; fourth quarter margins therefore should not be viewed as a run rate for the first quarter of the following year.
Non-GAAP Measures
To supplement the Company's consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles ("GAAP"), we use adjusted EBITDA (loss), adjusted net income (loss) and adjusted net income (loss) per share, which are non-GAAP financial measures.
We define adjusted EBITDA (loss) as net income or net loss, as applicable, before net interest income (expense), taxes, depreciation and amortization expense, foreign currency gains or losses, acquisition-related gains or losses, deferred revenue fair value adjustments, transaction costs (including, as applicable, advisory fees and integration and restructuring expenses) and stock-based compensation expense. Some or all of these items may not be applicable in any given reporting period.
We define adjusted net income (loss) as net income or net loss, as applicable, before foreign currency gains or losses, acquisition-related gains or losses, deferred revenue fair value adjustments, transaction costs (including, as applicable, advisory fees and integration and restructuring expenses) 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 which result in adjusted net income, and basic weighted-average shares outstanding for periods which result in an adjusted net loss.
As of the date of this earnings release, we revised our definition of adjusted EBITDA and adjusted net income (loss) to exclude the impact of the deferred revenue fair value adjustments in connection with the acquisition of Trilogy. Business combination accounting guidance requires the write down of deferred revenue in conjunction with the acquisition. We included these revenues in adjusted EBITDA because they related to a specific transaction and are reflective of our ongoing financial performance.
The principal limitation of these non-GAAP financial measures is that they exclude significant expenses that are required by GAAP to be recorded in the Company's financial statements. These non-GAAP measures are key metrics Company management uses to compare the Company's performance to that of prior periods for trend analyses and for budgeting and planning purposes. These measures also provide useful information to investors and analysts relating to 2U's financial condition and results of operations. These financial measures are not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. In addition, these financial measures may be different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes.
For more information on 2U's non-GAAP financial measures and reconciliations of such measures to the nearest GAAP measures, see the reconciliation tables at the end of this press release under the heading "Reconciliation of Non-GAAP Measures." 2U urges investors to review these reconciliations and not to rely on any single financial measure to evaluate the Company's business.
Conference Call Information
What: 2U, Inc.'s second quarter 2019
financial results conference call
When:
Tuesday, July 30, 2019
Time:
5 p.m. ET
Live Call:
(877) 359-9508
Webcast:
investor.2U.com
About 2U, Inc. (Nasdaq: TWOU)
Eliminating the back row in higher education is not just a metaphor--it's our mission. For more than a decade, 2U, Inc., a global leader in education technology, has been a trusted partner and brand steward of great universities. We build, deliver, and support more than 250 digital and in-person educational offerings, including graduate degrees, professional certificates, Trilogy-powered boot camps, and GetSmarter short courses. Together with our partners, 2U has positively transformed the lives of more than 150,000 students and lifelong learners. To learn more, visit 2U.com. #NoBackRow
Cautionary Language Concerning Forward-Looking Statements
This press release contains forward-looking statements regarding our 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 the acquisition of Trilogy and future results of the operations and financial position of 2U, Inc., 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. We undertake 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:
-- trends in the higher education market and the market for online
education, and expectations for growth in those markets;
-- the acceptance, adoption and growth of online learning by colleges and
universities, faculty, students, employers, accreditors and state and
federal licensing bodies;
-- our ability to comply with evolving regulations and legal obligations
related to data privacy, data protection and information security;
-- our expectations about the potential benefits of our cloud-based
software-as-a-service, or SaaS, technology and technology-enabled
services to university clients and students;
-- our dependence on third parties to provide certain technological
services or components used in our platform;
-- our ability to meet the anticipated launch dates of our graduate
programs, short courses and boot camps;
-- our expectations about the predictability, visibility and recurring
nature of our business model;
-- our ability to acquire new university clients and expand our graduate
programs, short courses and boot camps with existing university clients;
-- our ability to successfully integrate the operations of Get Educated
International Proprietary Limited, or GetSmarter, and Trilogy Education
Services, Inc., or Trilogy, achieve the expected benefits of the
acquisitions and manage, expand and grow the combined company;
-- our ability to service our substantial indebtedness and comply with the
financial and other restrictive covenants contained in the credit
agreement governing our senior secured term loan facility;
-- our ability to execute our growth strategy in the international,
undergraduate and non-degree alternative markets;
-- our ability to continue to acquire prospective students for our graduate
programs, short courses and boot camps;
-- our ability to affect or increase student retention in our graduate
programs;
-- our ability to attract, hire and retain qualified employees;
-- our expectations about the scalability of our cloud-based platform;
-- our expectations regarding future expenses in relation to future
revenue;
-- potential changes in regulations applicable to us or our university
clients; and
-- our expectations regarding the amount of time our cash balances and
other available financial resources will be sufficient to fund our
operations.
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, 2018, as amended and supplemented by risks and uncertainties under the heading "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 and other reports filed with the Securities and Exchange Commission. 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: Ed Goodwin, 2U, Inc., egoodwin@2U.com
Media Contact: Molly Forman, 2U, Inc., mforman@2U.com
2U, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
June 30, December 31,
2019 2018
(unaudited)
Assets
Current assets
Cash and cash equivalents $
218,723 $
449,772
Restricted cash 14,761
Investments 25,000
Accounts receivable, net 71,578 32,636
Prepaid expenses and other assets 43,136 14,272
Total current assets 348,198 521,680
Property and equipment, net 57,464 52,299
Right-of-use assets 36,463
Goodwill 488,747 61,852
Amortizable intangible assets, net 339,269 136,605
University payments and other assets, non-current 61,606 34,918
Total assets $
1,331,747 $
807,354
Liabilities and stockholders' equity
Current liabilities
Accounts payable and accrued expenses $
66,468 $
27,647
Accrued compensation and related benefits 21,472 23,001
Deferred revenue 54,600 8,345
Lease liability 6,277
Other current liabilities 10,329 9,487
Total current liabilities 159,146 68,480
Long-term debt 245,451 3,500
Deferred tax liabilities, net 6,440 6,949
Lease liability, non-current 58,924
Other liabilities, non-current 737 23,416
Total liabilities 470,698 102,345
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, 63,231,376 shares issued 63 58
and outstanding as of June 30, 2019; 57,968,493 shares issued and outstanding as of
December 31, 2018
Additional paid-in capital 1,161,321 957,631
Accumulated deficit (293,692) (244,166)
Accumulated other comprehensive loss (6,643) (8,514)
Total stockholders' equity 861,049 705,009
Total liabilities and stockholders' equity $
1,331,747 $
807,354
2U, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited, in thousands, except share and per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
Revenue $
135,461 $
97,423 $
257,695 $
189,711
Costs and expenses
Curriculum and teaching 13,308 6,007 20,009 10,314
Servicing and support 23,993 17,297 44,167 32,530
Technology and content development 26,043 15,235 45,837 29,075
Marketing and sales 89,749 58,376 166,710 111,434
General and administrative 28,408 22,480 51,431 44,349
Total costs and expenses 181,501 119,395 328,154 227,702
Loss from operations (46,040) (21,972) (70,459) (37,991)
Interest income 1,814 912 4,163 1,254
Interest expense (2,424) (27) (2,479) (54)
Other expense, net (13) (825) (383) (1,220)
Loss before income taxes (46,663) (21,912) (69,158) (38,011)
Income tax benefit 18,691 3,565 19,632 4,793
Net loss $
(27,972) $
(18,347) $
(49,526) $
(33,218)
Net loss per share, basic and diluted $
(0.46) $
(0.33) $
(0.83) $
(0.62)
Weighted-average shares of common stock 60,516,662 54,981,192 59,334,246 53,840,582
outstanding, basic and diluted
Other comprehensive loss
Foreign currency translation adjustments, net 2,243 (14,178) 1,871 (9,546)
of tax of $0 for all periods presented
Comprehensive loss $
(25,729) $
(32,525) $
(47,655) $
(42,764)
2U, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
Six Months Ended
June 30,
2019 2018
Cash flows from operating activities
Net loss $
(49,526) $
(33,218)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense 24,351 14,783
Stock-based compensation expense 19,551 16,131
Non-cash lease expense 5,264
Bad debt expense 993
Changes in operating assets and liabilities:
Accounts receivable, net (25,548) (35,932)
Payments to university clients (20,060) (8,923)
Prepaid expenses and other assets (8,796) (3,705)
Accounts payable and accrued expenses 18,081 10,207
Accrued compensation and related benefits (5,964) (1,998)
Deferred revenue 15,849 24,086
Other liabilities, net (23,056) (2,854)
Other 912 1,221
Net cash used in operating activities (47,949) (20,202)
Cash flows from investing activities
Purchase of a business, net of cash acquired (387,815)
Additions of amortizable intangible assets (32,430) (40,039)
Purchases of property and equipment (8,139) (5,124)
Purchase of equity interests (5,000)
Proceeds from maturities of investments 25,000
Advances made to university clients (100) (100)
Advances repaid by university clients 200
Other 4
Net cash used in investing activities (408,280) (45,263)
Cash flows from financing activities
Proceeds from issuance of common stock, net of offering costs 330,862
Proceeds from exercise of stock options 2,380 4,793
Proceeds from debt 243,726
Tax withholding payments associated with settlement of restricted stock units (2,558) (3,407)
Payments for acquisition of amortizable intangible assets (1,283)
Payment of debt issuance costs (1,953)
Net cash provided by financing activities 240,312 332,248
Effect of exchange rate changes on cash (371) (1,319)
Net (decrease) increase in cash, cash equivalents and restricted cash (216,288) 265,464
Cash, cash equivalents and restricted cash, beginning of period 449,772 223,370
Cash, cash equivalents and restricted cash, end of period $
233,484 $
488,834
2U, Inc.
Reconciliation of Non-GAAP Measures
(unaudited)
The following table presents a reconciliation of net loss to adjusted net loss for each of the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
(in thousands, except share and per share amounts)
Net loss $
(27,972) $
(18,347) $
(49,526) $
(33,218)
Adjustments:
Foreign currency loss 13 825 383 1,220
Amortization of acquired intangible assets 5,341 1,597 6,767 3,277
Income tax benefit on amortization of acquired intangible assets (381) (438) (772) (898)
Acquisition-related income tax benefit (19,262) (2,987) (19,262) (2,987)
Deferred revenue fair value adjustment 3,352 3,352
Transaction costs 3,093 5,024
Stock-based compensation expense 9,967 9,009 19,551 16,131
Total adjustments 2,123 8,006 15,043 16,743
Adjusted net loss $
(25,849) $
(10,341) $
(34,483) $
(16,475)
Net loss per share, basic and diluted (1) $
(0.46) $
(0.33) $
(0.83) $
(0.62)
Adjusted net loss per share, basic and diluted (1) $
(0.43) $
(0.19) $
(0.58) $
(0.31)
Weighted-average shares of common stock outstanding, basic and 60,516,662 54,981,192 59,334,246 53,840,582
diluted
(1) The Company computes net
income (loss) per share and/
or adjusted net income (loss)
per share using diluted
weighted-average shares of
common stock outstanding for
periods which result in net
income and/or adjusted net
income, and uses basic
weighted-average shares of
common stock outstanding for
periods which result in net
loss and/or adjusted net
loss.
The following table presents a reconciliation of net loss to adjusted EBITDA (loss) for each of the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
(in thousands)
Net loss $
(27,972) $
(18,347) $
(49,526) $
(33,218)
Adjustments:
Interest income (1,814) (912) (4,163) (1,254)
Interest expense 2,424 27 2,479 54
Foreign currency loss 13 825 383 1,220
Depreciation and amortization expense 14,653 7,408 24,351 14,783
Income tax benefit (18,691) (3,565) (19,632) (4,793)
Deferred revenue fair value adjustment 3,352 3,352
Transaction costs 3,093 5,024
Stock-based compensation expense 9,967 9,009 19,551 16,131
Total adjustments 12,997 12,792 31,345 26,141
Adjusted EBITDA (loss) $
(14,975) $
(5,555) $
(18,181) $
(7,077)
2U, Inc.
Reconciliation of Non-GAAP Measures
(unaudited)
The following table presents (i) a reconciliation of net loss guidance to adjusted net income (loss) guidance and adjusted EBITDA (loss) guidance and (ii) a reconciliation of net loss per share guidance to adjusted net income (loss) per share guidance, each at the midpoint of the ranges provided by the Company, for each
of the periods indicated:
Three Months Ending Year Ending
September 30, 2019 December 31, 2019
$
$/Share
$
$/Share
(in thousands, except per share amounts)
Net loss $
(67,800) $
(1.07) $
(154,450) $
(2.52)
Foreign currency loss 375 0.01
Amortization of acquired intangible assets 10,550 0.17 27,875 0.45
Income tax benefit on amortization of acquired intangible assets (425) (0.01) (1,650) (0.03)
Acquisition-related income tax benefit (19,275) (0.31)
Transaction costs 5,025 0.08
Deferred revenue fair value adjustment 5,925 0.09 11,150 0.18
Stock-based compensation expense 19,450 0.31 57,025 0.93
Adjusted net loss (32,300) (0.51) (73,925) (1.21)
Interest income (800) * (5,350) *
Interest expense 5,725 * 13,925 *
Depreciation and amortization expense 10,150 * 39,125 *
Income tax expense 350 * 1,175 *
Adjusted EBITDA (loss) $
(16,875)
$
* $
(25,050)
$
*
Projected weighted-average shares of common stock outstanding, basic 63,225 61,300
* Not provided.
2U, Inc.
Key Financial Performance Metrics
(unaudited)
Full Course Equivalent Enrollments
Graduate Program Segment
The following table sets forth the full course equivalent enrollments and average revenue per full course equivalent enrollment in our Graduate Program Segment for the last eight quarters.
Q3 '17 Q4 '17 Q1 '18 Q2 '18 Q3 '18 Q4 '18 Q1 '19 Q2 '19
---
Graduate Program Segment full 24,062 27,082 29,770 30,548 32,665 34,695 39,512 39,180
course equivalent enrollments
Graduate Program Segment $
2,740 $
2,758 $
2,706 $
2,658 $
2,747 $
2,792 $
2,637 $
2,588
average revenue per full
course equivalent enrollment
Alternative Credential Segment
The following table sets forth the full course equivalent enrollments and average revenue per full course equivalent enrollment in our Alternative Credential Segment for the last eight quarters.
Q3 '17* Q4 '17 Q1 '18 Q2 '18 Q3 '18 Q4 '18 Q1 '19 Q2 '19**
---
Alternative Credential Segment 4,079 6,751 6,002 8,222 8,937 9,041 9,128 12,662
full course equivalent
enrollments
Alternative Credential Segment $
1,232 $
1,777 $
1,954 $
1,972 $
1,930 $
2,015 $
1,979 $
2,955
average revenue per full
course equivalent enrollment
* We acquired GetSmarter on July 1,
2017 and GetSmarter's results of
operations are included in our
results from the date of
acquisition. As such, GetSmarter
will impact the full course
equivalent enrollment measures
for our Alternative Credential
Segment from the acquisition
date forward. The calculation of
the Alternative Credential
Segment's average revenue per
full course equivalent
enrollment includes $0.7 million
of revenue that was excluded
from the results of operations
in the third quarter of 2017,
due to a deferred revenue fair
value purchase accounting
adjustment recorded as part of
the acquisition of GetSmarter.
** We acquired Trilogy on May 22,
2019 and Trilogy's results of
operations are included in our
results from the date of
acquisition. As such, Trilogy
will impact the full course
equivalent enrollment measures
for our Alternative Credential
Segment from the acquisition
date forward. The calculation of
the Alternative Credential
Segment's average revenue per
full course equivalent
enrollment includes $3.3 million
of revenue that was excluded
from the results of operations
in the second quarter of 2019,
due to a deferred revenue fair
value purchase accounting
adjustment recorded as part of
the acquisition of Trilogy.
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SOURCE 2U, Inc.
