2U Stock Tumbles 54% After Company Lowers Growth Expectations for 2019
The stock price for 2U, which partners with nonprofit colleges and universities to offer online degree programs, dropped about 54 percent overnight—between Tuesday’s market close and Wednesday’s opening—to $16.83 after the company told investors to expect greater losses than previously expected. 2U shares have not traded at this low since early 2016.
On the company’s earnings call Tuesday, 2U CEO Christopher “Chip” Paucek revised its guidance to expect a net loss of between $151.5 million and $157.5 million this fiscal year, which will end Dec. 31.
That range is almost double what 2U previously projected—between $77.2 million and $79 million—on its previous quarterly financial update in May.
For the second quarter of this year, which ended June 30, 2U posted a net loss of $28 million, 53 percent greater year over year. Despite all this, the company reported a boost in revenue, with $135.5 million for the second quarter of 2019, a 39 percent increase over the same period last year.
Competition and California
On the call Tuesday, Paucek offered several reasons for the revised financial projections. Among them, growing competition in its flagship offering of helping colleges and universities run their online graduate programs.
That market now has “many more offerings and more competition to enroll students,” he said, according to a transcript of the call. That new reality led the company to “temper our enrollment and revenue expectations. We expect the average program enrollment to come down from what we previously expected.” In other words, some of its largest online graduate programs may soon serve fewer students, Paucek added.
The company reported that “full course equivalent enrollments,” which it calculates by taking the number of students enrolled in a course and multiplying that by the percentage of the course completed during that period, hit 39,180 in the latest quarter. That’s the second highest since the start of 2017, but a slight dip from the previous quarter.
In February, 2U lowered revenue expectations due to a severe budget shortfall in University of Southern California’s school of social work, which contracts with the company to run its online graduate programs. USC accounted for about a fifth of 2U’s 2018 revenue. In May, the company saw its stock price drop about 25 percent immediately following its 2019 first quarter earnings.
In an accompanying filing for this latest quarter, the company noted that “with more graduate program options available, and with students typically having a preference to enroll in online programs offered by universities located in their region, students may choose a local option rather than making an enrollment decision based solely on factors such as program quality and university brand strength.”
2U is also lowering the number of new graduate programs it aims to launch next year. Last August, it announced plans to start 21 graduate programs in 2020. On Tuesday’s call, Paucek revised its forecast to “substantially fewer than 21, probably less than half of that.”
He declined to discuss the company’s plan to reach a positive cash flow. He said he’d share more details at an investor event in November.
In addition to running graduate-level online programs, the company also offers short-term courses with university partners. This business has also run into some challenges, Paucek noted, as “matching courses with lead professors takes more time than expected even after we signed a deal with the university.” He later added: “We really underestimated that in a substantial way, and that caused us to get behind.”
Finally, Paucek said the revised guidance is also the result of concerns in California, where federal aid is currently being withheld from residents enrolling in classes from online private and public colleges based outside the state.
Given the new competition and challenges to its online graduate program operations, the company has previously signaled plans to diversify its offerings beyond that core business. Earlier this year, it paid $750 million to acquire Trilogy Education Services, which helps university extension schools offer short-term coding education programs. In 2017, it purchased GetSmarter to jumpstart its short-course program offerings.
In the future, 2U could well enter the corporate training market. “One new exciting development for 2U, related to the impact of Trilogy across our business, [is that] 2U enters the enterprise channel,” Paucek said. “Trilogy combined with GetSmarter creates a significant enterprise opportunity in selling our offerings to companies looking to upscale their workforce and attract more technical talent.”
Some Analysts Downgrade
At least three investment banks—Needham & Co., Oppenheimer and BMO Capital Markets—downgraded their ratings of the company.
“Despite the strong performance of the recently acquired Trilogy business and seemingly attractive valuation following the recent stock sell-off, we are choosing to step to the sidelines until 2U can demonstrate an ability to drive consistent, profitable growth within the new market dynamics,” read the analyst note from Needham.
Oppenheimer analysts stated they believe 2U overpaid for Trilogy and faulted the company for “giving high expectations at its investor days that never really materialized.” BMO analysts stated that 2U’s higher prices compared to competitors may play a role in lowered enrollment expectations.
At least one investment bank, First Analysis, still expects 2U to outperform the market. The analysts said in a note that they like the diversified offerings from the company and some of the new contracts 2U reported during its earnings call.
2U inked a new deal with the University of North Carolina at Chapel Hill, which will generate at least 10 new programs. It will also launch a doctor of pharmacy degree with St. John Fisher College in Rochester, N.Y.
Even if 2U launches no new graduate degree programs, it expects growth in the mid to high teens in this business over the next few years, Paucek said.