Revenue from Trilogy Bootcamps Help 2U, But Future Still Uncertain

Feb 11, 2020

On his company’s latest quarterly earnings call, 2U CEO and co-founder Chip Paucek shared an example of why he brought his company—an online graduate program manager for colleges—into the coding bootcamp business.

A flagship online MBA program 2U manages for the University of North Carolina at Chapel Hill had seen enrollment decrease from a “roaring economy and an increasingly competitive world,” Paucek said Thursday in a quarterly earnings call, according to a transcript. That decrease neared 40 percent from 2016 to 2019, according to one report.

But with the help of technical courses added to the program from the Trilogy coding bootcamp 2U bought for $750 million last April—not to mention fellowships for students and 2U employees staffed at Chapel Hill—the MBA program appears to have turned a corner. The program’s January cohort is a 28 percent enrollment growth year over year, Paucek said.

“Our acquisition of Trilogy enables us to address the student, university and industry demand for market-driven training in rapidly evolving technical fields,” Paucek said. “That demand has fueled our boot camp product’s rapid growth.”

Likewise, a better-than-expected quarter from 2U—based in Landham, Md.—has some analysts thinking more positively about the company's Trilogy purchase and its strategy to reach positive cash flow, which saw its stock price tumble last summer when it told investors to expect decreased profits from its core business in helping universities operate their online programs.

2U’s stock traded at $23.23 at market close Monday, up 2 percent from market close Feb. 6. The stock is down about 76 percent from an all time high in April 2018.

This promotional video from University of North Carolina at Chapel Hill features alumni from the online MBA program.

Trilogy Starts to Pay Off

One of the standouts from 2U’s report for the three months that ended Dec. 31 was the acquired Trilogy bootcamp business, which saw $33.2 million in revenue and accounted for about 20 percent of 2U’s revenue for the quarter. 2U’s total quarterly revenue of $163 million is a 42 percent increase over the same period last year.

Still, the company reported a net loss of $44.6 million for the quarter, compared to a $4.8 million net income the year prior. It ended the quarter with $190 million in cash and $255 million in debt due to a loan for the Trilogy acquisition.

2U’s revenue in 2019 increased 40 percent over the previous year, to $547.7 million. But its net loss also grew, from $38.3 million in 2018 to $235.2 million last year.

2U delivers and supports more than 250 digital and in-person educational offerings, which includes online degree-granting programs, the 100 Trilogy bootcamps plus GetSmarter short courses. It claims to have served more than 150,000 students and users.

Analysts reported mixed feelings on the results. Some commended an improved quarter and others expressed skepticism on whether 2U has turned its business around or simply masked problems with Trilogy.

“2U closed out a rocky 2019 on a high note as grad program enrollments are showing signs of stabilization, while Trilogy appears to be a valuable addition to the business,“ according to a report from investment bank Needham & Co.

“While we need to see more progress and proof as 2U launches the new programs, we believe management is on the right path in terms of focusing on licensure programs which boast higher conversion rates and lower cost per lead, while also looking at ways to create content more affordably,” the report continued.

Meanwhile, a report from Oppenheimer & Co. listed business model concerns, a high price tag for Trilogy, an unclear path to profitability and lowered faith in 2U’s executives as reasons why the investment bank sees a “slow path to recovery.”

A report from investment bank D.A. Davidson likewise questioned whether 2U can become free cash flow positive in 2021, as promised by 2U CFO Paul Lalljie on the earnings call. “On balance, while the tone of business is improved from two quarters ago and we want to like 2U for the growth opportunities, we do not have enough data points to gain confidence that 2U can truly deliver a healthy balance of growth and profitability,” according to the report.

The company expects its full-year 2020 revenue will be in the range of $725 million to$750 million, which would be an increase of over 25 percent. 2U expects a net loss in 2020 of between $200 million and $220 million. And it’s important to note that none of 2U’s university contracts are up for renewal until 2024.

This CNBC clip features 2U CEO Chip Paucek on his company’s purchase of Trilogy.

Slower Program Launches

While 2U executives have expressed disappointment in the online degree-granting programs business its best known for, the company revealed some of its strategy to improve those profits. It will launch five new programs in 2020 and expects to launch at least 10 in 2021.

The number is a far cry from the 17 programs it launched in 2019—not to mention previous targets of 21 new programs in 2020 and 25 programs in 2021. But fewer programs will help 2U control costs. It invests about $5 million to $10 million to develop content and train professors when launching each program, according to the Needham report.

“Let me be clear—demand for our programs remains strong and we love the programs we’re launching in 2020, which leverage our competitive advantages in licensure fields,” Paucek said on the call, according to a transcript. “We are expanding our geographic footprint in education, social work, as well as entering two new verticals: pharmacy and architecture.”

2U has stated plans to launch four undergraduate programs with the University of London this year: a bachelor’s in data science and business analytics, economics, economics and management, and business and management.

“We try to do things more on a consolidated basis and most importantly, our objective is to make sure we have an organization that is nimble, flexible, and at the same time, efficient,” CFO Lalljie said on the call. “Launching five courses next year allows us to be selective.”

Trilogy CEO Dan Sommer discusses his company’s purchase by 2U in this interview from Nasdaq.

Punts on Recent Headlines

2U did not respond in detail to developments that have grabbed headlines leading up to its quarterly earnings call, including receipt of a letter from Democratic presidential candidate and Massachusetts Sen. Elizabeth Warren and Sen. Sherrod Brown, a Democrat from Ohio.

In January, the pair wrote to the five largest OPM companies to ask about their business practices and express concern over a lack of transparency in how they operate. According to the letters, OPM contracts have colleges share half the tuition revenue from students and suggests the arrangement could break federal law, which prohibits universities that receive federal dollars from paying commissions on student recruitment.

The letters went to 2U, Academic Partnerships, Pearson Learning, Wiley and Bisk. The letters requested answers by Feb. 21.

In response to a question about the letter, Paucek said 2U is “in the process of responding to the senators and we really like what we have to say.” He said 2U programs are still controlled by the universities. “These are their programs and the decisions that they are making every day drives the business and drives their opportunity along with us. We do talk to our partners all the time. We are excited about what we have to say with regard to the power of the business, the business model even in the states of those two particular senators.”

The company has previously promised to release a transparency report in 2020 to detail enrollment breakdowns by gender, race and age; retention and graduation; employment and license passage outcomes; ad and digital marketing spend; time to completion; average attendance rates, student satisfaction ratings and hour requirements.

Other news 2U executives haven’t discussed—and analysts didn’t ask about it on the latest earnings call—is a report that the company is interested in going private through a sale. Activist investor Sachem Head has reportedly become a top shareholder in 2U.

Sachem Head is also the activist investor that bought shares in publicly traded Instructure, which will hold a vote this week to decide if it goes private and sells to a private equity firm.


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