2U Defends Trilogy Bootcamp Purchase

Online Program Management

2U Defends Trilogy Bootcamp Purchase

By Wade Tyler Millward     Nov 19, 2019

2U Defends Trilogy Bootcamp Purchase

Last quarter, online program management company 2U shocked investors with worse than expected losses and, going forward, lower average program enrollment for some of its largest online graduate programs.

Now, 2U has beaten expectations with its latest earnings report for the quarter that ended Sept. 30. But the Lanham, Md.-based company’s leadership remained foggy on some aspects of its strategy to survive in an increasingly competitive industry.

Grad Degree Business

Despite concerns about its online graduate degree program business, the company showed growth. 2U added 15 new degree programs in the latest quarter and saw revenue grow 15 percent, to $103.4 million year over year. Full-course enrollment grew 25 percent to 40,910 people. 2U manages online degree programs on behalf of universities including Harvard, New York University and University of Southern California, its largest customer.

Still, 2U reported a loss this quarter of $10.7 million. Average revenue per course decreased year over year to about $3,000, due in part to more scholarships and to high growth in newer, less expensive programs.

2U expects revenue for the 2019 fiscal year of between $570 million and $575 million, which would mean a 38-to-40 percent increase year over year. It expects a loss of $22 million to $28 million for the year.

2U has been moving more into less expensive short-term courses through its acquisitions of GetSmarter and coding bootcamp Trilogy. While the graduate degrees that 2U helps run can cost as much as $150,000, its short courses cost as low as $1,000, CEO Chip Paucek said on an earnings call earlier this month, according to a transcript.

“Over time we need to have price points across the entire spectrum,” Paucek said. “We need to offer students options to further their educational goals whether they're looking for skills attainment from something like a short course to learn how to use AI in their job or something like a doctor of physical therapy which is like a three-year life changer.”

With that, the company is on course to launch its first undergraduate program, a bachelor's degree in data science and business analytics with the London School of Economics and the University of London, in fall 2020—for a tuition of about $25,000.

And Paucek said another university is interested in a zero interest deferred-tuition plan that 2U has piloted with Simmons University.

In Defense of Trilogy

2U wrote down about 10 percent of bootcamp Trilogy’s value five months after acquiring the company for $750 million in April. As newly hired CFO Paul Lalljie explained, “the carrying value of the Trilogy reporting unit exceeded its fair value.”

The move “raises concerns about management's use of capital,” according to a report from investment bank Oppenheimer. Yet, 2U CEO Paucek defended the purchase to analysts.

He said the acquisition will especially help 2U compete on technology-related courses. “If we hadn't gone down the path of short courses and boot camps, we'd be at a very significant competitive disadvantage to the rest of the space,” Paucek said.

Looking at the numbers, Trilogy brought in quarterly revenue of $29.2 million, more than half of 2U’s “alternative credentials” segment that includes acquired short course provider GetSmarter.

Alternative credentials saw enrollment of about 15,000 people, up 64.8 percent year over year. Average revenue per course was $3,825, about 98.2 percent up year over year.

More competition for Trilogy looms in an already crowded bootcamps space. A fellow publicly traded education technology company, Chegg, has promised low-cost courses with its own bootcamp acquisition, Thinkful.

Paucek said more interest in bootcamps further validates the Trilogy purchase. “Our business with Trilogy is at a scale and doing it with university partners in a way that no one else in the market is doing,” Paucek said in response to an analyst’s question about Chegg.

2020 Looks Unclear

2U’s leadership declined to provide guidance on its expected performance in the fourth quarter of 2019—or in 2020—and it rescheduled an event for investors to next year to give its new CFO time to adjust to his new role.

Lalljie said he will improve 2U’s quarterly cash spending habits in 2020, which will be helped with less program launches than the 19 programs launched in 2019. The company ended 2018 with $449.8 million in cash and ended September with $154.1 million in cash. The company also has a long-term debt of $253.5 million.

Paucek and Lalljie declined to talk about their scholarship strategy, individual contracts or a Bloomberg report of an activist investor that wants to push 2U toward considering a sale.

“We're not at a point yet where we've got or are ready to present our plan in terms of what next year looks like specifically but we'll get there soon,” Paucek said in response to an analyst’s question about 2020 cash spending.

2U’s stock, at $22.69, is flat from the investor call Nov. 12.

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