2U's Potential End Days Becoming More Clear

Today's earnings release confirmed November coverage and directly addresses the crisis

Author

Phil Hill
February 12, 2024

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In late November I finally took a deeper dive into the 2U / edX balance sheet and saw a crisis looming.

Now that I’ve looked deeper, I probably understated the depth of the coming changes to 2U. The company has almost no chance of generating the cash through normal business operations to pay its debts, and its debt holders are in control now. A structured bankruptcy is likely in 2024 unless these debt holders make enormous concessions. Put another way, there is almost no way that 2U / edX survives the next year without major changes, either in its offerings or in its solvency.

Clarity

With today’s earnings release for Q4 and Full Year 2023, the potential end days of this once dominant company are becoming more clear. Read the post above if you want to see the full explanation of the debt-driven crisis that 2U faces.

For today’s release, 2U’s new CFO came right to the point.

Our immediate focus in 2024 is to strengthen the fundamentals of our business in order to extend our debt maturities and restore a healthy balance sheet . . .

Although the release summary might appear positive, but trust me, it is not [emphasis added].

Result s for Fourth Quarter 2023 compared to Fourth Quarter 2022

* Revenue increased 8% to $255.7 million

* Degree Program Segment revenue increased 19% to $163.5 million

* Alternative Credential Segment revenue decreased 7% to $92.2 million

* Net loss was $42.4 million, or $0.52 per share, and includes non-cash impairment charges of $62.8 million

One-time Fees

The issue is that $54.6 million of Q4 revenue was from termination fees where academic partners pay 2U a fee for to cancel the agreement [emphasis added].

Revenue for the quarter totaled $255.7 million, an 8% increase from $236.0 million in the fourth quarter of 2022. Revenue from the Degree Program Segment increased $26.4 million, or 19%, and included $54.6 million of revenue recognized from the mutually negotiated exit of certain degree programs, also referred to as portfolio management activities. Revenue from the Alternative Credential Segment decreased $6.7 million, or 7%, primarily due to lower enrollments in coding boot camp offerings, partially offset by 8% growth in FCE enrollments in executive education offerings.

If you subtract that one-time $54.6 million amount, the Degrees segment (think traditional OPM) lost $28.2 million, more than a 20% year-over-year (YoY) decrease. That combines with the 7% loss in the Alternative Credential segment. If my math is correct, 2U / edX organically (in this case, removing one-time termination fees) decreased total revenue by more than 7% YoY for Q4.

The estimates of how much “portfolio management”, meaning program termination fees, should be expected moving forward was not too clear. In November 2U referenced an additional $40 million from 2U that did not occur in Q4. Once the formal 10K report comes out, we’ll see if that adds more clarity.

There are only two positive results to note:

  • Executive education increased enrollments by 8% to partially offset the losses from Bootcamps; and

  • There will be additional one-time termination fees recognized in 2024.

I do not want to imply that 2U / edX is hiding any of this situation. Further in the earnings release we get to the heart of the matter.

As of December 31, 2023, the company's cash, cash equivalents, and restricted cash totaled $73.4 million, a decrease of $109.2 million from $182.6 million as of December 31, 2022. As of December 31, 2023, the company's total debt was $904.7 million, including borrowings of $40.0 million under the company's revolving credit facility.

In January 2024, the company entered into a receivables factoring transaction with Morgan Stanley Senior Funding ("Morgan Stanley") whereby Morgan Stanley has committed to purchase up to $86.2 million of receivables owing to the company related to portfolio management activities at a purchase rate of 88%.

The company expects that if it does not amend or refinance its term loan, or raise capital to reduce its debt in the short term, and in the event the obligations under its term loan accelerate or come due within twelve months from the date of its financial statement issuance in accordance with its current terms, there is substantial doubt about its ability to continue as a going concern. The company's financial statements will be included in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Enrollment Declines

Intermingled with pure finances is a developing decrease in enrollment across all areas other than Executive Education.

Control

Go back to my November post:

Debt holders are in control, and they will determine whether to refinance the debt, whether to force 2U into bankruptcy, and whether to sell of any assets such as the Trilogy bootcamps to help pay off debt. 2U and its new CEO are obviously part of the process, but they are not in ultimate control. [snip]

If my analysis is correct, this means that 2U is facing an existential change in 2024. The company will likely survive, but it will undergo some significant changes from bankruptcy, from selling off assets, from additional layoffs, or more likely from some combination.

What we are seeing is more clarity on how those debt holders are making their moves.

Morgan Stanley has committed to purchase up to $86.2 million of receivables owing to the company related to portfolio management activities at a purchase rate of 88%.

Purchase receivables means that debt holders are directly taking over parts of the accounts receivables, with a 12% discount (or payment fee). Obviously, $86.2 million is not enough to solve a $900 million problem, but it buys time until we see the next move.

Outlook

2U / edX is now forecasting total revenue in 2024 of $805 - $815 million, a further 14% decrease from the disastrous 2023. But, the company is working to decrease costs even further. A “12 quarter” “shrink to grow strategy” according to CEO Paul Lalljie.

Internally, the company is being run as a financial Hail Mary in the hopes of survival. Everything will be focused on financial metrics - “comprehensive review of our business to streamline and consolidate costs”, “optimize staffing levels”, “outsourcing”, etc. With clients, the key term is “going concern”, meaning the likelihood of surviving as an operating company that can pay its bills.

There was nothing in the earnings release or the earnings call Q&A that changed my outlook.

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