Andrew Hermalyn From 2U Responds to Follow Up Questions

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Last week Josh Kim shared a Inside Higher Ed post titled ”3 Questions for 2U’s Andrew Hermalyn: How should universities think about 2U’s ability to be a long-term partner?” In that post, Josh framed the questions on the most recent earnings call from 2U.

As a quick note, my post-earnings piece was a follow-on to a November post that laid out my analysis in more detail.

It is admirable that Hermalyn and the 2U executive team are publicly addressing these types of questions, and I recommend that you read Kim’s post. I felt, however, that there were some relevant follow-up questions that should be addressed, and Hermalyn graciously agreed to provide responses that I am publishing in full below. I will have analysis to share on this discussion, but for now I’d like the answers to stand on their own.

1. You mentioned $73m in cash but not that the company had $182.6m in cash one year earlier. Should partners be concerned about this trend? If not, why not?

Partners should not be concerned. The decline in cash you’re referencing was due to paying down a portion of our term loan in January 2023, which is reflected in our year-over-year cash position.

We have implemented significant actions to improve our efficiency and free cash flow and, based on our guidance, expect positive free cash flow for 2024. We are confident that we have – and will continue to have – sufficient financial resources to operate our business, make strategic investments in growth areas, and deliver our contractual obligations to partners.

2. You mentioned that you “expect to refinance our debt between now and the end of the year”, but at what cost? What will you likely have to give up in order to refinance, and how could this impact partners? What happens if you are not able to refinance your debt in 2024?

We are confident that we will refinance our debt, but it's too early to say what the terms of a refinancing would be, and I can’t speculate on potential outcomes. Ultimately, our goal, and our lenders' goal, is to refinance in a way that sets 2U up for long-term success. That is the best outcome for them, for 2U, and for all of our stakeholders.

The debtholders care about the future of 2U. We feel strongly that any refinancing will make 2U stronger and enable us to continue delivering great outcomes for our partners and their students, just as we always have.

3. Similarly, the Morgan Stanley receivables purchase was at a purchase rate of 88%. This means that 2U will be giving up 12% of the revenue from terminating programs, just to pull forward cash, which feels expensive. Why is it worth giving up a full 12% at this time - is this a condition from lenders in order to further negotiate refinancing? Also, am I interpreting this news correctly?

While I can't comment specifically on the terms of that arrangement, it’s important not to assume that all of the payments from partners were short-term, so we felt this discount was commercially reasonable.

This transaction is not related to a potential refinancing and was not required by our lenders. We proactively decided to enter into this arrangement in light of the seasonality of our business, with January and February necessitating the highest marketing spend to recruit Fall cohorts and the planned launch of 60 new degree programs this year. Selling these receivables brought in additional cash to enable us to capitalize on the opportunities we’re seeing in the marketplace.

4 . What will be the impact of the financial restructuring on 2U’s ability to meaningfully grow programs without significant name brands (iow, not Georgetown or UNC, etc), given the typical need for major investments in this type of marketing and recruitment?

We don’t expect our refinancing efforts to have an impact on this. We have – and will continue to have – sufficient financial resources to support and grow our current portfolio and new launches. We’ve built models in partnership with the institutions we work with that enable lower investment by 2U without sacrificing the quality of our services.

Right now, we have the best set of offerings that we’ve ever had, from free courses to degrees, with some of the world’s best institutions. In 2024, we’re planning to launch 60 new degree programs, and a variety of alternative credential offerings in high-demand, high-impact topics such as AI and sustainability.

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