2U, Inc. Pops on Another Quarterly Beat and Raise

By Markets Fool.com

IMAGE SOURCE: GETTY IMAGES.

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2U Inc. (NASDAQ: TWOU) reported third-quarter 2016 results Thursday after the market close, and shares of the online education platform company are up 6% in after-hours trading as of this writing. Let's take a closer look, then, at how 2U kicked off the second half of the year.

2U results: The raw numbers

Metric

Q3 2016 Actual

Q3 2015 Actual

YOY Growth

Revenue

$52.0 million

$37.1 million

40.2%

GAAP net income (loss)

($6.8 million)

($8.2 million)

N/A

GAAP earnings (loss) per share

($0.14)

($0.20)

N/A

YOY = year over year. Data source: 2U Inc.

What happened with 2U this quarter?

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  • On an adjusted (non-GAAP) basis, which adds perspective by excluding stock-based compensation, 2U's net loss was $2.7 million, or $0.06 per share, narrowed from an adjusted net loss of $4.9 million, or $0.12 per share, in last year's third quarter.
  • Adjusted earnings before interest, taxes, depreciation, and amortization came in at a loss of $0.2 million, narrowed from an adjusted EBITDA loss of $2.9 million in the same year-ago period. This also marks an adjusted EBITDA loss margin improvement of 8 percentage points from last year's Q3.
  • All the above figures significantly exceeded 2U's stated guidance, which called for third-quarter revenue of $49.9 million to $50.4 million, an adjusted EBITDA loss of $2.0 million to $1.6 million, a GAAP net loss of $9 million to $8.6 million ($0.19 to $0.18 on a per-share basis), and an adjusted net loss of $4.6 million to $4.2 million ($0.10 to $0.09 on a per-share basis).
  • Recently announced partnerships include:
    • Two online offerings through the University of Dayton, including a general MBA and an advanced standing MBA for individuals with over 10 years of work experience or an undergrad degree in business.
    • A new online master of science in integrated design, business, and technology from USC's Jimmy Iovineand Andre Young Academy for Arts, Technology and the Business of Innovation.

What management had to say

2U CEO Chip Paucek added:

Once again 2U delivered strong financial performance in the third quarter of 2016. [...]We have now announced two new programs, including a new university partner in a new region as well as an existing partner launching a new program with us. Given the state of the new program pipeline, we are increasing our 2017 launch target from nine to 10 new programs. We will discuss our long-term growth strategy in detail during our Investor Day onNovember 15th.

Looking forward

For the fourth quarter, 2U expects revenue in the range of $56 million to $56.4 million, positive adjusted EBITDA of $3.8 million to $4.2 million, a GAAP net loss of $3.5 million to $3.1 million ($0.07 to $0.06 on a per-share basis), and adjusted net income of $1.1 million to $1.5 million (equating to adjusted net income per share of $0.02 to $0.03).

As such, 2U increased each of its respective guidance ranges for the full year, and now expects 2016 revenue of $204.5 million to $204.9 million, adjusted EBITDA of $3.8 million to $4.2 million, a GAAP net loss of $21.9 million to $21.5 million (or $0.47 per share to $0.46 per share), and an adjusted net loss of $5.8 million to $5.4 million (or $0.13 per share to $0.12 per share).

Finally -- with the caveat that its 2016 budget cycle isn't finished -- 2U offered an early look at its expectations for 2017. More specifically, next year 2U anticipates revenue growth of 30% to 31%, a net loss margin of between 12% and 10%, and adjusted EBITDA margin of between 2.5% and 3.5%. 2U also told investors to expect roughly the same quarterly revenue distribution in 2017 as we saw this year, as well as similar annual cost seasonality, which disproportionately reduces earnings in the second quarter of each year, and increases profitability as marketing costs typically wane in the year-end holiday quarter.

In the end, though, this is a fairly straightforward beat-and-raise situation from 2U. The company is steadily expanding its program offerings in these early stages of growth, while at the same time maintaining its long-term goal of achieving sustained profitability. So I think investors with a similar mindset and a willingness to pull up a seat and watch 2U's story unfold should be more than happy with where it stands today.

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Steve Symington has no position in any stocks mentioned. The Motley Fool recommends 2U. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.