2U’s Recipe for Revenue Growth

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Continuing our discussion of education tech provider 2U Inc (NASDAQ: TWOU), our Motley Fool Industry Focus podcast hosts analyze the importance the organization places on its contracts with major universities, as well as its use of data, to expand revenue.

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A full transcript follows the video.

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This video was recorded on Sept. 19, 2017.

Vincent Shen: I also think it's important to know, in terms of the way 2U approached some of these very prestigious universities and sell them on the idea of partnering on an online program, which again, some of these are still grappling with negative connotations, 2U will, for example, invest upfront up to $10 million in each partner university, getting them set up and ready to onboard students and begin with the program online. And the reason why the company is willing to do that is, the contracts that they sign with universities tend to be quite long with contractual terms of about 10 to 15 years. Beyond that, there's tuition sharing between the company and the university, with the company usually taking about 50% to 60% of the tuition. In the end, the company and the university again also have pretty aligned interests, which is to attract new students but also keep students enrolled in the 2U affiliated programs, and for them to do well. On the other side of that, 2U also handles a lot of the recruitment in the marketing for these programs where it provides that technological infrastructure and support that you mentioned, Asit. Through the end of 2016, for example, 83% of students who have entered relevant programs with 2U and these universities either graduated or remained enrolled. That's a pretty strong number there.

Something else I wanted to touch on as we wrap up here is, this is another company, like we talked about with Chegg, that relies heavily on data. 2U has developed what they call a proprietary algorithm that allows them to identify the universities and programs that they think are going to be the most successful as part of the 2U umbrella or portfolio. They look at things like the existing market for a degree, student demographics. In the end, with the company putting in that $10 million, for example, there's still definitely a risk. The payback period is typically four to five years. On the bright side, the majority of the company's earliest university partners have already chosen to renew, so they've seen the success that 2U has helped them to generate with these online programs, they want to continue.

In the end, the ability to scale each of these programs for a greater number of students, or for a university, to help a university scale to more programs, that opportunity also exists. And when you look ahead, 2U has spoken to some of the growth that it hopes to see and to capture through additional partnerships, and by also expanding abroad. Management has pointed to a long-term goal of 200 programs. Earlier this year, they also acquired GetSmarter for about $100 million. GetSmarter offers short courses, and it also has relationships with schools like MIT and Oxford in the U.S., U.K., and South Africa. So again, that's the early steps of part of that international expansion.

Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool recommends 2U. The Motley Fool has a disclosure policy.