Why 2U Inc (TWOU) Comes Through As A Rare Breed

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  1. TWOU gets a cut of about 60% of tuition from supported programs.
  2. The company’s marketing and sales expenses as a percentage of revenue fell to 59% last year.
  3. TWOU targets the graduates market, of which there are about 2.9 million in the U.S. alone.

If you happen to have a friend or family member who is trying to balance between work and study, you are certainly already familiar with some of the frustrations associated with such practice. 2U Inc (NASDAQ:TWOU) says that it exists to help students have a much easier time studying remotely.

To make this happen, 2U provides an integrated platform for online learning. The company’s solutions are geared towards colleges and universities that run online degree programs. Initially, 2U is targeting graduate students.

On average, a graduate degree course, based on 2U’s program, is $67,575. However, the range is usually between $36,630 and $124,325, depending on particular courses and other factors.

When it comes to taking revenue, the company’s share is usually in the vicinity of 60% of the related course tuition and fees.

In some ways, or perhaps in many ways, online degree programs are still in the early stage, which in itself indicates significant long-term growth potential. As such 2U is certainly in for strong long-term growth and profitability, at least if the company can move fast enough to tap opportunities as they come.

2U is an early mover in the fully online degree program support market, but as you can expect, there is also competition in the space.

What makes 2U kind of a rare breed in the online higher education program market?

Early stage growth market

The fully online tertiary education market is just beginning to develop and enrollment is still low in most, if not all, the institutions that are already implementing the program. The low penetration of fully online post-secondary education programs is a clear indication of the potential in the market.

2U is already doing well in this nascent market. The company has already tapped some of the leading universities and colleges to roll out its solutions. Some of 2U’s university program partners include Yale, Georgetown and several others.

The early-mover advantage, coupled with partnership with some of the renowned universities in the world, come as crucial enablers for 2U’s future growth

Inspiring progress

2U has shown strong partner retention and there is no doubt it can successfully reference its existing impressive client list to sign more contracts and grow revenue going forward. The company signs more than five program partners annually and existing partners are also expanding rollout of their fully online programs.

As an early mover and partner to some of the most prestigious universities in the world, there is no doubt 2U is in a favorable growth position. For example, the company has a high-profile referencable partner base, which is a key competitive advantage when it comes to winning over new program partners.

Superior solutions

2U Inc (NASDAQ:TWOU) isn’t trying to kill two birds with one stone. The company has properly designed solutions for the online education market that address a number of crucial needs of the market.

2U has been able to come up with what have been called ‘sophisticated solutions,’ that cover a wider spectrum in the online post-secondary education space. Among the company’s solutions are platform and marketing technologies.

Marketing efficiency

2U not only provides partners with best-in-class platforms and marketing solutions, the company also use sophisticated technology internally for its own marketing advantage. As such, the company stands to benefit from marketing efficiency, which should lead to profit margin improvements.

Additionally, as 2U taps more high-profile partners, it will require less effort and marketing investment to win the confidence of potential program partners.

Rapid SaaS adoption

One area that 2U is doing extremely well is in the cloud-based software-as-as-Service (SaaS) division. This segment is already growing rapidly and there exists more room for material appreciation in the future. This should bolster revenue and margins from the current levels going forward.

Long-term contracts

2U Inc (NASDAQ:TWOU) has structured its solutions in a way that also ensures an aspect of scalability to a critical mass.

The company also gets its college and university partners to sign long-term contracts that are initially between five and ten years. Long-term contracts, in some ways, ensure greater revenue visibility.

Well-defined and hustle-free approach

While 2U takes care of the delivery of online study and marketing platforms for its program partners, the company leaves colleges to deal with financial aid, admissions and accreditation issues. This ensures that the company is free from confusing offerings that can sometimes weigh heavily on margins.

Large addressable market

Given the pressure of balancing work and study, online education programs are in high demand in the U.S. and elsewhere around the world.

Globally, it is estimated that more than 160 million students are taking post-secondary education programs. Many in this student population and future enrolls will be shifting to online programs because of the flexibility it offers.

In the U.S. alone, annual revenue in the post-secondary market is about $550 billion, according to data from the National Center for Education Statistics (NCES). The total post-secondary students in the U.S. has reached more than 21 million and continues to grow at a compound annual growth rate (CAGR) of 2%.

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2U’s main focus is on graduate students, whose population in the U.S. is about 2.9 million. NCES also estimates that 22% of U.S. graduate students are signed up for online courses exclusively and another 8% are enrolled for some online courses.

In the near to medium term, 2U will primarily focus its attention in the U.S., where the addressable market is already huge. However, the potential in the global market will certainly see the company cast its net wider by expanding abroad.

Improving expenses situation

The one major area where 2U continues to lose money is through marketing and sales expenditures. However, what is assuring is that marketing and sales expenses have been falling as a percentage of revenue. Put differently, the expenses that go into marketing and student recruitment is paying off with faster revenue growth.

In 2011, marketing and sales expenses as a percentage of revenue were 108% and declined to less than 60% in 2014. Further decline of marketing and sales expenses as a percentage of revenue is expected this year to possibly hit 58%.

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Areas of concern

Money-bleeding business:

2U currently generates losses, a trend that may continue in the near to medium-term outlook. That is because the company still faces higher expenses.

Losses have been improving at 2U, but the company continues to generate negative cash flow. As such, investors coming to this stock should be aware that it might take some time before 2U starts generating positive cash flow.

Competition:

Competition is another threat to the 2U’s business. The business of supporting online studies has continued to attract more players. As the market becomes crowded, 2U could be pressured to put more money into marketing or renegotiate prices to retain clients.

Risky client concentration:

2U still has a small base of program partners, which to some extent has its revenue base highly concentrated at the top. The company generated 82% of its revenue in 2014 from just four core university programs.

Bottom line

What is more interesting in the case of 2U Inc (NASDAQ:TWOU) is that the company has initially narrowed its focus. The company targets the graduates market and leading institutions. There is more for 2U to gain than lose from this strategy.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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