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Summary

  • Cloud-based SaaS solutions that enable leading nonprofit colleges and universities to deliver their high-quality education to qualified students anywhere.
  • Top line revenue grew 49% in 2013 to $83 million, with a gross margin of 73% and a loss of $28 million.
  • TWOU generates recurring revenue from 10-15 year contracts.

Based in Landover, MD, 2U (NASDAQ:TWOU) scheduled a $110-million IPO on the Nasdaq, with a market capitalization of $470 million at a price range mid-point of $12 for Friday, March 28, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents
Manager, Joint Managers: Goldman Sachs, Credit Suisse
Co-Managers: Needham & Co., Oppenheimer & Co., Pacific Crest

End of lockup (180 days): Wednesday, September 24, 2014

End of 25-day quiet period: Tuesday, April 22, 2014

Summary
TWOU is a leading provider of cloud-based SaaS solutions that enable leading nonprofit colleges and universities to deliver their high-quality education to qualified students anywhere.

Top line revenue grew 49% in 2013 to $83 million, with a gross margin of 73% and a loss of $28 million.

During 2014 to 2015, TWOU expects to double the number of offered programs. The first of TWOU's clients' programs was launched in 2009.

TWOU generates recurring revenue from 10-15 year contracts.

13% of the IPO is from selling shareholders.

Valuation
Glossary
Pre-IPO grade-score summary

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

Cap (MM)

Sls

Erngs

BkVlue

TanBV

in IPO

2U, Inc.

$469

5.7

-16.8

5.10

5.85

23%

Conclusion
The rating on TWOU is buy.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business
TWOU is a leading provider of cloud-based SaaS solutions that enable leading nonprofit colleges and universities to deliver their high-quality education to qualified students anywhere.

TWOU's clients are leading nonprofit colleges and universities. They use TWOU's platform to offer full graduate degree programs online. The students in these programs receive the same degree or credit as their on-campus counterparts, and generally pay equivalent tuition.

Eight of TWOU's nine clients with whom TWOU has contracted to offer 2U-enabled graduate programs were ranked by U.S. News and World Report among the top 75 undergraduate institutions in its 2014 National University Rankings.

Currently, eight well-recognized nonprofit colleges and universities offer graduate degrees through TWOU's platform, including the University of Southern California, Georgetown University, the University of North Carolina at Chapel Hill and the University of California, Berkeley, and TWOU has contracted with a ninth university to enable a new graduate degree program that TWOU expects to launch in 2015.

Any individual student may be enrolled in more than one course during a period.

Rising Global Demand for Post-secondary Education
Higher education is a large and well-established market, both in the United States and worldwide.

In the United States alone, total revenue for all degree-granting post-secondary institutions was over $550 billion for the 2010-2011 academic year, according to a May 2013 report by the U.S. National Center for Education Statistics.

The decade between 2000 and 2010 saw a 37% increase in enrollment in post-secondary degree granting institutions in the United States, from 15.3 million to 21.0 million, according to the U.S. Department of Education, and that number is expected to rise to 23.8 million by 2021, a further increase of 13%.

TWOU helps generate revenue
From TWOU's inception through December 31, 2013, a total of 8,540 unique individuals have enrolled as students in clients' programs, and 82% of students who have ever entered these programs either have graduated or remain enrolled.

By the time the last of these individuals graduate or leave clients' programs, TWOU estimates that they will have generated more than $475 million in total program tuition and fees for TWOU clients.

History
The first of TWOU's clients' programs was launched in 2009.

One additional program launched in 2010, with two more commencing in 2011. In 2013, TWOU's clients launched five new programs.

Platform services
TWOU's innovative online learning platform and bundled technology-enabled services provide the comprehensive operating infrastructure colleges and universities need to attract, enroll, educate, support and graduate their students.

By leveraging its solutions, TWOU believes its clients are able to expand their addressable markets, while providing educational engagement, experiences and outcomes to their online students that match or exceed those of their on-campus offerings.

TWOU provides a suite of technology-enabled services designed to promote adoption and usage of its SaaS solutions by clients, and enrollment and retention of their students.

These services include program marketing, student acquisition, content development for courses and faculty and student support services, including technical training and support, non-academic student advising, academic progress monitoring and career services. TWOU also facilitates in-program field placements, student immersions and other student enrichment experiences.

Growth plan
TWOU is currently engaged by eight colleges and universities to enable 10 graduate programs that have launched and in which students have enrolled.

An additional program launched in January 2014, and four additional programs with existing clients are scheduled to commence later in 2014 or in 2015.

TWOU recently contracted with a ninth university to enable a new graduate program that TWOU also expects to launch in 2015.

TWOU's client contracts generally have initial terms between 10 and 15 years in length, and since TWOU's inception, all of the clients that have engaged TWOU remain active.

Dividend Policy
No dividends are planned.

Intellectual Property
TWOU has one patent application pending in the United States, which is directed to computer-implemented processes that facilitate asynchronous student responses to teacher questions, which is a process TWOU uses in its Bi-Directional Learning Tool, a technology it initially created to facilitate the Socratic method of teaching law.

Competition
Several competitors provide solutions that compete with some of the capabilities of TWOU's platform. Two such competitors, EmbanetCompass and Deltak, were acquired in 2012 by Pearson and John Wiley & Sons, respectively, both of which are large education and publishing companies.

5% stockholders
Entities affiliated with Redpoint Ventures 23.1%
John Katzman and affiliated entities 14.1%
Entities affiliated with Highland Capital Partners 11.3%
Novak Biddle Venture Partners V, L.P. 10.9%
Entities affiliated with Bessemer Venture Partners 8.3%

Use of proceeds
13% of the IPO is from selling shareholders. TWOU expects to net $86 million from its IPO. Proceeds are allocated as follows:

For program marketing and sales expenses to drive new student enrollments in TWOU's clients' programs, as well as to fund technology and content development expenses to support those programs and ongoing spending on services and support.

Disclaimer: This TWOU IPO report is based on a reading and analysis of TWOU's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: IPO Preview: 2U