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Summary

  • TWOU is a provider of a SaaS cloud-based platform that allows non-profit colleges and universities to offer online programs.
  • TWOU plans to raise $110.1 million in its upcoming IPO, offering 9.2 million shares at an expected price range of $11-$13 per share.
  • We are neutral on this IPO, given TWOU’s significant losses and the high CEO compensation—without high profits.

2U Inc. (NASDAQ:TWOU), provider of a SaaS cloud-based platform that allows non-profit colleges and universities to offer online programs, plans to raise $110.1 million in its upcoming IPO.

The Landover, Maryland-based firm will offer 9.2 million shares at an expected price range of $11-$13 per share. If the IPO can reach the midpoint of that range at $12 per share, TWOU will command a market value of $533 million.

TWOU filed on February 21, 2014.

Lead Underwriters: Credit Suisse Securities LLC, Goldman Sachs & Co.

Underwriters: Needham & Company LLC, Oppenheimer and Co. Inc., Pacific Crest Securities LLC

Summary

TWOU offers cloud-based SaaS solutions to enable non-profit higher education institutions to offer their resources online. The firm's platform allows its clients to provide instructor-led courses in a live setting, as well as other educational resources and social networking, to students via web-based and mobile applications. Eight universities currently offer graduate degree programs online via TWOU's solutions, including Georgetown University, the University of Southern California, UC Berkeley, and UNC Chapel Hill. Full course equivalent enrollments in TWOU-enabled programs has grown from 14,099 in calendar 2011 to 31,338 in calendar 2013.

TWOU generates revenue through long-term contracts (usually 10-15 years, initially) for a specified share of the tuition and fees that the firm's clients receive from the students enrolled in TWOU-enabled programs.

Valuation

TWOU offers the following figures in its S-1 balance sheet for the year ended December 31, 2013:

Revenue: $83,127,000.00

Net Loss: ($27,953,000.00)

Total Assets: $28,652,000.00

Total Liabilities: $22,629,000.00

Stockholders' Equity: ($92,024,000.00)

TWOU generated revenues of $29.7 million, $55.9 million and $83.1 million for the years ended December 31, 2011, 2012 and 2013, respectively. Over the same periods, the firm posted huge net losses of $24.9 million, $23.1 million and $28.0 million, respectively.

Business

TWOU competes with other providers of similar services, some of which have access to far greater financial resources than TWOU.

Major competitors include EmbanetCompass, which was recently acquired by Pearson (NYSE:PSO), and Deltak, which was recently acquired by John Wiley & Sons (JW/A). TWOU also must compete with online learning solutions, developed in-house by colleges and universities.

Management

Co-founder Christopher Paucek has served as TWOU's CEO since January 2012, and formerly served as the firm's President and COO. He previously served as the CEO of Smarterville Inc. and as vice president of business development and president of Educate Products for Educate Inc. Mr. Paucek received a B.A. from The George Washington University and is currently enrolled in the company's MBA@UNC program at the UNC Kenan-Flagler Business School of the University of North Carolina at Chapel Hill.

Conclusion

We are neutral on this IPO.

Though TWOU has seen significant losses over the past several years, those losses have remained relatively stable, even as the firm's revenues have grown exponentially, indicating potential for future success.

As online programs grow in popularity, TWOU should be able to cash in on the relationships it has established with universities through long-term contracts. However, we don't think TWOU will see near-term profits, and its decision to pay CEO Christopher Paucek a total compensation of nearly $5 million in 2013 is much more than we think is fair to shareholders and adds to the huge losses.

Source: 2U Inc. IPO Might Not Have Much To Teach