2U - Solid Growth And Stabilizing Losses For This SaaS Education Service Provider

Apr.22.14 | About: 2U, Inc. (TWOU)


Fast-growing SaaS education business provider is demonstrating accelerating top-line growth.

Losses are stabilizing which should be comforting to investors.

I need to see more improvements before investing in the business.

2U (NASDAQ:TWOU) provides cloud-based SaaS solutions targeted at non-profit colleges and universities to deliver education to students at a distance. The fast-growing business only recently made its public offering which showed solid demand for the company's shares.

Very strong revenue growth is accompanied by stabilizing losses which shows the potential for the firm in a growing education market which is being provided through online channels.

The Public Offering

2U offers an online learning platform accompanied by related technology for colleges and universities to provide enrolling, education, support and graduation solutions to make the learning experience similar to on-campus offerings. Some of the offerings include the online campus platform which allows for online content management, an application process portal and customer relationship management, among others.

2U sold 9.2 million shares for $13 apiece, thereby raising roughly $120 million in gross proceeds. The company itself sold 8 million shares and raised $104 million in proceeds before costs while selling shareholders offered the remainder of the shares.

The offering was strong as bankers and the firm aimed to sell shares in a preliminary $11-$13 price range. Solid demand for the shares allowed for the sale at the high end of the range.

Some 24% of the total shares outstanding were offered in the public offering. Trading at little above $13 in the weeks following the public offering 2U is valued at roughly $510 million.

The major banks that brought the company public were Goldman Sachs, Credit Suisse, Oppenheimer, Needham & Co and Pacific Crest Securities.


2U offers a flexible platform allowing schools to offer a high-quality educational content from a distance. Clients enrolled more than 31,000 full-course equivalent courses at the end of 2013, demonstrating the success of 2U's approach. As students can of course follow multiple courses at the same time this implies than roughly 8,500 individuals have enrolled as a student and used 2U's solutions to date.

2U has enrolled eight major clients including well-known educational institutions like the University of California, Berkeley.

Revenues for the year of 2013 came in at $83.1 million which is up by 48.8% on the year before. Losses expanded alongside revenue growth increasing towards $28.3 million for the past year.

2U held roughly $7 million in cash ahead of the offering while having no debt outstanding. On top of this comes the gross proceeds of $104 million resulting in a net cash position of roughly $100 million after the offering. This values operating assets at around $410 million, the equivalent of roughly 5 times annual revenues.

Investment Thesis

As noted above, the offering of 2U was a modest success after the firm priced shares at the high end of the preliminary offering range, with shares being sold 8.3% above the midpoint of the preliminary range. Shares quickly gained ground to levels around $16 per share in the days following the offering but later settled around $13 per share.

Investors might be attracted to 2U's impressive growth rates despite increasing losses. Revenue growth for the entire year of 2013 has been impressive, yet fourth-quarter revenue growth actually accelerated with revenues increasing by 51.1% to $24.8 million. This growth is supported by solid market fundamentals as online activities become more important in the higher education system in the future.

Investors are also comforted by the fact that relative losses are narrowing, with absolute losses stabilizing in the fourth quarter on an annual basis. The long contracts with its clients which often last 10-15 years result in reliable long-term cash flows although the concentration of clients could be a worry.

I believe 2U offers interesting solutions as it shows solid growth, while losses are stabilizing. The key dependency on some of its clients is a risk, although a new contract win could be a major boost to the business itself given the fact that contracts are typically large.

Despite these promising developments the company does not meet my investment criteria. I am awaiting further narrowing losses and proof of more sustainable top-line growth before considering making an investment in 2U.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.