2U, Inc. (TWOU) Q4 2023 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents mixed signals: a slight revenue decline, yet improved EBITDA and cost savings. The Q&A highlights strategic restructuring and liquidity, but lacks clarity on cost savings and debt negotiations. While some metrics are positive, uncertainties remain, leading to a neutral market reaction prediction.

Key Financial Performance

Q4 2023 Revenue $255.7 million, up 8% from $236 million a year ago, driven by 19% growth in the degree segment.

2023 Revenue $946 million, a 2% decline from $963.1 million in 2022, with degree segment revenue of $561 million decreasing $10.6 million or 2%.

Adjusted EBITDA Q4 2023 $90.2 million, an increase of 54% year-over-year, with a margin of 35%.

Adjusted EBITDA 2023 $170.8 million, an improvement of 37% over 2022.

Net Loss Q4 2023 $42.4 million, compared to $11.8 million in Q4 2022, reflecting revenue and operating expense drivers.

Net Loss 2023 $317.6 million, compared to $322.2 million in 2022.

Operating Expenses Q4 2023 $215.4 million, a 7% decrease over Q4 2022, driven by a $27.2 million decrease in personnel-related expenses.

Operating Expenses 2023 $974.9 million, a decrease of $108.1 million or 10% over 2022.

Cash and Cash Equivalents $73.4 million at year-end 2023, including a $40 million drawdown of the revolver.

Adjusted Unlevered Free Cash Flow 2023 $45.2 million, compared to $31.9 million for the 12 months ending September 30, 2023.

Degree Segment Adjusted EBITDA Q4 2023 $90.7 million, a margin of 56%, compared to a margin of 44% in Q4 2022.

Alt Cred Segment Adjusted EBITDA Q4 2023 Loss of $553,000, compared with a loss of $2.1 million in Q4 2022.

Degree Segment Adjusted EBITDA 2023 $214.7 million, a margin of 38% compared to a margin of 32% in 2022.

Alt Cred Segment Adjusted EBITDA 2023 Loss of $43.9 million compared with a loss of $55.6 million in 2022.

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Operating Highlights

New Degree Offerings: Introduced four new lower-price degree offerings and revised launch cadence to 60 programs for 2024, focusing on licensure and STEM verticals.

Alternative Credentials: Improving delivery model with asynchronous and non-cohort-based learning options to enhance flexibility for learners.

Market Positioning: Expect enrollment growth in 2024 by single digits, with new programs anticipated to generate up to $100 million in revenue at steady state.

Cost Savings: Achieved $90 million in savings on a run rate basis through cost reduction and marketing efficiency improvements.

Organizational Structure: Revised organizational structure to enhance alignment, accountability, and efficiency with eight business leaders reporting directly to the CEO.

Strategic Focus: Adopting a 'shrink-to-grow' mindset to improve EBITDA margins and cash flows, while ensuring profitability in growth strategies.

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Risk or Challenges

Debt Maturity: The company is facing potential and pending maturities of its term loan, which may lead to a going concern qualification in their upcoming 10-K.

Competitive Pressures: The education sector is experiencing a decline in online student enrollments compared to the pandemic peak, which may impact revenue growth.

Regulatory Issues: Changes in laws, regulations, and agency guidance for the education industry could affect operational strategies and financial performance.

Supply Chain Challenges: The company is reviewing all functions to eliminate redundant costs and may consider outsourcing or offshoring, indicating potential supply chain challenges.

Economic Factors: The overall economic environment and its impact on consumer spending and education funding could pose risks to revenue generation.

Operational Efficiency: The need to optimize costs and improve operational efficiency is critical, as the company aims to increase EBITDA margins and cash flows.

Market Demand: There is uncertainty regarding the demand for online education post-pandemic, which could affect enrollment and revenue.

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Guidance & Outlook

Cost Savings Initiatives: In 2023, 2U implemented cost-saving measures resulting in $90 million of savings on a run rate basis.

New Degree Offerings: Introduced four new lower-price degree offerings and revised the launch cadence to 60 programs for 2024, focusing on licensure and STEM verticals.

Operational Improvements: Plans to enhance marketing effectiveness using AI and automation, and to review functions to eliminate redundant costs.

Organizational Structure: Reorganized into eight business leaders to improve alignment, accountability, and efficiency.

Focus Areas: Strategic focus on product, cash, and organization to drive profitable growth and increase EBITDA margins.

2024 Revenue Guidance: Expected revenue for 2024 ranges from $805 million to $815 million.

2024 Adjusted EBITDA Guidance: Expected adjusted EBITDA for 2024 ranges from $120 million to $125 million.

Q1 2024 Revenue Guidance: Expected revenue for Q1 2024 ranges from $195 million to $198 million.

Enrollment Growth Expectations: Anticipate total enrollments in current programs to increase approximately 3% year-over-year.

New Enrollments Growth Expectations: Expect new enrollments in current programs to increase approximately 11% year-over-year.

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Shareholder Return Plan

Share Repurchase Program: None

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Key Q&A

Q:How should we think about the potential timeline for changes to start impacting profitability?

A:Our path forward is a shrink to grow strategy. We believe that over the next month or two, we'll have a good plan to execute against. It's a 12-quarter journey, and we will provide more details next quarter.

Q:Can you quantify the level of cost savings from the new initiatives?

A:Quantifying this is not responsible at this point, but we believe it can materially change our guidance.

Q:Can you elaborate on the cost control actions and expected savings?

A:We're looking at launch cadence, technology efficiency, and third-party spend. The 60 launches will deliver at least $100 million at steady state in 2.5 to 3.5 years.

Q:What targets do your lenders want to see to negotiate and extend debt maturities?

A:We can't get into detail around specific conversations with lenders, but they are awaiting our operating plan.

Q:What is the profile of degree programs that were not terminated?

A:We are focusing on programs with better debt-to-earnings ratios and have worked with partners to align tuition.

Q:Can you quantify reductions or cash receipts from programs that were candidates for portfolio management?

A:The 945 full year numbers exclude portfolio management in Q4, which was expected to be $49 million.

Q:What are the qualitative metrics regarding new enrollments?

A:New enrollment is expected to increase by 11% year-over-year, driven by key leading indicators like submit volume.

Q:Review of Unclear Management Responses

A:Management avoided giving a direct answer regarding the quantification of cost savings from new initiatives and specific targets for lenders.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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Despite some positive elements like new program launches and cost-saving initiatives, the earnings call reveals significant challenges. A 17% revenue decline, debt concerns, and lack of specific guidance on balance sheet improvements weigh negatively. The Q&A section highlights uncertainties, particularly around new program revenue and balance sheet resolutions. While new enrollments and cash flow improvements are positive, they are overshadowed by declining segments and financial pressures, likely leading to a negative stock price reaction.

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