PR Newswire | Jul 30, 2020 04:02PM EDT

07/30 15:01 CDT

2U, Inc. Reports Results for Second Quarter 2020Delivers revenue growth of 35% LANHAM, Md., July 30, 2020

LANHAM, Md., July 30, 2020 /PRNewswire/ --2U, Inc. (Nasdaq: TWOU), a global leader in education technology, today reported financial and operating results for the second quarter ended June 30, 2020.

Results for Second Quarter 2020 Compared to Second Quarter 2019

* Revenue increased 35% to $182.7 million * Graduate Program Segment revenue increased 14% to $115.7 million * Alternative Credential Segment revenue increased 97% to $67.0 million, including $36.6 million in revenue from Trilogy, acquired in May 2019 * Net loss increased $38.2 million to $66.2 million, or $1.03 per share

Non-GAAP Results for Second Quarter 2020 Compared to Second Quarter 2019

* Adjusted net loss was $21.8 million, or $0.34 per share, compared to adjusted net loss of $25.8 million, or $0.43 per share * Adjusted EBITDA loss was $2.1 million, compared to a loss of $15.0 million

"In these complex and challenging times, the importance of 2U's mission and the value we deliver for our partners and their students has never been more clear," Co-Founder and CEO Christopher "Chip" Paucek said. "As universities accelerate their digital transformations and more students affirmatively choose to pursue an education online, we believe our strong relationships with leading universities and the unmatched scale and quality of our portfolio of offerings position us well for future growth."

"We are driving significant improvement in key profitability and cash flow metrics while maintaining quality, enhancing operational efficiency, and executing on growth opportunities," said Chief Financial Officer Paul Lalljie. "We delivered a significant improvement in free cash flow in the second quarter and expect to achieve EBITDA profitability next quarter and for the full year. We also increased our financial flexibility with our recent convertible senior notes offering and revolving line of credit."

Discussion of Second Quarter 2020 Results

Revenue totaled $182.7 million, a 35% increase from $135.5 million in the second quarter of 2019. Graduate Program Segment revenue grew 14% to $115.7 million driven by an 18% increase in full course equivalent ("FCE") enrollments, partially offset by a 3% decrease in average revenue per FCE enrollment. Alternative Credential Segment revenue increased 97% to $67.0 million, driven by FCE enrollments of 20,435. The acquisition of Trilogy was completed on May 22, 2019, making this quarter the last period for which comparative period results do not exist.

Costs and expenses totaled $231.8 million, a 28% increase from $181.5 million in the second quarter of 2019. This $50.3 million increase was driven by $33.8 million of incremental operating costs related to Trilogy, with the remaining increase primarily attributable to personnel and personnel-related expense, curriculum and teaching costs, and depreciation and amortization expense, partially offset by decreased spend on travel and entertainment due to cost efficiencies and the impact of COVID-19.

As of June 30, 2020, the company's cash, cash equivalents, and restricted cash totaled $213.0 million, an increase of $23.1 million from $189.9 million as of December 31, 2019. The cash balance as of June 30, 2020 reflects net proceeds from the convertible senior notes offering. As of June 30, 2020, the company's outstanding borrowings were $385.3 million, principally related to the issuance of its convertible senior notes.

Non-GAAP Measures

To provide investors and others with additional information regarding 2U's results, the company has disclosed the following non-GAAP financial measures: adjusted EBITDA (loss), unlevered free cash flow, adjusted net income (loss), and adjusted net income (loss) per share. The company has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. The company defines adjusted EBITDA (loss) as net income or net loss, as applicable, before net interest income (expense), taxes, depreciation and amortization expense, foreign currency gains or losses, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, impairment charges, losses on debt extinguishment, and stock-based compensation expense. The company defines unlevered free cash flow as net cash provided by (used in) operating activities, less capital expenditures, payments to university clients, restructuring-related and certain other non-ordinary cash payments, and cash interest payments on debt. The company defines adjusted net income (loss) as net income or net loss, as applicable, before foreign currency gains or losses, acquisition-related gains or losses, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, impairment charges, losses on debt extinguishment, and stock-based compensation expense. Adjusted net income (loss) per share is calculated as adjusted net income (loss) divided by diluted weighted-average shares of common stock outstanding for periods that result in adjusted net income, and basic weighted-average shares outstanding for periods that result in an adjusted net loss. As of the date of this earnings release, we revised our definitions of adjusted EBITDA (loss) and adjusted net income (loss) to exclude losses on debt extinguishment. We believe this change is useful to investors because we did not have a loss on debt extinguishment in prior periods, and as a result, excluding the impact of such a loss beginning this period facilitates a period-to-period comparison.

The company's management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, to understand cash that is generated by or available for operational expenses and investment in the business after capital expenditures, for internal budgeting and forecasting purposes, for short- and long-term operating plans, and to evaluate the company's financial performance. Management believes these non-GAAP financial measures reflect the company's ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in the company's business as they exclude expenses that are not reflective of ongoing operating results. Management also believes that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating the company's operating results and prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.

The use of adjusted EBITDA (loss), unlevered free cash flow, adjusted net income (loss), and adjusted net income (loss) per share measures has certain limitations, as they do not reflect all items of income and expense that affect the company's operations. The company compensates for these limitations by reconciling the non-GAAP financial measures to the most directly comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP. Further, these non-GAAP measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited. Management encourages investors and others to review the company's financial information in its entirety and not rely on a single financial measure.

Conference Call Information

What: 2U, Inc.'s second quarter 2020 financial results conference call

When: Thursday, July 30, 2020

Time: 4:30 p.m. ET

Live Call:(877) 359-9508

Webcast: investor.2U.com

About 2U, Inc. (Nasdaq: TWOU)

Eliminating the back row in higher education is not just a metaphor-it's our mission. For more than a decade, 2U, Inc., a global leader in education technology, has been a trusted partner and brand steward of great universities. We build, deliver, and support more than 435 digital and in-person educational offerings, including undergraduate and graduate degrees, professional certificates, Trilogy-powered boot camps, and GetSmarter short courses. Together with our partners, 2U has positively transformed the lives of more than 245,000 students and lifelong learners. To learn more, visit 2U.com. #NoBackRow

Cautionary Language Concerning Forward-Looking Statements

This press release contains forward-looking statements regarding 2U, Inc.'s future business expectations, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this press release, including statements regarding the acquisition of Trilogy and future results of the operations and financial position of 2U, including financial targets, business strategy, and plans and objectives for future operations, are forward-looking statements. 2U has based these forward-looking statements largely on its estimates of its financial results and its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs as of the date of this press release. The company undertakes no obligation to update these statements as a result of new information or future events. These forward-looking statements are subject to a number of risks, uncertainties and assumptions that could cause actual results to differ materially from the results predicted, including, but not limited to:

* trends in the higher education market and the market for online education, and expectations for growth in those markets; * the acceptance, adoption and growth of online learning by colleges and universities, faculty, students, employers, accreditors and state and federal licensing bodies; * the impact of competition on the company's industry and innovations by competitors; * the company's ability to comply with evolving regulations and legal obligations related to data privacy, data protection and information security; * the company's expectations about the potential benefits of its cloud-based software-as-a-service technology and technology-enabled services to university clients and students; * the company's dependence on third parties to provide certain technological services or components used in its platform; * the company's expectations about the predictability, visibility and recurring nature of its business model; * the company's ability to meet the anticipated launch dates of its degree programs, short courses and boot camps; * the company's ability to acquire new university clients and expand its degree programs, short courses and boot camps with existing university clients; * the company's ability to successfully integrate the operations of its acquisitions, including Trilogy, to achieve the expected benefits of its acquisitions and manage, expand and grow the combined company; * the company's ability to refinance its indebtedness on attractive terms, if at all, to better align with its focus on profitability; * the company's ability to service its substantial indebtedness and comply with the covenants and conversion obligations contained in the indenture governing its convertible senior notes and the credit agreement governing its revolving credit facility; * the company's ability to generate sufficient future operating cash flows from recent acquisitions to ensure related goodwill is not impaired; * the company's ability to execute its growth strategy in the international, undergraduate and non-degree alternative markets; * the company's ability to continue to recruit prospective students for its offerings; * the company's ability to maintain or increase student retention rates in its degree programs; * the company's ability to attract, hire and retain qualified employees; * the company's expectations about the scalability of its cloud-based platform; * potential changes in regulations applicable to the company or its university clients; * the company's expectations regarding the amount of time its cash balances and other available financial resources will be sufficient to fund its operations; * the impact and cost of stockholder activism; * the impact of any natural disasters or public health emergencies, such as the coronavirus disease 2019 ("COVID-19") pandemic; * the company's expectations regarding the effect of the capped call transactions and regarding actions of the option counterparties and/or their respective affiliates; and * other factors beyond the company's control.

These and other potential risks and uncertainties that could cause actual results to differ from the results predicted are more fully detailed under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019, as amended and supplemented by risks and uncertainties under the heading "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and other SEC filings. Moreover, 2U operates in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for 2U management to predict all risks, nor can 2U assess the impact of all factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements 2U may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this press release may not occur and actual results could differ materially and adversely from those anticipated.

Investor Relations Contact: Ed Goodwin, 2U, Inc., egoodwin@2U.comMedia Contact: Glenda Felden, 2U, Inc., media@2U.com

2U, Inc.Condensed Consolidated Balance Sheets(in thousands, except share and per share amounts)

June 30, December 31, 2020 2019

(unaudited)

Assets

Current assets

Cash and cash equivalents $ 194,803 $ 170,593

Restricted cash 18,228 19,276

Accounts receivable, net 71,580 33,655

Prepaid expenses and other assets 40,378 37,424

Total current assets 324,989 260,948

Property and equipment, net 55,066 57,643

Right-of-use assets 49,813 43,401

Goodwill 406,340 418,350

Amortizable intangible assets, net 320,559 333,075

University payments and other assets, non-current 75,793 73,413

Total assets $ 1,232,560 $ 1,186,830

Liabilities and stockholders' equity

Current liabilities

Accounts payable and accrued expenses $ 84,541 $ 65,381

Accrued compensation and related benefits 29,090 21,885

Deferred revenue 77,071 48,833

Lease liability 8,484 7,320

Other current liabilities 13,785 12,535

Total current liabilities 212,971 155,954

Long-term debt 263,129 246,620

Deferred tax liabilities, net 2,424 5,133

Lease liability, non-current 73,592 66,974

Other liabilities, non-current 1,073 899

Total liabilities 553,189 475,580

Stockholders' equity

Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued - -

Common stock, $0.001 par value, 200,000,000 shares authorized, 64,300,599shares issued and outstanding as of June 30, 2020; 63,569,109 shares issued 64 63and outstanding as of December 31, 2019

Additional paid-in capital 1,306,483 1,197,379

Accumulated deficit (605,661) (479,388)

Accumulated other comprehensive loss (21,515) (6,804)

Total stockholders' equity 679,371 711,250

Total liabilities and stockholders' equity $ 1,232,560 $ 1,186,830

2U, Inc.Condensed Consolidated Statements of Operations and Comprehensive Loss(in thousands, except share and per share amounts)

Three Months Ended Six Months Ended June 30, June 30,

2020 2019 2020 2019

Revenue $ 182,687 $ 135,461 $ 358,166 $ 257,695

Costs and expenses

Curriculum and teaching 26,256 13,308 46,734 20,009

Servicing and support 30,294 23,993 60,827 44,167

Technology and content development 37,307 26,043 72,817 45,837

Marketing and sales 98,341 89,749 197,556 166,710

General and administrative 39,554 28,408 83,207 51,431

Total costs and expenses 231,752 181,501 461,141 328,154

Loss from operations (49,065) (46,040) (102,975) (70,459)

Interest income 154 1,814 667 4,163

Interest expense (6,518) (2,424) (12,011) (2,479)

Loss on debt extinguishment (11,671) - (11,671) -

Other income (expense), net 570 (13) (1,701) (383)

Loss before income taxes (66,530) (46,663) (127,691) (69,158)

Income tax benefit 363 18,691 1,418 19,632

Net loss $ (66,167) $ (27,972) $ (126,273) $ (49,526)

Net loss per share, basic and diluted $ (1.03) $ (0.46) $ (1.98) $ (0.83)

Weighted-average shares of common 64,075,405 60,516,662 63,850,869 59,334,246stock outstanding, basic and diluted

Other comprehensive loss

Foreign currency translationadjustments, net of tax of $0 for all 1,404 2,243 (14,711) 1,871periods presented

Comprehensive loss $ (64,763) $ (25,729) $ (140,984) $ (47,655)

2U, Inc.Condensed Consolidated Statements of Cash Flows(in thousands)

Six Months Ended June 30,

2020 2019

Cash flows from operating activities

Net loss $ (126,273) $ (49,526)

Adjustments to reconcile net loss to net cash used in operating activities:

Non-cash interest expense 5,675 520

Depreciation and amortization expense 47,470 24,351

Stock-based compensation expense 41,961 19,551

Non-cash lease expense 7,299 5,264

Provision for credit losses 1,267 993

Loss on debt extinguishment 11,671 -

Changes in operating assets and liabilities, net of assets and liabilitiesacquired:

Accounts receivable, net (39,521) (25,548)

Payments to university clients 4,354 (20,060)

Prepaid expenses and other assets (8,774) (8,796)

Accounts payable and accrued expenses 19,606 18,081

Accrued compensation and related benefits 7,383 (5,964)

Deferred revenue 28,843 15,849

Other liabilities, net (9,299) (23,056)

Other 1,694 392

Net cash used in operating activities (6,644) (47,949)

Cash flows from investing activities

Purchase of a business, net of cash acquired (949) (387,815)

Additions of amortizable intangible assets (32,497) (32,430)

Purchases of property and equipment (4,254) (8,135)

Purchase of investments - (5,000)

Proceeds from maturities of investments - 25,000

Advances made to university clients - (100)

Advances repaid by university clients 275 200

Net cash used in investing activities (37,425) (408,280)

Cash flows from financing activities

Proceeds from debt 371,708 243,726

Payments on debt (250,409) -

Payment of debt issuance costs (3,419) (1,953)

Purchases of capped calls in connection with issuance of convertible senior (50,540) -notes

Prepayment premium on extinguishment of senior secured term loan facility (2,528) -

Proceeds from exercise of stock options 1,825 2,380

Tax withholding payments associated with settlement of restricted stock units (464) (2,558)

Proceeds from employee stock purchase plan share purchases 1,771 -

Payments for acquisition of amortizable intangible assets - (1,283)

Net cash provided by financing activities 67,944 240,312

Effect of exchange rate changes on cash (713) (371)

Net increase (decrease) in cash, cash equivalents and restricted cash 23,162 (216,288)

Cash, cash equivalents and restricted cash, beginning of period 189,869 449,772

Cash, cash equivalents and restricted cash, end of period $ 213,031 $ 233,484

2U, Inc.Reconciliation of Non-GAAP Measures(unaudited)

The following table presents a reconciliation of net loss to adjusted net lossfor each of the periods indicated:

Three Months Ended Six Months Ended June 30, June 30,

2020 2019 2020 2019

(in thousands, except share and per share amounts)

Net loss $ (66,167) $ (27,972) $ (126,273) $ (49,526)

Adjustments:

Foreign currency (gain) loss (570) 13 1,701 383

Amortization of acquired intangible assets 10,605 5,341 21,388 6,767

Income tax benefit on amortization of acquired intangible (331) (381) (710) (772)assets

Acquisition-related income tax benefit - (19,262) - (19,262)

Deferred revenue fair value adjustment - 3,352 - 3,352

Transaction and integration costs 359 3,093 1,083 5,024

Restructuring-related costs 196 - 484 -

Stockholder activism costs 1,347 - 5,586 -

Loss on debt extinguishment 11,671 - 11,671 -

Stock-based compensation expense 21,091 9,967 41,961 19,551

Total adjustments 44,368 2,123 83,164 15,043

Adjusted net loss $ (21,799) $ (25,849) $ (43,109) $ (34,483)

Net loss per share, basic and diluted $ (1.03) $ (0.46) $ (1.98) $ (0.83)

Adjusted net loss per share, basic and diluted $ (0.34) $ (0.43) $ (0.68) $ (0.58)

Weighted-average shares of common stock outstanding, basic and 64,075,405 60,516,662 63,850,869 59,334,246diluted

2U, Inc.Reconciliation of Non-GAAP Measures(unaudited)

The following table presents a reconciliation of net loss to adjusted EBITDA(loss) for each of the periods indicated:

Three Months Ended Six Months Ended June 30, June 30,

2020 2019 2020 2019

(in thousands)

Net loss $ (66,167) $ (27,972) $ (126,273) $ (49,526)

Adjustments:

Net interest expense (income) 6,364 610 11,344 (1,684)

Foreign currency (gain) loss (570) 13 1,701 383

Income tax benefit (363) (18,691) (1,418) (19,632)

Depreciation and amortization expense 23,985 14,653 47,470 24,351

Deferred revenue fair value adjustment - 3,352 - 3,352

Transaction and integration costs 359 3,093 1,083 5,024

Restructuring-related costs 196 - 484 -

Stockholder activism costs 1,347 - 5,586 -

Loss on debt extinguishment 11,671 - 11,671 -

Stock-based compensation expense 21,091 9,967 41,961 19,551

Total adjustments 64,080 12,997 119,882 31,345

Adjusted EBITDA (loss) $ (2,087) $ (14,975) $ (6,391) $ (18,181)

2U, Inc.Reconciliation of Non-GAAP Measures(unaudited)

The following table presents a reconciliation of net cash usedin operating activities to unlevered free cash flow for each of thetwelve-month periods indicated:

Twelve Months Ended

June 30, March 31, December 31, September 30, 2020 2020 2019 2019

(in thousands)

Net cash used in operating activities $ (10,669) $ (29,309) $ (51,974) $ (62,738)

Additions to amortizable intangible assets (64,990) (67,161) (64,923) (64,427)

Purchases of property and equipment (9,536) (12,693) (13,421) (15,279)

Payments on acquisition of amortizable intangible assets (897) (897) (2,180) (1,283)

Payments to university clients 7,500 14,925 26,100 26,450

Non-ordinary cash payments* 17,874 19,544 13,989 11,008

Free cash flow (60,718) (75,591) (92,409) (106,269)

Cash interest payments on debt 16,475 17,064 12,147 7,128

Unlevered free cash flow $ (44,243) $ (58,527) $ (80,262) $ (99,141)

? Non-ordinary cash payments include transaction, integration, restructuring-related and stockholder activism costs.

2U, Inc.Key Financial Performance Metrics(unaudited)

Full Course Equivalent Enrollments

Graduate Program Segment

The following table sets forth the FCE enrollments and averagerevenue per FCE enrollment in the company's Graduate Program Segment for thelast eight quarters.

Q2 '20 Q1 '20 Q4 '19 Q3 '19 Q2 '19 Q1 '19 Q4 '18 Q3 '18

Graduate Program Segment FCE 46,142 45,734 41,704 40,910 39,180 39,512 34,695 32,665enrollments

Graduate Program Segmentaverage revenue per FCE $ 2,507 $ 2,590 $ 2,595 $ 2,527 $ 2,588 $ 2,637 $ 2,792 $ 2,747enrollment

Alternative Credential Segment

The following table sets forth the FCE enrollments and averagerevenue per FCE enrollment in the company's Alternative Credential Segment forthe last eight quarters.

Q2 '20 Q1 '20 Q4 '19 Q3 '19 Q2 '19 Q1 '19 Q4 '18 Q3 '18

Alternative Credential Segment FCE 20,435 15,141 14,639 14,729 12,662 9,128 9,041 8,937enrollments

Alternative Credential Segmentaverage revenue per FCE $ 3,279 $ 3,766 $ 3,883 $ 3,825 $ 2,955 $ 1,979 $ 2,015 $ 1,930enrollment*

The Trilogy acquisition was completed on May 22, 2019. Average revenue per FCE? enrollment for the company's Alternative Credential Segment includes $3.3 million, $6.0 million and $1.9 million of purchase accounting adjustments for the second, third and fourth quarters of 2019, respectively.

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SOURCE 2U, Inc.