2U says reorienting around edX is putting it on a path to profitability
- Although 2U officials touted that a new business strategy is helping the ed tech company get on track to be profitable, they told analysts Thursday that they still expect net losses in 2023.
- The company built its brand on helping top-ranked colleges launch and run online degrees. In 2021, it also acquired edX, a prominent MOOC platform, to lower expenses by drawing customers through free offerings before attempting to transition them into the company’s paid programs, such as degrees and certificates.
- 2U officials shared some evidence that the strategy has been working — spending on paid marketing was $46.5 million lower in 2022 compared to the year before as the company relied more on the edX platform to draw customers. However, revenue for the company’s degree business fell $20.7 million year over year, or 3%, due to fewer full-course equivalent enrollments and lower average revenue per student.
2U is hoping that a recent series of moves will help put it on the path to profitability. They include laying off employees, making edX the public-facing brand of the company and rolling out a new pricing model for colleges wanting help with launching online degree programs. The company has never had a single profitable year since it went public in 2014, and it has amassed around $1.3 billion in debt and liabilities.
However, investors appear to be pleased with 2U’s recent actions — the company’s stock price jumped up to $12 Friday morning, compared to just under $10 when markets closed the day before. Some analysts also recently applauded the company’s decision to refinance some of its debt this year, a move they expect to save about $10 million annually in interest payments.
Still, the company is facing challenges. Democratic lawmakers are increasingly voicing concerns about revenue-share agreements — the bedrock of 2U’s degree business. The company helps colleges run online programs in exchange for a cut of their revenue. Typical revenue-share agreements in the online program management sector call for companies to receive between 40% and 60%.
Lawmakers contend these arrangements encourage companies like 2U to aggressively recruit students, as they make money based on tuition revenue from enrollment. They also question whether revenue-share agreements violate federal law that prevents incentive-based compensation for recruiting students.
However, 2U CEO Chip Paucek told analysts during a Thursday call that interest in the company’s revenue-share offerings continues to increase.
“We like what it means for the future of that part of the business,” he said.
Last year, 2U unveiled new options for tuition-share agreements starting at 35%. Colleges that only want a core set of services, such as student support and pricing strategy, will have that rate. Colleges that want more services, such as content development and paid marketing, will pay tuition-share rates up to 60%. The higher shares give colleges access to a full suite of services, similar to 2U’s traditional contracts, according to a company announcement last year.
2U plans to launch 25 degrees in 2024 with colleges that opt for a smaller set of services and lower tuition-share agreements. These programs usually cost the company between $500,000 and $1 million to launch, compared to between $2.5 million and $5 million for colleges that receive 2U’s full bundle of services, according to company officials.
The new options — along with the lower expenses they require — enable 2U to work with colleges that have small online programs and no desire to scale them.
“In the past, that would have been very problematic for 2U,” Paucek said. “Therefore, we wouldn’t be able to launch those programs. And in this model, we can really work with the clients and (it) allows us to just launch many more degrees.”
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