The educational technology stock that went -2-

The market is changing such that students are not willing to pay a high sticker price for an online degree unless it's from one of the top five universities in the world, he said.

"If you're not one of those universities there's going to be downward pricing pressure on degrees, which is going to be great for students," he said. "For 2U, it means a lot more people are focused on their balance sheet, they have a lot of debt, they've made a lot of acquisitions that in hindsight they've overpaid for significantly."

'Selling assets to raise cash'

For example, in 2021, the company paid $800 million to acquire the assets of edX, a nonprofit online learning organization started by Harvard University and the Massachusetts Institute of Technology. All of 2U was recently worth less than $100 million.

The company has $380 million of 2.25% convertible bond notes coming due in 2025. "What does 2U do with that debt? Knoblauch said. That is very top of mind for every investor right now."

The company will likely have to refinance it on terms that may dilute current shareholders' equity, he added.

2U expects a significant amount of revenue over the next year or two to come from fees schools pay to end their contracts early. "Those aren't high quality cash flows," Knoblauch said. "It's more them selling off assets to raise cash. Obviously you can't do that forever."

The company is still launching degree programs. It has plans to stand up more than 80 new programs next year, including many that they're taking over from another provider, which means they won't have to spend as much to get them off the ground, Paucek said on the earnings call. In addition, many of the degrees the company is launching next year are operated through its flex model, where schools pay a flat fee per service they wish to use.

Meanwhile, as the relationships between legacy partners and the company ends there are questions about what it means for students, said Stephanie Hall, acting senior director for higher education policy at the Center for American Progress, a left-leaning think tank. It is unclear how the end of these deals will change the experience of already enrolled students, or for prospective students whose information is already in the application and enrollment funnel, Hall said.

Both Papadopoulos and Noguera at USC said they expect the transition to be relatively seamless for students and applications.

"Students can expect to receive the same level of service or even better," Noguera said. "It's an amicable break up. We're working together to make sure that students won't be hurt in the process. We're working pretty well together to ensure that."

Still, the challenges 2U is facing raise questions about how risks to these online degree programs are managed to ensure students continue to get what they expected from the programs if they transition companies or sunset all together, Hall said. There are regulations surrounding more typical college closures to make sure students aren't harmed, but this space doesn't have the same oversight, she said.

"That's one of the big consumer-protection issues when it comes to OPMs is we have no idea what's happening internally within the company and we don't know how financially stable it is," she said, noting that because 2U is publicly traded there is a rare level of visibility into their finances. "That stability is important for, first and foremost, the institutions who have signed on as clients, who are also counting on that revenue stream. It's also important for students."

-Jillian Berman

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11-21-23 1336ET

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