2U(TWOU) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The unaudited statements show decreased assets and equity, with revenue growth offset by a wider net loss due to impairment and restructuring charges Condensed Consolidated Balance Sheets Total assets and stockholders' equity declined while total liabilities increased, driven by goodwill reduction and higher long-term debt Condensed Consolidated Balance Sheet Summary (in thousands) | Account | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $2,033,234 | $2,109,006 | | Total Current Assets | $418,967 | $393,852 | | Goodwill | $788,021 | $834,539 | | Intangible assets, net | $611,886 | $665,523 | | Total Liabilities | $1,427,584 | $1,279,851 | | Total Current Liabilities | $403,961 | $333,507 | | Long-term debt | $927,746 | $845,316 | | Total Stockholders' Equity | $605,650 | $829,155 | Condensed Consolidated Statements of Operations and Comprehensive Loss Revenue grew modestly, but the net loss widened significantly in H1 2022 due to substantial impairment and restructuring charges Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $241,464 | $237,209 | $494,793 | $469,682 | | Loss from operations | $(47,984) | $(37,091) | $(159,352) | $(74,223) | | Net loss | $(62,852) | $(21,831) | $(188,632) | $(67,395) | | Net loss per share | $(0.82) | $(0.29) | $(2.46) | $(0.91) | - The company recorded impairment charges of $58.8 million and restructuring charges of $17.5 million in the first six months of 2022, which were significant contributors to the increased net loss[17] Condensed Consolidated Statements of Cash Flows Operating cash flow improved significantly in H1 2022, though overall cash decreased due to investing and financing activities Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Category | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $28,644 | $(2,194) | | Net cash (used in) provided by investing activities | $(35,179) | $4,812 | | Net cash (used in) provided by financing activities | $(2,975) | $450,563 | | Net (decrease) increase in cash | $(12,124) | $452,468 | Notes to Condensed Consolidated Financial Statements Key disclosures cover segment reporting, the edX acquisition, significant impairment charges, a strategic realignment plan, and debt composition - The company operates through two reportable segments: the Degree Program Segment and the Alternative Credential Segment[31][32][33] - In Q1 2022, a significant decline in market capitalization triggered an interim impairment assessment, resulting in impairment charges of $58.8 million within the Alternative Credential Segment[54] - During Q2 2022, the company initiated the '2022 Strategic Realignment Plan', expecting to incur $35-$40 million in restructuring charges to accelerate its transition to a platform company[102][103] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth driven by the edX acquisition, a wider net loss, and a strategic realignment plan to generate cost savings - The company is accelerating its transition to a platform company through the '2022 Strategic Realignment Plan', which is expected to generate approximately $70 million in annualized cost savings[221] - As of June 30, 2022, the company's principal sources of liquidity were cash and cash equivalents of $220.8 million, which management believes is sufficient for the next 12 months[280][286] H1 2022 vs H1 2021 Performance Summary (in thousands) | Metric | H1 2022 | H1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $494,793 | $469,682 | 5.3% | | Loss from Operations | $(159,352) | $(74,223) | 114.7% | | Net Loss | $(188,632) | $(67,395) | 179.9% | | Adjusted EBITDA | $34,182 | $30,860 | 10.8% | Results of Operations H1 2022 revenue grew 5.3%, but the net loss expanded significantly due to major impairment and restructuring charges - Q2 2022 revenue increased by $4.3 million (1.8%), which includes $10.0 million from the newly acquired edX[242] - H1 2022 revenue increased by $25.1 million (5.3%), including $20.9 million from edX[255] - Significant charges in H1 2022 included $58.8 million in impairment charges and $17.5 million in restructuring charges[254][262] Business Segment Operating Results The Degree Program segment's profitability grew, while the Alternative Credential segment's loss widened due to edX acquisition costs Segment Performance for Six Months Ended June 30 (in thousands) | Segment | Revenue 2022 | Revenue 2021 | Profitability 2022 | Profitability 2021 | | :--- | :--- | :--- | :--- | :--- | | Degree Program | $297,257 | $292,089 | $75,357 | $53,861 | | Alternative Credential | $197,536 | $177,593 | $(41,175) | $(23,001) | | Total | $494,793 | $469,682 | $34,182 | $30,860 | - The Degree Program Segment's profitability increased by $21.5 million (39.9%) in H1 2022 due to revenue growth and operational efficiency initiatives[278] - The Alternative Credential Segment's loss increased by $18.2 million (79.0%) in H1 2022, mainly due to $35.4 million in operating expenses from edX[279] Key Business and Financial Performance Metrics Full Course Equivalent (FCE) enrollments showed mixed results, with growth in Degree Program FCEs and a slight decline in Alternative Credential FCEs FCE Enrollments and Average Revenue per FCE | Segment & Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Degree Program | | | | | | FCE enrollments | 60,303 | 60,429 | 122,912 | 120,436 | | Avg. revenue per FCE | $2,373 | $2,420 | $2,418 | $2,425 | | Alternative Credential | | | | | | FCE enrollments | 23,443 | 23,679 | 46,107 | 44,757 | | Avg. revenue per FCE | $3,891 | $3,843 | $3,951 | $3,968 | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations and potential future impacts of accelerating inflation - The company's primary foreign currency exposures relate to revenue and expenses in South Africa and the United Kingdom[342] - For the six months ended June 30, 2022, the company recognized a foreign currency translation loss of $0.3 million and foreign currency exchange losses of $2.8 million[343][344] - While inflation has not had a material effect to date, management is monitoring accelerating inflation as a potential risk that could harm future business[346] Controls and Procedures Disclosure controls and procedures were deemed effective, excluding the recently acquired edX business pending integration - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[347] - The evaluation of controls excluded the newly acquired edX business, which constituted approximately 3% of consolidated assets and revenues[347] PART II. OTHER INFORMATION Legal Proceedings A securities class action lawsuit has reached a settlement in principle, fully covered by the company's insurers - A securities class action lawsuit has reached a settlement in principle, with the $37.0 million payment to be fully funded by the company's insurers[91] Risk Factors Key risks include potential future impairment charges and the successful execution of the 2022 Strategic Realignment Plan - There is a risk of further impairment of intangible assets and goodwill, which could be triggered by failure to achieve business targets or further declines in market capitalization[352][353] - The success of the 2022 Strategic Realignment Plan is not guaranteed and faces risks such as unexpected costs and employee attrition[354] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or issuer repurchases were conducted during the reporting period - There were no unregistered sales of equity securities or issuer repurchases of equity securities during the quarter[355][356] Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[356] Mine Safety Disclosures This item is not applicable to the company's operations - None[357] Other Information No other material information was required to be disclosed for the period - None[358] Exhibits This section lists all exhibits filed with the report, including required CEO and CFO certifications - The exhibits filed include certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002 and XBRL interactive data files[360]