2U, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended. The words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions, or the negative of such words or phrases, are intended to identify "forward-looking statements." We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Many factors could cause or contribute to these differences, including those discussed in Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , and our other filings with theSecurities and Exchange Commission , or "SEC ." Statements made herein are as of the date of the filing of this Form 10-Q with theSEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement. Unless the context otherwise requires, all references to "we", "us" or "our" refer to2U, Inc. , together with its subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year endedDecember 31, 2019 , which are included in our Annual Report on Form 10-K, filed with theSEC onFebruary 28, 2020 . Overview We are a leading provider of education technology for nonprofit colleges and universities. We build, deliver, and support more than 400 digital and in-person educational offerings, including graduate degrees, undergraduate degrees, professional certificates, boot camps, and short courses, across the Career Curriculum Continuum. Together with our university clients, we have positively transformed the lives of more than 215,000 students. Our comprehensive platform of tightly integrated technology and services provides the digital infrastructure that universities need to attract, enroll, educate and support students at scale. With our platform, students can pursue their education anytime, anywhere, without quitting their jobs or moving; and university clients can provide broader access to their educational offerings, thereby improving outcomes, skills attainment and career prospects for a greater number of students. We have two reportable segments: the Graduate Program Segment and the Alternative Credential Segment. In our Graduate Program Segment, we provide the technology and services to nonprofit colleges and universities to enable the online delivery of degree programs. Students enrolled in these programs are generally seeking an undergraduate or graduate degree of the same quality they would receive on campus. In our Alternative Credential Segment, we provide premium online short courses and technical, skills-based boot camps through relationships with nonprofit colleges and universities. Students enrolled in these offerings are generally seeking to reskill or upskill through shorter duration, lower-priced offerings that are relevant to the needs of industry and society. Response to COVID-19 We have taken several immediate steps to ensure the continuity of our business, to provide unique solutions to our partners, and to ensure the health and safety of our employees in the current environment. For example, we have: • shifted boot camp offerings and other campus-based experiences from
physical classrooms to online. At this time, all boot camps are running
without disruption, including all expected upsells of new boot camp
content;
• modified our course production capability into a "Studio-in-a-Box"approach, which allows faculty to record asynchronous content directly in
their home or office with virtual assistance from our course designers.
This allowed all current launches to remain on schedule across the
business;
• provided training to our university clients' campus-based faculty on best
practices for successful online teaching through No Back Row® PRO;
• offered new solutions for existing and new clients, including 2UOS
Essential and 2UOS Plus; and
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• begun developing innovative solutions to enable continuity and success for
existing and new university clients' on-campus and online efforts this
fall.
In addition to the typical operational complexities associated with launching
and supporting quality online offering, many of our university clients are
currently experiencing budget and cash flow shortfalls related to COVID-19. The
upfront investments we make in our university clients' offerings is even more
important during this time of additional financial constraints. Long-term, we
expect that the unprecedented impact of COVID-19 will accelerated the adoption
of online higher education.
Our Business Model and Components of Operating Results
The key elements of our business model and components of our operating results
are described below.
Revenue Drivers
In our Graduate Program Segment, we derive substantially all of our revenue from
revenue-share arrangements with our university clients under which we receive a
contractually specified percentage of the amounts students pay them to enroll in
degree programs. In our Alternative Credential Segment, we derive substantially
all of our revenue from tuition and fees from students taking our short courses
and boot camps. Revenue in each segment is primarily driven by the number of
student enrollments in our offerings and the prices of those offerings.
Operating Expense
Marketing and Sales
Our most significant expense relates to marketing and sales activities to
attract students to our offerings across both of our segments. This includes the
cost of Search Engine Optimization, Search Engine Marketing and Social Media
Optimization, as well as personnel and personnel-related expense for our
marketing and recruiting teams.
In our Graduate Program Segment, our marketing and sales expense in any period
generates student enrollments eight months later, on average. We then generate
revenue as students progress through their programs, which generally occurs over
a two-year period following initial enrollment. Accordingly, our marketing and
sales expense in any period is an investment to generate revenue in future
periods. Therefore, we do not believe it is meaningful to directly compare
current period revenue to current period marketing and sales expense. Further,
in this segment we believe that our marketing and sales expense in future
periods will generally decline as a percentage of the revenue reported in those
same periods as our revenue base from returning students in existing programs
increases. In our Alternative Credential Segment, our marketing and sales
expense in any period generates student enrollments as much as 24 weeks later,
on average. We then generate revenue as students progress through their courses,
which typically occurs over a two- to six-month period following initial
enrollment.
Curriculum and Teaching
Curriculum and teaching expense consists primarily of amounts due to
universities for licenses to use their brand names and other trademarks in
connection with our short course and boot camp offerings. The payments are based
on contractually specified percentages of the tuition and fees we receive from
students in those offerings. Curriculum and teaching expense also includes
personnel and personnel-related expense for our short course and boot camp
instructional staff.
Servicing and Support
Servicing and support expense consists primarily of personnel and
personnel-related expense associated with the management and operations of our
educational offerings, as well as supporting students and faculty members.
Servicing and support expense also includes costs to support our platform,
facilitate in-program field placements and student immersions, and assist with
compliance requirements.
Technology and Content Development
Technology and content development expense consists primarily of personnel and
personnel-related expense associated with the ongoing improvement and
maintenance of our platform, as well as hosting and licensing costs. Technology
and content expense also includes the amortization of capitalized technology and
content.
General and Administrative
General and administrative expense consists primarily of personnel and
personnel-related expense for our centralized functions, including executive
management, legal, finance, human resources, and other departments that do not
provide direct operational services. General and administrative expense also
includes professional fees and other corporate expense.
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Net Interest Income (Expense) Net interest income (expense) consists primarily of interest expense from our long-term debt and interest income from our cash and cash equivalents. Interest expense also includes the amortization of debt issuance costs. Other Expense, Net Other expense, net primarily consists of foreign currency gains and losses. Income Taxes Our income tax provisions for all periods consist ofU.S. federal, state and foreign income taxes. Our effective tax rate for the period is based on a mix of higher-taxed and lower-taxed jurisdictions. Due to our current and accumulated net operating losses, we have not been required to payU.S. federal income taxes to date. Results of Operations Consolidated Operating Results Comparison of Three Months EndedMarch 31, 2020 and 2019 The following table presents selected condensed consolidated statement of operations data for each of the periods indicated. Three Months Ended March 31, 2020 2019 Period-to-Period Change Percentage of Percentage of Amount Revenue Amount Revenue Amount Percentage (dollars in thousands) Revenue$ 175,479 100.0 %$ 122,234 100.0 %$ 53,245 43.6 % Costs and expenses Curriculum and teaching 20,478 11.7 6,701 5.5 13,777 206.9 Servicing and support 30,533 17.4 20,174 16.5 10,359 52.1 Technology and content development 35,510 20.2 19,794 16.2 15,716 78.7 Marketing and sales 99,215 56.5 76,961 63.0 22,254 29.0 General and administrative 43,653 24.9 23,023 18.8 20,630 88.9 Total costs and expenses 229,389 130.7 146,653 120.0 82,736 56.4 Loss from operations (53,910 ) (30.7 ) (24,419 ) (20.0 ) (29,491 ) 120.8 Interest income 513 0.3 2,349 1.9 (1,836 ) (78.1 ) Interest expense (5,493 ) (3.1 ) (55 ) 0.0 (5,438 ) * Other expense, net (2,271 ) (1.3 ) (370 ) (0.3 ) (1,901 ) *
Loss before income taxes (61,161 ) (34.8 ) (22,495 )
(18.4 ) (38,666 ) 171.9 Income tax benefit 1,055 0.6 941 0.8 114 12.1 Net loss$ (60,106 ) (34.2 )%$ (21,554 ) (17.6 )%$ (38,552 ) 178.9 %
* Not meaningful for comparative purposes.
Revenue. Revenue for the three months endedMarch 31, 2020 increased$53.2 million , or 43.6%, to$175.5 million as compared to$122.2 million in 2019. This increase was driven by a 13.7% increase in Graduate Program Segment revenue and a 215.7% increase in Alternative Credential Segment revenue. The increase in revenue from the Alternative Credential Segment includes incremental revenue of$35.4 million from Trilogy, which we acquired inMay 2019 . Revenue from our Graduate Program Segment increased$14.3 million , or 13.7%, primarily due to growth in full course equivalent enrollments of 6,222, or 15.7%, partially offset by a decrease in the average revenue per full course equivalent enrollment, from$2,637 to$2,590 . 26
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Revenue from our Alternative Credential Segment increased$39.0 million , or 215.7%, primarily due to growth in full course equivalent enrollments of 6,013, or 65.9%, as well as an increase in the average revenue per full course equivalent enrollment, from$1,979 to$3,766 . These increases were primarily due to the addition of 3,529 incremental full course equivalent enrollments from Trilogy. Curriculum and Teaching. Curriculum and teaching expense increased$13.8 million , or 206.9%, to$20.5 million as compared to$6.7 million in 2019. This increase was primarily due to the addition of incremental curriculum and teaching expense from Trilogy and an increase in short course enrollments in our Alternative Credential Segment. Servicing and Support. Servicing and support expense increased$10.3 million , or 52.1%, to$30.5 million as compared to$20.2 million in 2019. This increase was primarily due to a$10.7 million increase in personnel and personnel-related expense to serve a greater number of students and faculty in existing and new offerings, including the incremental addition of Trilogy boot camps. This increase was partially offset by decreases in other servicing and support expense. Technology and Content Development. Technology and content development expense increased$15.7 million , or 78.7%, to$35.5 million as compared to$19.8 million in 2019. This increase was due in part to a$11.0 million increase in amortization expense and a$4.2 million increase in personnel and personnel-related expense (net of amounts capitalized for technology and content development), including the addition of incremental technology and content development expense from Trilogy. In addition,$0.4 million of the increase was due to non-capitalized curriculum development expense and hosting and licensing expense to support the launch of new programs, including the incremental addition of Trilogy boot camps. Marketing and Sales. Marketing and sales expense increased$22.2 million , or 29.0%, to$99.2 million as compared to$77.0 million in 2019. This increase was primarily due to a$10.5 million increase in marketing and sales expense to attract prospective students to new and existing offerings, including the addition of incremental marketing and sales expense from Trilogy. In addition,$7.8 million of the increase was due to personnel and personnel-related expense, primarily related to the addition of incremental personnel and personnel-related expense from Trilogy. Amortization and marketing infrastructure expense increased$3.8 million to support an increased number of offerings, including the incremental addition of Trilogy boot camps. General and Administrative. General and administrative expense increased$20.7 million , or 88.9%, to$43.7 million as compared to$23.0 million in 2019. This increase was primarily due to a$15.3 million increase in personnel and personnel-related expense, including the addition of incremental personnel and personnel-related expense from Trilogy. In addition,$3.3 million of the increase was related to restructuring-related, transaction, integration and stockholder activism expense. These increases were partially offset by$1.2 million of lower one-time transaction and integration-related expense from our acquisition of Trilogy. Net Interest Income (Expense). Net interest income (expense) was$(5.0) million and$2.3 million for the three months endedMarch 31, 2020 and 2019, respectively. This change was primarily due to interest expense of$5.4 million related to our Term Loan, which was entered into inMay 2019 . Other Expense, Net. Other expense, net was$2.3 million and$0.4 million for the three months endedMarch 31, 2020 and 2019, respectively. This increase was primarily due to fluctuations in foreign currency rates impacting our operations in the Alternative Credential Segment. Income Tax Benefit. For the three months endedMarch 31, 2020 , we recognized a tax benefit of$1.1 million , and our effective tax rate was approximately 2%. This tax benefit was due to net operating loss and the reversal of taxable temporary differences of the acquired intangibles in our Alternative Credential Segment. We expect to continue to recognize a tax benefit for our Alternative Credential Segment to the extent that this segment continues to generate pre-tax losses while carrying a net deferred tax liability. To date, we have not been required to payU.S. federal income taxes because of our current and accumulated net operating losses. Business Segment Operating Results We define segment profitability 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, and stock-based compensation expense. Some or all of these items may not be applicable in any given reporting period. 27
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The following table presents a reconciliation of net loss to total segment profitability for each of the periods indicated.
Three Months Ended
March 31,
2020 2019
(in thousands)
Net loss $ (60,106 ) $ (21,554 )
Adjustments:
Interest expense (income), net 4,980 (2,294 )
Foreign currency loss 2,271 370
Income tax benefit (1,055 ) (941 )
Depreciation and amortization expense 23,485 9,698 Transaction and integration costs
724 1,931
Restructuring-related costs 288 -
Stockholder activism costs 4,239 -
Stock-based compensation expense 20,870 9,584 Total adjustments
55,802 18,348
Total segment profitability $ (4,304 ) $ (3,206 )
Three Months Ended March 31, 2020 and 2019
The following table presents revenue by segment and segment profitability for
each of the periods indicated.
Three Months Ended March 31, Period-to-Period Change
2020 2019 Amount Percentage
(dollars in thousands)
Revenue by segment*
Graduate Program Segment $ 118,457 $ 104,174 $ 14,283 13.7 %
Alternative Credential Segment 57,022 18,060 38,962 215.7
Total revenue $ 175,479 $ 122,234 $ 53,245 43.6 %
Segment profitability
Graduate Program Segment $ 6,460 $ 710 $ 5,750 **
Alternative Credential Segment (10,764 ) (3,916 ) (6,848 ) 174.9
Total segment profitability $ (4,304 ) $ (3,206 ) $ (1,098 ) 34.2 %
* Immaterial amounts of intersegment revenue have been excluded from
the above results for the three months ended March 31, 2020 and
2019.
** Not meaningful for comparative purposes.
Graduate Program Segment profitability increased $5.8 million to $6.5 million as
compared to $0.7 million in 2019. This increase resulted from revenue growth of
$14.3 million and ongoing cost management of our marketing, admissions and
content development activities within this segment. Additionally, our expenses
were impacted by reduced travel and related costs, as well as lower marketing
rates due to the impact of the COVID-19 pandemic.
Alternative Credential Segment profitability decreased $6.8 million , or 174.9%,
to $(10.8) million as compared to $(3.9) million in 2019. This decrease was
primarily due to the addition of Trilogy's results of operations since the
acquisition date.
Liquidity and Capital Resources
As of March 31, 2020 , our principal sources of liquidity were cash and cash
equivalents totaling $138.2 million , which were held for working capital and
general corporate purposes.
On April 23, 2020 , we issued convertible senior notes due 2025 (the "Notes") in
an aggregate principal amount of $330 million in a private placement to
qualified institutional buyers under Rule 144A of the Securities Act of 1933. We
also granted the initial purchasers of the Notes an option to purchase up to an
additional $50 million aggregate principal amount of the Notes at any time until
May 5, 2020 . The notes bear interest at a rate of 2.25% per year, payable
semi-annually in arrears on May 1 and November 1 of each year, beginning on
November 1, 2020 . The Notes mature on May 1, 2025 , unless repurchased, redeemed
or converted in accordance with their terms prior to such date. Prior to
November 1, 2024 , the notes are convertible
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only upon satisfaction of certain conditions. In connection with the pricing of the Notes, we entered into privately negotiated capped call transactions with a premium cost of approximately$43.9 million . The capped call transactions are expected to reduce the potential dilution to our common stock upon any conversion of the Notes and/or to offset any cash payments we are required to make in excess of the principal amount of the converted Notes. If the initial purchasers of the Notes exercise their option to purchase additional Notes, we expect to use a portion of the net proceeds from the sale of the additional notes to enter into additional capped call transactions. OnApril 23, 2020 , we repaid our$250 million Term Loan in full (including interest and prepayment premium) and terminated our credit agreement with Owl Rock Capital Corporation. In connection with the extinguishment of the Term Loan, we expect to recognize a charge of approximately$12 million in the second quarter of 2020. To date, we have financed our operations primarily through payments from university clients and students for our technology and services, the Term Loan, the Notes, and public and private equity financings. We believe that our existing cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months. Operating Activities Cash flows from operating activities have typically been generated from our net income (loss) and by changes in our operating assets and liabilities, particularly from accounts receivable, adjusted for non-cash expense items such as amortization and depreciation expense and stock-based compensation expense. Cash used in operating activities for the three months endedMarch 31, 2020 consisted primarily of our net loss of$60.1 million , adjusted for non-cash items including$23.5 million of depreciation and amortization expense,$20.9 million of stock-based compensation expense, and$3.6 million of reductions in the carrying amounts of our right-of-use assets. The net change in operating assets and liabilities of$1.6 million was favorable to cash flows from operations primarily due to a$23.4 million increase in accounts payable and accrued expenses and a$21.7 million increase in deferred revenue. Typically, the first quarter tends to end with a seasonally high accounts receivable balance due to the timing of the academic calendar. Accounts receivable was$75.4 million at the end of the quarter, up$41.8 million from the end of 2019. Approximately 86% of the receivables are current, and we have confidence in the credit worthiness of our partners and students despite economic impacts from the COVID-19 pandemic. Cash used in operating activities for the three months endedMarch 31, 2019 consisted primarily of our net loss of$21.6 million , adjusted for non-cash items including$9.7 million of depreciation and amortization expense,$9.6 million of stock-based compensation expense, and$2.6 million of reductions in the carrying amounts of our right-of-use-assets. The net change in operating assets and liabilities of$32.9 million was unfavorable to cash flows from operations primarily due to a$37.5 million increase in accounts receivable due to the typical timing of the academic calendar and delays in collections from certain university clients, a$10.6 million increase in payments to university clients, a$10.5 million increase in prepaid expenses and other assets and a$6.8 million decrease in accrued compensation and related benefits, partially offset by favorable changes in accounts payable and accrued expenses of$17.5 million and deferred revenue of$16.2 million . Investing Activities Cash used in investing activities for the three months endedMarch 31, 2020 was$19.1 million , consisting primarily of$15.8 million of additions of amortizable intangible assets and$2.4 million of purchases of property, plant and equipment. Cash provided by investing activities for the three months endedMarch 31, 2019 was$6.0 million , consisting primarily of a$25.0 million maturity of a certificate of deposit, partially offset by$13.6 million of additions of amortizable intangible assets,$3.2 million of purchases of property, plant and equipment and$2.5 million related to the purchase of an equity interest in an education technology company. Financing Activities Cash used in financing activities for the three months endedMarch 31, 2020 was$2.5 million , consisting primarily of the payment of debt issuance costs in connection with theFebruary 2020 amendment of our Term Loan. Cash provided by financing activities for the three months endedMarch 31, 2019 was$0.6 million , consisting primarily of$1.9 million of proceeds received from the exercise of stock options, partially offset by$1.3 million of deferred payments made for the acquisitions of amortizable intangible assets. Off-Balance Sheet Arrangements 29
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We do not have any off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of Regulation S-K, such as the use of unconsolidated
subsidiaries, structured finance, special purpose entities or variable interest
entities.
Critical Accounting Policies
Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts
We generate substantially all of our revenue from contractual arrangements, with
either our university clients or students, to provide a comprehensive platform
of tightly integrated technology and technology-enabled services that support
our offerings.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good
or service to the customer. A contract's transaction price is allocated to each
distinct performance obligation and recognized as revenue when, or as, the
performance obligation is satisfied. The transaction price is determined based
on the consideration to which we will be entitled in exchange for transferring
services to the customer. To the extent the transaction price includes variable
consideration, we estimate the amount of variable consideration that should be
included in the transaction price utilizing the expected value method. Variable
consideration is included in the transaction price if, in our judgment, it is
probable that a significant future reversal of cumulative revenue under the
contract will not occur. Any estimates, including the effect of the constraint
on variable consideration, are evaluated at each reporting period, and if
necessary, we adjust our estimate of the overall transaction price. Revenue is
then recognized over the remaining estimated period of performance using the
cumulative catch-up method.
Our Graduate Program Segment derives revenue primarily from contractually
specified percentages of the amounts our university clients receive from their
students in 2U-enabled degree programs for tuition and fees, less credit card
fees and other specified charges we have agreed to exclude in certain university
contracts. Our contracts with university clients in this segment typically have
terms of 10 to 15 years and have a single performance obligation, as the
promises to provide a platform of tightly integrated technology and services
that university clients need to attract, enroll, educate and support students
are not distinct within the context of the contracts. The single performance
obligation is delivered as the university clients receive and consume benefits,
which occurs ratably over a series of academic terms. The amounts received from
university clients over the term of the arrangement are variable in nature in
that they are dependent upon the number of students that are enrolled in the
program within each academic term. These amounts are allocated to and are
recognized ratably over the related academic term, defined as the period
beginning on the first day of classes through the last. Revenue is recognized
net of an allowance, which is established for our expected obligation to refund
tuition and fees to university clients.
Our Alternative Credential Segment derives revenue primarily from contracts with
students for the tuition and fees paid to enroll in, and progress through, our
short courses and boot camps. Our short courses run between six and 16 weeks,
while our boot camps run between 12 and 24 weeks. In this segment, our contracts
with students include the delivery of the educational and related student
support services and are treated as either a single performance obligation or
multiple performance obligations, depending upon the offering being delivered.
All performance obligations are satisfied ratably over the same presentation
period, which is defined as the period beginning on the first day of the course
through the last. We recognize the proceeds received, net of any applicable
pricing concessions, from the students enrolled and share contractually
specified amounts received from students with the associated university client,
in exchange for licenses to use the university brand name and other university
trademarks. These amounts are recognized as curriculum and teaching costs on our
condensed consolidated statements of operations and comprehensive loss. Our
contracts with university clients in this segment are typically shorter and less
restrictive than our contracts with university clients in our Graduate Program
Segment.
We do not disclose the value of unsatisfied performance obligations for our
Graduate Program Segment because the variable consideration is allocated
entirely to a wholly unsatisfied promise to transfer a service that forms part
of a single performance obligation. We do not disclose the value of unsatisfied
performance obligations for our Alternative Credential Segment because the
performance obligations are part of contracts that have original durations of
less than one year.
Contract Acquisition Costs
We pay commissions to certain of our employees to obtain contracts with
university clients in our Graduate Program Segment. These costs are capitalized
and recorded on a contract-by-contract basis and amortized using the
straight-line method over the expected life, which is generally the length of
the contract.
With respect to contract acquisition costs in our Alternative Credential
Segment, we have elected to apply the practical expedient in ASC Topic 606 to
expense these costs as incurred, as the terms of contracts with students in this
segment are less than one year.
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Payments to University Clients
Pursuant to certain of our contracts in the Graduate Program Segment, we have
made, or are obligated to make, payments to university clients at either
execution of a contract or at the extension of a contract in exchange for
various marketing and other rights. Generally, these amounts are capitalized and
amortized as contra revenue over the life of the contract, commencing on the
later of when payment is due or when contract revenue recognition begins.
Accounts Receivable, Contract Assets and Liabilities
Balance sheet items related to contracts consist of accounts receivable, net and
deferred revenue on our condensed consolidated balance sheets. Included in
accounts receivable, net are trade accounts receivable, which are comprised of
billed and unbilled revenue. Accounts receivable, net is stated at amortized
cost net of provision for credit losses. Our methodology to measure the
provision for credit losses requires an estimation of loss rates based upon
historical loss experience adjusted for factors that are relevant to determining
the expected collectability of accounts receivable. Some of these factors
include current market conditions, delinquency trends, aging behavior of
receivables and credit and liquidity quality indicators for industry groups,
customer classes or individual customers.
The Company's estimates are reviewed and revised periodically based on the
ongoing evaluation of credit quality indicators. Historically, actual write-offs
for uncollectible accounts have not significantly differed from prior estimates.
We recognize unbilled revenue when revenue recognition occurs in advance of
billings. Unbilled revenue is recognized in our Graduate Program Segment because
billings to university clients do not occur until after the academic term has
commenced and final enrollment information is available. Unbilled accounts
receivable is recognized in the Alternative Credential Segment once the
presentation period commences for amounts to be invoiced to students under
installment plans that are paid over the same presentation period. Our unbilled
revenue represents contract assets.
Deferred revenue represents the excess of amounts billed or received as compared
to amounts recognized in revenue on our condensed consolidated statements of
operations and comprehensive loss as of the end of the reporting period, and
such amounts are reflected as a current liability on our condensed consolidated
balance sheets. We generally receive payments for our share of tuition and fees
from degree program university clients early in each academic term and from
short course and boot camp students, either in full upon registration for the
course or in full before the end of the course based on a payment plan, prior to
completion of the service period. These payments are recorded as deferred
revenue until the services are delivered or until our obligations are otherwise
met, at which time revenue is recognized.
Long-Lived Assets
Amortizable Intangible Assets
Acquired Intangible Assets. We capitalize purchased intangible assets, such as
software, websites and domains, and amortize them on a straight-line basis over
their estimated useful life. Historically, we have assessed the useful lives of
these acquired intangible assets to be between three and ten years.
Capitalized Technology. Capitalized technology includes certain purchased
software and technology licenses, direct third-party costs, and internal payroll
and payroll-related costs used in the creation of our internal-use software.
Software development projects generally include three stages: the preliminary
project stage (all costs are expensed as incurred), the application development
stage (certain costs are capitalized and certain costs are expensed as incurred)
and the post-implementation/operation stage (all costs are expensed as
incurred). Costs capitalized in the application development stage include costs
of designing the application, coding, integrating our and the university's
networks and systems, and the testing of the software. Capitalization of costs
requires judgment in determining when a project has reached the application
development stage and the period over which we expect to benefit from the use of
that software. Once the software is placed in service, these costs are amortized
using the straight-line method over the estimated useful life of the software,
which is generally three to five years.
Capitalized Content Development. We develop content for each offering on a
course-by-course basis in collaboration with university client faculty and
industry experts. Depending upon the offering, we may use materials provided by
university clients and their faculty, including curricula, case studies,
presentations and other reading materials. We are responsible for the creation
of materials suitable for delivery through our learning platform, including all
expenses associated with this effort. With respect to the Graduate Program
Segment, the development of content is part of our single performance obligation
and is considered a contract fulfillment cost.
The content development costs that qualify for capitalization are third-party
direct costs, such as videography, editing and other services associated with
creating digital content. Additionally, we capitalize internal payroll and
payroll-related costs incurred to create and produce videos and other digital
content utilized in the university clients' offerings for delivery via our
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online learning platform. Capitalization ends when content has been fully developed by both us and the university client, at which time amortization of the capitalized content development costs begins. The capitalized costs for each offering are recorded on a course-by-course basis and included in capitalized content costs in amortizable intangible assets, net on our consolidated balance sheets. These costs are amortized using the straight-line method over the estimated useful life of the respective course, which is generally four to five years. The estimated useful life corresponds with the planned curriculum refresh rate. This refresh rate is consistent with expected curriculum refresh rates as cited by faculty members for similar on-campus offerings. Evaluation of Long-Lived Assets We review long-lived assets, which consist of property and equipment, capitalized technology costs, capitalized content development costs and acquired finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. In order to assess the recoverability of the capitalized technology and content development costs, the costs are grouped by the lowest level of independent cash flows. Recoverability of a long-lived asset is measured by a comparison of the carrying value of an asset or asset group to the future undiscounted net cash flows expected to be generated by that asset or asset group. If such assets are not recoverable, the impairment to be recognized is measured by the amount by which the carrying value of an asset exceeds the estimated fair value (discounted cash flow) of the asset or asset group. Our impairment analysis is based upon cumulative results and forecasted performance.Goodwill Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. Our goodwill balance relates to the acquisitions of GetSmarter inJuly 2017 and Trilogy inMay 2019 . We review goodwill at least annually, as ofOctober 1 . Between annual tests, goodwill is reviewed for possible impairment if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We test our goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. We initially assess qualitative factors to determine if it is necessary to perform a quantitative goodwill impairment review. We review goodwill for impairment using a quantitative approach if we decide to bypass the qualitative assessment or determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on a qualitative assessment. Upon completion of a quantitative assessment, we may be required to recognize an impairment based on the difference between the carrying value and the fair value of the reporting unit. We determine the fair value of a reporting unit by utilizing a weighted combination of the income-based and market-based approaches. The income-based approach requires us to make significant assumptions and estimates. These assumptions and estimates primarily include, but are not limited to, the selection of appropriate peer group companies, discount rates, terminal growth rates, and forecasts of revenue, operating income, depreciation and amortization expense, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, we consider each reporting unit's historical results and current operating trends, revenue, profitability, cash flow results and forecasts, and industry trends. These estimates can be affected by a number of factors including, but not limited to, general economic and regulatory conditions, market capitalization, the continued efforts of competitors to gain market share and prospective student enrollment patterns. In addition, the value of a reporting unit using the market-based approach is estimated by comparing the reporting unit to other publicly-traded companies and/or to publicly-disclosed business mergers and acquisitions in similar lines of business. The value of a reporting unit is based on pricing multiples of certain financial parameters observed in the comparable companies. We also make estimates and assumptions for market values to determine a reporting unit's estimated fair value. Other than the reporting unit impaired in the third quarter of 2019, we had no reporting units whose estimated fair value exceeded their carrying value by less than 10% as ofOctober 1, 2019 , the date of our annual goodwill impairment assessment. It is possible that future changes in our circumstances, including a potential impact from COVID-19, or in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of our reporting units, could require us to record additional impairment charges in the future. Recent Accounting Pronouncements Refer to Note 2 in the "Notes to Condensed Consolidated Financial Statements" included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of the FASB's recent accounting pronouncements and their effect on us. Key Business and Financial Performance Metrics 32
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We use a number of key metrics to evaluate our business, measure our
performance, identify trends affecting our business, formulate financial
projections and make strategic decisions. In addition to adjusted EBITDA (loss),
which we discuss below, and revenue and the components of loss from operations
in the section above entitled "Our Business Model and Components of Operating
Results," we utilize full course equivalent enrollments as a key metric to
evaluate the success of our business.
Full Course Equivalent Enrollments
We measure full course equivalent enrollments for each of the courses offered
during a particular period by taking the number of students enrolled in that
course and multiplying it by the percentage of the course completed during that
period. We add the full course equivalent enrollments for each course within
each segment to calculate the total full course equivalent enrollments per
segment. This metric allows us to consistently view period-over-period changes
in enrollments by accounting for the fact that many courses we enable straddle
multiple fiscal quarters. For example, if a course had 25 enrolled students and
40% of the course was completed during a particular period, we would count the
course as having 10 full course equivalent enrollments for that period. Any
individual student may be enrolled in more than one course during a period.
Average revenue per full course equivalent enrollment represents our
weighted-average revenue per course across the mix of courses being offered
during a period in each of our operating segments. This number is derived by
dividing the total revenue for a period for each of our operating segments by
the number of full course equivalent enrollments within the applicable segment
during that same period. This amount may vary from period to period depending on
the academic calendars of our university clients, the relative growth rates of
our degree programs, short courses, and boot camps, as applicable, and varying
tuition levels, among other factors.
The following table presents the full course equivalent enrollments and average
revenue per full course equivalent enrollment in our Graduate Program Segment
and Alternative Credential Segment for each of the periods indicated.
Three Months Ended
March 31,
2020 2019
Graduate Program Segment
Full course equivalent enrollments 45,734 39,512
Average revenue per full course equivalent enrollment$ 2,590 $ 2,637 Alternative Credential Segment* Full course equivalent enrollments 15,141
9,128
Average revenue per full course equivalent enrollment$ 3,766 $ 1,979 * Trilogy's results of operations are included in our results of operations since the acquisition date. Of the increase in full course equivalent enrollments in our Graduate Program Segment for the three months endedMarch 31, 2020 and 2019, 2,880 or 46.3% and 3,511 or 36.0%, respectively, were attributable to degree programs launched during the preceding 12 months. Of the increase in full course equivalent enrollments in our Alternative Credential Segment for the three months endedMarch 31, 2020 and 2019, 3,052 or 50.8% and 2,343 or 75.0%, respectively, were attributable to offerings launched during the preceding 12 months. Adjusted EBITDA (Loss) We define 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, and stock-based compensation expense. Adjusted EBITDA (loss) is a key measure used by our management and board of directors to understand and evaluate our operating performance and trends, to develop short- and long-term operational plans and to compare our performance against that of other peer companies using similar measures. In particular, the exclusion of certain expenses in calculating adjusted EBITDA (loss) can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that adjusted EBITDA (loss) provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Adjusted EBITDA (loss) is not a measure calculated in accordance withU.S. GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance withU.S. GAAP. 33
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Our use of adjusted EBITDA (loss) has limitations as an analytical tool, and you
should not consider it in isolation or as a substitute for analysis of our
financial results as reported under
the assets being depreciated and amortized may have to be replaced in
the future, and adjusted EBITDA (loss) does not reflect cash capital
expenditure requirements for such replacements or for new capital
expenditure requirements;
• adjusted EBITDA (loss) does not reflect changes in, or cash
requirements for, our working capital needs;
• adjusted EBITDA (loss) does not reflect the impact of changes in
foreign currency exchange rates;
• adjusted EBITDA (loss) does not reflect acquisition related gains or
losses such as, but not limited to, post-acquisition changes in the
value of contingent consideration reflected in operations;
• adjusted EBITDA (loss) does not reflect transaction costs, integration
costs, restructuring-related costs, impairment charges, or stockholder
activism costs;
• adjusted EBITDA (loss) does not reflect the impact of deferred revenue
fair value adjustments;
• adjusted EBITDA (loss) does not reflect the potentially dilutive impact
of equity-based compensation;
• adjusted EBITDA (loss) does not reflect interest or tax payments that
may represent a reduction in cash available to us; and
• other companies, including companies in our industry, may calculate
adjusted EBITDA (loss) differently, which reduces its usefulness as a
comparative measure.
Because of these and other limitations, you should consider adjusted EBITDA
(loss) alongside other U.S. GAAP-based financial performance measures, including
various cash flow metrics, net income (loss) and our other U.S. GAAP results.
The following table presents a reconciliation of net loss to adjusted EBITDA
(loss) for each of the periods indicated.
Three Months Ended
March 31,
2020 2019
(in thousands)
Net loss $ (60,106 ) $ (21,554 )
Adjustments:
Interest expense (income), net 4,980 (2,294 )
Foreign currency loss 2,271 370
Income tax benefit (1,055 ) (941 )
Depreciation and amortization expense 23,485 9,698 Transaction and integration costs
724 1,931
Restructuring-related costs 288 -
Stockholder activism costs 4,239 -
Stock-based compensation expense 20,870 9,584
Total adjustments 55,802 18,348
Adjusted EBITDA (loss) $ (4,304 ) $ (3,206 )
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