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, 2021 . 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 (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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, 2021 , and our other filings with theSecurities and Exchange Commission (the "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, 2021 , which are included in our Annual Report on Form 10-K, filed with theSEC onMarch 1, 2022 .
Overview
We are a leading online education platform company. Our mission is to expand access to high-quality educational opportunities that unlock human potential. InNovember 2021 , we acquired substantially all of the assets of edX Inc. (the "edX Acquisition"), including the edX brand, website and marketplace. As a result of the edX Acquisition, we expanded our digital education offerings to include open courses and micro-credential offerings at the undergraduate and graduate levels and added an education consumer marketplace, edx.org, with over 44 million registered learners. Following the completion of the edX Acquisition, we now serve more than 230 top-ranked global universities and other leading institutions, and offer more than 4,000 high-quality online learning opportunities, including open courses, executive education offerings, boot camps, micro-credentials, professional certificates as well as undergraduate and graduate degree programs. With the edX Acquisition, we are now positioned as one of the world's most comprehensive free-to-degree online learning platforms. We believe our platform and robust consumer marketplace provide our clients with the digital infrastructure to launch world-class online education offerings and allow students to easily access high-quality, job-relevant education offerings without the barriers of cost or location.
We have two reportable segments: the Degree Program Segment and the Alternative Credential Segment.
In our Degree 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 open courses, executive education programs, technical, skills-based boot camps and micro-credential programs at the undergraduate and graduate levels through relationships with nonprofit colleges and universities and other leading institutions. Students enrolled in these offerings are generally seeking to reskill or upskill for career advancement or personal development through shorter duration, lower-priced offerings.
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COVID-19 Update
The COVID-19 pandemic continues to have widespread impacts on society and the global economy. Our focus remains on ensuring the health and safety of our employees and clients, while ensuring the continuity of our business. We have adapted our business practices to allow our global workforce to continue to work from home on a voluntary basis. In addition, many of our in-person offerings and other campus-based experiences are offered in a virtual format, including the field placement components in certain of our clinical graduate programs. Our course production capabilities allow faculty to record studio-quality asynchronous content remotely. We continue to closely monitor the impact of the COVID-19 pandemic on our business. The pandemic initially accelerated the need for online learning and training, but has also created new and different demand dynamics in the market. At the beginning of the pandemic, we experienced increased demand from new and existing university clients and students as universities moved classes online. More recently, we have seen some of these pandemic-related trends subside in certain areas of our business. We have experienced fluctuations in our student retention rates, student enrollments and in our marketing costs. In particular, our marketing costs began to increase in the second half of 2021 as the COVID-19 pandemic began to taper and have since decreased slightly in 2022. In addition, during the past year, competition for talent has increased, resulting in higher employee turnover and additional costs to attract and retain employees. We cannot estimate the impact of COVID-19 on future demand or cost levels or on our business or economic conditions generally, due to numerous uncertainties, including uncertainties regarding the duration or reemergence of the outbreak in various regions, including the potential impact of variants of the virus, actions that may be taken by governmental authorities, future fluctuations in demand and cost levels and labor market conditions. For a discussion of additional risks related to COVID-19, see Part I, Item 1A. "Risk Factors."
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 Degree 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 executive education programs and boot camps. Revenue in each segment is primarily driven by the number of student enrollments in our 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 Degree 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. 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 executive education 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 executive education and
boot camp instructional staff.
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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 expenses 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 expenses. 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 expenses.
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 Income (Expense), Net
Other income (expense), net consists primarily of foreign currency gains and losses, gains and losses related to the sale of investments and other non-operating income and expense.
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. 37
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Results of Operations
Consolidated Operating Results
Comparison of Three Months Ended
The following table presents selected condensed consolidated statement of operations and comprehensive loss data for each of the periods indicated.
Three Months Ended March 31,
2022 2021 Period-to-Period Change
Percentage of Percentage of
Amount Revenue Amount Revenue Amount Percentage
(dollars in thousands)
Revenue $ 253,329 100.0 % $ 232,473 100.0 % $ 20,856 9.0 %
Costs and expenses
Curriculum and teaching 33,230 13.1 33,148 14.3 82 0.2
Servicing and support 39,624 15.6 33,184 14.3 6,440 19.4
Technology and content development 51,057 20.2 42,924 18.5 8,133 18.9
Marketing and sales 130,982 51.7 113,237 48.7 17,745 15.7
General and administrative 51,022 20.1 47,112 20.3 3,910 8.3
Impairment charges 58,782 23.2 - - 58,782 *
Total costs and expenses 364,697 143.9 269,605 116.1 95,092 35.3
Loss from operations (111,368) (43.9) (37,132) (16.1) (74,236) 199.9
Interest income 257 0.1 362 0.2 (105) 29.1
Interest expense (13,890) (5.5) (7,881) (3.4) (6,009) 76.3
Other expense, net (1,030) (0.4) (915) (0.4) (115) 12.5
Loss before income taxes (126,031) (49.7) (45,566) (19.7) (80,465) 176.6
Income tax benefit 251 0.1 2 - 249 *
Net loss $ (125,780) (49.6) % $ (45,564) (19.7) % $ (80,216) 176.1 %
* Not meaningful for comparative purposes.
Revenue. Revenue for the three months endedMarch 31, 2022 increased$20.9 million , or 9.0%, to$253.3 million as compared to$232.5 million in 2021. This increase includes$10.9 million from edX, acquired in the fourth quarter of 2021. Revenue from our Degree Program Segment increased$8.3 million , or 5.7%, primarily due an increase in FCE enrollments of 2,602, or 4.3% and a 1.3% increase in average revenue per FCE enrollment, from$2,431 to$2,462 . Revenue from our Alternative Credential Segment increased$12.6 million , or 14.5%, primarily due to a$8.2 million increase in revenue from the addition of edX offerings and an increase in FCE enrollments of 1,586, or 7.5%, partially offset by a 2.3% decrease in average revenue per FCE enrollment, from$4,108 to$4,012 . Curriculum and Teaching. Curriculum and teaching expense for the three months endedMarch 31, 2022 was$33.2 million , which was comparable to the three months endedMarch 31, 2021 . Servicing and Support. Servicing and support expense increased$6.4 million , or 19.4%, to$39.6 million as compared to$33.2 million in 2021. This increase includes$2.7 million of operating expense from edX. The remaining increase was primarily due to a$2.3 million increase in personnel and personnel-related expense and a$1.4 million increase in other student support costs to serve a greater number of students. Technology and Content Development. Technology and content development expense increased$8.2 million , or 18.9%, to$51.1 million as compared to$42.9 million in 2021. This increase includes$4.8 million of operating expense from edX. The remaining increase was primarily due to a$3.0 million increase in depreciation and amortization expense. Marketing and Sales. Marketing and sales expense increased$17.8 million , or 15.7%, to$131.0 million as compared to$113.2 million in 2021. This increase includes$7.8 million of operating expense from edX. The remaining increase was primarily due to a$8.6 million increase in marketing expense to support our revenue growth and a$2.5 million increase in 38
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depreciation and amortization expense primarily related to amortization of
acquired trade names. These increases were partially offset by a
General and Administrative. General and administrative expense increased$3.9 million , or 8.3%, to$51.0 million as compared to$47.1 million in 2021. This increase includes$2.6 million of operating expense from edX. The remaining increase was primarily due to a$2.5 million increase in litigation-related expense and a$1.5 million increase in transaction and integration expense. These increases were partially offset by a$3.3 million decrease in personnel and personnel-related expense.
Impairment Charges. During the three months ended
Net Interest Income (Expense). Net interest expense increased$6.1 million , or 81.3%, to$13.6 million as compared to$7.5 million in 2021. This increase was primarily due to an$11.0 million increase in interest expense incurred under our Amended Term Loan Facility, which we entered into inJune 2021 and amended inNovember 2021 . This increase was partially offset by a$4.9 million decrease in interest expense due to the adoption of ASU 2020-06, which eliminated the amortization of the debt discount previously associated with the Notes. Other Expense, Net. Other expense, net was$1.0 million for the three months endedMarch 31, 2022 , as compared to$0.9 million for the three months endedMarch 31, 2021 . This change 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, 2022 , we recognized an income tax benefit of$0.3 million , and our effective tax rate was less than 1%. For the three months endedMarch 31, 2021 , we recognized an income tax benefit of less than$0.1 million , and our effective tax rate was less than 1%. To date, we have not been required to payU.S. federal income taxes because of our current and accumulated net operating losses. 39
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Business Segment Operating Results
We define segment profitability as net income or net loss, as applicable, before net interest income (expense), other income (expense), net, taxes, depreciation and amortization expense, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, certain litigation-related costs, consisting of fees for certain non-ordinary course litigation and other proceedings, impairment charges, losses on debt extinguishment, and stock-based compensation expense. Some of these items may not be applicable in any given reporting period and they may vary from period to period. Total segment profitability is a non-GAAP measure when presented outside of the financial statement footnotes. Total segment profitability 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 total segment profitability can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that total segment profitability 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.
The following table presents a reconciliation of total segment profitability to net loss for each of the periods indicated.
Three Months Ended
March 31,
2022 2021
(in thousands)
Net loss $ (125,780) $ (45,564)
Adjustments:
Stock-based compensation expense 24,424 24,947
Other expense, net 1,030 915
Net interest expense 13,633 7,519
Income tax benefit (251) (2)
Depreciation and amortization expense 34,415 24,987
Impairment charges 58,782 -
Other* 6,027 946
Total adjustments 138,060 59,312
Total segment profitability $ 12,280 $ 13,748 * Includes (i) transaction and integration expense of
three months ended March 31, 2022 and 2021, respectively, (ii) restructuring-related
expense of $0.8 million and $0.5 million for the three months
ended
2021, respectively, and (iii) stockholder activism andlitigation-related expense of
$2.8 million and$0.4 million for the three months endedMarch 31, 2022 and 2021, respectively. 40
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Three Months Ended
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
2022 2021 Amount Percentage
(dollars in thousands)
Revenue by segment*
Degree Program Segment $ 154,167 $ 145,875 $ 8,292 5.7 %
Alternative Credential Segment 99,162 86,598 12,564 14.5
Total revenue $ 253,329 $ 232,473 $ 20,856 9.0 %
Segment profitability
Degree Program Segment $ 35,818 $ 25,888 $ 9,930 38.4 %
Alternative Credential Segment (23,538) (12,140) (11,398) 93.9
Total segment profitability $ 12,280 $ 13,748 $ (1,468) (10.7) %
* Immaterial amounts of intersegment revenue have been excluded from the above
results for the three months ended March 31, 2022 and 2021.
Degree Program Segment profitability increased $9.9 million , or 38.4%, to $35.8
million as compared to $25.9 million in 2021. This increase was primarily due to
revenue growth of $8.3 million , including $2.7 million from the addition of edX
offerings and operational efficiency initiatives.
Alternative Credential Segment profitability decreased $11.4 million , or 93.9%,
to $(23.5) million as compared to $(12.1) million in 2021. This decrease was
primarily due to higher operating expenses, including $18.0 million of operating
expense from edX, partially offset by revenue growth of $12.6 million , including
$8.2 million from the addition of edX offerings.
Liquidity and Capital Resources
As of
InApril 2020 , we issued the Notes in an aggregate principal amount of$380 million , including the exercise by the initial purchasers of an option to purchase additional Notes, in a private placement to qualified institutional buyers under Rule 144A of the Securities Act. The Notes are governed by an indenture (the "Indenture") between the Company andWilmington Trust, National Association , as trustee. The Notes bear interest at a rate of 2.25% per annum, payable semi-annually in arrears onMay 1 andNovember 1 of each year, beginning onNovember 1, 2020 . The Notes mature onMay 1, 2025 , unless repurchased, redeemed or converted in accordance with their terms prior to such date. Prior toNovember 1, 2024 , the Notes are convertible only upon satisfaction of certain conditions, and thereafter at any time until the close of business on the second scheduled trading date immediately before the maturity date. In connection with the Notes, we entered into privately negotiated capped call transactions with a premium cost of approximately$50.5 million . The capped call transactions are generally 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, with such reduction and/or offset subject to the cap. The net proceeds from the issuance of the Notes were$319.0 million after deducting the initial purchasers' discount, offering expenses and the cost of the capped call transactions. As ofMarch 31, 2022 , the conditions allowing holders of the Notes to convert had not been met and we have the right under the Indenture to determine the method of settlement at the time of conversion, and the Notes, therefore, are classified as a non-current on the condensed consolidated balance sheets. Refer to Note 8 in the "Notes to Condensed Consolidated Financial Statements" included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our Notes. OnApril 23, 2020 , we repaid our$250 million senior secured term loan facility in full (including interest and prepayment premium) and terminated our credit agreement with Owl Rock Capital Corporation. In connection with the extinguishment of our$250 million senior secured term loan facility, we recognized a charge of approximately$11.7 million in the second quarter of 2020. OnJune 25, 2020 , we entered into a$50 million credit agreement withMorgan Stanley Senior Funding, Inc. , as administrative agent and collateral agent, and certain other lenders party thereto that provided for$50 million in revolving 41
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loans. In connection with entering into the Term Loan Agreement (as defined below) inJune 2021 , we terminated our$50 million credit agreement withMorgan Stanley Senior Funding, Inc. Refer to Note 8 in the "Notes to Condensed Consolidated Financial Statements" included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information. OnAugust 6, 2020 , we sold 6,800,000 shares of our common stock to the public. We received net proceeds of$299.8 million , which we use for working capital and other general corporate purposes. InJune 2021 , we entered into a Term Loan Credit and Guaranty Agreement, datedJune 28, 2021 ("the Term Loan Agreement"), withAlter Domus (US) LLC as administrative agent and collateral agent, to make term loans to us in the aggregate principal amount of$475 million (the "Term Loan Facilities"), which have an initial maturity date ofDecember 28, 2024 . Loans under this facility bear interest at a per annum rate equal to a base rate or adjusted Eurodollar rate, as applicable, plus the applicable margin of 4.75% in the case of the base rate loans and 5.75% in the case of the Eurodollar loans. We used the proceeds of the Term Loan Facilities to fund a portion of the edX Acquisition and to pay related costs, fees and expenses. OnNovember 4, 2021 , we entered into a First Amendment to Term Loan Credit and Guaranty Agreement and a Joinder Agreement, which amended the Term Loan Agreement (collectively, the "Amended Term Loan Facility") primarily to provide for an incremental facility to us in an original principal amount of$100 million . The proceeds of the Amended Term Loan Facility may be used for general corporate purposes. Refer to Note 8 in the "Notes to Condensed Consolidated Financial Statements" included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our Amended Term Loan Facility. We have financed our operations primarily through payments from university clients and students for our technology and services, the Amended Term Loan Facility, the Notes, and public and private equity financings. We believe that our existing cash and cash equivalents, together with cash generated from operations and available borrowing capacity under the Amended Term Loan Facility, will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months. We regularly evaluate our liquidity position, debt obligations, and anticipated cash needs, and may consider capital raising and other market opportunities that may be available to us.
Our operations require us to make capital expenditures for content development,
capitalized technology, and property and equipment and to service our debt.
During the three months ended
We or our affiliates may, at any time and from time to time, seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in
thousands).
Three Months Ended
March 31,
2022 2021
Net cash (used in) provided by operating activities
(14,296) (15,057)
Net cash used in financing activities (1,914)
(6,348)
Effect of exchange rate changes on cash (36)
(32)
Net decrease in cash, cash equivalents and restricted cash
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, adjusted for non-cash expense items such as depreciation and amortization expense and stock-based compensation expense.
The following sections set forth the components of our
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Net income (loss) (adjusted for non-cash charges)
The following table sets forth our net loss (adjusted for non-cash charges)
during the three months ended
Net loss$ (125,780) Non-cash interest expense 4,254 Depreciation and amortization expense 34,415 Stock-based compensation expense 24,424 Non-cash lease expense 5,750 Provision for credit losses 2,350 Impairment charges 58,782 Other 1,378
Net income (adjusted for non-cash charges)
Changes in operating assets and liabilities, net of assets and liabilities acquired
The following table sets forth the net cash used from changes in operating
assets and liabilities during the three months ended
Changes in operating assets and liabilities, net of assets and liabilities acquired: Cash used in accounts receivable, net and other receivables, net
$ (13,218) Cash used in prepaid expenses, other assets, and other liabilities, net
(10,091)
Cash used in accounts payable and accrued expenses
(11,944)
Cash provided by deferred revenue
29,614
Net cash used from changes in operating assets and liabilities
From
•Accounts receivable, net and other receivables, net increased$13.2 million and deferred revenue increased$29.6 million . These increases were primarily due to the timing of our Degree Program Segment clients' academic terms. •Accounts payable and accrued expenses decreased$11.9 million , primarily due to the payment of performance-based annual bonuses during the three months endedMarch 31, 2022 , partially offset by a higher accrual for marketing expense.
•Other liabilities decreased
Investing Activities
Our investing activities primarily consist of strategic acquisitions, divestitures and purchases of property and equipment to support the overall growth of our business. We expect our investing cash flows to be affected by the timing of payments we make for capital expenditures and the strategic acquisition or other growth opportunities we decide to pursue.
During the three months endedMarch 31, 2022 , net cash used in investing activities was$14.3 million . This use of cash was driven by cash outflows of$17.5 million for the addition of amortizable intangible assets and$1.8 million for purchases of property and equipment, partially offset by a purchase price adjustment related to a change in net working capital which reduced the preliminary purchase price of the edX Acquisition by$5.0 million .
Financing Activities
Our financing activities primarily consist of long-term debt borrowings, the repayment of principal on long-term debt, tax withholding payments associated with the settlement of restricted stock units and the exercise of stock options. During the three months endedMarch 31, 2022 , net cash used in financing activities was$1.9 million . This use of cash was driven by cash outflows of$1.9 million for quarterly amortization payments on our Amended Term Loan Facility and$0.9 million for tax withholding payments associated with the settlement of restricted stock units, partially offset by a cash inflow of$0.9 million from cash proceeds received from the exercise of stock options. 43
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Critical Accounting Policies and Estimates
Revenue Recognition, Receivables and Provision for Credit Losses
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 Degree 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 executive education programs and boot camps. Our executive education programs run between two 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 expenses 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 Degree Program Segment. We do not disclose the value of unsatisfied performance obligations for our Degree 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.
Payments to University Clients
Pursuant to certain of our contracts in the Degree Program Segment, we have made, or are obligated to make, payments to university clients at either the execution of a contract or at the extension of a contract in exchange for various marketing and other rights. Generally, these amounts are capitalized as other assets on our condensed consolidated balance sheets, 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.
Receivables, Contract Assets and Liabilities
Balance sheet items related to contracts consist of accounts receivable, net,
other receivables, net and deferred revenue on our condensed consolidated
balance sheets. Accounts receivable, net includes trade accounts receivable,
which are comprised of
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billed and unbilled revenue. Our trade accounts receivable balances have terms of less than one year. 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. Our 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 Degree Program Segment because billings to university clients do not occur until after the academic term has commenced and final enrollment information is available. Our unbilled revenue represents contract assets. Other receivables, net are comprised of amounts due under tuition payment plans with extended payment terms from students enrolled in certain of our alternative credential offerings. These plans, which are managed and serviced by third-party providers, are designed to assist students with covering tuition costs after all other student financial assistance and scholarships have been applied. The associated receivables generally have payment terms that exceed one year and are recorded net of any implied pricing concessions, which are determined based on our collections history, market data and any time value of money component. There are no fees or origination costs included in these receivables. 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. Our deferred revenue represents contract liabilities. We generally receive payments from Degree Program Segment university clients early in each academic term and from Alternative Credential Segment 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.
Business Combinations
The purchase price of an acquisition is allocated to the assets acquired, including intangible assets, and liabilities assumed, based on their respective fair values at the acquisition date. The excess of the cost of an acquired entity, net of the amounts assigned to the assets acquired and liabilities assumed, is recognized as goodwill. The net assets and results of operations of an acquired entity are included on our condensed consolidated financial statements from the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions, and information obtained from management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. Unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results.
On
Long-Lived Assets
Amortizable Intangible Assets
Acquired Definite-lived Intangible Assets. We capitalize purchased
definite-lived 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 10 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
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amounts 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 online learning platform, including all expenses associated with this effort. With respect to the Degree 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 expenses incurred to create and produce videos and other digital content utilized in the university clients' offerings for delivery via our 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 begins. The capitalized costs for each offering are recorded on a course-by-course basis and included in amortizable intangible assets, net on our condensed consolidated balance sheets. These amounts 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, capitalized content development 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, the amounts 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.
We review goodwill and other indefinite-lived intangible assets for impairment annually, as ofOctober 1 , and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill or an indefinite-lived asset 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.
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Changes in these estimates and assumptions could materially affect the determination of fair value and the goodwill impairment test result. As ofMarch 31, 2022 andDecember 31, 2021 , the goodwill balance was$804.6 million and$834.5 million , respectively, and the indefinite-lived intangible asset balance was$225.0 million and$255.0 million , respectively. Refer to Note 4 in the "Notes to Condensed Consolidated Financial Statements" included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding this transaction and for more information regarding goodwill and our indefinite-lived intangible asset.
Other Indefinite-lived Intangible Assets
Our indefinite-lived intangible asset was acquired in
Interim Impairment Assessment
During the first quarter of 2022, we experienced a significant decline in our market capitalization, which management deemed a triggering event related to goodwill and our indefinite-lived intangible asset. As a result, we performed an interim impairment assessment as ofMarch 1, 2022 and determined the carrying value for one of our reporting units within the Alternative Credential segment and the carrying value of our indefinite-lived intangible asset exceeded their respective estimated fair values. As a result, during the three months endedMarch 31, 2022 , we recorded impairment charges of$28.8 million and$30.0 million to goodwill and the indefinite-lived intangible asset, respectively. These charges are included within operating expense within our condensed consolidated statements of operations. The estimated fair values of the remaining reporting units exceeded their respective carrying values by approximately 10% or more. We utilized a weighted combination of the income-based approach and market-based approach to determine the fair value of each reporting unit and the income-based approach to determine the fair value of its long-lived intangible asset. Key assumptions used in the income-based approach included forecasts of revenue, operating income, depreciation and amortization expense, capital expenditures and future working capital requirements, terminal growth rates, and discount rates based upon each respective reporting unit's or indefinite-lived intangible asset's weighted-average cost of capital adjusted for the risk associated with the operations at the time of the assessment. The income-based approach largely relied on inputs that were not observable to active markets, which would be deemed "Level 3" fair value measurements. Key assumptions used in the market-based approach included the selection of appropriate peer group companies. Changes in the estimates and assumptions used to estimate fair value could materially affect the determination of fair value and the impairment test result.
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
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 FCE enrollments as a key metric to evaluate the success of our business.
Full Course Equivalent Enrollments
We measure FCE 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 FCE enrollments for each course within each segment to calculate the total FCE 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 FCE enrollments for that period. Any individual student may be enrolled in more than one course during a period. Average revenue per FCE 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 FCE 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, executive education programs, and boot camps, as applicable, and varying tuition levels, among other factors.
For the Degree Program Segment, FCE enrollments and average revenue per FCE enrollment include enrollments and revenue from edX bachelor's and master's degree offerings. For the Alternative Credential Segment, FCE enrollments and
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average revenue per FCE enrollment exclude enrollments and revenue from edX
offerings due to the large number of learners taking free or low-cost courses.
We believe excluding the impact of these enrollments and revenue is useful to
investors because it facilitates a period-to-period comparison.
The following table presents the FCE enrollments and average revenue per FCE
enrollment in our Degree Program Segment and Alternative Credential Segment for
each of the periods indicated.
Three Months Ended
March 31,
2022 2021
Degree Program Segment*
FCE enrollments 62,609 60,007
Average revenue per FCE enrollment
22,664 21,078
Average revenue per FCE enrollment
* FCE enrollments and average revenue per FCE include enrollments in edX degree
offerings and revenue from these offerings of $2.7 million and
three months ended March 31, 2022 and 2021, respectively.
** FCE enrollments and average revenue per FCE exclude the impact of enrollments in edX
offerings and the related revenue of $8.2 million and $0.0 million, for the three
months ended March 31, 2022 and 2021, respectively.Adjusted EBITDA (Loss)
We define adjusted EBITDA (loss) as net income or net loss, as applicable, before net interest income (expense), other income (expense), net, taxes, depreciation and amortization expense, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, certain litigation-related costs, consisting of fees for certain non-ordinary course litigation and other proceedings, impairment charges, losses on debt extinguishment, and stock-based compensation expense. Some of these items may not be applicable in any given reporting period and they may vary from period to period. 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 that are not reflective of our ongoing operating results 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 with
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
•although depreciation and amortization expense are non-cash charges, 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 (i) changes in, or cash requirements
for, our working capital needs; (ii) the impact of changes in foreign currency
exchange rates; (iii) acquisition related gains or losses such as, but not
limited to, post-acquisition changes in the value of contingent consideration
reflected in operations; (iv) transaction and integration costs; (v)
restructuring-related costs; (vi) impairment charges; (vii) stockholder activism
costs; (viii) certain litigation-related costs; (ix) losses on debt
extinguishment; (x) the impact of deferred revenue fair value adjustments; (xi)
interest or tax payments that may represent a reduction in cash; or (xii) the
non-cash expense or the potentially dilutive impact of equity-based
compensation, which has been, and we expect will continue to be, an important
part of our compensation plan; and
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•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 otherU.S. GAAP-based financial performance measures, including various cash flow metrics, net income (loss) and our otherU.S. GAAP results. The following table presents a reconciliation of adjusted EBITDA (loss) to net loss for each of the periods indicated. Three Months Ended March 31, 2022 2021 (in thousands) Net loss$ (125,780) $ (45,564) Adjustments: Stock-based compensation expense 24,424 24,947 Other expense, net 1,030 915 Net interest expense 13,633 7,519 Income tax benefit (251) (2) Depreciation and amortization expense 34,415 24,987 Impairment charges 58,782 - Other* 6,027 946 Total adjustments 138,060 59,312 Adjusted EBITDA$ 12,280 $ 13,748
* Includes (i) transaction and integration expense of
three months ended March 31, 2022 and 2021, respectively, (ii) restructuring-related
expense of $0.8 million and $0.5 million for the three months
ended
2021, respectively, and (iii) stockholder activism andlitigation-related expense of
$2.8 million and$0.4 million for the three months ended March
31, 2022 and 2021,
respectively.
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