Well that was quite an earnings call. 2U ($TWOU) shared their second quarter 2019 results and answered investment analyst questions this afternoon, and the implications of the call go well beyond 2U’s stock (down 25% in after hours trading by end of call). 2U is changing their entire outlook for graduate programs (i.e. their traditional Online Program Management, or OPM, model) as well as their short-course model (i.e. non-degree coursework based on the company’s GetSmarter acquisition).
Feel free to head over to Twitter for the full thread and discussions, but I’ll recap the main points below and add why I think this is an inflection point for the OPM market.
- While 2U executives described material changes in their top online programs (e.g. USC social work, UNC MBA) last quarter, this time they are changing their overall guidance and not just planning to “operate their way out of the problem”. Today’s call was 2U recognizing that the markets around online education have changed in fundamental ways.
- The primary change 2U sees is for online education overall and not just for OPM-based programs – there are many more online offerings available in just the past few years, leading to a much more competitive, regional market. Students more and more are looking for online programs from schools near them. One effect is that it is much harder to scale programs to several hundred students.
- As a result, 2U is changing their outlook, cutting down expected new graduate program starts by at least half over the next year or two, and cutting back on marketing spend per program as the last 50 students to recruit are the toughest ones (paraphrase). And they are cutting expectations for enrollment per cohort across their portfolio.
- 2U mentioned many times during the call that it is their scale and suite of offerings that will be their competitive advantage. In addition, 2U executives believe they are seeing these structural changes first due to scale, but other OPM providers will see them soon, and the smaller ones are already having problems.
- The recent Department of Education guidance around financial aid for California students in out-of-state programs from nonprofit providers (including many of 2U’s clients) is also having an impact on guidance. 2U expects the issue to be resolved soon, but they needed to account for the uncertainty in today’s earnings and projections.
- 2U announced a new “institutional suite” product based on their recent RFP win with UNC for a university-wide support (exclusive provider) for 10 graduate programs. This institutional suite is not the same thing as their traditional full-service revenue-sharing OPM model, however. Importantly, it includes fee-for-service offerings.
- 2U is seeing similar-in-scope changes to their short courses segment that is based on the company’s acquisition of GetSmarter.
- As a company, 2U is redefining itself by its scale and suite of offerings – traditional OPM for grad programs, short course / non-degree offerings from GetSmarter, bootcamps based on the company’s acquisition of Trilogy, and the new institutional suite with fee-for-service models.
Why This is Important
While MindWires has investment companies as clients with our consulting and market analysis, we do not provide investment analysis. I tend to write about stock market issues only as it directly affects company offerings for education. And yes, this news is worth following in that regard – we’ll have to see how analysts cover the earnings call news and how it impacts 2U’s operations. Put another way, I don’t know the impact on 2U the company, but it is worth watching.
More broadly, I think the impact will be much broader in nature. Last year I wrote about the OPM market and how it is chaotic and dangerous, despite overall market growth.
The picture one gets is of a chaotic market that is not for the faint of heart, and one that will likely see further consolidations and category changes. 2U, for its part, has been successful partially due to a niche strategy where they go after elite master’s programs and mostly avoid direct competition or engagement with the rest of the market. And recently we have started to see the MOOC providers become OPM providers – where the primary revenue for Coursera and FutureLearn are based on revenue sharing with online programs, albeit with lower sharing rates and with very different marketing approaches. In other words, there seems to be several efforts to enter into the same OPM race, but if possible to avoid being in the mainline rev-share OPM market. The Toecutter would feel right at home.
Over the past year 2U is no longer staying on the outside of this chaos – they are caught up in the dynamics, and today’s call acknowledged the messy, changing market while changing the company plans. Beyond 2U the company, I agree that other OPM companies will be affected by the same market forces. The market is getting even messier.
In short, I agree with the 2U description that online education markets are changing and should lead institutions and support companies to adjust or revamp their plans accordingly.
Higher education often has a herd mentality, and online education is one of the most active herds. It seems that every time you talk to an institution considering a new or revised online strategy, there is some positioning against 2U programs. Either they want to emulate USC and UNC and Syracuse, or they want to deliberately take a different path. 2U as an idea has great currency, but those assumptions about what the idea is are changing. 2U is not the same company as they were even two years ago. They now offer fee-for-service as well as revenue-sharing models (as do most of the other large OPMs) [Note: These fee-for-service offerings are in addition to traditional revenue sharing models for 2U], and their growth assumptions appear to be as much around bootcamps and short courses and they are around traditional graduate degree programs.
It is worth mentioning what 2U did not describe during the call (if they did, I missed it) – the effect of campaigns pushing back against revenue-sharing models and OPMs in general. I suspect that when we pull back the covers on the UNC-based institutional suite offerings we will see these effects indirectly, but they did not directly mention this situation directly.
There is a lot going on in the world of online education for higher education, with the California ruling and 2U revised plans coming out in just the past eight days. There are big implications to consider, and we’ll cover the ongoing changes as we learn more, but mark today’s date as a major change in the OPM market.
Note: I wrote this post fairly soon after the call. If I misread anything in my analysis, I’ll update this post accordingly.
Update 8/1: Added note clarifying fee-for-service as additive model.
A huge part of their problem is price. They are on the wrong side of history. History teaches us that with increased competition and supply, prices come down. Their entire cost structure is based on procuring these high prices from students. Despite having legacy programs that were significant, their business model does not lend itself to scale, in my opinion. Scale comes from serving the masses and the masses can’t afford their programs. The scale in the OPM world comes where there is access and affordability. Perhaps their new diversification approach will prove to be what makes the difference for them. All that said, I do agree with the research data that online is regionalizing and these legacy national programs will continue to struggle to maintain their positions unless they are extremely competitive in terms of not only price, but also program attributes. Times, they are a changin’…