IPOs, Initial Public Offerings: pre & post IPO

2U (TWOU)

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Based in Landover, MD, 2U (TWOU) scheduled a $110 million IPO on the Nasdaq with a market capitalization of $470 million at a price range midpoint of $12 for Friday, March 28, 2014.

Recommendation
Update March 26:  TWOU now positive from buy, lost a little luster
The initial rating on TWOU was a buy.

SEC Documents
Manager, Joint managers: Goldman Sachs, Credit Suisse
Co-Managers: Needham & Co., Oppenheimer & Co., Pacific Crest

End of lockup (180 days): Wednesday, September 24, 2014

End of 25-day quiet period: Tuesday, April 22, 2014

Summary
TWOU is a leading provider of cloud-based SaaS solutions that enable leading nonprofit colleges and universities to deliver their high quality education to qualified students anywhere.

Top line revenue grew 49% in 2013 to $83 million with a gross margin of 73%, and a loss of $28 million.

During 2014 to 2015 TWOU expects to double the number of offered programs.   The first of TWOU’s clients' programs was launched in 2009.

TWOU generates recurring revenue from 10-15 year contracts.

13% of the IPO is from selling shareholders.

Valuation
Glossary
Pre-IPO grade-score summary
http://gaskinsco.com/scr-rate.htm
Many IPOs in today’s environment are graded C+ and scored 7.
If the pre-IPO grade is below C+ or the score is below 7,
then our analysts may have some concerns about the company’s
outlook and/or its market segment.
If the pre-ipo grade is above C+ or the score is above 7,
then our analysts believe the company’s overall business outlook is very favorable.
C = unprofitable, C+ = profitable

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

Cap (mm)

Sls

Erngs

BkVlue

TanBV

in IPO

2U, Inc. (TWOU)

$469

5.7

-16.8

5.10

5.85

23%

SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Grwth

mination

tary

rating

20 is perfect

2

2

2

1

C, 7

Business
TWOU is a leading provider of cloud-based SaaS solutions that enable leading nonprofit colleges and universities to deliver their high quality education to qualified students anywhere.

TWOU’s clients are leading nonprofit colleges and universities. They use TWOU’s platform to offer full graduate degree programs online. The students in these programs receive the same degree or credit as their on-campus counterparts and generally pay equivalent tuition.

Eight of TWOU's nine clients with whom TWOU has contracted to offer 2U-enabled graduate programs were ranked by U.S. News and World Report among the top 75 undergraduate institutions in its 2014 National University Rankings.

Currently, eight well-recognized nonprofit colleges and universities offer graduate degrees through TWOU's platform, including the University of Southern California, Georgetown University, the University of North Carolina at Chapel Hill and the University of California, Berkeley, and TWOU has contracted with a ninth university to enable a new graduate degree program that TWOU expects to launch in 2015.

Any individual student may be enrolled in more than one course during a period.

Rising Global Demand for Postsecondary Education
Higher education is a large and well-established market, both in the United States and worldwide.

In the United States alone, total revenue for all degree-granting postsecondary institutions was over $550 billion for the 2010-2011 academic year, according to a May 2013 report by the U.S. National Center for Education Statistics.

The decade between 2000 and 2010 saw a 37% increase in enrollment in postsecondary degree granting institutions in the United States, from 15.3 million to 21.0 million, according to the U.S. Department of Education, and that number is expected to rise to 23.8 million by 2021, a further increase of 13%.

TWOU helps generate revenue
From TWUO's inception through December 31, 2013, a total of 8,540 unique individuals have enrolled as students in clients' programs, and 82% of students who have ever entered these programs either have graduated or remain enrolled.

By the time the last of these individuals graduate or leave clients' programs, TWOU  estimates that they will have generated more than $475 million in total program tuition and fees for TWOU  clients.

History
The first of TWOU’s clients' programs was launched in 2009.

One additional program launched in 2010 with two more commencing in 2011. In 2013, TWOU’s clients launched five new programs.

Platform services
TWOU’s innovative online learning platform and bundled technology-enabled services provide the comprehensive operating infrastructure colleges and universities need to attract, enroll, educate, support and graduate their students.

By leveraging its solutions, TWOU believes its clients are able to expand their addressable markets while providing educational engagement, experiences and outcomes to their online students that match or exceed those of their on-campus offerings.

TWOU provides a suite of technology-enabled services designed to promote adoption and usage of its SaaS solutions by clients and enrollment and retention of their students.

These services include program marketing, student acquisition, content development for courses, and faculty and student support services, including technical training and support, non-academic student advising, academic progress monitoring and career services. TWOU also facilitates in-program field placements, student immersions and other student enrichment experiences.

Growth plan
TWOU is currently engaged by eight colleges and universities to enable 10 graduate programs that have launched and in which students have enrolled.

An additional program launched in January 2014 and four additional programs with existing clients are scheduled to commence later in 2014 or in 2015.

TWOU recently contracted with a ninth university to enable a new graduate program that TWOU also expects to launch in 2015.

TWOU’s client contracts generally have initial terms between 10 and 15 years in length, and, since TWOU’s inception, all of the clients that have engaged TWOU remain active.

Dividend Policy
No dividends are planned.

Intellectual Property
TWOU has one patent application pending in the United States, which is directed to computer-implemented processes that facilitate asynchronous student responses to teacher questions, which is a process TWOU uses in its Bi-Directional Learning Tool, a technology it initially created to facilitate the Socratic method of teaching law.

Competition
Several competitors provide solutions that compete with some of the capabilities of TWOU’s platform. Two such competitors, EmbanetCompass and Deltak, were acquired in 2012 by Pearson and John Wiley & Sons, respectively, both of which are large education and publishing companies.

5% stockholders
Entities affiliated with Redpoint Ventures                                 23.1%
John Katzman and affiliated entities                            14.1%
Entities affiliated with Highland Capital Partners          11.3%
Novak Biddle Venture Partners V, L.P.                        10.9%
Entities affiliated with Bessemer Venture Partners        8.3%

Use of proceeds
13% of the IPO is from selling shareholders.  TWOU expects to net $86 million from its IPO. Proceeds are allocated as follows:

for program marketing and sales expenses to drive new student enrollments in TWOU’s clients' programs, as well as to fund technology and content development expenses to support those programs and ongoing spending on services and support.

Financials
Glossary
Pre-IPO grade-score summary
http://gaskinsco.com/scr-rate.htm
Many IPOs in today’s environment are graded C+ and scored 7.
If the pre-IPO grade is below C+ or the score is below 7,
then our analysts may have some concerns about the company’s
outlook and/or its market segment.
If the pre-ipo grade is above C+ or the score is above 7,
then our analysts believe the company’s overall business outlook is very favorable.
C = unprofitable, C+ = profitable

2U, Inc. TWOU, C, 7

Post IPO shares: 39.1mm

Online learning platform

IPO Mkt

Landover, MD

Cap (mm)

$469

@$12

Last 5 qtrs

Dec '12

March '13

June '13

Sept '13

Dec '13

Rev ($thousands)

$16,420

$19,134

$18,691

$20,499

$24,803

Rev growth

17%

-2%

10%

21%

Service & support exp

$4,410

$5,018

$5,656

$5,842

$6,202

Gross margin

73%

74%

70%

72%

75%

Marketing & sales

$10,899

$11,770

$13,695

$15,412

$13,226

M & sls % of rev

66%

62%

73%

75%

53%

Loss

-$4,930

-$3,746

-$8,895

-$10,133

-$5,179

Loss % of sales

-30%

-20%

-48%

-49%

-21%

=====================================

2011

2012

2013

Rev ($thousands)

$29,733

$55,879

$83,127

Rev growth

88%

49%

Service & support exp

$12,300

$14,926

$22,718

Gross margin

59%

73%

73%

Marketing & sales

$32,116

$45,390

$54,103

M & sls % of rev

108%

81%

65%

Loss

-$24,878

-$23,113

-$27,953

Loss % of sales

-84%

-41%

-34%

Adj EBITDA

-$22,514

-$18,814

-$21,245

Adj EBITDA % of sales

-76%

-34%

-26%

Accumulated deficit ($mm)

($100)

Per share dilution on IPO

-$9.95

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

Cap (mm)

Sls

Erngs

BkVlue

TanBV

in IPO

2U, Inc. (TWOU)

$469

5.7

-16.8

5.10

5.85

23%

SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Grwth

mination

tary

rating

20 is perfect

2

2

2

1

C, 7

 

 

 

 

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