Here’s how ed-tech company 2U spiraled from $5 billion to ‘going concern’
Chip Paucek, co-founder and former CEO of 2U, appears at the company’s headquarters in Lanham, Maryland on Nov. 17, 2021. The company’s chief financial officer, Paul Lalljie, replaced Paucek as CEO in November 2023.
Marvin Joseph | The Washington Post | Getty Images
When 2U went public a decade ago, the company was out to prove it could make a splash in the notoriously difficult $550 billion U.S. higher education market.
For a while, it was on to something. The stock price ballooned from $13 at 2U’s 2014 IPO to a high of $98.58 four years later as demand increased for the company’s online education offerings. At its peak, 2U had a market cap of more than $5 billion and growth rates comparable to high-flying cloud software companies. Revenue climbed 44% in 2018.
Now, the company is hanging on for dear life.
2U’s stock price has been trading below $1 for much of 2024 following a problematic forecast in November and indications that some universities were terminating their contracts. This week, 2U issued weak guidance for the year and warned investors of “substantial doubt about its ability to continue as a going concern” without additional capital or reduced debt.
2U shares plummeted 59% after the announcement. They fell an additional 10% on Wednesday to close at 34 cents, valuing 2U at $27.5 million.
Analysts at Needham lowered their rating to hold from buy after this week’s report, and said the outlook made them more skeptical about 2U’s ability to refinance its debt, which stood at more than $900 million at the end of 2023. Cash and equivalents dwindled to $73.4 million from $182.6 million at the end of 2022.
In a statement to CNBC, a 2U spokesperson said the company won’t “speculate on potential outcomes.”
“2U expects to continue to engage constructively with our lenders and other financial stakeholders as we continue to evaluate options to strengthen our balance sheet and adapt our business to the present landscape,” the spokesperson said. “We have sufficient time and liquidity, and we believe we will reach a resolution that will benefit our stakeholders.”
The company started in 2008, initially under the name 2Tor, and built a business around the idea of helping universities pick up more students by holding classes online. For years, an outsized amount of 2U’s business came from a few colleges.
In 2017, 2U generated more than half its revenue from the University of Southern California (which ran the company’s oldest program), Simmons College in Boston and the University of North Carolina. 2U was eventually able to diversify and by 2021 no university client accounted for more than 10% of revenue.
The biggest problem, however, was that 2U’s model never proved profitable. 2U has lost money every year as a public company, with its total deficit over the past three years surpassing $830 million. A big chunk of 2U’s revenue has gone to pay for sales and marketing, and the company had “to expend substantial financial and other resources on technology and production efforts to support a growing number of offerings,” as stated in its 2021 annual report.
Bulking up
Rather than preserve capital, 2U went big on M&A.
In 2019 it paid more than $600 million to buy Trilogy Education, giving 2U more university partners. Then, in 2021, the company announced plans to buy online learning platform edX for about $800 million in cash. That acquisition would give 2U more than 230 education partners, including 19 of the top 20 universities across the globe, the companies said in a joint release when the deal closed.
The plan didn’t work. 2U took on debt for the edX acquisition, resulting in “interest payments that exceeded the revenue edX would generate,” analysts at Cantor Fitzgerald wrote in a report late last year.
By early 2022, sales growth had slipped into the mid single digits, and by the middle of that year, they were on the decline. Year-over-year revenue dropped for five straight quarters. Multiple rounds of layoffs ensued.
The third quarter of 2023 brought with it a catastrophic development.
2U told investors in its earnings report in November that USC, its flagship customer, was paying $40 million to the company to end their relationship. 2U cut its forecast for the full year. The stock plummeted 57% in one day.
“We thank USC for the role they’ve had in helping us build our company,” then-CEO Chip Paucek said on the earnings call. However, he added that “with the results from the standpoint of new pipeline, the health of the existing portfolio is very strong.”
Days later, Paucek stepped down. He was succeeded by then-CFO Paul Lalljie.
Paucek, who didn’t respond to a request for comment, is now co-CEO of Pro Athlete Community, a company he helped start in 2022 to help educate professional athletes in business. His former company is now in crisis mode, with its share price in the tank.
Any stocks trading below $1 for 30 consecutive days can lead to a delisting from the Nasdaq. While 2U could potentially institute a reverse split to bolster its share price, that would amount to a temporary fix for a much bigger problem. Cantor Fitzgerald, KeyBanc and Piper Sandler have all discontinued coverage of the stock in recent months, signaling their lack of confidence in the company’s future.
Gautam Tambay, co-founder and CEO of online learning startup Springboard, told CNBC that it’s sad to see a pioneer in the space struggle.
“There’s a big part of me that would like to see them work through these challenges and get to the other side and be able to serve the mission that they started the company to serve, which is ultimately serve their students,” Tambay said.
Far removed from its growth days, 2U is just trying to survive.
On this week’s earnings call, Lalljie said the company is “embarking on a 12-quarter journey” to reset, which involves cutting expenses and working with lenders on its debt payments.
“We need to shrink to grow,” Lalljie said, “so that we can support the balance sheet that we have, so that we can be in a position to negotiate and extend the maturities — the upcoming maturities that we have and to ensure that we have a financially resilient company going forward.”
Executive Chair and CEO of Microsoft Corporation Satya Nadella speaks during the “Microsoft Build: AI Day” event in Jakarta, Indonesia, on April 30, 2024.
Ajeng Dinar Ulfiana | Reuters
Microsoft plans to pause hiring in part of its consulting business in the U.S., according to an internal memo, as the company continues seeking ways to reel in expenses.
The announced cuts come a week after Microsoft said it would lay off some employees. Those cuts will affect less than 1% of the company’s workforce, according to one person familiar with Microsoft’s plans.
Although Microsoft indicated earlier this month that it plans to continue investing in its artificial intelligence efforts, cost cuts elsewhere could lead to gains for the company’s stock price. Microsoft shares increased 12% in 2024, compared with a 29% boost for the Nasdaq Composite index.
The changes by the U.S. consulting division are meant to align with a policy by the Microsoft Customer and Partner Solutions organization, which has about 60,000 employees, according to a page on Microsoft’s website. The changes are in place through the remainder of the 2025 fiscal year ending in June.
To reduce costs, Microsoft’s consulting division will hold off on hiring new employees and back-filling roles, consulting executive Derek Danois told employees in the memo. Careful management of costs is of utmost importance, Danois wrote.
The memo also instructs employees to not expense travel for any internal meetings and use remote sessions instead. Additionally, executives will have to authorize trips to customers’ sites to ensure spending is being used on the right customers, Danois wrote.
Additionally, the group will cut its marketing and non-billable external resource spend by 35%, the memo says.
The consulting division has grown more slowly than Microsoft’s productivity software subscriptions and Azure cloud computing businesses. The consulting unit generated $1.9 billion in the September quarter, down about 1% from one year earlier, compared with 33% for Azure.
Under the leadership of CEO Satya Nadella, Microsoft in early 2023 laid off 10,000 employees and consolidated leases as the company contended with a broader shift in the market and economy. In January 2024, three months after completing the $75.4 billion Activision Blizzard acquisition, Microsoft’s gaming unit shed 1,900 jobs to reduce overlap.
A Microsoft spokesperson did not immediately have a comment.
WATCH: Microsoft plans to spend $80 billion to build out AI this year
Elon Musk walks on Capitol Hill on the day of a meeting with Senate Republican Leader-elect John Thune (R-SD), in Washington, U.S. December 5, 2024.
Benoit Tessier | Reuters
Tesla and SpaceX CEO Elon Musk, Meta CEO Mark Zuckerberg and Amazon founder Jeff Bezos will attend President-elect Donald Trump’s inauguration, NBC News reported on Tuesday.
They will be seated on the platform near cabinet officials and elected leaders, according to a person familiar with the planning of the inauguration who spoke to NBC News.
The prominent attendance of several tech luminaries and billionaires at Trump’s inauguration signals how quickly the technology industry leadership has warmed up to Trump as he takes his second term as president.
During Trump’s first term, Bezos regularly clashed with the president over his ownership of The Washington Post, Amazon’s relationship with the USPS and how much tax the tech company paid. Zuckerberg also traded barbs with Trump, particularly over immigration and misinformation.
But as Trump takes office for a second time, the technology industry has contributed to his inaugural fund and several CEOs have praised Trump and offered well wishes for his administration.
Musk has joined Trump’s administration in a role overseeing the Department of Government Efficiency, a new body that is looking to find government waste and cut it. He’s also spent time with Trump at his Mar-a-Lago resort in Florida.
Amazon and Meta have contributed $1 million each to Trump’s inaugural fund. Google also contributed $1 million, CNBC reported last week. OpenAI CEO Sam Altman contributed $1 million, and so has Apple CEO Tim Cook, according to a Axios report that the tech company has not commented on.
Reps for Musk, Zuckerberg and Bezos didn’t immediately comment to NBC News.
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