Cantor Fitzgerald downgraded 2U, Inc. (NASDAQ:TWOU) to a Neutral rating (From Overweight) and cut their 12-month price target on the educational tech group to $1.50 (From $5.30) as the company fights to “stay afloat”.
Heading into 3Q results, shares of TWOU were hovering close to their all-time lowest levels. A recent drop of 44%, from their 2Q to November 8th, was caused by the management's failure to disclose in the previous quarter that the full-year revenue guidance included a substantial one-time payment from university partners terminating specific degree programs.
This revelation, along with 2U's inability to generate positive FCF, has raised concerns among investors regarding the company’s upcoming debt maturities and its capability to repay or refinance those obligations.
2U is facing the maturity of $380M in 2.25% convertible notes in 2025, followed by a $380M LIBOR +5.5% term loan due in 2026, and $147M in 4.5% convertible notes due in 2030. As of the end of 3Q23, 2U's cash decreased to $41M from $53M in 2Q23.
“TWOU will need to rectify its debt problem.” Wrote analysts at Cantor Fitzgerald in a note. “We believe it can either issue equity (which would result in 173% increase in share count based on current prices) or refinance that debt with new debt.”
Opting for the second choice would likely lead to a significant rise in interest payments. The 2025 convertible currently carries a 2.25% interest rate, but its current Yield to Maturity (YTM) is 35%. If 2U were to refinance this debt at, for example, a 12% interest rate, cash interest payments would increase.
2U is currently receiving upfront revenue from universities that are essentially repurchasing their degree programs from 2U. Since 2U is the owner of these programs and anticipates them generating revenue in the future, universities are obliged to make payments.
This will lead to an increase in 2U's receivables balance, which will eventually decrease as the contract end-date approaches, thereby bolstering 2U's cash position on the balance sheet.
According to 2U, the termination of contracts in 2023 is expected to bring in approximately $140 million in cash over the next 12-24 months.
In light of these contract terminations, management foresees a revenue increase of around $110 million and an adjusted EBITDA increase of approximately $60 million in 2023.
Shares of TWOU are down 51.81% in afternoon trading on Friday.