Dive Brief:

• 2U has added six new programs to its partnership with Pepperdine University, a Christian institution in California and one of the online program manager’s largest clients.
• The expansion brings the total number of online programs 2U has developed with Pepperdine to 12. The latest include online master’s in teaching and speech-language pathology and a doctorate program in education.
• The company expects the first program to launch in 2024, with others following next year. Accreditation for two of the programs are still pending. The announcement comes as 2U negotiates with lenders to ease its financial pressures and works to downsize amid falling revenue and a smaller program base.

Dive Insight:

As 2U expands its Pepperdine partnership, the company is suffering financially as other academic clients, including the University of Southern California, have scaled back their partnerships with the OPM. 

In the first quarter, revenue in 2U’s degree segment declined nearly 21% to $111.5 million.

In an earnings call this month, Chief Financial Officer Matt Norden attributed the decline to “fewer steady-state programs” that were operating during the quarter, as well as to what 2U calls “portfolio management activities,” which includes negotiated exits from programs the company runs with clients. 

2U's alternative credential business, which includes its coding bootcamps, also fell 11% to $86.8 million.

2U's financials could in time take a heavy hit from those program cancelations, but short-term revenue tied to those negotiated exits have helped soften the blow.

For example, 2U logged $54.6 million of revenue in Q4 from what the company described as the “mutually negotiated exit of certain degree programs.” That amount boosted 2U’s revenue over the prior year, but the cancelations also leave uncertainty over the company’s future, especially as it grapples with its debt of $906.4 million.

“The long-term viability of the business is in question,” Tim Hynes, global head of credit research at Debtwire, told Higher Ed Dive in April. “We're still trying to figure out what 2025 will look like, because you've got all these universities that have canceled. So that's going to take a big chunk out of revenue, and then we don't know who else is going to cancel.”

At least one partner, the University of North Carolina at Chapel Hill, plans to terminate at least one contract, and two master’s programs at the flagship — in public health and business — want to break ties with the OPM as well, according to a Wall Street Journal report from earlier this week. 

It cited a UNC-Chapel Hill internal audit that found, in the newspaper’s words, that “2U’s marketing plans were vague, enrollment projections were overly optimistic, and the quality of its course production was on the decline.” 

In an emailed statement, 2U told Higher Ed Dive, “We are not in any conversation or negotiation to exit from programs we support in partnership with UNC-Chapel Hill,” and noted that the contracts related to the public health and business master’s programs “span several more years.”

In that light, 2U and Pepperdine going forward with their expansion — which they signaled in a May earnings call — is one good sign for the company. 

Pepperdine is 2U’s second-largest university client, according to a Debtwire analysis. To date, 7,000 students have enrolled in the programs managed by 2U and Pepperdine, the companies said in their release. 

Overall, Syracuse University is the company’s No. 1 academic partner, accounting for nearly one-quarter of the company’s programs in its degree segment, with Pepperdine at No. 2, followed by London School of Economics and Political Science, Simmons University and University of Dayton, per Debtwire. 

Declining revenue from a shrinking degree program portfolio adds pressure on 2U to cut a deal with its lenders. 

Norden told analysts in May that the company’s estimated revenue will fall short of requirements tied to a covenant on 2U’s credit facilities. A default on the covenant could allow lenders to stop providing cash under the agreement, accelerate payment deadlines and go after collateral on 2U’s assets, according to a filing. 

Norden said 2U was in “constructive” talks with lenders to address the revenue covenant. “We expect those discussions to continue with the goal of executing a transaction in the near-term,” Norden said at the time. 

The finance chief also noted that new student enrollment in the company’s current degree portfolio grew 6% over Q1 2023, which he said “shows the strong momentum of the degree business.”