Buried deep within 2U's recent earnings calls lies a hidden truth, one that seems to have eluded the watchful eyes of Wall Street analysts. It's not about AI, it's not about the company's valiant struggle with its balance sheet. It's about a silent force lurking in the shadows, a ghostly portfolio of abandoned degree programs, and the surprising possibility that this very "ghost" could be the key to unlocking 2U's true growth potential.

To understand this seemingly paradoxical claim, we need to delve into the company's "portfolio management activities," a euphemism for terminating unprofitable degree programs. Throughout 2023, 2U engaged in this financial house cleaning, shedding programs that didn't meet their new, stricter profitability criteria. This resulted in $88 million of revenue recognized in 2023, mostly from the final payouts by universities for ending contracts early.

But here's where the story takes an intriguing turn. In the fourth quarter of 2023, 2U made a conscious decision to hold back on further portfolio management. They were expecting to recognize $49 million from program terminations, but only $25 million materialized. This wasn't a random act. 2U specifically states that they "decided not to move forward with certain portfolio management opportunities."

Why? Because they "were able to make the necessary course corrections in those programs while continuing to run them." In other words, they found a way to bring those ghostly programs back from the brink of termination and turn them into potentially profitable ventures.

This is where the "reverse exorcism" comes in. Instead of casting out these underperforming programs, 2U is breathing new life into them, essentially resurrecting them from their financial grave. And while the company hasn't quantified the potential financial impact, the implication is significant.

Imagine this: a pool of degree programs, already built, already in operation, just waiting to be optimized. These programs have existing infrastructure, faculty, and potentially even a student base. 2U wouldn't need to invest heavily in new launches, saving both time and money. They could focus on applying their new, stricter profitability criteria, refining the curriculum, optimizing marketing, and leveraging the power of their edX marketplace to drive enrollments.

This could be a game-changer for 2U's Degree segment, which saw a 9% year-over-year decline in revenue in 2023, primarily due to "a high number of graduates from some of our larger programs that were launched during the pandemic." This decline, however, doesn't tell the full story. 2U points out that their current degree portfolio, when compared to 2019 (pre-pandemic), shows a 21% growth in full course equivalents (FCEs), a measure of student enrollment.

This suggests that the underlying demand for 2U's degree programs is strong. The challenge lies in navigating the post-pandemic landscape, where online learning is no longer the sole option. And here's where those resurrected programs could play a crucial role. By revitalizing them, 2U can tap into the existing demand and drive revenue growth without the heavy upfront investment required for new launches.

This approach aligns perfectly with 2U's overall "shrink-to-grow" strategy, where they're focusing on efficiency, profitability, and strengthening their balance sheet. The revitalized programs, with their lower capital requirements and potential for faster profitability, could become a significant driver of cash flow, helping 2U to address its debt maturities and achieve sustainable growth.

Hypotheses and Numbers:

If 2U can successfully revive just 20% of the programs they were considering terminating (representing $10 million in potential termination revenue), and achieve a 15% EBITDA margin on those programs, this could result in an additional $1.5 million in annual EBITDA.

Degree Segment Performance

The following chart illustrates the potential impact of revitalizing terminated programs on 2U's Degree segment revenue. Note: This is a hypothetical representation based on the assumption that 20% of terminated programs are successfully revitalized.

The silent ghost of 2U's abandoned degree programs could become a powerful engine for growth. It's a reverse exorcism, not of a malevolent spirit, but of untapped potential, one that might just rewrite the company's future narrative and surprise even the most skeptical of analysts.

"Fun Fact: 2U's edX platform boasts over 86 million learners worldwide, making it one of the largest online learning marketplaces in the world! This massive reach provides 2U with a powerful platform to promote and scale its revitalized degree programs."