2U, Inc. (TWOU) on Q3 2021 Results - Earnings Call Transcript

Operator: Good day and thank you for standing by. Welcome to the 2U Third Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session I would now like to hand the conference over to Mr. Ken Goff, Senior Vice President, Investor Relations. Thank you. Please go ahead. Ken Goff: Thank you, operator. Good afternoon, everyone, and welcome to 2U's third quarter 2021 earnings conference call. I'm Ken Goff, Investor Relations at 2U. I'm joined by Chip Paucek, our Co-Founder and CEO; and Paul Lalljie our CFO. Following Chip and Paul's prepared remarks, we will take questions. Our Investor Relations website investor.2u.com has our earnings press release and slide presentation, as well as a simultaneous webcast of this call. A webcast replay of this call will be made available for the next 90 days. Statements made on this call include forward-looking statements regarding our financial and operating results, the continued impact of the COVID-19 pandemic, our pending acquisition of edX, including the expected closing date, new educational offerings, student and university demand and other matters. These statements are subject to risks, uncertainties and assumptions. Any forward-looking statements made on this call reflect our analysis as of today and we have no plans or duty to update them. Please refer to the earnings press release and the risk factors described in the documents we file with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2020, and our most recent quarterly report on Form 10-Q for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of 2U's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations page of our website. With that, let me hand the call over to Chip. Chip Paucek: Thanks, Ken. Before I get into my normal discussion of results, I want to start by sharing some exciting news related to the edX acquisition. I'm thrilled to report that we received the necessary approvals from the Massachusetts Attorney General and the Massachusetts Supreme Court. We're now in the final stages of the close process, which we expect to wrap up in the middle of this month. I'll come back to what edX means for us in a moment, but let me first touch on some of the highlights from our third quarter results. Revenue grew 16% year-over-year, strong growth against last year's comps. The degree segment was particularly robust, driven by undergrad and licensure programs, with revenue growth of 21% and segment margins of 22%. And adjusted EBITDA grew to $14.7 million, a margin of 6% and an improvement of $11 million over the year ago quarter. All in all, great results that we believe demonstrate the underlying strength of our model. And while we're at it, look at the product announcements. Since our last earnings call, we announced deals with both new and existing partners, including an online Masters and Social Work Degree with Howard University, a top 25 ranked school of social work; a deal with the University of Miami Herbert Business School to power its current online MBA and create a new track, the online advanced MBA for students who want a faster more affordable option; an expansion of the Netflix Pathways technical Boot Camps with new HBCU Partners and UC Irvine, one of the nation's leading Hispanic-serving institutions; a new alternative credential client National University of Singapore, one of the world's top computing schools; and the extension of our partnership with Oxford Saïd Business School for six new alternative credential offerings in high-demand market relevant business topics, a nice reflection of the diversity of our product line and the momentum in our business. Turning back to edX. The transaction represents a pivotal moment in 2U's history. For nearly 14 years we've led the way in building and defining the OPM sector, all with a focus on quality access and student outcomes. The addition of edX will effectively transform to you into the world's most complete online education platform company with edX operating as the primary brand for our marketplace, educational offerings and services. Let's dig a little deeper, starting with the consumer-facing marketplace. With edX, we will become one of the world's most diverse and extensive free-to-degree consumer-facing marketplaces. Learners will have access to over 3,500 high-quality online education offerings, ranging from thousands of free MOOC courses to nearly 200 undergrad and graduate degree programs and everything in between. Together 2U and edX will deliver learning opportunities from 38 of the top 50 universities in the world as ranked by US News and a growing list of companies. edX.org has a truly impressive global consumer reach. It's a top five education site in the world and a top 1,000 site globally with a domain authority that's nearly as strong as whitehouse.gov and newyorktimes.com. As of the end of the quarter, the edX brand had 41 million registered learners and has drawn 150 million visits from learners this year alone. And we believe our combined free to degree portfolio of content will only further solidify edX.org as a leading global education platform and destination. We know from survey data that learners on the edX platform have similar career motivations and demographics, as those that enroll in 2U-powered programs. And we've learned that many of the learners who are coming to edX.org to search for and enroll in MOOCs, enroll in online degree and nondegree offerings powered by 2U at a higher rate than leads we generate from other channels. We believe this overlap in learners will be a key driver in the marketing cost benefits we expect to achieve with this transaction. It is a direct replacement for leads we currently pay for and will drive new revenue production at a lower CAC. Bringing in even more high-intent learners to edX.org will be a strategic priority for us. We plan to leverage to use unmatched marketing capabilities, expertise and scale to amplify and extend edX's brand and global reach, which we believe will ultimately allow us to more efficiently and effectively attract larger numbers of new learners, while reducing our CAC and marketing spend with third parties. We expect this to be a powerful new lever for the company in driving profitable growth and margin improvement across our business. But becoming an education platform company is about more than just having a global marketplace. It's about marrying that marketplace with a complementary and scalable set of tech-enabled services. Core capabilities like student support, our career engagement and clinical placement networks as well as program-specific marketing and lead nurturing all of which we believe will solidify 2U's position as the digital transformation partner of choice to great nonprofit universities. As an example, we'll be able to offer partners a traditional full-service bundle or a lighter option similar to what edX has been providing for its lower price degrees. We'll also be able to effectively build MOOCs, Micro Bachelors and Micro Masters leveraging 2U's massive libraries of course content. That unlocks additional value for our partners, while creating more affordable pathways for learning on edX. We're bullish on our ability to continue delivering more lower cost high-quality online degree and nondegree offerings to the market. It's amazing what a non-org and edX team have built, a true global brand with global impact. Reaching that kind of scale and impact organically is pretty remarkable and we're honored and excited to come together and unlock the opportunities ahead. Now let's talk about enterprise, a revenue stream with exciting growth, whether through direct sales of our channel partners -- whether through direct sales or our channel partners, we're seeing real traction and demand from enterprises for our structured offerings. Together with edX, we can now provide enterprise customers with an even more expansive and relevant mix of structured and self-paced technical and nontechnical libraries to reskill and upskill their workforce. We believe the breadth quality and flexibility of our expanding portfolio of subscription offerings is a winning combination for growth in the enterprise market. Before I turn it over to Paul, let's talk more about the landscape and our performance. Much attention and speculation has been paid to the overall Ed tech market in the last several weeks. We grew revenue by 16% in the quarter of a large base and performed strongly on the bottom line once again, demonstrating the underlying strength of our model, and our continued operational discipline, and focus on profitable growth. Faced with near-term volatility in lead generation expenses, which we told you to expect, we stayed focused on our profitable growth strategy, expanding our EBITDA margin while maintaining strong revenue growth. As we look ahead, we believe that COVID has finally changed the landscape and that long-term demand for online education and training will only grow, and we are extremely well positioned for the future. Our focus on driving profitable growth, which we've delivered on over a multiyear period, extends beyond just marketing. We have many examples throughout the business of how we're using our scale to drive profitability and impact. One example, our data science and student engagement teams created a construct that should drive 25% better efficiency in our student engagement, using a proprietary scoring system that will allow our counselors to focus calls on people who need them. This has a virtuous effect on the business. First, it's better for the prospective students, creating a more seamless experience with fewer, but more value-added interactions. Second, it creates a better employee experience allowing our team to have more impactful conversations, which is what drives that team. Third, it creates a much more efficient staffing operation. We piloted this in 2021. It worked brilliantly and it's now rolling out system-wide. We believe initiatives like this are working, and will continue to positively impact the business. Overall, we're demonstrating scale and increased efficiency. Revenue per employee increased. Our margins have continued to improve and we believe edX will have a significant long-term impact on driving further margin improvement. In closing, let me leave you with a few additional thoughts on edX. As a global brand and platform, edX will create a flywheel effect in our business, which we believe will significantly impact our largest expense line over time, helping build an even more sustainable and durable business. We're effectively becoming edX, an education platform company with a comprehensive set of products and services, and one of the most diverse marketplaces for online education, under one roof and brand. We now have an opportunity to build stronger connections with learners around the world, to create more accessible and affordable pathways into higher education, and to further solidify edX as the trusted brand of choice for life's learning journey. It will take us some time to fully realize this transformational impact, but it's inspiring. And we think it will become clear very soon that the combination is off to a phenomenal start. And now, Paul will take you through the current results. Paul Lalljie: Thanks, Chip, and good afternoon, everyone. Our third quarter results reflect the resilience of our business model and our ability to adapt to changing market conditions. Third quarter revenue grew 16% year-over-year to $232.4 million, with the Degree segment of 21% and Alternative Credentials up 7%. Operating expense for the quarter totaled $275.9 million, an increase of 12% over the third quarter of 2020, primarily to support revenue growth. Adjusted EBITDA for the quarter totaled $14.7 million, a margin of 6% while unlevered free cash flow on a trailing 12-month basis was a modest use of $5.2 million. In a nutshell, we reported a strong results on the top and bottom line. These results are especially good, given the digital marketing environment, as well as tougher comparisons to the year ago quarter. We remain disciplined and focused on executing against our strategic goals, especially the progress we are making to drive profitable growth. As we look forward, the edX acquisition should close soon and we expect it to be a game changer, in terms of our marketing position, growth prospects and the overall economics of the business. I'd like to start with a discussion of our results for the quarter, then I'll provide an update on our balance sheet, free cash flow and cash position followed by our financial outlook for the remainder of 2021. Now for a closer look at revenue. Third quarter revenue was $232.4 million, up 16% from the third quarter of last year. Full course equivalent or FCE totaled 78,000 an increase of 10% on a year-over-year basis while revenue per FCE was up 5%. Revenue in the Degree segment grew 21% compared to the same period last year. This represents the seventh straight quarter of revenue growth. FCE for the quarter increased 21% while revenue per FCE remained relatively flat. Total FCEs reflect the growth in our scaling programs, particularly licensure-based programs. Revenue per FCE reflects the program mix and seasonality in undergraduate. In particular, a small percentage of undergraduate students attend summer classes, impacting both the FCE count and revenue per FCE. We expected and plan for both the seasonal effects in FCE and the revenue per FCE in the third quarter, given the timing of the undergraduate academic calendar. When thinking about the trends in FCE and revenue per FCE for the Degree segment, keep in mind that we launched the Simmons hybrid undergraduate program in the fourth quarter of last year, which means that we will lap the impact of this program launch next quarter. Revenue in the Alternative Credential segment grew 7% on a year-over-year basis, driven by a 22% increase in revenue per FCE, partially offset by a 12% decline in FCE. Growth in this segment was driven by a 20% increase in boot camp revenue, offset by a 10% decline in short course revenue. On last quarter's earnings call, we talked about an environment of elevated digital marketing costs across the business and in particular, in the Alternative Credential segment. This trend continued for much of the third quarter. In response, we reduced marketing spend at the beginning of the quarter while in the latter part of the third quarter we saw a significant improvement in demand as well as a gradual improvement in cost per lead. As a result, we increased our marketing spend to take advantage of this more favorable environment and we will continue to manage spend dynamically with the goal of optimizing return on investment. As a reminder, Alternative Credentials grew 57% in the third quarter of last year with boot camp growing 54% and short course growing 60% as the pandemic and stay-home orders pulled forward demand from this year into last year. And while cost per lead is an important input, what really matters is cost per enrollment, which is also a function of how well we convert leads that we generate. To that end, we have implemented several strategies to drive higher quality leads and to improve conversion. We continuously adjust our channel mix, focusing on more efficient verticals and we have introduced technology to automate and streamline more of our digital marketing processes. The result despite the increase in cost per lead in the Degree segment, we only experienced a low single-digit increase in cost per enrollment this quarter. We believe that recent stabilization in cost per lead and effective mitigation strategies are strong positive indicators for the business. And of course, we will soon have the massive user base and organic traffic of edX's consumer marketplace which we believe will have a significant positive impact on our ability to generate enrollment efficiently. Turning now to costs and expenses. Operating expense for the quarter totaled $275.9 million, up 12% from last year. This increase was driven by an 18% increase in marketing and sales expense to drive revenue growth. G&A increased 13% year-over-year to $49.7 million or 21% of revenue. Of the $5.7 million increase $4.8 million was non-cash and related to changes we made through our Denver office lease, as we continue to manage our real estate footprint. Excluding this onetime impact, G&A this quarter would have been 19% of revenue, a continuation of the better operating leverage that we've been experiencing over the past quarters. Importantly, over the next five years, we expect to see net savings of $5 million from this real estate division, primarily from sublease income and reduced rent. Adjusted EBITDA for the quarter totaled $14.7 million, a margin of 6%, and up almost threefold from the third quarter of 2020. We continue to focus on driving profitable growth and the strong bottom line performance reflects the steps we have taken to drive operational efficiency. Moving on to segment margins. Margins in the Degree segment came in at 22% for the quarter, up 14 percentage points from the same period last year. Segment loss in the Alternative Credential segment came in at 22% for the quarter, compared to 8% for the same period last year driven by higher marketing spend particularly in the latter half of the third quarter. This spend in the third quarter is expected to drive enrollment in the fourth quarter. Net loss for the quarter totaled $60.1 million. This number was impacted by the Denver lease expense, I mentioned earlier, as well as $1.7 million in costs related to the edX acquisition. Net interest expense in the quarter was $16.5 million, an increase of $9.6 million driven by the term loan B associated with financing the edX acquisition. Head count at the end of the quarter totaled 3,746 compared to 3,735 from the year ago quarter. Turning now to the balance sheet and cash flow statement. At the end of the September quarter, cash and cash equivalents totaled $951.3 million, down from $971.3 million in the June quarter, reflecting the use of net working capital. Our accounts receivable balance totaled $95.4 million, down $6 million from the end of the previous quarter. Deferred revenue came in at $97 million, down $13.3 million from the second quarter, primarily driven by seasonality. This quarter operating cash flow was a net use of less than $1 million. We spent $18.3 million in capital expenditures and ended the quarter with a cash balance of $951.3 million. Unlevered free cash flow was a use of $5.2 million on a trailing 12-month basis. This reflects the reversal of the working capital trend that we saw over the last four quarters, primarily driven by reduced revenue growth against a flat expense base. As we near the closing of the edX acquisition and enter a new fiscal year where the first quarter is our tallest expense quarter to be conservative, we amended our term loan agreement to raise an additional $100 million. The incremental borrowings have similar terms and conditions to the existing term loan and has an original issue discount of 2%. I'll now turn to guidance in some context for how we're thinking about the coming quarter. The underlying strength of our business is clear, as we navigate near-term volatility in the current phase of the pandemic. We believe the drivers of our long-term prospects are fundamentally unchanged and our performance and expectations for 2021 shows the resilience of our business model across operating environment. And we expect the addition of edX to take our model and lower prospects to the next level. As we would normally update our full year 2021 guidance in this call, we thought it would be helpful to do so based on an assumed edX closing date, so that you will have a clearer picture of the estimated starting points for 2022 metrics. For the full year, we are now expecting revenue to range from $935 million to $955 million. This assumes the addition of edX for the remainder of 2021, which we expect to contribute at least $4 million of incremental revenue recognized on a net basis. This represents growth of 22% at the midpoint of the guidance range. Adjusted EBITDA is expected to range from $60 million to $70 million, a margin of 7% at the midpoint of the adjusted EBITDA and revenue ranges. Our EBITDA range assumes dilution of approximately $5 million from the edX operation in 2021. The assumptions for edX's contribution to the stub period including accounting adjustments and closing impacts. And as such they are not reflective of go-forward run rates. We will provide more information on revenue and EBITDA run rates when we provide our 2022 guidance. We expect capital expenditures to be approximately $80 million and weighted average shares outstanding to be approximately 74.6 million shares. To conclude, let me emphasize that we grew top line 16% in the quarter with headwinds from the digital marketing environment and extremely high year-over-year comparisons. Our top line is especially good when combined with the $14.7 million of EBITDA we delivered in the quarter. We expect to close out 2021 with momentum and enter 2022 from a position of strength, particularly with edX as a part of our organization. We are excited about the opportunities ahead of us and look forward to delivering on those opportunities for the benefit of all of our stakeholders. And with that, we'll open the call for questions. Operator? Operator: Your first question comes from the line of Ryan MacDonald with Needham. Ryan MacDonald: Hi, thanks for taking my questions, and thanks for the additional color on edX as you approach the close here. Chip and Paul maybe it's one for both of you to start on edX. Clearly a really large opportunity here once the acquisition is closed and opportunity to expand the stack of offerings that you provide to learners and your university partners. As you will come close -- to the close of the acquisition, can you talk about how quickly you think that you can start to integrate edX into the 2U platform and start to benefit from some of those synergies both on the top and the bottom line as we start to think about fiscal 2022? Thanks. Chris Paucek: Yeah, no problem Ryan. So we are very excited about it. As we've gotten closer to it really since we signed the deal, we've gotten more excited about it. The overlap with our business is pretty stunning. And there's no question that as I said in my prepared remarks when you look at the people that edX is serving and you compare them to the historical people that we've served on behalf of our university partners, the overlap is pretty uncanny. And that syncs with what other platforms have said publicly. So we're very excited about what it will do. What's probably underappreciated at this stage is a single 2U backed degree has more video content than a season of Game of Thrones. So there's a tremendous amount of opportunity for us to help our university partners transfer that content to free content to offer more access for learners. And that just creates a bigger flywheel across the business, because of the overlap from a learner to prospect basis like we're highly confident in that overlap. We haven't, obviously, closed this yet so we're not operating together. But we like our odds of having an impact reasonably quickly as we come together in terms of what the marketplace will do to drive opportunities into what were historically 2U programs and vice-versa. There's been a significant amount of interest on the 2U side to expand edX products across the 2U portfolio. So examples of that, we think MicroMasters and MicroBachelors are both wildly attractive from the standpoint of creating new options for people to gain a credential that will help them in their careers currently and simultaneously gain access at 20% or 25% difference in cost to the future Master's or Bachelor's program that might help them succeed even further. So it creates a good outcome for the learner immediately and also creates a new funnel for us to offer programs downstream. The edX community is interested in the services that we provide -- the tech-enabled services we provide and we'll talk all about this in more detail at the time of the close. So we do like what we see in terms of the efficiencies it will drive. We did a ton of diligence on the acquisition, including looking at the direct overlap of people in terms of the learner base. And we think, we'll -- it will take some time to see the full impact, which I know is whatever we he wants to know is how quickly. But as -- and I'll hand it over to Paul, but we do really like what we see sitting here today. Paul Lalljie: Yeah. Ryan, I mean, I think a couple of things. Our objective is to start recognizing some of the benefits that we expect to see in the sales and -- marketing and sales line. We said that, we expected $40 million to $60 million over in two years' time. Now, on an annual basis, for us we're going to try and do that as quickly as we can. But as we sit here today, we'll probably update you on timing of how soon we can recognize some of those. But our objective would be, to do this as quickly as we can. Because we believe in the strategic objectives, we believe in the outcomes that we can have there and we recognize that this is a winning formula for us. And that's the -- that's what resulted in us doing this acquisition. Chip Paucek: And the only other comment that I would make Ryan is you kind of have to think about it a bit in reverse from what you said. We're not integrating edX into 2U but it's really the other way around. edX really becomes our Google and 2U becomes Alphabet. I mean, we will put edX front and center into all activity and have for the first time ever one unified place where we can both offer new programs to the audience and drive more high-quality learning outcomes across all of our disciplines, in particular in cases where someone may -- it may not be directly obvious what exactly the person is looking for in terms of their future. They may want to look across discipline. And it's that kind of opportunity we've really never had before. So, you could think about it as the reason that we said this in the prepared remarks, becoming edX is the edX brand and that experience really does become front and center for the entire company. Ryan MacDonald: That's helpful color Chip. And then, Paul, for my follow-up Chip, I really wanted to ask you about some of the current dynamics we're seeing in enrollments and particularly in the undergrad side of the market. Undergrad is a relatively early innings opportunity for 2U. And so, I'd be curious, with the challenges that universities are seeing or your university partners are seeing with on-campus enrollment, is this altering the conversation at all for online programs for undergrad students? And is that creating a nice opportunity in the pipeline here for you? Thanks. Chip Paucek: Yeah. I mean, there's no question that what we're talking about, there's obviously been a lot of news related to what's been reported. And what the fundamentals are for various businesses. And I think what people might be forgetting in this case is that, you're talking about a massive transition over time, from what was purely a campus-based experience to a high-quality online experience. We've been doing this for 14 years, but most people haven't. And digital transformation is still in very early innings. So we are seeing excellent growth in our undergraduate programs and really like the odds of having more opportunities to do that over the next 24 months. When you start thinking about what people might have thought as our sort of program cadence back in the day, we're looking at more than double next year, what we did this year. There's a lot of opportunity in the space overall. And we are certainly as excited about undergrad as we were prior to all of these recently reported results. Ryan MacDonald: Thanks Paul and Chip. Operator: Your next question comes from the line of Stephen Sheldon with William Blair. Stephen Sheldon: Hey guys. Congrats on the results. I guess first I just wanted to ask if you could share anything about how edX performed, as we think about the last few quarters. And I guess heading into the fourth quarter had they continued to grow? And any differences in what they've been seeing in growth between their different businesses? Paul Lalljie: Stephen, Paul here. There are a couple of things. I mean, I think we continue to see performance in the last quarter or so after we had made the announcement. The challenge for us is that we had to go through this conversion process this audit of converting them into to some extent adopting the standards of for-profit organization ASC 606 I don't want to bore you with the accounting pieces of it. But the basic pieces here is that when we parse it -- break it apart and get back to the fundamentals, the business continue to be strong. And I think it points to the strength of the brand and it points to the strength of the marketplace that they have. But we'll have more color on that when we get into our first -- fourth quarter results or first quarter of next year because then we have a good indication of how the numbers are comparing on a core profit basis which quite frankly we just -- they just went through that audit and they completed that on Friday last week. Stephen Sheldon: Okay, that's helpful. And I guess a great to hear that you've been able to offset some of the increased cost per lead on the marketing side with enrollment efficiency. But I guess just looking out over the next few years, marketing efficiencies should get a boost from edX. So, how much room do you have to increase enrollment efficiency on top of that? And could you potentially see I guess efficiency improvements in both marketing and the enrollment process as you think about the next few years? Chip Paucek: Well, I guess I would say the project that we talked about in the prepared remarks related to seat engagement has been pretty incredible to see that is a significant improvement and also one that has direct cost benefit. One of the things we're excited about for edX is the opportunity for us to offer some of the services we provide that edX has not been able to historically provide to its university partners. And one of those is students port one is lead nurturing to answer this question directly. And so we do like our odds of being able to -- when you think about what's happening, Sheldon, it's like we're marrying the best overall engine on a per program level at scale, really nobody is anywhere near our level of scale if you think about that from a degree point of view. Two, an overall marketplace where for the first time, we'll be able to drive folks to the top level of the marketplace and offer them opportunities to change their lives in a whole variety of different ways. So, you're talking about just -- it's a game-changer in terms of both marketing efficiency and expanded reach around the world. LSE undergrad has been fascinating for 2U. It's our largest program now by enrollment and it is a worldwide program. And the reality is edX has 150 million visitors a year and many of those are from other parts of the world that we can offer programs like that to at a very low cost. That program is already -- it's incredibly high quality at a lower price. And we think that that's a worldwide opportunity for us. We just haven't had this kind of overall platform to work from in the past. And so the combination of the two is we do think this is industry redefining and it is certainly transformational for both what was 2U and what was edX. The number of opportunities to offer people affordable pathways into something that is going to change their life. And the reality is 2U's programs are all extremely high quality. So, I think you bring those two together and it's quite a story. Stephen Sheldon: Got it. Thank you very much. Look forward to close. Thanks. Operator: Your next question comes from the line of Jeff Silber with BMO Capital Markets. Jeff Silber: Thank you so much. I wanted to know if we could drill down a bit into your different business segments. Maybe talk about the Degree performance undergrad versus grad trends? And then also for both Degree and Alternative Credentials talk about what's happening in the US versus outside the US? Paul Lalljie: So, Jeff let me start off here and then Chip can join in. One of the things that we said last quarter is that once we build up momentum in the Degree business that momentum tends to continue for a period of time. I think what we're seeing here is the continuation of that momentum particularly in the Degree business, it's a 21% overall year-over-year growth. And if we should bifurcate that, our undergraduate businesses whether it is Simmons or LSE continues to perform well and led the way in terms of drivers of year-over-year growth. As we get into -- I think we all saw an environment in a digital marketing environment, particularly in the summer months that did have some impact across the business on demand and on conversion. And we saw those – that environment improve as we got into the latter part of the third quarter. So as we go forward, as we extrapolate and go forward, we do expect our business to continue to perform well, particularly the Degree side of the equation, because we have seen that recovery. However, the impact of the summer months will have some impact on what we see going forward. When we reported results last quarter, we talked about cost per leads, across the board increasing 45%, 70%, 25% on in the short course, and in the Boot Camp business. Those same numbers, those same corresponding increases today sit around 24%, 33% and 12% for the degree short course in Boot Camp business. So, we have seen an improvement, and we expect that to translate into favorable performance for us as we go forward, especially with some of the marketing strategies that we've put in place. In terms of the Alternative Credential side of the house, the marketing cycle is much shorter. So what we expect to see as we go forward, we expect to see improvement in year-over-year performance, particularly in short course business as we get into the fourth quarter. And then next year, we expect to see better performance as we go forward. So the bottom line is, if we bifurcate Degree and Alternative Credentials, we expect the Alternative Credentials business to perform better as we go forward. We have seen improvement in the digital marketing environment. And in particular, as we close edX and integrate into the edX marketplace and platform we will then see more favorable trends in the Alternative Credential space in a shorter period of time. Chip, I don't know, if you would add anything to that? Chip Paucek: I mean, I think you covered it. We – Jeff, we like what we see in undergrad right now it's new for us, right? So – but it's working. And licensure, the reason we noted that is that the world needs more nurses and physician assistance and speech therapists. And we've got today, a proprietary clinical placement network that we think is – we do think builds the moat around the company in a meaningful way. Just like everyone else, when COVID hit, the shorter-term credentials obviously got a big boost. So there were tough comps in Alt Cred. But if you look at some of the things, we've announced in Alt Cred, the Netflix pathways are an example of something that's meaningful that we do think that's a replicable model across other enterprises. Enterprise overall Jeff is new for 2U. It's the fastest-growing part of the company. It's really working, and we like what it means for the next couple of years. So one other example that, you wouldn't see anywhere is we started doing much shorter form short courses that are called strengths. We're doing technology tracks in the Boot Camp business for people that have already received a certain amount of technology training, where we can offer them additional training to get them instead of from point A to point B, you're getting them from point B to C to B. You're taking them further in what they need. So a pretty diversified company at this stage. So we think some of the read-throughs from the rest of the world, just really don't make much sense. Jeff Silber: All right. And actually, the second part of my question, I know, I asked the long question. I was just talking about US versus international. Again, if you can have color by segment that would be really helpful? Chip Paucek: Jeff, in terms of our Degree business, London School of Economics has a program continues to do well, and it has a favorable international presence. If you – if we look forward to the edX acquisition, I mean, I think it's 50% of their traffic comes from that international environment. So it bodes well for us as we go forward, and presents a huge opportunity for us. In terms of our Alternative Credential business, particularly our short course business that has a large international presence. And quite frankly, we saw that digital marketing environment not just in the US, but globally and that did impact us as we reported the third quarter here. A decline – a 10% decline in the short course business. However, we do see improvement in that environment also and we expect to see that improve, particularly starting with the fourth quarter and going into 2022. Jeff Silber: All right. That's really helpful. Thank you so much. Operator: Your next question comes from the line of Josh Baer with Morgan Stanley. Unidentified Analyst: Hi, guys. Thank you for you time. This is Ben on for Josh. Just had a quick question. How have completion rates trended across degrees crash and short courses? And then just a follow-up to that. Do you think the option to make higher wages – having higher wages having impact as far as people choosing work over school? And how long do you think that will last for? Chip Paucek: So it's interesting about the overall dynamics because of our diversification that you have some puts and takes. And clearly in a full economy, a traditional higher education is more countercyclical. What's interesting about 2U is we now offer so many upskilling and reskilling products that are critical for people to succeed or get retrained to succeed. And we think that that is a global trend it is not only picking up steam but is getting quite critical for employers in the time of a great resignation. You've got a pretty dire need by employers to get their employees ready for what the need is for the business. And then you've got other aspects of the pandemic where we see – where we do see things like tailwinds like in nursing and in teaching. So you put it together, part of the reason that over the last five years, and you’ve really have diversified the company is we want to be the most comprehensive education platform on Planet Earth. And we think that this edX acquisition is – for us is the game changer to get there. We've already got today over 190 of high-quality degree programs and you marry that to a worldwide prospect base with new programs like MicroMasters and MicroBachelors and we think it's a big opportunity. In terms of retention, we overall have been holding pretty steady. If you look at retention historically at 2U, using better and better data, we've driven graduation rates up over a decade substantially. I actually don't know exactly what that number is in front of me today but I would tell you that, helping students succeed and sort of finish their programs is critical to the business because if somebody takes the program and leaves that program quickly, we do very, very poorly. I think that's one of the underappreciated aspects of the shared success revenue share model is that students need to graduate they need to stay in the programs for us to do well. And I don't think people realize that. So we are squarely focused on not just doing well for the world but also driving the business at 2U. Retention is kind of the one number that rules them all. So overall, feeling pretty steady about it. Unidentified Analyst: Got it. And then how is Gill partnership tracking? And then what will be – how will edX and its business offerings fit into that partnership? Chip Paucek: Look we see Gill was a great growth opportunity from a channel partner perspective. Today we're offering – we're excited to see the Morehouse undergraduate degree roll out as an opportunity for Target and Walmart employees. We've seen all kinds of opportunity for technical retraining. The Boot Camps in particular have started pretty hot with Gill. So – and it's early days. We really just got implemented. So we think Gill creates strong opportunity for the company over the next couple of years. Unidentified Analyst: Awesome. Thank you so much. Operator: Your next question comes from the line of George Tong with Goldman Sachs. George Tong: Hi, thanks. Good afternoon. So wanted to dive deeper into your lead management strategy. As you think about the normalization of the lead costs, how are you planning to approach investing in the lead flow to drive further growth acceleration over the next call it two to four quarters? Chip Paucek: Well George, I mean, I know we've said edX quite a bit but hard to overstate just how large the opportunity is from an organic perspective. 2U today is operating at a scale in – on the marketing side that the rest of the space is not. I do think we have an unmatched capability there on a per program level. And then, as I said, you marry that to an incredibly large base of folks that we now have really proven to ourselves through a bunch of diligence are highly relevant to other opportunities and we'll actually end up converting at higher rates than we've seen in most of our paid marketing channels. So we think it's a game changer for 2U from that point of view. George Tong: Got it. And then, as we looked at your degree program business, can you talk a little bit about the undergrad opportunity separately from the grad opportunity and where you see potential for either domestic or international growth that's incremental to what you've already built? Chip Paucek: We do like the pipeline of undergraduate programs that we see ahead of us. As I noted in the comments earlier, we're -- from a program perspective, we're looking at more than double what we did this past year. We've gotten much better at launching them with greater efficiency and a lower cash footprint. And we do think that undergrad’s part of the story. There's very significant worldwide demand for affordable high-quality online offerings and that goes for undergrad as well. So I know there's been quite a bit of commentary in the space overall about undergrad enrollment and we're certainly not seeing that. George Tong: Got it. Very helpful. Thank you. Operator: Your next question is from Fred Havemeyer with Macquarie. Fred Havemeyer: Hi. Thank you. I wanted to ask about the alternative credential segment, where, while FCEs were slower as you're navigating the higher marketing cost environment, it looks like the average revenue per FCE actually climbed to a high this quarter. And that's something interesting to see when some of the others in Ed tech have been talking about, competition to their offerings from higher wages. People are spending more on instead. So what are the dynamics that you think are driving this trend? And is there anything in terms of the mix of programs to call out here? Paul Lalljie: So, Fred, I mean, first and foremost, mix is what's driving the revenue per FCE. As you know the Boot Camp business has much higher revenue than the short course and we had more of the Boot Camp enrollment that we had of the short course enrollment in the quarter, giving rise to higher revenue per FCE. So the bottom line is its mix. And the thing that I will caution is that going forward, we should expect noise in that number. We should expect volatility in that number, because mix flips and changes. And as we've said a number of times, we've managed the business as a portfolio. If we have a better opportunity on one side of the equation, we'll spend into that opportunity. So I think we are fortunate to have an increase in revenue per FCE. But at the same time, it's the overall picture that we try to manage as we go forward. Fred Havemeyer: Of course, that does make sense. And then, I don't want to beat any dead horses on enrollment data. But within some of the enrollment data and perhaps Chip this would be a question for you. It was looking like more technical and specifically computer science or IT-focused graduate degrees were actually showing significant growth. I was wondering, are you seeing any of that play out within say mix of your portfolio or in terms of leads that you're seeing? And then, generally, like is there any sort of trend that you're seeing with respect to the ongoing great resignation as you've called out, with job seekers looking to either upscale or rescale perhaps into more technical areas? Thank you. Chip Paucek: We think the affordable edX degrees in those disciplines will be another substantial opportunity that we really haven't talked about at all. In terms of our Degree business, we continue to believe strongly in the licensure programs. Our MBAs have done better than clearly others might be showing. We feel like our Degree business, if you look at what it's going to deliver this calendar year we think it's pretty impressive at our size. So it's a credit to Ebony Lee and her team overall doing a great job managing that overall business for us, and one that we're very excited about what it means for next year. We have a good read-through. 21% of growth on a really big base. There's certainly no one else in the platform business that's close. So I would say, we're leaning in on the Degree side. Operator: Your next question comes from the line of Brett Thill. Q – Unidentified Analyst: Hi. This is David on for Brent. Thanks for taking the question. I guess on edX, I mean hopefully join the portfolio in the next couple of weeks. Can you discuss how you think they’ll fit in, the competitive landscape. And maybe having differentiated from some other that two weeks one public in the space and then maybe second on that, how you’re thinking about the opportunity in the consumer side versus the enterprise side? Thanks Chip Paucek: I would say it's really about the combination of the two of us coming together to create what is really by far the most comprehensive free to degree online education platform. There really is an unmatched offering set. It's early days in the enterprise business but one that we are investing in and excited about. 38 of the top 50 university partners in the world according to US News, quite an impressive portfolio and a 2U group of universities that are very excited about offering new options that edX brings to the table. So we're pretty bullish on getting this done and coming together and really going forward representing edX to the world more than 2U. Q – Unidentified Analyst: Got it. Thanks, guys. Operator: At this time there are no further questions. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.
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2U, Inc. Undergoes Reverse Stock Split

  • 2U, Inc. executed a 30-for-1 reverse stock split to maintain its listing status on the Nasdaq Global Select Market.
  • The reverse stock split aimed to increase the per-share market price to regain compliance with Nasdaq's minimum bid price requirement.
  • Following the reverse stock split, TWOU's share price saw an increase of 3.36% to $0.2275, amidst ongoing market volatility and challenges in the online education sector.

On June 14, 2024, 2U, Inc. (NASDAQ:TWOU), a leading online education platform, underwent a significant change in its stock structure through a 30 for 1 reverse stock split. This financial maneuver adjusted the number of shares available to investors but did not alter the overall value of their investment in the company. This move is particularly noteworthy for those tracking the education technology sector, as it reflects the company's strategic efforts to navigate market challenges and maintain its listing status on a major stock exchange.

The decision for the reverse stock split came after approval from 2U's Board of Directors and was in line with the range approved by stockholders during the annual meeting on May 20, 2024. The reverse stock split took effect at 5 p.m., Eastern Time, on June 13, 2024, with the common stock beginning to trade on a post-split basis the following day. This adjustment was made under the same trading symbol "TWOU" but with a new CUSIP number, signaling a fresh start for the company's stock on the Nasdaq Global Select Market. The primary goal behind this move was to increase the per-share market price of the common stock, aiming to regain compliance with Nasdaq's minimum bid price requirement, which is crucial for the company's continued listing and investor confidence.

Following the reverse stock split, TWOU's share price saw an increase of 3.36% to $0.2275. This price movement occurred within a trading day that saw the stock fluctuate between a low of $0.21 and a high of $0.2288. Despite this positive uptick, it's important to note that the stock is still significantly down from its yearly high of $4.81, having recently touched its yearly low at $0.21. This volatility highlights the challenges faced by 2U in the competitive online education sector, where it strives to maintain its market position and shareholder value amidst fluctuating market conditions.

The company's market capitalization, standing at approximately $19.15 million, along with a trading volume of over 2.01 million shares, underscores the scale of 2U's operations and its significance in the online education market. These figures reflect the company's current financial health and market perception, which are critical for investors and stakeholders monitoring its progress post-reverse stock split. Through this strategic financial adjustment, 2U aims to stabilize its stock performance and strengthen its compliance with Nasdaq's listing requirements, marking a pivotal step in its ongoing efforts to enhance shareholder value and secure its position in the competitive landscape of online education providers.

Analysts React to Leadership Transitions at 2U

Shares of 2U, Inc. (NASDAQ:TWOU) fell 4% intra-day today following the announcement that Paul Lalljie, the current Chief Financial Officer, will replace Christopher Paucek as Chief Executive Officer. Matt Norden, the Chief Legal Officer, will take over as CFO.

Analysts described the leadership change as sudden but not entirely unexpected, considering the company's recent challenges. KeyBanc analysts expressed surprise at Paucek's departure, citing his long tenure with 2U. However, they acknowledged the company's significant growth decline, increased focus on near-term debt obligations, and continued share price drop. The analysts view the appointment of Lalljie as CEO as a strategic move by 2U, aimed at enhancing operational efficiency and driving profitable growth.

Morgan Stanley analysts also weighed in on the executive shake-up. They noted that, despite the abruptness, the change was not surprising given 2U's ongoing struggles with growth and profitability. They specifically referenced challenges that have arisen since the company's acquisition of edX, an online learning platform. This leadership transition seems to be a response to these broader issues faced by 2U.

2U, Inc. Shares Dropped 48% on Disappointing Q4 Results and 2022 Outlook

2U, Inc. (NASDAQ:TWOU) shares dropped 48% Thursday afternoon following the company’s disappointing Q4 results and worse-than-expected 2022 guidance.

Analysts at Berenberg Bank downgraded the company to hold from buy, lowering their price target to $17 from $40. While the analysts are positive on the business longer term, they move to the sidelines due to disappointing 2022 guidance, weak enrollment data, lack of catalysts ahead, and management’s commentary that the business will not be cash flow positive until the back half of 2023.

Below are the main points highlighted by the company’s management during the earnings call:

(1) The launch cadence in 2022 is weaker than expected as some programs are delayed until 2023.

(2) The AC segment enrollment trends continue to be burdened by elevated costs per lead.

(3) The company will not be profitable on an unlevered FCF basis until the second half of 2023.

(4) The business is expected to grow at around 12% CAGR until 2025.