2U, Inc. (TWOU) on Q4 2021 Results - Earnings Call Transcript

Operator: Good day and thank you for standing by. Welcome to the Fourth Quarter and Full Year 2021 Earnings Report 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 Parth Patel, Head of Investor Relations. Thank you. Please go ahead. Parth Patel: Thank you, Operator. Good afternoon, everyone, and welcome to 2U’s full year and fourth quarter 2021 earnings conference call. I’m Parth Patel, Head of 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 may include forward-looking statements regarding our financial and operating results, the continued impact of the COVID-19 pandemic, plans and objectives of management for future operations, the integration of edX, student and university demand and other matters. Such 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 filed 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: Thank you, Parth. As you’ve seen in the numbers today, we delivered strong performance in 2021 and a competitive digital marketing environment. All while continuing to deliver world-class learning experiences and unmatched student outcomes and positioning our company to become the leading education platform globally. We believe that our business is sustainable and resilient. And our 2021 numbers reflect that strength. 2U’s 2021 results were led by revenue growth in excess of 20% in both our degree and alternative credential business, with particularly strong demand for our undergraduate offering. We also delivered on profitability ending the year with an adjusted EBITDA margin of 7%, a 5% improvement from last year. And this past November, we completed our acquisition of edX, one of the world’s leading online education platforms. With this industry redefining combination, we’ve expanded our company to become one of the world’s most complete online learning platforms and attained a powerful driver of profitable growth and margin improvement. On the call today, I’ll first provide some additional details about how edX is currently enhancing our business. Second, I’ll map out our key strategic priorities for 2022. And lastly, I’ll share how these priorities translate into our midterm performance targets. Let’s start off with edX. With edX as our consumer brand, 2U is positioned to continue to lead the growing online education market and deliver powerful societal impact. Together edX and 2U now serve 43 million registered learners, an increase of over 3 million learners since we joined force. They also support more than 230 partners, including 38 of the top 50 universities globally, and offer over 3,600 digital programs on the world’s most comprehensive free-to-degree online education marketplace. Demonstrating their support to the combination, more than 27 2U partners have already committed to delivering free and open course content to millions of edX learners. And edX learners can now find hundreds of 2U powered programs from leading universities on edx.org, including technology focused boot camps, get smarter executive education, disruptively priced undergraduate degrees, and Master’s and Doctorate degree in fields from nursing and education to business and law. These offerings are easily discoverable. You can now go and see them for yourself. And they expand edX’s portfolio into new disciplines with higher learner demand. In the past few months, we’ve also launched new products that leverage the combined strengths of 2U and edX to meet the demands of the market and drive affordability in higher education, like Harvard’s first Micro Bachelor certificate in chemistry. Through these innovative, accessible and affordable programs, we continue to deliver life changing outcomes for learners, and broader societal impact, while helping universities transform themselves from the digital age. In 2022, we plan on maintaining our commitment to profitability as we transform 2U into a leading education platform company with edX at the center driving unmatched outcomes for millions of learners worldwide. We expect the three key drivers will improve our profitability in 2022. Number one, strengthen our degree segment. Number two international and enterprise expansion. And number three, scale and operational efficiency. Together, we believe these will deliver substantially improved performance to our bottomline while delivering meaningful growth. In our degree segment, which just delivered 20 plus percent margin, we remain focused on launching quality programs that can deliver profitability. In Q4, we made the decision to wind down the Simmons hybrid on ground undergraduate program. Although our degree segment would have delivered double-digit growth with this program in 2022, we recognize that it would negatively impact profitability and was not part of our long-term product strategy. We also pushed out the launch dates of a few of our contracted degree programs impacting this year’s cadence. This includes our Arcadia’s Hybrid Physician assistant degree, which is based on accreditation delays, which we’ve seen from time-to-time in various programs over the years. However, the degree programs that are on our 2022 roadmap are expected to be diverse and significant drivers of long-term profitability. In the coming weeks, we expect to announce a new online undergraduate program already under contract, as well as the first Master’s degree from a longtime edX MOOC partner. Both of world-class institutions, both disruptively priced. It’s notable that if we stopped launching programs at the end of 2022, we project our degree business alone, would scale to $800 million in steady state revenue, with margins in excess of 35%. That’s pretty remarkable, we’re not stopping. We expect our launch cadence to go back up in 2023. As one example, we’re planning for our institutional deal with UNC Chapel Hill to deliver multiple programs next year. We couldn’t be prouder of our relationship there and UNC is not the only one expanding. We’re also launching expanding partnerships with top universities in international markets to meet the growing demand for flexible high quality online education overseas. About 80% of edX’s community of registered learners resides outside of the United States, and marketplace data shows us the degree programs are in particularly high demand. You can already see the strategy in action. This afternoon, we announced that we’ve expanded our relationship with boot camp partner, University of Sydney, one of the best universities in Australia, consistently ranked as a top 50 university in the world. We’ll be powering four of their online graduate degrees launching in 2023. Next, as we told you before, enterprise is currently the fastest growing part of our business. Enterprise revenue doubled year-over-year from 2020 to 2021. And in 2022, we’re planning to build on that momentum to again double its size under the edX for business brand. Together 2U and edX currently have more than 1,200 enterprise clients. We believe we can serve these organizations even better by cross-selling across our broader portfolio of up-skilling and re-skilling programs, including boot camps in high demand disciplines, like coding, data analytics, cyber security and product management, executive education in key leadership topics, and edX’s expansive course library. We also plan to build on our relationships with distribution partners like Gilden Bright Horizons, to bring online degree and alternative credential programs to more employees at some of the largest businesses in the world. With a great resignation underway, we believe there’s growing recognition from businesses worldwide that up-skilling and re-skilling employee is imperative to build the sustainable talent pipeline that enables them to execute their business plan. We’re ready to meet those needs. Lastly for 2022, the shift to becoming a platform company will be central to our strategy. We’re currently integrating the 2U and edX teams, with the goal of better supporting partners and students, and accelerating the growth and impact of edX. This year, our best-in-class marketing team will work to both significantly grow the edX community and deliver learners a more intuitive user experience so they can explore the edX marketplace with ease and confidence. This includes new search and e-commerce features like personalized recommendations, geo targeting, and mobile checkout. We also plan to expand cross-selling opportunities from IBM’s new blockchain a central certificate to the nation’s top ranked online MBA. We believe the breadth, quality and relevance of the edX 2U portfolio is unmatched. You’ll see us presenting our offerings in smarter ways, including bundling and stacking complementary programs to create clearer and more affordable pathways for learners to achieve their goals. Just one example of this strategy in action, students can now earn up to six credits in SMU data analytics boot camp, and apply those credits to the 2U powered SMU Master’s in data science. We believe stackable modular education like this is the future of higher education. Finally, before I turn it over to Paul, I want to share more about our longer term plans for 2U and what we expect that to mean for midterm performance targets. 2U has always had a bold vision for the future. Looking beyond 2022, our ambition is to be the most important education company in the world, the premier education platform company with edX at the center. And as we transform into edX, serving the needs of the edX community of learners over their lives and careers will become the number one priority for the business. The pandemic has not only accelerated the adoption of online learning, but it has also permanently shifted the power dynamics in higher education toward consumers. Consumers are becoming the dominant force in higher Ed. They have more choice over what, when, where and how they want to learn. They’re seeking greater flexibility and personal relevance placing a premium on convenience and affordability and increasingly choosing online option. And they’ll find those options at edX, the right learning at the right time from the world’s best institution, delivering great outcomes for students. The edX platform makes us a better business longer term. As such I want to share some of our midterm targets to provide a sense of our current expectations. By the end of 2025, we’re targeting a CAGR of at least 12.5% and consolidated adjusted EBITDA margin between 15% and 20%. But we’re also targeting to be free cash flow positive by the end of 2024, with crossover in the back half of 2023. Additionally, our goal is to grow annual enterprise bookings to 150 million by the end of 2024, and in doing so, expand our reach to more learners worldwide. As we expand our reach, we believe we will expand our impact by continuing to lead the industry in quality, transparency and life changing student outcomes. In December, we released 2U second annual industry leading transparency report, one expression of our continued commitment to prioritizing student success in everything we do. Let me close by highlighting just a few stats we shared in that report. Average term-one to term-two retention across our partners, online degree programs increased by four percentage points to 90% in 2020 from 86% in 2019. Our estimated percentage of revenue from decreased from an already low 38% to 31%. The number of students of color increased across our partners’ boot camps and degree programs, creating more diverse pipelines of talent and thousands of aspiring nurses, counselors and teachers completed over 3.5 million hours of virtual and in-person field placements, helping care for and educate people and communities across all 50 states. Super powerful, 2U is having a profound and positive effect on people around the world who see a better future for themselves and for society through education. And that is why we do what we do. And now Paul will take you through current results, and I’ll return for Q&A. Paul Lalljie: Thanks, Chip and good afternoon, everyone. As you’ve seen from our press release, we had a nice end to the year, notable improvements quarter-over-quarter, all while diligently prioritizing the integration of edX. We are also seeing strength and leading indicators, which gives us confidence in the resilience of our business model. Today, I’d like to start with a discussion of results both for the quarter and the year. Then I’ll provide an update on our balance sheet and cash flow statement and conclude with some thoughts on our financial outlook for 2022. Taking a closer look at our results. Revenue for the quarter totaled $243.6 million, up 13% from a year ago. For the full year, revenue grew 22% to $945.7 million, a $171.1 million increase over 2020. Full course equivalent enrollments or FCEs totaled 80,120 for the quarter. FCEs remained relatively flat on a year-over-year basis and increased 3% on a sequential basis, changing the trajectory from the third quarter of 2021. Moving on to our segments, degree segment revenue in the fourth quarter totaled $152.4 million, growth of 17% from the fourth quarter of 2020. The increase was driven by higher student enrollment and the acceleration of $82 million in the transitioning of our Simmons on ground program. On a full year basis, degree segment revenue increased 22% to $592.3 million driven by a 20% increase in FCE and a 2% increase in average revenue for FCE. Revenue from the alternative credential segments totaled $91.2 million, growth of 8% from the fourth quarter of last year. This increase includes 6% growth in boot camp revenue, a $5.2 million contribution from edX offset by a 5% decrease in executive education revenue. On a full year basis, alternative credential revenue increased 23% to $353.4 million, driven by a 15% increase in average revenue for FCE. The alternative credential segment showed strong sequential growth in both revenue and FCEs. This is notable particularly in an environment of elevated cost per lead. Now let’s take a look at cost and expense. Operating expense for the quarter totaled $293.3 million up 20% from last year. And full year operating expense totaled $1.1 billion, up 17% on a year-over-year basis, compared to revenue growth of 22%. This increase in operating expense included $14.4 million from the addition of edX. On a year-over-year basis, marketing and sales expense grew 17%, down two percentage points as a percent of total revenue to 48%. This is notable and reflects the discipline in an environment of elevated cost per lead. Personnel and personnel related expense, our largest expense item increased $10.9 million for the quarter to $121.3 million, with edX contributing $5.7 million. For the year, personnel and personnel related expense increased $19.3 million to $468.3 million at the end of the year with headcount of 3,982 relatively flat year-over-year, while supporting 20 plus percent revenue growth. Revenue per employee increased 16% year-over-year, demonstrating continued improvement in operating efficiencies and productivity. Moving on to profitability. Net loss for the quarter totaled $67.3 million, an increase of $29.6 million from the fourth quarter of last year reflecting higher interest expense from our term loan facility, convertible notes and the $14.4 million addition of operating expense from the edX acquisition. For the full year, net loss totaled $194.8 million, an improvement of $21.7 million over last year driven by better operating efficiency. Adjusted EBITDA for the quarter totaled $21 million, an increase of $2.2 million in the fourth quarter of 2020, driving full year adjusted EBITDA of $66.6 million, an increase of $50.5 million from the prior year. Adjusted EBITDA margin in the degree segment was 21% for the year and 11 point improvement over 2020, showing the inherent profitability of the degree segment business model. Adjusted EBITDA margin in the alternative credential segment was a loss of 17%, largely driven by increased marketing and sales expense and $11.7 million impact from edX expenses. Now for our discussion of the balance sheet and cash flow statement. We ended the quarter with cash and cash equivalents of $249.9 million, a decrease of $701.4 million from the September quarter. This decrease was a result of closing the edX acquisition in November, with a preliminary purchase price of $773 million and the payment of $13.8 million in related integration and transaction fees. This decrease in cash was partially offset by $99.9 million in net proceeds from incremental borrowings under our term loan end facility. Our accounts receivable balance totaled $67.3 million, down $28.1 million from the end of the previous quarter, and up $20.6 million from last year. Fluctuation in our accounts receivable balance reflects the timing of payments from our university partners, which often matches the academic calendar. As a result, we typically experienced increased collections in the fourth quarter. A year-over-year increase is representative of revenue growth in our business, and the addition of receivables from the edX acquisition of $6.9 million. Unlevered free cash flow usage on a trailing 12-month basis was $33.9 million compared to a net use of $5.2 million at the end of the third quarter. This decline reflects the rolling off of the fourth quarter of 2020, where we had substantial improvement in net working capital. To expand further, as previously highlighted last year, our fourth quarter of 2020 included favorability from better management of net working capital as we drove increased collection of accounts receivable and optimized vendor relationships. While we continue to maintain the improvements put in place in the fourth quarter of 2020, the incremental benefit has less of an impact. Now for a discussion of guidance on our long-term financial goals. Our priorities for 2022, center around the integration of edX, continued investments in our degree program segment and improved profitability in the alternative credential segment. Our guidance for 2022 called for revenue to range from $1.05 billion to $1.09 billion representing growth of 13% at the midpoint. Adjusted EBITDA is expected to range from $70 million to $90 million representing growth 20% at the midpoint. Keep in mind that this increase in adjusted EBITDA includes $30 million to $40 million of dilution from the addition of edX. In other words, on an organic basis, we expect adjusted EBITDA to increase by more than 50%. In addition, we expect capital expenditures to be approximately $80 million and weighted average shares outstanding to be approximately 78 billion. Our guidance reflects prudence in an unpredictable digital marketing environment, and it provides flexibility for us to proactively manage our marketing spend. In addition, we expect capital expenditures to be approximately $80 million. Let me provide some color on our expectation on the distribution of our revenue as we progress through the year. First, we expect revenue to increase quarter-over-quarter throughout the year. Additionally, we expect the revenue growth to accelerate in the second half of the year with the first quarter having sequential growth in the mid single-digits. Over the years, we believe that we’ve launched and grown enough degree programs demonstrate that we have a scalable business with an upfront investment that ultimately produce a strong margin at maturity. This concept is reflected in the overall margins of the degree program segment. And in 2021, our mature cohort produced margins that are above our steady state expectations. In fact, those margins are close to 35%. For the alternative credential segment, we have harmonized the two acquisitions in that segment, Trilogy and GetSmarter. And with the addition of edX marketplace, we expect that the alternative credential segment will generate positive margins in 24 months to 36 months, depending on the dilution of edX. If we look out over the midterm, we expect the edX platform and marketplace to be critical components as we deliver growth, profitability and cash flows. This transformational acquisition combines the unique strengths and complementary capabilities of two pioneers in online education. It also brings together a comprehensive set of offerings, access to a large global base of current and potential learners and the consumer brand. Importantly, we believe it positions us to deliverer 10% to 15% efficiency in marketing costs by the end of 2023 into 2024. Looking out over the midterm, our goal is to deliver at least 12.5% revenue growth at a compounded annual basis 2021 to 2025, the consolidated adjusted EBITDA margins range between 15% and 20% by 2025, resulting in more than four times 2021 level of EBITDA. In addition, our goal is to generate positive unlevered free cash flow for the full year 2024, driven by higher program launches, growth and registered learners, lower marketing and sales expense and greater contribution from enterprise revenue. Over the next four years, we expect to increase degree program launches, while decreasing the cumulative cash flow point for program. We also expect to double registered learners participating in our platform. Marketing and sales expense as a percentage of revenue is expected to decrease less than 40% by 2025. To conclude, our 2021 results showed strength and resiliency in the face of difficult year-over-year comparison. We maintained our spending discipline and volatile marketing environment and made important improvements to our marketing infrastructure. We ended the year with another good quarter that included notable sequential improvements and key indicators, which we believe point to rebound in revenue growth, particularly in the alternative credential segment in 2022. Looking out beyond 2022, we have laid out a roadmap for creating sustainable shareholder value, including our goals for revenue, margins and cash flow. The entire 2U team is focused, excited and motivated to execute against these goals. We look forward to a strong 2022. And with that, we’ll open the call for questions and answers. Operator. Operator: Your first question comes from the line of Stephen Sheldon with William Blair. Stephen Sheldon: Thanks. I guess first here on the 2022 revenue guidance. Can you just frame the impact of some of the one-off items you talked about with the Simmons undergraduate program wind down and pushing out a launch for key programs? And then, on the Simmons wind down, just I guess, what drove that decision, what pressures were you facing there in terms of profitability? Paul Lalljie: Stephen, let me start off, I think we’ll double team this one here. The impact on 2021 is $8.2 million, but on a 2022 guidance perspective, it was about almost $15 million, $16 million. But the bottomline is, on the degree program segment we were expecting well into the double-digits, year-over-year growth. However, with that being pushed out that number is now in the single-digit as you can imagine. In terms of pressure on margin as you can imagine that business was on a revenue basis with high margins in the near term. But as we go out in time and transfer some of the functions that we had to include as part of our operations that would have put some strain on the margins in the near term. So overall, in 2021 and 2022, it would have been a contrast, meaning a pressure on margins in 2022 and the benefit to margin in 2021. Chip, I don’t know if you have any other color to add? Chip Paucek: Yes. I mean, I think, Sheldon, we’re making a call there based on what we thought was important for the long-term future of the business in terms of what we’re going to focus on in that segment driving. We’re excited about what we’re doing with Simmons from the standpoint of the online undergrad program and feel very strongly about the future of that, very thankful that we were able to help Simmons get through the COVID period, but was not strategic for us long-term, and we do think would be a drag on profitability longer term. So, focusing on building high quality online, graduate and undergraduate programs that will fit our long-term profitability profile more than anything. So we feel very comfortable making that decision and look forward to building the rest of the Simmons business. With regard to the other degree programs, we definitely had some move out of the cadence of 2022. I mentioned one specific accreditation delay. we had several others that higher Ed right now is definitely seeing unprecedented leadership change, just like the rest of the world from a great resignation standpoint. So you’re talking about a bunch of leaders changing inside of higher Ed that had an impact on some programs. We’re pretty excited about the programs that we have in the calendar year and we’ll have more to say here in the next couple of months about programs that will be there for 2023. So feel confident saying that the cadence will increase in 2023. Stephen Sheldon: Got it, and then just as a follow up with less more detail on how the integration process with edX is going relative to your expectations? What’s gone better or worse than expected? And how, I think, you gave some detail on potentially the marketing efficiencies by 2023. I guess, how quickly do you think you could start to realize some of the marketing synergies and have you included any in your EBITDA guidance for 2022? Paul Lalljie: So Stephen, first of all, I think overall, we’re excited. We are in the early stages, just because the transaction closed in November timeframe. In terms of our guidance for 2022, we are expected to realize some of the benefits as we get into the fourth quarter timeframe of 2022. And it is not a significant amount that we’re including. So it’s not a material number to 2022 guidance, but we’re expecting that in the back half of the year. But, there are certain things that are visible. Right now if you go to edx.org, you can see the listing of our offerings on the website and we are beginning to put in place all the technical pieces to start realizing synergies as we get to the back half of the year. Chip, I don’t know. Chip Paucek: I guess I would add, right now we feel like it’s nicely on track. And we’re excited about the transition. Look, this is clearly a transitional year for 2U and as we’ve become a platform company, there’s no question that whole notion of the flywheel and how we bring learners in to learn and therefore convert them into new products. We’re already seeing it today. And we’re pretty pleased to see the number of learners go up from the time that we came together, from 39 million to 43 million, pretty good increase. And we expect that to continue. There’s nice momentum around edX for business and how enterprise is working there. Continue to get really good feedback from the edX clients. So we’ve only had a couple of months, but right now we’re loving it. Stephen Sheldon: Got it. Thank you for taking the questions. Chip Paucek: Sheldon, one other comment, I was told to make it clear, I want to make sure everyone is clear, when we’re talking about Simmons, we’re talking about the on campus program wind down not about that programs future. Operator: Your next question comes from the line of Ryan MacDonald with Needham. Ryan MacDonald: Hi everyone. Thanks for taking my questions. As we think about the guidance for fiscal 2022, can you give us a bit of a sense of how that growth works across degrees, Alt Cred and perhaps some more color on what do you think edX can contribute to 2022 revenue here? Paul Lalljie: Hi Ryan a couple of things. First of all, I kind of alluded in my quarterly spread, we expect to see Q1 to be mid single-digit overall growth on the top line. And then, we expect that on a sequential basis, and we expect that to continue to increase as we go quarter-over-quarter throughout the year. So that’s point number one. Point number two, edX for 45 days in 2021, delivered about $5.2 million. Keep in mind that was net revenue recognition. So what do I mean by that. Partner fees that otherwise would have been included in the revenue line is subtracted from the revenue line in our situation. So it’s anywhere between 40% and 50% reduction in revenue, if you will. So if you look at the others in the space with similar type of revenue streams, they recognize revenue on a gross basis. We did our diligence, did our analysis on this, and we concluded that this is a net revenue recognition for us. And we expect similar type of recognition in December, with one exception. As we look forward into 2022, there are certain things that will stop doing, for example, membership fees, something that’s been recorded as revenue when edX was a nonprofit. It’s something that we intend to discontinue as we move forward. So short of giving a number, I think you can expect the revenue from that business to be somewhere between 35 and 45 depending on how quickly we roll-off the membership fees. We are definitely excited about this. So the other thing I want to point out is that, as we think about the degree and the Alt Cred business, our alternative credential business, if you think of a year-over-year growth that we’re expected on full year basis that’s 30% at the midpoint of guidance, as you can imagine, our internal business plan is a bit more aggressive than that number one. Number two, we have certain assumptions around what cost per lead is going to do because that’s a big variable as we go through the year. And I think you’ve seen the way we’ve provided guidance in 2021 and 2020 and prior years. We always try to give ourselves a shot with optionality as we go through the rest of the year, meaning we have the ability to adopt our spend depending on what’s going on with the market. So as we look out to 2022 there, our degree business would have had double-digit growth rates without Simmons that mid single-digit and then the alternative credential business should be in mid 20. Ryan MacDonald: That’s really helpful color. I really appreciate that Paul. Chip one for you as a follow up. So you talked about the push out of some of the launch cadence of some of these degree programs. Can you talk about, if how that maybe translates to what you’re seeing in the overall demand environment for online programs? Are universities maybe caught reeling a bit because of the enrollment declines they’re seeing or is this actually creating a larger, greater demand for new revenue stream to be able to offer both online and on ground? Thanks. Paul Lalljie: Yes. There is plenty of demand for the business model. There is plenty of demand for the online program management services from us and other companies. You can see that Ryan in reports of growth in the space. And if you look at, you compare our growth overtime to the growth in that same time period for them, we’re above that range. So you continue to see plenty of demand for the core services. And on some level what you’re looking at with the overall decreasing amount of undergraduate students in the US, significantly higher percentage of undergrad students outside the United States and really a growing market and that’s part of the reason for our announcement today with Sydney with four degree programs for 2023, that’s a big new commitment for 2U. So we obviously had some programs move out into 2023 and had more to do with leadership change in a variety of places than it does with demand for the services. Ryan MacDonald: Helpful color, thanks so much, I will hop back in queue. Operator: Your next question comes from the line of George Tong with Goldman Sachs. George Tong: Hi, thanks, good afternoon. Your alternative credentials business is seeing most impact from higher lead gen costs. Can you discuss trends that you saw in the quarter around cost per lead across the business and what your guidance for 2022 and beyond assumes for lead gen costs? Paul Lalljie: So George, in the fourth quarter, we saw an improvement from the trends that we were seeing in the third quarter. If you look back and I know it spreads from the third quarter, I think we said, we were seeing almost a 70% increase in cost per leads in the executive education portion of the business. And then, in the boot camp side of the house it was almost 25%. So, we were seeing much higher cost per leads, those rates decreased in the fourth quarter. But I think there are a couple of things that happened in the fourth quarter. Our team has also found ways to automate, for example, some of the allocation of marketing dollars. And those things allowed us to be more efficient in generating leads as we got through the back half of the year. And I think you saw that occurred in the numbers, numbers in the fourth quarter, and the alternative credential segment improved particularly, if you look at it on a sequential basis, fourth quarter over third quarter. And we expect, we have assumptions in the model for 2022 that basically assume somewhere around 10% to 15% inflation and cost per lead from 2021 exit run rates, and still much above the pre-COVID cost per lead numbers if you will. And to some extent that is why I described our guidance is prudent. That is why I use words like we have optionality as we go through the calendar year, because if we see inflation or cost per lead, running at lower rates than what we assumed in the model, then we have the ability to spend more dollars and stay within our numbers, or we have the ability to have more leads for the same rates that we’re spending. And that will allow us to have better conversion and better revenue from a flow through perspective. So at this point in time, I think the digital marketing environment somewhat unpredictable to all of us, but we’re putting a line in the sand and that was what we predicted for the year. Chip Paucek: The only thing I would add to that George, that’s a good example of why our partners want our services and want to work with 2U in a variety of things. It’s complicated and we’re dealing with the scale and the complexity of it in a way that’s very difficult to deal with the single university and on top of that it’s why we brought that in. We believe that the future is a platform company will create greater optionality for the company in all kinds of ways, but certainly not a small part of that is what it does from a learner perspective. And we’re already seeing that today. Even though we’ve only owned it for a couple of months. George Tong: Great, that’s very helpful. And perhaps diving into edX, you gave examples of how you’re effectively integrating edX into the product 2U platform, within the quarter and since 4Q have you seen or what kind of examples have you seen where edX has successfully drove traffic and converted the audience online to actual program attendance trend? What kind of evidence have you seen around the synergies that you’re hoping to achieve over the next 24 months? Chip Paucek: George, it’s literally been a couple of months. So we’re seeing very significant lead flow come into the system and we’re working on variety of different ways to convert that seat flow across the product lines. I’ve been particularly pleased with what it’s doing on the LSE undergraduate program. So obviously, there’s a very large international audience for edX, and that program has both the brand and a price point. It’s clearly attractive to audiences worldwide. So we’re just getting going here. We do think that there’s been a significant amount of demand for micro-bachelors and micro-masters, we think the product opportunities there are very significant across the portfolio and candidly the question for 2U is just how much of that we’re going to be able to do this calendar year, not whether there is demand for it. If you look at something like Harvard micro-bachelors that we just announced a little while ago, the first micro-bachelors from Harvard, it creates credit pathways for people, they need credit to attend quality undergrad program and can do that to any program involved will accept those credits. So, creating flexibility and pathways for people into high quality options is what this is all about. And as part of a story of just the overall free to degree portfolio that combination of high quality free option, high quality Alt Cred in forms of both boot camps and shorter courses and degrees and we bring that full portfolio to bear. So we really do like what it says for the company over the next couple of years. George Tong: Got it, very helpful. Thank you. Operator: Your next question comes from the line of Phillip Leytes with Berenberg Capital. Phillip Leytes: Hi guys, thanks for taking my questions. Can you elaborate a little bit on the strategy with enterprise? What gives you confidence that you can scale that part of the business given the highly competitive landscape? Chip Paucek: So I mean, it’s going incredibly well, very proud of the enterprise team. We’ve got a broad portfolio of both subscription base and sort of single products for both executives and a broader number of programs for up-skilling and re-skilling, technical boot camps across so many different subjects really knowing close to that sort of breath, and we’re seeing that being very significant demand across a larger and larger list of customers. And even excited about seeing our degree business get into the action with both . So, enterprise, it’s really going well. So, we’re proving to ourselves that we can be very competitive in that segment and as we mentioned double last year, it’s going to double this year. so, I think, what key is the broader portfolio is very appealing to the enterprise client. So, this significant demand from enterprise is worldwide for up-skilling and re-skilling their employees out to stay competitive in the marketplace and we’re seeing that. Phillip Leytes: Got it, thanks. Operator: Our next question comes from the line of Josh Baer with Morgan Stanley. Josh Baer: Great, thanks for the question and appreciate the longer term frameworks and targets there. I had on question, Chip, on your comments about reaching $800 million in steady state revenue and 35% margins on the degree business, if you stopped launching programs end of 2022. How do you think about the timeframe for steady state? I guess, first part of the question. Chip Paucek: So, if you look at the current programs that are in the pipeline and we think about end of 2024, we’d be at a reasonable steady state in those programs. And Josh, part of the reason we’re talking about that business, if we build a great business here and we feel like at times people just don’t understand it. And if you look at the degree business granted, it’s clear and as we explain, we had some movement out of 2022 to 2023. actually intentional, this is us trying to, we’re at a stage of life, we’re going to do over a billion revenue this year. So we’re trying to build a profitable business and see that profitability come through with the financial state and not kick the can down the road. And if you look at the degree business, it’s just incredibly profitable today, and it continues to be. So we’re trying to put color around it just to give people an understanding of how valuable that business is. It’s also a business that we really believe what we’re seeing is fundamentally a significant long-term play here, if you look at the OPM space overall, produces good amount of data that shows the size of the space and the growth, and over 80% of the growth in the space – sorry, over 80% of the space is revenue share deals, and I think there is at times a misperception as to sort of, this is somehow going to be a shorter term thing and we just continue every year to pull out more and more clients that are breaking – Sydney is literally one of the best institutions on the planet, it’s for brand new degree. So it’s not that we expect to stop. But we want to balance the growth trajectory with greater profitability because we think that a large enough company today that we need to let that come through in current periods. And that’s what you see happening. So clearly, edX creates some shorter term dilution on the bottomline that we think is well worth the investment because of what it will do long-term for the platform of the company and for the flywheel it will generate greater profitability long-term. But in the short term, the core business itself you would have seen substantial earnings improvements. I mean, you may want to hit that. Paul Lalljie: I mean, that’s over 50% improvement on a year-over-year basis. The midpoint of guidance is $80 million EBITDA and the edX dilution at the midpoint it’s about $35 billion. So what we’re presenting here today is our 2022 guide, our outlook represents the choices that we’ve made to balance growth and profitability. And it’s something that we’re very proud of. We believe a billion plus of revenue, it is something that’s necessary and we believe that 2022 is that year of transition. And as we get to the medium-term and the long-term as you see the numbers that we put out there, we can truly realize the benefits of a platform company. Josh Baer: That’s helpful. The second part of my original question was, if you have any insights into that same type of steady state exercise with the alternative credential side, just as far as scale and steady state margins, assuming no new launches? Thanks. Paul Lalljie: Yes. I mean, the Alt Cred is a little bit different. If you think of the two components of it before edX, the boot camp is more of presentation. You take in the subject and you’re rolling out across the partner networks that you have. And then, in the short course or executive education side, it is about the presentations of the new partners that you sign up. So it’s a much different business with much shorter cycles in it. How do I say this, in the degree side, student enters the program and sticks around for two and a half years, the cycles and the alternative credential side is much, much shorter. Here’s what I’ll say to you, if you look at the trend in the margins on the alternative credential side 2020, 2021, it’s been material improvement. And without the edX delusion we probably would have seen that business crossing over into profitability as we exit 2022 into 2023. And in the guide, I’ve said 24 months to 36 months depending on the solution that we see from the edX addition to the portfolio. But standalone that business would have been profitable I would say within 12 months to 18 months, had we not done the inclusion of edX to it. So hopefully that gives you an insight into that. But I think the similar analysis to the degree segment is probably not a fair comparison. Josh Baer: Great, thanks. Operator: Your next question is from the line of Brent Thill with Jefferies. Unidentified Analyst: Hi guys, this is David on for Brent. Thanks for taking the question. I want to double click on the enterprise side. Sounds like you guys are seeing a lot of momentum. I think you said the business doubled last year and you expect it to double again this year. I was wondering if you could put some more context behind that. Is revenue growth accelerating there? What’s retention looking like and do you find that you’re landing, load your deals out. Let’s just talk about how that business is trending will be helpful? Thanks. Chip Paucek: So it’s clear that this is a segment that we’re going to talk a lot more about over the next couple of years and put more color on for the investor community as we get our arms around how significant it can be. But right now, pretty much all the products we have are selling. So it’s a combination of the sort of 2U side and the edX side coming together, offering sort of seat based content for executives or programs like the Netflix boot camp that we ran with, started off as some high quality, historically black colleges. And then, what we added to it was some high quality Hispanic serving institution. And that program has been a home run and has broader applicability across the business overall to many more clients, because people desperately need to improve diverse pipelines of talents that’s been very popular. The edX for enterprise side, we will run all of this as edX for enterprise as we bring the two together. And our team is on a worldwide basis delivering Zec Ed through what was our GetSmarter business, still today, representative of GetSmarter and overtime we will come out of that. So there’s a lot there. Paul Lalljie: Yes. And David a couple of things. I mean, you can think of it as a channel, multi-product channel, sales channel essentially, and with the addition of edX, edX brings to us over 1,200 enterprise partners. So to some extent, we’ve gotten some fuel in this category as well as a significant growth engine for us, I think in Chip’s comments, he said that bookings could be in excess of $150 million as we get to the end of 2024. Chip Paucek: I would also note that edX brought with it some very experienced sales team members. So that’s been real positive. Unidentified Analyst: Thanks for the color guys. Appreciate it. Operator: And there are no further questions in the queue at this time. Your closing remarks please. Chip Paucek: Again, thank you everybody. We’ll talk to you soon. Operator: 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.