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Edited Transcript of TWOU earnings conference call or presentation 12-Nov-19 10:00pm GMT

Q3 2019 2U Inc Earnings Call

Landover Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of 2U Inc earnings conference call or presentation Tuesday, November 12, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Paucek

2U, Inc. - Co-Founder, CEO & Director

* Ed Goodwin

2U, Inc. - VP of IR

* Paul S. Lalljie

2U, Inc. - CFO

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Conference Call Participants

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* Blake Johnson

Goldman Sachs Group Inc., Research Division - Research Analyst

* Brad Alan Zelnick

Crédit Suisse AG, Research Division - MD

* Corey Adam Greendale

First Analysis Securities Corporation, Research Division - MD

* Jeffrey Marc Silber

BMO Capital Markets Equity Research - MD & Senior Equity Analyst

* Jeffrey P. Meuler

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Ryan Michael MacDonald

Needham & Company, LLC, Research Division - Senior Analyst

* Stephen Hardy Sheldon

William Blair & Company L.L.C., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to 2U, Inc. 2019 Third Quarter Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference call over to your speaker today, Ed Goodwin, SVP, Investor Relations. Please go ahead, sir.

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Ed Goodwin, 2U, Inc. - VP of IR [2]

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Thank you, operator. Good afternoon, everyone, and welcome to 2U's Third Quarter 2019 Earnings Conference Call. On the call, we have Chip Paucek, our CEO; and Paul Lalljie, our CFO. Following Chip and Paul's remarks, we will take questions.

Our press release was issued after the close of the market and is posted on our website, where this call is being simultaneously webcast.

Statements made on this call include forward-looking statements regarding our financial and operating results, new educational offerings, student and university demand and other matters. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and the risk factors and documents we filed with the Securities and Exchange Commission, including 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.

The webcast of this replay -- of this call will be available for the next 90 days on our company website under the Investor Relations link.

With that, let me hand it over to Chip.

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [3]

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Thanks, Ed. 2U is founded on the belief that the great university can and will remain a powerful engine for social and economic mobility in the digital age. Our partnerships fuel that engine. They enable universities to sustainably meet the growing demand for higher education by developing a diverse portfolio of online and blended offerings that are relevant to the evolving needs of lifelong learners.

2U remains a partner of choice for top universities, which is evident in our tremendous progress over the past quarter. We launched over 30 new offerings and maintained our high bar of student retention across the portfolio. The Trilogy integration is progressing nicely. We've realigned the organization to better serve students and our partners, drive efficiency and position 2U for where the market is going.

Some great new executives joined the team. We're set up for a run of profitable growth, driving to free cash flow. Our original belief remains as true as it was back in 2008. As more universities launch digital offerings, the value proposition of our partnership model is stronger than ever. 2U is uniquely positioned to capitalize on this powerful secular tailwind based on our 11-year track record of successfully working with university partners.

With the arrival of new CFO, Paul Lalljie, we're introducing a new structure for these calls. I'll begin with a review of our strategy. Then I'll provide an overview of our performance in the segments this quarter, including the highlights of the success we're having with the Trilogy acquisition and its integration status. Then I'll give an overview of our operations. Finally, I'll turn it over to Paul, who will walk you through our results with more detail and commentary.

Let's start with reaffirming our strategy. We partner with top-tier universities and expand our relationship with each of our clients. Through our comprehensive 2UOS platform, we build, deliver and support world-class digital education offerings that meet market demand and drive strong student outcomes, and we scale enrollments for those offerings.

From that jumping-off spot, let's get into our segments and how we're driving the business. Our Grad Program Segment had a strong quarter. Revenue was $103.4 million, up 15% compared to third quarter 2018. Growth was driven by the scaling of more recent launches and offset somewhat by the rightsizing of our older programs, in particular, our legacy social work program, which is not new news. We believe there's a solid trajectory for the segment, and Paul will give you more detail on how to think about our revenue ramp.

Top-tier universities demand programs that have the highest quality, preserve academic integrity and foster brand affiliations, which is why they consistently choose 2U as their partner. This quarter, we launched 15 new degree program offerings. Student retention in this segment was 82%. And as a leading indicator of future performance, we have a number of pipeline wins to highlight.

Shortly after our last earnings call, we announced our first undergraduate program, a Bachelor of Data Science and Business Analytics with our partner, LSE and the University of London. The program has been slotted to launch in fall 2020 and will have a total tuition of roughly $25,000, total. LSE has been operating this program as a correspondence-based degree with strong demand, but chose to partner with 2U to increase engagement and scale the program. Notably, it's the first grad program to come to us through our GetSmarter client, which validates our belief that our comprehensive offerings can be leveraged across the partner base.

This quarter, we also announced a new top-tier university and a brand-new vertical. The Rochester Institute of Technology will launch Architecture Online. This program will have a strong sustainability focus and will prepare graduates to enter the modern field of architecture on the way to becoming licensed architects. We're breaking new ground once again with our first program in the architecture vertical, where there are very few online options.

We also announced another licensure program with one of our largest university partners, a Master of Social Work with Syracuse University, which is slotted to launch in the fall of 2021. The date is notable. It shows we're able to slot new programs well into the future.

We have a deep moat and are winning overall in the large market for licensure-type programs, which often require clinical placements of some kind, including social work, speech, psychology, mental health counseling and others. We're seeing double-digit enrollment growth in these programs. Our competitors are underpenetrated in these disciplines, with some notable ones not -- choosing not to play here. They'll have a hard time competing with us in licensure.

Finally, we're making progress on our exclusive pan-university partnership with UNC Chapel Hill. We'll have more to say here soon.

So to summarize, the Grad Program Segment performed well this quarter driven by strong growth from our newer launches. We had a number of pipeline wins, signing a new university partner and adding new offerings at existing partners. And we continue to execute against -- as we continue to execute against our strategy, we'll drive long-term growth and profitability in this segment.

In the Alternative Credential Segment, revenue was $50.4 million, up 192% compared to third quarter of 2018, primarily due to the addition of Trilogy. Short courses also contributed to growth, outperforming our expectations. In fact, many short courses are hitting all-time highs on student volume. There are also a number of pipeline wins to cover.

On the short courses side, we're winning with some of the most recognizable brands in the world, including MIT, LSE, Oxford, Yale and Stanford. These brands drive improved enrollments. Also importantly, we made significant progress aligning faculty to short courses. We've slotted a number of new courses with global brands. We believe we're positioning for strong performance in 2020.

On the boot camp side, there are plenty of wins to highlight. We launched a number of boot camps in data, cyber, web development and digital marketing. In addition, we signed 3 new universities to launch boot camps in 2020, which we'll announce when we begin marketing those offerings. And I'm particularly excited about our new boot camp subject, fintech, which rolled out to Columbia and Rice. The fintech pilot is one of the best starts we've seen in a new boot camp subject. You gain skills for a wide variety of fintech roles, including creating blockchains, building deep learning neural networks using TensorFlow and creating predictive models for stock prices with Python and Jupyter notebooks. It's really something. Our boot camp offering is the most compelling in the market. The world needs technology talent, and we believe the great university can provide it in tandem with 2U. The tie to industry here is real. Our relationships with enterprise allow us to continue offering the most relevant technical content. It's a massive opportunity to rescale and upscale the workforce.

The integration of Trilogy is well underway. We've already integrated back office functions, such as finance, HR, comms and tech, and we're starting to see some of those cost benefits. We've also integrated the university relations team, and they're already beginning to cross-sell to the 26 universities who were originally Trilogy clients and selling boot camps into our existing university clients. The fact that we're landing and expanding across a broader set of universities validates our M&A strategy and further bolsters our position. Trilogy is still a young company, but we're also starting to rationalize their spending and cost structure, some of which needed greater discipline, particularly on the marketing side. And integration will help us achieve better margin.

To summarize, the Alternative Credential Segment delivered strong results and pipeline wins, and the integration of Trilogy is proceeding nicely.

Turning to our operations. We're driving towards profitability and positive free cash flow while streamlining decision-making. As we continue to invest in quality, we're taking a closer look at improving the efficiency of our operations. We realigned our org structure, adding managing directors for each product line. We also recently merged 2 of the largest departments of the company, our admissions and our student support teams. This is an approach many universities are now taking. Additionally, we combined 2 distinct program experience teams that work directly with our partners. So the restructuring helps us improve the student experience, the university experience and the efficiency of our operations. With disciplined cost management and focused execution behind working capital initiatives, we expect to drive improved cash flow progression company-wide. Paul will play a key role in this.

Turning to the team. Our strong culture has resulted in high employee retention over the years, and that continued to be the case this quarter. I'm proud to work with an incredible group of mission-driven people who put students and our university partners first.

We also had 3 talented executives join our team. We added a Chief Learning Officer, Luyen Chou, who came to us from Trilogy with 2 decades of industry experience. He spent 5 years as the Chief Product Officer of Pearson prior to joining Trilogy in that same role. We also brought on a new Chief Marketing Officer, Jennifer Ogden-Reese, who came to us from SeatGeek, where she was CMO the past 3 years. Jennifer spent over a decade at Time Warner, where she led a multiplatform consumer strategy for some of the most iconic and successful media brands in the world. Both Luyen and Jennifer will report to COO, Mark Chernis.

Most importantly, I'm honored to have Paul Lalljie by my side. He'll be a fantastic partner for me in running the business, given his extensive experience, as part of the new star senior management team.

Paul, Jennifer and Luyen not only bring a passion for our mission to eliminate the back row in higher education, they also further strengthen the diversity of the leadership team at 2U.

To conclude, I believe the great university remains a powerful engine for social and economic mobility, and we remain the partner best suited to help bring them into the digital age, and in doing that, drive long-term value for shareholders.

With that, I'll hand it off to Paul to discuss the financials.

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Paul S. Lalljie, 2U, Inc. - CFO [4]

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Thanks, Chip, and good afternoon, everyone. Let me start off by saying how thrilled I am to be on the 2U team. I joined 2U because it is a mission-based and leading -- and has a leading position in a transformational market segment. I see 2U leading the way and capitalizing on the opportunity to offer high-quality online education for the best educational institutions in the world. I look forward to making an impact as we focus the company on scalable growth and free cash flow generation.

2U's performance this quarter reflects strong top line growth, important pipeline wins, the progress made on integrating our recent acquisitions and a relentless focus on organizational efficiency.

I'll start with a discussion of revenue, followed by a discussion of costs and how I think we can drive efficiencies, then touch on the balance sheet before finishing up with a discussion of guidance.

Revenue for the quarter totaled $153.8 million, up 44% from last year. In the Graduate Program Segment, revenue grew 15% over the third quarter of last year. You may recall, we previously disclosed that there were headwinds in our largest program. Excluding the impact of that program, revenue in the graduate segment would have grown 25%.

We also told you last quarter that we were seeing pressure across some of our older programs. Many of those programs have grown to be far larger than our original expectations. And while they remain relatively large, many are coming down in size, but I'm happy to say that our newer cohorts are scaling extremely well. To put this into perspective, for the 35 programs launched between 2015 and 2018, year-over-year revenue in the third quarter was 54%.

The 15% Graduate segment revenue growth was driven by a 25% increase in full course equivalents or FCEs. This was partially offset by a decrease in revenue per FCE of 8% driven by 2 main factors. One is an increase in the number of scholarships, which helps increase access to education. We account for scholarships on a contra revenue item. The other is the extremely strong growth in some of our newer and less expensive programs, which helped drive growth in FCEs, but that shift in mix reduces revenue per FCE. While we don't set tuition of any of our programs, it is important to provide offerings across the pricing spectrum. Students will choose the option that works best for them, and we are well positioned to meet a variety of students' needs.

The Alternative Credential Segment revenue grew 192%, which includes $29.2 million of revenue from the Trilogy acquisition. On an organic basis, revenue in this segment grew 23%. This growth was driven by a 65% increase in FCEs and 98% growth in revenue per FCE. Keep in mind that the cost of a boot camp is much higher than that of a short course, so you should expect to see revenue per FCE continue to show strong increases until we lap the Trilogy acquisition.

Let's look at costs and expenses. Net loss for the quarter was $141.1 million, with costs and expenses totaling $288.8 million, up $131.2 million versus the third quarter of 2018. The increase includes a $70.4 million noncash goodwill impairment charge, $59.9 million of operating costs for the Trilogy acquisition, $6.6 million in restructuring-related expense and $2.5 million of integration and transaction costs. Excluding these items, the underlying operating costs grew 26% or $30.6 million. This increase was primarily driven by increased spend on direct marketing, personal- and personnel-related expenses, and investments in our technology platform to support the launch of programs across our product offerings.

Let me spend a few moments on the noncash goodwill impairment charge. The sustained decline in our stock price during the third quarter presented a triggering event that warranted a goodwill impairment review. We performed a review as of September 1, 2019, and that resulted in a $70.4 million impairment charge because the carrying value of the Trilogy reporting unit exceeded its fair value.

Looking at costs and expenses on a sequential basis, excluding impairment, restructuring and Trilogy operating expenses, there was actually a 2.8% sequential decline in the underlying costs. To put this into perspective, in the third quarter of 2018, expenses showed a sequential decline of 0.5%.

Adjusted net loss for the quarter totaled $26.2 million, and adjusted EBITDA loss was $10.7 million. Both measures showed a larger loss than the third quarter of last year primarily driven by incremental operating costs from the Trilogy acquisition and additional costs from launching new programs.

I'd like to share some color on how I'm thinking about driving towards profitability after my first few weeks at 2U. As Chip said, we provide the highest quality of service to help great universities build, support and deliver digital education at scale. This works because of the investments we make in our partners. Since starting here, it has become clear that we can continue to deliver the same high level of service to our customers while driving efficiencies across the business. Some of these initiatives have already started. The restructuring action reduced costs by $800,000 in the quarter and should reduce run rate cost by $11 million to $12 million annually. Plus, I believe that the way we have organized our teams position us to serve our customers more efficiently.

We're going to be more disciplined in the programs we select, how we deploy investment capital to develop and market those programs. My focus will be on ensuring that we only spend money on things that drive desired outcomes. For example, I see opportunities for efficiency in how we build courses and market certain programs, and I believe we will drive leverage in support functions as the business continues to scale.

The Trilogy business is strategically aligned with our mission. As Chip pointed out, it clearly positions us to win in STEM, adds a number of incredible university partners and helps us maintain our leadership position in digital education. But it is clear that there are considerable opportunities to operate more efficiently as we complete the integration of Trilogy and build towards smarter growth and sustained profitability.

Now for a discussion of the balance sheet. As of September 30, 2019, cash and cash equivalents totaled $154.1 million, a decrease of $64.6 million from June 30. The $64.6 million decrease from the June quarter was primarily driven by the use of cash from operations of $37.7 million and $18.5 million in additions of amortizable intangible assets related to content and delivery.

Accounts receivable at the end of the quarter totaled $84.8 million compared to $71.6 million at the end of the June 2019 quarter. We expect this balance to come down in the fourth quarter as schools pay off their fall term balances before the year-end.

Long-term debt was $253.5 million at the end of the quarter, principally related to our term loan facility maturing in May 2024. As I think of cash going forward, we're going to optimize the mix of programs we launch and the launch cadence based on the demand from our partners as well as the economic returns and cash flow profiles for each of the programs, and we will continue to drive operational efficiencies. So even though we're still in our 2020 planning process, we expect to enhance our liquidity position by reducing the rate of quarterly cash usage. I would also note that going forward, free cash flow will be a metric that we will focus on in our disclosures and in our discussions of quarterly results. We will define free cash flow as net cash used in operating activities, less capital expenditures and excluding restructuring payments and certain identified non-ordinary course payments.

Now for a discussion of guidance. Given where we are in the year, we have high visibility in our revenue for the remainder of the year. And when coupled with strong leading indicators such as FCEs, enrollment and pipeline wins, we have confidence to increase our revenue for 2019. We now expect revenue to range between $570 million and $575 million, representing growth of 39% at the midpoint of the range.

We are increasing our guidance for net loss, which we now expect to be between $238.8 million and $232.8 million due to the impairment, restructuring and integration charges.

We are not changing our guidance for adjusted EBITDA loss, which is expected to be between $28 million and $22 million. This guidance reflects the timing of certain operating expenses that moved from the third quarter to the fourth quarter. This is why we did not increase our adjusted EBITDA guidance more substantially for the full year.

Before we leave guidance, let me comment on 2020. While I recognize that on prior third quarter earnings call, we gave a guidance preview for the following year, I do not plan on doing this going forward, as it is my practice as CFO to complete the budgeting cycle for the year before issuing guidance. Having said that, we do have strong leading indicators, and as such, we expect to see the business trajectory arc for the second half of 2019 continue into 2020.

So to summarize, we have a leadership position in a huge market with strong secular tailwinds. Our Board and management team believe that we have the right strategy and the right business configuration to drive profitable growth and long-term shareholder value. The market we serve, that is the global online higher education market as defined by HolonIQ, is a $30 billion market with a projected 14% compounded annual growth rate from 2018 to 2025. And as you've seen from our growth rates, we are growing faster on a consolidated basis and on a segment basis. As we focus on optimizing program launches and operational efficiencies, we expect to deliver increased long-term value to our shareholders.

Before we turn to our question-and-answer session. I ask that you focus your questions today on our third quarter results and go-forward strategy, which are the subjects of today's call. We are aware of a media report regarding one investor's view of our company. We welcome the perspective of shareholders, though we will not be addressing that report on this call.

And with that, operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question coming from the line of Brad Zelnick with Crédit Suisse.

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Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [2]

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Excellent. Chip, congrats on a good quarter and nice to see some stability in the business. And a warm welcome to Paul, Jennifer and Luyen as well.

Chip, you mentioned...

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [3]

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Thank you, Brad.

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Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [4]

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Sure. You mentioned that you continue to see plenty of growth opportunities with both business segments, but are also becoming more disciplined on expenses as you adjust for the new competitive environment. How do you think about balancing growth versus cost savings between each segment? And any insight into how we should think about revenue growth for DGP and Alternative Credentials for this year and next?

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [5]

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Thanks, Brad. So I would say, for -- when we think about across the segments, we are focused on our ROIC and how we think about returning -- how we think about profitable growth and the best use of cash across both segments.

We think the Alternative Credential Segment, clearly, from a strategic standpoint is where universities are going to need to boost their offerings. And candidly, the STEM category is something that you really can't expand into without an opportunity like Trilogy, without the boot camp offering and the tie to industry that Trilogy brings to 2U. So we will continue to expand the portfolio.

I mean just to frame it for you, when we IPO-ed the company, we had 6 partners and 10 grad degrees. And today, we have 72 partners and over 300 offerings. So just think about that. 10 degrees to over 300 offerings across a whole variety of different types of subjects, and we include -- we continue to expand that today. So I think the discipline that we need to bring to the table is just to continue to be as strong as possible, picking the best programs and driving the best opportunity for both student outcomes and for the company. And our Alternative Credential Segment is a part of that.

Now at the same time, I think you can see that Paul provided the segments, and we were pleased with the grad program segment. When you've got our -- one of our legacy programs declining, our largest program, and are still able to see 15% growth in that segment. And without that 1 program, you would have seen 25% growth. And then on top of that, the 2015 to 2018 programs grew at 54%. You're talking about still very strong offerings that are growing not only above the rest of the overall OPM segment, but online education overall. We are still at the top of growth expectations.

So we're pretty pleased with the quarter, and we look forward to giving you more detail at our Investor Day, which, to be clear, we will do as early as possible in the new calendar year, and we'll be back to this community with a more specific date as we get closer.

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Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [6]

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That makes perfect sense. And maybe just a quick follow-up. Can you share any feedback you've received on your 0-interest deferred tuition plan with Simmons? And might we expect to see other programs jumping on board as well?

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [7]

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Yes. We thought that was one of the first times that we've seen across all of higher ed that anyone has offered a deferred tuition program, and what I love about it is it aligns our university partner with the long-term outcome of the student. As in the student defers half of the tuition in the nursing program until they've graduated from the program and they're in a job with a minimum floor, and there is no interest at all in the program. So I do believe it's driving down the cost of education overall. We're excited about rolling it out. It's an early pilot, to be clear. And so -- but we do expect to have another announcement shortly from another university that was particularly interested in rolling it out to their students. So we think it shows where our scale can really benefit not just our university partners, but the world, the student body. So we think it's a great opportunity.

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Operator [8]

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Our next question coming from the line of Jeff Meuler with Baird.

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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Chip, hoping you could talk more broadly about, I guess, price elasticity on the student side and how it impacts CAC and your economic model just with, I guess, picking up off the last question, the 0-interest deferred tuition and the other 2 data points from the call, the increased scholarships and the outsized growth. So just would love your thoughts on price elasticity and how it impacts our financial model.

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [10]

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Well, clearly, over -- as we provide greater value to the student, we do think conversion improves. So it's all about the value proposition. We've always played at the premium end of the market. That's no surprise. The largest cost to graduate education is the opportunity cost of the lost income.

At the same time, as we start to think about various prices, various lengths and different types of certification across a much broader spectrum of what is now -- I mean we are a much bigger company than we were in -- back in 2014 across many different segments. And one of the things I thought was notable about the quarter is you've got -- obviously, average FCE came down in Grad, but average FCE was way up in Alternative Credential. Well, why? Because we've got programs that start as inexpensively as $1,000 with a short course, and we have programs that go all the way up to $150,000 on the degree side. And over time, we need to have price points across the entire spectrum. We need to offer students options to further their educational goals, whether they're looking for skills attainment from something like a short course to learn how to use AI in their job or something like a doctor of physical therapy, which is like a 3-year life changer.

So there are certain disciplines like licensure, where we're up double digits in enrollments, and I do think we're building a pretty deep moat. Those require more credits. So inherently, those tend to have a higher cost. There are certain things like STEM offerings, where on the STEM side, candidly, if we hadn't gone down the path of short courses and boot camps, we'd be at a very significant competitive disadvantage to the rest of the space. That's where we need to be, is lower-priced faster options for STEM, but at the same time, drive quality.

Like I do feel like something that has not been talked about enough is we are driving the kind of quality that universities respond to, quality of the content itself, quality of the student body, and ultimately, quality of the student outcome, most importantly. And I thought, interestingly, this quarter, it was right after our last call that we announced the London School of Economics with our first undergraduate program. Like LSE really got on board after having an incredibly high-quality experience in the short course business with excellent enrollments in which students are now, like literally, physically at times coming to LSE for in-person immersions because they experience a really high-quality short course. We don't think that happens across all of higher ed. And then they got excited about what improved engagement and retention could do for a legacy program that they've been offering all over the world, and we think it's a huge opportunity for us going forward, and we've got a launch period for 2020. So a lot going on there and a lot of opportunities for 2U to continue pursuing quality at scale.

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Jeffrey P. Meuler, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [11]

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And when you do the graduate programs or the undergrad programs at lower price points, do you make up for it with lower CAC and/or increased scale that the target financial model still holds?

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [12]

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Yes. I mean if you start thinking about the -- as we scale programs to a much larger size and we have larger expectations for those programs, clearly, the students on the most outer ring end up -- from just purely from that perspective, end up being more expensive.

So I think having good geographic balance, having reasonably sized expectations, working with our partners to identify the best opportunities for a full investment program -- and we'll talk more about that over time as we develop more models for our university partners to drive new program growth. It's all about the sort of combination of the ROIC and the quality we can achieve for our partners, and we think we're on the right track here.

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Operator [13]

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Our next question coming from the line of Corey Greendale with First Analysis.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [14]

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So I'd focused on the efficiency topic. A couple of questions on the program marketing and sales. So the first is, to the extent it makes sense to sort of intentionally decrease the amount you're spending in some programs that are already in place, what kind of constraints are in place? Are there any contractual constraints on lowering that? Or for programs that have been launched in the last few years, do you have some, in any cases, performance requirements that you need to meet, certain enrollment thresholds or anything like that, that would artificially constrain what you can do on that front?

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [15]

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So here's what I'd say, Corey, is -- I appreciate the question. We -- first of all, just a general practice going forward, we're too large of a company with too many offerings to be talking about any individual university or any individual contract. We're just not going to do it. It's not wise for the company. It's not wise for the relationships. With that said, in general, that's not a concern.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [16]

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Okay. And a question maybe for Paul, which is a 2-part question. Understand and applaud the focus on efficiency. Given the fact that in the Graduate Program business, there is a 2-year sales cycle, how does that affect how much and how quickly you can effect change to make things more efficient on the program marketing side?

And secondly, I just wanted to clarify your comment about early in the 2020 planning process, but lowering the quarterly burn. I just want to make sure I understand. Are you -- I know you're not giving guidance. But are you suggesting that free cash flow in 2020 should be less negative than it is in 2019?

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Paul S. Lalljie, 2U, Inc. - CFO [17]

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So a couple of things. Let me start off by providing a framework of how we will look at the programs we launch in the coming years and going forward. We want to look at it from 3 perspectives. We want to look at it from an ROIC perspective. We want to look at it from a cash flow perspective. And we want to look at it from a quality perspective. So essentially, we're going to choose -- we're going to select programs and the timing of program launches so that we can choose programs that are reaching our ROIC targets that we have. We want to make sure we optimize our cash flows, and we want to make sure we maintain the quality of the program. So if we think of it from that perspective, then as we get into 2020 and 2021, we will launch the programs that are most impactful to our financials, particularly our free cash flow and our profitability measures. That's point number one.

Point number two, the measures that you've seen us taken in the third quarter, whether it's the restructuring charge that we've taken, whether it is the integration of the Trilogy business, whether it is the alignment of the organization, we are doing that with an eye towards improving our free cash flow performance as we get into next year and going forward.

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Corey Adam Greendale, First Analysis Securities Corporation, Research Division - MD [18]

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So I think -- so maybe you're just not answering the question yet, but -- or ready to answer the question. But is it fair to say you will plan in a way that you would expect free cash flow to be less negative in 2020 than in 2019?

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Paul S. Lalljie, 2U, Inc. - CFO [19]

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Yes. Absolutely, yes. We intend to have free cash flow, as a dilution to our cash balance, be less and less as we go through the quarters. And we will come back to you at a specific timing on when it will be accretive. So the answer is absolutely yes.

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Operator [20]

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Our next question coming from the line of Stephen Sheldon with William Blair.

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Stephen Hardy Sheldon, William Blair & Company L.L.C., Research Division - Analyst [21]

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And I appreciate all the additional detail this quarter. I wanted to ask a little bit more on the scholarship front. You've been talking about that more frequently, which I think is a great initiative. Can you maybe help frame how much you paid out in scholarships this quarter? Did that help a broader funnel conversion? And then how are you thinking about spending on scholarships as we look forward?

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [22]

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So I guess I would say we're not at a point where we're going to get into any additional detail around how we deploy scholarships, not only from the standpoint of just us, we've given quite a bit of additional clarity on this call, but also just from a competitive standpoint.

We do believe it's part of our strategy. It is clear that lower prices drive conversion, and the most successful students have a lot of options. That's just the reality across all of our segments.

I would say, notably, in the campus space, in the professional programs in particular, you've seen it be very tough sledding for campus programs right now in professional programs, given something that we're getting our arms around, the impact of the economy is having a very significant impact on campus programs overall. And our professional programs are really holding their own where we are still seeing growth. So at various stages of a student journey, scholarship becomes really important when they're high-quality students, and we have high-quality programs. So high-quality students are a factor.

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Stephen Hardy Sheldon, William Blair & Company L.L.C., Research Division - Analyst [23]

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Got it. Is it offered to both -- is it both to existing students and to those that are in the funnel?

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [24]

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Just not going to get into additional detail around scholarship.

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Stephen Hardy Sheldon, William Blair & Company L.L.C., Research Division - Analyst [25]

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Okay. That's fair. And then just as we think through kind of program launches for next year, and just with the ones that have been announced so far, is there any way to roughly frame what type of capital commitment you'll need to get those programs up and running at this point? I just -- I'm not asking for specifics. Just any way to frame it?

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Paul S. Lalljie, 2U, Inc. - CFO [26]

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So let me see if I can take a stab at this one. Look, as I've gotten up to speed here and start looking at how we're going to plan for next year, I mean I mentioned the 3 pieces that we look at. We look at our hurdle rate, we look at the cash flow commitments, and we look at the quality of the programs.

If we take 2019 as an example, doing back-of-the-envelope math, we've launched about 19 programs, and at an average of, back-of-the-envelope math, about $5 million of cash usage. If we think of 2020, we will absolutely want to launch programs in a way that allows us to have a better performance on the profitability measure. So we can pick a number. It's not going to be 19, but it's going to be something that allows us to reduce the expenditures that we spend. And on a year-to-date spend, we can look at $70 million, $75 million that we've spent so far. So if we think of that on a basis for next year, we can think of numbers, back of the envelope, around 10, that allows us to optimize that. That's point number one.

Point number two, we do have -- the business has grown. We now have the short course business, the Alternative Credential Segment that are more capital light, if you will. So we do have the alternative of launching programs across the spectrum, not only in the degree segment, but also in the Alternative Credential Segment, which allows us to optimize our performance on an annual basis.

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [27]

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And if I could jump in, Paul. I would add, we were very fortunate and excited to bring Paul in as our new CFO. Candidly, we're fortunate to have it happen quickly. And Paul has been with us a month, and I think it's pretty impressive on his behalf that he's been here a month and he's this engaged in where the business is going and getting a real perspective on us going forward.

With that said, we will provide a lot of additional detail on how we think about ROIC and capital allocation at our Investor Day. And as I said earlier, it is our goal to have that as early as possible in the new year. We just need a little bit more time for Paul to get through his process, and we're off to a great start here.

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Operator [28]

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Our next question coming from the line of Jeff Silber with BMO Capital Markets.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [29]

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Just to follow-up that last question, Paul. You had mentioned -- and forgive me if I'm putting words in your mouth, but it sounds like we're going to have fewer program launches next year than in 2019. Will we also expect the cost or the cash burn for each program launch to be less as well based on some of the efficiency focus that you have?

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Paul S. Lalljie, 2U, Inc. - CFO [30]

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The short answer is yes, and we will redeploy capital spend in -- some of the capital spend into some of the more capital-light programs in the Alternative Credential Segment. But the bottom line is we are going to look across the portfolio, applying the 3 -- the framework I mentioned earlier and then optimize the performance.

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [31]

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Just to be clear, Jeff, and we're not at a point yet where we've got or are ready to present our plan in terms of what next year looks like specifically, but we'll get there soon.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [32]

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I understand. I appreciate that. And I'm apologizing for asking this question, but unfortunately, I cut out towards the end of the call when you started to talk about some of the media speculation about the activist. I'm not going to ask about a specific investor. But having somebody or a firm like this involved, does it at least maybe change your mindset about either pursuing strategic alternatives or other options?

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [33]

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Jeff, we're not going to comment on speculation or media reports related to the company. We're focused on creating value for shareholders through creating long-term value for our partners and students.

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Operator [34]

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Our next question coming from the line of Ryan MacDonald from Needham & Company.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [35]

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Chip, I'll start with you. It's great to see the strong results in Trilogy, particularly with additional university adds. But can you talk about what you're seeing in terms of demand environment from students in that business? And then how price-sensitive do you expect that market to be now that we're beginning to see other vendors like Chegg with its Thinkful acquisition, talking about lowering prices for its boot camp offerings?

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [36]

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Well, so I feel like it is encouraging to see as -- following our announcement of our acquisition of Trilogy, many others in the space sort of jumping into the space, validating this is a bit where the puck is going.

I would tell you, our business with Trilogy is at a scale and doing it with university partners in a way that no one else in the market is doing. We think the university partners are a huge win from that perspective. To be clear, it is running above our expectations. We have -- now that we're integrating the business, we have found that there are -- there's some real efficiencies we can gain.

As we originally integrated our marketing of GetSmarter, our marketing competency into GetSmarter, we found a lot of success in not only improving scale but also improving efficiency, and we see the same thing in the case of Trilogy. We do think that there's quite a bit of expense on the marketing side that we will improve.

And on top of that, we did pull back a little bit their online offering because we obviously have a lot of experience doing online, and are excited to relaunch that here in 2020, and we think that's a really big opportunity.

And then finally, in a future call, we will talk about the enterprise opportunity. We just didn't have time on this call. We'll talk about that more at our Investor Day. But we do think enterprise as a channel is a real part of both our short course and our boot camp business, and we do think even has a role on the grad side with degrees, particularly with our LSE degree.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [37]

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Got it. And then just a quick follow-up on -- in the grad program business. It was great to see the first announced program between 2U and Keypath during the quarter. I guess given the commentary around limiting cash burn next year as we launch programs, how should we think about the role that a 2U and Keypath partnership plays in terms of additional program launches moving forward?

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [38]

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We're excited about Keypath. We think they're a great business. We've gotten to know them even more since the announcement, as you would expect. We were thrilled to have our first one. There are certainly more to come.

We do think more flexible partnership options are a reality of where we're going. We think that there are a variety of ways we can offer smaller programs that are still really high quality, and Keypath is very much part of that story. So we'll provide more color over time.

The reality is, it's a combination of sort of ROIC and quality. And I do think, ultimately, Steve Fireng and the team at KeyPath are doing a great job, and we're excited about the strategic relationship.

So more options for high-quality programs and more flexible approaches to the market is something you will hear a lot more about at our upcoming Investor Day.

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Operator [39]

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Our next question coming from the line of George Tong with Goldman Sachs.

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Blake Johnson, Goldman Sachs Group Inc., Research Division - Research Analyst [40]

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This is Blake on for George. Given the evolving competitive landscape discussed last quarter, how should we think about your steady-state program sizes going forward? I know it was 300 to 500 previously. But how do you see that range trending over time?

And related to that, do you continue to expect to see high 30% margins for cohorts older than 4 years? Or will we see that trend down a bit as some of the smaller-sized programs age?

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Christopher J. Paucek, 2U, Inc. - Co-Founder, CEO & Director [41]

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So the latter is fairly easy. We still believe we've got a great strong margin business in the grad side, and that doesn't change. Obviously, as we've discussed in the past, we have seen the overall size of the largest programs come down. As we talked about in this call, just the impact of 1 program took growth in the segment from 25% to 15%. That was a very significant part of our business.

But just to give you an example of the sort of development of the business is when we were -- when we IPO-ed the company, we had 10 programs, 10 degree programs. And today, we have 300-plus offerings across a variety of different product types. But how that's relevant to your question is, at the time we IPO-ed, 69% of our revenue came from one client. And today, we have one client above 10%, that same client, only one.

So revenue concentration risk has come way down in the company, and so this is all about the diversifying of the business. And over time, we're focused on driving quality for our partners with the best return on capital we can and approaching the market with enough flexibility that we solve the long-term needs of the university and drive high-quality student outcomes. And that's our story.

So I wanted to -- as we end the call -- that's our last question, operator. I wanted to thank Paul Lalljie for his arrival, and we're excited to get out on the road and look forward to talking to everyone in more detail over the next couple of weeks.

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Operator [42]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect. Everyone, have a great day.