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'We’re removing the stigma of online education long term': 2U CEO

2U CEO Chip Paucek joins Yahoo Finance’s Zack Guzman to discuss the company's third-quarter earnings report.

Video Transcript

ZACK GUZMAN: Welcome back to live market coverage here on "The Ticker." We've been focusing in on some of these businesses that have seen their, I guess, customer demand completely change here in 2020. We've covered that with Zoom and the way that everyone shifted to the work from home environment.

But education also undergoing a similar shift. We highlighted that with the company, 2U, which, for more than a decade, has focused in on education technology and worked with universities to build and support that shift to online education.

The company just reported its third quarter results earlier this week, showing that revenues of $201.1 million were displayed in the corner. That was a 31% jump from the year ago quarter. Also adjusted EBITDA, a total of $3.7 million. That was an improvement from the $10.7 million of adjusted EBITDA loss the company reported in the third quarter of last year. So a lot going on here, continued growth.

And here to discuss that with us is 2U's CEO, Chip Paucek joins us now. And Chip, welcome back to the program. You know, we talked about the setup to this earlier in the year. It sounds like you're continuing to see that shift. So what played out in the third quarter to bring that 31% growth across all your segments of the business?

CHIP PAUCEK: So Zack, we really had a great quarter. So we partner with top nonprofit universities to deliver really high quality online education, graduate, undergraduate degrees, technical boot camps to reskill and upskill people, and short courses where you might want to learn an individual skill or learn more about leadership to further your career goals.

And, you know, across the business, we saw organic growth increase. Our degree business organic growth rose. Our short course and our bootcamp segment, which we call alternative credentials, we saw pretty stunning growth. So 57% growth in the quarter in that particular segment.

You know, right now, people are looking for opportunities to reskill and upskill themselves, given what is clearly a challenging economic environment created by COVID. So these great short courses, they're six to eight weeks to allow you to learn a skill, whether it be blockchain or leadership or sustainability, to drive your career forward.

And then on the bootcamp side, you're talking about technical boot camps ranging from big data to coding to fintech to really advance yourself in your career on a go forward basis. And people were really seeking them out. So we-- thanks for having me on. We had a great quarter.

ZACK GUZMAN: Yeah, and speaking-- I mean, you were saying that you were surprised to see the stock market reaction here. Of course, we had a lot of broader market news after you reported it. But shares were down-- shares have been down. When we talk about the growth here, though, it's something we talked about last time in terms of you kind of rightsizing the investments into the opportunity right now.

Of course, you guys returned to giving a guidance, which is not something we've seen a lot of companies do. But for the full year of 2020, you said the net loss is going to range from $225 million to $210 million there. So talk to me about how you're positioning that and where you're seeing profitability play out here as revenue continues to grow.

CHIP PAUCEK: Well, we have been focused over a multi-year period here of driving towards free cash flow generation, driving towards profitability in both our original business, which was the degree business, and our short core segment and our alternative credentials overall. If you look at the quarter, 31% revenue growth in the quarter, 13% expense growth, and rapidly approaching that sort of free cash positive turnover-- crossover, excuse me.

So we feel like real progress on the side of our overall portfolio management. Our degree business has a deeper investment cycle and creates a longer term revenue stream for each individual degree because we partner with a great university and share tuition revenue over the length of a long contract. It requires a larger investment, whereas our short course and our bootcamp segment is a smaller investment profile.

So balancing that agenda with sort of a focus on profitable growth has been a key component of the company's strategy. And we thought we really demonstrated that in the quarter. So if you look at our guide, guiding to 34% at the midpoint of the range, but also guiding to not just a positive EBITDA quarter that we had, but that continuing on a go forward basis.

So we feel like we've got great momentum. You know, we just passed 275,000 learners. So we feel like the momentum is on the side of helping people reskill and upskill themselves in an economy that they clearly need, whether it be something like an undergraduate program, which is new for the company.

And if you look at the economic impact of COVID, there's no question that people with a high school degree are suffering at a higher rate compared to people that have a college degree. So, you know, the notion of both short courses, bootcamps, and high quality degrees allows us to be the company that can meet the learner where the learner is with a great nonprofit school.

ZACK GUZMAN: Yeah, when it comes to that, I mean, last time we spoke, it sounded like demand was off the charts when it came to talking to those major universities, trying to shift some of their things online. I think you said you talked to more universities and reaching out than you had before. Are you seeing that maybe wane as universities plan for opening up back on campus next year? Are they still very worried about where cases go from here?

CHIP PAUCEK: No, I actually think regardless of how many cases in a current month, I mean, obviously, we're all living through something that we've all never lived through before. And it's really challenging. Universities are now thinking about the long-term. We're finding that we're in more conversations.

One of the things we said on our call yesterday is undergraduate education is definitively not only a very large opportunity for the company. It's the largest part of the higher ed marketplace. So you think about the US alone is about $550 billion in total spend in higher ed, 80 of which is grad, the rest of which is undergrad.

And we have two great undergrad announcements. One of the things we announced yesterday was the London School of Economics and University of London expanded our partnership to include now a bachelors in mathematics, as well as a bachelors in finance, two new-- really, the entire portfolio for LSE.

And I would say, Zack, we're seeing a significant uptick in conversations with universities about fully online undergrad from schools that you wouldn't expect. LSE is one of the best brands in the world. So we do think we're removing the stigma of online education long term.

ZACK GUZMAN: Yeah, and just one last question, too, for you because this is-- if I had to pinpoint one thing that maybe pressured shares a little bit earlier before the earnings report, back in August, you guys issued 6.8 million shares in a follow on offering there, to raise cash. Now you have quite a bit of that on your hands, now almost $500 million as of the quarter end.

So when it comes to that, I mean, are you looking to do that again? Because maybe that could be one fear out there for investors looking at a younger company chasing opportunities here. So what would you say on that front?

CHIP PAUCEK: You know, I would say the balance sheet's in a great spot. One of our goals going into the year was substantially improve the liquidity of the business. We've done that. We removed the debt that we had from an acquisition we made last year. And we've got the company in a spot now where we have the flexibility to do what we need to do.

You know, we've made a commitment to investors that we're focused on profitable growth. And we feel very comfortable with that commitment. So, you know, all in all, if you look at the positioning of the company, we've got everything we need. And we're at the nexus of, in many ways, the future of work and the future of education coming together.

You know, at this point, we are the largest provider of alternative credentials really in, we think in the United States. And people need to reskill and upskill themselves. And we feel like we're at that sort of nexus. And working with a great non-profit school on digital transformation-- you know, people in the old days about 2U would have called us an online program manager. We think that's a pretty quaint term.

Like, you know, we help a university transform themselves for great digital options for people to advance their careers. And, you know, today, we've got the balance sheet. We've got the momentum. And we've got the great partners to be able to really go after that opportunity in a big way.