Q4 2019 Earnings Call

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The only mode. After his presentation, there will be a question and answer session.

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Thank you operator, good afternoon, everyone and welcome to choose fourth quarter in full year 2019 earnings conference call on the call. We have chip Paucek, our CEO and poll algae. Our CFO following jump balls prepared remarks, we'll take questions. This call is being simultaneously webcast.

Website, where you can find her press release, which was issued after the close of market as well as our earnings presentation.

The web cast replay of this call will be available for the next 90 days our company website under the Investor Relations like.

Statements made on this call include forward looking statements regarding our financial and operating results new educational offerings.

Student, new student and University demand and other matters.

These statements are subject to risks uncertainties and assumptions any forward looking statements made on this call reflect our analysis as of today.

No plans or duty to update.

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 through year end December 31st 2018, and our most recent quarterly report Yeah 10-Q for information on risk uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements.

In addition, during today's call will discuss non-GAAP financial measures, which we believe or useful supplemental measures of Tuesday.

Non-GAAP measures should be considered in addition to and not as a substitute for more in isolation from GAAP results you can find additional disclosures regarding these non-GAAP measures.

Including reconciliations with our comparable GAAP results in our earnings press release.

On the Investor Relations page of our website.

With that let me hand, it over to Jeff.

[noise], Thanks, Ed to use starting 2020 with tremendous momentum we had a strong finish to 2019 and we're excited.

I didn't see what's happening universities are launching more with us our degree business is turning the corner. Our short course business is finding new courses and enrolling students in record numbers and our boot camp business is starting to deliver on the strategic value of our acquisition.

As we move through 2020 will improve our operational efficiency we.

Tenured realignment and sharp corporate hygiene, I really like where we're headed maintaining industry, leading revenue growth, while delivering margin improvement through the year and driving toward positive free cash flow.

All of which is only possible due to the unwavering commitment of two you employees to do what's right by our partners and their students every day.

On today's call I'll provide an overview of our 2019 performance and discuss where the business is heading into 2020.

Our CFO Paul Lousy will then walk you through our results with more detail and commentary.

Let's start with the highlights of our 2019 financial and operational performance.

So your revenue.

40% to 574.7 million, notably even without the addition of trilogy to you cross half a billion dollars in full year revenue.

On the bottom line full year adjusted EBITDA loss totaled 23.9 million, reflecting the significant investment we made and the alternative credential segment.

Through the trilogy acquisition, we added a new product line radically expanded our capabilities to meet demand in stem disciplines and more than doubled our partner base.

As I said before this was an important investment in the long term growth and market positioning of to you.

Well, let's get into our segments and how they performed in 2019.

Grad finished.

The year strong our base a mature programs drove segment profitability in 2019, our newer programs are scaling enrollments and driving revenue growth.

Well into the future University demand for our full investment revenue share model is strong and we're managing our launch cadence to optimize gross cash flow and profitability.

At all this up and we're expecting double digit revenue growth and increasing segment profitability in 2020.

Let's get into a bit more detail looking in our mature programs scaling programs and future program pipeline.

And our base of mature programs, new enrollments are stabilizing and we believe we're through the trough.

But given that revenue lives new enrollments the revenue headwinds still has to flow through the system and should have its largest impact on the back half of 2020 before stabilizing in 2021.

Despite this impact the margins in our base of mature programs held up very well at 38% as you can see in the 2019.

Cohort margin slide in our earnings presentation.

Our recently launched programs are scaling new enrollments, which we expect will drive revenue growth over the next two years.

Take a look at the 2019 list of top programs by New enrollments, which you'll also find in earnings presentation.

Last year, we had one recently launched.

Program in the top 10. This year there are two in the top five.

And each of the top 20 programs had more than 250, new enrollments raising the bar from 200 enrollments last year.

Again revenue last enrollments, so scaling enrollments in newer programs should be a revenue tailwind through 2020 and beyond.

Yeah.

Our pipeline for future programs is robust, but in order to app optimize positive cash flow with growth and profitability. We slowed our 2020 launch cadence defied programs, we expect to ramp the cadence backed up in 2021.

Let me be clear demand for our programs to remain strong.

And we love the programs, we're launching in 2020, which which leverage our competitive advantages in licensure fields.

We're expanding our geographic footprint in education, social work as well as entering into new verticals pharmacy and architecture.

This program will be our first undergraduate offering opening up the largest segment at the higher education.

Market and meaningfully increasing our Tam.

We announced an exciting development here two days ago, the University of London, and the London School of Economics in political science have agreed to expand our undergrad program from one degree and data science to includes six additional growth degrees launching in 2020 and 2021.

The expanded portfolio allows us to offer degrees encompassing the full range of LLC subject expertise, including business Economics Finance and international relations.

Looking to the future we believe our cadence for 20 Twond for 2021, well at minimum double from 2020 based on our.

Robust pipeline and our ongoing hygiene related cost savings.

Our full revenue share model is sought after by potential clients. The fact that we're offering alternatives to it and engaging partners in dialogue across the spectrum of models has had the impact of increasing demand for to you in our full model.

One node for you about university that receive some very public attention, we're committed to non talking about our clients programs in public without their expressed approval. We ask you NC Chapel Hill Kenan Flagler business School, if we can share some of their recent successes with you and they kindly approved.

As you all know this program receive lots of attention due to the.

Public nature of the school and investors' appetite for information about to you.

You can see is one of the flagship programs for to you and has been with us for nearly a decade.

Past couple of years saw new enrollment declines due to an increasingly challenged environment for business schools, given the roaring economy, and an increasingly competitive world.

[music].

In 2018, we began working on a comprehensive energize plan to reinvigorate this program, including placing some of our team on campus fellowships for students a reimagine student experience and adding into the degree some gain game changing technical courses from trilogy.

Well after multiple.

Owners of enrollment declines this program first stabilized and then began seeing growth again in late 2019.

And the best part the January cohort for this program showed 28% enrollment growth year on year from 2019, 28%.

I'm thrilled to tell you that the trilogy course has been a.

Ron and our relationship with the school is possibly the best it's ever been I want to thank Dean Doug Shackleford Associate Dean Melissa logic, and our GM might turn for their leadership.

To finish our discussion of Grad, let's touch on our long term expectations for the segment at this point, we've done a ton of work updating our expectations for the steady state.

Economics of a typical program.

We expect we expect that new enrollments will average in the mid to high two hundreds per program at steady state.

This is down a bit from our previous expectation, but still not much larger than industry norms.

The current averaged 420, new enrollments for the top 20 list gives us confidence here.

Even at these revised averages we expect our portfolio programs will still deliver our targeted margins at maturity.

Our confidence here supported by the 38% cohort margin for mature programs in 2019.

Scale helps here on a per program basis, we've seen improvements across multiple cost categories.

Over the past few years.

The investments or return cycle in the Grad business is still working and working well this will come crystal clear as the balance of program shifts from investment towards maturity and the slowing of the 2020 launch cadence will accelerate that ship.

When we report cohort margins next year they'll be 23 programs in.

The greater than four year bucket and 22 in less than two year bucket.

This is a major reason, we believe segment profitability will increase this year.

To summarize our base of mature programs delivered strong margins in 2019, our newer programs are scaling enrollments and driving revenue growth.

We're planting important flags.

Across regions and verticals with our new launches and we're managing our cadence to optimize cash flow growth and profitability. The grad business heads into 2020 with momentum.

Turning to the alternative credential segment 2019 revenue was 157.5 million up 148% compared to.

2018, primarily due to the addition of trilogy.

Well talk more about boot camps in a moment, but let's start with short courses.

Revenue grew over 30% last year, we continue to experience strong University and student demand for our short course product.

We launched 36, new courses in 2019 gross.

In our portfolio to 127 forces.

We've seen record student enrollment in courses across the portfolio and we've made tremendous progress improving our pipeline execution.

In the second half of 2019, we focus the sales process on aligning faculty members with specific courses I'm pleased.

To tell you that for 2020, we've already slotted, 90% of our planned new courses nearly the entire year is slotted what a different six months mix I'm proud of our team for this turnaround.

Most of these new courses or with some of the most recognizable brands in the world, including MIT, LSC, Oxford, Yale Stanford and Cambridge.

Longer term, we still have significant runway for expansion with those partners only one university has more than 20 courses in its portfolio. We believe we're positioned for strong performance in 2020 and beyond.

Turning now to boot camps, our acquisition of trilogy enabled us to address the student.

University and industry demand for market driven training in rapidly evolving technical fields.

That demand has fueled our boot camp proud products rapid growth since its 2016 founding trilogy has enrolled over 35000 students with a portfolio of over 100 boot camps across 49 University partners.

Last year alone trilogy, launched 43, new boot camps and piloted its six subjects fintech.

And we're off to the races. In 2020, just this morning, we announced that our newest partner, Michigan State University will launch a boot camp encoding.

The growth story here is pretty simple one.

New boot camps to existing logos to launch online boot camps for multiple subjects.

Our current portfolio allows us to run part of this.

Coating is the only subject that's been broadly deployed across the partner base. In fact, the three most recently added subjects, what you're seeing excellent conversions have been.

On should fewer than 10 partners.

The boot camp product line is crucial to the long term success of the University market and to you is now the only comprehensive provider of non degree in stem products to universities Theres plenty of runway here and we're in pole position.

In conclusion 2019 was challenging.

But last year, we took actions to deliver long term value for all of our stakeholders are grad business is turning for the better we added a product line that opens a significant new segment of the market, we more than doubled our client base and currently have a portfolio of over 400 product offerings. We delivered strong second half results and we believe we've turned the corner.

Into 2020.

Do you expect to maintain industry, leading growth, while delivering margin improvement over the course of 2020 and driving towards positive free cash flow all with a relentless focus on quality and outcomes when the student wins the University wins, and then we went and with that I'll hand, it over to Paul.

Thanks, Jeff and good afternoon, everyone.

One.

As you've seen in our announcement, we had a strong fourth quarter to close out 2019.

Revenue for the quarter was up 42% to $106 million to $3.2 million.

For the year revenue totaled $574.7 million up 40%.

Both the grad business on the.

The credentials business had strong growth year over year.

Grad business grew 20% and alternative credentials grew 38% on a pro forma basis.

Adjusted EBITDA for the quarter was a positive $5 million compared to a loss of $10.7 million in the third quarter.

We ended the year with.

$189.9 million of cash and the revenue backlog of $525 million across the business.

We are set for a strong 2020.

With momentum across the business and compelling leading indicators.

Now for a closer look at revenue.

Revenue in the Grad business.

Segment came in at $108.2 million for the quarter.

And year over year.

This was driven by a 20% increase in full course equivalence RFC, partially offset by a 7% decrease in revenue perhaps see.

As with the case last quarter the majority of the.

Decrease of revenue per se was due to a shift in mix.

Revenue in the graduated segment would have grown 19% in the quarter, excluding our largest program, which has been facing headwinds as we discussed on prior calls.

For the fourth quarter revenue in the alternative credential segment totaled.

$34.9 million, which includes $33.2 million from trilogy.

FC ease were up 6% to 2% while revenue per FC was up 93%.

Keep in mind that boot camp tuition is much higher than that of a short course, so you should expect to see revenue.

For FC continued to show significant increases until we lap the trilogy acquisition date.

Short course revenue for the quarter grew 19% year over year with sequential growth accelerating versus the third quarter.

Let's look at cost and expenses.

Net loss for the quarter came.

In at $44.6 million would cost and expenses totaling $204.5 million up 83% from the fourth quarter of 2018.

This increase includes $55.1 million of operating expense from trilogy.

$70 million and marketing and sales expense.

Related to launching in scaling of new offerings.

$5.8 million of restructuring costs.

And $5.6 million and costs related to improving our technology stack.

Excluding costs from trilogy operating expense increased 34% in the quarter.

On a sequential basis.

And excluding the impairment charge in the third quarter, we reduce cost by 6% across the board.

We reduced genie by 4% sequentially when adjusted for certain non ordinary course expense.

Marketing and sales expense came down 12% on a sequential basis.

Reflecting our.

Seasonal reduction in the fourth quarter spend as well as some new cost management initiatives.

These results demonstrate our focus on controlling costs as we continue to drive towards profitability and positive free cash flow.

Adjusted net loss totaled $11.2 million for the quarter after a.

Adjusting for $15.4 million and stock based compensation $10.8 million in amortization of acquired intangibles.

As well as certain non ordinary course items.

Adjusted EBITDA for the quarter totaled $5 million, bringing the 2019 adjusted.

Even in loss to $23.9 million.

Now turning to cash.

We ended the year with $189.9 million in cash and equivalents up $19 million from the September quarter.

This increase was driven by a reduction in accounts receivable of 51.

$1.1 million.

As we mentioned on our third quarter call, we added a threed cash flow metric to our disclosures.

This unlevered free cash flow measure is defined as net cash from operating activities.

Capital expenditures, excluding restructuring payments.

Yes.

Certain non ordinary cash payments and interest payments on net.

Unlevered free cash flow for the last 12 months was a negative $80.3 million. This is an improvement of $18.9 million from the end of the third quarter driven in part by less.

Cash used in operating activities lower capital expenditure offset by higher cash interest payments.

As I said on last quarter's call. This will be an important metric going forward.

With that I'll turn to our guidance for first quarter and full year 2020.

We expect first quarter revenue to range from $170 million to $180 million representing growth of 31% to 39%.

Adjusted EBITDA loss is expected to be between 18 and $8 million.

While net loss is expected to be between 70 and $60 million.

With adjusted net loss coming in between 36 and $26 million.

For the full year 2020, we expect revenue to range from $725 million to $750 million representing growth of 20, 630%.

Adjusted EBITDA is expected to range from a loss.

The $5 million.

EBITDA contribution of $10 million for the year.

We expect adjusted EBITDA to be positive starting in the third quarter.

Net loss is expected to be between 220 and $200 million, while adjusted net loss is expected to be between 90 and 70 million.

Collars.

Of note, we expect stock based compensation expense to be approximately $80 million and 2020. This is up from 2019 for three reasons first we are using performance based equity awards for our long term incentive award, which drives higher stock based.

Compensation expense.

Fared so our prior practice of issuing stock options.

Second we changed our vesting schedule to match market practice and third we have a higher number of plan participants year over year.

We are confident that our compensation structure is.

Yes.

It helps us attract and retain employees.

And performance based awards, but a greater percentage of management compensation address aligning favourably with shareholders.

With that let me provide some perspectives and what gives us confidence that we can target the top end of our revenue range.

And the graph.

Segment, we are encouraged by how FCS have been performing relative to budget so far in 2020.

Last quarter, we discuss the realignment of our student engagement team and I believe that those changes are having a positive impact on retention.

While we believe the grads.

Segment has turned the corner our guidance reflects the impact of some larger programs that are still experiencing enrollment declines if enrollment flattens or improves in any of these programs that could be an upside.

As chip said in the alternative credential segment.

While we are only a month entity.

Here, we are nearly fully slotted for our planned new short courses.

And from a profitability perspective, we will continue to integrate trilogy, and get smarter acquisitions, and we focus on improving marketing efficiency across the portfolio by increasing share driving self serve options.

On working on strengthening historical programs.

So to conclude we delivered strong results to close out 2019 revenue grew 42% with positive EBITDA.

On $5 million and we showed an improvement in free cash flow for last 12 months I.

And maintain.

In program quality and student outcomes, we are launching some excellent new programs into year I'm driving the company towards profitability and positive free cash flow, we have great momentum for 2020 and beyond.

And with that I'd like to hand, the call back to chip. Thank you Paul before we open it up for Q and I want to take.

A few minutes to talk about one of the core hallmarks of our business model. The institutional independence of our nonprofit University partners something that gets too often overlooked in the public back and forth about lpms in the business model.

Two things are more sacred University, then share governance and their institutional independents and respect for both of these.

Principles is central to our business model and the success of our partnerships. When you hear me say that these are not our degree programs. Those aren't just words in practice our partners exercise the same academic and governance controls over their online programs as they do for their traditional campus based degrees.

That includes seeking in maintaining.

Accreditation approval hiring paying in managing the faculty developing in approving degree program curriculum, establishing all admissions criteria, making all admissions and financially decisions and setting tuition prices.

We've always helped our partners bring the best themselves online so it shouldn't comment.

Surprised that the quality and outcomes delivered by two you power degree programs are comparable to in some cases surpass those of campus based programs.

Notably students into your power programs are more diverse than the national average and I wanted to point something about something out about our business that I think will come as this.

Surprise to many of you in 2019, we estimate that only 38% of to use total revenue as a company came from tuition payments to our partners derived from title for eligible student loans, 38%.

Hi, co founded to you on the belief that online a higher education could be world class.

And live up to its full potential by harnessing the power of great nonprofit universities as the first generation College graduates who is able to attend the George Washington University. Thanks to a federally funded Pell Grant and is a problem of the two you powered EMEA you won't see program I know first hand, the power of that transformational impact the world needs more.

Our high quality education to you and our business model are part of the solution.

And now we're open to QNX.

Thank you.

Ladies and gentlemen, as a reminder to ask the question when you could press Star then one on your telephone.

Well you questions press the pound.

Again.

I wanted to ask the question.

Please stand by will be capacity.

Our first question comes from the line of Brad Brad Zelnick with Credit Suisse. Your line is open.

Hi, This is Bob and on for Brad Chipping call Congrats on a great quarter.

I appreciate all the color information you guys.

Provided on the different segments, but maybe just superstars can you provide more insight in how we should think about graduate programs for 2020, I know you said double digits, but should we think closer to the fourq your growth rate or the threeq your growth rate.

So this is Paul Herradura there're a couple of things our guidance for the year, which is 725 to 750.

As you can see the midpoint of that range is roughly around 28% than a year over year basis. The graduate degree portion of our business is no longer 70, 580% of our total revenue as it has less than that we have significant growth coming from our alternative potential business so to some.

We're not providing guidance at the segment level, but it's a portfolio management from our perspective, where it where we're allocating our capital on a monthly and quarterly basis based on the opportunities that we see for example in 2020 were launching five programs in 2019, we launched 17.

So to some extent, we will focus our resources, where do you opportunity exists for us to hit that midpoint of that guidance range and quite frankly right now as we sit there were targeting the top end at the range, So and as it is not on.

Particularly we wouldn't be giving guidance undergrad segment already I'll turn to credential segment.

Secular and we're not focusing on any one segment, but on the growth of the portfolio as a whole thing I would add is that we're pretty excited about how we see the grad business terming.

And so.

Pleased with some of the developments in our legacy programs like we mentioned with the.

EMEA, you and see that program was.

Discussed at length, and we did get specific approval to be able to talk about it because as you know we really can't talk about our clients programs without their approval and that one the story was just incredibly encouraging about what we're delivering for students and for the school.

At this stage.

So the game a decade later.

That's helpful. Appreciate the context and the as a follow up is decided I. Appreciate the color you gave on the top 20, new programs and nice to see two new programs and there is there any common characteristics that you're seeing with some of the new programs that success is there anything underlying that we'll see in the data that.

Hey, these kind of progress can be successful.

We are in clinical fields.

We do have at this point I think a fairly large moat around the company from the standpoint of being able to build high quality.

Reeled experiences with our great partners, we think that we'll continue to provide.

Big.

These there's a bunch of verticals that we are newly entered that have these characteristics. So we have one one psychology program. We have one physician assistant program. So theres a lot of opportunities for us to expanding the verticals that we're clearly winning and then in some of the other verticals you've got.

The complexity of a really strong economy that does tend to make it harder road to Ho on programs like business programs, but I'd say, we're actually hold our own quite a bit so planning the flags.

In regions, where we are underpenetrated is pretty important.

Thanks, Congrats again.

Thank you.

Our next question comes from Atlanta, Ryan.

Mcdonnell with Needham Your line is open.

Hi, Thanks for taking my questions I guess first.

I want to if you could double down or talk a little bit more about the dynamics that you're seeing within the different cohorts I guess, if we're looking.

And yet on a year over year basis.

When we look at the three to four your core forward in the greater than four years.

Slightly less profitability I guess in those core.

Did you see I guess or impact outside of perhaps issues that you kind of dealt with throughout the year that that sort of.

Maybe less than one expected.

Ability thanks.

Brian do you mean in the greater than four years, we actually saw greater than expected profitability.

So I just want to correct.

Just comparing to the year over year it looks like in the greater than four years, you're at 38% this year versus last year I think it's at 42 anywhere.

Yes, but.

We've always.

As we mentioned last year, we think it's really important that you think of the that mid thirtys as our expected target we did say.

Do you expect not to expect.

The margins to be in the fortys longer term.

I think as you know.

We had some.

Really significant notable decreases that were well talked about AD nauseum in some of our larger programs. So we were pretty excited about the fact that the core business model not only held up but was stronger than our long term target.

Got it got it Okay and then we also had some good movement between the.

Other cohorts. So you can see that some of the other cohorts moved in a positive fashion and at this point, we feel very strongly that the grab business will continue to deliver strong margin as you shift to the balance of the programs.

From newer to.

Sure.

We should see that impact the total amount overtime as well and pretty encouraged by that.

Got it and then I guess switching to the the new announcement with University of London, and the expansion there for additional.

The Koreans within that program can you talk.

About the dynamics of what you're seeing with launching an undergrad program and multiple degrees on that and how that compares to launching.

Graduate programs. Thanks.

So it is the same you are the same model our business, we deploy what we deploy across to you unless a comprehensive platform to build deliver and.

Port World Class higher education at scale and nothing to define scale better than undergrad, it's something we've.

Taking our time to find the right program to enter into Fabulous opportunity with.

Two of the best brands in the World.

We think of it internally like larger Grad program.

It should be larger than a normal grad program, but the reality is when you look at the opportunity. If we were thinking about this like a venture backed company, we'd be talking about tens of thousands of students. It's a it's a really big market.

It's an incredible brand you've got from a capex standpoint.

You got a reasonably ring fence sort of size given that it's all within business and as you know businesses.

Incredibly sought after at the undergrad level. So this was an opportunity to work with the school that had an existing program that they really wanted to bring into our format.

They became convinced that retention.

As we did that we think retention will be able to drive higher.

And the other thing I would say encouraging about this is not just the sheer size of the opportunity, but the confidence of the partner given how spectacular the LSC short course experience.

Has been.

It's been a great experience with LSC on the short course side.

And it has been worldwide experience so that.

The LSC legacy and brand is clearly a worldwide brands in a way that candidly surprised us so we really.

Love that we're entering.

With University in London, and the London School of Economics, the largest part of the market. If you think about in the U.S. graduate Education is 80 billion Undergrads 550 in total so it's just a much much bigger market.

So we're going to be careful and launched this.

In a high quality manner, and not do a ton of them before we.

Get our legs on the opportunity, but it is hard to overstate how excited internally we are about this whole initiative.

And marketing.

Many of you have folks that are interested in undergrad you can find.

Our pages lives and we've already got great.

Great interest from consumers. So I would encourage you to send people to the website and become prospect.

Thank you.

Our next question comes from the line of Sheldon with William Blair. Your line is open.

Hi, Thanks.

First can you talk about changes to the graduate programs selection process that you've made since mid 2019 now that now that you slowed program launch and launches and have had to become a little bit more selective what are they kind of the main factors, you're thinking about as you choose which partners and which.

Graham to launch and what effect is that have on you're negotiating leverage.

So you can think about it in sort of three three.

Almost like a triangle return on invested capital quality growth.

We want all three.

The reality is you've got.

Disciplines that were really Underpenetrated, where we are winning and winning in a way that.

Is.

Not just defined by what it does financially that people on this call get excited by but what it does for the student and the University.

And we do expect to.

Can you expand.

In the verticals, where we're seeing traction.

And you know we've always been selective about what we run.

And you are correct that we did slow the cadence.

You can think about it a little bit like in 2008 in 2012.

We took a break.

And it.

Probably the most important thing we did that early venture backstage.

In this case, we're slowing it's not a pit stop.

And we do expect to ramp back up in 2021, and right now have not only ample opportunities, but many that are at the late stage of the process. So as we've gotten more efficient about how to launch these programs.

We do like the idea of fueling that efficiency into a broader portfolio and ramping back up the cadence.

In 2021.

So we have a bunch programs already slotted for 2021 in a meaningful way.

So.

I think it's important that we.

Not only think about the return to you, but the return to the University and the benefits to students.

Got it okay. That's helpful.

On and then just a second on the commentary for adjusted EBITDA to become positive in the third quarter I just wanted to make sure I understood. The implications there is that just meant to say.

The quarterly EBITDA will be positive over the remainder of 2020 or does that comment also extend.

Beyond 2020, it into 2021 is we think about absolute profitability based upon what you can see at this point.

So a couple of things I think the comment was meant to say that we are actually hitting that.

Also for point and hope to maintain that as we go forward here from there on out of course, we're only given guidance for 2020. So for now that will be a 2020 number but the bottom line is.

Q1 is normally our biggest expense quarter, and our largest capex quarter and when we crossover in Q3 of 2020, we hope to maintain.

That going forward into perpetuity not just for 2020.

Yes.

Great. Thank you.

Thank you.

Our next question comes from the line of Jeff Silber.

Capital markets. Your line is open.

Thanks, So much just wanted to follow up on that last comment about the hopes to.

We maintain the adjusted EBITDA perpetuity.

I guess.

Most folks we're thinking given the step back I guess in 2020 with the program launch and maybe re accelerating it next year that might be tough to do can you give us. Some examples how do you think you'll get there.

So a couple of things the.

2020 spend for US is based on the launches that we made in 2019 to 17 launches that we made in 2019. So that is factored into our calculation number one number two in every given calendar year. We have the launches that we have for that period and then we also have layered on top of that launches that are going to be it in that.

Current calendar year. So for example in 2019, we had 2018 launches and 2019 launches compounding effect in that fiscal year 2019, and 2020, we are going to have the runoff. The 2019 launches on our compounding effect is only five forces for 2020. So that is one thing that will contribute.

Right there on particularly the sales and marketing line in the technology to curriculum and support line.

In addition to that as we exited 2019, we talked about $12 million of run rate expenses as of the third quarter earnings call. We had already made adjustments for as we got into Q4, we continued with cost.

Cost management programs, particularly led by our Chief operating officer, Mark churn, if and he has continued that process. Instead of planning process were 2021, and we expect to see benefits from that as we exit 2020 2019 into 20 and into tiny tiny once we expect to have more reductions in our run rate expenses.

Yes, Jeff the slowing cadence is to our benefit there on the bottom line, you've got a higher number a mature programs that start to just throw off the margin and as you as as you have that balance move.

I think people probably forget a little bit just how many we launched in 2018, we ended 2000.

Many 19, we launched a lot of programs 31 in that that time period.

So just compare that to.

Back in the day, we were launching four or five a year.

It was a lot and it has a very positive impact on growth because you get a lot of new enrollments for those programs.

Allows us to get through the trough of some of the challenges that we had in our in some of our more historic programs and on those programs you might have heard Paul mentioned that if we can see some of those turn to the positive the way EMEA UN see has.

We like what that means for the segment.

So.

We're not we're certainly not at a point, where we're thinking of older programs as.

We're not working every day to try to make them as good as we can and.

That MBS you won't see story it shows that by working together with the school.

It's pretty amazing what we what we were able to achieve in that particular.

Color case, so I'd like our odds of being able to continue to improve all of the programs that are in that greater than four year bucket.

All right that the scraped and I apologize to shift over to were regulatory issue, but.

I guess, a number of weeks ago, there with the publicized letter from a couple of senators.

To your company and some of the others in this space I guess they were quite a quick questioning the business practices of some of the Opn I don't know if you've had an opportunity to respond publicly to that I'm just wondering if you'd like to do that now thanks.

Thank you, Jeff we are in the process of responding to the senators.

And.

We.

Really like what we have to say, we think our business as you heard me mentioned.

At the close of our remarks.

Institutional independence in our case couldn't be more relevant to the entire story of two you not just legally but philosophically. These are their approach.

Grams and the decisions that they are making every day.

Drive the the business and drive.

Their opportunity along with us.

We do talk to our partners all the time, we're excited about.

What we have to say with.

Hard to the power of the business the business model.

Then in the states of those two particular senators. So as an example, Simmons has 96% board pass rate.

In that discipline, if you pastor boards its.

Thats nursing, sorry, incredibly strong opportunity for.

The folks that pass their board, it's kind of a life changing experience so.

We will we're very comfortable with our answers.

And we do expect a positive dialogue on a go forward, that's really more than anything about transparency and if you look we did.

Now I.

Six months ago I'm for you forgive me if it was.

I forget exactly what month it was.

But before all of this.

We announced a.

We think the industry, leading transparency framework that.

It has great opportunity for the rest of the space and for.

To you to be able to show people.

How high quality, what we're doing is and what the results are.

So ultimately.

Well timed.

And even more important given some of the questions, but I would tell you that.

The story here is.

Supporting our great partners to do what they wake up every morning, and do which is drive high quality student outcomes for students in all kinds of different disciplines.

Across.

Literally at this point now 70, plus total partners.

So.

More to come on this overtime.

Okay. Thank you so much.

Thank you.

Our next question comes from the line, Jeff Miller with Baird. Your line is open.

Yes. Thank you in terms of the guest decision to launch five.

Degree programs in 2020, and then separately.

Back up in 2021.

But to around 10, or so can we read into that like is there any sort of.

Management intention to.

Make EBITDA or free cash flow positively.

Advance year to year to year.

So the dialing it back.

Five is that to show improvement and then you still do a kind of a measured pace of improvement in 2021 is there some plus.

Kind of financial.

Something that we could take away that we should expect continued EBITDAR for cash for improvement beyond 2020.

Well I think there are a couple of things.

Number one that gives us an opportunity to.

Work on the run rate expenses in each of our cost categories as we get into 2020. The budget process was one where we did not just think the exit rates out of 2019 and applied into Twentytwenty for a number of programs.

We launch we try to integrate the three businesses that we have we tried to do things more on a consolidated basis on most importantly, our objective is to make sure. We have an organization that is nimble flexible and at the same time deficient.

Launching five courses next year it allows us to be selective.

It allows us to make sure that we have.

That makes sure ensures that we have the ability to evaluate programs around across the prism the that chip spoke of earlier, which is.

Return on invested capital, making sure we have the quality of programs, making sure. We go into verticals, where we have advantage.

And then at the same time, making sure that we maintained the quality.

All of these things allow us to have.

And access to capital because our mature program cohorts becomes larger overtime and that allows us to naturally generate better margins on at the same time allow us to manage the business the fish.

Secondly, and BC linked selective into programs that we launch we are not stopping or slowing our cadence because we don't have demand we have strong demand and we are we're doing this in an effort to become a.

Scalable larger and more efficient company as we go forward.

In addition to that.

The timing of free of doing all of this allows us to bring the company back the free cash flow as we exit 2021 exit 2020 and get into 21, we're highly confident that the program that we are on will allow us to exit 2020 on a path to cash flow.

Question into any to anyone.

Okay, and then just maybe a broader question on what you're experiencing in terms of marketing efficiencies. So I guess deals LTV to CAC question, but you stepped up marketing spends.

Probably a year year and Africa go and then I think dial that back and you're talking.

Nothing about smaller average size program so.

And then I guess you have to the various acquisitions and business lines, which are integrating.

So just what are you experiencing in terms of marketing efficiency have you now kind of dialed back the budget to take out what you you.

These are things working stable in terms of marketing efficiency at some of the more seasoned programs et cetera. Thanks.

Yes.

Jeff we things are looking stable.

And I would say the clearly given some of the challenges that we've talked about over 2019.

Marketing has been I understand why you're asking the question reasonable question, we feel very confident that we are getting.

Some really strong sit scale benefits across the other cap cost categories, and if you look on a vertical basis.

Many of the verticals that we're entering now.

Or that we're building programs and now.

We're pretty excited about what they look like from the from the standpoint of.

Marketing efficiency.

Separately the amount of work going on from our senior team.

You know, including our new CMO, Jennifer walked in Reais to.

Five improvements.

Across the marketing funnel by using AI by using more self serve options by.

Using the benefit of share.

So.

We feel like the headwind that we had from is still there from a revenue.

Endpoint, but we really like what we're starting to see on the enrollment side and you heard Paul mentioned that.

The movement of the student engagement team together, we think is actually already paying benefits on student retention and there's nothing that makes us happier than hearing that student retention improves because it is.

Is the most important number.

Because it drives the student outcome and also drives our business model. So.

Pretty excited about some of the things were seeing right now.

And it's nice to have a call with all of you that we're excited about.

Thanks, Jeff.

Thank you.

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

Hi, Thanks. Good afternoon, you plan to Reaccelerate the rate of your Nucor's launches in 2021 to about 10 from five in 2020, how do you internally think about.

The way you target, but pace of Nucor's launches is it the.

Number so is it.

10, 10, or if it really a percentage growth off of the prior year.

But really determines the blueprint for the growth algorithm of your graduate degree program.

I think George you have to think about it in with regard to what we talked about before sort of.

The return on capital quality.

Okay and growth and then we are being.

Very thoughtful about the overall balance for to you the overall pace and driving the free cash flow and I thought what Paul said, a moment ago about what we expect in 2021 is pretty meaningful.

Yes, George I mean.

For us we've been in.

We've been operating for long time now number one number two we are company of sides $737 million revenue on the topline and the third piece as it's a series of J curve and.

No.

Becoming cash flow positive with the capital intensive business is important for us so that.

Something that we balance as we go through this and with the prism that chip and I spoke of earlier, the ROI seem to quality into growth I think it gets us there so free cash flow crossover in fiscal year 2021.

Got it that's helpful and then switching gears to margin, obviously, but the pace of new program launches.

The key role in in your EBITDA margin performance.

Side, the mic and the pace of new program launches are there other internal initiatives or levers that you have that can help drive EBITDA margin expansion.

Yes, there are there are several initiatives internally.

If you think of operational efficiencies, whether it is the integration of the of the acquired assets, whether it's the trilogy.

Acquisition and.

Having a consolidated back office.

When we think of how we do procurement in the organization on how we do that more efficiently.

I was on the centralized basis or on a geographic basis.

We also look at it from the perspective of how can we managed to organization more efficiently with the use of technology and also with the use of.

Management techniques as we go forward. So it's a it's a broad spectrum I mean, I'm not going to get into the details of what each of these.

I'm, sorry, but it's at the normal breadth of activities that you would go through an organization that has grown rapidly when you grow rapidly youre focused on the topline growth what we need to do know its consolidates become efficient. So we can now scale going forward and the organization as well on its way to do that.

George what I would say also.

We are you can hear it in our comments.

You can see it in the results we are definitely focused on improving the bottom line not just the top but I'd like to reemphasize that we do have market leading growth.

This is still an incredible growth story across the business and I hope it is now up a bit more.

Obvious to everyone the sort of strategic rationale for some of these moves we've made.

Sure course business and the boot camp business are both important to the future of the University and they're driving real results for Q U.

Pretty incredible to see in six months, what we've done just on the short.

Of course side as an example, so.

We are balancing growth and profitability, but let's not forget that we still lead the market here.

Got it very helpful. Thank you.

Thank you.

Ladies and gentlemen.

I would now like to turn the call chip.

Well.

Closing remarks.

Thank you everybody we appreciate.

We will see you out on the road take care.

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