Q4 2020 2U Inc Earnings Call
Excuse me. This is the operator todays conference is scheduled to begin momentarily until that time here and I have to be placed on hold and thank you for your patience and please continue to hold.
[music].
Yeah.
Ladies and gentlemen, thank you for standing by and wealth.
From to the two U for Q 'twenty earnings report call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session fast flow question. During the session you will need to press star one on your telephone if you require any further assistance. Please press star zero.
I would now turn the conference over to Mr. Ken Golf S V. P of Investor Relations. Thank you. Please go ahead Sir.
Thank you operator.
Good afternoon, everyone and welcome to to use full year and fourth quarter 2020 earnings conference call.
And Ken <unk> Senior Vice President of Investor Relations at two years.
I'm joined by Chip <unk>, our co founder and CEO and Paul <unk> our CFO.
Following chip and Paul's prepared remarks, we will take questions, our Investor Relations website investor Dot two dot com as our earnings press release, and slide presentation as well as a simultaneous webcast of this call.
A webcast replay of this call will be made available for the next 90 days.
Statements made on this call include forward looking statements regarding our financial and operating results. The continued impact of the COVID-19, pandemic, new educational offerings student and University demand and other matters.
These statements are subject to risks uncertainties and assumptions and.
Any forward looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them.
Please refer to the earnings press release, and the risk factors described and the documents we file with the Securities and Exchange Commission Inc.
<unk> our annual report on form 10-K for the year ended December 31, 2019, and our most recent quarterly report on form 10-Q for information on risks uncertainties and assumptions that may cause actual results to differ materially from those set forth and such statements.
In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of to use 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 and our earnings press release and on the industrial relations page of our website with that let me hand, it over to chip.
Thanks, Ken.
Want to start this call by first thanking my fellow to use all around the World 2020 presented us all with unprecedented complexity and our global team rose to the challenge again and again to deliver on behalf of our partners their students and each other.
True at all their hard work resilience empathy and humor was truly inspiring and is made to you are stronger and better company.
And that strength is clearly reflected in the financial and operational results, we delivered for the year.
We grew revenue by 35% to $775 million and we achieve EBITDA profitability for the year coming in and $16 1 million.
We set out at the beginning of 'twenty and 'twenty with for key financial priorities for the business.
Drive strong revenue growth from <unk>.
Deliver margin improvements and improve operational efficiency and drive toward positive free cash flow.
We outperformed expectations across all three all of these important measures all while staying hyper focused on quality and most importantly student outcomes and we enter 2021 and a position of strength and with the momentum for another great year performance and positive societal impact.
We understand that as a disruptor the burden of proof is on us to demonstrate that the business. We built is sustainable.
We never doubted it and that chapter should be closed for the rest of U as well.
I think it's clear that 2020 results provide many compelling proof points and with each passing quarter, we expect to add more.
You'll hear more on this from Paul So I'll now turn to what we're seeing and the marketplace.
Earlier. This year you heard me talk about the structural changes and challenges facing higher education.
As the institutions grapple with a digital transformation imperative.
And imperative to be clear it was at their doorstep, even before COVID-19.
Since the start of the pandemic pandemic, we've seen this drive a clear increase in pipeline and conversations with existing and prospective partners.
Universities understand that online is here to stay and must be part of their broader institutional strategy now and for the future.
We hear three common and interconnected emerging from our conversations for.
<unk>.
Focus on better serving non traditional working adult learners, who are looking for both degree and non degree offerings across their careers and lives.
Second pressure to identify new and sustainable revenue streams at the same time institutions are facing inescapable budgetary and investment constraints.
And third growing demands oncologists and universities from business and government to do a better job aligning.
In demand jobs, and creating career focused upskilling and reskilling pathways.
We believe these three themes reflect structural changes already happening and the market that will continue to shape the higher education landscape long after COVID-19 is under control.
You can already see them playing out and some of our recent announcements.
Take our new partnership with Morehouse College, one of the most respected and iconic HBC use with an unmatched 154 year legacy of excellence and educating black men of integrity and character.
<unk> House, President and David Thomas has a clear digital transformation and vision for the college with a focus on better serving non traditional adult learners.
And our new online undergraduate degree offerings represent the foundational building blocks of that vision.
As President Thomas said, and the net and announcing our partnership last week quote Theres never been a more important time for the impact of Morehouse just scale and quote.
And he's right.
And according to the census Bureau, there are over 3 million Black men and the U S. For some college credits Morehouse online will now offer the market a flexible affordable and academically rigorous degree completion program from an institution with and unrivaled track record of positively transforming the lives of black men.
And if that doesn't give meaning to our mission of eliminating the back row and higher education, and then I don't know what well.
But when it comes to undergrad, our partnership with Morehouse College as needed the beginning nor the end of the story for two U.
It took us over a decade to enter the undergraduate market, which is more than six times larger than the graduate market.
And in the past 14 months, we've already signed Simmons University, The London School of Economics, and now Morehouse three great partners keep an eye out for even more to U powered undergrad offerings.
As more and more universities move to embrace online as part of their digital transformation strategies one of the challenges. They will face is deciding what degree and non degree programs to launch.
And in an increasingly crowded online marketplace, where schools are constrained by tight budgets and limited investment dollars. These can be high stakes decisions getting it wrong can result in significant financial and Reputational risks through a school as reflected in the recent burning glass report bad bets the cost of failing programs.
One of the underappreciated capabilities, we bring to the table beyond just investment capital is and unmatched proprietary dataset that helps our partners make well informed choices about the right programs to launch which is now more important and other.
Finally, before turning it over to Paul I want to spend a few minutes talking about our alternative credential segment.
These offerings are not only delivering impressive growth, but also meeting critical societal needs.
Even before Covid and the demand for non degree career focused skill base post post secondary education was growing rapidly.
The economic toll of Covid, particularly on women and black and Brown communities has been devastating only furthering demand for these kinds of alternative credentials.
Even workers, who were able to remain employed during the pandemic have seen their company's rapidly pivot to digital and embraced E commerce and order to survive.
So these workers also need to learn new skills to stay relevant.
Our growing portfolio of short course is focused on functional and leadership skills as well as emerging and disruptive technologies is purpose built for this.
Our newest short course partnership is with the Institute for management, and development, and Switzerland, or IMD announced earlier this week.
This is the latest example of the growing strength and international reach of our alternative credentials business.
We couldnt be more thrilled to team up with David Bach Dean of innovation and programs from IMD, one of the world's top ranked and most respected business schools to offer short courses in cyber security and supply chain and other timely and relevant subjects.
It's clear there's no silver bullet for solving societies growing workforce skills gap.
But we believe the unparalleled reach and scale of our global offerings and network of Tech skills based boot camps will allow to you to play an important role and helping solve this problem.
In 'twenty and 'twenty alone more than 20000 students enrolled into U powered University boot camps and today, we powered boot camps in eight different career relevant subjects coding data analytics UX UI Cyber security Technology project management, Fintech digital marketing and.
Management.
And across our portfolio, we now support boot camps at 44 different universities in 28 states covering more than 75 per cent of the total U S population.
We're also providing comprehensive career services and an industry leading scale over.
Over the past 12 months, our workforce engagement team has hosted more than 750 job related events and spent 22000 hours supporting job seeking students.
We also provided students from our boot camps over 11000, and free job referrals to our growing network of more than 6600 employers.
But helping close the work force skills gap isn't just about power and quality programs and career services at scale. It's also about creating more accessible and affordable offerings that foster greater equality of opportunity.
And we're finding innovative ways to do just that.
Whether it's our $3 million scholarship program, which has already reached over 1000 students since its launch in June of last year.
And our groundbreaking collaboration with Netflix and Norfolk State University, where our more recently announced access to education and scholarship fund a private public partnership with employee Prince Georges Our local Maryland work Force organization, and George Washington University.
We're breaking down historical barriers and creating pathways into well paying in demand jobs for women and minority communities.
We believe these kinds of Reskilling and Upskilling partnerships between higher education business and government are both scalable and sustainable across urban and rural communities and.
They also represent the kind of smart policy solutions, we need to get millions of Americans back to work.
So we look forward to working with governors as well as the new Congress and by day Ministration on a bipartisan basis to support expansion of funding for these and other higher education initiatives.
As we kick off the second month of 'twenty 'twenty, one I'm both realistic about the difficulties. We all continue to face as a result of the ongoing threats posted by Covid.
But at the same time deeply optimistic about the positive impact to you can have on the lives of people, who choose education and the step forward on their path to a better future.
With that over to our fine CFO Paul lousy.
Thanks, Chip and good afternoon, everyone.
And as you've seen from our press release, we reported a solid fourth quarter capping off a record year of revenue and a return to positive EBITDA, all while investing for sustainable growth today.
Today I'd like to start with a discussion of our performance both for the quarter and the year.
And then I'll provide an update and our balance sheet and conclude with our outlook for 'twenty and 'twenty one.
Now turning to our performance for the quarter.
Revenue totaled $215 $3 million up 32% from a year ago and.
A degree segment revenue totaled $135 million growth of 21%.
This increase was driven by higher student demand and improved retention rates.
Revenue and the alternative credential segment totaled $84 $8 million growth of 54% net.
This includes $52 $8 million from trilogy, which grew 59% while the short course revenue grew 47 per cent.
Growth in this segment was driven by new launches and improved marketing efficiency.
Revenue for the year totaled $774 $5 million and increase of 35% or $200 million over 2019 on an organic basis. This represents growth of 21%.
Last year, we refined our processes and delivered new offerings, along the career curriculum continuum and.
And invested in our platform to meet changing needs of learners.
It's these structural changes that position us to deliver sustainable growth and the future.
And put this into perspective for 2020, we enrolled approximately 99000, new students on behalf of our partners representing growth of 45%.
While this contributed to our 'twenty and 'twenty performance. These new students will also drive revenue and the future as enrolled students complete their programs.
And the degree segment for example, students typically take more than two years to graduate.
Total full course equivalent enrollment.
Our ftes came in at 80006 hundred 15.
FTE growth accelerated due to strong performance and our mature graduate programs and undergraduate and and our Reskilling and Upskilling courses.
Now, let's take a look at our cost and expenses.
Operating expense for the quarter totaled $245 $3 million.
A 20% increase from the fourth quarter of last year and compares to revenue growth of 32%.
On a sequential basis operating expenses for the quarter decreased one percentage point.
Due to seasonally lower spend.
And in particular, we tend to reduce marketing spend during the holiday season, when it's less efficient net.
This drove an 8% sequential decline and marketing and sales.
On a year over year basis, marketing and sales expense and 13%.
Showing substantial leverage relative to revenue growth.
Yeah.
For the full year operating expense was $953 $5 million growth of 16% versus 2019.
Marketing and sales as a percent of revenue decreased nine points and 2020.
While there are a number of puts and takes overall this demonstrates scaling marketing infrastructure and more efficient direct marketing spend.
Net loss for the quarter totaled $37.7 million compared to $44 $6 million and the prior year driven by revenue growth and lower interest expense.
Adjusted EBITDA totaled $18 $8 million and increase of $13 $8 million from the fourth quarter of 2019.
And a full year basis, adjusted EBITDA totaled $16 $1 million.
One of our main goals and 'twenty and 'twenty was to reach EBITDA profitability.
We exceeded it significantly and we are confident that the strong revenue growth and the scaling of our infrastructure will support margin expansion going forward.
And it research and profitability margin was 10 per cent per year in nine point improvement over 2019, driven by strength and mature programs and marketing efficiency.
The segment profitability margin pretty alternative credential segment improved seven points from last year to negative 12% as we integrated trilogy, and invested and launch of new market relevant offerings.
Now for a discussion of the balance sheet.
We ended the quarter with a cash balance of $518 9 million and increase of $19 $3 million from the September quarter.
This increase was driven by operating cash flow of $36 $5 million and.
Adjusted EBITDA.
And the typical seasonal benefit and net working capital and.
These benefits were partially offset by $17 million and capital expenditures.
Unlevered free cash flow usage, and a 12 month basis.
It was $3 $7 million and $6 2 million improvement from the third quarter.
Improving cash flow is a top priority for 2020, and we made significant progress throughout the year with a $76 $5 million improvement compared to 2019.
The increase and cash flow was driven primarily by a $40 million improvement and adjusted EBITDA.
The network and management of net working capital and a $9 million decrease and capital expenditures.
We expect continued improvement and cash flow and 2021.
But it's worth noting and this is not expected to be a straight line.
For example, and this first quarter, we should see the typical seasonal increase and expense and net working capital.
Accounts receivable was $46 $7 million at the end of the year up $13 million from last year.
Of note 90 per cent of the accounts payable accounts receivable balance is current.
This increase in accounts receivable was offset by $43 $4 million and accounts payable and accrued expenses and a $26 $7 million increase and deferred revenue.
At the end of the fourth quarter, we had outstanding long term debt of $273 $2 million for.
Fully related to our convertible notes of April 2020.
Now for some thoughts and our 'twenty 'twenty one guidance.
Over the past three quarters, we have repeatedly discussed the strong demand and we've been seeing.
We're continuing to see this strength across our University partners, our students and our enterprise clients.
As you've seen in the past few quarters for a degree segment slowly build up momentum.
And by stability and our older programs and growth.
And with an hour and newer launches, particularly in non the graduate.
We also have good visibility and a degree segment because when a student signs up program. It typically stay and the program for more than two years.
Our short course, and boot camp offerings have a much faster for pickup.
And their rate of growth comes from new and relevant content as well as the growing need for short duration reskilling and upskilling opportunities.
We believe that our good near term visibility for these offerings and the fact that we will continue to launch market relevant offerings give us confidence and our ability to drive sustainable revenue growth.
We expect the progress we made in 2020 to be sustainable and.
And we will continue to operate the business and a portfolio basis.
Making our investment positions and the balance growth margins and ROIC.
We expect revenue for 'twenty and 'twenty, one to range from $910 million for $945 million.
Growth of 20% at the midpoint.
As you have seen we reported very strong revenue for the second half of 2020 and for anyone who doesn't and that the year over year revenue comparisons will show more substantial growth and the first half of 'twenty and 'twenty one.
And the second.
Adjusted EBITDA is expected to range from $45 million for $65 million and margin of 6% at the midpoint of adjusted EBITDA and revenue.
In addition.
We expect capital expenditures to be approximately $85 million and weighted average shares outstanding to be about 76 million shares.
Okay.
Before moving to the conclusion.
I wanted to give one last piece of context on to that.
With the goal of providing shareholders with timely and informative communications about our business.
And no longer providing cohort margins, our top programs by new enrollment.
Those metrics are no longer as representative of the business as they once were.
As you know our business has changed substantially since we first provided these metrics.
Today, our alternative credential segment accounts for more than a third of our revenue.
And we operate the business to optimize the entire portfolio of offerings.
We generated positive consolidated adjusted EBITDA in 2020.
And expect that to continue.
The degree segment generated double digit EBITDA margins in 2020 and.
And we expect that to continue.
We also continued to make progress towards positive unlevered free cash flow.
To give you some examples of how much the business has changed today, we have over 500 domestic and international programs and.
Food and graduate and undergraduate and.
And the alternative credential is offering.
We even have we even have short courses that are larger than what we used to call. It D. G. P and we expect the LSE undergraduate program launched in 2020 to become our largest program as measured by enrollment and 2021 and.
The bottom line is our EBITDA and free cash flow progress demonstrates our ability to sign and scale new programs successfully.
And conclusion, our financial performance continues to be strong.
We exited 2020 with strong momentum revenue growing over 20%, while adjusted EBITDA and free cash flow improved significantly.
This momentum is reflected in our guidance and with our improved liquidity position, we have the financial flexibility to continue to make attractive investments and sustainable profitable growth.
With that I'd.
And I'd like to turn the call over to the operator for.
A question and answer session operator.
And at this time, if people and I was asked a question Thats Star one on your telephone keypad Star one to ask a question.
And our first question comes from Jeff Mueller with Baird.
Yeah. Thanks, just as one of the old timer and says you're changing your methodology wanted to ask about.
The cohort margin change just obviously not overly concerning with your 'twenty 'twenty, one profitability guidance being what it is but I'm.
Just curious are the scaled program margins roughly stable like how much of the improvement is being driven by fewer launches that are and their first two to three years, just any perspective on that.
This is Paul here, let me, let me probably start out and start out with this one here.
Look I think we manage the business very differently. When we think of investments whether it is marketing spend or anything like that we spend across the portfolio.
And and we are guided by objective data on things like ROIC.
Things like.
The efficiency of that spend.
Given that type of management methodology, managing a portfolio and a portfolio basis, and therefore meant that looking at core.
Cohort margin dip.
Defeats that overall comprehensive purpose at the same time.
And the cohort margin was very very applicable.
When we were focused on launching programs that would then get the certain margin profile. Later, so we are somewhat substantiated the margin profile of the consolidated business and the segment at that point and time today, we have great margins as you've seen we've improved I would say more than 600 basis points on a year over year.
And it's based on what we're trying to project here.
And.
From $16 1 million from midpoint to $55 million in 'twenty and 'twenty, one and at the same time day.
The grants and the degree segment business is delivering 10, plus double digit margins for 2020, and we expect that to continue so what does this all mean, if we look at the actual numbers for 2020, we would see that the most recent cohort for.
Performed much better than.
In past years and that has two contributing factors number one we launched a lower number of programs, but number two we found cheaper better ways of launching programs and we've talked about that all year with things like studio and a box and all the various ways. We found the launching program cheaper.
If we look at the next cohort that is about 300 basis points better than we were expecting our debt we had seen in the past and I think the one that you're really interested as and in the mature core.
Cohort and in that cohort.
Margins there are better.
And that our long term targets that we provided at the analyst day last year. So essentially we can provide the color and the context that says.
And the cohort margin analysis.
As well for.
For the numbers that we have for 2020.
Where we believe it is not relevant is to focus on that as an indicator of health.
What we wanted to do is focus on the overall and consolidated adjusted EBITDA margin and cash flow profile of the business.
And and on the overall trajectory of the top line growth and Jeff I don't know if there's anything you'd add for that Jeff is a fellow old timer and.
So you know I I I wanted to give them a.
They look good and I guess, I would say, but pauls right like we've completely transformed the business and the last three years and they arent helpful to investors and understanding the business and you need to judge us on the whole.
Fair enough and the whole looks good.
The just any more commentary on the.
Degreed segment.
Revenue per F C E and <unk>.
And it's mix driven and maybe LSC ramping is having an outsized impact if that's expected to be your largest program by enrollment, but any additional comment on revenue per FTE and particularly curious how.
How you view the profitability potential of some of our lower cost program.
So Jeff again, I would probably kick it off and and then chip will chime in.
But if we if we think of the growth and SCE and and the Grad segment.
And that's the main the main contributor to that growth is the on the graduate both U S C program and Simmons.
When we think of the long term profile of undergraduate we view it and the same ROIC the benchmark that we use for the graduate program. We believe we can get for the same types of steady state margin and as you know very well.
Marketing spend is a key component.
The ROIC the analysis and the overall profile of these programs when we think of <unk>.
Marketing spend for on the graduate that there were a couple of things that factor into it I mean, the duration matters right you acquire a student and they stay and for a longer period of time than it is for a graduate program and then of course the cost and those two programs are also different and then the third factor is the way.
Manage the programs and the way we launched the program. We've we've obviously thought and ways to do this cheaper better faster and those are things that we will.
Those are continuous improvement that we were both through.
And Jeff what I would add is we really like what we see so far the Morehouse program.
We announced it a week ago haven't even started paid marketing and it has the fastest start of <unk>.
Interest that we've really ever seen as a company. So we are tapping into.
You know a fundamental shift.
Theres no doubt debt.
And what you see here is.
When you think about where online education will go.
No one says today, Oh, I'm going online shopping, they're just going shopping and that's one of the ways. They do it and it's clear that over time. This digital transformation imperative is going to be very real and we feel like we're the market leader right now entering the largest segment, we really like what we see and as Paul mentioned in his prepared remarks L. A.
<unk> will be our largest program by enrollment this calendar year. So.
You know very very pleased with our undergrad right now and like the opportunity ahead for the company.
And here you congrats to both of you and all of the two youths. Thanks.
Thank you and our next.
And our next question comes from Stephen Sheldon with William Blair.
Hi, Chip and Paul Thanks for taking my questions first congrats on the underground announcement with Morehouse sounds it sounds like you could expect more undergraduate announcements. So curious how those conversations are going with universities and what factors are outcomes, they're thinking about when making these decisions are they thinking about.
And they're weird.
Danny and go out.
And someone might be for them at all.
And the old people.
Okay.
We have.
If somebody if somebody my mind.
The shelf Sheldon free.
The state. The question. This is chip I would say.
Go ahead did you.
And I'm, just kind of curious as they think about expanding what they're what they're really thinking about it I think gaining enrollment share driving higher quality offerings increase and scale and then using that to potentially drive down the tuition cost and then from to use perspective would consider this one of the bigger growth drivers.
Potentially over the next few years.
Yeah, I mean, it is a must have this is a place where we definitely see a change post COVID-19 you have institutions.
And as for them themselves they need to transform themselves.
And we are a partner of choice to over 75, great nonprofit universities doing really high quality work.
And.
I have been surprised that the number of of undergrad conversations that we are now in and we're being careful to make sure that we align the long term goals for the company setting up.
Really good.
A really good lineup of program opportunities for the next couple of years.
Morehouse, David Thomas is.
Is transforming the college and U.
If you look at the opportunity ahead for Morehouse and for two U behind it we think that's a pretty critical program for the world.
Both for Black men for men of color.
You heard me say that 3 million Black men have some college credit and unfortunately, many of those have college credit and some debt associated with it and haven't completed and we think we can really move the dial.
And.
We think it's an important program not just for the business opportunity and more importantly for those individuals and Morehouse has just an incredible track record I mean, it's 150 for years and.
Doctor Martin Luther King went to Morehouse and the quality is there so.
We're just very proud of that relationship.
And I will tell you I would.
I was really.
Pretty overwhelmed by the response to the first week.
Both from potential prospects, who were giving our counselors are just incredible stories of what morehouse means to them.
And for our employees. This was a this might might've been the most important announcement, we've ever had I don't know if that's an overstatement.
So our employees are the response was so high that we asked for volunteers across the organization to work over the weekend unexpected and we had something on the order of 65 councillors volunteer to be able to reach out to the prospects immediately given the response and spent the entire pad.
AST weekend.
Just getting through the initial queue of folks that were interested so really strong.
And you will continue to hear more about undergrad I will tell you to you and it did take US a long time to launch our first degree program in the marketplace, but we did have a groundbreaking program a longtime ago called semester online that I really do think set the stage for high quality online.
Operations and are our approach to Grad education with an incredibly high touch high completion rate.
<unk> has a set us set us up well for a really great run here with the exception of additional mental health.
Ponant for undergrad students, we feel like we're really well set up as the market leader to do something big here. So.
Pretty excited about it.
That's great and.
And really appreciate that detail.
Maybe as a follow up here for Paul clearly it seems like Youre starting to see some of the positive margin characteristics and the model show through both in the quarter and and your guidance. So.
So I'm curious if you could maybe talk and any got you talked about a little bit before but just more qualitatively about some of the moving pieces and within the guidance and particular between the maturing of the degree program and some of the and efficiency initiatives over the last year, including things like student and a box and on the marketing side and then if there's a way to roughly frame the probe.
Graham launch investments you've assumed in 2021 relative to prior years. So.
And just qualitatively.
As you think about those three factors and and the guidance.
Yes.
So a couple of things when we think of the mature programs.
That is about how do how can we spend our marketing dollars efficiently, whether it's direct marketing or organic marketing one of the things that we've been doing is developing our organic marketing engine and that has been helping us and becoming more efficient on and overall basis. When it comes to the way we serve the students our student facing organization.
And I think you recall last year and continuing our 2019 and continuing into 2020, we started by first of all and making sure. We're organized appropriately set a week and efficiently serve the students we call. It delighting. The students every step of the way and I think we are beginning to see some of the benefits of that and then when it comes.
The launching new programs, which is where our studio and our box falls and and then some of the things that we're doing in and our learning and development team. We're finding ways to do these things and and a more U K banner and.
All of that has led to the overall schematic of managing the business with overall revenue and overall EBITDA margin, which makes launch cadence total number of programs launch less relevant because we are going to commit to our EBITDA targets and.
You know what to say to us and a very less and sophisticated way. The objective of ours is to ensure that we can launch and the cost that he used to the dollars that it used to cost us to launch one program, we're going to try and see if we can launch one and a half are true programs are one and three quarter program for that same dollar amount and and that way we do.
Developed muscle memory and the scaling that then bite at that and we get to 'twenty and 'twenty two I mean.
We are we have and engine that is just delivering more and more efficient scale and the business. So that is the overall framework around which we're looking at this.
Got it makes a lot of sense congrats on the results.
And our next question comes from Ryan Macdonald from Needham.
Yeah, Good afternoon, chip and Paul and congrats on an excellent quarter and year.
As we look at the undergrad market opportunity and can you talk about a bit about the what the what we should think about for the launch cadence in terms of time lead time needed to go from sort of announcement to two for students enrolled.
He it was your first for sort of foray into this space and you took a bit more time to get that going but then with Simmons. It was sort of wrapped and fire you know getting things ready quickly for an unusual fall how should we think about as we think about the undergrad opportunity sort of unfolding into 'twenty, one and 'twenty two how that launch cadence looks thanks.
Okay.
Thanks, Ryan this is chip.
And we've gotten away from thinking about cadence, it's invested of the past from the standpoint of and the same way that D. G. P was.
And the reason for that is we are trying and succeeding and getting better and faster at improving our launches and I think you can see that in the case of and expectation of Morehouse to actually serve students. This calendar year, even though we just announced it.
And that that has been a key focus of Marc <unk>, our chief operating officer, and our broader team of folks, including Ebony Lee who runs our <unk>.
Degree business.
That's a key focus and the reason is if we can keep driving higher quality programs and get them rolling faster that's better for our schools better for our students.
So.
And the thing about undergrad is.
It is an exciting opportunity you will see more.
And but right now like LSE.
It went well enough that LSC took it from one data science based degree to every degree that LSC has in its portfolio, including you know and undergraduate program and economics from the London School of economics at a price point that is affordable for the world and.
We're seeing demand from that.
So it's less about cadence and more about fitting them into a broader portfolio of activity that drives the kind of results that the company needs to see on a consolidated basis and one other data point for U as we are getting to a scale. We just passed 300000 students across our programs and these are actual student.
And past 14 million total.
Lineups over our history.
And we are thinking cross program across our product set across the career curriculum continuum more and more as a company. So.
Just pretty excited about where the company sits today I do think we've done some really hard work to transform the business over the last three years and we're seeing the fruits of that.
And when we think about with the with the existing Grad programs are sort of on the platform already obviously, we saw some really healthy enrollment in the fall but.
Can you talk about what youre starting to see as we get into the spring here in terms of application growth and then and enrollment growth for some of the spring 'twenty. One cohorts is there still a knock on effect I guess from this sort of increased shift online and <unk> that we've seen over the last year.
Yeah, no and so I want to say.
We believe that.
Clearly online is now part of People's consideration set in a way that wasn't.
It was not before.
And for everybody in the world and in every way and so that will benefit us on some level.
And it's clear that the economic impact of Covid continues to emphasize.
People's need to Reskill and upskill themselves across all three of our product sets we.
We do think we've provided some strong guidance for next year for this year.
20% at the midpoint and you know when you're approaching 1 billion in revenue that's no small numbers. So we feel like the Grad segment will continue to drive really positive results for US go forward and we're seeing that and some of our oldest programs, we're seeing that and some of the newer programs like the undergrad programs <unk> and.
And excited to see pipeline just continue to be super strong so.
There is an acceleration of adoption, but.
We anticipate that this will continue throughout the calendar year and as we get into 'twenty two.
Excellent congrats again.
And our next question comes from Brett Knoblauch, with Bayer and Bares capital.
Hi, guys. Thanks for taking my question and congrats on a great quarter and maybe the first one for chip.
You mentioned you were seeing better retention across.
You're all from C. Maybe go into a bit more detail on that.
So we've got a you know a student.
Student engagement team debt.
We actually over the last two years one of the things we did sort of inside the house is are.
We aligned teams and a more and in a in a way that's had a huge impact on our performance and working with the students directly under Brad Adams leadership, we've we have seen and improvement in retention is kind of the one number that rules them all when it goes up it's really most importantly, good for the world it's been for the students.
Graduates good good for society.
And it's it's good for two U because it obviously drives the revenue that we see through our system. So if.
If we look at the second semester retention for degrees, it's up about a full point, which is a really meaningful number for us so a credit to our team and they did all this during the time of personal strained with regard to Covid you know as we all know Covid, it's been hard on the world and so to see us improve these drivers during this kind of time.
And.
And it makes me incredibly proud.
Gotcha, and then maybe one for Paul on the margin profile of this out of the segment margin.
You're implying.
I guess the degree segment margin was 10 per cent for the year, that's kind of implying Q4 segment margin and there was north of 20%.
Should we expect kind of a year over year improvement there every quarter and 2021.
So a couple of things I mean, Q4 was indeed greater than 20% and was about 22%.
But keep in mind that there's a huge seasonal impact right marketing spend and generally not that efficient and the holiday season. So we generally cut back and the marketing spend particularly in the holiday season. So that that has the seasonal impact I think what you can expect is that you should see sequential increase.
Including seasonal impact so.
If you look at the trends that we had and in 2020.
Five 5%.
Close to five and the second quarter, and then I think it was 8% and the third quarter you should generally see generally see some uplift meant and a sequential basis. If you look at that trending from 2000, and 'twenty into 'twenty and 'twenty, one what you're not going to see a sequential trend off of 22%.
Oh, yeah, and I wasn't implying that but thanks, and then maybe if I could just add one more yeah, yeah yeah.
You talked about the ability to absolutely and lots of programs more more quickly.
Than you could before to what extent is that a function of the overall macro environment. Obviously education is a big counter cyclical. So more people are going back to get their degree and does that factor in and and how quickly you can announce and launch a program.
No, we're really not talking about macro there Brett we're talking about us we.
You know over a long time time period.
Growing the company.
We have a focus now over the last two years on driving efficiency, we are absolutely gotten more efficient we.
We are seeing the benefits of scale I think one of the reasons, we emphasize some of the scale points in the prepared remarks is people because our brand is behind the scenes.
You don't see people with the awareness of the scale of to you today.
And we are definitely seeing the benefits of that.
So we're just getting more efficient we're getting better at launching these programs.
And what I believe is a higher quality level. So this is not about doing them in a way that's lower quality, it's about doing something that is equal or higher quality. So an example of that.
We debuted something across the programs that have clinical placements called the V. FX that is a virtual field experience for students that can actually engage virtually before they go into a clinical setting to do their first session with and actual patient you'd like any clinical setting and our social work program and buy.
Doing this virtually number one youre driving improvements and efficiency for the company Youre driving innovation into the industry and its chip.
And the students better because they get to work with actors in a program before they go out and deal with somebody who returned from the war with PTSD, you're talking about like good for the world good for efficiency and and just better for the student experience. So it's that kind of innovation that can help us drive programs.
Up more quickly and we think a higher quality level and that has been a key focus of the last two years.
Yeah.
Perfect. Thanks, so much guys really appreciate it.
And our next question comes from Josh Baer with Morgan Stanley.
Hi, Thanks for the question and congrats on a great quarter.
You've been you've been talking about the ability to say, yes to more business and.
That may look like a bit of a different.
Business model versus versus history, and I'm, just wondering how how did that type of business contributed to the outperformance this quarter.
Josh.
One of the debt that phrase was coined probably I think it was second quarter.
Earnings announcements and and that was on the heels of the <unk> announcement by way of example, I mean I think if you look at our quarterly results for the fourth quarter here and the full year.
That was a contributor and the fourth quarter So I.
And I think that is that is more a statement that speaks to the structure and the form of what we do it is it is the hybrid model that was applied to debt at Simmons.
Program and at the same time, we're keeping in mind, we're using is our north star.
Our long term margin profile and our revenue growth when we make these decisions. These decisions are not being made to fill our launch cadence number or it's not being made to do things for particular short term nature. It is more it is larger and in nature.
Yeah, one thing I would add Josh is.
In terms of the way, we think about the business. It's serving these partners and their students as effectively as possible, saying, yes to them means having more opportunities to say, yes, having more deployments at and existing partner.
Whether that be deepening the relationship with all with alternative credentials.
We have many partners now that offer all three distinct products across the board.
We have many partners that have stepped up from one type of product like a degree program to Alt credit either a boot camp or short courses and then in some cases like Simmons or.
Other cases across our grad portfolio, we're deepening the relationship by offering services to their campus students and a meaningful way.
One thing important to note, we don't really think.
Broader deployment in terms of our solution going to all of higher Ed It's not the way our business works and it's also not something today that we are focused on trying to drive improvements in the existing business and a meaningful way and I think youre seeing some of the fruits of that.
So <unk>.
Simmons is a fantastic relationship and one that did contribute and one that we expect to continue to grow over time, and I think you'll see more things like that Simmons relationship.
That's great and then on like thinking about comments like the newest cohort has better margins than in prior years are trying to be able to launch more products for the same with the same dollar is that kind of.
Suggesting a different shape to the J curve.
Different longer term.
Economics, and those types of partnerships.
Yeah, one one interesting thing as we call it internally our J curve projects. So we are absolutely focused on trying to change the J curve.
Products do have different capital requirements, one of the things that has really improved the overall business is that we have flexibility to launch programs that create that.
The debt really answer a societal need you take our diversity short course with northwestern from Alvin Tillery, who is a nationally respected.
Expert it's done extremely well it's being.
It's being bought pretty heavily by the enterprise unit.
And that is a very different J curve than building, a new nursing program with a university or building a new physical therapy program with the University. So we.
We are seeing the improvements come in the J curve and it's a pretty critical step forward for the company to be able to drive to free cash flow and we are making real progress on that and we do still expect to see that crossover this calendar year.
Great. Thank you.
And our next question comes from Brent Thill with Jefferies.
Yeah.
Chip U.
You have many great growth engines, if you had to prioritize to Maine.
Commitments for 'twenty, one that you'd like to achieve how would you articulate those those two priors from where you sit.
Well.
You know we are.
We like the balanced portfolio, we think operating across the career curriculum continuum is really important and one of the reasons Paul emphasizes a third of our revenue now comes from old Cred, we're the largest provider of nonprofit alternative credentials in the country.
You know that that that segment is larger than any of the move providers. As an example, so we do think that.
That's a really important.
Priority for the company Undergrad is new and we're being careful about how many we slot in.
And keeping our grad business rolling and seeing positive enrollments from older programs.
Is is important so.
No.
It has been.
Brent a transformation of the company over the last let's say three years, two U looks fundamentally different than it did.
At our IPO and certainly even even than it did when we first acquired get smarter, which candidly has been a homerun honestly, it's we saw where the market was going we saw where Ed Tech was going.
And really.
Or are seeing the benefits of that today. There is no question that.
As we transform the business to stay ahead of market demand and now we're positioned in a multi trillion dollar market to drive.
The future of higher Ed I.
I don't think that's an overstatement.
Great. Thank you.
And our next question comes from Tom single Hearst with Citi.
Good evening.
Got it from here.
And from today's that says Hey, your voices and congrats on the quarter.
And a couple of questions. The first from actually on and let's see and international and we don't see attitude and a fantastic success.
And see that and they can make.
Expansion of the mandate I suppose for the question is.
And it's obviously, a big opportunity and undergraduate but does it signal a bigger opportunity and international as well and now you've got that footprint.
Is that going to see as much emphasis.
Going forward.
First question.
Yes.
I think both.
But kony and IMD should tell you something we do think that debt you're talking about as you know two of the best brands in Europe and law.
<unk> is certainly one of the best brands and the U K and we do think that this is a worldwide story.
We also are excited about our growth engine that we think we found to localize short courses into different languages, and we think that that provides a significantly lower capex way of achieving growth and the short course business and are excited about that so.
Tom you will hear more and more about.
About international opportunities over time.
That's right and something and then.
Question is obviously COVID-19.
And that's just more broadly and education.
He is an area that just getting more and more focus and.
And tons of Investor interest and capital flooding into the site professional lending, perhaps especially itself and start the question is.
I mean.
Sure.
Should we worry about more competition, if there are sort of more better capitalized companies out there sort of aiming for the same market would you see that it.
For the indication and the validation of what your debt.
You know honestly, what's interesting is over the last several years, we haven't seen a significant increase and the number of competitors and we have seen certainly some and OPM go the other direction.
And I would say, we welcome people coming into the space are.
We think it's really good for the Ed Tech market and certainly lonely out here and these are.
And the in the public Ed Tech Hills, and we do think that what's unusual is for the percent of GDP that goes to education. It is very strange that there that this small.
Number of large companies that are public. So we think it's good we think it's good for the valuation of two U. We think it's good for the market overall and you know I.
I do think we're at a scale that we don't think anybody is quite close to.
And in the.
And the nonprofit University world.
And welcome people coming in we think that.
Our scale will allow us to compete really successfully and I think we're seeing that and our marketing efficiency, we're seeing and and demand and the pipeline.
But our leadership position.
You know as one of.
Excited to see.
And more and more people come into the space and as they do they'll have to prove quality they'll have to prove scale.
And we welcome the opportunity to continue to prove ourselves.
That's amazing thanks, guys and congrats again on the quarter.
Our next question comes from Arvind <unk> with Piper Sandler.
Hi.
Thanks for thanks for taking taking my question and.
And congrats congrats on a really good quarter.
Yeah, I had a prototype for the question and.
And I Wonder to ask you about your priorities as you think over the next two or three years.
And you certainly have some surprises and 2019 and 2020 was very unique across and many many different vectors.
But not with a you know.
The business Foundation at a really good place.
Can you give us some color about how you're thinking about the business over the next next two or three years.
Yeah. Thanks, <unk>, So I would say we have come out I.
And I do think we came out of the fire of 2019 molded like Larry and steel so forgive the game of Thrones margin, but we feel that.
And then a much stronger position today than.
And then it was back in 2019.
And in terms of the priorities for the company Theres no question that financially.
Driving to a balance point of view on the rule of 40 driving to.
Free cash flow is critical we said that a couple of years ago to be clear over the last let's say year and a half let's say six quarters. Everything. We said we told you we were going to do we've done and we continue to expect to be able to achieve that and at the same time, helping our universities drive high quality ops.
And as for students across their careers and lifetimes meeting the learner where the learner is.
And driving really high quality student outcomes, while doing that because at the end of the day, that's really all that matters and our business. If the student wins. The University wins, then two U wins and that is really important.
It's pithy, but it's important it is there is the real story behind the.
And the way we run the business.
So I do think that the upskilling opportunity is significant and I think you're seeing that and our results today, you're seeing that in our short course business and of course, our legacy degree business with undergrad as a growth lever you just need to be able to meet the student where the student is and draw.
<unk> high quality options for working adults and I think we're really well positioned to do that.
Great Great and.
Do you live and pretty thoughtful about them.
And how youre growing and to who you partner with and all of that.
But as you kind of look at.
And I guess you know the next couple of years are there any gating factors are that debt that prevent you from growing faster and you know that sort of investments that need to be made made.
And from a technology side from a sales and marketing side.
What's what's what's going to prevent us from.
And even for you and faster growth over the next couple of years.
Or if we want to grow smart not just fast and that's been a key focus for the company over the last three years and I think as I've said a couple of times on this call we're starting to see the benefits of it.
We've continued to invest and each.
Part of the two U O S operating system that we provide to our schools to power this experience.
And that certainly includes marketing and includes.
Everything from privacy to accessibility to core technology under the leadership of our CTO James Konigsberg.
So this is about.
A balanced agenda of ensuring that were.
Creating a long term sustainable engine of social mobility that is what the stories about so.
We're excited to continue to prove it and the marketplace I do think we've we have made some real headway here in terms of showing the sustainability of this business.
Great.
Thank you very much and we look for the year.
Thank you our thank you.
And I would now turn the conference back over to Mr. Chip Pasek.
For.
For closing remarks, okay. Thank you everyone for joining us today.
Before I go I would like to.
Offer a birthday wishes to a few folks first of all to my Alma mater, George Washington University for their 200th birthday.
And then two our chief Chief operating Officer, Mark <unk> and to our CFO Paul Lousy.
And turned greater than 50, and one term.
It hasn't quite made it to 50 and I will let you have fund guessing who that is thanks to everybody. We will see you out on the road.
And that does concludes today's call. Thank you for your participation you may now disconnect.
Okay.
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