Q1 2021 2U Inc Earnings Call
Ladies and gentlemen, this is the operator today's conference will begin momentarily until that time your lines will again be placed on hold thank you for your patience.
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I'm here of chip.
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Yes can people hear us I can hear the the three of them coming out of turn the call over to Ken Golf S. V. P of Investor Relations. Please go ahead.
Thank you operator, good afternoon, everyone and welcome to to use first quarter 2021 earnings conference call.
Ken Golf SVP of Investor Relations at two U and 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 of 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, and we have no plans or duty to update them.
Please refer to the earnings press release and the risk factors described in the documents, we file with the Securities and Exchange Commission, including our annual report on form 10-K for the year ended December 31, 2020, and our most recent quarterly report on form 10-Q for information on risks.
The fees and assumptions that may cause actual results to differ materially from those set forth in such statements.
In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of 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 U.
You can find the additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations page of our website.
With that let me hand, it over to chip.
Thanks, Ken higher education, it's one of the world's largest industries and like so many others before it is now undergoing a profound digital transformation and.
In the midst of its more and more of the world's best universities are turning to to U as their trusted long term partner.
Across our entire product portfolio from undergrad and grad degrees to boot camps and short courses the demand for tissue shared success business model is strong and we expect that to continue.
The result of business firing on all cylinders the based on our guidance will be fast approaching $1 billion in annual revenue by year end.
Two of your strength is clearly reflected in our first quarter numbers, which were fantastic.
Growth of 32% on a revenue base that is much larger than our competitive set with accelerating profitability.
Notably in Q1, we turned free cash flow positive on a trailing 12 month basis.
And we now expect that to be the case for 2021, which would be a year ahead of our original target and Mark an important milestone for two U.
Our CFO, Paul Lougee will give more details on the quarter and what do you expect for the year.
I want to focus on how we believe our scale and quality drives to use strategic positioning and differentiates us as the clear market leader.
Let's start with our scale.
Today, we power of the industry's most comprehensive mix of 540 plus degree of non degree offerings from 80 of the world's best nonprofit universities.
Our short course portfolio is growing rapidly.
And we're expanding our network of partners.
Over the past quarter, we extended our partnership with them.
And signed two of the world's best ranked business schools IMD in Switzerland, and the Rotman school at the University of Toronto.
Shifting to the degree business, we now offer of 184 programs across 26 discipline, including those in healthcare, where we offer differentiated value to partners and students through our unique expertise and growing nationwide network of contracted clinical placement sites.
Here are just a few numbers to give you a sense of our scale and impact in healthcare disciplines.
We're powering 95 different health care related degrees at 19 colleges and universities.
<unk> programs have produced 18000 graduate inception to date. Another 14000 students are currently enrolled.
Our clinical placement network now includes 73000 contracted sites across all 50 states.
And we've secured a total of more than 67000 placements, which translates into over 19 million of hours the field work by students.
It's no wonder of other Oems, including new players in the degree market often avoid these complicated licensure based disciplines.
I'd like to highlight the major license or deal for us this quarter with the long term partner the.
The family Institute at Northwestern University, and early to your partner recently agreed to a long term extension through 2034 of our counseling at northwestern degree and also agreed to team up again with two U. The launch of New Masters degree in marriage and family therapy.
This is an excellent business for both parties and one that is solving a critical counseling need for society.
Northwestern also shows the impact of our business working across the great University and the career curriculum continuum.
We now have seven schools that northwestern working with two U in degrees short courses and boot camps. This would not have been possible without the expansion of our business model and product line over the years.
Speaking of expansion undergrad is a rapidly growing part of our business and we continue to gain share.
Note that this is the largest part of the higher education market in.
In the U S alone. There are currently $16 six active $16 6 million active undergraduate students and 36 million learners, who have some college credit but didn't graduate.
Our first the undergraduate degrees at LLC have generated excellent demand across more than 150 countries since January of 2020 and.
And the number of degrees, we're offering grew from one to nine and less than a year.
Our new undergrad degree completion offering with Morehouse College, one of the nation's top HBC use we announced in February has had one of the initial one of the highest levels of initial interest that we've really ever seen as the company attracting thousands of prospective students within the first few days after announcement and before any paid marketing.
Expect more entries from us in this market.
Let's turn our attention of boot camps, another part of the business, where we believe our scale and quality are delivering unique value to the market.
Historically four year nonprofit colleges and universities have not been major skills based training providers today, that's changed because of our 40 plus partners spanning 27 states and the district of Columbia are Reskilling and Upskilling tens of thousands of Americans each year.
This year alone, we expect to make nearly 30000 free job referrals for graduates of two U powered boot camps.
At the moment when the skills gap has become a major bipartisan focus for the Congress and by the administration, we think our scale and the quality of our boot camps represents a differentiated and competitive strength for two U.
And the recent expansion of to use career engagement network will only further reinforced this competitive strength and differentiation.
By leveraging the career support and job placement capabilities that are central to our boot camps and tapping into our growing network of 250, plus employer partners, including companies like State farm, Deloitte and Google <unk>.
<unk> is able to offer unlimited access to industry specific career relevant resources, including Toolkits webinars job listings and career fairs.
All of at no cost to the 325000 current students and alumni of two you powered degree of non degree programs.
The growing scale of network effects of our career engagement network are real.
More students and graduates drives more employer partners more employer partners drive better career resources and job opportunities and better career resources and job opportunities drives greater value to students, it's the virtuous ecosystem and.
And we believe our scale and expertise enables us to connect the dots between higher Ed and employers in ways. No. One else has really been able to figure out we.
We do believe this adds to our competitive moat and will be difficult for others to replicate.
Speaking of career success I want to end on what matters most of all student outcomes.
The only way to truly win in the education market and build a sustainable business is to deliver quality outcomes for students. It's something to you has been doing from day, one which is why our already strong graduation, and retention rates have continued to improve over the years you can see those numbers in our transparency report.
Our new compelling proof point of the quality in our degree programs comes from our research with Gallup last.
Last week, we released our second year of student outcomes focus Gallup research and by any measure. It shows the <unk> is leading the way not only in delivering quality, but equitable education experiences and outcomes. Let me share a few key findings from the report of.
97% of alumni from two U powered online graduate degree programs are having positive career outcomes, 97%.
And that number is 94% for black alumni and 97% for first generation of alumni.
Although career fulfillment not increased pay was by far the primary motivation for students returning the graduate school, 53% of alumni still reported of salary increase after graduation, and 20% reported significant increases.
The the extent that anyone still believes that online education is inferior together with our partners, we prove them wrong and more importantly, along the way. We're also demonstrating the great online education can deliver truly equitable education experiences and positive career outcomes.
We're delivering on the original promise of this company's mission of eliminating the background of higher education, and we built a hell of the business while doing it.
Now I'd like to turn it over to our fine CFO, Paul Lougee to take you through our results and I'll return for Q&A.
Thanks, Jeff and good afternoon, everyone, we had an outstanding quarter with results that exceeded expectations.
Revenue growth, 32% to $232 $5 million over the first quarter of 2020 when.
We saw strong growth across the portfolio. The degree program segment grew 23% boot camp the eight.
Percent on short course of 41% all on a year over year basis.
<unk> expense for the quarter totaled 206 to $9 6 million, an increase of 18% significantly lower than the 32% revenue growth.
This resulted in a $14 $5 million improvement in net loss from the first quarter of last year.
Adjusted EBITDA for the quarter total of $13 $7 million of margin of 6%, while free cash flow on a trailing 12 month basis came in at the positive $9 million.
In a nutshell, we reported accelerating revenue growth better than expected EBITDA margins and positive unlevered free cash flow on a trailing 12 month basis of very strong start to the year.
Now, let's take a closer look at the revenue for the quarter.
Revenue growth this quarter was driven by a 33% increase in full course equivalent enrollments, which came in at 81000 for the quarter showing strength across products launch cohorts and the verticals.
Revenue in the alternative credential segment grew 52% on a year over year basis, driven by 39% increase in Sce's and of 9% increase in revenue per FTE.
Revenue growth in boot camp was particularly strong for the quarter driving the increase in revenue per FTE.
And the the Green program segment revenue grew 23% compared to last year.
The fifth straight quarter of accelerating revenue growth.
<unk> for the quarter increased 31%.
While the revenue per FTE decreased 6% year over year.
The outperformance was driven.
Both by strength in a number of new enrollments and increased student retention rate.
Turning to costs and expenses.
Total operating expense for the quarter total $296 6 million, an increase of 18% over last year.
Marketing and sales expense increased 14% year over year and keep in mind revenue grew 32% as we continued to drive efficiencies and leverage our scale.
That led to an eight point improvement in marketing and sales as a percent of total revenue compared to last year.
Net loss for the quarter was $45 6 million, a $14 5 million improvement compared to the year ago quarter.
Adjusted EBITDA totaled $13 7 million for the quarter and $18 1 million improvement compared to last year and a 6% margin.
Moving onto segment margins in the alternative credential segment margins improved five points compared to last year benefiting from scale on integration initiatives driving operational efficiencies.
Margins in the degree segment came in at 18% for the quarter driven by higher revenue growth.
Headcount at the end of the quarter totaled 3734 compared to 3738 from the year ago quarter.
Turning to the balance sheet.
Our accounts receivable balance totaled $74 7 million up $28 $1 million from the end of the previous quarter.
This increase in accounts receivable was driven by the timing of collections from our University partners. In fact, a focus on working capital has kept our accounts receivable balance flat with the with the first quarter of last year, Despite strong revenue growth.
Deferred revenue came in at $108 4 million up $32 $9 million from the fourth quarter of 2020, primarily driven by seasonality in the degree segment.
This quarter, we generated $7 $6 million in operating cash flow spent $15 1 million in capital expenditures and ended the quarter with the cash balance of $505 1 million.
I am proud to report that we delivered positive unlevered free cash flow of $9 million on a trailing 12 month basis.
This was primarily driven by positive cash flow from operations and a reduction in capital expenditures.
We ended the quarter with $280 million in long term debt related to the convertible notes we issued in April of last year.
I'll now turn to guidance and some context for how we're thinking about the coming quarters.
Our first quarter results provide the foundation for a strong year, we continue to have good visibility in the longer cycle of degree segment, which continues to increase steadily.
The alternative credential segment has maintained strong growth.
Career relevant Upskilling and Reskilling opportunities are in focus as a means of addressing the current scale of GAAP in the economy, presenting us with the growing market opportunity.
We set aggressive targets for adjusted EBITDA, and we've been exceeding those targets, giving.
Giving us the flexibility to increase investments where appropriate to drive future growth.
We now expect revenue for 2021 to range from 925 to 955 million growth of 21% of the midpoint at.
Adjusted EBITDA is expected to range from $55 million to $65 million.
Margin of 6% at the midpoint of adjusted EBITDA and revenue.
We continue to expect capital expenditures to be approximately $85 million on weighted average shares outstanding to be approximately 76 million shares.
To conclude let me emphasize that we reported a very strong quarter and we are well positioned for the rest of 2021.
We expect the degree business to continue its strong performance and the alternative credential segment to continue to grow faster than the market.
All while expanding margins and delivering and generating cash flows.
And with that let's move to the question and answer session operator.
At this time in order to ask a question you will need to press star one on your telephone keypad again that is star one.
Well pause for just a moment.
Yeah.
And your first question is from Brett Knoblauch of Berlin Bert capital.
Hi, guys. Thanks for taking my question and congrats on the quarter.
Just curious about your thoughts.
At your website and the change a bit over the last year or so and it is starting to resemble a bit of of marketplace type of steel.
That something that you would be you would consider entering into in terms of acquiring or building your own marketplace and leverage the different type of doing the acquisition funnel.
So we do think continuing to elevate the two U brand through powered by to use an important part of the strategy I would say that.
Our marketing apparatus today is world class and out of scale, but I think most don't quite realize.
So we will continue to explore all facets of driving high quality student enrollment for our University partners.
You might have noticed an announcement this week from Fortune magazine the.
Team at portion of Fortune launched an education vertical and we are.
Our key advertising partner for that vertical.
And excited about one example, breadth of our new advertising source for us to reach the right students for our University partners and do it at a scale that we think.
As industry, leading so we will continue to explore more and more opportunities. We will continue to elevate the powered by <unk> brand.
And.
Seek out opportunities to find students where they need to be found.
Understood and then maybe just one follow up during the quarter you guys launched a partnership that I thought was really important with skilled could you expand upon maybe the.
The financials of that partnership when that's going to take place how that's going to work.
Given they have a good corporate install base of $3 million plus employees.
Yes, so I guess I would back up by first the.
Letting you know that enterprise has definitely been of part of our growth.
In a way that I think is an obvious to the community. We built a large of large scale consumer operation that as I said at the beginning of the call. We are sniffing distance from $1 billion in revenue now.
And that has been built historically on what I think is.
A.
<unk> marketing funnel, but.
Most of the higher Ed isn't spending dollars this particular way.
And so we launched into enterprise a couple of years ago and it is one of the fastest growing parts of the business today.
And the opportunity to partner with the Rachel Romer Carlson and her great company to find.
The power of degree programs into the enterprise, we do think is an excellent growth opportunity.
We found that both short courses and boot camps to date have been very much in demand from employers the career engagement network.
Is the part of the key to the story in terms of our industry leading scale.
Create.
Sorry can you I'm getting a ton of feedback on the call can you hear me Brett yes.
Yes, I can okay, we're having some challenges in the audio line. So I was wanted make sure you can hear me. So the current engagement network, we think is.
Strategically very relevant.
And one part that we didn't mentioned in the prepared remarks as it does build employer relationships from the standpoint of creating opportunities for our products to be available to their employees and so guild is part of that.
Selling our short courses in our boot camps in as part of that you might've seen an announcement with us.
With Netflix in Norfolk State University, where repowering technical boot camps to increase diversity and Netflix is workforce, we think theres great applicability. There. So we do very much like the growth opportunities that we see in.
In enterprise and all of our employer partners are now recruiting talent not just out of our boot camps, but out of our degree business and our short course business and you are talking about 325000 alumni.
So great opportunity for us to drive sort of all ends of that ecosystem.
Perfect. Thanks, so much really appreciate it.
Your next question is from Josh Baer of Morgan Stanley.
Thanks for the question and congrats on the Armstrong.
The strong results this quarter.
Was hoping you could help frame the potential ranges for SCE enrollment growth across the different business lines, maybe by providing any context for the number of degree programs and short courses and boot camps that are either.
Currently ramping or expected to be launched by the end of the year or expected to be launched next year.
Any any context would be helpful.
So Josh this is Paul here I'll kick it off and chip.
Chime in.
Later on one of the things. The we've consistently said is that we manage the business on a portfolio of basis and.
Sure.
And chips comments he mentioned at the end of the year of we're going to be just shy of $1 billion of revenue and one of the benefits of managing the business on a portfolio of basis is that we can truly benefit from scale I think you've seen the progression on the EBIT of side of the profit side of the equation on the free cash flow side of the equation and that is not.
Because we're benefiting from market trend that is not because we're reducing expenses in a given quarter are cutting expenses or that is not because of one time activities in nature that is because we have a chief operating officer, Mark <unk> and his team that are maniacally focused on improving the way we do business.
<unk>, how can we build course cheaper better faster, how can we service and delight students and a weighted as efficient and a weighted is truly.
Student friendly customer friendly and if we can implement some of those types of measures. What we have is an efficient scalable operations.
Why do I mentioned, it that way, if we're allocating capital across the business, where we will get the highest rate of return is therefore means that we are agnostic to the number of degree programs that we launch or the number of new courses in the short course business that we built are the number of offerings in the boot camp business that we.
Launch.
I think we also mentioned is the one of the prior calls we have.
Short courses and boot camps.
That are larger than some of our degree businesses. The green program. So to some extent it is less about the cadence for us and more about how can we holistically grow our top line growth profitability and have EBITDA and cash flows at the end of the day. So to some extent, we somewhat look at it from a very.
Current perspective in terms of Ftes ftes in revenue per FTE continued to be a good indicator of the business. However.
For example, within the degree of business with the launching of the Simmons program and fall of last year and with LSC. What we have is more enrollment.
But lower revenue per FTE, just because of those those programs are lower cost programs. So to some extent the revenue per FTE as the mix shifts becomes less relevant for us as we go forward. So the bottom line is look we delivered some some really really good numbers this quarter.
We feel good about the year, we feel good about the.
Accelerating meaning the sequential increase in our topline and our bottom line as we go through time and the thing that we're probably the most proud of.
As the free cash flow positive free cash flow this quarter right, we were expecting that towards the back half of the year more importantly, somewhere around Q3, Q4, we were able to have that sooner and.
The current course and speed I think we'd be able to maintain that as we go through the year and thats the kind of progression that we want investors and the the.
The Street community to look at as the yardstick of measurement of our success because that's how we measure our success chip I don't know if you add the debt well the only thing I would add Josh we've got at this stage, we've got short course, and bootcamp relationships that are larger than some of our historic degree program. So you really do have to look at it holistically.
Launch cadence is.
It was a bit of of term from our early years as the company is not as relevant today, even though on the degree side, we're continuing to launch all kinds of new degrees.
The one that I just talked about the marriage of family program. The degree program with Northwestern University.
We're now working with seven different schools, there across all three product categories take what we announced yesterday with key path and Pepperdine.
Our <unk> program with Pepperdine. So I think an example of something that really isn't fully appreciated is just how successful we've been landing and expanding with our University partners, but it is not just about adding another degree today.
All of these announcements together is how you get a company.
You, obviously have to do a lot to raise the guidance on a company that's getting close to a 1 billion of revenue right by definition of the numbers of large today. So it takes all of this it takes our degree cadence. It takes our short course of opportunities. It takes new logos like AMD. It takes the opportunities in <unk>.
Surprised like Netflix It takes the Guild partnership all of these things together create something that right now we're feeling pretty good about where the company is going we feel like this company is the strongest it's been since our IPO in 2014.
And Josh before we close this out I mean, I think we mentioned this earlier, our our marketing apparatus is best in class and that's what allows us to benefit from scale across each of our businesses and I think that there is something to be said for such a marketing apparatus.
And if we keep growing fast in the market then.
Our position of secured.
Got it if I could just follow up I mean.
I.
And the lack of managing on a portfolio of basis. It sounds like if you were to focus on degrees vs versus alternative credentials you might you might like.
As analysts might be loss because there.
One could be bigger than the other or there might be better return somewhere else from like there shouldn't be this.
Huge focus on the exact number of launches between each of them I guess like thinking about company growth. The biggest drivers enrollment growth of the biggest driver of that is.
I think new.
New launches whether it comes from from one of the other.
So I guess, Mike is there anything else that investors should should look to to try to.
Of course, the trajectory of growth going forward or is it kind of that last comment around.
The expectations to grow ahead of the market and that's like a good framework for thinking about the growth trajectory outside of 2021.
Well I mean I have no doubt that we sorry, Paul go ahead.
Please go sorry, I apologize.
<unk> many years ago, now, we decided that we needed to meet the learner, where the learner needed to be met and we needed to broaden our horizons to go to.
Two from degree too.
Short of courses and.
Create opportunities for somebody to learn across their lifetime and to tie. This to the first question that was asked.
There is somewhere in the in the ballpark of 15 million people that have come into our system in some particular way and we're getting much better.
Operating across this ecosystem and offered offering those folks opportunities to learn where they need to learn when they need to learn and so Josh. It's certainly not just about the degree of business today I mean, the <unk> segment for two U.
Alone is larger than most of our competitors and candidly growing faster.
That's without the degree business.
We happen to believe strongly in both you saw an acceleration in the degree business, we expect that to continue.
52% in the <unk> segment on that revenue base is pretty.
Pretty impressive most of that tech doesn't get to that revenue base alone when you combine them.
We really become a key partner for the University and that honestly is how you end up with seven schools across northwestern.
The and disciplines that range from the business school to the family Institute for counseling.
So we love those growth opportunities.
It's clear that undergrad is changing the game for two U.
It is clear that the most significant COVID-19 impact.
For the company is what has happened in undergrad education. There is no question that the consideration set if you are of great president of the Provost somewhere in this country you are thinking about digital transformation fundamentally differently than you were two years ago, and we are starting to really see the benefit of that which is why we said expect more from us in the undergrad space because they are common.
Awesome, Thanks for the insight.
The next question is from Brent Thill from Jefferies.
If you can outline your view on the rule of 40.
I know if you take.
All of new got it.
'twenty one on the top and six on the bottom of your Youre getting to a rule of 27% I know you have longer term aspirations can you just talk to.
How quickly you can get there and how important that is to you and the rest of the team.
So Brent.
Let me, let me start off here and then I think.
Chip chip will jump in but.
I recognize the use the guide there and get to 27.
I guess I could I could go with 32 and.
Started doing the seven and get the 39, which is this quarter but.
Youre looking at it the right way to full year is probably the way to let the bis and.
The rule of 40 lies in the eyes of to be holder. Some use revenue growth then.
EBITDA some use revenue growth and cash flows the bottom line is.
We use.
Our yard stick, which is the rule of 40.
How we are creating value as we go through our progression.
We're going to hold ourselves accountable to maintaining a healthy topline growth and to maintain our <unk>.
To expand and improve the margin line for us as we go forward.
For us. It is it is very important that we become EBITDA positive and cash flow positive we've gotten there and it is something that we focus on it was very easy in 2020 for us to sit on our laurels benefit from lower cost per leads.
And the.
Deliver results because there was demand in the marketplace. Instead of our teams worked very hard to improve the processes within the business. How we do things how can we do things more efficiently and those are the things that are going to allow us to maintain the momentum that we had exiting 2020 and.
As we go through the passage of time here I think we will continue to use the rule of 40 is a good benchmark, but the bottom line is.
All we can ask ourselves is the continued to improve on a year over year basis on a rule of 40 level.
It is not meant for us the provide here's where when are we going to be at 40 of our here is when we are going to be of 35, we're going to push ourselves right.
The task ourselves with getting to EBIT positive in Q back end of 2020, we did that in Q3, we tasked ourselves this year with getting to cash flow crossover into cash flow positive on a trailing 12 month basis the back half of the year, we achieve it in the first quarter.
So we will continue to set ourselves aggressive targets internally, but I think rest assured brands.
You can look to us to continuously improve that rule of 40% of year over year basis, yes.
Yes, I mean, what I would add is we are at a stage of life. We are seven years and as a public company and giving long term prognostications as to what will happen on the rule of 40 basis. We're just not going there. What we are willing to do is put the results out and let them speak for themselves and I will tell you. If you look at slide 13 of the earnings presentation that is a pretty Sweet chart.
That is our free cash flow.
And incredibly proud of what the company has accomplished over the last two years.
Tremendous amount of work with.
Market, leading growth, while simultaneously crossing that historic milestone.
So Brian we are thinking about revenue growth and EBITDA together that is clearly our version of rule of 40.
And we really like our odds of improving it as we continue to mature as the company.
Yes, Paul I wasn't I wasn't trying to take away from your achievement of the quarter just more of on the guidance trying to reconcile.
That relative to the outperformance so.
Really appreciate the color. Thanks again.
Thanks, Brad I was just trying to lighten up the mood here all of it.
Thanks.
Yes.
Your next question is from Jeff Silber of BMO capital markets.
Thank you so much U.
You alluded to this in your prepared remarks about folks down in D. C really paying more attention to enhancing skill sets for employers employees and the.
Unemployed.
I know we had some news this morning from President and about the American family Pan I'm. Just wondering if you kind of chance to look at it and what you think.
It could be any impact on your business because of its true.
The problem, Jeff So I would say I would start by saying that we've been very pleased with the conversations we're having both on the hill.
And early days of the by the administration.
There is a clear of bipartisan focus on Reskilling and Upskilling, we have 40 plus partners all over the country with great regional balance.
The Great University is doing something that the great University historically has not done which is.
Reskilling and Upskilling people directly for the workforce in a way that's meaningful at scale.
And so that's been a strong positive this morning's announcement, we were actually quite excited about the focus on health care.
And specifically health care related to build.
Building a pipeline of skilled.
The health care workers with graduate degrees, we think that that is the real opportunity for the company.
If you look across our business on the degree side today.
I think we're doing high quality health care graduate education out of scale really nobody else's is close.
And at of quality levels. So just take one example of that.
The physician assistant program with Yale.
It's just a fabulous program incredibly high quality students come from all over the country. They get to attend Yale University, but then equally important they return to their local area to not only do their practicum, but the open ultimately practice.
And we think that kind of program is really getting noticed by those that care about health care education. So so Jeff overall, we're pretty pleased with the discussions we're having and on.
On balance like what we see.
Okay, that's great to hear shifting gears a bit from a competitive perspective.
We've been seeing a lot of companies expanding.
The expanding in the space, we had a pretty successful IPO on the states about a month or so ago our U.
Are you seeing more intensity from a competitive percentage.
I mean honestly not know so.
The company, you're referring to the successful IPO, we were very happy for them and I would say.
They've been they've been in existence for quite some time not as long as we have been but for a long time now and.
And so we've been competing in the general ecosystem with most of the players if anything Jeff.
<unk> had some folks fall by the wayside.
Doing this more and more you got to be able to do it at scale, you've got to be able to do it at high quality.
One of the things that I think sometimes when we talk about some of the things in the prepared remarks.
I understand the importance of focusing on our rule of 40 and on our cash flow progression of all of these things.
The important but ultimately these businesses are going to be judged on quality outcomes and if you look at what's happened with retention rate over a decade.
It's pretty remarkable what we've been able to do from the standpoint of the improving graduation of retention rates.
So we're feeling like our system is getting better and better the.
Effects for the students and for the faculty is getting better and better we feel very strongly about our current net promoter scores the board pass rates in our programs that have them are very high.
So.
From a competitive standpoint, you take just a couple of examples this year of of new innovations for the company the career engagement network.
We think.
Elite higher education, Hasnt quite seen anything like it.
And then you know an example of something totally different is we rolled out something called the virtual field practicum to allow students that are in clinical based programs to engage virtually with an avatar first and then eventually with an actor of portraying someone that might have.
PTSD returning from the from the war before they actually deal with somebody in a live setting in the clinical setting where they are dealing with somebody who has returned from the war with PTSD or loss of everything in the fire and like it's been so positive for our social work programs. It's super innovative the net promoter scores for it are off the charts from the student.
And we did that to just continue to drive innovation in those programs and.
I feel like our today more and more the combination of scale and quality.
Can it be difficult for some of the smaller players to compete with US. So you are seeing some folks fall by the wayside a bit.
Okay. That's really helpful. Appreciate the color. Thanks.
Your next question is from Stephen Sheldon from William Blair.
Hi, Thanks, great to see the continued acceleration in the degree of segment you guys gave some cash.
Commentary earlier, but just can you talk about or I guess the frame the factors that drove that acceleration this quarter, how much of the undergraduate programs playing into it and how sustainable this type of growth could be as we think about.
The next few quarters.
So we're very proud of the degree business Ebony Lee and her team are managing director for the degrees.
Just doing incredible job. So I would say to you is we have an internal term that won't make any sense of anybody but it's called the 15, one percenters and what we mean by that is.
These are very large operations and they're complicated so sheldon like there is a bunch of factors that ultimately drive success for the student and when I say success of the student I don't mean, the successful enrollment I mean, we are of business, where if the student wins the university of wins and we win what does that mean, if a student if we retain of students.
And they successfully graduate they typically have a great career outcome in our programs and so driving that retention rate driving small improvements across a bunch of different categories. We say the 15, 1% or so it's like there's not one thing that is going to move the dial. It's a collection of activity from a really great team focused on <unk>.
Improving it and so youre seeing a bunch of our historic programs, whether it be the master of data science of Berkeley, or the master of business Administration of Carolina.
Which I graduated from you've got programs at historic highs.
There you've got not just strong enrollment, but you've got really high quality student marks.
And then you combine that with <unk>.
The undergrad or Morehouse.
Or Simmons undergrad.
And those are all really exciting opportunities, which is why you will see us launch new undergrad program. So.
The degree business is it's just been a lot of effort among of team that is focused on.
Making service their mission of driving this positive outcome for the students that.
That is not just one of our guiding principles is what actually makes this place work every day.
Great. Thanks, and then I guess.
Follow up I, just wanted to get an update on the concept of stack ability and alternative credentials and specifically as we continue continued to expand boot camp and short course offerings have you seen.
I guess notable changes over the last year or so and how universities are trying to apply the concept of stack ability for some of these piecemeal offerings, where they can be pieced together by a learner in two of larger certificate or degree of overtime.
Yes, so Paul I can probably take that one for you. So we are actively working in a whole variety of different universities on opportunities for people to have pathways from one product to the other you heard me mention Sheldon the the.
Close to 50 million people that have come into our world in some capacity and being able to offer those people other opportunities.
With Great University partners to improve their lives and so sometimes that involves giving.
Given somebody an opportunity to move from a short course to a degree and we do think that there.
But there will be interesting credit opportunities across the business. So it's something we're pretty pretty focused on today.
Great. Thank you.
And we have time for one last question and your question is from Ryan Macdonald of Needham.
Hi, Thanks for taking my questions first one for chip chip, we've clearly seen some really strong demand in terms of application trends on the Grad segment and enrollment I'm. Just curious as you as you talk to your University partners, what what ability do they have to be able to fully service that demand today for the spring cohorts and our.
We are seeing any of the demand start to bleed in default of cohorts as we think about the second half of the year.
Well, that's certainly our job is to work in the case of of two U powered program. We are powering the by definition pairing the experience for them and that includes.
Ensuring that students are fully supported so.
Our chief of University Operations Officer, Brad Adams has a very large team focused on helping the university handle the scale that we're operating at <unk>.
You might imagine that with the brand new program like Morehouse.
<unk> been working very hard.
Under the leadership of the GM Karlo young to really get them ready for what.
Today going to be clearly a program that will operate at scale. The 36 million people with some college credit that Havent completed.
And the opportunity for Black Americans is profound I mean, morehouse is such an incredible institution.
The great history and for the first time as the President and David Thomas talks about it.
You can.
More house without borders U can attend Morehouse and.
Have a really high quality experience.
From anywhere in the world and so we have to get them ready for that that is our job and.
We have liked what we've seen on <unk>.
Demand for degrees not just on the graduate side, but on the undergraduate side as well.
And it's our job to make sure that not only the door stay open which during COVID-19.
I think we handled the incredibly well under a tremendous amount of pressure that the world was under and our schools were under so one note on that point Ryan is.
I'd just tell you definitively the the model that we operate on the ultimately we call it our shared success model.
We are powering.
Under two U S. A very large component of what the University provides certainly not the instruction on the degree side.
Pretty much everything else is on our side and it is under more demand now than it was three or four years ago and I do think that there is some impact from COVID-19 on the interest in <unk>.
Expanding opportunities, where we can bring not just the expertise and the scale to bear, but the capital to bear.
And we've been focused on doing that with.
Capital footprint, where we're not sacrificing quality at all but figuring out how to do things more efficiently and better in the process and that is some of what scale got you. So today as you heard Paul mentioned, we kept our headcount flat. It went down a little year on year, and we were still able to achieve this kind of.
Growth in the quarter of 32% so.
Prior now firing on all cylinders right now Brian.
Great and as a follow up I wanted to ask about the the recent win of Pepperdine and the decision to partner with key path on that opportunity I think this is only maybe the second program you've partnered with key path on just wondering what what made partnering with key past sort of the right decision versus going alone as the <unk>.
The solely to U program, and how does that change the structure of how the program has delivered or priced if anything.
So we keep finding a way to say, yes to our partners instead of saying no. If we can get two of smart, yes that works for both sides I mean, what people have to understand that these are.
You don't get to become of Dean at Pepperdine unless you are incredibly successful in your own right and are building a high quality operation and building strong sustainable operation and so being able to say, yes Keith.
<unk> is part of our toolset, we've been very happy.
And to be clear working with key path has been an absolute pleasure.
The firing and the team there.
They are of Great company, and so just like with our guilt relationship. If we can partner with someone else to expand the opportunity set we're going to do it.
Excellent congrats again.
I will now turn the call back over to chip <unk> for final remarks.
Thank you everyone. We appreciate you joining us this quarter and we look forward to seeing it on the road.
Take care.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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