Q2 2021 2U Inc Earnings Call
Good day and thank you for standing by welcome to the second quarter 2021earnings report conference call at.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need the press star 1 on your telephone if you require any further assistance. Please press star Zero I would now like to hand, the conference over to your speakers day, Mr. Kent Golf Senior Vice President Investor Relations.
Sir you may begin.
Thank you operator good.
Good afternoon, everyone and welcome to <unk> second quarter of 2021 earnings Conference call.
The Gulf Senior Vice President of Investor Relations of 2 U and I'm joined by Chip <unk>, our co founder and CEO and Paul <unk> our CFO.
Yeah.
Following chip and Paul's prepared remarks, we will take questions our Investor Relations website Investor Dot 2 dot Com has our earnings press release and slide presentation as well as the 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, our pending acquisition of index, new educational offerings student and University demand and other matters. These statements are subject to risks uncertainties and assumptions.
Any forward looking statements made on this call reflect our analysis as of today, 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.
1.2020, 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 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 <unk> performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release.
<unk> on the Investor Relations page of our website with that let me hand, it over to chip.
Thanks, Ken.
<unk> has always had a bold vision for the future I want to start today's call with some reflections on where that vision started where we've been and what the whole of the future holds given our ex news.
We started this company in 2008 to create the world.
And if the online education.
And we've been defying the odds ever since.
Back then high quality high quality online education wasn't of thing people said online education was bad it couldnt be great Couldnt create the same outcomes of the same relationships the same quality.
Nearly a decade of half later, our 550 plus programs have become industry.
The industry, leading examples of online education done right at scale driving life changing outcomes for people.
With nonprofit universities at the core of what we do we're proving the higher education can be blended connected accessible affordable and sustainable.
From the beginning we've invested in building our partners' brands.
And we've generated over $5 billion in tuition bookings for their institution as we help transform the lives of over 350000 students.
All while delivering great outcomes, and increasing retention and graduation rates you see this impacting our Gallup research 97% of students in <unk> powered degree.
The programs report positive career outcomes and 92% would do it all over again.
At every step along our journey to U has been growing and evolving.
We got very good at what we do we scaled our proprietary machine learning based per marketing engine.
The not just find any student, but the right student.
We figured out clinical placements at scale and.
And we built 185 plus degree offerings.
As we saw the market evolve and the demand for lifelong learning increase we recognize the nonprofit universities needed to move beyond the degree.
So we made a strategic acquisition and entered the executive education space with short courses.
And more recently as Reskilling and Upskilling of become of worldwide imperative. Our boot camp acquisition has established us as the largest provider of University of led tech skills training in the United States.
In the past 12 months alone our partners boot camps have reached more than 23000 students and provided over 30000 free job referrals.
All while creating new pathways for historically underrepresented communities to enter the tech industry.
Our journey of then continued with the move into the largest part of higher education undergrad.
We launched Simmons and built our entire campus and online experience of first for Q U.
We launched the London school of economics scaling.
1 of our largest degree programs and most recently, we helped Morehouse College bring is beyond borders vision to life by launching its first online degree, which are now becoming some of the fastest growing programs in our history.
We also quietly started building out an enterprise channel first with our short courses than with our boot camps, including.
Ailing of to breaking partnership program with Netflix.
We did all of this without establishing <unk> as the consumer brands as a result people often don't fully appreciate our scale reach and impact because they don't aggregate our activity around the <unk> brand the only kind of they see 2 U is when theyre thinking about twow, our NASDAQ ticker.
What matters is that we're doing this right the right intentions, the right motivations and most importantly, regardless of the skeptics of profit making businesses. The right outcomes. We are delivering on our mission to eliminate the back row in higher education.
Of course during our long journey the world around US also continue to evolve.
Back.
Of our ground 12, the massive open online course revolution happen move.
<unk> platform companies were born and caught lightning in a bottle.
They were founded to bring access to the world's education to the to the masses.
There were 2 big companies in the <unk> story.
Non for profit 1 nonprofit but their tax status isn't really the story.
Their impact however is the both generated worldwide attention of worldwide following of worldwide base of learners. They both created additional pathways for people around the globe to get educated.
They both became huge brands and.
And they both had a global impact on higher Ed and millions of lives.
And then in 2020 Covid happened.
Taking digital transformation from a nice to have 2 of strategic imperative for all of higher Ed overnight.
We believe the pandemic reinforce to the world and higher Ed the value of to use model and our approach to building sustainable high quality online education.
And it also drove millions of additional learners to the MOOC platforms.
Ex the leading nonprofit move platform alone added millions of new learners and signed up nearly 1000 universities to its at ex for campus offering, allowing schools worldwide to teach at ex courses on campus.
When of non <unk>, the founder and CEO of IDEXX and I started talking about this transaction we record.
Is the transformational moment happening in higher Ed and.
And we saw a clear vision for creating greater access to affordable high quality online education built on a shared alignment around our mission.
And we're turning that vision into reality.
When the deal closes we will have a company with all of the necessary ingredients.
Recognize the digital transformation of higher education.
Our powerhouse global consumer brand <unk>.
Combined with the most comprehensive and complementary set of freed of degree offerings and an unmatched bundle of tech enabled services.
2 U and <unk> are perfectly fitting puzzle pieces, but more than that.
Gather we believe we will accelerate the opportunity the scale and most importantly, the impact.
<unk> will be the fuel that helps supercharge, our company and will supercharge our impact.
And yes, it will redefine Q U in the industry.
So, let's talk a bit more about about how.
<unk> is of mass.
To the brand of top 5 education brand.
Yes, as a leading education platform. It has huge traffic, but in my opinion. The word brand is about relationships more than anything else.
Ex creates tremendous opportunities for learning for everyone. With the addition of that ex will have a relationship with anyone in the world who wants to learn the.
They'll become.
Some part of to use ecosystem and instead of us paying premiums to the social networks define them they'll come to us organically.
Ex creates network effects and we'll apply those to 2 U of business that today knows how to digitally transform of University and offers a complete suite of services products and competencies for the great University.
Our city to thrive.
2 you can substantially increase the free course portfolio, creating more learning and thus, creating more opportunities to introduce learners to our university partners other programs across the broadest spectrum of offerings in the industry.
<unk> will create a flywheel in our enterprise business more courses means more learners.
As more companies means more jobs for students, which means the bigger better business opportunity.
Alex will create a flywheel on our campus ambitions more courses means more campuses utilizing our courses for their students, which means more learners, which means more opportunities for our partners, including both existing addax and 2 new partners.
At ex will create an incredible opportunity to not only deploy open at ex throughout our platform, but also to work with Harvard MIT and our partner institutions to develop platform features and functionality that drive purge of got pedagogical improvements and innovations that improve student outcomes.
Ex will create new product categories for 2 U.
<unk> and micro masters and disruptive price master's programs and tech data and business the.
These are innovative and affordable ways to offer greater access to higher Ed and a particularly appropriate for emerging economies and learners abroad.
At ex will accelerate our international ambitions.
Today, while massive in the U S. Ex is even bigger abroad. As 1 example at ex has almost the same learners in traffic from India as the United States.
Our localization efforts will help us more efficiently grow the short course business internationally. The first localized courses. Some from standard Stanford are doing well at ex will fuel this effort.
Fedex will create a strategically valuable increasing our partner base to 226 partners from 84 <unk>.
Including many of the world's best companies like IBM, Google and AWS.
It's also notable that the IDEXX partners will have access on a fee basis to our world class competencies of the 2 U OS op.
Operating system.
Finally, as I said before but is worth repeating at ex will make us a global consumer brand overnight.
Now, let's talk about the industry.
Following the closing of the <unk> ex transaction, we believe that no company will be better positioned than 2 U on a worldwide basis to.
The digital transformation of higher education.
We will bring a complete approach and 1 built on the backs of hard work of 14 years to build the full system for true digital transformation.
We're aligned in this effort with the great institutions of Harvard MIT, the ex partner community and the 2 new partner community.
The lead their price and mission is more important than tax status in.
In fact, our ability to drive innovation and efficiency will help provide competitive advantage to great nonprofit universities that drive the best outcomes for students.
Emission alignment matters.
But this deal is more than that.
It's signal.
The new era, and a clear race.
While the space race between brands and Bezos that certainly captured everyone's attention. This race is about changing this world.
Who will become the primary consumer learning platform of the next 20 years.
We believe our ability to serve great universities to scale.
Global reach and impact across every possible product offering with a comprehensive and proven approach to do it will solidify us as that partner and redefines what it takes to win in the market.
We built an unmatched world class machine learning marketing system, putting universities at the center.
We built a world.
The outcomes driven student engagement and placement system.
We're building a world class career engagement network.
With Ed ex we will layer on top of that their worldwide brand products and marketplace and 40 million learners.
Learners faculty universities and employers coming together on our platform.
Because quality matters the approach matters and we have the portfolio of tech services and products to deliver high quality outcomes at scale.
In this race I like our odds.
Before I turn it over to Paul Let me touch briefly on our current results I thought these were pretty stellar 30% growth.
In Q2, and a much larger than expected profit, yes profit.
Driving 30% growth of this size in Ed Tech is not easy and the comps for the year, our hard given the impact of Covid last year.
There's clearly some lumpiness in the <unk> side, given that no 1 really knows how COVID-19 will impact short term global consumption of education.
As you saw on Google's earnings digital advertising costs are clearly higher across the board driven in part by more people getting out of their houses.
But coming into this year, if we knew we would grow more than 20% top line at our size with significant margin expansion to high single digits with real free cash generation.
Particularly with the momentum degree business provides for 2021, we all would of been thrilled.
Our degree business did particularly well with 20 plus percent growth in 6 quarters of acceleration and a very strong launch scheduled for next year.
Some of the projected our growth slowing to single digits for next year the strength.
Strength of our degree business alone and the number of new launches makes that hard to imagine.
Looking at revenue growth plus EBITDA margin.
Expect to look better next year on an organic rule of 40 basis.
With growth being solid and improved profitability in our degree launch schedule is definitely part of that.
It.
Unlike 2017 in terms of total number of degree offerings and we are doing these more efficiently.
We have strong leading indicators new partners and scaling programs like Morehouse LSE and Simmons that are clearly meeting of market demand.
We're excited to begin working with a few new clients on the degree side, including the University.
It looks Miami for their MBA and several other grad and undergrad programs, we expect to announce shortly.
We expect 2022 is going to be particularly strong for the degree segment.
On all Cred, we also have some new news with a great new partner.
E University as our first partner in Spain and assigned.
First of the amendment with us to launch a suite of business and technology related alternative credential offerings.
He is the top private University in Spain, and is best known for its business school that is consistently ranked in the top tier globally.
The stellar quarter in us holding our guide regardless of the Covid uncertainty and lead cost volatility.
The <unk> agree.
It should give you confidence in our trajectory even before the <unk> ex deal comes to fruition.
But that is all shorter term thinking and on this call given what we've announced I really think it's important for you to take a step back and look at the long term the.
The industry is growing universities must transform.
Simply put combining the strengths of 2 U in <unk> ex will be of massive win for all of our stakeholders investors enterprises universities, and most importantly learners and a major milestone in our evolution.
We are delivering on the original promise of this company's mission of eliminating the back row in higher education.
<unk> and with the ex announcement, we're not playing around go bigger go home, we made our choice.
Now I'd like to turn it over to Paul <unk> CFO to take you through the results and I'll return for Q&A.
Thanks, Jeff and good afternoon, everyone.
We had another outstanding quarter revenue grew 30%.
Second quarter of 2020.
The $237.2 million.
We saw strong revenue growth across products with the degree of segment up 26% on alternative credential up 36% on a year over year basis.
Expense for the quarter totaled $274.3 million.
Over the base of 18% over the second quarter of 2020, resulting in a net loss of $21.8 million.
A $44.3 million improvement.
Adjusted EBITDA for the quarter totaled $17.1 million.
A margin of 7% and Unlevered free cash.
Cash flow on the trailing 12 month basis totaled $2.5 million.
In a nutshell, we reported strong revenue growth.
Solid EBITDA margin and positive Unlevered free cash flow on a trailing 12 month basis for the second consecutive quarter.
A very strong first half.
And in clear and continued evidence of the durability and sustainability of our business model and revenues as.
As well as our growing earnings power.
Now, let's take a closer look at revenue for the quarter.
Full of course equivalent our FTE totaled 84000.
Half of the increase of 26% on a year over year basis with the revenue per FTE up 3%.
Revenue in the degree segment grew 26% compared to the same period last year.
This represents the sixth straight quarter of accelerating revenue growth.
Ftes for the quarter increased.
The 1% while revenue per FTE decreased 3%.
This decrease in revenue per FTE was due to the continued strength in our recently launched on the Grad offerings.
Volume and lower cost per credit.
But it wasn't just on the Grad that showed strong performance.
Third quarter we.
We saw strength in the number of enrollments and increased the ENT retention rate across vertical cohorts and products.
And then demand for high quality online degrees remain high with the pandemic accelerating the digital adoption curve, which we believe will have a.
The lasting impact.
In addition university demand remains elevated.
As evidenced by our recent wins, including.
Including our recently announced MBA with the University of Miami and the strength, we see in the pipeline.
But the degree of trajectory into perspective for the first.
First half of the year. This segment grew 25%.
And 11 point acceleration compared to the first half of 2020.
Revenue in the alternative credential segment grew 36% on a year over year basis.
Driven by 16% increase in Ftes and 17% increase in revenue.
<unk> per FTE.
Growth in this segment was driven by of 53% increase in boot camp revenue and 16% increase in short course revenue.
Across all of our businesses.
And in particular, the alternative credential segment, we are seeing an increase in digital marketing costs.
Which is something many companies are dealing with.
As the economy reopens and advertisers re enter the market.
It is important to note that we expect the stay with our framework of driving profitable growth and not chase revenue at the expense of EBITDA.
Turning to costs.
Cost and expenses total.
Total operating expense for the quarter totaled $274.3 million, an increase of 18% over last year.
This marks the fourth consecutive quarter, where revenue growth was at least 10 percentage points higher than expense growth.
Compared.
To the second quarter of last year marketing and sales expense increased 17% against revenue growth of 30%.
As we continue to drive efficiencies and benefit from scale.
If we look back over the past 8 quarters marketing and sales expense as a percent of revenue has declined more than.
12 points.
And as we've discussed.
There are many more opportunities to drive further improvement, especially with the acquisition of ethics.
Net loss for the quarter total $21.8 million, a $44.3 million improvement compared to the year ago quarter.
While much of this improvement came from revenue growth and margin expansion.
We also benefited from a $27.9 million non operating gain on the sale of of 2019 investment and key path education.
Adjusted EBIT for the quarter totaled.
$17.1 million, a $19.2 million improvement from last year, and a margin of 7%.
We expect the continued to deliver EBITDA as we managed through the reopening dynamics of the economy.
As I mentioned earlier, we will continue to be disciplined.
<unk>, we allocate the and manage the profitable growth across the portfolio.
Moving onto the segment margin.
Margins in the alternative credential segment improved 2 points sequentially.
Margins in the degree segment came in at 19% for the quarter driven by increased enrollments.
Better retention rates and cost efficiency initiatives.
I mentioned earlier that the degree revenue growth in the first half of 2021 was 11 points higher than the first half of 2020.
Well that revenue acceleration was coupled with a 14 point margin.
<unk> improvement.
Headcount at the end of the quarter totaled 3720 compared to 3677 from the year ago quarter.
Turning to the balance sheet.
At the end of the June quarter cash and cash equivalents totaled 971.
<unk> million dollars.
Up from $505.1 million at the end of the March quarter.
This increase was primarily due to $475 million loan that we closed in connection with signing the purchase agreement for the <unk> ex acquisition.
Operating cash flow for.
The quarter was the use of $9.8 million.
Which was significantly impacted by timing related increases in net working capital.
Cash provided by investing activities was $19.9 million.
Driven by the proceeds from the sale of our investment in <unk>.
Partially offset.
3 of them by $17.3 million and capital expenditures.
Accounts receivable at the end of the quarter totaled $101.4 million.
Up $26.7 million from the end of the previous quarter.
This increase was primarily driven by the timing of our clients.
Academic calendar.
As well as the typical increase in accounts receivable from revenue growth.
Unlevered free cash flow on a trailing 12 month basis totaled $2.5 million.
This is particularly impressive given the net working capital headwinds I just discussed.
The.
The increase in accounts receivable alone was a drag of $30.5 million and free cash flows for the trailing 12 months.
Now for a discussion of guidance.
We are acutely aware of the uncertainties that companies are facing with the spike in Covid cases due to.
Of the Delta variant.
In the face of similar uncertainty last year, we withdrew our guidance.
However, this year, we believe we can maintain our guidance at prudent levels.
We have good momentum in our degree business.
And as I've said in prior quarters. It is a business that takes time.
<unk> of momentum, but when it gets going it goes for a while.
That's the new partnerships and other leading indicators, we believe that the momentum we're seeing in a degree of business as sustainable.
At the same time we.
We see businesses across a range of industries.
Trying to get.
To build on the Delta variant and what it might mean for the path and pace of reopening of economies around the world.
And <unk>.
For consumer behavior.
After carefully considering the operating environment and other factors, we are reaffirming our guidance for 2021.
Originally provided on our first.
Handle earnings call and affirmed on June 30th.
We expect revenue to range from $925 million the $955 million.
The growth of 21% of the midpoint.
Adjusted EBITDA is expected to range from $55 million of $65 million a margin.
<unk> of 6% at the midpoint of adjusted EBITDA and revenue.
Given the efficiency improvements, we've been able to drive of new launches.
We expect capital expenditures to be approximately $75 million.
Which is slightly lower than our initial projections coming into the year.
The weighted average.
Average shares outstanding is expected to be approximately 75 million shares.
The conclude we reported another strong quarter, adding more proof points for the durability and sustainability of our business model.
You may see some variability in our revenue growth rate.
In the quarter to quarter due to things like the Delta variant and advertising costs.
That variability will be around a fundamentally strong trend line over the long term.
Moreover, we are delivering efficiency improvements and new launch costs.
And overall expense growth well bill.
The revenue growth.
All of which is translating into improved margins profitability and cash flow.
And as we work towards the closing of the IDEXX transaction, we believe that ex will enhance our long term strategic position in the AD Tech space.
And with that.
We'll.
Hello, Raul for questions operator.
Thank you.
Minder to ask a question you will need of press star 1 on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Opened with your first question comes from the line of Stephen Sheldon with William Blair.
Alright. Thanks.
<unk> you've made the comment that it's looking like 2017 in terms of I think program launches. So can you maybe frame that a little bit more and help us understand the potential impact the.
New program launches could have to growth.
At a high level as we think about the next few quarters and into 2022.
Hey, chip I think youre on mute.
Thank you. Thank you Paul sorry.
Sheldon Thank you for the question so.
You might have seen a couple of days ago, We announced the University of Miami MBA and that's an example of a program that we think is is the sizable program and.
It looks more like what in the old days, we would call. The DCP is and what's great about it is it will launch in January which is an outstanding.
Start 2022 for us.
And the pipeline demand right now is very strong and so we've definitely seen.
Universities, focusing on how to do something longer term that is.
That is.
As less of a pandemic response and more there.
Any way to cycle in the Chronicle of higher education, just yesterday about the fact that the schools that are doing well and the pandemic our schools. The bill digital activity over the last decade, and they are reaping the benefit of that and the reality is if schools haven't built a digital presence they have the transform and it's expensive it's hard it's complicated.
<unk> many times on your own it doesn't work without great partners like to U and we're very proud the today, we still see the underappreciated across.
Our stakeholders is that we've never lost the degree program.
1.
Degree partner.
No.
The University.
There was an art offers degrees with 2 U we were still with everybody since 2008 so.
We're excited about what the pipeline means for the degree program business next year.
And look forward to continuing to delivering for people as they.
The figure out how to transform themselves now I would also tell you that from an efficiency.
Part of the point, we are getting better at.
Doing this and we're figuring out how to do these.
In a more.
The efficient manner with the lower cash footprint.
And that's pretty important to our long term.
Objectives.
Got it and when you think about.
About the program launched I know I know on the on the efficiency side.
You're you're usually spending sarmatic months in advance of trying to get the marketing interest when I. When the deal is after our program is announced I guess as you think about you know as you think about the second half of this year.
If you've got all of these programs that are going to be launching.
<unk> next year.
The kind of the including some spend related to getting those programs up and up and running.
I guess, how should we think about the spending to get some of these program launches.
I guess I'm kind of asking is that spend kind of hitting in the second half of this year, where the revenue generation will be more 2020 debt.
As you know the degree business the way the model works is that we do spend to drive we invest in our program and we see it steady state over let's say of 3 to 5 year period, depending on the program now if you look at our undergrad programs.
Amazing to see what's happening with the underground business and we do expect to announce more undergrad.
Programs over the course of the next 6 months.
And some of those will be in the pipeline for next year as well so.
We're pretty excited about what that means you do have to invest to get the degree business Rolling and a couple of years ago. We did slow down the pace I think people probably don't appreciate.
At our size today that the pace has really picked up.
We're launching offerings from degree offerings.
Across both undergrad and grad debt.
Look more like years past.
Paul you want to add anything.
No I mean, I think you've touched on at the bottom line is.
We're going to balance.
Top line growth with EBITDA margins and.
While we are spending ahead of launches in the back half of this year of et cetera.
The numbers that we have out there includes that type of spend and we are going to be prudent we're going to get it.
Balanced profitable growth is the name of the game for Us and.
And when you combine that with the strong positioning we have and then our combination with <unk>. We believe that we have a sustainable business that can endure but thats the time.
Got it thank you.
Your next question comes from the line of Ryan Macdonald with Needham.
Hi, Thanks for taking my questions.
Would be curious to understand the sense of trajectory in enrollments you know heading into the fall semester, Inc. We've seen when we look at Grad applications really healthy growth in those applications across some of those major degree verticals, thus far in 'twenty, 1 and starting to see some international students.
The net recovery of undergrad can you just talk generally about how you are feeling about the conversion of those applications into enrollments in the 2 programs.
Okay.
Yes.
We feel like we've got as we mentioned on the degree side very strong.
Trajectory on the <unk> side in.
Enrollment we passed now 350000 students were doing the sort of scale that I don't think anybody else really is.
Ed Tech so.
The conversions that we've seen on the degree side continue to run at a strong pace.
And what's been fascinating Ryan is just to see how many of our.
Our partners that have been with the company for a long time really get the benefit of.
The the <unk>.
Experience and the quality.
Their brands have improved in the online environment over the last decade, and you see many programs with outstanding.
Enrollment levels.
Look at record conversions.
So our degree of conversions are still running higher than pre COVID-19 levels demand is real strong.
And we've got a whole bevy of new short courses and boot camps on the way.
And some of the short course topics are just really incredible. So we did see if you go back 4 years through our acquisition of get smarter that I think that was us being around the corner here.
Universities are going to need to evolve beyond the degree and you have to be able to meet the learner, where the learner needs to be met.
Succeed and.
And we think the great nonprofit university can be at the center of all of that activity.
And then when you start to layer in what's going to happen when we closed the transaction with ex.
It's pretty incredible.
More time on that on this call.
Then we haven't had an opportunity to talk about it that much to this.
Community.
And we've been quite busy with the.
The more important stakeholders in terms of the partners.
Just it's been it's been pretty incredible. The response has been incredible so far and I do think there is reason to believe it will change the industry.
And it certainly will have.
A substantial impact on us because.
We do become a platform in the marketplace and we do it overnight.
With an incredible team that comes together from ex and <unk>.
Incredible founder and I would tell you that I do really love what it means for opening doors to more people to create.
Access to all of our programs, whether it be technical training from a great University and of boot camp or learning about diversity of women's leadership in the short course for getting your doctor of physical therapy in a degree program.
Yes.
I guess that's of great sort of move some of our my follow up which was.
At ex obviously, clearly a lot of excitement.
As youre thinking of sort of moving towards the close of that transaction I guess, given the conversations you've had with the existing University partners from ex U sorry about few of the areas, where you're most excited about or you sort of U S. Low hanging fruit in terms of investment to scale the components of that business.
Thanks.
Okay.
Well I mean, we're going to build.
Very large numbers of new free and low cost options that grow the marketplace we've committed to.
The mission of the organization and that was actually reasonably easy for 2 U to do because there is just such deep mission alignment.
It's around we're excited about.
Of the opportunity to be the complete for each of degree solution.
You could say free the Phd.
We will offer more free courses, we will offer great opportunities for people to have access to all of our both programs and competencies.
And built.
And think about the partner base Ryan we go from.
84% to $2.26.
We have 78% of the top 50 universities.
In the world, 78% as hard to get to 80% of vaccination of the hard to get to 80% of anything.
So.
So we're talking about 3500 plus offerings.
225 plus partners.
<unk> hundred enterprise clients and I think we very quietly built out the enterprise channel that's something we've been doing for the last year and a half.
And it's the fastest growing part of 2 U right now.
And then you've got 50 million.
So you're to learners engaged in some form of activity with us I do think the.
If you think about our brand.
<unk> is a worldwide global learning brand.
And you can argue that that is the the 1 thing that is sort of the perfectly fitting puzzle.
Piece to the solution for 2 U.
So I mean the.
We are extraordinarily excited about what once we close this what this can mean for greater adoption of high quality learning.
Improving our technology.
And bringing our marketplace component.
Component to our business that.
As the market leader today.
And your next question comes from the line of Brent Thill with Jefferies.
Thanks Chip just on the <unk>.
Of the kind of of the most surprising thing for you I know you you highlighted the.
A lot of the core capabilities and in strategy, but is there is there of 1 or 2 things that really kind of struck the you that maybe we can all see on that debt you think over time can really help transform.
Yeah.
Not sure if you cut off you can still hear me, Ken So I would say the.
The Brent the the.
Ex has just been it's been incredible.
Every day, we learn of some something new that is just a huge opportunity.
The combination of these 2.
2 entities is.
It is sort of joking like Jerry Maguire, you had me of Hello.
Just incredible when you bring the 2 of US together what it does.
And so just 1 example.
When we were we were so intensely dealing with the process that.
At 1.
1 point, Alex for campus had 500 University partners and by the time, we got done we learned it had 935 universities that were offering at ex for campus worldwide powering their campus programs using the IDEXX content.
The enterprise opportunity as very significant when you combine the number of programs we have there.
Sales for the enterprise and you combine that with the huge library that ex has the partner synergy.
And I would say we prepared for all different types of outcomes in terms of how the world would respond obviously it was a shocking transaction to people because.
The.
For most folks.
They were very very some.
Surprised just by.
The nature of what ex was and where it came from and who we are and.
I would tell you. The response has been incredible so that surprised me Brent we prepared for.
We've had this is our third acquisition.
And I would say.
In some ways the <unk>.
Response to this has been the.
Best of the 3.
From a partner standpoint.
So there is just a great opportunity for us to do right by the full partner community of the IDEXX partners.
And the 2 new partners and the combined partners Theyre quite of few that we share.
And then 1 final thing would be ex has relationships with great.
Companies some of the world's best companies to offer their content.
And that's going very well and there is a lot of demand for those courses on the <unk> marketplace.
And so whether it be IBM Google AWS.
AWS great content from some of the world's leading companies and you might have seen that we recently launched our first short course.
Economist.
And so we also love that option and we think we will grow.
The entire suite.
There's a lot there.
1 maybe final point would be.
The worldwide opportunity so to U when people think of 2 U because.
With the history.
Of really high quality long form master's programs, and we do that and we do it well and I think we do it better than anybody but over the years, we really have diversified the company so more than half of our learners come from outside the United States today and.
And so just the opportunity in India alone.
Ex.
Of our long as.
As much traffic and as many learners from India as they do from the United States and that is purely untapped for the 2 U side. So we are quite excited about what that means.
Great. Thanks for the deep dive chip, Paul just really quickly.
I know you covered the free cash flow, but it has been improving off of 5 quarters in a row.
You took a little bit of the pit stop this quarter. It just sounds like there is some short term.
Mechanics, there in working capital that that should should alleviate itself over time can you just make sure I just had a question the.
Couple of quick questions around that.
You could address that thank you.
Yes, I mean very directly at the $35 million drag from accounts receivable and that is simply the timing of the academic calendar based based on the our partners. So that the matter of when we collect.
I think the key point and all of that 90 plus percent of our as part of <unk>.
Which means by the time, we get to the next quarter, we'll have that windfall in net working capital if you will.
It's not something that the systemic and as more of something of just a matter of timing from a collections perspective.
Great. Thank you.
Your next question comes from the line of Fred <unk> with Macquarie.
Fred Your line is open. Please go ahead with your question.
Maybe maybe move to the next 1 operator policies I was muted there.
Can you guys hear me.
Yes, we can.
Sorry about that.
I still haven't gotten the hang of working remotely sometimes here. So thank you guys very much of.
This is a unique time in the education landscape here of though we appreciate.
Appreciate that it's certainly an uncertain time as well and in some respects, but with that I'd like to ask what do you see drawing learners to your alternative credentials offering in this environment and do you see any signs of workers who are considering switching.
Considering switching to new roles in the industries as part of the wave of great resignations of unanticipated.
To be occurring.
During some of your online learning offerings and boot courses.
Well I mean, reskilling and Upskilling is the huge need for everyone in the world Youre going to have to.
You're going to of to fully retrain yourself every 5 years and technology training in particular has been.
We'll need and improving diversity.
Everyone's tech organizations has been a critical need and I feel like we've got this incredible solution for people with our technical boot camps.
And if you look at 30000 job referrals.
We're doing this at a scale that certainly no 1 else in that.
<unk> is I would say the the career engagement network that we recently.
Rolled out across our portfolio.
The Nx partners in the AD ex learners are pretty excited about that.
Giving people access to the world's best employers and it does become a bit of a flywheel because the more students U.
Of course.
The more employers want to work with U and the more U S.
A single University of you really can't do this.
The great employers aren't going to line up in a single University the.
The way they will for a company like to use it kind of aggregate of very large number of high quality learners in 1 spot so.
Ultimately all of this gets turbocharged would that ex.
Scale matters, and we think it will allow us to bend back the cost curve in a variety of ways.
And the alternative credentials are a big part of the story.
In terms of the worldwide learning base, so there's a bunch of Inc.
The incredible of course is coming up.
We have incredible of course from rice about the impact of Covid.
It's about the debut in the London School of Economics, just rolled out shorter courses that are only 3 weeks.
Or sort of a new specialty for the launch of school of economics, and you might have heard in there Fred that we did make an.
That we haven't press released yet that we've now signed I E, which for those investors on the call that are in Europe. They will be immediately familiar with I E..1 of the best schools in Europe.
The top school in Spain.
And.
Just continuing to March down the path of some of the world's best universities outside of the United States.
<unk>.
Over the last 6 months, we've announced announced the bunch and.
Really important to provide opportunities for people to improve.
Their careers and our both our short courses in our boot camps can do just that.
Okay. Thank you for that and then.
The.
The really.
Announcement of digital marketing strategy that you guys have been employing here chip you touched on the landscape of of the dynamics in digital marketing that Youre noticing. We've also noticed that your digital marketing spend per enrollee has been notably better on a unit basis than in prior years. So I'd like to ask around that what is that could you just walk us.
Back to you of what it is that you've done to.
To achieve those improvements and then.
With the introduction of the Etfs, where do you think that could potentially go.
So a couple of things, let me start off and then probably chip can add to this.
I think I think to U has.
Our world class marketing apparatus, and the marketing apparatus apparatus is something that has the ability to evaluate audiences and just online offline data our data sciences team come together and.
Run models and algorithms to decide where it's appropriate to spend.
Across what channel number of programs marketing programs et cetera. They have done a great job of developing these models and those things generate scale with the passage of time, it's like fine wine it gets better with time and we're seeing some of the benefits of those marketing.
The work that.
Our marketing Department has been putting forward here for us at the same time.
We do have.
The broader set of offerings.
As we were preparing for this call if we look across our portfolio.
2 years ago, we had 109 short courses now we have over 199, if we.
Money at our boot camp business.
Used to have 104 programs and end of 2019, we now have 184 and in our degree of business instead of having 177 offerings. We have 185, we are operating at scale and the business of scaling with us very efficiently and what youre seeing here as a matter.
And efficient marketing department spending prudently and at the same time.
The business that has matured from an infrastructure perspective to generate that scale.
Chip I don't know if you had addressed the ex parte.
I think you did a great job the.
Look back.
Next question operator.
Your next question comes from the line of Josh Baer with Morgan Stanley.
Great. Thanks for the question and congrats on the quarter on the Ed ex acquisition.
I wanted to start there because it's very interesting 1.
I'm wondering how how youre planning on.
Going to the market with ex meaning does the 2 U motion exist at ex motion exist and it's kind of partner led meaning more flexibility and more choice for current and future partners.
Josh.
At ex becomes our full consumer experience to.
It is obviously our corporate entity.
But you can expect us to continue to grow the <unk> brand put at ex front center in a whole variety of ways.
The partner response on both sides has been outstanding and so if you look at University of Miami is actually an interesting example of a.
<unk> partner that is now on the degree side in other words, the partner that came to us as part of our bootcamp acquisition and Thats very common if you look at the across the business. The London School of economics came to us as it gets smarter partner of short course partner and now we run every undergrad program. They have online so we do.
<unk> the opportunity to work more broadly with each of the partners in the ex framework from a consumer standpoint.
It's.
It's hard to overstate the opportunity set in front of us.
Ex has a very large learner base and huge amounts of traffic we are excellent at marketing.
Loved excellent at SCO were excellent and content marketing, we bring resources they have not had as of nonprofit.
They have a very large number of product offerings that we are excited about we think both micro micro.
Micro bachelors and micro Masters.
We will grow substantially.
With 2 U behind them.
We are they create credit pathways for people to get.
Greater affordability and admission into various masters and bachelors programs. So those credit pathways, we think of very attractive.
We will grow the free of core space and 2 U has a tremendous amount of content already paid.
For that exists today. Unlike every other massive open online of course that will be built where youre going to the university of the University has to build that course themselves to you has the huge repository of content that can all be.
Repurposed into various free versions.
Paid from build the certificates off those and build pathways from those of the degree programs.
We think this allows us to create more of affordability pathways for people. We do think it will let us bend back the cost curve you heard me mentioned at ex for campus and ex for enterprise those are.
Opportunities that we will grow and then finally opened.
And that ex is used by over 100 million people worldwide.
We do think the open source community becomes a lever in terms of building greater improvements in pedagogy improvements and learning we're very excited to work with the non and his team to drive that across our business.
But it is important to note.
Open it to you really know nobody knows the named <unk> its not of consumer brands.
And we're not trying to make to you of consumer brand.
But the world is very familiar with that ex it is a huge global consumer brand for education.
And we intend to make it substantially.
Note that over the next.
10 years.
So we're trying to focus people a little bit on the longer term opportunity not that the current quarter I'm thrilled with the current quarter Yay, that's great but.
This isn't about the next 5 months about the next 5 to 10 years and.
If you think about what we've layered on to the existing 2 U business.
The biggest really I don't think theres anything we could do to expand and accelerate the opportunity and the impact like adding add ex to the fold.
So the.
Ex brand itself will become the expression of <unk> to the world.
In every way maybe with the exception of this way in other words this community.
Part of the 2 you name very well and provosts and presidents of universities no. The 2 new name very well, but learners do not.
And many do know Ed ex so we're excited about what that brings to the table from an organic traffic standpoint and.
And just opportunities to teach more people.
Great very clear thank you and just 1 clarification the commentary around the organic revenue growth plus EBITDA margin looking better.
That was for FY 'twenty, 2 compared to FY 'twenty 1.
Or <unk> 21 compared to last day.
<unk> it.
It was 22 compared to 21 and you know what.
If you look at.
I think part of my commentary that Youre.
Youre going to see fluctuations, but it's generally around the trend line that is heading in the right direction.
I think that applies here too if you do the trailing 12 months.
He has almost 37.
If you look at it in the current year guidance of 21, 6%.
27, so pick a number of in between there I think that that's the ballpark that we're saying.
We will continue to focus on how we can improve on that annual basis right that if the.
Annual measure that we're trying to zero in on and we're trying.
We look forward as from the long term perspective of how to build a sustainable and durable business and.
Strong financial results as 1 aspect of that.
<unk> is another aspect of that and then the combination of.
It makes us that platform company with the marketplace that is unmatched.
Yeah.
And look at it should as we come together with that ex it should improve the ability to convert across all of our product lines. So very exciting in terms of the combination in terms of what it will do for the rule of 40.
And your last question comes from the line.
And.
The <unk> with Bahrenburg capital.
Hi, guys. Thanks for taking my questions.
Maybe the first on the <unk>.
The segment.
You guys are approaching the quarterly.
The revenues of $100 million.
I haven't seen the same type.
Right.
Scale benefits.
And the degree segment there at what point would you expect to start to see some segment margin improvements in the Acs segment.
So there are a couple of things here.
I think 1 of the things that we've been.
<unk> discussed.
Of very actively on every single 1 of these calls we manage the business in the portfolio basis. So to some extent, we're not going to let segment margins to some extent drive the way we allocate capital we are going to allocate capital where it is most efficient and what youre seeing right now is the scale and the leverage of the degree business coming through.
The player the all spread business, we believe over time will demonstrate similar type of scale and margin power, but at the same time, we are doing things. We are building out offerings. As we go through this I mean I use. The example of the short course business, having a 109 courses.
Less than 18 months.
Loud and today. They have 199 same thing in the boot camp side, we are investing in both of those businesses of short courses boot camp and the oil price side sort of we can continue to build revenue in a sustainable way. So we don't just want to benefit from favorable debt.
Digital marketing trends, we want the benefit from learners.
Owners wanting a particular type of force we want to make sure we have those courses and at the same time use the digital marketing spend as the variable side of the equation, but the bottom line is we are spending on the port at the portfolio and we're going to spend wherever we get most efficient growth and youre going to see margins fluctuate.
The go in times of the degree of sometimes in the <unk> side. It is not.
The thing that we manage to.
Understood. Thank you and then obviously the only.
The other thing.
The other thing I would add Brad is obviously the.
Marketing is very significant expense on the all the <unk> side and we do think.
The items.
The ex will have a big impact there.
The obvious.
Important to note.
Yes, the California.
Of that as well.
And then maybe on the net.
Degree side.
You know that you guys the fifth straight quarter of sequential growth accelerating.
Think.
Can you just.
Yes.
Other of your comments on your guidance with degree segments, continuing the momentum as of right now of implies kind of like second half of the sheer revenues are pretty much flat kind of the first half, which looking back at you guys history.
There's really never been the case.
So is this just really just being extremely conservative given the kind of the delta variant coming about.
Just anything in that that maybe we should know about from the tough comp perspective.
So a couple of things I'm going to touch on 3 different areas. The first 1 is.
<unk>.
The last year, when we were in a similar situation we pulled guidance because it was just unknown to us what we have right now is the belt of variants, where you have an economy that was beginning to open and then you had the delta variant on top of it we're not sure how that's going to play out so number 1 we need to make sure that we are prudent if we're going to have guidance out there we kept.
Items, and we displayed prudent by keeping the range of where it's at that's number 1 number 2.
The key for US is the examined each of our businesses from a very fundamental perspective.
The revenues that we're generating that gave us 30% year over year of growth in the current quarter the.
The quarter.
Is that the sustainable saying what are the things that drove that and when we look back at the things that drove that the number of partners. The number of courses. The students that are enrolled those are sustainable things that we have when someone enters the degree.
They stick around for about 2 and a half years on average and generate revenue from that period.
The second time, the third point I am going to make is if you look back at the second half of last year, you had the launch of Simmons and the back half of the year and we had.
Ancillary revenue in the degree of segment from Covid related activities, where we're helping other partners. Those are 2 things the create tough comps.
On the year over year basis and the.
Then the last point I am going to make us more of a historical big picture point. If you look back at the historical trends of 2 U the fourth quarter of back half of the year used to be of generally higher.
Half for us simply because we launched a large number of programs with any.
Any given calendar year that would generate revenue in that back half of the year. Our launch cadence as you know has been reduced in the last 2 years, which would have more of a flattening or more of the leveling or slightly up back half of the year instead of the unusually high back half of the year that you've seen historically.
If there are 3 points that I would make me, but the bottom line is the degree business is very well positioned.
We have great University partners you saw with the recent announcements we are still having strong demand there and we expect that business. The continued to do well even as we enter 2022.
And there are no further questions at this time I will now turn the call back over to management for any closing remarks.
Thank you very much everyone. We look forward to talking to you about the story out on the road.
Yes.
And this concludes today's.
So no reference call. Thank you for participating and you may now disconnect.
Goodbye.
Yes.
Yes.
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Yeah.
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