Q2 2022 2U Inc Earnings Call
At this time I would like to welcome everyone to <unk>, Inc. Second quarter 2022 earnings call I'll.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
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I would now like to turn the call over to Lillian benzene Duffy Deputy General Counsel. Please go ahead Mr. <unk>.
Thank you operator.
Good afternoon, everyone and welcome to <unk> second coronary 'twenty earnings conference call.
We call this afternoon.
I called founder and CEO and Paul <unk>, our CFO following chip.
Kevin Costner, Canada, Max we will take questions, our Investor Relations website, Investor Dot two dot com as our earnings press release and slide presentation as well.
I was a simultaneous webcast of this call.
Webcast replay of this call will be made available.
Statements made on this call may include forward looking statements regarding our financial and operating results.
Can you the impact of Covid, 19, plans and objectives of management for future operations, including the realignment plan and.
Integration of IDEXX Junior 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.
Please refer to the earnings press release to the risk factors.
And the documents we file with the securities. Thanks, Jamie.
Including our annual report on Form 10-K for the year ended December 31, 2021, and other SEC filings for information on risks uncertainties and assumptions that may cause our 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 and on the Investor Relations page.
With that let me hand, the call over to Jeff. Thanks, Lillian over the last six months, we've become increasingly confident in our platform strategy, which puts nx at the center as a unifying platform to drive high quality learning outcomes, we're bringing together our universities learners and enterprise partners into one platform driving network effects to deliver our mission.
<unk> deepened our strategic mode drive sustainability and power long term growth.
During what was clearly a complicated quarter our confidence in our platform strategy increase due to meaningful progress on various tactics, we discussed on last quarter's call, including organic demand generation and the publishing platform of annex.
As the quarter labs, and the work progressed, we also realized that in order to really unlock this overall strategy, we need to fully reorganized our company around the <unk> platform.
Joey just service to ourselves our partners, our learners and our shareholders. If we didn't go all the way into this platform transformation.
Combination of these three things one increasing confidence in our strategy to a realization of the need to fully reorganized to unlock it and.
And three a deteriorating macro environment drove us to make more immediate transition to the platform strategy.
We believe that accelerating our transition to a platform company, we will strengthen our foundation and long term sustainability and driving long term profitability and cash flow.
Now before I address the reorganization.
It's important to note that despite the macro challenges our long term outlook for higher education and digital education remains positive.
Fully believe that higher education is particularly countercyclical, which will improve our business as conditions evolve.
Our changes this quarter will make us much stronger as demand improves one positive to the post Covid World is that online education is pervasive and is here to stay and more importantly, higher education is still the single best path of social mobility and economic prosperity in the world.
Nonetheless, we are radically changing too you know it was time for decisive action.
So what does that mean.
We are realigning our business and organization around the <unk> brand and platform, including one unified product and marketing strategy.
The immediate changes include number one a new marketing framework. This should significantly reduce our overall marketing spend as a percentage of revenue and increased efficiency and profitability.
A simplified organizational structure and employee reductions. We believe this will eliminate redundancies and increase agility, along with other cost cutting initiatives and three a new model for partners.
<unk> bold and important steps to support our partners and expanding access and bringing down the cost of higher education I'll now touch on each of these.
First marketing marketing investment decisions will be made at the platform level aggregated across business lines with the goal of increasing the lifetime value of each learner.
This does not mean that there'll be no more product level marketing, but we now have a world class platform that allows us to do more.
It allows us to do so more efficiently and as part of a unified strategy.
Under our new leadership, which I'll cover in a minute we've already begun enforcing a new higher bar for all marketing spend decisions while at the same time, leveraging our ability to drive and benefit from organic volume from the <unk> platform.
As a result, we plan to exit the calendar year at a run rate equivalent to the long term target we set out at our 2020 Investor day of marketing spend at 37% of revenue. We believe this will be transformative to our business.
This isn't the moment to push the efficient frontier of marketing.
We have a flexible and variable cost basis, which allows us to implement a new marketing framework and let more profit flow through the bottom line.
This impacts the full year guidance, we shared last quarter, our full year EBIT expectations increased by 30%, while our revenue expectations come down by 10%.
The executive education business will be particularly impacted by this new marketing framework, we expect to see a significant drop on the topline contribution to margin by year end.
We come to the conclusion that you simply can't run that part of the business our paid spend alone and we believe this is a universal issue not a two U ish.
We believe there are opportunities for selective attention here, but will not be expanding this business for now.
Instead, we plan to make it as profitable as possible and simply build programs off of our growing marketplace, an organic presence we.
We do see opportunities for the expansion of our boot camp business, where the built in value has been overshadowed by the larger losses in exact yet and the <unk> integration.
To be clear, we still have work to do in all credit, but our goal is to have this segment drive towards positive EBITDA for 2023.
Moving on to our second point the organizational changes.
We're moving to a more streamlined leadership and operational structure.
As part of these changes all marketing spend and revenue decisions for to you I will now be aggregated under our newly appointed Chief revenue Officer, Harsha Gorilla Who's been with the company for over nine years.
<unk> team, including our newly appointed Chief Marketing Officer, Michael Kirby White Who's also been with two nine years, we will focus on optimizing marketing spend at a platform level, while continuing to drive growth.
In addition, annex founder and onto Agarwal will take on a new role as our first ever Chief platform officer responsible for our unified product and technology strategy strategy.
As we consolidate individual businesses under the <unk> umbrella significant head count reductions representing 20% of total budgeted personnel spend will take place in Q3 with a focus on creating greater alignment and efficiency across the organization as well as removing silos and redundancies that have developed over the years while there.
It was the right call. It certainly isn't an easy one the colleagues who will be leaving us have done great work and helped US build this company over the last 15 years I am very grateful for that we will do everything we can to treat them well and assist them in their transitions they've earned our care and respect and we will honor that.
I do want to note that these changes will have no impact on the quality of our offerings. In fact, we expect the reorganization will deliver greater value to learners and improve student outcomes.
Finally, moving on to our position in the market our commitment to add extra founding mission is stronger than ever.
As we embrace our future is that X, we're taking bold and important steps to help our partners expand access and bring down the cost of higher education. These steps include embracing Alex its flexible approach to degree support and evolving our revenue share structure to give universities more options and flexibility to leverage our industry, leading technology and services for their online.
Degree programs.
In this model revenue share for degree programs will begin in a base of 35% and go up from there, allowing universities to stack additional bundles of tech enabled services depending on their needs. This model offers options that lower our upfront investment speed up the timeline to positive cash flow and open the door for conversations with universities looking for greater.
Flexibility.
We have a new flexible IDEXX degree to announce today, we just signed into University partner University of Wisconsin, Madison, The school of business to power disruptive price $24000 master of business analytics.
<unk> also includes a micro masters on the fundamentals of the business. The combination of a low price degree and a micro masters attached to it should allow us to unlock the full potential of the <unk> platform.
We will also be announcing a new initiative to help our existing partners bring down the cost of higher education trading greater affordability for revenue share.
To support and encourage our partners to bring down tuition for students in the 180 plus online graduate degree programs, we power at X. Two you lowered share for partners, who choose to lower their tuition pricing.
As we've said many times before lower tuition is not only good for the world, It's better for our business lower prices increased student demand, which decreased our marketing costs.
We've been focused on helping our partners drive greater affordability for many years, but.
But we're super proud to deliver this clear action, you'll see more about these initiatives in the coming days as.
As we make all of these changes I am proud to say that by year's end, we will have answered the question from our IPO eight years ago. Yes, you can build a sustainable education business in higher Ed at scale now I'll turn it over to Paul to talk about the financials in more detail.
Thanks, Chip and good afternoon, everyone.
As Jeff discussed in a macroeconomic environment that remains challenging in the second quarter. We are radically changing to you by accelerating our transition to a platform company.
These changes we are discussing today had a significant impact on our second quarter results and full year guidance.
I'd ask you to keep them in mind as we discuss the numbers.
Taking a closer look at our results for the quarter.
Revenue for the quarter totaled $241 5 million up 2% from a year ago.
Including $10 million for Fedex.
Of course equivalents, our FTE totaled 84000 for the quarter roughly flat on a year over year basis.
On a sequential basis decreased 2%.
And the degree program segment revenue in the second quarter totaled $143 1 million a decline of roughly 2% from the second quarter of 2021.
This decrease was largely driven by higher leaves of absence and certain of our degree programs and a 2% decrease in average revenue per FTE.
Revenue from the alternative credential segment totaled $98 4 million.
Growth of 8% from the second quarter of 2021.
Marilyn due to $7 $1 million and a 1% increase in average revenue per FTE.
The performance and alternative credentials included a 12% decline in.
Revenue, primarily due to our decisions to reduce planned marketing.
Now, let's take a look at costs and expenses.
Operating expense for the quarter totaled $289 4 million up from $274 3 million in the second quarter of 2021.
This $15 $1 million increase includes $17 $1 million of operating expense from FX and a $15 1 million restructuring charge in connection with the planned reduction of 20% of our personnel and personnel related expenses.
Personnel and personnel related expense, our largest expense line item decreased $6 2 million.
Fortunately note that this includes the addition of $5 $9 million of expense associated with Fedex.
Marketing and sales as a percent of revenues came in at 44% for the quarter.
Even by a $3 $5 million decrease in marketing spend on prospect generation.
Important to point out here, we spent $11 million less than we projected to spend in the second quarter as part of our new marketing framework.
Moving on to profitability for the quarter.
Net loss for the quarter totaled $62 9 million compared to a net loss of $21 9 million in the second quarter of last year.
Selecting the higher operating expenses, I, just discussed and a $5 $7 million higher interest expense.
In addition in the second quarter of 2021, we benefited from a $27 9 million nonoperating gain on the sale of an investment in key path education.
Adjusted EBITDA totaled $21 9 million a year over year increase of 28%.
The increase was driven primarily by reduced marketing expense and lower personnel and personnel related expense.
Adjusted EBITDA margin in the degree segment was 28% for the quarter and.
And 850 basis point improvement over the second quarter of 2021, showing the inherent profitability of the degree segment business model.
Adjusted EBITDA in the alternative credential segment was a negative 18%.
600 basis point decline from the second quarter of 2021, primarily due to increased losses in the exact add business related to macroeconomic conditions and the inclusion of <unk> operating expense.
Now for a discussion of the balance sheet and cash flows.
We ended the quarter with cash and cash equivalents of $237 8 million, an increase of $4 2 million from the end of the first quarter.
Our accounts receivable balance totaled $9 8 million down.
Down $8 $1 million from the end of the first quarter.
Fluctuations in our accounts receivable balance reflects the timing of payments from University partners.
Unlevered free cash flow on a trailing 12 month basis was $11 5 million compared.
Compared to a net use of $34 1 million.
The end of the first quarter.
This improvement in Unlevered free cash flow was driven by lower marketing spend lower personnel and personnel related expenses and improved net working capital.
I will now discuss how we expect the remainder of the year to play out.
We expect the current realignment plan to be completed during the fourth quarter and believe it will generate approximately $70 million in annualized cost savings once completed.
Which includes a 20% reduction in overall personnel and personnel related expenses.
We incurred a restructuring charge of $15 8 million in the second quarter and expect to incur an aggregate restructuring charge of between 35 and $40 million at the time.
The plan is completed.
That means that a chip and I believe there is further opportunity to improve our operating efficiency through process reengineering workflow automation and our rationalization of our real estate footprint.
It is too early to size these initiatives, but nonetheless critical to understand that we are firmly focused on driving simplification and cost reduction throughout the organization.
Given all the initiatives I've discussed.
We are revising our 2022 full year outlook.
We now expect revenue to exceed $960 million representing growth of 2% while at the same time, increasing our adjusted EBITDA guidance.
Which we now expect the range from $105 million to $115 million for the full year, representing 65% growth at the midpoint.
To give a bit more color on our updated full year revenue expectations.
Primary driver of the change is our revamped framework for marketing spend which impacted revenue in the second quarter and will impact revenue for the full year.
While the macroeconomic environment remained challenging during the second quarter and May remain challenging in the near term.
We believe that our new marketing framework will enable us to deliver profitable revenue.
And growth when the environment improves.
Also expect capital expenditures to be approximately $70 million and weighted average shares outstanding to be approximately 77 4 million shares.
And while we are not providing 2023 guidance at this time.
In part based on the initiatives we have discussed in this call we expect to generate at least $150 million and adjusted EBIT next year.
We also expect to achieve our long term target for marketing and sales as a percent of revenue up 37%.
To conclude.
We were already powering high quality digital education offerings at an unmatched scale.
This quarter, we have taken important steps to align the business behind a single platform under the <unk> brand and create a sustainable engine and drive profitable growth and cash flow in the near and long term.
Look forward to sharing our progress with you in the coming quarters with that let me hand, the call back to chip. Thanks, Paul before we move to Q&A I want to take a moment to acknowledge and thank our outgoing chief operating officer, Mark <unk> as.
As you saw in our release and filings Mark decided to step down from his current role to pursue other opportunities and transition to a consulting capacity in October .
He has been part of <unk> history for 14 years first as a director and then as our COO.
Mark's leadership and contributions have been invaluable to me and I'm, making to you the company it is today.
Beyond grateful for his contributions to <unk> and for our friendship I wish him nothing but the best in his future endeavors.
And now we'll open it up to questions.
As a reminder, if you would like to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press star one again.
For just a moment to compile the Q&A roster.
Our first question comes from.
Stephen Sheldon from William Blair. Please go ahead your line is open.
Hey, Thanks for asking questions I just wanted.
To quickly apply this move to focus on profit free cash flow.
Great to see I think it makes a lot of sense just to ensure that investors can see the.
Sustainability of the model, but the first question here.
What are you targeting here on the profit and free cash flow side over the next few years and specifically are there certain targets you have in place that maybe once you'd hit you'd shift focus.
Or have a little bit more flexibility to focus more on top line growth again, I guess, how are you thinking about those trade offs over the next over the medium term.
Well the first thing I would say before I turn it to Paul what I would say first of all Steve and thank you for your comment is that the we do believe that the company has.
A number of growth levers and we didn't fill the script with lots of commentary on it because we thought at this time. The important thing was up was up was for us to drive home the transformation of the company the focus on cash flow the focus on profitability because of the platform that we are able to transition to.
And so but.
But we do think that there are a number of profitable growth categories for the company.
Not just enterprise, which I know, we talked about last time and continues to be strong.
But our boot camp business is totally under appreciated the fact that.
Now able to work directly with either governments or foundations to offer technology training at scale in a way that other people cant the new flexible model on degrees, we do think.
It will be responded to very favorably by the market.
So theres a variety of interesting options and as we transition to a platform company. We do think that the <unk> platform itself has a lot of innovation ahead of it to offer more creative solutions for people to sort of unlock their potential so theres a bunch there, but I want to pass it to you to talk about I believe it's slide five.
In the Investor deck worth highlighting Steven so Stephen's slide five of the Investor presentation and some <unk>.
Margin progression.
And also target margins as we go forward, but there are a couple of things here I think we've always talked about.
Variable cost basis, particularly around marketing spend.
But I'd like to go back and highlight a couple of things of chips script right chip talked about the confidence that we've gained over the last six months.
As we begin to integrate and operate Nx as part of the combined entity. We now have an organic marketing platform that gives us the confidence.
Modulate and to change the marketing framework that we have around marketing expense. So the first target that we have is around marketing and sales as a percentage of revenue that number for 2023, we're expecting that to be 37% and if that number is 37% you can see from our historical trends the other cost category.
<unk> have been pretty consistent over time and that allows us to achieve a margin of 15% on the EBITDA level next year on the EBIT line next year and importantly, based on the numbers we are providing for this year, it's around 12%.
And most importantly to translate all the best to what really matters free cash flow. It's a free cash flow positive business exiting December 31, 2022 and positive for the calendar year 2023, and at these margin level. It gives us the flexibility to reinvest.
Growth opportunities reengineering, the balance sheet do all the things that we need to do as a company to be.
Be sustainable both on the top line and the bottom line.
What I would add is 150 million minimum EBITDA in 2023, and I do think it's worth pointing out the reason I direct your attention to slide five as the percent of sales and marketing for <unk> has been part of the discussion around the company for a long time and.
2019, 56% $2021, 46% exiting this year at 37%, which was the high end of the range that we gave at Investor day in 2020, So we feel like our transition to a platform strategy is really going to allow us to not just drive profitable growth in the future but.
Really.
Have a great foundation from here.
To grow and.
I give my CFO , a tremendous amount of credit for driving us in that direction over the last couple of years.
Got it that's really helpful. I appreciate that.
And then just to follow up on the planned changes to the revenue share structure and degrees can you dig into that a little bit more especially for.
The University partners that are allowing the tuition. They charge have you started having discussions around that with partners and if so I guess what.
What feedback have you gotten from them.
As <unk> discussed this with them.
Yes, we have.
We will announce that more fully here in the next day or so.
We've said for some time that lower prices are actually good for the business because they are.
And we do have unmatched scale that allows us to drive it down and to be clear from a organic perspective.
The greater the affordability the more organic volume that we're going to see for those for those offerings and that's that's a benefit of <unk>.
Transitioning to IDEXX.
Is that organic volume. So the goal here is to maintain quality, while we increased access for people now in existing programs, we've definitely seen improvements in enrollment based on tuition coming down.
And we're excited to drive that conversation and incentivize our partners.
To have that conversation with us.
Because we thought it was time.
Great. Thank you.
Our next question comes from Jeff Myler from Baird. Please go ahead. Your line is open yes. Thank you.
So just as investors looked to have confidence in the 2023, EBITDA and free cash flow projections, just help us with the degreed trends because it looks like that's your primary profit pool, and degreed took a pretty big step down in revenue. This quarter. So just what are you assuming or.
Or just help us with.
The profit pool sustainability to kind of underpins the the $1 50 in 2023.
First I would.
I want to be careful with the notion of a pretty big step step down granted it did go down 2%, but not how I would define pretty big and it's a pretty tough comp so but regardless of that what you are dealing with right now.
In the entire world of higher Ed is this is this is a very tricky time, we're probably at a nadir overall of in a post COVID-19 world, where you've got some reopening happening everywhere you have people sort of.
Getting out into their lives we saw for the first time.
Paul mentioned this in his prepared comments, we did see a dip in retention now our retention is still extremely.
Extremely high if you look at it across if you compare it to other types of programs in the market, but that that actually did drive some of the change in the current period no question retention coming down a little bit by having an increase in people taking leave of absences and we've got a good history of being able to bring those people back into the system.
To complete their degrees, but nonetheless that actually hit that.
That hit the current period.
And we believe that as the economy does soften it.
It is countercyclical, we found it hasn't quite hit the job market, yet, but we do believe that will happen over time.
And as it does we do think that the degree business will improve we operate in so many different disciplines right now that have a significant shortage of people whether it would be the helping hands disciplines to help disciplines like nursing or speech.
Our stem.
Programs.
So.
We like the odds of the sustainability of that business I would also say I feel like we are doing the degree business at a scale that others are not and it's significantly more profitable than most other folks so.
We're big believers in driving new degree opportunities.
And we think that our pipeline will start to show that it was pretty excited to be able to have one announcement today that is meaningful disruptive we priced.
And this is kind of what we said at Investor Day 2020.
And Jeff This is Paul here, so $70 million reduction on an annualized basis into 2023.
That is to some extent.
Rises.
<unk> the margin on both sides of the business I would say more pointedly on the alternative credential side of the house pilot it is negative today.
Our goal and objective is to make that business positive in 2023 or at least flat zero in 2023 and with the degree side of the business. It has the predictability and it has a larger organic component when it comes to marketing and organic component is of course, the cheaper portion of marketing.
So at the end of the day.
It is.
2023 is more near term and specifically has the benefit of the $70 million run rate reduction in expenses that contributes to that $150 million EBITDA in 2023.
Okay. Thanks, and then how many with the partner the University partner conversation I understand how this plays well into mission of expanding reach around high quality education at an affordable price point, all Super important things.
From I guess two fronts one.
Whats the impact on surplus for University partners with the new strategy and what do you tell the University partners that may have staffed to a certain enrollment expectation or.
Or just.
Help us with the University partner conversation.
Well the staffing to enrollment.
Level is.
Lower prices definitely drives your enrollment higher so that's not the issue. We think you can drive a meaningful surplus.
The reason that we're willing to put revenue share behind it is simply to help that conversation and incentivize.
What is a long term partner.
Help us drive greater affordability in general we've found a partner.
Partners to be responsive to the conversation part of the reason that we're doing this is to.
Put the full force of the company behind it because at our scale. We can we think it'll be good for everybody longer term now to be clear Jeff there are.
The different degrees and different university brands and different prices means.
Theres a variety of different outcomes related to the size of the revenue difference and the size of the price difference so.
Not easy to put it into a formula and we're keen on folks getting as affordable as they can because we think it really does benefit not just the world, but the company so far.
Sponsors.
It's positive we've got good discussions happening and we should have some schools that we're able to talk about in the short term.
Thank you and I, obviously personally love to win today, so on Wisconsin.
Yes.
Okay.
Our next question comes from Ryan Macdonald from Needham. Please go ahead. Your line is open.
Hi, Paul Thanks for taking my questions and I loved the new focus here on our profitability chip I wanted to double click on the selective marketing spend and sort of the shift in strategy towards more of a portfolio basis, rather than the individual product can you talk about how how that works again I guess in those conversations.
Patients with your University partners in terms of being able to balance our marketing spend.
Appropriately to make sure that your partners are getting the appropriate amount of marketing to drive those enrollments. How does this new strategy sort of changed that shift in focus at all.
Ryan I would say I think the story here is just making sure that we're.
We are all in it together it is an appropriate partnership and if something if something is going to require marketing spend to be unprofitable. Then it's not sustainable for anybody and so whether the story is that we need to try to drive the price down.
Organic with acts as a huge factor organic.
The story of marketing these programs more and more we do think that the platform is.
Necessity.
It's really not an option it's not optional.
Need to have this kind of platform and one of the reasons. We were so excited to team up with that X is just the scarcity value of this type of opportunity is real so to be clear, we will continue to drive University individual program marketing, but as we aggregate the activity under <unk>.
<unk>.
All the boats will rise because we will have greater opportunities to offer new types of offerings to people that have come in one of the things Thats. Notable is like at <unk>, We've got learner growth and at the same time, you've got this other very large bucket of activity that is effectively prospects slower lead flow.
Those over time coming together into something that gets much more compelling for everybody that's part of our partnerships.
They can't be distinctly separate long term, they really need to come together, so building, both pre enrollment and post enrollment opportunities on the <unk> platform is a meaningful part of the long term strategy and it does start today because now we've reorganized the company entirely under one platform.
That's very helpful. And then maybe just one quick clarifying question as you talk about the gives us the macro impacts you talked about within degrees that you saw an increase in people taking leave of absences, but can you talk about what.
Youre seeing in sort of top of the funnel for new enrollments with programs as you look out into not just I guess beyond this fall, but building sort of a pipeline for next spring as well.
So I would say.
Resting that like the first thing I would say is overall.
Overall demand across.
Sort of traffic organically related to education.
Is down.
And so.
Some of that you see.
<unk> actually.
Actually not just degree but across our full business.
Have a place to start.
I said, we're operating right now.
And maybe this sort of last couple of quarters like this nadir of.
Where demand is and the reason I say that as the economy is softening, but you haven't yet seen that hit the job market and we think it will and over time, we think that that will benefit programs.
Where people are looking to get into new types of jobs and new types of careers.
No. The retention difference was small in terms of quality retention, but meaningful enough to drive a current period.
The change in the business. Paul go ahead, yes. So that was that was roughly around $6 million sequential decline on retention that was.
The largest driver in the degree business. So overall, what we're seeing overall softness from a marketing perspective, and a new enrollment perspective. We also had the retention challenge on a sequential basis Q1 to Q2 and the degree business in particular.
Big part of the reason that we felt like.
Throughout the quarter I mean, I said at the beginning but it's worth it's worth reiterating like we got more confident in the platform yes.
We got more it was more obvious to us that we really had to rework to unlock it fine. The other thing that happened is the macro did get worse during the quarter and for that reason, we decided that we needed to take decisive actions like we thought this kind of action was prudent.
And we think it positions us well and we do think that it will get better.
When it gets better.
Got a really profitable base to grow from.
Helpful color. Thanks, a lot.
Our next question comes from Tom <unk> from Citi. Please go ahead. Your line is open.
Yes.
Evening, yes.
<unk> from Citi.
A lot of what you said, thanks, a lot of sense I think it will be welcome to.
Many shareholders.
I wanted to ask one question about the way that you go to market I mean, I get the impression to use position.
Shortly has been.
Let's say that and how is that being quite premium sort of white glove service. If you will if you are moving to a model, where you're marketing more of the platform and you're reducing head count how do you just like how do you make sure that <unk> you Doug.
<unk> sort of <unk>.
Quality coal.
So in particular your University partners.
Yes so.
By the way it's laid over there. So we appreciate you being on I would say.
We made it.
Purposely clear in the in the prepared remarks to emphasize the fact that we're doing this in a way that we believe will not decrease quality and that is utmost concern to the company into the management team.
Quality has been our <unk>.
Mark and I believe we've got good odds I mean part of what is going on here is the company has done M&A over the years and what Youre seeing now is the company, bringing those together in a more fundamental way and eliminating some redundancy and that's difficult because we care very much about the people, but it is necessary and we do.
Not believe that this will impact the quality of the programs.
So.
Ultimately.
Quite proud of the high quality outcomes.
Ross the business, including.
This was not the quarter to have the prepared remarks with a whole bunch of.
Strong statements about how great. Some particular thing is we were really proud of the Gallup survey related to our bootcamp programs, which didn't get that much attention that we think should have the proof that the year. One ROI was effectively equal to the cost of the boot camps, so like <unk>.
Quality matters, and we do think our universities.
Big part of the reason that they are with to you is that we've proven that over the years and under the <unk> banner.
Being able to have a broader platform strategy that folks can participate in has been responded to you well I mean, it's notable that the Wisconsin program is both a master's degree antimicrobial masters.
And that should open up access and drive greater affordability to an already affordable degree, but the key is that all has to be done at our quality level I do think.
To you and <unk> coming together makes it really interesting like we didn't have the platform.
But I will tell you that the tech enabled services the power of these things across the board.
Our exceptional and.
Our partners know that which is why today still today. Many years later, we haven't lost a degree partner.
Okay. Thanks, and then one quick follow up for Paul.
Perfect.
I'll be helping them and the strength of the U S dollar.
Especially appeal international.
Programs is that how much of a drag is that in.
In the in the <unk>.
The guidance reset.
Yes that was that was a significant contributor to us.
The exact ad performance.
Lumped it under the bucket of the macro environment.
And my explanation in the script in the prepared remarks. It is factored in and does not expect it to get better in the guidance that we've provided.
But it is it is a main contributor in our <unk> business.
That's very clear thank you very much.
Our next question comes from Josh Baer from Morgan Stanley . Please go ahead. Your line is open.
Great. Thanks for the question.
Wanted to dig in on so the.
Change in the flexibility of degree offerings.
Hoping you could repeat or a view how the economics will work one more time and then have a couple follow ups.
So we have we have a piece coming out on this tomorrow that will give greater detail.
But the flexible model starts with the core service bundle.
At 35% and then adds you stack on it depending on the needs of the University partner and this team.
Out of the innovation group here based on conversations with both current and potential partners as to what they may want to see so an example of that Josh is like not everyone needs of course production of course build and we find that to be very positive because that's.
That's a large capex load and some universities have built groups on their campus to drive to build online courses.
I happen to think our learning design is excellent, but not everyone needs it and so having that priced into the original bundle. It makes it challenging for some schools. So thats. One example, other examples are paid marketing will not be part of the core the core bundle because it is not necessary for every single University program, either because the unit.
Is it trying to make it that large or because it's not appropriate for that particular program.
So effectively the core bundle offers.
A set of core services that we believe when combined with the Nx platform because it includes nurturing our lead nurturing we think it'll drive.
Quality.
And if it's a program that the school is interested in scaling up at a level that.
It's more like our historical program and we have some of those in play right now at what look like looks like very similar.
Two you historical Rev share levels.
People tend to over focus on the Rev share percentage and not focus on what Youre doing for the Rev share in order to help the University partner, which is one of the reasons to surplus provided.
<unk> provided to the school is typically very positive. So it's like a comprehensive set of options for school.
And we think it's going to have a strong market response now to be clear Josh there still will be programs that look much more like what you've seen historically from us.
We just wanted to be more flexible for the University partner.
Got it thanks chip two follow ups, there sort of a core service bundle is that basically just the technology.
No it's not.
And we can get you some more on this but.
Okay.
Of course, the core service includes the technology. It includes the organic.
Coming off of our platform. It includes lead nurturing. It includes a basic level of student support, but not things like clinical placement, if someone's going to be placed into local doctor's office or a school or something that's a large part of our operation here and has a real expense load to it. So no. It's not just technology, we actually.
We think it'll be supercomputing with anything else that is out in the market today and thats only because of our scale.
Great that makes a lot of sense and then last question on this.
I could see how this is a competitive and interesting.
<unk> around flexibility for new conversations Mike My question is how.
What are the implications for existing customers existing partners existing contracts are.
Do they have a chance to like existing partner that might be able to do parts of the.
No.
Service themselves like do they have a chance to opt into this flexible pricing model to revisit contracts like whats the approach for the existing customers.
We've got a very good conversations happening across the board with regard to the way. The original contract was laid out and the length of the contract and I think you know Josh that as I said, we haven't lost a degree partner.
And all of those conversations as you get into the renewal period as people start needing to think about what the contract is going to look like after the first let's say eight or 10 years whenever that happens.
We're engaged in a whole variety of conversations and certainly this is part of it but.
But the original construct to you invested.
In that sort of beginning part of the J curve over those original programs and therefore in the school understands that so.
Just a reminder, that those contracts are not only a strong and valid but we're having really good conversations with partners about what the future of those looks like now in all of our extensions or renewals, whether it was because we were going back to the client because we needed to change something about the contract like specific <unk> or because the contract.
Starting to come to the end of the contract.
We've never really gotten extremely close to the end of the contract to be clear, we always approach it.
As.
Positive friendly conversation that happens long before we get to the end, but all of those conversations have included revenue share adjustments over time, and that's perfectly appropriate because the company at that stage.
It is now in to the cash flow and that program has generated the IRR that we expected and so it's like what is the go forward look now I will tell you during the time period of two you're starting to today. There are basically no online programs that was a whole bunch of online programs and so you have to be thinking about it more as a platform strategy and I will tell you. It is.
Getting harder and harder for University partners to do this on their own without that because <unk>.
Candidly the only people that win by more and more people coming on without a platform partner or the social media networks like that's it that's the wins in that case, so having the platform. We think is a competitive advantage long term to each of our individual partners because if you're only the platform and you don't do part program marketing.
Well it gets hard and doing degrees, it's tough well.
Well, if you have the platform and you have per program marketing as long as you're setting the bar at a reasonable level like for the company.
We think that's a good place to land and so we like our odds of more new programs at existing partners because of this flexible service and I would tell you just based on conversations that have been had so far.
It'll be a wide variety of these it's not as <unk> as Youll see when we announced it tomorrow.
<unk> attached to it and there'll be some that want the core with just clinical placement or some that want the core with with course production, where some that want paid marketing because they want to scale the program.
So we're just trying to create greater flexibility for people.
Great. Thank you I appreciate it.
Our next question comes from George Tong from Goldman Sachs. Please go ahead. Your line is open.
Hi, Thanks, good afternoon.
I'd like to dive into your pipe.
Our platform strategy can you elaborate on the details of what your new marketing framework involves the mechanics of it and we understand it should result in cost savings, but how will drive improved revenue performance.
Well, I mean, Jordan, Georgia, I think today.
We're going to be careful to not go too into the weeds, but I would say.
How much marketing spend come down in the current period.
And third we did not spend $11 million and pay that we were originally planning to spin and for the year, it's going to be about $40 million. So it's significant George like the platform does allow you to aggregate organic demand we mentioned on our last call that we were at roughly.
10% of our lead flow coming in a.
Our run rate of 10%.
That is clearly going up.
Just on.
The platform itself and based on us reducing paid options that aren't as good from a conversion standpoint.
Now as you get into platform innovation, there's all kinds of things we think we can do.
To drive opportunities across all of our products including degrees.
So we do think that.
Youll see a wide variety of different.
Innovations on the platform side.
But.
Got it.
Sorry.
Yes.
George If you think of the platform the platform allows us to leverage the six pillars that we talked about on the last call, whether it's traffic, whether it's Seo and content publishing our portfolio marketing versus the single product marketing that we talked about it allows us to do things that are very different and keep in mind organic.
<unk> is our cheapest form of marketing so at the end of the day, if we're going to cut paid marketing is therefore means that we are cutting the less productive marketing and if we got the less productive marketing, we therefore improve profitability almost immediately pointing that we have the backdrop of an organic marketing platform that can help us to grow.
At the same time, so George just a couple of helpful comments from last call I outlined a series of strategies related to the.
The annex marketplace.
And.
One is building traffic the other is seo and driving greater SCO authorities portfolio marketing versus single product marketing evolving the product evolution to create stackable, that's pretty critical.
And then obviously international and enterprise opportunities, but we'll dig into these in greater detail and show you the progress of them.
At the Investor Day, we will announce because we think it's a bit overdue for us to get with this community.
But one thing that you can do on your own to see the power of it right. Now is just go to Google and type online Masters degrees and once you get past the paid ads youll see that theres a pretty substantial.
Ranking of X.
It wasn't there six months ago.
Got it that's helpful.
Then as a follow up you're reducing your guidance for revenue by 10% due to macro headwinds how do you square that with the view that higher education is countercyclical.
But.
So a couple of things.
On the guidance guidance is coming down from one.
$1 70 at the midpoint to 916 and at the same time EBITDA is going up from a midpoint of <unk> 85, So a midpoint of $1 10.
I'd like to just correct that that is not because of macro headwinds that is us.
Leaning into the Platts platform strategy realigning and changing.
The marketing sort of framework.
And doing it to drive greater profitability to the bottom line just wanted to clear that up.
Alright, but to follow up though you mentioned that you are experiencing macro headwinds and that's accounting for some of the revenue shortfall in the quarter and reflected in the full year guide. So just how do you square that with the view that higher education is countercyclical, if youre being impacted by macro headwinds today.
I mean, we obviously go across the business not just degrees and the job market has not been substantially impacted as of yet we do believe that.
Winter is in the process of coming so we think that youll see that happen.
But the the macro that we were seeing in the quarter caused us to just believe that we needed to be decisive and make this change now.
Because we thought it was smart to do so yes, George if we look back at how.
How we got to the numbers.
Talks about whether it's on the revenue coming down or to EBIT, increasing it comes from basically three buckets and comes from a reduction in marketing spend.
<unk> has a flow through effect on the bottom line it comes from.
Reduction in personnel and personnel related expenses, which flows through to the bottom line also and then the other side of the equation has operational efficiencies across the business and we will reduce over time now where does the macro come into all of this from a macro perspective.
It is somewhat gave us the opportunity are allowed us to accelerate our platform strategy, knowing that we have confidence in what the organic platform and ethics can do for us and putting all of those together got US citizen point. It is not the macro that caused the decrease but it is the macro as a contributor.
In that environment and that Tri factor, if you will.
Got it.
Helpful. Thank you.
Yes George.
Our next question comes from Jeff Silber from BMO Capital markets. Please go ahead. Your line is open.
Thank you so much.
I know restructuring as painful I don't want to get into the details, but at a high level what type of positions are being eliminated and do you think that could have an adverse impact on your business.
So <unk>.
Suggested.
Cross the company.
Yes.
Across the board.
<unk> levels different departments.
So difficult for me to do.
Comment further, but we did bring we brought three companies together over the last five years and.
We haven't done this and.
It was time, particularly given.
Not just the macro but unlocking the platform strategy in this entire conversation around the reward started unrelated to what was going on in the macro we've been working on it for a while and.
The macro certainly drove.
In our opinion the need for us to be.
More urgent on the matter.
Okay fair enough.
If I can move on to another potential uncomfortable topic, there's been a lot of speculation in the media about another company coming to your board with a buyout offer if you're willing to comment on that great. If not more importantly are you finding any of your partners or potential partners asking about this.
Do you think schools might be more reluctant to sign on if they think they might be I don't have changed.
So Jeff over what is now eight years as a public company. The number of times that I've been asked about something related to this is not small as a public company you're effectively always for sale.
And you are of course going to do what's right for shareholders. We don't comment on rumors and our partners have been perfectly fine about this discussion.
And our partners are in general pretty used to us having discussions related to what it means to be a public company and have benefited from a strong long term public business that we think right now just got a lot stronger.
Okay. That's really helpful. Thanks, so much.
Ladies and gentlemen, this concludes today's call.
You may now disconnect.
Please wait the conference will begin shortly.
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Okay.
Thanks.
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Yes.
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Yes.
Okay.
Okay.
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