Q3 2022 2U Inc Earnings Call
Good afternoon, everyone and welcome to <unk>, Inc. 's third quarter 2022 earnings call.
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As a reminder, today's call is being recorded at this time I would like to turn the conference over to see throw stick by our senior Vice President Investor Relations. Please go ahead.
Thank you and good afternoon, everyone welcome to to use third quarter 2022 earnings Conference call. Joining me on the call. This afternoon are chip I'll say, our co founder and Chief Executive Officer, and Paul <unk>, Our Chief Financial Officer.
Following chip and Paul's prepared remarks, we will take questions, our Investor Relations website investor Dot two dot com as our earnings press release, and slide presentation as well as a live webcast of this call a replay of the webcast will be made available shortly and will remain available for the next 90 days.
Statements made on this call may include forward looking statements regarding our financial and operating results plans and objectives of management for future operations, including our strategic realignment plan the integration of Fedex and transition to a platform company anticipated trends for learners and University partner.
<unk> and other matters.
These statements are subject to risks and 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 to the risk factors described in the documents we file with the Securities Exchange Commission, including our annual report on Form 10-K for the year ended December 31.
2021, and our 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.
And Additionally, <unk>.
During today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of to use performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures.
Including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations page of our website and with that let me hand, the call over to Chad. Thank you. Steve. We're pleased to report a strong set of results in line with our expectations on the top line and significantly exceeding expectation.
On the bottom line with adjusted EBITDA growing 121% year over year. These results.
This reflects the successful execution of our strategic realignment and most importantly, a winning transition to a platform company under the <unk> brand candidly all of this despite what's happening in the macro environment.
Do you is transitioning most activity to the Nx platform and we're seeing material progress internally and externally on the three things we talked about last quarter first we completed our organizational realignment, reducing our expense run rate by $70 million.
Second we implemented a new more efficient marketing framework reflected in the $18 $7 million reduction in variable slash paid marketing spend from Q2 to Q3.
Third we launched more than 115, new opening courses professional certificates and micro credentials from 46 unique partners signed multiple degree programs and brought six new corporate and University partners to the platform, including UC Riverside and Google Cloud total learners on IDEXX also increased.
Over $46 million.
These strategic shifts combined with the muscle mass Ie domain authority of the Nx platform puts us in a strong position to build on our profitability in 2023 blocking the challenging marketing realities that other companies and institutions are experiencing.
Let me start with the marketing framework the steps, we took to reduce marketing spend by $26 $5 million year over year and drove down our cost per lead by approximately 30% versus the prior year, resulting in marketing and sales expense as a percent of revenue of roughly 37%.
Another important data point for you as of today, 39% of all organic or free leads generated across the company are from addax.
We believe this will be very material to 2023, and so the long term strategy at play here organic leads are very valuable we typically get over 40% of our students from organic.
We expect alternative credentials to benefit the most from this strategy.
Why first demand is increasing for alternative credentials as learners look for shorter less expensive options to advance their careers throughout their lifetime.
And we expect unit economics to improve as a result of this lower cost of acquisition as.
As a result of that we believe the Alt credit segment will be profitable next year.
The transition to our platform strategy and the execution of our new marketing framework also allows us to deploy marketing dollars more efficiently and more effectively here's an example, and executive education, which is part of our old credit segment, we reduced spend in Q3 by more than 50% year over year, but we still doubled our.
Annick lead flow in that product line, yes, thanks to the platform organic leads double.
Put another way the number of organic leads we currently get from annex for exactly that alone is now larger than the organic leads we get from Google for exact yet and.
And we've only owned annex for 11 months.
This type of activity helps us continue to manage down spend in social channels, where the spend was less productive essentially substituting our most expensive channels with free leads from addax and driving down the cost of acquisition overall.
This was one of the core parts of our thesis behind the acquisition and we're starting to see it happen.
So why do we not see more revenue growth in the short term remember we chose to eliminate a bunch of less productive spend from our business last quarter, taking a temporary pause in growth to drive better profitability.
While the impacts of our platform strategy are nascent in the degree business. Our current analysis shows that 10% to 15% of enrollments in our MBA programs are <unk> registered learners.
One of the things. This tells US is the pathway between the content on <unk> already exists today.
It also shows us that as we leverage the portfolio of content, we have and continue to develop new stackable offerings, while positioning ourselves to better monetize current and new learners, while helping them improve their lives and grow their careers.
We're finding that leads acquired for two new products. The original to your channels are up to three times more valuable over their lifetime when they become registered learners on Nx Dot org. This.
This is worth mention in more detail.
Two you have scale in recent years, we've created over 4 million new leads annually for original to your programs.
We historically convert 1% to 5% of those to various products from degrees the short courses.
So what are the other 95% to 99% doing.
There is a meaningful opportunity to engage and convert those individuals into pay that ex learners over their lifetimes.
Our platform will be the best at finding matching and converting high intent career advancers, including all of those to your leads through meaningful learning pathways that deliver great career outcomes. We expect this will drive revenue at a much lower CAC and.
And as a result of the increased revenue from the two new acquired leads will drive more and more content to the Nx platform, which which in turn we expect will result in more and more lenders coming into IDEXX effectively accelerating our platform flywheel.
Which brings me to an update on our pipeline and new flexible offerings, we have a bunch of wins this quarter on the content side, including new pathways, new certificates, new free courses and new degree offerings. All supported by the platform that not only drive impact, but also set us apart from the competition.
We continue to have broad and active pipeline discussions for both our full degree bundle as well as an escalating number of conversations on our new flex degrees that we rolled out in July .
Our new flexible model for degrees offers a core bundle at 35% and enables partners to select additional elements of our tech and services bundle, including enhanced marketing support placement and content development for incremental Rev share on top of the 35% Rev share.
Importantly, this will not replace our from our full model that will remain.
But the flex model will allow us to continue to aggregate heidrick high quality content on <unk> Dot org that we simply Couldnt make work in the full model operating meaningful pathways for learners and driving incremental business. Let me give you. An example, we have a new development with one of our oldest partners the George Washington University Milken School of public health.
<unk> learned Goldman's leadership, we just signed a brand new doctorate in public health as the new flexible degree offering. This doctor. It is a great example of the power of this new model as it wouldn't be possible and are full degree model.
GW will also be offering a new micro masters in public health to drive scale and interest in the discipline.
The micro Masters will stack into the existing very successful public health Masters under the full bundle, which will stack into the new doctor It.
Ultimately, creating a full public health pathway.
We have many more of these in negotiation and we believe the platform strategy overall and things like the flexible model will help us get the degree segment back to growth as we exit 2023.
It's also important that the partners that are listening to this call know that in the flex model. We will offer you. The same quality of service that made this a world class company.
Original to your partners see the value in our expanding the London School of Economics, and political science just launched its first massive open online course on at X and two micro bachelors programs, which stack into its undergraduate degrees also powered by <unk>. This.
This is a meaningful part of our product strategy and we expect to announce more like this too.
A note on the enterprise channel and momentum we're seeing in boot camps overall, our Nx for business Enterprise unit grew 62% this quarter, our boot camp product line in particular, which is now rebranded under addax drives a critical global need and is a significant growth plan ahead for government and business.
As one example, this quarter, we announced a partnership with the United Kingdom Department for Education, where they will fund 200 seats for a fully online SKU skills boot camp and front end web development.
The boot campus part of the UK governments skills for life initiative focused on investing in lifelong learning and skills training.
All boot camp participants will have access to nx his career engagement network, which provides a comprehensive career support it's going very well and was valued at up to $4 8 million pounds local and federal governments worldwide are in need of this and we think that's a huge potential growth area for Ed expert business for 2023.
Overall in the face of complex market dynamics, our transition to a platform company and corresponding focus on profitability is showing good signs of success, we delivered record profitability with adjusted EBITDA of $32 5 million, an EBITDA margin of 14% our quarterly results.
<unk> increased our confidence in our strategy and our 2022 EBITDA outlook, which Paul will now cover in more detail take it away Paul Thanks, Chip and good afternoon, everyone.
As chip mentioned, we delivered a strong quarter I was particularly pleased with our record adjusted EBITDA of $32 $5 million, reflecting the execution of our platform strategies and our strategic realignment plan.
These results give us the confidence confidence to increase our adjusted EBITDA guidance for the year, while positioning us for a strong 2023.
Starting with the topline revenue for the quarter totaled $232 2 million flat when.
Compared to the third quarter of 2021.
Full course equivalent enrollments our Ftes came in just over 80000 for the quarter, reflecting a 3% increase on a year over year basis, while average revenue per FTE declined 5% compared to the third quarter of 2021, primarily driven by mix.
Revenue for our degree program segment decreased 7% compared to the third quarter of last year, driven by a 1% decline in FTE Enrolments and a 6% decline in average revenue per FTE, reflecting a greater percentage of lower cost ex masters and undergraduate programs.
And our alternative credential segment revenue increased 12% compared to the third quarter of last year, reflecting the inclusion of legacy <unk> offerings in <unk>.
15% increase in FTE enrollments and an 8% decline in average revenue per FTE.
Strong revenue growth in the alternative credential segment was driven by a 17% increase in boot camp revenue, particularly our web development cyber security and enterprise offerings.
As expected revenue from our exact business declined as we implemented a new marketing framework and focused on our more profitable exact ad offerings.
Now for our discussion of operating expenses.
Our third quarter operating expense totaled $336 5 million.
Up from $275 9 million in the third quarter of 2021.
This $66 million increase include $17 million of operating expense related to <unk>, which was acquired in the fourth quarter last year, and a noncash impairment charge of $79 $5 million.
To elaborate on the noncash impairment charge based on the continued decline in our stock price and as a result, our market capitalization.
Determined that a triggering event for an impairment analysis had occurred.
This evaluation led to a $52 million write down of certain goodwill assets and a $29 $3 million reduction of intangible assets.
On our second quarter call, we shared our plans for accelerating our platform strategy centered around ethics.
As part of this strategy, we implemented a higher bar for return on paid marketing spend and began seeing a positive impact this quarter.
For example, marketing and sales as a percent of revenue came in at 46% for the quarter a decline of more than 1000 basis points on a year over year basis.
This decrease was largely driven by a $26 5 million decrease in paid marketing costs.
Without noncash items, such as stock based compensation and DNA marketing and sales as a percent of revenue came in at 37% for the quarter.
During the quarter, we recorded $11 $6 million of restructuring charges up $6 $2 million compared to the third quarter of last year.
These charges included $9 $3 million associated with real estate consolidation.
On a year to date basis, we recorded $29 2 million of restructuring charges.
Before I move off of expenses, let me highlight three things.
One in the third quarter, we completed the cost takeout actions, we discussed last quarter.
Which we expect to result in operating expense savings of $70 million on an annual basis.
We are more efficient in marketing and sales expense.
41% of revenue this quarter versus 48% last quarter.
And three we expect our total restructuring cost to be within our estimates that we outlined last quarter.
Turning to our profitability measures.
Adjusted EBIT for the quarter increased $17 8 million to $32 5 million or a 121% improvement when compared to the third quarter of last year.
Our adjusted EBITDA margin increased 760 basis points to 14% compared with the last quarter of last year.
That's sustainable improvement shows the early benefits of our platform strategy and the strategic realignment.
Segment profitability, our adjusted EBITDA for the degree program segment was $44 9 million, a 32, 7% margin.
When compared to the prior year segment profitability increased by 36%.
While the margin increased by 1040 basis points.
For our alternative credential segment segment loss or adjusted EBITDA came in at $12 4 million and $5 8 million improvement compared to the third quarter of 2021.
Segment profitability margin of negative, 13% improved by 850 basis points compared to the third quarter of 2021.
Now for a discussion of the balance sheet and cash flow statement.
We ended the quarter with cash and cash equivalents of $185 2 million.
A decrease of $68 $8 million from the end of 2021 and $52 $6 million sequentially.
The year to date variance is largely largely due to capex and interest.
The sequential decline primarily reflects higher receivables and lower payables.
Our accounts receivable balance of $97 $2 million increased 27 $3 million from the June 30 quarter.
Fluctuations in our accounts receivable balance reflects the seasonal timing of payments from our University partners, which often matches the academic calendar.
Accounts payable and accrued expenses of $133 $4 million decreased $16 $7 million from the June 30 quarter.
These net working capital trends drove a use of $1 3 million and unlevered free cash flow as compared with $11 $5 million or the <unk>.
Railing 12 months ended June 32022.
We ended the quarter with gross debt of $948 $1 million consisting.
Consisting of $568 million from a secured term loan and $380 million in convertible senior notes.
Terminal and has a maturity date of December 2024, while the convertible notes will mature in may of 2025.
On the topic of debt, we are actively evaluating options to opportunistically refinance our term loan.
We are making good progress and we are optimistic in our ability to get a transaction done in the coming quarters, mainly because of the significant EBITDA expansion, we saw in the third quarter.
And are expecting going forward.
Now for a discussion of 2022 guidance.
Our priorities for the rest of 2020 to remain the same.
One increase adjusted EBITDA.
To improve free cash flow and three continue to transition to a platform company.
We are affirming our revenue guidance for 2022, which calls for revenue to exceed $960 million.
We are increasing our adjusted EBITDA guidance to range from $115 million to $117 million, which at the midpoint is 5% higher than the midpoint of our prior guidance and a 74% increase on a year over year basis.
While we're not providing guidance for 2023.
We are reiterating our commitment to a target of at least $150 million of adjusted EBITDA for 2023.
Why do we believe this target is achievable.
We've completed the cost take out in the quarter, reducing our run rate expense.
We're seeing strong performance in our new marketing framework lowering our marketing spend and we're seeing early success from the Nx platform.
With 39% of all organically coming from the Nx platform.
In addition, our 2022, we expect capital expenditures to be approximately $70 million and weighted average shares outstanding to be approximately $78 million.
To conclude I'm <unk>.
Thrilled with how much we've accomplished in the last three months, we took bold steps, we implemented a new more efficient marketing framework eliminated silos increased agility and reduce cost.
Expanded our market presence with new offerings that leverage the power of our Nx platform and increase the value of learners over their lifetime.
And most importantly.
We're proud of delivering record adjusted EBITDA and margins.
Looking forward to you is well positioned to drive more learners and content to the Nx platform.
During profitable revenue growth over time, a truly scalable business.
And with that let me hand, the call back to the operator for questions.
Thank you as a reminder 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, we'll pause for just a moment to compile the Q&A roster.
And our first question comes from George Tong from Goldman Sachs. Please go ahead. Your line is open.
Alright, thanks, good morning.
Afternoon.
So you beat on the bottom line against your own expectations you effect, if we took out the $70 million of expenses restructuring and because of more efficient marketing you saw reduction quarter over quarter and paid in variable marketing spend so trying to understand where it is.
Your view that the upside in profitability coming from which specific areas of the business surprised you to the upside in terms of cost efficiency and how would you think about that surprised carrying forward.
Its sustainability.
So George let me start off here in <unk>.
Chip will.
Augment a little bit as we go through this no first of all I think our personnel and personnel related expenses one of the areas that we saw.
An improvement on the cost side of the equation in terms of the two operating segments. The degree segment.
With 32 point something percent EBITA margin for the quarter adjusted EBITDA margin for the quarter is definitely an area that drove overall EBITDA improvement and then in the alternative credential segment. There was significant improvement on a year over year basis and on a sequential basis.
If we look at this in totality as we go forward, we're going to see cost cost.
<unk> and three general areas, we're going to see it in personnel personnel related expense, we're going to see it in the.
Very able our paid marketing spend and we're going to see it in areas such as our real estate and also in areas.
And in terms of leveraging the infrastructure that we have as an organization, but the first two are the main areas that you should expect going forward George what I would add to that is yes.
Organic lead production.
For our exact Ed business and even for our boot camp business Thats coming off the platform is non trivial so.
Boot camp is a huge growth opportunity. We do think we will get a lot of growth there next year in 2023.
You might have noticed we transitioned all the boot camps to add X. So that allows us to do a bunch of things that we were not able to do before including offering a variety of alternative credentials across each lead that comes in the door. That's something that it's clear to us that investors don't understand it's one thing to think about the leads coming off.
The Nx platform and it's another to think about the scale and power of the <unk> side going index on an individual basis, we've recruited people for a single point solution over our entire history and we're really good at it.
And ultimately when they enroll in something they have a life changing experience and thats. The most important thing when they don't enroll its a very large percentage of people that ultimately will convert into something else and historically that's been off of our platform. Because we didn't have a platform now we have a platform to convert those people. So that organic lead percentage is something that we'll talk about.
Lot more over the next year and as we get to what is now going to be a planned March investor day. After we finish our K, we feel like we will have a lot to talk about about how the scale of the platform is working to our benefit to drive down costs. You heard me mentioned that Youll see it first in all cred.
<unk>, everyone to like it a lot more when its got a lot lower CAC.
Yeah.
Yep.
And then so.
Youre right now pushing forward with your platform strategy Youre seeing the efficiencies with respect to marketing.
And your organic leads are coming in stronger than expected when.
When would you expect that to create a flywheel to help drive reaccelerate revenue growth. So now you're sort of in this phase where you're optimizing margins one will the story shipped back to.
Our growth acceleration, one that flywheel start to spin.
Last call we announced.
A bunch of things that it was very complicated period from the standpoint of reorganizing the entire company changing the entire marketing framework and in doing so clearly taking a pause from growth in order to focus on profitability, which given where the company is and given where the market is overall I don't mean, the stock market in the world like we thought that that was.
A really prudent and proper thing to do we do think we're starting to get the benefit of it now.
Clearly that creates a moment in time, where we're taking a pause from growth.
Small single digit growth and we do like our odds of seeing growth improve as we get into next year.
And should be able to start seeing that flywheel produced the whole no notion of matching people into a pathway. It's clear at this stage I'll give you. An example of something George that had a really substantial impact this quarter as we started geo pricing a variety of the Fedex, sorry, Exec Ed courses the short courses.
You might have known as the original get smarter courses.
It worked fabulously. So <unk> has a very large amount of international traffic and the reality is as we could start geo pricing.
In that business line, we found conversion got substantially better in those markets for those courses, we were able to do it. So we think that's just one example, there is a bunch of levers that we have to execute on across the business and that is certainly one of them.
So ultimately it gives us a great opportunity to.
Two.
Prove revenue growth as we get into 2023.
And our flexible degree model should be able to get us additional growth in the degree business as we take a pause on some of the pieces in degree where we reduced spend.
Final growth lever I would say enterprise, 62% in the quarter non trivial right and now it's getting to be a meaningful number.
A year ago, it was high growth, but nobody cared because we're pretty big in it was a small number overall.
Now getting to be non trivial. So we've got an entire team focused on that and we do like what it means.
If you think about what we announced with.
The UK government the department for education in the U K.
Reskilling and Upskilling is a worldwide need and candidly nobody is doing it at scale, we really are.
We think we have the largest boot camp business on.
On the planet.
So we think that opportunity to work with local governments and enterprises with a product that ultimately helps people fully transition into a new role as a big deal.
Great very helpful. Thank you.
Our next question comes from Josh Byrd from Morgan Stanley . Please go ahead. Your line is open.
Hey, guys. This is Matt Saltzman on for Josh Baer Tonight, Thanks for taking the question.
With regard to <unk> I think the reorganized in the operational efficiencies are very clear I, just have kind of a broader strategic question.
Just around the strategy going forward.
Are there specific ways that you guys are attracting partners to create new content on the.
On the platform new domains, that's going to help bring some of those new awareness of the platform. It I think it's you know it's great to hear about the.
Nick leads that are coming through but I'm. Just curious how you guys are going to continue that momentum.
Well since we acquired at X. We've released over 500, new massive open online courses youre talking about a lot of content.
Lot of new content, we want to make sure that the full IDEXX community of partners, both University partners and corporate partners know how committed we are to continue to growing the platform and that all starts with great. New free courses, we also announced a whole variety of different professional certs different corporate partners like Google Google.
Cloud.
The web three foundation like Theres, a bunch of new content and we do think youll see that accelerate over the next year like we are.
Working on a whole bunch of new partners new content.
And the flex model on the degree side.
Allows us to really aggregate great degrees without the J curve that you've historically seen in our degree business. So we think you will see an acceleration of launches on the degree side.
Making it clear that we're still doing full degrees I've got a couple of those were about to get out there and.
But not everything is Matt for a full degree model because that includes paid marketing and if youre going to include paid marketing, it's got a scale and number one some schools don't want really big scale number two not every program will have really large scale. So it's a great opportunity for us to have more degrees to offer to more students both here and.
International markets like our our new relationship with the University of Sydney is doing incredibly well out of the gate. So.
We're all in on just the notion of free to degree.
And having steps along the way what we need to do is just continue to develop the right technology and the right infrastructure to match people on their pathway.
You can see it in a variety of places the website itself at X Dot Org is really changing pretty rapidly with a large amount of production of new pages, New course pages, new learn focused pages.
On disciplined like machine learning and things that are of high value to folks.
That all just drives greater share of voice on the web. So at X has the kind of muscle mass on the Internet that you use never had before but I will tell you. We have I think the single best team and higher Ed at monetizing educational traffic. So that's a really nice combination.
It took a while for it to start to show you know, but it's really starting to show.
Got it. Thank you I appreciate the thorough answer.
Yes.
Our next question comes from Ryan Macdonald from Needham <unk> Company. Please go ahead. Your line is open.
Chip and Paul Thanks for taking my question and congrats on all the great progress you've made this quarter.
Thanks, Raj I can access enrollments.
Obviously, we're seeing and then fall numbers that grabbed enrollments are declining but I'd be curious given the pipeline activity you're talking about a lot of new programs coming on I'd be curious to hear what youre seeing in terms of new applications. As you think about the 2023 cohorts and whether or not sort of the tough macro is is translating into sort of a tailwind to enrollment.
At all.
Yes so.
Ryan it's interesting everybody's degree business really across the entire industry.
Declined.
Ours is pretty resilient, we did see a little bit of decline, but pretty resilient in part more than half of our business is.
Helping hands disciplines or license Youre focused disciplined and those tend to have a little bit more resiliency. The macro is tough on degree in general.
As the job market starts to get worse not to root for layoffs for the world, but the reality is that is definitively good for the degree business.
Higher Ed has a long history of that we do think as the economy gets tougher.
Exiting one of the hardest demand environments for really in the history of the degree space overall, and we think we're probably likely heading into.
Rougher waters for the world, but clearer waters for the degree business if that makes sense. So now the flip side of that is we're definitely seeing on the front end the boot camp side in particular is really cooking.
And that actually does sink historically, where job focused programs do typically get the boost first.
As you mentioned, we do think this flex model is meaningful launching many of those programs while they won't be as large we do think that they will be profitable nicely profitable.
And we also think that they don't have the kind of J curve associated with the cash burn because the course build is on the university side and the paid marketing is different.
The share of voice, we can achieve on Google now is meaningful.
Because of the platform, so really like what that strategy means for getting the degree business back to growth in 2024, and 2023, we are going to grow to be clear and we're going to grow faster than we just grew this year.
We do like the direction of parts of the business not just enterprise.
But the reality is all degree businesses have been in a bit of a tough tape here. So we thought ours was.
Pretty good given the circumstances.
Yeah very much. So that's that's helpful and then on the Flex program.
It's great to hear about the strong pipeline you're building, but I'm curious, how it's altering the conversations with existing partners.
On one side or should we expect you know does this create an opportunity for early renewals and expansions of existing contracts and if so should investors expect any sort of transition hurry period from the modeling perspective as they shift from maybe the traditional model to a flex.
In General Ryan.
<unk> and flex will coexist.
Somebody having a full program.
Flex existing doesn't mean all of those schools are running to a flex program. That's not the case our partners understand for them for the most part is if something is.
As large if it's a program that.
Is really meaningful to the partner and to <unk>.
<unk>.
I understand that you can't get there without the scale that the paid marketing brings to the table.
We've got really stable partnerships across the board partners are in a good place.
The GW example is a great example of like where this flex model does come into bear for our current clients. So you heard me mentioned in the prepared remarks that that doctor. It would not have been able to work in the in the <unk>.
<unk> model and there's a reason like that it's just not simply going to get to the size that you would need to make that J curve.
Function properly to make it work financially.
So the reality is.
That's one.
We love deploying flex for GW into a high quality program today that has a really strong full degree model in the master of public health and then putting a doctorate in for the program is great.
I think youll see a lot more of that we've had quite a bit of interest from <unk>.
Not every faculty grouped at every University partner, we work with wants to scale too.
500, or 700 or whatever the number is of students.
But many of them might have 50 or 75 students and they might want 50 or 75 more.
And that is a perfect opportunity for flex and for <unk>, just to build a bigger and bigger portfolio of high quality degree programs. So we do think it's really relevant now you heard me mentioned that you will see us launch additional full programs because we do think that there is still great opportunity.
One of the things Cove. It did do is sending everybody online clearly the days of debating whether you should go online or over so we think flex is a great really a great.
Right way to capture some of that demand under the two U X platform.
Excellent I appreciate the color and congrats I guess, one other comment I would I would mentioned is that we're still pretty far away from renewal periods in the degrees. So.
As you know we went through a wave of renewing early a bunch of degrees. So we don't have any renewals of any kind until 2025.
And later, so we feel good about where we are with existing clients.
Our next question comes from Jeff Silber from BMO Capital markets. Please go ahead. Your line is open.
Thanks, So much just to follow up on the last question focusing on the degree segment.
When you go to market.
Do you go to market specifically with this flex degree scheduled your go to market with your full service program can you talk a little bit about the strategy there sure Jeff We do both we really are.
We've got opportunities for.
It puts us in a lot of conversations that we weren't in before.
The full model.
Audi is.
We didn't want to deploy the full model many places in our existing University base.
Or many places that were new because those programs wouldnt have gotten to the scale.
Would really matter in terms of the.
The ROI that we need to see if youre going to put it in $5 million to $10 million and net negative cash over the first four years of programs Gotta get really big.
So we show up with a much broader menu of options for the school that is really working so you noticed I used the word escalating number of flex program. So we're excited about what that means for for the number of programs. We can sign over the next 12 months.
And but there are some places, Jeff where theres a great opportunity for a program that does one scale is really interested in scale.
Or might want a disruptive price something you can get really really big so.
The notion of a degree program like the very successful Boston University MBA, we do think there'll be more of those types of programs. So it just gives us a much broader menu of things to go to market with on the degree side.
Now one of the things we've had to do Jeff is we've also had to as we've reworked the company like reordering all of our activity under key leaders across the business. So it is not siloed.
So we're really excited about what some of these professional search like the Google Cloud server.
They mean for the business or the London School of Economics announcement like Jeff you might remember.
LSC was get smarter client.
Right when we bought the company hasn't done anything with to you and you fast forward now today.
So proud to host the executive director of LSC here at headquarters and.
It's an incredible client and they just announced their first massive open online course in mass.
Mass is a huge need for the world so that could be a very large massive open online course, but whats great is that it basically pass into.
<unk>, which give somebody a good certificate and drives revenue for the school and for to you and then it pass into our nine undergraduate programs and the best part of it is those undergraduate programs why does somebody stall in the current funnel that we have for to you. They typically stall because they don't have the math requirement.
That's how to change the world and drive a great business at the same time so.
Not just about the degrees anymore I think this community of people should be assured that we're very focused on the right things in terms of the bottom line. We're willing to say today that all credit will be profitable next year and I'll tell you when you bring in a bunch of students that have a successful outcome and ultimately theres no CAC everybody's going to like it a lot more.
Alright, Thats, great to hear and then my follow up question.
I know youre not giving guidance for next year, you did talk a little bit about your goals. So one of the things I know last quarter was was your cadence to get to positive free cash flow. I think you said you hope to get there.
On a run rate by the end of this year and then continuing with 2023 is that something we should still be expecting.
So Jeff I, absolutely I mean, if you look at the numbers that we have here we delivered this quarter and then the midpoint that the guidance exiting this year 116.
It was up nicely for an EBIT number next year to achieve the 150 and then if we do some reconciliations in the 150, if capex is coming in somewhere $60 million to $70 million anywhere between that and then assuming networking capital close to zero or.
If anything a use of about 10 as we as we roll through some of the restructuring charges that go through that fall over into next year.
Looking easily at a cash flow number on a full year basis that is somewhere between $10 million to $20 million.
That is assuming an increased <unk>.
Interest payment in calendar year 2023, so the bottom line is we.
We are still our plan is still to exit the year. If you take the month of December multiplied by 12.
Cash flow positive and probably more importantly, our visibility into the $1 50.
As we exit the year, we've completed the.
Cost realignment activities over the summer those are all behind us.
We've done some of the real estate work and we have some for foundry aspects left when we put those pieces together, we're still very confident that a $1 50 and feel good about.
Crossing over to free cash flow next year.
Alright, that's great to hear thanks, so much.
Our next question comes from Brett Knoblauch from Cantor Fitzgerald. Please go ahead. Your line is open.
Yes.
Hi, guys. Thanks for taking my question.
So you guys started the year with 7200 employees I guess regarding the head count reductions.
I guess, how many employees are you at now and where do you see that trending over the medium term and so Brad Cowen.
The table.
Did you say 7200.
We didn't we don't.
Anywhere near 7200 employees just wanted to.
Make sure Ftes.
So it might be four times, there was 30 3900 32, okay.
Got it alright, so obviously part time employees come in and out of our business based on instructors for boot camps, and the old credit segment, but.
We.
We decreased overall personnel expenses by 20% compared.
Compared to our budget.
And feel that we're in.
Nothing harder to do as an executive team then that we are very happy.
To be ahead of it we did it I was very proud of the team we did it very quickly and effectively and now we are focusing the company on all the positives related to where we stand in the market and how.
How great. We think the opportunity ahead of the company is right now the reality is like.
I mean, right now I feel like we're at IPO again.
Feel like the company has an incredible runway ahead of it.
And getting there with greater efficiency was important but I think you could reasonably argue that while the.
Cost savings was really important.
Getting to a point of increasing our speed, increasing our decision, making time upping our risk tolerance to make those decisions quickly has been huge so I think we've been operating really effectively over the last three or four months.
Okay. That's helpful and then maybe on the on the segment margin as we look out to next year.
On the degree side was very strong this quarter I'm guessing, we should expect that to be over 30% next year with the kind of the AC or I guess with your guidance.
For Q4, it seems like Ace deals would be close to breakeven.
And yes, Q4 was set up.
For next year.
Am I thinking about that right.
So Brian a couple of things.
That's.
Remember that there is some seasonality in the business. So we do expect the fourth quarter.
To have higher margins, that's something we've seen since really over the years.
A degree in business in particular should show higher margins as you get into the next quarter, and then first and second quarters generally.
That's where we do most of our spend in most of our build in a given calendar year. So you should expect some contraction as you get into those periods, but look we haven't done that.
The bottoms up work in 2023 as yet we haven't gone through and completed budgeting process yet for the next calendar year, but I think youre thinking about in generally the right way I think the biggest leverage that you will see are the biggest changes at UNC and then the alternative credential segment.
That is the one where you'll see the significant movement and then the degree business was simply all of its natural course.
As you know if you look at it from a cohort perspective, we have more of our degree programs that are in that mature cohort that we should expect to be 33 or above from a fully loaded margin perspective and in combination that will flow through to a consolidated margin profile throughout the year, but the <unk> business is the one where we will see.
The significant improvement on a year over year basis.
Yes.
Understood I appreciate it thanks guys.
Our next question comes from Jeff <unk> from Baird. Please go ahead. Your line is open.
Yes. Thank you.
'twenty 'twenty three revenue commentary is more positive than I was expecting at this point of the transition is that all about organic lead quantity and quality and synergies or is there also a learning in terms of what youre seeing in the paid lead channel.
And how efficiently or effectively youre able to cut marketing spend in that part of the business without.
I think too negative of an impact on paid leads and conversions.
I mean, Jeff when we when we made the marketing change we were doing it with a ton of analysis from what I think is the best team in the United States to do that so they are very good.
But it was it was all obviously estimates and that we know exactly how the efficiency was going to come out no.
Which is why we're pleased to keep our revenue guidance in line.
And we're seeing that we can drive some greater efficiency on the bottom line. So.
So that's worked out as hoped or better than hoped.
Obviously.
Honestly as I mentioned the degree business, it's tricky time for everybody's degree businesses. I mean, we are I think the last to report in this cycle and obviously everybody had declines in a lot of those businesses are a lot smaller than ours. So.
We do think going into next year, you have some things like our boot camp business, which is just really getting impressive.
And.
Enterprise is meaningful so.
This entire.
There is an entire arc of activity around both government and.
The enterprise side of the shop.
As you know.
A really good place for what we think it means meaningful growth for next year.
We have a lot to do Jeff.
I'm very proud of what the team has done.
But we're early days of Lake.
The expansion on the web and on X in particular.
The entire project called lead to learner that is really powerful people don't fully appreciate like.
Over 4 million leads that.
Come into to you that our Super high intent by the way these are people that.
Have said I would like you to contact me about a master in data science from blank.
And ultimately only 1% of those on the degree side ultimately convert.
The other 99 are most of the time doing something and historically, we've not had the opportunity to talk to them about that.
And now we're going to so like.
In some ways that the two <unk> going into FX might be more powerful than the IDEXX going to to you.
But it's early days with that so.
But I just I feel so bullish about the team that's doing it.
We're starting to see it is the point.
Actually starting to see if you can you can see it happening we believed it when we bought at X, but we're now at a point where like.
You can really see it happening so.
It's easy to get excited about what.
24% and 25 start to look at what look like.
Why we did this is also getting harder and harder to convert people.
Away that you might have.
Five six years ago on the web like Google's gotten smarter about search so.
So the old way of aggregating people under sort of Seo based websites, it's getting harder and harder.
<unk> has.
<unk>.
So many different opportunities for us to publish high quality content and then help people find a pathway from that content into something that changes their lives like matching people into pathways is the entire story of 'twenty three and 'twenty four.
Got it.
You have slide forward like the 15% EBITDA margin target we have your.
Qualitative growth commentary from a revenue perspective.
Just on the 150 of EBITDA that you're targeting in 'twenty three.
How much protection is there on being able to achieve that in a weaker revenue environment should say that agreed business remained challenging just like how close to $1 billion qualitatively do you need to be for that to be an achievable figure.
So a couple of things Jeff.
If we if we were to take the $70 million of.
<unk>.
Cost reductions cost takeout the activities of the summer and we look at the guidance that we provided for this year of 116, if one were to assume that we had taken out that $70 million on January one.
You're getting pretty close to that $1 50, so to some extent we have protected ourselves in in terms of how we're getting to the 150 and not depending too much on the topline.
Performance to get there however, as we sit here today, we don't expect the top line next year to decline on a year over year basis for the company right. So we are expecting growth and it's a matter of how much growth and that will depend on.
As we go through our planning process here for 2023, we're going to come up with some refinements on that but the bottom line is that the mere fact that we had the confidence to give that $1 50, we feel better about it now it is not a number that is dependent on hitting a certain revenue number in order to make it happen I think we can see clarity to Pat there and you know.
Our business right, we have tremendous visibility into next year from a degree program perspective, particularly with long term contracts, particularly with returning students.
Have tremendous visibility into a significant portion and then.
We feel good about the performance that we've seen from the boot camp business, particularly with that.
With the platform strategy and new framework, that's been performing very well. So and then we have enterprise and government and social and we put those pieces together.
Good about our trajectory for next year, it's a matter of refining and Jeff I guess, what I would add is when we think about next year and that 150, we certainly weren't presuming strengthen the degree segment. When we gave you that $1 50. So.
We've got real strength in boot camp and so if the world gets a little less friendly and degree gets better for us yet, but that's not what we.
We're not planning on that today.
Pretty comfortable with where we are and feel very good about that 150 that floor of $1 50.
Understood and then just last for me Paul benchmark rates of interest rates have moved up a lot since you I'm sorry, the term loans.
I understand it's preliminary discussions but.
What youre, saying youre talking about refi that debt.
Is it about extending the remaining duration or is there actually some conversation that you might be able to get a lower rate on the debt because you're an improved credit with the profitability improvement.
So I mean.
Of course, improving the credit quality and.
And looking at better terms is definitely something that we're looking at.
And with the production with the EBITDA expansion that we're expecting next year. Those are the types of things that are giving us the optimism that we're seeing in terms of getting it extended and also focusing on terms that can help us whether its a cap whether it's.
Reduce.
Rates all those types of things are on the table, but the bottom line is we want to make sure we take that risk off the table.
And that is that is somewhat a perceived risk because of the end of the day look we have.
By the time, we get to next quarter and exit the year.
We believe we have good liquidity strong liquidity for our business perspective.
Close to $200 million of cash exited the year.
Hopefully, we'll be generating cash next year and then it's a matter of just getting the maturities extended where we want to get it and protect ourselves from fluctuating interest rates as you as you started out and Jeff just a plug for everybody else on the call I would love I. Appreciate you pointing out slide four in the earnings presentation, because I do think it's Superman.
<unk> in terms of what it says about where the company is today.
The margin progression from IPO till now the percent of sales and marketing.
From IPO till now we think it's.
It's a slide that people should pay attention to and marketing and sales of 37% of revenue. We said we were going to do it. We're there we're there.
Right alright, thanks for taking my questions.
Sure Jeff.
We have no further questions in queue I'd like to turn the call back over to Steve Roth for closing remarks.
I want to thank everyone for joining us on today's call. If you have follow up questions. Please reach out to me at Investor Relations have a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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