Q4 2022 2U Inc Earnings Call

Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today.

At this time I would like to welcome everyone to the two you incorporated fourth quarter and full year 2022 earnings call.

Today's call is being recorded and all lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.

If you would like to withdraw your question simply press Star one once again.

Thank you and I will now turn the conference over to Steve <unk> head of Investor Relations you may begin.

Thanks, Debbie good afternoon, everyone and welcome to <unk> fourth quarter and full year 2022 earnings Conference call. Joining me on the call. This afternoon are chip, how sac and our.

Our co founder and Chief Executive Officer, and Paul <unk>, Our Chief Financial Officer.

Following our prepared remarks, we will take questions. Our earnings press release and slide presentation are available on the Investor Relations website and a replay of this webcast will be made available later today.

Statements made on this call may include forward looking statements, including 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 our learners and University partners and other matters.

These statements are subject to risks uncertainties and assumptions any forward looking statements made on this call reflect our analysis as of today and we have no plans or duty to update them.

Please refer to the earnings press release into the risk factors described in the documents, we file with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2021, and other SEC filings for information on risks uncertainties and assumptions that may cause.

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 to use performance. These non-GAAP measures should be considered in addition to and not a substitute for or in isolation from GAAP results.

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.

Handing the call to chip I am pleased to share our plans for an Investor day event on March 21 at the NASDAQ market site in New York, We're planning to provide additional details and insights about our strategy business trends financial performance and our roadmap for future value creation with that let me hand, the call to chip.

Thanks, Steve executing our platform strategy drove meaningful profitability improvements across our business and it's creating opportunities to accelerate our profitable growth trajectory. We concluded 2022 with strong results, including $58 million of adjusted EBITDA for the quarter or growth of 178%, beating our guidance.

By nearly $10 million for the full year, we delivered $125 million of adjusted EBITDA growth of 88% in.

In addition, unlevered free cash flow turned positive.

These excellent results were made possible by our team who answered the call. After we made a mid year decision to accelerate our platform strategy and realign our company.

Our alternative credential segment is doing very well delivering almost $400 million of revenue in 2022.

This is driven primarily by bootcamp growth of 18% versus the prior year with contributions from both consumer and enterprise. We anticipate this growth will continue as more learners opt for shorter less expensive and more career specific training to reach that next job promotion or bump in salary and we expect.

That continued growth will offset the near term declines in the degree business.

Most notably in 2023, we expect the all credit segment to crossover into profitability for the first time. After six years of building that business. This is a big deal no more quote empty calories looking at the top line of our degree business for 2022 revenue slowed by 3% year over year to 570.

$2 million.

We saw the near term impact of our new marketing framework, which reduced unprofitable spend combined with a strong labor market the increase the opportunity cost of higher education.

However, we remain focused on enabling great outcomes, delivering strong profitability and signing new degree programs. We believe that these new degree programs and a cooling labor market will set up the degree segment to return to topline growth in 2020 for client satisfaction is high and the response to the new flexible degree offering has been good.

Right.

As a reminder, the flexible offering includes a lower revenue share for a different bundle of services, including very limited paid marketing and no capex for core spill.

We expect revenue per degree for those to be 15% to 20% on average of the revenue generated for our full degrees. However, these programs are designed to have minimal cash burn and similar profitability.

For year on year comparisons, we launched four full degree programs in 2022 and began building a pipeline of new flexible degree offerings in the second half were.

We're selling both of these effectively both Paul and flex with a greater focus on cash flow generation.

While in 2022, and 2023, we launched or expect to launch a similar number of degree programs four or five full degrees and a limited number of flex degrees. In 2024, we expect to increase that size of fleet launching at least seven new full degrees three of which have already been signed and.

<unk> flexible degrees. We believe this robust launch schedule will help us get the degree segment back to top line growth in 2024 and more momentum in 2025.

Taking a broader look it's been just over a year since we combined the IDEXX platform as the core capabilities of to you, including our digital marketing expertise scale and services.

Fast forward to today, and we're leveraging an industry leading platform offering everything from degrees to boot camps to professional certificates to free courses all in one place and easily accessible to millions of learners around the world regardless of where they are on their learning or career journey. The combination is generating tangible proof points.

We are driving meaningful cost efficiencies, thanks to the power of the <unk> platform and our overall scale, which should create the sustainable marketing advantage long term.

More specifically this means reducing paid marketing spend while growing organically flow on.

On slide 10 of the earnings deck, you'll see that marketing and sales expense as a percent of revenue declined to 34% in the fourth quarter the lowest it's ever been.

In 2022, we reduce paid marketing by $47 million when compared to 2021, and we generated revenue above our expectations, despite lower marketing spend and a strong labor environment are.

Our organic lead generation from Addax his strong accounting for 37% of organic leads in the fourth quarter.

The quality of organic leads provides confidence in the sustainability of our marketing efficiencies and our ability to leverage the power of the <unk> platform to drive enrollments.

When it comes to learn growth and new content, we're gaining momentum.

Differently, we're in the early stages of igniting the flywheel or the premise and increasing high quality content, we will attract more learners and more learners will drive more partners, who want their content on the IDEXX platform.

To bring that to life, our learning community increased by nearly $6 million during 2000 $22 million to $48 million at year end 2 million learners joined in Q4 alone.

On the content side, we are growing the catalog with the help of both new and existing partners. In 2022, we launched a dozen micro credentials and our partners added over 600 free online courses to the <unk> platform.

We also added 16 members to add X during 2022, including the American Psychological Association Baylor University Oracle Russell Sage College, the University of California, Davis, and Wesleyan University, we have some news for you Pepperdine in Lehigh just joined and will be announced shortly.

We're expanding our relationships with current partners to launch innovative in demand offerings are Great example from last week is the disruptive lead price Masters of science and artificial intelligence with the University of Texas, Austin, a partner of annexes for the last decade, and a top 10 computer Science School. This is a near perfect example of a well.

Timed relevant and accessible program that addresses a large and growing skills gap in our workforce. It's also only $10000 for the entire degree as a real time proxy for interest within 48 hours of our announcement, we generated 3400 organic or free leads all through at X.

In addition to UT. This week, we're excited to have announced a new full degree with our longstanding partner the University of North Carolina at Chapel Hill will be launching a doctorate in education and organizational leadership, we all.

Also have some news on this call we've signed the contract to launch a new flexible degree with the University of California, Davis, a masters of science in management.

Overall, we feel really good about our ability to grow our learner base and our ability to continue to enhance our platform with new high quality content.

We also remain focused on continuing to grow our enterprise business, we're seeing tremendous progress here during 2022 enterprise revenue increased 86% versus the prior year, while securing new customers and building a pipeline of opportunities we see a lot of potential here and we're leaning heavily into this part of the business investors have high appetite.

Here and we will unveil the full strategy at our upcoming Investor day event in March.

A quick note on the international front as we look for ways to expand our geographic reach we're implementing new tactics such as market specific pricing for our offerings. In addition, we're excited about the potential for adding new content from new partners like Americas that appeal to learners outside the United States and Europe , beginning with India will leverage their.

Restructure and localization to generate high margin revenue.

We'll also continue to improve and differentiate the learner experience drive platform innovation and deliver world class outcomes proving that high quality online education can be done well at scale.

And finally as promised we're driving to higher and more sustainable profitability due to our new marketing framework, which leverages. The hydro main authority of Addax, our strategic realignment completed last summer and ongoing cost discipline measures such as managing head count and third party third party spend.

Looking forward, we're excited about our plans and opportunities to advance the utility of the IDEXX platform, while creating both learner and shareholder value Paul will cover the 2023 outlook in more detail, but the highlights are a range of $155 million to $160 million for adjusted EBITDA with positive EBITDA from our alternative credential segment.

In the back half of the year and our first ever year of positive Levered free cash flow.

Platforms are the future of education, we're confident that our platform strategy is working and that we're well positioned to create value for learners partners and shareholders.

By executing our strategy, we are focused on driving higher profitability and delivering positive cash flow.

My goal is to deliver positive EPS during 2024, our goal I believe is achievable given the positive leverage we're seeing in the business transformation isn't easy, but we're confident about what's ahead and look forward to sharing more in March at our Investor day with that I'll turn it over to Paul.

Thanks, Chip and good afternoon, everyone.

And as you've seen from our press release, we had a strong finish to the year delivering revenue of $236 million and.

And EBITDA of $58 4 million in the fourth quarter net.

Net loss came in at $11 8 million and free cash flow on a trailing 12 month basis was a positive $11 5 million.

The significant improvements across all of our profitability measures demonstrate the early returns of our best in class platform and organizational realignment.

Our team responded to a difficult macro environment and deliver particularly in the second half of the year, giving us the confidence to deliver strong profits cash flows and outcomes for our partners in 2023.

Today, I will discuss our results for both the quarter and the year.

Then I'll provide an update on our balance sheet and cash flow, including recent financing activities and conclude with our thoughts on our financial outlook for 2023.

Now for a closer look at revenue Rec.

Revenue for the quarter totaled $236 million down.

Down 3% from $243 6 million in the fourth quarter of 2021.

For the full year revenue grew 2% to $906 to $3 $1 million from $945 7 million.

The Green segment revenue decreased 10% to $137 $1 million for the fourth quarter.

Selecting a 9% year over year decline in FTE enrollments with average revenue per FTE remaining relatively flat.

On a full year basis degree segment revenue decreased 3% to $571 $6 million driven by a 2% decrease in Ftes and average revenue per FTE.

The alternative credential segment continued to deliver strong revenue growth in the fourth quarter with revenue increasing to $98 $9 million up 8%.

<unk> for the quarter increased 15% and average revenue per ftes declined 11% over the prior year.

We continue to experience strong revenue growth from our boot camps, which grew 18% on a year over year basis on the strength of coding cyber web development and enterprise.

Revenue from legacy <unk> offerings contributed $5 9 million for the quarter.

Our exact end revenue declined 11% year over year, driven by lower revenue per FTE due to geographical pricing strategies.

On a full year basis, the alternative credential segment revenue increased 11% to $391 $5 million.

Legacy <unk> offerings contributed $22 million and the remaining increase was driven by a 9% increase in Fcs.

Turning to operating expenses operating expense totaled $236 million for the quarter, a decrease of 6% to $2 $7 million or 21% compared to last year's fourth quarter.

This significant improvement was primarily driven by a $26 3 million decline in paid marketing expense and a $24 $2 million reduction in personnel and related costs associated with headcount reduction and lower performance based compensation.

As chip mentioned earlier, when we acquired on X, we emphasized the value creation potential from improved marketing and sales efficiency.

Due to annex is large global audience and massive library of educational content.

And brands with consumer and Google credibility.

We are beginning to see this pay off with an increasing percentage of organic leads coming from ethics and these leases have a greater propensity to purchase driving higher conversion rates.

As a result marketing and sales as a percent of revenue declined to 34% from 45% in the fourth quarter of 2021.

Also at the time of acquisition, we identified enterprise as a key growth opportunity.

And in 2022, we increased our enterprise revenue by 86% to $44 $8 million in the fourth quarter Enterprise revenue grew 183% on a year over year basis.

Stock based compensation expense for the quarter totaled $17 5 million down $5 5 million or 24% from the fourth quarter of 2021, primarily due to head count reductions.

During the quarter, we recorded $4 1 million in restructuring charges related to the 2022, the strategic realignment plan, bringing the total to $33 2 million for 2022.

Turning to profitability measures adjusted EBITDA for the quarter increased 178% to $58 4 million a margin of 25% compared to a margin of 9% for last year's fourth quarter.

This significant increase in adjusted EBITDA was primarily the result of accelerating our platform strategy and executing the strategic realignment plan.

Our fourth quarter adjusted EBITDA also benefited from the typical seasonal decline in marketing spend.

Net loss for the quarter totaled $11 8 million, an improvement of $55 $4 million from last year, primarily due to lower operating expense and lower transaction and integration expense.

Segment profitability, our adjusted EBITDA for a degree segment came in at $65 million, a margin of 44% compared to $39 $4 million in the fourth quarter of 2021.

For our alternative credential segment segment loss, our adjusted EBITDA loss came in at $2 $1 million.

Paired with a segment loss of $18 $4 million in the fourth quarter of 2021.

In light of this trend we expect this segment to be profitable on an EBITDA basis.

Full year 2023.

Now for a discussion of the balance sheet and cash flow statement.

We ended the year with cash and cash equivalents of $182 6 million a decline of $2 $6 million from the third quarter of 2022.

And we delivered Unlevered free cash flow of $11 $5 million for the trailing 12 months ending December 31, 2022, an improvement of $45 4 million compared to the 12 months ending December 31 2021.

Gross debt at year end totaled $953 $8 million, including $506 million to $7 million of term loan and $380 million of senior convertible notes.

In January .

We significantly improved our credit profile by refinancing our term loan.

We paid off a portion of our outstanding balance and extended the maturity date by two years we.

We used $104 million from the balance sheet.

And the proceeds from the issuance of new senior convertible notes to reduce the term loan by $187 million.

After this transaction, we have gross debt of $914 $2 million, including a $380 million term loan.

And $527 million up two tranches of senior convertible notes.

On a steady state basis, we expect cash interest savings from this transaction to be approximately $10 million per year.

These financing transactions.

<unk> three objectives first we reduced our secured debt to $380 million.

A secured debt leverage ratio of one nine times 2023, EBIT guidance a reduction of nearly one full turn.

Second we pushed out the near term maturities of our debt near.

Nearly 60% of our total debt now matures in 2026 and beyond.

And third we put in place a revolving credit facility of $40 million to manage working capital.

These activities enable us to focus on executing on our plan and I'm proud of the team for getting these transaction across the finish line in a difficult macro environment.

We remain opportunistic with respect to further balance sheet optimization.

Now for a discussion of the 2023 guidance.

Our guidance for 2023 calls for adjusted EBITDA to range from $155 million to $160 million representing growth of 26% at the midpoint.

For revenue.

Which we view as an output from our model, we expect revenue to range from $985 to $995 million, reflecting the market trends the chip described.

We expect net loss to range from $95 million to $90 million.

Underlying our outlook.

As a change in the financial profile of our business as we expect alternative credential revenue to grow to nearly half of the consolidated revenue and deliver positive adjusted EBITDA in 2023.

We believe this change will provide flexibility to continuing positioning our degree business for accelerating profitability profitable growth in 2024 and beyond.

As we add more programs, including flexible degrees and as macroeconomic factors move in.

Move in our favor.

Concerning revenue pacing for 2023, we expect sequential revenue growth every quarter, while year over year growth is expected to return in the second half.

In addition, as we continue to focus on net loss for 2023.

We expect to reduce stock based compensation.

The $70 million compared to $80 million in 2022.

Also we expect capital expenditures of $65 million versus $75 million in 2022 and weighted average shares outstanding.

$82 million.

To conclude the acceleration of our platform strategy and the strategic realignment plan in 2022 resulted in a nice finish to the year, particularly in our profitability.

This year, we expect to build on that success to deliver strong adjusted EBITDA, which is a growth of 26% and positive free cash flow as we set up 2024 from profitable topline growth.

And with that let me hand, the call back to chip.

Thanks, Paul before we open it up to Q&A I'd like to take a quick moment to say how proud I am of the entire team for their unwavering focus and dedication in delivering outstanding results. This year strategic realignments are never easy the team not only delivered but did so while staying maniacally focused on what matters most doing what's best for universities and their students with that I'll turn it back to the <unk>.

Operator for Q&A.

Thank you.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we will pause for just a moment to compile the Q&A roster.

Okay.

And we will take our first question from Ryan Macdonald with Needham Your line is open.

Hi, Thanks for taking my question and congrats on a great quarter.

Thanks, Brian .

Chip and Paul.

As you think about the degree launch cadence interesting to hear.

Seven to eight degree all degrees or seven full degrees and then 25 flex degrees first chip how do you expect sort of enrollments to trend in the or to progress on the new flex degrees given the attractive price point and then for Paul Perhaps you can talk about sort of just remind us on the investments.

Upfront required to launch the flex degrees relative to the full.

No problem Ryan So, yes, flex is going incredibly well, we still have a good number of full an issue as you heard we expect full to not quite double year on year. Once you get to 'twenty four but.

Going from four five to seven.

We still have plenty of folks interested in that offering flex is a great response to the market and.

We think that 25% is realistic.

You heard me mentioned for the first time that we think it's roughly 15% to 20% from the standpoint of what these programs will look like on a revenue basis, which you can apply on an enrollment basis. We're obviously not doing paid marketing in every one of those cases.

It's notable that if you look at the flexible offering while it starts at 35% and has a very limited amount.

Hi intent marketing.

Mostly organic if you add if a client chooses to add paid marketing for an additional 15% the programs will be a lot bigger so TBD in terms of what percentage of overall flex will have the additional marketing in it a lot of that depends on the desire of the school.

In scaling the program one of the great things about the flex offering is not every school wants to scale. These programs. Many of the schools want to go online and offer high quality to their to their student base without scaling the program in the past that would have been very problematic for to you and therefore, we wouldn't be able to launch those programs and in this.

Model, we can really work with the clients and.

It allows us to use launch many more degrees and we think over time that should get really attractive for the segment as you know with our degree business. If it goes down or up it takes time to feel it through the financials. So.

Excited about what that could mean for 'twenty for growth.

In addition to getting to 25, and we do think overall.

The macro should start to favor degrees more it's notable that while our degree business declined and we expect it to decline this year.

Look across the space.

<unk> held up.

We think better than most.

We think our degree business is pretty resilient, so ultimately being able to offer quality to our partners high quality outcomes to the learners, which is kind of table Stakes for two U and a model that.

Ultimately gives us greater flexibility to the University partner.

We didn't announce it until whatever it was six months ago, and it's very creating a very attractive pipeline so pretty strong.

Yes, and Ryan will refer to these as a capital light, meaning very little from a launch perspective in comparison to the progression of the launches that we had from.

From a capex perspective is almost nonexistent and then from a.

Total cumulative cash the launch we're looking somewhere between $501 million.

Depending on the program, it's closer to 500000 for some closer to 1 million for others, but the bottom line as it is.

It is not something that put a constraint on our resources as we think of launching a large number of these programs than ever and in any calendar year. It is something that we can definitely afford to do in the calendar year in large volumes like for example, 25 as we are targeting here.

That's super helpful color I really appreciate it maybe just one more for me chip.

Emiratis are announcements are really interesting opportunities, obviously drive new revenue streams outside the U S. Just curious where you're at in terms of getting the content platform and and how should we think about potential contributions to 2023 revenues from that relationship.

Yeah.

We're excited about it ashwin and his team have built a great company with infrastructure in that market that we don't have and while in the past, we might've thought of launching.

Actual sort of folks in that country partnering with a company like emeritus that has great payment options for learners and an infrastructure makes a ton of sense for US now Ryan everything takes time. So we do think this will build into something more meaningful as we go throughout the year.

And notable that as we bring in that that revenue, we think it creates an opportunity for an improvement in margins. So we also have a couple of relationships like that that are in play right now and we are.

Our plan is to talk about that strategy in a little bit more detail.

At Investor Day, where we have more time to to give you a greater amount of the story.

Thanks, Congrats again.

Okay.

Thanks Ryan.

And we will take our next question from George Tong with Goldman Sachs. Your line is open.

Alright, thanks, good afternoon.

Jordan chip.

Hello.

Mentioned that the cash to launch a flex program could range from about 500000 to a million.

What's your estimate full degree programs with cost to launch at this point and how would that compare to prior launches before you embarked on your overall restructuring and platform strategy.

Yeah. So currently George somewhere between two and a half to $5 million as our cumulative cash to launch a regular program of course size matters. When it comes to those but two 5% to five is a good ballpark at this time and the two variables there George would be the content and some programs are more expensive.

Others, but the bigger variable interest interestingly is the marketing because as the program grows more quickly you would actually consumes more cash.

In the early stages, but therefore generates a bigger number at steady state. So when we have something launch it does really well now we do think over time <unk>, probably change that too. So like the domain authority of Fedex allows us to generate high quality content from an Seo perspective in a way that we just didn't have access to anything like that before.

Sure.

So we think that that's a meaningful lever when you start thinking about the next five years.

It takes time, but over the next three to five years, we should be able to see a great opportunity to drive that down.

But.

The faster our program scales the more cash burn in the short period, we're pretty excited about the response to the AI degree.

We've never really seen anything quite like it to be honest it outpacing anything that we've done in the past, including our Morehouse undergrad programs.

Got it that's helpful.

The launch cadence for 'twenty, two 'twenty three 'twenty 'twenty four definitely is.

It's useful from a modeling perspective as you think about.

A number of programs coming up for renewal when when do you expect the next big wave to hit and based on conversations you've been having with your partners.

Is there any intention to shift along the spectrum of flex versus full degree offerings.

And in general no because if a program is today launched and it's a program that we intend to renew it.

Typically that means that it had the benefit of larger marketing that comes with the full program model and therefore, it's at scale and without that marketing it will be more challenging to chip.

To keep that program at a higher enrollment levels.

What you will see is we went through a period George wait and I know you've been with us for a while but for those investors that weren't we went through a period, where we had signed a lot of exclusive deals and our early history, where we had we.

Had offered exclusivity in various disciplines and we figured out over time that we shouldn't have done that and that we needed to offer more programs in verticals because programs had greater geographic boundaries to them. Even though you were online that was not immediately obvious in the early days so by signing exclusive so we had to go.

Early into the contracts so the to use side had to go to our clients and try to reopen the agreements to eliminate exclusivity and in doing so we came up with a model that worked quite well across our portfolio and there were mild variations, but we would give schools.

Small single digit relief in the Rev share in order to be able to go to a less exclusive or in some cases, a nonexclusive basis. The reason I go there is that we're generally through that we have a limited amount of it that still exists but for the most part what youre going to see now is a much more sort of routine renewal.

And we actually just signed one that we have not yet announced.

We sort of like under the wire here so.

We'll be able to get detail on shortly to everybody that looks I think looks much more like what youre going to see.

That case, it's candidly just extending the program because the client is really happy with really no change.

And so we'll get greater detail on that shortly we thought we might have it for this call, but we didn't didn't quite make it in time to put a proper release on it so.

Other thing I think you'll see rather than people transitioning from fault the flex.

Not saying that it's not possible that there is.

One or two of those at some point, but youll see more and more current partners wanting to launch new programs in some cases fall in some cases flex.

Back in the day when we only had the full model we did not have an opportunity to work with every school at the University because in many cases the university either didn't want to scale, a particular school school by school decisions matter and so if the faculty at a particular school didn't want to scale, we really didn't have anything forum now.

We do.

Or other cases, where that particular brand maybe mixed with that particular geography and discipline didn't allow us to scale. The program, what's great about blacks as it works for all of that so it really just allows us to aggregate more overall degree demand on our platform. So we think it.

Sets up quite positive.

Out years with regard to degree.

Yes.

Got it very helpful. Thank you.

Robert.

And we will take our next question from Stephen Sheldon with William Blair. Your line is open.

Okay. Thank you.

Congrats on the ETF and the UNC announcements out of it just seems like a really nice additional wins with some of the largest institutions out there.

Would love to get some detail on what trends you're seeing between institution doing more to launch and support online programs and sales kind of in house versus outsourcing to third party providers like yourselves.

Have you seen that change much looking back over the last couple of years and that the trend book much different bye.

Hype or worse side higher Ed institutions.

Yes, thanks, Stephen so the most most common trend is related to of course build when we started the company.

Universities didn't have didn't have the capability of building online courses or launching online courses and so that was a 100% necessary to get our program online.

And while we were very proud of our team that builds really high quality content and it's meaningful.

Over time more and more universities have developed capacity to do that as part of the reason for the flexible model. We do think Youll see a good number of the core bundle with clinical placement or the core bundle with marketing and clinical placement and.

Other often not the core spilled.

From the standpoint of the financials that is a net positive because it does lower the capex.

And we are focused on getting to positive EPS and as you know the capex as part of that story. So.

From my standpoint, we see the flex innovation as simply opening new doors.

And I'd say, that's the biggest trend Steve and the only other thing I'd say is this entire notion of sort of in source and outsource is just way overplayed in various places.

Really its more complicated than that like many of our best relationships. We work directly with the folks that you would argue or the in source. So.

Very commonly we've got great relationships with universities departments that are building a variety of capacity. So we had today an incredible day at headquarters, where I'm at right outside of Washington, DC, and Maryland, where we had our social enterprise Bootcamp partners. So our bootcamp partners from rain.

<unk> from University of Kansas.

Colombia to all kinds of really great schools that are partnering with us and local workforce agencies to drive critical skills training for the country and this kind of training can't be done without private partnerships private public partnerships. It's just not possible to do the scale. So we think we're doing something really good for the world that we also.

Inc is a great business opportunity.

And the reason I go there as in many of these cases that is working with the continuing Ed component of the institution that very often also has some responsibility in this notion of in source outsource so.

I understand why folks ask about it but overall.

We feel like the.

The interest in our revenue share based model continues to increase.

So we like what it means for the future of that part of the business.

Got it very helpful.

I wanted to ask about the enterprise.

Details TJ it seems like growth there accelerated during the year, if I heard that correctly that it grew.

83% year for you in the fourth quarter and I know, it's still somewhat small, but what's driving that acceleration how were end market macro dynamics play into that just any detail you can provide.

So.

Might be the best example of something that you know because we were bringing together.

Fedex acquisition included so many different angles and I would tell you that.

Enterprise, we are really getting our legs, there and we feel like it's a huge opportunity.

Forward will debut the full strategy at our Investor day in March to give it the time that it needs that you really can't do on an earnings call, but we're adding new customers.

There's a lot of reseller activity there is a tremendous bootcamp opportunity.

The skills training combined with the support and the career in.

Engagement that we can provide is really part of what I think is a durable mode around the competition.

And then what I mentioned earlier in terms of the social impact.

If you look at like the U K.

The United Kingdom Department of Education skills Fund that we announced May I don't know how many months ago. It was but it would be September September of last year. So.

Just you've got a variety of growth levers in enterprise in.

In places where.

We're going to be able to really drive.

Sort of a durable advantage to the competition and then some places where our Nx for enterprise offering just has incredibly high quality courses that are known for rigor from 37 of the 50 best schools on planet Earth.

And adding folks like Oracle and IBM and incredible corporate content.

So theres a lot more of that coming we've been really pretty keen on the amount of content being added and we just keep announcing it and we felt like often maybe not getting.

Enough attention, but.

Ultimately enterprise is a very significant growth lever for both 'twenty, three and 'twenty four and helps us with the trough that we're going to see on the degree side simply from as you move it up or down in our marketing spend did change on that side. It takes time to sort of.

See it move through the revenue so it sets us up nicely for 24, because you get degree back to good place and then you've got these growth levers of both enterprise and boot camp that are really meaningful.

Great. Thank you nice work.

As a reminder, it is star one if you would like to ask a question and we will take our next question from Jeff Silber with BMO capital markets. Your line is open.

Hey, Good afternoon. This is Ryan Griffin on for Jeff I was just wondering it sounds like ex Biopharma is operating really efficiently.

Are there any specific kpis you can point us to to help us kind of track how conversion has been going on.

The spend for those users acquired through the platform versus through other customer acquisition channels. Thank you.

So.

No Brian .

We try not to get too in the weeds here, you will see that 37% of organic lead flow in the quarter came from <unk>. So we do think that's a meaningful lever because ultimately organic is.

The most powerful because by definition, we're not paying for that.

And I do think.

Getting sales and marketing.

To 34% in the quarter.

That is a nontrivial accomplishment if you look at our history. So we do think that the platform strategy allows us to ultimately.

Define the <unk>.

<unk> long term future of the company based on our own domain and our own.

Our own domain authority.

One of the challenges with.

These calls as you know, we don't talk a ton about the the learning going on on the platform, but it's important to note that since we bought it we've added over 600 free courses to the platform also so like.

That's a big part of the stories. This is a worldwide free platform for people to come in and change their lives.

So the percent of marketing is down.

Our CPL is just simply more efficient because of the <unk> platform.

Marketings down.

26 point something million dollars less in paid marketing and as you can see from the revenue trajectory, we're able to maintain that and we were able to augment paid marketing with organic growth. So from a lead perspective. So the overall high level metrics are there and.

We're trying to up level that conversation, if you will and not get too much into each of the <unk>.

Inputs that gets you to deal with but the overall level.

Got it thank you and just for a follow up on the capital allocation front are there any other debt refinanced catalysts youre looking at or maybe to reduce the term loan any further.

I mean, Ryan look looking at it this way, we delivered $125 million of EBITDA in 2022.

We're on a trajectory to deliver.

Pick a number $157 $5 million plus in 2023.

We have the fundamentals as an organization.

To have optionality when it comes to capital markets and we will continue to explore it out at the end of the day, we are very focused on optimizing our balance sheet and we'll make sure. We continue to look for opportunities as we go through time.

I don't know if that is.

In the near term or when that is but we are building the fundamentals to make sure that we can tap into the capital markets as appropriate and optimize our balance sheet.

Got it thanks, so much.

And we will take our next question from Josh Baer with Morgan Stanley . Your line is open.

Great. Thank you for the question.

If we look at EBITDA margins in the back half of this year.

And I know Theres, some Q4 seasonality around lower marketing spend but I think you were over 19%. So I'm wondering why EBITDA margins for 2023 goes down to 16% from these higher levels.

Assuming that there is the continuation of that reduced paid marketing spend in the first half of 2023, which wasn't there.

2022.

So just wondering if you could give any context there may be aware if you are investing.

Into next year and where.

So Josh let me put that into perspective, a little bit in the third quarter of 2022 was a 14% EBITDA margin in Q4, 25% and revenue in that back half of the year of 2022, let's say $468 million with EBITDA of about $91 million. That's the 90, 819% that you're referring.

And if you take the midpoint of our guidance of $1 57 five.

The percentage of the midpoint on the revenue side, that's the 16% keep in mind.

All of the back half number that you're talking about there to Q4 numbers has seasonality associated with it and when Youre looking at the full number of 16% margin in 2023 that number encompasses a full cycle, meaning Q1, which is our toller spend and then Q4, which is going to be lower seasonal marketing spend.

But having said all of that I mean at the end.

End of the day. This is January and this is the beginning of the year and there is an element of prudence when it comes to.

Our guidance that we delivered here today.

Remember we are in a very complex macroeconomic environment and.

We have to be prudent as we go through 2023, but you hit the nail on the head and funny enough. We were prepared for that question by looking at the back half of the year margin what does it mean from a run rate perspective, and that you can tell from the response here. That's a very good observation on your part.

Thanks, Doug.

I appreciate that.

Do you like to.

Perform EBITDA in and embed some prudence in there I guess my other question is just you know we've.

You talked about through some of the.

The positives around top of funnel and efficiency from IDEXX wondering if you could comment on any <unk>.

Impacts you're seeing from the pullback in paid marketing spend to top of funnel or enrollment yes.

Yes, Josh so I would take that one.

I mean, obviously when we did it doing it the way we did it at sort of one moment in time.

I did have some risk associated with it I'm very pleased to tell you that.

Looked out in each individual sort of product line.

To our liking effectively what we thought it would be.

We are now spending marketing dollars based on positive contribution.

We do think over time as I mentioned, we will be able to get back to stronger growth, but we're just doing it carefully so.

Ultimately.

The marketing spend is it simply a much more efficient spend and you really can't get there without the organic lead flow that's coming.

Coming off the platform.

Is still.

It's still early days and we've only owned it for a little over a year end.

An example of the micro credentials.

Yes.

We do believe.

If you look at those.

There are good examples of those micro credentials in the <unk> portfolio driving significant enrollment into the original at X degrees and so.

Aligning that kind of content with a university partner is a non trivial exercise its really hard to do so when you see announcements like our GW doctor. It that was our first flex degree and you start noticing all of the lead flow running.

Running through at X what we.

We need to do is align every lead to learner status and have effectively every lead.

Via learner and have an opportunity to change their life, even if it means theyre doing something free on the platform that is a really significant opportunity Josh what that will do is that will not only increase the learner count, but it will get us to greater growth opportunities because as you know the vast majority of people that become quote lead.

Do not convert into a degree or into a boot camp and so aligning all of those together is really starting to work.

It is somewhat early days, but you might even noticed that today, the homepage of AD X looks quite different than it did yesterday. So there's just a gradual process of continuing to drive greater efficiency.

Greater commonality and the more paid marketing that goes to X and the <unk> funnel the greater the opportunity for us to expose people to new programs that they weren't considering before.

And we're now actually for the first time doing.

At X direct marketing for <unk> itself.

We were not really able to do that with the exception of a very minor test we did way back when we first bought addax now youre starting to see on a cost basis us yet.

Positive conversion for at X.

Compared to the lifetime value of a customer and we will talk about that in more detail in March there's only so much you can cover on an earnings call but.

But we really like where it sits.

We think this is this is the future of education and so we feel like.

We're ahead of folks here.

Thanks, Jeff and Paul Thanks.

And we will take our next question from Brent Thill with Jefferies. Your line is open.

Hey, guys. Thanks for taking the question. This is David spoke on for Brian .

Wanted to ask you guys had previously in the in the past you said you were going to offer up.

We have share points.

Two existing customers. They say, we're going to reduce their cost of of of their program. I was just curious is that gained any traction have you guys had any any folks out there.

Taking you up on that.

A little bit.

David I'd be I'd be I'd love to tell you that we've had a lot.

We're not exactly sure what investors thought of it we didn't do it for investor purposes, We did it because we really believe that lower cost is better for the student.

And candidly better for to you because these are not in a less inelastic goods. So as the price goes up demand goes down and we unilaterally pay for that so we do think.

Sort of our money, where our mouth is and reducing the Rev share in order to drive the cost down. We thought is a really good goal is happening we don't have anything to announce yet, but we will have a couple.

But.

These things take time, so compared to flex we made two announcements at the same time sort of swapping Rev share.

We think it's really important that the world understands that we are willing to do that and are excited to do it and.

And therefore.

Debunks that narrative.

But.

Compared to flex, we got a lot of interest in flex and not as much interest in lowering tuition. So we have more work to do there.

Got it that's helpful and maybe just one more if I may.

I wanted to double click a little bit on the enterprise.

Really go go out some you guys, obviously off the small base I think roughly 5% of your total revenue today.

Starting to hear more it sounds like you guys got a lot to tell us at the Investor day, but you know just thinking about the long term perspective of this business is this something that you expect could grow to a third or a half year revenue over time, how are you guys thinking about the long term contribution of enterprise.

We think this will get big.

Sorry that was it.

Yeah.

Great I appreciate it.

Yes.

And as a reminder, the star one if you would like to ask a question we will move to our next question from Brett.

Now block with Cantor Fitzgerald Your line is open.

Hi Tech and Paul how are you guys doing.

Maybe two on my end.

Just like I guess in general I think previous kind of assessments or maybe.

It says what a labor market really deteriorated I would imagine a lot of the incremental unemployed went to what the degree route are you seeing any change in I guess or do you expect a different in a market where it is hearing this time around where those people will go degrees or maybe you're at credit segments.

So Brett I would say in the if you look at the research typically job oriented programs moved first we have definitely seen that so our boot camps are doing very well.

And important to remind everyone that we have with.

With Gallup, we really study that showed that there is a year $111000 of salary increase from the boot camps also doing very well for people of color selection for boot camps are really good story from an outcomes point of view.

We do think that this will transfer to degree over time.

Obviously, everyone is talking about the layoffs.

Yes.

Okay.

Obviously, that's not great for the for those companies, but the fact is Tim.

Typically the degree business you would expect it to be countercyclical, but not necessarily to the economy as much as it is to the labor market. So as the labor market has started to cool we do think we'll return to.

To sort of more normalcy, there, but I would also tell you that we do feel like we're now sort of operating at pre COVID-19 levels like we're kind of through the entire COVID-19 experience.

Which is also meaningful so we feel like we know we're dealing with so as we get through the trough that we see from the marketing spend change.

We think we get to a better place in 'twenty four 'twenty five.

That's helpful and then maybe one for Paul on the grid segment profitability.

44% in the quarter it was quite remarkable.

I guess.

Seasonality thing seasonality in the fourth quarter as well.

There's just less overhead costs and marketing costs associated with it and is there going to be a I guess a margin headwind from the revenue mix shift that youre kind of alluding to next year as degrees rather decline segment increases.

Well a couple of things.

First of all in the fourth quarter, absolutely seasonal seasonally lower marketing spend.

<unk> significantly their.

Secondly, marketing and sales 34% of revenue some of that contributed to.

Yes.

The degree of profitability as we roll that forward into 2023.

We are going to be spending more on launches we are going to be spending more on <unk>.

New degree programs. So as we look at that and we look at the trend that we are in and getting down to trough and coming out the back half of the year, we will see lower margins and the degree business, but what I would say lower margin that's going to be higher than it's been in prior years on an overall basis I'm talking about.

Mid to high <unk> to low <unk> type stuff I'm not talking about.

Numbers that are sub 20 or anything like that so it's going to be very good margins and at the same time, we have the alternative credential business, it's going to become profitable and contribute to the margins.

On a total company basis.

And keep in mind, what we're doing here is positioning us for 2020 for topline growth overall and continued to increase profitability. So we can get to net income positive EPS positive in 2024 and to some extent.

When you when you think of all of this from a total company perspective.

The green the Green business is doing what it's doing they all credit business is doing what it's doing but enterprises a surprise, it's the big one that drops to the bottom line as we get into the back half of 2023 into 2024.

Perfect really appreciate it guys. Thank you.

I appreciate it.

And we have no further questions. So I will turn the call back to Steve Roth for any closing remarks.

Okay I just wanted to thank everyone for joining US today reminder, to stop by our Investor Day in New York on March 21st you can now register on our website and if you have follow up questions. Please give a shot out to investor relations. Thank you.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation you may now disconnect.

Please wait the conference will begin shortly.

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