Q2 2023 2U Inc Earnings Call
Hello, and welcome to the two you Inc. Second quarter 2023 earnings call 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 star one on your telephone keypad.
I will now turn the conference over to Mr. Steve Eric Farah.
Sarah Duck head of Investor Relations. Please go ahead.
Thank you Sarah good afternoon, everyone and welcome to TD as second quarter 2023 earnings Conference call. Joining me on the call. This afternoon are chip <unk> co founder and Chief Executive Officer, and Paul <unk>, Our Chief Financial Officer.
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.
Following our prepared remarks, we will take questions.
Statements made on this call will include forward looking statements regarding our financial and operating results plans and objectives for management.
For future operations and the implementation of our platform strategy anticipated trends for learners and University partners changes in laws regulations and agency guidance for our industry and other matters. These statements are subject to risks uncertainties and assumptions any forward looking statements made on this.
Call reflect our analysis as of today, and we have no plans or duty to update them.
Please refer to the earnings press release and to the risk factors described in our documents filed with the Securities Exchange Commission, including our annual report on Form 10-K for the year ended December 31 two.
2022, and other SEC filings for information on risks uncertainties and assumptions that may cause our actual results to differ materially from those set forth in such statements.
In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of <unk> performance.
These non-GAAP measures should be considered in addition to and not a substitute for or in isolation from our 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.
With that let me hand, the call to ship. Thanks, Steve We had a strong Q2, notably we sustained double digit EBIT margins continue to drive down costs and increased organic leads from the nx platform to 44%.
We believe the business is moving strongly in the right direction due to our platform strategy.
As a result, we're increasing our bottom line guidance for the full year, while reiterating our top line we.
We did have some revenue shift from Q2 to later in the year something Paul will cover in detail.
I'll provide more color on our full year expectations in a moment, but first I want to give some commentary on the AD tech sector as a whole and our strategy.
And tech is critical to the future of society the need for high quality education is only increasing digital penetration is low and it is a massive global market.
It's becoming more clear to me by the day that our strategy is the correct one to achieve pre eminence in our space. We're the only company that can deliver outcomes at scale outcomes, because we built an apparatus that delivers the hard parts many of which are driven not just by <unk>, but also by people.
It's my belief that AI will only accelerate this differentiation.
Everyone knows with the <unk> acquisition, we moved to a platform strategy. This brings us closer to the consumer lowers our costs and generates lots of new revenue synergy.
To attack it properly we reorganized our team and we continue to do so actively.
We believe this is creating long term sustainable profitability.
Transitioning to a platform company involves rotating our offerings adapting and growing our products by the day to be better suited to the long term needs of our customers both universities and students.
Think of this rotation as us turning dials, creating greater emphasis on certain attributes that are critical to the long term future of our platform.
I see it there are five keys to this rotation.
First we've been expanding from highly selective and expensive programs to those with greater access and affordability youll.
You will see two you continue to aggressively manage our portfolio to better suit the evolving needs of our customer base.
Second we're rotating and have been for some time now from degree to non degree in 2024 for the first time, we expect our alternative credentials will be larger than our degree business, our acquisitions of get smarter and trilogy, where critical here.
Third we're rotating from reaching consumers to serving enterprises and governments and therefore, gaining access to larger addressable market with an extremely efficient model.
Youll see two you continue to focus on growing the enterprise business with a series of offerings that make us unique in this space.
Enterprise revenue grew 35% this quarter, we expect continued strong growth in the future.
Fourth we're rotating to more frequent purchases.
We're doing a better job moving from single purchases to a subscription based model while in its infancy, we believe subscriptions, particularly for enterprise markets will be an increasingly important part of our business in 2024 and 2025.
Fifth and finally, we're continuing to diversify the content base to include content created by industry leaders. Our content acquisition strategy is bearing incredible proof of course launches on AD X are up 56% year over year. The vast majority of these deals are very capex light given the course bill is not part of most of these launches.
To deliver this strategy, we must continuously evaluate our current portfolio of offerings and at times exit programs that do not fit.
We managed our portfolio in this manner for a few years now and we've discussed some of those in the past and we'll continue rotating the dial towards evolving student needs.
We've always been laser focused on delivering offerings that drive a part of the positive ROI for the student the University and to you that is not changing at all.
In fact re examining our programs regularly through portfolio management helps ensure that we continue to deliver on that promise.
When managing our portfolio, we think about four key factors one the financial health of the program.
<unk> efficient resource allocation.
Three debt to earnings ratio as the programs.
And for the strategic importance of the relationship with the partner.
Portfolio management creates greater value for not just the students, but ultimately for our shareholders.
Of note for the quarter, we expect it to sunset some programs in Q2, which would have resulted in significant additional revenue in the quarter. These.
These were pushed into the back half of the year, we're confident they will close which makes us continue to feel very good about our full year expectations.
Before I move on I want to highlight two notable degree developments.
Our new signings are occurring at a pace that we've never seen before due to our recently unveiled flex revenue share model. We're.
We're seeing a radical increase in demand for this model.
This is part of our previously discussed rotation, bringing in programs that meet a market need and have attractive pricing.
The new Flex model offers the University a variety of revenue share based bundles to select from and has been a homerun, we've really never seen anything like this.
It allows us to aggregate degrees on the platform and bringing new programs that are attractive to students either because of the cost is lower better pathways exist into the programs or both.
Note. This model is very capex light compared to our full bundle as course Bill does not typically purchased by the University.
Note universities generally prefer the core flex model plus paid marketing netting out at 50%.
Demand for the Flex model means we are ramping up launches I am pleased to announce that we are doubling our degree cadence for 2024 launches from our previously announced target of 25 programs to at least 50 programs.
You may remember that our largest ever launch year was 17 programs 50 is really something and 130% increase over our historic high.
Universities, clearly want revenue share deals and the current regulatory climate is not dissuading them.
Universities have spoken out aggressively in support of revenue sharing we're confident with our short and long term plans to navigate the regulatory environment properly.
Regardless, we also wanted to create an option in our tool kit for a new model that isn't built on a revenue share for any schools do not want that might not want revenue sharing.
We're excited to announce our flat fee model.
Our flat fee is an innovative non revenue share based model.
In this model, we charge a simple flat fee for our standard standard services across the board based on the particular program and services, we expect to provide.
This flat fee would include a shorter term contract of three to five years.
Instead of a long term revenue sharing model to you would price the program competitively to what might be available in the market to universities on a fee or revenue share basis doing it based on a proprietary formula and betting on ourselves for renewal upon success of the first firm.
We can do this because of the combo of our excellent operating history and our platform strategy.
Lastly, you will not suffer from the never ending list of charges school space and a fee for service relationship.
One of the main positives for to you is the flat fee revenue will be extremely predictable its a fixed guaranteed fee and.
In addition, I think it'll be very difficult for competitors to replicate we.
We have the track record to sell at the operating history to price it and believe the response will be strong based on initial conversations.
Also note. We believe this model will be profitable, we will be as profitable as our flex revenue share model, but will have a much smaller cash burn.
To be Crystal clear, we believe that revenue sharing will continue to be an important part of the ecosystem and we think this flat fee fits nicely with our revenue sharing models.
A few notable developments on our other product lines, our boot camp business continues to grow and innovate, although we've seen some softening in the coatings segment.
We're in a bit of a tech recession in terms of jobs. So that is having some impact.
Fortunately the new AI boot camp is off to a great start.
Also notable that the boot camp business is generating great results in our enterprise segment.
Our <unk> business is really surging.
We are successfully converting off the nx platform and we're adding a ton of AI content.
Exactly that is a real differentiator in our enterprise segment. It is cohort based posting a 90 plus percent completion compared to typically completion rates in the teens at best for the competition.
Finally, a few comments on the impact of AI.
First someone has to teach AI at scale, we are that company I alluded to it earlier, but the pace of new AI content on the platform is excellent and we will continue.
Second we believe implementing implementing generative AI inside our business will be a huge positive for us and allow us to deepen our competitive moat.
This is already evident through our implementation of the <unk> expert chat bot on our platform and our chat GBT plug in there.
These tools are driving new user engagement on <unk> X and eliminating some legacy support costs, but these tools are just the beginning.
I will actually allow us to build more efficiently on the durable note to you has around our product and service layer.
Cohort based instructor led learning and other people mediated experiences drive significantly higher completion rates. This.
This is hard to build but the results that drives are powerful.
Our competition doesn't have these things and it shows compare the industry processor completion rate of low teens at best to our executive completion rate of over 90%.
AI will not replace our cohort based learning or people learning from them and with other people, but strategic implementation of AI will create significantly greater efficiency in creating those interactions the.
The combination of people plus AI can bridge, the uncanny Valley and drive a greater durable moat around to you.
It can bring down our cost substantially and drive greater high value human contact.
We're at the early stages of unlocking the power of AI across our business and we're very very excited about it.
Finally, I want to highlight that we added an executive hire that will be critical to executing on our strategy Aaron Mccullough, our chief product officer. He has an outstanding background and AD Tech. In addition to stints at Uber Walmart and other companies are.
Aaron will be critical in driving the next phase of our platform strategy.
16 years into our journey, we've seen a lot and we've also changed a lot working around corners and ahead of the competition.
We have more capabilities and a better product suite than anyone in our space our business and our team are conditioned to face the challenges of this new era.
Paul will now take you through current results Paul.
Thanks, Chip and good afternoon, everyone.
On our second quarter call of last year.
Said that the long term objective of our platform strategy is to drive sustainable profitable growth and to set up the company to capitalize on the significant opportunity in front of us a.
A year later, here's where we are on a 12 month basis.
Adjusted EBITDA has grown $70 million, we reduced marketing and sales as a percentage of revenue by nine percentage points and increased organic leads from the platform by 22 percentage points, all indicators of a healthier and more efficient business.
Taking a closer look at results.
Revenue for the quarter totaled $222 $1 million down 8% from a year ago, driven by a 9% decrease in full course equivalents, our ftes, which totaled 76300 for the quarter.
Revenue from the alternative credential segment totaled $102 6 million, an increase of 4% from the second quarter of 2022.
Primarily due to a 10% increase in ftes, while revenue per FTE decreased 8%.
Boot camp revenue increased on the strength of our cyber security offerings offset by softness in our coatings segment.
Exact AD revenue increased due to stronger demand for our artificial intelligence courses.
As chip mentioned enterprise continues to be a focus of ours and the numbers support that enterprise grew 35% and now has annualized bookings of almost $100 million.
The Green program segment revenue decreased 16% to $119 5 billion, primarily driven by a 16% decrease in ftes.
Reflecting the implementation of our new marketing framework last summer.
Given the time from marketing spend to revenue we are now seeing that impact.
As part of our portfolio management efforts in the second quarter, we expect that to finalize agreements to sunset certain programs. However.
These were pushed into the second half of the year.
These agreements would have generated revenue in the degree program segment in the second quarter.
Now, let's take a look at costs and expenses.
For the second quarter operating expense totaled $378 $2 million.
From $289 4 million in the second quarter of last year.
$88.8 million increase includes a noncash impairment charge in the current quarter of $134 1 million.
Without the impairment charge operating expense for the quarter decreased 16% from the second quarter of last year, reflecting efficiencies from our platform strategy.
This decrease was primarily driven by a $13 $9 million decline in paid marketing costs.
$13 $1 million decrease in restructuring expense.
And $11 $1 million reduction in personnel and personnel related expenses and a $4 million decline in depreciation and amortization expense.
To elaborate on the noncash impairment charge based on our stock price decline.
And as a result, our market capitalization, we determined that a triggering event for an interim impairment analysis had occurred.
This evaluation led to a $16 $7 million write down of certain goodwill assets.
And a $117 $4 million reduction of intangible assets.
Marketing and sales as a percent of revenue decreased to 43% from 48% in the second quarter of last year.
This decrease was driven by a $13 $9 million reduction in marketing spend on prospect generation.
Removing noncash noncash items, such as stock based compensation and depreciation and amortization marketing and sales expense as a percent of revenue declined to 39% in the second quarter.
<unk> from 44% in the same period last year.
Stock based compensation expense for the period totaled $11 million down 51% from the prior year due to the combination of a significant reduction in equity awards granted and lower brand value.
We ended the quarter with 3314 full time employees compared to 3848 employees in the second quarter of last year.
Moving onto profitability.
Net loss for the quarter totaled $173 7 million.
Compared to a net loss of $62 9 million in the second quarter of last year.
Reflecting the $134 $1 million noncash impairment charge, and partly offset by lower operating expense of $45 $4 million.
And $4 million and higher interest expense.
Adjusted EBITDA for the quarter totaled $21 8 million a margin of 10%.
Compared to a 9% margin for the same period last year.
Adjusted EBITDA margin in the degree segment was 28% for the quarter flat compared to the second quarter of 2022.
Adjusted EBITDA margin in the alternative credential segment was a negative 11% a 700 basis point improvement from the second quarter of 2022.
Now for a discussion of the balance sheet and cash flow statement.
We ended the quarter with cash and cash equivalents of $6 to $6 $7 million.
A decrease of $42 6 million from the end of the first quarter.
As a reminder, the timing of payments from our University partners.
The academic calendar.
As a result accounts payable accounts receivable balance increased $14 5 million to $87 $3 million from the first quarter.
In addition, we ended the quarter with lower accounts payable and accrued expenses of $122 million, a $4 3 million dollar decrease from the first quarter.
For the trailing 12 months ended June 32023, we generated $11 7 million of adjusted Unlevered free cash flow a slight improvement over the same period last year.
Now for a discussion of the 2023 guidance.
As we enter the second half of the year, we remain focused on scaling our business, increasing adjusted EBITDA and continuing to build our competitive advantages as a platform company.
We are reaffirming our 2023 revenue guidance to range from $985 million to $995 million, representing 3% growth at the midpoint.
This guidance is primarily based on the following.
The strength of contracts, we have signed that are expected to generate revenue in the back half of the year.
Stronger expected second half growth led by enterprise, particularly our social impact programs.
Unexpected execution of portfolio management transactions in the back half of the year.
During our first quarter earnings call, we said that revenue in the second half of 2023 would be approximately 10% more than the first half.
However.
Due to a shift in revenue from the second quarter to the back half of the year. We now anticipate a 15% increase in revenue for the back half of the year compared to the first half.
Specifically, we expect our enterprise revenue to accelerate in the fourth quarter.
Our degree segment to generate higher revenue due to the shift in revenue we just discussed.
On adjusted EBITDA, we have demonstrated that we can more we can be more deliberate on corporate spending.
We are seeing the benefits of our platform strategy, particularly with respect to paid marketing.
As a result, we are increasing our adjusted EBITDA guidance to range from $160 million to $165 million or growth of approximately 30% at the midpoint of the revenue and adjusted EBITDA guidance ranges.
To conclude our platform strategy is working there are numerous indications of this including the momentum and content velocity the.
The growth in organic leads significant marketing efficiencies enterprise growth.
And the strong demand, we're seeing for our flex degree offerings.
We are on track to meet and perhaps beat our 2023 financial goals, while optimizing our degree portfolio and rolling out New program options for our partners.
All of which is building a more competitively differentiated resilient business for the future of education and positioning the company to deliver continued improvement in profitability and cash flows.
With that I'd like to turn the call to the operator for questions.
Thank you if you have a question. Please press star one on your telephone keypad.
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One moment. Please for your first question.
Your first question comes from the line of George Tong with Goldman Sachs. Your line is open.
Hi, Thanks, good afternoon.
You're doubling the cadence of your new degree program launches for 2024 from 25 initially to 50 can you discuss the expected capital intensity of these new launches and the anticipated impact to free cash flow generation.
Yeah, So George the Capex on all of these new offerings not just the degree side, but also on the content velocity on the IDEXX courses. They are all very very Capex light the vast majority of them do not include.
Of course build.
And on top of that a decent portion of the launches.
Our existing online programs that are already in the market as online programs.
There is a sort of a double benefit there is they don't have the cash burn and we get revenue more quickly so.
So what's going on with pipeline is we've really never seen anything like it before it's very positive. So we also like the financial characteristics. So rotating the business to programs that can meet the demand you've got to sort of average tuition.
Somewhere close to half of what our historical average tuition would be so we think that's also very positive for the long term future of the.
Revenue in the degree business.
Got it that's helpful. You also talked about the introduction of a flat fee model can you talk about which customers. This new model would likely appeal to.
And what the incremental revenue impact would be if you would expect any potential cannibalization from existing revenue streams and if so how to quantify that.
So I would say.
Just like when we announced flex flex revenue share model, we had some folks wondering if that might negatively impact our existing clients.
We're pretty good at.
At testing these things out.
Determining what the impact might be to our existing base.
The reality is some clients.
Some potential clients just don't want a revenue share model and we're trying to add something to our toolkit that allows us to expand out into the market and aggregate the larger number of degree programs.
So.
There's obviously a shorter contract lengths.
We're willing to bet on ourselves because of both of our operating history, our track record in the space.
And our ability to we believe bet on ourselves to have a longer term relationship in that flat fee.
The reality is this fee for service is not something that most university partners want revenue sharing still extremely popular as you can tell by our cadence.
But we do have a limited number of folks that don't want a revenue share and are interested in this notion of a flat fee. So we think we'll get some really solid additional pickup. The reality is we've had fee for service for some time and just hasnt been very popular.
So we like the idea of having our full bundle in a flat fee that allows people gives us great predictability, that's a real positive.
And ultimately you have.
Our ability to sort of bet on ourselves to go forward, but including that.
The full bundle in that flat fee and.
And not having to sort of do a long list of individual fee for service components.
Yes.
Time's onerous and expensive.
So.
We're pretty excited about George we think.
The response to the flex model has been stellar.
And we will have we will.
Announcements related to.
The universities that are that are actually coming on board.
Soon but we are willing to say that at least 50 for next year.
The notable thing about that overall pipeline is when you look at the overall sort of aggregated pipeline you've got.
Very large amount of long term steady state revenue that should come into play.
From this pipeline and we do like that in both cases, they get started faster because you don't have the big J curve.
Got it very helpful. Thank you.
Your next question comes from the line of Jeff Silber with BMO capital markets. Your line is open.
Alert to the third floor to the second border a third quarter that looks like the second border and then a fourth quarter that has the benefit of some enterprise contracts and some other contracts that we have on the degree side of the house that brings the revenue back up and produces a significant grill within a year over year.
Your basis in the fourth quarter, but at the same time, allowing us to hit our guidance range do we had at the beginning of the year on our plan at the beginning of the year. Most importantly, probably on the EBIT aside and the cash flow side of the equation.
When we when we <unk>. It is one of those areas that we have more control over so we're probably a little bit playing a wait and see mode. Before we deliver everything we can on the EBIT side of the equation, but that's one of the sites that we feel like we have visibility we have control and it's one of the sites that we have.
Tremendous confidence in and then what we're doing now is making sure that we can set the <unk> the business up for more resilient 2024, 2025, and those are the contracts that will come in and help us to delivered Q4 numbers.
Alright, that's great to hear it and then I'm a degree program site, it's great to hear about the accelerated launches for next year I Wanna talk about the other side of the equation in terms of renewals can you remind us when your next renewals are coming up in your degree programs are you having negotiations with those partners should we expect a different type of.
Contract, maybe shifting out of revenue sharing a flat fee et cetera.
Yeah, Jeff we were continually pretty much never not in some kind of discussion or negotiation with our clients. We do have very very substantial.
Percentage of the revenue locked.
I'm Gonna get I'll get the number for you before we're done with the questions existing contracts represent.
It's like greater than 90% of.
Of our revenue through.
Nonetheless, it's we do feel very confident in the current client relationships in our ability to navigate new moving people to flex in some cases, what's interesting about flax.
Cause you might've heard me mention that.
A case of flax when people are really most interested in is the core model plus marketing, which is very similar to to our full bundle at this stage. So we don't have any renewals until I believe after 2026 I'm trying to verify that in the room, Yeah 2026, Sir Thank you Paul.
So okay feeling.
Very positive about the existing client base there are definitely some cases, where you have.
Current clients that have programs that exist already and as you might imagine if they exist already doing them under the full revenue share bundle like what we have historically been known for doesn't make as much sense because the courses already exist and therefore, the cash to create those has already been in place.
So.
You know, we think flat fee just sort of opens up more opportunities not just with new clients, but add existing clients.
The reality is just wanted to give them you want to give them the options and.
I think if we keep giving them the options, we should see more and more degrees come onto the platform.
Alright that makes sense makes so much.
Your next question comes from the line, Brian Mcdonald's, which Needham and company. Your line is open.
Alright, Thanks for taking my questions Uhm, maybe to start shipping Paul you know, obviously common topic on the conversation was a portfolio D a portfolio management and continuing to sort of.
Valuating existing portfolio.
Given the commentary.
Alternative credentials as expect to be larger in 2024, I'm curious beyond you know what you're talking about instead of the shifter sunsetting programs and <unk>, how how many additional programs or what level of evaluation R. U undertaking to sunset additional programs as we go into 2024.
Having a contributing factor on sort of the commentary around alternative credit entrails exceeding degrees next year.
Thank you right now the the the the commentary related to all all kind of degrees are not really related we tried to lay out the four criteria that we used to evaluate whether or not we want to continue with programs and one is the financial health of the program to is you know the overall partner relationship.
Three is the resource allocation and four is the debt to earnings on various programs. So we've been doing this for some time now we thought it was important to call. It out so that people understand that this is like he was going to be an ongoing process. The bus gradually rotating the business to something that we think fits the long term.
How you more strongly both for students Prime most importantly, but also for our shareholders. So you know overall, we feel like we've been able to do it historically with no student impact I think that was the keys as we started doing these a couple of years.
[noise] ago, our biggest concern in how we handle them was making sure that students had a really good outcome and then our overall student outcomes didn't suffer during that process in any way and honestly we've gotten good at it.
So we we've gotten pretty good at a very smooth transition on these.
We're obviously not going to talk about individual clients or individual contracts at all it is multiple university partners.
And something that we think is important.
For us to continue to drive the long term value you know with where the business is going now what's interesting about it Ryan is it.
We've got so many launches coming in that we do think we're able to drive a really good sort of rotation to that kind of newer revenue in those cases that we think might be more appropriate revenue mixed for the platform.
Yeah, if I, if I may jump in for a second here Ryan.
Add Investor day, we talked about the mix.
Degree versus old credit on a long term basis. In 2022 is a 50 941 split and then we talked about longterm 40, 60 split if you think of that rotation in steady state of the flex programs that are coming in and some of the newer models and the new revenue that will come in you'll get back to a place where you're comparing app.
<unk> the apples on a long term basis. So that 40, 60 split where all grabbed becomes a larger portion of the business becomes really material as we go forward comparing apples to apples.
Super helpful Caller I appreciate that maybe it's a follow up chip, we're seeing obviously, an education that continued growing of skills based learning skills based hiring as as a theme across sort of.
Not only university institutions, but also enterprise organizations.
Given the the rotational comment you made about adding more industry content partners to the platform is this sort of your strategy for how you'll be tackling more of this skills based opportunity and do you expect that to be more of a driver to the enterprise business or maybe an enhancer to the existing university relationships USA.
We definitely believe in University back credentials feels very strongly that we continue to have the best portfolio of universities.
In the World honestly like N have.
In many ways double down on our relationships with many of those schools.
Ryan what I think is fascinating about the space right. Now is that you know you've got a lot of people sort of smaller companies that are failing and then larger companies that are kind of bailing out of the space and we really like our where we sit in the market and I don't mean, the stock market I mean, the university market, we feel like our sort of overall strength is represented by that pipeline so certain.
Getting away from University content, we think it's critical in our University partners of the best in the World and we continue to work with them to provide them a greater sort of tool kit to.
Do more content with us as part of the reason the content strategies way up now with that said industry, leading companies is also a big part of it and in some cases industry, leading individuals like like Deepak Chopra. So like we do think the content overall will drive greater organic growth.
We do think that's something that's a little misunderstood in terms of like.
Yes, <unk> overall like or if you look at like five consecutive quarters of an improvement in both registered learners and learner prospects in two consecutive quarters of of year on year growth and both of those categories, regardless of what's going on overall with traffic.
Traffic overall is a little bit more of a vanity metrics. So we do think like we're bringing in the right people to the platform to do that we need both quality university content and quality industry content. So you've seen a big mix of both if you look at our announcements.
Tel Aviv University and University, and then of course companies like data breaks and so we do think overall.
The story as is and not or is.
Is this is not it's not a pivot it's a rotation.
And just one quick thing for the previous question, Jeff Silber, 95% of degree revenue is under contract, which renew under contracts would renew after 2026. So we still got quite a bit of runway in the existing portfolio, sorry for not having that right real time.
Go ahead Ryan.
That's all I've got thanks for the <unk> the color.
Your next question comes from the line of Josh Bear with Morgan Stanley . Your line is open.
Very close to the question.
I wanted to ask on all Creds still with the negative double digit margins I guess.
Why isn't that business profitable today, and what are some of the drivers that will get it.
Over to profitable.
Josh a couple of things there number one I think we are moving towards but the realignment that we did last year, where you're looking at an annual basis to get the profitability. We're beginning to move in that direction a lot of our lead that are coming off the platform is helping the executive business is helping to boot camp.
Business. We're also leveraging our students support organization across degree and the alternative Prudential business and then from an enterprise perspective is enterprise grows and becomes a large a component of the revenue stream, we have a better flow through an intra enterprise both from a contribution.
Margin all the way down to an IBRA level and then we are implementing lots of efficiencies within the back office to help us to be more efficient whether it's the use of AI or the way we serve the students in that segment.
It's it's.
Cost cutting is not a thing it's about how do you efficiently change the way you operate and run a business and we began that we've begun to do that last year and we got to continue to do that and we believe we can get there in a 12 month basis, particularly as we see the enterprise business continues to grow.
Great. Thanks, and so the the 12 month basis or I guess could you just update on the timeline to get too profitable for that segment.
In the beginning of this year, we said, we hope to be there for the calendar year 2023, and we're still on track to do that the the 11% negative margin that you mentioned is a 700 basis point improvement on a year over year basis, and we expect the fourth quarter to be a material quarter, particularly.
And the alternative Prudential business with enterprise being a significant driver in that quarter.
Okay. So that's for the full year of 23.
Not just two four okay, great. Thank you and then I'm thinking ahead like with the with the mix shift.
Tore it all cred.
I mean, how how should we think about the impact too just overall business Margaret profile.
You know coming from more degree business, which has such great margins. Thanks.
Well, Josh you did Paula chance of insect but you did hear as mentioned that we think that the new flesh model is is is quite attractive on a margin basis.
Programs may not be quite as large as the programs that we've run way back in the day, you know 510 years ago, but but they they're gonna get quite attracted for margin point of view.
<unk>, yes, so Josh I mean, our our long term our mid term and long term numbers that we provided investor day midterm, We said EBIT margin, 17% to 19% this year with the guidance. We just provided that's roughly around 16%, we don't see anything changing with the <unk>.
If not anything it gets better because to some extent the margins that we have capital life programs in the flex degrees were rotating into flex degrees or flat model or the flat fee model and both of those have very similar margins at steady state to what were rotating out of so to some extent it is the alternative.
Prudential business that really ramps up the margin as we go forward.
And keep in mind, we were at 16, so to get between 17 and 19 for the midterm it seems to be a shorter but and then we have to focus on the long term of 24 to 26th which are the numbers. We provide provide investor day, clearly overtime old credit is becoming more and more important because the world wants it like students students and employers want this car.
Intent.
At the same time or degree businesses, very large and profitable and will continue to be so like we're not getting.
Getting out of our degree business in any manner of this is not a pivot we.
I actually really love, what's happening on the degree pipeline side, we think it's.
You know pretty.
Pretty wild we've never done more than 17, so it's.
It's <unk>.
Investing in what we think will drive.
Right longterm benefit and great value for the students.
Once again, ladies and gentlemen, if you have a question. It is star one on your telephone keypad.
Your next question comes from the line Steven Shelton with William Blair. Your line is open.
Hi, you've got Pat Mattikalli on for Steven Today, I have a couple of questions for you. All so first on the sixth fee model that you announced this quarter.
I just wanted to ask if there have been any updates on the regulatory front related to oversight of opm's or any updates how ya feel positioned on that front that may have influencer driven that decision.
No we as I mentioned in the prepared remarks, we feel like the flat fee model is just a way to offer additional an additional sort of tool kit University partners to drive value for them. There are some that don't want a revenue share that's not new we.
We feel very comfortable with where we are from a regulatory standpoint, and it's been extraordinarily clear from both universities M from E C and others that support the industry how important revenue sharing is sort of an.
On an overwhelming basis.
Sort of hard to overstate, how much support there was for revenue sure and really nothing has changed on that front. So we didn't announce flat fee because of regulatory reason, we announced flat fee because we like it to be honest, it's it's pretty good.
Yep, Okay very good and then it sounds like you continue to focus on materially growing your enterprise business and yet you noted some encouraging indicators on that front this quarter, but can you just talk about what you've seen in terms of and market demand, there and learning and development.
Budgets in general.
What's interesting about the enterprise business is like there are multiple components to it that I think are very differentiated from what you've seen in the space. So you've got first of all.
Incredibly high completion rate programs that are driven on a cohort basis to whether it be.
Mid level exacts or C suite level, and you're even able to configure some of these to the enterprise very specifically in a way that's become very attractive and you've got boot camps, where you've got people sort of fully rescaling folks.
And we don't think anybody really can do this kind of stuff that scale. The way. We can you know we passed something on the order of 55000 graduates in that.
In that business. So for most people, it's sort of onesie choosy and we can really handle these things for the enterprise in both cases it scale than separately.
This is all very attractive both from a social impact standpoint.
Sort of tapping funding sources. So once again move the dial at scale for local communities.
On Tech Reskilling and governments, where in the case of government. It's a mix of of all of the above so you've got government's interested in purchasing both the individual executive courses the subscription overalls addax and the the boot camps themselves. So.
There's just a tremendous amount of opportunity for us there.
It's now getting to a non trivial number.
So you're looking at a run rate that is now a number that obviously will matter more to this audience.
You know when we've got a sort of a big company and it's not as big a number where folks haven't been paying attention to it but we're paying a ton of attention jokes, we think highly differentiated.
Outcomes of scale is the way I would really think about it. It's like we can drive a really high outcome for people and ultimately that is really what matters, whether you're a single consumer or you are an enterprise.
Where we're coming from right now, we see enterprise as a very significant 24 and 25 growth opportunity.
Understood. Thanks for the culture.
Your final question comes from the line <unk> Your line is open.
Yeah. Thank you apologize.
Just me that's confused but it it's not I'm not understanding.
Standing y son.
Sunsetting programs later than expected as causing revenue to be pushed.
Oh is this like early break fees.
Fees that you were expecting to be recognized and two two that you're expecting to be recognized in the back half or just to get any more clearer on.
What the dynamic kiss that sunsetting later than expected pushes revenue up.
Yeah. So uncertain cases, there's a contractual arrangement that we expect it in the forecast.
And in this particular case, it's moved into the back half of the year.
It's that simple. So these are these are negotiated agreements Jeff.
With that dynamic in the rotation comments, but also the do launch bullishness in target do.
The mid term revenue growth targets eight to 10 per cent tigger from 2022 that you gave a sudden buster day to those still stand or any change.
Yeah, we're not as of right now, we're not changing any update to our guidance at all and we don't expect to change I guess, we obviously don't in our queue to call give a guide for 2024.
But we like what are we said Jeff. So this is we understand that.
The quarter impact is one that.
Of course, you're going to ask questions about we don't we.
We don't manage the business on the quarters.
And we manage the business overall in a way that we think is best.
For the company and therefore for the shareholders.
And that's part of the reason that we feel comfortable with the annual guide.
So shift, but not but not a change.
What are the contractual.
Arrangements in place that.
The timing was moved but the contractual arrangements for the sunset where they in place.
At the time that you gave us the multiyear targets at the Investor Day in March.
Yeah, I mean, Jeff there's there's obviously a lot in a forecast so you know.
There's a lot of puts and takes in the forecast. We've done this for some time you might remember Jeff in particular, the Simmons Undergrad program.
We talked.
With you in particular quite a bit about so the Simmons on ground. That's an example of one where you you did have a substantial impact and that current period. We've had some of these.
In the first six months of the year, we will continue to have them you know.
So unfortunately.
We had a multiple universities in play on this and it's a shift.
But we feel very confident in our ability to manage them overall.
And we like the mix that we're moving to.
Okay. Thank you.
There are no further questions at this time I will turn the call to Steve various tech.
And I just want to thank everybody for joining us today and you can follow up questions. Please give me a call or send me an email. Thanks, so much and have a good day.
This concludes today's conference call. Thank you for joining you may not disconnect your lines.
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