Q2 2019 Earnings Call
Third quarter earnings conference call.
If anyone should require assistance during the call.
Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would now like to introduce your host for today's conference Mr., Ed Goodwin SVP Investor Relations Mr. Goodwin you may begin.
The recorded webcast of this call will be available in the Investor Relations section of our website also we routinely post announcements and information on our website, which we encourage you to access and make use of when an asset before we begin she will host an investor day at our headquarters on November six 2019, we'll share more details in the coming months and we look forward to spending the day with you in November .
Today's speakers are Christopher Chip Pals Act.
Co founder and CEO and Cathy Graham CFO .
During today's call we may make forward looking statements, including statements regarding the company's future financial and operating results future market conditions, and the plans and objectives of management for future operations.
Before looking statements are not historical facts, but rather are based on our current expectations and beliefs and are based on information currently available to us the outcomes of the events described in these forward looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results anticipated by these forward looking statements.
This includes but is not limited to those risks contained in the risk factor section of the Companys annual report on Form 10-K for the year ended December 31, 2018, and other reports filed with the SEC as well as our ability to successfully integrate the operations of trilogy achieved the expected benefits the acquisition and manage expand and grow the combined company. All information provided in this call is as of today, except as required by law. We undertake no obligation to update publicly any forward looking statements made on this call to conform to statements or actual results or changes in our expectations also issues policy not to update our financial guidance other than in public communications.
non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release.
I'd now like to turn the call over to Jeff. Thanks said over the past 11 years, we've built the most important business and the online higher education ecosystem.
When we started to you the market was in its infancy.
The core thesis of the company was it online programs could drive a similar quality to campus programs and that the company scale and unique platform characteristics would build a competitive moat around the business over time.
Today, the online education market is evolving.
Secular forces are pushing more schools online.
Indeed, it's becoming obvious that all schools are going online, we're calling it the mainstreaming of online education.
We believe this represents a new reality in the marketplace and requires us and others to adjust to it.
We also believe that this new reality is one that to you is uniquely positioned to benefit from due to our size and comprehensive product set.
So we are adjusting our executional model against the dynamic of this mainstreaming of online education in a way that meets this new market dynamic.
Competition for students has increased.
Programs will be slightly smaller than they were in the past.
But the scale benefits of to use overall operating model a combination of two U.S. and products across the career curriculum continuum.
Become even more important as more schools come online.
The evolving market dynamics create some short term pressure, but the importance of to your scale is more valuable to our clients than ever.
We're moderating our outlook for the business in the short term, but the long term secular drivers are in our favor.
We know what is challenging us how the market is changing and most importantly, what we're going to do about it.
Let's start with Q2 results. They were solid second quarter revenue was 135.5 million up 39% over last year, Kathy will give you more detail shortly.
Our full year 2019 guidance reflects our moderated outlook given the shifting market dynamics.
On the top line, we now expect revenue to be 565.7 to 575.7 million a growth of 39% at the midpoint.
Excluding the expected financial impact of trilogy. This implies a step down in revenue expectations for the rest of the business.
So why have our revenue expectations gone down excluding trilogy.
Let's first talk about our grad business.
As I've mentioned before we're coming just from some conclusions about the overall online education marketplace.
It's evolving.
The Cline and program specific issues, we've talked about so much over the past year, Vermont masking this broader trend of the mainstreaming of online education.
In 2008, there were very few high quality online options.
As we've grown the business since then new online options for students have expanded significantly.
Today, most schools are going online some form.
There are now many more offerings and more competition to enroll students.
What does this mean to us.
We need to shift our expectations per program, which result in a smaller average steady state program size than what we would historically expect.
Now I know investors want to unpack the funnel and we've tried that in the past.
What we're saying here is our guidance presumes lower conversion rates on a go forward basis.
The reality is this is the case of small differences in parts of the funnel across a multitude of different programs in many different disciplines with a multitude of structures. Its overall trend analysis and conclusion about the market.
It's an evolving market and one that we believe we will continue one we believe we'll continue to see more offerings.
This mainstreaming of online education means increasingly regional competition.
While brand still when they win and smaller circles of dominance.
Regional bias impact enrollment decisions for example, a student in Philadelphia has online options locally that they didnt have back in 2014.
Program quality and brand strength, both matter in the long run, but you need to compete for students and more options simply means it's somewhat harder.
So in light of this new reality, we've changed our outlook.
In the Grad business, we've tempered our enrollment and revenue expectations.
We expect the average program enrollment at steady state to come down from what we previously expected.
Weve accounted for the largest programs are progressing towards the mean some of that was program specific issues. However, we think it's prudent to expect fewer programs to substantially outperform these average long term.
Fewer super large programs does create less single program exposure or revenue concentration risk for to you.
We're shifting our expectations per program going forward, but our scale becomes even more important as the market evolves.
Our overall leverage increases as our platform builds across each business competency, we provide our clients.
Our scale creates marketing efficiencies and opportunity drives clinical placements across a bigger platform and creates operational leverage across to us.
In this new reality single program operators or companies without the scale benefits. The two you seize will struggle.
Many smaller competitors in our space are seeing this real time.
One other important comment about the grad business.
We do not believe we have a unit economic problem.
Our mature cohort margins remain strong.
By lowering enrollment expectations, we expect a more efficient marketing spend over the long term, helping to alleviate some of the pressures from our need to compete with other online education offerings.
Scale helps here, we've seen that we can properly spend for smaller steady state enrollment to drive sustainable business.
So what are we seeing in the short course business.
We expect the short course business to continue growing nicely.
But we're learning number one what courses work with which school brands and number two that matching courses with Lee professors takes more time than expected even after we signed the deal with the University.
We will build more moderation into our expectations to account for these factors.
This is unrelated to the new normal just some executional issues, we need to get right.
Before I move on to talk about our plan going forward I wanted to touch on some regulatory developments related to recent guidance issued by the department of education.
This is a complicated issue.
But technically just guidance would prohibit residents of California enrolled in distance education programs at out of state public and non profit institutions from receiving federal student aid funds.
While we are optimistic that the impact will be broken soon.
Considering that the department of education has not yet indoors, California student complaint process. We felt it was prudent to reflect this uncertainty in our current guidance.
Given these overall trends and the increasing complexity of our business, we have tempered our expectations for the remainder of 2019 and widened our guidance ranges.
So lets pull back and talk about the plan going forward.
First we control our destiny.
We continue to have growing cohorts in our Grand business that we believe we can run profitably.
We have a short course business that we believe can be self sustaining while growing over the long term.
We have a boot camp business that is operating some of the most in demand course topic in the world.
At the end of Q2, we had almost $220 million in the bank.
If we manage our overall business for moderating growth by adjusting our new program cadence and operating expenses. We believe we will drive towards positive free cash flow.
So how are we going to do this.
First we will moderate our grad program launch cadence.
We look at 2020 in early 2021 as the time periods to deliver on what we have with a smaller amount of new program launches.
To be clear what we're doing here is proactively adjusting the velocity of new program launches to support our path to profitability and positive free cash flow.
This will allow us to ship more focus to optimizing the performance of our existing programs, while we continue to add programs, but at a smaller rate.
We have a lot of the optimization projects underway and are seeing some fruits of our efforts there even with this current outlook.
I'm not yet ready to tell you how many programs we will do as it's still a work in progress that will have to wait for Investor day on November six.
But I expect it to be substantially fewer than 21, probably less than half of that.
This cadence Recalibration is simply the right thing to do right now for the business for the students and our partners both financially and operationally.
But to put the strength of the Grad model in perspective.
If we do not sign any additional programs beyond what we have today. We currently project the grad business to grow in the mid to high teens in 2020 from our current 2019 expectations and and that's an area that growth should remain solid for a few years with no new signings and operating within this new reality of smaller steady state program enrollments.
But of course, we will sign new programs.
And our competitive positioning remains incredibly strong.
As indicated by the announcements I will cover shortly.
We intend to give you our updated launch cadence and the impact on growth rate in the bottom line at Investor Day.
So what else are we doing.
We're focusing on better efficiency for the business and its costs overall.
We have a bunch of projects underway on this effort scale clearly helps here. These efforts combined with the cadence slowing should put us put us on a path to free cash flow.
The new path is intentional one we're driving with clarity and purpose.
Now on to pipeline.
We talk a lot about competition for enrollments earlier in the call.
But when it comes to competition for partnerships, we're still winning new deals demand is there and is exciting we are laser focused on winning the right deals I'm proud of our work here.
So two relevant announcements for you first our entrance into the pharmacy vertical to you continues to lead in disciplines with complicated clinical characteristics.
Which is where we built the widest modes.
I'm excited to announce the Doctor Pharmacy, we're seeing John Fischer College in Rochester, New York. This is a much anticipated new discipline for to you.
It will require an advanced pharmacy practice experience consisting of 77 clinical rotations.
Thanks, John Fischer is still going through a few internal steps related to the program, but its sign.
Second our first ever institutional suite.
The mainstreaming of online education means that in institutions are now asking for a more comprehensive solution across a broader set of programs.
We're able to meet that demand due to the breadth of offerings across the career curriculum continuum and the scale benefits of to us.
I'm proud to announce we've been awarded a competitive RFP to become UN see chapel Hills exclusive and University digital education collaborator for programs spanning the entire career curriculum continuum.
We expect no fewer than 10 offerings with the first few launching in 2020.
In addition to offering our full service model for graduate degrees. The institutional suite includes a new fee for service model to power smaller sized programs.
This is the type of arrangement that will be very difficult for competitors to replicate and couldn't have happened if we hadnt become more comprehensive in part by acquiring trilogy and get smarter.
This is the future we'll have much more on this deal and its impact at Investor day.
Finally, I want to give a word or two on the alternative credential segment and specifically the acquisition of trilogy.
First our short course business had a big win today, we announced a 10 year contract extension with the University of Cape town to deliver new short courses across the universe.
You see T is a critical partner for to you and were excited about whats ahead.
With trilogy is part of the team. We're now meeting the evolving needs of the workforce, particularly in stem subjects, which evolve at a faster pace than other disciplines.
Our overall business outlook increases this year from the addition of trilogy in a variety of ways.
We expect to expand the trilogy core business substantially over the next few years.
You can see many competitive wins in our press release.
But trilogy also creates great opportunity for our other business lines.
In the few months since we announced the acquisition Weve already met with a number of trilogy partners, who are interested in expanding their relationship with two you across the career curriculum continuum.
We'll talk about this more in November as there is too much to cover here.
One new exciting development for two you related to the impact of trilogy across our business.
Two you enters the enterprise channels.
Trilogy, combined with get smarter creates a significant enterprise opportunity in selling our offerings the companies looking to upskill their workforce and attract more technical talent.
This is already a real business line today.
We're seeing demand for seats to short courses and boot camps and will expand those efforts next year.
Overall, while we're moderating our outlook for our legacy business short term our core thesis remains intact, and we will differentially benefit long term from accelerating secular trends.
Our competitive positioning is very strong due to our scale advantage breadth of our two U.S. platform and comprehensive product line across the CCC.
We're adjusting to meet the new market dynamic in program size.
And making an executional change over the next couple of years to address the financial and operational needs of the business.
We will slow program cadence still grown nicely get to free cash and most importantly, when for students and universities, while we do it.
With that I'll turn it over to Kathy.
Thanks, Chad.
Before moving to our revised view for the remainder of 2019, let me first do a quick review second quarter results.
Second quarter revenue of 135.5 million exceeded the same period in 2018 by 39%.
Business combination accounting rules required us to exclude 3.3 million in second quarter revenue.
Revenue prior to this adjustment was 138.8 million representing growth of 42.5% year over year.
And our graduate programs segment revenue was 101.4 million or 24.9% year over year growth for the quarter.
And the alternative credential segment, including a partial quarter of revenue from the trilogy acquisition revenue was 34.1 million or 110.1% year over year growth in prior to the purchase accounting adjustment revenue was 37.4 million or 130.7% year over year growth.
In the graduate programs segment revenue growth continued to be driven by an increase in full course equivalents.
For the second quarter Etsy, he showed a year over year increase of 28.3%.
Offset by a 2.6% decline in average revenue per se.
The decline in average revenue per Se is based largely on program mix academic calendar changes.
And our alternative credential segment, we are seeing the impact of rolling a partial period of trilogy book can't performance into this segment.
The result was a year over year increase of 54% NFC east and 49.8% and average revenue per se.
This reflects the addition of a somewhat longer delivery period, but higher priced products into this segments mix.
You should expect to see a further shift in these metrics in third quarter. Once a full period of boot camp performance is included.
Looking at our second quarter loss measures always been skewed versus prior periods and expectations by the acquisition of trailer chain.
At 28 million second quarter net loss improved from our pre trilogy expectations, primarily because of better than expected performance in our pre trilogy business and an approximately $19 million one time tax benefit related to the acquisition.
And while at 25.8 million and 15 million, respectively. Adjusted net loss and adjusted EBITDA loss were both higher than our pre trilogy expectations. They also benefited from earnings over performance in the legacy business.
From a balance sheet perspective, we ended second quarter with 218.7 million in cash and investments and had 71.6 million in receivables balances.
Note that our receivables balances are relatively consistent with the first quarter. Despite the addition of our new boot camp business.
This reflects the reduction of graduate program receivables between the sequential quarters based on academic calendar timing and the related collection cycle.
Also note that our long term debt has increased to 245.5 million in the quarter, reflecting the term loan facility, we entered into the trilogy acquisition.
Now looking forward, we are providing guidance for third quarter and full year 2019 inclusive of the expected results for our new boot camp business.
Before turning to the numbers I want to reiterate and expand on what you discussed earlier.
As the mainstreaming of online education is developed and student have more online options. We expect to continue to see smaller average steady state program sizes across much of our business.
As a result, we've updated our expectations based on the evolving business environment, where we have to consider higher variability and uncertainty.
And our graduate program business, we are reducing our expectations for the ultimate size of programs, allowing for the fact that the rate at which program scale has become more variable and allowing for a slowdown in 2020 launch cadence.
For short courses, we are also moderating our expectations along the lines chip mentioned earlier.
Our revenue guidance now incorporates our continuing expectations for the trilogy boot camp product line offset by the moderated outlook, we have for our legacy business.
We now expect revenue between 147.6, and 152.6 million for the third quarter and between 565.7 and 575.7 million for the full year.
Adding back solely the trilogy boot camp revenue that we will not recognize as a part of purchase accounting. These ranges are 153.6 to 158.6 million and $576.9 million to $586.9 million for the full quarter third quarter and full year respectively.
Our expected earnings measures have now changed as a result of the changes to our expectations and the incorporation of trilogy into this business.
Because of this I strongly suggest that you read the reconciliation of our adjusted net loss and adjusted EBITDA loss guidance to our net loss guidance to better understand the changes. Additionally, I do want to mention that while we do not expect to be able to make up the entire reduction in expected revenue over the remainder of the year, we have slowed the growth of our cost structure and particularly in our graduate programs business expect to be able to offset some portion of the revenue decline even over the short time period.
We now expect a net loss of between 69.3 and $66.3 million for the third quarter and between 157.5 and 151.5 million for the full year.
These ranges include the flow through of $5.9 million and $11.1 million purchase accounting driven revenue reduction for the third quarter and full year respectively.
These revenue reductions are excluded for the purposes of providing our adjusted loss measure ranges.
Im thinking of this net loss guidance compared to prior expectations remember that for the full year is now reflects transaction costs and the acquisition related tax benefit booked in the second quarter, which we then excluded from our adjusted loss ventures.
Further for both the third quarter and full year net loss guidance includes interest expense on the term loan facility, we entered into for the trilogy acquisition and a step up in acquired intangibles amortization related to that acquisition, both of which we exclude from our adjusted loss measure ranges.
We now expect an adjusted net loss of between 33.8 and $30.8 million for the third quarter and between 76.9 and 70.9 million for the full year.
We also expect an adjusted EBITDA loss of between 18.4, and 15.4 million for the third quarter and between 20 and $22 million for the full year.
And finally, I want to reinforce something CIT said earlier, well, we are acknowledging an evolving environment.
Increasing uncertainty we do believe we are on a path to continued growth well getting to free cash generation and we look forward to talking to you more about this.
Other aspects of our longer term plan in November chip.
I want to close with a note to our two team. This year has certainly pushed us, but I want to make it clear to all of you.
You are amazing.
You built super high quality products with excellent outcomes for students.
We are positioned for the long term succeeds sustained success, we just announced our first ever exclusive institution wide deal with none other than University, North Carolina Chapel Hill, we are changing the world.
Let's get the Q and Ed.
Thank you ladies and gentlemen, if your question is if you have a question at this time. Please press. The Star then the number one kunar Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key again, that's star then one to ask a question.
Have any background noise. Please please your line on mute once your question.
Our first question comes from.
Sarah Hindlian of Macquarie.
You May proceed with your question.
All right great. Thank you very much chip in healthy I was wondering if you could help me.
Understand and maybe just size the impacts to the core gradually business.
Exactly what you're seeing happen what could happen in the state of California would shift from federal.
For federal.
Loans for students, who are doing that distance learning and then I have a follow up as well.
So thanks, there so on the state of California, obviously, it's an evolving situation one that we're optimistic we'll get resolved.
But we felt like given the fact that it is not yet officially resolved it could put some uncertainty.
In to certain students mines.
Or more importantly, certain universities mine. So we felt like we had to account for it in our forecast.
The.
Sort of backing up to the Grad business overall, we were trying to up to make sure that folks understand there's significant growth potential in what we've already built which is why we're trying to sort of give clarity that if we stopped all launches.
We would see growth in that business in the mid to high teens and would expect that to continue for some time so.
There's a lot there still for the Grad business that we're excited about and of course, we're not going to.
And all launches we do think it's right now right now is appropriate time for us to change the velocity of the launch schedule in order to drive number one operational improvement for the business and number two better financial performance for the company overall.
Okay, great. Thank you and I have a follow up for you Cathy.
In terms of talking about driving towards free cash flow.
Positive numbers, which I think is fairly important from a number of investors out there.
Do you have a sense or is it too early to give us a sense as to how long.
That Germany will take and chip I. Appreciate your comments that you set off new program CB certain dynamics, but as you said you will be doing some new program. So how do we think about the timing of free cash flow breakeven.
Yes, so Sara I think that we are working through a lot of this right now and it's our intention to be a lot more specific about this in investor day.
So we appreciate the time to be able to get there and put some real thought into being able to give you at plan that you guys will really.
We can lay out for you.
All right. Okay. That's fair enough. Thank you.
Thank you and our next question comes from Brett No block of Berenberg Capital You May proceed with your question.
Hi, guys. Thanks for taking my question.
First is there can you just break out the revenue associated with true in the quarter or is that something that's not planted.
Yeah, we're not planning to do that we are presenting our business on an alternative credentials and graduate program segment basis.
So.
So we don't intend to break that out.
Okay, and then on the second question.
I was reading an article about Boston University is launching a 23000 I would agree with Fedex now with the change of structure and your programs.
Something you might expect to begin offering if universities.
So.
We are.
Is the question are we going to continue to offer.
Well I'll just go go here, we will continue to offer competitive programs in the landscape over the next several years.
We have quite a few different MBA programs at different price points.
That won't stop.
So again, we'll we're inside units on a.
We wish and pricing standpoint, I feel like you're seeing a lot more of these universities move online and not only is move online, but move online to cheaper degrees.
Yeah. Your programs are I think.
On the higher end of that market.
You know, we do continue to believe that.
You have to drive a long term quality and sustainable business.
And one that doesnt exist off the backs of the campus program. So we do think over time, it's really important.
That that both quality and cost will get considered.
Now there is no question that we are working on a variety of things to have.
To attack the cost problem very specifically.
And we will talk about those in detail at Investor Day.
On this particular call we felt that given the.
The new outlook that we focus squarely on the outlook talk about the outlook or whatever detail investors need.
And not come up with a long list of optimization points, we were working on but I want to be exceptionally clear.
We've got some really good plans until two attacked to attack one of the things that we think is an important component which is tuition costs.
We just didnt plan on this call to a to unpack the funnel in that way.
Okay. Then last question I will jump back in the queue.
Do you think the university flow activity issue that you guys.
Noted Q1 is due to the regulatory concerns with I think it's.
134 or five.
Do you think that play into why maybe there tempering there or netscout in the program to fast.
No I mean.
So to be clear.
The various aspects of the funnel I would say.
Having now lived this publicly I would tell you that there it's a complicated business the funnel itself is complicated.
And there are parts of it that it's noisy and the admit rate in particular is noisy.
While we did have some program specific issue sort of masking. The overall issue just to to extrapolate a little bit more on your last question.
The reality is it's not one particular thing.
That is driving this new sort of reality for us. It's not one particular competitor is not one particular program and it's certainly not one particular aspect of a program like cost.
When we look at it.
Decline surveys from folks that have come into our programs. It's hard to find a university listed more than once it's just a longer list.
Of single universities, this expanded pretty dramatically since we ipos.
So this is a moment for us to ultimately.
So at this point change our outlook presume that we're going to have lower conversion rates going forward.
Candidly presume that there will be a lot more competition.
Not the competition will stay flat today.
So while we have to continue to work on a variety of ways to address it. This is us saying that we do think this is a new normal.
Okay. Thank you.
Thank you and our next question comes from Ryan Macdonald of Needham You May proceed with your question.
Hi, chip in Canada.
I guess first question for you.
Chip is really around.
The expected program launch cadence and just sort of trying to sort of sync up what you were saying in the prepared remarks, you mentioned that University partners are still really willing to sign up with partnerships, where you, but then you're obviously moderating that cadence.
Is that because you're seeing sort of a shift more from the University partners to a demand for the short course or the trilogy type content versus full thread program.
Know definitively not I don't want to put a I don't want to put out there that the this is an intentional change in our velocity of program launches.
We are you know that what we have seen in terms of we've spent a fair amount of time over the last year talking about competition for.
And then for competition for deals and we thought that the UN see institutional announcement.
It was not only a big one but one that is relevant given that it was a super competitive RFP. We certainly have seen an increase in the number of RFP is given that there are more people chasing after business, but feel very confident that we are well positioned to continue to get the programs that we won and get them at.
At.
The sort of target economics that we like.
So it's not because of some retreat to short courses.
We just need to be during this period.
Selective about what we are launching.
And we know we need to slow down a little bit and.
Improve the aspects of what we've got.
Focus on little bit more internally on what we have and we think that will service well.
Operationally and the power of that was.
We're certainly not getting need anybody's money, if we do that so.
We've got to.
Drive the long term sustainability of the business now one thing I would say Ryan is that the institutional suite.
It's it's different and it's awesome and we're very proud of the relationship.
That relationship has gotten a lot of attention from this community for a bunch of reasons.
And you know the University is.
Very happy with our performance and I would say proud of our team that we were able to.
You know be flexible in our approach to the school.
Obviously, it's a top 20 University theres, a ton of really exciting programs in that.
Relationship that will push the boundaries of what's possible to do online.
We like it quite a lot. We just didnt think that today was the time for us to be running down a long list of things to tell you how great a variety of things, where we just want to sort of level set with this community that we're dealing with what we do think it's a bit of a new reality from a competition for students standpoint, and just need to.
Reflect that in our outlook.
Got it and then just a quick follow up I know, we've already sort of discuss the California, non but just to clarify what do you see Davis program that you talked about the delay experienced delays.
In the first on the first quarter call is there potential because of the regulatory changes for additional delays to that program in the back half a 19.
That program is up and running.
To be clear, the California issue Doesnt affect California schools, it's unrelated it affects all nonprofits that are offering programs and distance education to California students.
So this was a careful issue for us to consider as we are putting through guidance. It is all very real time.
It's tricky I can tell you. It is super important to anyone that is in my seat, whether that's being discussed or not it is super important from the standpoint of other nonprofits in the world that are servicing online education, because California is what the eighth largest country on the planet So while regional bias will certainly impact.
Things from the standpoint of California students will obviously be focused California universities will have more sort of regional bias and therefore have more California.
Students in them.
Schools that are outside of California, clearly offer distance programs to California and were included in that so we had to sort of take that into account.
And reflect that in our guidance now we are optimistic.
That it will get resolved, we just don't know how long thats going to take.
Got it thanks for that clarification.
Thank you and our next question comes from Rishi Jaluria with D.A. Davidson you May proceed with your question.
Yes.
Thank you for taking my question.
First off I was wondering if you could just talk about the institutional suite and interest is like so far and what your current pipeline looks like.
So these are the institutional suite is a fantastic opportunity for us to extend to us across full institution.
Lot of programs. It is our first one.
We've been working on for some time, we do have others like this that are in play.
Nothing to announce there yet but.
There there are large.
It's one of the most important deals we've ever done.
It does have.
A component associated with it that we are we will be offering for the institutional client a fee for service component that we think is super interesting.
From the standpoint of better serving the client overall and in part that is part of the reason that we now have an exclusive relationship with that school, which we've never had before so I certainly understand today is a complicated day in terms of explaining our outlook.
But this is not trivial.
Okay, great. Thank you.
I was wondering if you could talk about how much risk you feel qualitatively is left.
In this new normal considering a lot of the challenges you're facing.
Outside.
So I'd say in the past periods Weve when we've had challenges and this is not just as a public company, but as a private company. You know this place is filled with entrepreneurs and we tend to figure out how to operate our way.
Out of a variety of challenges, we're having and we are often successful I'm not.
Going to spend a ton of time on the call talking about all the components that are going on all the projects that are going on to improve our funnel.
Or our student experience, but given the outlook people are focused on our funnel and I would tell you that there's a bunch of projects in terms of helping students that are more self serve oriented and we like some of the fruit we're seeing there.
Theres, a bunch of positives I would say.
Alternatively, what we had to do here was just pull back not expect that we'd be able to operate our way out of the problem look at the market and on top of that look at what was happening in our newest programs that is certainly a data point here that gave us the belief that we needed to sort of put out there and new outlook.
And build up from here.
So we now move forward with while a.
Slower a slightly slower scaling grad business, one that we still think has great growth potential and one that strategically is really difficult to compete with.
The market is evolving this will become more obvious.
I would tell you to you sell today has significantly larger program sizes than anybody else and we're not guessing.
Only at the graduate level so far.
And at the graduate level. There is no question that more schools are launching programs and thats not going to stop.
So we felt like we needed to reflect that in our outlook.
Great. Thank you.
Thank you and our next question comes from Jeff Mueller of Baird. You May proceed with your question.
Yes. Thank you so it's not 100% clear because we're layering on trilogy, but if I back out an estimate of trilogy revenue.
The revenue guidance reduction.
For the year looks fairly material and I know you are.
Calling that out as well, but just.
Can you help me kind of understand I think the three factors are the execution challenges in short course, California.
And then this kind of broadly weaker enrollment trend competition issue. So just first can you help me size up those three sectors and if theres an additional factor, let me know what I'm missing.
I think you first have to start with the one you covered last which is that.
I mean, Jeff we are at this point change our outlook because we believe this is a bit of a new normal our programs are individually larger than others and so I do think we're feeling it first I think the smaller programs in the universe will feel it.
And so.
Not that the other two aren't relevant they certainly are.
So I'll get to the short course in the second but first I would say, yes. This is a moment for us to pull back and sort of reset the velocity of the growth of the business from the standpoint of our cadence.
To better serve what we have today and to better serve the company financially and to make sure that we've got this place guided on a path to free cash flow number one number two the short course business. Obviously, our business complexity has increased strategically we think it's been really really good for to you, but that has driven complexity in our ability to both operate and forecast the business I think thats fairly obvious now so I might as well just said on the call.
One of the things in the short course business that has proven to be trickier than expected.
Is aligning.
Not the University deal on the Grad side, when we get a university deal they take forever, but when we get them.
We're done you know, we then launched them in this case when we get them.
We then have to align faculty to teach the courses and I would tell you, we really underestimated that in a substantial way and that caused us to get behind on the short course side.
In a way that we felt like we wouldn't be able to catch up in this calendar year. So that was a big part of what happened on the short course business and then of course Weve talked about California. So far on this call that one is it's difficult to estimate, but we certainly didnt want to not included when we're changing our outlook we felt like it was prudent.
And smart for us to put a set of.
Projections together.
We thought.
You know that we thought definitively we'd be able to improve upon and deliver from here.
Okay, and then on the competition or enrollment trend question. So just help me better understand what happened there was a.
Part of an answer to a recent question that you said you have to look at what's happening in the newest program. So is it predominantly that the new programs are ramping more slowly have you see the broadening of the decline just how broad is the incremental weakness across the portfolio and is it predominantly new enrollment that we're talking about.
Yes, I think.
So if I can help you think about the way we talked about what a DGP is and by the way we're going to get into this in a ton of detail at Investor Day, I mean, this stuff is real time.
And at Investor Day, we will sort of unpack the way we're talking about the model when you consider that an institutional suite looks nothing like a DGP and certainly.
There are things like what we announced with our pharmacy program, which you've heard about for a long time that one obviously looks and feels more like a DGP, but the institutional suite does not I would say that as more competition comes into play.
Outer bands of what you might have brought in on student size Theyve always gotten more expensive by definition, you're at it more as the efficient frontier when you're at the outer rhythm of students size. So that that last 50 students is difficult.
And when you start.
Bringing in more competition and they are more choices for people I think what I said on the call earlier just to reiterate is.
You know, it's it's rare that a university shows up more than once on the decline surveys theres just a lot of them. So it's.
You know, it's a bunch of different factors across.
Across the business and yes. It is it is a large enough number they it's certainly worth you focusing on it and why you are asking questions about my point is it is it is.
It's a real change to the outlook and at this point, we're presuming that it continues we're not presuming will operate our way out of it and the reality is if some of these pieces, we're able to improve.
We do better than forecast.
Okay last one from me please just.
What changed or what specifically are you seeing in the funnel that.
It seems like the narrative has shifted a bit from last quarter, where there was more focus on selectivity and student preference for self service and less focused on competition.
On this call competition seems to be much more of an issue. So what specifically are you seeing in the funnel that lead to the conclusion. Thank you.
Yes, Jeff it's tough Theres a lot of factors.
There's always been a lot of factors and what we're saying to use that some program specific issues, we allowed to mask the broader trend thats really the problem. We said it on the call we mean it.
And we're not going to allow that to happen anymore. So we're changing the outlook.
To be clear that's program specific issues were big.
Now there are very large so we were certainly caught up in them.
But at this point, we think it's prudent to.
To sort of pull back.
And get a little bit out of the individual noise of water very complicated funnels that all look really different.
And just presume that we're dealing with.
What is the new normal now you notice on the call I Didnt talk about.
The economy and that is certainly a factor there is no question I didn't talk about cost that is certainly a factor.
And obviously at some point, we'll enter an economy that is strong.
And we have we believe some really good tools coming up to address cost.
But.
For today, we felt like it was better to.
Just level set with this community that we think we're looking at a revised outlook and we're not going to presume.
That improves.
Okay. Thank you.
Thank you. Our next question comes from Jeff Silber BMO capital markets. You May proceed with your question.
Thanks, so much.
Just wanted to delve a little bit further into jeffs question.
What changed over the past three months three months ago, you came any kind of change the longer term expectations for the business did things meaningfully get worse over the past three months.
You know I mean, we're at a pretty critical moment of sort of.
Where the year is and we had a bunch of new programs that later in the year.
As you know we have a lot of back half launches and so as we started to.
To get really good data about what was happening real time it wasn't what we expected.
You couple that with.
The larger programs regressing from.
From the size they were I mean, what's what's top about Jeff is there still big.
They are not as big as they were.
And how much of that was program specific issues versus what we're really now seeing particularly when it's not like a single competitor is driving.
The Delta.
And you put it all together and we felt like we are at this point now where.
That is new data and then to be fair on the short course side as I mentioned, we had some unfortunate.
We had some things that were execution related.
We thought we'd have better numbers for and we don't so that is a factor and then of course, you know we talked about California.
Okay and actually but my second question was on California.
Can you just give us an order of magnitude if I look at your full course equivalent enrollment for the graduate programs.
Roughly what percentage of those California resident attending schools outside of California. Thanks.
Jeff we can't get into the student body numbers per school.
Which as you know we do our best to keep our clients out of this and Thats on upon to buy started talking about my school student body Ana.
Earnings call I'd have much bigger problems.
We do think we've considered in our.
In our outlook and part of the reason we raised that.
Okay. Thanks.
Thank you and our next question comes from Brian Schwartz of Oppenheimer. You May proceed with your question.
Hi, This is Chad standing on for Brian Thanks for taking the question.
Spoke a little bit about competition for the Grad business I'd be curious to hear.
The how you view the competitive landscape in the boot camps space and that competition differ whether its classroom or on prem versus sort of digital learning.
And then how do you think about differentiating those boot camp offerings. Thanks.
Well sure they're they're they're you know theres a lot of competition in each market we operate in.
Those has done.
An exceptional job partnering with universities in a way that we think is super responsive to universities needs I can tell you that since the acquisition, we continue to be more and more impressed by the health of those University report partner relationships and therefore, the strength of the overall offering.
I'm sure other companies in the space will continue to seek out University partnerships.
So I would expect competition to increase.
Trilogy is geographic footprint is getting quite impressive and we do think it becomes a platform we can rollout.
Quite a few other.
Opportunities across boot camp space.
On line.
It's earlier in their lifecycle.
And we think.
That we can be very additive to.
Trilogy visibility to both market and serve a variety of different online options.
Some that will look and feel like they are ground programs and some they won't.
Theres a lot of expertise in this building.
For that and I would say finally, the institutional suite is a real advantage our partnership with Chapel Hill.
Becomes a pretty exciting opportunity for all three of our product segments.
That's helpful. Thank you.
Thank you and our next question comes from Corey Greendale of first analysis. You May proceed with your question.
Hey, good afternoon.
Two real quick questions and a longer question. The quick questions I just wanted to clarify on the.
You and see the 10 programs.
Would that be 10 graduate programs that those could include other offerings. Besides three programs.
Yes at least.
The answer is yes, sorry, yes grad programs.
Things that you would have considered a DGP I'm trying to not say GGP is because we think that relationship is going to look different and what a DGP was and we're going to talk about that quite a bit at investor day.
Okay and then a quick question is just to make sure I'm not getting lost in the nomenclature.
Is there any change in your outlook for trilogy relative to what you discussed at the time of the acquisition.
No our outlook for trilogy has increased since the time of the acquisition.
Okay, and then a longer question is just.
Translating some of.
What's happening in the market and to kind of your operating decisions.
The concepts that because there's greater competition, therefore, you're hitting a quite a diminishing return on the incremental dollar spent on marketing earlier and therefore.
All else equal forget on program, you'll be investing less in marketing or.
Our probably how I should think about that.
Yes.
Outer rings of students are more expensive.
Clearly this may be frustrating to some in this community because last November we did the opposite that was a mistake.
We've said that before I will say it more strongly now.
What we're doing today is reordering reorienting, our spend and our operation off of what is a smaller expected steady state enrollment and we think thats a more prudent place to be.
And one that should build the base from here.
That we can.
Get too.
Not only.
Successful sort of strip.
Business from a strategic standpoint in terms of our footprint, but also drive profitability and free cash.
Okay and last one I know you will probably get into great detail on Investor day.
I just wanted to kind of.
Thanks.
That's.
Yes.
Thank you.
Yes.
Thanks.
Great.
Thank you.
Programs upfront.
Yes. So the answer is yes, and I would also say.
We are so far above everybody else.
You know it's part of the reason I think we're seeing this first to be honest.
Yes, if you're if you're launching a program with 100 students and it's different.
And just as.
We are launching a program you are trying to get to 400, it's different story.
Great all right well thanks.
Thank you. Our next question comes from Brad Zelnick of Credit Suisse. You May proceed with your question.
Great. Thank you so much for fitting me in I've got one for chip in a follow up for Kathy Chip, We've always love to use mission, you're a clear visionary in online education, but now with the third time recalibrating expectations and the amount of dramatic change you're seeing in your market and your stock down.
Over 60% from earlier this year against a backdrop, where software is up closer to 30% are you and the board entertaining strategic alternatives for the business at this point.
I'm not I'm not going to comment on.
The business overall from that standpoint, I can tell you.
That the board is.
You know very supportive and focused on our long term strategy.
And very very focused on sort of.
Our ability to execute against it.
Okay.
And just for Kathy are you expecting you might need to grant additional equity to employees to encourage retention given the dramatic move in the stock.
Hi, Thank you need we need to look at that through an entire plan, which we are working for us.
Yes, I mean, I would say Brad just to.
To add to that we're we're considering.
This team has delivered.
For 11 years now against the opportunity that I think people thought it was very difficult to.
Sort of this whole notion of.
Not lending the skeptic win I understand right now we're going to be under the gun I also understand that I've got to keep this team super motivated and thinking about the long term future and thinking about being motivated about driving things like free cash.
And we'll do so.
It with my board in a way that we think is appropriate.
Excellent thanks for taking the questions.
Thank you and our next question comes from George Tong of Goldman Sachs. You May proceed with your question.
Hi, Thanks, good afternoon.
Well with respect to the Grad degree segment, you mentioned that even if you stopped all launches you see essentially mid to high teens growth, obviously, you're not going to stop your all your launch as I think you mentioned you're going to be roughly half of what you had initially guided to in the outer years. So the question is with respect to your guidance your full year guidance for 2019 or what are your essentially incorporating for grad degree.
Program growth and then how would you see that evolving over time.
So I think George you know that we.
At this point, we're we're we're going to hold off until our normal November period to give.
And asked estimate of next year's growth rate.
We are trying to give some clarity.
That.
Growth is still built in the system.
And obviously, we're not going to end all launches.
Got it okay with respect to profitability, you basically said that you're going to strike a balance between margins cash flows and growth. So how would you say your EBITDA margins for the full year in the underlying business if you exclude trilogy.
Compares with your initial guidance before.
So George what we said was that.
We did not expect in the.
Pre trilogy business to be able to offset.
All of the revenue.
Revisions to revenue that we have built into this current guidance.
That we would be able to offset some so by that.
You can infer that we expect our margins in the short term period to be slightly lower as we go through a transition.
Somewhat lower.
Got it thank you.
Thank you and our next question comes from Arvind Ramnani of Keybanc.
With your question.
Hi, This is Brian going on for Arvind. Appreciate you taking my question just real quick you are trying to understand a little bit more the dynamics associated with the short course business.
You said.
That you kind of see what courses work with what schools is this sort of imply that your.
Strategically.
Hi, just repositioning who you sell this offering into and does the revision in DGP reflect a materially less synergies from the short courses and vice versa.
This may impact or you can and cannot sell it into thank you.
So we are we are definitely spending time thinking about where to deploy capital in short course business from the standpoint of what might have the greatest impact.
We do not believe at this point that we have perfect clarity is too.
Which ones will or which ones won't work I will tell you that we do believe that.
There's a bunch of current partners.
That are working really well.
And.
There are some trilogy partners that are quite excited about the short course opportunity.
I think the big thing for Us is making sure that we're not underestimating.
How how long it will take to get the course is actually launched versus getting the deals done I will tell you, we I think as evidenced by what we delivered there.
Quite a few.
Universities that want to partner with the schools and I think were slowing that down a little bit.
And learning from.
Learning how to appropriately place the.
The emphasis on driving the faculty member alignment with the course.
When I do think that there's we're excited about widening the aperture of the short course business a little bit.
From the standpoint of which courses.
We might launch so lot of work going there clearly some executional issues that added to.
This outlook in a way that is.
Obviously disappointing.
But still a rapidly growing business that.
We think is a huge part of our future. So we're no less bullish on the strategy behind it.
Great. Thanks.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Chip house. Thanks for any further remarks.
Okay. Thank you very much we look forward to seeing you out on the road.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program and you may all disconnect everyone have a wonderful day.