2U, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the To Use Third Quarter Earnings Code. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone keypad. If you're requiring assistance from an operator, please press star 0. And now I'd like to turn your conference over to your speaker today. Mr. Kinkoff, please go ahead, sir.

Thank you, Operator. Good afternoon, everyone, and welcome to 2U's third quarter 2020 earnings conference call. I'm Ken Gough, SVP of Investor Relations at 2U, and I'd like to start by saying that I am the appropriate amount of excited for this to be my first time reading the disclosures on one of our calls. I'm also joined by Chip Pausack, our CEO, and Paul Lalje, our CFO. Following Chip and Paul's prepared remarks, we will take questions. Our Investor Relations website, investor.2u.com, has our earnings press release and slide presentation, as well as a simultaneous webcast of this call. A webcast replay of this call will be made available for the next 90 days. Statements made on this call include forward-looking statements regarding our financial and operating results, the continued impact of COVID-19 pandemic, new educational offerings, student and university demand, and other matters. These statements are subject to risks, uncertainties, and assumptions. Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them. Please refer to the earnings press release and the risk factors described in the documents we file with the Security and Exchange Commission, including our annual report on Form 10-K for the year ended December 31st, 2019, and our most recent quarterly report on Form 10-Q for information on risks, uncertainties, and assumptions that may cause 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 two-use performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and on the investor relations page of our website. With that, let me hand it over to Chip.

Thanks, Ken. To start, I hope everyone listening is doing well and staying safe. Turning to our business, 2U had an excellent quarter. It's crystal clear that our offerings are exactly what students and universities need, and we're providing significant societal benefit. It's apparent in the demand we're seeing and in our results. We delivered revenue of 201.1 million, which is growth of 31 percent all organic. Adjusted EBITDA crossed into positive territory, coming in at 3.7 million. Cash flow is approaching break-even on a trailing four-quarter basis, and our balance sheet is in a net positive cash position for the first time since early 2019. Enrollment trends in the third quarter were favorable, and we expect that trend to continue. We're clearly delivering products that meet the diverse needs of lifelong learners. And we believe the impacts of COVID-19 accelerated demand across our three primary products, short courses, boot camps, and degrees. And all of this is reflected in our reintroduced guidance. Now let's take a step back so I can offer you a few perspectives on the business. I'm very proud of what 2U has accomplished in 2020. Twelve and a half years ago, we started with a vision for where higher education was headed. And because of the strategic choices and investments we've made since then, 2U is now uniquely positioned to meet the needs of our partners and lifelong learners at a moment when the value and demand for online education has never been greater. We believe the impact of these choices and investments, particularly our move into alternative credentials, can now be seen in the strength of our third quarter results. The value of non-degree educational offerings was clear to adult learners even before the COVID-19 outbreak. In a survey from research firm Strata, the majority of respondents saw themselves as more attractive job candidates and reported personal and subjective benefits from earning non-degree credentials that go beyond labor market returns. That sentiment among both learners and employers is also reflected in the findings of our recently released report called The future of work is here, which is linked in the earnings presentation. We first saw the strategic and growth potential in this segment of the market four years ago before acquiring the short course business. And our acquisition of the boot camp business five quarters ago further demonstrated our commitment to expanding non-degree offerings. Today, those deals are bearing fruit. We believe that 2U's alternative credential segment generates more annual revenue than any of the other MOOC and alternative credential providers based anywhere outside of China. These non-degree offerings serve directly as an on-ramp to degrees, a way to supplement existing degree offerings, and an avenue for current degree holders to upskill or reskill. They're a natural complement to, not a replacement for, our degree business. In fact, in today's challenging economy, a degree clearly helps lead to job stability. Just look at the Bureau of Labor Statistics unemployment numbers over 2020, which consistently show that individuals with only a high school diploma are out of work at rates at more than double those with a college degree. As we've said before, the career curriculum continuum is not a linear concept, but rather an expression and reflection of the breadth of educational offerings adult learners need and want at various career and life stages. So 2U's portfolio tells a story of and, not or. The whole is greater than the sum of its parts. And the impact from COVID and the economy is only making our portfolio of offerings more valuable. We're seeing growing interest from new and existing partners in launching not just alternative credential and grad programs, but also online undergrad degrees, which is by far the largest part of the addressable higher education market and an area that has become hot for 2U. our LSE and University of London undergrad degree offerings have officially expanded again with the addition of two signature degrees, a BSc in finance and a BSc in mathematics and economics. And the first LSE undergrad cohort successfully launched in August with the upcoming fall cohort expected to come in well above our initial targets. We've talked about early indicators over the past few quarters. which are now beginning to translate into current period results. These leading indicators demonstrate the counter-cyclical attributes of this market, and we believe will drive upside to future performance. And given the long cycle nature of the degree business, we expect the positive momentum should be sustainable going forward. As the business grows, we've also improved our enterprise-wide operational efficiency and increased our liquidity. the degree business is now nicely profitable on an EBITDA basis with strong cohort margins. This enhanced profitability is the result of a more measured cadence of program launches and an increased focus on driving scale and tech-enabled efficiencies. As we invest in launching profitable offerings across our portfolio of products, we remain focused on delivering continued margin expansion and driving toward positive cash generations. Looking at the market landscape today, the real challenge and opportunity for universities is not finding an online program manager to launch a degree. It's finding a true digital transformation partner in order to better serve adult learners who, at all stages and ages of life, are searching for high-quality online education offerings differentiated by length or cost, certificate or degree, standalone or stackable. Because of the strategic choices and investments 2U made over the past 12 and a half years, we've become the digital transformation partner of choice to more than 75 great nonprofit universities around the world. Through our scalable platform, comprehensive tech-enabled capabilities, and market-relevant product strategy across the career curriculum continuum, 2U is helping drive and enable the digital transformation of the great nonprofit universities. And through it all, 2U has evolved and become more nimble and innovative. We're offering universities co-investment opportunities, supporting our partners' campus operations, and launching innovative new products like our new artificial intelligence offering with Columbia University School of Engineering. Another exciting example of 2U's innovation is our tech boot camp for credit announcement last week with Netflix and Norfolk State University. We're happy to team up with an iconic company like Netflix and one of the nation's most respected HBCUs to help increase black representation and career pathways in tech. So as they like to say at Norfolk State, behold the green and gold. There's never been a more important and exciting time to be in EdTech and 2U is meeting the moment and doing our part to help drive the digital transformation and sustainability of higher education. We are powering more relevant, high-quality, blended, affordable, and accessible degrees and alternative credentials that meet society's critical needs. Now I'll turn it over to Paul to take you through our results and discuss expectations for the year.

Thanks, Chip, and good afternoon, everyone. A year ago, we set about improving operational efficiency, sharpening the way we allocate capital across the portfolio, and boosting our liquidity position. We have steadily reported progress, and in particular, we highlighted optimism in leading indicators for the past two quarters. As you've seen from today's earnings report, we have delivered organic revenue growth of 31%, significantly improved profitability, reduced the use of cash on a trailing 12-month basis by almost $90 million, and now boast a balance sheet with a net cash position. These are extraordinary results by our extraordinary team, and we now have the foundation to continue this progression. This afternoon, I'll go over our results for the quarter, discuss steps we've taken to strengthen our balance sheet further, and provide some color on our annual guidance, starting with results for the quarter. Revenue for the quarter totaled $201.1 million, a 31 percent increase from the third quarter of last year. This represents all organic growth since we acquired Trilogy more than a year ago. The 31% increase represents a 13% acceleration from last quarter's organic growth. Grad segment revenue was $122 million, up 18% over last year, and a four-point acceleration from last quarter. Growth was driven by a 17% increase in full course equivalent, our proxy for enrollment. In addition, we saw encouraging trends across vertical areas and launch cohorts. Revenue in the alternative credential segment totaled $79.1 million, up 57% over last year, and in line with the increase in FCEs. This was driven by a 60% growth in short course revenue as we continue to see Extremely strong demand for this product. Boot camp revenue grew 54% year over year, reflecting several new offerings and strong uptake across subjects, all leading to high enrollment. Now let's take a look at cost and expenses. Operating expense for the quarter totaled $247 million, up 13% from last year. The increase was driven primarily by personal and personal-related expense across categories. Curriculum and teaching expense grew 41% from last year, driven by the growth in alternative credentials revenue. Marketing and sales expense grew 7% year-over-year, and while there are several puts and takes, overall, this demonstrates the continued scaling of our marketing infrastructure and more efficient online advertising spend. Net loss for the quarter totaled $52.6 million compared to $141.1 million a year ago. Adjusted EBITDA totaled $3.7 million, a significant improvement from the $10.7 million of adjusted EBITDA loss that we reported in the third quarter of last year. This impressive EBITDA improvement was primarily the result of strong revenue growth and improved operational efficiency. Now for a discussion of the balance sheet. We ended the quarter with cash balance of $499.6 million, up from $213 million at the end of last quarter. This increase was primarily driven by the inclusion of $300 million from our August follow-on offering. We also had $15.5 million in capital expenditures while operating cash flow was essentially flat. Unlevered free cash flow was a use on a trailing 12-month basis in the amount of $9.9 million, a $34.3 million improvement from the June quarter. This performance was primarily driven by a $37.5 million improvement in cash from operating activities and a $6.2 million decrease in capital expenditures. And on top of the improvement to unlevered free cash flow, we also reduced our trailing 12-month cash interest payments by $5.2 million versus last quarter. In early August, we issued 6.8 million shares in a follow-on offering for net proceeds of approximately $300 million to further improve our financial flexibility and put us in a net cash position. Now for some color in our guidance. As you've seen in our announcement today, we have reintroduced guidance for fiscal year 2020. Specifically, we expect revenue to range between $760 and $775 million, a growth of 34% at the midpoint. Net loss is expected to range between $225 and $210 million. We also expect adjusted EBITDA to range from $7 to $14 million. In addition, we expect capital expenditures for the year to be approximately $80 million and weighted average shares outstanding to be just above $67 million. Our results this quarter and the leading indicators provide visibility for the rest of the year and give us the optimism to reintroduce guidance at this time. However, let me take the opportunity to share the principles that will inform our approach to guidance from now on. We believe that it's important for us to set expectations for the business, both internally and externally. And it's important for management to have the flexibility to make decisions that impact the business both in the near term and in the long term. Annual guidance with quarterly updates if necessary meets these objectives. We have begun this practice of giving annual guidance starting today. To state the obvious, annual guidance for fiscal year 2020 effectively implies fourth quarter guidance. However, we felt it was important to start now and also outline our plan for guidance going forward. We expect to provide guidance for fiscal year 2021 when we report our fourth quarter results next year. In closing, let me remind you that this quarter we delivered organic revenue growth of 31%, while adjusted EBITDA totaled $3.7 million. We reintroduced guidance, which has revenue growth continuing and we expect to be adjusted EBITDA positive for the full year. On all accounts, extraordinary results and the validation of our strong market position. We continue to keep our university partners at the center with student outcomes as our North Star. I look forward to updating you next quarter. And with that, I'd like to hand the call back to Chip.

Thanks, Paul. Since March, when all of higher education was forced online, we've been reminded in so many different ways that delivering high-quality online education is complicated, expensive, and requires an integrated approach to technology, pedagogy, and support for students and faculty. Our capabilities, investment, and integrative approach are what set 2U apart. And the quality of the offerings and experiences we power across the career curriculum continuum is a major reason why I'm excited about the forthcoming release of our inaugural transparency report. As you've heard me say during our investor day earlier this year, We believe higher education must redefine itself to better serve society's critical needs. And our transparency report will help to demonstrate how 2U is clearly helping our partners deliver on this promise. At a time when parents, students, and policymakers are all asking more of higher education and calling for greater transparency about the quality and outcomes it delivers, we're proud to be at the forefront of defining what quality looks like online while answering this call. And with that, we'd be happy to take your questions.

And at this time, if you do have any questions, you can press star, the number one on your telephone keypad. Again, that's star one. And we'll start with our first question that's on the line from the line of Steven Sheldon from William Blair.

Hey, thanks. Good to see strong growth in each segment. I think you talked about sustainable momentum going forward. So I wanted to ask about the underlying factors driving the acceleration, especially on the full degree side. And what that can mean for potential growth rates looking into 2021 is I would think you'd have increasing visibility there.

Yeah, so, you know, we do think that the economic impact from the pandemic is proving that our business is counter-cyclical, and we do think that it is causing people to, on the degree and boot camp side, really – seek out career opportunities to, uh, improve them, you know, improve their, their long-term futures. Uh, and we're seeing increased demand across all three categories, but in those in particular, as you know, are a bit longer term. So, uh, we're starting to see that, uh, in current period results and we're pretty, uh, pretty pleased about what it means for the business.

Got it. And I mean, as we think about, you know, you've seen some acceleration there over the last couple of quarters, um, With the enrollment trends that you've seen and the funnel trends, I guess, how should we think about the growth trajectory, at least early in the year?

Steven, this is Paul here. A couple of things. I think, as we've said in the past and we'll continue to reiterate, we expect to see that growth trend continue. I think last quarter we talked about our organic growth increasing to the point that we expect to see continue. what does that mean? If we look at the 31% year-over-year growth that we see this year, I think page 12 of Ken's beautiful investor presentation that's on the website, you would see the sequential growth on a year-over-year basis. The third quarter of last year was a 17% year-over-year growth, and that somewhat widened to the 31% that you see here this year. So to some extent, you have to look at it on a holistic basis. What's the organic growth on a full-year basis? And we expect to see that to continue into next year, particularly the trends we've been seeing in the last two quarters. We expect to see that continue. But I want to make sure that the quantum is appropriate. The bottom line is the trend is expected to continue. And most importantly, if we peel back the onion, in two-thirds of the business, when a student enrolls, they stay in the system for an average of two and a half years. So we know that we're going to see that increase lift as we go through the next couple of quarters and in a third of the business which is the alternative credential business it's been extremely strong in the last two quarters we expect that to continue we have you know we've launched more subjects in the boot camp business we've built more courses in the short course side of the house and we expect that to continue next year because a lot of this is more topical areas and we're seeing the demand for that that we don't expect that to slow in the near term

Got it. That's really helpful. And then as a follow-up, it seems like Simmons has been very forward-thinking with its decision to invest in permanent hybrid learning options within its undergraduate programs. What have you seen, I guess, in terms of other universities starting to consider investing in this way in a more structural hybrid offering, if any? And could that be a big opportunity for 2U over the next few years?

Yes, Stephen, we think it's a huge opportunity. We did go out of our way to mention that undergrad is a place that we definitely think there's a lot of runway for the company, and there's no doubt that that's been impacted by the fact that COVID-19 forced everybody to go online, removed a bit of the sort of, uh, challenge overnight. And, uh, we're, we're in many different conversations that look and feel like what we're doing with Simmons. Uh, so, uh, now it's, you know, obviously higher ed is, uh, moves at a pace that is not the same as business. And, um, but I, but I tell you, it's, it's been, it's been, uh, really a great series of conversations and a great number of opportunities for the company. Now, with that said, we're really focused on making sure that we maintain a thoughtful cadence of longer-term opportunities, that we're balancing the agenda for long-term growth. And you can see now we're back to some pretty heady growth numbers, and we're making sure that we're being thoughtful about how we invest and how we drive towards free cash and all the commitments that we've made in terms of portfolio management, looking at margin and the return on invested capital for each of the options that we have. But there's no question that undergrad is strong. And you can see we did mention that we already have two more additional LSE degrees.

Got it. Thanks and congrats on the solid results.

We do have more questions online. Our next question comes from the line of Arvind Ramnani from Piper Sandler.

Hey, thanks. You know, I just wanted to kind of really ask about the kind of the demand environment. You know, what has been the appetite for, you know, universities to sign up to you, and how does the pipeline really look over the next 12 to 18 months?

Arv, do you mean demand from university partners? Yes. It's been very strong. You know, there's no question that the effects from the pandemic have had even a stronger increase in conversations related to our full investment model from schools, given that this is a really tough time and schools need to drive high-quality options. They need to drive high-quality online options. and, you know, there's a ton of conversations and there's a ton of opportunity. We're being measured in how we deploy ourselves, but we're, you know, pretty excited about it.

Yeah, and when you think of the kind of the market opportunity, you know, kind of beginning of 2020 versus now, you know, have you sort of reframed the market opportunity? And what I'm really trying to get at here is, like, you know, when you think of – you know, increased appetite from undergrad or kind of other new segments of the market that you think are kind of more willing to work with the 2U?

There's no doubt. We've never had the kind of undergrad conversations we're having right now. But just as an example, to get to these results, you know, we had more than 50 new boot camp launches this year. We just didn't announce them all. You're talking about a pretty incredible expansion of the alternative credential segment, both on short courses and boot camps, with demand across the entire partner base. And that's how you get to the kind of eye-popping growth numbers for that particular segment. You know, that segment is now the largest provider of alternative credentials in the country, you know, we believe. 45 new short courses launched 50 plus boot camps launched and then you get to undergrad and obviously that's a long-term opportunity for the degree business we've also seen an acceleration in demand for many of the programs that we've been running for years and years and hitting all-time highs on a variety of programs in these recent cohorts where people are clearly looking to reskill and upskill themselves in a tricky of economic times you know we started the company in in 2008 in what we thought was the worst economy we'd ever see, and it got increasingly better over a long time period, but in small ways over a very long time period. It's difficult to see the impacts of the overall sort of macro. I can tell you today we feel pretty strongly that we're seeing just how counter-cyclical that part of the business is, and we do think it gives us a great opportunity for driving growth on the degree side as well.

Great. Perfect. I'll get back in queue.

And we do have more questions on the line. Our next question comes from the line of Rishi Jaluria from DA Davidson.

Hey, guys. Hey, Chip, Paul, Ken. Thanks so much for taking my questions. Nice to see some continued solid results. Just two for me. First, I wanted to start maybe by thinking about your multiple growth drivers that you have, and how do you think about you know, wanting to capitalize on the opportunities you have in the alternative credential segment with Get Smarter and Trilogy, while at the same time, you know, making sure that you're not taking your eye off the ball with the core graduate opportunity.

Yeah, I mean, Rishi, it's all portfolio strategy. This is balancing our long-term investment opportunities. And, you know, we're putting everything through the lens that we told you. You know, well over a year ago, we told everybody we were going to do this. we've done it and you know we've continued to demonstrate i think quarter after quarter that we're focused on it and granted covid through a massive curveball at the planet and it's been complicated but i have to say uh you know it's created uh you know a need uh for existing partners uh a need for existing programs to be fully online to be operational you know we really didn't mention that just how efficient the company has been operating on a remote basis, how strong the employees are delivering for the partners, you know, 31% organic growth. And it's really across the whole portfolio. And that makes me very proud because, you know, we intentionally went down this path in a way that clearly was not obvious to the rest of the world, but it was pretty obvious to us at the time that alternative credentials are here to stay and they're meaningful. They're meaningful opportunities for people to reskill themselves. If you're getting a boot camp in, you know, data science or web development, you know, you see great opportunities for high-quality jobs. And then in our degree business, I mean, you have, you know, certain degrees like our public health programs, just, I mean, really just incredible growth. Why? Because people are obviously focused on trying to deliver at a time of need for the world and see opportunities in that. So, you know, we really like how we've established ourselves across this selection of opportunities for people to create lifelong learning. And the universities themselves need partners to do this. You know, this isn't really like online program management. That doesn't even make sense anymore. This is about sort of digital transformation for the great nonprofit university. And, you know, we think that we are at the center of all of that and have pretty incredible positioning for the next several years.

All right, great. That's helpful. And just on the topic of alternative credentials, it looks like we saw nice strength in both sides of the business. I want to drill down on the 34% growth you saw on the boot camp side of the business. I think really impressive, especially given that Trilogy was a largely in-person business that you've transitioned online. Can you talk a little bit about that transition online, how it's been so far? And I think more importantly, how should we be thinking about the boot camp business going forward and, you know, with potential reopenings and even post-pandemic? Is there an opportunity to potentially even accelerate that now that you've got this fully online version of it and then, you know, the ability to bring back the in-person instruction for those that need it? Thanks.

Well, I think you could see the growth was pretty heady. So, um, we're focused on quality and growth and I'm pleased to tell you that, you know, net promoter scores are up. Uh, like it's clear that these programs are meeting, uh, the demand in the marketplace. They're delivering for people in the marketplace and, uh, delivering high quality longterm outcomes for people. Most importantly, which will be, um, you know, that will be, uh, over time what matters the most, um, So, you know, going online with the boot camp business obviously was stressful when we were doing it, taking everything online, but it's been fantastic, expanding our geography, and we didn't expect to have to go that fast, but it's been a significant win for, most importantly, the students, but also for the company.

All right, great. That's helpful. Thank you so much.

Our next question on the line comes from the line of Brad Zelnick from Create Swiss.

Hi, it's Bob and on for Brad. Congrats Chip and Paul on the impressive results. One for Chip and a follow-up. Chip, there's always been discussion in the industry as it relates to the various business models for OPMs. How has the financial strain on educational institutions during COVID changed the discussion at all? I imagine there'll be a greater interest in the revenue share model, but curious to hear your perspective and understand how customers and prospective customers are thinking about it.

Yes, there's definitely been increased interest in the investment model. It's never been more important. People don't talk enough. The revenue share gets quite a bit of attention, but the investment that goes in to create the business doesn't get enough attention. It is real investment, and it's significant. And at this time, you're talking about schools needing it even more due to the really intense economic impacts from COVID. So, you know, we're being thoughtful in our deployment. But, you know, if you look at the programs that we've delivered for people, you know, our partners are very happy right now. And why? You know, right when they need it the most, these programs, it's almost a rush to quality. It's like people are focused on what works and who's been doing this for a while. You know, it's not like higher ed just invented the internet this week. You know, we've been doing this for 12 and a half years and we've gotten really good at it. So, and the investment model over time, there's no doubt that we're seeing an increase. Now, with that said, you know, we're focused on also driving the company's financial goals and that segment, a measured cadence allows really profitability to grow substantially in current periods over time. And we think that's really important for the company at this stage of life. So we've got these great growth levers. We've got really high quality deployments going out. We have new opportunities in undergrad, but they are all being put through this portfolio strategy and this balancing of our investment opportunities. Now, fortunately, the alt-cred segment has a different investment profile than the degree segment. So we are able to sort of put them together nicely and create the long-term sort of portfolio effect for the company. It's also clear that all the partners are interested in talking about all the different opportunities. So it creates a lot of cross-selling opportunities for the company.

So, you know, pretty excited, pretty excited about where we are right now. Got it. And just as a follow-up, how should we think about the potential change in an administration and the impact that could have to you and just education as a whole?

We started the company in 2008. We've been through Democratic administrations, Republican administrations, and been very successful in both. Feel very confident that we will be successful working with any administration and have done, you know, have a full team that has worked on that for now many years and done it, in my opinion, quite well, quite effectively, spent a fair amount of time, you know, working the various departments and feel really comfortable with our ability to deliver what is, you know, a very transparent model that is innovative, that creates the right kind of investment characteristics for schools right when they need it the most, and really, you know, are very comfortable telling you that whoever wins, we feel to be on very strong footing.

Thanks, Miguel. Thanks again.

And our next question, of Ryan McDonald from Needham.

Hi, everyone. Thanks for taking my questions. Congrats on an excellent quarter. Chip, first one for you. You know, given that we've seen a surge in positive COVID cases throughout the fall on campuses and in residential programs, can you give us a sense of how university partners are beginning to think about the spring semester? Are the conversations that you're having with these universities still reactionary in nature, you know, looking to find a temporary solution for the spring, or is it more strategic and sort of longer-term view? Thanks.

That's a great question, Ryan. I think the reason that we, in my opinion, the reason that we're seeing such an increase in the longer-term undergrad discussion is that people are thinking much more strategically. You know, I The narrative around higher education, you know, I personally think has been frustrating. I think, you know, what higher ed has had to do and been able to do during this time period I think has been more impressive than not. And I would tell you that people are starting to think about their long-term future. You know, we said at Investor Day at the very beginning of this crisis that we thought higher education needed to be blended and connected. We didn't say online. And the reality is blended and connected means that you're threading the campus experience with high-quality options for people to be more flexible and be more innovative and be more accessible. And so we're seeing that. We're seeing that reflected in our partner set in a way that is quite impressive. Now, is everybody moving at the same pace? No. You know, you have schools like Simmons that what Simmons University did on the timeline they did it is quite incredible. And then you have schools like LSE that were ahead of the curve and, you know, are launching an online program with students in it right now because they had decided to do online undergrad classes you know, a year and a half ago. But this stuff takes time. And so we're seeing real opportunities for us to deploy higher quality online undergrad offerings, but we're going to do it at a pace that makes sense for the company and for the partners because we need to also make sure that everything we do is really good.

Excellent. And as a follow-up, you know, graduated program enrollments have obviously been very strong for the fall cohorts. Can you discuss what you're starting to see in terms of top of the funnel and application volumes coming in for the spring launches next year?

You know, Ryan, we're more and more just up-leveling the conversation, you know, from the funnel discussion. What we can tell you is we've seen great leading indicators. We made that clear in the script. We feel like we are seeing growth across all three segments. And you're starting to see that translate into current results. And, you know, having been a public CEO for what will be going on seven years, I can tell you that, you know, I'm perfectly comfortable being able to let the results speak for themselves. And, you know, over time, it'll come. And as it comes, people will get it more. And what we're telling you is we are seeing leading indicators that are very positive. And, you know, now, fortunately, you know, we're able to talk about the current period, and you can see that organic growth and sequential growth going up in each of these core segments. And so it's not just talking about what might happen in the future or what we believe might happen. It's talking about what's happening right now. So, you know, we like our odds of continued momentum.

Excellent. Congrats again.

And our next question comes from Jeff Silber from BMO Capital Markets. Thanks so much.

I'll keep my first question at a high level then. There's obviously a lot going on in the ed tech space these days. You know, considering your experience in this industry, where do you see this space going over the next few years and what is 2U's role in that?

So Jeff, we do think that the notion of what even an online program manager means is, it's not even obvious what that definition is anymore. There are many companies that operate in the space today that one could consider online program managers. And what we're focused on is the digital transformation of the great university and you know, it really is a comprehensive product strategy for these schools to to meet the needs of the learner in places where they might have greater challenges doing that on their own or supporting them in ways that make them stronger and you know, I do think it's you know, hopefully this earnings period does start to show to everybody that that, you know, why we went down the path we did on the two acquisitions we did. You know, our Get Smarter acquisition and our Trilogy acquisitions were both strategic, and they were about being a more comprehensive solution to the great university and the great nonprofit university. So, you know, we think we're really well positioned for that reason. And there will be, you know, continued opportunities, both organically and inorganically, for us to drive new opportunities for digital transformation for schools. Okay, I appreciate that.

And my follow-up is actually for Paul. You had set the bogey of reaching justity but not positivity by the third quarter. You got there. I just want to confirm something. This is something you think is sustainable going forward. I know the business model has changed from a seasonality perspective, but would it make sense to see you having adjusted EBITDA positive on a quarterly basis going forward? Thanks.

Yeah, so, Jeff, our objective was not to cut expenses to get to EBITDA profitability. Our objective was to reengineer some of our processes internally, look at the way we operate, how do we operate more efficiently. And I think that's what the team has done. So what you're seeing here today is a manifestation of a lot of hard work internally to make sure we can build and deliver the service that the students and the university partners expect from us. And we do it cheaper, better, faster. This is not meant to be crossover in the third quarter and then in Q1 of next year go back down. We expect to maintain profitability from here on out. Our guidance calls for EBITDA profitability on a full year basis to be positive. And also, we expect to be positive. You know, first quarter is our tallest quarter in terms of expenses, and we are projecting to maintain profitability through that period.

Okay. That's very clear. Thanks so much.

Our next question on the line comes from the line of Brent Teal from Jefferies.

Thanks. Chip, can you update us on the number of partnerships in the quarter? Did you add – Any new ones? I think last quarter you added two. Was there any update to what you added in this current quarter?

Brent, we don't update each individual program level at this point. We don't announce every new launch. It became fairly clear to us that people didn't understand just how many upsells we were going after and landing in Our boot camp business is one example. So during this period, it was something above 50. I think it was 54. Those are individual new programs at each school that are meaningful. And so at this stage of the game, we're a pretty big company, and there's a lot of activity. We announced Simmons because it's pretty unusual that you take a full university online in such a short period and begin even working with and receiving financial benefits from the campus program. So it's, you know, we're really trying to manage the portfolio. The business has changed quite a bit. And so each individual announcement, you know, you will see us continue to have some meaningful announcements over the quarter. And we're excited about some of them. But, you know, like the Netflix Norfolk State announcement was our first HBCU something that we not only think is a really important opportunity in terms of the world needing HBCUs to drive high-quality options for black Americans, but on top of that, it's something that we promised our employees that we were going to go after and really believed was important internally. So I guess I'd tell you that you're going to keep seeing them, but we're not – You know, we're adding all kinds of stuff. We added Columbia. We added for artificial intelligence. We've added, you know, something on the order of 45 short course partnerships with schools on a whole variety of different topics. And, of course, we're continuing to add grad programs. Those grad programs come at a slower pace than our boot camps and our short courses because they have a larger investment profile.

Okay, that's helpful, Collar. And, Paul, just on the sustainability, EBITDA, what are the biggest sources of leverage for sustained profitability? How would you bucket and go after the bigger pieces where you're excited that gives you that confidence that you can keep sustaining?

So, Brent, there are a couple of things. The marketing infrastructure that we've put in place is a highly scalable infrastructure. The more programs we add to it, the more leverage we generate from that. So that is one area that we're seeing tremendous leverage in. The second happens to be in our technology platform. Our technology platform also, I describe it as platform as a service, because as we keep adding things to it, we keep lowering the fixed cost per unit, and we end up generating more operating leverage off of that as we go forward. And then there are some of our student-facing organizations that are becoming more and more efficient over time as we use technology to help in some of the delivery of services that we have to the student population. So it's across the board, student-facing, technology, and then marketing infrastructure. Those are the three areas with probably marketing leading the way and technology following closely. The bottom line is the real proof in the pudding is 31% top-line growth. and 13% cost increase in the quarter. And I think you're going to continue to see that divergence of top-line growth and growth in expense as we go through the passage of time.

Like the divergence. Thank you.

And that was our last question that we have for right now.

All right. Thanks, everybody, for joining us today. I just want to wish a very happy birthday to my executive assistant, Sandra Bailey. for all her incredible hard work. Thank you, Sandra. And we will see everybody else out on the road.