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spk02: variant and what it might mean for the path and pace of reopening of economies around the world and for consumer behavior. After carefully considering the operating environment and other factors, we are reaffirming our guidance for 2021 originally provided in our first quarter earnings call and affirmed on June 30th. We expect revenue to range from $925 million to $955 million. Growth of 21% at the midpoint. Adjusted EBITDA is expected to range from $55 million to $65 million, a margin of 6% at the midpoints of adjusted EBITDA and revenue. Given the efficiency improvements we've been able to drive in new launches, we expect capital expenditures to be approximately $75 million, which is slightly lower than our initial projections coming into the year. Weighted average shares outstanding is expected to be approximately 75 million shares. To conclude, we reported another strong quarter, adding more proof points for the durability and sustainability of our business model. You may see some variability in our revenue growth rate from quarter to quarter due to things like the Delta variant and advertising costs. that variability will be around a fundamentally strong trend line over the long term moreover we are delivering efficiency improvements in new launch costs and overall expense growth well below revenue growth all of which is translating into improved margin profitability and cash flow and as we work towards the closing of the edX transaction We believe that edX will enhance our long-term strategic position in the edTech space. And with that, we'll open the call for questions. Operator?
spk00: Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And your first question comes from the line of Stephen Sheldon with William Blair.
spk05: Hey, thanks. Chip, you made the comment that it's looking like 2017 in terms of, I think, program launches. So can you maybe frame that a little bit more and help us understand the potential impact that new program launches could have to growth at a high level as you think about the next few quarters and into 2022? Sure.
spk02: Hey, Chip, I think you're on mute.
spk03: Thank you. Thank you, Paul. Sorry. So, Sheldon, thank you for the question. So you might have seen a couple days ago we announced the University of Miami MBA. And that's an example of a program that we think is a sizable program and looks more like what in the old days we would have called it DGP is. And what's great about it is it will launch in January, which is an outstanding way to start 2022 for us. And the pipeline demand right now is very strong. And so we've definitely seen universities focusing on how to do something longer term that is less of a pandemic response and more. There was an article in the Chronicle of Higher Education just yesterday about the fact that The schools that are doing well in the pandemic are schools that built, you know, digital activity over the last decade, and they're reaping the benefit of that. And the reality is if schools haven't built a digital presence, they have to transform. And it's expensive. It's hard. It's complicated many times on your own. It doesn't work without great partners like 2U. And, you know, we're very proud that today we still, I think, underappreciate it across our stakeholders is that we've never lost a degree program. not one uh you know a degree partner uh so uh you know a university partner that offers degrees with to you we we're still with everybody since 2008. so uh you know we're excited about what the pipeline means for the degree program business next year uh and you know look forward to continuing to delivering for people as they figure out how to transform themselves uh now we also tell you that from an efficiency standpoint we are getting better at doing this, and we're figuring out how to do these in a more efficient manner with a lower cash footprint, and that's pretty important to our long-term objectives.
spk05: Got it. And when you think about the program launched, I know on the efficiency side, you're usually spending some months in advance trying to get a marketing interest when a deal after a program is announced. If you think about the second half of this year, You know, if you've got all these programs that are going to be launching next year, are you kind of including some spend related to getting those programs up and running? How should we think about the spending to get some of these program launches? And I guess I'm kind of asking, is that spend kind of hitting in the second half of this year where the revenue generation will be more 2022?
spk03: As you know, the degree business, the way the model works is that we do spend to drive revenue we invest in a program and we see it steady state over you know let's say a three to five year period depending on the program now if you look at our undergrad programs it's pretty amazing to see what's happening with the undergrad business and we do expect to announce more undergrad programs uh over the course of the next you know six months uh And some of those will be in the pipeline for next year as well. So, you know, we're pretty excited about what that means. You do have to invest to get the degree business rolling. And, you know, a couple of years ago, we did slow down the pace. I think people probably don't appreciate at our size today that, you know, the pace has really picked up. We're launching, you know, offerings from, you know, degree offerings across both undergrad and grad that look, you know, more like years past. Paul, you want to add anything?
spk02: No, I mean, I think you touched on that. The bottom line is we're going to balance top line growth with even the margins. And, um, you know, while we are spending ahead of launches and in the back half of this year, et cetera, um, the, the numbers that we have out there includes that type of spend and you're going to be proven. We're going to, we're going to balance profitable growth is the name of the game for us. And, uh, when you combine that with the strong positioning we have, and then our combination with edX, uh, we believe that we have a sustainable business that can endure the test of time.
spk05: Got it. Thank you.
spk00: Your next question comes from the line of Ryan MacDonald with Needham.
spk03: Hi. Thanks for taking my questions. You know, Chip, we'll be curious to understand the sense of trajectory in enrollments, you know, heading into the fall semester. I think we've seen when we look at grad applications, you know, fairly healthy growth in those applications across some of those major degree verticals thus far in 21 and starting to see some international student enrollment recovery in undergrad. can you just talk generally about how you're feeling about, uh, the, the conversion of those applications into, uh, enrollments into your programs? Yeah. I mean, we've, uh, we feel like we've got, uh, as we mentioned on the degree side, very strong, uh, trajectory and on the all cred side, you know, in total, we've passed now 350,000 students. We're doing this at a scale that, um, I don't think anybody else really is, uh, in ed tech. So, um, you know the conversions that we've seen on the degree side continue to run at a strong pace um and you know what's been fascinating ryan is just to see how many of our partners that have been with the company for a long time really get the benefit of the uh you know the experience and the uh quality uh you know their brands have improved in the online environment over the last decade and you know you see many programs with outstanding enrollment levels that look at record conversions. So our degree conversions are still running higher than pre-COVID levels. Demand is real strong. And we've got a whole bevy of new short courses and boot camps on the way. And some of the short course topics are just really incredible. So, you know, we did see, you know, if you go back four years to our acquisition to get smarter, I think that was us being around a corner here, that universities were going to need to evolve beyond the degree, and you have to be able to meet the learner where the learner needs to be met to succeed. And we think the great nonprofit university can be at the center of all that activity. And then when you start to layer in what's going to happen when we close the transaction with edX, It's pretty incredible. I mean, I spent more time on that on this call than I, you know, we haven't had an opportunity to talk about it that much to this community. And we've been quite busy with the more important stakeholders in terms of the partners and, you know, it's been pretty incredible. The response has been incredible so far. And I do think there's a reason to believe it will change the industry. And it certainly will have a substantial impact on us because, you know, we do become a platform in a marketplace and we do it overnight with an incredible team that comes together from FedEx and an incredible founder. And I would tell you that I do really love what it means for opening doors to more people to create access to all of our programs, whether it be technical training from a great university in a boot camp or learning about diversity or women's leadership in a short course or, you know, getting your doctor of physical therapy in a degree program. Yeah, I guess that's a great sort of move toward my follow-up, which is around edX. Obviously, clearly a lot of excitement as you're thinking sort of moving towards the close of that transaction. I guess given the conversations you've had with the existing university partners from edX, can you talk about a few of the areas where you're most excited about or you sort of view as low-hanging fruit in terms of investment to scale components of that business? Thanks. Well, I mean, we're going to build very large numbers of new free and low-cost options that grow the marketplace. You know, we've committed to the mission of the organization, and that was actually reasonably easy for 2U to do because there is just such deep mission alignment. And we're excited about the opportunity to be the complete free-to-degree solution. You know, you could say free to PhD. You know, we will offer more free courses. We will offer great opportunities for people to have access to all of our both programs and competencies that we build. And think about the partner base, Ryan. You know, we go from 84 to 226. We have 78% of the top 50 universities in the world. It's hard to get to 80% vaccination. Hard to get to 80% of anything. Um, so you're talking about 3,500 plus offerings, you know, 225 plus partners, 1200 enterprise clients. And I think, you know, we very quietly built out the enterprise channel. That's something we've been doing for the last year and a half. And it's the fastest growing part of TV right now. And then you've got 50 million learners engaged in some form of activity with us. I do think the, you know, if you think about our brand, edX is a worldwide global learning brand. And you can argue that that is the one thing that is sort of the perfectly fitting puzzle piece to this solution for 2U. So I mean, we are extraordinarily excited about what, once we close this, what this can mean for greater adoption of high quality learning, improving our technology, and bringing a marketplace component to a business that, you know, is the market leader today.
spk00: And your next question comes from Brent Sill with Jefferies.
spk04: Thanks. Chip, just on edX, what's kind of the most surprising thing for you? I know you highlighted it.
spk03: a lot of the core capabilities and in in strategy but is there is there one or two things that really kind of struck you that maybe we can all see that that you think over time can really help transform yeah um i'm not sure if you cut off you you can still hear me ken so i would say um the brent the the edX has just been, it's been incredible. Every day we learn something new that is just a huge opportunity. The combination of these two entities is, it is, you know, I'm sort of joking like Jerry Maguire, you had me at hello. You know, it's just incredible when you bring the two of us together, what it does. And so, you know, just one example, when we were so intensely dealing with the process that At one point, edX for Campus had 500 university partners, and by the time we got done, we learned it had 935 universities that were offering edX for Campus worldwide, powering their campus programs using the edX content. The enterprise opportunity is very significant when you combine the number of programs we have that are built for the enterprise, and you combine that with the huge library that edX has, the partner synergy, And I would say, you know, we prepared for all different types of outcomes in terms of how the world would respond. Obviously, it was a shocking transaction to people because, you know, for most folks, they were very, very surprised just by the nature of what edX was and where it came from and who we are. And I would tell you the response has been incredible. So that surprised me, Brent. We prepared for, you know, we've had – this is our third acquisition – And I would say, you know, in some ways the response to this has been the best of the three from a partner standpoint. So there's just great opportunity for us to do right by the full partner community, the edX partners and the 2U partners and the combined partners. There are quite a few that we share. And then one final thing would be edX has relationships with great companies, you know, some of the world's best companies to offer their content. And that's going very well, and there's a lot of demand for those courses on the edX marketplace. And so whether it be IBM, Google, AWS, great content from some of the world's leading companies. And you might have seen that we recently launched our first short course with The Economist. And so we also love that option, and we think we'll grow the entire suite. There's a lot there. One maybe final point would be uh you know the worldwide opportunity so to you when people think of to you you know because of our long history they think of really high quality long-form uh masters programs and we do that and we do it well and i think we do it better than anybody but over the years we really have diversified the company so more than half of our learners come from outside the united states today and so uh just the opportunity in india alone you know edx has uh as much traffic and as many learners from India as they do from the United States. And that is purely untapped for the 2U side. So we are quite excited about what that means. Great. Thanks for the deep dive, Chip. Paul, just really quickly, I know you covered the free cash flow, but it has been improving for five quarters in a row, and you took a little bit of a pit stop this quarter. It just sounds like there's some short-term changes mechanics there in working capital that should alleviate itself over time. Can you just make sure?
spk04: I just had a question, a couple of fine questions around that, if you could address them. Thank you.
spk02: Yes. I mean, very directly, it's the $30.5 million drag from accounts receivable. And that is simply the timing of the academic calendar based on our partners. So it's a matter of when we collect. I think the key point in all of that, 90 plus percent of our AR is current. which means by the time we get to the next quarter, we'll have that windfall in networking capital, if you will. So it's not something that is systemic. It is more something of just a matter of timing from a collections perspective.
spk03: Great. Thank you.
spk00: Your next question comes from the line of Fred Havermeyer with Macquarie. Fred, your line is open. Please go ahead with your question.
spk03: Maybe move to the next one, operator. I apologize. I was muted there. Can you guys hear me? Yes, we can. Sorry about that. still having to get the hang of working remotely sometimes here. So thank you guys very much. This is a unique time in the education landscape here, though we appreciate that it's certainly an uncertain time as well in some respects. But with that, I'd like to ask, what do you see drawing learners to your alternative credentials offering in this environment? And do you see any signs of workers who are considering switching to new roles in new industries as part of the wave of great resignations that many anticipate to be occurring, considering some of your online learning offerings and boot courses? Well, I mean, reskilling and upskilling is a huge need for everyone in the world. You know, you're going to have to fully retrain yourself every five years. And technology training in particular has been a critical need. And improving diversity in everyone's tech organizations has been a critical need. And I feel like we've got this incredible solution for people with our technical boot camps. And if you look, 30,000 job referrals, we're doing this at a scale that certainly no one else in ed tech is. I would say the career engagement network that we recently rolled out across our portfolio and the edX partners and the edX learners are pretty excited about that, giving people access to the world's best employers. And it does become a bit of a flywheel because the more students you have The more employers want to work with you and the more, you know, as a single university, you really can't do this. You know, great employers aren't going to line up at a single university the way they will for a company like 2U that can aggregate a very large number of high-quality learners in one spot. So ultimately, all of this gets turbocharged with edX. Scale matters. And, you know, we think it will allow us to bend back the cost curve in a variety of ways. And, you know, the alternative credentials are a big part of the story in terms of the worldwide learning base. So there's a bunch of incredible courses coming up. We have an incredible course from Rice about the impact of COVID that's about to debut. And London School of Economics just rolled out shorter courses that are only three weeks that are sort of a new specialty for the London School of Economics. And you might have heard in there, Fred, that we did make an announcement that we hadn't press released yet, that we've now signed IE, which for those investors on the call that are in Europe, they will be immediately familiar with IE, one of the best schools in Europe, the top school in Spain, and just continuing to march down the path of some of the world's best universities outside of the United States. uh you know over the last six months we've announced announced a bunch and uh really important to provide opportunities for people to improve uh their careers and our both our short courses and our boot camps can do just that okay thank you for that and then You know, around really the digital marketing strategy that you guys have been employing here, you know, Chip, you touched on the landscape of the dynamics in digital marketing that you're noticing. We've also noticed that your digital marketing spend per enrollee has been notably better on a unit basis than in prior years. so i'd like to ask around that you know what is it can you just walk us back through what it is that you've done to and to achieve those improvements and then you know with the introduction of edx where do you think that can potentially go so a couple of things here let me start off and then probably uh chip can add add to this look i i think i think to you has a world-class marketing apparatus
spk02: And a marketing apparatus is something that has the ability to evaluate audiences in just online, offline data. Our data scientist team come together and run models and algorithms to decide where it's appropriate to spend money, across what channel, number of programs, marketing programs, et cetera. They have done a great job at developing these models, and those things generate scale with the passage of time. It's like fine wine. It gets better with time. And we are seeing some of the benefits of those marketing, work that our marketing department has been putting forward here for us. At the same time, we do have a broader set of offerings. As we were preparing for this call, if we look across our portfolio, two years ago, we had 109 short courses. Now we have over 199. If we look back at our bootcamp business, We used to have 104 programs in end of 2019. We now have 184. And in our degree business, instead of having 177 offerings, we have 185. We are operating at scale and the business is scaling with us very efficiently. And what you're seeing here is a matter of an efficient marketing department spending prudently and at the same time, a business that has matured from an infrastructure perspective to generate that scale. Chip, I don't know if you would address the edX part.
spk03: I think you did a great job. Next question, operator.
spk00: Your next question comes with Morgan Stanley.
spk01: Great. Thanks for the question, and congrats on the quarter and the edX acquisition. I wanted to start there because it's very interesting. Wondering how you're planning on going to market with edX, meaning does 2U Motion exist and edX Motion exist, and it's kind of partner-led, meaning more flexibility, more choice for current and future partners?
spk03: Josh, edX becomes our full consumer experience. 2U is obviously our corporate entity, but you can expect us to continue to grow the edX brand, put edX front and center in a whole variety of ways. The partner response on both sides has been outstanding. And so, you know, if you look at University of Miami is actually an interesting example of a trilogy partner that is now on the degree side. In other words, a partner that came to us as part of our boot camp acquisition program. And that's very common. If you look across the business, the London School of Economics came to us as a get smarter partner, a short course partner, and now we run every undergrad program they have online. So we do love the opportunity to work more broadly with each of the partners in the edX framework. From a consumer standpoint, it's hard to overstate the opportunity set in front of us. You know, edX has a very large learner base and huge amounts of traffic. We are excellent at marketing. We are excellent at SEO. We are excellent at content marketing. We bring resources they have not had as a nonprofit. They have a very large number of product offerings that we are excited about. We think both micro bachelor's and micro master's will grow substantially with 2U behind them. They create credit pathways for people to get greater affordability and admission into various master's and bachelor's programs. So those credit pathways we think are very attractive. We will grow the free course space, and 2U has a tremendous amount of content already paid for that exists today. Unlike every other massive open online course that will be built where you're going to the university and the university has to build that course themselves, 2U has a huge repository of content. It can all be built. repurposed into various free versions and then build the certificates off those and build pathways from those to the degree programs. We think this allows us to create more affordability pathways for people. We do think it will let us bend back the cost curve. You heard me mention edX for campus and edX for enterprise. Those are both opportunities that we will grow. And then finally, Open edX is used by over 100 million people worldwide. uh and you know we do think the open source community becomes a lever uh in terms of building greater uh improvements in pedagogy improvements in learning uh we're very excited to work with anon and his team uh to drive that across our business uh but it's important to know that you know to you really no nobody knows the name to you it's not a consumer brand um and we we're not trying to make to you a consumer brand But the world is very familiar with edX. It is a huge global consumer brand for education. And we intend to make it substantially bigger over the next 10 years. So we were trying to focus people a little bit on the longer term opportunity, not that the current quarter, I'm thrilled with the current quarter, yay, that's great. But this isn't about the next five months, it's about the next five to 10 years. And if you think about what we've layered on to the existing 2U business, Personally, I don't think there's anything we could do to expand and accelerate the opportunity and impact like adding edX to the fold. So the edX brand itself will become the expression for 2U to the world. in every way, maybe with the exception of this way. In other words, this community knows the 2U name very well, and provosts and presidents of universities know the 2U name very well, but learners do not. And many do know edX. So we're excited about what that brings to the table from an organic traffic standpoint and just opportunities to teach more people.
spk01: Great. Very clear. Thank you. And just one clarification, the commentary around the organic revenue growth plus EBITDA margin looking better, that was for FY22 compared to FY21 or 21 compared to last year? It was 22 compared to 21.
spk02: And you know what? If you look at I think part of my commentary that spoke to you're going to see fluctuations, but it's generally around the trend line that is heading in the right direction. I think that applies here too. If you do the trailing 12 months, that rule of 40 is almost 37. If you look at it in the current year guidance, it's 21 plus six, that's 27. So pick a number in between there. I think that's the ballpark that we're saying, that we will continue to focus on how we can improve on that annual basis, right? It's the annual measure that we're trying to zero in on, and we're trying to look at this from a long-term perspective of how to build a sustainable and durable business. And you know what? Strong financial results is one aspect of that. Positioning is another aspect of that. And then, you know, the combination of edX makes us that platform company with a marketplace that is unmatched.
spk03: You know, and as we come together with edX, it should improve the ability to convert across all of our product lines. So very exciting in terms of the combination, in terms of what it will do for the Rule of 40.
spk00: And your last question comes from the line of Brett Noble with Ehrenberg Capital.
spk04: Hi, guys. Thanks for taking my question. Maybe just first on the AC segment, you know you guys are approaching a you know quarterly revenues of 100 million dollars um haven't seen the same type of scale benefits as we've seen in the degree segment there at what point would you expect to start to see some segment margin improvements in the ac segment so so brent uh there are a couple of things here uh i think one of the things that we've been
spk02: discussing very actively on every single one of these calls. We manage the business on a portfolio basis. So to some extent, we're not going to let segment margins to some extent drive the way we allocate capital. We're going to allocate capital where it is most efficient. And what you're seeing right now is the scale and the leverage of the degree business coming through loud and clear. The all spread business we believe over time will demonstrate similar type of scale and margin power. But at the same time, we're doing things, we're building out offerings as we go through this. I mean, I use the example of the short course business having 109 courses less than 18 months ago, and today they have 199. Same thing in the bootcamp side. We are investing both of those businesses, short course and bootcamp, in the AllCred side so that we can continue to build revenue in a sustainable way. So we don't just want to benefit from favorable digital marketing trends. We want to benefit from learners wanting a particular type of course. We want to make sure we have those courses. And at the same time, use the digital marketing spend as the variable side of the equation. But the bottom line is we are spending as a portfolio, and we're going to spend wherever we get most efficient growth. And you're going to see margins fluctuate either sometimes on the degree side or sometimes on the all credit side. It is not something that we manage to.
spk04: Understood. Thank you.
spk03: The only other thing I would add, Brad, is obviously the marketing is a very significant expense on the alt-cred side, and we do think that edX will have a big impact there. It's obvious, but important to note.
spk04: Yeah, I was going to comment on that as well. And then maybe on the degree side, You know, I think you guys said fixed rate quarter of sequential growth accelerating. Can you just, I guess, put together your comments on, you know, your guidance with, you know, degree segments and continuing momentum? As right now implies, kind of like second half of this year, revenues are going to be pretty much flat compared to the first half, which looking back at your guys' history has really never been the case. So it's just really, you know, you guys being extremely conservative given the Delta variant coming about. You know, just anything in that that maybe we should know about from the COVCOMP perspective?
spk02: So a couple of things. I'm going to touch on three different areas here. You know, last year when we were in a similar situation, we pulled guidance because it was just unknown to us. What we have right now is the Delta variant where you have an economy that was beginning to open and then you had the Delta variant on top of it. We're not sure how that's going to play out. So number one, we need to make sure that we are prudent if we're going to have guidance out there. We kept the guidance and we displayed prudence by keeping the range where it's at. That's number one. Number two, the key for us is to examine each of our businesses from a very fundamental perspective. The revenues that we're generating that give us 30% year-over-year growth in the current quarter, the second quarter, Is that a sustainable thing? What are the things that drove that? And when we look back at the things that drove that, the number of partners, the number of courses, the students that are enrolled, those are sustainable things that we have. When someone enters the degree segment, they stick around for about two and a half years on average and generate revenue for that period of time. The third point I'm going to make is if you look back at the second half of last year, you had the launch of Simmons in the back half of the year, and we had ancillary revenue and degree segments from COVID-related activities where we were helping other partners. Those are two things that created tough comps on a year-over-year basis. And then the last point I'm going to make is more of a historical big picture point. If you look back at the historical trends of 2U, the fourth quarter back half of the year used to be a generally higher have for us simply because we launched a large number of programs within a given calendar year that would generate revenue in that back half of the year our launch cadence as you know has been reduced in the last two years which would have more of a flattening or more of a leveling or a slightly up back half of the year instead of the unusually high back half of the year that you've seen historically so those are three points that i would make make but the bottom line is the degree business is very well positioned. We have great university partners. You saw with the recent announcement, we're still having strong demand there, and we expect that business to continue to do well, even as we enter 2022.
spk00: And there are no further questions at this time. I'll now turn the call back over to management for any closing remarks.
spk03: Thank you very much, everyone. We look forward to talking to you about the story out on the road.
spk00: And this concludes today's conference call. Thank you for participating, and you may now disconnect.
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