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spk03: Good day and thank you for standing by. Welcome to the 2U third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Mr. Ken Goff. Senior Vice President, Investor Relations. Thank you. Please go ahead.
spk00: Thank you, Operator. Good afternoon, everyone, and welcome to 2U's third quarter 2021 earnings conference call. I'm Ken Goff, Investor Relations at 2U. I'm joined by Chip Pousek, our co-founder and CEO, and Paul Walge, 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 the COVID-19 pandemic, our pending acquisition of edX, including the expected closing date, 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 Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2020, 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 the call over to Chip.
spk05: Thanks, Ken. Before I get into my normal discussion of results, I want to start by sharing some exciting news related to the edX acquisition. I'm thrilled to report that we received the necessary approvals from the Massachusetts Attorney General and the Massachusetts Supreme Court. We're now in the final stages of the closed process, which we expect to wrap up in the middle of this month. I'll come back to what edX means for us in a moment. But let me first touch on some of the highlights from our third quarter results. Revenue grew 16% year over year, strong growth against last year's comps. The degree segment was particularly robust, driven by undergrad and licensure programs, with revenue growth of 21% and segment margins of 22%. And adjusted EBITDA grew to 14.7 million, a margin of 6%, and an improvement of 11 million over the year-ago quarter. All in all, great results that we believe demonstrate the underlying strength of our model. And while we're at it, look at the product announcements. Since our last earnings call, we announced deals with both new and existing partners, including an online master's in social work degree with Howard University, a top 25-ranked school of social work. A deal with University of Miami Herbert Business School to power its current online MBA and create a new track, the Online Advanced MBA, for students who want a faster, more affordable option. An expansion of the Netflix Pathways Technical Boot Camps with new HBCU partners and UC Irvine, one of the nation's leading Hispanic-serving institutions. A new alternative credential client, National University of Singapore, one of the world's top computing schools, and the extension of our partnership with Oxford Said Business School for six new alternative credential offerings in high demand market relevant business topics. A nice reflection of the diversity of our product line and the momentum in our business. Turning back to edX, the transaction represents a pivotal moment in 2U's history. For nearly 14 years, we've led the way in building and defining the OPM sector. all with a focus on quality access and student outcomes. The addition of edX will effectively transform 2U into the world's most complete online education platform company, with edX operating as the primary brand for our marketplace, educational offerings, and services. Let's dig a little deeper, starting with the consumer-facing marketplace. With edX, we'll become one of the world's most diverse and extensive free-to-degree consumer-facing marketplaces. Learners will have access to over 3,500 high-quality online education offerings, ranging from thousands of free MOOC courses to nearly 200 undergrad and graduate degree programs and everything in between. Together, 2U and edX will deliver learning opportunities from 38 of the top 50 universities in the world, as ranked by U.S. News, and a growing list of companies. edX.org has a truly impressive global consumer reach. It's a top five education site in the world and a top thousand site globally with a domain authority that's nearly as strong as whitehouse.gov and newyorktimes.com. As of the end of the quarter, the edX brand had 41 million registered learners and has drawn 150 million visits from learners this year alone. And we believe our combined free-to-degree portfolio of content will only further solidify edX.org as a leading global education platform and destination. We know from survey data that learners on the edX platform have similar career motivations and demographics as those that enroll in 2U-powered programs. And we've learned that many of the learners who are coming to edX.org to search for and enroll in MOOCs enroll in online degree and non-degree offerings powered by 2U at a higher rate than leads we generate from other channels. We believe this overlap in learners will be a key driver in the marketing cost benefits we expect to achieve with this transaction. It is a direct replacement for leads we currently pay for and will drive new revenue production at a lower CAC. Bringing in even more high-intent learners to edX.org will be a strategic priority for us. We plan to leverage 2U's unmatched marketing capabilities, expertise, and scale to amplify and extend edX's brand and global reach, which we believe will ultimately allow us to more efficiently and effectively attract larger numbers of new learners while reducing our CAC and marketing spend with third parties. We expect this to be a powerful new lever for the company in driving profitable growth and margin improvement across our business. But becoming an education platform company is about more than just having a global marketplace. It's about marrying that marketplace with a complimentary and scalable set of tech enabled services, core capabilities like student support, our career engagement and clinical placement networks, as well as program specific marketing and lead nurturing. all of which we believe will solidify 2U's position as the digital transformation partner of choice to great nonprofit universities. As an example, we'll be able to offer partners a traditional full-service bundle or a lighter option, similar to what edX has been providing for its lower-priced degrees. We'll also be able to effectively build MOOCs, micro-bachelors, and micro-masters, leveraging 2U's massive libraries of course content. That unlocks additional value for our partners while creating more affordable pathways for learning on edX. We're bullish on our ability to continue delivering more lower cost, high quality online degree and non-degree offerings to the market. It's amazing what Anand Argawal and the edX team have built. A true global brand with global impact. Reaching that kind of scale and impact organically is pretty remarkable. and we're honored and excited to come together and unlock the opportunities ahead. Now let's talk about enterprise, a revenue stream with exciting growth. Whether through direct sales of our channel partners, whether through direct sales or our channel partners, we're seeing real traction and demand from enterprises for our structured offerings. Together with edX, we can now provide enterprise customers with an even more expansive and relevant mix of structured and self-paced technical and non-technical libraries to reskill and upskill their workforce. We believe the breadth, quality, and flexibility of our expanding portfolio of subscription offerings is a winning combination for growth in the enterprise market. Before I turn it over to Paul, let's talk more about the landscape and our performance. Much attention and speculation has been paid to the overall EdTech market in the last several weeks. We grew revenue by 16 percent in the quarter off a large base and performed strongly on the bottom line once again, demonstrating the underlying strength of our model and our continued operational discipline and focus on profitable growth. Faced with near-term volatility in lead generation expenses, which we told you to expect, We stayed focused on our profitable growth strategy, expanding our EBITDA margin while maintaining strong revenue growth. As we look ahead, we believe that COVID has fundamentally changed the landscape and that long-term demand for online education and training will only grow. And we are extremely well positioned for the future. Our focus on driving profitable growth, which we've delivered on over a multi-year period, extends beyond just marketing. We have many examples throughout the business of how we're using our scale to drive profitability and impact. One example, our data science and student engagement teams created a construct that should people who need them.
spk06: This has a virtuous effect on the business.
spk05: First, it's better for the prospective students, creating a more seamless experience with fewer but more value-added interactions. Second, our team to have more impactful conversations, which is what drives that team. Third, it creates a much more efficient staffing operation. We piloted this in 2021. It worked brilliantly, and it's now rolling out system-wide. We believe initiatives like this are working and will continue to positively impact the business. Overall, we're demonstrating scale and increased efficiency. revenue per employee increased, our margins have continued to improve, and we believe edX will have a significant long-term impact on driving further margin improvement. In closing, let me leave you with a few additional thoughts on edX. As a global brand and platform, edX will create a flywheel effect in our business, which we believe will significantly impact our largest expense line over time, helping build an even more sustainable and durable business. We're effectively becoming edX, an education platform company with a comprehensive set of products and services and one of the most diverse marketplaces for online education under one roof and brand. We now have an opportunity to build stronger connections with learners around the world, to create more accessible and affordable pathways into higher education, and to further solidify edX as the trusted brand of choice for life's learning journey. It will take us some time to fully realize this transformational impact, but it's inspiring. And we think it'll become clear very soon that the combination is off to a phenomenal start. And now, Paul will take you through the current results.
spk06: Thanks, Chip, and good afternoon, everyone.
spk07: Our third quarter results reflect the resilience of our business model and our ability to adapt to changing market conditions. Third quarter revenue grew 16% year-over-year to $232.4 million, with the degree segment up 21% and alternative credentials up 7%. Operating expense for the quarter totaled $275.9 million, an increase of 12% over the third quarter of 2020, primarily to support revenue growth. Adjusted EBITDA per quarter totaled $14.7 million, a margin of 6%, while unlevered free cash flow on a trailing 12-month basis was a modest use of $5.2 million. In a nutshell, we reported strong results on the top and bottom line. These results are especially good given the digital marketing environment as well as tougher comparisons to the year-over-quarter. We remain disciplined and focused on executing against our strategic goals, especially the progress we're making to drive profitable growth. As we look forward, the edX acquisition should close soon, and we expect it to be a game changer in terms of our marketing position, growth prospects, and the overall economics of the business. I'd like to start with a discussion of our results for the quarter, then I'll provide an update in our balance sheet, free cash flow and cash position, followed by our financial outlook for the remainder of 2021. Now for a closer look at revenue. Third quarter revenue was $232.4 million, up 16% from the third quarter of last year. Full-course equivalents, or FCEs, totaled 78,000, an increase of 10% on a year-over-year basis, while revenue for FCE was up 5%. Revenue in the degree segment grew 21% compared to the same period last year. This represents the seventh straight quarter of revenue growth. FCEs for the quarter increased 21%, while revenue for FCE remained relatively flat. Total FCEs reflect the growth in our scaling programs, particularly licensure-based programs. Revenue per FCE reflects the program mix and seasonality in undergraduate. In particular, a small percentage of undergraduate students attend summer classes, impacting both the FCE count and revenue per FCE. We expected and planned for both the seasonal effects in FCEs and the revenue per FCE in the third quarter, given the timing of the undergraduate academic calendar. When thinking about the trends in FCEs and revenue per FCE for the degree segment, keep in mind that we launched the Simmons hybrid undergraduate program in the fourth quarter of last year, which means that we will lap the impact of the credential segment through 7% on a year-over-year basis, driven by a 22% increase in revenue per FCE, partially offset by a 12% decline in FCEs. Growth in this segment was driven by a 20% increase in boot camp revenue, offset by a 10% decline in last quarter's earnings call.
spk06: We talked about an environment of elevated digital marketing costs across the business and in particular segments. This trend continued for much of the third quarter.
spk07: In response, we reduced marketing spend at the beginning of the quarter, where we saw significant improvement in demand, as well as a gradual improvement in cost per lead. As a result, we increased our marketing spend to take advantage of this more favorable environment, and we will continue to manage spend dynamically with the goal of optimizing return on investment. As a reminder, alternative credentials grew 57% in the third quarter of last year, with boot camp growing 54% and short course growing 60% as the pandemic and stay-at-home orders pulled forward demand from this year into last year. And while cost per lead is an important input, What really matters is cost per enrollment, which is also a function of how that we generate. To that end, we have implemented several strategies to drive higher quality leads and to improve conversion. We continuously focusing on more efficient verticals, and we have introduced technologies to automate and streamline more of our digital marketing processes. The result? Despite the increase in cost per lead in the degree segment, we only experienced a low single-digit increase in cost per enrollment this quarter. We believe that recent stabilization in cost per lead and effective mitigation strategies are strong positive indicators to the business. And of course, we will soon have the massive user base and organic traffic of edX's consumer marketplace. which we believe will have a significant positive impact on our ability to generate enrollment efficiently. Turning now to costs and expenses. Operating expense for the quarter totaled $275.9 million, up 12% from last year. This increase was driven by an 18% increase in marketing and sales expense to drive revenue growth. G&A increased 13% year-over-year to $49.7 million, or 21% of revenue. Of the $5.7 million increase, $4.8 million was non-cash. And related to changes we made to our Denver office lease, as we continue to manage our real estate back, G&A this quarter would have been 19% of revenue, a continuation of the better operating leverage that we've been experiencing over the past quarters. Importantly, over the next five years, we expect to see net savings of $5 million from this real estate decision, primarily from sublease income and reduced rent. Adjusted EBITDA for the quarter totaled $14.7 million, a margin of 6%, and up almost threefold from the third quarter of 2020. We continue to focus on driving profitable growth, and this strong bottom line performance reflects the steps we have taken to drive operational efficiency. Moving on to segment margins. Margins in the degree segment came in at 22% for the quarter, up 14 percentage points from the same period last year. Segment loss in the alternative credential segment came in at 22% for the quarter, compared to 8% for the same period last year, driven by higher marketing spend, particularly in the latter half of the third quarter. This spend in the third quarter is expected to drive enrollment in the fourth quarter. Net loss for the quarter totals $60.1 million. This number was impacted by the Denver lease expense I mentioned earlier, as well as $1.7 million in costs related to the edX acquisition. Net interest expense in the quarter was $16.5 million, an increase of $9.6 million driven by the term loan fee associated with financing the edX acquisition. Headcount at the end of the quarter totaled $3,746 million. compared to 3,735 from the year of the balance sheet and cash flow statement.
spk06: At the end of the September quarter, cash and cash equivalents totaled $951.3 million, down from $971.3 million in the June quarter, reflecting the use of net working capital.
spk07: Our accounts receivable balance totaled $95.4 million, down $6 million from the end of the previous quarter. Deferred revenue came in at $97 million, down $13.3 million from the second quarter, primarily driven by seasonality. This quarter, operating cash flow was a net use of less than $1 million. We spent $18.3 million in capital expenditures and ended the quarter with a cash balance of $951.3 million. This reflects the reversal of the working capital trend that we saw primarily driven by reduced revenue growth against a flat expense base. As we near the closing of the edX acquisition and enter a new fiscal year, where the first quarter is our tallest expense quarter, to be conservative, we amend an additional $100 million.
spk06: The incremental borrowings have similar terms and conditions to the existing term loan and has an original issue discount of 2%. I'll now turn to guidance and some context for how we're thinking about the coming quarter.
spk07: The underlying strength of our business is clear as we navigate near-term volatility in the current phase of the pandemic. We believe the drivers of our long-term prospects are fundamentally unchanged and our performance and expectations for 2021 shows the resilience of our business model across operating environments. and we expect the addition of edX to take our model and our prospects to the next level. As we would normally update our full year 2021 guidance in this call, we thought it would be helpful to do so based on an assumed edX closing date so that you will have our expecting revenue to range from $935 million to $955 million. This assumes the addition of edX for the remainder of 2021, which we expect to contribute at least $4 million of incremental revenue recognized on a net basis. This represents growth of 22% at the midpoint of the guidance range. Adjusted EBITDA is expected to range from $60 to $70 million, a margin of 7%, at the midpoints of the adjusted EBITDA and revenue ranges. Our EBITDA range assumes dilution of approximately $5 million from the edX operations in 2021. The assumptions for edX's contribution to the subperiod, including accounting adjustments and closing impacts, and as such, they are not reflective of go-forward run rates. We will provide more information on revenue and EBITDA run rates when we provide unweighted average shares outstanding to be approximately 74.6 million shares. To conclude, let me emphasize that we grew top line 16% in the quarter with headwinds from the digital marketing environment and extremely high year-over-year comparisons. Our top line is especially good when combined with the $14.7 million of EBITDA we delivered in the quarter. We expect to close out 2021 with momentum and enter 2022 from a position of strength.
spk06: Particularly, we're excited about the opportunities ahead of us and look forward to delivering on those opportunities for the benefit of all of our stakeholders.
spk07: And with that, we'll open the call for questions. Operator?
spk03: As a reminder, to ask a question, you will 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. Your first question comes from the line of Ryan McDonald with Needham.
spk09: Hi. Thanks for taking my questions, and thanks for the additional color on edX as you approach the close here. Chip and Paul, maybe one for both of you to start. On edX, you know, clearly a really large opportunity here once the acquisition is closed and an opportunity to sort of expand the stack of offerings that you provide to learners and your university partners. As you come close to the close of the acquisition year, can you talk about how quickly you think that you can start to integrate edX into the 2U platform and start to benefit from some of those synergies both on the top and the bottom line as we start to think about fiscal 22? Thanks.
spk05: Yeah, no problem, Ryan. So we are very excited about it. As we've gotten closer to it, really since we signed the deal, we've gotten more excited about it. the overlap with our business is pretty stunning. And there's no question that, as I said in my prepared remarks, when you look at the people that edX is serving and you compare them to the historical people that we've served on behalf of our university partners, the overlap is pretty uncanny. And that syncs with what other platforms have said publicly. So we're very excited about what it'll do. You know, what's probably underappreciated at this stage is, you know, a single 2U-backed degree has more video content than a season of Game of Thrones. So there's a tremendous amount of opportunity for us to help our university partners transfer that content into free content to offer more access for learners. And that just creates a bigger flywheel across the business because of the overlap from a learner to prospect basis. Like we're highly confident in that overlap. We haven't obviously closed this yet, so we're not operating together, but we like our odds of having an impact reasonably quickly as we come together in terms of what the marketplace will do to drive opportunities into what were historically 2U programs and buy an amount of interest on the 2U side to expand edX products across the 2U portfolio. So examples of that, We think MicroMasters and MicroBachelors are both wildly attractive from the standpoint of creating new options for people to gain a credential that will help them in their careers currently and simultaneously gain access at a 20% or 25% difference in cost to the future masters or bachelor's program that might help them succeed even further. So it creates a good outcome for the learner immediately. and also creates a new funnel for us to offer programs downstream. The edX community is interested in the services that we provide, the tech-enabled services we provide, and we'll talk all about this in more detail at the time of the close. So we do like what we see in terms of the efficiencies it will drive. We did a ton of diligence on the acquisition, including looking at the direct overlap of people in terms of the learner base. And we think, you know, it'll take some time to see the full impact, which I know is what everybody wants to know is how quickly. But, you know, and I'll hand it over to Paul, but we do really like what we see sitting here today.
spk07: Yeah, Ryan, I mean, I think a couple of things. Our objective is to start recognizing some of the benefits that we expect to see in the sales and marketing and sales line. You know, we said that we expected 40 to 60 million dollars over in two years time now on an annual basis. For us, we're going to try and do that as quickly as we can. But as we sit here today, we'll probably update you on timing of how soon we can recognize some of those. But our objective would be to do this as quickly as we can because we believe in the strategic objectives. We believe in the outcomes that we can have here. And we recognize that this is the winning formula for us, and that's the – That's what resulted in us doing this acquisition.
spk05: And the only other comment that I would make, Ryan, is you kind of have to think about it a bit in reverse from what you said. We're not integrating edX into 2U, but it's really the other way around. edX really becomes our Google, and 2U becomes Alphabet. I mean, we will put edX front and center into all activity and have, for the first time ever, one unified place where we can both offer new programs to the audience and drive more high-quality learning outcomes across all of our disciplines, in particular in cases where it may not be directly obvious what exactly the person is looking for in terms of their future. They may want to look across disciplines. And it's that kind of opportunity we've really never had before. So you can think about it as, you know, the reason that we said this in the prepared remarks, you know, becoming edX is the edX brand and that experience really does become front and center for the entire company.
spk09: That's helpful color, Chip, and then Paul. For my follow-up, Chip, I really wanted to ask you about some of the current dynamics we're seeing in enrollments, and particularly in the undergrad side of the market. You know, undergrad's a relatively early innings opportunity for 2U, and so I'd be curious with the challenges that universities are seeing or your university partners are seeing with on-campus enrollments, Is this altering the conversation at all for online programs for undergrad students? And is that creating a nice opportunity in the pipeline here for you? Thanks.
spk05: Yeah, I mean, there's no question that what we're talking about, you know, there's obviously been a lot of news related to what's been reported and what the fundamentals are for various businesses. And I think what people might be forgetting in this case is that you're talking about a massive transition over time from what was purely a campus-based experience to a high-quality online experience. You know, we've been doing this for 14 years, but most people haven't. And digital transformation is still in very early innings. So we are seeing excellent growth in our undergraduate programs and really like the odds of having more opportunities to do that over the next 24 months. You know, when you start thinking about what people might have thought as our sort of program cadence back in the day, you know, we're looking at more than double next year what we did this year. um there's a lot of opportunity in the space overall and uh we are certainly as excited about undergrad as we were uh prior to all of these recently reported results thanks i'll hop back into your next question it comes from the line of stephen sheldon with william blair
spk08: Hey, guys, and congrats on the results. First, I just wanted to ask if you could share anything about how edX performed as we think about the last few quarters and I guess heading into the fourth quarter. Have they continued to grow in any differences in what they've been seeing in growth between their different businesses?
spk07: Stephen, Paul here. There are a couple of things. I mean, I think we continue to see performance in the last quarter or so after we had made the announcement. The challenge for us is that we had to go through this conversion process, this audit of converting them into, to some extent, adopting the standards of a for-profit organization, ASC 606. I don't want to bore you with the accounting pieces of it, but the basic pieces here is that the strength of
spk06: the brand and it points to the strength you have more color on that when we get into fourth quarter results or first quarter of next education of uh how the numbers are comparing on a on a switch quite frankly we just they just went through that audit and they completed that okay That's helpful. And I guess great to hear that you've been able to offset some of the increased cost per lead on the marketing side with enrollment efficiency. But I guess just looking out over the next few years, marketing efficiency should get a boost from edX.
spk08: So how much room do you have to increase enrollment efficiency on top of that? And could you potentially see, I guess, efficiency improvements in both marketing and the enrollment process as you think about the next few years?
spk05: Well, I guess I would say the project that we talked about in the prepared remarks related to student engagement has been pretty incredible to see. That is a significant improvement and also one that has direct cost benefit. One of the things we're excited about for edX is the opportunity for us to offer some of the services we provide that edX has not been able to historically provide to its university partners. And one of those is you know, student support. One is lead nurturing to answer this question directly. And so, you know, we do like our odds of being able to, when you think about what's happening, Sheldon, it's like we're marrying the best overall engine on a per program level at scale. Really nobody's anywhere near our level of scale. If you think about that from a degree point of view to an overall marketplace where for the first time we'll be able to drive folks to the top level of the marketplace and offer them opportunities to change their lives in a whole variety of different ways. So you're talking about just a, I mean, it's a game changer in terms of both marketing efficiency and expanded reach around the world. You know, LSE undergrad has been fascinating for 2U. It's our largest program now by enrollment and it's, it is a worldwide program. And the reality is edX has, you know, 150 million visitors a year. And, you know, many of those are from other parts of the world that we can offer programs like that to at a very low cost. That program is already, you know, it's incredibly high quality at a lower price. And, you know, we think that that's a worldwide opportunity for us. We just haven't had this kind of overall opportunity platform to work from in the past. And so the combination of the two is we do think this is industry redefining, and it is certainly transformational for both what was 2U and what was edX. The number of opportunities to offer people affordable pathways into something that is going to change their life and the reality is two-use programs are all extremely high quality. So I think you bring those two together, and it's quite a story.
spk08: Got it. Thank you very much. Look forward to the closing. Thanks.
spk03: Your next question comes from the line of Jeff Silber with BMO Capital Markets.
spk10: So much. I wanted to know if we could drill down a bit into your different business segments, maybe talk about the degree performance, undergrad versus grad trends, and then also for both degree and alternative credentials, talk about what's happening in the U.S. versus outside the U.S.
spk07: So, Jeff, let me start off here, and then Chip can join in. One of the things that we said last quarter is that once we build up momentum in the degree business, that momentum tends to continue for a period of time. I think what we're seeing here is the continuation of that momentum, particularly in the degree business. It's a 21% overall year-over-year growth. And if we should bifurcate that, our undergraduate businesses, whether it is Simmons or LSC, continues to perform well and led the way in terms of drivers of year-over-year growth. As we get into, I think we all saw an environment, a digital marketing environment, particularly in the summer months, that did have some impact across the business on demand and on conversion. And we saw that environment improve as we got into the latter part of the third quarter. So as we go forward, as we extrapolate and go forward, we do expect our business to continue to perform well, particularly the degree side of the equation, because we have seen that recovery. However, the impact of the summer months will have some impact on what we see going forward. When we reported results last quarter, we talked about cost for leads across the board increasing 45%, 70%, 25% in the grad, in the short course, and in the Those same numbers, those same corresponding increases today sit around 24%, 33% and 12% for the degree short course in bootcamp business.
spk06: So we have seen an improvement and we expect that to translate into favorable performance for us as we go forward, especially with some of the marketing strategies that we've put in place.
spk07: In terms of the alternative credential side of the house, the marketing cycle is much shorter. So what we expect to see as we go forward, we expect to see improvement in year-over-year performance, particularly in short-courses business as we get into the fourth quarter. And then next year, we expect to see better performance as we go forward. So the bottom line is, if we bifurcate degree and alternative credentials, we expect the alternative credential business to perform better as we go forward. We have seen improvement in the digital marketing environment. And in particular, as we close edX and integrate into the edX... I mean, I think you covered it.
spk05: Jeff, we like what we see in undergrad right now.
spk06: It's new for us, right? But it's working.
spk05: And licensure, the reason we noted that is that the world needs more nurses and physician assistants and speech therapists. and you know we've got today a proprietary um clinical placement network that that we think is we do think builds the mode around the company in a meaningful way uh just like everyone else you know when covet hit uh shorter term credentials obviously got a big boost so there were tough comps in old cred but if you look at some of the things pathways are an example of something that's meaningful uh that you know we do think that's a replicable model across other enterprises enterprise overall jeff is is new for two years we didn't see anywhere as we started doing much shorter form short courses uh that are that are called sprints um we're doing business for people that have uh that have already uh received can offer them additional training to get them instead of from you know point a to point b you're getting them from point b to
spk06: It's a pretty diversified company at this stage from the rest of the world.
spk10: All right. And actually, the second part of my question, I know I asked a long question, was just talking about U.S. versus international. Again, if we can have color by segment, that would be really helpful.
spk07: You know, Jeff, in terms of our degree business, continues to do well, and it has a favorable international presence. If we look forward to the edX acquisition, I mean, I think it's 50% of their traffic comes from that international.
spk06: It bodes well for us as we go forward and presents a huge opportunity. In terms of our alternative credentials, of course, business. It has a large international presence. And, you know, quite frankly, we saw that digital marketing environment, not just in the U.S., but globally.
spk07: And that did impact us as we reported the third quarter here, a decline, a 10% decline in the short-term environment also. And we started with the fourth quarter and going into 2022. All right.
spk10: That's really helpful. Thanks so much.
spk03: Your next question comes from the line of Josh Baer with Morgan Stanley.
spk04: Hi, guys. Thank you for your time. This is Ben Manon for Josh. Just a quick question. How have completion rates trended across degrees, boot camps, and short courses? And then just to follow up to that, do you think the option to make higher wages, having higher wages, choosing work over school, and how long do you think that will last for?
spk05: You know, it's interesting about the overall dynamics because of our diversification. You know, you have some puts and takes, and, you know, clearly in a full economy, traditional higher education is more counter-cyclical. It's interesting about 2U. many upskilling and reskilling products that are critical for people to succeed or get retrained to succeed. And, you know, we think that that is a global trend that is not only picking up steam, but is getting quite critical for employers in the time of a great resignation. You know, you've got a pretty dire need by employers to get, you know, their employees ready for what the need is for the business. And Then you've got other aspects of the pandemic where we do see things like tailwinds, like in nursing and in teaching. So you put it together. Part of the reason that over the last five years we really have diversified the company is we want to be the most comprehensive education platform on planet Earth, and we think that this edX acquisition – uh, is, uh, you know, for us is the game changer to get there. Uh, you know, we've already got today over 190, uh, high quality degree programs and you marry that to a worldwide prospect base with new programs like micro masters and, and, uh, micro micro bachelors. And we think it's a big opportunity in terms of retention. Um, you know, we overall have been holding pretty steady, uh, You know, if you look at retention historically at 2U, using better and better data, we've driven graduation rates up over a decade substantially. I actually don't know exactly what that number is in front of me today, but I would tell you that, you know, helping students succeed and sort of finish their programs is critical to the business because if somebody takes the program and leaves that program quickly, we do very, very poorly. I think that's one of the underappreciated aspects of the shared success revenue share model is that students need for us to do well.
spk06: And I don't think people realize that. So we are squarely focused on not just doing well for the world,
spk05: world but also uh driving the business to you retention is kind of one the one number that rules them all so um you know overall feeling feeling pretty steady about it got it um and then how is the guild partnership tracking and then uh what will be how will edX and its business offering fit into that partnership We see Guild as a great growth opportunity from a channel partner perspective. Today we're offering, we're excited to see the Morehouse undergraduate degree roll out as an opportunity for Target and Walmart employees. We've seen all kinds of opportunity for technical retraining. The boot camps in particular have started pretty hot with Guild. So And it's early days. We really just got implemented. So we think Guild creates a strong opportunity for the company over the next couple of years.
spk11: Awesome. Thank you so much.
spk03: Your next question comes from the line of George Tong with Goldman Sachs.
spk06: Hi, thanks.
spk01: Good afternoon. So to want to dive deeper into your lead management strategy, as you think about the normalization of the lead costs, how are you planning to approach investing in the lead flow to drive further growth acceleration over the next two to four quarters?
spk05: Well, George, I mean, I know we've said edX quite a bit, but it's hard to overstate just how large the opportunity is from an organic perspective. 2U today is operating at a scale on the marketing side that the rest of the space is not. I do think we have an unmatched capability there on a per-program level. And then, as I said, you marry that to an incredibly large base of of folks that we now have really proven to ourselves through a bunch of diligence are highly relevant to other opportunities and will actually end up converting at higher rates than we've seen in most of our, you know, paid marketing channels. So, you know, we think it's a game changer for 2U from that point of view.
spk01: Got it. And then as we look at your degree program business, can you talk a little bit about the undergrad opportunity separately from the grad opportunity and where you see potential for either domestic or international growth that's incremental to what you've already built?
spk05: We do like the pipeline of undergraduate programs that we see ahead of us. You know, as I noted in the comments earlier, we're From a program perspective, we're looking at more than double what we did this past year. We've gotten much better at launching them with greater efficiency and a lower cash footprint, and we do think that undergrad's part of the story. There's very significant worldwide demand for affordable, high-quality online offerings, and that goes for undergrad as well. So I know there's been quite a bit of commentary in the space overall about undergrad enrollment and We're certainly not seeing that. Got it. Very helpful. Thank you.
spk03: Your next question is from Fred Hasmeyer with Macquarie.
spk11: Hey, thank you. I wanted to ask about the alternative credential segment, where while FCEs were slower as you were navigating the higher marketing cost environment, it looks like the average revenue for FCE actually climbed to a high this quarter. That's something interesting to see when some of the others in ed tech have been talking about competitions that are offering some higher wages. People are spending more on 2E instead. What are the dynamics that you think are driving this trend, and is there anything in terms of the mix of programs to call out here?
spk07: So, Fred, I mean, first and foremost, mix is what's driving the revenue for FCE. As you know, the boot camp business is much higher revenue than the short course. And we had more of the boot camp enrollment than we had of the short course enrollment in the quarter, giving a rise to higher revenue for FCE. So the bottom line is it's mixed. and the thing that i will caution is that going forward we should expect noise in that number we should expect volatility in that number because mix flips and changes and as we've said a number of times we manage the business as a portfolio if we have a better opportunity on one side of the equation we'll send them to that opportunity so um i think we're fortunate to have an increase in revenue for fc but at the same time it's the overall picture that we try to manage as we go forward
spk11: Of course, that does make sense. And then, you know, I don't want to beat any dead horses on enrollment data, but, you know, within some of the enrollment data, and perhaps, Chip, this would be a question for you, it was looking like more technical and specifically computer science or IT-focused graduate degrees were actually showing significant growth. I was wondering, are you seeing any of that play out within, say, a mix of your portfolio or in terms of leads that you're seeing? And then generally, like, is there any sort of a trend that you're seeing with respect to the, you know, the ongoing great resignation, as you've called out, with job seekers looking to either upskill or reskill, perhaps into more technical areas?
spk05: Thank you. We think the affordable edX degrees in those disciplines will be another substantial opportunity that we really haven't talked about at all. In terms of our degree business, we continue to believe strongly in the licensure programs. Our MBAs have done better than clearly others might be showing. know we feel like our degree business if you look at what it's going to deliver this calendar year we think it's pretty impressive at our size so it's a credit to ebony lee and her team overall uh doing a great job managing that overall business for us and one that you know we're very excited about what it means for next year you know we have a good read through 21 of growth on a really big base there's certainly no one else in the platform business that's close so I would say we're leaning in on the degree side.
spk03: Your next question comes from the line of Brent Phil.
spk02: Hi, this is David Arn for Brandt. Thanks for taking the question. I guess on edX, hopefully joining the portfolio in the next couple of weeks, can you discuss how you think they'll fit into the competitive landscape and maybe how they differentiate from some other vendors who recently went public in the space? And then maybe secondarily on that, how are you thinking about the opportunity in the consumer side versus the enterprise side? Thanks.
spk05: I would say it's really about the combination of the two of us coming together to create what is really by far the most comprehensive free-to-degree online education platform. There really is an unmatched offering set. It's early days in the enterprise business, but one that we are investing in and excited about. 38 out of the top 50 university partners in the world, according to U.S. News. Quite an impressive portfolio and a 2U group of universities that are very excited about offering new options that edX brings to the table. So, you know, we are pretty bullish on getting this done and coming together and really going forward representing edX to the world more than 2U.
spk07: Got it. Thanks, guys.
spk03: At this time, there are no further questions. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.
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