2U, Inc.

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.

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.

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.