2U, Inc.

Good day and thank you for standing by. Welcome to the fourth quarter and full year 2021 earnings report conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 1. I would now like to hand the conference over to Parth Patel, Head of Investor Relations. Thank you. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to 2U's full year and fourth year, fourth quarter 2021 earnings conference call. I'm Park Patel, head of investor relations at 2U. I'm joined by Chip Palasek, our co-founder and CEO, and Paul Lousy, 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 may include forward-looking statements regarding our financial and operating results, the continued impact of the COVID-19 pandemic, plans and objectives of management for future operations, the integration of edX, 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 to the risk factors described in the documents we filed with the Securities and 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 risk, uncertainties, and assumptions that may cause our actual results to differ materially from those forced in such statements. In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures to these performance. These non-GAAP measures should be considered in addition to and not as a substitute for or 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, we'll hand the call over to Chip. Thank you, Mark. As you've seen in the numbers today, we delivered strong performance in 2021 in a competitive digital marketing environment, all while continuing to deliver world-class learning experiences and unmatched student outcomes and positioning our company to become the leading education platform globally. We believe that our business is sustainable and resilient, and our 2021 numbers reflect that strength. Two use 21 results were led by revenue growth in excess of 20% in both our degree and alternative credential business, with particularly strong demand for our undergraduate offerings. We also delivered on profitability, ending the year with an adjusted EBITDA margin of 7%, a 5% improvement from last year. And this past November, we completed our acquisition of edX, one of the world's leading online education platforms. With this industry-redefining combination, we've expanded our company to become one of the world's most complete online learning platforms and have gained a powerful driver of profitable growth and margin improvement. On the call today, I'll first provide some additional details about how edX is currently enhancing our business. Second, I'll map out our key strategic priorities for 2022. And lastly, I'll share how these priorities translate into our midterm performance targets. Let's start off with edX. With edX as our consumer brand, 2U is positioned to continue to lead the growing online education market and deliver powerful societal impact. Together, edX and 2U now serve 43 million registered learners, an increase of over 3 million learners since we joined forces. They also support more than 230 partners, including 38 of the top 50 universities globally, and offer over 3,600 digital programs on the world's most comprehensive free-to-degree online education marketplace. Demonstrating their support of the combination, more than 27 2U partners have already committed to delivering free and open course content to millions of edX learners. And edX learners can now find hundreds of 2U-powered programs from leading universities on edX.org, including technology-focused boot camps, get smarter executive education, disruptively priced undergraduate degrees, and master's and doctorate degrees in fields from nursing and education to business and law. These offerings are easily discoverable. You can now go and see them for yourself. And they expand edX's portfolio into new disciplines with higher learner demand. In the past few months, we've also launched new products that leverage the combined strengths of 2U and edX to meet the demands of the market and drive affordability in higher education, like Harvard's first micro bachelor's certificate in chemistry. Through these innovative, accessible, and affordable programs, we continue to deliver life-changing outcomes for learners and broader societal impact while helping universities transform themselves in the digital age. In 2022, we plan on maintaining our commitment to profitability as we transform 2U into a leading education platform company with edX at the center, driving unmatched outcomes for millions of learners worldwide. We expect the three key drivers will improve our profitability in 2022. Number one, strengthen our degree segment. Number two, international and enterprise expansion. And number three, scale and operational efficiency. Together, we believe these will deliver substantially improved performance to our bottom line while delivering meaningful growth. In our degree segment, which just delivered 20 plus percent margin, we remain focused on launching quality programs that can deliver profitability. In Q4, we made the decision to wind down the Simmons hybrid on-ground undergraduate program. Although our degree segment would have delivered double-digit growth with this program in 2022, we recognized that it would negatively impact profitability and was not part of our long-term product strategy. We also pushed out the launch dates of a few of our contracted degree programs, impacting this year's cadence. This includes Arcadia's hybrid physician assistant degree, which has faced some accreditation delays, which we've seen from time to time in various programs over the years. However, the degree programs that are on our 2022 roadmap are expected to be diverse and significant drivers of long-term profitability. In the coming weeks, we expect to announce a new online undergraduate program already under contract, as well as the first master's degree from a long-time edX MOOC partner, both at world-class institutions both disruptively priced. It's notable that if we stop launching programs at the end of 2022, we project our degree business alone would scale to 800 million in steady state revenue with margins in excess of 35%. That's pretty remarkable. We're not stopping. We expect our launch cadence to go back up in 2023. As one example, we're planning for our institutional deal with UNC Chapel Hill to deliver multiple programs next year. You couldn't be prouder of our relationship there, and UNC is not the only one expanding. We're also launching and expanding partnerships with top universities in international markets to meet the growing demand for flexible, high-quality online education overseas. About 80% of edX's community of registered learners resides outside of the United States. and marketplace data shows us that degree programs are in particularly high demand. You can already see the strategy in action. This afternoon, we announced that we've expanded our relationship with boot camp partner University of Sydney, one of the best universities in Australia, consistently ranked as a top 50 university in the world. We'll be powering four of their online graduate degrees launching in 2023. Next, as we told you before, enterprise is currently the fastest growing part of our business. Enterprise revenue doubled year over year from 2020 to 2021. And in 2022, we're planning to build on that momentum to again double its size under the edX for business brand. Together, 2U and edX currently have more than 1,200 enterprise clients. We believe we can serve these organizations even better by cross-selling across our broader portfolio of upskilling and including boot camps in high-demand disciplines like coding, data analytics, cybersecurity, and product management, executive education in key leadership topics, and edX's expansive course library. We also plan to build on our relationships with distribution partners like Guild and Bright Horizons to bring online degree and alternative credential programs to more employees at some of the largest businesses in the world. With the great resignation underway, we believe there's growing recognition from businesses worldwide that upskilling and reskilling employees is imperative to build a sustainable talent pipeline that enables them to execute their business plans. We're ready to meet those needs. Lastly, for 2022, the shift to becoming a platform company will be central to our strategy. We're currently integrating the 2U and edX teams with the goal of better supporting partners and students and accelerating the growth and impact of edX. This year, our best-in-class marketing team will work to both significantly grow the edX community and deliver learners a more intuitive user experience so they can explore the edX marketplace with ease and confidence. This includes new search and e-commerce features like personalized recommendations, geo-targeting, and mobile checkout. We also plan to expand cross-selling opportunities from IBM's new Blockchain Essentials Certificate to the nation's top-ranked online MBA, We believe the breadth, quality, and relevance of the edX2U portfolio is unmatched. You'll see us presenting our offerings in smarter ways, including bundling and stacking complementary programs to create clearer and more affordable pathways for learners to achieve their goals. Just one example of this strategy in action. Students can now earn up to six credits in SMU's Data Analytics Boot Camp and apply those credits to the 2U-powered SMU Masters in Data Science. We believe stackable modular education like this is the future of higher education. Finally, before I turn it over to Paul, I want to share more about our longer-term plans for 2U and what we expect that to mean for mid-term performance targets. 2U has always had a bold vision for the future. Looking beyond 2022, our ambition is to be the most important education company in the world, the premier education platform company with edX at the center. And as we transform into edX, serving the needs of the edX community of learners over their lives and careers will become the number one priority for the business. The pandemic has not only accelerated the adoption of online learning, but it has also permanently shifted the power dynamics in higher education toward consumers. Consumers are becoming the dominant force in higher ed. They have more choice over what, when, where, and how they want to learn. They're seeking greater flexibility and personal relevance. placing a premium on convenience and affordability, and increasingly choosing online options. And they'll find those options at edX, the right learning at the right time from the world's best institutions, delivering great outcomes for students. The edX platform makes us a better business longer term. As such, I want to share some of our midterm targets to provide a sense of our current expectations. By the end of 2025, we're targeting a CAGR of at least 12.5% and consolidated adjusted EBITDA margins between 15% and 20%. We're also targeting to be free cash flow positive by the end of 2024 with crossover in the back half of 2023. Additionally, our goal is to grow annual enterprise bookings to $150 million by the end of 2024, and in doing so, expand our reach to more learners worldwide. As we expand our reach, we believe we will expand our impact by continuing to lead the industry in quality, transparency, and life-changing student outcomes. In December, we released 2U's second annual industry-leading transparency report, one expression of our continued commitment to prioritizing student success in everything we do. Let me close by highlighting just a few stats we shared in that report. Average Term 1 to Term 2 retention across our partners' online degree programs increased by 4 percentage points to 90% in 2020 from 86% in 2019, already low 38% to 31%. The number of students of color increased across our partners' boot camps, creating more diverse pipelines of talent, and thousands of aspiring nurses, counselors, and teachers completed over 3.5 million hours of virtual and in-person field placements, helping care for and educate people in communities across all 50 states.