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.

Super powerful. To you is having a profound and positive effect on people around the world who see a better future for themselves and for society through education.

And that is why we do what we do. And now, Paul will take you through current results, and I'll return for Q&A.

Thanks, Jeff, and good afternoon, everyone. As you've seen from our press release, we had a nice end to the year. notable improvements quarter over quarter, all while diligently prioritizing the integration of ethics. We are also seeing strength in leading indicators, which gives us confidence in the resilience of our business model. Today, I'd like to start with a discussion of results, both for the quarter and the year. Then I'll provide an update on our balance sheet and cash flow statement, and conclude with some thoughts on our financial outlook for 2022. Taking a closer look at our results, revenue for the quarter totaled $243.6 million, up 13% from a year ago. For the full year, revenue grew 22% to $945.7 million, a $171.1 million increase over 2020. Full-course equivalent enrollment, or FCEs, totaled $80,120 for the quarter, FCEs remained relatively flat on a year-over-year basis and increased 3% on a sequential basis, changing the trajectory from the third quarter of 2021. Moving on to our segments, degree segment revenue in the fourth quarter totaled $152.4 million, growth of 17% from the fourth quarter of 2020. This increase was driven by higher student enrollment and the acceleration of $82 million from the transitioning of our Ed Simmons on-ground program. On a full-year basis, degree segment revenue increased 22% to $592.3 million, driven by a 20% increase in FCEs and a 2% increase in average revenue per FCE. Revenue from the alternative credential segment totaled $91.2 million, growth of 8% from the fourth quarter of last year. This increase includes 6% growth in boot camp revenue, a $5.2 million contribution from edX, offset by a 5% decrease in executive education revenue. On a full year basis, alternative credential revenue increased 23% to $353.4 million, driven by a 15% increase in average revenue per FCE. The alternative credential segment showed strong sequential growth in both revenue and FCEs. This is notable, particularly in an environment of elevated cost per lead. Now let's take a look at cost and expense. Operating expense for the quarter totaled $293.3 million, up 20% from last year. For the full year, operating expense totaled $1.1 billion, up 17% on a year-over-year basis, compared to revenue growth of 22%. This increase in operating expense included $14.4 million from the addition of edX. On a year-over-year basis, marketing and sales expense grew 17%, down two percentage points as a percent of total revenue to 48%. This is notable and reflects the discipline in an environment of elevated cost per lease. Personal and personal-related expense our largest expense item increased $10.9 million for the quarter to $121.3 million, with edX contributing $5.7 million. For the year, personal and personal-related expense increased $19.3 million to $468.3 million. We ended the year with headcounts of 3,982, relatively flat year over year. while supporting 20-plus percent revenue growth. Revenue per employee increased 16 percent year over year, demonstrating continued improvement in operating efficiencies and productivity. Moving on to profitability, net loss for the quarter totaled $67.3 million, an increase of $29.6 million from the fourth quarter of last year, deflecting higher interest expense from our term loan facility convertible nodes, and the $14.4 million addition of operating expense from the edX acquisition. For the full year, net loss totaled $194.8 million, an improvement of $21.7 million over last year, driven by better operating efficiency. Adjusted EBITDA for the quarter totaled $21 million, an increase of $2.2 million from the fourth quarter of 2020, driving full-year adjusted EBITDA of $66.6 million, an increase of $50.5 million from the prior year. Adjusted EBITDA margin in the degree segment was 21% for the year, an 11-point improvement over 2020, showing the inherent profitability of the degree segment business model. Adjusting EBITDA margin in the alternative credential segment was a loss of 17%, largely driven by increased marketing and sales expense and an $11.7 million impact from FedEx expenses. Now for our discussion of the balance sheet and cash flow statement. We ended the quarter with cash and cash equivalents of $249.9 million, a decrease of $701.4 million from the September quarter. This decrease was a result of closing the edX acquisition in November with a preliminary purchase price of $773 million and the payment of $13.8 million in related integration and transaction fees. This decrease in cash was partially offset by $99.9 million in net proceeds from incremental borrowing under our terminal and facilities. Our accounts receivable balance totaled $67.3 million, down $28.1 million from the end of the previous quarter, and up $20.6 million from last year. Fluctuation in our accounts receivable balance reflects the timing of payments from our university partners. which often matches the academic calendar. As a result, we typically experience increased collections in the fourth quarter. The year-over-year increase is representative of revenue growth in our business and the addition of receivables from the edX acquisition of $6.9 million. Unlevered free cash flow usage on a training 12-month basis was $33.9 million, compared to a net use of $5.2 million at the end of the third quarter. This decline reflects the rolling off of the fourth quarter of 2020, where we had substantial improvement in net working capital. To expand further, as previously highlighted last year, our fourth quarter of 2020 included favorability from better management of net working capital as we drove increased collections of accounts receivable and optimize vendor relationships. While we continue to maintain the improvements put in place in the fourth quarter of 2020, the incremental benefit has less of an impact. Now for a discussion of guidance on our long-term financial goals. Our priorities for 2022 center around the integration of edX, continued investments in our degree program segment, and improved profitability in the alternative credential segment. Our guidance for 2022 calls for revenue to range from $1.05 billion to $1.09 billion, representing growth of 13% at the midpoint. Adjusted EBITDA is expected to range from $70 to $90 million, representing growth of 20% at the midpoint. Keep in mind that this increase in adjusted EBITDA includes $30 to $40 million of dilution from the addition of edX. In other words, on an organic basis, we expect adjusted EBITDA to increase by more than 50%. In addition, we expect capital expenditures to be approximately $80 million and weighted average shares outstanding to be approximately $78 million. Our guidance reflects prudence in an unpredictable digital marketing environment and it provides flexibility for us to proactively manage our marketing spend. In addition, we expect capital expenditures to be approximately $80 million. Let me provide some color on our expectation on the distribution of our revenue as we progress through the year. First, we expect revenue to increase quarter over quarter throughout the year. Additionally, We expect the revenue growth to accelerate in the second half of the year, with the first quarter having sequential growth in the mid-single digits. Over the years, we believe that we've launched and grown enough degree programs to demonstrate that we have a scalable business with an upfront investment that ultimately produces strong margins at maturity. This concept is reflected in the overall margins of the degree program segment. And in 2021, our mature cohort produced margins that are above our steady state expectation. In fact, those margins are close to 35%. For the alternative credential segment, we have harmonized the two acquisitions in that segment, Trilogy and Get Smarter. And with the addition of edX Marketplace, we expect that the alternative credential segment will generate positive margins in 24 to 36 months depending on the dilution of edX. If we look out over the midterm, we expect the edX platform and marketplace to be critical components as we deliver growth, profitability, and cash flows. This transformational acquisition combines the unique strengths and complementary capabilities of two pioneers in online education. It also brings together a comprehensive set of offerings access to a large global base of current and potential learners, and a consumer brand. Importantly, we believe it positions us to deliver 10 to 15% efficiency in marketing costs by the end of 2023 until 2024. Looking out over the midterm, our goal is to deliver at least 12.5% revenue growth on a compounded annual basis, 2021 to 2025. that consolidated adjusted EBITDA margins to range between 15% and 20% by 2025, resulting in more than four times the 2021 level of EBITDA. In addition, our goal is to generate positive, unlevered free cash flow for the full year 2024, driven by higher program launches, growth in registered learners, lower marketing and sales expense, and greater contribution from enterprise revenue. Over the next four years, we expect to increase degree program launches while decreasing the cumulative cash flow point per program. We also expect to double registered learners participating in our platform. Marketing and sales expense as a percentage of revenue is expected to decrease less than 40% by 2025. To conclude, our 2021 results showed strength and resiliency in the face of difficult year-over-year comparisons. We maintained our spending discipline in a volatile marketing environment and made important improvements to our marketing infrastructure. We ended the year with another good quarter that included notable sequential improvements in key indicators, which we believe point to a rebound in revenue growth, particularly in the alternative credential segment in 2022. Looking out beyond 2022, we have laid out a roadmap for creating sustainable shareholder value, including our goals for revenue, margins, and cash flow. The entire 2U team is focused, excited, and motivated to execute against these goals. We look forward to a strong 2022. And with that, we open the call for questions and answers. Operator?

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 Stephen Sheldon with William Blair.

Hey, thanks. I guess first here on the 2022 revenue guidance, can you just frame the impact of some of the one-off items you talked about with the Simmons undergraduate program wind down and pushing out the launch of a few programs. And then on the Simmons wind down, just, I guess, what drove that decision? What pressures were you facing there in terms of profitability?

Steven, let me start off. I think we'll double-team this one here. The impact on 2021, $8.2 million. On a 2022 guidance perspective, it was about almost $15, $16 million. But the bottom line is, on the degree program segment, we were expecting well into the double digits year-over-year growth. However, with that being pushed out, that number is now in the single digits, as you can imagine. In terms of pressure and margin, as you can imagine, that business was on a revenue basis with high margins in the near term. But as we go out in time and transfer some of the functions that we had to include as part of our operations, that would have put some strain on the margins in the near term. So overall, it would have been in 21 and 2022, it would have been a contrast, meaning a pressure on margin in 2022 and the benefit to margin in 2021.

Chip, I don't know if you have any other comments to add. Long-term future of the business in terms of what we're going to focus on in that segment, driving, you know, we're excited about what we're doing with Simmons from the standpoint of the online undergrad program and feel very strongly about the future of that. You know, very thankful that we were able to help Simmons get through the COVID period, but it was not strategic for us long-term, and we do think would be a drag on profitability longer term. So, you know, focusing on building high-quality online graduate and undergraduate programs that will fit our long-term profitability profile more than anything. So I felt very comfortable making that decision and, you know, look forward to building the rest of the Simmons business. With regard to the other degree programs, you know, we definitely had some move out of the cadence of 2022. You know, I mentioned one specific accreditation delay. You know, we had several others that higher ed right now is definitely seeing unprecedented leadership change just like the rest of the world from a great resignation standpoint. So you're talking about a bunch of leaders changing inside of higher ed. That had an impact on some programs. We're pretty excited about the programs that we have in the calendar year. And we'll have more to say here in the next couple of months about programs that will be there for 2023. So feel confident saying that the cadence will increase in 2023. Got it.

And then just as a follow-up, we'd love some more detail on how the integration First of all, I think overall we're excited.

We are in the early stages just because the transaction closed in November timeframe.

In terms of our guidance for 2022, we are expected to realize some of the benefits in the timeframe of 2022. And, you know, it is not a significant amount that we're including, so it's not a material, but we're expecting that in the back half of the year.

But, you know, right now if you go to edX.org,

You can see the listing of our offerings on the website, and we are beginning to put in place all the technical pieces to start realizing synergies as we get to the back half of the year.

I guess I would add right now we feel like it's nicely on track. And we're excited about the transition. Look, this is clearly a transitional year for 2U. And as we become a platform company, there's no question that that whole notion of the flywheel and how we bring learners in and help learners find new opportunities to learn and therefore convert them into new products, we're already seeing it today. And, you know, we're pretty pleased to see the number of learners go up from the time that we, you know, the time that we came together from 39 to 43 million, a pretty good increase. And, you know, we expect that to continue. There's nice momentum around edX for business and how enterprise is working there. You know, continue to get really good feedback from the edX clients. So, you know, we've only had it a couple of months, but right now, You know, we're loving it. Got it. Thank you for taking my question. Sheldon, one other comment I was told to make clear. I want to make sure everyone's clear about the on-campus program wind down, not the online undergraduate program.

We're very excited about that program's future.

Our next question comes from the line of Ryan McDonald with Needham.

Hi, everyone. Thanks for taking my questions.

You know, as we think about the guidance for fiscal 22, can you give us a bit of a sense of how that growth looks across, you know, degrees, alt-cred, and perhaps You know, some more color on what do you think edX can contribute to 2022 revenue here?

Ryan, a couple of things. First of all, I kind of alluded in my spread, the quarterly spread. We expect to see Q1 to be mid-single-digit overall growth on the top line, and then we expect that to, on a sequential basis, And we expect that to continue to increase as we go quarter over quarter throughout the year. So that's point number one. Point number two, edX for 45 days in 2021 delivered about $5.2 million. Keep in mind, that was net revenue recognition. So what do I mean by that? Partner fees that otherwise would have been included in the revenue line it's subtracted from the revenue line in our situation. So it's anywhere between 40% and 50% reduction in revenue if you will so if you look at you know others in the space with similar type of revenue streams they recognize revenue on a gross basis we did our diligence did our analysis on this and we concluded that this is a net revenue recognition for us and we expect similar type of running rates into 2022 as we saw in in uh in the few in the month and a few days in With one exception, as we look forward into 2022, there are certain things that we'll stop doing. For example, membership fees, something that's been recorded as revenue when edX was discontinued as we move forward.

So short of giving a number, you know, I think I should mention membership fees, but that's general. what we expect to see there.

And as you've seen from our announcements, we... So the other thing I want to point out is that as we think about the degree in the all-current business, our alternative prudential business, if you think of the year-over-year growth that we're expected on a full-year basis, it's 30% of the midpoint of guidance. As you can imagine, in our internal businesses, plan is is a bit more aggressive than that number one number two we have certain assumptions around what cost per lead is going to do because that's a big variable as we go through we've provided guidance in 2021 and 2020 and prior years we always try to give ourselves a shot with optionality as we go through the rest of the year meaning we have the spend depending on what's going on with so As we look out to 2022 here, our degree business would have had double-digit growth rates, and then the alternative credential business should be in 2020.

I really appreciate that, Paul. Chip, one for you as a follow-up.

So you talk about the push-out of some of the launch cadence of some of these degree programs. You know, can you talk about what is how? the overall demand environment for online programs? Are universities maybe caught reeling a bit because of the enrollment declines they're seeing, or is this actually creating larger or greater demands for new revenue streams to take on ground?

Thanks.

Yeah, there's plenty of demand for online. the online program management services from us and other companies. You can see that, Brian, in HolonIQ's reports of growth in the space.

If you look at, you know, you compare our growth over time to the growth in that same time period for them, you know, we're in that, you know, we're above that range. So, you know, you continue to see plenty of demand for the core services. And, you know, on some level, what you're looking at with an overall decreasing amount of undergraduate students worldwide in the U.S., a significantly higher percentage of undergrad students outside the United States and really a growing market. And that's part of the reason for our announcement today with Sydney with four degree programs for 2023. You know, that's a big new commitment for 2U. So we obviously had some programs move out into 2023 and, you know, has more to do with leadership change in a variety of places than it does with demand for the services.

Hopeful caller. Thanks a lot, Chip. I'll hop back into you. Good afternoon. Your alternative credentials business is seeing multiple trends that you saw in the quarter around cost per lead across the business and what your guidance for 2022 and beyond assumes for lead gen costs?

George, in the fourth quarter, we saw an improvement from the trends that we were seeing in the third quarter. If you look back at our spreads from the third quarter, I think we said we were seeing almost a 70% increase in cost per leads in the executive education portion of the business. In the bootcamp side of the house, it was almost 25%. So we were seeing much higher cost per lead. Those rates decreased in the fourth quarter. But I think there are a couple of things that happened in the fourth quarter. Our teams also found ways to automate, for example, some of the marketing processes allocation of marketing dollars. And those things allowed us to be more efficient in generating leads as we got through the back half of the year. And I think you thought that occurred in the numbers, right? The numbers in the fourth quarter in the alternative credential segment improved, particularly if you look at it on a sequential basis, fourth quarter over third quarter. We have assumptions in the model for 2022 that basically assume somewhere around 10 to 15% inflation in cost per lead from the 2021 exit run rates and still much above the pre-COVID cost per lead numbers, if you will. And to some extent, that is why I described our guidance as prudent, right? That is why I use words like we have optionality as we go through the calendar year. Because if we see inflation or cost per lead running at lower rates than what we assume in the model, then we have the ability to spend more dollars and stay within our numbers, or we have the ability to have more leads for the same rates that we're spending. And that will allow us to have better conversion and better revenue from a flow-through perspective. So at this point in time, the environment is somewhat unpredictable to all of us, but we are putting a line in the sand, and that's what we're predicting for the year.

The only thing I would add to that, George, is that that's a good example of why our partners want our server. and want to work with 2U on a variety of things. You know, it's complicated, and, you know, we're dealing with a scale and, you know, the complexity of it in a way that it's very difficult to do as a single university. And on top of that, it's why we bought ETA. Greater optionality for the company in all kinds of ways, but certainly not a small part of that is what it does from a learner perspective.

And we're already seeing that today. even though we've only owned it for a couple of months. Great. That's very helpful.

And perhaps diving into edX, you gave examples of how you're effectively integrating edX into the broader 2U platform. Within the quarter and since 4Q, have you seen or what kind of examples have you seen where actual program attendance trends? What kind of evidence have you seen around the synergies that you're hoping to achieve over the next 24 months?

It's literally been a couple of months. So we're seeing very significant lead flow come into the system, and we're working on a variety of different ways to convert. I've been particularly pleased with what it's doing on the LSE undergraduate program. So obviously there's a very large international audience for edX, and That program has both a brand and a price point that's clearly attractive to audiences worldwide. So, you know, we're just getting going here. We do think that there's been a significant amount of We think the product opportunities there are very significant across the portfolio. You know, and candidly, the question for two of you is just how much of that we're going to be able to do this calendar year, not whether there's demand for it. You know, if you look at something like the Harvard MicroBachelors, that we just announced a little while ago. It was the first micro-bachelors from Harvard. You know, it creates credit pathways for people that need credit to attend a quality undergrad program and can do that to any program in the world that will accept those credits. So creating flexibility and pathways for people into high-quality options is what this is all about. And it's part of a story of just the overall free-to-degree portfolio that, you know, combination of high-quality free options in the forms of both boot camps and shorter courses and degrees. And, you know, we bring that full portfolio to bear. So we really do like what it says for the company over the next couple of years.

Your next question comes from the line of Philip Leitis with Beringberg Capital.

Hey, guys. Thanks for taking my question. Can you elaborate a little bit on the strategy with enterprise? What gives you confidence that you can scale that part of the business given the highly competitive landscape?

I mean, it's going incredibly well. Very proud of the enterprise team. You know, we've got a broad portfolio of both subscription-based and sort of executives and a broader number of programs for, you know, upskilling and technical boot camps that subjects.

Really, no one's close to that sort of breadth.

And we're seeing that be in very significant demand across the larger and larger list of customers. And even excited about seeing our degree business right horizon. So enterprise right now is – it's really going well. So we're proving to ourselves that we can be very competitive in that segment. And, you know, as we mentioned, doubled last year. It's going to double this year. So I think what's key is the broader portfolio is very significant demand from enterprises worldwide for upskilling and reskilling their employees.

Got it. Thanks.

Our next question comes from the line of Josh Baer with Morgan Stanley.

Great.

Thanks for the question and appreciate the longer-term frameworks and targets there. I had a question on your comments about if you stopped launching programs end of 2022. How do you think about the timeframe for steady state.

So if you look at the current programs that are in the pipeline and we think about, you know, end of 2024, we'd be, and Josh, you know, part of the reason we're talking about this is if we build a great business here and we feel like at times people just don't understand it. And, you know, if you look at the degree business,

You know, granted, it's clear that, you know, and as we explained, we had some movement out of 2022 to 2023. Some of that was direct profitable business.

And seeing that profitability come through in the financials, it did not kick the can down the road.

And if you look at the degree business, it's just incredibly profitable today, and it continues to be. So we were trying to put color around it.

It's also a business that we really believe what we're seeing is a significant long-term play here. If you look at the OPM space overall, you know, home and IQ,

produces a good amount of data that shows the size of the space and the growth. And over 80% of the growth in the space, sorry, over 80% of the space is revenue share deals. Pull out more and more clients that are great universities. University of Sydney is literally one of the best institutions on the planet.

It's four brand new degrees. So it's not that we expect to stop.

But we want to balance the growth trajectory with greater profitability because we think that we're, you know, a large enough company today that we need to let that come through in current periods. And that's what you see happening. So clearly, edX creates some shorter-term company. And for the flywheel, it will generate greater profitability long-term. But, you know, in the short-term, the core business itself, you know, you would have seen substantial earnings improvements. I mean, right? You might want to hit that.

Yeah, I mean, that's over 50% improvement on a year-over-year basis, right? The midpoint of guidance is $80 million to keep it up, and the edX solution at the midpoint is about $35 million, right? So... What we're presenting here today is our 2022 guide. Our outlook represents the choices that we've made to deliver, to balance growth and profitability. And it's something that we're very proud of. We believe that a billion plus of revenue, it is something that's necessary. And, you know, we believe that 2022 is that year of transition. And as we get to the medium term and the long term, as you see with the numbers that we put out there, we can truly realize the benefits of a platform company.

That's helpful. The second part of my original question was just if you had any insights into that, Same type of steady state exercise with the alternative credential side, just as far as scale and steady state margins, assuming no new launches. Thanks.

Yeah, I mean, the alt-cred business is a little bit different, right? If you think of the two components of it before edX, the boot camp is more of presentations. You've taken the subject and you're rolling out across the partner networks that you have. And then in the short course or executive education side, it is about the presentations of the new partners that you sign up. So it's a much different business with much shorter cycles in it. How do I say this? In the degree side, a student enters the program and sticks around for two and a half years. The cycles on the alternative credential side is much, much shorter. Here's what I'll say to you. If you look at the trend in the margins on the alternative credential side, 2020, 2021, it's been material improvement. And Without the edX dilution, we probably would have seen that business crossing over into profitability as we exit 2022 into 2023. And, you know, in the guide, I've said 24 months of – 24 to 36 months, depending on the dilution that we see from the edX addition to the portfolio. But standalone, that business would have been profitable, I would say, within – 12 to 18 months had we not done the inclusion of edX to it. So hopefully that gives you an insight into that, but I think the similar analysis with the degree segment is probably not a fair comparison.

Great. Thanks.

Your next question is from the line of Brent Phil with Jefferies.

Hey guys, this is David on for Brent. Thanks for taking the question. Uh, I wanted to double click on the enterprise side. Uh, it sounds like you guys are seeing a lot of momentum.

I think you said that the double last year and expected to double again this year.

I was wondering if you could put some more context behind that. Is revenue growth accelerating there? Um, what's retention looking like? And do you find that you are landing larger deals now? Just talk about how that business is trending would be helpful. Thanks.

So, um, you know, it's clear that this is a segment that we're going to talk a lot more about over the next couple of years and put more color on for the investor community as we get our arms around how significant it can be. Um, But right now, pretty much all the products we have are selling. So it's a combination of the sort of 2U side and the edX side coming together, offering sort of seat-based content for executives or programs, and then what we added to it was some high-quality space. and serving institutions and that program has been a home run and has broader applicability across the business overall to many more clients because people desperately need to improve diverse pipelines of talents. That's been very popular.

The edX for Enterprise side, we will run all of this as edX for Enterprise as we bring the two together.

And, you know, our team is on a worldwide basis, you know, delivering exec ed through what was our Get Smarter business still today.

Representatives Get Smarter and Overtime will become edX.

So there's a lot there.

Yeah. And, David, a couple of things. I mean, you can think of it as a channel, a multi-product channel, sales channel, essentially.

And with this, In addition to edX, edX brings to us over 1,200 enterprise partners.

So to some extent, we've gotten some fuel in this category, as well as a significant growth engine for us. I think in Chip's comments, he said that bookings could be in excess of $150 million.

Some very experienced sales team members. So that's been real positive.

Got it. Thanks for the call, guys. Appreciate it.

And there are no further questions in queue at this time. Your closing remarks, please.

Okay. Thank you, everybody. We'll talk to you soon.

This does conclude today's conference call. Thank you for participating. You may now disconnect.