2U, Inc.

Good afternoon. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to 2U Inc's second quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question, you'll need to press star followed by the number one on your telephone keypad. If you need operator assistance at any time, please press star zero. I would now like to turn the call over to Lillian Brownstein, Deputy General Counsel. Please go ahead, Ms. Brownstein.

Thank you, operator. Good afternoon, everyone, and welcome to 2U's second quarter 2022 earnings conference call. On the call this afternoon are Chip Pausek, our co-founder and CEO, and Paul Lauji, 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, continued impact of COVID-19, plans and objectives of management for future operations, including the realignment plan, the integration of edX, student and university demands, 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 file with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2021, and other SEC filings for information on risks, uncertainties, and assumptions that may cause our 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, Lillian. Over the last six months, we've become increasingly confident in our platform strategy, which puts edX at the center as a unifying platform to drive high-quality learning outcomes. We're bringing together our university's learners and enterprise partners into one platform, driving network effects to deliver our mission, deepen our strategic mode, drive sustainability, and power long-term growth. During what was clearly a complicated quarter, our confidence in our platform strategy increased due to meaningful progress on various tactics we discussed on last quarter's call. including organic demand generation and the publishing platform of edX. As the quarter elapsed and the work progressed, we also realized that in order to really unlock this overall strategy, we'd need to fully reorganize our company around the edX platform. We'd do a disservice to ourselves, our partners, our learners, and our shareholders if we didn't go all the way into this platform transformation. Simultaneously, while that was going on during the current quarter, the macroeconomic environment that we talked about on the Q1 call deteriorated further. This put additional pressure on our normal way of doing business and also on organic demand within all of online education, with some particular challenges in higher education. The combination of these three things, one, increasing confidence in our strategy, two, a realization of the need to fully reorganize to unlock it, and three, a deteriorating macro environment, drove us to make more immediate transition to the platform strategy. We believe that accelerating our transition to a platform company will strengthen our foundation in long-term sustainability by driving long-term profitability and cash flow. Now, before I address the reorganization, it's important to note that despite the macro challenges, the long-term outlook for higher education and digital education remains positive. We fully believe that higher education is particularly counter-cyclical, which will improve our business as conditions evolve. Our changes this quarter will make us much stronger as demand improves. One positive to the post-COVID world is that online education is pervasive and is here to stay. And more importantly, higher education is still the single best path of social mobility and economic prosperity in the world. Nonetheless, we are radically changing to you now. It was time for decisive action. So what does that mean? We're realigning our business and organization around the edX brand and platform, including one unified product and marketing strategy. The immediate changes include, number one, A new marketing framework. This should significantly reduce our overall marketing spend as a percentage of revenue and increase efficiency and profitability. Two, a simplified organizational structure and employee reductions. We believe this will eliminate redundancies and increase agility along with other cost-cutting initiatives. And three, a new model for partners. This includes bold and important steps to support our partners in expanding access and bringing down the cost of higher education. I'll now touch on each of these. First, marketing. Marketing investment decisions will be made at the platform level, aggregated across business lines, with the goal of increasing the lifetime value of each learner. This does not mean that there'll be no more product-level marketing, but we now have a world-class platform that allows us to do so more efficiently and is part of a unified strategy. Under our new leadership, which I'll cover in a minute, we've already begun enforcing a new higher bar for all marketing spend decisions, while at the same time leveraging our ability to drive and benefit from organic volume from the edX platform. As a result, we plan to exit the calendar year at a run rate equivalent to the long-term target we set out at our 2020 investor day of marketing spend at 37% of revenue. We believe this will be transformative to our business. This isn't the moment to push the efficient frontier of marketing. We have a flexible and variable cost basis, which allows us to implement a new marketing framework and let more profit flow through the bottom line. This impacts the full year guidance we shared last quarter. Our full year EBITDA expectations increased by 30%, while our revenue expectations come down by 10%. The executive education business will be particularly impacted by this new marketing framework. We expect to see a significant drop on the top line, but contribution to margin by year end. We've come to the conclusion that you simply can't run that part of the business off paid spend alone, and we believe this is a universal issue, not a 2U issue. We believe there are opportunities for selective attention here, but we'll not be expanding this business for now. Instead, we plan to make it as profitable as possible and simply build programs off of our growing marketplace and organic presence. We do see opportunities for the expansion of our boot camp business. where the built-in value has been overshadowed by the larger losses in exec ed and the edX integration. To be clear, we still have work to do in AltCred, but our goal is to have this segment drive towards positive EBITDA for 2023. Moving on to our second point, the organizational changes. We're moving to a more streamlined leadership and operational structure. As part of these changes, all marketing spend and revenue decisions for 2U will now be aggregated under our newly appointed Chief Revenue Officer, Harsha Mukherjee, who's been with the company for over nine years. Harsha and his team, including our newly appointed Chief Marketing Officer, Michael Kirbywhite, who's also been with 2U nine years, will focus on optimizing marketing spend at a platform level while continuing to drive growth. In addition, edX founder, Anant Agarwal, will take on a new role as our first ever chief platform officer responsible for our unified product and technology strategy. As we consolidate individual businesses under the edX umbrella, significant headcount reductions representing 20% of total budgeted personnel spend will take place in Q3 with a focus on creating greater alignment and efficiency across the organization, as well as removing silos and redundancies that have developed over the years. While this is the right call, it certainly isn't an easy one. The colleagues who will be leaving us have done great work and helped us build this company over the last 15 years. I'm very grateful for that. We'll do everything we can to treat them well and assist them in their transitions. They've earned our care and respect, and we will honor that. I do want to note that these changes will have no impact on the quality of our offerings. In fact, we expect the reorganization will deliver greater value to learners and improve student outcomes. Finally, moving on to our position in the market, our commitment to edX's founding mission is stronger than ever. As we embrace our future as edX, we're taking bold and important steps to help our partners expand access and bring down the cost of higher education. These steps include embracing edX's flexible approach to degree support and evolving our revenue share structure to give universities more options and flexibility to leverage our industry-leading technology and services for their online degree program. In this model, revenue share for degree programs will begin at a base of 35% and go up from there, allowing universities to stack additional bundles of tech-enabled services depending on their needs. This model offers options that lower our upfront investment, speed up the timeline to positive cash flow, and open the door for conversations with universities looking for greater flexibility. We have a new flexible edX degree to announce today. We just signed a new university partner, University of Wisconsin-Madison, the School of Business to power a disruptively priced $24,000 Master of Business Analytics. This deal also includes a MicroMasters on the fundamentals of business. The combination of a low-price degree and a MicroMasters attached to it should allow us to unlock the full potential of the edX platform. We'll also be announcing a new initiative to help our existing partners bring down the cost of higher education, trading greater affordability for revenue share. To support and encourage our partners to bring down tuition for students in the 180-plus online graduate degree programs we power, edX2U will lower its share for partners who choose to lower their tuition prices. As we've said many times before, lower tuition is not only good for the world, it's better for our business. Lower prices increase student demand, which decrease our marketing costs. We've been focused on helping our partners drive greater affordability for many years, but we're super proud to deliver this clear action. You'll see more about these initiatives in the coming days. As we make all of these changes, I'm proud to say that by year's end, we'll have answered the question from our IPO eight years ago. Yes, you can build a sustainable education business in higher ed at scale. Now I'll turn it over to Paul to talk about the financials in more detail.

Thanks, Jeff, and good afternoon, everyone. As Jeff discussed, in a macroeconomic environment that's remained challenging in the second quarter, we are radically changing to use by accelerating our transition to a platform company. These changes we're discussing today had a significant impact on our second quarter results and full year guidance. So I'd ask you to keep them in mind as we discuss the numbers. Taking a closer look at our results for the quarter. Revenue for the quarter totaled $241.5 million, up 2% from a year ago, including $10 million from edX. Full course equivalents, or FCEs, totaled $84,000 for the quarter, roughly flat on a year-over-year basis, and on a sequential basis decreased 2%. In the degree program segment, revenue in the second quarter totaled $143.1 million, a decline of roughly 2% from the second quarter of 2021. This decrease was largely driven by higher leaves of absence in certain of our degree programs and a 2% decrease in average revenue per FCE. Revenue from the alternative credential segment totaled $98.4 million, growth of 8% from the second quarter of 2021, primarily due to $7.1 million from edX and a 1% increase in average revenue per FCE. The performance in alternative credentials included a 12% decline in exec ed revenue, primarily due to our decisions to reduce planned marketing. Now let's take a look at cost and expenses. Operating expense for the quarter totaled $289.4 million, up from $274.3 million in the second quarter of 2021. This $15.1 million increase includes $17.1 million of operating expense from edX and a $15.1 million restructuring charge in connection with the planned reduction of 20% of our personal and personal-related expenses. Personal and personal-related expense, our largest expense line item, decreased $6.2 million. Importantly, note that this includes the addition of $5.9 million of expense associated with edX. Marketing and sales as a percent of revenues came in at 44% for the quarter, driven by a $3.5 million decrease in marketing spend on prospect generation. Important to point out here, we spent $11 million less than we projected to spend in the second quarter as part of our new marketing framework. Moving on to profitability for the quarter. Net loss for the quarter totaled $62.9 million compared to a net loss of $21.9 million in the second quarter of last year, reflecting the higher operating expense I just discussed and a $5.7 million higher interest expense. In addition, in the second quarter of 2021, we benefited from a $27.9 million non-operating gain on the sale of an investment in key path education. Adjusted EBITDA totaled $21.9 million, a year-over-year increase of 28%. The increase was driven primarily by reduced marketing expense and lower personal and personnel-related expense. Adjusted EBITDA margin in the degree segment 28% for the quarter, an 850 basis point improvement over the second quarter of 2021, showing the inherent profitability of the degree segment business model. Adjusted EBITDA in the alternative credential segment was a negative 18%, a 600 basis point decline from the second quarter of 2021, primarily due to increased losses in the exec ed business related to macroeconomic conditions and the inclusion of edX's operating expense. Now for a discussion of the balance sheet and cash flow statement. We ended the quarter with cash and cash equivalents of $237.8 million, an increase of $4.2 million from the end of the first quarter. Our accounts receivable balance totaled $69.8 million, down $8.1 million from the end of the first quarter. Fluctuations in our accounts receivable balance reflect the timing of payments from university partners. Unlevered free cash flow on a trailing 12-month basis was $11.5 million, compared to a net use of $34.1 million at the end of the first quarter. This improvement in unlevered free cash flow was driven by lower marketing spend, lower personal and personnel-related expenses, and improved net working capital. I will now discuss how we expect the remainder of the year to play out. We expect the current realignment plan to be completed during the fourth quarter and believe it will generate approximately $70 million in annualized cost savings once completed, which includes a 20% reduction in overall personnel and personnel-related expenses. We incurred a restructuring charge of $15.8 million in the second quarter and expect to incur an aggregate restructuring charge of between $35 and $40 million by the time the plan is completed. Let me say that Chip and I believe there's further opportunity to improve our operating efficiency through process reengineering, workflow automation, and a rationalization of our real estate footprint. It is too early to size these initiatives, but nonetheless, critical to understand that we're firmly focused on driving simplification and cost reduction throughout the organization. Given all the initiatives I've discussed, we are revising our 2022 full-year outlook. We now expect revenue to exceed $960 million, representing growth of 2%, while at the same time increasing our adjusted EBITDA guidance which we now expect to range from $105 million to $150 million for the full year, representing 65% growth at the midpoint. To give a bit more color on our updated full-year revenue expectation, the primary driver of the change is our revamped framework for marketing spend, which impacted revenue in the second quarter and will impact revenue for the full year. While the macroeconomic environment remains challenging during the second quarter and may remain challenging in the near term, we believe that our new marketing framework will enable us to deliver profitable revenue and growth when the environment improves. We also expect capital expenditures to be approximately $70 million and weighted average shares outstanding to be approximately 77.4 million shares. And while we are not providing 2023 guidance at this time, in part based on the initiatives we have discussed in this call, we expect to generate at least $150 million in adjusted EBITDA next year. We also expect to achieve our long-term target for marketing and sales as a percent of revenue of 37%. To conclude, We were already powering high-quality digital education offerings at an unmatched scale. This quarter, we have taken important steps to align the business behind a single platform under the edX brand and create a sustainable engine to drive profitable growth and cash flow in the near and long term. We look forward to sharing our progress with you in the coming quarters. With that, let me hand the call back to Jeff.

Thanks, Paul. Before we move to Q&A, I want to take a moment to acknowledge and thank our outgoing Chief Operating Officer, Mark Chernus. As you saw in our release and filings, Mark decided to step down from his current role to pursue other opportunities and transition to a consulting capacity in October. He's been part of 2U's history for 14 years, first as a director and then as our COO. Mark's leadership and contributions have been invaluable to me and in making 2U the company it is today. I'm beyond grateful for his contributions to 2U and for our friendship. I wish him nothing but the best in his future endeavors. And now we'll open it up to questions.

As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster.

Our first question comes from Steven Sheldon from William Blair.

Please go ahead. Your line is open.

Hey, thanks. And before asking questions, I just wanted to quickly applaud this move to focus on profit and free cash flow. Great to see. I think it makes a lot of sense just to ensure that investors can see the sustainability of the model. But the first question here is, What are you targeting here on the profit and free cash flow side over the next few years? And specifically, are there certain targets you have in place that maybe once you'd hit, you'd shift focus or have a little bit more flexibility to focus more on top line growth? Again, I guess, how are you thinking about those trade-offs over the medium term?

Well, the first thing I would say before I turn it to Paul, what I would say, first of all, Stephen, thank you for your comment, is that we do believe that the company has a number of growth levers and, you know, we didn't fill the script with lots of commentary on it because we thought at this time the important thing was for us to drive home the transformation of the company, the focus on cash flow, the focus on profitability because of the platform that we are able to transition to. And so, but we do think that there are a number of profitable growth categories for the company. Not just enterprise, which I know we talked about last time and continues to be strong, but our boot camp business is totally underappreciated. The fact that we're now able to work directly with either governments or foundations to offer technology training at scale in a way that other people can't. The new flexible model on degrees we do think will be responded to very favorably by the market. So there's a variety of interesting options, and as we transition to a platform company, We do think that the edX platform itself has a lot of innovation ahead of it to offer more creative solutions for people to sort of unlock their potential. So there's a bunch there, but I want to pass it to you to talk about, I believe it's slide five in the investor deck. Worth highlighting, Stephen.

So Stephen, slide five of the investor presentation has some margin progression and also target margins as we go forward. but there are a couple of things here i think we've always talked about a variable cost basis particularly around marketing spend uh but i i'd like to go back and highlight a couple of things in chip's script right chip talked about the confidence that we've gained over the last six months as as we begin to integrate and operate edX as part of the combined entity we now have an organic marketing platform that gives us the confidence to modulate and to change the marketing framework that we have around marketing spend. So the first target that we have is around marketing and sales as a percentage of revenue. That number for 2023, we're expecting that to be 37%. And if that number is 37%, you can see from our historical trends, the other cost categories have been pretty consistent over time. And that allows us to achieve a margin of 15% on the EBITDA line next year. And importantly, based on the numbers we're providing for this year, It's around 12%. And most importantly, if you translate all of this to what really matters, free cash flow, it's a free cash flow positive business exiting December 31st, 2022, and positive for the calendar year 2023. And at these margin levels, it gives us the flexibility to reinvest, growth opportunities, re-engineer the balance sheet, do all the things that we need to do as a company to be sustainable both on the top line and the bottom line.

You know, what I would add is, you know, 150 million minimum of EBITDA in 2023. And I do think it's worth pointing out, the reason I drew your attention to slide five is, you know, the percent of sales and marketing for 2U has been part of the discussion around the company for a long time. And, you know, 2019, 56%. Exiting this year at 37%, which was the high end of the range that we gave at Investor Day. in 2020. So we feel like our transition to a platform strategy is really going to allow us to not just drive profitable growth in the future, but to really have a great foundation from here to grow. And I give my CFO a tremendous amount of credit for driving us in that direction over the last couple of years.

Got it. That's really helpful. Appreciate that. And then just to follow up, on the plan changes to the revenue share structure and degrees, can you dig into that a little bit more, especially for the university partners that are lowering the tuition they charge? Have you started having discussions around that with partners? And if so, I guess what feedback have you gotten from them as you've discussed this with them?

Yes, we have. And we'll announce that more fully here in the next day or so. You know, we've said for some time that lower prices are actually good for the business because they are. And, you know, we do have unmatched scale that allows us to drive it down. And to be clear, from an organic perspective, the greater the affordability, the more organic volume that we're going to see for those offerings. And that's a benefit of transitioning to edX. is that organic volume. So the goal here is to maintain quality while we increase access for people. Now, in existing programs, we've definitely seen improvements in enrollment based on tuition coming down, and we're excited to drive that conversation and incentivize our partners to have that conversation with us because we thought it was time.

Great. Thank you.

Our next question comes from Jeff Moyler from Baird.

Please go ahead. Your line is open.

Yeah, thank you. So just as investors look to have confidence in the 2023 EBITDA and free cash flow projections, just help us with the degreed trends because it looks like that's your primary profit pool and degreed took a pretty big step down in revenue this quarter. So just what are you assuming or just help us with – the profit pool sustainability to kind of underpin the 150 in 2023?

So, Jeff, first, I would want to be careful with the notion of a pretty big step down. Granted, it did go down 2%, but not how I would define pretty big, and it's a pretty tough comp. But regardless of that, what you are dealing with right now in the entire world of higher ed is This is a very tricky time. We're probably at a nadir overall in a post-COVID world where you've got some reopening happening everywhere. You have people sort of getting out into their lives. We saw for the first time, and Paul mentioned this in his prepared comments, we did see a dip in retention. Now, our retention is still extremely high if you look at it across, if you compare it to other types of programs in the market. But that actually did drive some of the change in the current period, no question, retention coming down a little bit by having an increase in people taking leave of absences. And, you know, we've got a good history of being able to bring those people back into the system to complete their degrees, but nonetheless, that actually hit, that hit the current period. And we believe that as the economy does soften, it is counter cyclical. You know, we found that it hasn't quite hit the job market yet, but we do believe that'll happen over time. And as it does, we do think that the degree business will improve. You know, we operate in so many different disciplines right now that have a significant shortage of people, whether it be the helping hands disciplines, the health disciplines like nursing or speech, and, you know, our STEM programs, you know. So, you know, we like the odds of the sustainability of that business. I would also say I feel like we are doing the degree business at a scale that others are not. And it's significantly more profitable than most other folks. So, you know, we're big believers in driving new degree opportunities. And we think that, you know, our pipeline will start to show that. I was pretty excited to be able to have one announcement today that is meaningful, disruptively priced. So, you know, this is kind of what we said at Investor Day 2020. Yeah.

And Jeff, this is Paul here. So 70 million dollars reduction in an annualized basis into 2023. That is to some extent rises, increases the margin on both sides of the business. I would say more pointedly on the alternative credential side of the house, while it is negative today and our goal and objective is to make that business positive in 2023 or at least flatten that zero in 2023. And with the degree side of the business, it has the predictability And it has a larger organic component when it comes to marketing. And organic component is, of course, the cheaper portion of marketing. So at the end of the day, you know, it is 2023 is more near term and specifically has the benefit of the $70 million run rate reduction in expenses that contributes to that $150 million EBITDA in 2023.

Okay, thanks. And then help me with the partner, the university partner conversation. I understand how this plays well into mission of expanding reach around high quality education at an affordable price point, all super important things. But from, I guess, two fronts. One, what's the impact on surplus for university partners with the new strategy? And what do you tell the university partners that may have staffed to a certain enrollment expectation or just help us with the university partner conversation?

Well, the staffing to an enrollment level is, you know, the lower prices definitely drives your enrollment higher. So that's not the issue. We think you can drive a meaningful surplus. The reason that we're willing to put revenue share behind it is simply to help that conversation and incentivize what is a long-term partner to help us drive greater affordability. In general, we have found partners to be responsive to the conversation. Part of the reason that we're doing this is to put the full force of the company behind it, because at our scale, we can. We think it'll be good for everybody longer term. Now, to be clear, Jeff, there are, you know, different degrees and different university brands and different prices means There's a variety of different outcomes related to the size of the revenue difference and the size of the price difference. So it's not easy to put into a formula. And, you know, we're keen on folks getting as affordable as they can because we think it really does benefit not just the world but the company. So far, you know, response is, I mean, it's positive. We've got good discussions happening, and we should have some schools that we're able to talk about in the short term.

Thank you. And I obviously personally love the wind today. So on Wisconsin. Thanks.

Our next question comes from Ryan McDonald from Needham. Please go ahead. Your line is open.

Hi, Chip and Paul. Thanks for taking my questions. And yeah, I love the new focus here on profitability. Chip, I wanted to double click on the selective marketing spend and sort of the shift in strategy towards more of a portfolio basis rather than the individual product. Can you talk about how that works, I guess, in those conversations with your university partners in terms of being able to balance out marketing spend appropriately to make sure that your partners are getting the appropriate amount of marketing to drive those enrollments? How does this new strategy sort of change that shift in focus at all?

You know, Ryan, I would say I think the story here is just making sure that we're – that we are all in it together it is an appropriate partnership and if something uh if something is going to require marketing spend to be unprofitable then it's not sustainable for anybody and so whether the story is that we need to try to drive the price down uh organic with edx is a huge factor uh organic you know the story of marketing these programs more and more we do think that the platform is is a necessity it's you know it's really not an option it's not optional like you you need to have this kind of platform and one of the reasons we were uh so excited to team up with edx is just the scarcity value of this type of opportunity is real so um to be clear we will continue to drive a university individual program marketing but as we aggregate the activity under edx you know all the boats will rise because we'll have greater opportunities to offer new uh types of offerings to people that have come in you know one of the things that's notable is like at 2u we've got learner growth and at the same time we've got this other very large bucket of activity that is effectively prospect flow or lead flow those over time come together into something that gets much more compelling for everybody that's part of our partnerships uh you know they they can't be distinctly separate long term they really need to come together so building both pre-enrollment and post-enrollment opportunities on the edX platform is a meaningful part of the long-term strategy. And it does start today, because now we've reorganized the company entirely under one platform.

That's very helpful. And then maybe just one quick clarifying question. As you talk about the macro impacts, you talked about within degrees that you saw an increase in people taking leave of absences. Do you chat about what you're seeing on sort of top of the funnel for new enrollments with programs as you look out into not just, I guess, beyond this fall, but building sort of a pipeline for next spring as well?

So, I would say, you know, it's interesting that, like, the first thing I would say is overall, like, overall demand across sort of traffic organically related to education is down uh and so you know some of that you see in in in in actually not just degree but across our full business so that's sort of a place to start is you know i said we're operating right now in in maybe this sort of last couple quarters like this nadir of uh where demand is and the reason i say that is the economy is softening but you haven't yet seen that hit the job market And we think it will. And over time, we think that that will benefit programs where people are looking to get into new types of jobs and new types of careers. The retention difference was small in terms of quality retention, but meaningful enough to drive a current period that change in the business. Paul, go ahead.

Yeah, so that was roughly around $6 million of sequential decline on retention that was the largest driver in the degree business. So overall, while we're seeing overall softness from a marketing perspective and a new enrollment perspective, we also had the retention challenge on a sequential basis, Q1 to Q2 in the degree business in particular.

Yeah, that's a big part of the reason we felt like throughout the quarter, I mean, I said at the beginning, but it's worth reiterating, like we got more confident in the platform, yes. We got more, it was more obvious to us that we really had to rework to unlock it. Fine. The other thing that happened is the macro did get worse during the quarter. And for that reason, we decided that we needed to take decisive action. Like we thought this kind of action was prudent. And we think it positions us well. And we do think that it'll get better.

When it gets better, you know, we've just got a really profitable base to grow from. Helpful color. Thanks a lot.

Our next question comes from Tom Singlehurst from Citi.

Please go ahead. Your line is open.

Evening. Yeah, thanks. It's Tom here from Citi. A lot of what you said makes a lot of sense. I think we'll be welcome to many shareholders. I wanted to ask one question about the way that you go to market, though. I mean, I get the impression that two-use position historically has been sort of perceived as and has actually been quite premium a sort of white glove service if you will if you're moving to a model where you're marketing more as a platform and you're reducing headcount how do you just make how do you make sure that you you don't compromise the sort of quality of the sort of service to in particular your university partners yeah so uh by the way it's late over there so we appreciate you being on um i would say uh you know we made it uh

purposely clear in the prepared remarks to emphasize the fact that we're doing this in a way that we believe will not decrease quality. And that is of most concern to the company and to the management team. Quality has been our hallmark. And I believe we've got good odds. I mean, part of what is going on here is the company has done M&A over the years. And what you're seeing now is the company bringing those together in a more fundamental way and eliminating some redundancy And that's difficult because we care very much about the people, but it is necessary. And we do not believe that this will impact the quality of the programs. So ultimately, you know, quite proud of the high-quality outcomes across the business, including, you know, this was not the quarter to have the prepared remarks with a whole bunch of strong statements about how great some particular thing is. We were really proud. of the Gallup survey related to our boot camp programs, which didn't get that much attention, and we think should have, that proved that the year one ROI was effectively equal to the cost of the boot camps. So, like, you know, quality matters. And we do think our universities, a big part of the reason that they are with 2U is that we've proven that over the years. And under the edX banner, being able to have a broader platform strategy that folks can participate in, has been responded to well i mean it's notable that the wisconsin program is both a master's degree and a micro masters uh day one and you know that should open up access and drive greater affordability to an already affordable degree but the key is it all has to be done at our quality level i do think to you and edx coming together makes it really interesting like we didn't have the platform uh but i will tell you that the the tech enabled services that power these things across the board are exceptional. And, you know, our partners know that, which is why today, you know, still today, many years later, we haven't lost a degree partner.

That's very clear. And then one quick follow-up for Paul. FX can't be helping. I mean, the strength of the U.S. dollar, especially for your international programs. How much of a drag is that in the guidance research?

Yeah, that was a significant contributor to the exec ed performance. I lumped it under the bucket of the macro environment in my flux explanation in the script and the prepared remarks. It is factored in. It is not expected to get better in the guidance that we've provided, but it is a main contributor in our exec ed business.

That's very good. Thanks very much.

Our next question comes from Josh Baer from Morgan Stanley. Please go ahead. Your line is open.

Great. Thanks for the question. I wanted to dig in on the change in the flexibility of degree offerings. I was hoping you could repeat or review how the economics will work one more time and then have a couple of follow-ups.

We have a piece coming out on this tomorrow that will give greater detail. But the flexible model starts with a core service bundle at 35% and then adds, you know, you stack on it depending on the needs of the university partner. And, you know, this came out of the innovation group here based on conversations with both current and potential partners as to what they may want to see. So an example of that, Josh, is like not everyone needs course production or course build. And we find that to be very positive because, you know, that's a large CapEx load and, Some universities have built groups on their campus to drive, to build online courses. And I happen to think our learning design is excellent, but not everyone needs it. And so having that priced into the original bundle makes it challenging for some schools. So that's one example. Other examples are paid marketing will not be part of the core bundle because it's not necessary for every single university program either because the university isn't trying to make it that large or because it's not appropriate for that particular program. And so, you know, effectively, the core bundle offers, you know, a set of core services that we believe, when combined with the edX platform, because it includes nurturing, lead nurturing, we think it'll drive quality, you know, quality, profitable programs to you with a significantly smaller, like very little, J curve. much lower investment up front and if it's a program that the school is interested in scaling up at a level that you know is more like a historical program and we have some of those in play right now at what looks like look like very similar to you historical rev share levels you know people tend to. Over-focus on the rev share percentage and not focus on what you're doing for the rev share in order to help the university partner, which is one of the reasons the surplus provided to the school is typically very positive. So it's like a comprehensive set of options for a school, and we think it's going to have a strong market response. Now, to be clear, Josh, there still will be programs that look much more like what you've seen historically from us. We just want to be more flexible for the university partner.

Got it. Thanks, Chip. Two follow-ups there. So the core service bundle, is that basically just the technology? No, it's not.

And we can get you some more on this, but it includes the core service includes the technology. It includes the organic coming off of our platform. It includes lead nurturing. It includes a basic level of student support, but not things like clinical placement. If someone's going to be placed into a local doctor's office or a school or something, that's a large part of our operation here and has a real expense load to it. So no, it's not just technology. We actually think it'll be super competitive with anything else that is out in the market today. And that's only because of our scale.

Great. That makes a lot of sense. And then last question on this is, you know, I could see how this is a competitive and interesting, you know, development around flexibility for new conversations. My question is how, what are the implications for existing customers, existing partners, existing contracts are, you know, do they have a chance to like existing partner that might be able to do parts of the, you know, OPM service themselves? Like, do they have a chance to opt into this flexible, pricing model to revisit contracts? What's the approach for the existing customers?

We've got very good conversations happening across the board with regard to the way the original contract was laid out and the length of the contract. And I think you know, Josh, that, as I said, we haven't lost a degree partner. And all of those conversations, as you get into the renewal period, as people start needing to think about you know what the contract is going to look like after the first let's say eight or ten years whenever that happens uh we're engaged in a whole variety of conversations and certainly this is part of it uh but you know the the original construct to you invested uh in that uh sort of beginning part of the j curve over those original programs and therefore and the school understands that so you know, just a reminder that those contracts are not only strong and valid, but, you know, we're having really good conversations with partners about what the future of those looks like. Now, in all of our extensions or renewals, whether it was because we were going back to the client because we needed to change something about the contract, like exclusivity, or because the contract is starting to come to the end of the contract, you know, we've never really gotten extremely close to the end of a contract, to be clear. We always approach it as a positive, friendly conversation that happens long before we get to the end. But all of those conversations have included revenue share adjustments over time. And that's perfectly appropriate because the company at that stage is now in to the cash flow and that program has generated the IRR that we expected. And so it's like, what does the go forward look? Now, I will tell you, during the time period of 2U starting to today, there were basically no online programs. Now there's a whole bunch of online programs. And so you have to be thinking about it more as a platform strategy. And I will tell you, it's getting harder and harder for university partners to do this on their own without that. Because, you know, candidly, the only people that win by more and more people coming on without a platform partner are the social media networks. Like, that's it. And that's who wins in that case. So having the platform, we think, is a competitive advantage long term to each of our individual partners because If you're only the platform and you don't do per-program marketing, life gets hard in doing degrees. It's tough. Well, if you have the platform and you have per-program marketing, as long as you're setting the bar at a reasonable level, like for the company, we think that's a good place to land. And so we like our odds of more new programs at existing partners because of this flexible service. And I will tell you, just based on conversations that have been had so far, There'll be a wide variety of these. It's not, as you'll see when we announce it tomorrow, there's like a stack to it. And there'll be some that want the core with just clinical placement or some that want the core with course production or some that want paid marketing because they want to scale the program. So we're just trying to create greater flexibility for people.

Great. Thank you. Appreciate it.

Our next question comes from George Tong from Goldman Sachs. Please go ahead. Your line is open.

Hi, thanks. Good afternoon. I'd like to dive deeper into your platform strategy. Can you elaborate on the details of what your new marketing framework involves, the mechanics of it? And we understand it should result in cost savings, but how will it drive improved revenue performance?

Well, I mean, George, I think today we're going to be careful to not go too into the weeds, but I would say it How much marketing spend come down in the current period?

Current period, we did not spend $11 million in pay that we were originally planning to spend. And for the year, it's going to be about $40 million.

So it's significant, George. The platform does allow you to aggregate organic demand. We mentioned on our last call that we were at roughly 10% of our lead flow coming in, a run rate of 10%. That is clearly going up based on the platform itself and based on us reducing paid options that aren't as good from a conversion standpoint. Now, as you get into platform innovation, there's all kinds of things we think we can do to drive opportunities across all of our products, including degrees. So we do think that You know, you'll see a wide variety of different, you know, innovations on the platform side.

But the, sorry.

Yeah, so, George, if you think of the platform, the platform allows us to leverage the six pillars that we talked about in the last call. Whether it's traffic, whether it's SEO and content publishing, or portfolio marketing versus the single product marketing that we talked about, it allows us to do things that are very different. And keep in mind, organic marketing is our cheapest form of marketing. So at the end of the day, if we're going to cut paid marketing, it therefore means that we're cutting the less productive marketing. And if we cut the less productive marketing, we therefore improve profitability almost immediately, knowing that we have the backdrop of an organic marketing platform that can help us to grow at the same time.

so George uh just a couple of helpful comments from you know last call I outlined a series of strategies related to the um the edX Marketplace and um you know one is you know building traffic the other is SEO and driving greater SEO the third is portfolio marketing versus uh single product marketing uh evolving uh the product evolution to create stackables that's pretty critical uh and then obviously, international and enterprise opportunities. But, like, we'll dig into these in greater detail and show you the progress of them at the investor day, we'll announce, because we think it's a bit overdue for us to get with this community. So, you know, one thing that you can do on your own to see the power of it right now is just go to Google and type online master's degrees. And once you get past the paid ads, you'll see that there's a pretty substantial increase you know, ranking of edX, you know, that wasn't there six months ago.

Got it. That's helpful. And then as a follow-up, you're reducing your guidance for revenue by 10% due to macro headwinds. How do you square that with the view that higher education is a counter-cyclical?

So a couple of things on the guidance. Guidance is coming down from a billion 70 at the midpoint to 960. And at the same time, EBITDA is going up from a midpoint of 85 to a midpoint of 110.

So I'd like to just correct that that is not because of macro headwinds. That is us leaning into the platform strategy, realigning and changing the marketing sort of framework And, you know, doing it to drive greater profitability to the bottom line. Just want to clear that up.

Right. But to follow up, though, you mentioned that you are experiencing macro headwinds and that's accounting for some of the revenue shortfall in the quarter and reflected in the whole year guide. So just how do you square that with the view that higher education is counter cyclical if you're being impacted by macro headwinds today?

Well, I mean, we obviously go across the business, not just degrees. And the job market has not been substantially impacted as of yet. We do believe that winter is in the process of coming. So we think that you'll see that happen. But the macro that we were seeing in the quarter caused us to just believe that we needed to be decisive and make this change now because we thought it was smart to do so.

Yeah. And George, if we look back at how we got to the numbers we just talked about, whether it's on the revenue coming down or the EBITDA increasing. It comes from basically three buckets. It comes from a reduction in marketing spend, which has a flow through effect on the bottom line. It comes from a reduction in personal and personal related expense, which flows through to the bottom line also. And then the other side of the equation has operational efficiencies across the business that we will reduce over time. Now, where does the macro come into all of this? From a macro perspective, it somewhat gave us the opportunity or allowed us to accelerate our platform strategy, knowing that we have confidence in what the organic platform in edX can do for us. And putting all of those together got us to this endpoint. It is not the macro that caused the decrease. But the macro is a contributor in that environment, in that trifecta, if you will.

Got it. Helpful. Thank you. Thanks, George.

Our next question comes from Jeff Silber from BMO Capital Markets.

Please go ahead. Your line is open.

Thank you so much. I know restructuring is painful. I don't want to get into the details. But at a high level, what type of positions are being eliminated, and do you think that could have an adverse impact on your business?

So, Jeff, it's across the company, it's across the board at different levels, different departments, so difficult for me to comment further. But we did bring, you know, we brought three companies together over the last five years and, you know, haven't done this. And, you know, it was time, particularly given, you know, not just the macro, but unlocking the platform strategy. You know, this entire conversation around the reorg started unrelated to what was going on in the macro. You know, we've been working on it for a while. And just, you know, the macro certainly drove, in our opinion, the need for us to be you know, more urgent on the matter.

Okay, fair enough. If I can move on to another potential uncomfortable topic, there's been a lot of speculation in the media about another company coming to your board with a buyout offer. If you're willing to comment on that, great. If not, more importantly, are you finding any of your partners or potential partners asking about this? Do you think schools might be more reluctant to sign on if they think there might be an ownership change?

So, Jeff, over what is now eight years as a public company, the number of times that I've been asked about something related to this is not small. As a public company, you're effectively always for sale. And you're, of course, going to do what's right for shareholders. We don't comment on rumors. And our partners have been perfectly fine about this discussion. And our partners are, in general, pretty used to us having discussions related to what it means to be a public company and have benefited from a strong long-term public business that we think right now just got a lot stronger okay that's really helpful thanks so much ladies and gentlemen this concludes today's call you may now disconnect