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.