2U, Inc.

Good afternoon, everyone, and welcome to 2U Inc.' 's third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, please press star 1 again. If you should require assistance during the call, please press star followed by 0. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Steve Vorostek, Senior Vice President, Investor Relations. Please go ahead.

Thank you and good afternoon, everyone. Welcome to 2U's third quarter 2022 earnings conference call. Joining me on the call this afternoon are Chip Palsik, our co-founder and chief executive officer, and Paul Lauji, our chief financial officer. 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 live webcast of this call. A replay of the webcast will be made available shortly and will remain available for the next 90 days. Statements made on this call may include forward-looking statements regarding our financial and operating results, plans and objectives of management for future operations, including our strategic realignment plan. The integration of edX and transition to a platform company, anticipated trends for learners and university partners, and other matters. These statements are subject to risks and 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 31st, 2021, and our 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. And with that, let me hand the call over to Chip.

Thank you, Steve. We're pleased to report a strong set of results in line with our expectations on the top line and significantly exceeding expectations on the bottom line, with adjusted EBITDA growing 121% year over year. These results reflect the successful execution of our strategic realignment and, most importantly, a winning transition to a platform company under the edX brand. Candidly, all of this despite what's happening in the macro environment. 2U is transitioning most activity to the edX platform, and we're seeing material progress internally and externally on the three things we talked about last quarter. First, we completed our organizational realignment, reducing our expense run rate by $70 million. Second, we implemented a new, more efficient marketing framework reflected in the $18.7 million reduction in variable slash paid marketing spend from Q2 to Q3. Third, we launched more than 115 new open courses, professional certificates, and micro-credentials from 46 unique partners, signed multiple degree programs, and brought six new corporate and university partners to the platform, including UC Riverside and Google Cloud. Total learners on edX also increased to over 46 million. These strategic shifts, combined with the muscle mass, i.e. domain authority of the edX platform, puts us in a strong position to build on our profitability in 2023, bucking the challenging marketing realities that other companies and institutions are experiencing. Let me start with the marketing framework. The steps we took reduced marketing spend by $26.5 million year over year and drove down our cost per lead by approximately 30% versus the prior year, resulting in marketing and sales expense as a percent of revenue of roughly 37%. Another important data point for you, As of today, 39% of all organic or free leads generated across the company are from edX. We believe this will be very material to 2023 and to the long-term strategy at play here. Organic leads are very valuable. We typically get over 40% of our students from organic. We expect alternative credentials to benefit the most from this strategy. Why? First, demand is increasing for alternative credentials. as learners look for shorter, less expensive options to advance their careers throughout their lifetime. And we expect unit economics to improve as a result of this lower cost of acquisition. As a result of that, we believe the alt-cred segment will be profitable next year. The transition to our platform strategy and the execution of our new marketing framework also allows us to deploy marketing dollars more efficiently and more effectively. Here's an example. In executive education, which is part of our alt-cred segment, we reduced spend in Q3 by more than 50% year-over-year, but we still doubled our organic lead flow in that product line. Yes, thanks to the platform, organic leads doubled. Put another way, the number of organic leads we currently get from edX for exec ed alone is now larger than the organic leads we get from Google for exec ed. And we've only owned edX for 11 months. This type of activity helps us continue to manage down spend in social channels, where the spend was less productive, essentially substituting our most expensive channels with free leads from edX and driving down the cost of acquisition overall. This was one of the core parts of our thesis behind the acquisition, and we're starting to see it happen. So why do we not see more revenue growth in the short term? Remember, we chose to eliminate a bunch of less productive spend from our business last quarter taking a temporary pause in growth to drive better profitability. While the impacts of our platform strategy are nascent in the degree business, our current analysis shows that 10% to 15% of enrollments in our MBA programs are edX registered learners. One of the things this tells us is that pathways between the content on edX already exist today. It also shows us that as we leverage the portfolio of content we have and continue to develop new stackable offerings, We'll position ourselves to better monetize current and new learners while helping them improve their lives and grow their careers. We're finding that leads acquired for 2U products through original 2U channels are up to three times more valuable over their lifetime when they become registered learners on edX.org. This is worth mentioning in more detail. 2U has scale. In recent years, we've created over 4 million new leads annually for original 2U programs. We historically convert 1% to 5% of those to various products, from degrees to short courses. So what are the other 95% to 99% doing? There's a meaningful opportunity to engage and convert those individuals into paid edX learners over their lifetimes. Our platform will be the best at finding, matching, and converting high-intent career advancers, including all of those to you leads, through meaningful learning pathways that deliver great career outcomes. We expect this will drive revenue in a much lower cap. And as a result of the increased revenue from the 2U acquired leads, we'll drive more and more content to the edX platform, which in turn we expect will result in more and more learners coming into edX, effectively accelerating our platform flywheel. Which brings me to an update on our pipeline and new flexible offerings. We have a bunch of wins this quarter on the content side, including new pathways, new certificates, new free courses, and new degree offerings, all supported by the platform that not only drive impact, but also set us apart from the competition. We continue to have broad and active pipeline discussions for both our full degree bundle, as well as an escalating number of conversations on our new flex degrees that we rolled out in July. Our new flexible model for degrees offers a core bundle at 35% and enables partners to select additional elements of our tech and services bundle including enhanced marketing, support, placement, and content development for incremental rev share on top of the 35% rev share. Importantly, this will not replace our full model. That will remain. But the flex model will allow us to continue to aggregate high-quality content on edX.org that we simply couldn't make work in the full model, offering meaningful pathways for learners and driving incremental business. Let me give you an example. We have a new development with one of our oldest partners, the George Washington University Milken School of Public Health. Under Dean Lynn Goldman's leadership, we just signed a brand new doctorate in public health as a new flexible degree offering. This doctorate is a great example of the power of this new model, as it wouldn't be possible in our full degree model. GW will also be offering a new MicroMasters in public health to drive scale and interest in the discipline. The MicroMasters will stack into the existing very successful Public Health Masters under the full bundle, which will stack into the new doctorate, ultimately creating a full public health pathway. We have many more of these in negotiation, and we believe the platform strategy overall and things like the flexible model will help us get the degree segment back to growth as we exit 2023. It's also important that the partners that are listening to this call know that in the flex model, we will offer you the same quality of service that made this a world-class company. Original 2U partners see the value and are expanding. The London School of Economics and Political Science just launched its first massive open online course on edX and two micro-bachelors programs, which stack into its undergraduate degrees, also powered by 2U. This is a meaningful part of our product strategy, and we expect to announce more like this soon. A note on the enterprise channel and momentum we're seeing in boot camps. Overall, our edX for Business Enterprise unit grew 62% this quarter. Our boot camp product line, in particular, which is now rebranded under edX, drives a critical global need and has a significant growth plan ahead for government and business. As one example, this quarter we announced a partnership with the United Kingdom Department for Education, where they will fund 1,200 seats for a fully online skills boot camp in front-end web development, The boot camp is part of the UK government's Skills for Life initiative, focused on investing in lifelong learning and skills training. All boot camp participants will have access to edX's Career Engagement Network, which provides comprehensive career support. It's going very well and was valued at up to 4.8 million pounds. Local and federal governments worldwide are in need of this, and we think that's a huge potential growth area for edX for Business for 2023. Overall, In the face of complex market dynamics, our transition to a platform company and corresponding focus on profitability is showing good signs of success. We delivered record profitability with adjusted EBITDA of $32.5 million and EBITDA margin of 14%. Our quarterly results increase our confidence in our strategy and our 2022 EBITDA outlook, which Paul will now cover in more detail. Take it away, Paul.