2U, Inc.

ladies and gentlemen good afternoon my name is abby and i will be your conference operator today at this time i would like to welcome everyone to the 2u incorporated fourth quarter and full year 2022 earnings call today's call is being recorded and 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 If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one once again. Thank you, and I will now turn the conference over to Steve Verostik, Head of Investor Relations. You may begin.

Thank you, Abby. Good afternoon, everyone, and welcome to 2U's fourth quarter and full year 2022 earnings conference call. Joining me on the call this afternoon are Chip Pousek and our co-founder and chief executive officer, and Paul Lauge, our chief financial officer. Following our prepared remarks, we will take questions. Our earnings press release and slide presentation are available on the Investor Relations website, and a replay of this webcast will be made available later today. Statements made on this call may include forward-looking statements, including 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, 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 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. Before handing the call to Chip, I am pleased to share our plans for an Investor Day event on March 21st at the NASDAQ market site in New York. We are planning to provide additional details and insights about our strategy, business trends, financial performance, and our roadmap for future value creation. With that, let me hand the call to Chip.

Thanks, Steve. Executing our platform strategy drove meaningful profitability improvements across our business. and it's creating opportunities to accelerate our profitable growth trajectory. We concluded 2022 with strong results, including $58 million of adjusted EBITDA for the quarter, or growth of 178%, beating our guidance by nearly $10 million. For the full year, we delivered $125 million of adjusted EBITDA, or growth of 88%. In addition, unlevered free cash flow turned positive. These excellent results were made possible by our team who answered the call after we made a mid-year decision to accelerate our platform strategy and realign our company. Our alternative credential segment is doing very well, delivering almost $400 million of revenue in 2022. This is driven primarily by boot camp growth of 18% versus the prior year, with contributions from both consumer and enterprise. We anticipate this growth will continue as more learners opt for shorter, less expensive, and more career-specific training to reach that next job, promotion, or bump in salary. And we expect that continued growth will offset the near-term declines in the degree business. Most notably, in 2023, we expect the alt-cred segment to cross over into profitability for the first time after six years of building that business. This is a big deal. No more, quote, empty calories. Looking at the top line of our degree business for 2022, revenue slowed by 3% year-over-year, to $572 million. We saw the near-term impact of our new marketing framework, which reduced unprofitable spend combined with a strong labor market that increased the opportunity cost of higher education. However, we remain focused on enabling great outcomes, delivering strong profitability, and signing new degree programs. We believe that these new degree programs and a cooling labor market will set up the degree segment to return to top-line growth in 2024. Client satisfaction is high, and the response to the new flexible degree offering has been great. As a reminder, the flexible offering includes a lower revenue share for a different bundle of services, including very limited paid marketing and no CapEx for course build. We expect revenue per degree for those to be 15% to 20% on average of the revenue generated for our full degrees. However, these programs are designed to have minimal cash burn and similar profitability. For year-on-year comparisons, we launched four full degree programs in 2022 and began building a pipeline of new flexible degree offerings in the second half. We're selling both of these effectively, both full and flex, with a greater focus on cash flow generation. While in 2022 and 2023, we launched or expect to launch a similar number of degree programs, four or five full degrees, and a limited number of flex degrees, In 2024, we expect to increase that sizably, launching at least seven new full degrees, three of which have already been signed, and 25 flexible degrees. We believe this robust launch schedule will help us get the degree segment back to top line growth in 2024 and more momentum in 2025. Taking a broader look, it's been just over a year since we combined the edX platform with the core capabilities of 2U, including our digital marketing expertise, scale, and services. Fast forward to today, and we're leveraging an industry-leading platform offering everything from degrees to boot camps to professional certificates to free courses, all in one place and easily accessible to millions of learners around the world, regardless of where they are on their learning or career journey. The combination is generating tangible proof points. We're driving meaningful cost efficiencies thanks to the power of the edX platform and our overall scale. which should create a sustainable marketing advantage long-term. More specifically, this means reducing paid marketing spend while growing organic lead flow. On slide 10 of the earnings deck, you'll see that marketing and sales expenses of percent of revenue declined to 34% in the fourth quarter, the lowest it's ever been. In 2022, we reduced paid marketing by $47 million when compared to 2021, and we generated revenue above our expectations despite lower marketing spend and a strong labor environment. Our organic lead generation from edX is strong, accounting for 37% of organic leads in the fourth quarter. The quality of organic leads provides confidence in the sustainability of our marketing efficiencies and our ability to leverage the power of the edX platform to drive enrollments. When it comes to learner growth and new content, we're gaining momentum. Put differently, we're in the early stages of igniting the flywheel, or the premise that increasing high-quality content will attract more learners and more learners will drive more partners who want their content on the edX platform. To bring that to life, our learner community increased by nearly 6 million during 2022 to 48 million at year end. Two million learners joined in Q4 alone. On the content side, we're growing the catalog with the help of both new and existing partners. In 2022, we launched a dozen micro-credentials and our partners added over 600 free online courses to the edX platform. We also added 16 members to edX during 2022, including the American Psychological Association, Baylor University, Oracle, Russell Sage College, the University of California, Davis, and Wesleyan University. We have some news for you. Pepperdine and Lehigh just joined and will be announced shortly. We're expanding our relationships with current partners to launch innovative in-demand offerings. A great example from last week is the disruptively priced Masters of Science in Artificial Intelligence with the University of Texas Austin, a partner of edX's for the last decade, and a top 10 computer science school. This is a near perfect example of a well-timed, relevant, and accessible program that addresses a large and growing skills gap in our workforce. It's also only $10,000 for the entire degree. As a real-time proxy for interest, Within 48 hours of our announcement, we generated 3,400 organic or free leads all through edX. In addition to UT, this week we're excited to have announced a new full degree with our longstanding partner, the University of North Carolina at Chapel Hill. We'll be launching a doctorate of education in organizational leadership. We also have some news on this call. We've signed a contract to launch a new flexible degree with the University of California, Davis, a master's of science in management. Overall, we feel really good about our ability to grow our learner base and our ability to continue to enhance our platform with new high-quality content. We also remain focused on continuing to grow our enterprise business. We're seeing tremendous progress here. During 2022, enterprise revenue increased 86% versus the prior year, while securing new customers and building a pipeline of opportunities. We see a lot of potential here and are leaning heavily into this part of the business. Investors have high appetite here, and we will unveil the full strategy at our upcoming Investor Day event in March. A quick note on the international front. As we look for ways to expand our geographic reach, we're implementing new tactics, such as market-specific pricing for our offerings. In addition, we're excited about the potential for adding new content from new partners, like Emeritus, that appeal to learners outside the United States and Europe. Beginning with India, we'll leverage their infrastructure and localization to generate high margin revenue. We'll also continue to improve and differentiate the learner experience, drive platform innovation, and deliver world-class outcomes, proving that high quality online education can be done well at scale. And finally, as promised, we're driving to higher and more sustainable profitability due to our new marketing framework, which leverages the high domain authority of edX. Our strategic realignment, completed last summer, and ongoing cost discipline measures, such as managing headcount and third-party spend. Looking forward, we're excited about our plans and opportunities to advance the utility of the edX platform while creating both learner and shareholder value. Paul will cover the 2023 outlook in more detail, but the highlights are a range of $155 to $160 million for adjusted EBITDA, with positive EBITDA from our alternative credential segment in the back half of the year. and our first ever year of positive levered free cash flow. Platforms are the future of education. We're confident that our platform strategy is working and that we're well positioned to create value for learners, partners, and shareholders. By executing our strategy, we're focused on driving higher profitability and delivering positive cash flow. My goal is to deliver positive EPS during 2024. a goal I believe is achievable given the positive leverage we're seeing in the business. Transformation isn't easy, but we're confident about what's ahead and look forward to sharing more in March at our Investor Day. With that, I'll turn it over to Paul.