2U, Inc.

Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the 2U Inc. first quarter 2023 earnings conference 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. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you, Steve Verostek, Head of Investor Relations. You may begin your conference.

Thank you, Rob, and good afternoon, everyone. Welcome to 2U's first quarter 2023 earnings conference call. Joining me on the call this afternoon are Chip Kousek, our co-founder and CEO, and Paul Laugie, our Chief Financial Officer. Following our prepared remarks, we will take your questions, our earnings release and slide presentation are available on the investor relations website and a replay of the webcast will be made available later today. 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 implementation of our platform strategy, anticipated trends for learners and university partners, changes in laws, regulations, and agency guidance for our industry 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 filed with the Securities and Exchange Commission. including our annual report on Form 10-K for the year ended December 31, 2022, 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 our 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, I'll turn the call to Chip.

Thank you, Steve. We had a great Q1. Notably, we reached positive levered free cash flow for the first time. We'll tell you all about it shortly, but before we get into the business, let me spend a few minutes on a topic that's clearly overshadowing the fundamentals and the strong performance of the company. There's some confusion about what's going on in the regulatory environment, and I'd like to try to clear that up. As framing for you, forgive the civics lesson, but the order of priority goes law, regulation, guidance. The law comes from Congress. Regulation is the executive branch implementing those laws, and guidance is meant to be additional color or commentary related to the regulation. A dear colleague letter, which you'll hear me talk about coming up, is a form of guidance. They come out from many different agencies on many different topics. On February 15th, the Department of Education made two separate and largely unrelated announcements that were applicable to our industry. First, they announced a significantly expanded interpretation of who the department can regulate as a, quote, third-party servicer under the Higher Education Act. Second, they announced a review of the 2011 Bundled Services Dear Colleague Letter. I feel like we need to explain both because some folks have been conflating the two. First, let's talk third-party servicer, which has nothing to do with revenue sharing under Bundled Services. Through a Dear Colleague Letter, which is a reminder as guidance, the Department announced a brand-new, significantly expanded interpretation of the definition of third-party servicer under the Higher Education Act. To provide some context for you, a third-party servicer is specifically defined by the Higher Education Act and the Department's regulations as entities that manage an institution's Title IV financial aid programs, either manually or through automated processing. To safeguard federal funds, third-party servicers are subject to extensive requirements governing the management of Title IV loan and grant programs. In its February 15th Dear Colleague letter, the Department announced a new and much broader interpretation of the definition of a third-party servicer that would cover a wide variety of entities who support an institution's educational programs, including hospitals, police departments, publishers, study abroad programs, high schools, and online program managers, even though these entities have no plausible connection to the administration of Title IV financial aid. The Department originally set the compliance date at May 1, 2023, and invited the public to submit written comments, which of course we did. Following very critical comments from the entire space and the American Council on Education, on February 28, the Department postponed the effective date to September 1, 2023. By the conclusion of the comment period on March 30, the department had received over 1,000 comments from students, educational institutions, nonprofit associations, and service providers to colleges and universities. The vast majority of these comments, in fact around 99%, were against the department's expanded view of a third-party servicer. Many of the comments denounced the letter's expansive new interpretation as contrary to law, complained the letter would disrupt educational institutions and their third-party contractors, and emphasize the unworkability of the September 1st effective date. Like so many others, we disagree with the department's new definition of third-party servicers. We firmly believe the department's actions contradict the Higher Education Act and their longstanding interpretation of it, and also violate the rulemaking requirements under the law. As a result, we filed a lawsuit against the department in early April, asking the court to declare this guidance unlawful and unenforceable. We urged the court to reject the department's actions to revise the law and claim sweeping powers which are not authorized by Congress. We then filed a request for a preliminary injunction on April 7th, asking the court to stay the effective date of the Dear Colleague letter pending the outcome of the litigation. Then on April 1st, the department, through a blog post, announced that they decided to revise the Dear Colleague letter and delay its effective date to six months following the release of some updated version, whenever that may be. Now, a couple of points for you to note about the third-party servicer guidance and our lawsuit. First, suing the Department of Education was not a decision we made lightly. As with any business, we have to take calculated risks and measure potential benefits versus those risks. And this lawsuit was no different. We obviously consulted our internal and external constituencies, including our board, and it was something we thought through quite meaningfully. At the end of the day, we recognize the importance of being a leader in this industry, and we recognize the need to protect our shareholders and shareholder value and to ensure that we're able to continue to deliver for universities and their students, each of which is critically important. Here, this meant pushing back against the department when it overstepped its legal authority. Second, I want to reiterate that we're not alone in our views of the department's actions here. Universities have spoken out against the department's actions, and in that spirit, We've not seen any negative impact to our pipeline or anything like that since we filed the suit. In fact, the suit has been very well received by our clients. So far, so good. It's important to reiterate that we agree with the department's stated goals of additional transparency in our space and reducing the cost of tuition and correspondingly student debt. We just disagree with the department's means for achieving these goals. We welcome the opportunity to collaborate with the department to find ways to move those goals forward in a manner consistent with law. Now, moving on to bundled services. People confuse the department's third-party servicer guidance with the department's announcement that it's reviewing the bundled services rule. Essentially, in its announcement, the department stated it's reviewing the benefits and disadvantages of revenue-sharing arrangements that have been the norm for many institutions for more than two decades. The department did not issue any new guidance with respect to bundled services. Guidance written back in 2011 in a dear colleague letter makes it clear that the Higher Education Act permits revenue sharing agreements where a third party is providing recruiting services as part of a bundle of services to the institution. This understanding, which is consistent with the department's position since 1992, spanning five presidential administrations, serves as the foundation for our degree business model as well as the foundation for the rest of the industry. the Department invited the public to submit written comments on bundled services, and those written comments overwhelmingly supported the current guidance. Overall, the Department received 268 comments, and over 90% supported keeping the bundled services rule in its current form. This is good. A couple of important points for you to note about bundled services. First, I've seen many articles conflating the Department's review of bundled services with its new third-party service or guidance. which is entirely inaccurate. The fact is the department has not made any changes to the 2011 bundled services to your colleague letter. They only announced they'd be reviewing it. Second, for the first time since TU was founded in 2008, we're seeing universities speak out loudly about the benefits of revenue sharing. This is huge. Universities have become very animated and concerned about any changes that might be made. Rather than trying to summarize all the amazing letters the university submitted, let me share a quote from Grover Gilmore, Dean Emeritus of the School of Applied Social Sciences at Case Western Reserve University. He addressed this fact in his comments. Quote, tuition revenue sharing is a good business model for the university, he wrote. Quote, 2U shares an interest in attracting qualified candidates who can complete the program. As a full service partner, it's in the interest of every area in the business model. from marketing to online content support and to student support to ensure that students are served very well. With bundled services, marketing success and the revenue generated are tied directly to the enrollment and eventual graduation of students. From our point of view, related to bundled services, it's really good to see the department listening to the actual stakeholders that matter for whom these relationships are critical. This is a big deal. Now, notably, Our velocity of client signings for our new flex model are accelerating, indicating not only our clients' desires for these revenue-sharing models in the current climate, but their confidence in both the immediate and longer-term future of revenue sharing. Okay, enough with regulatory. Now let's move on to the first quarter results and accomplishments. TU delivered a solid start to 2023 with strong EBITDA growth and positive free cash flow. Our results are driven by our best-in-class edX platform and execution of our platform strategy. Our core focus remains profitability and sustainable cash flow while driving strong student outcomes. To this end, I'm pleased to report a new milestone for the company. We generated positive adjusted free cash flow of $10 million for the 12 months ended March 31, 2023. This metric is inclusive of our interest payments, and it's something we've never done before. we delivered adjusted EBITDA growth of 146% versus the prior year. We continue to leverage the domain authority of edX to drive organic leads and marketing efficiency. During the quarter, edX generated 41% of organic leads, up from 37% in the fourth quarter. We announced a new metric at Investor Day to encompass the full breadth of the edX2U portfolio of activity. This metric is the learner prospects. This quarter, we generated over 3 million new learner prospects, which includes all expressions of interest across our open course, degree, boot camp, and executive education offerings. This brings our total to 76 million across our platform. Our marketing and sales expense was 42% of revenue in the quarter, a full 10 percentage points lower than the first quarter of 2022. More importantly, while expense was down meaningfully, Our total number of leads increased by 7%. To understand why revenue declined 6% versus the prior year, remember we transitioned to our new marketing framework in mid-2022, so this was expected. Revenue is an output rather than an input to our model. The enterprise business continued to cook with strong revenue growth at 57%. We have enormous runway here. edX's best-in-class content portfolio is highly relevant for every level of the organization, from entry-level workers to the C-suite. Our competitive differentiators are meaningful in this huge and growing market. Annual learning and development spend is $360 billion globally. We had a great quarter on what we call content velocity. We're rapidly adding new higher education offerings, with four flex degrees, one full degree, and 33 new professional certificates added this quarterly. We just signed an additional flex degree with Arcadia University, our partner since 2019, to launch their Doctor of Education program. As mentioned, our pipeline of opportunities is strong, with substantial interest in our flex degree model in both the U.S. and abroad. Notably, the U.K. is a hotbed of degree activity, as these universities cope with lower enrollments following Brexit. But we've seen increasing interest in this model in the U.S. also, Together with our partners, this quarter we launched over 130 new edX courses from 50 unique institutions. We welcomed many new members, including Southern Methodist University, Tel Aviv University, Wesleyan University, the University of Cape Town, Lufthansa, and others. This morning, we announced a new partnership with Deepak Chopra, the internationally recognized author and leader in global well-being, to create open courses and executive education programs in topics ranging from consciousness to integrative medicine, areas Chopra has defined over the course of his decades-long career as an international figure in well-being. His partnership underscores that edX is not only a platform with content and programs from the world's top universities, but also a hub for influential minds and thought leaders. All of this exceptional content requires a superior platform and learner experience. With this in mind, we're committed to continuously advancing the edX platform with innovative ways to deliver value to learners. We built and will soon launch two new tools that leverage generative AI. The first is the ability for learners to instantly obtain a concise summary of a video lecture, a more convenient and efficient way to access, evaluate, and reinforce the educational content. The second is a learner help center, which leverages the capabilities of ChatGPT to efficiently answer questions about courses, the platform, policies, and purchasing. We believe this feature can expedite the pre-course selection process for learners, as well as improve the service experience. We have an exciting number of AI-related projects on the roadmap for the remainder of 2023 and beyond. In conclusion, we're off to a really good start in 2023 as we execute the platform strategy and drive greater profitability and cash flow. Our solid performance for the quarter led us to increase our adjusted EBITDA outlook for the full year. Now, Paul will take you through the additional detail. Take it away, Paul.