2U, Inc.

Hello and welcome to the 2U Inc. second quarter 2023 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. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. I will now turn the conference over to Mr. Steve Barostek, Head of Investor Relations. Please go ahead.

Thank you, Sarah. Good afternoon, everyone, and welcome to 2U's second quarter 2023 earnings conference call. Joining me on the call this afternoon are Chip Halsek, our co-founder and chief executive officer, and Paul Laugie, our chief financial officer. 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. Following our prepared remarks, we will take questions. Statements made on this call will include forward-looking statements regarding our financial and operating results, plans and objectives for management for future operations, the implementation of our platform strategy, anticipated trends for learners and university partners, changes in laws, regulations, and agency guidance for 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 our documents filed with the Securities Exchange Commission, including our annual report on Form 10-K for the year ended December 31st, 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 to-use performance. These non-GAAP measures should be considered in addition to and not 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. So with that, let me hand the call to Chip.

Thanks, Steve. We had a strong Q2. Notably, we sustained double-digit EBITDA margins, continued to drive down costs, and increased organic leads from the edX platform to 44%. We believe the business is moving strongly in the right direction due to our platform strategy. As a result, we're increasing our bottom line guidance for the full year while reiterating our top line. We did have some revenue shift from Q2 to later in the year, something Paul will cover in detail. I'll provide more color on our full year expectations in a moment, but first I want to give some commentary on the EdTech sector as a whole and our strategy. EdTech is critical for the future of society. The need for high-quality education is only increasing. Digital penetration is low, and it's a massive global market. It's becoming more clear to me by the day that our strategy is the correct one to achieve preeminence in our space. We're the only company that can deliver outcomes at scale, outcomes, because we built an apparatus that delivers the hard parts, many of which are driven not just by tech, but also by people. And it's my belief that AI will only accelerate this differentiation. Everyone knows with the edX acquisition, we moved to a platform strategy. This brings us closer to the consumer, lowers our costs, and generates lots of new revenue synergy. To attack it properly, we reorganized our team, and we continue to do so actively. We believe this is creating long-term sustainable profitability. Part of transitioning to a platform company involves rotating our offerings, adapting and growing our products by the day to be better suited to the long-term needs of our customers, both universities and students. Think of this rotation as us turning dials, creating greater emphasis on certain attributes that are critical to the long-term future of our platform. As I see it, there are five keys to this rotation. First, we've been expanding from highly selective and expensive programs to those with greater access and affordability. You will see 2U continue to aggressively manage our portfolio to better suit the evolving needs of our customer base. Second, we're rotating, and have been for some time now, from degree to non-degree. In 2024, for the first time, we expect our alternative credentials will be larger than our degree business. Our acquisitions of Get Smarter and Trilogy were critical here. Third, we're rotating from reaching consumers to serving enterprises and governments, and therefore gaining access to larger addressable market with an extremely efficient model. You'll see 2U continue to focus on growing the enterprise business with a series of offerings that make us unique in the space. Enterprise revenue grew 35% this quarter. We expect continued strong growth in the future. Fourth, we're rotating to more frequent purchases. We're doing a better job moving from single purchases to a subscription-based model. While in its infancy, we believe subscriptions, particularly for enterprise markets, will be an increasingly important part of our business in 2024 and 2025. Fifth and finally, We're continuing to diversify the content base to include content created by industry leaders. Our content acquisition strategy is bearing incredible fruit. Course launches on edX are up 56% year over year. The vast majority of these deals are very CapEx-like, given that course build is not part of most of these launches. To deliver this strategy, we must continuously evaluate our current portfolio of offerings and, at times, exit programs that do not fit. We've managed our portfolio in this manner for a few years now, and we've discussed some of those in the past, and we'll continue rotating the dial towards evolving student needs. We've always been laser focused on delivering offerings that drive a positive ROI for the student, the university, and to you. That's not changing at all. In fact, reexamining our programs regularly through portfolio management helps ensure that we continue to deliver on that promise. When managing our portfolio, we think about four key factors. One, the financial health of the program. Two, efficient resource allocation. Three, debt to earnings ratios of programs. And four, the strategic importance of the relationship with the partner. Proper portfolio management creates greater value for not just the students, but ultimately for our shareholders. Of note for the quarter, we expected to sunset some programs in Q2, which would have resulted in significant additional revenue in the quarter. These were pushed into the back half of the year. We're confident they will close, which makes us continue to feel very good about our full year expectations. Before I move on, I want to highlight two notable degree developments. Our new signings are occurring at a pace that we've never seen before due to our recently unveiled flex revenue share model. We're seeing a radical increase in demand for this model. This is part of our previously discussed rotation, bringing in programs that meet a market need and have attractive pricing. The new flex model offers the university a variety of revenue share based bundles to select from and has been a home run. We've really never seen anything like this. It allows us to aggregate degrees on the platform and bring in new programs that are attractive to students, either because the cost is lower, better pathways exist into the programs, or both. Also note, this model is very CapEx-like compared to our full bundle, as course build is not typically purchased by the university. Note, universities generally prefer the core flex model plus paid marketing netting out at 50%. Demand for the flex model means we're ramping up launches. I'm pleased to announce that we're doubling our degree cadence for 2024 launches from our previously announced target of 25 programs to at least 50 programs. You may remember that our largest ever launch year was 17 programs. Fifty is really something, and 130% increase over our historic high. Universities clearly want revenue share deals, and the current regulatory climate is not dissuading them. Universities have spoken out aggressively in support of revenue sharing. We're confident with our short and long-term plans to navigate the regulatory environment properly. Regardless, we also wanted to create an option in our toolkit for a new model that isn't built on a revenue share for any schools that might not want revenue sharing. We're excited to announce our flat fee model. Our flat fee is an innovative non-revenue share-based model. In this model, we charge a simple flat fee for our standard services across the board based on the particular program and services we expect to provide. This flat fee would include a shorter-term contract of three to five years. Instead of a long-term revenue sharing model, TU would price the program competitively to what might be available in the market to universities on a fee or revenue share basis, doing it based on our proprietary formula and betting on ourselves for renewal upon success of the first term. We can do this because of the combo of our excellent operating history and our platform strategy. This flat fee will not suffer from the never-ending list of charges schools face in a fee-for-service relationship. One of the main positives for 2U is the flat fee revenue will be extremely predictable. It's a fixed, guaranteed fee. In addition, I think it'll be very difficult for competitors to replicate. We have the track record to sell it, the operating history to price it, and believe the response will be strong based on initial conversations. Also note, we believe this model will be profitable, will be as profitable as our flex revenue share model, but will have a much smaller cash burn. To be crystal clear, we believe that revenue sharing will continue to be an important part of the ecosystem, and we think this flat fee fits nicely with our revenue sharing models. A few notable developments on our other product lines. Our boot camp business continues to grow and innovate, although we've seen some softening in the coding sector. We're in a bit of a tech recession in terms of jobs, so that is having some impact. Fortunately, the new AI boot camp is off to a great start. It's also notable that the boot camp business is generating great results in our enterprise segment. Our exec ed business is really surging. We're successfully converting off the edX platform, and we're adding a ton of AI content. Exec ed is a real differentiator in our enterprise segment. It is cohort-based boasting a 90 plus percent completion compared to typically completion rates in the teens at best for the competition. Finally, a few comments on the impact of AI. First, someone has to teach AI at scale. We are that company. I alluded to it earlier, but the pace of new AI content on the platform is excellent and will continue. Second, we believe implementing generative AI inside our business will be a huge positive for us and allow us to deepen our competitive mode. This is already evident through our implementation of the edX Expert Chatbot on our platform and our ChatGPT plugin. These tools are driving new user engagement on edX and eliminating some legacy support costs. But these tools are just the beginning. AI will actually allow us to build more efficiently on the durable mode 2U has around our product and service layer. Cohort-based instructor-led learning and other people-mediated experiences drive significantly higher completion rates. This is hard to build, but the results it drives are powerful. Our competition doesn't have these things, and it shows. Compare the industry prof-cert completion rate of low teens at best to our exec ed completion rate of over 90%. AI will not replace our cohort-based learning or people learning from and with other people. But strategic implementation of AI will create significantly greater efficiency in creating those interactions. The combination of people plus AI can bridge the uncanny valley and drive a greater durable mode around 2U. It can bring down our costs substantially and drive greater high-value human contacts. We're at the early stages of unlocking the power of AI across our business, and we're very, very excited about it. Finally, I want to highlight that we added an executive hire that will be critical to executing on our strategy, Aaron McCullough, our chief product officer. He has an outstanding background in ed tech in addition to stints at Uber, Walmart, and other companies. Aaron will be critical in driving the next phase of our platform strategy. Sixteen years into our journey, we've seen a lot, and we've also changed a lot, working around corners and ahead of the competition. We have more capabilities and a better product suite than anyone in our space. Our business and our team are conditioned to face the challenges of this new era. Paul will now take you through current results. Paul?