2U, Inc.

ground noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. As a reminder, today's call is being recorded. I will now hand today's call over to Steve Borostic. Please go ahead, sir.

Thank you, Tamika, and good afternoon, everyone, and welcome to 2U's third quarter 2023 earnings conference call. Joining me on the call this afternoon are Chip Pausek, our co-founder and CEO, and Paul Laugie, our chief financial officer. Following our prepared remarks, we'll take questions. First, I'd like to cover a few housekeeping items. The earnings 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 during our call will 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 and portfolio management activities, 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 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 to-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. So with that, let me hand the call to Chip.

Thanks, Steve, and good afternoon, everyone. Revenue for the third quarter came in at $229.7 million, with adjusted EBITDA of $28.6 million. These results did not meet our expectations, given weaker demand in our coding boot camps. and continued enrollment softness in some of our higher-priced degree programs. We also know we need to strengthen our balance sheet and are working on it diligently, and Paul will talk about that more in a moment. That said, we did see a number of things that we believe are going in the right direction, which gives us confidence in our ability to return to profitable growth in the future. Our exec ed business grew 32% year over year, and key leading indicators continue to improve in our degree business. Degree pipeline also remains strong. and we're targeting over 80 new launches for next year. We've already signed contracts for over half of these programs. From a marketing standpoint, we've increased the return on our trailing 12-month marketing spend by a factor of two since implementing our new marketing framework in mid-2022. Learner prospects grew 3 million to 81 million at the end of Q3, and organic lead volume from the edX platform continued to increase, up to 46 percent of total leads generated. Lastly, we continue to see solid growth in our enterprise business, up 22% in the quarter, and based on current performance and a strong enterprise pipeline, believe it is poised to more than double next year. So let's move on and unpack our results in more detail, starting with the degree segment. As we discussed on our last call, part of our platform strategy involves rotating out of degree programs that are not performing from a financial standpoint, from a debt-to-earning standpoint, from a partner relationship standpoint or for other reasons. We refer to this rotation as portfolio management, where we mutually agree with the partner to exit certain programs for a fee. The market for degree programs has changed over the years, and some programs have become more difficult to run due to their pricing or other factors. Where we can't work with our partners to make adjustments to improve these factors, we will consider whether exiting the program makes sense to improve the health of our overall portfolio long term. For example, We believe that affordability is key to the degree segment success going forward. But as you know, program pricing is the decision that rests entirely with the university partner. So we've taken a hard look at our portfolio through that lens. In that light, in the third quarter, we mutually agreed to transition out of certain degree programs with a client where we believe the long-term future of those particular programs was challenged. This resulted in revenue in the quarter of $26 million related to the fee the university agreed to pay in connection with the transition Early in the fourth quarter, we also mutually agreed to transition out of certain degree programs with USC. This will result in revenue in the fourth quarter of approximately $40 million. We thank USC for the role they've had in helping us build our company, but ultimately the programs we agreed to exit no longer align with our platform strategy. Paul will dig into how these transactions show up in our results and impact our outlook. I wanted to highlight a couple of points when thinking about portfolio management. One, in every transition, 2U and the school are hyper-focused on ensuring that students are well-served and have a seamless experience. And two, transitioning out of these programs through portfolio management is in the best interest of the company. It allows us to reallocate resources from programs we're exiting to programs remaining in the portfolio, and it also allows us to generate significant cash in the near term that we can use to strengthen our balance sheet and invest in our growth area. While on the subject of portfolio management, you might be wondering whether we're engaging in these activities because of softness across the entire degree portfolio. I wanted to give you some color to show why that is not the case. We think it's helpful to look at the performance of the remaining degree portfolio independent of portfolio management, similar to a same-store sales comparison. A key leading indicator for degree performance is submitted application volume. And for the programs in our current portfolio, over the past few months, the 90-day submitted application volume has remained over 10% higher than the prior year. We expect that this will translate to increased enrollment starting with the January 2024 cohort with revenue following. This gives us high confidence in the growth profile of the degree segment going forward. In addition, the profitability of our current portfolio remains strong. So at the end of the day, the underlying degree business has many positive attributes that we believe will drive profitable growth in the future. But the story of the degree segment is not just about portfolio management and the health of the current portfolio. We're the market leader in OPM for degrees, and we're building on that lead. We're indeed transitioning to an overall more competitive and affordable portfolio, and we're well-positioned to do so because of our flex revenue share model, which enables us to profitably deliver lower-cost degrees. As a reminder, our FLEX model allows universities to obtain our product and service stack with a tiered revenue share model based on what they need. It also allows for a shorter overall contract, which can be desirable for some partners. Most partners have been selecting our core services plus enhanced marketing and placement for a revenue share of 50% to 55% to 2U. University demand for our FLEX degrees continues to be incredibly strong. We're launching over 80 degrees in 2024, up from a previous target of 50, over 70 of which are flexed, and we've signed contracts for over half of these programs, as you can see in the earnings release. We believe these new degrees can generate $120 million of revenue at steady state and will more than replace the revenue of the degrees being exited through portfolio management. Our new flex model is allowing us to radically alter the makeup of the degree business. We're aggregating degrees that we believe will meet significant market demand with competitive pricing. The average tuition price of our Flex degree programs is $40,000, about 50% less than our full model degree programs. We also think this demand for our Flex degrees is just the beginning. Based on current interest from university clients, we expect degree signings to continue at this rate and anticipate that 2025 will have a similar number of new launches as 2024. So to sum up what's happening in the degree segment, while portfolio management may complicate current period results, the cash generated from these transactions, the health of the current portfolio, and the significant demand for new flex programs give us confidence that the segment can return to really solid growth as we enter 2025. Moving on to Alt-Cred, Q3 presented some challenges due to significant softness in our boot camp business in coding, which was disappointing. Coding is now running at pre-pandemic levels of enrollment after 2022 enrollment that was very, very strong. This underperformance impacted both the top and bottom lines in the segment. However, non-coding offerings in the boot camp business, like cyber, showed growth. Turning to the other side of Allcred, our executive education business performed nicely in Q3, growing 32% due to platform organic growth, and a really compelling artificial intelligence product line. These are the only cohort-based products in the market at scale, which creates fantastic retention and student outcomes. Also, organic leads in this part of the business are up 12% year over year. Across all of Altcred, we continue to believe that the key to success is cohort-based programs, which drive high completion rates and strong student outcomes. But given the Q3 performance in coding, we're taking a hard look at all aspects of this business and are committed to making it profitable and cash flow positive as soon as possible. Before I turn it over to Paul, I wanted to provide a quick note on regulatory matters. We continue to strongly believe that revenue sharing will continue, particularly given the vocal support for the model from universities and other third parties. As regulators listen to their stakeholders, We believe they'll see the importance of third-party arrangements for driving innovation, access, and affordability in higher education. With that, I'll hand things over to Paul to discuss the results in more detail.