2U, Inc.

Thank you for standing by, and welcome to the 2U Inc. Fourth Quarter 2023 Earnings Call. I would now like to welcome Steve Verostek, Senior Vice President of Investor Relations, to begin the call. Steve, over to you.

Thank you, Mandeep, and good afternoon, everyone. Welcome to 2U's Fourth Quarter 2023 Earnings Conference Call. Joining me on the call this afternoon are Paul Lauge, Chief Executive Officer, and Matt Norton, Chief Financial Officer. We will share our prepared remarks and follow it by questions. But first, I'd like to cover a few housekeeping items. 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. Commentary made on this call will include forward-looking statements regarding our financial and operating results, plans and objectives of management for future operations, including our performance improvement initiatives, plans and ability to refinance our debt, 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 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 filing. 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 2U's performance. These non-GAAP measures should be considered in addition to, and not as a substitute for, or an 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. With that, let me hand the call to Paul.

Thank you, Steve, and good afternoon, everyone. I step into the CEO role with immense pride and a sense of profound responsibility. Over the past four years, I've been privileged to witness firsthand how we impact lives with the educational offerings we power. Now it's time to sharpen our focus on fundamentals to develop financial resilience while continuing to deliver on our mission. In the last two months, I've delved into the intricacies of 2U, viewing our operations through a new lens and with a broader remit, identifying our strengths and recognizing opportunities for further improvement. Today, I will share some of my observations, acknowledging that we are in the early stages of this journey. 2U has a distinctive leadership position in the education sector, backed by a robust network of university partners, expansive global reach, and a team whose industry acumen is unmatched. The top-line growth that we've enjoyed in the past has been no fluke. We have consistently worked to ensure alignment between market needs and our offerings. Now we need to focus on refining our business model to ensure we are not just delivering the most in-demand offerings, but doing so efficiently. My immediate focus has been to strengthen bonds with our internal team and external partners, engaging in meaningful conversations to set a new course and move to execute it quickly. We've embraced transparency and accountability delineating our business into two distinct lines with each dedicated leadership to ensure full accountability. But before I get into the details, the most important thing we want you to hear from us today is that we know we need to improve our performance and to do it quickly. We must increase our EBITDA margin in order to generate stronger cash flows. This will support our plan to extend our debt maturities in the short term and achieve our long-term goal of profitable revenue growth. Therefore, we need to adopt a shrink to grow mindset and take the necessary measures today to set ourselves up for success long-term. We started 2024 with a clear sense of our objectives, which I'll walk you through today. But before we talk about where we're going, let's first look at how we got here. In 2023, we took some initial steps to reduce costs and to make our marketing strategies more efficient. Throughout the year, these improvements resulted in $90 million of savings on a run rate basis. We also introduced four new lower price degree offerings, reimagined our content delivery process for further efficiency, and added some key members to our management team. These actions are crucial for our future success. In addition to these accomplishments, 2023 provided many takeaways that should inform our path forward. While it's not helpful to Monday morning quarterback, I believe our organizational structure and strategic alignment will allow us to respond more quickly to market demands going forward. And I want to reiterate that our approach to growth will not compromise our profitability. We're committed to making the best strategic decisions for the business and will practice radical transparency in explaining these decisions and their impact on the business. We won't dwell in the past. We will carry forward our strengths but recognize that change is necessary at this juncture. As my leadership team has heard me say repeatedly, we'll be doing a lot of things differently. Now for a discussion of where we're going. We plan to focus on three areas, product, cash, and organization to drive profitable growth, increase EBITDA margins and cash flows, and shift towards a more cost-efficient model. I'll now add some color to each of these areas, starting with product. We have refined our approach to selecting degree programs by adopting a more rigorous criteria that prioritizes profitability and aligns with the proven strengths of our marketing and operational strategy. As a result, we are revising our launch cadence to 60 programs for 2024. For new degrees that we expect to sign in 2024 and launch in 2025, we are focusing on licensure and STEM verticals. Our new framework is designed to ensure chosen programs embody the essential characteristics of success, including competitive pricing, strong organic appeal, and minimal capital requirements, all of which should result in strong contribution margins and cash flows. This focus will enhance our overall portfolio in alliance with our commitment to deliver high-quality and market-relevant education. For alternative credentials, we plan to improve the delivery model with a focus on efficiency. We will consider adding asynchronous and non-cohort-based learning options to give learners the flexibility they desire. We will align program start dates and content creation cadence to leverage resources more effectively. We believe these efforts will drive efficiency in the business and help us expand our recovery. Next, cash. We will continue to prioritize marketing effectiveness. Our first step was to set and maintain high hurdle rates for paid marketing. Now we will work on utilizing AI and automation to increase the number of leads generated and ultimately converted. Progress will be measured by an increase in conversion rates across key marketing channels. We have also identified several areas for potential improvement. For example, In light of the new organizational structure, we will review all functions to eliminate redundant costs and will automate repeatable back-office processes and consider outsourcing or offshoring where appropriate. Our operational improvements will be geared towards reducing fixed costs, ensuring flexibility and scalability. We believe these efforts will result in a business that can consistently generate sufficient cash and will support the discussions with our lenders to reach a resolution on extending our debt maturity. Moving on to organization. At an organizational level, we now have a structure that reflects our focus on alignment, accountability, and efficiency. There are eight business leaders who report to me, including a head of marketing, two lines of business heads, a head of technology, and three G&A function leads. Our aim is to foster strategic alignment across the company guided by a culture of curiosity. We rely on objective data to make decisions, prioritize high caliber talent, and embrace radical transparency. Our strategy based on these three objectives will help us pursue a shrink to grow approach in the short term and with a clear vision of the future of the company. It is important to note that the initiatives we're discussing today are just beginning. We will continue to evolve and develop our plan for the long term over the coming months. Before I turn things over to Matt, I want to briefly discuss our results for the year. Our revenue for 2023 is approximately $946 million with an adjusted EBITDA of around $170 million. It is worth noting that $88 million of this revenue came from exiting certain degree programs or portfolio management. We do not expect to have additional portfolio management activities in 2024. We are optimistic about our degree business and expect enrollment to grow this year by single digits looking at the current portfolio. We also expect that our 2024 launches will generate up to $100 million in revenue at steady state, which is between two and a half to three and a half years from launch. We expect our executive education business to continue its strong growth while we will continue to manage the coding bootcamp business to reflect the current demand level. We anticipate that coding bootcamp environment will continue to remain in its current state throughout 2024. Furthermore, we expect our enterprise business which includes both executive education and boot camps to continue its strong growth. However, it is a lumpy business and we're setting realistic expectations at the outset of the year. To summarize, I'd like to emphasize the important points we discussed today. We are committed to facing our current challenges head on. We're taking bold steps to reduce expenses and improve our performance quickly in order to extend our debt maturity as soon as possible. To all of our stakeholders, partners, employees, equity holders, and debt holders, we're embarking on a 12-quarter journey to reset and enhance our operations. And we need your support in this journey. We are committed to earning that support quickly, and I believe that we will become a stronger company. With that, let me turn the call over to Matt.