2U Inc (TWOU) 2014 Q2 法說會逐字稿

Good evening and welcome to the 2U second-quarter 2014 earnings results conference call and webcast. This call is being recorded. I would now like to hand the call over to 2U's Director of Investor Relations Mr. Alex Makler, for opening remarks and introductions. Mr. Makler, please go ahead sir.

Thank you. Hello everyone and welcome to 2U's second-quarter 2014 earnings call. Following my introduction, I will turn the call over to our CEO and cofounder Chip Paucek, who along with our President and COO Rob Cohen and CFO Cathy Graham will walk you through the financial results and guidance found in the earnings release distributed this afternoon. You can find a copy of this earnings release in the Investor Relations section of our website at investor.2U.com. The recorded webcast of this call will be available in the Investor Relations section of our website for three months from today. Also, we routinely post announcements and information on our website which we encourage you to access and make use of.

Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events and future financial performance of the Company. These forward-looking statements are subject to material risk and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors that may cause actual results to differ materially from those in the forward-looking statements. In particular, we refer you to the risk factors described in the final prospectus of our initial public offering filed with the SEC on March 28, 2014, the quarterly report on Form 10-Q that we filed today, and other filings with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events.

During this call, we will also present both GAAP and non-GAAP financial measures. The non-GAAP measures are in addition to, not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. The non-GAAP results and the related reconciliations to GAAP can be found in our press release.

And with that, let me please turn over the call to Chip.

Thanks Alex. As we prepared to become a public company, the most consistent piece of advice I received was to deliver with consistency, be predictable, and to do what you said you would do. I'm very pleased to report that our Q2 results and updated guidance are representative of that advice.

For the quarter, we exceeded our stated guidance for all of our financial measures. Strong growth in our program delivered $24.7 million in revenue, a 32% increase over the second quarter of 2013. This higher-than-expected revenue along with spending efficiencies resulted in $8.5 million and $7.1 million in adjusted net and adjusted EBITDA losses respectively. Based on these results, we are increasing our revenue expectations for the full year 2014 to a range of $107.1 million to $108.4 million. We are also improving our adjusted EBITDA loss guidance to a range of $18.2 million to $17.1 million.

Our new program growth has been robust and a driver of our strong results. At the end of 2012, we had four programs. Our announced program lineup now includes 17 programs in 13 verticals or academic disciplines with 12 universities.

Before I review our program lineup let me remind you the way to think about new programs. New programs require heavy investment over a three- to four-year period, driving adjusted EBITDA losses before they swing to profitability. This investment is required to produce the courses and technology necessary to launch the program and the marketing assets to build a funnel of prospective students.

New programs come in two forms, a first program in a vertical or academic discipline and a second program in a vertical. Investment required in a new program ranges from $4 million to $9 million in net negative cash over the initial three to four years. First programs in our vertical include programs such as our recently announced Master of Arts in Counseling with the Family Institute at Northwestern University. These programs tend to take longer to breakeven and require a higher initial investments. This is because we have to build the marketing apparatus required to create a long-term funnel of prospective students that might be interested in the programs.

One good example of this marketing build is our website teach.com. Teach.com was built to provide excellent content to people who are potentially interested in becoming teachers. While this site took time and investment to grow, it's now delivering high-quality prospective teachers to our current education partner. Over time, we expect it will pick up steam and provide additional enrollments in other programs.

Other examples of our marketing investments include socialworklicensemass.com and certificationmass.com. Second programs in the same vertical tend to breakeven faster and require less investment. This is because the marketing apparatus is already in place to generate the prospective students for that particular discipline. Second programs allow 2U to find a home for prospective students who might not be interested in or appropriate for the first program. Remember 2U's goal is not to find any student but rather the right student for each school, driving the desired long-term outcome.

We also have new offerings in existing programs, such as the Master of Legal studies with the great Law School at Washington University in St. Louis. These offerings typically require minimal additional investment. However, they are an important part of the strategy to help programs reach their full potential. They leverage the content, lead base or both of the existing program and they can broaden the appeal to potential students for minimal additional investment. They are important to growth but do not result in a change to the program models.

As part of our growth strategy, we committed to all of you that will launch no fewer than four new programs per year regardless of how many new offerings and existing programs we launch. I would like to review 2014 briefly as the schedule is set, all programs are either launched or on track.

The 2014 slate includes the Master of Information and Data Science at Cal Berkeley, the Master of Healthcare Administration at GW, my alma mater, the Master of Social Work at Simmons College, our second social work program, and the RN to BSN MSN at Simmons College, our first undergraduate program.

At the time of IPO, 2U had no 2015 programs announced. Now our 2015 slate is set and fully announced. It includes four new programs and several new offerings at existing programs. It's worth noting that all of the new programs are with new university partners who are now far enough along that I can even give you the actual launch schedule. So let's start with the new programs.

In January, we will launch our Master of Business Administration with the Whitman School of Management at Syracuse University. This is our second MBA program in the critical business administration vertical. We predict enrollment in this program will be very strong based on the proprietary program selection algorithm results. We believe this program will get 2015 off to a great start.

Also in January, we expect to launch our Master in Data Science with SMU, Southern Methodist University. This is our second program in the data science vertical and our first degree at SMU and in the state of Texas. This is a greenfield program for SMU, meaning that it is currently not offered on their campus. While SMU is an excellent and well-respected national brand, we think interest will be particularly strong in the Southwest. We are thrilled to work with Provost Paul Ludden and his excellent team on this big opportunity.

Before the end of Q2 2015, we anticipate launching the Master of Arts and Counseling program with the prestigious Family Institute at Northwestern University. Northwest is our highest ranked university partner to date. Counseling is a large new vertical with approximately 10,000 degrees conferred in 2013. This vertical grew approximately 12% in 2013. We believe this makes a sizable new opportunity for the Company. We thank Provost Dan Linzer for his confidence in us.

Finally, we expect to close 2015 with the launch of our Master of Communications program with the S.I. Newhouse School of Public Communications at Syracuse. This is the first program in the large communication vertical that had approximately 9,000 degrees conferred in 2013 and has had average yearly growth of about 6% since 2008.

We have a new announcement today making some news on this call. It's a new offering within the existing Syracuse MBA program. Beginning in mid-2015, the Whitman School of Management will offer a Master of Science in Accounting with 2U. We are excited to expand our relationship with this great institution.

I'd like to talk for a moment about profitability. Currently we still have more (technical difficulty) in the investment phase than the return phase. Because of the lag time between marketing spend and revenue generation, the underlying profitability in the model is harder to see in our current financial results. However, our most mature programs are already demonstrating that even without second program leverage, they move to profitability as they move through their lifecycle. As programs age, their models move to profitability and begin showing strong margins. It takes time for students to enroll in programs, and they generate revenue for us as they take courses over the program's life. By the time we reach cash flow breakeven in a program, the expected future revenue from already enrolled students is generally greater than the net negative cash we've already invested.

Our earliest programs show the benefit of time to the financial model. We launched one program in 2009, one in 2010 and two in 2011, a group we refer to as our first launch cohort, or the core four. Together, these programs became adjusted EBITDA positive in 2013 at single digit margins on a fully allocated basis. But if you assume that they all launched with our first program in 2009, we believe that 2013 adjusted EBITDA margin for this first launch cohort would've been in the mid-20s% while still scaling.

In addition, it's important to know we optimize our marketing spend based on a ratio of the lifetime value of a student to marketing spend. As we bring additional programs in the same degree vertical, the efficiency of this spend improves dramatically.

Another advantage of second programs is the existing marketing apparatus allows us to scale them faster and at substantially reduced expense, therefore bringing in revenue earlier and recovering costs more quickly. While we can expect first programs to reach natural scale at an average of five to six years, second programs can generally get there more quickly, perhaps by a year or more. We believe that our first launch cohort clearly demonstrates this path. More (technical difficulty) launch cohorts while at earlier stages of growth are showing similar patterns.

In addition, recent launch cohorts include second programs in the existing vertical which decreases the average student acquisition cost across our program portfolio. Proven lifecycle profitability and the impact of second programs is expected to drive profitability towards our targeted mid-30s% adjusted EBITDA margins.

As a management team, we are committed to this path to profitability. We are excited with what we are seeing today, delivering high growth and a path to profitability. And while we are still at a point in our business lifecycle where we have more programs in the investment phase than in the return phase, we believe we have reached that turning point.

We now expect the 2014 adjusted EBITDA loss will improve by about 17% compared to 2013, even though we remain in high-growth mode. Our goal is to build the world's best online education, scale our revenue, and bring the Company increasingly closer to profitability while building the world's best student outcomes.

With that, I'll hand over to Rob for some second-quarter operating highlights.

Thanks Chip. I want to start off by talking about Net Promoter Score, or NPS, which is the key performance metric we use to measure satisfaction across our programs. Our blended student and faculty NPS during Q2 remains strong at 70. Let's remember that NPS is a high bar. Anything above zero is good and anything above 50 is world-class. We believe the more satisfied students and professors are, the more likely student outcomes will be excellent.

From an operations standpoint, our dedicated team is providing active ongoing support for 11 launch degree programs as of June 30. Here are some quick stats to illustrate this undertaking.

82% of all students that started one of our programs had graduated or were still enrolled as of June 30. We are enabling, on average, approximately 1,000 live classroom sessions a week. To remind you, these sessions are live interactions between faculty and students and intimate classes that average only 10.4 students.

In June, we announced that our 10,000th student had enrolled in our university program. We are proud of this milestone not only because we get to be part of providing an outstanding educational experience to an increasing number of students, but because it demonstrates another step along the path of driving 2U to scale and profitability.

At the end of June, our partner programs had enrolled 10,484 students inception to date, which have resulted in tuition bookings for our university partners through this same period of $582.1 million. But our impact can be felt beyond just enrollment numbers. Last quarter, we hit a key milestone with our first program at the USC Rossier School of Education. Five years after our partnership began, the online Master of Arts and Teaching program graduated its 2,000th student. These graduates now teach at 947 school districts around the world.

Across all of our programs, 2U has successfully placed students through on-site and virtual methods 18,346 times and have contracts with 10,509 placement sites spread across the world. These figures are a true testament to the value that this company is creating but it's not all about numbers, so let me touch on a couple of additional highlights from the quarter.

In May, we announced a notable development, our cross-university course initiative expanding the course selection available to students in our partner programs. Students can now take courses in other 2U-enabled programs and in fields of study other than their own, allowing them to more broadly meet their educational interests. This initiative also creates a differentiating feature for 2U programs that helps set us and our university partners apart from other online offerings as we look to attract high-quality students.

Also in May, we hosted our First Annual 2U Partner Symposium. The symposium was a summit for our university partners to collaborate on best practices within the programs we run together. We had over 60 university administrators, faculty, and staff in attendance, including all current university partners and a few prospective ones. In fact, two prospective partners who attended the symposium signed with us quickly thereafter. This was a private event. No press or investors were invited. Real challenges and issues were discussed, including a panel session called "Organizational Models for Online Programs", which isn't very interesting to most people but we think is particularly useful to this group. We believe our schools are embracing the online environment like no one else in higher education. It was probably the best event 2U has ever held. We are very proud of the relationships we've built and the groundbreaking leaders we're working with.

With that, I will hand things over to Cathy.

As Chip mentioned, our second-quarter financial results came in strong, showing significant year-over-year revenue growth and coming in ahead of our expectations on all measures. Second-quarter revenue was $24.7 million, above the top end of our guidance range. This 32% year-over-year increase was driven by a 34% increase in full course equivalent enrollments, or FCEs, offset by slightly lower average revenue per FCE.

The FCE increase was generated across our program maturity range from the first launch cohort to new 2014 programs. 81% of FCEs and 84% of revenue came from our first launch cohort.

To give you an idea of the rate at which our program portfolio is diversifying, in the second quarter of 2013, the first launch cohort contributed 99% of both FCEs and revenue. The fluctuation in average revenue per FCE was well within the normal range we expect to see between year-over-year and sequential periods and does not indicate any change in our revenue share range. Fluctuations in average revenue per FCE are due to both mix shift driven by new program launches, individual program growth rates and changing academic calendars, as well as differences in net course tuition resulting from factors such as tuition increases and scholarship grants.

For additional detail on FCEs and FCE trends, we provide a rolling eight quarters of FCE history as a part of our earnings release. We also provide our platform revenue retention rate to give you more insight into the performance of our most established programs. Full explanations of these metrics can be found in the MD&A section of today's 10-Q filing.

As is seasonally normal, second-quarter revenue did decrease 6% sequentially. Due to the academic calendars of our partner programs, the second calendar quarter has the fewest in-session days of any quarter in the year. As we recognize revenue for each program from the first day of classes to the last, this results in lower revenue recognition during this period.

Our earnings measures, adjusted net loss and adjusted EBITDA loss, both came in better than our guidance for the second quarter at $8.5 million and $7.1 million respectively. Over-performance on the revenue line along with expense efficiencies drove the positive variance. These results were nearly flat with the second quarter of 2013, even though we continue to invest heavily in launching and scaling new programs.

We said in our first-quarter call that we expected our loss measures to stop accelerating around mid-year and that's proving to be true. On a pro forma per-share basis, adjusted net loss for the second quarter was $0.22, $0.015 better than the midpoint of our guidance range calculated on the same basis.

The material item reconciling net loss attributable to common stockholders to adjusted net loss is stock-based compensation expense. It was $2 million in the second quarter, up from $632,000 in the same quarter of 2013. The increase was driven by two factors, grants made for new hires, promotions, and retention, and the increasing valuations attributed to our common shares as we approached our public offering.

We define adjusted net loss as net loss attributable to common stockholders before preferred stock accretion, the warrant expense portion of net interest expense, and stock-based compensation expense. Our definition of adjusted EBITDA loss is net loss before net interest expense, taxes, depreciation and amortization and stock-based compensation expense. Additionally, for per-share measures, we use a pro forma share count as though the conversion of all preferred shares to common which occurred upon the closing of our IPO had occurred on January 1, 2013.

Quickly commenting on our balance sheet, cash position at June 30 was $104.8 million, making up the majority of our $108.2 million in current assets. I want to remind you that each of our partner programs has a unique academic calendar and that we receive payment after the start of their academic terms. Depending on where our partners are in their academic calendars, at the end of each calendar quarter, we could have wide variations in cash, Accounts Receivable, and deferred revenue from quarter to quarter. We suggest that you look at changes in these accounts as a group to better understand our balance sheet position.

Turning to guidance, we expect third-quarter revenue to be between $26.6 million and $27.3 million. At the midpoint of this range, this represents 31% growth over the same quarter of 2013. On a sequential basis, this guidance also demonstrates the expected normal revenue rebound from a seasonally low second quarter.

Adjusted net loss for the third quarter is expected to be between $7.3 million and $6.7 million, or $0.18 to $0.17 per share. We expect our adjusted EBITDA loss for the quarter to be between $5.8 million and $5.2 million. This guidance reflects startup and marketing expenses that we've shifted from fourth quarter to third related to the just announced SMU Data Science program. As we now expect this to be the second program to launch in January 2015, earlier than our models assumed, we need to begin marketing immediately. Even with the additional expense, third-quarter guidance ranges for each of our earnings measures indicate the uptick we expect to see over second-quarter results. This gives us further confidence in our view that 2014 losses will improve over the prior year.

Four full year 2014, we are increasing our expected revenue range to between $107.1 million and $108.4 million. This includes our expectations for the Simmons Social Work program launched last month as well as the Simmons RN to BSN and MSN program scheduled for October.

Remember that new programs contribute very little revenue in the early operating quarters. The vast majority of revenue from this point in the year forward will come not only from those already launched programs but from returning students in those programs. Both of these factors provide us with strong visibility into revenue for the rest of 2014.

Despite the fact that we continue to invest heavily in launching and scaling new programs, our earnings measures for 2014 are trending up, demonstrating that we are on the path to profitability. We are improving our expected adjusted net loss for the year to between $24.1 million and $23.1 million or $0.64 to $0.61 per share. At the midpoint of the range, this indicates about an 8% improvement over full year 2013. And we now expect adjusted EBITDA loss to be between $18.2 million and $17.1 million. Again, at the midpoint, we are now expecting 2014 adjusted EBITDA loss to be a 17% improvement over 2013 results.

One additional comment on full-year earnings measures. By giving third-quarter guidance, we are implicitly providing fourth-quarter guidance as well. When you run your numbers, you'll see that our annual guidance implies a very strong sequential improvement in adjusted net and adjusted EBITDA losses.

I want to remind you that we have significant expense seasonality in the fourth quarter of every year. During this quarter, we reduced marketing spend across our programs substantially as marketing effectiveness drops during the holiday season. With that color on a great quarter and perspective on what we think are very positive expectations, I'll turn the call back to Chip for his closing comments.

So, before we wrap up and take questions, I'd like to share a quick story about impact. Let's remember why we are here. Most online education isn't very good. Why? One reason, it often lacks the person-to-person face-to-face learning experiences. At 2U, not only do we enable live classes but we also have programs like nursing, social work, and teaching that require fieldwork as a prerequisite for graduation. Our placement services team works tirelessly to match students with real-world experiences, including clinical placements based on their geographical location. Let me tell you about two of these students connecting in a rather unique way.

Melissa Willmar and Erin Johnson are both students in Georgetown's online nurse and midwifery program. Funny thing is, they both live far outside the continental US, 4,700 miles from Georgetown's DC campus in Hawaii. Yes, they are Georgetown students who currently live in Hawaii. On June 6, Melissa, who is already a mom to two young girls, was in the Castle Medical Center in Kailua, Hawaii preparing to give birth to her third child. When Melissa's nurse midwife arrived to deliver her baby, she introduce Melissa to Erin, a Georgetown student performing her clinical rotations at yes, you guessed it, Castle Medical Center. It didn't take Melissa and Erin long to realize they were actually classmates in Georgetown's program. Immediately, the two bonded. Moments later, Erin delivered her classmate's baby. Baby Tipton, mom Melissa and delivery student Erin are all doing really well. Thank you very much for letting me share your story and go Hoyas.

The reality is the programs we enable bring students together from all over the world. We aim to do it at the highest quality level, including physical placements when necessary. Virtual babies wouldn't make the cut. You have to deliver the goods. Live weekly classes, real-world experiences like the one you heard from Melissa and Erin today are a normal part of our business. We like to think that we are eliminating the back row in every classroom and bringing every student forward to help them realize their full potential, doing what you said you'd do. For investors yes, but most importance, doing what we said we would do for our university partners and their students. After all, outcomes matter more than anything else.

With that, Cathy, Rob, and I will be happy to take your questions.

(Operator Instructions). Michael Nemeroff, Credit Suisse.

Congratulations on a nice, strong quarter. Just about all of the launches in 2015, I'm noticing that a couple are going to be a little bit earlier because I think we had modeled in one per quarter pretty linearly. Looking at my estimates, does that imply that, as these programs launch and you get a little bit more revenue upfront, that you feel pretty darn confident in where consensus is for 2015 at this point in time?

Obviously, we are thrilled to launch the year starting in January with the second program in one of the largest verticals that we could operate in, which is business administration with a great school, Syracuse, and we're also pretty excited about our January launch of SMU Data Science. While it's not currently a large vertical because it really doesn't exist, we found a lot of success with Berkeley and we are thrilled to have a second program there.

But I would just caution you Michael to remind you that new programs, as we said in the script earlier, that new programs take a while to mature and do not have a really significant impact on revenue in that year, in the actual year that they are launching. So we do believe that January is a great start. Launching two right at the beginning of January is important but we think you just need to factor that in in terms of new programs having a delay to the effect on revenue. We do like what it says that, you know, when we IPOed in March, we didn't have any 2015 programs announced and now we've got the full slate set, so that certainly should give an indication of how we feel about pipeline going forward.

That's very helpful, Chip. And then as you -- I know you track a lot of data about the students that you service and I'm just curious if there's been any notable change, positive or negative, in the retention rates of on each of the programs that are already launched and then also if -- I know it's hard to track, but I know you try and track the outcomes of whether you see an improvement in how -- in placements post-degree.

So I would say to answer that in order, first, retention, currently 82% across our partner portfolio students who graduate are still enrolled, that's more akin to a campus program than it would be to an online program, so we feel like it's very strong. We do actually feel like, as a team, we are improving it by working more closely with our university partners who care about retention more than just about anything else because it really is where the rubber meets the road in terms of delivering the outcome to the student. Obviously, if you stay through the program, you graduate, you get a great degree, the same degree as you would on campus, a huge value to the student. So we feel like retention is a strong part of the overall 2U story as we indicated in our impact report which we released in April and will continue to do on an annual basis.

As far as outcomes, the reason I mentioned the impact report is we do believe that there is this long-term correlation between our financial success and the student outcomes. And I think the Company is focused on the right things. And while we are a public company, the DNA of the Company is focused much more on outcomes than anything else. You know we have one great advisor who said to us that they love that we've kind of grown up on a protein diet focusing on what matters most, which is really the long-term outcome of the student. So, we continue to see very strong job placement rates. And I happen to love that story about midwifery because it's pretty crazy that two students 4,700 miles away from their campus are delivering a classmate's baby. But we see that kind of stuff all the time.

The reality is, if you attend a great institution and you get a great degree from a school like Berkeley or Georgetown or now Northwestern, you typically have a pretty fabulous outcome, and we are happy to deliver that in the online environment for the first time.

That's helpful. And then one for Cathy if I may. Nice job on managing the expenses and decreasing the loss expectation. Where is that leverage coming from? Is it just because that you're launching maybe one or two more complementary programs sooner than expected than we were to expect, or are you getting some kind of -- are you getting better at the marketing? Just give us a sense on where that leverage is coming from.

It's really coming from two places and one of which you hit on which is the second program. As they start to get their stride, that's really what helps us get more efficient and really take the benefit of marketing efficiency and leverage in our programs.

But the second thing is just we're getting the benefit of time. We have more programs that every quarter that goes by are more and more mature. And if you'll remember the discussions about our program lifecycle, as programs mature and we pass that sort of inflection point where we are at our peak investment, you know, just as time goes on, by nature of the kind of business that we have, time is on -- time is our friend from having more programs that have been in place for a longer period of time and we are seeing that benefit.

Thanks for taking my questions. I'll pass it along. Thank you.

Corey Greendale, First Analysis.

Congratulations on a good quarter and some great program additions over the past few months.

Thank you.

And I just have to say I love that midwife story and look forward to hearing stories next year about Syracuse students auditing other Syracuse students.

(laughter)

Noted.

So I just had a few questions for you. So first of all, the model of adding a second program in a vertical helping improve your economics is clearly working. Can you just update? I think you'd said in the past that adding the second program, adding the Simmons program doubled your conversion rates. Can you just kind of uptake that and what are you seeing so far in the Simmons nursing program? I assume you've started marketing them. What benefit you think you will be there now that you're adding a second program there.

I think it would be too early for us to give specific guidance around -- and as you know we don't disclose on a per-program basis. We did for the process of -- for the roadshow, talk about Simmons and the impact that it's had on our nursing vertical. And it has been very strong but we can't get into details on a per-program basis across the portfolio. It is notable, however, that we now have four distinct verticals with a second program in process.

And also so I'd don't know if you'll comment on this one either but the SMU and Berkeley obviously both strong brands. Can you talk about the synergies you expect there? Do you think you'll get students in Texas enrolling in Berkeley or in California students enrolling in SMU, or do you think it will be more specific to the geographies where they are located?

Across our portfolio, these are all pretty exceptional brands. You have to think of -- what's pretty amazing is you have to put them in perspective that you are dealing with institutions that have more longevity than anything in our culture. You've got some of the best business brands in the world, like Coca-Cola founded in 1886, and you have Georgetown Chapel Hill founded in 1789. They have 100 years on Coke. I mean these are unbelievably strong brands.

With that said, we have found in our program selection algorithm that there is a distinct regional effect to all of higher Ed and higher Ed education is inherently a local business in many ways. And so we have found that you will certainly be stronger in a particular region for each university. While they are national and clearly if you look at our program footprint today if you look at the core four as an example, Dean Karen Gallagher now has students in 56 countries in the Rossier School of Ed. So it clearly goes global, but the fact is conversion will be more powerful in a particular region where that brand is stronger and there is a reason. There's hundreds of years of brand resonance for a particular brand in that area.

So we do like the lineup. And Corey, we have talked in the past about the program selection algorithm and we think it's a real value to the Company in terms of deploying capital in new programs, simply because we didn't have it until 2014. So, we started using it to select programs in 2014 and 2015, and so we are going into these new programs with quite a bit of confidence that maybe we didn't have in the past.

And with the 2015 slate set, clearly the message that you are committed to improving profitability, that comes through loud and clear. What would get you to add a fifth program in 2015? And would you do it if it would result in profitability not getting better in 2014?

You know, we promised no fewer than four. Obviously, that phrase "no fewer than four" means it's no fewer than four. It's certainly possible that we could always do more, but the fact is we are committed as a management team to this path to profitability. And what we really like in this current quarter is that we are seeing the results of it and we think we've sort of flipped. You know this tipping point has been reached where you've got more programs generating a return. And you're starting to see some of the programs we launched in earlier -- in not the core four but in a later cohort really start to generate results that hit the financial statements. So some of it, as Cathy mentioned, is simply time.

The reality is no fewer than four means no fewer than four. And at this point, we are very comfortable telling you that 2015 is set. Obviously, in the future, we'll keep everyone posted if we decide to increase the number. But currently right now, we feel very good about where we are.

And I just would add one additional comment about pipeline. We are actively working on 2016, 2017, and beyond. I think you know I've said in the past that we do actually have quite a bit of dialogue going on around with different universities and feel pretty confident about our future pipeline.

Great. Thanks. I'll turn it over.

Brian Schwartz, Oppenheimer.

Thanks for taking my questions this afternoon. I too will extend my congratulations on another strong quarter from you.

Thanks Brian. Good to hear you.

Great. I've got three questions here for you. Chip, I wanted to just ask if you could talk from a qualitative perspective of the new programs that you signed up in the quarter. When you ran them through the program selection algorithm, are the opportunities when they are at full-scale, are they fairly consistent in size with the prior new program?

The tough thing about our business is there really is no average program. They all are very different schools, very different disciplines and even just very different tuition levels. So, you have some programs in our portfolio that are around $50,000 for a full program and you have some in our portfolio that are at $100,000 and many in between. So, we did very specifically and somewhat surgically select these opportunities as not just disciplines that we thought. And you notice in the commentary we made we actually gave you some comments around the types of things that we are looking at in the algorithm where we are looking at the number of degrees conferred. We are looking at the growth in the space. We're looking at job prospects in the space. We think it's really critical that the Company focus on programs that have great job opportunities because ultimately it is about the outcome.

And then a lot of it comes down to the leadership team at the school and this is where the algorithm is of least help, frankly. We've gotten to a point now, we actually say no much more than we say yes. And I don't say that to indicate anything about our hubris or the fact that we think we are the cat's meow. But the fact is this model takes a leadership team that is committed to driving a really high-quality experience and doing it at scale. And it's not easy. It's not inexpensive, but it's also not easy. It's very hard to do.

And the reason we mentioned the symposium in our call is we thought it was kind of a breakthrough moment for a group of people whose really one common denominator was that they were making online students equal to the campus students. They were sort of ending the segregation of online education. They were sort of doing this, in our opinion, the right way. And so, watching them talk together about how to drive the outcome was really powerful.

That's all commentary that I feel like today we are honoring what we said to ourselves, which is what that we would put much more science behind choosing program opportunities. Now, it gets challenging in the case of greenfields simply because there are no degrees conferred in an area like data science. But looking at job prospects and looking at job growth, we thought that that one was a really solid opportunity. And frankly we had a dean, Dean Anna Saxenian at Berkeley that really pushed as hard to do it and convinced us it was a great opportunity. We are very thankful she did. So it is a two-way street. Qualitatively, we feel really strong about the lineup that we are putting forward and do not see -- while we understand investor focus on pipeline, it is not a significant management concern.

Great. I'll let you catch your breath here for a second here Chip. I've got a question maybe that's for Rob or Kathy. But you kind of -- you seem to paint a very clear picture in your commentary here that the business and the new program wins are quite strong and if not accelerating right now. Is there anything that we should be aware of or anything that's preventing you from these new program starts being a choke line on your capacity? Can you talk through that just to make sure that we can feel comfortable on that, given this accelerating trend on new program starts?

This is Rob. The reason we lay out that we will launch no fewer than four programs a year is so that we can continue our path to increased profitability. Our capacity is not limiting us at all. In fact, this year, we are launching programs much quicker after deals signature and being able to market programs very, very quickly. So, operationally we are continuing to have great success serving the universities and students that we currently serve, have no difficulty quickly launching new programs and that's not holding us back in any way.

,Over the past year we've added a full-time position that's actually beginning implementation of new programs through our sales process so that we are able to very, very successfully launch these and if not -- it's not creating any barrier.

I think it's safe to say, Brian, we wouldn't have given you a calendar if we weren't highly confident on the launch schedule itself.

That's great. And then last question from me, Chip, I'd love to get your latest assessment here on where you think we are in terms of nonprofit universities' appetites for a cloud learning platform. So maybe if you look at your pipeline here today, what percentage of the opportunity out there do you feel would viably consider a cloud learning solution for graduate degrees and then what did that look like, say, 18 to 24 months ago? Thanks.

Well, it is clearly significantly different than 18 to 24 months, but I'm not sure if that has as much to do with the appetite for cloud as much as it does, frankly, that we've kind of delivered on what we told people we would do. And when I say that, I don't mean investors. I mean our partners that we've delivered high-quality student outcomes in a way that you don't typically see with online learning. And I think, in our case, part of the special sauce here is that we've really gotten great at -- these are real Georgetown/Berkeley/Chapel Hill Wash U/GW students. They really are becoming Trojans, Tar Heels and (technical difficulty) in a way that you typically don't see in most online programs. And there's a passion for the schools in a way that's very real.

So, we think that from a -- 2U has become, certainly at the elite level of schools, a go-to option if you are considering going online. I think it should be an indicator of that strength that all of the universities that we announced this year were actually new universities. So, 2015 is all filled with new universities.

Now, I just caution you a little bit that one of our great deans mentioned to me the story of change in higher Ed is the story of the turtle being mugged by two snails. And somebody asked the turtle what happened and he said I don't know. It all happened so fast. And that was one of my deans telling me that it is a thoughtful slower process. And so, we don't believe in the notion of a land grab. Our schools have for good reason been thoughtful about their path. And we don't believe that it's fear of change. We think there is a lot of good justification for when you've got such an incredible brand and reputation that you be thoughtful about your path. The last thing you want to do is in any way hurt the brand. So, most schools are still going on a slower pace than I think many folks that we talked to would expect. We actually think, from that standpoint, it's actually for our company a positive because we have certainly proven we can do this. And while there will be others out there that will try, we are almost seven years in and it's not easy, so they are going to have to prove they can deliver the quality before schools will sign up with them.

Thank you again for taking my questions today.

Michael Tarkan, Compass Point.

I know, last quarter, you discussed the amount of revenue that's basically pent-up in this model over the next couple of years based on I guess enrollment and retention trends. If you were to shutdown new program investment, I think the number last quarter was around $110 million. Do you have an update on that for us? And I guess as a follow-up, should we still think about expenses against that in that low 20% range?

Hi Michael, yes. The update would be that, at the moment, it's about $114 million for that equivalent number. And just to remind everyone who might not know exactly what we are discussing, this is what we would consider to be our backlog number. This is if we were to shut down marketing today and teach out the students, have the University program teach out the students who are already enrolled, an attrition adjusted number would be about $114 million of remaining revenue and in the low 20% of cost of sales against that number today.

Okay thank you. And then with all of the new launches coming online and sort of the mix of different tuition costs rolled in, different growth rates, how should we think about revenue per I guess full course equivalent for the back half of the year and into 2015?

We don't expect a significant difference in average revenue per FCE. There is -- the launches in the back end of the year though, they may be -- we have one program that is probably slightly below our average. The remaining program in 2014 is probably slightly below our average in terms of course tuition. The numbers that it will generate will not change things all that much in the remainder of the year. What we should see is just the normal fluctuations we would see because of timing, class mix, things like that.

Okay. And then one more. Do you guys have a preference from a strategic standpoint right now in terms of what type of program you'll be launching, whether it's a complementary program, maybe a completely new program at an existing university partner, or a completely new school? How do you guys think about that and balance that as you look at new opportunities? Thanks.

That's a great question. It's also a very tough question. The reality is we are looking at the sort of -- we have to balance the notion of sort of plowing virgin snow in a discipline like communication that we haven't touched yet which we think creates a lot of long-term opportunity for the Company with building a second program that might unlock more leverage more quickly. They are both really important.

And then you also mentioned greenfields. Data Science -- it's no surprise to anyone internally that we are launching our second data science program because it's done very well. But it certainly was not on our radar previously. So we have to balance those opportunities. We are obviously looking at IRRs and we are looking at each particular program from the standpoint of what we think steady-state enrollment might be. But that is certainly a tough part of our job as managers, choosing the programs on a go-forward basis. Now, I think as I mentioned, Michael, we feel like compared to let's say 18 or 24 months ago, we are choosing with significantly more data. It's less qualitative and more quantitative.

Okay, thank you.

Andre Benjamin, Goldman Sachs.

We know from Cathy's earlier comments that the pre-2013 programs are about 81% of revenue, so the rest are 19%. And we also know that given we're only a little bit through 2014 or halfway, most of that is probably the 2013 program. So, focusing a bit closer on those, is there any color that you could provide on how the programs that were launched in 2013 are trending in terms of growth and profitability versus either expectations or how the core four were doing at that same time in their lifecycle?

We do believe that the core four are representative of the future with one exception. There is no second program in the core four. So we do think that 2013 is showing some similarities. It's obviously a lot earlier in the lifecycle and we just have to remember we did launch the Rossier School of Education in 2009, the USC School of Social Work in 2010, and Georgetown nursing at Chapel Hill MBA at UNC in 2011. So they just have a lot more history. But we are -- we do see some similarities. Cathy, would you like to add something?

Yes. So Andre, we've sort of done an exercise where we've taken the 2013 launches and tracked them sort of time zero against the original launches. And what we see is them following a very, very similar pattern, if we adjust for sort of changes we've made in our business model. And by changes, I mean that you learn as you go through this and particularly around how to market for students and how to launch programs. We certainly learned a lot through our first few. So if you kind of normalize those changes, you see very, very similar patterns.

Okay. It seems like a lot of things are going very well between a number of additional programs announced, raising guidance, a lot of great stories about student outcomes. What isn't going as well as you maybe would like, where you're seeing some of the bigger challenges? And what can you share with us regarding what your partners are telling you about what maybe you should be working on?

Well, the reality is if you are -- all of our partners, with what they've done in their history, have a very high bar. So, while we are telling you that we are very pleased with the results, the reality is we can't be satisfied. We have to drive higher outcomes. We have to drive higher retention. We have to drive better job placement rates, placement in programs.

We were happy to talk about placement on this call because it's actually one of sort of the unsung jobs even at times within the Company because it's very, very difficult to find that local placement for that midwife or the acute critical care nurse or the family nurse practitioner or our teaching program. And so I can assure you that our schools are always pushing us for more. So, regardless of whether retention is a solid number, the fact is we have to try to make it better. That's our job.

And I would say, Andre, it's a very good question that -- the hardest thing for 2U without question is preconceived notions of online education. They are bad. And so, we certainly didn't create those preconceived notions, but they are very real and as you go from here to Europe to Asia, they get worse. So, we sort of battle that every day. Most of the people that are considering one of our programs had really never considered an online program before, and so they are just inherently pretty skeptical and they have to be -- really spend a lot of time with us and with some of the folks at our schools to really believe. Now, that will get better over time. We certainly didn't build it into our margin, into our models on a long-term basis but we do believe that over time, we'll get wind at our back there because that should get better, but it's a daily issue. It comes up all the time.

And one last small one. To follow-up on the question about revenue per course, to more explicitly ask, is your thinking still that the average revenue per FCE should grow in the low single digits? And are you seeing any change in the sentiment of your university partners towards raising tuition given the state of the economy or debates around affordable education that call that into question?

I'll take the first part of that question and then give it to Chip for the last part. Yes, over time, we do believe that a low and low single digits is probably the growth rate. The assumption is that as we sort of mature this portfolio of programs, we will be adding programs that will not materially change the average tuition as we build this portfolio into what we (technical difficulty) looking at primarily is the effective tuition increases. So, the assumption is, as we've discussed, valid.

So, as far as tuition prices, all of our university partners are most concerned about delivering a really high-quality outcome and typically do indeed actually deliver that outcome. So, I will tell you that one of the benefits of the model that we bring to the table is, for the first time in history, you don't have to pick up your life, quit your job and moved to attend a top 20 B school. That is a nontrivial change to your expense burden and therefore potentially your student loan burden. We think it's a big part of the story. We don't think it's been fully told.

We do believe that it is the right decision by our partners to charge the same tuition. It is ultimately the same quality, the exact same degree, the same faculty in many cases, the same rights and therefore same responsibilities. And it's also not easy or inexpensive to do it this way. Live weekly classes with the real Berkeley faculty member, it's not easy. So we think it's the right call but we do believe we are having a pretty profound impact on individual students' actual debt burdens.

Thank you.

(Operator Instructions). Michael Huang, Needham.

So, nice win at Northwestern. I was wondering. Given the strength of brand here in the new verticals, I was wondering if you could just talk about the relative length of sales cycle and how that compares to others in the past. And at the end of the day, what was the catalyst for the decision to launch now?

Good seeing you, good hearing you again. I would say every single conversation is different. We've had some extremely fast and we've had some slower. This was maybe our longest. So this has been in process for about 2.5 years. Part of the reason was the school was going through accreditation. And this is the sort of real thing delivered on every level. So, of course accreditation is a key component of it. So, this particular relationship took a long time, and I was really excited to be able to mention Dan Linzer on the call because the provost there has been a real pioneer in this regard.

But the Family Institute at Northwestern is a very prestigious school. We are thrilled to add Sheryl and Fran and their team to our partner list and it did take a while.

Now Mike, the other sort of Syracuse program would be the opposite. It was the shortest one in our history. It took a couple of months. So everything is -- they are all different. Now, we have quite a few in our pipeline. And one of the reasons -- it's great if somebody could mute by the way. One of the reasons (technical difficulty) one of the reasons -- by the way, it would be great if somebody has got background noise if you could mute your phone.

Mike, are you in a train station?

There you go. One of the things that makes it tricky about a pipeline is that these conversations all go at a different pace and so we do have quite a few conversations going across many different universities. And the time to close is going to be different per school. So I really -- nothing to do with our interest level in the relationship. It's just some take more time.

Got you. Apologize for the background noise here. I am holed up here at the airport.

Been there many times. No worries.

A question about the partner symposium. I think you had mentioned that there were a couple of prospects there that had already closed post-that. And then I think you threw out a number about I think it was like 60 attendees now. Are those all distinct universities or was that the number of attendees across a smaller set of universities? And I was wondering if you could share with us how many prospects actually were there?

Yes. It is not 60 universities. We invite the senior leadership team from each school. It's a small group of people from each school, typically the dean, in many cases the Provost. We were thrilled to have quite a few provosts actually in attendance. This is -- really it's a great opportunity for us and for them to frankly learn from one another in terms of how they are operating their programs.

I thought what Rob said was totally right on with regard to sort of organizational models for online programs. You would never see that as an exciting topic for most people in the world but for this group it really is because everyone is handling it slightly differently and if they can learn how to -- from their peers in terms of how to better organize themselves, there were many other examples. Chapel Hill led a session on the power of immersion because Chapel Hill has done that incredibly well. So, it wasn't 60 different schools. And the two partners that we did mention that signed after were SMU and Northwestern. So it's a small group. It's intentionally a small group but I want to emphasize we didn't talk about this on the call because it's a lead-gen opportunity. It is not. We don't view it as lead-gen for schools. We definitely view it as a learning experience. And we wanted to keep it pretty intimate. We like to talk about because we do think it speaks to the difference in the Company that we really focused on the right thing, which is driving quality.

Thanks so much.

Thank you. And at this time, I see no other questions in queue. I'd like to turn the call back over to the CEO, Mr. Chip Paucek, to close the call.

Okay, thank you very much everyone. We are happy to conclude a successful quarter and we look forward to continuing to eliminate the back rows all over the country and the world. Thank you very much for your time.