2U Inc (TWOU) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2U third-quarter earnings call. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the call over to Alex Makler, Director of Investor Relations. Sir, you may begin.

Thank you, operator. Good afternoon, everyone, and welcome to 2U's third-quarter 2014 earnings conference call. By now you should have received a copy of the earnings release for the Company's third-quarter 2014 results. If you have not, a copy is available on our website, 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.

Today's speakers are Chip Paucek, CEO and cofounder; Rob Cohen, President and COO; and Cathy Graham, 2U CFO.

Before we begin I would like to remind you that some of the comments made on today's call, including our financial guidance, are forward-looking statements. These statements are subject to the risks and uncertainties as described in the Company's filings with the SEC. Actual results may vary materially from those described during the call.

In addition, all forward-looking statements are made as of today and the Company does not undertake to update any forward-looking statements based on new circumstances or revised expectations. Also, non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release. I would now like to turn the call over to Chip.

Thanks, Alex. Since relaunched 2U in 2008, I've been speaking about our mission of partnering with leading colleges and universities to deliver the world's best online degree program so students everywhere can reach their full potential. Our cloud-based software as a service platform provides schools with the comprehensive operating infrastructure they need to attract, enroll, educate, support and graduate students globally.

[While having] live face-to-face classes, dynamic course content and real world learning experiences, 2U's No Back Row approach ensures that every qualified student can experience the highest quality university education for the most successful outcome.

From the early days of the Company's history we've always believed there would be a long-term correlation between our financial results and the outcomes of students in our programs. We had strong financial results this quarter, but those results have only come by maintaining a laser-like focus on driving high quality outcomes for students in our partner programs.

Let me begin by talking about our exceptional third-quarter financial results. I am very pleased to report that for the quarter 2U exceeded its previously stated guidance for all of our financial measures. Strong growth in our programs delivered $28.4 million in revenue, a 39% increase over the third quarter of 2013.

This higher-than-expected revenue resulted in $5.1 million and $3.4 million in adjusted debt and adjusted EBITDA losses respectively. For adjusted EBITDA loss that equates to a 60% year-over-year improvement versus Q3 2013. Due to these strong results we're increasing our revenue expectations for full-year 2014 to a range of $109.2 million to $109.7 million. We are also improving our adjusted EBITDA loss guidance to a range of $15.8 million to $15.4 million.

At the midpoint of this updated guidance we now expect the 2014 adjusted EBITDA loss will improve by about 27% compared to 2013, even though we remain in high-growth mode with a significant number of our programs still in the early investment phase of their life cycles.

We are growing aggressively and we believe that the long-term profitability of our model is beginning to show in current financial results. Last quarter we told you we reached an inflection point as our losses had stopped accelerating. This quarter's results show clear deceleration.

Now I think it is important that I spend some time talking about the program pipeline. As we told you last quarter, we have already met our stated annual goal of announcing no fewer than four new programs per year for 2015, notable in that we hadn't announced any of our 2015 programs at the time of IPO.

Just to remind you, we have announced our MBA with Syracuse, our Data Science Masters with SMU, our Masters in Counseling with Northwestern and our Masters in Communication with Syracuse Newhouse. We've always said the pipeline is not a significant concern to management given that we say no much more often that we say yes to potential schools.

We are not trying to bring every school online, but rather create the world's best programs at scale. As such not every school or degree is the right opportunity for us. We are looking to pursue programs that fit our algorithm and approach and those that have the leadership and political will to back the opportunity at scale. Regardless, we do think it is helpful to provide some additional visibility.

We have begun to work on new programs for 2016 and 2017. Currently 2U has several potential programs which we believe are in the final stages of negotiation. Historically, when we have reached this stage of negotiation the deals close. If this trend continues and they all close we would nearly fill our 2016 slate.

As a matter of fact, we've made so much progress with our pipeline that we now believe launching a fifth program in 2015 is likely, likely enough that we are officially adding it to our 2015 plan. We have more than a dozen other potential programs in earlier but still very real stages of discussion.

All of these discussions represent attractive potential opportunities for the Company and were specifically sought out by our team. Frankly, our pipeline typically looks like this. We believe it is very strong and represents what is needed to get us to our stated launch goals.

In addition, we have a new announcement today, an additional offering within the existing MBA Syracuse program. Beginning in the second half of 2016 the Martin J. Whitman School of Management at Syracuse will offer a Master of Science in Business Analytics. This is a burgeoning new field that we think unlocks real opportunity for Whitman as business analytics is a hot sector. This is a new degree for Syracuse, or greenfield as we call it, that is still pending University and state approval.

As a reminder, offerings are part of our strategy to help programs reach their full potential and broaden the appeal to potential students for minimum -- minimal additional investment. They are important to growth but they don't result in a change to the program models. We couldn't be more excited to continue to expand our relationship with this great institution.

Now while this is a new offering and not a new program, we think that announcing a 2016 offering this early shows that the pipeline is shaping up very nicely beyond 2015. Before I hand things over to Rob I'd also like to highlight an announcement that 2U issued this afternoon that gives me personal joy.

We are honored that today Edward Macias joined the 2U Board of Directors. For 25 years Ed served as the Chief Academic Officer at Washington University in St. Louis, guiding the University through one of the most important periods of its growth. During this time leading Wash U, Ed led countless efforts to strengthen the quality of faculty, expanded academic program, enhance diversity and enrich the academic experience for students.

Ed is an influential and visionary leader in higher education. He is a champion of online education and a true believer in 2U's mission of proving that online education can rival and even surpass the on-campus experience. Ed is an immensely valuable addition to the Board. He is also a true mentor and friend to me and I look forward to working with him even more closely.

With that I will hand things over to Rob for some third-quarter operating highlights.

Thanks, Chip. Once again I want to start off by talking about net promoter score, or NPS, which is a key performance metric we use to measure satisfaction across our programs. Our blended student and faculty NPS during Q3 remained strong at 71.5.

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.

In Q3 we launched our second Master of Social Work program, this one through Simmons College. Additionally, we began marketing for all of our announced programs and offerings scheduled to launch in the first half of 2015.

Our dedicated team is providing active ongoing support for 12 launch degree programs as of September 30. Here are some quick stats to illustrate this undertaking.

84% of all students that started one of our programs that graduated or were still enrolled we are enabling on average approximately 1,100 live classroom sessions a week. To remind you, these sessions are live interactions between faculty and students in intimate classes that average only 10.8 students.

Finally, at the end of September our partner program's total student enrollments have produced inception to date tuition bookings for our university partners of $679 million.

Before I (technical difficulty) hand things over to Cathy I want to talk to the financials, I want to highlight a key differentiator which we believe is positively impacting student outcomes for many of our programs. While student enrollments are critical to our financial success, the value we generate goes well beyond how many students have been rolled in our programs to date.

Many degree verticals require field-based learning experiences. In these verticals a degree can't be conferred unless the student completes a certain amount of practical field work. In September we announced that our University partners had surpassed their 20,000th field placement for these verticals -- 20,000.

Hands-on, in person student experiences are significant differentiator for our University partners and their programs. Our SaaS platform and excellent people allow us to deliver these placements. We are helping our university partners generate educational experiences that further blur the lines between online and on-campus students.

As of the quarter end across these programs 2U has successfully placed students through on-site and virtual methods 20,317 times. We have been able to do so by obtaining contracted relationships with 13,128 placement set sights in all 50 states and more than 60 countries across the world. These figures are a true testament to the value that this Company is creating. With that I will hand things over to Cathy.

As Chip told you, our third-quarter financial results were strong. The quarter produced significant year-over-year growth, both in revenue and earnings measures, and exceeded our expectations across the Board. At $28.4 million, third-quarter revenue showed a 39% year-over-year increase. This was driven by a 35% increase in full course equivalent enrollments, or FCEs, and a 2% increase in average revenue per FCE.

As a reminder, small fluctuations in average revenue per FCE, either up or down, are normal and do not indicate any change in our pricing structure. The FCE increase was generated across our program portfolio at all phases of program maturity. 77% of FCEs and 82% of revenue came from our first launch cohort made up of the four programs we launched between 2009 and 2011.

To give you an idea of the rate at which our program portfolio is diversifying in the third quarter of 2013, the first (technical difficulty) cohort contributed 96% of FCEs and 97% of revenue.

Our earnings measures, adjusted net loss and adjusted EBITDA loss, came in at $5.1 million and $3.4 million respectively. While last quarter we were able to demonstrate that our year-over-year losses have stopped accelerating, this quarter we are demonstrating that they are clearly decelerating.

Adjusted net loss for the quarter represented a 46% improvement over the same quarter of 2013, while adjusted EBITDA loss showed a 60% improvement. Both of our earnings measures not only improved but also came in well ahead of our expectations. Over performance on the revenue line, along with operating expense efficiencies, drove much but not all of the positive variance.

Additionally, some labor and other costs related to the launch of 2015 programs started later or scaled more slowly than expected, creating additional savings. Most of these costs are now in place and we do not expect that the delays will have any impact on 2015 program performance.

On a per share basis, adjusted net loss was $0.13. When calculating a per share amount 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.

The primary item reconciling net loss attributable to common stockholders to adjusted net loss, as well as adjusted EBITDA to EBITDA, is stock-based compensation. This was $2.2 million in the third quarter, up from $639,000 in the same quarter of 2013. The increase reflects both grants made for new hires, promotions and retention as well as increasing valuations attributed to our common shares as we approached our public offering.

For a better understanding of adjusted net loss, adjusted EBITDA loss and pro forma shares outstanding, please see the definitions provided in our press release and SEC filings.

Turning to the balance sheet, our cash position at September 30 was $80.6 million and accounts receivable totaled $10 million. September is typically a low cash month in our business because of the timing of academic calendars and how we collect relative to them. As always, we suggest that you look at the changes in cash, accounts receivable and deferred revenue as a group to fully understand our balance sheet position.

So let's look forward. As the business continues to perform we're also raising our expectations for the rest of 2014. We now expect revenue to be between $29.7 million and $30.2 million for the fourth quarter and are increasing our full-year guidance to between $109.2 million and $109.7 million. At the midpoint of these ranges that is year-over-year growth of 21% for the quarter and 32% for the year.

Adjusted net loss is expected to be between $3.1 million and $2.7 million or (technical difficulty) per share for the fourth quarter and between $21.9 million and $21.5 million or $0.58 to $0.57 per share for the year. We also now expect our adjusted EBITDA loss to be between $1.6 million and $1.2 million for the fourth quarter and between $15.8 million and $15.4 million for the year.

Both of these ranges forecast continued loss deceleration and year-over-year loss improvement. At the midpoint of the full-year ranges we have increased our expectation for adjusted net loss improvement to 15% over 2013 and we expect adjusted EBITDA loss to improve by 27%.

As we approach the end of the year we'd also like to give you a preliminary look at 2015. As we haven't completed our budget cycle, these are early indications that we will update with more precise guidance at a later date.

Our 2015 story has a strong timing component, primarily on the cost side, as we've accelerated the launch of a second of our four announced programs to January and are preparing to launch this program later in 2015. New programs require significant investment in their early stages and incur significant losses before turning to profitability.

The earlier in the year programs launch and the more programs we launch the more losses we recognize compared to a low early revenue base. We will come back to this in a moment, but let's start with revenue.

We currently expect year-over-year revenue growth for 2015 to be between 28% and 31%. We also expect to see a shift in the way revenue is distributed across the quarters compared to the pattern we've seen in prior years.

This year we saw revenue decline in the second quarter because programs had fewer days in session during that quarter than in any other. For 2015 we're seeing shifting academic calendars in more mature programs and newer programs with heavier second-quarter schedules altering revenue distribution.

To be clear, this shift has nothing to do with enrollment expectations, those remain on track, but as we recognize revenue from the first day of classes to the last, changes in academic calendars do have an impact on our revenue distribution.

We currently expect that year-over-year revenue growth for the first quarter will be in the low 20%s. Because of a shaft in revenue to the second quarter, however, the first half of the year should have a year-over-year growth rate that looks like our first -- our full-year expectations.

For adjusted EBITDA loss we currently expect a 2015 loss margin of 9% to 10%, an improvement from the approximately 14% we are expecting for 2014. On a dollar basis this represents a more modest improvement than we are seeing in 2014 for two reasons. First, we are accelerating the launch of a second of our four announced programs to January giving us two January launches. And second, we are now preparing to launch a fifth program later in the year.

While both of these will benefit revenue growth and profitability in future periods, they increase our expense base while producing relatively little incremental revenue during the first year of their operations.

The launch of a second program in January is expected to have a noticeable impact on adjusted EBITDA loss improvement in the first half of 2015. While we are currently forecasting dampened year-over-year adjusted EBITDA growth for the first half of the year, we do expect growth rates to rebound in the second half.

With that color on a great quarter, and some perspective on what we think are very positive expectations for the future, I will turn the call over to Chip for his closing comments.

So before we wrap up and take questions I'd like to close with a story about impact. Today one of the biggest challenges we face as a Company is preconceived notions of online education, they're terrible and there is a reason. Most online programs are inferior to on-campus programs. Part of the reason is they are impersonal. Online forums and chat rooms don't create lifelong bonds.

2U backed programs are extremely personal and intimate. A USC professor talks about the fact that he feels a greater sense of, quote, intellectual intimacy with his online students than with their on-campus counterparts. In a 2U program there is clearly No Back Row. But it is more than that.

Great educational experiences are about more than just a single person learning something. Great educational experiences are about being part of something bigger, being part of a real community, a real network, networks like Carolina and Georgetown that have existed for over two centuries.

In 2U programs you become part of the full community, you aren't a second-class citizen. You are a Tar Heel, a Trojan, a [Hoya], a colonial, a Golden Bear. A great example of this is the first graduating class of MBA UNC, our program with the Kenan-Flagler Business School at UNC Chapel Hill.

Most of our programs start small and this one was no exception. MBA UNC first class consisted of 19 students who came from a variety of backgrounds, all of whom who felt that an MBA would help them advance their careers. They became not only classmates but also great friends and active members of the Carolina community.

The best metaphor for this is they named themselves, the O19, it stood for original 19. They were UNC's pioneers in attending this type of program and they knew it and were proud of it. They became very passionate about the program and the University. They were Tar Heels just as much as anyone who attends the University on campus and they wanted to leave their mark.

At graduation this small group of graduates came together and donated the single largest class gift in Kenan-Flagler history to name a physical conference room after themselves. They are online students, they are calling it the O19 Conference Room.

Now think about this for a minute -- a physical conference room named the O19 or original 19, the largest class gift in the history at Kenan-Flagler from 19 people in an online program. The reason I love this story is it is not about money. Yes after spending $100,000 on their MBA these students reach back into their pockets to donate.

But the money is not the important part, the important part is how they felt about their experience. This was their community, their friends, their network, their Carolina.

Graduation rates job placement rates, net promoter scores are important, they measure impact, but they aren't the only measure that matters. Passion matters, community matters, being a part of something bigger matters. For 2U ending the segregation of the online student definitely matters. No Back Row indeed.

With that, Cathy, Rob and I invite you guys to step out of the back row and ask a few questions.

(Operator Instructions). Michael Nemeroff, Credit Suisse.

Very nice job on the quarter. So, Chip, I think you answered one of my first questions, it was about the pipeline [after] 2016, because I think we heard last quarter that you were pretty much done with 2015. One of the things that you didn't answer is the quality of the schools that you are going after.

And then secondly, I'd love to know as you are talking with your schools, what kind of push -- are you getting any pushback on the revenue split between you and the school?

And also, now that you've got a number of programs that are out there and they are doing well and you've got a lot of graduates out there and the outcomes are good, what kind of questions are prospective schools asking you when they evaluate to you now versus what they asked you previously? Are they financial questions? Are they about outcomes? Are they about benefits to the school? How are those discussions going these days?

So, thanks for the question. So the first thing I would say is really the story has always been, and I believe always will be, much more about mission than money. This is about driving high quality outcome for their students, expanding access for their students, really sort of unleashing these brands on a global basis and allowing people to attend that for the first time ever don't have to pick up their life, quit their job and move.

So there is no question that this is a mission orientation first and foremost. Now clearly financials are important, it's important to have long-term sustainability and to have positive stories on each side of that. So from a revenue split standpoint we continue to feel very strongly that our revenue split is in a reasonable place and will continue to be.

From a brand perspective, there is no question that we are -- we think we are working with some of the best schools in the world, we expect that to continue. We do believe that the world is starting to sort of realize, based on some early pioneers, that you can do something transformative and if anything improve your brand, not hurt your brand.

You take a Doug Shackelford at Chapel Hill or a Marilyn Flynn at USC, those are both great examples of people that had a vision, believed in us and we've really delivered for the schools. So clearly it's important that we've got a track record to sort of stand on at this point and it makes negotiations easier.

I would say the most notable thing about that section on pipeline is frankly, Michael, that is not unusual. We were just trying to give visibility because we get a lot of questions about pipeline. So we are just trying to show people that we think the pipeline is pretty strong.

And these are all conversations that we are actually going out and sort of specifically directing based on the algorithm indicating that it is a strong marketing opportunity, a strong opportunity for scale. And then the question is, is there a leadership team there that can do what Kent Syverud and Ken [Cavius] have done at Syracuse where you have got the leadership in place to really drive a great sort of long-term opportunity. So the pipeline is strong.

Michael Tarkan, Compass Point.

Thanks. Just following up on the pipeline. In terms of 2016-2017, can you give us any sense as to how many schools? Are they new schools, secondary, primary programs? Any kind of color around that?

So if you look at our 2015 pipeline that was announced, we thought it was notable that of the four that we have announced, that three of the four were -- they were new universities, all of them. So we are definitely extending our reach to new universities as proven by our past. I think it is reasonable to expect that to continue.

We have been appropriately conservative in our expectation of the number of second programs. As you know, they do scale faster. So we have been conservative in our approach in terms of modeling second programs longer-term. Anything you would like to add there, Cathy?

No.

No?

Okay, and then in terms of the competitive environment out there, can you kind of provide some color as to what you are seeing maybe from some of your direct competitors or what the schools are telling you, the ones that are going and trying to build this on their own? Any kind of comment there?

Yes. You know, you are talking about -- first of all just address the market overall, how large it is. You're talking about $1.7 trillion worldwide in global higher ed. It is so large that clearly there will be more than one way to address the need.

What is notable about 2U is we still believe that right now we are the only Company that is really stating the goal of trying to build the world's best. We are not trying to bring every program online, we have no interest in bringing every program online.

We are interested in bringing programs online that have scalability, that have the right leadership team, that sort of fit our view of what could be a really big long-term opportunity for the Company. And therefore we are definitively not -- we are definitively not trying to launch every school.

With that said, I think the fact that the Company's track record has continued to get better and better with a broader array of partners, we have now done public universities, we've done private universities, we've done liberal arts colleges. So I feel like we are starting to prove to people that this approach to online education can be great. We didn't have that in 2010 or 2009.

Today we've got a pretty strong track record. When you have got, as Rob said, 84% of your students graduated or still enrolled and you combine that with $679 million of tuition bookings, that is a real positive story for everybody. So it is certainly not getting harder, frankly it is getting somewhat easier to attract the right opportunity.

Okay, thanks. And then one last one for Cathy. Given (technical difficulty) revenue backlog this quarter, I think it was around $114 million last quarter.

It was $114 million last quarter, it's actually jumped up quite significantly, it is around $146 million this quarter.

Okay. And just can you provide a little color around that? Is it just the new program coming online and new launches?

Well, part of it is that and part of it is that at this time of year, since September is a very large group of starts forward new students, it is a time when you will actually see that number bump up quite significantly.

Our backlog does have some timing component in it depending on where the end of the quarter is relative to when students started. So it will go up and down a little bit. But September of a year is one of the times when you will see that bump up because there is a large influx of new students.

Understood, thank you.

Corey Greendale, First Analysis.

First, I had a couple of just modeling things for Cathy. The -- I just want to verify shifts in academic calendars, that is reflected in FCEs, not in rev per FCE, is that correct?

It will be reflected in FCEs, not in rev per FCE. And it is all about -- of course you know we recognize revenue from the first day of classes to the last. So it shifts in those, calendars. Or new programs that are growing quickly that have a heavier second-quarter load, that is what is shifting revenue.

Okay, and then in the quarter the revenue per FCE improved just a little bit. I'm not making too big a deal of a 2% change. But in so far as it did improve, was that more mix or retention?

It is a combination but it is primarily -- it is primarily mix.

Okay. And then within the 2015 initial outlook you are giving, should we assume kind of consistent rev per FCE? Or should we assume some slight downward trend given kind of the newer programs might be at lower price points?

At this point we would assume that they should be relatively flat with -- the thing that may pull it down a little bit is depending on the number of students in lower price programs versus higher. But we don't see anything that is dramatically shifting -- anything that is dramatically shifting at this point.

Okay, and you have already given some very helpful guidance for 2015 so I don't want to be too demanding here. But since you were very careful or very specific about what Q1 looks like versus Q2, I wonder if you might give a little bit more specificity around how big the differential in EBITDA margin might be in Q1 of the first half versus the back half of the year?

So, you should look at probably the earliest quarters, the first quarter having -- it is hard to say. How am I going to put this to you, Corey? Where -- you should see that you would probably expect margins in the first half of the year to be more consistent with what we saw in 2014 and improving and the back half of the year to get to what we are projecting for the year.

Okay. And then I had one for Chip or I guess whoever wants to answer it. But now that you had -- July seems like a long time ago already, but during the quarter you had a lunch of the Simmons Social Work program. So I was hoping you could comment kind of on how that went.

And more broadly, all your Simmons programs, the effect that is having on your conversion rates, whether it is doubling the conversion rates in those verticals as I think you talked about at some point.

Yes, so, I would say -- it is a great question, I would say overall right now we see the second program leverage to be consistent with what we would have seen in the past like we told you from a nursing standpoint. We are definitely seeing across the board the second program leverage is very real.

We don't think there is anything isolated to a particular vertical or discipline, which is why we are excited about our two early program starts in 2015 which are both second programs, one with Syracuse in MBA and one with data science with SMU. So we think leverage continues to be very strong there and indeed makes our algorithm look more and more predictive.

Great, congratulations on the quarter. I will turn it over.

Thanks, Corey.

Andre Benjamin, Goldman Sachs.

First question, I was wondering, given all the success and color on the pipeline and people that are interested, how we should think about risk of maybe an additional program in the late part of 2015 given it is already November of this year and I know you are continuing to try to balance growth in profitability. Should we write that off as a possibility or is it still possible?

Sorry, I am -- forgive me, are you saying is it still possible that there is a 2015 program? Because I want to be clear --.

That you could do another program. So you just said you are going to do five, you have never really talked about the idea of doing six, is that even a possibility?

No. At this point we are willing to say that we think it is very likely there will be a fifth program and we move on to 2016.

All right. And any update in the out years, 2016-2017, on the potential to pursue an undergraduate program again anytime soon or any kind of color on what some of the more attractive verticals may be for those years?

So it's a great question, Andre, we've had -- there are so many verticals that we have not yet covered. That when you combine the fact that we believe that there are a large number of verticals we have not yet touched with the fact that we are now going to build clearly more than second programs -- in some cases we will build third or fourth programs -- with the fact that doctorate is clearly part of our wheelhouse now, we have got two on the books and you will certainly see more in the future.

There is no shortage of opportunity for the Company and we actually think, frankly, that is one of the great things about 2U and one of the reasons that we IPO'd the business. We think that there is tremendous organic growth potential if we just put capital to work smartly. So we are trying to identify really solid opportunities and go after them.

There are some very large disciplines we haven't touched yet. We haven't touched computer science, we haven't touched engineering, we haven't touched pharmacy. There is a whole bunch. And then of course there is doctorates. So given that it is reasonable to expect us to stay focused on graduate education for the near term.

Perfect, thank you.

Michael Huang, Needham.

Just a couple questions for you. First of all I was wondering if you could help us understand what is ultimately driving the decision to accelerate the launch of that second program into January. Was wondering how much is driven by -- is your view of capacity and to deliver another program here or how much is being driven by University preference for an accelerated start date?

You know, it is fair to say that I think it is really important everyone remembers that these are not 2U programs, these are Berkeley, Georgetown, USC, Chapel Hill, Wash U programs. And so, we work very closely and we do believe that these are more akin to long-term partnerships. But what the University wants and needs is really critical to 2U.

So there are moments where, for various reasons, whether it be internal reasons at the school or reasons for 2U that we want to accelerate the launch of the program. In that particular case we had the opportunity to launch two second programs in two very sizable verticals, two verticals frankly that we had already had quite a bit of success in, business administration, data science.

So when we were able to do it, really no capacity issue on the 2U side whatsoever. At this point we are getting very good at launching these and that is not a significant risk point for the Company. It fit the calendar better and both partners were excited to do it. You have really strong leadership teams at both schools. So we were raring to go and we decided to move it up. Any additional color? Okay.

That's helpful. And was wondering, without providing too much granularity here, was just wondering if you could share with us given your track record and given I would imagine some leverage in negotiations, are you seeing any changes with respect to pricing and kind of share of tuition revenue? I mean is that at all trending in a favorable direction or -- maybe just some color around that.

Sure. We have -- over the history of 2U we've seen it trend up to where it is today. We think it is at an appropriate place and we do believe that if you look across our portfolio you will see many instances of a University signing an additional relationship with us. And I think that that strongly indicates, even though we are nowhere near renewal times, because these contracts are all very long, even our earliest contracts.

Given the fact that none are shorter than 10 years we are not anywhere near renewal. But we do believe that second programs at the same university, while it doesn't provide the same leverage as a second program in a vertical, it certainly shows us and we think it should show shareholders that there is an interest from the University in extending the relationship because they are doing it again with a new contract.

And on the rev share, the reason for the rev share, even though we are taking more than half the revenue, the fact is we are doing a series of things that are expensive and complicated and all academic functions you would want the University to do it is doing. And really on both sides of the revenue split we think it is an equitable split from the standpoint of the school and 2U both doing well in the end.

The notion of trying to move it up over time, which is something we certainly get asked about all the time, I think you probably know the phrase, hogs get fed, pigs get slaughtered -- or is it vice versa? So we are trying to be thoughtful and we like where it is today. We think we are in a good place today.

Okay, and my final question really is I guess giving you a chance to talk about either the technology or services that you are offering. And so when you are thinking about your technology roadmap or service offering roadmap is there any kind of area of innovation that you potentially could share with us? I mean is there anything that you are layering on top of your current set of services or technology that you would like to share?

Sure, I will give you two different pieces, one in service and one in technology. So, on the service side we recently included faculty recruiting as part of our bundle. And the whole notion is for the money we are paid, let's continue to make it better and better and better over time. And so that notion of assisting our schools, finding great faculty on a global basis seem like a win-win. So we added that to our suite on the services side.

You have heard Rob talk a lot about placement because we really believe it has become a very significant competitive advantage to the Company. In some ways we are touching programs that you could argue are the hardest to bring online, whether it be counseling or nursing or midwifery. I talked about the birthing of the babies. One of the things that is interesting it takes 30 babies to graduate from the midwifery program, you have to deliver 30 babies.

So continuing to build out our suite of services is important. Now on the tech side, in the content builds our teams, our Chief Content Officer Ian Van Yuyl, and our Chief Technology Officer James Kenigsberg, have done a great job building out what we call the BLT internally, it is the (technical difficulty) learning tool.

And the bidirectional learning tool came from the notion of trying to make the asynchronous content Socratic, making the asynchronous content two way. And so it requires a lots of feedback from the students. And then on a section level, which is where the technology gets hard, allows interaction at the section level including threaded video discussions at the section level.

So it takes the one part of the solution (technical difficulty) that we have live classes and you are live with the real faculty once a week, it took the one part that maybe wasn't quite as deeply interactive and made it super interactive. So that is kind of being rolled out across the partner portfolio and we've got a patent pending on that.

Awesome, great. Thanks, guys, appreciate it.

Ben McFadden, Pacific Crest Securities.

I wanted to see if I could get some color around drilling down on the individual cohort level. So, on the 2013 cohort, if you could just talk about kind of the traction that you are seeing within those programs relative to your expectations. And also whether there is an opportunity to get an inflection in those programs either through seasonality or just through the building of the marketing funnel.

So, Ben, when we go back and we look at the 2013 cohort and even the early 2014 cohort and we look at how they are scaling relative to the earlier programs. Once we adjust for certain things that we have learned about building marketing funnels and operating, we see them scaling very similarly to -- very similarly to the early program.

The difference that I would say is that we now have second programs as a part of the mix which fell much earlier than first programs. They may get to the same size ultimately, but the way they scale is more of a convex curve for a second program and a concave curve for a first program.

So you do tend to see some inflection in the second year, end of the second year, but not such that it would be -- that it is going to be a hockey stick in any way on -- than these are on first programs. On second programs you are just seeing them come out of the gate significantly stronger from an enrollment standpoint than anything we had seen in our first program all of which were first programs in their vertical.

Okay, great. And then also on the core cohort maybe you could give us some color as to how much growth opportunities are still left in those four programs. And then also when do you see them reach a maturity both from a growth standpoint and a profitability standpoint?

So, they are -- were launched anywhere between 2009 and 2011. So the earlier programs are getting closer to steady-state while the two later programs do still -- are still at a little bit higher growth curve. (technical difficulty).

Ladies and gentlemen, please stand by, your conference call will continue momentarily. Once again, thank you for your patience and please stand by.

Okay, Ben, where did I lose you?

I think the last thing we heard was kind of the growth opportunity with the core cohorts, but you hadn't talked about the profitability aspect.

Okay, so the growth is on the top-line. So, on a profitability you would have seen that -- you would've seen that we are -- from a profitability standpoint you've got four programs together that if we had lined them all up so they had all started in 2009 with the first program, would have been in the mid-20s adjusted EBITDA margins.

Now remember that none of those programs, they are all first programs in their verticals, none of them are second programs in their verticals. So from that standpoint, as we have said, if you are expecting us -- we sort of put a stake in the ground in a mid-30s adjusted EBITDA margins at steady-state. First programs will have slightly lower than that, second programs will have higher than that. So these guys are right about where we would expect them.

Okay, great, thanks a lot.

Brian Schwartz, Oppenheimer.

Congratulations on another strong quarter. Chip, I wanted to ask you a question about just the landscape in Higher Ed Tech, because there seems to be a huge gap here if I compare your results to other Higher Ed Tech suppliers in the space. I was wondering if you can share just your thoughts on why 2U is seeing this level of growth in outperformance versus other Higher Ed Tech vendors in this space.

Ladies and gentlemen, please stand by, your conference call will resume momentarily. Thank you for your patience and please remain on the line.

Yes, I'm sorry about this, everybody, we don't know what is going on, but there is some phone outage (technical difficulty) so we are calling you back in from our cell phone, I hope you can hear me okay. So is that Brian?

Yes, it is. I don't know if you heard my question, Chip, or if I should repeat it.

I'm sorry, repeat it, we did not hear it.

Sure, sure, sure. I just wanted to get kind of your opinion on the landscape in Higher Ed Tech because there is a huge gap right now if I compare your results here to other Higher Ed Tech suppliers. So just wanted to get your opinion if you could share with us why 2U is seeing this level of growth in outperformance versus other Higher Ed Tech vendors in the space?

Well, I mean without commenting too much on other vendors I would tell you that I think really we did something I think that maybe might up in hard to do in 2008. And now today is really proving to be I think the reason we are doing so well is we convinced -- I said it in the call but it really bears repeating -- that we convinced our Board in the early days there would be this long-term correlation between our success and the student outcomes.

And right now the outcomes across our programs are really strong and that is really in my opinion where the rubber meets the road is delivering the outcome to the student and therefore to the University because our great schools are really about their students, that is what this is about in the end.

So the notion of sort of ending the segregation of the online student might sound like a copy but it is not, it is very real. And the reason I love that O19 story is those are my friends and I think you guys all might know, I am in the MBA program at Chapel Hill. I know all 19 of them and how do I know them? Because I am in the program, you really get to know people and you really build long-term relationships.

And so sort of focusing on those people is really at the end of the day what works. I mean clearly there is a significant amount of investment going into Ed Tech overall. Do I love all of those investments? Of course not.

Do I think some will turn into real game changing companies? I do because the world is definitely starting to wake up to the power of education technology. We are happy to be at the front end of that. But frankly we are just sort of focusing on what we know how to do which is just keep building more of the world's best online degree programs.

Thank you, Chip. And one quick question for Cathy, just on the spending for 2015. Maybe if I could ask a granular question because you gave us very good color so far. But when you think about expanding your vertical reach or your intellectual property for R&D versus spending on sales and marketing and G&A, where do you feel like you are going to put more of the weighting as you exit it this year and you head into 2015? Thanks.

You know, I don't really -- we don't really see it as a changing in weighting. The marketing spend is something that we build in that is commensurate with the number of programs we are running and where those programs are in their lifecycle, whether they are early and we are building that funnel or whether that is at more of a steady-state.

From an investment in technology standpoint, we have a continuous pattern of investing in technology to make sure that our platform, both the front end that the students and the faculty see and the backend where we and our university partners work together to deliver all of the services that make this work, is in a continual state of improvement.

So, there is really not a re-weighting. There may be some differences in dollar spend, but that will be solely related to what is happening as far as where programs are in their lifecycle.

That is very helpful, thank you for taking my questions this afternoon.

You're welcome.

Michael Nemeroff, Credit Suisse.

Sorry I think I got disconnected after I asked my first question.

We're obviously having phone issues here, so go right ahead.

You know I think it is me as well. Maybe this question is for Rob and it actually relates to the marketing effectiveness. And I was just wondering if there was any metrics that you could share around how that is going. I know it is a big part of how you get the applicant pull.

And then if I get disconnected I went to put my next one in before I get disconnected. It is to Cathy. And I understand about the -- or the fifth program in 2015 and that is great because you've got good visibility now on a lot of pipeline. Just what does that do in terms of the long-term profitability goals, especially on the EBITDA margin versus what you may have said through the IPO process, is there any difference there?

Okay, I will hand it over to Rob quickly and then you come back to me.

Well, I think my answer to the first question actually leads to the answer of the second, is why we were on the road we were talking about getting our total marketing cost down to about 32%. And what we are doing this year with our second programs and just overall getting better at what we do in marketing is driving towards those long-term margins.

And as we bring in the second programs, as we answered a little bit earlier as well, we are seeing a lot of efficiency and are heading towards there, although not quite there, but getting there in the long run.

And so, Michael, the question on long-term profitability, you might remember we told people when we were on the road that there would be a three- to five-year time frame to profitability for the Company. And today we are comfortable saying that we are clearly at the front end of that range. So we do not see impact from that fifth programming -- from that fifth program negatively impacting our profitability because we are really starting to see leverage in the model.

Okay, great. Thanks very much for taking my follow up, I appreciate it. Nice quarter again, guys. Thanks.

Hey, thanks, Michael.

(Operator Instructions). I'm showing no questions at this time. I would like to turn the call over to management for closing remarks.

Okay, thank you for joining us today. We look forward to all of you continuing to step out of the back row and join us on these calls. We will talk to you next quarter. Take care, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect.