2U Inc (TWOU) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2U first-quarter earnings call. (Operator Instructions). I would now like to turn the call over to your host, Ed Goodwin, Senior Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to 2U's first-quarter 2015 earnings conference call. By now you should have received a copy of the earnings release for the Company's first-quarter 2015 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.

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 Co-Founder; Rob Cohen, President and COO; and Cathy Graham, CFO.

During today's call, we may make forward-looking statements, including statements regarding the Company's future financial and operating results, future market conditions and the plans and objectives of management for future operations. These forward-looking statements are not historical facts, but rather are based on our current expectations and beliefs that are based on information currently available to us. The outcome of the events described in these forward-looking statements is subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results anticipated by these forward-looking statements. This includes but is not limited to those risks contained in the Risk Factors section of the Company's annual report on Form 10-K for the year ended December 31, 2014 and other reports filed with the SEC.

All information provided in this call is as of today. Except as required by law, we undertake no obligation to update publicly any forward-looking statements made on this call to conform to statements or actual results or changes in our expectations.

Also, it is 2U's policy not to update our financial guidance other than in public communications.

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, Ed. Higher education is undergoing transformation. This is a very long game, and we are only in the second inning. A very wise friend and partner of 2U Stefan Krug, Deputy Provost of Simmons College, once told me the story of change in higher ed the story of a turtle being mugged by two snails. When the turtle is asked what happened, he says I don't know. It all happened so fast. Kidding aside, change is slow in higher ed, but it's happening. 2U is the market leader driving this transformation. Leading that transformation it turns out is good business. I'm very pleased to report that we had another very good quarter.

2U exceeded again its previously stated guidance for all financial measures for the first quarter. Building on these strong results, we are increasing our revenue expectations for full year of 2015. The midpoint of our new guidance range now implies 33% revenue growth over 2014. We're also improving our adjusted EBITDA loss guidance, further solidifying our path to profitability.

At the midpoint of our guidance, we now expect that adjusted EBITDA loss will improved by about 36% year over year. We're now further convinced that the leverage we are driving from our MPV or multiple program vertical strategy is a significant factor in our continued rapid loss deceleration.

Our core business is doing well. In fact, we have a new announcement for you today. The first of a new model called the enterprise program model that we believe allows us to further penetrate our target market. We are expanding our relationship with our amazing partner, Simmons College. Simmons was founded in 1899, and their current programs with 2U have scaled quickly. It's a fantastic school with a fantastic leadership team.

Up to this point, 2U has only focused on large programs with large potential enrollments. Through the 2U's enterprise program model, we figured out a way to aggregate smaller individual degrees into the revenue expectation of about one typical program. By doing so, we can share a number of operating and overhead functions across the degree in a cost effective way. Simmons and 2U will deliver a Master of Business Administration, a Master of Public Health, a Master of Communications Management, a healthcare focus Master of Business Administration and a Master of Behavior Analysis, all launching during 2016 and 2017.

While we think none of these degrees at Simmons alone could have supported a full bill, together they could be quite powerful. Cathy will help you understand how we are thinking about this financially in a moment. You should consider the Simmons enterprise program one 2016 program in our promise of no fewer than five per year.

From my perspective, this gives us an opportunity to work with the great partners we have today on degrees that we don't believe will individually see the scale based on the factors we traditionally consider. Historically we've said no to many of them, thus opening the door to lower quality competition on campus. We now have a way to say yes. The enterprise program model dramatically expands our ability to further penetrate the overall graduate market.

How many smaller degrees flanked the larger degrees? How many spokes from a hub? We like this a lot. I'd like to thank President Helen Drinan, Provost Katie Conboy, Deputy Provost Stefan Krug, and VP of Strategic Initiatives Suzie Murphy for their flexibility, imagination, and verve. We believe this new enterprise model will help us capture more of the market.

I want to spend a little time talking about what we believe to be our TAM or total addressable market. As we previously stated, the total higher ed market in the US alone is $550 billion. It's very large. Given the sheer size of this market, I thought it would be helpful to spend a little time discussing how we are segmenting the total market to build out our unique growth strategy over the foreseeable future. There is a worldwide transformation occurring in higher ed. Currently we are focusing on graduate degrees. Over time we will move further into undergrad. But today and for the foreseeable future, our business is focused on the graduate market.

Further, most of our business today is US-based. This will change. This is an international story over time. But for now, let's focus just on the US graduate segment. Data from IPEDS indicates that the graduate market is about 14% of the overall US higher ed market or approximately $80 billion. That's a massive number.

On our IPO roadshow, as an indication of our plans over the medium-term, we gave an example of working in 30 different verticals and building two programs in each. We were simply trying to put the potential size of 2U in perspective. I'd like to dig a little deeper into this as we believe the white space ahead of 2U is much, much larger than this previous example might have indicated.

Every year the Department of Education publishes data on degrees conferred by academic discipline in the US graduate market, including both master and doctoral degree conferrals. We've identified over 100 graduate level academic disciplines with more than 1000 graduates per year. Of that number, our team has determined that there are at least 50 where we believe we can effectively launch a first program and then implement our MPV strategy at the types of top-tier institutions we target.

Beyond that, we believe that a number of additional disciplines will emerge because of market demand and will grow to fit into this profile. These are disciplines like data science, a greenfield that haven't been around long enough to rank highly in the DOE database, but market demand is high enough that we've already launched two programs in that vertical. We think it would be conservative to say disciplines like this to give us at least 10 more degree verticals to target.

We are also now thinking that these larger particles will support more programs than we originally discussed. We expect that most disciplines will support at least three programs and that some could support many more. Given the size of the opportunity, let's just assume we can launch three programs in each of the 60 degree verticals. That would mean 180 programs. Assuming all of these reach the size we project for a typical program, we would expect our annual revenue once they reach steady-state to approach $3 billion. Assuming our typical share split, this implies we have somewhere around 6% of today's $80 billion graduate market. And that's in terms of revenue.

Universities in the tier we target have tuitions that are about double the average. This means we could reach $3 billion in revenue by capturing just 3% of today's graduate students. Given the size of our social work vertical, we feel very good about that estimate. Projecting off the most recent data, we expect our social work vertical is on track to produce over 5% of this year's new US MSW degrees, and we don't believe social work is an outlier in any way.

It's rare to find a company with this kind of organic growth potential without pivoting away from its core business strategy. Given our current projections and our competitive advantage in the target market, we believe we are on track for continued success. Given its potential, over the next couple of years, the question from our management is, as we move towards profitability, should we speed up growth? While we remain committed to achieving adjusted EBITDA profitability by no later than 2017, we believe the opportunity is too large to not increase our pace. We are currently determining when and by how much, and we will give further guidance on that toward the end of 2015.

Finally, I'd like to give some color on pipeline. It's very strong. After we sign Simmons and Yale, we still have 11 programs in some real form of negotiation. Historically, we closed the vast majority of potential deals at this stage. In addition, we have many in earlier stages of negotiation that we believe to be real conversations. We promise no fewer than five degree programs per year, and we are unconcerned about that promise.

Before I turn it over to Rob, I just want to say a few words about approvals and our recent Yale announcement. Every single program we announced is required to go through its own internal and external approval processes, including accreditation, and every program is different. Some have discipline-specific accreditors. Some don't. Some have state approvals, some don't. They are all complicated, but what's true for all of these is the academic institution, the school owns 100% of that accreditation process. For that reason, we can't opine on any individual degrees process. It is simply not our place.

We're respectful of our partners and their relationships with their accreditors. We are excited that Yale is beginning the process of moving ahead. While we have no specific timeline for that degree, we like the opportunity as much as we ever have. We are patient, and we will not put our partner relationship at risk by discussing it further. We continue to feel very good about Yale University.

And now I'll turn it over to Rob.

Thanks, Chip. I want to speak briefly about our product and partner suite. Chip just talked about our new enterprise program with Simmons College. The enterprise program model is another way to further integrate with our client, as well as expand our ability to penetrate our target market. We can now address degrees we couldn't before, provide broader service to our partner universities and impact additional students and faculty and institutions all while driving revenue and growth for our business.

Speaking of impact, we recently released our second annual impact report. This report challenges preconceived notions of online education and shows that 2U-enabled degree programs are having a positive effect on students and faculty around the world. It is part of our larger effort to remain transparent and drive important conversation about how online education can be done well and what happens when it is. There's a wealth of information to report, and we encourage you to read it. It can be found on our website, and a direct link is included in our earnings release.

Before I pass things over to Cathy, I wanted to provide a couple of additional summary stats and highlights from the quarter. In Q1, we launched three previously announced programs: our second business degree, this one through Syracuse University's Whitman School of Management; our second data science degree, this one through Southern Methodist University; and our first counseling degree through The Family Institute at Northwestern University.

Additionally, we have begun marketing for all other scheduled 2015 launches. Our dedicated team is providing active ongoing support for 16 large degree programs as of March 31.

A couple of quick numbers to illustrate this undertaking. 83% of all students that started one of our programs inception to date had graduated or is still enrolled. During the quarter, we enabled nearly 1300 live sessions a week with an average class size of 11.9 students.

Finally, at the end of March, our partner program's total student enrollments have produced inception to date tuition bookings for our university partners of $795 million.

Now I will turn it over to Cathy to take you through the financials.

As Chip has already told you, we kicked off 2015 with another strong set of financial results. Both revenue and earnings measures showed significant year-over-year growth and exceeded our expectations across the board. At $34.6 million, first-quarter revenue exceeded the comparable 2014 period by 31%. As is typical, revenue growth was driven primarily by increases in full course equivalents. Compared to the prior year period, first-quarter FCEs increased by 33%, offset slightly by a 2% decline in average revenue per FCE.

As a reminder, small fluctuations in average revenue per FCE either up or down are normal and don't indicate any change in our pricing structure. FCE increases were generated across our program portfolio, further diversifying our revenue drivers and revenue base.

In the first quarter, 67% of FCEs and 72% of revenue came from the four programs in our first launch cohort. By comparison, in the first quarter of 2014, the first launch cohort contributed 86% of FCEs and 88% of revenue.

Our first-quarter earnings measures also showed significant progress, moving us even further down the path to profitability. At $1.6 million, our adjusted EBITDA loss showed a 58% improvement over the prior year period. Adjusted net loss showed a similar trend, improving by 34% on a dollar basis and 51% on a per-share basis. As has been the case in recent quarters, our first-quarter earnings performance was driven by higher-than-expected revenue, headcount and other operating efficiencies and marketing efficiencies tied to our expanding MPV strategy.

From a balance sheet perspective, we ended the first quarter with $83.1 million in cash and a 3 to 1 ratio of current assets to current liabilities. This balance sheet strength provides the foundation for our strategy of driving growth through continued investment in the launch and scaling of new programs.

As the business continues to perform, we are raising our expectations for the rest of 2015. We expect revenue to be between $34.1 million and $34.6 million for the second quarter, reflecting 39% year-over-year growth at the midpoint of the range. This guidance confirms the shifting trend to sequential growth between the first and second quarters that we discussed in our initial 2015 guidance commentary.

In prior years, we have seen revenue decline in the second quarter because our early programs had fewer class days during that quarter than in any other. We are now seeing shifting academic calendars in those more mature programs and newer programs with heavier second-quarter schedules altering our pattern of revenue distribution.

For the full year, we are increasing our revenue guidance to be between $145.6 million and $147.4 million. At the midpoint of the range, this implies year-over-year revenue growth of 33%.

Looking at earnings measures, we expect our second-quarter adjusted EBITDA loss to be between $6.3 million and $5.9 million. Note that though our pattern of generating lower sequential revenue in the second quarter is reversing this year, our pattern of recognizing a larger sequential adjusted EBITDA loss is not. In past years, this larger sequential loss has been driven by two factors, the sequential revenue decline and the fact that second quarter has substantially higher amount of annual and periodic costs, including for graduation, on campus, and other physical program activities.

For 2015, while the revenue driver is reversing, the expense driver is not. For the full year, we now expect our adjusted EBITDA loss to be between $10.2 million and $8.7 million. At the midpoint of this range, this implies year-over-year adjusted EBITDA loss improvement of 36%.

Before I hand things back to Chip for his closing comments, I want to give you some thoughts on the Simmons enterprise program from a financial perspective. As you have already heard, our enterprise program model will aggregate a number of degrees -- in this case, five -- to create FCE and revenue base at steady-state that is similar to a typical 2U-enabled program.

So how will the program scale given the degrees within the program roll out over a 12- to 24-month period? Our expectation is that it will scale very much like a typical first program in a degree vertical. In a first program, FCEs and revenue generally scale on a concave curve over the first few years, reflecting the relatively long-term nature of building a prospect funnel.

In the Simmons enterprise program, four of the five degrees are in multi-program verticals, meaning they will benefit from the marketing funnel we've already developed for one or more programs in that discipline. Because of this, MPV programs tend to generate FCEs and revenue faster than the first program in a degree vertical, more along a convex curve over the first few years. We expect that this staged rollout of these degrees, offset by the faster growth curve of the MPV programs, will make the Simmons enterprise program scale very much like a typical first program.

So, how about the cost side? By aggregating degrees, we can create enough scale to share a number of operating and overhead functions in a cost effective way.

Also, we will by necessity need to somewhat limit the flexibility in developing course content to contain costs. We don't believe that the sharing of functions or the limitations on content creation will in any way impact the quality of the education being delivered or the student and faculty experience. This enterprise program will still benefit from the complete 2U platform, including all of the innovative technology and white glove services we provide.

So by aggregating degrees to create scale and by adjusting our cost structure to match, we expect the Simmons enterprise program will look very much like a typical first program in all ways. It should require a similar amount of net negative cash investment in the $9 million to $10 million range. It should reach adjusted EBITDA and cash flow breakeven around the same time, end of year three or beginning of year four, and it should have similar margins at steady-state, at the lower end of our mid-[30s] target. All-in-all, a great model to drive continued growth in profitability, expand market opportunity and deepen relationships within our university partners.

Chip?

Thanks, Cathy. We end every earnings call with a story that emphasizes the real impact and outcomes we produce for our clients, the value we create for both the individuals and the institutions. Why? Because we believe the impact on the individual lives will ultimately be predictive of the financial future of this Company.

Today we want to talk about student satisfaction, which we believe to be a major driver of our continued growth. I want to take a moment to share a student's perspective on the impact the 2U-enabled program has had on her life. Elizabeth is part of the inaugural class at Berkeley's Master of Information and Data Science program. She came to my attention the day we launched our second annual impact report because she unsolicited and unprompted wrote not only a glowing review of the report, but a candid story about her personal experiences in our Berkeley program. For the record, we didn't ask her to write; we didn't know she planned on doing it. She shared her story publicly in a blog post on her own. Her words honestly gave me chills.

Elizabeth lives in Chicago. In the post, she says, quote, I'm actually in school at Berkeley. She goes on to talk about the amazing support she received from Berkeley staff and faculty and specifically calls out the role 2U has played in her experience. Quote, the support from 2U to ensure a seamless experience and provide ongoing encouragement is outstanding. I truly believe 2U's programs will continue to open the opportunity of incredibly high-quality education to many who would not have considered it before. End quote.

Elizabeth states that students and graduates from online programs have the power to change the perception of online education. How? It's simple. Through their performance at their companies and the contributions to their communities. People will notice. This is about the highest quality education delivered online. This is what we mean when we talk about impact and outcomes and eliminating the back row. It's about Elizabeth and students like her around the world, giving them incredible experience that ultimately transforms their lives. Elizabeth and her classmates are about to graduate, and we congratulate them on this great achievement.

And with that, Cathy and Rob and I welcome your questions.

(Operator Instructions) Michael Nemeroff, Credit Suisse.

Great. Thanks, guys. Congratulations on a good quarter. Thanks for taking my questions. Appreciate it. Chip, just a couple for you around this new enterprise program. So, you announced multiple program verticals. Now it sounds like this is a multiple vertical program. Why Simmons? Will there be others? Have other customers expressed interest in this approach? And anything you could share around that would be helpful.

Yes, thanks, Michael. So yes, others have. Obviously this is new. We've been working on it for a little while. So others have expressed interest. I would say on why Simmons, all aspects of the Simmons partnership to date have been pretty fantastic. The school is great to work with and, you know, flexible in their approach, and the degrees we have with them today honestly have all exceeded our expectations. They've been very strong.

So, that great relationship sort of extending out into this new model requires some work on both sides to really get it right. And when I said I thank them for their flexibility and their imagination, we did this together. So a great partner to test this out with.

You know, one of the questions I get from investors a lot is, why do the schools give up such a large piece of the tuition? Is there anything that you could share with us about how well these schools are doing, especially someone like Simmons? How much extra capital they bring into -- extra tuition they bring into the school, and anything anecdotally that could enlighten us as to why these schools really like it, even if they give up a lot of tuition dollars?

So, in this particular case, what's awesome is I can actually point you to a direct public blog post that the Provost, Katie Conboy of Simmons, wrote and literally sent out to her entire community that where she talks about the impact of this partnership to date having a very transformative effect on the school. So her words will be much more powerful than anything I could say is, and I'll figure out a way to get that out to the overall investor community, maybe on our Investor Relations page. But it was pretty incredible because even that, we had no idea they were sending it out, and it went to everybody with a Simmons email address. So we were super proud of it.

I mean in general, Michael, we really believe that the way we create value for ourselves is by creating value for our partners and for the students. And if we sort of just keep that front and center, we think it will all sort of work out in the end long-term. It really is about driving that outcome. And when you look at something like the enterprise model, the notion of no back road, the reason we love it is we think it's not just a metaphor for the student experience with the Brady Bunch-like deal and the programs, but it's also a metaphor for the university partners. All of these leaders at our schools have had to really lean in in a major way to do this fully transforming not just the method of instruction but all the business processes that the university exists on.

So, it really does take a significant leadership commitment. I feel like we talk about the origins of the Company. Really the inspiration is not just technology. It's about institutional will, and these guys have all made a commitment to doing it this way, which is not easy. So we love the idea of the enterprise model allowing us to expand with our schools in a way that really wasn't possible previously.

That's helpful, Chip, and then you also mentioned and understandably so that is there's a pretty large market opportunity probably bigger as you do MPVs and now the enterprise program. And you mentioned that you were going to evaluate accelerating the number of programs that you launched I assume after you get to adjusted EBITDA positive. Could you tell us what the factors will be in deciding exactly how many or how fast that you go?

Well, we are still absolutely committed to profitability, adjusted EBITDA profitability by 2017 as we discussed previously. We are not backing away from that. But as we get there closer, I think it's fairly obvious to those that know our business well that the loss is decelerating faster than expected.

So we are making more progress on the bottom line than was obvious at the time of IPO. And so because of that, currently we are evaluating how much faster we could go. What's interesting about our pace is in 2013 we launched five programs. So five programs for us is actually normal. So the commitment of doing no fewer than five, we've been running on that for quite a few years now.

We think the existing operation could grow, could go up to a larger number without significant change to the structure. But we are being thoughtful and careful because the most important thing is that we don't sacrifice quality at all. They have to be great. Every single one of these. That's really what we've become known for, and I don't -- I'm trying to say that without making it sound like we think we are God's gift to education. Like, it's important that we know internally, this Company knows, that everything has been built on driving quality, and we will not get ahead of ourselves there. With that said, we are certainly evaluating how many more beyond five to do.

To that point, on the -- about the loss accelerating or a little bit faster than expected, when I extrapolate from these results from this quarter and over the last quarter, a couple of quarters, it appears as if you could get to adjusted EBITDA positive sometime this year if you wanted to. Cathy, would you let that happen, or would you purposely avoid it and then spend a little bit more and hit the gas on the growth in that case?

So I think if you talk about 2015, when you say this year, our launch schedule is locked. But as you talk about going into 2016, that is where we are talking about what it is we should be doing. You will have heard Chip say in his comments that we are looking at not only how fast we go but when we start doing it.

You know, we have talked entirely regularly about the fact that our -- the number of programs that we choose to launch has been a balance between growth and profitability. That's been our mantra from the time we were on the IPO roadshow, and that balance will continue to be a part of that judgment that we make. We -- as Chip said, we're not backing off 2017. But it is possible that we decide to change the trajectory such that we move, that we are able to launch additional programs. We are not prepared to go there yet.

But you know we'll let you know as soon as we know.

Yep.

Okay. Thanks, guys. Thanks for taking my questions. Nice quarter.

Michael Tarkan, Compass Point.

Chip, on the enterprise program model, I know prior to this you had been targeting programs that you could scale to a larger size, and maybe you touched on this earlier. But by rolling up some more of the smaller programs into a larger program, can you maybe give us a sense for how much more of the market this could open up?

We think that -- the reason we love this is there are some really excellent schools at current universities that we simply wouldn't have been able to work with before. And so by being smart in terms of aggregating these degrees together, we can share some overhead, not sacrifice quality and, therefore, penetrate more of an existing university, which is certainly, given that we set up operations and we actually have to build the structure to run that school, we think that that provides additional leverage.

It's tough for me to tell you just how much bigger the penetration would be. We were trying to give a better illustration of what we've been thinking lately with that 180 example. And the flexibility there is, we do think that there are 50 obvious verticals today, and I'd say the lesson learned post-IPO is that their MPV is working really well. And so the notion of having more than two in each of those 50 verticals is smart. That's becoming obvious to us.

So there will be some like an MBA vertical where we do more because it's so big, and there will be some where we do fewer. This allows us to expand both MPV and programs that are not MPV today. So, we think it helps potentially fill out that illustration of those 180 programs. And if you start getting to that size, obviously the Company is very large.

I think, Michael, the thing about 2U that's most interesting and sort of transformative from a business model perspective, I really believe it's pretty rare to find a company that has this kind of organic growth potential, if you just put capital to work, and that's where we are today, just focused on driving quality programs. The enterprise model just allows us to extend it a bit.

Okay and then just a quick one to follow-up on that. Are the revenue share and contract term lengths, are they consistent with the new model?

Yes. As you know, we don't specifically talk about any individual deal, but yes, overall it's safe to say that it's very similar.

And then last one for me. Chip, I believe you have entered into a couple of relatively high-profile corporate partnerships with Google and Goldman, and I'm just wondering if you could touch on maybe those relationships or what the strategy is in the corporate channel.

So the corporate channel is something that we are in early days of exploration, and we have a couple of deals where we've got a partnership that allows their employees to get the benefit of all of the 2U programs. We think that's a big deal long-term, and as we aggregate a bigger sort of portfolio of opportunities for people, we think it even becomes more compelling to corporate partners.

I'd say one notable change post-IPO is we're getting a lot more people coming to us first and then to one of our university programs. That's new and we are pleased to say we think it's because we are getting known for delivering really high quality.

Now, these are real Berkeley programs, Georgetown programs. These are not 2U programs. So ultimately the most important thing is the great university. We stand behind them. Corporate partnerships allow us to potentially find a sort of new path from a recruiting standpoint, and it's pretty attractive to our university partners because the audience on the other side is an attractive audience. So, we don't have any new ones to announce, but we're working on them.

Great. Thanks.

Andre Benjamin, Goldman Sachs.

First question, on the enterprise programs, what logistically actually needs to be done differently to get the enterprise programs off the ground and operate them versus the single ones? I'm just trying to understand how this is new and whether something got solved, or was it just natural evolution? I guess I know it's very early, but any view on how maybe the mix of enterprise programs would play out versus your more traditional single programs?

Well, it is certainly new, but we don't want to get into too much detail on how we will actually do it because we don't want to signal everything to a competitor. But one example of a change to allow it to work is instead of having a dedicated floor of support and admissions for each program, we've aggregated them into one floor, and that provides sort of cost savings in a pretty material way. Such as one example I can give you of something we're doing differently on the enterprise model.

But we actually do think it's a nice evolution, and you know we don't see this in any way as fundamentally different or pivot of any kind.

Great. And should we take this to mean that you will primarily still be working with, for lack of a better word, just like the top schools that had that national or very regional brand, or should we take this to mean that you are not willing to work with some lower-ranked schools because you can be profitable, despite their smaller reach by aggregate in their programs?

We are definitely focused on the top tier segment, and we don't expect that to waiver anytime soon. We feel like we're the only company that's proven that they can scale an elite institution online and most importantly do it at a quality level that is exceptional. So just note, the enterprise model students won't feel any difference. It's the same to students.

Thank you.

Corey Greendale, First Analysis.

Congratulations on the quarter and the new expanded partnership with Simmons. On the latter point, this may be a little bit of a silly question, but the Simmons nursing and social work programs are large enough to be standalone. MBA is a large vertical. I'm just curious why that bucket did with these other programs instead of saying that that alone could be a large program?

You know, we do think that obviously Simmons has impressed us on the side of enrollment. It's been very strong. And clearly, the way we are aggregating these five degrees we think is smart and allows us to do it with lower risk. We evaluate every program, as you know, with our program selection algorithm that gives us the market prediction. And different schools have different results in that algorithm, and this might have been a program that maybe on its own we wouldn't have been comfortable enough launching. And it could be either because the market prediction is not as high as other schools or it could be because the school may not want the size. That's very often one of the reasons that we said no in the past to a school is that the school was not ready for something to be, let's say, 500 students per year.

So in this case, could those individual degrees surprise us? Sure. They could. But from a market perspective, we thought this was the right call for that particular combination of university and degree offering.

That's really interesting. I think intuitively one wouldn't have known that. So the fact that you -- your algorithm spits that out, that's interesting that -- I think that says something about the algorithms that there's a lot of value there.

Yes, Corey, we think the algorithm is maybe a sort of underreported part of the story. We've got a team of data scientists that have done really excellent work to help us really be much more scientific about how we go about this. And we think it is a competitive advantage to the Company long-term, no doubt.

Great. And then I had a couple of clarifying questions about a couple of your comments earlier. Just to make sure the communication is -- everyone is on the same page, when you talk about EBITDA-positive in 2017, do you mean for the full year, or you will have at least one quarter that it's positive in 2017?

For 2017.

For the full year?

Yes.

Okay. And then on the new communication about potentially accelerating, I'm taking away that you think you can hit profitability in 2017 and accelerate prior to 2017. So you may open more programs in 2016. Am I misinterpreting that?

No. That's the general idea. We're just not ready to give you an indication as to how many yet.

Okay. I understand. I just didn't want anybody to be surprised that that happened. And then, next question, on the -- looking -- I scanned through the queue quickly since you had the nice sense to put it out before the call. You've been growing headcount and program marketing and sales about 36%. I think that's been pretty consistent. Is there any reason not to view that as kind of a leading indicator of where you think FCE growth will be for the foreseeable future?

We have, quite frankly, been frontloading some of that to prepare for -- to prepare for continued growth. I'm not sure it will be a consistent straight curve or it could sort of -- you won't necessarily see that continue. There may be fits and starts through those, but yes, the fact that we are hiring in that area to market and promote should lead you to believe that we've got a pipeline there that we are ready to work with.

And then, I just have one question on the competitive front somewhat, Chip. I'm so you saw the announcement from University of Illinois that they are doing something with Corsair to have some form of MBA online for [20,000]. I think it's a different value proposition than yours, but it is a top 50 school. What is your reaction when you see programs like that? Do you think that ends up that there's a different portion of the addressable market that's interested in that value proposition and that kind of eats into your TAM, or how do you think about that?

Yes, we think in that particular case that that is really going to have a bigger impact on maybe the proprietary sector than on the 2U clients from a positioning standpoint what the degree actually is.

I will tell you overall, we think the more people that come in on some level, the better because preconceived notions of online education are really the big problem. So we are fighting that every day, and the more people that think of a nonprofit university the better when they think of online ed. That's not been the case today.

So, in that particular one, we don't worry about it as much from a competitive standpoint, and I do think you're right that the value profits being offered there is quite different. So, we are continuing to focus on just building what we think are the absolute top-tier programs in each of these verticals.

Okay. So is it fair to say that you think at this point in the adoption curve we are more -- needing more validation online in the upper echelons of higher ed as opposed to students getting more price sensitive?

Yes. We really believe that we get much more wind at our back long-term from a TCA perspective than we do headwinds based on more people coming in. I mean look, these are big, big markets. So investors should know not every university in the country is going to sign with 2U, and that's perfectly fine. We're not going to be perfect for everybody, and we're also not trying to launch everybody.

So, when you see somebody launch -- there are a bunch of reasons why somebody may launch a program without us. But as more schools come in at that top-tier, we think it helps us more than it hurts us.

Thanks and again just great job on quarter and great job in terms of how you are communicating with the Street and setting expectations well in advance. We really appreciate it.

Michael Huang, Needham & Company.

Just a few questions for you. So just in terms of kind of the timing of the introduction of the enterprise model, given the fact that there's no shortage of opportunity in the single degree program and you've been successful there, I was just curious around kind of the motivation for launching this now. And then kind of as a follow-up to that previous question, are you seeing anything from a competitive standpoint that perhaps is the catalyst for getting this going?

Great questions. No, it really -- this wasn't about competitors. It's about DNA change. So when a school launches with 2U, they are doing so much work on their side to fundamentally change how they've done almost everything, except the great academic experience. They do that exceptionally well.

From a business model standpoint, it's really hard to launch with us. It's hard for both sides. Building these programs at this quality level is really tough. And so once you've got a great partner that's gone through the heavy lift, from our standpoint being able to sign more schools and what typically happens is the other schools at that university partner and obviously not at every university, but typically you get some that are clamoring for sort of this level of quality, even if they might not want 500 students or might be in a program discipline that we don't believe can get there.

So this was much more about extending our reach within our great partners. I feel like this whole notion that this transformation is happening, we've been running the Company for seven years, and it didn't look like this seven years ago. The world is really starting to move, and the horse has left the barn, and our schools are all on the horse, and they are really going after it. And so being able to work with our great leaders to do more we think is pretty appealing.

Now, it does have a competitive impact, Mike, so it's not why we did it. But I even said in my remarks earlier, that clearly there are moments where if I could go back, if we had the enterprise model, there would be some programs now at various partners that we would be able to launch. And we'd be on them instead of somebody else. So there is a competitive component to it.

Got you. Okay. And then maybe one for you, Cathy. In terms of the revenue upside in the quarter, was that driven primarily by an FCE outperformance? Obviously you saw some nice acceleration in growth in that metric. And then, kind of drilling into that if that's the case, was there any out cohort that just knocked it out of the park? Was there any outperformance across America or --? Thanks.

So, Mike, no. It was not really from any specific program or class. What we are seeing is we've got a team of people who are doing a tremendous amount of work on retention of existing students and putting we've talked about coaching in the last call and some of those other things that we are doing to really expand the service offerings and make ourselves even more valuable to the students. And then, you know, a nice byproduct of that is that we are seeing some movement in retention that we are able to impact. And so, a lot of it was coming out of that, returning students.

Mike, one quick comment in addition to what I said before to your first question. I want to just to reiterate to everybody on the call that the enterprise model was about capturing opportunity. It's not because there aren't a lot of really exciting interesting degree verticals coming our way. Just stay tuned. There's a lot there.

Great. Okay. Thanks, guys. Appreciate it.

Ben McFadden, Pacific Crest Securities.

I just wanted to focus a little bit on the growth that you are seeing in FCE in the 2013/2014 cohorts. Is there any type of sense that you can or color that you can provide us as far as how much of that is being driven by these secondary programs instead of the new primary programs?

So it would be hard for us to give you specifics. But anecdotally we are, indeed, seeing the beginnings of sort of this cross vertical marketing, benefiting the first program as well as the second program. We are seeing this not only in enrollments in the schools, but we are seeing it in our own -- efficiency of our own marketing costs.

So, it probably at this point, because we're still in relatively early days, are not driving from a percentage point standpoint in the early cohorts anything major, but we are seeing individual places where we know this cross-vertical marketing is having a benefit to the first school.

From a marketing efficiency standpoint, we ended the first quarter with a [3] to [1] ratio of lifetime revenue of a student to the total cost to acquire a student. You'll remember at the end of the year that was sort of in the [2.9] or little bit better range.

And at the time of IPO, it was [2.4].

[2.4].

So that's really the leverage in the model right there.

Yes. So we are seeing the leverage of the model move forward, and yes, it is having a benefit to the first program.

And then just on the core cohorts, can you just give us an update as far as how you are viewing those as whether you fully view them at steady-state and exactly where the margins are on those businesses? Because it still seems that they are growing at least slightly at the same time.

Yes, they are growing if you look at the core four. They are growing as we've said. They continue to grow in that sort of, you know, mid to high single digits, which is kind of what you would expect for things that are approaching at or approaching steady-state if you look at them together.

Some of that is just from the natural, you know where they are naturally in their cycle, but also, remember that there are several of these where we have recently added offerings, and that provides for us an opportunity to keep some measure of higher growth in these more mature programs. So we are still seeing growth there.

From a profitability standpoint, they are adjusted EBITDA positive, have been since 2013, and that continues to increase. If you look at them on a cohort basis, which is as though you lined them all up and they all started in 2009 with the first program -- so basically there is still a little bit of forecast in there -- they are in the mid -- they would be -- we would anticipate in the mid, high 20s% from an adjusted EBITDA margin.

And when you consider the fact that there are no second programs in there, those are all first programs, that's really kind of approaching steady-state. We talk about adjusted EBITDA margins on average in the mid-30s%, but we say first program generally somewhat lower than that, second program is generally somewhat higher. So we are still getting growth and approaching what we would consider to be steady-state profitability.

Great. Thanks a lot.

Jeff Silber, BMO Capital Markets.

Thanks so much. Just one more question on the enterprise announcement. Would it makes sense then that we would see more of these with existing partners as opposed to a new relationship doing this from day one?

You'll see both. So, we like this enterprise model, but we've got some new bold programs coming, and we've got some new logos coming and so both, Jeff.

Okay. We'll stay tuned there. And then just on a modeling related question, if I look at your technology and content development line, it looks like we've been seeing some slower growth in that expense. I'm assuming some of that is just leveraging what you have, but is this the kind of new normal that we'll see increases in that line item in the single digits as opposed to the double digits we are seeing your other expense line items increase?

You know, I think that what you are going to see is a slow -- if you think about this on where it should wind up in terms of as a percent of revenue, we sort of said steady-state. That's kind of in the 11% to 13% of revenue at steady-state.

So, you're probably going to see -- and, again, sometimes it will be higher and lower. It's hard to look at it on a per quarter basis. But if you look at it over the course of years, you should see it start to trend down towards that -- the increases will still keep it trending down towards that level.

Okay. Great. Fair enough. Thanks so much.

Alex Paris, Barrington Research.

This is Chris Howell in for Alex Paris. Thanks for taking my questions. Aside from the, I guess, potential P&L benefits from the Yale agreements, I think from a branding perspective the upside is huge here. This most likely alleviates any concerns if there were any with future partnerships. Have you seen this Yale partnership start to maybe raise some eyebrows among potential new partnerships? Meaning more opportunities are coming to you?

That's a good question. I mean Berkeley and Northwestern and Georgetown are not exactly somebody to -- they are all pretty excellent I guess is my point. The interesting thing about Wash. U and Northwestern is they are ranked higher than some of the Ivies.

So we really feel like we had already established a reputation for being really high quality, not just in the brands but in the delivery, you know, the outcomes. So but clearly it did get a lot of attention, and it was positive attention for the most part. Our pipeline is strong. We feel very good about where our pipeline is today.

That helps. And then, I guess, just one follow-up on Yale. With them -- with having to possibly do a separate accreditation path for the PA program, which I believe is not unprecedented given previous programs such as Northwestern, I'm curious how long it might take before you get approval for something like this and kind of what the timeline is going forward from there?

So, unfortunately, as I mentioned earlier, I really can't comment on any specifics related to Yale because it's really not my place to do so. I will say that all of our programs have to go through these processes, and to date we've done well. But at the end of the day, we have to be thoughtful about how we handle these things, given that anything that I say could affect the process. So we are simply not saying much purposefully. But I do believe I said before and I will say again we like that opportunity as much as we did previously.

Okay. Then I just have one last question, if I may. And I know this is -- is this the first partnership that as I guess lists the physical restraints meaning they can enroll multiple times a year and so just kind of on that note?

Sorry, which program are you referring to? The enterprise model?

The Yale agreement. Is it the first partnership that lifts kind of the physical constraints around how students can enroll in any given year?

No. Actually pretty much all of our partnerships involve multiple start dates. Some more than others. And that's actually a good example of something that is quite a complicated change on the University side and requires a huge amount of institutional leadership because that's different than how things have been done in the past.

Okay. Those are all my questions. Thank you.

Brian Schwartz, Oppenheimer.

This is [Julien Sarpenian] in for Brian today. I had one question really actually. I really wanted to ask about how the sales conversation might be evolving with potential schools. Now that you think you are having some good momentum, are you getting more questions along like the financials or about the outcomes of the programs, or are the schools more concerned about the benefits? Can you give a bit of color on that a little bit maybe?

Yes, I mean most important to every one of our partners is without question the outcomes. This is a mission discussion before it's a financial discussion. So, all of our partners are -- if you are Georgetown nursing, you are interested in training more excellent advanced practice nurses in the Jesuit tradition of Georgetown. That's -- it's critically important.

At the same time, it's got to be able to operate and be a solid business for them. Sustainability is really important. So while they are not for-profit enterprises, they obviously need to be successful, and revenue is part of that.

So it's a combination, but I would say it's always been -- and there's really no change here. It's always been much more conversation about mission than it is about financials. So, that's not new.

The nice thing for 2U -- and I'll just take another opportunity to plug our impact report. We actually thought our team did an awesome job on the impact report because it's just quite pretty. But more importantly, the data is really critical. When you start looking at 100% board pass rates for Georgetown and over 3000 babies delivered in the midwifery program, and really that is what this whole story is about. And long-term, I really believe that as long as we remember that, we are going to build a great business in the process.

All right. Thank you.

This ends the Q&A for today. I'll turn it back to management for closing remarks.

Thank you, everyone. We look forward to talking to you next quarter. #nobackrow.

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