2U Inc (TWOU) 2015 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the 2U Incorporated fourth-quarter and all-year earnings conference call.

(Operator instructions)

I would now like to turn the call over to our host for today, Ed Goodwin, Senior Director of Investor Relations, you may begin.

Thank you operator. Good afternoon, everyone and welcome to 2U's fourth-quarter and full-year 2015 earnings conference call. By now, you should have received a copy of the earnings release for the Company's fourth quarter and full-year 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; 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 and are based on information currently available to us.

The outcome of the events described in these forward-looking statements are 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 statement 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. Outcomes drive our business. Student success drives University success, which in turn drives 2U success. 2U has just delivered the best quarter in its history. Q4 2015 was adjusted-EBITDA profitable. As a matter fact, the entire year of 2015 showed tremendous progress. Revenue growth in 2015 was very strong at 36%. Our progress on the bottom line was even more impressive; 2015 adjusted EBITDA loss improved by 55%.

In addition our expectations for the future have improved. We now expect Q1 of 2016 and Q4 of 2016 both to be adjusted-EBITDA profitable. While we believe the year will still be adjusted-EBITDA negative, the deceleration of the loss continues. We're primed to get this Company to profitability. Kathy will discuss that in a moment.

Progress for the business has been driven by our incredibly successful strategy of deploying multiple programs in the same academic discipline. We call this MPV, multiple program vertical. 2U is at the epicenter of the rapidly-evolving online education market. Great schools are seeing the power of what we deliver.

Our existing clients are demanding more programs. We have any program to talk about today in a rapidly growing vertical from a partner that loves what we bring to the table. Our partners are evolving and developing academic disciplines to meet new demands from students and employers.

When we launched 2U, data science was a big unknown. In 2014 we partnered with UC Berkeley to launch a data-science program that had not previously existed on campus. It was a green field. We like what we saw and in 2015 added a second program in that vertical with Southern Methodist University.

I am thrilled to announce today a third program in that important vertical. Syracuse will launch Data Science at Syracuse pending school, University and state approvals. Today the emerging discipline of data science joins business and nursing as one of our multiple program verticals with three or more programs in it even though it did not exist just a few years ago.

This announcement also works our fifth program with Syracuse University, making it our largest partner by number of programs. Now think about that for a second. For those that have followed 2U in the last few years, Syracuse wasn't a client at the time of our IPO. Now they have five programs. Our relationship with Syracuse has really grown into an impressive partnership; go orange.

The overall business of 2U is truly diversified and doing it rapidly. Let's examine this for a moment. At that time of our 2014 IPO, we had nine launch programs with seven University partners. Only one was an MPV program.

Today we have 14 University partners with 29 announced programs in 20 verticals. Of our announced programs, 18 have launched and are at various points in the typical lifetime cycle. Impressively, the programs launched since IPO are now in a position to drive real revenue growth in the future.

There is a long lag between marketing spend to attract the student and that student being accepted into a program. Then students pay for their program over their life as a successful student generating revenue for 2U as they take their courses. As such, new enrollment is an early predictor of future revenue.

Our original four programs launched between 2008 and 2012 make up a cohort we've referred to as the core four. For a long time they've dominated our business as they've all reached or, in some cases, vastly exceeded our steady state new student enrollment targets.

However, some new programs are approaching steady-state new enrollments more quickly than expected. To demonstrate, we're providing additional color on the top-10 programs by new student enrollments in the calendar year of 2015. This color will give investors clarity on the diversifications occurring inside the business and we plan to include this data in each Q4 call.

We have listed the top-10 programs based on new student enrollment 2015 on our Investor Relations page in order from first to tenth. MSW at USC, our first social work program; Nursing at Simmons, our second nursing program; USC Rossier online, our teaching and education program; MPH at GW, our public health program; MSW at Simmons, our second social work program; MBA at Syracuse, our second business program; MBA at UNC, our first business program; Nursing at Georgetown, our first nursing program; Data Science at Berkeley, our first data science program; and at Wash-U law, our law and legal studies program. We like what this list shows.

First while the Core Four is important, and we do love those programs, this Company is not a four-trick pony. Only two of the original Core Four are in the top six. Second MPV is massively important. The first two MPV programs launched in 2013 and 2014 were in the top five for new enrollments in 2015.

MPV programs are ramping toward our steady-state targets and doing it more quickly. Syracuse Business is already sixth on the list and it was not launched until Q1 of 2015.

Third, newer verticals are important to our long-term goals of the Company. Notably, our first program in the public-health vertical has gotten very large and is already fourth on the list.

As a reminder, new student enrollments are a leading indicator of revenue. These 2015 new-student enrollments will show up in revenue over the next two or more years as students earn credits toward their degrees.

So what about future growth? We expect 6 new program launches in 2016; 9 in 2017; and 12 or more in 2018. As of today, we have announced 11 future programs which represent a significant portion of our targeted program launches for the next three years.

I'm also pleased to be able to confirm our 2016 program launch schedule with you now. We plan to launch six new programs in 2016 and they are the Enterprise Program with Simmons College made up of five separate degree offerings in different disciplines. As a reminder, four of these five degrees are in multiple program verticals allowing us to optimize marketing across most of this enterprise program. This program will launch in March with the first two of five degrees an MBA and a healthcare MBA.

The remaining three degrees in Applied Behavior Analysis, Strategic Communications and Public Health will start classes between the fourth quarter of 2016 and the second quarter of 2017 tracking to our initial expectation that an enterprise program degrees would start up individually over a 12- to 18-month timeframe. In September, we expect launch nursing at USC, our third nursing program and our first on the West Coast.

Also targeted for September launch are two programs with NYU, School Counseling and Speech Pathology. These are the first of several announced programs with NYU and our first programs in each of these important degree verticals.

And rounding out our launch schedule for 2016 are two programs with Syracuse University, each expected to launch in October. The I-school at Syracuse program will offer three related Information Management degrees or concentrations. The engineering at Syracuse program will offer three related Computer Engineering degrees including a degree in Cyber Security. Of the six programs expected to launch in 2016, four are in new-degree verticals and two, USC nursing and Simmons Enterprise are MPV, or in the case of Simmons, largely, MPV programs.

This reflects the balance we have discussed between launching the degree verticals necessary for the long-term expansion of our business, as we have seen with Public Health and adding the second, third and fourth programs that help us gain efficiencies and profit margin. Look for more program announcements over the coming months; we have got plenty more on the way. Now I went to turn it over to our CFO, Cathy Graham.

Thank you Chip. While our financial results for fourth quarter and full-year 2015 largely speak for themselves, I would like to give you some color on the results before turning to our thoughts for the future. We closed out 2015 by again delivering significant year-over-year revenue growth.

At $43.3 million for the fourth quarter and $150.2 million for the full year, revenue has exceeded the prior-year periods by 41% and 36%, respectively. As is typical, revenue growth in both periods was driven primarily by increases in full-course equivalents. For the fourth quarter, FCEs increased by almost 44% offset slightly by a 2% decline in average revenue per FCE.

For the full year, FCE has increased by about 39% also offset by a 2% decline in average revenue. As a reminder, small fluctuations in average revenue per FCE are driven primarily by program mix reflecting the relative program tuition, enrollment and days in session during any period. FCE increases were generated across our program portfolio continuing to diversify our revenue base.

In the fourth quarter, 53% of FCEs and 56% of revenue came from the four programs in our first launch cohort. By comparison, in the fourth quarter of 2014, the first launch cohort contributed 72% of FCEs and 76% revenue. At $1.9 million for the fourth quarter, we are very pleased to announce our first ever adjusted-EBITDA positive quarter.

While the fourth quarter is typically our highest margin quarter, and being positive here does not mean that all subsequent quarters will be positive, reaching this milestone is a meaningful indicator that we remain on the task to our adjusted-EBITDA profitability goals. We continue to expect to be adjusted-EBITDA positive for the full-year 2017.

Fourth-quarter performance brought our adjusted EBITDA loss for the year to $6.6 million. Both fourth-quarter and full-year adjusted EBITDA measures showed significant improvement as we closed out the year. On a year-over-year comparison basis, adjusted EBITDA showed a 441% improvement for the fourth quarter and a 55% improvement for the full year. This equated to approximately 600 and 900 basis point year-over-year improvements in adjusted EBITDA margin for the fourth quarter and full year, respectively.

We are also excited to confirm some cohort-level expectations we shared with you during our third-quarter call. Our first launch cohort, consisting of the four programs launched prior to 2012, have a 27% fully allocated adjusted-EBITDA margin for full-year 2015.

Remember that we expect programs will achieve an average adjusted-EBITDA margin in the mid-30s with the first programs in the degree vertical being somewhat lower and subsequent programs being somewhat higher. Considering that all of these our first programs, this cohort is approaching steady-state margins. Further our 2000 launch cohorted programs had a fully allocated adjusted-EBITDA margin of 4% for the year. As these programs have only been operating for between two and three years, this launch cohort passed the breakeven point sooner than we would have typically expected.

Note that in the fourth quarter be recognized a non-cash charge of $884,000 related to expanding and consolidating office space specifically triggered by our signing of a new headquarters facility lease for late 2016 or early 2017 occupancy. We had allowed for this charge to be as high as $1.5 million. So about $600,000 in both the quarter and the year as adjusted-EBITDA over performance was related to the lower lease-related charge.

From a balance-sheet perspective, we ended the fourth quarter with $183.7 million in cash and no outstanding debt. Though we continue to track towards sustainable adjusted-EBITDA profitability, we will continue to use additional cash for technology, content and other infrastructure investments in support of programs and corporate growth. Given our current cash position, we continue to believe that we can increase our program launch schedule from 6 programs in 2016 to 9 in 2017 and 12 or more in 2018 while maintaining progress towards steady-state margins. Let me clear, we do believe our current business plan is fully funded.

Now expanding and improving on the initial look at 2016 we gave up with our third-quarter results, we have provided specific first quarter and full-year 2016 guidance. With these ranges, it is clear that we are expecting the revenue growth and margin improvement trends we saw in 2015 to continue.

On the top line we are now expecting revenue of between $46.2 million and $46.7 million for the first quarter and $197.3 and $199.8 million for the full year. At their midpoints, these ranges imply year-over-year growth of 34% for the first quarter and 32% for the full year.

With regard to revenue distribution across the 2016 quarters, we are expecting revenue to step up sequentially throughout the year with the percentage step up accelerating somewhat from quarter to quarter. To help you further with your quarterly models, the guidance provided in our earnings release also states that we currently expect 47% to 48% of our 2016 revenue to be recognized in the first half of the year. Our guidance also reconfirms our commitment to keep 2U on the path to profitability in 2016.

On the adjusted-EBITDA line, we are now expecting adjusted-EBITDA profitability of between $400,000 and $700,000 for the first quarter and an adjusted EBITDA loss of between $2.3 million and $400,000 for the full year. At their midpoints, these ranges imply year-over-year improvement of 134% for the first quarter and 80% for the full year. While we do not currently plan to reach adjusted-EBITDA profitability for 2016, we do expect both the first and fourth quarters to be adjusted-EBITDA positive.

As is typical we expect that our largest adjusted EBITDA loss quarter will be the second as this has the highest amount of annual and periodic cost including for graduation on campus and other physical program activities. Again to help you with your quarterly models, the guidance provided in our earnings release includes supplemental guidance on the adjusted-EBITDA loss margins we expect for this first and second half of the year. Know that we are expecting to be adjusted-EBITDA profitable for the second half of 2016 as a whole.

Before leaving the subject of adjusted-EBITDA margin improvement, I want to remind you that, as we approach adjusted-EBITDA breakeven, we're executing on our stated plan to increase our annual program launch schedule and make other infrastructure investments to ensure continued growth and operational quality. As we start building and marketing new programs, as much as a year before launch, targeting nine program launches for 2017 is adding cost to 2016.

We will also continue to upgrade corporate systems to support our growth including doing a major ERP installation requiring significant implementation costs. We can absorb these costs and still deliver margin improvement, but as we have said before, as we invest to serve increasing market demand and maintain strong top-line growth, post breakeven adjusted-EBITDA margin improvement will be at a more moderate price.

Finally, before I hand the call back to Chip for his closing remarks, I would like to spend a minute on our capital expenditure expectations for 2016. In addition to creating content for a larger number of new programs, we will be building out our new headquarters building as well as new or expanded facilities in both New York and Denver. As such, we expect capital expenditures to be significantly higher than usual for 2016 likely in excess of $40 million.

Upwards of 20% of this total will be paid by our headquarter's landlord in the form of tenant-improvement allowances so will not be a use of cash. And we expect capital expenditures to return to more normal levels in 2017. This temporary increase in capital expenditures was anticipated but does not impact our ability to execute our increasing program-launch strategy.

Closing out, what a great year and a great outlook. Chip?

Thanks Kathy. It is important to remember that our results are driven by thousands of successful outcomes. As a Company, we're trying to end the segregation to the online student blurring the line between campus and online students so that, in the end, they're all just great students. Last week marked an important step in the blurring of that line with the announcement of the formal launch of Campus Scaffold at the Milken Institute School of Public Health at the George Washington University.

Students enrolled in the Masters in Public Health on campus and online learn from the same faculty. They study the same curriculum. They will earn the same degree.

While beginning in the spring 2016 term, Milken is ending the segregation of these groups. All MPH students will have the opportunity to take up to 15 credits in either program format. We think this is the critical strategic step by one of our partners with long-term implications that we love.

We hope to see more of this over time. Long term, it is all about outcomes for students whether they are online or offline.

With that, I'm now open to receive your questions.

(Operator Instructions)

Michael Nemeroff of Credit Suisse.

Congratulations on a great quarter and the adjusted-EBITDA profitability, really nice. First question is on the last thing you had mentioned about the Milken Institute. How should we think about all of the schools that you are working with? Is this something that you are in discussions with other partner schools where even the established programs you have already that are just online? Are other schools thinking about combining or mixing the online and on-campus like you provide?

Yes, we think strategically it is really important to think long term about where online education is right now. You compare it to, this is going to sound a little weird, but let me get there. If you compare it to online dating, you think about that 15 years ago, it was scandalous and you didn't want to admit to anyone you were doing it and today it has become the norm. If you're looking for a mate, that is typically how you're finding somebody.

Online education is really in the early stages of its evolution and as you, over time, blur that line and make it clear that you can deliver something equal or, frankly, better in many cases, than the on-campus, you have got something really powerful. So we are seeing more interest across the entire portfolio for campus scaffold. With that said, we think it is more important strategically and not from a revenue perspective. While we love the additional revenue and, of course, we do get additional revenue from it, this is more about working with our great partners to help them build great digital versions of themselves long-term.

So the second question is around the marketing. How have the marketing programs changed or evolved to attract new applicants now that you've introduced a lot of these new MPVs, both from a strategic and a tactical perspective. And for Kathy, from a cost perspective, can you give us a sense of the cost savings by having these MPVs in place?

I am not going to get too much into the tactical because there is some real special sauce there that we think we have gotten quite good at. We do believe that the way we market the programs has become a strategic competitive advantage and, on some level, building a bit of a moat around the business. It is not just been understanding that you are going to work with multiple partners, but how you handle the marketing itself and the admissions process is critical because you also have to do it in a way that reflects the integrity of a Berkeley and a Georgetown and a Northwestern.

That's the key is that these are all programs that need to be -- we're brand stewards of the schools, so we have to do it in a particular way that not only has the student finding the right outcome but reflects these great brands that we're working with. From a strategic standpoint, there is no doubt that MPV has allowed us to unlock tremendous efficiencies and, in some cases, we're definitely able to do marketing in sort of a combination of marketing the vertical rather than the individual school.

More than anything, delivery of MPV has really resulted in some pretty incredible marketing efficiencies. Michael, if your remember, at the time of IPO, we talked quite a bit about the LTR/TCA ratio which is a internal metric we use with the lifetime revenue that we expect from a student divided by the cost to acquire a student. And, way back at the IPO, it was something around 2.4, is that right? So at the end of last quarter, it was a little north of 3. And today, as we sit here with you, it is now actually, as we speak, at our long term steady-state target which is 3.2. So we continue to see real efficiency based on that MPV strategy.

Let me just add Michael, and we've talked about this before, that one of the things that happens as we get to this magic 3.2 ratio is that as we add more MPV programs, we actually could be more efficient than that and our ratio could go up. We then have a choice as a business as to whether we spend more money pushing the ratio back down and grow faster or whether we continue to be more efficient and perhaps put more money to the bottom line. So that is actually a really nice position for us to be in as a business now that we are in this high-growth position but really at our long-term target for LTR to TCA.

And the only other thing I would add, Michael, is it really comes down to the sort of, over time, the revolution at 2U has really been about being able to predict enrollment at the time somebody comes into the prospect funnel. That really is a driver of how we actually operate the MPV, because if you cannot predict enrollment at the time somebody comes into the marketing funnel, ultimately you will spend quite a bit of money on things that do not work. Our goal is to match the right student to the right program as much as we possibly can, so that is what we are trying to do every day.

Thanks, guys, for taking my questions. Great quarter. Thank you very much.

Michael Tarkan, Compass Point.

Thank you. Chip, could you spend a moment on the competitive landscape a little bit, what you're seeing whether it is still relatively dormant. I know there is a for-profit school out there that is converting to a non-profit that has talked about getting into the business. I'm just curious what you guys are seeing from that standpoint. Thanks.

Thanks, Michael. We haven't seen, really, much of a change there. We do think we've got a pretty substantially lead and expect to keep it. It is not that we make light of the competition. We certainly watch everything everyone else is doing, but I feel like our model in the early days was the nonobvious model. In other words, it is much more obvious to think, let's aggregate as many degree programs as we can and provide a vanilla service layer across that. That's not what we do.

That is not what we do we. We build the world's best online degree programs and we build them to scale. That's the goal going in. So, being able to select the right programs is really important which is where that program selection algorithm comes in. I just remind you that the 2015 cohort was the first cohort we actually used the algorithm to select and we have been doing it since, obviously, going into our 2016 cohort.

So not a tremendous number of changes in the landscape. I think this notion of building a long-term scalable program which means you have to invest really heavily over the early years of the program's life, is not really that obvious, but I think at this point is proving to be much smarter than the way people have historically thought of the online program management space.

Thanks and then, as a follow-up, in terms of demand both on the school side and from a student perspective, are you seeing any noticeable changes where schools are coming to you organically than they had historically now that you have a little bit of a track record? And the same thing goes on the student side; are you seeing us go over a tipping point from a demand perspective for an online degree? Thanks.

On both counts, I will start with the latter. I actually think we're still in very early stages I think we tend to -- with the business, we've been doing this now for eight years and so for us it has been a long journey, but the reality is we really are in the third inning of what is a very long game. Not huge changes in the demand. And what I mean by that is, we think preconceived notions of online education are so bad and, as they get better, we will get wind at our back, but it's going to take a long time.

On the school side, we have absolutely seen a change, no doubt, to a point where, frankly, it is getting kind of hard for new logos to make it onto the page because we have had so much demand from our existing partners. That is a very high-class problem. If you look, I said it in the script, the reality is Syracuse was not a client until first quarter of 2015 and now they have five programs and they are our biggest. So it is a combination of our existing programs wanting more and new partners when they come to the table having many more degrees up front, like we now have with NYU with four degrees. That's all new; that is definitely new in the last, let's say, 12 to 18 months.

Thank you.

Corey Greendale of First Analysis.

Good afternoon. Great quarter, great year. I'm at an airport so I'm going to mute between questions. Hopefully you can hear me okay.

We can hear you fine. No problem Corey.

Thank you. First question I have is, can you remind me, in the Simmons Enterprise, were you thinking about that as a first program in a vertical second program in a vertical as far as from an economic?

Hi Corey. From an economic standpoint we will be thinking of it as though it is a first program in a vertical. What ends up happening in this is, as these individual degrees launch, over a period of time, it kind of mimics the acceleration or the enrollment pattern of a first program even though four of the five degrees within this Enterprise program are MPV degrees or in MPV verticals. So you should think of it as a first program from an economic standpoint.

Great and I noticed that sales and marketing costs that your year-over-year growth decelerated in Q4. Is that just a function of the fact that you only have Simmons Enterprise starting in Q1 of 2016 and you had three programs? Or is there something going on under the covers that on the same program basis?

So remember, Corey, first of all that we always see a deceleration sequentially in fourth quarter of marketing costs because we just really cut back on marketing in that end-of-quarter holiday period. It is not just effective or as effective, so we cut back on the spend. As far as the growth on a year-over-year basis, a couple of things. Number one, wild, large numbers. But the second thing is, yes, if you'll remember, in 2015, we had Syracuse MBA launching very early and that was a large program with a large marketing funnel. So, you are just seeing a difference in launch schedule also the fact that there is the typical deceleration in this quarter.

Okay and then for Chip, thanks guys for providing the top-10 programs; it's really useful. I had two questions about that. I want to qualify that. Did you say that these programs have reached steady-state or they are approaching steady-state. I'm just trying get a sense if these programs, if some of the new ones are still growing.

Yes, the new ones, all of the new ones are still growing. We were talking about the Core Four. The Core Four has been around since 2008 and 2011 and so the Core Four have either reached or, in some cases, exceeded steady-state enrollments. And while, we have a little bit of growth occurring, it is obviously slower at this point because they're much farther into their life cycle. We've been running some of these for four to five to six years. The newer programs, what I found pretty incredible about the annual enrollment, sort of top-10, is just simply the way our model works is there is a very significant sort of time-ramp to get programs up to steady state.

I think you know that it, but it takes multiple years to get the enrollment numbers up. You have to build the marketing apparatus and students don't enroll in a top program on a lark. Is a long thoughtful process. So the fact that you have, like our first program in the vertical, GW Public Health already in the fourth spot and the fact that you have Simmons Nursing in the second spot shows, what I think is, a pretty incredible trajectory for those programs.

And actually that ties into my next question which this may be slightly in the weeds, but I am interested with the Simmons nursing is now larger than Georgetown Nursing. Whitman is now larger than UNC. Could you attribute that to selectivity or to price points or to geography or what you think is driving it?

There's a number of factors that go into enrollment and, obviously, I cannot get into a discussion of individual components from individual programs. I can tell you that all of our programs are selective, our job is to find the right student not just any student. That is always complicated, so geography is definitely a factor in certain cases. So the reality is a vertical where we've got large businesses operating today it is certainly easier for us to go and sort of drive the programs faster. We are excited about things like USC nursing. That is our third program in that vertical for that reason.

All right.

We thought that was notable, as well, and Corey, I'm shocked you are the weeds.

(laughter) I live in the weeds, which is not to say weed. It is a very different thing, weeds. (laughter) Last quick one is, you just announced your third Data Science program. You said that did not exist not that long ago. Could use that to talk about the 60 vertical programs, each vertical layer. Does this suggest that the more programs where we can get more than three and maybe can get easily more than three programs in those verticals than we were thinking about before?

Yes, so remember when we talked about that, that came from the original practical application of our TAM when we discussed it in the IPO. And originally, we said 30 and 2. Well, why did we say that. At the time of IPO, we had one vertical, nursing, running with two programs, that's it. So, it was working really well. We knew it was working well, but it was new.

So we were careful about our expectations, in terms of how many would do. And also, important to note, at that time we did not have the right to run multiple programs, so that is been a huge effort among many of the Senior Management Team here, including myself, to make that happen where we could unlock exclusivity over time. So we were careful and we gradually upped it to 60 because simply, we had seen the power of this notion of green fields.

And frankly, there were many other verticals that we started running that maybe in the beginning we didn't think were big enough and have done quite well. So, School Counseling is good example of something we announced that really people did not pay any mind to, but is actually a really good size vertical and it is with NYU, which is a great school. So we do think that longer term, whether it is three or some larger number is TBD but, given the fact that we are running four MBAs already, we do think that there will be some verticals which have larger number of enrollments where you'll see a good number above three.

Therefore, might be some smaller ones where we are not going to run 3. We might run two, but you can make an argument that we probably don't want to run a vertical at all unless we can do two, and the reason for that is, very simply, that it drives so much incredible efficiency. And then, one other note on that, is international at some point comes into play and we do think regional bias is a factor, and we do think it is a worldwide phenomenon. So, at some point, you'll see us run programs in verticals we are running today with partners outside the US.

That's very helpful. Great job, everyone, thank you.

Ben McFadden, Pacific Crest Securities.

Thanks for taking my questions. I wanted to start with a question on the rationale behind your latest announcement of programs set to launch in 2016, the Information Management and the Computer Engineering/Computer Science at Syracuse. Maybe you could talk to us about why you view that opportunity as particularly beneficial to you in 2016 and also maybe talk to us about how you view the trade-off between launching more programs at an existing partner like Syracuse versus maybe going out and developing new University partnerships.

I will start there. The thing about the University partners work with is they get it. They believe in the term -- this has always been a story more about institutional will than technology. It's making these students equal is nontrivial. You have to break all kinds of tradition. Most schools did not have online students, when they did they did not treat them the same way. So we ask a lot of our partners; so when they get it, it is a big deal. The number of ways that this is a partnership expressed through revenue shared is, we talked about it, it is not that we are trying to be nice and call them partners; that is really what this is. The fact that they get it is important.

Syracuse has been fantastic to work with already. That leadership team there is pretty spectacular, so the balance of new university versus existing is more just about the fact that we have current partners that are coming to us and asking for more programs. And, if we were just trying to look at the world through financial engineering, we would do all MPV, but the reality is we have to plough the virgin snow of these new verticals. There are many verticals that we are launching now that we think will get big over time and the fact is you cannot have a second and a third without a first.

And so, you look at Engineering or Information Management, they are both really good size verticals that we had not played in yet with two deans that we love at those schools. And something like cyber security is really hot right now, so to us that was kind of a no-brainer. It does not mean that we are not interested in getting the efficiencies out of MPV; we are.

But you take something like Occupational Therapy at NYU, once again, something else people really did not focus on that much, but that is a vertical that really our competitors don't want to touch because we have this massive placement apparatus that has been built over time and, frankly, we weren't great at it in the early years. It was really hard and we got really good at it over time. And now it is kind of building a mote around the Company, so we want to launch those verticals and drive long-term value.

We do think, over time, you'll see more of a balance of MPV simply because we will break new verticals, break into new verticals and then, therefore, as we break into them, we'll have more seconds and thirds. But, Data Science should be an indicator that was really an idea at the time, from a great dean at Berkeley, and now we are able to see that there's big opportunity there and real jobs there. You will see us do more MPV, but we just cannot forget that we need to blaze this trail with new verticals.

Great. Cathy, maybe you could talk to us a little bit about, you talked about the seasonality of the model on EBITDA basis, but as we look at the CapEx spend that you are spending in 2016 on these new headquarters and building out New York and Denver. And also we have the content-development aspect of the equation which, I assume, is going to start ramp up as you launch these programs in the second half of 2016. Is there any color that you can provide as far as around the cash flow side of the equation, how the seasonality of the model should look there?

Yes, so I would expect that you will not see a lot of the real estate build expense hitting CapEx in the first quarter. That will be a little bit later second quarter and after, so you can think of a fair amount of it hit after that. However you should think, given what we are launching and the fact that we will be launching more programs in 2016, that the content development or the content-build expense that we capitalized, is not going to have a whole lot of seasonality to it. I'd put that piece -- what we typically spend in that piece won't have a lot of seasonality. Weight anything related to the real estate more towards the back two-thirds of the year.

Great, thanks for taking my question.

Jeff Meuler, Robert W. Baird.

Thank you and Chip, I'm just glad you stopped short of saying you wanted to be the tender of higher education or anything with your analogy. (laughter) The question is, as to you and OPM started to grow up a bit and as you've started to leverage the program selection algorithm and overall gotten more sophisticated, I want to take MPV off the table with this question. If we're looking at first programs only, are you seeing any signs that you are going to be able to reduce the net-cash outflow to launch first programs or are going to take the form of, if you don't reduce the cash outflow it results in them ramping more quickly in terms of revenue and profitability and they are just a lot more profitable in year three and year four than they originally were? Thank you.

I think the real story there, Jeff, is that we had, in some ways, done that prior to being a public company. We learned a lot of lessons in the early years. So they cost a lot more. The Core Four were significantly more expensive to get going. And I mentioned earlier, placement being good example of something that it is not the incredibly sexy part of our business, but the reality is it's super important. And it was really hard and we had to get it right; and the moment that you get it right, it is the most important thing in the world to the school because it drives a really critical outcome for the long-term value to the student.

So basically, the number of ways that we improved the business, and I think probably the smartest thing, one of the smartest things that we have ever done -- it was not doing any programs in 2012, taking that big pause before we started launching. So I think it would be unwise to expect that first programs at this point. We did not IPO until we really felt like we had this business stable and predictable and ready to go, But we do think what is probably more relevant to a first program long-term is this notion of, over time the reality is preconceived notions of online ed will get better; that is going to happen. To us, it's pretty obvious. I'm in the MBA program. I know how good it is and the reality is, it is phenomenal. So, as people start to graduate from that program you get more people out there. You will get more wind at your back, but we think it is probably going to take a long time. So, still today, unfortunately really even, just in the last year the number of negative stories about online education vastly outweigh the positives. So we've got to stay the course.

Okay, fair enough. And then Cathy, what are programs at steady-state, what should CapEx including capitalized content be as a percentage of revenue?

So, it's better probably not to think of it as a percentage of revenue, because it is kind of the same cost to maintain the program. It is not really revenue related. It is more how many credits, how many courses in the program. We tend to think, on average, that it is probably in the sort of $300,000 plus a year to probably maintain it. We work in a five year refresh cycle and so we think of this is as being our cost of building a new program split over five years.

Okay and one more for me. I think this is the case, but if you could just confirm it without talking about any given client specifically. Clients of yours that have multiple programs are still paying a similar revenue share on average for all of the programs, meaning they are not getting a material discount from signing multiple programs with you, correct?

Yes.

Brian Schwartz of Oppenheimer.

Thanks for taking my questions this afternoon. Chip, I'd like to detour you to a different topic here. I noticed that you have brought in the new Chief Operating Officer here recently. I just thought it might be a good time here to ask you how you're feeling about the leadership team and if you have any areas you are looking to add or fill on the leadership team here over the next 12 months?

Thank you, Brian, great question. We, as you saw earlier in the year, we announced some leadership changes. So one of my, who I'd consider a partner, Rob Cohen, who was our founding CFO and has been with us the entire eight years decided to retire. Sort of my joke to the team internally was that Cherry finally won. That is his wife, by the way. So, Rob decided to retire and we will miss him tremendously and it's a good thing he's staying with us on a part-time basis to continue to handle a very specific part of, really his great skill set of negotiating the actual physical contracts; but once it goes to lawyers, he's just exceptional. So he stays with us, but obviously not as our COO.

We were pretty thrilled to be able to bring in Susan Cates. I been trying to hire Susan for literally the entire time that I have been here. So she comes with a tremendous amount of experience from higher ed. Also a ton of experience in ed tech and operates quite a large business, granted on the University side, but it is a pretty good size business. And, from my standpoint, brings direct expertise in one of our biggest areas that will be a huge challenge that we don't have internal expertise today, which is learning and development.

So I really consider, if you think about one of our biggest potential concerns long-term, culture has built this Company. The culture here is fantastic. The people really make it go. When I say stuff like that at times, investors sort of drone out, but the reality is, it's completely true. This is all about the people. It is not about me, is not about Kathy. It is about this team all unified to drive what is a really high outcome for a student. The bench could easily get depleted over time, so you have to bring in people in from the outside as well as continue to train people up internally and Susan has deep experience there.

The other comment I would make is that Jim Shelton's hire probably makes a lot more sense to people today now that they understand that Rob is leaving. So we are always thinking about succession planning. It is a critical thing for the Company. I do want to reiterate to everybody out there, just to make sure that they know, I couldn't be more long. I'm not going anywhere. I love this place and I intend to be here for an extraordinarily long time. But, with that said, we do have to be thinking about long-term, how to have great succession across the Senior Executive team.

So I'm pretty excited to have Susan start. She comes March 31 and she and Rob will have a long transition where they will both be here. So, pretty blown away to have her and really looking forward to the future.

Two follow-up questions that I had. I just want to be reminded again, is it right that there is no large university partner contract that are coming up for renewal here over the next 12 months, is that right?

No, not over the next 12 months. We have the next renewal would be our first one, the Rossier program at USC and that would be in some point in 2018. Forgive me, I don't know offhand what month, so that one is in 2018. And I think, as you know Brian, we have now, really frankly, extended all of the early ones to very long time periods, so 2030, 2032; very long time periods. The next one up would be the Rossier program and then, after that, there's quite a bit of time. I think it's something like six more years before anything comes up. So, that's the only one.

Thank you. That last question I have, just kind of piggybacking off that answer and it is coming up here in the Q&A quite a bit. And so this is how I would phrase it, Chip and Cathy. Your business is very unique out there, in terms of the magnitude and distance that you have in terms of your revenue visibility. And your commentary here, as well as the data, it seems to indicate that there is increasing momentum right now in terms of new online graduate programs being adopted both by your install base and likely in your pipelines too, based on your introductory comments and some of your other comments during the Q&A. So the question then is you have this great long-distance on revenue visibility, so how do you manage and how do you decide over the near-term how to balance that long-term opportunity to go gobble off more and more University partners and programs as fast as you can, versus showing a better pace to profitability? Thanks.

We feel like right now we are on an excellent pace to profitability and we're able to accomplish our goals, but one of the key reasons that we did move up from 4 programs at the time of IPO per year to then 6 this year, 9 the year after and 12-plus the year after that, is it is pretty amazing to have this kind of organic growth potential if you put capital to work and we have all the capital we need because we have gotten significantly more efficient as a Company. We do want to keep growing, but the reality is we also, as a Company, believe companies need to be profitable. This team, it is sort of not our first rodeo. We have all been in large businesses before and the fact is companies do need to be profitable.

So, we feel like we are on the right path regardless of what the flavor of the month is on Wall Street. We want this Company to be long-term, sort of an iconic business. We think it has that kind of potential. And you are right to say there is more momentum today. People do ask, I see you have announced many Syracuse programs, are there going to be more new logos? And the answer is yes, there is a good number of new logos in the pipeline right now. I feel like, at some point, we've proven enough that we should be able to start, when we express confidence in the pipeline we hope that people will begin to worry about it a little less because it is a general investor obsession. But the fact is, we love the pipeline, feel better about it on a continual basis even though we have increased the number of programs per year. Anything you want to add?

Only I think Brian, that, I would add that we really haven't changed our story and our comment or our perspective on that since the time we went public.

That's right.

When we went public, we said that we believed it was imperative for us to move towards adjusted-EBITDA profitability. We gave that timeframe. We have since been able to move that timeframe up because of MPV but, fundamentally, we've done what we said we were going to do. We also said that, as we have got to and through adjusted-EBITDA profitability, we were going to basically slowly the trajectory toward steady-state margins in order to be able to take advantage of the increasing demand that is there for us from existing and new partners. And so, it is actually really nice to be able to sit here almost 2 years in and say exactly the same thing that we said at the time of IPO.

Yes, and to add to that, the critical thing is the long-term correlation between our financial results and student outcomes, period. That is how this Company will succeed long-term.

Thank you and congratulations again on a very nice quarter.

Jeff Silber of BMO Capital Markets.

It's actually Henry Chin for Jeff. I just wanted to tack-on a follow-up to the prior question. In terms of your accelerating the number of programs, how are you thinking about in terms of the strategic rationale for doing that? Is that more, is that demand is increasing and that you have more capability to meet that demand or how much of it is a need to build a moat around a different vertical? Thanks.

We do believe we have seen demand increase. We have also seen, if you think about the tremendous progress in the Company from the time of the IPO, the reality is we had one vertical operating with two programs, that's it. So to say that, that strategy has been successful is a vast understatement. It has been really strong. So the ability to add additional programs, particularly as we've been able to work out arrangements with our early partners where exclusivity was a challenge, opens up a huge opportunity for 2U to continue to grow. I feel very blessed to be sitting here in this Company at this moment with this team with this market opportunity. That kind of thing doesn't happen every day, so we want to take advantage of it. We have gotten a lot of things right. We did not get it all right in the beginning. We have gotten really good at it now. And so, the opportunity is there to grow and we want to take advantage of it.

Got it, okay. And to follow-up, in terms of some of your new programs, in terms of their ramping up of enrollment, are you seeing an acceleration there?

So new programs, when they're a second program in a vertical, they grow much faster. It has been a fascinating experience running the MPV programs and we are learning a lot about how to do it and we have some incredible people here executing on that strategy. And I'm very pleased to see that, we talked about on the call, that you can see from the list that MBA Syracuse is very large. But what's also not obvious is that, that same moment MBA at UNC had its largest cohort in its history, so that program is still doing exceptionally well and frankly, right now, probably doing better than it has ever done. That is a really strong execution by a smart team.

I would just add, so we do not see -- the way we explained it to people is that indeed, second, third, and fourth programs will scale more quickly because they can leverage the marketing funnel that has been developed by the first. Every vertical is a little bit different and so those rates will be a little bit different, but we see a pretty consistent trend that, that is true. It is part of the reason we get the efficiencies that we do out of MPV.

I think this is about a team that is constantly learning, constantly innovating and the reality is they are not afraid to make a decision, take an opportunity and then learn from it. We are going to go for it and each time we are going to learn every step of the way, because, fortunately, we have a team of people that are pretty good at not making the same mistake twice.

Okay got it. Thanks so much, appreciate the color.

That does conclude our question-and-answer session for today. I would now like to turn the call back over to Chip Paucek for any further remarks.

Thank you, everyone, for joining us today. We look forward to talking to you out on the road and we will see you at our next quarterly call.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now all disconnect. Everyone, have a great day.