2U Inc (TWOU) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to the Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference call over to your host, Mr. Ed Goodwin, Vice President of Investor Relations.

Thank you, operator. Good afternoon, everyone, and welcome to 2U's third quarter 2016 earnings conference call. By now, you should have received a copy of the earnings release for the Company's third quarter 2016 results. If you've 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; 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 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, 2015 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, Eddy. This past quarter was unusually strong. Revenue for Q3 was $52 million, an increase of 40% year-over-year. Adjusted EBITDA loss was $200,000, an improvement of approximately 8 percentage points in margin over the third quarter of last year. As discussed last quarter, we expected the adjusted EBITDA profitable for the full year of 2016, which is now just one quarter away and we will have done that while maintaining revenue growth above 30% the past two years and we do expect that to continue for the foreseeable future.

The numbers are great and Cathy will give you guidance about how not to get ahead of us, but now I'm going to talk about our pipeline. Throughout our history, program launch cadence has roughly matched the rate of market adoption. Early on, the university would launch one program with 2U and wait to see if they could deliver outcomes similar to their on-campus programs, while doing at its scale. Our early programs began producing graduates and we saw that student outcomes were often is good or even better than on-campus outcomes. And our proud partners, were very open with their peers about those results. For that reason, today the word is out about 2U. Our newer partners are often asking to launch multiple programs from the start and our existing partners continue to ask for more. So, now I'm ready to tell you that we're officially increasing our 2017 launch target from nine programs to 10 new programs.

New program pipeline is now in a place where if we don't speed up, we'll miss good opportunities and that's reflected in the pipeline pacing. As of this call, we've signed 11 of the 21 new programs we expect to launch in 2017 and 2018 or 52% of the original target. By comparison, at this time in 2015, we've signed 53% of the target. So, we're on pace with a much larger target. We're extremely confident in the current state of the pipeline and as Susan Cates, our COO, discussed on the last call, this team and the platform are ready to scale. I don't want to miss good opportunities to change people's lives and build an iconic business in the process.

This officially increases our two-year launch target to 22 programs. We'll discuss this increase and our longer-term strategy for pipeline during our Investor Day on November 15, which I hope you'll be able to attend or watch via webcast. Note that we've previously discussed this framework in terms of "announced programs", but we realized that the number of announced programs doesn't always shed light on how our pipeline is actually pacing. Why? One of the lessons we've learned over the years as a public company, is it there are number of factors that could affect when we announce a program after it's signed. And there are times when we'd love to announce a program, but we choose to delay the announcement in deference to our partners. This has happened in the past. Right now, as a matter of fact, we have a signed contract for a program that we have not yet announced. While it's a done deal and we love it, we're holding the announcement until the school is ready for the bright light to shine on them.

There are other times where we feel like we have to announce a program, but we really would have preferred to hold off like when the accreditation process is public. So moving forward, we'll continue to announce pipeline progress against our two-year launch target, but instead of using signed programs -- instead we'll use signed programs instead of announced programs. So, we officially now have 35 signed programs. We'll disclose what that 35th program is at some point in the future when the school is ready. We believe that signed programs will be a more accurate measure of pipeline progress. We think it gives you additional disclosure and we'll give you a better sense of how the pipeline is actually pacing.

So, let's talk about what we announced in the last two weeks. Yesterday, we announced our partnership with the USC Jimmy Iovine and Andre Young Academy to offer Design@USC, our first program in the design vertical. The interdisciplinary program will result in an online Master of Data Science in integrated design, business and technology. We believe this will be in high demand from the millennial workforce. Like data science, design is an emerging academic discipline that we believe will be a nice vertical for us. The concept of integrating technology business and fine arts into one degree is super interesting. With the addition of design, 2U is now operating in 22 verticals. Personally, this kind of blows me away.

We launched successful programs in a wide variety of academic disciplines and we've really only scratched the surface of the verticals we plan on entering. It's very clear to us that investors don't really understand these verticals in the same way that many early 2U supporters didn't understand why we built a social work vertical, which is now one of our largest. The new verticals are producing. Our first public health program, MPH@GW, was fourth on the Top 10 new student enrollment lists for 2015. Data Science is now good enough that we have three programs. Even newer indications of verticals that we decided to enter look good. So, as an example, the very first speech pathology and the very first school counseling program each at NYU and each in our 2016 launch cohort had very strong inaugural cohorts. During our Investor Day, our CMO, Harsha Mokkarala will shed more light on the entire vertical landscape.

Finally, in terms of MPV, we're also growing. We're expanding our MBA footprint to the Midwest by partnering with University of Dayton to offer MBA@Dayton, which will include two offerings, a general MBA and an advanced standing MBA for individuals with more than 10 years of work experience or an undergraduate degree in business. I love this not only because of the new geography, which is really important, but because the program offers a differentiated products. Students that have an undergrad in business or relevant work experience will be able to complete the advanced standing MBA in as little as one year. The business vertical makes it clear. Our MPV strategy is evolving and it's working really well. More to come on November 15 on Investor Day.

Now, I'll turn it over to Cathy to take you through the financials.

Thank you, Chip. 2U's trend of strong financial performance continued in the third quarter. Revenue came in well ahead of guidance and that along with continued operating and scale efficiencies produced higher than anticipated earnings measures. At $52 million, third quarter revenue exceeded the comparable 2015 period by 40%. It also exceeded the midpoint of the revenue guidance range we provided by about $1.8 million, larger outperformance than we typically achieve. And arriving at our guidance ranges for each period, we project results across our portfolio, making assumptions about things like new enrollments, retention, refunds, average course loads, et cetera. Usually, some things come in a bit ahead and some come in a bit behind, but we end up pretty close to what we expected.

This quarter, it just so happened that almost every variable performed to the positive. Exceeding guidance by this much is not what we typically see or we do not expect this level of overperformance be a regular occurrence. Revenue growth was once again driven primarily by an increase in full course equivalents. Compared to the prior year period, third quarter FCEs increased by 38% and average revenue per FCE increased by 1%. FCE increases were generated across our program base, but as our business model projects, the largest increases were from programs in their first three years of operation.

The increase in average revenue per FCE resulted from several different factors, but most notably from the typical annual increase in tuition at many of our university partners. As we expand our program portfolio with additional launches at new and existing partners, our revenue base continues to rapidly diversify. Our earnings measures, net loss, adjusted net loss and adjusted EBITDA, each showed year-over-year dollar and margin improvement. At $6.8 million, third quarter net loss improved by $1.4 million and net loss margin improved by 9 percentage points to 13%. On a per share basis, net loss improved to $0.14 from $0.20 in the prior year period. This was despite a 5.3 million share increase in weighted average shares outstanding, driven by our September 2015 follow-on offering and to a lesser extent the exercise for vesting of stock-based compensation related share.

After adjusting for $4.1 million in non-cash stock-based compensation expense, third quarter adjusted net loss was $2.7 million or 5% of revenue. This represented a $2.2 million and 8 percentage point year-over-year improvement to adjusted net loss and adjusted net loss margin respectively. And on a per share basis, improved to $0.06 from $0.12 in the prior year period. Note that we continue to see meaningful year-over-year stock-based compensation expense increases, which should remain the case through the first quarter of 2018. At that time, the first grants made under an annual grant framework instituted prior to our March 2014 IPO will have completed their four-year vest cycle and stock compensation expense increases should moderate.

After a further net adjustment of $2.5 million consisting of depreciation and amortization expense offset slightly by an immaterial amount of net interest income, third quarter adjusted EBITDA loss was approximately $200,000 or less than 0.5% of revenue. This represented a $2.7 million improvement in adjusted EBITDA loss and an 8 percentage point year-over-year improvement to adjusted EBITDA loss margin. As with revenue, the results we achieved for adjusted EBITDA loss and our other earnings measures were well above our expectations and guidance for the quarter. The atypically large revenue overperformance was the driving contributor but maintaining operating efficiencies through a heavy fall launch schedule also added to the stronger than expected results.

From a balance sheet perspective, we entered the third quarter with a $156.9 million in cash and no outstanding debt. During the quarter, we capitalized approximately $3.6 million in costs associated with the build-out of workspaces at our new and existing locations, in addition to the capitalized costs we regularly book for technology and content development. Particularly for the remainder of 2016 and in 2017, we will be using cash to complete our headquarters and Denver office space and to build out a new facility in New York. Despite these investments in the physical expansion necessary to house our growing workforce, we believe that we are fully funded to increase our expected program launch schedule from six programs this year to what is now expected to be 10 in 2017, and 12 or more in 2018.

Now looking forward, we have provided guidance for the fourth quarter and increased our guidance for full year 2016. We now expect revenue to be between $56 million and $56.4 million for the fourth quarter and are increasing our full-year guidance to be between $204.5 million and $204.9 million. At their midpoint, these ranges represent year-over-year revenue growth of 30% for the quarter and 36% for the year. Looking at earnings measures for the fourth quarter, we now expect a net loss of between $3.5 million and $3.1 million and adjusted net income of between $1.1 million and $1.5 million. Looking at the midpoints of these ranges as a percentage of the midpoint of our revenue guidance, it implies improvement of 2 percentage points in both net loss and adjusted net income margins over the fourth quarter of 2015. Adjusted EBITDA for the fourth quarter is now expected to be positive at between $3.8 million and $4.2 million. At the midpoint of this and our fourth quarter revenue range, this implies a 7% adjusted EBITDA margin, 3 percentage points better than our margin in the prior year period.

Looking at full-year earnings measures expectations, we continue to expect adjusted EBITDA positive results for 2016 along with significant margin improvement in all our earnings measures. For net loss and adjusted net loss, we are now expecting ranges of $21.9 million to $21.5 million and $5.8 million to $5.4 million respectively. Taking the midpoint of these ranges as a percentage of the midpoint of our 2016 revenue guidance, it implies a 7% percentage point improvement in both net loss and adjusted net loss margin over full-year 2015. We are now expecting a positive adjusted EBITDA of between $3.8 million and $4.2 million for the full year, which at the midpoint of this and our full-year revenue range implies a 2% adjusted EBITDA margin. This represents a 6 percentage point improvement over the adjusted EBITDA loss margin for 2015.

Just as a reminder, we reduced our marketing activities during the year-end holiday period. So, our fourth quarter margins typically increase. Fourth quarter margin should not be viewed as a run rate going into the early quarters of 2017. As we approach the end of the year and though we have not yet completed our budget cycle, we want to give you a first look at expectations for 2017. We currently expect year-over-year revenue growth for 2017 to be between 30% and 31%. Our revenue growth rate will vary from year-to-year based on factors, including the number, timing and first program MPV program mix within our launch cohorts. We continue to expect that we should be able to maintain 30% plus revenue growth for the foreseeable future. As for earnings, we currently expect a net loss margin of between 12% and 10%, unchanged from the approximately 11% we now expect for 2016.

The moderation of our adjusted EBITDA margin expansion, meaningful growth in stock compensation expense through early 2018 and additional depreciation and amortization attributed to both to leasehold improvements and our new and expanding facilities are the major contributors to the expected flattening of this margin for next year. We now expect an adjusted EBITDA margin of 2.5% to 3.5%, a slight improvement from the approximately 2% we are guiding to for 2016. This modest margin improvement assumption, albeit on what we expect will be a significantly larger revenue base, is due to our move from a six program launch schedule in 2016 to a 10 program schedule in 2017. We had already communicated that we expected to see only small margin improvements at the nine program schedule and increasing that to 10 programs as more short-term margin pressure. Both strong demand and our operational readiness is encouraging us to move faster. We know that the additional launch will benefit revenue growth and profitability in future periods. However, accelerating our launch schedule by even one more program increases our expense base while producing relatively little incremental revenue in the launch year.

To help you with your quarterly models, we expect that the distribution of revenue across 2017 quarters should reflect a similar pattern to what we're seeing for full-year 2016. We also expect that cost seasonality will impact the distribution of our earnings measures across the 2017 quarters in a similar manner to this and prior years. In second quarter, we typically incur a disproportionate amount of annual costs that reduce our earnings measures related to meetings, trainings, graduations, and other periodic events. Conversely, we typically reduce our marketing costs during the year-end holiday period which increases earnings measures in the fourth quarter. But let's not get ahead of ourselves. We have plenty of time to see 2017 unfold. We had another great quarter and are looking forward to finishing out 2016 by delivering on the strong operating and financial expectations we've set forth here today. Chip?

Thanks, Cathy. A few months ago, Susan Cates, our COO, told me she was receiving the Alumni Merit Award from UNC Kenan-Flagler Business School and asked me to attend the alumni award's dinner. I spent last Friday night at that dinner honoring Susan, a great leader, colleague, and friend. Susan was recognized as a member of the UNC Kenan-Flagler community, who personified the school's core values of excellence, leadership, integrity, community and teamwork, all values that she embodies every day at 2U. UNC Provost, Jim Dean, introduced her as "Southern, woman, leader, role model". I couldn't agree more with that characterization and we at 2U are incredibly honored to have her. But to my surprise, another moment of the night stood out. Allison Hughes received the Dwight D. Anderson Young Alumni Award for leadership in career accomplishments and exceptional commitment to the school. So, why do you care, who is Allison. Well, she is an alumni with MBA@UNC. She is an entrepreneur and she is the first online student to win an alumni award, selected from the school's 35,000 alumni from all programs. So, first of all, how great is that? The first online student to win an alumni award.

But there's more to her story that I want to share with you. Allison, a veteran and former Black Hawk pilot was an MBA@UNC student when her husband was critically wounded in Afghanistan. Following his injury, Allison took time off from the program to care for her husband and saw firsthand the weight of the issues facing thousands of service members who are wounded. When Allison returned to the MBA@UNC program, she was inspired and she launched the development of Heal From the Ground, a non-profit with a mission to improve the quality of life for caregivers of wounded soldiers. Allison was also juggling being a mother of two young sons and she credited MBA@UNC for empowering her with both the skills to launch her non-profit and the flexibility and unceasing support during her MBA journey and her husband's recovery. Listening to her was inspirational and emotional. This is why we do it, these are the outcomes, this is the impact. Last Friday was a celebration of us all here; Susan, Allison, MBA@UNC and 2U. This is the power of 2U partnerships and what we can do when lives are transformed through education.

And with that, I'm open to receive your questions.

(Operator Instructions) Michael Nemeroff, Credit Suisse.

Hey guys, really stellar results. Congratulations. Chip, I'm kind of curious, you've given us some metrics about previous cohorts, you gave us metrics about the 2015 cohorts. There were some qualitative commentary. I'm curious if you could maybe give us a sense now that we're through three quarters on how the 2016 cohort has performed thus far? And then I have a follow-up for Cathy, please.

Sure, So, thanks, Michael. What we said in the past is that we do tend to think of these in annual cohort groups and if our 2013 and 2014 cohorts are roughly within the model ahead, but the 2015 cohort was the first one that we used the program selection algorithm to sort of determine the power of a particular program and then we went out and signed them and 2016 was the same. In 2015, as you guys all know because of the Top 10 list, it's really been strong. 2016, it was all back halved. So, it is -- they are newer unlike 2015 where they were in the -- a lot of the launches were earlier in the year. But what's super encouraging is just to give you a little data. Application starts are certainly not the final indicator of whether a program will be large because there's a bunch of factors; selectivity -- a variety of factors that could result in a program being of certain size, but they are a nice leading indicator of the potential demand.

And what's pretty exciting to us is, given that five of the six in 2016 are not MPV, which means the new vertical that we're sort of driving a brand new spending and where we have to learn a lot about that particular vertical, what's pretty cool is of the 16 programs, three of the 16 are in the Top 7 in terms of fastest application starts in the first three months. So, that's just a good additional piece of data that we think directionally supports the power of the program selection algorithm.

Harsha, our CMO will get into this in a bit more in the weeds. One of the reasons we're excited about our Investor Day and I know we keep teasing it, but is that these calls for good reason or not that long and we can't talk about things forever. And so, the pipeline discussion and the vertical discussion, probably most importantly, like the way we're thinking about what's the definition of a program is and what a vertical looks like and how that impacts our long-term point of view, we feel like these new verticals we're launching are proving to us that they're really worth launching.

That's very helpful, Chip. Thanks. And maybe for Cathy, just looking, really not a lot to ask, because the quarter was so clean, but the revenue per course equivalent was up nicely this quarter. I'm just curious why that was and how we should think about that going into 2017 for modeling purposes?

Yes. So, one of the factors that sort of present itself in this quarter is the timing of when tuition increases go through, and so we saw some benefits from that in this quarter. Given that, we really don't expect to see a huge change in average revenue per FCEs through 2017. We've expected to be the typical of maybe [up 1%, down 1%] depending on mix, but fundamentally, we expected to be pretty stable for the foreseeable future.

That's great. Thanks very much. Congratulations guys.

Thanks, Michael.

Thank you.

Michael Tarkan, Compass Point.

Thanks for taking my questions. So, as I get a lot of questions about the competitive landscape that you guys operate in and it sounds like your pipeline is growing pretty healthily. I'm just wondering sort of if you've seen anything changed recently or anything from a horizon that would derail any of this trajectory that you guys are on. Thanks.

We don't increase the commitment to 10 lightly. We're ready to do it, the Company is ready for it, the platform is getting better and when I say that, I mean, the platform with the capital to you, the combination of the great people and the great technology together and I honestly think like when we wrote in here that the word is out on 2U, like we're getting really good and I don't say that lightly. It took us a long time to get to this level and we feel good about it, but we're not resting. We're making the platform better every day. That's the goal of everybody that works here.

So, the pipeline is pretty robust and we are comfortable at this point, announcing the 10, because we are kind of swimming in some form of programs right now. So, the competitive landscape, we do think over time you'll see more and more people in it and right now, we've got a really wonderful sort of situation where we're clearly the market leader and we don't expect to give that up any time soon. So, we're pressing hard on all cylinders to continue to drive excellence across the business and most importantly, the reason I end the story, the script with the story about Allison is like that's what this is all about. If we deliver that outcome for her and hearing her -- Doug Shackelford, the Dean, I mean, just going off on a little editorial here, the Dean of that program stood up when she gave our speech, walked over to me, he touched me on the shoulder and said, Southern Doug, I'm not going to do his accent for you, but Chip, if we shut this program down right now, we've done our job and I mean -- of course, we're not doing that, don't get concerned. He was trying to say like what an exceptional experience we just delivered for her. She said in her own words, I didn't put it in her mouth and that was, for me, super powerful. That's why we do this.

So, if we keep that in mind, competitive landscape there is more people, sure, but that's what happens in any market. It actually tells you it's a real market and I would remind you that's $80 billion at the graduate level in the US alone. So, there's plenty of room. So, I guess, I would argue that the more people that come online, the better. Ultimately, it doesn't -- we want them to do it well, we want them to drive an outcome for the student and if they do that, whether it's a school doing it themselves or it's a school that is working with somebody else, it helps with preconceived notions of online learning and you get to a point where people aren't immediately presuming online is bad. So -- but I will tell you that I don't think anyone is close to us right now. I do think we are delivering a level of quality that really is the highest in the space.

Thanks and then just as a follow-up on that. As you think about the new schools that are joining the pipeline and even the existing ones, is the interest level coming more organically now or are you still going out and trying to educate them on the 2U model, or are they coming more towards you?

So, it's a little bit of both. So, I'm proud to say that we now have a team of people doing this and it's not the way it was back in the day when it was me running around the country. So, not that I'm not still involved, it's just that we now have relationships being built because of the quality of the current offerings that we have with. I mean, higher ed is very collegial, people talk to people. When I was CEO of Hooked on Phonics, we sold to Walmart and Target and they didn't talk to each other, right. So, in higher ed, that's not the way it works. So, we have to deliver quality and if we do, it is something that really does get out and people talk about it. And I'm very proud to tell you that when we get reference, they're very strong. And then on top of that, we do have a real team of people. So, we have relationships now where I'm not involved in building a new relationship or signing the contract. And I think that that's not only good for my wife, it's good for 2U in a really important way. So, it's a little bit of both, Michael. It is clear that we don't increase it to 10 lightly, but we're ready for it and we definitely have it and I like it.

Andre Benjamin, Goldman Sachs.

Thanks and good evening. I guess my first question is, you now have a lot of these programs under your belt, different sizes, different verticals, are you observing any change in the amount of money that it's costing you to develop the programs and is that an area that you're thinking of focusing in terms of potentially improving the economics going forward?

So, it's a really good question, Andre. So I would say that, if in the early days of MPV, we might have said that MPV is going to be a $5 million net negative cash and we would say a first in a vertical might be a $10 million net negative cash. They're sort of coming together more in that some MPV programs will be more expensive because as an example, Southern Methodist University Data Science program in Texas, we found to have a really good sort of organic lead gen in and of itself. In that particular region, it performed strongly. So, we spend more there. It's not just the MPV funnel, right. And in other cases, first programs in a vertical, I think we are getting a little better at not having them be as expensive as they used to be now. There are some that will be more expensive, some inherently will be. And so, every time we enter a new vertical, we have to learn. But I do think the efficiency of the MPV sort of portfolio approach is going to not just help 2U, it's going to help our partners and Cathy has something to add.

Also Andre, we've talked about this before, but I think it's important to reiterate, we are continually getting more efficient at a lot of the things we do, not just marketing. But one of the reasons that we want to do this is that we can use the savings that we generate from getting more efficient at things we do today to keep making our bundle better and better. And we think that's really kind of imperative to us continuing to have a sticky business model and continuing to grow with our partners is to continue to improve the quality and the content and the breadth of that bundle and do it at a price that keeps us in that kind of average model but be able to offer more for the same.

And then a little bit on the music program at USC, definitely very different from some of the traditional degree areas and so I am wondering a little bit more on who approached who and maybe what do I want to get at here, was there any of the idea generation on your side or was it mostly USC coming to you and saying if you would think about it? I'm just trying to think outside the box in terms of the direction of where the idea generation can come from for some of the future verticals?

So I would definitely not take credit for the idea here. USC is a super innovative school and they developed this notion of the academy and I thought it was a brilliant idea, so immediately when I saw it, I went to the school because number one, you don't see Dr. Dre mentioned that often with regard to a new academy at a school. And it just -- the intersection of it is not a music degree, it's a intersection of sort of the integration of business technology and design expressed through a fine arts school, which is what the Roski school is, pretty brilliant actually.

Like if you think about when we announced it, the funny thing is we obviously can't announce these internally until we've announced them externally and when we announced it internally, you all may not know we have a tuition benefit for employees and I immediately heard from an unusually large number of them about this particular offering because we think it will be really interesting to -- we have a ton of millennials in our workforce and we think it will be particularly interesting to that group. We would want to hire people coming out with this degree.

So I would certainly not take credit for the idea, they have a brilliant school with a brilliant Dean, Erica Muhl, and USC as an institution has been super supportive. So I would say one other thing to sort of emphasize about this is when we announced our nursing school at USC, we thought that was a big deal because it was them making a commitment to build a new department. They didn't have nursing but they did it within our existing partner school, the USC (technical difficulty). This is our third new school at USC, which also shows sort of a development of them from the standpoint of the long-term relationship. It's the kind of economics that we've always had. So, it's a really good sign all around. And actually, just from a degree standpoint, we think it could have really interesting legs. Data Science back in the day when we announced it, people had no idea what it was, and now we have three of them for a reason.

Kerry Rice, Needham.

Great quarter, guys. A couple of questions and maybe a housekeeping question. So in the program selection algorithm, I just wanted to understand a little bit better does that include or does that take into consideration verticals as well? And so, as you think about particularly like the MBA@Dayton, I assume it takes in the different verticals you are already in and maybe geography. If you could expand on that a little bit? And then I was curious to get an update on international and your thinking was around that. And then my housekeeping question is on if you can give the long-term lifetime revenue per total acquisition cost ratio for the quarter? Thanks.

Okay. So, (inaudible) there, let me get it in order here. So, the first would be -- program selection algorithm. So, Kerry, we are going to talk a lot about that at Investor Day not to push off the question. And indeed we have to now look when we are launching a new program, it matters both to us and to the partner that's coming in. We have to think about it in terms of the portfolio we have because we are generating a very large number of prospects now that have expressed an interest in an online degree in a particular discipline. And so, we can't think about it as just a separate relationship, we do have to think about how it impacts the whole portfolio.

Regionality is big and I want to emphasize that in the case of Dayton, we have had some people ask us about the school and I actually think even in people's questions, it's often reflected a little bit -- the regional bias is often reflected in the question. We tend to get questions about it not from people in Chicago but from people in California or New York or Florida who aren't as immediately familiar. But they have an excellent on campus program that's actually quite good sized and so we felt like that was a really good opportunity. When we have three MBAs that all happen to be -- while they are far enough away from each other, they all happen to be on the East Coast. So being able to add programs over time in different regions for that discipline are a really big deal.

Number two, international. So as we told you when we announced Lord Willets, we are going to be careful and thoughtful about our long-term plan there. So we don't have anything to announce on international and ultimately I think patience is important there. We have a huge runway here in the United States and as we mentioned, we feel like we have got both program and verticals that we haven't touched that are extremely interesting. Just another example, physical therapy, haven't done that one yet. It's big, it's attractive and so you will hear about this from Harsha in intimate detail. And then the third question was, Cathy?

You are looking for the current LTR to TCA ratio which for this quarter was 3.1.

Ben McFadden, Pacific Crest.

Hey, everyone. Thanks for taking my questions. Chip, I wanted to start actually just following up on a question you kind of just answered on the MBA@Dayton and the fact that it kind of falls outside of maybe the typical geographies where you have originally launched these programs in Southern California and sort of the New York or mid-Atlantic region. So, as you look at the pipeline over the next couple of years, I was curious as to what you are seeing as far as geography goes and how much of that pipeline could potentially fall outside of those areas where you've heavily concentrated over the past five to 10 years?

I would say -- Ben, thank you. I would say that many of our original program announcements in the early days I would love to tell you that we were being particularly sort of thoughtful. They are all incredible schools and we are blessed to have them and very lucky frankly. In a lot of ways, they shouldn't have signed with us, [we had no] track record. I always feel blessed when I go -- like being at Kenan-Flagler Friday night was awesome because it's like -- and I said to people there, thank you, you gave us a chance and we have delivered. But it doesn't matter, they gave us a chance.

But the reason I answer that way is that it's not like we were perfectly scientific in selecting where we were and didn't have the ability to be and then on top of that as you guys all know, signed exclusive relationships. So for some time, we weren't cultivating any other programs in those verticals anywhere else. Today, we are being very specific about where we are going. You heard me give a little nugget about SMU Data Science being a positive and we are underrepresented in that area of the country and it's a really important area of the country.

So, you will see us try to do more in that region, you will see us try to do more on the West Coast, you will see us tried to do more in the Midwest. But fortunately, there is a lot of options. So, it's a big market and we do have the ability to be somewhat choosy and I don't want to make it sound like we think we are God's gift to online education, but we've built a track record now that allows us to be thoughtful in deploying that capital.

Great, and then Cathy, launching a tenth program next year kind of speaks for itself but I wonder if you could just talk about the operational readiness for accelerating into 10 plus programs both on an infrastructure basis and a hiring basis, how has that changed over the last three months and how confident do you feel that you are meeting those objectives to accelerate the business?

Yes, so from an operating standpoint, I think I would say that if we had only been looking at this for the last three months, I would feel far less confident about launching a tenth program than if we had been looking at it for the last several years, which is what we've actually been doing. We have been focused on things like building, training, developing the middle-management base, understanding, getting the systems in place. And you guys know that we are doing a workday implementation for HCM and financials. We are working on data warehouses. Our tech team has been working hard on ensuring that we are automating and streamlining our processes as it relates to exchanging information with our university partners as it relates to flowing information through our own processes and uses and departments. And having been doing that for several years now, it's really the reason that when the opportunities present themselves, we can even consider stepping up the way we are stepping up.

So, the fact that we are talking about that we are committing now to going to 10 for 2017 and we've still got the plus on the end of the 12 for 2018, we are as Chip said, we don't do this lightly and we are really only doing it because we do feel operationally ready to take it on.

One thing I would add, Ben, as you might have noticed in the last call, we had Susan Cates come on and address the variety of operational issues midpoint of the call. We are not going to do that every time but that was purposeful because at that moment we thought it was likely that we would end up doing what we are doing now which is increase the number of programs. We want to make sure people understand that we are thinking about this way before we take an action. So we are ready for 10, we have more than 10, so let's go.

Brian Schwartz, Oppenheimer & Company.

Hey, guys, this is Daniel Greenfield dialing in for Brian Schwartz. Thanks for taking my question. In the past, you guys have talked about in a corporate partnership, specifically you mentioned discounts for employees that corporations could offer just sort of benefit kind of it sounds like you guys do internally. It sounds really interesting like an interesting value-added service for your current partnership. So, I am just curious if there is any updates or progress on that initiative?

So I would say what we tried when we talked about it the first time to make sure that people didn't overreact to it and there is a reason, it is something that's in our sort of our toolbox in terms of an opportunity that we can pursue for programs where we think it's relevant to drive high-quality prospects and it has done that in some cases. We have a great relationship in our MSW program that drives it. We have some interesting things happening across the portfolio but it's really not material. So, it's not a huge part of how we deploy dollars.

I will tell you that over time we do think that fellowships and scholarships will become more but in the short-term, the bigger impact of our corporate relationships is in our placement operation, where just to give you an example of the kind of scale we are seeing, this quarter we went from a little under 29,000 placements to over 31,000. And these are individual people going into a local hospital or clinic or school to deliver the hands-on part of their academic experience and it's really powerful.

And so those are important relationships across the 2U ecosystem. And I do think happen to build a bit of a moat around the Company because honestly, we want to do all the programs that nobody else really wants to touch because they are real hard. So bring on a bunch of things for us. We like physical therapy and we are about to do occupational therapy and we do think long-term there is an MD out there. Now that will be complicated but we don't see why not.

Jeff Meuler, Baird.

Thank you. Just given the success of the program selection algorithm, I guess what are the main criteria in assessing the prospective or innovative programs that maybe don't flow through the program selection algorithm and the data you currently have in terms of like assessing what would be a good opportunity? I am thinking things like the Design@USC program but looking for the more general framework of what you are looking for in those innovative programs?

It's a tough answer to give you. I mean, clearly like in the case of data science, where it's a pure greenfield and there were no degrees which I think is really what Jeff you might be getting to. Is there more risk associated with a data science degree than there is with a fourth or fifth or sixth MBA? Yes.

When it's a vertical we are operating in today, we have a really, really solid idea of what it will do. And I think what will be useful about Investor Day is sort of the combination. We're learning that it's not just the region, it's also the combination of the region and the school and the discipline where they all come together to make something really interesting. And you will hear about that more from Harsha.

So in the case of something that's brand-new, our Head of our Data Science team, Matt Delaney is constantly working to try to refine how we can get to a better ultimate prediction for something that's brand new. But I would also emphasize that there is so many verticals that we have not yet entered that have good size enrollments where you are not guessing and then there's verticals like MPH as an example where we have an extremely strong program and we are in early days of building out that vertical. So building the second, third, fourth MPH program is really obvious. So, it's sort of a combination of the two.

We do think job growth in a particular area is a place that Matt is spending a lot of time thinking about. But 2U is a constant work in progress and I am proud to say that that is a place where we think as we get better and better at the data, I will have a better and better answer.

I do think that what we need to see in pipeline is a combination of obvious MPV, obvious vertical and then some places where we think we might be doing something that is new and a bit defensible. I will tell you right now, data science looked a little crazy. I know that sounds like everybody now big data, big data but at the time it looked a little crazy and we have three of them now and that won't be the last.

And then are you -- how many of the 10 launches planned in 2017 are already slotted? And how are you expecting the timing of the rollout to I guess ladder through the year? I am just wondering with 2016 being more back-end loaded with the launches, anything we need to take into consideration for modeling purposes around expenses due to timing of launches in 2017?

I think unfortunately right now you've got to give us a little bit more time to give you a clear answer. It's a good question, we should have a little bit more data by Investor Day. I would just remind you that we didn't give you the cadence for the prior years until we were in that year. And let me explain why. I'm surprised no one asked me about the signed program that we haven't announced yet. So, in the past, this has caused some stress here where we have a program, we've got it signed and for a good reason, totally in deference to the school, we are not announcing it, but we actually know that it's likely to launch in a reasonably short time because we've had it for a while. We have that happen and in this particular case, that signed program, it is our expectation that that will launch in 2017.

So, we got to be a little patient because in this particular case, it's important for our partner and so the cohort sort of cadence will come together soon but we don't have it yet. So we do have four that are officially slotted. So, it was nice that with design we could sort of lock down that slot at the time of announcement. That's not always the case.

Corey Greendale, First Analysis.

Good afternoon, nice work everyone. So the first question I had is I know, Chip, you will probably say we just raised it to 10. So let's leave it at that for the moment but given that you are talking about having a possibility of having to give up good opportunities if you don't respond to them sooner rather than later and the fact that given the initial guidance for 2017, it sounds like you could launch at least one, possibly two more without going negative on EBITDA. Should we be surprised if we hear that it ends up being 11 or 12 in 2017 or is there no way you would allow that to happen and you'd force any additional starts?

We don't do it lightly, we do have to be well ahead of that. I mean, these programs, the ones that we're talking about now -- I will give you an example, the USC design program that's been a conversation for a long time. So they don't happen overnight. So, at this point we're comfortable with the 10 and Cathy did say with the 12 there was a plus there for a reason. But we don't know what that will be yet and once we do, we will tell you.

Just like we are doing with the signed, I feel like this notion of signed was not for us to do anything but give you additional disclosure about something that we felt you kind of needed to know. I think we're just getting smarter about how to handle that. It just gives you additional information, it doesn't hurt anything but we're not ready to go beyond anything for the 12 yet, we're just not there.

But you are correct, the nice thing is with what I said about -- what's interesting about the programs is now the NYU multi-program deal will not be the last. Remember when we announced that that was like okay, the school is coming on with multiple programs up front. We have that occurring more often now, which is a good thing.

Yes, understood. Second question I had is based on some of the data in the Q, it looks like USC is continuing to grow nicely and I'm not going to ask you about specifically why that is. But is there anything within that that leads you to think that -- it sort of changes the thinking about what a program looks like in maturity and at some point, (inaudible) think it will be slowing down and it just doesn't seem to be yet?

So, Corey, remember that at USC, we did in fact launch USC Nursing just recently. So if you look at the relationship as a whole, we've actually launched a new program and so the biggest reason that you are seeing -- the existing programs are behaving nicely but you have to remember on that one that we're launching a new School of Nursing within USC and we'll start to see that grow as a part of the overall USC relationship.

So, I understand going forward, but in the quarter the first class just started in September, right?

Yes. So, you are not getting a whole lot of revenue for it but the other thing there would be we've talked a bit about offering before particularly in the School of Education and we've talked about the fact that we did launch with them as an offering within the education program an EDD and so that actually has changed and grown between 2015 and 2016.

Okay, that helps. Then I had two quick housekeeping things. I think in answer to I think it was Michael Nemeroff's question, you were saying you expect revenue per FCE to be stable. I just want to be clear, stable with kind of this level in Q3 moving forward?

Yes, I think the Q3 level you can say you should -- as I just said, there may be a little up, a little down depending on mix but it will be relatively stable at the Q3 level through 2017.

Okay. And then the last question is the CapEx, it hasn't ramped as much as I had expected at least for the new facility. Just can you give us some sense of what you expect CapEx to be for the year and then how that looks next year?

I am not sure I'm ready to give you CapEx for this year because we have a bit of a buildout plan going on at the moment. But what I wanted to do was to start to give you some CapEx numbers and I will do so again at the end of the fourth quarter to let you know what is sort of being spent on what I would consider sort of non-recurring operations kind of CapEx. We are getting through our budget plan now, Corey, and I will be able to give you a better idea.

Jeff Silber, BMO Capital Markets.

Thanks so much. My questions have been asked but I just had a quick follow-up from Corey's last question about CapEx but taking it just at a higher level. You have obviously made some great progress in terms of targeting and moving towards adjusted EBITDA profitability. Can you tell us at a high level what the ramp up will be to get to positive free cash flow on an annual basis?

So a lot of that, Jeff, is dependent upon the launch schedule as you well know. So you should not expect us to be there in 2017 and quite frankly the answer to that question will be dependent on how many we decide to launch in 2018. Every time that we launch an additional program, it pushes that out just a little. When we were sort of at the five program, five, six program, free cash flow if you were launching that every year, free cash flow was about a year behind. You could expect free cash flow would have been about a year behind adjusted EBITDA. When you start to move from five to 10, it really pushes that out. So, we don't like the fact that we can't give you a better target but unfortunately it's really based on launch schedule.

Is that it?

I am showing no further questions at this time. I would like to turn the conference back over to Chip.

Okay. Thank you, everyone. So, I look forward to seeing you November 15 for our first Annual Investor Day. Please join us at that time and thanks for joining us on another great quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.