2U Inc (TWOU) 2017 Q1 法說會逐字稿

Good afternoon. My name is Connor, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2U Incorporated 2017 First Quarter Earnings Conference Call. (Operator Instructions) Ed Goodwin, VP of Investor Relations, you may begin your conference

Thank you, operator. Good afternoon, everyone, and welcome to 2U's First Quarter 2017 Earnings Conference Call. By now, you should have received a copy of the earnings release for the company's first quarter 2017 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 Christopher 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 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, 2016, 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 direct comparable GAAP in the tables attached to our press release. Now I would like to turn the call over to Chip.

Thanks, Ed. Well it's been a big week. We've got a lot to talk about on this call so fasten your seatbelts. First, I'll talk about our financial results, then pipeline very briefly, which is excellent. And then our pending acquisition of GetSmart.

Back in 2008, a small team believed that we can help transform a great university into a better digital version of itself. Online education could be great if you could convince some of the world's best universities to also believe. Over the past 9 years, our management team has remained focused, enabling high-quality student outcomes and helping our partners succeed in their digital transformations. Our business is now showing the full promise of what we believe was possible, and we're evolving appropriately to meet new market needs.

First, our financial results. The first quarter kicked off another great year for 2U across all of its financial measures. Revenue for Q1 was $64.8 million, a 37% improvement year-over-year. On the bottom line, adjusted EBITDA was $3.9 million for the quarter, an improvement of approximately 1 percentage point margin year-over-year. We're thrilled with the results, and Cathy will provide more detail later in the call.

Moving onto pipeline. Our domestic graduate program, or DGP business, continued its rapid growth. Earlier this year, we confirmed our 2017 launch targets and announced our DGP launch cadence over the next 3 years. If met, these would result in more than tripling our total launched DGPs by the end of 2020. Even still, that would only be 42% penetration of our long-term total DGP target. Sitting here today, we're very confident in our ability to meet these targets.

We continue to see increasing demand for DGP from new and current partners. Our newer partners put the [ask] in to launch multiple DGPs from the start, and most of our existing partners continue to ask for more. That's reflected in recent announcements. University of Denver became our 18th partner, with 2 initial DGPs expected to launch in January 2018. MBA@Denver, a Master of Business Administration degree, and MSW@Denver, a Master of Social Work degree. We like these a lot. Both DGPs add a new geographic presence in existing multiple program verticals. And the leadership at DU is just fantastic. Their strong commitment to being a good private institution dedicated to the public good and their entrepreneurial and innovative spirit shine through in everything they do. Go Pioneers!

We also announced a new DGP with our first partner, University of Southern California. DPT at USC, a

Doctor of Physical Therapy degree. Yes, I said a Doctor of Physical Therapy. This is USC's fifth DGP with 2U, and the UFC division, of -- I know I was going to get that. Bio-- Cathy, help me out.

Biokinesiology.

Thank you. Biokinesiology and physical therapy is now the fourth school at USC to partner with us. Notably, the current physical therapy program is ranked #1 in the country by U.S. News & World Report. We're also excited to add physical therapy as our 24th vertical. According to the U.S. Bureau of Labor Statistics, physical therapy careers are expected to see growth of 34% between 2014 and 2024. Physical therapy is an excellent example of a vertical that we're able to enter because of our incredible placement function.

Verticals which lead to licensure, like physical therapy, typically requires students to complete many hours of practice and assessment in clinical settings to graduate. Working through an entire curriculum on your own at your own pace isn't an option here, and we knew this getting into the company. So we built a bundle of solutions designed to support a differentiated, engaging learning environment that includes live classes, group projects, intensive residencies and local clinical placings. This is true digital education, and it's the reason why we have DGPs in nursing, social work, speech pathology, mental health counseling, school counseling and occupational therapy. With these new Denver and USC DGPs, we now have slotted 5 of the 13 new DGPs we expect to launch in 2018. This is all ahead of schedule.

Before we move off of DGPs, I wanted to briefly touch on some news related to a previously announced contract, Syracuse J.D., just to give you full disclosure whether it's good or bad. To ensure that graduates from this program can sit for the bar in any state, Syracuse needed to receive ABA approval. The first step of this process is submitting an initial variance. That was recently (inaudible) This is not dissimilar to what happened with the LTA. Syracuse is planning its path forward and we'll support them in this process. We do so love this vertical, we love the idea of a J.D., but as we told you when we announced the contract, we're not counting on this DGP to hit our announced launch targets. We thought this was going to be an involved process and it will be. Change is hard.

A quick update on Yale, since I know you'll ask. Things are progressing nicely as they move to the accreditation process, but that's about all we can say.

To wrap this up, pipeline has in a really good place,, and we're super confident in our launch cadence. Expect more announcements in the coming weeks.

Now changing gears. At 2U, we hold a private annual company meeting for full time employees that's a big part of our company culture. Past themes reflected the company's needs and emotions at that time, including the theme of believe in a past meeting, or drive in another meeting. So what's the theme of this is company meeting? Well it's super relevant, the theme is evolve.

As a market leader in a sector undergoing significant change, we must use our position to continue to evolve for our clients and their students. Education is a means to an outcome. Graduate degrees are remarkably powerful currency, and we believe we'll continue to deliver life-changing outcomes. But not everyone in the world can afford a graduate degree. Not everyone has enough time to pursue a graduate degree. And in some cases, a nondegree alternative, like a certificate, as what they need. This is not a story of "or"; it's a story of "and". We've always believed that nondegree alternatives would be part of our long-term growth strategy. We just didn't necessarily know how or when. Our DGP business was and is too strong for us to think about building a nondegree business by ourselves. We've seen many acquisition opportunities within the higher education market over the years, but none of them until GetSmarter made sense. This was an opportunity we simply could not pass up.

Back in 2008, an ocean away there was another small team that believed that digital education could be great. Sam and Rob Paddock founded a company called GetSmarter in Cape Town, South Africa. With an eerily similar mission in complementary business to 2U. GetSmart powers engaging online short course certificates in a manner that mirrors the 2U model of high touch, high-quality digital education with a focus on student outcomes. They currently partner with 7 world-class universities: Cambridge, HarvardX, MIT, University of Chicago, and Africa's top 3 Universities: University of Cape Town, University of Witwatersrand and the University of Stellenbosch Business School. This staple of incredible brand relationships is comparable to ours one (inaudible) more impressive. I'm super excited to add my personal repertoire that Cambridge was founded in 1209 by King Henry III, 683 years before Coca-Cola. For those of you playing along, update your bingo squares.

GetSmarter broadens our product assortment with lower price open enrollment certificates. Their portfolio includes over 70 short courses, including Business Sustainability Management at University of Cambridge, Health Informatics at University of Chicago, and Graphic Design at University of Cape Town. And even though they offer short courses, GetSmarter follows the 2U mission of providing high-quality, high touch digital education. You're not alone when you take a GetSmarter short course. Their people-mediator approach helps drive a course completion rate of 88%. This is really unusual in the short course world, and it is awesome, by the way.

Not only does GetSmarter give us immediate presence in the [nondegree] alternative market, it also becomes our near-term international strategy. While there's global demand for U.S. graduate degrees, short courses provides the best product market fit for very broad international adoption. With its lower cost, shorter time frame and open enrollment format, GetSmarter is a true international product that has enrolled students in 150 countries.

So what about synergy or leverage? Well, first of all, we're not doing this for cost efficiencies on either side. That's not what this story is about. We're doing it because the fit is incredible. Their product is the perfect fit for us. It broadens our reach across different student needs. GetSmarter enhances our ability to help the right student choose the right education at the right time. This year, hundreds of thousands of prospects will ask for information at about graduate degrees offered in our DGPs, but less than 2% of those prospects will end up enrolling in the DGP. Even though the majority of the other 98% are qualified, what happens to them? Well, short courses are an option for prospects who can't afford a graduate degree or might not have the time to pursue it or for prospects looking for more targeted skills.

The short courses can also be additive. They can be supplemental education for the student that do enroll in a graduate degree program. We believe that short course certificates from GetSmarter will be an excellent option for people to both add and update skills throughout their careers. Someone might need a fintech course, or digital marketing, or compliance management. I highly recommended all of you check out and, by the way, pay for a GetSmarter course. We think you'll love it.

We believe, over time, 2U's marketing and data analytics capabilities will provide many opportunities for GetSmarter to improve what they already do extremely well. Both teams already have thoughts on a course selection algorithm for GetSmarter, as just one example.

(inaudible) competitive framework here, in some ways the degree market is a harder place to start a business, which is why competition often starts with nondegree alternatives. They pitch our clients on nondegree alternatives like certificates, and our clients often want them. 2U has hadn't much of an answer for this over the past several years. Well, guess what, we do now and we believe we have the best answer, it's called GetSmarter. The client reaction has been even better than we expected. When we wrote the first draft of this script, we said in that draft that we believed our pipeline will help GetSmarter and that their pipeline would help us. Well, we love what we've heard thus far. After the announcement, 2U clients have asked for short courses. And GetSmarter clients have asked for graduate programs. Sort of what we expected, but we're really excited to see it happen so quickly.

We like the deal terms, too. And Cathy will talk about in her section. We believe the DGP business will continue to grow over 30% for the foreseeable future. We do expect the addition of GetSmarter will accelerate the combined companies' growth. It's right for 2U, it's right for GetSmarter, and it makes me really bullish on our joint future. I'd like to thank the brothers, Sam and Rob Paddock, for building an exceptional company with an exceptional team. It's a truly perfectly fitting puzzle piece.

And now, I'll hand it over to Cathy.

Thanks, Chip. 2017 kicked off with a strong first quarter. Revenue came in nicely ahead of our guidance, and that performance produced higher than anticipated adjusted EBITDA. At $64.8 million, first quarter revenue exceeded the comparable 2016 period by 37%. Revenue for the quarter came in higher than we expected, primarily because of strong FCE growth. But also, in part because of adjustments to student refund allowances at 4 university partners that moved in our favor. Of first quarter revenue, approximately $450,000 was generated by improvement in those student refund allowances.

That said, revenue growth was indeed once again driven primarily by an increase in FCEs. Compared to the prior year period, first quarter FCEs increased by 35%, and average revenue per FCE increased by 1%. FCE increases were generated across our GDP base, but as our model projects, the largest increases were from DGPs in their first 3 to 4 years of operations. As we expand our portfolio with additional launches at new and existing university partners, our revenue base continues to rapidly diversify.

Now looking at our earnings measures. First quarter year-over-year net loss and net loss per share remained flat with the prior year period at $3.4 million and $0.07, respectively. The quarter's (inaudible) net loss margin, however, improved by 2 percentage points compared to the first quarter of 2016.

After adjusting for $3.9 million in noncash stock-based compensation expense, first quarter adjusted net income was $500,000 or 1% of revenue. This represented a $300,000 and 1 percentage point year-over-year improvement to adjusted net income and adjusted net income margin, respectively. Adjusted net income per share increased $0.01 in the current quarter from $0 in the prior year period.

Note that both net loss and adjusted net income were negatively impacted by approximately $425,000 in unforecasted accelerated depreciation, primarily related to the move to our new headquarters building. In process, we made the determination to accelerate depreciation on more furniture and other assets than originally estimated, and so have accounted for those costs in the first quarter. After a further net adjustment of 2 -- $3.6 million, consisting of depreciation and amortization expense, offset slightly by an immaterial amount of net interest income. First quarter adjusted EBITDA was $3.9 million or 6% of revenue. This represented a $1.7 million improvement in adjusted EBITDA and a 1 percentage point improvement in adjusted EBITDA margin over the prior year period.

From a balance sheet and cash flow perspective, we ended the quarter with $142.9 million in cash and $28.7 million in receivables, the majority of which have been collected since quarter-end. During the first quarter, we had cash capital expenditures of $14.3 million, of which $4.9 million were costs to be capitalized related to technology and content development. The remainder were primarily costs related to build out of our headquarters facility to support our growing workforce.

Now looking forward, we've provided guidance for the second quarter, and as our business continues to perform, are raising our guidance for full year 2017. Before discussing the details, however, I want to confirm that the guidance we're providing today is only for 2U. It does not include any expected results for the pending acquisition of GetSmarter. We will provide updated guidance, including GetSmarter, once we close the transaction and make the appropriate filings, which is expected to happen in the third quarter.

On the top line, we're expecting revenue of between $64 million and $64.4 million for the second quarter, and $269.4 million and $270.9 million for the full year. At their midpoint, these range by year-over-year growth of 30.7% for the second quarter and 31.2% for the full year.

With regard to second quarter revenue guidance, you'll note that while we typically expect to see a slight sequential increase in revenue, the range we've provided is a bit below the revenue we delivered for the first quarter. This is largely because of the additional revenue generated by that $450,000 in reductions to student refund allowances we saw during the first quarter. Without this additional first quarter revenue, our second quarter revenue guidance would be relatively flat.

Before moving to earnings guidance, I'd like to remind you that we made a strategic decision to accelerate the rate at which we launch new DGPs, increasing our cadence by 3 DGPs per year through at least 2020. When comparing our current earnings expectations to prior year period results, remember that increase in the number of DGPs in their investment phase has the effect of slowing the pace of margin improvement, as measured at the adjusted EBITDA level. I also want to remind you that 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. This typically leads to second quarter earnings measures that are seasonally the lowest of the year.

With these reminders out of the way, let's turn to our expectations for earnings measures. We now expect a net loss of between $11.4 million and $10.9 million for the second quarter, and between $26.8 million and $25 million for the full year. We also expect an adjusted net loss of between $5.8 million and $5.4 million for the second quarter, and an adjusted net loss of between $6.2 million and $4.7 million for the full year. For each of these net loss and adjusted net loss ranges, midpoint guidance shows losses that are somewhat larger, but margins that are slightly better than the corresponding prior year periods. I'll remind you that as we said previously, we expect meaningful increases in year-over-year stock-based compensation expense to continue through 2018, and depreciation expense to increase faster in 2017 than in prior periods because of the recent and expected facilities buildouts. These 2 factors are offsetting the purposefully smaller expected year-over-year improvement in adjusted EBITDA results and margins.

We expect an adjusted EBITDA loss of between $2.1 million and $1.7 million for the second quarter, and adjusted EBITDA of between $9.5 million and $11 million for full year 2017. Adjusted EBITDA excludes the impact of both stock compensation and depreciation and amortization, so midpoint guidance implies year-over-year improvement in both expected results and corresponding margins.

Now before I wrap up, I'd like to circle back to GetSmarter. We haven't closed the transaction yet, so while I can't provide much in the way of financial expectations, I can give you some additional color on their business model. GetSmarter creates courses with leading universities in the U.S., U.K. and South Africa and offers them directly to students around the globe. These courses are priced in the currency of the partner university, and per course prices currently average around $2,500 for U.S.- and U.K.-based courses, and $1,000 for South Africa-based courses.

Like 2U, GetSmarter shares course tuition with its university partners and its revenue share percentages are generally (inaudible) to what 2U receives under our agreement to somewhat better. GetSmarter's revenue was approximately $17 million in 2016, a bit more than half of which was generated from courses offered with its South African University partners. In late 2016 and early 2017, however, GetSmarter significantly increased new client wins with U.S. and U.K. universities. This trend leads us to expect a substantial increase in the number of courses offered, the number of students taking courses and an acceleration not only in their business, but in the business of the combined company.

GetSmarter provides a range of services around its course offerings that parallel 2U services: course creation, technology platform, student acquisition and student support. They also provide the academic tutors that work with students during the course presentations. However, you should think of the economic life cycle of a GetSmarter course as being significantly shorter than for a 2U GDP. While for a 2U DGP, it takes an average of 7 months from our first contact with the student until they're seated in their first class, GetSmarter students are generally taking their course within a month. And where a 2U GDP generally take 2 or more years to complete, GetSmarter courses average 10 weeks in length. This shorter cycle of investment to recovery means that a GetSmarter course does not have the substantial investment and long recovery period of a 2U DGP. We've agreed to pay the GetSmarter shareholders approximately $103 million in cash at closing and up to an additional $20 million based on achieving certain financial targets for 2017 and 2018. We have also agreed to $9.4 million in restricted stock units to certain members of management. Of the approximately $103 million we'll pay at closing, about $2.2 million of bonuses and other cash costs will be expensed through our income statement, instead of being accounted for as purchase price.

After excluding these amounts, and including the estimated impact of potential future -- capital markets activities to replenish cash, we expect that the acquisition of GetSmarter will be neutral to adjusted net loss per share for 2017. With these items and additional transaction-related stock compensation expense, however, we expect the acquisition to be dilutive to full year 2017 net loss per share.

So the last few months have been pretty eventful at 2U. Multi-year DGP launch targets published, new DGPs announced, headquarters moved and (inaudible) agreements signed and strong first quarter financial results posted. We're excited to continue delivering against the objectives we set out for the rest of the year and are looking forward to updating those with our expectations for GetSmarter once that transaction is completed.

Chip?

Thanks, Cathy. To close out our call, I wanted to provide plug for something we're doing. It's our new blog and podcast called The Front Row. The Front Row is about what it takes to solve the problems of the future and how our partners and others are making an impact. The posts and episodes demonstrate how digital education is at the forefront of progress. The blog is now live, at thefrontrow. 2u.com, and the podcast launches May 9. In fact, the first episode is called The Workforce of the Future, super relevant to our GetSmarter friends. Check it out, it's well worth your time.

Finally, I'd like to thank the 2Us who worked so hard on this transaction and to welcome our new colleague, GetSmarter. We look forward to a very bright future together. And with that, we have plenty to minutes receive your questions.

(Operator Instructions) Your first question comes from the line of Michael Nemeroff with Crédit Suisse.

I'll just take a minute here and ask you a little bit more about GetSmarter. Since the rest of the business seems to be performing extremely well. I'm curious and I'm getting this question from investors, what is the special sauce about GetSmarter? We've been hearing about what makes 2U so special. Is it GetSmarter's technology, is it their client base? And then I have a follow-up for Cathy, maybe.

Thanks, Michael. So I would say culture. The incredible team matters, and we've learned that over the years here. I do believe that when I went to visit the first time, I was -- we wrote the words eerily similar for a reason, that's not to compliment us, we're pretty proud of our team, but Sam and Rob have built an incredible team that really cares about what they're doing and is trying to drive a really big agenda of the world's best digital education in a very similar way. When you move that to the product, I will tell you that the brand's footprint is really incredible. These are awesome institutions that they're working with. And the approach is unusual, it's people-mediated. So the fact that you're aligned with a tutor in small groups is really unusual for this type of product and something that was immediately appealing to us, which leads to the 88% completion rate. So overall, we really like the product and I wasn't kidding when I said I would love on of our investors to go out and purchase a GetSmarter course. So really incredible people and a really good product. It fits perfectly to what we're trying to accomplish (inaudible)

Chip, you said that you are going to effectively run it independent, but I'm curious, logistically speaking, as people are talking to your people in your funnel and trying to turn them into applicants to the partner schools that are currently working with for degrees, how is that going to work where you're just going to wait a period of time if you don't convert and then hit them with an offer for a certificate course? I'm just trying to think from a strategy perspective how are you thinking about that.

Well, Mike, I think you know that one of the things we don't (inaudible) on these calls is give a tremendous amount of information about what our competitors may learn in terms of how we do things like prospect delivery. In the short term, I will tell you the (inaudible) is close and then we've already got a great sum and plan between the 2 management teams, and I look forward to digging in with them. We do think there's a lot of runway, just to give you a couple of numbers, 400,000 prospects between 2017 and 2018, 2U will generate 400,000 prospects in just business and data signs. And if you're converting less than 2% of them, that leaves a large number of people that are converting to a particular opportunity. So we do think there's a lot of power in the combination, but these guys are doing incredibly well on their own. So we're going to take it patiently and work diligently with Sam and Rob to sort of drive the business going forward it. And you'll get -- what I will tell you, we knew we would get a lot of questions on this call about it, and you'll get a lot of answers once we close. We have to do right by this and close, and then we'll give more color and guidance as we do in our DGP business.

Your next question comes from the line of Michael Tarkan with Compass Point.

It's actually Andrew Eskelsen on for Mike. Thanks for taking my questions. I will sort of change it up and just on competition, can you sort of talk about what you're seeing in the competitive environment? Is it still relatively dormant? And if not, where are you seeing that emerge from? Is it schools doing themselves, full service providers, a la carte offering, can you just talk about that? And I have a follow-up.

So I would say that we do think we continue to be the market leader, and we're not letting off the gas. We're not resting our laurels. The reason for the evolve theme was GetSmarter. But it's also continuing to evolve what is a comprehensive bundle for our clients in a way that I think does put us further ahead of the competition, whether it be -- we've got a really incredible thing that is now sort of [optical] character recognition scanning 44,000 transcripts last year to complete students for our clients. We've got better data analytics. And keep pushing all those things forward, I think we'll keep us ahead of the clients. I do think the competitive nature of this with our team up with GetSmarter is also real. If this transaction is mostly offense, something you just couldn't -- we really couldn't pass up. It was just too good. The combined -- the short combined entities. There is also a little bit of defense here in that this is a place where people sort of want to come at us and go to our clients and offer short courses or certificates, and the reality is we haven't had a good answer for that. So now we do. We have an excellent answer; it's called GetSmarter. So I'm not going to tell you -- these are really big marketplaces, you're talking about 80 billion graduate education of the U.S., you're talking about 1.9 trillion worldwide higher ed. So there'll be plenty of people that try to do things themselves and there will be plenty of other entrants. But we've been more and more emphasizing is that it's not online education really. Why? Because that has a bad rep, it's is the world's best digital education.

Got you. On the U Denver social work program, I believe that they already had an existing online program and that you guys are either taking it over or replacing it. Was that a competitive win or to the school run that themselves? Can you just talk through that a little bit please?

Yes. That's a good question. And you're correct. they did have a program, and the school was running it themselves. So we have had this happen a couple of times now. In this case, the school was excited to partner with us and scale the programs, and do (inaudible). So we're honored that they went with us. We do think that, that geography and a combination of what is a very highly ranked school of social work in a geography that we have very low penetration overall is a big win. So we are seeing -- more and more we are seeing the competitive landscape -- you do have other contracts coming to us at times. But I think it's way too early to talk about share. The overall market is growing, and we do think that while we're happy to have contracts come to us if they're contracts that we want, the reality is the market's growing so fast. There's plenty of opportunity to grow around.

Okay. I've got one more if I can. This is on the -- I know you touched on this briefly, but in regards to marketing efficiency on the recent acquisition, can you talk about how you -- I know you don't want to give things competitively, but can you talk about how you sort of expect this to affect your conversion rates? How should we think about efficiencies given that you've gained the ability to better monetize your marketing funnel?

Yes, it's just way too early for us to get into that. I mean I would just caution everyone to remind them that this was signed at almost 11:00 p.m. Monday night and we announced it at 9:15 Tuesday morning. So not a whole lot of time in between Tuesday and now. So we'll get back to you once we close the transaction with more details.

Your next question comes from the line of Kerry Rice with Needham.

This is Jinjin on for Kerry. First, just on GetSmarter acquisition. Now with the acquisition, you opened up to the total addressable market of $1.9 trillion globally, so how should think about say, like, in terms of investment focus for 2U? Are you going to -- obviously, the DGP is going to be the primary focused. But in terms of expansion, are you going to continue doing international nondegree short courses? Or are you going to roll out the graduate programs internationally, or doing the short courses domestically? Any sort of color would be helpful. And I have a follow-up.

So obviously, as I just mentioned, it's all very new. And we -- first of all, just to be very clear, this is not part of broad M&A strategy. We don't have a corp desk person for a reason. This was opportunistic, and it was a strategic fit. While we liked the transaction a lot from shareholder value, this was a strategic fit more than anything else. And in the short term, we are pretty full with opportunity. Our DGP business continues to grow very quickly, and now we've got a great opportunity for a nondegree alternative. So this is where you're going to see (inaudible) puts us in the near term to the point where GetSmarter provides an excellent international strategy as well that I mentioned in the call. So this fulfills our international strategy for the time being. Because there's so much opportunity within these 2 segments. Part of the reason for the entire transaction is that there's a fantastic team in South Africa that is focused on these nondegree alternatives. And so that was really appealing to us, the people are really excellent. So we're driving the whole thing together. We came up with this idea "better together". We think it's very true.

And next question is for Cathy and on the total marketing cost this quarter, seems like it's a little bit of step up from what we had anticipated. Is it because of the cluster of programs that launched late last year, kind of picking up the marketing gaps to ramp that, or any other reason into that?

Yes. So you have part of the answer. We did launch some things late last year that we are in the process of scaling. But add to that the fact that we are accelerating our launch cadence from 6 last year to 10 this year, and then we'll be further accelerating it into 18. We are -- early on, you're putting gas on driving the ramping of those DGPs. So it's a combination of launching things late in the year last year as well as the fact that we have accelerated our program schedule for this year.

Your next question comes from the line of Jeff Meuler with Baird.

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You've got [Nick McKeedis] on for Jeff, just circling back to the new program announcement in Denver specifically, MSW, MBA 2 verticals that you guys have, obviously, had a lot of success in. Just given that success in the past, can you talk about potential pipeline as we look into '18 for the 2 programs that you're launching? And how that can lead to some early success in the programs?

I mentioned pipeline is super strong, and I feel better about pipeline right now than any earnings call I've done since we were public. It's really strong. Andrew Hermalyn and team are doing a great job, and we're very confident about our launch cadence. So I'm not sure where else to go on that one for you.

Okay, I was more so specific to MSW and MBA verticals, and launching (inaudible)

If you go back to the disclosure we gave at our Investor Day, we gave a rough framework of how many programs we were thinking about in different verticals, based on vertical sizes. And those are 2 large verticals. So we do think that there's opportunity in those verticals. At the same time, you look at something like the DPT, which is really highly differentiated, and I don't think competitors will get to that segment anytime soon. One number we haven't talked about this quarter is our placements crossed 34,000, so 34,435 to be exact in over 25,000 contracted agencies, 25,750 agencies. So that's pretty -- that's real scale and allows us to enter verticals that have this kind of job growth. That's really what you want. Then the outcome is excellent, and ultimately, it's all about the outcomes. So you're going to see it continue to do (inaudible) I told you we're going to do. So we're just doing what I told you we're going to go. We're going to launch more in existing verticals and we're going to do new verticals when we think that they're really attractive, sort of a combination of market opportunity meeting institutional wealth.

Okay, thanks. And then just the J.D. program announcement, I appreciate the candor and disclosure. Anything you can say to us on time line or is it still just kind of TBD at this point?

It's -- we were in the situation before and I'm sure we'll face it again, change is hard. And these -- our clients are really trailblazing. And we really like this vertical, and we're going to stay at it. But the reality is there's just not a lot I can say because it doesn't do me any good. So ultimately, we have a lot of confidence in our partner. And most importantly for investors, if you remember when we announced this in the first place, we told everybody to ignore it because it wouldn't really go live until it goes live. And we also told you we weren't relying on it. And I do feel like our progress on 2018 pipeline probably gives everybody comfort. It certainly gives me comfort. We're ahead of schedule. And also notably -- we probably should have said this in our script, we've got some nice January launches, which is something we didn't have this past year in 2017. So we like the timing a little bit so far of the pipeline.

Okay, that's helpful and then just one last one for me. Cathy on the tuition refund, so that's just isolated to Q1 and there won't be an impact over the remainder of '17?

Yes, what we saw there is actually we had a couple of programs particularly lap their anniversary date, which is often when you see some more material adjustments. I mean, every quarter we'll have a little movement in one way or the other as we true things up. But honestly, nothing like -- we don't usually see this magnitude of movement. So we would not anticipate having this be in any way recurring.

Your next question comes from the line of Jeff Silber with BMO.

It's Henry Chien. Good afternoon. Just had a question on how you're thinking about going after the certificate market in the U.S. I know for your DGPs, you have a pretty nicely defined a framework in terms of graduate, strong outcomes and going after the same verticals. I was wondering -- I know it's early, if you have any similar framework of how you're going after the certificate market, especially since that space seems to be changing pretty dynamically recently?

We have a lot of ideas but it's just too early, Henry.

Okay, fair enough. And just switching over to the current trends. Any color you can provide on what's driving the acceleration enrollment growth and some of the better margins than expected?

We announced -- I know people have come to expect us to perform. The team, like people in this room, are exceptional. They are really, really performing. They are great people. And that is what this is all about, is people continuing to evolve in their jobs and get better at what they're doing, and we don't talk about the efficiency of times because it's not -- I appreciate the question because it gives me the opportunity to salute the people in the room. They're getting really, really good. And not just the people in the room, but the people in New York, and Denver, and L.A. and (inaudible) so -- and Chapel Hill. So it's all about our team just continuing to get better and better at this. And I certainly learned over the years to value that team more than anything else.

Your next question comes from the line of Corey Greendale with First Analysis.

Couple of questions. First of all, I was hoping that you might be able to address the primary questions that I've been getting on GetSmarter. The first is -- can you give us any -- and I realize it's early, but can you give us any sense of just kind of level of -- should we be looking at each course as a separate program kind of as your current -- is it more like each university is an economic unit? And what do the margins look like at maturity?

Corey, what I would tell you is I know it's frustrating but you got to give us time. We're just not yet at a point where we're willing to give any sort of guidance on them. It's so -- I mean literally, we signed it Monday night. And we have a ton of ideas and they have done of ideas, and we do think the acceleration is very attractive. But just not yet. We just can't. There are a private company, obviously, if they were public, there would be a lot of information on them. And we're working through it, and we're super confident in the group together. But we just don't -- we're just not there yet, Corey. But you also know, I think we've proven over our 3-plus public years that we'll tell you.

I understand. The other question, Chip, I'm hoping to get -- this is what I've been getting a lot which is -- so you talked about the defensive aspect of this that the universities were interested in. You didn't have a solution. The question I've been getting is why not -- when you add a new program you just hire people to do that, why not just hire people? Hire a team of 20 people to start this out and start doing it as opposed to doing an acquisition.

Yes. I mean, very simply, like, if you look at what they've accomplished and you look at what they've built and you look at the remarkable fit, we think it's a much better strategy. Our team here is very consumed with what is a significantly scaling business. When we gave the guidance at 13, 16, and 19, just consider that the year before IPO we did 4. So we're scaling our business and we're pretty focused on it. And so having a team focused on that opportunity that fits as well as it does for us, we thought is well worth paying for.

Okay, and I had one more mundane question for Cathy, which is the cash flow in the quarter receivables jumps in. They don't do that in Q1. Is that just the timing of the academic quarter relative to the fiscal quarter at some university?

Absolutely, at several universities. So that's why you note that we said that we gave you a receivables number and said that the majority of it has been collected. So it's nearly timing.

Your next question comes from the line of Ben McFadden with Pacific Crest Securities.

I wanted to start with shocking GetSmarter. Just Chip, maybe can you talk about just from a strategy standpoint. Because I know what the core offering a big part of the strategy here with the multi programs in a vertical is to provide some level of differentiation so you fully capitalize on that marketing funnel. Just curious how that relates to GetSmarter, whether they have a similar type structure currently or whether there's a strategy to drive a similar type structure going forward that's really going to capitalize on a larger portion of that marketing funnel.

Well, there is a lot of interest on their side to sort of be able to leverage the analytics that we built here. And so I do think that there'll be a lot of applicability to what we now have done. And then you also think about, like, think about a fintech course, there's not a fintech degree right. That's a good example of something that right now is a really interesting area that people want skills. And so -- but there's not a fintech degree versus, like, you can think almost, like, if you frame the 2 -- think about DPT with USC, the #1 program in the country and something that is highly clinical over $160,000 and then a fintech course from MIT, it's really a fantastic opportunity for someone to learn fintech. But it's obviously a lot less expensive and there's a different need there. So we think that there's a lot of applicability to what we've learned about how to deliver prospect sharing. But then, it's just once again a little too early for us to know much more about -- for us to be able to tell you much more. That's the point.

Sure. And then Cathy, maybe just a non-GetSmarter question. I'm just curious on any update regarding the 2016 cohort and how that's ramping relative to cohorts you've seen in the past?

Yes. Actually, ramping very nicely. It is doing what we would expect or better. And so we think it's going to be a good strong cohort for us as we sort of move it through that first 2 years and into the point where we'll kind of report it on an annual basis.

Your next question comes from the line of Andre Benjamin with Goldman Sachs.

My first question is as we think about this big ramp in growth and the cash it's going to take to do that, and then you're going to fund this acquisition, I think Cathy alluded to the fact that as you may need to replenish the cash coffer at some point. I guess how are you thinking about doing that? Are you probably going equity again like you did the last time you raise cash? Would you maybe think about taking on some debt? Any color on timing of when you would likely make that decision?

Yes. So, Andre, we were fortunate enough to have enough cash on our balance sheet to be able to execute this transaction when it became apparent that cash was the best way to do this. But after we close, we're going to be -- expect to be a position where we still have cash to meet our obligations and run the business. We have said that we're going to probably want to go out and replenish that at some future point. But we're going to consider all of our options and that covers timing and the mechanism. So it's another place where we can say, it's just too early yet. We're not under pressure to do anything, and so that's -- we'll consider all our options at the time.

Okay, that's fair. And I guess, in terms of the GetSmarter business, how should we think about the differences in how short courses operate and look internationally versus domestically? I know they've got some both types of partners. Is there a big difference we should be thinking about as you think to launch more and the kind of the Western world?

Yes. We think that the broad international market appeal is a big part of why we love it. 150 countries, over 50,000 students. That's a lot. I think it broadens our footprint in a way that's very attractive. But, Andre, it's just totally a good question, it's just too early to get into giving you sort of guidance in that way. We just don't -- it's too early.

Your next question comes from the line of Brian Schwartz with Oppenheimer.

I just have one for the topic of the call today on GetSmarter, but I think I have a different one that I'm just curious about. Within the category, whether it's consumer ad tack or it's the short course certification category are there any deep verticals or industry expertise that GetSmarter is known for in the market? Or is the business more horizontal across this new category?

Yes. I mean, I think the way I'd answer that, Brian, is ultimately, the competitive landscape for GetSmarter does have some differences from 2U, although some of the competitors for GetSmarter are gradually starting to try to work themselves into some form of us. So Coursera specifically. And by the way, if you look at -- from a value standpoint, if you look at, like, a lynda.com and you look at the trailing multiple of lynda.com when LinkedIn purchased them, we do really feel very strongly about shareholder value, in this case. So the competitive landscape will continue to change. We think GetSmarter and 2U together are really, really well poised for that competitive landscape. We now really have a full assortment of what a great university would want in their digital transformation. And we couldn't say that Monday morning. We could say it Tuesday morning but not Monday morning. So very proud to be affiliated with not just the team, but the brand of GetSmarter.

And then one question for Cathy, just on the core business, the non-GetSmarter. As we're looking out over the next 3 quarters here and the rest of the year, just kind of wondering now where 1 quarter in, if there's any of the investment areas that you could learn into a little bit more this year that could be faster here in terms of spending that you're excited about? Or maybe even the opposite, are there any investment areas that maybe you don't need to spend as much here this year?

Yes. So I think I'm going to answer with the thing that I always answer, which is the place that we are leaning in is student acquisition and particularly in the marketing functions. You guys will notice that with regard to quarters, you're not seeing as much sort of year-over-year improvement (inaudible) as a percentage of revenue. And a big piece of that is accelerating the growth in prior launched DGPs as well as accelerating our launch schedule. That is the place when we have opportunity, something is performing really well, we want to have the ability to lean in and drive something that is functioning and converting really well. And then in the short run, that actually may mean spending more and driving down the LTR to TCA in the short run. So that's the place that we really focus on putting additional dollars behind when we see something that's working well.

There are no further questions at this time. I will turn the call back over to the presenters.

Thank you, everyone, for joining. One final thing. Last week, we published our annual report and launched a corresponding website. So links to the site is in our press release. I encourage you to read the whole thing. If you're an investor, you really should. Thanks, again, and we'll see you out on the road.

This concludes today's conference call. You may now disconnect.