2U Inc (TWOU) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the 2U, Inc., 2017 Fourth Quarter Earnings Call. (Operator Instructions)

And now I would like to welcome your host, Mr. Ed Goodwin, Vice President of Investor Relations.

Thank you, operator. Good afternoon, everyone, and welcome to 2U's Fourth Quarter and Full Year 2017 Earnings Conference Call. By now, you should have received a copy of the earnings release for the company's fourth quarter and full year 2017 results. If you have not, a copy is available on our website, investor. 2u.com.

Before we begin, I want to let you know that we now have a deck that accompanies our earnings call, which you can find on our Investor site. We'll be referencing some of the slides during this call, so I encourage you to access the deck. The recorded webcast of this call will be available in the Investor Relations section of our website. Also, we routinely post announcements and information on our website, which we encourage you to access and make use of.

Today's speakers are Chip Paucek, CEO and Co-Founder; and Cathy Graham, CFO.

During today's call, we may make forward-looking statements, including statements regarding the company's future financial and operating results, future market conditions and the plans and objectives of management for future operations. These forward-looking statements are not historical facts but rather are based on our current expectations and beliefs and are based on information currently available to us.

The outcome of the events described in these forward-looking statements 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 directly comparable GAAP measures in the tables attached to our press release.

I would now like to turn the call over to Chip.

Thanks, Eddie. April 2, 2008, 1:26 p.m. What is that date and time: The moment our Certificate of Incorporation was filed in the state of Delaware. This April 2, 2U will be 10 years old.

We've accomplished a great deal in this last decade, including just completing our 16th public quarter and our best year ever. But we're really just hitting our stride. It's rare to find a company that has momentum on its side and is seeing acceleration at this stage of its life. We operate in a very large market that is undergoing transformation, and 2U is the company leading that transformation.

You've heard me say it before, but it's always worth repeating because we mean it. Our financial success is driven by a simple formula: When students win, universities win. And when universities win, 2U wins. Yes, I'm a bit fired up, and why shouldn't I be? We just completed a great 2017, and I like where we stand moving forward.

Let's talk about the results first. Q4 was great. On the top line, revenue was $86.7 million, 51% growth over Q4 2016, 51% for the quarter. What about 2017 overall? We had revenue of $286.8 million, 39% growth over last year. Our graduate program segment grew 31% in 2017 with the remaining growth driven by our GetSmarter course -- short course segment, which is rapidly proving itself as a core component to our vision.

On the bottom line, adjusted EBITDA was $12.7 million for the quarter and was $11.4 million for the year, an improvement of approximately 2 percentage points in margin over all of last year. Cathy will take you through this in more detail shortly, but it was a great year and a great quarter.

What's driving our progress? Well, in the graduate program segment, which we now refer to as our 2U Grad division, we began the acceleration of our new DGP launch cadence. Ten new programs launched in 2017. We increased our 2018 slate from 13 to 14 new programs, and we've now announced 3 of the 16 new programs for 2019. More on that in a moment.

On top of all that, we successfully completed the acquisition of GetSmarter, creating our short course segment. We believe GetSmarter will become a meaningful contributor to our performance. Given that it's the end of the year, we give you additional disclosure, including our cohort margins and our top 10 list by annual enrollment. The power of our purpose-driven business model is evident in those results, too, so I'd like to share a bit on these now.

First, let's talk cohort margins. At our Investor Day in October, we gave you a preview of our 2017 cohort margins. At that time, we had a good amount of clarity on where we were. I'm thrilled to say that we actually exceeded what we gave you. Cathy will cover that in her section.

So let's turn to the top 10 list for a moment, which you we can find in our earnings deck. The first thing you'll notice is a top-15 list, not 10. Why? Well, let's talk about why we started giving this list in the first place. There was a moment in time earlier in our life as a public company where our business was not as well understood and some people wrongly believed our growth was driven only by the core 4 original programs. So while we can't disclose enrollment numbers unless our clients do, this relative ranking, the top-10 list, helped investors gain confidence that our newer programs were growing and that our growth came across many different verticals. It told a true story that newer programs were on the list and that the programs on the list were approaching, achieving and, in some cases, exceeding our steady-state target of 300 to 500 new-student enrollments per year.

Today, we're no longer seeing the same movement in the top 10. Why? Well, first of all, I'm pleased to say that many of our older programs continue to grow through innovations in product marketing, but more importantly, the vast majority of our programs are new. Even more fundamentally, the programs we have -- the programs on the list tell you less than several years ago. Regardless, let me give you some color that we think is useful.

First, #10 on the list, datascience@Berkeley, was just a hair under 300 new-student enrollments, all at Berkeley quality. This means that the top-10 programs have grown to our target enrollment levels. What's more impressive, the top 7 were each above 500 new-student enrollments.

Let me put that in perspective. 1/3 of all programs operating in 2017 were at or above our steady-state target for annual new enrollments. That would be impressive even if those programs were launched at the same time, but remember, most of our total 34 programs are pretty new. Eight were running for only 1 or 2 quarters, the brand new, in that case; and 16 of the total, or about half, have had around less than 2 years.

So how do we show you the progress of our newer programs? Well, we expanded the list from 10 to 15. Of programs ranked 11 to 15, there are 3 from our 2016 cohort: NYU Speech; Syracuse info science; and yes, Simmons Enterprise. Not only were those 3 programs launched less than 2 years ago, each is also the first in its vertical.

And while the Enterprise model was challenging in terms of its original premise of collapsing the cost structure of 5 things into 1, as we moved to a more of a normal program, some of the offerings, including behavioral analysis, shined. You can see that we now also offer behavioral analysis at Dayton. That's our program selection at work there, by the way.

So our growth is not only driven by a handful of programs in large verticals, our growth is driven by an expanded selection of graduate programs. We continue to enter new academic verticals. And in existing verticals, we continue to add programs in different geographic regions with varying levels of selectivity using product marketing to further build out those businesses.

So let's talk a bit about pipeline. It continues to be excellent. Today, we announced an important step forward in pipeline that addresses our vision as a worldwide leader in digital education, our first international graduate program. And what a partner to start with. If I was going to pick one single university degree combination to start with in Europe, this might be it. University College London, or UCL, has partnered with 2U to offer an MBA program, which is expected to launch in 2019, pending any further university approvals.

UCL was founded in 826 (sic) [1826] and has always been a trailblazer. UCL was the first university in Europe to allow women to have the same standing as men and to allow students of any religion to attend. This will be the first online Master's program for their excellent School of Management. This partnership will help them extend their mission across the globe. I'd like to thank Vice Provost Anthony Smith for his leadership here.

But again, along the lines of just getting started, this is the first IGP in the history of 2U, but we believe the first of many. This will clearly have an impact on our TAM. After UCL, we now have 3 graduate programs slotted for 2019. Pipeline is going great, and you can expect a flurry of activity and announcements over the next several months. Let's spend a few moments talking about our WeWork deal. It's multidimensional, and we love what the parties each bring to the table.

First, the deal gives 2U a perpetual license to the Flatiron School's code. Last year at Investor Day, we told you we plan to invest more in our learning tech. We built a ton of impressive technology across the business, and that includes the online campus we built back in 2009. Today, we believe it's still the best purpose-built, mobile-first platform for delivering live classes and distance content.

But as we promise our partners, our job is to make the programs great permanently to evolve our tech and services, not to be best-in-class but ahead of the best-in-class. And that's what I think this will allow us to do on the learning side.

I was blown away when I first did a demo of Learn. It's by far the best learning platform I've seen. Built on GitHub, it allows all kinds of flexibility in content delivery, data tracking and social interaction. By integrating our existing proprietary tech platform, particularly the robust back end, into our now proprietary code of Learn, we'll see a fundamental step-up in our student and faculty experience. We'll rebrand this integrated platform and announce that to the world in the coming months, but it's really good, so stay tuned.

On the rest of the deal, simply put, WeWork brings a distinct physical expression to our online experience. Think about it. Every student in a 2U graduate program will get a free global access pass to any WeWork in the world. That's something none of our partners could do on their own.

The scholarships offer a new channel for us to operate in, but as you know, scholarships and fellowships are normal course of business for 2U. But being able to deliver them to the WeWork community is super exciting.

And finally, the Future of Learning and Work center will offer us an opportunity to showcase our faculty. As the plan for the learning center comes together, we'll share more with you. The deal is a powerful example of how our scale benefits our partners. Cathy, take it away.

Thanks, Chip. While our financial performance for fourth quarter and full year 2017 largely speaks for itself, I'd like to give you some color on these results before turning to our view of the future.

We closed out 2017 by again delivering significant year-over-year revenue growth. At $86.7 million for the fourth quarter and $286.8 million for the full year, revenues exceeded the prior year periods by 51% and 39%, respectively.

In our graduate program segment, year-over-year revenue growth was 30% for the quarter and 31% for the year with the remainder of the growth in each period coming from short course revenue. Graduate program revenue growth continued to be driven primarily by an increase in full course equivalents. For the fourth quarter, FCEs showed a year-over-year increase of 25%, in line with our expectations.

For those of you wondering when you can expect to see reacceleration in year-over-year FCE growth, we anticipate this will occur in the second half of 2018. Consider what we've said about 2018 graduate program revenue that we expect year-over-year growth around the 30% mark but with acceleration in later quarters paving the way to a higher annual growth rate for 2019. If our revenue growth rate is expected to be about 30% for the year but the later quarter should be higher, it stands to reason that the earlier quarter should be lower. We expect the same pattern to hold true for graduate program FCEs.

Fourth quarter FCE growth was enhanced by a 4% increase in average revenue per FCE. About 1.5 percentage points of the increase was due to an increase in the quarter's revenue, driven by year-end changes we made, based on experience, to the assumptions we use to reserve for bad debt and, in one case, to calculate deferred revenue.

An additional 1 percentage point was due to a year-end adjustment that lowered revenue in one program during the fourth quarter of 2016. The remainder was due primarily to the impact of either actual tuition increases on average revenue per FCE or effective increases, resulting from the fact that we made more use of scholarships in new programs in 4Q 2016 than we did in this past fourth quarter.

In our short course segment, we had over 6,700 short course FCEs in the fourth quarter, and as expected, the percentage of FCEs offered at U.S. and U.K. universities increased sequentially to more than half of the total. This resulted in the corresponding increase in average revenue per FCE to $1,777, 44% higher than in the third quarter. You should expect to see average revenue per short course FCE continue to increase over time as higher-priced U.S. and U.K. university courses become an increasing majority of this segment's revenue.

Now looking at our earnings measures. At $500,000, fourth quarter net income improved year-over-year by $2.7 million, and the corresponding margin improved by more than 4 percentage points over the prior year period. For the full year, our $29.4 million net loss showed a year-over-year decline of $8.7 million but only a 0.2% decline in margin to 10.3%. These full year dollar and margin declines were the result of absorbing facilities-related step-ups in depreciation and amortization, acquisition-related increases and equity compensation expense, and a book-only foreign currency loss recognized in conjunction with transferring funds to South Africa for the GetSmarter acquisition.

After net adjustments of $7.4 million, fourth quarter adjusted net income was $7.5 million -- $7.9 million or 9% of revenue. This represented a $5.9 million and 6 percentage point year-over-year improvement to adjusted net income and adjusted net income margin, respectively. On a per-share basis, adjusted net income improved by $0.10 over the same quarter of 2016.

For the full year, after net adjustments of $25.1 million, adjusted net loss was $4.3 million or 2% of revenue. This represented a $500,000 decline but a 1 percentage point year-over-year improvement in adjusted net loss and adjusted net loss margin, respectively. Even with the slight dollar decline, year-over-year adjusted net loss per share improved by $0.01 due to the inclusion of shares outstanding related to our September 2017 follow-on offering.

Note also that we saw acquisition-related increases in stock-based compensation expense in the second half of 2017 and continue to see meaningful year-over-year stock-based compensation expense increases related to our headcount growth. That said, we believe that our stock-based compensation expense of 7.6% of revenue remains very reasonable relative to similar high-growth companies we surveyed.

After a further net adjustment of $4.8 million, fourth quarter adjusted EBITDA was $12.7 million or 15% of revenue. This represented an $8.2 million improvement in adjusted EBITDA and a 7 percentage point improvement in adjusted EBITDA margin over the prior year period.

For the full year, after a further net adjustment of $15.7 million, adjusted EBITDA was $11.4 million or 4% of revenue. This represented a $6.9 million improvement in adjusted EBITDA and a 2 percentage point improvement in adjusted EBITDA margin over the prior year.

As we did last year at this time, we've provided fully allocated graduate program segment profitability margins at the launch cohort level for full year 2017. This segment profitability measure is the same as the adjusted EBITDA measure we have used in prior years. However, now that we're reporting segments, we have updated our terminology to match our disclosure.

Programs operating for 4 years or more had a margin of 39%, 3 percentage points higher than the smaller group that made up our 4-year-or-more vintage for 2016. This small group of 9 from only 2 launch cohorts has some of our largest and most profitable programs, so it's currently at the higher end of what we would expect for mature program margins.

Further, remember that the number of new programs we are launching per year now significantly exceeds both the total number of programs in this most mature cohort and the number that are moving into this cohort on an annual basis. Given this and the fact that a portion of our corporate cost allocations are done on a per-program basis, cost allocations are being pulled away from our most mature programs at a faster rate than the rate at which the total costs being allocated are expanding. As this pattern is likely to continue for several years, it is possible that we may see the margins for this cohort expand even further before potentially settling back a bit.

For 2017, programs that have been operating for between 3 and 4 years had a fully allocated margin of 25% for the year, 7 percentage points higher than the 18% margin we reported for this vintage in 2016. Additionally, programs that have been operating for between 2 and 3 years had a fully allocated margin of 14% for the year, 20 percentage points above the 6% loss margin we reported for this vintage in the prior year.

Remember that these cohorts contain only 1 year of program launches each and are, therefore, most prone to margin variability based on program mix. This is particularly true for the 2- to 3-year cohort, where the influence of launch timing is still noticeable and where our models would generally predict a wide range of margins, typically between negative 10% and positive 10%.

And that leaves all of the segment-level losses in our graduate program business exactly where we would expect in programs operating for 2 years at less, including programs expected to launch in 2018, where we had costs in 2017 but no revenue.

This time period corresponds to our period of heaviest net negative cash investment in new program launch and scaling. And for 2017, these programs had a combined loss margin of 400%. And while this represents an increased loss for this cohort compared to the prior year period, the increase is driven primarily by the continuing expansion of our annual launch calendars. What we're seeing now across all our program cohorts strongly validates the typical program economic life cycle we've discussed with you and makes us very comfortable that increasing our investment in new programs to drive growth is a wise, strategic decision.

From a balance sheet perspective, we ended the year with $223.4 million in cash. This balance reflects activity during the year, including both the use of $97.1 million in cash for the purchase of GetSmarter and the addition of $189.5 million in net proceeds from the sale of common stock, both of which occurred in the third quarter. Our year-end balance sheet also has a low $14.2 million in receivables balance, reflecting the fact that most programs and courses are completed and our clients have paid before year-end.

Now expanding on the initial look at 2018 we gave you with our third quarter results, we've provided specific first quarter and full year 2018 guidance. Before I move to the numbers, however, I'd like to comment on recent exchange rate movements to give you further context for our guidance.

When we provided our preliminary view of 2018 in early November, we were basing our expectations on a forecasted U.S. dollar-South African rand exchange rate of approximately 13.5. This average monthly exchange rate for this currency pair had been within about 2% of this mark for all of 2017, and in fact, had weakened slightly in the fourth quarter. Further, forecasts from various international currency trading desks projected either a steady or further weakening rate throughout 2018. However, over the past 90 days, the expectation and eventual realization of an improving political climate in South Africa has significantly strengthened the rand relative to the dollar. Today, the dollar-rand exchange rate is below 12, a change of more than 10% from our initial assumptions.

Within our short course segment, a strengthening rand has the effect of converting rand-denominated revenue and expenses into higher dollar amounts. With a minority of short course revenue and the majority of short course costs denominated in rand, this means that if the exchange rate stays closer to current levels for the remainder of 2018, the operating plan we had in November would convert to a little more revenue but a lot more cost compared to our earlier expectations.

That said, we believe that, for 2018, the consolidated business can produce at the adjusted EBITDA margin we achieved for 2017. This is within the range we previously told you to expect, and you should understand that we will be reticent to move this up unless there's a significant change in environment or until we have clear evidence of sustainable overperformance. Note that the guidance given here today assumes exchange rates as of December 31, 2017, most notably a dollar-rand rate of 12.39.

So now to the numbers. On the top line, we're expecting revenue of between $91.1 million and $91.6 million for the first quarter and $397.7 million and $402.7 million for the full year. At their midpoints, these ranges imply year-over-year growth of 40.9% for the first quarter and 39.6% for the full year.

As you can see, we've raised our expectations for full year revenue significantly since the November preview and that the majority of this increase relates to the first quarter. Greater visibility into first quarter start dates and first-time course enrollments in our short course segment, along with some smaller benefit from changes in exchange rate assumptions are the primary drivers of this increase.

Based on our first -- current first quarter expectations and additional visibility we now have into short course timing later in the year, we've updated our expectations for how revenue will be distributed across the year, including pulling some revenue timing forward. We now expect that approximately 46% of 2018 revenue will be recognized in the first half of the year, and that in the second half of the year, approximately 49% of second half revenue will be recognized in the third quarter.

Looking at earnings measures. We expect a net loss of between $14.9 million and $14.5 million for the first quarter and between $45 million and $42.8 million for the full year. When looking at period-over-period net loss comparisons, remember that we acquired GetSmarter on July 1, 2017, which will skew both dollar and margin patterns throughout the year. Also remember that we made a strategic decision to increase the rate at which we launched new graduate programs from 10 in 2017 to 14 expected in 2018, and then 16 and 19 expected in the 2 subsequent years. And as we've said previously, this increase in the number of programs that are in their investment phase has the effect of slowing the pace of margin improvement as measured at the adjusted EBITDA levels.

At the same time, we still expect meaningful year-over-year increases in stock-based compensation expense, both because of organic growth and the addition of GetSmarter management to our plan and depreciation because of our recent unexpected facilities build-out. We do not expect that these increases in stock-based compensation and depreciation expenses will be offset by the purposefully smaller expected year-over-year improvement in adjusted EBITDA.

We expect an adjusted net loss of between $7.3 million and $6.9 million for the first quarter and between $7.7 million and $5.6 million for the full year. We also expect an adjusted EBITDA loss of between $2.3 million and $1.9 million for the first quarter and positive adjusted EBITDA of between $15 million and $17.3 million for the full year.

When looking at period-over-period comparisons for these 2 measures, remember that adjusted net loss is still impacted by the operating and facilities-related factors and adjusted EBITDA is still impacted by the operating factors that impact net loss.

And as we told you in our 2018 preview, because of the investments we're making in both launching and scaling graduate programs earlier in the year and because we anticipate launching a meaningful number of new short courses in mid- to late year, we're anticipating significant differences in our margin [patters,] both from 2017 and between the first and second halves of 2018.

In November, we gave you a fair amount of detail about how we expect our loss and earnings measures to be distributed across the year. Now that we have a few more months of visibility into our short course segment, we've made some updates to our distribution expectations, which should help you with our current thinking on the later 2018 quarters. I encourage you to read this section of our earnings release carefully in order to understand how we now believe 2018 will unfold.

And finally, as a last word on our forward-looking expectations, I want to remind you that we remain in the early stages of integrating the GetSmarter acquisition and scaling what is still a relatively early stage short course segment. As we've said previously, for 2018, we expect our short course financial results to remain highly sensitive to the performance of new courses in their first or second presentations. By definition, early presentations of new courses have the least certainty around student enrollment and, therefore, revenue and margins. Please give us some time to see how these early presentations perform and don't immediately assume that revenue and margin results will come in at the top end of their ranges.

But despite that cautionary note, we remain very excited about how both our graduate program and short course segments are shaping up for 2018. The fact that we're comfortable in significantly raising our first quarter and full year revenue expectations based on the short course outlook only further reinforces our belief that the GetSmarter acquisition can create real value for the combined company. Chip?

As we stand here today on the cusp of our 10th birthday, it's clear that 2U has built a proven, purpose-driven business model that's helping transform higher education for the better. The life-changing outcomes of students and our partner programs and the performance of our business are both compelling proof.

I want to close with a note about how the power of what we're building can be seen in the caliber of people who've chosen to join our board in the past few months: Valerie Jarrett, former Senior Adviser to President Obama; and Greg Peters, Chief Product Officer at Netflix.

I want to emphasize the word "chosen" because these are 2 amazing individuals, trailblazers in their respective worlds, who we have the ability to choose how they live their values. And both of them have chosen 2U because of their passion for education and belief in our mission. I'm so excited and honored to have Valerie and Greg join us on the journey to becoming the world's most iconic higher education company.

And with that, we open up questions.

(Operator Instructions) And our first question is from the line of Michael Nemeroff with Credit Suisse.

Cathy, the guide for Q1 is quite a bit above consensus, probably the strongest guidance you've given for an out-quarter since going public. How much of the upside is coming from the graduate degree programs, and how much of the upside is from GetSmarter? And in your comments, you talked a lot about FX and movements. Is any of that coming from FX? And then a question for Chip, specifically, on the new international programs. Congrats on that. How many international programs do you expect to launch in 2019? And Chip, maybe you can talk about any of the differences from a deal flow and economics, if any, from the U.S. domestic programs. Are there any vagaries in the metrics that we should expect as you build a bigger overseas business?

Hey, Michael, so while we don't give guidance on a segment basis, I think what I -- to echo what I said in my prepared remarks is really the primary driver for us in raising our guidance so much in the first quarter is that, in the latter half of -- or the latter section of the fourth quarter, we were actually able to see that there were earlier start dates for some of the short courses, which made a more -- which pulled more revenue into Q1 as well as getting a better feel for the fact that some of those courses would have their first cohorts enroll higher than we might have originally expected. So that really was the primary driver. As for exchange rates, really not that huge a factor here in -- it was definitely the smaller piece of any change in our guidance.

And Michael, what I would add to that is I feel like we got smarter with GetSmarter. So we feel very strongly about that business and how it's coming together, how the integration is going, how the team is working. We're much more actively involved on the marketing side with GetSmarter, and it's really going extremely well. On the IGP, I would say, first of all, we do think it's a significant moment for the company. It is our first. As I said, if I was going to pick one sort of combo of university and degree, this might be it. Great way to start in Europe. We do think that there's -- that it is an expansion of our TAM. We've told you guys for a long time that $80 billion of U.S. graduate education has been the sort of more immediate aspect of the total very, very large number of higher education worldwide that we're going after. And now, we are expanding to Europe. We do think that this won't be our last. We're not ready to disclose how quickly we'll go, but I think you should expect patience here. If you might remember, when we signed Lord Willetts -- David Willetts joined us a couple years ago, people thought that, that might mean immediately that we jump into Europe and we did not. We took our time. We found the right partner, the right opportunity. And you will see that continue. But we do believe that it is a big part of the story on a go-forward basis long term. So patience, but we do think the opportunity is very large. This particular program fits into the sort of notion of a DGP nicely. It is a GBP 50,000 price degree. It's an MBA where we have lots of MPV activity. And we feel that with the team that -- we're building a larger team to go after the opportunity in a way that should allow us to express our MPV strategy. So we're pretty excited about it.

That's helpful, Chip. Does it change the business -- are there any differences in the way the revenue comes in, the way that the deal -- the length of the time the deal closes? Any real differences in the IGPs versus the DGPs from a business standpoint?

While I can't tell you every future IGP, just like every future DGP, I don't know the answer to that. But I can tell you, this one, no. This one is well within our standard. And if it wasn't, I would have to disclose it because we tell you at this point when something is different, and it's not. So the school is pretty fabulous, and we're excited to launch it in '19.

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

Just competitively -- I asked you this a few times. We've seen some activity on the for-profit trying to move into nonprofit space. I'm just kind of wondering if you're seeing anything, any other sort of competitors out there trying to build what you guys have done so far?

No, I don't. I think at this point, the for-profit space is largely irrelevant. It really is a different market. People don't apply to Berkeley and Strayer at the same time. We serve Berkeley. Number two, we believe that we're the only company right now that is -- that goes very deep on both depth and breadth. We believe that our bundle is getting better and better, whether it be through Learn, with WeWork or the global access passes with WeWork or just the general business that we're building around things like accessibility and data architecture. And it's our job to keep making it better. And what we have that many of the companies don't have is a fantastic alignment among the folks on this call, my board, my team, my employees and our partners to invest what is a very large amount of net negative cash in each DGP. And we're now proving, with the cohort margins, that it makes a ton of sense to do that, but it's very tough to get there. And we spent -- we raised $102 million of venture capital before IPO, and we spent it. Now the important thing is, we didn't make mistakes twice very often, and we learn from them. We built a very large business with a real moat around it. So for somebody to really compete, it can't be a super horizontal model with a light layer of investment across a bunch of different activities. That's not how we enter the market. So we're going to be thoughtful and careful. But just like with UCL MBA, we're going to go big when we do it.

And then just from a GetSmarter perspective, I know it's early days, but is that tracking maybe better than expected? Or -- and then as a follow-up on that, how do we think about -- I know revenue per student is picking up -- or revenue per FCE is picking up, but -- based on the mix. But is there pricing power within GetSmarter, at least in the U.S?

So first, I would say, we're thrilled with where GetSmarter is. And I think some of that is evident in the quarter we just had and in our future guide. I mean, it's fairly clear. We told you at Investor Day that our DGP business, our sort of core business that we would see right around 30%, and then it would accelerate in the out-years. We feel strongly that that's actually still very much on track. But given that we told you that it's going to be around 30%, and obviously, we're showing 39.6% revenue growth, you can do your own math there. It's -- so we feel very strongly about how GetSmarter is progressing. And really, the sort of theme of this call when we discussed how we were going to theme it is we're just getting started on some level. We're a decade in, but we haven't done most things to give GetSmarter credit. While we are helping them in a variety of ways -- the team built a great pipeline with great universities and great courses. And by the way, you guys should all take the Blockchain course, by the way. So the opportunity is huge. We haven't done much cross-selling, very little. From a funnel perspective, Berkeley is now a client of GetSmarter. It is reasonable to expect there to be many additional clients within the 2U portfolio that sign up, but GetSmarter is delivering on its own in a way that's pretty powerful. And as Cathy said in her prepared remarks, which I know you're going to want the script after because there was a lot there, it's also clear that the mix moving to more U.K. and U.S. courses is good for the average FCE cost for GetSmarter in general. So we feel really good about it.

And our next question comes from the line of Sarah Hindlian with Macquarie.

So I had a couple questions for you. Chip, maybe I'll start with you on this one. Berkeley looks like they became one of your first graduate degree programs to sign up for short course work. How should we be thinking about that cross-sell opportunity in there? And maybe just some other follow-up questions I have around what you're doing to optimize GetSmarter. There was clearly some nice improvement there in both enrollments and in price per course. So we'd love to hear what 2U brings to table and really where you're seeing some success there.

So you cut out in the middle, but I think what you asked is where are we in the cross-selling opportunity overall. And it is super early days. We have -- truly, we haven't done much of it at all. We're going to do it very carefully and thoughtfully. But we're excited about it. We think it's very real in terms of the opportunity, long term, particularly within the short course universe, where there's a ton of people that will want to take more than one course. We're definitely seeing that, and we think that, while it's really not part of our '18 set of guidance at this point, we think that's a place where there's a ton of room to run, both cross-selling across GetSmarter, across 2U grad and GetSmarter. And then once our clients start overlapping, like you're going to see with Berkeley cybersecurity, you've got really interesting opportunities where you have some that should effectively bridge directly into the notion of the DGP or the IGP. So we think that's really -- there's a ton of opportunity there, and it's early days.

All right, Chip, and just one more question for you. I'd love to hear a little bit about -- a little bit more from you about what drove your decision to move on to Learn.co.'s LMS solution in quarter. That was a pretty interesting move. What does that bring to the table also?

So I talked about it a little bit in terms of the architecture of it. What I would tell you is that, over the last several years, we spent a ton of investment on a bunch of things that no one would ever see that are critical to our clients, whether it be data security, data architecture, accessibility, things that are really important to our university clients, and of course, the marketing apparatus or the placement apparatus, both of which have a tremendous amount of tack. And then we spent a lot of time building out things like Central Park, which is our SaaS technology that allows us to launch programs more easily and quickly. And so we did say to the world last year, look, we're going to be investing more on the learning tech side. And we were thrilled that when we -- when I got the demo for Learn, knew very quickly that it could be something that would be a true step forward, sort of keep us ahead of best-in-class. It's built on top of GitHub and just allows the flexibility that I think I would argue to you, from a content standpoint, very sort of content agnostic. Doesn't have rigid bones like most of the learning management systems do, in part because of that architecture. And it will make us feel a little bit like moving from Hotmail to Slack. And it's STEM first, so it has coding directly built into the platform itself like a coding environment. So that'll help us with different verticals that, today, might be difficult for us to tap with our existing system. So there's a bunch of things about it we like. Also extremely impressed with the team over there. And the work so far on the integration is off to a great start, so we're pretty pleased about that.

Our next question comes from the line of Monika Garg with KeyBanc.

Cathy, at the analyst event, you had talked about 2019 DGP growth of 32% to 34%; 2020, 33% to 35%. And you said GetSmarter growth higher than DGP. Given that you raised significantly your guidance 2018, is it still to assume '19/'20 growth could be in the similar ranges?

Yes, it is.

Then I have a question on the short courses. Chip, do you think there could be short courses opportunities at enterprises? Like you add enterprises, Fortune 500 companies, look to train their workforce. Could you sign enterprise-wide agreements with Fortune 500 companies that give access to their employees for short courses you offer?

So I would say today, the marketing behind both our short course and our 2U grad segments is largely focused direct-to-consumer. And in both cases, there is some enterprise purchasing going on. It's not a huge part of the focus, but we think it's directly relevant. If you take Blockchain as an example, I was kind of giving you all grief that I feel like every consulting firm on the planet should go out and take our Blockchain course because all the consultants running around are talking about it, but they really don't know exactly what it is. So we do think there's an enterprise play there. But at this point, the growth you're seeing in GetSmarter is being driven by effectively our, I think, very strong expertise in the direct-to-consumer world. At this point, the machine learning that we're applying in the marketing business on both sides is really strong. And machine learning is machine learning, whether it's applied to our DGPs and IGP or short courses.

Just the last one, increasing your revenue in 1 quarter significantly walked toward what is leading to better growth expectations. Is it mainly GetSmarter? And could you also talk about profitability expectations for GetSmarter?

So as we said a moment ago, clearly, the GetSmarter business is off to a great start and is having a strong impact, but we're also very pleased with where our core is. And we do think that we will see acceleration in the core business in '19 and '20. Cathy?

Yes. So as I said in my prepared remarks, the primary driver of this is addition -- of the first quarter step-up is definitely the improved or additional visibility that we had into first quarter enrollments in new courses and start dates, some of which were earlier than we had originally expected, bringing more revenue into the first quarter. And that was the biggest factor around that revenue. From a profitability standpoint, what we're doing now is investing a tremendous amount of any revenue we get back into making sure that we drive a long-term, sustainable business, both from a marketing perspective and from additional infrastructure perspective in GetSmarter. So we're not willing, at this point, to sort of step up any margin expectations because, quite frankly, we think it's in everybody's best interest for us to be reinvesting those funds.

Our next question comes from the line of Kerry Rice with Needham & Company.

So most of my questions have been answered but maybe just a couple here. Maybe one for Chip. Interestingly, on the top-10 or maybe top-15 programs, are you surprised by the uptake in programs, such as the NYU speech pathology? Because I think when you launched that, you thought it would be a pretty small course. Now it's #11 -- or a small program. And then the second one is maybe just some housekeeping for you, Cathy. Can you give us what backlog was exiting 2017 and the LTV to TCA ratio?

Thanks, Kerry. So our program selection algorithm is being used really wisely by the team. We're grading every single opportunity and being surgical in our choices as to how to deploy capital. And I would tell you that no, we're not surprised. I think people are surprised by something like speech until you understand that there's a huge shortage in the country of good quality speech pathologists. When my son, Henry, was a year old, he had -- he was effectively deaf, and we had to have surgery, and ultimately had to use a speech pathologist. And it was really hard to find one in Annapolis, Maryland. So it's a great example of a 2U degree, in demand, not many programs, really difficult to do because of the clinical placement aspect. So while it's not the largest vertical, we thought it was obvious, and it's doing well. And so now, are there surprises? Of course, because we don't have a crystal ball. So at times, there are surprises. But in general, the portfolio is not only not surprising us, if anything, it's surprising us to the positive. So we feel very strongly about it.

And Kerry, the backlog at 12/31 was $308 million. I'll just remind you guys all that backlog is always lower at the end of the year than it is in the preceding quarters because, at the end of the year, almost all of our courses are completed -- or all of the courses in our programs are completed for the year. There's very little that runs over year-end, so you don't have anything that's sort of mid-course. There's a seasonal decline in that backlog. And LTR to TCA is around 3.1. And that's -- we've sort of told you guys that we're investing pretty heavily in driving launches in 2018, which are earlier, so that's actually right where we would expect.

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

One question I wanted to ask you is on the international markets for GDP. Now that you're opening up those markets here with the announcement today, does it change the capacity or the cadence of the number of new programs that the business can sign or start per annum? That was one question I wanted to ask. And then the second question on the international market is just kind of understanding the go-to-market strategy. It seems here in the U.S., it was more of an inbound strategy. The partners were all coming to you. And I was wondering if that's the same situation international. Or if it requires more of an outbound go-to-market strategy.

Thanks, Brian. So no, I mean, I would say our DGP strategy has really not been inbound. It's outbound. We're very surgical in what we go out and find and have used data to our advantage over the years and have gotten quite good, I think, at predicting the outcome of the programs. And IGP will be no different. We think the opportunity is very big. The specific go-to-market strategy of every single degree is somewhat different. It's important to know. I mean, these are -- particularly when it's a new vertical. Fortunately, in this case, it is not a new vertical. The MBA vertical is booming for us. So we do think that it's great to start our first international program or our first European sort of flag that we planted with something that we have a tremendous amount of experience in. You might have seen that we recently hired Katie Brin, the former Chief Privacy Officer of the Federal Trade Commission. So we do think that that's also super relevant to the long-term future of how we think about all aspects of marketing our business. So Brian, we have to learn every time we do speech pathology is different than data science. So there's a lot of learning there, and we have to figure it out. But once we get one launched, we get very good at understanding the apparatus we need to build for that vertical.

And then the one follow-up question, Chip, on the WeWork announcement, won't make you repeat the value proposition. I think you were very clear on the opportunities on the retention side and the pricing in the vertical side. What I wanted to ask you was just on the enablement of this partnership and how long the expectation that you have it's going to take to bring the technology that you want onto your platform or any other aspects of the enablement between this new partnership announcement.

It's multidimensional. The thing that'll take the longest is the learning center. That's very much a work in progress. But something like the scholarships and the global access we think will roll out very quickly in the short term. And then the Learn.co will roll out gradually to each of our partner programs. It's nontrivial moving 1,000 students from 1 platform to a different platform. The data migration alone is super important, and you can't screw that up. Because these are people's master's degrees, so we have to do it thoughtfully and carefully. But I can tell you, tomorrow, I leave for our partner symposium, which is our annual partner meeting, and there's no question that they all want it, and they'd all like it as soon as possible. So we're working on a plan to try to roll it out, and I'm going to tell them before I tell you.

Our next question is from the line of Corey Greendale with First Analysis.

I just want to circle back quickly to Michael Nemeroff's question at the beginning. The way you're talking about -- the London program, Chip, it sounds like it should have economics more like an MPV program. But I just want to verify, is that right?

Yes. I mean, it is an international degree program, but it is GBP 50,000 in a vertical that we operate today. There will certainly be some crossover. Now every DGP that has MPV is slightly different. And you've probably seen that in our initial cohort releases, like not all of them immediately launch at the same size. And some of that has to do with the region, and some of that has to do with the marketing apparatus. Some of that has to do with the discipline, the vertical itself. They do act differently. But Corey, it's reasonable to expect that this has more MPV feel than not.

Okay, good. And as you said, there was a lot in the script. Did you say that the top 5 out of the top 15 have 700 new enrollments?

We said the top 7 out of the top 10 have more than -- 500 or more. And you, in particular, have done quite a bit of work on exactly which one is which, so I'll let you figure that out. But...

Yes, fair enough. Actually, that sort of eliminates the question I was going to ask about that, but thank you for the clarification. And then Cathy, just maybe slightly in the -- well, this one's not in the weeds. Is there any impact of 606 on the guidance?

So on 606, we have said previously that there is no impact on our financials from -- on our revenue from 606. There is potentially some impact on the cost side, but it should be positive and largely immaterial. But from a revenue standpoint, there's nothing.

Okay. And this is the one I don't know if it's in the weeds or just in the far distance but with the change in the tax laws -- I realize it's a long time before you're a taxpayer, but can you give us any guesstimate for those of us running long-term DCFs what your tax rate is when you become a cash taxpayer?

So what I could tell you is that we have reassessed all of our tax items at the new 21% rate, and there should be no impact on the -- on either the size of our existing NOLs or on our ability to use them. Obviously, it will impact, going forward, our sort of creation of NOLs and potentially our ability to use those. But on everything going backwards, no. From a future tax rate standpoint, unfortunately, Corey, I think that, a, hopefully, it's beyond the -- it is beyond your -- the horizon of your model. But if you're running for very long, what we don't know is what our international tax rates will be relative to the U.S. and what the size of the relative profitability will be at that point in time. So it's a little difficult for us to forecast.

Okay. I've got a model going up beyond 2030, so we can talk about what you think of my numbers next time we talk?

You got it.

One other quick one, Cathy, sorry, on just -- are there any -- is there any guidance you can give on kind of cash flow things like CapEx or cash flow from ops or anything like that for 2018?

So I think that if you look at what our CapEx was for 2017 and then take that in conjunction, because we have not given specific guidance in that, so I don't want get too specific, but I'll tell you how to get there, and then talk about -- and then go back and look at our call from a year ago and what we said about the drop in our CapEx expense in 2018, that should give you a reasonable way to get to CapEx for this year.

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

Yes. So the 300 to 500 steady-state target per year has been out there for a while. Just I guess, with the seasoned programs that you have and the data that you have from Ed and are disclosing today, coupled with things like UNC MBA was -- has been around since 2011, moving up the list and probably benefiting from MPV-driven efficiencies. I guess, what gives you confidence that 300 to 500 is still the right average target versus potential upside bias to that?

Well, I mean, it is a portfolio, Jeff. And so clearly, the top-15 list, looking pretty darn good. And the timing on the top-15 list also looks good. But it's a portfolio, and we're not at a point where we're going to increase that number yet.

Okay. And then just as I look at the magnitude of GetSmarter revenue variation from quarter-to-quarter, how much of that is naturally -- I guess, outside of your control because of the business model versus, over time, what is in your control in terms of increased frequency the courses are run or whatever it is? Just how are you thinking about that?

Well, as GetSmarter ramps up -- it's individual courses, and they sort of pursue a balanced portfolio, of course, options across their university partners. We think we should be able to add to the predictability, and I know they believe that. So that's a key goal for the company. It's not just the individual courses that might be the big -- the sort of highest sellers but also finding those stable courses. Like they have -- their UCT portfolio, their University of Cape Town portfolio is really strong and very stable across a whole bunch of different disciplines. So we feel like the frequency of the courses running is also something they're working on pretty actively. So we feel like over time, as we're able to commit more capital and sort of stabilizing the company, which is part of the reason Cathy was not willing to go there yet on exactly how profitable we think it'll be because we're in heavy growth mode.

And our last question is from the line of Jeff Silber with BMO Capital Markets.

I know, down in Washington, there's a lot of stuff going on. One of the things that they're working on is the potential reauthorization of the Higher Education Act. I know it's a long way to go, but there has been some talk about capping some of the graduate program loans. I'm just wondering if you're hearing any more about that, if you think if this does go through, how might it impact your business.

No problem, Jeff. So I would say, just like any legislation, what is being talked about versus what gets put in place is -- there's a ways to go. On loan caps, in particular, we feel like our business has incredibly high-quality students in incredibly high-quality programs, that if there are caps, private lenders would be thrilled to loan, too. So we're not that worried about it. And there's also a variety of ways where fostering innovation across something like helping a great school like Emerson or Rice or Berkeley move, online. We think there's a variety of places where there could be -- so I would argue to you that we feel like we were strong in the past administration. We think we'll be strong in this administration because fostering innovation across really high-quality universities is a win.

Okay, great. And then in terms of tax reform, Cathy, I know you went through some of the potential impact. Anything else besides the tax rate? Accelerated depreciation or things like that, does that impact you at all?

No, it actually doesn't. We -- there were things like transition payments in -- to enable repatriation in 2017, that we looked at all of it, and none of it applied to us during this period.

And that's all the questions we have.

Thank you. So I'll end with a quick shout out to a [2U-th] that really delivered the UCL deal. Ryan Douglass, thank you. Your folks should be proud. Speaking of folks, hey, Edward Paucek. To my dad, I say, no back row, Pops.

And that's it, folks. We'll see you out on the road.

And ladies and gentlemen, we thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful evening.