2U Inc (TWOU) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the 2U 4Q '20 Earnings Report Call. (Operator Instructions)

I would now hand the conference over to Mr. Ken Goff, SVP of Investor Relations. Thank you. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and welcome to 2U's Full Year and Fourth Quarter 2020 Earnings Conference Call. I'm Ken Goff, Senior Vice President of Investor Relations at 2U. I'm joined by Chip Paucek, our Co-Founder and CEO; and Paul Lalljie, our CFO. Following Chip and Paul's prepared remarks, we will take questions.

Our Investor Relations website, investor. 2u.com, has our earnings press release and slide presentation, as well as a simultaneous webcast of this call. A webcast replay of this call will be made available for the next 90 days.

Statements made on this call include forward-looking statements regarding our financial and operating results, the continued impact of the COVID-19 pandemic, new educational offerings, student and university demand and other matters. These statements are subject to risks, uncertainties and assumptions. Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them.

Please refer to the earnings press release and the risk factors described in the documents we file with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2019, and our most recent quarterly report on Form 10-Q for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements.

In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of 2U's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations page of our website.

With that, let me hand it over to Chip.

Thanks, Ken. I want to start this call by first thanking my fellow 2Utes all around the world. 2020 presented us all with unprecedented complexities, and our global team rose to the challenge again and again to deliver on behalf of our partners, their students and each other. Through it all, their hard work, resilience, empathy and humor was truly inspiring and has made 2U a stronger and better company. That strength is clearly reflected in the financial and operational results we delivered for the year.

We grew revenue by 35% to $775 million, and we achieved EBITDA profitability for the year, coming in at $16.1 million. We set out at the beginning of 2020 with 4 key financial priorities for the business: drive strong revenue growth, deliver margin improvements, improve operational efficiency, and drive toward positive free cash flow. We outperformed expectations across all of these important measures, all while staying hyper-focused on quality and, most importantly, student outcomes. And we enter 2021 in a position of strength and with the momentum for another great year of performance and positive societal impact.

We understand that as a disruptor, the burden of proof is on us to demonstrate that the business we built is sustainable. We never doubted it, and that chapter should be closed for the rest of you as well. I think it's clear that 2020 results provide many compelling proof points. And with each passing quarter, we expect to add more. You'll hear more on all of this from Paul.

So I'll now turn to what we're seeing in the marketplace. Earlier this year, you heard me talk about the structural changes and challenges facing higher education as institutions grapple with a digital transformation imperative. And imperative, to be clear, it was at their doorstep even before COVID.

Since the start of the pandemic, we've seen this drive a clear increase in pipeline conversations with existing and prospective partners. Universities understand that online is here to stay and must be part of their broader institutional strategies now and for the future.

We hear 3 common and interconnected themes emerging from our conversations. First, the focus on better serving nontraditional working adult learners who are looking for both degree and nondegree offerings across their careers and lives; second, pressure to identify new and sustainable revenue streams at the same time the institutions are facing inescapable budgetary and investment constraints; and third, growing demands on colleges and universities from business and government to do a better job aligning in-demand jobs and creating career-focused upskilling and reskilling pathways. We believe these 3 themes reflect structural changes already happening in the market that will continue to shape the higher education landscape long after COVID is under control.

You can already see them playing out in some of our recent announcements. Take our new partnership with Morehouse College, one of the most respected and iconic HBCUs with an unmatched 154-year legacy of excellence in educating black men of integrity and character. Morehouse President, David Thomas, has a clear digital transformation vision for the college with a focus on better serving nontraditional adult learners. And our new online undergraduate degree offerings represent the foundational building blocks of that vision.

As President Thomas said, in announcing our partnership last week, "There's never been a more important time for the impact of Morehouse to scale." And he's right. Today, according to the Census Bureau, there are over 3 million black men in the U.S. with some college credits. Morehouse online will now offer the market a flexible, affordable and academically rigorous degree completion program from an institution with an unrivaled track record of positively transforming the lives of black men. If that doesn't give meaning to our mission of eliminating the back row in higher education, then I don't know what will.

But when it comes to undergrad, our partnership with Morehouse College is neither the beginning nor the end of the story for 2U. It took us over a decade to enter the undergraduate market, which is more than 6x larger than the graduate market. And in the past 14 months, we've already signed Simmons University, the London School of Economics and now Morehouse, 3 great partners. Keep an eye out for even more 2U-powered undergrad offerings.

As more and more universities move to embrace online as part of their digital transformation strategies, one of the challenges they will face is deciding what degree and nondegree programs to launch. And in an increasingly crowded online marketplace, where schools are constrained by tight budgets and limited investment dollars, these can be high-stakes decisions, getting it wrong can result in significant financial and reputational risks to a school, as reflected in the recent Burning Glass report, Bad Bets: The Cost of Failing Programs.

One of the underappreciated capabilities we bring to the table beyond just investment capital is an unmatched proprietary data set that helps our partners make well-informed choices about the right programs to launch, which is now more important than ever.

Finally, before turning it over to Paul, I want to spend a few minutes talking about our Alternative Credential segment. These offerings are not only delivering impressive growth, but also meeting critical societal needs. Even before COVID, the demand for nondegree career-focused, skill based postsecondary education was growing rapidly. The economic toll of COVID, particularly on women and black and brown communities has been devastating, only furthering demand for these kinds of alternative credentials.

Even workers who were able to remain employed during the pandemic have seen their companies rapidly pivot to digital and embrace e-commerce in order to survive. So these workers also need to learn new skills to stay relevant. Our growing portfolio of short courses focused on functional and leadership skills as well as emerging and disruptive technologies is purpose-built for this.

Our newest short course partnership is with the Institute for Management and Development in Switzerland, or IMD, announced earlier this week. This is the latest example of the growing strength and international reach of our Alternative Credentials business. We couldn't be more thrilled to team up with David Bach, Dean of Innovation and Programs from IMD, one of the world's top-ranked and most respected business schools to offer short courses in cybersecurity, supply chain, and other timely and relevant subjects.

It's clear there's no silver bullet for solving society's growing workforce skills gap, but we believe the unparalleled reach and scale of our global offerings and network of tech skill-based boot camps will allow 2U to play an important role in helping solve this problem. In 2020 alone, more than 20,000 students enrolled in 2U-powered University boot camps. And today, we powered boot camps in 8 different career-relevant subjects: coding, data analytics, UX/UI, cybersecurity, technology project management, fintech, digital marketing and product management. And across our portfolio, we now support boot camps at 44 different universities in 28 states, covering more than 75% of the total U.S. population.

We're also providing comprehensive career services at an industry leading scale. Over the past 12 months, our workforce engagement team has hosted more than 750 job-related events and spent 22,000 hours supporting job-seeking students. We also provided students from our boot camps, over 11,000 free job referrals to our growing network of more than 6,600 employers.

But helping close the workforce skills gap isn't just about powering quality programs and career services at scale. It's also about creating more accessible and affordable offerings that foster greater equality of opportunity. And we're finding innovative ways to do just that, whether it's our $3 million scholarship program, which has already reached over 1,000 students since its launch in June of last year. Our groundbreaking collaboration with Netflix and Norfolk State University or our more recently announced Access 2 Education Scholarship Fund, a private-public partnership with Employ Prince George's, our local Maryland workforce organization and George Washington University. We're breaking down historical barriers and creating pathways into well-paying in-demand jobs for women and minority communities.

We believe these kinds of reskilling and upskilling partnerships between higher education, business and government are both scalable and sustainable across urban and rural communities. They also represent the kind of smart policy solutions we need to get millions of Americans back to work. So we look forward to working with governors as well as the new Congress and Biden administration on a bipartisan basis to support expansion of funding for these and other higher education initiatives.

As we kick off the second month of 2021, I'm both realistic about the difficulties we all continue to face as a result of the ongoing threats posted by COVID, but at the same time, deeply optimistic about the positive impact 2U can have on the lives of people who choose education as a step forward on their path to a better future.

With that, over to our fine CFO, Paul Lalljie.

Thanks, Chip, and good afternoon, everyone. As you've seen from our press release, we reported a solid fourth quarter, capping off a record year of revenue and a return to positive EBITDA, all while investing for sustainable growth. Today, I'd like to start with a discussion of our performance, both for the quarter and the year. Then I'll provide an update on our balance sheet and conclude with our outlook for 2021.

Now turning to our performance for the quarter. Revenue totaled $215.3 million, up 32% from a year ago. The degree segment revenue totaled $130.5 million, growth of 21%. This increase was driven by higher student demand and improved retention rates. Revenue in the Alternative Credential segment totaled $84.8 million, growth of 54%. This includes $52.8 million from Trilogy, which grew 59%, while short course revenue grew 47%. Growth in this segment was driven by new launches and improved marketing efficiency. Revenue for the year totaled $774.5 million, an increase of 35% or $200 million over 2019. On an organic basis, this represents growth of 21%.

Last year, we refined our processes and delivered new offerings along the Career Curriculum Continuum, and invested in our platform to meet changing needs of learners. It's these structural changes that position us to deliver sustainable growth in the future. To put this into perspective, for 2020, we enrolled approximately 99,000 new students on behalf of our partners, representing growth of 45%. While this contributed to our 2020 performance, these new students will also drive revenue in the future as enrolled students complete their programs.

In the degree segment, for example, students typically take more than 2 years to graduate. Total full course equivalent enrollment, or FCEs came in at 80,650. FCE growth accelerated due to strong performance in our mature graduate programs, in undergraduate and in our reskilling and upskilling courses.

Now let's take a look at our costs and expenses. Operating expense for the quarter totaled $245.3 million, a 20% increase from the fourth quarter of last year and compares to revenue growth of 32%. On a sequential basis, operating expenses for the quarter decreased 1 percentage point due to seasonally lower spend. In particular, we tend to reduce marketing spend during the holiday season when it's less efficient. This drove an 8% sequential decline in marketing and sales. On a year-over-year basis, marketing and sales expense grew 13%, showing substantial leverage relative to revenue growth. For the full year, operating expense was $953.5 million, growth of 16% versus 2019. Marketing and sales as a percent of revenue decreased 9 points in 2020. While there are a number of puts and takes, overall, this demonstrates scaling marketing infrastructure and more efficient direct marketing spend.

Net loss for the quarter totaled $37.7 million compared to $44.6 million in the prior year, driven by revenue growth and lower interest expense. Adjusted EBITDA totaled $18.8 million, an increase of $13.8 million from the fourth quarter of 2019. On a full year basis, adjusted EBITDA totaled $16.1 million. One of our main goals in 2020 was to reach EBITDA profitability. We exceeded it significantly, and we are confident that the strong revenue growth and the scaling of our infrastructure will support margin expansion going forward.

Degree segment profitability margin was 10% for the year, a 9-point improvement over 2019, driven by strength in mature programs and marketing efficiency. The segment profitability margin for the Alternative Credential segment improved 7 points from last year to negative 12%, as we integrated Trilogy and invested in the launch of new market relevant offerings.

Now for a discussion of the balance sheet. We ended the quarter with cash balance of $518.9 million, an increase of $19.3 million from the September quarter. This increase was driven by operating cash flow of $36.5 million, adjusted EBITDA and the typical seasonal benefit in net working capital. These benefits were partially offset by $17 million in capital expenditures.

Unlevered free cash flow usage on a 12-month basis was $3.7 million, a $6.2 million improvement from the third quarter. Improving cash flow is a top priority for 2020, and we made significant progress throughout the year with a $76.5 million improvement compared to 2019. The increase in cash flow was driven primarily by a $40 million improvement in adjusted EBITDA, the network, the management of net working capital and a $9 million decrease in capital expenditures. We expect continued improvement in cash flow in 2021, but it's worth noting that this is not expected to be a straight line. For example, in this first quarter, we should see the typical seasonal increase in expense and net working capital.

Accounts receivable is $46.7 million at the end of the year, up $13 million from last year. Of note, 90% of the account -- accounts receivable balance is current. This increase in accounts receivable was offset by $43.4 million in accounts payable and accrued expenses and a $26.7 million increase in deferred revenue. At the end of the fourth quarter, we had outstanding long-term debt of $273.2 million, principally related to our convertible notes of April 2020.

Now for some thoughts on our 2021 guidance. Over the past 3 quarters, we have repeatedly discussed the strong demand we've been seeing. We are continuing to see this trend across our university partners, our students and our enterprise clients. As you've seen in the past few quarters, our degree segment slowly builds up momentum, driven by stability in our older programs and growth in our newer launches, particularly in undergraduate. We also have good visibility in the degree segment because when a student signs up program, they typically stay in the program for more than 2 years.

Our short course and boot camp offerings have a much faster pickup. And their rate of growth comes from new and relevant content as well as the growing need for shorter duration, reskilling and upskilling opportunities. We believe that our good near-term visibility for these offerings and the fact that we will continue to launch market relevant offerings give us confidence in our ability to drive sustainable revenue growth.

We expect the progress we made in 2020 to be sustainable, and we will continue to operate the business on a portfolio basis, making our investment decisions to balance growth, margins and ROIC. We expect revenue for 2021 to range from $910 million to $945 million, growth of 20% at the midpoint. As you have seen, we reported very strong revenue for the second half of 2020. And for anyone who does the math, the year-over-year revenue comparisons will show more substantial growth in the first half of 2021 than in the second.

Adjusted EBITDA is expected to range from $45 million to $65 million, a margin of 6% at the midpoint of adjusted EBITDA and revenue. In addition, we expect capital expenditures to be approximately $85 million, and weighted average shares outstanding to be about 76 million shares.

Before moving to the conclusion, I wanted to give one last piece of context on [2021] with the goal of providing shareholders with timely and informative communications about our business. We're no longer providing cohort margins, our top programs by new enrollment. Those metrics are no longer as representative of the business as they once were. As you know, our business has changed substantially since we first provided these metrics.

Today, our Alternative Credential segment accounts for more than 1/3 of our revenue, and we operate the business to optimize the entire portfolio of offerings. We generated positive consolidated adjusted EBITDA in 2020 and expect that to continue. The degree segment generated double-digit EBITDA margins in 2020, and we expect that, too, to continue. We also continue to make progress towards positive unlevered free cash flow.

To give you some examples of how much the business has changed, today, we have over 500 domestic and international programs, including graduate, undergraduate and alternative credentials offering. We even have our -- we even have short courses that are larger than what we used to call a DGP, and we expect the LSE on the graduate program launched in 2020 to become our largest program as measured by enrollment in 2021. The bottom line is our EBITDA and free cash flow progress demonstrates our ability to sign and scale new programs successfully.

In conclusion, our financial performance continues to be strong. We exited 2020 with strong momentum, revenue growing over 20%, while adjusted EBITDA and free cash flow improved significantly. This momentum is reflected in our guidance. And with our improved liquidity position, we have the financial flexibility to continue to make attractive investments in sustainable profitable growth.

With that, I'd like to turn the call over to the operator for the question-and-answer session. Operator?

(Operator Instructions) And our first question comes from Jeff Meuler with Baird.

Just as one of the old timers as you're changing your methodology, I wanted to ask about the cohort margin change. Just obviously, not overly concerning with your 2021 profitability guidance being what it is. But just curious, are the scaled program margins roughly stable? Like how much of the improvement is being driven by fewer launches that are in the first 2 to 3 years? Just any perspective on that?

Jeff, this is Paul here. Let me probably start out with this one here. Look, I think we manage the business very differently. When we think of investments, whether it is marketing spend or anything like that, we spend across the portfolio. And we are guided by objective data on things like ROIC, things like the efficiency of that spend.

Given that type of management methodology, managing the portfolio on a portfolio basis, it therefore meant that looking at cohort margin defeats that overall comprehensive purpose. At the same time, the cohort margin was very, very applicable when we were focused on launching programs that would then get to certain margin profile later, so we are somewhat substantiating the margin profile of the consolidated business and the segment at that point in time. Today, we have great margins. As you've seen, we've improved. I would say more than 600 basis points on a year-over-year basis based on what we're trying to project here from $16.1 million to a midpoint of $55 million in 2021. And at the same time, the brand -- the degree segment business is delivering 10-plus double-digit margins for 2020, and we expect that to continue.

So what does this all mean? If we look at the actual numbers for 2020, we would see that the most recent cohort performed much better than in past years. And that has 2 contributing factors: number one, we launched a lower number of programs; but number two, we found cheaper, better ways of launching programs. And we've talked about that all year with things like Studio in a Box and all the various other ways we found of launching programs cheaper.

If we look at the next cohort, that is about 300 basis points better than we were expecting or that we had seen in the past. And I think the one that you're really interested is in the mature cohort. And in that cohort, the margins there are better than our long-term targets that we provided at Analyst Day last year. So essentially, we can provide the color in the context that says, the cohort margin analysis is well for the numbers that we have for 2020. Where we believe it is not relevant is to focus on that as an indicator of health. What we want to do is focus on the overall and consolidated adjusted EBITDA margin, the cash flow profile of the business, and on the overall trajectory of the top line growth.

And Jeff...

Chip, I don't know if there's anything you would add to that.

Jeff, as a fellow old timer, I wanted to give them. They look good. And I guess I would say, but Paul's right. Like we've completely transformed the business in the last 3 years. And they aren't helpful to investors in understanding the business, and you need to judge us on the whole.

Fair enough. And the whole looks good. The -- just any more commentary on the degree segment revenue per FCE. I'm guessing it's mix-driven and maybe LSE ramping is having an outsized impact if that's expected to be your largest program by enrollment. But any additional comment on revenue per FCE? And particularly curious how you view the profitability potential of some of the lower cost programs.

So Jeff, again, I'll probably kick it off and Chip will chime in. But if we think of the growth in FCE in the Grad segment, the main contributor to that growth is the on the graduate, both the LSE program and Simmons. When we think of the long-term profile of undergraduate, we view it in the same ROIC benchmark that we use for the graduate program. We believe we can get to the same types of steady state margin. And as you know very well, marketing spend is a key component of the ROIC analysis and the overall profile of these programs.

When we think of marketing spend for undergraduate, there are a couple of things that factor into it. I mean the duration matters, right? You acquire a student, they stay in for a longer period of time than it is for a graduate program. And then, of course, the cost of those 2 programs are also different. And then the third factor is that we manage the programs and the way we launch the programs. We've obviously found ways to do this cheaper, better, faster, and those are things that we will -- those are continuous improvement that we will go through.

Yes. And Jeff, what I would add is we really like what we see so far. The Morehouse program, we announced it a week ago, haven't even started paid marketing, and it has the fastest start of interest that we've really ever seen as a company. So we are tapping into a fundamental shift. There's no doubt that what you see here is -- when you think about where online education will go, no one says today, "Oh, I'm going online shopping." They're just going shopping, and that's one of the ways they do it.

And it's clear that over time, this digital transformation imperative is going to be very real. And we feel like we're the market leader right now entering the largest segment, we really like what we see. And as Paul mentioned in his prepared remarks, LSE will be our largest program by enrollment this calendar year. So very, very pleased with our undergrad right now and like the opportunity ahead for the company.

And our next question comes from Stephen Sheldon with William Blair.

First, congrats on the undergrad announcement with Morehouse. It sounds like you could expect more undergraduate announcement. So curious how those conversations are going with university. And what factors or outcomes they're thinking about when making these decisions? Are they thinking about...

(inaudible)

Gaining. Someone might be...

We have somebody -- somebody might not be muting. So Sheldon, appreciate the question. This is Chip. I would say, go ahead. Did you...

Yes. Yes. I mean, I'm just kind of curious, as they think about expanding, what they're really thinking about. Is it gaining enrollment share, driving higher quality offerings, increasing scale and then using that to potentially drive down the tuition cost? And then from 2U's perspective, would consider this one of the bigger growth drivers, potentially, over the next few years?

Yes. I mean, it is a must have. This is a place where we've definitely seen a change post-COVID. You have institutions transform themselves. They need to transform themselves. And we are a partner of choice to over 75 great nonprofit universities doing really high-quality work. And I have been surprised that the number of undergrad conversations that we are now in. And we're being careful to make sure that we align the long-term goals of the company, setting up really good -- a really good lineup of program opportunities for the next couple of years.

Morehouse, David Thomas is transforming the college. And if you look at the opportunity ahead for Morehouse and for 2U behind it, we think that's a pretty critical program for the world, both for black men, for men of color. You heard me say that 3 million black men have some college credit. And unfortunately, many of those have college credit and some debt associated with it and haven't completed. And we think we can really move the dial and we think it's an important program, not just for the business opportunity, but more importantly, for those individuals. And Morehouse has just an incredible track record. I mean, it's 154 years, and Dr. Martin Luther King went to Morehouse, and the quality is there. So we're just very proud of that relationship.

And I will tell you, I was really pretty overwhelmed by the response, the first week both from potential prospects who were giving our counselors just incredible stories of what Morehouse means to them. And for our employees, this was a -- this might have been the most important announcement we've ever had. I don't know if that's an overstatement. So our employees, the response was so high that we ask for volunteers across the organization to work over the weekend unexpected, and we had something on the order of 65 counselors volunteer to be able to reach out to the prospects immediately given the response, and spent the entire past weekend just getting through the initial queue of folks that were interested. So really strong. And you will continue to hear more about undergrad.

I will tell you, 2U, it did take us a long time to launch our first degree program in the marketplace, but we did have a groundbreaking program a long time ago called Semester Online, that I really do think set the stage for high-quality online undergrad operations. And our approach to grad education was an incredibly high-touch, high completion rate, has set us up well for a really great run here with the exception of additional mental health components for undergrad students. We feel like we're really well set up as the market leader to do something big here. So pretty excited about it.

That's great, and I really appreciate the detail. Maybe as a follow-up here for Paul, clearly, it seems like you're starting to see some of the positive margin characteristics in the model show through both in the quarter and in your guidance. So curious if you could maybe talk -- and you guys -- you talked about it a little bit before, but just more qualitatively about some of the moving pieces within the guidance, in particular, between the maturing degree program, some of the efficiency initiatives over the last year, including things like Studio in a Box and on the marketing side.

And then if there's a way to roughly frame the program launch investments you've assumed in 2021 relative to prior years. So just -- I guess, just qualitatively, what -- as you think about those 3 factors in the guidance.

Yes. No, so a couple of things. When we think of the mature program, that is about how can we expand our marketing dollars efficiently, whether it's direct marketing or organic marketing. One of the things that we've been doing is developing our organic marketing engine, and that has been helping us in becoming more efficient on an overall basis.

When it comes to the way we serve the students, our student-facing organization, I think you recall last year and continuing -- 2019 and continuing into 2020. We started by, first of all, making sure we are organized appropriately so that we can efficiently serve the students. We call it delighting the students every step of the way. And I think we're beginning to see some of the benefits of that.

And then when it comes to launching new programs, which is where Studio in a Box falls in, and then some of the things that we're doing in our learning and development team, we're finding ways to do these things in a more [efficient] manner. And all of that has led to the overall schematic of managing the business with overall revenue and overall EBITDA margin, which makes launch cadence, total number of programs launched less relevant because we are going to commit to our EBITDA target.

To say this in a very less than sophisticated way, the objective of ours is to ensure that we can launch the cost -- the dollars that is used to cost us to launch 1 program, we're going to try to see if we can launch 1 1/2 or 2 programs or 1 3/4 programs for that same dollar amount. And in that way, we developed muscle memory and scaling that then by the time we get to 2022, I mean, we are -- we have an engine that is just delivering more and more efficient scale in the business. So that is the overall framework around which we're looking at this.

And our next question comes from Ryan MacDonald with Needham.

Congrats on an excellent quarter and year. As we look at the undergrad market opportunity, and -- can you talk about a bit about what we should think about for the launch cadence in terms of time -- lead time needed to go from sort of announcement to first students enrolled? With LSE, it was your first sort of foray into the space, and you took a bit more time to get that going. But then with Simmons, it was sort of wrap the fire, getting things ready quickly for an unusual fall. How should we think about as we think about the undergrad opportunity sort of unfolding into '21 and '22? How that launch cadence looks?

Ryan, this is Chip. We've gotten away from thinking about cadence. It's a vestige of the past from a standpoint in the same way that DGP was. And the reason for that is we are trying and succeeding in getting better and faster at improving our launches. And I think you can see that in the case of an expectation of Morehouse to actually serve students this calendar year, even though we just announced it. That has been a key focus of Mark Chernis, our Chief Operating Officer and a broader team of folks, including Ebony Lee, who runs our degree business. That's a key focus. And the reason is, if we can keep driving higher quality programs and get them rolling faster, that's better for our schools, better for our students.

So -- and the thing about the undergrad is it is an exciting opportunity. You will see more. And -- but right now, like LSE, it went well enough that LSE, took it from 1 data science-based degree to every degree that LSE has in its portfolio, including an undergraduate program in Economics from the London School of Economics at a price point that is affordable for the world. And we're seeing demand from that. So it's less about cadence and more about fitting them into a broader portfolio of activity that drives the kind of results that the company needs to see on a consolidated basis.

And one other data point for you is we are getting to a scale. We just passed 300,000 students across our programs. Those are actual students and passed 14 million total sign-ups over our history, and we are thinking across program -- across product set, across the Career Curriculum Continuum more and more as a company. So just pretty excited about where the company sits today. I do think we've done some really hard work to transform the business over the last 3 years, and we're seeing the fruits of that.

Excellent. And when we think about with the existing grad programs, sort of on the platform already. Obviously, we saw some really healthy enrollments in the fall. But can you talk about what you're starting to see as we get into the spring here in terms of application growth and enrollment growth for some of the spring '21 cohorts? Is there still a knockout effect, I guess, from the sort of increased shift online that we've seen over the last year?

Yes. No, so I want to say, we believe that, clearly, online is now part of people's consideration set in a way that wasn't -- that was not before for everybody in the world in every way, and so that will benefit us on some level. And it's clear that the economic impact of COVID continues to emphasize people's need to reskill and upskill themselves across all 3 of our product sets. We do think we've provided some strong guidance for next year -- for this year, 20% at the midpoint. And when you're approaching $1 billion in revenue, that's no small number.

So we feel like the Grad segment will continue to drive really positive results for us go forward. And we're seeing that in some of our oldest programs. We're seeing that in some of the newer programs like the undergrad programs and excited to see pipeline just continue to be super strong. So there is an acceleration of adoption, but we anticipate that this will continue throughout the calendar year and as we get into '22.

And our next question comes from Brett Knoblauch with Berenberg Capital.

Congrats on a great quarter. Maybe the first one for Chip. You mentioned you were seeing better retention across your offerings. Can you maybe go into a bit more detail on that?

So we've got a student engagement team that we actually, over the last 2 years, one of the things we did sort of inside the house is we aligned teams in a more -- in a way that's had a huge impact on our performance and working with the students directly under Brad Adams' leadership, we have seen an improvement in retention. It's kind of the one number that rules them all. When it goes up, it's really most importantly good for the world. It's good for the students who graduate. It's good for society. And it's good for 2U because it obviously drives the revenue that we see through our systems.

So if we look at second semester retention for degrees, it's up about a full point, which is a really meaningful number for us. So credit to our team. And they did all this during the time of personal strain with regard to COVID. As we all know, COVID has been hard on the world. And so to see us improve these drivers during this kind of time, makes me incredibly proud.

Got you. And then maybe one for Paul, on the margin profile, the segment margin. If you're implying -- I guess the early segment margin was 10% for the year, that's kind of implying Q4 segment margin there was north of 20%. Should we expect kind of a year-over-year improvement there every quarter in 2021?

So a couple of things. I mean Q4 was indeed greater than 20%. It was about 22%. But keep in mind that there's a huge seasonal impact, right? Marketing spend is generally not that efficient in the holiday season. So we generally cut back in the marketing spend, particularly in the holiday season. So that has a seasonal impact. I think what you can expect is that you should see sequential increase, including seasonal impact.

So if you look at the trends that we had in 2020, 5.5%, close to 5% in the second quarter, and then I think it was 8% in the third quarter. You should generally see some uplift meant on a sequential basis if you look at that trending from 2020 into 2021. What you're not going to see is sequential trend off of 22%.

Yes. I wasn't implying that. And then maybe if I could just add one more. You talked about the ability to absolutely (inaudible) more quickly than you could before. To what extent is that a function of the overall macro environment? Obviously, education is a big countercyclical. So more people are going back to get their degree. Does that factor in? And how quickly you can announce and launch a program?

No, we're really not talking about macro there, Brett. We're talking about us. We -- over a long time period of growing the company, we have focused now, over the last 2 years, on driving efficiency. We have absolutely gotten more efficient. We are seeing the benefits of scale.

I think one of the reasons we emphasize some of the scale points in the prepared remarks is people -- because our brand is behind the scenes, you don't see people with the awareness of the scale of 2U today. And we are definitely seeing the benefits of that, so we're just getting more efficient. We're getting better at launching these programs at what I believe is a higher quality level. So this is not about doing them in a way that's lower quality, it's about doing something that is equal or higher quality.

So an example of that, we debuted something across the programs that have clinical placements called the VFX, that is a Virtual Field eXperience for students that can actually engage virtually before they go into a clinical setting to do their first session with an actual patient like in a clinical setting, in a social work program. And by doing this virtually, number one, you're driving improvements in efficiency for the company. You're driving innovation into the industry and it's -- and the students better because they get to work with actors in a program before they go out and deal with somebody who returned from the war with PTSD. You're talking about like good for the world, good for efficiency and just better for the student experience.

So it's that kind of innovation that can help us drive programs up more quickly at, we think, a higher quality level. And that has been a key focus over the last 2 years.

And our next question comes from Josh Baer with Morgan Stanley.

Congrats on the great quarter. You've been talking about the ability to say yes to more business, and that, that may look like a bit of a different business model versus history. I'm just wondering how did that type of business contribute to the outperformance this quarter.

Josh, one of the -- that phrase was coined probably, I think it was second quarter earnings announcement. And that was on the heels of the Simmons announcement by way of example. I mean, I think if you look at our quarterly results for the fourth quarter here and the full year, that was a contributor in the fourth quarter.

So I think that is more a statement that speaks to the structure and the form of what we do. It is the hybrid model that was applied to the Simmons program. And at the same time, we are keeping in mind we're using as our North Star, our long-term margin profile and our revenue growth when we make these decisions. These decisions are not being made to fill a launch cadence number or it's not being made to do things for a particular short-term nature. It is more -- it is larger in nature.

Yes. One thing I would add, Josh, is that in terms of the way we think about the business, it's serving these partners and their students as effectively as possible. Saying yes to them means having more opportunities to say yes, having more deployments at an existing partner, whether that be deepening the relationship with alternative credentials. We have many partners now that offer all 3 distinct products across the board. We have many partners that have stepped up from one type of product like a degree program to alt cred, either a boot camp or short courses. And then in some cases, like Simmons or other cases across our grad portfolio, we're deepening the relationship by offering services to their campus students in a meaningful way.

One thing important to note, we don't really think broader deployment in terms of our solution going to all of higher eds. It's not the way our business works, and it's also not something today that we are focused on trying to drive improvements in the existing business in a meaningful way. And I think you're seeing some of the fruits of that.

So Simmons is a fantastic relationship and one that did contribute and one that we expect to continue to grow over time. And I think you'll see more things like that Simmons relationship.

That's great. And then on -- like thinking about comments like the newest cohort has better margins than in prior years or trying to be able to launch more products for the -- with the same dollar. Is that kind of suggesting a different shape to the J-curve, like a different longer-term economics in those type of partnerships?

Yes. One interesting thing is we call it internally our J-curve projects. So we are absolutely focused on trying to change the J-curve. Different products do have different capital requirements. One of the things that has really improved the overall business is that we have flexibility to launch programs that create -- that really answer a societal need. You take our diversity short course with Northwestern from Alvin Tillery, who's a nationally respected expert, it's done extremely well. It's being bought pretty heavily by the enterprise unit. And that is a very different J-curve than building a new nursing program with a university or building a new physical therapy program with the university.

So we're seeing the improvements come in the J-curve. And it's a pretty critical step forward for the company to be able to drive to free cash flow, and we are making real progress on that, and we do still expect to see that cross over this calendar year.

And our next question comes from Brent Thill with Jefferies.

Chip, you have many great growth engines. If you had to prioritize 2 main commitments for '21 that you'd like to achieve, how would you articulate those 2 priorities from where you said?

Well, we are -- we like the balanced portfolio. We think operating across the Career Curriculum Continuum is really important. And one of the reasons Paul emphasized that 1/3 of our revenue now comes from Alt Cred, we're the largest provider of nonprofit alternative credentials in the country. That segment is larger than any of the MOOC providers as an example. So we do think that, that's a really important priority for the company. Undergrad is new, and we're being careful about how many we slot in, and keeping our Grad business rolling and seeing positive enrollments from older programs is important.

So it's -- it has been, Brent, a transformation of the company over the last, let's say, 3 years. 2U looks fundamentally different than it did at our IPO. And certainly, even than it did when we first acquired GetSmarter, which, candidly, has been a home run, honestly. It's -- we saw where the market was going. We saw where EdTech was going. And really are seeing the benefits of that today. There's no question in that we transformed the business to stay ahead of market demand, and now we're positioned in a multitrillion dollar market to drive the future of higher ed. I don't think that's an overstatement.

And our next question comes from Tom Singlehurst with Citi.

Guys, I'm Tom here from Citi. He voiced in congrats on the quarter. The -- I had a couple of questions. The first one actually on LSE and international. I mean, obviously, LSE has been a fantastic success. I mean you can see that in the expansion of the mandate. I think the question is, it's obviously a big opportunity in undergraduate, but does it signal a bigger opportunity in international as well? I know you've got that footprint, but is that going to see as much emphasis going forward? That was the first question.

I think both Bocconi and IMD should tell you something. We do think that you're talking about, as you know, 2 of the best brands in Europe. LSE is certainly one of the best brands in the U.K., and we do think that this is a worldwide story. We also are excited about a growth engine that we think we found to localize short courses into different languages. And we think that, that provides a significantly lower CapEx way of achieving growth in the short course business and are excited about that. So Tom, you will hear more and more about international opportunities over time.

That's very exciting. And then the second question is obviously, so EdTech, just more broadly, in education, is an area that's just getting more and more focus in terms of investor interest and capital flowing into the space, professional learning, perhaps especially so. I suppose the question is, I mean, should we worry about more competition if there are sort of more better capitalized companies out there sort of aiming for the same market? Or do you see that as just an indication and a validation of what you're doing?

Honestly, what's interesting is, over the last several years, we haven't seen a significant increase in the number of competitors, and we've seen certainly some in OPM go the other direction. And I would say we welcome people coming into the space. We think it's really good for the EdTech market. It's certainly lonely out here in these -- in the public EdTech hills. And we do think that what's unusual is for the percent of GDP that goes to education, it is very strange that they are this small number of large companies that are public. So we think it's good. We think it's good for the valuation of 2U. We think it's good for the market overall.

And I do think we're at a scale that we don't think anybody is quite close to in the nonprofit university world and welcome people coming in. We think that our scale will allow us to compete really successfully, and I think we're seeing that in our marketing efficiency. We're seeing it in demand in the pipeline. But our leadership position is one of -- excited to see more and more people come into the space. And as they do, they'll have to prove quality. They'll have to prove scale, and we welcome the opportunity to continue to prove ourselves.

Our next question comes from Arvind Ramnani with Piper Sandler.

Congrats on a really good quarter. Yes, I had a broader level question. And I wanted to ask you about your priorities as you think over the next 2, 3 years. You certainly had some surprises in 2019, and 2020 was very unique across many, many different vectors. But now with the business foundation at a really good place, can you give us some color about how you're thinking about the business over the next 2, 3 years?

Yes. Thanks, Arv. So I would say we have come out of -- I do think we came out of the fire of 2019 molded like Valyrian steel. So forgive the Game of Thrones reference, but we feel that the company is in a much stronger position today than it was back in 2019. And in terms of the priorities for the company, there's no question that financially, driving to a balanced point of view on the rule of 40, driving to free cash flow is critical. We said that a couple of years ago.

To be clear, over the last, let's say, 1.5 years, let's say, 6 quarters, everything we said we told you we were going to do, we've done and we continue to expect to be able to achieve that. And at the same time, helping our university drive high-quality options for students across their careers and lifetimes, meeting the learner where the learner is and driving really high-quality student outcomes while doing that because at the end of the day, that's really all that matters in our business. If the student wins, the university wins, then 2U wins. And that is really important. It's pithy, but it's important. It is the real story behind the way we run the business.

So I do think that the upscaling opportunity is significant, and I think you're seeing that in our results today. You're seeing that in our short course business, and of course, our legacy degree business with undergrad as a growth lever. You just need to be able to meet the student where the student is and drive high-quality options for working adults. And I think we are really well positioned to do that.

Great. Great. And you have been pretty thoughtful about how you're growing and sort of who you partner with and all of that. But as we kind of look at I guess, the next couple of years, are there any gearing factors that prevent you from growing faster? Sort of investments that need to be made either from a technology side or from a sales, marketing side? Like what's going to prevent you from even faster growth over the next couple of years?

Arv, we want to grow smart, not just fast, and that's been a key focus for the company over the last 3 years. And I think, as I've said a couple of times on this call, we're starting to see the benefits of it. We've continued to invest in each part of the 2UOS operating system that we provide to our schools to power this experience. That certainly includes marketing. It includes everything from privacy to accessibility to core technology under the leadership of our CTO, James Kenigsberg.

So this is about a balanced agenda of ensuring that we're creating a long term sustainable engine of social mobility. That is what the story is about. So we're excited to continue to prove it in the marketplace. I do think we have made some real headway here in terms of showing the sustainability of this business.

And I would now like to turn the conference back over to Mr. Chip Paucek for closing remarks.

Okay. Thank you, everyone, for joining us today. Before I go, I would like to offer birthday wishes to a few folks. First of all, to my Alma Mater, George Washington University for their 200th birthday. And then to our Chief Operating Officer, Mark Chernis, and to our CFO, Paul Lalljie, one turned greater than 50. And one turned -- hasn't quite made it to 50, and I will let you have fun guessing who that is. Thanks, everybody. We will see you out on the road.

And that does conclude today's call. Thank you for your participation. You may now disconnect.