2U Inc (TWOU) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the 2U, Inc. First Quarter 2022 Earnings Call. (Operator Instructions)

I would now like to hand the conference over to your host, Lillian Brownstein, Deputy General Counsel. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome 2U's First Quarter 2022 Earnings Conference Call. On the call this afternoon are 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 the simultaneous webcast of the call. A webcast replay of the call will be made available for the next 90 days.

Statements made on this call may include forward-looking statements regarding our financial and operating results, the continued the impact of the COVID-19 pandemic, plans and objectives of management for future operations, the integration of edX, student and university demands 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 to the risk factors described in documents we filed with the SEC, including our annual report on Form 10-K for the year ended December 31, 2021, for information on risks, uncertainties and assumptions that may cause our 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 of comparable GAAP results, in our earnings press release and on the Investor Relations page of our website.

With that, let me hand the call over to Chip.

Thank you, Lillian. Welcome, everyone, to our first quarter 2022 earnings call. Let's get straight to the results for the quarter and our guide. We had a strong first quarter as we expected. We delivered $253.3 million in revenue, a 9% year-over-year increase over Q1 2021, and adjusted EBITDA totaled $12.3 million.

Our guidance, which Paul will talk about in more detail later on the call, we're keeping our 2022 revenue guide in line with what we said in February. And we're increasing our adjusted EBITDA guidance, which is now expected to range from $80 million to $90 million. This represents growth of 28% at the midpoint and a $5 million increase to our previous guide. So overall, we're pleased with our Q1 results and how things are shaping up for the rest of the year.

To be clear, the macro environment continues to remain complicated due to the ongoing impact of COVID, the strong labor market and some overall softness in education traffic and demand. People are also returning to normal life, and that has some impact. But I'm pleased to say we're holding our own nicely, all while we continue to transform 2U to a platform company. We believe our free-to-degree product portfolio with edX as our consumer brand is just what the market needs.

Higher education, like some of the industries, is becoming consumer-centric, a dynamic only accelerated by COVID. And we believe that the company to best understand this learner-centricship and can offer students the education and skills they want, when they need it throughout their working lives will win.

We've been working on integrating edX since we closed in November, and I wanted to take a moment to give you some details. EdX is now the most comprehensive free-to-degree marketplace of educational offerings worldwide. If you go to edX.org today, not only will you see thousands of open courses, you'll now find an unmatched portfolio of all 2U's offerings across degrees, boot camps and executive education available to learners everywhere in the world. It's pretty incredible in the first time in 2U's history where all of our program offerings can be found in one place.

We're off to a great start on edX, but we have much more to do. We see 6 keys to unlocking the full potential of edX.org and cementing it as the preferred destination of choice for learners across the globe. Those 6 are: number one, traffic; number two, SEO and content publishing; number three, portfolio marketing versus single product marketing; number four, product evolution with stackable credentials; number five, white label opportunities and revenue model flexibility; and number six, new international channels and enterprise expansion.

We're making some good progress across all of these dimensions and I'll hit on some with a few comments. We grew learners this quarter to 44 million, primarily with greater SEO efforts. Right out of the gate, post close, SEO and content publishing have been a core focus of our team. It's going unbelievably well, and we're already seeing it bear some pretty compelling fruit. For example, if you type executive education into Google, you should see edX as the top organic search result for that term, often in the top 5. Go ahead and try it.

You can do the same for online boot camps and online masters degrees. Although these offerings have been on edX.org for only a few months, they already rank on Page 1 of Google's organic search returns and, in many cases, in the top 5. This is a big deal. It means not just monetizing the existing traffic, but creating better and better lead flow every day. Organic traction on Google is the key driver of our business.

You'll see us actively continue to publish new content on a disciplined basis, a career basis and a learning opportunity basis, all of which should continue to significantly improve organic search results across a variety of categories. It's early that these SEO efforts are already creating some really great traction for 2U's products and partners.

We're seeing run rate of 500,000 leads per year coming to the 2U prospect forms on edX in 2022. This represents nearly 10% of our lead volumes company-wide with no additional marketing costs involved. And better, we expect to be able to triple this amount over the next 18 months. The reality is the tiny fraction of the edX traffic are even seen between the products. We have much, much wood to chop.

University of London and LSE Undergrad are an example of a 2U degree benefiting from this new lead flow. LSE Undergrad is a global brand, a high-quality experience and a very affordable degree, roughly $26,000. Learners are coming from all over the globe. We're seeing significant traction from edX.

Over Q1 alone, edX already represents 20% of our lead volume and our largest non-pay channel for this degree. And those leads are submitting applications at a 30-plus percent better rate than leads from our paid channels. That is huge. The implications for this across our business is significant, particularly as we create more affordable pathways for people and improve our product stick with edX.

On new products and stackable credentials, this takes time, but we're also making considerable progress. We love the MicroMasters and MicroBachelors programs. We have 30-plus MicroMasters in negotiation with our university partner base. These will create quality, career-focused options for our learners, saving them tuition dollars in the process. Each MicroMasters offers 9 to 12 credits for free to the learner, stacking into the full masters program if the learner wants to move ahead with their study.

And before I turn it over to Paul, I want to add a quick comment on both the enterprise channel and our university pipeline and partners. The enterprise channel continues to grow quickly. We saw almost 70% growth in revenue from enterprise in Q1 compared to the previous quarter. We've integrated all activity under the edX For Business brand. And we're seeing a lot of interest and traction in the market because of the breadth and diversity of edX's offerings.

On the university side, we continue to see growing demand from new and existing clients. We're on a bit of a roll now. I'm happy to announce our newest degree with the University of North Carolina at Chapel Hill. UNC is launching a new school of data science and a new degree program, a masters in data science. This will launch in 2023. We love this opportunity with one of our flagship clients. Overall, partners are excited about the opportunity that edX brings to the table as a digital transformation partner and a platform for serving adult learners worldwide.

As a testament to the central role great universities play in the 2U vision, we're excited to announce the launch of 2U's first university Leadership Council. The council comprises 15 Presidents and Provosts from our partners who will help guide us in our mission to unlock human potential through high-quality affordable online higher education. Members include Alan Garber, Provost to Harvard University; Cynthia Barnhart, Provost of MIT; and Wayne Frederick, President of Howard University; among other incredible leaders. The full council be viewed at edX.org. Take time to check it out.

Now I'll turn it over to Paul to get into the financials.

Thank you, Chip, and good afternoon, everyone. We reported solid top line performance with strong adjusted EBITDA and cash flow performance, which is particularly noteworthy considering the first quarter is typically a higher expense quarter and the quarter with the highest use of cash. And we did this while diligently prioritizing executing -- the execution and integration of edX.

Revenue grew 9% to $253.2 million over the first quarter of 2021. We saw growth across the portfolio. Degree Program segment grew 6%, and the Alternative Credential segment grew 15%, all on a year-over-year basis, while edX contributed $10.9 million. Expense for the quarter totaled $364.7 million, including $18.3 million of operating expense from edX and $58.8 million of noncash impairment charges related to certain of our acquired intangibles and goodwill assets. Adjusted EBITDA for the quarter totaled $12.3 million, a margin of 5%, while free cash flow used on a trailing 12-month basis came in at $34.1 million.

In summary, we reported solid top line performance in a difficult marketing environment and exceeded our expectations on adjusted EBITDA and cash flows. After a discussion of results for the quarter, I will provide an update on the balance sheet and cash flow statement and then conclude with some thoughts on our financial outlook for 2022.

Taking a closer look at our results. Revenue for the quarter totaled $253.3 million, up 9% from a year ago, driven by a 5% increase in full course equivalent enrollments, or FCE, which came in at 85,000 for the quarter. FCEs increased 6% on a sequential basis.

In the Degree Program segment, revenue in the first quarter totaled $154.2 million, growth of 6% from the first quarter of 2021. This increase was driven by higher student enrollment, a 4% increase in FCE and a $2.7 million contribution from edX.

Revenue from the Alternative Credential segment totaled $99.1 million, growth of 15% from the first quarter of last year, driven by higher student enrollment and 8% increase in FCE. This increase includes 3% growth in revenue from our boot camps, 9% growth in exec ed revenue and an $8.2 million contribution from edX.

Now let's take a closer look on cost and expenses. Operating expense for the quarter totaled $364.7 million, up from $269.6 million in the first quarter of 2021. This increase includes $18.3 million of operating expense from edX and a $58.8 million noncash impairment charge.

Let me expand a few moments on the noncash impairment charge. Following the decline in our stock price during the first quarter, we determined that a triggering event had occurred and consequently, performed an interim impairment review, which led to a write-down of $30 million of trade name and $28.8 million write-down of goodwill. Personnel and personnel-related expense, our largest expense line item, increased $5.5 million for the quarter to $124.5 million with edX contributing $7 million.

Moving on to profitability. Net loss for the quarter totaled $125.8 million, an increase of $80.2 million from the first quarter of last year, reflecting the $58.8 million of noncash impairment charge, $6 million in higher interest expense and $18.3 million of additional operating expense from edX. Adjusted EBITDA totaled $12.3 million for the quarter.

Adjusted EBITDA margin in the Degree Program segment was 23% for the quarter, a 6 point improvement over the first quarter of 2021, showing the inherent profitability of the Degree segment business model.

Adjusted EBITDA margin in the Alternative Credential segment was a loss of 24% compared to a loss of 14% in the first quarter of 2021, driven by an $18 million impact from edX expenses.

Now for a discussion of the balance sheet and cash flow statement. We ended the quarter with cash and cash equivalents of $233.6 million, a decrease of $16.3 million from year-end 2021. Our accounts receivable balance totaled $77.9 million, up $10.6 million from the end of the previous quarter. Fluctuations in our accounts receivable balance reflects the timing of payments from our university partners, which often matches the academic calendar. Unlevered free cash flow usage on a trailing 12-month basis was $34.1 million compared to a net use of $33.9 million at the end of 2021.

Now for a discussion of guidance. Our priorities for 2022 center around unlocking value of edX, continued investment in our Degree Program segment and improve the profitability in the Alternative Credential segment. We are affirming our revenue guidance for fiscal year 2022.

We expect revenue to range from $1.05 billion to $1.09 billion, representing growth of 13% at the midpoint. We are increasing our adjusted EBITDA guidance, which is now expected to range from $80 million to $90 million, representing growth of 28% at the midpoint. In addition, we expect capital expenditures to be approximately $80 million and weighted average shares outstanding to be approximately 78 million.

Let me provide some color on our expectation for the quarterly progression of our revenue for the remainder of the year. On our last earnings call, we shared that we expect a challenging and unpredictable marketing environment. And while we have seen that, we still expect to achieve revenue growth accelerate in the second half of the year. And we expect flat to moderate -- to modest growth in the second quarter on a sequential basis.

To conclude, our first quarter results showed resilience in enrollment and revenue. And we are proud of our team for going above and beyond to deliver these results by focusing on disciplined execution, along with integrating edX.

And with that, let me hand the call back to Chip.

Thanks, Paul. Before we turn to questions, I want to spend a minute talking about the first set of Gallup results that were released last week from our recent survey of nearly 4,000 boot camp graduates. The findings are compelling and a clear reflection of the career-enhancing value our boot camps can deliver.

Gallup found that at 1 year after graduation, the median salary for all boot camp graduate surveyed was $11,000 higher than what they said they were earning while they attended the boot camp. Gallup also found that the median boot camp graduate who worked full time during and after the boot camp offset 59% of what their boot camp program cost them in the first year after graduation. We hear a lot of talk in higher education about ROI, and this is what great ROI looks like. And we're delivering this ROI at an unmatched level of scale, 48,000 boot camp graduates to date across 50-plus partners. In the coming weeks, Gallup will be releasing more data about our boot camps, including the career satisfaction of graduates and the impact of boot camps on creating equitable pathways for historically underrepresented learners to enter careers in STEM. So keep an eye out.

We know that our boot camps can deliver life-changing outcomes, which is the big reason why we're expanding our access partnerships across the United States and overseas. These are public-private collaborations with workforce agencies at the state and local level, nonprofit partners where funding is provided directly by the government or philanthropic support, which allow the boot camps to be offered at even more affordable prices and, in some cases, for free.

We currently have access partnerships up and running with the following university partners, the University of Birmingham, University of Central Florida, University of Denver, University of Kansas, University of North Carolina at Chapel Hill, University of Oregon, University of Texas at San Antonio, the University of Texas at Austin and the University of Utah, with more in the pipeline. We believe these public-private collaborations can and will be an effective and scalable way to help local communities across the country meet the growing demand for skilled tech workers, and that is a winning proposition for us all.

Now let's open it up to Q&A.

(Operator Instructions) Our first question comes from the line of Stephen Sheldon from William Blair.

First, I wanted to ask on the marketing side. Have you seen any changes in your efficiency to fill cohorts and programs across businesses? And I know a lot of education peers in the industry are talking about students pursuing work right now given where wages are. And curious if that's making it harder or costlier to fill the programs that 2U supports? Or if any headwinds there are starting to be offset by some of the positive marketing efficiencies you talked about from edX?

Stephen, so we did plan for inflation in our budget to marketing costs. That was baked into our plan, so we felt pretty ready for it. There's no question you do see some impact to the business. Labor costs are increasing, makes it more competitive to hire people. We are seeing some wage pressure. And on the marketing side, we've actually seen more stability, to be clear. So volatility has definitely gone down since Q1. So we feel like it's less volatile right now than it was in Q1.

And given that we baked increases into the budget, we're working through them. Now it's also clear that the Degree business has always been and always will be somewhat countercyclical. So you can argue that right now when you're at full employment, it's a harder time for the Degree business just conceptually. But we also took that into account, so we feel comfortable right now. With how things are going, of course, the need for reskilling and upskilling is significant. And the need for companies to continue to prepare their workforce, significant. You might have seen the Chief Learning Officer survey that showed great growth ahead for enterprise. And we mentioned in the call that we saw 70% quarter-on-quarter. So ultimately, we feel that we're -- that we've got it pretty well covered.

Got it. That's helpful. And then I did want to ask about the enterprise traction. Just great -- that was great to see -- great to get some more detail on what's driving that between what you got from edX, the assets you already had and the benefit of the Guild partnership. I guess what are you seeing across those different channels of engagement with enterprise customers?

Really strong demand for boot camps in particular. There's no question that technology training is a huge part of this. And so we're seeing strong demand for boot camps across our own enterprise activity and our deal partnership. Executive Ed is -- we do think the enterprise channel is critical to that product line in particular. And so pretty major uptake from a whole bunch of different clients. We decided to not get into listing clients or listing wins into the earnings call just simply for competitive reasons.

But 70% quarter-on-quarter sequential, nontrivial. So we're obviously a lot bigger than most people in the space. So the enterprise number historically was doing really well, but hadn't registered. It's definitively starting to matter. And we'll provide more and more clarity on the channel strategy over time. You might have heard me comment that we've now integrated all enterprise activity under the edX for Business brands. And that's definitely been a win. So part of the -- really the joy of this overall transaction is that it is impacting pretty much all parts of 2U. So that's a good example.

For our next question, we have George Tong from Goldman Sachs.

Last quarter, you had mentioned seeing some delays with implementations and new program launches. Can you provide an update there in the progress? Are some of those programs accredited and the time lines with some administration changes and how they're approaching a relaunch or a new launch of those programs in 2023?

Yes, we feel like we're on track right now with the expected program launches for this calendar year. And we're feeling -- you heard me mention that we feel like we're on a bit of a roll. We are feeling, definitely, an improvement in the pipeline and what next year and the year after looks like.

What's actually quite interesting is because some of the types of programs that we run take a long time to get through the process, we're actually building a nice queue of programs for 2023 and, believe it or not, 2024, which I know investors tend to be surprised that universities do work in 5-year planning so -- sometimes 10-year planning, and so we feel like we're building a queue of particularly licensure programs, which we've done very well with for the outer years.

And we're definitely seeing more growth from existing partners. So you heard me mention University of North Carolina at Chapel Hill. The institutional programs that we built there were -- clearly, we've gotten off to a slower start there and it's really starting to come along. So very excited that we now have our first relationship for degrees in Australia with University of Sydney. That is a significant relationship at University of Sydney. For the U.S. folks on the call, University of Sydney is one of, by far, the most prestigious schools in all of Australia. So we think that's a significant opportunity.

EdX is clearly helping with existing partners. The transition to a platform company is meaningful. We are -- you heard us mention the impact on the LSE Undergrad program. That is a perfect, truly a perfect program for the edX overall platform, and you'll see us do many more programs like that from the standpoint of creating really affordable options for people worldwide to unlock their potential.

And what we're seeing is edX will be a weapon in our ability to not only hold the cost, but to bring the cost down over time. One of the misnomers in the entire OPM space is that because you're sharing revenue, people think that you're interested in higher prices, and that's just ridiculous. We actually have the entire burden of the marketing expense and the expense of finding the right student for the right program, and we don't make the admissions decision. So ultimately, these are not inelastic goods. As the price goes up, conversion goes down. And it's really, really good for the world to have more affordability. It's also really good for our business. So you'll see us continue to have more and more affordable programs over time. So edX is definitely having a real impact on our ability to generate new pipeline opportunities.

Got it. Very helpful. And then secondly, with lead gen costs, we've certainly seen increases over the past year on cost to acquire leads. Can you talk about how those costs have evolved in both the Degree Program side of the business and then also the Alternative Credential side of the business?

So George, let me start off and Chip can join in after. We planned -- we budgeted an inflation in cost for leads across our business for 2022. And we are still seeing cost at that inflated level. However, it is -- we're seeing some stability, and we're seeing some more predictable cost as we go through the period. But generally, it is still inflated and we have maintained that spend at the levels that we have in our budget. In fact, just a little bit below our budget in the first quarter.

Yes. And I mean, George, now that we're starting to give more color on edX, there's many reasons why we did it. But clearly, organic search is just a huge, huge important part of our -- it's a lever for our business. And you can now just go do it on your own and look, go on Google and type in the search terms that are relevant. And what you'll see us do over time is offer more and more opportunities, more specific content marketing with the incredible domain authority of edX. It will allow us to just open the doors to more people to further their goals.

I mean the best driver of organic is edX. It is a huge part of our future from the standpoint of driving greater affordability because we can obviously use it to pull the cost down. But we have seen some stability. I would also say maybe just to add to this to the first question, what's important that -- one of the things that we find curious at times is people have read-throughs from other ed tech companies that honestly have very little to do with our business or very little similarity to our business from a product standpoint.

So from our standpoint, we had built in what we thought was a reasonable amount of inflation into the marketing costs. And we obviously spent a lot of capital to do something that we think long term will really combat that in a significant way. You're talking about the top 5 education website worldwide, and probably most importantly, one that unlocks people's potential. So free courses are great for the world, and they also create an incredible marketplace opportunity.

For our next question, we have Ryan McDonald from Needham.

Congrats on a nice quarter here. First, maybe a question for both of you. I really like the comment about the 30-plus negotiations on the MicroMasters program. Can you kind of walk us through as your existing partners look to adopt those what's the process is in terms of launching those programs? And what maybe impact that would have on sort of profit margins or the adjusted EBITDA outlook that we see today?

Ryan, So that -- we love the MicroMasters. That's why we typically call them out. Stackable credentials are a big part of the future. You're creating just incredible opportunities for people to unlock their potential, to get a certificate that they can use to improve their current sort of job prospects. And then if they want to continue, you've got this credit load that comes up. You're creating a pathway of people into a Degree Program.

Now what's fascinating is they take -- while they take time, like where this has been done at edX to date, you've just got incredible results. So you take the MIT supply chain MicroMasters and you look at the impact that it's had -- that it has had historically on the MIT on-campus supply chain masters. They used to run a small cohort, and they effectively doubled it because of the MicroMasters impact.

Now we don't expect things to double nor need them to double to have a huge impact. If you're able to generate an opportunity to have a 10% lift or something like that into a program, you're talking about a huge economic opportunity. But most importantly, you're driving affordability to the learner. So you're talking about really these -- the reason we love them so much is they're an excellent alternative credential for somebody to improve their life. And then if they want to continue their studies, they want to sort of take the next step, even if they want to take it down the road, you've got this ability to drive a $10,000 cost difference into the masters program. You're talking about material cost savings.

So those will take time. That's the -- the one bummer is everything takes time. So the reason we put it in the 30-plus is that our university partners are really excited about them. So like we're going to have a whole bunch of them. Are they going to have an impact on this calendar year financially? No. It's just -- we're hoping you get a couple of them launched this year. Should they next year? Absolutely.

And maybe as a follow-up, just as a clarification. Obviously, we -- you called out the tight labor market and sort of the impact that, that is seemingly having on sort of bleeding into undergraduate enrollments and stopping programs really to enter the labor force, et cetera. As you look at the guidance that you set for the full year, are you essentially assuming no improvement in sort of this or change to the current labor market dynamics when you think about that top line?

Well, the -- first of all, once again, if we're talking about read-throughs from other companies, we have 3 undergrad programs to date, and we're about to announce our fourth. We have 187 masters programs, to be clear. So it is a very different -- it's a different construct.

Now there's no question that graduate degrees are more interesting to people when they are looking for jobs. That's not new. But we've had a really strong economy for a couple of years now. So we expected it. Over time, if the economy does take a step back, is that good for our degree business? Sure. But we're operating in this current environment, and we feel like we're prepared for it.

We also have the -- you've got some tailwinds from that. The boot camps are doing incredibly well from -- in the enterprise channel, and there's a reason. The reason that we included the Gallup Research, I understand why we want to talk about things like the marketing levels and our EBITDA levels. But like at the end of the day, this business is about producing results for human beings. And when you look at the results of that boot camp business, like the ROI immediately is there and people go into tech and obviously do well over time. And what I feel like is everyone else in the boot camp space is doing very small numbers. So if you're going to do this at scale, those types of results are impressive. So we do think that, that has some tailwind aspect to it.

And I guess I should have also mentioned that something that because of edX has become a lot more important of 2U is we are now according all kinds of different corporate partners to create content on edX, and it's going very well. So in Q1 alone, we had new products from IBM, Google, the Linux Foundation, MapWorks and Codio. And those types of programs are very attractive to people in this current labor market. And we expect to do more of it, and that's part of the reason that we're seeing the kind of growth in enterprise we're seeing. So we see that as a tailwind.

Yes. And Chip, I mean, at the end of the day, we have multiple approaches to hitting the numbers that we have. In this economy that we're in here, employers are doing more to keep their employees. So [all credit line] approach, degree segment is another approach. As we think of some of the things we talked about, edX, MicroMasters, it's multiple approach. And then at the end of the day, we also have the ability to deliver stronger EBITDA depending on how we see variable expenses grow to support revenue.

Yes. I mean I thought -- Paul, I thought it was interesting like if you look at the rest of the stage, you've got people seeing weakness in consumer offset by enterprise. And we thought our consumer held its own. And of course, we want a bigger enterprise business. It is, Ryan, starting to get meaningful. But net-net, we saw growth in our degree business. I think a lot of others did not.

For our next question, we have Josh Baer from Morgan Stanley.

Great. Paul, I wanted to revisit some of the commentary on free cash flow. And just if you can help walk through, again, free cash flow burn and then timing for free cash flow breakeven, that would be helpful. And just to like make sure we know is it unlevered or levered free cash flow, operating free cash flow, just any details on the trajectory on free cash flow side.

Josh, so I think if we look back at the first quarter and when we provided numbers, we had $80 million of EBITDA, $80 million of CapEx, expecting a neutral net working capital for a year, that would have given us somewhat of a net neutral free cash flow. And then when we look at it on a levered basis, with that payments included in it, which is about between $45 million and $50 million, we were expecting about a $50 million use of cash on a full year basis, on a levered basis.

After our first quarter results, our [total] expense quarter, the highest cash usage for the quarter, we only burned $16 million. If we look back at our plan at the beginning of the year, we were probably expecting somewhere between $25 million and $40 million of use of cash in the first quarter. We ended up spending about $16 million of cash in the quarter, net cash. And we also ended up delivering more EBITDA, which we passed through to the guidance. So all of this means that as we sit here today, we now have $85 million of EBITDA expected for the year. We have $80 million of CapEx, which is probably on the conservative side of things, but take it for what it's worth. That's positive $5 million for the year. And then we have $45 million, $50 million of interest payments. Net-net, at the end of the year, we should be expecting to be use of cash of about $40 million on a levered basis.

Now all of this is dependent on how the next 3 quarters unfold. I think what we've demonstrated in the first quarter is that we have a plan that have multiple ways of hitting the top line and the delivering on the bottom line. But most importantly, we have variable expense in the model, that says if return on investment is not there on the marketing spend, you will see that drop to the bottom line. And also, we're finding ways -- Mark Chernis and the operating teams are finding more and more ways to deliver revenue at lower cost. So we're optimistic on the adjusted EBITDA side of the equation. And we're hoping that we can see favorable marketing conditions to help us deliver revenues.

Okay. Great. That's helpful. And then I wanted to ask one, I think the number of registered learners, if I'm right, moved up about 1 million quarter-over-quarter. Just wanted to get your take on that, like if -- are you happy with that level? Is that the right level going forward? How should we think about that?

We still firmly believe that it's, first of all, it was a 2 million increase, Josh, and very -- almost no marketing, to be clear. So I think if you compare and contrast that across the industry, we're pretty full right now from the standpoint of digesting what is a very significant transformation, not just an acquisition. And so we're not in the process yet of spending marketing dollars on edX for the portfolio of edX. So it is really just organic and SEO, and there's a lot of blocking and tackling. So when I said we have a lot of wood to chop, like we have a lot of work to do. But it's actually start to work. So we will pick up the pace of the learner acquisition and particularly we're starting to see the benefits of doing so.

What's interesting about one of the items that I listed on edX that we didn't talk about at all on this call, but you can only talk about so much, is one of the keys, one of the 6 keys is portfolio marketing versus product marketing. Every product historically for 2U -- if think about how profound what happened is, every single program has its own marketing funnel. And we're trying to find somebody at that one moment that is the right person that can get in, and we don't make the decision, that is interested in attending University of California Berkeley data science right now. Like that's what we do. And that's hard. What if you're talking to somebody that might want an MBA, but doesn't know what type of MBA. Even better example. What if you're talking to somebody in a counseling discipline. We have many different counseling programs and they get very specific. So you want marriage and family? Do you want clinical psychology? Do you want social work? Do you want speech therapy? There's many different types. We've never been able to market to those people without being as specific as that individual program.

So the idea of this portfolio marketing, we think is really relevant and we think will drive the number of learners into the system because, ultimately, starting with free is an excellent way to introduce people to topic and to drive interested learners into different types of programs. So we fully believe long term in the free expression.

So I would also tell you, like unifying registration across the entire 2U system, I know that sounds easy. But it's like as we start to do things like that, start to offer applications across edX, start to offer all conversion across edX, right now, you click on a card and you go outside the site. None of that's optimal. It's very early days, and we're already talking about 10% of our lead gen.

So we do think that you're looking at really very significant change to the way we think about marketing over the next 3 years. And that's one of the reasons why we're being careful about how much marketing dollars we put behind edX today. Now each individual program is kind of operating at the efficient frontier of that program. So there's a lot of belief here based on what we're seeing. So it's the bottom quartile of that degree spend could we spend better by doing it at the top of the edX funnel. But we just need a little bit more time. And I will tell you, having done this job for 14 years, you just got to be really careful about how you deploy the marketing spend. We've just got to be careful and thoughtful about how we deploy the spend, just having learned some lessons from our past life here.

For our next question, we have Jeff Silber from BMO Capital Markets.

Just wanted to go back to the FCE numbers in both segments. Both of them accelerated compared to what we saw last quarter. I'm assuming it's probably too early for edX to have had an impact on those numbers, and I'm wondering if you can just give us a little bit of color what you were seeing, why you saw that acceleration?

Jeff, yes, it is a bit early for edX to contribute here in the FCE contribution. If we look at it from a quarterly perspective, it is basically the production -- the marketing spend that we had in the fourth quarter -- productive marketing spend that we had in the fourth quarter. And also, it's the beginning of a lot of the academic calendar for some of our classes. So we were expecting something that we -- we were expecting something that we were projecting, and it [faintly] represents prior period marketing spend that we had projected. It also had some seasonal impact. It is the beginning of presentations, particularly in some of our exec ed courses. And it's basically across the board. If you look at both the Degree segment, FCEs increased as well as the Alternative Credential. It's both of them.

Now keep in mind that some of the increases also has to do with contribution from edX masters, which was in the Degree segment, although it's minimal, I wanted to make sure I call that out. And then in the Alternative Credential segment, we did not include any of their FCE in that particular segment. So that is purely organic increase in the Alternative Credential segment.

Okay. That's really helpful. And my follow-up, and I hate to switch to a regulatory issue, but I think a number of us have been waiting for this GAO report on OPMs, which I believe just came out earlier today. I haven't read any single page of it, but it looks like they're recommending just providing clear instructions to auditors and colleges about the OPM arrangement that the schools are involved with. I'm not sure if you had a chance to look at it, but I'm just curious if you have your thoughts are on the report. Okay, great. Sorry. Any thoughts would be appreciated.

So we reviewed the report, and we're very supportive of the GAO's recommendation. So number one, we've led the industry in transparency. We put out transparency reports for multiple years. We've always complied with the rules regarding incentive compensation. Whenever our university partners have been asked for information about how we can compensate employees when they had any kind of audit, we happily provided it. And the reality is as the OPM industry continues to grow, it's become an even more vital part of the higher ed ecosystem. So Jeff, greater transparency and continued oversight will actually ensure that the industry as a whole is serving the best interest of students and, of course, universities and also taxpayers.

So we work with both Democratic and Republic administrations from the beginning in a constructive way. And we continue to actively engage not just for Department of Education, but members of both sides of the aisle on what an appropriate regulatory landscape for this increasingly important segment looks like. So we thought it was positive.

And for our last question, we have Brent Thill from Jefferies.

This is David Lustberg on for Brent. I want to touch on the adjusted EBITDA guidance increase. I think the midpoint's at $5 million. I know last quarter, you called out $30 million or $40 million of a headwind from edX. I'm just curious, is this coming from core 2U side or edX side? Or is it a little bit of a combination of both?

I think it's a combination of both, right? So let me start with a couple of numbers here. If you look at the edX numbers that we provided at the beginning of the year, we had roughly around $35 million (inaudible). If you look at the run rate that we have, the first quarter numbers produced about $7 million. I think it was $10.9 million of revenue and $18.3 million of expenses. That's about $7 million. You run rate that, that's $28 million run rate. And we expect the next 3 quarters to be better than the first quarter. So that said, edX is going to burn less than we had anticipated at the beginning of the year. So that's one bit of contribution.

The second one is, if we look at the personnel and personnel-related expenses, I said that, that increased about $5 million, so $124 million for the year. But I also said that edX contributed $7 million of that $124 million, which means that overall, they were saving on the personnel and personnel-related expenses. I'm a little more cautious on that one because while we -- personnel and personnel-related expense shows saving, given the environment that we're in now, given the macro environment, given the great resignation, we do expect that the wage component of personnel and personnel-related may put some pressure on that number as we get through the back half of the year.

But overall, I go back to our ability to use technology and our human capital extremely well as an organization to deliver revenue cheaper and faster. And I think we'll continue to see operating leverage as we go through time. And the 85 is simply a representation of operating leverage across the board, not any one particular thing.

Great. That's really helpful color. And a second question, you talked about the enterprise side. Apologies if I missed it. I got hold in with the operator. But can you provide any color on how many enterprises you guys are in today or just maybe your penetration within the enterprise or your ability to cross-sell over the time? Or maybe just color on the growth rate? I think you said 70% quarter-over-quarter, but maybe how that compares to from other quarters to help put that into context would be really helpful. Appreciate it.

Yes. I guess we're very aware that this is a segment that is keenly of interest to the investor community. And effectively, what's happened is edX has opened a ton of doors. Basically, Guild obviously exposes us to new enterprises. But we're at a point where we're aware that as we give greater detail to The Street throughout this calendar year, you'll hear more and more from us on what the segment overall looks like -- sorry, what this line of business looks like, how it fits across products. And what's interesting is it is across all of the 2U products today. You know what I'm saying. That's real. So -- but we're not at a stage yet where we can give you a tremendous amount of additional detail. It is 70% sequential growth. And right now, 60% year-on-year.

There are no further questions at this time. I'll hand it back over to Chip Paucek for closing remark.

Thank you, everybody. I guess that's all. We will look forward to talking to everybody throughout the quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.