2U, Inc.

Thank you, Jeannie, and good afternoon, everyone. Welcome to 2U's First Quarter 2024 Earnings Call.

Joining me on the call this afternoon are Paul Lalljie, our Chief Executive Officer; and Matt Norden, our Chief Financial Officer. We will be sharing our remarks before opening the call up for your questions.

But first, I'd like to cover a few housekeeping items.

Our earnings release and slide presentation are available on the Investor Relations website. Our remarks today are being recorded and a webcast replay will be made available later today.

Statements made during our call will include forward-looking statements regarding our financial and operating results, plans and objectives of management for future operations, including our performance improvement initiatives, plans and ability to improve our balance sheet, anticipated trends for learners and university partners, changes in laws, regulations and agency guidance for our industry 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 the documents filed with the Securities and Exchange Commission, including our quarterly report on Form 10-Q for the quarter ended March 31, 2024, and other SEC filings.

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 a substitute for or in isolation from our 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.

So with that, let me hand the call to Paul.

Thank you, Steve, and good afternoon, everyone. We are off to a solid start in 2024.

Our first quarter financial results exceeded our expectations. As we continue to execute our shrink to grow strategy, where we are laser-focused on revenue that delivers the greatest impact on profitability.

Revenue for the quarter was $198.4 million, while our adjusted EBITDA was $17.3 million. We have seen an increase in total new enrollments, which went up to 116,000 from 88,000 in the last quarter across all of our 4,600 partner programs.

In addition, our learner network has grown to 86 million compared to 83 million last quarter. We are continuing to lean into our product lines that are performing strongly and have some exciting progress to share on our executive education and degree businesses.

Matt will provide further details on our financial results shortly.

On the business side, we've made significant strides to hone our strategies, to optimize the business for profitability and the return to revenue growth. This began with a rigorous evaluation of operations and making smart decisions to enhance programs and focus resources.

We have made significant progress in establishing the right operational framework and are now establishing a baseline for revenue, margin and cash flow.

We are also tackling our balance sheet challenges head on. We have the management team to navigate these hurdles and the fundamentals to fix our balance sheet in the near term and return to top line growth in 2025.

We are bullish on the future of 2U because of the market opportunity and our leading position in the education industry.

Advances in generative AI coinciding with paradigm shifts in the labor force are creating a technology moment and driving strong demand for workforce development. According to the World Economic Forum's Future of Jobs report for 2023, 60% of workers will require additional training by 2027, although only half of them currently have access to the proper training resources.

In addition to the forefront of this wave, we are ready to seize the immense opportunity that this presents. However, to make the most of this opportunity, we must ensure that we have the right foundation in place.

product innovation, operational efficiency and fixing our balance sheet. Our goal is clear: to be the go-to company for workforce development, meeting learners where the learner wants to be met.

Starting with product. In the first quarter, we launched 42 new degree programs, many in high-demand fields with a strong organic appeal.

As I mentioned last quarter, our objective is to launch programs that deliver the best value proposition and outcomes for students as well as provide strong economics for 2U. These launches fit the objective and they bode well for our future financial performance.

Most of these programs are under our Flex model and require about 1/5 of the capital outlay of a degree under our traditional model, and we anticipate that they will begin generating positive cash flow about 1 to 2 years sooner.

We continue -- we remain encouraged by the robust demand from our partners for our educational offerings. Recently, we expanded our partnership with Pepperdine University to launch 6 new degree programs, bringing the total number of degrees with Pepperdine to 12.

One of these new degrees, a Masters in Speech Language Pathology is a first of its kind for Pepperdine University and its newly established College of Health Science. This program aligns perfectly with our strategic focus and our core competencies, leveraging our strengths in fields where we have a proven track record.

We possess the most extensive network of placement centers and have consistently demonstrated our ability to scale programs effectively in this vertical.

Building on this success, we expect year-over-year growth in degree enrollments from continuing programs. When combined with enrollments from newly launched programs, we have confidence in our ability to deliver profitable growth in our degree segment next year.

Our long-term prospects are also looking good based on a robust pipeline, scale, on our strong track record of delivering positive learner outcomes.

In the Alternative Credential segment, we are seeing that online education is emerging as the most important tool for upskilling workforces facing unprecedented technological changes. We intend to capture this opportunity.

This quarter, we signed 5 new contracts to offer AI boot camps, which we believe will help mitigate the softer demand we're seeing in coding. Just as important, we are working to deliver these programs as efficiently as possible through innovations in our delivery model.

As with all of our business improvements, continuity of student experience in delivering, strong student outcomes remain at the forefront of our decision-making. In the first quarter, our students achieved completion rates of 89% for exec ed and 76% for our boot camps.

In exec ed, we continue to see accelerated growth, led by our AI courses offered by MIT Sloan and Oxford, and we expect this trend to continue.

We recently signed a subscription-based contract with the council of higher education in Andhra Pradesh, India. The program is off to an impressive start with over 100 course completions in the first month alone.

Our high-quality online courses are now available to over 1 million students across the state's 22 universities, providing a valuable learning resource.

Our boot camp business is experiencing weaker demand, particularly in coding, although our Executive Education business is performing well and making up for some of the shortfall in boot Camp, the overall predictability in demand for the boot camp business remains difficult.

Now turning to operating efficiency. We are building on our prior actions, which have already reduced our operating expenses by approximately $90 million on an annual basis.

Our focus remains on optimizing our cost structure in all fronts, from personnel and delivery costs to our technology stack and marketing efforts.

first, through the introduction of technology into various points of our processes. And second, by strategically teaming up with partners that excel in specific areas.

If a partner demonstrates superior efficiency and effectiveness, we'll prioritize collaboration over performing those functions ourselves, allowing us to focus on areas that are our core competency. These types of changes can increase our speed to market and improve our efficiency while reducing our fixed costs.

EdX Marketplace gives us powerful reach and scale. The key to unlocking the value of this reach and scale is organic lead generation.

Through improved market segmentation, cross-sell activities and search engine optimization, we expect to increase organically generation. The financial benefits include incremental revenue from a greater yield on marketing dollars and reducing our technology and marketing support costs.

These are examples of how we are operating differently.

Turning now to the balance sheet. We are tackling our balance sheet challenges head on.

The business improvements are meant to put us on a trajectory to deliver higher profitability and cash flow, which in return becomes the impetus for fixing the balance sheet. We have begun the process of fixing the balance sheet by working collaboratively with our lenders and expect those conversations will continue over the coming months as we work for the best possible terms.

As we implement our plans, we are closely monitoring the needs of our students, partners and employees. For students, we strive to continue delivering a compelling value proposition that includes the content they need, delivery that fits the way they want to learn at a price that represents good value and outcomes that support their life's goals.

For university partners, we need to deliver programs that support and advance their missions while providing flexibility in future in program structure. Just as important, we need to demonstrate that we have the right plan in place, continue to be a valued partner for many years to come.

We are talking to partners regularly, especially as we work on fixing the balance sheet.

And none of this is possible without the day-to-day contributions of our valuable employees. In a period of significant change for the company, we thank our employees, my colleagues, for their focus and unwavering commitment to our mission, our students and our partners.

In conclusion, I want to emphasize that we possess the necessary technology, partnerships and resources to return to top line growth. Our primary goal is to expand our product range by offering relevant programs that are competitively priced and delivered in the most efficient manner.

With new launches in the first quarter and the upcoming new launches, we are confident we will achieve top line growth in 2025. Additionally, we expect our profitability and cash flow to improve due to the cost-saving measures we are implementing.

We are poised to fix our balance sheet while maintaining our reputation as a good company so we can ensure that we have a solid capital structure that matches our reputation as a top-tier company.

And with that, I'll turn the call over to Matt.

Thanks, Paul, and good afternoon, everyone. Before walking through the results, I wanted to start with a few key themes for you to keep in mind.

First, as you heard on prior calls, we've taken steps to bolster our financial position. While we have more work to do, we are pleased to see the positive impact of these actions reflected in the first quarter results.

Notably, we exceeded our revenue and profitability expectations for the first quarter, driven by the strong performance of our exec ed business with enrollment growth of 32% over the first quarter of 2023 and the positive impact of our prior cost optimization actions.

Second, in the first quarter, we began implementing our performance improvement initiatives with the goal of putting us in a strong position to address our balance sheet issues as soon as possible. We expect that these initiatives will enable us to achieve our full year adjusted EBITDA expectations, notwithstanding trends we're seeing in the bootcamp business, which I'll talk more about later in the call.

Third, due to the extensive transformation work we have underway and where we are in the year, we're maintaining our prior full year 2024 revenue and adjusted EBITDA guidance.

With those themes in mind, let's move on to the results. I'll start by walking through the P&L, and then I'll provide an update on our balance sheet and cash flow statement.

I'll then share some additional detail on our performance improvement initiatives, and we'll present our thoughts on what is driving our outlook for the second quarter and the remainder of 2024. I'll conclude with an update on the status of discussions with our debt holders.

Starting with revenue. In the first quarter, we generated total revenue of $198.4 million, a 17% decline from $238.5 million in the first quarter of 2023.

This decrease was driven by a 21% decline in the degree segment and an 11% decline in the Alt-Cred segment.

The decline in the degree segment was primarily driven by fewer steady-state programs operating in the quarter as compared to the first quarter of 2023 due to our portfolio management activities in 2023. In light of this and as we did on the fourth quarter call, to gain a better perspective on the degree segment's performance, we evaluated the segment excluding the impact of portfolio management.

This analysis reveals that degree revenue declined only 4% year-over-year, a significant improvement from the 9% of the current portfolio, which we reported in the fourth quarter.

Also, as was the case in the fourth quarter, this decline was primarily due to a higher number of graduates who enrolled during the pandemic and the number of new student enrollments in the quarter. But new student enrollment from the current portfolio grew 6% over the first quarter of 2023, which again shows the strong momentum of the degree business.

Also note that the 6% new enrollments increase, excludes new enrollments from the 42 new programs we launched in the first quarter; including these programs, new enrollment increased 17% year-over-year. So overall, we were quite pleased with the degree segment's performance in the quarter and the trajectory it's on.

Decline in Alt-Cred revenue in the first quarter was impacted by similar factors to those we experienced in the fourth quarter. Continued softness in boot camps, particularly coding, partially offset by continued strength in our executive education offerings, particularly AI.

Boot camp revenue declined 33% compared to the first quarter of 2023, while executive education revenue increased 44% over the same period.

Moving on to operating expenses. Operating expense improved across the board, reflecting the impact of our recent cost optimization activities.

For the first quarter, operating expense was $225.7 million, a 13% decrease from the first quarter of 2023. This decrease was primarily driven by a $29.5 million decrease in personnel and personnel-related expense and a $5.6 million decrease in paid marketing costs.

This decrease was partially offset by $7 million in costs to implement our performance improvement initiatives, which resulted in G&A expense being relatively flat year-over-year.

Turning now to our profitability measures. Net loss for the quarter totaled $54.6 million compared to $54.1 million in the first quarter of 2023, reflecting the revenue and operating expense drivers I mentioned previously.

Adjusted EBITDA for the quarter decreased 43% to $17.3 million, a margin of 9%. This was largely driven by the same factors that I mentioned earlier, primarily fewer steady-state programs operating in the quarter as compared to the first quarter of 2023.

Looking at profitability by segment. Degree segment adjusted EBITDA was $32 million for the quarter, a margin of 29%.

For the Alt Cred segment, adjusted EBITDA loss was $14.7 million, a $2.3 million improvement over the first quarter of 2023.

Now let's turn to the balance sheet and cash flow statement. We ended the quarter with cash, cash equivalents and restricted cash, $137.4 million, an increase of $64 million from December 31, 2023.

This increase includes $74 million received in the quarter in connection with the sale of certain receivables that we referenced on our prior call.

Looking at the cash flow statement. Cash provided by operating activities was $72.2 million for the quarter.

We delivered adjusted unlevered free cash flow of $102.7 million for the 12 months ending March 31, 2024, compared to $45.4 million for the 12 months ending December 31, 2023. These results show the positive impact that our cost optimization and working capital initiatives had on liquidity in the quarter.

I'll now provide some more detail regarding our performance improvement initiatives and their financial implications. As Paul mentioned, a key goal of this plan is to significantly improve operating efficiency to put us in a stronger position to fix our balance sheet.

In addition to the cost optimization actions we took in 2023, we've now identified $90 million to $100 million of additional run rate cost savings from initiatives across the company, which we expect to fully realize by the end of 2025.

To highlight a few of the specific initiatives underpinning the plan. We expect to continue to improve the efficiency of our sales and marketing operation by leveraging the edX platform and further streamlining marketing technology and processes.

We've identified approximately $15 million of run rate savings from this initiative. Also through the use of lower cost locations and outsourcing arrangements for various back-office functions and standardizing and simplifying our technology infrastructure, we believe we can reduce our technology and product spend by approximately $20 million on a run rate basis.

We are also continuing to take a hard look at G&A where we have identified approximately $8 million of run rate savings. The remaining savings come from various initiatives that we've identified across the entire organization, including opportunities related to real estate, process improvements and various other corporate hygiene initiatives.

Turning now to a discussion of our outlook for the second quarter and full year 2024, starting with revenue. Our guidance for the second quarter calls for revenue to range from $191 million to $194 million.

For the year, as I mentioned previously, we're affirming our prior revenue guidance with revenue expected to range from $805 million to $815 million.

For adjusted EBITDA, our guidance for the second quarter calls for adjusted EBITDA to range from $16 million to $18 million. For the full year, we're again affirming our prior adjusted EBITDA guidance with adjusted EBITDA expected to range from $120 million to $125 million for the year.

This outlook reflects continued headwinds in coding boot camps, partially offset by continued strong exec ed performance throughout the rest of 2024.

We are currently evaluating all options to mitigate boot camp performance as much as possible. While we have taken some steps already, by capitalizing on the strength of our AI exec ed offerings to launch 5 new AI boot camps this quarter.

We're evaluating other options like reallocating resources across the boot camp portfolio and optimizing the delivery model, which could reduce boot camp revenue for the full year, while improving adjusted EBITDA.

Also, we're still working on refining and implementing many of the initiatives in our performance improvement plan. So the exact impact on 2024 adjusted EBITDA is still in flux at this time.

But we do believe that the cost optimization actions we took in 2023, along with some in-year impact from our performance improvement plan will enable us to meet our adjusted EBITDA expectations for the full year, regardless of boot camp performance.

Before I conclude, I wanted to briefly comment on the status of discussions with our debt holders. Based on our current guidance for the second quarter, we do not expect revenue for the 12 months ended June 30, 2024, to satisfy the recurring revenue covenant contained in our credit facilities.

But we have continued to have a constructive dialogue with our creditors to timely address the revenue covenant and find the overall best solution to best position for the company -- to best position the company for the long term.

We expect those discussions to continue with the goal of executing a transaction in the near term. We expect that any transaction would fully support the company's ability to continue operating and providing services for our partners and students.

To conclude, we exceeded our expectations for the first quarter, marking a solid start to the year. Our team remains highly committed to strengthening our financial position, which is crucial for enhancing our capital structure and securing the company's long-term success.

We are actively implementing our performance improvement initiatives and are optimistic about our prospects for reinforcing our market position. This will enable us to thrive well into the future and deliver value for our stakeholders.

And with that, let me hand the call back to the operator to begin the Q&A session.

Wanted to dig into the newly launched programs. You talked about kind of the steeper -- or sorry, the shallower payback, free cash flow 1 to 2 years sooner under the flex model.

If you look at all the newly launched programs, 42, can you help to quantify what the impact is for this year and next year from a revenue and a free cash flow perspective?

Josh, let me start off and Matt will jump in here shortly. On last quarter's call, we said that in total, the 60 -- approximately 60 programs that we launched in 2024 will cost us about $23 million, $25 million of expenses, and we'll have revenue of somewhere between $10 million to $15 million in this calendar year.

The other data point that we provided was that we expect to have steady state revenue of about $100 million, $100 million, $120 million. I don't remember exactly which of those numbers we said.

100 -- $100 million is a steady-state revenue going forward. And we expect that these programs will get the steady state probably years -- between 2 and 3 years, sometimes a little bit later, and that's because you have cohort 1, cohort 2 that comes in on top of the other, which I think you know very well.

But the bottom line is, this really projects very well for the odd years as we launch them in calendar year 2024.

Matt, I don't know if you'd add anything else?

No, I think you hit all the key points.

Okay. That's great.

And then one on the operational efficiency. You mentioned the introduction of tech to drive cost savings, technology.

And clearly, this makes sense. I think it also takes some time and investment.

So do you have any specific examples of some of those initiatives where you're looking to use technology to drive cost savings and how to think about the impact.

Yes. So I think it falls into a couple of buckets.

Certainly, what I mentioned around outsourcing and moving some back office functions to low-cost -- lower-cost locations. Some of that is in the tech department, and that takes less of an upfront investment than some of what you might be thinking about.

And I think there are opportunities to automate a lot of our processes throughout the business on the marketing side, as I mentioned, where we expect $15 million in run rate savings related to those activities.

And I also think there's opportunities to deploy AI in multiple areas of the business. Also really on the marketing side, which is the marketing and operations side, I would say, to make the way we engage with students at the top of the funnel more efficient, ultimately leading to not only a more efficient business, but probably a better experience for students.

Paul, I don't know if you would have anything to add there.

The only thing I would add is that we do have a presence in Cape Town. Our -- we do have a tremendous employee base there, talented employee base there that I think we can build off of as we think of broadening our operations into lower cost environment.

Great to see the strong results and some nice growth on executive education in particular. Can you just talk about what seems to be resonating well with that offering with customers in what seemingly is a tough sort of environment for corporate learning and development spend?

Ryan, let me start off. And again, Matt may join in.

Our AI executive education courses are definitely doing very well for us. It goes back to the objective and the fundamentals in Alternative Credential.

It's all about hit-driven topics, and it's all about making sure you have the appropriate content. And I can't underestimate having the appropriate partners.

We do have great partners. MIT and Oxford are really, really great partners for us as we continue to grow executive education.

Look, our objective here is to continue to have -- to launch new content and new programs so that we can always have that new S curve that is on top of what we have currently, and that allows us to have a sustainable growth and a sustainable trajectory in that business.

The other thing I'd point to and highlight as we think of Alternative Credentials in general, the Andhra Pradesh deal is a significant deal for us. It is a different market.

And it's -- like I said, it's off to an impressive start. 100,000 course completions in the first month alone.

And this is something that is unique and different from what we had traditionally offered. Most importantly, it is done on a subscription-based model, and that allows us to have recurring revenue as we go forward.

Very helpful. And maybe just as a follow-up on the topic of shoring up the balance sheet.

Just as we think about sort of the next steps in progression here, it seems like you've kind of bolstered cash on the balance sheet, you've identified additional operational efficiencies to drive more savings, generating more adjusted EBITDA. What, I guess, do you need -- do the lenders need to see to maybe progress further on those talks?

Or where do you think you need to kind of continue to execute to get closer to a resolution there.

Yes. As we said on the last call and this call, we have a constructive dialogue with our lenders, and that's obviously increasing in frequency, I would say.

So I don't think they need to see anything else necessarily. I think it's a question of coming up with the right solution for the company given where we are.

And we are, as you can imagine, hyper-focused on getting to that solution as quickly as possible to turn the page from where we are. So I think as we said in the near term, we're going to have a resolution that will really set up to you for future success.

And Ryan, we're fortunate. We have a group of lenders.

It's concentrated, number one. And number two, it consists of players that we are very familiar with, and we've spoken to a number of times.

So this makes it all more convenient for us to get through this in a shorter time frame.

The one point that I would want to make to all of this, as we go through this now, the first quarter was all about developing that plan, making sure we have the right framework to have the discussion with our lenders. But none of this -- absolutely none of this has anything to do with operations, our focus on our partners and our students and delivering the quality of education; those are operational things.

That's what we do every day. That's what we do well.

It has nothing to do with the balance sheet. We're trying to separate the two things.

And Matt and the team are going to leave you to the tip of the spear as we fix the balance sheet. But operationally, we're very proud of where we are and the commitment of our employee base to serve students and make them the highest priority for us.