2U, Inc. (TWOU) CEO Christopher Chip Paucek on Q2 2018 Results - Earnings Call Transcript

2U, Inc. (NASDAQ:TWOU) Q2 2018 Results Earnings Conference Call August 2, 2018 5:00 PM ET

Executives

Ed Goodwin - VP, IR

Christopher Chip Paucek - CEO

Cathy Graham - CFO

Analysts

Sarah Hindlian - Macquarie

Monika Garg - KeyBanc

Brian Schwartz - Oppenheimer

George Tong - Goldman Sachs

Jeff Silber - BMO Capital Markets

Michael Tarkan - Compass Point

Operator

Good day, ladies and gentlemen, and welcome to 2U Second Quarter 2018 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Mr. Ed Goodwin, Vice President of Investor Relations. Sir, you may begin.

Ed Goodwin

Thank you, operator. Good afternoon, everyone, and welcome to 2U Second Quarter 2018 Earnings Conference Call. By now, you should have received a copy of the earnings release for the company's second quarter 2018 results. If you have not, a copy is available on our website, investor.2u.com. The recorded webcast of this call will be available in the Investor Relations section of our website. Also, we routinely post announcements and information on our website, which we encourage you to access and make use of. Today's speakers are Christopher Chip Paucek, CEO; and co-founder; and Cathy Graham, CFO.

During today's call, we may make forward-looking statements, including statements regarding the company's future financial and operating results, future market conditions and the plans and objectives of management for future operations. These forward-looking statements are not historical facts but rather are based on our current expectations and beliefs and are based on information currently available the outcome of the events described in these forward-looking statements is subject [Audio Gap] and unknown risks and uncertainties that could [Audio Gap] results to differ materially from the results anticipated by these [Audio Gap] statements. This includes, but is not limited to, those risks contained in the Risk Factors section of the company's annual report on Form [Audio Gap] for the year ended December 31, 2017, and other reports filed with the SEC.

All information provided [Audio Gap] call is as of today. Except as required by law, we undertake [Audio Gap] to update publicly any forward-looking statements made on this call to conform to statements or actual results or changes in our expectations. Also, it is 2U's policy not to update our financial guidance other than in public communications. Non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release.

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

Christopher Chip Paucek

Thanks, Eddie. Don't let the skeptic win, that's one of our guiding principles and one that I love. 2U is creating a long-term sustainable engine of social mobility. We're doing it with a shared success model. When students win, the university wins, and that's how we win.

We had another outstanding quarter. Revenue for Q2 was $97.4 million, a 50% improvement year-over-year. The outperformance on the top line was driven by the short course segment with $16.2 million in revenue. This performance is leading us to raise full year revenue [Audio Gap] this quarter by over $2 million. At the [Audio Gap] of our new range, we expect year-over-year revenue growth of [Audio Gap]. For the grad segment, FCE growth has turned the corner. Last quarter, year-over-year FCE growth was 25%. [Audio Gap] expect that to be the low point for the year. It reaccelerated this quarter, jumping to 28%, and we expect FCE growth to be around 30% for the full year. This is the beginning of the reacceleration in the grad business that we told you about. The swing is happening. Cathy will give you some additional details and walk you through the pattern in regards to revenue in a moment.

Let's talk about why we're confident in the reacceleration over the next few years, enrollments and pipeline. First, enrollments. Most of the DGPs launched in 2018 have had their first class starts and were deep into the application cycle for all fall starts. So we now have high visibility into how we believe the 2018 cohort will scale. As an example, our first physical therapy program, [Indiscernible] came out of the gate with 48 students. [Audio Gap] start for a new vertical, particularly at $175,000 [Audio Gap] Even more exciting is the first [Audio Gap] size at the Fordham MSW program. While classes have not yet started, we expect the first cohort to be around 450 students, 450. That is far and away the largest first cohort in the history of 2U, and it's not close. On the whole, the 2018 launch cohort might be the [Audio Gap] our history.

But let's not forget [Audio Gap] 14 new programs make up less than third of the total 48 total [Audio Gap] that will be operating by the end of this year. So what about the [Audio Gap] programs? We believe most of them are still years away from reaching steady-state enrollments. These things take time. The first program in a vertical typically takes 5 to 6 years to achieve our projected steady state enrollments. Subsequent programs typically take 4 to 5 years. So we're still expecting enrollment growth in some of our oldest programs. But how do we get enrollment growth out of mature programs where program [Audio Gap] start reaching steady state as quickly as we expected? [Audio Gap] back to basics for a second. Remember that a [Audio Gap] not necessarily a single degree. [Audio Gap] is a financial term for The Street. 16 of them have two or three degree offerings. And 7 DGP [Audio Gap] offerings. Now this is not new. For [Audio Gap] our second partner, started with [Audio Gap] DGP. Since 2010, each DGP has its own portfolio of activity to drive quality and growth for our partners. We can't just look at 1 degree. Adding new offerings to existing DGPs is an important [Audio Gap] to drive revenue enrollment growth over time [Audio Gap] and more mature programs. So take [Audio Gap] which launched in 2013. While there are a bunch of brilliant things about it [Audio Gap] we're going to pause [Audio Gap] we have an audio problem. [Audio Gap] pause it and let's use the backup.

All right. Can you hear me clearly at this point? Operator, can you hear me clearly?

Operator

Yes, I can hear you.

Christopher Chip Paucek

Okay. So we're going to start over. Don't let the skeptic win, that's one of our guiding principles and one that I love. 2U is creating a long-term sustainable engine of social mobility. We're doing it with a shared success model. When students win, the university wins, and that's how we win.

We had another outstanding quarter. I know I told you that a moment ago, but now you can hear me. Revenue for Q2 was $97.4 million, a 50% improvement year-over-year. The outperformance on the top line was driven by the short course segment with $16.2 million in revenue. This performance is leading us to raise full year revenue guidance this quarter by over $2 million. At the midpoint of the new range, we expect year-over-year revenue growth of 43%.

For the grad segment, FCE growth has turned the corner. Last quarter, year-over-year FCE growth was 25%. We expect that to be the low point for the year. It reaccelerated this quarter, jumping to 28%, and we expect FCE growth to be around 30% for the full year. This is the beginning of the reacceleration in the grad business we told you about. The swing is indeed happening. Cathy will give you some additional details and walk you through the pattern in regards to revenue in a moment.

Let's talk about why we're confident in the reacceleration over the next few years, enrollments and pipeline. First, enrollments. Most of the DGPs launched in 2018 have had their first class starts, and we're deep into the application cycle for all fall starts. So now we -- we now have high visibility into how we believe the 2018 cohort will scale. As an example, our first physical therapy program, DPT@USC, came out of the gate with 48 students. That's an excellent start for a new vertical, particularly at $175,000 in tuition. Even more exciting is the first cohort size at the Fordham MSW program. While classes have not yet started, we expect the first cohort to be around 450 students, yes, 450. That is far and away the largest first cohort in the history of 2U, and it's not close. On the whole, the 2018 launch cohort might be the best in our history. But let's not forget that these 14 new programs make up less than 1/3 of the 48 total DGPs that will be operating by the end of this year. So what about the other 34 programs? We believe most of them are still years away from reaching steady state enrollments. These things take time. The first program in a vertical typically takes 5 to 6 years to achieve our projected steady state enrollments. Subsequent programs typically take 4 to 5 years. So we're still expecting enrollment growth in some of our oldest programs. How do we get enrollment growth out of mature programs or programs that aren't reaching steady state as quickly as we expected? Well, let's get back to basics for a second. Remember that a DGP is not necessarily a single degree. A DGP is a financial term for The Street. 16 of these have 2 or 3 degree offerings. 7 DGPs have 4 offerings. This is not new. For example, Georgetown, our second partner, started with 4 things in its DGP since 2010. Each DGP has its own portfolio of activity to drive quality and growth for our partners. You can't just look at 1 degree. Adding new offerings to existing DGPs is an important tool for us to drive enrollment growth over time for both newer and more mature programs.

Take @WashULaw, which launched in 2013. While there's a bunch of brilliant things about it, the DGP initially underperformed expectations. The degree offering at the time was an LL. M. for foreign attorneys targeted at non-U. S. citizens. Currency issues in its 2 largest markets, Brazil and Mexico, really hurt. Our GM for the program, Ken LaOrden, worked with the school to launch a second degree offering that had broader demand, the Master of Legal Studies or MLS. This MLS drove considerable growth in the DGP and was so successful that we've now signed 3 MLS programs with other schools. Since then, Wash U extended its contract for 12 years and added a third offering, an LL. M. in Taxation, which we believe will drive continued growth in the DGP. Additionally, new offerings allow us to be responsive to demands in the market and to evolve some of our most mature programs. Two examples for you. It wouldn't be obvious at all, but this has happened in our first partner, the Rossier School of Education at USC. For seven years, the vast majority of enrollments came from the initial Masters in teaching degree offerings. But in response to market demand, we added the Doctor of Education, a longer degree offering with higher tuition. Today, EdD is now a sizable portion of enrollments at the school, and it continues to grow. 10 years in, Rossier has become a more sustainable and resilient program than ever before. This was happening under the hood of our first partner without any of you really knowing.

Now let's go back to Georgetown and talk about their Midwifery program. Midwifery students have to assist in the delivery of 30 babies in order to graduate. What we learned over time, that there's a segment of the market that wants to work with women but doesn't necessarily want to deliver babies. So we worked with Georgetown to launch a degree offering specifically in women's health. This is our job.

Offerings are an important part of the story of all of our DGPs. Investors need to consider the whole DGP, not just a single part of it. And even more, investors need to consider the whole portfolio, not just a few DGPs. We penetrate the overall graduate market using a portfolio approach, which creates a powerful, more resilient, long-term business that we believe will drive the highest aggregate revenue for the company. Now this will naturally result in some DGPs that are larger and some that are smaller, which is not new news. That's how you get to an average, folks. Vertical, region, program length, tuition and new offerings all factor into the ultimate size of a DGP.

As we said in the past, we target around 16 million of revenue on average across our portfolio for programs that had actually reached steady state. Today, when we look at the DGPs in our portfolio with at least four years of operating history, so most not at steady state, the average revenue across those programs is higher than 16 million today, slightly better than our long-term model. Let me reiterate that, higher than 16 million today.

The second reason we're confident in the reacceleration over the next few years is our pipeline. We're now one program away from filling the 16 slots for our 2019 cohort. On our previous call, we had announced seven programs for 2019. That was only three months ago. To help with the math, we've announced eight programs in the last three months, eight. Our pipeline is simply stronger than it's ever been. The 2019 cohort is nearly slotted. The 16th program is coming very soon. And in August of 2018, our new partnerships team is now deep in the process of signing programs for 2020. Next year, we expect at least 14 of our new programs will be MPV. Now you'll remember, these programs ramp enrollments faster than programs in new verticals. So we believe that the 2019 cohort will be an important contributor to the acceleration of revenue growth in the years to come. But there's a lot of room left to run.

We recently updated our long-term DGP target to 250 programs. But the important part is what that 250 number represents, somewhere around 80,000 to 85,000 conferrals per year. To set the stage, there are thousands of college and universities in the United States, and the Department of Ed identifies over 1,700 verticals. There's obviously a lot of program options. It's early days. Now to be clear, we don't want to sign all programs. Signing a program is not the important thing, scaling it at quality is. And 2U has a track record of scaling enrollments that's better than anyone in this space.

In 2016, there were roughly 950,000 masters and doctorates degrees conferred by U.S. universities. Our target of 80,000 to 85,000 conferrals implies an 8.5 percentage market share for 2U at steady state, single digits, folks. That's without accounting for any growth in conferrals, and our programs are clearly making market.

Graduate education is huge, and we do not need to capture a big piece to scale a large domestic graduate business. But we are indeed scaling, and our partners are happy. We've now signed 63 graduate programs at similar economic terms, all within our standard ranges for revenue share and contract length. We've done this across 26 universities, with 54 distinct schools, each with their own deans and faculty. And eight of our oldest-standing relationships have extended for a really long time at roughly the same terms. Our next contract term doesn't even come up until 2024, yes, 2024. 54 distinct schools chose to partner with 2U.

For a university, choosing an OPM isn't simply about revenue percentages. It's about delivering on your promises. Revenue share is the place people immediately like to go when they want to talk negatively about our business. Most of those have a clear agenda. Let me make this clear. There is no moral superiority to any model, whether it's revenue share or fee for service. It's about value. What value are you creating for your university partner? Are you driving quality? Are you driving scale? It all comes down to value per dollar. We invest heavily in our programs to drive quality and scale, which creates real surplus for our partners.

Fee for service isn't new. It's existed our entire history. And the general contractor model, the current iteration promoted by the bears, has so many fees, it's like a fee party. And some of the fees even scale with enrollments. In addition, this model shifts the risk and cost to the university. The general contractor model, in our opinion, is a messy, complicated business. And clearly, today, there's no track record of success. These other models are not impacting our new program pipeline. Quite the opposite. We're taking over do-it-yourself programs, and we're winning contracts from competitors.

Do-it-yourself programs don't have the benefit of a world-class digital marketing shop or the leverage created by our multiple program verticals. When we take them over, they scale, often quickly. We've given you examples of this in the past, like Syracuse MBA. I just shared another one earlier in this call. Fordham was operating their own online MSW program before we took it over. Now, there'll be 450 students in the first cohort. And we're winning more contracts from competitors. Take the Graziadio Business School at Pepperdine University. Before 2U, they had 2 OPM relationships, 1 general contractor arrangement and 1 traditional revenue share model. Pepperdine terminated the program powered by the general contractor, and Pepperdine gave us the MBA powered by the traditional OPM. Our model delivers great outcomes from [more] students. Our model extends the mission and reach of the university. Our model makes it a more sustainable institution. Our model works.

The graduate segment is the organic growth engine powering 2U. FCE growth is beginning to reaccelerate. New student enrollments are strong across the portfolio. Pipeline is excellent. 2019 is nearly locked, and we're way ahead on 2020 pipeline progress. There's a lot of room to run, but most importantly, our partners are happy. They continue to extend existing contracts and add new programs. Our revenue share is simply not in question. Everything else on that is noise.

Moving on. The short course segment is another growth engine in a massive market that provides a lower cost and shorter duration alternative for students. This is a real business. Cathy will discuss that more in a moment. Short course has also increased stickiness with existing partners and opened the door to new institutions. Some news for you. We've expanded our partnership with the University of Dayton to deliver Masters-level online short courses in business and management. And there'll be many others. Some that we will enter with a single course to give the university a chance to experience the quality of our service.

One year in, we obviously love the GetSmarter acquisition, and now most of you do as well. We remain laser-focused on the 1.9 trillion global higher education market. In this market, our portfolio management approach is creating a powerful, sustainable business. Now with our successful capital raise this past May, we're in a position to go out and capture that opportunity. We will make the investments necessary to keep 2U on a path to $1 billion in revenue, and we've given ourselves the flexibility to move quickly on the next GetSmarter. But yes, we will be choosy.

And with that, I turn it over to the lady in pink, our fine CFO, Cathy Graham.

Cathy Graham

Thank you, Chip. 2U's trend of strong financial performance continued in the second quarter. Revenue came in nicely ahead of guidance, contributing to better-than-expected performance in our earnings measures. At $97.4 million, second quarter revenue exceeded the prior year period by 50%. In our graduate program segment, year-over-year revenue growth was 25% for the quarter, with the remainder of the growth coming from the addition of short course revenue. As we've said previously, we've been expecting year-over-year graduate program revenue rates to bottom -- growth rates to bottom out in the first half of this year. We now believe that this occurred in the first quarter of 2018. Sequentially, graduate program growth picked up slightly in the second quarter, and we expect to see a more significant reacceleration in the second half of the year.

Both graduate program and short course revenue growth continues to be driven by an increase in full course equivalent. As we expected, graduate program FCE growth turned upwards in the second quarter, showing a year-over-year increase of 28%, 3 percentage points higher than in the first quarter. This FCE growth was offset by a 2 percentage point decrease in average revenue as per FCE, driven primarily by two factors. The largest impact accounting for more than half of the decline was due to the comparison against an artificially high 2017 quarter, which, as we told you at the time, had a couple of onetime adjustments inflating the average revenue per FCE.

Additionally, our program mix has moved to include more programs with emergence and capstone courses. This second quarter contains a higher number of these types of lower credit count courses in the mix. Reiterating what we told you last quarter and following the pattern I previously described for revenue, we expect to see an even more significant reacceleration in graduate program FCE growth during the second half of the year.

In our short course segment, we had 8,222 short course FCEs in the second quarter, a 37% sequential increase, at an average revenue per FCE of $1,972. You should still expect to see average revenue for short course FCE trend up a bit more over time, as higher-priced U.S. and U.K. university courses drive an increasing majority of this segment's revenue.

Turning to our earnings measures. At $18.3 million, second quarter net loss widened year-over-year by $6.6 million, and the corresponding margin declined by 75 basis points. This was meaningfully better than expected, primarily because of a onetime $3 million tax benefit we recognized related to our acquisition of CritiqueIt. After net adjustments of $8 million, including for the acquisition-related tax benefit, second quarter adjusted net loss was $10.3 million or 10.6% of revenue. This represented a $5.1 million and 2.6 percentage point year-over-year reduction to adjusted net income and adjusted net income margin, respectively.

After a further net adjustment of $4.8 million, second quarter adjusted EBITDA loss was $5.6 million or 5.7% of revenue. This represented a $4.1 million increase in adjusted EBITDA loss and a 3.4 percentage point expansion in adjusted EBITDA loss margin over the prior year period. From a balance sheet perspective, we ended the second quarter with $488.8 million in cash, reflecting the addition of funds raised in our May 2018 follow-on offering. Our balance sheet also had $50 million in receivables balances, appropriately reflecting the timing of second quarter graduate program class starts. Now looking forward, we are expecting revenue of between $106 million and $107 million for the third quarter and $409.7 million and $412.2 million for the full year. At their midpoints, these ranges imply year-over-year growth of 52% for the quarter and 43% from the year. As you can see, at the midpoint of the ranges, we've increased our expectations for full year revenue from previous guidance for by $2.3 million. Continued higher-than-expected enrollments in new short courses are the primary driver of the increase.

As demonstrated by the significant sequential increase in the year-over-year FCE growth, we expect that our core graduate program business has passed its low growth point and has started to reaccelerate. However, the turn has happened a bit more gradually than we anticipated at the start of 2018. We said for some time now that we expect the graduate program segment to produce around 30% revenue growth for the year. But based on the impact we're seeing of prior period spend allocation decisions that enabled the kick-start of a high potential 2018 cohort and the path to a larger portfolio, combined with, as occasionally happens, some admit rate changes in a few of our larger programs, we are seeing a mix change that we now expect to lower average revenue per FCE for the year. We still anticipate year-over-year FCE growth to come in around 30% for 2018, but given the impact of slightly lower expectation for 2018 average revenue per FCE, we are now expecting year-over-year revenue growth for this segment to come in at between 28% and 29%.

However, our view of 2019 revenue growth expectations for this segment remains strong. We are confirming what we set out at our October 2017 Investor Day. We still expect 2019 year-over-year graduate program revenue growth of between 32% and 34%. Initial interest in our 2018 launch cohort programs increases confidence in this expectation, including the 450 expected students in the first [indiscernible] cohort and strong starts in Harvard Analytics, USC DPT, Baylor EdD and UNC Public Health. Additionally, we like what we see on the short course side. But given the now expected heavy growth in 2018, we caution you not to get ahead of us for 2019. This year's revenue growth rates are being spurred by a heavy weighting of new courses and new course start timing, all over a low 2017 revenue base. We are now able to say that we expect 2019 year-over-year revenue growth for our short course segment to be at least 35%. Please give us time to get this business to a point of more stability before you expect too much. Before we move off the subject of short course revenue, I'd like to point out that the implied short course revenue expectations for 2018 indicate a growth rate of about 150% over full year 2017 revenue for this segment. This also means that we likely spent less than 2 times 2018 short course revenue to acquire GetSmarter.

Now looking at earnings measures. We expect a net loss of between 11.6 million and 11 million for the third quarter and between 42.7 million and 41.5 million for the full year. Note that we've improved our expectations for full year net loss from our last guidance to reflect the onetime income tax benefit we recognized in the second quarter related to our acquisition of CritiqueIt. We now expect an adjusted net loss of between 1.7 million and 1.1 million for the third quarter and between 5.8 million and 4.6 million for the full year. We also expect positive adjusted EBITDA of between 4.2 million and 4.8 million for the quarter and between 16.9 million and 18.1 million for the full year.

And finally, as the last point on guidance, I want to remind you that while as of July 1, we've owned and been operating short courses for a year, we are still integrating and scaling what is a relatively early stage business segment. As we said previously, for the remainder of this year, and at least into next, we expect our short course financial results to remain highly sensitive to the timing of new course starts and the performance of those courses in their early presentations. By definition, initial presentations of new courses have the least certainty around student enrollment and therefore, revenue and margin. Please give us some time to see how these presentations perform and don't immediately assume that revenue and margin results will come in the top end of their ranges.

That disclaimer aside, we are getting our arms around the margin footprint of the business. While we're just getting to the point in our integration where we can really test how much can be driven from marketing synergies and we'll clearly be investing to capture growth opportunities for some time to come, we have done enough work throughout the short course business to be convinced that in the long run, this segment can produce real and appropriate steady state adjusted EBITDA margin.

So despite all of the disclaimers about not getting ahead of us, that are appropriate for a company managing such significant growth, we're really pleased with how our business continues to perform. We have the benefit of a strong underlying business model, a very large target market and lots of room left to run. With high visibility, especially in our graduate program business, we like what we're seeing. All the signs indicate that we should be able to continue capturing market opportunities on our terms and keep this growth engine pushing forward.

Chip?

Christopher Chip Paucek

Thanks, Cathy. The consolidated 2U, Inc. is a stronger company. We partner with 36 of the best universities in the world to power a portfolio of over 180 digital educational offerings across graduate programs and short courses. We're a more complete solution to our university partners. And more 2U-powered education offerings means great outcomes for more students. 2U is in the midst of a big opportunity. Bulls and bears aside, don't forget what it's about, the operating system for social mobility. That will continue to guide our decisions and chart our progress. And I'm pleased to say, it's going very well.

And now we could turn it over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Sarah Hindlian from Macquarie.

Sarah Hindlian

Chip, question for you. It sounds like your FCEs are turning a little bit sooner than expected, and I'd love to know what you're seeing to really drive that and if that seems to be an appropriate categorization. And then, certainly, this is a stock and a name that we're familiar, has been hounded by bears for quite some period of time, but I'm wondering if there's anything in particular you think is worth addressing or calling out sort of market right now or where there's a point of education that could be of use.

Christopher Chip Paucek

Thanks, Sarah. Well, yes, FCEs did turn the corner. We are pleased -- this is what we expected. This is what we told you to expect. But certainly, it shows up in the quarter going from 25% to 28%. We do expect it to be in the 30s and feel good about the momentum in the core business. Now, obviously, enrollment is a precursor to FCE. Enrollment is where it starts. And we did see, although it was important, that we give people the news about what's going on in the 2018 cohort. The 2018 cohort is pretty stunning, and we're very happy with the progress it's making and clearly happy that we've got the largest start in the history of the company and, candidly, not close. There's never been a cohort anywhere near that size. As far as the bears go, honestly, we're focused on the long term. This is not a short-term play. This a big opportunity, and it's a worldwide opportunity, and we're the market leader. And it's a growth story. So we're focused on delivering a long-term sustainable business that drive high-quality student outcomes worldwide, and we're not slowing down.

Operator

And our next question comes from the line of Monika Garg from KeyBanc.

Monika Garg

Chip, it's kind of a great example you gave for the programs you won either from [Audio Gap] universities or the ones you've winning from competition. Maybe could you share the comments universities shared with you, 2U, when they decided to move to 2U from competitors?

Christopher Chip Paucek

So interestingly, not if -- I appreciate the question. Interestingly, like historically, I've said this isn't really a share gain at this point. What you're talking about is a -- I feel like we're in the stage of existence in graduate education that electric cars are in that space, like it's early days. Like you're talking about everything going this direction over time. You're talking about a large secular change, like, [Indiscernible] pick up your life, quit your job and move to attend grad school? Well, you should, like approved. The model is great. The outcomes are strong. I think you can argue the value prop is not only better, but the experience is better. So I think share at this point isn't that relevant. And the reason that we emphasized the notion of sort of the conferrals and 80,000 to 85,000 we expect as we get to our long-term steady state is that we're powering this big system that we call 2UOS, a technology with a human touch, and it's a comprehensive solution that partners with a school for a decade or more to drive this outcome.

So I will tell you that we think it's early days, and we consider most of this fellow travelers, like you're talking about improving preconceived notions of online education by having high-quality schools go online. Now we happen to like our model. We think our model is the right model. We think our MPV strategy is working brilliantly. We think that's evidenced by the number of school signing. I mean, you don't have to believe me, look at the proof. And so what has happened as of late is we are starting to see contracts come to us either from schools that were running them themselves or from competitors. This is now becoming a thing, and certainly, we like it. But once again, I would emphasize that regardless of the sort of notion of the competition, ultimately, when we power a program, we scale it, and we do it equality. So it's not just about being big, it's being good. And we do both. And to do that, you have to invest. And we invest heavily in the school system that I just don't think anybody is close to comparable. So net-net, we feel really good about our competitive position. And so we just keep improving the operating system for social mobility. We keep improving 2UOS on a consistent basis, doing things like our acquisition of CritiqueIt to drive technology, our WeWork deal, which has been a phenomenal hit with the student body. So you have students now that are in 2U powered programs literally all over the planet going to a WeWork.

Monika Garg

Then, Chip, we are seeing a couple of universities bring new online Masters program at lower prices than their comparable on-campus ones. Like, for example, University of Illinois has now iMBA online comparable to the on-campus MBA but lower price. So how do you think this could impact the pricing of the online programs? How are university partners thinking of pricing of the online programs?

Christopher Chip Paucek

So it's early days in the market evolution. And clearly, there's going to be many different models of people approaching the market. Now I will tell you, across the board, and there's plenty of data out there on this, across the board, online programs are, generally speaking, priced at campus tuition. An equal percentage, actually, of online programs are priced higher than campus tuition as lower than campus tuition. In other words, the vast majority of programs are either priced at campus tuition or higher. There are some notable exceptions. You obviously just made one. Now we happen to think that this model provides long-term sustainability. We think it provides a program that runs sufficiently on its own, not being subsidized either by the campus program or by an outside entity of some kind. And so we do indeed like our model. Now, over time, 2U has continued to evolve its own cost model. And I can tell you that our Harvard Business Analytics Certificate is a good example of that, of a program that exists between the pricing of a short course and a campus degree. But regardless, we do think that our model today, being priced where they are, has been received extraordinarily well by the market. And we do think, over time, there's a lot going on underneath the system based on our pricing research that we feel strongly about. And the only other thing I would note, Monika, is that people tend to overemphasize the notion of the revenue share. And I will reemphasize that it's all about what you deliver for it. So, ultimately, we strongly believe that our revenue share is there to create a reasonably equal share of surplus. I would never tell the school where to spend its money. It's not my place. It's not my program. But we -- when we've been able to dig deep with the school, we've been able to prove to ourselves that, that is indeed correct, that we are building a long-term equal share of surplus. And we're doing it in a way that not only creates sustainability for the school but I also think creates huge value for the consumer. So room and board and the opportunity costs are the two largest costs to the graduate education. And ultimately, we're having a huge impact on the individual student cost. Now, over time, in individual verticals, as pricing evolves, we also think that we are the company with the entire suite, the horsepower inside this company across the spectrum of not just marketing but clinical placement of things like accessibility, data security, all these different parts that people don't normally talk about. We like our odds of being a company that will continue to be a market leader. As competition enters the space and as you look out multiple years down the road, we feel like our competitive position will be super strong.

Operator

And our next question comes from the line of Brian Schwartz from Oppenheimer.

Brian Schwartz

Chip, I want to switch the topic here away from competition. I wanted to ask you about any potential revenue synergies that the business is starting to experience with GetSmarter. And I'm wondering if you're seeing any cross-selling activity or if you could talk about the interest levels among the DGP partners for looking at the GetSmarter platform. And then also, are you doing anything internally there at looking at potential like bundling the 2 program offerings for a higher ed?

Christopher Chip Paucek

Yes, so I'd say, it really is still early days on the side of the marketing funnel and share. But the little [indiscernible] announcement that was in the prepared remarks is a good example of, we do think there will be synergy, in many cases, where we're offering short courses along the same line from a subject area or vertical to these large DGPs that we're marketing. We do think that, that has real value. And it's clear that at this point, we're not going to -- it's difficult to tell you about every course that's launching. It's just -- there's too many of them. And in some cases, we'll launch courses with universities that, candidly, we don't have these DGPs. We never did that in the past, and we're finding that to be an interesting strategy for people to be able to find -- experience our quality and service. But clearly, when there is a crossover, we do think that share across the board is pretty interesting. We're not at a point where we're willing to announce bundling of the courses. But it's a very smart question, which tells you that we're certainly looking at it. We do think that, that's an interesting opportunity longer term.

Brian Schwartz

And then the 1 follow-up I had was just on the capital raise during the quarter, really around the uses of cash and how you're thinking about that. It looks like you got now almost $0.5 billion of cash on the balance sheet. Can you talk through your philosophy and how you think about the priorities of using that cash between the organic growth investment, M&A, maybe buybacks?

Christopher Chip Paucek

So we obviously, as we said in the prepared remarks, wanted to give ourselves the ability to be flexible. We want to continue to improve the bundle. CritiqueIt, our latest announcement, was about the core value prop to our students and faculty. There was a part of it we were already using in part of our online campus, in particular, the grade book that was a big win for our schools. And we do think that, that technology will evolve and improve the actual student learning experience. There was also a team component to it. Ashley Bradford and the team from CritiqueIt, pretty incredible people, were able to become part of our TechDev team. So it's just a good example of the type of thing that we did want the flexibility to be able to pursue. Now, clearly, we also are going to give ourselves the option of looking at things like the next GetSmarter. I think GetSmarter, at this point, does create almost unfair high bar in terms of value that it will create for shareholders. But the reality is, we will be choosy in what we see, because we're not doing this because we need growth. We do think that worldwide, the opportunity is big, and we believe that we're the company in [indiscernible] position to capture the opportunity. So we don't need growth. But the reality is, it's a worldwide story, and we're not slowing down.

Now, at the same time, while we do have someone working with us in sort of strategic partnerships, we don't have a CorpDev budget where that money has been assigned and has to be spent to do a certain number of M&A deals. That's not how we're thinking about it. So on a go-forward basis, we will continue to evaluate each option. And Cathy clearly will have an extraordinarily high bar. I'm kidding, I will have a high bar as well.

Operator

And our next question comes from the line of George Tong from Goldman Sachs. You may begin.

George Tong

You've indicated that average revenue per FCE will moderate this year due in part to mix changes toward lower credit and cheaper courses. Based on your pipeline of courses looking ahead, can you discuss whether you expect this trend to continue into 2019?

Cathy Graham

George, so if you look back historically, you've seen average revenue per FCE go up and go down. And it tends to work through cycles based on what we are launching, whether those programs are heavier in lower credit courses, like capstones and emergence, or not. And we would expect that cycle to sort of continue. As you can tell, it never really moved significantly over the course of a single quarter. We sort of talked about whether or not -- we've talked in the past about the fact that a couple of percentage points each way in a quarter is pretty much mix-related. In this case, we probably expect it to sort of stay, not go up exceptionally much more sort of at least over the next couple of quarters. And then what we need to look at is what is happening in 2019. So the thing is, it does not, from our perspective, impact what our growth rate is expected to be for 2019. We've reconfirmed that 32% to 34% in the core business. So I think that you can look at us building those things into our models as far as what we expect.

Christopher Chip Paucek

The only thing I would add, George, this is Chip, is that I think there are past quarters where it's gone down like this, and there are also past quarters where it's gone up quite a bit. And the reality is, in either case, we didn't make big deal about it because it's not. So...

George Tong

And then as a follow-up, can you discuss broadly how year one enrollments in your newer programs compare with year one enrollments in your earlier programs? In other words, are class sizes changing such that you need to speed up or slow down the pace of new program launches to sustain your revenue growth trends?

Christopher Chip Paucek

Here's what I would say to you, is we don't get into individual programs for a reason. It's tricky. We are talking about an average. I would say that the grading of our programs and the selection of our programs is a pretty critical part of the story long term. And we feel like we're getting better at that. Candidly, we thought -- while Fordham has outperformed our expectations, there's no question, we thought it was going to be really big. But clearly, we have a lot of experience in that market, we have a lot of experience in that vertical. So both the geography and the vertical, we have a lot of experience. And so we thought it was going to be big. It's bigger than we thought. But -- and then the other programs in the vertical, like we're pretty excited about the start of the vertical. So I'm not sure if that's -- do you want to add anything?

Cathy Graham

Yes. Let me just add that one of the things you should keep an eye on and think about when comparing backwards is that, as we've said, you tend to see MPV programs scale more quickly than first programs. And so if you're really comparing to win, you've got first programs in a vertical -- a cohort, older programs that were almost, by definition, the first programs in their vertical to ones that are now the second, third or fourth program. You would expect to see those have larger first and follow-on cohort.

Christopher Chip Paucek

And, I guess, if I would add, the interesting thing about our business is we do these calls, and clearly, it's important to explain to our investors what's going on in the business. And we're a pretty transparent company. At the same time, we're not doing these to please investors. We're doing them strategically for the benefit of our partners and for 2U. And so the reason I go there is that, clearly, something in New York, based on what we've told you about regional buys, is going to have a tremendous amount of growth opportunity. But that doesn't mean that we're not going to launch incredibly exciting programs in Tennessee or in Colorado that aren't as big in New York. And that's important to our long-term strategy. So the reality is, Fordham is super exciting. We're pretty excited about our opportunities at Vanderbilt also. And that you sort of got to think long term and not just get too excited or disappointed about any particular thing you see in any particular enrollment number from somebody that wants to point out a particular number across the portfolio. I do think it's important that we remember, we're giving you averages. But strategically, we like our choices right now.

Operator

And our next question comes from the line of Jeff Silber from BMO Capital Markets.

Jeff Silber

Chip, at a conference, I believe, last quarter, you talked about the fact that there's some internal conversations going on whether -- and I think the quote was a margin expansion profile is appropriate for the company over the next few years, given all the growth opportunities in your business. I just was wondering if you could address that for a few minutes, how you're looking at growth versus margin expansion.

Christopher Chip Paucek

Thank you, Jeff. So this is definitely a growth story. And we've been discussing this quite a bit, because the reality is, when we talk about our LTR-TCA ratio, that's an internal metric that we use to run the business. It's not a number that we use to talk to you guys about it. We do get asked about it each quarter. In this quarter, as an example, it was 3.05. But the reality is, our steady state long-term target is 3.2. And at this stage of the company's life, there's no question that we are leaving excellent marketing opportunities on the table to generate high-quality enrollments for our partners. And we really don't believe that, that's the right call at this point in the company's life. We think that we should take advantage of those opportunities. Our marketing has gotten more efficient. We don't have a marketing efficiency problem. We actually think that there are ample opportunities across the portfolio for us to continue to invest. So we've been asking ourselves that question quite a bit. And it's clear that margin expansion is a real question for us at this point. Now we're working on a bunch of plans, and obviously, we have a lot to talk about this quarter. And as we evaluate where we will be, we will certainly let the investor community know once we've made decisions about where we will end up. Anything you'd like to add, Cathy?

Cathy Graham

No. I think you said it right.

Jeff Silber

Okay, great. And, Cathy, actually, this one's for you, also on the margin thing. I think in your remarks, you talked about seeing that the short courses eventually can reach, that you said, real and steady state adjusted EBITDA margins. Since you're a CFO, is it possible to put some numbers around [indiscernible]?

Cathy Graham

The answer is not yet. And the reason is the reason that I stated in the prepared remarks. We are just getting to the point where we've done enough integration to be able to test share, and by that, I mean, shared lien, so that we can see whether or not there are marketing synergies. And that could be a meaningful impact on what that margin is. And we need to give that some time to get through that -- to get through -- give our marketing guys time to get through that test and see how that develops across a number of programs and a number of different verticals. But we will absolutely keep you updated as we go through that and are able to share where we think that falls out.

Christopher Chip Paucek

But I would say, that is a step on the road. We are now starting to get confident that this is a real business from the standpoint of not just the top line but the bottom line. And so we felt it was worth putting that in, even though we're not at a point where we're giving you a number.

Cathy Graham

And by the way, I will point out that we do expect that this short course segment will be adjusted EBITDA-positive for 2018.

Christopher Chip Paucek

Jeff, what I would say is I feel like we have now 18-quarter track record of telling you something if we know it. We're going to -- if we know something, we're going to tell you. We're not quite there yet, but we're getting closer.

Operator

And our next question comes from the line of Brad Zelnick from Credit Suisse.

Unidentified Analyst

It's Bob [ph] in here for Brad. Can you guys just provide some thoughts into how we should think about the mix of new program launches between new verticals and MPVs for 2020 and beyond?

Christopher Chip Paucek

Yes. Well, this next -- this 2019 cohort is almost all MPV. The one program so far -- we haven't announced the 16th program yet. But the one program in the current lineup that is not -- actually, notably is the JD with Dayton, which is a new entry into one of the largest verticals by conferrals. So here's what I'd say, is that, clearly, we've done a lot of new vertical expansion. If you look at like the 16 cohorts, five of the six were new verticals. And so when you add new verticals, by definition, that means you can add a lot of MPV programs. And we clearly have added more programs per vertical than we expected. So 2019 is pretty exciting from an MPV standpoint. And by definition, there are more MPV-type programs we can run than there are new verticals. Now at the same time, we're still pretty early in the number of verticals. We're at 24. And we do believe the numbers we've given you in the past in terms of the total expectation long term are real. So just some examples of verticals that we haven't touched yet. There's been a lot of discussion in activity around MBAs, and we love our MBA programs. But the largest portion of our business are in programs that have these deep clinical experiences that tend to leave the licensure. And ultimately, there's a bunch that we have not done yet. We will do veterinary. We will do the MD. We will do pharmacy. We will do dentistry. We will do all of them. We believe they will all go this way. And they happen to be programs that have perfect sort of -- a very good setup for 2U. We think those are all real. So clearly, it's an increasing percentage of MPV, simply because we're getting really good at these different verticals. And what happens across our portfolio is our clients that have those programs see that we're doing really well in those verticals. And it is certainly easier to launch a program at an existing client than it is a new one. So in terms of the mix of something like 2020, we've given you 2019, we cannot yet give you 2020. And we have not given you the cadence, the exact amount that we will do in 2020. But we're getting to it.

Unidentified Analyst

And then -- and just following up. You guys mentioned previously that you're entering some new marketing channels for short courses. Can you just provide some insights into how that's performing and what you've learned so far?

Christopher Chip Paucek

We don't -- we tend to not talk about individual marketing channels, simply because we don't need to give a road map to our competition about how to do everything we do. It is our business that continually experiment with marketing. And as these programs get large, whether it be short courses or our degree programs, we do think that we tend to operate almost at the efficient frontier marketing. What I mean by that is, by definition, we're constantly testing not just individual channels. And it's not all about checks to Google. And we have an entire team doing large amount of content creation to drive organic interest in the programs. So, ultimately, I'm not going to talk about the individual channels, but by definition, we are continually innovating on that side.

Operator

And our next question comes from the line of Michael Tarkan from Compass Point.

Michael Tarkan

Just getting back to the Fordham program a little bit. You have 2 other Social Work programs, one in '18 and one in '19. I guess, I'm wondering sort of is a lot of the growth coming organically? Is it coming from MPV? Can we expect those other ones -- not necessarily getting to that level right out of the gate, but is the Social Work vertical one of the bigger ones that you see developing over -- on the near term?

Christopher Chip Paucek

Yes. Well, Social Work is large by conferrals. So that shouldn't be entirely shocking. MBA is large by conferrals. Part of the reason we have a lot of MBAs, Social Work, Nursing. And we said in the past that there are some programs that are smaller by conferrals that we still really like quite a bit, in part, because there are fewer programs available, and you have this huge shortage across the spectrum of these programs. So from an outcomes perspective, just as an example, like my son, when he was 1, when he was -- he's now -- that's my youngest, he's 13 now. He had a hearing problem and, therefore, had a speech problem, and it was really difficult to find a speech therapist in Annapolis, Maryland. They just couldn't find one. And so the reality is, while speech is not big by conferrals, there's not enough programs. And so we love the idea of filling that shortage. Social Work is an exciting vertical. We like the fact that we're getting good geographic sort of range. We've now got California, Colorado, Texas and New York. But, Mike, I would caution to as much as I love telling you the 450 number, and I do appreciate the inherent value of that, and I can tell you, Fordham's thrilled about it, remember, these are students that are -- that Fordham has accepted, not 2U. Ultimately, you also have to remember, it's New York. It's the market of -- it's the New York market is, the single best market in the country. And now we do have the 2 best markets in the country for that particular discipline. We have New York and California. So we don't want to get carried away with every Social Work program having that kind of start.

The other thing that's interesting and that we haven't talked about and that I love about this announcement in terms of having our cohort almost fully, fully slotted is the marketing lead time is also a factor. And it's not something we talk a lot about. But one of the challenges of scaling the company like this is there is a tremendous number of people and a super talented bunch, by the way, that are doing the actual work. This doesn't happen. I don't have a wave, and it happens. These people are working hard. And in doing so, in the past, at times, having not a ton of lead time to get a program up and running inherently means even if it's MPV, you're going to start smaller because you don't have a lot of time. These things take time to go through the funnel. So this program, we've been working for a long time and gave us the ability to have a larger number.

Now, finally, you are correct that share is a factor that's inherently useful. So MPV does scale faster, you will see that. Cathy did mention in her prepared remarks, there were a couple of other programs that were notable enough that she called them out in terms of we're pretty excited about what's happening, like, the Harvard Business Analytics Program, the Baylor program, the UNC Public Health program. That was our second program in that vertical, and that was a vertical that did not only good size but one that we only had one operating. So lot of value there, and it's turning out to be a pretty exciting cohort.

Michael Tarkan

Just on the marketing front. Are you noticing any changes in the cost to acquire a student? I appreciate all the context around the marketing channel. And on an underlying basis, are there any changes in that student acquisition cost?

Christopher Chip Paucek

Yes. I mean, student acquisition, it's inherently embedded in our LTR-TCA ratio. And clearly, our current financial statement shows expenses related to future periods of revenues. So that's kind of an irrelevant discussion, not your discussion, Mike. Google click inflation is one example of something that we've dealt in our entire history as a company. And as we get greater scale, we are able to be more effective there, not less. Our relationship with the large companies that have channels, that we're working through has substantially improved over the last couple of years. And as of late, actually, Google click inflation has gone a positive direction. But regardless, the MPV strategy is clearly what drives our marketing efficiency. So, today, we don't have a marketing efficiency issue.

Michael Tarkan

And then just last quickly, I'm assuming no, but any update on the undergraduate front?

Christopher Chip Paucek

Not on this call.

Operator

And it looks like we have no further questions at this time. I would like to turn the call back to Chip Paucek for closing remarks.

Christopher Chip Paucek

Thank you, everybody. I'd like to thank our excellent assistants who powered this call, Sarah Muntzing, Sandra Bailey and Lisa Wood. Thank you for all of your support in helping us deliver these earnings calls. It's not easy. And we look forward to seeing you out on the road. Take care, everyone.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.