2U, Inc. (TWOU) CEO Christopher Paucek on Q4 2018 Results - Earnings Call Transcript

Feb. 26, 2019 1:51 AM ET2U, Inc. (TWOU)
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2U, Inc. (NASDAQ:TWOU) Q4 2018 Results Earnings Conference Call February 25, 2019 5:00 PM ET

Company Participants

Edward Goodwin - Vice President, Investor Relations

Christopher Paucek - Co-Founder and Chief Executive Officer

Cathy Graham - Chief Financial Officer

Conference Call Participants

Jeffrey Meuler - Robert W. Baird & Co.

Sarah Hindlian - Macquarie Capital

Thomas Singlehurst - Citigroup Global Markets

Brian Schwartz - Oppenheimer & Co.

Corey Greendale - First Analysis

Scott Berg - Needham & Company

Jeffrey Silber - BMO Capital Markets

Rishi Jaluria - D.A. Davidson & Company

Jason Celino - KeyBanc Capital Markets

Bhavin Shah - Credit Suisse

Christopher Howe - Barrington Research

Peter Appert - Piper Jaffray & Company

George Tong - Goldman Sachs


Good day, ladies and gentlemen, and welcome to the 2U 2018 Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this call may be recorded.

I would now like to introduce your host for today’s conference, Ed Goodwin, VP, Investor Relations. Sir, you may begin.

Edward Goodwin

Thank you, operator. Good afternoon, everyone, and welcome to 2U’s fourth quarter and full year 2018 earnings conference call. By now, you should have received a copy of the earnings release for the company’s fourth 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, Co-Founder and CEO, and Cathy Graham, CFO.

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

The outcome of the events described in these forward-looking statements is subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results anticipated by these forward-looking statements.

This includes, but is not limited to, those risks contained in the Risk Factor section of the company’s annual report on Form 10-K for the year ended December 31, 2017 and other reports filed with the SEC.

All information provided in this call is as of today. Except as required by law, we undertake no obligation to update publicly any forward-looking statements made on this call to conform to statements or actual results or changes in our expectations.

Also, it is 2U’s policy not to update our financial guidance other than in public communications.

Non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release.

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

Christopher Paucek

Thanks. Edward. A few weeks ago, we held our 6th Annual Global Partner Symposium. The inaugural symposium in 2014 had attendees from 11 US university partners. This year, we had attendees from 37 institutions across the US, UK, Mexico and South Africa – a truly global event. It was humbling and exciting to see how far we've come and how bright the future is.

At symposium, we highlighted some new partner benefits as well a new framework for how we think about the future of digital education. I love it and I'll talk about it later.

But I know all of you've been waiting for our results, so let's get right to those. I'm telling you our business is resilient, it's diversified and it's growing.

Fourth quarter was rock solid. On the top line, revenue for the fourth quarter was $115.1 million, 33% growth over Q4 2017. And for 2018, we finished with $411.8 million revenue, 44% growth over last year. Over 10 years in, we grew this company 44%.

On the bottom line, adjusted EBITDA was $20.1 million for the quarter and was $17.7 million for the year. Cathy will take you through the financials in more detail shortly.

Now, let's walk through some color on the segments, starting with Grad. We told early in the year we expected the Grad segment revenue growth for 2018 would be between 28% and 29% due to some program specific issues. The segment finished the year at the top end of that range, with 28.8% revenue growth,

Our diversified Grad portfolio is strong. You can see the power of the portfolio at work in the additional disclosures we share at the end of the year, including our cohort margins and our list of grad programs by annual new student enrollment. Both can be found in our earnings deck.

Cathy will address cohort margins in her section. I'll cover the list of top Grad programs by annual new student enrollment now. As we did last year, we've again expanded the list by five spots, this time from 15 programs to 20 programs. We believe the expanded list better demonstrates the progress of our newer programs and the strength of the overall portfolio.

While we don't give the exact enrollment numbers – that's the partners call – I can share that the entire top 20 is above 200 new student enrollments, and so are some of the programs outside of the top 20.

Notably, there's a program from every single cohort in the top 20. Mature programs continue to enroll new students. Newer programs are scaling well. And the 2018 cohort continues to be excellent. In fact, seven programs on the list were launched in the past two years. Let that land for a second. Seven! So much for the theory that all of the new ones will be small and suboptimal.

We're not only seeing strength across our cohorts, but across verticals. There are 10 verticals represented on the list. Ten!

It's also across geographies. There are programs from every major region of the US. We told you verticals matter and geography matters.

Our expanding selection of programs continues to drive growth in the Grad segment.

Now, let's talk pipeline. The 2019 cohort is locked. You can find the detailed list on our investor site.

Let me talk about the final two programs we announced. The Tufts University School of Medicine became the third school of that university to announce a grad program with 2U.

The DGP will include a Master of Public Health degree, our fifth in that vertical, and a Master of Health Informatics and Analytics degree, our second in that vertical. We love how our relationship with Tufts has grown over the last year.

We also announced an MBA with Tech Monterrey EGADE School of Business. This is our second grad program outside the US and our first in the massive market of Latin America, with one of the best B-schools in the entire region.

We launched a dual degree with that Tech Monterrey back in 2015 with WashULaw. We're excited to expand more with them.

So, along with the UCL MBA, we will have two international grad programs in 2019.

Looking ahead to 2020, we have a target of launching 21 programs. We've [indiscernible 0:06:35.0] two so far, with Tech Monterrey moving into 2019, Tufts Education shifted from 2019 to 2020. As a reminder, small shifts in slotting are normal.

We also announced today social work at Case Western Reserve University, a top 10 program in the discipline, with a major existing online presence. This program was run by a competitor for some time and has now come to us. We're thrilled to add this highly regarded school to our portfolio. Thank you, Dean Gilmore, for your faith in us.

Expect many more to come. Pipeline is simply outstanding.

Finally, before we move on to the Short Course segment, I realize all you want to hear about our UNC and USC specific issues, so I don't want to shy away from it.

This is my fifth year as a public company CEO. I can easily say last quarter was the most complicated we had. It was a whirlwind. But this whirlwind was not related to fundamental issues with our business model or overstated fears of competitive pressures.

We had some complicated scenarios in some of our legacy programs and we're dealing with them. Let me take them one at a time.

USC. Last year, we told you our issues with the school's social work were a potential future problem. We had to forecast our expectations for the changes to the school's plan for 2019, making our best estimate of the magnitude at the time, which resulted in us lowering our implied revenue growth expectations for the segment by roughly 3 percentage points.

Today, we feel like our estimates were correct. January classes are underway and we're deep in the recruitment period for the May cohort. This continues to be a fluid situation in terms of school leadership, which is certainly not settled, but we believe our projections for 2019 are solid. We will continue to work with the school to drive the best results possible. We have to be patient here and support the school in its longer-term plans and strategy. So, that's what we're doing okay.

Okay. On to UNC. Last year, we told you that this program's performance would have an impact on the current period or 2018. We told we accounted for the issue and included it in our future forecasts for 2019. As you can see from our guidance, we got it covered.

But we're excited, in the last few months, our teams have come together and are working very well. The leadership at Kenan-Flagler is all in. We've been working closely with Kenan-Flagler, innovating, creating, fellowships being deployed, driving quality. Yes, the year-on-year numbers are down, but we're on the right path. I want to thank Dean Doug Shackelford and Program Managing Director Melissa Hlavac for their leadership.

I would also like to congratulate them for the recent number one ranking in US News and for beating Duke last Wednesday. I like our odds of driving improvements in the program and in the numbers. We're focused on it as a team together. Go Heels.

With that, let's turn to Short Courses. It's been a heck of a year. Six quarters in, the Short Course segment has become a real contributor to our growth. Revenue for the segment was $63.4 million in 2018, 289% growth over last year. This acquisition has been an absolute success.

When we bought GetSmarter, they had nine partners. Now, that number is 17, most of which are existing grad partners. As an example, our partnership with Northwestern included one grad program with the Family Institute. Now, it also includes short courses at the Kellogg School of Management.

We also announced we began offering short courses at Syracuse, with at least 10 new short courses across multiple verticals. The value was obvious to our partners. Short courses deepen our relationship across the entire university.

Let's turn to our recently announced strategic partnership with Keypath, which enables us to say yes to a broader spectrum of grad programs at our partners.

During our first 11 years, we've been highly selective to ensure the universities and programs we chose to support would deliver both world-class outcomes and the financial returns needed to drive sustainability in our model.

Keypath was purpose-built to launch programs at a lower investment level, which opens up a much larger pool of potential programs. Delivering quality at a smaller scale is in their DNA. Their programs provide strong outcomes for students and a sustainable profitable model for their partners.

So, for program opportunities that exist in our pipeline that don't meet our investment profile, we can finally say yes to our partners through what we're calling the Powered by Keypath model.

How will it work? 2U will manage the university relationship and all contracting with our partners. As it's our contract, 2U will retain responsibility for the success of any Powered by Keypath program. Keypath will provide the primary investment and most services to power each program. 2U would then provide some additional layer of services, which will vary by contract.

Under the partnership, 2U will receive gross revenue share for all Powered by Keypath program. The university will pay 2U and then we will pay Keypath a proportion of this, commensurate with the services they provide.

This is all new and there's still plenty of details to work out as we move forward, but there's a reason we announced it at the start of our symposium. During our time together, we discussed Powered by Keypath with our provosts, deans and faculties across 37 universities. Coming out symposium, there is substantial client demand for this model.

I want to make one thing clear. Powered by Keypath programs will be additive to our new program launch cadence, separate from our long-term target of 250 DGPs. We believe we can achieve our near-term guidance and long-term revenue targets for the Grad segment with our current business model.

But, strategically, we think the partnership with Keypath makes a ton of sense on three levels. First, it creates an additional revenue stream that requires very little capital from 2U without the type of loss curves you would see in a typical 2U program.

The revenue we would expect from a Powered by Keypath program won't be as large as a typical 2U program. But as we start launching these, we believe it can develop into a really solid revenue stream over time.

Second, Powered by Keypath allows to say yes to more of the graduate programs our partners are asking for. When we've said and noticed smaller programs in the past, our partners have had three choices – do nothing, launch the program on their own or work with a competitor.

Very often, when you saw a competitor announce a program with one of our partners, it's because we said no to that program. Well, with Powered by Keypath, we can say yes to more.

And, finally, there's a strategic benefit to powering more of the portfolio at each partner. Powered by Keypath will allow us to work with even more deans and faculty members at schools across our partners. Having a broader relationship across each university makes us a better partner and enables us to have more substantive conversations at the provost level about a strategic, university-wide approach to digital education. You can call it our institutional suite.

All of this aligns with the heart of our business model. When students win, universities win. And then 2U wins. A greater selection of high quality offerings will drive more outcomes for more students.

And with that, I'll turn it over to Cathy.

Cathy Graham

Thank you, Chip. 2U closed out 2018 with strong fourth quarter and full-year financial performance. Revenue came in at the high-end of our guidance range and earnings measures were either at or better than the high-end of the ranges we provided.

For both the quarter and the year, we once again delivered significant year-over-year revenue growth. At $115.1 million for the fourth quarter and $411.8 million for the full year, revenues exceeded the prior-year periods by 32.8% and 43.6% respectively.

In our Graduate Program segment, year-over-year revenue growth was 29.7% for the quarter and 28.8% for the year, with our Short Course segment reporting year-over-year revenue growth of 51.9% and 288.5% for the quarter and the year respectively.

Keep in mind, we only owned GetSmarter for six months of the 2017 period.

For the fourth quarter and full-year 2018, fluctuations in currency from the rates prevailing in the comparable prior-year periods did not have a material impact on revenue or any of our other financial measures or trends.

Graduate Program revenue growth continued to be driven primarily by an increase in full course equivalents, adjusted by only slight movements in average revenue per FCE that fall within our typical ranges.

For the fourth quarter, FCE showed a year-over-year increase of 28.1%, enhanced slightly by a 1.2% increase in average revenue per FCE.

For the full year, FCE showed a year-over-year increase of 29.1%, offset slightly by a small two-tenths of 1% decline in average revenue per FCE.

In our Short Course segment, revenue growth continued to be driven by increases in both FCEs and average revenue per FCE, reflecting new course launches and a continued shift in course mix towards higher-priced US and UK-based courses.

As expected, FCE showed a year-over-year increase of 33.9% for the fourth quarter and 197.3% for the year. In both periods, FCE growth was enhanced by 13.4% and 30.7% increases in average revenue per FCE for the quarter and the full year respectively.

Now, turning to our earnings measures, at $4.8 million, fourth-quarter net income improved year-over-year by $4.3 million and the corresponding margin improved by 3.6 percentage points over the prior-year period to 4.2%.

For the full year, our $38.3 million net loss showed a year-over-year decline of $8.9 million, but a 1 percentage point improvement in margin to 9.3%. The full-year dollar decline was the result of absorbing growth and acquisition-related step ups in depreciation and amortization and equity compensation expense, which were partially offset by acquisition-related tax benefits and increased interest income earned on higher cash balances.

After net adjustments of $8.8 million, fourth-quarter adjusted net income was $13.7 million or 11.9% of revenue. This represented a $5.8 million and 2.8 percentage point year-over-year improvement to adjusted net income and adjusted net income margin respectively.

On a per share basis, adjusted net income improved by $0.09 over the same quarter of 2017.

For the full year, after net adjustments of $34.8 million, adjusted net loss was $3.5 million or 0.9% of revenue. This represented an $800,000 an six-tenths of 1 percentage point year-over-year improvement in adjusted net loss and adjusted net loss margin respectively. On a per share basis, year-over-year adjusted net loss improved by $0.03.

After a further net adjustment of $6.4 million, fourth-quarter adjusted EBITDA was $20.1 million or 17.4% of revenue. This represented a $7.3 million improvement in adjusted EBITDA and a 2.8 percentage point improvement in adjusted EBITDA margin over the prior-year period.

And for the full year, after a further net adjustment of $21.2 million, adjusted EBITDA was $17.7 million or 4.3% of revenue. This represented a $6.2 million improvement in adjusted EBITDA and a four-tenths of 1 percentage point improvement in adjusted EBITDA margin over the prior year.

Now, as we do at this time each year, we have provided fully-allocated Graduate Program segment profitability margins at the launch cohort level for full-year 2018. This segment profitability measure is calculated on the same basis as adjusted EBITDA, but for this purpose we've used the terminology that matches our disclosures.

The group of 12 programs operating for four years or more had a segment profitability margin of 42%, 3 percentage points higher than the somewhat smaller number of programs that made up our four year or more grouping for 2017.

As we discussed in November when we previewed margin expectations for our most mature program cohort, this margin has become somewhat higher than we would have expected. This demonstrates that there are almost certainly additional students that we could enroll in servicing these programs, while staying within our target financial parameters.

As such, this higher margin was a significant part of our decision to expand marketing spend and take somewhat lower margins for 2019 to attract additional students and drive additional revenue.

But as we're talking about this additional marketing spend, I need to remind you of one important point. Our Graduate Program business model has a significant time lag between the point of marketing spend and the period of revenue recognition.

This year spend increase is not an exercise in spending more to grow the same or less, but realistically it is not going to have a material impact on 2019 revenue. It will drive revenue primarily for 2020 and 2021.

For 2018, programs that have been operating between three and four years had a fully allocated margin of 25% for the year, equal to the margin in 2017 and still well above the high end of our expected range.

Additionally, programs that have been operating for between two and three years had a fully allocated loss margin of 8% for the year, 22 percentage points below the margin we reported for this grouping in the prior-year, but still well within our expected range.

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

That leaves the majority – the vast majority of the segment level losses in our Graduate Program business exactly where we would expect, in programs operating for two years or less, including programs expected to launch in 2019 where we had costs in 2018, but no revenue.

This timeframe corresponds to our period of heaviest net negative cash investment in new program launch and scaling. And for 2018, these programs had a combined loss margin of 199%.

While this represents a significant decrease in percentage loss for this cohort compared to the prior-year period, the change isn't particularly meaningful. Variances in this grouping are largely driven by program mix and the timing of launches within our accelerating program launch schedule and higher or lower loss percentages in this timeframe have no bearing on program economic lifecycles or ultimate steady state margins.

What we're seeing now across all our program cohort strongly validates the typical program economic lifecycle we've consistently discussed with you and makes us very comfortable that, to drive growth, increasing our investments in both new program launches and current program marketing are wise strategic decisions.

From a balance sheet perspective, we ended the year with $449.8 million in cash. This balance reflects activity during the year, including the addition of $330.9 million in net proceeds from the sale of common stock, which occurred in the second quarter.

Our year-end balance sheet also had $32.6 million in receivable balances, reflecting the fact that most programs and courses are completed, but not all of our clients have paid before year-end.

Now, expanding on the initial look at 2019 we gave with our third quarter results, we've increased our 2019 revenue and adjusted earnings measure expectations and provided specific first quarter and full-year 2019 guidance.

On the top line, we are expecting revenue of between $121.5 and $122.1 million for the first quarter and $546.6 million and $550.8 million for the full year. At their midpoints, these ranges imply year-over-year growth of 32% for the first quarter and 33.3% for the full year.

Based on our current outlook, and particularly with the additional visibility we now have into Short Course timing, we expect that 45% to 46% of 2019 revenue will be recognized in the first half of the year.

Further, we expect that, as a percentage of full-year revenue, third and fourth quarter revenue distribution will be similar to the distribution we saw in 2018.

We now expect a net loss of between $22 million and $21.6 million for the first quarter and between $80.2 million and $77 million for the full year.

Relative to the 2019 preview we provided in November, our net loss guidance has increased somewhat due to an increase in our estimate of stock compensation expense. This expense increase is primarily related to additional one-time equity grants we're making to a broad group of existing managers, which will be entirely expensed in 2019 and early 2020.

We expect an adjusted net loss of between $10.8 million and $10.4 million for the first quarter and between $21.8 million and $19.4 million for the full year.

For the first half of 2019, we expect an adjusted net loss margin of 12.6% to 12.1%. And for the second half, we expect a third quarter loss and fourth quarter income.

We expect the distribution of loss and income between third and fourth quarters will be somewhat more skewed than we saw in 2018, largely based on the timing of Short Course marketing and presentations.

We also expect an adjusted EBITDA loss of between $4.6 million and $4.2 million for the first quarter and positive adjusted EBITDA of between $11.8 million and $14.2 million for the year.

For the first half of 2019, we expect an adjusted EBITDA loss margin of between 6.9% and 6.5%. And for the second half, we expect a similar distribution of positive adjusted EBITDA between the third and fourth quarters as we saw in 2018.

Much of the color I've provided here as to how to think about our performance across the 2019 quarters is also presented in the financial outlook section of our earnings release. I encourage you to read this section carefully in order to understand how we now believe 2019 will unfold.

And finally, as a last word on our expectations for 2019, I want to remind you that, while a large portion of our business is relatively predictable, we still have areas of uncertainty that could cause our results to vary from our current expectations.

In particular, we continue to launch a significant number of new short courses and we expect our Short Course financial results to remain highly sensitive to the types of new courses we launch and the performance of new courses in their early presentations.

Please give us some time to see how these courses perform and to expand our portfolio to reduce reliance on any group of courses or new course launches. Don't immediately assume that revenue and margin results for this year will come in at the top end of their ranges.

But despite that cautionary note, we remain excited and energized by the opportunity we have in front of us, not only for 2019, but beyond. Our revenue and adjusted earnings measure expectations for the year are up. But, more importantly, we remain confident in our ability to continue delivering 30-plus-percent topline growth, get to $1 billion in revenue within three years and leverage a business model that we've proven can deliver profitability as programs mature.

But even with all the positives, we've been through a period recently where we've had to hold on to our belief in one of 2U's guiding principles – don't let the skeptic win. Trust me, we haven't and we won't.


Christopher Paucek

Thanks, Cathy. You rock. As I mentioned at the outset, our Global Partner Symposium was really something.

I want to close with two highlights. First, we introduced the Career Curriculum Continuum, a product strategy and a framework for lifelong learning, education without end, that anchors universities at the center. We're excited about empowering partners to meet the demands of learners across the continuum. You'll hear more about it over the next year.

Second, we teamed up with LinkedIn to help students further their career goals and produce greater insights into the professional pathways and outcomes of students in 2U-powered programs.

This exciting and unique expansion of our relationship is possible because of our scale and the strength of our overall relationship with LinkedIn.

Under the agreement, students in 2U-powered degree programs will receive complementary access to LinkedIn Premium Career, which offers a suite of career-enhancing benefits including resume building tools, insights on salary and earning potential, as well the ability to contact recruiters and hiring managers in the system.

The collaboration will also include tailored workshops for 2U partner institutions, university leaders and faculty to better understand how to leverage LinkedIn's platform for thought leadership and to build more engagement with their students and alumni.

Finally, and perhaps most importantly, 2U and LinkedIn will work together to share insights about career pathways that help measure outcomes and empower students to make informed decisions when considering their career journey.

I think this has the potential to have a huge impact on our long-term mission of alerting the back row in higher education.

And now we can move on to Q&.

Question-and-Answer Session


Thank you, sir. [Operator Instructions]. And our first question is going to come from Jeff Meuler from Baird. Your line is now active.

Jeffrey Meuler

Yeah, thank you. So, I want to ask on the Keypath partnership. So, can you just talk a bit more about what services you're envisioning? And I know some of this is still being ironed out, but what services 2U is envisioning, providing to the university partner beyond just managing the relationship? And do you envision that it's going to result in, I guess, 2U deriving significant financial benefit from – directly from the smaller Powered by Keypath programs or is it more about the broad and strategic relationship with the client?

Christopher Paucek

Thanks, Jeff. First and foremost, it is about the strategic relationship more than anything else. We do like the financial impact over time. We think it could be meaningful. Clearly, not to 2019. It takes time for these programs to rollout. And while we would hope to see some impact here, we're not presuming any impact on our guidance.

And so, in terms of the services provided, we have a lot more work to do and we actually have to deploy it with partners. Now, the reason we put it out there for the symposium is just to get it in front of our – the overall partner suite. And not overstating, it was fabulously received. So, we do think there's great potential. The services we'll provide, there are some things that are pretty obvious on our side that we feel like we can add to the core Keypath bundle. But Keypath was purpose-built for programs at this kind of capital footprint.

And we felt like it was being additive. We felt like it was a great opportunity for us to have our cake and eat it too, not take away from what we're doing with our 250 estimate, but cover more of the ground at each school. And we care about these relationships. So, building that sort of strategic framework becomes a key part of this notion of the institutional suite, which we think is really powerful.

Jeffrey Meuler

Okay. Thanks for that. And then, now that you're, I guess, over a year-and-a-half into GetSmarter being part of the company, I would be curious what you're seeing in terms of marketing synergies. I'm thinking both about improving the GetSmarter marketing function, as well as are you starting to see benefits from drafting off of their traffic, their funnel in terms of converting some of those students to the green 2U students? Thanks.

Christopher Paucek

Thanks, Jeff. So, it's still early days to share actually. We feel like there's a lot of room to run long-term in what we can do. One of the things about the Career Curriculum Continuum that we like is the notion of starting with skin in the game with the short courses and leading up as you go up the continuum.

We think, as you see greater numbers of short courses, there's incredible opportunity in course bundles, which we're calling course stacks, which we think should lead directly into other parts of the continuum, which is all a different way of talking about the sort of overall synergy of the short course business with the Grad segment.

We like the idea of the short courses leading directly into, a pathway into a variety of degrees. We've got a bunch of interest in that. And fascinatingly, it kind of happens today across our Grad segment in a way that people don't realize. There's a thing called the cross program course initiative. So, as an MBA UNC student, before I graduated, I took a GW public health course in advocacy and I took a WashULaw short course in contract as part of my MBA@UNC curriculum. And so, we've already got some experience of working it across the system, which is actually much harder to do than doing it within a university directly. So, we think that there's a lot of applicability there.

In terms of how marketing has been impacted, GetSmarter is fully part of 2U in every way. It is fully integrated. The Cape Town team is the 2U team and working really well with even managing just how to work together across what is a long way and a lot of time zone challenges, which now we've got people in Africa and, obviously, in Asia. We're getting pretty good at it. So, I feel like, overall, the teams are working well together and our scale is directly part of what is creating the opportunity for this kind of growth in that segment.

Jeffrey Meuler

Thank you.


And our next question comes from Sarah Hindlian from Macquarie. Your line is now open.

Sarah Hindlian

Yes, hi. Thank you so much, guys, and congrats on the quarter and I think, more importantly, the outlook.

Chip, I have a couple of questions for you. One thing that's really clear to me when I speak to your graduate partners is that there is a tremendous – really a tremendous upsell opportunity within Short Courses. Is that fair? And if so, is there an opportunity to see those Short Course partners pull in to you for grad degrees? And then, I have a follow-up for you as well.

Christopher Paucek

Thank you, Sarah. So, yeah. The short answer is that when we acquired the company, we firmly believe that there was huge potential for sort of cross-pollination on all levels. These are long-term strategic relationships. They're all complicated, but they've been fantastic so far.

If you look at the Short Course progress, when we announced Syracuse with a very large deployment of short courses, we're now up to 17 partners. And all of those, except Stanford, were partners that were grad partners.

And then, the flipside of that, we think, becomes very obvious over time. As you might imagine, it takes longer to establish a full degree relationship than it does a short course relationship.

So, there's all kinds of opportunity. I maybe wouldn't call it upselling because we think of it more as sort of building the partnership, but I know that that is semantics in this world. So, we really like the long-term opportunity across all of the above. It's clear that the continuum will exist across all these partners and we believe the university is front and central in the student's life across that continuum and we think we're the company to power that.

Sarah Hindlian

All right. That's really helpful. And I just had another one I wanted to talk to you about while I have you. The competitive win at Case Western, were there other bidders? And what drove the win of that program for you guys, given that there was already an existing program in place?

Christopher Paucek

Yes, there were. In general, we tend to stay above the fray in terms of talking about individual companies. We're very excited to land this relationship. It is one of the most prestigious schools in the country. It is one of the most prestigious social work schools in the country with a really large established online presence. So, it is a standard 2U relationship with maybe one exception, the upfront payment is a little larger because, effectively, we are taking over a large number of students that will drive revenue growth to 2U directly as we take them over. But beyond that standard, on all counts.

So, the school is pretty fantastic. And I would say, what drove it, at this point, you don't guess with 2U. We've proven it. We create value for our schools. We create value for the students. And I feel like the rest of the space, you're going to have to prove it. You've got to walk the walk, not just talk the talk. And I think, in 2U's case, over 11 years, we're now at a stage where we're looking at something like 530,000 live classes across – with 2.7 billion in attrition-adjusted tuition bookings and probably, most importantly, really high quality student net promoter scores and a retention rate that rivals the campus programs.

So, we feel like 48 programs running, the reality is, at this point, the proof is there. And so, Case did a lot of work, researched stuff a ton, it was a very intense process and we're very proud to come out with the relationship. And now, the reality is that doesn't mean anything. Now, we've got to go deliver.

Sarah Hindlian

Awesome. Thank you both so much.


Thank you. And our next question comes from Tom Singlehurst from Citi. Your line is now active.

Thomas Singlehurst

Evening, Chip. Evening, Cathy. Tom here from Citigroup.

Christopher Paucek

Hey, Tom. Thank you. I know it's late. I know it's late your time.

Thomas Singlehurst

No problem. No problem. Thanks for taking the call. A couple of questions. The first one, just very specifically, more for Cathy, the dynamics between FCEs and revenue per FCE. Probably just a feature of my forecast, but it strikes me we've had a couple of courses where we've got the mix wrong. The FCEs appear to have come in slightly light, but it has been more than made up by better revenue per FCE. Can you just talk about the shape expected for 2019? And then, specifically, on the Short Courses, how much higher the revenue per FCE can go? Because it looks relatively elevated relative to sort of where it started?

And then, the second question, maybe for you Chip, just on the Keypath deal, looks very interesting. And I love the idea of sort of having a segmented offering. I'm just sort of interested why you felt the strategic partnership was the right way to do it as opposed to having your own sort of Greenfield development in this area, perhaps with a differentiated brand? Thank you.

Christopher Paucek

Cath, you go first.

Cathy Graham

Sure. So, particularly in the fourth quarter, on the Graduate Program side, this is – I think what you're seeing is the danger of looking at any individual quarter as opposed to a longer-term trend and somewhat smoothing these things out.

Two things impact us. One is what are sort of courses/programs that are launching late in the third and in the fourth quarter. And then, the second is what does the academic calendar look like, so that there are mix issues – or not issues, but mix factors which are taking into account those kinds of things that happen in any particular quarter, which is I think why you sort of have to look at these a little bit on more of an average basis.

On the Short Course side, you are correct. We have seen very significant drive up in average revenue per FCE as FCEs have grown. And as I said, that's because we've been seeing the impact of having a higher number of larger or higher-priced US and UK courses in the mix.

I do think that we will continue to see over this year a much smaller increase if you end up looking at 20 19 over 2018, but I would not expect anything close to what we saw in this past year.

Christopher Paucek

And, Tom, so just to hit that one quickly, what I would say is pipeline outstanding. And the reality is, there's only so much we can do. And we've gotten here over 11 years by staying focused on what we're trying to accomplish.

And so, as we started to look at the space, it became obvious as we were getting all this inbound from our current partners about various programs that there were programs that simply wouldn't meet the financial expectation that we would need to deliver to have the kind of investment that we put in a program, and it was really frustrating to have to say no to existing partners for programs that, while they won't be as large, are still going to be really good quality programs in the space. Then we say no. And what happens is, number one, we don't make somebody happy on the partner side, which is really important because these relationships matter. Or number two, somebody else shows up and that becomes complicated in a variety of ways.

So, what got going here is we looked at the rest of the space pretty actively and, in general, didn't love much and we got to Keypath. And I would tell you, we were really impressed with what is a high quality organization; and, equally important, the process of doing diligence, we dug pretty intensely into their partners. And I would tell you, really high praise from their partner suite about what Keypath was delivering. And so, for us, we felt like this was an opportunity for us to strategically be more powerful across the space, sort of do more for our partners and, at the same time, not take away current capacity in doing so.

So, we thought it was like win-win-win and thrilled that we had Keypath at our symposium and to have the reception from – you announce something, you don't know how it's going to go and it went really well. So, we feel like we're off to the races on that one.

Thomas Singlehurst

That's super. And one quick follow-up on that. Maybe this is just a function of there being less good partners out there in the market, but should we assume that the sort of smaller rounds are naturally less sticky or sort of higher churn rate? So, is that just because there's a sort of variance in quality between different providers and that's led to more turnover than we might otherwise expect?

Christopher Paucek

Yeah. I don't think the size of program has anything to do with the stickiness, in my opinion. On 2U's side, what I can tell you, we haven't lost a client. We haven't lost a program. I feel like people often – the competitive landscape causes a series of questions. And I feel like often – an example of something that we'll hear from folks that really is not a big deal is we'll hear things like a school has this in-house operation to run something and, easily, probably something like half of our partners have an in-house operation to run 2U type programs. And we very often actually work with that division in some way.

So, there's a variety of different things in the competitive landscape that don't mean that a program is sticky or not. I think what it's going to come down to is you deliver more than anything else. Like, you've got to deliver. And these deans, provosts, faculties, they don't get to these various schools and not be pretty darn smart. So, like, we're not getting lucky. Like, we're delivering for the partners. So, ultimately, the size of program, I don't think, will be indicative of whether or not it's successful long-term.

We've set up this construct where we've built a system to deliver against a larger capital footprint. And we do put in a lot of capital into these programs and that model is not going to work for every discipline. So, there are also sort of subsets of verticals where it gets harder to do our size of capital footprint based on the tuition level of a particular vertical. So, we also feel like this could be relevant there. But, right now, where we are is we've got to try it. And just like we've done anything else, we're going to be very careful, we're going to roll out some of these and then we'll go from there.

Thomas Singlehurst

That was very clear. Thank you.

Christopher Paucek

Thanks, Tom.


Thank you. Our next question comes from Brian Schwartz from Oppenheimer. Your line is now active.

Brian Schwartz

Yeah, hi. Thanks for taking my questions this afternoon. I have one question on the increased marketing spend in the first half of the year. As we look at the year ahead and and we look at the spend in the marketing dollars, can you provide a little color exactly where you're investing more heavily? And what I'm very interested in is, are you adding any new marketing capabilities or services that you think would help sustain the growth in the years to come? Thanks.

Christopher Paucek

Thanks, Brian. So, I would say, the demand gen team is continually evaluating marketing opportunities and deploying against new marketing opportunities. So, yes, I do think we continue to add both new vehicles and new competencies, and that's kind of our job. Like, I think what folks will figure out over time, as more folks enter the space, is that generating enrollments from an existing thing is good, but it doesn't pay long-term. You have to be able to continue to deliver on it and deliver on it year after year. And if you've got 100 students in a program, it's a lot harder to have it be 150 and then have it be 200 and have it be 250.

So, we have to continue to innovate. We do that. One example of it is we have been purchasing more websites, which we think – we're now able to diagnose a website and know whether or not we can use it appropriately to find the right student for a particular discipline and [indiscernible 0:47:59], obviously, makes that more interesting over time. So, there's continued innovation on that front and it's something we can never really stop innovating on. We have to – the 2U OS over time will get more robust. It's our belief that the bundle gets better and better and better. And one of the dots on 2U OS is dot digital marketing. It's a core component of what we deliver for our partners.

Brian Schwartz

Thank you.


Thank you. And our next question comes from Corey Greendale, First Analysis. Your line is now active.

Corey Greendale

Hey, good afternoon. Congratulations on another good year. First, a couple of quick ones for Cathy. I know you're still figuring out the model with Keypath, but anything you can tell us a little bit about the margin profile? I assume there is kind of the take from the fact that there's a revenue share with them, but then you are providing less services. Any sense of what those programs can look like from a margin perspective?

Cathy Graham

So, Corey, it's early days. And I would not want to go there at this moment. But I think that what we can tell you is that we will be – as Chip mentioned, these are our contracts. We are responsible for them. So, we will be recognizing revenue growth and then paying Keypath a percentage of the take, depending on what it is that they are providing as their bundle of services. I think that these are going to have smaller top line and smaller bottom line numbers on an individual program basis. But you have to think that there are a much, much larger number of them out there than sort of the numbers that we are targeting under our DGP business today. So, stay tuned and we will give you more for this. This is a very strategic relationship for us, but we do expect it to be beneficial economically.

Christopher Paucek

And simultaneously building a business that we do now have a minority stake in, which is great.

Corey Greendale

Yeah. So, the other question I had for Cathy – I'm sorry if I missed this among all the detail – but did you provide any indication of any cash flow information for 2019? And if you didn't, is there anything you could give us?

Cathy Graham

So, we did not discuss any cash flow information for 2019. However, we will be filing – when our 10-K hits, there is an indication of CapEx in there. So, if you were to look at our results and CapEx somewhere in the mid-90-millions which will cover technology, content development and the fact that we will have step ups this year in facilities-related CapEx compared to 2018, lower than in 2017, but a step up compared to 2018. That should be able to give you some sort of idea of where we should come in.

Christopher Paucek

But just to be exceptionally clear, the company is fully funded.

Cathy Graham


Corey Greendale

Yeah. Very helpful. And then, Chip, can I ask you one strategic question –

Christopher Paucek

I thought you'd talk to me first, Corey.

Corey Greendale

I always talk to you first, but I'm kind of…

Christopher Paucek

Go ahead. I'm just kidding.

Corey Greendale

No worries. I should say, by the way, just to be clear – and Cathy wouldn't say this – you also rock. So, I just want to be on the record with that.

My question for you is, since you mentioned, in answer to the question about the relationship between GetSmarter and the Graduate Program business and the stackable credentials, one conversation that comes up in sort of philosophical discussions with investors is what happens over time in terms of using shorter courses as an entrée into degrees and using that as a way to lower the cost of the degree to the student and potentially offering short courses for free and getting some portion of the degree done for free which is good from a volume prospective there for the student, but to lower the cost via the revenue per student. Just what are your thoughts on kind of where the world heads on that axis?

Christopher Paucek

Yeah. We absolutely think, over time, the degrees have – the short courses have a very relevant role in the life of a degree. And we do think, over time, they can have an impact on our ability to sort of constrain the cost. There's no question that we think the skin in the game associated with a single short course and the quality of that short course experience is starting to impress various university partners. They are robust courses in and of themselves. So, we do think that the entire stack, the entire continuum is relevant.

And so, at this point, we also believe that it is better to start on the continuum with the place where they do have skin in the game, but we're continually evaluating the full continuum and that, of course, includes three options. So, we do a lot of work on it. But as I said, at this point, we're focused on starting with short courses that folks are sort of more inherently bought into and driving a sort of full experience. So, net-net, stay tuned long-term for the evolution of the continuum. But we do think it's very relevant.

Corey Greendale

Great. Thank you for taking the questions.


Thank you. Our next question comes from Ryan McDonald from Needham. Your line is now active.

Scott Berg

Hi, everyone. This is Scott Berg on for Ryan. Thanks for taking our questions today. I guess, first of all, Chip, can you talk about the partner symposium a little bit more in terms of what you're hearing from partners on demand trends entering this year? Is the environment in 2019 kind of stable with what we saw with 2018 or is there some opportunity to maybe see some increased activity there?

Christopher Paucek

Sorry, stable on what? I didn't quite get it.

Scott Berg

Stable on some of the demand activity in 2019 versus 2018 trends. Or is there some opportunities maybe to see some increased activity from partners?

Christopher Paucek

When you say demand activity, can you help me out what – do you mean demand of – student demand or do you mean demand from universities?

Scott Berg

Yes. The demand from the universities.

Christopher Paucek

I think I said, at this point, we've taken short courses from 9 to 17. We just announced our 35th university partner. We've got demand from existing partners. We've got demand from a lot of new partners. You will continue to see new logos. We're a little less focused on new logos because we have so much to fill with our current schools. I think you'll see demand for Keypath programs.

So, there's no question that – there was a recent survey in Inside Higher Ed that showed the provosts expect to do more online education. So, ultimately, that doesn't surprise us. This is clearly something that demand has picked up. It's very obvious.

Scott Berg

Sure. And then, the follow-up question was on the increased spend in sales and marketing here in 2019. How should we track the progress of that spend going forward this year? Is it going to be a new win announcements or are there other ways to kind of track that progress, given that there won't be any revenue attached to that here in the short term?

Cathy Graham

So, I don't think the new wins are the way to think about this because what we're really talking about here is marketing spend that is being put into attracting new students, not attracting new university partners. So, really, what you're – unfortunately, what I'm going to tell you is that you're going to have to wait and look at growth and student acquisition in 2020 to really be tracking that kind of success on the additional spend.

Scott Berg

Great. That's all we had. Let's jump back in the queue. Thank you.

Cathy Graham

Thank you.


Thank you. Our next question comes from Jeff Silber from BMO Capital Markets. Your line is now active.

Jeffrey Silber

Thank you so much. Forgive me, I jumped on late. Cathy, I don't know, could you give specific guidance for revenues between your Graduate Programs and your Short Courses for 2019?

Cathy Graham

We did not. As we said to everyone the last time when we talked in November, we need to be able to preserve the ability to move our resources between segments and drive opportunities where we believe they are best. And so, we are not giving segment guidance going forward.

Jeffrey Silber

Okay, fair enough. Shifting back to your presentation, the slide where you have profitability margin by launch quarter, I really appreciate you guys updating us on this. Focusing then on the calendar year 2018 cohort, looking at that 42% number for greater than four years that have been around, one, can you just confirm both USC and UNC that the programs you're having some issue with, they're both in that number? And two, I know you don't give specific guidance, but would it make sense for that specific margin to go down in 2019 given the issues those two schools are facing? Thanks.

Christopher Paucek

So, just note that I think the programs that you are probably asking about by asking about USC and UNC are in it, but there are other USC and UNC programs that are newer that are not in it and you should expect that to continue because we are in the process of – you will likely see more, even newer USC and UNC programs.

So, from that standpoint, the 42% number does not – it includes the ones that I believe you are asking about, Jeff, which was the ones that we discussed when talking about our longer-term program issues.

Cathy Graham

And so, I guess, what I would say is that it would be our expectation that you should probably see that margin go down a little bit in the four-year and more, but not for the reasons that you're talking about.

The reason that we would expect it to go down is that a lot of those programs are places where we are deploying additional marketing dollars. If you think of a 42% margin, almost by definition that means there are students that we can – additional students we can capture and still stay within our target economics, which would be a mid-30s kind of margin range. And so, while it's not the issues in those programs that would cause anything to sort of decline, it is – we would expect them to come down because of our purposeful additional spend.

Jeffrey Silber

Okay. Really appreciate the color. Thanks so much.

Cathy Graham


Christopher Paucek

No problem, Jeff.


Thank you. And the next question comes from Rishi Jaluria from D.A. Davidson. Your line is now active.

Rishi Jaluria

Hi, guys. Thanks for taking my questions. Let me start with you, Chip. So, this year, we have two kind of brand-new programs that you really haven't done anything, at least in my experience, similar to J.D. with the University of Dayton. I know you've done law programs before, but I think this is the first J.D. And then, I think international, with both UCL and Monterrey, can you give us a sense for what are your expectations and what needs to happen with these kind of new launches to maybe start the cadence of adding more programs like this? And then, I've got a follow-up.

Christopher Paucek

Well, J.D., anything with accreditation complication, we're going to have to be patient, prove quality and believe that long-term that will win. And, obviously, we're focused on the long-term and we believe most of our investors are focused on the long-term. So, I look at J.D. a little bit like I look at the physician assistant vertical with Yale where it was really tough to get it going and now we're up and running and it's doing really, really well. And we like the ability long-term to do more in that discipline because there's a huge shortage. So, J.D. is going to be a longer-term process.

With the two international MBAs, we really – those are MBAs. We're really good at running MBAs and believe that there's very significant worldwide demand for those programs and we're doing, in each discipline, programs with two of the best schools in their regions.

So, in those cases, clearly, there is marketing apparatus we'll build over time in those geographies that we don't have today. So, we are cautious about our expectations per program, but like our odds quite a bit long-term. We think those are very normal 2U launches.

And at this point, it is notable that we don't really ever miss launches. They just launch now.

Rishi Jaluria

That's helpful. Thanks. And then, Cathy, if we look at the Grad Program FCE, I know I don't want to extrapolate too much from one quarter. We just saw a sequential change in that metric from Q3 to Q4 that's maybe lower than the normal Q3 to Q4. Was that mostly due to the program specific issues at UNC and USC that you highlighted last quarter or were there other factors that led to that? Thanks.

Cathy Graham

No. Not really having to do much with those at all. Some slight UNC, but USC, as we disclosed in November, was really a 2019 topic as opposed to anything that was happening in 2018.

Really what's going on there is we need you to look at these things sort of over the course of some quarters and sort of think of those more on an average basis.

Academic calendars, launch timing, year-end true-ups, those kinds of things are the stuff that will skew those in any given quarter which doesn't sort of – I wouldn't read too much into it.

Christopher Paucek

And, analysts, we know we ran over, so we're still – we're not going to cut the call off, just FYI. So, keep going.

Rishi Jaluria

Got it. I'll jump off and leave the time for the other analysts. Thank you guys so much.

Cathy Graham



Thank you. Our next question comes from Monika Garg from KeyBanc Capital Markets. Your line is now open.

Jason Celino

Hey, guys. This is Jason Celino on for Monika. Can you hear me okay?

Christopher Paucek

Yeah. We hear you fine.

Jason Celino

Great, thanks. Appreciate the question. So, we appreciate the efforts to not leave any enrollments on the table if they can power more growth and with the kind of increased spending in 2019. But, directionally, how should we think about EBITDA margin expansion maybe going forward? I don't know if you can provide comments on that.

Cathy Graham

So, kind of what we have said is that you shouldn't think of this as being a continual degradation of margins on year-over-year and continuing basis. This is kind of getting us back on to the right glide path from where such a number of our programs should be. And I can't tell you, at this point, whether 2020 will sort of flatten out in margin or step up a little. But, over time, I would say that our intention is to return to the kind of patterns that we had been seeing, which is you will see slow, but perhaps steady, increases in margin over time as we move towards steady-state. You should keep in mind that, for us, margins are, in many ways, a matter of choice as to how much investment we're making in growth. And I just want you guys to remember that this is very much within our control based on how quickly we decide to grow and what opportunities there are in front of is.

Christopher Paucek

Which frankly links to a question she answered earlier about the long-term cohort margins and our belief that – it's why we're not telling you to expect long-term cohort margins in the 40s. We do believe it's important for us to continue to invest in growth for our partners.

Jason Celino

Okay, great. No, and that's actually very helpful. And then, kind of with the Tech de Monterrey degree that you guys talked about, is there any specific differences in maybe student profile or customer acquisition costs with this program?

Christopher Paucek

Well, we just announced it. So, we haven't started yet, right? So, do we expect it to be materially different? No. But it's brand-new and we're going to launch in Latin America and we have work to do there. So, we expect it to benefit from share the way our MBA programs all benefit from share. And I will tell you it's a fabulous partner. It's basically one of the best schools in the entire Latin American continent. It's awesome.

Jason Celino

Okay, great. Thanks. Those are my questions.


Thank you. And our next question comes from Brad Zelnick from Credit Suisse. Your line is now open.

Bhavin Shah

Hi, guys. It's Bhavin here on for Brad. Thanks for taking my question. It was very nice to see – it's good to see some new programs immediately contribute to success and see some success. I believe we had three programs from 2018 show up in the top 20, with four of them in the top 10. What are some of the big changes you guys made here to drive that success? And then, how should we think about your ability to repeat this into 2019?

Christopher Paucek

Thank you. So, the notion of how we select programs, I feel like is becoming a big part of the long-term sort of special sauce of how we deliver. And part of the reason we were excited about the Keypath relationship is in we're pretty careful about our program selection. So, we do think long-term we like our odds of what programs – how to grow this business with our original 250 DGP expertise. So, there's a lot of room to run. The scale is working. MPV is real. And you can see it showing up. I thought the seven program from the sub two years being in the top 20, we feel like that top 20 list is a pretty strong indicator that you're talking about manufactured fantasies of competition when you talk about whether or not we're causing ourselves issues with regard to our ability to continue doing what we're doing here.

Bhavin Shah

That's very helpful. Thank you, guys.


Thank you. Our next question comes from Alexander Paris from Barrington Research. Your line is now open.

Christopher Howe

This is Chris Howe sitting in for Alex. Thanks for taking my questions since it's getting late here. Had a few things to touch on. In regard to UNC, you had mentioned the improved outlook you're seeing there. How should we think about whether or not you cannot reduce – the thing that was taken away from 2019, whether or not you can get that back in 2020 given the improved outlook and what you're seeing there at UNC?

Christopher Paucek

At this point, what I would say is, we really do love how the teams are working together short-term on things like fellowships being deployed, which not only drive the cost down for the students, but clearly are something that we do believe is important when you're in a competitive situation for high-quality students and, long-term, thinking about innovation in that program in a way that is very real and will show up in all kinds of new ways.

But the reality is we like our odds, but we certainly didn't bank on it in our guidance and our expectations. So, stay tuned.

Christopher Howe

That's helpful. And then, one more here. Just in regard to the 30% plus revenue growth that you're seeing in your outlook, any changes – or how should we allocate the growth here between the mix between your Graduate and Short Courses? And just going off that, what are you seeing internationally as we look ahead into this revenue growth and the opportunities there? Thank you.

Christopher Paucek

Well, it's a big world out, obviously. So, international will be a part of it. We're going to be patient in our rollout and thoughtful how we handle it, which is why we've only launched two great schools with full programs. You'll see that continue over time.

With regard to the Grad and Short Course segments, we don't disclose guidance on a segment basis. It's that simple.

Christopher Howe

Got it. Thank you.


Thank you. Our next question comes from Peter Appert from Piper Jaffray. Your line is now active.

Peter Appert

Thanks. So, Chip, any thoughts on the consolidation that's been going on in the OPM space in terms of competitive implications or opportunities for you guys?

Christopher Paucek

Well, I think Keypath, obviously, was a step on the road for us from the standpoint of looking at the competition. We're excited to have that new relationship. We do expect consolidation probably to continue.

In terms of how it affects us, I don't think so. 2U is just continuing to do our long-term marks on what we think are these great opportunities. And, candidly, it's a massive market. I do feel like, Peter, people sort of overstate this notion of this program or that program. Like, there are a lot of programs. Over time, I do think you're talking about nearly all graduate education going online. I happen to believe that. And I do think when you start thinking about signing a program, I would pay a lot of attention to what competitors are actually signing versus the logo, like we think, in many cases, it's great that these programs are being signed, taken online, gives us a great opportunity over time to potentially take those programs into our own stable. Why? Because it really – it doesn't matter that you sign something. You've got to deliver against it. So, we like our odds.

I feel like, when you look at this business holistically, it's really difficult. One of the reasons we put out the 2U OS construct is like it's a comprehensive solution that we feel, candidly, we've done not a great job over time in sort of explaining to the world how comprehensive it is. But we're getting better at it. And I feel like, as we start to give a fuller perspective as to how comprehensive it is – it's difficult to match. So, over time, maybe focus a little bit more on share of overall students than share of logos or programs.

Peter Appert

And then, Chip, how about – on Keypath, is there a pathway to greater ownership? Would that make strategic sense for you to own the whole thing?

Christopher Paucek

We, obviously, chose to focus the structure this way. And we're not disclosing the details of the transaction itself, but we're proud to have Keypath as part of our overall suite. And we do think it becomes relevant to this notion of the institutional suite. And you'll hear more of that over time – more about that over time, Peter.

Peter Appert

Got it. Thank you.


Thank you. Our next question comes from George Tong from Goldman Sachs. Your line is now active.

George Tong

Hi, thanks. Good afternoon. I know you're not giving guidance by segment, but now that you have increased visibility into UNC and USC and the broader enrollment pipeline, can you outline the potential sources and drivers of acceleration or deceleration in FCE growth in the Grad segment over the next four quarters?

Christopher Paucek

Well, obviously, we disclosed what we thought the impact was of those two larger customers. We feel like we have those covered. As I mentioned, while we haven't built in an expectation of an increase, we are working on a variety of things to improve each individual situation and really love sort of how the teams have come together on UNC. Certainly, we're not banking on it, but going to work very hard together to improve the enrollments in that program. So, I also would tell you that we have 17 programs launching this year.

I feel like the portfolio has shown its resiliency. That's a very important point, that like this business is super resilient. It is not reliant on any one program. And we feel like every single program that we launch, we build that resiliency over time. Running these programs is complicated. There will be issues. There will be problems. It's not a perfect business. But the reality is it's a great business and we feel like, over time, that continues to show.

We grew up 44% on a base of 400-plus-million dollars. It's a big business at this point. So, love the opportunity to continue to grow both segments. But, obviously, at this point, we're big enough that you need to focus on the overall guide. I feel like we give an incredible amount of specificity in our guidance at this point and are pretty transparent about our overall business. So, excited about what the future holds for both segments.

Cathy Graham

And let me just add that, in addition to the fact that we're launching 17 new programs in 2019, we launched 14 in 2018 on 24 over the last two years. And if you think about that and you think about the lifecycle, the economic lifecycle of a program, those are still growing rapidly. And so, the biggest drivers of FCE growth are going to be continued growth in those programs and new launches.

George Tong

Great. That's helpful.

Christopher Paucek

And I would say – George, one comment on that, I would say, just important to note that we do see the Grad business over time accelerating.

Cathy Graham


George Tong

Got it. That's helpful. And turning to Keypath, you noted that it's your contract and that 2U will retain responsibility for the success of any program. Can you delineate what types of services you're likely to provide compared to Keypath and whether these are going to be higher-margin services or lower-margin services?

Christopher Paucek

At this point, George, it's just too early. We do expect Keypath to deliver most of what Keypath provides its current partners. And, certainly, we will not provide as much as we provide or nearly as much as we provide on a 2U program. So, it's early. But we will certainly tell you more about it as it comes together.


George Tong

Yep. Got it, thank you.

Christopher Paucek

No problem.


Thank you. And I'm showing no further questions. I would now like to turn the call back to Chip Paucek, CEO and Co-Founder.

Christopher Paucek

Thanks, operator. As we close out February, which is Black History Month, I want to give a shout-out to the leadership of the newly-formed Black Engagement Network at 2U. Karlo Young, Dorian Redman, Suraju Jolaoso, Lauren Woodfork, Will Minor, [indiscernible], Jermaine Lee, Shassata Fahim, Reggie Ryder, Cedric Loiseau and Brittany Henderson. We thank you for your leadership and we'll see you out on the road everybody.


Thank you. Ladies and gentlemen, that does conclude today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.

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