2U, Inc. (NASDAQ:TWOU) Q3 2019 Results Earnings Conference Call November 12, 2019 5:00 PM ET
Ed Goodwin - SVP, IR
Christopher Paucek - CEO
Paul Lalljie - CFO
Conference Call Participants
Brad Zelnick - Credit Suisse
Jeff Meuler - Baird
Corey Greendale - First Analysis
Stephen Sheldon - William Blair
Jeff Silber - BMO Capital Markets
Ryan McDonald - Needham & Company
Ladies and gentlemen, thank you for standing by, and welcome to the 2U, Inc. 2019 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. [Operator Instructions].
I would now like to hand the conference call over to your speaker today, Ed Goodwin, SVP, Investor Relations. Please go ahead sir.
Thank you, Operator. Good afternoon, everyone, and welcome to 2U's third quarter 2019 earnings conference call. On the call we have Chip Paucek, our CEO and Paul Lalljie, our CFO. Following Chip and Paul's remarks we will take questions.
Our press release was issued after the close of the market and is posted on our website where this call is being simultaneously webcast. Statements made on this call include forward-looking statements regarding our financial and operating results, new educational offerings, student and university demand and other matters. These statements are subject to risks, uncertainties and assumptions.
Please refer to the press release and the risk factors and documents we filed with the Securities and Exchange Commission including our most recent quarterly report on Form 10-Q for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements.
In addition, during today's call we will discuss non-GAAP financial measures which we believe are useful as supplemental measures of 2U's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results.
You can find additional disclosures regarding these non-GAAP measures including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations page of our website. The webcast this replay of this call will be available for next 90 days on our company website under the Investor Relations link.
With that, let me hand it over to Chip.
Thanks Ed. 2U is founded on the belief that the great university can and will remain a powerful engine for social and economic mobility in the digital age. Our partnerships fuel that engine. They enable universities to sustainably meet the growing demand for higher education by developing a diverse portfolio of online and blended offering that are relevant to the evolving needs of lifelong learners.
2U remains the partner of choice for top university which is evident in our tremendous progress over the past quarter. We launched over 30 new offering and maintain our high bar student retention across the portfolio.
The Trilogy integration is progressing nicely. We've realigned the organization to better serve students and our partners, drive efficiency and position 2U for where the market is going. Some great new executives joined the team. We're set up for a run a profitable growth driving to free cash flow.
Our original belief remains as true as it was back in 2008. As more universities launched digital offerings, the value proposition of our partnership model is stronger than ever. 2U is uniquely positioned to capitalize on this powerful secular tailwind based on our 11-year track record of successfully working with university partners.
With the arrival of new CFO, Paul Lalljie, we're introducing a new structure for these calls. I'll begin with a review of our strategy. Then I'll provide an overview of our performance in the segments this quarter including the highlight of the success we're having with the Trilogy acquisition and its integration status. Then I'll give an over review of our operation.
Finally, I'll turn it over to Paul who will walk you through our results with more detail and commentary. Let's start with reaffirming our strategy. We partner with top-tier universities and expand our relationship with each of our client. Through our comprehensive 2U OS platform, we build, deliver and support world-class digital education offerings that meet market demand and drive strong student outcomes. And we scale enrollment for those offerings.
From that jumping off spot, let's get into our segments and how we're driving the business. Our grad program segment had a strong quarter. Revenue was $103.4 million, up 15% compared to third quarter 2018.
Growth was driven by the scaling of more recent launches and offset somewhat by the rightsizing of our older programs, in particular our legacy social work program which is not new news.
We believe there's a solid trajectory for the segment and Paul will give you more detail on how to think about our revenue ramp. Top-tier universities demand programs that have the highest quality, preserve academic integrity and foster brand affiliation, which is why they consistently choose 2U as their partner.
This quarter we launched 15 new degree program offering. Student retention in this segment with 82% and as a leading indicator of future performance we have a number of pipeline wins to highlight.
Shortly after our last earnings call, we announced our first undergraduate program, a Bachelor of Data Science and Business Analytics with our partner LSE and the University of London.
The program has been slotted to launch in the fall 2020 and we'll have a total tuition of roughly $25,000, total. LSE is been operating this program as a correspondence based degree with strong demand, but chose to partner with 2U to increase engagement and scale the program.
Notably, it’s the first grad program to come to us through our GetSmarter client, which validates our belief that our comprehensive offerings can be leveraged across the partner base. This quarter we also announced our new top-tier university and a brand new vertical. The Rochester Institute of Technology will launch architecture online.
This program will have a strong sustainability focus and will prepare graduates to enter the modern field of architecture on the way to becoming license architect. We're breaking new ground once again with our first program in the architecture vertical with a very few online options.
We also announced another licensure program with one of our largest university partners. A master of social work with Syracuse University, which is slotted to launch in the fall 2021. The date is notable. It shows were able to slot new programs well into the future.
We have a deep mode and our winning overall in the large market for licensure type program which often require clinical placements of some kind including social work's speech, psychology, mental health counseling and others. We're seeing double digit enrollment growth in these programs. Our competitors are underpenetrated in these disciplines, with some notable ones not -- choosing not to play here. You'll have a hard time competing with us in licensure.
Finally, we're making progress on our exclusive pan-university partnership with UNC Chapel Hill. We'll have more to say here soon. So to summarize, the grad program segment performed well this quarter driven by strong growth from our newer launches.
We had a number of pipeline wins signing a new University partner and adding new offerings at existing partners. And we continue to execute against -- as we continue to execute against our strategy we'll drive long-term growth and profitability in this segment.
In the Alternative Credential segment, revenue was $50.4 million, up 192% compared to third quarter 2018 primarily due to the addition of Trilogy. Short courses also contributed to growth outperforming our expectation. In fact, many short courses are hitting all-time highs on student volume.There are also a number of pipeline wins to cover.
On the short course side, we're winning with some of the most recognizable brands in the world, including MIT, LSE, Oxford, Yale and Stanford. These brands drive improved enrollments, also importantly, significant progress aligning faculty to short courses.
We've slotted a number of new courses with global brands. We believe we're positioning for strong performance in 2020. On the boot camp side, there are plenty of wins to highlight. We launched a number of boot camps in data, cyber, web development and digital marketing.
In addition, we signed three new universities to launch boot camps in 2020, which we'll announce when we began marketing those offering. And I'm particularly excited about our new boot camp subject, Fintech which rolled out to Columbia and Rice.
The Fintech pilot is one of the best starts we've seen in the new boot camp subject. You gain skills for a wide variety of Fintech roles, including creating blockchain, building deep learning neural networks using tensor flow and creating predictive models for stock prices with Python and Jupiter notebooks, it's really something.
Our boot camp offering is the most compelling in the market. The world needs technology talent and we believe the great university can provide it in tandem with 2U. The tie to industry here is real. Our relationships with enterprise allow us to continue offering, the most relevant technical content. It's a massive opportunity to rescale and upscale the workforce.
The integration of Trilogy is well underway. We've already integrated back office functions such as finance, HR, comps and tech and we're starting to see some of those cost benefits. We also integrated the University relations team, and they're already beginning to cross sell for the 26 universities originally Trilogy client and selling boot camps in to our existing university clients.
The fact that we're landing and expanding across the broader set of University validates our M&A strategy and further bolsters our position. Trilogy is still a young company, but we're also starting to rationalize their spending and cost structure some of which need a greater discipline particularly on the marketing side and integration will help us achieve better margin.
To summarize, the Alternative Credential segment delivered strong results and pipeline wins and the integration of Trilogy is proceeding nicely. Turning to our operations; we're driving towards profitability and positive free cash flow while streamlining decision-making.
As we continue to invest in quality we're taking a closer look at improving the efficiency of our operation. We realigned our org structure adding managing directors for each product line.
We also recently merged two of the largest departments for the company; our admissions and our student support teams. This is an approach many universities are now taking. Additionally, we combined two distinct program experienced team that work directly with our partners.
So the restructuring help this improve student experience, the university experience and the efficiency of our operations. With disciplined cost management and focused execution behind working capital initiatives, we expect to drive improved cash flow progression companywide. Paul will play a key role in this.
Turning to the team. Our strong culture has resulted in high employee retention over the years and that continue to be the case this quarter. I'm proud to work with an incredible group of mission-driven people who put students and our university partners first.
We also had three talented executives join our team. We added our Chief Learning Officer, Luyen Chou, who came to us from Trilogy with two decades of industry experience. He spent five years as a Chief Product Officer of Pearson prior to joining Trilogy in that same role.
We also brought on our new Chief Marketing Officer, Jennifer Ogden-Reese, who came to us from SeatGeek where she was CMO the past three years. Jennifer spent over a decade at Time Warner where she led a multiplatform consumer strategy for some of the most iconic and successful media brands in the world. Both Luyen and Jennifer will report to COO, Mark Chernis.
Most importantly, I'm honored to have Paul Lalljie by my side. It will be fantastic partner for me in running the business, given his extensive experience as part of the Newstar Senior Management team. Paul, Jennifer, Luyen not only bring a passion for our mission to eliminate the back row in higher education, they also further strengthens the diversity of the leadership team at 2U.
To conclude, I believe the great university remains a powerful engine for social and economic mobility and we remain the partner best suited to help bring them into the digital age and in doing that drive long-term value for shareholders.
With that, I'll hand it off to Paul to discuss the financials.
Thanks Chip and good afternoon everyone. Let me start off by saying how thrilled I am to be in the 2U team. I joined 2U because it is a mission-based and leading – and has the leading position in a transformational market segment.
I see 2U leading the way and capitalizing in the opportunity to offer high-quality online education for the best educational institutions in the world. I look forward to making an impact as we focus the company on scalable growth and free cash generation.
2U's performance this quarter reflects strong topline growth, important pipeline win, the progress made on integrating our recent acquisition and relentless focus on organizational efficiency.
I'll start with the discussion of revenue followed by a discussion of cost and how I think we can drive efficiency then touch on the balance sheet before finishing up with a discussion of guidance.
Revenue for the quarter totaled $153.8 million, up 44% from last year. In the graduate program segment, revenue grew 15% over the third quarter of last year. You may recall, we previously disclosed that there were headwinds in our largest program. Excluding the impact of that program, revenue in the graduate segment would've gone 25%.
We also told you last quarter that we were seeing pressure across some of our older programs. Many of those programs have grown to be far larger than our original expectations. And while they remain relatively large many are coming down in size. But I'm happy to say that our newer cohorts are scaling extremely well.
To put this into perspective for the 35 programs launched between 2015 and 2018 year-over-year revenue in the third quarter was 54%. A 15% graduate segment revenue growth was driven by a 25% increase in Full Course Equivalents or FCEs. This was partially offset by a decrease in revenue per FCE of 8%, driven by two main factors; one, is an increase in the number of scholarships, which helps increase access to education. We account for scholarships on a contra revenue item.
The other is the extremely strong growth in some of our newer and less expensive programs, which help drive growth in FCEs, but that shift in mix reduces revenue for FCE.
While we don't set tuition of any of our programs it is important to provide offerings across the pricing spectrum. Students will choose the option that works best for them and we are well-positioned to meet a variety of students need.
The Alternative Credential segment revenue grew 192%, which includes $29.2 million of revenue from the Trilogy acquisition. On an organic basis revenue in this segment grew 23%. This growth was driven by a 65% increase in FCEs and 98% growth in revenue per FCE.
Keep in mind that the cost of boot camp is much higher than that of a short course, so you should expect to see revenue per FCE continue to show strong increases until we lap the Trilogy acquisition.
Let's look at costs and expenses. Net loss for the quarter was $141.1 million with costs and expenses totaling $288.8 million, up $131.2 million versus the third quarter of 2018. The increase includes a $70.4 million of non-cash goodwill impairment charge, $59.9 million of operating costs for Trilogy acquisition, $6.6 million in restructuring related expense and $2.5 million of integration and transaction costs.
Excluding these items the underlying operating cost grew 26% or $30.6 million. This increase was primarily driven by increased spend on direct marketing, personal and personal related expenses and investments in our technology platform that support the launch programs across our product offerings.
Let me spend a few moments on the non-cash goodwill impairment charge. The sustained decline in our stock price during the third quarter presented a triggering event at warranted a goodwill impairment review.
We performed a review as of September 1, 2019 and that resulted in a $70.4 million impairment charge because the carrying value of the Trilogy reporting unit exceeded its fair value.
Looking at costs and expenses on a sequential basis excluding impairment, restructuring and Trilogy operating expenses there was actually a 2.8% sequential decline in the underlying cost.
To put this into perspective in the third quarter of 2018 expenses showed a sequential decline of half a percent. Adjusted net loss for the quarter totaled $26.2 million and adjusted EBITDA loss was $10.7 million. Both measures showed a larger loss in the third quarter of last year primarily driven by incremental operating cost from the Trilogy acquisition and additional cost from launching new programs.
I'd like to share some color and how I'm thinking about driving towards profitability after my first few weeks at 2U. As Chip said, we provide the highest quality of service to help great universities build, support and deliver digital education and scale. This works because of the investments we make in our partners.
Since starting here, it has become clear that we can continue to deliver the same high level of service to our customers while driving efficiencies across the business. Some of these initiatives have already started. The restructuring action reduced cost by 800,000 in the quarter and should reduce run rate cost by $11 million to $12 million annually, plus I believe that the way we have organized our team positioned us to serve our customers more efficiently.
We are going to be more disciplined in the programs we select, how we deploy investment capital to develop and market those programs. My focus will be on ensuring that we only spend money on things that drive desired outcomes.
For example, I see opportunities for efficiency in how we build courses and market certain programs. I believe we will drive leverage and support functions of the business continue to scale.
The Trilogy business is strategically aligned with our mission. As Chip pointed out, it clearly positions us to win in STEM, adds the number of incredible university partners and helps us maintain our leadership position in digital education.
But it is clear that there are considerable opportunities to operate more efficiently as we complete the integration of Trilogy and built towards smarter growth and sustain profitability.
Now for a discussion of the balance sheet. As of September 30, 2019 cash and cash equivalents total $154.1 million, a decrease of $64.6 million from June 30, the $64.6 million decrease from the June quarter was primarily driven by use of cash from operations of $37.7 million and $18.5 million in addition of amortizable intangible assets related to content and delivery.
Accounts receivable at the end of the quarter totaled $84.8 million compared to $71.6 million at the end of June 2019 quarter. We expect this balance to come down in the fourth quarter as schools pay off their full-term balances before the year-end. Long-term debt was $253.5 million at the end of the quarter principally related to our term loan facility maturing in May 2024.
As I think of cash going forward, we're going to optimize the mix of programs we launch and the launch cadence, based on the demand from our partners as well as the economic returns and cash flow profiles for each of the program. And we will continue to drive operational efficiency.
So even though we're still in our 2020 planning process, we expect to enhance our liquidity position by reducing the rates of quarterly cash usage. I would also note that going forward free cash flow will be a metric that we will focus on in our disclosures and in our discussions at quarterly results. We will define free cash flow as net cash used in operating activities, less capital expenditures and excluding restructuring payments and certain identified non-ordinary course payments.
Now, for the discussion of guidance. Given where we are in the year, we have high visibility in our revenue for the remainder of the year. And when coupled with strong leading indicators such as FCE's enrollment and pipeline wins we have confidence to increase our revenue for 2019.
We now expect revenue to range between $570 million and $575 million representing growth of 39% at the midpoint of the range. We are increasing our guidance for net loss which we now expect to be between $238.8 million and $232.8 million due to the impairment, restructuring and integration charges.
We are not changing our guidance for adjusted EBITDA loss which is expected to be between $28 million and $22 million. This guidance reflects the timing of certain operating expenses that moved from the third order to the fourth quarter. This is why we did not increase our adjust EBITDA guidance more substantially for the full year.
Before we leave guidance, let me comment on 2021. While I recognize that on prior third quarter earnings call we gave a guidance preview for the following year. I do not plan on doing this going forward. As it is my practice as CFO to complete the budgeting cycle for the year before issuing guidance.
Having said that, we do have strong leading indicators and as such we expect to see the business trajectory arc for the second half of 2019 continue into 2020. So to summarize, we have a leadership position in a huge market with strong secular tailwind.
Our board and management team believe that we have the right strategy and the right business configuration to drive profitable growth and long-term shareholder value. The markets we serve that is the global online higher education market is defined by HolonIQ is a $30 billion market with a projected 14% compounded annual growth rate from 2018 to 2025.
And as you've seen from our growth rates we are growing faster on a consolidated basis and on a segment basis. As we focus on optimizing program launches and operational efficiencies we expect to deliver increased long-term value to our shareholders.
Before we turns our question-and-answer session I ask that you focus your questions today on our third quarter results and go forward strategy, which are the subject of today's call. We are aware of the media report regarding one investor's view of our company. We welcome the perspective of shareholders though we will not be addressing that report on this call.
And with that, operator, please open the line for questions.
[Operator Instructions] And our first question is coming from the line of Brad Zelnick with Credit Suisse. Your line is open.
Excellent. Thank you so much. Chip, congrats on a good quarter. Nice to see some stability in the business and a warm welcome to Paul, Jennifer and Luyen as well.
Thank you, Brad.
For sure. You mentioned that you continue to see plenty of growth opportunities with both business segments, but are also becoming more disciplined on expenses as you adjust for the new competitive environment. How you think about balancing growth versus cost savings between each segment? And any insight into how we should think about revenue growth for DGP in Alternative Credentials for this year and next?
Thanks Brad. So, I would say, when we think about across the segments, we are focused on our ROIC and how we think about returning – how we think about profitable growth and the best use of cash across both segments. We think the alternative credential segment clearly from a strategic standpoint is where universities are going to need to boost their offerings and candidly the STEM category something that you really can't expand into without an opportunity like Trilogy, without the boot camp offering and the tie to industry that Trilogy brings to you.
So, we will continue to expand the portfolio. I mean, just to frame it for you, when we IPO-ed the company we had six partners and 10 grad degrees and today we have 72 partners and over 300 offerings. So just think about that. 10 degrees to over 300 offerings across a whole variety of different types of subject and we continue to expand that today. So I think the discipline that we need to bring to the table is just to continue to be a strong as possible, picking the best programs and driving the best opportunity for both student outcomes and for the company. And our Alternative Credential segment is part of that.
Now, at the same time, I think you can see that Paul provided the segments and we were pleased with the grad program segment when you got one of our legacy programs declining our largest program and are still able to see 15% growth in that segment and without that one program you would have seen 25% growth. And then on top of that, the 2015 to 2018 programs grew at 54%. You're talking about still very strong offerings that are growing not only above the rest of the overall OPM segment, but online education overall. We are still at the top of growth expectation. So we're pretty pleased with the quarter and we look forward to giving you more detail at our Investor Day which to be clear we will do as early as possible in the new calendar year and we'll be back to this community with a more specific date as we get closer.
Thanks. That makes perfect sense. And maybe just a quick follow-up. Can you share any feedback you received on your zero interest deferred tuition plan with Simmons? And might we expect to see other programs jumping on board as well? Thanks.
Yes. We thought that was -- one of the first times that we've seen across all of higher ed that anyone has offered a deferred tuition program. What I love about it is it aligns our university partner with the long-term outcome of the student. As in the student the first half of the tuition in the nursing program until they've graduated from the program and they're in a job with a minimum floor and there is no interest at all in the program. So I do believe it's driving down the cost of education overall. We're excited about rolling it out. It's an early pilot to be clear and so we do expect to have another announcement shortly from another university that was particularly interested in rolling out to their students. So we think it shows where our scale can really benefit not just our university partners but the world, the student body. So we think it's a great opportunity.
Awesome. Thanks for taking my questions.
Our next question is coming from the line of Jeff Meuler with Baird. Your line is open.
Yes. Thanks. Chip, hoping you could talk more broadly about I guess price elasticity on the student side and how it impacts CAC and your economic model just with I guess picking up off the last question, the zero interest deferred tuition and the other two data points from the call, they increased scholarships and the outsized growth. So just would love your thoughts on price elasticity and how it impacts your financial model? Thanks.
Well, clearly over -- as we provide greater value to the student we do think conversion improves. So it's all about the value proposition. We've always played at the premium end of the market. That's no surprise. The largest cost to graduate education is the opportunity cost of the lost income. At the same time as we start to think about various prices, various lengths and different types of certification across a much broader spectrum of what is now – I mean, we are a much bigger company than we were in back in 2014 across many different segments. And one of the things I thought was notable about the quarter is you've got obviously average FCE came down in grad, but average FCE was way up in an Alternative Credential. Why? Because we've got programs that start as inexpensively as a $1000 with a short course and we have programs that go all the way up to a $150,000 on the degree side.
And over time, we need to have price points across the entire spectrum. We need to offer students options to further their educational goals whether they're looking for skills attainment from something like a short course to learn how to use AI in their job or something like a doctor of physical therapy which is like a three-year life changer. So there are certain disciplines like licensure where we're up double digits in enrollments. And I do think we're building a pretty deep moat. Those require more credit. So inherently those tend to have a higher cost. There's certain things like STEM offerings where on the STEM side candidly if we hadn't gone down the path of short courses and boot camps we'd be at a very significant competitive disadvantage to the rest of space.
That's where we need to be is lower priced faster options for STEM. But at the same time drive quality. Like I do feel like something that has not been talked about enough is we are we are driving the kind of quality that universities respond to, quality of the content itself, quality of the student body and ultimately the quality of the student outcome most importantly. And I thought interestingly this quarter it was right after our last call, but we announced the London School of Economics with our first undergraduate program, like LSE really got on board after having an incredibly high quality experience in the short course business with excellent enrollments in which students are now like literally physically at times coming to LSE for in-person immersion because they experience a really high quality short course.
We don't think that happens across all of higher ed. And then they got excited about what improved engagement and retention could do for a legacy program that they've been offering all over the world. And we think it's a huge opportunity for us going forward. And we've got a launched period for 2020. So lot going on there and a lot of opportunities for 2U to continue pursuing quality at scale.
And when you do the graduate programs or the undergrad programs at lower price points, do you make up for it with lower CAC and or increased scale that the target financial model still holds? Thanks.
Yes. I mean, if you're -- if you start thinking about as we scale programs to a much larger size and we have larger expectations for those programs, clearly the students on the most outer ring end up from just -- purely from that perspective end up being more expensive. So I think having good geographic balance, having reasonably sized expectations, working with our partners to identify the best opportunities for a full investment program. And we'll talk more about that over time as we develop more models for our university partners to drive new program growth. It's all about the sort of combination of the ROIC and the quality we can achieve for our partners and we think we're on the right track here.
Okay. Thanks Chip.
Our next question is coming from the line of Corey Greendale with First Analysis. Your line is open.
Thanks. Good afternoon. So, focused on the efficiency topic, a couple questions on the program marketing and sales. So the first is to the extent it makes sense to sort of intentionally decrease the amount you're spending in some programs that are already in place. What kind of constraints are in place? Are there any contractual constraints on lowering that or for programs have been launched in last few years? Do you have some in any cases performance requirements? You need to meet certain enrollment thresholds or anything like that would artificially constrain what you can do on that front?
So here's what I would say, Corey, appreciate the question. We, first of all, just the general practice going forward, we're too large of a company with too many offerings to be talking about any individual university or any individual contract. We're just not going to do it. It's not wise for the company. It's not wise for the relationships. With that said, in general that's not a concern.
Okay. And the question maybe for Paul which is a two-part question. I understand and applaud the focus on efficiency given the fact that in the graduate program business there is a two-year sales cycle. How does that affect how much? And how quickly you can effect change to make things more efficient on the program in marketing side? And secondly, I just wanted to clarify your comment about early in the 2020 planning process, but lowering the quarterly burn. I just make sure I understand that. Are you – I know you're not giving guidance. But are you suggesting that free cash flow in 2020 should be less negative than it is in 2019?
So, a couple of things. Let me let me start off by providing a framework of how we will look at the programs we launched in the coming years and going forward. We want to look at it from three perspectives. We want to look at it from an ROIC perspective. We want to look at it from a cash flow perspective and we want to look at it from a quality perspective. So essentially, we're going to choose -- we're going to select programs and the timing of program launches, so that we can choose programs that are reaching our ROIC targets that we have.
We want to make sure we optimize our cash flows and we want to make sure we maintain the quality of the program. So if we think of it from that perspective then as we get into 2020 and 2021 we will launch the programs that are most impactful to our financials particularly our free cash flow and our profitability measures. That's point number one. Point number two, the measures that you've seen us taken in the third quarter whether it's the restructuring charge that we've taken, whether it is the integration of the Trilogy business, whether in the alignment of the organization. We are doing that with an eye towards improving our free cash flow performance as we get into next year and going forward.
So I think – So, maybe you're just not answer the question yet, but already answered the question. But is it fair to say you will plan in a way that you would expect free cash will be less negative in 2020 than 2019?
Yes absolutely yes.
We intend to have free cash flow as a dilution to our cash balance. The less and less as we go through the quarters and we will come back to you at a specific timing on when it will be accretive. So the answer is absolutely yes.
Good. Well, thank you for the clarity. Appreciate it.
Our next question coming from the line of Stephen Sheldon with William Blair. Your line is open.
Good afternoon and appreciate all the additional detail this quarter. I wanted to ask a little bit more on the scholarship front. You've been talking about that more frequently which I think is a great initiative. Can you maybe help frame how much you pay down in scholarships this quarter? And did that help a broader funnel conversion? And then how are you thinking about spending on scholarships as we look forward?
So, I guess I would say, we're not at point where we're going to get into any additional detail around how we deploy the scholarships not only from the standpoint of just – we've given quite of additional clarity on this call, but also just on a competitive standpoint. We do believe its part of our strategy. It is clear that lower prices drive conversion and the most successful students have a lot of option. That just a reality across all of our segments. I would say, notably in the campus space in the professional programs in particular you've seen it would be tough sledding for campus programs right now in professional programs, given something we're getting our arms around the impact economic is having a very significant impact on campus programs overall. And our professional programs are really holding their arm where we are still seeing growth. So at various stages of student journey scholarship comes really important when their high quality students and we have high quality program, so high quality students are a factor.
Got it. Is it offer to both to existing students and to those that are in the funnel?
I'll just not going to get into additional detail around scholarship.
Okay. That's helpful. And then just if you think through kind of program launches for next year and with the ones that have been announced so far, is there any way to roughly frame what type of capital commitment you'll need to get those programs up and running this point. And just – any way to frame it?
Let me see if I can take a stab at this one. Look, as I've gotten up to speed here and start looking at how we're going to plan for next year. I mean, I mentioned the three pieces that we look at. We look at our hurdle rate. We look at the cash flow commitments and we look at the quality of programs. If we take 2019 as an example, doing back of the envelope math, we've launched about 19 programs and at an average of back of the envelope math about $5 million of cash usage. If we think of 2020, we will absolutely want to launch programs in a way that allows us to be that have a better performance on the profitability measure so we can pick a number. It's not going to be 19, but it's going to be something that allows us to reduce the expenditures that we spent. And on the year to-date spend we can we can look at $70 million, $75 million that we've spent so far.
So if we think of that on a basis for next year, we can we can think of numbers back in the envelope around 10, that allows us to optimize that. That's point number one. Point number two, we do have that the business has grown. We now have the short course business, the Alternative Credential segments that are more capital light if you will. So we do have the alternative of launching programs across the spectrum not only in the great degree segments, but also in the Alternative Credential segment which allows us to optimize our performance on an annual basis.
And if I could jump in Paul I would add. We were very fortunate and excited to bring Paul in as our new CFO. And candidly we're fortunate to have it happen quickly. And Paul's been with us for months and I think it's pretty impressive on his back that he's been here a month and he's this engaged in where the business is going and getting a real perspective on us going forward. But with that said, we will provide a lot of additional detail on how we think about ROIC and capital allocation at our Investor Day. And as I said earlier it is our goal to have that as early as possible in the New Year. We just need a little bit more time for Paul to get through his process and we're off to a great start here.
Great. Thank you very much.
Our next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is now open.
Thanks so much. Just a follow up that last question, Paul. You had mentioned and forgive me if I'm putting words in your mouth, but it sounds like we're going to have fewer program launches next year than in 2019. Would we also expect the cost or the cash burn for each program launch to be less as well based from some of the efficiency focus that you have?
The short answer is yes and we will redeploy capital spend -- some of the capital spend into some of the more capital light programs in the Alternative Credentials segment. But the bottom line is we are going to look across the portfolio applying to three -- the framework I mentioned earlier and then optimizing the performance.
And just to be clear Jeff and we're not at a point yet where we've got our ready to present our plan in terms of what next year looks like specifically, but we'll get there soon.
I understand. Appreciate that. And I'm apologizing for asking this question but unfortunately I cut out towards the end of the call when you started to talk about some of the media speculation about the activists. I'm not going to ask about a specific investor, but having somebody or a firm like this involved, does it at least you know maybe change your mindset about either pursuing strategic alternatives or other options? Thanks.
Jeff. We're not going to comment on speculation or media reports related to the company. We're focused on creating value for shareholders through creating long-term value for our partners and student students.
Okay. fair enough. Thanks.
Our next question coming from the line of Ryan McDonald from Needham & Company. Your line is open.
Hi. Good afternoon. Thanks for taking my questions. Chip, I'll start with you. It's great to see the strong results in Trilogy particularly with the additional university ads. Can you talk about what you're seeing in terms of demand environment from students in that business? And then how price sensitive do you expect that market to be? Now that we're beginning to see other vendors like Chegg with its Thinkful acquisition, talking about lowering prices for its boot camp offerings?
Well, so I feel like it is encouraging to see as following our announcement of our acquisition of Trilogy. Many others in the space sort of jumping into the space validating this is a bit where the puck is going. I would tell you our business with Trilogy is at a scale and doing it with university partners in a way that no one else in the market is doing. We think the university partners are huge win from that perspective. To be clear, it is running above our expectations. We have now that we're integrating the business, we have found that there are -- there's some real efficiencies we can gain as we originally integrated our marketing of GetSmarter, our marketing competency into GetSmarter, we found a lot of success in not only improving scale, but also improving efficiency and we see the same thing indicates a Trilogy.
We do think that there's quite a bit of expense on the marketing side that we will improve. And on top of that, we did pull back a little bit there online offering because we obviously have a lot of experience doing online and are excited to relaunch that here in 2020 and we think that's a really big opportunity. And finally in a future call we will talk about the enterprise opportunity. We just didn't have time on this call. We'll talk about that more in our Investor Day. But we do think enterprise as a channel is a real part of both our short course and our boot camp business and we do think even has a role on the grad side with degrees particularly with our LSE degree.
Got it. And then just a quick follow up on the grad program business. It's great to see the first announced program between 2U and Keypath during the quarter. I guess given the commentary around limiting cash burn next year as we launch programs, how should we think about the role that a 2U and Kepath partnership plays in terms of additional program launches moving forward?
We're excited about Keypath and we think they're a great business. We've gotten to know them even more since the announcement as you would expect. We were thrilled to have our first one. There are certainly more to come. We do think more flexible partnership options are a reality of where we're going. We think that there are a variety of ways we can offer smaller programs that are still really high quality and Keypath is very much part of that story. So we'll provide more color over time. The reality is it's a combination of sort of ROIC and quality and I do think ultimately, Steve Fireng and the team at KeyPath are doing a great job and we're excited about the strategic relationship. So more options for high quality programs and more flexible approaches to the market is something you will hear a lot more about at our upcoming Investor Day.
Great. Thank you very much.
And our next question comes from the line of George Tong with Goldman Sachs. Your line is now open.
Good evening. This is Blake on for George. Thanks for taking my question. Given the evolving competitive landscape discussed last quarter how should we think about your steady state program sizes going forward. I know its 300, 500 previously, but how do you see that range trending over time? And related to that do you continue to expect to see high 30% margins for cohorts older than four years or will we see that trend down a bit at some of the smaller sized programs age?
So, the latter is fairly easy. We still believe we've got a great strong margin business in the grad side and that doesn't change. Obviously, as we've discussed in the past we have seen the overall size of the largest programs come down. As we talked about in this call just the impact of one program took growth in the segment from 25 to 15. That was a very significant part of our business. But just to give you an example of the sort of development of the business is when we were when we IPO-ed the company we had 10 programs -- 10 degree programs. Today, we have 300 plus offerings across a variety of different product types. But how that's relevant to your question is at the time we IPO-ed 69% of our revenue came from one client. And today we have one client above 10%, that same client, only one. So revenue concentration risk has come way down in the company.
And so this is all about the diversifying of the business. And over time, we're focused on driving quality for our partners with the best return on capital we can and approaching the market with enough flexibility that solves the long-term needs of the university and drives high quality student outcomes. And that's our story. So I wanted to -- as we end the call. That's our last question, Operator. I wanted to thank Paul Lalljie for his arrival and we're excited to get out on the road and look forward to talking to everyone in more detail over the next couple of weeks.
Thank you ladies and gentlemen this concludes today's conference call. Thank you for participating. You may all disconnect. Everyone have a great day.