2U, Inc. (TWOU) Q4 2022 Earnings Call Transcript

2U, Inc. (NASDAQ:TWOU) Q4 2022 Earnings Conference Call February 2, 2023 4:30 PM ET

Company Participants

Steve Virostek - Head, Investor Relations

Chip Paucek - Co-Founder and Chief Executive Officer

Paul Lalljie - Chief Financial Officer

Conference Call Participants

Ryan MacDonald - Needham

George Tong - Goldman Sachs

Stephen Sheldon - William Blair

Ryan Griffin - BMO Capital Markets

Josh Baer - Morgan Stanley

David Lustberg - Jefferies

Brett Knoblauch - Cantor Fitzgerald

Operator

Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the 2U Inc. Fourth Quarter and Full Year 2022 Earnings Call. Today’s call is being recorded. [Operator Instructions] Thank you. And I will now turn the conference over to Steve Virostek, Head of Investor Relations. You may begin.

Steve Virostek

Thanks, Abby. Good afternoon, everyone and welcome to 2U’s fourth quarter and full year 2022 earnings conference call. Joining me on the call this afternoon are Chip Paucek, our Co-Founder and Chief Executive Officer; and Paul Lalljie, our Chief Financial Officer. Following our prepared remarks, we will take questions. Our earnings press release and slide presentation are available on the Investor Relations website and a replay of this webcast will be made available later today.

Statements made on this call may include forward-looking statements, including our financial and operating results, plans and objectives of management for future operations, including our strategic realignment plan, the integration of edX and transition to a platform company, anticipated trends for learners and university partners, and other matters. These statements are subject to risks, uncertainties and assumptions. Any forward-looking statements made on this call reflect our analysis as of today and we have no plans or duty to update them.

Please refer to the earnings press release and to the risk factors described in the documents we filed with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2021 and other SEC filings for information on risks, uncertainties and assumptions that may cause our actual results to differ materially from those set forth in such statements.

In addition, during today’s call, we will discuss non-GAAP financial measures which we believe are useful as supplemental measures of 2U’s performance. These non-GAAP measures should be considered in addition to and not a substitute for or in isolation from 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.

Before handing the call to Chip, I am pleased to share that our plans for an Investor Day event on March 21 at the NASDAQ market site in New York. We are planning to provide additional details and insights about our strategy, business trends, financial performance and our roadmap for future value creation.

With that, let me hand the call to Chip.

Chip Paucek

Thanks, Steve. Executing our platform strategy drove meaningful profitability improvements across our business and it’s creating opportunities to accelerate our profitable growth trajectory.

We concluded 2022 with strong results, including $58 million of adjusted EBITDA for the quarter or growth of 178%, beating our guidance by nearly $10 million. For the full year, we delivered $125 million of adjusted EBITDA or growth of 88%. In addition, unlevered free cash flow turned positive. These excellent results were made possible by our team, who answered the call after we made a midyear decision to accelerate our platform strategy and realign our company.

Our Alternative Credentials segment is doing very well, delivering almost $400 million of revenue in 2022. This is driven primarily by boot camp growth of 18% versus the prior year, with contributions from both consumer and enterprise. We anticipate this growth will continue as more learners opt for shorter, less expensive and more career specific training to reach that next job, promotion or bump in salary. And we expect that continued growth will offset the near-term declines in the Degree business. Most notably, in 2023, we expect the Alt Cred segment to cross over into profitability for the first time after 6 years of building that business. This is a big deal. No more “empty calories.”

Looking at the top line of our degree business for 2022, revenue slowed by 3% year-over-year to $572 million. We saw the near-term impact of our new marketing framework, which reduced unprofitable spend combined with a strong labor market that increased the opportunity cost of higher education. However, we remain focused on enabling great outcomes, delivering strong profitability and signing new degree programs. We believe that these new degree programs and a cooling labor market will setup the degree segment to return to top line growth in 2024.

Client satisfaction is high and the response to the new flexible degree offering has been great. As a reminder, the flexible offering includes a lower revenue share for a different bundle of services, including very limited paid marketing and no CapEx for course build. We expect revenue per degree for those to be 15% to 20% on average of the revenue generated for our full degrees. However, these programs are designed to have minimal cash burn and similar profitability.

For year-on-year comparisons, we launched four full degree programs in 2022 and began building a pipeline of new flexible degree offerings in the second half. We are selling both of these effectively, both full and flex with a greater focus on cash flow generation. While in 2022 and 2023, we launched or expect to launch a similar number of degree programs, 4 or 5 full degrees and a limited number of flex degrees. In 2024, we expect to increase that sizably, launching at least 7 new full degrees, 3 of which have already been signed and 25 flexible degrees. We believe this robust launch schedule will help us get the degree segment back to top line growth in 2024 and more momentum in 2025.

Taking a broader look, it’s been just over a year since we combined the edX platform with the core capabilities of 2U, including our digital marketing expertise, scale and services. Fast forward to today and we are leveraging an industry-leading platform offering everything from degrees to boot camps to professional certificates to free courses, all in one place and easily accessible to millions of learners around the world regardless of where they are on their learning or career journey. The combination is generating tangible proof points. We are driving meaningful cost efficiencies, thanks to the power of the edX platform and our overall scale, which should create a sustainable marketing advantage long-term. More specifically, this means reducing paid marketing spend while growing organic inflow.

On Slide 10 of the earnings deck, you will see that marketing and sales expense as a percent of revenue declined to 34% in the fourth quarter, the lowest it’s ever been. In 2022, we reduced paid marketing by $47 million when compared to 2021 and we generated revenue above our expectations despite lower marketing spend and a strong labor environment. Our organic lead generation from edX is strong, accounting for 37% of organic leads in the fourth quarter. The quality of organic leads provides confidence in the sustainability of our marketing efficiencies and our ability to leverage the power of the edX platform to drive enrollments.

When it comes to learner growth and new content, we are gaining momentum. Put differently, we are in the early stages of igniting the flywheel or the premise that increasing high-quality content will attract more learners and more learners will drive more partners who want their content on the edX platform. To bring that to life our learner community increased by nearly 6 million during 2022 to 48 million at year end. 2 million learners joined in Q4 alone.

On the content side, we are growing the catalog with the help of both new and existing partners. In 2022, we launched a dozen micro credentials and our partners added over 600 free online courses to the edX platform. We also added 16 members to edX during 2022, including the American Psychological Association, Baylor University, Oracle, Russell Sage College, the University of California Davis and Wesleyan University. We have some news for you. Pepperdine and Lehigh just joined and will be announced shortly.

We are expanding our relationships with current partners to launch innovative in-demand offerings. A great example from last week is the disruptively priced Masters of Science in Artificial Intelligence with the University of Texas, Austin, a partner of edX’s for the last decade and a top 10 computer science school. This is a near perfect example of a well-timed, relevant and accessible program that addresses a large and growing skills gap in our workforce. It’s also only $10,000 for the entire degree. As a real-time proxy for interest, within 48 hours of our announcement, we generated 3,400 organic or free leads all through edX.

In addition to UT, this week, we are excited to have announced a new full degree with our longstanding partner, the University of North Carolina at Chapel Hill. We will be launching a Doctorate of Education in Organizational Leadership. We also have some news on this call. We have signed a contract to launch a new flexible degree with the University of California Davis, a Masters of Science in Management.

Overall, we feel really good about our ability to grow our learner base and our ability to continue to enhance our platform with new high-quality content. We also remain focused on continuing to grow our enterprise business. We are seeing tremendous progress here. During 2022, enterprise revenue increased 86% versus the prior year, while securing new customers and building a pipeline of opportunities. We see a lot of potential here and are leaning heavily into this part of the business. Investors have high appetite here and we will unveil the full strategy at our upcoming Investor Day event in March.

A quick note on the international front. As we look for ways to expand our geographic reach, we are implementing new tactics such as market-specific pricing for our offerings. In addition, we are excited about the potential for adding new content from new partners like Emeritus that appeal to learners outside the United States and Europe. Beginning with India, we will leverage their infrastructure and localization to generate high margin revenue. We will also continue to improve and differentiate the learner experience, drive platform innovation and deliver world-class outcomes proving that high-quality online education can be done well at scale. And finally, as promised, we are driving to higher and more sustainable profitability due to our new marketing framework, which leverages the high domain authority of edX, our strategic realignment completed last summer and ongoing cost discipline measures, such as managing headcount and third-party spend.

Looking forward, we are excited about our plans and opportunities to advance the utility of the edX platform while creating both learner and shareholder value. Paul will cover the 2023 outlook in more detail, but the highlights are a range of $155 million to $160 million for adjusted EBITDA with positive EBITDA from our Alternative Credentials segment in the back half of the year and our first ever year of positive levered free cash flow.

Platforms are the future of education. We are confident that our platform strategy is working and that we are well positioned to create value for learners, partners and shareholders. By executing our strategy, we are focused on driving higher profitability and delivering positive cash flow. My goal is to deliver positive EPS during 2024, a goal, I believe, is achievable given the positive leverage we are seeing in the business. Transformation isn’t easy, but we are confident about what’s ahead and look forward to sharing more in March at our Investor Day.

With that, I will turn it over to Paul.

Paul Lalljie

Thanks, Chip and good afternoon everyone. As you have seen from our press release, we had a strong finish to the year, delivering revenue of $236 million and EBITDA of $58.4 million in the fourth quarter. Net loss came in at $11.8 million and free cash flow on a trailing 12-month basis was a positive $11.5 million. The significant improvements across all of our profitability measures demonstrate the early returns of our best-in-class platform and organizational realignment. Our team responded to a difficult macro environment and delivered, particularly in the second half of the year giving us the confidence to deliver strong profits, cash flows and outcomes for our partners in 2023. Today, I will discuss our results for both the quarter and the year. Then I will provide an update on our balance sheet and cash flow, including recent financing activities and conclude with our thoughts on our financial outlook for 2023.

Now for a closer look at revenue. Revenue for the quarter totaled $236 million, down 3% from $243.6 million in the fourth quarter of 2021. For the full year, revenue grew 2% to $963.1 million from $945.7 million. Degree segment revenue decreased 10% to $137.1 million for the fourth quarter reflecting a 9% year-over-year decline in FCE enrollments, with average revenue per FCE remaining relatively flat. On a full year basis, Degree segment revenue decreased 3% to $571.6 million, driven by a 2% decrease in FCEs and average revenue per FCE.

The Alternative Credentials segment continued to deliver strong revenue growth in the fourth quarter, with revenue increasing to $98.9 million, up 8%. FCEs for the quarter increased 15% and average revenue per FCEs declined 11% over the prior year. We continue to experience strong revenue growth from our boot camps, which grew 18% on a year-over-year basis on the strength of coding, cyber, web development and enterprise.

Revenue from legacy edX offerings contributed $5.9 million for the quarter. Our exec ad revenue declined 11% year-over-year, driven by lower revenue per FCE due to geographical pricing strategies. On a full year basis, the Alternative Credentials segment revenue increased 11% to $391.5 million. Legacy edX offerings contributed $22 million and the remaining increase was driven by a 9% increase in FCEs.

Turning to operating expenses, operating expense totaled $230.6 million for the quarter, a decrease of $62.7 million or 21% compared to last year’s fourth quarter. This significant improvement was primarily driven by a $26.3 million decline in paid marketing expense and a $24.2 million reduction in personnel and related costs associated with headcount reduction and lower performance-based compensation.

As Chip mentioned earlier, when we acquired edX, we emphasized the value creation potential from improved marketing and sales efficiency due to edX’s large global audience, a massive library of educational content and brands with consumer and Google credibility. We are beginning to see this pay off with an increasing percentage of organic leads coming from edX and these leases have a greater propensity to purchase, driving higher conversion rates.

As a result, marketing and sales as a percent of revenue declined to 34% from 45% in the fourth quarter of 2021. Also at the time of acquisition, we identified enterprise as a key growth opportunity. And in 2022 we increased our enterprise revenue by 86% to $44.8 million. In the fourth quarter, enterprise revenue grew 183% on a year-over-year basis. Stock-based compensation expense for the quarter totaled $17.5 million, down $5.5 million or 24% from the fourth quarter of 2021, primarily due to headcount reductions. During the quarter, we recorded $4.1 million in restructuring charges related to the 2022 strategic realignment plan, bringing the total to $33.2 million for 2022.

Turning to profitability measures. Adjusted EBITDA for the quarter increased 178% to $58.4 million, a margin of 25% compared to a margin of 9% for last year’s fourth quarter. This significant increase in adjusted EBITDA was primarily the result of accelerating our platform strategy and executing the strategic realignment plan. Our fourth quarter adjusted EBITDA also benefited from the typical seasonal decline in marketing spend.

Net loss for the quarter totaled $11.8 million, an improvement of $55.4 million from last year, primarily due to lower operating expense and lower transaction and integration expense. Segment profitability or adjusted EBITDA for the Degree segment came in at $60.5 million, a margin of 44% compared to $39.4 million in the fourth quarter of 2021. For our Alternative Credentials segment, segment loss or adjusted EBITDA loss came in at $2.1 million compared with a segment loss of $18.4 million in the fourth quarter of 2021. In light of this trend, we expect this segment to be profitable on an EBITDA basis for the full year 2023.

Now for a discussion of the balance sheet and cash flow statement. We ended the year with cash and cash equivalents of $182.6 million, a decline of $2.6 million from the third quarter of 2022. And we delivered unlevered free cash flow of $11.5 million for the trailing 12 months ending December 31, 2022, an improvement of $45.4 million compared to the 12 months ending December 31, 2021. Gross debt at year end totaled $953.8 million, including $567 million of term loan and $380 million of senior convertible notes.

In January, we significantly improved our credit profile by refinancing our term loan. We paid off a portion of our outstanding balance and extended the maturity date by 2 years. We used $104 million from the balance sheet and the proceeds from the issuance of new senior convertible notes to reduce the term loan by $187 million. After this transaction, we have gross debt of $914.2 million, including a $380 million term loan and $527 million of two tranches of senior convertible notes. On a steady-state basis, we expect cash interest savings from this transaction to be approximately $10 million per year. These financing transactions achieved three objectives. First, we reduced our secured debt to $380 million, a secured debt leverage ratio of 1.9x 2023 EBITDA guidance, a reduction of nearly one full turn.

Second, we pushed out the near-term maturities of our debt. Nearly 60% of our total debt now matures in 2026 and beyond. And third, we’ve put in place a revolving credit facility of $40 million to manage working capital. These activities enable us to focus on executing on our plan, and I’m proud of the team for getting this transaction across the finish line in a difficult macro environment. We remain opportunistic with respect to further balance sheet optimization.

Now for a discussion of the 2023 guidance. Our guidance for 2023 calls for adjusted EBITDA to range from $155 million to $160 million, representing growth of 26% at the midpoint. For revenue, which we view as an output for our model, we expect revenue to range from $985 million to $995 million, reflecting the market trends that Chip described. We expect net loss to range from $95 million to $90 million.

Underlying our outlook is a change in the financial profile of our business as we expect Alternative Credentials revenue to grow to nearly half of the consolidated revenue and deliver positive adjusted EBITDA in 2023. We believe this change will provide flexibility in continuing, positioning our Degree business for accelerating profitability – profitable growth in 2024 and beyond as we add more programs, including flexible degrees and as macroeconomic factors move in our favor.

Concerning revenue pacing for 2023, we expect sequential revenue growth every quarter, while year-over-year growth is expected to return in the second half. In addition, as we continue to focus on net loss for 2023, we expect to reduce stock-based compensation to $70 million compared to $80 million in 2022. We also expect capital expenditures of $65 million versus $75 million in 2022 and weighted average shares outstanding of 82 million.

To conclude, the acceleration of our platform strategy and the strategic realignment plan in 2022 resulted in a nice finish to the year particularly in our profitability. This year, we expect to build on that success to deliver strong adjusted EBITDA, which is a growth of 26% and positive free cash flow as we set up 2024 for profitable top line growth.

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

Chip Paucek

Thanks, Paul. Before we open it up to Q&A, I’d like to take a quick moment to say how proud I am of the entire team for their unwavering focus and dedication in delivering outstanding results this year. Strategic realignments are never easy. The team not only delivered but did so while staying maniacally focused on what matters most, doing what’s best for universities and their students.

With that, I’ll turn it back to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we will take our first question from Ryan MacDonald with Needham. Your line is open.

Ryan MacDonald

Hi, thank you for taking my question and congrats on a great quarter.

Chip Paucek

Thanks, Ryan.

Ryan MacDonald

Maybe this is for Chip and Paul. As you think about the degree launch cadence, interesting to hear of the 7 to 8-degree – full degrees or sevenfold degrees and then 25 flex degrees. First, Chip, how do you expect sort of enrollments to trend or to progress on the new flex degrees given the attractive price point? And then for Paul, perhaps you can talk about sort of just to remind us on the investments upfront required to launch the flex degrees relative to the full?

Chip Paucek

No problem, Ryan. So yes, flex is going incredibly well. We still have a good number of full and as you heard, we expect full to not quite double year-on-year once you get to ‘24, but going from 4 or 5 to 7, and we still have plenty of folks interested in that offering. Flex is a great response to the market. And we think that, that 25 is realistic. You heard me mention for the first time that we think it’s roughly 15% to 20% from the standpoint of what these programs will look like on a revenue basis, which you can apply on an enrollment basis. We’re obviously not doing paid marketing in every one of those cases.

It’s notable that if you look at the flexible offering, while it starts at 35% and has a very limited amount of high intent marketing, mostly organic. If you add – if a client chooses to add paid marketing for an additional 15%, the programs will be a lot bigger. So TBD in terms of what percentage of overall flex, we will have the additional marketing in it. A lot of that depends on the desire of the school, interest in scaling the program. One of the great things about the flex offering is not every school wants to scale its programs. Many of the schools want to go online and offer high quality to their student base without scaling the program. And in the past, that would have been very problematic for 2U. And therefore, we wouldn’t be able to launch those programs. And in this model, we can really work with the clients and allows us to just launch many more degrees. And we think over time that should get really attractive for the segment. As you know, with our Degree business, if it goes down or up, it takes time to feel it through the financials. So we’re excited about what that could mean for ‘24 growth. In addition to getting to 25%, and we do think, overall, the macro should start to favor Degrees more. It’s notable that while our Degree business declined and we expect it to decline this year, if you look across the space, ours held up, we think, better than most. We think our Degree business is pretty resilient. So ultimately, being able to offer quality to our partners, high-quality outcomes to the learners, which is kind of table stakes for 2U and a model that ultimately gives greater flexibility to the university partner. We didn’t announce it until whatever it was 6 months ago, and it’s very – creating a very attractive pipeline. So pretty strong.

Paul Lalljie

Yes. And Ryan, we refer to these as capital light, meaning very little from a launch perspective in comparison to the traditional launches that we had. From a CapEx perspective it’s almost non-existent. And then from a total cumulative cash to launch, we’re looking somewhere between $500,000 and $1 million depending on the program. It’s closer to $500,000 for some and closer to $1 million for others. But the bottom line is it is not something that put a constraint in our resources as we think of launching a large number of these programs in any calendar year. It is something that we can definitely afford to do in the calendar year in large volumes, like, for example, 25 as we are targeting here.

Ryan MacDonald

That’s super helpful color. I really appreciate it. Maybe just one more for me, Chip, on the Emeritus announcement, really interesting opportunities obviously drive new revenue streams outside the U.S. Just curious where you’re at in terms of getting the content on the edX platform? And how should we think about potential contributions to 2023 revenues from that relationship? Thanks.

Chip Paucek

We’re excited about it. Ashwin and his team have built a great company with infrastructure in that market that we don’t have. And while in the past, we might have thought of launching actual sort of folks in that country, partnering with a company like Emeritus that has great payment options for learners and infrastructure makes a ton of sense for us. Now Ryan, everything takes time. So we do think this will build into something more meaningful as we go throughout the year and notable that as we bring in that revenue, we think it creates an opportunity for an improvement in margins. So we also have a couple of relationships like that, that are in play right now. And our plan is to talk about that strategy in a little bit more detail at Investor Day where we have more time to give you a greater amount of the story.

Ryan MacDonald

Thanks. Congrats again.

Chip Paucek

Thanks, Ryan.

Operator

We will take our next question from George Tong with Goldman Sachs. Your line is open.

George Tong

Hi, thanks. Good afternoon.

Chip Paucek

Hi, George.

George Tong

Hello. You mentioned that the cash to launch a flex program to range from about $500,000 to $1 million. How much would you estimate full degree programs would cost to launch at this point? And how would that compare to prior launches before you embark on your overall restructuring and platform strategy.

Paul Lalljie

Yes. So currently, George, somewhere between $2.5 million to $5 million is our cumulative cash to launch a regular program. Of course, size matters when it comes to those, but $2.5 million to $5 million is a good ballpark at this time.

Chip Paucek

And the two variables there, George, would be the content and some programs are more expensive than others. But the bigger variable interestingly is the marketing because as the program grows more quickly, it actually consumes more cash in the early stages, but it therefore generates a bigger number at steady state. So when we have something launched, it does really well. Now we do think, over time, edX probably changes that, too. So like the domain authority of edX allows us to generate high-quality content from an SEO perspective in a way that we just didn’t have access to anything like that before. So we think that, that’s a meaningful lever when you start thinking about the next 5 years. SEO takes time but over the next 3 to 5 years, we should be able to see a great opportunity to drive that down. But the faster a program scales the more cash it will burn in the short period. We’re pretty excited about the response to the AI degree. We’ve never really seen anything quite like it, to be honest, it outpacing anything that we’ve done in the past, including our Morehouse undergrad program.

George Tong

Got it. That’s helpful. The launch cadence for 2023, 2024 definitely is useful from a modeling perspective. As you think about a number of programs coming up for renewal, when do you expect the next big wave to hit and based on conversations you’ve been having with your partners, is there any intention to shift along the spectrum of flex versus full degree offerings?

Chip Paucek

In general, no, because if a program is today launched and it’s a program that we intend to renew, typically, that means that it had the benefit of larger marketing that comes with the full program model, and therefore, it’s at scale. And without that marketing, it will be more challenging to keep that program at a higher enrollment level. What you will see is we went through a period, George, it – and I know you’ve been with us for a while, but for those investors that weren’t, we went through a period where we had signed a lot of exclusive deals in our early history where we had offered exclusivity in various disciplines. And we figured out over time that we shouldn’t have done that and that we needed to offer more programs in verticals because programs had greater geographic boundaries to them, even though you were online. That was not immediately obvious in the early days. So by signing exclusives, we had to go early into the contracts. So the 2U side, had to go to our clients and try to reopen the agreements to eliminate exclusivity. And in doing so, we came up with a model that worked quite well across our portfolio, and there were mild variations, but we would give schools small single-digit relief in the rev share in order to be able to go to a less exclusive or, in some cases, a non-exclusive basis.

The reason I go there is that we’re generally through that. We have a limited amount of it that still exists. But for the most part, what you’re going to see now is a much more sort of routine renewal and we actually just signed one that we have not yet announced. We sort of like under the wire here. So that we will be able to get detail on shortly to everybody that looks – I think, looks much more like what you’re going to see. And in that case, it’s candidly just extending the program because the client is really happy with really no change. And so we will get greater detail on that shortly. We thought we might have it for this call, but we didn’t quite make it in time to put a proper release on it. So the other thing I think you’ll see rather than people transitioning from full to flex. And I’m not saying that it’s not possible that there is one or two of those at some point. But you’ll see more and more current partners wanting to launch new programs, in some cases, full, in some cases, flex. Back in the day when we only had the full model, we did not have an opportunity to work with every school at the university because in many cases, the university either didn’t want to scale a particular school – school-by-school decisions matter. And so if the faculty at a particular school didn’t want to scale, we really didn’t have anything for them. Now we do. Or other cases where that particular brand may be mixed with that particular geography and discipline didn’t allow us to scale a program. What’s great about flex is it works for all of that. So it really just allows us to aggregate more overall degree demand on our platform. So we think it sets up a quite positive out years with regard to degree.

George Tong

Got it. Very helpful. Thank you.

Chip Paucek

No problem.

Operator

And we will take our next question from Stephen Sheldon with William Blair. Your line is open.

Stephen Sheldon

Hi, thank you. Congrats on the [indiscernible] and the UNC announcement. So it seems like a really nice additional wins with some of the largest institutions out there. So on that front I would love to get some detail on what trends you’re seeing between institutions, doing more to launch and support online programs themselves kind of in-house versus outsourcing the third-party providers like yourselves. Have you seen that change much looking back over the last couple of years? And does the trend look much different by type or, I guess, size of higher ed institutions?

Chip Paucek

Yes. Thanks, Stephen. So the most common trend is related to course build. When we started the company, universities didn’t have the capability of building online courses or launching online courses. And so that was 100% necessary to get a program online. And while we were very proud of our team that builds really high-quality content and it’s meaningful over time, more and more universities have developed capacity to do that. That’s part of the reason for the flexible model. We do think you’ll see a good number of the core bundle with clinical placement or the core bundle with marketing and clinical placement and other – often not the course build – from the standpoint of the financials that is a net positive because it does lower the CapEx. And we are focused on getting to positive EPS. And as you know, the CapEx is part of that story. So from my standpoint, we see the flex innovation as simply opening new doors. And I’d say that’s the biggest trend.

Steven, the only other thing I would say is this entire notion of sort of in-source and outsource is just way overplayed in various places. It’s not really this – it’s more complicated than that. Like many of our best relationships, we work directly with the folks that you would argue are the in-source. So very commonly, we’ve got great relationships with the universities, departments that are building a variety of capacity. So we had today an incredible day at headquarters where I’m at in – right outside of Washington, D.C. and Maryland, where we had our social enterprise of boot camp partners. So our boot camp partners from ranging from University of Kansas to Colombia to all kinds of really great schools that are partnering with us and local workforce agencies to drive critical skills training for the country. And this kind of training can’t be done without private partnerships – private-public partnerships. It’s just not possible to do the scale. So we think we’re doing something really good for the world that we also think is a great business opportunity. And the reason I go there is, in many of these cases, that is working with the continuing ed component of the institution that very often also has some responsibility in this notion of in-source outsource. So I understand why folks ask about it. But overall, we feel like the interest in our revenue share-based model continues to increase. So we like what it means for the future of that part of the business.

Stephen Sheldon

Got it. Very helpful. And then I wanted to ask about the enterprise detail you gave. It seems like growth there accelerated during the year, if I heard that correctly, that it grew 183% year-over-year in the fourth quarter. And I know it’s still somewhat small. But what’s driving that acceleration? How are end market macro dynamics playing into that? Just any detail you can provide on the trend?

Chip Paucek

Yes. So, might be the best example of something that because we were bringing together, I mean the edX acquisition included so many different angles. And I would tell you that enterprise, we are really getting our legs there. And we feel like it’s a huge opportunity going forward, will debut the full strategy at our Investor Day in March to give it the time that it needs that you really can’t do on an earnings call. But we are adding new customers. There is a lot of reseller activity. There is a tremendous boot camp opportunity. The skills, training, combined with the support and the career engagement that we can provide is really part of what I think is a durable moat around the competition. And then what I mentioned earlier in terms of the social impact, if you look at like the UK, the United Kingdom Department of Education Skills Fund that we announced, I don’t know how many months ago it was…

Paul Lalljie

Maybe September of last year...

Chip Paucek

September of last year. So, just you have got a variety of growth levers in enterprise in places where we are going to be able to really drive sort of a durable advantage to the competition. And then some places where our edX for enterprise offering just has incredibly high-quality courses that are known for rigor from 37 of the 50 best schools on Planet Earth and adding folks like Oracle and IBM and incredible corporate content. So, there is a lot more of that coming. We have been really pretty keen on the amount of content being added. And we just keep announcing it, and we feel like often maybe not getting enough attention. But ultimately, enterprise is a very significant growth lever for both ‘23 and ‘24 and helps us with the trough that we are going to see on the degree side simply from – as you move it up or down and our marketing spend did change on that side. It takes time to sort of see it move through the revenue. So, it sets us up nicely for ‘24 because you get degree back to a good place, and then you have got these growth levers of both enterprise and boot camp that are really meaningful.

Stephen Sheldon

Great. Thank you. And that’s all for me.

Operator

[Operator Instructions] And we will take our next question from Jeff Silber with BMO Capital Markets. Your line is open.

Ryan Griffin

Hey. Good afternoon. This is Ryan Griffin on for Jeff. I was just wondering, it sounds like the edX platform is operating really efficiently. Are there any specific KPIs you can point us to, to help us kind of track how conversion has been going or maybe on the spend for those users acquired through the platform versus through other customer acquisition channels? Thank you.

Chip Paucek

So, we – Ryan, we try not to get too in the weeds here. You will see that 37% of organic lead flow in the quarter came from edX. So, we do think that’s a meaningful lever because ultimately, organic is the most powerful case by definition. We are not paying for that. And I do think getting sales and marketing to 34% in the quarter, that is a non-trivial accomplishment if you look at our history. So, we do think that the platform strategy allows us to ultimately define the long-term future of the company based on our own domain and our own domain authority. One of the challenges with these calls is we don’t talk a ton about the learning going on, on the platform. But it’s important to note that like, since we bought it, we have added over 600 free courses to the platform also. So, like that’s a big part of the story. This is a worldwide free platform for people to come in and change their lives. So, the percent of marketing is down and our CPL is just simply more efficient because of the edX platform.

Paul Lalljie

I mean paid marketing is down. We spent $26 point-something million less than paid marketing. And as you can see from the revenue trajectory, we are able to maintain that. And we are able to augment paid marketing with organic growth, so from a lead perspective. So, the overall high-level metrics are there. And we are trying to up-level that conversation, if you will, and not get too much into each of the inputs that get you to the overall level.

Ryan Griffin

Got it. Thank you. And just for a follow-up on the capital allocation front. Are there any other debt refinance catalysts you are looking at or maybe to reduce the term loan any further?

Paul Lalljie

I mean Ryan, look at it this way, we delivered what, $125 million of EBITDA in 2022. We are on a trajectory to deliver – pick a number, $157.5 million plus in 2023. We have the fundamentals as an organization to have optionality when it comes to capital markets. And we will continue to explore that. At the end of the day, we are very focused on optimizing our balance sheet, and we will make sure we continue to look for opportunities as we go through time. I don’t know if that is in the near-term or when that is, but we are building the fundamentals to make sure that we can tap into the capital markets as appropriate and optimize our balance sheet.

Ryan Griffin

Got it. Thanks so much.

Operator

And we will take our next question from Josh Baer with Morgan Stanley. Your line is open.

Josh Baer

Great. Thank you for the question. If we look at EBITDA margins in the back half of this year, and I know there is some Q4 seasonality around lower marketing spend, but I think you were over 19%. So, I am wondering why EBITDA margins for 2023 goes down to 16% from these higher levels assuming that there is the continuation of that reduced paid marketing spend in the first half of 2023, which wasn’t there in 2022. So, just wondering if you could give any context there maybe where – if you are investing into next year and where?

Paul Lalljie

So, Josh, let me put that into perspective a little bit. The third quarter of 2022 was a 14% EBITDA margin and in Q4 25%. And revenue in that back half of the year of 2022, let’s say, $468 million with EBITDA of about $91 million. That’s the 19% that you are referring to. And if you take the midpoint of our guidance of $157.5 million as a percentage of the midpoint on the revenue side, that’s the 16%. Keep in mind, half of the back half number that you are talking about there, the Q4 numbers has seasonality associated with it. And when you are looking at the full number of 16% margin in 2023, that number encompasses a full cycle, meaning Q1, which is our tallest pen and then Q4, which is going to be lower seasonal marketing spend. But having said all of that, I mean at the end of the day, this is January, this is the beginning of the year. And there is an element of prudence when it comes to our guidance that we delivered here today. Remember, we are in a very complex macroeconomic environment. And we have to be prudent as we go through 2023. But you hit the nail on the head. And funny enough, we were prepared for that question by looking at the back half of the year margin, what does it mean from a run rate perspective and you can tell from the response here. That’s a very good observation on your part.

Josh Baer

Thanks. And I definitely appreciate that. You like to outperform EBITDA and embed some prudence in there. I guess my other question is just we talked about through some of the positives around top of funnel and efficiency from edX. Wondering if you could comment on any impacts you are seeing from the pullback in paid marketing spend to top of funnel or enrollment?

Chip Paucek

Yes. Josh, I would take that one. We were – I mean obviously, when we did it, doing it the way we did it at sort of one moment in time, I did have some risk associated with it. I am very pleased to tell you that it worked out in each individual sort of product line to our liking effectively what we thought it would be. We are now spending marketing dollars based on positive contribution. We do think over time, as I mentioned, we will be able to get back to stronger growth, but we are just doing it carefully. So, ultimately, we – the marketing spend is simply a much more efficient spend and you really can’t get there without the organic lead flow that’s coming off the platform. I mean it is still – it’s still early days, and we have only owned it for a little over a year. And an example of the micro credentials, we do believe, if you look at those, there are good examples of those micro credentials in the edX portfolio driving significant enrollment into the original edX degrees. And so aligning that kind of content with a university partner is a non-trivial exercise. It’s really hard to do. So, when you see announcements like our GW Doctorate, that was our first flex degree. And you start noticing all of the lead flow running through edX. What we need to do is align every lead to learner status and have effectively every lead be a learner and have an opportunity to change their life even if it means they are doing something free on the platform. That is the really significant opportunity. Josh, what that will do is that will not only increase the learner count, but it will get us to greater growth opportunities because, as you know, the vast majority of people that become a “lead” do not convert into a degree or into a boot camp. And so aligning all of those together is really starting to work. It is somewhat early days, but you might even notice that today, the homepage of edX looks quite different than it did yesterday. So, it’s just a gradual process of continuing to drive greater efficiency, sort of greater commonality. And the more paid marketing that goes to edX and the edX funnel, the greater the opportunity for us to expose people to new programs that they weren’t considering before. And we are now actually, for the first time, doing edX direct marketing for edX itself. We were not really able to do that with the exception of a very minor test we did way back when we first bought edX. Now, you are starting to see, on a cost basis, us get positive conversion for edX compared to the lifetime value of a customer. And we will talk about that in more detail in March. There is only so much you can cover on an earnings call. But we really like where it sits. It’s a – we think this is the future of education. And so we feel like we are ahead of folks here.

Josh Baer

Okay. Thanks Chip and Paul.

Operator

And we will take our next question from Brent Thill with Jefferies. Your line is open.

David Lustberg

Hey guys. Thanks for taking the question. This is David Lustberg on for Brent. I wanted to ask, you guys had previously in the past, you said you were going to offer up rev share points to existing customers if they were going to reduce their cost of their programs. Just curious, has that gained any traction? Have you guys had any folks out there taking you up on that?

Chip Paucek

A little bit, Dave. And I would be – I would love to tell you that we have had a lot. We are not exactly sure what investors thought of it. We didn’t do it for investor purposes. We did it because we really believe that lower cost is better for the student and candidly better for 2U because these are not inelastic goods. So, as the price goes up, demand goes down and we unilaterally pay for that. So, we do think putting sort of our money where our mouth is in reducing the rev share in order to drive the cost down, we thought is a really good goal. It is happening. We don’t have anything to announce yet, but we will have a couple. But these things take time. So, compared to flex, we made two announcements at the same time, sort of swapping rev share, we think it’s really important that the world understands that we are willing to do that and are excited to do it. And therefore, debunks that narrative. But compared to flex, we got a lot of interest in flex and not as much interest in lowering tuition. So, we have more work to do there.

David Lustberg

Got it. That’s helpful. And maybe just one more if I may. I wanted to double click a little bit on the enterprise. Really good growth from you guys, obviously, of the small base, I think roughly 5% of your total revenue today. Excited to hear more, it sounds like you guys got a lot to tell us at the Investor Day. But just thinking about the long-term perspective of this business, is this something that you expect could grow to a third or a half of your revenue over time? How are you guys thinking about the long-term contribution of enterprise?

Paul Lalljie

We think this will get big. Sorry, that was it.

David Lustberg

Yes. That’s great. Yes. Appreciate it.

Operator

[Operator Instructions] We will move to our next question from Brett Knoblauch with Cantor Fitzgerald. Your line is open.

Brett Knoblauch

Hi Chip and Paul. How are you guys doing? Just maybe two on my end. Just like, I guess in general, I think previous kind of recessions or maybe – and this is where the labor market really deteriorated. I would imagine a lot of the incremental unemployed went to degree route. Are you seeing any change in I guess or do you expect a difference in the market led theory this time around, where these people would go degrees or maybe your Alt Cred segment?

Chip Paucek

So Brett, I would say in the – if you look at the research, typically, job-oriented programs moved first. We have definitely seen that. So, our boot camps are doing very well. And important to remind everyone that we – with Gallup, we released a study that showed that there is a year one $11000-salary increase from the boot camps, also doing very well for people of color. So, like if the boot camps are a really good story, from an outcomes point of view. We do think that this will transfer to degree over time. Obviously, everyone is talking about the layoffs and it’s obviously, it’s not great for those companies. But the fact is, typically, the degree business, you would expect it to be countercyclical, but not necessarily to the economy as much as it is to the labor market. So, as the labor market has started to cool, we do think we will return to sort of more normalcy there. But I would also tell you that we do feel like we are now sort of operating at pre-COVID levels, like we are kind of through the entire COVID experience, which is also meaningful. So, we feel like we know what we are dealing with. So, as we get through the trough that we see from the marketing spend change, we think we get to a better place in ‘24 and ‘25.

Brett Knoblauch

That’s helpful. And then maybe one for Paul on the Degree segment profitability. I thought 44% in the quarter was quite remarkable. I guess is that a seasonality in the fourth quarter as maybe there is just less overhead costs and marketing costs associated with it? And is there going to be a, I guess a margin headwind from the revenue mix shift that you are kind of alluding to next year as degree’s revenue decline and AC segment increases?

Paul Lalljie

Well, a couple of things. First of all, the fourth quarter, absolutely seasonally lower marketing spend contributed significantly there. Secondly, marketing and sales, 34% of revenue, some of that contributed to the degree profitability. As we roll that forward into 2023, we are going to be spending more on launches. We are going to be spending more on new degree programs. So, as we look at that and we look at the trends that we are in and getting down the trough and coming out the back half of the year, we will see lower margins in the degree business. But I would say lower margin, it’s going to be higher than it’s been in prior years on an overall basis. I am talking about mid – high-20s to low-30s type stuff. I am not talking about numbers that are sub-20s or anything like that. So, it’s going to be very good margins. And at the same time, we have the alternative credential business that’s going to become profitable and contribute to the margins on a total company basis. And keep in mind, what we are doing here is positioning us for 2024 top line growth overall and continued to increase profitability, so that we can get to net income positive, EPS positive in 2024. And to some extent, when you think of all of this from a total company perspective, the degree business is doing what it’s doing, the Alt Cred business is doing what it’s doing. But enterprise is a surprise, and it’s the big one that drops to the bottom line as we get into back half of 2023 into 2024.

Brett Knoblauch

Perfect. Really appreciate it guys. Thank you.

Operator

And we have no further questions. So, I will turn the call back to Steve Virostek for any closing remarks.

Steve Virostek

Good. I just want to thank everyone for joining us today. A reminder to stop by our Investor Day in New York on March 21, you can now register on our website. And if you have follow-up questions, please give a shout out to Investor Relations. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. We thank you for your participation.