Q1 2024 2U Inc Earnings Call

Participants

Steve Virostek; SVP, IR; 2U Inc

Paul Lalljie; Chief Executive Officer, Director; 2U Inc

Matthew Norden; Chief Financial Officer, Chief Legal Officer; 2U Inc

Josh Baer; Analyst; Morgan Stanley & Co. LLC

Ryan MacDonald; Analyst; Needham & Company Inc.

Presentation

Operator

Thank you for standing by. My name is Jamie and I will be your conference operator today. At tme, I would like to welcome everyone to the 2U Inc. First Quarter 2024 earnings call. (Operator Instructions) Thank you. I would now like to turn the conference over to Steve Verus deck. You may begin.

Steve Virostek

Thank you, Jamie, and good afternoon, everyone. Welcome to to use First Quarter 2024 earnings call. Joining me on the call this afternoon are Paul Lalljie, our Chief Executive Officer, and Matt Jordan, our Chief Financial Officer, will be sharing our remarks before opening the call up for your questions. But first, I'd like to cover a few two housekeeping items. Our earnings release and slide presentation are available on the Investor Relations website.
Our remarks today are being recorded and webcast replay will be made available later today. Statements made during our call will include forward-looking statements regarding our financial and operating results, plans and objectives of management for future operations, including our performance improvement initiatives, plans and ability to improve our balance sheet, anticipated trends for learners and university partners, changes in laws, regulations and agency guidance for our industry and other matters. These statements are subject to risks, uncertainties and assumptions.
Any forward looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them. Please refer to the earnings press release and to the risk factors described in the documents filed with the Securities and Exchange Commission, including our quarterly report on Form 10-Q for the quarter ended March 31st, 2024, and other SEC filings for information on risks, uncertainties and assumptions that may cause our actual results to differ materially from those set forth in such statements.
In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of to use performance. These non-GAAP measures should be considered in addition to and not a substitute for or in isolation from our GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, earnings press release and on the Investor Relations page of our website. So with that, I'll hand the call to Paul.

Paul Lalljie

Thank you, Steve, and good afternoon, everyone. We are off to a solid start in 2024. Our first quarter financial results exceeded our expectations as we continue to execute our shrink to grow strategy where we are laser focused on revenue that delivers the greatest impact on profitability. Revenue for the quarter was $198.4 million. While our adjusted EBITDA was $17.3 million. We have seen an increase in total new enrollments, which went up to 116,000 from 88,000 in the last quarter across all of our 4,600 parts programs. In addition, our learner network has grown to 86 million compared to 83 million last quarter. We are continuing to lean into our product lines that are performing strongly and have some exciting progress to share on our executive education degree businesses.
Matt will provide further details on our financial results shortly. On the business side, we've made significant strides to hone our strategies to optimize the business for profitability and a return to revenue growth. Miss began with a rigorous evaluation of operations and making smart decisions, enhance programs and focus resources. We have made significant progress in establishing the right operational framework and are now establishing a baseline for revenue margin and cash flow.
We are also tackling our balance sheet challenges head on. We have the management team to navigate these hurdles and the fundamentals to fix our balance sheet in the near term and return to top line growth in 2025. We are bullish on the future of to you because of the market opportunity and our leading position in the education industry advances and entered into AI for inciting with paradigm shifts in the labor force are creating a technology moment and driving strong demand for workforce development.
According to the World Economic Forum's future of jobs report for 2023, 60% of workers will require additional training by 2027. Although, only half of them currently have access to the proper training resources position at the forefront of this wave, we are ready to seize the many opportunities this presents. However, to make the most of this opportunity, we must ensure that we have the right foundation in place to fully capitalize on this moment, we continue to focus on three areas, product innovation, operational efficiency and fixing our balance sheet.
Our goal is clear to need a go-to company for workforce. The better ones to be met. Starting with product. In the first quarter, we launched 42 new degree programs. Many in high demand feels that the strong organic appeal. As I mentioned last quarter, our objective is to launch programs that deliver the best value proposition and outcomes for students as well as provides strong economics for to you. These launches fit the objective and they bode well for our future financial performance.
Most of these programs are under our flex model and require about one-fifth of the capital outlay of a degree on our traditional model. And we anticipate that they will begin generating positive cash flow about one to two years sooner. We remain encouraged by the robust demand from our partners for our educational offerings.
Recently, we expanded our partnership with Pepperdine University to launch 6 new degree programs, bringing the total number of degrees with Pepperdine to 12. One of these new degrees in Masters and speech language pathology is a first of its kind for Pepperdine University and its newly established knowledge of health science. This program aligns perfectly with our strategic focus in our core competencies, leveraging our strengths in fields where we have a proven track record.
We possess the most extensive network of placements centers and have consistently demonstrated our ability to scale programs effectively in this vertical. Building on this success, we expect year-over-year growth in degree enrollments from continuing programs. When combined with enrollments from newly launched programs, we have confidence in our ability to deliver profitable growth in our degree segment next year.
Our long-term prospects are also looking good based on a robust pipeline scale on our strong track record of delivering positive learner outcomes in the Alternative Credential segment, we are seeing that online education is emerging as the most important tool for upskilling workforces facing unprecedented technological changes. We intend to capture this opportunity.
This quarter, we signed five new contracts to offer a boot camps, which we believe will help mitigate the softer demand we're seeing in coding jet important. We are working to deliver these programs as efficiently as possible through innovations in our delivery model. As with all of our business improvements, continuity of student experience and delivering strong student outcomes remain at the forefront of our decision making.
And the first quarter, our students achieved completion rates of 89% for execEd at 76% for our boot camps. in exec, and we continue to see accelerated growth led by our AI courses offered by MIT, Sloan and Oxford. And we expect this trend to continue.
We recently signed a subscription based contract with the Council of higher education and Andhra Pradesh India. The program is off to an impressive start with over 100 course completions in the first month alone. Our high-quality online courses are now available to over 1 million students across the states 22 universities providing valuable learning resource.
Our boot camp business is experiencing weaker demand, particularly in coding. Although our executive education business is performing well and making up for some of the shortfall in bootcamp, the overall predictability in demand for to boot camp business remains difficult.
Now turning to operating efficiency. We are building on our prior actions, which have already reduced our operating expenses by approximately $90 million on an annual basis. Our focus remains on optimizing our cost structure on all fronts. From personnel and delivery costs to our technology stack and marketing efforts.
Two specific ways. We're looking to reduce our costs while increasing efficiency and quality are: first through the introduction of technology into various points of our processes. And second, by strategically teaming up with partners that XL in specific areas. If a partner demonstrate superior efficiency and effectiveness, we have prioritized collaboration, overperforming those functions ourselves, allowing us to focus on areas that are our core competency.
These types of changes can increase our speed to market, improve. Our efficiency plan to reduce using our fixed costs. EdX marketplace gives us a powerful reach and scale. The key to unlocking the value of this reach and scale is organically generation through improved market segmentation, cross-sell activities and search engine optimization. We expect to increase organic lead generation. Financial benefits include incremental revenue from a greater yield on marketing dollars and reducing our technology and marketing support costs. These are examples of how we are operating differently.
Starting now to the balance sheet. We are tackling our balance sheet challenges head on the business improvements are meant to put us on a trajectory to deliver higher profitability and cash flow, which in return becomes the impetus for fixing the balance sheet. We have begun the process of fixing the balance sheet by working collaboratively with our lenders and expect those conversations will continue over the coming months as we work for the best possible terms.
As we implement our plans, we are closely monitoring the needs of our students, partners and employees for students. We strive to continue delivering a compelling value proposition that includes the content they need delivery that fits the way they want to learn on a price that represents good value and outcomes that support their life goals. For university partners. We need to deliver programs that support and advance their missions while providing flexibility in future in program structure.
Just as important, we need to demonstrate that we have the right plan in place, continued to be a valued partner for many years to come. We are talking to partners regularity, especially as we work on fixing the balance sheet. And none of this is possible without the day-to-day contributions of our valuable employees in a period of significant change for the company. We thank our employees, my colleague for their focus and unwavering commitment to our mission. Our students on our partners.
In conclusion, I want to emphasize that we possess the necessary technology partnerships and resources to return to top-line growth. Our primary goal is to expand our product range by offering relevant programs that are competitively priced and delivered in the most efficient manner. With new launches in the first quarter and the upcoming new launches, we are confident we will achieve top-line growth in 2025.
Additionally, we expect our profitability and cash flow to improve due to the poised to fix our balance sheet while maintaining our reputation as a good company so we can ensure that we have a solid capital structure that matches our reputation as a top-tier company. And with that, I'll turn the call call over to Matt.

Matthew Norden

Thanks, Paul, and good afternoon, everyone. Before walking through the results, I wanted to start with a few key themes for you to keep in mind. First, as you heard on prior calls, we've taken steps to bolster our financial position. While we have more work to do, you see the positive impact of these as reflected in the first quarter results. Notably, we exceeded our revenue and profitability expectations for the first quarter, driven by the strong performance of our executive business, with enrollment growth growth of 32% over the first quarter of 2023. In the past positive impact of our prior cost optimization actions.
Second, the first quarter, we began implementing our performance improvement initiatives with the goal of putting us in a strong position to address our balance sheet issues as soon as possible. We expect that these initiatives will enable us to achieve our full year adjusted EBITDA expectations, notwithstanding trends we're seeing in the food can business, which I'll talk more about later in the call. Third, through to the extensive transformation work we have underway where we are in the year. We're maintaining our prior full year 2024 revenue and it adjusted EBITDA guidance.
That those themes in mind, let's move on to the results. I'll start by walking through the P&L, and then I'll provide an update on our balance sheet and cash flow statement. I'll then share some additional detail on our performance improvement initiatives and will present our thoughts on what is driving our outlook for the second quarter and the remainder of 2024. I'll conclude with an update on the status of discussions with our debtholders.
Starting with revenue. In the first quarter, we generated total revenue of $198.4 million or 17% decline from $238.5 million in the first quarter of 2023. This decrease was driven by 21% decline in the degree segment and an 11% decline in the alt cred segment. The declined in the degree segment was primarily driven by fewer steady state programs operating in the quarter compared to the first quarter of 2023 due to our portfolio management activities in 2023.
In light of this and as we did on the fourth quarter call to gain a better perspective on the degree segment's performance, we evaluated the segment, excluding the impact of portfolio management. This analysis reveals that degree revenue declined only 4% year over year. Significant improvement from the 9% decline of the current portfolio, which we reported in the fourth quarter also was the case in the fourth quarter. This decline was primarily due to a higher number of graduates who enrolled during the pandemic and the number of new student enrollments in the quarter.
But new student enrollment from the current portfolio grew 6% over the first quarter of 2023, which again shows the strong momentum of the decrease business. Also note that the 6% new enrollment increase excludes new enrollments from the 42 new programs we launched in the fourth first quarter. Including these programs, new enrollment increased 17% year over year. So overall, we were quite pleased with the degree segment's performance in the quarter and the trajectory it's on .
Decline in all cred revenue in the first quarter was impacted by similar factors to those we experienced in the fourth quarter, continued softness in boot camps, particularly coating, partially offset by continued strength in our executive education offerings, particularly AI. Boot camp revenue declined 33% compared to the first quarter of 2023, while executive education revenue increased 44% over the same period.
Moving on to operating expenses, operating expense improved across the board, reflecting the impact of our recent cost optimization activities. For the first quarter, operating expense was $225.7 million, a 13% decrease from the first quarter of 2023. This decrease was primarily driven by $29.5 million decrease in personnel and personnel-related expense and a $5.6 million decrease in paid marketing costs. This decrease was partially offset by $7 million in costs to implement our performance improvement initiatives, which resulted in G&A expense being relatively flat year over year.
Turning now to our profitability measures. Net loss for the quarter totaled $54.6 million compared to $54.1 million in the first quarter of 2023, reflecting the revenue and operating expense drivers I mentioned previously. Adjusted EBITDA for the quarter decreased 43% to $17.3 million margin of 9%. This was largely driven by the same factors that I mentioned earlier, primarily fewer steady state programs operating in the quarter as compared to the first quarter of 2023.
Looking at profitability by segment decreased segment adjusted EBITDA was $32 million for the quarter, a margin of 29%. For the alt cred segment, adjusted EBITDA loss was $14.7 million, a $2.3 million improvement over the first quarter of 2023.
Now let's turn to the balance sheet and cash flow statement. We ended the quarter with cash, cash equivalents and restricted cash $137.4 million, an increase of $64 million from December 31, 2023. This increase includes $74 million received in the quarter in connection with the sale of certain receivables that we referenced on our prior call.
Looking at the cash flow statement, cash provided by operating activities was $72.2 million for the quarter. We delivered adjusted unlevered free cash flow of $102.7 million for the 12 months ending March 31st, 2024, compared to $45.4 million for the 12 months ending December 31st, 2023. These results show the positive impact that our cost optimization and working capital initiatives had on liquidity in the quarter. I'll now provide some more detail regarding our performance improvement initiatives and their financial implications.
As Paul mentioned, a key goal of this plan is to significantly improve operating efficiency to put us in a stronger position to fix our balance sheet. In addition to the cost optimization actions we took in 2023, we've now identified $90 million to $100 million of additional run rate cost savings from initiatives across the company, which we expect to fully realized by the end of 2025.
To highlight a few of the specific initiatives underpinning the plan. We expect to continue to employ prove the efficiency of our sales and marketing operation by leveraging the EdX platform and further streamlining marketing technology and processes. We've identified approximately $15 million of run rate savings from this initiative. Also through the use of lower-cost locations and outsourcing arrangements for various back office functions and standardizing and simplifying our technology infrastructure, we believe we can reduce our technology and product spend by approximately $20 million on a run-rate basis.
We are also continuing to take a hard look at G&A where we have identified approximately $8 million of run-rate savings. The remaining savings come from various initiatives that we've identified across the entire organization, including opportunities related to real estate process improvements and various other corporate hygiene initiatives.
Turning now to a discussion of our outlook for the second quarter and full year 2024. Starting with revenue. Our guidance for the second quarter calls for revenue to range from $191 million to $194 million for the year. As I mentioned previously, we are reaffirming our prior revenue guidance with revenue expected to range from $805 million to $815 million. For adjusted EBITDA, our guidance for the second quarter calls for adjusted EBITDA to range from $16 million to $18 million. For the full year were again affirming our prior adjusted EBITDA guidance, with adjusted EBITDA expected to range from $120 million to $125 million for the year.
This outlook reflects continued headwinds in coding boot camp. It's partially offset by continued strong Exec and performance throughout the rest of 2024. We are currently evaluating all options to mitigate boot camp performance as much as possible. Well, we have taken some steps already by capitalizing on the strength of our AI. ExEd offerings to launch five new AI. boot camps this quarter. We're evaluating other options like reallocating resources across the boot camp portfolio and optimizing the delivery model, which could reduce boot camp revenue for the full year with while improving adjusted EBITDA.
Also, we're still working on refining and implementing many of the initiatives in our performance improvement plan. So the exact impact on 2020 for adjusted EBITDA is still in flux at this time, but we do believe that the cost optimization actions we took in 2023, along with some in-year impact from our performance improvement plan, will enable us to meet our adjust EBITDA expectations for the full year regardless of boot camp performance.
Before I conclude, I wanted to briefly comment on the status of discussions with our debtholders. Based on our current guidance for the second quarter do not expect revenue for the 12 months ended June 30th, 2024, to satisfy the recurring revenue covenant contained in our credit facility cities, but we have continued to have a constructive dialogue with our creditors to timely address the revenue covenant and find the overall best solution to best position the company for the long term. We expect those discussions to continue with the goal of executing a transaction in the near term. We expect that any transaction would fully support the company's ability to continue operating and providing services for our partners and students.
Include, we exceeded our expectations for the first quarter, marking a solid start to the year. Our team remains highly committed to strengthening our financial position, which is crucial for enhancing our capital structure and securing the Company's long-term success. We are actively implementing our performance improvement initiatives and are optimistic about our prospects for Ray reinforcing our market position. This will enable us to thrive well into the future and deliver value for our stakeholders. And with that, let me hand the call back to the operator to begin the Q&A session.

Question and Answer Session

Operator

(Operator Instructions)
Josh Baer, Morgan Stanley.

Josh Baer

Thanks for your question. Wanted to dig into the new launch programs start to go through the steeper or sorry, the show or payback on free cash flow for the two year sooner on under the flex model. If you look at all the newly launched programs to 42, can you help to four or five? The impact is for this year? And next we'll hear from a revenue and free cash flow perspective?

Paul Lalljie

Josh, let me start off and Matt will jump in here. Shortly on last quarter's call, we said that in total to 60 , approximately 60 program that we launch in 2024 will cost us about $23 million, $25 million of expenses, and we'll have revenue of somewhere between $10 million to $15 million in this calendar year. And the other data point that we provided was that up, we expect to have steady state revenue of about $100 million, $100 million, $120 million. I don't remember exactly which of those numbers we set at $100 million is a steady state revenue going forward. And we expect that these programs will get the same he said probably years to between two and three years, sometimes a little bit later.
And that's because you have cohort one and cohort two that comes in on top of the other, which I think you know very well. But on the bottom line, is this really projects very well for the out years as we launch them in calendar year 2024. Matt, I don't know if you'd add anything else.

Matthew Norden

No. I think you had of key points.

Josh Baer

Okay. Great. And then one on the operational efficiency. You mentioned the introduction of tech to drive costs, crossovers, technology. And clearly, this makes sense, and I think it also takes time and investment. So do you have a specific examples of some of those initiatives where you're looking to use technology to drive cost savings and kind of think about the Gulf states for that?

Matthew Norden

Yes. Certainly what I mentioned around them, outsourcing and moving some back office functions to low cost, lower cost locations from some of that is in the tech stack department. And that takes less of an upfront investment than some of what you might be thinking about some and EDI. I think there are opportunities to automate a lot of our processes throughout the business. On the marketing side, as I mentioned, where we expect $15 million in run rate savings related rate related to those activities. And I also think there's opportunities to deploy a I in multiple areas of the business. I'm also really on the marketing side, which is our marketing and operations side, I would say to make, um, the way we engage with students at the top of the funnel more efficient and ultimately leading to not only a more efficient business, but probably a better experience for students. Paul, I don't know if you would have anything to add that are.

Paul Lalljie

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

Josh Baer

Okay, helpful. Thank you.

Operator

Your next question comes from the line of Ryan MacDonald with Needham & Co., please go ahead.

Ryan MacDonald

Thanks for taking my questions. Are great to see the strong results in some nice growth on on executive education in particular. Can you just talk about what seems to be resonating well with that offering with with customers and what you know, seemingly is a tougher sort of environment for corporate learning and development spend? Thanks.

Paul Lalljie

Brian, let me start off and again, that Matt may join in on our AI. executive education courses are definitely doing very well for us. It goes, it goes back to the objective and the fundamentals in Alternative Credential. It's all about fit driven topics, and it's all about making sure you have the appropriate content. And I can't underestimate having the appropriate partners.
We do have great partners, MIT and Oxford, a really, really great partners for us as we as we continued to grow executive education, that our Our objective here is to continue to have at to launch new content and new programs so that we can always have that new S-curve, but that is on top of what we have currently at that allows us to have the sustainable growth and sustainable trajectory in that business.
The other thing I'd point to and highlight as we think of alternative credentials in general, the entrepreneurs deal is a significant deal for us. It is it is in a different market and it's like I said, it's off to an impressive start to 100,000 course completions in the 1st month alone. And this is something that is unique and different from what we had traditionally offered to the most importantly, it is done on a subscription based model, and that allows us to have recurring revenue as we go forward.

Ryan MacDonald

Very helpful. Thanks. And then maybe just to follow up on the topic of shoring up the balance sheet. Just as you think about sort of the next steps and progression here, it seems like you've kind of bolster cash on the balance sheet. You've identified additional operational efficiencies is to drive more savings, was generating more adjusted EBITDA. What would they get students? Do you need to build lenders need to see today we progress further on those talks? Or do you think you need to kind of continue to execute to a figure close to a resolution there? Thanks.

Matthew Norden

Yes, on nas we said on the last call in this call, we have a constructive dialogue with our lenders, and that's obviously increasing in frequency, I would say so. So I don't think they need to see anything else necessarily. I think it's a question of coming up with the right solution for the Company and given where we are and we are, as you can imagine, the hyper focused on getting to that solution as quickly as possible to turn the page from where we are, um, so I think as we said in the near term, we're going to have a resolution that will really set up to you for future success.

Paul Lalljie

And Ryan, we're fortunate we have a group of lenders that it's concentrated number one. And number two, it's it consists of players that we are very familiar with, and we've spoken to a number of times so that this makes it all come more convenient for us to get through this in a shorter timeframe than on the one point that I that I wouldn't want to make to all of this as we go through this now, the first quarter was all about developing that plan, making sure we have the right framework to have the discussion with our lead, Anders, but none of this absolutely none of that has anything to do with operations, our focus on our partners and our students and delivering the quality of education. Those are operational things.
That's what we do every day. That's what we do well has nothing to do with the balance sheet. We're trying to separate the two things. And you don't have the team are going to lead the tip of the spear as we've fixed the balance sheet. But operationally, we're very proud of where we are and the commitment of our employee base still and to serve students and make them the highest priority for us.

Ryan MacDonald

Excellent. I appreciate the color. Thanks.

Operator

(Operator Instructions). That concludes our Q&A session. Thank you for your participation. This concludes today's conference call. You may now disconnect.