Nov 5, 2014
Operator
Good day, ladies and gentlemen. And welcome to the 2U's Third Quarter Earnings Call.
At this time all participants are in a listen-only-mode. Later we will conduct a question and answer session and instructions will be given at that time.
(Operator Instructions) As a reminder this conference call is being recorded. I would now like to turn the call over to Alex Makler, Director of Investor Relations.
Sir, you may begin.
Alex Makler
Thank you, operator. Good afternoon, everyone and welcome to 2U's third quarter 2014 earnings conference call.
By now you should have received a copy of the earnings release for the company's third quarter 2014 results. If you have not, a copy is available on our website investor.2u.com.
The recorded webcast of this call will be available in the Investor Relations section of our website for three months from today. Also we routinely post announcements and information on our website, which we encourage you to access and make use of.
Today's speakers are Chip Paucek, CEO and Co-Founder, Rob Cohen, President and COO and Cathy Graham 2U's CFO. Before we begin, I'd like to remind you that some of the comments made on today's call including our financial guidance are forward-looking statements.
These statements are subject to the risk and uncertainties as described in the company's filings with the SEC. Actual results may vary materially from those described during the call.
In addition, all forward-looking statements are made as of today and the company does not undertake to update any forward-looking statements based on new circumstances or by its expectations. Also non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release.
I would now like to turn the call over to Chip.
Chip Paucek
Thanks, Alex. Since we launched 2U in 2008, I have been speaking about our mission of partnering with leading college and universities to deliver the world's best online degree programs, so students everywhere can reach the full potential.
Our cloud-based software-as-a-service platform provides schools with the comprehensive operating infrastructure they need to attract, enroll, educate, support and graduate students globally, blend and live face-to-face classes, dynamic course content and real-world learning experiences to use No Back Row Approach, ensures that every qualified student can experience a highest quality university education for the most successful outcome. From the early days to the company's history, we've also believed there will be long-term correlation between our financial results and the outcomes of students in our programs.
We have strong financial results this quarter. But those results have only come by maintaining a laser like focus of driving high quality outcomes for students in our partner programs.
Let me begin by talking about our exceptional third quarter financial results. I am very pleased to report that for the quarter 2U exceeded its previously steady guidance for all of our financial measures.
Strong growth in our programs delivered $28.4 million in revenue, a 39% increase over the third quarter of 2013. This higher than expected revenue resulted in $5.1 million and $3.4 million in adjusted net and adjusted EBITDA losses respectively.
For adjusted EBITDA loss that equates to 60% year-over-year improvement versus Q3 2013. Due to the strong results, we're increasing our revenue expectations for full year 2014 to a range of $109.2 million to $109.7 million.
We're also improving our adjusted EBITDA loss guidance to a range $15.8 million to $15.4 million. At the mid point of this updated guidance, we now expect that 2014 adjusted EBITDA loss will improve by about 27% compared to 2013 even though we remained in high growth mode with a significant number of our programs still in the early investment phase of their life cycles.
We're growing aggressively and we believe that the long-term profitability of our models is beginning to show in current financial results. Last quarter we told you we reached an inflection point as our losses had stopped accelerating.
This quarter results show clear deceleration. Now I think it’s important that I spend some time talking about the program pipeline.
As we told you last quarter, we've already met our stated annual goal of announcing no fewer than four new programs per year for 2015, notable and that we hadn’t announced any of our 2015 program at the time of IPO. Just to remind you, we've announced our MBA with Syracuse, our DataScience Masters with SMU, our masters in Counseling with Northwestern and our masters in Communication with Syracuse Newhouse.
We've also said the pipeline is not a significant concerned to management given that we say no much more often than we say yes to potential schools. We're not trying to bring every school online, but rather create the world’s best programs at scale.
As such, not every school or degrees is the right opportunity for us. We're looking to pursue programs that fit our algorithm and approach and those that have the leadership and political will to back the opportunities of scale.
Regardless, we do think it’s helpful to provide some additional visibility. We began to work on new programs for 2016 and 2017.
Currently 2U has several potential programs which we believe are in the final stages of negotiation. Historically, when we reach the stage of negotiation the deals closed.
If this trend continues and they all close, we would nearly fill our 2016 slate [ph], as a matter of fact, we made so much progress with our pipeline that we now believe launching a fifth program in 2015 is likely, likely enough that we're efficiently adding it to our 2015 plan. We have more than a dozen other potential programs in earlier, but still very real stages of discussion.
All of these discussions represent attractive potential opportunities for the company and we're specifically sort out by our team. Frankly, our pipeline typically looks like this.
We believe it’s very strong and represents what's needed to get us to our stage of launch goals. In addition, we have a new announcement today, an additional offering within the existing MBA Syracuse program.
Beginning in the second half of 2016, the Martin J. Whitman School of Management at Syracuse will offer a Master of Science in Business Analytics.
This is burgeoning new field that we think unlocks real opportunity for Whitman, as Business Analytics is a hot sector. This is a new degree for Syracuse or Greenfield as we call it that still pending university in state approval.
As a reminder, offerings are part of our strategy to help programs reach their full potential and broaden the appeal for potential students for minimal additional investment. They're important to growth, but they don’t result in a change to the program models.
We couldn’t be more excited to continue to expand our relationship with this great institution. Now while this is a new offering and not a new program, we think that announcing a 2016 offering this early shows that the pipeline is shaping up very nicely beyond 2015.
But last, before I hand things over to Rob, I'd also like to highlight an announcement that 2U issued this afternoon that gives me personal joy. We're honored that today Edward Macias has joined the 2U board of directors, for 25 years Ed serves the Chief Academic Officer at Washington University in St.
Louis, guiding the university through one of the most important periods of its growth. During this time leading Wash U, Ed led countless efforts to strengthen the quality of faculty, expanded academic program, enhanced diversity enriched the academic experience for students.
Ed is an influential and visionary leader in higher education. He is a champion of online education and true believer in 2Us mission approving at online education can ride or even surpass the on-campus experience.
Ed is an immensely valuable addition to the board. He is also true mentor and friend to me and I look forward to working with him even more closely.
With that, I'll hand things over to Rob for some third quarter operating highlights.
Rob Cohen
Thanks, Chip. Once again I want to start off by talking about Net Promoter Score or NPS, which is the key performance metric we use to measure satisfaction across our programs.
Our blended student and faculty NPS during Q3 remain strong at 71.5. Let's remember that NPS is the high bar, anything above zero is good and anything above 50 is world class.
We believe the more satisfied students and professors are, the more likely student outcomes will be excellent. In Q3 we launched our second master of social work program this one to Simmons College.
Additionally we begin marketing for all of our announced programs and offerings scheduled to launch in the first half of 2015. Our dedicated team is providing active, ongoing support for 12 launch degree programs as of September 30.
Here are some quick stats to illustrate this undertaking, 84% of all student have started one of our programs that graduated or were still enrolled. We are enabling on average, approximately 1100 live classroom sessions a week.
To remind you these sessions are live interaction between faculty and students in intimate classes that average only 10.8 students. Finally, at the end of September, our partnered programs total students enrollment have produced inception to-date, tuition bookings for our university partners at 679 million.
Before turning things over to Cathy to talk to the financial, I want to highlight a key differentiator which we believe is positively impacting student outcomes for many of our programs. While student enrollments are critical to our financial success, the value we generate goes well beyond how many students have been enrolled in our programs to date.
Many degree verticals require field base learning experiences. In these verticals a degree can't be conferred unless the student completes a certain amount of practical field work.
In September, we announced that our university partners had surpassed our 20,000 field placement for these verticals, 20,000 hands on in person student experiences are significant differentiator for our university partners and their programs. Our staff [ph] platform and excellent people allow us to deliver these placements.
We are helping our university partners generate educational experiences that further blows the lines between online and on-campus students. As of the quarter end, across these programs 2U had successfully placed student to onsite and virtual message 20,300 [ph] we've been able to do so by obtaining contracted relationships with 13,128 placements in our 50 states in more than 60 countries across the world.
These figures are a true testament to the value that this company is creating. With that, I will hand things over to Cathy.
Cathy Graham
As Chip told you, our third quarter financial results was strong. The quarter produced significant year-over-year growth both in revenue and earnings measures and exceeded our expectations across the board.
At $28.4 million, third quarter revenue showed a 39% year-over-year increase. This was driven by 35% increase in Full Course Equivalent enrollment or FCEs and 2% increase in average revenue per FCE.
As a reminder, small fluctuations in average revenue per FCE either up or down are normal and do not indicate any change in our pricing structure. The FCE increase was generated across our program portfolio at all phases of program maturity.
77% of FCE's and 82% of revenue came from our first launch cohort, made up of the four programs we launched between 2009 and 2011. To give you an idea of the rate, at which our program portfolio is diversifying in the third quarter of 2013.
The first launch cohort contributed 96% of FCE's and 97% of revenue. Our earnings measures, adjusted net loss and adjusted EBITDA loss came in at $5.1 million and $3.4 million respectively.
While last quarter we were able to demonstrate that our year-over-year losses had stopped accelerating, this quarter we demonstrate stating that they are clearly decelerating. Adjusted net loss for the quarter represented a 46% improvement over the same quarter of 2013, while adjusted EBITDA loss showed a 60% improvement.
Both of our earnings measures not only improved, but also came in well ahead of our expectations. Over performance on the revenue lines, along with operating expense efficiencies drove much but not all of the positive variance.
Additionally, some labor and other costs related to the launch of 2015 programs started later or scaled more slowly than expected creating additional savings, most of these costs are now in place and we do not expect that the delays will have any impact on 2015 program performance. On a per share basis, adjusted net loss was $0.13.
When calculating a per share amount, we as a pro forma share is though the conversion of all preferred shares to common, which occurred upon the closing of our IPO had occurred on January 1 2013. The primary item reconciling net loss attributable to common stock holders to adjusted net loss, as well as adjusted EBITDA to EBITDA is stock based compensation.
This was $2.2 million in the third quarter, up from $639,000 in the same quarter of 2013. The increase reflects both grants made for new hires, promotions and retention and the increasing valuations attributed to our common shares, as we approached our public offering.
For a better understanding of adjusted net loss, adjusted EBIDA loss and pro forma shares outstanding, please see the definitions provided in our press release and SEC filings. Turning to the balance sheet.
Our cash position at September 30 was $80.6 million and accounts receivable totaled $10 million. September is typically a low cash month in our business because of the timing of academic calendars and how we collect relative to them.
As always, we suggest that you look at the changes in cash, accounts receivable and differed revenue as a group to fully understand our balance sheet position. So let's look forward.
As the business continues to perform, we're also raising our expectations for the rest of 2014. We now expect revenue to be between $29.7 million and $30.2 million for the fourth quarter and our increase in our full year guidance to be between $109.2 million to $109.7 million.
At the mid point of these ranges that year-over-year growth of 21% for the quarter and 32% for the year. Adjusted net loss is expected to between $3.1 million and $2.7 million or $0.08 to $0.07 per share for the fourth quarter and between $21.9 million and $21.5 million for $0.58 to $0.57 per share for the year.
We also now expect our adjusted EBITDA loss to be between $1.6 million and $1.2 million for the fourth quarter and between $15.8 million and $15.4 million for the year. Most of these ranges forecast continue loss deceleration and year-over-year loss improvement.
At the mid point of the full year ranges, we've increased our expectation for adjusted net loss improvement to 15% over to 2013 and we expect adjusted EBITDA loss to improve by 27%. As we approach the end of the year, we'd also like to give a preliminary look at 2015.
As we haven’t completed our budget cycle these are early indications that we will update with more precise guidance at a later date. Our 2015 story has a strong timing component, primarily on the cost side, as we've accelerated the launch of a second of our four announced programs to January and are preparing to launch of this program later in 2015.
New programs require significant investment in their early stages and incur significant losses before turning to profitability. The earlier in the year programs launched and the more programs we launched, the more losses we recognize compared to a low early revenue base.
We'll come back to this in a moment, but let’s start with revenue. We currently expect year-over-year revenue growth for 2015 to be between 28% and 31%.
We also expect to see a shift in a way revenue was distributed across the quarters compared to the pattern we have seen prior years. This year we saw revenue decline in the second quarter because programs had fewer days inception during that quarter than in any other.
For 2015, we're seeing shifting academic calendars in more mature programs and newer programs with heavy year second quarter schedules altering revenue distribution. To be clear, the shift has nothing to do with enrollment expectations, those remain on track, but as we recognized revenue from the first day of classes to the lest changes in academic calendars do have an impact on our revenue distribution.
We currently expect that year-over-year revenue growth for the first quarter will be in the low 20% because of the shift in revenue to the second quarter however the first half of the year should have a year-over-year growth run rate that looks like our first – our full year expectations. For adjusted EBITDA loss, we currently expected 2015 loss margins of 9% to 10%, an improvement from the approximately 14% we were expecting for 2014.
On a dollar basis this represent a more modest improvement that we're seeing in 2014 for two reasons. First, we're accelerating a launch of the second of our four announced programs to January giving us two January launches and [Audio Gap] EBITDA growth for the first half of the year, we do expect growth rates to rebound in the second half.
With that color on a grate quarter, and receptive on what we think a very positive expectations for the future, I'll turn the call over to Chip for his closing comments.
Chip Paucek
So before we wrap up and take questions. I'd like to close of the story of that impact.
Today one of the biggest challenges we face as a company is frequency notions of online education, its terrible, and there is a reason, most online program are inferior to on-campus programs, part of reason is they are in personal, online forms and chat rooms don’t create life long bonds. 2U back programs are extremely personal and intimate, a USC professor talks about the fact that he feels a greater sense of core intellectual intimacy with his online students than with their on-campus counterparts.
In the 2U program there is clearly no back drop, but it’s more than that. Great educational experiences are about more than just a single person learning something, greater educational experiences are about being part of something bigger, being part of a real community, a real network, networks like Carolina and Georgetown that have existed for over two centuries.
In 2U program you become part of the whole community, you want a second class citizen, you are [inaudible] colonial and golden bear. A great example of this, is the first graduating class of MBA UNC, our program with the Kenan-Flagler, a business school at UNC Chapel Hill.
Most of our programs starts small and this one is no exception, MBA UNC first class consisted of 19 students who came from a variety of backgrounds all of whom self in an MBA would help them advance their careers. This came down with classmate, but also great friends and active members of the Carolina community.
The best metaphor for this is, is they name themselves, the O19. Its [inaudible] There were UNC pioneers and depending this type program and they knew it and we're proud of it.
They became very passionate about the program and the university, they were hard [ph] deals, just as much as anyone who attends university on campus and they want to leave their mark. At graduation, the smog of the graduate came together and donated the single largest class gift in Kenan-Flagler industry, to name physical conference room after themselves.
They are online students, they are calling it a O19 conference room, now think about this for a minute, our physical conference room name the O19 or original 19. The largest class gift in the history of Kenan-Flagler from 19 people in online program.
The reason I love this story is this not about money, yes, after spending hundred thousand dollars on their MBA these students reach back into their pockets to donate. But the money is not the important part, the important part is how the sell about their experience.
This was their community, their friends, their network, their Carolina. Graduation rates, job placement rates, net promoter scores are important a major impact.
But they aren’t only measures that matters, passion matters, community matters, being a part of something bigger matters. For 2U any missegregation of the online student definitely matters, no back row indeed.
With that Cathy, Rob and I invite you guys to step out of the back row and ask a few questions.
Operator
(Operator Instructions) And our first question comes from Michael Nemeroff of Credit Suisse. Your line is open.
Michael Nemeroff
Hey, guys. Thanks for taking my questions and very nice sale on the quarter.
Chip Paucek
Thanks, Michael.
Michael Nemeroff
So, Chip you know, I think you answered one of my first questions was about that the pipeline into 2016, because I think we heard last quarter that you were pretty much down with 2015. One of the things that you didn’t answer is the quality of the schools that you're going after.
And then secondly, I'd love to know as its goals, what kind of push there, are you getting any push back on revenue split that between you and the school. And also now that you've got a number of programs that are out there and they are doing well and you've had a lot graduates out there and the outcomes are good.
What kind of questions are perspective schools asking you when they evaluate 2U now versus what they asked you previously, are they financial questions, are they about outcomes, are they about benefits to the school? How those discussions are going these days?
Chip Paucek
So, thanks for the questions. So first thing I would say is really the story has always been and I believe always will be much more about mission than money.
This is about driving high quality outcome for their students, expanding assets for their students, really sort of unleashing these brands on a global basis and allowing people to attend it for the first time that we don’t have to pick up their life, quit their job and move. So there is no question that this is a mission orientation first and foremost.
Now clearly, financials are important. It’s important to have long-term sustainability and to have positive stories on each side of that.
So from a revenue split stand point, we continue to feel very strongly that our revenue split is in a reasonable place and we'll continue to be. From a brand perspective, you know there is no question that we are – we think we're working with some of the best schools in the world.
We expect that to continue. We do believe this – the world is starting to sort of realize based on some early pioneers that you can do something transformative and if anything improve your brand, not hurt your brand, you take [inaudible], those are both great examples of people that had a vision believed in us and we've really delivered for the schools.
So clearly it’s important that we got a track record to sort of stand on it at this point and it makes negotiations easier. I'd say the most notable thing about that section on pipeline is frankly Michael, that’s not unusual.
We were just trying to give visibility because we get a lot of questions about pipeline. So we're just trying to show people that you know, we think the pipeline is pretty strong and these are all conversations that we are actually going out and sort of specifically directing based on the algorithm indicating that it’s a strong marketing opportunity.
It’s a strong opportunity for sale and then the question is there a leadership team there that can do you know, what Kent Syverud and Ken Kavajecz, have done at Syracuse. You know where you've got the leadership in place to really drive a great sort of long-term opportunity.
So I find this strong.
Operator
Thank you. Our next question comes from Michael Tarkan of Compass Point.
Your line is open.
Michael Tarkan
Thanks, just following up on the pipeline, in terms of 2016, 2017 can you give us any senses to how many schools are the new schools, secondary, primary programs, any kind of color around that?
Chip Paucek
So if you look at our 2015 pipeline that was announced, we thought it was notable that of the four that we've announced, the three of the four were – they were new universities all of them. So we are definitely extending our reach to new universities as proven by our past.
I think it’s reasonable to expect that to continue. We have been appropriately conservative in our expectation of the number of second programs, as you know that you scale faster.
So we've been conservative in our approach in terms of modeling second programs longer term anything you'd like add at that?
Cathy Graham
No.
Michael Tarkan
Okay. And then in terms of a competitive environment out there, can you kind of provide some color as to what you're seeing maybe from some of your direct competitors or what the schools are telling you the ones that are going and trying to build this on their own, any kind of color on that?
Chip Paucek
Yes, you know, you're talking about first of all just address the market overall how large is you know, you're talking about 1.7 trillion worldwide and global hire ad is so large, that clearly there will be more than one way to address the need. What's notable about 2U is we still believe that right now we are the only company that’s really you know stating the goal of trying to build the worlds best.
We're not trying to bring every program online, no interest in bringing every program online. When I just stated in bringing programs online that has scalability, they have the right leadership team, it sort of fit our view of what could be a really big long-term opportunity for the company and therefore we're defendably not trying to launch every school.
With that said, I think the fact that the company is track record has continued to get you know, better and better with a broader array of partners you know, we've now done public universities, we've done private universities, we've done level arts [ph] colleges. So I feel like we're starting to prove to people that this approach to online education can be great.
That – we didn’t have that in 2010 or 2009 you know, today we've got a pretty strong track record when you got as Rob said 84% of your students graduated or still enrolled and you combine that with 679 million of tuition bookings, that’s a real positive story for anybody. So it’s certainly not getting harder, frankly it’s getting somewhat easier to attract the right opportunity.
Michael Tarkan
Okay. Thanks and then one last one for Cathy, given up the visibility of revenue backlog this quarter I think it was around $114 million last quarter?
Cathy Graham
Was a 114 last quarter, it’s actually jumps up quite significantly; it’s around 146 million this quarter.
Michael Tarkan
Okay. And just try to put a little color on that is just the new that the new program coming online any launches?
Cathy Graham
Well, part of it is that and part of it is that at this time of year since September is a very large group of start for new students, it is a time when you will actually see that number bump up quite significantly. That you know, our backlog does have some timing component in it depending on where we ended the quarter is relative to when students started.
So it will go up and down a little bit, but September of the year is one of the times when you will see that bump up because there is a large influx of new students.
Michael Tarkan
Understood. Thank you.
Operator
Thank you. Our next question is from Corey Greendale of First Analysis.
Your line is open.
Corey Greendale
Hey, good afternoon.
Chip Paucek
Hey, Corey.
Corey Greendale
First I had a couple of just modeling things for Cathy. I just wanted to verify shifts in academic calendars, that is reflected in FCEs not in rev per FCE is that correct?
Cathy Graham
It is it will be reflected in the FCEs not in rev per FCE and it is all without of course you know, we recognized revenue from the first day of classes to the last. So it shifts in those calendars or new programs that are growing quickly that have a heavier second quarter load that’s what shifting revenue.
Corey Greendale
Okay. And then in the quarter the revenue per FCE improved just a little bit, not making to big a deal out of it 2% change, but and so far as it did improve, it was that more mix or retention?
Cathy Graham
It’s a combination, but it’s primarily – it’s primarily mix.
Corey Greendale
Okay. And then within the 2015 initial outlook you are giving, should we assume kind of consistent rev per FCE or should we assume some slight downward trend given kind of the newer programs might be at lower price points?
Cathy Graham
At this point we would assume that they should be relatively flat with you know, the thing that may pull it down a little bit is depending on the number of students in lower price programs versus higher. But we don’t see anything that is dramatically shifting anything that is dramatically shifting at this point.
Corey Greendale
And you've already given some very helpful guidance for 2015, so I don’t want to you know, be too demanding here, but since you were very careful or specific about what Q1 looks like versus Q2, I wondered if you might give a little bit more specificity around how big the differential in the EBITDA margin might be in Q1 of the first half versus the back half of the year?
Cathy Graham
So, you should look at probably the earliest quarter the first quarter having its hard to say, you're how may I going to put this to you Corey, you should see that, you would probably expect margins in the first half of the year to be more consistent with what we saw in 2014 and improving in the back half of the year to get to what we're projecting for the year.
Corey Greendale
Okay. And then I had one for Chip I guess, whoever wants to answer it, but now that you had July seems like a long time ago already, but during the quarter you had the launch of the social work programs, so I was hoping if you comment kind of how that went and more broadly all your siemens programs do you expect that is having a new conversion rate as far that is doubling the conversion rates in those verticals because I think you talked about it some point?
Chip Paucek
Yes. So I would say its great question, I would say overall right now we see the second program leverage to be consistent with what we were to seeing in the past like we told you from a nursing standpoint.
We are definitely seeing across the board the second program leverage is very real, we don’t think there is anything isolated to a particular vertical or discipline which is why we're excited about our two early programs starts in 2015 which were both second programs, one with Syracuse and MBA and one with DataScience with SMU. So we think leverage continues to be very strong there and indeed makes our algorithm look more and more predictive.
Corey Greendale
Okay. Congratulation on the quarter.
I'll turn it over.
Chip Paucek
Thanks, Corey.
Operator
Thank you. Our next question comes from Andre Benjamin of Goldman Sachs.
Your line is open.
Andre Benjamin
Thanks, good evening. First question, I was wondering given all the success and color on the pipeline and people that are interested, how we should think about risk of maybe on additional program in the late part of 2015 given its already November of this year and I know you are continuing to try to balance growth and profitability, should we write that off of the possibility or is it still possible?
Chip Paucek
Sorry, forgive me, are you saying is it still possible that there is a 2015 program because I wanted to be clear?
Andre Benjamin
That you could do another program, so you just given your thoughts, that you now that really talk about the idea of doing six, is that a even possibility?
Chip Paucek
No, at this point we're willing to say that we think its very likely there will be a fifth program and we move on to 2016.
Andre Benjamin
Okay. And any update any out years in case I haven’t seen on the potential or pursue and undergraduate program, again any time soon or any kind of color on what some of the more trackers or echo’s [ph] for those years?
Chip Paucek
So, you know, it’s a great question Andre, we've had – there are so many verticals that we have not yet covered. That when you combine the fact that we believe that there are large number of verticals we have not yet touched with the fact that we are now going to build clearly more than second programs in some cases we build third or fourth programs with the fact that doctorate is clearly part of our real house now, we've got two on the books and you'll certainly see more in the future.
There is no shortage of opportunity for the company and we actually think you know, frankly that’s one of the grate things about2U and one of the reasons that we IPO the business we think that there is tremendous organic growth potential if we just put capital work smartly. So we're trying to identify really saw at opportunities and go after them.
There is very large disciplines we haven’t touched yet and we haven’t touched computer science, we haven’t touched engineering, we haven’t touched pharmacy, there whole bunch and then of course there is doctorate. So given that it’s reasonable to expect us to stay focused on graduate education for the near term.
Andre Benjamin
Perfect. Thank you.
Operator
Thank you. Our next question comes from Michael Huang of Needham.
Your line is open.
Michael Huang
Thanks very much. Hey, guys just a couple of questions for you guys.
First of all, I was wondering if you can help us understand what's ultimately driving the vision there to accelerate the launch of that second program to January. I was wondering how much is driven by your view you know of catastrophe and since you delivered another program here or how much is being driven by university preference for an accelerated start date?
Chip Paucek
You know, I mean, it’s fair to say that, I think it’s really important everyone remembers that these are not two year programs, these are Berkeley, Georgetown, USC, Chapel Hill, Wash U programs. And so we work very closely and we do believe that these are more tend to long-term partnerships but the what the universities wants and need is really critical to you.
So there are moments where for various reasons whether it be internal reason at the school or reasons for 2U that we want to accelerate the launch of a program and that particular case we have the opportunities to launch two second programs in two various sizeable verticals, two verticals frankly that we had already had a quite a bit of success in, business administration, DataScience. So when we were able to it, really no capacity issue on the 2U side whatsoever at this point we're getting very good at launching these and that is not a significant risk point for the company.
It’s fit the calendar better and both partners were excited to do it. We have really strong leadership teams at both schools.
So we were willing to go, we decided to move it up, any additional color?
Michael Huang
That’s helpful. And I was wondering without providing too much granularity here, I was just wondering if you could share with us, given your track record and given I would imagine, some leverage in negotiations I mean are you seeing any changes in respect to pricing and kind of share of tuition revenue I mean, is that at all trending in a favorable direction or and then maybe some color around that?
Chip Paucek
Sure. We've offered the history of two year, we sent, we've seen a trend up to where it is today.
We think that that an appropriate place and we do believe that you know if you look across our portfolio you will see many instances of the university signing an additional relationship with us. And I think that that’s strongly indicates even though we're no where near renewal times because these contract are all very long even our earliest contracts given the fact that none of short in 10 years.
We're not anywhere near renewal, but we do believe that second programs at the same university while it doesn’t provide the same leverage as a second program in a vertical its certainly shows a assonate [ph] we think it should show shareholders that there is an interest from the university and extending the relationship because they are doing it again with a new contract. On the rev share you know the reason for rev share even though we are taking more than half the revenue the fact is we're doing a series of things that are expensive and complicated and all academic functions you want the university to do its doing and really on both sides of the revenue split we think it’s an equitable split from the stand point of the school and two year both doing well in the end.
The notion trying to move it up over time which is something we certainly get after that all the time. I think you probably know to foot the phrase hogs get –fat pigs slaughtered is it vice versa.
So we're trying to be thoughtful and you know we like where it is today we think we're in a good place today.
Michael Huang
Got you. Okay.
And my final question really is I guess giving you a chance to talk about either technology or service that they were offering and so when you're thinking about your technology roadmap or service offering roadmap. I mean is there any kind of area of innovation that you potentially could share with us, is there anything that you are layering on top of your current set of services or technology that you like to share?
Chip Paucek
Sure. I will give it to from pieces, one in service and one in technology.
So on the service side, we recently included faculty recruiting as part of our bundle and the whole notion is for the money we're paid lets continue to make it better, better and better over time. And so the notion of assisting our schools, find great faculty on a global basis seem like win-win.
So we added that to our suite on the services side. You've Rob talk a lot about placement because we really believe it’s become a very significantly competitive advantage to the company you know in some ways we're touching programs that you could argue with a hardest to bring online.
Whether it be counseling or nursing or midwifery, I talked about the birthing of the babies. One of the things interesting is it takes 30 babies to graduate from the midwifery program you have to deliver 30 babies.
So we are continuing to build out our suite of services is important now on the tech side, in the content builds our teams our Chief Content Officer, an Van Tuyl and Chief Technology Officer, James Kenigsberg have done a great job building out what we call the BLT internally to pressure learning tool. And the battles from learning tool came from the notion of trying to make asynchronous content subtract, making the asynchronous content two way.
And so it requires a lot of feedback from the students and then on a section level which is where the technology gets hard allows interaction at the section level, including threaded video discussions at the section level. So it take a one part of the solution, we have live classes and your live with the real faculty once a week, it took the one part that maybe wasn’t quite as deeply interactive and made it super interactive.
So that’s kind of being rolled out across the partner portfolio and we've got a patent pending on that.
Michael Huang
Awesome, great. Thanks guys.
I appreciate it.
Operator
Thank you. Our next question comes from Ben McFadden of Pacific Crest Securities.
Your line is open.
Ben McFadden
Hi, guys. Thanks for taking my call.
I wanted to see if I could get some color around drilling down on the individual cohort level, so on the 2013 cohort if you could just talk about kind of the traction that you're seeing within those programs so it is to your expectations and also whether there is an opportunities to get an inflection in those programs either through seasonality or just through the building of the marketing funnel?
Cathy Graham
So, Ben when we go back and we look at the 2013 cohort and even the early 2014 cohort and we look at how they are scaling relative to the earlier programs. Once we adjust for certain things that we've learned about building marketing funnels and operating, we see them scaling very similarly to very similarly to the early program.
The difference that I would say is that we now have second programs as a part of the mix which so much earlier than first programs they may get to the same size ultimately but the way they scale is more of a convex curve for a second program and a concave curve for first program. So you do tend to see some inflection in the second year and to the second year but not such that it would be you know, that is going to be hockey stick in any way and these are on first programs.
On second programs you are just seeing them come out of the gate significantly stronger from an enrollment standpoint than anything we had seen in our first programs all of which were first programs in their vertical.
Ben McFadden
Okay. Great.
And the also on the core cohort maybe you could give us some color as to how much growth opportunity there is still left in those four programs and then also when do you see them reach a maturity both from a gross stand point and a profitability stand point?
Cathy Graham
So, they are you know, they are we're launched anywhere between 2009 and 2011. So the earlier programs are getting closer to steady state while the two later programs do still you know are still on a little bit higher growth curve.
Operator
(Operator Instructions)
Cathy Graham
Hey, Ben, where did l loose you?
Ben McFadden
I think the last thing we heard was kind of the growth opportunity with the core cohort but you haven’t talked about the profitability aspect?
Cathy Graham
Okay. So the growth is on the top line so on a profitability you would have seen that you would have seen that we are from a profitability standpoint you've got four programs together that if we had lined them all up so they all started in 2009 with the first program would have been in the mid 20s adjusted EBITDA margins.
Now remember that none of those programs they are all first programs in their verticals, none of them are second programs in their verticals. So, from that standpoint, as we said, if you are expecting us you know, sort of stake in the ground in the mid 30 to adjusted EBITDA margins at steady state, first – will have slightly lower than that, second programs will have higher than that.
So these types are rate about where we would expect them.
Ben McFadden
Okay. Great.
Thanks a lot.
Chip Paucek
Hello?
Operator
Thank you. Our next question comes from Brian Schwartz of Oppenheimer.
Your line is open.
Brian Schwartz
Yes. Thank you for taking my questions this afternoon, congratulations on another strong quarter.
Chip I want to ask you question about just the landscape in higher ad tech because there seems to be huge gap here if I compare your results to auto higher ad tax suppliers in the space. Just wondered if you can share just your thoughts on why 2U is seeing this level of growth and how out performance versus other higher ad tech vendors in the space?
(Operator Instructions)
Chip Paucek
Hi. Are you there?
Operator
Yes, you may proceed.
Brian Schwartz
Can you hear me?
Chip Paucek
Yes, I am sorry about this everybody we don’t what's going on but there is some phone – so we'll call back in from our cell phone I hope you can hear me okay. So is that Brian.
Brian Schwartz
Yes, it is. I don’t know if you heard my question Chip, if I should repeat that?
Chip Paucek
I am sorry, repeat it, we did not hear.
Brian Schwartz
Sure, sure. You know I just wanted to get kind of your opinion on the landscape and higher ad tec because there was a huge gap right now if I compare your results here to other higher add tax suppliers so just wanted to get your opinion if you could share with us why 2U is seeing this level of growth and how performance versus other higher ad tec vendors in the space?
Chip Paucek
Well, I mean, without commenting too much on other vendors I would tell you that you know I think really we did something I think that maybe might have been hard to do in 2008 and now today is really proving to be I think the reason we're doing so well as we convinced I said it in the call but its – repeating that we convinced our board in the early days that this long-term correlation which is now success in the student outcomes and you know right now the outcomes across our programs are really strong and that’s really in my opinion was a rubber meets the road is delivering the outcome to the student therefore to the university because our great schools are really about their students so this is about in the end. So the notion of sort of ending the segregation of the online students you know might sound like you know like a copy but its not its very real and the reason I love that 019 story is those are my friends and I think you guys all might know I mean the MBA program at Chapel Hill.
I know all my all 19 of them and how do I know them because I am in the program you really get to know people and you really build long-term relationships and to sort of focusing on those people is really at the end of the day what works I mean, clearly there is a significant amount of investment going into ad tech overall do I love all of those investments of course not, do I think some will turn into really game changing companies I do because you know the world is definitely starting to wake up to the power of education technology we'll have to be at the front end of that but frankly you know we're just sort of focusing on what we know how to do which is just keep building more the worlds best online repos
Brian Schwartz
Thank you, Chip. And one quick question for Cathy just on the spending for 2015 maybe if I could ask you granular question because you gave us very good color so far but when you think about expanding your vertical reach or your intellectual property for R&D versus spending on sales and marketing and G&A where do you feel like you're going to put more of the waiting as you exhibit this year and you head into 2015?
Thanks.
Cathy Graham
I don’t really – we don’t really see it as a changing in waiting, the marketing spend is something that we build in that is commensurate with the number of programs we are running and where those programs are in the life cycle, whether they are early and we are building that funnel or whether that is at more of a steady state. From an investment and technology stand point we have a continuous pattern of investing in technology to make sure that our platform both the front end that the students and the faculty see and the back end where we and our university partners work together to deliver all of the services that make this work is an continual state of improvement.
So there is really not a re waiting these there maybe some differences in dollars spend but that will be solely related to what is happening as far as where are programs are in their life cycle.
Brian Schwartz
That’s very helpful. Thank you for taking my questions this afternoon.
Chip Paucek
You're welcome.
Operator
Thank you. And we have a follow up question from Michael Nemeroff of Credit Suisse.
Your line is open.
Chip Paucek
Hey, Michael.
Michael Nemeroff
Hey guys, thanks. I am sorry I think I got disconnected after my first question.
Chip Paucek
We obviously having phone issues here, so go ahead.
Michael Nemeroff
I thought I think it may as well. Maybe this question is for Rob is actually relates the marketing effectiveness, and I was just wondering if there was any metrics that you could share around how that’s going.
I know it’s a big part of value you get the applicant pull and then if I get disconnected I want to just put my next line in before I get disconnected. Its to Cathy I understand about the or the fifth program in 2015 and that’s great because you know you've got good visibility now on lot of pipeline, just what does that do in terms of the long-term profitability goal especially on the EBITDA margin versus what you may have said through the IPO process, is there any difference there?
Chip Paucek
Okay. I hand it over to Rob quickly and then as you come back to me.
Rob Cohen
I think my answer to the first question actually leads to the answer to the second while we on the road we were talking about getting our total marketing cost down to about 32% and what we're doing this year with our second programs and just overall getting better of what we do in marketing is driving towards those long-term margins as we bring in the second program as we answered a little bit earlier as well we're seeing a lot of efficiency and our heading towards there although not quite there but getting here on the long run.
Chip Paucek
And so Michael the question on long-term profitability if you might remember we told people when we were on the road there would be three to five year timeframe to profitability for the company and today you know, we're comfortable saying that we're clearly at the front end of that range. so we do not see a impact from that fifth programming from that fifth program negatively impacting our profitability because we're really starting to see leverage in the model.
Michael Nemeroff
Okay. Great.
Thanks very much for taking my follow up. I appreciate it.
Nice quarter again guys, thanks.
Chip Paucek
Hey, thanks Michael.
Operator
(Operator Instructions) and I am showing no questions at this time. I like to turn the call over to management for closing remarks.
Chip Paucek
Okay, thank you for joining us today. We look forward to all of you continuing to step out of back row and join on these calls, we'll talk to you next quarter.
Rob Cohen
Thank you, everyone
Operator
Ladies and gentlemen, thank you for participating in today' conference. This does conclude the program.
You may all disconnect. Everyone have a great day.