Feb 27, 2015
Operator
Welcome to the TWOU Incorporated Fourth Quarter Earnings Conference Call. [Operator Instructions].
I would now like to turn introduce to your host for the conference call Mr. Alex Makler, Director of Investor Relations.
You may begin.
Alex Makler
Good afternoon, everyone and welcome to 2U's fourth quarter and full year 2014 earnings conference call. By now you should have received a copy of the earnings release for the company's fourth quarter and full year 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.
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, CFO.
During today's call we may make forward-looking statements including statements regarding the company's future financial and operating results, future market conditions and the plans and objectives of management for future operations. These forward-looking statements are now historical facts but rather are based on current expectations and belief and are based on information currently available to us.
The outcome of the events described in these forward-looking statements is subject to known and unknown risk and uncertainties that could cause actual results to vary material from results anticipated by these forward-looking statements. This includes but is not limited those factors contained in the risk factor section of the company's final prospectus for our initial public offering dated March 27, 2014 and subsequent periodic and current reports filed with the SEC.
All information provided in this call is as of today. Except as required by law we would under no obligation to update publically any forward-looking statements made on this call to conform to statements or actual results or changes in our expectations.
Also it is 2u's policy not to update our financial guidance other than in public communications. Finally, 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
I would like to begin today's call by telling you a story, it's a story about a famous B-School legendary [inaudible] brand and it's alums [ph]. It's got two legendary professors battling over the role of online education at their university.
One professor says the school should do nothing. This online thing isn't important, we have been around a long time, we have waited a lot of fads, our future is secure with it.
The other professor says higher ed is failing quickly. It doesn’t provide with today's students and employers really need.
The world will be driven by nano degrees and micro-credentials, we will fade away like the dinosaurs unless we blow it all up and start over just blow it up. This debate is playing out all over higher education but the reality is both professors are flat wrong.
Let's start with the blow it up school of thought, why would you blow up as something as great George Town or Berkley or North Western? The degree is practically a cost of entry item for success in today's world.
Every metric from employment rate to earnings power goes up as you move from high school to doctorate. On top of that these schools provide some of the most meaningful experiences of people's lives.
Great education experiences are about being part of something bigger, being a Trojan, [inaudible] Ahoy is bigger. So now let's talk about the do nothing school of thought, doing nothing is crazy.
Einstein provide some perspective here, "The world as we have created it is a process of our thinking. We cannot change it without changing our thinking."
He was pretty damn smart, do nothing, the internet isn't going away. The world is flexible and on-demand.
If you don’t adapt to this, you will fail. Most of the industry players have not yet figured out their path in the internet era but we have.
So while the debate rages on the smart bold schools are getting it. They understand it's possible to fundamentally preserve the greatness of their universities while fully disrupting how they deliver it.
The same degree, the same power, same results, same professor, same mission, same zeal, same relationship, same intimacy all while creating true global access. Delivering that experience wherever their students are and creating the flexibility the students of today demand.
What if you can eliminate the background and bring every student forward hence no back row. What if instead of requiring the students to fit around the degree you could fit the degree around the student, we’re providing that flexibility, bringing the degree into the 21st century while maintaining all of it's inherent greatness.
In leading this transformation 2u plays in a massive market 550 billion in the U.S. alone.
We believe we’re reshuffling the deck of higher hand [ph] and in the process creating a rapidly growing and highly visible business with a very, very long runway. It's rare to find a company with this kind of growth potential without the need to pivot away from it's core business, that’s what 2u is.
Inception today we have created an expected 698 million and attrition adjusted tuition bookings and it's growing fast. It's also driving great financial results.
For 2014 we delivered better than 30% revenue growth and adjusted EBITDA loss improvement. Our guidance for 2015 shows we believe this trend will continue.
At the midpoint of our guidance we’re estimating 31% revenue growth and 22% improvement in our adjusted EBITDA loss. Cathy will walk you through the details in a moment but 2014 is behind us and it's not where I want us to spend our time.
I'm focused on 2015, 2016 and 2017. I'm thinking about driving results for our partners and their students.
We do believe there will be a correlation between our long term financial success and student outcomes. We recently completed our second annual 2u partner symposium, this is our annual partner meeting where we invite a small group of leaders from each school to talk about the opportunities and challenges they face as launch and grow their programs.
There is no press, no outside investors, just us and them. So it's an option conversation.
We debut some new service offerings to keep expanding our suite of technology and service as we push to stay at the leading edge. I think it's important for you to understand our true value of the partners so I have asked our excellent President and COO, Rob Cohen to give you some highlights.
Rob Cohen
Thanks, Chip. Our technology and services platform is industry leading but we aren't resting our laurels.
We will always push to be better. Let's talk first about technology, we have improved the tech components of our platform with new features such as variable speed playback of all asynchronous content.
Students can now change the pace of delivery to accommodate disabilities or match their comfort with the material. In addition, our CTO James Kenigsberg should complete the process of eliminating the last pieces of Moodle from online campus a proprietary LMS by the end of this year.
This rebuilt creates more modularity giving us better agility and development and maintenance. In our backend operations we have expanded the cloning ability of our SaaS technology, this innovation called Ellis Island allows us to standup new programs more quickly.
We have also built a product we call air traffic control which allows us to easily monitor the now large number of simultaneous live classes running across our program portfolio. In Q4 of 2014 we averaged almost 1300 live classes a week and had completed a 153,000 live classes inception to-date, clearly real time monitoring is critical.
We have continued to expand our tech enabled services, for the past two quarters we have been piloting a new student coaching service as the pilot resulted in increased retention we expect to roll this out across our schools. One area that hasn’t been obvious to the outside world are the services we provide to ensure accessibility for individuals with disabilities.
If you’re creating a great digital version of a campus program access for everyone is critical. Beyond close captioning for the hearing impaired we offer active narration of asynchronous content for visually impaired students and live in-class signing for hearing impaired students.
We talk a lot about students but supporting faculty is also critical for 2u. Our faculty recruiting service is now fully ramped up and available to all our clients.
We love that our faculty net promoter score is high but we think we can do more. We have heard that faculty and 2u enabled programs want to be more engaged with each other and with us.
So we have started to roll out additional faculty offerings designed to end the segregation of the online faculty expanding training for online pedagogy and adding networking events and other professional development opportunities. We have also announced a new service offering for administrators, our Emergen administration support.
Emergen [ph] are opportunities for students to meet on-campus or at other locations to learn, study and connect with their universities and each other. We will now assist in planning and managing Emergen [ph] across our program portfolio.
Finally though 2u's core mission is to create a digital version of each program we have decided that we could be more impactful to our partners, so we have introduced a new service called Campus Scaffold which deepens our relationship with the school. Campus Scaffold has two components, first we will work with our partners to break down the walls between online and on-campus by enabling on-campus students to take online courses and vice versa.
We’re pioneering this with GWs Milken School of Public Health this fall. Secondly 2u will leverage the significant investment we make in demand generation for each of our partners to increase their on-campus enrollment.
Given the scale we have achieved in demand generation we can provide significant strategic value to our partners at little expense to 2u. Campus Scaffold helps our schools to bridge the divide between online and on-campus students ending the segregation of these groups and powering successful high quality education delivery school wide.
To be clear, the expansion of our services is at little or no cost to our university partners. We’re committed to great education and to great outcomes and we will continue to improve and expand our services to drive these results.
Chip Paucek
Thanks, Rob. I would like to make a few comments about what we’re now calling MPV, or multiple program verticals.
As we have discussed our earlier contracts had exclusivity clauses, they were a lot more stringent than our most recent agreements. Given the power of the MPV strategy we have been working with our early partners to reduce or eliminate this exclusivity.
We now have two programs in two of the first four verticals and have three in another. We’re firmly committed to the MPV strategies, in most verticals we will launch at least two programs and the larger verticals we could launch more, why?
If there is one thing our program selection algorithm has taught us is that the intense regional bias of higher education works on our favor. In fact because of student acquisition efficiencies having multiple well-chosen programs in a vertical can increase enrolment in all of the programs including the first.
Our recent agreement with American universities Kogod School of Business to launch our third MBA and a new Master of Business Analytics is a major step forward in this MPV strategy. We thank Provost's, Scott Bass for his leadership.
In a related development the University of North Carolina Chapel Hill, our third partner and our first in the critical and large MBA market has agreed to both substantially reduce the exclusivity provision and extend the initial term of the original contract with us by an additional 10 years. The contract is now effective until 2030.
To put a five point on UNC's commitment to and satisfaction with 2u, I will be 60 years old when the initial term of that contract ends. And while we provided UNC with consideration for the exclusivity reduction note that the revenue share under this agreement remains the same.
So how does the rest of the pipeline look? Well our slots for '15 are completely filled, we made great progress on both '16 and '17.
We’re not ready to announce new programs for '16 yet but it's safe to say I'm not losing sleep over the pipeline at all. I will be able to give you more details about additional programs before too much time passes.
It's clear that universities are waking up to the transformative power 2u can deliver. Now ask our fine CFO, Cathy Graham to take you through the numbers.
Cathy Graham
Now Chip said earlier, we aren't going to spend a lot of time on 2014 results, we’re looking forward, but there are few highlights and drivers that I would like to cover. We closed out 2014 by again delivering significantly year-over-year revenue growth.
For the fourth quarter and the full year revenue exceeded the prior year periods by 24$ and 33% respectively. As is typical in both periods revenue growth was driven primarily by increases in full course equivalence.
For the fourth quarter FCEs increased by 27% offset slightly by a 2% decline in average revenue per FCE. For the full year FCEs increased by 31% augmented slightly by a 1% increase in average revenue per FCE.
As a reminder small fluctuations in average revenue per FCE either up or down are normal and don’t indicate any change in our pricing structure. FCE increases were generated across our program portfolio further diversifying our revenue drivers and revenue base.
In the fourth quarter 72% of FCEs and 76% of revenue came from the four programs in our first launch cohort. By comparison in the fourth quarter of 2013 the first launch cohort contributed 93% of FCEs and 94% of revenue.
Our earnings measures also continue to show significant improvement as we closed out the year. On a year-over-year comparison basis adjusted EBITDA loss showed an 83% improvement in the fourth quarter and a 30% improvement for the full year.
Adjusted net loss showed similar trends improving 56% for the quarter and 19% for the year. Throughout 2014 our earnings measures exceeded expectations driven by revenue over performance, headcount and other operating efficiencies and improved marketing efficiencies tied to our expanding MPV strategy.
We were able to manage our business in a way that allowed us to both add cost in the second half of the year for an additional January 2015 program launch and accelerate our path to profitability. Our MPV strategy was probably the major factor in the rapid deceleration of our adjusted EBITDA loss in 2014 and it's going to be a big driver in the continued improvement we’re projecting for 2015 but before we talk about 2015 guidance I want to spend a moment talking about our marketing efficiency and how we manage it.
We expense our marketing and sales has incurred but we enroll students generated by that marketing for the next two years or more and we get paid as those students progress through their programs generally over another 2.5 years. This means there is a big lag before this marketing efficiency shows up in our financial statements.
So we manage against a ratio of the attrition adjusted life time revenue of the students or LTR to the total cost to acquire that student or TCA. In any period we clearly known our spend but to calculate this ratio we have to project the number of students that spend will ultimately generate.
While projections are inherently uncertain and getting prospects to convert to students could take two years or more, we have a lot of history, review our data continuously and use it to inform our forecast. So while actual student enrollments may vary from projections resulting in retrospective changes to the ratio for any period we think that generally those changes will be minimal.
To achieve our target mid-30s adjusted EBITDA margins we need to get to an LTR to TCA ratio of 3.2 or better along with other scale economies. At the end of 2013 this ratio was about 2.4, by the end of 2014 this ratio was approaching 3, a dramatic improvement.
Yes we’re getting the benefit of increasing average program maturity but that doesn’t explain improvement of this magnitude. What does explain is additional programs in existing degree verticals by having more program options for students particularly given the proven regional bias in enrollment we can find more students from the same marketing spend.
Now let's shift our discussion and look forward to 2015. Expanding and improving on the initial look at 2015 we gave with our third quarter results we have now provided specific first quarter and full year 2015 guidance.
With these ranges it's clear that we’re expecting the revenue growth and margin improvement trends we saw in 2014 to continue. On the top line our mid-point guidance represents year-over-year growth of 27% for the first quarter and 31% for the year.
As we have told you previously we’re anticipating a shift in our quarterly revenue pattern this year, so let me take a minute and give you some additional color. Historically we have seen the sequential decline in revenue between the first and second quarters of each year, this was due to the fact that our early partner program had fewer class days in session during the second quarter than in any other and in session class days were the driver of our revenue recognition.
As we’re expanding the number of programs we enable and these newer programs have a higher concentration of second quarter class days our revenue pattern is shifting. For 2015 we expect a small sequential increase in revenue from first quarter to second.
To help you with your quarterly models our earnings release also provide supplemental guidance on how much of our 2015 revenue we expect to recognize in the first half of the year. Our guidance also conveys our commitment to keeping 2u on the path to profitability in 2015.
In comparison to the 2014 periods our midpoint adjusted EBITDA loss guidance anticipates 33% improvement in the first quarter and 22% improvement for the full year. Though our pattern of generating lower sequential revenue in the second quarter is reversing in 2015 our pattern of recognizing a larger sequential adjusted EBITDA loss is not.
In prior years this larger sequential loss was driven by two factors, first the sequential revenue decline and second the fact that second quarter has a substantially higher amount of annual and periodic cost including for graduations on-campus and other physical program activities. For 2015 while the revenue driver is reversing the expense driver is not.
Again to help you with your quarterly models our earnings release provide supplemental guidance on the adjusted EBITDA loss margins we expect for the first and second half of the year. While we’re forecasting significant revenue growth and margin improvement for 2015 we believe it's just the beginning.
It's reasonable to expect that as we get to and through profitability we will start stepping up the number of programs we do each year helping to sustain high revenue growth and with our MPV strategy we will be increasingly able to optimize our marketing spend across degree verticals, reducing risk and driving profitability. Chip?
Chip Paucek
Thanks, guys. So we have covered a lot of ground today I want to end the call with a story about impact after all let's remember that’s what this is all about in the end.
Earlier in the call Rob mentioned accessibility for individuals with disabilities. Sally is a social work student who enrolled in the MSW at USC program in September of last year.
She has been completely blind since the age of three and her dream is to provide social work services to individuals with disabilities. Sally is not a real name but a name she was given internally to protect her privacy.
Sally has been so thrilled by her experience in the USC online program that she has offered to work with us to test and develop new ways to make our platform even more accessible. We deploy a hosts of accessibility options to enable students to succeed in our clients programs.
For visually impaired students like Sally, this includes technology to ensure that she can access content using her screen reader as well as audio descriptions on all film like course work videos. We have also installed an add-in on our computer to allow her to launch her webcam during class on her own.
So Sally has told has how much she had to fight for this level of accessibility in her undergrad program and she never thought it would hand it to her in graduate school especially in an online program. But rather than me describing her experience let me read you Sally's words in terms of what this has meant to her, "What you guys are doing is very much so groundbreaking, it's incredible really.
I would like to let you know that how wonderfully one of my units just worked for me. There were a lot of videos with these crazy frames that I had to navigate through.
Then I had to fill in answers on a few questions and submit those, all of it worked. I can't tell you how excited I was when I was able to move through the whole thing and submit answers on my own.
It was a huge relief. Thanks to you and everyone who has worked on that unit.
I never thought I would be able to access something so visual before." That’s what this is all about.
Truly transforming lives by delivering an amazing education experience to students who would not otherwise have had access. A lack of access comes in many forms, it could be because of disability like Sally's, or because picking up your life and moving to attend an on-campus program is simply not an option for you.
Sally just recently had her first field placement placed by 2u part of her social work program as field placement. 2u placed her at the disability network South-West Michigan where Sally is able to pursue her goal of providing social work services to individuals with disabilities.
This is what we mean when we talk about eliminating the back row, great outcomes like Sally's. As investors we remind you that we believe there will be a long term correlation between our financial success and student outcomes.
So before we take questions I would like to make sure you’re aware we will be at two upcoming conferences where we will be speaking on March 3, we will be at the Pac Crest 10th Annual Emerging Technology Summit in San Francisco and on April 8, we will be at the ASU+GSV Summit in Scottsville, Arizona, we would love to see you there. And with that, Cathy, Rob and I will take your questions.
Operator
[Operator Instructions]. Our first question comes from Michael Nemeroff with Credit Suisse.
Michael Nemeroff
First question is, you mentioned that the pricing on the renewal for UNC is stable and I think that’s really impressive because I think that’s a question of lot of investors have as customers come back overtime with renewals. Is your expectation that that will -- that renewal will kind of look like other renewals as they come in the future?
Chip Paucek
So I would say well every conversation is different and I would never try to say they are all the same, every partner is different, every relationship is different. We do believe long term we do not expect our margins to suffer long term.
We’re thrilled that Chapel Hill -- I try to put it in perspective, I mean you know guys -- many people on the phone have met me and sort of we were joking about how to characterize it, you know it's 2030 so I will be 60 as I said but you can argue that my kids will have kids and I will be a grand dad. So it's a long commitment, we don’t take it lightly and the fact that they are signing up with us for that period at the same revenue share we thought it was important to share with everybody.
Michael Nemeroff
Yes I will be 59 so I can relate. The second question is on the MPV program, I'm just kind of curious is there a limit to the number of programs in a vertical?
I mean for instance you signed up your third MBA, I mean is 10 too big of a number, how should we think about that?
Chip Paucek
It's a tricky question, so fundamentally we have definitely we think now proven to ourselves that certainly more than two will very often be the case particularly in some of these larger markets. The flip side of that, there are so many verticals for us to pursue.
So we haven't hit some really big segments of the market, computer sign, engineering, architecture, a ton [inaudible] occupational therapy, physical therapy, speech pathology and those are good examples of programs that we actually think competition fundamentally really has a hard time penetrating because we built this large apparatus to deal with students placements in the field which we think is kind of mode around the business. So we do want to continue to plough the virgin snow of these disciplines.
Is it possible that you will see a two more than 3, 4 or 5? It is certainly possible.
Today we’re just thrilled with the kind of explosion of pipeline we have seen just in the last six months, I mean that’s somewhat new for us, there has been a real increase in inbound activity to the company and that’s great news.
Michael Nemeroff
I know you said Chip that you don’t lose sleep over the 16 pipeline, but I would be remised if I didn’t ask, have you signed anything for '16 and then at this time last year, have you signed anything for '15 as a comparison?
Chip Paucek
So I think the tough thing is to talk about specific contracts on a go forward basis is tough for us, we really can't do it. I can't tell you that the reason I'm not losing sleep is there is no question that the company is sort of ahead on timing overall compared to previous periods and unfortunately I can't give you a metric because it's not the way our business works.
There is not this large SaaS team running around the country with a 100 sales reps talking to people, it's me and one other great person here [inaudible] and that’s it. So there is -- I personally -- there are moments in our history where I was losing sleep and right now I'm definitively not on this particular topic.
The pipeline is really strong and I think it's a combination of you can see we have been expanding within the portfolio so I think it's reasonable to expect that to continue, the partners that have signed up with us, I mean Chapel Hill, I wasn’t able to say this before well now I can say, this is much better than a renewal. I mean investors might know most of our renewals are at the end of a 10 year period or three years and the fact that they have extended this for 10 years from today is really I think a statement of their commitment but it's just a good example of the existing pipeline of universities that we have already are positive and what's happened is we have had a real I think explosion is probably not too strong.
We have had a real increase in inbound interest to us. So I can assure you we will be announcing things in short order.
They are coming but we thought it was important for this call to talk about our results, talk about Chapel Hill and move on from there.
Michael Nemeroff
And then lastly one for Cathy, one of the questions that I get from investors all the time, or one of the push backs is yes, the first cohort of schools is profitable. I was wondering without going into detail if you don’t want but could you give us a sense for the profitability trend of the second cohort of schools that you’ve signed and how that’s looking?
Cathy Graham
Sure. So well we don’t talk about them individually, what we do talk about is that we are seeing the same kind of trend in the second cohort -- the second launch cohort which would be our 2013 cohort.
We’re seeing the same trend on path to profitability, that we saw in the first one. So when we adjust for things like changes we made in our business we are seeing definitely the same sort of pattern and frankly we think that that pattern will be sustained or perhaps even get better as we move through 2014 launch cohorts in 2015 and the reason is that we have the algorithm that really will be used to select the 2015 launches that we announced throughout last year and we think that the use of that algorithm has so much allowed us to so much better make choices about what programs we launch that our patterns may actually improve.
But we’re seeing the similar kind of trajectory and nothing that would cause us to believe that our models are not moving in that direction.
Chip Paucek
Yes, just one additional point Michael, just keep in mind the first cohort doesn’t have any second or third programs obviously.
Operator
Our next question comes from Michael Tarkan with Compass Point.
Unidentified Analyst
This is actually Andrew on for Mike. Cathy, could you give us that revenue backlog number that you normally provide.
I think it was a 146 million last quarter?
Cathy Graham
It was a 146 million last quarter, it is now a 127 million at the end of the year but let me remind you that that would be seasonally typical. It does show great growth over last year so all of the trajectory is going in the right direction but the reason that it moves down from third quarter to fourth quarter is because generally all programs wrap up classes by the end of December and don’t carry over year-end, whereas at the end of September you have got a lot of revenue that’s still in the pipeline of being recognized.
So what ends up happening is that at the end of December it goes, your backlog is at a low point. By the time you get to end of January it's popped back up again.
So it's a terribly typical pattern but we’re at 127 for the end of this quarter.
Unidentified Analyst
And then sort of in terms of 2016 and 2017 program announcements, could you maybe give us some color as to what you’re thinking about in terms of whether these will be focused on new schools or new verticals or some sort of combination of the two?
Chip Paucek
So if you look at our 2015 cohort of launches we had two new verticals out of five and we have not specifically stated how many programs we will do in 2016 yet but we think it's reasonable for investors given that we did five to expect no fewer than five programs in 2015. What I can't tell you today is how many will be first, second or third or frankly fourth.
We’re working across many different disciplines with many different universities and we’re not -- we’re looking at them as all independent opportunities, we do want to build for the future so while investors are particularly excited about the whole notion of the MPV strategy. Honestly we’re not running the company based on what investors are excited about, we’re in this for the long haul and so the notion on ploughing that virgin snow is pretty important because you obviously can't have a second or third program without a first.
So I don’t have a specific answer for you. I can't tell you that we’re very actively working on building some programs that are in new disciplines that I think will surprise people.
Unidentified Analyst
And then last one for me, I know that you don’t necessarily want to provide guidance beyond 2015 but do you sort of have a sense as to when you think you will reach profitability on an adjusted EBITDA basis?
Chip Paucek
At the time of IPO we told people 3 to 5 years to adjusted EBITDA of profitability and we’re very comfortable saying '17, the early part of that range.
Operator
Our next question comes from Michael Huang with Needham & Co.
Michael Huang
Just a couple of quick questions for your, first of all just to clarify so campus scaffolds and some of the new offerings there I think you had mentioned that you’re going to be helping out with on-campus recruitments but just wanted to clarify, so 2u will get no tuition share from any students that are attending the on-campus program, right? And then -- so I know that there are those significant incremental cost and so I was wondering how ultimately this benefits the model.
Is this just from a retention and overall experience standpoint or how ultimately can you leverage kind of the deepening of relationship that I assume you’re driving through campus scaffold.
Rob Cohen
As I said when I was talking through these new offerings, these new services, it's going to be at minimum cost and minimum revenue to 2u but I don’t want to get into details of what the exactly the relationship is. The reason we’re doing this is ultimately the schools are our long term partners and if we help them grow their on-campus programs and make their on-campus program stronger and more viable, 10 years from now it's going to be good for the school and good for 2u and that’s why we’re doing it.
Chip Paucek
Yes, and the only thing I would add Mike. It is one more moment of embedding us into the DNA of these institutions which is non-trivial.
So we -- the whole idea -- if you think forward 20 years this will all be obvious to people but ending the segregation of the online student and online faculty, it might sound sort of puffy and big language but it's very real and as you bridge that device I don’t think that there is anything more powerful because, you know they are our clients so of course you expect them to take nice things about them but having been a first generation college students who -- my life transformed by attending GW. You know it's very real and so that bridging that device between the two and offering more flexibility for online students and on-campus students to move in between, we think it's super powerful to the current offering.
And Cathy?
Cathy Graham
And I will just add to echo something Chip said earlier, as Rob said, this is been driven for deeply embedding our relationships with our partners. However with minimal revenue and minimal expense it does not seem that we’re, we do not view this as any way impacting the long term target margins that we have provided for you guys.
Michael Huang
Okay. And then just a follow-up, sorry for being a little bit dense here, so if I'm an on-campus student and then I ultimately decide that I want to participate in some of the online programs.
Would that count as an FCE?
Cathy Graham
Actually that’s an interesting question, we’re piloting this fall, we’re piloting it with GW and we will be working that out as we go through it and we will certainly let you know. We would not want to mess up our the metrics that you used to track our core business.
So we may be looking for something else or a sub-category that will allow you to do that but as we get to actually having revenue and students we will report on that.
Chip Paucek
I mean just one thing to clarify Mike, is in most cases the campus program is very small. Just keep that in mind.
So when we show up obviously we can take a school from 50 students to 500 or from 80 to a 1000 but the fact is you’re typically dealing with most Top Tier graduate programs are pretty tiny.
Michael Huang
And then -- I don’t know if you can provide additional color on that but was curious, you know with respect to the renewal discussion with or the extension discussion with UNC, was that initiated by UNC or was that initiated by 2u and what was the motivation for UNC to extend now as opposed to just waiting?
Chip Paucek
Well you know I think we have made a pretty compelling case that the notion of multiple programs actually does indeed help grow the first program. We’re seeing that on the ground, that was an idea two years ago now it's real, it's data and so [Technical Difficulty].
So Mike, what I was saying is it's one of the more complicated discussions, I mean if you think about the early days of the company we convinced these guys we were in a marriage and now I'm asking for an open marriage and so as you might imagine that has it's own complications. But in this particular case we’re so hand in glove with that excellent university and you know Doug shot for the dean there it's pretty incredible and so this was a bit two way.
I mean we really did want to build more programs in this vertical. We had seen pretty phenomenal results with Syracuse.
We wanted to build more programs and it turned into a conversation that evolved to this. So from my standpoint it was very much two way, I'm not sure how else I would describe it, is that given what you need?
Michael Huang
Yes. Thank you so much guys.
I appreciate it.
Operator
Our next question comes from Ben McFadden with Pacific Crest.
Ben McFadden
I wondered if you could just give us any color on how we should think about the core cohort growing in 2015 versus sort of the 2013 and 2014 cohorts?
Chip Paucek
Ben, do you mean the first cohort is that what you’re asking?
Ben McFadden
Yes for 2015, how should we consider growth for those core four?
Cathy Graham
So Ben, the way we’re looking at this for the core four is that they are still growing. They are growing in the high single, low double digits which is kind of what you would expect for things that are moving along that substantially.
You know that level is maturity. However I will remind everyone that as we have said before that growth in more mature programs is not necessarily something that you ought to measure us by because we control a lot of that.
So really the level of growth that we have in our more mature program is tied to how much we’re willing to spend to get the next incremental student and at some point frankly you want us not to grow those programs because what it cost us to get the next incremental student in that program we could get three incremental students in a younger program. So I will just caution you that it isn't really a measure of the health of the business, it's a measure of where we can get the most bank for our buck in terms of growing our business overall.
Ben McFadden
And then I also wanted to ask a question sort of on the linearity of 2015. You talked about how you won't see a big of down tick in Q2 relative to Q1 that you’ve seen in the past but relative to the second half, are we going to see something similar between Q3 and Q4?
Is the broadening of the portfolio just going to make this I guess a more linear year than sort of what we have seen in past?
Cathy Graham
It will be a more linear year particularly in the latter half of the year. I think what we have told you is that there will be a very small increase in -- sequential increase in revenue between first and second quarter and then it should be more linear after that.
I will also remind you that [Technical Difficulty].
Chip Paucek
I would like to make sure everyone understands that this is not the 2u platform. Just FYI.
But Cathy you want to--
Cathy Graham
Yes, so let me finish the one thing that I also just wanted to remind you because we didn’t talk about it in the script is that in the earnings release we did remind you that in the fourth quarter particularly we see a step down in marketing expenditures and so the average adjusted EBITDA margin for the second half of the year shouldn’t be viewed as a run-rate going into the first year because there is some seasonality there as well.
Operator
Our next question comes from Andre Benjamin with Goldman Sachs.
Andre Benjamin
So two quick one, I guess as we think about the margin progression that you laid out, I know that it will improve substantially in the second half of the year. As we think about the big buckets that underlay that, I don’t need to be super specific but how much of that is driven by changes in the marketing spend versus say technology and service just we’re trying to model at that level.
Cathy Graham
So I think what you will see improvements in all categories. We should see particularly what you saw this year that we did not see as a percent of revenue improvement in the G&A line because of public company costs.
However by the time we get into the back half of next year those comparisons should start to work for us instead of against us. Yes, a big piece of this is the fact that these second programs is allowing more efficient marketing spend and therefore we’re driving more revenue off each marketing dollar, so that is a place where you will see efficiencies in the [Technical Difficulty].
Chip Paucek
Andrew, I'm sorry, did we answer your question?
Andre Benjamin
It's cut off in the middle, but I think I got the vast majority of it which is most of the efficiencies is going to be driven from the marketing spend. I think one last question, it's a little bit out of the box, know you’ve a strong organic offering but are there any assets out there that we can think about either now or down the road that would make sense to add in order to enhance the value of proposition, again not asking for specific assets or anything that you might be doing now--
Chip Paucek
So just number one in terms of potential acquisitions, while the company will always certainly consider anything the fact is we have got so much run-way in our core business that we’re not spending anytime focused on external acquisitions, none. It's pretty rare to have this kind of organic growth potential, just capital and that’s what we’re doing.
So we’re focused on continuing to just build this core business. What I liked about our script today is little different for you guys is we showed you a little bit more of our product, with some of the new product offerings.
We think historically we have not done enough of that so when you hear about the diversity of the offering to our partners whether it be something that was for the students like disability access or something for -- to help us build the business larger like Ellis Island or air traffic control where you’re talking about things that really improve our SaaS component. We think that’s all really important to drive not just efficiency but quality into the business.
So we’re always looking for good external technology and we are not afraid in any way to license it if we think it improves the student experience. So our tech team and our content teams are always looking.
But fundamentally we’re not -- we think this company does need to focus on it's core business because the opportunity is so big.
Cathy Graham
Andrew, if I could just finish up before we cut off. I wouldn’t think that we will see efficiencies in the lead generation or the profit generation spend.
We’re also making investments in that area for new product, or for new programs. So I would not consider that you see disproportionate improvement as a percent of revenue on the program marketing and sales line, think you’re going to see it across the Board.
Operator
Our next question comes from Corey Greendale with First Analysis.
Corey Greendale
On the subject of product extension, have you thought about selling your platform as a reliable telecommunications service?
Chip Paucek
Yes, obviously, about 45 minutes ago that would have been useful but kidding aside this is not our platform just to make sure that’s exceptionally clear.
Corey Greendale
No question. So just a few questions, a bunch of them have been answered but for Cathy just to be clear the change in seasonality in Q2 that is reflected in the FCE number as opposed to the revenue for FCE number is that correct?
Cathy Graham
Could you repeat that for me Corey, we’re cell phoning here.
Corey Greendale
I'm sorry. I just want to make sure for modeling purposes that when you’re talking about the change in seasonality Q1 to Q2 that that will be reflected in the FCE number as we model it not in the revenue for FCE number?
Cathy Graham
You’re absolutely correct. It is in the FCE number.
Corey Greendale
Okay. And 2015 as a whole, should we expect as your mix changes that the revenue for FCE dollar amount should be relatively stable each quarter before it's been in '14?
Cathy Graham
Yes, you shouldn’t see a whole lot of switching around in that. Change is an average revenue per FCE other than being driven a percent or two one way or the other are going to slowly overtime if at all.
So I wouldn’t look at any material impact one way or the other over 2015.
Corey Greendale
And then Chip, I wanted to ask you about Syracuse in particular given that there was I don’t know if it was your press release or Syracuse talked about the very successful first cohort there, certainly benchmarking that against the early days of UNC seems like it has great potential. Can you just give us your thoughts on ultimately where you think that can go relative to the size of the UNC program?
Chip Paucek
I think I rather not compare things in relative to size, all of our partners are equally important. I will tell you that Syracuse without question if you looked at the algorithm there is a uniqueness to the State of New York that’s pretty powerful.
If you’re going to have regional bias that’s a darn good place to have it and the Syracuse brand has outperformed internally in ways we have been thrilled with. So, while the first cohort was the largest cohort in Whitman's history, net-net we expect to see really, really good things from that particular program and now Newhouse is launched and you can make a reasonable argument that Newhouse is the best school communications in the country.
So we think we felt very strongly that Syracuse is a big part of our future. It's been interesting [inaudible] there was our dean at the WashULaw School and took a lot of arrows, it's hard to launch a law school online, that’s not an easy thing to do and now he is at Syracuse we really have -- they fully embraced us in a way that’s pretty wonderful for 2u.
Corey Greendale
Yes I meant the MBA program but thanks for catching on the communications as well. And then just quickly maybe for Rob actually, two questions, you commented, some asked about the scaffold.
The coaching service that you’re adding, I'm imagining that’s not highly material to either expenses or revenue but can you just comment on that and then I had a quick follow-up on the changes you’re making to the LMS.
Rob Cohen
Coaching is just about retention, it's doing a better job servicing the students who are in the program, it's not about spending more money. So engaging the students in more active conversation and making sure that they are better prepared for the difficult and rigor of these degrees, we are going to increase retention.
So it's really a retention effort and not about spending more money or actually different money, it's just about doing a better job at what we do.
Corey Greendale
So financially it's slightly accretive because it will improve retention?
Rob Cohen
That’s exactly right, this is about getting better retention.
Corey Greendale
Okay, I'm imagining that you’re tweaking and changing the LMS all the time but just to verify at some institutions not companies, not the school that you work with but tools that have run their own programs when they make changes to the LMS sometimes you see an impact temporarily on retention or on student satisfaction. Can you just comment a little bit about how you’re managing this picking mood [ph] out of this system and whether there is any concern that you can see a little blip as a result?
Rob Cohen
Actually we expect the way we are changing the system to do it in -- to do it in a way that specifically guards against that happening. I mentioned the call the concept of modularity, by making sure that the platform is little pieces that can be changed slightly overtime.
It's not going from V1 to V5 to V9 it's small tweak that gradually improves performance in a way that can take the user gently through the changes to the platform due to lifecycle degree. So we’re well aware that radical change could upset customers and we’re doing it specifically in a way to guard against that.
Operator
Our next question comes from Jeff Silber with BMO.
Henry Chien
It's Henry Chien calling in for Jeff. I just had a quick one, so now that you have had lot more visibility as a public company, just wondering has there been any change in terms of your sales strategy or communication with potential clients and maybe as a follow-on to that, now you’re getting more increase, are you seeing any trends in terms of what really resonates for them to come to your rather than some of your other competitors in this space?
Thanks.
Chip Paucek
I think it's all about quality, we keep, if we stay focused on student outcomes long term we win. So we really haven't changed, I mean as a private company we felt that way, as a public company we felt that way.
I mean transparency is a good thing so we’re trying to be as transparent as possible but us being a public company it's really the only effect on our university it's been it's occasionally people call universities and we can't really control that and while I find it annoying I understand it. So, from a pipeline perspective I really think the sort of increase in interest in the company has been much more about the fact that we’re delivering than whether we’re [inaudible].
Henry Chien
And I mean is there anything in particular that just in terms of say differentiation and why would they come to you rather than some of the other competitors?
Chip Paucek
We’re not a horizontal play, I'm not trying to put everybody online. I'm not trying to put as many programs online.
I'm trying to build the world's best online programs. So it's a very different approach, it's not for everybody because it takes -- tis really hard, it's really hard to do it this way.
So it takes a leadership commitment that is non-trivial I mean it takes somebody very committed to it. We’re not trying to take a 50 students program and add an additional 20 or 50 students to it and everything we do is pretty high differentiated.
So we look for a partner that is interested in being great in the century. I mean that’s -- I know it comes like it's big words but that’s actually what we’re doing.
So what we found is that resonates with a lot of people on higher ed and I think now we’re starting to prove that online education might just be as good in some cases, if done this way it can be better.
Operator
Our next question comes from [inaudible] with Oppenheimer.
Unidentified Analyst
Just got a quick one, I was wondering if you could talk a little bit about how we should be thinking about how FCEs will ramp with the third and maybe the fourth and fifth additional programs. I know when you had the two program maximum, it was it kind of flowed, the primary would fill and then the secondary would kind of dip into that you know overflow pool but as you add these third maybe the fourth and fifth programs, are we going to see the same type of waterfall effect or is it the third program and the secondary program going after the same pool at the same time.
Cathy Graham
So what we’re anticipating is that each program will have some of it's own pipeline as well as leveraging the pipeline of the demand pipeline of the people in front of it, the universities in front of it the universities in front of it. However we don’t yet know because the third program has not started operating exactly what our first third program is now started operating exactly what those dynamics are going to look like.
So what we have done is assumed that we get slightly less efficiencies out of the third program than we get out of the second program in the same degree vertical. We may be surprised and find out that depending on what the program is where it exists from a geographic standpoint, where it exists in the sort of scale of university ranking that that could be very different but we don’t yet have any practical insights to that.
So we’re modeling this as though it gets to roughly the same size same way a second program would get roughly the same size but with slightly less marketing efficiency.
Unidentified Analyst
And I know one of your key differentiators in the market is delivering good outcomes from field placements that are really adding to the students learning experience. My question is kind of around the potential for adding programs that do not require as much or maybe even no field experience result in a good learning outcome.
Are you having conversations with universities about these types of degrees or for the say, near or medium term focusing more on degrees where field placements plays a key role in the learning outcomes.
Chip Paucek
If you look across our portfolios, we have [inaudible] today that don’t have field placements, so the MBA program, the data science programs are great examples of programs. They are incredibly high quality, now they do have emergence typically where students go to campus or go to some other location so an MBA at UNC, they are four year, the fourth quarter is always in Chapel Hill, the other three have moved as far as Singapore, Johannesburg, they are all over the place.
One upcoming is in San Francisco and you would be shocked how many students attend. So emergens are a big part of what we think creates a really high quality program.
The reason we bring placement is just a really differentiator because none of three years, four years and five years really experienced with it. So we like all programs, frankly, and we [inaudible] programs with placement.
The online program that don’t have a field experience are pretty powerful.
Rob Cohen
I just wanted to add that’s why we really are queueing up the emergence [ph] report for the universities because we do believe the real life experiences are very positive for all the degrees. So for the degrees that don’t have a field experience we think there should be an Emergen [ph] and we’re going to support the university to self-enable that so really we can provide great experiences no matter what the degree is going to look like.
Operator
And I'm not showing any further questions at this time. I would like to turn the conference back over to our host.
Chip Paucek
Okay. Thank you very much everyone.
We look forward to talking to you again next quarter and join us at Back Row.
Operator
Ladies and gentlemen that concludes today's presentation. You may now disconnect and have a wonderful day.