May 8, 2015
Operator
Good day ladies and gentlemen and welcome to the 2U First 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 follow at that time. I’d now like to turn the call over to your host Ed Goodwin, Senior Director of Investor Relations.
Please go ahead.
Ed Goodwin
Thank you, operator. Good afternoon, everyone and welcome to 2U's first quarter 2015 earnings conference call.
By now you should have received a copy of the earnings release for the Company's first quarter 2015 results. If you have not, a copy is available on our Web site investor.2u.com.
The recorded webcast of this call will be available in the Investor Relations section of our Web site. Also we routinely post announcements and information on our Web site, 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 not historical facts, but rather are based on our 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 risks and uncertainties that could cause actual results to differ materially from the results anticipated by these forward-looking statements.
This includes but is not limited to those risk contained in the Risk Factor section of the Company's annual report on Form 10-K for the year ended December 31, 2014 and other reports filed with the SEC. All information provided in this call is as of today.
Except as required by law, we under take no obligation to update publicly 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.
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’d now like to turn the call over to Chip.
Chip Paucek
Thanks, Ed. Higher education is undergoing transformation.
This is a very long game and we’re only in the second innings. A very wise friend and partner of 2U, Stefan Krug, Deputy provost of Simmons College once told me the story of change in higher Ed, and the story of a turtle being mugged by two snails.
When the turtle was asked what happened? He says, I don’t know, it all happened so fast.
Getting aside change is full in higher Ed, but its happening. 2U is the market leader driving this transformation.
Leading that transformation it turns out is good business. I’m very pleased to report that we had another very good quarter.
2U exceeded again its previously stated guidance for all financial measures for the first quarter. Building on these strong results, we’re increasing our revenue expectations for full-year 2015.
The midpoint of our new guidance range now implies 33% revenue growth over 2014. We are also improving our adjusted EBITDA loss guidance, further solidifying our path to profitability.
At the midpoint of our guidance, we now expect that adjusted EBITDA loss will improve by about 36% year-over-year. We are now further convinced that the leverage we’re driving from our MPV or Multiple Program Vertical strategy is a significant factor in our continued rapid loss deceleration.
Our core business is doing well. In fact, we’ve a new announcement for you today.
The first of a new model called the enterprise program model that we believe allows us to further penetrate our target market. We are expanding our relationship with our amazing partner Simmons College.
Simmons was found in 1899 and their current programs with 2U have scaled quickly. It’s a fantastic school with a fantastic leadership team.
Up to this point, 2U is only focused on large programs with large potential enrollments. Through the 2U’s enterprise program model, we figured out a way to aggregate smaller individual degrees into the revenue expectation of about one typical program.
By doing so, we can share a number of operating and overhead functions across the degrees in a cost effective way. Simmons and 2U will deliver a Master of Business Administration, a Master of Public Health, a Master of Communications Management, a health care-focused Master of Business Administration, and a Master of Behavior Analysis, all launching during 2016 and ’17.
While we think none of these degrees at Simmons alone could have supported a full build, together they could be quite powerful. Cathy will help you understand how we’re thinking about this financial in a moment.
You should consider the Simmons enterprise program, one 2016 program in our promise of no fewer than five per year. For my perspective, this gives us an opportunity to work with the great partners we have today on degrees that we don’t believe will individually see the scale based on the factors we traditionally consider.
Historically, we’ve said no, to many of them. Thus, opening the door to lower quality competition on campus.
We now have a way to say yes. The enterprise program model dramatically expands our ability to further penetrate the overall graduate market.
How many smaller degrees flank the larger degrees? How many spokes from a hub?
We like this a lot. I’d like to thank President Helen Drinan, Provost Katie Conboy, Deputy Provost Stefan Krug, and VP of strategic initiatives Suzie Murphy for their flexibility, imagination and verve.
We believe this new enterprise model will help to capture more the market. I want to spend a little time talking about what we believe to be our TAM or total addressable market.
As we previously stated, the total higher Ed market in the U.S alone is $550 billion. It’s very large.
Given the sheer size of this market, I thought it would be helpful to spend a little time discussing how we are segmenting the total market to build out our unique growth strategy over the foreseeable future. There is a worldwide transformation occurring in higher Ed.
Currently we are focusing on graduate degrees. Over time, we will move further into undergrad.
But today and for the foreseeable future, our business is focused on the graduate market. Further, most of our business today is U.S.
based. This will change.
This is an international story over time. But for now let's focus just on the U.S graduate segment.
Data from IPEDS indicates that the graduate market is about 14% of the overall U.S higher Ed market or approximately $80 billion. That's a massive number.
On our IPO road show, as an indication of our plans over the medium term, we gave an example of working in 30 different verticals and building two programs in each. We were simply trying to put the potential size of 2U in perspective.
I’d like to dig a little deeper into this. As we believe the white space ahead of 2U is much, much larger than this previous example I might have indicated.
Every year the Department of Education publishes data on degrees conferred by academic discipline in the U.S graduate market, including both Master and Doctoral degrees conferrals. We have identified over a 100 graduate-level academic disciplines with more than 1,000 graduates per year.
Of that number, our team is determined that there are at least 50 where we believe we can effectively launch a first program and then implement our MPV strategy at the types of top tier institutions we target. Beyond that, we believe that a number of additional disciplines will emerge, because of market demand and will grow to fit into this profile.
These are disciplines like data science, a Greenfield, it haven’t been around long enough to rank highly in the DOE’s data base. But market demand is high enough that we’ve already launched two programs in that vertical.
We think it would be conservative to say disciplines like this to give us at least 10 more degree verticals to target. We are also now thinking that these large verticals will support more programs than we originally discussed.
We expect that most disciplines will support at least three programs and that some could support many more. Given the size of the opportunity, let's just assume we can launch three programs in each of the 60 degree verticals.
That would mean 180 programs. Assuming all of these reach the size we project for a typical program, we’d expect our annual revenue once they reach steady state to approach $3 billion.
Assuming our typical revenue share split, this implies me to have somewhere around 6% of today's $80 billion graduate market. And that's in terms of revenue.
Universities in the tier we target have tuitions that are about double the average. This means we could reach $3 billion in revenue by capturing just three 3% of today’s graduate students.
Given the size of our social work protocol, we feel very good about that estimate. Projecting off the most recent data, we expect our social work verticals on track to produce over 5% of this year's new U.S MSW degrees.
And we don't believe social work is an outlier in anyway. It’s rare to find a company with this kind of organic growth potential without pivoting away from its core business strategy.
Given our current projections and our competitive advantage in the target market, we believe we are on track for continued success. Given this potential, over the next couple of years the question for the management is, as we move towards profitability, should we speed up growth?
While we remain committed to achieving adjusted EBITDA profitability by no later than 2017. We believe the opportunity is too large to not increase our pace.
We are currently determining when and by how much and we will give further guidance on that towards the end of 2015. Finally, I’d like to give some color on pipeline.
It's very strong. After we signed Simmons and Yale, we still have a 11 programs in some real form of negotiations.
Historically, we close the vast majority of potential deals in this stage. In addition, we have many in earlier stages of negotiations that we believe to be a real conversation.
We promise not fewer than five degree programs per year and we’re unconcerned about that promise. Before I turn it over to Rob, I just want to say a few words about approvals in our recent Yale announcement.
Every single program we announce is required to go throughout it, internal and external approval processes, including accreditation. Every program is different.
Some have discipline specific to creditors, some don’t. Some has state approvals, some don't.
They are all complicated. But what’s true for all of these is the academic institution; the school owns a 100% of that accreditation process.
For that reason we can't opt on any individual degrees process. It's simply not our place.
We are respectful of our partners and their relationships with their accreditors. We're excited that Yale is beginning the process of moving ahead.
While we have no specific timeline for that degree, we like the opportunities much as we ever have. We are patient and we will not put our partner relationship at risk by discussing it further.
We continue to feel very good about Yale University. And now I'll turn it over to Rob.
Rob Cohen
Thanks, Chip. I want to speak briefly about our product and partner suite.
Chip just talked about our new enterprise program with Simmons College. The enterprise program model is another way to further integrate with our client, as well as expand our ability to penetrate our target market.
We can now address degrees we couldn’t before, provide broader service to our partner universities and impact additional students and faculty and institutions all while driving revenue and growth for our business. Speaking of impact, we reasonably released our second annual impact report.
This report challenges preconceived notions about my education and shows that 2U enabled degree programs were having a positive effect on students and faculty around the world. It is part of our larger effort to remain transparent and drive important conversation about how online education to be done well and what happens when it is.
There is a wealth of information in the report and we encourage you to read it. It can be found at our Web site and a direct link is included in our earnings release.
Before I hand things over to Cathy, I want to provide a couple of additional summary facts and highlights from the quarter. In Q1, we launched three previously announced programs.
Our second business degree, this one through Syracuse University's Whitman School of Management; our second data science degree, this one through Southern Methodist University and our first counseling degree through the Family Institute at Northwestern University. Additionally, we have begun marketing for all other schedules for 2015 launches.
Our dedicated team is providing active ongoing support for 16 launch degree programs as of March 31. A couple of quick numbers to illustrate this undertaking, 83% of all students that started one of our programs inception to date had graduated or still enrolled.
During the quarter, we enabled nearly 1,300 live sessions a week with an average class size of 11.9 students. Finally, at the end of March, our partner program total student enrollment have reduced inception to date tuition bookings for our university partners of 795 million.
Now I'll turn it over to Cathy to take you through the financials.
Cathy Graham
As Chip has already told you, we kicked off 2015 with another strong set of financial results. Both revenue and earnings measure showed significant year-over-year growth and exceeded our expectations across the board.
A $34.6 million, first quarter revenue exceeded the comparable 2014 period by 31%. As is typical, revenue growth was driven primarily by increases in full course equivalent compared to the prior year period first quarter FCEs increased by 33% offset slightly by a 2% decline in average revenue per FCE.
As a reminder, small fluctuations in average revenue for 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 first quarter, 67% of FCEs and 72% of revenue came from the four programs in our first launch cohort. By comparison, in the first quarter of 2014, the first launch cohort contributed 86% of FCEs and 88% of revenue.
Our first quarter earnings measures also showed significant progress, moving us even further down the path to profitability. A $1.6 million, our adjusted EBITDA loss showed a 58% improvement over the prior year period.
Adjusted net loss showed a similar trend, improving by 34% on a dollar basis and 51% on a per share basis. As it's been the case in recent quarters, our first quarter earnings performance was driven by higher-than-expected revenue, headcount and other operating efficiencies and marketing efficiencies tied to our expanding MPV strategy.
From a balance sheet perspective, we ended the first quarter with $83.1 million in cash and a 3 to 1 ratio of current assets to current liabilities. This balance sheet strength provides the foundation for our strategy of driving growth through continued investment in the launch and scaling of new programs.
As the business continues to perform, we are raising our expectations for the rest of 2015. We expect revenue to be between $34.1 million and $34.6 million for the second quarter, reflecting 39% year-over-year growth at the midpoint of the range.
This guidance confirmed the shifting trend to sequential growth between the first and second quarters that we discussed in our initial 2015 guidance commentary. In prior years, we have seen revenue decline in the second quarter because our early programs have fewer class days during that quarter than in any other.
We're now seeing shifting academic calendars in those more mature programs and newer programs with heavier second quarter schedules, altering our pattern of revenue distribution. For the full year, we are increasing our revenue guidance to be between $145.6 million and $147.4 million.
At the midpoint of the range, this implies year-over-year revenue growth of 33%. Looking at earnings measures, we expect our second quarter adjusted EBITDA loss to be between $6.3 million and $5.9 million.
Note that though our pattern is generating lower sequential revenue in the second quarter is reversing this year. Our pattern is recognizing a larger sequential adjusted EBITDA loss is not [ph].
In past years, this larger sequential loss is been driven by two factors. The sequential revenue decline and the fact that second quarter has substantially higher amount of annual and periodic costs, including for graduation, on campus, and other physical program activities.
For 2015, while the revenue driver is reversing, the expense driver is not. For the full year, we now expect our adjusted EBITDA loss to be between $10.2 million and $8.7 million.
At the midpoint of this range, this implies year-over-year adjusted EBITDA loss improvement of 36%. Before I hand things back to Chip for his closing comments, I want to give you some thoughts on the Simmons enterprise program from a financial perspective.
As you have already heard, our enterprise program model will aggregate a number of degrees in this case file to create FCE and revenue base at steady state that is similar to a typical 2U enabled program. So how will the program scale, given the degrees within the program, roll out over a 12 to 24 month period?
Our expectation is that it will scale very much like a typical first program in a degree vertical. In the first program FCEs in revenue generally scale on a concave curve over the first few years, reflecting the relatively long-term nature of building a prospect funnel.
In the Simmons enterprise program, four of the five degrees are in multi-program verticals, meaning they will benefit from the marketing funnel we have already developed for one or more programs in that discipline. Because of this, MPV programs tend to generate FCEs and revenue faster than the first program in a degree vertical, more along a convex curve over the first few years.
We expect that the stage rollout of these degrees offset by the faster growth curve of an MPV program will make the Simmons enterprise program scale very much like a typical first program. So how about the cost side?
By aggregating degrees, we can create enough scale to share a number of operating and overhead functions in a cost-effective way. Also, we will by necessity need to somewhat limit the flexibility in developing course content to contain costs.
We don't believe that the sharing of functions or the limitations on content creation will in any way impact the quality of the education being delivered or the student and faculty experience. This enterprise program will still benefit from the complete 2U platform including all of the innovative technology and white glove services we provide.
So by aggregating degrees to create scale and by adjusting our cost structure to match, we expect the Simmons enterprise program will look very much like a typical first program in all ways. It should require a similar amount of net negative cash investment and it took $9 million to $10 million range.
It should reach adjusted EBITDA and cash flow breakeven around the same time, end of year three or beginning of year four and it should have similar margins at steady state at the lower end of our mid 30s target. All in all, a great model to drive continued growth and profitability, expand market opportunity, and deepen relationships within our university partners.
Chip?
Chip Paucek
Thanks, Cathy. We end every earnings call with a story that emphasizes the real impact and outcomes we produce for our clients.
The value we create for both the individuals and the institutions. Why?
Because we believe the impact on the individual lives will ultimately be predictive of the financial future of this Company. Today we want to talk about student satisfaction, which we believe would be a major driver of our continued growth.
I want to take a moment to share a student's perspective on the impacts of 2U enabled program has had on her life. Elizabeth is part of the inaugural class at Berkeley’s Master of Information and Data Science Program.
She came to my attention the day we launched our second annual impact report, because she unsolicited and unprompted wrote not only a glowing review with the report, but a candid story about her personal experiences in our Berkeley program. For the record, we didn’t ask her to write, we didn’t know she plan on doing it.
She shared her story publicly in a blogpost on her own. Her words honestly gave me chills.
Elizabeth lives in Chicago. In the post she says “I’m actually in school at Berkeley”.
She goes on to talk about the amazing support she received from Berkeley staff and faculty and specifically calls out the role 2U is playing her experience. “The support from 2U to ensure a seamless experience and provide ongoing encouragement is outstanding.
I truly believe 2U’s programs will continue to open the opportunity of incredibly high-quality education to many who would not have considered it before.” Elizabeth states the students and graduates from online programs have the power to change the perception of online education.
How? It's simple.
Through their performance of their companies and the contributions to their communities, people will notice. This is about the highest quality education delivered online.
This is what we mean when we talk about impact and outcomes and eliminating the back row. It's about Elizabeth and students like her around the world giving them incredible experience that ultimately transforms their lives.
Elizabeth and her classmates are about to graduate and we congratulate them on this great achievement. And with that, Cathy and Rob and I welcome your questions.
Operator
[Operator Instructions] Our first question comes from Michael Nemeroff with Credit Suisse. Your line is open.
Michael Nemeroff
Great. Thanks guys.
Congratulations on a good quarter. Thanks for taking my questions.
I appreciate it.
Chip Paucek
Thanks, Michael.
Michael Nemeroff
Chip, just a couple for you around this new enterprise program. So you announced multiple program verticals now it sounds like this is a multiple vertical program.
Why Simmons? Will there be others have other customers express interest in this approach and anything you could share about -- around that would be helpful?
Chip Paucek
Yes. Thanks, Michael.
So yes, others have. Obviously, this is new.
We have been working on it for a little while. So others have expressed interest.
I would say on why Simmons? All aspects of the Simmons partnership to date have been pretty fantastic.
The school is great to work with and flexible in their approach and the degrees we have with them today, honestly it has all exceeded our expectations. They have been very strong.
So that great relationship sort of extending out into this new model requires some work on both sides to really get it right and when I said I thank them for their flexibility and their imagination, we did this together. So a great partner to test this out with.
Michael Nemeroff
One of the questions I get from investors a lot is, is why do the schools give up such a large piece to the tuition? Is there anything that you could share with us about how well these schools are doing, especially someone like Simmons?
How much extra capital they bring into the extra tuition, they bring into the school? And any -- and anything anecdotally that could enlighten us as to why these schools really like it even if they give up a lot of tuition dollars?
Chip Paucek
So in this particular case, what is often is I can actually point you to a direct public blogpost that the provost Katie Conboy of Simmons wrote and literally send out to her entire community that is where she talks about the impact of this partnership to date having a very transformative effect on the school. So her words will be much more powerful than anything I could say, and I will figure out a way to get that out to the overall investor community, maybe on our investor relations page.
But it's pretty incredible, because even that we had no idea they were sending it out and it went to everybody with a Simmons e-mail address. So we were super proud of it.
I mean, in general, Michael we really believe that the way we create value for ourselves is by creating value for our partners and for the students. And if we sort of just keep that front and center, we think it all sort of workout in the end, long-term.
It really is about driving that outcome. And when you look at something like the enterprise model, the notion of no back road, the reason we love it, is we think its not just a metaphor for the student experience with [indiscernible] in the programs, but its also a metaphor for the university partners.
I mean, all of these leaders at our schools has had to really lean in, in a major way to do this, its fully transforming not just the method of instruction but all the business processes that the university exists on. So, it really does take a significant leadership commitment.
I feel like, we talk about the origins of the company really that the inspiration is not just technologies, but that institutional will. And these guys have all made a commitment to doing it this way which is not easy.
So, we love the idea of the enterprise model allowing us to expand with our schools in a way that really wasn’t possible previously.
Michael Nemeroff
That’s helpful, Chip. And then, you also mentioned then and understandably so that there is pretty large market opportunity probably bigger as you do MPVs and now the enterprise program.
And you mentioned that you were going to evaluate, accelerating the number of programs that you launch, I assume after you get the adjusted EBITDA positive. Could you tell us what the factors will be in deciding exactly how many or how fast that you go?
Chip Paucek
Well we are still absolutely committed to profitability -- adjusted EBITDA profitability by ’17 as we discussed previously. We’re not backing away from that.
But as we get there closer, I think it’s fairly obviously to those that know our business well that the loss is decelerating faster than expected. So, we’re making more progress on the bottom line than was obvious at the time of IPO.
And so, because of that currently we’re evaluating how much faster we could go. What's interesting about our pace is in 2013 we launched five programs.
So, five programs for us is actually normal. So the commitment of doing no fewer than five, we’ve been running on that for quite a few years now.
We think the existing operation could grow -- could go up to a larger number without significant change to the structure, but we’re being thoughtful and careful because the most important thing is that we don’t sacrifice quality at all. They have to be great, every single one want to be.
That’s really what we’ve become known for, and I don’t -- I’m trying to say that without making a sound like we think we’re God’s gift to education like it’s important that we know internally, this company knows that everything is being built on driving quality and we will not get ahead of ourselves there. With that said, we are certainly evaluating how many more beyond five to do.
Michael Nemeroff
To that point on the profit or about the loss accelerating or a little bit faster than expected. When I extrapolate from these results, from this quarter and over the last quarter, couple of quarters -- it appears as if you could get to adjusted EBITDA positive sometime this year if you wanted to.
Cathy, could you let that happen or would you purposely avoid it and spend a little bit more and hit the gas on the growth in that case?
Cathy Graham
So I think if you talk about 2015 when you say this year our launch schedule is locked. But as you talk about going into 2016, that’s where we’re talking about what it is we should be doing.
And you would have heard Chip say in his comments that we’re looking at not only how fast we go, but when we start doing it. We have talked entirely, regularly about the fact that our -- the number of programs that we choose to launch has been a balance between growth and profitability.
That’s been our mantra from the time we were on the IPO road show, and that balance will continue to be a part of that judgment that we make. As Chip said, we’re not backing off 2017, but it is possible that we decide to change the trajectory such that, we move -- that we are able to launch additional programs.
We’re not prepared to go there yet.
Chip Paucek
But we’ll let you know as soon as we know.
Cathy Graham
Yes.
Michael Nemeroff
Okay. Thanks guys.
Thanks for taking my questions. Nice quarter.
Chip Paucek
Thanks, Michael.
Operator
Our next question comes from Michael Tarkan with Compass Point. Your line is open.
Michael Tarkan
Thanks for taking my questions. So Chip on the enterprise program modeling, I know you are -- prior to this you had been targeting programs that you could scale to a larger size, and maybe you touched on this earlier.
But by rolling up some more of the smaller programs into a larger program, can you maybe give us a sense for how much more of the market this could open up?
Chip Paucek
We think that the reason we love this is, there are some really excellent schools at current universities that we simply wouldn’t have been able to work with before. And so, by being smart in terms of aggregating these degrees together we can share some overhead, not sacrifice quality and therefore penetrate more of an existing university which is certainly given that we set up operations and we actually have to build a structure to run that school.
We think that, that provides additional leverage. It’s tough for me to tell you just how much bigger the penetration would be.
We were trying to give a better illustration of what we’ve been thinking lately with that 180 example, and the flexibility there is, we do think that there are 50 obviously verticals today. And I’d say the lesson learned in post IPO is that their MPV is working really well, and so the notion of having more than two in each of those 50 verticals is smart, that’s becoming obvious to us.
There will be some like an MBA vertical where we do more, because it’s so big and there’ll be some where we do fewer. This allows us to expand both MPVs and programs that are not MPV today.
So, we think it helps potentially fill out that illustration of those 180 programs. And if you start getting to that five, obviously the company is very large.
I think Michael, the thing about to you that’s most interesting and sort of transformative from a business model perspective, I really believe it’s pretty rare to find a company that has this kind of organic growth potential if you just put capital to work, and that’s where we are today just focused on driving quality programs. Enterprise model just allows us to extend it a bit.
Michael Tarkan
Okay. And then just to quickly follow-up on that, are the revenue share and contract term lengths, are they consistent with the new model?
Chip Paucek
Yes, as you know we don’t specifically talk about any individual deal. But yes, though overall it’s safe to say that it’s very similar.
Michael Tarkan
Okay. And then last one for me, Chip I believe you have entered into a couple relatively high profile corporate partnerships with Google and Goldman, and I’m just wondering if you can touch on maybe those relationships or what the strategy is in the corporate channel?
Thank you.
Chip Paucek
Thanks Michael. So, the corporate channel is something that we’re in early days of exploration and we have a couple of deals where we’ve got a partnership that allows their employees to get the benefit of all of the 2U programs.
We think that’s a big deal long-term, and as we aggregate a bigger sort of portfolio of opportunities for people, we think it even becomes more compelling to corporate partners. I’d say one, notable change post IPO is we’re getting a lot more people coming to us first and then to one of our university programs, that’s new, and we are pleased to say we think its because we’re getting known for delivering really high quality.
Now these are real Berkley programs, George Town programs, these are now 2U programs. So ultimately the most important thing is the great university we stand behind them.
Corporate partnerships allow us to potentially find a sort of new path from a protruding standpoint, and it’s pretty attractive to our university partners because the audience on the other side is an attractive audience. So, we don’t have any new ones to announce, but we’re working on them.
Michael Tarkan
Great. Thanks.
Operator
Our next question comes from Andre Benjamin with Goldman Sachs. Your line is open.
Andre Benjamin
Thanks. Good evening.
Cathy Graham
Hi, Andre.
Andre Benjamin
First question on the enterprise programs, what logistically actually needs to be done differently to get the enterprise programs off the ground and operate them versus the single ones. I’m just trying to understand how this is new and whether something got solved or was it just a natural evolution?
I guess, I know it’s very early, but any view on how maybe the mix of enterprise programs would play-out versus your more traditional single programs?
Chip Paucek
Yes, well it is certainly new. But we don’t want to get into too much detail on how we’ll actually do it, because we don’t want to signal everything to a competitor.
But one example of a change to allow it to work is instead of having a dedicated floor of support and admissions for each program, we’ve aggregated them into one floor, and that provides sort of cost savings in a pretty material way. Such as one example I could give you of something we’re doing differently on the enterprise model.
But we actually do think it’s a nice evolution, and we don’t see this in any way as fundamentally different or pivots of any kind.
Andre Benjamin
Great. And should we take this to mean that, you’ll primarily still be working with for lack of a better word, just like the top schools that had that national or very regional brand or should we take this to mean that you’re now willing to work with some lower rank schools because you can be profitable despite their smaller reach by, by aggregating their programs?
Chip Paucek
Yes, we’re definitely focused on the top tier segment, and we don’t expect that to waver anytime soon. We feel like we’re the only company that’s proven that they can scale and lead institution online and most importantly do it a quality level that is exceptional.
So, just note the enterprise model, the students won't feel any difference; it’s the same to students.
Operator
Thank you. Our next question comes from Corey Greendale with First Analysis.
Your line is open.
Corey Greendale
Hi, good afternoon.
Chip Paucek
Hi, Corey.
Corey Greendale
Hi, congratulations on the quarter and the new expanded partnership with Simmons. On the later point, this maybe a little bit of a silly question, but the Simmons nursing and social work programs are large enough to be standalone.
MBA is a large vertical, I’m just curious why is that bucketed with these other programs instead of that saying that, that alone could be a large program?
Chip Paucek
We do think that obviously Simmons has impressed us on the side of enrollment, it’s been very strong. And clearly the way we’re aggregating these five degrees we think is smart and allows us to do it with lower risk.
We evaluate every program as you know with our program selection algorithm that gives us a market prediction, and different schools have different results in that algorithm. And this might have been a program that maybe on its own we wouldn’t have been comfortable enough launching and it could be either because the market prediction is not as high as other schools or it could be because the school maybe not want the size, that’s very often one of the reason that we’ve said no in the past to a school, is that the school was not ready for something to be lets say 500 students per year.
So in this case, could those individual degrees surprise us? Sure, they could.
But from a market perspective we thought this was the right call for that particular combination of university and degree offering.
Corey Greendale
That’s quite interesting. I think intuitively one wouldn’t have know that for that fact that your algorithms spits that out that’s interesting that, I think that’s definitely about the algorithm that there’s a lot of value there.
Chip Paucek
Yes, I mean, Corey we think the algorithm is maybe a sort of underreported part of a story. We’ve got intimidated scientists that have done really excellent work to help us really be much more scientific about how we go about this, and we think it is a competitive advantage to the company long-term, no doubt.
Corey Greendale
Great. And then, I had a couple of clarifying questions about a couple of your comments earlier.
Just to make sure that communication is, everyone is on the same page. When you talk about EBITDA positive in 2017, during for the full year or you will have at least one quarter that is positive in 2017?
Cathy Graham
For 2017.
Corey Greendale
For the full year?
Cathy Graham
Yes.
Corey Greendale
Okay. And then, on the new communication about potentially accelerating, I’m thinking away that you think you can hit profitability in 2017 and accelerate prior to 2017.
So, you may have more programs in 2016, am I misinterpreting that?
Chip Paucek
No, that’s the general idea. We are just not ready to give you an indication as to how many yet.
Corey Greendale
Okay. Now I understand it didn’t want anybody to be surprised that that happened.
Then, next question, on the -- and looking -- I scanned through the queue quickly since you were nice enough to put it off before the call. You’ve been growing headcount in program marketing and sales about 36%.
I think that’s been pretty consistent. Is there any reason not to view that as kind of a leading indicator of where you think FCE growth will be for the foreseeable future?
Cathy Graham
We have quite frankly been frontloading some of that to prepare for -- to prepare for continued growth. I’m not sure it will be a consistent straight curve or sort of -- you won't necessarily see that continue.
There maybe fits and starts through those, but yes the fact that we are hiring in that area to market and promote -- should we do to believe that we have got a pipeline there that we’re ready to work with.
Corey Greendale
Okay. And I just had one question on the competitive front so much, Chip.
I’m sure you saw the announcement from University of Illinois that they’re doing some Coursera to have some form of MBA online for 20,000, I think it’s a different value proposition than yours, but its is top 50 school. What is your reaction when you see programs like that, do you see if that ends up, that there is a different portion of the adjustable market that’s interested in that value proposition and that kind of eats into your TAM or how do you think about that?
Chip Paucek
Yes, we think in that particular case that that is really going to have a bigger impact on maybe the proprietary sector than on the 2U clients from a positioning standpoint what the degree actually is. I will tell you overall, we think the more people that come in on some level the better, because preconceived notions of online education are really the big problem.
So, we’re fighting that every day, and the more people that think of a non-profit university the better when they think of online Ed, that’s not been the case to date. So, in that particular one, we don’t worry about it as much from a competitive standpoint and I do [technical difficulty] write that the value prop that’s being offered there is quite different.
So, we are continuing to focus on just building what we think are the absolute top tier programs in each of these verticals.
Corey Greendale
Okay. So is it fair to say that you think at this point in the adoption curve we’re more -- needing more validation of online in the upper echelons of higher ed as opposed to been getting more price sensitive?
Chip Paucek
Yes, we really believe that we get much more wind in our back long-term from a TCA perspective than we do headwinds based on more people coming in. I mean look, these are big, big markets.
So investors should know not every university in the country is going to sign it to you and that’s perfectly fine. We’re not going to be perfect for everybody, and we’re also not trying to launch everybody.
So, when you see somebody launch there are bunch of reasons why somebody may launch a program without us. But as more schools come in at that top tier, we think it helps us more than it hurts us.
Corey Greendale
Thanks. And again just, great job on the quarter and a great job in terms of higher communicating with the street and setting expectations [indiscernible] into that.
You’re really appreciated.
Chip Paucek
Thanks, Corey.
Corey Greendale
Thanks.
Operator
Our next question comes from Michael Huang with Needham & Company. Your line is open.
Michael Huang
Thanks very much. Good afternoon.
Chip Paucek
Hi, Mike.
Michael Huang
Hi, there, just a few questions for you. So, just in terms of kind of the timing of the introduction of the enterprise model, I mean, given the fact that there is no shortage of opportunity in the single degree program and you’ve been so successful there.
I was just curious around kind of the motivation for launching this now. And then kind of as a follow-up to that previous question, I mean are you seeing anything from a competitive standpoint that perhaps is the catalyst for getting this going?
Chip Paucek
Great question. No, it really just wasn’t about competitors, it’s about DNA change.
So when the school launches with 2U, they are doing so much work on their side to fundamentally change how they’ve done almost everything, except the great academic experience, I mean they do that exceptionally well. From a business model standpoint, it’s really hard to launch with us.
Its hard for both sides, building these programs at this quality level is really tough. And so once you’ve got a great partner that’s gone through the heavy lift from our standpoint being able to sign more schools and what typically happens is the other schools that that university partner and obviously not at every university but typically you get some that are clamoring for sort of this level of quality even if they might not want 500 students or might be in a program discipline that we don’t believe can get there.
So, this was much more about extending our reach within our great partners. I feel like this whole notion that, this transformation is happening.
We’ve been running the company for seven years and it didn’t look like this seven years ago. The world is really starting to move, and the horses left the barn and our schools are all on the horse and they’re really going after it.
And so, being able to work with our great leaders to do more, we think it’s pretty appealing. Now it does have a competitive impact Mike.
So its not why we did it, but I even said in my remarks earlier that clearly there are moments where if I could go back, if we had the enterprise model there’d be some programs now at various partners that we’d be able to launch and we’d be ornaments to somebody else. So, there is a competitive component to it.
Michael Huang
Got you, okay. And then maybe one for you Cathy, in terms of the revenue upside in the quarter, was that driven primarily by an FCE out performance, obviously you saw some nice acceleration in growth in that metric.
And then, kind of drilling into that if that’s the case, I mean was there any cohort that just knocked it out of the park? Was there any out performance across the new cohort?
Thanks.
Cathy Graham
So Mike, no, it was not really from any specific program or class. What we’re seeing is we’re -- we’ve got a team of people who are doing a tremendous amount of work on retention of existing students and putting -- we’ve talked about coaching on our last call, and some of those other things that we’re doing to really expand the service offerings and make ourselves even more valuable to the students.
And a nice byproduct of that is that, we’re seeing some movement in retention that we’re able to impact. And so, a lot of it was coming out of that, returning students.
Chip Paucek
Hey, Mike one quick comment in addition to what I said before to your first question. I want to just reiterate to everybody on the call that the enterprise model was about capturing opportunity.
It’s not because there aren’t a lot of really exciting interesting degree verticals coming our way. Just stay tuned, there’s a lot there.
Michael Huang
Great. Okay.
Thanks guys. I appreciate it.
Cathy Graham
Thanks.
Operator
Our next question comes from Ben McFadden with Pacific Crest Securities. Your line is open.
Ben McFadden
Hi, guys. Thanks for taking my call.
Chip Paucek
No worries.
Ben McFadden
I just wanted to focus a little bit on the growth that you’re seeing in FCE in the 2013, 2014 cohorts. Is there any type of sense that you can or color you can provide us as far as how much of that is being driven by the secondary programs instead of the new primary programs?
Cathy Graham
So it would be hard for us to give you specifics. But anecdotally we are indeed seeing the beginnings of sort of this cross vertical marketing benefiting the first program as well as the second program.
We’re seeing this not only in enrollments in the schools but we’re seeing it in our own -- efficiency of our own marketing costs. So it probably at this point because we’re still in relatively early days are not driving from a percentage standpoint in the early cohorts anything major, but we are seeing individual places where we know this cross vertical marketing is having a benefit to the first school.
From a marketing efficiency standpoint as we ended the first quarter with a 3:1 ratio of lifetime revenue of a student to the total cost to acquire a student. You’ll remember at the end of the year that was sort of in the 2.9 or a little bit better range.
Chip Paucek
And at the time of IPOs …
Cathy Graham
2.4.
Chip Paucek
So that’s really the leverage in the model right there.
Cathy Graham
So we’re seeing the leverage of the model move forward and yes, it is having a benefit to the first program.
Ben McFadden
Okay. And then just on the core cohorts, can you just give us an update of as far as how you’re viewing those as, as whether you fully view them at steady state and exactly where the margins are on those businesses, because it still seems that they’re growing at least slightly at the same time?
Cathy Graham
Yes, they are growing. If you look at the cohort they’re growing as -- as we’ve said they continue to grow in that sort of mid-to-high single digits, and which is kind of what you’d expect for things that are approaching at or approaching steady state if you look at them together.
Some of that is just from the natural, where they are naturally in their cycle, but also remember that there are several of these where we have recently added offerings and that provides for us an opportunity to keep some measure of higher growth in these more mature programs. So, we are still seeing growth there.
From a profitability standpoint, they are adjusted EBITDA positive have been since 2013 and that continues to increase. If you look at them on a cohort basis which is as though you line them all up and they all started in 2009 with the first program.
So basically there is still a little bit of forecast in there. They’re in the mid high -- they would be, we’d anticipate in the mid-high 20s from an adjusted EBITDA margin.
And when you consider the fact that there are no second programs in there, those are all first program. That’s really kind of approaching steady state.
We talk about adjusted EBITDA margins on average in the mid 30s, but we say first program is generally somewhat lower than that; second program is generally somewhat higher. So we’re still getting growth and approaching what we would consider to be steady state profitability.
Ben McFadden
Great. Thanks a lot.
Operator
Our next question comes from Jeff Silber with BMO Capital Markets. Your line is open.
Jeffrey Silber
Thanks so much. Just one more question on the enterprise announcement.
Would it make sense then that we would see more of these with existing partners as opposed to a new relationship doing this from day one?
Chip Paucek
You’ll see both. So, we like this enterprise model, but we’ve got some new full programs come in and we’ve got some new logos come in and -- so both, Jeff.
Jeffrey Silber
Okay. We’ll stay tuned there.
And then a modeling related question, if I look at your technology and content development line, it looks like we’ve been seeing some slower growth in that expense. I’m assuming half of some of that is just leveraging what you have.
But is this the kind of new normal that we’ll see increases in that line item in the single digit to suppose to the double digits where we’re seeing your other expense line items increase?
Cathy Graham
I think that what you’re going to see is a slow -- if you think about this on where it should windup in terms of, as a percent of revenue. We sort of said steady state that’s kind of in the 11% to 13% of revenue at steady state.
So you’re probably going to see and again sometimes it will higher and lower. It’s hard to look at it on a per quarter basis.
But if you look at it over the course of years, you should see it start to trend down towards that -- the increases will still keep it trending down towards that level.
Jeffrey Silber
Okay, great. Fair enough.
Thanks so much.
Operator
Our next question comes from Alex Paris with Barrington Research. Your line is open.
Christopher Howe
Hi. This is Chris Howe in for Alex Paris.
Thanks for taking my questions.
Cathy Graham
Hi, Chris.
Christopher Howe
Hi. How are you?
Cathy Graham
Good. How are you?
Christopher Howe
Good. Aside from the, I guess potential P&L benefits from the Yale agreements.
I think from a branding perspective the upside is huge here. This most likely alleviates any concerns if there were any with future partnerships.
Have you seen this Yale partnership start to maybe raise some eyebrows among potential new partnerships meaning more opportunities are coming to you?
Chip Paucek
It’s a good question. I mean Berkley and North Western and George Town are not exactly some of these are -- they are all pretty excellent I guess is my point.
I mean the interesting thing about WashU and North Western is that they’re ranked higher than some of the IVs. So, we really feel like we had already established a reputation for being really high quality not just in the brands but in the delivery, the outcomes.
So, but clearly it did get a lot of attention, so that -- and it was positive attention for the most part. So, in the pipeline -- our pipeline is strong.
We feel very good about where pipeline is today.
Christopher Howe
Okay. That helps and then just, I guess one follow-up on Yale.
With them -- with having to possibly do a separate accreditation path for the PA program which I believe is not unprecedented given previous programs such as North Western. I’m curious how long it might take before you get approval for something like this and kind of what the timeline is going forward from there?
Chip Paucek
So, unfortunately as I mentioned earlier, I really can't comment on any specifics related to Yale, because it’s really not my place to do so.
Christopher Howe
Okay.
Chip Paucek
I will say that all of our programs have to go through these processes and today we’ve done well. But at the end of the day we have to be thoughtful about how we handle these things given that anything that I can say could affect the process.
So, we are simply not saying much purposefully but I do believe I said before and I will say again, we like that opportunity as much as we did previously.
Christopher Howe
Okay. And I just have one last question, if I may.
And I know this is the -- is this the first partnership that I guess list the physicals restraints meaning they can enroll multiple times a year and so, just kind of on that note?
Chip Paucek
Sorry, which program are you referring to? The enterprise model?
Christopher Howe
The Yale agreement. Is it the first partnership that lift kind of the physical constraints around how students can enroll in any given year?
Chip Paucek
No, actually pretty much all of our partnerships involve multiple start gates.
Christopher Howe
Okay.
Chip Paucek
Some more than others. And that's actually a good example of something that is quite a complicated change on the university side and requires a huge amount of institutional leadership, because that's different than how things have been done in the past.
Christopher Howe
Okay. Those are all my questions.
Thank you.
Chip Paucek
You’re welcome.
Operator
Our next question comes from Brian Schwartz with Oppenheimer. Your line is open.
Julian Serafini
Hi. This is Julian Serafini in for Brian today.
I had one question really actually. I really wanted to ask about the [indiscernible] conversation might be evolving with potential schools?
Now that you seem to be having some good momentum. Are you getting more questions along like the financials, or about the outcomes of programs that the schools are more concerned about the benefits.
Can you give a better color on that a little bit maybe?
Chip Paucek
Yes, I mean, most important to every one of our partners is without question the outcomes. This is a mission discussion before it’s a financial discussion.
So all of our partners are -- if you are Georgetown nursing, you are interested in training more excellent advanced practice nurses in the graduate [ph] tradition of Georgetown that’s -- it’s critically important. Now at the same time, it's got to be elaborate and be a solid business for them.
The sustainability is really important. So while they are not for profit enterprises, they obviously need to be successful and revenue is part of that.
So it's a combination, but I would say it's always been and there is really no change here. It's always been much more conversation about mission than it is about financials.
So that is not new. The nice thing for 2U and I will just taken other opportunity to plug our impact report, we actually thought our team did an awesome job on the impact report, because it’s quite pretty.
But more importantly the data is really critical and you start looking at 100% board pass rates for Georgetown and over 3,000 babies delivered in the midwifery program and really that is what this whole story is about. And long-term, I really believe that as long as we remember that, we are going to build a great business in the process.
Julian Serafini
All right. Thank you.
Chip Paucek
You're welcome.
Operator
This ends the Q&A for today. I'll turn it back to management for closing remarks.
End of Q&A
Chip Paucek
Okay. Thank you everyone.
We look forward to talking to you next quarter. #no back row.
Operator
Ladies and gentlemen, thanks for participating in today's program. This concludes the program.
You may all disconnect.