Feb 26, 2016
Operator
Good day, ladies and gentlemen, and welcome to the 2U Incorporated Fourth Quarter and All Year Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to turn the conference over to our host for today, Ed Goodwin, Senior Director of Investor Relations.
You may begin.
Ed Goodwin
Thank you, operator. Good afternoon, everyone, and welcome to 2U's fourth quarter and full year 2015 earnings conference call.
By now, you should have received a copy of the earnings release for the Company's fourth quarter and full year 2015 results. If you've 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 and Cathy Graham, CFO. We've a lot to share this quarter as well as a message directly from one of our university partners.
So we expect our prepared remarks to be a bit longer than usual. Of course, we'll reserve ample time for Q&A.
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 beliefs, 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 risks contained in the Risk Factors 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 undertake 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 would now like to turn the call over to Chip.
Chip Paucek
Thanks, Ed. Outcomes drive our business.
Student success drives university’s success, which in turn drives 2U’s success. 2U has just delivered the best quarter in its history.
Q4 2015 was adjusted EBITDA profitable. As a matter of fact, the entire year of 2015 showed tremendous progress.
Revenue growth in 2015 was very strong at 36%. Our progress on the bottom-line is even more impressive.
2015 adjusted EBITDA loss improved by 55%. In addition, our expectations for the future have improved.
We now expect Q1 of 2016 and Q4 of 2016 both to be adjusted EBITDA profitable. While we believe the year will still be adjusted EBITDA negative, the deceleration of the loss continues.
We are trying to get this company to profitability. Cathy will discuss that in a moment.
Progress of the business is been driven by our incredibly successful strategy of deploying multiple programs in the same academic discipline. We call this MPV, Multiple Program Vertical.
2U is at the epicenter of the rapidly evolving online education market. Great schools are seeing the power of what we deliver.
Our existing clients are demanding more programs. We have a new program to talk about today and a rapidly growing vertical from a partner that loves what we bring to the table.
Our partners are evolving and developing academic disciplines to meet new demands from students and employers. When we launched 2U, Data Science was a big unknown.
In 2014, we partnered with UC Berkeley to launch a Data Science program that did not previously existed on campus, it was a Greenfield. We like what we saw and in 2015 added a second program in that vertical with Southern Methodist University.
I am thrilled to announce today, a third program in that important vertical. Syracuse will launch Data Science Syracuse pending school, university and state approval.
Today the emerging discipline of Data Science joins business and nursing as one of our multiple program verticals with three or more programs in it, even though it didn’t exist just a few years ago. This announcement also marks our fifth program with Syracuse University making it our largest partner by number of programs and I think about that for a second.
For those that follow 2U in the last few years, Syracuse wasn’t a client at the time of our IPO. Now they have five programs.
Our relationship with Syracuse has really grown into an impressive partnership Go Orange. The overall business of 2U is truly diversified and doing it rapidly.
Let’s examine this for a moment. At the time of our 2014 IPO, we had nine launch programs with seven university partners, only one was an MPV program.
Today, we have 14 university partners with 29 announced programs in 20 verticals. Of our announced programs, 18 have launched and are at various points in the typical program life cycle.
Impressively, the programs launched since IPO are now in a position to drive real revenue growth in the future. There is a long lag between marketing spend to attract the students and that student being accepting to a program, then students pay for their program over their life as a successful student generating revenue for 2U as they take their course.
As such, new enrolment is an early predictor of future revenue. Our original four programs launched between 2008 and 2012 make up a cohort we prefer to in the core four.
For a long time, they’ve dominated our business as they’ve all reached or in some cases vastly exceeded our steady state new student enrollment targets. However, some new programs are approaching steady state new student enrollments more quickly than expected.
To demonstrate, we are providing additional color on the top 10 programs by new student enrollments in the calendar year of 2015. This color will give investors clarity on the diversification occurring inside the business and we implant to include this data in each Q4 calls.
We’ve listed the top 10 programs based on new student enrollment in 2015 on our investor relations page. In order from first to ten, MSW@USC our first social work program.
Nursing@Simmons our second nursing program, USC Rossier Online, our teaching and education program. MPH@GW, our Public Health Program, MSW@Simmons, our second Social Work Program, MBA@ Syracuse, our second business program, MBA@UNC, our first business program, Nursing@Georgetown, our first nursing program, Datascience@Berkeley our first Data Science program, and @WashULaw, our law and legal studies program.
We like what this list shows. First, while the core four is important and we love those programs.
This company is not a four trick pony, only two of the original core four are in the top six. Second, MPV is massively important.
The first two MPV programs launched in 2013 and 2014 were in the top five for new enrollments in 2015, MPV programs are ramping toward our steady state targets and doing it more quickly. Syracuse business is already sixth on the list and it wasn’t launched until Q1 of 2015.
Third, newer verticals are important to our long-term goals as a company. Notably, our first program in the public health vertical has gotten very large and is already fourth on the list.
As a reminder, new student enrollments are a leading indicator of revenues. These 2015 new student enrollments will show up in revenue over the next two or more years as students earn credits towards their degrees.
So what about future growth? We expect six new program launches in 2016, nine in 2017 and 12 or more in 2018.
As of today, we have announced the 11 future programs which represent a significant portion of our targeted program launches for the next three years. I am also pleased to be able to confirm our 2016 program launch schedule with you now.
We plan to launch six new programs in 2016 and they are; the enterprise program with Simmons College made up of five separate degree offerings in different disciplines. As a reminder, four of these five degrees are in multiple program verticals allowing us to optimize marketing across most of this enterprise program.
This program will launch in March with the first two of five degrees in MBA and in healthcare MBA. The remaining three degrees in Applied Behavior Analysis, Strategic Communications and Public Health will start classes between the fourth quarter of 2016 and the second quarter of 2017 tracking to our initial expectations that in enterprise program degrees would start up individually over a 12 to 18 month timeframe.
In September, we expect to launch Nursing@USC, our third nursing program and our first on the West Coast. Also targeted for September launch, our two programs with NYU, School Counseling and Speech Pathology.
These are the first of several announced programs with NYU and our first programs in each of these important degree verticals and rounding out our launch schedule for 2016 are two programs with Syracuse University, each expected launch in October. The iSchool@Syracuse program will offer three related information management degree is our concentration, the Engineering@Syracuse program will offer three related computer engineering degrees including a degree in cyber security.
Of the six programs expected to launch in 2016, four are in new degree verticals and two USC nursing and Simmons Enterprise or MPV, or in the case of Simmons, largely MPV programs. This reflects the balance we’ve discussed between launching the degree verticals necessary for the long-term expansion of our business as we’ve seen with public health and adding the second, third and fourth programs that help us gain efficiencies and drive margins.
Look for more program announcements over the coming months. We’ve got plenty more on the way.
Now, I want to turn it over our CFO, Cathy Graham.
Cathy Graham
Thank you, Chip. While our financial results for fourth quarter and full year 2015 largely speak for themselves, I’d like to give you some color on the results before turning to our thoughts for the future.
We closed out 2015 by again delivering significant year-over-year revenue growth. At $43.3 million for the fourth quarter, and $150.2 million for the full year, revenues exceeded the prior year periods by 41% and 36% respectively.
As is typical, revenue growth in both periods was driven primarily by increases in full course equivalents. For the fourth quarter, FCEs increased by almost 44%, offset slightly by a 2% decline in average revenue per FCE.
For the full year, FCEs increased by about 39%, also offset by a 2% decline in average revenues. As a reminder, small fluctuations in average revenue per FCE are driven primarily by program mix reflecting the relative program tuition, enrollment and days and session during any period.
FCE increases were generated across our program portfolio continuing to diversify our revenue days. In the fourth quarter, 53% of FCEs and 56% of revenue came from the four programs in our first launch cohort.
By comparison, in the fourth quarter of 2014, the first launch cohort contributed 72% of FCEs and 76% of revenues. At $1.9 million for the fourth quarter, we are very pleased to announce our first ever adjusted EBITDA positive quarter.
While the fourth quarter is typically our highest margin quarter and being positive here does not mean that all subsequent quarters will be positive, reaching this milestone is a meaningful indicator that we remain on the path to our adjusted EBITDA profitability goals. We continue to expect to be adjusted EBITDA positive for full year 2017.
Fourth quarter performance brought our adjusted EBITDA loss for the year to $6.6 million, both fourth quarter and full year adjusted EBITDA measures show significant improvement as we closed out the year. On a year-over-year comparison basis, adjusted EBITDA showed a 441% improvement for the fourth quarter and a 55% improvement for the full year.
This equated to approximately 600 and 900 basis point year-over-year improvements in adjusted EBITDA margin for the fourth quarter and full year respectively. We are also excited to confirm the cohort level expectations we shared with you during our fourth quarter call.
Our first launch cohort consisting of the four programs launched prior to 2012 had a 27% fully allocated adjusted EBITDA margin for full year 2015. Remember that we expect programs will achieve an average adjusted EBITDA margin in the mid 30s, with the first programs in a degree vertical being somewhat lower and subsequent programs being somewhat higher considering that all of these are first programs, this cohort is approaching steady state margins.
Further, our 2000 launch cohort of programs had a fully allocated adjusted EBITDA margin of 4% for the year as these programs have only been operating for between two and three years, this launch cohort passed the breakeven point sooner than we would have typically expected. Note that in the fourth quarter, we recognized a non-cash charge of $884,000 related to expanding and consolidating office space, specifically triggered by our signing of a new headquarters facility lease for late 2016 or early 2017 occupancy.
We had a route for this charge to be as high as $1.5 million, so about $600,000 both the quarter and the year as adjusted EBITDA overperformance which related to the lower lease-related charge. From a balance sheet perspective, we ended the fourth quarter with a $183.7 million in cash and no outstanding debt.
Though we continue to track towards sustainable adjusted EBITDA profitability, we will continue to use additional cash for technology, content, and other infrastructure investments in support of program and corporate growth. Given our current cash position, we continue to believe that we can increase our program launch schedules from six programs in 2016, to nine in 2017 and 12 or more in 2018 while maintaining progress towards steady state margin.
Let me be clear, we do believe our current business plan is fully funded. Now standing and improving on the initial look at 2016, we gave with our third quarter results.
We’ve provided specific first quarter and full year 2016 guidance. With these ranges, it’s clear that we are expecting revenue growth and margin improvement trends we saw in 2015 to continue.
On the top-line, we are now expecting revenue of between $46.2 million and $46.7 million for the first quarter and $197.3 million and $199.8 million for the full year. At their midpoints, these ranges imply year-over-year growth of 34% for the first quarter and 32% for the full year.
With regard to revenue distribution across the 2016 quarters, we are expecting revenue to step up sequentially throughout the year with the percentage step-up accelerating somewhat from quarter-to-quarter. To help you further with your quarterly models, the guidance provided in our earnings release also states that we currently expect 47% to 48% of our 2016 revenues to be recognized in the first half of the year.
Our guidance also reconfirms our commitment to keep 2U on the path to profitability in 2016. On the adjusted EBITDA line, we are now expecting adjusted EBITDA profitability of between $400,000 and $700,000 for the first quarter and an adjusted EBITDA loss of between $2.3 million and $400,000 for the full year.
At their midpoints, these ranges imply year-over-year improvement of 134% for the first quarter and 80% for the full year. While we do not currently plan to reach adjusted EBITDA profitability for 2016, we do expect both the first and fourth quarters to be adjusted EBITDA positive.
As is typical, we expect that our largest adjusted EBITDA loss quarter will be the second as this has the highest amount to the annual and periodic cost including for graduation, on-campus and other physical program activity. Again to help you with your quarterly models, the guidance provided in our earnings release includes supplemental guidance on the adjusted EBITDA loss margins we expect for this first and second halves of the year.
Those that we are expecting to be adjusted EBITDA profitable for the second half of 2016 as a whole. Before leaving the subject of adjusted EBITDA margin improvement, I want to remind you that as we approach adjusted EBITDA breakeven, we are executing on our stated plan to increase our annual program launch schedule and make other infrastructure investments to ensure continued growth and operational quality.
As we start building and marketing new programs as much as the year before launch targeting nine program launches for 2017 is adding cost to 2016. We will also continue to upgrade corporate systems to support our growth including doing a major ERP installation requiring significant implementation costs.
We can absorb these costs and still deliver margin improvement, but as we’ve said before, as we invest to serve increasing market demand, and maintain strong top-line growth, post-breakeven adjusted EBITDA margin improvement will be at a more moderate pace. Finally, before I hand the call back to Chip for his closing remarks, I’d like to spend a minute on our capital expenditure expectations for 2016.
In addition to creating content for a larger number of new programs, we will be building out our new headquarters building, as well as new or expanded facilities in both New York and Denver. As such, we expect capital expenditure to be significantly higher than usual for 2016, likely in excess of $40 million.
About a 20% of this total will be paid by our headquarters’ landlord in the form of tenant improvement allowances, so will not be a use of cash and we expect capital expenditures to return to more normal levels in 2017. This temporary increase in capital expenditures was anticipated and does not impact our ability to execute our increasing program launch strategy.
Closing out, what a great year and a great outlook. Chip?
Chip Paucek
Thanks, Cathy. It’s important to remember that our results are driven by thousands of successful outcomes.
As a company, we are trying to end the segregation of the online students learning the line between campus and online students, so then the end, they are all just great students. Last week marked an important step in the blurring of that line with the announcement of the formal launch of Campus Scaffold at the Milken Institute School of Public Health at the George Washington University.
Students enrolled in the masters in public health on campus and online learned from the same faculty. The study the same curriculum.
They will earn the same degree. While beginning in the spring 2016 term, Milken is ending the segregation of these groups.
All MPH students will have the opportunity to take up the 15 credits in either program format. We think, this is a critical strategic step by one of our partners with long-term implications that we love.
We hope to see more of this over time. Long-term, it’s all about outcomes for students whether they are online or offline.
And with that, I am now open to receive your questions.
Operator
Thank you. [Operator Instructions] And our first question comes from Michael Nemeroff of Credit Suisse.
Your line is now open.
Michael Nemeroff
Hey guys. Can you hear me okay?
Chip Paucek
Yes, we can hear you fine, Michael.
Michael Nemeroff
Great, congratulations on a great quarter and adjusted EBITDA profitability. Really nice to see.
Chip Paucek
Thanks.
Michael Nemeroff
I want to just – my first question is on the last thing you had mentioned about the Milken Institute. How should we think about all of the schools that you are working with?
Is this something that you are in discussions with other partner schools, where even the established programs you have already that are just online? Or other schools thinking about combining or mixing the online and on-campus like you provide?
Chip Paucek
Yes. We think strategically, it’s really important to think long-term about where online education is right now.
If you compare it to – it’s going to sound a weird, let me get there. If you compare it to online dating, you think about that 15 years ago, scandalous and you didn’t want to admit to anyone you were doing it, and today it’s become the norm.
If you are looking for a mate, that’s typically how you are finding somebody. Online education is really in the early stages of its evolution and as you, over time, blur that line, and make it clear that you can deliver something equal or frankly better in many cases than the on-campus, you’ve got something really powerful.
So we are seeing more interest across the entire portfolio for Campus Scaffold. With that said, we think it’s more important strategically and not from a revenue perspective while we love the additional revenue and of course we do get additional revenue from it.
This is more about working with our great partners to help them build great digital versions to themselves long-term.
Michael Nemeroff
So, the second question is around the marketing. How have the marketing programs changed or evolved to attract new applicants, now that you’ve introduced a lot of these new MPVs, both from a strategic and a tactical perspective and for Cathy, maybe, from a cost perspective?
Can you give us a sense of the cost savings by having these MPVs in place?
Chip Paucek
So, I am not going to get too much into the tactical, because there is some real special thoughts there that we think, we’ve gotten quite good at. We do believe that the way we market the programs has become a strategic competitive advantage and on some level building a bit of a mode around the business.
It’s not just understanding that you are going to work with multiple partners, but how you handle the marketing itself and the admissions process is critical, because you also have to do it in a way that reflects the integrity of a Berkeley and a Georgetown and a Northwestern. I mean, that’s the key is that, these are all programs that needs to be – we are brand stewards of these schools.
So we have to do it in a particular way that only has the student finding the right outcome, b but reflects these great brands that we are working with. From a strategic standpoint, there is no doubt that MPV has allowed us to unlock tremendous efficiencies and in some cases, we are definitely able to do marketing in sort of a combination of marketing the vertical rather than the individual school.
More than anything, the delivery of MPV has really resulted in some pretty incredible marketing efficiencies, Michael, if you remember at the time of IPO, we talked quite a bit about the LTR TCA ratio which is a internal metric we use with the lifetime revenue that we expect from a student divided by the cost to acquire a student. And way back at the IPO was something around 2.4, is that right?
So, at the end of last quarter, it was little north of 3 and today, as we sit here with you, it is now actually, as we speak add our long-term steady state targets which is 3.2. So, we continue to see real efficiency based on that MPV strategy.
Cathy Graham
Let me just add, Michael that, we’ve talked about this before that one of the things that happens as we get to this sort of magic 3.2 ratio, is that as we add more MPV programs, we actually could be more efficient in that and our ratio could go up. We then have a choice as a business as to whether we spend more money pushing the ratio back down and grow faster or whether we continue to be more efficient and perhaps put more money to the bottom-line.
So that’s actually a really nice position for us to be in as a business. Now that we are in this high growth position, but really at our long-term target for LTR to TCA.
Chip Paucek
And the only other thing I would add, Michael is, it really comes down to the sort of over time, the revolution at 2U has really been about being able to predict enrollment at the time somebody comes into the prospect funnel. That really is a driver of how we actually operate the MPV, because if you can’t predict enrollment at the time somebody comes in, in the marketing funnel, ultimately, you will spend quite a bit of money on things that don’t work.
So, our goal is to match the right students at the right program as much as we possibly can. So that’s what we are trying to do everyday.
Michael Nemeroff
Thanks, guys for taking my questions. Great quarter.
Thank you very much.
Operator
Thank you. And our next question comes from Michael Tarkan of Compass Point.
Your line is now open.
Michael Tarkan
Thank you. Just, Chip, could you spend a moment on the competitive landscape little bit, what you are seeing, whether it’s still relatively dormant?
I know there is a for profit school out there that’s converting to a non-profit that talked about getting into the business. I am just curious what you guys are seeing from that standpoint?
Thanks.
Chip Paucek
Thanks, Michael. We haven’t really much of a change there.
We do think, we got a pretty substantial lead and expect to keep it. So, it’s not that we make light of the competition.
We certainly watch everything everyone else is doing, but I feel like, our model in the early days was the non-obvious model. In other words, it’s much more obvious to think, okay, let’s aggregate as many degree programs as we can and provide sort of a vanilla service layer across that, that’s not what we do.
We build the world’s best online degree programs and we build them at scale. That’s the goal going in.
So, being able to select the right programs is really important which is where that program selection algorithm comes in. I just remind you that the 2015 cohort was the first cohort we actually used the algorithm to select and we’ve been doing it since obviously going into our 2016 cohort.
So, not a tremendous number of changes in the landscape. I think, this notion of building a long-term scalable program which means, you have to invest really heavily over the early years of the program’s life is not really that obvious.
But I think at this point, it’s proving to be much smarter than the way people have historically thought of the online program management space.
Michael Tarkan
Okay, thanks. And then, as a follow-up, just in terms of demand, both on the school side and from a student perspective, are you seeing any noticeable changes where either schools are coming to you organically than they had historically, now that you have a little bit of a track record and then the same sort of thing goes on the student side, are you seeing sort a scorer maybe a tipping point from a demand perspective for an online degree?
Thanks.
Chip Paucek
So, on both camps I will start with the latter. I actually think we are still in very early stages and I think we tend to – we’ve been doing this now for eight years and so, for us it’s been a long journey, but the reality is, we really are in the third inning of what is a very long game.
So, not huge changes in the demand and what I mean by that is, we think pre-conceived notions of online education are so bad and as they get better, we will get wended our back. But it’s going to take a long time.
On the school side, we’ve absolutely seen a change. No doubt.
To a point where – frankly, it’s getting kind of hard for new logos to make it onto the page, because we’ve had so much demand from our existing partners, that is a very high class problem. If you look – I said it in the script, the reality is Syracuse was not a client until first quarter of 2015 and now they have five programs and they are our biggest.
So, it’s the combination of our existing partners wanting more and new partners when they come to the table having many more degrees upfront like we now have with NYU with four degrees, that’s all new. That’s definitely new in the last – let’s say, 12 to 18 months.
Michael Tarkan
Thank you.
Operator
Thank you. And our next question comes from Corey Greendale of First Analysis.
Your line is now open.
Corey Greendale
Hey, good afternoon. Great quarter, great year and – three questions, do you hear me, okay?
Chip Paucek
We can hear you fine. No problem Corey.
Corey Greendale
Thank you. So, first question I have is, can you just remind me in the Simmons enterprise, we’ll be thinking about that as a first program in a vertical or second program in a vertical or if you have a second on it?
Cathy Graham
So, hi, Corey. From an economic standpoint, we will be thinking of it as though it is a first program in a vertical.
What ends up happening in this is, as these individual degrees launch, sort of over a period of time, it kind of mimics the acceleration or the enrollment pattern of a first program, even though four of the five degrees within this enterprise programs are MPV degrees, or in MPV verticals. So you should think of it as a first program from an economic standpoint.
Corey Greendale
Great, and I noticed that sales and marketing part, that the year-over-year growth decelerated in Q4. Is that just a function of the fact do you only have kind of enterprise starting in Q1 and do have three programs or is it something going on under the covers that on the same program basis, if you better…
Cathy Graham
So, remember, Corey, that we always – first of all, we always see a deceleration sequentially in fourth quarter of marketing costs because, we just really cut back on marketing in that sort of end of quarter holiday period. It’s just not effective or as effective, so we cut back on the spend.
As far as the growth on a year-over-year basis, a couple of things, number one, large numbers, but the second thing is, yes, if you’ll remember in 2015, we had Syracuse MBA launching very early and that was a large program with a large marketing funnel. So you are just seeing a difference in the launch schedule, also the fact that there is the typical deceleration in this quarter.
Corey Greendale
Okay, and then, for Chip. Thanks guys for providing the top 10 programs, so useful.
But two questions about that. I just want to clarify, did you say that these programs have reached steady state or they are approaching steady state?
I am just trying to get a sense of these programs, some of the new ones still growing?
Chip Paucek
Yes, the new ones – all of the new ones are still growing. We were talking about the core four.
I mean, the core four has been around since between 2008 and 2011 and so the core four have either reached or in some cases exceeded steady state enrollments and while we have a little bit of growth occurring, it’s obviously slower at this point, because they are much farther into their life cycle. We’ve been running some of these for four, five six years.
The newer programs, what I found pretty incredible about the annual enrollment sort of top 10 is just simply that, the way our model works is there is a very significant sort of time ramp to get programs up to steady state. I think you know that that it takes multiple years to get the enrollment numbers, obvious to build the marketing apparatus and students don’t enroll in a top program on a lark.
It’s a long thoughtful process. So, the fact that you have like our first program in a vertical GW Public Health, already in the fourth spot and the fact that you have Simmons Nursing in the second spot shows what I think is a pretty incredible trajectory for those programs.
Corey Greendale
And actually that’s ties into my next question which is, just maybe slightly – but I am interested would be at and then USC Nursing is now large in the Georgetown nursing with men is larger than UNC, is that – can you attribute that to be slight – or huge price points or to geography or what do you think is driving?
Chip Paucek
Well, I mean, there is a number of factors that go into enrollment and obviously, I can’t get into a discussion of individual components from individual programs. I can’t tell you that, all of our programs are selective, our job is to find the right student, not just any student, that’s always complicated.
So, geography is definitely a factor in certain cases. So, the reality is that, a vertical where we’ve got large businesses operating today, it is certainly easier for us to go and sort of drive the programs faster.
So, we are excited about things like USC Nursing, that’s our third program in that vertical for that reason. But again, I thought that was – we thought that was notable as well and Corey, I am shocked you are in the weeks.
Corey Greendale
I live in the weeks, but not to say weeks. Last quick one is, you just announced the third is Data Science program, and you said that didn’t – not that long ago.
Could you use that – talk about kind of the key verticals, the program of each vertical item Does this suggest that maybe there is more programs that we can get more than three or maybe anything more than three programs in those verticals than we are thinking about before?
Chip Paucek
Yes, so, remember, when we talked about that, that came from the original sort of practical application of our TAM when we discussed it in the IPO and originally we said 30 in two, well, why do we say that? I mean, at the time of IPO, we had one vertical nursing, running with two programs, that’s it.
So, it was working really well. We knew it was working really well, but it was new.
So, we were careful about our expectations in terms of how many we would do and also important to note, at that time, we didn’t have the right to run multiple programs. So, that’s been a huge effort among many of the senior management team here including myself to make that happen where we could unlock exclusivity over time.
So, we were careful and we gradually opted to 60 because simply we have seen the power of this notion of Greenfields and frankly there were many other verticals that we started running that maybe in the beginning we didn’t think were big enough and have done quite well. So, like school counseling is a good example of something we announced that really people didn’t pay any mind to, but it’s actually a really good size vertical and it’s with NYU which is a great school.
So, we do think that longer term, whether it’s three or some larger number, it’s TBD. But given the fact that we are running four MBAs already, we do think that there will be some verticals which have larger number of enrollments where you will see a good number above three.
Therefore, sort of, might be some smaller ones where we are not – we are going to run three, we might run two, but you can make an argument that we probably don’t want to run a vertical at all unless we can do two and the reason for that is very simply that it drives so much incredible efficiency. And then one other note on that, is international at some point comes into play and we do think regional bias is a factor and we do think it’s a worldwide phenomenon.
So at some point, you will see us run programs in verticals we are running today with partners outside of the US.
Corey Greendale
Yes, that’s really helpful. Great quarter.
Thank you.
Operator
Thank you. And our next question comes from Ben McFadden of Pacific Crest Securities.
Your line is now open.
Ben McFadden
Hey guys. Thanks for taking my questions.
Chip Paucek
Hey, Ben.
Ben McFadden
I wanted to start with sort of a question on the rationale behind your latest announcements of programs at the launch in 2016. The information management and the computer engineering/computer science at Syracuse, maybe you could talk to us about why you view that opportunity as particularly beneficial to you in 2016?
And also maybe talk to us about how you view the trade-off between launching more programs at a existing partner like Syracuse versus maybe going out and sort of developing new university partnerships?
Chip Paucek
So, I’ll start there. The thing about the university partners we work with is they get it.
They are – they believe in the term, this is always been a story more about institutional will than technology. I mean, it’s making these students equal is non-trivial.
That give to break all kinds of tradition, most schools didn’t have online students, when they did, they didn’t treat them the same way and so, we ask a lot of our partners. So, when they get it, it’s a big deal.
The number of ways that this is a partnership expressed or a revenue share is, we talk about, it’s not that we are trying to be nice and call them partners. That is really what this is.
So, the fact that they get it is important. Syracuse has been fantastic to work with already.
The leadership team there is pretty spectacular. So, the balance of new university versus existing is more just about the fact that we have current partners that are coming to us and asking for more programs and if we were just trying to look at the world through financial engineering, we would do all MPV, but the reality is, we have to plough the virgin snow of these new verticals.
There are many verticals that we are launching now that we think will get vague over time and the fact is you can’t have a second and a third without a first. And so, you look at engineering or information management, they are both really good size verticals that we hadn’t played in yet with two deans that we love at those schools and something like cyber security is really hot right now.
So, to us, that was kind of a no brainer. It doesn’t mean that we are not interested in getting the efficiencies out of MPV, we are.
But you take something like occupational therapy at NYU, once again, something else people really didn’t focus on that much. But that’s a vertical that really our competitors don’t want to touch, because we have this massive placement apparatus that’s been built over time and frankly we weren’t graded it in the early years, it was really hard and we got really good at it over time and now it’s kind of building a mode around the company.
So, we want to launch those verticals and drive long-term value. We do think over time, you will see more of a balance of MPV, simply because we’ll break new verticals – break into new verticals and then therefore, as we break into them, we’ll have more seconds and thirds, but Data Science should be an indicator that that was really an idea at the time from a great dean at Berkeley and now we are able to see that there is big opportunity there and real jobs there.
So, you’ll see us do more MPV, but we just can’t forget that we need to blaze this trail with new verticals.
Ben McFadden
Great. And then, Cathy, maybe you could talk to us a little bit about, I mean, you talked about the seasonality of the model on an EBITDA basis, but as we look at the CapEx spend that you are spending in 2016 on these new headquarters, and kind of building out New York and Denver and then also we have the content development aspect of the equation which I assume is going to start to ramp up as you launch these programs in the second half of 2016.
Is there any color that you can provide as far as around the cash flow side of the equation, how the seasonality of the model should look there?
Cathy Graham
Yes, so, I would expect that you will not see a lot of the real estate build expense hitting CapEx sort of in the first quarter. That will be a little bit later second quarter and after.
So you can think a fair amount of it after that. However, you should think, given what we are launching and the fact that we will be launching more programs in 2016, that the content development or the content build expense that we capitalized isn’t going to have a full lot seasonality to it.
That’s – so I put that piece what we typically spend in that piece won’t have a lot of seasonality weight anything related to the real estate more towards the back two-thirds of the year.
Ben McFadden
Great. Thanks for taking my questions.
Operator
Thank you. And our next question comes from Geoff Miller of Robert W.
Baird. Your line is now open.
Geoff Miller
Yes, thank you. And Chip, I am just glad you start short of saying you wanted to be the tender of higher education or anything with your analogy.
The question is, as 2U and OPM have started to grow up a bit and as you’ve started to leverage the program selection algorithm and overall gotten more sophisticated, and I want to take MPV off the table with this question. If we are really looking at the first programs only, are you seeing any signs that you are going to be able to reduce the net cash outflow to launch first programs?
Or maybe does that take the form of if you don’t reduce the cash outflow, it results and I am ramping more quickly in terms of revenue and profitability and they are just a lot more profitable in year three and four than they originally were? Thank you.
Chip Paucek
I mean, I think the real story there, Jeff, is that, we had, in some ways done that prior to being a public company. We learned a lot of lessons in the early years.
So, they cost a lot more. The core four were significantly more expensive to get going and I mentioned earlier, placement being good example of something that it’s not the incredibly sexy part of our business, but the reality is super important and it was really hard and we had to get it right and the moment that you get it right.
It’s the most important thing in the world to the school, because it drives a really critical outcome for the long-term value to the students. So, basically, the number of ways that we improve the business and I think probably the smartest thing, one of the smartest things that we’ve ever done and it was not doing any programs in 2012 taking that big pause before we started launching.
So, I think it’d be unwise to expect that first programs at this point. We did an IPO until we really felt like we had this business stable and predictable and ready to go.
What we do think is probably more relevant to a first program long-term is this notion of at over time, the reality is pre-conceived notions of online ed will get better. That’s going to happen.
I mean, to us it’s pretty obvious. Like I am in the MBA program.
I know how good it is and the reality is, it’s phenomenal. So, as people start to graduate from that program, you get more people out there like you will get more wind at your back.
But we think it’s probably going to take a long time. So, still today, I mean unfortunately, you really even – just in the last year, the number of negative stories about online education vastly outway the positives.
So we got to stay the course.
Geoff Miller
Okay, fair enough. And then, Cathy, when a program is at the steady state, what should CapEx including capitalized content be as a percentage of revenue?
Cathy Graham
So, when – it’s better probably not to think of it as a percentage of revenue, because it’s kind of the same cost to maintain the program. It is not really revenue related.
It’s more how many credits, how many courses in the program. We tend to think on average that it’s probably in the sort of 300 plus thousand dollars a year to probably maintain it.
We worked in – we kind of work on a five year refresh cycle and so we think of this is as being kind of our cost of building a new program split over five years.
Geoff Miller
Okay, and then, one more from me. I think this is the case, but if you could just confirm or help talking about any given clients specifically, clients of yours that have multiple programs are still paying a similar revenue share on average for all of the programs meaning they are not getting a material discount from signing multiple programs with you, correct?
Chip Paucek
Yes, yes.
Geoff Miller
Thank you.
Operator
Thank you. And our next question comes from Brian Schwartz of Oppenheimer.
Your line is now open.
Brian Schwartz
Yes, hi, thanks for taking my questions this afternoon. Chip, I’d like to detour you to a different topic.
I noticed that you’d had brought in a new Chief Operating Officer here recently. And just thought it might be good time here to ask you how you are feeling about the leadership team?
Do you have any areas you were looking to add or fill on the leadership team here over in the next 12 months?
Chip Paucek
Well, thank you, Brian. Great question.
So, we – as you saw, earlier in the year, we announced some leadership changes. So, one of my – who I consider a partner, Rob Cohen, who is our Founding CFO and has been with us the entire eight years decided to retire sort of my joke to the team internally with the Cherry finally won.
So, that’s his wife by the way. So, Rob decided to retire and we will miss him tremendously.
The good thing he is staying with us on a part time basis to continue to handle a very specific part of really his great skill set of negotiating the actual physical contracts. Like once it goes to the lawyers, he is just exceptional.
So, he stays with us, but obviously not as our COO. And we were pretty thrilled to be able to bring in Susan Cates.
I’ve been trying to hire Susan for literally the entire time that I’ve been here. So, she comes with a tremendous amount of experience from Higher Ed, also a ton of experience in ed tech and operates quite a large business granted on the university side, but it’s a pretty good size business and from my standpoint brings direct expertise in one of our biggest areas that will be a huge challenge that we don’t have internal expertise today, which is learning and development.
So, I really consider, if you think about, one of our biggest potential concerns long-term culture has built this company. The culture here is fantastic.
The people really make it go. When I say stuff like that at times, investors sort of drone out, but the reality is it’s completely true.
This is all about the people, it’s not about me. It’s not about Cathy.
It’s about this team, all sort of unified to drive what is a really high outcome for a student. And the bench could easily get depleted over time, so you have to bring in people from the outside as well as continue to train people up internally and Susan has deep experience there.
The other comment I would make is that, Jim Shelton’s hire probably makes a lot more sense to people today. Now that they understand that Rob is leaving.
So, we are always thinking about succession planning. It’s a critical thing for the company.
I do want to reiterate to everybody out there just to make sure they know that I couldn’t be more long, I am not going anywhere. I love this place and I intend to be here for an extraordinarily long time.
But with that said, we do have to be thinking about long-term how to have great succession across the senior executive team. So I am pretty excited to have Susan start.
She comes March 31 and she and Rob will have a long transition where they will both be here. So, pretty blown away to have her and really looking forward to the future.
Brian Schwartz
Two follow-up questions that I had. I just want to be reminded again, is it right that there is no large university partner contracts that are coming up for renewal here over the next 12 months, is that right?
Chip Paucek
No, not over the next 12 months. We have the next renewal would be our first one, the Rossier program at USC and that would be in some part – in some point in 2018, forgive me, I don’t have off hand what month.
But, so that one is in 2018 and I think, as you know, Brian, we’ve now really frankly extended all of the early ones to very long time periods. So 2030, 2032 very long time periods.
So, the next one up would be the Rossier program and then after that, there is quite a bit of time. I think it’s something like six more years before anything comes up.
So, I’d see only one.
Brian Schwartz
The last question I had – just kind of piggy backing off that answer and it’s coming up here in the Q&A quite a bit and so, this is how I would phrase that Chip and Cathy, your business is very unique out there in terms of the magnitude in distance that you have in terms of your revenue visibility and your commentary here as well as the data, it seems to indicate that there is increasing momentum right now in terms of new online graduate programs being adopted both by your installed base and likely in your pipelines too based on your introductory comments and some of your other comments during the Q&A. So, the question then is, you have this great long distance on revenue visibility, so, how do you manage and how do you decide over the near term how to balance that long-term opportunity to go gabble up more and more of the university partners and programs as fast as you can versus showing, it validates the profitability?
Thanks
Chip Paucek
We feel like, right now, we are on an excellent pace to profitability and we are able to accomplish our goals, but one of the key reasons that we did move up from four programs at the time of IPO per year to then six this year, nine the year after and 12 plus the year after that, is it’s pretty amazing to have this kind of organic growth potential, if you put capital to work and we have all the capital we need because we’ve gotten significantly more efficient as a company. So, we do want to keep growing but the reality is, we also – as a company believe companies need to be profitable.
So, this team, it’s sort of not our first rodeo. We’ve all been in large businesses before and the fact is companies do need to be profitable.
So, we feel like we are on the right path regardless of what the flavor of the month is Wall Street. We want this company to be long-term sort of an iconic business.
We think it has that kind of potential and you are right to say there is more momentum today. People do ask, I see you’ve announced the many Syracuse programs that are going to be more new logos and the answer is yes.
There is good number in new logos in the pipeline right now. I feel like at some point, we’ve proven enough that we should be able to start – when we express confidence in the pipeline, we hope that people will begin to worry about it a little less, because it is a general investor of session.
But the fact is, we love the pipeline. Feel better about it on a continual basis even though we’ve increased the number of programs per year.
Anything you want to add?
Cathy Graham
Only I think, Brian that, I would add that we really haven’t changed our story and our comment or our perspective on that since the time we went public.
Chip Paucek
That’s right.
Cathy Graham
When we went public, we said that we believed it was imperative for us to move towards adjusted EBITDA profitability. We gave that timeframe, we since been able to move that timeframe up because of MPV, but fundamentally, we’ve done what we said we were going to do.
We also said that as got to and through adjusted EBITDA profitability we were going to basically slow the trajectory towards steady state margins in order to be able to take advantage of the increasing demand that is there for us from existing and new partners and so, it’s actually really nice to be able to sit here almost two years in and say exactly the same thing that we said at the time of IPO.
Chip Paucek
Yes, and to add to that, the critical thing is the long-term correlation between our financial results and student outcomes period, that is how this company will succeed long-term.
Brian Schwartz
Thank you and congratulations again on a very nice quarter.
Chip Paucek
Thanks Brian.
Operator
Thank you. And our next question comes from Jeff Silber of BMO Capital Markets.
Your line is now open.
Henry Chien
Hey.
Chip Paucek
Hey, Jeff.
Henry Chien
Hey, it’s actually Henry Chien for Jeff.
Chip Paucek
Hey, Henry.
Henry Chien
Hey guys. So I just wanted to tack on a follow-up to the prior question.
In terms you are accelerating the number of programs, how are you thinking about in terms of the strategic rationale for doing that? Is that more that demand is increasing and that you have more capability to meet that demand or how much of it is the need to build the moat around different verticals?
Thanks.
Chip Paucek
Well, I mean, we do believe we have seen demand increase. We’ve also seen, I mean, if you think about the tremendous progress in the company from the time of the IPO, the reality is, we had one vertical operating with two programs.
That’s it. And so, to say that that strategy has been successful is a vast understatement.
It’s been really strong. So, the ability to add additional programs, particularly as we; been able to workout arrangements with our early partners where exclusivity was a challenge opens up a huge opportunity for 2U to continue to grow.
And I do feel like, I feel very blessed to be sitting here in this company at this moment with this team, with this market opportunity. I kind of think it doesn’t happen everyday.
So we want to take advantage of it. We’ve gotten a lot of things right.
We didn’t get it all right in the beginning. We’ve gotten really good at it now.
And so, the opportunity is there to grow and we want to take advantage of it. Anything?
Henry Chien
Got it. Okay, and to follow-up, in terms of some of your new programs, in terms of the ramping of enrollments, are you seeing an acceleration there?
Chip Paucek
So, new programs, when they are a second program in a vertical, they grow much faster. It’s been a fascinating experience running the MPV programs and we are learning a lot about how to do it and we have some incredible people here executing on that strategy and I am very pleased to see that we talked about on the call that you can see from the list, that MBA@Syracuse is very large.
But what’s also not obvious is that that same moment, MBA@UNC had its largest cohort in its history. So that program is still doing exceptionally well and frankly, right now, probably doing better than it’s ever done.
That’s really strong execution by a smart team. So…
Cathy Graham
Yes, I would just – just to add, so, we don’t see - the way we explain it to people is that indeed, second , third and fourth programs will scale more quickly, because they can leverage the marketing funnel that’s been developed by the first. Every vertical is a little bit different and so those rates will be a little bit different, but we see a pretty consistent trend that that’s true.
It’s part of the reason we get the efficiencies that we do out of MPV.
Chip Paucek
I think it’s a – this is about a team that is constantly learning, constantly innovating and the reality is, they are not afraid to make a decision, take an opportunity and then learn from it. We are going to go for it and each time, we are going to learn every step of the way, because fortunately, we have a team of people that are pretty good at not making the same mistake twice.
Henry Chien
Got it. Okay, thanks so much.
I appreciate the color.
Operator
Thank you. And that does conclude our question and answer session for today.
I would now like to turn the call back over to Chip Paucek for any further remarks.
Chip Paucek
Thank you, everyone for joining us today. We look forward to talking to you out on the road and we will see you at our next quarterly call.
Cathy Graham
Thank you.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This conclude today’s program.
You may all disconnect. Everyone have a great day.