Feb 24, 2017
Operator
Good afternoon, ladies and gentlemen and welcome to the 2U, Incorporated Fourth Quarter and Full Year 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. [Operator Instructions].
I would now like to introduce your host for today's conference Mr. Ed Goodwin, Vice President of Investor Relations.
Sir, you may begin.
Ed Goodwin
Thank you, operator. Good afternoon everyone and welcome to 2U's fourth quarter and full year earnings conference call.
By now you should have received a copy of the earnings release for the company's fourth quarter and full year 2016 results. If you have not, a copy is available on our website, investor.2U.com.
The recorded webcast of this call will be available in the Investor Relations section of our website. Also, we routinely post announcements and information on our website which we encourage you to access and make use of.
Today's speakers are Chip Paucek, CEO and co-Founder 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 beliefs and are based on information currently available to us. The outcomes of the events described in these forward-looking statements are 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 Factor section of the Company's annual report on Form 10-K for the year ended December 31, 2015 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 likely 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, Eddie. 2U had a fantastic 2016.
The entire 2U story is driven by high-quality student outcomes. Students succeeding, drives our University partner's success, which in turn drives 2U.
While we're delivering for our University partners and it's driving our results. Fourth quarter capped off another great year for 2U all with financial measures.
Revenue for Q4 was $57.4 million contributing to total revenue of $205.9 million for 2016, a 37% improvement over 2015. On the bottom line, adjusted EBITDA was $4.5 million for the quarter and year an improvement of approximately seven percentage points in margin over all of last year and I am happy to report that 2016 was the first time to 2U's history that the company was adjusted EBITDA profitable for the full year.
To give you a sense of how far we've come, when we public in March of 2014, the adjusted EBITDA margin for the full year 2013 was negative 26%. Now the close of 2016 showed a 2% adjusted EBITDA margin, a pretty vast improvement and that's with revenue growth well above our 30% target.
We believe we can indeed keep revenue growth rate above 2% for the foreseeable future. For some additional color, this time of year, we give you our cohort margins and our top 10 list of annual enrollment.
These metrics help show what's happening in our model. First let's talk cohort margin, which you can find on the back of our press release.
These indicate the inherent profitability in the model over time, given the lag that exists between marketing spend and revenue when looking at the company's whole financials, but on a cohort basis, for color basis, you can see more of what's happening to profitability. Three years ago, we told you that you could model profitability by lining the first four programs up at time zero and adding a little forecast to that.
While you don't have to do any of that now. Time this model, programs take time to retire enrollment and remember students don't enroll in a top program at larger and it's our job to not just find any student, but the right student.
So, each launch cohort has a lag to it. It takes years five or six for programs to reach steady state enrollment and even then takes a bit longer for steady-state financials.
This was all difficult to describe the new public company three years ago, but we have enough programs within our operating history just to show you. Programs operating for more than four years are those approaching steady-state financially, which in this case is composed of our core four original programs showed at 36% adjusted EBITDA margin, that's higher than we targeted.
Those operating in three, four years dictate our 2013 cohort showed 18%. This is better than where Cathy told you it would be.
And the 2014 cohort of programs or those operating two to three years is at negative 6% or moving on close to breakeven. This is right where we told you it would be.
And remember these are all fully allocated. We gave you a model three years ago, and told you this happened and now you're seeing it in our financial results.
Now, let's talk about size and start with the top 10 list. Our top 10 ranks our programs where new program enrolment.
Enrolment is a precursor to revenue. So, this can give you lots of color as to what happened in the system.
MPV is the story here, where our multiple program vertical strategy. Each of our verticals with multiple programs launched are represented on the list; nursing, social work business and data science.
When we add a new program in a vertical where we have one or more programs already launched. We see new student enrolment in the subsequent program ran more quickly than what we typically see for our first program in a vertical.
We believe this is evidenced by MBA, therapies moving to third and business in America entering the list. Both were 2015 MPV programs, both now show up in the top 10.
But MPV also drive enrolment for the first program launched in a vertical. Each first program in MPV remains on the top 10 list.
And MBA UNC actually moved up a spot. Moving forward we'll continue to balance launching program in new verticals with programs in existing verticals.
After all we can't launch second until you have a first. And there are lots of first left for us to cover.
So, the top ten lists gives us a good look into the power of MPV, which has been good for everyone involved. Students have more options, we're converting more of our marketing spend, and we're building something big here.
At the time of this call our university partners just passed $1.5 billion in attrition adjusted tuition since inception. TU is doing digital education at scale.
So, our model trying to prove, but it's really starting to show in our results both on a cohort level and companywide. That is exciting.
Now let's briefly talk about pipeline; it very, very strong and our announcement to prove it. This month we finalized our 2017 launch schedule for 10 new programs.
This is one more than we told you at the beginning of last year for more than in 2016 and we thought it and announced everything well before we did last year even with the larger number. We believe that the 2017 launch cohort will prove to be one of the most balanced launch cohort in our history.
Four programs our new degree verticals and six are in multiple program verticals. In fact, four will create new MPVs There's also nice geographic diversity among the universities with programs on East Coast, in the Midwest and on the West Coast.
And we're excited to welcome three new university partners Pepperdine, Dayton and Vanderbilt. One additional point regarding pipeline, last quarter we mentioned that we had a signed program that was not yet tested.
Due to a variety of unique factors outside our control it turns out that we'll not be moving forward with that program. Now I can't go into specifics, but I can tell you the program was signed with an existing partner, there was a leadership change and a decision was subsequently made not to move forward with an online program at all.
In hindsight, signed and announced, signed and not announced is not how we'll handle these things going forward. There're so many moving parts that we think it's better just to announce when we're ready.
Ultimately, what should matter to you is we have enough to make our target, the slot at 2017 cohort prove that to be a strong, yes. It can all in out ahead of schedule.
And yes, we also like where we are for our 2018 commitment. We expect more announcements in the coming month.
We got new verticals, new universities and deeper commitments from existing partners. I'm now going to pass it to Cathy to highlight what an excellent year we have.
Cathy Graham
Thanks Chip. Well, our financial performance for fourth quarter and full year 2016 largely speaks for itself.
I'd like to give you some color on these results before turning to our view of the future. We closed out 2016 by again delivering significant year-over-year revenue growth.
At $57.4 million for the fourth quarter and $205.9 million for the full-year the revenue is exceeded the prior year period by 33% and 37% respectively. As it's typical revenue growth in both periods was driven primarily by increases in full course equivalent.
For the fourth quarter FCE showed the year-over-year increase of 31%, enhanced slightly by a 1% increase in average revenue per FCE. For the full-year FCE 36% year-over-year also enhanced by a 1% increase in average revenue per FCE.
FCE increases were just across our program portfolio, but as our business model projects the largest percentage increases was from programs in their first three years of operations. As we expand our portfolio with an increasing number of programs launches at new and existing partners our FCE and revenue basis continue to rapidly diversify.
Our earnings measures net loss -- adjusted net loss and adjusted EBITDA each showed year-over-year dollar and margin improvement. At $2.2 million fourth quarter year-over-year net loss improved by $1.2 million and the corresponding net loss margin improved by 4 percentage point to 4%.
For the full-year our $20.7 million net loss show year-over-year improvement of $6 million and net loss margin improved by 8 percentage point to 10%. On a per share basis fourth quarter net loss was $0.05 from $0.07 in the prior year period.
And full-year net loss improved to $0.44 from $0.63 in the prior year period. After adjusting for $4.2 million in non-cash stock based compensation expense fourth quarter adjusted net income was $2 million or 4% of revenue.
This represented a $2.1 million and 4 percentage point year-over-year improvement to adjusted net income and adjusted net income margin respectively. Adjusted net income per share improved to $0.04 from $0.00 in the prior year period.
Remember the fourth quarter is typically our highest margin quarter and being positive here does not mean that our subsequent quarters will be positive. However, reaching this milestone is a meaningful indicator that we remain on the path to achieving profitability across our earnings measures.
For the full-year adjusting for $15.8 million in non-cash stock based compensation expense adjusted net loss was $4.9 million or 2% of revenue. This represented a $9.4 million and 7 percentage point year-over-year improvement to adjusted net loss and adjusted net loss margin respectively.
Adjusted net loss per share improved to $0.10 from $0.34 in the prior-year. Note that we continue to see meaningful year-over-year stock based compensation expense increases, which should remain the case through the first quarter of 2018.
At that time the first grants made under an annual grant framework put in place prior to our March 2014 IPO will have completed their four-year vesting cycle, and stock compensation expense increases should moderate. After a further net adjustment of $2.5 million consisting of depreciation and amortization expense offset slightly by an immaterial amount of net interest income, fourth quarter adjusted EBITDA was $4.5 million or 8% of revenue.
This represented a $2.7 million improvement in adjusted EBITDA and 4 percentage point improvement in adjusted EBITDA margin over the prior year period. For the full year, after a further net adjustment of $9.4 million adjusted EBITDA was $4.5 million or 2% of revenue.
This represented in a $11.2 million improvement in adjusted EBITDA and 7 percentage point improvement in adjusted EBITDA margin over the prior year. As we did last year at this time we have provided for 2016 fully allocated adjusted EBITDA margin at the launch cohort level.
Program that had been operating for four years or more have an adjusted EBITDA margin 26%. This launch cohort consists of the four programs we launched prior to 2012 and their adjusted EBITDA margin representing 9 percentage point improvement from the 27% margin we reported for this group in the prior-year.
Remember that we expect programs will achieve an average adjusted EBITDA margin in the mid-30s range with first programs in the degree vertical being somewhat lower and subsequent programs being somewhat higher. As these programs who offers programs in the vertical we’re particularly pleased with how they are performing as they reach the mature phase of their program verticals.
Additionally, our 2013 launch cohort which consists the programs that have been operating for between three and four years had a fully allocated adjusted EBITDA margin of 18% for the year. This represents 14 percentage point improvement from the 4% margin the reporting for this cohort 2015.
Our 2014 launch cohort and programs had an adjusted EBITDA loss of 6% right in the range of what our model would predict for programs operating between two and three years and consistent with what we told you previously about this cohort, that leaves the vast majority of the losses in the company exactly where you would expect. In programs operating for two years were left which includes we have incurred for programs expected to launch in 2017.
These programs had a combined adjusted EBITDA loss margin of 130% corresponding to our period of heaviest net negative cash investment in program launch and scaling. I'm really pleased with over the last two years we've reached the point where we can provide you with actual data on margins and margin progress across the program maturity timeline.
What we are seeing now strongly validates the typical and economic life cycle we discussed with you since IPO including our expectations for target steady state margins and the investment breakeven and return time period. From a balance sheet and cash flow perspective we ended the year with $168.7 million in cash and no outstanding debt.
During the fourth quarter and full year we had cash capital expenditures of $8.4 million and $24.4 million respectively. Cost we capitalized related to technology and content development were $4.4 million for the quarter and $16.7 million for the year with the remainder in each period being primarily for costs related to build-out the facilities to support our growing workforce.
Now expanding on the initial look at the 2017 we gave with our third quarter results, we provided specific first quarter and full year 2017 guidance. On the top line, we are expecting revenue of between $63.6 million and $64 million for the first quarter and between $267.6 million and $269.8 million for the full year.
At their mid points these ranges imply year-over-year growth of 34.4% for the first quarter and 30.5% for the full year. While we have committed to delivering revenue growth rates north of 30% for the foreseeable future these rates will vary from year-to-year while 2016 revenue growth benefited from the 2015 loss calendar but well distributed across the year a large program launch in January and with 60% MPV 2017 drafting off of 2016 cohort that well strong had a back loaded launch calendar and only one MPV program, coming off of 37% of revenue this year is attempting to think vast that’s the new normal.
But please now get ahead above. To help you with your quarterly models the guidance provided in our earnings release states that we currently expect 52% to 53% of our 2017 revenue to be recognized in the second half of the year, sequentially revenue should step up from quarter-to-quarter, so because of the timing of 2016 and 2017 program launches the magnitude of those increases may vary somewhat from the prior year.
Compared to the 2016 quarters we expect a smaller percentage step up between Q1 and Q2 for the larger percentage step up between Q3 and Q4. Looking at earnings measures we expect a net loss of between $4.1 million and $3.7 million for the first quarter and between $28 million and $25.6 million for the full-year when comparing these results to prior periods, remember that we made a strategic decision to accelerate the rate at which we launch new programs form six in 2016 to 10 in 2017 and 12 plus in 2018 and as we've said previously this increasing in the number of programs in their investment days as the effect of slowing the pace of margin improvement as measured at the adjusted EBITDA level.
At the net loss level, our expectation set first meaningful increases in year-over-year stock-based compensation expense will continue through 2018 and second the depreciation expense will increase faster than in prior periods, because of our recent unexpected facility build-out are offsetting the purposely smaller expected year-over-year improvement in adjusted EBITDA margin. We expected adjusted net income of -- and $400,000 for the first quarter and an adjusted net loss of between $7.2 million and $5.2 million for the full year.
Remember that adjusted net income or loss excludes only stock compensation expense, but includes depreciation expense and its therefore impacted by most of the factors impacting net income or loss when looking at year-over-year comparison for results and margins. We expect adjusted EBITDA of between $2.9 million and $3.2 million for the first quarter and between $8 million and $10 million for the full year 2017.
Adjusted EBITDA excludes the impact of both stock compensation and depreciation showed year-over-year midpoint guidance improvement for both expected result and the corresponding margins. To help you further with your quarterly models, the guidance provided in our earnings release also states that cost seasonality in both the -- fourth quarter impact margin patterns in the first and second half of the year.
I want to remind you that in the second quarter we typically encourage disproportionate amount of annual costs that reduce our earnings measures related to meetings, trainings, graduation and other periodic events. Conversely, we typically reduce our marketing costs during the year-end holiday period, which increases earnings measures in the fourth quarter.
Now before I turn the call back to Chip, I want to comment on our capital asset additions for 2016 and our expected capital asset additions for 2017. As we have discussed with you before we are in a period of significant facilities build-out.
This week we moved into our new headquarters in Maryland we have been expanding our facility in Denver and later this year we plan to relocate our New York offices to a new facility in Brooklyn. As a result, temporarily outside increases were capitalized assets for leasehold improvements and other facilities related cost.
In 2016 we added $30.8 million in new capital assets of which $11.7 million or 38% were facilities related. In 2017, we are expecting to add new capitalized assets of between $64 million and $69 million of which 55% to 60% are expected to be facilities related.
By the time, we get to 2018 however, we expect facilities related capital asset additions to drop to between 35% and 40% of 2017 levels. At this point, total capital increases should return to a normal operating trajectory driven primarily by the capitalized content and technology development costs related to an expanding portfolio of new programs.
Please consider the depreciation related to this temporary site and capital asset additions when you update your model. Enough about depreciation, let’s focus on the bigger picture.
Our fourth quarter performance capped off a year where we're really proud of and we are now looking forward to delivering on the strong operating and financial expectations we have set out for 2017. Chip?
Chip Paucek
Thanks Cathy. Got to love her.
Before I close this out, first one quick note. The top 10 list can be found in the download section of our Investor page.
When I think about our 12 beaten rates and our third anniversary of being a public company, I am proud to say that our model is proving out, in our financial results, plaintiff's there right in front of you, but the path what we are doing is built in the system that aligned with great universities to help them transform in the better digital versions of themselves. Our pipeline is better than ever for a reason.
We deliver on the -- for the world fast online education. With the report issued two days ago, by the Christian Institute that highlights our partnership with Simmons College for recent bit of added if you haven't seen it is really worth to read.
Our combination of technology comprehensive service and data architecture with a really important dose of great culture grown in, has made our company the market leader, over time I really become convinced the glue between all these pieces and the coordination of them together is what makes 2U special. It's hard, it shows up in unexpected places, like how you provide accessibility for those with disabilities from day one of the new program or how you provide local clinical placement on a national scale or how you leverage data to drive better outcomes, just a few examples.
All of this is actually the sexy quite hard to replicate. Our growing portfolio of program and the bundle that serves their schools is producing data that no one else in higher education can match.
We're drawing insights from that data to continually improve our programs. Each program launch contributes to the improvement of all those launch before it and those insights enable us to operate in more verticals and some more regions and expand program offering.
But the power is actually in the bundle itself. Our comprehensive approach allows universities to deliver great digital education at scale.
I intend to ensure we continue to make the bundle better and better over time and that is exactly what we're doing. And now, I'll open to receive your questions.
Operator
[Operator instructions] And our first question comes from Michael Nemeroff of Credit Suisse. Your line is now open.
Michael Nemeroff
Thanks for taking my questions. Congratulations, on a great quarter and another great year.
I want to hammer in a little bit more on this cohort financial performance. Looking at the comparison of last year and the improvements in the programs greater than four years and especially the older ones.
Theoretically you said mid-30s as the target for the adjusted EBITDA margin. I am curious, can we squeeze out a little bit more than what you told us to anticipate previously and what should what should we read into these numbers on a go-forward basis and I have a follow-up for Chip on the competitive landscape thanks.
Chip Paucek
Okay. So, thank you, Michael.
So, the first thing I would say before I turn it to Cathy is we're obviously very pleased with the cohort margins overall. We feel like they are an important part of the story in terms of understanding what's going on inside the system.
They have proved tremendously and of course that original, the first set of program is really delivering and it certainly took some time to get there and the performance since IPOs is great. With that said, we just want to be cautious going forward.
We think we're giving you a reasonable margin expectation. On our verticals, we are entering a lot of new vertical we have.
I think 11 verticals already that we're in that we do not yet MPV established and so we're really -- we're thinking about the future and certainly don't want expectation to get outsized because we're going to get some that aren’t right. We're going to get some that we don't -- that don't see that kind of margin improvement, Cathy?
Cathy Graham
Yeah so, I agree with Chip. I think the typical program models that we've given you are still our best assumptions.
The reality is we love these number, but it's the first group of programs that's really moving into maturity and also remember that behind this cohort, there is effectively a gap year of 2012. So, we've got -- it will take a while for the group to kind of get to where we're looking at today.
But the other thing to remember is that all that in this group while they are all first programs they are in multiprogram -- multiple program vertical and the multiple program vertical as we've talked about helps not only the second program and the third program but it helps the first program as well and we're seeing some of that. What we don't know yet is how prevalent that is across the entire universe or what it's going to result in.
So, while we are excited and hopeful we would not encourage anyone to move off of our typical program margin.
Michael Nemeroff
That's helpful, thanks. And then for Chip the first thing that I would say is initially when the company came out, there were people that were actually doubting the business model itself and obviously when you show cohorts with margins in the mid-30s, I think that we put that to rest pretty nicely.
Now the question that comes up is around competition and your ability to get -- to remain competitive and get the pricing that you've been getting longer-term and the rise of competitors in the market. I am just curious what you think about the market in general as it's changed over the last three years?
Chip Paucek
The first thing I would say is we tried to emphasize this a little bit in our Investor Day where many, many, many programs that are part of universities and we're definitive trying to run them all, not trying to launch them all. A one size fits all approach to universities inherently very challenging thing and not everyone is a program that we believe would result in the kind of business that would be worth used pretty heavy investment in the early phase.
So, the story 2U is a great market opportunity meeting institutional will, both are real important. The second thing I would say is there's a lot of market.
This is a really big total addressable market and so I think it's encouraging more than discouraging if there are more people coming into the state. When university launches itself without us, we still see that as a positive for 2U because it puts wind in our back with regard to the notion of preconceived notions of online education getting better.
So, we are starting to prove that this is not going away with folks right like the whole notion of the sleeping giants waking up, well guess what, they're awake and their way our partners approving. That $1.5 billion in attrition adjusted tuition is a nontrivial number.
So, that's part of the reason in my closing comments I empathized the power of the bundle. That wasn’t just talk.
We actually really do think that the notion of the fee-for-service providers, they’ve been around the entire history of 2U. Candidly, we actually use different providers in different parts of our portfolio to do different things because ultimately, we are aligned with these partners long-term to drive high-quality student outcomes and drive performance for the school and we'll get there anyway we need to.
So, this isn’t about us all of our proprietary code or having all of our own service. This is all about driving students and vastly experienced investors we can.
So, the competitive landscape are there more 3Us, 4Us and 5Us, sure. Honestly, we're doing better than we ever have and our pipeline is as good as it is for a reason.
This is getting really good.
Michael Nemeroff
Thank you. Great job, thanks.
Operator
Thank you. And our next question comes from Michael Tarkan from Compass Point.
Your line is now open.
Michael Tarkan
Thanks for taking my questions. Just drilling down again on the profitability number, so with that first cohorts it's tracking higher than you had initially thought given that it's a slew of first program.
So, I guess I'm wondering is it a function of enrollment being stronger than you had initially predicted? Is it that you're getting more synergies just sort of what is driving the stronger performance?
Cathy Graham
Hi Michael. So, a couple of things, first of all as I mentioned, we are -- we're seeing these first programs get the benefit of MPV, which is keeping in this group their revenue growth actually a little higher than we would have expected of them at this stage.
Chip Paucek
It's quite notable that in the top 10 list, which by the way is on the Investor page. You saw MD&A UNC actually go up, that I think is what people wouldn't have expected.
We're thrilled to see if that program beyond the fact that I'm blissfully getting close to graduation. That program has been with us a long time and we love seeing that really get stronger and we do think that there's a bunch of interesting benefits to MPV along the lines of not the way people immediately thought about it.
We do get the benefit of really good broader spend that we can leverage the data to spend very wisely, even not spending on people that we know we shouldn't spend on. So, there's a lot of MPV benefit built up into that.
Cathy Graham
Yeah and there's some other things going on here, some of them are just mathematics, which is again when we look at that cohort of programs, the more we -- they're very large and for a lot of years they have been carrying a very large percentage of the overhead of the company, when you looked at it on an allocated basis and the more that we, the more programs that we add and the more they become a smaller and smaller percentage of our revenue and student base, the more they're taking probably a share of the overheads that is more proportional to what is actually going on in that business. So, these are some of the things that are really making the margins as we see them today, a little better than we might have expected, but I'll reiterate what I said previously which is this is the first group of programs to reach this size and this level of maturity and when we look across our portfolio, we're not yet ready to say that in any way we would move off what we think our typical margins would be.
Chip Paucek
And obviously even further we have an obligation to continue to invest in those programs, that a big part of the story. We're not sitting here every day trying to make him more profitable.
We're trying to grow those programs for our partners.
Michael Tarkan
Understood, that's helpful and then secondly, on the revenue growth. So I know you've talked about a 30% growth number for the foreseeable future and I know we're working off of a larger base, but as the calendar lays out with 2016 being backend loaded, 2017 been backend loaded with a larger number of programs, 2018 being an acceleration, is it possible and I know you don't want to see ahead of ourselves, but it is possible that we could see a potential acceleration off of the 30% as we think about '19 and '20, those two years?
Chip Paucek
Just pulling back for a second Michael, the first thing, it's important to know that we're thrilled with where we ended up for the calendar year. 37% is fantastic but Cathy said it for a reason.
We do want people to pay attention to the calendar the way they were back half, that's real, we started with a big program. They were very evenly space and I said to you guys historically one of the hardest things to give you clarity on is slotting like when they're going to launch.
Each one of these is a different situation. They're complicated I know, everybody has a thousand question about pipeline, but the reality is getting the slotting, getting clarity on the slotting is hard, which is one of the reasons we were so thrilled to get the 2017 slotting out before we got the 2016 slotting out, you know there were more of them.
So just you got to be cautious with the way we sign up against the calendar.
Cathy Graham
Yeah so, I think our early view is that by the time we get into 2018, the early view is that maybe a little better distributed across the calendar, which would certainly assist in giving at least some wins at the back for driving acceleration in revenue growth at that point, but it's really too early to tell. What we want you to understand is that these things aren’t going to be consistent in one direction or another.
We will see them move around by several percentage points year-over-year because of all the things that have said and we just want to make sure that you guys are expecting that.
Chip Paucek
So, the moral of the story there is highly confident about 30 as we've told you and we do feel strongly that that can last for the foreseeable future, which I know it doesn't give you a specific, but that doesn’t mean only next year.
Operator
Thank you. And our next question comes from Ben McFadden of Pacific Crest Security.
Your line is now open.
Ben McFadden
Hi, good afternoon. Thanks for taking my questions.
I wanted to start with the 2016 cohort, you mentioned on the call that it's doing well, but I was wondering if you could provide just a little bit more color as far as how that fits -- I know it's early days, but how that fits relative to kind of what you've seen with these other cohorts the 2015, the 2014, any additional color there would be great.
Chip Paucek
We group it with '15 for a reason right, it's so early Ben, what you can tell from just what they are is that there is a small percentage of MPV that does certainly affect how quickly they scale. We told you in the past that the first program takes longer to ramp, but they're all new verticals.
The reality is most just had their second intake of students, it's early days and just consider UNC starting with the now payments '19 the original '19 it's not that UNC started big, it didn't. It actually took a long time to really get its legs from an enrollment perspective because we were learning how to market it.
So, it's just too early to give you a ton of color except from the fact that it's obvious that it's mostly not MPV. But we like what we see.
It's not that we're staring at anything we don't like and that's the good news for 2U is there is a lot of articles and there is a lot of articles that we think have the combination of being appropriately sized so that our marketing team that is giving us instructions as to which ones to go out using the program selection algorithm, combined with the fact that we get to the school side and there's a reception that needs to hold like that's all a very important part of the story. And honestly at the end of the day having programs that drive the kind of outcomes we want for the students, we're not just looking at enrollment numbers.
We're thinking about ultimately does this good provide tremendous value for the end-user, it's got to right. So, it's nice for 2U as there is a bunch of programs in that category, everyone we launch builds the model a little bit more because we increase the number of clinical placements and we increase the complexity of what we're dealing with and that's really hard to replicate.
So, and we are not depending on falling down.
Ben McFadden
Great. And then Cathy I wanted to switch to the Q1 guide here.
It actually on a sequential basis I believe it was up relative to what we saw last year. I was wondering if you could help us to expect how much of that is just a shift in seasonality around when the classes are taking place in the model.
I know you've been talking about that for a while that there's going to be a seasonality shift over time versus the timing of these 2016 program launches?
Cathy Graham
It is almost all the timing of launches then. So, one place you rarely ever see any movements around the start of classes is in the first quarter.
It's the only time when January is about the only time when every program has a cohort, has a intake of students. So, what you see here is really has far more to do with launch schedule than it does have to do with any moving around.
We did give you some guidance for 2017 about how to think about Q1 to Q2 and then Q3 to Q4. That again is primarily driven by launch timing, but there are some differences in the way the cohort or the student who take the laid out from the prior year.
Ben McFadden
Great. Thank you very much.
Operator
And our next question comes from Kerry Rice from Needham and Company. Your line is now open.
Kerry Rice
Thanks a lot. Great quarter, guys.
Maybe a couple of housekeeping for Cathy and then one for Chip. Cathy, can you -- I'm sure it's disclosed maybe in the 10-K which hasn't been published yet, but any update on backlog and then lifetime revenue per total cost ratio?
And then I'll follow up is the next question.
Cathy Graham
Sure. So, on backlog end of the year was $248 million, which is as you would expect down sequentially from the third quarter.
It always happens every year, it's a standard part when that happens because sort of the end of the year is the only time when all classes close out all revenue is from those terms is recognized and it's not fitting in backlog, but it is up 30% year-over-year. So pretty consistent with the way the financials are running.
And I believe you are asking about the marketing side as well of the LTR to TCA ratio. So, for fourth quarter write down our target of 3.2 and you can see we've been writing that 3.1, 3.2 ratio, and that's where we're running the business these days.
Chip Paucek
And the reason I love that number is there are so many new verticals launching that's a good story. On some level the new verticals mean that you're depressing it because we're figuring out how to market them.
Kerry Rice
And then the follow-up for you Chip is that you talked about that you're not moving forward with the one program that you hadn't revealed who the partner was, but you said something about either change in leadership at that, I don’t know if that was a particular school or not, but it was with an existing partner. So, I guess my question is, is there any a risk to any other programs from that partner because of a change or leadership, was there any kind of clarification you can provide on that?
Chip Paucek
I wouldn’t know we are still on that. In doing new programs it really comes down to when there's a new program they were setting up and running.
I say it for a reason it's not to complement my clients when we talk about market opportunity and institutional will. You need to have somebody on their side.
They really is driving this because these are really complicated transaction, multilevel, lots of people involved. You might have a 100 people on their side involved and somebody on their side ends up driving it.
So, I wouldn't oversteer I don't believe there's risk associated with that partner across the board in any meaningful way. We gave you that disclosure simply because we felt like we should.
It's just a point that we felt like we should make. I think in hindsight we're trying to give additional color on pipeline, how to explain it to people.
And ultimately what we come down to now is we paid every target we've given you and we've raised it. So ultimately, what we're really looking at is we feel very confident in our ability to deliver 12 plus for next year.
And we certainly have in Q1 it will be for the year after, but we feel like pipeline is in the best place it's been. So, we're going to tell you about when we're ready to and sort of not oversteer on pipeline metrics.
Kerry Rice
All right. Thank you very much.
Operator
Next question comes from Brian Schwartz from Oppenheimer. Your line is now open.
Brian Schwartz
Hi, Chip and Cathy. I've got two questions for you.
They're business related questions I know everyone trying to dissect the numbers. Mine is more classroom process related and what you're seeing behind the scenes.
So, the first question I wanted to ask you about is really in regards to what's happening with the sales cycles of the business and when I say sales cycles I'm really talking about your sales in your service cycles around three things; one, you're marketing services that you offer; two, your R&D and program development for new programs; and then three, you're adding new partners and/or programs. Are they getting complexity cycles, are they getting elongate at?
How is the data around these sales cycles changing over the past year? And then I have a follow-up.
Chip Paucek
Well, that's a question there, Brian. So, I'd say is that all three gather you got to separate them out.
So, program development or new partner signing has gotten over time shorter in a way that's positive. That has more to do with the fact that we're certainly expanding more within our partners suite because we have a big partners suite.
At the same time, we thought this year -- 2016 was a great that the announcements we need for 2017, we love for a bunch of reasons, great diversity of geography and really leadership change people moving from one school to a different school in the past has really helped us a lot if you look like [indiscernible] Syracuse. And this year we got some really new action from some great universities that just are brand brand-new.
And they're really are just because our partners suite is with our programs. So, we've been able to I think with quality staffing, something that Susan has been real focused on.
If you look we made a bunch of announcements about hires. We are continuing to beep up different parts of the world to deal with what is a larger business.
We're not just adding all more time for ourselves here. We're building behind it.
So, couple of those I think have become more routine. I mean it's interesting that these programs just launched now, right.
Now there's a ton of people working here to make sure that they just launched now. But we haven't had to talk about that in a really long time because we're getting really good at it.
Marketing is a complicated story that I think we try to give you clarity around LTR to TCA, so you can get a sense as to what's happening and I think that's the way to approach it. But talking about the sort of cycle of marketing I think is sufficiently complicated enough that I'm not sure if we would want to give the playbook to everybody else.
What we have said is that it does take on average seven month for somebody to enroll in a program and then over time they deliver revenue by completing the program which is why ultimately the most important number across the whole thing is that retention this quarter was 83%.
Brian Schwartz
Thank you, Chip. That was a lot of color.
I appreciate. The one follow-up question I want to ask you was just how you think about internally about geographic expansion here within the United States.
As you think about adding partners across the different regions in the U.S. How do you go about balancing the decision between going depot with the partners and geographies that the business is already very well established and I referred of the two quos verse pursuing new partners in new regions like what the business is doing with the University of Dayton and Washu in the Midwest?
Thanks.
Chip Paucek
So, I'd say I do what they tell me to do. I mean getting aside the idea is to make sure that you got that combination of market opportunities institutional well.
We try to go into this in quite a bit of detail at the Investor Day. So, that may actually be a useful PowerPoint for the investor community to revisit because Harsha tried to show that the vertical breadth and it leads to just conceptually in different sizes of verticals based on degrees conferred how many we might do that’s Greenfield but it gives you quite a bit color and geographic diversity is real important.
At the same time that all institution will think once again it’s not a complement to our partners, it is like having the right people on the other side is a big part of the equation. So, geographic balance is important, but it is not the only story.
Brian Schwartz
Thank you for taking my questions at this afternoon and on a very strong results this year in 2016, congratulations.
Chip Paucek
Thanks Brian.
Operator
And your next question comes from Jeff Silber from BMO Capital Markets. Your line is now open.
Jeff Silber
Thanks so much. I am going to ask the question and everybody seems to be asking this earnings season every company.
So, we've got a new President down in Washington I know there may not be some direct impact on your company, but I am just wondering are there any policy changes any talk of policy changes that could be either beneficial or detrimental for your company?
Chip Paucek
You know Jeff, we were prepared in either case and we felt strongly that to you would do very well in either case. So, you know that kind of where I believe -- there clearly some that believe that regulation will change the reality is when your brand stood from some of the best brands in the world you have to be super careful regardless.
So, we were prepared in either outcome and we feel very good about the company going forward and would it felt honestly just as good in the other case. Its more I feel like that's kind of just what the story is from that standpoint or so.
Jeff Silber
Okay, fair enough. And then Cathy this one is for you.
In terms of the financial outlook on revenue, what revenue per student trends or assumption should we be making? Thanks.
Cathy Graham
Yeah. It’s actually looks like it’s going to be a year where average revenue per FCE is going to be remain relatively flat.
We may see the typical kind of the up a percent, down a percent kind of thing that happens throughout the year just depending on timing and mix between quarter, but we’re not anticipating any significant movement one way or the other.
Jeff Silber
Okay. That’s great to hear.
Thanks so much.
Cathy Graham
Thanks.
Operator
And your next question comes from Corey Greendale from First Analysis. Your line is now open.
Corey Greendale
Hi, good afternoon. Congratulations on year and new headquarters.
Couple of questions, so the top 10 list are all a part of that top 10 list that the 300 to 400 new students scale?
Chip Paucek
We don’t disclose that Corey.
Corey Greendale
Okay.
Chip Paucek
We try to give it relative. I mean obviously certain programs have disclosed on their own what their sizes are but ultimately you know there's a reason that we just -- we try to give you additional color so you can understand the story, but ultimately, I would kind of have to leave it to you to do your own map or not.
Corey Greendale
Okay, that’s fine. I wanted to ask about the -- people may ask you about the cohort, I think there is only one people haven’t asked about cost – about that one which could be the two to three year cohort which is exactly we said it would be comparing it to the two to three-year cohort last year that last year that cohort is actually positive EBITDA and this year its negative, I just – and these are pretty I think – big programs in the cohort this year, so if you can just comment on why that change in profitability?
Cathy Graham
Yeah. Absolutely Corey and you hit it right on the head.
We said even last year that 2013 cohort which was last year in that two to three-year bucket, was ahead of what we would expect and we expected that the 2014 cohort would come in more typical in the sort of single digit of losses and in fact that's exactly what has proven out. The thing that if you look at that 2013 cohort it has in it -- what is probably most -- the program the launched program that as had is maybe the best MPV program from a financial performance standpoint and so that cohort actually mode through fidelity on the back of that and another large program launch faster than we would have expected.
The following year, the 2014 cohort has in it at least one fairly significant Greenfield and in Greenfield you are often spending far more money in the early stage to drive revenue in there and so it’s just variability in the mix of what these programs are high and completely expected given the profiles of those cohorts.
Corey Greendale
Great and Cathy seems it is very helpful since you’re going to roll with that. One other for you which you appreciate all the detail on the CapEx can you give us some sense in 2017 why you separate free cash flow or year-end cash or just some direction on that?
Cathy Graham
We are not going to talk about year-end cash quite yet. We do want to reiterate that it's really depending on some of the timing.
We would look at spending obviously spending more cash this year and its one of the reasons why we really can’t talk about free cash flow in -- how 2017 will play into free flow. But we do feel standby that if you take out sort of these additional spikes for outsized capital asset additions related to facilities that we still believe what we discussed at Analyst and Investor Day which was that when we were sort of doing the five to six launches -- cash flow breakeven was basically year after adjusted EBITDA breakeven, but if you kind of move to 10 map pushes out a year and then if you kind of move to 12 plus it pushes somewhere in that same neighborhood.
We will have the better view if we get further through the year but I think the principal still hold.
Corey Greendale
That as -- I and for the record you still believe the business plan is fully funded with the cash you have?
Cathy Graham
Yes.
Corey Greendale
Perfect. All right.
Thank you.
Operator
And our next question comes from Andre Benjamin from Goldman Sachs. Your line is now open.
Andre Benjamin
Thanks and good evening. I guess some of the biggest articles for degree areas you have not necessarily penetrated the JV, law degrees, engineering, medical doctor, biology, architecture I know we’re staying tuned for 2018, but I’m just wondering is there anything in particular about some of those areas that are concerns that people have raised since they are big I would imagine they been discussed and what are some of the things we should think about potentially resolving those concerns?
Chip Paucek
Well I mean, they are all different, they'll have different issues. We obviously have to go through accreditations and approvals but we do think over time if there is a good size vertical that we believe drives the right outcomes for the students and even more lately the ones that have clinical placements honestly even more attractive because we’re getting really good at that thanks to great team of people that are doing that here 2U.
There is just lot to do Andre and so some of it is – just got an example, we even done our second MBA, like we are just were early days and I know it didn't seem like it, but the company is early days in the story there is a lot left. You know and the fact that we are starting to like doctorate too is relevant, there is just a lot of opportunity there in the addressable market of high-quality verticals for great graduate programs.
Andre Benjamin
You continue to beat your own guidance also trend are clearly even more favorable then you expected and a lot of what you discussed is clearly very positive today in general is there anything that you can highlight that maybe was a little bit less favorable than you are expecting that I forgot offset by positive news?
Chip Paucek
I think it's pretty interesting that we included a section in our prepared remarks about assigned program that we told you about that we didn't deliver on. So, we are not trying to just give you all the rosy stuff, but the company is doing really well.
We are focused on the right things. We trying to be as transparent as we can and we really like where the business is.
I mean, I said I think we are delivering high quality digital education and doing it scale in a way that nobody else's do.
Andre Benjamin
Thank you.
Operator
And our next question comes from Jeff Meuler from Baird. Your line is now open.
Jeff Meuler
Thank you. Just given the Vanderbilt partnership structure may be a comment on your current thoughts on the enterprise model and whether or not that's evolving or how to think about the way to Vanderbilt is structured?
Chip Paucek
Okay. So, couple things about that -- you combined two there, I will just both quickly.
So, Vanderbilt -- I still think Vanderbilt -- the way Vanderbilt is structured you're referring to ED and school counseling together. Honestly, we have done that from the very beginning.
So, we've done that, done all the way back to -- you go to all the way back to Georgetown where we had the family nurse practitioner, the midwifery, acute critical care and nurse education all wrapped up in the one. So more than -- when we -- each program I think the most important thing for all of you to know is that's the financial term.
So, we may actually give you a different words for here shortly because program might confuse people when people are talking even internally at 2U or with of our partners of that very program to run. That's a financial term, that we're trying to give you clarity as to what it will deliver financially and I thought we actually did a good job on the Investor Day of highlighting the various puts and takes against the way to think about it.
So, that was sort of point number one at Vanderbilt. Point number two on the enterprise model, we love our partnership with Simmons.
They’ve been an incredible partners, super flexible and we've been able to do a lot of great work together and enterprise was an idea to try to aggregate the five discreetly different things into the cost structure of one and as a program, or a financial term, we actually like what enterprise is delivering, but there's a reason we haven't enrolled out more enterprise programs. So actually, that might go back to one of the other questions about something that didn't go perfectly is the enterprise structure is something we've learned a lot from and financially as a program, we actually like what that program is delivering, but we're not going to be rolling out more enterprise structure.
So, those five different things in the cost structure one thing was tricky, but we do think we're learning a lot from it and as I mentioned, we don't consider that to be Vanderbilt at all.
Jeff Meuler
Okay. And then I guess just given the margin on the core four coupled with where the marketing efficiency ratio is despite rolling out new verticals, any thoughts to more aggressively leaning into marketing spend for some of the more established programs that are doing so well?
Chip Paucek
We kind of do that. So, the idea is that -- we have this whole real obligation to our partners to deliver for them and that's for the moral of that story is.
The ones that are doing well and the ones that aren’t doing as well as we want. We've got an obligation on both sides.
That's what these school have signed up for is extremely high quality, at scale that improve their side of the equation also. So, we do that all the time.
Jeff Meuler
Got it. Thank you.
Chip Paucek
No problem.
Operator
And our next question comes from Alex Paris from Barrington Research. Your line is now open.
Chris Howe
Good afternoon. This is Chris Howe sitting in for Alex Paris.
Cathy Graham
Hi.
Chris Howe
Hi. In regard to the article that Chip had highlighted, can you talk about or provide additional color on the changing dynamics in the corporate workplace and how that's influencing the actions of traditional universities, your internal thoughts on that and maybe what impact this is having so far on the speed of adoption?
Thank you.
Chip Paucek
Well the reality is there is a ton of need for high-quality education and we do think that we play hard in helping universities today adapt to the needs of the workplace because why should you pick up you like, quit your job and move to 10 grade grad school. That's kind of a big deal.
Over time, things like data sciences, speech are both great opportunity for the company in verticals that would not have registered on people's radars at the time that we think provide really high quality financial and job outcomes for folks. And I think over time you'll see us -- they're a key focus of the company, driving the outcome for the student.
Chris Howe
Thank you for taking my question.
Cathy Graham
Thank you.
Operator
At this time, I'm showing no further questions. I would now like to turn the call back over to Chip for any closing remarks.
Chip Paucek
Thanks operator. So, before we go, I just want to say a special thank you to our accounting team led by Chief Accounting Officer Andrea Papa, including Dan Wick, Bryan Moore, Dave Solow, Andrew Nowak, Crystal Johnson, Kelly Wong, Tam Ogula, Ashley Lyle and the incomparable intern Daniel Edward for their support this earnings season.
We'll see you out on the road folks.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program.
You may now all disconnect. Everyone have a great day.