May 5, 2017
Operator
Good afternoon. My name is Connor, and I'll be your conference operator today.
At this time, I would like to welcome everyone to the 2U Incorporated 2017 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Ed Goodwin, VP of Investor Relations, you may begin your conference.
Ed Goodwin
Thank you, operator. Good afternoon, everyone, and welcome to 2U's first quarter 2017 earnings conference call.
By now, you should have received a copy of the earnings release for the company's first quarter 2017 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 Christopher -- 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 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 31st, 2016, 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 Ed. Well, it's been a big week.
We've got a lot to talk about on this call so fasten your seatbelts. First, I'll talk about our financial result, then pipeline very briefly, which is excellent, and then our pending acquisition of GetSmarter.
Back in 2008, a small team believes that we can help transform a great university into a better digital version of itself. Online education could be great if you could convince some of the world's best universities to also believe.
Over the past nine years, our management team has remained focus; enabling high quality student outcomes and helping our partners succeed in their transformations. Our business is now showing the full promise of what we believe was possible and we're evolving appropriately to meet new market needs.
First, our financial results, the first quarter kicked-off another great year for 2U across all of its financial measures. Revenue for Q1 was $64.8 million, a 37% improvement year-over-year.
On the bottom-line, adjusted EBITDA was $3.9 million for the quarter, an improvement of approximately one percentage point in margin year-over-year. We're thrilled with the results and Cathy will provide more detail later in the call.
Moving onto pipeline, our domestic graduate program, or DGP business, continued its rapid growth. Earlier this year, we confirmed our 2017 launch targets and announced our DGP launch cadence over the next three years.
If met, these would result in more than tripling our total launched DGPs by the end of 2020. Even still that would only be 42% penetration of our long-term total DGP target.
Sitting here today, we're very confident in our ability to meet these targets. We continue to see increasing demand for DGPs from new and current partners.
Our newer partners asking [ph] to launch multiple DGPs from the start and most of our existing partners continue to ask for more. That's reflected in recent announcements.
University of Denver became our 18th partner, with two initial DGPs expected to launch in January 2018. MBA@Denver, a Master of Business Administration degree, and MSW@Denver, a Master of Social Work degree.
We like these a lot. Both DGPs add a new geographic presence in existing multiple program verticals and the leadership at 2U is just fantastic.
Their strong commitment to being a good private institution dedicated to the public good and their entrepreneurial innovative spirit shine through in everything they do, go pioneers. We also announced a new DGP with our first partner, University of Southern California, DGP at USC, a Doctor of Physical Therapy degree, yes, I said a Doctor of Physical Therapy.
This is USC's fifth DGP with 2U and the USC division of Bio [Indiscernible] -- I know I was going to get that, Bio -- Cathy, help me out.
Cathy Graham
Biokinesiology.
Chip Paucek
Thank you. Biokinesiology and Physical Therapy is now the fourth school at USC to partner with us.
Notably, their current Physical Therapy program is right number one in the country by U.S. News & World Report.
We're also excited to add physical therapy as our 24th vertical. According to the U.S.
Bureau of Labor Statistics, physical therapy careers are expected to see growth of 34% between 2014 and 2024. Physical therapy is an example of a vertical that we're able to answer because of our incredible placement function.
Verticals will lead to licensure, like physical therapy, typically requires students to complete many hours of practice and assessment in clinical settings to graduate. Working through an entire curriculum on your own at your own pace is an option here and we knew this [Technical Difficulty] the company.
So, we built a bundle of solutions designed to support a differentiated, engaging market environment that includes live classes, group projects, intensive residencies, and local clinical placings. This is true with digital education and it's the reason why we have DGPs in nursing, social works, speech pathology, mental health counseling, school counseling, and occupational therapy.
With these New Denver and USC DGPs, we now have slotted five of the 13 new DGPs we expect to launch in 2018. This is all ahead of schedule.
Before we move off of DGPs, I want to briefly touch on some news related to previously announced contracts Syracuse JD, just to give you full disclosure, whether it's good or bad. To ensure that graduates from this program consists of the bar in any state, Syracuse needed to receive ADA approval.
The first step of this project is winning an initial variance. That was recently [Technical Difficulty].
This is not dissimilar to what happened with LTA. Syracuse is planning its path forward and we'll support them in this process.
We do so love this vertical, we love the idea of a JD, but as we told you when we announced the contract, we're not counting on this DGP to hit our announced launch targets. We thought this was going to be an involved process and it will be.
Change is hard. A quick update on Yale, since I know you'll ask.
Things were progressing nicely as they moved to the accreditation process, but that's about all we can say. To wrap this up, pipeline is in a really good place and we're super confident in our launch case.
Expect more announcements in the coming weeks. Now, changing gears, at 2U, we hold a Private Annual Company Meeting for full-time employees as a big part of our company culture.
Past themes reflected the company's needs and emotion that time, including the theme of believe in the past meeting, or drive in another meeting. So, what's the theme of this is company meeting?
Well, it's super relevant, the theme is evolve. As a market leader in a sector undergoing significant change, we must use our position to continue to evolve for our clients and their students.
Education is a means to an outcome. Graduate degrees are remarkably powerful currency and we believe they will continue to deliver life-changing outcomes.
But not everyone in the world can afford a graduate degree. Not everyone has enough time to pursue a graduate degree.
And in some cases, a non-degree alternative, like a certificate, as what they need. This is not a story of or, it's a story at and.
We've always believed that non-degree alternatives will be part of our long-term growth strategy. We just didn't necessarily know how or when.
Our DGP business was and is too strong for us to think about building a non-degree business by ourselves. We've seen many acquisition opportunities within the higher education market over the years, but none of them until GetSmarter made sense.
This was an opportunity we simply could not pass up. Back in 2008, an ocean away, there was another small team that believed that digital education could be great.
Sam and Rob Paddock founded the company called GetSmarter in Cape Town, South Africa with an eerily similar mission and complementary business to 2U. GetSmarter powers engaging online short course certificates and mirrors the 2U model of high touch, high quality digital education with a focus on student outcomes.
They currently partner with seven world-class universities; Cambridge, HarvardX, MIT, University of Chicago, and Africa's top there Universities, University of Cape Town, University of the [Indiscernible] and University of Stellenbosch Business School. This table is incredible brand relationships is comparable to ours, one could be one more impressive.
I'm super excited to add my personal repertoire that Cambridge was founded in 1209 by King Henry III, 683 years before Coca-Cola. For those of you playing along, update your bingo squares.
GetSmarter broadens our product assortment with lower price open enrollment certificates. Their portfolio includes over 70 short courses, including business Sustainability Data Management at University of Cambridge, Health Informatics at University of Chicago, and Graphic Design at University of Cape Town.
They offer short courses; GetSmarter follows the 2U mission of providing high-quality, high touch digital education. You're not alone when you take the GetSmarter short course.
Their people-mediated approach helps drive the course completion rate at 88%. This is really unusual in the short course world and is often by the way.
Not only does GetSmarter give us immediate presence in the [technical difficulty] alternative market, it also becomes our near-term international strategy. While there's global demand for U.S.
graduate degrees, short courses provides a best product market fit for very broad international adoption. With its lower cost, shorter time frame and open enrollment format, GetSmarter is the true international product that has enrolled students in 150 countries.
So, what about synergy or leverage? Well, first of all, we're not doing this for cost-efficiencies on either side, that's not the good story to battle [ph].
We're doing it because the fit is incredible. Their product is a perfect fit for us.
It broadens our reach across different student needs. GetSmarter enhances our ability to help right student choose the right education at the right time.
This year, hundreds of thousands of prospects will ask for information at about graduate degrees offered in our DGPs, but less than 2% of those prospects will end up enrolling in the DGP. Even though [technical difficulty] the other 98% are qualified, what happens to them?
Well, short courses are not in for prospects who can't afford a graduate degree or might not have the time to pursue it or for prospects looking for more targeted skills. The short courses can also be additive.
They can be supplemental education from the student that do enroll in a graduate degree program. We believe that short course certificates from GetSmarter will be an option for people to both add and update skills throughout their careers.
Someone might need a FinTech course, or Digital Marketing, or Compliance Management. I highly recommended that all of you check out and by the way, pay for, a GetSmarter course.
We think you'll love it. We believe, over time, 2U's marketing and data analytics capabilities will provide many opportunities for GetSmarter to improve what they already do extremely well.
Both teams already have thoughts on course selection algorithm for GetSmarter is just one example. [technical difficulty] competitive framework here, in some ways the degree market is a harder place to start a business, which is why competition often starts with non-degree alternatives.
They pitch our clients on non-degree alternatives like certificates, and our clients often want them. 2U has hadn't much of an answer for this over the past several years.
Well, guess what, we do now and we believe we have the best answer, it's called GetSmarter. The client reaction has been even better than we expected.
When we wrote the first draft of this script, we said in that draft that we believed our pipeline would have GetSmarter and that their pipeline would help us. Well, we love what we've heard this far After the announcement, 2U clients have asked for short courses.
And GetSmarter clients asked for graduate programs, sort of what we expected, but we're really excited to see it happen so quickly. We like the deal terms too and Cathy will talk about in her section.
We believe the DGP business will continue to grow over 30% for the foreseeable [technical difficulty]. Well we do expect the addition of GetSmarter will accelerate the combined companies growth.
Its right for 2U, its right for GetSmarter, and it makes me really bullish on our joint future. I'd like to thank the brothers, Sam and Rob Paddock for building an exceptional company with an exceptional team.
It's a truly perfectly fitting puzzle piece. And now, I'll hand it over to Cathy.
Cathy Graham
Thanks Chip. 2017 kicked off with a strong first quarter.
Revenue came in nicely ahead of our guidance and that performance produced higher demand anticipated adjusted EBITDA. At $64.8 million, first quarter revenue exceeded the comparable 2016 period by 37%.
Revenue for the quarter came in higher than expected, primarily because of strong FCE growth. But also, in part because of adjustments to student refund allowances at four university partners that moved [technical difficulty] favor.
Our first quarter revenue, approximately of $450,000 was generated by improvement in those student refund allowances. That said, revenue growth was indeed once again driven primarily by an increase in FCEs.
Compared to the prior year period, first quarter FCEs increased by 35% and average revenue per FCE increased by 1%. FCE increases were generated across our DGP base, but as our model projects, the largest increases were from DGPs and their first three to four years of operations.
As we expand our portfolio with additional launches at new and existing university partners, our revenue base continues to rapidly diversify. Now, looking at our earnings measures, first quarter year-over-year net loss and net loss per share remained flat with the prior year period at $3.4 million and $0.07, respectively.
The corresponding net loss margin, however, improved by two percentage points compared to the first quarter of 2016. After adjusting for $3.9 million in non-cash stock-based compensation expense, first quarter adjusted net income was $500,000 or 1% of revenue.
This represented a $300,000 and one percentage point year-over-year improvement to adjusted net income and adjusted net income margin respectively. Adjusted net income per share increased $0.01 in the current quarter from zero in the prior year period.
Note that both net loss and adjusted net income were negatively impacted by approximately $425,000 in forecasted accelerated depreciation, primarily related to the move to our new headquarters building. In process, we made the determination to accelerate depreciation on more furniture and other [technical difficulty] that originally estimated and so have accounted for those costs in the first quarter.
After a further net adjustment of $3.6 million consisting of depreciation and amortization expense, offset slightly by an immaterial amount of net interest income. First quarter adjusted EBITDA was $3.9 million or 6% of revenue.
This represented a $1.7 million improvement in adjusted EBITDA and a one percentage point improvement in adjusted EBITDA margin over the prior year period. From a balance sheet and cash flow perspective, we ended the quarter with $142.9 million in cash and $28.7 million in receivables, the majority of which have been collected since quarter end.
During the first quarter, we had cash capital expenditures of $14.3 million, of which $4.9 million were cost to be capitalized related to technology and content development. The remainder were primarily costs related to build out of our headquarters facility to support our growing workforce.
Now, looking forward, we've provided guidance for the second quarter and as our business continue to perform, are raising our guidance for full year 2017. Before discussing the details, however, I want to confirm that the guidance we're providing today is only for 2U.
It does not include any expected results for the pending acquisition of GetSmarter. We will provide updated guidance, including GetSmarter, once we close the transaction and made the appropriate filings, which is expected to happen in the third quarter.
On the topline, we're expecting revenue of between $64 million and $64.4 million for the second quarter and $269.4 million and $270.9 million for the full year. At their midpoints, these [technical difficulty] year-over-year growth of 30.7% for the second quarter and 31.2% for the full year.
With regard to second quarter revenue guidance, you'll note that while we typically expect to see a slight sequential increase in revenue, the range we've provided to this below the revenue we delivered for the first quarter. This is largely because of the additional revenue generated by that $450,000 in reductions to student refund allowances we saw during the first quarter.
Without this additional first quarter revenue, our second quarter revenue guidance would be relatively flat. Before moving to our earnings guidance, I'd like to remind you that we made a strategic decision to accelerate the rate at which we launch new DGPs, increasing our guidance by three DGPs per year through at least 2020.
When comparing our current earnings expectations to prior year period results, remember that increase in the number of DGPs in their investment phase has the effective slowing the pace of margin improvement as measured at the adjusted EBITDA level. I also want to remind you that in second quarter, we typically incur a disproportionate amount of annual costs that reduce our earnings measures related to meetings, trainings, graduations and other periodic events.
This typically leads to second quarter earnings measures that are seasonally the lowest of the year. With these reminders out of the way, let's turn our expectations for earnings measures.
We now expect a net loss of between $11.4 million and $10.9 million for the second quarter and between $26.8 million and $25 million for the full year. We also expect an adjusted net loss of between $5.8 million and $5.4 million for the second quarter and an adjusted net loss of between $6.2 million and $4.7 million for the full year.
For each of these net loss and adjusted net loss ranges, midpoint guidance shows losses that are somewhat larger, but margins that are slightly better than the corresponding prior year periods. I'll remind you that as we said previously, we expect meaningful increases in year-over-year stock-based compensation expense to continue through 2018 and depreciation expense to increase faster in 2017 than in prior periods because of the recent unexpected facilities buildouts.
These two factors are offsetting the purposefully smaller expected year-over-year improvement in adjusted EBITDA results and margins. We expect an adjusted EBITDA loss of between $2.1 million and $1.7 million for the second quarter and adjusted EBITDA of between $9.5 million and $11 million for full year 2017.
Adjusted EBITDA excludes the impact of both stock compensation and depreciation and amortization, so midpoint guidance implies year-over-year improvement in both expected results and corresponding margins. Now, before I wrap-up, I'd like to circle back to GetSmarter.
We haven't closed the transaction yet, so while I can't provide much in the way of financial expectations, I can give you some additional color on their business model. GetSmarter creates courses with leading Universities in the U.S., U.K.
and South Africa, and offers them directly to students around the globe. These courses are priced in the currency of the partner University, and per course prices currently average around $2,500 for U.S.
and U.K.-based courses and $1,000 for South Africa-based courses. Like 2U, GetSmarter share course tuition with its University partners and its revenue share percentages are generally [technical difficulty] 2U receives under our agreement to somewhat better.
GetSmarter's revenue was approximately $17 million in 2016, a bit more than half of which was generated from courses offered with its South African University partners. In late 2016 and early 2017, however, GetSmarter significantly increased new client wins with U.S.
and U.K. Universities.
This trend lead us to expect a substantial increase in the number of courses offered, a number of students taking courses, and an acceleration not only in their business, but in the business of the combined company. GetSmarter provides a range of services around its course offerings that parallel 2U services; course creation, technology platform, student acquisition and student support.
They also provide the academic tutors that work with students during the course presentations. However, you should think of the economic lifecycle of a GetSmarter course as being significantly shorter than for a 2U DGP.
While for 2U DGP, it takes an average of seven months from our first contact with the student until they're seated in their first class, GetSmarter students are generally taking their course within a month. And where it 2U DGPs generally take two or more years to complete, GetSmarter courses average 10 weeks in length.
This shorter cycle of investment to recovery means that a GetSmarter course does not have the substantial investment and long recovery period of a 2U DGP. We've agreed to pay the GetSmarter shareholders approximately $103 million in cash at closing and up to an additional $20 million based on achieving certain financial targets for 2017 and 2018.
We have also agreed [technical difficulty] $9.4 million in restricted stock units to certain members of management. Of the approximately $103 million we'll pay at closing, about $2.2 million of bonuses and other cash costs will be expensed through our income statement, instead of being accounted for as purchase price.
After excluding these announce, and including the estimated impact of potential future mark -- capital market activities to replenish cash, we expect that the acquisition of GetSmarter will be neutral to adjusted net loss per share for 2017. With these items and additional transaction-related stock compensation expense, however, we expect the acquisition to be dilutive to full year 2017 net loss per share.
So, the last few months have been pretty eventful at 2U. Multi-year DGP launch targets published, new DGPs announced, headquarters moved and [technical difficulty] agreements signed and strong first quarter financial results posted.
We're excited to continue delivering against the objectives we've set out for the rest of the year and are looking forward to updating those with our expectations for GetSmarter once that transaction is completed. Chip?
Chip Paucek
Thanks Cathy. To close out our call, I wanted to provide a for something we're doing.
It's our new podcast called The Front Row. The Front Row is about what it takes to solve the problems of the future and how our partners and others are making an impact.
The episodes demonstrate how digital education is at the forefront of progress. The blog is now live at thefrontrow.2u.com and a podcast launches May 9th.
In fact, the first episode is called The Workforce of the Future, super relevant to our GetSmarter front. Check it out because it's well worth your time.
Finally, I'd like to thank the 2U to worked so hard on this transaction and to welcome our new [technical difficulty], GetSmarter. We look forward to a very bright future together.
And with that, we have plenty of minutes to receive your questions.
Operator
[Operator Instructions] Your first question comes from the line of Michael Nemeroff with Credit Suisse. Your line is open.
Michael Nemeroff with Credit Suisse, your line is open.
Michael Nemeroff
Thanks for taking my questions. I'll just take a minute here and ask you a little bit more about GetSmarter.
Since the rest of the business to be performing extremely well. I'm curious and I'm getting this question from investors, what is the special sauce about GetSmarter?
We've been hearing about what makes 2U so special, is it GetSmarter's technology, is it their client base? And then I have a follow-up for Cathy maybe.
Chip Paucek
Thanks Michael. So, I would say culture.
The -- incredible team matters and we've learned that over the years here. I do believe that when I went to visit the first time, I was -- we wrote the words yearly similar for a reason, that's not a complement to us -- complement us, we're pretty proud of our team, but Sam and Rob have built an incredible team that really cares about what they're doing and is trying to drive a really big agenda of the world's best digital education in a very similar way.
When you move that to the product, I will tell you that the brand's footprint is really incredible. These are awesome institutions that they're working with.
And the approach is unusual, it's people-mediated. So, the fact you're aligned with a tutor in small groups is really unusual for this type of product and something that was immediately appealing to us, which leads to 88% completion rate.
So, overall, we really like the product and I wasn't kidding when I said I would love all of our investors to go out and purchase a GetSmarter course. So, really incredible people and a really good product.
It fits perfectly to what we're trying to accomplish. [Indiscernible].
Go ahead
Michael Nemeroff
Chip, you said that you were going to effectively what it independent, but I'm curious, logistically speaking, as people are talking to your people in funnel and trying to turn them into applicants to the partner schools that you're currently working with for degrees, how is that going to work where you're just going to wait a period of time if they don't convert and then hit them with an offer for a certificate course. I'm just trying to think from a strategy perspective how are you thinking about that?
Chip Paucek
Well, Mike, I think you know that one of the things we don't [technical difficulty] on these calls is give a tremendous amount of information about what our competitors may learn in terms of how we do things like prospect delivery. In a short-term, I will tell you, we obviously [technical difficulty] disclose and then we've already got a great summer plan between the two management teams and I look forward to digging in with them.
We do think there's a lot of runway, just to give you a couple of numbers, 400,000 prospects between 2017 and 2018, 2U will generate 400,000 prospects in just business and data science. And if you're converting less than 2% of them, that leads to large number of people that are converting to a particular opportunity.
So, we do think there's a lot power [ph] in the combination, but these guys are doing incredibly well on their own. So, we're going to take it patiently and work diligently with Sam or Rob to sort of drive the business going forward.
And you'll get -- what I will tell you, we knew we get a lot of questions on this call about it and you'll get a lot of answers once we closed. Sorry, [Indiscernible] in close and then we'll give more color and guidance as we do in our DGP business.
Michael Nemeroff
That's great. All right.
Thanks for taking my questions. Congratulations.
Chip Paucek
No problem.
Operator
Your next question comes from the line of Michael Tarkan with Compass Point. Your line is open.
Andrew Eskelsen
Hey guys, it's actually Andrew Eskelsen on for Mike. Thanks for taking my questions.
I will sort of change it up and just on competition, can you sort of talk about what you're seeing in the competitive environment? Is it still relatively dormant?
And if not, where are you seeing that emerge from? Is it -- schools doing themselves, full service providers, à la carte offering, can you just talk about that?
And I have a follow-up.
Chip Paucek
So, I would say that we do think we continue to be the market leader and we're not letting off the gas. We're not resting on our [Indiscernible], the reason for evolved fee was GetSmarter, but it's also continuing to evolve what is the comprehensive bundle for our clients in a way that I think does put us further ahead of the competition, whether it be -- we've got really thing that is now sort of obstacle character recognition, scanning 44,000 transcripts last year to complete students for our clients.
We've got better data analytics. And keep pushing all those things forward, I think we'll ahead of the clients.
As you think the competitive nature of this with our team up with GetSmarter is also real. If this transaction is mostly offense something we just couldn't -- we really couldn't pass up, it was just too good the combine -- sort of combined entities.
There's also a little bit defense here and this is a place where people sort of want to come at us and go to our clients and offers short courses or certificates and the reality is we haven't had a great answer for that. So, now we do, even excellent [technical difficulty] it's called GetSmarter.
So, I'm not going to tell you that these are really big market places, you're talking about 80 billion graduate education of the U.S., you're talking about 1.9 trillion worldwide higher Ed, so there will be plenty of people that try to do things themselves and there will be plenty of other entrants. But we've been more and more emphasizing is that online education really, why because that has a bad rep, it's the world's best digital education.
Andrew Eskelsen
Got you. Thank you.
Still on the U Denver Social Work Program, I believe that they already have an existing online program and that you guys are either taking it over or replacing it. Was that a competitive win or did the school run it themselves, can you just talk through that a little bit please?
Chip Paucek
Yes, that's a good question. And you're correct, they did have a program and the school was running it themselves.
So, we had a couple of times now, in this case, the school was excited to partner with us and scale the programs, and do what [technical difficulty]. We're honored that they work with us, we do think that that geography and the combination of what is very highly ranked school, Social Work in a geography that we have very low penetration overall is a big win.
So, we're seeing more -- more and more we're seeing the competitive landscape, you do have other contracts coming to us at times, but I think it's way too early to talk about share. The overall market is growing and we do think that while we're happy to have contracts come to us, if they're contracts that we want, the reality is the market is growing so fast, there's plenty of opportunity to grow around.
Andrew Eskelsen
Okay. Thanks.
I've got one more if I can. This is on the -- I know you touched on this briefly, but in regards to marketing efficiency on the recent acquisition, can you talk about how you -- I know you don't want to give things away competitively, but can you talk about how you sort of expect this to affect your conversion rates?
How should we think about efficiencies given that you've gained the ability to better monetize your marketing funnel?
Chip Paucek
It's just way too early for us to get into that. I mean I would caution everyone to remind them that this was fine at almost 11:00 P.M.
Monday night and we announced it at 9:15 Tuesday morning. So, not a whole lot of time in between Tuesday and now, so, we'll get back to you once we close the transaction with more details.
Andrew Eskelsen
Okay. Thanks for taking my questions.
Operator
Your next question comes from the line of Kerry Rice with Needham. Your line is open.
Unidentified Analyst
Thanks for taking the question. This is [Indiscernible] on for Kerry.
First, just on GetSmarter acquisition. Now with acquisition, you opened up to the total addressable market of $1.9 trillion globally, so how should think about like in terms of investments focus for 2U, are you going to -- obviously, the DGP is going to be the primary focused.
But in terms of expansion, are you going to continue doing international non-degree short courses, or are you going to roll out the graduate programs internationally, or doing the short courses domestically? Any sort of color would be helpful and I have a follow-up.
Chip Paucek
So, obviously, as I just mentioned, it's all very new. And we -- first of all, just to be very clear, this is not part of a broad M&A strategy.
We don't have a [Indiscernible] person for a reason. This was opportunistic and it was a strategic fit while we like transaction a lot in terms of shareholder value, this was a strategic fit more than anything else.
And in the short-term, we're pretty full with opportunity. Our DGP business continues to grow very quickly and now we've got a great opportunity for non-degree alternatives.
So, this is where you're going to see [technical difficulty] in the near-term to the point where GetSmarter provides an excellent international strategies well that I mentioned in the call. So, this fulfills our international strategy for the time being because of -- there's so much opportunity within these two segments.
Part of the reason for the entire transaction is that there's a fantastic team in South Africa that is focused on these non-degree alternatives and so that was really appealing to us. The people are really excellent.
So, we're driving the whole thing together, we came up with this idea of better together and we think it's very true.
Unidentified Analyst
Thanks. And next question is for Cathy on the sales and marketing cost this quarter, seems like it's little bit of step-up from what we have anticipated.
Is this because of the cluster of programs that launched last year picking up the marketing gap to ramp that or any other reason into that? Thanks.
Cathy Graham
Yes. So, part of the answer is we did launch some things in late last year that we are in the process of scaling.
But add to that the fact that we are accelerating our launch cadence from six last year to 10 this year and then we'll be further accelerating it into 18. We are -- early on, you're putting gas on driving the ramping of those DGPs.
So, it's a combination of launching things late in the year, last year as well as the fact that we have accelerated our program schedules for this year.
Unidentified Analyst
Okay. Thanks.
Operator
Your next question comes from the line of Jeff Meuler with Baird. Your line is open.
Nick Nikitas
Hey guys. You got Nick Nikitas on for Jeff.
Just circling back to the new program announcements in Denver specifically, MSW MBA two verticals that you guys have obviously had a lot of success in just given that success in the past, can you talk about potential pipeline as we look into 2018 for the two programs that you're launching? And how that can lead to some early success in the programs?
Chip Paucek
As I mentioned pipeline is super strong and I feel better about pipeline right now than any earnings call I've done since we were public. It's really strong.
Andrew Hermalyn and the team are doing a great job and we're very confident about our launch cases. So, I'm not sure where else to go on that one for you.
Nick Nikitas
Okay, I was more so specific to MSW and MBA verticals and launched--
Chip Paucek
If you go back to the disclosure we gave at our Investor Day, we gave a rough framework of how many programs we were thinking about in different verticals, based on vertical sizes and those are two large verticals. So, we do think that there's opportunity in those verticals.
At the same time, you look at something like the DGP, which is really highly differentiated and I don't think competitors will get to that segment anytime soon. One number -- we haven't talked about this quarter is our placements across 34,000, so 34,435 to be exact in over 25,000 contracted agencies, 25,750 agencies.
So, that's pretty -- that's real scale and allows us to enter verticals that have this kind of job growth. That's really what you want because then the outcome is excellent and ultimately, it's all about the outcomes.
So, you're going to see us continue to do, honestly what I told you we're going to do. So, we're just doing what I told you what we're going to do.
We're going to launch more in existing verticals and we're going to do new verticals when we think that they're really attractive, sort of combination of market opportunity leading institution well.
Nick Nikitas
Okay. Thanks.
And then just JD the program announcement, appreciate the candor and disclosure, anything you can say to us on timeline or is it still kind of TBD at this point?
Chip Paucek
It's -- we were in this situation before and I'm sure we'll face it again, change is hard. And these -- our clients are really trailblazing.
And we really like this vertical and we're going to stay at it. But the reality is they're just not like [Indiscernible] because it doesn't do me any good.
So, ultimately, we have a lot of confidence in our partner [technical difficulty] and most importantly for investors, if you remember when we announced this in the first place, we told everybody to ignore it because it wouldn’t really go live until it goes live. And we also told you we weren't relying on it.
And I do feel like our progress on 2018 pipeline probably gives everybody comfort -- it certainly gives me comfort. We're ahead of schedule and also notably, we probably should have said this in our script, we got some nice January launches, which is something we didn't have this past year in 2017.
So, we like the timing a little bit so far of the pipeline.
Nick Nikitas
Okay, that's helpful. And then one last one for me.
Cathy on the tuition refund, so that's just isolated to Q1, and there won't be an impact over the remainder of 2017?
Cathy Graham
Yes, what we thought there is -- actually we had a couple of programs, particularly last year anniversary date, which is [technical difficulty] you see some more material adjustments. I mean every quarter we'll have a little movement in one way or the other as we through things up.
But honestly, nothing like -- we don't usually see this magnitude it of movement. So, we would not anticipate having this fee in any way recurring.
Nick Nikitas
Okay, great. Thanks.
And congrats on the continued strong performance
Chip Paucek
Thank you.
Operator
Your next question comes from the line of Jeff Silber with BMO. Your line is open.
Henry Chen
Hey, guys. It's Henry Chen.
Good afternoon. Just had a question on how you're thinking about going after the certificate market in the U.S.
I know for your DGPs, you have defined a framework in terms of graduate, strong outcomes, and going after same verticals. I was wondering -- I know it's early, if you have any similar framework of how you're going after the certificate market, especially since that space seem to be change pretty dynamically recently?
Chip Paucek
We have a lot of ideas, but it's just too early, Henry.
Henry Chen
Okay, fair enough. And just switching over to current trends.
Any color you can provide on what's driving the acceleration enrollment growth and some of the better margins than expected?
Chip Paucek
We announced -- I know people have come to expect us to perform. The team, like people in this room, are exceptional.
They are really, really performing. They are great people.
And that is what this is what this all about. As people continuing to evolve in their jobs and get better at what they're doing and we don't talk about the efficiency entirely because it's not -- I appreciate the question because it gives me the opportunities to salute the people in the room.
They're getting really, really good. And not just the people in the room, but people in Europe, ion Denver, and L.A.
and so -- and Capitol Hill. So, it's all about our team just continuing to get better and better at this.
And I certainly learned over the years to value that team more than anything else.
Henry Chen
Got it, okay. Thanks for the color.
Operator
Your next question comes from the line of Corey Greendale with First Analysis. Your line is open.
Corey Greendale
Hey good after. Couple of questions.
So, first of all, I was hoping that you might be able to address the primary questions that I've been getting on GetSmarter, so the first is could you give -- I realize it's early, but could you give us any sense of just kind of level of -- should we be looking at each course as a separate program kind of as your current and more like in each university is an economic unit and what are the margins look like at maturity?
Chip Paucek
Yes, so Corey what I would tell you is I know it's frustrating, but you got to give us time. We're just not yet at a point where we're willing to give any sort of guidance on them.
It's so -- I mean literally we signed it Monday night, and we have a ton of ideas and they have ton of ideas. And we do think the acceleration is very attractive, but just not yet.
We just can't. They are private company, obviously, if they were public, there would a lot of information on them.
And we're working through it and we're super confident in the group together. But we just don't -- we're just not there yet Corey.
Corey Greendale
No, I understand.
Chip Paucek
But what we -- you also know that we -- I think we've proven over our three plus public years that we'll tell you.
Corey Greendale
No, I understand. The other question, Chip I'm hoping to get this -- this is what I've been getting a lot which is, so you talked about the defensive aspect of this, the universities were interested, you didn’t have a solution, the question I've been getting is when you add in a program, you just -- you hire people to do that, well, why don't just hire people -- hire a team of 20 people to start this out and start doing it as oppose doing a lot an acquisition.
Chip Paucek
I mean, very simply like if you look at what they've accomplished and you look at what they've built and you look at the remarkable fit, we think it's a much better strategy. Our team here is very consumed with what is a significantly scaling business.
When we gave the guidance at 2013, 2016, and 2019 just consider that the year before IPO, we did four. So, we're scaling our business and we're pretty focused on it.
And so having a team focused on that opportunity that fits us well as it does for us, we thought is well worth paying for.
Corey Greendale
Okay. And then I had one more mundane question for Cathy, which is just -- the cash flow in the quarter receivables jumped in as it did in Q1, is that just the timing of the academic quarter relative to the fiscal quarter at some university?
Cathy Graham
Absolutely at several universities, so that's why we note that we said that we gave you a receivables number and said the majority of it has been collected. So, nearly timing.
Corey Greendale
Okay, got it. All right.
Thank you.
Operator
Your next question comes from the line of Ben McFadden with Pacific Crest Securities. Your line is open.
Ben McFadden
Hey everyone thanks for taking my questions. I wanted to start with shocking GetSmarter.
I just -- Chip maybe can you talk about just from a strategic standpoint. Because I know what the core offering a big part of the strategy here will be multi programs in a vertical is to provide some level of differentiation so you fully capitalize on that marketing funnel.
Just curious how that relates to GetSmarter, whether they have a similar type structure currently or whether there's a strategy to drive a similar type structure going forward that's really going to capitalize on a larger portion of that marketing funnel.
Chip Paucek
Well, there's a lot of interest on their side of to serve be able to leverage the analytics that we built here. And so I do think there'll be a lot of applicability to what we now have done.
And then you also think about like think about a FinTech course, there's not a FinTech degree right, that's a good example of something that right now is a really interesting area that people want skills. And so -- but there's not a FinTech degree versus like if you think all like if you frame the two -- think about DGP with USC, the number one program in the country and something that is highly clinical over $160,000 and then a FinTech course from MIT, it's really a fantastic opportunity for someone to learn FinTech.
But it's obviously a lot less expensive and there's a different need there [technical difficulty] So, we think that there's a lot of applicability to what we've learned about how to deliver prospect sharing. But then it's just want to get a little too early for us to know much more about what -- for us to be able to tell you much more.
That's the point.
Ben McFadden
Sure. And then Cathy maybe just a non-GetSmarter question, just -- curious on us any update regarding the 2016 cohort and how that's ramping relative to cohorts you've seen in the past?
Cathy Graham
Yes, actually, ramping very nicely. It is doing what we would expect or better.
And so we think it's going to be a good strong cohort for us as we sort of move it through that first two years and into the point where we'll kind of report it on an annual basis.
Ben McFadden
Great. Thank you.
Operator
Your next question comes from the line of Andre Benjamin with Goldman Sachs. Your line is open.
Andre Benjamin
Thank you. My first question is as we think about this big ramp in growth and the cash is going to take to do that, and then you're going to fund this acquisition, I think that Cathy alluded to the fact that as you may need to replenish the cash offer at some point I guess how are you thinking about doing that?
Are you probably going equity again like you did the last time you raise cash or do you maybe think about taking on some debt? Any color on timing of when you would likely make that decision?
Cathy Graham
Yes. So, Andre we were fortunate enough to have enough cash on our balance sheet to be able to execute this transaction when it became apparent that cash was the best way to do this.
But after we close, we're going to be -- expect to be a position where we still have cash to meet our obligations and run the business. We have said that we're going to probably want to go out and replenish that at some future point.
But we're going to consider all of our options and that covers timing and the mechanism. So, it's another place where we can say, it's just too early yet.
We're not under pressure to do anything, and so that's -- we'll consider all our options at the time.
Andre Benjamin
Okay, that's fair. And then I guess in terms of the GetSmarter business, how should we think about the differences?
And how short courses operate and look internationally versus domestically? I know they've got some bold types of partners, is there a big difference we should we think about as you think to launch more in kind of the Western world?
Chip Paucek
We think that the broad international market appeal is a big part of why we love it. 150 countries, over 50,000 students, that's a lot.
I think it broadens our footprint in a way that's very attractive. But Andre [technical difficulty] question just too early to get into giving you sure guidance in that way.
We just don't -- it's just too early.
Andre Benjamin
That's fair. Thanks.
Operator
Your next question comes from the line of Brian Schwartz with Oppenheimer. Your line is open.
Brian Schwartz
Yes, hi. Thanks for taking my questions this afternoon and congratulations on a real good quarter.
I just have one -- I just have one for the topic of the cost today on GetSmarter, but I think I have a different one that I was just curious about. Within the category, whether its consumer ad tech or it's the short course certification category are there any deep verticals or industry expertise that GetSmarter is known for in the market?
Or is the business more horizontal across this new category? Thanks Chip.
Chip Paucek
Yes. I mean I think the way I would answer that, Brian, is ultimately, the competitive landscape for GetSmarter does have some differences from 2U, although some of the competitors for GetSmarter are gradually starting to try to work themselves into some form of us.
So that -- of course there are specifically. And by the way, if you look at the -- from a value standpoint, if you look at a lynda.com and you look at the trailing multiple of lynda.com when LinkedIn purchased them, we do really feel very strongly about shareholder value in this case.
So, the competitive landscape will continue to change. We think GetSmarter and 2U together are really, really well poised for that competitive landscape.
We now really have a full assortment of what a great university would want in their digital transformation. And we couldn't say that Monday morning, we could say it Tuesday morning, but not Monday morning.
So, very proud to be affiliated with not just the team, but the brand of GetSmarter.
Brian Schwartz
And then one question for Cathy, just on the core business, the non-GetSmarter, as we're looking out over the next three quarters here and the rest of the year, just kind of wondering now where one quarter in, if there's any of the investment areas that you could lean into a little bit more this year that could be faster here in terms of spending that you're excited about? Or maybe the opposite, are there any investment areas that maybe you don't need to spend as much here this year?
Thanks.
Cathy Graham
Yes. So, I think I'm going to answer with the thing that I always answer, which is the place that we are leaning in is student acquisition and particularly, in the marketing functions.
You guys will notice that with regard to the quarters, you're not seeing as much sort of year-over-year improvement marketing as a percentage of revenue. And a big piece of that is accelerating the growth in prior launched DGPs as well as accelerating our launch schedule.
That is the place when we have opportunity, something is performing really well, we want to have the ability to lean in and drive something that is -- that's functioning and converting really well. And then the short one actually may mean spending more and driving down the LTR TCA in the short run.
So, that's the place that we really focus on putting additional dollars behind when we see something that's working well.
Brian Schwartz
That's really good color. Thank you again for taking my questions this afternoon.
Cathy Graham
Thanks.
Operator
There are no further questions at this time. I will turn the call back over to the presenters.
Chip Paucek
Thanks everyone for joining. One final thing, last week, we published our Annual Report and launched the corresponding website; the links to the site is in our press release.
I encourage you to read the whole thing. If you're an investor, you really should.
Thanks again and we'll see you out on the road.
Operator
This concludes today's conference call. You may now disconnect.