Jul 30, 2019
Operator
Good day, ladies and gentlemen, and welcome to the 2U, Inc. 2019 Second Quarter Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.
As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr.
Ed Goodwin, SVP, Investor Relations. Mr.
Goodwin, you may begin.
Ed Goodwin
Thank you, Operator. Good afternoon, everyone, and welcome to 2U's second quarter 2019 earnings conference call.
By now, you should have received a copy of the earnings release for the company's second quarter 2019 results. If you have not, a copy is available on our Web site, investor.2u.com.
The recorded webcast of this call will be available in the Investor Relations section of our Web site. Also, we routinely post announcements and information on our website, which we encourage you to access and make use of.
Christopher Paucek
Thanks, Ed. Over the past 11 years, we've built the most important business in the online higher education ecosystem.
When we started 2U the market was in its infancy. The core thesis of the company was that online programs could drive a similar quality to campus program, and that the company's scale and unique platform characteristics would build a competitive moat around the business over time.
Today, the online education market is evolving. Secular forces are pushing more schools online.
In deed it's becoming obvious that all schools are going online. We're calling it the mainstreaming of online education.
We believe this represents a new reality in the marketplace, and requires us and others to adjust to it.
Cathy Graham
Thanks, Chip. Before moving to our revised view for the remainder of 2019, let me first do a quick review of second quarter results.
Second quarter revenue of 135.5 million exceeded the same people in 2018 by 39%. Business combination accounting rules required us to exclude 3.3 million in second quarter revenue.
Revenue prior to this adjustment was $138.8 million, representing growth of 42.5% year-over-year. In our Graduate Program segment, revenue was $101.4 million or 24.9% year-over-year growth for the quarter.
And the alternative Credentials segment including a partial quarter of revenue from the Trilogy acquisition revenue was $34.1 million or 110.1% year-over-year growth. And prior to the purchase accounting adjustment, revenue was $37.4 million or 130.7% year-over-year growth.
In the Graduate Program segment, revenue growth continued to be driven by an increase in full course equivalents. For the second quarter FTE showed a year-over-year increase of 28.3%, offset by a 0.6% decline in average revenue per FTE.
The decline in average revenue per FTE is based largely on program, the mix and academic calendar changes. At our Alternative Credentials segment, we are seeing the impact of rolling a partial period of Trilogy book performance into this segment.
The result was a year-over-year increase of 54% in FTEs and 49.8% in average revenue per FTE. This reflects the addition of a somewhat longer delivery period but higher priced product into this segment's mix.
You should expect to see a further shift in these metrics in third quarter once the full period of bootcamp performance is included. Looking at our second quarter loss measures, all we've been skewed versus prior periods and expectations by the acquisition of Trilogy.
At $28 million second quarter net loss improved from our pre Trilogy expectations primarily because of better than expected performance in our pre-trilogy business and in approximately $19 million one-time tax benefit related to the acquisition, and well at $25.8 million and $15 million respectively adjusted net loss and adjusted EBITDA loss were both higher than our pre-trilogy expectations. They also benefited from earnings over performance in the legacy business.
From a balance sheet perspective, we ended the second quarter with $218.7 million in cash and investments and $71.6 million in receivables balances. Note that our receivables balances are relatively consistent with the first quarter despite the addition of our new book camp business.
This reflects the reduction of graduate program receivables between the sequential quarters based on academic calendar timing and the related collection cycle. Also note that our long-term debt has increased to $245 million in the quarter reflecting the term loan facility we entered into for the Trilogy acquisition.
Now looking forward, we're providing guidance for third quarter and full-year 2019 inclusive of the expected results for our new bootcamp business. Before turning to the numbers, I want to reiterate and expand on what you've discussed earlier.
As the mainstreaming of online education is developed and students have more online options, we expect to continue to see smaller average steady state program sizes across much of our business. As a result we've updated our expectations based on the evolving business environment where we have to consider higher variability and uncertainty.
And our graduate program business, we are reducing our expectations for the ultimate size of programs, allowing for the fact that the rate at which program scale has become more variable and allowing for a slow-down in 2020 launch cadence. For short courses, we are also moderating our expectations along the lines just mentioned earlier.
Our revenue guidance now incorporates our continuing expectations for the Trilogy bootcamp product line offset by the moderated outlook we have for our legacy business. We now expect revenues of between $147.6 million to $152.6 million for the third quarter and between $565.7 and $575.7 million for the full-year.
Adding that fully, the Trilogy bootcamp revenue that we will not recognize as a part of the purchase accounting these ranges are $153.6 million to $158.6 million and $576.9 million to $586 million for the third quarter and full-year respectively. Our expected earnings measures have now changed as a result of the changes to our expectations and the incorporation of Trilogy into this business.
Because of this, I strongly suggest that you read the reconciliation of our adjusted net loss and adjusted EBITDA loss guidance to our net loss guidance to better understand the changes. Additionally, I do want to mention that while we do not expect to be able to make up the entire reduction in expected revenue over the remainder of the year, we have slowed the growth of our cost structure, and particularly in our Graduate Program business expect to be able to offset some portion of the revenue decline even over the short time period.
We now expect a net loss of between $69.3 million and $66.3 million for the third quarter, and between $157.5 million and $151.5 million for the full-year. These ranges include the flow through of $5.9 million and $11.1 million of purchase accounting-driven revenue reduction for the third quarter and full-year respectively.
These revenue reductions are excluded for the purposes of providing our adjusted loss measure ranges. In thinking of this net loss guidance compared to prior expectations, remember that for the full-year it now reflects transaction costs and the acquisition-related tax benefit booked in the second quarter, which we then exclude from our adjusted loss measures.
Further, for both the third quarter and full-year, net loss guidance includes interest expense on the term loan facility we entered into for the Trilogy acquisition, and a step-up in acquired intangibles amortization related to that acquisition, both of which we exclude from our adjusted loss measure ranges. We now expect an adjusted net loss of between $33.8 million and $30.8 million for the third quarter, and between $76.9 million and $70.9 million for the full-year.
We also expect an adjusted EBITDA loss of between $18.4 million and $15.4 million for the third quarter, and between $28 million and $22 million for the full-year. And finally, I want to reinforce something Chip said earlier.
While we are acknowledging an evolving environment and increasing uncertainty, we do believe we are on a path to continued growth, while getting to free cash generation. And we look forward to talking to you more about this and other aspects of our longer-term plan, in November.
Chip?
Christopher Paucek
I'll then close with a note to our 2U team. This year has certainly pushed us, but I want to make it clear to all of you, you're amazing.
You've built super high quality products with excellent outcomes for students. We're positioned for the long-term sustained success.
We just announced our first ever exclusive institution-wide deal with none other than University of North Carolina, Chapel Hill. We are changing the world.
Let's get to Q&A.
Operator
Thank you. Our first question comes from Sarah Hindlian of Macquarie.
You may proceed with your question.
Sarah Hindlian
All right, great, thank you very much. Chip and Cathy, I was wondering if you could help me understand and maybe just size the impact to the core graduate business, exactly what you're seeing happen, what could happen in the state of California with shifts for federal loans for students who are doing distance learning.
And then I have a follow-up as well.
Christopher Paucek
So, thanks, Sarah. So on the state of California, obviously it's an evolving situation; one that we're optimistic will get resolved.
But we felt like, given the fact that it is not yet officially resolved it could put some uncertainty into certain students' minds or more importantly certain universities' minds. So we felt like we had to account for it in our forecast.
Sort of backing up to the Grad business overall, we're trying to make sure that folks understand there's significant growth potential in what we've already built, which is why we're trying to sort of give clarity that if we stopped all launches we would see growth in that business in the mid to high teens, and would expect that to continue for some time. So there's a lot there still for the Grad business that we're excited about.
And of course we're not going to end all launches. We do think it's right now is appropriate time for us to change the velocity of the launch schedule in order to drive, number one, operational improvement for the business, and number two, better financial performance for the company overall.
Sarah Hindlian
Okay, great. Thank you.
And I have a follow-up for you, Cathy. In terms of talking about driving towards free cash flow of positive numbers, which I do think is fairly important to a number of investors out there, do you have a sense or is it too early to give us a sense as to how long that journey will take.
And Chip, I appreciate your comment that if you shut off new programs you'd see these certain dynamics. But as you said, you will be doing some new programs.
So how do we think about the timing of free cash flow breakeven?
Cathy Graham
Yes. So Sarah, I think that we are working through a lot of this right now, and it's our intention to be a lot more specific about this in investor day.
So we'd appreciate the time to be able to get there and put some real thought into being able to give you a plan that you guys will really -- that we can lay out for us.
Sarah Hindlian
All right, okay, that's fair enough. Thank you.
Operator
Thank you. And our next question comes from Brett Knoblauch of Berenberg Capital.
You may proceed with your question.
Brett Knoblauch
Hi guys, thanks for taking my question. First, is there -- can you guys break out the revenues that were associated with Trilogy in the quarter or is that something you guys not plan to do?
Cathy Graham
Yes, we're not planning to do that. We are presenting our business on an alternate credentials and Graduate Program segment basis.
So we don't intend to break that out.
Brett Knoblauch
Okay, that's fine. And then on second question, just was reading an article about how Boston University is launching a $23,000 degree edX.
Now, with the change of structure in your programs, is this something you might expect to being offering with universities?
Christopher Paucek
So we are -- is the question are we going to continue to offer -- well, I'll just go here. We will continue to offer competitive programs in the landscape over the next several years.
We have quite a few different MBA programs at different price points, that won't stop. So we will continue --
Brett Knoblauch
The question is on tuition pricing standpoint. I feel like you're seeing a lot more of these universities move online, and not only move online but move online to cheaper degree.
Christopher Paucek
Yes.
Brett Knoblauch
And given your programs are higher end of that market?
Christopher Paucek
You know, we do continue to believe that you have to drive a long-term quality and sustainable business, and one that doesn't exist off the backs of the campus program. So we do think over time it's really important that both quality and cost will get considered.
Now, there's no question that we are working on a variety of things to have -- to attack the cost problem very specifically, and we will talk about those in detail at investor day. On this particular call, we felt that given the new outlook that we focus squarely on the outlook, talk about the outlook and whatever detail investors need, and not come up with a long list of optimization points we were working on.
But I want to be exceptionally clear; we've got some really good plans in tow to attack one of the things that we think is an important component, which is tuition cost. We just didn't plan on this call to unpack the funnel in that way.
Brett Knoblauch
Okay, then last question, I'll jump back in the queue. Do you think the university selectivity issue that you guys noted at Q1 is due to the regulatory concerns with, I think it's AB 1345, do you think that's playing to why maybe their tempering their -- or not scaling the program success?
Christopher Paucek
No, I mean -- so to be clear, the various aspects of the funnel I would say having now lived this publicly, I would tell you that it's a complicated business. The funnel itself is complicated.
And there are parts of it that it's noisy. And the admit rate in particular is noisy.
While we did have some program specific issues sort of masking the overall issue, just to extrapolate a little bit more on your last question. The reality is it's not one particular thing that is driving this new sort of reality for us.
It's not one particular competitor, it's not one particular program, and it's certain not one particular aspect of a program, like cost. When we look at decline surveys from folks that have come into our programs, it's hard to find a university listed more than once, it's just a longer list of single universities that's expanded pretty dramatically since we IPO'd.
So this is a moment for us to ultimately at this point change our outlook, presume that we're going to have lower conversion rates going forward. And candidly presume that there will be a lot more competition, not the competition will stay flat today.
So while we have to continue to work on a variety of ways to address it, this is us saying that we do think this is a new normal.
Brett Knoblauch
Okay, thank you.
Operator
Thank you. And our next question comes from Ryan MacDonald of Needham.
You may proceed with your question.
Ryan MacDonald
Hi, Chip and Cathy. I guess first question for you, Chip, is really around the expected program launch cadence, and just sort of trying to sort of sync up what you were saying in the prepared remarks.
You mentioned that university partners are still really willing to sign up with partnerships for you, but then you're obviously moderating that cadence. Is that because you're seeing sort of a shift more from university partners to a demand for the short course or the Trilogy type content versus a full grad program?
Christopher Paucek
No, definitely not. I don't want to put out there that the -- this is an intentional change in our velocity of program launches.
What we have seen in terms of -- we spent a fair amount of time over the last year talking about competition -- for competition for deals. And we thought that the UNC institutional announcement is not only a big one, but one that is relevant given that it was a super competitive RFP.
We certainly have seen an increase in the number of RFPs given that there are more people chasing after business, but feel very confident that we are well positioned to continue to get the programs that we want and get them at the sort of target economics that we like. So it's not because of some retreat to short courses.
We just need to be, during this period, selective about what we're launching. And we need to slow down a little bit, and improve the aspects of what we've got, focus on a little bit more internally on what we have.
And we think that will serve us well operationally. And the power of that was we're certainly not going to need anybody's money if we do that.
So we've got drive the long-term sustainability of the business. Now, one thing I would say, Ryan, is that the institutional suite is different, and it's awesome, and we're very proud of the relationship.
That relationship has gotten a lot of attention from this community for a bunch of reasons. And the university is very happy with our performance, and I would say proud of our team that we were able to be flexible in our approach to the school.
Obviously it's a top-20 university. There's a ton of really exciting programs in that relationship that will push the boundaries of what's possible to do online.
We like it quite a lot. We just didn't think that today was the time for us to be running down a long list of things to tell you how great a variety of things were.
We just want to sort of level-set with this community that we're dealing with -- what we do think is a bit of a new reality from a competition for student standpoint, and just need to reflect that in our outlook.
Ryan MacDonald
Got it. And then just a quick follow-up, I know you've already sort of discussed the California ad nauseam, but just to clarify.
With the UC Davis program that you talked about, the delay -- experienced delays on the first quarter call. Is there potential because of these regulatory changes for additional delays to that program in the back-half of '19?
Christopher Paucek
No, that program is up and running. To be clear, the California issue doesn't affect California schools, it's unrelated.
It affects all nonprofits that are offering programs in distance education to California students. So this was a careful issue for us to consider as we were putting through guidance.
It is all very real-time. It's tricky, and I could tell you it is super important to anyone that is in my seat.
Whether that's being discussed or not it is super important from the standpoint of other nonprofits in the world that are servicing online education because California is what, the eight largest country on the planet. So while regional bias will certainly impact things from the standpoint of California students while obviously be focused -- California universities will have more sort of regional bias and therefore have more California students in them.
Schools outside of California clearly offer distance programs to California and we're included in that. So we had to sort of take that into account and reflect that in our guidance.
Now, we are optimistic that it will get resolved. We just don't know how long that's going to take.
Ryan MacDonald
Got it, thanks for that clarification.
Operator
Thank you. And our next question comes from Rishi Jaluria with DA Davidson.
You may proceed with your question.
Unidentified Analyst
Hannah on for Rishi. Thank you for taking my questions.
First off, I was wondering if you could just talk about the institutional suite and what interest is like so far and what your current pipeline looks like.
Christopher Paucek
So, the institutional suite is a fantastic opportunity for us to extend to U.S. across full institution, lot of programs, it's our first one, we've been working for some time.
We do have others like that that are in play. Nothing to announce there yet, but they are large.
It's one of the most important deals we've ever done. It does have a component associated with it that we will be offering for the institutional client of fee-for-service component that we think is super interesting from the standpoint of better serving the client overall.
And in part, that is part of the reason that we now have an exclusive relationship with that school which we've never had before. So, I certainly understand today is a complicated day in terms of explaining our outlook, but this is non-trivial
Unidentified Analyst
Okay, great. Thank you.
And then second, I was wondering if you could talk about how much risk do you feel qualitatively, has left in this new normal considering a lot of the challenges you're facing our outside of your control.
Christopher Paucek
So I'd say in the past periods we've, when we've had challenges and this is not just as a public company, but as a private company. This place is filled with entrepreneurs and we tend to figure out how to operate our way out of a variety of challenges we're having.
And we are often successful. I'm not going to spend a ton of time on the call talking about all the components that are going on all the projects that are going on to improve our funnel or our student experience, but given the outlook.
People are focused on our funnel and I would tell you that there is a bunch of projects in terms of helping students that are more self-serve oriented and we like some of the fruit we're seeing there, there is a bunch of positives, I would say, ultimately what we had to do here was just pull back not expect that we'd be able to operate our way out of the problem, look at the market and on top of that, look at what was happening in our newest program that is certainly a data point here that gave us the belief that we needed to sort of put out there our new outlook and build up from here. So, we now move forward with -- while a -- slightly slower scaling Grad business, one that we still think has great growth potential and one that strategically is really difficult to compete with the market is evolving this will become more obvious.
I would tell you 2U sale today has significantly larger program sizes than anybody else and we're not guessing only at the graduate level so far. And at the graduate level, there is no question that more schools are launching programs and that's not going to stop.
So we felt like we needed to reflect that in our outlook.
Unidentified Analyst
Okay. Thank you.
Operator
Thank you. And our next question comes from Jeff Meuler of Baird.
You may proceed with your question.
Jeff Meuler
Yes. Thank you.
So it's not 100% clear because we're layering on Trilogy but if I back out an estimate of Trilogy revenue, the revenue guidance reduction for the year looks fairly material, and I know you're calling that out as well, but just can you help me kind of understand I think the 3 factors are the execution challenges in short course California and then this kind of broadly weaker enrollment trend competition issue. So, just first, can you help me size up those three factors and if there is an additional factor.
I mean, no. What I'm missing?
Christopher Paucek
I think you first-half to start with the one you covered last which is that, you know, I mean, Jeff, we are at this point change in our outlook, because we believe this is a bit of a new normal. Our programs are individually larger than others and so I do think we're feeling at first.
I think the smaller programs in the universe will feel it, and so, not that the other two aren't relevant. They certainly are.
So I'll get to the short course in a second, but first, I would say, yes, this is a moment for us to pullback and sort of reset the velocity of the growth of the business from the standpoint of our cadence to better serve what we have today, and to better serve the company financially, and to make sure that we've got this place guided on a path of free cash flow, number one. Number two, the short course business; obviously, our business complexity has increased.
Strategically, we think it's been really, really good for 2U, but that has driven complexity in our ability to both operate and forecast the business. I think that's fairly obvious now, so I might as well just say it on the call.
One of the things in the short course business that has proven to be trickier than expected is aligning. Not the university deal on the grad side, when we get a university deal, they take forever.
But when we get them, we're done. You know, we then launch them.
In this case, when we get them, we then have to rely on faculty to teach the courses. And I would tell you, we really underestimated that in a substantial way.
And that caused us to get behind on the short course side in a way that we felt like we wouldn't be able to catch up in this calendar year. So that was a big part of what happened on the short course business.
And then of course, we talked about California so far on this call. That one is -- it's difficult to estimate but we certainly didn't want to not include it when we're changing our outlook.
We felt like it was prudent and smart for us to put a set of projections together that we thought definitively we'd be able to improve upon and deliver from here.
Jeff Meuler
Okay. And then, on the competition or enrollment trend question, so just help me better understand what's happening there -- part of an answer to a recent question that you said, you have to look at what's happening in the newest program.
So is it predominantly that the new programs are ramping more slowly? Have you seen a broadening of the decline?
Just how broad is the incremental weakness across the portfolio and that's a predominantly new enrollment that we're talking about?
Christopher Paucek
Yes, I think so. If I could help me think about the way we talked about what a DGP is and by the way, we're going to get into this in a ton of detail at Investor Day.
I mean, this stuff is real-time. And at Investor Day, we will sort of unpack the way we're talking about the model when you consider that an institutional suite looks nothing like a DGP.
And certainly, there are things like what we announced with our pharmacy program, which you've heard about for a long time, that one obviously looks and feels more like a DGP, but the institutional suite does not. I would say that as more competition comes into play, the outer bands of what you might have brought in on student size, they've always gotten more expensive.
By definition, you're more at the efficient frontier when you're at the outer rim of student's size, so that that last 50 students is difficult. And when you start bringing in more competition and they're more choices for people, I think what I said on the call earlier, just to reiterate, is it's rare that a university shows up more than once on the decline surveys.
There's just a lot of them. So it's a bunch of different factors across the business.
And yes, it is a large enough number, that it's certainly worth you focusing on it and why you're asking me questions about it. My point is, it is -- it's a real change to the outlook.
And at this point, we're presuming that it continues, we're not presuming we will operate our way out of it. Hence the reality is, if some of these pieces were able to improve, we do better than forecast.
Jeff Meuler
Okay. Last one from me, please, just what change?
Or what specifically, are you seeing in the funnel that it seems like the narrative has shifted a bit from last quarter where there was more focus on selectivity and student preference for self-service and less focused on competition. And on this call competition seems to be much more of an issue.
So what specifically are you seeing in the funnel that leads to that conclusion? Thank you.
Christopher Paucek
Yes, Jeff, it's tough. There's a lot of factors.
There's always been a lot of factors. And what we're saying to you is that some programs specific issues we allowed to mask the broader trend.
That's really the problem. We said it on the call, we mean it.
And we're not going to allow that to happen anymore. So we're changing the outlook.
To be clear, those program specific issues were vague, but now they were very large. So we were certainly caught up in them but at this point, we think it's prudent to sort of pullback and get a little bit out of the individual noise of what are very complicated funnels that all look really different and just presume that we're dealing with, what is the new normal.
Now you notice on the call I didn't talk about the economy, and that is certainly a factor there is no question, I didn't talk about cost. That is certainly a factor and obviously at some point we'll enter in the economy that isn't a strong and we have, we believe some really good tools coming up to address cost but for today we felt like it was better to just level set with this community that we think we're looking at a revised outlook and we're not going to presume they improves.
Jeff Meuler
Okay, thank you.
Operator
Thank you. Our next question comes from Jeff Silber of BMO Capital Markets.
You may proceed with your question.
Jeff Silber
Thanks so much. Just wanted to a little further into Jeff's question, what changed over the past three months.
I mean, three months ago, you came in, you kind of changed the longer-term expectations for the business, did things meaningfully get worse over the past three months?
Christopher Paucek
Yes, I mean we're at a pretty critical moment of sort of where the year is and we had a bunch of new programs that later in the year. As you know, we have a lot of back half launches.
And so as we started to get really good data about what was happening real time, it wasn't what we expected. You couple that with the larger programs regressing from the size, they were, I mean what's top about it Jeff, is there still big, they're not as big as they were and how much of that was program specific issues versus what we're really now seeing particularly when it's not like a single competitor is driving the delta and you put it all together and we felt like we are at this point now where that is new data.
And then, to be fair on the short course side, as I mentioned, we had some unfortunate, we had some things that were execution related that we thought we have better numbers for, and we don't. So that is a factor.
And then of course we talked about California.
Jeff Silber
Okay. And actually my second question was on California, can you just give us an order of magnitude; if I look at your full course equivalent enrollment for the graduate programs, roughly what percentage of those are California residents attending schools outside of California?
Thanks.
Christopher Paucek
Jeff, we can't get into the student body numbers per school, which as you know, we do our best to keep our clients out of this and that's not upon to buy started talking about my school student body in a earnings call I have much bigger problems. We do think we've considered it in our, in our outlook and it's part of the reason we raised it.
Jeff Silber
Okay. Thanks.
Operator
Thank you. And our next question comes from Brian Schwartz of Oppenheimer.
You may proceed with your question.
Unidentified Analyst
Hi, this is Chad on for Brian. Thanks for taking the question.
I spoke a little bit about competition for the Grad business, I'd be curious to hear the how you view the competitive landscape in the bootcamp space. And so that competition differ whether it's classroom or on-prem versus sort of digital learning and then how do you think about differentiating those bootcamp offering.
Thanks.
Christopher Paucek
Well, sure they're there is a lot of competition in each market we operate in is done an exceptional job partnering with universities in a way that we think it's a super responsive to universities needs. I can tell you that since the acquisition we continue to be more and more impressed by the health of those university partner relationships, and therefore the strength of the overall offering.
I'm sure other companies in the space will continue to seek out University partnerships. So I would expect competition to increase Trilogy's geographic footprint is getting quite impressive and we do think it becomes a platform we can roll out quite a few other opportunities across bootcamp space.
Online, it's earlier in their life cycle, and we think that we can be very addictive to Trilogy's ability to both market and serve a variety of different online options some that will kind of feel like their ground programs and some that. Well, there is a lot of expertise in this building for that and I would say, finally, the institutional suite is a real advantage.
Our partnership with Chapel Hill becomes a pretty exciting opportunity for all three of our product segments.
Unidentified Analyst
That's helpful. Thank you.
Operator
Thank you. And our next question comes from Corey Greendale with First Analysis.
You may proceed with your question.
Corey Greendale
Hey, good afternoon. Two real quick questions, a longer question and then the quick question, I just wanted to clarify on the UNC the 10 programs, would that be 10 graduate programs that those could include other offerings besides three programs?
Christopher Paucek
Yes, it's, at least. The answer is, yes.
Sorry. Yes, grad programs, things that you would have considered a DGP?
I'm trying to not say DGPs because we think that relationship is going to look different than what a DGP was. And we're going to talk about that quite a bit at Investor Day.
Corey Greendale
Okay. And other quick question is, just to make sure I'm not getting lost in the nomenclature?
Is there any change in your outlook for Trilogy relative to what you discussed at the time of the acquisition?
Christopher Paucek
No, our outlook for Trilogy has increased since the time of the acquisition.
Corey Greendale
Okay. And then the longer question is just translating some of what's happening in the market into kind of your operating decision, is the concepts that because there's greater competition.
Therefore, you're hitting a point of diminishing return of the incremental dollar spent on marketing earlier, and therefore, all people forgiven program, you'll be investing less in marketing or tell me how I should think about that?
Christopher Paucek
Yes, the outer rings of students are more expensive. Clearly, this may be frustrating to some in this community, because last November, we did the opposite.
That was a mistake. We've said that before, I will say it more strongly now.
What we're doing today is reorienting our spend and our operation off of what is a smaller, expected steady state enrollment. And we think that's a more prudent place to be, and one that should build a base from here that we can, get to not only successful sort of business from a strategic standpoint, in terms of our footprint, but also drive profitability and free cash.
Corey Greendale
Okay. And last, I know you'll quite get into great detail on this at the Investor Day, but I'm guessing this translates into if we were to look at kind of a single program model that typically you'll invest less than the $5 million to $10 million that you have historically before hitting breakeven, is that right without getting into detail, and do you think that it all impacts your differentiation in the market?
There's a lot of reasons, a whole bunch of reasons universities will go with 2U, but one of them is how much you invest in the programs up front?
Christopher Paucek
Yes, so the answer is yes, and I would also say, we're so far above everybody else. You know, that's part of the reason I think we're seeing this first, to be honest.
You know, if you're launching a program with 100 students, and it's different, it just says, if you're launching a program, you're trying to get the 400, it's different story.
Corey Greendale
Great. All right.
Well, thanks.
Operator
Thank you. Our next question comes from Brad Zelnick of Credit Suisse.
You may proceed with your question.
Brad Zelnick
Great. Thank you so much for fitting me in.
I've got one for chip and a follow-up for Cathy. Chip, we've always loved to use mission, you're a clear visionary in online education.
But now with the third time recalibrating expectations and the amount of dramatic change you're seeing in your market, you are stock down over 60% from earlier this year against the backdrop or software is up closer to 30%. Are you in the board entertaining strategic alternatives for the business at this point?
Christopher Paucek
I'm not going to comment on the business overall, from that standpoint, I can tell you that the board is very supportive and focused on our long-term strategy, and very focused on sort of our ability to execute against it.
Brad Zelnick
Okay. And just for Cathy, are you expecting you might need to grant additional equity to employees to encourage retention, given the dramatic move in the stock?
Cathy Graham
I think you need -- we need to look at that through an entire plan, which we are working through.
Christopher Paucek
Yes, I mean, I would say Brad, just to add to that, we're considering -- this team has delivered for 11 years now against the opportunity that I think people thought was very difficult to sort of this whole notion of not letting the skeptic win. I understand right now why we're going to be under the gun.
I also understand that I've got to keep this team super motivated and thinking about the long-term future and thinking about being motivated about driving things like free cash and we will do so it with my board in a way that we think is appropriate.
Brad Zelnick
Excellent. Thanks for taking the questions.
Operator
Thank you. And our next question comes from George Tong of Goldman Sachs.
You may proceed with your question.
George Tong
Hi, thanks. Good afternoon.
With respect to that grad degree segment, you mentioned that even if you stopped all launches, you'd see essentially mid to high teens growth, obviously, you're not going to stop your all your launches, I think you mentioned you can be roughly half of what you had initially guided to in the outer years. So the question is, with respect to your guidance, your full-year guidance for 2019, what are you essentially incorporating for grad degree program growth?
And then how would you see that evolving over time?
Christopher Paucek
So I think George that we at this point we're going to hold off until our normal November period to give an estimate of next year's growth rate. We are trying to give some clarity that growth is still built in the system.
And obviously, we're not going to end all launches.
George Tong
Got it. Okay, then with respect to profitability, you basically said that you're going to strike a better balance between margins, cash flows and growth.
So how would you say your EBITDA margins for the full-year in the underlying business, if you exclude Trilogy compares with your initial guidance before?
Cathy Graham
So, George, what we said was that we did not expect in the pre-trilogy business to be able to offset all of the revenue -- revisions to revenue that we have built into this current guidance but that we would be able to offset some. So by that, you can infer that we expect our margins in this short-term period to be slightly lower as we go through a transition, somewhat lower.
George Tong
Got it, thank you.
Operator
Thank you. And our next question comes from Arvind Ramnani of KeyBanc.
You may proceed with your question.
Unidentified Analyst
Hi, this is Brian going on for Arvind. I appreciate you taking my question.
Just real quick, you're trying to understand a little bit more the dynamics associated with the short course business. You said that you kind of see what courses work with what schools.
Does this sort of imply that you are strategically, I guess repositioning who you sell this offering into? And does the revision in DGP reflect materially less synergies from the short courses and vice versa?
As this may impact who you can and cannot sell it into? Thank you.
Christopher Paucek
So, we are definitely spending time thinking about whether to deploy capital and short course business from the standpoint of what might have the greatest impact. We do not believe at this point that we have perfect clarity as to which ones will or which ones won't work, I will tell you that we do believe that there's a bunch of current partners that are working really well, and there are some Trilogy partners that are quite excited about the short course opportunity.
I think that the big thing for us is making sure that we're not under estimating how long it will take to get the courses actually launched versus getting the deals done. I will tell you, we -- I think as evidenced by what we deliver, there are quite a few universities that want to partner with the schools.
And I think we're slowing that down a little bit. And learning from -- learning how to appropriately place the emphasis on driving the faculty member alignment with the course.
And I do think that there's -- we're excited about widening, the aperture of the short course business a little bit from the standpoint of which courses we might launch, so a lot of work going there. Clearly some execution issues that added to this outlook in a way that's obviously disappointing, but still a rapidly growing business that we think is a huge part of our future.
So we're no less bullish on the strategy behind it.
Unidentified Analyst
Great, thank you.
Operator
Thank you. And I'm not showing any further questions.
At this time, I would not like to turn the call back over to Chip Paucek for any further remarks.
Christopher Paucek
Okay. Thank you very much.
We look forward to seeing you out on the road.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect.
Everyone have a wonderful day.