Jul 30, 2020
Operator
Ladies and gentlemen, thank you for standing by. And welcome to the 2U, Inc.
Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode.
After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today Ed Goodwin, SVP, Investor Relations.
Thank you, please go ahead.
Ed Goodwin
Thank you, operator. Good afternoon everyone and welcome to 2U's second quarter 2020 earnings conference call.
On the call, we have Chip Paucek, our CEO; and Paul Lalljie, our CFO. Following Chip and Paul's prepared remarks, we will take questions.
This call has been simultaneously webcast on our website where you can find our press release, which was issued after the close of the market as well as our earnings presentation. The webcast replay of this call will be available for the next 90-days on our Company website under the Investor Relations link.
Chip Paucek
Thanks Ed. As we passed the halfway mark of the year, it's now clear that 2020 will be in both our personal and professional lives unlike to any other we've ever experienced.
Whether it's the effects of COVID, or the impact of the Black Lives Matter movement, we're confronting profound changes, challenges and opportunities as a society. For 2U, these new norms have only served to reinforce the importance of our mission, the value of our business model, and our company's capacity to help universities meet society's most critical needs.
I'll come back with these important issues and speak directly to the impact of the Black Lives Matter movement on 2U. But since this is an earnings call, I'll start by highlighting our results.
We're very pleased about our progression over the past. We entered 2020 with a goal of maintaining strong revenue growth and delivering margin improvements throughout the year while driving towards positive free cash flow.
We delivered on those priorities thus far and feel great about the remainder of 2020. We posted another quarter of accelerating organic growth with strong bottom and improved unlevered free cash flow.
We did so in an uncertain environment, demonstrating the strength and resiliency of our business model.
Paul Lalljie
Thanks, Chip, and good afternoon everyone. Our second quarter results demonstrate the momentum we're experiencing as we continue to execute against our objective that is delivering strong top line growth while improving our profitability and cash flow with increasing financial flexibility.
I'll go over our results for the quarter, discuss the best we've taken to improve our financial flexibility, and provide some color on how we're thinking about the rest of the year. Now for a closer look at the results for the quarter.
Revenue for the quarter, total is $182.7 million, a 35% increase from $135.5 million in the second quarter of last year. We acquired Trilogy on May 22, 2019, giving us a year-over-year comparison of results with partial financials for the boot camp business.
Our organic revenue grew 18% year over year, excluding $36.6 million of Trilogy revenue this quarter and $11.9 million from the year ago, quarter representing a 3 point acceleration of organic revenue growth and continuing the trend from last quarter. Grad segment revenue grew 14% over the second quarter of last year.
This increase was driven by an 18% increase in full course equivalent and partially offset by a 3% decline in revenue for FCE. We expect revenue for FCE to continue to decline going forward as enrollment in our newer programs, LSE and Simmons becomes a larger percentage of the total.
Chip Paucek
Thanks, Paul. 2U is doing important work by helping higher education meet the critical needs of society.
I want to close by addressing one of the most pressing issues for our society, systemic racism. George Floyd turned into a seminal moment for 2U.
Over the years, we strive to intensively to build a diverse company leadership team and Board. The protests happening in America and the Black Lives Matter movement reverberated in important ways at 2U.
As the impact of the moment unfold inside the Company, our leadership team and I personally became increasingly aware of how much more we can and must do. It's been an intense journey, but I'm quite bullish about what we can improve on internally and how we can positively impact the world through our products.
Our announcement this morning of the launch of Northwestern's leading diversity, equity and inclusion short course, taught by Professor Alvin Tillery is a clear and compelling example of this in practice. At a time when every organization is grappling with how to develop more inclusive leaders and foster greater diversity and equity, Professor Tillery's course demonstrates the power of education and our business to help to drive much needed progress on this critically important societal issue.
For our employees and partners that are listening right now, I want you to know that building a truly diverse, equitable and inclusive 2U will become part of our legacy as a company and my personal legacy as Co-Founder and CEO. And with that, we'll open it up to Q&A.
Operator
Okay. And your first question from the line of Brent Thill of Jefferies.
Your line is now open.
Brent Thill
Good afternoon. Curious if you could give us more detail on what drove the outperformance on particularly in the short course growth and also on EBITDA?
Thank you.
Chip Paucek
Well, I guess I would say, upfront, the short courses, we're definitely seeing record enrollment. Clearly, people are rescaling in this environment.
We're also seeing tremendous momentum in the degree side. But I think as you know, on the degree side, it takes time to show up as revenue.
There's a very long cycle on the degree. But, what we're seeing in the business, we've honestly never seen before on the degree side, many of our older programs at historical highs at this point in their lifecycle of that various cohort.
On the short course side, 30 great new courses that are doing really well, and I would say, what we're most pleased about is not just the growth, but the portfolio has become extraordinarily more balanced over the last three years since we entered the space through our acquisition of Get Smarter. So we've had to rapid expansion with many different global brands, including the London School of Economics and Oxford and the types of courses.
Three years ago, the courses were more generally sort of disruptive tech courses. And what we're seeing today is we're broadening the portfolio widening the aperture of the model quite significantly, with many different types of functional and leadership courses, like you've seen today from Northwestern with the diversity course.
On the EBITDA side, we are certainly getting more efficient. This has been a big part of our focus over the past year.
And maybe I can pass it over to Paul to address.
Paul Lalljie
Yes, thanks, Chip. A couple of things to start off with the EBITDA aside, in the third quarter of 2019, one of the things that we stated up front is that we were embarking on this, a several sets of cost savings initiatives.
I think, what we're seeing now is the efficiency and some of those initiatives coming to fruition. Our students success teams, our technology organization.
We are truly seeing the scalability in those organizations. And we will continue to see that as we go forward.
And those initiatives pay a dividend. Now, I would also see that the lack of travel the COVID environment.
We have savings of, perhaps about $4 million to $5 million around there in the quarter. And maybe 50% of that pertains to travel 50% for travel related type expenses.
But the rest of it is coming from the cost savings initiative. We are on a mission.
The mission is to be EBITDA positive and cash flow positive. We set that out very explicitly at the end of 2019 and we're continuing to March forward on that fact.
Our Chief Operating Officer, Mark Turnes, is very focused on that and our teams are focused on it, and they've done an incredible job marching in that direction. So that's the contributor on the EBITDA side of the equation.
Operator
Your next question comes from the line of Tom Singlehurst from Citi. Your line is now open.
Tom Singlehurst
Hey Chip, hey Paul, thank you for taking the question. It's Tom here from Citi in London.
A couple of questions, the first one, I sort of go back on the sort of big student enrollment and it is countercyclical debate. And clearly, you've seen a very big uptick in the short courses and you attribute that in part to sort of rescaling and up skilling.
Obviously, for longer sales cycles for graduate programs, but is it -- is there any risk of cannibalization effect?
Chip Paucek
So, we really feel that what's interesting about to use. We started the Company in 2008 and saw an increasing economy bit by bit for 12 years until we got to this moment.
And arguing that 2U, as you know, covering education, it's generally counter cyclical, but the question was. Are we specifically and we really, there was a very difficult trend to see that there was a gradual headwind appearing over a very long time period.
And it is clear, as plain as day we are counter cyclical but across the entire business. So, we have seen it across all three products.
And I think what's exciting is, we are now a sizable, scalable platform across a whole bunch of different relevant offerings that will allow us to meet the increased demand. So we really like what this means for the next couple of years.
Tom Singlehurst
The second thing is, when we last talked about three months ago. At that point, it felt like a lot of the work day-to-day was done helping existing partners.
But obviously since then we've been very much for add a number of new platforms, added a number of new partners and critically helping with some of this sort of open ended on learning to on campus stuff. I suppose, I was just interested in the competitive landscape for that.
I mean, are you the only player there that's sort of sitting in part with repurposing on-campus learning? Or what's the key differentiation for to use the platform?
Thank you.
Chip Paucek
I think our 2UOS is so comprehensive and offers, I think the most comprehensive platform for a great university to do this really well, and the value proposition we offer is now even more compelling, whether that be in something like bringing somebody online for fall like we did with Amherst or doing the historical model of the shared success where we invest in received revenue over a really long contract. They're both in demand.
Without question, there has been an acceleration of demand on the side of our revenue share opportunities and we're excited about what that means. And there has also been an acceleration in demand for undergrad.
And so we'll have more to say about that overtime.
Tom Singlehurst
Is there a conflict here between the number of additional partnerships you can add and the progress towards EBITDA and free cash flow breaking?
Paul Lalljie
Tom, a couple of things, I think last quarter, I had a similar question. And my response was, it's not about saying yes, it's how we say, yes.
I think we can find a way to balance the two objectives. And that is what we're seeing, right?
We're seeing that our platform is scalable. We do have efficiency in the business.
It is not an expense base where every parking that you add, you have to add incremental expenses in the same fashion. And there are various ways and different models of doing this.
So I think you will find that our Simmons example, our Amherst example. They're all very, very different in the way we said, yes.
And I think that will continue to help us to get there. I think more fundamentally, I think we outlined a framework around this we're going to make investment decisions as we go forward.
And I think that framework will inform us in all times, it will inform us in times when there are tremendous opportunities, it will inform us in times when they are scarcity of opportunities. It's that framework that becomes our North Star.
And I think we can balance the two as we move forward, particularly because we have a strong relationship with each of our partners. We are well respected in the space and the things that we provided is, of a very, very high quantity.
We balance that with our framework. I think we can do both together.
But it does require some balancing, which is, I guess, the inherent portion of your question. It does require us to balance it out as we go forward and we will continue to do that.
Operator
Your next question comes from the line of Ryan MacDonald from Needham. Your line is now open.
Ryan MacDonald
I guess first just thinking about the sustainability of the demand that you're seeing. Obviously, there's some benefits from COVID here, but if we sort of start to see things reversing and potentially get vaccine back last year.
How sustainable do you think that the trend that you're currently seeing for the back half are?
Chip Paucek
Ryan, we think the share shift is real. When you survey the students and you talk about this, we do think that there's a sustainability of this demand.
And what's happening is you're getting the opportunity to have people even consider it. And I will tell you from experience, like, I took one of our programs, and they're incredible, they're really good.
And you don't have to take my word on it. The Gallup survey we did show that across the board, almost every single metric show that you could be better than the campus.
So I think quality online will win. I think what's happening here is the adoption curves just been pulled forward.
So, you see it on our share shift survey. You can also see it in what Strata put out today, I'm not sure if you've seen that that's worth a look.
I think what's happening is, we do think there's a little bit of a rush to quality going on here. It's been really wonderful to see programs that we run that have this incredible track record of delivering, really get recognized.
And so and it's across the portfolio right now. So, we're seeing some things that we've not seen before.
So, we're trying to be thoughtful in how we think about when we're ready to call it, but I have to tell you, it's impressive.
Ryan MacDonald
And as a follow-up to that, the recent close five survey data results really showed willingness from universities that we're already working with a partner to increase the reliance. So I guess as we're preparing for a fall when, there's a up in the your question of how much on campus running there will be.
Is there anything you're doing with your existing grad partners to help move their on campus version of their programs online with 2U during the interim period?
Chip Paucek
Yes. So, we're much more active with her current partners in terms of helping them in a whole variety of ways.
And I do think, we talked about Simmons in the call, and sort of worth really highlighting just how bold of Simmons is doing in an extraordinary short period of time to really transform totally the institution. But if you take 2UOS plus, we've got a whole bunch of partners that are now sort of embracing the online format for their campus based program.
And that's been a big part of what we've been working on as a team. We're being careful in our choices.
But it's, we feel very fortunate that we have a lot of opportunities. So, how we balanced that is key to our progression as a company, but it's pretty remarkable what's happening right now.
So we're doing everything we can to support the partner base and I think we're getting really, really good response from the universities because of it.
Ryan MacDonald
And qualification for Paul. Paul, you mentioned in the back cash respecting organic revenue growth increase.
Is that sequential, like an acceleration from the first half or a year-over-year growth? Thanks.
Paul Lalljie
It is an increase in the year-over-year growth at 18% that we saw in the second quarter. We can expect that number to be a higher number in the back half of the year.
And it is also a sequential increase. If one were to look at it back half of the year versus front half a year.
So it's both.
Operator
Your next question comes from the line of Stephen Sheldon from William Blair. Your line is now open.
Stephen Sheldon
I guess first wanted to get updated thoughts on the concept of stackable credentials and degrees. Are you seen any early indications at the academic could accelerate the adoption of these offerings, especially as universities need to look for new revenue sources and need ways to differentiate and drive demand with students in a potentially lower overall enrollment environment over the next few years, I guess, what are you seeing there?
Chip Paucek
Well, we've definitely seen a really significant increase on the short course side and do think that the Alternative Credentials are here to stay. And it does certainly validate our move into both short courses and boot camps.
Having the full product set is we think really compelling for the schools. And we've definitely seen an interest in our university partners continue to expand new revenue opportunities.
I think when COVID first broke, some people were positing that this would cause companies like us to have a harder time, because universities were going to do it all themselves, and I think that showed us sort of fundamental lack of understanding that universities are really large, doing many different things, and it's impossible for them to do everything themselves. And the reality is demand has picked up pretty significantly.
Since, once we got through the initial period of everybody worrying about, just as a human being or worrying about what was going on with the pandemic. I do think that there's no question that we're going to continue to see more.
This is a very significant financial issue for university partners also, so stackable or not. The credentials themselves are certainly in demand, as evidenced by the record numbers that we're seeing.
Now, we do have a whole variety of things happening across the portfolio that are quite interesting that you'll see over time as we announced. The question, but I would tell you that we love the leadership position we now have in this segment.
We think it's really critical to our long-term success.
Stephen Sheldon
And then on the student, the record student demand trends are seen. Is there any way to quantify or frame how much of an increase you've been seen over on some of those metrics you talks about like lead generation applications enrollments are as we think about the fall?
Chip Paucek
I guess, I would say, we tried to give some characterization of what we think the second half looks like. Paul, you want to jump in here?
Paul Lalljie
Yes, yes. Stephen, look, we are seeing demand, primarily driven by the marketing efficiency that we're seeing in direct marketing spend.
But at the end of the day, the demand that we're seeing is across the board and demand as you know, in the grad business, it takes a while before the gestation period is 8, 7, 8, 10 sometimes 12 months to get to the point of an enrollment. So, I mean, one other things that we're trying to do is to be measured, right?
We're not going to call it before we see something goes through the various stages of the funnel, if you will. And at the same time and the short course side of the business, I think we've been very pointed in what's happening in the short course sides of business.
We had tremendous success in the second quarter from the short course business. We expect that to continue in the back half of the year.
When we think of that business and we think of, it tends to have the low of the summer months and a little bit into the fourth quarter, with the pandemic we're not seeing that, right, instead of instead of Europe being on vacation, we're seeing folks that are more active when it comes to participating in online education. So, I think that the Alternative Credential business which is short and we have more visibility into it, we are seeing better efficiency and better conversion of our marketing dollars in that space.
And it's kind of early for us to call with specificity things in the undergrad business. Being measured and being prudent is probably best for everyone as we move forward here, particularly in an environment that we're in here today.
Operator
Your next question comes from the line Jeff Meuler from Baird. Your line is now open.
Jeff Meuler
I think there was a comment about a shorter time to cash flow positive and each degree that you'll be lunching. So just curious as to how you're planning to do that, like what are you changing in the offer and what are you doing more efficiently?
And then this might be too early, but to the extent to which you would be willing to put any numbers or timelines around that would be interested?
Chip Paucek
I think it's too early Jeff. We're and a bit to detail, I would say what's important as you know that it's a concerted effort on behalf of the Company to drive the most successful, high quality programs we can and do them in the most capital efficient manner.
And I think you're seeing that in the results. If you look at the cash flows over the last three quarters, that's a particularly impressive slide in the earnings deck, and something that we definitively are intentionally working on.
And if you think about the journey we had last year as a public company today, I do believe we're making good on all of the promises that we pretty strongly put out there about what the Company was going to be able to achieve. So how can we do it?
The playbook on how we're doing it? I think, we certainly don't need to advertise to everybody.
Jeff Meuler
And then, there was kind of a comment in the prepared remarks about universities doing things in a thoughtful and high quality way, is maybe different from the scrambled solutions that some, I think could be implementing or have implemented in the past. So, as you kind of approach this environment where universities may need more contingency based solutions, can you just go into where you want to play their and/or maybe where you don't want to play there?
Chip Paucek
I think we want to play where we're meeting a significant need with a partner that would have interest in more of our offerings. Being in those conversations is important.
We like the deployments from the standpoint of assisting the great schools. I mean, today, there was a wonderful story in Forbes about our Amherst deployment that was super positive and talks about how we're actually helping the course builds, we're actually doing in more detail in the course built.
So I was very, very pleased to see it. And it's fair to say that we are still laser focused on driving the business that has a revenue share associated with it, and then offering that to increasing set of partners.
We've had more demand for that from both existing and new partners. And -- but, obviously, we have to do that in a way that's balanced with regard to our desire, 12 years in to get the Company to cash flow positive and forward.
Fortunately, we create really strong margin as we go long-term. So we, I feel like we're really set for a really good run over the next two, three years.
Operator
Your next question comes from the line of Brad Zelnick from Credit Suisse. Your line is now open.
Brad Zelnick
I appreciate and support the decision to focus on cost discipline and profitability. But given what's going on in the world and the increasing need for distance education.
How are you prioritizing all the investments internally? And what would cause you to lean in and invest further into the opportunity?
Chip Paucek
Well, Brad, I think, our measured commentary shouldn't in any way indicate that we're not leaning in and investing in the opportunity. If you think about what we actually did over the last four months, I'm thrilled with our team, and I think it's a matter of how we say yes.
So Studio in a Box, as an example is a really innovative approach to being able to employ more and more broadly in right when candidly, we didn't do it as a COVID response, we did it, because we believed that was a way to innovate on building the degree side. And obviously, now if we hadn't done it with in COVID or our studio operations would be entirely shuttered.
So you can apply that kind of logic to the broader portfolios. I do think, I wouldn't want you to believe that we weren't leaning in.
It's a matter of how many large scale deployments we take in and on what timeline and how we roll them out. And fortunately, as you heard me mentioned, we have a situation where we will be able to increase them over the next couple of years from where we are to today.
Paul Lalljie
If I may chime in for a little bit here, a lot of what we're doing, we're talking about operational efficiency. If we can find a way to do things better and cheaper and faster than we have more capital to deploy and new opportunities, so by no means, are we screening opportunities by saying, what, we don't have enough money to spend.
We are finding ways to do things better. We are focusing on doing things more efficiently in Studio in a Box is a prime example of that.
Brad Zelnick
Thank you Paul and Chip, that makes a lot of sense, actually. Maybe if I could follow up with one more, on the really nice acceleration in growth that you're seeing in Alternative Credentials, organically, I might add.
Are you seeing the larger pipeline now that more prospective students have free time? And how should we think about the pace of new program launches within this segment?
Chip Paucek
We are seeing a larger pipeline of students, we are seeing larger pipeline of universities, and we are seeing a large pipeline of courses. And if you remember, this was a challenge shortly after acquiring get smarter.
It's a really good story. So we announced one this morning.
That's incredible opportunity for companies and for individuals to learn diversity, equity and inclusion and how to be a diverse, equitable and inclusive company. We announced Ohio State a couple of weeks ago on the boot camp side.
Our up-sell rate on the camps is ahead of internal plan in a pretty substantial way. So there is definitely increased demand.
I'm most pleased to see our global brands briefing in a large number of high quality faculty for all kinds of different courses. And if you look at the sort of, even taken the risk down substantially on the short course portfolio because we've basically taken exposure to disruptive topics that tend to be more hit driven, way down, and build a very large number of functional and leadership courses, and now are just entering technical short courses.
So, we feel like we've got a very large runway of more partners, more offerings and really likely that business is going, the team's done a great job.
Operator
All right. Thank you.
And as you're returning the call on time, I'll turn the call back to Chip for closing remarks.
Chip Paucek
So, I wanted to take a brief moment to thank our information technology team, who is kept to you running and not only running, but really performing and outperforming, give a particular shout out to our Vice President of Information Technology and Infrastructure, Dan Berman, who celebrated his 10 year 2U anniversary today. Thank you, Dan, thank you to your team, and we will see everyone out on the road.
Operator
Thank you very much. And ladies and gentlemen these conclude today's conference calls.
Thank you all for joining. You may now disconnect.