Oct 27, 2020
Operator
Ladies and gentlemen, thank you for standing by and welcome to the 2U's Third Quarter Earnings Call. At this time all participants lines are in a listen-only mode.
And now, I'd like to turn your conference over to your speaker today, Mr. Ken Goff.
Please go ahead, sir.
Ken Goff
Thank you, operator, good afternoon everyone and welcome to 2U's third quarter 2020 earnings conference call. I'm Ken Goff, SVP of Investor Relations at 2U and I'd like to start by saying that I am to be appropriate amount of excited for this to be my first time reading the disclosures on one of our calls.
I'm also joined by Chip Paucek, our CEO and Paul Lalljie our CFO. Following Chip and Paul's prepared remarks, we will take questions.
Our Investor Relations website investor.2U.com has our earnings press release and slide presentation as well as a simultaneous webcast of this call.
Chip Paucek
Thanks Ken. To start, I hope everyone listening is doing well and staying safe.
Turning to our business, 2U had an excellent quarter. It's crystal clear that our offerings are exactly what students and universities need and we're providing significant societal benefit.
It's apparent in the demand we're seeing and in our results. We delivered revenue of $201.1 million, which is growth of 31% all organic.
Adjusted EBITDA crossed into positive territory coming in at $3.7 million. Cash flow is approaching breakeven on a trailing four quarter basis and our balance sheet is in a net positive cash position for the first time since early 2019.
Enrollment trends in the third quarter were favorable and we expect that trend to continue. We're clearly delivering products that meet the diverse needs of lifelong learners and we believe the impacts of COVID-19 accelerated demand across our three primary products, short courses, boot camps and degrees and all of this is reflected in our reintroduced guidance.
Now, let's take a step back so I can offer you a few perspectives on the business. I'm very proud of what 2U has accomplished in 2020.
12.5 years ago we started with a vision for where higher education was headed and because of the strategic choices and investments we've made since then, 2U is now uniquely positioned to meet the needs of our partners and lifelong learners at a moment when the value and demand for online education has never been greater. We believe the impact of these choices and investments, particularly our move into Alternative Credentials can now be seen in the strength of our third quarter results.
Paul Lalljie
Thanks Chip and good afternoon everyone. A year ago, we said about improving operational efficiency, sharpening the way we allocate capital across the portfolio and boosting our liquidity position.
We have steadily reported progress and in particular, we highlighted optimism and leading indicators for the past two quarters. As you've seen from today's earnings report, we have delivered organic revenue growth of 31%, significantly improved profitability, reduce the use of cash on a trailing 12-month basis by almost $90 million and now boast a balance sheet with a net cash position.
These are extraordinary results by our extraordinary team and we now have the foundation to continue this progression. This afternoon, I'll go over our results for the quarter, discuss steps we've taken to strengthen our balance sheet further and provide some color on our annual guidance.
Starting with results for the quarter. Revenue for the quarter totaled $201.1 million, a 31% increase from the third quarter of last year.
This represents all organic growth since we acquired Trilogy more than a year ago. The 31% increase represents a 13% acceleration from last quarter's organic growth.
Grad segment revenue was $122 million up 18% over last year and the four-point acceleration from last quarter. Growth was driven by a 17% increase in full course equivalent, our proxy for enrollment.
In addition, we saw encouraging trends across vertical areas and launch cohorts. Revenue in the Alternative Credentials segment totaled $79.1 million, up 57% over last year and in line with the increase in FCEs.
This was driven by a 60% growth in short course revenue, as we continue to see extremely strong demand for this product. Boot camp revenue grew 54% year-over-year, reflecting several new offerings and strong uptake across subjects all leading to high enrollment.
Now, let's take a look at cost and expenses. Operating expense for the quarter totaled $247 million, up 13% from last year.
The increase was driven primarily by personnel and personnel related expense across category. Curriculum and teaching expense grew 41% from last year, driven by the growth in Alternative Credentials revenue.
Marketing and sales expense grew 7% year-over-year and while there are several puts and takes, overall this demonstrates the continued scaling of our marketing infrastructure and more efficient online advertising spend.
Chip Paucek
Thanks Paul. Since March, when all of higher education was forced online, we've been reminded in so many different ways that delivering high quality online education is complicated, expensive and requires an integrated approach to technology, pedagogy and support for students and faculty.
Our capabilities, investment and integrative approach are what set 2U apart. And the quality of the offerings and experiences we power across the career curriculum continuum is a major reason why I'm excited about the forthcoming release of our inaugural transparency report.
As you've heard me say during our Investor Day earlier this year, we believe higher education must redefine itself to better serve society's critical needs and our transparency report will help to demonstrate how 2U is clearly helping our partners deliver on this promise. At a time when parents, students and policymakers are all asking more of higher education and calling for greater transparency about the quality and outcomes it delivers, we're proud to be at the forefront of defining what quality looks like online while answering this call.
And with that, we'd be happy to take your questions.
Operator
And we'll start with our first question that's on the line from the line of Stephen Sheldon from William Blair.
Stephen Sheldon
Good to see strong growth in each segment. I think you talked about sustainable momentum going forward.
So, wanted to ask about the underlying factors driving the acceleration, especially on the full degree side and what that could mean for potential growth rates looking into 2021 as I would think you'd have increasing visibility there?
Chip Paucek
Yes. So, we do think that the economic impact from the pandemic is proving that our business is counter cyclical and we do think that it is causing people to on the degree and boot camp side really seek out career opportunities to improve their long-term futures and we're seeing increased demand across all three categories.
But those in particular, as you know are a bit longer term so we're starting to see that in current period results and we're pretty pleased about what it means for the business.
Stephen Sheldon
Got it. I mean as we think about, you've seen some acceleration there over the last couple of quarters with the enrollment trends that you've seen and the funnel trend.
I guess, how should we think about the growth trajectory, at least early in the year?
Paul Lalljie
Steven, this is Paul here a couple of things, I mean I think as we've said in the past and we will continue to reiterate, we expect to see that growth trend continue. I think last quarter, we talked about our organic growth increasing to the point that we expect to see continue.
Now, what does that mean? If we look at 31% year-over-year growth that we see this year, I think Page 12 of Ken's beautiful investor presentation that's on the website.
You would see the sequential growth on a year-over-year basis. The third quarter of last year was a 17% year-over-year growth and that somewhat widened the 31% that you see here this year.
So, to some extent you have to look at it on a holistic basis, what's the organic growth on a full year basis and we expect to see that to continue into next year, particularly the trend we've been seeing in the last two quarters, we expect to see that continue. But I want to make sure that the quantum is appropriate.
The bottom line is the trend is expected to continue and most importantly if we peel back the onion in two-thirds of the business, when a student enrolls, they stay in the system for an average of 2.5 years. So we know that we're going to see that increase lift as we go through in the next couple of quarters and in the third of the business, which is the alternative credential business, it's been extremely strong in the last two quarters, we expect that to continue, we've launched more subjects in the boot camp business, we've built more courses in the short course side of the house and we expect that to continue next year because a lot of this is more topical areas and we are seeing the demand for that, that we don't expect that to slow in the near term.
Stephen Sheldon
Got it. That's really helpful.
And then as a follow-up, it seems like Simmons has been very forward banking with its decision to invest in permanent hybrid learning options within its undergraduate programs. What are you seeing I guess in terms of other universities starting to consider investing in this way in a more structural hybrid offerings, if any, and could that be a big opportunity for 2U over the next few years?
Chip Paucek
Yes Steve, we think it's a huge opportunity. We did go out of our way to mention that undergrad is a place that we definitely think there is a lot of runway for the company and that there is no doubt that that's been impacted by the fact that COVID-19 forced everybody to go online, removed a bit of the sort of challenge overnight and we're in many different conversations that look and feel like what we're doing with Simmons.
So, now obviously Higher Ed moves at a pace that is not the same as business and. But I'd have to tell you, it's been really a great series of conversations and a great number of opportunities for the company.
Now, with that said, we're really focused on making sure that we maintain a thoughtful cadence of longer term opportunities that we're balancing the agenda for long-term growth and you can see now, we're back to some pretty heady growth numbers and we're making sure that we're being thoughtful about how we invest and how we drive toward free cash and all the commitments that we've made in terms of portfolio management, looking at margin and the return on invested capital for each of the options that we have. But there's no question that undergrad is strong and you can see, we did mention that we already have two more additional LSE degrees.
Stephen Sheldon
Got it. Thanks and congrats on the solid results.
Operator
And we do have more questions on line. Our next question comes from the line of Arvind Ramnani from Piper Sandler.
Arvind Ramnani
I just wanted to kind of really ask about the demand environment? What has been the appetite for universities to sign up with 2U and how does the pipeline really look over the next 12 to 18 months?
Chip Paucek
Do you mean demand from university partners?
Arvind Ramnani
Yes.
Chip Paucek
It's been very strong. There's no question that the effects from the pandemic have had - even a stronger increase in conversations related to our full investment model from schools, given that this is a really tough time and schools need to drive high quality options, they need to drive high quality online options and there is a ton of conversations and there is a ton of opportunity.
We're being measured in how we deploy ourselves, but we're pretty excited about it.
Arvind Ramnani
Yes and when you think of the market opportunity kind of beginning of 2020 versus now, have you all sort of reframed the market opportunity and what I'm really trying to get at here is like when you think of increased appetite from undergrad or are there new segments of the market that you think are kind of more willing to work with 2U?
Chip Paucek
There's no doubt. We've never had the kind of undergrad conversations we're having right now.
But, just as an example to get to these results, we had more than 50 new boot camp launches this year, we just didn't announce them all. You're talking about a pretty incredible expansion of the Alternative Credentials segment both on short courses and boot camps with demand across the entire partner base and that's how you get to the kind of eye-popping growth numbers for that particular segment.
That segment is now the largest provider of Alternative Credentials in the country we believe. So, 45 new short courses launched, 50 plus boot camps launched and then you get to undergrad and obviously that's a long-term opportunity for the degree business.
We've also seen an acceleration in demand for many of the programs that we've been running for years and years, hitting all-time highs on a variety of programs in these recent cohorts where people are clearly looking to rescale and upscale themselves in tricky economic times. We started the company in 2008, in what we thought was the worst economy we'd ever see and it got increasingly better over a long time period, but in small ways over a very long time period.
Is difficult to see the impacts of the overall sort of macro I can tell you today, we feel pretty strongly that we're seeing just how counter cyclical that part of the business is and we do think it gives us a great opportunity for driving growth on the degree side as well.
Arvind Ramnani
Great. Perfect.
I'll get back in queue.
Operator
And we do have more questions on the line. Our next question comes from the line of Rishi Jaluria from DA Davidson.
Rishi Jaluria
Nice to see some continued solid results. There is just two from me first, I wanted to start maybe by thinking about your multiple growth drivers that you have and how do you think about wanting to capitalize on the opportunities you have and the Alternative Credentials segment with GetSmarter and Trilogy while at the same time making sure that you're not taking your eye off the ball with the core graduate opportunity?
Chip Paucek
Yes, I mean Rishi. It's all portfolio strategy, this is balancing our long-term investment opportunities and we're putting everything through the lens that we told you.
Well over a year ago, we told everybody we are going to do this and we've done it and we've continued to demonstrate I think quarter after quarter that we're focused on it and granted COVID threw a massive curve ball at the planet and it's been complicated. But I have to say it's created a need for existing partners, a need for existing programs to be fully online, to be operational.
We really didn't mention that just how efficient the company has been operating on a remote basis, how strong the employees are delivering for the partners, 31% organic growth and it's really across the whole portfolio and that makes me very proud because we intentionally went down this path in a way that clearly was not obvious to the rest of the world, but it was pretty obvious to us at the time that, Alternative Credentials are here to stay and they are meaningful. They are meaningful opportunities for people to reskill themselves, if you're getting a boot camp in data science or web development.
You see great opportunities for high quality jobs. And then in our degree business, I mean you have certain degrees like our public health programs just really - just incredible growth, why?
Because people obviously are focused on trying to deliver at a time of need for the world and see opportunities in that. So, we really like how we've established ourselves across this selection of opportunities for people to create lifelong learning and the universities themselves need partners to do this.
This isn't really like online program management that doesn't even make sense anymore. This is about sort of digital transformation for the great non-profit university and we think that we are at the center of all of that and have pretty incredible positioning for the next several years.
Rishi Jaluria
All right, great, that's helpful. And just on the topic of Alternative Credentials, it looks like we saw nice strength in both sides of the business.
I wanted to drill down on the 34% growth you saw on the boot camp side of the business. I think really impressive, especially given that Trilogy was a largely in person business that you've transitioned online.
Can you talk a little bit about that transition online, how it's been so far? And I think more importantly, how should we be thinking about the boot camp business going forward and with potential reopening and even post pandemic, is there an opportunity to potentially even accelerate that now that you've got this fully online version of it and then the ability to bring back the in-person instruction for those that need it?
Thanks.
Chip Paucek
Well, I think you can see the growth was pretty heady, so we're focused on quality end growth and I'm pleased to tell you that Net Promoter Scores are up like it's clear that these programs are meeting the demand in the marketplace, they are delivering for people in the marketplace and delivering high quality long-term outcomes for people most importantly, which will be - that will be over time what matters the most. So going online with the boot camp business obviously was stressful when we were doing it - taking everything online.
But it's been fantastic expanding our geography and it's - we didn't expect to have to go that fast but it's been a significant win for most importantly the students, but also for the company.
Rishi Jaluria
All right, great. That's helpful.
Thank you so much.
Operator
Our next question on the line comes from the line of Brad Zelnick from Credit Suisse.
Unidentified Participant
Hi, it's Bob for Brad. Congrats Chip and Paul on the impressive results; one for Chip and a follow-up.
Chip there's always been discussion in the industry as it relates to the various business models for OPM's. How has the financial strain on educational institutions during COVID change the discussion at all?
I imagine, there'll be a greater interest in the revenue share model, but curious to hear your perspective and understand how customers and prospective customers are thinking about it?
Chip Paucek
Yes, there's definitely been increased interest in the investment model, it's never been more important. People don't talk enough - the revenue share gets quite a bit of attention, but the investment that goes into create the business doesn't get enough attention.
It is real investment and it's significant, and at this time you're talking about schools needing it even more due to the really intense economic impacts from COVID. So, we're being thoughtful in our deployment.
But if you look at the programs that we've delivered for people, our partners are very happy right now and why? Right when they need it the most, these programs - it's almost a rush to quality like people are focused on what works and who has been doing this for a while.
It's not like Higher Ed just invented the Internet this week. We've been doing this for 12.5 years and we've gotten really good at it, so - and the investment model over time there is no doubt that we're seeing an increase.
Now with that said, we're focused on also driving the company's financial goals and that segment a measured cadence allows really profitability to grow substantially in current periods, over time, and we think that's really important for the company at this stage of life. So, we've got these great growth levers, we've got really high-quality deployments going out, we have new opportunities in undergrad.
But they are all being put through this portfolio strategy and this balancing of our investment opportunities that fortunately the Alt Cred segment has a different investment profile than the degree segment. So, we are able to sort of put them together nicely and create the long-term sort of portfolio effect to the company.
It's also clear that all the partners are interested in talking about all the different opportunities, so creates a lot of cross-selling opportunities for the company. So, pretty excited about where we are right now.
Unidentified Participant
Got it. And just as a follow-up, how should we think about the potential change in administration and the impact that could have to 2U and just education as a whole?
Chip Paucek
We started the company in 2008; we've been through Democratic administrations, Republican administrations and been very successful in both. Feel very confident that we will be successful working with any administration, and have done - have a whole team that has worked on that for now many years and done it in my opinion quite well, quite effectively, spent a fair amount of time working the various constituencies and feel really comfortable with our ability to deliver what is a very transparent model that is innovative, that creates the right kind of investment characteristics for schools right when they need it the most and really are very comfortable telling you that whoever wins, we feel to be on very strong footing.
Unidentified Participant
Thanks. Congrats again.
Operator
And our next question comes from the line of Ryan MacDonald from Needham.
Ryan MacDonald
Chip, first one for you, given that we've seen a surge in positive COVID cases throughout the fall and on campuses and in residential programs, can you give us a sense of how university partners are beginning to think about the spring semester? Are the conversations that you're having with these universities still reactionary in nature working to find a temporary solution for the spring or is it more strategic and sort of longer-term view?
Thanks.
Chip Paucek
That's a great question Ryan. I think the reason - this is in my opinion - the reason that we're seeing such an increase in the longer-term undergrad discussion is that people are thinking much more strategically.
The narrative around higher education I personally think has been frustrating. I think what Higher Ed has had to do and been able to do during this time period I think has been more impressive than not.
And I would tell you that people are starting to think about their long-term future. We said at Investor Day at the very beginning of this crisis that we thought higher education needed to be blended and connected.
We didn't say online. And the reality is blended and connected means that you're threading the campus experience with high quality options for people to be more flexible and be more innovative and be more accessible and so we're seeing that.
We're seeing that reflected in our partner set, in a way that is quite impressive. Now, is everybody moving at the same pace?
No. You have schools like Simmons, what Simmons University did on the timeline they did it, is quite incredible.
And then you have schools like LSEs that were ahead of the curve, and we are launching an online program with students in it right now because they had decided to do online undergrad 1.5 year ago. But this stuff takes time.
And so we're seeing real opportunities for us to deploy higher quality online undergrad offerings. But we're going to do it at a pace that makes sense for the company and for the partners because we need to also make sure that everything, we do is really good.
Ryan MacDonald
Excellent. And then as a follow-up graduate program enrollments have obviously been very strong for the fall cohorts.
Can you discuss what you're starting to see in terms of top of the funnel and application volumes coming in for the spring launches next year?
Chip Paucek
Ryan, we're more and more just up leveling the conversation from the funnel discussion. What we can tell you is we've seen great leading indicators we made that clear in the script.
We feel like we are seeing growth across all three segments and you're starting to see that translate into current results and having been a public CEO for what will be going on seven years I can tell you that I'm perfectly comfortable being able to let the results speak for themselves. And over time, it will come and as it comes, people will get it more.
And what we're telling you is we are seeing leading indicators that are very positive. Now fortunately we are able to talk about the current period and you can see that organic growth and sequential growth going up in each of these core segments.
And so, it's not just talking about what might happen in the future or what we believe might happen it's talking about what's happening right now. So, we like our odds of continued momentum.
Ryan MacDonald
Excellent. Congrats again.
Operator
And our next question comes from the line of Jeff Silber from BMO Capital Markets.
Jeff Silber
I'll keep my first question at a high level then. There is obviously a lot going on in the Ed tech space these days, considering your experience in this industry, where do you see this space going over the next few years and what is 2U's role in that?
Chip Paucek
So Jeff, we do think that the notion of what even an online program manager means is we don't - it's not even obvious what that definition is anymore. There are many companies that operate in this space.
Today that one could consider online program managers and what we're focused on is, the digital transformation of the great university and it really is a comprehensive product strategy for these schools to meet the needs of the learner in places where they might have greater challenges doing that on their own or supporting them in ways that make them stronger, and I do think hopefully this earnings period does start to show to everybody that why we went down the path we did on the two acquisitions we did. Our GetSmarter acquisition and our Trilogy acquisitions were both strategic and they were about being a more comprehensive solution to the great non-profit university.
So, we think we're really well positioned for that reason and there will be continued opportunities, both organically and inorganically for us to drive new opportunities for digital transformation for schools.
Jeff Silber
Okay, I appreciate that. And my follow-up is actually for Paul, I mean you set the bogey of reaching adjusted EBITDA positivity by the third quarter.
You got there, I just want to confirm, this is something you think is sustainable going forward? I know the business model has changed from a seasonality perspective, but would it make sense to see you having adjusted EBITDA, positive on a quarterly basis going forward?
Thanks.
Paul Lalljie
Yes. So Jeff, our objective was not to cut expenses to get to EBITDA profitability, our objective was to reengineer some of our processes internally, look at the way we operate, how do we operate more efficiently and I think that's what the team has done.
So, what you're seeing here today is a manifestation of a lot of hard work internally to make sure we can build and deliver the service that the students and the university partners expect from us, and we do it cheaper better, faster. This is not meant to be crossover in the third quarter and then in Q1 of next year go back down.
We expect to maintain profitability from here on out. Our guidance calls for EBITDA profitability on a full year basis to be positive and also, we expect to be positive.
First quarter's our tallest quarter in terms of expenses and we are projecting to maintain profitability through that period.
Jeff Silber
Okay, that's very clear. Thanks so much.
Operator
Our next question on line comes from the line of Brent Thill from Jefferies.
Brent Thill
Chip, can you update us on the number of partnerships in the quarter, did you add any new ones? I think last quarter you added two, was there any update to what you added in this current quarter?
Chip Paucek
So Brent, we don't update each individual program level at this point. We don't announce every new launch, so it became fairly clear to us that people didn't understand just how many upsells we were going after and landing in our boot camp business is one example, so during this period - something about 50 - I think it was 54.
Those are individual new programs at each school that are meaningful and so at this stage of the game we're a pretty big company and there's a lot of activity. We announced Simmons because it's pretty unusual that you take a full university online in such short period and begin even working with and receiving financial benefits from the campus programs.
We're really trying to manage the portfolio. The business has changed quite a bit and so each individual announcement.
You will see us continue to have some meaningful announcements over the quarter and we're excited about some of them. But like the Netflix Norfolk state announcement was our first HBCU, it's something that we not only think is a really important opportunity in terms of the world needing HBCUs to drive high quality options for Black Americans.
But on top of that we also - it's something that we promised our employees that we were going to go after and really believed was important internally. So, I guess I would tell you that you're going to keep seeing them, but we're adding all kinds of stuff, we added Colombia, we added for artificial intelligence, we've added something on the order of 45 short course partnerships with schools on a whole variety of different topics and of course, we're continuing to add grad programs.
Those grad programs come at a slower pace than our boot camps and our short course just because they have a larger investment profile.
Brent Thill
Okay, and that's helpful color and Paul, just on the sustained EBITDA, what are the biggest sources of leverage for sustained profitability. How would you bucket and go after kind of the bigger pieces where you're excited that, that gives you that confidence that you can keep sustaining?
Paul Lalljie
So Brent, there are a couple of things. The marketing infrastructure that we've put in place is a highly scalable infrastructure.
The more programs we add to it, the more leverage we generate from that. So, that is one area that we're seeing tremendous leverage in.
The second happens to be in our technology platform also I describe it as a platform-as-a-service, because as we keep adding things to it, we keep lowering the fixed cost per unit and we end up generating more operating leverage off of that as we go forward. And then there are some of our student facing organizations that are becoming more and more efficient over time, as we use technology to help in some of the delivery of services that we have to the student population.
So, it's across the board. Student facing, technology and then marketing infrastructure those are the three areas with probably marketing leading the way and technology following closely.
The bottom line is, it is - the real proof in the pudding is 31% top line growth and 13% cost increase in the quarter. And I think you're going to continue to see that divergence of top line growth and growth in expense, as we go through the passage of time.
Brent Thill
Like the diversions. Thank you.
Operator
And that was our last question that we have for right now.
Chip Paucek
All right. Thanks everybody for joining us today.
I just want to wish a very happy birthday to my Executive Assistant, Sandra Bailey for all her incredible hard work. Thank you Sandra and we will see everybody else out on the road.
Operator
And this does conclude today's call. You may all now disconnect speakers .