All for joining. My name is Josh Baer, Software Analyst at Morgan Stanley, covering ed tech, among other things. We have the pleasure of having the CFO of 2U here, Paul Lalljie and IR Stephen Virostek. From our end, some disclosures before we begin. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. You have any questions, please reach out to your Morgan Stanley sales representative. I think, Steve, you had some additional disclosure. Yeah, I see your disclosure. From me. I'm gonna raise you one here. All right. Josh. Sounds good. We're gonna be making some forward-looking statements today. As you know, they're subject to risks and uncertainties, which are contained within our 10-K filing with the Securities and Exchange Commission. You can also refer to the Safe Harbor statement, which is on the 2U investor relations website. Great. There's a lot of interesting things to talk about today. Wanted to kick it off to level set for those in the room and on the webcast. Paul, if you could take a couple minutes to give an overview of 2U's business and really why, you know, what value does 2U bring to universities and to students? Yeah. First of all, Josh, thank you for having us. good afternoon, everybody. For those of you who are not familiar with 2U, let me take a few minutes to provide a quick overview. The bottom line is 2U is a partner to great universities. We provide the technology and the services that those universities use to deliver high quality education. over 230 partners, 37 of the top 50 partners, 50 universities in the world. You know, our focus is on delivering high quality education. There are a couple of things that we're very proud of. We're very proud of graduation rates. It's our goal to play our part in making education affordable and to make education accessible. Graduation rates are very, very important to us. We operate, we use a platform strategy. Our edX platform is a platform that efficiently allows us to match a learner with the appropriate content that is required. Because of that, we have an extremely scalable platform, and we have a business that while it is just under $1 billion of revenue, this year, we're expected to deliver in excess of $150 million of EBITDA. That scalability comes from the platform strategy that we have. We operate in a very large market. That's a $36 billion market on a global basis. We believe that we have a very important role to play to help continuing to make education affordable and accessible. Great. A great overview. Wanted to ask about macro. It impacts you in a couple different ways. Was hoping you could talk about the cost of paid marketing and enrollments, what you're seeing in the market, and also what assumptions are embedded in 2023 outlook? A couple of things, Josh. If you recall, you know, last year, we made some changes to our business where we accelerated our platform strategy. We started focusing on organic leads, increasing the percentage of organic leads. What we saw at the end of last quarter, 37% of organic leads was coming from the platform. The impact of that, lower cost per lead on average across the business. When we look at the environment, the macroeconomic environment that we're in summer of last year when we made the change, we saw a direct impact on our alternative credential business. The boot camp, the Exec Ed business, we saw better conversion, we saw good take rates on that business. As a result, you can see in the fourth quarter, the segment had a loss of just about a million something dollars. We expect to be profitable this year. Because we have the alternative credential, the boot camp business growing 18% last year, we now have the option of taking out the less profitable spend from the business. In the numbers that we've guided to this year, we are somewhat indifferent to the macroeconomic conditions. If the macroeconomic conditions worsen, meaning you have recession, and to be more precise, high unemployment, that is good for our business. If it continues at the same rate, we are fine with numbers that we've provided. If it worsens, meaning, unemployment changes, goes even lower, you know, we also have the alternative of continuing to do well in the alternative credential side of the house. In times where unemployment is low, reskilling and upskilling becomes a very important factor, and we'll continue to do well there and focus on profitability. At the end of the day, you know, we've said this, we're gonna be profitable in the alternative credential business in 2023, and we hope to generate more leverage in that business as we go forward. That all makes sense. When it comes to employment and enrollment, are you seeing any changes in student behaviors or interest in your programs? Well, look, I mean, I think what we saw in 2020 was an unusual spike, the COVID spike if you will, or the acceleration or the pull forward of demand in that environment. Post-COVID, we have seen somewhat of that reversion back to where enrollment levels would have been. I think as we sit here today, we're continuing to see strong demand in the alternative credential side, we are seeing demand in the degree side of the business, that is particularly in areas like STEM. We are seeing softer demand in areas like nursing, clinical licensure, and in business, we're seeing stronger demand in the STEM verticals. What does all of this mean at the end of the day? It means that platform is the future. With the platform that can efficiently match a student with the appropriate educational content, you can then have a refined rate of conversion, a refined marketing apparatus that optimizes what you're doing versus, you know, having to spend inefficiently in order to achieve your objectives on the enrollment side of the equation. One tangible example of that is our announcement of a Master of Artificial Intelligence at UT Austin. It's a disruptively priced $10,000 master degree. The only way that that's feasible is when you have a platform, as Paul said, that can match learners with the relevant content. I think we set a record in the first 48 hours of announcing that program, we had over 3,000 organic leads. Great. Thank you. Before we dig into platform and degrees and margins, I did want to address, a recent event in regard to the Department of Education Dear Colleague letter. Could you help outline what happened and what does it mean for 2U? Essentially, you know, 2U operates for the most part under some regulatory guidance that was published in 2011. In February or last month, the Department put out some more guidance around broadening the definition of a third-party servicer. Prior to that, third-party servicer was really applicable to Title IV, those who administer Title IV services. They have broadened that definition to now encompass much more than that, and including some of the service that we and other edtech companies provide. There is a comment period, and there is an effective date, which was scheduled to be September 1st from a timeline perspective. Essentially, we're in the process of learning more, understanding exactly what it means during this comment period. There is also a listening sessions scheduled for up to March 16th. I think it's this week and up to March 16th, where they're taking comments around bundled services or incentive compensation, both of which are important to us. We believe strongly in transparency. We believe that we wanna make education affordable and accessible across the board, and transparency only helps us as an industry. Back when the GAO report was published last year that called for greater transparency, you know, we made comments around sunlight is the best disinfectant. We do have transparency reports that we publish today, and we look forward to whatever the comment period leads to. We are prepared to participate as we should. What are you being asked to comment on? What would the issue. In the release, they had brought to the attention the rising student debt levels. Well, I think. Oh, you're not providing financing or you're just- That's correct. We're not involved in the Title IV financing of the degrees. We don't set the tuition. We have a revenue share agreement with the university partners that we provide a suite of bundled services that includes the recruitment and the pedagogy and the administration of the courses all the way through placement after graduation. The Dear Colleague letter of 2011 outlines in gory detail the specificity around which we operate, that governs how we operate, what we do. The comment period is along the lines of understanding more about the services we provide, the services others provide. That's what we're trying to understand as we go through the process, what exactly is it that we're required to do. In terms of third-party servicer, it is broadening the spectrum of saying any, you know, anyone who provides services to an institution in higher education should be under this definition of third-party servicer. If that definition is then clarified, then we need to understand what are the consequences of that. What do we have to comply with, right? Currently, as outlined, the institution would have to make a filing to the Department of Education about our contract, about the things we do, et cetera. It is more understanding and clarifying all the details so that it is something that could be enacted, if you will. Is this directed? Yeah. The question was it directed specifically at 2U. No, this was broad-based. This was a broad-based issue and announcement from the Department of Education. Okay. Let's pivot back to degrees. We'll leave time for questions at the end as well. Wanted to ask about the difference between full and flex degrees from your perspective, from a revenue cost and program standpoint, and how has flex degrees impacted your competitive standing in the market? A couple of things here, Josh. Back to the platform strategy of summer of 2022. Part of what we were doing was ensuring we use the platform as this storefront, this marketplace. We would list all of our content there. As a result, we can do a lot of different things. Number one, because the platform has strong credibility with consumers and with search engines, we can then attract high-intent leads to the platform. One way of attracting high-intent leads to the platform is by improving and broadening the content that you have on the platform. The flex degrees for us was one way of doing that. We can refer to it as a content aggregation play, if you will, where there are certain types of degrees that we, you know, was best suited to be done on a standalone basis without the full suite of services, without content build, without broad-based marketing, et cetera. The objective there was to have those degrees listed on our platform, hence increasing the content, hence increasing the traffic flow to the platform. As you can imagine, the cost to do such a thing is not a lot. We said between $500,000-$1 million as a cash flow point. It takes maybe a year and a half to two years to get to steady state because it's a natural flow of organic traffic that builds up the student base in that program. From, capital light, not much capital in order to launch such a program. It is a much leaner way of launching. I don't know if I left anything out there, Steve, but it's a much leaner way of improving the content on the platform. No, I think those are the key points. I think we've announced five flex degrees so far, and, you know, there's more in the pipeline. We're planning on launching 25 of them, next year. Yeah. That's great. Like, the benefits to some of these new flex degrees and new business is clear. Just also wondering if you think about your existing customer base, your existing programs, if there could be potential headwinds upon renewal, if they select, you know, less a slimmer kind of set of options from you. Yeah. One of the things we did as we were thinking about launching this, we talked to our current university partner base before we did this. The second thing is, if you think of the size of the class sizes in each of these programs, marketing plays an important role in maintaining that class size, in growing that class size. Marketing plays an important role in ensuring our university partners continue to attract the quality of students that they want in order to deliver the quality of the program. From our perspective, those are important pieces that our university partners want to have as part of their portfolio. We don't see that as being a threat to our business. We see it more as how do we improve and lower, at the end of the day, the cost to acquire a student? The more traffic we have, everyone benefits from that. It's a platform that has richer content that attracts more students, that allows us to have better conversion. Okay, got it. You started, dropping some data points around enterprise- Mm-hmm. on the last call. How do you think about the competitive landscape there, and really how is the 2U edX combo differentiated? A couple of things. The enterprise business grew 86% last year. It's just under $50 million of revenue in 2022. We expect the growth rates to continue at that strong rate in 2023. From our perspective, the enterprise business has a lot to do with the content library that we have. We have the appropriate content that enterprises want as part of their business to ensure that they can continue to reskill and upskill their employee base so that they can be competitive in the marketplace. If you think of the things that we have listed on our platform as content, you know, we just added content around ChatGPT, for example. We have appropriate market-based content that can be used by the enterprise customer base. I think the key differentiation for us happens to be the content that we have. Secondly, I think there is a quality factor that matters. I think we've always focused on high quality education from the beginning, and I think that transcends and continues in the enterprise segment. Our definition of enterprise really extends to government and what we call social impact, right? These are, you know, development dollars from different government agencies that are earmarked for upskilling and reskilling of employees. We signed a contract last fall with the UK Department for Education, GBP 5 million contract, again, to pay for services that we have, the courses that we have today. We think that's an exciting opportunity for us, and we're planning to disclose a bit more about our enterprise strategy at our Investor Day, which will be March 21st in New York. Great. Looking forward to it. Shifting to profitability and unit economics. We referenced the pullback in marketing spend previously. Do you anticipate impacts to growth as a result of these more measured, you know, marketing efforts? Josh, I think we had to have a starting point, and the starting point was the implementation of the marketing framework that allowed us to raise the threshold or raise the bar on return on marketing dollars spent. That, in the degree business in particular, has a seven to 12 month lag before it flows through the system. As a result, we're seeing some of that. I would argue as we go forward that we will not see the two things as correlated as it did at the time of implementation. Because the platform will make us more efficient, will allow us to scale as we go forward. For example, as we launch new programs, we might be able to do it cheaper, better, faster. As we add new flex programs, we might be able to add a program with 50 students, for example, and putting it on our platform may allow it to get to 75 students, by way of example. That in itself offers a natural growth trajectory to it. Steve mentioned additional pathways for our offerings, whether it is government or whether it is enterprises or whether it is some sort of specialty as we go forward here. Those are some of the benefits that we can realize as a result of the platform. The disruptive, priced degree in AI, that is something that we can do as a result of the platform. I bring this all back to, I don't think growth will suffer as a result of it. I do think when we have macro environments like the one that we're in, particularly you know, affecting portions of the business, you really don't wanna be spending into that headwind in order to deliver growth when you can deliver profits. We are poised to have a platform that allows us to grow the business efficiently and at a profitable manner. That's helpful. We talked about Alternative Credentials and some of the improvement in profitability recently and getting to break even this year. I mean, what happens next or, like, where can those margins go? Really same question for the degree segment? A couple of things. I could use Steve's captive marketing strategy by saying Investor Day is on March 21st, but I will provide some context. The last time we talked about unit economics was probably in March 2020. At that time we said the alternative credential business could get to those mid-teens type numbers. We said that the degree business could be in the low thirties, 33 to be precise. We saw last quarter the degree business was within the low forties, 43, 10 points higher. We don't expect that to maintain. We expect that to come back closer to the mid-thirties than it is to the forties, and we expect the alternative credential business to get to those mid-teens type numbers. We'll provide some more context, particularly around unit economics at Investor Day, and then we can have some refinement around it. The bottom line is, look, our guidance is somewhere around a 16% margin level on a consolidated basis, and we hope to continue to expand that as we go through time. Great. I'll ask one more for now, and then we can poll the audience for any additional questions. Wanted to ask about the international opportunity, just from a geographic perspective, where you see the largest opportunities, and also how some of your partnerships help you get there. Steve, I can start and you can answer. Sounds good. If you think of international, when we, for example, acquired edX, we said that we had 50%+ of the traffic coming from India. We have a partner that allows us to that has a presence and content in India, and we can attract the students using our platform to get there. That is probably the hybrid approach that we'll use. It is probably the most cost-effective way of entering international markets. I don't think you will see us going and build a presence in India, for example, to deliver that content. We will partner and of course we'll if we have interest in the appropriate partners, we will definitely broaden our scope. As we sit here today, we're thinking of the hybrid approach. Yeah. We're certainly blessed with, you know, university partners that have international brands, right? That reach far beyond the U.S. borders. We have non-U.S. university partners like the London School of Economics, right? Stellenbosch University in South Africa and Queensland in Australia. You know, we are reaching those international audiences through those type of offerings and relationships. Okay, great. Pause there. Any questions? What happens- There's an- What's the contingency plan for the business if the bundled services exemption and the revenue sharing p ortion of the Dear Colleague letter goes away, 'cause that's specifically what the senators are calling for to review. Have you had any kind of contingent, kind of cost structure or pricing contract structure conversation with the customers already? Yeah. No, we have not, because to some extent those things require refinement. Of course, like all businesses, you do think about extremities or the black swan situations. At the end of the day, I think the Department of Education and the regulators are gonna be thoughtful about things they do and why they do it and how they do it. We just need to let that process go through. The short answer is no. Question here. Can you just comment on how you're thinking about share gain versus competitors? It seems like some of you are kind of entrenching into each other's spaces. All right. I would start with the fact that we are the largest, right, OPM provider. We have a significant, you know, degree business, about $600 million. It's profitable, and it's producing great student outcomes. You know, we feel like, we're setting the bar with respect to, you know, degrees. The platform allows us to add alternatives, around that. Whether it's a boot camp or a short course or a professional certificate, even free courses, allows us to add those relatively cost-effectively and match effectively the learners with those particular courses. We feel incredibly good about our competitive position right now. I mean, I would add to that, the platform is the key differentiation for us. Then the content library the second. When you put those two pieces together, I think we have a business where Steve mentioned the degree side of the business that's, you know, a sizable business. I think it's larger than any of the platform companies that are in India tech space. Then on the alternative credential side, it's showing growth and it's profitable. When you put those two pieces together, those are key differentiation. Being in that tech and in this macro environment and not generating profits, it's, you know, I know investors have their skepticism about you are going to deliver profit. I lived it for two, three years here. We're at the point where we are delivering profits. That Alt Credit business is profitable, that's the key differentiation. That will allow us to gain share. Going back to the regulatory process and the comment period, how long do you expect this whole process to take? The timeline is published by September 1. Okay ... so that six-month period. I, that's as we sit here today. Okay. Gotcha. Yeah. In your experience, I don't know if 2011 is a good guide, how long did that entire process? I guess you guys weren't really I mean, you were around at that point, but is there anything that? I was not around. Yes. I mean, I do think regulatory processes generally has a tendency to push to the right. Mm-hmm. I think you will have well-formed opinions as we go down the path here. It's not. I mean, I don't think they, you know, there is silence, and then all of a sudden something happens. Right. Right. I think we'll have good commentary and feedback along the way. In terms of, I guess, the timeline, you've got the regulatory process that is going to cause some type of inherent uncertainty, but then you have the convertible bonds coming due, and I don't know when your the other debt comes due. How do you think about refinancing in the face of this regulatory concern? Mm-hmm. I guess as part of that question, you've got a decent sized cash balance. Are you looking at buying back convertibles in the open market? I know you just issued a smaller convert, but. Yeah ... what are you thinking about, balance sheet management? I mean, a couple of things. Number one, the convertible notes that we have are due in May of 2025. Mm-hmm. We have the amended and extended term loan, $380 of it, we paid down a big portion of it. It's due in 2026, December of 2026. We are looking and thinking about the balance sheet and how to optimize it on a daily basis. Are we thinking about buying back notes in the open market? I mean, yes, but is that we have to think about it as a holistic strategy. We're thinking about that in conjunction with Investor Day, delivering on the numbers and as we go through each of the quarters makes it easier in terms of financing. We are thinking about it. It is part of the- Do you have the ability to? I know you have a loan it sounds like that's outstanding. Do you have flexibility with the existing or the new converts that just came in, the bank facility? Yes to buy back bonds? Yes, we do. Okay. We do. Thanks. We do. Great. We are over time. Really appreciate the conversation, Paul. Thank you so much. Josh, thank you very much.