2U, Inc. (NASDAQ:TWOU) Q2 2020 Results Conference Call July 30, 2020
Chip Paucek, CEO
“…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.
Revenue grew 35% year-over-year to 182.7 million. Organic growth accelerated 3.18% driven by an increase in short course enrollments as people begin to rescale and up-skill in this environment. On the bottom line, we came in well above our plan for adjusted EBITDA with a loss of 2.1 million for the quarter. Year-over-year, this is a 12.9 million improvement.
And importantly, we delivered our third straight quarter of improved unlevered free cash flow. Similar to last quarter, the bottom line outperformance was driven by increased efficiencies in the business as well as lower costs due to COVID-19. Paul will go into this in more detail in a moment.
Turning back to the business environment and the impact of COVID, it’s now unmistakably clear that a structural change is happening in higher education. As the survey we released earlier this week demonstrated, on the prospective student side, we’re seeing a demonstrable shift toward online and away from campus space programs.
From the university partner side of the equation, we’re seeing a rapid acceleration in our partners’ mindset in regards to broader digital transformation across their institutions, which we believe will play out favorably over time for 2U. And we’re also beginning to see the counter cyclical impact of the worsening economy result in more people deciding to further their education. All of these factors and positively affected student demand and university pipeline across our portfolio.
Let’s begin with student demand. In late spring, we started to see enrollment pick up in our degree business. We hypothesize that this might be the result of a share shift from prospects choosing online over campus-based programs, but we wanted to dig deeper. So across our portfolio of degree offerings, we surveyed prospects in our funnel. We asked them how COVID-19 is impacting their decision making and choices between online and campus-based offerings.
The last data set from the survey came out of the field less than 10 days ago, and the findings were clear and powerful. More than 50% of prospects, regardless of discipline, said that COVID made them much more likely to choose an online degree over a campus program. Now think about that. More than half of prospects are much more likely to consider online. Now that number went all the way up to 73% when you include respondents who also said it made them more likely to choose online.
This was consistent across both graduate and undergraduate prospects. Another number that struck us, 20% of those surveyed said that absent COVID, they would have not considered an online program. So, these are all together new converts to exploring online. Over the past three months, we’ve seen unprecedented demand across our entire portfolio of offerings.
Across the business, we’ve seen historic highs with lead generation, submitted applications, and enrollments. These are early leading indicators that we rely on to project future growth. And we view as solid predictors of future growth. We believe these positive trends are not only about modality, but also about the proven quality of our partners programs. Some of our oldest, most well established programs are expecting record cohorts for the fall semester. High quality and student outcomes matter.
We also like leading indicators we’re seeing in our first undergrad offering. Classes starting August and we expect a stronger start to be initially projected, a few fun facts about the current applicant pool. Applicants range in age from 17 to 59 years old, and hailed in 110 countries. This shows the power and global reach of high quality online education and our world class portfolio. Expect to hear a lot more about undergrad from us in the near future.
Now let’s turn to our partners. University demand is also markedly up. Universities need to embrace hybrid online education for the fall and more importantly, further into the future if they want to thrive. There’s a big difference between the emergency remote instruction and intentional high-quality online education.
During the spring semester, on campus students experienced what it was like if you rely on 90 minutes of non-stop videoconference lecturing as a substitute for the full classroom experience, it wasn’t great. But if done right, online higher education can be as good if not better than campus education.
To create quality online programs, you need to flip the classroom. Intentional curation of content, better learning design, dynamic live classes, more diverse students, brand affiliation, and quality technical design, all improve learning and increase the value of the experience, our long history of delivering purpose-built online offerings across so many different partners and disciplines positions TWOU incredibly well.
Investing in high quality online education has become mission critical for universities, and our expertise and capabilities are increasingly indispensable to our partners. We’re seeing new partnerships, like our recent deal with Amherst College, in one of the world’s best small liberal arts colleges decides to embrace online. That’s a clear sign of seismic change and smart leadership.
We expect more deployments like Amherst as institutions confront growing uncertainty over the upcoming school year. Although, we’re innovating to meet the needs of the marketplace, we also continue to see increasing demand for our traditional revenue share model from both new and existing partners. The profound financial impacts of the pandemic have only made the value of our upfront investment and bundle of services more clear. Our shared success model is alive and well.
At the same time, we’re being careful and thoughtful in our choices. We’re actively working to deploy upfront cash more efficiently and shorten the time to cash flow positive of each degree. We do anticipate an increase in deployments as we move through ’21 and 2022. Our newly expanded Simmons University partnership is worth calling out specifically. The overall Simmons relationship has material for two years.
In addition to our existing graduate offerings, we’ll now support the entire undergraduate institution both on campus and online, a notable first for two years. This expanded relationship begins when fall 2020 classes resumed fully online due to COVID and includes our digital build out of over 300 existing undergraduate courses using Studio in a Box.”