2U, Inc. (NASDAQ:TWOU) Q1 2022 Earnings Conference Call May 5, 2022 4:30 PM ET
Lillian Brownstein – Deputy General Counsel
Chip Paucek – Co-Founder and CEO
Paul Lalljie – Chief Financial Officer
Conference Call Participants
Stephen Sheldon – William Blair
George Tong – Goldman Sachs
Ryan MacDonald – Needham
Josh Baer – Morgan Stanley
Jeff Silber – BMO Capital Markets
David Lustberg – Jefferies
Ladies and gentlemen, thank you for standing by. And welcome to the 2U Incorporated First Quarter 2022 Earnings Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your host, Lillian Brownstein, Deputy General Counsel. Thank you. Please go ahead.
Thank you, Operator. Good afternoon, everyone. And welcome to 2U’s first quarter 2022 earnings conference call. On the call this afternoon are Chip Paucek, our Co-Founder and 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. A webcast replay of this call will be made available for the next 90 days.
Statements made on this call may include forward-looking statements regarding our financial and operating results, the continued impact of the COVID-19 pandemic, plans and objectives of management for future operations, the integration of edX, student and university demand and other matters.
These statements are subject to risks, uncertainties and assumptions. Any forward-looking statements made on this call reflect our analysis as of today and we have no plans or duty to update them.
Please refer to the earnings press release and the risk factors described in the documents we filed with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2021, for information on risks, uncertainties and assumptions that may cause our actual results to differ materially from those set forth in such statements.
In addition, during today’s call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of 2U’s performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results.
You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations page of our website.
With that, let me hand the call over to Chip.
Thank you, Lillian. Welcome everyone to our first quarter 2022 earnings call. Let’s get straight to the results for the quarter and our guide. We had a strong first quarter as we expected. We delivered $253.3 million in revenue, a 9% year-over-year increase over Q1 2021 and adjusted EBITDA totaled $12.3 million.
For guidance, which Paul will talk about in more detail later on the call, we are keeping our 2022 revenue guide in line with what we said in February and we are increasing our adjusted EBITDA guidance, which is now expected to range from $80 million to $90 million. This represents growth of 28% at the midpoint and a $5 million increase to our previous guide. So, overall, we are pleased with our Q1 results and how things are shaping up for the rest of the year.
To be clear, the macro environment continues to remain complicated due to the ongoing impacts of COVID, the strong labor market and some overall softness in education, traffic and demand. People are also returning to normal life and that has some impact. But I am pleased to say we are holding our own nicely, all while we continue to transform 2U to a platform company.
We believe our free-to-degree product portfolio with edX is our consumer brand is just what the market needs. Higher education, like so many industries is becoming consumer centric, a dynamic only accelerated by COVID and we believe that the companies who best understand this learner centric shift and can offer students the education and skills they want when they need it throughout their working lives will win.
We have been working on integrating edX since we closed in November and I wanted to take a moment to give you some detail. edX is now the most comprehensive free-to-degree marketplace of educational offerings worldwide.
If you go to edX.org today, not only will you see thousands of open courses, you will now find an unmatched portfolio of all of 2U’s offerings across degrees, boot camps and executive education available to learners everywhere in the world. It’s pretty incredible in the first time in 2U’s history where all of our program offerings can be found in one place.
We are off to a great start on edX, but we have much more to do. We see six keys to unlocking the full potential of edX.org and cementing it as the preferred destination of choice for learners across the globe.
Those six are, number one, traffic; number two, SEO and content publishing; number three, portfolio marketing versus single product marketing; number four, product evolution with stackable credentials; number five, white label opportunities and revenue model flexibility; and number six, new international channels and enterprise expansion.
We are making some good progress across all of these dimensions and I will hit on some with a few comments. We grew learners this quarter to 44 million, primarily with greater SEO effort. Right out of the gate post close, SEO and content publishing have been a core focus of our tea. It’s going unbelievably well and we are already seeing it bear some pretty compelling fruit.
For example, if you type executive education into Google, you should see edX is a top organic search results for that term, often in the top five. Go ahead and try it. You can do the same for online boot camps and online master’s degrees.
Although, these offerings have been on edX.org for only a few months, they already rank on page one of Google’s organic search returns and in many cases in the top five. This is a big deal. It means not just monetizing the existing traffic, but creating better and better lead flow every day. Organic traction on Google is a key driver of our business.
You will see us actively continue to publish new content on a discipline basis, a career basis and a learning opportunity bases, all of which should continue to significantly improve organic search results across a variety of categories. It’s early, but these SEO efforts are already creating some really great traction for 2U’s product and partner.
We are seeing run rates of 500,000 leads per year coming to the 2U prospect forms on edX in 2022. This represents nearly 10% of our lead volume company-wide, with no additional marketing costs involved. And better, we expect to be able to triple this amount over the next 18 months. The reality is a tiny fraction of the edX traffic were even seeing the 2U products. We have much, much wood to chop.
University of London and LSE Undergrad are an example of a 2U degree benefiting from this new lead flow. LSE Undergrad is a global brand, a high quality experience and a very affordable degree, roughly $26,000. Learners are coming from all over the globe.
We are seeing significant traction from edX. Over Q1 alone, edX already represents 20% of our lead volume and our largest non-paid channel for this degree. And those leads are submitting applications at a 30% plus better rate than leads from our paid channels. That is huge. The implications for this across our business is significant, particularly as we create more affordable pathways for people and improve our products fit with edX.
Our new products and stackable credentials, this takes time, but we are also making considerable progress. We love the MicroMasters and MicroBachelors programs. We have 30 plus MicroMasters in negotiation with our university partner base. These will create quality, career focused options for our learners, saving them tuition dollars in the process. Each MicroMasters offers nine to 12 credits for free to the learner, stacking in the full master’s program if the learner wants to move ahead with their studies.
Now before I turn it over to Paul, I want to add a quick comment on both the enterprise channel and our university pipeline and partners. The enterprise channel continues to grow quickly. We saw almost 70% growth in revenue from enterprise in Q1 compared to the previous quarter. We have integrated all activity under the edX for business brand and we are seeing a lot of interest and traction in the market, because of the breadth and diversity of edX’s offerings.
On the university side, we continue to see growing demand from new and existing clients. We are on a bit of a roll now. I am happy to announce our newest degree with the University of North Carolina at Chapel Hill. UNC is launching a new school of data science and a new Degree Program, a Master’s in Data Science. This will launch in 2023. We love this opportunity with one of our flagship clients. Overall, partners are excited about the opportunity that edX brings to the table as a digital transformation partner and a platform for serving adult learners worldwide.
As a testament to the central role great universities play in the 2U vision, we are excited to announce the launch of 2U’s first University Leadership Council. The Council comprises 15 presidents and provosts from our partners, who will help guide us in our way mission to unlock human potential through high quality affordable online higher education.
Members include Alan Garber, Provost of Harvard University, Cynthia Barnhart, Provost of MIT, and Wayne Frederick, President of Howard University, among other incredible leaders. The full Council can be viewed at edX.org. Take time to check it out.
Now I will turn it over to Paul to get into the financials.
Thanks, Jeff, and good afternoon, everyone. We reported solid topline performance, with strong adjusted EBITDA and cash flow performance, which is particularly noteworthy considering that first quarter is typically a higher expense quarter and the quarter with the highest use of cash and we did this while diligently prioritizing the executing — the execution and integration of edX.
Revenue grew 9% to $253.2 million over the first quarter of 2021. We saw growth across the portfolio. The Degree Program segment grew 6% and the Alternative Credential segment grew 15%, all on a year-over-year basis, while edX contributed $10.9 million.
Expense for the quarter totaled $364.7 million, including $18.3 million of operating expense from edX and $58.8 million of non-cash impairment charges related to certain of our acquired intangibles and goodwill assets.
Adjusted EBITDA for the quarter totaled $12.3 million, margin of 5%, while free cash flow used on a trailing 12-month basis, came in at $34.1 million.
In summary, we reported solid topline performance in a difficult marketing environment and exceeded our expectations on adjusted EBITDA and cash flows. After a discussion of results for the quarter, I will provide an update on the balance sheet and cash flow statement and then conclude with some thoughts on our financial outlook for 2022.
Taking a closer look at our results, revenue for the quarter totaled $253.3 million, up 9% from a year ago, driven by 5% increase in full course equivalent enrollments or FCEs, which came in at 85,000 for the quarter. FCEs increased 6% on a sequential basis.
In the Degree Program segment, revenue in the first quarter totaled $154.2 million, growth of 6% from the first quarter of 2021. This increase was driven by higher student enrollment, a 4% increase in FCE and a $2.7 million contribution from edX.
Revenue from the Alternative Credential segment totaled $99.1 million, growth of 15% from the first quarter of last year, driven by higher student enrollment, an 8% increase in FCe. This increase includes 3% growth in revenue from our boot camps, 9% growth in exec ed revenue, and an $8.2 million contribution from edX.
Now let’s take a closer look at cost and expenses. Operating expense for the quarter totaled $364.7 million, up from $269.6 million in the first quarter of 2021. This increase includes $18.3 million of operating expense from edX and the $58.8 million non-cash impairment charge.
Let me spend a few moments on the non-cash impairment charge. Following the decline in our stock price during the first quarter, we determined that a triggering event had occurred and consequently performed an interim impairment review, which led to a write-down of $30 million of trade name and $28.8 million write-down of goodwill.
Personnel and personnel related expense, our largest expense line item increased $5.5 million for the quarter to $124.5 million, with edX contributing $7 million.
Moving on to profitability. net loss for the quarter totaled $125.8 million, an increase of $80.2 million from the first quarter of last year, reflecting the $58.8 million of non-cash impairment charge, $6 million in higher interest expense and $18.3 million of additional operating expense from edX.
Adjusted EBITDA totaled $12.3 million for the quarter. Adjusted EBITDA margin in the Degree Program segment was 23% for the quarter, a 6-point improvement over the first quarter of 2021, showing the inherent profitability of the degree segment business model.
Adjusted EBITDA margin in the Alternative Credential segment was a loss of 24%, compared to a loss of 14% in the first quarter of 2021, driven by an $18 million impact from edX expenses.
Now for our discussion of the balance sheet and cash flow statement, we ended the quarter with cash and cash equivalents of $233.6 million, a decrease of $16.3 million from year end 2021. Our accounts receivable balance totaled $77.9 million, up $10.6 million from the end of previous quarter. Fluctuations in our accounts receivable balance reflect the timing of payments from our university partners, which often matches the academic calendar. Unlevered free cash flow usage on a trailing 12-month basis was $34.1 million, compared to a net use of $33.9 million at the end of 2021.
Now for discussion of guidance, our priorities for 2022 center around unlocking value of edX, continued investment in our Degree Program s segment and improve the profitability in the Alternative Credential segment.
We are affirming our revenue guidance for fiscal year 2022. We expect revenue to range from $1.05 billion to $1.09 billion, representing growth of 13% at the midpoint. We are increasing our adjusted EBITDA guidance, which is now expected to range from $80 million to $90 million, representing growth of 28% of the midpoint. In addition, we expect capital expenditures to be approximately $80 million and weighted average shares outstanding to be approximately 78 million.
Let me provide some color on our expectation for the quarterly progression of our revenue for the remainder of the year. On our last earnings call, we shared we expect a challenging and unpredictable marketing environment. And while we have seen that, we still expect to see revenue growth accelerates in the second half of the year and we expect flat to moderate — to modest growth in the second quarter on a sequential basis.
To conclude, our first quarter results showed resilience and enrollment and revenue, and we are proud of our team for going above and beyond to deliver these results by focusing on discipline execution, along with integrating edX.
And with that, let me hand the call back to Chip.
Thanks, Paul. Before we turn to questions, I want to spend a minute talking about the first set of Gallup results that were released last week from our recent survey of nearly 4,000 boot camp graduates. The findings are compelling and a clear reflection of the career enhancing value our boot camps can deliver.
Gallup found that one year after graduation, the median salary for all boot camp graduates surveyed was $11,000 higher than what they said they were earning while they attended the boot camp.
Gallup also found that the median boot camp graduate who worked full-time during and after the boot camp, offset 59% of what their boot camp program cost them in the first year after graduation.
We hear a lot of talk in higher education about ROI and this is what great ROI looks like. And we are delivering this ROI at an unmatched level of scale, 48,000 boot camp graduates to-date across 50 plus partners.
In the coming weeks, Gallup will releasing more data about our boot camps, including the career satisfaction of graduates and the impact of boot camps on creating equitable pathways for historically underrepresented learners to enter careers in STEM. So keep an eye out.
We know that our boot camps can deliver life changing outcomes, which is a big reason why we are expanding our access partnerships across the United States and overseas. These are public private collaborations with workforce agencies at the state and local level, non-profit partners where funding is provided directly by the government or philanthropic support, which allow the boot camps to be offered at even more affordable prices and in some cases for free.
We currently have Access Partnership up and run with the following university partners, the University of Birmingham, University of Central Florida, University of Denver, University of Kansas, University of North Carolina, Chapel Hill, University of Oregon, University of Texas, San Antonio, the University of Texas at Austin and the University of Utah, with more in the pipeline.
We believe these public private collaborations can and will be an effective and scalable way to help local communities across the country meet the growing demand for skilled tech workers and that is a winning proposition for us all.
Now, let’s open it up for Q&A.
[Operator Instructions] Our first question comes from the line of Stephen Sheldon from William Blair. Stephen, your line is open.
Hey. Thank you. First, I wanted to ask on the marketing side. Have you seen any changes in your efficiency to fill cohorts and programs across businesses? And I know a lot of education peers in the industry are talking about students pursuing work right now given where wages are at and curious if that’s making it harder or costlier to fill the programs that to us support or if any headwinds there are starting to be offset by some of the positive market inefficiencies you talked about from edX?
Hey, Stephen. So, we did plan for inflation in our budget to marketing costs that was baked into our plan. So we felt pretty ready for it. There’s no question that you do see some impacts to the business, labor costs are increasing, makes it more competitive to hire people, we are seeing some wage pressure.
And on the marketing side, we have actually seen more stability, to be clear. So volatility has definitely gone down since Q1. So we feel like it’s less volatile right now than it was in Q1. And given that we baked increases into the budget, we are working through him.
Now, it’s also clear that, the Degree business has always been and always will be somewhat counter cyclical. So you can argue that right now when you are at full employment is a harder time for the Degree business just conceptually.
But we also took that into account. So, we feel comfortable right now with how things are going, and of course, when — the need for rescaling and upskilling is significant and the need for companies to continue to prepare their workforce significant.
You might have seen the Chief Learning Officer survey that showed great growth ahead for enterprise, and we mentioned in the call that, we saw 70% quarter-on-quarter. So, ultimately, we feel that we are — the — we have got it pretty well covered.
Got it. That’s helpful. And then did want to ask about the enterprise traction. Just the great — that was great just the — great to get some more detail on what’s driving that between what you got from edX, the assets you already had and the benefit of the Guild partnership, I guess, what do you see in across those different channels of engagement with enterprise customers?
Really strong demand for boot camps in particular. There’s no question that technology training is a huge part of this. And so we are seeing strong demand for boot camps across our own enterprise activity and our Guild partnership.
Executive Ed is, we do think the enterprise channel is critical to that product line in particular. And so, pretty major uptake from a whole bunch of different clients, we decided to not get into listing clients or listing wins into the earnings call, just simply for competitive reasons, but 70% quarter-on-quarter sequential non-trivial.
So, we are obviously a lot bigger than most people in the space. So the enterprise number, historically, was doing really well, but hadn’t registered. It’s definitively starting to matter. And we will provide more and more clarity on the channel strategy over time.
You might have heard me comment that we — we have now integrated all enterprise activity under the edX for business brand and that’s definitely been a win. So, part of the really the joy of this overall transaction is that it is impacting pretty much all parts of 2U. So that’s a good example.
Great. Thank you.
For our next question we have George Tong from Goldman Sachs. Georgia your line is open.
Hi. Thanks. Good afternoon. Last quarter you had mentioned — hi. I think some delays with implementations in new program launches, can you provide an update there and the progress for some of those programs to get reaccredited and the timelines with some administration changes and how they are approaching a re-launch or new launch of those programs in 2023?
Yeah. We feel like we are on track right now with the expected program launches for this calendar year, and we are feeling, you heard me mentioned that, we feel like we are on a bit of a roll. We are feeling definitely an improvement in the pipeline, and what next year and the year after looks like.
What’s actually quite interesting is, because some of the types of programs that we run take a long time to get through the process, we are actually building a nice queue of programs for 2023, and believe it or not, 2024, which I know, investors tend to be surprised that, universities do work in five-year planning. So — sometimes tenure planning. And so, we feel like we are building a queue of, particularly licensure programs, which we have done very well with for the outer years.
And we are definitely seeing more growth from existing partners. So, you heard me mention University of North Carolina, Chapel Hill, the institutional programs that we built there, were — clearly we had gotten off to a slower start there and it’s really starting to come along.
So very excited that we now have our first relationship four degrees in Australia, with the University of Sydney, that is a significant relationship and University of Sydney for the U.S. folks on the call, University of Sydney is one of by far the most prestigious schools in all of Australia. So we think that’s a significant opportunity.
edX is clearly helping with existing partners. The transition to a platform company is meaningful. We are — you heard us mention the impact on the LSC Undergrad program. That is a perfect, truly a perfect program for the edX overall platform. And you will see us do many more programs like that, from the standpoint of, know, creating really affordable options for people worldwide to unlock their potential.
And what we are seeing is, edX will be a weapon in our ability to not only hold the cost, but to bring the cost down over time. One of the misnomers in the entire OPM space is that, because you are sharing revenue, people think that you are interested in higher prices and that’s just ridiculous.
We actually have the entire burden of the marketing expense and the expense of finding the right student for the right program and we don’t make the admissions decision. So, ultimately, these are not inelastic goods, as the price goes up, conversion goes down, and it’s really, really good for the world to have more affordability, it’s also really good for our business. So you will see us continue to have more and more affordable programs over time. So edX is definitely having a real impact on our ability to generate new pipeline opportunities.
Got it. Very helpful. And then, secondly, with lead gen costs, we have certainly seen increases over the past year on cost to acquire leads. Can you talk about how those costs have evolved in both the Degree Program side of the business and then also the Alternative Credential side of the business?
George, let me start off and Chip can join in after. We planned, we budgeted an inflation in cost for leads across our business for 2022. And we are still seeing costs at that inflated level. However it is — we are seeing some stability and we are seeing some more predictable costs as we go through the periods. But, generally, it is still inflated and we have maintained the spend at the levels that we have in our budget. In fact, just a little bit below our budget in the first quarter.
Yeah. And I mean, George, the – now that we are starting to give more color on edX, there’s many reasons why we did it. But clearly, organic search is just a huge important part of our, it’s a lever for our business.
And you can now just go do it on your own and look and go on Google and type in the search terms that are relevant. And what you will see us do over time, is offering more and more opportunities, more specific content marketing, with the incredible domain authority of edX that will allow us to just open the doors to more people to further their goals. I mean, the best driver of organic is edX. It is a huge part of our future from the standpoint of driving greater affordability, because we can obviously use it to pull the cost down.
But we have seen some stability. I would also say maybe just to add to this to the first question. What’s important is — one of the things that we find curious at times is people have read-throughs from other ed tech companies that honestly have very little to do with our business or very little similarity to our business from a product standpoint.
So, from our standpoint, we had built in what we thought was a reasonable amount of inflation into the marketing costs. And we obviously spent a lot of capital to do something that we think long-term will really combat that in a significant way.
You are talking about top five education website worldwide. And probably most importantly, one that unlocks people’s potential. So, free courses are great for the world, and they also create an incredible marketplace opportunity.
Very helpful. Thank you.
For our next question, we have Ryan MacDonald from Needham. Ryan, your lines open.
Hi, Chip and Paul. Congrats on a nice quarter here. First, maybe a question for both of you, I really like the comment about the 30-plus negotiations on the MicroMasters program. Can you kind of walk us through as your existing partners look to adopt those what’s the process in terms of launching those programs? And what maybe impact that would have on sort of profit margins or the adjusted EBITDA outlook that we see today? Thanks.
Hey, Ryan. So that — we love the MicroMasters. That’s why we typically call them out. Stackable credentials are a big part of the future. You are creating just incredible opportunities for people to unlock their potential, to get a certificate that they can use to improve their current sort of job prospects.
And then if they want to continue, you have got this credit load that comes up. You are creating a pathway of people into a Degree Program. Now what’s fascinating is they take — while they take time, like where this has been done at edX to date, you have just got incredible results.
So you take the MIT supply chain MicroMasters and you look at the impact that it had historically on the MIT on-campus supply chain masters. They used to run a small cohort, and they effectively doubled it because of the MicroMasters impact.
Now we don’t expect things to double or need them to double to have a huge impact. If you are able to generate an opportunity to have a 10% lift or something like that into a program, you are talking about a huge economic opportunity.
But most importantly, you are driving affordability to the learner. So you are talking about really these — the reason we love them so much is they are an excellent Alternative Credential for somebody to improve their life.
And then if they want to continue their studies, they want to sort of take the next step, even if they want to take it down the road, you have got this ability to drive a $10,000 cost difference into the master turning different material cost savings. So those will take time.
That’s the one bummer is it everything takes time. So the reason we put it in the 30-plus is that our university partners are really excited about them. So like we are going to have a whole bunch of them.
Are they going to have an impact on this calendar year financially? No. We are hoping you get a couple of them launched this year. Should they next year? Absolutely.
Thanks for that. Maybe as a follow-up, just as a clarification, obviously, you called out the tight labor market and sort of the impact that is seemingly having on sort of bleeding into undergraduate enrollments and stopping programs really to enter the labor force, et cetera. As you look at the guidance that you set for the full year, are you essentially assuming no improvement in sort of this or change to the current labor market dynamics when you think about that topline? Thanks.
Well, first of all, once again, if we are talking about read-throughs from other companies, we have three undergrad programs to date, and we are about to announce our fourth. We have 187 masters program, to be clear.
So, it is a very different — it’s a different construct. Now there’s no question that graduate degrees are more interesting to people when they are looking for jobs. That’s not new. But we have had a really strong economy for a couple of years now. So we expected it.
Over time, if the economy does take a step back, is that good for our degree business? Sure. But we are operating in this current environment, and we feel like we are prepared for it. We also have the — you have got some tailwinds from that.
The boot camps are doing incredibly well from the enterprise channel and there’s a reason. The reason that we included the Gallup Research, I understand why we want to talk about things like the marketing levels and our EBITDA levels.
But like at the end of the day, the business is about producing results for human beings. And when you look at the results of that boot camp business, like the ROI immediately is there and people go into tech. And obviously do well over time. But I feel like as everyone else in the boot camp space is doing very small numbers.
So, if you are going to do this at scale, those types of results are impressive. So we do think that, that has some tailwind attached to it. And I guess I should have also mentioned that something that because of edX become a lot more important to 2U is we are now according — all kinds of different corporate partners to create content on edX, and it’s going very well.
So in Q1 alone, we had new products from IBM, Google, the Linux Foundation, MapWorks and Codio. And those types of programs are very attractive to people in this current labor market. And we expect to do more of it, and that’s part of the reason that we are seeing the kind of growth in enterprise we are seeing. So we see that as a tailwind.
Yeah. And Chip, I mean, at the end of the day, we have also approaches to hitting the numbers that we have. In this economy that we are in here, employers are doing more to keep their employees.
So all credit is one approach. The degree segment is another approach. As we think of some of the things we talked about, edX, MicroMasters, it’s multiple approach. And then at the end of the day, we also have the ability to deliver stronger EBITDA depending on how we see variable expenses to support revenue.
Yeah. I thought it was interesting that if you look at the rest of the stage, you have got people seeing weakness in consumer offset by enterprise. And we thought our consumer held it own. And of course, we want a bigger enterprise business. It is starting to get meaningful. But net-net, we saw growth in our degree business. I think a lot of others did not.
Very helpful color. Thanks a lot.
For our next question, we have Josh Baer from Morgan Stanley. Josh, your line is open.
Great. Thanks for the question. Paul, I wanted to revisit some of the commentary on free cash flow. And just if you can help walk through, again, free cash flow burn and then timing for free cash flow breakeven, that would be helpful. And just to make sure we know is it unlevered or levered free cash flow, operating free cash flow, just any details on the trajectory on free cash flow side.
Hey. Josh, so I think if we look back at the first quarter and when we provided numbers, we had $80 million of EBITDA, $80 million of CapEx, expecting the neutral net working capital for a year. That would have given us somewhat of a net neutral free cash flow.
And then when we look at it on a levered basis, with that payments included in it, which is about between $45 million and $50 million, we were expecting about a $50 million use of cash on a full year basis, on a levered basis.
After our first quarter results, our total expense quarter, the highest cash usage for the quarter, we only burned $16 million. If you look back at our plan and the taking of the year, we were probably expecting somewhere between $25 million and $40 million of use of cash in the first quarter.
We ended up spending about $16 million of cash in the quarter, net cash. And we also ended up delivering more EBITDA, which we passed through to the guidance. So all of this means that as we sit here today, we now have $85 million of EBITDA expected for the year.
We have $80 million of CapEx, which is probably conservative side of things. but take it for what it’s worth. That’s positive $5 million for the year. And then we have $45 million, $50 million of interest payments.
Net-net, at the end of the year, we should be expecting to be a use of cash of about $40 million on a levered basis. Now all of this is dependent on how the next 3 quarters unfold. I think what we have demonstrated in the first quarter is that we have a plan that have multiple ways of hitting the topline and the delivering on the bottomline.
But most importantly, we have variable expense in the model, that says if return on investment is not there on the marketing spend, you will see that drop to the bottomline. And also, we are finding ways Mark Chernis and the operating teams are finding more and more ways to deliver revenue at lower cost.
So we are optimistic on the adjusted EBITDA side of the equation. And we are hoping that we can see favorable marketing conditions to help us deliver revenues.
Okay. Great. That’s helpful. And then I wanted to ask one, I think the number of registered learners, if I am right, moves up about 1 million quarter-over-quarter. Just wanted to get your take on that, like if — are you happy with that level? Is that the right level going forward? How should we think about that?
We still firmly believe that it’s, first of all, it was a 2 million increase, Josh, and very — almost no marketing, to be clear. So I think if you compare and contrast that across the industry, we are pretty full right now from the standpoint of digesting what is a very significant transformation, not just an acquisition.
And so we are not in the process yet of spending marketing dollars on edX for the portfolio of edX. So it is really just organic and SEO, and there’s a lot of blocking and tackling. So when I said we have a lot of wood to chop, like we have a lot of work to do.
But it’s actually start to work. So we will pick up the pace of the learner acquisition and particularly we are starting to see the benefits of doing so. What’s interesting about one of the items that I listed on edX that we didn’t talk about at all on this call, but you can only talk about so much, is one of the keys, one of the six keys is portfolio marketing versus product marketing.
Every product historically for 2U — think about how profound what happened is every single program has its own marketing funnel. And we are trying to find somebody at that one moment that is the right person that can get in, and we don’t make the decision, that is interested in attending University of California Berkeley data science right now.
Like that’s what we do. And that’s harder. What if you are talking to somebody that might want an MBA that doesn’t know what type of MBA. Even better example. What if you are talking to somebody in a counseling discipline.
We have many different counseling programs and they get very specific. So you want marriage and family? Do you want clinical psychology? Do you want social work? Do you want speech therapy?
There’s many different types. We have never been able to market to those people without being as specific as that individual program. So the idea of this portfolio marketing, we think is really relevant and we think will drive the number of learners system because, ultimately, starting with free is an excellent way to introduce people to the topic and to drive interesting learners into different types of programs.
So we fully believe long-term in the free expression. So I would also tell you, like unifying registration across the entire 2U system, I know that sounds easy. But as we start to do things like that, start to offer applications across edX, start to offer all conversion of across edX, right now, you click on a card and you go outside the site.
None of that’s optimal. It’s very early days, and we are already talking about 10% lead gen. So we do think that you are looking at really very significant change to the way we think about marketing over the next three years.
And that’s one of the reasons why we are being careful about how much marketing dollars we put behind us today. Now each individual program is kind of operating at the efficient frontier of that program.
So there’s a lot of belief here based on what we are seeing. The bottom quartile of that degree spend could be spent better by doing it at the top of the edX panel. But we just need a little bit more time.
And I will tell you, having done this job for 14 years, you just got to be really careful about how you deploy the marketing spend. We have just got to be careful and thoughtful about how we deploy the spend, just having learned some lessons from our past life here.
For our next question, we have Jeff Silber from BMO Capital Markets. Jeff, your line is open.
Thanks so much. Just wanted to go back to the FCE numbers in both segments, both of them accelerated compared to what we saw last quarter. I am assuming it’s probably too early for edX to have an impact on those numbers, just give us a little bit of color what you were seeing why you saw that acceleration?
Jeff, yes, it is a bit part for edX to contribute here in the FCE contribution. If we look at it from a quarterly perspective, it is basically the production marketing spend that we had in the fourth quarter — productive marketing spend that we had in the fourth quarter.
And also, it is the beginning of a lot of the academic calendar for some of our classes, something that we were expecting, something that we were projecting, and it rely represents prior period marketing spend that we had projected. It also had some seasonal impact.
It is the beginning of presentations, particularly in some of our exec ed courses. And it’s basically across the board. If you look at both the Degree segment, FCEs increased as well as the Alternative Credential. It’s both of that.
Now keep in mind that some of the increase is also has to do with contribution from edX. Masters, which was in the Degree segment, although it’s minimal, I want to make sure I call that out. And then in the Alternative Credential segment we did not include any of their FCE in that particular segment. So that is purely organic increase the Alternative Credential.
Okay. That’s really helpful. And my follow-up, and I think you switched to a regulatory issue, but I think a number of us have been waiting for this. GAO report on OPMs, which I believe just came out earlier today. I haven’t read any single page of it, but it looks like they are recommending just providing clear instructions to auditors and colleges about the OPM arrangement that the schools are involved with. I am not sure if you had a chance to look at it, but I am just curious if you have your thoughts are on the report.
Okay. Great. Sorry. Thanks. Any thoughts would be appreciated.
So, we reviewed the report, and we are very supportive of the GAO’s recommendation. So number one, we have led the industry in transparency. We put out transparency reports for multiple years.
We have always complied with the rules regarding incentive compensation. Whenever our university partners have been asked for information about how we can compensate employees when they had any kind of audit, we have happily provided it.
And the reality is as the OPM industry continues to grow, become vital part of the higher ed ecosystem. So Jeff, greater transparency and continued oversight will actually ensure that the industry as a whole is serving the best interest of students and, of course, universities and also taxpayers.
So, we work with both Democratic and Republic administrations from the beginning in a constructive way. And we continue to actively engage not just for the Department of Education, but members of both sides of the aisle on what an appropriate regulatory landscape for this increasingly important segments looks like. So we thought it would be positive.
Okay. I appreciate the color. Thanks so much.
And for our last question, we have Brent Thill from Jefferies. Brent, your line is open.
Thanks. Hi, guys. This is David Lustberg on for Brent. Thanks for taking the question. I want to touch on adjusted EBITDA guidance increase. I think the midpoint is about $5 million. I know last quarter, you called out $30 million or $40 million of a headwind from edX. I am curious is this coming from core 2U side or edX side or is it a lot bit of combination of both?
I think it’s a combination of both, right? So, let me start with a couple of numbers here. If you look at the edX numbers that we provided at the beginning of the year, we had roughly around $35 million for sure.
If you look at the run rate that we have, the first quarter versus produced about $7 million. I think it was $10.9 million of revenue and $18.3 million of expenses. That’s about $7 million. You run rate that, that’s $28 million run rate. And we expect the next three quarters to be better than the first quarter. So that says edX is going to burn less than we had anticipated at the beginning of the year. So that’s one bit of contribution.
The second one is, if we look at the personnel and personnel-related expenses, I said that, that increased about $5 million, so $124 million for the year. But I also said that edX contributed $7 million of that $124 million, which means that overall, they are saving on the personnel and personnel-related expenses.
I am a little more cautious on that one because while we — personnel and personnel-related expense shows and saving, given the environment that we are in now, given the macro environment, given the great resignation, we do expect that the wage component of personnel and personnel-related as may put some pressure on that number as we get through the back half of the year.
Overall, I go back to our ability to use technology and our human capital extremely well as an organization to deliver revenue cheaper and faster. And I think we will continue the operating leverage as we go through time. And the 85% is simply a representation of operating leverage across the board, not any one particular thing.
Great. That’s really helpful color. Thanks for that. And a second question, you talked about the enterprise side. Apologies if I missed it. I got hold in with the operator. But can you provide any color on how many enterprises you guys in today or just maybe your penetration within the enterprise or ability to cross-sell over time or maybe just color on the growth rate? I think you said 70% quarter-over-quarter, but maybe how that compares to from other quarters to help put that into context would be really helpful. Appreciate it.
Yeah. I guess we are very aware that this is a segment that is keenly of interest to the investor community. And effectively, what’s happened is edX has opened a ton of doors. Basically, yield obviously exposes us to new enterprises.
But we are at a point where we are aware that as we give greater detail to The Street throughout this calendar year, you will hear more from us on what the segment overall looks like — Sorry, about what this line of business looks like, how it fits across products.
And what’s interesting is it is across all of the 2U products today. You know what I am saying. That’s real. So — but we are not at a stage yet where we can give you a tremendous amount of additional detail. It is 70% sequential growth. And right now, 50% year-on-year.
Great. Really appreciate. Thanks.
There are no further questions at this time. I will hand it back over to you, Chip Paucek for closing remark.
Thank you, everybody. I guess that’s all. We look forward to talking to everybody throughout the quarter.
Ladies and gentlemen, this concludes today’s conference call. Thank you all for participating. You may now disconnect.