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2U Inc (NASDAQ:TWOU)
Q4 2019 Earnings Call
Feb 6, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the 2U, Inc. 2019 Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions].

I would now like to hand the conference over to your speaker for today, Ed Goodwin, SVP, Investor Relations. You may begin.

Ed Goodwin -- Senior Vice President, Investor Relations

Thank you, Operator. Good afternoon, everyone, and welcome to 2U's fourth quarter and full year 2019 earnings conference call. On the call, we have Chip Paucek, our CEO and Paul Lalljie, our CFO. Following Chip and Paul's remarks, we will take questions. This call has been simultaneously webcast on our website where you can find our press release, which was issued after the close of the market as well as our earnings presentation. The webcast replay of this call will be available for the next 90 days on our Company website under the Investor Relations link.

Statements made on this call include forward-looking statements regarding our financial and operating results, new educational offerings, 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 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, 2018 and our most recent quarterly report on Form 10-Q for information on risks, uncertainties and assumptions that may cause 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 our comparable GAAP results in our earnings press release and on the Investor Relations page of our website.

With that, let me hand it over to Chip.

Christopher Paucek -- Co-Founder and Chief Executive Officer

Thanks Ed. 2U is starting 2020 with tremendous momentum. We had a strong finish to 2019 and we are excited to see what's happening. Universities are launching more with us. Our degree business is turning the corner. Our short course business is sliding new courses and enrolling students in record numbers and our boot camp business is starting to deliver on the strategic value of our acquisition. As we move through 2020, we will improve our operational efficiency with continued realignment and short corporate hygiene. I really like where we are headed, maintaining industry-leading revenue growth while delivering margin improvement through the year and driving toward positive free cash flow, all of which is only possible due to the unwavering commitment of 2U employees to do what's right by our partners and their students every day.

On today's call, I'll provide an overview of our 2019 performance and discuss where the business is heading in 2020. Our CFO, Paul Lalljie will then walk you through our results with more detail and commentary.

Let's start with the highlights of our 2019 financial and operational performance. Full year revenue increased 40% to $574.7 million, notably even without the addition of Trilogy. 2U crossed $0.5 billion in full year revenue. On the bottom-line, full year adjusted EBITDA loss totaled $23.9 million, reflecting the significant investment we made in the Alternative Credential segment. Through the Trilogy acquisition, we added a new product line, radically expanded our capabilities to meet demand and staff disciplines and more than doubled our partner base. As I said before, this was an important investment in the long-term growth and market positioning of 2U.

Let's get into our segments and how they performed in 2019. Grad finished the year strong. Our base of mature programs drove segment profitability in 2019. Our newer programs are scaling enrollments and driving revenue growth. Looking to the future, university demand for our full investment revenue share model is strong and we are managing our launch cadence to optimize growth, cash flow and profitability. Add all this up and we are expecting double-digit revenue growth and increasing segment profitability in 2020.

Let's get into a bit more detail looking at our mature programs, scaling programs and future program pipeline. In our base of mature programs, new enrollments are stabilizing and we believe we are through the trough. But given that revenue lags new enrollments, the revenue headwinds still has to flow through the system and should have its largest impact on the back half of 2020 before stabilizing in 2021. Despite this impact, the margins in our base of mature programs held up very well at 38%, as you can see in the 2019 cohort margin slide in our earnings presentation. Our recently launched programs are scaling new enrollments which we expect will drive revenue growth over the next two years.

Take a look at the 2019 list of top programs by new enrollments, which you will also find in our earnings presentation. Last year, we had one recently launched program in the top 10. This year, there are two in the top five. And each of 20 programs had more than 250 new enrollments, raising the bar from 200 enrollments last year. Again revenue lags enrollments. So scaling enrollments in newer programs should be a revenue tailwind through 2020 and beyond. Our pipeline for future programs is robust. But in order to optimize positive cash flow with growth in profitability, we slowed our 2020 launch cadence to five programs. We expect to ramp the cadence back up in 2021. Let me be clear. Demand for our programs remains strong and we love the programs we're launching in 2020 which leverage our competitive advantages in licensure fields. We are expanding our geographic footprint in education, social work, as well as entering two new verticals, pharmacy and architecture. The FIT program will be our first undergraduate offering, opening up the largest segment of the higher education market and meaningfully increasing our TAM.

We announced an exciting development here two days ago. The University of London and the London School of Economics and Political Science have agreed to expand our undergrad program from one degree in data science to include six additional group degrees launching in 2020 and 2021. The expanded portfolio allows us to offer degrees encompassing the full range of LSC's subject expertise including business, economics, finance and international relations.

Looking to the future, we believe our cadence for 2021, will minimum double from 2020 based on our robust pipeline and our ongoing hygiene-related cost savings. Our full revenue share model is sought after by potential clients. The fact that we're offering alternatives to it and engaging partners in dialogue across the spectrum of models has had the impact of increasing demand for 2U and our full model. One note for you about a university that received some very public attention. We are committed to not talking about our clients' programs in public without their expressed approval. We asked UNC Chapel Hill's Kenan-Flagler Business School, if we could share some of their recent successes with you and they kindly approved. As you all know, this program received lots of attention due to the public nature of the school and investors' appetite for information about 2U.

MBA@UNC is one of the flagship programs for 2U and it's been with us for nearly a decade. The past couple of years saw a new enrollment decline due to increasingly challenged environment for business schools given the roaring economy and an increasingly competitive world. In 2018, we began working on a comprehensive energized plan to reinvigorate this program. It included placing some of our team on campus, fellowships for students, a reimagined student experience and adding in to the degree some game-changing technical courses from Trilogy. While after multiple quarters of enrollment decline, this program first stabilized and then began seeing growth again in late 2019. And the best part, the January cohort for this program showed 28% enrollment growth year-on-year from 2019, 28%. I am thrilled to tell you that the Trilogy course has been a home run, and our relationship with the school is possibly the best it's ever been. I want to thank Dean Doug Shackelford; Associate Dean, Melissa Hlavac; and our GM Mike Terren for their leadership.

To finish our discussion of grad, let's touch on our long-term expectations for the segment. At this point, we've done a ton of work updating our expectations for the steady state economics to the typical program. We expect that new enrollments will average in the mid to high 200s per program at steady state. This is down a bit from our previous expectation, but still much larger than industry norms. The current average of 420 new enrollments for the top 20 list gives us confidence here. Even at these revised averages, we expect our portfolio of programs will still deliver our targeted margins at maturity. Our confidence here is supported by the 38% cohort margin for mature programs in 2019. Scale helps here. On a per program basis, we've seen improvements across multiple cost categories over the past few years.

The investment to return cycle in the grad business is still working and working well. This will become crystal clear as the balance of program shifts from investment toward maturity and the slowing of the 2020 launch cadence will accelerate that shift. When we report cohort margins next year, there will be 23 programs in the greater than four year bucket and 22 in the less than two year bucket. This is a major reason we believe segment profitability will increase this year.

To summarize, our base of mature programs delivered strong margins in 2019. Our newer programs are scaling enrollments and driving revenue growth. We are planting important flags across regions and verticals with our new launches and we are managing our cadence to optimize cash flow growth and profitability. The Grad Business heads into 2020 with momentum.

Turning to the Alternative Credential segment. 2019 revenue was $157.5 million, up a 148% compared to 2018, primarily due to the addition of Trilogy. We'll talk more about boot camps in moment, but let's start with short courses. Revenue grew over 30% last year. We continue to experience strong university and student demand for our short course product. We launched 36 new courses in 2019 growing our portfolio to 127 courses. We've seen record student enrollment in courses across the portfolio and we've made tremendous progress improving our pipeline execution.

In the second half of 2019, we focused the sales process on aligning faculty members with specific courses. I am pleased to tell you that for 2020, we've already slotted 90% of our planned new courses. Nearly the entire year is slotted. What a difference six months makes. I am proud of our team for this turnaround. Most of these new courses are with some of the most recognizable brands in the world, including MIT, LSC, Oxford, Yale, Stanford and Cambridge. Longer term, we saw a significant runway for expansion with those partners. Only one university has more than 20 courses in its portfolio. We believe we are positioned for strong performance in 2020 and beyond.

Turning now to boot camps. Our acquisition of Trilogy enables us to address the student, university and industry demand for market-driven training in rapidly evolving technical fields. That demand has fueled our boot camp product's rapid growth. Since its 2016 founding, Trilogy has enrolled over 35,000 students with a portfolio of over a 100 boot camps across 49 university partners. Last year alone, Trilogy launched 43 new boot camps and piloted its sixth subject FinTech. And we're off to the races in 2020. Just this morning, we announced that our newest partner, Michigan State University will launch a boot camp in coding. The growth story here is pretty simple. One, roll out new boot camps to existing logos. Two, launch online boot camps for multiple subjects.

Our current portfolio allows us to run hard at this. Coding is the only subject that's been broadly deployed across the partner base. In fact, the three most recently added subjects which are seeing excellent conversions have been launched at fewer than ten partners. The boot camp product line is crucial to the long-term success of the university market. And 2U is now the only comprehensive provider of non-degree STEM products to universities. There is plenty of runway here and we are in pole position.

In conclusion, 2019 was challenging. But last year we took actions to deliver long-term value for all of our stakeholders. Our grad business is turning for the better. We added a product line that opens a significant new segment of the market. We more than doubled our client base and currently have a portfolio of over 400 product offering. We delivered strong second half results and we believe we turned the corner going into 2020. 2U expects to maintain industry-leading growth, while delivering margin improvement over the course of 2020 and driving toward positive free cash flow, all with a relentless focus on quality and outcomes. When the student wins, the university wins, and then we win.

And with that, I'll hand it over to Paul.

Paul S. Lalljie -- Chief Financial Officer

Thanks Chip and good afternoon everyone. As you have seen in our announcement, we had a strong fourth quarter to close out 2019. Revenue for the quarter was up 42% to $163.2 million and for the year, revenue totaled $574.7 million, up 40%. Both the grad business and the Alternative Credentials business had strong growth year-over-year. The grad business grew 20% and Alternative Credentials grew 38% on a pro forma basis.

Adjusted EBITDA for the quarter was a positive $5 million, compared to a loss of $10.7 million in the third quarter. We ended the year with $189.9 million of cash and the revenue backlog of $525 million across the business. We are set for a strong 2020 with momentum across the business and compelling leading indicators.

Now for a closer look at revenues. Revenue in the Grad business segment came in at $108.2 million for the quarter, up 12% year-over-year. This was driven by a 20% increase in full course equivalents or FCE partially offset by a 7% decrease in revenue per FCE. As was the case last quarter, the majority of the decrease of revenue per FCE was due to a shift in mix.

Revenue in the graduate segment would have grown 19% from the quarter excluding our largest program which has been facing headwinds as we discussed on prior calls. For the fourth quarter, revenue in the Alternative Credentials segment totaled $54.9 million, which includes $33.2 million from Trilogy. FCEs were up 62%, while revenue per FCE was up 93%. Keep in mind that boot camp tuition is much higher than that of a short course. So you should expect to see revenue per FCE continue to show significant increases until we lap the Trilogy acquisition date. Short course revenue for the quarter grew 19% year-over-year with sequential growth accelerating versus the third quarter.

Let's look at costs and expenses. Net loss for the quarter came in at $44.6 million with costs and expenses totaling $204.5 million, up 83% from the fourth quarter of 2018. This increase includes $55.1 million of operating expense from Trilogy, $17 million in marketing and sales expense related to launching and scaling of new offerings, $5.8 million of restructuring costs, and $5.6 million in cost related to improving our technology stack. Excluding cost from Trilogy, operating expense increased 34% in the quarter. On a sequential basis, and excluding the impairment charge in the third quarter, we reduced cost by 6% across the board. We reduced G&A by 4% sequentially when adjusted for certain non-ordinary course expense.

Marketing and sales expense came down 12% on a sequential basis, reflecting our seasonal reduction in the fourth quarter spend, as well as some new cost management initiatives. These results demonstrate our focus on controlling costs as we continue to drive toward profitability and positive free cash flow. Adjusted net loss totaled $11.2 million for the quarter after adjusting for $15.4 million in stock-based compensation, $10.8 million in amortization of acquired intangibles, as well as certain non-ordinary course items. Adjusted EBITDA for the quarter totaled $5 million, bringing the 2019 adjusted EBITDA loss to $23.9 million.

Now turning to cash. We ended the year with $189.9 million in cash and equivalents, up $19 million from the September quarter. This increase was driven by a reduction in accounts receivables of $51.1 million. As we mentioned in our third quarter call, we added a free cash flow metric to our disclosures. This unlevered free cash flow measure is defined as net cash from operating activities, less capital expenditures, excluding restructuring payments, certain non-ordinary cash payments and interest payments on debt. Unlevered free cash flow for the last twelve months was a negative $80.3 million. This is an improvement of $18.9 million from the end of the third quarter, driven in part by less cash used in operating activities, lower capital expenditure offset by higher cash interest payments. As I said in last quarter's call, this will be an important metric going forward. With that, I will turn to our guidance for the first quarter and full year 2020. We expect first quarter revenue to range from $170 million to $180 million, representing growth of 31% to 39%.

Adjusted EBITDA loss is expected to be between $18 million and $8 million, while net loss is expected to be between $70 million and $60 million with adjusted net loss coming in between $36 million and $26 million. For the full year 2020, we expect revenue to range from $725 million to $750 million, representing growth of 26% to 30%. Adjusted EBITDA is expected to range from a loss of $5 million to an EBITDA contribution of $10 million for the year. We expect adjusted EBITDA to be positive starting in the third quarter.

Net loss is expected to be between $220 million and $200 million, while adjusted net loss is expected to be between $90 million and $70 million. As note, we expect stock-based compensation expense to be approximately $80 million in 2020. This is up from 2019 for three reasons. First, we are using performance-based equity awards for our long-term incentive award, which drives higher stock-based compensation expense, compared to our prior practice of issuing stock options.

Second, we changed our vesting schedule to match market practice and third, we have a higher number of plan participants year-over-year. We are confident that our compensation structure is competitive and helps us attract and retain employees. And performance-based awards, but a greater percentage of management compensation at risk, aligning favorably with shareholders.

With that, let me provide some perspectives in what gives us confidence that we can target the top-end of our revenue range. In the Grad segment, we are encouraged by how FCEs have been performing relative to budget so far in 2020. Last quarter, we discussed the realignment of our student engagement team and I believe that those changes are having a positive impact on retention. While we believe the grad segment has turned the corner, our guidance reflects the impact of some larger programs that are still experiencing enrollment declines. If enrollment flattens or improves in any of these programs, that could be an upside. As Chip said in the Alternative Credentials segment, while we are only a month into the year, we are nearly fully slotted for our planned new short courses. And from a profitability perspective, we will continue to integrated Trilogy and get smarter acquisition and we focused on improving marketing efficiency across the portfolio by increasing share, driving self-serve options, and working on strengthening historical programs.

So to conclude, we delivered strong results to close out 2019. Revenue grew 42% with positive EBITDA of $5 million and we showed an improvement in free cash flow for the last 12 months and maintained program quality and student outcomes. We are launching some excellent new programs in the year and driving the company toward profitability and positive free cash flow. We have great momentum for 2020 and beyond.

And with that, I'd like to hand the call back to Chip.

Christopher Paucek -- Co-Founder and Chief Executive Officer

Thank you, Paul. Before we open it up for Q&A, I want to take a few minutes to talk about one of the core hallmarks of our business model. The institutional independence of our non-profit university partners, something that gets too often overlooked in the public back and forth about OPMs in the business model. A few things are more sacred to university and shared governance and their institutional independence and respect for both of these principles is central to our business model and the success of our partnerships. When you hear me say that these are not our degree programs, those aren't just words. In practice, our partners' exercises saying academic and governance controls over their online program as they give for their traditional campus-based degree. That includes, seeking and maintaining accreditation approval, hiring, paying and managing the faculty, developing and improving degree program curriculum, establishing all admissions criteria, making all admissions and financial aid decisions and setting tuition prices.

We've already helped our partners bring the best of themselves online. So it shouldn't come into surprise that the quality and outcomes delivered by 2U powered degree programs are comparable to and in some cases surpass those of campus-based programs. Notably, students in 2U powered programs are more diverse than the national average. And I wanted to point something out about our business that I think what comes to surprise to many of you. In 2019, we estimate that only 38% of 2U's total revenue in the company came from tuition payments to our partners derived from Title IV eligible student loans, 38%. I co-founded 2U on the belief that online higher education could be world-class and live up to its full potential by harnessing the power of great non-profit university.

As the first-generation college graduate who is able to attend the George Washington University, thanks to a federally funded telegram and is as a proud alarm of the 2U powered MBA UNC program, I know firsthand the power of that transformational impact. The world needs more high quality education. 2U and our business model are part of this solution.

And now, we are open to Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Brad Zelnick with Credit Suisse. Your line is open.

Bhavin Shah -- Credit Suisse AG -- Analyst

Hi, this is Bhavin on for Brad. Just to start congrats on a good quarter. I appreciate all the color and information you guys have provided on different segments. But maybe, just to start, can you provide more insight in how we should think about graduate programs for 2020. I know you said double-digits, but should we think closer to the 4Q growth rate or the 3Q growth rate?

Paul S. Lalljie -- Chief Financial Officer

So, this is Paul here. There are a couple of things. Our guidance for the year which is $725 million to $750 million. As you can see the midpoint of that range is roughly around 28% on a year-over-year basis. The graduate degree portion of our business is no longer 75%, 80% of our total revenue. It is less than that. We have significant growth coming from our Alternative Credential business. So, to some extent, we are not providing guidance at the segment level, but it's a portfolio management from our perspective. We are allocating our capital on a monthly and a quarterly basis, based on the opportunities that we see. For example, in 2020, we're launching five programs. In 2019, we launched 17 programs. So to some extent, we will focus our resources where the opportunity exists for us to hit that midpoint of that guidance range and quite frankly, right now as we sit here, we are targeting the top-end of the range. So, it is not a particularly -- we won't be giving guidance on the grad segment, or the Alternative Credential segment in particular and we are not focusing on any one segment, but on the growth of the portfolio as a whole.

Christopher Paucek -- Co-Founder and Chief Executive Officer

Another thing I would add is that, we are pretty excited about how we see the Grad business turning. And so, pleased with some of the developments in our legacy programs, like we mentioned with MBA@UNC. That program was discussed at lengths and we did get specific approval to be able to talk about it because, as you know we really can't talk about our clients' programs without their approval. And that one the story was -- it was just incredibly encouraging about what we are delivering for students and for the school at this stage of the game a decade later.

Bhavin Shah -- Credit Suisse AG -- Analyst

That's helpful. Appreciate the context. And the follow-up is just I appreciate the color you gave on the top 20 new programs and nice to see two new programs in there. Is there any common characteristics that you are seeing with some of the new programs that have seen success? Is there anything underlying that that you are able to see in the data that shows, hey, these kind of programs can be successful?

Christopher Paucek -- Co-Founder and Chief Executive Officer

In clinical fields, we do have at this point I think a fairly large mode around the company from the standpoint of being able to build high quality field experiences with our great partners. We think that will continue to provide big opportunities. There is a bunch of verticals that we are newly entered that have these characteristics. So we have one psychology program. We have on physician assistant program. So there is a lot of opportunities for us to expand in the verticals that we are clearly winning. And then in some of the other verticals, you've got the complexity of a really strong economy that does tend to make it a harder road to hoe on programs like business programs. But I have to say, we are actually holding our own quite a bit. So, planting the flags in regions where we are under-penetrated is very important.

Bhavin Shah -- Credit Suisse AG -- Analyst

Thanks. Congrats again.

Operator

Thank you. Our next question comes from the line of Ryan MacDonald with Needham. Your line is open.

Ryan MacDonald -- Needham & Company -- Analyst

Hi, yes. Thanks for taking my questions. I guess first, I wanted to -- if you could double down or talk a little bit more about the dynamics that you are seeing within the different cohorts. I guess, if we are looking it on a year-over-year basis, when we look at the three to four year cohort in the greater than four years. We saw slightly less profitability, I guess, in those cohorts. What did you see I guess, are impact outside of perhaps the issues that you kind of dealt with throughout the year that sort of drove maybe less than your expected profitability? Thanks.

Christopher Paucek -- Co-Founder and Chief Executive Officer

Ryan, do you mean, in the greater than four years, we actually saw greater than expected profitability? So I just want to correct that statement.

Ryan MacDonald -- Needham & Company -- Analyst

Just comparing to the year-over-year it looks like in the greater than four years you are at 38% this year versus last year I think it's at 42% in there.

Christopher Paucek -- Co-Founder and Chief Executive Officer

Yeah. But as we mentioned last year, we think it's really important that you think of that mid-30s as our expected target. We did say not to expect the margins to be in the 40s longer term. And I think, as you know, we had some really significant notable decreases that were well talked about ad nauseam in some of our larger programs. So we were pretty excited about the fact that the core business model not only held up, but it was stronger than our long-term target.

Ryan MacDonald -- Needham & Company -- Analyst

Got it. Okay. And then --

Christopher Paucek -- Co-Founder and Chief Executive Officer

We also had some good movement between the other cohorts. So you can see that some of the other cohorts moved in a positive fashion and at this point, we feel very strongly that the grad business will continue to deliver strong margin as you shift the balance of the programs from newer to mature, we should see that impact the total amount over-time as well. I am pretty encouraged by that.

Ryan MacDonald -- Needham & Company -- Analyst

Got it. And then, I guess, switching to the new announcement with the University of London and t he expansion there for additional degrees within that program. Can you talk about the dynamics of what you are seeing with launching an undergrad program in multiple degrees on that and how that compares to launching a graduate program? Thanks.

Christopher Paucek -- Co-Founder and Chief Executive Officer

So, it is the same model. Our business we deploy, what we deploy across 2U in the last comprehensive platform to build, deliver and support world-class higher education at scale and nothing defines scale better than undergrad. It's something we've taken our time to find the right program to enter. It's a fabulous opportunity with two of the best brands in the world. We think of it internally like a larger grad program. It should be larger than a normal grad program. But the reality is, when you look at the opportunity, if we were thinking about this like a venture brand company, we've been talking about tens of thousands of students. It's a really big market. It's an incredible brand.

You got from a capex standpoint, you've got reasonably ring fence sort of size given that it's all within business and as you know business is incredibly sort after at the undergrad level. So, this was an opportunity to work with a school that had an existing program that they really wanted to bring into our format. They became convinced that retention as we did. We think retention will be able to drive higher. And the other thing I would say, encouraging about this is, not just this year, size of the opportunity. But the confidence of the partner given how spectacular the LSC short course experience has been. It's been a great experience with LSC on the short course side and it has been a worldwide experience.

So that the LSC legacy and brand is clearly a worldwide brand in a way that candidly surprised us. So, we really love that we are entering with the University of London and the London School of Economics, the largest part of the market. If you think about, in the US, graduate education is $80 billion, undergrad is $550 billion in total. So it's just a much, much bigger market. So, we are going to be careful and launch this in a high quality manner. And not do a ton of them before we get our legs on the opportunity, but it is hard to overstate how excited internally we are about this whole initiative. And, marketing, many of you have folks that are interested in undergrad. You could find our page is live and we've already got great interest from consumers. So I would encourage you to send people to the website and become a prospect.

Operator

Thank you. Our next question comes from the line of Stephen Sheldon with William Blair. Your line is open.

Stephen Sheldon -- William Blair and Company -- Analyst

Hi, thanks. First, can you talk about changes to the graduate program selection process that you've made since mid-2019? Now that you've slowed program launches and have had become a little bit more selective, what are the kind of the main factors you are thinking about as you choose, which partners and which programs to launch? And what effect does that have on your negotiating leverage?

Christopher Paucek -- Co-Founder and Chief Executive Officer

So, you can think about it in sort of three, almost like a triangle, return on invested capital, quality, growth. We want all three. The reality is, you've got discipline that we are really under-penetrated where we are winning and winning in a way that is not just defined by what it does financially that people on this call get excited by. But what it does for the student and the university. And we do expect to continue to expand in the verticals where we are seeing traction. And we've always been selective about what we run and you are correct that we did slow the cadence. You can think about it a little bit like in 2012, we took a break and it was probably the most important thing we did at that early venture backstage.

In this case, we are slowing, it's not a pitstop. And we do expect to ramp back up in 2021 and right now have, not only ample opportunities, but many that are the late stage of the process. So, as we've gotten more efficient about how to launch these programs, we do like the idea of fueling that efficiency into a broader portfolio and ramping back up the cadence in 2021. So, we have a bunch of programs already slotted for 2021 in a meaningful way. So, I think it's important that we, not only think about the returns to 2U, but the return to the university and the benefits to the students.

Stephen Sheldon -- William Blair and Company -- Analyst

Got it. That's helpful. And then just a second on the commentary for adjusted EBITDA to become positive in the third quarter. I just wanted to make sure I understood the implications there. Is that just meant to say that quarterly EBITDA will be positive over the remainder of 2020? Or does that comment also extend beyond 2020 and into 2021 as we think about absolute profitability based upon what you can see at this point?

Paul S. Lalljie -- Chief Financial Officer

So, a couple of things. I think the comment was meant to say that we are actually heading that crossover point. And hope to maintain that as we go forward here from thereon out. Of course, we have only given guidance for 2020. So for now, that will be a 2020 number. But the bottom-line is, Q1 is normally our biggest expense quarter and our largest capex quarter and when we crossover in Q3 of 2020, we hope to maintain that going forward into perpetuity, not just for 2020.

Stephen Sheldon -- William Blair and Company -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is open.

Jeffrey Silber -- BMO Capital Markets -- Analyst

Thanks so much. Just wanted to follow-up on that last comment about the hopes to maintain the adjusted EBITDA perpetuity. I guess, most folks were thinking given the step back I guess in 2020 with the program launch and maybe reaccelerating it next year that might be tough to do. Can you give us some examples of how do you think you'll get there?

Paul S. Lalljie -- Chief Financial Officer

So, a couple of things. So, the 2020 spend for us is based on the launches that we made in 2019. The 17 launches that we made in 2019. So that is factored into our calculation, number one. Number two, in every given calendar year, the launches that we have for that period and then we also have layered on top of that, the launches that are going to be did in that current calendar year. So, for example, in 2019, we had 2018 launches and 2019 launches compounding effect in that fiscal year 2019. In 2020, we are going to have the run-off the 2019 launches and our compounding effect is only five courses for 2020. So that is one thing that will contribute right there on particularly the sales and marketing line and the technology curriculum and support line. In addition to that, as we exited 2019, we talked about $12 million of run rate expenses as of the third quarter earnings call that we had already made adjustments for. As we guided to Q4, we continued with cost management programs, particularly led by our Chief Operating Officer, Mark Chernis, and he has continued that process into the planning process for 2021 and we expect to see benefits from that as we exit 2019 into 2020 and into 2021. We expect to have more reduction in our run rate expenses.

Christopher Paucek -- Co-Founder and Chief Executive Officer

Yeah. I mean, Jeff, the slowing cadence is to our benefit there on the bottom-line. You got a higher number of mature programs that start to just cross the margin and as you have that balance moves, I think people probably forget a little bit just how many we launched in 2019. We launched a lot of programs, 31 in that time period. So, just compare that back in the day, we were launching four or five a year. It means a lot and it has a very positive impact on growth. Could you give a lot of new enrollments for those programs, allows us to get through the troughs of some of the challenges that we had in some of our more historic programs. And on those programs, you might heard Paul mention that, if we can see some of those turn to the positive, the way MBA UNC has, we like what that means for the segment. So we are certainly not at a point where, we are thinking of older programs as that we are not working every day to try to make them as good as we can. And, that MBA UNC story shows that by working together with the school, it's pretty amazing what we were able to achieve in that particular case. So, I would like our odds of being able to continue to improve all of the programs that are in that greater than four year bucket.

Jeffrey Silber -- BMO Capital Markets -- Analyst

All right. That's great. And I apologize to shift over to a regulatory issue, but, I guess, a number of weeks ago, there was a publicized letter from a couple of senators to your company and some of the others in this space. I guess they were questioning the business practices and some of the OPNs. I don't know if you had an opportunity to respond publicly to that. I am just wondering if you would like to do that now. Thanks.

Christopher Paucek -- Co-Founder and Chief Executive Officer

Thank you, Jeff. We are in the process of responding to the senators and we really like what we have to say. We think our business, as you heard we mentioned at the close of our remarks, institutional independence in our case could be more relevant to the entire story of 2U, not just legally, but philosophically. These are their programs and the decisions that they are making every day drives the business and drives their opportunity along with us. We do talk to our partners all the time. We are excited about what we have to say with regard to the power of the business, the business model even in the states of those two particular senators. So, as an example, Simmons has a 96% board pass rate. In that discipline, if you pass your boards, that's nursing, sorry, incredibly strong opportunity for the folks that pass their board. It's kind of a life-changing experience.

So we are very comfortable with our answers and we do expect a positive dialogue on a go-forward that's really more than anything about transparency and if you look, we did announced, I don't know, six months ago, forgive me if it was -- I forgot exactly what month it was. But before all of this, we announced a -- we think industry-leading transparency framework that has great opportunity for the rest of this space and for 2U to be able to show people how high quality. What we are doing is and what the results are. So, ultimately, well timed and even more important, given some of the questions. But I would tell you that the story here is supporting our great partners to do what they wake up every morning and do, which is drive high quality student outcomes for students in all kinds of different disciplines across, literally at this point now, 70 plus total partners. So, more to come on this over-time.

Jeffrey Silber -- BMO Capital Markets -- Analyst

Okay. Thank you so much.

Operator

Thank you. Our next question comes from the line of Jeff Meuler with Baird. Your line is open.

Jeffrey Meuler -- Robert W. Baird & Co. -- Analyst

Yeah. Thank you. In terms of the, I guess, decision to launch five degree programs in 2020 and then stuck up in 2021, but to around ten or so, can we read into that? Like, is there any sort of management intention to make EBITDA or free cash flow positively advance year-to-year-to-year? Sort of the dialing it back five is that to show improvement and then you still do kind of a measured pace of improvement in 2021. Is there some implicit kind of financial, this is something that we could take away that we should expect continued EBITDA or free cash flow improvement beyond 2020?

Paul S. Lalljie -- Chief Financial Officer

Well, I think there are a couple of things. Number one, it gives us an opportunity to work on the runrate expenses in each of our cost categories as we get into 2020, the budget process was one where we did not just take the exit rates out of 2019 and applied into 2020 for the number of programs we launch. We try to integrate the three businesses that we have. We try to do things more on a consolidated basis and most importantly, our objective is to make sure we have an organization that is nimble, flexible, and at the same time, efficient. Launching five courses next year allows us to be selective. It allows us to make sure that we make sure and ensures that we have the ability to evaluate programs across the prism that Chip spoke of earlier which is return on invested capital making sure we have the quality of program, making sure we go into verticals where we have advantage and then at the same time, making sure that we maintain the quality.

All of these things allow us to have an access to capital, because our mature program cohort becomes larger over time and that allows us to naturally generate better margins and at the same time allow us to manage the business efficiently and be selective in the programs that we launch. We are not stopping or slowing our cadence, because we don't have demand. We have strong demand and we are doing this is in an effort to become a scalable, larger and more efficient company as we go forward. In addition to that, the timing of doing all of this allows us to bring the company back to free cash flow as we exit 2020 and get into 2021. We are highly confident that the program that we are on will allow us to exit 2020 on a path to cash flow accretion in 2021.

Jeffrey Meuler -- Robert W. Baird & Co. -- Analyst

Okay. And then, just maybe a broader question on what you are experiencing in terms of marketing efficiency. So I guess deals -- we get a question, but you stuffed out marketing spend probably a year, year-and-a-half ago and then dialed it back and you are talking about smaller average size programs. So, and then, I guess, you have the various acquisitions and business lines which you are integrating. So, just, what are you experiencing in terms of marketing efficiency? Have you now kind of dialed back the budget to take out what you increased? Or things looking stable in terms of marketing efficiency at some of the more seasoned programs, etc. Thanks.

Christopher Paucek -- Co-Founder and Chief Executive Officer

Yeah. Jeff, things are looking stable and I would say, clearly, given some of the challenges that we've talked about over 2019, marketing has been a -- I understand why you are asking the question, reasonable question. We feel very confident that we are getting some really strong scale benefits across the cost categories. And if you look on a vertical basis, many of the verticals that we are entering now or that we are building programs in now, we are pretty excited about what they look like from the standpoint of marketing efficiency. Separately, the amount of work going on from our senior team including our new CMO, Jennifer Ogden-Reese to drive improvements across the marketing funnel by using AI, by using more self-serve options, by using the benefit of share.

So, we feel like the headwind that we had from -- it is still there from a revenue standpoint. But we really like what we are starting to see on the enrollment side and you heard Paul mention that the movement of the student engagement team together, we think is actually already paying benefits on student retention and there is nothing that makes us happier than hearing that student retention improves because it is the most important number. Because it drives the student outcome and also drives our business model. So, pretty excited about some of the things we are seeing right now. And it's nice to have a call with all of you that we are excited about.

Jeffrey Meuler -- Robert W. Baird & Co. -- Analyst

Thanks, Chip.

Operator

Thank you. Our next question comes from the line of George Tong with Goldman Sachs. Your line is open.

George Tong -- Goldman Sachs -- Analyst

Hi thanks. Good afternoon. You plan to reaccelerate the rate of your new course launches in 2021 to about ten from five in 2020. How do you internally think about the way you target the pace of new course launches? Is it the number? So is it 10, 10, 10? Or is it really a percentage growth off of the prior year that really determines the blueprint for the growth algorithms of your graduate degree program?

Christopher Paucek -- Co-Founder and Chief Executive Officer

I think, George, you have to think about it with regard to what we talked about before, sort of the return on capital, quality and growth. And then, we are being very thoughtful about the overall balance for 2U. The overall pace and driving the free cash flow and I thought what Paul said a moment ago about what we expect in 2021 is pretty meaningful.

Paul S. Lalljie -- Chief Financial Officer

Yeah. George, for us, we've been operating for a long time now, number one. Number two, we are a company of size, $737 million of revenue on the top-line. And the third piece is, it's a series of J curves and becoming cash flow positive with the capital-intensive business is important for us. So, that is something that we balance as we go through this and with the prism that Chip and I just spoke of earlier, the ROIC the quality and the growth, I think it gets us there to free cash flow crossover in fiscal year 2021.

George Tong -- Goldman Sachs -- Analyst

Got it. That's helpful. And then, switching gears to margins. Obviously, that the pace of new program launches plays a key role in your EBITDA margin performance. Besides the mix and the pace of new program launches, are there other internal initiatives or levers that you have that could help drive EBITDA margin expansion?

Paul S. Lalljie -- Chief Financial Officer

Yeah. There are several initiatives internally. If you think of operational efficiencies, whether it is the integration of the acquired assets, whether it's the Trilogy acquisition and having a consolidated back office, when we think of how we do procurement in the organization and how we do that more efficiently, either on a centralized basis or on a geographic basis. We also look at it from the perspective of how can we manage the organization more efficiently with the use of technology and also with the use of management techniques as we go forward. So, it's a broad spectrum. I mean, I am not going to get into the details of what each of these programs are, but it's a normal breadth of activities that you would go through in an organization that has grown rapidly. When you grow rapidly, your focus on the top-line grows. What we need to do is consolidate, become efficient, so that we can now scale going forward and the organization is well on its way to do that.

Christopher Paucek -- Co-Founder and Chief Executive Officer

And George, what I would say also, you can hear it in our comments. You can see in the results. We are definitely focused on improving the bottom-line, not just the top. But, I would like to reemphasize that we do have market-leading growth. This is still an incredible growth story across the business and I hope it is now a bit more obvious to everyone the sort of strategic rationale for some of these moves we've made. The short course business and the boot camp business are both important to the future of the university and they are driving real results for 2U. It's pretty incredible to see in six months what we've done just on the short course side as an example. So, we are balancing growth and profitability, but let's not forget that we still lead the market here.

George Tong -- Goldman Sachs -- Analyst

Got it. Very helpful. Thank you.

Operator

Thank you. Ladies and gentlemen, in the interest of time, I would now like to turn the call over to Chip Paucek for closing remarks.

Christopher Paucek -- Co-Founder and Chief Executive Officer

Thank you everybody. We appreciate. We will see you out on the road. Take care.

Duration: 54 minutes

Call participants:

Ed Goodwin -- Senior Vice President, Investor Relations

Christopher Paucek -- Co-Founder and Chief Executive Officer

Paul S. Lalljie -- Chief Financial Officer

Bhavin Shah -- Credit Suisse AG -- Analyst

Ryan MacDonald -- Needham & Company -- Analyst

Stephen Sheldon -- William Blair and Company -- Analyst

Jeffrey Silber -- BMO Capital Markets -- Analyst

Jeffrey Meuler -- Robert W. Baird & Co. -- Analyst

George Tong -- Goldman Sachs -- Analyst

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