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2U Inc (NASDAQ:TWOU)
Q4 2020 Earnings Call
Feb 11, 2021, 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 4Q '20 Earnings Report Call. [Operator Instructions]

I would now like to turn the conference over to Mr. Ken Goff, SVP of Investor Relations. Thank you. Please go ahead, sir.

Ken Goff -- Senior Vice President, Investor Relations

Thank you, operator. Good afternoon, everyone, and welcome to 2U's full year and fourth quarter 2020 earnings conference call. I'm Ken Goff, Senior Vice President of Investor Relations at 2U. I'm joined by 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 for 90 days.

Statements made on this call include forward-looking statements regarding our financial and operating results, the continued impact of the COVID-19 pandemic, 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 earnings press release and the risk factors described in the documents we file with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2019, and our most recent quarterly report on Form 10-Q for informations 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 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.

Chip Paucek -- Co-Founder and Chief Executive Officer

Thanks, Ken. I want to start this call by first thanking my fellow 2Youths around the world. 2020 presented us all with unprecedented complexities, and our global team rose to the challenge, again and again, to deliver on behalf of our partners, their students, and each other. Through it all, their hard work, resilience, empathy, and humor was truly inspiring, and has made 2U a stronger and better company. That strength is clearly reflected in the financial and operational results we delivered for the year.

We grew revenue by 35% to $775 million, and we achieved EBITDA profitability for the year coming in at $16.1 million. We set out at the beginning of 2020 with four key financial priorities for the business, drive strong revenue growth, deliver margin improvements, improve operational efficiency, and drive toward positive free cash flow. We outperformed expectations across all of these important measures, all while staying hyper-focused on quality, and most importantly, student outcomes. And we enter 2021 in a position of strength, and with the momentum for another great year of performance, and positive societal impact.

We understand that as a disruptor, the burden approved is on us to demonstrate that the business we built is sustainable. We never doubted it and that chapter should be closed for the rest of you as well. I think it's clear that 2020 results provide many compelling proof points, and with each passing quarter, we expect to add more. You'll hear more on all of this from Paul.

So, I'll now turn to what we're seeing in the marketplace. Earlier this year, you heard me talk about the structural changes and challenges facing higher education as institutions grapple with a digital transformation imperative. An imperative to be clear, it was at their doorstep, even before COVID. Since the start of the pandemic, we've seen this drive a clear increase in pipeline conversations with existing and prospective partners. Universities understand that online is here to stay and must be part of their broader institutional strategy now and for the future.

We have three common and interconnected themes emerging from our conversations. First, the focus on better serving non-traditional working adult learners, who are looking for both, degree and non-degree offerings across their careers and lives. Second, pressure to identify new and sustainable revenue streams at the same time institutions are facing inescapable budgetary and investment constraints. And third, growing demands on colleges and universities from business and government to do a better job aligning in-demand jobs, and creating career-focused upskilling and reskilling pathways.

We believe these three themes reflect structural changes already happening in the market. It will continue to shape the higher-education landscape long after COVID is under control. You can already see them playing out in some of our recent announcements. Take our new partnership with Morehouse College, one of the most respected and iconic HBCUs, with an unmatched 154-year legacy of excellence in educating black men of integrity and character. Morehouse President David Thomas has a clear digital transformation vision for the college, with a focus on better serving non-traditional adult learners. And our new online undergraduate degree offerings represent the foundational building blocks of that vision.

As President Thomas said in announcing our partnership last week, "to scale". According to the Census Bureau, there are over 3 million black men in the U.S. with a flexible, affordable, and academically rigorous degree completion program from an institution with an unrivaled track record of positively transforming the lives of black men. If that doesn't give meaning to our mission of eliminating the back row in higher education then I don't know what will.

But when it comes to undergrad, our partnership Morehouse College is neither the beginning nor the end of the story for 2U. It took us over a decade to enter the undergraduate market, which is more than 6 times larger than the graduate market. And in the past 14 months, we've already signed Simmons University, the London School of Economics, and now Morehouse, three great partners. Keep an eye out for even more 2U-powered undergrad Aucklands.

As more and more universities move to embrace online, as part of their digital transformation strategies, one of the challenges they will face is deciding what degree and non-degree programs to launch. And in an increasingly crowded online marketplace where schools are constrained by tight budgets and limited investment dollars, these can be high-stakes decisions, getting it wrong can result in significant financial and reputational risk to a school. As reflected in the recent Burning Glass report, bad debts, the cost of failing programs. One of the under-appreciated capabilities we bring to the table beyond just investment capital is an unmatched proprietary dataset that helps our partners make well-informed choices about the right programs to launch, which is now more important than ever.

Finally, before turning it over to Paul, I want to spend a few minutes talking about our Alternative Credential segment. These offerings are not only delivering impressive growth but also meeting critical societal needs. Even before COVID, the demand for non-degree career-focused skill-based post-secondary education was growing rapidly. The economic toll of COVID, particularly on women, and black and brown communities has been devastating only furthering demand for these kinds of Alternative Credentials.

Even workers who were able to remain employed during the pandemic, have seen their companies rapidly pivot to digital and embrace e-commerce in order to survive. So these workers also need to learn new skills to stay relevant. Our growing portfolio of short course is focused on functional and leadership skills, as well as emerging in disruptive technologies is purpose-built for this. Our newest short course partnership is with the Institute for Management and Development in Switzerland or IMD announced earlier this week. This is the latest example of the growing strength and international reach of our Alternative Credentials business. We couldn't be more thrilled to team up with David Bach, Dean of Innovation and Programs from IMD, one of the world's top-ranked and most-respected business schools, to offer short courses in cyber-security, supply chain, and other timely and relevant subjects.

It's clear there is no silver bullet for solving society's growing workforce skills gap, but we believe the unparalleled reach and scale of our global offerings and network of tech skills base boot camps will allow 2U to play an important role in helping to solve this problem. In 2020 alone, more than 20,000 students enrolled in 2U-powered university boot camps and today we power boot camps in eight different career-relevant subjects, coding, data analytics, UX/UI, cyber-security, technology project management, fintech, digital marketing, and product management. And across our portfolio, we now support boot camps at 44 different universities in 28 states covering more than 75% of the total U.S. population.

We're also providing comprehensive career services at an industry-leading scale. Over the past 12 months, our workforce engagement team has hosted more than 750 job-related events and spent 22,000 hours supporting job-seeking students. We also provided students from our boot camps, over 11,000 free job referrals to our growing network of more than 6,600 employers. But helping close the workforce skills gap isn't just about powering quality programs and career services at scale, it's also about creating more accessible and affordable offerings that foster greater equality of opportunity, and we're finding innovative ways to do just that.

Whether it's our $3 million scholarship program, which is already reached over 1,000 students since its launch in June of last year, our ground-breaking collaboration with Netflix and Norfolk State University, or our more recently announced Access 2 Education Scholarship Fund, a private-public partnership with Employ Prince George's, our local Maryland Workforce organization and George Washington University, we're breaking down historical barriers and creating pathways into well paying in-demand jobs for women and minority communities.

We believe these kinds of reskilling and up-skilling partnerships between higher education, business, and government are both scalable and sustainable across urban and rural communities. They also represent the kind of smart policy solutions we need to get millions of Americans back to work. So we look forward to working with governors, as well as the new Congress and Biden Administration on a bipartisan basis to support expansion of funding for these and other higher education initiatives. As we kick-off the second month of 2021, I'm both realistic about the difficulties we all continue to face as a result of the ongoing threats posted by COVID, but at the same time, deeply optimistic about the positive impact to the step forward on their path to a better future.

With that, over to our fine CFO, Paul Lalljie.

Paul S. Lalljie -- Chief Financial Officer

Thanks. We reported a solid fourth quarter capping off a record year of revenue and the return to positive EBITDA, all while investing for sustainable growth. Today, I'd like to start with a discussion of our performance both for the quarter and the year, then I'll provide an update on our balance sheet, and conclude with our outlook for 2021.

Now turning to our performance for the quarter. Revenue totaled $215.3 million, up 32% from a year ago. The Degree segment's revenue totaled $130.5 million growth of 21%. This increase was driven by higher student demand and improved retention rates. Revenue in the Alternative Credentials segment totaled $84.8 million growth of 54%. This includes $52.8 million from Trilogy, which grew 59% while short course revenue grew 47%. Growth in this segment was driven by new launches and improved marketing efficiency. Revenue for the year totaled $774.5 million, an increase of 35% or $200 million over 2019. On an organic basis, this represents growth of 21%.

Last year, we refined our processes and delivered new offerings along the career curriculum continuum, and invested in our platform to meet changing needs of learners. It's these structural changes that position us to deliver sustainable growth in the future. To put this into perspective, for 2020, we enrolled approximately 99,000 new students on behalf of our partners, representing growth of 45%. While this contributed to our 2020 performance, these new students will also drive revenue in the future, as enrolled students complete their programs. In the Degree segment, for example, students typically take more than two years to graduate. Total full course equivalent enrollments or FCEs came in at 80,650. FCE growth accelerated due to strong performance in our mature graduate programs, in undergraduate, and in our reskilling and up-skilling courses.

Now let's take a look at our costs and expenses. Operating expense for the quarter totaled $245.3 million, a 20% increase from the fourth quarter of last year and compares to revenue growth of 32%. On a sequential basis, operating expenses for the quarter decreased 1 percentage point due to seasonally lower spend. In particular, we tend to reduce marketing spend during the holiday season when it's less efficient. This drove an 8% sequential decline in marketing and sales. On a year-over-year basis, marketing and sales expense grew 13% showing substantial leverage relative to revenue growth.

For the full year, operating expense was $953.5 million growth of 16% versus 2019. Marketing and sales as a percent of revenue decreased 9 points in 2020. While there are a number of puts and takes, overall, this demonstrates scaling and more efficient direct marketing spend. Net loss for the quarter totaled $37.7 million compared to $44.6 million in the prior year, driven by revenue growth and lower interest expense.

Adjusted EBITDA totaled $18.8 million, an increase of -- on a full-year basis, adjusted EBITDA totaled profitability, we exceeded it significantly, and we are confident that the strong revenue growth and the scaling of our infrastructure, will support margin expansion going forward. Degree segment profitability margin was 10% for the year, a 9 point improvement over 2019, driven by strength in mature programs and marketing efficiency. The segment profitability margin for the Alternative Credentials segment improved 7 points from last year to negative 12%, as we integrated Trilogyand invested in the launch of new market-relevant offerings.

Now for a discussion of the balance sheet. We ended the quarter with cash balance of $518.9 million, an increase of $19.3 million from the September quarter. This increase was driven by operating cash flow of $36.5 million, adjusted EBITDA, and a typical seasonal benefit in net working capital. These benefits were partially offset by $17 million in capital expenditures. Unlevered free cash flow usage on a 12-month basis was $3.7 million, a $6.2 million improvement from the third quarter.

Improving cash flow is a top priority for 2020, and we made significant progress throughout the year with a $76.5 million improvement compared to 2019. The increase in cash flow was driven primarily by a $40 million improvement in adjusted EBITDA, the network -- the management of net working capital, and a $9 million decrease in capital expenditures. We expect continued improvement in cash flow in 2021. But it's worth noting that this is not expected to be a straight line. For example, in this first quarter, we should see the typical seasonal increase in expense and net working capital.

Accounts receivable is $46.7 million at the end of the year, up $13 million from last year. Of note, 90% of the accounts receivable balance is current. This increase in accounts receivable was offset by $43.4 million in accounts payable and accrued expenses, and a $26.7 million increase in deferred revenue. At the end of the fourth quarter, we had outstanding long-term debt of $273.2 million, principally related to our convertible notes of April 2020.

Now for some thoughts on our 2021 guidance. Over the past three quarters, we have repeatedly discussed the strong demand we have been seeing. We are continuing to see this trend across our university partners, our students, and our enterprise client. As you've seen in the past few quarters, our Degrees segment slowly built up momentum, driven by stability in our older programs, and growth in our newer launches, particularly in undergraduate. We also have good visibility in the Degree segment, because when a student signs up program, it typically stay in the program for more than two years.

Our short course and boot camp offerings have a much faster pickup, and their rate of growth comes from new and relevant content, as well as the growing need for shorter duration reskilling and up-skilling opportunities. We believe that our good near-term visibility for these offerings, and the fact that we will continue to launch market-relevant offering, give us confidence in our ability to drive sustainable revenue growth. We expect the progress we made in 2020 to be sustainable, and we will continue to operate the business on a portfolio basis making our investment decisions the balance growth margins and ROIC.

We expect revenue for 2021 to range from $910 million to $945 million, growth of 20% at the midpoint. As you have seen, we reported very strong revenue for the second half of 2020, and for anyone who does that, the year-over-year revenue comparisons will show more substantial growth in the first half of 2021 than in the second. Adjusted EBITDA is expected to range from $45 million to $65 million, a margin of 6% at the midpoints of adjusted EBITDA and revenue. In addition, we expect capital expenditures to be approximately $85 million, and weighted average shares outstanding to be about 76 million shares.

Before moving to the conclusion, I wanted to give one last piece of context on 2021. With the goal of providing shareholders with timely and informative communications about our business, we're no longer providing cohort margins, our top programs by year. As you know, our business has changed substantially since we first provided these metrics. Today, our Alternative Credentials segment accounts for more than a third of our revenue, and we operate the business to optimize the entire portfolio of offerings.

We generate positive consolidated adjusted EBITDA in 2020 and expect that to continue. The Degree segment generated double-digit EBITDA margins in 2020, and we expect that too to continue. We also continue to make progress toward positive unlevered free cash flow. To give you some examples of how much the business has changed, today, we have over 500 domestic and international programs, including graduate, undergraduate, and alternative credentials offering. We even have short courses that are larger than what we used to call a DGP, and we expect the LLC undergraduate program launched in 2020, to become our largest program as measured by enrollment in 2021. The bottom line is our EBITDA and free cash flow progress demonstrates our ability to sign and scale new programs successfully.

In conclusion, our financial performance continues to be strong. We exited 2020 with strong momentum, revenue growing over 20%, while adjusted EBITDA and free cash flow improved significantly. This momentum is reflected in our guidance. And with our improved liquidity position, we have the financial flexibility to continue to make attractive investment, and sustainable, profitable growth.

With that, I'd like to turn the call over to the operator for the question-and-answer session. Operator?

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Jeff Meuler with Baird.

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

Yes, thanks. Just as one of the old-timers as you're changing your methodology, wanted to ask about the cohort margin change. Just, obviously, not overly concerning with your 2021 profitability guidance being what it is, but just curious, are the scaled program margins roughly stable, like how much of the improvement is being driven by fewer launches that are in their first two to three years, just any perspective on that?

Paul S. Lalljie -- Chief Financial Officer

This is Paul here. Let me probably start out with this one here. Look, I think we manage the business very differently. When we think of investments, whether it is marketing spend or anything like that, we spend across the portfolio, and we are guided by objective data on things like ROIC, things like -- given that type of cohort margin defeat that overall comprehensive purpose.

At the same time, the cohort margin was very, very applicable. When we were focused on launching programs, that would then get to certain margin profile later, so we are somewhat substantiating the margin profile of the consolidated business and the segment at that point in time. Today, we have great margins, as you've seen, we've improved. I would say more than 600 basis points on a year-over-year basis based on what we're trying to project there, from $16.1 million to midpoint of $55 million in 2021. And the same time, the grads -- the Degree segment business is delivering 10-plus double-digit margins for 2020 and we expect that to continue.

So what does this all mean? If we look at the actual numbers for 2020, we would see that the most recent cohort performed much better than in past years, and that has two contributing factors. Number one, we launched a lower number of programs, but number two, we found cheaper, better ways of launching programs, and we've talked about that all year with things like Studio in a Box and all the various other ways we found of launching programs cheaper. If we look at the next cohort, that is about 300 basis points better than we were expecting or that we had seen in the past.

And I think the one that you're really interested is in the mature cohort, and in that cohort, the margins there are better than our long-term targets that we provided at Analyst Day last year. So essentially, we can provide the color and the context that says, the cohort margin analysis is well for the numbers that we have for 2020. Where we believe it is not relevant is to focus on that as an indicator of health. What we want to do is focus on the overall and consolidated adjusted EBITDA margin, the cash flow profile of the business, and on the overall trajectory of the top-line growth.

Chip Paucek -- Co-Founder and Chief Executive Officer

And, Jeff.

Paul S. Lalljie -- Chief Financial Officer

Because I don't know if there is anything you would add to that.

Chip Paucek -- Co-Founder and Chief Executive Officer

Jeff, as a fellow old-timers, so I wanted to give them -- they look good, and I guess I would say Paul's right. Like, we completely transformed the business in the last three years, and they aren't helpful to investors in understanding the business, and you need to judge us on the whole.

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

Fair enough, and the whole looks good. The -- just any more commentary on the Degree segment revenue per FCE. I'm guessing it's mix-driven and maybe LLC ramping is having an outsized impact if that's expected to be your largest program by enrollment, but any additional comment on revenue per FCE, and particularly curious how you view the profitability potential of some of the lower-cost programs.

Paul S. Lalljie -- Chief Financial Officer

So, Jeff, again I probably kick it off and then Chip will chime in. But if we think of the growth in FCE in the Grad segment, the main contributor to that growth is the undergraduate both the LSC program and Simmons. When we think of the long term profile up on the graduate, we view it in the same ROIC benchmark that we use to the graduate program. We believe, we can get to the same types of steady-state margin, and as you know very well, marketing spend is a key component of the ROIC analysis and the overall profile of these programs.

When we think of marketing spend for undergraduate, there are a couple of things that factor into it. I mean the duration matters, right, you acquire a student, they stay in for a longer period of time than it is for a graduate program. And then, of course, the cost of those two programs are also different. And then the third factor is that we manage the programs and the way we launched programs, we've obviously found the ways to do this cheaper, better, faster and those are things that we will -- those are continuous improvement that we will go through.

Chip Paucek -- Co-Founder and Chief Executive Officer

Yes, and Jeff, what I would add is, we really like what we see so far. The Morehouse program, we announced it a week ago, haven't even started paid marketing, and it has the fastest start of interest that we really ever seen as a company. So we are tapping into a fundamental shift. There is no doubt that what you see here is when you think about where online education will go. No one says today, oh, I'm going online shopping, they're just going shopping, and that's one of the ways they do it. And it's clear that over time, this digital transformation imperative is going to be very real, and we feel like what we see. And as Paul mentioned, it will be our largest program by enrollment. Very pleased with our undergrad right now, and we like the opportunity ahead for the company.

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

I hear you, congrats to both of you and all of the 2Youths. Thanks.

Paul S. Lalljie -- Chief Financial Officer

Thanks, Jeff.

Operator

And our next question comes from Stephen Sheldon with William Blair.

Stephen Sheldon -- William Blair & Company -- Analyst

Hi, Chip and Paul, thanks for taking my questions. First, congrats, on the undergrad announcement with Morehouse. It sounds like you could expect more undergraduate announcements, but curious how those conversations are going with universities. And what factors or outcomes they're thinking about when making these decisions? Are they thinking about...

Paul S. Lalljie -- Chief Financial Officer

Is that?

Stephen Sheldon -- William Blair & Company -- Analyst

Gaining -- Someone might be kind of make it up.

Ken Goff -- Senior Vice President, Investor Relations

Just be on hold people.

Chip Paucek -- Co-Founder and Chief Executive Officer

Look, we have somebody if somebody might mind. So, Sheldon, appreciate the question. This is. Chip, I would say go ahead, or do you...

Stephen Sheldon -- William Blair & Company -- Analyst

Yes, I mean, I'm just kind of curious if they think about expanding what they're really thinking about. The gain in enrollment share driving higher-quality offerings, increase in scale, and then using that to potentially drive down net commission costs. And then from 2U's perspective, would consider this one of the bigger growth drivers, potentially over the next few years?

Chip Paucek -- Co-Founder and Chief Executive Officer

Yes, I mean it is a must-have, this is a place where we definitely see a change. Post-COVID, you have institutions transform themselves, they need to transform themselves, and we are a partner of choice to over 75-grade non-profit universities doing really high-quality work. And that -- I have been surprised that the number of undergrad conversation that we are now in and we're being careful to make sure that we align the long-term goals of the company, setting up a really good lineup of program opportunities for the next couple of years.

Morehouse, David Thomas is is transforming the college, and if you look at the opportunity ahead for Morehouse and for 2U behind it, we think that's a pretty critical program for the world both for black men, for men of color. You heard me say the 3 million black men have some college credit and unfortunately, many of those have college credit and some debt associated with it and haven't completed, and we think, we can really move the dial.

And we think it's an important program, not just for the business opportunity, more importantly, for those individuals, and more Morehouse has just an incredible track record, I mean, it's 154 years and Dr. Martin Luther King went to Morehouse and the quality is there. So we're just very proud of that relationship. And I will tell you, I was really pretty overwhelmed by the response to the first week both from potential prospects to we're giving our counselors just incredible stories of what Morehouse means to them and for our employees. This was a -- this might have been the most important announcement we've ever had, I don't know if that's an overstatement.

So our employees -- the response was so high that we ask for volunteers across the organization to work over the weekend unexpected and we had something on the order of 65 counselors volunteer to be able to reach out to the prospects immediately given the response and spent the entire past weekend just getting through the initial queue of folks that we're interested. So really strong, and you will continue to hear more about undergrad.

I will tell you 2U, it did take us a long time to launch our first-degree program in the marketplace, but we did have a ground-breaking program a long time ago called semester online that I really do think set the state and our approach to grad education with an incredibly high touch, high completion rate has set us up well for a really great run here with the exception of additional mental health components for undergrad students. We feel like we're really well set up as the market leader to do something big here. So pretty excited about it.

Stephen Sheldon -- William Blair & Company -- Analyst

That's great, and then really appreciate that detail. Maybe a follow-up here for Paul. Clearly, it seems like you're starting to see some of the positive margin characteristics in the model show through both in the quarter and in your guidance. So curious if you could maybe talk and anything you got, you talked about a little bit before, but just more qualitatively about some of the moving pieces within, the guidance in particular, between the maturing of degree programs, some of the efficiency initiatives over the last year, including things like Studio in a Box, and on the marketing side? And then, if there's a way to roughly frame the program launch investments you've assumed in 2021 relative to prior-year. So just to I guess -- just qualitatively as you think about those three factors in the guidance.

Paul S. Lalljie -- Chief Financial Officer

Yes. No, so a couple of things. When we think of the mature programs, that is about how do -- how can we spend our marketing dollars efficiently, whether it's direct marketing or organic marketing. One of the things that we've been doing is developing our organic marketing engine, and that has been helping us in becoming more efficient on an overall basis. When it comes to the way we serve the students, our student-facing organization, I think you recall last year and continuing 2019, and continuing into 2020, we started by, first of all, making sure we are organized appropriately so that we can efficiently serve the student. We call it delighting the student every step of the way, and I think we are beginning to see some of the benefits of that.

And then, when it comes to -- and then, some of the things that we're doing in our learning and development team, we're finding ways to do these things in a more decent manner. And all of that has led to the overall schematic of managing the business with overall revenue and overall EBITDA margins, which makes launch cadence, total number of programs launched, less relevant because we are going to commit to our EBITDA target. And to say this in a very less than sophisticated way, the objective of ours is to ensure that we can launch -- the cost that was used -- the dollars that were used cost us to launch one program, we're going to try to see if we can launch 1.5 or 2 programs or 1.75 programs for that same dollar amount. And in that way, we developed muscle memory and scaling, that then by the time we get to 2022, I mean, we are -- we have an engine that is just delivering more and more efficient scale in the business. So that is the overall framework around which we are looking at this.

Stephen Sheldon -- William Blair & Company -- Analyst

Got it. Makes a lot of sense. Congrats on the results.

Operator

And our next question comes from Ryan MacDonald with Needham.

Ryan MacDonald -- Needham & Company -- Analyst

Yes, good afternoon, Chip and Paul, and congrats on an excellent quarter and year. As we look at the undergrad market opportunity, can you talk about a bit about the -- what the -- what we should think about for the launch cadence in terms of time -- lead time needed to go from sort of announcement to first students enrolled. With LSE, it was your first sort of foray into the space and you took a bit more time to get that going. But then with Simmons, it was sort of rapid-fire, getting things ready quickly for an unusual fall. How should we think about as we think about the undergrad opportunity sort of unfolding into '21 and '22 or how that launch cadence looks? Thanks.

Chip Paucek -- Co-Founder and Chief Executive Officer

Thanks, Ryan. This is Chip. We've gotten away from thinking about cadence, it's a vestige of the past from the standpoint, and in the same way that DGP was. And the reason for that is, we are trying and succeeding in getting better and faster, and expectation of more Morehouse to actually signal, we just announced it, our and a broader team of folks including Ebony Lee who runs our Degree business, that's a key focus. And the reason is, if we can keep driving higher quality programs and get them rolling faster, that's better for our schools, better for our students.

So -- and the thing about undergrad is it is an exciting opportunity, you will see more. And -- but right now, like LSE, it went well enough that LSE took it from one data-science-based degree to every degree that LSE has in its portfolio, including an undergraduate program in economics from the London School of Economics, at a price point that is affordable for the world, and we're seeing demand from that.

So it's less about cadence and more about getting them into a broader portfolio of activity that drives the kind of results that the company needs to see on a consolidated basis. And one other data point for you is we are getting to a scale. We just passed 300,000 students across our programs, those are actual students and passed 14 million total sign-ups over our history. And we are thinking across program -- across a product set, across the career curriculum continuum, more and more as a company. So just pretty excited about where the company sits today. I do think we've done some really hard work to transform the business over the last three years, and we're seeing the fruits of that.

Stephen Sheldon -- William Blair & Company -- Analyst

Excellent. And when we think about it with the existing graduate programs sort of on the platform already, obviously, we saw some really healthy enrollments in this fall, but can you talk about what you're starting to see as we get into the spring here, in terms of application growth and the net enrollment growth for some of the spring '21 cohorts, is there still a knock-on effect, I guess, from the sort of increased shift online, and one that we've seen over the last year?

Chip Paucek -- Co-Founder and Chief Executive Officer

Yes. No, so I want to say, we believe that clearly online is now part of people's considerations set in a way that wasn't -- it was not before, for everybody in the world in every way. And so, that will benefit us at some level. And it's clear that the economic impact of COVID continues to emphasize peoples' need to reskill and up-skill themselves across all three of our product sets. We do think we provided some strong guidance for next year -- for this year, 20% at the midpoint. And when you're approaching $1 billion in revenue, that's a small number.

So we feel like the grad segment will continue to drive really positive results for us go forward and we're seeing that in some of our oldest programs, we're seeing that in some of the newer programs, like the undergrad programs. And excited to see pipeline just continue to be super strong. So there is an acceleration of adoption but we anticipate that this will continue throughout the calendar year, and as we get into '22.

Stephen Sheldon -- William Blair & Company -- Analyst

Excellent. Congrats again.

Operator

And our next question comes from Brett Knoblauch with Berenberg Capital.

Brett Knoblauch -- Berenberg Capital Markets -- Analyst

Hi, guys, thanks for taking my question, and congrats on the great quarter. Maybe the first one for Chip. You mentioned you are seeing better retention across your offerings. So you maybe go into a bit more detail on that?

Chip Paucek -- Co-Founder and Chief Executive Officer

So we've got a student engagement team that -- we actually, over the last two years, one of the things we did sort of inside the house is we aligned teams in a more -- in a way that's had a huge impact on our performance. And working with the students directly under Brad Adams' leadership, we have seen an improvement in retention. It's kind of the one number that rules them all. When it goes up, it's really, most importantly good for the world and for the students who graduate. It's good for society, and it's good for 2U because it obviously drives the revenue that we see through our system.

So if we look at second-semester retention for degrees, it's up about a full point, which is a really meaningful number for us. So credit to our team. And they did all this during the time of personal strain with regard to COVID. As we all know, COVID has been hard on the world. And so, to see us improve these drivers during this kind of time makes me incredibly proud.

Brett Knoblauch -- Berenberg Capital Markets -- Analyst

Got you. And then maybe one on -- for Paul on the margin profile is of the steady margin. If you're implying, I guess the Degree segment margin of 10% for the year, that's kind of implying Q4 segment margin now is north of 20%. Should we expect kind of a year-over-year improvement there every quarter in 2021?

Paul S. Lalljie -- Chief Financial Officer

So a couple of things, I mean, Q4 was indeed greater than 20%, it was about 22%. But keep in mind that there is a huge seasonal impact, right. Marketing spend is generally not that efficient in the holiday season, so we generally cut back in the marketing spend, particularly in the holiday season. So that has a seasonal impact. I think what you can expect is that you should see sequential increase, including seasonal impact. So if you look at the trends that we had in 2020, 5.5%, close to 5% in the second quarter, and then I think it was 8% in the third quarter. You should generally see some upliftment on a sequential basis if you look at that trending from 2020 into 2021. What you're not going to see is sequential trend of 22%.

Brett Knoblauch -- Berenberg Capital Markets -- Analyst

Oh yes, I wasn't implying that but thanks. And then maybe if I could just add one more.

Paul S. Lalljie -- Chief Financial Officer

Yes, yes, yes.

Brett Knoblauch -- Berenberg Capital Markets -- Analyst

You talked about the ability to...

Paul S. Lalljie -- Chief Financial Officer

Absolutely.

Brett Knoblauch -- Berenberg Capital Markets -- Analyst

Announce events more quickly than you could before. To what extent is that a function of the overall macro-environment? Obviously, education is a bit counter-cyclical so more people are going back to get their degree. Is that a factor and how quickly you can announce and launch a program?

Chip Paucek -- Co-Founder and Chief Executive Officer

No, we're really not talking about macro there Brett, we're talking about us. We over a longtime period of growing the company we have focused now over the last two years on driving efficiency, we have absolutely gotten more efficient, we are seeing the benefits of scale. I think one of the reasons we emphasize some of the scale points in the prepared remarks is people -- because our brand is behind the scenes, you don't see people with the awareness of the scale of 2U today. And we are definitely seeing the benefits of that, so we're just getting more efficient. We're getting better at launching these programs at what I believe is, a higher-quality level.

So this is not about doing them in a way that's lower quality, it's about doing something that is equal or [Technical Issues] social work program. And by doing this virtually, number one, you're driving improvements and efficiency for the company, you're driving innovation into the industry and it's -- students better because they get to work with actors in a program before they go out and deal with somebody who returned from the world of PTSD. You're talking about like, good for the world, good for efficiency, and just better for the student experience.

So it's that kind of innovation that can help us drive programs up more quickly at we think a higher quality level, and that has been a key focus of the last two years.

Brett Knoblauch -- Berenberg Capital Markets -- Analyst

Perfect. Thanks so much, guys. I appreciate it.

Operator

And our next question comes from Josh Baer with Morgan Stanley.

Joshua Baer -- Morgan Stanley -- Analyst

Hi, thanks for the question, and congrats on a great quarter. You've been talking about the ability to say yes to more business, and that may look like a bit of a different business model verse history. I'm just wondering how did that type of business contribute to the outperformance this quarter?

Paul S. Lalljie -- Chief Financial Officer

Josh, one of the -- that phrase was coined probably I think in the second quarter earnings announcement and that was on the heels of the segment's announcement by way of example. I mean, I think if you look at our quarterly results for the fourth quarter here and the full year, that was a contributor in the fourth quarter. So I think that is more a statement that speaks to the structure on the form of what we do. It is the hybrid model that was applied to the Simmons' program, and at the same time, we're keeping in mind, we're using as our north star, our long-term margin profile, and our revenue growth when we make these decisions.

These decisions are not being made to fill a launch cadence number or it's not being made to do things for a particular short-term nature, it is more, it is larger in nature.

Chip Paucek -- Co-Founder and Chief Executive Officer

Yes. One thing I would add, Josh, is that in terms of the way we think about the business it's serving these partners and their students as effectively as possible. Saying yes to them means having more opportunities to say yes, having more deployments at an existing partner, whether that be deepening the relationship with alternative credentials. We have many partners now that offer all three distinct products across the board, we have many partners that have stepped up from one type of product like a degree program to alt cred, either a boot camp or short courses. And then in some cases, like Simmons of other cases across our grad portfolio, we're deepening the relationship by offering services to their campus students in a meaningful way.

One thing important to note, we don't really think broader deployment in terms of our solution going to all of higher ed, it's not the way our business works, and it's also not something today that we are focused on trying to drive improvements in the existing business in a meaningful way and I think you're seeing some of the fruits of that. So Simmons is a fantastic relationship and one that did contribute and one that we expect to continue to grow over time and I think you'll see more things like that Simmons relationship.

Joshua Baer -- Morgan Stanley -- Analyst

That's great. And then on -- by thinking about comments like the newest cohort has better margins than in prior years are trying to be able to launch more products for the -- with the same dollar, is that kind of suggesting a different shape to the J-curve, like a different longer-term economics in those type of partnerships?

Chip Paucek -- Co-Founder and Chief Executive Officer

Yes. One interesting thing as we call it internally our J-curve project. So we are absolutely focused on trying to change the J-curve. Different products do have different capital requirements. One of the things that has really improved the overall business is that we have flexibility to launch programs that create anything that really answer a societal need. You take our diversity short course with Northwestern from Alvin Tillery who is a nationally respected expert, it's done extremely well. It's been bought pretty heavily by the enterprise unit, and that is a very different J-curve than building a new nursing program with the university or building a new physical therapy program at the university.

So we are seeing the improvements come in the J-curve, and it's a pretty critical step forward for the company to be able to drive to free cash flow, and we are making real progress on that and we do still expect to see that crossover this calendar year.

Joshua Baer -- Morgan Stanley -- Analyst

Great, thank you.

Operator

And our next question comes from Brent Thill with Jefferies.

Brent Thill -- Jefferies -- Analyst

Chip, you have many great growth engines. If you had to prioritise two main commitments for '21 that you'd like to achieve, how would you articulate those two priors from what you said?

Chip Paucek -- Co-Founder and Chief Executive Officer

Well, we are we like the balanced portfolio, we think operating across the career curriculum continuum is really important. And one of the reasons, Paul emphasized that the third of our revenue now comes from Alt Cred. We're the largest provider of non-profit alternative credentials in the country, that segment is larger than any of the MOOC providers as an example. So we do think that that's a really important priority for the company.

Undergrad is new and we're being careful about how many we slot in, and keeping our Grad business rolling and seeing positive enrollments from older programs is important. So it has been a transformation of the company over the last, let's say three years. 2U looks fundamentally different than it did at our IPO, and certainly, even than it did when we first acquired GetSmarter, which candidly has been a home run, honestly. It's -- we saw where the market was going, we saw where ed-tech was going, and really are seeing the benefits of that today. There is no question that we transformed the business to stay ahead of market demand and now we're position in a multi-trillion dollar market to drive the future of higher ed, I don't think that's an overstatement.

Brent Thill -- Jefferies -- Analyst

Great, thank you.

Operator

And our next question comes from Thomas Singlehurst with Citi.

Thomas Singlehurst -- Citigroup -- Analyst

Good evening, guys, I'm Tom here from Citi. Hearing your voices, congrats on the quarter. The -- I had a couple of questions. The first one actually on LSE and international reality LSE been a fantastic success, I mean you can see that in the expansion of the mandate. I think the question is it's obviously a big opportunity in undergraduate, but it doesn't signal a bigger opportunity in international as well. I don't know you've got that footprint, but is that going to save much emphasis going forward? That was the first question.

Chip Paucek -- Co-Founder and Chief Executive Officer

Yes. I think both the Coney and IMD should tell you something. We do think that you're talking about, as you know two of the best brands in Europe. LSE is certainly one of the best brands in the U.K. and we do think that this is a worldwide story. We also are excited about a growth engine that we think we've found to localize short courses into different languages and we think that that provides a significantly lower capex way of achieving growth in the Short Course business, and are excited about that. So, Tom, you will hear more and more about international opportunities over time.

Thomas Singlehurst -- Citigroup -- Analyst

That's very exciting, and then, the second question is, obviously, I'm sure that tech just more broadly in education is a barrier that's just getting more and more focused in terms of investor interest and capital flowing into the state professional, I mean, perhaps especially so. A further question is I mean, should we worry about more competition, if there are sort of more better-capitalized companies out there to enter into the same market, or do you see that as a sort of indication and the validation of what you did?

Chip Paucek -- Co-Founder and Chief Executive Officer

Honestly, what's interesting is, over the last several years, we haven't seen a significant increase in the number of competitors, and we've seen certainly some in OPM go the other direction. And I would say we welcome people coming into this space. We think it's really good for the ed-tech market, it's certainly lonely out here in the public ed-tech hills, and we do think that what's unusual is for the percent of GDP that goes to education, it is very strange that there are this small number of large companies that are public. So we think it's good, we think it's good for the valuation of 2U, we think it's good for the market overall.

And I do think, we're at a scale that we don't think anybody is quite close to in the non-profit university world, and welcome people coming in. We think that our scale will allow us to compete really successfully. And I think we're seeing that in our marketing efficiency, we're seeing in the demand in the pipeline. But our leadership position is one of excited to see more and more people come into the space, and as they do, they'll have to prove quality, they'll have to prove scale. And we welcome the opportunity to continue to prove ourselves.

Thomas Singlehurst -- Citigroup -- Analyst

That's amazing. Thanks, guys, and congrats again on the quarter.

Operator

Our next question comes from Arvind Ramnani with Piper Sandler.

Arvind Ramnani -- Piper Sandler -- Analyst

Hi. Thanks for taking my question, and congrats on a really good quarter. I had a broader level question, and I wanted to ask you about your priorities as you think over the next two or three years. You certainly had some surprises in 2019, and 2020 was very unique across many different vectors. But now with the business foundation at a really good place, can you give us some color about how you are thinking about the business over the next two, three years?

Chip Paucek -- Co-Founder and Chief Executive Officer

Yes. Thanks, Arv. So I would say, we have come out, I do think we came out of the fire of 2019 molded like Valyrian steel. So forgive the Game of Thrones reference but we feel in much stronger position today than it was back in 2019. And in terms of the priorities for the company, there is no question that financially driving to a balanced point of view on the rule of 40, driving to free cash flow is critical. We said that a couple of years ago, to be clear, over the last, let's say a year and a half, let's say six quarters, everything we said we told you we were going to do, we've done, and we continue to expect to be able to achieve that.

And at the same time, helping our university drive high-quality options for students across their careers and lifetimes, meeting the learner where the learner is, and driving really high-quality student outcomes while doing that because at the end of the day, that's really all that matters in our business. If the student wins, the university wins, then 2U wins. And that is really important, it's petty, but it's important. It is the real story behind the way we run the business. So I do think the up-skilling opportunity is significant, and I think you're seeing that in our results today, you're seeing that in our Short Course business, and, of course, our legacy Degree business, with undergrad as a growth lever. You just need to be able to meet the student, where the student is, and drive high-quality options for working adults. And I think we are really well-positioned to do that.

Arvind Ramnani -- Piper Sandler -- Analyst

Great. And you all have been pretty thoughtful about how you are growing into, who you partner with, and all of that. But as you kind of look at I guess, the next couple of years, are there any gating factors that prevent you from growing faster? So the investments that need to be made either from a technology side or from a sales, marketing side, like, what's going to prevent you all from seeing even faster growth over the next couple of years?

Chip Paucek -- Co-Founder and Chief Executive Officer

Arv, we want to grow smart, not just fast, and that's been a key focus for the company over the last three years. And I think, as I've said a couple of times on this call, we're starting to see the benefits of it. We continue to invest in each part of the 2UOS operating system that we provide to our schools to power this experience. That certainly includes marketing, it includes everything, from privacy to accessibility to core technology, under the leadership of our CTO, James Kenigsberg. So this is about a balanced agenda of ensuring that we're creating a long-term sustainable engine of social mobility, that is what the story is about. So we're excited to continue to prove it in the marketplace. I do think we have made some real headway here in terms of showing the sustainability of this business.

Arvind Ramnani -- Piper Sandler -- Analyst

Great. Thank you very much, and good luck for the year.

Chip Paucek -- Co-Founder and Chief Executive Officer

Thank you, Arv.

Paul S. Lalljie -- Chief Financial Officer

Thank you.

Operator

And I would now like to turn the conference back over to Mr. Chip Paucek for closing remarks.

Chip Paucek -- Co-Founder and Chief Executive Officer

Okay, thank you, everyone, for joining us today. Before I go, I would like to offer birthday wishes to a few folks. First of all, to my alma mater, George Washington University for their 200th birthday, and then to our Chief Operating Officer, Mark Chernis, and to our CFO, Paul Lalljie. One turned greater than 50, and one turned -- hasn't quite made it to 50, and I will let you have fun guessing who that is. Thanks, everybody. We will see you out on the road.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Ken Goff -- Senior Vice President, Investor Relations

Chip Paucek -- Co-Founder and Chief Executive Officer

Paul S. Lalljie -- Chief Financial Officer

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

Stephen Sheldon -- William Blair & Company -- Analyst

Ryan MacDonald -- Needham & Company -- Analyst

Brett Knoblauch -- Berenberg Capital Markets -- Analyst

Joshua Baer -- Morgan Stanley -- Analyst

Brent Thill -- Jefferies -- Analyst

Thomas Singlehurst -- Citigroup -- Analyst

Arvind Ramnani -- Piper Sandler -- Analyst

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