2016 Annual Report

Delivering Great Digital Education At Scale

Announced Domestic GraduAte Programs
Multiple Program Verticals

As of April 20, 2017

Fellow Stockholders –

Back in 2008, a small team believed that we could help transform a great university into a better digital version of itself. Digital transformation was possible. Online education could be great if you could convince some of the world’s best universities to also believe.

Believe what?

To believe that the online student experience could be equal to or better than the on-campus experience. To believe that you could end the segregation of the online student. To believe that online students have the same success and passion as on-campus students and therefore should have the same rights and privileges as on-campus students.

To believe that online education could actually be great. Not just OK — but truly excellent.

To believe that quality education was possible on the internet if you didn’t do it the old, tired way of those that came before. To believe that institutional power and will could be focused on this new form of delivery, eliminating the back row in education.

picture of Chip Paucek CEO of 2U

Strong Track Record of Growth

chart displaying increased revenue from 2013 to 2016

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Most people thought we were a little, or a lot, crazy. But if we could succeed in channeling incredible universities, with their distinct and powerful freedom of thought, into this new digital transformation, we would build a very successful business.

Over the past nine years, my management team has heard me continuously preach about the importance of staying focused on delivering great digital education at scale, enabling high-quality student outcomes and helping our partners succeed in their digital transformation. Our business, as envisioned back in 2008, is now showing the full promise of what we believed was possible.

We are generating high-quality student outcomes. From inception to the end of 2016 — 24,776 students enrolled or graduated. 31,997 placements in 24,752 placement sites. 83 percent retention across academic disciplines ranging from data science to speech pathology. 2U, Inc. is a company that does well by doing good — I love that. And we are breaking down barriers in verticals that online education has been too scared to tap.

Our growth strategy rests on leveraging our improved bundle of technology, services and data architecture to launch and scale domestic graduate programs, or DGPs, in new and existing degree verticals for the world’s best universities. If we continue to execute on this strategy, we believe that our domestic graduate business could grow to $3 billion or more in annual steady state revenue at maturity.

2016 was a great year. Our revenue increased by 37 percent, well exceeding our target of 30 percent year-over-year revenue growth. And while we exceeded our target revenue growth rate in 2016, we also became adjusted EBITDA profitable for the first time on a full-year basis. At $4.5 million, adjusted EBITDA margin for the full year 2016 was 2 percent. To give you a sense of how far we’ve come, our adjusted EBITDA margin for the full year 2013 prior to our initial public offering was negative 26 percent.

Since IPO, we have told investors that it was our plan to balance revenue growth with margin expansion through the point of full-year adjusted EBITDA profitability. We have delivered on that plan for the past three years, incrementally increasing our annual new DGP launches as a result. At the end of 2016, we had launched and were operating 24 DGPs.

But now that we have achieved adjusted EBITDA profitability, it is our intention to increase the annual launch cadence of DGPs and pursue revenue growth while still maintaining small margin improvement on the bottom line. In early 2017, we confirmed our new DGP launch targets for the next four years: 10 DGPs in 2017, 13 DGPs in 2018, 16 DGPs in 2019 and 19 DGPs in 2020. This means we would more than triple our total launched DGPs by the end of 2020. We believe that this dramatic step up in launches will keep revenue growth above 30 percent for the foreseeable future.

Increasing Annual DGP Launch Target

chart showing increase in expected DGP launch targets

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But 2016 was not all about revenue growth. As mentioned above, 2U reached adjusted EBITDA profitability for the first time on a full-year basis. And even though we expect that our overall margin improvement will slow as we increase our program launch cadence in the coming years, we saw significant cohort margin improvement in 2016 as our launched DGPs continue to mature and scale. The cohort margin table below shows just how well our launch cohorts performed in 2016 and validates our view that the DGPs we have launched are achieving the financial results that we expect over time. We expect that to continue as we launch additional DGPs in the coming years.

2016 Adjusted EBITDA Cohort Margins*

chart displaying 2016 Adjusted EBITDA Cohort Margins

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Yes, the business is doing well. Our current DGPs are performing well. Our expected launch cadence is set through 2020. Our partners are happy, and we do not have a contract up for renewal until 2021. If we meet our launch targets and continue to scale launched programs, 2U is poised for success over many years.

But we must not settle or get complacent.

At 2U, we hold a private annual company meeting for full-time employees that is a big part of our company culture. Past themes reflected the company’s needs and emotions at the time, including the theme “believe” at a past meeting. So what’s the theme of this year’s company meeting?


Companies can become stagnant – especially when life is good. It’s easy to rest on your laurels. But it was innovation that got us here. And continued innovation, and our successful evolution, will take us and our partners to new heights.

Our partners are centuries-old institutions. Bedrocks of our society. We believe they are the most important institutions in our entire culture. And they are mission-driven, committed to delivering life-changing outcomes for their students.

These institutions have built their reputations over centuries, and they are understandably hesitant to make changes that could put their reputations at risk. As these institutions evolve and begin to extend their reach through technology, they need to maintain the same admissions standards, the same academic rigor, the same level of interaction with faculty. That’s what our business model enables them to accomplish. With us, their centuries-old reputations are protected.

More than ever before, a university can put its curriculum online and enroll students. “Online” is becoming easier. But our continued evolution and partnership promises a better version of online. Our team has innovated over the years and built something great, but we must not rest.

We will continue to evolve our comprehensive bundle of solutions to create what we believe is the world’s best digital education.

Our use of the word “digital” is intentional. Digital education leverages technology to bring the entire university experience to life. It should be academically rigorous. It should create a community of learners. It should be accessible to all qualified students. It is not simply putting courses online for students to view at their own pace.

Our bundle gets better, and better, and better. We’ve promised our partners more than just an online degree program. They are trusting us with their brands. They are asking us to embrace their missions, to understand their unique cultures. They are looking for a long-term partner to power their digital transformation.

Yes, digital education includes an online learning management system, or LMS, to house the curriculum. Yes, it includes working with faculty to develop asynchronous content. Students should be required to attend weekly class. To interact with their professors. To work on group projects with classmates. To attend intensive residencies. To complete clinical placements. Together, this creates a differentiated, engaging learning environment.

Digital education should also be accessible. While an LMS and asynchronous content allow students to enroll in a graduate degree from a distance, without the proper support structures, some qualified students may not be able to enroll. In order to bring the entire university experience to life, it’s necessary to invest in the staff and technology to support the needs of all qualified students.

Digital education is hard. Digital education is capital intensive. 2U’s continued evolution of our platform, our services and our data infrastructure brings the full university experience to bear in a digital format—and does it at scale.

But it’s not only our clients who are evolving. Higher education is also evolving and new segments are becoming more important to our clients as they continue with their digital transformations. We have a lot of runway in the $80 billion domestic graduate program market, and we expect to remain primarily focused on that market in the future. But we realize that our core market represents less than 1 percent of the $1.9 trillion global higher education market, and we believe that there is room for us to expand beyond domestic graduate degree programs.

There are more than 7 billion people in the world, and for each one of them, education remains one of the most powerful drivers of change and upward mobility. I know it was for me as a first-generation college graduate. People pursue education for different reasons, goals and dreams. And it’s these unique aspirations that make higher education one of the largest markets in the world.

Clearly, this is not limited to students looking for a graduate degree program from a U.S. institution. Some students are looking for non-degree alternatives, like certificates, and others are looking for graduate degrees from international institutions. And there is, of course, the undergraduate market.

For 2U to succeed in achieving its goal of becoming a truly iconic company — the leader in digital education — our future must be open to these opportunities outside of our core domestic graduate market.

As we prepare to more than triple the launched DGPs by the end of 2020, our team remains focused on our role as brand steward for each and every one of our universities. If we deliver for our partners, we will have provided more opportunities for students around the world to access great digital education.

2U, and our comprehensive approach to quality, will indeed continue to evolve to meet the needs of its clients.

Thanks for being with us on this journey. And enjoy the ride.

Christopher “Chip” Paucek


P.S. #NoBackRow

24,776 Students Enrolled

Inception through December 31, 2016