Dive Brief:

• Online program manager (OPM) 2U ended the first quarter of its 2019 fiscal year with $122.2 million in revenue, up 32% year-over-year, as increased marketing spending on its graduate programs widened its net loss from $14.9 million a year ago to $21.6 million for the period.
• Enrollment growth drove the top-line gains. 2U's graduate programs saw a 32.7% increase in enrollment, or 9,742 students, although that increase was offset by a slight drop in revenue per course enrollee from $2,706 to $2,637 year-over-year. Short course enrollment climbed 52.1% from a year ago, with per course enrollee revenue rising from $1,954 to $1,979.
• The company is projecting 2019 revenue between $534 million and $537 million, compared to $411.8 million in revenue reported for 2018.

Dive Insight:

Despite the strong financials, the OPM struck a cautious tone in a call with analysts Tuesday. 2U CEO Chip Paucek said the company was revising down its annual revenue guidance for its graduate programs, citing increasing selectivity at institutions reducing the admit rate for some of its longer-running programs.

"We're starting to see a more consistent trend emerge across the portfolio," he said. "Our partners are becoming more selective across the board, particularly as programs scale."

Average enrollment in the company's top five graduate programs is projected to be 20% lower in 2019 than in 2017 — although for the top 15 programs enrollment is expected to be 3% higher. "We believe that the average will go up even with the decline in our largest programs," he said.

Other headwinds triggering the more conservative focus include difficulty getting prospective students who have indicated interest in 2U's programs through the funnel to the application step. The delayed launch of its online MBA with the University of California, Davis, from 2018 to 2019 was also a factor.

Still, Paucek touted the profitability of individual programs. "One of the results of this is we can run lower revenue programs at really strong margin," he said. "Over time, this should broaden the profile of the programs we can launch, including lower-tuition programs, and it gives 2U the opportunity to continue to invest in scholarships."

2U launched one graduate program and nine short courses during the period. At the quarter's close, 2U was operating 49 graduate programs and expects to be 40% to its long-term goal of 250 programs by the end of 2021. This year, the company will launch its first international graduate programs, with MBAs through University College London and Tecnológico de Monterrey, in Mexico.

The report was the company's first after its $750 million acquisition of boot camp provider Trilogy Education. The move shed light on 2U's diversification plans. On Tuesday's call, Paucek told analysts that once the acquisition is finalized, it will "have products and offerings across the full continuum of student needs to meet the demands of the 21st century workforce."

Going forward, the company plans to report its short-course and boot camp earnings together under a new business unit, Alternative Credential. 2U expects short-course margins to be slightly lower than boot camp margins.

"We're evolving from a company entirely reliant on a single line of business — grad programs — to one where a considerable portion of our revenue will come from alternative credentials," Paucek said.

Short-courses are a growing part of 2U's business, accounting for 14.8% of the company's revenue during the most recent quarter compared to 12.6% in the first quarter of 2018.

Paucek said the company sees "tremendous potential" for implementing short courses across its other product offerings, including stacking them into certificates, embedding courses into boot camps and degrees, and even offering for-credit short courses.

In light of a slowdown in admissions to its top graduate programs, Paucek indicated 2U will pull back on an ongoing push to market them and instead focus on stabilizing those programs at a slightly lower cost for students as they reach scale.

The quarterly report follows several months of strategic growth. In addition to the purchase of Trilogy, which is underway, the company forged a partnership with OPM Keypath Education earlier this year. That arrangement gives 2U customers access to lower-investment programs that, analysts say, will help it address their widening range of online learning needs.

It's not the only OPM strategically diversifying its offerings. Zovio, formerly Bridgepoint, is looking to shift from its longtime role as a college operator to an educational services provider. The company has so far picked up a tutoring platform and a boot camp, and executives told Education Dive last month that an OPM and another workforce skills training company are also acquisition targets.