Nerdy Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 8 speakers on the call.

Operator

Hello, everyone, and welcome to the Nerdy, Inc. Third Quarter 2023 Earnings Call. My name is Felicia, and I'll be your operator today. Please note after the presentation part of this call, there will be a question and answer session. I will now hand you over to TJ Lin, Associate General Counsel, Securities Counsel.

Operator

Please go ahead, sir.

Speaker 1

Good afternoon, and thank you for joining us for Nerdy's Q3 2023 earnings call. With me are Chuck Cohn, Founder, Chairman and Chief Executive Officer of Nerdy and Jason Pelo, Chief Financial Officer. Before I turn the call over to Chuck, I'll remind everyone that this discussion will contain forward looking statements, including but not limited to expectations with with respect to Nerdy's future financial and operating results, strategy, opportunities, plans and outlook. These forward looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results. Any forward looking statements are made as of today's date, Amnerdy does not undertake or accept any obligation to publicly release any updates or revisions to any forward looking statements to reflect any change in expectations or any change in events, conditions or circumstances on which any such statement is based.

Speaker 1

Please refer to the disclaimers in today's shareholder letter announcing Nerdy's 3rd quarter results and the company's filings with the SEC for a discussion of the risks. Not all of the financial measures that we will discuss today are prepared in accordance with GAAP. Please refer to today's shareholder letter for reconciliations of these non GAAP measures. With that, let me turn the call over to Chuck. Chuck?

Speaker 2

Thanks, TJ, and thank you to everyone for joining us today. In the Q3, our strong first half of the year continued and we delivered revenue and profitability ahead of our expectations. Both our consumer and institutional businesses saw strong demand in the quarter as School year ramp, which combined with the operating leverage that we are receiving from our new always on recurring revenue models and investments in AI to also drive bottom line outperformance. Learning memberships, our new all access subscription offering that aims to support learners across academic calendar years, Subjects and learning formats continue to resonate with consumers this back to school season. The improved value proposition and Expanded product suite included in learning memberships is appealing to a broad set of audiences and are locking accelerated growth across multiple customer segments.

Speaker 2

We saw growth in new consumer customers purchasing learning memberships and joining the platform for the first time accelerate as the school year started exceeding 45% year over year new customer growth in both August September. That momentum helped drive continued revenue acceleration in the 3rd quarter to 19% year over year growth for our consumer business and 27% for the total company, representing an acceleration of 6011 100 basis points, respectively. At the end of Q2, we completed the evolution to 100% of our consumer customers purchasing learning memberships with the transition of our professional audience. Consumer revenue recognized from Learning membership subscriptions increased to 96% in the quarter, up from 88% in the 2nd quarter and 20% last year in the 3rd quarter. We ended the quarter 39,500 Learning Members and $164,000,000 in annualized run rate revenue.

Speaker 2

Our institutional business, Varsity Shooters for Schools, similarly saw a significant uptick in customer demand with the start of the school year with revenue of $5,600,000 up 133 percent year over year. Bookings from varsity tutors for schools in the With the start of the school year, we see growing recognition of what we've always known. Tutoring continues to be the proven solution for accelerating and remediating learning. This is leading to a significant uptick in interest in high dosage tutoring and an increase in the scale and velocity of institutional opportunities, including numerous state level tutoring programs. During the Q3, the pace of change in innovation continued.

Speaker 2

We significantly overhauled, And build deeper and larger relationships with existing ones. As part of the new offering, we introduced 2 access based subscription products, District assigned and parent assigned to complement teacher assigned. With Varsity Tutors for Schools, school district partners can now choose to administer high dosage tutoring At the school district level with district designs, empower teachers to manage and prescribe high dosage tutoring to students in their classroom with our teacher assigned offering or with parent assigned school districts can provide parents and families with our learning memberships. We believe that allowing school districts to purchase learning memberships on behalf of their students and enabling parents to have control and ownership of their child's learning solves an important problem for many schools and represents a significant commercial opportunity. It also serves as an example of our platform oriented approach to growth, where we aim to build once and then leverage the product capability many times to serve net new audiences, in this case, selling our primary consumer product into K-twelve school districts with administrative tools layered on top for district wide scale.

Speaker 2

As we head into 2024, an elegant convergence of subscription business models and access based products has occurred in both our consumer and institutional businesses. We believe this will help us better serve the needs of our customers, Further simplify our operations, allow us to innovate faster in the future and further position us for sustained growth and profitability in the years ahead. I am pleased to share that in the Q3, we delivered $40,300,000 of revenue, an increase of 27% year over year, above our guidance range of $38,000,000 to $40,000,000 Revenue growth was driven by both our consumer and institutional businesses, which were up 19% and 133% year over year, respectively. Gross profit of $29,200,000 in the 3rd quarter increased 33% year over year and gross margin of 72.4% for the quarter was a record and compares to 69.0 percent in the same period last year, a 3 40 basis point increase. Our customer lifetime values continue to show significant improvements relative to our old package model, driven by our evolution to learning memberships, which continues to be a key driver to our strong operating results and improved profitability year over year.

Speaker 2

During the Q3, we delivered non GAAP adjusted EBITDA margin improvements of over 2,300 basis points year over year, driven by improvements across every P and L line item. Moving on to our consumer business, Our learning membership model continues to lead to more attractive unilevel economics, broader customer appeal, longer duration and higher lifetime value customer relationships, higher gross margin and a more scalable and efficient operating model. It also serves as an easier platform from which to drive innovation and incremental growth, Given our ability to add new product capabilities into the existing all access subscription offering, thereby making the offering more appealing and engaging, driving conversion of new members and the retention of existing ones. Consumer revenue of $34,500,000 increased 19% year over year and represented 86% of total revenue in the 3rd quarter, delivering sequential accelerating growth each of the last three quarters. Active members of approximately 39,500 as of September 30, 2023 increased 8,500,000 or 27 percent during the quarter.

Speaker 2

Average revenue per member per month or ARPUM of approximately $3.46 at the end of the 3rd quarter resulted in an annualized run rate of approximately $164,000,000 from learning memberships Significantly upgraded and enhanced learning membership digital experience. These updates enrich the experience, Encourage achievement, reinforce personal accountability to learning and improve the discoverability of learning formats and subjects. We also improved the user experience with new AI driven learning formats to continue to broaden the resources available as a part of learning memberships delivering increased value. These improvements are quickly resulting in learning members Overall, non tutoring engagement in September was up 54% year over year for all clients and up 68% year over year for new members in their 1st month, which was our first cohort of new customers that only experienced the all new My Learning Hub and subject portals. From many years of experience, we know that when customers engage more deeply with our product, including across multiple learning formats, multiple subjects Where multiple students per household, it is highly predictive of stronger long term retention and higher lifetime value of those customers.

Speaker 2

During the Q3, we rolled out numerous product and user experience enhancements. The new My Learning Hub transforms the way learning membership customers engage with our platform, making discovery with our platform more intuitive and user friendly. My Learning Hub serves as the new homepage and central destination for learning members, allowing members to effortlessly access their upcoming live tutoring schedule, Easily track their past learning interactions in a subject and importantly discover new subjects to learn. Subject portals enable learners to easily find all the different ways they can learn a given subject and leads to increased multi format engagement within a subject when visited. With the use of generative AI for content generation, we've been able to rapidly expand subject portals to our Top 200 most in demand subjects and have simultaneously expanded the amount of learning resource content available within each subject portal.

Speaker 2

We've leveraged generative AI to create more than 100,000 practice problems, answers and explanations that are now available for learning membership to use this back to school season. We increased the visibility and accessibility of our AI tutor, which is now readily available in hundreds of subjects. Since launch, we've seen a significant uptick in engagement with high repeat rates with learners using it for short homework help type interactions. Looking ahead, we will continue to deploy new capabilities and products at a rapid pace and build on our success set in retention over time as we further enhance our products and drive improved engagement. Turning our attention to our institutional business and varsity tutors for schools, We continue to make substantial progress building the foundation for a durable institutional business capable of supporting millions of students.

Speaker 2

Consistent with our strategy heading into 2023, our focus on product expansion and partnerships with larger school districts is yielding results. Institutional revenue of $5,600,000 increased 133% year over year and represented 14% of total revenue in the 3rd quarter. Varsity Tutors for Schools executed 80 contracts in the 3rd quarter yielding $10,600,000 of bookings, an increase of 89% year over year. Year to date, Varsity Tutors for Schools has executed 27 point $4,000,000 of bookings, an increase of 102% year over year with average order value of more than 120,000 of more than 75% increase versus the same time period a year ago. With the start of the school year, we are seeing a growing recognition Among educational and policy leaders and what we've always known, tutoring is a proven solution for accelerating and remediating learning.

Speaker 2

At the same time, COVID learning loss isn't going away, and it's clearly not just related to making up for learning loss during school shutdowns anymore. Also indicating the acuity of the situation, ACT scores are 30 year lows and NAEP scores for math and reading dropped to the lowest point in decades. The acuity of the student achievement problem combined with the growing broad recognition that tutoring is an effective way to address the issue is leading to an acceleration in market activity with multiple states focused on rolling out state funded statewide tutoring programs. During the quarter, we made significant platform enhancements that have enabled us to shift our institutional business to one that is access and subscription based and that provides more value for our institutional customers. The Varsity Tutors for Schools platform now comes with powerful academic resources and tools and the ability to choose between 3 simple models for high dosage tutoring administration.

Speaker 2

As part of the simplification and overhaul, we retired the on demand That instead have a suite of products and resources that are now included with access to the Varsysitters for Schools platform. The breadth of the resources included in the platform allows for us to serve a much broader set of needs for our institutional partners and greatly expands the number of students we can impact within school districts. We also made significant improvements to our high dosage tutoring product by providing more flexible implementation models and pricing models that enables school districts to more easily implement large scale, best in class, high dosage tutoring to a broader set of students. Our teacher assigned product, which was launched earlier this year, was our first always on subscription offering for districts that enabled teachers to provide high dosage tutoring intervention to students in their classroom based on their own unique insights and knowledge of what was occurring. We've seen strong engagement with teacher assigned districts and growing excitement in the market for this solution.

Speaker 2

The insights garnered from teacher assigned combined with learnings from our new subscription based consumer model led us to introducing 2 new access based subscription models in the quarter, district designed and parent designed. These new products provide varsity tutors for schools with a comprehensive product portfolio capable of meeting the high dosage tutoring needs of districts by providing the flexible implementation models that meet the common use cases districts encounter, allowing them to better serve students and their community. We believe the simplification and evolution of our product suite that positions Varsity Tutors for Schools is the product and is supported by 3 flexible models for administering high dosage better positions us to attract new institutional customers to the offering, while also building deeper and larger relationships with existing ones. In closing, I want to thank the Nerdy team for continued excellence in execution and innovation. I'm proud of the results we delivered in Q3 and encouraged by the continued progress with both Learning Memberships and the Varsity Tutors for Schools business.

Speaker 2

Our continued progress in product innovation has allowed us to launch New access based subscription products that now cover the entirety of our consumer and institutional businesses. We believe our simplified and enhanced offerings will allow us to to better attract and retain new customers, while also driving profitable growth. With that, I'll turn the call over to Jason to discuss the financials in more detail. Jason?

Speaker 3

Thanks, Chuck, and good afternoon, everyone. In the Q3, our strong first half of the year continued and we delivered revenue and profitability ahead of our expectations. Both our consumer and institutional businesses saw strong demand in the quarter as the school year ramped, which combined with the operating leverage driven from our evolution to always on recurring revenue models and investments in AI to drive bottom line outperformance. We completed the transition of our consumer business to a subscription model in just over a year's time, demonstrating strong product market fit and execution. The transition to learning memberships continues to yield more attractive unit level economics, longer duration and higher lifetime value customer relationships, higher gross margin and a more efficient and scalable operating model.

Speaker 3

In the Q3, we delivered revenue of $40,300,000 results that were above our guidance range of $38,000,000 to $40,000,000 and represented 27% year over year growth and sequential quarterly acceleration of over 1100 points. Our active member count of approximately 39,500 as of September 30th increased 8,500 or 27% during the quarter. Learning memberships revenue grew to $33,200,000 during the quarter and represented 82% of Total company recognized revenue and 96% of consumer recognized revenue in the 3rd quarter, and we expect nearly 100% of consumer revenue to be from learning memberships in the Q4. Consumer new customer growth of 40% and consumer revenue growth of 19% in the 3rd quarter both accelerated sequentially on a year over year basis each quarter throughout 2023, demonstrating the strength of our consumer offerings. And as Chuck mentioned, we saw growth in new customers purchasing learning memberships and joining the platform for the first time accelerated as the school year started, exceeding 45% year over year new customer consumer growth in both August September.

Speaker 3

Our institutional business delivered revenue of $5,600,000 representing 133% year over year growth and delivered bookings of $10,600,000 an increase of 89% year over year and represented the 2nd consecutive quarter with more than $10,000,000 in bookings. Moving down the P and L, a record gross margin of 72.4% in the 3rd quarter yielded gross profit of $29,200,000 an increase of $7,300,000 and 33% year over year. Gross profit and gross margin increases were driven by growth in our consumer business as a result of the strong adoption of learning memberships, which has led to lifetime value expansion and higher gross margin. As we evolve towards a greater mix of learning memberships revenue, we expect consumer gross margin to continue to expand. Sales and marketing expenses on a GAAP basis were $19,300,000 in the 3rd quarter, an increase of $3,100,000 compared to the same period last year.

Speaker 3

Non GAAP sales and marketing expenses excluding non cash stock based compensation were $18,500,000 were 46% of revenue in the 3rd quarter. This compared to 48% of revenue in the same period of last year, an improvement of more than 150 basis points year over year. Sales and marketing spend and efficiency improvements were driven by the continued expansion in lifetime value from learning membership customers, are focused on optimizing the level of marketing spend and substantial Varsity Tutors for Schools revenue growth, which is yielding efficiencies from prior investment the institutional sales and go to market organization. As learning memberships become a greater percentage of total revenue and the institutional business continues to scale, We expect to yield durable sales and marketing improvements as the business delivers accelerating sequential year over year revenue growth. G and A on a GAAP basis was $35,500,000 in the 3rd quarter, an increase of $2,100,000 compared to the same period last year.

Speaker 3

Non GAAP G and A excluding non cash stock based compensation, transaction related costs, restructuring costs and a legal settlement provision was $20,500,000 or 51 percent of revenue in the 3rd quarter, our seasonal low point, compared to 70% of revenue in the same period last year. This represents an improvement of more than 1900 basis points year over year. Our investments in product development and our platform oriented approach to growth have allowed us to launch a suite of always on subscription based products, including learning memberships for consumers and our district teacher and parent assigned offerings for institutional consumers. Subscription and access based offerings simplify the operating model needed to support customers and grow the business, while also providing a more predictable pattern of revenue recognition over time. We delivered an adjusted EBITDA loss of 8,200,000 an improvement of $5,800,000 and more than 2,300 basis points year over year at the top end of our guidance range of an adjusted EBITDA loss of $8,000,000 to $10,000,000 Adjusted EBITDA margin improvements can be seen across every P and L line item, including higher revenues, gross margin expansion, sales and marketing efficiency gains and continued variable labor productivity improvements stemming from automation efforts in our business model changes that streamline operations.

Speaker 3

During the Q3, we had negative operating cash flow of $4,800,000 compared to negative operating cash flow of $13,300,000 last year, an improvement of $8,500,000 that reflects the substantial improvements from our Evolution to Learning memberships. We ended the quarter with 84 $1,000,000 of cash on our balance sheet and no debt, giving Nerdy ample liquidity to fund the business and pursue growth initiatives. Turning to our business outlook. Today, we are providing 4th quarter and updated full year 2023 guidance. For the Q4 and full year, we expect year over year revenue growth will be driven by the continued growth of recurring revenue streams in our consumer business, the corresponding increase in the number of learning membership subscribers and higher institutional revenues.

Speaker 3

4th quarter and full year revenue guidance reflects higher revenues from learning memberships and varsity tutors for schools when K-twelve schools and universities are in session. Our continued momentum provides us with confidence that we will complete 2023 having delivered accelerating sequential year over year growth each quarter. For the Q4 of 2023, we expect revenue in a range of $54,000,000 to $56,000,000 representing 32% gross at the midpoint versus our Q4 2022 revenue of $41,800,000 For the full year, we expect revenue in the range of $194,000,000 representing 19% growth at the midpoint versus our 2022 revenue of 162,700,000 The full year guidance reflects recent learnings from our 1st back to school period with all customers on learning memberships. 1st, new learning member acquisition of customers joining the platform has been strong and ahead of our expectations, providing us confidence and the demand for our offerings in the year ahead. We also learned how our existing learning members would utilize their memberships as they exited summer and went back to school.

Speaker 3

This time of year marks the period when learners reevaluate the level of upcoming learning support needed as well as their schedule and availability, which in turn impacts their tutoring needs and frequency. The impact of this shows up in our guidance in 2 primary ways. First, the level of members pausing or downgrading to a lower frequency level throughout the summer months, a lower need period was consistent with our expectations. As the school year started, fewer of these customers reactivated their membership than we expected. And second, At the start of the school year, we saw fewer existing members upgrade to higher frequency learning membership levels than anticipated, which has led to lower ARPU than expected.

Speaker 3

4th quarter and full year non GAAP adjusted EBITDA guidance reflects the continuing benefits from our recurring revenue products, which focused on long term relationships with higher value customers and improving gross margin profile and operating leverage stemming from the completion of our evolution to recurring revenue business models, partially offset by increased investments in marketing, engineering and product talent to drive continued product innovation and Varsity Tutors for Schools go to market strategy. For the Q4 of 2023, we expect non GAAP adjusted EBITDA to be breakeven. For the full year, we expect non GAAP adjusted EBITDA loss of approximately $6,000,000 a substantial improvement from the non GAAP adjusted EBITDA loss of $35,700,000 last year. The change in full year adjusted EBITDA guidance primarily reflects the flow through of the lower revenues previously discussed. As Chuck mentioned, we're proud of the results we delivered in Q3 and our ability to drive accelerating growth each quarter throughout 2023.

Speaker 3

That revenue acceleration is occurring while concurrently driving more than 2,300 basis points of improvement year over year in adjusted EBITDA during the Q3. We also made significant business model improvements that we believe will enhance the predictability of our business and drive enhanced levels of growth and profitability. Thank you again for your time. And with that, I'll turn it over to the operator for Q and A. Operator?

Operator

Thank you. We will now open the Q and A session. We'll take our first question from Ryan MacDonald from Needham. Please go ahead.

Speaker 4

Yes. Hey, guys. This is Matt Shea on for Ryan. Thanks for taking the questions. Maybe just to start, want to double click on the Learning memberships.

Speaker 4

It was nice to see you guys beat your number in the quarter, but it looks like kind of towards the back half of the year, something happened in October where That growth slowed. And so I just want to kind of parse through some of the comments you gave earlier. Is the lower growth expectation with learning memberships relative to your prior expectations solely due To that fewer reactivated memberships that you're expecting in Q4, why should we see that kind of 45% growth in learning memberships moderated in Q4.

Speaker 3

Hey, Matt. Thanks for the question. I think I'd start off with, 1, we saw a really strong demand during the back to school period. It was up 45% plus in both August September. And as I indicated in the prepared comments, really the change in the Q4 guide for the full year reflects 2 things primarily.

Speaker 3

So During the summer months, we allowed members to adjust the level of frequency of their learning membership during non Peak utilization times in order to drive higher levels of retention, we also allowed customers to pause during the summer months.

Speaker 2

And so what happened is, As

Speaker 3

we move through the back to school period, we saw 2 things, lower levels of retention for people that were paused as they reassessed the level of academic need In the new calendar school year, as well as fewer members that reengaged at higher levels of tutoring frequency and so that lowers the ARPA more average revenue per month that they pay for us. And so both of those collectively are really the decline that we see in The full year guidance is probably about fifty-fifty split between the 2. But when we think about the long term health of the business, still feel really good given the demand signals that we're seeing from customers.

Speaker 2

Yes, this is Chuck. The only thing I'd add is you saw sequential revenue That is pretty considerable throughout the course of the year and this is our first back to school season with learning memberships. We've never gone through it summer before. Summer is obviously a period of time where at the beginning of the school year end of summer, people can kind of reevaluate the extent to which they want a certain level of Frequency for the product. And what we've seen is, we're talking about like 2,500 members So you're on 40,000.

Speaker 2

So I think we feel really good about the trends in totality and the levels of engagement that we're seeing post back as well. And then of course, the fact that The growth rate on new customers was 45% in both August September, gives us a lot of confidence in the business. So Significant growth throughout the year on a revenue basis. The delta that Jason mentioned is only 2,500 members Or so relative to what was kind of implied in the full year guide. So we feel really good about the trends and this is just our first Full back to school with earning memberships and it feels like a normal year where our products resonating and the engagement is going up as we make product improvements And we feel good about the future in that regard.

Speaker 4

Okay. Got it. Appreciate all that color. And then maybe just as we think about what you can add In Q4, if revenue is going down, could we or I guess just taking down, but could we potentially see more learner Ads then in Q4 than you saw in Q3 or how are you kind of thinking about the expectation of how many learners you're going to have?

Speaker 3

No. I think we historically don't see higher adds in Q4 relative to Q3 given the timing of the back to school period and the end of The 1st semester. So, we would expect around 42,000 active members at the end of the year, as we move through the Q4.

Speaker 2

Yes. We're still obviously seeing both significant nominal revenue add on a sequential basis from The $40,000,000 level to the $55,000,000 level in the guide. So you're also then seeing the acceleration from 27% growth to 32% of the guidance. So you're also seeing sequential acceleration. So we feel really good about it.

Speaker 2

Seasonally, you're at just a point in the year with how like the semester falls where you wouldn't add as many, but we feel really good about Like actual dollars and then year over year growth that the business is experiencing?

Operator

Thank you. We will now move on to the next questioner, Andrew Boone from JPM Securities. Please go ahead.

Speaker 5

Thank you for taking my questions. This is Matt on for Andrew. Could you just talk to us about the thought process behind the overhaul of the Varsity Tutors And maybe how this changes your go to market strategy? And then number 2, just with strong customer acquisition with the back to school period. And now you guys have a little bit more time on your belt with cohorts and understanding learning memberships.

Speaker 5

Is there an opportunity here to lean in with a little bit more marketing spend maybe as you about 2024. Thank you.

Speaker 2

Great question. This is Chuck. I'll answer it. So We've gone through a similar evolution on the institutional side that we have on the consumer side. We have packages in the consumer world.

Speaker 2

And prior to starting memberships, we actually launched Varsity Tutors for Schools just about 2 years ago and sold blocks of hours to Schools that they could then use in kind of unlimited ways. And there was a certain elegance that, of course, came with our Learning membership model on the consumer side and we've now sought to replicate that on the institutional side. So there's simplification as it relates to explaining our products to the customers, The 3 different high dosage tutoring implementation models are far more scalable. They're easier to use. Our systems and platform have improved dramatically.

Speaker 2

It's easier to use, like to onboard customers and to then Actually allocate the access to the model to different portions of the student population. And so this new access based subscription model that kind of mirrors what we've done on learning memberships and mirrors what we did with our teacher assigned product that now applies to these 2 new products, district designed and parent designed, which is learning memberships for schools, is something that we're super, super excited about. It makes for Far easier conversations. It's very clear how each of these products can then meet all of the common needs states related to Tutoring and related forms of intervention. And from our perspective, that then With all sorts of different opportunities because you now have a scalable model that is far more efficient.

Speaker 2

But one of the things that's going to allow us to do is instead of Requiring district wide SaaS contracts, which can be a barrier to starting a relationship with us now that we've automated and made it so much more scalable on So it really opens up all sorts of different opportunities. The initial indications are it's resonating, it's simple and We think it can drive a whole lot of growth in the years to come. And then separately, as it relates to the marketing comment, I guess that Was that specific to institutional or consumer?

Speaker 5

I was thinking more just on the consumer side, just with the nice The NICE acquisition period going into back to school, is there another opportunity just to lean in more there?

Speaker 2

Yes. One of the things that I think we shared on the last earnings call was to just drive good operating discipline. We were kind of holding our Customer acquisition cost, Con said, while we saw pretty dramatic improvements in lifetime value, those have continued to hold. So we feel really good about that relationship. And we're continuing to grow reach and grow new customer acquisition by making our product resonate more and more.

Speaker 2

So we think that continuing to improve the product marketing and the underlying Product set that comes with your earning membership and driving growth through conversion is something that is a very Highly accretive way to grow the business. We're going to continue to explore other marketing opportunities as well. We think this has the potential to Continue to appeal to a large segment of the U. S. Student population and we would expect that the extent to which it resonates improves as we continue to add new features and products.

Speaker 2

So it's getting better fast. It's already really good. We think it adds incredible value It's going to keep getting better.

Speaker 5

Great. Thank you.

Operator

Thank you. The next question comes from Doug Anmuth from JPMorgan. Please go ahead.

Speaker 6

Hey, it's Brian Smiley on for Doug. Thanks for taking my questions. Just starting on learning memberships, can you just talk about the pricing strategy there and how it could over time, particularly just as you evolve the membership going forward? And then on VTS, can you just better Help us better understand how renewals with existing customers are trending, have these new formats come up in those conversations and are they driving deeper spend?

Speaker 2

Sure. So one of the things that we test is the actual features that come with any given membership well as the frequency of live tutoring hours to come as well. And so there's different need states that exist for any given subject. An example would be foreign languages Where you have people that are learning it in a given school and in an academic context and it's more intensive and more oriented towards Accomplishment and grades and specific academic achievement. And there's other cases where you have adult learner, like, say, my mom who might be learning Spanish Before she goes on a trip.

Speaker 2

And that's a real example. And in both cases, by having different levels of frequency And different price points you can appeal to different audiences. And so the way that we think about this is we'll actually do consumer research and identify it and then we'll also Test the incrementality of different offerings and what product features we actually feature for a given Yes, the audience being effectively the combination of subjects and ages of students. And given that our platform services the entire consumer base from kindergarten through adult and professional learners and everything in between. There's a lot of different ways to kind of group it.

Speaker 2

So Our product and product marketing teams are actually going through and testing different audience segments to make sure that we are Evolving the product in a way that meets different market needs and what we see is that you get increased conversion and retention associated with those

Speaker 3

And then on your second question as it relates So like varsity tutors for schools customers and how they're responding to new products. I'd say it's incredibly well. We've recently been at a couple of the Larger school district conferences, including the Council of Great City Schools, the Virginia Association of Superintendents, as well as New Jersey. And I think what School district leaders like is the simplicity of the models, the ability to affect multiple students in multiple knee cases across Whether or not they want to maintain control of the allocation of hours at the district level, put that power within the teacher's hands or allow parents to schedule those hours after the school day and on the weekends through parent assigned. And so During the quarter, we actually converted 20 customers to these new contracts.

Speaker 3

So it's not only resonating with prospective customers, it's also resonating well with customers that Have been with us for some period of time now. So add that all together and I think we feel really good about how we're positioned heading into 2024.

Speaker 2

Yes. I would also add the product itself, as we've made these consumer membership upgrades, The institutional business is piggybacking off of those upgrades for its students. So it also just naturally inherits all the benefits of Better product discovery of everything that we have within the platform, the subject portals that we referenced, a lot of the Diagnostic testing, the live classes, the live chat based tutoring, all these other things that come with the Live, video based tutoring that really is our superpower. All these additional features that are available for entire school districts of students that can deploy Allow for them to provide events value to the student basis. So there's classes in ACT and SAT and enrichment and coding and you name it.

Speaker 2

And districts really are valuing the kind of broad array of different solutions that they have available that come with These new 3 high dosage tutoring subscription offerings.

Speaker 6

Got it. Thank you.

Operator

Thank you. The next question comes from Alice Gollard from Raymond James. Please go ahead.

Speaker 7

Hi. This is Jessica on for Alex. Thanks for taking my question. I just was a little bit curious. So as almost all your active members in the consumer segment have now come migrating completely over to new subscription model.

Speaker 7

I want to double click on what trends you're seeing so far for churn and renewals. It might be a bit early, but is there anything you're Seeing on renewal rates of this new model compared to what you had before? And are you seeing anything like upgrades, downgrade within packages month to month? Thanks.

Speaker 2

Sure. Good question. So one of the things that we shared in our shareholder letter was the actual cohort curves. So you can see that For all the different cohorts that have started since we launched the membership product, Relative to our old package model, there's significantly higher lifetime value. And that's a function of the fact that people are just getting more value From a consumer's perspective, the relationship is oriented toward multi subject support, multi learning format support and multiple academic calendar years.

Speaker 2

And you then see that change in psychology and change in product positioning and change in the features that come with the product manifest in much higher levels of retention relative to the package model. And at a year, Mark, you are trending toward About 2x what we were getting in terms of revenue for a given customer relative to the old package file. So It's kind of a dramatic improvement as I referenced earlier in the call, holding customer acquisition cost constant, we think that's very, very favorable. It's also a way better experience for Our learners on the platform, both consumer, as well as now institutional customers that are leveraging That underlying membership capability with their students.

Speaker 3

And then I think the second part of your question was, what do we see with month to month versus contract customers? We believe it's important to offer the customers the flexibility to choose the pricing plan that best suits their needs and preferences. Month to month Leads to higher conversion for certain customers who don't want a long term contract. It's also worth noting that the month to month has a higher ARPU of about 15% to 20% for that flexibility. And then all of our customers, including month to month and contract can consume beyond their membership With what we call supplemental hours.

Speaker 3

And so there's kind of an unlimited ability to engage with us in Tudor based products during the month and we'll just bill on a supplementary basis thereafter. So net net, we think having both options is important to drive conversion and customer satisfaction and growth over time. So we feel good about That flexibility.

Speaker 7

Got it. Thanks. And so also on the flip side of your consumer segment, What are they seeing from active experts? Like what benefits are they seeing that are encouraging them to stay and join your platform?

Speaker 2

Yes, Hiren. Sure. So one of the things that we sought to do, and this occurs naturally through how All of the AI algos work on the platform is that the top tutors get allocated more work and on average they tend to be Better in general. And so they're sticking around on the platform at higher and higher rates because they're getting a higher volume of students. They're also really appreciating the fact that with learning memberships, there's a much higher level recurrence to those students.

Speaker 2

So they meet more and more and more frequently and that kind of combined with higher volume allocated to them that allows for them to generate more income. And these also tend to be students that are oriented toward a long term goal and the feedback that we've gotten about that kind of relationship and the matches that are occurring both by the very nature of the product, but then also Because our matching algorithms continue to get better and better and better with more data is something that has actually improved The relationship that experts have on the platform with both the students and with the platform itself. So we feel good about that relationship. We've purposely, as we've said for many quarters in a row, decreased the number of active experts on the platform because it drives operating efficiency, because we're leading into the best Folks and then separately, because we're just getting smarter about figuring out how to find the right people for the platform as well. So we feel great about the liquidity, Got a source of great operating leverage and we think we have a kind of good model here for Providing both a good experience for the experts and then separately making sure that we are constantly improving the experience for the learners themselves.

Speaker 7

Got it. Thanks.

Operator

It appears we have no further questions. So with that, I thank you all for joining this event and you may now disconnect your line.

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Key Takeaways

  • Strong Q3 results with 27% year-over-year revenue growth to $40.3 million, beating guidance and driving profitability ahead of expectations.
  • Consumer business momentum powered by the transition to 100% subscription via Learning Memberships, delivering 19% revenue growth, 39,500 active members and a $164 million annualized run rate.
  • Institutional segment (Varsity Tutors for Schools) saw 133% revenue growth to $5.6 million and $10.6 million in bookings, leveraging new access-based subscription models for district-, teacher- and parent-assigned tutoring.
  • Record 72.4% gross margin (up 340 bps) and a 2,300 bps year-over-year non-GAAP adjusted EBITDA margin improvement, resulting in an $8.2 million adjusted EBITDA loss.
  • Q4 revenue guidance of $54–56 million (32% growth) with breakeven adjusted EBITDA, and full-year revenue forecast of $194 million (19% growth) with a non-GAAP EBITDA loss of approximately $6 million.
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Earnings Conference Call
Nerdy Q3 2023
00:00 / 00:00