Nerdy Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2025

There are 8 speakers on the call.

Operator

Good afternoon, and thank you for attending the Nerdy Incorporated Q1 twenty twenty five Earnings Call. My name is Jason, and I'll be the moderator today. I would now like to pass the conference over to your host, DJ Lin, Associate General Counsel of Nerdy. You may proceed.

Speaker 1

Good afternoon, and thank you for joining us for Nerdy's first quarter twenty twenty five earnings call. With me are Chuck Cone, Donner, Chairman and Chief Executive Officer of Nerdy and Jason Pello, 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 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, and Nurni 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 first 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.

Speaker 2

Thanks, TJ, and thank you to everyone for joining today's call. In the first quarter, we continued to execute against our goals to deliver product innovation and operational improvements that will enable a return to growth and profitability. Our investments in the quality of our revenue and focus on delivering enhancements to learning memberships are continuing to build momentum. Improvements

Speaker 3

to

Speaker 2

the onboarding experience and learner expert matching process and the launch of several new products are improving match quality and lifetime value through a more personalized offering. Due to the increased value we continue to incorporate into our learning memberships, we increased consumer pricing during the quarter. When combined with the mix shift to higher frequency learning memberships, average revenue per member per month or ARPAM increased to $335 a 14% improvement on a year over year basis as of 03/31/2025. Coupled with improvements to new customer acquisition, monthly recurring learning membership revenue inflected positively on a year over year basis at the March, a clear indication that our quality of revenue strategy is taking hold. During the first quarter, we implemented tutor incentives that are driving higher utilization of tutoring sessions across both our consumer and institutional businesses.

Speaker 2

Following the adoption of the new expert incentives, are already seeing several positive leading indicators in the learner expert relationship including faster time to first session, more sessions in the first thirty days, more sessions per active tutor, lower tutor replacement rates and higher customer retention, all of which should continue to strengthen our business. During the quarter, gross margins were lower year over year due to the temporary timing differences between the investments we've made in tutor incentives and the price increases enacted for our new consumer customers. As we move throughout the year and mix towards a higher proportion of new consumer customers, we expect to deliver sequential quarterly improvements to gross margin. Our recent streak of strong execution combining product innovation with streamlined processes and systems sets us up to scale more efficiently and accelerate future growth. From a product perspective, we continue to deliver new products at a rapid pace.

Speaker 2

For years, our proprietary AI has powered matching algorithms, adaptive assessments, content creation and the operational workflows to keep our vertically integrated quality controlled marketplace operating. Now returning those same engines outward so learners, families and educators see the benefits in real time through Live plus AI that include a unified experience rolling out across every audience we serve from families purchasing tutoring to K-twelve school districts licensing the platform for their students, expert tutors on our marketplace and even classroom teachers and partner schools. Live plus AI is grounded in a simple truth. Technology is most powerful when it amplifies, not replaces the human bond at the center of learning. By embedding AI tools directly into the learning experience, including AI enhanced tutoring, AI session insights and video playback, twenty four seven chat tutoring by humans or AI, live classes, tutor copilot, and much more, we're giving students hands on exposure to this transformative technology and personalizing their learning.

Speaker 2

Recently, the president signed an executive order titled Advancing Artificial Intelligence Education for American Youth, which calls for integrating AI across k 12 education, training teachers on AI utilization and developing workforce skills for an AI powered future. The executive order validates our existing strategy giving schools added confidence to embrace AI, reducing hesitation, boosting interest and enabling them to better personalize learning for each student while building the AI fluency students will need in the future. During the first quarter, we introduced generative AI capabilities that turned each tutoring session into actionable insights for learners, parents, and educators. Our platform automatically transcribes and summarizes every session highlighting key concepts and areas of strength or weakness and it links it directly to the relevant sections of the recorded video. AI generated summaries are now provided for all sessions providing links to key learning moments during each tutoring session.

Speaker 2

For consumers these insights help learners track progress and gives parents a clear view of their investments value. We've now broadly rolled out these improvements to all consumer customers after seeing higher tutoring session utilization in our testing along with greater than 95% positive feedback rate among parents and students and improved customer retention. For institutions AI generated session summaries are now available for all varsity tutors for school sessions allowing teachers and administrators to gain data driven insights to refine instruction or interventions while benefiting from transparent reporting and clear visibility in the program efficacy. As we move throughout the year, we will deepen our AI capabilities for institutions with dynamic exit ticket generation and advanced cohort level analysis and analytics, aiding district leaders in identifying at risk students earlier and allocating resources more effectively. We also released our next generation AI lesson plan and practice problem generators to create robust customized standards aligned lesson content in seconds.

Speaker 2

These tools are now available to both experts for tutoring and within our paid institutional products to teachers. By automating lesson preparation, progress summaries, and individualized practice problems, our tools can free up substantial time each week for educators. It also helps advance key district priorities such as accelerating learning gains, improving student outcomes and strengthening staff retention. For learners, they benefit by getting access to our robust set of academic resources that provide them with additional support between live sessions. Moving on to our business outlook, we're executing on multiple levers in order to deliver on our path to profitability.

Speaker 2

First, product innovation is enhancing the onboarding experience. In particular, AI session summaries, tutor incentives and higher session frequency learning memberships are improving retention rates in recent cohorts on a year over year basis. Second, price increases are leading to revenue and gross margin improvements in new customer cohorts. As we move throughout the year and mix shift toward a higher proportion of new consumer customers, we expect to deliver sequential quarterly improvements to gross margin and end the year with ARPAM above $370 on a consolidated basis. Finally, by rolling out AI powered productivity tools and software driven workflows, we improved operating leverage and decreased headcount by about 16% since December 31.

Speaker 2

We believe that the recent advances in AI provide us with the opportunity to drive further levels of productivity including the identification of key processes that will allow us to improve both the customer experience and operational consistency while also removing substantial costs. We expect the combination of the above levers will lead to learning membership revenue returning to growth in the second quarter of twenty twenty five. As we move throughout the year, we expect to deliver sequential quarterly improvements in consolidated revenue growth rates and gross margin that we expect will culminate in becoming adjusted EBITDA and operating cash flow positive in the fourth quarter of twenty twenty five. In closing, artificial intelligence is reshaping education and its impact is greatest when paired with the empathy, encouragement and accountability of skilled educators. By bringing our AI capabilities to the forefront through Live plus AI, we are elevating the learner experience, deepening customer engagement and widening the competitive moat we have built over more than a decade.

Speaker 2

As 2025 unfolds, we will expand these capabilities, strengthen relationships across every audience we serve and execute on our path to sustainable profitable growth. And with that, I'll turn the call over to Jason to discuss the financials in more detail. Jason?

Speaker 4

Thanks, Chuck, and good afternoon, everyone. As Chuck mentioned, we made significant progress during the first quarter against the vision we laid out at the beginning of the year. Nerdy delivered revenue of $47,600,000 in the first quarter, above our guidance range of 45,000,000 to $47,000,000 which represented a decrease of 11% year over year from $53,700,000 during the same period in 2024. Consistent with expectations, revenue declined when compared to the prior year period, primarily due to lower number of learning memberships as well as lower institutional revenue. These impacts were partially offset by higher ARPU in our consumer business as a result of a mix shift to higher frequency learning memberships and price increases enacted during the first quarter.

Speaker 4

Additionally, the consumer business experienced higher retention in newer cohorts due primarily to improvements in the user experience and new expert incentives. Learning membership subscription revenue was $37,900,000 representing 80 of total company revenue. As of March 31, active members and ARPAM were 40,500.0 and $335 respectively, which resulted in an annualized run rate of approximately $163,000,000 from learning memberships at quarter end. ARPAM of $335 represented an increase of 14% from $293 as of 03/31/2024 and was up 11% from $3.00 $2 at year end. As Chuck mentioned, monthly recurring learning membership revenue inflected positively on a year over year basis in March, giving us confidence in our expectation that learning membership revenue will return to growth in the second quarter of twenty twenty five.

Speaker 4

Our institutional business delivered revenue of $9,400,000 and represented 19% of total company revenue during the first quarter. Varsity Tutors for Schools executed 90 contracts yielding $4,000,000 of bookings. Our strategy to introduce school districts to the platform and ultimately convert them to our fee based offerings continues to produce results by delivering 34% of paid contracts and 19% of total bookings value in the first quarter. Moving down the P and L, gross profit of $27,600,000 in the first quarter was lower by 24% year over year. Gross margin was 58% in the first quarter, which compared to gross margin of 68% during the same period in 2024.

Speaker 4

The decrease in gross margin was primarily due to investments in our partnership with experts through incentives, coupled with higher utilization of tutoring sessions across both our consumer and institutional businesses. Following the adoption of new expert incentives, we are already seeing faster time to the first session, more sessions in the first thirty days, lower tutor replacement rates, and higher retention, all of which should continue to strengthen our business over the long term. We also expect price increases for new customers enacted during the first quarter of twenty twenty five will yield sequential quarterly improvements to gross margin as we move throughout the year. Sales and marketing expenses for the quarter on a GAAP basis were $15,800,000 a decrease of $1,600,000 from $17,400,000 in the same period in 2024. Non GAAP sales and marketing expenses excluding non cash stock based compensation and restructuring costs were $15,300,000 compared to $16,900,000 last year.

Speaker 4

The decrease in sales and marketing expenses was primarily driven by consumer marketing efficiency gains where we saw customer acquisition cost decreased by $1,900,000 or 19% year over year in the first quarter. As previously mentioned, we also moderated our investments in the institutional business given near term funding uncertainties. We continue to believe a significant opportunity exists in the institutional space and that the product enhancements we are making to the unifying platform will drive growth in future periods. General and administrative expenses for the quarter on a GAAP basis were $28,400,000 a decrease of $3,600,000 from $32,000,000 in the same period in 2024. Non GAAP G and A excluding non cash stock compensation expenses and restructuring costs was $20,700,000 compared to $21,400,000 in the same period in 2024.

Speaker 4

Included in G and A costs were product development costs of $10,700,000 Several new software driven processes and system implementations that when coupled with AI enabled productivity improvements are delivering operating leverage and enabled us to reduce headcount by approximately 16% at the end of the first quarter as compared to 12/31/2024. We believe that recent advances in AI provide us the opportunity to drive further levels of productivity as we continue to scale. Non GAAP adjusted EBITDA loss of $6,400,000 for the three months ended 03/31/2025 was at the top end of our guidance range of negative $6,000,000 to negative 8 million dollars and compared to positive non GAAP adjusted EBITDA of $24,000 in the same period in 2024. Non GAAP adjusted EBITDA performance relative to guidance was primarily driven by marketing efficiency improvements coupled with benefits from headcount restructuring and AI enabled productivity and operating leverage improvements. These improvements were partially offset by lower gross margin due to expert incentives and higher utilization of tutoring sessions across both our consumer and institutional businesses.

Speaker 4

Compared to last year, non GAAP adjusted EBITDA was lower primarily due to lower revenues and gross margin. As of March 31, the company's principal sources of liquidity were cash and cash equivalents of $44,900,000 and we have zero debt. Turning to the business outlook. Today, we are introducing second quarter guidance increasing the low end of the revenue range for the full year and reaffirming adjusted EBITDA guidance for the full year. For the second quarter, we expect consumer revenues will be positively impacted by improvements in new customer acquisition and higher ARPU due to the mix shift to higher frequency learning memberships coupled with price increases enacted in our consumer business.

Speaker 4

We also expect improvements to the user experience and investments in tutor pay rates will drive continued retention improvements. For the full year, we expect a return to growth in consumer revenues as product innovation accelerates and operational improvement initiatives pull through leading to accelerating consumer revenue growth rates each quarter throughout 2025. Institutional revenue reflects the flow through of lower 2024 bookings into the first half of twenty twenty five coupled with a cautious federal and state level funding environment. For the second quarter of twenty twenty five, we expect revenue in the range of 45,000,000 to $48,000,000 For the full year, we are increasing the low end of our revenue range by the first quarter outperformance to 191,500,000 to $200,000,000 Turning to adjusted EBITDA guidance. For the second quarter, we expect recent investments in tutor pay rates coupled with higher utilization in both our consumer and institutional business will result in lower gross margin compared to the prior year.

Speaker 4

As we move throughout the year, we expect price increases for new consumer customers enacted during the first quarter will yield sequential quarterly improvements to gross margin. Full year non GAAP adjusted EBITDA improvements reflect a return to consumer revenue growth coupled with benefits from AI enabled productivity and operating leverage improvements partially offset by investments in tutor pay rates. For the second quarter of twenty twenty five, we expect adjusted EBITDA in a range of negative $3,000,000 to negative $6,000,000 For the full year, we are reaffirming adjusted EBITDA guidance in a range of negative $8,000,000 to negative $18,000,000 As we move throughout the year, we expect to deliver sequential quarterly improvements in consolidated revenue growth rates and gross margin that we expect will culminate in becoming adjusted EBITDA and operating cash flow positive in the fourth quarter of twenty twenty five. This would result in us ending the year with no debt and cash in a range of $35,000,000 to $40,000,000 which we believe provides us with ample liquidity to fund the business and pursue growth initiatives. In closing, thank you again for your time and for your continued interest in our company.

Speaker 4

With that, I'll turn it over to the operator for Q and A. Operator?

Operator

Our first question is from Jason Tilchin with Canaccord. Your line is now open.

Speaker 5

Good afternoon. Thanks for taking my question. Last quarter you talked about the focus for varsity tutors for schools sort of shifting to paid access to those institutional customers. I'm wondering if you could provide a little bit of an update on what steps you've taken thus far, the progress that's been made and how you expect the bookings pipeline to trend there given the comments in the shareholder letter around sort of more cautious funding environment?

Speaker 2

Sure. Thank you and good question. This is Chuck. So I'll start off. So kind of reflecting on the quarter.

Speaker 2

So we had a very strong quarter. I would call it perhaps the most productive period in our company history from a product innovation and execution perspective. So we exceeded revenue. We exceeded adjusted EBITDA. We exceeded active members.

Speaker 2

But more importantly than that, we made pretty tremendous progress on advancing our Live plus AI product road map and shipping features to customers that are now pulling through to increased retention, increased engagement, enhancing the overall capabilities of Tutors. So we're arming them with digital superpowers with Tutor Copilot. Just shipping and bringing to bear the products, in particular, the AI capabilities that, in many cases, were powering the marketplace behind the scenes for now are front and center. And the benefits not only pull through to the consumer business, but also to the the institutional business. So those features like AI session summaries, like the ability to look at the performance of a given cohort over time, like the teacher productivity tools, all of those are resonating with school districts.

Speaker 2

And I think we're very, very encouraged by the interest and appetite for those specific capabilities. And it is a very different, both funding environment, but also environment as it relates to interest in an appetite for the application of AI for both teachers and students. And that is something that is very encouraging. So thinking back to the 1,200 school districts or so and 5,000,000 students on the platform, it drove a significant amount of bookings and upsell in the quarter. But it also is then leading to conversations now where we're talking about our new Live plus AI paid platform that we think will allow for us to continue to monetize those different school districts.

Speaker 2

So in order to get access to the paid platform and some of these new capabilities, you actually have to upgrade from the free offering to the paid offering. So the free offering will persist. We're driving engagement there. We think we're adding a lot of value. But to get any of the new capabilities, you need to then upgrade to the Live plus AI paid platform.

Speaker 2

So the initial signals are really positive, and I think we're very encouraged.

Speaker 4

The only thing I'd add, mean, certainly, had $4,000,000 of bookings during the quarter. That was in line with expectations that we had set out at the beginning of the year. The pipeline, on a looking forward basis, continues to, I would say, exceed my expectations at this point in the year, I think which is reflective of all the AI improvements that we've made into the platform as well as the structural improvements to the marketplace that have substantially increased, the logistical capabilities, the reliability of the platform as we service hundreds of school district partners. So overall, I think cautious, but optimistic is what I'd say about, the institutional side of the house. Yeah.

Speaker 4

And we we really

Speaker 2

haven't seen any of those headwinds to date, but we're obviously very cognizant of the headlines. So I think we're taking a bookings pipeline that is exceeding our expectations and just discounting it for the unknown. But in terms of what we've seen on the ground here from customers, it's all very encouraging.

Speaker 5

Super helpful answer. One follow-up. You talked about in the beginning of your answer and also in the shareholder letter, all these different products that you've been rolling out. And I'm curious more on the consumer side, like out of all these different new features, especially the AI ones, which are you most excited about in terms of driving improved engagement and retention as we move through this year and go into 2026?

Speaker 3

Well, I I'd say some of

Speaker 2

them are different portions of their life cycle journey, wherein in some cases, we've actually proved out the incremental number of bits you can get by exposing a new customer or an existing customer to a certain feature. And, you know, in the case of the AI summaries, they're both getting better sequentially over time. But even based on the product as it exists today, it we can already demonstrate that it's leading to more engagement. We just need to get more customers in front of it, and so we're integrating it more deeply throughout the experience. And in that case, that's sort of a, what what internally we would call kind of a get the best exercise where the basis points of of when are already identified, and we're just running it throughout the experience, while enhancing it.

Speaker 2

And so we're pretty excited about that dynamic and the ability to turn that into a predictive analytics platform over time that really gives key insights and kind of be the brain of the operation, and the the feedback continues to be outstanding. A number of the other capabilities that we're building in, like Tutor Copilot or earlier, where the pause the signals are very positive. But in terms of, like, directly leaking into financial impact, you know, I I think we're it's like less of a math problem right now, although we think it will very quickly turn into true superpowers in real time that augment that experience in ways that do lead to pretty pretty meaningful improvements in the session delivery and, thus, engagement, retention, lifetime value extension, etcetera. So that one's just a little bit earlier. But in general, I think the pace at which the products are shipping is much faster.

Speaker 2

And it's also just encouraging that there's been a fundamental change in terms of both consumers and school districts valuing those extra capabilities. And the kind of combination of live and AI is something that, I think we've been happy to see does not require much explaining. They're both on surface value taking the kind of combination thereof as one plus one equals three.

Speaker 5

Great. Very helpful. Thank you very much.

Operator

Our next question is from Yi Fu Lee with Cantor Fitzgerald. Your line is now open.

Speaker 3

Thank you for taking my question. Congrats, Chuck and Jason, for a strong start to 02/2025. So, like, Chuck and and or Jason, I was wondering if you could just give us a little bit more on a macro. It it doesn't sound like it's impacting Nerdy at at all versus, you know, the other ad tech firms that reported a couple of weeks ago. That's the first part of the question.

Speaker 3

It's like, you know, what is it that, you know, you feel that Nerdy is much more confident, right, in terms of whether the guidance, etcetera, that, you know, macro is not impacting Nerdy? And secondly, Chuck, on the obviously, last quarter, you talked about AI for human interaction, and this quarter is AI plus. You know, obviously, there's a lot of new products out there. We've seen better metrics in terms of average revenue per member, annual run rate inflecting up positively. Similar to, like, the last question from the previous analyst, like, was wondering, like, which of these products would you say was monetized earlier in the life cycle versus later?

Speaker 3

And then I also have a follow-up for Jason on the financials.

Speaker 2

Sure. So first on the on the macro side, we've been doing this a while. I've been doing this eighteen years since I founded the business. And at no single point have we been able to connect any sort of macroeconomic factors to performance of the business. And that is certainly true now where the interactions that we see with our customers look normal, healthy.

Speaker 2

That also extends to just demand for tutoring overall, normal, healthy. And from our perspective, it feels like we're in control of our own destiny. And as we improve the product, we're rewarded with deeper engagement and better retention from our customers. So I can't speak for other businesses, but on our side, everything looks normal and healthy, and we feel good about the macroeconomic environment and how our customers are performing. Separately, as it relates to the different AI capabilities, maybe to clarify one thing, AI for HI, you know, continues to be our underlying philosophy, artificial intelligence for human interaction.

Speaker 2

We simplified it to the consumer with live plus AI, and it's also the name of the product name that we're we're bringing to bear, like, putting in front of both consumers and institutions. So the paid platform for school districts is also branded Live plus AI. So it's both a philosophy and, you know, a actual product. So it's a comprehensive learning solution that encompasses our live offerings, so live recurring tutoring with a subject matter expert over time, you know, typically once a week, twice a week as as most of our customers do, spanning the 3,000 subjects on our platform, as well as about a hundred livestream classes from expert instructors every week. We have a artificial intelligence tutor, AI tutor.

Speaker 2

We have diagnostic tests that are adaptive in nature. We have practice problems. We have, you know, a whole host of other different capabilities, and we also include many of the ways that we augment the live experience like tutor copilot and, like, AI session summary. So that's what we mean when we talk about Live plus AI. So it's both the philosophy and the product.

Speaker 2

And we're actually trying to simplify it. To your point around complexity, we're simplifying it. And it it that kind of combination, I think, is resonating. In terms of what hits when, I mean, it's it's the holistic nature of bringing it to bear and then augmenting the sessions in ways that add value. So we're trying to make sure that the tools and capabilities we built are as integrated as possible and most likely to impact student outcomes, impact student engagement.

Speaker 2

So we're threading those throughout the experience. On the school district side, we're trying to make sure that both the administrators and the teachers can get, you know, very quick value that allows for them to save time and then get insights that allow for them to better direct instruction.

Speaker 3

Okay. Chuck, can I just follow-up one, quick one before I turn it over to Jason on the financials is, like, out of all these AI products, right, is there one particular one that, hey? The feedback was so positive. Hey. I really like your transcription service.

Speaker 3

I you know, copilot, you you spoke about that. It might be a little bit later events, right, that you know, for monetization. Right? Is there any particular product that's like, woah. You know, like, this is this is this is game changer.

Speaker 2

Sure. Yeah. So one customer facing product or feature that is very material has been the AI summaries where we're transcribing all of the tutoring sessions. We're then summarizing them. We're then analyzing them to give insights and recommendations, and we're then able to provide those to parents and students so that students can immediately jump to the the exact moment.

Speaker 2

So it's actually auto tagged as of recently where the exact second mark that different concepts were discussed. So you can actually click on a link for a particular topic and jump to that moment So you don't have to watch sixty minutes of video to find it. You can actually jump to that exact moment. So it's both productive for students.

Speaker 2

And then the parents love the fact that they can find out what happened in the session and that they're they're, in fact, investing their money wisely in tutoring and that the student is benefiting from it. So rather than getting a short answer like, how did your tutoring session go? Oh, it went fine. Now they can get deep insight into how to best support the students themselves and then also to the extent it's working. And so that has been, like, remarkably positive.

Speaker 2

And, you know, we think it can be a a really killer feature that continues to get better and more immersive and more insightful over time, and it's an area of where we're spending a lot of time on the product side. But I'd expect for that particular one to, you know, be one of several examples of big winners.

Speaker 3

Got it. Got it. Thanks for the extra color, Chuck. Really appreciate. And then, Jason, flipping over to the financial side, you talked about leveraging AI for internal use, meaning, like, to get more operational efficiency.

Speaker 3

Obviously, we see this across the, SaaS software space where, you know, people are using AI, you know, to leverage, to gain more efficiency. You know, 60% reduction, but, like, in terms of how much more can you extract out of it, and, I guess, like, what are the areas you're taking, you know, the cost out? And, Jason, how should we expect over the medium or longer term, to think about, like, EBITDA or free cash flow breakeven? And that's it for me. Thank you, Chuck and Jason.

Speaker 4

Yeah. Good question, Yi. I'd say we're maybe halfway through our journey as far as applying AI and machine learning to our operations. You know, specific use case is the matching algorithms. We've continued to see improvements in the systems taking over the majority the vast majority actually at this point of all the student, and expert matches, on both the initial placement, but then also the any downstream replacements or additional subjects covered, which leads to happier customers.

Speaker 4

That leads to higher lifetime values over time. But when you think about, like, a lot of the monotonous processes around customer service, those are also all being automated. Let me if you if you think about customer service and and chat, that that is also being automated before we get to a live human to answer any questions that you may have. So there's there's still a lot of opportunity there. I would say, you know, as you think about the year the year in front of us for 2025, the cost side of the house continues to to track or exceed expectations by being lower than than than what we were targeting.

Speaker 4

And then I think what's most important as you think about '26 and '27, we'll be able to continue to scale the business without a commensurate increase in headcount to support that growth, which is really what's exciting as we think about the year ahead.

Speaker 3

Yeah. So we're we're making more

Speaker 2

progress on efficiency related initiatives than expected. Like, maybe to make it more real in you know, when you do a better job matching a student and a tutor, you then and this happened in the first quarter. We saw our automated matching percentages go way up. We saw the quality of the match go way up. We saw the amount of times a a customer requested a different tutor go way down, and we saw all of the leading indicators of retention start to improve, like the time to their first session and their satisfaction rates and all the other things that, you know, then bode well for that entire customer journey and putting them on a happy path to be a very high LTV customer with very low customer service costs over time.

Speaker 2

And so that's something that we feel like we're making tremendous strides at that is aided by AI.

Speaker 3

Okay. Thank you very much, Chuck and Jason. Extremely, thankful for your color.

Speaker 4

We'll talk soon.

Speaker 3

Thank you.

Operator

Our next question is from Andrew Boone with Citizens. Your line is now open.

Speaker 6

Hi. This is Brianna on the line for Andrew Boone. Thanks for taking my questions. So just can you walk us through how the timing gap between two year investments and February price increases affected gross margins in the quarter? And as there is a mix shift towards higher frequency learning membership, how should we be thinking about gross margin improvement through the year?

Speaker 6

And then, can you just speak to future investments in AI? Are there areas of automation or product enhancements that remain untapped, especially as you think about AI impacting the learner experience over time?

Speaker 4

Sure. I'll speak to gross margin first, and then I'll let Chuck talk about additional AI opportunities. Look. We expected and guided the fact that new expert incentives would result in lower gross margins in q one and for the full year. That is a temporary timing difference between the investments we made in tutor incentives and the price increases enacted for new customers.

Speaker 4

And as we it's been very intentional that we're investing in these tutor partnerships on the marketplace. It's a strategy that reinforces tutor and customer satisfaction. It's driving retention and ultimately will support revenue growth. As we move throughout the year and we mix shift towards a higher proportion of new customers, we expect it to deliver sequential quarterly improvements to gross margin. And that will ultimately culminate in 2026.

Speaker 4

We'll get back to historical margins above 70%. So we feel really good about the investments. The benefits we're seeing on the tutor side are pretty pronounced. We're able to shift significantly more work to the highest quality tutors, which will continue to have downstream benefits as we move throughout the year.

Speaker 2

Yeah. And then may maybe just to clarify one point. So we applied we tested this in the fall. We started applying it broadly in December. And what you're you're now seeing is that the tutors are aligned to driving lifetime value and retention.

Speaker 2

So the deeper they get in a given customer relationship on a per customer basis, they get paid more. And what was really exciting to see in the first quarter was that you started to see retention inflect way up, you know, in combination with consumer product and some of the other incentives, some of the other optimizations and improvements we made around the matching side and mixing towards a higher quality tutor, all else being equal. But then every single kind of cohort of tutor, all else being equal, started improving their time to their first session, their time to their second session, their time to their third session. And all of a sudden, you started seeing customers get deeper and deeper in the relationship and satisfaction going up. And you saw that really across the board.

Speaker 2

And that price that that increase in compensation, which is driving some of the retention inflection, is was applied to all customers. Starting in February is when we rolled out new pricing, higher pricing for new customers that we think is appropriate given the enhanced value on the platform. And for those new customers at the higher pricing, their gross margins are already at a higher, healthy level that is in the, like, kind of mid to high 70s range, which is kind of consistent with what we've seen before. And so as you get deeper in the year with each subsequent quarter, you're mixing towards a higher proportion of customers that came in on that new pricing and you're benefiting from the retention associated with the alignment between the tutors on the platform and, you know, the plat the marketplace itself us as the company. And so what's kind of exciting, though, is the second optimization that occurs.

Speaker 2

So the first optimization is what we described. Everybody's more excited about the work, and they start doing a better job, all else being equal. The second optimization is that now the best tutors on the platform that drive the highest customer satisfaction engagement, the highest LTV are now absorbing more of the work. And so what you're seeing as we get deeper into the semester is that we're able to mix up the tenure and quality of the average match, which we watch closely, and inflect it in a way that traditionally would not have been possible. That's something that bodes really well for lifetime value down the road.

Speaker 2

So we're pretty excited about this as kind of a new vector. It required doing a bunch of really boring infrastructure work last year related to invoicing and scheduling and other aspects that are really important to a marketplace operation, where we had some technical debt that we now have, started to really address and now get wins on. So we're very encouraged by that dynamic.

Operator

Our next question is from Greg Gibas with Northland Securities. Your line is now open.

Speaker 7

Great. Good afternoon, Chuck and Jason. Congrats on the results here. Wondering if you could speak a little more to the monthly recurring revenue inflection that you saw in March, maybe how it compared to January and February. Are you able to maybe give some context on the monthly growth dynamics?

Speaker 7

And I guess just a follow-up too on kind of maybe relative to your internal assumptions and expectations where you saw the upside in the quarter?

Speaker 2

Sure. So a year ago, that number inflected negative due to churn associated with lower frequency offerings. We spent a good portion of the time over this past year really nailing the foundation, improving all aspects of that consumer onboarding in the digital experience. We also shifted toward the more recurrent, higher frequency customer base. And then, you know, throughout this most recent quarter, started making real strides in the matching algorithm and tutor incentives and, you know, a couple of other levers that we did that that weren't present last year that were present in the quarter and will continue to, hit and drive, you know, further improvement like AI session summaries.

Speaker 2

So in March is when the the MRR flipped positive. So effectively, the consumer earning membership business went from being a year over year, headwind to total company growth to now being a tailwind and something that should both accelerate year over year with each subsequent month or quarter throughout the year and also drive elevated year over year growth relative to last year. So I'd say we're we're we feel really good about that dynamic, and we're then investing in a way that we think can lead to continued improvement throughout the course of the year and perhaps provide real upside come next fall.

Speaker 4

And then maybe just to talk about the path to profitability here. We're executing across the three levers that we laid out for the year: product innovation and tutor incentives. They're leading to improved customer experience and retention in recent cohorts. Price increases that Chuck mentioned will have us ending the year with ARPU above $370 on a consolidated basis. We significantly reduced headcount during the quarter and continue to believe that there's additional opportunity to drive further levels of productivity as we scale.

Speaker 4

And then as we move throughout the year, kind of that sequential quarterly improvements in consolidated revenue growth rates and gross margin that we expect will culminate in becoming adjusted EBITDA and operating cash flow positive in the fourth quarter of twenty twenty five. So all of this coming together according to plan as we expected and laid out when we initiated guidance for the year and we're excited about the execution that we're seeing across the teams.

Speaker 7

Great. That's helpful. And wondering, I guess, as a percentage maybe of your learning member base, what percent is maybe paying the new increased pricing level that you implemented at this point? And the path to that $370,000,000 plus in ARPU, should we think about that kind of straight line on

Speaker 1

a quarterly basis to get there?

Speaker 4

Maybe I'll start with the second part. So $335,000,000 was the ARPU at the end of the first quarter. That's up 14% year over year and it's up 11% from the end of twenty twenty four, which was $3.00 $2 As we move throughout the year, you should expect second quarter ARPU to be $345 at the June. At the September, it would be $360 and at the end of the year, would be $370 So we continue to believe that the prices are appropriate. They represent the value that we're providing to customers on the platform, and we feel good about them as we move throughout the year.

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Key Takeaways

  • Strong 14% year‐over‐year increase in average revenue per member per month (ARPAM) to $335 and a positive inflection in monthly recurring revenue in March demonstrate the success of higher‐value learning memberships and pricing actions.
  • Launch of Live + AI capabilities—especially AI‐generated session summaries with auto‐tagged video links—has driven >95% positive feedback, deeper engagement, and accelerated institutional interest in AI‐powered instruction.
  • New tutor incentives are yielding faster time to first session, higher session frequency, lower tutor replacement rates and improved customer retention, though Q1 gross margins were temporarily pressured by the incentive investment timing versus price increases.
  • Operational efficiency improved via AI‐driven matching algorithms, reduction of headcount by ~16% since year‐end, and software‐enabled workflows, setting the company on track to be adjusted EBITDA and operating cash flow positive in Q4 2025.
  • In the institutional segment, Varsity Tutors for Schools closed 90 contracts yielding $4 million in Q1 bookings, and the rollout of a paid Live + AI platform aims to convert free‐tier school districts despite a cautious funding environment.
AI Generated. May Contain Errors.
Earnings Conference Call
Nerdy Q1 2025
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