This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Hello all and welcome to the Nerdy Fair Quarter 2021 Earnings Call. My name is Brica and I'll be today's event specialist. Following the presentation, we will have a question and answer session. If you would like to register a question, please press star followed by the number 1 on your telephone keypads. I would now like to hand the call over to your host, Marta Nicholls. So Marta, please go ahead.
spk07: Good afternoon, and thank you for joining us for NERDI's Third Quarter 2021 Earnings Call. With me are Chuck Cohn, Founder, Chairman, and Chief Executive Officer of NERDI, and Jason Pello, Chief Financial Officer. Before I turn the presentation over to Chuck, I'll remind everyone that this discussion contains forward-looking statements, including but not limited to expectations with respect to NERDI'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 NERDI 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. Please refer to the disclaimers in today's press release announcing NERDI's Q3 results and the company's and PPG PACE Tech Opportunities 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 press release for reconciliations of these non-GAAP measures. With that, let me turn the call over to Chuck.
spk05: Chuck? Thanks, Marta, and thanks to all of you for joining us today to discuss our third quarter results. We're excited to speak with you for the first time as a standalone public company, having completed our transaction with TBG Pace Tech Opportunities and our listing on the New York Stock Exchange in September. As we shared in today's press release and shareholder letter, the future is bright, and we're looking forward to this next chapter and the capital we now have to drive the shift from offline to online learning. I believe it's a once in a generation opportunity, and I am looking forward to you joining us on this journey. NERDI's mission is to transform how people learn, and we believe that innovative technology can make all the difference. We seamlessly connect experts and learners in any subject, anywhere, anytime, and make learning more personalized and accessible. Our business continued to grow in Q3 as we executed our strategy of subject expansion, format expansion, and product innovation. We experienced record bookings in the quarter of $44.5 million as schools returned to classrooms, up 32% year over year. And we saw continued strong performance in our key operating metrics during Q3, with active learners up 36%, online sessions jumping 45% year-over-year, and active experts increasing 23% year-over-year while maintaining our sessions per active expert. In July and August, we saw a return to more normal seasonality, which resulted in slower than expected consumption, followed by a dramatic acceleration in bookings in September after all schools returned to in-person learning. We experienced a return to more normal summer seasonality in Q3, as easing COVID restrictions permitted families to take much needed vacations. This was quite a bit different from the 2020 period where we experienced higher than usual consumption in the summer at a time when lockdowns were common and summer vacations were skipped. This change in consumer behavior was different from what we envisioned at the beginning of the year when COVID was peaking. The relative consumption of our services during the summer of 2021 ultimately looked more like 2017, 18, and 19, while higher than usual consumption in the summer months of 2020 proved to be an outlier. Since students returned to school in September, we've seen record bookings driven by consumer demand for our core one-on-one products. As students return to classrooms nationwide, bookings in our direct-to-consumer business, that is our historic one-to-one-in-classes business, for September and October combined have grew at 31% compared to those same two months a year ago. Our total bookings, including our new K-12 institutional strategy, grew 63% during September and October. And we continue to see comparable bookings growth in November. Revenue grew 19% in the third quarter to $31.3 million. As a reminder, revenue is primarily driven by consumption in the period and utilization of hours by customers the increased bookings occurred later in the quarter and those higher levels of bookings are now starting to get consumed as we enter q4 based on the significant demand we are seeing in both the direct-to-consumer and in our direct-to-school initiatives we made the deliberate decision to pull forward investments in sales, expert supply, and product development to make the most of this sizable opportunity heading into 2022. If you look at where we experienced accelerated demand once summer ended and schools all had resumed, it was basically all across key areas of the business. In our direct-to-consumer offerings, demand was up across the board, including K-12, college, and professionals. and we are seeing an incremental boost with the addition of our new K-12 institutional strategy, which I'll touch on more in a moment. Last year, when schools went virtual, a lot of schools elected to assign take-home exams were let pass-fail and stopped assigning traditional letter grades to assess student performance. This year, schools are almost entirely back to in-person instruction and are evaluating students again and assigning grades. This has led to heightened levels of consumer demand for supplemental support, including tutoring among both K-12 and college students. Our professional testing offerings have also continued to experience robust growth. The increased demand trends we've seen, coinciding with the return of a new normal in-classroom environment, validate a long-held understanding we have about our business. When learning and outcomes matter to students, our business accelerates. The more that outcomes matter, the better we do. And the recent bookings results are the logical and expected result of grades and test scores battering again the students. As we approach the end of 2021, we have increased confidence that the favorable consumer demand trends and the demand we're seeing from our direct-to-school initiatives will persist into 2022. Given these trends, as well as our growth investments, we have increased confidence in our full-year 2022 revenue targets. We continue to innovate in Q3, investing in the expansion of NERDI's product portfolio with our launch of Varsity Tutors for Schools. This new product leverages our platform capabilities to offer our online learning solutions directly to K-12 school districts and states. Institutions can seamlessly deploy our educational solutions across broad populations of students in an efficient manner. This initiative offers the opportunity to further our mission and have an enormous impact by expanding access to high-quality supplemental online learning solutions to broader student populations. And the need has never been greater. We've received a strong reception for Varsity Tutors for Schools that's translating into early success. with 47 contracts with partners with a one-year value of nearly $10 million signed since our launch in August. This initial traction has been above our expectations and gives us confidence that we are well-positioned to help schools at a broad scale and that they appreciate the partnerships we can bring to bear to help address COVID learning loss. We are excited about this effort and believe that over time, it can be as big as our direct-to-consumer efforts. The capabilities of this new K-12 offering represent the beginning of an institutional go-to-market strategy that will allow us to serve learners through many organizations, including schools, universities, businesses, and others. We view partnering with these institutions to offer a broader learning platform as a service as a long-term opportunity to help improve the way that supplemental learning is administered. As an example of how this shows up in our new K-12 offering, many schools are adopting a small group approach, specifically with one expert coaching up to five learners per session. To address this need, we rolled out new functionality that leverages our technology capabilities to assess, identify, and then group students with similar needs based on adaptive diagnostic testing results aligned to a specific state or Common Core standards. a critical functionality for schools and institutions. The 1 to 5 learning format builds upon our current class and tutoring formats. It integrates adaptive testing and other content into a single UI on our proprietary live learning platform, along with new administrator tools and integrations with learning management and student information systems. Our existing learning solutions previously offered almost exclusively via direct-to-consumer model, now meet the needs of a broad array of audiences and institutions. Our investments in platform and software-driven capabilities will serve as building blocks to quickly assemble new solutions, making it possible to efficiently enter new addressable markets, starting with our direct-to-school initiative. In addition, the American Rescue Plan provides $123 billion to help K-12 schools reopen safely, and at least 20% is earmarked to help address pandemic-related learning loss over the next several years. This is significant funding, and live tutoring has proven to be one of the most effective interventions to address learning loss. The Department of Education recommends high-dosage tutoring as an appropriate strategy for federal funding. We believe this funding is an important jumpstart for schools in the long-term adoption of third-party learning solutions and that we are uniquely positioned to help schools administer, measure, and optimize the benefits for their students. COVID learning loss is real and will take many years to remediate. A recent McKinsey study on COVID in education shows that on average, students have fallen five months behind in mathematics and four months behind in reading. These losses will take significant time and resources to address, and NERDI's Learning Platform as a Service offering provides a range of necessary solutions for schools to help them immediately address this urgent issue. Turning briefly to some of our growth initiatives in our direct-to-consumer business, during the third quarter of 2021, We also continued to expand our large format classes with 55 new STAR courses. To date, we provided millions of hours of free live online instruction to hundreds of thousands of learners. The STAR course format has served as a powerful tool to build our brand, expand reach with new audiences, and drive repeat engagement across multiple formats. In parallel, we invested in expanding subject breadth and the frequency of our small group class offering to drive growth and reach new audiences, which resulted in small group class revenue increasing approximately 94% year-over-year during the third quarter. And beyond introducing new subjects, formats, and products, we've continued ongoing investments in AI and improving match quality as our personalization capabilities remain critical to differentiating how we can help learners and enhancing the online experience of our platform. These investments power the network effects in our business and have helped us attract, retain, and drive engagement among both learners and experts. We remain confident in the underlying trends driving demand for our services. The long-term transition from offline to online learning, the large and growing addressable market, and our ability to scale and innovate at a rapid pace to deliver solutions that meet learner needs in any subject, anywhere, and at any time. With that, I'll turn the call over to Jason to discuss the financials in more detail. Jason?
spk06: Thanks, Chuck, and good afternoon, everyone. As Chuck noted, our business continued to grow rapidly in the third quarter as we executed on our subject expansion, format expansion, and product innovation growth strategies. We experienced record back-to-school performance in our direct-to-consumer business And importantly, we launched our K-12 institutional strategy with the introduction of our new Varsity Tutors for Schools product suite. We made targeted investments to support our institutional strategy, including the build-out of our institutional sales team and growth in our tutor operations and supply functions to support increased demand and ensure strong execution for our school's product. Consistent with our forecast, we continue to invest in hiring new talent across engineering, product, marketing, and sales. And we continue to believe these additions will allow us to drive sustained growth and innovation for years to come. We also continue to invest in both the quality and frequency of our free STAR courses, which allow us to provide exceptional value to learners, drive engagement across existing users, and increase awareness among new learners. Turning to the financial results. First on the top line, we continue to see results from our investments in growth and innovation. we experienced record bookings in the quarter of 44.5 million as schools returned to classrooms up 32% year-over-year. Revenue of 31.3 million yielded 19% growth year-over-year, demonstrating continued demand for our offerings across all of our academic audiences, from K-12 through high school and college, as well as significant interest in our professional offerings. Year-to-date revenue of 98.6 million increased 39% year-over-year. Summer seasonality in 2021 had a greater impact on Nerdy's operating and financial results than in previous years because demand in the prior year during the summer of 2020 was different from historical patterns. Like many companies, we experienced higher than usual demand last summer in 2020 when lockdowns were common and most summer vacations were skipped. This year, during the summer of 2021, more families took a much needed break from academics, traveling and spending more leisure time outside resulting in consumption patterns more in line with seasonality in the years before COVID. As students return to school this fall, demand for our services has increased significantly year over year, a trend we've seen continue into October and early November. This trend can be seen across several operating metrics, including tutor inquiries, which were up 36% on a combined basis in September and October, and accelerating bookings growth during each month throughout the back-to-school period. As Chuck mentioned, During September and October, bookings including our new Varsity Tutors for Schools offering grew by 63% on a combined basis, driven by strength in our direct-to-consumer offerings across K-12, college, professional, and the addition of our new K-12 institutional strategy. Since the beginning of August and through the end of October, Varsity Tutors for Schools has contracted with 47 school districts for an aggregate annual contract value of nearly $10 million. Moving down to P&L, Gross profit of $20.7 million increased 15% year-over-year during the third quarter. Year-to-date gross profit of $65.3 million increased 40% year-over-year. Gross profit increases were driven by the adoption of one-to-one online learning, expansion across more subjects, more formats, and more consumer audiences. Gross margins of 66% in the third quarter reflect continued investments in the launch of new class products and further testing of subscription offerings. Sales and marketing expenses for the third quarter on a GAAP basis were $18.8 million, up $5.5 million versus the same period in 2020. Non-GAAP sales and marketing expenses, excluding non-cash stock-based compensation, were $16.1 million, or 52% of revenue, compared to 50% of revenue in last year's third quarter. We made investments in establishing and growing our sales organization to support our K-12 institutional strategy and investments in marketing to support learner acquisition and bookings. Our investments in automation and AI continue to provide us with operating leverage. We invest in expanding new marketing vehicles, including star courses, our free celebrity labs, live large group classes, and new advertising channels, including continued testing across television to drive brand awareness and reach. As a reminder, marketing expenses will fluctuate from quarter to quarter based on consumption patterns that drive revenue levels, seasonality, and the timing of our investments in new marketing activities. General administrative expenses for Q3 were $59.9 million. It included significant one-time transaction costs and non-cash stock-based compensation charges related to the closing of our transaction with TBG Pace in our public listing in September. Excluding these items, non-GAAP G&A expenses for the third quarter were $17.8 million, or 57% of revenue, compared to $9.4 million, or 36% of revenue, in the same period in 2020. Consistent with our forecast, we moved quickly to bring in new talent to drive innovation and growth. We made targeted investments in new product development, including our K-12 institutional strategy. We also invested in tutor operations and expert supply to bring more tutors on board and prepare for substantial back to school demand. During the third quarter, we reported a net loss of $57.7 million versus $7.5 million in the third quarter of 2020. excluding non-recurring items including transaction costs, debt repayment and extinguishment, mark-to-market derivative adjustments, and non-cash stock comp expenses. Adjusted net loss was $14.7 million for the third quarter of 2021 versus $5.9 million in the third quarter of 2020. NERDI reported a non-GAAP adjusted EBITDA loss of $11.7 million in the third quarter of 2021. compared to a non-GAAP adjusted EBITDA loss of $3.2 million in the same period one year ago. Reconciliations of non-GAAP measures to their most directly comparable GAAP financial measures are included in our earnings release. As Chuck mentioned, we completed our business combination with TPG Pace on September 20th, and Nerdy Common Stock New Orleans started trading on the New York Stock Exchange the following day. As part of the transaction closed, we paid off all outstanding debt, including repayment of our previously fully forgiven promissory note with the Small Business Administration in October. The company now has ample liquidity to opportunistically invest and operate against our plan, ending the quarter with cash and cash equivalents of $170 million, putting us in a position of strength as the market for supplemental learning expands and quickly shifts from offline to online. In summary, our results reflect continued strength and validation of our growth strategy. we are focused on growing our business via subject expansion, format expansion, and product innovation. Back-to-school bookings coupled with accelerating adoption of our K-12 institutional strategy provides strong momentum heading into the fourth quarter in 2022. As Chuck mentioned, we have increased confidence that the favorable consumer demand trend and the demand we're seeing from our direct-to-school initiatives will persist into 2022. Given these trends, As well as our growth investments, we have increased confidence in our full-year 2022 revenue targets. We are providing the following guidance updates. For the fourth quarter, we expect revenue in the range of $40 to $43 million, up 25% at the midpoint from $33 million in the year-ago quarter and consistent with the forecast in early 2021. For the full year, we expect revenue in the range of $139 to $141 million, above the forecast provided in early 2021, and up 35% at the midpoint versus $104 million in 2020. For the fourth quarter, we expect an adjusted EBITDA loss in the range of $4 to $6 million, reflecting continued investments in the build-out of varsity tutors for schools, expert supply, and new talent to support our growth. Additionally, we are well capitalized and expect to continue to invest in growth and innovation for the foreseeable future, as we're seeing strong returns on these investments. Thanks again for your time, and I'll turn the call back over to Chuck. Chuck?
spk05: Thanks, Jason, and thanks again to all of you for joining us today. We're really pleased with the pace of innovation and product evolution at Nerdy. We're excited that schools have been enthusiastic about partnering with us to make delivery of supplemental learning more effective and efficient on behalf of students. Our direct-to-consumer business is growing really well, and we're energized by the opportunity to help many more students and build another major growth factor with our new institutional strategy. Let's turn the call over to the operator and get started with Q&A. Operator?
spk09: Thank you. If you would like to ask a question, please press star followed by the number 1 on your telephone keypads now. If you change your mind at any time, please press star 2 to remove the question. We have the first question on the phone lines from Doug Anness of J.P. Morgan. So, Doug, I've opened your line.
spk04: Thanks for taking the questions. Something you could talk a little bit about varsity tutors for school and just in terms of revenue recognition and just how to think about the lag between bookings and revenue and how the timing kind of plays out there as you head into 4Q and if that leads into the question of whether you can help us bridge a little bit kind of the significant sequential revenue growth that you're forecasting from 3Q to 4Q. And then sticking with the school initiative, what are the key investments that you need to make around that business? Thanks.
spk06: No problem, Doug. Thanks for the call and thanks for joining us today. We believe that trends in bookings can provide useful color in understanding the future business momentum Recent booking trends are strongly an indicator of the growth in the business, so we'd expect to see consumption pull through beginning in Q4 and into Q2. If you look at historical consumption patterns, the majority of bookings pull through to revenue over the subsequent six months, once students are matched with experts and begin to consume. And then specifically, as it relates to varsity tutors for schools, what we've seen there is that we had some early adopters execute contracts with the company, and those schools are just now starting to consume and set up the sessions with their students. So we would expect that to have some impact in Q4, but a significantly larger impact in 2022.
spk04: And anything just in terms of... investments that you may need to make in terms of the school initiative. And maybe if you could talk a little bit about just kind of the sales process there or just kind of the go to market for how some of those deals get closed.
spk05: Sure. So this is Chuck and we have we've been building out an enterprise sales strategy over the course of the last four months and have significantly built out that team and go to market strategy. And it is now starting to work effectively, drive real results as evidenced by bookings, and is turning into what we believe is a replicable playbook. And so we're already bearing the cost of, you know, a kind of midsize enterprise sales organization as well as investing in customer support. And while we would anticipate increasing the headcount associated with this initiative, given the strong results we're seeing, you know, we feel like that we're already bearing, you know, a significant amount of the cost. And as some of those bookings come through and start getting recognized as the programs go into effect, you know, we think that we're right now seeing a pretty attractive return on investment in a relatively short time frame. So in the near term, costs will go up, but we, as Jason said, actually expect that gap revenue recognition will start to flow through in a material way in Q1 as those programs go live. So some of them are already live. They're going well. We're excited by the progress. and expect that they'll have a material impact or could have a material impact on the total number from a gap perspective in Q1.
spk04: Thank you.
spk09: Thank you, Doug. We now have the next question from Mario Loon of Berkeley. So Mario, please go ahead when you're ready.
spk02: Great. Thanks for taking the questions and congrats on your first quarter as a standing owner of the company. A couple more questions on the varsity tutors for schools. Any more details you can provide on how you guys started that product suite? Is it correlated directly with the $123 billion COVID release funding? Like, for example, was that $10 million that those districts are contracted with was that you know using that funding and then secondly can you talk about a bit about the cadence of adding these contracts uh with is it mostly before the academic school year or is it expected to continue to pick up contracts throughout the calendar year thank you sure thanks maria so the way that we think about it is um there's so there are a variety of different
spk05: needs that schools have. Schools obviously have students that are experiencing significant learning loss, as we said before in the prepared remarks. And they also have a variety of other challenges right now related to everything from extramural activities getting cut back, to labor shortages within schools that are making a variety of different aspects challenging. And one of the things that occurred during COVID is that some of the historical buying patterns have been shaken loose and a great unbundling is occurring. And schools are now open to leveraging online platforms to solve some of these problems and partnering with an organization like us to an extent that just wasn't true a couple of years ago. So if you look at the $10 million in bookings, almost all of that is related to high-dosage tutoring, which is prescribed by and recommended by the Department of Education as a very effective way to remediate the COVID learning loss. And the platform that we offer, the software-driven platform, has you know a variety of different capabilities and educational solutions that could be deployed many of these are investments that we've already made on the consumer side and now we're just modifying them and making them available to schools in general so that a school administrator could not only deploy a high dosage tutoring solution across a broad population base of thousands or tens of thousands of students but they could also roll out special education support they could have language programs and they could have a variety of other solutions many of which have already been built on the consumer side of the platform and have a institutional need so this is based both on feedback from school administrators as well as what we're seeing schools actively outsourcing for in the market and it leverages uh the platform that we've already built and many of the products that we've already built in such a way where we think we'll be able to eventually double leverage those investments so take products that have product market fit that are compelling to solve important solutions for students on the consumer side and also make those available to school administrators to seamlessly deploy for a platform-oriented approach across broad groups of students and and then maybe mario i would add from kane's perspective
spk06: You have to keep in mind, like, most schools were just focused on returning to school safely at the beginning of school, and they, in many cases, deferred standardized testing to just recently. And now that those tests have occurred, schools are realizing the significance of the COVID learning loss, and they're starting to reach out to us as a greater case. So, you know, we've had great early success. The pipeline continues to build, and we think that this will have a significant impact to 2022, and more importantly, for years to come.
spk05: Yeah, and the other thing I'd add is we think this is a long-term opportunity. So we have been considering launching an institutional strategy for many years and finally got the consumer platform to the point where we felt like we had a robust product suite. We could help people in a multitude of different ways, that the software was advanced and scalable. And we can actually take it and extend it in an efficient manner to the institutional audience in a way that gives us a huge head start. So we consider our foray into institutional to be long-term in nature and strategic and something that will allow us to double leverage the investments that we've already made.
spk02: Perfect. Thank you both.
spk09: Thank you, Mario. We now have Maria Ripps of Canaccord. So, Maria, please go ahead and you're ready.
spk08: Thanks, Sandra. Thanks so much for picking my questions. So you touched on your small group initiative. It seems like sort of your revenue growth there was pretty strong this quarter. Can you just talk about the adoption of this format, utilization of classes? And do you see this offering sort of appealing more to learners that are already on the platform, or do you see this offering sort of bringing more more learners to to note as well and then secondly uh just make a refresh us on the impact uh to both near-term and long-term margin as you continue to uh build this offering thanks maria thanks for the questions you know as we noted in the release small group class revenue increased approximately 94 year-over-year during the third quarter
spk06: On a seasonal basis, we expect that classes will be a smaller percentage of the mix during the school year and a larger portion of the mix during summer months due to more seasonal offerings like summer camps and other enrichment classes. However, we continue to make investments in the launch of the new class margins which did impact near-term margins during the third quarter, which is consistent with what we talked about during the second quarter, as we look to build out the breadth of our offering here and capture top-line growth. From our perspective, it's clear the approach is working. We've got a big opportunity here that we should be putting this into.
spk05: Yeah, the other color I would add is, I mean, this has to at least double the timbre going after the consumer segment. It's a more social experience. It allows us to identify a whole host of new users. And we certainly are cross-selling the one-to-end, the one-to-many class capability into our existing one-to-one user base. But this allows us to reach probably twice as many people. And in certain categories, those categories skew towards classes over one-to-one. So we expect this will continue to be a significant growth driver for many years to come. There are segments where we're investing and seeing significant traction, like professional trading and certifications, like enrichment, where there's a a one-to-many element that is very appealing, more social, lower cost, and we'd expect to keep resonating. And so as those different initiatives that are leveraging this capability scale, we would then expect for that to be gross margin accretive on a go-forward basis. And so we're still investing in those areas. And expect that throughout the course of next year, you would then start to see one to many dry post-margin accretion. But we're seeing great results in the market. This really unlocks a couple of categories that we're investing in, and we're super excited about the growth and traction we're seeing here.
spk08: Got it. That's very helpful. Thank you for the call.
spk05: Thanks for the question.
spk09: Thank you. We now have a question from Andrew Boone from JMP Security. So, Andrew, please go ahead when you're ready.
spk03: Hi, guys. Thanks for taking the questions too, please. The first, just given the tightness in the job market, and I think you mentioned this in your answers to one of the prior questions, can you talk about attracting and retaining experts and whether you've seen any headwinds there? And then number two is just now that we're kind of a year out from kind of strong COVID growth. Can you talk about your COVID cohorts and whether you've seen any change in their behavior or any change in retention? Thanks so much.
spk06: No problem, Andrew. Thanks for the questions. We did add experts aggressively in anticipation of summer demand and institutional expectations during the quarter. From a supply perspective, I think we're doing really well. We grew the number of active experts on the platform by 26% in Q2 and then another 23% in Q3. And then you need to remember that our business is entirely online, so we can look anywhere in the country for talent. And our experts like that the work is flexible, they can earn on top of their day job, since most of the demand is in the evenings, after school, and after work. So, you know, in that, I feel like we are continuing to add supply to the market and to meet the demand increases that we're seeing from varsity tiers for schools.
spk05: Yeah, so we haven't seen any scaling challenges. And if you look at, like, the actual rates being paid and converted to an hourly basis, it's You know, it's plus or minus 1% on any given day. It's effectively the exact same number year over year. We've been able to dramatically grow the number of experts on the platform. And we feel really good about the scalability there and our ability to attract great people. And one of the things we've done is we've leaned into our machine learning matching algorithms is give some of those best experts the most work and give them that consistent ability to earn. They don't have to do any marketing. It's super flexible. They can do it from home. It tends to be in the evenings and weekends, and that's resonating with people, people who don't want to go out into the world and, you know, leave their homes, and they can do meaningful work, and it's thus far, you know, continuing to be – you know, really resonating and there's no scaling issues whatsoever. Of course, we see all the labor challenges that some other platforms have, but the fact that this is online, you can do it from home and it's in all hours is kind of a big differentiator. And then on the cohort side, you know, we're seeing demand kind of roaring back in academics as the school year is starting. So we've talked about this in the past, but during COVID, it was really a big demand headway. And we saw good levels of engagement, of course, as we brought together our four different learning formats to create this comprehensive learning destination and give people more reasons to come back. And, you know, as we mentioned in the prepared remarks, we saw consumption drop in the middle of the summer as people took vacations. And what's happened is, as schools have resumed, we've seen a significant uptick in engagement, in demand. And we see the resumption of in-person schooling as a huge positive growth driver for the business. So we're excited that kids are back in school. We think that in-person schooling is great from a social or emotional perspective for kids, but it's also a tremendous growth driver. Because what happens in in-person schools is professors assign in-classroom tests and teachers actually evaluate grades and assign grades on a normal basis. And so now that outcomes matter, we're seeing demand for our supplemental products, including tutoring, come forward and back.
spk03: Great. Thanks, guys.
spk09: Thank you. We now have another question on the line from Aaron Kessler of Raymond James. So, Aaron, I've opened your line. You're ready.
spk06: Great. Thank you. A quick question on the, you mentioned kind of test optional at universities. Do you view this as more of a long-term trend or is this kind of a short-term trend, still kind of a reaction to COVID kind of headwinds? And then just maybe any thoughts, did you see kind of any impact on marketing from IDFA and just any general thoughts on kind of how you shifted your marketing strategy as well? Thank you. Sure.
spk05: Yeah, so we think that test optional for exams like the ACT, SAT, GMAT, GRE is a long-term trend. And what we're seeing that's really interesting is that the demand for the college admissions and university and graduate admissions tests specifically has shifted to other areas. And so we've seen a couple of those areas feel some pressure and decrease, but then areas like the AP exams and IB exams have increased significantly. So to give you a little bit more color, AP and IB are now bigger than the ACT or SAT, as an example. And what's interesting is in a world where you can no longer differentiate yourself or many schools no longer differentiate yourself on the basis of a standardized test score instead all of a sudden grades and GPA matter a whole lot more and so one of the really interesting things that is driving this significant growth in academic tutoring demand is the fact that students and parents are now recognizing this back to school that if they want to differentiate themselves on a college admissions or for that matter a graduate school admissions basis they need to get much better grades which requires getting great grades in a variety of different classes that ultimately form your GPA. And so we feel like we're really well positioned to provide that academic support and help students achieve academic excellence. And we expect for this to be a long-term trend and for that test option to actually be a big growth driver for the business in years to come.
spk06: Got it. Chris, any thoughts on marketing and any IDFA impact?
spk05: So we advertise on a variety of different platforms, including paid social, search, affiliate, referral. As you probably know, referral and word of mouth referrals are particularly important in this category. So we have a pretty diversified marketing strategy. And while we advertise on, say, paid social as an example for our star courses and a couple of other areas, we've over time started focusing on the specific cohorts of users who actually purchase more and engage more and have been able to identify them. So there's definitely a little bit of pressure there, but it has been more than offset by our ability to get smarter about who we target. and get higher roi and increase the funnel conversion associated with users coming from those channels so um you know i think we feel good about the long-term trends and our ability to monetize from those platforms given just the improvements we're making in the product and level of engagement that we're seeing and you can see it in our inquiries also our tutoring inquiries that we've shared where they're growing rapidly uh we're seeing cats basically held constant despite volumes growing significantly. And we feel good about all the long-term growth drivers that are back while being able to maintain our return on ad spend.
spk06: Got it. Great. Thank you.
spk09: We now have Greg Gibbous from Northern Securities. Please go ahead, Greg, and on to Grayson.
spk06: Good afternoon, Chuck and Jason. Thanks for taking the questions. Sorry if I missed this earlier, but tutoring for schools, you mentioned 47 school districts now after recently going live or announcing that product for an annual contract value of $10 million. Are most of those live today, and is any of those contributions included in Q4 guidance?
spk05: Almost none of them are live thus far. A couple of them will be going live in Q4. Most of them, if not all of them, will be live by Q1. So many of the kind of madless hierarchy of needs this back-to-school season was to make sure that, from the district administrator's perspective, that the in-person schooling went effectively, that they were able to solve some of the teacher shortage issues and get the school year off and running. schools are now turning their attention to the severity of COVID learning loss and looking for solutions that can help address it. And so on a rolling basis, we're seeing inquiries from schools who are interested in partnering. And then as we gain trust and ultimately arrive at a partnership and contract, a few weeks later or a few months later, they'll actually start the classes based on the specific needs of the school district and some of the logistical factors related to planning time of day day of week how to slot it in the middle of the day or before school or after school so very little of that's going to impact q4 and you'll see q1 will be the first quarter that would actually have almost all of those go up in addition to whatever we sign between now and the end of the year okay great that's helpful
spk06: And I guess kind of wondering what the rough range of penetration rate is relative to purchases after making an inquiry. And just kind of wondering if that trended higher or lower in the quarter.
spk05: Well, our conversion of those inquiries has been relatively constant. So, you know, these are kind of, and the reason that we actually showed this was to show kind of an apples to apples comparison of a like type of customer inquiry. And we have been able to convert them at the same rates that we did during the height of COVID in virtual learning. So there's been no impact to kind of the change in the world. We've just seen demand go up.
spk06: The one thing I'd add to that is, You know, I think consumers adopt online learning at a higher pace, which is leading to those higher levels of inquiry and higher bookings. But, you know, our ability to convert has remained relatively constant and is, you know, what we believe to be favorable.
spk04: Got it. Thank you.
spk09: Thank you. As a reminder, to ask any further questions today, please press star followed by the number one on your telephone keypads. We now have the next question from Ryan MacDonald of Needham and Company. So Ryan, please go ahead when you're ready.
spk01: Hi, thank you very much. Good to hear from you, Chuck and Jason. I guess the first question I have is around the consumption trends and sort of the conversion from the bookings to consumption. I'm just curious, as you look into October and November here, can you talk about what you're seeing of those bookings converting into consumption? And I guess secondly, is there anything that you can do or that you're looking to do to try to drive consumption or sort of initial engagement there? with the learner as well. Thanks.
spk05: Thanks, Ryan. Good question. So we have seen sequential increases in consumption every month since July, and people inquire, and then they purchase and then those purchases or we call bookings. And then they start actually consuming the bookings, which is when it, of course, becomes revenue. And so we have seen consumption pick up each and every month since then. And one of the interesting things that we saw this year was given that, you know, really up until the end of August, there were questions about whether certain schools would go back in person or online. We saw students delay consumption until school actually started, and they were certain that, yep, I'm going back in person. I understand what that means. I understand what homework might look like. and uh got their first test you know actually saw the the results of you know the first real in-person test now that testing in schools is happening again and um that is really the big growth driver or pickup driver people uh going from you know a kind of consumer psychological state where they're thinking all right i know i need help this year too um i need help i've already bought a tutoring package, and now I'm actually going to start consuming it. So we saw that first test result, really that whole K-12 segment, and also the college segment being the big growth driver. Now that students are getting graded and tested on a regular basis, we're seeing demand and then consumption actually come back. And so we're constantly trying to improve the experience, make it stickier, drive engagement, drive consumption. But at the end of the day, there was definitely something different about this year with the wait and see approach where people actually bought the tutoring, but waited a little while to start consuming. And so, typically, it is consumed over the course of six months, and we would expect for that to be the case here, where you'd start to see the very significant increase in bookings we saw, you know, $44.5 million, which is obviously a whole lot more than the $31.5 in revenue that we had before. We'd expect for that to start pulling through, you know, towards the end of Q4 and into Q1 and Q2.
spk01: Very helpful. And then as a follow-up, I wanted to ask on Star Courses. Obviously, great to see the continued growth and number of courses being offered, but I'd love to hear about the sort of the trends around enrollments for those courses and how that's translating to converting to paid learners as well on the platform. Thanks.
spk05: Sure. So Star Courses is our free large group class strategy where we leverage celebrity instructors and then make them freely available and drive both engagement and LTV extension as well as a premium strategy. And so one of the things that we've really realized over the course of the last several months and become much better at is that we can target specific types of users who purchase disproportionately. And so we've increased the actual – premium conversion rate more than 40% year-over-year, and we feel like we have additional opportunity to continue to refine that funnel. And kind of zooming out a little bit, we think about StarCourses through the lens of subject expansion and rolling up to our enrichment category where we're seeing tremendous progress. So enrichment is clearly going to be a big growth driver for the company in the years to come. And we're investing in StarCourses as a way to not only convert people directly through that premium strategy, but also get existing customers to engage in products like summer camps or after school clubs. for languages where there's a tremendous consumer need that hasn't been met historically. So the funnel is getting more efficient. It's continuing to drive significant revenue among existing users who then come back for some of these additional free products. And we're going to continue to evolve it in 2022 because we think it's a winning strategy. Consumers appreciate it. And it builds on a trust and credibility for the platform that is driving real growth.
spk01: Great, thanks for the color.
spk09: Thank you. As we have no further questions registered, I would like to hand it back over to Chuck for some closing remarks.
spk05: Thank you, and thank you, everyone, for joining me today. So I am 15 years into this journey. I've never been more excited. We are incredibly well positioned for growth. We're experiencing record bookings growth as the school year starts. And, you know, the past couple of months have really validated what we always knew to be true, which is that when outcomes matter, our business accelerates. And all of the platform software driven capabilities that we've invested in are now able to be leveraged in new and different ways and serve as building blocks that allow us to meet important consumer needs and now important institutional needs as well with schools. So we're very excited to be embarking on this journey as a public company. We feel excited by and energized by the opportunity that we have. We feel like we can do immense good in the world and that the business trends will continue to perform at a very high level and feel great about the year ahead. So thank you so much for joining us today, and we look forward to speaking with many of you individually in the next couple of days.
spk09: Thank you very much. That does conclude today's call. Thank you all again for joining. You may now disconnect your lines.
Disclaimer