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spk05: and thank you for attending today's Nerdy Fourth Quarter 2021 earnings call. My name is Selena and I will be your moderator. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Molly Sorg, Head of Investor Relations. Please go ahead.
spk04: Good afternoon, and thank you for joining us for NERDI's fourth quarter and full year 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 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 NERDI's future financial and operating results, strategy, opportunities, plans, and outlooks. 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 fourth quarter and full year 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 press release for reconciliations of these non-GAAP measures. With that, let me turn the call over to Chuck. Chuck?
spk09: Thanks, Molly, and thank you to everyone who has joined us today. We appreciate your interest in NERDI. We're happy to be back in front of you discussing the strong momentum we built in 2021 and the meaningful opportunities we believe are ahead of us. Let's get started with a few of our 2021 highlights. Last year, Nerdy achieved new all-time demand records with full-year 2021 revenue growing 35% from the prior year to $140.7 million. and bookings growing nearly 50% over 2020. From a platform perspective, we saw strong engagement with active learners up 46% and online sessions up 73% over 2020, with paid sessions per active expert increasing 19% versus the prior year. The investments we are making in product, technology, sales, and marketing are driving strong customer engagement and retention across existing users and driving growth in new users. These investments are paying off both in terms of driving scale and strong unit economics as our one-to-one customer LTVs continue to grow. Our consumer results demonstrate the continued momentum and strength of our platform-based approach to growth. With technology at our core, we continue to scale in new subjects, formats, and audiences, increasing user engagement. We also launched Varsity Tutors for Schools in August, representing the beginning of an institutional go-to-market strategy to serve new audiences. That institutional strategy over time will focus on schools, universities, businesses, and other organizations. Earlier this month, we contracted with our 100th school district an important early milestone, but one that represents only scratching the surface of the scale of opportunity we see across the more than 14,000 school districts within the United States. With over $140 million on our balance sheet following the closing of our business combination with TPG PaceTech opportunities, our business is more than sufficiently capitalized to fund our company to profitability, and to pursue targeted M&A. There's a lot to be excited about here. We're seeing strong business momentum in January and February across our business, including user growth, engagement, bookings, and consumption. As we look ahead to 2022, our business is focused on three core themes, all of which we believe will continue to help drive our growth and advance our value proposition and strategic positioning in the market. We plan to further penetrate the direct-to-consumer market with enhanced product offerings, audience coverage, and a relentless focus on the customer experience, including self-service capabilities. Second, we are executing on the vast institutional opportunity in front of us as we begin to develop recurring and durable relationships with schools and other institutions. Third, we are building out our scalable technology platform with new products and capabilities to better meet the needs of learners. this platform oriented approach to growth allows us to utilize the shared capabilities we have developed that serve as the building blocks that can be modified for different markets and audiences providing significant leverage over time for every dollar invested in doing so we're able to build solutions that improve quality decrease cost improve convenience and meet the needs of learners enabling broad access to high quality live learning and as our business scales can achieve meaningful operating leverage from the platform investments we are making today we believe the demand for supplemental learning is rapidly growing as a result of several macro trends we are excited to talk with you about today first let's talk about the trends we are seeing on the consumer side of the business we continue to see that learners and parents are increasingly receptive to using online learning platforms as higher quality more convenient and less expensive supplemental learning solutions this rapid adoption has led to online learning platforms being viewed as normal further accelerating their appeal and driving overall market expansion which we believe is just getting started nerdy's platform allows us to personalize experiences for learners at scale through technology, making our solutions even more attractive to our customers and enabling us to efficiently target and serve new audiences. As we highlight in our fourth quarter shareholder letter, we believe we are at the beginning of a GBA war. A long-term trend towards heightened and unprecedented levels of competition among students for great grades. Nearly 80% of undergraduate universities have taken a test-optional approach to admissions, no longer requiring ACT or SAT exams. That leaves GPA as the most heavily weighted component of a college application. Students that might have historically distinguished themselves with a standardized test score now must increasingly do so through GPA. A January 2022 survey found that 62% of parents with high school-aged children believe GPA is more important than it has ever been for college-bound students. This focus on GPA is changing the way that many students are thinking about leveraging tutoring and supplemental academic support. In the past, many students historically would cram for short periods of time, measured in weeks, with the objective of achieving a great score on the ACT or SAT. Now, with GPA as the priority, students are focused on maximizing their grades over four years across all classes to ensure their highest average possible score. This shift in focus has translated to increased demand for our services with one-on-one consumer bookings for our middle and high school academic audiences increasing by 43% in the fourth quarter and 41% in 2021 compared to the same period to the prior year. As we said in November, when learning and outcomes matter to students, our business accelerates. Shifting gears to our professional audience, we are continuing to see rapid growth in this category as professionals increasingly seek to augment their qualifications with advanced certificates and coursework. Bookings in our professional audience grew 77% in the fourth quarter and 91% in 2021 compared to the same periods in the prior years, representing one of our fastest-growing audiences among our direct-to-consumer offerings. Importantly, we are seeing these demand trends persist into 2022, driving our decision to strategically invest in further product innovation, sales, marketing, expert supply, and our technology platform. We view these initiatives as having strong ROIs, with each dollar of investment leveraged across multiple audiences, driving revenue growth and scale for years to come. And these strategic investments are coming at the perfect time, supporting our ability to serve as the provider of choice in the $75 billion supplemental learning market as it rapidly shifts from offline to online. On the institutional side, our enthusiasm for the growth potential in this space is influenced by the macro environment we are operating in today. As we enter 2022, the education system in the United States is under tremendous stress, but with immense opportunity for transformation. While COVID accelerated and amplified some of the acute challenges that existed before the pandemic and added incremental headwinds in the process, it also created an environment where new solutions to these challenges are welcome and are actively being pursued. And with the recent advancements in technology, like the learning solutions that Nerdy offers, transforming the way people learn has never been more possible. We believe we are on the brink of what we call the great unbundling of education. as school administrators and educators are beginning to rethink how they can deliver the best outcomes for students, looking for new solutions beyond the traditional approach, which historically solved learning demands only with internal and in-person resources. Education leaders are more open than ever to using online solutions and are recognizing the value third-party platforms can bring to complement existing classroom instruction, including in scaling evidence-based high-dosage tutoring. We call this the era of unlimited learning and view this as the beginning of a durable, long term category trend, a trend that is being recognized by educators, administrators and policymakers alike. In his speech, Vision for Education in America delivered last month, Education Secretary Miguel Cardona highlighted that strategies like targeted intensive tutoring can help meet the needs of students and the demands of the economy. He challenged all district leaders to set a goal of giving every child that fell behind during the pandemic at least 30 minutes per day, three days a week with a tutor to provide that child with consistent, intensive support, recognizing that we cannot expect classroom teachers to do it all by themselves. We believe NERDI's learning platform as a service can be the unlimited learning solution for school districts, administrators, and educators as they seek to improve student outcomes. Our learning platform as a service offers a customizable set of solutions, allowing learning to be always on and available for learners. By offering a comprehensive suite of learning solutions, Institutions can add services and product offerings over time as needs evolve, allowing Nerdy to be a long-term partner to institutions as they seek recurring relationships that bring modern solutions to their districts. Importantly, the capabilities of this new offering represent only the beginning of an institutional go-to-market strategy that we believe can be as big as our direct-to-consumer efforts. Our learning platform as a service can easily be adapted to serve new audiences beyond schools, such as universities, businesses, and other organizations. We are building each platform capability once with the intent of leveraging the investment in many new markets and with many new audiences over time. We believe Nerdy is offering the right suite of product solutions as the education landscape evolves and we enter the new era of unlimited learning. I believe we are participating in a once in a generation opportunity to help drive the shift from offline to online in learning. And the investments we've made to build a scalable platform can easily be leveraged to serve new audiences and markets and put us in a position to lead in the transformation of how people learn through technology. With that, I'll turn it over to Jason to discuss the financials in more detail. Jason? Thanks, Chuck, and good afternoon, everyone. As Chuck noted, our business continued to grow rapidly throughout the year and into the fourth quarter as we executed on our product innovation and growth strategy, which led to record bookings and revenues in our direct-to-consumer business and the launch of our institutional strategy with the introduction of our sleep tutors for schools. Our financial results demonstrate the continued momentum and strength in our platform-based approach to learning, and 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. On the top line, we continue to innovate and bring new products to market that further extends our ability to reach new audiences and deepen relationships with learners while also increasing expert engagement and driving revenue growth. we achieved new all-time bookings and revenue records in both the fourth quarter and the full year. Bookings of $47.3 million in the fourth quarter were up 53% over the fourth quarter of 2020, and bookings of $159.9 million in 2021 were up 48% versus the prior year. Revenue of $42 million during the fourth quarter yielded 27% growth year-over-year, with full-year revenues of $140.7 million up 35% over 2020. Revenues from our institutional strategy were immaterial to both our fourth quarter and full year 2021 results, and consumer growth increased relative to our third quarter growth rate. O'Keeffe and revenue growth were driven by strength in our direct consumer offerings across the K-8 high school, college graduate, and professional adult audiences, in addition to the launch of Varsity Tutors for Schools. Bookings are a strong leading indicator of the demand in our business, giving us increased confidence that the platform investments we made during 2021 are working to drive new customer adoption as well as strong engagement and retention across existing users. Moving down to PML, gross profit of $28.7 million increased 27% year-over-year during the fourth quarter. Year-to-date gross profit of $94 million increased 36% over 2020, And gross profit increases were driven by the continued adoption of one-to-one online learning, expansion across more subjects to consumer audiences, such as professional and learning differences, and growth in our small group class format. Gross margins of 68.2% during the quarter and 66.8% during the year were flat to the comparable periods in 2020. Sales and marketing expenses on a GAAP basis were $17.9 million for the fourth quarter and $65.4 million for the full year, up $5 and $21.6 million versus the same period in 2020. Non-GAAP sales and marketing expenses, excluding non-cash stock-based compensation, were $17.2 million for 41% of revenue in the fourth quarter and $62.1 million for 44% of revenue for the full year. This compares to 39% of revenue in last year's fourth quarter and 42% of revenue in 2020. In both the fourth quarter and full year, we continue to make investments in marketing, targeting new audience and advertising new products, including Star Courses, our free, celebrity-led, live, large free classes to drive customer acquisition, brand awareness, and reach. We also made investments in establishing and growing our sales organization to support varsity tutors for schools by institutional offerings. Additionally, investments in machine learning and automation continue to provide us with operating leverage improvements. General administrative expenses for the fourth quarter and full year were $34.3 million and $122 million, respectively, excluding non-recurring one-time items and non-cash stock compensation expense, non-GAAP G&A expenses for $19.1 million, or 45% of revenue, in the fourth quarter and $61.3 million, or 44% of revenue, for the full year. This compares to $11 million, or 33% of revenue, and $40.2 million, or 39% of revenue, in the same period in 2020. In both the fourth quarter and full year 2021, we saw higher general and administrative expenses as we accelerated investments in new product development, moving quickly to bring in new talent to drive innovation and growth. These investments allowed us to launch our institutional strategy with the introduction of varsity tutors for schools, build and scale the institutional sales team, grow expert supply, as well as develop and launch a new suite of product capabilities in support of the initiative. We also expanded and enhanced our finance, accounting, and legal function in connection with becoming a newly public company, a one-time step up in cost that over time will create leverage as our business grows. We reported a non-GAAP adjusted EBITDA loss of $5.5 million in the fourth quarter of 2021 and $22.4 million for the full year compared to non-GAAP adjusted EBITDA of $200,000 in the fourth quarter of 2020 and a non-GAAP adjusted EBITDA loss of $8.9 million for the full year. NERDI's decrease in adjusted EBITDA relative to 2020 was mainly driven by the one-time cost associated with becoming a newly public company and the strategic investments we made in new talent and marketing to drive product innovation and growth and to build out varsity tutors for schools. We continue to believe that now is the time to invest in our platform in order to capitalize on the attractive macro tailwinds impacting our business, continue to build out the foundation for our institutional strategy, and to build new products and technology capabilities that will enable us to better meet the learner and expert needs in the future, support innovation, operate more efficiently, and help drive continued growth while further strengthening our competitive moat. And importantly, each dollar of investment we make to support a learning solution for one audience can be leveraged across multiple audiences over time. We ended the year with cash and cash equivalents of $144 million in no debt, providing us with ample liquidity to operate against our plan and achieve profitability by the end of 2023. Our strong liquidity also puts us in a position of strength to pursue targeted M&A as the overall market for supplemental learning expands and quickly shifts from offline to online. The strong consumer institutional demand trends that drove our all-time record revenue in 2021 have continued in early 2022. Providing us with increased confidence that these trends, including the rapid shift from offline to online learning, the GPA war, and the great unbundling of education leading to unlimited learning, can prove to be robust catalysts for our business. Given these trends, as well as our growth investments designed to capitalize on these favorable demand tailwinds, we have increased confidence in our 2022 outlook. Today, we're providing the following guidance updates. For the first quarter of 2022, we expect revenue in a range of $45 to $48 million, up 34% at the midpoint from $34.6 million in the year-ago quarter. For the full year of 2022, we expect revenue in the range of $196 to $200 million, representing more than 40% growth at the midpoint versus our 2021 revenue of $140.7 million. Nerdy's growth forecast reflects normal pre-COVID seasonality in the first half of the year, followed by the anticipation of heightened travel during the summer months, and then a return to normal fourth-quarter trends for the direct consumer audience. We also expect revenue from our new growth investments to build throughout the year, including revenues driven by Varsity Tutors for Schools, which are expected to ramp into the 2022-2023 academic school year starting in August. having the most impact on fourth quarter 2022 revenue growth. As for adjusted EBITDA, for the first quarter of 2022, we expect a non-GAAP adjusted EBITDA loss in the range of $6 to $8 million. For the full year 2022, we expect a non-GAAP adjusted EBITDA loss in the range of $20 to $25 million. Given the strength of our balance sheet, our 2022 adjusted EBITDA guidance for both the first quarter and full year reflects accelerated investments to drive efficiencies and support growth in the direct-to-consumer and institutional categories in order to capitalize on the significant demand trends we're seeing across the board. We view these initiatives as having strong ROIs with each dollar of investment leveraged across multiple audiences, driving revenue growth and scale for years to come. Thank you again for your time. And with that, I'll turn the call back over to Chuck. Thanks, Jason. And thanks again to all of you for joining us today. As I hope you can tell from our remarks, we are very excited about the opportunity we see ahead for our business. We continue to see momentum among our direct-to-consumer audiences as we further refine and enhance our product offerings. And we see tremendous opportunity on the institutional side as we enter this new era of unlimited learning. We believe that with the right investment and a steadfast focus on execution, our growth potential is vast. Let's turn the call over to the operator and get started with Q&A. Operator?
spk05: Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question comes from Andrew Boone with JMP Securities. Please go ahead.
spk11: Hi, guys. Good afternoon, and thanks for taking my questions. Two, please. One, just a little bit more strategic on the product. Chuck, I think you talked about self-service in your prepared remarks. Can you just touch on kind of the timing there, whether you've kind of run any tests? You know, I know you guys do some stuff around small group classes there. How can that extend to just reduce friction overall for buyers as you think more about the typical kind of one-on-one, higher-priced kind of tutoring buys? And then number two is, you know, active learners came in a little bit lighter than kind of, I guess, where our numbers were. Can you just talk about kind of thoughts there on 2022? Is it kind of fair to assume 20% growth, or is there any seasonality in the 4Q? Is there anything to highlight as we think about kind of thinking about active learner growth for next year? Thank you so much.
spk09: Can do. Thank you, Andrew. Appreciate the question. So, yeah, so the way that we think about improving the customer experience, there's many different aspects of it. Part of it relates to personalization. Part of it relates to quality. Part of it just is oriented around making it easy for people to get the help they need as efficiently as possible. So as it relates to self-service, we've made huge upgrades to, as an example, our external portfolio of e-commerce capabilities related to classes and ability to check out, as well as building out capabilities related to supporting some of these subscription offerings we have like clubs. And we've also started to improve many aspects internally. We think there's a big opportunity to remove friction, make the experience more intuitive, And we think that will manifest in a couple of different ways, including continuing to improve that promoter score, making it easier to consume additional products, including additional tutoring subjects, as well as purchasing sort of tangential products like classes, and then just making it easier to review. So we're going to be continuing to work on those throughout the course of the year. We have a big initiative and work stream oriented toward that. overhauling the customer experience both on mobile as well as on web, and then also improving the personalization recommendations such that without any word, we help you get to the products or recommendations that are likely the best fit for you. So we'd expect for those to pull through to improved efficiency as a percentage of revenue on some of the customer service and sales line items. We'd also expect for it to drive renewal and LTV extension, and then just generally provide a better customer experience. That's something that we think is a big opportunity this year, but that we'll continue to invest in on a global level. And then, Andrew, I'll take the question on active learners. This is Jason. You know, look, on a year-over-year basis, we continue to exhibit durable growth with active learners up 46% from 2021 versus 2020. From Q3 to Q4 specifically, seasonally the business slows down from Q3 to Q4 on the classes side as we've seen an increased mix shift towards academic. This trend's accelerated now with the test prep down. and academic tutoring up with a greater focus on GPA that Chuck mentioned during the call. So sequentially, from Q3 to Q4, ARPU increased due to the greater mix of one-to-one tutoring in Q4 versus classes in the summer, which is consistent with prior years. Q3, as you remember, has a lot of enrichment classes and camps in the summer, which decreased as you head into the school year. And then, as I mentioned, this test prep decline, the shift toward academics, has resulted in higher ARPUs during the fourth quarter. As you think about 2022, I would say you should continue to model low single-digit declines in revenue per active learner, given our anticipated continued mix shift towards a higher proportion of classes, which implies active learner growth will be slightly faster than our revenue guidance. Yeah, I think it's also worth noting that as we come out of Q4 and headed into Q1, we've seen the acceleration then in active learner growth, sessions, and consumption. ultimately leading to higher levels of gap thus far. As a result of us seeing implementations go live on the varsity tutors for school side, which is a big driver skewing towards the class orientation, as well as some of the investments we're making on the consumer side in and around areas like professional, as well as enrichment that's pulling through to higher levels of class sales as well, which is then disproportionately driving active worker growth relative to Thank you so much, guys.
spk05: Thank you, Andrew. The next question comes from Doug Ameth with JPMorgan. Please proceed.
spk00: Hey, it's Brian Smileycon for Doug. Thanks for taking my questions. Just to start, can you elaborate a bit on what's driving the slope of revenue growth recovery through 22 that you discussed in the letter? and potentially quantify the expected VTS contribution. And then just thinking about the bottom line, too, what are the puts and takes on the 22 EBITDA guide? It came in a bit later than we expected, so just curious to see your thoughts on investments leading to those losses. Thanks.
spk09: Yeah, so as we look at the macro trends in totality, we're seeing strong consumer growth. We're seeing accelerating consumer consumption. We're seeing gap revenue growth on the consumer side growing as well. We have these macro tailwinds for the business, including people taking way more ownership of their education. The GPA war driving this maniacal focus on grades. And we feel really good about the tailwinds in consumer and our ability to execute against that strategy. And then similarly, on the institutional side, there's this incredible macro trend where schools are willing to entertain students ways of solving problems and leveraging third-party solutions that just didn't previously exist and the technology is now in a place where it's possible to deliver always-on learning to an extent that simply wasn't possible or practical in the past we feel like we're incredibly well positioned there and the investments that we're making today and you mentioned that even dot forecast for 22 They're oriented around investing against the consumer institutional and platform opportunity in such a way where we can leverage this technology-enabled platform, build capabilities once, leverage them, multiple times across different audiences and market segments. And over time, we think that drives not just revenue growth in consumer and institutional, but it also drives substantial operating leverage. So if you look at the efficacy of our spend on a bookings basis, we feel really good about how it's pulling through in the early signal And then how the investments we're making in some of these areas set us up for a really big 23 as well, which is a result of how we're going about building it and the scale of the opportunity here. We've said it before, but the institutional opportunity, we believe, can be as big as the consumer opportunity, and we're really, really excited about the traction we're seeing. So we feel good about the 40-plus percent revenue growth target we're putting forth for 2020. And we believe that the investments we're making are commensurate with the opportunity and set us up for a very high likelihood of achieving it, along with the ability to put us in a position where we can have strong growth across both consumer and institutional years ahead. The only thing I'd add to that, Chuck kind of mentioned it, we're seeing an acceleration of growth across the business. So Q3 was up 19%, Q4 is up 27%. The guide would put you at 35% at the midpoint for Q1, and then the full year growth for 2022 continues to accelerate 40% at the midpoint of the guide range. So this is why we're doubling down on investments. The macro trends Chuck talked about, the GPA war, the great unbundling that were in the shareholder letter and in the prepared remarks today, they're a bigger opportunity than we saw a year ago. So we think it's the right time to invest. The reason we went public was to make sure that we were appropriately capitalized. We are. $144 million of cash on the balance sheet, no debt, and these levels of investment are modest from our perspective, and they're very intentful.
spk00: Thanks for taking my questions.
spk05: Thank you. The next question comes from Ryan McDonald with Needham. Please proceed.
spk08: Good afternoon, Chuck and Jason. Congrats on a great quarter. You know, Chuck, first one for you. There was an interesting article in the New York Times this morning with some survey data that showed I think over half of American children missed at least three days of school and 25% missed more than a week in January alone, as you've seen sort of the surge with Omicron and some loosening restrictions on schools, so forcing more children to learn remotely again. I'm curious, as you've looked at sort of traffic and consumption on the platform to start the year, if you're seeing any correlation with, you know, increased number of days at home or out of school versus, you know, time spent on the platform. And, you know, I guess from maybe two-part question, is this having an impact on the trends you're seeing in terms of consumer bookings versus also then on the institutional side because schools are obviously needing more of this or having a greater need for the tutoring platforms given that? Thanks, Mark.
spk09: Thanks, Ryan. Great question. Yeah, so the way we think about it is as long as the outcomes matter and as long as grades are being assigned and people are being held accountable and trying to learn, there's demand for supplemental education solutions. And so the specific things you referenced with attendance being down nationally in January a little bit due to Omicron, certainly if kids aren't attending school at all in any way, shape, or form, then that's a little bit of a headwind. But what we saw was that, you know, despite some of the attendance headlines that we see nationally, the consumer business continued to perform well, and, you know, we feel really good about how it's tracking in totality. So, you know, net-net, sure, you know, we'd love for there not to be any snow days or summers for that matter as it relates to consumption patterns, but the reality is that some of these tailwinds that we have, related to the focus on academics, the normalization of online learning, and then just the acuity of the problem that schools are experiencing, how well-positioned we are to help them. They dwarf, you know, any of the things you referenced like, you know, a snow day or attendance related . So we feel good about the macro tailwind to the business and then our ability to continue to, you know, deliver strong growth and also help people throughout, you know, these times where there is a lot of uncertainty.
spk08: Really helpful. And maybe just as a follow-up for Jason, you know, you talked about obviously some really strong success still happening on the institutional side with varsity tutors for schools, you know, 100 deals now, so essentially a doubling since the end of October. We'd love to understand, you know, any quantification around, you know, what that's translating to in terms of the, you know, monetary bookings and You mentioned in the remarks around sort of outlook for 22 that you're expecting a more material impact from a revenue perspective in fourth quarter. Does that mean that these contracts that you're signing now are more for next school year, or are you starting to see sort of go-lives happen every day and sort of that translating to consumption early in the year? Thanks. Thanks.
spk09: yeah no great question you know we're really excited about the varsity tutors for schools opportunity and what it can grow into i would say in the fourth quarter as we mentioned on the last call the expectation was what it would be a material portion of the revenue and it was but as chuck mentioned earlier on this call we have kicked off many of the implementations we're starting to see that go live during the first quarter and expect to continue into the second quarter and then as we move forward looking into the 2022 2023 school year that's where we really expect to see some of the investments we're paying off right now start to really take hold as schools have assessed the need from the standardized testing that they've provided students the heightened levels of teacher resignations and retirements that you mentioned so we think that this will continue to parlay itself into a long-term and durable growth opportunity especially as we get into the coming school year but Revenue is flowing right now in the first quarter and the second quarter, and we feel really good about it.
spk06: Thanks, Mike Keller. Congrats again.
spk05: Thank you, Ryan. The next question comes from Eric Sheridan with Goldman Sachs. Please proceed.
spk02: Thanks so much for taking the question. Maybe sticking with some of the themes we've talked about so far, looking at those investments you plan on making in 22, first question would be, can you isolate what level of those investments might be one time in nature so we can better understand some of the investment curve in 22 when measured against the longer-term profitability goals? And Chuck, I believe in your comments you talked about how some of these investments obviously play into the broader platform theme for the company overall and could touch upon multiple areas of the business over the long term can you just refresh investors view on how you see investments reflecting black in driving sort of more of a platform ecosystem impact across the entirety of the company over the medium to long term thanks so much thanks sir good question
spk09: So as Jason referenced earlier, we had a one-time big step up in public company-related costs in accounting, finance, legal, and related expenses. We would not expect that those would grow proportionate to revenue over time. As you think about the areas that we're investing, both as it relates to consumer and then institutional and then our tech platform, most of those take the form of personnel. So we're investing in one core underlying tech platform where we can build a capability once, leverage it many times, and that powers both, say, our professional audience, our enrichment audience, our learning differences team on the consumer side, as well as powering a lot of what we need to do to deliver on our customer expectations on the institutional side as well. And so you see a big increase in performance. engineering and product costs this year, you're already seeing the results of those investments over the past year. We grew our engineering headcount, as an example, 50% last year. We expect to grow about 50% again this year. And then you would expect that the revenue would catch up with that increase in personnel costs. We feel really good about the strong bookings growth that we're seeing pull through. And then we would expect that between growing into the engineering and product spend that's been driving growth and operating leverage, combined with the big step-up in cost related to our institutional sales team, which then takes a little bit of time to pull through. You're basically growing into that operating leverage to a large extent, in addition to getting additional operating efficiencies related to self-service and other capabilities, matching, driving higher LTV, continuing to get efficiency there, as well as some gross margin improvements as classes mature and as we sell more group tutoring sessions over time. So all of those things are, you know, largely relate to the fact that as revenue catches up with bookings, which are very strong, 53% in the fourth quarter, you'd expect for that to then start covering the increased fixed costs, which gives us confidence in our ability to get back to profitability in 23.
spk02: Great. Thanks so much for the color.
spk05: Thank you, Eric. The next question comes from Maria Rips with Canaccord. Please proceed.
spk01: Great. Thanks so much for taking my questions. First, can you just comment on the competitive dynamics in the industry? Some of the sort of COVID trends are starting to subside here. And what are you seeing with some of the offline competitors now? And then secondly, you mentioned potential M&A is one of the growth levers going forward. Can you maybe just talk about what kind of assets or capabilities would be added to the platform?
spk09: Thanks, Maria. So, on the competitive side, you know, we've always said that we compete mostly against offline options as well as mom-and-pops. We've heard estimates that there's 5,000 mom-and-pop tutoring companies out there, many hundreds of professional testing companies. And, you know, we believe those estimates. It's a very fragmented market, and that hasn't changed over the course of the last couple of years. So, there isn't any one company or group of companies, for that matter, that we've seen come up more frequently. And so the way we think about competition is from the perspective of making sure that we're continuing to enhance the value that we deliver over time faster than the aggregate market is improving. And so as long as we're consistently increasing the quality of delivery We're decreasing costs and we're improving convenience, and then making sure that the value equation is coming out net positive each and every year. We're getting a little bit better at delivering more and more value. We will ultimately take share because that's how consumers ultimately make their decision. Higher quality, lower cost, more convenient, and you can deliver against those things and personalize the experience. which we believe we're doing, we'll ultimately take care of it. So there hasn't been a big shift on the consumer side or any shift, you know, for that matter that we've seen and be able to witness. And then on the institutional side, it's very fragmented. You have mom and pop companies that have been around for a while. You have new entrants that were formed to go after this opportunity. You have legacy companies that are pivoting to add some sort of online option. And we feel like our platform, and our ability to deliver high-quality live learning at scale across the entire district and leverage capabilities that we've built, like adaptive testing and like additional products that we can then solution sell into those audiences in ways that allow school administrators to solve problems they're experiencing is really differentiated. And our learning platform as a service approach is oriented around landing relationships building trust and credibility with that school and that school administrator over time demonstrating that we could add value and then presenting an opportunity for them to both extend that solution to other students and other grades throughout the school district as well as add on additional products outside of just the initial one that they started with and then marie i'll talk to the m&a side of your question so We're excited because we're finally capitalized to be offensive in this space, and we're well-funded with the balance sheet, and we've also got access to equity capital as a public company, so we feel really good about that. We would focus our effort on adding incremental capabilities that we can accelerate our entrance into new product categories and that we can extend across the entire platform to both the consumer side as well as the institutional side. So the main focus of any M&A activities will be to consider targets that accelerate our product map in the future.
spk01: Got it. That's very helpful. Thank you both.
spk05: Thank you, Maria. The next question comes from Mario Liu with Barclays. Please proceed.
spk10: Great. Thanks for taking the question. The first one is on varsity tutor for schools. I was just wondering if you could share some behavior of the school districts that you signed up earlier in the program, whether the ones that went live, how they added to their contract budget. Just any data points you can share that gives confidence that this segment will grow larger than D2C over time. And then secondly, you mentioned in the past that international expansion was going to be a long-term driver Is this less of a focus now for the company with Varsity Tutors for Schools? Any updates on international? Thanks.
spk09: Thanks, Mario. I'll talk about the Varsity Tutors for Schools behavior first, and then Chuck will talk about the international opportunity in front of us. So, you know, as we mentioned in the call and in the shareholder letter, we signed our 100th deal, so we're seeing great product fit, receptivity. And importantly, you know, in addition to the 100 contracts that we've signed, over 30% have already re-upped, even though the vast majority of the contracts haven't ended yet. So, you know, that just demonstrates from our perspective our ability to land and expand. You know, in some cases we've signed three core deals with certain school districts who started at, you know, a very niche level. all the benefits of the program platform and the convenience we can provide, all of our tutor base, and they've continued to expand that to entire schools or their entire school district. So I feel really good about our opportunity there and the trend lines that we're seeing. Yeah, and then on international, I think we've said this before, that it's a tremendous opportunity. We believe that over time we're well positioned to go after it. We, you know, today it's a mid-single-digit percentage of the business. We have, you know, a small number of resources focused there, but it's not a primary focus. And our focus remains on the direct-to-consumer opportunity in the United States and the institutional opportunity within the United States. But we're very cognizant of just how big the international opportunity is over time. But, you know, it's relatively deprioritized, but we're pretty excited about what it can do in years ahead. Great. Thank you.
spk05: Thank you, Mario. The next question comes from Aaron Kessler with Raymond James. Please proceed.
spk06: Hey, guys. Congrats on the quarter. A couple questions. Maybe first with kind of the inflationary cost we're seeing, how are you thinking about kind of potentially adjusting rates or maybe thinking about paying tutors more? Any thoughts there? And then just maybe you can talk about strong trends within high schools, any other trends you would call out, maybe lower grades or higher ed or maybe different subjects. Thank you.
spk09: Hey, Greg, thanks for the question. So, you know, so far today we haven't had any difficulty recruiting experts with our current pay structure. Active experts in the fourth quarter of this year were up 24% year over year versus the prior year. I would say we're experimenting with enhanced pay scales called bonus structures for our top experts, which we believe will help drive retention and engagement for those top experts, as I mentioned. We continuously explore the best pricing of our product, and we pass through modest pricing in the ordinary course and believe the category to be largely elastic. So overall, feel good about where we're at from a cost structure perspective as we move into 2022. And then, hi, Greg. I think your second question was whether there's any interesting trends occurring at the audience level. So assuming I understood that correctly, you know, one of the things we're calling out.
spk06: Yeah, I think we call it strong trends at high school. Just any other things you would call out?
spk09: Yeah, yeah. So we've seen, you know, what's really interesting is that shift away from test prep towards academics is has driven a substantial increase in acceleration related to high school academic bookings in particular. So it was up 43% year over year in the fourth quarter for high school academics. 41%, excuse me. And 41% for the full year, 43% for the fourth quarter. We're also seeing a lot of strength in college. So the same kind of focus on test optional that occurred with high school students applying to undergraduate universities is also occurring as it relates to college students applying to graduate universities, where there's been relatively, there's been relative pressure on graduate test prep, but it's more than made up for by the strength in academics. And we saw 50% growth in academic tutoring bookings for college students. And so both of those segments, you know, are driving substantial bookings growth in totality that we expect to pull through early in the year to strong gap growth as consumption pulls through. And then separately, professional, which is another area that we've referenced we're really excited about, has grown really quickly as well. So for the full year, bookings were up 91% for our professional business on the consumer side and 77% for the fourth quarter specifically. So professionals, professional consumers are looking for the same sort of benefits that they can get from an online platform that exists for all eight pages. So rather than drive to a rented out classroom or, you know, a strip mall, they can instead go online and get a higher quality service that's more convenient. In many cases, we're a third less or half the price of some of the established incumbents. And we can just provide a lot of value, which continues to resonate with professionals.
spk06: Great. Thank you.
spk05: Thank you, Aaron. The next question comes from Greg Dubas with Northland Securities. Please proceed.
spk07: Thank you, Dr. Jason. Thanks for taking the questions and congrats on the strong quarter. If I could follow up on your commentary around the professional learners being the fastest growing category right now, the 77% growth. What I guess you think is driving that, and do those types of, does that category of learners typically have a higher or lower ARPU?
spk09: Yeah, that category of learners typically have a higher initial package size from the perspective of you know higher complexity subject leads to higher costs on the tutor side that we pass through but what what i would say is that segment is a little bit more focused on passing an exam or a test so it's not as um ltv accretive over the fullness of time as you see in the academic side of the house at least today, but we're continuing to move upstream to make people more and more prepared for their test and feel like the opportunity continues to expand. I think it's also worth mentioning that's our newest segment. We just launched it a couple years ago. It's launching from a much smaller base. So we think there's tremendous opportunity there, and there's many examples in and around the professional segment where there are companies that have hundred million dollar revenue businesses in one subject. And there's many hundreds of subjects that could fall within professional. So given the kind of antiquated nature of any of the competitors in the space and our ability to leverage many of the capabilities on our platform, we feel like we're very well positioned to continue to build out that suite, including leading into things like bundling and adaptive testing, where we feel like we can add a lot more value over the course of the next year.
spk07: Got it. That's helpful. And then, you know, I could follow up on kind of your guidance assumptions. You know, you said varsity tutors for schools, the institutional product was pretty minimal in Q4. It makes sense given its launch in August. But, you know, should we assume maybe a similar pace of new school additions? I think it was from August to February getting to 100. Is that kind of what you're assuming in guidance? And would it almost make sense to break out a contribution from the institutional product?
spk09: Good question. I say, like, the thing that we all need to keep in mind is this is a very nascent kind of, like, foothold into the institutional space for us. It's six months old. We feel really good about the opportunity set. The product market fit, 100th contract, continue to accelerate demand as we get reference accounts. We continue to build out the sales team in that space and expect that we'll have continued traction and demand from schools, especially given the macro environment. So the one thing to keep in mind, it's very early. As we think about 2022 guidance on both the consumer side as it relates to heightened travel, expecting a more modest Q3 than we historically would have seen, and as it relates to the institutional opportunity, while we're working with some schools to have summer programs, we do expect that the majority of schools will reduce their consumption during the summer months, and then we'll have a very – very good fourth quarter as you know consumers come back in the back school period grades matter again outcomes matter that's when our business accelerates and you couple that with the institutional benefits that we expect to see in 2022 and 2023 school year we feel really good great thank you thank you greg that concludes the q a session
spk05: I would like to pass the conference back to Chuck Cohn for additional remarks.
spk09: Thank you, and thank you everyone for joining us today. We're incredibly excited about the momentum in our business, the strength that we're seeing in the consumer segment, all the initial traction we've seen on the institutional side and how the investments that we've made over the course of the last several months in particular, combined with the macro trends in consumer in areas like the GPA war, the parental focus on outcomes and taking ownership of education and the normalization of online platforms, combined with this incredible opportunity related to helping partners with schools to solve some really important problems they're experiencing, combined creates an opportunity that we think is really exciting, warrants investing in, and we appreciate your time and interest as we continue to execute against this very big opportunity.
spk05: That concludes the Nerdy Fourth Quarter 2021 earnings call. Thank you for your participation. You may now disconnect your lines.
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