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spk03: Good afternoon. My name is Hannah and I will be your conference operator today. At this time, I would like to welcome everyone to the Nerdy First Quarter 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by two. Thank you. Molly Sorg, Head of Investor Relations, you may begin your conference.
spk00: Good afternoon, and thank you for joining us for NERDI's first quarter 2022 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 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 changes 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 first quarter results and the company's filings with the SEC for a discussion of the risks. Not all of the financial measures that we will discuss today are prepared in accordance with GAAP. Please refer to today's press release for reconciliations of these non-GAAP measures. With that, let me turn the call over to Chuck.
spk12: Thanks, Molly, and thank you to everyone who has joined us today. We're happy to be back in front of you to discuss our strong start to 2022, in addition to some of our more recent business developments. Let's get started with a few of our highlights. In the first quarter, Nerdy once again achieved new all-time demand records with revenues of $46.9 million, up 36% over the prior period, and bookings increased of $48.5 million, up 30% versus the first quarter of 2021. We also experienced continued strength in our marketplace dynamics, with active learners up 56%, online sessions up 57%, and the number of active experts on our platform up 37% compared to the first quarter of last year. On the consumer side, the education trends we highlighted in February, including the increased adoption and normalization of online learning, the GPA war, and heightened ownership for learning outcomes, supported strong first quarter engagement. Demand during the first quarter across academic tutoring bookings remained strong, with high school academics growing at 30%, college academics growing at 20%, and K-5 academics growing at 47% versus the same period a year ago. Our professional development business continued to experience strong demand with bookings growing 57% in the quarter versus the prior period. This booking strength was partially offset by test prep, including the Veritas prep business we discontinued in the fourth quarter. Test prep for exams like SAT, ACT, GRE, and other similar exams now represent less than 7% of consumer bookings in the quarter. That demand has shifted towards academic tutoring and is driving a focus on long-term relationships to maximize grades and GPA, which we believe is a significant and long-term tailwind. We believe these education trends are leading to consumer interest in supplemental learning solutions that support a more consistent use pattern over extended periods of time, defaulting to recurring, always-on relationships. As a result, in the first quarter, we launched a monthly membership offering to complement our current package model. The membership model orients customer relationships towards consistent weekly use over extended periods of time. And we believe the membership model will grow our total addressable market and increase the number of customers that utilize our offerings. From a learner perspective, early learner engagement and consumption data suggests membership customers experience a significant increase in the percentage of clients that are actively meeting and consuming on a recurring basis. We believe the higher levels of tutoring session consistency will lead to improved learning outcomes and enhanced satisfaction among learners. The membership model also simplifies our sales process, which is already translating to early sales conversion improvements compared to our one-on-one package offering. And the membership pricing structure can also improve the predictability of our revenues going forward, with early data suggesting it can further enhance customer lifetime value. Based on the exciting early results, we plan to expand the membership program to further increase our customer reach in the coming months. We'll continue to provide updates on this exciting initiative in future quarters as the initiative progresses. Switching to the institutional side of the business, Varsity Tutors for Schools is resonating with schools, and we are continuing to observe strong demand trends in this category. Schools are increasingly leveraging online learning platforms to augment and supplement traditional schooling. We've been building on the foundation we laid last fall, adding school district partnerships, shortening implementation timelines, enhancing our existing product offering, and investing in the development of several new products for the upcoming back-to-school period. Specifically, we are introducing two new offerings aimed at enabling school districts to provide always-on learning solutions to further support teachers and students in addition to our existing high-dosage tutoring product. The first of these new products is Varsity Tutors on Demand. which is a district-wide solution that provides universal support to all students with access to 24-7, on-demand, self-directed learning tools, primarily via chat-based tutoring. The solution will offer asynchronous essay editing and writing assistance, as well as access to online courses in core and enrichment subjects. Importantly, Varsity Tutors On Demand offers school districts a more affordable entry point to third-party supplemental learning. We are currently offering this product with several school districts and expect to broadly sell on demand in the coming school year. The second of our new products is teacher-led tutoring, which is a district-wide solution that provides teachers with the opportunity to schedule face-to-face online tutoring with a consistent expert in our live learning platform for any student that needs personalized intervention. This solution will also be available to the entire student population of a school. Once again, increasing access and providing teachers with a supplemental support they need. Both of these new relationships will be structured in a per student per year contract model, and we believe the introduction of these new products will make our institutional offering even more competitive as they will allow for us to serve a broader set of school districts that have new and different needs. We plan to continue to enhance our existing offerings and build new solutions with the ultimate aim of delivering increased value to our school district partners and supporting our teachers. In conclusion, as I hope you can tell, we are very excited about the opportunity we see ahead for our business. We believe education is shifting to an always-on model where learners of all ages and institutions are seeking long-term, recurring relationships to support their learning needs. Our product offerings are continuing to evolve in support of these long-term customer trends, and we are maintaining our focus on offering solutions that improve quality, decrease cost, and improve convenience. Before I turn the call over to Jason, I wanted to touch on today's updated guidance. Like most companies, we also experienced a decrease in consumer bookings growth rates in March and April, in line with the broader global macroeconomic background. Our updated guidance reflects this recent macroeconomic volatility, as well as the decision to more broadly offer a membership offering that delays revenue recognition of those customers by several months. We believe many of the offerings we mentioned today will help streamline the operations of the business and allow us to improve operational efficiency, and we continue to expect we will achieve profitability in 2023. We look forward to executing on the new initiatives I discussed and to continuing to update you on our progress in the coming quarters. With that, I'll turn the call over to Jason to discuss the financials in more detail.
spk11: Jason? Thanks, Chuck, and good afternoon, everyone. It's exciting to be talking with you today after another strong quarter from nerdy. As we continue to innovate and bring new products to market, deepening our relationships with learners, we are seeing strong top-line results. We once again achieved all-time bookings and revenue records in the first quarter as we continue to see momentum in the underlying trends driving demand for our services. Bookings of $48.5 million in the first quarter were up 30% over the first quarter of 2021, and revenue of $46.9 million during the quarter yielded 36% growth year over year. Bookings and revenue growth continue to be driven by the strength in our direct-to-consumer offerings across key formats and audiences. Our small class and group revenue increased 243% to reach $6.4 million in revenue, up from $1.9 million in the first quarter of 2021. accounting for 14% of our first quarter revenue as compared to just 5% in the same period a year ago. The increase was driven by the introduction of small group tutoring in varsity tutors for schools, as well as the continued adoption of small group classes among the consumer audience. As Chuck mentioned, we continue to evolve our product operating support of the evolution towards always-on learning by expanding the launch of a monthly membership program. Under the membership model, customers pay a fixed monthly rate for a minimum contract term ranging from three to 36 months with a number of sessions per month varying from one to three times per week. Typical monthly prices for a contract meeting once per week are in the range of $200 to $325 per month, with cost savings if learners meet more frequently. We believe offering a membership option that is in the $200 to $300 range per month versus typically greater than $1,000 upfront is appealing to customers and the reason why we're seeing great results so far, especially in today's macroeconomic environment. In the institutional business, Varsity Tenders for Schools revenue is on track for the year. We're seeing continued demand for our institutional clients and believe the new per-student, per-year product offerings we're launching will further support our ability to partner with even more districts in the upcoming year. In the first quarter, we signed 61 new contracts and delivered $4.6 million in revenue, representing nearly 10% of our first quarter revenue, demonstrating strong early adoption. Moving down to P&L, Rose profit of $32.8 million increased 40% year over year during the first quarter. The increase was driven by growth across consumer one-on-one audiences, growth in our small group class format, and the introduction of new products, including varsity tutors for schools. Gross margins of 69.8% during the quarter expanded over 200 basis points from 67.6% in the first quarter of 2021. Sales and marketing expenses on a GAAP basis were $23 million in the first quarter, up $8.4 million compared to the same period in 2021. Non-GAAP sales and marketing expenses, excluding non-cash stock-based compensation, were $21.9 million, or 46.7% of revenue in the first quarter. This compares to 42.2% of revenue in the last year's first quarter. In the first quarter, we continue to make investments in growing our sales organization to support Farsi Tutors for Schools' growth and across marketing to target new audiences, drive customer acquisition, and extend brand awareness. We reported a non-GAAP adjusted EBITDA loss of $6.6 million in the first quarter of 2022 compared to a non-GAAP adjusted EBITDA loss of $300,000 in the first quarter of 2021. Nerdy's decrease in adjusted EBITDA relative to 2021 was mainly driven by the strategic investments we made in platform and technology investments to drive product innovation and growth, to build out of varsity tutors for schools, and costs associated with becoming a newly public company. Turning to the business outlook, today we're providing second quarter 2022 guidance and updating our full year 2022 guidance to reflect two primary drivers expected to impact our top and bottom line forecast. First, the launch of our membership model is aimed at simplifying the business and driving higher engagement and lifetime value relationships with learners, but it will also change our revenue recognition patterns. Because revenue is recognized on a linear basis over the term of the contract versus being front-weighted in the first several months, as is the case in our existing package model, we expect to realize lower revenue recognition in the first several months for our membership customers, followed by higher revenue recognized thereafter. While this evolution towards subscription offerings results in lower near-term revenue and adjusted EBITDA, we believe the continued evolution towards an always-on membership model is both the right long-term decision to support learners and will accelerate our growth and profitability in the years ahead. Second, after strong bookings in January and February, we experienced a decrease in consumer bookings growth rates in March and April, in line with the broader global macro background. We also continue to expect a heightened level of travel this coming summer, resulting in lower levels of summer academic activities. The net effect of these changes is that we're updating our revenue guidance as follows. For the second quarter of 2022, we expect revenue in the range of $37 to $40 million, up 17% at the midpoint from $32.8 million in the year-ago quarter. For the full year 2022, we expect revenue in a range of $160 to $175 million. representing 19% growth at the midpoint versus our 2021 revenue of $140.7 million. We also expect sequential revenue decline in the second and third quarters given our evolution towards the membership model, as well as recent consumer bookings trends and the expectation for heightened summer travel, which primarily impacts the third quarter. We then expect revenue re-acceleration in the fourth quarter during the key back-to-school period driven by anticipated consumer demand and higher revenues from Varsity Tutors for Schools, which we expect to ramp into the upcoming school year starting in August. Our adjusted EBITDA guidance for both the second quarter and full year reflect a reduction to our previous guidance due to these changes. For the second quarter of 2022, we expect a non-GAAP adjusted EBITDA loss in the range of $9 to $12 million. For the full year 2022, we expect a non-GAAP adjusted EBITDA loss in the range of $28 to $38 million. We believe the market for supplemental learning continues to quickly shift from offline to online, expanding our total addressable market. Our strong liquidity puts us in a position of strength. To capitalize on this long-term trend, we'll continue to invest in new products and innovation to drive outsized growth. However, in light of the volatile global macroeconomic environment, we are paying close attention to costs and the pace of investments. We ended the quarter with cash and cash equivalents of $141.7 million in no debt. providing us with ample liquidity to operate against our plan and achieve profitability by the end of 2023. Thank you again for your time.
spk12: I'll turn the call back over to Chuck. Thanks, Jason, and thanks again to all of you for joining us today. We appreciate your interest in Nerdy and look forward to continuing the dialogue during this exciting time for the company as we improve access to supplemental learning solutions and advance our mission to transform how people learn. Before we turn it over to the operator for Q&A, I wanted to share that Ian Clarkson, our president and chief operating officer, will be departing the company. I'd like to personally thank Ian for his many contributions to the growth of Nerdy, including helping us go public this past September. He's been a key member of our leadership team, has played an important role scaling the company, has helped us develop a strong team, including at the executive level, that has set the company up for continued success for many years to come. Ian will be providing transition services to the company as a consultant and advisor over the next nine months. Thank you for your contributions, Ian. With that, let's turn the call over to the operator and get started with Q&A. Operator?
spk03: At this time, I would like to remind everyone in order to ask a question, press star then number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. The first question is from the line of Ryan McDonald with Amita. Please proceed.
spk09: Hi. Thanks for taking my questions. Maybe, Jason, the first one for you. As we think about sort of the updated outlook and the cut to the top line of guidance, can you parse out a bit sort of the mix of the decline, I guess, that's expected due to the soft macro versus the transition of the customer base over to this membership model? Thanks.
spk11: Yeah, absolutely, Ryan. The majority of the decline related to the guidance revisions is due to the change in the revenue recognition patterns to the evolution of a membership model. So I would say two-thirds of the change is due to the membership model being introduced with one-third due to consumer pressures that we started to see in March and April, coupled with our expectations for an even higher level of summer travel compared to what we previously expected. We're also hearing that consumers are buying closer to need. So historically where, you know, a customer would buy, you know, a package of 20 hours. Right now they're buying smaller packages to get them through the end of the calendar school year. But then they're also telling us, look, call me back right before back to school because I know that the need exists for my students. And, you know, we expect to rebuy that. So, you know, two thirds is the membership model change, which is intentional. And one third is probably the macro that we're seeing from consumers.
spk09: That's really helpful, Collar. And then, Chuck, for you, you know, it's really interesting to see the continued evolution of the institutional offering to include chat-based and sort of all-you-can-eat offering to touch the entire student population. Can you just talk about what's driving, what drove that platform expansion? You know, I know a big component of sort of spend and allocation of spend is sort of understanding, the district's understanding sort of student testing and assessments to see who's kind of far enough behind? Is there any difficulty in sort of identifying sort of the most that need students? And so they're just shifting purchasing patterns to have something that can address sort of the entire school sort of wall to wall? Thanks.
spk12: Sure. And good question, Ryan. A couple of quarters ago, we actually outlined our product roadmap for our institutional business that we call Learning Platforms to Service. So the big idea here was that a school or other institution should be able to leverage our platform and deploy different product solutions across different segments of their student population in a way that's seamless and allows students for them to tailor experiences and meet the needs of individual student segments, recognizing that there are some segments like, for instance, high-dosage tutoring, where schools are particularly interested in focusing on a subset of students. We're seeing very often it's 1%, 2%, 3%, 4% of students who need a much, much more focused form of intervention that oftentimes runs the entire school year and meets multiple times per week. As we thought about the other ways that we could help school administrators meet their objectives and help students, one of the ways that came up was in the form of a chat-based solution, in addition to a whole list of other ways that live instruction and supplemental support could be delivered. through a scale solution leveraging the internet. So in this case, it actually serves a different student need, and it allows school districts to offer a solution to all students. So normally, this is a product that we envision schools deploying across an entire school district as opposed to a subsegment. And it allows for that to serve as a really important catchment system to ensure that students can get help whenever they want. 24-7, seven days a week, but it's a little bit different than the live, focused intervention that we've been selling to date that has a very important need and in and of itself is a very large market, chat we see as complimentary. And the same is true for our other product, our teacher-led tutoring product, where a teacher can assign tutoring to students to ensure they get the help they need in a really focused fashion for specific students spanning a whole host of different subjects. And so as simple of a concept as teacher-led tutoring might be, it really has never been available. And so what we're trying to do is bring the power of our platform to allow for teachers to get leverage in a way that makes them more effective and allows for specific students spanning all grade types within a K-12 school district to get the help that they need. So both of these kind of come together to create what we think is a very elegant and tiered product offering that can be bundled together, but can help schools solve a variety of different needs for students that they have in their school population.
spk11: And I think your point is also Brad, I was just going to add, you know, I think importantly, you know, the broader product offering in schools is important as we move into this new school year. Their needs continue to evolve and develop. And, you know, given our platform-based approach, we're able to continue to evolve with them and meet those needs. And so, you know, we feel really well, really strong about the positioning that we have going into this key selling season over the course of the summer heading into the fall with schools.
spk09: That's super helpful. And I was just going to ask you a quick follow-up before I jump back in the queue. You know, are you seeing, I guess, in the conversations you're having with schools and districts today where there's sort of this interest in purchasing both at the same time and sort of viewing them as complementary? Or is the market still one where they're maybe going, you know, either high dosage or chat-based at this point? Thanks.
spk12: Yeah, we see these as complimentary, and the conversations that we're having are about bundled solutions. And we've already seen school districts, prior to us actually having these products, go out and find alternative solutions that allow them to make effectively their own bundling solution where Very often they're purchasing from a variety of different vendors with different modalities of learning related to tutoring and then bringing them together in a way that allowed them to deploy a holistic solution. And what we've done here is bring them together under one group, one technology platform that allows for them to get both seamless integration on the technology side, allows them to interact with fewer vendors, and then, importantly, allows for them to get leverage from their purchasing, where there can be favorable economics associated with bundling all these different services together. So we're seeing people very interested in using multiple different modalities for different formats that best suit worker needs. And that varies to some extent depending on the subjects and the grades and the and then the amount of intervention that's required, which I think is why schools are so interested in multiple different formats. Thanks. We appreciate the color.
spk03: Thank you, Mr. McDonald. The next question is from the line of Eric Sheridan with Goldman Sachs. Please proceed.
spk01: Thanks so much for taking the question. Maybe following up on the revenue guide color you gave there to the series of questions from the first analyst, just understanding a little bit better the evolution of the membership model beyond just 2022, how should we be thinking about it as a driver of penetration, of greater growth, of revenue recognition beyond just the element you called out of Q4 over Q3, and any element of where you could see spinning into the membership plan among your existing base of users, and how should we think about that mix shift? causing dynamics of revenue growth going forward. And then the second question, beyond just the mixed shift dynamic on the membership piece, would be understood the need to make the investments against the long-term dynamics and the opportunity you're going after. But if we were to have a macroeconomic environment that was to continue to worsen beyond what you saw in March and April, how should we figure out some of the fixed versus variable dynamics of costs in the business and investments that were must make for the long term versus areas where it could be more variable going forward. Thanks.
spk12: Thanks, Eric. And two good questions. So on the first, you mentioned evolution. I think that's the right word. So it's an intentional evolution. And it's one that's being made in response to changing consumer trends towards this concept that we're calling always-on learning that relates to people looking for much longer-term relationships that span longer periods of time. And it's now possible because of the normalization of education, online learning specifically, and people are more open to these recurring relationships. So one of the things that is important about this, and I'm sure is obvious, is that the upfront cost is quite a bit less. So it can be as much as 80% less upfront in the first month, which makes it price accessible to much broader segments of the population than would have been the case previously. What we're seeing thus far is that the one to one membership model is actually receiving higher conversion in our initial data than the one to one package offering. So we think there's an opportunity to expand the number of customers over time who are actually leveraging the platform. And then because this relationship defaults to always-on, where it can recur over long periods of time, there's an opportunity to build a membership base over the course of many years that accumulates and gives us higher levels of predictability and revenue, higher levels of profitability, and also allows us to simplify our business in a whole host of different ways. So we think there's a lot of really interesting things here, and we're going to continue to lean in, which, as Jason mentioned, requires sacrificing some short-term revenue recognition, but it's in exchange for all hosts of simplification to the business, benefits to consumers, and we think unilevel economic improvements over time. But we're still early days here, and we'll continue to provide updates on that into the future. And then shifting gears to your question around the general macroeconomic environment and potential Slow down. You know, one of the things, kind of thinking back to how our P&L looks, we have a lot of, you know, this is a lot of our expenses are related to people. We've made a whole host of different investments in the actual technology platform that allow us to personalize experiences in a way that drives revenue growth and will allow us to get operational efficiencies in the year ahead. And so simply by slowing down the rate at which we hire, you can grow into operating leverage. And we would expect that to be a big source of improvement in the operating margins of the business with an eye towards profitability in 2023. So there's certainly a lot of uncertainty in the general economy now, but based on simply doing more with less, and simply slowing the rate of hiring, both on the fixed and variable side. I think in both cases, we would expect to get leverage, where on the fixed side, you can simply slow your rate of hiring. On the variable side, you can, again, leverage technology to drive operational improvements that necessitate hiring fewer people into higher volumes. So I think we feel good about those general drivers as we head into our peak season, and You know, a lot of these conversations are starting right now, well before we ramp up, you know, what would be normal seasonal back-to-school hiring, which is the exact right time, I think, to be having these conversations.
spk11: And then maybe just to add to that, we'll also rein in some of the more speculative investments and concentrate on more progress in fewer areas. So some examples would include reducing spend associated with speculative marketing activities, as well as shifting resources from less important areas, as was the case with Veritas Press. which we just continued in Q4, to focusing on the membership model evolution as well as making sure that we're appropriately positioned varsity tutors for schools as we head into this key back to school season. And the last thing I would add is, you know, most importantly, we've got a really strong balance sheet, $141 million of cash, and we still expect to achieve profitability by the end of 2023.
spk12: Yeah, and we're coming off, you know, some strong, you know, some strong trends in the first quarter as well.
spk03: Thank you, Mr. Sheridan. Our next question is from the line of Maria Ripps with Canaccord. Please proceed.
spk02: Good afternoon, and thank you for taking my questions. Just following up on your membership model launch, anything you can share with us in terms of what portion of your learners that were offered the membership option actually signed up for it, and where do you expect that mix sort of longer term? And do you expect to offer both pricing models on the DTC side, or do you intend to sort of transition entirely to the subscription model over time? And then I have a quick follow-up.
spk12: Thanks, Maria. Yeah. Yeah, we're in the early stages of the membership rollout. So you started to see it, I think, impact the booking numbers a little bit in March, which factors into the whole gross sales. We're only counting the first month of a membership payment as the gross bookings. And then in the last couple of months, we've started to increase it to a higher percentage of customers, but we're trying to make it a measured rollout and evaluate the efficacy and make sure we're being thoughtful in which segments of the audience population that we're offering it to. So, you know, it's still early days, and we're going to be continuing to expand it and measure the outcome. But the initial data, you know, is very promising, but early.
spk02: And do you expect to keep both sort of models all the time?
spk12: Yeah, we think there's a place for both. And there are certain subjects and audience areas that lend themselves towards long, long-term recurring relationships. And there's other segments where there might be more of a short-term need. And we're still trying to work through the right way to pair both together to maximize the flexibility from the customer's perspective and allow us to serve different student populations. But there's definitely one of the things we're doing now is rolling it out in a way that allows for us to mix and measure our way into different audience segments. And so we're trying to be thoughtful about that rollout and where we actually remove packages versus where, you know, there's multiple different options available. So, again, early days, and we're trying to do, you know, what's right for the business, what's right for the customer, and what's right for ease of operations as well.
spk02: Got it. That's very helpful. And then given that the membership model sort of creates a more predictable steady demand and it seems like it brings higher sales conversion, can you maybe just talk about whether you expect any margin implications when this pricing model is fully ramped?
spk11: You know, the way that we're pricing the membership packages now, we would expect similar gross margins over time. You know, again, we're still early. We're still in price discovery, I'd say, as it relates to, you know, what the consumer is looking for. But over time, we would expect the gross margin profile to be consistent with what we've seen, you know, during the first quarter at 70%.
spk02: Got it. Thank you very much.
spk03: Thank you, Mr. Ripp. The next question is from the line of Doug Anmuth with JPMorgan. Please proceed.
spk07: Thanks for taking the questions. I have two. First, Jason, just hoping that for the guide you could perhaps parse out a little bit around better thinking about active learners and then ARHU as you go through 22. And then just secondly, just curious with the guidance for 22, does that on the DTC side, does that assume stable and friends with March and April, or is there any further kind of deterioration or softening built in there? Thank you.
spk11: Yeah, no problem. Fix to the questions. So from an active learner perspective, I mean, certainly you saw the number 56% during the first quarter. We saw strong growth there. And a lot of that was predicated on, you know, what we had been guiding to, which was significant levels of implementation, neurovarsity tutors for schools initiative, So from a learner perspective, if you're modeling that downstream, we've always said that you should expect ARC who declines on the consumer side in the mid to single digits given the next shift towards a higher proportion of classes. And then what we're seeing here on the institutional side is certainly a lower price point as more of those students are also participating in the one to five classes offering. Net-net, if I had to forecast it over the fullness of the year, I think you should continue to model, you know, mid-double digits declines in ARPU as we move forward, which is consistent with what we saw during the first quarter, given the mixed expectations between consumer and institutional. Yeah, mid-teens. Yeah. And then, you know, I alluded to it earlier. Again, I think two-thirds of the decline in the guide is related to the membership market, one-third is related to macro. But, again, what we're hearing from customers is that, you know, they're buying closer, but they know that, you know, their students and their children have significant needs and they expect to come back to them, you know, during the season. The other thing to keep in mind is the consumer perspective. It's much easier to put your arms around as consumers are more used to paying for things on either a subscription or membership basis. The lower upfront price point, $300 per month, is going over really well. And customers are willing to commit to a longer service for that lower price on the end, too, because they know that they've always got a subscription.
spk12: The one other thing I mentioned is Some of this is definitely related to the fact we're gearing up for some sort of monster leisure summer. One of the things that we the end here is that people are planning to take a very leisurely summer involved with a full host. So you're seeing fewer academic activities scheduled that range from courses to K-3 enrichment. And we don't attribute any of that to you know, it's difficult to disentangle from, you know, consulting. So we're just wrapping up the March package today that I'm not going to use until the fall. And then repurchase another one, you know, as back to school starts. So that's what we attribute to, you know, people being very clear there's a little bit less summer academic activities plans, but everything will lead us to believe there's still a great, great need and a lot of demand for tutoring this back-to-school season.
spk03: Thank you, Mr. Anmu. The next question is from the line of Andrew Boone with J&P Securities. Please proceed.
spk06: Hi, good afternoon, and thanks for asking my questions. Two, please. So to start off, I'll go down the same topic everyone else is. Given the learnings that you're seeing in terms of lower prices with subscription, are there any learnings that you can extend back to your traditional model? Does that make you rethink in terms of any of your price points or purchase to go to market in terms of maybe offering smaller packages? And then secondly, going to varsity tutors for schools, It sounds like sales execution improved in terms of the 61 signings you guys talked about. Can you help us better understand the drivers there, whether that's just better sales execution, the maturation of the sales force, anything that you'd like to call out there? Thanks so much.
spk12: Good question. So, We've been, you know, experiencing with various forms of subscriptions for a while now, and it continued to kind of hone in on what we thought would be most compelling to consumers. And, you know, as we've continued to increase the level of testing we've done and seen good traction, there's obviously been a, you know, a shift in the headlines over the course of the last couple of months on what's going on with the economy. So, you know, as we think about what's likely to resonate in a future state beyond what we're seeing today, we also think that having memberships that are lower up front and lend themselves towards recurring relationships that just default to on and can span many years we think that's a really good solution so that that you know certainly in a you know environment where there's macro pressures is helpful but it's also you know unrelated to that i think a function of just normalization of education and people wanting help across a wide variety of subjects potentially spanning many years so this whole gpa war concept where people are really focused on gpa which of course is the culmination of good grades and lots and lots and lots of classes as opposed to test prep where you know people would historically cram a little bit more and so those kind of two things converge to create an environment where we can create products that are lower up front, that resonate more with customers, that we believe they'll be more likely to buy, and that, over time, can generate relationships that are much, much longer in duration than what was possible in the package model.
spk11: And the other thing I'd add is that mindset absolutely parlays itself into our school's offerings. As it relates to the on-demand and teacher-led products, we're in the early stages of price discussions with school partners. What I can tell you is that the on-demand and teacher-led offerings will be very competitively priced in order to allow school districts to significantly increase the number of students who can be helpful with our product offerings. So the per-student cost will be much lower than the high-dosage tutoring, but there will be a lot more students covered in a given school contract. You know, we're in the early innings of these conversations, but net-net, we expect to provide more details after we get through this key back to schooling season, which happens, you know, from July and August.
spk06: Anything on the sales force or sales execution to call out?
spk12: Sure. So on the sales execution front, You know, we recently had Anthony Salcito join to lead our institutional efforts. So he's the chief institutional business officer, joined us just a couple of months ago, helped overall our product strategy with an eye towards back-to-school execution and a focus on larger accounts than we've targeted historically. So Anthony was previously the vice president of worldwide education for Microsoft and Microsoft led their $4 or $5 billion P&L for all education customers worldwide and has been a tremendous help thus far in really informing and evolving our strategy as to how we bring these multitude of different product capabilities we have together in a really elegant way that can meet the unique needs of schools, which of course has been a net new area for us over the course of the past year. So It's also something that the way that we're going to market and the way that we're framing these relationships lends itself to recurrence over much longer periods of time and embeds the offerings in a way that we think make them really sticky. So while only 2% of the American Rescue Plan funds of $24 billion had been spent at the end of the year um and we expect for that to drive growth for you know the next several years in a really material fashion we are also using this as an opportunity to uh to really catalyze our entry into schools and then build products that that provide so much value that there's a lot of stickiness and recurrence and they that schools would never kind of want to get rid of them is our goal so um you know we to kind of summarize new leader super excited about his contributions We have a new product strategy that augments the high-nosage tutoring model that's already getting a lot of success and traction. And then there's that kind of refocusing occurring on different accounts than we've had in the past. So, again, back to, you know, one of the other questions around the investment we've made here, we have kind of slowed the overall total rate of hiring, and we're now growing into – that, you know, that investment was made, which will provide operating leverage in the year ahead. But we feel really good about the momentum that we have for the rest of the year.
spk06: Thank you.
spk03: Thank you, Mr. Boone. The next question is from the line of Aaron Kessler with Raymond James. Please proceed.
spk10: Great. Thanks. A couple of questions on the gross margins. Can you give us a sense for how we should think about gross margins for the remainder of the year? Maybe kind of seasonality that we should think about for gross margins, especially with the school districts, probably having an influence on that. And just any further updates on bookings for as far as you choose for schools in Q1 or kind of ending schools? And then any updates on kind of Q2 bookings there as well? Thank you.
spk11: Yeah, so on the gross margin, certainly we saw improved gross margins in Q1 year over year, about 200 basis points of improvement. Probably three key factors that drove that improvement. One, we just continued Veritas Prep, which was a lower margin product during the fourth quarter. Second, we continue to optimize our class offering, looking at the frequency, the depth of the product offering, and continue to refine the go-to-market strategy there. And as you saw during the quarter, pretty significant increases in that class business, up 243% year-over-year. So certainly the mix has continued to improve at 14%, which is in line with our prior discussions. And then the last piece would be we did increase prices significantly. to a small extent at the start of the year, consistent with historical patterns. And then on a go-forward basis, you know, we continue to believe 70% margins is the target and the expectation for the remainder of 2022. And similarly, believe that the various varsity tutors for schools product offerings will be in line with what you've seen to date in the first quarter as we move through the course of the coming year.
spk10: Got it. Any updated stats on bookings for schools, either maybe ending schools you had in Q1 or a quarter-to-date trend there you're seeing as well?
spk12: Well, we're not planning to break them out, but one of the things that, you know, we – know we can't share today is that you know we're still tracking for the original gap forecast that we share and feel good about about our students for schools accounting for you know 10 percent uh or more of a gap revenue for the year so that continues to track and you know as we head into back school and we have these two new product offerings to complement high-dosage tutoring that's already received a lot of traction. I think we feel good about that original forecast and what was implied there. And then we're just now heading into what's going to be a really key back-to-school period that will determine, you know, the full extent of the, you know, the repurchases from existing customers, what products they're interested in leveraging with their student base, and then also all the net new customers that we would expect and targets higher to contract lift over the course of the next quarter. So this is really the period where it kind of all kicks off, but I think we feel really good about the momentum we have and then the extent to which we can meet the market need.
spk10: Great, thank you.
spk03: Thank you, Mr. Kessler. The next question is from the line of Brett Novak with Cantor Fitzgerald. Please proceed.
spk12: Hi, guys. Thanks for taking my question. Maybe just on the membership model, at the low end of the range, $200 a month, that's $2,400 for the year. Last year, it looks like average revenue per learner was around $1,100. What percentage of your learners last year paid $2,400, where it might make more sense on a price basis for that learner to enroll in a membership model as opposed to the more transactional consumer model they did last year? Well, what's interesting about it, and thank you for that question, is that we don't think we're sacrificing customers with this model. It not only appeals to folks who can afford to pay up front, it appears to be – It's also appealing to both those people and net new customers as well. So that's what's kind of interesting about the initial data is the higher conversion that we're seeing. So there's the potential that we actually make this accessible to more and more workers. So that's something that's both important to us from the perspective of being a mission-driven company that cares deeply about expanding access to education and tutoring specifically. But it's also helpful from the perspective of lowering that barrier to actually try it. So right now we're still in the early days of experimenting, you know, in the data while promising it's early. So we're going to continue to use both models. And as we see traction on memberships, we'll seek to increase the proportion of customers that are offered it over time and in which audience segments. But I'd say it's too early to answer, you know, that question specifically. But there are customers that are committed to longer periods of time and the relationship defaults to on, which we think is really promising. And then I guess just kind of trying to put together your new full-year guide, do you plan on introducing the membership model to your entire active learner base by the end of the year? And should I read into that that maybe 2Q is more of an impact for macro and the back half of the year kind of lower revenue growth there is more a result of the membership model? Well, it's a sequential rollout. I think it'd be too early to say it'll be fully rolled out by the end of the year. But as we thought about the guide and forecast for the major of the year, we factored in the fact that an increasing percentage of prospective customers are being offered the membership model. As that number goes up, the amount of revenue that um that is kind of subject to the new membership revenue recognition which is linear that occurs um you know sequentially over time of course supposed to be much more front-loaded packet model increases so you have more customers that are going into what is effectively a j curve associated with reprec and you know after x months um we believe it can be better off but that relationship you know is still still early so promising data um certainly q3 you know with potential rollout would be most impacted simply because that's a big quarter for us. And so to the extent you're pushing out some of the revenue, you know, a couple of months in service of much higher lifetime value relationships, potentially, you know, that is where you'd see the fullest, you know, effect of that effect. And so as we thought about the guide, you know, we did assume that there's increasing proportion of memberships, you know, over the next couple of quarters. And, you know, eventually that J curve should catch back up. But that kind of pushes out some of the short-term revenue recognition service of long-term economics.
spk11: And certainly while we think that the membership model is more conducive to more customers being able to surpass that high-cost entry on the package model, there are components of the business that it's unlikely that we would offer the membership. And a couple examples would be like the professional certification business, you know, where people are trying to just pass an exam. Or similarly, you know, in the test prep space where people are looking to pass a singular test, we believe the package model will still work there. But early days, we'll also continue to see the effects of the summer, heightened summer travel during the summer, so that will also depress Q3 to a greater extent than we previously got it.
spk05: Understood. Appreciate it. Thanks, guys.
spk03: Thank you, Mr. Knobloch. The next question is from the line of Mario Liu with Barclays. Please proceed.
spk05: Great. Thanks for taking the questions. So you mentioned recently that roughly 2% of the American Rescue Plan dollars have been spent thus far. So just wondering if you could help us identify what you believe are the main factors that is holding up spend and how you think this could be unlocked in the near term.
spk12: Thanks, Mario. Good question. So this past year, schools focused on safely reopening and staffing issues. So that included all of the national debates you saw around masks. It also included issues with getting kids to school with school buses. It also extended to teacher shortages, where you have major school districts that are shutting down a day a week. And so one of the things that we've seen is that schools focus initially there and are now starting to think about how to best leverage these funds. So in some cases, you're seeing school districts that are trying to get creative and see if they can use it for, say, new HVAC systems, which are quite expensive. But in other cases, they're actually saying, wait a second, this money's earmarked for COVID-related learning loss. We need to be really thoughtful about how we deploy it, and we need to start moving. So you're seeing pressure from the Department of Education. You're seeing pressure from state education agencies that school districts should kind of pick up the pace because the reality is that the data that is coming out on student results relative to historical standards is really poor, and it's really sad. And people are increasingly realizing that action needs to be taken now. So I think you're going to see the pace pick up as we head into this next back to school and that the pressure will be on school districts to thoughtfully and intelligently deploy different learning solutions that have a high degree of probability of remediating the severe learning loss that you're now seeing in some of these schools. state-level results for standardized testing. You know, I can't speak to everything that kind of slowed down schools initially, but I think the realization that it's unlikely that funding timelines will be extended considerably is now putting real pressure on school districts to act and move quickly. But, you know, our pipeline continues to grow, and we feel really good about the potential to solve large problems for large school districts or state agencies in the near head.
spk05: Very helpful. Thank you.
spk03: Thank you, Mr. Liu. The next question is from the line of Greg Givas with Northline Securities. Please proceed.
spk08: Hey, good afternoon. Thanks for taking the questions. I was wondering if you could maybe talk a little bit more about how much of a decline in bookings that you saw in March and April relative to the strength you saw in January and February?
spk12: Well, so one of the things, um, so we are actively rolling out this membership and so you're shifting people from what had been a bookings model where people would prepay for, you know, north of $1,000 to what, you know, and as we think about bookings, we actually are counting as just one month up front. So we're only counting the first month of that booking supper. So it's a little bit of, you know, apples and cucumbers to some extent but um you know we did see a sequential slowdown as we've approached summer you know with with particular areas that would have been driven by summer related academic activities kind of disproportionately seeing that slow down so uh it's kind of tough to break the two apart but it was enough that we felt it was important to highlight and be transparent about how some of the repurchase trends in particular just on the average order value side could be related to some of the macro pressures But, you know, what we're hearing, as Jason mentioned, is people are purchasing a little bit closer to when they expect to consume, which then lends itself towards, you know, a little bit of a smaller package throughout the school year and then purchasing again the back-to-school period as opposed to doing it all at once. So, you know, I think we feel good about the long-term trends related to People focusing on the GPA is to a much greater extent. That, of course, spans high school and college. We had really strong K-5 bookings in the first quarter, 57% bookings growth. That's an area where we would expect a little bit of a slowdown in the summer. given just the less of a focus on enrichment activities, academic activities that we expect this summer with the heightened leisure travel. But again, as we head back in the back of school, I think we're feeling good about the long-term consumer trends that relate to need state. The other thing I'd like to say is our institutional is kind of unrelated to those trends. And we're kind of set up in a way that we feel really good about for back to school as well. So we expect, as I mentioned, to achieve the revenue goal that we set out for. And then we have a couple of new products that we think allow for us to meet new and varying needs. And then they can be bundled together in a way that's really compelling. And these new products really lend themselves towards recurring relationships and recurring revenue in a way that we're really excited about.
spk08: Great. And then it looks like really nice momentum in the institutional side. I wanted to ask maybe what your full-year breakdown, I guess, between direct-to-consumer and institutional was. And then if you can remind us the gross margin differential between those two.
spk11: Yeah, so our initial guide at the varsity tiers for schools business is about 10% of the total guide, so that would infer $20 million. We still believe we're on track to achieve that during the course of the year. And then from a margin perspective, we believe and have priced the products fairly consistently to achieve the blended margin that you saw during the first quarter at 70%. All right, thank you.
spk03: Thank you, Mr. Zivas. There are no further questions, and this concludes today's conference call. You may now disconnect.
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