Nerdy, Inc.

Good afternoon, and thank you for attending today's Nerdy Third Quarter 2022 Results Conference Call. My name is Jason, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star 1 on your cell phone keypad. I'd now like to pass the conference over to our host, Molly Sorg, Head of Investor Relations.

Good afternoon, and thank you for joining us for Nerdy's Third 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, strategies, opportunities, plans, and outlook. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results. Any forward-looking statements are made as of today's date, and NERDI does not undertake or accept any obligation to publicly release any updates or revisions to any forward-looking statements to reflect any change in expectations or any change in events, conditions, or circumstances on which any such statement is based. Please refer to the disclaimers in today's shareholder letter announcing NERDI's third quarter results and the company's filings with the SEC for a discussion of the risks. Not all of the financial measures that we will discuss today are prepared in accordance with GAAP. please refer to today's shareholder letter for the reconciliations of these non-GAAP measures. With that, let me turn the call over to Chuck. Chuck?

Thanks, Molly, and thank you to everyone who has joined us today. We're happy to be back in front of you discussing our third quarter results. Two quarters ago, we unveiled to you our ambitious plan to evolve our products and revenue model to orient towards long-term recurring relationships with customers that default to being always on. We did this in response to market changes we were seeing, including new consumer and institutional customer preferences for learning solutions that could provide ongoing support across academic calendar years, subjects, and learning formats. As a result, we began to converge our product and revenue strategies and developed new recurring revenue products, including learning memberships for consumers and on-demand teacher-assigned for school district customers. Early data suggested our transitional learning memberships would lead to longer duration and higher lifetime value customer relationships, enhanced gross margins, better marketing efficiency, better forecasting visibility, and a more scalable and efficient operating model. We also believe the transition would allow us to serve a larger market of learners while offering experts an opportunity for more consistent earnings. We shared that this transition would require trading off revenue recognition in the short term because our package model recognizes revenue in a front-loaded manner. While in our learning membership model, revenue is recognized linearly over time. We estimated that cumulative revenue for a given customer would catch up and surpass that of a package customer by month six in the transition. We described this revenue recognition difference as the J curve. Two quarters into this initiative, we are pleased to report that the new business model has exceeded our expectations and validated our underlying assumptions and more. Based on the positive feedback we received as schools started across the country, combined with the favorable customer economics we observed, we determined learning memberships is the winning model and we made learning memberships the primary solution offered to consumers during the quarter. In doing so, we made the decision to lean farther into the J curve on revenue recognition as we transitioned a larger percentage of the business than previously targeted to learning memberships. We also discontinued our academic and enrichment class a la carte sales by rolling them into our learning membership offering. As anticipated and consistent with what we discussed in August, summer travel leisure was heightened with consumption seasonally declining over the summer months. We then saw continued strengthening of demand for supplemental learning as schools went back into session and demand picked up. Notably, we haven't observed any discernible macroeconomic pressure on demand for our products. We delivered revenue of $31.8 million in the third quarter, results that were just above the midpoint of our guidance range of $30 to $33 million. This result reflects stronger than anticipated performance given our decision to shift a higher proportion of new customers to learning memberships, which decreases recognized revenue in the current quarter, in order to be able to generate higher levels of revenue in subsequent quarters from those specific customers. During the third quarter, approximately 62% of new learners in our consumer business purchased a learning membership as opposed to a package. Revenue recognized in the third quarter from learning memberships grew to $5.8 million, or 18% of total recognized revenue, up from just 2% of total recognized revenue in the second quarter. Learning membership revenue has already grown to an annualized run rate of $50.2 million as of September 30th. As I have mentioned, for our consumer business, learning memberships are helping to transform our relationship with customers into one that is recurring in nature, spanning multiple subjects and learning formats. This model encourages ongoing consistent learning over longer periods of time, which is leading to significant improvements in customer engagement. In addition to one-on-one tutoring, each membership includes access to unlimited live and asynchronous learning formats with content available for the entire household. We're seeing these benefits deliver positive multi-format engagement trends, and over 25% of our early cohorts have adopted at least one other learning format beyond one-on-one tutoring. For customer audiences where our class and learning resource content is broader, that number grows to 40%. The higher retention and engagement is leading to superior customer monetization and lifetime value trends relative to our package model. Our recent monthly cohort's cumulative membership revenue is on a path to equal or exceed historical average customer revenue cohort curves after approximately four months, more than making up for the approximately 30% of customers and less than 10% of revenue that consumer class customers historically represented. This clearly demonstrates the superior economics of our learning membership and the higher value of the active orders we are adding to the platform. We now expect by the end of the calendar year, our monthly subscription revenue recognized from learning memberships will exceed the revenue recognized from package customers. And by the end of the first quarter next year, we expect our monthly consumer revenue will be driving year-over-year growth in our consumer business again with superior unit-level economics as we exit the J-curve.