Nerdy, Inc.

Good afternoon and welcome to Nerdy Inc Q4 earnings call and release. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, we will conduct a question and answer session. To ask a question at this time, please press star followed by the number one on your telephone keypad. If you change your mind at any time, please press star two. And for operator assistance at any point, it's the star zero key. Thank you. I'll now turn the call over to TJ to begin today's call. So, TJ, you may begin.

Good afternoon, and thank you for joining us for NERDI's fourth 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 statement 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 fourth quarter results in the company's filing with the SEC for a discussion of the risks. Not all of the financial measures that we will discuss today are prepared in accordance with GAAP. Please refer to today's shareholder letter for reconciliations of these non-GAAP measures. With that, let me turn the call over to Chuck.

Thanks, TJ, and thank you to everyone who has joined us today. Over the last 10 months, we've been working to transition our products and revenue model toward long-term, recurring, always-on relationships with our customers. We believe this change would benefit our consumer and institutional customers and our business model by shifting to longer-term relationships that supported evolving learner needs states. We created new subscription and recurring revenue products, including learning memberships for consumers and on-demand and teacher-assigned products for institutional customers that were built specifically to address the ongoing support we believe both types of customers desired. We shared that this new focus would require a short-term hit to revenue recognition because our package model has a more front-loaded revenue recognition associated with it than the learning membership model where subscription revenue is recognized linearly over time. We estimated that by month six for a given learning membership customer, the cumulative revenue would catch up and surpass that of a given package customer, a phenomenon we called the J curve. We expected that by the start of the second quarter in 2023, the cumulative build of recurring revenue from learning membership customers would cause us to return to growth in our consumer business as well as for the total company. but now with a product suite and revenue model we believed would position us for higher levels of growth, profitability, and predictability in the years to come. I am pleased to share that we have made substantial progress in the fourth quarter, and our shift to an always-on business model is ahead of plan. Learning membership adoption continues to exceed our expectations, demonstrating higher conversion, engagement, and customer retention than our former package model, which in turn has led to meaningfully higher customer lifetime value and operating leverage. We delivered revenue of $41.8 million in the fourth quarter, above our guidance range of 39 to 41 million. These results reflect stronger than anticipated active learning membership counts, which totaled over 20,000 as of year end. Also, we saw continued strength in lifetime value performance from learning membership customers. This progress, combined with operating efficiencies gained from the business model evolution, provides us increased confidence in achieving adjusted EBITDA profitability by the end of 2023, as previously communicated. In the fourth quarter, we delivered on our commitment to enhance learning memberships by providing unlimited access to three new products, Codeverse, TutorChat, and EssayReview. With the addition of these formats, we were able to grow the percentage of customers engaging in a non-tutoring format in their first month to over 30% in December. Multi-format engagement has historically been highly correlated with higher retention, higher lifetime value, and higher customer satisfaction. Learning membership revenue continues to grow at a rapid pace. Revenue recognized in the fourth quarter from learning memberships grew to $20.8 million a $15 million increase from the third quarter representing 50% of total company-recognized revenue in the quarter, up from just 2% of total recognized revenue in the second quarter and 18% in the third quarter. In fact, learning membership revenue has reached an annualized run rate of more than $87 million as of year end, an increase from $50 million as of the end of the third quarter providing us with increased forecasting visibility in the future revenues. The rapid transition of learning memberships is also allowing us to deliver gross margin expansion and a more scalable and efficient operating model. During the fourth quarter, gross margin of 70.5% was approximately 230 bps higher than gross margin of 68.2% during the comparable period of 2021. As we shift towards a higher proportion of learning membership customers and revenue, we expect continued gross margin expansion in 2023. Learning memberships also enabled further marketing yield optimization during the fourth quarter with marketing expenses as a percentage of revenue improving by approximately 370 basis points year over year, driving further efficiencies in our consumer business. Higher engagement and retention among learning membership customers and an average revenue per learning membership of approximately $350 per month during the fourth quarter combined to drive continued lifetime value expansion and an accelerated marketing payback period. In fact, recent monthly cohorts cumulative learning membership, average revenue per customer continues to expand and separate from the historical amount an average consumer customer would spend over time under our historical package model by the third or fourth month after starting. These results clearly demonstrate the superior lifetime value of our learning membership model and the higher average value of the consumer customers we are adding to the platform. During the fourth quarter, Varsity Tutorship Schools delivered on a major milestone in our product evolution with the go-live of both on-demand and teacher-assigned. These two new products are oriented toward providing district-wide solutions that can be deployed across entire student and teacher populations, significantly widening the impact we can have with our school district partners. Additionally, these new offerings align to a school district's in-class curriculum, are embedded into the school's workflow, and importantly, are directed by teachers who we believe are ideally suited to assess their own students' learning needs. We executed over 70 contracts, including 15 on-demand contracts with our first teacher-assigned partnership, an important milestone as we transition to our more expansive partnership model with larger school districts. Collectively, these contracts resulted in a record $11.3 million of bookings during the fourth quarter. We believe these results clearly demonstrate that our new always-on product offerings are resonating with school district partners especially when bundled together or combined with our existing high-dosage tutoring products. These strong results and continued momentum to start the year provide us increased confidence that Varsity Tutors for Schools is well positioned to provide solutions that administrators, teachers, and students are seeking to support their evolving needs. Looking ahead to 2023, I wanted to share our plans for how we'll continue to focus on delivering exceptional value to customers and results for our investors. First, we'll continue to scale always-on recurring revenue products. Given the success of learning memberships across our academic audiences, we plan to transition our test prep and professional audiences to learning memberships by the end of 2023. With the completion of this transition, we will have shifted 100% of our consumer business to always-on recurring revenue subscription products. With a strong foundation in place, we believe we can continue to drive higher levels of learning membership growth across all of our consumer audiences through further product enhancements and testing. Specifically, we plan to iterate on the pricing and the structure of learning memberships to broaden their appeal at the top of the funnel and drive further growth and conversion in customer acquisition. We also plan to create more flexibility for customers to manage their membership and tutoring frequency including new self-service capabilities, which we believe will increase retention and lifetime value by better aligning learning memberships to evolving customer needs. Additionally, we plan to make it easier for members to discover multiple new learning paths, including new learning formats and programming coverage, to drive further engagement among members with the aim of providing more value and enhancing customer satisfaction. Within our institutional business, we expect our new teacher-assigned and on-demand products will represent a growing proportion of institutional bookings during the year as we remain focused on district-wide solutions and partnerships with larger school districts. Our second major area of focus is achieving adjusted EBITDA profitability. As learning membership mix continues to increase as a percentage of total revenue, we believe we will be able to drive continued gross margin expansion and further simplify our operating model in the year ahead. We also plan to make further investments in automation, self-service capabilities, as well as weaving additional AI capabilities through our platform to enhance both the learner and expert experience. Recently, we have seen improved adjusted EBITDA performance each month as we progress further through the J curve. Given our recent momentum, we have increased visibility into and confidence in achieving adjusted EBITDA profitability by the end of 2023 as previously communicated. Our third area of focus is that we'll continue to lead the way forward with new technologies, further leveraging artificial intelligence capabilities to transform how people learn and further personalize the learning experience. We've long believed that AI for HI, or artificial intelligence for human interaction, has the ability to transform how people learn. AI has been central to our ability to improve quality, enhance personalization, and decrease the cost of our offerings. Today, AI powers our ability to identify the highest quality experts, assess learners' foundational knowledge, and helps ensure the right expert-learner match occurs, among many other use cases on the platform. The latest AI advancements are allowing us to rapidly develop transformative experiences involving the real-time generation of content with near-zero costs, improving our ability to deliver live human interaction and personalized learning at scale, and providing new superpowers to experts and learners on the platform. We recently announced the launch of two new AI-driven products and plan to leverage the latest advancements in machine learning and AI, including ChatGPT and similar technologies, to drive further product enhancements personalization, and cost efficiency in the year ahead. The first two products include an AI-generated lesson plan creator embedded in the company's live learning platform that is available for use during live tutoring sessions. And separately, an AI-generated chat tutoring product that pairs a conversational AI-driven chat with the ability to access a live expert on demand. These two products represent the company's ongoing orientation toward taking a software and AI-driven approach to solve customer and business problems and build a highly scalable platform. We plan to roll out additional products and features for consumer customers that expand on these new capabilities as part of learning memberships. We believe that these additional products and tools will allow us to further personalize the experience for each learner and expert, yielding higher levels of engagement, retention, and customer lifetime value, driving both revenue predictability and operating leverage in the year ahead. In closing, I am proud of our team's execution. Just 10 months ago, we laid out a vision for our stated goal to transition our business towards always-on recurring revenue streams with the introduction of learning memberships and the new institutional products, including teacher-assigned and on-demand. These efforts have allowed us to build a strong foundation for growth. They have also helped us establish a business model that can produce longer duration and higher value relationships with our customers, serve as a more scalable platform for future innovation, and have helped position us to achieve adjusted EBITDA profitability by the end of 2023. In the coming year, we look forward to continuing to push the pace of innovation and enhancing our ability to meet the needs of both consumer and institutional learners in any subject anywhere and at any time. We appreciate your continued interest in our company. With that, I'll turn it over to Jason to discuss the financials in more detail.