Nerdy, Inc.

Hello everyone and welcome to the Nerdy Inc third quarter 2023 earnings call. My name is Felicia and I'll be your operator today. Please note after the presentation part of this call there will be a question and answer session. You may register for a question by pressing star followed by one on your telephone keypad. I will now hand you over to TJ Lin, Associate General Counsel Securities Council. Please go ahead, sir.

Good afternoon, and thank you for joining us for NERDI's third quarter 2023 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 NERVI 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 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. Chuck?

Thanks, TJ, and thank you to everyone for joining us today. In the third quarter, our strong first half of the year continued, and we delivered revenue and profitability ahead of our expectations. Both our consumer and institutional businesses saw strong demand in the quarter as the school year ramp, which combined with the operating leverage that we are receiving from our new always-on recurring revenue models and investments in AI to also drive bottom-line outperformance. Learning Memberships, our new all-access subscription offering that aims to support learners across academic calendar years, subjects, and learning formats, continued to resonate with consumers this back-to-school season. The improved value proposition and expanded product suite included in Learning Memberships is appealing to a broad set of audiences and unlocking accelerated growth across multiple customer segments. We saw growth in new consumer customers purchasing learning memberships and joining the platform for the first time accelerate as the school year started, exceeding 45% year-over-year new customer growth in both August and September. That momentum helped drive continued revenue acceleration in the third quarter to 19% year-over-year growth for our consumer business and 27% for the total company. representing an acceleration of 600 and 1100 basis points respectively. At the end of Q2, we completed the evolution to 100% of our consumer customers purchasing learning memberships with the transition of our professional audience. Consumer revenue recognized from learning membership subscriptions increased to 96% in the quarter, up from 88% in the second quarter and 20% last year in the third quarter. We ended the quarter with 39.5 thousand learning members and 164 million in annualized run rate revenue. Our institutional business, Varsity Tutors for Schools, similarly saw a significant uptick in customer demand with the start of the school year with revenue of 5.6 million up 133% year-over-year. Bookings from varsity tutors for schools in the quarter were 10.6 million, up 89% year over year, delivering the second consecutive quarter with more than $10 million in bookings. With the start of the school year, we see growing recognition of what we've always known. Tutoring continues to be the proven solution for accelerating and remediating learning. This is leading to a significant uptick in interest in high dosage tutoring and an increase in the scale and velocity of institutional opportunities, including numerous state-level tutoring programs. During the third quarter, the pace of change and innovation continued. We significantly overhauled, simplified, and evolved our institutional offering. We believe this will better position Varsity Tutors for Schools to attract new customers to the offering and build deeper and larger relationships with existing ones. As part of the new offering, we introduced two access-based subscription products, district-assigned and parent-assigned to complement teacher-assigned. With Varsity Tutors for Schools, school district partners can now choose to administer high-dosage tutoring centrally at the school district level with district-assigned, empower teachers to manage and prescribe high-dosage tutoring to students in their classroom with our teacher-assigned offering, or with parent-assigned, school districts can provide parents and families with our learning memberships. We believe that allowing school districts to purchase learning memberships on behalf of their students and enabling parents to have control and ownership of their child's learning solves an important problem for many schools and represents a significant commercial opportunity. It also serves as an example of our platform-oriented approach to growth, where we aim to build once and then leverage the product capability many times to serve net new audiences. In this case, selling our primary consumer product into K-12 school districts with administrative tools layered on top for district-wide scale. As we head into 2024, an elegant convergence of subscription business models and access-based products has occurred in both our consumer and institutional businesses. We believe this will help us better serve the needs of our customers, further simplify our operations, allow us to innovate faster in the future, and further position us for sustained growth and profitability in the years ahead. I am pleased to share that in the third quarter, we delivered $40.3 million of revenue, an increase of 27% year-over-year above our guidance range of $38 to $40 million. Revenue growth was driven by both our consumer and institutional businesses, which were up 19% and 133% year-over-year respectively. Gross profit of $29.2 million in the third quarter increased 33% year-over-year And gross margin of 72.4% for the quarter was a record and compares to 69.0% in the same period last year, a 340 basis point increase. Our customer lifetime values continue to show significant improvements relative to our old package model, driven by our evolution to learning memberships, which continues to be a key driver to our strong operating results and improved profitability year over year. During the third quarter, we delivered non-GAAP adjusted EBITDA margin improvements of over 2,300 basis points year-over-year, driven by improvements across every P&L line item. Moving on to our consumer business, our learning membership model continues to lead to more attractive unilevel economics, broader customer appeal, longer duration and higher lifetime value customer relationships, higher gross margin, and a more scalable and efficient operating model. It also serves as an easier platform from which to drive innovation and incremental growth, given our ability to add new product capabilities into the existing all access subscription offering, thereby making the offering more appealing and engaging, driving conversion of new members and the retention of existing ones. Consumer revenue of $34.5 million increased 19 percent year-over-year and represented 86 percent of total revenue in the third quarter, delivering sequential accelerating growth each of the last three quarters. Active members of approximately 39.5 thousand as of September 30, 2023, increased 8.5 thousand or 27 percent during the quarter. Average revenue per member per month, or ARPM, of approximately $346 at the end of the third quarter resulted in an annualized run rate of approximately $164 million from learning memberships at quarter end, more than 3x the level a year ago. During the third quarter, we began introducing a significantly upgraded and enhanced learning membership digital experience. These updates enrich the experience, encourage achievement, reinforce personal accountability to learning, and improve the discoverability of learning formats and subjects. We also improve the user experience with new AI-driven learning formats to continue to broaden the resources available as a part of learning memberships delivering increased value. These improvements are quickly resulting in learning members utilizing additional learning formats and content and driving higher non-tutoring and total engagement on the platform. Overall, non-tutoring engagement in September was up 54% year-over-year for all clients and up 68% year-over-year for new members in their first month, which was our first cohort of new customers that only experienced the all-new My Learning Hub and subject portals. From many years of experience, we know that when customers engage more deeply with our product, including across multiple learning formats, multiple subjects, or multiple students per household, it is highly predictive of stronger long-term retention and higher lifetime value of those customers. During the third quarter, we rolled out numerous product and user experience enhancements. The new My Learning Hub transforms the way learning membership customers engage with our platform, making discovery with our platform highly predictive of stronger long-term retention and higher lifetime value of those customers. During the third quarter, we rolled out numerous product and user experience enhancements. The new My Learning Hub transforms the way learning membership customers engage with our platform, making discovery with our platform more intuitive and user-friendly.