Nerdy, Inc.

Hello, everyone. Thank you for attending today's NERDI Incorporated fourth quarter 2023 earnings call. My name is Sierra and I'll be your moderator today. 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, press star one on your telephone keypad. I would now like to pass the conference over to our host, TJ Lin, Associate General Counsel of NERDI.

Good afternoon, and thank you for joining us for NERDI's fourth 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 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 fourth 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 reconciliations of these non-GAAP measures. With that, let me turn the call over to Chuck.

Thanks, TJ, and thank you to everyone for joining us today. We entered 2023 with three primary goals that included scaling always-on subscription and access-based revenue products, driving profitability, and leveraging AI for HI, or artificial intelligence for human interaction, to transform how people learn. I'm proud of the NERDI team for delivering against all three of these commitments, which were accomplished through the tight execution against ambitious initiatives in both our consumer and institutional businesses over the past year. These include completing the evolution to subscription-based offerings, the simplification of our product operating model and pricing, enhancements to our offerings, including the launch of multiple new scalable products and durable improvements in the efficiency of our operating model. As a result of this work, revenue accelerated each quarter to 32% year-over-year growth in the fourth quarter. Non-GAAP adjusted EBITDA margin improved by approximately 2,100 basis points year-over-year representing a $33.2 million improvement in profitability, or 108% flow-through from revenue to non-GAAP-adjusted EBITDA. Our progress evolving, enhancing, converging our consumer and institutional business models, products, and platforms has set the stage for us to build from a solid foundation for growth. It's also enabled us to develop a freemium growth strategy that aims to introduce our products to consumers and institutions at a larger scale than ever before. I wanted to start off by sharing the following retrospective in relation to our three primary goals from 2023. During the year, we successfully transitioned 100% of our consumer business to learning memberships. Market acceptance and demand for learning memberships was strong throughout the year, with new consumer customer growth of 26% year-over-year, resulting in us ending the year with 40.7 thousand active learners, up 101% year-over-year. We also made significant platform enhancements that have enabled us to shift our institutional business to access-based subscription models that we believe provide more value to our institutional customers. This new model was made possible by the unification and overall of our consumer learning membership experience, which then allowed for us to scalably offer our suite of products, including those originally built for consumer audiences, to K-12 schools and other institutions. During the year, Varsity Tutors for Schools contracted with nearly 200 school districts, delivering $37.6 million of bookings, an increase of $12.8 million or 52% compared to the previous year. Institutional revenue of $33.8 million increased 77% year-over-year and represented 17% of consolidated recognized revenue in 2023, ahead of our initial 15% expectation to start the year. This level of institutional growth occurred while launching two new products and shifting the business model products and platform to one that involves access-based subscription offerings focused on a subset of students requiring tutoring, and then also providing every student in that district with access to our suite of powerful learning resources at no additional cost. Strong adoption of learning memberships and customer lifetime value expansion in our consumer business, coupled with continued scaling of our institutional business, led to accelerating consolidated revenue growth each quarter throughout the years. We delivered year-over-year growth of 5% in Q1, 16% in Q2, 27% in Q3, and 32% in Q4. A year ago, as we headed into 2023, we believed the transition to a learning membership model would lead to more attractive unit-level economics, broader customer appeal, longer duration, and higher lifetime value customer relationships higher growth margin, and a more scalable and efficient operating model. We also thought that learning memberships would serve 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 offerings more appealing and engaging. We expected this to drive both the conversion of new members and the retention of existing ones. We also believe that if we built access-based subscription products and made investments in automation, self-service capabilities, and AI, that we could simplify operations and simultaneously enhance both the learner and expert experience. I'm pleased to say that our belief that the transition to subscription revenue relationships with customers would provide substantial operating leverage has proven to be correct. During 2023, we were able to deliver adjusted EBITDA margin leverage across every P&L line item on a year-over-year basis. At the start of the year, we expected a non-GAAP adjusted EBITDA loss in the range of $10 million to break even for the full year in 2023, and that we would be adjusted EBITDA positive in the fourth quarter. Against this commitment, we delivered adjusted EBITDA profitability in the first and second quarter a full nine months ahead of our initial goal. We also delivered adjusted EBITDA profitability of $3 million in the fourth quarter, ending the full year with an adjusted EBITDA loss of $2.5 million versus an adjusted EBITDA loss last year of $35.7 million. That improvement of $33.2 million in 2023 versus 2022 represents an adjusted EBITDA margin improvement of approximately 2,100 basis points year over year. Said another way, we delivered consolidated revenue growth of $30.7 million in 2023 versus the prior year. And at the same time, we're able to generate a full year improvement of $33.2 million representing a 108% flow through of consolidated revenue growth to non-GAAP adjusted EBITDA. We believe these substantial improvements position us for adjusted EBITDA profitability and being operating cash flow positive for the full year in 2024 and beyond. In relation to our third goal in 2023, We've long believed that AI for AI 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 delivering our offerings. AI powers our ability to identify the highest quality experts, assess learners' foundational knowledge, help ensure the right expert-learner match, and drive operational efficiency. During the year, our investments in AI allowed for us to rapidly develop learning experiences involving the real-time generation of content with near zero costs, improve our ability to deliver live human interaction and personalized learning at scale, provide new superpowers to experts and learners on the platform, and allowed us to remove substantial operating costs from our business. Our continued investments in AI4HI allowed us to launch an all-new membership experience, making it easier for learners to more fully engage with their learning membership by improving product discovery and personalization. We also successfully launched multiple AI-driven solutions that positively impact the customer experience, including an AI-generated lesson plan creator, AI-driven chat tutoring, and AI-generated learning content, including practice problems and Q&A. Looking ahead, AI will continue to accelerate our efforts to deliver a compelling product experience and build the leading platform for connecting learners and experts in any subject, anywhere, and at any time. Turning to our recent performance, I'm pleased to share that in the fourth quarter, we delivered $55.1 million of revenue, an increase of 32% year-over-year, capping the year by delivering accelerating sequential growth each quarter in 2023. Revenue growth was driven by both our consumer and institutional businesses, which were up 17 and 160% year-over-year, respectively. New consumer customer growth of 35% year-over-year in the fourth quarter remains strong. Wording membership customer lifetime values continue to show substantial improvements relative to our old package models. We delivered record quarterly gross profit of $39.2 million in the fourth quarter, an increase of 33% year-over-year. We delivered adjusted EBITDA of positive $3 million in the fourth quarter above our guidance range of breakeven, resulting in adjusted EBITDA margin improvements of approximately 1,900 basis points year-over-year for the quarter. Moving on to our consumer business, our learning membership model continues to lead to more attractive unilevel economics broader customer appeal, longer duration, higher lifetime value customer relationships, higher gross margin, and a more scalable and efficient operating model. The recently introduced MyLearningHub and subject portals, which enrich the experience and improve the discoverability of learning formats and subjects, are leading to increasing levels of year-over-year non-seudering engagement, which we found is highly predictive of stronger long-term retention and higher lifetime value. During the fourth quarter, we began to test additional product offering tiers by grouping product capabilities and testing multiple price points to identify a pricing model with mass market appeal and deliver the right customer experience and learning support to every student. We also tested multiple self-service features aimed at enhancing and simplifying user experience. These tests, often involving lower average revenue per month or ARPM products, decreased ending ARPM in the quarter, but it provided our teams with multiple signals in the consumer intent, preferences, and behavior that informed our initial approach to a consumer freemium model. Turning our attention to our institutional business and Varsity Tutors for Schools, over the course of 2023, we made significant platform enhancements that have enabled us to shift our institutional business to one that is access and subscription-based, and one that provides more value to our institutional customers. Our relationship with Varsity Tutors for Schools now comes with access to a broad range of powerful academic resources for an entire district, as well as the ability to choose between three simple models for high-dose tutoring with district assigned, teacher assigned, and parent assigned. With Varsity Tutors for Schools, our institutional customers can now choose to administer tutoring centrally at the school district level, empower teachers to manage tutoring interventions, or provide parents with learning memberships and oversee tutoring outside of schools for their own students. The breadth of the resources included in the platform allows us to serve a much broader set of needs for our institutional customers and greatly expands the number of students we can impact. Our focus on product expansion is yielding results with institutional revenue of $11.3 million, increasing 160% year-over-year and representing 21% of total revenue in the fourth quarter. Varsity Futures for Schools executed 42 paid contracts in the fourth quarter, yielding $10.3 million of bookings. The third consecutive quarter was more than $10 million of bookings. In addition to the high dosage models that are typically focused on a subset of students within a school district, access to the varsity tutors platform is now provided for all students district-wide, enabling us to provide more value to the school district and its students and families. For example, take a school district with 100,000 students focusing its high dosage tutoring on 1,000 students within the district. The other 99,000 students will now also receive access to products, including 24-7 on-demand chat-based tutoring, on-demand essay review, more than 100 live group classes per week in areas including enrichment, test prep, and academic subjects, our STAR courses, our self-study tools, our college and career readiness resources, our adaptive assessments, our recorded enrichment classes and test prep classes, and more at no additional cost. In many cases, districts were and are paying large amounts of money for these services, and they can now direct those cost savings towards live, video-based, high-dosage tutoring from Varsity Tutors for Schools. We are now leaning into this interest and recently began making access to the Varsity Tutors platform available at no cost to school districts on a rolling state-by-state basis across the U.S. By providing this robust set of academic resources at no cost, we aim to efficiently build trust and credibility at scale and earn the right to be considered for live video-based high-dosage tutoring, which is our superpower and the primary way we intend to monetize these relationships over time. Initial interest has been strong, with more than 250 districts representing more than a million students signing up and offering access to their students. The level of initial uptake and success has caused us to invest significant organizational resources towards this initiative and enabling a successful Q124 launch. These efforts include a specific focus on platform scalability and building the freemium upsell go-to-market motion of high-dose tutoring sales to K-12 school districts as we build trust and credibility with these new no-cost access partners. Turning our attention to 2024, we have three main priorities that aim to further our mission of helping people learn. First, we will scale the winning product for every learner. As we continue to evolve and enhance our product offerings within our new access-based subscription model, our focus remains on delivering enhanced value to both consumer and institutional customers. In 2023, we successfully unified our offerings into access-based subscription models and leveraged AI to improve our products. We'll build upon this strong foundation in 2024 to scale our platform and reach more learners across more learning needs. Our 2024 plan involves significant enhancements to the customer experience that are designed to make accessing high-quality live instruction more intuitive for every learner. Specifically, we plan to streamline onboarding, simplify scheduling, enhance self-service tools, and expand expert engagement features to improve the learning experience on our platform. We also plan to continue to leverage AI to improve the quality of live instruction delivered on the platform and the quality of the customer experience learners receive. We plan to equip experts with better capabilities to help tailor instruction and create individual learning journeys that accelerate skill acquisition. Additionally, we plan to use AI to guide learners towards the most effective next steps in their learning journey, building on our success with AI and matching learners and experts. We believe these initiatives will increase engagement on the platform, increase the value we provide for both learners and experts, improve customer lifetime value, and ultimately improve our unilevel economics and the total revenue and profitability of the business. As our second goal and priority for the year, we will deliver growth by scaling two freemium models. Our efforts this past year enabled us to converge our consumer and institutional businesses into similar access-based subscription models built on a unified common platform. That's allowed us to take products originally built for either our consumer audience or our institutional audience and make them available to each other as part of a standard product offering in both businesses. This includes 24-7 chat-based tutoring, AI tutor, on-demand essay review, more than 100 live group classes per week in enrichment, test prep, and academic subjects, our STAR courses, self-study tools, college and career readiness resources, adaptive assessments, and more. We believe the logical next step is the introduction of a freemium offering within both our consumer and institutional businesses that introduces Nerdy to millions and eventually tens of millions of learners with a specific aim at dramatically growing awareness and driving a halo effect across both businesses. The initial no-cost version of our platform on its own already meets multiple customer needs states across study support, homework help, college admission prep, and enrichment. It also serves as a natural on-ramp that will allow us to introduce and upsell our live video-based online tutoring products to a far broader audience across multiple points in a learner's education journey. With more than 1 million students signed up across more than 250 school districts on the Varsity Tutors for Schools side, encouraging early signal across consumer customers, we believe a freemium growth strategy will allow us to drive substantial marketplace awareness. We also think it can help us achieve multiple different business objectives, including unlocking e-commerce, expanding into new marketing channels, introducing Nerdy to new audiences, and finally, expanding our total addressable market by becoming a household name. We're looking forward to updating you on the progress we make against this effort over the course of the next year as we further enhance and refine this strategy. As our third goal in 2024, we will deliver profitable growth. In 2024, we expect to build upon our recent success by delivering profitable growth through an increase in the number of active members and lifetime value extension in our consumer business, as well as delivering higher institutional revenues as we continue to rapidly grow Varsity Tutors for Schools. We believe that by scaling our winning access-based subscription offerings, we will be able to deliver accelerating full-year revenue growth of 24% year-over-year at the midpoint of our guidance improve adjusted EBITDA margin by an additional 500 basis points, and deliver positive operating cash flow in 2024. In closing, with our transitional learning memberships and our new unified platform complete, we look forward to building from a strong foundation, scaling and continuing to enhance these winning models, launching a freemium strategy to grow the number of learners introduced to our platform, and doing so in a way that drives profitable growth. I would like to close by thanking our team at NERDI for their strong work this past year and their ongoing high-quality efforts towards meeting the needs of learners in any subject, anywhere, and at any time. With that, I'll turn the call over to Jason to discuss the financials in more detail. Jason?