Nerdy, Inc. (NYSE:NRDY) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good afternoon. Thank you for attending the Nerdy First Quarter 2023 Earnings Call. My name is Elisa, and I will be your 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. [Operator Instructions] I would now like to pass the conference over to your host, Charles Cohn with Nerdy. Mr. Cohen, you may proceed.

TJ Lynn: Good afternoon, and thank you for joining us for Nerdy’s First Quarter 2023 Earnings Call. With me are Charles Cohn, Founder, Chairman, and Chief Executive Officer of nerdy 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 Nery’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 Nerdy 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 Nerdy’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 shareholder letter for reconciliations of these non-GAAP measures. With that, let me turn the call over to Chuck. Chuck?

Chuck Cohn : Thanks, TJ, and thank you to everyone who has joined us today. One year ago, we unveiled an ambitious plan to evolve our products and revenue model toward long-term, recurring, always-on relationships with our customers. We created a new subscription and recurring revenue products, including learning memberships for consumers and teachers signed and on-demand products for institutional customers that were built specifically to address the ongoing support we believe both types of customers need it and desired. We shared that we believe these new models would provide a superior platform for innovation by allowing us to bring together multiple different product capabilities we have developed into a comprehensive all-access offering that enable learners to receive the help they need across multiple learning formats, thousands of subjects at multiple academic calendar years.

In addition to allowing us to provide a better and more personalized experience to learners, the new operating model would be far more efficient to operate, allowing us to drive operating leverage, simplify our sales model and shift additional resources toward net new innovation, including the application of AI for HI for artificial intelligence for human interaction. To get to this evolved state, we shared that this new model would require trading off revenue recognition in the short term because our package model had a more front-loaded revenue recognition than the learning membership model where subscription revenue is recognized linearly over time. We expected that by the start of the second quarter of 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 the product suite and revenue model, we believe would position us for higher levels of growth, profitability, and predictability in the years to come.

We stated that we expected our new business model to deliver substantial operating efficiencies and that we anticipated achieving adjusted EBITDA profitability by the end of 2023. I am pleased to share that in the first quarter, we exited the J-curve business model transition to subscription and returned to year-over-year growth, delivering $49.2 million of revenue, which was above our guidance range of $45 million to $47 million. Wording membership subscriptions accounted for 60% of total company recognized revenue, up from nearly 0% in the first quarter last year, demonstrating strong product market fit. On the institutional side of the business, we delivered record revenue of $8.5 million, an increase of 32% year-over-year, representing 17% of total recognized revenue in the first quarter.

In combination, our consumer subscription and institutionally contracted revenue accounted for 77% of total company revenue recognized in the quarter. a dramatic increase over the past year, which we believe speaks to the power of our platform-oriented approach to growth and how we can efficiently go to market with all-access solutions that could provide more value to customers. The rapid business model evolution learning memberships and recurring revenue and our continued application of AI to the customer experience and operational processes drove continued growth and improvement in customer lifetime values relative to our package model as well as operating efficiency improvements. Together, they were key contributors to our strong operating results and improved profitability.

We are pleased to share that we achieved adjusted EBITDA profitability in the first quarter, 9 months earlier that our target of the fourth quarter of 2023, delivering nearly 1,700 basis points of improvement year-over-year and $1.4 million of adjusted EBITDA. The improvement in adjusted EBITDA represents an annualized improvement of approximately $32 million. We also realized $6.8 million of positive operating cash flow and $5.8 million of free cash flow in the quarter. I’m pleased to share that we made substantial progress on accelerating the use of generative AI around our business, including launching 2 new customer-facing products as well as accelerating the use of AI and machine learning to drive substantial operating efficiencies and internal productivity improvements.

As we shared with you in our prospectus 2 years ago, when we made our intention to become a publicly listed company known, we’ve long believed that AI can fundamentally transform how people learn. We’ve been applying AI to our business, products, and operational processes for over 6 years, and AI has been foundational to our ability to improve quality, enhance personalization and decrease the cost of our offerings. AI powers our ability to identify the highest quality experts assess Werner’s foundational knowledge to help ensure the right expert learner match and drive operational efficiency among many other use cases. In our prospectus, we also described the proprietary technology infrastructure we’re building as AI for HI or artificial intelligence for human interaction and outline the core foundational capabilities we apply to live learning to enhance the interaction in ways that were not previously possible.

Through the application of AI, we aim to provide experts and learners with superpowers that transform live online learning. We credit our orientation around AI for HI for allowing us to reach the milestone of having recently delivered our 10 millionth hour of live one-on-one tutoring on our live learning platform and more broadly for allowing us to make good on delivering high-quality relationship-based live online learning available at scale. We’ve used this data in the insights we garner from having instrumented every part of the learning journey to drive real-world practical value in our business. We credit AI for enhancing our customer lifetime values, helping us identify what each student does or doesn’t know about a particular subject, when to reach out to a customer to drive engagement and retention, and how to make operational processes far more efficient.

We believe we stand to benefit tremendously from the latest advancements in generative AI and further drive revenue growth and cost reduction through its application. What has been maybe most exciting is seeing what our internal teams have been able to accomplish over the last 90 days and the overall piece of innovation internally. As internal access to generative AI tools has expanded, we are seeing it enhance our team’s quality of work, the speed it takes to complete set work, and open up new possibilities for products and process improvement in a way that previously would not have been feasible or that would have been cost prohibitive. To illustrate the speed of innovation, I’ll cover some of the progress we’ve made leveraging AI in just the last quarter.

We’ve continued to improve our expert render matching algorithms. As a reminder, we first started applying machine learning matching algorithms 6-plus years ago to begin to detect patterns that no human possibly could to better inform the match between a learner and an expert. And with thousands of experts available for a given learner, taking a technology-first approach to programmatically identifying patterns that were predictive of better learning experiences and outcomes has proven highly effective. Today, we simultaneously test competing machine learning algorithms until one is named the statistical Victor and flipped to 100% of the volume for a given segment, and then the process repeats. And as we capture and better leverage data to inform the learner expert match, the quality of the match will continue to improve for both learners and experts in turn leading to a far better learning experience, ultimately driving better customer satisfaction, better learner outcomes, and ultimately, higher customer lifetime value.

In the first quarter, we also further expanded learning formats and content. Our growth flywheel, which we first shared publicly in January of 2021, reflects additional learning formats beyond 1:1 as a key contributor to what attracts new learners to the platform. These additional learning formats, combined with relative content to the subject being learned create personalized learning experience that drive engagement and retention of learners on the platform. During the first quarter, we leveraged generative AI to launch 2 previously announced products, AI-enabled chat tutoring and AI lesson plant generator, both of which we believe will be further accelerated to our growth flywheel. Additionally, we have steadily enhanced the availability of asynchronous content on the platform in areas like self-study and computer adaptive diagnostic testing, which has driven higher levels of engagement and customer satisfaction.

However, due to the unlimited possibilities of subject and age complexity and the nuances between school curriculum, it just wasn’t feasible nor possible to have rich levels of content in every single subject that someone could conceivably want to learn on the platform. Base to advances in generative AI that has now changed. We stand to be a huge beneficiary of being able to infuse high-quality, hyper-personalized content that has historically been expensive and time-consuming to develop into every learning experience. We believe this hyper-personalization will allow us to further meet the needs of our learners on a recurring basis over time. We’re also seeing significant improvements to productivity and operating efficiency through the application of generative AI.

Today, approximately 30% of our software code is being written by AI. All of our employees have access to in-line generative AI capabilities like GPD 4 and are encouraged and expected to use it in their work. And we’re now using generative AI to more efficiently solve customer support interactions and automate operational processes, including now broadly leveraging AI-powered support parts across learner-facing, expert-facing, and even internally-facing interactions, and we expect to see further wins on driving both conversion and retention as well as improvements in operational efficiency as a result of continued investments in generative AI across the business. Let’s move on to learning memberships, which are scaling ahead of expectations.

We continue to see substantial evidence that validates our belief that the learning membership model leads to more attractive unit-level economics, longer duration and higher lifetime value customer relationships, higher gross margin, and a more scalable and efficient operating model. We are also able to provide an improved and more comprehensive learning experience for learners and more consistent earning potential for experts. We remain convinced that this all-access always-on business model serves as a better platform for innovation and growth. It allows us to better capture and then apply our proprietary data across product interactions over time to drive deeper personalization for learners across many different learning formats and subjects.

And we’re able to easily incorporate new products that add more value to the learning membership experience over time. Orders have a better experience on the platform, engage more frequently and for longer periods of time, and were ultimately rewarded in the form of higher customer lifetime values. Learning Membership revenue continued to grow at a rapid pace during the first quarter and reached an annualized run rate of approximately $143 million as of March 31, an increase from $87 million as of year-end and nearly $0 in the first quarter of 2022. Active members grew to nearly 33,000 as of March 31, up from approximately 20,000 as of year-end. During the first quarter, we expanded learning memberships to new customer audiences by fully transitioning all purchases by existing package customers in the learning memberships as well as moving all of our new test prep audience customers into learning memberships.

As we look ahead, we plan to transition the professional audience to learning memberships by the end of the year, which would represent a transition to 100% of new customers to our consumer business to always on recurring revenue products. This past quarter, we introduced month-to-month learning memberships, which are driving higher levels of conversion by alleviating friction in the member experience while increasing the average monthly subscription fee and accelerating the marketing payback period. We also enhanced the value provided in learning memberships by providing unlimited access to 2 new products. Our AI-enabled chat tutoring enables learners to receive help from an AI tutor and also involves a live human tutor with a click of a button.

After piloting this capability in early Q1 and receiving positive feedback and engagement data, we’ve recently expanded access to all owners on the platform. The primary use case so far involves quick Q&A and homework health in between live recurring one-on-one tutoring sessions. It’s a good example of how generative AI has enhanced our ability to build a product, in this case, one encompassing Q&A and homework help that historically would have required substantial investments in content but now can be done for effectively no cost and served up to the customer in line at the right moment in the learning journey to keep them learning efficiently and effectively. The second product we added to learning memberships was our AI lesson plant generator.

We went from idea to minimum viable product to a fully built and value-added capability deployed across our entire platform and available to all experts as of late April. With this product, we use generative AI to pre-generate lesson plans, including practice problems and other curriculum content in advance of tutoring sessions. The lesson plan generator is embedded in the user interface as a dynamic and editable pain that is ever-present during live tutoring sessions. We consider the ability to create hyper-relevant hyper-personalized content spanning any subject, any age level that is personalized for the unique needs of the specific learner to be an example of the sort of superpower we have made available to experts and learners that previously would have either been impossible or cost prohibitive.

With the addition of these new products, we continue to grow the percentage of learning membership customers engaging in a nontutoring format during the first quarter to over 27%, the highest of any quarter yet. The multi-format engagement has historically been highly correlated to lifetime value extension. Looking ahead, we’re working to make it easier for learners to more fully engage with our learning membership by improving discovery in an all-new member portal. This will include personalized AI-generated learning recommendations that predict and suggest the next product interaction across learning formats and subjects that is most likely to drive engagement and customer value. As we head into the slower summer months, we’ve created compelling content for learning members to keep learning over the summer through increased engagement with academic, college prep, and enrichment subjects.

Turning our attention to our institutional business of Varsity Tutors for schools, enhancements to our product suite of high dosage tutoring, teacher aside and on-demand, coupled with prior investments in Versus for Schools sales and go-to-market resulted in record institutional revenue of $8.5 million in the first quarter, an increase of 32% year-over-year and representing 17% of total revenue in the first quarter. Varsitutors for schools executed a record 97 contracts totaling $6.3 million of bookings during the first quarter. Marcy Tutors for schools engagement trends, including our new teacher-assigned products, significantly exceeded our expectations and provide us with confidence that the solutions we have built have a strong product market fit and are well suited for meeting the needs of school district partners, teachers, and students and helping students learn in an unprecedented scale.

Teacher Assign continues to deliver against our vision for delivering personalized live learning at a district-wide scale while providing unparalleled support in agency for educators. These high levels of engagement are occurring across a wide variety of grade levels of subjects, and teacher feedback has been enthusiastic that they love it. In particular, teachers see teachers signed as co-teacher in the classroom, empowering them to help more students. Each features unique insights of individual students, including the student’s understanding of the classroom curriculum are incorporated in the tutoring sessions. These strong results and continued momentum to start the year give us increased confidence that [indiscernible] for schools is well positioned to provide solutions that administrators, teachers, and students are seeking to support their evolving needs.

In closing, live human instruction that inspires and motivates when coupled with AI is enhancing the state of learning. With recent advances in generative AI, the ability to deliver personalized live instruction at scale for all students is within reach. We’re proud of our progress to date growing our learning membership count to 33,000 active members. However, with more than 50 million students in the United States alone were just getting started. We look forward to remaining at the forefront of product innovation and enhancing our ability to meet the needs of both consumer and institutional learners. With that, I’ll hand the call over to Jason to discuss the financials in more detail. Jason?

Jason Pello : Thanks, Chuck, and good afternoon, everyone. I’m pleased to be speaking with you today about another strong quarter for Nerdy. We previously shared that we expected our evolution towards toning memberships would lead to longer duration and higher lifetime value customer relationships, enhanced gross margin, provide for more attractive unit-level economics and drive higher levels of growth and profitability. I’m pleased to report that during the first quarter, our team’s hard work on the evolution to recurring revenue offerings pulled through, delivering a return to growth and positive adjusted EBITDA of $1.4 million, a nearly 1,700 basis point improvement year-over-year and more than 9 months ahead of our stated target.

Looking ahead, we expect to yield additional efficiency improvements through scaling learning memberships, driving additional automation and self-service features, and the continued application of AI throughout our business. Turning to Q1 results. In the first quarter, we delivered revenue of $49.2 million, results that were above our guidance range of $45 million to $47 million. These positive results reflect the continued growth in active memberships, which totaled nearly 33,000 as of March 31, up from 20,000 at year-end. Learning memberships revenue grew to $29.7 million during the quarter and represented 60% of consumer revenues in the quarter, up from nearly 0% in the first quarter last year, demonstrating a strong product market fit. Our institutional business delivered record revenue of $8.5 million, representing 17% of total revenue during the first quarter, and delivered bookings of $6.3 million.

On a combined basis, learning memberships and institutional revenues delivered 77% of total revenue, a substantial change from just 2 years ago when the business was a 100% package business and 0% institutional revenue business. Moving down the P&L. Gross profit of $33.9 million for the first quarter represented an increase of 3% compared to the same period last year. Gross margins of 68.9% for the first quarter were approximately 90 basis points lower than 69.8% in the same period last year. The increase in gross profit was driven by gross margin expansion across our consumer audience, which was offset by higher-than-anticipated engagement with our new products in our institutional business. As we evolve towards a greater mix of learning membership revenue, we expect consumer gross margin to expand throughout 2023.

Sales and marketing expenses on a GAAP basis were $15.6 million in the first quarter, a decrease of $7.4 million compared to the same period in 2022. Non-GAAP sales and marketing expenses, excluding noncash stock-based compensation, were $14.7 million or 30% of revenue in the first quarter. This compares to 47% of revenue in the same period of last year and approximately 1,700 basis point improvement year-over-year. Sales and marketing spend and efficiency improvements were driven by the transition to learning memberships, including the continued expansion of lifetime value, our focus on optimizing the level of marketing spend, and a more efficient operating model in our consumer business. We also delivered substantial Bars tutors for Schools revenue growth, yielding efficiencies from prior investments in the institutional sales and go-to-market organization.

As learning memberships become a greater percentage of total revenue, and the institutional business continues to scale, we expect to yield durable sales and marketing improvements. G&A on a GAAP basis was $29.7 million in the first quarter, a decrease of $800,000 compared to the same period in 2022. Non-GAAP G&A expenses, excluding noncash stock-based compensation, were $19.5 million or 40% of revenue in the first quarter. This compares to 41% of revenue in the same period of last year, an approximately 100 basis point improvement year-over-year. Combined with our ongoing efforts in automation, self-service capabilities, and the application of AI, we’ve been able to generate operating efficiencies and remove significant costs from the business.

As noted, we reported adjusted EBITDA of $1.4 million, a nearly 1,700 basis point year-over-year improvement in the first quarter, beating the guidance range we provided of an adjusted EBITDA loss of $3 million to break even. Cash provided by operating activities was positive $6.8 million in the first quarter of 2023 compared to cash used in operating activities of $0.9 million in the prior year period, resulting in cash and cash equivalent balances increasing by $5.8 million during the quarter ended March 31. With no debt and $96.5 million of cash on our balance sheet, we believe Nerdy has ample liquidity to fund the business and pursue growth initiatives. Turning to our business outlook. Today, we’re providing second-quarter and updated full-year 2023 guidance.

We saw positive new customer addition and engagement trends in the first quarter that have continued into April and May and compared favorably to our normal seasonality and internal expectations. For the second quarter and full year, we expect revenue growth will be driven by the continued evolution towards recurring revenue streams, the corresponding build in the number of learning membership subscribers, and higher institutional revenues. Our positive momentum provides us with increased visibility into confidence in our expectation that we will deliver sequential year-over-year revenue growth each quarter as we move throughout 2023. For the second quarter of 2023, we expect revenue in the range of $45 million to $47 million. For the full year 2023, we are raising our revenue targets to $193 million to $200 million, representing 21% growth at the midpoint versus our 2022 revenue of $162.7 million.

For the full year, revenue guidance reflects our decision to shift 100% of the consumer business to learning memberships by the end of the year, including the remaining professional audience. Revenue guidance reflects normal summer seasonality, including anticipated lower levels of new customer acquisition, consumption, and learning membership retention during the summer months when K-12 schools and universities are out of session. Additionally, revenue guidance reflects a higher level of high-dosage tutoring program utilization by school districts in the spring semester and a return to the normal seasonal pattern of starting new implementations in the fall when school starts, thus slightly shifting revenue into the first 2 quarters versus our prior expectation of consistent use throughout the summer.

Our adjusted EBITDA guidance for both the second quarter and full year reflects the continuing benefits from our recurring revenue products, which focus on long-term relationships with higher-value customers and improving consumer gross margin profile and operating efficiencies stemming from our continued shift to recurring revenue business models. For the second quarter of 2023, we expect a non-GAAP adjusted EBITDA loss in the range of $3 million to break even. For the full year 2023, we are raising our targets to an adjusted EBITDA loss in the range of $7 million to breakeven. Full-year adjusted EBITDA guidance reflects the impact of normal summer seasonality and higher variable costs in the third quarter as we ramp into the back-to-school selling season, followed by a return to positive adjusted EBITDA in the fourth quarter consistent with prior guidance.

Thank you again for your time. And with that, I’ll turn the call back over to Chuck.

Chuck Cohn : Thanks, Jason, and thanks again to all of you for joining us today. As always, we appreciate your interest in Nerdy and look forward to continuing the dialogue during this exciting time for the company. With that, I’ll turn it over to the operator for Q&A. Operator?

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Ryan MacDonald with Needham.

Operator: Our next question comes from the line of Doug Anmuth with JPMorgan.

Operator: Our next question comes from the line of Brett Knoblauch with Cantor Fitzgerald.

Operator: Our next question comes from the line of Eric Sheridan with Goldman Sachs.

Operator: Thank you. Our next question comes from the line of Andrew Boone with JMP Securities. Moving on to our next question from the line of Mario Lu with Barclays.

Operator: Our next question comes from the line of Andrew Boone with JMP Securities.

Operator: There are no additional questions waiting at this time. So I would like to pass the conference back over to the management team for closing remarks.

Chuck Cohn : We’d just like to thank everyone for their time on the call today. As you can tell, we feel really good about the business while the transition, the learning memberships, and the expansion of Varsity Tutors for Schools as well as the application of AI throughout our business to drive continued growth and cost efficiency.

Operator: That concludes today’s call. Thank you for your participation.