Nerdy, Inc. (NYSE:NRDY) Q3 2023 Earnings Call Transcript

Nerdy, Inc. (NYSE:NRDY) Q3 2023 Earnings Call Transcript November 7, 2023

Nerdy, Inc. beats earnings expectations. Reported EPS is $-0.13, expectations were $-0.19.

Operator: Hello, everyone, and welcome to the Nerdy, Inc. Third Quarter 2023 Earnings Call. My name is Felicia, and I will be your operator today. Please note after the presentation part of this call, there will be a question-and-answer session. [Operator Instructions] I will now hand you over to TJ Lynn, Associate General Counsel — Securities Counsel. Please go ahead, sir.

TJ Lynn: Good afternoon, and thank you for joining us for Nerdy’s third quarter 2023 earnings call. With me are Chuck 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 Nerdy’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 disclaimer in today’s shareholder letter announcing Nerdy’s third quarter results and the company’s filings with the SEC for a discussion of the risks. Not all 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 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 continue 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 are locking 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 basis points and 1,100 basis points, respectively. At the end of Q2, we completed the evolution of 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 39,500 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 theaters for schools for 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 in 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 design and para designed to complement teacherside [ph]. With Varsity Tutors for schools, school district partners can now choose to administer high dosage tutoring centrally at the school district level with districts designed empower teachers to manage and prescribe high-dosage tutoring students in their classroom with our teacher assigned offering or with para design 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 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 one to them leverage the product capability many times to serve net new audiences, in this case, selling our primary consumer product indicate 12 school districts with administrative tools layered on top for district-wide scale. As we head into 2024, and elevate 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 million 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 69.6% 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 unit level 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% year-over-year and represented 86% of total revenue in the third quarter, delivering sequential accelerating growth each of the last three quarters. Active members of approximately 39,500 as of September 30, 2023, increased 8,500 or 27% 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 earning 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 improved the user experience with a new AI-driven learning format 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. For many years of experience, we know that when customers engage more deeply with our products, including across multiple learning formats, multiple subjects where multiple students per household 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 a discovery with our platform more intuitive and user friendly. My Learning Hub serves as the new homepage and central destination for learning members, allowing members to effortlessly access their upcoming live tutoring schedule, easily track their past learning interactions in a subject and importantly, discover new subjects to learn. Subject portals enable learners to easily find all the different ways they can learn a given subject and leads to increased multi-format engagement within a subject when visited. With the use of generative AI for content generation, we have been able to rapidly expand subject portals to our top 200 most in-demand subjects and have simultaneously expanded the amount of learning resource content available within each subject world.

We’ve leveraged generative AI to create more than 100,000 practice problems, answers and explanations that are now available for learning membership customers to use this back-to-school season. We increased the visibility and accessibility of our AI tutor, which is now readily available in hundreds of subjects. Since launch, we’ve seen a significant uptick in engagement with high repeat rates with learners using it for short homework health-type interactions. Looking ahead, we will continue to deploy new capabilities and products at a rapid pace and build on our success executing against our AI for HI or artificial intelligence for human interaction strategy. We expect to see continued upside in retention over time as we further enhance our products and drive improved engagement.

Turning our attention to our institutional business and varsities for schools. We continue to make substantial progress building the foundation for a durable institutional business capable of supporting millions of students. Consistent with our strategy heading into 2023, our focus on product expansion and partnerships with larger school districts is yielding results. Institutional revenue of $5.6 million increased 133% year-over-year and represented 14% of total revenue in the third quarter. Varsity Tutors for schools executed 80 contracts in the third quarter, yielding $10.6 billion of bookings, an increase of 89% year-over-year. Year-to-date, Varsity Tutors schools has executed $27.4 million of bookings, an increase of 102% year-over-year with average order value of more than 120,000 or more than 75% increase versus the same time period a year ago.

With the start of the school year, we are seeing a growing recognition among educational and policy leaders of what we’ve always known Tutoring is a proven solution for accelerating and remediating learning. At the same time, COVID learning loss isn’t going away, and it’s clearly not just related to making up for learning loss during school shutdowns anymore. Also indicating the acuity of the situation, ACT scores are 30-year lows and NAP scores for math and reading dropped to the lowest point in decades. The acuity of the student achievement problem, combined with the growing broad recognition that tutoring is an effective way to address the issue is leading to an acceleration in market activity with multiple states focused on rolling out state-funded, statewide tutoring programs.

During the quarter, we made significant platform enhancements that have enabled us to shift our institutional business to one that is access and subscription-based and that provides more value for our institutional customers. The Marce Deters Schools platform now comes with powerful academic resources and tools and the ability to choose between three simple models for high-dosage trig administration. As part of the simplification and overhaul, we retired the on-demand product and instead have a suite of products and resources that are now included with access to the Varsity Tutors schools platform. The breadth of the resources included in the platform allows for us to serve a much broader set of needs for our institutional partners and greatly expands the number of students we can impact within school districts.

We also made significant improvements to our high-dosage tutoring product by providing more flexible implementation models and pricing models that enables school districts to more easily implement large scale, best-in-class high-dosage uterine to a broader set of students. Our teachers signed product, which was launched earlier this year was our first always-on subscription offering for districts that enable teachers to provide high dosage tutoring intervention with students in their classroom based on their own unique insights and knowledge of what was occurring. We’ve seen strong engagement with teachers sign districts and growing excitement in the market for this solution. The insights garnered from teachers sign combined with learnings from our new subscription-based consumer model led us to introducing 2 new access-based subscription models in the quarter, district designed and paresigned.

These new products provide VRS deters for schools with a comprehensive product portfolio capable of meeting the high dosage titering needs of school districts by providing the flexible implementation models that meets the common use cases, districts encounter, allowing them to better serve students in their community. We believe the simplification and evolution of our product suite that positions Varsity Tutors for schools as the product and is supported by three flexible bottles for administering high-dosage tittering, better positions us to attract new institutional customers to the offering while also building deeper and larger relationships with existing ones. In closing, I want to thank the Nerdy team for continued excellence in execution and innovation.

I’m proud of the results we delivered in Q3 and encouraged by the continued progress with both Learning Memberships and the Varsity Tutors for schools business. Our continued progress in product innovation has allowed us to launch new access-based subscription products that now cover the entirety of our consumer and Institutional businesses. We believe our simplified and enhanced offerings will allow us to better attract and retain new customers while also driving profitable growth. With that, I’ll turn the call over to Jason to discuss the financials in more detail. Jason?

Jason Pello: Thanks, Chuck, and good afternoon, everyone. 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 ramps, which combined with the operating leverage, driven from our evolution to always on recurring revenue models and investments in AI to drive bottom line outperformance. We completed the transition of our consumer business to a subscription model in just over a year’s time, demonstrating strong product market fit and execution. The transition to Learning Memberships continue to yield more attractive unit level economics, longer duration and higher lifetime value customer relationships, higher gross margin in a more efficient and scalable operating model.

In the third quarter, we delivered revenue of $40.3 million, results that were above our guidance range of $38 million to $40 million and represented 27% year-over-year growth and sequential quarterly acceleration of over 1,100 basis points. Our active member counts of approximately 39,500 as of September 30, increased 8,500 or 27% during the quarter. Learning Memberships revenue grew to $33.2 million during the quarter and represented 82% of total company recognized revenue and 96% of consumer recognized revenue in the third quarter. And we expect nearly 100% of consumer revenue to be from Learning Memberships in the fourth quarter. Consumer new customer growth of 40% and consumer revenue growth of 19% in the third quarter both accelerated sequentially on a year-over-year basis, each quarter throughout 2023, demonstrating the strength of our consumer offerings.

And as Chuck mentioned, we saw growth in new customers purchasing and Learning Memberships in joining the platform for the first time accelerated as the school year started, exceeding 45% year-over-year new customer consumer growth in both August and September. Our Institutional business delivered revenue of $5.6 million, representing 133% year-over-year growth and delivered bookings of $10.6 million, an increase of 89% year-over-year and represented the second consecutive quarter with more than $10 million in bookings. Moving down the P&L. A record gross margin of 72.4% in the third quarter yielded gross profit of $29.2 million, an increase of $7.3 million and 33% year-over-year. Gross profit and gross margin increases were driven by growth in our consumer business as a result of the strong adoption of Learning Memberships, which has led to lifetime value expansion and higher gross margin.

As we evolve towards a greater mix of learning memberships revenue, we expect consumer gross margin to continue to expand. Sales and marketing expenses on a GAAP basis were $19.3 million in the third quarter, an increase of $3.1 million compared to the same period last year. Non-GAAP sales and marketing expenses, excluding non-cash stock-based compensation, were $18.5 million or 46% of revenue in the third quarter. This compared to 48% of revenue in the same period of last year, an improvement of more than 150 basis points year-over-year. Sales and marketing spend and efficiency improvements were driven by the continued expansion and lifetime value from learning membership customers are focused on optimizing the level of marketing spend and substantial varsity tutors for schools revenue growth, which is 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 as the business delivers accelerating sequential year-over-year revenue growth. G&A on a GAAP basis was $35.5 million in the third quarter, an increase of $2.1 million compared to the same period last year. Non-GAAP G&A, excluding non-cash stock-based compensation, transaction-related costs, restructuring costs and illegal settlement provision was $20.5 million, or 51% of revenue in the third quarter, our seasonal low point, compared to 70% of revenue in the same period last year. This represents an improvement of more than 1,900 basis points year over year. Our investments in product development and our platform oriented approach to growth have allowed us to launch a suite of always on subscription based products including learning memberships for consumers and our district teacher and parent-assigned offerings for institutional consumers.

Subscription and access space offering simplify the operating model needed to support customers and grow the business while also providing a more predictable pattern of revenue recognition over time. We delivered an adjusted EBITDA loss of $8.2 million, an improvement of $5.8 million, and more than 2,300 basis points year-over-year, at the top end of our guidance range of an adjusted EBITDA loss of $8 million to $10 million. Adjusted EBITDA margin improvements can be seen across every P&L line item, including higher revenues, gross margin expansion, sales and marketing efficiency gains and continued variable labor productivity improvements stemming from automation efforts and our business model changes that streamline operations. During the third quarter, we had negative operating cash flow of $4.8 million compared to negative operating cash flow of $13.3 million last year, an improvement of $8.5 million that reflects the substantial improvements from our Evolution to Learning memberships.

We ended the quarter with $84 million of cash in our balance sheet and no debt, giving their ample liquidity to fund the business and pursue growth initiatives. Turning to our business outlook, today we are providing fourth quarter and updated full year 2023 guidance. For the fourth quarter and full year, we expect year-over-year revenue growth will be driven by the continued growth of recurring revenue streams in our consumer business, the corresponding increase in the number of learning membership subscribers, and higher institutional revenues. Fourth quarter and full year revenue guidance reflects higher revenues from learning membership and varsity tutors for schools when K-to-12 schools and universities are in session. Our continued momentum provides us with confidence that we will complete 2023 having delivered accelerating sequential year-over-year growth each quarter.

For the fourth quarter of 2023, we expect revenue in a range of $54 million to $56 million, representing 32% growth at the midpoint, versus our Q4 2022 revenue of $41.8 million. For the full year, we expect revenue in the range of $192 million to $194 million, representing 19% growth at the midpoint versus our 2022 revenue of $162.7 million. The full year guidance reflects recent learnings from our first back to school period with all customers on learning memberships. First, new learning member acquisition of customers joining the platform has been strong and ahead of our expectations, providing us confidence in the demand for our offerings in the year ahead. We also learned how our existing learning members would utilize their memberships as they exited summer and went back to school.

This time of year marks the period when learners re-evaluate the level of upcoming learning support needed as well as their schedule and availability, which in turn impacts their tutoring needs and frequency. The impact of this shows up in our guidance in two primary ways: First, the level of members pausing or downgrading to a lower frequency level throughout the summer months, a lower need period was consistent with our expectations. As the school year started, fewer of these customers reactivated their membership than we expected. And second, at the start of the school year, we saw fewer existing members upgrade to higher frequency learning membership levels than anticipated, which has led to lower ARPU than expected. Fourth quarter and full year non-GAAP adjusted EBITDA guidance reflects the continuing benefits from our recurring revenue products, which focus on long-term relationships with higher-value customers an improving gross margin profile and operating leverage stemming from the completion of our evolution to recurring revenue business models, partially offset by increased investments in marketing, engineering and product talent to drive continued product innovation, and Varsity Tutors for schools go-to-market strategy.

For the fourth quarter of 2023, we expect non-GAAP adjusted EBITDA to be breakeven. For the full year, we expect non-GAAP adjusted EBITDA loss of approximately $6 million a substantial improvement from the non-GAAP adjusted EBITDA loss of $35.7 million last year. The change in full year adjusted EBITDA guidance primarily reflects the flow-through of the lower revenues previously discussed. As Chuck mentioned, we’re proud of the results we delivered in Q3 and our ability to drive accelerating growth each quarter throughout 2023. That revenue acceleration is occurring while concurrently driving more than 2,300 basis points of improvement year-over-year in adjusted EBITDA during the third quarter. We also made significant business model improvement that we believe will enhance the predictability of our business and drive enhanced levels of growth and profitability.

Thank you again for your time. And with that, I’ll turn it over to the operator for Q&A. Operator?

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Q&A Session

Operator: Thank you. We will now open the Q&A session. [Operator Instructions] Our first question from Ryan MacDonald from Needham. Please go ahead.

Matt Shea: Yeah. Hey, guys. This is Matt Shea on for Ryan. Thanks for taking the questions. Maybe just to start, I want to double-click on the learning memberships. It was nice to see you guys beat your number in the quarter, but it looks like kind of towards the back half of the year, something happened in October, where that growth slowed. And so I just want to kind of parse through some of the comments you gave earlier is the lower growth expectation with learning memberships relative to your prior expectations, solely due to that fewer reactivated memberships that you’re expecting in Q4? Why should we see that kind of 45% growth in learning memberships moderate in Q4?

Chuck Cohn: Hey, Matt. Thanks for the question. I think I’d start-off with, one, we saw a really strong demand during the back-to-school period. It was up 45% plus in both August and September. And as I indicated in the prepared comments, really, the change in the Q4 guide for the full year reflects two things primarily. So during the summer months, we allowed members to adjust the level of frequency of their learning membership during on peak utilization times in order to drive higher levels of retention, we also allowed customers to pause during the summer months. And so what happened is as we move through the back-to-school period, we saw two things. Lower levels of retention for people that were paused as they reassess the level of academic need in the new calendar school year as well as fewer members that reengaged at higher levels of tutoring frequency and so that lowers the Arbor average revenue per month that they pay for us.

And so both of those collectively are really the decline that we see in the full year guide. It’s probably about 50-50 split between the two. But when we think about the long-term health of the business, we still feel really good given the demand signals that we’re seeing from customers.

Chuck Cohn: Yes, this is Chuck. The only thing I’d add is you saw a sequential revenue acceleration that is pretty considerable throughout the course of the year, and this is our first back-to-school season with learning memberships. We’ve never gone through the summer before. And summer is obviously a period of time where at the beginning of the year and the summer, people can kind of reevaluate the extent to which they want a certain level of frequency for the product. And what we’ve seen is we were talking about like 2,500 members delta here on 40,000. So I think we feel really good about the trends in totality and the levels of engagement that we’re seeing go-backs, of course, the fact that the growth rate on new customers was 45% in both August and September gives us a lot of confidence in the business.

So significant growth throughout the year on a revenue basis the delta that Jason mentioned is only 2,500 members or so relative to what was kind of implied in the full year guide. So we feel really good about the trends, and this is just our first full back-to-school with learning memberships. And it feels like a normal year where our products resonated and the engagement is going up as we made product improvements, and we feel good about the future in that regard.

Matt Shea: Okay. Got it. I appreciate all that color. And then maybe just as we think about what you can add in Q4, if revenue is going down, could we — or I guess, just taking down. But could we potentially see more learner ads than in Q4 than you saw in Q3? Or how are you kind of thinking about the expectation of how many learnings you’re going to have?

Chuck Cohn: No. I think we historically don’t see higher adds in Q4 relative to Q3, given the timing of the back-to-school period and the end of the first semester. So we would expect around 42,000 active members at the end of the year as we move through the fourth quarter.

Jason Pello: Yes. We’re still obviously seeing both significant nominal revenue add on a sequential basis from the 40% level to the 55% level in the guide. So you’re also then seeing the acceleration from 27% growth to 32% of the guidance. So you’re also seeing sequential acceleration. So we feel really good about it. Seasonally, you’re disappointed in the year with how like the semester falls where you wouldn’t add as many, but we feel really good about the actual dollars and then year-over-year growth that the business is experiencing.

Operator: Thank you. We will now move on to the next questioner, Andrew Boone from JPM Securities. Please go ahead.

Unidentified Analyst: Thank you for taking my questions. This is Matt on for Andrew. Can you just talk to us about the thought process behind the overhaul of the prosecutors for school product and maybe how this changes your go-to-market strategy? And then number two, just with strong customer acquisition with the back-to-school period. And now you guys have a little bit more time on your belt with cohorts understanding learning memberships. Is there an opportunity here to lean in with a little bit more marketing spend maybe as you think about 2024? Thank you.

Chuck Cohn: Great question. This is Chuck. I’ll answer it. So we’ve gone through a similar evolution on the institutional side that we have on the consumer side. We have packages in the consumer world. And prior to starting memberships, we actually launched marketers for schools just about two years ago and lots of hours of hours to schools that they could then use in unlimited ways. And there was a certain elegance that, of course, came with our learning membership model on the consumer side, and we’ve now sought to replicate that on the institutional side. So there’s simplification as it relates to explaining our products to the customers, the three different high implementation models are far more scalable or easier to use.

Our systems and platforms have improved dramatically. It’s easier to use like onboard customers and to then actually allocate the access to the model to different portions of the student population, and so this new access-based subscription model that kind of mirrors what we’ve done in learning memberships and meters what we did with our teachers assigned product that now applies to these two new products, district assigned and parent assigned, which is learning memberships for schools is something that we’re super, super excited about. It makes for far easier conversations. It’s very clear how each of these products can then meet, all of the common need states related to tutoring and related forms of intervention. And from our perspective, that’s been all sorts of different opportunities because you now have a scalable model that is far more efficient.

One of the things that allows us to do is instead of equiring district-wide SaaS contracts, which can be a barrier to starting a relationship with us now that we’ve automated and made it so much more scalable on the implementation side, we can actually do more bite-sized implementations that are specific to a specific portion of a very large school district. So it really opens up all sorts of different opportunities. The initial indications, it’s resonating is simple, and we think can drive a whole lot of growth in the years to come. And then separately, as it relates to the marketing comment, I get that — was that specific to institutional or consumer?