Nerdy Inc. Q3 FY2024 earnings call

Product and Engineering Efforts - Focused on improving the first 30-day onboarding experience for new customers, including new onboarding assistant and tutor match tracker, leading to improved completion rates, accuracy, customer satisfaction, and retention. - Product enhancements drove higher first session success rates, tutoring engagement, and discoverability of non-tutoring products. ### Varsity Tutors for Schools - Invested in converging consumer and institutional platforms, enabling access for entire school districts, and expanding the sales organization. - Successfully enabled access to the platform for 1.1 million additional students, bringing total to 4.4 million students at nearly 900 school districts, with strong student engagement. - 32% of paid contracts and 22% of total bookings value from school districts that initially partnered via free platform access. ### Market Infrastructure - Working to modernize marketplace infrastructure, with session scheduling enhancements, invoicing and substitution automation, but certain initiatives delayed due to resourcing for Varsity Tutors for Schools, expected to yield gross margin improvement and operating leverage when implemented. ### Product Development - Invested in product development, launching and improving subscription and access-based products, simplifying operating model to support unified platform.

In the third quarter, Consumer Learning Memberships' subscription revenue was $31.4 million, representing 84% of total company revenue. Active members were 39,700 as of September 30, up 1% year-over-year. ARPM was approximately $302 as of September 30, up 7% from $281 at the end of the second quarter, resulting in an annualized run rate of approximately $144 million from Learning Memberships at quarter end. The Institutional business delivered revenue of $5.4 million, a decrease of 3% year-over-year and represented 14% of total revenue. 32% of paid contracts and 22% of total bookings value in the third quarter came from school district partners who initially partnered with Varsity Tutors for Schools via no cost access to our platform and subsequently converted to our paid offerings.

Fourth Quarter - Revenue expected in range of $44 million to $47 million. - Adjusted EBITDA expected in range of negative $7 million to negative $10 million. ### Full Year - Revenue expected in range of $186 million to $189 million. - Adjusted EBITDA expected in range of negative $23 million to negative $26 million. - Fourth quarter expected to show sequential improvement in adjusted EBITDA from third quarter, with expectations to continue into 2025. - Consumer revenue impacted by decline in number of Learning Membership subscribers and lower average revenue per member per month; Institutional revenue affected by lower bookings year-to-date leading to lower revenues in fourth quarter versus prior year.

- Institutional business face risk of moderating investments to reflect normalized sales cycle in post-ESSER environment, which may impact growth. ### - Delays in marketplace infrastructure initiatives due to resourcing for Varsity Tutors for Schools could affect customer experience and gross margin improvement. ### - Lower retention in older customer cohorts with higher proportion of low-frequency Learning Memberships may continue through year-end if not addressed.

Q: Guys, understood the various puts and takes in terms of the 4Q guide. But can you guys double-click in terms of your visibility into stability in terms of the consumer side of the business? How do we think about timing there? And then stepping back more operationally, Chuck, can you talk about driving engagement with customers? How are you guys thinking about getting more frequency on the platform overall so that you do improve retention for consumers?

A: Thanks, Andrew. Good question. So, the way that we think about the kind of consumer business and its overall performance in the quarter, which I shared a little bit in the prepared remarks, relates back to the old cohorts, which were a blend of customers that were on the weekly tutoring frequency and some that were not. Those that were not had higher levels of churn at the year-end, which pulled through to the quarter. Those that were on the weekly tutoring frequency had much higher levels of retention, which is attributable to the fact that tutoring is a weekly habit-oriented activity that people get into every Tuesday night for French tutoring, every Thursday night for LSAT prep in preparation for going to law school. And as we got back into the school year and as we shared on the last quarterly call, we reoriented the focus towards memberships that were focused on weekly tutoring habit. And, in addition to that, that alone, from a mix perspective, drove higher levels of retention and higher ARPM on both a kind of blended and year-over-year basis. And then separately, we made a series of product enhancements that we shared in the shareholder letter that improved the first 30-day activation. So they removed friction. They made it easier to schedule. They made it easier to figure out the status of your tutor to replace your tutor. And those are durable product-driven changes that we're then seeing pull through to higher first session success rates and then a bunch of downstream positive metrics related to tutoring engagement. We've also made a series of improvements to the platform itself in a way that drive discoverability of many of the non-tutoring products, including AI tutor, live classes, adaptive diagnostic testing and some of the self-service tools. So, we have seen both one-on-one engagement on a weekly or monthly basis year-over-year. And then separately, for non-tutoring engagement, we've seen it actually grow quite nicely this back-to-school season in connection with both the mix changes and then all of the product-driven changes. And all of that engagement then pulls through traditionally to much higher levels of retention. And so we're seeing among the first several months of back-to-school cohorts that all of the kind of negative year-over-year retention trends have reverted and we're back to parity, and we'd hope that through the product-driven changes that we're working on right now, we have high conviction that those can then pull through to material year-over-year wins on retention on a go-forward basis. So that's how we kind of model it and think about it. But as those cohorts pull through and shift the total answer of cumulative members, we'd expect to see retention -- the retention answer totality shift positively.

Q: Curious if we could go a little bit further on the Institutional revenue, kind of what's driving the decline there? And nice to see that you enabled another 1.1 million students up to 4.4 million now. How is progress trending regarding kind of monetizing or upselling those offerings for school districts?

A: Greg, good question. So, as we shared over the past couple of quarters, we were taking a big swing related to this back-to-school season and making the most of the end-to-ESSER motion. And that was informed by the last couple of years of bookings and all the progress and success we've had. And one of the things that we saw this back-to-school season was that the platform active strategy where we give access to the platform had high levels of demand. We also saw that ramping a new sales team heading into that back-to-school season was a little bit more challenging than expected. And then ESSER itself did not create the level of urgency that we expected at that 9/30 deadline. And I think in retrospect, we're overly focused on that specific deadline as opposed to focusing on broad-based strategic conversations that span a multitude of funding types and different [ needs base ] that districts have. And one of the really positive things is, to the extent to which as our platform and all of its product capabilities have evolved and all of the integrations that we've done, we're now able to accommodate and serve a broad swath of different use cases. And whether a school district wants to administer tutoring before school, during school, in class, outside of class, after school or a nicer weekends with parents, we put in place the platform and software-driven changes that allow for us to accommodate a broad swath of different needs. And that also spans different students groups, whether it's related to math or reading in K-5 and remediating learning loss or whether it's related to certain special education students. There's a broad -- there's a way that our platform can accommodate many of these different student populations that have acute needs. So, we're finding that there's these pockets that all school districts largely have that have good funding. We're seeing with that new -- with our new sales team, the deal sizes came in a little bit smaller, which we attributed back to a newer motion and newer team. And we would expect for the deal sizes to increase as we get farther into the school year and that team matures and we're getting a little bit better at kind of platform access strategy. So I think we feel good about the deal volumes, but not the average deal size. But the platform access strategy itself is working. It's generating deals and they're kind of converting through and we're building a lot of trust. We put a lot of energy into it. And we think long term, it's a good investment, it will pay back. We're building trust with school districts. Short term, it's a complicated motion of having all the school districts for the first time this back-to-school season launch concurrently, but we made tremendous progress on the product front and we're seeing high levels of engagement across some of those school districts that then, we shared some of the stats we're pulling through to deals. So we feel good about the kind of strategic advantage we have related to the platform access and that how that ultimately accrues to strong relationships with those districts.

Q: I guess turning gears to the consumer side. Wanted to just kind of get a little bit more color on your expectations for maybe active member growth versus ARPM dynamics in Q4 on a year-over-year basis. Kind of, if you expect any changes in kind of dynamics there between those 2? And I guess, separately, as it relates to -- I think you spoke to lower customer acquisition costs you're seeing. Wondering if you could touch on kind of what's driving that? Is it different marketing initiatives or kind of go-to-market strategy, where you're maybe seeing success there?

A: Sure. Thanks for the question. So, the positive trends we're seeing in the new customer cohorts we mentioned on the call, those were partially offset by lower retention in older customers that included a higher proportion of the lower frequency Learning Memberships. That was a trend we spoke to last quarter. We think that will continue through the end of the year and then subsequently subside. We think we'll end the year with about 36,000 active members. You mentioned ARPM. Importantly, we saw ARPM improve from $281 at the end of Q2 to $302 at the end of Q3 as we focused on those higher frequency customers. That trend will continue in Q4. We think we'll end around $310 and then again, continue to accrete as we move into 2025. Within marketing, specifically on the consumer side, we are seeing some efficiency there. Customer acquisition costs decreased by about $1.4 million or 8% year-over-year in the third quarter. When you couple that with consumer sales conversion improvements, our CACs were down about 14% in Q3, which we feel really good about, the durability of that efficiency improvement as we move into 2025 as we're able to target our marketing investments toward higher LTV customers and segments that have quicker paybacks.