Nerdy, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights:

• Live+AI Vision: Progressed in embedding real-time intelligence in learning journey stages. Consumer Learning Membership revenue returned to year-over-year growth driven by higher engagement, AI-powered product enhancements, and improved AI Learner-Expert matching system.
• Financials: Total revenue was $45.3 million, down 11% year-over-year, primarily due to a non-recurring state-funded program and lower institutional revenue. Gross margin sequentially expanded 350 basis points from the first quarter.
• Product Enhancements: Focused on AI-powered session summaries, interactive practice resources, Nerdy app for tutors with real-time guidance, Tutor Copilot chat-based tool, streamlined checkout process, and website overhauls for modern AI-powered learning experiences.
• School District Success: Partnership with a large school district showed students in high-dosage tutoring programs had significant score improvements, demonstrating the effectiveness of Live+AI in institutional settings.

Segment Performance:

• Consumer Learning Membership: Revenue was $37.8 million, up 4% year-over-year, representing 84% of total revenue. Active Members stood at 30,600 as of June 30, with average revenue per member per month (ARPM) reaching $348, a 24% increase year-over-year.
• Institutional: Revenue was $7.3 million, representing 16% of total company revenue during the second quarter. Varsity Tutors for Schools bookings grew 21% year-over-year.

Guidance:

• Third Quarter: Expect revenue in the range of $37 million to $40 million. Consolidated and consumer revenues to return to positive year-over-year due to higher consumer customer acquisition and ARPM growth from mix shift to higher frequency Learning Memberships and price increases.
• Full Year: Expect revenue in the range of $191 million to $197 million. Consumer revenue to return to growth with accelerating each quarter. Institutional revenue to return to year-over-year growth in the fourth quarter of 2025. Non-GAAP adjusted EBITDA loss expected to be $11 million to $13 million in Q3 and $13 million to $17 million for the full year, aiming for profitability in Q4 2025.

Risks:

• Forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results. Risks discussed in today's shareholder letter and company's filings with the SEC.

Question and Answer: Q: Can you just talk about the return to revenue growth, obviously, impressive to see. I mean, like what gives you confidence in the improving trends through the back half of the year, whether that be across product, pricing, tutor payment, investments and operational improvements? And I guess within that as well, too, can you just help us better understand the composition of active member versus ARPM growth?

A: Thanks, Bryan. Happy to. So I would say the last 60 days, in particular, were the single most productive period in our company history by a significant margin. So we've changed how we work and how we approach building AI natively and allow for us to rapidly increase the pace of innovation, and you're seeing that pull through to the products, many of which we announced today that we think are going to have a pretty tremendous impact on growth in the second half of the year. But what we're already seeing is that those improvements that we made to retention, to customer onboarding and activation that we spoke to in the last 2 calls, have continued to hold for new customer cohorts. And I'd say we're kind of ahead of where we expected to be with the new 30-day and sort of leading indicators of retention with a whole host of improvements in flight and shipping right now. So we feel really good about as we approach the beginning of the school year, how conversion is improving, retention is improving and the early indications of all the different waves of schools, also look like they're shaping up to help us have a great back-to-school in school year, but we're kind of looking at the underlying KPIs that are highly indicative of that revenue acceleration. And then separately, the -- on the Institutional side, we're seeing strong leading indicators related to the pipeline growth and interest from schools in the Live+AI platform, and feel really good about some of the kind of the extent to which the high-dosage tutoring product as well as our Live+AI offerings are resonating. Jason H. Pello: Bryan, this is Jason. Maybe just to add some numbers to that. Importantly, during the second quarter, we returned Learning Membership revenue to growth. It was up 4% year-over-year. That [sends] a 4-quarter decline. Also, institutional bookings were up 21% year-over-year in the second quarter, which positions us well as we move into the back half. As Chuck mentioned, we're seeing like continued improvement in new customer acquisition. As we move throughout the rest of the year, we expect ARPM to continue to increase based on, one, the mix shift towards the higher frequency Learning Memberships that are driving higher levels of engagement with our platform, coupled with improvements in Active Members. So from a cadence perspective, we would expect ARPM to move from $348 at the end of Q2, which was up 24% year-over-year to $380 at the end of Q3 and Q4. And then we would expect Active Members to be around 38,000 at the end of Q3, and we would end the year at 40,000 Active Members, which is up 7% year-over-year, returning to both Active Member growth and ARPM growth. And then maybe just a little bit more color on the Institutional business. It's shaping up to be the strongest quarter we've ever had from a bookings perspective in Q3, which gives us that continued confidence as we move into the back half of the year that you'll see sequential consolidated revenue growth acceleration every quarter in 2025, which is exciting to see.

Q: Curious, you shared a ton of information regarding all these AI tools in the prepared remarks and the shareholder letter. Wondering if you could just sort of give a brief overview of what you're most excited about in terms of driving benefits over the next few quarters and then more so over the medium-term, what has the potential to be most impactful for the overall platform?

A: Of course, good question. So our first kind of foray into the application machine learning was probably like 2016, 2017, where we started using it to drive the student and learner matches. And as we got progressively better at that, we then saw it pull through to better retention out of the gate and ultimately, lifetime value. And of course, that lifetime value was high margin and highly accretive, and we kind of gained confidence in our ability to apply AI and ML to this vertically integrated marketplace business and get leverage out of it. And one of the other kind of similar yields that we got in sort of Gen AI phase that was really material was related to our AI session summaries and video playback where after tutoring sessions, we can allow for parents to not only get a recorded video sent to them and students as well, but also for them to get a summary and insight associated with that session. So we've made that progressively better over the course of the year. A couple of the things that we are rolling out that have been really resonating and I think will get -- drive just continued higher levels of retention and engagements in LTV extension are some of those improvements. So you're starting to see interactive graphics associated with the tutoring sessions themselves. You're starting to see agentic practice problems where we're able to take the transcription from the actual live tutoring session and then use that to generate automatically practice problems and other forms of content immediately after the session, thereby allowing us to extend the value that's provided on an ongoing basis between sessions. That's something that we're seeing terrific feedback on. And we're also then able to take into account the context, not just of the past tutoring session, but now of all of the tutoring sessions to-date. So whether it's 2 or 4 or 10 or 12 or however many there are, we're able to take that into account to have way more informed and thoughtful recommendations, and that required a bunch of work and infrastructure to put in place, our ability to query that context window and pipe around the data in the right way. But now you're starting to see the real benefits of us having all of that content. So I would expect for that to continue to drive retention and engagement and just customer delight for both consumer customers as well as school district customers who will have the ability to see that on a cohort level. But the thing I'm actually most excited about is what's shipping right now with our Nerdy app, which allows for us to influence what's happening in the session in real-time with computer vision and audio where it can see and hear what is occurring and then provide recommendations for both the tutor or for a teacher or for the students. And so, for a tutor, we'll actually be able to elevate the performance of every subject matter expert, allow for them to stretch into other areas, allow for them to always know the right answer, allow for them to remember everything the student said in the tutoring session thus far and ensure that they didn't miss anything, ensure they spend less time checking practice problems, more time and valuable instructional time. So I think we're going to like very significantly positively impact the session experience across millions of sessions per year, and that's something that I think could have a profound impact on the customer experience and ultimately on retention and lifetime value.