Nerdy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 7 speakers on the call.

Operator

Good afternoon. Thank you for attending today's Nerdy Inc. Second Quarter 2023 Earnings Call. My name is Bethany, and I will be the 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

I would now like to pass the conference over to our host, TJ Lynn, Associate General Counsel with Nerdy Inc. Please go ahead.

Speaker 1

Good afternoon and thank you for joining us for Nerdy's Q2 2023 earnings call. With me are Chuck Cohn, Founder, Chairman and Chief Executive Officer of Nerdy and Jason Pellow, Chief Financial Officer. Before I turn the call over 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 20 forward looking statements to reflect any change in expectations or any change in events, conditions or circumstances on which any such statement is based.

Speaker 1

Please refer to the disclaimers in today's shareholder letter announcing Nerdy's 2nd 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?

Speaker 2

Thanks, TJ, and thank you to everyone for joining us today. In the Q2, our strong start to the year continued, and we delivered revenue and profitability ahead of our expectations. We also made substantial progress in advancing our always on recurring revenue product offerings and the application of AI for HI or artificial intelligence for human interaction to our business. As we head into the upcoming school year, it is worth noting what has changed over the past year And how we believe those changes position us for growth in the periods ahead. 1 year ago, we are entering our 1st back to school with learning memberships, A new all access subscription offering that aim to support learners across academic calendar years, subjects and learning formats.

Speaker 2

We had just introduced the concept the quarter before and learning memberships had just driven 2% of consumer revenue in the Q2 of 2022. Fast forward to today and learning memberships accounted for 73% of total company revenue and 88% of consumer revenue in the Q2 of 2023. As of this June, 100% of new consumer customers joining the platform Are doing so through a learning membership subscription, marking the completion of our evolution to the new recurring revenue business model 6 months earlier than expected. We now expect that nearly 100% of recognized consumer revenue Will be from learning membership subscriptions by year end. We underwent a similar evolution over the past year in our institutional offering, varsity tutors for schools.

Speaker 2

We shared 1 year ago that we are building new always on products that were built for district wide scale that will enable us To help more learners than ever before. We also shared that we were seeking to bring together our different offerings to address a multitude of deeds for School District Partners and Students. This would require building the product offering and shifting our sales strategy to focus on deeper And more comprehensive partnerships with these larger school districts. We are pleased to share that our strategy continues to work And that the strong momentum from the Q1 continued into the Q2. Our institutional business delivered revenue of 8,400,000 dollars an increase of 43% year over year, representing 17% of total revenue in the quarter.

Speaker 2

Bookings in the quarter totaled $10,500,000 an increase of 175% year over year. We shared over the past year and at the start of this year that we expected our new always on recurring revenue offerings to be far superior to our legacy package model. In addition to allowing us to provide a better and more personalized experience to learners, our new operating model would be Far more efficient, allowing for us to drive operating leverage, simplify our sales model and shift additional resources Towards net new innovation, including the application of AI for HI. Those anticipated business model benefits Are now being realized and driving substantial improvements in our operating results. The new and simpler operating model made possible by our always on recurring revenue offerings combined with the benefits we are realizing from the application of AI has allowed for us to significantly reduce the labor to operate the platform.

Speaker 2

These changes have meaningfully enhanced our contribution margin profile and simultaneously allowed us To fund increased investments in product and engineering, including AI, to more aggressively pursue our product roadmap And drive both growth and profitability in future periods. I am pleased to share that in the Q2, we delivered $48,800,000 of revenue, An increase of 16% year over year, exceeding our guidance range of $45,000,000 to $47,000,000 And representing an 1100 basis point acceleration in growth over the previous quarter. We saw positive new customer acquisition and engagement trends in the 2nd quarter with new consumer membership and package customers acquired in the quarter Growing 19% year over year. As we progress farther into the summer, June July represented the highest levels of year over year growth for new consumer membership and package customers this year. We completed our evolution to 100% learning memberships For new consumer customers in June with the transition of the professional audience occurring 6 months earlier than originally targeted.

Speaker 2

Our customer lifetime values continued to show significant improvements relative to the old package model, Driven by our evolution of learning memberships and the application of AI for HI. These drivers were key contributors to our strong operating results and improved profitability. We delivered positive adjusted EBITDA of $1,300,000 A $10,900,000 improvement year over year in the Q2, beating our guidance range of adjusted EBITDA loss of $3,000,000 to breakeven. That represents a more than 2,500 basis point improvement in adjusted EBITDA margin year over year. We have continued to make substantial progress on accelerating the use of AI throughout our business, including launching membership experience improvements That leveraged generative AI as well as accelerating its use to drive substantial operating efficiencies and internal productivity improvements.

Speaker 2

Moving to our consumer business, the learning membership model has demonstrated superior unit level economics, longer duration and higher lifetime value customer relationships, higher gross margin and is a more scalable and efficient operating model. Learning memberships 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, ultimately driving conversion of new members And the retention of existing ones. Learning membership revenue continued to grow at a rapid pace in the 2nd quarter. Revenue during the Q2 from learning memberships grew to $35,600,000 a $5,900,000 or 20% increase from the Q1 of 2023. We ended the 2nd quarter with 31,000 active members paying approximately $350 per month, representing $130,000,000 annualized run rate at quarter end.

Speaker 2

This August, in time for back to school, we are introducing a significantly upgraded and enhanced learning membership digital experience That makes it easier for learners to more fully engage with their learning membership. These updates are aimed at enriching the experience, encouraging achievement, Reinforcing personal accountability to learning and improving the discoverability of learning formats and subjects. From many years of experience, we know that when customers engage more deeply with our products, including across multiple learning formats, Multiple subjects or multiple students per household. It is highly predictive of stronger long term retention and higher lifetime value of those customers. The new digital learning membership experience transforms the way members engage with our platform, Making engaging a discovery with the platform more intuitive and user friendly by serving as the new homepage and central destination for learning members.

Speaker 2

It allows members to effortlessly access their upcoming live tutoring schedule, easily track their past learning interactions in a subject, And track progress and achievement towards learning goals. The new digital membership experience enables easier discovery of new subjects And we'll encourage users to explore additional areas of interest through personalized AI generated learning recommendations That predict and suggest the next product interaction across learning formats and subjects that are most likely to drive engagement and customer value. The new experience also brings together all of the key account management information and resources into a simple user experience That provides easy self-service membership management tools to better meet the changing needs of learning members. We also expect these new self-service tools will help drive operating Now let's turn our attention to varsity tutors for schools and our institutional business. Consistent with our strategy heading into 2023, our focus on larger and more expansive partnerships with larger school districts, Including the inclusion of our high dosage, teacher assigned and on demand products into a single district partnership is yielding results.

Speaker 2

Institutional revenue in the quarter was $8,400,000 an increase of 43% year over year, representing 17% of total revenue in the 2nd quarter. We completed 48 contracts in the quarter totaling $10,500,000 of bookings, An increase of 175 percent year over year. Year to date, our average contract value is above $100,000 More than double compared to the same period last year. Our continued growth in the 2nd quarter and expanding portfolio of reference accounts, Compelling efficacy data that demonstrates the effectiveness of our solutions and enhancements to our unique product suite provide us confidence that we are well positioned as we enter key back to school selling season. Over the last 6 years, AI has been foundational to our ability to improve quality, Enhance personalization and decrease the cost of our offerings.

Speaker 2

We've been using AI for years to power our ability to identify the highest quality experts, assess learners' foundational knowledge, help ensure the right expert learner match and drive operational efficiency. Last quarter, I shared that the speed of innovation occurring at nerdy was both stunning and invigorating and that we are actively infusing generative AI Into our products to supercharge and personalize human interaction, drive operating efficiency and generally enhance the effectiveness and efficiency of our platform. I also shared that we had made significant investments in instrumentation and data capture and that through those investments had built up a large proprietary dataset over the past 10,000,000 hours of live instruction delivered through our live learning platform. We also shared that over the past 6 plus years, we had developed Practical experience driving enhanced personalized learning interactions as well as efficiency gains through the application of AI. As a result, we believe we stood to benefit tremendously from the latest advancements in generative AI.

Speaker 2

90 days later, That speed of innovation that was initially stunning is now quickly becoming just how we work. Our teams are both encouraged And push to leverage AI in their daily work and all employees have access to in line generative AI tools in addition to system And workflow driven approaches to support high volume activities at scale, allowing our teams to focus their time and energy on new innovation and growth opportunities. To illustrate the speed of innovation occurring, along with where AI related investments are being made Beyond some of the more visible consumer facing applications, we shared several examples in our shareholder letter, a few of which I'll share with you today. The first is related to leveraging generative AI to produce high quality learning content at scale. In order to scale learning content to the 3 1,000 plus subjects we currently support and the corresponding tens of thousands of skills we needed to construct an AI based approach for evaluating learning content.

Speaker 2

We designed a robust system that generates practice content across a spectrum of subjects and skills leveraging generative AI. The system is unique as it integrates a human in the loop feedback process, ensuring both accuracy and difficulty are aligned with educational standards While curating datasets we can use for improving our own AI models. Every subject is different and needs a unique dataset In order to tune and optimize our AI models for both accuracy, difficulty and academic learning standard alignment. We are rapidly deploying learning content across approximately 200 of our most in demand subjects With more than 66,000 AI generated practice problems, answers, and explanations having been created and vetted in the last month or so. They will be available for learning membership customers to use this back to school season in a variety of learning formats, such as quizzes, computer adaptive tests, and more.

Speaker 2

By year end, we expect to be able to 10x the quantity of high quality learning content generated by the new AI system. In addition to new capabilities being deployed, we're also continuing to enhance the existing generative AI capabilities we've spoken about in the past. During the quarter, we made enhancements to our AI tutor chat system, focusing on both user experience and educational effectiveness. By employing an upgraded AI model and refining metrics to evaluate each conversation, we've sharpened our understanding of the AI tutors' Strengths and Areas for Improvement. These updates reflect our commitment to pedagogical adherence and the individualized needs of each student.

Speaker 2

We also continue to see strong engagement with our AI lesson plan generator. Over the last 90 days, we've had experts Leverage it more than 45,000 times for lesson plans in their sessions with learners. We continue to increase the quality and relevance of AI generated content, and 92% of these lessons were rated 5 stars. Another example relates to using AI to power chatbots. We saw significant interest from our internal product and operating teams in different functional areas To begin using sophisticated AI powered chatbots to allow users to get answers faster.

Speaker 2

We created a templated approach for Developing, training and deploying chatbots to support customers and internal teams. We have seen strong results thus far And AI powered chatbots have been deployed for a variety of different uses on both sides of the platform and for internal teams. Our IT customer support bot, for example, addresses technical issues learners and experts experience, like issues with audio and video. It is currently resolving more than 50% of all interactions, arming live agents with better diagnostic information, Enabling them to solve the root issue faster, and we'd expect for these numbers to keep going up over time. These sorts of AI enabled solutions to completing work are helping to drive substantial operating efficiency gains across the business.

Speaker 2

Whether it's the mass production of hyper personalized learning content or the use of AI powered chatbots for customer service interactions, The application of AI throughout our business is yielding a better experience for owners than experts and driving significant operating leverage. Looking ahead, 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 AI. In closing, I want to extend my thanks to our team at nerdy for their high quality work and focus on driving Strong execution in service of our learners, experts, institutional partners and shareholders. We have an opportunity to redefine how people learn and build a business of significant value and impact in the years to come. Our strategic evolution towards always on recurring revenue products and the continued implementation of AI for HI The financials in more detail.

Speaker 2

Jason?

Speaker 3

Thanks, Chuck, and good afternoon, everyone. We shared at the beginning of the year That we expected our new always on recurring revenue offerings to be far superior to our legacy package model and that the benefits would become apparent in the coming quarters. With accelerating growth and profitability that stem from more attractive unilevel economics, longer duration and higher lifetime value customer relationships, Higher gross margin in a more scalable and efficient operating model. Today, I'm pleased to report that during the Q2, Those anticipated business model benefits are now being realized and driving substantial improvements in our operating results. In the Q2, we delivered revenue of $48,800,000 results that were above our guidance range of $45,000,000 to $47,000,000 It represented 16% year over year growth.

Speaker 3

Our active member count of 31,000 as of June 30 exceeded our expectation It was driven by higher than anticipated levels of new client acquisition and strong retention among learning membership customers. Learning memberships revenue grew to $35,600,000 during the quarter and represented 73% of total company recognized revenue And 88% of consumer recognized revenue in the Q2. As Chuck mentioned, we expect nearly 100% Consumer recognized revenues will be from learning memberships by the end of the year. Our institutional business delivered revenue of $8,400,000 representing 17% of total revenue during the Q2 and delivered bookings of $10,500,000 an increase of 175% year over year. On a combined basis, learning memberships and institutional revenues delivered 90% of total revenue, which is a substantial change from last year when just 16% of revenues We're from consumer subscription and institutional contracts.

Speaker 3

Moving down the P and L. Gross profit of $34,100,000 in the 2nd quarter increased by $5,400,000 19 percent year over year. Gross margin of 69.8 percent for the 2nd quarter was approximately 160 basis points higher than 68.2% in the same period last year. Both gross profit and gross margin increase 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 membership revenue, we expect consumer gross margin to continue to expand throughout 2023.

Speaker 3

Sales and marketing expenses on a GAAP basis were $14,900,000 in the 2nd quarter, a decrease of $3,100,000 compared to the same period in 2022. Non GAAP sales and margin expenses, excluding non cash stock based compensation, were $14,200,000 or 29% of revenue in the 2nd quarter. This compared to 40% of revenue in the same period of last year, an improvement of more than 1100 basis points year over year. Sales and marketing spend and efficiency improvements were driven by the completion of our evolution to learning memberships, including the continued expansion of lifetime value, Our focus on optimizing the level of marketing spend in a more efficient operating model in our consumer business leading to attractive LTV to cap dynamics. We also delivered substantial varsity tutors for schools revenue growth, yielding efficiencies from prior investments in the institutional sale go to market organization.

Speaker 3

As learning memberships become a greater percentage of total revenues 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 each quarter as we move throughout 2023. G and A on a GAAP basis was $29,700,000 in the Q1, a decrease of $3,000,000 compared to the same period in 2022. Non GAAP general and administrative expenses, excluding non cash stock based compensation, were $20,300,000 or 42% of revenue in the 2nd quarter, which compared to 54% of revenue in the same period last year, an improvement of nearly 1300 basis points year over year. In July 2023, the company communicated workforce reductions to certain variable hourly employees in expert vetting and matching roles in IT customer support. The workforce reductions are the result of efficiencies gained through new recurring revenue relationships with higher lifetime value customers that simplify the company's operating model, As well as automation efforts involving self-service capabilities, the application of AI and other efficiency efforts.

Speaker 3

Cost savings realized from the workforce reductions across variable roles, staffed in proportion to customer volumes are allowing us to increase the pace of investments in product and engineering, including AI, to more aggressively pursue our product road map and drive both growth and profitability As Chuck mentioned, we delivered positive adjusted EBITDA of $1,300,000 a $10,900,000 For more than 2,500 basis point improvement year over year, beating our guidance range of an adjusted EBITDA loss of $3,000,000 to breakeven. Positive adjusted EBITDA was driven by improvements across every P and L line item on a year over year basis, including higher revenues, gross margin expansion, sales and marketing efficiency gains and continued variable labor productivity improvements stemming from our automation efforts In our business model changes that streamline operation. We believe we'll be able to continue to drive further efficiency and operating leverage As revenue and active member accounts continue to grow through our work on enhanced self-service and AI capabilities. During the Q2, we had negative operating cash flow of $4,500,000 which primarily reflects the continued burn down of legacy package deferred revenue and compared to negative operating cash flow of $19,300,000 last year, An improvement of $14,800,000 that reflects the substantial improvements from our Evolution to Learning memberships.

Speaker 3

We have $90,900,000 of cash on our balance sheet and no debt, giving Nerdy ample liquidity to fund the business and pursue growth initiatives. Turning to our business outlook. Today, we're providing Q3 and updated full year 2023 guidance. For the Q3 and full year, We expect year over year revenue growth will be driven by the completion of our evolution towards recurring revenue stream in our consumer business, The corresponding increase in the number of learning membership subscribers and higher institutional revenues. 3rd quarter revenue guidance Reflects the quarterly low point in revenue during the year, which is due to normal seasonality and the resulting lower revenues from learning membership, legacy package customers, And varsity tutors for schools that occur when K to 12 schools and universities are on summer break.

Speaker 3

In fact, we experienced the summer trough or low point in active members 2 weeks ago, and total members started growing again this past week, A trend we expect to continue as new learning member acquisition grows, approaching the start of the school year and the end of summer break for all students. Full year revenue guidance reflects normal back to school seasonality with effectively all schools in session after Labor Day in September, Including anticipated higher levels of new customer acquisition and retention, coupled with higher institutional revenues during the academic calendar When K to 12 Schools and Universities are in session. For the Q3 of 2023, we expect revenue in a range of $38,000,000 to $40,000,000 Representing 23% growth at the midpoint versus our Q3 2022 revenue of $31,800,000 For the full year, we're raising our revenue targets from $193,000,000 to $200,000,000 to $196,000,000 to $200,000,000 Representing 22% growth at the midpoint versus our 2022 revenue of 162,700,000 Our positive momentum provides us with increased confidence in our expectation that will deliver accelerating sequential year over year revenue growth each quarter as as we move throughout 2023. Our adjusted EBITDA guidance for both the Q3 and full year reflects the continuing benefit from our recurring revenue products, which focus on long term relationships with higher value customers and improving gross margin profile And further operating efficiencies stemming from the completion of our evolution to recurring revenue business model.

Speaker 3

3rd quarter adjusted EBITDA guidance reflects the impact of lower revenue due to normal summer seasonality and higher variable costs in the Q3 as we ramp into the back to school selling season. For the Q3 of 2023, we expect an adjusted EBITDA loss in the range of $8,000,000 to $10,000,000 For the full year, we're raising our adjusted EBITDA targets from a loss of $7,000,000 to breakeven to an adjusted EBITDA loss of $4,000,000 to breakeven. Consistent with prior guidance, we expect to return to positive adjusted EBITDA in the 4th quarter. Thank you again for your time. And with that, I'll turn it over to the operator for Q and A.

Speaker 3

Operator?

Operator

Thank you. Before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of Doug Anmuth with JPMorgan. Please go ahead.

Speaker 4

Hey, it's Brian Smiley on for Doug. Thanks for taking my questions. Just to start, can you just elaborate on the early results and feedback you're seeing from the revamped user experience launch in 2Q. And then could you also just provide an update on the benefits of monthly memberships and how you think about pricing going forward? Thanks.

Speaker 2

Absolutely. Thanks, Brian. Yes, so we're really excited with the new digital learning membership experience. We've completely overhauled it with a specific focus on discovery and self-service tools. So there are a variety of different ways that you can get value out of your learning membership ranging from, Of course, live tutoring to group classes to recorded on demand videos to asynchronous content.

Speaker 2

And then as part of this back to school launch, we're going to be launching a large, large swath of AI generated content in practice test format, Diagnostic, test format and others. And so there's so much different content that we wanted to organize it in a way That was consistent with how students study. And so on their main dashboard page, students are able to discover A variety of different tools they can use and then dig into a particular subject and find all the different learning formats associated with that subject Because we know that most students prefer to learn across multiple different learning formats. So when this launched, We saw a pretty dramatic step function change in engagement among non tutoring formats. And that's really exciting because we know that historically When learners engage in multiple subjects or multiple learning formats that we see significantly higher retention And customer lifetime valuable ultimately.

Speaker 2

And so that's exactly the metric that we are trying to move. And as we Add a couple of additional capabilities beyond just the existing membership features that they have to date, like the AI generated content, like a couple of additional Generations on a couple of our key product modalities. AI Cuber is getting a huge overhaul soon. We're pretty excited about potential to get yet another step function change, which we believe will ultimately lead to much higher levels of engagement and retention, ultimately Customer lifetime value.

Speaker 4

Awesome. Thank you. And then just, on the monthly membership to benefit towards overall pricing and top of funnel acquisition.

Speaker 3

Yes. I think I would say During the summer, both acquisition and retention exceeded our expectation. We think from a price point perspective, the value that we can Provide through the nerdy membership with all of our modalities is appropriately placed. And then certainly, we feel like Those level of new customer additions during the summer months continue to accelerate with June July being the highest. We're well positioned going into the KeyBanc school period And we feel really good about the setup that we've got going.

Speaker 2

Yes. And we saw like one of the really exciting things is that as we continue to improve The customer experience and some of the product marketing associated with it, we've seen conversion at the top of the funnel continue to improve And that's resulted in an acceleration in new customer additions on a year over year basis Throughout the last several months, over the last couple of months, so call it June, July and even August month to date, We're in the mid to high 30s and north of 35% growth on the kind of combination of tutoring, Package and Learning membership customers. So really excited about that. And then as we mentioned in our prepared remarks, as of June, 100% of new consumer customers joining the platform are doing so through a learning membership, which of course is subscription revenue and more predictable and ultimately Allows for us to add more value to that customer experience by continuing to bundle in additional product features that are additive to that marketing experience. So The fact that there's this close connection between improving the value that we're providing to consumers, seeing conversion at the top of the funnel accelerate I think we're always in that driving new member ads that were ahead of our expectations is something that we feel really, really good about.

Speaker 2

And so Right now, there's about 15% of students or so in the United States are at school. Schools started going back about a week ago. Over the next 5 weeks, The remainder will begin to start, but the fact that new customer acquisition is ramping up and the extent to which some of the new elements of our member experience And our offering overall are resonating, really exciting and encouraging. But we're not all the way through the back to school season yet. We're kind of We have really strong summer on new customer adds, good start to August, and we feel good.

Operator

Thank you. Our next question comes from the line of Ryan MacDonald with Needham. Please go ahead.

Speaker 5

Hey, thanks for taking the question. This is Matt Shea on for Ryan and Nice to see the EBITDA strength in the quarter as well. I wanted to double click on the guidance though. So I think we were a little surprised by the lower numbers in Q3 relative to consensus. And I think part of that is, some questions around the new Learning membership model and the consumer revenue.

Speaker 5

So curious with the seasonality that you described in the prepared remarks, can we think about that as really just compared to varsity tutors for school and some of those package customers and really that you're not seeing that same seasonality with some of the learning memberships. And ultimately would just love to kind of get an update on what Things were seasonal that you're starting to see abate and what things are maybe seasonal that will continue to be part of the nerdy model, now and in the future.

Speaker 3

Yes. I think one of the things to keep in mind, while we beat revenue expectations during Q2, Q3 guide is consistent with our expectations from before Q2. One of the things to keep in mind is when we guided towards active members at the end Q2. That was our first point going through the summer. And what we ended up seeing was that the low points And the number of active members actually happened about 2 weeks ago.

Speaker 3

And then last week, we actually started to have, again, net new additions to learning memberships. And then as Chuck mentioned, as we enter this back to school period, we're only about a week in. We've got at least 6 more weeks before the majority of students or the vast majority of students are In school at both K-twelve and universities post Labor Day. And so the quarter is a little bit back weighted. We just wanted to take that into consideration given this is our first Order or first back to school period having the consumer offering being 100% nerdy members and also the timing and cadence of that seasonality.

Speaker 3

So Look, as Chuck mentioned, active new ads during July June were above 35%, And we feel really good about the setup, but just again not having been through a back to school period at 100% Learning memberships and given that we're only a week into the back to school period, we felt that that guidance is prudent and consistent with what we had previously stated.

Speaker 2

Yes. Look, we're doing exactly what we said we would do. So we exceeded expectations on revenue and EBITDA in Q2. Feel great about that. We finished with more active learners than we expected.

Speaker 2

That was a function of better new customer acquisition and retention than expected. And the low point kind of in the summer is that last week in July, which obviously falls between quarters and then from that point on ramps So last week, it started ramping back up with the school year, big net positive that week. So we're really well positioned for the start of the school year. But as it relates to, I guess, your implication around raising guidance relative to expectations around the next two quarters, we just want to see a little more data. We feel really well positioned to start the school year, and this guide is consistent with our expectations.

Speaker 2

Yes.

Speaker 3

The only thing I'd add is the positive momentum we had and the guide that we put out there delivers accelerating sequential year over year revenue growth each quarter as we move throughout 2023. And we expect to be adjusted EBITDA positive in the 4th quarter and growing at north of 40 So we feel really good about those metrics and I think they demonstrate the strength of learning memberships.

Speaker 5

Got it. Appreciate that color. I think that all makes sense. Maybe switching gears to the institutional business, it looks like with the ESSER funds, Those should all be or they're all planned to be committed by the deadline at this point. So curious how additive that continues To be with some of your RFP volume and demand and then post that funding, do you have any concerns that the funding is driving some interest right now And maybe that makes it tougher to drive deals once that those ESSER funds have been used?

Speaker 5

Or is it more of just additive to conversations now and you think that you can continue to have productive conversations whether PESR funding is on the table or not.

Speaker 2

Great question. So look, we're coming off a great quarter. We had 43% revenue growth in the quarter. Our bookings, dollars 10,500,000 were up 175% year over year. We only launched for our C2s for Schools 2 years ago.

Speaker 2

And 1 year ago, we launched this new always on strategy focused on larger districts, Bigger partnerships, more comprehensive solutions, a top down sponsorship from superintendents. And we feel great about the Momentum to date and the extent to which our product is resonating. So, and I'll answer your question about the specific funding types. But maybe to put it into perspective, Right now, we are serving less than 1% of public school students. And we've obviously built a tremendous amount of momentum over just This past year and as we enter the back to school period, we feel like this strategy around putting teachers at the center of the relationship Where based on their own unique knowledge of what's occurring in the classroom and who needs the most intervention they're able to prescribe tutoring to the students that need it And get leverage in their own lives.

Speaker 2

So we're solving kind of the 2 most important and acute issues that school district administrators face, Which is student achievement, including learning loss and then separately teacher retention. And this product lines up incredibly well against both of those. And So as we head into back to school, we have a whole host of different product enhancements that we'll be rolling out that are oriented around making the product even better. And then also even more cost efficacious as it relates to being able to help a larger number of students And making it more reasonable for an entire school district to be able to roll this out broadly. So right now, I believe about a third of those ESSER III funding dollars have been spent.

Speaker 2

So that leaves $16,000,000,000 excuse me, to be spent over the course of the next, call it, 15 months. And we feel really good about the position that we're in and frankly the extent to which this product solves such acute needs that it's Durable, long lasting nature and we feel like we're just getting started. So we are hearing multiple year deals being brought up. That's exciting. That's something that we Expected that happen.

Speaker 2

We had one of those in the quarter that was material, and we feel good about the ability for this product to Continue to scale.

Operator

Thank you. Our next question comes from the line of Andrew Boone with JMP Securities. Please go ahead.

Speaker 6

Matt on for Andrew. Thanks for taking my question. Maybe 2, just on the institutional business, Can you just talk about your sales force and if there's any other investments that need to be made there, especially as the business continues to scale? And then just now it's obviously learning memberships at an inflection point. What further investments do you need to make?

Speaker 6

Obviously, the new portal is is a key focus now, but are there any other additions that you need to make into that business, as it continues to grow? Thank you.

Speaker 2

Sure. Happy to answer that good question. So on the Marcy Tutors for School side, one of

Speaker 6

the things you're starting to

Speaker 2

see happen is that we're getting operating leverage at the Investments that we made in our institutional go to market strategy and team over the course of the past, call it 18 months or so, Holding that cost count and now benefiting from the increased revenue, those are actually driving operating leverage. So the kind of team size and totality and the investment there is Relatively constant. And then as we're getting renewals as that revenue base is growing, you're starting to see the benefits fall through to the bottom line. So I would not expect that we grow the team substantially and feel good about the overall kind of total investment there. And then separately on learning memberships, you're going to see the fact that we're adding new learning members as you ramp up through the school year, Who are of course higher lifetime value than their package predecessors drive sequential revenue growth in the coming quarters.

Speaker 2

So you're basically layer taking What we expect to be higher customer lifetime value customers on top of one another who then are higher longer duration, higher value per month. And as a result, you get revenue acceleration. So, we would expect kind of coming out of Q3 our seasonal low point That you start getting pretty significant operating leverage associated with it. And while we're adding in certain Areas like software engineering and AI. Thus far, those investments have been self funding, and We feel really good about heading into 2024, the ability for this business to be quite profitable.

Speaker 6

Great. Thank you so much.

Operator

Thank you. Our next question comes from the line of Mario Lu with Barclays. Please go ahead.

Speaker 2

Hey, this is Jesse on for Mario. Thanks for taking the question. Kind of piggybacking on to the last question. So you guys Had another strong quarter in terms of marketing spend leverage and sort of that layer caking dynamic that you mentioned earlier. So how should we think about the sustainability of this lower marketing spend intensity?

Speaker 2

And then going forward, is there more runway for marketing efficiencies? Or should we expect to level off here in the out years. Thanks.

Speaker 3

Yes, that's a great question. I think as you mentioned, we've been able to drive substantial leverage Through the first half of this year from a marketing perspective, given the combination of both higher LTVs on the one hand and those will continue to layer tank, which Inc. Going forward, coupled with just efficient and optimized marketing spend. One of the things that we're going to do during the Q3 and this Plays into the EBITDA guide is given the strength of the LTVs in the more efficient operating model, we are going to lean into Some additional marketing spend to extend our reach during the KeyBanc School period. We think it's a prudent thing to do, when customers are In the greatest need state for tutoring.

Speaker 3

And again, given the strength of the LTVs that we've seen, we think it's the right time to do it. Yes. As it relates to your

Speaker 2

question on sustainability, I mean, the exciting thing about the growth in new customer adds that we're seeing is that it's been driven by conversion. So our product is resonating more with customers and we're making it more resonant. We're increasing the value that we're able to communicate and provide. And that of course has incredible benefits from a unilateral economic perspective and allows you to drive an immense operating leverage over time. And so As we continue to add new SKUs to appeal to different audiences, feature different elements of the membership To communicate value propositions that are specific to that type of customer that they're likely to leverage, We've seen conversion improve and then unit level economics improve.

Speaker 2

So, CAC going down and then new ads going up. And that is something that we think we'll be able to continue to optimize over the course of many years, continuing to make the product More resonant and appealing, adding more value to the learning membership and as a result, driving sales and marketing and operating leverage.

Operator

Thank you. There are no additional questions waiting at this time. And that concludes today's conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.

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Earnings Conference Call
Nerdy Q2 2023
00:00 / 00:00