Nerdy Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

There are 11 speakers on the call.

Operator

Hello, everyone. Thank you for attending today's Nerdy Incorporated 4th Quarter 2023 Earnings Call. My name is Sierra, and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, TJ Wen, Associate General Counsel of Nerdy.

Speaker 1

Good afternoon, and thank you for joining us for Nerdy's Q4 2023 earnings call. With me are Chuck Cohn, Founder, Chairman and Chief Executive Officer of Nerdy and Jason Polo, 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.

Speaker 1

Please refer to the disclaimers in today's shareholder letter announcing Nerdy's 4th 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.

Speaker 2

Thanks, TJ, and thank you to everyone for joining us today. We entered 2023 with 3 primary goals that included scaling always on subscription and access based revenue products, driving profitability and leveraging AI for HI or artificial intelligence for human interaction to transform how people learn. I'm proud of the nerdy team for delivering against all three of these commitments, which were accomplished through the tight execution against ambitious initiatives in both our consumer and institutional businesses over the past year. These include completing the evolution to subscription based offerings, the simplification of our product operating model and pricing, enhancements to our offerings, including the launch of multiple new scalable products and durable improvements in the efficiency of our operating model. As a result of this work, revenue accelerated each quarter to 32% year over year growth in the Q4.

Speaker 2

Non GAAP adjusted EBITDA margin improved by approximately 2,100 basis points year over year, representing a $33,200,000 improvement in profitability or 108% flow through from revenue to non GAAP adjusted EBITDA. Our progress evolving, enhancing, converging our consumer and institutional business models, products and platform has set the stage for us to build from a solid foundation for growth. It's also enabled us to develop a freemium growth strategy that aims to introduce our products to consumers and institutions at a larger scale than ever before. I wanted to start off by sharing the following retrospectives in relation to our 3 primary goals from 2023. During the year, we successfully transitioned 100% of our consumer business to learning memberships.

Speaker 2

Market acceptance and demand for learning memberships was strong throughout the year with new consumer customer growth of 26% year over year, resulting in us ending the year with 40,700 active learners, up 101% year over year. We also made significant platform enhancements that have enabled us to shift our institutional business to access based subscription models that we believe provide more value to our institutional customers. This new model was made possible by the unification and overhaul of our consumer learning membership experience, which then allowed for us to scalably offer our suite of products, including those originally built for consumer audiences to K-twelve schools and other institutions. During the year, Varsity Teachers for Schools contracted with nearly 200 school districts, delivering $37,600,000 of bookings, an increase of $12,800,000 or 52% compared to the previous year. Institutional revenue of $33,800,000 increased 77% year over year and represented 17% of consolidated recognized revenue in 2023, ahead of our initial 15% expectation to start the year.

Speaker 2

This level of institutional growth occurred while launching 2 new products and shifting the business model products and platform to one that involves access based subscription offerings focused on a subset of students requiring tutoring. And then also providing every student in that district with access to our suite of powerful learning resources at no additional cost. Strong adoption of learning memberships and customer lifetime value expansion in our consumer business, coupled with continued scaling of our institutional business led to accelerating consolidated revenue growth each quarter throughout the year as we delivered year over year growth of 5% in Q1, 16% in Q2, 27% in Q3 and 32% in Q4. A year ago, as we headed into 2023, we believe the transition to a learning membership model would lead to more attractive unit level economics, broader customer appeal, longer duration and higher lifetime value customer relationships, higher growth margin and a more scalable and efficient operating model. We also thought that learning memberships would serve 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 offerings more appealing and engaging.

Speaker 2

We expected this to drive both the conversion of new members and the retention of existing ones. We also believe that if we built access based subscription products and made investments in automated and self-service capabilities and AI that we could simplify operations and simultaneously enhance both the Werner and expert experience. I'm pleased to say that our belief that the transition to subscription revenue relationships with customers would provide substantial operating leverage has proven to be correct. During 2023, we were able to deliver adjusted EBITDA margin leverage across every P and L line item on a year over year basis. At the start of the year, we expected a non GAAP adjusted EBITDA loss in the range of $10,000,000 to breakeven for the full year in 2023 and that we would be adjusted EBITDA positive in the 4th quarter.

Speaker 2

Against this commitment, we delivered adjusted EBITDA profitability in the first and second quarter, a full 9 months ahead of our initial goal. We also delivered adjusted EBITDA profitability of $3,000,000 in the 4th quarter, ending the full year with an adjusted EBITDA loss of $2,500,000 versus an adjusted EBITDA loss last year of $35,700,000 That improvement of $33,200,000 in 20.23 versus 2022 represents an adjusted EBITDA margin improvement of approximately 2,100 basis points year over year. Said another way, we delivered consolidated revenue growth of 30 point $7,000,000 in 20.23 versus the prior year and at the same time, we're able to generate a full year improvement of $33,200,000 representing 108% flow through of consolidated revenue growth to non GAAP adjusted EBITDA. We believe these substantial improvements position us for adjusted EBITDA profitability and being operating cash flow positive for the full year in 2024 and beyond. In relation to our 3rd goal in 2023, we've long believed that AI for HI or artificial intelligence for human interaction has the ability to transform how people learn.

Speaker 2

AI has been central to our ability to improve quality, enhance personalization and decrease the cost of delivering our offerings. AI powers our ability to identify the highest quality experts, assess learners' foundational knowledge, help ensure the right expert learner match and drive operational efficiency. During the year, our investments in AI allowed for us to rapidly develop learning experiences involving the real time generation of content with near zero costs, improve our ability to deliver live human interaction and personalized learning at scale, provide new superpowers to experts and learners on the platform and allowed us to remove substantial operating costs from our business. Our continued investments in AI for AI allowed us to launch an all new membership experience, making it easier for learners to more fully engage with other learning membership by improving product discovery and personalization. We also successfully launched multiple AI driven solutions that positively impact the customer experience, including an AI generated lesson plan creator, AI driven chat tutoring and AI generated learning content, including practice problems in Q and A.

Speaker 2

Looking ahead, AI will continue to accelerate our efforts to deliver a compelling product experience and build the leading platform for connecting learners and experts in any subject anywhere and at any time. Turning to our recent performance, I'm pleased to share that in the Q4, we delivered $55,100,000 of revenue, an increase of 32% year over year, capping the year by delivering accelerating sequential growth each quarter in 2023. Revenue growth was driven by both our consumer and institutional businesses, which were up 17% and 160% year over year, respectively. New consumer customer growth of 35% year over year in the 4th quarter remained strong. Wording membership customer lifetime values continue to show substantial an increase of 33% year over year.

Speaker 2

We delivered adjusted EBITDA of positive $3,000,000 in the 4th quarter above our guidance range of breakeven resulting in adjusted EBITDA margin improvements of approximately 1900 basis points year over year for the quarter. Moving on to our consumer business, our learning membership model continues to lead to more attractive unilevel economics, broader customer appeal, longer duration and higher lifetime value customer relationships, higher gross margin and a more scalable and efficient operating model. The recently introduced My Learning Hub and subject portals, which enrich the experience and improve the discoverability of learning formats and subjects, are leading to increasing levels of year over year non tutoring engagement, which we found is highly predictive of stronger long term retention and higher lifetime value. During the Q4, we began to test additional product offering tiers by grouping product capabilities and testing multiple price points to identify a pricing model with mass market appeal and deliver the right customer experience and learning support to every student. We also tested multiple self-service features aimed at enhancing and simplifying experience.

Speaker 2

These tests often involving lower average revenue per month or ARPUM products decreased ending ARPUM in the quarter, but it provided our teams with multiple signals in the consumer intent, preferences and behavior that informed our initial approach to consumer freemium model. Turning our attention to our institutional business and varsity tutors for schools. Over the course of 2023, we made significant platform enhancements that have enabled us to shift our institutional business to one that is access and subscription based and one that provides more value to our institutional customers. Our relationship with Varsity Tutors for Schools now comes with access to a broad range of powerful academic resources for an entire district, as well as the ability to choose between 3 simple models for high dosage tutoring with district assigned, teachers assigned, and parents assigned. With Varsity Tutors for Schools, our institutional customers can now choose to administer tutoring centrally at the school district level, empower teachers to manage tutoring interventions, or provide parents with learning memberships and oversee tutoring outside of schools for their own students.

Speaker 2

The breadth of the resources included in the platform allows us to serve a much broader set of needs for our institutional customers and greatly expands the number of students we can impact. Our focus on product expansion is yielding results with institutional revenue of $11,300,000 increasing 160% year over year and representing 21% of total revenue in

Speaker 1

the 4th

Speaker 2

quarter. Marcy's Euthers for Schools executed 42 paid contracts in the 4th quarter, yielding $10,300,000 of bookings, the 3rd consecutive quarter was more than $10,000,000 of bookings. In addition to the high dosage models that are typically focused on a subset of students within a school district, access to the Varsity Cedars platform is now provided for all students district wide, enabling us to provide more value to the school district and its students and families. For example, take a school district with 100,000 students focusing its high dosage tutoring on 1,000 students within the district. The other 99,000 students will now also receive access to products, including 20 fourseven on demand chat based tutoring, on demand essay review, more than 100 live group classes per week in areas including enrichment, test prep and academic subjects, our STAR courses, our self study tools, our college and career readiness resources, our adaptive assessments, our recorded enrichment classes and test prep classes and more at no additional cost.

Speaker 2

In many cases, District were and are paying large amounts of money for these services and they can now direct those cost savings towards live video based high dosage tutoring from Varsity Tutors with Schools. We are now leaning into this interest and recently began making access to the Varsity Tutors platform available at no cost to school districts on a rolling state by state basis across the U. S. By providing this robust set of academic resources at no cost, we aim to efficiently build trust and credibility at scale and earn the right to be considered for live video based high dosage tutoring, which is our superpower and the primary way we intend to monetize these relationships over time. Initial interest has been strong with more than 250 districts representing more than a 1000000 students signing up and offering access to their students.

Speaker 2

Level of initial uptake and success has caused us to invest significant organizational resources towards this initiative and enabling a successful Q1 'twenty four launch. These efforts include a specific focus on platform scalability and building the freemium upsell go to market motion of high dosage tutoring sales to K-twelve school districts as we build trust and credibility with these new no cost access partners. Turning our attention to 2024, we have 3 main priorities that aim to further our mission of helping people learn. 1st, we will scale the winning product for every learner. As we continue to evolve and enhance our product offerings within our new access based subscription model, our focus remains on delivering enhanced value to both consumer and institutional customers.

Speaker 2

In 2023, we successfully unified our offerings into access based subscription models and leveraged AI to improve our product. We'll build upon this strong foundation in 2024 to scale our platform and reach more learners across more learning needs. Our 2024 plan involves significant enhancements to the customer experience that are designed to make accessing high quality live instruction more intuitive for every learner. Specifically, we plan to streamline onboarding, simplify scheduling, enhance self-service tools and expand expert engagement features to improve the learning experience on our platform. We also plan to continue to leverage AI to improve the quality of live instruction delivered on the platform and the quality of the customer experience learners receive.

Speaker 2

We plan to equip experts with better capabilities to help tailor instruction and create individual learning journeys that accelerate skill acquisition. Additionally, we plan to use AI to guide learners towards the most effective next steps in their learning journey, building on our success with AI and matching learners and experts. We believe these initiatives will increase engagement on the platform, increase the value we provide for both learners and experts, improve customer lifetime value and ultimately improve our unilevel economics and the total revenue and profitability of the business. As our second goal and priority for the year, we will deliver growth by scaling 2 freemium models. Our efforts this past year enabled us to converge our consumer and institutional businesses into similar access based subscription models built on a unified common platform.

Speaker 2

That's allowed us to take products originally built for either our consumer audience or our institutional audience and make them available to each other as part of a standard product offering in both businesses. This includes 20 fourseven cap based tutoring, AI tutor, on demand essay review, more than a 100 live group classes per week in enrichment test prep and academic subjects, our STAR courses, self study tools, college and career readiness resources, adaptive assessments and more. We believe the logical next step is the introduction of a freemium offering within both our consumer and institutional businesses that introduces nerdy to 1,000,000 and eventually tens of 1,000,000 of learners with a specific aim at dramatically growing awareness and driving a halo effect across both businesses. The initial no cost version of our platform on its own already meets multiple customer needs states across study support, homework help, college admission prep and enrichment. It also serves as a natural on ramp that will allow us to introduce and upsell our live video based online tutoring products to a far broader audience across multiple points in a learner's education journey.

Speaker 2

With more than 1,000,000 students signed up across more than 250 school districts on the Varsity Tutors for School side, an encouraging early signal across consumer customers, we believe a premium growth strategy will allow us to drive substantial marketplace awareness. We also think it can help us achieve multiple different business objectives, including unlocking e commerce, expanding into new marketing channels, introducing nerdy to new audiences, and finally, expanding our total addressable market by becoming a household name. We're looking forward to updating you on the progress we make against this effort over the course of the next year as we further enhance and refine this strategy. As our 3rd goal in 2024, we will deliver profitable growth. In 2024, we expect to build upon our recent success by delivering profitable growth through an increase in the number of active members and lifetime value extension in our consumer business, as well as delivering higher institutional revenues as we continue to rapidly grow Varsity Teachers for Schools.

Speaker 2

We believe that by scaling our winning access based subscription offerings, we will be able to deliver accelerating full year revenue growth of 24% year over year at the midpoint of our guidance, improve adjusted EBITDA margin by an additional 500 basis points and deliver positive operating cash flow in 2024. In closing, with our transition to learning memberships and

Speaker 3

our new unified platform complete, we look

Speaker 2

forward to building from a strong foundation, continue to enhance these winning models, launching a premium strategy to grow the number of learners introduced to our platform and doing so in a way that drives profitable growth. I would like to close by thanking our team at Nerdy for their strong work this past year and their ongoing high quality efforts towards meeting the needs of learners in any subject, anywhere and at any time. With that, I'll turn the call over to Jason to discuss the financials in more detail. Jason?

Speaker 3

Thanks, Chuck, and good afternoon, everyone. As Chuck mentioned, we're proud of the results we delivered in 2023 that included completing the evolution to access based subscriptions in our consumer and institutional businesses in just over a year's time, clearly demonstrating the strong product market fit and strong operational execution. Both our consumer and institutional businesses continued to see strong demand in the quarter, which combined with the operating leverage driven from our evolution to access based subscription revenue models drove meaningful bottom line performance. The transition to learning memberships continues to yield more attractive unit level economics, longer duration and higher lifetime value customer relationships, higher gross margin and a more scalable and efficient operating model. We also rapidly scaled our institutional business, which delivered revenue growth of 77% year over year in 2023 through partnerships with nearly 200 school districts during the year.

Speaker 3

Turning to the Q4. We delivered revenue of $55,100,000 results that represented 32% year over year growth, yielding sequential growth acceleration throughout each quarter in 2023. Active members of 40,700 as of December 31 were up 101% year over year, resulting in an annualized run rate of approximately $151,000,000 from Learning memberships at year end, a 74% increase year over year from $87,000,000 last year. Learning memberships revenue grew to $43,500,000 increased 32% sequentially from the 3rd quarter, represented 79% of total company recognized revenue and nearly 100% of consumer recognized revenue in the 4th quarter. Consumer new customer growth of 35% and consumer revenue year over year growth of 17% in the 4th quarter continued to demonstrate strong demand for our consumer offering.

Speaker 3

Our institutional business delivered revenue of $11,300,000 in the 4th quarter, representing 160% growth year over year. And we also delivered bookings of $10,300,000 which represented the 3rd consecutive quarter with more than $10,000,000 in bookings. Moving down the P and L. Record quarterly gross profit of $39,200,000 in the 4th quarter increased 33% year over year. Gross margin of 71.3% in the 4th quarter was 75 basis points higher than gross margin of 70.5% during the same period in 2022.

Speaker 3

Gross profit and gross margin increases were primarily driven by growth in our consumer business as the result of strong adoption of learning memberships, which has led to lifetime value expansion and higher gross margin. As we start 2024 with essentially all consumer revenues from Learning memberships, we expect consumer gross margin to continue to expand. Sales and marketing expenses for the 3 months ended December 31 on a GAAP basis were $18,800,000 an increase of $1,800,000 from $17,000,000 in the same period in 2022. Non GAAP sales and marketing expenses, excluding non cash stock based compensation, were $18,200,000 or 33 percent of revenue, compared to $15,700,000 or 38 percent of revenue in the same period in 2022, an improvement of more than 4 50 basis points year over year. Sales and marketing spend and efficiency improvements were driven by the transition to learning memberships, including the continued expansion of lifetime value, our focus on optimizing the level of marketing spend in a more efficient operating model in our consumer business.

Speaker 3

We also delivered substantial Varsity Tutors for Schools revenue growth, yielding efficiencies from prior investments in the institutional sales and go to market organization. We expect that a more efficient operating model in our consumer business and the continued scaling of our institutional business will continue to lead to sales and marketing efficiency improvements as the business delivers accelerating revenue growth. General and administrative expenses for the 3 months ended December 31 on a GAAP basis were $30,700,000 a decrease of $2,200,000 from $32,900,000 in the same period in 2022. Non GAAP G and A, excluding non cash stock based compensation and restructuring costs, was $19,800,000 or 36 percent of revenue compared to $21,000,000 or 50 percent of revenue in the same period in 2022, an improvement of over 1400 basis points year over year. Included in G and A costs were product development costs of $11,500,000 an increase of $2,100,000 from $9,400,000 in the same period in 2022.

Speaker 3

Our investments in product development and our platform oriented approach to growth have allowed us to launch a suite of access based subscription products, including learning memberships for consumers and our district teacher and parent assigned offerings for institutional customers. As we've noted throughout 2023, access based subscription offerings simplify the operating model needed to support customers and grow the business, while also providing a more predictable pattern of revenue recognition over time. Our ongoing automation efforts involving self-service capabilities, the application of artificial intelligence and other efficiency efforts have allowed us to generate operating efficiencies and remove significant costs from the business. As Chuck mentioned, our belief that the transition to subscription and access based revenue relationships with customers would provide substantial operating leverage has proven to be correct. We delivered non GAAP adjusted EBITDA profitability of $3,000,000 in the 4th quarter, ahead of our guidance of breakeven.

Speaker 3

During 2023, we're able to deliver adjusted EBITDA margin leverage across every P and L line item on a year over year basis. Ending the full year with a non GAAP adjusted EBITDA loss of $2,500,000 versus a non GAAP adjusted EBITDA loss of $35,700,000 in the same period last year. This resulted in adjusted EBITDA improvement of $33,200,000 and adjusted EBITDA margin improvement of approximately 2,100 points year over year in 2023. We believe these durable improvements position us to be adjusted EBITDA profitable and operating cash flow positive for the full year in 2024. These leverage and efficiency improvements were delivered while making substantial investments in product development and our platform oriented approach to growth, ensuring we can continue to execute against our product roadmap and deliver innovative solutions to meet the needs of today's learners.

Speaker 3

During the Q4, we delivered negative operating cash flow of $5,000,000 compared to negative operating cash flow of $14,500,000 last year, an improvement of $9,500,000 that reflects the benefits from our evolution to learning memberships, partially offset by temporary changes in working capital. With no debt and $74,800,000 of cash on our balance sheet, we believe we have ample liquidity to fund the business and pursue growth initiatives. Turning to our business outlook. Today, we are introducing Q1 and full year 2024 guidance. For the Q1 and full year, we expect year over year revenue growth to be driven by the continued growth of Learning memberships in our consumer business, the corresponding increase in the number of Learning membership subscribers, coupled with continued LTV extension and higher institutional revenues as we continue to rapidly scale Varsity Tutors for Schools.

Speaker 3

New learning member acquisition remains strong and a growing awareness that high dosage tutoring is the most effective way to remediate learning loss by parents, educators and policymakers provides us with confidence in the demand for our offerings in the year ahead. It should be noted that first half year over year revenue growth is impacted by legacy package revenue in 2023 of $10,900,000 $4,900,000 in the 1st and second quarters respectively that does not recur in 2024 due to the completion of our transition to subscription based earning memberships in our consumer business. Once we reach the second half of the year, when package revenues are no longer included in prior year comparable quarterly revenues, we expect growth to accelerate consistent with the sequential quarterly acceleration we delivered in 2023. 1st quarter revenues are also impacted by lower ARPU resulting from recent efforts to test additional product tiers by grouping product capabilities and testing multiple price points to identify a pricing model with mass market appeal. As we move throughout the year, we expect ARPUM for our core learning membership offering to increase as we optimize our testing efforts.

Speaker 3

For the Q1 of 2024, we expect revenue in a range of $51,000,000 to $53,000,000 For the full year, we expect revenue in the range of $232,000,000 to $246,000,000 representing accelerating year over year growth of 24% at the midpoint versus our 2023 revenue of $193,000,000 1st 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 and improving gross margin profile and operating leverage stemming from the completion of our evolution to access based subscription revenue business models. These benefits are partially offset by investments in Varsity Tutors for Schools go to market strategy and product development to drive continued innovation and support our accelerating growth. For the Q1 of 2024, we expect non GAAP adjusted EBITDA in a range of negative $3,000,000 to breakeven. For the full year, we expect non GAAP adjusted EBITDA in a range of positive $5,000,000 to positive $15,000,000 an improvement of over 500 basis points in non GAAP adjusted EBITDA at the midpoint. We also expect to deliver positive operating cash flow in 2024.

Speaker 3

In closing, thank you again for your time and for your continued interest in our company. With that, I'll turn it over to the operator for Q and A. Operator?

Operator

Thank you. We will now begin the Q and A session. Our first question today comes from Eric Sheridan with Goldman Sachs. Please proceed.

Speaker 4

Just wanted to come back to the introduction of the freemium model and how we should be thinking about broader financial implications from that as they build through the year, elements of how you want to align the marketing structure of the company, what you think the market opportunity is that you're sort of tapping into and how to think about the broader eventual evolution of sort of the user funnel having that product out there and what it might mean for broader premium users to eventually over time possibly move into higher price plans? Thanks so much.

Speaker 5

Thanks, Eric. This is Chuck. Great question. So we have been methodically testing it over the course of the last couple of months and easing our way into it and we would expect that that would continue to be the case throughout 2024. So the big opportunity that we have with our freemium strategy is to take advantage of all of the non tutoring engagement, all these incredible products that we've built, many of which companies charge large amounts of money for and have built multi $100,000,000,000 businesses on and give them away at no cost or low cost and actually introduce consumers to our ecosystem and then monetize on live tutoring.

Speaker 5

And of course, live tutoring is our superpower that we do better than anyone else out there. So we would expect to test into some of these different freemium models and do so in a way that builds to that really big opportunity of kind of mass market appeal and allow it for people as they have a specific learning need where they get benefit from tutoring to upsell from there. So the way that we're thinking about it is kind of focusing on the existing model, continuing to scale winning model and then adding incremental users into these different kind of previous states and monetizing thereafter.

Speaker 4

Great. Thanks so much for the color, Chuck.

Operator

Our next question comes from Doug Anmuth with JPMorgan. Please proceed.

Speaker 6

Hey, it's Brian Smialek on for Doug. Thanks for taking the questions. Just on Varsity Tutors, can you just describe more drivers of growth into 20 24, especially considering the ESSER III allocation funding deadline is coming up in September? Are you seeing any incremental demand from existing partners around that deadline looming and any uptick in the new customer backlog?

Speaker 3

Yes, sure, Brian. Great question. I can take this one. So as you think about 2024, I think it's going to be a continuation of what we saw in 2023. So on the consumer side, you'll see continued scaling of learning memberships, the number of active members and continued LTV extension that we've experienced throughout this year as we scale that business.

Speaker 3

And then when you think about the Varsity Tutors for Schools business, I mean, certainly, we had a great year this year. Total bookings were up 50%, and revenue for the full year was up 77%. As we think about next year, we're getting a lot of positive signal on our new products, district assigned, teacher assigned and parent assigned. And one of the investments we're going to make is expanding the go to market sales team in varsity tutors for schools to capture that opportunity. I think it's a little bit too early to tell how the Ester money is going to come in at the end of the year.

Speaker 3

But as a reminder for participants, those monies must be spent by September of 2024 and contracted, but the services can be provided over the course of the next 4 years post September 2024. And so we feel like there's a pretty significant opportunity here to capture our fair share of those funding sources and enter into multiple year contracts with our partners

Speaker 5

in the school district space. Yes. And Brian, I would also add, this is Chuck now, that there are all sorts of different funding sources being used. There are state specific legislation that's been passed in a variety of different states for tutoring. Tutoring is the one thing that is consistently working across the United States.

Speaker 5

And there's broad bipartisan support for the fact that tutoring is highly effective and great at remediating learning loss. And so we feel like we're well positioned to participate in a variety of different state programs, local programs and that As you think about the difference, the funding environment, including federal funding, there's going to be a good broad support for continuing to find something as effective as a tutoring. And really all the studies are showing that it's highly effective in remediating learning loss. So we feel good about that. And then separately, as you think about our strategy of providing access to the Marcy Tutors for Schools platform, we're actually able to introduce ourselves highly efficiently to a much larger number of school districts.

Speaker 5

So there's something like 15,000 public school districts in the United States. Through this strategy, just recently, we've been able to very quickly nearly double the number of school districts with whom we have a relationship. And we think that that's something that really builds as you grow throughout 2024, where that kind of cumulative number of different school district relationships, where we provide value, build trust and credibility and then subsequently are able to then sell in high dose securing something that is pretty exciting and the feedback thus far from school district partners has been very positive. And oftentimes it very quickly leads to a commercial relationship as well.

Speaker 6

Great. Thanks for the color.

Operator

Our next question comes from Ryan MacDonald with Needham. Please proceed.

Speaker 7

Hey, this is Matt Chae on for Ryan. Thanks for taking the questions. Wanted to start with learning memberships. Nice to see that the transition is now complete, but Q4 learning numbers came in slightly below the 42,000 expectation. Just curious on what caused the difference?

Speaker 7

And are you providing any outlook for Q1 on learning numbers? Or just any color on how you're forecasting LMs for 2024 would be helpful?

Speaker 3

Yes, sure. Thanks, Matt. I guess I would say we thought that the number of active learning members came in largely in line with our expectations. We had continued strength in new customer growth, up 35% year over year in the Q4. And so I think as we look ahead, we feel really good about where we're positioned.

Speaker 3

Looking ahead to next year, we'd expect about $45,500 at the end of Q1. And then thinking longer term at the end of the year, we would expect about 56,000 active members. Now the thing to keep in mind is both of those numbers that I just provided exclude the potential conversion of premium to pay customers as we move throughout the year. It's a little bit early to forecast that, although we feel good about the conversion mechanisms that we're seeing, but the numbers I gave you are more for our traditional learning membership customers.

Speaker 7

Got it. Appreciate that, Jason. Yes, I wanted to touch on the freemium conversion channel there. Obviously, you mentioned that you've been testing it a little bit, but rolling it out now more broadly. What inning would you say you're in and kind of building out that go to market?

Speaker 7

And maybe just if you could flesh out more of the strategy or that wedge to drive that upsell from premium to paid? Thanks guys.

Speaker 5

Sure. So this is something that we've been building towards for a couple of years. So as we build all these different products, we've talked before about how we got to stick with them as building blocks where you can assemble different compelling products for specific audiences that really resonate. And between having live video based tutoring, small group classes, live stream capabilities where you get up to 50,000 people in a class at almost no marginal cost, diagnostic testing, self study videos and a whole host of other resources, including AI tutor. We brought these all together in such a way where we're able to then build different product offerings that can resonate in such a way where we can then monetize and we have kind of tested different variants in the past and had great success.

Speaker 5

And so this is something that wasn't possible until we were able to converge both our consumer and institutional businesses and our consumer and institutional platforms into 1 unified product offering. So we're pretty excited about the potential here. So as we mentioned, it's early, but the signal thus far is good and we've been working towards this goal for a long time.

Speaker 3

Yes. The only thing I'd add is, freemium is going to give us an array of benefits as we move forward. We're going to be able to connect with customers in different needs states, drive substantial marketplace awareness. We'll be able to unlock e commerce to an extent we haven't been able to in the past. It will enable expansion via new marketing channels and it will enable Nerdy to introduce ourselves to what we think will be millions of students over the course of this year and potentially become a household name.

Speaker 3

So this is a big long term opportunity. We feel really good about the initial signals. But to your question, it is early innings. We'll continue to refine the offering as we move throughout the year and with the expectation of being ready to go for back to school in the fall.

Speaker 5

Yes. I think the important thing is that tutoring is a proven monetization engine and we know how to monetize. So we feel really good about that connectivity between the engagements in non tutoring products and then ultimately monetizing in a material way on the actual tutoring side, which of course is our superpower.

Speaker 7

Super helpful. Thank you.

Operator

Our next question comes from Andrew Boone with JMP Securities. Please proceed.

Speaker 4

Thanks so much for taking my questions. I wanted to ask about the cost of operating the freemium model. Is there anything that we should know about either increased hosting or anything else that you can think about there as well as any revenue that may fall off as now some products become free? And then secondly, learning memberships are aging. You guys have now been through this process a while.

Speaker 4

Is there anything that you guys can share now that we're a little bit more mature in cohorts on retention or anything in that kind of vein? Thanks so much.

Speaker 5

Sure. So I think the important thing here is that these ancillary products have either no marginal cost associated with them or low marginal cost associated with them. So the cost that we bear is related to some of the testing that we did for both getting them live, testing e commerce, rolling out some self-service tools and you kind of see that reflected in the lower ARPU starting point at our Q1 guide. But it builds to a fairly acceleration throughout the year and ultimately full year revenue growth that is still 24%, but accelerating. And we feel good about this being self funding from a maybe even margin accretive over the course of the year.

Speaker 5

So we feel good about the economics here and the fact that we could do so in a highly efficient manner that introduces us to a large number of new burners.

Speaker 3

And then sorry, last question was on the retention of maturing cohorts. You'll see in the shareholder letter, we did remove that from what was historically provided. And from our perspective, we would say that they were originally shown to demonstrate the superior economic profile of learning memberships versus our legacy package model. We've proven that out over the last 5 or 6 quarters. Those cohorts continue to have LTV extension and we feel really good about the retention, the engagement of learning memberships and how we're positioned as we enter 2024.

Speaker 5

Yes, I'd also add that we added a chart in our shareholder letter this time that actually shows the year over year improvement by month and non tutoring engagement, which we found to be very important to retention and getting value out of the membership over time, particularly in shoulder periods. So we feel great about that connection between the product improvements we're making, particularly related to both additional products in that product discovery and that how that pulls through to engagement, which in turn pulls through to retention And that being something that we continue to that we can continue to drive for many, many quarters and years to come.

Speaker 3

Thank you.

Operator

Our next question today comes from Alex Schuler with Raymond James. Please proceed.

Speaker 8

Great. Thank you. Chuck, can you just elaborate a little bit more on what you're referring to as far as kind of unlocking the e commerce opportunity? What will that look like for nerdy?

Speaker 5

Sure. So we have had e commerce capabilities, but we also have a consultative sales engine and we would expect for the majority, if not the entirety of these premium sales to occur through e commerce, which would be a source of operating leverage on sales and marketing.

Speaker 8

Okay. Perfect. So effectively a self-service motion for some of these premium members.

Speaker 3

Not anything new

Speaker 5

We'll continue to polish it and refine it, but we would expect that that would be something that makes us more efficient over time and that we that there's not a kind of commensurate increase in costs with that line item as we scale.

Speaker 3

And Alex, one thing I'd add is we'd encourage everybody on this call to go to varsitytutors.comordrdy.com and experience the freemium product for themselves live on both of the websites.

Speaker 8

Perfect. We'll check that out. So another great quarter on the institutional booking side. Can you just help frame how the pipeline looks heading into 2024 from kind of a total bookings opportunity relative to this time last year? Is kind of the growth in pipeline and opportunities kind keep supporting an acceleration for that segment?

Speaker 5

Sure. So it's dramatically bigger and it speaks to the improvements that we've made in the product offering itself combined with the fact that we believe that there's a emergent multi $1,000,000,000 industry being formed within K-twelve tutoring that we're very excited about. So over the course of the past, call it, 13 months or so, we've launched 3 different subscription products within our institutional segment. Are first teacher assigned, then district assigned, then parents assigned model. The last one allowing us to allocate learning memberships, especially our consumer product with administrative tools sitting on top to school districts.

Speaker 5

So we can really service all three common ways that schools would ever want to administrate tutoring. And then separately, because of the convergence of our platforms, we've been able to take all of the different products, including the ones that were originally built for our consumer audiences and extend it to school districts. And even as a school district is only interested in focusing on a sub segment of students, we're able to provide value to all of the students. And in many cases, there is existing spend associated with the products that we're giving away at no cost as part of this kind of total offering. And it's been very compelling.

Speaker 5

It's opened doors and we're excited about how both the quality of our high dosage offering, the value that we're able to provide and then the actual like our ability to then build relationships at scale and that kind of go to market motion in sales and marketing builds towards a really big year.

Speaker 8

Okay, great. And maybe Chuck, just one quick follow-up on that. Is anything changed as you've launched kind of teacher assigned, district assigned, parent assigned, now you have those 3 flavors out there? And then also the platform access is kind of a newer motion. But have you seen win rates notably improve as a result of having kind of those several different flavors for states or districts to kind of sign up with Varsity Shooters?

Speaker 5

Yes, we have. And the fact that we can solve all these different needs states is we're also seeing school districts purchase for different parts of the school district with different products. So they're actually using multiple different products that then frankly from their perspective it just seems it's much more simple to communicate. There's a very specific use case associated with each one. And then the fact that we're able to provide so much value to everybody throughout the district is something that's really resonating as well.

Speaker 5

So they're more simple conversations, when rates are higher and it's more efficient to build trust and credibility.

Operator

Our next question today comes from Maria Ripps with Canaccord. Please proceed.

Speaker 9

Great. Thanks for taking my questions. Can you maybe share a little bit more color on your pricing and product test, sort of what products have you been bundling together? And what type of consumer are you targeting sort of with these offerings? And then how heavily do you intend to roll out this plan sort of going forward once sort of initial testing is completed?

Speaker 5

Sure. So we started off, call it, the past in Q4 with testing a variety of different options. We've learned quickly and we're using that to then inform a broader rollout. So in addition to some of the 4 and 8 hour packages that we've tested and primarily sold as part of our all inclusive learning membership over the course of the past year. We've also introduced different pricing tiers and some of those include lower hours of tutoring.

Speaker 5

Some of those include much lower price points and then the ability to kind of up purchase when acute needs arise. And I think we have good signal there. It's still early days, but there are certain SKUs that are really resonating and allowing for us to get people onto the platform, engaging in products at no cost that traditionally they would have paid other companies for, in some cases, large amounts of money, which we think kind of creates this gravitational force towards our website that will attract users very efficiently. And then we've been very encouraged by the initial monetization side. So again, early and our plan does not count on tremendous success there, but working in such a way where we believe that, that could be a big growth driver in the future.

Speaker 9

Got it. Thank you so much for the color.

Operator

Thank you for your questions. Our next question today comes from Brett Knoblauch with Cantor Fitzgerald. Please proceed.

Speaker 10

Hi, guys. This is Thomas Shinsky on for Brett. We're encouraged to see the introduction of the freemium model. I was just wondering if there was any consideration of this model cannibalizing existing revenues from customers that maybe were on the platform, but not using the

Speaker 3

Sure. I could take that one. So I think it's important to remember that our free product and platform provides study and support resources that do not replace high justice tutoring, but instead they supplement it. So the need states are different, supplemental resources will serve as a great on ramp for tutoring, and they're largely very low marginal to no marginal cost. So think things like an AI based tutor, practice problems, assessments and personalized learning plans, as well as asynchronous content.

Speaker 3

So those items, support a learning journey over the course of someone's semester and when they have an acute need and need specific tutoring to really understand the materials and continue to grow as a learner. That's where we think that the upsell motion to 1 on 1 live or small group tutoring, which are our superpowers, is where we'll be able to monetize the upsell from premium to paid offerings. Yes.

Speaker 5

There's something about live that like that's our superpower. That's why people come here. And that's where we're truly fast and class. And we've surrounded that offering with all sorts of ancillary powerful resources that create a environment where students can kind of continue to learn over time. But the accountability, the relationship, the motivation, the ability to comprehend that comes from that social interaction that's probably present in live face to face interaction, That continues to be what people want and we believe is both highly durable, not something that people would substitute for these other options and then a very powerful monetization engine.

Speaker 10

Awesome. Thank you, guys.

Operator

Thank you all for your questions. There are currently no questions in queue. There are no further questions at this time. So that will conclude today's conference call. I like to thank everyone for their participation and you may now disconnect your line.

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Earnings Conference Call
Nerdy Q4 2023
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