All right. Good afternoon, everyone. We're gonna get started here. My name is Alex Sklar. I'm one of the application software and internet analysts here at Raymond James. Very pleased to have Nerdy with us this year. We've got Chief Executive Officer, Chairman, and Founder, Chuck Cohn, and Chief Financial Officer, Jason Pello. We're gonna get into do a fireside chat. I'll open it up with five or so minutes to the audience if there's any questions here. Hey, thanks for joining us today.
Thanks for having us.
Thanks for having us, Alex.
So, I think I just want to start as part of an introduction. The business has gone through an evolution the last couple of years with the transition to a subscription model, launching the B2B business, the Varsity Tutors for Schools business. Can you just provide a background on what Nerdy does today? And as part of that, it'd be helpful to just kinda hear about that evolution that I alluded to.
Sure. So Nerdy is a leading platform for online learning. We use technology, including AI, to connect experts and learners and deliver high-quality live learning at scale. So we have both a direct-to-consumer model, that's what we've been doing for a long time now. We also have an institutional offering called Varsity Tutors for Schools that allows for us to scale tutoring solutions and other live learning solutions across K-12 school districts. So we have a business that spans everything from kindergarten through adult and professional learners, and it's pretty evenly distributed throughout that, allocation on the consumer side.
Perfect. So I think I want to kind of transition to the addressable market, and when we think about kind of the personalized learning market broadly, it's massive. So can you just talk about, though, where Nerdy fits in that personalized learning market? How much is addressable through digital channels today? How has that digital channel kinda grown broadly? And maybe where does Nerdy win in that equation?
So you can kind of think about the market in a couple of different ways. There's academic tutoring, there's test prep, there's enrichment, there's professional. Those are different audience segments that we service on the platform. We, within the different realms and different modalities that consumers consider when they learn things online, you can learn in a one-on-one setting, a small group setting. We have asynchronous tools, and we kind of brought them all together to surround our superpower, which is live. We're best in class at delivering live at scale through a software-based interface in a way that preserves relationships. And then we surround it with this ecosystem of tools and content and other additive learning resources that create something that is differentiated and we believe provides an incredible amount of value to both consumers and institutions.
So on the consumer side, we have what's called a Learning Membership, which is an all-access pass where students can learn in any given subject, thousands of different subjects across multiple different learning modalities, and that's oriented towards supporting them across different subjects, different school years, different students per household, all within that same Learning Membership. And it's an access-based model, and we've undergone a business evolution over the course of the last, call it, 18 months or so, to get to the point where just a couple of months ago, we announced that we had shifted the last of all the new consumers joining the platform to Learning Memberships, and now we're at 100% subscription revenue and expect that in the fourth quarter will be 99% or so, consumer subscription and institutional and contracted revenue, which is up from, you know, zero two years ago.
So we're pretty excited about the transformation there, and then all the acceleration that's occurring as a result of that, and also all the operating leverage we're getting. So it's significantly better gross margins. We've been able to drive 2,300 basis points of EBITDA operating leverage year-over-year in the third quarter, and we're pretty excited about the momentum in the business.
That's perfect. So when you talk about live, I think, though, you're talking about digital live. So any commentary just kind of on how that mix of digital has shifted within the addressable market over the past few years? Obviously, the pandemic was probably a big accelerant, but are you still seeing that kind of regular cadence of digital making up a bigger piece of the total pie?
Yeah, absolutely, and the quality of the product online has just gotten better, and people are more aware that you can get an exceptional experience online. So both the digital penetration, but then also just consumer recognition that, you know, regardless of one of thousands of subjects they might be learning, that they should consider an online option because it's oftentimes higher quality, lower cost, more convenient, is something that absolutely continues to increase year by year. And we have been on the kind of cutting edge of advancing what great looks like in that environment and benefiting from being able to provide more values to consumers, higher NPS product, lower cost, you know, effectively everything that drives digital penetration in other categories.
Perfect. So I wanted to kind of touch base on the macro for a second. I think in education is always kind of viewed, maybe some countercyclicality to it. Kids go to school in economically harder times, right? So can you just talk about how the macro impacts your business broadly and whether the launch of the institutional has any impact on kind of maybe smoothing any trends that on the consumer side, if there are any?
Sure, I can take this one. So I'll break it into the consumer and institutional markets. On the consumer side, we've been in business for 16 years, and we've never been able to correlate economic cycles, whether good or bad, with the business's performance. So we've been largely agnostic there. I think it's important to remember that parents are the key decision-makers here and the actual purchaser in the vast majority of cases, and oftentimes, parents will always prioritize education over other discretionary spend. We've got a variety of price points with Learning Memberships, anywhere from $179 to north of $500, to meet, you know, the frequency with which the student needs and the budgetary requirements of the family.
And then when you think about the institutional side, you know, COVID learning loss and learning loss in general, post-COVID, continues to be very real. There's two pain points that state officials and school administrators are trying to solve, so learning loss and teacher attrition and retention. So, there's significant new funding sources coming into the market, whether it's federal dollars or state dollars, that we think will drive that business to also be agnostic to economic cycles.
Perfect. You kind of alluded to some of the competitive positioning value prop already with just the idea of how many different pieces of the kind of learning market you touch with your solutions in terms of the content side. But maybe just broadly, how should we think about kind of where you're winning customers from? How much of it is kind of this is their first foray into virtual and into kind of personalized learning versus they're coming from, have experience doing it, either in person or other modalities?
It's both. You know, the, like, it's a high-quality product, it's lower cost, it's more convenient, it's getting better. You know, we're maybe relating it back to, like, the economic cycle question, aside from the fact that we've never been able to tell any impact on the economy, positive or negative, it's always been driven by you know, our growth has always been driven by product improvements. This is an area where we've seen significant traction just over the course of the last couple of months alone, as we've made big strides in bringing together disparate products and then actually adding and enhancing additional ones outside of tutoring, so we can continue to add more and more value to Learning Membership.
So our non-tutoring engagement, so the use of tools like Classes, and AI Tutor, and Async products, and self-study tools, is actually up more than 100% year-over-year for all of our new cohorts that are joining over the last few months. And so we're pretty excited about the extent to which they're leveraging all these different products and then staying in the ecosystem. So, you know, people are joining from, you know, a variety of different past uses, but largely speaking, the product's great and then getting consistently better over time.
That 100% usage stat's a great one, and we'll probably... we'll hit on it a little bit later, but obviously, it comes with some profitability improvements-
Mm-hmm.
-with that mix as well-
Yeah, 'cause it drives retention.
Yeah. So maybe just going back kind of on the consumer segment and the subscription model. So it's been, over the last year and a half, really strong execution against that, that transition. You alluded to it being at 100% kind of now. Can you just kinda go back and frame, like, what was the decision process of why you made that transition and some of the key learnings you kinda made, since, since it's kinda now been completed or-
Sure.
during the process? Yeah.
Yeah, so we used to sell... Our revenue model was that you could buy packages of tutoring or classes, and they were individually purchased, and that was a good business model. We started testing the ability to, instead of having a purchase separate you from kind of engaging on a perpetual basis, to instead bring everything together. So regardless of what somebody might wanna learn, the relationship from the consumer's perspective, was framed up from the get-go as supporting you across all subjects, all school years, all kids in the family, and all learning formats. And it was a completely different consumer psychology that we were testing relative to the old model, and we wanted to make sure it defaulted to a use-it-or-lose-it, always-on recurring structure that drove habit, that drove people to engage and commit to learning a task.
The change in customer behavior was pretty significant as it related to, like, retention and staying in habit on learning something, as it related to starting to leverage multimodality products. That step function changed up as we've made some significant product enhancements this back-to-school period, and all of those things kinda combined to create a much higher LTV relationship that's trending north of 2x what we used to get, while holding customer acquisition costs constant, which has been a source of immense leverage.
And then as the product's getting better, we're gonna get better and better at retaining people over the fullness of time, and continuing to add value to the Learning Membership and having product-driven growth cause us to both enhance conversion at the top of the funnel and then retention on the back end, such that it, you know, is highly accretive way to grow.
So, and maybe this is gonna dovetail on that 2x LTV commentary, but some of the other KPIs that you've talked about before, you hit on usage.
Mm-hmm.
I know you just said you had some early positive results from some of the new UI stuff, but what are the other KPIs, Jason, I don't know, that you can speak to with the learning subscription?
Sure. So we've always thought and said that, you know, as we transition to a Learning Membership model, we'd have higher growth rates, higher profitability, higher gross margins, higher lifetime value, and a more efficient operating model. So if I think about each of those different components, 100% of our customers on the consumer side can purchase Learning Memberships now. As Chuck mentioned, 96% of revenue in the third quarter on the consumer side is from Learning Memberships. It will be 100% in the fourth quarter. LTVs, as you mentioned, 2x the legacy package model at the 12-month mark. Gross margins were at a record 72.4% on a consolidated basis. That's up 340 basis points year-over-year in the third quarter.
We delivered 33% improvement in gross profit year-over-year during the third quarter as well. And then, when you think about the annualized recurring revenue from Learning Memberships, it was $164 million as we ended the third quarter. That's up more than 3x from $50 million, you know, just a year ago. So we think the benefits from the transition are becoming readily apparent, in both, like, the unit-level economics, but then also towards the overall business adjusted EBITDA margin profile, which I know we'll get to in a little bit.
Perfect. I think just to switch gears, just for the sake of time, to the institutional side, I think that's been one of the more exciting... It's still obviously a smaller piece of the business, but it's growing fast. You started Varsity Tutors for Schools, like, I think, just over two years ago. Can you just talk about how that business has kind of evolved, the go-to-market investments there, and then you talked about all the opportunities you're seeing come to market now from some of these statewide deals and district-level deals, but where are we today in that?
Yeah, so we've undergone a similar evolution on the institutional side that we did on the consumer side, where we started off selling tutoring to school districts that they could then scale across their entire student populations, but it was sold in blocks. And we've since evolved that to a subscription offering, first with a product called Teacher Assigned, that allows teachers to assign tutoring to any student in their class that needs it through an access-based model, and then recently, with the introduction a couple of months ago, post Labor Day, of two different products, one called District Assigned. That is another access-based model that allows district administrators to centrally administer it. It kind of replaces our old high-dosage model. And then Parent Assign, which is effectively Learning Memberships that schools can then buy at scale and allocate to parents.
And that's useful when they want the parents to kind of own the responsibility. And so between those three different use cases of either a central administrator or a teacher or a parent having control and responsibility over the relationship, we're able to solve all three common use cases in a really elegant, simple-to-explain, access-based subscription model. Those now come with what we call access to the platform, which includes all of the other tools that we have available, and those come at no cost districtwide, across, you know, what could be hundreds of thousands of students. And so we're able to provide immense value by giving away chat-based tutoring and live classes and AI Tutor and a whole host of other things, with that offering at no cost in service of the relationship and to drive engagement across the district.
And that's really changed the conversations we're having and allows us to piggyback off of the consumer investments and the infrastructure that we have there to really have holistic relationships with school districts. And so that evolution towards a subscription-based model really was finalized just over the last couple of months. It's going great. And, you know, we were fortunate to have somebody, Anthony Salcito, who had led Microsoft's worldwide education business and spent 30 years there, join us a year ago to really help us kind of evolve that offering.
So I'm curious if you can just help frame kind of what you've seen on the pipeline side on that, on that institutional business, because you do have several new kind of flavors of the offering out, as you just alluded to in the last few months, but it seems like the pipeline's been kind of building for a little while now. So how big, kind of, or how, how much have you seen growth in that institutional pipeline, year over year, and how much of that do you think is kind of execution on your part versus something's changed with the, what you talked about with learning loss and these states realizing that that's a bigger issue they need to solve now? I'm kind of curious how secular this could be.
Yeah, I think it's a combination of the fact. I mean, I think it's well acknowledged now in policy circles and in academic circles, that high-dosage tutoring is the primary way to remediate learning loss, and so you've got that working for us. But then on the product side, I think we've been able to skate where the puck is and bring new products to market that meet school districts' needs. So you've got teacher-assigned and district-assigned tutoring offerings for high-dosage tutoring that can meet their needs during the school day.
Last quarter, we introduced Parent Assign, which is essentially taking our Learning Memberships on the consumer side, selling them in bulk to school districts, and then the school districts can apportion them out to different families within the district to meet, you know, needs after school and on the weekend and put the power, you know, really in the parents' hands in that instance. So I, I think it's a combination of the market continues to evolve, and we've been able to innovate at a significant pace to meet the needs of those school districts.
Yeah, and I would add also, just post Labor Day, there's been a fundamental change in the market and the amount of attention this is receiving, including state-specific legislation that has been passed to fund tutoring, because it's become clear that it is the most effective way to remediate or accelerate learning loss, is something that is net new. So this industry effectively did not exist before COVID, and it has accelerated significantly just recently.
And last one from me on this topic before we move on, but the idea that a lot of the times you've kind of alluded to, you're landing with the platform, you're kind of giving away the text-based tutoring and some of the asynchronous video. In some cases, you're landing with maybe a specific grade or subject. Can you just talk about, like, how you think that expansion motion is gonna play out on the institutional side, just based on some of the conversations today?
I think what's been important in the institutional space is over the last two years, we've really gained a high level of credibility and trust in the marketplace. And now that we've got, you know, the breadth of product offering, as we have conversations with schools, we're seeing a significant opportunity to cross-sell. So, you know, there's a pocket of students that is maybe the lowest 5%-10% on state standards, where they want District Assigned tutoring, so the school district can administer it. Then there's a portion of, you know, educators that want to put the power in the teacher's hands to make sure that they're providing tutoring to their students in the classroom that most need it at that specific time.
And then certainly with Parent Assign, you can meet niche needs like special education, where there's compensatory services and required additional hours of time that are required for those students, and you can put that power in the parents' hands after school. So I think on a go-forward basis, you'll see a greater level of cross-sell across all three of the products.
Yeah, and even within a given product, selling into additional grades and subjects where now, because we've automated, you know, effectively most of the human labor out of the implementation process, and it can be sold like a true SaaS product, it's actually relatively trivial to do a high volume of implementations, which was not the case even, you know, last semester, which then allows for us to go after all sorts of different opportunities and more flexibly partner with schools, move faster, and then have the opportunity to upsell thereafter.
Perfect.
So maybe just switch gears now to the kind of profitability. It's something you already alluded to, significant leverage in the model over the past year. I think you inflected kind of profitability in the first half of 2023. Can you just kind of talk about the right way to think about incremental margins going forward? I think you, a lot of the B2B investments on the sales force seems like it's kind of you've hit the level where you can scale it from there, but how should investors think about kind of operating leverage?
Sure. So to start the year, we had an ambitious target to deliver 1,900 basis points of adjusted EBITDA margin improvement on the year, and to deliver adjusted EBITDA profitability by the fourth quarter of this year. We were able to pull that forward to the first quarter and the second quarter of this year. During the third quarter is seasonally like the highest level investment. It's also the lowest revenue period because we're entering that back to school period. So negative adjusted EBITDA margin in the third quarter, and then as you look to the fourth quarter, we will be positive again. And I think if you think about the full year, we'll deliver over 2,000 basis points of adjusted EBITDA margin improvement during 2023.
And, and maybe said another way, revenue will increase about $30 million this year, and adjusted EBITDA will increase by more than $30 million, which demonstrates the power of the new platform, the leverage we're getting from the investments we made a year ago in sales and marketing on the institutional side. And then when you look forward, during 2024, we will be adjusted EBITDA and free cash flow positive for the full year. So we just feel really good about the leverage we're getting. It's becoming more and more evident to us that it's gonna pull through, and I think through the use of AI and further automation, there's just more upside to come as we move into 2024.
Yeah, and probably worth noting how we got the operating leverage, which is a function of that LTV extension, more efficient conversion at top of funnel, and then significant improvements we've gotten in just the efficiency of the platform that come through a better business model. So none of it came from, call it cutting, like cutting, it came from automating-
Yeah
... and being more efficient, and that's something that is durable, and we think accrues to significant operating leverage in the year ahead.
No, it's an important distinction, for sure. So, I'm kind of curious on the efficiency side. So giving away, you're kind of leading with the platform as kind of a freemium. On the institutional side, does that at all change the kind of customer acquisition costs equation on the direct consumer side? Like, we should think about this as a new channel for kind of direct customer acquisition?
Well, I think we're a little early there, you know, but certainly there's a convergence happening between models of how people access the platform and then the subscription products that are available, and then the benefit that we could see over time due to, you know, a large number of students already being on the platform. So, you know, we're excited about how having that brand recognition and having school districts select us from all the different vendors that are out there, which is happening at a higher and higher rate on a larger set of deals, we think that ultimately accrues to brand value over time, certainly.
You alluded to kind of AI, and the role of AI. I'm curious, the role of AI for Nerdy, maybe both from a product side and anything you're doing on the back-end side as well, but, what are some of the different ways that it kind of fits in with your product set, maybe to start?
Sure. So we have this concept called AI for HI, or artificial intelligence for human interaction, that has kind of been core to how we operate for a long time. So we believe that we can leverage technology, including AI, to enhance the digital interaction of people in a digital environment, such that they have superpowers, and they get an experience that wouldn't be possible offline. So starting in, call it 2016, 2017, we started investing in machine learning, matching algorithms to select the tutor for a given student's needs, out of thousands that are potentially available. And we got such great results that effectively, students had a better experience and then elected to stick around on the platform longer and longer and longer because they were getting a great experience.
That then pulled through to lifetime value extension, probably driving, call it 50%-ish type LTV extension in that time period, and it caused us to realize that there were significant customer enhancements and business model enhancements that could come through that level of investment. And so we kind of instrumented all parts of our platform. We started storing all the data and then using that data to inform personalization and remove cost from the business. And so, you know, as the generative AI phase has advanced, we've been able to piggyback off of a lot of the existing software infrastructure and data instrumentation we had to move really fast. So we have an AI tutor that's really good, that's part of the customer experience that drives additional engagement.
We have AI lesson plan generation, where we create practice problems and content for every lesson occurring on the platform so that students can get a, you know, consistently great experience, and it reduces time and effort required by tutors. We are scoring customer service calls to make sure that we can then inform both, customer service, as well as sales conversations with real-time recommendations. We're using it to remove cost via AI support chatbots. I mean, there's probably dozens of different ways we're using it. But, you know, it's just kind of how we work at this point, and something that we think, just enhances both personalization that ultimately drives conversion and retention, then separately drives operating leverage.
Got it. So, a lot more to come there for sure.
Mm-hmm.
So, just in terms of other growth vectors, I know it's been mostly organic business thus far. As you inflect free cash flow positive, and you start generating a lot more cash, is there any opportunity for kind of M&A in the near term or any other way to think about kind of some other uses of cash?
Yeah, I think from an investor perspective, you know, you should expect that we'll continue to focus on the organic opportunity. You know, we're in the infancy of completing the transition to Learning Memberships. You know, if you think about the number of students in the United States, it's anywhere from 50-55 million students at any given time. We had 40,000 members to the end of the third quarter.
So if you can capture just 0.5% or 250,000 learning members, you're at a billion-dollar run rate consumer business. And then on the institutional side, you know, with the rollout of the three new products and the platform access over the course of the last, call it, 90 days, we feel like that's a significant opportunity that we're gonna work against over the course of the coming several years. So no near-term expectation for M&A, but we feel really good about the organic opportunities that are in front of us.
I'll open up to the audience if there's any questions. Yep.
How? No.
Just repeat the question for the webcast.
Oh.
Effectively, the question was, how often are some of the Learning Memberships going over the allocated hours that come with a subscription opportunity to upsell them on renewal?
Sure. This is a more recent capability that we've had over the course of the last 6-9 months. It didn't exist last year during the back-to-school period, to the extent that it does now. But it's Learning Members purchase a two, four, or eight-hour package on average, and if they want to consume more than that during any given month, they absolutely can, and then we'll bill them on a supplemental basis. I would say, you know, we're probably in the teens from a penetration perspective, but that continues to expand, especially as we've got the new user experience that we rolled out over the course of the last back-to-school period, which makes it more prominent and drives awareness that you can absolutely overconsume, especially during periods like, you know, the coming weeks when students are studying for their final exams.
We see that to a greater extent. So, we feel good about where we're at. We feel like there's significant more opportunity there to drive awareness on the one hand and increase penetration.
Yeah, and, you know, teens level, you're still talking about, you know, well over $1 million a month and growing.
Yeah.
Chuck, I wanna ask, you've been kind of an active buyer of the stock the last year, I think north of $30 million worth of stock. So I'm kinda curious, from your seat of having founded the business and been public for several years now, what are you seeing... What do you think investors are missing maybe that has you confident that you've been actually putting more back into the company?
Sure. Well, we, you know, I think we laid it out today and in, you know, all of our past shareholder letters, but, you know, I've been doing this a while now, 17 years since I started as a junior in college, and as we've shifted to Learning Memberships and been able to bring all these different products to bear, the quality of that experience is so much better, and then the unit-level economics that we're able to drive with, call it 2x and growing LTV, holding CACs constant, significantly higher gross margins, way more efficient operating model, way easier to drive innovation by just adding in, you know, additional content and capabilities to the existing tool.
It's such a better business model that, after, you know, making the case about why we were so excited and seeing us kind of not get credit, I thought it was just a great buying opportunity and elected to purchase shares.
Yeah. All right. Well, I just have a question to wrap up here, a lot of the heavy lifting's kind of now in the rearview mirror. I think you've—we've talked about a lot of the investments today. So as you think about 2024 and kind of the next leg of kind of growth, what are the one or two things that you all are individually most focused on to kind of execute next year to sort of get on that long-term kind of trajectory for growth?
I think on the consumer side, like, the thing that we're most focused on is continuing to drive higher levels of engagement. Product-led growth has always been our strategy. More value we can provide to customers, the higher level of non-tutoring engagement we can have on the platform, will drive continued, you know, stickiness and retention over time. So making sure that we're appropriately leveraging AI and technology to continue to improve on the consumer side is, is a top priority. And then, maybe you want to talk to the institutional side?
Yeah, on the consumer side, though, the customer experience enhancements and the extent to which it allows you to get more value out of the platform, and then pulling through to engagement, which pulls through to retention and LTV, is a big deal. Like, the product is getting a lot better quickly on, like, a weekly basis, and we're able to then piggyback off of all those investments on the institutional side. So one of the big areas of focus will be making sure that we take those capabilities and appropriately roll them out to schools such that it's easy for them to leverage the many different things that you can do. So, you know, from our perspective, it's a big opportunity, and we're very squarely focused on just tight execution.
Awesome. Chuck and Jason, thank you so much for joining us today. Thanks, everyone.
Thank you, Alex.
Thank you so much, Alex. Appreciate being here.