All right, I'm Andrew Byrne. I cover internet here at Citizens. Very happy to welcome Chuck and Jason from Nerdy. Thank you guys so much for being here and supporting the conference. Let's just start off, Chuck, with an introductory question. Right, so just give a brief overview of Nerdy. Talk about how the products are differentiated in the market.
Sure. So Nerdy is a leading online platform, and we deliver live online tutoring at scale. So we have both a consumer business and an institutional business, Varsity Tutors being our consumer business, and Varsity Tutors for Schools being our institutional opportunity. So the thing that we do better than anybody else out there is actually deliver on the promise of live learning at scale. So we have a two-sided, vertically integrated marketplace, and we have experts and learners on either side of the marketplace. And we've been able to figure out how to deliver quality consistently in a way that allows for us to provide immense value to either parents or students, in the case of our consumer business, or alternatively, for school districts in our institutional business.
So we have brought together a variety of different forms of content and tools that kind of wrap around that core capability of live, and that's what we do better than anybody else out there and can't be commoditized. So we have one core product on our consumer business. We call it a Learning Membership. It's an all-access pass to both tutoring, hundreds of live classes a week, diagnostic testing. We have in there self-study tools, video modules, a whole host of other things, and you're able to get supported across different academic subjects, calendar years, it can be leveraged with different students in the family, and it's this concept of being a comprehensive learning destination that can really support students over time.
We can talk about it later, but a journey that we've undergone over the course of the last 18 months or so. It's going really well. And then we've similarly built a series of products for our institutional customers, school districts, that allow for us to leverage all those products and then serve their needs at district-wide scale.
All right, so, so you just talked about the 18 months of Learning Memberships. Chuck, talk about the key learnings that have taken place over the last 18 months and kind of the evolution of your thinking over that time period.
So originally, we sold packages, kind of blocks of hours or blocks of classes, and we've been able to evolve the relationship with the customer to one that's kind of permanent in duration at the onset, and change the consumer psychology to one that's oriented around ongoing support across a variety of subjects, multimodality learning, and keeping people in our ecosystem. And the original insights that kind of led to us first testing Learning Memberships almost two years ago, were oriented around the fact that when we can drive engagement, when we can cause learners to use multiple subjects or multiple learning formats, they get way more value. The lifetime values go up significantly, 2x-3x higher.
And we started kind of testing both the idea of a subscription tutoring element and then baking in all these additional low or zero marginal cost products that are highly additive to the experience. And in many cases, these products are things that other companies would charge for, and we kind of include in that base offering. And the results related to the kind of stickiness, the extent to which retention and engagement went up, were so good that we then leaned in there. And I think a lot of what we've learned over the course of the last year relates to some of the finer points around how we actually drive engagement and discovery, particularly since we've overhauled our experience and kind of converged, our platform to one that is oriented toward doing that kind of next learning action that can add value to the customer journey.
Yeah, the only thing I'd add is, you know, when we originally went into the transition, we thought that we would have higher lifetime value on a customer basis, better unit level economics, improving gross margins, and we would have a much simpler operating, cadence within our business to support learners. All of those things have proven accurate over the course of the last year, and we're pleased to say that as we enter 2024, essentially all of our consumer revenues will be from, subscription-based Learning Memberships.
Bring this to 2024, right?
Mm.
So relate the Learning Membership, kind of better understanding of that product today to the kind of the 2024 guide that you guys have laid out.
Sure. So if we, I'll get to 2024, but if you think about 2023, we delivered accelerating sequential growth every single quarter throughout the year, capping at 32%. On our institutional business, we delivered $11.3 million in the fourth quarter. That was up 160%. That business, on a consolidated annual basis, delivered $33 million. That was up 77%, and we substantially improved our unit level economics. Total revenue on the full year was up $30 million or 19%, and $33 million of it flowed through to adjusted EBITDA or 108%.
So the business became very efficient, very lean, and all that was done on the heels of continuing to invest in our product and engineering teams to drive innovation, which we delivered throughout the course of the year, and we'll get to some of those innovations later. So we feel really good about the guide for 2024, the compounding benefit of continued acceleration on a full year basis in revenue and the efficiencies we've brought to bear during the course of this year. So the guide is $231 million-$246 million, up 19% at the midpoint, and we'll deliver an additional 500 basis points of adjusted EBITDA margin improvement this year.
Okay, let's shift slightly to the institutional business, right? Year three of Varsity Tutors for Schools, the product set has expanded. Can you help explain the new offerings and how just that, that expanded portfolio is resonating with school districts?
Sure. So much like we underwent, you know, a journey in terms of evolving to a subscription offering, and one that provided access-based solutions on the consumer side, we've undergone a similar one on the institutional side as well. So over the course of the last, call it two years, we've really zeroed in on the specific ways that school districts want to offer tutoring programs. So, high-dosage tutoring is this kind of emergent, multi-billion dollar industry within schools that previously did not exist pre-COVID. And schools themselves are kind of figuring out how they want to operate, what the common use cases are, and then how to make it scalable.
And we've been able to adapt what had been kind of blocks of tutoring to instead a access-based model that makes it super flexible for school districts to either allow for a central administrator to oversee the program, to allow for teachers to assign and prescribe tutoring, or for parents to then be responsible for that with the purchase made by the school. And between those three models, we're able to service the super majority of tutoring needs that school districts have. And that's, you know, that, that was kind of rolled out and finalized really in late September. And that kind of combined with providing access to our platform for all students in a district, even those that aren't receiving high-dosage tutoring, is something that's going over really, really well.
In many cases, districts were paying hundreds of thousands or millions a year for these products, that now just come with the platform.
Okay. Y ou guys have really been able to converge, certainly the learner experience of kind of the consumer and institutional business. It's now more of a unified common platform. What are the benefits that you expect from that more commonality?
Well, we've always had this idea of, you know, build once, leverage N number of times, and that obviously gives you immense operating leverage over time. It allows for you to take different product capabilities that you have, and much like Lego blocks, then adapt them for certain audiences. So we've already seen a lot of benefits associated with the platform in terms of both like the sequentially accelerating growth throughout 2023, but also then with operating leverage. So, you know, we had something like 2,100 bps of adjusted EBITDA margin improvement in the year, and that was a function of the fact the business is just so much more efficient.
And so heading into 2024, you have just a better business model with much higher lifetime values, holding customer acquisition costs basically constant, and then you get a lot of operating leverage from higher lifetime value customers and more of them, with then kind of the repeat nature of the institutional sales model in a growing market where, you know, our products are getting better and we're learning, and we're better meeting customer needs. And so I kinda think of those two things together end up allowing for us to move way faster, better service existing customer needs, and also remove a lot of cost.
You just said that kind of holding CAC steady, right? That's what I just pulled out from that little kind of answer. If I think about the framework of holding CAC steady and the compounding nature of Learning Memberships and those cohorts over time, is there a framework that we should think about for that customer acquisition cost? It's really an adjacent question.
Yeah, I think what you started to see, especially in the fourth quarter, is the benefits from holding that CAC constant, the extension of the LTVs, and then the residual flow-through to contribution margin and adjusted EBITDA margin, and really those dynamics of a platform-based approach taking hold. We would expect those to continue into the next year, and, you know, we think that, you know, the level of CACs on the consumer side, you know, provide immense value at, you know, near 3-to-1 LTV to CAC ratios at the end of the second year.
Yeah, and we'd expect that as the brand continues to grow, as we get embedded in more schools, as we benefit more from the halo effect, that we believe we're already starting to really experience. That would also then, of course, provide additional efficiencies in sales and marketing, you know, in the next couple of years.
One of the announcements from 4Q was the rollout of freemium for both institutional and consumer. Starting with institutional, talk about the products that you're offering to schools, and then strategically, what are you trying to offer with that freemium launch?
Sure. So we're trying to build relationships with every single school district in the United States, and all the students that are in those schools. One of the things that we announced recently was that we're going to be granting K-12 schools access to the Varsity Tutors platform, including free 24/7 on-demand, chat-based tutoring, live classes in hundreds of different subjects, so think like ACT, SAT, robotics, you name it. All the diagnostic testing, all the self-study modules, all of that's kind of available for free, and those are products that school districts, in many cases, are already purchasing. Our real superpower is live, so live video-based, recurring tutoring with a subject matter expert, and that's where we've invested in the systems and processes to do that at scale in a way that others have not.
Because it takes what is effectively a very logistically and labor-intensive process, and then with software, makes it scalable and efficient. That puts us in a position to meet this need within school districts at a time where there's all sorts of state legislation that's occurring related to specifically funding tutoring. That's a net new industry, and we think the fact that we can be a partner that schools can count on to deliver on that reliability and ultimately efficacy is something that really accrues to our advantage. So, you know, our goal here is to build trust and credibility with schools, and then, you know, monetize via selling it in high-dosage live tutoring over time, which is much more complicated to do, but is the thing that we're really good at.
Well, on the consumer side, the availability of these now free products, what are you seeing in terms of top-of-funnel engagement with it? How does that impact the consumer experience? And then is there a different kind of consumer journey into Learning Memberships?
Go ahead. I think it's early on the consumer side, what we're seeing on the freemium aspect, but what we like is it's opening up the TAM, it's expanding our ability to engage with customers via e-commerce, and really drive down the customer acquisition cost. The products that we're providing on a freemium basis, as Chuck mentioned, are low to no cost for us because they're software driven, but they provide immense value to students. They are distinct from live tutoring, and what we know as a company is that customers are always willing to pay for that live one-on-one support because it's unique, it drives engagement, it drives accountability, confidence with students.
And so, you know, we think that there's always a willingness for students to come into the platform via the on-ramp for freemium, and then convert over into a paid offering with one-on-one live tutoring.
Yeah, I, I think that's really important. So, like, live's the part that drives accountability, motivation. Humans are inherently social, and all the studies show that as soon as a student knows that they're engaging with AI, that the accountability goes down considerably, the motivation goes down considerably. And we have a great AI tutor product that we launched 13 months ago. It drives good engagement, but it's primarily used for homework help. You know, it can't drive, it can't teach somebody to learn how to read. It can't help a fourth grader catch back up in school. And, you know, we think it has a place, and we're adding all these different AI-generated capabilities to give the experts on the platform what we describe as superpowers that allow for them to have all these amazing resources at their disposal.
But live's that kind of inherent, monetization engine that is hard to do and can't be commoditized, and is highly motivating. So, we feel good about that kind of connection, and then are giving away things that others are trying to charge for and have charged for, and built their businesses around.
You've talked about expanded top of funnel, both on the consumer and institutional side with free, right? What's the go-to-market motion or change that you guys need on the resources side to really capture what is a larger top-of-funnel audience now?
Well, I think first, you know, we're still doing everything we were already doing with our existing pricing and go-to-market motion. And so, we're going to continue to execute and make that funnel better and make the products, you know, resonate more, while adding on an incremental kind of engagement strategy that allows for people to become familiar with our products, and then when the need serves them, when there's, you know, an opportunity to then upsell them into live tutoring. So a lot of this is a function of driving engagement and just enhancements to the platform, testing different, pricing elements in kind of bifurcated, segmented traffic sources, so it doesn't impact the rest of the business.
You know, we have folks that are working on that, but that's largely a product and engineering led effort that, you know, is incremental and separate from the actual core, like, go-to-market strategy.
Maybe just to put a couple numbers to it. You know, what we announced on our earnings is that we've already signed up over a million students and enabled them on the institutional side at over 250 school districts. To date, that's over the course of the last three to four months. We've set an ambitious goal for the team to sign up 10 million students this year. That represents about 20% of the entire K-12 student population in the U.S. We think that's completely achievable, and we think it really positions us as the, you know, a household name, a leader in this space, where when schools have a high-dosage tutoring need, you know, we're the first person that they come to, to talk to, to fulfill it.
Yeah, we have a relatively very small amount of revenue associated with freemium in the strategy for the year. Very- you know, I think it's 2% or so that we kinda internally counted on. But, you know, so we, we think that there's an opportunity to put in place a strategy that allows for us to efficiently engage and meet large numbers of consumer students as well.
Freemium certainly changes the competitive landscape. You talked about, again, kind of the school districts paying money into various providers for the solution that you're now providing. Talk to us about share, right? Where do you think share is today? And then, I guess, more importantly, what's the goal in, say, three years for share?
So there's 14,600 school districts. You know, we've been doing this for a little over two years. We've been on the consumer side, you know, I started the business 17 years ago, so I have a little more experience there. So the market share on the institutional side, this is a growing industry where, you know, just in the course of the last few months, there's state legislation being passed in a large number of states. And as a result, you know, I can't give you, like, a specific percentage, except to say that our products are better, we're growing quickly, and I think we're better competitively, and strategically situated, that we should get significantly disproportionate share in this growing industry.
So, you know, our goal is to build relationships with every school district in the United States, and then from there, be in a position to service a wide variety of different live learning needs they may have through the platform. So we feel like the marketplace that we've built and then our ability to deliver a consistently great experience, is something that allows for us to service not just what is currently called high-dosage tutoring, but other tangential opportunities as well that are very large in nature.
All right. Let me, let me push on that. Do you feel like this is a winner-take-most market, and does freemium do anything to change that perspective?
It all comes down to trust and the ability to deliver quality at scale reliably. And so we think that given the infrastructure investments we've made and kind of the what we can also give away, that we're going to be able to build a business that does business with a large number of school districts in the United States. And, you know, we're trying to put in place scalable, efficient strategies to reach very large number of school districts in a way that otherwise wouldn't have been the case.
Okay. As we near the expiration of ESSER III, can you level set and talk about where we are today and what programs are available to Nerdy, and then what's the runway in terms of still tapping into these dollars?
I can take that one. So ESSER III was a federal funding program through the American Rescue Plan. There was $24 billion originally allocated towards high-dosage tutoring. There's about $10 billion of it left. That money has to be spent by September of 2024, contracted. It can extend into multiple year contracts over the course of the following subsequent four years. And how are we positioning ourselves? Look, all of our products are eligible because they fit within the school day. They support high-dosage tutoring and COVID learning loss. So we feel good about the product set. We feel great about the pricing set on a relative basis compared to our competitors.
We think that the platform access strategy positions us to have all the conversations with school districts because we're giving them immense value, to support, homework help and, and ACT and SAT classes, through the freemium strategy there. So we think we've got the right products, the right sales motion. We're continuing to build out the sales team to capture the demand, and we feel like we're appropriately positioned heading into the deadline.
Yeah, and the one thing I'd add is like the, you know, White House just clarified the two things that they would like for school districts to spend those funds on as that 9/30 date for contracting approaches, is high-dosage tutoring and absenteeism. And there's actually a great study out of D.C. Public Schools last week that highlighted the role that high-dosage tutoring can play in reducing absenteeism, because twice as many students don't show up to school on any given day as was the case pre-COVID. So now, high-dosage tutoring actually checks, like, both big boxes that school districts are aiming to check. It's been elevated to the highest levels, and there's a lot of bipartisan supports for it. So we feel like we're well-positioned for that opportunity in multi-year deals, but we're also able to participate in all of these different funding sources.
You know, a lot of the products that we've built actually provide leverage to teachers, and given the teacher shortages that exist, that's also a way that schools can allow for each teacher to be a little bit more effective as well.
So natural extension of that last comment, talk about AI in terms of the unlock for efficiency for Nerdy. What, what's kind of the next step, though? Like, what do you have near-term sight in terms of the product roadmap, in terms of continuing to integrate AI?
We have this idea that, you know, we shared in our, our public prospectus, originally called AI for HI, or Artificial Intelligence for Human Interaction, and we believe that you can augment the human capabilities and experiences in a digital environment such that you can give experts and learners superpowers that would otherwise not exist in the physical world. We've invested heavily in machine learning infrastructure that allows for us to power all the matching on both sides of the network via ML, and that's something that's allowed for us to deliver a much better experience that ultimately resulted in higher customer lifetime values. And so last year, when generative AI kind of took off, we were in a position to move quite quickly, given both the team we had in place and then a lot of the infrastructure and data instrumentation.
So that then led to very quickly launching both an AI Tutor, AI-based call scoring for our agents that actually allow for us to provide real-time feedback. We built what we call, you know, the machine that produces content this past summer that actually allows for generative AI content that is produced at high volumes relative to state standards, to then be used in diagnostic testing and other products. We've removed significant cost. You know, I think, Klarna has been in the news a lot recently, but, you know, at this point about last summer, we used, you know, a series of generative AI-related tools to automate, you know, more than 100 roles in customer service that help drive durable operating leverage improvements.
You know, looking ahead, you know, we would expect that we're gonna continue to invest in the platform, not only to keep doing all the things we were doing related to both cost removal and streamlining the customer experience, but then also doing, l ike, one of the big projects that we have slated relates to AI-driven product recommendations and the next best learning action. And as we've leaned into some of those products and capabilities in the past, we've been able to drive significant increases in engagement, and we think by doing that on a more fulsome level, now that we've brought all of our products to bear, that we can drive LTV extension and just enhancements to that experience that are just highly accretive and drive growth.
Jason, the initial kind of IPO guidance when you guys became a public company was 25%-30%.
Mm-hmm.
Is that still the right framework today?
Yeah, those are 25%-30% adjusted EBITDA margins. That's still absolutely the framework. As Chuck mentioned earlier, we delivered 2,100 basis points of improvement over the course of 2023, which is substantial. Those are durable, and we think that they'll continue to compound as we scale the business. So we've got another 500 basis points of improvement in 2024. As we scale, we'll work towards that, you know, longer-term target of 25%-30%. But we think that the vertically integrated marketplace dynamics are really starting to, like, show themselves now that we've started to deliver a higher level of scale over the course of the last year.
Yeah, and, you know, with a vertically integrated model, marketplace model that has, you know, 70-something% gross margins, there's a lot of operating leverage you get on that incremental dollar as you scale.
Yep. All right, last big-picture question here. The business has certainly evolved over the last four years, right? Ended offline tutoring in 2020, 2021 was the launch of institutional, 2022 was subscriptions, now 2024 is freemium. Is this the final version that we should expect of Nerdy, or what's your thought in terms of evolving the business from here?
Well, we certainly think that a like registration-based model where people access our platform and try it out before buying is not a revolutionary concept, even if we haven't done it before. But as it relates to our business, we do think it's a really natural evolution of the platform. So we're gonna be very focused on just executing against what we outlined versus call it net new ideas. That said, you know, we are going to continue to push the pace of innovation and make sure that the products that we're bringing to market and the product enhancements continue to get better over time, while recognizing that, you know, we need to be squarely focused on executing against what we communicated in our shareholder letter.
So we feel good about the plan for the next year and what that will allow us to build in the coming years, how it kind of builds over time and delivers.
Great. Thank you so much, guys.