Welcome everyone, to this final and virtual day of the 19th Annual Needham Technology Media and Consumer Conference. I'm Ryan MacDonald, and I lead Needham's EdTech research efforts at the firm. With me in this session, I'm happy to be joined by Nerdy's founder and CEO, Chuck Cohn, and CFO, Jason Pello. Gentlemen, thanks for joining me today.
Thanks for having us, Ryan.
Ryan, thanks for having us.
Yeah. So for those who are listening in, thanks for joining us. We've got a fireside chat format for this. So we've got about 40 minutes. I've got about probably 30 minutes of questions, and we'll save the last 10 minutes or so for audience Q&A. So if you do have a question that comes to mind during the presentation, please insert it in the chat, and we'll make sure to get that asked and answered. But with that, we'll jump right in. So Chuck, for those who might not be familiar, how about an overview of Nerdy?
Sure. Happy to, Ryan. Nerdy is a leading platform for live online learning, and our mission is to transform how people learn through technology. We leverage technology, including AI, to deliver high-quality live learning at scale, and we're better at it than anybody else out there. Our flagship business, Varsity Tutors, is one of the largest platforms for live online tutoring, and we have both a consumer and institutional business. On the consumer side, we serve learners from kindergarten through professional and adult. We have an all-access-based subscription that allows you to get access and get students supported across different calendar years, different academic subjects, different learning modalities. Live is at the center of it, and we bring it together in kind of one simplified offering.
And then on the institutional side, we've have a similar offering that we actually have rolled out over the course of this past school year, where we've kind of converged the products and go-to-market strategies with some of those access-based models, and we deliver, again, a series of tools and capabilities oriented around providing access to live tutoring at scale, and then giving away different tools and capabilities that allow for us to get embedded and build relationships in a efficient way with school districts and eventually, you know, other institutions. And so those two items come together to create the live learning platform and, you know, the products that we have at Varsity Tutors and Nerdy.
Awesome. Yeah, that's a great overview and helpful. But let's start with the Q1 earnings, which you reported last week. Learning new memberships came in nicely ahead of expectations, and the profitability was similarly strong. What helped drive the outperformance in the quarter?
Yeah, Ryan, we had a good quarter. Q1 revenue was $53.7 million. That was ahead of our guidance of $51-$53 million. We were up 9% year-over-year on a consolidated basis. And if you break that down a little bit further, within consumer, Learning Membership revenue of $39.9 million during the quarter was up 39% year-over-year, so that product continues to resonate with our customers. We ended the quarter with 46.1 thousand active members, which was up 40% year-over-year, and exceeded our guidance target of 45.5 thousand. And then, if you think about the institutional side, that business continues to track expectations amid accelerating growth. We delivered $11.9 million of revenue, which was a record during the quarter, up 39% year-over-year.
You know, the more efficient operating model that Chuck mentioned with our new access-based solutions is allowing us to drive improvements in profitability, slightly ahead of break even for the quarter. Off to a good start on the year, and we reaffirmed both the full year and full year guidance on both revenue and Adjusted EBITDA, and confirmed that we will be both Adjusted EBITDA and free cash flow positive during 2024. So we're off to a good start.
Yeah, sounds like it. And as we kinda talk about the business segment, so I wanna start with Varsity Tutors for Schools. And one of the strategies you deployed earlier this year is sort of to offer access to the platform for free. So school districts that enable the platform, they can receive access to products, including 24/7 chat-based tutoring, on-demand essay review, 100+ live large group classes per week, some test prep, et cetera, self-study tools, and a whole host of offerings there. I'm curious, you know, especially, you know, in the budget environment that we are in, where, you know, some tailwinds, some headwinds, et cetera, what sort of response has the program received thus far, and, you know, what are you trying to accomplish with this strategy? How many school students are signed up so far?
Sure. So this is something that we've been, you know, thinking about for a long time as we started to build adjacent products and got out of just one-on-one, you know, live online tutoring to then small group and then live stream capabilities. You know, get 50,000 people in the class. We actually hold the world record for largest online science class with Mayim Bialik, you know, from a couple years ago. I think 33,000 students in the class or something like that. And, you know, adaptive diagnostic testing, self-study, as we kind of brought all these things together, at the time, we had a package model where you bought blocks of hours, and the same thing was true on our school's business. And the, the other products and capabilities you used were kind of separated by a transaction.
They weren't naturally embedded, and one of the things that we worked toward that took, you know, an incredible amount of product and engineering work, but was always part of the vision, was converging it into this access-based model. And so as that happened, you know, that then allows for you to build relationships in different ways, to give away zero or very low marginal cost products that introduce consumers or institutions to your offering. And, you know, as we got to the point where we were able to start testing that last fall, you know, we were pretty, pretty excited about the extent to which it resonated. It shouldn't be a surprise. In many cases, school districts were paying hundreds of thousands or even millions of dollars for these products, so it was, you know, very well-received.
You know, it allows for you to then get embedded and be part of the conversation, kind of first in line for different commercial opportunities that come available. Sometimes they're concurrent with rolling out the free access, sometimes you have to earn the right, you know, and earn trust over time. But, you know, the opportunity we have here is to get embedded into eventually all the school districts, all the universities, all the businesses in a way that augments how they access live expertise and instruction and tutoring. You know, out of the gate, I think we're pretty excited by the progress that we've made.
Mm-hmm.
So, you know, we have, you know, a couple million students signed up and counting quickly. And, you know, we feel like we're still, you know, ramping, and the pace of those conversations will pick up quite a bit, particularly as the school year starts, you know, in August. And so great, you know, to see the product strategies converge took a lot of work from our teams, but we're now in a position where we're gonna be able to build relationships at scale to an extent that wasn't previously possible. And, you know, get kind of the implicit endorsement of these institutions as they choose to work with us, which we think has a big halo effect on the consumer side as well.
And so, you know, thinking kind of beyond, you know, call it, like, the back-to-school season, and you referenced funding, this is a small business. We feel like we're building, you know, from what was literally zero, you know, 2.5 years ago in our institutional business, and ramped to, you know, mid-$30-something million in bookings over a two-year period. And we're now in a position where kind of evolve the strategy further to provide way more value to institutions to significantly improve the reliability and scalability of our products. And, you know, take this kind of vertically integrated marketplace model we have and allow for it to really scale in a way, that, you know, hadn't been built for third-party institutions originally.
And so we feel good about how the volume of relationships we're gonna be growing then enables us to have, you know, and participate in a lot of commercial relationships to an extent that wouldn't have been the case, say, you know, even now or even six months ago, just because we'll have 10 or 20 or 30 times as many institutional relationships over time.
Yeah, I mean, I think it's really interesting, and I think it looks like an effective, really effective strategy here. Because when you look at, you know, the biggest EdTech or education businesses out there, I mean, I think almost all of them will tell you the biggest challenge is getting your foot in the door in a complex ecosystem, you know, district schools with various different funding sources. And so I think that's really fascinating to see, you know, being able to use this to sort of get in the door. But, you know, how is this strategy opening up conversations to drive more adoption of your high-dosage offerings and sort of monetize the footprint that you're sort of building right now?
You know, school districts have a variety of different needs.
Yeah.
They have, you know, acute needs. They have needs that are oriented around supporting students, you know, in less acute states, homework help. There's, you know, test prep needs. There's enrichment needs. There's all sorts of things that they'd love to be able to justify funding, but oftentimes can't-
Yeah
... because they need to focus on more acute issues. And so the fact that we can help across all these different offerings, and then the fact that, say, like, our live stream capabilities are getting better over time, you know, those are things that allow for them to solve different problems even beyond tutoring, and make us a platform that they'd, you know, want to engage with. And so realistically, institutions, you know, K-12 school districts, too, don't wanna roll out unnecessary number of platforms, right? There's an administrative cost every time you roll out new software and have to drive adoption internally. And so the fact that we're- we are getting embedded, I think, has made us first in line, that is resulting in sales.
Really, all the sales now are coming with the, you know, access to the platform, or the access to the platform comes first, and then the sale comes. But there's, you know, nearly 100% connection between the two at this point. So we've made sure that they aren't kind of separated, and that we're building in a way that, you know, leads to that just natural kind of penetration of account from a visibility and value and engagement perspective. So they're kind of intertwined at this point, one and the same, and we feel really good about how it allows for us to have a totally different conversation than others can or than we were been having in the past.
Interesting. On the Q1 call, you also discussed your intent to invest incrementally in sales headcount to better service the demand you're seeing and drive higher win rates. Can you just talk about the strategic rationale of this incremental investment? And, you know, are you confident that these reps can actually ramp to productivity in the current selling season, given where we stand, sort of in the selling season this year ahead of the next school year?
Sure. Yeah. No, I mean, this was an offensive move, and, you know, we kind of realized that, you know, folks that were, like, literally in their city, their geographic area, were selling five times as much as those that were covering multi-state regions. And, you know, while you'd love to have some of these insights when you first start up, you know, a business, I think, like, we feel like it builds for a really strong back-to-school season-
Mm-hmm.
... that we're hiring, you know, tenured people that understand our product. The types of solutions we now have with access-based models are so much more simple to describe than was the case, you know, six months or a year ago. That, you know, it lends itself to faster ramp times, and we feel good about this more offensive and aggressive posture related to go-to-market because we believe we deserve to win.
Mm-hmm. And, you know, I mean, in that context of we got to talk about ESSER. It's actually been a very big topic of conversation this week at the conference. And, what we've seen from the latest data we've seen, from Burbio is that about 30% of the funds remain unspent ahead of the September thirtieth allocation deadline. How is that impacting the demand environment within the institutional business so far this year?
Well, it's building, and you know, with ESSER, you can spend on tutoring for up to four years post-9/30.
Mm-hmm.
So there's an opportunity to guarantee access to, you know, high quality, high dosage tutoring, and that puts us in a favorable position relative to over the last couple years when there wasn't the same urgency to spend, and also when you could have spent on, you know, a much broader swath of services or solutions.
Mm-hmm.
We feel like we're really well positioned. The fact that the U.S. Department of Education has chosen to emphasize high-dosage tutoring, tutoring to the highest level-
Mm-hmm.
It's relevant for this, you know, particular funding source, but the reality is, it's just effectively created an industry that did not previously exist in school districts.
Mm-hmm.
So there's this multi-billion-dollar industry being created, and there's no incumbent to speak of, and so we feel like we're well positioned. Live is hard. Live is really hard. You know, one of the reasons that you'll see, say, that, you know, the top several layers of our company are ex-Amazon is because we have to take what could be very labor-intensive or logistically challenging problems and use software to make it look easy to the end user and scale it in a highly efficient manner, and others have not wanted to take that approach or haven't been able to take that approach. So that's put us in a position where we do have that infrastructure to scale and meet demand in a way that would be challenging for other vendors out there. Many, you know...
Frankly, there's a relatively small field.
Mm-hmm.
So ESSER is a big opportunity to drive adoption. It is a big selling opportunity, but there's already talk in many of these conversations about other funding sources. Most of our sales in Q1 didn't even come from ESSER.
Mm-hmm.
So, you know, if this tidal wave of demand comes, it'll be, you know, net incremental to what we've experienced.
Mm-hmm.
You know, there's already talk about others, like, using Title I more flexibly. We hear that at the federal level a lot. There's lots of state programs rolling out, and frankly, given teacher shortages and whatnot, some of our solutions, like our teacher-assigned product, also allow for existing, you know, operating funds to be used and allow for teachers and schools to just be more effective with their existing staff, and we can be a good partner in that regard. So I think we feel good about, like, frankly, the fact that scaling, you know, more than 10 times the number of relationships puts us in a position to have different conversations than we have in the past, and we are. You know, there's special education funds being used. There's Title I funds being used. There's state-specific legislation getting passed for high-dosage tutoring.
We feel like we're at the center of the kind of early days of a big industry being formed, and then, you know, all the products that we've built kind of build for other adjacent institutional markets as well.
Interesting. Yeah, so, like, obviously, you know, we're a lot of discussions about what a post-ESSER world looks like. And, you know, we've kind of heard this comment similarly from other companies this week, that maybe so much it's not a spending cliff as it may be more of it's a more gradual, you know, normalization, if you will. But it sounds like from what you're saying or what you've heard so far from other funding sources, that you think this is similarly gonna be the case in the tutoring ecosystem?
Maybe if we'd had, you know, a $1 billion in institutional-
Yep
... revenue, you know, and, and, you know, had a fully baked product three years ago and, and go-to-market strategy, it would be a different environment. But, you know, we're in the building phase now, where, like, the products are getting markedly better, the go-to-market motion's getting markedly better. We're more than 10X-ing the number of institutional relationships we're gonna have on a, you know, a given day, and so, it's a big market out there. You know, $800 billion in K-12 spend and, you know, I think there's an opportunity for us to help make school districts and other institutions more effective with kind of augmenting what they're able to learn in a really flexible way.
Mm-hmm.
The only thing I'd add is, you know, Chuck mentioned it earlier, the Department of Education, I think within both policy circles and in administrative circles within school districts, have—there's really a growing awareness that high-dosage tutoring is the most effective way to remediate learning loss, which we know is very real. It's gonna take years to solve. So all of our products align to the two biggest problems district administrators face, which is student achievement and teacher retention. So we feel really good about how our products position well, and as Chuck mentioned, partner with school districts over time. We think from an ESSER perspective, that many of our future customers and current customers will enter into multi-year agreements, which is allowed by the ESSER funding, for up to four years.
That'll provide some continuity to the school districts over, you know, a lot longer duration period. And we think that that's the right thing to do to help students for many years.
Yeah, interesting. I mean, you, you've obviously had a lot of success winning more statewide deals, you know, I guess in the current environment with ESSER, but, were statewide tutoring deals, did they become more common with ESSER, or what-- how does it compare sort of pre-ESSER to current? And is there a risk in the transition that we need to move from statewide contracts to sort of renegotiating at at the district or school level moving forward?
I mean, there really weren't state... I don't—I can't actually think of any statewide contracts that-
Yeah
... existed pre-ESSER, so it's-
Mm-hmm.
But it's more about the fact that, like, the industry didn't exist...
Mm-hmm
... so to speak. And so with COVID, you know, there was, you know, it kind of forced a different way of thinking about how schools can operate and whether tutoring has to be provided, you know, on-site, during school, in person.
Mm-hmm.
You know, if those are the constraints, then all of a sudden it becomes massively logistically challenging. And there's just been a growing awareness and, you know, between COVID and teacher shortages, and then frankly, the great results of tutoring-
Mm-hmm, mm-hmm
... you know, that probably have been around for 2,500, 3,000 years, but, you know, now we're getting, from an institutional perspective, broadly acknowledged that it's possible to deliver at scale. All those things, you know, have resulted in policy circles, and, you know, many education leaders kind of converging on this idea that high-dosage tutoring at scale is possible, and that it's the most effective way to remediate or accelerate learning loss. There's a lot of things you could spend money on, right? You could go buy more computers or, you know, more buildings or more HVAC equipment, but none of those actually drive student outcomes reliably, and this is something where-
... you know, you can actually drive real outcomes. You have somebody that can serve as a mentor, and also, you know, drive accountability that is different than the teacher that can do so outside of school on an individualized basis. So there's a lot of reasons why this industry is being created and will persist.
Yeah. I mean, at the end of the day, there's -- what, there's on average a little over $12,000 spent per student, and only 2% of that is on IT or ed tech at the moment. So a lot of room to even just expand the mix of spend there per student basis in the budget over time, I think. So-
Mm-hmm.
Maybe last one on sort of the institutional businesses in with the statewide deals is, on the Q1 call, you kind of talked about spending a lot of time and effort on this Arizona state deal, which is a bit more uniquely structured relative to other ones. How's that program tracking, and is it meeting your expectations at the moment?
Yeah. So I mean, the Arizona state deal, and I'd say more broadly, other state deals have been yielding promising results. The programs are tracking well in terms of revenue. I think we'll deliver about $5 million of first-half revenue with the Arizona state program itself. But I think we're also focused on the strategic value of these partnerships. So when you build a relationship with an entire department of education within a state, you get their inherent endorsement, that leads to downstream conversations with school district partners. It also, you know, creates a halo effect with other states because we're able to demonstrate we can scale and meet the needs of an entire state, unlike, you know, many of our competitors.
And so I think those relationships really advanced our credibility and visibility in the marketplace, and we think they're a great fit for our company.
Yeah, and each time, like, a new program rolls out like this, you know, there's a little bit of a learning phase where you-
Mm
... figure out what the right go-to-market strategy is. And this one, that was certainly true, where, you know, the state footed the bill, but at the same time, you have to go out and actually market and acquire students directly-
Mm-hmm
... using, you know, a consumer go-to-market strategy. You know, that's an example where that was the first time we'd see it. You have to borrow a lot of our internal consumer resources.
Yeah.
It's one of the ideas, you know, behind this concept of convergence that we talk about, of orienting both go-to-market teams, what had been separate, you know, in a kind of converged way, towards, you know, the similar kind of underlying product structure. So, you know, absent like, you know, this particular program, like the consumer business, would actually be doing, you know, more revenue, have more students. And so yeah, there's just a little bit of trading off of resources as we figure out the right way to operate and, you know, make our products as simple as possible to scale. Like, we feel really good about those learnings and then how that sets us up for, you know, a big back half of the year. Excellent. Maybe shifting over to the consumer side of the business.
You introduced the freemium model on that side of the business. Can you just talk about what some initial learnings you're getting from that introduction of the model, and how should the investors really think about the evolution of the user funnel and the go-to-market strategy with the inclusion of the freemium model?
Sure. So the product evolution towards freemium allows us to have a growth strategy that introduces us to, you know, what we think is gonna be millions of students. It really supports an increase in growing TAM. We probably leaned in a little bit more aggressively than we needed to at the end of the quarter that impacted ARPA, but it also, more importantly, drove lots of top-of-funnel engagement, nice conversion metrics. We're getting cohorts of learners into the ecosystem. We can, we're learning about how they're engaging with us on our paid products, what products to include in front of and behind a paywall, and, and importantly, what that upsell motion could look like towards paid at a larger scale. So by and large, we think it's early innings, as it relates to a freemium strategy.
We'll be more measured as we move forward, as it impacts, you know, our, our core business and the, the revenue from our freemium products. But we're excited about, where this product can take us over the fullness of time, and introduce, introduce us to, millions of students in the US.
Yeah, and I, you know, I, it's an incremental strategy, so there's no... Like, we're still gonna nail the go-to-market on our premium membership offering. So this was, you know, I think it probably stole the show a little bit more than intended some of our investor conversations so far. And, you know, it's exciting, and it's different, but, you know, it's segmented, and we'll be disciplined about testing it. And so, you know, we did a bigger test in Q1. We got a bunch of really good data on the particular segments, the particular traffic sources, the particular lower-intent people that are earlier in their journey-
Mm
... that, you know, can get to know our product. It, you know, we think it has a path to unlock large swaths of traffic and users that, you know, might not have been in the market for tutoring, but like, will be soon. And they can start engaging when they're earlier in that learning journey. So some of the data for particular subject pockets was pretty exciting.
Mm.
You know, we'll continue to test in an isolated way, but not, you know, broadly across the business in the near term, because it's all about driving, you know, engagement and onboarding, which are also the things that we're doing to drive growth in our premium users.
Have you found any learnings around, you know, where maybe what segment of the consumer population is finding the freemium offering most attractive, whether it's K-12 versus higher ed versus maybe some of the professional test prep stuff?
Well, it's also a function of, like, where we tested, but, you know-
Yeah
... certainly there's more kind of natural commercial upsell intent right out of the gate, like the test prep area.
Yeah.
That's always an easy area to test, where there's people, you know, that use books, and there's people that use videos to learn, and there's people that, you know, use live tutors or small group classes or larger group classes. So there's already, like, a lot of just natural commercial intent and different obvious bifurcation of acute need state. So that's always an easy place to test and learn, and that's an area we've seen traction. And, you know, in, in the academic one, you know, it's, it's a little bit more oriented around being present and part of, you know, the student's way of studying-
Mm
... during the school year. So that when they have an acute need, all of a sudden, you know, they get into a recurring tutoring relationship. But, you know, we think there's an opportunity to much, you know, like the kind of-
... Spotify AI DJ, you know, to serve you up that right piece of content in the right moment, or right tool, or right learning capability, or tutor that, you know, keeps you engaged in our platform and learning over time.
Well, that sounds great, and if it can do anything to avoid the significant summer seasonality that's inherent in this business, that's always a good thing too, right?
Absolutely.
Totally. Totally. Yeah, we're not, we're not committing to, you know, summer not being a thing in-
Yeah
... a business that serves students. But, you know, we'll continue to get a more and more predictable business over time.
Excellent. Let's talk about innovation. And specifically, obviously, some of your advancements in generative AI. But can you help investors understand what you've launched in gen AI to date, you know, and what's in store for the future? And then, as we think about how generative AI impacts your business moving forward, do you see it to be more of a greater driver of incremental revenue or cost savings for the business in the future?
Yeah. So starting in, call it 2016, as you know, most of our shift to online was occurring, we started realizing, like, wait a second, when you have, you know, 1,000 tutors to choose from and one student, who should you choose? You know, knowing that the match is really personal. And what we started doing was testing using various machine learning models to try to predict the right tutor for a given student's needs. And that was an area where we started, you know, instrumenting more and more of the business, you know, investing more in some of that underlying infrastructure and the actual skill sets too needed to train these models.
And we ended up getting so much leverage out of that personalization that occurred, trying to predict, you know, lifetime value, continuity, and then using that to inform the whole matching process, that we, we drove substantial improvements in unit level economics and LTV extension over many years, and still does. And, you know, it then led to us realizing, like, you know, in a digital world, it's possible to capture data that informs personalization in a way that wouldn't be possible offline. It's also possible to augment, you know, content, tools, capabilities that wouldn't be possible, and that you can effectively give experts and learners on both sides of this vertically integrated marketplace superpowers that wouldn't exist in the offline world.
Mm-hmm.
You know, that then led to us, you know, kind of actually trademarking, you know, this concept of AI for HI at the time, of artificial intelligence for human interaction.
Mm.
And, you know, we've been threading generative AI capabilities. We use ML in a variety of places, you know, predictive lead scoring and, you know, scoring different application models just to get more and more and more efficient and smarter, and make better decisions. But as, you know, generative AI has, the capabilities become available, you know, we have everything from, you know, real-time feedback for, consumer sales and customer service agents while they're on the phone to provide, you know, personalized recommendations and feedback on each call so they can get better. We have an AI tutor, you know, that students can use that's part of our Learning Membership. We have AI-generated lesson plans that actually ensure that, you know, there's good materials, high quality content, practice materials for every session.
You know, there's many, many, many other use cases. We're spending time right now on our transcription services so that you can take some of the information in tutoring sessions to just inform, like, the next set of, you know, AI-generated lesson plans, you know, a little bit more thoughtfully based on what was discussed in the last session. You know, the idea here is that we'll thread those capabilities with the latest models throughout the platform. I'm a believer that vertically integrated marketplaces with the best instrumented data, you know, and the best and most cohesive product experience ultimately win.
Mm-hmm.
You know, we feel like there's an opportunity to kind of compound those growth. So if you think about it, not just in the world of, like, online versus online, but online versus offline, which is where, you know, the majority of learning, including tutoring, takes place, the digital experience is gonna keep getting better and better and better. And having that kind of cohesive experience will, I think, allow for us to take share and cause more and more people to want to spend more time in our platform.
Then maybe just to address your question on costs and how AI is helping us make improvements there.
Mm.
In 2023, we delivered, you know, over 2,100 basis points of Adjusted EBITDA margin improvement.
Mm.
That's largely driven by, you know, the shift towards the subscription and access-based business models. But certainly, there's a large component due to higher levels of automation and utilization of AI within the business. And I think what's important is, you know, we've really grown into our cost structure, and so on a go-forward basis, these tools and technologies will allow us to scale at an outsized base while, you know, not commensurately having to increase the cost structure. So we'll get a lot of leverage out of them as we continue to grow the business.
No, that's great. Yeah, I think, I think, you know, we're in the... Now we're at a point now with generative AI, where we've kind of gotten through last year, you know, the discovery phase. Now there's starting to build in tools, and I think it will be very interesting to see just across the board with companies like how, you know, if the integration of those solutions can sort of structurally change, you know, the operating models over time, and maybe some incrementally more profitable businesses overall. But we can't wait to see it. So, Jason, let's talk about the guidance for 2024.
It's a question we get, you know, quite a bit over the last week, but, you know, as you look at sort of what you guided for second quarter, you know, the fiscal 2024 guidance assumes a pretty heavy ramp in revenues in the back half of the year and in fourth quarter in particular. Can you just kind of walk through what gives you confidence in sort of the ramp and how you're thinking about second half of the year?
Yeah, sure. Great question. I think it's important to acknowledge that our business is always back halfway, given the seasonality and, you know, the start of the back-to-school period being, you know, the largest selling season for both, our consumer business as well as our institutional business.
Mm-hmm.
When I think about the back half forecast, our consumer business, new user acquisition remains healthy. It was up 19% during the first quarter. We feel good about the fact that we're driving higher and higher levels of engagement, and we think that there'll be a halo effect from the platform access strategy, which continues to rapidly grow across our institutional base. The other thing that which is leading to, you know, higher levels of activity in the market, and greater levels of conversation, as Chuck mentioned, you know, for that reason, obviously, we talked about earlier scaling the sales team on the institutional side.
We think that that's the absolutely the right investment, given, you know, the growing awareness in the space, you know, the increases in platform access, and then certainly, as we've talked about, ESSER provides funding, the potential for outsized bookings as we approach the back-to-school period. So net-net, while that's not included in the forecast, we feel good about how we're set up for the back half.
Yeah. And specifically on the consumer side, you know, the fiscal 2024 guidance assumes about 56,000 Learning Memberships in fourth quarter.
Mm-hmm.
-which is a really big step up from the 37,000 you're expecting in second quarter. Can you just give us maybe a little bit more on, like, what the signals of optimism you're seeing, seem to make that achievable target? And, how important is utilizing that, the freemium model that you've been investing in and driving paid conversion there, how important that, is that going to be in towards achieving those sort of Learning Membership targets, for fourth quarter?
Sure. So I would say our consumer business reflects normal seasonal patterns as it relates to the guide.
Mm-hmm.
You know, the work we're doing today is mostly around driving high levels of engagement. We introduced subject portals last year, made discoverability of all of our products across a different subject more discoverable for students. So think classes, think adaptive assessments, that's driving higher levels of engagement. Historically, we've always known and been able to prove out that higher levels of engagement, especially across modality levels of engagement, drive higher levels of LTV. So we feel good about that. And then as it relates to the freemium side, you know, given it's early days, we have a very modest amount of revenue in there from the freemium strategy, $6 million for the full year.
You know, the more successful we can be there, especially from a halo effect of institutional rolling over to consumer, I would consider that to be upside to the model.
That's all.
Yeah, and that's not... When we say freemium, that just means like lower price tiers we're testing.
Yeah.
It doesn't free to, free to paid. So, it's probably worth clarifying that.
Yeah.
So the, like, the other element here is we have some mega projects that we've been working on that we think are really awesome for our customers that, you know, remove long-standing points of friction that could be better, that, you know, drive LTV extension and, you know, repeat usage. Things like overhauling our entire calendaring and scheduling and invoicing systems that
Mm
you know, are not glamorous, but for any two-sided marketplace are critical. And, you know, those have been in flight for, you know, at this point since, call it the middle of last fall. We've put significant engineering resources into them, and they've been kind of shipping recently. We've been getting commensurate wins and engagement in onboarding that, you know, has historically been highly predictive of LTV extension. So there's a lot of kind of goodness flowing through some of those cohorts, and there's a lot more stuff that's almost done that will just be frankly removing anything that could be confusing or cumbersome in scheduling and, you know, in messaging and in improving kind of the two-sided velocity-
Mm-hmm
with the marketplace.
Excellent. Just as a reminder, we have about five minutes left. For those who are listening in, if you have questions for Nerdy's management team, you can input them in the chat box. We'll make sure to get them asked and answered. As we think about the impact of... You've got the freemium on the consumer side. You've also got a large amount of free users in on-demand tutoring on the institutional side, you know, coming into the model now. We would expect, obviously, a lot more usage on the platform, but maybe not, you know, revenue to match that.
Should we expect, is any pressure on gross margins, you know, throughout the course of the year as you work on sort of, you know, obviously ramping those users up, but also then working on sort of getting more of the paid conversion with some of these, these relationships?
Yeah, good question. I guess the way we think about it is the majority of our freemium offering, so what's included in that offering is software-based.
Mm.
So low cost to no cost for us to provide that to students.
Mm.
And the way that I think about it is, over the fullness of time, I actually think that it'll significantly reduce our customer acquisition costs, because if we're successful, we'll drive substantial awareness in the marketplace and organic, inbound interest from our customer base. So net-net, gross margins were 70% last year.
Mm.
We have forecasted that they'll be 71% this year.
Excellent.
We remain confident in those estimates and think that this strategy has the opportunity to not only increase the top of the funnel, but lower our customer acquisition costs pretty substantially over the fullness of time.
Yeah, and one thing that's probably worth noting is, like in the quarter, when now that our products are subscription-based and you recognize revenue linearly, you have consumption that fluctuates, you know, goes up in semester, that it's been cool to see just how much engagement and interest there is in actually, like, leveraging these products within school districts. But then, you know, in the summer, you get the benefit. As you head into summer, you see the actual volumes ramp down, and then you, you know, benefit from, you know, the linear rev rec on the other side of gross margin. So there's the revenue is more consistent, but the linear rev rec is, you know, causes different gross margin patterns than would have been the case historically. We feel really good about playing that blended average game.
Mm-hmm
... and, you know, the continuity that can drive in the relationships, and then also the kind of value that we're able to provide to school district customers.
... Sure. And on the earnings call, and even in this conversation, you've mentioned a couple of times that it's this idea of the convergence of the consumer and the institutional businesses for Varsity Tutors. Can you just clarify and sort of help us understand what you mean by that? And, you know, how does this translate to benefits in the business over time?
Sure. So, you know, as one example, like maybe the primary example, we now have, you know, as of a few days ago, all of our school district customers are on, you know, the Learning Membership experience.
Mm-hmm.
Yeah. You know, that they had kind of completely different look, feels, platforms-
Mm-hmm
... associated with it. Some of the, you know, the same backend services powered both, but we've converged those to the same kind of modern experience that drives discoverability. So that would be, like, one example where now you're actually on a unified product and platform. You know, a second one is related to say, like, how AI-generated lesson plans, you know, work. They were available on the consumer side. They weren't available on the institutional side.
Mm-hmm.
We're going to build them with both audiences in mind, you know, going forward. We have, you know, different ways that we can market and have school districts, you know, extend, say, a discount program of some sort to large swaths of students that are interested in, or maybe even already purchasing consumer tutoring outside of the, you know, the school district, the school day, and the relationship with their own school. And now they're able to just get a discount from a vetted provider, and the school district can kind of pass along, some sort of relationship. You know, and that was not an area where our consumer team would naturally have been building those kind of ingress points-
Mm-hmm
... you know, connecting them. And so there's kind of countless examples where in the other direction, you can refer people into your schools. And if you're a, you know, existing consumer, you know, get this, get this product in your school district. And so, like, we're gonna work on those kind of hooks, bidirectionally.
Mm-hmm.
And then, you know, we're also going to just continue to build different product capabilities related to, like, quality and driving engagement that benefit both audiences.
Makes sense. Maybe just in the last minute or so that we have left, Chuck, you know, how does the business evolve from here? Or would you say that this is now the version of Nerdy that we should expect over the next few years, given that vision?
Well, you know, I don't think you should expect, like, radical business model evolution. I think we're just gonna continue to execute on the, you know, capabilities that we have, and, you know, that should pull through to acceleration and growth, to significant, you know, improvements in profitability that, you know, we feel, like Jason mentioned, that we have the right cost structure in place to drive the level of innovation and execution that we need. And then as you kind of graduate into the next school year and beyond, you're starting to get into, you know, an operating leverage structure that drives significant increases in profitability over time, while allowing us to continue to make this a more immersive, immersive experience and extend it into additional audiences. So there's nothing...
Maybe, like, we thought we deserved to win in K-12 as an example in institutional, but over time, we'll extend that platform to, you know, a number of different institutional audiences as well, with the goal of, you know, our live learning platform being kind of the natural and best way to augment how, you know, tutoring or live expertise transfer occurs.
Excellent. Well, it's gonna be exciting to watch over the, that evolution continue for the business as it scales. So, that's all, all the time we have for today. So Chuck, Jason, thank you so much for joining me, and thanks everyone who, logged in, and have a great day.
All right. Thanks, Ryan.
We appreciate it. Thanks.