Good afternoon. My name is Hannah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nerdy first quarter 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by two. Thank you. Molly Sorg, Head of Investor Relations, you may begin your conference.
Good afternoon, and thank you for joining us for Nerdy's first quarter 2022 earnings call. With me are Chuck Cohn, Founder, Chairman, and Chief Executive Officer of Nerdy, and Jason Pello, Chief Financial Officer. Before I turn the call over to Chuck, I'll remind everyone that this discussion will contain forward-looking statements, including, but not limited to, expectations with respect to Nerdy's future financial and operating results, strategy, opportunities, plans, and outlook. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results. Any forward-looking statements are made as of today's date, and Nerdy does not undertake or accept any obligation to publicly release any updates or revisions to any forward-looking statements to reflect any change in expectations or any changes in events, conditions, or circumstances on which any such statement is based.
Please refer to the disclaimers in today's press release announcing Nerdy's first quarter results and the company's filings with the SEC for a discussion of the risks. Not all of the financial measures that we will discuss today are prepared in accordance with GAAP. Please refer to today's press release for reconciliations of these non-GAAP measures. With that, let me turn the call over to Chuck. Chuck?
Thanks, Molly, and thank you to everyone who has joined us today. We're happy to be back in front of you to discuss our strong start to 2022, in addition to some of our more recent business developments. Let's get started with a few of our highlights. In the first quarter, Nerdy once again achieved new all-time demand records with revenues of $46.9 million, up 36% over the prior period, and bookings of $48.5 million, up 30% versus the first quarter of 2021. We also experienced continued strength in our marketplace dynamics, with active learners up 56%, online sessions up 57%, and the number of active experts on our platform up 37% compared to the first quarter of last year.
On the consumer side, the education trends we highlighted in February, including the increased adoption and normalization of online learning, the GPA war, and heightened ownership for learning outcomes, supported strong first-quarter engagement. Demand during the first quarter across academic tutoring bookings remained strong, with high school academics growing at 30%, college academics growing at 20%, and K through five academics growing at 47% versus the same period a year ago. Our professional development business continued to experience strong demand, with bookings growing 57% in the quarter versus the prior period. This booking strength was partially offset by test prep, including the Veritas Prep business we discontinued in the fourth quarter. Test prep for exams like SAT, ACT, GRE, and other similar exams now represent less than 7% of consumer bookings in the quarter.
That demand has shifted towards academic tutoring and is driving a focus on long-term relationships to maximize grades and GPA, which we believe is a significant and long-term tailwind. We believe these education trends are leading to consumer interest in supplemental learning solutions that support a more consistent use pattern over extended periods of time, defaulting to recurring, always-on relationships. As a result, in the first quarter, we launched a monthly membership offering to complement our current package model. The membership model orients customer relationships towards consistent weekly use over extended periods of time, and we believe the membership model will grow our total addressable market and increase the number of customers that utilize our offerings. From a learner perspective, early learner engagement and consumption data suggests membership customers experience a significant increase in the percentage of clients that are actively meeting and consuming on a recurring basis.
We believe the higher levels of tutoring session consistency will lead to improved learning outcomes and enhanced satisfaction among learners. The membership model also simplifies our sales process, which is already translating to early sales conversion improvements compared to our one-on-one package offering. The membership pricing structure can also improve the predictability of our revenues going forward, with early data suggesting it can further enhance customer lifetime value. Based on the exciting early results, we plan to expand the membership program to further increase our customer reach in the coming months. We'll continue to provide updates on this exciting initiative in future quarters as the initiative progresses. Switching to the institutional side of the business, Varsity Tutors for Schools is resonating with schools, and we are continuing to observe strong demand trends in this category. Schools are increasingly leveraging online learning platforms to augment and supplement traditional schooling.
We've been building on the foundation we laid last fall, adding school district partnerships, shortening implementation timelines, enhancing our existing product offering, and investing in the development of several new products for the upcoming back to school period. Specifically, we are introducing two new offerings aimed at enabling school districts to provide always-on learning solutions to further support teachers and students in addition to our existing high-dosage tutoring product. The first of these new products is Varsity Tutors On Demand, which is a district-wide solution that provides universal support to all students with access to 24/7 on-demand self-directed learning tools, primarily via chat-based tutoring. The solution will offer asynchronous essay editing and writing assistance, as well as access to online courses in core and enrichment subjects. Importantly, Varsity Tutors On Demand offers school districts a more affordable entry point to third-party supplemental learning.
We are currently offering this product with several school districts and expect to broadly sell On Demand in the coming school year. The second of our new products is teacher-led tutoring, which is a district-wide solution that provides teachers with the opportunity to schedule face-to-face online tutoring with a consistent expert in our live learning platform for any student that needs personalized intervention. This solution will also be available to the entire student population of a school, once again, increasing access and providing teachers with the supplemental support they need. Both of these new relationships will be structured in a per-student, per-year contract model, and we believe the introduction of these new products will make our institutional offering even more competitive, as they will allow for us to serve a broader set of school districts that have new and different needs.
We plan to continue to enhance our existing offerings and build new solutions with the ultimate aim of delivering increased value to our school district partners and supporting their teachers. In conclusion, and as I hope you can tell, we are very excited about the opportunity we see ahead for our business. We believe education is shifting to an always-on model, where learners of all ages and institutions are seeking long-term recurring relationships to support their learning needs. Our product offerings are continuing to evolve in support of these long-term customer trends, and we are maintaining our focus on offering solutions that improve quality, decrease cost, and improve convenience. Before I turn the call over to Jason, I wanted to touch on today's updated guidance. Like most companies, we also experienced a decrease in consumer bookings growth rates in March and April, in line with the broader global macroeconomic background.
Our updated guidance reflects this recent macroeconomic volatility, as well as the decision to more broadly offer a membership offering that delays revenue recognition of those customers by several months. We believe many of the offerings we mentioned today will help streamline the operations of the business and allow us to improve operational efficiency, and we continue to expect we will achieve profitability in 2023. We look forward to executing on the new initiatives I discussed and to continuing to update you on our progress in the coming quarters. With that, I'll turn this call over to Jason to discuss the financials in more detail. Jason?
Thanks, Chuck, and good afternoon, everyone. It's exciting to be talking with you today after another strong quarter from Nerdy. We continue to innovate and bring new products to market, deepening our relationships with learners. We are seeing strong top-line results. We once again achieved all-time bookings and revenue records in the first quarter as we continue to see momentum in the underlying trends driving demand for our services. Bookings of $48.5 million in the first quarter, up 30% over the first quarter of 2021, and revenue of $46.9 million during the quarter yielded 36% growth year-over-year. Bookings and revenue growth continue to be driven by the strength in our direct-to-consumer offerings across key formats and audiences.
Our small class and group revenue increased 243% to reach $6.4 million in revenue, up from $1.9 million in the first quarter of 2021, accounting for 14% of our first quarter revenue as compared to just 5% in the same period a year ago. The increase was driven by the introduction of small group tutoring in Varsity Tutors for Schools, as well as the continued adoption of small group classes among the consumer audience. As Chuck mentioned, we continue to evolve our product offering in support of the evolution towards always-on learning by expanding the launch of a monthly membership program. Under the membership model, customers pay a fixed monthly rate for a minimum contract term ranging from 3- 36 months, with the number of sessions per month varying from 1- 3 times per week.
Typical monthly prices for a contract meeting once per week are in the range of $200-$325 per month, with cost savings if learners meet more frequently. We believe offering a membership option that is in the $200-$300 range per month, versus typically greater than $1,000 up front, is appealing to customers and the reason why we're seeing great results so far, especially in today's macroeconomic environment. In the institutional business, Varsity Tutors for Schools revenue is on track for the year. We're seeing continued demand for our institutional clients and believe the new per-student, per-year product offerings we're launching will further support our ability to partner with even more districts in the upcoming year.
In the first quarter, we signed 61 new contracts and delivered $4.6 million in revenue, representing nearly 10% of our first quarter revenue, demonstrating strong early adoption. Moving down the P&L, gross profit of $32.8 million increased 40% year-over-year during the first quarter. The increase was driven by growth across consumer one-on-one audiences, growth in our small group class format, and the introduction of new products, including Varsity Tutors for Schools. Gross margins of 69.8% during the quarter expanded over 200 basis points from 67.6% in the first quarter of 2021. Sales and marketing expenses on a GAAP basis were $23 million in the first quarter, up $8.4 million compared to the same period in 2021.
Non-GAAP sales and marketing expenses, excluding non-cash stock-based compensation, were $21.9 million, or 46.7% of revenue in the first quarter. This compares to 42.2% of revenue in last year's first quarter. In the first quarter, we continued to make investments in growing our sales organization to support Varsity Tutors for Schools' growth and across marketing to target new audiences, drive customer acquisition, and extend brand awareness. We reported a non-GAAP adjusted EBITDA loss of $6.6 million in the first quarter of 2022, compared to a non-GAAP adjusted EBITDA loss of $300,000 in the first quarter of 2021.
Nerdy's decrease in adjusted EBITDA relative to 2021 was mainly driven by the strategic investments we made in platform and technology investments to drive product innovation and growth, to build out our Varsity Tutors for Schools, and costs associated with becoming a newly public company. Turning to the business outlook. Today, we're providing second quarter 2022 guidance and updating our full year 2022 guidance to reflect two primary drivers expected to impact our top and bottom line forecast. First, the launch of our membership model is aimed at simplifying the business and driving higher engagement and lifetime value relationships with learners, but it will also change our revenue recognition patterns.
Because revenue is recognized on a linear basis over the term of the contract versus being front-weighted in the first several months, as is the case in our existing package model, we expect to realize lower revenue recognition in the first several months for our membership customers, followed by higher revenue recognized thereafter. While this evolution towards subscription offerings results in lower near-term revenue and adjusted EBITDA, we believe the continued evolution towards an always-on membership model is both the right long-term decision to support learners and will accelerate our growth and profitability in the years ahead. Second, after strong bookings in January and February, we experienced a decrease in consumer bookings growth rates in March and April, in line with the broader global macroeconomic background. We also continue to expect a heightened level of travel this coming summer, resulting in lower levels of summer academic activities.
The net effect of these changes is that we're updating our revenue guidance as follows. For the second quarter of 2022, we expect revenue in the range of $37 million-$40 million, up 17% at the midpoint from $32.8 million in the year-ago quarter. For the full year 2022, we expect revenue in a range of $160 million-$175 million, representing 19% growth at the midpoint versus our 2021 revenue of $140.7 million. We also expect sequential revenue decline in the second and third quarters given our evolution towards the membership model, as well as recent consumer booking trends and the expectation for heightened summer travel, which primarily impacts the third quarter.
We expect revenue re-acceleration in the fourth quarter during the key back-to-school period, driven by anticipated consumer demand and higher revenues from Varsity Tutors for Schools, which we expect to ramp into the upcoming school year starting in August. Our adjusted EBITDA guidance for both the second quarter and full year reflect a reduction to our previous guidance due to these changes. For the second quarter of 2022, we expect a non-GAAP adjusted EBITDA loss in the range of $9 million-$12 million. For the full year 2022, we expect a non-GAAP adjusted EBITDA loss in the range of $28 million-$38 million. We believe the market for supplemental learning continues to quickly shift from offline to online, expanding our total addressable market. Our strong liquidity puts us in a position of strength.
To capitalize on this long-term trend, we'll continue to invest in new products and innovation to drive outsized growth. However, in light of the volatile global macroeconomic environment, we are paying close attention to cost and the pace of investments. We ended the quarter with cash and cash equivalents of $141.7 million and no debt, providing us with ample liquidity to operate against our plan and achieve profitability by the end of 2023. Thank you again for your time. I'll turn the call back over to Chuck.
Thanks, Jason, and thanks again to all of you for joining us today. We appreciate your interest in Nerdy and look forward to continuing the dialogue during this exciting time for the company as we improve access to supplemental learning solutions and advance our mission to transform how people learn. Before we turn it over to the operator for Q&A, I wanted to share that Ian Clarkson, our president and chief operating officer, will be departing the company. I'd like to personally thank Ian for his many contributions to the growth of Nerdy, including helping us go public this past September. He's been a key member of our leadership team, has played an important role scaling the company, has helped us develop a strong team, including at the executive level, that has set the company up for continued success for many years to come.
Ian will be providing transition services to the company as a consultant and advisor over the next nine months. Thank you for your contributions, Ian. With that, let's turn the call over to the operator and get started with Q&A. Operator?
At this time, I would like to remind everyone in order to ask a question, press star then number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. The first question is from the line of Ryan MacDonald with Needham. Please proceed.
Hi, thanks for taking my questions. Maybe Jason, the first one for you. As we think about sort of the updated outlook and the cut to the top line of guidance, can you parse out a bit sort of the mix of the decline, I guess, that's expected due to the soft macro versus the transition of the customer base over to this membership model? Thanks.
Yeah, absolutely, Ryan. The majority of the decline related to the guidance revisions is due to the change in the revenue recognition patterns to the evolution of a membership model. I would say two-thirds of the change is due to the membership model being introduced, with one-third due to consumer pressures that we started to see in March and April, coupled with our expectations for an even higher level of summer travel compared to what we previously expected. We're also hearing that consumers are buying closer to need. Historically, where, you know, a customer would buy, you know, a package of 20 hours, right now they're buying smaller packages to get them through the end of the calendar school year.
They're also telling us, "Look, call me back right before back to school because I know that the need exists for my students." You know, we expect to rebuy then. You know, two-thirds is the membership model change, which is intentional, and one-third's probably the macro that we're seeing from consumers.
Got it. That's really helpful color. And then Chuck, for you know, I thought it was really interesting to see the continued evolution of the institutional offering to include chat-based and sort of all-you-can-eat offering to touch the entire student population. Can you just talk about what drove that platform expansion? You know, I know a big component of sort of spend and allocation of spend is sort of understanding the district's understanding sort of student testing and assessments to see who's kind of far enough behind. Is there any difficulty in sort of identifying sort of the most at need students, and so they're just shifting purchasing patterns to have something that can address sort of the entire school, sort of wall-to-wall? Thanks.
Sure. Good question, Ryan. A couple of quarters ago, we actually outlined our product roadmap for our institutional business that we call Learning Platform as a Service. The big idea here was that a school or other institution should be able to leverage our platform and deploy different product solutions across different segments of their student population in a way that's seamless and allows for them to tailor experiences and meet the needs of individual student segments, recognizing that there are some segments, like for instance, high-dosage tutoring, where schools are particularly interested in focusing on a subset of students. We're seeing very often it's 1%-4% of students who need a much, much more focused form of intervention that oftentimes runs the entire school year and meets multiple times per week.
As we thought about the other ways that we could help school administrators meet their objectives and help students, one of the ways that came up was in the form of a chat-based solution, in addition to, you know, a whole list of other ways that live instruction and supplemental support could be delivered through a scaled solution leveraging the internet. You know, in this case, it actually serves a different student need, and it allows school districts to offer a solution to all students. Normally, this is a product that we envision schools deploying across an entire school district as opposed to a subsegment. It allows for that to serve as a really important catchment system to ensure that students can get help whenever they want. 24/7, seven days a week.
It's a little bit different than the live-focused intervention that we've been selling to date that has a very important need, and in and of itself is a very large market. Chat we see as complementary. And the same is true for our other product, our teacher-led tutoring product, where a teacher can assign tutoring to students, to ensure they get the help they need in a really focused fashion for specific students spanning a whole host of different subjects. As simple of a concept as teacher-led tutoring might be, it really has never been available.
What we're trying to do is bring the power of our platform to allow for teachers to get leverage in a way that makes them more effective and allows for specific students spanning all grade types within a K-12 school district to get the help that they need. Both of these kind of come together to create what we think is a very elegant and tiered product offering that can be bundled together, but can help schools solve a variety of different needs for students that they have in their school population.
I think.
If I may just jump in.
Sure.
Ryan, I was just gonna add, you know, I think importantly, you know, the broader product offering in schools is important as we move into this new school year. Their needs continue to evolve and develop and, you know, given our platform-based approach, we're able to continue to evolve with them and meet those needs. You know, we feel really well, really strong about the positioning that we have going into this key selling season over the course of the summer heading into the fall with schools.
Yeah. Super helpful. I was just gonna ask you as a quick follow-up before I jump back in the queue. You know, are you seeing, I guess, in the conversations you're having with schools and districts today, where there's sort of this interest in purchasing both at the same time and sort of viewing them as complementary? Or is the market still one where they're maybe going, you know, either high dosage or chat-based at this point? Thanks.
Yeah. We see these as complementary, and the conversations that we're having are about bundled solutions. We've already seen school districts, prior to us actually having these products, go out and find alternative solutions that allow them to make their, effectively, their own, you know, bundling solution, where very often they're purchasing from a variety of different vendors with different modalities of learning related to tutoring, and then bringing them together in a way that allowed them to deploy a holistic solution. What we've done here is bring them together under one roof, one technology platform, that allows for them to get both seamless integration on the technology side allows them to interact with fewer vendors, and then importantly, allows for them to get leverage from their purchasing, where there can be favorable economics associated with bundling all these different, services together.
We're seeing people very interested in using multiple different modalities for different formats that best suit learner needs. That varies to some extent depending on the subjects and the grades and then the amount of intervention that's required, which I think is why schools are so interested in multiple different formats.
Thanks. We appreciate the color.
Thank you, Mr. MacDonald. The next question is from the line of Eric Sheridan from Goldman Sachs. Please proceed.
Thanks so much for taking the question. I may be following up on the revenue guide color you gave there to the series of questions from the first analyst. Just understanding a little bit better the evolution of the membership model beyond just 2022, how should we be thinking about it as a driver of penetration, of greater growth, of revenue recognition beyond just the element you called out of Q4 over Q3, and any element of where you could see, spinning into the membership plan, among your existing base of users and how should we think about that mix shift, causing dynamics of revenue growth going forward?
Then the second question beyond just the mix shift dynamic on the membership piece would be, understood the need to make the investments against the long-term dynamics and the opportunity you're going after. But if we were to have a macroeconomic environment that was to continue to worsen beyond what you saw in March and April, you know, how should we think about some of the fixed versus variable dynamics of costs in the business and investments that we must make for the long term versus areas where it could be more variable going forward? Thanks.
Thanks, Eric, two good questions. On the first, you mentioned evolution. I think that's the right word. It's an intentional evolution, and it's one that's being made in response to changing consumer trends towards this concept that we're calling always-on learning. That relates to people looking for much longer term relationships that span longer periods of time. It's now possible because of the normalization of education, online learning specifically, and people are more open to these recurring relationships. One of the things that is important about this, and I'm sure is obvious, is that the upfront cost is quite a bit less. It can be as much as, you know, 80% less upfront in the first month, which makes it price accessible to much broader segments of the population than would have been the case previously.
What we're seeing thus far is that the one-to-one membership model is actually receiving higher conversion in our initial data than the one-to-one package offering. We think there's an opportunity to expand the number of customers over time who are actually leveraging the platform. Because this relationship defaults to always on, where it can recur over long periods of time, there's an opportunity to build a membership base over the course of many years that accumulates, and gives us higher levels of predictability and revenue, higher levels of profitability, and also allows us to simplify our business in a whole host of different ways.
We think there's a lot of really interesting things here, and we're going to continue to lean in, which as Jason mentioned, requires sacrificing some short-term revenue recognition, but it's in exchange for a whole host of simplifications of the business, benefits to consumers, and we think unit-level economic improvements over time. You know, we're still early days here, and you know, we'll continue to provide updates on that into the future. Then shifting gears to your question around you know, the general macroeconomic environment and you know, potential slowdown.
You know, one of the things kind of thinking back to like how, you know, how our P&L looks, we have a lot of, you know, a lot of our expenses are related to people, and we've made a whole host of different investments in the actual technology platform that allow us to personalize experiences in a way that drives revenue growth and will allow us to get operational efficiencies in the year ahead. Simply by slowing down the rate at which we hire, you can grow into operating leverage, and we would expect for that to be a big source of improvement in the operating margins of the business with an eye towards profitability in 2023. You know, there's certainly a lot of uncertainty in the general economy now.
Based on simply doing more with less, and simply slowing the rate of hiring both on the fixed and variable side, I think in both cases, we would expect to get leverage. Where on the fixed side, you can simply slow your rate of hiring. On the variable side, you can again leverage technology to drive operational improvements that necessitate hiring fewer people into higher volumes. I think we feel good about those general drivers as we head into our peak season. You know, a lot of these conversations are starting right now, well before we ramp up, you know, what would be normal seasonal back-to-school hiring, which is the exact right time, I think, to be having these conversations.
Maybe just to add to that, we'll also rein in some of the more speculative investments and concentrate on more progress in fewer areas. Some examples would include reducing spend associated with speculative marketing activities, as well as shifting resources from less important areas, as was the case with Veritas Prep, which we just continued in Q4 to focusing on the membership model evolution as well as making sure that we're appropriately positioned Varsity Tutors for Schools as we head into this key back-to-school season. The last thing I would add is, you know, most importantly, we've got a really strong balance sheet, $141 million in cash, and we still expect to achieve profitability by the end of 2023.
Yeah. We're coming off, you know, some strong trends in the first quarter as well.
Thank you, Mr. Sheridan. Our next question is from the line of Maria Ripps with Canaccord. Please proceed.
Good afternoon, and thank you for taking my questions. Just following up on your membership model launch, anything you can share with us in terms of what portion of your learners that were offered the membership option actually signed up for it? Where do you expect that mix sort of longer term? Do you expect to offer both pricing models on the DTC side, or do you intend to sort of transition entirely to the subscription model over time? I have a quick follow-up.
Thanks, Maria. Yeah, we're in the early stages of the membership rollout, so we you know you started to see it, I think, impact the bookings numbers a little bit in March, you know, which factors into the whole gross sales. We're only counting the first month of a membership payment as the gross bookings. Then, you know, in the last couple you know months, we've started to increase it to you know a higher percentage of customers. But we're trying to make it a measured rollout and you know evaluate the efficacy and make sure we're being thoughtful in which segments of the audience population that we're offering it to. You know, it's still early days, and we're gonna be continuing to expand it and measure the outcome.
The initial data, you know, is very promising, but early.
Got it. Do you expect to keep both, sort of, models over time?
Yeah, we think there's a place for both. You know, there are certain subjects and audience areas that lend themselves toward long-term recurring relationships, and there are other segments where there might be more of a short-term need. We're still trying to work through the right way to pair both together to maximize the flexibility from the customer's perspective and allow us to serve different student populations. But there will definitely. There's definitely one of the things we're doing now is rolling it out in a way that allows for us to mix and measure our way into different audience segments. We're trying to be thoughtful about that rollout and where we actually remove packages versus where, you know, there's multiple different options available.
Again, early days, and we're trying to do, you know, what's right for the business, what's right for the customer, and what's right for ease of operations as well.
Got it. That's very helpful. Given that the membership model sort of creates a more predictable, steady demand, and it seems like it brings higher sales conversion, can you maybe just talk about whether you expect any margin implications when this pricing model is fully ramped?
You know, the way that we're pricing the membership packages now, we would expect similar gross margins over time. You know, again, we're still early. We're still in price discovery, I'd say, as it relates to, you know, what the consumer's looking for. Over time, we would expect the gross margin profile to be consistent with what we've seen, you know, during the first quarter at 70%.
Got it. Thank you very much.
Thank you, Ms. Ripps. The next question is from the line of Doug Anmuth with J.P. Morgan. Please proceed.
Thanks for taking the questions. I have two. First, Jason, just hoping that for the guide, you could perhaps parse out a little bit around how you're thinking about active learners and then, ARPU as we go through 2022. Just secondly, just curious with the guidance for 2022, does that, on the DTC side, assume stable, kind of trends with March and April, or is there any further, kind of deterioration or softening built in there? Thank you.
Yeah, no problem. Thanks for the questions. From an active learner perspective, I mean, certainly you saw the numbers, up 56% during the first quarter. We saw strong growth there. A lot of that was predicated on, you know, what we had been guiding to, which was, significant levels of implementation in our Varsity Tutors for Schools initiative. From a learner perspective, if you're modeling that downstream, we've always said that, you should expect ARPU declines on the consumer side in the mid to single digits, given the mix shift towards a higher proportion of classes. Then what we're seeing here on the institutional side is certainly a lower price point, as more of those students are also participating in the 1-5 classes offering.
net-net, if I had to forecast it over the fullness of the year, I think you should continue to model, you know, mid double digits declines in ARPU as we move forward, which is consistent with what we saw during the first quarter, given the mix expectations between consumer and institutional.
Yeah. Mid-teens. Yeah.
Yeah. Then, you know, I alluded to it earlier. Again, I think two-thirds of the decline in the guide is more related to the membership model, one-third related to the macro. What we're hearing from customers is that, you know, they're belt-tightening right now with their wallet. They're buying closer, but they know that, you know, their students or their children have significant needs, and they expect to come back to, you know, during that. The other thing to keep in mind in the consumer. It's much easier to put your arms around as consumers are more used to paying for things on either a subscription or membership basis. The lower upfront price point, $300 per month, is going over really well.
Customers are willing to commit to, you know, a longer service for that lower price in the end too, because they know that always.
Yes. The one other thing I'd mention is, you know, some of this is definitely related to the fact we're gearing up for some sort of monster leisure summer. One of the things that we see is that people are planning to take a very leisurely summer involving a whole host of. So you're seeing fewer academic activities scheduled that range from courses to K through eight enrichment, and we don't attribute any of that half-heartedly to, you know, difficult to disentangle from, you know, well in advance of the next large package to date that I'm not going to use until the fall. Smaller ones and then purchase another one, you know, as back to school starts. That's what we attribute to, you know, people being very clear there's a little bit less summer academic activities planned.
Everything would lead us to believe there's still a great need and a lot of demand for tutoring this back-to-school season.
Thank you, Mr. Anmuth. The next question is from the line of Andrew Boone with JMP Securities. Please proceed.
Hi, good afternoon, and thanks for taking my questions. Two, please. To start off, I'll go down the same topic everyone else is. Given the learnings that you're seeing in terms of lower prices with subscription, are there any learnings that you can extend back to your traditional model? Does that make you rethink in terms of any of your price points or just your go-to-market in terms of maybe offering smaller packages? Secondly, going to Varsity Tutors for Schools, it sounds like sales execution improved in terms of the 61 plannings you guys talked about. Can you help us better understand the drivers there, whether that's just better sales execution, the maturation of the sales force, anything that you'd like to call out there? Thanks so much.
Good question. We've been, you know, experimenting with various forms of subscriptions for a while now and have continued to kind of hone in on what we thought would be most compelling to consumers. You know, as we've continued to increase the level of testing we've done and seen good traction, there's obviously been a, you know, a shift in the headlines over the course of the last couple of months on what's going on with the economy. You know, as we think about what's likely to resonate in a future state beyond what we're seeing today, we also think that in having memberships that are lower upfront and lend themselves towards recurring relationships that just default to on and can span many years, we think that's a really good solution.
That, you know, certainly in a you know environment where there's macro pressures is helpful, but it's also, you know, unrelated to that. I think a function of just normalization of education and people wanting help across a wide variety of subjects, potentially spanning many years. This whole GPA war concept where people are really focused on GPA, which of course is the culmination of good grades in lots and lots and lots of classes, as opposed to test prep, where, you know, people would historically cram a little bit more.
Those kind of two things converge to create an environment where we can create products that are lower upfront, that resonate more with customers that we believe they'll be more likely to buy, and that over time can generate relationships that are much, much longer in duration than what was possible in the package model.
The only thing I'd add is that mindset absolutely parlays itself into our schools offerings. You know, as it relates to the on-demand and the teacher-led products, we're in the early stages of price discussions with school partners. What I can tell you is that the on-demand and teacher-led offerings will be very competitively priced in order to allow school districts to significantly increase the number of students who can be helped with our product offerings. The per student cost will be much lower than the high dosage tutoring, but there'll be a lot more students covered in a given school contract. You know, we're in the early innings of these conversations. But net net, we expect to provide more details after we get through this key back-to-schooling season, which happens from July and August.
Anything on the sales force or sales execution to call out?
Sure. On the sales execution front, you know, we recently had Anthony Salcito join to lead our institutional efforts. He's the Chief Institution Business Officer, joined us just a couple of months ago, helped overhaul our product strategy, with an eye towards back-to-school execution and a focus on larger accounts than we've targeted historically. Anthony was previously the Vice President of Worldwide Education for Microsoft and, led their $4 billion-$5 billion P&L for all education customers worldwide and, has been a tremendous help thus far in really, informing and evolving our strategy as to how we bring these multitude of different product capabilities we have together in a really elegant way that can meet the unique needs of schools.
Which of course, you know, has been a net new area for us over the course of the past year. It's also something that, you know, the way that we're going to market and the way that we're framing these relationships lends itself to recurrence over much longer periods of time and embeds the offerings in a way that we think make them really sticky. You know, while only 2% of the American Rescue Plan funds of $24 billion had been spent at the end of the year, and we expect for that to drive growth for, you know, the next several years in a really material fashion.
We are also using this as an opportunity to really catalyze our entry into schools, and then build products that provide so much value that there's a lot of stickiness and recurrence and that schools would never kind of want to get rid of them as our goal. You know, to kind of summarize, new leader, super excited about his contributions. We have a new product strategy that augments the high-dosage tutoring model that's already getting a lot of success and traction. Then there's that kind of refocusing occurring on different accounts than we've had in the past. Again, back to, you know, one of the other questions around the investment we've made here.
We have kind of slowed the overall total rate of hiring, and we're now growing into that, you know, that investment we've made, which will provide operating leverage in the year ahead. We feel really good about the momentum that we have for the rest of the year.
Thank you.
Thank you, Mr. Boone. The next question is from the line of Aaron Kessler with Raymond James. Please proceed.
Great. Thanks. A couple questions on the gross margins. Can you just give us a sense for how we should think about gross margins for the remainder of the year, maybe kind of the seasonality that we should think about for gross margins, especially with the school districts probably having an influence on that? Just any further update on bookings for Varsity Tutors for Schools in Q1 or kind of ending schools, and then any updates on kind of Q2 bookings there as well? Thank you.
Yeah. On the gross margin, certainly we saw improved gross margins in Q1 year over year, about 200 basis points of improvement. Probably three key factors that drove that improvement. One, we discontinued Veritas Prep, which was a lower margin product during the fourth quarter. Second, we continue to optimize our class offering, looking at the frequency, you know, the depth of the product offering, and continue to refine, you know, the go-to-market strategy there. As you saw during the quarter, you know, pretty significant increases in that class business, up 243% year over year. Certainly the mix has continued to improve at 14%, which is, you know, in line with our prior discussions.
The last piece would be, you know, we did increase prices to a small extent at the start of the year, consistent with historical patterns. On a go-forward basis, you know, we continue to believe 70% margins is the target and the expectation for the remainder of 2022. Similarly believe that the Varsity Tutors for Schools product offerings will be in line with what you've seen to date in the first quarter as we move through the course of the coming year.
Got it. Any updates, Chuck, on bookings for Varsity Tutors for Schools? Either maybe ending schools you had in Q1 or the quarter to date trends that you're seeing as well?
Well, we're not planning to break them out, but one of the things that, you know, we can share today is that, you know, we're still tracking for the original GAAP forecast that we shared and feel good about Varsity Tutors for Schools accounting for, you know, 10% or more of GAAP revenue for the year. That continues to track. You know, as we head into back to school, and we have these two new product offerings to complement high-dosage tutoring that's already received a lot of traction, I think we feel good about that original forecast and what was implied there.
We're just now heading into what's going to be a really key back-to-school period that will determine, you know, the full extent of the, you know, the repurchases from existing customers, what products they're interested in leveraging with their student base, and then also all the net new customers that we would expect and target to contract with over the course of the next quarter. This is really the period where it kind of all kicks off, but, I think we feel really good about the momentum we have and then the extent to which we can meet the market need.
Great. Thank you.
Thank you, Mr. Kessler. The next question is from the line of Brett Knoblauch with Cantor Fitzgerald. Please proceed.
Hi, guys. Thanks for taking my question. Maybe just on the membership model at call it the low end of the range, $200 a month, that's, you know, $2,400 for the year. Last year looks like average revenue per learner was around $1,100. I guess, you know, what percentage of your learners last year paid $2,400, where it might be makes more sense on a price basis for that learner to enroll in a membership model as opposed to, you know, the more transactional consumer model they did last year?
Well, what's interesting about it, and thank you for that question, is that we don't think we're sacrificing, you know, customers with this model. It not only appeals to folks who can afford to pay up front, it appears to be also appealing to, you know, both those people and net new customers as well. That's what's kind of interesting about the initial data, you know, the higher conversion that we're seeing. There's the potential that we actually make this accessible to more learners. That's something that's both important to us from the perspective of being a mission-driven company that cares deeply about expanding access to education and tutoring specifically. It's also helpful from the perspective of lowering that barrier to actually trying.
Right now we're still in the early days of experimenting, you know, and the data, while promising, is early. We're gonna continue to use both models, and as we see traction on memberships, we'll seek to increase the proportion of customers that are offered it over time and in which audience segments. I'd say it's too early to answer, you know, that question specifically. There are customers that are, you know, committing to longer periods of time, and the relationship defaults to on, which we think is really promising.
I guess, you know, just kind of trying to put together your new full-year guide. Do you plan on introducing the membership model to your entire active learner base by the end of the year? Should I read into that maybe 2Q is more of an impact from macro and the back half of the year kind of lower revenue growth there is more, a result of the membership model?
It's a sequential rollout, so I think it'd be too early to say it'll be fully rolled out by the end of the year. As we thought about the guide and forecast through the latter part of the year, we factored in the fact that an increasing percentage of prospective customers are being offered the membership model. As that number goes up, the amount of revenue that is kind of subject to the new membership revenue recognition, which is linear and occurs, you know, sequentially over time, of course, as the much more front-loaded package model increases. You have more customers that are going into what is effectively a J curve associated with rev rec. You know, after X months, we believe it can be better off, but that relationship, you know, is still early.
Promising data, certainly Q3, you know, with the potential rollout would be most impacted simply because that's a big quarter for us. To the extent you're pushing out some of the revenue, you know, a couple of months in service of much higher lifetime value relationships, potentially, you know, that is where you'd see the fullest, you know, extent of that effect. As we thought about the guide, you know, we did assume that there's increasing proportion of memberships, you know, over the next couple of quarters and, you know, eventually that J-curve should catch back up. That kind of pushes out some of that short-term revenue recognition in service of long-term economics.
Certainly, while we think that the membership model's, you know, more conducive to more customers being able to surpass that high cost of entry into the package model, there are components of the business that, you know, it's unlikely that we would offer the membership. A couple examples would be like the professional certification business, you know, where people trying to just pass an exam or similarly, you know, in a test prep space where people are looking to pass a singular test, we believe the package model will still work there. Early days, we'll also continue to see the effects of the summer heightened summer travel during the summer, so that'll also depress Q3 to a greater extent than we previously guided.
Understood. Appreciate it. Thanks, guys.
Thank you, Mr. Knoblauch. The next question is from the line of Mario Lu with Barclays. Please proceed.
Great. Thanks for taking the questions. You mentioned recently that roughly 2% of the American Rescue Plan dollars have been spent thus far. Just wondering if you could help us identify, you know, what you believe are the main factors that is holding up spend and how you think this could be unlocked in the near term.
Thanks, Mario. Good question. You know, this past year, schools focused on safely reopening and staffing issues. That included, you know, all of the national debates you saw around masks. It also included issues with getting kids to school with school buses. It also, you know, extended to teacher shortages where you have major school districts that are shutting down, you know, a day a week. One of the things that we've seen is that schools focus initially there and are now starting to think about whether, you know, how to best leverage these funds. In some cases you're seeing school districts that are trying to get creative and see if they can use it for, say, you know, new HVAC systems, you know, which are quite expensive.
In other cases they're actually saying, "Wait a second, this money's earmarked for COVID-related learning loss. We need to be really thoughtful about how we deploy it and we need to start moving." You're seeing pressure from the Department of Education. You're seeing pressure from state education agencies that school districts should kind of pick up the pace because the reality is that the data that is coming out on student results relative to historical standards is really poor and it's really sad, and people are increasingly realizing that action needs to be taken now.
I think you're gonna see the pace pick up as we head into this next back to school, and that the pressure will be on school districts to thoughtfully and intelligently deploy different learning solutions that have a high degree of probability of remediating the severe learning loss that you're now seeing in some of these state level results for standardized testing. You know, I can't speak to everything that kind of slowed down schools initially, but I think the realization that it's unlikely that funding timelines will be extended considerably is now putting real pressure on school districts to act and move quickly.
you know, our pipeline continues to grow, and we feel really good about the potential to solve large problems for large school districts or state agencies in the near ahead. Very helpful. Thank you.
Thank you, Mr. Lu. The next question is from the line of Gregory Gibas with Northland Securities. Please proceed.
Hey, good afternoon, and thanks for taking the questions. I was wondering if you could maybe talk a little bit more about how much of a decline in bookings that you saw in March and April relative to the strength you saw in January and February.
One of the things, we are actively rolling out this membership, and you're shifting people from what had been a bookings model where people would prepay for, you know, north of $1,000 to what, you know, and as we think about bookings, we actually are counting as just one month up front, so we're only counting the first month of that bookings number. It's a little bit of, you know, apples and cucumbers to some extent. You know, we did see a sequential slowdown as we've approached summer, you know, with particular areas that would've been driven by summer related academic activities, kind of disproportionately seeing that slowdown.
It's kind of tough to break the two apart, but it was enough that we felt, you know, it was important to highlight and be transparent about how some of the repurchase trends in particular, just on the, like, average order value side could be related to some of the macro pressures. You know, what we're hearing as Jason mentioned, is people are purchasing a little bit closer to when they expect to consume, which then lends itself towards, you know, a little bit of a smaller package throughout the school year and then purchasing again in the back-to-school period, as opposed to doing it all at once.
I you know I think we feel good about the long-term trends related to people focusing on the GPAs to a much greater extent that of course spans high school and college. We had you know really strong K through five bookings in the first quarter, 57% bookings growth. You know that's an area where we would expect a little bit of a slowdown in the summer given the less just the less of a focus on enrichment activities, academic activities that we expect this summer with the heightened leisure travel. Again as we head back to school I think we're feeling good about the long-term consumer trends that relate to need state. The other thing I'd mention.
Okay, got it.
Is of course-
Sorry, go ahead.
Our institutional kind of unrelated to those trends, you know, we're kind of set up to in a way that we feel really good about for back to school as well. You know, we expect, as I mentioned, to achieve the revenue goal that we set out for. Then we have a couple of new products that we think allow for us to meet new and varying needs, and that can be bundled together in a way that's really compelling. These new products really lend themselves towards recurring relationships and recurring revenue, in a way that we're really excited about.
Great. Looks like really nice, you know, momentum in the institutional side. Wanted to ask, you know, maybe what your full year breakdown, I guess, between direct to consumer and institutional was, and then if you can remind us the gross margin differential between those two.
Yeah. Our initial guide had the Varsity Tutors for Schools business at about 10% of the total guide, so that would infer $20 million. We still believe we're on track to achieve that during the course of the year. From a margin perspective, we believe and have priced the products, you know, fairly consistently to achieve the blended margin that you saw during the first quarter at 70%.
All right. Thank you.
Thank you, Mr. Gibas. There are no further questions, and this concludes today's conference call. You may now disconnect.