Yahoo Finance Nerdy, Inc. (NYSE:NRDY) Q1 2024 Earnings Call Transcript
Nerdy, Inc. (NYSE:NRDY) Q1 2024 Earnings Call Transcript May 7, 2024
Nerdy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. Thank you for attending today's Nerdy Inc. Q1 2024 Earnings Call. My name is Tamia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to your host, TJ Lynn, Associate General Counsel of Nerdy. You may proceed.
TJ Lynn: Good afternoon and thank you for joining us for Nerdy's first quarter 2024 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 change in events, conditions or circumstances on which any such statement is based.
Please refer to the disclaimers in today's shareholder letter 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 shareholder letter for reconciliations of these non-GAAP measures. With that, let me turn the call over to Chuck.
Chuck Cohn: Thanks, TJ, and thank you to everyone for joining us today. In the first quarter, we executed against the three primary goals we laid out for the year, including scaling the winning product for every learner, expanding the number of learners we can impact by introducing freemium strategies across both our consumer and institutional offerings, and laying the foundation to deliver profitable growth for the full year. Our focus on delivering enhancements to the loyalty membership experience, which includes streamlining the onboarding experience, enhancing self-service tools that make it easier for customers to manage their tutoring relationships, and driving non-tutoring engagement is yielding positive results. Learning memberships continued to resonate with consumers during the spring semester resulting in consumer learning membership subscription revenue of $39.9 million in the first quarter, increasing 34% year-over-year and representing 74% of total company revenue.
We finished the first quarter with active members of 46,100 as of March 31, 2024, up 40% year-over-year and exceeding our guidance target of 45,500. Our institutional strategy is delivering results and allowing us to introduce our product to institutions at a larger scale than ever before. In the first quarter, we delivered record quarterly institutional revenue of $11.9 million, an increase of 39% year-over-year, representing 22% of total company revenue. Our team successfully enabled access to Varsity Tutors for an additional 1.2 million students, bringing the total to 2.2 million students at over 475 different school districts. For the full year, we set an ambitious target of enabling access to the Varsity Tutors for schools platform for 10 million students or approximately 20% of the K-12 population in the United States for this year.
By providing a robust set of academic test prep and enrichment resources at no cost to our institutional partners, we aim to efficiently build trust and credibility at scale and lay the foundation to become the preferred online tutoring and live learning platform of school districts and the communities they serve. We believe that this can be a scalable way to introduce ourselves to the majority of students in the United States. To start the year, we stated that by scaling our winning access based subscription offerings in both consumer and institutional that we expected to deliver profitable growth and positive operating cash flow for the full year. During the first quarter, we continued to scale both learning memberships and our Varsity Tutors for Schools access based subscription offerings, which resulted in adjusted EBITDA of positive $24,000, which was slightly above the top end of our guidance range and positive operating cash flow of $4.4 million.
The convergence of subscription business models and access based products across our consumer and institutional businesses is allowing us to unify the Varsity Tutors for schools and consumer user experiences into one modern intuitive and personalized experience that better serve the needs of our customers and learners. We expect that these changes, which have required material time and organizational resources, will enable us in the future to more efficiently and easily sell into and service customers beyond K-12 just as we do in our consumer business across thousands of subjects spanning audiences such as college graduate school, professional and more. Our focus on convergence will also allow us to simplify our business and focus the efforts of our team.
By allowing us to build one to leverage many times and better leveraging product and consumer experience improvements across both consumer and institutional businesses, we believe we can increase the pace of execution, drive higher levels of engagement with our product, and ultimately improve growth and profitability. Moving to our consumer business, the focus on enhancing the learning membership experience, including streamlining the onboarding experience, improving self-service tools and driving non-tutoring engagement is yielding positive results. This past school year, we introduced My Learning Hub as your personalized home page to the membership experience, which aim to encourage achievement, reinforce personal accountability to learning and improve the discoverability of learning formats and subjects.
Those changes drove a 64% year-over-year improvement in non-tutoring engagement among new customer cohorts during the first quarter. Based on our past experience, when customers engage more deeply with our product, it is highly predictive of stronger long-term retention and higher customer lifetime value. We also began to deliver improvements to our scheduling and invoicing system. Two large projects started last fall that are oriented around overhauling our marketplace infrastructure. We expect those projects to drive material improvements to our tutoring customer experience and ultimately drive retention improvements by enabling more recurring sessions and less user friction. During the first quarter, we continued to test additional product offering tiers and price points in an effort to identify a pricing model that can appeal to new learner types in different phases of their academic journey.
These tests, which involves lower average revenue per month product, decreased ending ARPU in the quarter, but are providing our teams with multiple signals into consumer intent, preferences and behavior. As I mentioned earlier, one of our goals this year is to expand the number of learners we can impact by introducing freemium strategies across both our consumer and institutional offerings. The initial consumer freemium version of our product meets multiple customer needs based across study support, homework help, college admissions prep, and enrichment. It also serves as a natural on ramp that allows to introduce and upsell our live video based online one-on-one tutoring, which is our superpower to a far broader audience across multiple points in Alberta's education journey.
While we aim to have this experience broadly appeal to all of our audiences, we are testing with a subset of users in ACT and SAP prep given the increases in demand we're experiencing following colleges and universities announcing they will reinstate SAT and ACT scores as part of their admission criteria. These test prep subjects are both a great place to test new offerings in an isolated way, be in a scenario where our work here will support both freemium learning membership customers as well as school districts interested in rolling out paid ACT and SAT tutoring program. This is an example of our approach to convergence and the focus on building once and leveraging money time. Turning our attention to our institutional business, the Varsity Tutors for schools platform now automatically comes with access to a range of powerful academic resources for an entire district with the ability to choose between three simple models for high dosage tutoring, district-assigned, teachers-assigned, and parent-assigned.
Institutional customers can now choose to administer tutoring through school leaders, through teachers or through parents. The parent-assigned offering allows schools to empower parents with learning memberships to oversee tutoring at home. Utilization of institutional high dosage product as well as access to the Varsity Tutors platform provided to those schools reach an all-time high of 772,000 learning sessions, up a 100% year-over-year, demonstrating product market fit as well as our ability to scale operations to meet the growing needs of our school district partners. In addition to high dosage models that are typically focused on a subset of students within a district, access to the varsity series platform is provided for all students district wide at no cost, enabling us to provide more value to these partners and their students and families.
Free access to the Varsity Tutors platform includes 247 on demand chat based tutoring, on demand essay review, hundreds of live group classes per week in enrichment, test prep and academic support subjects, self-study tools, college and career readiness resources, adaptive assessments, recorded enrichment and test prep classes and more. By providing us robust set of academic resources at no cost, we aim to efficiently build trust and credibility at scale and lay the foundation to becoming the preferred tutoring platform for these schools as they look to implement high dosage tutoring programs. This strategy can also allow us to introduce ourselves as a trusted brand to all K-12 students, which we believe can ultimately drive large downstream halo effects in our consumer business.
This strategy is yielding early positive results. As one example of how we see this strategy taking hold, we recently engaged conversations with a large suburban school district on the East Coast that learned about us as a result of our marketing efforts related to the free access. Initial discussions quickly shifted towards our paid subscriptions, and the school district purchased a 1,000 parent assigned learning membership to support students who are not able to be physically in school consistently due to health issues or other issues. Concurrent to the rollout of parents-assigned to the district also enabled access to the Varsity Tutors platform for more than 75,000 students, providing them with the ability to join hundreds of live weekly enrichment test prep and academic support classes.
Nearly 2,000 parents attended our first parent night to announce the availability of these powerful resources. That momentum led to preliminary discussions about a larger paid tutoring program in the upcoming school year focused on utilizing our district-assigned and teacher-assigned models on-site at school. Furthermore, the customer is seeking for us to enable parents of those 35,000 students to be able to purchase learning memberships directly from us as consumers and benefit from a discount half belong to them as a vetted partner of the school district. We successfully enabled access to the Varsity Tutors platform for an additional 1.2 million students bringing the total to 2.2 million students at over 475 school districts. Our efforts to support this go to market strategy include a specific focus on platform scalability and building the freemium upsell go-to-market motion of high dose security sales to K-12 school districts as we build trust and credibility with each new no cost access partner.
In closing, a growing awareness that tutoring is the most effective way to accelerate learning by parents, educators and policymakers represents a significant opportunity for our company to transform the way people learn through technology. By converging subscription business models and access based products across consumer and institutional, we're simplifying our business and focusing our efforts. We expect these changes will allow us to innovate faster, lead to higher levels of customer engagement with our products, and drive higher levels of growth and profitability over time. We appreciate your continued interest in our company. With that, I'll turn the call over to Jason to discuss the financials in more detail. Jason?
Jason Pello: Thanks, Chuck, and good afternoon, everyone. As Chuck mentioned, in the first quarter, I'm happy to share with you that Nerdy made strong initial progress towards achieving the three primary goals we laid out for the year. In the first quarter, we delivered revenue of $53.7 million results that represented 9% year-over-year growth. Revenue growth was driven by both our consumer and institutional businesses, which were up 3% and 39% year-over-year, respectively. Our learning membership model continues to lead to more attractive unit level economics, broader customer appeal, longer duration and higher lifetime value customer relationships, higher gross margin and a more scalable and efficient operating model relative to our old package model.
Consumer learning membership subscription revenue of $39.9 million increased 34% year-over-year in the first quarter and represented 74% of total company revenue. New consumer customer acquisition remained healthy with growth of 19% year-over-year in the first quarter as learning memberships continue to resonate with learners. Active members of 46,100 as of March 31 were up 40% year-over-year and exceeded our guidance target of 45,500. ARPU of approximately $293 at the end of the first quarter resulted in an annualized run rate of approximately $162 million from learning memberships. At quarter end, a 13% increase year-over-year. Our institutional business delivered record quarterly revenue of $11.9 million an increase of 39% year-over-year and delivered bookings of $4.4 million.
Bookings numbers reflect the focus on embedding the Varsity Tutors platform and hiring and ramping sales headcount in service of optimizing for the back to school buying period and the longer term opportunity within institutional. Moving down to P&L. Gross profit of $36.5 million in the first quarter increased 8% year-over-year. Gross margin of 68% in the first quarter compared to gross margin of 68.9% during the same period in 2023. The increase in gross profit was primarily driven by the continued scaling of our consumer and institutional businesses. The decrease in gross margin was primarily due to higher utilization of tutoring sessions across our new access based products within our institutional business in a seasonally high period during the school year.
Sales and marketing expenses for the quarter on a GAAP basis were $17.4 million, an increase of $1.8 million from $15.6 million in the same period last year. Non-GAAP sales and marketing expenses, excluding non-cash stock based compensation were $16.9 million or 31% of revenue compared to $14.7 million or 30% of revenue in the same period last year. We continue to invest in the Varsity Tutors for schools go-to-market organization by more than doubling the number of territories to drive a greater local presence, ensure close alignment to state initiatives and capture the increased activity in the market driven by growing awareness that tutoring is the most effective way to accelerate learning by educators. These impacts were partially offset by marketing efficiencies driven by the transition to learning memberships, which allows for a more efficient operating model in our consumer business.
General and administrative expenses for the quarter on a GAAP basis were $32 million, an increase of $2.3 million from $29.7 million in the same period last year. Non-GAAP G&A, excluding non-cash stock based compensation, was $21.4 million or 40% of revenue compared to $19.5 million, which was also 40% of revenue in the same period last year. Included in G&A costs were product development costs of $10.6 million an increase of $2.2 million from $8.4 million in the same period last year. Our investments in product development and our platform oriented approach to growth have allowed us to launch and continuously improve our three desk subscription products, including learning memberships for consumers in our district teacher, parent design and platform access offerings for institutional customers.
These subscription and access-based offerings simplify our operating model needed to support the organization, which allows us to maximize our investment in the live learning platform. We delivered non-GAAP adjusted EBITDA profitability of $24,000 in the first quarter, slightly above the top end of our guidance range of negative $3 million to breakeven. Non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA margin improvements relative to guidance were primarily driven by higher revenues and continued operating efficiency gains. During the first quarter, we also delivered positive operating cash flow of $4.4 million with no debt and $77 million of cash on our balance sheet, we believe we have ample liquidity to fund the business and pursue growth initiatives.
Turning to the business outlook. Today, we are introducing guidance for the second quarter of the year and reaffirming previously provided full year revenue and adjusted EBITDA guidance. We expect year-over-year revenue growth will be driven by the continued growth of Learning Memberships in our consumer business, the corresponding increase in the number of Learning Memberships subscribers coupled with LTV extension and higher institutional revenues as we continue to rapidly scale varsity tutors for schools. New Learning Memberships of customers joining the platform remains healthy and a growing awareness that tutoring is the most effective way to accelerate learning by parents, educators and policymakers provides us with the confidence in the demand for offerings in the year ahead.
Second quarter revenue growth is impacted by legacy package revenue of $4.9 million in the comparable period last year. That does not recur in 2024 due to the completion of our transition to subscription based learning memberships in our consumer business. Once we reach the second half of the year when package revenues are no longer included in the prior year comparable quarterly revenues, we expect growth to accelerate consistent with the sequential quarterly acceleration we delivered in 2023. Second quarter and full year non-GAAP adjusted EBITDA guidance reflects the continuing benefits from our recurring revenue products, which focus on long-term relationships with high value customers and operating leverage stemming from the completion of our evolution to access based subscription revenue business models, partially offset by investments in Varsity Tutors for schools go to market organization and product development to drive continued innovation and support our continued growth.
For the second quarter of 2024, we expect revenue in the range of $50 million to $52 million. For the full year, we are reaffirming previously provided guidance for revenue in the guidance for revenue in the range of $232 million to $246 million representing 24% growth at the midpoint versus our 2023 revenue of $193 million. For the second quarter of 2024, we expect non-GAAP adjusted EBITDA in the range of negative $4 million to negative $2 million. For the full year, we are reaffirming our expectation for non-GAAP adjusted EBITDA in a range of $5 million to $15 million an improvement of over 500 basis points in non-GAAP adjusted EBITDA margin at the midpoint. We also expect to deliver positive operating cash flow in 2024. In closing, thank you again for your time and for your continued interest in our company.
With that, I'll turn it over to the operator for Q&A. Operator?
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