Nerdy Inc. Q4 FY2024 earnings call

Chuck Cohn noted that in 2024, Nerdy unified consumer and institutional offerings, improved marketplace technology, and enhanced all access subscription offerings. They had a strong fourth quarter with revenue and adjusted EBITDA above guidance. Key AI-powered products introduced include an AI session playback tool, next-generation AI lesson plan and practice problem generators, and Tutor Copilot. In 2025, they plan to enhance AI-driven offerings, upgrade the AI tutor, refine expert learner matching, and agentify processes. In 2024, they unified platforms, improved onboarding, increased consumer engagement, and invested in institutional go-to-market strategy, scaling varsity tutors for schools and expanding the number of learners impacted.

In the fourth quarter, consumer Learning Membership subscription revenue was $39.2 million, representing 82% of total company revenue. The institutional business delivered revenue of $6.8 million, accounting for 14% of total company revenue. Consumer engagement rose 26% year-over-year in the fourth quarter, and new customer retention improved. Institutional business executed 91 contracts, yielding $4.6 million of bookings and enabled access to the platform for an additional 600,000 students, bringing the total to 5 million students across over 1,100 school districts as of yearend.

For the first quarter of 2025, Nerdy expects consumer revenues to be positively impacted by ARPM improvements due to mix shift and price increases, with revenue in the range of $45 million to $47 million and adjusted EBITDA in the range of negative $6 million to negative $8 million. For the full year 2025, they expect a return to growth in consumer revenues, with institutional revenue reflecting lower 2024 bookings. Full-year revenue is expected to be in the range of $190 million to $200 million, and adjusted EBITDA is expected to be in the range of negative $8 million to negative $18 million. They expect adjusted EBITDA and cash flow positive in the fourth quarter of 2025, ending the year with cash in the range of $35 million to $40 million.

Forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results. Uncertainty around government funding poses a risk to the institutional business. The impact of AI implementation on operations and financial results is also a risk as the company navigates the integration of new AI technologies.

Q: As we look towards the guide, can you help us bridge the assumptions on the active learning numbers and ARPM for 1Q and just help us parse through the dynamic there? And then, when looking towards the full year revenue guide based on 1Q, this implies an acceleration throughout the year. Can you help us understand the visibility into the full year and confidence on that outlook? And then, second question, just what drove the pricing decision for new customers in 1Q? And how should we think about pricing potentially weighing in on member growth for 2025?

A: Absolutely. This is Chuck. I'll try to answer all of this. So we feel really good about Q4. We beat our own expectations by a significant amount on both revenue and EBITDA. We also made good progress on a number of important initiatives related to strengthening the underlying marketplace infrastructure that allows for us to be more efficient and deliver higher quality services consistently. So we felt like the underlying foundation was strengthened and we can start being a little bit more offensive, as it relates to some of the product innovations that we're shipping. So, a couple of the things that were particularly exciting about the quarter was a lot of the work that we talked about last time on consumer product and activation started pulling through to higher retention, and we saw that elevate both sequentially and year-over-year throughout the quarter and strengthened. And so, we launched tutor incentives, which was something that, historically, we have really not optimized very much and we saw significant changes in behavior that we got really excited about. So, tutors taking, call it, more than 3x as much work when they join the platform and then also driving significant utilization that we know pulls through to retention. And to start the year, we've seen retention continue to elevate year-over-year, which is something we're really excited about. So that has an impact on gross margin in Q1, but ultimately, we think pays for itself a few months out with the kind of crossover line of contribution profit per customer being, something that as a result of being able to enlist and motivate the tutors on the platform to drive retention. We're pretty excited about how that can ultimately pull through. So we feel like the guide is appropriate and we haven't baked in all that much elevated retention, but the trends continue to improve and we really feel good about kind of the start of the year and where this could go as we continue to test. So, separately, we increased prices about 20% in totality, which we thought was appropriate given some of the value that we've been adding to the platform and the way that we've enhanced it, including, but not limited to both the tutor incentives and the quality improvements that we've made in the underlying marketplace infrastructure where we're matching customers on average to a much higher quality and better match for them, as well as then some of the ongoing product and personalization capabilities that we've rolled out, like the GenAI summarization, like the other content and tools, like Tutor Copilot. There's investments that we made behind them, and they're providing real value, and the customers are indicating that they actually value these. And so, we think that the pricing increases are appropriate and warranted and we feel good about those. And then, as we move throughout the year, you're basically blending into on average a higher ARPM base throughout the year and that kind of combined with, what we think are good customer acquisition trends, positive in February on acquired revenue, for instance, combined with that elevated retention, those are things that we feel good about, as we move throughout the year and will drive that acceleration.

Q: Chuck, how is the new AI products impacting retention in the consumer business? And then second one is sort of a follow-up, but Jason or Chuck, either one, could you just explain the gross margin and the higher utilization dynamic that happened in the fourth quarter? And it sounds like that's going to improve across the next few quarters. Could you just kind of explain what's going on and then why it's improving?

A: Sure. So, there's a couple of different ways. So, it allows for us to better assess quality, improve match quality. We know those things both pull through to better retention. There's features that more directly impact a day-to-day customer experience like the Tutor Copilot, so tutors are able to show up to sessions and be more prepared in general, same with lesson plan generation and practice tools. Those are all things that allow for, on average, the sessions to be more productive, more personalized, more relevant, and also for experts themselves to have higher effective hourly pay, because they spend less time prepping but are able to actually deliver higher quality life lessons. And you take that and you combine it with some of the features like the GenAI summarization that actually allow for parents to see the value in particular of their kids' lessons and very, very quickly, let's say a 60 to 90 minute lesson instead of having to watch the whole thing, which can be tedious, immediately see the value and better understand what's been accomplished. And that's something where the engagement is really high. It's pulling through to customers, making it farther along in their journey from the first week to the second week to the third week to the fourth week to the fifth week, and so on. And so, that's something where, we're really excited about how both the product that we launched as well as subsequent improvements we'll be able to make that could get really, really cool, in terms of being able to see some of the insights that come with it. Those are things that are just allowing us for allowing us to communicate and demonstrate the outcomes and value that much more efficiently to consumers. They're also able to, watch it and jump to the right spot more efficiently. There's a whole host of different ways that, we think that particular product can be really, really compelling. But the whole idea is that, it's less work, you get more value, it's easier, it's more personalized and we kind of remove friction at every point in a way that really delights people. Jason Pello: Yes. And then I'll speak to the gross margin and the utilization. I just said, like to start by saying we love seeing higher utilization on the platform, higher levels of activation, higher levels of first time to first session, the number of sessions in month one and month two, across new customer cohorts based on all the UX work that we did over the course of the last two quarters is really starting to pull through. We always have seen historically that higher levels of engagement and utilization, drive higher levels of retention and we're seeing that. We noted it in the letter and on the call that it's up 26%. That does impact gross margins, although we think it benefits contribution profit dollars over the long run, because customers will stay with us for a longer period of time when they're having a great experience on the platform. The other thing on gross margin is, the tutor incentives that we are investing in are across all customers. And so, there's a significant impact in the first quarter, to that gross margin. But as the new prices take hold for new customers and blend in over the course of the year, you'll see sequential improvements in gross margin, as we move across the year. So, I've got gross margin of 60% in Q1, 64% in Q2, and in the back half, we're in the 66% range as those price improvements pull through. And just from a funnel metrics perspective, we feel good about those price improvements that we've incorporated this past month in February, ARPM is over $400 and we think that the customer remains healthy.