Nerdy, Inc. (NRDY) Q3 2021 Earnings Report, Transcript and Summary

Hello, all and welcome to the Nerdy Third Quarter 2021 Earnings Call. My name is Brika and I will be today’s event specialist. [Operator Instructions] I would now like to hand the call over to your host, Marta Nichols. Please go ahead.

Good afternoon and thank you for joining us for Nerdy’s third quarter 2021 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 presentation over to Chuck, I will remind everyone that this discussion contains 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 press release announcing Nerdy’s Q3 results and the company’s and TPG Pace Tech Opportunities 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, Marta and thanks to all of you for joining us today to discuss our third quarter results. We are excited to speak with you for the first time as a standalone public company, having completed our transaction with TPG Pace Tech Opportunities and our listing on the New York Stock Exchange in September. As we shared in today’s press release and shareholder letter, the future is bright and we are looking forward to this next chapter and the capital we now have to drive the shift from offline to online learning. I believe it’s a once-in-a-generation opportunity and I am looking forward to you joining us on this journey. Nerdy’s mission is to transform how people learn and we believe that innovative technology can make all the difference. We seamlessly connect experts and learners in any subject, anywhere, anytime and make learning more personalized and accessible. Our business continued to grow in Q3 as we executed our strategy of subject expansion, format expansion and product innovation. We experienced record bookings in the quarter of $44.5 million as schools returned to classrooms, up 32% year-over-year. And we saw continued strong performance in our key operating metrics during Q3, with active learners up 36%, online sessions jumping 45% year-over-year and active experts increasing 23% year-over-year, while maintaining our sessions per active expert. In July and August, we saw a return to more normal seasonality, which resulted in slower than expected consumption followed by a dramatic acceleration in bookings in September after all schools returned to in-person learning. We experienced a return to more normal summer seasonality in Q3 as easing COVID restrictions permitted families to take much needed vacations. This was quite a bit different from the 2020 period, where we experienced higher than usual consumption in the summer at a time when lockdowns were common and summer vacations were skipped. This change in consumer behavior was different from what we envisioned at the beginning of the year when COVID was peaking. The relative consumption of our services during the summer of 2021 ultimately looked more like 2017, ‘18 and ‘19, while higher than usual consumption in the summer months of 2020 proved to be an outlier. Since students returned to school in September, we have seen record bookings driven by consumer demand for our core one-on-one products. As students return to class organization-wide, bookings in our direct-to-consumer business, that is our historic one-to-one in classes business for our September and October combined, grew at 31% compared to those same 2 months a year ago. Our total bookings, including our new K-12 institutional strategy, grew 63% during September and October and we continue to see comparable bookings growth in November. Revenue grew 19% in the third quarter to $31.3 million. As a reminder, revenue was primarily driven by consumption in the period and utilization of hours by customers. The increased bookings occurred later in the quarter and those higher levels of bookings are now starting to get consumed as we enter Q4. Based on the significant demand we are seeing in both the direct-to-consumer and in our direct to-school initiatives, we made the deliberate decision to pull forward investments in sales, expert supply and product development to make the most of the sizable opportunity heading into 2022. If you look at where we experienced accelerated demand once summer ended and schools all had resumed, it was basically all across key areas of the business. In our direct-to-consumer offerings, demand was up across the board including K-12, college and professional. And we are seeing an incremental boost with the addition of our new K-12 institutional strategy, which I will touch on more in a moment. Last year, when schools went virtual, a lot of schools elected to assign take-home exams, will let pass/fail and stopped designing traditional letter grades to assess student performance. This year, schools are almost entirely back to in-person instruction and are evaluating students again and assigning grades. This has led to heightened levels of consumer demand for supplemental support, including tutoring among both K-12 and college students. Our professional testing offerings have also continued to experience robust growth. The increased demand trends we have seen coinciding with the return of a new normal in classroom environment validate a long-held understanding we have about our business. When learning and outcomes matter to students, our business accelerates. The more that outcomes matter, the better we do and the recent bookings results are the logical and expected results of grades and test scores battering again the students. As we approach the end of 2021, we have increased confidence that the favorable consumer demand trends and the demand we are seeing from our direct to-school initiatives will persist into 2022. Given these trends as well as our growth investments, we have increased confidence in our full year 2022 revenue targets. We continue to innovate in Q3, investing in the expansion of Nerdy’s product portfolio, with our launch of Varsity Tutors for Schools. This new product leverages our platform capabilities to offer our online learning solutions directly to K-12 school districts and states. Institutions can seamlessly deploy our educational solutions across broad populations of students in an efficient manner. This initiative offers the opportunity to further our mission and have an enormous impact by expanding access to high-quality, supplemental online learning solutions to broader student populations and the need has never been greater. We received a strong reception for Varsity Tutors for Schools, that’s translating into early success, with 47 contracts with partners with a 1-year value of nearly $10 million signed since our launch in August. This initial traction has been above our expectations and gives us confidence that we are well-positioned to help schools at a broad scale and that they appreciate the partnerships we can bring to bear to help address COVID learning loss. We are excited about this effort and believe that over time, it can be as big as our direct-to-consumer efforts. The capabilities of this new K-12 offering represents the beginning of an institutional go-to-market strategy that will allow us to serve learners through many organizations, including schools, universities, businesses and others. We view partnering with these institutions to offer a broader learning platform as a service as a long-term opportunity to help improve the way that supplemental learning is administered. As an example of how this shows up in our new K-12 offering, many schools are adopting a small group approach, specifically with 1 expert coaching up to 5 learners per session. To address this need, we rolled out new functionality that leverages our technology capabilities to assess, identify and then group students with similar needs based on adaptive diagnostic testing results aligned to a specific state or common core standards, a critical functionality for schools and institutions. The 1:5 learning format builds upon our current class and tutoring formats. It integrates adaptive testing in other content into a single UI on our proprietary live learning platform, along with new administrator tools and integrations with learning management and student information systems. Our existing learning solutions previously offered almost exclusively via direct-to-consumer model, now meet the needs of a broad array of audiences and institutions. Our investments in platform and software-driven capabilities will serve as building blocks to quickly assemble new solutions, making it possible to efficiently enter new addressable markets, starting with our direct-to-school initiative. In addition, the American Rescue Plan provides a $123 billion to help K-12 schools reopen safely and at least 20% is earmarked to help address pandemic-related learning loss over the next several years. This is significant funding and live tutoring has proven to be one of the most effective interventions to address learning loss. The Department of Education recommends high dosage tutoring as an appropriate strategy for federal funding. We believe this funding is an important jumpstart for schools in the long-term adoption of third-party learning solutions and that we are uniquely positioned to help schools administer, measure and optimize the benefits for their students. COVID learning loss is real and will take many years to remediate. A recent McKinsey study on COVID in education shows that on average, students have fallen 5 months behind in mathematics and 4 months behind in reading. These losses will take significant time and resources to address and Nerdy’s Learning Platform as a Service offering provides a range of necessary solutions for schools to help them immediately address this urgent issue. Turning briefly to some of our growth initiatives in our direct-to-consumer business, during the third quarter of 2021, we also continued to expand our large format classes, with 55 new StarCourses. To-date, we provided millions of hours of free live online instruction to hundreds of thousands of learners. The StarCourse format has served as a powerful tool to build our brand, expand reach with new audiences and drive repeat engagement across multiple formats. In parallel, we invested in expanding subject breadth and the frequency of our small group class offering to drive growth and reach new audiences, which resulted in small group class revenue, increasing approximately 94% year-over-year during the third quarter. And beyond introducing new subjects, formats and products, we have continued ongoing investment in AI and improving match quality as our personalization capabilities remain critical to differentiating how we can help learners and enhancing the online experience of our platform. These investments power the network effects in our business and have helped us attract, retain and drive engagement among both learners and experts. We remain confident in the underlying trends driving demand for our services. The long-term transition from offline to online learning, the large and growing addressable market, and our ability to scale and innovate at a rapid pace to deliver solutions that meet learner needs in any subject, anywhere and at any time. With that, I will turn the call over to Jason to discuss the financials in more detail. Jason?

Thanks, Chuck and good afternoon everyone. As Chuck noted, our business continued to grow rapidly in the third quarter as we executed on our subject expansion, format expansion and product innovation growth strategies. We experienced record back-to-school performance in our direct-to-consumer business. And importantly, we launched our K-12 institutional strategy with the introduction of our new Varsity Tutors for Schools product suite. We made targeted investments to support our institutional strategy, including the build-out of our institutional sales team and growth in our tutor operations and supply functions to support increased demand and ensure strong execution for our schools product. Consistent with our forecast, we continue to invest in hiring new talent across engineering, product, marketing and sales. And we continue to believe these additions will allow us to drive sustained growth and innovation for years to come. We also continue to invest in both the quality and frequency of our free StarCourses, which allow us to provide exceptional value to learners, drive engagement across existing users and increased awareness among new learners. Turning to the financial results. First, on the top line, we continue to see results from our investments in growth and innovation. We experienced record bookings in the quarter of $44.5 million as schools returned to classrooms, up 32% year-over-year. Revenue of $31.3 million yielded 19% growth year-over-year, demonstrating continued demand for our offerings across all of our academic audiences from K-12 through high school and college as well as significant interest in our professional offering. Year-to-date revenue of $98.6 million increased 39% year-over-year. Summer seasonality in 2021 had a greater impact on Nerdy’s operating and financial results than in previous years, because demand in the prior year during the summer of 2020 was different from historical patterns. Like many companies, we experienced higher than usual demand last summer in 2020 when lockdowns were common and most summer vacations were skipped. This year, during the summer of 2021, more families took a much needed break from academics, traveling and spending more leisure time outside resulting in consumption patterns more in line with seasonality in the years before COVID. As students return to school this fall, demand for our services has increased significantly year-over-year, a trend we have seen continue into October and early November. This trend can be seen across several operating metrics, including tutor inquiries, which were up 36% on a combined basis in September and October and accelerating bookings growth during each month throughout the back-to-school period. As Chuck mentioned, during September and October, bookings, including our new Varsity Tutors for Schools offering grew by 63% on a combined basis, driven by strength in our direct-to-consumer offerings across K-12, college, professional and the addition of our new K-12 institutional strategy. Since the beginning of August and through the end of October, Varsity Tutors for Schools has contracted with 47 school districts for an aggregate annual contract value of nearly $10 million. Moving down the P&L, gross profit of $20.7 million increased 15% year-over-year during the third quarter. Year-to-date gross profit of $65.3 million increased 40% year-over-year. Gross profit increases were driven by the adoption of one-to-one online learning, expansion across more subjects, more formats and more consumer audiences. Gross margins of 66% in the third quarter, reflects continued investments in the launch of new class products and further testing of subscription offerings. Sales and marketing expenses for the third quarter on a GAAP basis were $18.8 million, up $5.5 million versus the same period in 2020. Non-GAAP sales and marketing expenses, excluding non-cash stock-based compensation, were $16.1 million or 52% of revenue compared to 50% of revenue in last year’s third quarter. We made investments in establishing and growing our sales organization to support our K-12 institutional strategy and investments in marketing to support learner acquisition and bookings. Our investments in automation and AI continue to provide us with operating leverage. We invested in expanding new marketing vehicles, including StarCourses, our free, celebrity-led, live, large group classes in new advertising channels, including continued testing across television to drive brand awareness and reach. As a reminder, marketing expenses will fluctuate from quarter-to-quarter based on consumption patterns that drive revenue levels, seasonality and the timing of our investments in new marketing activities. General and administrative expenses for Q3 were $59.9 million and included significant one-time transaction costs and non-cash stock-based compensation charges related to the closing of our transaction with TPG Pace and our public listing in September. Excluding these items, non-GAAP G&A expenses for the third quarter were $17.8 million or 57% of revenue compared to $9.4 million or 36% of revenue in the same period in 2020. Consistent with our forecast, we moved quickly to bringing new talent to drive innovation and growth. We made targeted investments in new product development, including our K-12 institutional strategy. We also invested in tutor operations and expert supply to bring more tutors on board and prepare for substantial back-to-school demand. During the third quarter, we reported a net loss of $57.7 million versus $7.5 million in the third quarter of 2020. Excluding non-recurring items, including transaction costs, debt repayment and extinguishment, mark-to-market derivative adjustments and non-cash stock comp expenses adjusted net loss was $14.7 million for the third quarter of 2021 versus $5.9 million in the third quarter of 2020. Nerdy Reported a non-GAAP adjusted EBITDA loss of $11.7 million in the third quarter of 2021 compared to a non-GAAP adjusted EBITDA loss of $3.2 million in the same period 1 year ago. Reconciliations of non-GAAP measures to their most directly comparable GAAP financial measures are included in our earnings release. As Chuck mentioned, we completed our business combination with TPG Pace on September 20 and Nerdy common stock in warrants started trading on the New York Stock Exchange the following day. As part of the transaction close, we paid off all outstanding debt, including repayment of our previously fully forgiven promissory note with a small business administration in October. The company now has ample liquidity to opportunistically invest and operate against our plan, ending the quarter with cash and cash equivalent of $170 million, putting us in a position of strength as the market for supplemental learning expands and quickly shifts from offline to online. In summary, our results reflect continued strength and validation of our growth strategy. We are focused on growing our business via subject expansion, format expansion and product innovation, back-to-school bookings, coupled with accelerating adoption of our K-12 institutional strategy provides strong momentum heading into the fourth quarter in 2022. As Chuck mentioned, we have increased confidence that the favorable consumer demand trends and the demand we’re seeing from our direct to school initiatives will persist into 2022. Given these trends, as well as our growth investments, we have increased confidence in our full year 2022 revenue targets. We are providing the following guidance update. For the fourth quarter, we expect revenue in the range of $40 million to $43 million, up 25% at the midpoint from $33 million in the year ago quarter and consistent with the forecast in early 2021. For the full year, we expect revenue in the range of $139 million to $141 million, above forecast provided in early 2021 and up 35% at the midpoint versus $104 million in 2020. For the fourth quarter, we expect an adjusted EBITDA loss in the range of $4 million to $6 million, reflecting continued investments in the build-out of Varsity Tutors for Schools, expert supply and new talent to support our growth. Additionally, we are well capitalized and expect to continue to invest in growth and innovation for the foreseeable future, and we’re seeing strong returns on these investments. Thanks again for your time, and I’ll turn the call back over to Chuck. Chuck?

Thanks, Jason, and thanks again to all of you for joining us today. Really pleased with the pace of innovation and product evolution at Nerdy. We’re excited that schools have been enthusiastic about partnering with us to make delivery of supplemental learning more effective and efficient on behalf of students. Our direct-to-consumer business is growing really well, and we’re energized by the opportunity to help many more students and build another major growth factor with our new institutional strategy. Let’s turn the call over to the operator and get started with Q&A. Operator?

Thank you. [Operator Instructions] We have the first question on the phone line from Doug Anmuth of JPMorgan. So Doug, I have opened to your line.

Thanks for taking the questions. I was hoping you could talk a little bit about Varsity Tutors for Schools and just in terms of revenue recognition and just how to think about the lag between bookings and revenue and how the timing kind of plays out there as you head into 4Q. And I guess that leads into the question of whether you can help us bridge a little bit kind of the significant sequential revenue growth that you’re forecasting from 3Q to 4Q? And then sticking with the school initiative, what are the key investments that you need to make around that business? Thanks.

No problem, Doug. Thanks for the call, and thanks for joining us today. We believe the trends in bookings can provide useful color in understanding the future business momentum. Recent booking trends are a strong leading indicator of the growth in the business and we’d expect to see consumption pull-through beginning in Q4 and into Q2. If you look at historical consumption patterns, the majority of bookings pull through to revenue over the subsequent 6 months once students are matched with experts and begin to consume. And then specifically as it relates to Varsity Tutors for Schools, what we’ve seen there is that we had some early adopters execute contracts with the company and those schools are just now starting to consume and set up the sessions with their students. So we would expect that to have some impact in Q4, but a significantly larger impact in 2022.

And anything just in terms of investments that you may need to make in terms of the school initiative and maybe if you could talk a little bit about just kind of sales process there or just kind of the go-to-market for how some of those deals get closed?

Sure. So this is Chuck. And we have we’ve been building out an enterprise sales strategy over the course of the last 4 months and have significantly built out that team and go-to-market strategy. And it is now starting to work effectively, drive real results as evidenced by bookings and is turning into what we believe is a replicable playbook. And so we’re already bearing the cost of a kind of midsized enterprise sales organization as well as investing in customer support. And while we would anticipate increasing the headcount associated with this initiative, given the strong results we’re seeing, we feel like that we’re already bearing a significant amount of the cost. And as some of those bookings come through and start getting recognized as the programs go into effect, we think that we’re right now seeing a pretty attractive return on investment in a relatively short time frame. So in the near-term, costs will go up. But as Jason said, actually expect that GAAP revenue recognition that will start to flow through in a material way in Q1 as those programs go live. So, some of them are already live. They are going well. We’re excited by the progress and expect that they will have a material impact or could have a material impact on the total number from a GAAP perspective in Q1.

Thank you.

Thank you, Doug. We now have the next question from Mario Lu of Barclays. So, Mario, please go ahead when you are ready.

Great. Thanks for taking my question and congrats to your first quarter as a standalone public company. A couple more questions on the Varsity Tutors for Schools, anymore details you can provide on how you guys started that product suite, is it correlated directly with the $123 billion COVID release funding? Like for example, was that $10 million that those districts are contracted with, was that using that funding? And then secondly, can you talk about – a bit about the cadence of adding these contracts with this is mostly before the school year? Or is it expected to continue to pick up contracts throughout the calendar year? Thank you.

Sure. Thanks, Mario. So the way that we think about it is there is – so there are a variety of different needs that schools has. Schools obviously have students that are experiencing significant learning loss, as we said before in the prepared remarks. And they also have a variety of other challenges right now related to everything from extracurricular activities getting cut back to labor shortages within schools that are making a variety of different aspects challenging. And one of the things that during COVID is that some of the historical buying patterns have been shaken loose rate unbundling is occurring. And schools are now open to leveraging online platforms to solve some of these problems and partnering with an organization like us to an extent that just wasn’t true a couple of years ago. So if you look at the $10 million in bookings, almost all of that is related to high dosage tutoring, which is prescribed by – recommended by the Department of Education as a very effective way to remediate the COVID learning loss. And the platform that we offer that is software-driven platform has a variety of different capabilities in educational solutions that could be deployed. Many of these are investments that we’ve already made on the consumer side and now we’re just modifying them and making them available to schools in general. So that a school administrator could not only deploy a high-dosage tutoring solution across a broad population base of thousands or tens of thousands of students, but they could also roll out special education, sports. They could have language programs and they could have a variety of other solutions, many of which have already been built on the consumer side of the platform and have an institutional need. So this is based on feedback from school administrators as well as what we’re seeing schools actively outsourcing in the market and it leverages the platform that we’ve already built and many of the products that we’ve already built in such a way where we think we will be able to eventually double leverage those investments. So take products that have product market fit that are compelling to solve important solutions for students on the consumer side and also make those available to school administrators to seamlessly deploy for a platform-oriented approach across broad groups of students.

And then maybe, Mario, I would add from a cadence perspective, you have to keep in mind like most schools were just focused on returning to school safely at the beginning of school, and in many cases, deferred standardized testing to just recently. And now those tests have occurred, schools are realizing the significance of the COVID learning loss and they are starting to reach out to us at a greater pace. So we’ve had great early success. The pipeline continues to build, and we think that this will have a significant impact to 2022 and more importantly, for years to come.

Yes. And the other thing I’d add is we think this is a long-term opportunity. So we have been considering launching an institutional strategy for many years and finally got the consumer platform to the point where we felt like we had a robust product suite. We could help people in a multitude of different ways that the software was advanced and scalable and we can actually take it and extend it in an efficient manner to the institutional audience in a way that gives a huge head start. So we consider our foray into institutional to be long-term in nature and strategic and something that will allow us to double leverage the investments that we’ve already made.

Perfect. Thank you, both.

Thank you, Mario. We now have Maria Ripps of Canaccord. So, Maria, please go ahead when you are ready.

Thanks so much for taking my question. So you touched on your small group initiatives. It seems like sort of your revenue growth there was pretty strong this quarter. Can you just talk about the adoption of this format utilization of classes? And do you see this offering sort of offering more to learners that are already on the platform or do you see this offering sort of bringing more learners to Nerdy as well? And then secondly, just maybe refresh us on the impact to both near-term and long-term margin as you continue to build this offering?

Thanks, Maria. Thanks for the questions. As we noted in the release, small group class revenue increased approximately 94% year-over-year during the third quarter. On a seasonal basis, we expect that will be a smaller percentage of the mix during the school year and a larger portion of the next during summer months due to more seasonal offerings like summer camps and other enrichment classes. However, we continue to make investments in the launch of the new class margins which did impact near-term margins during the third quarter, which is consistent with what we talked about during the second quarter as we look to build out the breadth of our offering here and capture top line growth. And from our perspective, it’s clear the approach is working, and we’ve got a big opportunity here that we should keep playing into.

Yes. The other color I would add is, I mean, this has to at least double the TAM going after the consumer segment. It’s a more social experience. It allows us to identify a whole host of new users. And we certainly are cross-selling the one to and the one-to-many class capability into our existing one-to-one user base, but this allows us to reach probably twice as many people. And in certain categories, those categories skew towards classes over one-to-one. So we expect this will continue to be a significant growth driver for to come. There are segments where we’re investing and seeing significant traction like professional trading and certifications like enrichment where there is a one-to-many element that is very appealing, more social, lower cost, and we’d expect to keep resonating. And so as those different initiatives that are leveraging this capability scale, we would then expect for that to be gross margin accretive on a go-forward basis. And so we’re still investing in those areas and expect that throughout the course of next year, you would then start to see one-to-many drive gross margin accretion. But we’re seeing great results in the market. This really unlocks a couple of categories that we’re investing in, and we’re super excited about the growth and traction we’re seeing here.

Got it. That’s very helpful. Thank you for the color.

Thank you.

Thank you. We now have a question from Andrew Boone from JMP Securities. So, Andrew, please go ahead when you are ready.

Hi, guys. Thanks for taking my questions. Two, please. The first, just given the tightness in the job market, and I think you mentioned this and you your answers to one of the prior questions. Can you talk about attracting and retaining experts and whether you’ve seen any headwinds there? And then number two is just now that we’re kind of a year out from kind of strong COVID growth, can you talk about your COVID cohorts and whether you’ve seen any change in their behavior or any change in retention. Thanks so much.

No problem, Andrew. Thanks for the questions. We did add experts aggressively in anticipation of summer demand and institutional expectations during the quarter. From a supply perspective, I think we’re doing really well. We grew the number of active experts on the platform by 26% in Q2 and then another 23% in Q3. And then you need to remember that our business is entirely online. So we can look anywhere in the country for talent. And our experts like the work is flexible, they can earn on top of their day job since most of the demand is in the evenings after school and after work. So net-net, I feel like we are continuing to add supply to the market and can meet the demand increases that we’re seeing from our schools.

Yes. And so we haven’t seen any scaling challenges. And if you look at like the actual rates being paid and converted to an hourly basis, it’s plus or minus 1% on any given day. It’s effectively the exact same number year-over-year. We’ve been able to dramatically grow the number of experts on the platform. And we feel really good about the scalability there and our ability to attract great people. And one of the things we’ve done is we’ve leaned into our machine learning matching algorithms is give some of those best experts the most work and give them that consistent ability to earn. They don’t have to do any marketing, it’s super flexible. They can do it for now. It tends to be in the evenings that we guessed. And that’s resonating with people. People who don’t want to go out into the world and leave their homes and they can do meaningful work, and it’s thus far continuing to be really resonating and there is no scaling issues whatsoever. Of course, we see all the labor challenges that some other platforms have, but the fact that this is online, you can do it from home and half hours is kind of a big differentiator. And then on the cohort side, we’re seeing demand kind of rolling back in academics as the school year starting. And so we’ve talked about this in the past. But during COVID, there was really a big demand headwind. And we saw good levels of engagement, of course, as we brought together our four different learning formats to create this comprehensive learning destination and give people more reasons to come back. And as we mentioned in the prepared remarks, we saw consumption drop in the middle of the summer as people took vacations. And what’s happened is, as schools have presumed, we’ve seen a significant uptick in engagement, in demand. And we see the resumption of in-person schooling as a huge positive growth driver for the business. So we’re excited that the kids are back in school. We think that in-person schooling is great from a social and emotional perspective for kids, but it’s also a tremendous growth driver. Because what happens in in-person schools is professors assign in-classroom tests and teachers actually evaluate grades and assign grades on and so now that outcomes matter, we’re seeing demand for our supplemental products, including tutor income.

Great, thanks, guys.

Thank you. We now have another question from the line from Aaron Kessler of Raymond James. So, Aaron, I have opened your line.

Great. Thank you. A question on the – you mentioned kind of test optional universities. Do you view this as more of a long-term trend? Or is this kind of a short-term trend, still kind of reaction to COVID kind of headwinds? And then just maybe any thoughts – did you see kind of any impact on marketing from IDFA and just general thoughts on kind of how you shifted your marketing strategy as well. Thank you.

Sure. Yes. So we think that test optional for exams like the ACT, SAP, GMAT, GRE is a long-term trend. And what we’re seeing that’s really interesting is that the demand for the college admissions and university and graduate admission test specifically has shifted to other areas. And so we’ve seen a couple of those areas feel some pressure and decrease, but then areas like the AP exams and IB exams have increased significantly. So to give you a little bit more color, AP and IB are now bigger than the ACT or SAT, as an example. And what’s interesting is in a world where you can no longer differentiate yourself or at many schools no longer differentiate yourself on the basis of a standardized test score, instead, all of a sudden, grades and GPA matter a whole lot more. And so one of the really interesting things that is driving the significant growth in academic tutoring demand is the fact that students and parents are now recognizing this back-to-school that if they want to differentiate themselves on a college admissions or for that matter, graduate school admission basis, they need to get much better grades, which requires getting great grades in a variety of different classes that ultimately form your GPA. So we feel like we are really well positioned to provide that academic support and help students achieve academic excellence. And we expect this to be a long-term trending for test to actually be a big growth driver for the business in years to come.

Got it. And just any thoughts on marketing and any IDFA impact?

So, we advertise on a variety of different platforms, including paid social, search, affiliate, referral. As you probably know, referral and word of mouth referrals are particularly important in this category. So, we have a pretty diversified marketing strategy. And while we advertise on, say, paid social as an example, for our StarCourses and a couple of other areas, we have over time, started focusing on the specific cohorts of users who actually purchase more and engage more and have been able to identify them. And so, there is definitely a little bit of pressure there, but it has been more than offset by our ability to get smarter about who we target and get higher ROI and increase the funnel conversion associated with users coming from those channels. So, I think we feel good about the long-term trends and our ability to monetize from those platforms given just the improvements we are making in the product and the level of engagement that we are seeing. And you can see in our inquiries also – our tutoring inquiries that we have shared, where they are growing rapidly. We are seeing tests basically held constant despite volumes growing significantly, and we feel good about all the long-term growth drivers that are back while being able to maintain our return on assets.

Alright. Great. Thank you.

We now have Greg Gibas from Northland Securities. Please go ahead Greg. Your line is open.

Good afternoon. Chuck and Jason, thanks for taking the questions. Sorry if I missed this earlier, but you have got tutoring for schools. You mentioned 47 school districts now after recently going live or announcing that product for an annual contract value of $10 million. Are most of those live today? And are any of that – those contributions included in Q4 guidance?

Almost none of them are live thus far. A couple of them will be going live in Q4. Most of them are, if not all of them, will be live by Q1. So, many of the – the kind of hierarchy this back-to-school season was to make sure that from the district administrative perspective that the in-person schooling went effectively that they were able to solve some of the teacher shortage issues and get the school year off and running. Schools are now turning their attention to the severity of COVID learning loss and looking for solutions that can help address it. And so on a rolling basis, we are seeing inquiries from schools who are interested in partnering. And then as we gain trust in ultimately arrive at a partnership and contract a few weeks later or a few months later, they will actually start the classes based on the specific needs of the school district and some of the logistical factors related to planning, time of day, day of week, how to slot it in the middle of the day or before school or after school. So, very little of that’s going to impact Q4, and you will see Q1 will be the first quarter that we actually have almost all of those go off in addition to whatever we sign between now and the end of the year.

Okay. Great. That’s helpful. And I guess kind of wondering what the rough range of penetration rate is relative to purchases after making an inquiry? And just kind of wondering if that trended higher or lower in the quarter?

Well, our conversion of those inquiries has been relatively constant. So, it’s – these are kind of – and the reason that we actually showed this was to show kind of an apples-to-apples comparison of a like type of customer inquiry. And we have been able to convert them at the same rates that we did during the height of COVID and virtual learning. So, there has been no impact to kind of the change in the world. We have just seen demand go up.

The one thing I would add to that is I think consumers adopt online learning at the higher pace, which is leading to those higher levels of inquiry and higher bookings. But our ability to convert has remained relatively constant and is what we believe to be.

Got it. Thank you.

[Operator Instructions] We now have the next question from Ryan MacDonald of Needham & Company. Sorry Ryan, please go ahead when you are ready.

Hi. Thank you very much. Good to hear from you, Chuck and Jason. I guess the first question I have is around the consumption trends and sort of the conversion from the bookings to consumption. I am just curious, as you look into October and November here, can you talk about what you are seeing of those bookings converting into consumption? And I guess, secondly, is there anything that you can do or that you are looking to do to try to drive consumption or sort of initial engagement with the learner as well? Thanks.

Thanks, Ryan. Good question. So, we have seen sequential increases in consumption every month since July. And people inquire and then they purchase, and then those purchases, we call bookings, and then they start actually consuming the bookings, which is when it of course, becomes revenue. And so we have seen consumption pick up each and every month since then. And one of those interesting things that we saw this year was given that really up until the end of August, there were questions about whether certain schools will go back in person or online, we saw students delay consumption until school actually started, and they were certain that, yes, I am going back in person, I understand what that means. I understand what homework might look like and got their first test, actually saw the results of the first real in-person test now that testing in schools is happening again. And that is really the big growth driver or pickup driver and people going from a kind of consumer psychological state where they are thinking, alright, I know I need held this year to – I need help. I have already bought a tutoring package, and now I am actually going to start to. So, we saw what that first test result for really that whole K-12 segment and also the College segment being the big growth driver. Now that students are getting graded and tested on a regular basis, we are seeing demand and then consumption actually comes back. And so we are constantly trying to improve the experience, make it stickier, drive engagement, drive consumption. But at the end of the day, there is definitely something different about this year with the wait-and-see approach, where people actually bought the tutoring, but waited a little while to start consuming. And so typically, it is consumed over the course of six months. And we would expect for that to be the case here where you start to see the very significant increase in bookings we saw, $44.5 million, obviously a whole lot more than the 31.5% in revenue that we had in the quarter, we would expect for that to start pulling through towards the end of Q4 and into Q1 and Q2.

Very helpful. And then as a follow-up, I wanted to ask on StarCourses. Obviously, great to see the continued growth in a number of courses being offered. But I would love to hear about the sort of the trends around enrollments for those courses and how that’s translating to converting to paid learners as well on the platform? Thanks.

Sure. So, StarCourses is our free large group glass strategy, where we leverage celebrity instructors and then make them freely available and drive both engagements and LTV extension as well as a premium strategy. And so one of the things that we have really realized over the course of the last several months have become much better at is that we can target specific types of users who purchase disproportionately. And so we have increased the actual premium conversion rate more than 40% year-over-year, and we feel like we have additional opportunity to continue to refine that funnel. And kind of zooming out a little bit, we think about StarCourses through the lens of subject expansion and rolling up to our enrichment category where we are seeing tremendous progress. So, enrichment is clearly going to be a big growth driver for the company in the years to come. And we are investing in StarCourses as a way to not only convert people directly through that premium strategy, but also get existing customers to major products like summer camps or after-school clubs or languages where there is a tremendous consumer need that hasn’t been met historically. So, the funnel is getting more efficient. It’s continuing to drive significant revenue among existing users who then come back for some of these additional free products, and we are going to continue to evolve it in 2022, because we think it’s a winning strategy, consumers appreciate it and has built a lot of trust and credibility for the platform that is driving real growth.

Great. Thanks for the color.

Thank you. As we have no further questions registered. I would like to hand it back over to Chuck for some closing remarks.

Thank you and thank you, everyone for joining me today. So, I am 15 years into this journey. I have never been more excited. We are incredibly well positioned for growth. We are experiencing record bookings growth as the school year starts. And the past couple of months have really validated what we always knew to be true, which is that when outcomes matter, our business accelerates. And all of the platform and software-driven capabilities that we have invested in are now able to be leveraged in new and different ways and serve as building blocks that will allow us to meet important consumer needs and now important institutional needs as well with schools. So, we are very excited to be embarking on this journey as a public company. We feel excited by energy, by the opportunity that we have. We feel like we can do immense good in the world and that the business trends will continue to perform at a very high level and feel great about the year ahead. So, thank you so much for joining us today, and we look forward to speaking with many of you individually in the next couple of days.

Thank you very much. That does conclude today’s call. Thank you all again for joining. You may now disconnect your lines.