Nerdy, Inc. (NRDY) Q4 2022 Earnings Report, Transcript and Summary

Good afternoon and welcome to Nerdy Inc. Q4 Earnings Call Annually. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, we will conduct a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to TJ to begin today's call. TJ, you may begin.

Good afternoon and thank you for joining us for Nerdy's Fourth 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 publically 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 shareholder letter announcing Nerdy's fourth 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?

Thanks, TJ, and thank you to everyone who has joined us today. Over the last 10 months, we've been working to transition our products and revenue model toward long-term recurring always on relationships with our customers. We believe this change would benefit our consumer and institutional customers and our business model by shifting to longer-term relationships that supported evolving learner needs states. We created new subscription and recurring revenue products, including learning memberships for consumers and on-demand and teachers products for institutional customers that were built specifically to address the ongoing support we believe both types of customers desired. We shared that this new focus would require a short-term hit to revenue recognition because our packaged model has a more front-loaded revenue recognition associated with it than the learning membership model where subscription revenue is recognized linearly over time. We estimated that by month six for a given learning membership customer the cumulative revenue would catch up and surpass that of a given package customer, a phenomenon we call the J-curve. We expected that by the start of the second quarter in 2023 the cumulative build of recurring revenue from learning membership customers would cause us to return to growth in our consumer business, as well as for the total company. But now with the product suite and revenue model, we believed would position us for higher levels of growth, profitability, and predictability in the years to come. I am pleased to share that we have made substantial progress in the fourth quarter and our shift to an always-on business model is ahead of plan. Learning membership adoption continuous to exceed our expectations demonstrating higher conversion, engagement, and customer retention than our former package model, which in turn has led to meaningfully higher customer lifetime value and operating leverage. We delivered revenue of $41.8 million in the fourth quarter, above our guidance range of $39 million to $41 million. These results reflect stronger-than-anticipated active learning membership counts which totaled over 20,000 as of year-end. Also, we saw continued strength in lifetime value performance from learning membership customers. This progress combined with operating efficiencies gained from the business model evolution provides us increased confidence in achieving adjusted EBITDA profitability by the end of 2023, as previously communicated. In the fourth quarter, we delivered on our commitment to enhance learning memberships by providing unlimited access the three new products to Adverse, Tutor Chat, and Essay Review. With the addition of these formats, we were able to grow the percentage of customers, engaging in a non-tutoring format in their first month to over 30% in December. Multi-format engagement has historically been highly correlated with higher retention, higher lifetime value, and higher customer satisfaction. Learning membership revenue continues to grow at a rapid pace. Revenue recognized in the fourth quarter from learning memberships grew to $20.8 million, a $15 million increase from the third quarter representing 50% of total company recognized revenue in the quarter, up from just 2% of total recognized revenue in the second quarter and 18% in the third quarter. In fact learning membership revenue has reached an annualized run rate of more than $87 million as of year-end, an increase from $50 million as of the end of the third quarter, providing us with increased forecasting visibility in the future revenues. The rapid transition of learning membership is also allowing us to deliver gross margin expansion and a more scalable and efficient operating model. During the fourth quarter, gross margin of 70.5% was approximately 230 bps higher than gross margin of 68.2% during the comparable period of 2021. As we shift toward the higher proportion of learning membership customers and revenue, we expect continued gross margin expansion in 2023. Learning memberships also enabled further marketing yield optimization during the fourth quarter with marketing expenses as a percentage of revenue improving by approximately 370 basis points year-over-year, driving further efficiencies in our consumer business. Higher engagement and retention among learning membership customers and an average revenue per learning membership of approximately $350 per month during the fourth quarter combined to drive continued lifetime value expansion and an accelerated marketing payback period. In fact, recent monthly cohorts cumulative learning membership average revenue per customer continues to expand and separate from the historical amount in average consumer customers spend over time under our historical package model by the third or fourth month after starting. These results clearly demonstrate the superior lifetime value of our learning membership model and the higher average value of the consumer customers we're adding to the platform. During the Fourth quarter, Varsity Tutors for Schools delivered on a major milestone in our product evolution with the go-live of both on-demand and Teacher Assigned. These two new products are oriented toward providing district-wide solutions that can be deployed across entire student and teacher population, significantly widening the impact we can have with our school district partners. Additionally, these new offerings aligned to a school district in-class curriculum are embedded into schools workflow and importantly are directed by teachers who we believe are ideally suited to assess their own students learning needs. We executed over 70 contracts including 15 on-demand contracts with our first Teacher Assigned partnership, an important milestone as we transition to a more expansive partnership model with larger school districts. Collectively, these contracts resulted in a record $11.3 million of bookings during the fourth quarter. We believe these results clearly demonstrate that our new always-on-product offerings are resonating with school district partners, especially when bundled together, combined with our existing high-dosage tutoring products. These strong results and continue momentum to start of the year provides us increased confidence that Varsity Tutors for Schools is well positioned to provide solutions that administrators, teachers, and students who are seeking to support their evolving needs. Looking ahead to 2023, I wanted to share our plans for how we'll continue to focus on delivering exceptional value to customers and results for our investors. First, we'll continue to scale, always on recurring revenue products. Given the success of learning memberships across our academic audiences, we plan to transition our test prep and professional audience to learning memberships by the end of 2023. With the completion of this transition, we’ll have shifted 100% of our consumer business do always on recurring revenue subscription products. With the strong foundation in place, we believe we can continue to drive higher levels of learning membership growth across all of our consumer audiences through further product enhancements and testing. Specifically, we plan to iterate on the pricing and the structure of learning memberships to broaden their appeal at the top of the funnel and drive further growth and conversion in customer acquisition. We also plan to create more flexibility for customers to manage their membership and tutoring frequency, including new self-service capabilities, which we believe will increase retention and lifetime value by better aligning learning memberships to evolving customer needs. Additionally, we plan to make it easier for members to discover multiple new learning paths, including new learning formats and programing coverage to drive further engagement among members with the aim of providing more value and enhancing customer satisfaction. Within our institutional business, we expect our new Teacher Assigned an on-demand products will represent a growing proportion of institutional bookings during the year as we remain focused on district-wide solutions and partnerships with larger school districts. Our second major area of focus is achieving adjusted EBITDA profitability. As learning membership mix continue to increase as a percentage of total revenue, we believe we will be able to drive continued gross margin expansion and further simplify our operating model in the year ahead. We also plan to make further investments in automation self-service capabilities as well as leaving additional AI capabilities through our platform to enhance both the learner and expert experience. Recently, we have seen improved adjusted EBITDA performance each month as we progress further through the J-curve. Given our recent momentum, we have increased visibility into and confidence in achieving adjusted EBITDA profitability by the end of 2023 as previously communicated. Our third area of focus is that we will continue to lead the way forward with new technologies, further leveraging artificial intelligence capabilities to transform how people learn and further personalized learning experience. We won’t believe that AI for HI or artificial intelligence for human interaction has the ability to transform how people learn. AI has been central to our ability to improve quality, enhance personalization, and decrease the cost of our offerings. Today, AI powers our ability to identify the highest quality experts, assess learner's foundational knowledge, and helps to ensure the right expert learner match occurs among many other use cases on the platform. The latest AI advancements are allowing us to rapidly develop transformative experiences involving the real-time generation of content with near zero costs. Improving our ability to deliver live human interaction and personalized learning at scale and providing new superpowers to experts and learners on the platform. We recently announced the launch of two new AI driven products and plan to leverage the latest advancements in machine learning and AI, including ChatGPT and similar technologies to drive further product enhancements, personalization and cost efficiency in the year ahead. The first two products include an AI generated lesson plan creator embedded in the company's live learning platform that is available for use during live tutoring sessions. And separately, an AI generated chat tutoring product that pairs a conversational AI driven chat with the ability to access a live expert on demand. These two products represent the company's ongoing orientation for taking a software and AI driven approach to solve customer and business problems and build a highly scalable platform. We plan to roll out additional products and features for consumer customers that expand on these new capabilities as part of learning memberships. We believe that these additional products and tools will allow us to further personalize the experience for each learner and expert yielding higher levels of engagement, retention and customer lifetime value, driving both revenue predictability and operating leverage in the year ahead. In closing, I am proud of our team's execution. Just 10 months ago, we laid out a vision for our stated goal to transition our business towards always on recurring revenue streams with the introduction of learning memberships and the new institutional products, including Teacher Assigned and on-demand. These efforts have allowed us to build a strong foundation for growth. They have also helped us establish a business model that can produce longer duration and higher value relationships with our customers, serve as a more scalable platform for future innovation and has helped position us to achieve adjusted EBITDA profitability by the end of 2023. In the coming year, we look forward to continuing to push the pace of innovation and enhancing our ability to meet the needs of both consumer and institutional learners in any subject, anywhere and at any time. We appreciate your continued interest in our company. With that, I'll turn it over to Jason to discuss the financials in more detail. Jason?

Thanks, Chuck, and good afternoon, everyone. I'm pleased to be speaking with you today about Nerdy's strong fourth quarter performance and our outlook for the first quarter and full year of 2023. Our team continued to make substantial progress against our business model evolution. And as Chuck mentioned, the accelerated transition to recurring revenue streams, including learning memberships continued in the fourth quarter, reflecting the strong adoption we've seen from consumers during the back-to-school season and fall semester. Notably, we haven't observed any discernible macroeconomic pressure on demand for our products. And as we've shared in the past three earnings calls, this evolution toward learning memberships resulted in lower near term revenue and adjusted EBITDA. However, we expect that it will ultimately allow us to generate superior long term customer unit economics and drive higher levels of growth and profitability given the positive customer economics we're experiencing. This shift in revenue recognition is reflected in our revenue growth rate for the three and 12 months ended December 31. Expenses as a percentage of revenue also reflect the impacts of lower near term recognized revenue in the denominator for rate based expense calculations as we continue to progress through the J-curve during the fourth quarter. It's important to keep this in mind as we discuss our financial results for the period. In the fourth quarter, we delivered $41.8 million, results that were above our guidance range of $39 million to $41 million, reflecting stronger than anticipated active learning memberships, which totaled over 20,000 as of December 31 and continued strength in lifetime value performance from learning numbers. It also reflected the growth we're experiencing in our institutional business, which delivered revenue of $4.4 million, representing 10% of total revenue during the fourth quarter and record bookings of $11.3 million. On our last earnings call, we stated that we expected our monthly subscription revenue from learning memberships by the end of the calendar year would exceed the revenue recognized from packaged customers. We delivered on this promise with learning memberships representing 66% of consumer revenues in December, and as Chuck mentioned, 50% of consolidated revenues for the fourth quarter demonstrating the rapid transition to recurring revenue products. Moving down the P&L, gross profit of $29.5 million for the fourth quarter represented an increase of 3% compared to the same period last year. Gross margin of 70.5% for the three months ended December 31, expanded approximately 230 basis points from 68.2% in the same period last year. Gross profit and gross margin increases were primarily driven by gross margin expansion across our consumer audience as we evolve towards a greater mix of learning memberships, the trend we expect to continue into 2023, driving continued gross margin accretion. Sales and marketing expenses on a GAAP basis were $17 million in the fourth quarter, a decrease of $900,000 compared to the same period in 20 21. Non-GAAP sales and marketing expenses excluding non-cash stock based compensation were $15.7 million or 38% of revenue in the fourth quarter of 2022. This compared to 41% of revenue in the same period last year and approximately 330 basis point improvement year-over-year. Throughout the fourth quarter, we continue to focus on optimizing the level of marketing spend yielding efficiencies in our consumer business. Consumer efficiencies were partially offset by the investments we made in our institutional sales and the go to market organization in support of Varsity Tutors for Schools, which we expect to grow into as revenue continues to scale and we slowed the rate of hiring, which we've already done thereby creating operating leverage. As we discussed in our last call, our investments in product development and subscription offerings when combined with our ongoing efforts in automation and self-service capabilities have allowed us to simplify operations and remove significant costs from the business. In the fourth quarter of 2022, we announced the completion of workforce reductions of approximately 17% of our total workforce. And as of December 31, we had approximately 700 employees representing a 30% decrease year-over-year, clearly demonstrating the sales and operating efficiencies enabled by our new always on strategy and product offerings. Going forward, the application of artificial intelligence and machine learning in our business processes will allow us to further simplify our business model, reducing the need to hire incremental staff as revenue scale and we exit the J-curve, returning to growth without a proportional increase in both variable and fixed costs. We reported a non-GAAP adjusted EBITDA loss $5.5 million in the fourth quarter, beating the guidance range we provided with an adjusted EBITDA loss of $6 million to $8 million. Adjusted EBITDA outperformance versus guidance was driven by higher revenue, higher gross margin, marketing efficiency gains, workforce reduction actions stemming from our business model changes and diligent cost oversight. Turning to the business outlook. Today, we're providing first quarter and full year 2023 guidance. We continue to see more evidence that validates our belief that learning membership model leads to longer duration and higher value customer relationships, enhanced gross margin and a more scalable and efficient operating model. Consistent with our prior guidance, we continue to expect that we will exit the aggregate J-curve business model transition, driving year over year growth with more attractive unit level economics as we start the second quarter in 2023. We believe the combination of our unique platform, comprehensive product offerings, including learning memberships, the interest in early contracting successes we are seeing in Varsity Tutors for Schools new offerings and our ability to deliver high quality live learning at scale, personalized to each Learner positions us for continued growth as the education landscape evolves. As is typical for our business, we expect sequential quarterly revenue growth from the fourth quarter to the first quarter in 2023. For the first quarter of 2023, we expect revenue in a range of $45 million to $47 million. For the full year 2023, we expect revenue of $190 million to $200 million; representing 20% growth at the midpoint versus our 2022 revenue of $162.7 million. Full year revenue guidance reflects our decision to shift 100% of the Consumer business to Learning Memberships by the end of 2023, including the remaining Test Prep and Professional audiences. To provide a little more color on revenue modeling, given the rapid shift to recurring revenue products. From a quarterly perspective, we expect the percentage of full year revenue to approximate 24%, 23%, 22% and 31% during the first, second, third and fourth quarters, respectively, during 2023. This quarterly cadence results in our expectation that year over year growth rates will increase each quarter over the course of 2023 with growth of 40% year over year as we exit the year. Revenue guidance also reflects normal summer seasonality, including the anticipated lower levels of new customer acquisition, consumption and retention during the summer months, when K-12 schools and universities are out of session. Our adjusted EBITDA guidance for both the first quarter and full year reflects the continued benefits from our recurring revenue products which focus on longer term relationships with higher value customers and improving gross margin profile and operating efficiencies stemming from our continued shift to recurring revenue business models. For the first quarter of 2023, we expect a non GAAP adjusted EBITDA loss in the range of $3 million to breakeven. For the full year 2023, we expect non GAAP adjusted EBITDA loss in the range of $10 million to breakeven. Full year adjusted EBITDA guidance reflects the impact of normal summer seasonality and higher variable costs in the third quarter as we ramp into the back-to-school selling season. It should be noted that full year adjusted EBITDA guidance reflects a more than $30 million improvement year over year, resulting in a 1,900 basis point improvement in adjusted EBITDA margin at the guidance midpoint. Clearly demonstrating the sale, marketing and operating efficiencies I mentioned earlier and their ability to positively impact the P&L in addition to higher revenue and gross margin. We're confident in our ability to achieve adjusted EBITDA profitability by the end of 2023 and have increased visibility and confidence in how this goal will be reached. Additionally, our balance sheet remains strong with no debt and $90.7 million of cash, providing us with ample liquidity to operate against our plan and pursue growth initiatives. Thank you again for your time. And with that, I'll turn the call back over to Chuck.

Thanks, Jason, and thanks again to all of you for joining us today. As always, we appreciate your interest in Nerdy and look forward to continuing the dialogue during this exciting time for the company. With that, I'll turn it over to the operator for Q&A. Operator?

Thank you. [Operator Instructions] The first question we have from the phone line comes from Doug Anmuth with JPMorgan. Your line is open.

Great. Thanks so much for taking the question. So it's good to see the learning membership transition tracking ahead of schedule, just as you complete the J-curve transition. I guess thinking bigger picture, can you just walk us through more around your long term strategic vision for the subscription model? How you could potentially iterate around pricing and structure of memberships? And then what are the key investments to get there? Thanks.

Thanks, Doug. This is Chuck. Great question. So the way that we're thinking about this is that, learning membership is an all-encompassing comprehensive solution that supports students across multiple academic calendar years, multiple subjects, allows for them to engage across different learning modalities. And you can access any of 3,000 different subjects worth of tutoring, more than 250 live classes per week. We have asynchronous diagnostic tests. We have code verse and other coding related content. We have star courses and other on demand lessons. And our goal is to continue to add more value each and every quarter and allow for people to learn however they want, whenever they want and support them in a way that really fosters academic success and learning. And so we're going to continue to lean into additional product capabilities and bring them together in a way that really feels holistic and makes it easy to access. Some of those could include things like our AI generated lesson plans, our AI tutor solution that we're working on right now. But also just continuing to build out the content coverage that we have in areas like our class selection as an example, we'll continue to get more and more different classes that are relevant for each different audience. So we're going to be testing price, we're going to be testing contractual terms, we're going to be adding different content to see what really resonates. And as we look at some of the tests that we've done already year to date, we're really excited about that as a vector of growth and how we can kind of play with different elements to find the right fit for a given audience segment so that we can drive conversion improvements and ultimately build a high net promoter score product that people are super excited about.

Yes. And Doug, maybe -- this is Jason. I would add to that. One of the things we're seeing about learning membership model. We've mentioned this in the past. We're seeing longer duration and higher lifetime value customer relationships, enhanced gross margin, vendor marketing efficiency, we're getting better forecasting visibility, we're expanding into new [TAM] (ph) here. And so because of that during the first quarter, we transitioned all of our existing customers to learning memberships as well as our test prep audience to learning memberships, which we're really excited about as we evolve towards 100% of our consumer customers being on learning memberships by the end of 2023.

Great. Thank you both.

Thank you. Your next question comes from Ryan MacDonald of Needham. Please go ahead when you're ready, Ryan.

Hey, guys. This is Matt Shea on for Ryan. Thanks for taking the question and congrats on the quarter. I wanted to start with the institutional business, Varsity Tutors for Schools. Nice to see some contract wins and some on demand and teacher assigned contributions, which I would assume help unlock some of the COVID related learning loss relief budgets. When you're seeing clients adding these new offerings, what are purchasing habits looked like? And if you had success, seeing clients utilize that learning loss budgets? And then are you seeing more one year deals or schools trying to lock in that functionality for a multi-year period?

Thanks, Matt. Good question. So earlier -- so this past, call it, six months ago or so, we started shifting our focus from selling exclusively high dosage tutoring of [indiscernible] up to one to five group tutoring online. Two, instead also selling on demand and Teacher Assigned as you noted. And so those are district wide solutions that are available to the -- they're basically sold top down to superintendents and then are available to all students within a school district. So that is a multi-model shift where we started focusing on those bigger school districts. And we also started focusing on bundled solutions. And those are really more strategic conversations that we've had in the past. And it was a different way of partnering and selling into schools. And we've actually seen really, really good traction there. And so, there's more than 100,000 students that have access to these products. You referenced the specific funding type, one of the things that's interesting about some of these new products that align to the curriculum within school is that, there's a variety of different funding sources that can actually be used. Not just I think the [SR3] (ph) funds that you're specifically referencing. And they're embedded in the workflow of teachers and in the actual classroom. And we're seeing really good adoption out of the gate and feel good about how our ability to provide teachers leverage and provide schools with an effective tool for helping students learn and remediate loss even before it occurs actually is a very durable solution that superintendents are really excited about. So some of those could be multiyear deals, that is something we're hearing more and more, but there's a variety of different funding sources and the new products that we built specifically aligned towards those long term recurring partnerships with school districts.

Got it. That is helpful. And then jumping over to the consumer business. Learning memberships, we were surprised to see $350 average revenue per learning -- per revenue per learning membership, which was higher than the six to 12 monthly plan listed on your guys' website and then the rough math off of the $87 million run rate and 20,000 learning members gets you to a number even higher than $350. So curious, does this suggest more customers are adopting shorter duration plans or are they choosing to purchase more hours than the base six to 12 month subscriptions currently offer? Thanks.

Yes, good question. And when we first introduced learning memberships, we had basically the most simplistic version of it possible. There was kind of a one size fits all frequency and initially that only included one-on-one tutoring. And then over the course of the next several months as we head into to back-to-school, we started adding additional product capabilities that included the tutor chat, essay review, Codeverse, async, diagnostic testing and other product capabilities, but we also started leaning into additional frequencies. So that means you can purchase the ability to have a higher volume of consumption. And so what we saw was many of the learning membership customers in Q4 started skewing towards higher consumption models that allowed them to get higher levels of academic support than be the case in the base model you're referencing. So that was simply a function of us blending towards higher average revenue customers because there are higher frequencies. The interesting thing though is we're going to continue to test a variety of different flavors and memberships to drive both conversion and retention in addition to continuing to optimize the revenue per member metric. So we're not specifically trying to maximize average revenue per member, we're trying to maximize the contribution profit per visitor and build a big and profitable business. But certainly, we're very pleased with level of uptake in some of these higher frequency products in the quarter.

Thank you. Your next question comes from Eric Sheridan of Goldman Sachs. Your line is now open.

Thanks so much for taking the questions. I want to come back to the comments you made about the AI driven products. You made that announcement in the period running up to the earnings report and then we talked about a little bit in the prepared remarks. Can you talk a little bit about maybe past investment cycles around AI and machine learning? And how should we be thinking about AI and machine learning as cornerstones of your investment policy going forward? And then coming back to the way you framed it, how should we thinking about it as an add on to product enhancements, personalization and cost efficiency maybe beyond just the next six to 12 months when you think about more AI and more machine learning tools being deployed on the platform? Thanks so much.

Thanks, Eric. Great question. So we started leveraging machine learning, probably about six or seven years ago to identify patterns that wouldn't be otherwise possible for a human to detect. And so one of the first use cases we have that also ended up being one of our highest leverage applications of AI related to the match between a learner and an expert where that relationship and that connection is incredibly important in terms of compatibility to the extent to which a learner and expert want to continue working together over time. And when we can get that match right, we are rewarded with high lifetime value relationships, high net promoter source and a much better unit level economics as a result of a customer getting a great experience. And so one of the things that occurred was we started instrumenting the business in more and more places than to capture information that could ultimately inform that match as well as other ways that we can leverage all that data available to better improve personalization. So over the course of, call it, three years, I think we saw at least a 30 plus percent increase lifetime value at that point simply through [indiscernible] matching, if not, more. And also, we were able to remediate all sorts of different bad things that could happen in the customer experience and just overall polish the experience from the end users perspective. So that was one example. But we use that [indiscernible]. So we use it for customer propensity modeling, we use it for lead scoring and figuring out the most appropriate way to put energy against different customer types and interactions. We use it for our adaptive diagnostic testing that's used to assess both expert capabilities, as well as what students do or do not know. So we have a computer adaptive testing that can really zero in on what a student needs to learn in the most efficient way possible. That's only we also leverage on the institutional side now extensively. And our expectation would be that, many of the investments we're making here are actually quick payback period, high solution. So as an example, we already have something like, I want to say, 2,500 different tutors over the course of the last two weeks that are able to access and leverage AI generating lesson plans. And we know that when we generate those, that [indiscernible] roughly 20% improvement in student outcomes associated with it. So we're able to generate content effectively for free that is of very high quality that allows for the students and the tutor to have a great experience leverage that content and we're going to continue to make a better [indiscernible]. So we've got really, really good feedback there. Another example would be we're actually leveraging GBT specifically related to call score against standardized rubrics where we had previously been incurring costs externally. And we're actually able to back test it against historical models and then replicate what had been a human experience with, in this case, an AI driven experience. And we're only a couple of weeks in, but we're already -- we've already pocketed $1 million win there on the cost side, which is something that we are really excited about. And the other benefit is, we're able to get all of our customer service agents who interact with customers real time feedback relative to best practices in a way that really enhances value. So I could list 100 examples for you, but we're really excited about this. And there's both real cost saving opportunities, as well as real revenue generating opportunities that can enhance membership in totality.

That was super helpful. Thanks so much for all the color.

Thank you. We'll now have the next question from Brett Knoblauch from Cantor Fitzgerald.

Great. Hi, guys. Thanks for taking my question. I guess first on the institutional side, obviously, a very strong quarter. I was just curious how many of the 70 deals that you executed were of new customers versus, I guess, re-signing existing customers?

Sure. So about 40 of the contracts were new customers, 15 of them were on demand contracts and we had one teacher assigned deal, which was an important milestone.

But -- and then I guess if we look at -- sorry, go ahead.

No, I was just going to say, look, we're really pleased with the pace that the team is putting in place. The products are resonating in the market. Now the Teacher Assigned is lives and people can experience it. We're having, I would say, deeper and broader conversations with more small districts, especially as they think about where they're going to put this kind of technology into play next year at the start of the school year.

Perfect. That's helpful. And then on the average monthly revenue of $350, I guess, where would you expect that to trend? I know you talked about a bit of self-service and some pricing model iterations. I was just curious that you'd expect that number to kind of remain where it is, trend up, trend down? Or how should we think about that?

Yes, I guess I would say -- I would expect it to remain pretty consistent. And I mentioned that because there's going to be some higher priced products. So we just moved into the test prep audience, that's a higher price product that generally has higher frequency because people are looking to study over a shorter period of time. And then that will be offset by some lower priced products, especially as we move seasonally throughout the year to try to drive retention. So think about maybe a more casual language audience where you have lower frequency one on one sessions, but then you get all the benefits of the classes and being able to talk live with peers in a forward language. So net-net, I would expect over the course of 2023 remains within the $350 range. But there's going to be some puts and takes that are both higher and lower to try to drive adoption and retention.

Yeah. The 1 thing I would add is, it's early days and based on some of the tests that we're running and how we think that we can modify learning memberships to appeal to different specific audience segments. We think that there is a big opportunity to just continue to test different modifications of memberships where we might be able to drive huge conversion improvements for certain segments, whereas in other segments where there may be some more kind of standard answer margin as group of people related to certain frequency, there's less deviation. But it's early days, we're going to take some big swings. And we think that conversion in addition to just maximizing the revenue per member per customer on average is a really big lever. So we're going to be testing there as well.

Okay. Understood. Thanks guys and congrats again.

Thanks, Brett.

Thank you. We now have Maria Ripps of Canaccord. Your line is open.

Great. Good afternoon, and thanks so much for taking the questions. First, given that the membership model is becoming sort of a meaningful portion of your revenue base, what kind of assumptions are embedded in your sort of full year guidance from the renewal rate standpoint given that some of your early cohorts will be coming up renewal this year?

Yeah. Good question, Maria. I think just as Chuck mentioned, it's still early days as it relates to renewal rates from learning memberships. We continue to see strong retention. We continue to develop new and unique products to roll into the learning memberships to drive engagement and adoption. The one thing I'd caution on is, we haven't experienced the end of one school year in the transition across the summer to another school year. And so the guide appropriately from our perspective takes into account that unknown. Certainly, we're doing a lot from a content and programming perspective, whether it's classes or enrichment versus academic subjects during the summer months, increased prevalence from star courses, to drive engagement. But that is the one unknown that I would just caution you guys when we think about modeling the summer months [indiscernible] from school to school year.

Got it. That's very helpful. And then could you maybe talk about your rationale to transition your test prep customers to learning membership sort of understanding that the unit economics and sort of customer LTVs of memberships are more attractive. Just maybe talk about why it may make sense to -- for Test Prep product sort of given that those are less recurring by nature?

Sure. Yep. Happy to answer that. So the way we approach transitioning all of the audiences so far was by methodically AB testing the different audience segments to understand better conversion and then unit level economics associated with the old and new model. And then once we had confidence that it was trending to stat sig, we would then kind of flip over to the new model that we believe was the superior economic model and also one that we think serves as a great platform for innovation that we've seen actually delights our customers a lot more. So in the case of Test Prep, where we've actually transitioned 100% of all new customers thus far this year to learning memberships. That's an area where we think that there's higher lifetime value, there's going to be higher gross margin, there's going to be happier customers, we can continue to add more value to the actual subscription itself and enhance it over time. And then there's operational efficiencies that come with getting a higher proportion of the total consumer customer base over to one operating model so that you can simplify and streamline and become more efficient as well. So the rationale was simply kind of better across all fronts. But that's the bar that we'll hold ourselves to as we continue after the year with that remaining customers. So we have high confidence in the path to 100% subscription on consumer. And we already saw more than 50% of recognized revenue in this past quarter come from learning memberships, which is up from 18% in Q3 and 2% in Q2. So we feel really, really good about that, Maria.

Got it. Thank you so much for the color.

Thanks, Maria.

Thank you, Maria. We now have Andrew Boone with JMP Securities.

Hi, guys. Matt on for Andrew. Thanks for taking my question. Just understood your target for just EBITDA profitability in 2023. But with strong LTVs and now you're growing debt, just on retention of LTVs, is there an opportunity for you guys to lean more heavily into marketing spend? And just how are you thinking about this in 2023? Thanks.

Yeah, absolutely. Great question, by the way. One of the things that is a top goal around here for this year is becoming profitable. So we're doing everything we can to pull that forward. What we are seeing is great LTVs, especially relative to our old package model. If that continues and we fully expect that it will, we'll consider reinvesting some those dollars back into marketing in the back half of the year. But for now, we want to make sure that we can achieve profitability as quickly as possible.

Thank you. We now have Mario Lu of Barclays. Your line is now open.

Great. Thanks for taking the questions. The first one is on the full year revenue guide of 20% growth. I was just curious what was kind of the embedded percentage for institutional revenue for that full year number? And then, also, if there's any, like, change [indiscernible] plan dollars being deployed to Nerdy Services to kind of get to [indiscernible]. Thanks.

Hey, Mario. Thanks for the question. Yes, so embedded in the guide at the midpoint of 195 for the full year would be 15% of that total mix would be associated with the institutional business that represents about 50% growth year over year. So we're really excited about the opportunity for that business to delivered at a higher rate this year. And then when you think about funding sources within the institutional base and Chuck touched on this a little bit earlier, not only do you have the [American Rescue Plan] (ph) or SR3 funds, of which only 19% have been deployed as of October 2022 with the latest information we were able to garner. You've also got Title 1 funding, which is evergreen. And if you look at the most recent [indiscernible] budget passed about a quarter ago, it included $19 billion of Title 1 funding. And we expect that to continue to grow over time. And then lastly, I think the most important part is, because our solutions are embedded in the classroom workflow, and they support teachers, schools are using their own operating budgets to purchase these new exciting products. Especially, as it relates to Teacher Assign as a supplement to teachers in the classroom. Effectively, the way we think about it -- I think the way school districts are thinking about it is they get a co-teacher or someone that can be an extra set of hands for the teacher in the classroom during the school day so that those teachers don't have to stay beyond normal school hours, which we think and school district partners think will help drive future retention, which we think is just an added benefit.

Great. Thanks, Jason. And then just one on, the shareholder letter mentions, Nerdy is like the only company that currently combines live learning and AI technology. I know it's still early, but can you talk a bit about how large of an advantage this is, having this unique combination in terms of the client, both experts and learners?

Yeah. We're -- we outlined in this idea several years ago that we call AI for HI or artificial intelligence for human interaction. And the big idea here is that, in a world where instruction and expertise transfer occurs online that you can digitally enhance it and augment it in ways that simply are possible offline and give superpowers to both experts and learners in ways that are highly addictive. And so we think that that human element and the fact that we've focus on scaling relationships over time is highly defensible. And we'll continue to be able to lean into additional forms of personalization and add additional product value over the course of the next year. So one of the things that really excited about as it relates to generative AI is the ability to produce content at near zero cost that is highly relevant for what is occurring in that moment in time. But there's many, many honestly dozens of specific applications that we've already thought of and we're just trying to prioritize the most important approach just to make sure that they ultimately manifest themselves and think that customers value or that kind of add to retention and NPS and other things that would be a signal of great progress there. So one of the things that we've done though that I think really important is that, we've instrumented the business in a way that allows for us to take advantage of the fact that there's vertically integrated marketplace model where we can see exactly what's happening on both sides of the network. So if you think about what's maybe even different about this model than other marketplace model that might exist is, the learning actually occurs on the platform. So both the live tutoring itself and recorded video sessions, as well as then all of the learning as it relates to diagnostic testing and progress over time. And we are actually capturing all of that information and storing it and then we're able to leverage it in ways that enhance personalization as we find application. So we feel like we're well suited to run our head here and we plan to be aggressive on leveraging some of these new advances in AI to add value to customers much like we have in the past.

Great. Thanks, Jeff.

Thank you. That does conclude our Q&A session and conference call. So please have a lovely day, and you may now disconnect your lines.