Good afternoon. Thank you for attending the Nerdy First Quarter 2023 Earnings Call. My name is Elisa, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to your host, Charles Cohn with Nerdy. Mr. Cohen, you may proceed.

Good afternoon, and thank you for joining us for Nerdy's First Quarter 2023 Earnings Call. With me are Charles 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 Nery's future financial and operating results, strategy, opportunities, plans, and outlook. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results. Any forward-looking statements are made as of today's date, and Nerdy does not undertake or accept any obligation to publicly release any updates or revisions to any forward-looking statements to reflect any change in expectations or any change in events, conditions, or circumstances on which any such statement is based. Please refer to the disclaimers in today's shareholder letter announcing Nerdy's first-quarter results and the company's filings with the SEC for a discussion of the risks. Not all of the financial measures that we will discuss today are prepared in accordance with GAAP. Please refer to today's shareholder letter for reconciliations of these non-GAAP measures. With that, let me turn the call over to Chuck. Chuck?

Thanks, TJ, and thank you to everyone who has joined us today. One year ago, we unveiled an ambitious plan to evolve our products and revenue model toward long-term, recurring, always-on relationships with our customers. We created a new subscription and recurring revenue products, including learning memberships for consumers and teachers signed and on-demand products for institutional customers that were built specifically to address the ongoing support we believe both types of customers need it and desired. We shared that we believe these new models would provide a superior platform for innovation by allowing us to bring together multiple different product capabilities we have developed into a comprehensive all-access offering that enable learners to receive the help they need across multiple learning formats, thousands of subjects at multiple academic calendar years. In addition to allowing us to provide a better and more personalized experience to learners, the new operating model would be far more efficient to operate, allowing us to drive operating leverage, simplify our sales model and shift additional resources toward net new innovation, including the application of AI for HI for artificial intelligence for human interaction. To get to this evolved state, we shared that this new model would require trading off revenue recognition in the short term because our package model had a more front-loaded revenue recognition than the learning membership model where subscription revenue is recognized linearly over time. We expected that by the start of the second quarter of 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 believe would position us for higher levels of growth, profitability, and predictability in the years to come.…

Thanks, Chuck, and good afternoon, everyone. I'm pleased to be speaking with you today about another strong quarter for Nerdy. We previously shared that we expected our evolution towards toning memberships would lead to longer duration and higher lifetime value customer relationships, enhanced gross margin, provide for more attractive unit-level economics and drive higher levels of growth and profitability. I'm pleased to report that during the first quarter, our team's hard work on the evolution to recurring revenue offerings pulled through, delivering a return to growth and positive adjusted EBITDA of $1.4 million, a nearly 1,700 basis point improvement year-over-year and more than 9 months ahead of our stated target. Looking ahead, we expect to yield additional efficiency improvements through scaling learning memberships, driving additional automation and self-service features, and the continued application of AI throughout our business. Turning to Q1 results. In the first quarter, we delivered revenue of $49.2 million, results that were above our guidance range of $45 million to $47 million. These positive results reflect the continued growth in active memberships, which totaled nearly 33,000 as of March 31, up from 20,000 at year-end. Learning memberships revenue grew to $29.7 million during the quarter and represented 60% of consumer revenues in the quarter, up from nearly 0% in the first quarter last year, demonstrating a strong product market fit. Our institutional business delivered record revenue of $8.5 million, representing 17% of total revenue during the first quarter, and delivered bookings of $6.3 million. On a combined basis, learning memberships and institutional revenues delivered 77% of total revenue, a substantial change from just 2 years ago when the business was a 100% package business and 0% institutional revenue business. Moving down the P&L. Gross profit of $33.9 million for the first quarter represented an increase of 3%…

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?

[Operator Instructions] Our first question comes from the line of Ryan MacDonald with Needham.

Congrats on a great quarter. Maybe I just want to start first on the institutional business. Clearly, some really great momentum there with the record number of deals. I would just like to understand sort of how you foresee the demand environment on the institutional side progressing as we kind of get into the heart of the selling season here in 2Q and 3Q. And then as we look at the total contract value or the value of the deal count, obviously, it's down on a sequential basis. Just curious what you're seeing in terms of deal trends in terms of sizing around a number of modules or offerings being adopted or the size of deals in the pipeline.

Thanks, Ryan. This is Chuck. As you know, we landed our first teacher-signed contract. The momentum right out of the gate is super strong, and the feedback has been really encouraging, and engagement was much higher than we anticipated, which is excellent to see demonstrate a strong market fit, and we can now go out and kind of talk and demonstrate just how powerful why tutoring could be when teachers across the entire school district armor to be able to help students at district-wide scale the way that's highly individualized and takes into account their unique knowledge of that particular student and the curriculum that's being taught on the glass. So that was a huge accomplishment there. We obviously had a strong quarter in totality in terms of revenue as well. And as we head into summer and then back to school, what we're seeing is that the pipelines are continuing to grow. These are very large and very lumpy deals and conversations that we're having. So our last teacher-side contract, as you know, was approximately $5 million per year as a SaaS license that entitles the school district to district-wide tutoring that teachers can prescribe. And so these conversations involve many different stakeholders. They tend to be oriented around the start of the solar. So given the kind of magnitude involved, we wouldn't want to kick these off for just a few weeks or a few months because you really want teacher support, future buying where we kind of are very focused on making sure that seaters actually understand how to leverage the tools, and so all of that then lends itself to a series of opportunities that would start at the beginning of the new year. So we feel good about the pipeline value that's growing. We feel good about the bundled offerings and how together we're able to provide immense value and serve a multitude of district needs. And then as we head into the summer back school, I think we feel good about how many of the conversations we're having set us up for significant scale and opportunity this back-to-school season.

Super helpful. Great. I appreciate the commentary there. And then maybe just on the learning memberships, awesome to see the continued progress there. I guess I'd just be curious, as you continue to grow that member count, what you're seeing in terms of the makeup of those members, whether they were previous nervosity Tutors customers previously? Or if the learning memberships are sort of bringing net new learners to the platform.

Sure. Yes, we feel great about the fact that the business has grown about 63%, I believe, is the number from the fourth quarter to the end of the first quarter. So great progress there. In the totality of the active members, ballpark 75% were new to nerdy, and about 25% were legacy, folks who have been using us historically in a package model. And we're seeing in the field to all audiences. So there's kind of a good distribution among student ages, and we're seeing it resonate for different like high levels of subject usage and K5 that are a little bit different than middle school or high school or college or beyond. But in general, this idea of a comprehensive offering with live at the center that is been surrounded by classes and brings forms of pacing content and different modalities engaging, we think, really, really resonates here. So feel great about the progress and the offerings and engagement differ a little bit by age. But in general, we're seeing it resonate across all audiences, and it's just a more efficient go-to-market and one that makes it really easy to add additional product capabilities whether it's an AI tutor or some other form of concept like when we integrated Covis, we think it's a very easy and effective way that our customers understand to get more value over time.

Yes, Ryan, the only thing I'd add there, and we mentioned this on our last call, during the first quarter, we transitioned successfully the entire existing customer base within our academic subjects, which we feel really good about. We also transitioned the test prep audience. And then in our commentary, we shared that we're accelerating the transition of the professional business, given the positive feedback we've seen from customers as it relates to higher conversion, higher engaged higher retention. And then from a business perspective, it just allows us to drastically simplify the operating structure, which we feel really good about. Yes. And during the back-to-school season, we'll have an opportunity to reintroduce learning memberships for customers who would use package models in the past that currently are inactive.

Our next question comes from the line of Doug Anmuth with JPMorgan.

It's Bryan Smilek on for Doug. I guess just to start on the membership model. Can you just talk about the pricing strategy and structure over time? For example, should we expect a tiered strategy as the membership strategy proliferates over time? And then, I guess, just on the investment cadence, can you talk about any needs around AI and generative AI holistically going forward?

Sure. Thanks, Brian. Good questions. So we started off with a very simple kind of plain vanilla approach in learning memberships where we wanted to just effectively have one tier of offerings that would allow for us to go to market effectively last, call it, May and June, as we started leaning in the memberships aggressively. And initially, that was largely just one-on-one tutoring. And then over the course of the next couple of months in the fall, we started introducing all of these additional burden formats that provided more value including live classes in hundreds of subjects every week, we have a variety of different sincerest computer adaptive testing. We have covers in video game creation. And we started adding in other modalities like the AI Juno and chat-based uterine and a couple of other things as well. And so that then allows for us to have all these different ingredients or LEGO box that is a really, really compelling offering for our customers that can allow for us to support them over any academic calendar year across a variety of different subjects and then allowing them to learn how they want, when they want to live in the quarter stone. So in general, there's different amounts of one-on-one tutoring that you can get with your package. And one of the things that we've experimented with that has driven both conversion and retention was changing up the frequency. So you could appeal to people that are maybe a little bit more academically focused and are very concentrated in their efforts versus, say, a more casual burner in an area like foreign languages for adults. And so in totality, we are trying to take each of these underlying product capabilities and then find the content and the frequency that then…

Our next question comes from the line of Brett Knoblauch with Cantor Fitzgerald.

Congrats on the quarter. I guess could you maybe just give us a reminder on how the seasonality of the business is going to work now with the relationship model and how that might differ from the package model? And I guess, as we look at the second quarter, what should we be expecting from a membership count perspective in the change? And also, I guess you talked a bit about the institutional seasonality kind of gearing up for the back-to-school season and the start in the third quarter. Should we be expecting maybe institutional revenue to sequentially decline in the second quarter before kind of ramping back up in the back half of the year?

Yes. Great question, Brett. Yes. So consistent with prior years and seasonality trends, Q2 revenue is going to be lower than Q1. And as we previously discussed, we haven't yet gone through a transition of leading memberships from one scale to the next at scale. So we're being cautious with respect to learning membership retention and new customer acquisition during the summer months. So our Q2 guidance reflects typical seasonality, which is the result of a school calendar consumer purchasing and consumption patterns. I think it's important to also acknowledge the significant pull forward that we're seeing from busters for school's high-dosage tutoring business. We also have a portion of our business that's on the legacy package that we expect to sequentially decline period-over-period as we end the summer months. So net-net, we feel good about the anticipated levels of retention that are included in our forecast and guide, but we are cautiously optimistic there. And then from an active learner count, as of June 30, that would infer about 26,000 active members as we move through the summer, in which would then reaccelerate in the back-to-school period, consistent with historical norms and well into the fourth quarter. So we feel good about those trends that we're seeing, especially given, as Chuck mentioned on the call, the high levels of engagement, new ads in both Q1, April, and through May to date. Yes. So we had really strong engagement on the school side. We did a great job on the implementations. And we had previously assumed some of that revenue would kind of be keen to better across the first 3 quarters. We're just now assuming that it's a little more condensed in the first 2, but we feel really good about the engagement there and that how it goes for renewals kind of this back-to-school season.

Perfect. And I may make sure that I kind of understood you guys a bit correctly on the gross margin decline. So that was largely due to the institutional mix in that being such a large quarter in the institutional product because that's maybe not at scale enough where the gross margin is going to be kind of similar to the rest of the business?

Yes, that's right. So if you dissect the business into 2 parts, on the consumer side, we saw continued gross margin accretion, especially as we continue to mix shift towards a higher proportion of learning memberships. And then on the VarseTutors for the school side, if you remember, our new teacher-assigned product provides all access and unlimited support for the entire student population with the implementation that took place during the first quarter into the second quarter, we saw substantial levels of engagement which, frankly, we feel great about that there's product-market fit there but it did impress gross margins about 150 basis points relative to our expectations during the quarter, although we believe it sets us up strongly for expanding that product to additional school districts on the one hand and driving increased retention over time. And I think the important thing to remember is that while the revenue is recognized literally on some of these BTS SaaS products, what actually happens from an engagement perspective is the consumption goes up during the school year, particularly a period like January, February, March where it's all in the school year. And then as you go into the summer, you actually have probe levels of utilization, higher gross margin. So we think it's a great product overall. And then as Jason pointed out, the fact that the engagement was so high on its brand-new product. It's a really, really encouraging sign for other opportunities out there. And then more membership continues to drive significant gross margin accretion.

Our next question comes from the line of Eric Sheridan with Goldman Sachs.

Maybe 2 follow-ups on some of the comments that I've already made, just so we better understand. As you move towards the exit velocity this year and the rate of membership you're talking about, can you just help us unpack a little bit of how we should be thinking about sales and marketing efficiencies, not only in this year but as an exit velocity into next year? And how do you think about either harvesting some of those efficiencies from sales and marketing as you get bigger in memberships versus possibly accelerating membership adoption and investing them back in the business? That would be topic 1. And then Topic 2, you called out deploying capital behind AI. Can you help us better understand how much of these investments might be transient in 2023 to reposition the platform for what might be a different steady state or steady state-run rate of investments in AI over the long term? And any help you can in terms of comparing those 2 buckets.

Thanks, Eric. Good questions. So as it relates to sales and marketing efficiency, we drove 1,700 bps of sales and marketing efficiency year-over-year in the first quarter. And the reason we were able to do that was a couple. First, we have the new learning memberships model, which is significantly extending lifetime value to the shareholder loader. You can actually see just how much LTV has gone up on average relative to the old package model, but at a time and it's continuing to increase. Secondly, we focused our marketing efforts on appealing to customers who are looking for recurring support over multiple academic subjects, and multiple academic caliber years where we could serve them in a comprehensive way. And so by doing so, in fact, you're not focusing on what we previously described as, call it, the 7% of hyper transactional net bookings and you're really optimizing for the 93% that we think are the customers that want to be supported with tutoring and a comprehensive set of solutions like we have. Right now, we've been targeting marketing payback periods that are very efficient, call it, 6 months or less payback periods. And as we get through the summer and see how we're looking on those LTV curves as we head into the full year, there's going to be an opportunity to potentially change that payback a little bit and see if we're so excited about the Milo economics and have enough data, then we can lean in a little bit more aggressively. So the other factor here is not just getting more sales and marketing efficiency, obviously, but rather accelerating growth through changing that payback period a little bit and then acquiring a much larger number of users. So we're actively focused on things that we think will…

Thank you. Our next question comes from the line of Andrew Boone with JMP Securities. Moving on to our next question from the line of Mario Lu with Barclays.

This is Alex Hughes on for Mario. Just two quick questions, if I can. On the active expert side, it looks like it was down about 10% this past quarter. And you made comments previously that you're focusing on allocating more work to fewer active experts. So just wondering if there's been any incremental changes in terms of how you're identifying and acquiring those experts. And if your current AI products or future AI products shift that philosophy even more? And then the second question, just is there any update on the American rescue plan dollars being deployed to Nerdy services? And if so, what does that look like for the rest of the year?

Great questions, and I can take the first one and then hand it over to Jason for the second one. So we have made a conscious effort to focus on acquiring and retaining top experts to do a disproportionately good job and making sure that they get a great experience in the sense that they're getting kind of consistent earning opportunities over time. So in that regard, earning membership has been terrific for the expert experience because they're meeting with students on a recurring basis, typically, call it, 1 to 2 times a week or the tri-semester schooler in pursuit of a goal or skill. And as a result, they're able to count on the earnings associated with that. And so one of the things that we try to do is rather than more kind of randomly or democratically distribute the different opportunities, we've continued to lean further into our machine learning matching algorithms that then disproportionately send opportunities to talk experts. And by doing that, we're then able to retain them longer, which, of course, that leads to a much better customer experience over time. So there's kind of a compounding flywheel aspect to this. And one of the things that we've also been able to do is also start getting better at predicting who won't be likely to get work on the platform and be as successful and using AI-predictive algorithms to try to predict upfront before somebody even joins the platform, who's likely to be a consistent expert who then drives high levels of customer satisfaction and takes on a number of students versus those that say maybe a little bit more transient, interested in a short amount of work, a smaller amount of work in better concentrate the relationships a little bit more, so we can deliver a better customer experience. Of course, there's costs associated with bringing on experts. So it's terrific for the business to be able to decrease the number of people who might join and not actually work with students. So this is a conscious effort. We feel great about it, and you're seeing it pull through to operating leverage.

Yes. And then just on your question related to Esterfunding, wanted to keep in mind, unlike the B2B space where companies are pulling down third-party spending, all the government funding for schools has already been provided the money in the market and schools are seeking out our solutions like ours to address the student and teacher shortage that we're seeing in the marketplace. So as of January 31, only about 28% of the funding has been spent according to the DEA start DOE and administrators are looking for long-term solutions like ours because of learning loss and teacher shortages or long-term issues. We believe our new prudent per-year programs like teacher-signed and on-demand, allow for long-term durability as the product offerings evolve to meet both those needs and support teachers as co-teachers in the classroom in their normal daily workflows. So just the amount of money still on the market still needs to be spent by September of 2024. But even beyond Esser, because of that support for teachers in their daily workflow, we've got normal operating school budgets, which are all running surpluses. And then beyond that, you've also got Title 1 funding, which was $19 billion in the most recent as bill and those funds are evergreen. So we feel like there's plenty of funding in the market to support continued growth within Vasteras. Yes, we feel really good about the momentum there. And we've obviously evolved our offerings from what had initially just been high dosage tutoring to one that's much more comprehensive and to these new SaaS models of feature signed where the teachers really are at the center of the offering, and we think that's really powerful here. So the fact that schools have been a little bit slower and we're serving and spending in totality, we think but it's all for us it's given us an opportunity to build this exceptional product that is highly relative to the scale. We think we're uniquely qualified to deliver high-quality live at scale in a way that hasn't been done before through our district partners and really help them accomplish things that might otherwise have been more difficult for them to accomplish as it relates to helping students.

Our next question comes from the line of Andrew Boone with JMP Securities.

This is Matt on for Andrew. Just wanted to ask on with Comiga being offered for $20 a month, is there something that you guys are going to have to do with pricing or packaging? Is the competitive set evolving around AI? And then maybe a second one just on institutional. Are schools just asking for anything on AI-based tutoring offerings? Or is this something that you guys are looking at on a product roadmap? Any color there would be super helpful.

Sure. Okay. Good question. So champions tutoring has been around for 20-something years, and it's been $20 a month. And we're excited about incorporating it as a modality offering, but it's one of many, many different ways that you can learn. So as we think about our AI tutor and what it's able to accomplish, it's something that is being used today for call it homework out -- it's being used for Q&A. And it's kind of taking into place all these content resources that historically has existed online. What we're seeing is that people are using it to engage additionally beyond their live recurring face-to-face tutoring session that are in pursuit of gold. And so we see it as another form of content creation and another modality of interaction. So from our perspective, like we're going to be adding all sorts of different ways to engage. And this is one of them that happens to be in the press a lot, we think is exciting, but we're applying AI across a wide variety of different forms of both content personalization, expert learner matching and then also applying it to drive operational efficiencies. And so as we think about schools, I mean, this is a really exciting opportunity. So if you think about all the technology that we've built and our application of AI to drive human interaction and give what we describe as superpowers to tutors and now educators, this is an area where we're actively seeing schools ask about it and at really how can we allow for their titers to drive higher levels of personalization in their data. So as an example, the idea of an IPR individualized education plan has been tossed around for decades is something that, in an ideal world, schools will be able to provide to each and every student, but they can't. They can only do it for a small subset of students. Now thanks to generative AI, that's the sort of thing where you could actually do it at scale in a way the hyper-personalized and aligns to both the state standards within a given state and the specific curriculum requirements of a given school and that would never have been possible. So we're super excited about our ability to take some of the products we're building and then extend them into schools in ways that are kind of wrapped around by and provide additional capabilities to teachers that give them leverage and help educators solve problems.

There are no additional questions waiting at this time. So I would like to pass the conference back over to the management team for closing remarks.

We'd just like to thank everyone for their time on the call today. As you can tell, we feel really good about the business while the transition, the learning memberships, and the expansion of Varsity Tutors for Schools as well as the application of AI throughout our business to drive continued growth and cost efficiency.

That concludes today's call. Thank you for your participation.