Good afternoon. Thank you for attending today's Nerdy, Inc. Q3 2024 Earnings Call. My name is Cole, and I'll be the moderator for today's call. [Operator Instructions] I would now like to pass the conference over to your host, T.J. Lynn, Associate General Counsel of Nerdy. You may proceed.

Good afternoon, and thank you for joining us for Nerdy's Third Quarter 2024 Earnings Call. With me are Chuck Cohn, Founder, Chairman and Chief Executive Officer of Nerdy; and Jason Pello, Chief Financial Officer. Before I turn the call over to Chuck, I'll remind everyone that this discussion will contain forward-looking statements, including, but not limited to, expectations with respect to Nerdy's future financial and operating results, strategy, opportunities, plans and outlook. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results. Any forward-looking statements are made as of today's date, and Nerdy does not undertake or accept any obligation to publicly release any updates or revisions to any forward-looking statements to reflect any change in expectations or any change in events, conditions or circumstances on which any such statement is based. Please refer to the disclaimers in today's shareholder letter announcing Nerdy's third 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.

Thanks, T.J., and thank you to everyone for joining us today. In the third quarter, we continued to make progress against the primary goals we laid out for the year. The first goal we shared was Scaling the winning product for every Learner. As we have shared in the past, we have historically seen that getting new customers on our platform and into tutoring sessions seamlessly and with little friction involved is highly predictive of customer satisfaction, retention, and ultimately, lifetime value. We identified that the first 30-day onboarding experience was one of the highest impact areas where we could drive durable improvements to retention and lifetime value. We focused a significant portion of our product and engineering efforts towards this area, which has resulted in multiple key enhancements being shipped recently that will benefit both consumer and Institutional customers. These improvements to the digital experience focus on the fundamentals of a great customer experience. Our new onboarding assistant enables a customer's tutor placement request to be documented more accurately and efficiently, and we are seeing the improved completion rates and accuracy flow through to high-quality matches, faster time to first sessions and higher levels of customer satisfaction. Our new tutor match tracker provides greater transparency into the matching process, making it easier for customers to manage their tutoring relationships, confirm scheduling availability and introducing new members to the full breadth of our learning tools available to them. It also reduces the amount of new client inbound service requests prior to being matched to their tutor, which we expect to pull through to higher levels of customer retention. These user experience pages are delivering improvements across the first 30-day period post activation for new customers. The specific areas that have improved includes; time to first tutoring session, first session attendance…

Thanks, Chuck, and good afternoon, everyone. As Chuck mentioned, we continue to make progress towards achieving the 3 primary goals we laid out for the year. In the third quarter, we delivered revenue of $37.5 million, a decrease of 7% year-over-year. Revenue declined primarily due to lower ARPM in our Consumer business. ARPM was lower due to a higher mix of lower frequency Learning Memberships when compared to the prior year period. Consumer Learning Memberships' subscription revenue of $31.4 million represented 84% of total company revenue. Active members of 39,700 as of September 30 were up 1% year-over-year. ARPM of approximately $302 as of September 30 was up 7% from $281 at the end of the second quarter and resulted in an annualized run rate of approximately $144 million from Learning Memberships at quarter end. Our Institutional business delivered revenue of $5.4 million, a decrease of 3% year-over-year and represented 14% of total revenue. Our platform access strategy in our Institutional business is allowing us to introduce our products to school districts at a much larger scale than ever before. As Chuck mentioned, our strategy to introduce school districts to the platform and ultimately convert them to our fee-based offerings started to bear fruit in the third quarter with 32% of paid contracts and 22% of total bookings value coming from school district partners who initially partnered with Varsity Tutors for Schools via free access to our platform and subsequently converted to our paid offerings. We believe that providing access to our platform is allowing us to gain market share and that we are building a strategic and differentiated asset that positions us for continued, sustainable long-term growth within the K-12 market. However, we are taking steps to moderate our Institutional investments to reflect a more normalized sales cycle in…

[Operator Instructions] Our first question is from Andrew Boone with JMP Securities.

Guys, understood the various puts and takes in terms of the 4Q guide. But can you guys double-click in terms of your visibility into stability in terms of the consumer side of the business? How do we think about timing there? And then stepping back more operationally, Chuck, can you talk about driving engagement with customers? How are you guys thinking about getting more frequency on the platform overall so that you do improve retention for consumers?

Thanks, Andrew. Good question. So, the way that we think about the kind of consumer business and its overall performance in the quarter, which I shared a little bit in the prepared remarks, relates back to the old cohorts, which were a blend of customers that were on the weekly tutoring frequency and some that were not. Those that were not had higher levels of churn at the year-end, which pulled through to the quarter. Those that were on the weekly tutoring frequency had much higher levels of retention, which is attributable to the fact that tutoring is a weekly habit-oriented activity that people get into every Tuesday night for French tutoring, every Thursday night for LSAT prep in preparation for going to law school. And as we got back into the school year and as we shared on the last quarterly call, we reoriented the focus towards memberships that were focused on weekly tutoring habit. And, in addition to that, that alone, from a mix perspective, drove higher levels of retention and higher ARPM on both a kind of blended and year-over-year basis. And then separately, we made a series of product enhancements that we shared in the shareholder letter that improved the first 30-day activation. So they removed friction. They made it easier to schedule. They made it easier to figure out the status of your tutor to replace your tutor. And those are durable product-driven changes that we're then seeing pull through to higher first session success rates and then a bunch of downstream positive metrics related to tutoring engagement. We've also made a series of improvements to the platform itself in a way that drive discoverability of many of the non-tutoring products, including AI tutor, live classes, adaptive diagnostic testing and some of the self-service tools. So, we have seen both one-on-one engagement on a weekly or monthly basis year-over-year. And then separately, for non-tutoring engagement, we've seen it actually grow quite nicely this back-to-school season in connection with both the mix changes and then all of the product-driven changes. And all of that engagement then pulls through traditionally to much higher levels of retention. And so we're seeing among the first several months of back-to-school cohorts that all of the kind of negative year-over-year retention trends have reverted and we're back to parity, and we'd hope that through the product-driven changes that we're working on right now, we have high conviction that those can then pull through to material year-over-year wins on retention on a go-forward basis. So that's how we kind of model it and think about it. But as those cohorts pull through and shift the total answer of cumulative members, we'd expect to see retention -- the retention answer totality shift positively.

We have no further questions in the queue at this time. [Operator Instructions] We have a question from Greg Gibas with Northland Securities.

Curious if we could go a little bit further on the Institutional revenue, kind of what's driving the decline there? And nice to see that you enabled another 1.1 million students up to 4.4 million now. How is progress trending regarding kind of monetizing or upselling those offerings for school districts?

Greg, good question. So, as we shared over the past couple of quarters, we were taking a big swing related to this back-to-school season and making the most of the end-to-ESSER motion. And that was informed by the last couple of years of bookings and all the progress and success we've had. And one of the things that we saw this back-to-school season was that the platform active strategy where we give access to the platform had high levels of demand. We also saw that ramping a new sales team heading into that back-to-school season was a little bit more challenging than expected. And then ESSER itself did not create the level of urgency that we expected at that 9/30 deadline. And I think in retrospect, we're overly focused on that specific deadline as opposed to focusing on broad-based strategic conversations that span a multitude of funding types and different [ needs base ] that districts have. And one of the really positive things is, to the extent to which as our platform and all of its product capabilities have evolved and all of the integrations that we've done, we're now able to accommodate and serve a broad swath of different use cases. And whether a school district wants to administer tutoring before school, during school, in class, outside of class, after school or a nicer weekends with parents, we put in place the platform and software-driven changes that allow for us to accommodate a broad swath of different needs. And that also spans different students groups, whether it's related to math or reading in K-5 and remediating learning loss or whether it's related to certain special education students. There's a broad -- there's a way that our platform can accommodate many of these different student populations that have acute…

Yes. Maybe just to put some numbers behind what Chuck said, and appreciate the question, Greg. Platform access is allowing us to gain share in the market. We're building a strategic and differentiated asset that we think positions us for sustainable long-term growth within this K-12 market. Student engagement with the platform, as Chuck mentioned, was really high as we entered the back-to-school period, showing clear evidence of the need for support beyond the traditional classroom, and that the platform access strategy is starting to bear fruit. 32% of the paid contracts and 22% of total bookings value came from school district partners who originally partnered with Varsity Tutors for Schools via the free platform access and subsequently converted to our paid high-dosage tutoring offerings. So, we think that that's going to continue into 2025 and well beyond that and feel good about the work that we did during the third quarter to onboard nearly 900 schools.

Yes. And we definitely paid a short-term price in terms of resource allocation as back-to-school launched. But we feel good about the long-term strategic asset that we've built and how that ultimately generates growth and profitability.

Got it. Very helpful. Great. And then I guess turning gears to the consumer side. Wanted to just kind of get a little bit more color on your expectations for maybe active member growth versus ARPM dynamics in Q4 on a year-over-year basis. Kind of, if you expect any changes in kind of dynamics there between those 2? And I guess, separately, as it relates to -- I think you spoke to lower customer acquisition costs you're seeing. Wondering if you could touch on kind of what's driving that? Is it different marketing initiatives or kind of go-to-market strategy, where you're maybe seeing success there?

Sure. Thanks for the question. So, the positive trends we're seeing in the new customer cohorts we mentioned on the call, those were partially offset by lower retention in older customers that included a higher proportion of the lower frequency Learning Memberships. That was a trend we spoke to last quarter. We think that will continue through the end of the year and then subsequently subside. We think we'll end the year with about 36,000 active members. You mentioned ARPM. Importantly, we saw ARPM improve from $281 at the end of Q2 to $302 at the end of Q3 as we focused on those higher frequency customers. That trend will continue in Q4. We think we'll end around $310 and then again, continue to accrete as we move into 2025. Within marketing, specifically on the consumer side, we are seeing some efficiency there. Customer acquisition costs decreased by about $1.4 million or 8% year-over-year in the third quarter. When you couple that with consumer sales conversion improvements, our CACs were down about 14% in Q3, which we feel really good about, the durability of that efficiency improvement as we move into 2025 as we're able to target our marketing investments toward higher LTV customers and segments that have quicker paybacks.

There are no further questions in the queue at this time. So that concludes today's call. Thank you all for your participation. You may now disconnect your line.