Nerdy, Inc. (NRDY) Q3 2026 Earnings Report, Transcript and Summary

Good afternoon. Thank you for attending Nerdy Inc.'s Quarter 3 2026 Earnings Call. My name is Matthew, and I will be your 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 2026 earnings call. With me are Chuck Cohn, Founder, Chairman and Chief Executive Officer of Nerdy; and Atul Bagga, 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 today's call. Our third quarter results were in line with expectations with non-GAAP adjusted EBITDA improving by $4.5 million year-over-year and non-GAAP adjusted EBITDA margin improving by over 1,000 basis points. We also made important progress on our product transformation, rolling out a redesigned messaging-first student experience and advancing new self-service e-commerce capabilities. Together, these improvements are designed to make it easier for families to get started, deliver more value during and in between tutoring sessions and create a more efficient and scalable business. The third quarter marked an important transition in Nerdy's evolution. Throughout 2026, we have been building a new consumer learning experience, simplifying our business and applying AI to improve our products and operations. In recent weeks, major parts of that work have moved into customers' hands. That includes a large portion of our reimagined new student experience with the remaining features and products being launched in the coming weeks. Our new commerce infrastructure builds on our existing online purchasing capabilities with a registration-led path to learning membership. Our acquisition model is historically centered on generating leads and converting them through sales. The new experience enables customers to register, purchase and begin their learning membership through a self-service checkout flow without requiring a sales conversation. Over time, we expect this more modern way to transact with our customers to lower customer acquisition costs, expand reach and support a more efficient and scalable go-to-market model. These capabilities are arriving later than planned, limiting their contribution during the back-to-school acquisition window. We acquired fewer new learning membership customers than anticipated and entered the fourth quarter with a smaller recurring revenue base. Our Q4 revenue outlook reflects that shortfall in learning membership counts. Moving on to recent product developments. The new student experience changes how families use Nerdy. Instead of navigating menus and pages, learners and parents simply tell us what they need and the platform does it. More than 100 agentic actions sit behind that conversation. A student can get step-by-step help on tonight's homework, turn next week's test into personalized study plans with reminders, generate practice on exactly what they're struggling with, schedule or reschedule sessions with the tutor, message their tutor, unenroll or enroll in classes and do it all in the same thread. Everything in a learning membership from one-to-one tutoring to live classes to AI practice is now one message away. We believe this makes the learning membership more valuable between sessions and increasing engagement between tutoring sessions is one of the most direct ways we can elevate retention and customer lifetime value. We recently introduced a new capability called Smart Actions in the quarter that brings real-time AI directly into live instruction. It acts as a real-time assistant alongside the human tutor displaying superimposed suggestions directly on the digital classroom screen. Tutors can utilize suggested 3D interactive models, visual explanations and lesson content into the shared lesson with a click, pulling from the more than 15,000 prepared lessons that we now have that spans some 200 subjects that are getting filtered on in real time by AI as students and tutors talk about their academic work. A tutor explaining blood circulation, for example, can place a 3-dimensional heart on the screen and show the student how blood moves through it, which is both a more effective way to teach and it's also far more engaging and stimulating. For our youngest learners, we built an entirely separate elementary experience. It is rocket and space themed, visually rich and designed from the ground up for K through 5 students rather than the universal dashboard and experience for all learners that we've had in the past. We believe that a different form factor and a significantly more interactive and visually appealing way of engaging and teaching will result in a differential level of engagement for young learners, who we believe will have a lot of fun with this experience. Our focus is now on translating these launches into sustained gains in customer acquisition, retention and profitable growth. With that, I'll turn the call over to Atul to discuss the financials in more detail. Atul?

Thanks, Chuck, and good afternoon, everyone. In the third quarter, revenue was within our guidance range and non-GAAP adjusted EBITDA was ahead of the top end of our guidance range. As I said last quarter, my mandate is to get Nerdy to free cash flow positive while investing with discipline in the areas that drive member growth. Our cost structure continues to move us in that direction. Member growth is where we have more work to do, and that's reflected in the outlook that I will share in a moment. As a reminder, on our last call, we announced the wind down of Varsity Tutors for School or VT4S, along with our exit from First Tutors in the United Kingdom. Both these decisions direct our resources towards the growth of our core consumer business. These wind-downs are now substantially complete. We recorded $4 million in exit-related costs in the third quarter within the guidance range of $2 million to $4 million that we provided last quarter. VT4S revenue was $0.5 million in the quarter compared to $1.8 million in the same period last year. Now to the third quarter results. Revenue was $33.2 million, within our guidance range of $32 million to $35 million and down 10% year-over-year, driven by lower institutional and consumer revenue. Consumer revenue was $30.7 million, down 7% year-over-year and represented 93% of our total revenue. Institutional revenue was $2.5 million, down 34% year-over-year, driven by the wind down of the VT4S business. Average revenue per member per month or ARPM was $366, down 2% year-over-year. As a reminder, we fully lapped the price increases enacted in Feb 2025 and the change in ARPM now reflects a mix shift over periods. As of September 30, active members were 31,800, a decrease of 7% year-over-year. Active member performance was largely driven by the lower new member acquisition from delays in the new product launches, which was partially offset by year-over-year improvement in our retention. Last quarter, we said we expected our new product experience to support acquisition through the back-to-school seasons. Several of the product enhancements and customer acquisition initiatives behind that expectation, including our self-service registration and checkout experience ran behind our original plan and that delay weighed on third quarter customer acquisition. Some of these features have shipped, and the remainders will ship in the fourth quarter. We expect these to support our new client acquisition as they roll out. Gross margin in third quarter on a GAAP basis was 59.7%, including a $1.6 million non-cash charge for the abandonment of capitalized internal use software related to the wind down. Including that charge, non-GAAP gross margin was 64.5%, an expansion of 160 basis points compared to Q3 2025, which was mostly driven by lower amortization of capitalized internal use software and partially offset by higher expert costs as sessions per member increased. Moving to operating expenses. Over the past year, we made a strategic choice to lead with AI in how we operate, how we build new features, how we deliver the student and tutor experience, how we support our members and how we run our corporate functions. As a result, we have substantially improved our efficiency and transformed the organization. To give you a sense of scale of this change, a year ago, our total headcount was 934. At the end of third quarter, our headcount was 525, a reduction of 44%. Excluding the VT4S exit, our consumer sales, support, engineering, product and the G&A teams are leaner by more than 300 people as AI handles work that previously required additional headcount. At the same time, our product velocity has continued to increase. We are a much smaller team building more, and that shows up in every line of the operating expense. Sales and marketing expenses were $13.8 million, a decrease of 17% year-over-year, driven by AI-enabled productivity gains in the sales organization and reduced investment in our institutional business. General and administrative expenses were $18.4 million, down 29% year-over-year. G&A included product development costs of $7.8 million compared to $10.3 million in the same period last year as we continue to apply AI across the tech stack. Last quarter, we talked about the steep increase in AI spend during the second quarter. We talked about our efforts to optimize AI spend without impacting usage, and we told you that we expected AI spend to remain at or below second quarter level. In the third quarter, AI spend was $1.5 million, down from $2 million in the second quarter. More important, our September run rate of AI spend was more than 60% below its July peak, all driven by strong governance and model optimization and without reducing employee adoption of AI. In the third quarter, non-GAAP adjusted EBITDA loss was $5.7 million, ahead of our guidance range of negative $9 million to negative $6 million. To put that in context, a year ago this quarter, we posted a non-GAAP adjusted EBITDA loss of $10.2 million. That's an improvement of $4.5 million or 44% year-over-year and more than 1,000 basis points of margin expansion. Non-GAAP adjusted EBITDA performance related to our guidance was driven by lower sales staffing costs, lower AI cost and disciplined G&A management. Non-GAAP free cash flow was negative $5.9 million compared to negative $4.1 million in the same period in 2025. As we discussed last quarter, VT4S contracts are generally paid in advance. So exiting ahead of the peak season would reduce our cash collection this year. That played out as we expected. Two items related to the wind down drove the year-over-year change: the absence of approximately $5.1 million of prepaid VT4S bookings collected in the prior year quarter and $1.2 million of exit-related payments. Excluding these items, our free cash flow improved by approximately $4.5 million year-over-year. Moving to liquidity and capital resources. On September 28, we borrowed the remaining $10 million available under the first tranche of our term loan, bringing the total borrowings to $30 million. We ended the quarter with $42.5 million in cash and cash equivalents. Turning to our business outlook. Today, we are introducing fourth quarter 2026 guidance. The guidance reflects lower new client acquisitions in the third quarter, which carries into a smaller active member base and lower consumer revenue in the fourth quarter. Continued cost discipline offsets part of the revenue impact on non-GAAP adjusted EBITDA. Our fourth quarter outlook reflects the timing of product enhancements and customer acquisition initiatives I described earlier. Some of these features are live, and the remainder will ship later in the quarter. As they roll out, we expect the year-over-year gap in new client acquisition to narrow through the fourth quarter. Moving to revenue guidance. For the fourth quarter of 2026, we expect revenue in the range of $37 million to $39 million. Turning to adjusted EBITDA guidance. For the fourth quarter of 2026, we expect non-GAAP adjusted EBITDA to be approximately breakeven. We expect to end the year with $35 million to $37 million of cash, inclusive of $30 million drawn on our term loan. Based on our current operating plan, we expect existing liquidity to fund the company through free cash flow breakeven. To close, revenue within guidance, non-GAAP adjusted EBITDA ahead of the top end of our guidance and a cost structure that is meaningfully leaner and a total headcount down 44%. Our priority now is returning active members to growth and the product and customer acquisition releases shipping this quarter are central to that. My mandate has not changed, get Nerdy to free cash flow positive, while investing with discipline in the areas that drive member growth. With that, I'll turn it over to operator for Q&A. Operator?

[Operator Instructions]. Your first question comes from the line of Greg Gibas with Northland Securities.

You commented on achieving an improvement in retention year-over-year in the quarter, but new client acquisition was lower. And I was just wondering if you can maybe expand on the product enhancements and the customer acquisition initiatives that you're kind of referring to that maybe impacted that?

Sure. Thanks, Greg. Good question. So yes, look, there's an incredibly robust set of back-to-school deliverables we had, and many of them were contingent upon one another. So we launched an entirely reimagined e-commerce experience, a registration experience. So think register as a new user as opposed to submit a lead for information, which is a big deviation from our historical process. And we launched a new student experience, and we also changed payment providers from PayPal to Stripe. And there were several other kind of concurrent launches that were incredibly helpful as it relates to allowing us to test a whole host of things that we're very excited to be leaning into as it relates to new products and are very enabling, but they also were contingent upon one another. And so the sort of stacked different deliverables ended up causing us to have to delay. It's effectively one delay that impacted numerous things that were sequenced. And thus, like some of those things are just hitting a little bit later than expected. But we're pretty excited about like what I think is going to be a pretty dramatic improvement to the customer experience across all fronts, taking the messaging-first approach as an example, that's something that really lends itself to daily active use and the customers doing self-service and effectively solving problems that historically would have gone to customer service and being able to engage from a daily active practice perspective that we think can drive real habit and retention in a way that we haven't really been able to do before. So these are some of the most enabling and strategic product deliverables we've ever had. They just launched late, and we're excited about what that can mean for the future. So kind of early days as it relates to that pulling through to inflecting the overall business. On the sales side, I'll let Atul speak to this as well. Those product launches, many of them were oriented around platform efficiency and e-commerce, which then led to us under hiring in reality because of that delay on the sales side. So our sort of sales was capped as it relates to headcount capacity. That's not something we would expect to anticipate in the future given that these platform features are now enabled and will allow for us to handle more volume more efficiently.

Got it. That's helpful, Chuck. And as a follow-up, I guess, Atul, I wondering if you could just -- if you're willing to maybe provide an updated -- I know you're not maybe guiding for this, but just how you're thinking about your outlook for free cash flow breakeven, right? I mean it sounds like you have the liquidity to get there. But what needs to happen, I guess? Would you say that additional improvements on the cost side are needed? Or is it really just returning to member growth?

Thanks, Greg. That's a good question. And on the cost side, we feel pretty good about where we are. We will continue to look at opportunities, how we can run the platform more efficient. But the big job ahead of us is getting the customer acquisition. We know the product resonates well with the customers. As we talked about our retention, we are seeing sustained improvement. We look at our retention at 37 days, 60 days, 90 days. And in all these different KPIs, we see a sustained improvement in retention. So customers who are already using the product, they are using it more. As we talked about the gross margin impact, we are seeing the customers using product more. We are seeing customers retaining longer. The area that we have work to do is the customer acquisition. And the things that Chuck talked about, customer acquisition, those are the things that is going to help us. And as we improve our customer acquisition, as we continue to enhance the product quality, engagement and result in higher retention that gets us to the path of getting to cash breakeven.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.