Q3 2023 Nerdy Inc Earnings Call
Hello, everyone and welcome to the <unk>, Inc. Third quarter 2023 earnings call. My name is Felicia and I'll be your operator today.
Please note after the presentation part of this call there will be a question and answer session.
They register for a question by pressing star followed by one on your telephone keypad.
I will now hand, you over to T J Lynn Associate General Counsel.
<unk> console.
Please go ahead Sir.
Good afternoon, and thank you for joining us for <unk> third quarter 2023 earnings call.
With me are Chuck Jones, founder, Chairman, and Chief Executive Officer of Nerdy, and Jason Hello, 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 <unk> future financial and operating results.
<unk> 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 nobody 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 and today's shareholder letter announcing <unk> 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 Chuck.
Thanks T J and thank you to everyone for joining us today.
In the third quarter, our strong first half of the year continued and we delivered revenue and profitability ahead of our expectations.
Both our consumer and institutional businesses saw strong demand in the quarter as the school year ramp, which combined with the operating leverage that we are receiving from our new always on recurring revenue models and investments in AI to also drive bottom line outperformance.
Learning memberships are new all access subscription offering that aims to support learners across academic calendar years subjects and learning formats continued to resonate with consumers as back to school season.
The improved value proposition and expanded product suite included in learning memberships is appealing to a broad set of audiences and unlocking accelerated growth across multiple customer segments.
We saw growth in new consumer customers purchasing learning memberships and joining the platform for the first time accelerate as the school year started exceeding 45% year over year, new customer growth in both August and September.
That momentum helped drive continued revenue acceleration in the third quarter to 19% year over year growth for our consumer business and 27% for the total company, representing an acceleration of 600 1100 basis points respectively.
At the end of Q2, we completed the evolution in 100% of our consumer customers purchasing learning memberships with the transition of our professional audience.
Consumer revenue recognized from learning membership subscriptions increased to 96% in the quarter up from 88% in the second quarter and 20% last year in the third quarter. We ended the quarter with 39, 5000 learning members and $164 million in annualized.
Run rate revenue.
Our institutional business parks theaters for schools. Similarly saw a significant uptick in customer demand with the start of the school year with revenue of $5 6 million up 133% year over year.
Bookings from varsity tutors for schools in the quarter were $10 6 million up 89% year over year, delivering the second consecutive quarter with more than $10 million in bookings.
Was the start of the school year, we see growing recognition of what we've always known tutoring continues to be the proven solution for accelerating and Remediated learning. This is leading to a significant uptick in interest in high dosage tutoring and an increase in the scale and velocity of institutional opportunities, including numerous state level tutoring.
Programs.
During the third quarter, the pace of change and innovation continued we significantly overhauled simplified and evolved our institutional offering.
We believe this will better position varsity tutors for schools to attract new customers to the offering and build deeper and larger relationships with existing ones.
As part of the new offering we introduced two access based subscription products district, assign and pair decided to complement teacher aside.
With varsity tutors for schools School District partners can now choose to administer high dosage tutoring centrally at the school district level with district assigned empower teachers to manage their prescribed high dosage tutoring students in their classroom with our teacher aside offering or with tenants signed school districts can provide parents and families without learning.
Membership.
We believe that allowing school districts to purchase learning memberships on behalf of their students and enabling parents to have control and ownership of their child's learning solves an important problem for many schools and represents a significant commercial opportunity.
It also serves as an example of our platform oriented approach to growth, where we aim to build once and then leverage the product capability. Many times to serve net new audiences. In this case selling our primary consumer product indicated for school districts with administrative tools layered on top for district wide scale.
As we head into 2024, and elevate convergence of subscription business models and access based products has occurred in both our consumer and institutional businesses.
We believe this will help us better serves the needs of our customers further simplify our operations allow us to innovate faster in the future and further position us for sustained growth and profitability in the years ahead.
I am pleased to share that in the third quarter, we delivered $43 million of revenue an increase of 27% year over year above our guidance range of $38 million to $40 million.
Revenue growth was driven by both our consumer and institutional businesses, which were up 19% and 133% year over year, respectively.
Gross profit of $29 2 million in the third quarter increased 33% year over year and gross margin of 72, 4% for the quarter was a record and compares to 69.0% in the same period last year, a 340 basis point increase.
Our customer lifetime values continue to show significant improvements relative to our old packaged model driven by our evolution to learning memberships, which continues to be a key driver to our strong operating results and improved profitability year over year.
During the third quarter, we delivered non-GAAP adjusted EBITDA margin improvements of over 2300 basis points year over year, driven by improvements across every P&L line items.
Moving onto our consumer business are learning membership model continues to lead to more attractive unit level economics broader customer appeal longer duration higher lifetime value customer relationships higher gross margin and a more scalable and efficient operating model.
It also serves as an easier platform from which to drive innovation and incremental growth given our ability to add new product capabilities into the existing all access subscription offering, thereby making the offering more appealing and engaging driving conversion of new members and the retention of existing ones.
Consumer revenue of $34 $5 million increased 19% year over year and represented 86% of total revenue in the third quarter delivering sequential accelerating growth each of the last three quarters.
Active members approximately 39 5000 as of September 32023 increased eight 5000 or 27% during the quarter.
Average revenue per member per month, or ARPA of approximately $346 at the end of the third quarter resulted in an annualized run rate of approximately $164 million from learning memberships at quarter end more than <unk> the level a year ago.
During the third quarter, we began introducing a significantly upgraded and enhanced learning membership digital experience.
These updates enrich the experience encourage achievement reinforce personal accountability to learning and improves the discover ability of learning formats and subjects.
We also improved the user experience with new AI, driven learning formats to continue to broaden the resources available as a part of learning memberships delivering increased value.
These improvements are quickly, resulting in learning members utilizing additional learning formats and content and driving higher non tutoring and total engagement on the platform.
Overall, non tutoring engagement September was up 54% year over year for all clients and up 68% year over year for new members in their first month, which was our first cohort of new customers that only experienced the all new my learning hub and subject portals.
For many years of experience, we know that when customers engage more deeply with our product including across multiple earning formats multiple subjects or multiple students per household. It is highly predictive of stronger long term retention and higher lifetime value of those customers.
During the third quarter, we rolled out numerous product and user experience enhancements.
The new my learning hub transforms the way learning membership customers engage with our platform, making discovery with our platform.
Highly predictive of stronger long term retention and higher lifetime value of those customers during.
During the third quarter, we rolled out numerous product and user experience enhancements.
The new my learning hub transforms the way learning membership customers engage with our platform, making discovery with our platform more intuitive and user friendly.