Q2 2024 Nerdy Inc Earnings Call
[inaudible]
Matt: Good afternoon. Thank you for attending today's Nerdy Inc. Q2 2024 earnings call. My name is Matt, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call for an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, T.J. Lynn, Associate General Counsel at Nerdy. You may proceed.
Matt: Good afternoon. Thank you for attending today's Nerdy, Inc. Q2 2024 earnings call. My name is Matt, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call for an opportunity for questions and answers at the end.
TJ Lynn: I would now like to pass the conference over to your host, TJ Lynn, Associate General Counsel of Nerdy. You may proceed.
T.J. Lynn: Good afternoon, and thank you for joining us for Nerdy's second 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.
Speaker Change: Good afternoon, and thank you for joining us for nerdy second quarter 2024 earnings fall. With me, our Chuck Cohn, founder, chairman and chief executive officer of nerdy, and Jason Pello, Chief Financial Officer.
T.J. Lynn: Any forward-looking statements are made as of today, 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 under which any such statement is made. Please refer to the disclaimers in today's shareholder letter announcing Nerdy's second 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 Gap. Please refer to today's Sherholder Letter for reconciliation of these non-Gapmas. With that, let me turn the call over to you for chat.
TJ Lynn: 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.
TJ Lynn: These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results.
TJ Lynn: 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.
TJ Lynn: Please refer to the disclaimers in today's shareholder letter announcing Nerdy's second quarter results and the company's filings with the SEC for a discussion of the risks.
Speaker Change: Not all of the financial measures that we will discuss today are prepared in accordance with gas. Please refer to today's Sherholder Letter for Reconciliation of these non-gap measures. With that, let me turn the call of it a check.
Chuck Cohn: Thanks, DJ, and thank you to everyone for joining us today. In the second quarter, we continue to make progress against the three primary goals we laid out for the year, including our first goal, which was to scale the winning product for every learner. We've recently completed the convergence of all varsity leadership schools and institutional customers onto the unified consumer experience of use for learning members. The Unified Platform provides a modern, intuitive, and personalized learning experience that better serves the needs of learners, while also allowing us to increase the pace of innovation and leverage product improvements across both our consumer and institutional businesses to drive value in both businesses.
TJ Lynn: Thanks, TJ, and thank you to everyone for joining us today. In the second quarter, we continue to make progress against the three primary goals we laid out for the year, including our first goal, which was to scale the winning product for every learner.
TJ Lynn: [inaudible] Thank you.
TJ Lynn: The Unified Platform provides a modern, intuitive, and personalized learning experience that better serves the needs of learners, while also allowing us to increase the pace of innovation and leverage product improvements across both our consumer and institutional businesses to drive value in both businesses.
Chuck Cohn: Within our consumer business, we experienced a higher than expected level of seasonal end-of-year and summer cancellations, which has resulted in fewer active members than anticipated as we enter this back-to-school period. These changes were primarily driven by our lowest-priced product, which, in retrospect, didn't sufficiently encourage learners to establish a weekly habit and instead was overly focused on flexibility.
TJ Lynn: Within our consumer business, we experience a higher-than-expected level of seasonal end-of-year and summer cancellations, which has resulted in fewer active members than anticipated as we enter this back-to-school period.
TJ Lynn: These changes were primarily driven by our lowest-priced products, which, in retrospect, didn't sufficiently encourage learners to establish a weekly habit and instead were overly focused on flexibility.
Chuck Cohn: This experience caused us to scrutinize and reexamine our product priorities through the lens of what drives retention consistently over time within the tutoring category. In particular, we found that learning membership frequencies focused on making tutoring a weekly habit in service of an important learning goal naturally drove significantly better retention and higher lifetime value. Based upon this learning, we have reoriented our product collection for our premium learning membership, which encouraged the development of a weekly tutoring habit with a consistent tutor over a long period of time to support achieving an important learning outcome.
TJ Lynn: This experience causes us to scrutinize and re-examine our product priorities through the lens of what drives retention consistently over time within the tutoring category.
TJ Lynn: In particular, we found that the learning membership frequencies focused on making tutoring a weekly habit in service of an important learning goal naturally drove to significantly better retention and higher lifetime value.
Speaker Change: Based upon this learning, we have re-ordered into our product selection for our premium learning membership, which encouraged the development of a weekly tutoring habit with a consistent tutor over a long period of time to support achieving an important learning outcome.
Chuck Cohn: Examples include a parent ensuring their first grade student can read or a college student getting a great grade in an organic chemistry course in service of their dream of becoming a doctor and going to medical school.
Speaker Change: Examples include a parent ensuring their first grade student can read, or a college student getting a great grade in an organic chemistry course in service of their dream of becoming a doctor and going to medical school.
Chuck Cohn: We've been focused as a team towards executing on the fundamentals of a great customer experience, including shipping multiple significant improvements to the Learning Membership User Experience. In particular, one area of renewed focus is on a learner's first 30-day activation period, which includes significant enhancements to the scheduling experience that improves the schedule reliability, match quality, and ease of scheduling through a better digital onboarding experience. While many of these improvements have recently been deployed, the early signal is quite promising as it relates to both reducing churn of older cohorts and driving overall improved engagement and retention of new cohorts.
Speaker Change: Over the last 45 days, we've been focused as a team towards executing on the fundamentals of a great customer experience, including shipping multiple significant improvements to the learning membership user experience.
Speaker Change: In particular, one area of renewed focus is on a learner's first 30-day activation period.
Speaker Change: which includes significant enhancements to the scheduling experience that improves the schedule reliability, mass quality, and easy scheduling through a better digital onboarding experience.
Speaker Change: While many of these improvements were recently deployed, the early signal is quite promising as it relates to both reducing turn of older teleport and driving overall improved engagement and retention of new cohorts.
Chuck Cohn: The fifth in our product makes towards premium memberships, coupled with a digital user experience of growth. It's positively affecting newly acquired co-workers with faster time-to-first sessions, higher levels of deterioration sessions per week, higher levels of non-tuduring engagement due to improved discoverability across the platform, higher average revenue per member per month or arbum, higher new learning numbers, monthly recurring revenue, and higher levels of retention.
Speaker Change: The shift in our product mix towards premium membership.
Speaker Change: Coupled with digital user experience and projects.
Speaker Change: is positively affecting newly acquired cohorts with faster time through first session, higher levels of tutoring sessions per week.
Speaker Change: Higher levels of non-tutoring engagement due to improved discoverability across the platform.
Speaker Change: Higher average revenue per member per month or arpum, higher new learning number, monthly recurring revenue, and higher levels of retention.
Chuck Cohn: So while we're entering the back-to-school period with fewer active members than anticipated, we are encouraged by the recent improvements we're experiencing. Our second goal for the year was to continue to expand the number of learners we can impact. Our freemium strategy in our institutional business is allowing us to introduce our products to school districts at a larger scale than ever before. During the second quarter, we successfully enabled access to the varsity tutors for school platform for an additional 1.1 million students. Bringing the total of the 3.3 million students in nearly 600 schools to a total of 3.3 million students.
Speaker Change: So while we're entering the back school period with fewer active members than anticipated, we are encouraged by the recent improvements we're experiencing.
Speaker Change: Our second goal for the year was to continue to expand the number of learners we can impact.
Speaker Change: Our free name strategy and our institutional business is allowing us to introduce our product to some of the districts that a larger scale than ever before.
Speaker Change: During the second quarter, we successfully enabled access to the Varsity Tutors for Schools platform for an additional 1.1 million students, bringing the total to 3.3 million students in nearly 600 school districts.
Chuck Cohn: For the full year, we have set an ambitious target of enabling access to the Varsity Tutors platform for 10 million students, or approximately 20% of the K-12 population in the United States. By providing robust self-academic test-prep and enrichment resources at no cost or through school district partners, we aim to efficiently build trust and credibility at scale and lay the foundation to become the preferred tutoring platform for these school district partners because they look at implementing paid figuring progress.
Speaker Change: For the full year we have set an ambitious target of enabling access to the varsity geaters platform for 10 million students or approximately 20% of the K through 12 population in the ad states.
Speaker Change: By providing a robust set of academic test prep and enrichment resources at no cost to our school district partners, we aim to efficiently build trust and credibility at scale and lay the foundation to becoming the preferred tutoring platform for these school district partners as they look to implement paid tutoring programs.
Chuck Cohn: We believe this is a scalable way to introduce ourselves to a large portion of students and parents in the United States, which we believe will create a halo effect with our consumer business and allow us to build a larger revenue business with lower customer acquisition costs over time. We will probably also continue to make progress to improve the varsity teachers for school, student, and administrator experience. All of our faith in our school's customers has been conferred now onto the unified consumer product experience used for hurting men.
Speaker Change: We believe that the scalable way to introduce ourselves to a large portion of students and parents in the United States, which we believe will create a halo effect with our consumer business and allow us to build a larger revenue business with lower customer acquisition costs over time.
Speaker Change: This quarter, we also continue to make progress to improve the varsity tutors for school students and administrator experiences.
Speaker Change: All of our City Theaters for Schools customers have been converged now onto the unified consumer product experience used for learning membership. A change we believe can drive heightened levels of engagement and customer satisfaction by making the already available resources more discoverable and usable.
Chuck Cohn: A change we believe can drive heightened levels of engagement and customer satisfaction by making the already available resources more discoverable and usable. Additionally, our revamp and administrative dashboard increases school district leaders' ability to measure the impact of our high-dose tutoring programs by providing a real-time view of program key performance metrics that reinforce the value of our program. Our third goal was to lay the foundation to deliver profitable growth. We recently completed the expansion of the varsity cheaters program for schools, sales, and go-to-market teams.
Speaker Change: Our revamp and administrative dashboard increases school district leaders ability to measure the impact of our high-dose tutoring programs by providing a real-time view of program key performance metrics that reinforce the values of our programs.
Speaker Change: Our third goal was to lay the foundation to deliver profitable growth.
Speaker Change: We recently completed the expansion of the Varsity Tutors for Schools sales and go-to-market team. Hiring occurred later in the year and onboarding the sales team in the seasonally slower summer period has taken a bit longer than originally forecasted.
Speaker Change: That resulted in lower than anticipated bookings during the summer months, and a more backwated bookings expectation.
Chuck Cohn: We still believe that these investments are appropriate and given the level of market activity, if we had to go back to school, coupled with the growing awareness in the market that high quality engineering is the most effective way to accelerate. We also feel good about the production enhancements made as we head into back to school and how that ladders up to a more compelling offering for a cup. During the second quarter, we experience higher-than-inticipated tutoring-substitute costs within our institutional design, and it's easily high-period during the school year.
Speaker Change: We still believe that these investments are appropriate at giving the level of market activity as we headed to back to school. Coupled with the growing awareness in the market that high-dose engineering is the most effective way to accelerate learning.
Speaker Change: We also feel good about the product enhancements made as we head into back to school and how that ladders up to a more compelling offering for our customers.
Speaker Change: During the second quarter, we created a higher-than-intensipated tutor substitute cost within our institutional design, and it's easily high-perioded during the school year. As a reminder, this is our first school year with our new access-based subscription product.
Chuck Cohn: As a reminder, this is our first school year with our new access-based subscription products. In response, we recently introduced improvements to our underlying marketplace infrastructure systems, including session scheduling enhancements, an invoicing overhaul, and super substitution automation that we believe will allow us to provide best-in-class logistical reliability. We believe the software-based enhancements to our marketplace infrastructure will represent a material competitive advantage over time and are expected to meaningfully improve gross margins during the back-to-school period and on a go-for basis, while simultaneously improving the customer experience due to the higher reliability levels we're able to achieve. We also expected these changes, which have required material time and energy.
Speaker Change: In response, we recently introduced improvements to our underlying marketplace infrastructure systems, including session scheduling enhancements,
Speaker Change: Invoicing Overhaul, and Uber Substitution Automation that we believe will allow for us to provide best-in-class logistical reliability.
Speaker Change: We believe the software-based enhancements to our marketplace infrastructure will represent a material competitive advantage over time, and are expected to meaningfully improve gross margin during the back-to-school period and on a go-forward basis.
Speaker Change: while simultaneously improving the customer experience due to the higher reliability levels we're able to deliver.
Chuck Cohn: We also expect these changes, which have required material time and energy. We'll now enable us to more efficiently and easily scale the institutional business and handle even larger scale institutional opportunities.
Chuck Cohn: As we enter the back of school selling season, we are hyper focused on ensuring our marketplace delivery and exceptional experience for our customers.
Chuck Cohn: The reason conversion to our consumer and institutional platform coupled with the shift back or a core value proposition in the consumer business and the expansion of the varsity 繼續 with schools, go to market teams, we'll enable a return to durable and profitable growth as we act as a year.
Chuck Cohn: We appreciate your continued interest in our company and look forward to meeting the evolving needs of learners in any subject, anywhere, and at any time. With that, I'll turn the call over to Jason to discuss the financials in more detail. Jason?
Chuck Cohn: We appreciate your continued interest in our company, and look forward to meeting the evolving needs of learners in any subject, anywhere, and at any time. With that, I'll turn the call over to Jason to discuss the financials in more detail. Jason?
Jason Pello: Thanks, Chuck, and good afternoon, everybody. As Chuck mentioned, we continue to make progress towards achieving the three primary goals we laid out for the year. In the second quarter, we delivered revenue of $51 million, results that represent 4% year over year growth. Revenue growth in the current year period was driven by the continued scaling of our consumer and institutional businesses, partially offset by lower armament in our consumer business. Additionally, revenue for the three- and six-month-ended June 30, 2023 included legacy package revenue of $4.9 million and $15.8 million, respectively, that did not recur in the current year period due to the completion of the transition to learning memberships in our consumer business.
Jason Pello: Thanks, Chuck, and good afternoon, everyone. As Chuck mentioned, we continue to make progress towards achieving the three primary goals we laid out for the year. In the second quarter, we delivered revenue of $51 million. Results that represent 4% year over year growth.
Jason Pello: Revenue growth in the current year period was driven by the continued scaling of our consumer and institutional businesses, partially offset by lower ARPM in our consumer business.
Jason Pello: Additionally, revenue for the three- and six-month-ended June 30, 2023 included legacy package revenue of $4.9 million and $15.8 million, respectively, that did not recur in the current year period due to the completion of the transition to learning memberships in our consumer business.
Jason Pello: Consumer Learning Membership Subscription Revenue of $36.4 million increased 2% year-over-year in the second quarter and represented 72% of total company revenue. New consumer-customer acquisition remained healthy, with growth of 12% year-over-year in the second quarter as learning memberships continue to resonate with learners. Active members of 35,500 as of June 30th were up 15% year-over-year.
Jason Pello: Consumer Learning Membership Subscription Revenue of $36.4 million increased 2% year-over-year in the second quarter and represented 72% of total company revenue.
Jason Pello: New Consumer Customer Acquisition Remain Healthy, with growth of 12% year over year in the second quarter, as learning numbers continue to resonate with learners.
Jason Pello: Taxi members of 35.5,000, as of June 30th, we're up 15% year over a year. However, they were below our guidance of 37,000 members to end the quarter.
Jason Pello: However, they were below our guidance of 37,000 members to end the quarter. Arpim of approximately $281 at the end of the second quarter resulted in an annualized run rate of approximately $120 million from learning memberships at quarter end. The lower than expected Artham was due to a higher mix of lower-frequency non-premium learning memberships that anticipated it. Our institutional business delivered revenue of $11.1 million, and increased the 33% year of a year, which represented 21% of total revenue. Varsity tutors for schools executed 56 contracts, yielding $4 million of books.
Jason Pello: Our boom of approximately $281 at the end of the second quarter resulted in an annualized run rate of approximately $120 million from learning memberships at quarter end.
Jason Pello: The lower than expected Artham was due to a higher mix of lower-frequency non-premium learning membership that anticipated.
Jason Pello: Our institutional business delivered revenue of $11.1 million and increase the 33% year over year, which represented 21% of total revenue. Our C2DR school is executed 56 contracts, yielding $4 million of bookies.
Jason Pello: Boone's numbers reflect a focus on increasing access to varsity tutors for the school's platform and hiring and onboarding sales personnel in service of and optimizing for the back-to-school buying period and the longer-term market opportunity within institutions. Our freedom of strategy in our institutional business is allowing us to introduce our products to school districts at a larger scale than ever before. During the quarter, we successfully enabled access to the varsity tutors for schools platform for an additional 1.1 million students, bringing the total to 3.3 million students at nearly 600 schools.
Jason Pello: Boking's numbers reflect a focus on increasing access to varsity tutors for school's platform, and hiring and onboarding sales personnel in service of and optimizing for the back school buying period, and the longer term market opportunity within institutional.
Jason Pello: Our Fremus strategy in our institutional business is allowing us to introduce our products to school districts at a larger scale than ever before.
Jason Pello: During the quarter we successfully enabled access to the varsity tutors for school's platform for an additional 1.1 million students bringing the total to 3.3 million students at nearly 600 school districts.
Jason Pello: Moving down to P&L, gross profit of $33.5 million in the second quarter was lowered by 2% year-over-year. Gross Marching was 65.7% for the three months ended June 30th, 2024, compared to a gross margin of 69.8% during the comparable period in 2023. The decrease in gross margin for both current year periods was a result of lower margins related to our institutional offer, primarily due to higher utilization of tutoring sessions across our new access-based subscription products and higher substitution costs during a seasonally high period during the school year.
Jason Pello: Moving down to P&L, gross profit of $33.5 million in the second quarter was lowered by 2% year-over-year.
Jason Pello: Gross Marching was 65.7% for the three-months end of June 30. 2024 compared to a gross margin, a 69.8% during the comparable period in 2023.
Jason Pello: The decreasing gross margin for both current year periods was a result of lower margin related to our institutional operating. Primarily due to higher utilization of tutoring sessions across our new access-based subscription products and higher substitution costs in a seasonally high period during the school year.
Jason Pello: As Chuck mentioned, we have recently introduced improvements to our Marketplace Infrastructure Systems, which we believe will meaningfully improve gross margin during the back-to-school period and on a go-forward basis. Sales and marketing expenses for the quarter on a gap basis were $15.5 million, an increase of $0.6 million from $14.9 million in the same period in 2023. Non-gap sales and marketing expenses, including non-cash stock-based compensation, for $14.9 million, or 29% of revenue. This compares to $14.2 million, which was also 29% of revenue in the same period in 2023.
Jason Pello: As Chuck mentioned, we have recently introduced improvements to a marketplace infrastructure systems, which we believe will mean to improve growth margin during the back-to-school period and on a go-forward basis.
Jason Pello: Sales and marketing expenses for the quarter on a gap basis were $15.5 million, an increase of $0.6 million from $14.9 million in the same period in 2023.
Jason Pello: Now I'm guest sales and marketing expenses, including non-task, stock-based compensation for $14.9 million for 29% of revenue. This compared to $14.2 million, which was also 29% of revenue in the same period in 2023.
Jason Pello: Sales and marketing increases were driven by investments in our institutional sales and government relations organization. In order to drive customer acquisition, Miranda Awareness, and reach, including through signing up school districts with free access to the varsity tutors for schools platform. Year-to-date, we have more than doubled the number of territories in our sales organization to drive a greater local presence and ensure close alignment to state initiatives.
Jason Pello: Sales and marketing increases were driven by investments in our institutional sales and government relations organizations in order to drive customer acquisition, brand awareness, and reach, including through signing up school districts with free access to the Varsity Tutors for Schools platform.
Jason Pello: Year to date, we have more than doubled the number of territories in our sales organization to drive a greater local presence and ensure close alignment to state initiatives.
Jason Pello: While in parallel building out an inside sales team to capture the increased activity in the market, driven by a growing awareness that tutoring is the most effective way to accelerate learning by education. These impacts were partially offset by marketing spend efficiencies driven by the transition to learning memberships, which allow for a more efficient operating model in our consumer business. General and administrative expenses for the quarter, on a gap basis, were $33.2 million, an increase of $3.5 million from $29.7 million in the same period in 2023. Non-Gap Journal administrative expenses, excluding non-cash stock-based compensation costs, were $22.5 million for 44% of revenue.
Jason Pello: While in parallel building out an inside sales team to capture the increased activity in the market, driven by a growing awareness that tutoring is the most effective way to accelerate learning by educators.
Jason Pello: These impacts were partially offset by marketing spend efficiencies driven by the transition to learning memberships which allow for a more efficient operating model in our consumer business.
Jason Pello: General and administrative expenses for the quarter on a gap basis were 33.2 million dollars, an increase of 3.5 million dollars from 29.7 million dollars in the same period in 2023.
Jason Pello: non-GAAP General Administrative Expenses, excluding non-cash stock-based compensation costs, were $22.5 million, or 44% of revenue. This compared to $20.3 million, or 42% of revenue in the same period in 2023.
Jason Pello: This compared to $20.3 million, or 42% of revenue in the same period in 2023. Including G&A costs, we're product development costs of $11.6 million, and increase $3.2 million from $8.4 million in the same period in 2023. Our investments in product development and our platform-oriented approach to growth have allowed us to launch and continuously improve our suite of products, including learning memberships for customers and our district teacher and parent-assigned offerings for institutional customers. These subscription and access-based offerings simplify our operating model, need to support the organization, which allows us to maximize the investment in our platform.
Jason Pello: Included in G&A costs were product development costs of $11.6 million and increased of $3.2 million from $8.4 million in the same period in 2023.
Jason Pello: Our investments in product development and our platform-oriented approach to growth have allowed us to launch and continuously improve our suite of products, including learning memberships for customers and our district, teacher, and parent-assigned offerings for institutional customers.
Jason Pello: These subscription and access-based offerings simplify our operating model needed to support the organization which allows us to maximize the investment in our platform.
Jason Pello: The non-GAAP adjusted EBITDA loss of $2.1 million for the three months ended June 30, 2024 was at the top end of our guidance range of negative $2 million to negative $4 million. And compared to a non-GAAP adjusted EBITDA of $1.3 million in the same period in 2023. Non-gap adjusts, be with us, and non-gap adjusts, be with our margin improvements, relative to guidance, primarily driven by continued operating efficiency gains. Compared to last year, non-gap adjusted, even to non-gap adjusted, even to margins, we're lower primarily due to investments in the varsity tutors for schools, the go-to market organization, and the product development team to drive innovation and support our continued growth.
Jason Pello: Now I'm gap adjusted even to a lot of $2.1 million for the three months ended June 30, 2024, but this has happened to our guidance range of negative $2 million to negative $4 million. It compared to a non-graph adjusted even to us, but $1.3 million in the same period in 2023.
Jason Pello: non-GAAP Adjusted EBITDA and non-GAAP Adjusted EBITDA margin improvements relative to guidance were primarily driven by continued operating efficiency gains.
Jason Pello: Compared to last year, non-gap adjusted EBITDA and non-gap adjusted EBITDA margins were lowered primarily due to investments in the Varsity Tutors for Schools, Go-To-Market organization, and product development teams to drive innovation and support our continued growth.
Jason Pello: As of June 30, 2024, the company's principal sources of liquidity were cash and cash equivalents of $69.8 million. We believe our strong balance sheet provides us with ample liquidity to operate against our plan and pursue growth initiatives.
Jason Pello: As of June 30, 2024, the company's principal sources of liquidity were cash and cash equivalent of $69.8 million. We believe our strong balance sheet provides us with ample liquidity to operate against our plan and pursue growth initiatives.
Jason Pello: Turning to our business outlets. We're providing you with the third quarter in updating Pollo your revenue and adjusting you with the guide. For the third quarter, consumer revenue was impacted by the higher-than-expected level of seasonal end-of-school year and summer cancellations, which resulted in fewer active members than anticipated as we enter the upcoming back-to-school period, coupled with lower RPIs. For institutional customers, third quarter revenue guidance reflects the quarterly low point in revenue during the year due to normal seasonality and the resulting lower revenues from varsity tutors for schools when K-12 schools and universities are on summer break.
Jason Pello: Turning to our business outlook, we are providing third quarter in updating full-year revenue and adjusted EBITDA guidance.
Jason Pello: For the third quarter, consumer revenue is impacted by the higher-than-expected level of seasonal end-of-school year and summer cancellations, which have resulted in fewer active members than anticipated as we enter the upcoming back-to-school period, coupled with lower ARPA.
Jason Pello: For institutional, third quarter revenue guidance reflects the quarterly low point in revenue during the year due to normal seasonality and the resulting lower revenues from varsity tutors for schools when K-12 schools and universities are on summer break.
Jason Pello: Third quarter adjusted EBITDA guidance reflects the impact of seasonally lower revenue and higher variable costs in the third quarter as we ramp into the back-to-school selling season, coupled with investments in product development and varsity tutors for schools.
Jason Pello: Third quarter, adjusted e-bethic guidance reflects the impact of seasonally lower revenue in higher variable costs in the third quarter, as we rampant into the back-to-school selling season, coupled with investments in product development and the varsity tiers for schools.
Speaker Change: Fails in Government Relations Organization to Drive Continued Innovation and Growth.
Jason Pello: For the full year, Consumer Revenue Guidance reflects anticipated levels of new customer acquisition as students return during back-to-school, coupled with higher ARPM and retention improvements stemming from our focus on premium learning membership. With an institutional approach, full-year revenue guidance reflects the delay in onboarding our C-Tutors for Schools sales team, which has resulted in lower-than-anticipated bookings during the summer months and a more back-weighted bookings expectation as we enter the 2024-2025 school year.
Jason Pello: For the full year, consumer revenue guidance reflects anticipated levels of new customer acquisition as students return during back to school, coupled with higher article in retention improvements stemming from our focus on premium learning memberships.
Jason Pello: With an institutional, full year revenue guides reflect the delay and onboarding of our speechwriters for school sales teams, which has resulted in lower-than-itsits painted booking during the summer months, and a more back-weighted booking of expectations as we enter the 2024 or 2025 school year.
Jason Pello: Consistent with prior guidance, we expect a return to durable and profitable growth as we exit the year. For the third quarter of 2024, we expect revenue in a range of $35 to $38 million. For the full year, we expect to have a new revenue in the range of $196 to $204 million. For the third quarter of 2024, we expect adjusted EBITDA in a range of negative $19 million to negative $17 million. And for the full year, we expect adjusted EBITDA in a range of negative $21 million to negative $19 million.
Jason Pello: Consistent with prior guidance, we expect a return to durable and profitable growth as we exit the year.
Jason Pello: For the third quarter of 2024, we expect revenue in a range of $35 to $38 million.
Jason Pello: For the full year, we expect revenue in the range of $196 to $204 million.
Jason Pello: For the third quarter of 2024, we expect adjusted EBITDA in a range of negative $19 million to negative $17 million.
Jason Pello: And for the full year, we expect adjusted EBITDA in a range of negative $21 million to negative $19 million.
Jason Pello: As Chuck noted, as we enter the back-to-school selling season, we are acutely focused on delivering an exceptional experience for our customers and ensuring a return to operational excellence. In closing, thank you again for your time and for your continued interest in our company. With that, I'll turn it over to the operator for Q&A.
Jason Pello: As Chuck noted, as we enter the back-to-school selling season, we are acutely focused on delivering an exceptional experience for our customers and ensuring a return to operational excellence.
Jason Pello: In closing, thank you again for your time and for your continued interest in our company.
Jason Pello: With that, I'll turn it over to the operator for Q&A. Operator?
Operator: If you'd like to ask a question, please press starfall by one on your telephone keypad. If you'd like to remove a question, please press starfall by two. Again, to ask a question, press star one. As a reminder, if you're using a speaker phone, please remember to pick up your handset before asking your question. We'll pause your line briefly as questions or register. The first question is from the line of Ryan McDonald with Needham. Your line is now open.
Operator: If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1.
Operator: As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered.
Speaker Change: First question is from the line of Ryan McDonnell with mediums in your life that will be
Ryan McDonald: Hi, thanks for taking my questions. Maybe to start on the institutional business. So you've added 1.1 million students during the quarter and 3.3 million across 600 districts now with this freemium strategy. We could just talk about how you're using maybe this expanded presence now to convert more schools and districts to pay customers and what type of conversion rate you've seen thus far, you know, office strategy.
Ryan McDonald: Thanks for taking my questions. Maybe to start on the institutional business. So you've added 1.1 million students during the quarter and 3.3 million across 600 districts now from this freemium strategy.
Ryan McDonald: Can you just talk about how you're using maybe this expanded presence now to convert more schools and districts to paid customers, and what type of conversion rate have you seen thus far, you know, off the strategy?
Ryan McDonald: Thanks, Ryan. I appreciate the question. This is Chuck. So one of the things that's been really exciting about our platform access strategy or giving access to our
Speaker Change: Low or zero marginal cost products for schools is the fact that these are really valued. That there's a lot of perceived value and real value that administrators and their students received from them.
Speaker Change: Many of these students were kind of exposed to our products just toward the tail end of this past semester heading into the summer, but it's been pretty encouraging the fact that just about every school district is willing to meet with us and
Speaker Change: consider rolling these out, and there's been a very high uptick rate. And so we've been encouraged by the number of partnerships we've already formed.
Speaker Change: and the number of meetings that we're having heading into this school year and then how that ultimately relates to building trust and credibility with those school districts and that pulling through to.
Speaker Change: Commercial paid relationships. And so one of the aspects that I think we've been optimizing getting better at is making sure that those can happen concurrently and there's not the need to have.
Speaker Change: the conversation around our free tools first and then subsequently later have the commercial conversations. And so we've been getting better and better at using the opportunity to have an audience to explain just how powerful many of our access-based products like
Speaker Change: teacher assigned, district assigned.
Speaker Change: and the extent to which they can solve some core problems that administrators face, like learning loss remediation.
Speaker Change: like helping students be more excited about coming to school on the stage and then ultimately seeing attended both of which is kind of a secondary benefit of tutoring. And we've seen at this point really all of our bookings.
Speaker Change: coming through relate back to platform access opportunities and getting that kind of motion honed, took a little while to kind of thread the conversation on both elements of the product. But now, we're able to have much, much more comprehensive and strategic conversations.
Speaker Change: And both the volume and nature of those conversations is very, very encouraging.
Chuck Cohn: Appreciate the color there. Maybe Moving to the consumer business, so it sounds like we're moving kind of away from this lower price strategy and kind of focusing back more on the premium learning memberships. How long do you think it's going to take to sort of maybe, if you need to, rebuild the top of the funnel there on that offering and sort of drive that conversion? And for Jason, perhaps maybe you could help us understand, as you're looking at the guidance for the third quarter and the remainder of the year, sort of what sort of assumptions you're making for learning members and RPUM as you sort of kind of shift this strategy toward the premium membership Thanks.
Chuck Cohn: Appreciate the color there. Maybe moving to the consumer business. So it sounds like we're moving kind of away from this lower price strategy and kind of focusing back more on the premium learning memberships.
Chuck Cohn: How long do you think it's going to take to sort of maybe if you need to rebuild the cup of the funnel?
Speaker Change: there on that.
Chuck Cohn: Offering and sort of drive that conversion and then
Chuck Cohn: For Jason, perhaps, you know, maybe you could help us understand, as you're looking at the guidance for third quarter and the remainder of the year, sort of what sort of assumptions you're making for, you know, learning members and RPUM as you sort of kind of shift back this strategy towards the premium memberships. Thanks.
Speaker Change: Sir Ryan, thanks for the question.
Speaker Change: I think what's important about the shift back to premium memberships is that we're still seeing...
Speaker Change: healthy demand when we think about the top of the funnel, and then we think about conversion rates as we're moving towards the back to school. They're above what we saw last year. So we're encouraged by
Speaker Change: The health of the consumer, the market's there, and we think our premium offerings provide students the opportunity to get into a much deeper habit and consistent relationship with tutors. And anytime we've seen that, the data would indicate that you see higher levels of engagement and higher LTV.
Speaker Change: Recent weekly cohorts are already starting to demonstrate those factors. So we're seeing faster times to first session, higher levels of tutoring sessions per week, higher levels of non-tutoring engagement due to the increased discoverability that we've enabled across the platform. You're seeing higher ARPM and higher new learning member MRR or monthly recurring revenue.
Speaker Change: and already higher levels of retention across the most recent weekly cohorts in the middle of the summer.
Jason Pello: When we think about the back half and the back to school period, we expect to end Q3 with about 40,000 active members.
Speaker Change: And then we expect to end the year with about 43,000 active members.
Speaker Change: These growth rates are consistent with historical back-to-school seasonality.
Speaker Change: and the back-to-school peak that we see every year. And then from an ARPM perspective, because we're mid-shifting back towards premium members,
Jason Pello: In our highest volume period, we would expect arpum to be above $300 at the end of each quarter on a consolidated basis.
Chuck Cohn: Yeah, the other thing I would add, this is Chuck, is that as you go back to school, the number of new customers that you add seasonally is roughly double in September and October what it is in the June and July time frame, and so you're able to acquire much, much larger numbers of customers. And in this case, it'll be at higher ARPM levels, consistent with our premium membership.
Chuck Cohn: The other thing I would add, this is Chuck, is that as you enter back to school, the number of new customers that you add seasonally is roughly double in September and October , what it is in the June and July timeframe. And so you're able to.
Chuck Cohn: acquired much, much larger numbers of customers and in this case it'll be at higher arpum levels consistent with our premium membership so you can
Chuck Cohn: So you can... accelerate revenue meaningfully heading into the back-to-school period. And I think one of the things that we really consider to be a silver lining and positive is recognizing some of those higher levels of churn from the lower cost offerings in the spring. We realized that we had a little bit of work to do on the activation side to get people into a weekly habit, and that the product needed to do more of the heavy lifting.
Chuck Cohn: Accelerate revenue, you know, meaningfully heading into a back-to-school period.
Chuck Cohn: And I think one of the things that we really consider to be a silver lining and positive is in recognizing some of those higher levels of churn from the lower cost.
Chuck Cohn: Offerings in the spring we realized that we had a little bit of work to do on the activation side to get people into weekly habit and that the product needed to do more of the heavy lifting.
Chuck Cohn: And that goodness in identifying how we were going to go about doing it, as we actually executed on it, started pulling through to higher levels of one-to-one usage on a weekly basis, year-over-year relative to past cohorts, on a non-tutoring engagement level, and then through to ultimately retention. So we've seen those cohorts flip from negative year-over-year on retention in the late spring to early summer to then positive And the product work and other operational initiatives underway at the company are oriented toward nailing that weekly habit formation in the first 30 days of activation. And ultimately, that's what we would need to do to make a freemium or low-cost offering really, really successful anyway, and it also drives retention and acceleration within our premium memberships as well.
Chuck Cohn: and that goodness in identifying how we're going to be about doing it as we actually executed on it, started pulling through to higher levels of...
Chuck Cohn: 1-to-1 usage on a weekly basis.
Chuck Cohn: year-over-year relative to past cohorts on a non-tutoring engagement level and then through to ultimately retention. So we've seen those cohorts flip from
Chuck Cohn: Negative Year Rear on retention in the late.
Chuck Cohn: The late spring to early summer to then positive year over year and the product work and other operational initiatives underway. The company are oriented towards nailing that that weekly habit formation in the first 30 days in activation.
Chuck Cohn: and ultimately, that's what we would need to do to make a free member low-cost offering really, really successful anyways, and it also drives retention and acceleration within our previous memberships as well for that.
Operator: I appreciate the cover. Thanks.
Speaker Change: Appreciate the call. Thanks.
Andrew Boone: Thank you for your question. The next question is from the line of Andrew Boone with JMP Securities. Your line is now open.
Speaker Change: Thank you for your question. Next question is from the line of Andrew Boone with JMP Securities.
Chuck Cohn: Thanks so much for taking my question. Chuck, can you talk about the keys to increasing engagement for users? What exactly are they looking for? And what can you guys do to the product to really drive that engagement?
Chuck Cohn: Thanks so much for taking my question.
Trap: Trap, let me talk about the keys to increasing engagement for users. What exactly are they looking for and what can you guys do to the product to really drive that engagement?
Chuck Cohn: I'm very happy to have good questions. So, one of the things I think is true about any onboarding experience is that it needs to be intuitive, it needs to remove friction, it needs to push somebody toward the path of actually being able to consume the thing that they purchased quickly and get value out of it. And that's kind of the general North Star forward.
Speaker Change: We're happy to, good question.
Chuck Cohn: Joe.
Chuck Cohn: One of the things I think that's true about any onboarding experience is that it needs to be intuitive, it needs to remove friction, it needs to
Chuck Cohn: push somebody toward the path of actually being able to consume the thing that they purchased.
Chuck Cohn: quickly and get value out of it. And that that's kind of the general North Star board.
Chuck Cohn: The work that we're doing that is aimed at helping people very quickly and intuitively get through our digital experience.
Chuck Cohn: without friction in an intuitive manner, be able to find their tutor, know where it stands, to the extent that their match is pending, know exactly where in the process it is.
Chuck Cohn: and then ultimately, seamlessly get them through to that first session and have quality indicators and funnel indicators each step along the way that indicates that we as a computer making progress and enhancing.
Chuck Cohn: That experience, removing friction, they're getting through to a high quality session and after that first session that it's easy to replace their tutor to the extent that it's not perfect or to the extent that they need to reschedule or find alternative times we've made significant improvements to.
Chuck Cohn: our invoicing system, to our scheduling system, to our matching process, and then to the actual digital onboarding experience in UX as well. So if you log in, you'll see that we've made pretty dramatic upgrades over the course of the last
Chuck Cohn: 60 days or so, that make it more intuitive and you should expect to see continued enhancements of that experience that are oriented around getting somebody into the weekly habit. And then separately, once you nail...
Chuck Cohn: And then separately, once you nail the primary objective that people come into the platform with, which is tutoring, we then want to get them engaging with our non-tutoring products as well. And we know that when somebody engages in multi-modal learning historically, they end up with roughly twice the retention, twice the lifetime value of those customers that only use tutoring as a modality. And so we're now making it much easier to discover relevant classes, relevant diagnostic tests, engage with the AI tutor, then benefit from other forms of learning like on-demand videos that are relevant, and get people into a habit that spans multiple subjects and then ultimately multiple school years.
Chuck Cohn: the primary objective that people come into the platform with, which is tutoring, we then want to get them engaging with our non-tutoring products as well. And we know that when somebody engages in multi-modality learning historically, they end up with roughly twice the retention, twice the lifetime value of those customers that only use
Chuck Cohn: During as a modality and so
Chuck Cohn: We're now making it much easier to discover.
Chuck Cohn: relevant classes, relevant diagnostic tests.
Chuck Cohn: to engage in the AI tutor, do then that upset from other forms of learning like automated videos that are relevant and get people into a habit that spans multiple subjects.
Chuck Cohn: And we're also making it easy to add additional students to the account and making that intuitive as well, so an entire family can get value out of that experience. And that's something that you'll see the digital experience has gotten progressively better at doing and will continue to improve over the course of the next few months with a big focus there as well. Growth on both a cohort basis and year-over-year basis, and the one-to-one utilization rates, all the other modalities of learning, and then ultimately to retention.
Chuck Cohn: and then ultimately multiple school years and we're also making it easy to add additional students to the account.
Chuck Cohn: and making that intuitive as well so an entire family can get value out of that experience. And that's something that...
Chuck Cohn: You'll see the digital experience has gotten progressively better at doing and will continue to improve over the course of the next few months with a big focus there as well. But we're seeing that pull through to
Chuck Cohn: growth on both a cohort basis and year-over-year basis and the one-to-one utilization rates, all the other modalities of learning, and then ultimately to retention. So all the leading indicators there are good. It took having a little bit of a hiccup.
Chuck Cohn: So all the leading indicators there are good. It took having a little bit of a hiccup there in the late spring, early summer for us to really dig in and refocus all of our initiatives and identify that first seven to 30 days as an area that we could really improve and affect. But ultimately, we're seeing it pull through to a much better customer experience and, I think, much better unit-level economics over the fullness of time.
Chuck Cohn: there in the late spring early summer for us to really dig and refocus all of our initiatives and identify that first.
Speaker Change: 7 to 30 days as an area that we could really improve it in Slack.
Chuck Cohn: But ultimately we're seeing it pull through to much better customer experience and I think much better you know level economics over the fullness of time.
Andrew Boone: Thanks for that, and then I wanted to ask about Esther 3, and I think we're getting closer to the exploration there. I know we've talked about this in the past, but can you just...
Andrew Boone: Thanks for that. And then I wanted to ask about ESSER III, and I think we're getting closer to the expiration there. I know we've talked about this in the past, but can you just...
Andrew Boone: [inaudible]
Jason Pello: Alright, thanks for the question. I think what's important about the shift back to premium memberships is that we're still seeing healthy demand when we think about the top of the funnel. And then when we think about conversion rates as we're moving towards back to school, they're above where we saw last year. So we're encouraged by the health of the consumer; the market's there.
Chuck Cohn: Thanks for trying to appreciate the questions from the truck. So one of the things that's been really exciting about our platform access strategy or giving access to our lower zero marginal cost products for schools is the fact that these are really valued, that there's a lot of perceived value and real value that administrators and their students receive from them. And so many of these students were kind of exposed to our products just towards the tail end of this past semester heading into the summer, but it's been pretty encouraging the fact that just about every school district is willing to meet with us and, you know, consider rolling these out, and there's been a very high uptick rate.
Chuck Cohn: We'll now enable us to more efficiently and easily scale the institutional business and handle even larger-scale institutional opportunities. As we enter the back of the school selling season, we are hyper focused on ensuring our marketplace delivery and exceptional experience for our top. The recent conversion to our consumer and institutional platform, coupled with the shift back to our core value proposition in the consumer business and the expansion of the Varsity Tutors for Schools go-to-market teams, will enable a return to durable and profitable growth as we exit the year.
Chuck Cohn: I already occurred later in the year and onboarding the sales team during the seasonally slower summer period took a bit longer than originally forecast. That's resulted in lower-than-anticipated bookings during the summer months and a more back-weighted bookings expected.
Chuck Cohn: And we've seen, you know, at this point, really all of our bookings coming through relate back to platform access opportunities and getting that kind of motion, and it took a little while to kind of thread the conversation on both elements of the product. But now, you know, we're able to have much, much more comprehensive and strategic conversations, and both the volume and nature of those conversations are very, very encouraged.
Chuck Cohn: The work that we're doing is aimed at helping people very quickly and intuitively get through our digital experience without friction in an intuitive manner, and be able to find their tutor wherever it stands. To the extent that their match is pending, no exactly where in the process it is, and then ultimately seamlessly get them through to that first session and have quality indicators and funnel indicators each step along the way that indicates that we as a computer are making progress in enhancing that experience, removing friction so they're getting through to a high-quality session, and after that first session, it's easy to replace their tutor to the extent that it's not perfect.
Chuck Cohn: And we think our premium offerings provide students with the opportunity to get into a much deeper relationship with tutors. And anytime we've seen that, the data would indicate that you see higher levels of engagement and higher LTV. Recent weekly cohorts are already starting to demonstrate those factors. So we're seeing faster times to first session, higher levels of tutoring sessions per week, and higher levels of non-tutor engagement due to the increased discoverability that we've been able to cross the platform.
Chuck Cohn: And so we've been encouraged by the number of partnerships we've already formed and the number of meetings that we're having heading into this school year and then how that ultimately relates to building trust and credibility with those school districts and then rolling that through to commercially paid relationships. And so one of the aspects that I think we've been optimizing and getting better at is making sure that those can happen concurrently, and there's not the need to have the conversation around our free tools first and then subsequently later have the commercial conversations.
Chuck Cohn: You're seeing higher ARPU and higher new learning member MRR, or monthly recurring revenue, and already higher levels of retention across the most recent weekly cohorts in the middle of the summer. When we think about the back half of the back to school period, we expect to end Q3 with about 40,000 active members. And then we expect to end the year with about 43,000 active members. These growth rates are consistent with historical back-to-school seasonality and the back-to-school key that we see every year.
Chuck Cohn: To the extent that they need to reschedule or find alternative times, we've made significant improvements to our invoicing system, to our scheduling system, to our matching process, and then to the actual digital onboarding experience in UX as well. So if you log in, you'll see that we've made pretty dramatic upgrades over the course of the last 60 days or so that make it more intuitive. And you should expect to see continued enhancements to that experience that are oriented around getting somebody into the weekly habit.
Chuck Cohn: And so we've been getting better and better at using the opportunity to have an audience to explain just how powerful many of our access-based products are. Just teachers, scientists, district designs, and the extent to which they can solve some core problems that administrators face like learning loss or mediation, like helping students be more excited about coming to school in this day than ultimately seeing attendance full through, which is kind of a secondary benefit of tutoring.
Chuck Cohn: And then from an arpum perspective, because we're mixed shifting back towards premium members in our highest volume period, we would expect arpum to be above $300 at the end of each quarter on a consolidated basis. Yeah, the other thing