Q1 2025 Nerdy Inc Earnings Call

Good afternoon, and thank you for attending the Nerdy incorporated Q1 2025 earnings call. My name is Jason and I'll be the moderator today.

All lines will be muted during the presentation portion of the call and the opportunity for questions and answers at the end.

Speaker Change: I would now like to pass the conference over to your host E. J Lynn Associate General counsel of Nerdy. They proceed.

Speaker Change: Good afternoon, and thank you for joining Astro near the first quarter 2025 earnings call.

Speaker Change: Chuck <unk>, Chairman and Chief Executive Officer, Gary and Jason <unk>, Chief Financial Officer.

Speaker Change: 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: Any forward-looking statements are made as of today's date, and Nerdy does not undertake or accept any obligations to publicly release any updates or revisions to any forward-looking statements to reflect any change in expectations or any change in offense, conditions or circumstances on which any such statement is based.

Speaker Change: Please refer to the disclaimer since today's shareholder letter announcing Nerdy's first quarter results and the company's filings with the SEC for a discussion of the risks. Not all of the financial measures that we will discuss today are prepared in the quarter-to-gap. 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 DJ, and thank you to everyone for joining today's call.

Chuck: In the first quarter, we continue to execute against our goals to deliver product innovation and operational improvements that will enable a return to growth and profitability. Our investments in the quality of our revenue and focus on delivering enhanced benefits to learning memberships are continuing to build momentum.

Chuck: Improvement to the onboarding experience and learner expert matching process and the launch of several new products are improving match quality and lifetime value through more personalized offering.

Chuck: Give the increased value we continue to incorporate into our learning memberships, we increase consumer pricing during the quarter.

Chuck: When combined with the makeshift to higher frequency learning memberships, average revenue per month or ARPAM increased to $335.14% improvement on a year-rear basis as of March 31st, 2025.

Chuck: Coupled with improvements to new customer acquisition, monthly recurring learning membership revenue reflected positively on a year-rear basis at the end of March, a clear indication that our quality of revenue strategy is taking hold.

Chuck: During the first quarter we implemented two-ter incentives that are driving higher utilization of tutoring sessions across both our consumer and institutional

Chuck: Following the adoption of the new export incentives, we're already seeing several positive leading indicators and the learner expert relationship including faster time to first session more sessions in the first 30 days more sessions per active tutor lower tutor replacement rates and higher customer retention all of which should continue to strengthen our best.

Chuck: Yes.

Chuck: During the quarter gross margins were lower year over year due to the temporary timing differences between the investments we've made in tutor incentives and the price increases enacted for our new consumer customers.

Chuck: As we move throughout the year and mix towards the higher proportion of new consumer customers, we expect to deliver sequential quarterly improvements to gross margin.

Chuck: Our recent streak of strong execution, combining product innovation with streamlined processes and systems sets us up to scale more efficiently and accelerate future growth.

Chuck: From a product perspective, we continue to deliver new products at a rapid pace.

Chuck: For years, our proprietary AI has powered matching algorithms adaptive assessments content creation and the operational workflows to keep our vertically integrated quality controlled marketplace operating.

Chuck: Now returning those same engines outward.

Chuck: <unk> families and educators see the benefits in real time through live plus AI that include a unified experience rolling out across every audience. We serve from families purchasing tutoring to K 12 school districts licensing the platform for their students.

Chuck: Expert tutors on our marketplace.

Chuck: Even classroom teachers and partner schools.

Chuck: <unk> plus AI is grounded in a simple truth technology is most powerful when it amplifies not replaces the human bond at the center of learning.

Chuck: By embedding AI tools directly into the learning experience, including AI enhanced tutoring AI session insights and video playback $24 seven chat tutoring by humans or AI live classes, Peter co pilot and much more we're giving students hands on exposure to this transformative technology.

Chuck: And personalizing their learning.

Chuck: Recently, the President signed an executive order titled advancing artificial intelligence education for American youth, which calls for integrating AI across K 12 education training teachers on AI utilization and developing workforce skills for an AI powered future.

Chuck: The executive order validates our existing strategy, giving schools added confidence to embrace AI, reducing hesitation boosting interest and enabling them to better personalize learning for each student while building the AI fluency students will need in the future during the first quarter, we introduced generative AI capabilities that each tutoring session into app.

Chuck: <unk> insights for learners parents and educators.

Chuck: Our platform automatically transcribes and summarizes every session highlighting key concepts and areas of strength or weakness and it links directly to the relevant sections of the recorded video.

Chuck: AI generated summaries are now provided for all sessions.

Chuck: <unk> links to key learning moments during each tutoring session.

Chuck: For consumers. These insights help learners track progress and give parents a clear view of their investments value.

Chuck: We've now broadly rolled out these improvements to all consumer customers after seeing higher tutoring session utilization in our testing along with greater than 95% positive feedback rate among parents and students and improved customer retention.

Chuck: For institutions AI generated session summaries are now available for all varsity tutors for schools sessions, allowing teachers and administrators to gain data driven insights to refine instruction or interventions, while benefiting from transparent reporting and clearer visibility in the program efficacy.

Chuck: As we move throughout the year, we will deepen our AI capabilities for institutions with dynamic exit ticket generation and advanced cohort level analysis and analytics.

Chuck: Adding district leaders in identifying at risk students earlier and allocating resources more effectively.

Chuck: We also released our next generation AI lesson plan in practice problem generators to create robust customized standards aligned lesson content in seconds.

Chuck: These tools are now available to both experts for tutoring and within our paid institutional products to teachers.

Chuck: By automating lesson preparation progress summaries and individualized practice problems, our tools can free up substantial time each week for educators.

Chuck: It also helps advance key district priorities, such as accelerating learning gains improving student outcomes and strengthening staff retention.

Chuck: The learners that benefit by getting access to a robust set of academic resources that provide them with additional support between live sessions.

Chuck: Moving onto our business outlook, we're executing on multiple levers in order to deliver on our path to profitability.

Chuck: First product innovation is enhancing the onboarding experience in particular AI session summaries tuner incentives and higher session frequency learning memberships are improving retention rates and recent cohorts on a year over year basis.

Chuck: Second.

Chuck: Price increases are leading to revenue and gross margin improvements and new customer cohorts.

Chuck: As we move throughout the year and mix shift towards a higher proportion of new consumer customers, we expected to leverage sequential quarterly improvements to gross margin and end the year with ARPA above $370 on a consolidated basis.

Chuck: Finally by Rolling out AI powered productivity tools and software driven workflows, we improved operating leverage and decrease head count by about 16% since December 31.

Chuck: We believe that the recent advances in AI provide us with the opportunity to drive further levels of productivity, including the agenda vacation of key processes that will allow us to improve both the customer experience and operational consistency, while also removing substantial costs.

Chuck: We expect the combination of the above levers will lead to learning membership revenue returning to growth in the second quarter of 2025.

Chuck: As we move throughout the year, we expect to deliver sequential quarterly improvements in consolidated revenue growth rates and gross margin that we expect will culminate in becoming adjusted EBITDA and operating cash flow positive in the fourth quarter of 2025.

Chuck: In closing artificial intelligence is reshaping education and its impact is greatest when paired with the empathy encouragement and accountability of skilled educators.

Chuck: By bringing our AI capabilities to the forefront through live plus AI, we are elevating the learner experience deepening customer engagement and widening the competitive moat, we have built over more than a decade.

Chuck: As 2025 unfolds, we will expand these capabilities to strengthen our relationships across every audience, we serve and execute on our path to sustainable profitable growth.

Chuck: And with that I'll turn the call over to Jason to discuss the financials in more detail Jason.

Chuck: Chuck and good afternoon, everyone.

Jason: As Chuck mentioned, we made significant progress during the first quarter against the vision, we laid out at the beginning of the year.

Jason: <unk> delivered revenue of $47 6 million in the first quarter above our guidance range of 45% to $47 million.

Jason: This represented a decrease of 11% year over year from $53 7 million during the same.

Jason: Period in 2024.

Jason: Consistent with expectations revenue declined when compared to the prior year period, primarily due to lower number of learning memberships as well as lower institutional revenue.

Jason: These impacts were partially offset by higher ARPA and our consumer business as a result of a mix shift to higher frequency learning memory shifts and price increases enacted during the first quarter.

Jason: Additionally, the consumer business experienced higher retention and newer cohorts due primarily to improvements in the user experience and new expert incentives.

Jason: Membership subscription revenue was $37 9 million.

Jason: Representing 80% of total company revenue.

Jason: As of March 31, active members and ARPA were $45335, respectively, which resulted in an annualized run rate of approximately $163 million from learning memberships at quarter end.

Jason: $335 represented an increase of 14% from $293 as of March 31, two.

Jason: 24, and was up 11% from $302 at year end.

Jason: As Chuck mentioned monthly recurring learning membership revenue inflected positively on a year over year basis in March giving us confidence in our expectation.

Jason: Membership revenue returned to growth in the second quarter of 2025.

Jason: Our institutional business delivered revenue of $9 4 million and represented 19% of total company revenue during the first quarter.

Jason: First of all Kudos for school has executed 90 contracts, yielding $4 million of bookings.

Jason: Our strategy to introduce school districts to the platform and ultimately convert them to our fee based offerings continues to produce results by delivering 34% of paid contracts and 19% of total bookings value in the first quarter.

Jason: Moving down the P&L gross profit of $27 $6 million in the first quarter was lower by 24% year over year.

Jason: Gross margin was 58% in the first quarter, which compared to gross margin of 68% during the same period in 2024.

Jason: The decrease in gross margin was primarily due to investments in our partnership with experts through incentives coupled with higher utilization of tutoring sessions across both our consumer and institutional businesses.

Jason: Following adoption of new export incentives, we are already seeing faster time to the first session more sessions in the first 30 days lower tutor replacement rates and higher retention all of which should continue to strengthen our business over the long term.

Jason: We also expect price increases for new customers.

Jason: Enacted during the first quarter of 2025 will yield sequential quarterly improvements to gross margin as we move throughout the year.

Jason: Sales and marketing expenses for the quarter on a GAAP basis were $15 8 million or <unk>.

Jason: Decrease of $1 6 million from $17 4 million in the same period in 2024.

Jason: non-GAAP sales and marketing expenses, excluding noncash stock based compensation and restructuring costs were $15 3 million compared to $16 $9 million.

Jason: Last year.

Jason: The decrease in sales and marketing expenses was primarily driven by consumer marketing efficiency gains, where we saw our customer acquisition costs decreased by $1 9 million.

Jason: Our 19% year over year in the first quarter.

Jason: As previously mentioned, we also moderated our investments and institutional business given near term funding uncertainties.

Jason: We continue to believe significant opportunity exists in the institutional space and that the product enhancements, we are making the unified platform will drive growth in future periods.

Jason: General and administrative expenses for the quarter on a GAAP basis were $28 4 million a decrease of $3 6 million from $32 million in the same period in 2024.

Jason: non-GAAP G&A, excluding noncash stock compensation expenses and restructuring costs was $20 $7 million.

Jason: Compared to $21 4 million in the same period in 2024.

Jason: Included in G&A costs for product development costs of $10 7 million.

Jason: Several new software driven processes and system implementations that when coupled with AI enabled productivity improvements are delivering operating leverage and enabled us to reduce head count by approximately 16% at the end of the first quarter as compared to December 31 2024.

Jason: We believe that recent advances in AI provide us the opportunity to drive further levels of productivity as we continue to scale.

Jason: non-GAAP adjusted EBITDA loss of $6 4 million for the three months ended March 31, 2025 was at the top end of our guidance range of negative 6% to negative $8 million compared to positive non-GAAP adjusted EBITDA of $24000 in the same period in 2024.

Jason: non-GAAP adjusted EBITDA performance relative to guidance was primarily driven by marketing efficiency improvements coupled with benefits from head count restructuring and AI enabled productivity and operating leverage improvements.

Jason: These improvements were partially offset by lower gross margin due to export incentives and higher utilization of tutoring sessions across both our consumer and institutional businesses.

Jason: Compared to last year non-GAAP adjusted EBITDA was lower primarily due to lower revenues and gross margin.

Jason: As of March 31.

Jason: The company's principal sources of liquidity cash and cash equivalents of $44 $9 million and we have.

Jason: Zero debt.

Jason: Turning to the business outlook today, we are introducing second quarter guidance, increasing the low end of the revenue range for the full year and reaffirming adjusted EBITDA guidance for the full year.

Jason: For the second quarter, we expect consumer revenues will be positively impacted by improvements in new customer acquisition and higher ARPA.

Jason: Due to the mix shift to higher frequency learning memberships, coupled with price increases enacted in our consumer business.

Jason: We also expect improvements to the user experience and investments in tutor pay rates will drive continued retention improvements.

Jason: For the full year, we expect a return to growth in consumer revenues as product innovation accelerates and operational improvement initiatives pull through leading.

Jason: Leading to accelerating consumer revenue growth rates each quarter throughout 2025.

Jason: Institutional revenue reflects the flow through of lower 2024 bookings into the first half of 2025, coupled with a cautious federal and state level funding environment.

Jason: For the second quarter of 2025, we expect revenue in the range of $45 to $48 million.

Jason: For the full year, we are increasing the low end of our revenue range by the first quarter outperformance to 191 $5 million to $200 million.

Jason: Turning to adjusted EBITDA guidance.

Jason: For the second quarter, we expect recent investments and Tudor pay rates, coupled with higher utilization in both our consumer and institutional business.

Jason: Will result in lower gross margin compared to the prior year.

Jason: As we move throughout the year do you expect price increases for new consumer customers enacted during the first quarter will yield sequential quarterly improvements to gross margin.

Jason: Full year non-GAAP adjusted EBITDA improvements reflect a return to consumer revenue growth coupled with benefits from AI enabled productivity and operating leverage improvements, partially offset by investments into your pay rates.

Jason: For the second quarter of 2025, we expect adjusted EBITDA in a range of negative $3 million to negative $6 million.

Jason: For the full year, we are reaffirming adjusted EBITDA guidance in a range of negative $8 million to negative $18 million.

Jason: As we move throughout the year, we expect to deliver sequential quarterly improvements in consolidated revenue growth rates and gross margin that we expect will culminate in becoming adjusted EBITDA and operating cash flow positive in the fourth quarter of 2025.

Jason: This would result in us ending the year with no debt and cash in a range of $35 million to $40 million.

Jason: Which we believe provides us with ample liquidity to fund the business and pursue growth initiatives.

Jason: In closing thank you again for your time and for your continued interest in our company.

Jason: With that I'll turn it over to the operator for Q&A operator.

Jason: If you'd like to ask a question. It is star followed by one on your telephone keypad.

Jason: You'd like to remove that question is stockpiled by two.

Jason: Again to ask a question as star one.

Speaker Change: Our first question is from Jason until Chin with Canaccord. Your line is now open.

Speaker Change: Good afternoon, Thanks for taking my question.

Speaker Change: Last quarter, you talked about the focus for varsity tutors for schools sort of shifting to paid access to those institutional customers.

Speaker Change: Wondering if you could provide a little bit of an update on what steps you've taken thus far the progress that's been made and how you expect.

Speaker Change: The bookings pipeline to trend there given the comments in the shareholder letter around sort of more cautious funding environment.

Chuck: Sure. Thank you and good questions. This is Chuck so I'll start off so.

Chuck: Kind of reflecting on the quarter. So we had a very strong quarter I would call it.

Chuck: Perhaps the most productive period in our company history from a product innovation and execution perspective so.

Chuck: We exceeded revenue we exceeded adjusted EBITDA exceeded active members, but more importantly than that we made pretty tremendous progress on advancing our live class AI product road map and shipping features to customers that are now pulling through too.

Chuck: Increased retention increased engagement enhancing the overall capabilities of tutors silver arming them with digital superpowers was tutor co pilot.

Chuck: Shipping and bringing to bear that the products and in particular, the AI capabilities that in many cases, where power in the market place behind the scenes with our front and center and the benefits not only pull through to the consumer business, but also to the institutional business.

Chuck: So those features like AI session summaries like the ability to look at the performance of the given cohort over time like the teacher productivity tools. All of those are resonating with school districts and I think we're very very encouraged by the interest and appetite for those specific capabilities and it is a very different.

Chuck: Both funding environment, but also.

Chuck: The environment as it relates to interest in an appetite for the application of AI for both teachers and students and that is something that is very encouraging so thinking back to the.

Chuck: The 200 school districts or so and 5 million students on the platform drove a significant amount of bookings and upsell in the quarter, but it also is then leading to conversations now where we're talking about our new <unk> plus AI platform that we think will allow for us to continue to monitor.

Chuck: Ties those different.

Chuck: School districts, so in order to get access to the <unk> platform and some of these new capabilities you actually have to upgrade from the free offering to the paid offerings. So the free offering will persist we're driving engagement. There. We think we are adding a lot of value, but to get any of the new capabilities you need to then upgrade to the <unk>.

Chuck: <unk> AI platform. So the initial signals are really positive.

Chuck: And I think we're very encouraged.

Chuck: The only thing I'd add I mean, certainly we had $4 million of bookings.

Chuck: During the quarter that was in line with expectations that we had set out at the beginning of the year the pipeline.

Chuck: Looking forward basis continues to I would say it exceeds my.

Chuck: Expectations at this point in the year, I think which is reflective of all of the AI improvements that we've made into the platform as well as the structural improvements to the marketplace that have substantially increased.

Chuck: The logistical capabilities the reliability of the platform as we service.

Chuck: Hundreds of school District partners. So overall I think cautious but optimistic is what I would say about.

Chuck: The institutional side of the house, yes, we really haven't seen any of those headwinds to date, but we're obviously very cognizant of the headlines. So I think we're taking bookings pipeline that is exceeding our expectations and discounting answer the unknown, but.

Chuck: In terms of what we've seen on the ground here from customers, it's all very encouraging.

Chuck: Super helpful answer.

Chuck: Follow up you talked about in the beginning of your answer and also in the shareholder letter all of these different products that you've been rolling out.

Chuck: And I'm I'm curious more on the consumer side like out of all of these different <unk>.

Chuck: New features, especially the AI ones, which are you most excited about in terms of driving improved engagement and retention as we move through this year and going to 2026.

Chuck: Well I'd say some of them are different.

Chuck: Portions of their lifecycle journey, where in some cases, we've actually proved out the incremental <unk>.

Chuck: Number of bps, you can get by exposing a new customer or an existing customer or to a certain feature and in the case of.

Chuck: The AI summaries, they're both getting better sequentially over time, but even based on the product as it exists today.

Chuck: We can already demonstrate that it's leading to more engagement, we just need to get more customers in front of it and so we're integrating it more deeply throughout the experience and in that case that sort of a.

Chuck: What internally, we would call kind of a get the best exercise, where the basis points of winter already identified and we're just running it throughout the experience while enhancing it and so we're pretty excited about that dynamic and the ability to turn that into a predictive analytics platform over time that really gives key insights and kind of be the.

Brandon: Brandon the operation.

Brandon: The feedback continues to be outstanding.

Brandon: One of the other capabilities that we're building in like a tutor copilot or earlier, where the positive signals are very positive, but in terms of like directly looking at the financial impact.

Brandon: I think were like less of a math problem right now, although we think it will very quickly turn into true superpowers in real time, then augment that experience in ways that do lead to pretty pretty meaningful improvements in the session delivery and thus.

Brandon: Engagement retention and lifetime value extensive et cetera, so that one's just a little bit earlier, but in general I think the pace at which the products are shipping is much faster and it's also just encouraging that theres been a fundamental change in terms of both consumers and school districts valuing those extra capabilities.

Brandon: And then kind of a combination of lives NII is something that.

Brandon: I think we've been happy to see does not require much explaining the both on surface value taking kind of a combination thereof is one plus one equals three.

Brandon: Great very helpful. Thank you very much.

Nishu: Our next question is from Nishu, we with Cantor Fitzgerald. Your line is now open.

Nishu: Thank you for taking my question Congrats tucking Jason.

I'll start to 2025, so like Chuck.

Speaker Change: Jason I was wondering if you could just give us a little bit more on the macro it doesn't sound like it's impacting.

Speaker Change: At all versus the other at Tech.

Speaker Change: We put a couple of weeks ago.

Speaker Change: That's the first part of the question.

Speaker Change: What is it that.

Speaker Change: Sure.

That confidence.

Speaker Change: Confidence.

Speaker Change: In terms of whether the guidance et cetera that macro is not impacting.

Chuck: Dirty and secondly, Chuck.

Chuck: Chuck on the obviously last quarter, you talked about AI and human interaction and this core SP, plus obviously theres a lot of new products out there we've seen better metrics in terms of average revenue per member annual run rate and selecting out positively.

Speaker Change: Similar to like the last question is on the previous Alex I was wondering like which of these products would you say would monetize earlier in the lifecycle versus later and then I also have a follow up with Jason on the financials.

Chuck: Sure. So first on the on the macro side, we've been doing this a while I've been doing this 18 years since I founded the business.

Chuck: And no single point have we been able to connect any sort of macroeconomic factors to performance of the business and that is certainly true now where the interactions that we see with our customers look normal healthy that also extensive just demand for tutoring overall normal healthy.

Chuck: And from our perspective, it feels like we are in control of our own destiny and as we improve the product were rewarded with deeper engagement and better retention from our customers. So I can't speak for other businesses, but on our side everything looks normal and healthy and we feel good about the macroeconomic environment and how our customers are <unk>.

Chuck: Warming.

Chuck: Separately as it relates to the different AI capabilities, maybe to clarify one thing.

Chuck: Asia continues to be our underlying philosophy artificial intelligence for human interaction, we simplified the consumer with life plus AI and it's also the name of the.

Chuck: <unk> name that we're.

Chuck: Bringing to bear like putting in front of both consumers and institutions. So the paid platform for school districts is also printed.

Chuck: So it is both our philosophy and.

Chuck: Actual product.

Chuck: So it's a comprehensive learning solution that encompasses our live offerings. So why recurring tutoring with a subject matter expert overtime typically once a week twice a week as most of our customers do spanning the 3000 subjects on our platform as well as about 101.

Chuck: Live stream classes from expert instructors every week, we have a artificial intelligence tutor AI tutor we have.

Chuck: Diagnostic tests that are adaptive in nature, we have practice problems, we have a whole host of other different.

Chuck: Capabilities and we also include many of the ways, we augment the live experience by tutor co pilot and like AI session summary, so thats, what we mean when we talk about life plus AI. So it's both the philosophy on the product.

Chuck: And we're actually trying to simplify it.

Chuck: To your point around complexity, we're simplifying it and that kind of combination I think is resonating in terms of what hits when I mean.

Chuck: It's the holistic nature of bringing it to bear and then augmenting the sessions.

Chuck: In ways that add value. So we're trying to make sure that the tools and capabilities, we build as integrated as possible and most likely to.

Chuck: Impacts student outcomes impact student engagement. So we're threading those throughout the experience on the school district side, we're trying to make sure that both the administrators and teachers can get very quick value that allows for them to save time, and then get insights that allow for them to better direct construction.

Chuck: Okay.

Chuck: Follow up one.

Chuck: Quick one before I turn it over to Jason on the financials.

Chuck: PCI upon us is there one particular, one that hey, the feedback was so positive hey, I'd really like to types of listeners.

Chuck: Co pilot you spoke about that it might be a little bit later, if that's right.

Chuck: For monetization right is it any particular apologize I like this business does this game changer.

Speaker Change: Sure, Yes, so one customer facing product or feature that is very material has been the reason we're transcribing all of the tutoring sessions, where then summarizing them, where then analyzing them to give insights and recommendation.

Chuck: <unk>.

Chuck: And we're then able to provide those to parents and students.

Chuck: Students can immediately jumped to the exact moment, so it's actually auto tagged as of recently, whereas the exact second mark that different concepts were discussed so you can actually click on a link for a particular topic and jumped to that moment in a video. So you don't have to watch 60 minutes of video to find it you can actually talk to that.

Chuck: Exact moment so its most productive for students and then the parents love. The fact that they can find out what happened in this session and that they are they.

Chuck: They are in fact investing their money wisely and tutoring and that the students just benefiting from it so rather than getting a short answer like how does your tutoring sessions.

Chuck: Hi, now they can get deep insight into how to best support the student themselves and then also to the extent, it's working and so that has been remarkably positive.

Chuck: And we think it can be a really killer feature that continues to get better and more immersive and more insightful overtime and it's an area, where we're spending a lot of time on the product side, but I would expect for that particular one.

Chuck: B one of several examples of big winners got it got it thanks for the extra color.

Speaker Change: We appreciate it and then Jason I flip it over to the financial side, you talked about leveraging AI for internal use meaning like to get more operational efficiency. Obviously, we see this across SaaS software space, where people are using AI.

Chuck: To leverage to gain more efficiency.

Chuck: A 60% reduction, but like in terms of how much more.

Chuck: Check out of it and I guess like what are the areas you are taking.

Chuck: The cost out.

Jason Chin: And Jason how should we expect over the medium or longer term.

Chuck: Do you think about like.

Chuck: EBITDA free cash flow breakeven and Thats. It from me. Thank you talking Jason.

Speaker Change: Yes, good question.

Speaker Change: I'd say, we're maybe halfway through our journey as far as applying AI and machine learning to our operations.

Speaker Change: Specific use case is the matching algorithms we've continued to see improvements in the system is taking over the <unk>.

Speaker Change: <unk> the vast majority actually at this point of all of the students and expert matches on both the initial placement. But then also are there any downstream replacements or additional subjects covered.

Speaker Change: At least the happier customers that leads to higher lifetime values over time, but when you think about like a lot of the monotonous processes around customer service. Those are also all being Adrian <unk>.

Speaker Change: Automated let me if you think about customer service.

Speaker Change: Chat that has also been automated before we get into a lot of humans.

Speaker Change: Answer any questions that you may have.

Speaker Change: There's still a lot of opportunity there I would say.

Speaker Change: Think about the year.

Speaker Change: Here in front of us for 2025.

Speaker Change: The cost side of the house continues to track or exceed expectations.

Speaker Change: By being lower.

Speaker Change: Then than what we were targeting and then I think what's most important as you think about 26%, 27% will be able to continue to scale the business without a commensurate increase in head count to support that growth, which is really what's exciting as we think about the year ahead.

Speaker Change: Progress on efficiency related initiatives than expected maybe to make it more real.

Speaker Change: When you do a better job matching student in the tuner you than happened in the first quarter. We saw our automated matching percentages go way up we saw the quality of the mass go way up we saw the amount of time to come.

Speaker Change: <unk> requested a different tutor go way down.

Speaker Change: And we saw all of the leading indicators of retention and start to improve like the time to their first nation and their satisfaction rates and all the other things that bode well for that entire customer journey and putting them on a happy path to be very high LTV customer with very low customer service costs over time, and so that's something that we feel like we're making tremendous strides.

Speaker Change: And that was aided by AI.

Speaker Change: Okay. Thank you very much talking Jason extremely.

Thanks for your color, we'll talk soon.

Speaker Change: Thank you.

Speaker Change: Our next question is from Andrew Boone with citizens. Your line is now open.

Speaker Change: Hi, This is briana on the line for Andrew Thanks for taking my question. So just can you walk us through how the timing gap between CDO investments in February price increases affected gross margins in the quarter.

Speaker Change: There is a mix shift towards higher frequency learning numbers, how should we be thinking about gross margin improvement through the year and then can you speak to future investments in AI are there areas of automation or product enhancement that remains untapped, especially as we think about AI.

Speaker Change: Experience over time.

Speaker Change: Yeah.

Speaker Change: Sure I'll speak to gross margin first and I'll, let Chuck talk about additional M&A opportunities look we expected and guided to the fact that new expert incentives would result in lower gross margins in Q1 and for the full year.

Speaker Change: That is a temporary timing difference between the investments we've made in tutor incentives and the price increases enacted for new customers.

Speaker Change: It's been very intentional that we're investing in these tutor partnerships on our marketplace. It's a strategy that reinforces tutor in customer satisfaction, it's driving retention and ultimately will support revenue growth as we move throughout the year and we mixed shift towards a higher proportion of new customers. We expect it to recover sequential quarterly improvements to gross margin.

Speaker Change: And that will ultimately culminate in 2026, we'll get back to historical margins above 70%. So we feel really good about the investments.

Speaker Change: The benefits, we're seeing on the tutor side.

Speaker Change: Pretty pronounced we're able to shift significantly more work to the highest quality tutors.

Speaker Change: We will continue to have downstream benefits as we move throughout the year and then maybe just to clarify one point. So we applied we tested this in the fall we started applying it broadly in December.

Speaker Change: And what you're now seeing is that the tutors are aligned to driving lifetime value and retention. So the deeper they get in a given customer relationship on a per customer basis, they get paid.

Speaker Change: And what was really exciting to see in the first quarter was that you started to see retention in flat way up in combination with consumer product and some of the other.

Speaker Change: Some of the ever optimizations and improvements we've made around the matching signed and mixing towards the higher quality tutor all else being equal, but then every single kind of cohort of tutor all else being equal started improving their time to their first session and their time to their second session when they're talking to their third.

Speaker Change: And then all of a sudden you started seeing customers get deeper and deeper in the relationship and satisfaction going up and you saw that really across the board.

Speaker Change: And that price increase and compensation, which is driving some of the retention inflection is.

Speaker Change: Applying to all customers starting in February is when we rolled out new pricing.

Speaker Change: Your pricing for new customers that we think is appropriate given the enhanced value on the platform and for those new customers at the higher pricing their gross margins are already at a higher healthy level that is in the like.

Speaker Change: <unk>.

Speaker Change: Mid to high 70 percentage range, which is kind of consistent with what we've seen before and so as you get deeper in the year with each subsequent quarter, you're mixing towards a higher proportion of customers that came in on that new pricing.

Speaker Change: And youre benefiting from.

Speaker Change: The retention associated with the alignment between the tutors on the platform and the.

Speaker Change: The marketplace itself assets.

Speaker Change: The company and so what's kind of exciting though is the second optimization that occur. So the first one optimization is what we described everybody is more excited about the work and they start doing a better job of all else being equal. The second optimization is that now the best tutors onto the platform to drive the highest customer set.

Speaker Change: It is factored in engagement the highest LTV are now absorbing.

Speaker Change: More of the work and so what youre seeing as we get deeper into the semester is that we're able to mix up.

Speaker Change: The tenure and quality of the average mass, which we watch closely and inflect. It in a way that traditionally would not have been possible and thats something that bodes really well for lifetime value down the road. So we're pretty excited about this as kind of a new vector it require doing a bunch of really boring infrastructure work last year related.

Speaker Change: To invoicing and scheduling and other aspects that are really important to a marketplace operation, where we had some technical debt that we now have started to really address it now get wins on so we're very encouraged by that dynamic.

Speaker Change: Our next question is from Greg <unk> with Northland Securities. Your line is now open.

Speaker Change: Great. Good afternoon, Chuck Jason Congrats on the results here.

Speaker Change: I'm wondering if you could speak a little more to the monthly recurring revenue inflection that you saw in March maybe hour compare to January and February are you able to maybe give some context on the monthly growth dynamics and I guess, just a follow up to on kind of.

Speaker Change: Maybe relative to your internal assumptions and expectations, where you saw the upside in the quarter.

Speaker Change: Sure. So a year ago that number reflected negative due to churn associated with lower frequency offerings. We spent a good portion of the time of this past year really nailing the foundation, improving all aspects of that consumer onboarding and the digital experience.

Speaker Change: We also shifted towards the more recurrent higher frequency customer base and then throughout this most recent quarter started making real strides in the matching algorithm and tutor incentives and a couple of other levers that are.

Speaker Change: More present last year that were present in the quarter and will continue to.

Speaker Change: Pit and drive further improvement like AI session summaries.

Speaker Change: No.

In March is when the MLR flipped positive.

Speaker Change: Effectively the consumer membership business went from being a year over year.

Speaker Change: Headwind to total company growth to now being a tailwind and something that should both accelerate year over year with each subsequent month of the quarter throughout the year and also drive elevated year over year growth relative to last year. So I'd say, we feel really good about that dynamic and then <unk>.

Speaker Change: First thing in a way that we think can lead to continued improvement throughout the course of the year and perhaps provide real upside to come next fall.

Speaker Change: And then maybe just to talk about the path to profitability here, we're executing across the three levers that we laid out for the year product innovation and Tudor incentives. They are leading to improved customer experience and retention in recent cohorts.

Chuck: This increases the Chuck mentioned will have us ending the year with RPM above $370 on a consolidated basis.

Speaker Change: We significantly reduced head count during the quarter.

Speaker Change: You do believe that there is additional opportunity to drive further levels of productivity as we scale and then as we move throughout the year kind of that sequential quarterly improvements in consolidated revenue growth rates and gross margin that we expect will culminate in becoming adjusted EBITDA and operating cash flow positive in the fourth quarter of 2020, So all of it's coming together. According.

Speaker Change: The plan as we expected and laid out when we initiated guidance for the year.

Speaker Change: We're excited about the execution that we're seeing across the teams.

Speaker Change: Great that's helpful and.

Speaker Change: Wondering I guess as a percentage maybe of your learner learning member base.

Speaker Change: What percentage may be paying the new increased pricing level that you implemented at this point and the.

Speaker Change: The path to that 370 plus in <unk>.

Speaker Change: Should we think about that kind of straight line on a quarterly basis to get there.

Speaker Change: Maybe I'll start with the second part so 335 was the <unk> at the end of the first quarter.

Speaker Change: Up 14% year over year, and it's up 11% from the end of 2024, which was $302 as we move throughout the year you should expect second quarter open to be $3 45 at the end of <unk>.

Speaker Change: <unk> at the end of September it will be $360 then at the end of the year will be $370.

Speaker Change: So we continue to believe that the prices are appropriate they represent the value that we're providing to customers on the platform and.

Speaker Change: And we feel good about them as we move throughout the year.

Speaker Change: Once again to ask a question. It is star one on your telephone keypad.

Speaker Change: It looks like there are no additional questions that concludes the conference call. Thank you for your participation and enjoy the rest of your day.