Nerdy - Earnings Call - Q1 2025

Executive Summary

• Revenue of $47.6M beat the top end of company guidance ($45–$47M), but declined 11% y/y; gross margin compressed to 58.0% (−1,000 bps y/y), and adjusted EBITDA loss was $6.4M, at the top end of guidance.
• Consumer momentum improved: ARPM rose 14% y/y to $335, Active Members reached 40.5K, and monthly recurring Learning Membership revenue inflected positive y/y in March, supporting an expected return to Consumer revenue growth in Q2.
• Guidance: Q2 revenue $45–$48M; FY revenue low end raised to $191.5–$200M (from $190–$200M), FY adjusted EBITDA reaffirmed at −$8M to −$18M; management reiterated a path to adjusted EBITDA and operating cash flow positive in Q4 2025.
• Strategic levers: launch of Live + AI platform, tutor incentive model, ~16% headcount reduction, and AI-enabled workflow/productivity gains; cash $44.9M and no debt provide liquidity to execute.

What Went Well and What Went Wrong

• What Went Well

  • Revenue beat the top end of guidance; adjusted EBITDA loss was better than the midpoint as cost actions and marketing efficiency helped offset gross margin pressure.
  • Consumer unit economics improved: ARPM rose to $335 (+14% y/y), Active Members were 40.5K, and MRR turned positive y/y in March; “Our first-quarter results underscore the power of our Live + AI platform…” — Chuck Cohn, CEO.
  • Execution on AI/productivity: Live + AI released; AI session summaries broadly rolled out; headcount cut by ~16%, with management highlighting operating leverage benefits from AI.

• What Went Wrong

  • Topline declined 11% y/y and gross margin fell to 58.0% (from 68.0% a year ago) due to timing between tutor incentives and February price increases, plus higher tutoring utilization.
  • Institutional revenue fell to $9.4M (−21% y/y), with management citing cautious federal/state funding; bookings were $4.0M on 90 contracts.
  • Profitability pressure: net loss widened to $16.2M (vs. $12.0M y/y); adjusted EBITDA turned to −$6.4M (vs. ~$0 in Q1’24) on lower revenue and gross margin.

Transcript

Operator (participant)

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, with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, TJ Lynn, Associate General Counsel of Nerdy. May he proceed?

TJ Lynn (Associate General Counsel)

Good afternoon, and thank you for joining us for Nerdy's first quarter 2025 earnings call. With me are Chuck Cohn, Founder, Chairman and Chief Executive Officer of Nerdy, and Jason Pello, Chief Financial Officer. Before I turn the call over to Chuck, I'll remind everyone that this discussion will contain forward-looking statements, including but not limited to expectations with respect to Nerdy's future financial and operating results, strategy, opportunities, plans, and outlook. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results. Any forward-looking statements are made as of today's date, and Nerdy does not undertake or accept any obligation to publicly release any updates or revisions to any forward-looking statements to reflect any change in expectations or any change in events, conditions, or circumstances on which any such statement is based.

Please refer to the disclaimers in today's shareholder letter announcing Nerdy's 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 accordance with GAAP. Please refer to today's shareholder letter for reconciliations of these non-GAAP measures. With that, let me turn the call over to Chuck.

Chuck Cohn (Founder, Chairman, and CEO)

Thanks, TJ, and thank you to everyone for joining today's call. In the first quarter, we continued 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 enhancements to the Learning Memberships are continuing to build momentum. Improvements to the onboarding experience and learner-expert matching process and the launch of several new products are improving match quality and lifetime value through a more personalized offering. Due to the increased value we continue to incorporate into our Learning Memberships, we increased consumer pricing during the quarter. When combined with the makeshift to higher-frequency Learning Memberships, average revenue per member per month, or ARPM, increased to $335, a 14% improvement on a year-over-year basis as of March 31st, 2025.

Coupled with improvements to new customer acquisition, monthly recurring Learning Memberships revenue inflected positively on a year-over-year basis at the end of March, a clear indication that our quality of revenue strategy is taking hold. During the first quarter, we implemented tutor incentives that are driving higher utilization of tutoring sessions across both our consumer and institutional businesses. Following the adoption of the new expert incentives, we are already seeing several positive leading indicators in 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 business. 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.

As we move throughout the year and mix towards a higher proportion of new consumer customers, we expect to deliver sequential quarterly improvements to gross margin. 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. From a product perspective, we continue to deliver new products at a rapid pace. For years, our proprietary AI has powered matching algorithms, adaptive assessments, content creation, and the operational workflows that keep our vertically integrated quality-controlled marketplace operating. Now we're turning those same engines outward so learners, families, and educators see the benefits in real time through Live + 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, expert tutors on our marketplace, and even classroom teachers and partner schools.

Live + AI is grounded in a simple truth: technology is most powerful when it amplifies, not replaces, the human bond at the center of learning. By embedding AI tools directly into the learning experience, including AI-enhanced tutoring, AI Session Insights, and video playback, 24/7 chat tutoring by humans or AI, Live Classes, Tutor Copilot, and much more, we're giving students hands-on exposure to this transformative technology and personalizing their learning. 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. 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 turn each tutoring session into actionable insights for learners, parents, and educators. Our platform automatically transcribes and summarizes every session, highlighting key concepts and areas of strength or weakness, and it links it directly to the relevant sections of the recorded video. AI-generated summaries are now provided for all sessions, providing links to key learning moments during each tutoring session. For consumers, these insights help learners track progress and give parents a clear view of their investment's value. 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.

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 clear visibility in the program efficacy. 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, aiding district leaders in identifying at-risk students earlier and allocating resources more effectively. We also released our next-generation AI lesson plan and practice problem generators to create robust, customized, standards-aligned lesson content in seconds. These tools are now available to both experts for tutoring and within our paid institutional products to teachers. By automating lesson preparation, progress summaries, and individualized practice problems, our tools can free up substantial time each week for educators.

It also helps advance key district priorities such as accelerating learning gains, improving student outcomes, and strengthening staff retention. For learners, they benefit by getting access to a robust set of academic resources that provide them with additional support between live sessions. Moving on to our business outlook, we're executing on multiple levers in order to deliver on our path to profitability. First, product innovation is enhancing the onboarding experience. In particular, AI Session Summaries, tutor incentives, and higher session frequency Learning Memberships are improving retention rates in recent cohorts on a year-over-year basis. Second, price increases are leading to revenue and gross margin improvements in new customer cohorts. As we move throughout the year and make shift toward a higher proportion of new consumer customers, we expect to deliver sequential quarterly improvements to gross margin and end the year with ARPM above $370 on a consolidated basis.

Finally, by rolling out AI-powered productivity tools and software-driven workflows, we improved operating leverage and decreased headcount by about 16% since December 31st. We believe that the recent advances in AI provide us with the opportunity to drive further levels of productivity, including the identification of key processes that will allow us to improve both the customer experience and operational consistency while also removing substantial costs. We expect the combination of the above levers will lead to Learning Memberships revenue returning to growth in the second quarter of 2025. 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.

In closing, artificial intelligence is reshaping education, and its impact is greatest when paired with the empathy, encouragement, and accountability of skilled educators. By bringing our AI capabilities to the forefront through Live + AI, we are elevating the learner experience, deepening customer engagement, and widening the competitive moat we have built over more than a decade. As 2025 unfolds, we will expand these capabilities, strengthen relationships across every audience we serve, and execute on our path to sustainable, profitable growth. I'll turn the call over to Jason to discuss the financials in more detail. Jason.

Jason Pello (CFO)

Thanks, Chuck, and good afternoon, everyone. As Chuck mentioned, we made significant progress during the first quarter against the vision we laid out at the beginning of the year. Nerdy delivered revenue of $47.6 million in the first quarter, above our guidance range of $45 million-$47 million, which represented a decrease of 11% year-over-year from $53.7 million during the same period in 2023. Consistent with expectations, revenue declined when compared to the prior year period, primarily due to a lower number of Learning Memberships as well as lower institutional revenue. These impacts were partially offset by higher ARPM in our consumer business as a result of a mix shift to higher-frequency Learning Memberships and price increases enacted during the first quarter. Additionally, the consumer business experienced higher retention in newer cohorts due primarily to improvements in the user experience and new expert incentives.

Learning membership subscription revenue was $37.9 million, representing 80% of total company revenue. As of March 31st, active members and ARPM were 40,500 and $335 respectively, which resulted in an annualized run rate of approximately $163 million from learning memberships at quarter end. ARPM of $335 represented an increase of 14% from $293 as of March 31st, 2024, and was up 11% from $302 at year-end. As Chuck mentioned, monthly recurring learning membership revenue inflected positively on a year-over-year basis in March, giving us confidence in our expectation that learning membership revenue will return to growth in the second quarter of 2025. Our institutional business delivered revenue of $9.4 million and represented 19% of total company revenue during the first quarter. Varsity Tutors for Schools executed 90 contracts, yielding $4 million of bookings.

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. Moving down the P&L, gross profit of $27.6 million in the first quarter was lower by 24% year-over-year. Gross margin was 58% in the first quarter, which compared to a gross margin of 68% during the same period in 2023. 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.

Following the adoption of new expert 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. We also expect price increases for new customers enacted during the first quarter of 2025 will yield sequential quarterly improvements to gross margin as we move throughout the year. Sales and marketing expenses for the quarter on a GAAP basis were $15.8 million, a decrease of $1.6 million from $17.4 million in the same period in 2024. Non-GAAP sales and marketing expenses, excluding non-cash stock-based compensation and restructuring costs, were $15.3 million, compared to $16.9 million last year.

The decrease in sales and marketing expenses was primarily driven by consumer marketing efficiency gains, where we saw customer acquisition costs decrease by $1.9 million, or 19% year-over-year in the first quarter. As previously mentioned, we also moderated our investments in the institutional business given near-term funding uncertainties. We continue to believe a significant opportunity exists in the institutional space and that the product enhancements we are making to the unified platform will drive growth in future periods. 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. Non-GAAP G&A, excluding non-cash stock compensation expenses and restructuring costs, was $20.7 million, compared to $21.4 million in the same period in 2024. Included in G&A costs were product development costs of $10.7 million.

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 headcount by approximately 16% at the end of the first quarter as compared to December 31st, 2024. We believe that recent advances in AI provide us the opportunity to drive further levels of productivity as we continue to scale. Non-GAAP adjusted EBITDA loss of $6.4 million for the three months ended March 31st, 2025, was at the top end of our guidance range of -$6 million to -$8 million and compared to positive non-GAAP adjusted EBITDA of $24,000 in the same period in 2024. Non-GAAP adjusted EBITDA performance relative to guidance was primarily driven by marketing efficiency improvements coupled with benefits from headcount restructuring and AI-enabled productivity and operating leverage improvements.

These improvements were partially offset by lower gross margin due to expert incentives and higher utilization of tutoring sessions across both our consumer and institutional businesses. Compared to last year, non-GAAP adjusted EBITDA was lower primarily due to lower revenues and gross margin. As of March 31st, the company's principal sources of liquidity were cash and cash equivalents of $44.9 million, and we have zero debt. 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. For the second quarter, we expect consumer revenues will be positively impacted by improvements in new customer acquisition and higher ARPM due to the mix shift to higher-frequency Learning Memberships coupled with price increases enacted in our consumer business.

We also expect improvements to the user experience and investments in tutor pay rates will drive continued retention improvements. For the full year, we expect a return to growth in consumer revenues as product innovation accelerates and operational improvement initiatives pull through, leading to accelerating consumer revenue growth rates each quarter throughout 2025. 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. For the second quarter of 2025, we expect revenue in a range of $45 million-$48 million. For the full year, we are increasing the low end of our revenue range by the first quarter outperformance to $191.5 million-$200 million.

Turning to adjusted EBITDA guidance, for the second quarter, we expect recent investments in tutor pay rates coupled with higher utilization in both our consumer and institutional business will result in lower gross margin compared to the prior year. As we move throughout the year, we expect price increases for new consumer customers enacted during the first quarter will yield sequential quarterly improvements to gross margin. 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 in tutor pay rates. For the second quarter of 2025, we expect adjusted EBITDA in a range of -$3 million to -$6 million. For the full year, we are reaffirming adjusted EBITDA guidance in a range of -$8 million to -$18 million.

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. This would result in us ending the year with no debt and cash in a range of $35 million-$40 million, which we believe provides us with ample liquidity to fund the business and pursue growth initiatives. 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. Operator.

Operator (participant)

If you'd like to ask a question, it is star followed by one on your telephone keypad. If for any reason you'd like to remove that question, it is star followed by two. Again, to ask a question, it is star one. Our first question is from Jason Tilchen with Canaccord. Your line is now open.

Jason Tilchen (Director and Senior Equity Research Analyst)

Good afternoon. Thanks for taking my question. Last quarter, you talked about the focus for Varsity Tutors for Schools sort of shifting to paid access to those institutional customers. I'm 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 the bookings pipeline to trend there given the comments in the shareholder letter around sort of a more cautious funding environment.

Chuck Cohn (Founder, Chairman, and CEO)

Sure. Thank you. Good question. This is Chuck. I'll start off. Kind of reflecting on the quarter, we had a very strong quarter. I would call it perhaps the most productive period in our company history from a product innovation and execution perspective. We exceeded revenue. We exceeded adjusted EBITDA. We exceeded active members. More importantly than that, we made pretty tremendous progress on advancing our Live + AI product roadmap and shipping features to customers that are now pulling through to increased retention, increased engagement, enhancing the overall capabilities of tutors. We're arming them with digital superpowers with Tutor Copilot, just shipping and bringing to bear the products and, in particular, the AI capabilities that, in many cases, were powering the marketplace behind the scenes but now are front and center.

The benefits not only pull through to the consumer business but also to the institutional business. Those features like AI Session Summaries, like the ability to look at the performance of a given cohort over time, like the teacher productivity tools, all of those are resonating with school districts. I think we're very, very encouraged by the interest and appetite for those specific capabilities. It is a very different both funding environment but also environment as it relates to interest in and appetite for the application of AI for both teachers and students. That is something that is very encouraging. Thinking back to the 1,200 school districts or so and 5 million students on the platform, it drove a significant amount of bookings and upsell in the quarter.

It also is then leading to conversations now where we're talking about our new Live + AI paid platform that we think will allow for us to continue to monetize those different school districts. In order to get access to the paid platform and some of these new capabilities, you actually have to upgrade from the free offering to the paid offering. The free offering will persist. We're driving engagement there. We think we're adding a lot of value. To get any of the new capabilities, you need to then upgrade to the Live + AI paid platform. The initial signals are really positive, and I think we're very encouraged.

Jason Pello (CFO)

Yeah. The only thing I'd add, I mean, certainly we had $4 million of bookings during the quarter. That was in line with expectations that we had set out at the beginning of the year. The pipeline on a looking-forward basis continues to, I would say, exceed my expectations at this point in the year, I think, which is reflective of all the AI improvements that we've made into the platform, as well as the structural improvements to the marketplace that have substantially increased the logistical capabilities, the reliability of the platform as we service hundreds of school district partners. Overall, I think cautious but optimistic is what I'd say about the institutional side of the house.

Yeah. We really haven't seen any of those headwinds to date, but we're obviously very cognizant of the headlines. I think we're taking a bookings pipeline that is exceeding our expectations and just discounting it for the unknown. In terms of what we've seen on the ground here from customers, it's all very encouraging.

Jason Tilchen (Director and Senior Equity Research Analyst)

Super helpful answer. One follow-up, you talked about in the beginning of your answer and also in the shareholder letter, all these different products that you've been rolling out. I'm curious more on the consumer side. Out of all these different 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 go into 2026?

Chuck Cohn (Founder, Chairman, and CEO)

I’d say some of them are different portions of their life cycle journey, where in some cases, we’ve actually proved out the incremental number of basis points you can get by exposing a new customer or an existing customer to a certain feature. In the case of the AI summaries, they’re both getting better sequentially over time. Even based on the product as it exists today, we can already demonstrate that it’s leading to more engagement, and we just need to get more customers in front of it. We’re integrating it more deeply throughout the experience. In that case, that’s sort of what internally we would call kind of a get-the-basis-points exercise, where the basis points of win are already identified, and we’re just threading it throughout the experience while enhancing it.

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 brain of the operation. The feedback continues to be outstanding. A number of the other capabilities that we're building in, like Tutor Copilot earlier, where the signals are very positive, but in terms of directly linking it to financial impact, I think it's like less of a math problem right now, although we think it will very quickly turn into true superpowers in real time that augment that experience in ways that do lead to pretty meaningful improvements in the session delivery and thus engagement, retention, lifetime value extension, etc. That one's just a little bit earlier. In general, I think the pace at which the products are shipping is much faster.

It is also just encouraging that there's been a fundamental change in terms of both consumers and school districts valuing those extra capabilities. The kind of combination of Live and AI is something that I think we've been happy to see does not require much explaining. They are both on surface value, taking the kind of combination thereof as one plus one equals three.

Jason Tilchen (Director and Senior Equity Research Analyst)

Great. Very helpful. Thank you very much.

Operator (participant)

Our next question is from Yi Fu Lee with Cantor Fitzgerald. Your line is now open.

Yi Fu Lee (Senior Equity Research Analyst and Vice President)

Thank you for taking my question. Congrats, Chuck and Jason, for a strong start to 2025. Chuck and/or 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 Nerdy at all versus the other edtech firms that reported a couple of weeks ago. That's the first part of the question, what is it that you feel that Nerdy is much more confident, right, in terms of whether the guidance, etc., that macro is not impacting Nerdy? Secondly, Chuck, obviously last quarter, you talked about AI for human interaction. This quarter is AI plus. Obviously, there's a lot of new products out there. We've seen better metrics in terms of average revenue per member and run rate inflecting up positively.

Similar to the last question from the previous analyst, I was wondering which of these products would you say were monetized earlier in the life cycle versus later? I also have a follow-up for Jason on the financials.

Chuck Cohn (Founder, Chairman, and CEO)

Sure. First, on the macro side, we've been doing this a while. I've been doing this 18 years since I founded the business. At no single point have we been able to connect any sort of macroeconomic factors to performance of the business. That is certainly true now, where the interactions that we see with our customers look normal, healthy. That also extends to just demand for tutoring overall, normal, healthy. From our perspective, it feels like we're in control of our own destiny. As we improve the product, we're rewarded with deeper engagement and better retention from our customers. I can't speak for other businesses, but on our side, everything looks normal and healthy. We feel good about the macroeconomic environment and how our customers are performing.

Separately, as it relates to the different AI capabilities, maybe to clarify one thing, AI for HI continues to be our underlying philosophy, artificial intelligence for human interaction. We simplified it for the consumer with Live + AI. And it's also the name of the product name that we're bringing to bear, putting in front of both consumers and institutions. The paid platform for school districts is also branded Live + AI. It is both a philosophy and an actual product. It is a comprehensive learning solution that encompasses our live offerings, live recurring tutoring with a subject matter expert over time, typically once a week, twice a week, as most of our customers do, spanning the 3,000 subjects on our platform, as well as about 100 live stream classes from expert instructors every week. We have an artificial intelligence tutor, AI Tutor.

We have diagnostic tests that are adaptive in nature. We have practice problems. We have a whole host of other different capabilities. We also include many of the ways that we augment the live experience, like Tutor Copilot and like AI Session Summaries. That is what we mean when we talk about Live + AI. It is both the philosophy and the product. We are actually trying to simplify it to your point around complexity. We are simplifying it. That kind of combination, I think, is resonating. In terms of what hits when, I mean, it is the holistic nature of bringing it to bear and then augmenting the sessions in ways that add value. We are trying to make sure that the tools and capabilities we build are as integrated as possible and most likely to impact student outcomes, impact student engagement. We are threading those throughout the experience.

On the school district side, we're trying to make sure that both the administrators and the teachers can get very quick value that allows for them to save time and then get insights that allow for them to better direct instruction.

Yi Fu Lee (Senior Equity Research Analyst and Vice President)

Okay. Chuck, can I just follow up one quick one before I turn it over to Jason on the financials? All these AI products, right, is there one particular one that, hey, the feedback was so positive, hey, I really like the transcription service? Copilot, you spoke about that. It might be a little bit later events, right, for monetization, right? Is there any particular product that's like, "Whoa, this is a game changer?

Chuck Cohn (Founder, Chairman, and CEO)

Sure. Yeah. So one customer-facing product or feature that is very material has been the AI summaries where we're transcribing all of the tutoring sessions. We're then summarizing them. We're then analyzing them to give insights and recommendations. We're then able to provide those to parents and students so that students can immediately jump to the exact moment. It's actually auto-tagged as of recently where at the exact second mark that different concepts were discussed. You can actually click on a link for a particular topic and jump to that moment in a video. You don't have to watch 60 minutes of video to find it. You can actually jump to that exact moment. It's both productive for students.

The parents love the fact that they can find out what happened in the session and that they're, in fact, investing their money wisely in tutoring and that the student is benefiting from it. Rather than getting a short answer like, "How did your tutoring session go?" "Oh, it went fine." Now they can get deep insight into how to best support the students themselves and also to the extent it's working. That has been remarkably positive. We think it can be a really killer feature that continues to get better and more immersive and more insightful over time. It is an area where we're spending a lot of time on the product side. I'd expect for that particular one to be one of several examples of big winners.

Yi Fu Lee (Senior Equity Research Analyst and Vice President)

Got it. Got it. Thanks for the extra color, Chuck. Really appreciate it. Jason, flipping over to the financial side, you talked about leveraging AI for internal use, meaning to get more operational efficiency. Obviously, we see this across the SaaS software space where people are using AI to leverage to gain more efficiency. 16% reduction, but in terms of how much more can you extract out of it? I guess, what are the areas you're taking the cost out? Jason, how should we expect over the medium or longer term to think about EBITDA or free cash flow break even? That's it for me. Thank you, Chuck and Jason.

Jason Pello (CFO)

Yeah. Good question, Yi. I'd say we're maybe halfway through our journey as far as applying AI and machine learning to our operations. Specific use case is the matching algorithms. We've continued to see improvements in the systems taking over the vast majority, actually, at this point of all the student and expert matches on both the initial placement, but then also any downstream replacements or additional subjects covered, which leads to happier customers. That leads to higher lifetime values over time. When you think about a lot of the monotonous processes around customer service, those are also all being automated. If you think about customer service and chat, that is also being automated before we get to a live human to answer any questions that you may have. There's still a lot of opportunity there.

I would say, as you think about the year in front of us for 2025, the cost side of the house continues to track or exceed expectations by being lower than what we were targeting. I think what's most important is you think about 2026 and 2027, we'll be able to continue to scale the business without a commensurate increase in headcount to support that growth, which is really what's exciting as we think about the year ahead.

Chuck Cohn (Founder, Chairman, and CEO)

Yeah. We're making more progress on efficiency-related initiatives than expected. Maybe to make it more real, when you do a better job matching a student and a tutor, you then—and this happened in the first quarter—we saw our automated matching percentages go way up. We saw the quality of the match go way up. We saw the amount of times a customer requested a different tutor go way down. We saw all of the leading indicators of retention start to improve, like the time to their first session 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 a very high LTV customer with very low customer service costs over time. That is something that we feel like we're making tremendous strides at that is aided by AI.

Yi Fu Lee (Senior Equity Research Analyst and Vice President)

Okay. Thank you very much, Chuck and Jason. Extremely thankful for your color. We'll talk soon.

Chuck Cohn (Founder, Chairman, and CEO)

Thank you.

Operator (participant)

Our next question is from Andrew Boone with Citizens. Your line is now open.

Hi. This is Brianna on the line for Andrew Boone. Thanks for taking my question. Can you walk us through how the timing gap between tutor investments and February price increases affected gross margins in the quarter? As there is a mixture of towards higher frequency Learning Memberships, how should we be thinking about gross margin improvement through the year? Can you speak to the future investments in AI? Are there areas of automation or product enhancements that remain untapped, especially as we think about AI impacting the learner experience over time?

Jason Pello (CFO)

Sure. I'll speak to gross margin first, and then I'll let Chuck talk about additional AI opportunities. Look, we expected and guided the fact that new expert incentives would result in lower gross margins in Q1 and for the full year. That is a temporary timing difference between the investments we made in tutor incentives and the price increases enacted for new customers. It's been very intentional that we're investing in these tutor partnerships on a marketplace. It's a strategy that reinforces tutor and customer satisfaction. It's driving retention. Ultimately, we'll support revenue growth. As we move throughout the year and we make shift towards a higher proportion of new customers, we expect to deliver sequential quarterly improvements to gross margin. That'll ultimately culminate in 2026. We'll get back to historical margins above 70%. We feel really good about the investments.

The benefits we're seeing on the tutor side are pretty pronounced. We're able to shift significantly more work to the highest quality tutors, which will continue to have downstream benefits as we move throughout the year.

Chuck Cohn (Founder, Chairman, and CEO)

Yeah. Maybe just to clarify one point. We tested this in the fall. We started applying it broadly in December. What you're now seeing is that the tutors are aligned to driving lifetime value and retention. The deeper they get in a given customer relationship on a per-customer basis, they get paid more. What was really exciting to see in the first quarter was that you started to see retention inflect way up in combination with consumer product and some of the other incentives, some of the other optimizations and improvements we made around the matching side and mixing towards a higher quality tutor, all else being equal. 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 and their time to their third session.

All of a sudden, you started seeing customers get deeper and deeper in the relationship and satisfaction going up. You saw that really across the board. That increase in compensation, which is driving some of the retention inflection, was applied to all customers. Starting in February is when we rolled out new pricing, higher pricing for new customers that we think is appropriate given the enhanced value on the platform. For those new customers at the higher pricing, their gross margins are already at a higher, healthy level that is in the kind of mid to high 70% range, which is kind of consistent with what we've seen before.

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, and you're benefiting from the retention associated with the alignment between the tutors on the platform and the marketplace itself, us as the company. What's kind of exciting, though, is the second optimization that occurs. The first optimization is what we described. Everybody's more excited about the work, and they start doing a better job, all else being equal. The second optimization is that now the best tutors on the platform that drive the highest customer satisfaction and engagement, the highest LTV, are now absorbing more of the work.

What you're seeing as we get deeper into this semester is that we're able to mix up the tenure and quality of the average match, which we watch closely, and inflect it in a way that traditionally would not have been possible. That's something that bodes really well for lifetime value down the road. We're pretty excited about this as kind of a new vector. It required doing a bunch of really boring infrastructure work last year related 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 and now get wins on. We're very encouraged by that dynamic.

Operator (participant)

Our next question is from Greg Gibas with Northland Securities. Your line is now open.

Greg Gibas (VP and Senior Research Analyst)

Great. Good afternoon, Chuck and Jason. Congrats on the results here. Wondering if you could speak a little more to the monthly recurring revenue inflection that you saw in March, maybe how it compared to January and February. Are you able to maybe give some context on the monthly growth dynamics? I guess just to follow up too on kind of maybe relative to your internal assumptions and expectations, where you saw the upside in the quarter.

Chuck Cohn (Founder, Chairman, and CEO)

Sure. A year ago, that number inflected negative due to churn associated with lower frequency offerings. We spent a good portion of time over this past year really nailing the foundation, improving all aspects of that consumer onboarding and that digital experience. We also shifted toward the more recurrent, higher frequency customer base. Throughout this most recent quarter, we started making real strides in the matching algorithm and tutor incentives and a couple of other levers that were not present last year that were present in the quarter and will continue to hit and drive further improvement like AI Session Summaries. In March is when the MRR flipped positive.

Effectively, the consumer learning membership business went from being a year-over-year headwind to total company growth to now being a tailwind and something that should both accelerate year-over-year with each subsequent month or quarter throughout the year and also drive elevated year-over-year growth relative to last year. I'd say we feel really good about that dynamic. We're then investing in a way that we think can lead to continued improvement throughout the course of the year and perhaps provide real upside come next fall.

Jason Pello (CFO)

Yep. 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 tutor incentives, they're leading to improved customer experience and retention of recent cohorts. Price increases that Chuck mentioned will have us ending the year with ARPM above $370 on a consolidated basis. We've significantly reduced headcount during the quarter and continue to believe that there's 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 margins that we expect will culminate in becoming adjusted EBITDA and operating cash flow positive in the fourth quarter of 2025. So all of it's coming together according to plan as we expected and laid out when we initiated guidance for the year.

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

Greg Gibas (VP and Senior Research Analyst)

Great. That's helpful. Wondering, I guess, as a percentage maybe of your learning member base, what percentage is maybe paying the new increased pricing level that you implemented at this point? The path to that $370+ in ARPM, should we think about that kind of straight line on a quarterly basis to get there?

Jason Pello (CFO)

Maybe I'll start with the second part. $335 was the ARPM at the end of the first quarter. That's 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 ARPM to be $345 at the end of June. At the end of September, it would be $360. At the end of the year, it would be $370.

We continue to believe that the prices are appropriate. They represent the value that we're providing to customers on the platform. We feel good about them as we move throughout the year.