Nerdy - Q3 2023

Transcript

Operator (participant)

Hello, everyone, and welcome to the Nerdy Inc. Third Quarter 2023 earnings call. My name is Felicia, and I'll be your operator today. Please note after the presentation part of this call, there will be a question and answer session. You may register for a question by pressing Star, followed by 1 on your telephone keypad. I will now hand you over to T.J. Lynn, Associate General Counsel, Securities Counsel. Please go ahead, sir.

T.J. Lynn (VP of Associate General Counsel)

Good afternoon, and thank you for joining us for Nerdy's third quarter 2023 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 third-quarter results and the company's filings with the SEC for a discussion of the risks. Not all of the financial measures that we will discuss today are prepared in accordance with GAAP. Please refer to today's shareholder letter for reconciliations of these non-GAAP measures. With that, let me turn the call over to Chuck. Chuck?

Chuck Cohn (Founder, Chairman, and CEO)

Thanks, T.J. and thank you to everyone for joining us today. In the third quarter, our strong first half of the year continued, and we delivered revenue and profitability ahead of our expectations. Both our consumer and institutional businesses saw strong demand in the quarter as the school year ramped, which combined with the operating leverage that we are receiving from our new always-on recurring revenue models and investments in AI to also drive bottom-line outperformance. Learning Memberships, our new all-access subscription offering that aims to support learners across academic calendar years, subjects, and learning formats, continued to resonate with consumers this back-to-school season. The improved value proposition and expanded product suite included in Learning Memberships is appealing to a broad set of audiences and unlocking accelerated growth across multiple customer segments.

We saw growth in new consumer customers purchasing Learning Memberships and joining the platform for the first time accelerate as the school year started, exceeding 45% year-over-year new customer growth in both August and September. That momentum helped drive continued revenue acceleration in the third quarter to 19% year-over-year growth for our consumer business and 27% for the total company, representing an acceleration of 600 and 1100 basis points, respectively. At the end of Q2, we completed the evolution to 100% of our consumer customers purchasing Learning Memberships with the transition of our professional audience. Consumer revenue recognized from Learning Membership subscriptions increased to 96% in the quarter, up from 88% in the second quarter and 20% last year in the third quarter.

We ended the quarter with 39.5 thousand learning members and $164 million in annualized run rate revenue. Our institutional business, Varsity Tutors for Schools, similarly saw a significant uptick in customer demand with the start of the school year, with revenue of $5.6 million, up 133% year-over-year. Bookings from Varsity Tutors for Schools in the quarter were $10.6 million, up 89% year-over-year, delivering the second consecutive quarter with more than $10 million in bookings. With the start of the school year, we see growing recognition of what we've always known. Tutoring continues to be the proven solution for accelerating and remediating learning. This is leading to a significant uptick in interest in high-dosage tutoring and an increase in the scale and velocity of institutional opportunities, including numerous state-level tutoring programs.

During the third quarter, the pace of change and innovation continued. We significantly overhauled, simplified, and evolved our institutional offering. We believe this will better position Varsity Tutors for Schools to attract new customers to the offering and build deeper and larger relationships with existing ones. As part of the new offering, we introduced two access-based subscription products, District Assigned and Parent Assigned, to complement Teacher Assigned. With Varsity Tutors for Schools, school district partners can now choose to administer high-dosage tutoring centrally at the school district level with District Assigned, empower teachers to manage and prescribe high-dosage tutoring to students in their classroom with our Teacher Assigned offering, or with Parent Assigned, school districts can provide parents and families with our Learning Memberships.

We believe that allowing school districts to purchase Learning Memberships on behalf of their students and enabling parents to have control and ownership of their child's learning solves an important problem for many schools and represents a significant commercial opportunity. It also serves as an example of our platform-oriented approach to growth, where we aim to build once and then leverage the product capability many times to serve net new audiences. In this case, selling our primary consumer product into K-12 school districts with administrative tools layered on top for district-wide scale. As we head into 2024, an elegant convergence of subscription business models and access-based products has occurred in both our consumer and institutional businesses.

We believe this will help us better serve the needs of our customers, further simplify our operations, allow us to innovate faster in the future, and further position us for sustained growth and profitability in the years ahead. I am pleased to share that in the third quarter, we delivered $40.3 million of revenue, an increase of 27% year over year, above our guidance range of $38 million-$40 million. Revenue growth was driven by both our consumer and institutional businesses, which were up 19% and 133% year over year, respectively.

Gross profit of $29.2 million in the third quarter increased 33% year-over-year, and gross margin of 72.4% for the quarter was a record, and compares to 69.0% in the same period last year, a 340 basis point increase. Our customer lifetime values continue to show significant improvements relative to our old package model, driven by our evolution to Learning Memberships, which continues to be a key driver to our strong operating results and improved profitability year-over-year. During the third quarter, we delivered non-GAAP adjusted EBITDA margin improvements of over 2,300 basis points year-over-year, driven by improvements across every P&L line item.

Moving on to our consumer business, our learning membership model continues to lead to more attractive unit-level economics, broader customer appeal, longer duration and higher lifetime value customer relationships, higher gross margin, and a more scalable and efficient operating model. It also serves as an easier platform from which to drive innovation and incremental growth, given our ability to add new product capabilities into the existing All Access subscription offering, thereby making the offering more appealing and engaging, driving conversion of new members and the retention of existing ones. Consumer revenue of $34.5 million increased 19% year over year and represented 86% of total revenue in the third quarter, delivering sequential accelerating growth each of the last three quarters. Active members of approximately 39,500 as of September thirtieth, 2023, increased 8,500 or 27% during the quarter.

Average revenue per member per month, or ARPM, of approximately $346 at the end of the third quarter, resulted in an annualized run rate of approximately $164 million from Learning Memberships at quarter end, more than 3x the level a year ago. During the third quarter, we began introducing a significantly upgraded and enhanced Learning Membership digital experience. These updates enrich the experience, encourage achievement, reinforce personal accountability to learning, and improve the discoverability of learning formats and subjects. We also improved the user experience with new AI-driven learning formats to continue to broaden the resources available as a part of Learning Memberships, delivering increased value. These improvements are quickly resulting in learning members utilizing additional learning formats and content, and driving higher non-tutoring and total engagement on the platform.

Overall, non-tutoring engagement in September was up 54% year-over-year for all clients and up 68% year-over-year for new members in their first month, which was our first cohort of new customers that only experienced the all-new My Learning Hub and Subject Portals. From many years of experience, we know that when customers engage more deeply with our product, including across multiple learning formats, multiple subjects, or multiple students per household, it is highly predictive of stronger long-term retention and higher lifetime value of those customers. During the third quarter, we rolled out numerous product and user experience enhancements. The new My Learning Hub transforms the way Learning Membership customers engage with our platform, making discovery with our platform more intuitive and user-friendly.

My Learning Hub serves as the new homepage and central destination for learning members, allowing members to effortlessly access their upcoming live tutoring schedule, easily track their past learning interactions in a subject, and importantly, discover new subjects to learn. Subject portals enable learners to easily find all the different ways they can learn a given subject and leads to increased multi-format engagement within a subject when visited. With the use of generative AI for content generation, we've been able to rapidly expand Subject Portals to our top 200 most in-demand subjects and have simultaneously expanded the amount of learning resource content available within each subject portal. We've leveraged generative AI to create more than 100,000 practice problems, answers, and explanations that are now available for learning membership customers to use this back to school season.

We increased the visibility and accessibility of our AI Tutor, which is now readily available in hundreds of subjects. Since launch, we've seen a significant uptick in engagement with high repeat rates, with learners using it for short homework help type interactions. Looking ahead, we will continue to deploy new capabilities and products at a rapid pace and build on our success executing against our AI for HI, or artificial intelligence for human interaction strategy. We expect to see continued upside in retention over time as we further enhance our products and drive improved engagement. Turning our attention to our institutional business and Varsity Tutors for Schools, we continue to make substantial progress building the foundation for a durable institutional business capable of supporting millions of students. Consistent with our strategy heading into 2023, our focus on product expansion and partnerships with larger school districts is yielding results.

Institutional revenue of $5.6 billion increased 133% year-over-year, and represented 14% of total revenue in the third quarter. Varsity Tutors for Schools executed 80 contracts in the third quarter, yielding $10.6 billion of bookings, an increase of 89% year-over-year. Year to date, Varsity Tutors for Schools has executed $27.4 million of bookings, an increase of 102% year-over-year, with average order value of more than $120,000, a more than 75% increase versus the same time period a year ago. With the start of the school year, we are seeing a growing recognition among educational and policy leaders of what we've always known: tutoring is a proven solution for accelerating and remediating learning.

At the same time, COVID learning loss isn't going away, and it's clearly not just related to making up for learning loss during school shutdowns anymore. Also indicating the acuity of the situation, ACT scores are at 30-year lows, and NAEP scores for math and reading dropped to the lowest point in decades. The acuity of the student achievement problem, combined with the growing broad recognition that tutoring is an effective way to address the issue, is leading to an acceleration in market activity, with multiple states focused on rolling out state-funded, statewide tutoring programs. During the quarter, we made significant platform enhancements that have enabled us to shift our institutional business to one that is access and subscription-based, and that provides more value for our institutional customers.

The Varsity Tutors for Schools platform now comes with powerful academic resources and tools, and the ability to choose between three simple models for high-dosage tutoring administration. As part of the simplification and overhaul, we retired the on-demand product and instead have a suite of products and resources that are now included with access to the Varsity Tutors for Schools platform. The breadth of the resources included in the platform allows for us to serve a much broader set of needs for our institutional partners and greatly expands the number of students we can impact within school districts. We also made significant improvements to our high-dosage tutoring product by providing more flexible implementation models and pricing models that enable school districts to more easily implement large-scale, best-in-class, high-dosage tutoring to a broader set of students.

Our Teacher-Assigned product, which was launched earlier this year, was our first always-on subscription offering for districts that enabled teachers to provide High-Dosage Tutoring intervention to students in their classroom based on their own unique insights and knowledge of what was occurring. We've seen strong engagement with Teacher-Assigned districts and growing excitement in the market for this solution. The insights garnered from Teacher-Assigned, combined with learnings from our new subscription-based consumer model, led us to introducing two new access-based subscription models in the quarter: District-Assigned and Parent-Assigned. These new products provide Varsity Tutors for Schools with a comprehensive product portfolio capable of meeting the High-Dosage Tutoring needs of school districts by providing the flexible implementation models that meet the common use cases districts encounter, allowing them to better serve students in their community.

We believe the simplification and evolution of our product suite that positions Varsity Tutors for Schools as the product and is supported by three flexible models for administering high-dosage tutoring, better positions us to attract new institutional customers to the offering, while also building deeper and larger relationships with existing ones. In closing, I want to thank the Nerdy team for continued excellence in execution and innovation. I'm proud of the results we delivered in Q3 and encouraged by the continued progress with both Learning Memberships and the Varsity Tutors for Schools business. Our continued progress in product innovation has allowed us to launch new access-based subscription products that now cover the entirety of our consumer and institutional businesses. We believe our simplified and enhanced offerings will allow us to better attract and retain new customers while also driving profitable growth.

With that, 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. In the third quarter, our strong first half of the year continued, and we delivered revenue and profitability ahead of our expectations. Both our consumer and institutional businesses saw strong demand in the quarter as the school year ramped, which combined with the operating leverage driven from our evolution to always-on recurring revenue models and investments in AI to drive bottom-line outperformance. We completed the transition of our consumer business to a subscription model in just over a year's time, demonstrating strong product market fit and execution. The transition to Learning Memberships continues to yield more attractive unit-level economics, longer duration and higher lifetime value customer relationships, higher gross margin, and a more efficient and scalable operating model.

In the third quarter, we delivered revenue of $40.3 million, results that were above our guidance range of $38 million-$40 million and represented 27% year-over-year growth and sequential quarterly acceleration of over 1,100 basis points. Our active member count of approximately 39,500 as of September 30, increased 8,500 or 27% during the quarter. Learning Memberships revenue grew to $33.2 million during the quarter and represented 82% of total company recognized revenue and 96% of consumer-recognized revenue in the third quarter, and we expect nearly 100% of consumer revenue to be from Learning Memberships in the fourth quarter.

Consumer new customer growth of 40% and consumer revenue growth of 19% in the third quarter, both accelerated sequentially on a year-over-year basis, each quarter throughout 2023, demonstrating the strength of our consumer offerings. And as Chuck mentioned, we saw growth in new customers purchasing learning memberships and joining the platform for the first time accelerated as the school year started, exceeding 45% year-over-year new customer consumer growth in both August and September. Our institutional business delivered revenue of $5.6 million, representing 133% year-over-year growth, and delivered bookings of $10.6 million, an increase of 89% year-over-year, and represented the second consecutive quarter with more than $10 million in bookings.

Moving down the P&L, a record gross margin of 72.4% in the third quarter yielded gross profit of $29.2 million, an increase of $7.3 million and 33% year-over-year. Gross profit and gross margin increases were driven by growth in our consumer business as a result of the strong adoption of Learning Memberships, which has led to lifetime value expansion and higher gross margin. As we evolve towards a greater mix of Learning Memberships revenue, we expect consumer gross margin to continue to expand. Sales and marketing expenses on a GAAP basis were $19.3 million in the third quarter, an increase of $3.1 million compared to the same period last year. Non-GAAP sales and marketing expenses, excluding non-cash stock-based compensation, were $18.5 million, or 46% of revenue in the third quarter.

This compared to 48% of revenue in the same period of last year, an improvement of more than 150 basis points year-over-year. Sales and marketing spend and efficiency improvements were driven by the continued expansion in lifetime value from Learning Membership customers, our focus on optimizing the level of marketing spend, and substantial Varsity Tutors for Schools revenue growth, which is yielding efficiencies from prior investments in the institutional sales and go-to-market organization. As Learning Memberships become a greater percentage of total revenue and the institutional business continues to scale, we expect to yield durable sales and marketing improvements as the business delivers accelerating sequential year-over-year revenue growth. G&A on a GAAP basis was $35.5 million in the third quarter, an increase of $2.1 million compared to the same period last year.

Non-GAAP G&A, excluding non-cash stock-based compensation, transaction-related costs, restructuring costs, and a legal settlement provision, was $20.5 million, or 51% of revenue in the third quarter, our seasonal low point. Compared to 70% of revenue in the same period last year, this represents an improvement of more than 1,900 basis points year-over-year. Our investments in product development and our platform-oriented approach to growth have allowed us to launch a suite of always-on subscription-based products, including Learning Memberships for consumers and our District-, Teacher-, and Parent-Assigned offerings for institutional consumers. Subscription and access-based offerings simplify the operating model needed to support customers and grow the business, while also providing a more predictable pattern of revenue recognition over time.

We delivered an Adjusted EBITDA loss of $8.2 million, an improvement of $5.8 million and more than 2,300 basis points year-over-year, at the top end of our guidance range of an Adjusted EBITDA loss of $8 million-$10 million. Adjusted EBITDA margin improvements can be seen across every P&L line item, including higher revenues, gross margin expansion, sales and marketing efficiency gains, and continued variable labor productivity improvements stemming from automation efforts and our business model changes that streamline operations. During the third quarter, we had negative operating cash flow of $4.8 million, compared to negative operating cash flow of $13.3 million last year, an improvement of $8.5 million that reflects the substantial improvements from our evolution to Learning Memberships.

We ended the quarter with $84 million of cash on our balance sheet and no debt, giving Nerdy ample liquidity to fund the business and pursue growth initiatives. Turning to our business outlook. Today, we are providing fourth quarter and updated full-year 2023 guidance. For the fourth quarter and full year, we expect year-over-year revenue growth will be driven by the continued growth of recurring revenue streams in our consumer business, the corresponding increase in the number of Learning Membership subscribers, and higher institutional revenues. Fourth quarter and full-year revenue guidance reflects higher revenues from Learning Memberships and Varsity Tutors for Schools when K-12 schools and universities are in session. Our continued momentum provides us with confidence that we will complete 2023, having delivered accelerating sequential year-over-year growth each quarter.

For the fourth quarter of 2023, we expect revenue in a range of $54 million-$56 million, representing 32% growth at the midpoint, versus our Q4 2022 revenue of $41.8 million. For the full year, we expect revenue in the range of $192 million-$194 million, representing 19% growth at the midpoint, versus our 2022 revenue of $162.7 million. The full-year guidance reflects recent learnings from our first back-to-school period with all customers on Learning Memberships. First, new Learning Member acquisition of customers joining the platform has been strong and ahead of our expectations, providing us confidence in the demand for our offerings in the year ahead. We also learned how our existing Learning Members would utilize their memberships as they exited summer and went back to school.

This time of year marks the period when learners reevaluate the level of upcoming learning support needed, as well as their schedule and availability, which in turn impacts their tutoring needs and frequency. The impact of this shows up in our guidance in two primary ways. The level of members pausing or downgrading to a lower frequency level throughout the summer months, a lower need period, was consistent with our expectations. As the school year started, fewer of these customers reactivated their membership than we expected. And second, at the start of the school year, we saw fewer existing members upgrade to higher frequency learning membership levels than anticipated, which has led to lower ARPM than expected.

Fourth quarter and full-year non-GAAP adjusted EBITDA guidance reflects the continuing benefits from our recurring revenue products, which focus on long-term relationships with higher value customers and improving gross margin profile and operating leverage stemming from the completion of our evolution to recurring revenue business models. Partially offset by increased investments in marketing, engineering, and product talent to drive continued product innovation and Varsity Tutors for Schools go-to-market strategy. For the fourth quarter of 2023, we expect non-GAAP adjusted EBITDA to be breakeven. For the full year, we expect non-GAAP adjusted EBITDA loss of approximately $6 million, a substantial improvement from the non-GAAP adjusted EBITDA loss of $35.7 million last year. The change in full-year adjusted EBITDA guidance primarily reflects the flow-through of the lower revenues previously discussed.

As Chuck mentioned, we're proud of the results we delivered in Q3 and our ability to drive accelerating growth each quarter throughout 2023. That revenue acceleration is occurring while concurrently driving more than 2,300 basis points of improvement year-over-year in Adjusted EBITDA during the third quarter. We also made significant business model improvements that we believe will enhance the predictability of our business and drive enhanced levels of growth and profitability. Thank you again for your time, and with that, I'll turn it over to the operator for Q&A. Operator?

Operator (participant)

Thank you. We will now open the Q&A session. If you wish to ask a question, please press star followed by one on your telephone keypad. We'll take our first question from Ryan McDonald from Needham. Please go ahead.

Ryan MacDonald (Managing Director and Senior Equity Research)

Yeah. Hey, guys, this is Matt Shea on for Ryan. Thanks for taking the questions. Maybe just to start, want to double-click on the Learning Memberships. You know, it was nice to see you guys beat your number in the quarter, but it looks like kind of towards the back half of the year, something happened in October where that growth slowed. So I just want to kind of parse through some of the comments you gave earlier. Is the lower growth expectation with Learning Memberships relative to your prior expectations solely due to that fewer reactivated memberships that you're expecting in Q4? Or why should we see that kind of 45% growth in Learning Memberships moderate in Q4?

Jason Pello (CFO)

Hey, Matt, thanks for the question. You know, I think I'd start off with one, we saw really strong demand during the back-to-school period. It was up 45%+ in both August and September. And as I indicated in the prepared comments, really, the change in the Q4 guide for the full year reflects two things primarily. So during the summer months, we allowed members to adjust the level of frequency of their Learning Membership, during non-peak utilization times in order to drive higher levels of retention. We also allowed customers to pause during the summer months.

And so what happened is, as we moved through the back-to-school period, we saw two things: lower levels of retention for people that were paused as they reassessed the level of academic need in the new calendar school year, as well as fewer members that reengaged at higher levels of tutoring frequency, and so that lowers the ARPM or average revenue per month that they pay for us. And so both of those collectively are really the, the decline that we see in the, the full-year guide. It's probably about 50/50 split between the two. But, you know, when we think about the long-term health of the business, we still feel really good given the demand signals that we're seeing from customers.

Chuck Cohn (Founder, Chairman, and CEO)

Yeah, this is Chuck. The only thing I'd add is, you saw sequential revenue acceleration that is pretty considerable throughout the course of the year, and this is our first back-to-school season with Learning Memberships. We've never gone through a summer before, and summer's obviously a period of time where at the beginning of the school year, end of summer, people can kind of reevaluate the extent to which they want a certain level of frequency for the product. And, you know, what we've seen is, we're talking about, like, 2,500 members delta here on 40,000. So I think we feel really good about the trends in totality and the levels of engagement that we're seeing post back to school.

Then, of course, the fact that the growth rate on new customers was 45% in both August and September gives us a lot of confidence in the business. So significant, you know, growth throughout the year on a revenue basis. You know, the delta that Jason mentioned is only 2,500 members or so relative to, you know, what was kind of implied in, you know, the full-year guide. So we feel really good about the trends, and, you know, this is just our first kind of full back to school with Learning Memberships. And, you know, it feels like a normal year where our product's resonating, and the engagement is going up as we make product improvements, and we feel good about the future in that regard.

Ryan MacDonald (Managing Director and Senior Equity Research)

Okay. Got it. Appreciate all that color. And then maybe just as we think about what you can add in, in Q4, you know, if revenue is going down, could we or I guess just taking down. But could we potentially see more learner adds than in Q4 than you saw in Q3? Or how are you kind of thinking about the expectation of how many learners you're gonna add?

Jason Pello (CFO)

No, I think we historically don't see higher adds in Q4 relative to Q3, given, you know, the timing of the back-to-school period and the end of the first semester. So, we would expect around 42,000 active members at the end of the year, as we move through the fourth quarter.

Chuck Cohn (Founder, Chairman, and CEO)

... Yeah, we're still obviously seeing both significant nominal revenue add on a sequential basis from, you know, the, the 40 level to the 55 level in the guide. So you're also then seeing the acceleration from 27% growth to 32% in the guide. So you're also seeing sequential acceleration. So we feel really good about it. Seasonally, you're at just a point in the year, you know, with, with how, like, the semester falls, where you wouldn't add as many, but we feel really good about the, like, actual dollars, and then year-over-year growth that the business is experiencing.

Operator (participant)

Thank you. We will now move on to the next questioner, Andrew Boone from JMP Securities. Please go ahead.

Andrew Boone (Managing Director of Internet Equity Research)

Thank you for taking my question. This is Matt on for Andrew. Can you just talk to us about the thought process behind the overhaul of the Varsity Tutors for Schools product and maybe how this changes your go-to-market strategy? And then number two, just with strong customer acquisition, with the back-to-school period, and now you guys have a little bit more time under your belt with cohorts and just understanding Learning Memberships, is there an opportunity here to lean in with a little bit more marketing spend, maybe as you think about 2024? Thank you.

Chuck Cohn (Founder, Chairman, and CEO)

Great question. This is Chuck. I'll answer it. So we've gone through a similar evolution on the institutional side that we have on the consumer side. We have packages in the consumer world, and prior to starting memberships, we actually launched Varsity Tutors for Schools just about two years ago and sold blocks of hours to schools that they could then use in kind of unlimited ways. And there was a certain elegance that, of course, came with our learning membership model on the consumer side, and we've now sought to replicate that on the institutional side. So there's simplification as it relates to explaining our products to the customers. The three different high-dosage tutoring implementation models are far more scalable. They're easier to use. Our systems and platform have improved dramatically.

It's easier to use, like, to onboard customers and to then actually allocate the, you know, the access to the model to different portions of the student population. And so this new access-based subscription model that kind of mirrors what we did on Learning Memberships and mirrors what we did with our Teacher Assigned product, that now applies to these two new products, District Assigned and Parent Assigned, which is Learning Memberships for schools, is something that we're super, super excited about. It makes for far easier conversations. It's very clear how each of these products can then meet all of the common need states related to tutoring and related forms of intervention. And, you know, from our perspective, that then opens up all sorts of different opportunities because you now have a scalable model that is far more efficient.

One of the things that's allowed us to do is instead of kind of requiring district-wide SaaS contracts, which can be a barrier to starting a relationship with us, now that we've automated and made it so much more scalable on the implementation side, we can actually do more bite-sized implementations that are specific to a specific portion of a very large school district. So it really opens up all sorts of different opportunities. You know, the initial indications are it's resonating, it's simple, and we think it can drive a whole lot of growth in the years to come. And then separately, as it relates to, you know, the marketing comment, I guess that was that specific to institutional or consumer?

Andrew Boone (Managing Director of Internet Equity Research)

I was thinking more just on, on the consumer side, just with the nice... The, you know, the nice acquisition period going into back to school. Is this, is there another opportunity just to, to lean in more there?

Chuck Cohn (Founder, Chairman, and CEO)

Yeah, one of the things that, I think we shared on the last earnings call was to just drive, you know, good operating discipline. We were kind of holding our customer acquisition cost constant while we saw pretty dramatic improvements in lifetime value. You know, those have continued to hold. So we feel really good about that relationship. And, you know, we're continuing to grow reach and grow new customer acquisition by making our product resonate more and more. So we think that continuing to improve the product marketing and the underlying product set that comes with your Learning Membership and driving growth through conversion is something that is, you know, a very highly accretive way to grow the business. We're gonna continue to explore other marketing opportunities as well.

We think this has the potential to, you know, continue to appeal to a large segment of the U.S. student population, and we would expect that the extent to which it resonates improves as we continue to add new features and products. So it's getting better fast. It's already really good. We think it's incredible value, and it's gonna keep getting better.

Ryan MacDonald (Managing Director and Senior Equity Research)

Great. Thank you.

Operator (participant)

Thank you. The next question comes from Doug Anmuth from JP Morgan. Please go ahead.

Doug Anmuth (Head of US Internet Equity Research)

Hey, it's Brian Smiley on for Doug. Thanks for taking my questions. Just starting on Learning Memberships, can you just talk about the pricing strategy there and how it could evolve over time, particularly just as you, you know, evolve the membership, going forward? And then on VTS, can you just better help us - help us better understand how renewals with existing customers are trending? Have these new formats come up in those conversations, and are they driving deeper spend?

Chuck Cohn (Founder, Chairman, and CEO)

... Sure. So one of the things that we test is the actual features that come with any given membership, as well as the frequency of live tutoring hours that come as well. And so there's different need states that exist for any given subject. An example would be foreign languages, where you have people that are learning it in a given school, in an academic context, and it's more intensive and more oriented towards, you know, accomplishment and grades and specific academic achievement. And there's other cases where you have, you know, an adult learner, like, say, my mom, who might be learning Spanish, you know, before she goes on a trip. And that's a real example. And you know, in both cases, by having different levels of frequency and different price points, you can appeal to different audiences.

So the way that we think about this is, we'll actually do consumer research and identify it, and then we'll also test the incrementality of different offerings and what product features we actually feature for a given audience, the audience being effectively the combination of subjects and ages of students. Given that our platform services the entire consumer base from kindergarten through adult and professional learners and everything in between, there's a lot of different ways to kind of group it. Our product and product marketing teams are actually going through and testing different audience segments to make sure that we are evolving the product in a way that meets different market needs. What we see is that you get increased conversion and retention associated with those changes, which then drives high-margin growth.

Jason Pello (CFO)

And then on your second question, as it relates to, like, Varsity Tutors for Schools customers, and how they're responding to new products, I'd say it's incredibly well. You know, we've recently been at a couple of the larger school district conferences, including the Council of Great City Schools, the Virginia Association of Superintendents, as well as New Jersey. And, you know, I think what school district leaders like is the simplicity of the models, the ability to affect multiple students in multiple need cases across whether or not they want to maintain control of the allocation of hours at the district level, put that power within the teacher's hands, or allow parents to schedule those hours after the school day and on the weekends through Parent Assigned. And so during the quarter, we actually converted 20 customers to these new contracts.

So it's not only resonating with prospective customers, it's also resonating well with customers that, you know, have been with us for some period of time now. So, you know, add that all together, and I think we feel really good about how we're positioned heading into 2024.

Chuck Cohn (Founder, Chairman, and CEO)

Yeah, and I would also add the product itself, as we've made these consumer membership upgrades, the institutional business is piggybacking off of those upgrades for its students. So, it also just naturally inherits all the benefits of better product discovery of everything that we have within the platform. You know, the subject portals that we referenced, a lot of the diagnostic testing, the live classes, the live chat-based tutoring, all these other things that come with the live video-based tutoring, that really is our superpower. All these additional features that are available for entire school districts of students that can deploy allow for them to provide advanced value to the student bases.

So there's classes in ACT and SAT and enrichment and coding, and you name it, and districts really are valuing the kind of broad array of different solutions that they have available that come with these new, these new three High-Dosage Tutoring subscription offerings.

Doug Anmuth (Head of US Internet Equity Research)

Got it. Thank you.

Operator (participant)

Thank you. The next question comes from Alex Sklar, from Raymond James. Please go ahead.

Alex Sklar (Analyst)

Hi, this is Jessica on for Alex. Thanks for taking my question. I just was a little bit curious. So as almost all your active members in the consumer segment have now been migrating completely over to your new subscription model, I want to double-click on what trends you're seeing so far for churn and renewals. It might be a bit early, but is there anything you're seeing on renewal rates of this new model compared to what you had before? And are you seeing anything like upgrades, downgrades within packages month to month? Thanks.

Chuck Cohn (Founder, Chairman, and CEO)

Sure, good question. So one of the things that we shared in our shareholder letter was the actual cohort curves. So you can see that, for all the different cohorts that have started since we launched the membership product, relative to our old package model, they are significantly higher lifetime value. And that's a function of the fact that people are just getting more value from the entire experience. From a consumer's perspective, the relationship is oriented toward multi-subject support, multi-learning format support, and multiple academic calendar years. And you then see that change in psychology and change in product positioning and change in the features that come with the product, manifest in much higher levels of retention relative to the package model.

At a year, Mark, you are trending toward about 2x what we were getting in terms of revenue for a given customer relative to the old package model. It's, you know, kind of a dramatic improvement. As I referenced earlier in the call, you know, holding customer acquisition costs constant, we think that's very, very favorable. It's also a way better experience for our learners on the platform, both consumer, as well as now institutional customers that are leveraging, you know, that underlying membership capability with their students.

Jason Pello (CFO)

And then I think the second part of your question was, what do we see, you know, with month-to-month versus contract customers? We believe it's important to offer the customers the flexibility to choose the pricing plan that best suits their needs and preferences.

Chuck Cohn (Founder, Chairman, and CEO)

... Month-to-month, you know, leads to higher conversion for certain customers who don't want a long-term contract. It's also worth noting that the month-to-month has a higher ARPM, about 15%-20% for that flexibility. And then all of our customers, including month-to-month and contract, can consume beyond their membership, with what we call supplemental hours. And so, you know, there's kind of an unlimited ability to engage with us in tutor-based products during the month, and we'll just bill on a supplementary basis thereafter. So net-net, we think having both options is important to drive conversion and customer satisfaction and growth over time. So we feel good about that flexibility.

Doug Anmuth (Head of US Internet Equity Research)

Got it. Thanks. And so also on the flip side of your consumer segment, what are you seeing from active, your active experts? Like, what benefits are they seeing that are encouraging them to stay and join your platform?

Chuck Cohn (Founder, Chairman, and CEO)

Yeah, sure. So one of the things that we've sought to do, and this occurs naturally through how all the AI algos work on the platform, is that the top tutors get allocated more work, and, you know, on average, they tend to be better in general. And so they're sticking around on the platform at higher and higher rates because they're getting, you know, a higher volume of students. They're also really appreciating the fact that with Learning Memberships, there's a much higher level of recurrence to those students, so they meet more and more and more frequently. And that kind of combined with higher volume allocated to them, that allows for them to generate more income. And, you know, these also tend to be students that are oriented toward a, you know, long-term goal.

And the feedback that we've gotten about that kind of relationship and the matches that are occurring, both by the very nature of the product, but then also because our matching algorithms continue to get better and better and better with more data, is something that has actually improved the relationship that experts have on the platform with both the students and with, you know, the platform itself. So we feel good about that relationship. We've purposefully, as we've said for many quarters in a row, decreased the number of active experts on the platform because it drives operating efficiency, because we're leaning into, you know, the best folks, and then separately, because we're just getting smarter about figuring out how to find the right people for the platform as well. So we feel great about the liquidity.

It's been a source of great operating leverage, and we think we have, you know, a kind of good model here for providing both a good experience for the experts, and then separately, making sure that we are constantly improving the experience for the learners themselves.

Alex Sklar (Analyst)

Got it. Thanks.

Operator (participant)

As a reminder, if you wish to ask a question, please press star followed by one on your telephone keypad now. It appears we have no further questions. So with that, I thank you all for joining this event, and you may now disconnect your line.