Nerdy - Q4 2022

Transcript

Operator (participant)

Good afternoon, welcome to Nerdy Inc. Q4 Earnings Call and Release. All lines have been placed on mute to prevent any background noise, and after the speakers' remarks, we will conduct a question and answer session. To ask a question at this time, please press star followed by the one on your telephone keypad. If you change your mind at any time, please press star two. For operator assistance at any point, it's the star 0 key. Thank you. I'll now turn the call over to TJ to begin today's call. TJ, you may begin.

Speaker 10

Good afternoon, and thank you for joining us for Nerdy's fourth quarter 2022 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 today 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 fourth quarter results in 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 reconciliation of these non-GAAP measures. With that, let me turn the call over to Chuck. Chuck?

Chuck Cohn (Founder, Chairman, and CEO)

Thanks, TJ, and thank you to everyone who has joined us today. Over the last 10 months, we've been working to transition our products and revenue model toward long-term, recurring, always-on relationships with our customers. We believe this change would benefit our consumer and institutional customers and our business model by shifting to longer-term relationships that supported evolving learner need states. We created new subscription and recurring revenue products, including Learning Memberships for consumers and On Demand and Teacher Assigned products for institutional customers that were built specifically to address the ongoing support we believe both types of customers desired. We shared that this new focus would require a short-term hit to revenue recognition because our package model has a more front-loaded revenue recognition associated with it than the Learning Membership model, where subscription revenue is recognized linearly over time.

We estimated that by month six, for a given Learning Membership customer, the cumulative revenue would catch up and surpass that of a given package customer, a phenomenon we called the J-curve. We expected that by the start of the second quarter in 2023, the cumulative build of recurring revenue from Learning Membership customers would cause us to return to growth in our consumer business as well as for the total company. Now with a product suite and revenue model we believed would position us for higher levels of growth, profitability, and predictability in the years to come. I am pleased to share that we have made substantial progress in the fourth quarter, and our shift to an always-on business model is ahead of plan.

Learning Memberships adoption continues to exceed our expectations, demonstrating higher conversion, engagement, and customer retention than our former package model, which in turn has led to meaningfully higher customer lifetime value and operating leverage. We delivered revenue of $41.8 million in the fourth quarter, above our guidance range of $39 million-$41 million. These results reflect stronger than anticipated active Learning Memberships counts, which totaled over 20,000 as of year-end. We saw continued strength in lifetime value performance from Learning Memberships customers. This progress, combined with operating efficiencies gained from the business model evolution, provides us increased confidence in achieving Adjusted EBITDA profitability by the end of 2023, as previously communicated. In the fourth quarter, we delivered on our commitment to enhance Learning Memberships by providing unlimited access to three new products: Codeverse, Tutor Chat, and Essay Review.

With the addition of these formats, we were able to grow the percentage of customers engaging in a non-tutoring format in their first month to over 30% in December. Multi-format engagement has historically been highly correlated with higher retention, higher lifetime value, and higher customer satisfaction. Learning Memberships revenue continues to grow at a rapid pace. Revenue recognized in the fourth quarter from Learning Memberships grew to $20.8 million, a $15 million increase from the third quarter, representing 50% of total company-recognized revenue in the quarter, up from just 2% of total recognized revenue in the second quarter and 18% in the third quarter.

In fact, Learning Memberships revenue has reached an annualized run rate of more than $87 million as of year-end, an increase from $50 million as of the end of the third quarter, providing us with increased forecasting visibility into future revenues. The rapid transition to Learning Memberships is also allowing us to deliver gross margin expansion and a more scalable and efficient operating model. During the fourth quarter, gross margin of 70.5% was approximately 230 basis points higher than gross margin of 68.2% during the comparable period of 2021. We shift towards a higher proportion of Learning Memberships customers and revenue, we expect continued gross margin expansion in 2023.

Learning Memberships also enabled further marketing yield optimization during the fourth quarter, with marketing expenses as a percentage of revenue improving by approximately 370 basis points year-over-year, driving further efficiencies in our consumer business. Higher engagement and retention among Learning Membership customers and an average revenue per Learning Membership of approximately $350 per month during the fourth quarter combined to drive continued lifetime value expansion and an accelerated marketing payback period. In fact, recent monthly cohorts cumulative Learning Membership average revenue per customer continues to expand and separate from the historical amount an average consumer customer would spend over time under our historical package model by the third or fourth month after starting. These results clearly demonstrate the superior lifetime value of our Learning Membership model and the higher average value of the consumer customers we are adding to the platform.

During the fourth quarter, Varsity Tutors for Schools delivered on a major milestone in our product evolution with the go-live of both On Demand and Teacher Assigned. These two new products are oriented toward providing district-wide solutions that can be deployed across entire student and teacher populations, significantly widening the impact we can have with our school district partners. Additionally, these new offerings align to a school district's in-class curriculum, are embedded into a school's workflow, and importantly, are directed by teachers who we believe are ideally suited to assess their own students' learning needs. We executed over 70 contracts, including 15 On Demand contracts with our first Teacher Assigned partnership, an important milestone as we transition to our more expansive partnership model with larger school districts. Collectively, these contracts resulted in a record $11.3 million of bookings during the fourth quarter.

We believe these results clearly demonstrate that our new always-on product offerings are resonating with school district partners, especially when bundled together or combined with our existing High-Dosage Tutoring products. These strong results and continued momentum to start the year provide us increased confidence that Varsity Tutors for Schools is well-positioned to provide solutions that administrators, teachers, and students are seeking to support their evolving needs. Looking ahead to 2023, I wanted to share our plans for how we'll continue to focus on delivering exceptional value to customers and results for our investors. First, we'll continue to scale always-on recurring revenue products. Given the success of Learning Memberships across our academic audiences, we plan to transition our test prep and professional audiences to Learning Memberships by the end of 2023.

With the completion of this transition, we will have shifted 100% of our consumer business to always-on recurring revenue subscription products. With a strong foundation in place, we believe we can continue to drive higher levels of Learning Memberships growth across all of our consumer audiences through further product enhancements and testing. Specifically, we plan to iterate on the pricing and the structure of Learning Memberships to broaden their appeal at the top of the funnel and drive further growth in conversion and customer acquisition. We also plan to create more flexibility for customers to manage their membership and tutoring frequency, including new self-service capabilities, which we believe will increase retention and lifetime value by better aligning Learning Memberships to evolving customer needs.

Additionally, we plan to make it easier for members to discover multiple new learning paths, including new learning formats and programming coverage, to drive further engagement among members with the aim of providing more value and enhancing customer satisfaction. Within our institutional business, we expect our new Teacher Assigned and On Demand products will represent a growing proportion of institutional bookings during the year as we remain focused on district-wide solutions and partnerships with larger school districts. Our second major area of focus is achieving Adjusted EBITDA profitability. As Learning Membership mix continue to increase as a percentage of total revenue, we believe we will be able to drive continued gross margin expansion and further simplify our operating model in the year ahead. We also plan to make further investments in automation, self-service capabilities, as well as weaving additional AI capabilities through our platform to enhance both the learner and expert experience.

Recently, we have seen improved Adjusted EBITDA performance each month as we progress further through the J-curve. Given our recent momentum, we have increased visibility into and confidence in achieving Adjusted EBITDA profitability by the end of 2023, as previously communicated. Our third area of focus is that we'll continue to lead the way forward with new technologies, further leveraging artificial intelligence capabilities to transform how people learn and further personalize the learning experience. We've long believed that AI for HI, or artificial intelligence for human interaction, has the ability to transform how people learn. AI has been central to our ability to improve quality, enhance personalization, and decrease the cost of our offerings. Today, AI powers our ability to identify the highest quality experts, assess learners' foundational knowledge, and helps ensure the right expert-learner match occurs, among many other use cases on the platform.

The latest AI advancements are allowing us to rapidly develop transformative experiences involving the real-time generation of content with near zero cost, improving our ability to deliver live human interaction and personalized learning at scale and providing new superpowers to experts and learners on the platform. We recently announced the launch of two new AI-driven products and plan to leverage the latest advancements in machine learning and AI, including ChatGPT and similar technologies, to drive further product enhancements, personalization, and cost efficiency in the year ahead. The first two products include an AI-generated lesson plan creator embedded in the company's live learning platform that is available for use during live tutoring sessions. Separately, an AI-generated chat tutoring product that pairs a conversational AI-driven chat with the ability to access a live expert on demand.

These two products represent the company's ongoing orientation toward taking a software and AI-driven approach to solve customer and business problems and build a highly scalable platform. We plan to roll out additional products and features for consumer customers that expand on these new capabilities as part of Learning Memberships. We believe that these additional products and tools will allow us to further personalize the experience for each learner and expert, yielding higher levels of engagement, retention, and customer lifetime value, driving both revenue predictability and operating leverage in the year ahead. In closing, I am proud of our team's execution. Just 10 months ago, we laid out a vision for our stated goal to transition our business towards always-on recurring revenue streams with the introduction of Learning Memberships and the new institutional products, including Teacher Assigned and On-Demand.

These efforts have allowed us to build a strong foundation for growth. They have also helped us establish a business model that can produce longer duration and higher value relationships with our customers, serve as a more scalable platform for future innovation, and have helped position us to achieve Adjusted EBITDA profitability by the end of 2023. In the coming year, we look forward to continuing to push the pace of innovation and enhancing our ability to meet the needs of both consumer and institutional learners in any subject, anywhere, and at any time. We appreciate your continued interest in our company. With that, I'll turn it over to Jason to discuss the financials in more detail. Jason?

Jason Pello (CFO)

Thanks, Chuck. Good afternoon, everyone. I'm pleased to be speaking with you today about Nerdy's strong fourth quarter performance and our outlook for the first quarter and full year of 2023. Our team continued to make substantial progress against our business model evolution. As Chuck mentioned, the accelerated transition to recurring revenue streams, including Learning Memberships, continued in the fourth quarter, reflecting the strong adoption we've seen from consumers during the back-to-school season and fall semester. Notably, we haven't observed any discernible macroeconomic pressure on demand for our products. As we've shared in the past three earnings calls, this evolution toward Learning Memberships results in lower near-term revenue and Adjusted EBITDA. However, we expect that it will ultimately allow us to generate superior long-term customer unit economics and drive higher levels of growth and profitability given the positive customer economics we're experiencing.

This shift in revenue recognition is reflected in our revenue growth rates for the three and 12 months ended December 31st. Expenses as a percentage of revenue also reflect the impacts of lower near-term recognized revenue in the denominator for rate-based expense calculations as we continue to progress through the J-curve during the fourth quarter. It's important to keep this in mind as we discuss our financial results for the period. In the fourth quarter, we delivered $41.8 million, results that were above our guidance range of $39 million-$41 million, reflecting stronger than anticipated active Learning Memberships, which totaled over 20,000 as of December 31st, and continued strength in lifetime value performance from learning members.

It also reflected the growth we're experiencing in our institutional business, which delivered revenue of $4.4 million, representing 10% of total revenue during the fourth quarter, and record bookings of $11.3 million. On our last earnings call, we stated that we expected our monthly subscription revenue from Learning Memberships by the end of the calendar year would exceed the revenue recognized from packaged customers. We delivered on this promise, with Learning Memberships representing 66% of consumer revenues in December, and as Chuck mentioned, 50% of consolidated revenues for the fourth quarter, demonstrating the rapid transition to recurring revenue products. Moving down the P&L, gross profit of $29.5 million for the fourth quarter represented an increase of 3% compared to the same period last year.

Gross margin of 70.5% for the three months ended December 31st expanded approximately 230 basis points from 68.2% in the same period last year. Gross profit and gross margin increases were primarily driven by gross margin expansion across our consumer audience as we evolve towards a greater mix of Learning Memberships, a trend we expect to continue into 2023, driving continued gross margin accretion. Sales and marketing expenses on a GAAP basis were $17 million in the fourth quarter, a decrease of $900,000 compared to the same period in 2021. Non-GAAP sales and marketing expenses, excluding non-cash stock-based compensation, were $15.7 million, or 38% of revenue in the fourth quarter of 2022.

This compared to 41% of revenue in the same period of last year and approximately 330 basis point improvement year-over-year. Throughout the fourth quarter, we continue to focus on optimizing the level of marketing spend, yielding efficiencies in our consumer business. Consumer efficiencies were partially offset by the investments we've made in our institutional sales and the go-to-market organization in support of Varsity Tutors for Schools, which we expect to grow into as revenue continues to scale and we slow the rate of hiring, which we've already done, thereby creating operating leverage. As we discussed in our last call, our investments in product development and subscription offerings, when combined with our ongoing efforts in automation and self-service capabilities, have allowed us to simplify operations and remove significant costs from the business.

In the fourth quarter of 2022, we announced the completion of workforce reductions of approximately 17% of our total workforce. As of December 31st, we had approximately 700 employees, representing a 30% decrease year-over-year, clearly demonstrating the sales and operating efficiencies enabled by our new always-on strategy and product offerings. Going forward, the application of artificial intelligence and machine learning in our business processes will allow us to further simplify our business model, reducing the need to hire incremental staff as revenue scales and we exit the J-curve, returning to growth without a proportional increase in both variable and fixed costs. We reported a non-GAAP Adjusted EBITDA loss of $5.5 million in the fourth quarter, beating the guidance range we provided of an Adjusted EBITDA loss of $6 million-$8 million.

Adjusted EBITDA outperformance versus guidance was driven by higher revenue, higher gross margin, marketing efficiency gains, workforce reduction actions stemming from our business model changes, and diligent cost oversight. Turning to the business outlook. Today, we're providing first quarter and full year 2023 guidance. We continue to see more evidence that validates our belief that learning membership model leads to longer duration and higher value customer relationships, enhanced gross margin, and a more scalable and efficient operating model. Consistent with our prior guidance, we continue to expect that we'll exit the aggregate J-curve business model transition, driving year-over-year growth with more attractive unit-level economics as we start the second quarter in 2023.

We believe the combination of our unique platform, comprehensive product offerings, including Learning Memberships, the interest in early contracting successes we are seeing in Varsity Tutors for Schools' new offerings, and our ability to deliver high-quality live learning at scale personalized to each learner positions us for continued growth as the education landscape evolves. As is typical for our business, we expect sequential quarterly revenue growth from the fourth quarter to the first quarter in 2023. For the full year, we expect growth will be driven by the continued evolution towards recurring revenue streams, the corresponding build in the number of Learning Memberships subscribers, and higher institutional revenues. For the first quarter of 2023, we expect revenue in the range of $45 million-$47 million.

For the full year 2023, we expect revenue of $190 million-$200 million, representing 20% growth at the midpoint versus our 2022 revenue of $162.7 million. Full year guidance reflects our decision to shift 100% of the consumer business to Learning Memberships by the end of 2023, including the remaining test prep and professional audiences. To provide a little more color on revenue modeling, given the rapid shift to recurring revenue products, from a quarterly perspective, we expect a percentage of full year revenue to approximate 24%, 23%, 22%, and 31% during the first, second, third, and fourth quarters, respectively, during 2023.

This quarterly cadence results in our expectation that year-over-year growth rates will increase each quarter over the course of 2023, with growth of 40% year-over-year as we exit the year. Revenue guidance also reflects normal summer seasonality, including anticipated lower levels of new customer acquisition, consumption, and retention during the summer months when K-12 schools and universities are out of session. Our Adjusted EBITDA guidance for both the first quarter and full year reflects the continued benefits from our recurring revenue products, which focus on longer-term relationships with higher value customers and improving gross margin profile and operating efficiency stemming from our continued shift to recurring revenue business models. For the first quarter of 2023, we expect a non-GAAP Adjusted EBITDA loss in the range of $3 million to breakeven.

For the full year 2023, we expect non-GAAP Adjusted EBITDA loss in the range of $10 million to breakeven. Full year Adjusted EBITDA guidance reflects the impact of normal summer seasonality and higher variable costs in the third quarter as we ramp into the back-to-school selling season. It should be noted that full year Adjusted EBITDA guidance reflects a more than $30 million improvement year-over-year, resulting in a 1,900 basis point improvement in Adjusted EBITDA margin at the guidance midpoint. Clearly demonstrating the sales, marketing, and operating efficiencies I mentioned earlier and their ability to positively impact the P&L, in addition to higher revenue and gross margin. We're confident in our ability to achieve Adjusted EBITDA profitability by the end of 2023 and have increased visibility and confidence into how this goal will be reached.

Additionally, our balance sheet remains strong with no debt and $90.7 million of cash, providing us with ample liquidity to operate against our plan and pursue growth initiatives. Thank you again for your time. With that, I'll turn the call back over to Chuck.

Chuck Cohn (Founder, Chairman, and CEO)

Thanks, Jason. Thanks again to all of you for joining us today. As always, we appreciate your interest in Nerdy and look forward to continuing the dialogue during this exciting time for the company. With that, I'll turn it over to the operator for Q&A. Operator?

Operator (participant)

Thank you. If you would like to ask a question, please press star then one on your telephone keypad. If you change your mind, please press star two. The first question we have from the phone lines comes from Doug Anmuth with JPMorgan. Your line is open.

Doug Anmuth (Managing Director and Head of the U.S. Internet Team)

Great. Thanks so much for taking the question. It's good to see the Learning Memberships transition tracking ahead of schedule, just as you complete the J-curve transition. I guess thinking bigger picture, can you just walk us through more around your long-term strategic vision for the subscription model, how you could potentially iterate around pricing and structure of memberships, and then what are the key investments to get there? Thanks.

Chuck Cohn (Founder, Chairman, and CEO)

Thanks, Doug. This is Chuck. Great question. The way that we're thinking about this is that Learning Memberships is a all-encompassing comprehensive solution that supports students across multiple academic calendar years, multiple subjects, allows for them to engage across different learning modalities, and you can access any of 3,000 different subjects worth of tutoring, more than 250 live classes per week. We have asynchronous diagnostic tests. We have Codeverse and other coding-related content. We have StarCourses and other on-demand lessons. Our goal is to continue to add more value each and every quarter and allow for people to learn however they want, whenever they want, and support them in a way that really fosters academic success and learning.

We're gonna continue to lean into additional product capabilities and bring them together in a way that really feels holistic and makes it easy to access. Some of those could include things like our AI-generated lesson plans, our AI tutor solution that we're working on right now, but also just continuing to build out the content coverage that we have in areas, like our class selection as an example. We'll continue to get more and more different classes that are relevant for each different audience. We're going to be testing price. We're gonna be testing contractual terms. We're gonna be adding different content to see what really resonates.

As we look at some of the tests that we've done already year to date, we're really excited about that as a vector of growth and how we can kind of play with different elements to find the right fit for a given audience segment so that we can drive conversion improvements and ultimately build a high Net Promoter Score product that people are super excited about.

Jason Pello (CFO)

Yeah. Doug, maybe, this is Jason, I would add to that. You know, one of the things we're seeing about Learning Memberships model, we've mentioned this in the past, we're seeing longer duration and higher lifetime value customer relationships, enhanced gross margins, better marketing efficiency. We're getting better forecasting visibility. We're expanding into new TAM here. You know, because of that, during the first quarter, we transitioned all of our existing customers to Learning Memberships as well as our test prep audience to Learning Memberships, which we're really excited about, as we evolve towards 100% of our consumer customers being on Learning Memberships by the end of 2023.

Doug Anmuth (Managing Director and Head of the U.S. Internet Team)

Great. Thank you both.

Operator (participant)

Thank you. Your next question comes from Ryan MacDonald with Needham. Please go ahead when you're ready, Ryan.

Matt Shea (VP and Equity Research)

Hey, guys. This is Matt Shea on for Ryan. Thanks for taking the question, and congrats on the quarter. Wanted to start with the institutional business, Varsity Tutors for Schools. Nice to see some contract wins and some On Demand and Teacher Assigned contributions, which I would assume help unlock some of the COVID related learning loss relief budgets. When you're seeing clients adding these new offerings, what do purchasing habits look like? Have you had success seeing clients utilize that learning loss budgets? Are you seeing more one-year deals, or are schools trying to lock in that functionality for a multi-year period?

Chuck Cohn (Founder, Chairman, and CEO)

Thanks, Matt. Good question. Earlier, this past, you know, call it six months ago or so, we started shifting our focus from selling exclusively High-Dosage Tutoring, so one on one or up to one to five group tutoring online, to instead also selling On Demand and Teacher Assigned, as you noted. Those are district-wide solutions that are available to the, that are basically sold top down to superintendents and then are available to all students within a school district. That involved a model shift where we started focusing on those bigger school districts, and we also started focusing on bundled solutions. Those are really more strategic conversations than we've had in the past, and it was a different way of partnering and selling into schools. We've actually seen really, really good traction there.

There's more than 100,000 students now that have access to these products. The, you referenced the specific funding type. One of the things that's interesting about some of these new products that align to the curriculum within schools is that there's a variety of different funding sources that can actually be used, not just, I think, the ESSER III funds that you're specifically referencing. They're embedded in the workflow of teachers and in the actual classroom, and we're seeing really good adoption out of the gate and feel good about how our ability to provide teachers leverage and provide schools with an effective tool for helping students learn and remediate loss even before it occurs actually is a very durable solution that superintendents are really excited about. Some of those could be multiyear deals.

That is something we're hearing more and more. There's a variety of different funding sources. The new products that we've built specifically align towards those long-term recurring partnerships with school districts.

Matt Shea (VP and Equity Research)

Got it. That is helpful. Jumping over to the consumer business. Learning Memberships, we were surprised to see $350 average revenue per revenue per Learning Membership, which was higher than the 6-12 monthly plan listed on your, on your guys' website. The rough math off of the $87 million run rate and 20,000 Learning Members gets you to a number even higher than $350. Curious, does this suggest more customers are adopting shorter duration plans, or are they choosing to purchase more hours than the base 6-12-month subscriptions currently offer? Thanks.

Chuck Cohn (Founder, Chairman, and CEO)

Yeah, good question. When we first introduced Learning Memberships, we had basically the most simplistic version of it possible. There was kind of a one-size-fits-all frequency, initially, it only included one-on-one tutoring. Over the course of the next several months, as we headed into the back to school, we started adding additional product capabilities that included the Tutor Chat, Essay Review, Codeverse, Async, diagnostic testing, and other product capabilities. We also started leaning into additional frequencies, so that means you can purchase the ability to have a higher volume of consumption. What we saw was many of the Learning Memberships customers in Q4 started skewing towards higher consumption models that allowed them to get higher levels of academic support than would be the case in the base model you're referencing.

That was simply a function of us blending towards higher average revenue customers because there are higher frequencies. The interesting thing, though, is we're going to continue to test, you know, a variety of different flavors of memberships to drive both conversion and retention in addition to continuing to optimize the revenue per member metric. We're not specifically trying to maximize average revenue per member. We're trying to maximize the contribution profit per visitor and build, you know, a big and profitable business. Certainly we're very pleased with the level of uptake in some of these higher frequency products this quarter.

Operator (participant)

Thank you. Your next question comes from Eric Sheridan of Goldman Sachs. Your line is now open.

Eric Sheridan (Managing Director)

Thanks so much for taking the questions. I want to come back to the comments you made about the AI-driven products. You made that announcement in the period running up to the earnings report, and then we talked about it a little bit in the prepared remarks. Can you talk a little bit about maybe past investment cycles around AI and machine learning, and how should we be thinking about AI and machine learning as cornerstones of your investment policy going forward? Coming back to the way you framed it, how should we think about it as an add-on to product enhancements, personalization, and cost efficiency, maybe beyond just the next 6-12 months when you think about more AI and more machine learning tools being deployed on the platform? Thanks so much.

Chuck Cohn (Founder, Chairman, and CEO)

Thanks, Eric. Great question. We started leveraging machine learning probably about six or 7 years ago to identify patterns that wouldn't be otherwise possible for a human to detect. One of the first use cases we had that also ended up being one of our highest leverage applications of AI related to the match between a learner and an expert, where that relationship and that connection is incredibly important in terms of compatibility and the extent to which a learner and expert want to continue working together over time. When we can get that match right, we are rewarded with high lifetime value relationships, high Net Promoter Scores, and, you know, much better unit-level economics as a result of a customer getting a great experience.

One of the things that occurred was we started instrumenting the business in more and more places then to capture information that could ultimately inform that match as well as other ways that we could leverage all that data available to better improve personalization. Over the course of, call it three years, I think we saw, you know, at least a 30+% increase in lifetime value at that point simply through ML matching, if not more. We were able to remediate all sorts of different bad things that could happen in a customer experience and just overall polish the experience from the end user's perspective. That was one example, but we use ML in a variety of ways. We use it for customer propensity modeling.

We use it for lead scoring and figuring out the most appropriate way to put energy against different customer types and interactions. We use it for our adaptive diagnostic testing that's used to assess both expert capabilities as well as what students do or do not know. We have computer-adaptive testing that can really zero in on what a student needs to learn in the most efficient way possible, and that's something we also leverage on the institutional side now extensively. You know, our expectation would be that many of the investments we're making here are actually quick payback period type solutions. As an example, we already have something like, I want to say 2,500 different tutors over the course of the last two weeks that are able to access and leverage AI-generated lesson plans.

We know that when we generate those, that there's a roughly 20% improvement in student outcomes associated with it. We're able to generate content effectively for free that is of very high quality, that allows for the student and the tutor to have a great experience leveraging that content and, you know, we're gonna continue to make it better over time. We've gotten really, really good feedback there. Another example would be, we're actually leveraging GPT specifically related to call scoring against standardized rubrics where we had previously been incurring costs externally.

Speaker 10

We're actually able to back test it against historical models and then replicate what had been a human experience with, in this case, an AI-driven experience. You know, we're only a couple weeks in, but we're already we've already pocketed a $1 million win there on the cost side, which is something that we're really excited about. The other benefit is we're able to give all of our customer service agents who interact with customers real-time feedback relative to best practices in a way that really enhances value. I could list 100 examples for you, but we're really excited about this, and there's both real cost out opportunities as well as real revenue generating opportunities that can enhance membership in totality.

Eric Sheridan (Managing Director)

That's super helpful. Thanks so much for all the color.

Speaker 10

Thank you. We now have the next question from Brett Knoblauch from Cantor Fitzgerald.

Brett Knoblauch (Managing Director and Senior Equity Research Analyst)

Great. Hi, guys. Thanks for taking my question. I guess first on the institutional side, you know, obviously a very strong quarter. Was just curious how many of the 70 deals that you executed were of new customers versus, I guess resigning existing customers?

Jason Pello (CFO)

Sure. About 40 of the new, of the contracts were new customers. 15 of them were, On Demand contracts and, you know, we had the one, Teacher Assigned deal, which was an important milestone.

Brett Knoblauch (Managing Director and Senior Equity Research Analyst)

Got it. I guess if we look at-

Jason Pello (CFO)

you know, we're really-.

Brett Knoblauch (Managing Director and Senior Equity Research Analyst)

Oh, sorry. Go ahead.

Jason Pello (CFO)

No, I was just gonna say, look, we're really pleased with the pace that the team is putting in place. You know, the products are resonating in the market. You know, now the Teacher Assigned is live and people can experience it. We're having, you know, I would say deeper and broader conversations with more school districts, especially as they think about where they're gonna put this kind of technology into play next year at the start of the school year.

Brett Knoblauch (Managing Director and Senior Equity Research Analyst)

Perfect. No, that's helpful. Then on the average monthly revenue of $350, I guess, where would you expect that to trend? I know you talked about a bit of self-service and some pricing model iterations. I was just curious if you would expect that number to kind of remain where it is, trend up, trend down, or how should we think about that?

Jason Pello (CFO)

Yeah. I guess I would say I would expect it to remain pretty consistent. I mention that because there's gonna be some higher priced products. Think, you know, we just moved into the test prep audience. That's a higher priced product that generally has higher frequencies because people are looking to study over a shorter period of time. And then that'll be offset by some lower priced products, especially as we move seasonally throughout the year to try to drive retention. Think about, you know, maybe a more casual language audience where you have lower frequency one-on-one sessions, but then you get all the benefits of the classes and being able to talk, you know, live with peers in a foreign language.

Net-net, I would expect over the course of 2023 to remain within, you know, the 350 range. There's gonna be some puts and takes that are both higher and lower to try to drive adoption and retention.

Chuck Cohn (Founder, Chairman, and CEO)

Yeah. The one thing I would add is it's early days, and based on some of the tests that we're running and how we think that we can modify Learning Memberships to appeal to different specific audience segments, we think that there's a big opportunity to just continue to test different modifications of memberships where we might be able to drive huge conversion improvements for certain segments. You know, whereas in other segments where there maybe is a more kind of standardized or homogenous group of people related to a certain frequency, you know, there's less deviation. It's early days. We're gonna take some big swings, and we think that conversion in addition to just maximizing the revenue per member, per customer on average, is a really big lever. We're gonna be testing there as well.

Brett Knoblauch (Managing Director and Senior Equity Research Analyst)

Perfect. Understood. Thanks, guys, and congrats again.

Jason Pello (CFO)

Thanks, Brett.

Operator (participant)

Thank you. We now have Maria Ripps of Canaccord. Your line is open.

Maria Ripps (Managing Director and Equity Research)

Great. Good afternoon, thanks so much for taking the question. First, given that the membership model is becoming sort of a meaningful portion of your revenue base, what kind of assumptions are embedded in your sort of full year guidance from the renewal rate standpoint, given that some of your early cohorts will be coming up renewal this year?

Jason Pello (CFO)

Yeah, good question, Maria. You know, I think just as Chuck mentioned, it's still early days as it relates to renewal rates from Learning Memberships. We continue to see strong retention. We continue to develop new and unique products to roll into the Learning Memberships to drive engagement and adoption. The one thing I'd caution on is, you know, we haven't experienced the end of one school year and the transition across the summer to another school year. The guide appropriately from our perspective, takes into account that unknown. You know, certainly we're doing a lot from a content and programming perspective, whether it's classes or enrichment versus, you know, academic subjects during the summer months, increased prevalence from StarCourses to drive engagement.

That is the one unknown that I would just caution you guys when you think about modeling the summer months, and transitioning from school year to school year.

Maria Ripps (Managing Director and Equity Research)

Got it. That's very helpful. Could you maybe talk about your rationale to transition your test prep customers to Learning Membership, sort of understanding that the unit economics and sort of customer LTVs of memberships are more attractive? Just maybe talk about why it may make sense to for test prep products sort of given that those are less recurring by nature.

Jason Pello (CFO)

Sure. Yep, happy to answer that. The way we approach transitioning all of the audiences so far was by methodically A/B testing the different audience segments to understand both conversion and then unit level economics associated with the old and new model. Then, you know, once we had confidence that it was trending to statistical significance, we would then kind of flip over to the new model that we believed was the superior economic model, and also one that we think serves as a great platform for innovation that we've seen actually delight our customers a lot more.

In the case of test prep, where we've actually transitioned 100% of all new customers thus far this year to Learning Memberships, that's an area where we think that there's higher lifetime value, there's gonna be higher gross margin, there's going to be happier customers. We can continue to add more value to the actual subscription itself and enhance it over time. Then there's operational efficiencies that come with getting a higher proportion of the total consumer customer base over to one operating model so that you can simplify and streamline and become more efficient as well. The, the rationale was simply it was kind of better across all fronts. But that's the bar that we're holding ourselves to as we, you know, continue after the year for the remaining customers.

We have high confidence in the path to 100% subscription on consumer. You know, we already saw more than 50% of recognized revenue in this past quarter, come from Learning Memberships, which is up from 18% in Q3 and 2% in Q2. We're feeling really, really good about that ramp.

Maria Ripps (Managing Director and Equity Research)

Got it. Thank you so much for the call.

Jason Pello (CFO)

Thanks, Maria.

Speaker 10

Thank you, Maria. We now have Andrew Boone with JMP Securities.

Matt Clark (Managing Director)

Hi, guys. Matt on for Andrew. Thanks for taking my question. Just understood your target for just EBITDA profitability in 2023. With strong LTVs and now you're growing dad just on retention LTVs, is there an opportunity for you guys to lean more heavily into marketing spend? Just how are you thinking about this in 2023? Thanks.

Jason Pello (CFO)

Absolutely. I. Great question by the way. You know, one of the things that is a, is a top goal around here for this year is becoming profitable. We're doing everything we can to pull that forward. What we are seeing is great, you know, LTVs, especially relative to our old package model. If that continues, and we fully expect that it will, you know, we'll consider reinvesting some of those $ back into marketing in the back half of the year. For now, we wanna make sure that we can achieve profitability as quickly as possible.

Operator (participant)

Thank you. We now have Mario Lu of Barclays. Your line is now open.

Mario Lu (Equity Research Analyst)

Great. Thanks for taking the questions. The first one's on the full-year revenue guide of 20% growth. I was just curious what was kinda the embedded percentage for institutional revenue for that full-year number? Also, if there's any kinda change in the American Rescue Plan dollars being deployed to Nerdy services to kinda get to full year. Thanks.

Jason Pello (CFO)

Hey, Mario. Thanks for the question. Embedded in the guide at the midpoint, the 195 for the full year would be 15% of that total mix would be associated with the institutional business. That represents about 50% growth year-over-year. We're really excited about the opportunity for that business to deliver at a higher rate this year. When you think about funding sources within the institutional base, and Chuck touched on this a little bit earlier, not only do you have the American Rescue Plan or ESSER-III funds, of which only 19% have been deployed as of October 2022, was the latest information we were able to garner. You've also got Title I funding, which is Evergreen.

If you look at the most recent omnibus budget passed, about a quarter ago, it included $19 billion of Title I funding. We expect that to continue to grow over time. Lastly, I think the most important part is because our solutions are embedded in the classroom workflow and they support teachers, schools are using their own operating budgets to purchase these new exciting products, especially as it relates to Teacher Assigned, as a supplement to teachers in the classroom.

Effectively, you know, the way we think about it, and I think the way school districts are thinking about it, is they get a co-teacher or someone that can be an extra set of hands for the teacher in the classroom during the school day, so that those teachers don't have to stay, you know, beyond normal school hours, which we think and school district partners think will help drive teacher retention, which we think is just an added benefit.

Mario Lu (Equity Research Analyst)

Great. Thanks, Jason. Just one on the shareholder letter mentions, you know, Nerdy is like the only company that currently combines live learning and AI technology. I know it's still early, but can you talk a bit about, you know, how large of an advantage this is having this unique combination in terms of acquiring both experts and learners?

Chuck Cohn (Founder, Chairman, and CEO)

Yeah. We outlined this idea, several years ago that we call AI for HI or artificial intelligence for human interaction. The big idea here is that in a world where instruction and expertise transfer occurs online, that you can digitally enhance it and augment it in ways that simply aren't possible offline and give superpowers to both experts and learners

In ways that are highly additive. We think that that human element and the fact that we've focused on scaling relationships over time is highly defensible, and we'll continue to be able to lean into additional forms of personalization and adding additional product value, you know, over the course of the next year. One of the things that we're really excited about as it relates to generative AI is the ability to produce content at, you know, near zero cost that is highly relevant for what is occurring in that moment in time.

There's many, honestly dozens of specific applications that we've already thought of, and we're just trying to prioritize, you know, the most important approaches to make sure that they ultimately manifest themselves in things that customers value or that, you know, add to retention and NPS and other things that, you know, would be a signal of great progress there. One of the things that we've done though that I think is really important is that we've instrumented the business in a way that allows for us to take advantage of the fact that there's this vertically integrated marketplace model where we can see exactly what's happening on both sides of the network. You think about what's maybe even different about this model than other marketplace models that might exist is the learning actually occurs on the platform.

Both the live tutoring itself and recorded video sessions, as well as then all of the learning as it relates to diagnostic testing and progress over time. We are actually capturing all of that information and storing it, and then we're able to leverage it in ways that enhance personalization as we find, you know, applications. We feel like we're well-suited to run ahead here, and we plan to be aggressive on leveraging some of these new advances in AI to add value to customers, much like we have in the past.

Mario Lu (Equity Research Analyst)

Great. Thanks, Jeff.

Operator (participant)

Thank you. That does conclude our Q&A session and conference call. Please have a lovely day, and you may now disconnect your lines.