Good afternoon. Thank you for attending the Nerdy Second Quarter 2022 Results Conference Call. My name is Matt, and I will be the moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to our host, Molly Sorg, Head of Investor Relations. Molly, please go ahead.

Good afternoon and thank you for joining us for Nerdy’s second 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 will 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 changes 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 second quarter results and the company’s filings with the SEC for a discussion of the risks. Not all of the financial measures that we will discuss today are prepared in accordance with 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?

Thanks, Molly, and thank you to everyone who has joined us today. We are happy to be back in front of you discussing our second quarter results as we head into the back-to-school season for the 2022-2023 school year. We continue to experience strong demand for our product offerings. In the second quarter, Nerdy delivered revenue of $42.2 million, above our guidance range of $37 million to $40 million and up 29% as compared to the second quarter of 2021. We also experienced continued strength in our marketplace dynamics with active learners up 36%, online sessions up 35% and the number of active experts on our platform, up 42% compared to the second quarter of last year. Our results reflect healthy marketplace dynamics and continued momentum in both our consumer and institutional businesses as we head into back-to-school. The combination of our new always-on offerings, including our recently announced all-inclusive Learning Membership, our ever-growing data set and our AI-enabled platform allow us to create deeper and longer-lasting learner and expert relationships, and we believe set us up for strong growth and superior unit level economics heading into 2023 and beyond. On the consumer side, as we are focused on achieving academic excellence in high grades and professionals seek opportunities for incremental growth and up-skilling, we are continuing to see strong demand for our offerings. Notably while travel and leisure activities were heightened this summer, causing consumption to decline seasonally as the school year ended, we are not observing any discernible macroeconomic pressures impacting demand. In fact as we shared in our shareholder letter, our recent cohort’s lifetime value or LTV continued to expand higher than previous periods. This summer we have been ramping up our focus on Learning Memberships and the product offering has been well received by consumers. Our…

Thanks, Chuck and good afternoon everyone. I am pleased to be speaking with you today about Nerdy’s strong second quarter performance and our outlook for the balance of the year. The team executed at a high level during the quarter to deliver several significant product conditions in advance of the key back-to-school season. Needless to say, we are excited about our new Learning Membership offering in our new institutional products and the value we believe they bring to learners, teachers and their school partners. In the second quarter, we recognized revenue of $42.2 million, our second highest revenue quarter ever in what is traditionally a seasonally low period due to summer break. Revenue results were above the high end of our guidance range and an increase of 29% from the second quarter of 2021. Revenue growth was driven by continued strength in our direct-to-consumer offerings and the addition of our institutional business, Varsity Tutors for Schools. Our small class and group revenue increased 114% to reach $5.5 million in revenue, up from $2.6 million in the second quarter of 2021 and accounting for 13% of our second quarter revenue as compared to 8% in the same period a year ago. The increase was driven by the introduction of small group tutoring and Varsity Tutors for Schools. Going forward, as Chuck mentioned, our small group classes for consumers will primarily be offered as part of our all-inclusive Learning Membership, moving away from standalone small class purchases in most areas of our business. Varsity Tutors for Schools signed 44 new contracts during the quarter and delivered over $4.2 million in revenue, representing 10% of our second quarter revenue, consistent with our expectations. Moving down to P&L. Gross profit of $28.8 million for the second quarter represented an increase of 35% compared to…

Thanks, Jason, and thanks again to all of you for joining us today. Before we turn the call over to the operator and get started with Q&A, I’d like to thank Eric Blashford for his service on our Board over the past 7 years, which included advising the company from its first institutional capital raise in 2015 through our public listing this past year. Eric has been a trusted advisor to me and the Nerdy leadership team over the years, and I’m grateful for the counsel and contributions he provided through a critical growth period for the company. I’d also like to welcome Stuart Udell to Nerd’s Board. Stuart brings extensive education category experience and joins at a time when we are significantly evolving and expanding our offerings for schools. His track record for building and leading successful ed tech companies by scaling growth with districts and administrators makes him an invaluable addition to our team at this critical time. 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 Instructions] The first question is from the line of Doug Anmuth with JPMorgan. Your line is now open.

Thanks for taking the questions. I want to ask you a couple about the membership model. I was just hoping that you could provide some further color on just kind of what you’re seeing and with traction kind of uptake and conversion rates, and I know it’s still early, but retention as well? And if you can clarify just kind of the mix in revenue there with memberships and then other DTC revenue? And then separately, I may have missed it, but are you providing a bookings number this quarter? Thanks.

Thanks, Doug. Good questions. So one of the things that we see, and I think this is consistent with what we shared in our last quarterly earnings call was that our conversion rate for memberships compared to one-to-one is open and favorable year-over-year. So we’re seeing memberships convert favorably to people that bought a full tutoring package. So that’s very encouraging. Then we’re seeing that what people actually begin that they’re actually leading more consistently over time. And those trends based on what we’ve seen thus far, continue over the course of several months, and there’s significant separation in the consumption patterns of membership customers compared to package customers. So that’s really encouraging. We’re also seeing that the customers and memberships actually engage in additional products, inclusive class enrollments at significantly higher rates and we’ve seen historically that when a package customer historically engages in multi-modality learning. So that could be StarCourses, that could be adaptive testing, that could be classes that their LTV goes up significantly. And that’s something that has us really encouraged. And then based on all the customer satisfaction metrics and the metrics related to how value is perceived, those are us as well. And so those are the big metrics that we’re paying attention to, and we’re encouraged by all the customer-centric metrics there and metrics that indicate customers kind of building with their wallets.

And then Doug, what I’d add to that is, starting in July, we began to late into memberships to a greater extent based on the strong signal we’ve been seeing and continue to experience across that customer cohort. And if you add together our one-to-one tutoring customers in our membership customers, memberships accounted for over third of our clients in July. And so, as we mentioned on the call earlier in the scripted portion, as we move into our back-to-school season, we expect the majority of our new learners will purchase the membership.

Yes, the majority of our end consumer, of course.

And then lastly…

Got it. Okay. Any comments related to booking?

We are not sharing bookings as in the membership model, only the first month is actually considered prepaid bookings. And then on an ongoing basis, we are recognizing that revenue with yearly over time. So that’s going to be one of the changes that you’ll see in the metrics is that the bookings really don’t make sense to share in a membership context. And so one of the things that we’ll be doing post back-to-school is sharing all those membership centric metrics that bring better visibility into how it’s performing relative to the package models. So we look forward to providing that information in November on the next call after back-to-school season.

Okay, thank you both.

Thank you for your question. Our next question is from the line of Andrew Boone with JMP Securities. Your line is now open.

Hi, guys. Good afternoon. Thanks for taking my questions. Another couple on the membership. So can you guys talk about the J curve? Is there a way to estimate the separation between what you guys would see? The chart was really helpful. But what I’m trying to get at is what would a normalized 2Q start to look like our 3Q guidance start to look like, if you think about just a like-for-like apples-to-apples kind of go-to-market strategy? And then secondly, in terms of guidance, the letter talked about a slowdown active users given the transition. I’m trying to reconcile that versus all of the positive metrics you just gave in terms of conversion and everything else. Can you just double-click in terms of what would cause that slowdown? Thanks so much.

Yes. I’ll start with the slowdown in active users with the transition. One of the things to keep in mind, and Chuck mentioned it. As we build up this new all-inclusive offering, we’re rolling in our classes customers that were either Richmond or academic focus into the membership. And so historically, those counted separately from a unique user perspective, and now they’re included in the numbers on a go-forward basis. We think this is absolutely the right thing to do from both a retention perspective, from the level of value we’re providing to our customers, and we’re already seeing that is driving higher levels of engagement.

Yes. The other thing I’d mention is that we moderated our marketing spend and improved our expectations related to customer payback periods. And related to that, that means we’re waiting in branded sped. It means we’re rating in spend related to StarCourses and that ends up disproportionately impacting class segment where the customer payback degrees are not as fast as in the one-to-one segment. And so what you’re seeing, and you saw a little bit of this in Q2 with a 300 bps improvement in efficiency related to sales and marketing as a percent of revenue. A lot of those changes were made on a rolling basis throughout the quarter. And so as we head into back-to-school with an enhanced focus on the path to profitability and improve unit-level economics, we’re focusing the marketing spend on the really high-value revenue per active order customers and improved marketing payback. And so that then results in fewer class customers as a percentage of total, which then drives some of the slowdown in active orders in total. You’re going to see a significant mix shift towards higher value revenue customers.

And then maybe just to address your question on the J curve and the separation. Consistent with our prior guidance, we expected the impact to be greater this year as we lead into our all-inclusive Learning Memberships. We do think Q2 and Q3 represent the low point as we move through that J curve, which we still believe to be about 6 months taking into account conversion, retention, average revenue per member enrolling in those classes. As we exit the year, we should be on a more like-for-like basis going forward in 2023.

Thank you, guys.

Thank you for your question. The next question is from the line of Ryan MacDonald with Needham. Yore line is now open.

Hi, thanks for taking my question. Congrats on a great quarter. Maybe touching on Codeverse, the acquisition you made. Jason, can you talk about the contribution [Technical Difficulty] Codeverse in terms of the revenue? And then as that relationship matures, how should we think about the rolling in of the Codeverse offering into the membership over time? Thanks.

Yes, absolutely. I mean, good questions. Since the acquisition was completed in July, no financial impact during the second quarter. And then on a go-forward basis, from a revenue perspective, we’re not expecting any incremental revenue because we are going to be rolling into all-inclusive Learning Memberships. We think that that’s just another example of how we can provide increased capabilities from a product perspective on our side, but that and more importantly, increased value to our customers. And then we think about it from an EBITDA perspective, minimal impact. We have a team over there, was small. We’re able to punch about their way as it relates to product development. They’ve all come on board, and we’re really excited to have them as part as the team on a go-forward basis.

Yes. The way we’d expect for this to manifest itself in the P&L of the business is as we integrate that, which will be post back-to-school. So aggregating a number of the big product deliverables we have, will then integrate Codeverse into the learning membership products, and you would expect that point to drive higher levels of conversion by making the product more compelling and then higher levels of retention over time. And this is also particularly interesting given that in the summer period, we could see a large portion of our key K-8 customer base or K-12 customer base actually leveraging this product next summer.

Super helpful. And maybe just as a follow-up for me. On the Verity Tutors for Schools, great to see the 44 contracts signed in the quarter. I’m curious what you’re saying, I guess, in terms of momentum on the pipeline heading into third quarter. Are schools motivated to – were they motivated to really get a solution implemented and decided on selling season this year? Or are you still seeing sort of a healthy pipeline as we go into third quarter for the fall 2022 launch? Thanks.

Yes, we have a growing pipeline as we head into back-to-school. I think one of the things that we saw last year is that the start of the school year is a real forcing function to start thinking through the specific final elements of different contracts. And so as schools started last year, we saw the pipeline that had been building actually turned into completed contracts. So we feel good about the 44 contracts that we signed in the quarter. We feel good about the fact that the pipeline of bookings is growing. And then we’ve seen that the urgency increases just naturally from the school year starts, and we’ll start thinking about actually implementing those programs. And one of the things that we’ve also heard is that the American rescue plan funding, the $24 billion that was set aside for COVID learning loss, then only about 18% of the total funds have been spent at 11% specific to the ARD learning loss funding. And so there’s plenty of funding available. We’re hearing many schools that are interested in considering longer-term relationships that has been the case over the course of the past year, which is something that we’re encouraged by. And it lines up well with the two new products that we have in On Demand or chat-based solution and then Teacher Assigned or district-wide solution that allows teachers to assign online tutoring as live and interact if any student need it. So I think the two products align well with the long-term need and feel good about the pipeline going into back-to-school.

Excellent. Thanks for the color. Congrats again.

Thanks, Ryan.

Thank you for your question. The next question is from the line of Eric Sheridan with Goldman Sachs. Your line is now open.

Thanks so much for taking the questions. Maybe two, in terms of the pipeline you’re seeing, can you just maybe take a step back and refresh us on how pipeline turns into revenue? And how should we be thinking about that as a tailwind for revenue growth when you look out over the next 1 to 3 years? That would be sort of the big picture question. And then your comments on high-value marketing, any sense of going deeper there in terms of what that means in terms of which channels or the absolute spend on marketing and how you are thinking about ROI and marketing and how we should be thinking about marketing as a component of your operating cost at a multiyear view as a result of maybe that shift to high-value marketing? Thanks so much.

Hey Eric. Thanks for the question. I will answer the pipeline question, Chuck will take the marketing question. From a VTS pipeline conversion perspective, those are a little bit lumpier. You have got to work your way through school board approval, superintendent, and it takes a little bit longer certainly than our consumer side. We are also switching the sales team’s focus to focus on higher student-based populations because we are seeing that those traditionally have higher recurrence in year-over-year contracts, and we are able to meet a larger proportion of students’ needs in those districts. So, typically, once the contract is signed, an implementation period is a little bit less than a month and then you would start to see revenue being recognized thereafter, especially as it relates to the high dosage products. And then on the new On Demand and Teacher Assigned products, since those are on a per year per student basis, those are recognized more linearly across the contract on a monthly perspective. And then just maybe lastly, how schools are thinking about the longer term funding. Chuck mentioned only 11% of that SR3 funding had been deployed. There is a spending clip at the end of 2024 as it relates to those specific bonds. And so we would expect over the next 1.5 years schools would look to deploy those to a much greater extent. We are also starting to have conversations around multiyear contracts with schools because if they contract those monies before the end of the spending cliff, they can’t extend beyond the cliff. And so we feel like the opportunity set runway in front of us still remains quite high

And then on the second part of your question, so one of the things that we are focusing on with the Learning Membership product on the consumer side is long-term relationships with orders over time. And those are students that are interested in ongoing support across potentially multiple subjects and multiple different need states. So, they can leverage the solution and learn however they want across these different subjects over longer periods of time and service better student outcomes. And so implicitly, what that means is there will be some of the customers that are seeking last-minute hyper-transactional relationships. And this product is not oriented towards them, it’s oriented towards those long-term needs. And so the marketing on either a subject basis, an audience basis, or as it relates to any indication of intent, the marketing is going to line up towards communicating that we can support students on a recurring basis over multiple different modalities over longer period of time. We are seeing that the students purchasing, Learning Memberships are purchasing the 1-year contract most frequently. So, we are seeing it resonate. People are signing up for that reference. They are not actually showing up more frequently and are engaging at higher levels. But there are some customers that we are not marketing to or speaking to as it relates to, say, last minute help.

Thanks for the question.

Thank you for your question. The next question is from the line of Maria Ripps with Canaccord. Your line is now open.

Great. Good afternoon and thanks for the question. First, is there anything you can share around the economics of your all-inclusive memberships? And so how the gross margins of this offering compared to one-on-one or small group classes? And what are some sort of puts to takes to keep in mind here? And then I have a quick follow-up.

Yes. Thanks, Maria. I would say we said this on the last call, we still expect, based on current pricing that Learning Memberships would be slightly accretive to historical package gross margins. One thing I would caveat is we do continue to experiment with the price discovery with customers, what’s included the frequency of the offering and the impact that, that has on pricing. But we feel really good about the margins as it relates to memberships, and I think that it will be accretive going forward.

Got it. And then secondly, given that your product has evolved so much over the past year or so. On the marketing side, can you maybe just talk about how you align your brand messaging and creative with your product strategy now?

Sure. So, if you think about the types of marketing that we engaged in, one of the differences you will see in that StarCourses is now being converted into our Learning Membership product. And in service, our path towards better marketing efficiency and better operating leverage, we are actually pulling back some of the StarCourses promotion spend and then putting a lot of that spend towards more content and more resources and more online classes in the actual product. And so, the marginal cost, of course, is serving an incremental user for a class is very efficient. And we think that by spreading out effectively the whole offering of classes, removing the friction that historically would have been associated with it. And we can actually provide immense value, but do so in an efficient manner and communicate the breadth of the offering and the extent to which the list solution. So, one of the things as an example that we are going to communicate to parents of high school students or high school students as one specific audience, just to provide a little bit of color on is that we will have effectively all common advanced placement courses, covered. And all foreign language classes will be covered. And all of those things will be included in the Learning Membership and that, combined with adaptive diagnostic testing, covering effectively every K-12 subject is something that we would position as being part of that holistic offering that ensures that students have the academic support they need when they need it. And so a lot of the messaging oriented around that general theme around accomplishing goals and putting in the time and getting the corresponding academic results that come with having consistent ongoing support in leveraging the platform across these different products.

Okay. That’s very helpful. Thanks so much for the color.

Thank you for your question. The next question is from the line of Brett Knoblauch with Cantor Fitzgerald. Your line is now open.

Hi guys. Thanks for taking my question. Congrats. Just a question on guidance, it was a big beat this quarter generally follow that through. And at 1Q, you guys said about a third of the reduction was due to macro and it appears macro is not impacting you at all. So, can you just walk through the puts and takes of I guess, why that guidance is unchanged? Am I right in thinking that may be experiencing faster adoption of the membership offering, which is a result in stronger near-term headwinds?

Yes. Brett, thanks for the question. So, as it relates to the guide, I think there is a couple of different moving pieces in there. So again, we didn’t see a significant macro impact towards the tail end of the summer. We are not seeing it now as we enter the key back-to-school season. One of the things that we did say and experienced during the summer was that with the high travel, we did see a decrease in the number of enrichment classes. So, last summer, the one before this past one, we offered summer camps, those had significant demand. That demand fell off certainly this year. And then as it relates to rolling forward, begins the subsequent quarters and full year guidance. The way we are thinking about it is the positive signal that we got from a membership perspective is just allowing us to lead into a greater extent, and that exacerbates the J curve compared to the last guide, but allows us to continue to roll out memberships to a greater extent. So, those are really the puts and takes. The caveat and we mentioned this in the scripted portion. If we continue to see the strong signal, we are going to continue to lean into the memberships that will affect where we end up within the full year guidance.

Yes. And just to clarify, what we said in the last quarterly call was that we saw people purchasing a little bit closer to need. And as we headed into summer and we – I think this has proven to be the case with the concept of event straddled just heightened international travel, people did in fact a very significant vacations. And we didn’t attribute any one thing, rather said between macroeconomic factors potentially and/or travel, we have seen a little bit of bookings slowdown we wanted to share in the last quarter’s earnings call. Now, what actually happened is we actually are not seeing any macroeconomic impact today. The travel did in fact occur. And as we head into back-to-school now, we are encouraged by all of the trends that we are seeing as each wave of schools get us back in session.

Okay. It’s extremely helpful. And then how should we think about maybe the conversion of the one-on-one revenue and membership revenue? Should we expect over time that most of the one would eventually be coming through membership?

Well, we are really encouraged by the fact that it seems to be resonating across all the different metrics that I cited earlier. So, that’s what caused us that confidence in making it the option that we presented to the majority of our new customers. I think as it relates to what happens to the package model, we are still selling the package model to customers. And it’s a great business, but we are actively trying to improve the membership experience process to the point where we might be able to shift a higher proportion of customers there. So, our teams are actively focused on that. They deliver a great product for back-to-school that we feel is exceptional. That said, we are continuing to make it better. And so, as we see that were pull-through to improved economics or conversion metrics, that would be the thing that causes us to lean in further to the membership model and away from packages. But I think it would be too premature to speak to what ultimately happens there.

Understand. It’s really helpful. Thank you, guys. Appreciate it.

Thanks Brett.

Thank you for your question. The next question is from the line of Mario Lu with Barclays. Your line is now open.

Alright. Thanks for taking the question. I have a couple on Varsity Tutors for Schools. So, you mentioned you contracted over 180 school districts since inception. Just curious how the retention of those districts have trended over the last year or so? I believe earlier this year you mentioned 30% of these districts where you are up. Curious how that trended. And in terms of the strategy shift to the larger school districts, does that have an impact in terms of the prior guidance that school to be 10% of total revenue this year? Thanks.

Yes. Thanks Mario. I guess I would say, as it relates to the guide, we still feel good about the pipeline, continues to build. We did shift towards those higher student population school districts and the sales team focused, also focusing on bundled offerings by joining together, On Demand, Teacher Assigned and the high dosage tutoring as we continue to sell into schools. We are not changing today the current guidance relates to expectations for this year and continue to feel good about where we are positioned. From a bookings perspective, I would tell you that during the second quarter, we did nearly $4 million of our students for schools bookings, year-to-date, that’s $8 million. Program to-date, it’s $22 million. So, for a product offering that’s in its first year to deliver that kind of growth, I think it’s one estimate to the capability of the products that the team delivered as well as how it’s resonating within the market.

Yes. Some of these contracts we signed throughout the course of this fall and our 1-year contracts, and then you have the option to have another conversation. And so for some of those, the renewal conversation that really happens as the product starts approaching that renewal day and it’s not renewed in advance of that. So, I think we feel good about the pipeline going into back-to-school. And these new products actually allow for us to have different conversations about potentially bundling the different products together in a way that is different than the implementation over the course of the past year. So, collectively, those new products actually allow for us, I mean more strategic conversation that lends itself towards the district line solutions.

Alright. Thank you.

Thank you for your question. The final question is from the line of Greg Gibas with Northland Securities. Your line is now open.

Hey Chuck and Jason. Thanks for taking the questions. Apologies if I missed this, but wondering if you could address the dynamics relating to your tutoring base and maybe how you expect wages or tutor pay the trend going?

We are always excited about the other side of the marketplace. So, what we are seeing on an inflationary perspective related to experts is that to-date, we haven’t experienced that because we are able to source tutors from across the entire United States. And because of the immense value that we provide to the tutor side of the platform from an administrative – from a billing perspective from providing them our matching algorithms to get to the best student experience. We haven’t seen that yet to-date and continue to expect that to be the case going forward.

Yes. The one thing I would add is we are experimenting with different incentive offerings and different forms of compensation. And one of the things that we are actively aiming to do is focus on having fewer relationships with more very high-quality experts who can drive disproportionate engagement in LTV. And so our teams are actively trying to shift some of the volume of work progress to some of those top experts who can then disproportionately try an engagement on LTV inception. So, one of the metrics that we are actively aiming to change is to not increase the active learner counts as much, which of course, that’s cost associated with it and instead invest into higher levels of retention engagement on existing experts, particularly those that are driving disproportionately good outcomes for students.

Got it. Very helpful. I guess last one from me relating to Codeverse acquisition. Are you seeing other possible targets that – is this kind of what we should expect your M&A strategy to be primarily focusing some of these complementary or enhancements to the subscription offering. And I am just wondering if you are more potential there?

Yes, I think that the Codeverse acquisition is a good example of how an external resource that we acquire can be incorporated into our existing Learning Membership product in a way that drives additional value and allows for us to either enhance conversion or extend the lifetime value and prove better retention. The thing that is interesting about this is that we would be interested in replicating in future acquisitions that we may consider is that we can actually leverage it with our institutional audience in addition to consumers. And so our intent is to integrate Codeverse into our Learning Membership product later this year before the end of the school year and then next year, integrated it into our institutional offerings. So, students at K-12 school districts can leverage it as well. Of course, whether it’s the buy solution is the case here or as it relates to all the other products and product capabilities we have built. The fact that we can build it once and then leverage it across both all the consumer audiences as well as our institutional segment, we think is really compelling and allows for us to get more leverage out of our investments.

Thanks guys.

Thank you.

Thank you for your questions. This concludes today’s conference call. You may disconnect.