Good afternoon. Thank you for attending today’s Nerdy Third Quarter 2022 Results Conference Call. My name is Jason, 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.

Good afternoon and thank you for joining us for Nerdy’s third 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 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?

Thanks, Molly. And thank you to everyone who has joined us today. We are happy to be back in front of you discussing our third quarter results. Two quarters ago we unveiled to you our ambitious plan to evolve our products and revenue model to orient towards long-term recurring relationships with customers that default to being always on. We did this in response to market changes we are seeing including new consumer and institutional customer preferences for learning solutions that can provide ongoing support across academic calendar years, subjects, and learning formats. As a result, we began to converge our product and revenue strategies and develop new recurring revenue products, including learning memberships for consumers in on-demand, teacher assigned for school district customers. Early data suggested our transitional learning memberships would lead to longer duration and higher lifetime value customer relationships, enhanced gross margins, better marketing efficiency, better forecasting visibility, and a more scalable and efficient operating model. We also believe the transition would allow us to serve a larger market of learners while offering experts an opportunity for more consistent earnings. We shared that this transition would require trading off revenue recognition in the short term because our package model recognizes revenue in a front-loaded manner. While in our learning membership model revenue is recognized linearly over time. We estimated that cumulative revenue for a given customer would catch up and surpass that of a package customer by month six in the transition. We describe this revenue recognition difference as the J Curve. Two quarters into this initiative we are pleased to report that the new business model has exceeded our expectations and validated our underlying assumptions and more. Based on the positive feedback we received as school started across the country combined with the favorable customer economics we…

Thanks, Chuck, and good afternoon, everyone. I'm pleased to be speaking with you today about Nerdy's strong third quarter performance and our outlook for the balance of the year. Our team continued to execute at a high level during the third quarter and made substantial progress against our business model evolution. As Chuck mentioned, during this year's back-to-school season, we accelerated our transition to Learning Memberships as a result of the strong customer response and the positive economics we are experiencing. As we shared in our past two earnings calls, this evolution towards Learning Membership 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. This shift in revenue recognition is reflected in our revenue growth rates for the three and nine months ended September 30, 2022. Expenses as a percentage of revenue also reflect the impact of recognized revenue being at the bottom of the J Curve during the third quarter. It's important to keep this in mind as we discuss our financial results for the period. In the third quarter, we recognized revenue of $31.8 million, results that were just above the midpoint of our guidance range of $30 million to $33 million, despite presenting a higher proportion of customers with Learning Memberships than originally targeted. Revenue growth was driven by continued strength in our consumer offering and the addition of our institutional business. Institutional revenue of $2.4 million represented 7% of total revenue in the third quarter and was impacted by normal summer seasonality and longer-than-anticipated contracting and implementation time lines as we target larger school district opportunities. Moving down to P&L, gross profit of $21.9 million for the third quarter represented an increase of…

Thanks, Jason. And 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 Instructions] Our first question comes from Eric Sheridan with Goldman Sachs. Your line is now open.

Thanks so much for taking the questions. Maybe two, if I can. With what you're learning on the membership side, how should we be thinking about elements of LTV changes looking out into next year, less seasonality in the business and maybe some of the early learnings from those components on the membership piece that we should be keeping in mind? I know it's a little early to maybe guide to 2023, but just how we should be thinking about the output of the velocity on the membership side and what it means for the business in 2023? And then in the institutional piece, how much of the narrowing the range in Q4 was down to the institutional business? And is there any sense you can give us of the backlog or elements of sales force productivity in the institutional business, so we can better understand what's being built there for the long term from a revenue base? Thanks so much.

Thanks, Eric. Good questions. So I will take the first one and hand the second one over to Jason. But as you know, we started rolling out Learning Memberships in spring. It accounted for about 2% of recognized revenue in the second quarter, and about 18% of recognized revenue in the third quarter. One of the things that we shared in the shareholder letter was actually plotting our LTV curves relative to our old blended model of packages and classes. And you will see that there is significant LTV trajectory growth in LTV in the trajectory of the cohort lines relative to the old blended package and class model. So we feel really, really good about the trends. And three to four months in, you are seeing that the recognized revenue from Learning Membership is actually eclipsing that of the package model for a given customer, and is on a really, really healthy trajectory. And we have seen each of the last several months, really starting with May and then moving into this most recent September cohort, really positive size there. So we have not been through an entire school year. We haven't been through some of the end-of-term periods, but the results are really encouraging. And then if you look at the marketing side, we've been able to hold our marketing CAC and then CAC in totality flat on the consumer side approximately, and that's with blending into what we believe are much higher LTV customers. So, it's a little early to say how much that could change the LTV to CAC trajectory, but we feel really encouraged to share some of that data in a shareholder letter that allow you to, I think, see some of the trends that we're actually seeing.

Yes. And then maybe to address your question as it relates to the guide down in Q4 in Varsity Tutors for Schools. I think it's important, one, to remember, as we leaned into Learning Memberships, that does expand and even the length of the J Curve. So I'd say that's a little bit less than half of the change that we see. And then Varsity Tutors for School accounting for just over half of the guide down. So over the last two quarters, we have talked about the change in focus for the institutional sales team towards larger school districts. Certainly larger school districts require more constituent buying, which is elongating those contract periods. But what's important here is, unlike the B2B space where companies are pulling down third-party spending, government funding for schools has already been provided the monies in the market. And schools are seeking out solutions just like ours to meet their student and teacher needs. So from our perspective, the delays are just that. They're timing delays. They're transitory. And our focus on new products will lend themselves to these district right sales is the right one for the long term.

Our next question comes from Ryan MacDonald with Needham. Your line is now open.

Hi, thanks for taking my questions. Chuck, maybe first for you. Great to see some of the progress you're making on the Learning Memberships and the signs of higher LTVs there. When you talk about leaning more into that as we go into fourth quarter and into early next year, can you talk about what that looks like in terms of how you continue to try to push that prioritization to sort of the existing learners that are on your platform? And does this come with sort of a discontinuation of the package altogether as we think about 2023? I would just love to know some of the moving parts there. Thanks.

Sure. Thanks, Ryan. Good question. So the way that we went about rolling this out was actually testing it audience by audience and seeing the extent to which Learning Memberships resonated with a given audience, like elementary school students or middle school or high school or college or some other sub-segments they are in. And as we proved out that it was actually resonating and it was converting with favorable economics, we then shifted a higher and higher proportion of the business to Learning Memberships. And every time we do that, there is a little bit of a kind of mini J Curve, so to speak, related to the fact that we need to train the consultative sales organization, we need to update collateral and other materials, we need to update all the content that we have available and make sure that it actually resonates with that given the audience. And so as we went further into the school year, it has each of the different waves of schools started, we saw that it was converting well. A lot of the customer economics that were now maturing look really favorable. And we just became excited about how these longer-duration contracts that lead to higher lifetime value relationships, how they can ultimately drive enhanced gross margins; they could drive better marketing efficiency. You saw a 400 bps improvement in sales and marketing efficiency in the first quarter, and we would expect for continued efficiency to pull through in the coming quarters. And then it could bring better forecasting visibility. And then lastly, that actually was going to allow for us to operate a more scalable and efficient business model that could pull through to our goals of getting – becoming adjusted EBITDA profitable this coming year, which we feel really good about. So as we got further into the school year, we increased the percentage of customers. 62% of consumers in the current quarter purchased a Learning Membership. And then in October, it's actually shifted up to about 75%. And we do think that there's a segment of the customer base where Learning Memberships, at least that's turned for isn't maybe the right model to introduce today. That includes test prep and professional where sometimes there's more short-term and acute needs that are limited in duration, relative to, say, a long-term contract. And so our expectation is we won't shift 100% of the business, but we'll shift, call it, 80-something percent of the business over the course of the coming quarters to Learning Memberships on the consumer side.

Yes. And maybe just to add one comment to that. On the consumer side, we would expect by the end of this calendar year that our monthly subscription revenue from Learning Memberships would exceed that of the package customers. And then maybe just look a little bit further beyond that. By the end of the first quarter, our monthly consumer revenue will be driving year-over-year growth with more attractive unit level economics and having exited the J Curve during this transition period.

Yes. I think one of the things that's interesting here is as the mix of Learning Membership as a percentage of total goes up, there's going to be an opportunity to simplify our sales process, our operating model and then rationalize some of the offerings in a way that drives a lot of operating leverage.

That's super helpful color. I appreciate it. And maybe just on that point of sort of running a more efficient operating model moving forward. I'm curious what you're seeing in terms of usage in terms of tutor usage on the membership product versus the package. And how – or what potential efficiencies you see there in terms of either how you scale – continue to scale the number of tutors on the platform or perhaps maybe optimize the number of tutors on the platform as we look out into next year? Thanks.

Good question. So one of the things that we started focusing on the middle of the quarter, and you'll see pull through to a greater extent in the coming quarter is we started focusing on on-boarding fewer tutors and actually giving them more work. And one of the benefits of the Learning Membership from the expert side of the platform is that allows for a higher level of recurring-income generation opportunities. So from the experts' perspective, they can actually count on meeting with the student every week for the entire school year, which is just more dependable, consistent than more transactional customer take. So the feedback from the expert side has been really positive, and we're going to focus on allocating more work to those active experts and then orienting the relationships towards these long-term customer engagements in a way that develops a positive customer relationship and also gives the experts themselves a higher level of consistency to that income stream. And so thus far, that's been really well received. We really started focusing on it in the middle of the quarter, and you'd expect to see it pull through in the coming quarters in terms of fewer experts going into the platform, but more work for export.

Excellent. Appreciate the color. Thanks again.

Thanks for the question.

Our next question comes from Aaron Kessler with Raymond James. Your line is now open.

Yes. Hi guys. A couple of questions. Maybe can you just give us a sense maybe for the cost for some of the additional Learning Membership services you're offering, the three that you mentioned; I think COVID-19, Tutors Chat, Essay Review? And second, maybe just on the back on the institutional side. Is there an update on maybe total contracts, your total contract value? And wondering if there's any churn that you're seeing with the existing contracts as you move to larger school districts?

Yes, sure. I can maybe take the second one first. [indiscernible] in the shareholder letter that during the quarter, we booked $5.6 million of institutional contracts, so there was 21 new, 23 – 22, I think, recurring contracts or renewals. Importantly, as we shifted towards this larger school district focus, we're seeing that the contract values have more than doubled in the third quarter versus the first half of the year, on the one hand. And in the renewal section, we're starting to see that those clients that have renewed have more than doubled their level of contract value with us. So positive signs on both sides, but as we mentioned those higher-value contracts and large school district deals do take a little business more time. But those kind of metrics that I provide give us the optimism that it truly is just a time issue.

And then on your first question, so three new different – three new products that we're adding are Learning Memberships; so one is classes. We're offering 250 live classes per week that come as part of this all-inclusive model. We then have Tutor Chat, the chat-based tutoring offering that we originally built for Varsity Tutors for Schools that we're now incorporating into Learning Memberships. And then lastly, we have Essay Review, which is the on-demand essay editing tool that we also built for Varsity Tutors for Schools that we're again leveraging into Learning Memberships. So two good examples of how we can build once and then leverage a number of times, which is something we're pretty excited about. So these combined with Codeverse, we believe are going to be ways that we can generate value for customers throughout different kind of pathways in their learning journey. So whether its summer and they may not have an acute tutoring need, there's an opportunity to engage in coding classes and leverage some of these other products that can drive higher levels of engagement and retention. So we don't expect for them to be on a marginal basis, expensive. If anything, they would more than pay for themselves through just higher levels of retention and repurchase rates at the end of contract terms. So we feel really, really good about the relationship between getting customers to engage more, and that leading to higher levels of retention and engagement over time. And that's something that we're going to continue to lean into. So it's something that we've seen historically in our package model and continuing to improve in our membership model, and we're pretty excited to include these three new products this quarter.

Yes. And the only thing I would add, Aaron, even with the introduction of these new products into the Learning Membership during the fourth quarter, we still expect that Learning Memberships, as compared to our historical package business, will yield accretive gross margins.

Great. Thank you.

Our next question comes from Maria Ripps with Canaccord. Your line is now open.

Great. Thanks for taking my questions. First, sort of as you're in the process of transitioning to the membership model, and we see what seems to be sort of an active learner account reset this quarter, how are you thinking about your active learners sort of progressing from here? And can you talk about how your marketing message has evolved around your new membership product?

Yes, absolutely. So when you think about active learners, the thing that we need to keep in mind and we guided to this last quarter was that we would be including what were historically sold on a stand-alone basis, academic and enrichment classes within installed membership. So we anticipated that the learner accounts would go down. During the quarter, we did see that there was some flow-through from residual classes during the summer into the quarter that was offset by higher-than-anticipated uptake from a membership perspective as well as from our existing base, partially offset by reductions in the delays of implementation for Varsity Tutors for Schools. So net-net, active learner changes were largely in line with our expectations, probably a little bit higher given the strong demand we saw on the one-to-one side across both packages and memberships and then the flow-through that we saw related to class. When you think about Q4, we would anticipate that Active Learner accounts would be down about 10% on a year-over-year basis as we continue to have those classes pulled into Learning Memberships, and continue to roll those out to a great portion of our customer base.

Got it. And the second question was around your marketing message for your new membership product?

The way we largely thought about this is the Learning Membership is most likely to resonate with a customer with a recurrent need state. So one of the things that we focused on is how really optimizing your study time across multiple subjects, multiple modalities can ultimately allow for a student to achieve educational outcomes, to an extent that just can't happen in a more transactional environment. And so one of the things that we've really focused on is the fact that we can support you across all these different need states and the fact that we have tutors in over 3,000 subjects that can help you on a recurrent basis, and then between tutoring classes and other modalities, we have really everything that you might need to achieve that kind of success. And so that more holistic messaging that's oriented towards a longer-term need state is something that's pulled through our marketing, and then we've lessened the focus on transactional and last-minute help.

Understood. Thank you very much.

Thanks Maria.

Our next question comes from Doug Anmuth with JPMorgan. Your line is now open.

Thanks for the questions. Thanks for the charts on Page 11 of the letter, those are helpful. Just curious, is there anything in your view that could push out or delay the J Curve inflection and membership surpassing the package model roughly six months out as you've laid out? And then can you just talk a little bit about how the – better-than-expected membership traction informs what you can develop from a product perspective over time? Thanks.

Sure. Thanks, Doug. Yes, so we feel really good about all the trends we're seeing thus far related to kind of customer uptake and then the LTV trends over time. One of the things that we reserve the right to do in the future is kind of innovate on the actual product and pricing, and we want to be a little bit flexible in that regard. So based on the current economics, we feel good about moving through the J Curve in that six-month period. But there's also different flavors this membership that we could create over time that might have different pricing and margin structures and ultimately call us for a slightly different kind of transition there. But we also think those are the sort of things that could dramatically expand TAM and allows for us to target completely different in net new customers. And so while we're focused right now on just nailing the execution related to our current implementation of our new memberships, there's the opportunity to innovate on top of this with different pricing and content included in other membership offerings in the future.

Yes. You see that a little bit in those cohort curves that you referenced in the shareholder letter. So from May to June, we introduced twice-a-week frequency, simple change, but drove substantial improvements in the steepness of the LTV curve. And then since then, you've seen a high level of consistency, but I would agree with Chuck that we do reserve the right to continue to test our way into this and bundle the solution in different ways to meet different audience in these states. But for now, I think we feel really good about the [indiscernible].

Thank you both.

Our next question comes from Brett Knoblauch with Fitzgerald. Your line is now open.

Thank you. Hi guys. Congrats on the quarter. Two for me; the first is, I think we've seen a lot of – especially over the last couple of weeks in the media about the decline in kind of test scores call it, in the K-12 level. I guess have you seen this kind of light of fire under the admin to try and put new processes in place to address this issue? And how does that kind of coincide with, call it the longer deal cycles you're seeing across institutions?

Thanks, Brett. And I think you're referencing the national report card and the NEAT scores, which was certainly headline news nationally, drove a lot of inbound interest and also, of course, as the citizen calls for a great concern in the sense that the test scores are actually worse than I think many people had thought nationwide related to students and kind of the amount of learning regression over the course of the last two years. So in terms of how that then impacts the business, I think it's kind of twofold. One, it's made schools feel a little bit more pressure to think about some of these solutions, and there's more kind of top-down valuation of how schools are doing on a state line basis. And of course, many of these scores were given out state by state by state. And the news cycle certainly followed this. And so I think there's definitely a little bit more focus on solving this issue in the more near-term than might otherwise have been the case. But this is consistent with the trends that we've seen over the course of the last couple of years. And we feel good about our ability to partner with school districts and district administrators to really help students that clearly need a lot of help. So I'd say, consistent with what we've seen and positive in the sense that more attention on the skew problem's a good thing, but we expect that these problems would have been solved anyways, given some of the time lines involve the course of the next 18 months and the acuity of the problem. And separately, certainly, the headline news drove inbound demand on the consumer side and made parents a little bit more conscious of learning loss and paid attention to the need to invest against building foundational skills of their kids. So I'd say it was a slight positive in that regard. But more than anything, it just reinforces the importance of what we're doing and the extent to which our products and services can really help students when they really need help.

Got it. That's very helpful. Thank you. And maybe just one follow-up on the Learning Membership; can you talk about maybe demand from different cohorts, whether it's, call it, K-4 – 4 to 8, high school, or college and what you're seeing there? And I guess which kind of cohort's really outperforming the others?

Sure. So consistent with what I, I think I mentioned earlier, the more recurrent the need state is for a customer, the greater that Learning Memberships resonates with them. And so we're seeing that high school, middle school, elementary school are all areas where there's strong consistent demand at the college level, within the kind of groups of students that are looking for long-term, help-oriented around an academic class, the product resonates really well. There are certainly some customers that are looking for more short-term needs. And that's probably – it's resonating pretty well but not quite as well as in the high school audience, where all the classes tend to be an entire school year while in class. So we think that we can continue to adapt the products to meet the subsegment needs for each of these given audiences. And even in an area like say, foreign languages there's elementary school students learning it, there's people learning it in school formally. There's adult learners learning it for professional purposes, and there's an opportunity to take what is currently somewhat of a one-size-fits-all approach to foreign languages in a specific example and then start tailoring it to a greater and greater extent, depending on the need state of the underlying customers. So we think that's going to be a big, big vector of growth as we continue to refine the extent to which Learning Memberships can appeal to different subsegments of the audience. But by and large, it's resonating everywhere. And we feel really good about how we can continue to build from a strong foundation back-to-school to something much bigger in years to come.

Perfect. Understood. Thank you.

Thanks Brett.

Our next question comes from Andrew Boone with JMP. Your line is now open. Q - Andrew Boone Good afternoon and thanks much for taking my questions. Paid sessions was down 18% year-over-year. I understood the J Curve and everything else, but is there anything else to call out there that we should be thinking about? And then as we think about marketing, understood the greater efficiency and the goal of driving EBITDA by the end of 2023. But can you talk about, philosophically, what would it take for you guys to turn that back on or be more aggressive there? Or how are you thinking about just marketing spend overall as LTVs seem to be very positive? Thanks so much.

Yes, sure. I'll take maybe the first one. Chuck, take the marketing question. So on paid session, that is absolutely a reflection of the fact that historically, we sold academic and enrichment classes on a standalone basis, and we decided to consciously roll those into Learning Memberships to drive higher levels of customer perceived value, multi-format engagement and overall retention downstream. So the decline is what we would have expected as we move through the transition towards a greater proportion of our customers choosing Learning Memberships.

Yes. And those class customers that bought our classes accounted for about 30% of consumer customers in totality, but less than 10% of revenue. So one of the other changes that you should expect, other than just the fact that paid sessions goes down in the short term, is that we're able to drive operating efficiencies because we're actually servicing fewer but higher LTV customers and then focusing our resources on engaging them. So we feel really good about rolling the class model into Learning Memberships and the fact that it serves as a real value creator for our customers and also something that will drive long-term retention and engagement. And then on the marketing side, right now we're focused on driving profitable growth and efficiency, nailing execution on Learning Memberships and then our two new products on Varsity Tutors for Schools and the focus on larger school district contracts. But as we get into next year and as we see higher levels of data on retention and LTV, that would be where we start leaning into new and different marketing channels that can allow for us to grow TAM, in addition to continuing to iterate on different flavors of memberships that allow us to target different audiences and different price points. So we feel really good about the LTV trajectory. We feel good about the fact that caps relative to our package model for Learning Memberships are basically flat, but we think LTVs will be much higher, and that gross margins will be much higher as well. But we haven't been through an entire school year. So we're going to be prudent in that regard and monitor the cohort's performance closely, and as we see that data prove out, that will inform our marketing strategy next year. Q - Andrew Boone Thanks so much.

Thanks Andrew.

Our next question comes from Mario Lu with Barclays. Your line is now open.

Great. Thanks for taking the question. I have a couple on multiple formats. In the shareholder letter, you mentioned that customers that engage in learning across multiple formats see better retention and higher LTV. Just curious if you could share the split of the formats currently? Is desktop the most popular one today. And is expectation that over time, it goes more towards tablets and mobile as well? And then secondly, are there any initiatives in place in terms of strategy that will push more customers to use these multiple formats over time?

Sure. And a good question. I realize that learning formats can be interpreted in a couple of different ways. So when we said learning formats, we were referring to tutoring versus classes versus self-study versus other forms of content like Codeverse. And so we were not referring to desktop versus mobile. So our platform is available on Android and iOS, the desktop. And people use it in a variety of different ways. But the big growth lever that we see is that when we can get people to interact in something other than the original modality that they're brought in on. So they came in on tutoring to the extent that we can get them to try out classes or try out an async product. That's where we see really high retention. I think the stat was in our package model historically, it almost doubled LTV if you could get somebody to use three different modalities of learning. And so one of the things that we're trying to do here, and I think we're already seeing this pull-through in our cohort results, when we're able to expose somebody to a new type of interaction, a new way to learn, a new thing to do, we get rewarded with higher levels of engagement and retention and repurchase rates. And so to the extent we're able to keep somebody engaged and give them more reasons to come back, it pulls through to a bunch of very, very positive unit-level economic benefits. And that's one of the things that we're focused on in Q4 with the introduction of Tutor Chat and Essay Review and Codeverse.

Great. Maybe just one on institutional, it seems like you're gaining better-than-expected retention and higher-value contracts. Is the expectation still to be roughly 10% of total revenue for the segment over time? Or has that gone higher? Thanks.

Yes. I would say over the fullness of time, we would actually expect it to be beyond 10%. We're still in the early innings of the business. It is just over a year old. We introduced three – two new products this year. They're resonating well. We expect to start selling them into a greater extent during the fourth quarter now that they're live and available. So that percentage will increase over time as we move forward. As it relates to 2022, it will be about 10% to 15% this year, partially and mostly impacted by those long-dated contracting time periods that we're seeing as we target larger school districts in the fourth quarter.

Yes. And so we feel really – I think one of the things you heard us share is that as we focus on larger school districts, we've actually gotten really, really good buy [ph] and really high levels of engagement. And one of the things that we've seen is that because we're talking about district-wide sales that encompass all the students in the school district that then necessitates involving stakeholders of all sorts. And so it's turning out to be a longer sales cycle that's more complicated, but it's occurring as a result of school districts being interested in bundled solutions that span multiple years. And as a result, they are more complicated conversations, but we see it as a big positive. And so it's definitely a little lumpy, but over time still extremely bullish on the opportunity and expect that it will drive a lot of growth in the years to come.

Great. Thank you.

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

Very good afternoon Chuck and Jason. Thanks for taking the question. I guess first just to confirm, I think you said in the quarter 18% of revenue is generated by the Learning Membership model versus the traditional package. And were you expecting that to get to over 50% in Q4? And then secondly, what do you foresee being that gross margin difference between the two business models?

Yes. So we did say that revenue in the second quarter was 2% for Learning Memberships of total revenue. It was 18% in the third quarter, and then my comment earlier was that on a monthly basis, by the end of the year membership revenue would exceed package revenue on the consumer side, and that's exclusive of Varsity Tutors for Schools. So all that is intended to say that we are quickly mix shifting towards a higher proportion of recurring revenue from Learning Memberships. That does elongate and deepen the J Curve a little bit in the fourth quarter, hence the guide down relative to the prior expectations. We view that as a positive thing as we start 2023 with a higher membership base with recurring revenue. So continued progress, and we look forward to providing Q4 results in February. And then on the second part of your question, gross margin, it's early days. We haven't been through all of the peak semester usage, but we're confident that it will drive gross margin accretion even after adding in three new products. So I think it's too early to say exactly what, but we feel good about the general trajectory in totality, this will be a gross margin in answer.

Okay. Got it. And I guess just a quick follow-up. Do you anticipate maybe the institutional business growing potentially taking away from the consumer business at all or really no relationship there?

We think it's totally incremental. And very often with these schools, their titling Title 1 students. So those living at or below poverty line, so it tends to be a different demographic that receives the super majority of funding that the consumer side of the business, but it's a big market, right? It's – depending on the statistics, you look at a $15 billion-plus consumer market. And then on the institutional side, there's – almost all of the $24 million for COVID learning loss while still remaining in maybe something percent still remain. So two big markets. We think they're distinct, but we are getting a lot of leveraging. The fact that we can build a lot of leverage multiple times across different audiences and we think that's something that's going to drive a lot of operating leverage next year.

Got it. Makes sense. Thank you.

This concludes today's conference call. Have a great evening.