Hello everyone. Thank you for attending today's Nerdy Incorporated Fourth Quarter 2023 Earnings Call. My name is Sierra and I'll be your moderator today. All lines have been muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to our host TJ Lynn, Associate General Counsel of Nerdy.

Good afternoon and thank you for joining us for Nerdy fourth quarter 2023 earnings call. With me are Chuck Cohn, Founder, Chairman, and Chief Executive Officer of Nerdy; and Jason Pello, Chief Financial Officer. Before I turn the call over to Chuck, I'll remind everyone that this discussion will contain forward-looking statements including, but not limited to expectations with respect to Nerdy's future financial and operating results, strategy, opportunities, plans, and outlook. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results. Any forward-looking statements are made as of today's date and Nerdy does not undertake or accept any obligation to publicly release any updates or revisions to any forward-looking statements to reflect any change in expectations or any change in events conditions or circumstances on which any such statement is based. Please refer to the disclaimers in today's shareholder letter announcing Nerdy's fourth 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.

Thanks TJ and thank you to everyone for joining us today. We entered 2023 with three primary goals that included scaling always-on subscription access based revenue products driving profitability and leveraging AI for AI or artificial intelligence for human interaction to transform how people learn. I'm proud of the Nerdy team for delivering against all three of these commitments, which were accomplished through the tight execution against ambitious initiatives in both our consumer and institutional businesses over the past year. These include completing the evolution to subscription-based offerings, the simplification of our product operating model and pricing, enhancements to our offerings including the launch of multiple new scalable products, and durable improvements in the efficiency of our operating model. As a result of this work revenue accelerated each quarter to 32% year-over-year growth in the fourth quarter. Non-GAAP adjusted EBITDA margin improved by approximately 2,100 basis points year-over-year, representing a 33.2 million improvement in profitability or 108% flow-through from revenue to non-GAAP adjusted EBITDA. Our progress evolving and enhancing converging our consumer and institutional business model product and platform has set the stage for us to build from a solid foundation for growth. It's also enabled us to develop a freemium growth strategy that aims to introduce our products to consumers and institutions at a larger scale than ever before. I wanted to start off by sharing the following retrospective in relation to our three primary goals from 2023. During the year, we successfully transitioned 100% of our consumer business to learning memberships. Market acceptance and demand for learning memberships was strong throughout the year with new consumer customer growth of 26% year-over-year, resulting in us ending the year with 40,700 active learners, up 101% year-over-year. We also made significant platform enhancements that have enabled us to shift our institutional…

Thanks, Chuck and good afternoon, everyone. As Chuck mentioned, we're proud of the results we delivered in 2023 that included completing the evolution to access-based subscriptions in our consumer and institutional businesses in just over a year's time, clearly demonstrating the strong product market fit and strong operational execution. Both our consumer and institutional businesses continued to see strong demand in the quarter, which combined with the operating leverage, driven from our evolution to access-based subscription revenue models drove meaningful bottom line performance. The transition to learning memberships continues to yield more attractive unit-level economics, longer duration and higher lifetime value customer relationships, higher gross margins in a more scalable and efficient operating model. We also rapidly scaled our institutional business, which delivered revenue growth of 77% year-over-year in 2023 through partnerships with nearly 200 school districts during the year. Turning to the fourth quarter. We delivered revenue of $55.1 million results that represented 32% year-over-year growth, yielding sequential growth acceleration throughout each quarter in 2023. Active members of 40,700, as of December 31st were up 101% year-over-year, resulting in an annualized run rate of approximately $151 million from learning memberships at year end, a 74% increase year-over-year from $87 million last year. Learning memberships revenue grew to $43.5 million, increased 32% sequentially from the third quarter, represented 79% of total company recognized revenue and nearly 100% of consumer recognized revenue in the fourth quarter. Consumer new customer growth of 35% and consumer revenue year-over-year growth of 17% in the fourth quarter continued to demonstrate strong demand for our consumer offerings. Our institutional business delivered revenue of $11.3 million in the fourth quarter representing 160% growth year-over-year. And we also delivered bookings of $10.3 million, which represented the third consecutive quarter with more than $10 million in bookings. Moving down…

Thank you. We'll now begin the Q&A session. [Operator Instructions] Our first question comes from Eric Sheridan with Goldman Sachs. Please proceed.

Just wanted to come back to the introduction of the freemium model and how we should be thinking about broader financial implications from that as they build through the year, your elements of how you want to align the marketing structure of the company. What do you think the market opportunity is that you're tapping into, and how to think about the broader eventual evolution of the user funnel having that product out there and what it might mean for us broader freemium users to eventually over time possibly move into a higher price plans? Thanks so much.

Thanks Eric. This is Chuck. Great question. So we have been methodically testing it over the course of the last couple of months and easing our way into it. And we would expect that that would continue to be the case throughout 2024. So the big opportunity that we have with our freemium strategy is to take advantage of all of the non-tutoring engagement, all these incredible products that we've built, many of which companies charge large amounts of money for and have built multi-hundred billion-dollar businesses on and give them away at no cost or low cost and actually introduce consumers to our ecosystem and then monetize on live tutoring. And, of course, live tutoring is our SuperPower that we do better than anyone else out there. So we would expect to test into some of these different freemium models ads do so in a way that builds to that really big opportunity mass market appeal and allow it for people as they have specific learning needs where they get benefit from tutoring to upsell from there. So the way that we're thinking about it it's kind of focusing on the existing model, continuing to scale winning model and then adding incremental users into these different kind of previous states and monetizing their app.

Great. Thanks so much for the color, Chuck.

Our next question comes from Doug Anmuth with JPMorgan. Please proceed.

It's Brian Smile on for Doug. Thanks for taking the questions on just one versus the tutors, can you just describe more drivers of growth into 2020 especially considering the SR3 [ph] allocation funding deadline is coming up in September. Are you seeing any incremental demand from existing partners around that deadline looming and any uptick in the new customer backlog?

Yeah, sure Brian. Good question. I can take this one. So as you think about 2024 I think it's going to be a continuation of what we saw in 2023. So on the consumer side, you'll see continued scaling of learning memberships, the number of active members and continued LTV extension that we've experienced throughout this year. As we feel that business. And then we think about the Varsity Tutors For Schools business. I mean certainly, we had a great year this year. Total bookings were up 50% in revenue for the full year was up 77%. As we think about next year, we're getting a lot of positive signal on our new products Tutor designed, teacher assigned parent assigned. One of the investments are going to make is expanding the go to market sales team and Varsity Tutors For Schools capture that opportunity. I think it's a little bit too early to tell how the [indiscernible] money's going to come in at the end of the year. But as a reminder for from participants, those monies must be spent by September of 2024 and contracted but the services can be provided over the course of the next four years, post September 2024. So, we feel like there's a pretty significant opportunity here to capture our fair share of that those funding sources and enter into multiple year contracts, with our partners in the school district space.

And Brian, I would also add this is Chuck Cohn there are all sorts of different funding sources being used there. State-specific legislation, that's been passed in a variety of different states for tutoring -- tutoring but one thing that is consistently working across the United States and there's broad bipartisan support for the fact that tutoring is highly effective and great. It would be the reporting calls. And so, we feel like we're well positioned to participate in a variety of different state programs, local programs in that as you think about the different the funding environment including federal funding, there's going to be a good broad support for continuing to fund something as attractive as a tutoring. And really all the studies are showing that it's highly effective and remediating ordering loans. So we feel good about that. And then separately, as you think about our strategy of providing access to the Varsity Tutors For Schools platform, we're actually able to introduce ourselves highly efficiently to a much larger number of school districts. So, there's something like 15,000 public school districts United States, through this strategy. Just recently, we’ve been very quickly nearly double the number of school districts, with whom we have relationship. And we think that that's something that really builds, as we grow throughout 2024 where that kind of cumulative number of different school district relationships, where we provide value build trust and credibility and then subsequently are able to then sell them high dosage during something that is pretty exciting. And the feedback thus far, from school district partners has been very positive and oftentimes that it very quickly leads to a commercial relationship as well.

Great. Thanks for the color.

Our next question comes from Ryan MacDonald with Needham. Please proceed. Q – Unidentified Analyst: Hey, this is Matt on for Brian. Thanks for taking the questions. I wanted to start with learning memberships. Nice to see that the transition is now complete, but the Q4 learning numbers came in slightly below the 42,000 expectation. Just curious, on what caused the difference and are you providing any outlook for Q1 on the numbers there. Any color, on how you're forecasting elements for 2024 would be helpful.

Yes sure. Thanks, Matt. I guess I would say we thought that the number of active learning members came in largely in line with our expectations. We had continued strength in new customer growth, up 35% year-over-year in the fourth quarter. So I think as we look ahead, we feel really good about where we're positioned. Looking ahead to next year, we would expect about 45,500 at the end of Q1 and then thinking longer term at the end of the year, we would expect about 56,000 active members now. But can you keep in mind is, both of those numbers that I just provided exclude the potential conversion of freemium to paid customers as we move throughout the year. So, a little bit early to forecast that although, we feel good about the conversion mechanisms that we're seeing. But the numbers I gave you are more for our traditional learning membership customers. Q – Unidentified Analyst: Got it. Appreciate that Jason. Yes, wanted to touch on the freemium conversion channel there. What you know obviously, you mentioned that you've been testing it a little bit but obviously, rolling it out now more broadly what inning would you say, you're in in kind of building out that go to market? And maybe just, if you could flesh out more of the strategy are that that wedge to drive that upsell from freemium to paid. Thanks, guys.

Sure. So this is something that we've been building towards for a couple of years. So, as we built all these different products, we've talked before about how we kind of think of them as building blocks where you can assemble different compelling products for specific audiences that really resonate and between having five video-based tutoring, small group classes, live stream capabilities we can get up to 50,000 people in place that will still marginal cost, diagnostic testing, self-study videos, and a whole host of other resources including AI Tutor. We've brought these all together in such a way where we're able to then kill the different product offerings that resonate in such a way where we can monetize. And we have kind of tested different periods of the past and had great success. And so this is something that wasn't possible until we were able to converge both our consumer and institutional businesses and our consumer institutional platforms into one unified product offerings. So, we're pretty excited about the potential here. So, as we mentioned it's early, but the signal thus far is good and we've been working towards this goal for a long time.

Yes. The only thing I'd add is no freemium is going to give us an array of benefits as we move forward. We're going to be able to connect with customers and different need states drive substantial marketplace awareness. We'll be able to unlock a term of commerce to an extent we haven't been able to in the past, it will enable expansion via new marketing channels, it will enable Nerdy to introduce ourselves to what we think will be millions of students over the course of this year and potentially become a household. So, this is a big long-term opportunity. We feel really good about the initial signals. But to your question it is early innings. We'll continue to refine the offering as we move throughout the year and with the expectation of being ready to go for back-to-school in the fall?

Yes, I think the important thing is that tutoring is a proven monetization engine and we know how to monetize. So, we feel really good about that connectivity between the engagements and our tutoring products and then ultimately monetizing material with a while the actual Tutor [indiscernible]. Q – Unidentified Analyst: Super helpful. Thank you.

Our next question comes from Andrew Boone with JMP Securities. Please proceed.

Thanks much for taking my questions. I wanted to ask about the cost of operating the freemium model. Is there anything that we should know about either increased hosting or anything else that you can think about there as well as any revenue that may fall off as now some products become free? And then secondly learning memberships are aging. You guys have now been through this process a while, still anything that you guys can share now that we're a little bit more mature in cohorts on retention or anything of that kind of vein? Thanks so much.

Sure. So, I think the important thing here is that these ancillary products have either no marginal costs associated with them were at low marginal costs associated with them. So, the cost that we bear is related to some of the testing that we did for both getting them live, testing e-commerce, rolling out some self-service tools, and you kind of see that reflected in the lower starting point at our Q1 guide, but it builds to a fairly acceleration throughout the year. Ultimately, full year revenue growth, that is still 24% but accelerating. And we feel good about this being self-funding from a -- maybe even margin-accretive over the course of the year. So, we feel good about the economics here and the fact that the rule that we could do so in a highly efficient manner that introduces us to a large number of verse.

And then sorry last question was on the retention of maturing cohorts. You'll see in the shareholder letter we did remove that from lowest historically provided and from our perspective, we would say that they were originally shown to demonstrate the superior economic profile of learning memberships versus our legacy package model. We've proven that out over the last five or six quarters. Those cohorts continue to have LTV extension and we feel really good about the retention the engagement of learning memberships and how we're positioned as we enter 2024.

Yes, I'd also add that we added a chart in our shareholder letter this time that actually shows the year-over-year improvement by month and non-tutoring engagement, which we found to be very important to retention and getting value out of the membership over time particularly in shorter periods. So, we feel great about that connection between the product improvements we're making, particularly, related to both additional products and that product discovery and that how that pulls through to engagement, which in turn all through to retention. And that being something that we continue to do that we can continue to drive for many, many quarters and years to come.

Thank you.

Our next question today comes from Alex Tyler with Raymond James. Please proceed.

Great. Thank you. Jeff can you elaborate a little bit more on what you're on what you're referring to as far as kind of unlocking the e-commerce opportunity what will that look like for Nerdy?

Sure. So we have had e-commerce capabilities, but we also have a consultative sales engine. And we would expect for the majority if not the entirety of these premium sales to occur through e-commerce which should be a source of operating leverage on sales marketing.

Okay. Perfect. So you're effectively a self service and motion for some of these premium from these premium members -- not on an annual

…targeting that market will continue to polish it and refine it but we would expect that be something that makes us more efficient over time. And that means there's not a kind of commensurate decrease in costs that best buy an item as we scale.

And Alex one thing I'd add you know we'd encourage everybody on this call to go to Varsitytutors.com or dirty.com experienced the freemium product for themselves. It's live on both of the wells. Perfect. Would check that out -- had another great quarter on the institutional booking side. Can you just help frame how the pipeline looks heading into 2024 from kind of a total bookings opportunity relative to this time last year is kind of the growth in pipeline and opportunities kind of keep supporting us an acceleration for that segment out.

Sure. So it's dramatically bigger and it speaks to the improvements that we've made in the product offering itself combined with the fact that we believe that there's a emerging multibillion-dollar industry being more within K-12 tutoring that we're very excited about. So over the course of the past call it 13 months or so. We've launched three different subscription products within our institutional segment our first feature side that's different design, than parents assigned model. And the last one allowing us to allocate learning memberships essentially our consumer product with administrative tools sitting on top school districts. So we can really service all three common ways that schools would ever want to administrate tutoring and then separately because of the convergence of our platforms we've been able to take all of the different products including the ones that were originally built for our consumer audiences and extend to school districts. And even as the school district is only interested in focusing on a subsegment of students were able to provide value to all of the students in many cases. But rather there is existing spend associated with the products that we're giving away at no cost as part of this as part of this kind of total offering has been very compelling. It's opened doors and we're excited about how both the quality of our high dosage offering the value that we're able to provide and then the actual like our ability to build relationships at scale and that kind of go to market motion and sales and marketing built stores it really big.

Okay great. And maybe just one quick follow-up on that. Is anything changed as you've launched kind of feature sign different design paradigm. Now you have those three flavors out there? And then also the platform access is kind of a newer motion but have you seen win rates notably improve as a result of having kind of several different flavors for space or districts to kind of sign up with Varsity theaters?

Yes, we have and the fact that we can solve all these different needs states is we're also seeing school districts purchase for different parts of the school district with different products so they're actually using multiple different products. And frankly from their perspective it just seems it's much more simple to communicate. There's a very specific use case associated with each one and then the fact that we're able to provide so much value to everybody throughout the district is something that's really resonating as well. So they're more simple conversations. And when rates are higher and it's more efficient well trust and credibility.

All right. Thank you both.

Thanks, Alex.

Our next question today comes from Maria Ripps with Canaccord. Please proceed.

Great. Thanks for taking my questions. Can you share a little bit more color on your pricing and product test? Sort of what products have you been bundling together and what type of consumer are you targeting sort of with this offerings? And then, how heavily do you intend to roll out this plan sort of going forward one sort of initial testing is completed?

Sure. So we started off the call it the path in Q4 with testing a variety of different options. We learned quickly and we're using that to then for a broader rollout. So in addition to some of the 48 hours packages that we've tested and primarily sold as part of our all inclusive learning membership over the course of the past year, we've also introduced different pricing tiers and some of those include lower hours to drink. Some of those include much lower price points. And then the ability to kind of our purchase when acute needs arise. And I think we have good signal there. It's still early days, but there are certain SKUs that are really resonating and allowed for us to get people onto the platform engaging in products at no cost that traditionally they would have paid other companies for, in some cases large amounts of money which we think kind of creates this gravitational force towards our website that will attract users very efficiently. And then we've been very encouraged by the initial monetization side. So again early and your plan does not count on your tremendous success there, but working in such a way where we believe that that could be a big growth driver.

Got it. Thank you so much for the color.

[Operator Instructions] Our next question today comes from Brett Knoblauch with Cantor Fitzgerald. Please proceed.

Hi guys. This is Thomas Shinske on for Brett. We're encouraged to see the introduction of the freemium model. I was just wondering, if there was any consideration of this model cannibalizing its existing revenues from customers that maybe were on the platform, but not using the tutoring services? Thanks.

Sure. I can take that one. So I think it's important to remember that our free product and platform provides study and support resources that do not replace [indiscernible], but instead they supplemented. So the need states are different. Supplemental resources will serve as a great on-ramp for tutoring and they're largely very low marginal to no marginal costs. So think things like an AI-based tutor, practice problems, assessments and personalized learning plans, as well as a synchronous content, so those items support a learning journey over the course of someone's semester. And when they have an acute need and need specific tutoring to really understand the materials and continue to grow as a learner. That's where we think that the upsell motion to one-on-one live or small group tutoring which are superpowers is where we'll be able to monetize the upsell from freemium to paid offerings?

Yes, there's something about like that like that's our superpower. That's why people come in. And that's where we're truly best in plants place. And we've surrounded that offering with all sorts of ancillary powerful resources that create a environment where students can kind of continue to work overtime. But the accountability, the relationship, the motivation, the ability to comprehend that comes from that social interaction. That's probably present deadline face-to-face interaction. That continues to be what people want and we believe is both highly durable. That's something that people would substitute for these other options as well and then a very powerful monetization engine.

Awesome. Thank you guys.

Thank you all for your questions. There are currently no questions in queue. [Operator Instructions] There are no further questions at this time. So that will conclude today's conference call. I'd like to thank everyone for their participation and you may now disconnect your line.