Nerdy Inc

NYSE:NRDY

Earnings Call Analysis

Diversifying Product Offerings and Pricing to Expand Consumer Reach

The company has been strategically testing different product tiers and pricing models to enhance market appeal and provide an effective customer experience for every student. These tests, which sometimes involved products with a lower average revenue per month, ultimately equipped the company with valuable insights into consumer behavior, setting the stage for a consumer freemium model designed to entice newcomers while fostering a deeper understanding of customer preferences.

Investing in a Successful Institutional Business Launch

With the launch of Varsity Tutors for Schools, the company has experienced encouraging uptake that justified significant investment in resources to ensure a prosperous commencement in the first quarter of 2024. This move forms part of the company's overarching intent to provide services that cater effectively to the institutional market.

Projected Consumer and Institutional Revenue Growth in 2024

Entering 2024, the company is focused on amplifying profitable growth through an increase in active consumer memberships and extending their lifetime value. Simultaneously, it anticipates higher institutional revenues from its expansion in Varsity Tutors for Schools. This dual strategy is expected to propel full-year revenue growth by 24% year-over-year at the guidance midpoint, with a 500 basis point improvement in adjusted EBITDA margin and a prediction of positive operating cash flow.

Robust Demand and Gross Profit Surge in Consumer Offerings

Consumer demand remains robust as evidenced by a 35% growth in new consumer customers and a 17% hike in consumer revenue year-over-year in the fourth quarter. The quarter also reported a record gross profit of $39.2 million, a 33% increase from the prior year. Gross margin witnessed a slight ascent, and with the primary revenue coming from learning memberships, the company anticipates even stronger consumer gross margins going forward.

Financial Forecast and Earnings Performance

For Q1 2024, the company projects revenue between $51 million and $53 million, and for the full year, it expects revenue to be in the range of $232 million to $246 million. The forecast suggests an acceleration in year-over-year growth, pegged at 24% compared to the previous year's $193 million. Non-GAAP adjusted EBITDA is anticipated to fall between negative $3 million to break even in Q1, and for the full year, it is projected to be positive—ranging from $5 million to $15 million. This reflects an over 500 basis point uplift at the midpoint. Furthermore, positive operating cash flow is also on the company's financial radar for 2024.

Strengthening Retention through Product and Ecommerce Innovations

The company is polishing its existing ecommerce capabilities, anticipating that the freemium offerings will primarily transact through this channel for operational efficiency. Efforts to refine and scale the sales and marketing leverage are in place. Moreover, metrics such as improved non-tutoring engagement suggest strengthened customer retention and value from memberships, with the gradual phasing out of older models that have successfully demonstrated superior economics.

Expanding Institutional Offerings and Testing New Pricing Models

The company has diversified its institutional segment by rolling out three distinct subscription products, thereby accommodating various administrative tutoring needs of schools. On the consumer front, it has experimented with different pricing tiers, which include options that aim to attract users to the platform through cost-effective avenues. These innovations allow customers to engage with certain products initially without cost, which the company views as a precursor to monetizing premium offerings.

Freemium Model as a Catalyst for Tutoring Services

The free product suite offered by the company is not intended to substitute its core tutoring services but rather to complement them. These ancillary non-tutoring resources, which have minimal marginal costs, are expected to serve as a conduit for upselling customers to high-margin, live or small group tutoring services. This freemium model is designed to capture and monetize clients effectively when more personalized learning needs emerge.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, everyone, thank you for attending today's Nerdy, Inc. Fourth Quarter 2023 Earnings Call.My name is Sierra and I'll be your moderator today. [Operator Instructions]I would now like to pass the conference over to our host, TJ Lynn, Associate General Counsel of Nerdy.

[T. Lynn, executive]

Good afternoon and thank you for joining us for Nerdy's 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 disclaimer 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 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.

[Charles Cohn, executive]

Thanks, TJ, and thank you to everyone for joining us today. We entered 2023 with 3 primary goals that included scaling Always On subscription and access-based revenue products, driving profitability, and leveraging AI for HI or artificial intelligence for human interaction to transform how people learn.I'm proud of the Nerdy team for delivering against all 3 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, enhancing, converging our consumer and institutional business models, products 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 want to start off by sharing the following retrospective in relation to our 3 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 us ending the year with 40,700 active learners, up a 101% year-over-year.We also made significant platform enhancements that have enabled us to shift our institutional business to access based subscription models that we believe provide more value to our institutional customers.This new model was made possible by the unification and overhaul of our consumer learning membership experience, which then allowed for us to scalably offer our suite of products, including those originally built for consumer audiences to K-12 schools and other institutions.During the year, Varsity Tutors for Schools contracted with nearly 200 school districts delivering $37.6 million of bookings, an increase of $12.8 million, or 52% compared to the previous year.Institutional revenue of $33.8 million, increased 77% year-over-year and represented 17% of consolidated recognized revenue in 2023, ahead of our initial 15% expectation to start the year. This level of institutional growth occurred while launching 2 new products and shifting the business model, products and platform to one that involves access-based subscription offerings focused on a subset of students requiring tutoring. And then also providing every student in that district with access to our suite of powerful learning resources at no additional cost.Strong adoption of learning memberships and customer lifetime value expansion in our consumer business, coupled with continued scaling of our institutional business, led to accelerating consolidated revenue growth each quarter throughout the year, as we delivered year-over-year growth of 5% in Q1, 16% in Q2, 27% in Q3, and 32% in Q4.A year ago, as we headed into 2023, we believe the transition to a learning membership model would lead to more attractive unit-level economics, broader customer appeal, longer duration and higher lifetime value customer relationships, higher gross margin, and a more scalable and efficient operating model.We also thought that learning memberships would serve as an easier platform from which to drive innovation and incremental growth given our ability to add new product capabilities into the existing all access subscription offering, thereby making the offerings more appealing and engaging. We expected this to drive both the conversion of new members and the retention of existing ones.We also believe that if we've built access-based subscription products and made investments in automation, self-service capabilities, and AI, that we could simplify operations and simultaneously enhance both the learner and expert experience.I'm pleased to say that our belief that the transition to subscription revenue relationships with customers would provide substantial operating leverage has proven to be correct.During 2023, we were able to deliver adjusted EBITDA margin leverage across every P&L line item on a year-over-year basis. At the start of the year, we expected a non-GAAP adjusted EBITDA loss in the range of $10 million to break even for the full year in 2023, and that we would be adjusted EBITDA positive in the fourth quarter.Against this commitment, we delivered adjusted EBITDA profitability in the first and second quarter, a full 9 months ahead of our initial goal.We also delivered adjusted EBITDA profitability of $3 million in the fourth quarter, ending the full year with an adjusted EBITDA loss of $2.5 million versus an adjusted EBITDA loss last year of $35.7 million. That improvement of $33.2 million in 2023 versus 2022 represents an adjusted EBITDA margin improvement of approximately 2,100 basis points year-over-year.Said another way, we delivered consolidated revenue growth of $30.7 million in 2023 versus the prior year, and at the same time we're able to generate a full year improvement of $33.2 million representing 108% flow through of consolidated revenue growth to non-GAAP adjusted EBITDA. We believe these substantial improvements position us for adjusted EBITDA profitability and being operating cash flow positive for the full year in 2024 and beyond.In relation to our third goal in 2023, we've long believed that AI for HI, or artificial intelligence for human interaction, has the ability to transform how people learn. AI has been central to our ability to improve quality, enhance personalization and decrease the cost of delivering our offerings.AI powers our ability to identify the highest quality experts, assess learners' foundational knowledge, help ensure the right expert-learner match, and drive operational efficiency.During the year, our investments in AI allowed for us to rapidly develop learning experiences involving the real time generation of content with near 0 costs, improve our ability to deliver live human interaction and personalized learning at scale, provide new superpowers to experts and learners on the platform, and allowed us to remove substantial operating costs from our business.Our continued investments in AI for HI allowed us to launch an all new membership experience, making it easier for learners to more fully engage with their learning membership by improving product discovery and personalization.We also successfully launched multiple AI driven solutions that positively impact the customer experience, including an AI generated lesson plan creator, AI-Generated Lesson Plan Creator, AI-Driven Chat Tutoring, AI-Generated learning content including practice problems and Q&A.Looking ahead, AI will continue to accelerate our efforts to deliver a compelling product experience and build the leading platform for connecting learners and experts in any subject, anywhere, and in any time.Turning to our recent performance, I'm pleased to share that in the Q4, we delivered $55.1 million of revenue, an increase of 32% year-over-year, capping the year by delivering accelerating sequential growth each quarter in 2023.Revenue growth was driven by both our consumer and institutional businesses, which were up 17% and 160% year-over-year, respectively. New consumer customer growth of 35% year-over-year in the fourth quarter remains strong.Learning membership customer lifetime values continued to show substantial improvements relative to our old package model. We delivered record quarterly gross profit of $39.2 million in the fourth quarter, an increase of 33% year-over-year.We delivered adjusted EBITDA of positive $3 million in the fourth quarter, above our guidance range of breakeven, resulting in adjusted EBITDA margin improvements of approximately 1,900 basis points year-over-year for the quarter.Moving on to our consumer business, our learning membership model continues to lead to more attractive, unit-level economics, broader customer appeal, longer duration and higher lifetime value customer relationships, higher gross margin, and a more scalable and efficient operating model.The recently introduced My Learning Hub and Subject Portals, which enrich the experience and improve the discoverability of learning formats and subjects, are leading to increasing levels of year-over-year non-tutoring engagement, which we found is highly predictive of stronger long term retention and higher lifetime value.During the fourth quarter, we began to test additional product offering tiers by grouping product capabilities and testing multiple price points to identify a pricing model with mass market appeal and deliver the right customer experience and learning support to every student.We also tested multiple self service features aimed at enhancing and simplifying the user experience. These tests, often involving lower average revenue per month or ARPM products, decreased ending ARPM in the quarter, but it provided our teams with multiple signals into consumer intent, preferences and behavior that informed our initial approach to a consumer freemium model.Turning our attention to our institutional business, and Varsity Tutors for Schools. Over the course of 2023, we made significant platform enhancements that have enabled us to shift our institutional business to one that is access and subscription based and one that provides more value to our institutional customers.A relationship with Varsity Tutors for Schools now comes with access to a broad range of powerful academic resources for an entire district, as well as the ability to choose between 3 simple models for high-dosage tutoring with District Assigned, Teacher Assigned, and Parent Assigned.With Varsity Tutors for Schools, our institutional customers can now choose to administer tutoring centrally at the school district level, empower teachers to manage tutoring interventions or provide parents with learning memberships, and oversee tutoring outside of schools for their own students.The breadth of the resources included in the platform allows us to serve a much broader set of needs for our institutional customers and greatly expands the number of students we can impact.Our focus on product expansion is yielding results with institutional revenue of $11.3 million, increasing 160% year-over-year and representing 21% of total revenue in the fourth quarter.Varsity Tutors for Schools executed 42 paid contracts in the fourth quarter, yielding $10.3 million of bookings, the third consecutive quarter with more than $10 million of bookings.In addition to the high-dosage models that are typically focused on a subset of students within a school district, access to the Varsity Tutors platform is now provided for all students district wide, enabling us to provide more value to the school district and its students and families.For example, take a school district with 100,000 students focusing in high-dosage tutoring on 1,000 students within the district. The other 99,000 students will now also receive access to products including 24/7 on-demand chat based tutoring, on-demand essay review, more than 100 live group classes per week in areas including enrichment, test prep and academic subjects, our star courses, our self-study tools, our college and career readiness resources, our adaptive assessments, our recorded enrichment classes and test prep classes, and more at no additional cost.In many cases, districts were and are paying large amounts of money for these services and they can now direct those cost savings towards live video based high-dosage tutoring from Varsity Tutors for Schools.We are now leaning into this interest and recently began making access to the Varsity Tutors platform available at no cost to school districts on a rolling state-by-state basis across the U.S.By providing this robust set of academic resources at no cost, we aim to efficiently build trust and credibility at scale and earn the right to be considered for live video-based high-dosage tutoring, which is our superpower and the primary way we intend to monetize these relationships over time.Initial interest has been strong, with more than 250 districts representing more than a million students signing up and offering access to their students. The level of initial uptake and success has caused us to invest significant organizational resources towards this initiative and enabling a successful Q1 '24 launch.These efforts include a specific focus on platform scalability and building the freemium upsell, go-to-market motion of high-dosage tutoring sales to K-12 school districts as we build trust and credibility with these new no cost access partners.Turning our attention to 2024, we have 3 main priorities that aim to further our mission of helping people learn. First, we will scale the winning product for every learner. As we continue to evolve and enhance our product offerings within our new access-based subscription models, our focus remains on delivering enhanced value to both consumer and institutional customers.In 2023, we successfully unified our offerings into access-based subscription models and leveraged AI to improve our product. We'll build upon this strong foundation in 2024 to scale our platform and reach more learners across more learning needs.Our 2024 plan involves significant enhancements to the customer experience that are designed to make accessing high-quality live instruction more intuitive for every learner.Specifically, we plan to streamline onboarding, simplify scheduling, enhance self-service tools, and expand expert engagement features to improve the learning experience on our platform.We also plan to continue to leverage AI to improve the quality of live instruction delivered on the platform and the quality of the customer experience learners receive.We plan to equip experts with better capabilities to help tailor instruction and create individual learning journeys that accelerate skill acquisition.Additionally, we plan to use AI to guide learners towards the most effective next steps in their learning journey, building on our success with AI in matching learners and experts.We believe these initiatives will increase engagement on the platform, increase the value we provide for both learners and experts, improve customer lifetime value, and ultimately improve our unit-level economics and the total revenue and profitability of the business.As our second goal and priority for the year, we will deliver growth by scaling 2 freemium models. Our efforts this past year enabled us to converge our consumer and institutional businesses into similar access-based subscription models built on a unified common platform.That's allowed us to take products originally built for either our consumer audience or our institutional audience and make them available to each other as part of a standard product offering in both businesses.This includes 24/7 chat-based tutoring, AI tutor, on-demand essay review, more than a 100 live group classes per week in enrichment test prep and academic subjects, our StarCourses, self-study tools, college and career readiness resources, adaptive assessments, and more.We believe the logical next step is the introduction of a freemium offering within both our consumer and institutional businesses that introduces Nerdy to millions and eventually tens of millions of learners with a specific aim at dramatically growing awareness and driving a halo effect across both businesses.The initial no-cost version of our platform on its own already meets multiple customer needs states across study support, homework help, college admission prep, and enrichment.It also serves as a natural on ramp that will allow us to introduce and upsell our live video based online tutoring products to a far broader audience across multiple points in a learner's education journey.With more than 1 million students signed up across more than 250 school districts on the Varsity Tutors for Schools side, an encouraging early signal across consumer customers, we believe a freemium growth strategy will allow us to drive substantial marketplace awareness.We also think it can help us achieve multiple different business objectives, including unlocking ecommerce, expanding into new marketing channels, introducing Nerdy to new audiences, and finally, expanding our total addressable market by becoming a household name.We're looking forward to updating you on the progress we make against this effort over the course of the next year as we further enhance and refine this strategy.As our third goal in 2024, we will deliver profitable growth. In 2024, we expect to build upon our recent success by delivering profitable growth through an increase in the number of active members and lifetime value extension in our consumer business, as well as delivering higher institutional revenues as we continue to rapidly grow Varsity Tutors for Schools.We believe that by scaling our winning access-based subscription offerings, we will be able to deliver accelerating full year revenue growth of 24% year-over-year at the midpoint of our guidance, improve adjusted EBITDA margin by an additional 500 basis points and deliver positive operating cash flow in 2024.In closing, with our transition to learning memberships and our new unified platform complete, we look forward to building from a strong foundation, scaling and continuing to enhance these winning models, launching a freemium strategy to grow the number of learners introduced to our platform, and doing so in a way that drives profitable growth.I would like to close by thanking our team at Nerdy for their strong work this past year and their ongoing high-quality efforts towards meeting the needs of learners in any subject, anywhere, and at any time.With that, I'll turn the call over to Jason to discuss the financials in more detail. Jason?

[Jason Pello, executive]

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 a strong product market fit and strong operational execution.Both our consumer and institutional businesses continue 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 margin, and 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 31, 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 the P&L, record quarterly gross profit of $39.2 million in the fourth quarter increased 33% year-over-year. Gross margin of 71.3% in the fourth quarter was 75 basis points higher than gross margin of 70.5% during the same period in 2022.Gross profit and gross margin increases were primarily driven by growth in our consumer business as the result of strong adoption of learning memberships, which has led to lifetime value expansion and higher gross margin.As we start 2024 with essentially all consumer revenues from learning memberships, we expect consumer gross margin to continue to expand.Sales and marketing expenses for the 3 months ended December 31 on a GAAP basis were $18.8 million, an increase of $1.8 million from $17 million in the same period in 2022. Non-GAAP sales and marketing expenses, excluding non-cash stock based compensation were $18.2 million, or 33% of revenue compared to $15.7 million, or 38% of revenue in the same period in 2022, an improvement of more than 450 basis points year-over-year.Sales and marketing spend and efficiency improvements were driven by the transition to learning memberships, including the continued expansion of lifetime value, our focus on optimizing the level of marketing spend, and a more efficient operating model in our consumer business.We also delivered substantial Varsity Tutors for Schools, revenue growth, yielding efficiencies from prior investments in the institutional sales and go-to-market organization.We expect that a more efficient operating model in our consumer business and the continued scaling of our institutional business will continue to lead to sales and marketing efficiency improvements as the business delivers accelerating revenue growth.General and administrative expenses for the 3 months ended December 31 on a GAAP basis were $30.7 million, a decrease of $2.2 million from $32.9 million in the same period in 2022. Non-GAAP G&A, excluding non-cash stock based compensation and restructuring cost was $19.8 million, or 36% of revenue, compared to $21 million, or 50% of revenue in the same period in 2022, an improvement of over 1,400 basis points a year-over-year.Included in G&A cost were product development costs of $11.5 million, an increase of $2.1 million from $9.4 million in the same period in 2022. Our investments in product development and our platform oriented approach to growth have allowed us to launch a suite of access-based subscription products, including learning memberships for consumers and our District, Teacher and Parent Assigned offerings for institutional customers.As we've noted throughout 2023, access-based subscription offerings simplify the operating model needed to support customers and grow the business, while also providing a more predictable pattern of revenue recognition over time.Our ongoing automation efforts involving self-service capabilities, the application of artificial intelligence, and other efficiency efforts have allowed us to generate operating efficiencies and remove significant costs from the business.As Chuck mentioned, our belief that the transition to subscription and access-based revenue relationships with customers would provide substantial operating leverage has proven to be correct.We delivered non-GAAP adjusted EBITDA profitability of $3 million in the fourth quarter, ahead of our guidance of breakeven. During 2023, we were able to deliver adjusted EBITDA margin leverage across every P&L line item on a year-over-year basis.Ending the full year with a non-GAAP adjusted EBITDA loss of $2.5 million versus a non-GAAP adjusted EBITDA loss of $35.7 million in the same period last year. This resulted in an adjusted EBITDA improvement of $33.2 million and adjusted EBITDA margin improvement of approximately 2,100 basis points year-over-year in 2023. We believe these durable improvements position us to be adjusted EBITDA profitable and operating cash flow positive for the full year in 2024.These leverage and efficiency improvements were delivered while making substantial investments in product development and our platform oriented approach to growth, ensuring we can continue to execute against our product roadmap and deliver innovative solutions to meet the needs of today's learners.During the fourth quarter, we delivered negative operating cash flow of $5 million compared to negative operating cash flow of $14.5 million last year, an improvement of $9.5 million that reflects the benefits from our evolution to learning memberships, partially offset by temporary changes in working capital.With no debt and $74.8 million of cash in our balance sheet, we believe we have ample liquidity to fund the business and pursue growth initiatives.Turning to our business outlook. Today, we are introducing first quarter and full year 2024 guidance. For the first quarter and full year, we expect year-over-year revenue growth to be driven by the continued growth of learning memberships in our consumer business, the corresponding increase in the number of learning membership subscribers coupled with continued LTV extensions, and higher institutional revenues as we continue to rapidly scale Varsity Tutors for Schools.New learning member acquisition remains strong. And a growing awareness that high-dosage tutoring is the most effective way to remediate learning loss by parents, educators and policymakers provides us with confidence in the demand for our offerings in the year ahead.It should be noted that first half year-over-year revenue growth is impacted by legacy package revenue in 2023 of $10.9 million and $4.9 million in the first and second quarters, respectively that does not recur in 2024 due to the completion of our transition to subscription based learning memberships in our consumer business.Once we reach the second half of the year, when package revenues are no longer included in prior year comparable quarterly revenues, we expect growth to accelerate consistent with a sequential quarterly acceleration we delivered in 2023.First quarter revenues are also impacted by lower ARPM resulting from recent efforts to test additional product tiers by grouping product capabilities and testing multiple price points to identify a pricing model with mass market appeal. As we move throughout the year, we expect ARPM for our core learning membership offering to increase as we optimize our testing efforts.For the first quarter of 2024, we expect revenue in a range of $51 million to $53 million. For the full year, we expect revenue in a range of $232 million to $246 million, representing accelerating year-over-year growth of 24% at the midpoint versus our 2023 revenue of $193 million.First quarter and full year non-GAAP adjusted EBITDA guidance reflects the continuing benefits from our recurring revenue products, which focus on long term relationships with higher value customers, an improving gross margin profile and operating leverage stemming from the completion of our evolution to access-based subscription revenue business models.These benefits are partially offset by investments in Varsity Tutors for Schools' go-to-market strategy and product development to drive continued innovation and support our accelerating growth.For the first quarter of 2024, we expect non-GAAP adjusted EBITDA in a range of negative $3 million to break even. For the full year, we expect non-GAAP adjusted EBITDA in a range of positive $5 million to positive $15 million, an improvement of over 500 basis points in non-GAAP adjusted EBITDA at the midpoint. We also expect to deliver positive operating cash flow in 2024.In closing, thank you again for your time and for your continued interest in our company. With that, I'll turn it over to the operator for Q&A. Operator?

[Operator]

[Operator Instructions] Our first question today comes from Eric Sheridan with Goldman Sachs.

[Eric Sheridan, analyst]

A question, 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. Elements of how you want to align the marketing structure of the company, what you think the market opportunity is that you're sort of tapping into?And how to think about the broader eventual evolution of sort of the user funnel, having that product out there and what it might mean for broader freemium users to eventually over time, possibly move into higher priced plans.

[Charles Cohn, executive]

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 million 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 and we do better than anyone else out there.So we would expect to test into some of these different freemium models and do so in a way that builds to that really big opportunity of kind of mass market appeal. And allow it for people as they have a specific learning need where they could benefit from tutoring to upsell from there.So the way that we're thinking about it is kind of focusing on the existing model, continuing to scale winning model, and then adding incremental users into these different kind of freemium states and monetizing thereafter.

[Operator]

Our next question comes from Doug Anmuth with JPMorgan.

[Bryan Smilek, analyst]

Its Bryan Smilek on for Doug. Just on Varsity Tutors, can you just describe more drivers of growth into 2024, especially considering the ESSER III allocation funding deadline is coming up in September? Are you seeing any incremental demand from existing partners around that deadline looming and any uptake in the new customer backlog?

[Jason Pello, executive]

Yes. Sure, Brian. Great question. I can take this one. So, you know, 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 scale that business.And then when you think about the Varsity Tutors for Schools business, I mean, certainly, we had a great year this year. Total bookings were up 50%, and 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, District Assigned, Teacher Assigned, and Parent Assigned. And one of the investments we're going to make is expanding the go-to-market sales team in Varsity Tutors for Schools to capture that opportunity.I think it's a little bit too early to tell how the ESSER money is going to come in at the end of the year. But as a reminder for participants, those monies must be spent by September of 2024, and contracted, but the services can be provided over the course of the next 4 years post September 2024.And so we feel like there's a pretty significant opportunity here to capture our a fair share of those funding sources and enter into multiple year contracts with our partners in the school district space.

[Charles Cohn, executive]

Yes. And Brian, I would also add -- this is Chuck now -- that there are all sorts of different funding sources being used. There are state specific legislation that's been passed in a variety of different states for tutoring. Tutoring is the 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 at remediating learning loss.And so we feel like we're well positioned to participate in a variety of different state programs, local programs. And 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 effective as tutoring. And really all the studies are showing that it's highly effective in remediating learning loss. 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 in the United States.Through this strategy, just recently, we've been able to very quickly nearly double the number of school districts with whom we have a relationship. And we think that that's something that really builds as you 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 in high-dosage tutoring, is something that is pretty exciting. And the feedback thus far from school district partners has been very positive. And oftentimes, it very quickly leads to a commercial relationship as well.

[Operator]

Our next question comes from Ryan MacDonald with Needham.

[Matthew Shea, analyst]

This is Matt Shea on for Ryan. 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 members came in slightly below the 42,000 expectation.Just curious on what caused the difference, and are you providing any outlook for Q1 on numbers? Or just any color on how you're forecasting LMs for 2024 would be helpful?

[Jason Pello, executive]

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. And so I think as we look ahead, we feel really good about, where we're positioned. Looking ahead to next year, we'd 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 the thing to keep in mind is both of those numbers that I just provided exclude the potential conversion of freemium to pay customers as we move throughout the year. It's a little bit early to forecast that, although we feel good about the conversion mechanisms that that we're seeing. But the numbers that I gave you are more for our traditional learning membership customers.

[Matthew Shea, analyst]

Got it. Yes. I wanted to touch on the freemium conversion channel there. What -- 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 kind of building out that go-to-market? And maybe just if you could flex out more of the strategy or that wedge to drive that upsell from freemium to paid?

[Charles Cohn, executive]

Sure. So this is something that we've been building towards for a couple of years. So as we build all these different products -- we've talked before about how we got to stick with them as building blocks where you can assemble different compelling products for specific audiences that really resonate.And between having live video based tutoring, small group classes, live stream capabilities where you get up to 50,000 people in a class at almost no marginal cost, diagnostic testing, self-study videos, and a whole host of other resources including AI tutor, we brought these all together in such a way where we're able to then build different product offerings that can resonate, in such a way where we can then monetize. We have, kind of, tested different variants of the past that 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 and institutional platforms into one unified product offering. 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.

[Jason Pello, executive]

Yes. The only thing I'd add is, freemium is going to give us an array of benefits as we move forward. We're going to be able to connect with customers in different needs states, drive substantial marketplace awareness. We'll be able to unlock ecommerce to an extent we haven't been able to in the past.It'll enable expansion via new marketing channel. And it'll 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 name.So, this is a big long term opportunity. We feel really good about the initial signal. 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.

[Charles Cohn, executive]

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 engagement in non-tutoring products and then ultimately monetizing in a material way on the actual tutoring side, which, of course, is our superpower.

[Operator]

Our next question comes from Andrew Boone with JMP Securities.

[Andrew Boone, analyst]

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. Is there anything that you guys can share now that we're a little bit more maturing cohorts on retention or anything in that kind of vein?

[Charles Cohn, executive]

Sure. So I think the important thing here is that these ancillary products have either no marginal cost associated with them or low marginal cost 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 ecommerce, rolling out self-service tools and you can see that reflected in the lower ARPM starting points at our Q1 guide.But it builds to a fairly acceleration throughout the year and ultimately full year revenue growth that is still 24%, but accelerating. And we feel good about this being a 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 we could do so in a highly efficient manner that introduces us to a large number of new learners.

[Jason Pello, executive]

And then -- sorry, last question was on the retention of maturing cohorts. You'll see in the shareholder letter, we did remove that from what was 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 5 or 6 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.

[Charles Cohn, executive]

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 in 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 pulls through to retention. And that being something that we continue to -- that we can continue to drive for many quarters and years to come.

[Operator]

Our next question today comes from Alex Sklar with Raymond James.

[Alexander Sklar, analyst]

Chuck, can you just elaborate a little bit more on what you're on what you're referring to as far as kind of unlocking the ecommerce opportunity? What will that look like for Nerdy?

[Charles Cohn, executive]

Sure. So we have had ecommerce capabilities, but we also have a consultative sales engine and we would expect for the majority, if not the entirety of these freemium sales to occur through ecommerce, which would be a source of operating leverage on sales and marketing.

[Alexander Sklar, analyst]

Okay. So effectively a self-service motion for some of these freemium members. Not anything new --

[Charles Cohn, executive]

You have a working well as far as --

[Jason Pello, executive]

We'll continue to polish it and refine it. But, we would expect that that would be something that makes us more efficient over time and that we -- that there's not a kind of commensurate increasing costs with that line item as we scale.

[Charles Cohn, executive]

And Alex, one thing I'd add is, we'd encourage everybody on this call to go to varsitytutors.com or nerdy.com and experience the freemium product for themselves live on both of the websites.

[Alexander Sklar, analyst]

Perfect. We'll check that out. So, 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, an acceleration for that segment?

[Jason Pello, executive]

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 emergent multibillion dollar industry being formed 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 3 different subscription products within our institutional segment. Our first Teacher Assigned, then District Assigned, then Parents Assigned model, the last one allowing us to allocate learning memberships. It's actually our consumer product with administrative tools sitting on top to school districts. So we can really service all 3 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, we're able to provide value to all of the students.And in many cases, 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. And it's 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 then build relationships at scale, and that kind of go-to-market motion in sales and marketing builds towards a really big year.

[Alexander Sklar, analyst]

Okay. And maybe, Chuck, just one quick follow-up on that. Is anything changed as you've launched kind of Teacher Assigned, District Assigned, Parent Assigned, now you have those 3 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 those several different flavors for states or districts to kind of sign up with Varsity Tutors?

[Charles Cohn, executive]

Yes. We have. And the fact that we can solve all these different need 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 that then, 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 there are more simple conversations when rates are higher, and it's more efficient to build trust and credibility.

[Operator]

Our next question today comes from Maria Ripps with Canaccord.

[Maria Ripps, analyst]

Can you maybe 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 these offerings? And then how heavily do you intend to roll out this plan sort of going forward once sort of initial testing is completed?

[Charles Cohn, executive]

Sure. So we started off in this the call -- the past in Q4 with testing with a variety of different options. We've learned quickly and we're using that to then inform a broader rollout. So in addition to some of the 4 hour and 8 hour 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 of tutoring. Some of those include, much lower price points and then the ability to kind of up purchase when acute needs arise. And I think we have good signal there.It's still early days, but there are certain skews that are really resonating and allowing 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 lots 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 our plan does not count on tremendous success there but working in such a way where we believe that that could be a big growth driver in the future.

[Operator]

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

[Thomas Shinske, analyst]

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 existing revenues from customers that maybe were on the platform but not using the tutoring services?

[Jason Pello, executive]

Sure. I could 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 high-dosage tutoring. But instead, they supplement it.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 cost. So think things like an AI based tutor, practice problems, assessments and personalized learning plans, as well as asynchronous content.So those items, support a learning journey over the course of someone's semester. And when they have an acute need of any specific tutoring to really understand the materials and continue to grow as a learner, that's where we think the upsell motion to one-on-one live or small group tutoring, which are our superpowers, where we'll be able to monetize, the upsell from freemium to paid offerings.

[Charles Cohn, executive]

Yes. There's something about live that -- like, that's our superpower. That's why people come here, and that's where we're truly best-in-class. And we've surrounded that offering with all sorts of ancillary powerful resources that create a environment where students can kind of continue to learn over time.But the accountability, the relationship, the motivation, the ability to comprehend that comes from that social interaction that probably present in live 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, and then a very powerful monetization engine.

[Operator]

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.