Nerdy Inc (NRDY) 2021 Q1 法說會逐字稿

Good afternoon, and thank you for joining us for Nerdy's first-quarter 2021 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 presentation over to Chuck, I'll remind everyone that this discussion contains forward-looking statements, including, but not limited to, expectations with respect to future performance, including projected financial information, which is not audited or reviewed by auditors, and certain anticipated financial impacts of the proposed transaction to combine Nerdy with TPG Pace Tech Opportunities, the satisfaction of the closing conditions to the proposed transaction, and the timing of the conclusion of the transaction. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results.

TPG Pace and Nerdy do 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 press release announcing Nerdy's Q1 results and TPG Pace Tech Opportunities' filings with the SEC for a discussion of the risks that can affect the business combination and the other forward-looking statements made on today's call. In addition, please refer to today's press release for a reconciliation of non-GAAP measures discussed on this call to the most directly comparable GAAP measures.

With that done, let me turn the call over to Chuck Cohn. Chuck?

Thanks, Marta, and thank you all for joining us today to discuss our first-quarter results. We've had a strong start to the year, and our first quarter exceeded our targets. We are seeing strong results stemming from our investments in growth and innovation. We're encouraged by the anticipated return to a new normal, given the positive impact we expect such a return will have on our business. As states re-open and schools return to in-person instruction, we are seeing demand for our learning solutions accelerate.

Last year, in the first half of 2020, the COVID-19 pandemic and resulting school closures and closure of testing centers created a short-term challenge for our business that our team innovated through. We are now seeing those demand headwinds turn into tailwinds and add to the product-driven growth we have already been experiencing.

Our key operating and financial metrics were ahead of our targets in Q1. I'll highlight just a few. As we noted on our Analyst Day presentation two weeks ago, active learners grew 67% year-over-year, online sessions grew 186% year-over-year, and sessions per active expert rose 60% versus a year ago. Improvements across these key operating metrics translated into strong financial performance. Specifically, online revenue in the first quarter grew 100% year-over-year and doubled to reach $34.6 million, while total revenue grew at 50%. This was driven by strong learner and engagement growth as learners increasingly adopted our multi-format approach to delivering personalized learning.

Our gross margin also expanded significantly to 68% versus 63% in the same period one year ago, driven by the transition to delivering instruction 100% online, coupled with increased adoption of our paid small group class offering. Jason will spend more time on our financial results shortly. But before I turn it over to him, I wanted to touch on several topics to help provide some context and allow you to get to know Nerdy better.

Let's start with who we are and what we do. Nerdy's mission is to transform how people learn. We believe that innovative technology can make all the difference. At Nerdy, we are aiming to seamlessly connect experts and learners in any subject, anywhere, anytime, and to make learning more personalized and accessible.

Our flagship brand, Varsity Tutors, is one of the leading platforms for one-on-one instruction and tutoring in the United States. It's a proprietary platform that is purpose-built for learning and enables us to deliver high-quality instruction at scale and provide superior value on both sides of our network.

In 2020, we delivered over 4.7 million hours of live instruction across more than 3,000 different subjects. We're able to cover the entire learning lifecycle because we've taken a platform-based approach that scales the learning experience for both learners and experts that is effective, engaging, and convenient. We offer a wide range of subjects on our platform, from phonics, to algebra, to chemistry, to professional subjects like nursing and the Series 7 exam.

We believe that each learner deserves an experience that is as unique as they are. To deliver on this, we leverage software and invest in AI to power a personalized learning experience. All of this comes together in a comprehensive online learning destination that weaves together multiple learning formats, including one-on-one instruction, small group classes, large group classes, and adaptive self-study into a single cohesive solution for learners.

So what makes Nerdy and the way that we deliver learning so different? Research studies have shown again and again that personalized one-on-one instruction has a profound impact on learning outcomes, and our aim is to deliver consistently exceptional live online personalized learning at scale. So imagine your best teacher ever. Imagine if you could have that quality of instruction consistently, all tailored to your needs, your objectives, and your learning style. That is what we're building. We're delivering live personalized learning at scale, and we're taking a platform-oriented approach to doing it.

To do this, we utilize technology, including process automation, machine learning, and AI to identify the best experts capable of providing high-quality instruction. We then take into account over 100 different variables, including expert and learner attributes, the adaptive diagnostic assessments, and data from past learning experiences to find and match the right expert for a learner's unique needs.

We've invested substantially in our product capabilities over time to continue to enhance the experience of our platform. This past year, we began weaving together small group classes, large group classes, and adaptive self-study with one-on-one instruction to create a comprehensive learning destination that allows us to deepen our relationships with learners on our platform.

Last year, we launched free live large-format online classes, which are interactive and can accommodate 500 to over 50,000 learners at a time. To date, we've provided millions of hours of free live online instruction to hundreds of thousands of learners. We recently completed our 100th StarCourse, which are large-format classes led by well-known experts and celebrities.

For example, Bill Nye the Science Guy recently taught a large group class about germs, viruses, and vaccines that attracted over 15,000 learners to a single live class. We anticipate increasing our investments in StarCourses throughout 2021, as the format has served as a powerful tool to build our brand, expand reach with new audiences, and drive repeat engagement across multiple learning formats.

We also expanded and enhanced our paid small group class offering over the last year, giving learners a more collaborative, cost-effective, and social experience with groups of 5 to 25 students. What we've seen is that as we launched all these learning formats and brought them together, the net result is far greater than the sum of its parts.

Retention, engagement, and purchases from existing users have increased dramatically, and we're now focused on shifting more and more cohorts of learners into these deeper relationships, which is leading to improvements in our LTV curves in a durable and significant way. And the results speak for themselves. The average session rating is a near-perfect 4.9 out of 5 stars, and we have a Net Promoter Score of 68, which is on par with some of the best consumer brands in the U.S.

The platform we've created allows us to address a huge market for academic tutoring, professional certification and training, enrichment, and language learning in the U.S. Consumers increasingly recognize that they don't have to drive to a strip mall or corporate office park when they can find high-quality instruction with the click of a button.

The expected impact for the online learning market is considerable growth. It took 15 years for e-commerce adoption to grow by 5x, and research suggests online learning will grow by that amount in less than half the amount of time that it took e-commerce, representing a 30% compound growth rate going forward. We believe we are particularly well-positioned to benefit from this secular shift and stand to gain disproportionately from this powerful trend in years to come.

In the past year, we've seen COVID-19 accelerate the long-term trend of offline to online learning, as more and more consumers realize the accessibility and superiority of the online experience versus legacy in-person solutions. Recent third-party research indicates that the shift to online is happening rapidly, with 73% of consumers stating that they are more likely to use online learning solutions than they were a year ago and 92% are planning to use it going forward. We're encouraged at the rate of vaccine distribution, the anticipated return to a new normal, and the positive impact we anticipate these factors may have on our business.

Re-opening has led to an uptick in inquiries for Nerdy's solutions. As you'll see illustrated in today's earnings release, inquiries for our solutions in open areas, like Florida and Texas, have been growing at even faster rates than in areas like New York and California, where the majority of schools have either remained online or in hybrid learning. These trends give us confidence that the reopening of schools, colleges, testing centers, and the broader economy will serve as a growth catalyst for us throughout 2021 and beyond.

To summarize what we're seeing in the market, while shut downs related to COVID impacted our business early last year, we continued to grow as we invested in new products and wove together our product offerings, including small group classes, large format group classes, and adaptive self-study with one-on-one instruction to create a comprehensive learning destination.

As re-opening continues, we're seeing inquiry growth for our services, and we believe attention being paid to learning loss from this past year has the potential to provide a further catalyst for our business. We are really excited about all of the success we've had thus far in 2021, as well as the business momentum that has carried from Q1 into Q2. And most importantly, we are just getting started.

With that, I'll turn it over to Jason to discuss the financials in more detail. Jason?

Thanks, Chuck, and good afternoon, everyone. Our momentum from 2020 continued into the first quarter and strengthened. We're seeing continued growth from the investments we've made in product, marketing, and other areas to drive improved operating results.

As Chuck discussed, we've built a business that's scalable, efficient, and growing rapidly. And the scalability of our platform was further demonstrated during the quarter by the improved operating leverage across each of our major cost line items.

First, on the top line. Our Q1 total revenue growth was up 50% year-over-year, with online revenue growth doubling at 100% year-over-year. Revenue growth was driven by several factors, including subject expansion into areas like professional, and expansion into new formats beyond one-on-one instruction, such as small group classes, as learners are increasingly adopting our multi-format approach to delivering personalized instruction.

We've also been increasing the frequency of StarCourses taught on the platform, which are delivered for free. These StarCourses allow us to provide exceptional value to learners, drive engagement among existing learners, and increase awareness among new learners.

We believe the extent to which we are providing improved access to high-quality educational resources and affordable live learning solutions allows us to attract talent, mission-driven employees and build our brand. We also expect this will appeal to a large investor segment.

Our gross margins during the quarter increased to 68% versus 63% in the first quarter of the last year, an increase of more than 440 basis points. Margin expansion for the quarter was primarily driven by the transition to delivering instruction 100% online, coupled with the increased adoption of our paid small class group offering.

Looking at our other costs, sales and marketing expenses grew by $4.4 million year-over-year in Q1 to $14.6 million, but they overall decreased as a percentage of revenue from 44% to 42%. The decline as a percentage of revenue stems in part from increased use of process automation and machine learning to help streamline our consultative sales process. We deliberately reinvested these savings into launching new marketing vehicles, including StarCourses, and television advertising tests to drive brand awareness.

General and administrative expenses for Q1 were $13.2 million, up $2.1 million, but declining considerably as a percentage of revenue from 49% to 38% year-over-year. Our transition to delivering live 100% online instruction and the leverage gained from process automation and machine learning across our curation and matching processes helped limit G&A growth, as did reduced office expenses, as we shifted to becoming a remote-first company.

We've also broken out accounting and legal expenses related to the proposed transaction with TPG Pace of $2 million during the quarter. Excluding these transaction-related costs, general and administrative expenses as a percentage of revenue would have been 32%, further demonstrating the scalability of our platform.

As Chuck noted, our net loss and adjusted EBITDA loss narrowed quite a bit in Q1, with net loss down to $5.7 million, and our adjusted EBITDA loss down to just $300,000, with improvements driven primarily by increased gross profit and operating leverage.

Now while we are nearly adjusted EBITDA breakeven in Q1, we intend to further invest in growth and ramp up our spend across marketing, product, and technology over the remainder of the year.

And then finally, on the balance sheet. We had cash and cash equivalents of $25.6 million at the end of the quarter and additional liquidity under our credit facilities.

Turning to the outlook. The second quarter is off to a strong start as demand for our products and adoption of our multi-format approach to delivering personalized learning continues to resonate with learners. With the expected proceeds from the proposed business combination with TPG Pace, we expect to have increased flexibility to invest across engineering, product, and design, and we're going to make significant investments in marketing to drive awareness, capture market share, and ensure Nerdy remains at the forefront of innovation, something we plan to continue to do for the foreseeable future.

As previously announced, we expect our proposed business combination with TPG Pace to close in the second quarter of 2021, subject to our registration statement being declared effective by the SEC, shareholder approval, and other customary closing conditions.

With that said, thanks again for your time today. And with that, I'll turn the call back over to Chuck.

Thanks, Jason, and thanks again to all of you for joining us today. We're pleased to share our strong Q1 results with you today, and even more excited about what we believe the future holds.

If you'd like to learn more about Nerdy, I encourage you to view our Analyst Day presentation on our investor website at www.nerdy.com and view the videos about our products and customers linked to in today's earnings release.

We also hope to see you at either the Needham conference the week of May 17th, or the JP Morgan conference the week of May 24th. Thanks again, and we look forward to speaking with each of you soon.