Online learning company Nerdy Inc. (NYSE: NRDY) has launched a new commercialization approach it believes will help “improve the predictability” of its revenue, as it recently reported slowed customer bookings.
Clayton-based Nerdy has rolled out a new membership model that allows its customers to buy tutoring services on a subscription basis as opposed to its traditional model of buying blocks of tutoring hours to be consumed over time. While expected to lower quarterly revenue in the near term, Nerdy believes its new commercial strategy will provide greater stability in generating revenue and better position it to operate amid emerging education changes, specifically regarding tutoring and college admissions.
The new commercial approach comes as Nerdy's stock received a tepid response from investors since going public in September 2021, dropping significantly from its starting price of $10, trading at $3.34 as of midday Monday. Nerdy is among dozens of U.S. startups that used special purpose acquisition companies (SPACs) as a vehicle to go public, eschewing a traditional initial public offering, and that have experienced significant drops in share price since entering the public markets.
Nerdy, founded in 2007, offers an array of online tutoring tools for everything from online instruction to self-study. Nerdy founder, Chairman and CEO Chuck Cohn launched the company as a student at Washington University after having difficulty finding a tutor for one of his courses.
In an interview, Cohn said the membership model appeals to Nerdy because it simplifies its sales process while also creating what the company believes is a more engaging model for students, a feature Cohn says is important as students' in-class performance becomes more critical for college admissions.
“We’ve been working on various subscription offerings for a couple years and just continued to evolve based on insights we had,” he said. “We had a couple of different significant breakthroughs earlier this year that allowed us to see a path toward this being a really compelling model in totality.”
With Nerdy’s membership model, customers can buy tutoring subscriptions — priced at a monthly rate — ranging from three to 36 months and one to three tutoring sessions per week. Chief Financial Officer Jason Pello told analysts in an earnings call last month that membership contracts for one tutoring appointment per week range from $200 to $325 per month.
In mid-May, Nerdy reported record quarterly revenue of $46.9 million in the first quarter, up 36% year over year. However, it lowered its revenue guidance for the second quarter, saying it expects revenue ranging from $37 million to $40 million. It said the change stems from “macroeconomic volatility,” noting its customer bookings slowed in April and March, as well as from the implementation of the subscription model. The company said the decision to offer a monthly payment for the membership model "delays revenue recognition" compared to charging customers upfront.
“We believe offering a membership option that is in the $200 to $300 range per month versus typically greater than $1,000 upfront is appealing to customers and the reason why we’re seeing great results so far, especially in today’s macroeconomic environment,” Pello said.
Nerdy’s membership model comes as it tailors its operations to what Cohn has called the “GPA war,” referring to the increased focus on a student’s grade-point average as more colleges move away from standardized testing.
“We believe these education trends are leading to consumer interest in supplemental learning solutions that support a more consistent use pattern over extended periods of time, defaulting to recurring, ‘always on’ relationships,” Cohn told analysts last month.
That shift has impacted Nerdy’s own test prep services, with Cohn saying such bookings accounted for less than 7% of the company’s bookings in the first quarter. Cohn said Nerdy discontinued its test prep brand Veritas Prep, which it acquired in 2019, in the fourth quarter of 2021.
The membership model isn’t the only initiative through which Nerdy believes it can drive significant growth for the company. In August 2021, it established Varsity Tutors for Schools, a new collection of products designed for school districts. It is adding new products to that offering and signed 61 new school contracts in the first quarter. Cohn said he thinks Nerdy’s schools-focused business, which had $4.6 million in revenue in the first quarter, can one day be as large as its consumer segment.
Since going public, Nerdy’s stock price has hovered well below its starting price of $10, trading at $3.34 as of midday Monday. Since May 19, Cohn has purchased 5 million Nerdy shares, at a total cost of $12 million, transactions he says highlight his bullishness on the outlook of the edtech company.
