Executive Summary / Key Takeaways

• Nerdy is executing a strategic pivot, leveraging its proprietary Live Learning Platform and significant AI investments to drive a return to growth and achieve profitability.
• The Consumer segment is focusing on higher-frequency Learning Memberships and enhancing the user experience, leading to improved retention and a 14% year-over-year increase in Average Revenue per Member per Month (ARPM) to $335 as of March 31, 2025.
• AI-powered features like session summaries and Tutor Copilot are enhancing the learning experience, improving expert productivity, and are expected to be key drivers of customer engagement and retention.
• Operational efficiencies, including a 16% headcount reduction since December 31, 2024, driven by AI and software improvements, are bolstering operating leverage.
• Management guides for sequential quarterly improvements in revenue growth rates and gross margin throughout 2025, culminating in expectations to become adjusted EBITDA and operating cash flow positive in the fourth quarter of 2025.

Setting the Scene: Nerdy's Platform and the Power of Live + AI

Nerdy Inc., operating primarily through its Varsity Tutors and Varsity Tutors for Schools subsidiaries, stands as a prominent player in the evolving online learning landscape. Formed in 2021, the company's core mission is to transform education through technology, connecting learners of all ages with experts across a vast array of subjects and formats. At the heart of Nerdy's business is its proprietary Live Learning Platform, a vertically integrated system designed to manage the entire learning journey, from vetting and matching experts to delivering live instruction and providing continuous feedback. This platform serves two primary audiences: the direct-to-consumer market and institutional partners like K-12 school districts.

In recent periods, Nerdy has embarked on a significant strategic evolution, heavily emphasizing the integration of Artificial Intelligence into its core offerings. This strategy, encapsulated by the philosophy of "AI for Human Interaction" and the product branding "Live + AI," is grounded in the belief that technology is most powerful when it amplifies, rather than replaces, the human connection central to effective learning. The company's AI initiatives are not merely theoretical; they are being rapidly deployed across the platform. AI-generated session summaries, for instance, automatically transcribe and summarize tutoring sessions, highlighting key concepts and linking directly to relevant video segments. This provides tangible value for learners, parents, and educators, offering insights into progress and demonstrating the value of the learning investment. Initial testing showed higher utilization and over 95% positive feedback for this feature in the Consumer segment. Similarly, AI lesson plan and practice problem generators empower experts and teachers to create customized, standards-aligned content in seconds, automating preparation and freeing up time for live instruction. The Tutor Copilot feature provides real-time AI-driven support to experts during sessions, enhancing personalization and quality. These technological advancements are designed to drive deeper engagement, improve learning outcomes, and ultimately increase customer retention and lifetime value.

This technological push is also a critical component of Nerdy's competitive positioning. In a market populated by diverse players like Chegg (CHGG), Duolingo (DUOL), and Coursera (COUR), each with different strengths, Nerdy's focus on high-quality, live, interactive learning augmented by AI carves out a distinct niche. While Chegg excels in on-demand homework help and Duolingo in gamified language learning, Nerdy's strength lies in the personalized, real-time interaction facilitated by its expert network and enhanced by AI. Its proprietary AI matching algorithms aim to provide superior learner-expert pairings, a critical factor for satisfaction and retention in live tutoring. Compared to Coursera's focus on structured courses and professional certifications, Nerdy's platform offers greater flexibility and personalization across a wide range of subjects and learning needs. While competitors like Duolingo may demonstrate faster content delivery through pure automation, Nerdy's hybrid human-AI model is designed for deeper engagement and potentially higher retention in interactive learning segments. The company believes its integrated platform and rapid AI innovation are widening its competitive moat, particularly as some competitors, especially in the chat-based tutoring space, have faced recent challenges.

Strategic Execution and Performance Dynamics

Nerdy's strategic evolution is clearly reflected in its recent financial and operational performance. The first quarter of 2025 saw total revenue of $47.6 million, an 11% decrease compared to $53.7 million in the prior year period. This decline was primarily driven by a lower number of Learning Memberships in the Consumer segment and reduced Institutional revenue. However, this top-line figure masks underlying positive trends emerging from strategic adjustments.

In the Consumer business, which represented 80% of Q1 2025 revenue ($38.0 million), the company's pivot towards higher-frequency Learning Memberships and enhanced user experience is beginning to yield results. While Active Members were lower year-over-year (40,500 as of March 31, 2025 vs. 46,100 in the prior year), Average Revenue per Member per Month (ARPM) saw significant improvement, increasing 14% year-over-year to $335. This ARPM growth was driven by a favorable mix shift towards higher-frequency memberships and price increases enacted in Q1 2025 for new customers. Management highlighted that monthly recurring Learning Membership revenue inflected positively on a year-over-year basis at the end of March 2025, signaling that the strategy to improve the quality of revenue is gaining traction. Retention in newer customer cohorts is also showing improvement, attributed to user experience enhancements and new Expert incentives.

The Institutional business, contributing 19% of Q1 2025 revenue ($9.4 million), saw a 21% year-over-year decrease. The company executed 90 contracts yielding $4.0 million in bookings during the quarter. Nerdy's strategy to provide platform access to school districts to build relationships and convert them to paid offerings continues to show promise, with 34% of paid contracts and 19% of total bookings value in Q1 coming from partners who started with the free access model. However, investment in this segment has been moderated to align with a more normalized sales cycle post-ESSER funding uncertainties. Despite this, management sees significant opportunity and believes planned product enhancements to the unified platform will drive future growth.

Gross profit in Q1 2025 was $27.6 million, resulting in a gross margin of 58%, down from 68% in the prior year. This decrease was primarily due to investments in Expert incentives (designed to drive higher utilization and retention) and higher utilization of tutoring sessions across both segments. While these incentives temporarily pressured margins, management expects price increases for new Consumer customers enacted in Q1 2025 to drive sequential quarterly improvements in gross margin throughout the year.

Operating expenses saw notable reductions. Sales and marketing expenses decreased by $1.6 million or 9% year-over-year to $15.8 million, driven by consumer marketing efficiency gains and the moderated investment in the Institutional business. General and administrative expenses decreased by $3.6 million or 11% year-over-year to $28.4 million. This reduction reflects operating efficiencies gained from new software-driven processes, system implementations, AI-enabled productivity improvements, and a significant headcount reduction of approximately 16% since December 31, 2024. These cost reduction efforts are critical to improving operating leverage.

Nerdy's liquidity position remains stable, with cash and cash equivalents totaling $44.9 million as of March 31, 2025, down from $52.5 million at year-end 2024.

The company used $6.4 million in cash from operating activities in Q1 2025, compared to generating $4.4 million in the prior year, primarily due to lower revenue/gross margin, a $2 million legal settlement payment, and working capital changes. Investing activities used $1.2 million for capital expenditures, mainly software development and IT equipment. The company has no debt obligations, providing balance sheet flexibility.

Outlook and Path to Profitability

Management's outlook for 2025 is centered on a clear path to profitability, driven by the strategic initiatives currently underway. For the second quarter of 2025, the company expects revenue in the range of $45 million to $48 million and adjusted EBITDA in a range of negative $3 million to negative $6 million.

For the full year 2025, Nerdy increased the low end of its revenue guidance range, now expecting revenue between $191.5 million and $200 million. Full-year adjusted EBITDA guidance was reaffirmed in the range of negative $8 million to negative $18 million.

The confidence in this outlook stems from several key assumptions:

• Learning Membership revenue is expected to return to growth in Q2 2025 and accelerate throughout the year, driven by improvements in new customer acquisition, higher ARPM (projected to reach over $370 by year-end), and continued retention improvements from user experience enhancements and Expert incentives.
• Sequential quarterly improvements in consolidated revenue growth rates are anticipated.
• Gross margin is expected to improve sequentially throughout the year as the impact of Q1 2025 price increases for new Consumer customers blends into the revenue base, with a target of returning to historical margins above 70% in 2026.
• Continued benefits from AI-enabled productivity and operating leverage improvements are expected to offset investments in tutor pay rates and contribute to improved profitability.

Crucially, management explicitly targets becoming adjusted EBITDA and operating cash flow positive in the fourth quarter of 2025. This milestone is viewed as the culmination of the sequential improvements in revenue growth, gross margin, and operating leverage throughout the year. The company anticipates ending 2025 with cash in the range of $35 million to $40 million, which is deemed sufficient to fund operations and growth initiatives.

While the outlook is positive, risks remain. The company's history of net losses and negative operating cash flows means continued execution is critical. The ability to consistently acquire and retain customers, particularly in the Consumer segment, is paramount. Scaling the Institutional business in a cautious funding environment presents challenges, although the platform access strategy and AI enhancements are intended to mitigate this. The classification of experts as independent contractors remains a potential legal and regulatory risk. Furthermore, the rapid development and regulatory uncertainty surrounding AI could impact the business, although Nerdy views AI primarily as an opportunity to enhance its offerings.

Conclusion

Nerdy is undergoing a significant transformation, strategically leveraging its proprietary technology and aggressive AI integration to pivot towards a model focused on higher-value customers, improved retention, and operational efficiency. The recent positive inflection in Consumer monthly recurring revenue and the strong growth in ARPM signal that the strategic adjustments are beginning to bear fruit. While challenges remain, particularly in the Institutional segment and achieving consistent profitability, the company has laid out a clear path, supported by tangible operational improvements and technological advancements.

The investment thesis hinges on Nerdy's ability to execute on its Live + AI strategy, translating product innovation and operational efficiencies into sustained revenue growth, expanding gross margins, and ultimately achieving its target of becoming adjusted EBITDA and operating cash flow positive by the fourth quarter of 2025. Investors should closely monitor key metrics such as ARPM trends, customer retention rates in newer cohorts, the conversion success of the Institutional platform access strategy, and the company's progress against its profitability targets as indicators of the success of this turnaround narrative.