Beyond the Blackboard

By: subSPAC

EXECUTIVE SUMMARY

• The pandemic has been a catalyst for change, propelling the edtech sector to unprecedented heights as traditional educational institutions scrambled to adapt.
• However, as we enter 2023, the landscape has shifted significantly from the edtech boom of 2021.
• Companies now face the challenges of customer retention, unit economics, and the looming shadow of inflation and recession concerns.

DETAIL

The pandemic has been a catalyst for change, propelling the edtech sector to unprecedented heights as traditional educational institutions scrambled to adapt. However, as we enter 2023, the landscape has shifted significantly from the edtech boom of 2021. Companies now face the challenges of customer retention, unit economics, and the looming shadow of inflation and recession concerns. In this ever-evolving market, can Nerdy, the parent company of Varsity Tutors, successfully navigate these adversities and emerge stronger than ever? 

Smart Learning 

The COVID-19 pandemic has undoubtedly accelerated the shift to online learning platforms, disrupting the traditional education system and changing the way students access knowledge. In this rapidly evolving landscape, the total addressable market (TAM) for online learning platforms reached $106 billion in 2021, with projections estimating a CAGR of 16.5% through 2025, reaching a staggering $404 billion.

The United States, accounting for 35% of global revenue, has become a hotly contested battleground for these platforms. Moreover, venture capital investments in the space have grown 32x over the last decade, from $500 million to $16.1 billion, highlighting the immense opportunity for growth and innovation. Enter Nerdy, a St. Louis-based company that leverages technology to connect learners of all ages with subject matter experts across more than 3,000 subjects. 

With a range of live online learning services, Nerdy offers learners multiple formats to suit their needs, including learning memberships, one-to-one tuition, small and large group tuition, and adaptive self-study. Their flagship product, Varsity Tutors, provides live online tutoring and courses directly to students and consumers, as well as through schools and other institutions.

Nerdy’s tutoring services can be purchased by the hour and utilized in 15-minute blocks and was the company’s most significant revenue generator until 2021. Nerdy also provides learning-as-a-platform solutions to institutions, offering customized services and product bundles. The company uses diagnostic assessments to group individuals with similar proficiencies, creating a personalized learning environment and thereby accommodating anywhere between one and five learners at a time. 

Evolving from Adversity 

Despite the long-term growth prospects, Nerdy is grappling with macroeconomic challenges like persistent inflation and looming fears of a recession in the latter half of the year. Coupled with these broader concerns are issues specific to Nerdy and the edtech sector as a whole, such as high customer acquisition costs, product stickiness, and a decline in momentum as students return to in-person schooling.

Nerdy has instituted a series of product and operational changes to address customer needs, enhance its value proposition, and improve margins as growth slows. In the first quarter of 2022, they unveiled learning memberships—a flexible monthly membership program that complements their existing pay-by-the-hour model. This new offering allows students to choose a fixed monthly rate for a term of 3 to 36 months, with payments ranging between $200 and $325 per month, providing between one and there sessions per week. 

Without the burden of a large upfront payment, learning memberships have made tutoring sessions more accessible and affordable. The positive impact of this strategic move is evident, as learning memberships contributed to 50% of all revenues in the fourth quarter, up from 18% in the third quarter of 2022. Learning Memberships have also enabled the company to focus on nurturing long-term customer relationships, thereby enhancing the lifetime value, resulting in higher gross margins.

Nerdy has also launched two new AI-driven products: an AI-generated lesson plan creator and an AI-powered chat tutoring product. By integrating artificial intelligence into its offerings, Nerdy aims to streamline the learning process and deliver a more personalized experience, all while optimizing operational costs. These product changes are expected to help the company reach EBITDA profitability by the end of 2023. 

Financials and Valuation 

In Q4 2022, Nerdy’s revenue reached $41.8 million, surpassing their guidance range of $39-41 million, fueled by the robust customer response to Learning Memberships. For the full year, revenue rose 16% to $162.7 million, driven by the success of Learning Memberships and growth in their Institutional business. Looking ahead, Nerdy anticipates Q1 2023 revenue of $45-47 million and full-year revenue of $190-200 million, reflecting a 20% growth compared to 2022.

Nerdy’s growth is largely expected to come from their decision to shift 100% of the Consumer business to Learning Memberships by the end of 2023 (which had an annual run rate of $87 million at the end of 2022), coupled with momentum from institutional customers. 

Nerdy expects to reach EBITDA profitability by the end of 2023 as a result of switching its focus to recurring revenue products, improving its gross margins profile, and other operational efficiencies. Nerdy’s liquidity position also remains robust, with $90 million in cash on the balance sheet and no debt.

At last close, Nerdy was trading at $3.58/share, giving the company a market cap of $341 million, a far cry from when the company made its debut through its SPAC deal at $1.7 billion. Assuming that the company can generate revenues based on its guidance, it will trade at a forward EV/Revenue of 1.2x. This valuation is reasonable, provided that Nerdy successfully undergoes its operational transformation, resulting in enhanced unit economics and improved margins.

Bottom Line 

Nerdy’s innovative approach to education, coupled with the increasing demand for online learning experiences, positions the company to capitalize on this growing market. As more people seek flexible, personalized, and accessible education, Nerdy stands to benefit from this tectonic shift in the industry. While macroeconomic and industry-specific challenges still persist, Nerdy has continued to evolve its product line in order to improve efficiency, bring down costs, and increase the lifetime value of the customers. The learning membership model, which delivers subscription revenues, also has better unit economics, which should help drive the company’s goal of attaining profitability by the end of the year. Nerdy also boasts a solid balance sheet with robust liquidity and no debt, paving the way for growth through acquisitions if needed. If the company can continue to execute its strategy and attain profitability, it could lead to strong growth in the underlying stock. 

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Originally Posted March 26, 2023 – Beyond the Blackboard