Nerdy Inc. Q3 FY2021 Earnings Call

Hello, all and welcome to the Nerdy Third Quarter 2021 Earnings Call. My name is Brika and I will be today’s event specialist. [Operator Instructions] I would now like to hand the call over to your host, Marta Nichols. Please go ahead.

Good afternoon and thank you for joining us for Nerdy’s third 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 will remind everyone that this discussion contains 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 disclaimers in today’s press release announcing Nerdy’s Q3 results and the company’s filings with the SEC for a discussion of the risks. Not all of the financial measures that we will discuss today are prepared in accordance with GAAP. Please refer to today’s press release for reconciliations of these non-GAAP measures. With that, let me turn the call over to Chuck.

Thanks, Marta, and thanks to all of you for joining us today to discuss our third quarter results. We are excited to speak with you for the first time as a standalone public company, having completed our transaction with TPG Pace Tech Opportunities and our listing on the New York Stock Exchange in September. As we shared in today’s press release and shareholder letter, the future is bright and we are looking forward to this next chapter and the capital we now have to drive the shift from offline to online learning. I believe it’s a once-in-a-generation opportunity and I am looking forward to you joining us on this journey. Nerdy’s mission is to transform how people learn and we believe that innovative technology can make all the difference. We seamlessly connect experts and learners in any subject, anywhere, anytime and make learning more personalized and accessible. Our business continued to grow in Q3 as we executed our strategy of subject expansion, format expansion and product innovation. We experienced record bookings in the quarter of $44.5 million as schools returned to classrooms, up 32% year-over-year. And we saw continued strong performance in our key operating metrics during Q3, with active learners up 36%, online sessions jumping 45% year-over-year and active experts increasing 23% year-over-year, while maintaining our sessions per active expert. In July and August, we saw a return to more normal seasonality, which resulted in slower than expected consumption followed by a dramatic acceleration in bookings in September after all schools returned to in-person learning. We experienced a return to more normal summer seasonality in Q3 as easing COVID restrictions permitted families to take much needed vacations. This was quite a bit different from the 2020 period, where we experienced higher than usual consumption in the summer at a time when lockdowns were common and summer vacations were skipped. This change in consumer behavior was different from what we envisioned at the beginning of the year when COVID was peaking. The relative consumption of our services during the summer of 2021 ultimately looked more like 2017, 2018 and 2019, while higher than usual consumption in the summer months of 2020 proved to be an outlier. Since students returned to school in September, we have seen record bookings driven by consumer demand for our core one-on-one products. As students return to class organization-wide, bookings in our direct-to-consumer business, that is our historic one-to-one in classes business for our September and October combined, grew at 31% compared to those same 2 months a year ago. Our total bookings, including our new K-12 institutional strategy, grew 63% during September and October and we continue to see comparable bookings growth in November. Revenue grew 19% in the third quarter to $31.3 million. As a reminder, revenue was primarily driven by consumption in the period and utilization of hours by customers. The increased bookings occurred later in the quarter and those higher levels of bookings are now starting to get consumed as we enter Q4. Based on the significant demand we are seeing in both the direct-to-consumer and in our direct to-school initiatives, we made the deliberate decision to pull forward investments in sales, expert supply and product development to make the most of the sizable opportunity heading into 2022. If you look at where we experienced accelerated demand once summer ended and schools all had resumed, it was basically all across key areas of the business. In our direct-to-consumer offerings, demand was up across the board including K-12, college and professional. And we are seeing an incremental boost with the addition of our new K-12 institutional strategy, which I will touch on more in a moment. Last year, when schools went virtual, a lot of schools elected to assign take-home exams, allowed pass/fail and stopped designing traditional letter grades to assess student performance. This year, schools are almost entirely back to in-person instruction and are evaluating students again and assigning grades. This has led to heightened levels of consumer demand for supplemental support, including tutoring among both K-12 and college students. Our professional testing offerings have also continued to experience robust growth. The increased demand trends we have seen coincide with the return of a new normal in classroom environment validate a long-held understanding we have about our business. When learning and outcomes matter to students, our business accelerates. The more that outcomes matter, the better we do and the recent bookings results are the logical and expected results of grades and test scores mattering again for students. As we approach the end of 2021, we have increased confidence that the favorable consumer demand trends and the demand we are seeing from our direct to-school initiatives will persist into 2022. Given these trends as well as our growth investments, we have increased confidence in our full year 2022 revenue targets. We continue to innovate in Q3, investing in the expansion of Nerdy’s product portfolio, with our launch of Varsity Tutors for Schools. This new product leverages our platform capabilities to offer our online learning solutions directly to K-12 school districts and states. Institutions can seamlessly deploy our educational solutions across broad populations of students in an efficient manner. This initiative offers the opportunity to further our mission and have an enormous impact by expanding access to high-quality, supplemental online learning solutions to broader student populations and the need has never been greater. We received a strong reception for Varsity Tutors for Schools, translating into early success, with 47 contracts with partners with a 1-year value of nearly $10 million signed since our launch in August. This initial traction has been above our expectations and gives us confidence that we are well-positioned to help schools at a broad scale and that they appreciate the partnerships we can bring to bear to help address COVID learning loss. We are excited about this effort and believe that over time, it can be as big as our direct-to-consumer efforts. The capabilities of this new K-12 offering represent the beginning of an institutional go-to-market strategy that will allow us to serve learners through many organizations, including schools, universities, businesses and others. We view partnering with these institutions to offer a broader learning platform as a service as a long-term opportunity to help improve the way that supplemental learning is administered. As an example of how this shows up in our new K-12 offering, many schools are adopting a small group approach, specifically with 1 expert coaching up to 5 learners per session. To address this need, we rolled out new functionality that leverages our technology capabilities to assess, identify and then group students with similar needs based on adaptive diagnostic testing results aligned to a specific state or common core standards, a critical functionality for schools and institutions. The 1:5 learning format builds upon our current class and tutoring formats. It integrates adaptive testing and other content into a single interface on our proprietary live learning platform, along with new administrator tools and integrations with learning management and student information systems. Our existing learning solutions previously offered almost exclusively via direct-to-consumer model, now meet the needs of a broad array of audiences and institutions. Our investments in platform and software-driven capabilities will serve as building blocks to quickly assemble new solutions, making it possible to efficiently enter new addressable markets, starting with our direct-to-school initiative. In addition, the American Rescue Plan provides $123 billion to help K-12 schools reopen safely and at least 20% is earmarked to help address pandemic-related learning loss over the next several years. This is significant funding and live tutoring has proven to be one of the most effective interventions to address learning loss. The Department of Education recommends high dosage tutoring as an appropriate strategy for federal funding. We believe this funding is an important jumpstart for schools in the long-term adoption of third-party learning solutions and that we are uniquely positioned to help schools administer, measure and optimize the benefits for their students. COVID learning loss is real and will take many years to remediate. A recent McKinsey study on COVID in education shows that on average, students have fallen 5 months behind in mathematics and 4 months behind in reading. These losses will take significant time and resources to address and Nerdy’s Learning Platform as a Service offering provides a range of necessary solutions for schools to help them immediately address this urgent issue. Turning briefly to some of our growth initiatives in our direct-to-consumer business, during the third quarter of 2021, we also continued to expand our large format classes, with 55 new StarCourses. To date, we provided millions of hours of free live online instruction to hundreds of thousands of learners. The StarCourse format has served as a powerful tool to build our brand, expand reach with new audiences and drive repeat engagement across multiple formats. In parallel, we invested in expanding subject breadth and the frequency of our small group class offering to drive growth and reach new audiences, which resulted in small group class revenue increasing approximately 94% year-over-year during the third quarter. And beyond introducing new subjects, formats and products, we have continued ongoing investment in AI and improving match quality as our personalization capabilities remain critical to differentiating how we can help learners and enhancing the online experience of our platform. These investments power the network effects in our business and have helped us attract, retain and drive engagement among both learners and experts. We remain confident in the underlying trends driving demand for our services. The long-term transition from offline to online learning, the large and growing addressable market, and our ability to scale and innovate at a rapid pace to deliver solutions that meet learner needs in any subject, anywhere and at any time. With that, I will turn the call over to Jason to discuss the financials in more detail.

Thanks, Chuck and good afternoon everyone. As Chuck noted, our business continued to grow rapidly in the third quarter as we executed on our subject expansion, format expansion and product innovation growth strategies. We experienced record back-to-school performance in our direct-to-consumer business. Importantly, we launched our K-12 institutional strategy with the introduction of our new Varsity Tutors for Schools product suite. We made targeted investments to support our institutional strategy, including the build-out of our institutional sales team and growth in our tutor operations and supply functions to support increased demand and ensure strong execution for our schools product. Consistent with our forecast, we continue to invest in hiring new talent across engineering, product, marketing and sales. We believe these additions will allow us to drive sustained growth and innovation for years to come. We also continue to invest in both the quality and frequency of our free StarCourses, which allow us to provide exceptional value to learners, drive engagement across existing users and increase awareness among new learners. Turning to the financial results. First, on the top line, we continue to see results from our investments in growth and innovation. We experienced record bookings in the quarter of $44.5 million as schools returned to classrooms, up 32% year-over-year. Revenue of $31.3 million yielded 19% growth year-over-year, demonstrating continued demand for our offerings across all of our academic audiences from K-12 through high school and college, as well as significant interest in our professional offering. Year-to-date revenue of $98.6 million increased 39% year-over-year. Summer seasonality in 2021 had a greater impact on Nerdy’s operating and financial results than in previous years, because demand in the prior year during the summer of 2020 was different from historical patterns. Like many companies, we experienced higher than usual demand last summer in 2020 when lockdowns were common and most summer vacations were skipped. This year, during the summer of 2021, more families took a much needed break from academics, traveling and spending more leisure time outside resulting in consumption patterns more in line with seasonality in the years before COVID. As students returned to school this fall, demand for our services has increased significantly year-over-year, a trend we have seen continue into October and early November. This trend can be seen across several operating metrics, including tutor inquiries, which were up 36% on a combined basis in September and October and accelerating bookings growth during each month throughout the back-to-school period. As Chuck mentioned, during September and October, bookings, including our new Varsity Tutors for Schools offering grew by 63% on a combined basis, driven by strength in our direct-to-consumer offerings across K-12, college, professional and the addition of our new K-12 institutional strategy. Since the beginning of August and through the end of October, Varsity Tutors for Schools has contracted with 47 school districts for an aggregate annual contract value of nearly $10 million. Moving down the P&L, gross profit of $20.7 million increased 15% year-over-year during the third quarter. Year-to-date gross profit of $65.3 million increased 40% year-over-year. Gross profit increases were driven by the adoption of one-to-one online learning, expansion across more subjects, more formats and more consumer audiences. Gross margins of 66% in the third quarter reflect continued investments in the launch of new class products and further testing of subscription offerings. Sales and marketing expenses for the third quarter on a GAAP basis were $18.8 million, up $5.5 million versus the same period in 2020. Non-GAAP sales and marketing expenses, excluding non-cash stock-based compensation, were $16.1 million or 52% of revenue compared to 50% of revenue in last year’s third quarter. We made investments in establishing and growing our sales organization to support our K-12 institutional strategy and investments in marketing to support learner acquisition and bookings. Our investments in automation and AI continue to provide us with operating leverage. We invested in expanding new marketing vehicles, including StarCourses, our free, celebrity-led, live, large group classes in new advertising channels, including continued testing across television to drive brand awareness and reach. As a reminder, marketing expenses will fluctuate from quarter-to-quarter based on consumption patterns that drive revenue levels, seasonality and the timing of our investments in new marketing activities. General and administrative expenses for Q3 were $59.9 million and included significant one-time transaction costs and non-cash stock-based compensation charges related to the closing of our transaction with TPG Pace and our public listing in September. Excluding these items, non-GAAP G&A expenses for the third quarter were $17.8 million or 57% of revenue compared to $9.4 million or 36% of revenue in the same period in 2020. Consistent with our forecast, we moved quickly to bring in new talent to drive innovation and growth. We made targeted investments in new product development, including our K-12 institutional strategy. We also invested in tutor operations and expert supply to bring more tutors on board and prepare for substantial back-to-school demand. During the third quarter, we reported a net loss of $57.7 million versus $7.5 million in the third quarter of 2020. Excluding non-recurring items, including transaction costs, debt repayment and extinguishment, mark-to-market derivative adjustments and non-cash stock comp expenses, adjusted net loss was $14.7 million for the third quarter of 2021 versus $5.9 million in the third quarter of 2020. Nerdy reported a non-GAAP adjusted EBITDA loss of $11.7 million in the third quarter of 2021 compared to a non-GAAP adjusted EBITDA loss of $3.2 million in the same period one year ago. Reconciliations of non-GAAP measures to their most directly comparable GAAP financial measures are included in our earnings release. As Chuck mentioned, we completed our business combination with TPG Pace on September 20 and Nerdy common stock in warrants started trading on the New York Stock Exchange the following day. As part of the transaction close, we paid off all outstanding debt, including the repayment of our previously fully forgiven promissory note with a small business administration in October. The company now has ample liquidity to opportunistically invest and operate against our plan, ending the quarter with cash and cash equivalents of $170 million, putting us in a position of strength as the market for supplemental learning expands and quickly shifts from offline to online. In summary, our results reflect continued strength and validation of our growth strategy. We are focused on growing our business via subject expansion, format expansion and product innovation, back-to-school bookings, coupled with accelerating adoption of our K-12 institutional strategy provides strong momentum heading into the fourth quarter and 2022. As Chuck mentioned, we have increased confidence that the favorable consumer demand trends and the demand we’re seeing from our direct to school initiatives will persist into 2022. Given these trends, as well as our growth investments, we have increased confidence in our full year 2022 revenue targets. We are providing the following guidance update. For the fourth quarter, we expect revenue in the range of $40 million to $43 million, up 25% at the midpoint from $33 million in the year ago quarter and consistent with the forecast in early 2021. For the full year, we expect revenue in the range of $139 million to $141 million, above the forecast provided in early 2021 and up 35% at the midpoint versus $104 million in 2020. For the fourth quarter, we expect an adjusted EBITDA loss in the range of $4 million to $6 million, reflecting continued investments in the build-out of Varsity Tutors for Schools, expert supply and new talent to support our growth. Additionally, we are well capitalized and expect to continue to invest in growth and innovation for the foreseeable future, and we’re seeing strong returns on these investments.

Thanks again for your time, and I’ll turn the call back over to Chuck. Thanks, Jason, and thanks again to all of you for joining us today. I’m really pleased with the pace of innovation and product evolution at Nerdy. We’re excited that schools have been enthusiastic about partnering with us to make delivery of supplemental learning more effective and efficient on behalf of students. Our direct-to-consumer business is growing really well, and we’re energized by the opportunity to help many more students and build another major growth factor with our new institutional strategy. Let’s turn the call over to the operator and get started with Q&A.

Thank you. [Operator Instructions] We have the first question on the phone line from Doug Anmuth of JPMorgan. So Doug, I have opened to your line.

Thanks for taking the questions. I was hoping you could talk a little bit about Varsity Tutors for Schools and just in terms of revenue recognition and just how to think about the lag between bookings and revenue and how the timing kind of plays out there as you head into 4Q. And I guess that leads into the question of whether you can help us bridge a little bit kind of the significant sequential revenue growth that you’re forecasting from 3Q to 4Q? And then sticking with the school initiative, what are the key investments that you need to make around that business? Thanks.

No problem, Doug. Thanks for the call, and thanks for joining us today. We believe the trends in bookings can provide useful color in understanding the future business momentum. Recent booking trends are a strong leading indicator of the growth in the business and we’d expect to see consumption pull-through beginning in Q4 and into Q2. If you look at historical consumption patterns, the majority of bookings pull through to revenue over the subsequent 6 months once students are matched with experts and begin to consume. Specifically, as it relates to Varsity Tutors for Schools, what we’ve seen there is that we had some early adopters execute contracts with the company and those schools are just now starting to consume and set up the sessions with their students. So we would expect that to have some impact in Q4, but a significantly larger impact in 2022.

And anything just in terms of investments that you may need to make in terms of the school initiative and maybe if you could talk a little bit about just kind of sales process there or just kind of the go-to-market for how some of those deals get closed?

Sure. This is Chuck. We have been building out an enterprise sales strategy over the course of the last 4 months and have significantly built out that team and go-to-market strategy. It is now starting to work effectively, drive real results as evidenced by bookings and is turning into what we believe is a replicable playbook. We’re already bearing the cost of a midsized enterprise sales organization as well as investing in customer support. While we would anticipate increasing the headcount associated with this initiative, given the strong results we’re seeing, we feel like that we’re already bearing a significant amount of the cost. As those bookings come through and start getting recognized as the programs go into effect, we think that we’re right now seeing a pretty attractive return on investment in a relatively short time frame. So in the near term, costs will go up. But as Jason said, we expect that GAAP revenue recognition that will start to flow through in a material way in Q1 as those programs go live. Some of them are already live and going well. We’re excited by the progress and expect that they will have a material impact or could have a material impact on the total number from a GAAP perspective in Q1.

Thank you.

Thank you, Doug. We now have the next question from Mario Lu of Barclays. So, Mario, please go ahead when you are ready.

Great. Thanks for taking my question and congrats to your first quarter as a standalone public company. A couple more questions on the Varsity Tutors for Schools, anymore details you can provide on how you guys started that product suite, is it correlated directly with the $123 billion COVID release funding? Like for example, was that $10 million that those districts are contracted with, was that using that funding? And then secondly, can you talk about – a bit about the cadence of adding these contracts with this is mostly before the school year? Or is it expected to continue to pick up contracts throughout the calendar year? Thank you.

Sure. Thanks, Mario. The way we think about it is there are a variety of different needs that schools have. Schools obviously have students that are experiencing significant learning loss, as we said before in the prepared remarks. They also have a variety of other challenges right now related to everything from extracurricular activities being cut back to labor shortages within schools that are making a variety of different aspects challenging. During COVID, some of the historical buying patterns have been shaken loose; unbundling is occurring. Schools are now open to leveraging online platforms to solve some of these problems and partnering with an organization like us to an extent that just wasn’t true a couple of years ago. If you look at the $10 million in bookings, almost all of that is related to high dosage tutoring, which is prescribed by the Department of Education as a very effective way to remediate the COVID learning loss. The platform we offer has a variety of different capabilities in educational solutions that could be deployed. Many of these are investments we’ve already made on the consumer side and now we’re just modifying them and making them available to schools in general. A school administrator could deploy a high-dosage tutoring solution across a broad population base of thousands or tens of thousands of students and roll out special education and language programs, many of which have already been built on the consumer side of the platform and have an institutional need. This is based on feedback from school administrators as well as what we’re seeing schools actively outsourcing in the market and it leverages the platform we’ve already built and many of the products we’ve already built to meet important consumer and institutional needs.

From a cadence perspective, you have to keep in mind that most schools were focused on returning to school safely at the beginning of the school year, and in many cases, deferred standardized testing to just recently. Now those tests have occurred, schools are realizing the significance of the COVID learning loss and they are starting to reach out to us at a greater pace. We’ve had great early success. The pipeline continues to build, and we think this will have a significant impact on 2022 and more importantly, for years to come.

We think this is a long-term opportunity. We have been considering launching an institutional strategy for many years and finally got the consumer platform to the point where we felt like we had a robust product suite. We could help people in a multitude of different ways, the software was advanced and scalable, and we can actually take it and extend it in an efficient manner to the institutional audience in a way that gives a huge head start. So we consider our foray into institutional to be long-term in nature and strategic and something that will allow us to double leverage the investments we’ve already made.

Perfect. Thank you, both.

Thank you, Mario. We now have Maria Ripps of Canaccord. So, Maria, please go ahead when you are ready.

Thanks so much for taking my question. You touched on your small group initiatives. It seems like your revenue growth there was pretty strong this quarter. Can you just talk about the adoption of this format, utilization of classes? Do you see this offering more for learners that are already on the platform or do you see this offering bringing more learners to Nerdy as well? And then secondly, just maybe refresh us on the impact to both near-term and long-term margin as you continue to build this offering?

As we noted in the release, small group class revenue increased approximately 94% year-over-year during the third quarter. On a seasonal basis, we expect that it will be a smaller percentage of the mix during the school year and a larger portion during summer months due to more seasonal offerings like summer camps and other enrichment classes. However, we continue to make investments in the launch of the new class margins, which impacted near-term margins during the third quarter, consistent with what we talked about during the second quarter as we look to build out the breadth of our offering here and capture top-line growth. From our perspective, it’s clear the approach is working, and we’ve got a big opportunity here that we should keep playing into.

This has the potential to at least double the total addressable market going after the consumer segment. It’s a more social experience. It allows us to identify a whole host of new users. We certainly are cross-selling the one-to-one and the one-to-many class capability into our existing one-to-one user base, but this allows us to reach probably twice as many people. In certain categories, those categories skew towards classes over one-to-one. So we expect this will continue to be a significant growth driver to come. There are segments where we’re investing and seeing significant traction like professional trading and certifications where the one-to-many element is very appealing. We expect to keep resonating. And as those different initiatives that are leveraging this capability scale, we would then expect for that to be gross margin accretive on a go-forward basis. We’re seeing great results in the market and are excited about the growth and traction we’re seeing here.

Got it. That’s very helpful. Thank you for the color.

Thank you.

We now have a question from Andrew Boone from JMP Securities. So, Andrew, please go ahead when you are ready.

Hi, guys. Thanks for taking my questions. Two, please. The first, given the tightness in the job market, and I think you mentioned this in your answers to one of the prior questions. Can you talk about attracting and retaining experts and whether you’ve seen any headwinds there? And then number two is just now that we’re kind of a year out from strong COVID growth, can you talk about your COVID cohorts and whether you’ve seen any change in their behavior or any change in retention? Thanks so much.

We did add experts aggressively in anticipation of summer demand and institutional expectations during the quarter. From a supply perspective, I think we’re doing really well. We grew the number of active experts on the platform by 26% in Q2 and then another 23% in Q3. Remember, our business is entirely online. We can look anywhere in the country for talent. Our experts like the work, it is flexible, and they can earn on top of their day job. Most of the demand is in the evenings after school and after work. So net-net, I feel like we are continuing to add supply to the market and can meet the demand increases that we’re seeing from our schools.

We haven’t seen any scaling challenges. If you look at the actual rates being paid and converted to an hourly basis, it’s plus or minus 1% on any given day. It’s effectively the exact same number year-over-year. We’ve been able to dramatically grow the number of experts on the platform. We feel really good about scalability there and our ability to attract great people. One of the things we’ve done is we’ve leaned into our machine learning matching algorithms to give some of those best experts the most work and give them that consistent ability to earn. They don’t have to do any marketing. It’s super flexible. They can do it from home and work during the hours they prefer. We haven’t seen any scaling issues whatsoever. Of course, we see all the labor challenges that some other platforms have, but the fact that this is online is a big differentiator. We’re excited that the kids are back in school. We think that in-person schooling is great from a social and emotional perspective for kids, but it’s also a tremendous growth driver, because when proficients assign in-classroom tests and teachers evaluate grades and assign grades, we’re seeing demand for our supplemental products including tutoring income.

Great, thanks, guys.

We now have another question from the line from Aaron Kessler of Raymond James. So, Aaron, I have opened your line.

Great. Thank you. A question on the – you mentioned kind of test optional universities. Do you view this as more of a long-term trend? Or is this kind of a short-term trend, still a reaction to COVID kind of headwinds? And then just maybe any thoughts – did you see kind of any impact on marketing from IDFA and just general thoughts on how you shifted your marketing strategy as well. Thank you.

Yes. We think that test-optional for exams like the ACT, SAT, GMAT, GRE is a long-term trend. What’s interesting is that the demand for college admissions and university and graduate admission tests has shifted to other areas. We’ve seen a couple of those areas feel some pressure and decrease, but then areas like the AP exams and IB exams have increased significantly. AP and IB are now bigger than the ACT or SAT, as an example. In a world where standardized test scores can no longer differentiate you at many schools, grades and GPA start to matter a whole lot more. This is driving the significant growth in academic tutoring demand because students and parents are now recognizing back-to-school that to differentiate themselves on admissions, they need better grades. We expect this to be a long-term trend for tests to be a significant growth driver for business in the years to come. As for marketing, we advertise on various platforms, including paid social, search, affiliate, and referral. Referral and word of mouth referrals are particularly important in this category. We’ve diversified our marketing strategy. While we do advertise on paid social for our StarCourses and other areas, we've focused on specific cohorts of users who purchase more and engage more and we have identified them. There is some pressure from IDFA but it has been more than offset by our ability to become smarter with our targeting which gives us higher ROI and increases the funnel conversion for users coming from those channels. We are optimistic about the long-term trends and our ability to monetize from those platforms based on the improvements we are making in the product and levels of engagement we observe. Our tutoring inquiries have grown rapidly, and we’re seeing tests held constant despite volumes growing significantly.

Alright. Great. Thank you.

We now have Greg Gibas from Northland Securities. Please go ahead, Greg. Your line is open.

Good afternoon. Chuck and Jason, thanks for taking the questions. Sorry if I missed this earlier, but you’ve got tutoring for schools. You mentioned 47 school districts now after recently going live or announcing that product for an annual contract value of $10 million. Are most of those live today? And are any of those contributions included in Q4 guidance?

Almost none of them are live thus far. A couple of them will be going live in Q4. Most are going to be live by Q1. The schools focused on ensuring that in-person schooling went well and addressing some teacher shortages at the start of the school year. Now, they’re turning their attention to COVID learning loss and looking for solutions to help address it. We’re seeing inquiries from schools increasing and trust-building with inquiries turning into partnerships and contracts a few weeks or months later. Very little of that’s going to impact Q4, you’ll see Q1 will be the first quarter that we actually have almost all of those go off, along with whatever we sign between now and the end of the year.

Okay. Great. That’s helpful. And I guess I’m wondering what the rough range of penetration rate is relative to purchases after making an inquiry? Just kind of wondering if that trended higher or lower in the quarter?

Our conversion of those inquiries has been relatively constant. These are kind of – and the reason that we showcased this was to show an apples-to-apples comparison of a like type of customer inquiry. We have been able to convert them at the same rates we did during the height of COVID and virtual learning, so there has been no impact.

The one thing I would add is I think consumers adopt online learning at a higher pace, which is leading to higher levels of inquiry and higher bookings. Our ability to convert has remained relatively constant.

Got it. Thank you.

[Operator Instructions] We now have the next question from Ryan MacDonald of Needham & Company. Sorry, Ryan, please go ahead when you are ready.

Hi. Thank you very much. Good to hear from you, Chuck and Jason. I guess the first question I have is around the consumption trends and sort of the conversion from the bookings to consumption. Can you talk about what you are seeing of those bookings converting into consumption as you look into October and November here? And I guess secondly, is there anything that you can do or that you’re looking to do to try to drive consumption or sort of initial engagement with the learner as well? Thanks.

We’ve seen sequential increases in consumption every month since July. People inquire, then they purchase, then those purchases become bookings, and then they start consuming the bookings. We’ve seen consumption pick up each month since then. One interesting thing we saw this year was that until the end of August, there were questions about whether certain schools would go back in person or online. Consequently, students delayed consumption until they were certain they were going back in person. They understood what that meant for homework and exams. The first real in-person tests are happening again, which is a big growth driver and demand for tutoring is increasing. We are constantly trying to improve the experience, make it stickier, drive engagement, and drive consumption. Typically, it is consumed over the course of six months. We expect the significant increase in bookings we saw, $44.5 million, to start generating revenue towards the end of Q4 and into Q1 and Q2.

Very helpful. As a follow-up, I wanted to ask about StarCourses. Great to see the continued growth in the number of courses offered. But I would love to hear about the trends around enrollments for those courses and how that’s translating to converting to paid learners as well on the platform? Thanks.

StarCourses is our free large group class strategy, leveraging celebrity instructors to drive engagement. We’ve become better at targeting specific types of users who purchase disproportionately. We have increased our premium conversion rate by more than 40% year-over-year, and we believe we can still refine that funnel. We think of StarCourses in terms of subject expansion and enrichment, where we’re seeing tremendous progress. Enrichment will be a big growth driver for the company in the years to come. We are investing in StarCourses as a means to not only convert users through that premium strategy but also to bring existing customers back for additional products such as summer camps or after-school programs. The funnel is getting more efficient and has driven significant revenue among existing users who come back for these free products. We will continue to evolve it in 2022, as we believe it’s a winning strategy and consumers appreciate it, building trust and credibility for the platform.

Great. Thanks for the color.

Thank you. As we have no further questions registered. I would like to hand it back over to Chuck for some closing remarks.

Thank you and thank you, everyone for joining me today. I’m 15 years into this journey. I have never been more excited. We are incredibly well positioned for growth. We are experiencing record bookings growth as the school year starts. The past couple of months have validated what we always knew to be true, which is that when outcomes matter, our business accelerates. All of the platform and software-driven capabilities we invested in are now being leveraged in new ways to meet important consumer and institutional needs. We’re very excited to be embarking on this journey as a public company. We feel energized by the opportunity that we have. We feel that we can do immense good in the world and that the business trends will continue to perform at a high level. We feel great about the year ahead. Thank you for joining us today, and we look forward to speaking with many of you individually in the next couple of days.

Thank you very much. That does conclude today’s call. Thank you all again for joining. You may now disconnect your lines.