Nerdy Inc. (NRDY) Q3 2026 Earnings Call Transcript

And we told you that we expected AI spend to remain at or below second quarter level. In the third quarter, AI spend was $1.5 million, down from $2 million in the second quarter. More important, our September run rate of AI spend was more than 60% below its July peak. All driven by strong governance and model optimization and without reducing employee adoption of AI. In the third quarter, non-GAAP adjusted EBITDA loss was $5.7 million, ahead of our guidance range of negative 9 to negative 6 million dollars. To put that in context, a year ago this quarter, we posted a non-GAAP adjusted EBITDA loss of $10.2 million. That's an improvement of $4.5 million, or 44%, year-over-year, and more than 1,000 basis points of margin expansion. Non-GAAP adjusted EBITDA performance related to our guidance was driven by lower sales staffing cost, lower AI cost, and disciplined G&A management. Non-GAAP free cash flow was negative $5.9 million. Compared to negative $4.1 million in the same period in 2025. As we discussed last quarter, VT4S contracts are generally paid in advance. So exiting ahead of the peak season would reduce our cash collection this year. That played out as we expected. Two items related to the wind down drove the year-over-year change. Absence of approximately $5.1 million of prepaid VT4S bookings collected in the prior year quarter, and $1.2 million of exit-related payments. Excluding these items, our free cash flow improved by approximately $4.5 million year-over-year. Moving to liquidity and capital resources. On September 28th... We borrowed the remaining $10 million available under the first branch of our term loan, bringing the total borrowings to $30 million. We ended the quarter with $42.5 million in cash and cash equivalents. Turning to our business outlook, today we are introducing fourth quarter 2026 The guidance reflects lower newer client acquisitions in the third quarter, which carries into a smaller active member base and lower consumer revenue in the fourth quarter. Continued cost discipline offsets part of the revenue impact on non-GAAP adjusted EBITDA. Our fourth quarter outlook reflects the timing of product enhancements and customer acquisitions initiatives I described earlier. Some of these features are live, and the remainder will ship later in the quarter. As they roll out, we expect the year-over-year gap in new client acquisition to narrow through the fourth quarter. Moving to revenue guidance, for the fourth quarter of 2026, we expect revenue in the range of $37 to $39 million. Turning to adjusted EBITDA guidance, for the fourth quarter of 2026, We expect non-GAAP-adjusted EBITDA to be approximately break-even. We expect to end the year with $35 to $37 million of cash, inclusive of $30 million drawn on our term loan. Based on our current operating plan, we expect existing liquidity to fund the company through free cash flow break-even. To close, revenue within guidance, non-GAAP adjusted EBITDA ahead of the top end of our guidance, and a cost structure that is meaningfully leaner and a total headcount down 44%. Our priority now is returning active members to growth, and the product and customer acquisition releases shipping this quarter are central to that. My mandate has not changed. Get nerdy to free cash flow positive while investing with discipline in areas that drive member growth. With that, I'll turn it over to operator for Q&A. Operator?

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Greg Gibbous with Northland Securities. Your line is now open. Please go ahead. Hey, good afternoon, Chuck and Atul.

Thanks for taking the question. You know, you commented on achieving an improvement in retention year over year in the quarter, but new client acquisition was lower, and I was just wondering if you could maybe expand on the product enhancements and the customer acquisition initiatives that you're kind of referring to that maybe impacted that.

Sure. Thanks, Greg. Good question. So yeah, look, there's an incredibly robust set of back-to-school deliverables we had, and many of them were contingent upon one another. So we launched an entirely reimagined e-commerce experience, a registration experience. So think register as a new user as opposed to submit a lead for information, which is a big deviation from our historical process. And we launched a new student experience. And we also, you know, changed payment providers from PayPal to Stripe. And there were several other kind of concurrent launches that were incredibly helpful as it relates to allowing us to test a whole host of things that we're very excited to be leaning into as it relates to new products and are very enabling. But they also were contingent upon one another. And so the sort of stacked different deliverables ended up causing us to have to delay. It's effectively one delay that impacted numerous things that were sequenced. And thus, some of those things are just hitting a little bit later than expected. But we're pretty excited about what I think is going to be a pretty dramatic improvement to the customer experience across all fronts. Taking the messaging-first approach as an example, that's something that really lends itself to daily active use and to customers doing self-service and effectively solving problems that historically would have gone to customer service and being able to engage from a daily active practice perspective. That we think can drive real habits and retention in a way that we haven't really been able to do before. So these are some of the most enabling and strategic. Product deliverables we've ever had. They just launched late. And, you know, we're excited about what that can mean for the future. So kind of early days as it relates to that pulling through to inflecting the overall business. On the sales side, I'll let Atul speak to this as well. You know, those product launches, many of them were oriented around platform efficiency in e-commerce, which then led to us under hiring in reality because of that delay on the sales side. So our sort of SILs was capped as it relates to headcount capacity. That's not something we would expect to anticipate in the future, given that these platform features are now enabled and will allow for us to handle more volume more efficiently.

Got it. That's helpful, Chuck. And, you know, as a follow-up, I guess, Atul, I'm wondering if you could just, if you're willing to maybe provide an updated, you know, I know you're not maybe guiding for this, but just how you're thinking about your outlook for free cash till breakeven, right? I mean, it sounds like you had the liquidity to get there, but. What needs to happen, I guess? You know, would you say that additional improvements on the cost side are needed, or, you know, is it really just returning to member growth? Thanks.

Thanks, Greg. That's a good question. And on the cost side, we feel pretty good about where we are. We will continue to look at opportunities, how we can run the platform more efficient, but the big... Job I had a first is getting the customer acquisition. We know the product resonates well with the customers. As we talked about our retention, we are seeing sustained improvement. You look at our retention at 37 days, 60 days, 90 days, and in all these Different KPIs. We see sustained improvement in retention. So customers who are already using the product, they are using it more. As we talked about the gross margin impact, we are seeing the customers using product more. We are seeing customers retaining longer. The area that we have work to do is the customer acquisition. And the things that Chuck talked about, customer acquisition, those are the things that is going to help us. And as we improve our customer acquisition, as we continue to enhance the product quality, engagement, and result in higher retention, that gets us to the path of getting to cash break even.

Got it. Appreciate it. Thanks, guys.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.