Prepared remarks
Good afternoon. Thank you for attending Nerdy Inc.'s Quarter 2 2026 Earnings Call. My name is Matthew, and I will be your moderator for today's call. (Operator provided instructions.) I would now like to pass the conference over to your host, T.J. Lynn, Associate General Counsel of Nerdy. You may proceed.
Good afternoon, and thank you for joining us for Nerdy's Second Quarter 2026 Earnings Call. With me are Chuck Cohn, Founder, Chairman and Chief Executive Officer of Nerdy; and Atul Bagga, Chief Financial Officer. Before I turn the call over to Chuck, I'll remind everyone that this discussion will contain 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 shareholder letter announcing Nerdy's second quarter 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 shareholder letter for a reconciliation of these non-GAAP measures. With that, let me turn the call over to Chuck.
Thanks, TJ, and thank you to everyone for joining today's call. Q2 demonstrated continued improvement in Nerdy's operating performance. It also made clear what the company is becoming, a focused consumer learning company built around one connected system for learning, tutoring and progress. Total revenue was $43.3 million with consumer generating $36.5 million or 84% of total revenue. Gross margin expanded 320 basis points to 64.7%. Net loss improved to $6.9 million from $12 million a year ago. Our non-GAAP adjusted EBITDA loss narrowed 68% to $900,000 from $2.7 million a year ago, ahead of the midpoint of our guidance range. Alongside that progress, we have made two decisions that have narrowed the company's focus to its highest return opportunity. We decided to wind down Varsity Tutors for Schools and exit First Tutors, a small legacy tutoring property in the United Kingdom. This decision concentrates our people, capital and product development on the part of Nerdy where we have the strongest brand, the deepest operating experience and the greatest opportunity to build a differentiated learning experience for consumers.
We believe the market opportunity is significantly larger and the potential returns on our investments are substantially higher, but we've been encouraged by the progress in our consumer product and business. Let's move into the second quarter results and our outlook. Consumer revenue was $36.5 million in Q2. ARPM was $366, up 5% year-over-year. Learning memberships were 29.1 thousand at June 30, down 5% year-over-year with the rate of decline moderating for the fourth consecutive quarter. Returning the member base to durable growth remains an important back-to-school objective. The rate of decline has continued to narrow and at the same time, ARPM, gross margin and operating efficiency have all improved. We expect a stronger product experience that I'll describe later to support retention and acquisition as we move through the back-to-school season and into 2027. We're reducing our full year revenue outlook to $168 million to $175 million from $180 million to $190 million.
The reduction is driven by the businesses we decided to exit. Q3 is seasonally our lowest revenue quarter, which includes summer with students out of school, and our business ramps up seasonally very quickly as school starts in late Q3 and into Q4. That seasonality, together with the institutional wind down, is reflected in our Q3 non-GAAP adjusted EBITDA guidance of negative $9 million to negative $6 million, excluding exit costs. Our revised full year non-GAAP adjusted EBITDA outlook is negative $4 million to approximately breakeven, excluding exit costs. Before we move into product, I want to talk for a second about how Nerdy is leveraging a smaller team that's leveraging AI to build more. Total headcount at the end of Q2 was down 34% year-over-year. Our engineering organization was 30% smaller than it was a year ago, but it delivered substantially more product output. We incurred $2 million of AI-related expenses during the quarter, which is up sharply from the prior year, and we're actively moderating and getting more intelligence around that spend.
We used variable AI expense to accelerate that work without adding the permanent headcount that a traditional production model would have required. This is one of the most tangible ways AI is changing Nerdy. It allows for a smaller organization to build faster, operate with fewer fixed costs and direct more resources towards the customer experience. The result is not one isolated product release. Since the beginning of 2026, we've launched or rebuilt almost every piece of the digital learning experience surrounding our live tutoring product and our complementary non-tutoring products. This will be a significant step up in the breadth and quality of our offerings for our customers. Let me walk through some selected consumer product enhancements and why we think it changes the customer experience for the positive. Our library now includes more than 15,000 lessons covering each skill within 220 discrete subjects.
The lessons are available in two formats. The first is a dynamic textbook-style format for self-study purposes. The second is a presentation-style format for tutors to use in live tutoring sessions so that we have prepared structured lessons available for almost every subject. We believe this can up-level the experience across millions of tutoring sessions each year. We extended adaptive diagnostics, quizzes, full-length practice tests, flash cards and the lessons I mentioned to those 200-plus subjects, and we're weaving them together into what we're calling a Study Plan. A Study Plan is a software-based way to track and plan activities over time in pursuit of a goal and can serve as the common system to help drive daily active usage and provide value before, during and after tutoring sessions in pursuit of that long-term goal. The importance of the work is not on the volume of the content alone.
Every lesson, diagnostic, question, quiz, worksheet and activity is organized against the shared academic taxonomy in that subject. The structure allows a diagnostic to identify a skill gap and the study plan to recommend the appropriate next activity and the tutor to use that same information when deciding what a learner should do next. The Study Plan brings together four elements that our product previously handled discretely; the learner's goal, the time available to reach it, the skills already mastered and the combination of lessons, practice, diagnostics and live tutoring that most likely produce progress. The same plan is visible to the student, the tutor and is available both within the student experience, the tutor experience and the live learning platform itself where tutoring occurs. It's now a core part of the learning membership experience and in August, will be extended to 100% of tutoring relationships.
Historically, the tutoring session was often perceived by the customer as the product. And customer interactions could sometimes be quiet in between tutoring sessions. We're building a platform in which the Study Plan highlights all the different ways to learn a subject in between and during the live tutoring sessions and where it can serve as the daily active drumbeat to engagement. Our historical experience from 10-plus million hours of live tutoring and many more practice activities is driving personalization and our approach to how we're sequencing learning. And that combination of AI and human expertise is an example of what we mean when we talk about AI for HI. So that's the product. Let's talk about how it translates into growth. That same product infrastructure can support a more efficient acquisition and activation model. Historically, the vast majority of our customers converted via a telesales-assisted consultative sales process.
Under the new model, learners can register online, better see and experience the platform and purchase the learning membership via self-service checkout funnel. We believe this modern approach creates a substantially lower cost, more scalable customer acquisition model while improving the customer experience. In closing, we're entering this back-to-school season as a more focused, lean company with higher-quality products and a more efficient operating model, which we believe positions us well for the year ahead. With that, I'll turn the call over to Atul to discuss the financials in more detail. Atul?
Thanks, Chuck, and good afternoon, everyone. In the second quarter, revenue and non-GAAP adjusted EBITDA were both within our guidance ranges, and we continue to make progress on our cost structure, with free cash flow improving 24% year-over-year. As I said last quarter, my mandate is to get Nerdy to free cash flow positive while investing with discipline in the areas that drive member growth. And this quarter's result, together with the actions Chuck just outlined, move us further in that direction. Revenue in the quarter was $43.3 million, within our guidance range of $42 million to $44 million and down 4% year-over-year, driven by both consumer and institutional revenue. Consumer revenue was $36.5 million, representing 84% of total company's revenue. Average revenue per month or ARPM was $366, up 5% year-over-year. As a reminder, we began lapping the price increases enacted in February 2025 during this quarter, which moderated ARPM growth as expected.
As of June 30, active members were 29.1 thousand, a decrease of 5% year-over-year. This rate of decline has continued to narrow sequentially for the last four consecutive quarters. And by the end of 2026, we expect to return to a positive active member growth resulting from the ongoing initiatives to improve retention and a more efficient customer acquisition. Gross margin was 64.7%, an expansion of 320 basis points compared to Q2 of 2025, driven by lower amortization of capitalized internal use software following the abandonment charges in Q4 2025, along with lower expert costs. Moving to operating expenses. Sales and marketing expenses were $11.5 million, a decrease of 15% year-over-year, driven by AI-enabled productivity gains and reduced investment in our institutional business. General and administrative expenses were $22.9 million, down 14% year-over-year. G&A included product development costs of $9.7 million compared to $10.7 million in the same period last year, mostly from the lower headcount cost, offset by higher AI spend during the quarter.
Second quarter 2026 AI spend was $2 million, up from $0.7 million in Q1 and $0.4 million in the same quarter last year. Increase in AI spend is driven by our push to have every team leverage AI and AI adoption within Nerdy has moved quickly. Essentially, all of our team members now use AI tools on a daily basis to solve problems that used to require additional headcount or external software solutions. The return is visible in our results. Product velocity is highest in the company's history. Headcount is down 34% year-over-year and productivity improved across every function, benefits that flow directly into the G&A improvement I just described. We expect AI usage to continue to increase, while efficiency gains in how we deploy AI are expected to keep our AI spend at or below current level. In the second quarter, non-GAAP adjusted EBITDA was a loss of $0.9 million, within our guidance range of negative $2 million to breakeven.
To put that in context, a year ago this quarter, we posted a non-GAAP adjusted EBITDA loss of $2.7 million. That's an improvement of $1.8 million or 68% year-over-year. Adjusted EBITDA performance relative to our guidance was driven by lower marketing spend, reduced variable staffing costs and G&A controls, partially offset by higher AI spend. Moving to liquidity and capital resources. We ended the quarter with $38.4 million in cash and cash equivalents. Free cash flow was negative $6.3 million compared to negative $8.2 million in the same period in 2025 or an improvement of 24% despite lower revenue. Turning to our business outlook. Before I get to the numbers, let me set some context. As Chuck mentioned, we have made two strategic decisions, both aimed at sharpening our focus on the core business and directing our capital and management attention to where they earn the highest long-term return.
First, we exited First Tutors, a small tutoring business in the United Kingdom. Second, we are shutting down Varsity Tutors for Schools or VT4S. Together, these decisions simplify the company and direct our capital towards our highest return assets. We expect to incur approximately $2 million to $4 million in exit-related costs, mostly in Q3. With the VT4S exit, we are lowering our annual fixed cost run rate by approximately $11 million. Excluding this exit, our full year outlook is largely unchanged from previously announced revenue, non-GAAP adjusted EBITDA and cash guidance. For the third quarter of 2026, we expect revenue in the range of $32 million to $35 million. For the full year of 2026, we expect revenue in the range of $168 million to $175 million compared to our prior range of $180 million to $190 million. Turning to adjusted EBITDA guidance. For the third quarter of 2026, we expect non-GAAP adjusted EBITDA in the range of negative $9 million to negative $6 million, excluding the exit costs.
For the full year of 2026, we expect non-GAAP adjusted EBITDA in the range of negative $4 million to approximately breakeven compared to our prior outlook of approximately breakeven. As a reminder, the third quarter is seasonally our lowest revenue quarter with back-to-school cohorts converting into revenue late in third quarter and into the fourth. Now to the cash impact of the exit. We now expect to end the year with approximately $30 million to $32 million in cash and cash equivalents, inclusive of $20 million drawn on our term loan compared to our prior expectation of $40 million to $45 million. The change is due to timing of VT4S collections and expected cost of wind down. VT4S contracts are generally annual in nature, paid in advance and recognized as revenue over the following 12 months. Exiting this business ahead of the peak booking period reduces the cash collections and year-end cash balance assumptions that were embedded in our prior outlook.
To be clear, the year-end cash balance change is not a reflection of the change economics of the consumer business, rather the working capital cycle of the business we are exiting. Based on our current operating plan, we expect existing liquidity to fund the company through free cash flow breakeven. To close, revenue and non-GAAP adjusted EBITDA guidance, a 68% improvement in non-GAAP adjusted EBITDA loss and a free cash flow improvement 24% year-over-year. My mandate has not changed. Get Nerdy to free cash flow positive while investing with discipline in the areas that drive member growth. A simpler business, a leaner cost structure and capital behind the best opportunities is how we get there. With that, I will turn it over to the operator for Q&A. Operator?
Questions and answers
(Operator provided instructions.) Your first question comes from the line of Greg Gibas with Northland Securities.
Maybe I wanted to start with if you could elaborate on kind of the factors, if you could discuss those that went into your decision to wind down Varsity Tutors for Schools and perhaps what the net impact on cost or profitability once it's complete, you expect to see?
Sure. Thanks, Greg, and good question. So we continue to get more and more excited about the consumer product and the progress we make there and our ability to thread together all these different modalities of learning that allow for us to extend beyond tutoring and for us to have much deeper, much more holistic relationships with learners that span subjects, that span product modalities, that span semesters. And we're excited about the momentum that we see, the engagements and then our ability to continue to improve the product. And there's an opportunity to pull forward that product roadmap and go faster. And at the same time, we're investing in Varsity Tutors for Schools, which is a low single-digit percentage of the overall business. There's complexity associated with it. The school funding environment has been challenged for several years. And as we kind of looked at the relative opportunity, we're just way more excited about consumer. We think we get way higher ROI on each dollar of capital invested. And we think we can pull forward our consumer roadmap, and it also helps with the path to permanent profitability and as part of the kind of focus that we've said we're putting there. And so that was the key sort of element behind the decision. And frankly, we're excited about our ability to get after consumer and the progress we're already seeing.
So on profitability, that business is profitable. And we've talked about cost out. The full year annualized impact of the cost out is about $11 million. And this is a fixed cost that we have taken out. We have also talked about the reduction in revenue that's coming as a result of VT4S and First Tutors exit. So you can extrapolate and you can see the profitability of the business. But I would say the bigger issue here, again, is going back to what Chuck mentioned, it's about getting our focus behind where we think the biggest opportunities are and where we see the more leverage in our efforts and our resources.
Got it. That's helpful. As it relates to guidance, maybe specifically within the consumer business, what has changed with respect to your expectations there? And maybe what you most attribute the moderating decline in Learning Memberships to?
So Learning Membership is very much coming in as per our operating plan. We have not seen any material changes compared to our original plan. The change in our guidance is purely on the basis of the exits that we talked about from First Tutors and from VT4S businesses.
And we certainly don't endeavor to moderate the decline. The goal here is to significantly accelerate growth, which we are excited about the product's ability to fundamentally change how people interact with the different modalities and then the extent to which we completely rebuilt and expanded upon all the available content across hundreds of different subjects. So there's an opportunity to really change the trajectory of the consumer relationship. That's not implied in our guide, but it's something that we're working hard to effectuate with the product.
There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.