Be leery of a company that doesn't disclose their churn rate

Today, I’m digging into Nerdy Inc.

Nerdy runs Varsity Tutors, and they’re pushing a live plus AI learning model that blends real tutors with algorithmic matching, automated workflows, and AI-enhanced session support.

(Side note: I bought the domain NerdOut.com and I've been building out a linked note-taking app. Linked means notes are 1) linked to other notes as the primary method of organization and 2) linked to others via collaboration.

Think of it has a Notion-lite. But it's going to be free.

The method of monetization will be a course feature that I'm adding that will allow you to "nerd out" on a variety of topics while having the course content/notes live in your notes app. So Nerdy is especially interesting to me given what they do and their name! Nerd Out will launch in Q1 of 2026.)

Back to Nerdy, the elephant in the room with them is the impact that AI is having on their business.**

The company makes a big deal of their success in pushing subscriptions. Given that, I expected to see some public disclosures of customer churn. But I couldn't find it any mention of it. Talk about a red flag.

But I did find this in their Q3 2025 earnings accouncement:

"Our Active Member count as of September 30, 2025 was lower when compared to September 30, 2024 primarily due to operational challenges that we are actively addressing in part through the appointment of a new Chief Operating Officer to drive enhanced operational execution and systematic process improvements."

Not good...

Here are a few more quick hits from the report:

• They appear to have to spend a ton of money on sales and marketing, especially given the headwinds from AI in tutoring and education. When AI is eating the low end of the market, you have to fight harder and pay more to win customers who still want live humans.

• Even with that massive spend, they’re not profitable. Operating margins are still deep in the red.

• But credit where it’s due: their gross margins are surprisingly strong for a labor heavy business. When live tutors sit directly in COGS and you can still post margins north of 60%, that says pricing power exists.

All-in-all, I still think there are opportunities for curated and live education even with the AI explosion. With that said, this is another one of those SPAC companies that shouldn't really be public.

Finding their niche in today's AI era would be much easier as a private business. That's exactly what I'll be doing with Nerd Out!

With that, I'll see you tomorrow.

Nick

The 30,000-Foot View

Nerdy Inc runs a two sided marketplace that connects learners with subject matter experts for live tutoring, small group sessions, and academic support. The model is built around monthly Learning Memberships for consumers along with enterprise contracts sold to K 12 districts.

• Revenue mix: Consumer: 81%, Institutional: 18%, Other: 1%

• Key metrics

  • Market cap: about $110.6M

  • TTM revenue: $177.9M

  • TTM gross margin: 62.2%

  • TTM net loss: $62.6M

  • Employees: about 600

  • Industry: Edtech and online tutoring

Company History

• 2007: Varsity Tutors founded by Chuck Cohn

• 2016 to 2020: Expansion into online delivery, scaling subjects and formats

• 2021: Goes public via SPAC merger with TPG Pace Tech Opportunities, rebrands as Nerdy Inc

• 2023 to 2024: Full pivot to Learning Memberships and elimination of legacy packaged tutoring

• 2024: Institutional line grows but remains tied to public school funding

• 2025: Launch of Live Learning Platform 2.0 and new COO

• Nov 2025: Adds 50 million term loan for liquidity

Show Me the Money

Stand Out Financial Features

• A money incinerator?

• Crazy high Sales and Marketing expense of $71.6M in 2024

• Learning Memberships accounted for 89% of revenue in Q3 2025

• Liquidity remains tight with declining cash balances and new debt drawn

Financial Data

The N.O.O.B. Nine — Competitive Powers

The Nerd Out on Business Nine is made up of Hamliton Helmer's famous "7 Powers" of competitive advantage (Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resource, and Process Power) combined with two of my own (Data Flywheel and Distribution Advantage).

Average Score: 2.6/5 - Useful advantages exist but no entrenched moat.

Memorable Marketing

Nerdy focuses on premium positioning, performance marketing, and strong CRM. It blends direct to consumer advertising with district level selling in the education market.

Key Campaigns

Learning Memberships Roll Out (2023 to 2025)

• Channels: paid search, email automation, pricing tests

• Hook: all in subscription model

• Result: ARPM increased 24 percent year over year

Varsity Tutors for Schools Pilots (2023 to 2025)

• Channels: outbound sales, webinars

• Hook: high dosage tutoring for districts

• Result: Institutional revenue at 10 percent of total in Q3 2025

AI Native Platform Launch (2025)

• Channels: PR and owned media

• Hook: upgraded live learning platform with AI intelligence

• Result: strengthened product story and helped shift toward profitability narrative

Tactical Takeaways

• Shift services into monthly memberships for predictable revenue.

• Use product improvements as marketing events.

• Let CRM do the heavy lifting for upgrades and retention.

• Develop pilot programs that can scale into larger contracts.

AI Uses & Opportunities

Current Uses

• AI powered matching of learners to tutors

• AI assisted operations to reduce cost

• AI enriched session support inside the Live Learning Platform 2.0

Future Opportunities

• Automated onboarding that accelerates time to first session

• Real time incentive engine for tutor pay

• Outcome linked pricing for districts

• AI driven QA for session fidelity and tutor coaching

Bumps in the Road

• Persistent operating losses with TTM operating margin around negative 36 percent

• Dependence on slow moving public school funding

• Labor model exposure due to contractor classification risk

• Liquidity constraints that required a new term loan

• Active Member declines and operational challenges leading to leadership changes

Your Swipe File

• This newsletter isn't about investing, but always try to understand incentives when making an investment. SPACs lousy, performance, on average can at least be partially attributed to risk-free equity for this sponsor/promoter of the SPAC.

• Recurring pricing isn't the holy grail if churn is high. People are getting tired of subscriptions (Nerd Out courses will be one-time purchases).

• Publicly emphasize product velocity and customer visible metrics.

• Use automation to reduce customer acquisition and support costs.

• If you're using contractors, prioritize compliance and labor classification accuracy early.