NRDY - NYSE

Good afternoon. Thank you for attending Nerdy, Inc. Q3 2025 Earnings Call. My name is Makayia, and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to your host, TJ Lynn, Associate General Counsel of Nerdy. You may proceed.

Good afternoon, and thank you for joining us for Nerdy's Third Quarter 2025 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 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 third 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 reconciliations 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. As we close out the third quarter of 2025, I want to start by acknowledging some challenges we faced this back-to-school season. Our starting point heading into the fourth quarter was behind where we are targeting with delays in key product launches delaying our anticipated inflection in growth and profitability by a quarter. These setbacks, including some operational challenges, stem from the growing strain on our underlying systems, which were built over years to support an expanding array of products from live scheduled video tutoring to instant on-demand video tutoring to AI tools to diagnostics and more, and they span both our Consumer and Institutional offerings. As we've scaled the sprawl of these systems created technical debt that slowed our product velocity, leading to slower time lines and launches, this new school year, several key initiatives were impacted as product launches were delayed, which culminated in us not fully capitalizing on back-to-school peak. These disparate technology systems led to a disconnected experience across product modalities, including tutoring, livestream classes, AI tools and our practice and self-study tools, each in a different user interface. This slowdown year-to-date and product delays in the back-to-school period in particular, prompted a period of deep introspection for me. This summer, we started a few new vendor relationships with early-stage enterprise software start-ups. Their ability to build net new features, almost entire products in a week or two was 10x faster than what I had ever witnessed before. With brand-new code bases defaulting to AI coding versus just AI-assisted coding and no preconceived notions of what was possible or how to build software, they were able to build at 10x the pace of what we've seen before. That experience inspired me to rethink every aspect of how we build products and software. I dove into these root technical issues myself, working closely with a small group to rethink our platform for the ground up in this AI native era. In effect, it required replatforming my own skill set and learning to build software natively with AI and it represented a transition from being a nontechnical founder to a technical founder made possible with and thanks to extensive AI augmentation. Our platform is now undergoing the same replatforming and metamorphosis. What I realized is that to truly harness AI's potential, enhancing every aspect of live human tutoring, we needed to shed legacy constraints entirely. I've personally led a small group that worked day and night to rebuild key aspects of our core infrastructure from scratch using AI-assisted software development and preserving essential business logic and data while migrating to modern decoupled systems. As we proved out this new way of working and building, we enlisted our entire product and engineering org and have made significant progress. We are now targeting having nearly 100% of our traffic on new code bases written by AI by the end of November. What's really exciting is that it's already unlocking customer-facing innovation at a pace we've never seen before. And by the end of the year, we anticipate our back-end legacy systems will be fully decoupled, allowing us to integrate AI much more deeply across the platform and launch new interactive context-aware experiences with a fraction of the effort. This reinvention isn't abstract. It's already delivering tangible progress. For instance, our 2.0 version of our flagship Live Learning Platform video tutoring product launched with a rollout from September to October, achieving a reduction of approximately 50% in audio/video error rates and nearly 40% cost savings per session, along with very positive tutor feedback and very positive student feedback on usability and quality. We're also rolling out brand-new completely rethought new student and tutor experiences with October launches of entirely new and unified experiences that bring together all of our products into a cohesive interface. Products like our new AI Practice Hub featured in our last shareholder letter are now fully integrated into both the student experience and our new Live Learning Platform. This enables content and AI tools to enhance the entire customer journey and fully leverages the personalization and enhancements that AI now makes possible. Other AI-driven wins include better site conversion on our new homepage as well as a significant drop in the tutor replacement rate via new AI vetting of tutors with interactive conversational AI interviews that have automated 80% of the tutor application review. That has boosted new tutor quality and the quality of matches, which we believe will lead to meaningful retention improvements. We're collapsing disparate experiences into a unified cohesive platform that supports discovery across multiple subjects, multiple modalities and multiple academic years. For example, our new learner experience not only integrates Practice Hub directly into the core experience, but it also makes it easier to discover and enroll in live classes as well as find and use diagnostics and other self-study tools. We've seen early indicators that this drives higher engagement. Historically, when users adopt multi-subject or multimodality learning, retention improves meaningfully. Since launch, we've seen more than 50% growth in the consumption of self-study tools and content with emerging positive trends on repeat user engagement. With the new multi-format, multi-subject integrated experience, we believe we can extend the retention improvements that we're currently seeing in the first month for new customers, which are up meaningfully year-over-year into later stages of the customer life cycle. In the fourth quarter, our focus will extend beyond the first month activation and onboarding and we'll focus extensively on new product and new subject discovery for customers. As one small example of an improvement that's easy now that was hard in the past, we look forward to launching our first version of gamification, which we believe could take user delight to a whole new level. Our Live+ AI approach remains central to how we are enhancing the overall experience. That's where human tutors augmented by AI create an offering and drive outcomes that neither could achieve alone. This was underscored by a recent Carnegie Mellon study that showed human tutoring augmented by AI drove a much higher level of student outcomes than AI alone or humans alone. That reality is a key reason why the idea of AI-enhanced human tutoring was elevated to the highest levels of education policy, and it's been exciting to see the AI education effort kick off in September and a White House event I was fortunate to attend. Our multiyear partnership with Carnegie Mellon's Metals Applied Learning Sciences program has been transformative, yielding cutting-edge research and AI innovation that is now poised to redefine online tutoring. By applying advanced discourse analysis, large language models and other AI techniques to session transcripts and video feeds, we've uncovered key insights into effective tutoring dynamics that demonstrate the clear advantages of one-on-one interactions over traditional methods. It's also allowed for us to identify actionable strategies to enhance session quality and mitigate issues like inconsistent human performance. We're now operationalizing these findings to optimize experiences before, during and after tutoring sessions. We're delivering tailored insights to students and tutors post session and pairing the insights we surfaced with automated actions like agentic practice problems and more that enhance the overall experience for users on the platform. We anticipate these enhancements will drive substantial gains and retention over the coming months and years. To execute this vision and improve our overall execution, we've strengthened our operational leadership. In August, we appointed a new Chief Operating Officer with proven experience scaling operations and marketplaces and concurrently hired 13 director and senior director level operational leaders across key functions in the company. This is centralized control, up-leveled our talent across all operational leadership roles at the top several layers of the company and accelerated process improvements from software-driven efficiencies to better demand forecasting. As one such example, AI and sales is playing a key role here with real-time heads-up displays, agent prompting and call scoring having lifted conversion by more than 10%. These improvements have the potential to decrease overall sales and customer acquisition costs in the near future. On the Institutional side, our efforts to align our products with established intervention frameworks that schools rely upon like MTSS and RTI is resonating. Our new end-to-end Varsity Tutors for Schools experience launches towards the end of the quarter and will better align to how schools operate, make it easier for school leaders to prescribe interventions and act upon data and ultimately be a more sellable product for district-wide sales. In the third quarter, we continued our path to profitability, delivering 960 basis points improvement in non-GAAP adjusted EBITDA margin year-over-year, driven by improved operating efficiency and cost reductions across every P&L line item. AI-enabled productivity improvements, coupled with new software-driven processes are substantially improving our operations and are allowing us to do more with less. For example, our headcount was down by approximately 27% year-over-year as compared to the third quarter of last year. Recent advancements in our application of AI that are made possible by a new and more flexible platform provide us the opportunity to move faster and drive further levels of productivity and operating leverage while improving the customer experience as we continue to scale our business. Thank you for your continued support. We look forward to showing you in the quarters ahead what we'll be able to do with a new modern tech stack, and evolved approach to product development and liberated from tech debt. With that, I'll turn the call over to Jason to discuss the financials in more detail. Jason?

Thanks, Chuck, and good afternoon, everyone. Third quarter revenue was in line with expectations, delivering revenue of $37 million within our guidance range of $37 million to $40 million, which represented a decrease of 1% year-over-year from $37.5 million during the same period in 2024. And more importantly, a 1,000 basis point improvement in growth rates sequentially on a year-over-year basis versus the second quarter, putting us on a path to return to growth in the near term. Revenue decreased slightly when compared to the prior year period due to lower Institutional revenue, partially offset by higher Consumer revenue. Within Consumer revenue, Learning membership revenue increased 5% year-over-year. This was partially offset by a specific state-funded Consumer revenue program of $900,000 in Q3 2024 that did not recur in 2025. The current year period was positively impacted by higher ARPM in our Consumer business as a result of the mix shift to higher frequency Learning Memberships and price increases enacted during the first quarter of 2025. These changes are coupled with higher retention in newer cohorts due primarily to improvements in the user experience and new Expert incentives. Revenue recognized in the third quarter from Learning Memberships was $33 million and represented 89% of total company revenue. As of September 30, ARPM was $374, which represented a 24% increase year-over-year, and there were 34.3 thousand Active Members. Our Active Member count as of September 30 was lower when compared to the prior year and our expectations for this back-to-school season. This was primarily due to operational challenges that we're actively addressing in part through the appointment of a new COO to drive enhanced operational execution and systematic process improvements. We are also rolling out new student and tutor platform user experiences to all users in the fourth quarter that we believe will reaccelerate growth. Our Institutional business delivered revenue of $3.7 million and represented 10% of total company revenue during the third quarter. Varsity Tutors for Schools executed 44 contracts, yielding quarterly bookings of $6.8 million, which represented a decrease of 20% year-over-year. In our Institutional business, revenues and bookings continue to be impacted by federal and state funding delays and the related impact to high-dosage tutoring contracting and program start dates. We believe the combination of our Live+ AI capabilities and our high-dosage tutoring offerings are unique in today's K-12 market. And when our new end-to-end Varsity Tutors for Schools experience launches toward the end of the quarter on a new code base, we will be able to offset any funding uncertainty and return to growth. For the second consecutive quarter, gross margin improved sequentially quarter-over-quarter as margins increased approximately 140 basis points when compared to the second quarter of 2025. This gross margin expansion was primarily a result of price increases for new Consumer customers enacted during the first quarter of 2025. As mentioned on our prior two earnings calls, the year-over-year decreases in gross margin were primarily due to investments in our partnerships with Experts through pay and incentives. Following the adoption of these incentives, we continue to see faster time to the first session, more sessions in the first 30 days, lower tutor replacement rates and higher retention, all of which should continue to strengthen our business over the long term. We expect sequential quarterly gross margin improvement to continue into the fourth quarter of 2025 as the mix of our Consumer revenues continue to shift into higher frequency and higher-priced Learning Memberships. And as we are able to better optimize tutoring incentives now made possible due to improvements in the new tutor experience platform. Sales and marketing expenses for the quarter on a GAAP basis were $16.6 million, a decrease of $3.7 million from $20.3 million in the same period last year. These decreases in sales and marketing expenses were driven by Consumer marketing efficiency gains, coupled with the moderation of our investment in Institutional business given near-term funding uncertainties. General and administrative expenses for the quarter on a GAAP basis were $25.8 million, a decrease of $6 million from $31.8 million in the same period last year. Included in G&A costs were product and development costs of $10.3 million. AI-enabled productivity improvements, coupled with new software-driven processes and systems implementations, headcount reductions and other cost reduction efforts have enabled us to generate operating efficiencies and remove significant costs from the business. Recent advances in our application of AI across the entire tech stack provide us with the opportunity to move faster and drive further levels of productivity and operating leverage while improving both the customer experience and operational consistency as we scale our business. In the third quarter, we delivered a 960 basis point improvement in non-GAAP adjusted EBITDA margin year-over-year, driven by improved operating efficiency and cost reductions across every P&L line item. Non-GAAP adjusted EBITDA loss of $10.2 million for the three months ended September 30 beat our guidance of negative $11 million to negative $13 million and compared to a non-GAAP adjusted EBITDA loss of $14 million in the prior year period. Our third quarter performance reinforces our confidence in the near-term path to profitability. AI-enabled productivity improvements, coupled with new software-driven processes and systems are substantially improving our operations and allowing us to reduce headcount, which was down by approximately 27% year-over-year at the end of the third quarter. We believe these results, coupled with continued improvements enacted in the fourth quarter, keep us on the path to profitability on a non-GAAP adjusted EBITDA basis in the near term. Moving to liquidity and capital resources. As of September 30, the company's principal sources of liquidity were cash and cash equivalents of $32.7 million. Today, we are announcing that on November 3, we entered into a loan agreement that provides for a term loan in an aggregate principal amount of up to $50 million, which enhances our financial flexibility as we work to become profitable on a non-GAAP adjusted EBITDA basis in the near term while avoiding equity dilution. On November 3, we borrowed $20 million under the term loan. The proceeds will be used for working capital and other general corporate purposes. With our cash on hand and the funding available under the term loan, we believe we have ample liquidity to fund the business and pursue growth initiatives. Turning to our business outlook. Today, we are introducing fourth quarter guidance and updating full year guidance. Fourth quarter revenue guidance reflects higher sequential quarterly revenues in both our Consumer and Institutional businesses when K-12 schools and universities are in session. For the fourth quarter and full year, we expect Consumer revenue will be impacted by the decline in the number of Active Members. This will be partially offset by year-over-year improvements in ARPM due to the mix shift to higher frequency Learning Memberships, coupled with price increases and retention due to improvements to the user experience and investments in tutor pay and incentives. In our Institutional business, revenues are impacted by federal and state funding delays and the related impact to high-dosage tutoring contracting and program start dates. For the fourth quarter of 2025, we expect revenue in the range of $45 million to $47 million. For the full year, we expect revenue in the range of $175 million to $177 million. Turning to adjusted EBITDA guidance. For the fourth quarter and full year, adjusted EBITDA improvements year-over-year reflect Consumer and Institutional marketing efficiency improvements, coupled with the benefits from AI-enabled productivity and operating leverage improvements and diligent G&A cost control. Offsetting these improvements are investments in Expert pay rates and incentives, which are leading to higher engagement and retention. For the fourth quarter of 2025, we expect non-GAAP adjusted EBITDA loss in the range of $2 million to breakeven. For the full year, we expect a non-GAAP adjusted EBITDA loss in the range of $19 million to $21 million. We expect to end the year with $45 million to $48 million in cash, inclusive of the $20 million funded under the new term loan, which we believe provides us with ample liquidity. In closing, thank you again for your time and for your continued interest in our company. With that, I'll turn it over to the operator for Q&A. Operator?

[Operator Instructions] At this time, I would like to pass the call over to our first questioner, Ross Sandler with Barclays.

Chuck, the new management structure with the COO and 13 new team leads, how is that going to impact the kind of speed of execution for the company? And how are you guys dividing the responsibilities? And then second question is, with the new tech stack, you're obviously going to see faster product velocity. How do you expect that to impact like the KPIs of the business? Do we expect to see kind of faster member growth or better retention next year? Any color on how you're thinking about benefits from the tech stack?

Thanks, Ross. Yes. So we're very excited about John joining us as our Chief Operating Officer, and he spent a decade at Amazon and has deep experience scaling complicated marketplace businesses and implementing product and technology in such a way as to drive significant operational improvements. And we're going to be kind of collapsing layers of structure, product engineering ops, all roll into him. We generally -- I think centralizing control, having more simplified operating structures allows for us to make sure that the intersection of our investments in product engineering, how those ultimately pull through into operations are much more closely linked. I think that's something that we're excited about. But importantly, like we have made tremendous progress over the course of the quarter, like tremendous progress. And so over the course of, call it, 12 years, significant technology debt built up that eventually just slowed the rate at which we could test and launch new experiences. And what you can see and what is visualized both on our website and you can see for yourself also in the shareholder letter is a dramatic increase in product velocity and innovation. And so we're super, super excited about how much faster we're going to be able to launch new products that are much more deeply integrated, much more unified and ultimately better for the customer. And that's something that we're -- I think you will see starting to engagement metrics. We're going to be able to increase the velocity of testing on the external website after going many years with very little changing on our external public-facing website. You can now see the velocity in which we're launching new homepages, the new tutor galleries, the new practice hub type experiences. And so you should expect to see that continue. That wasn't possible until quite recently. It sort of got to a point, I think, in the quarter where there were multiple initiatives that sort of sold out longer-than-expected ride at school launch, which was a bummer, but it also forced us to really rethink the entire experience. And now thanks to a few breakthroughs, we're to the point where our teams are moving at a dramatically faster pace than was the case before. And I think that will impact both engagement metrics, but also positively impact revenue and also allow us to remove costs faster.

Ross, this is Jason. The only thing I'd add is with the new in-line experience significantly reduces friction, enhances discoverability, and we would expect improvements to multimodality for students using multiple learning opportunities across the site, multi-subject and multi-student within the same families, coupled with higher retention as these features roll out to the entire customer base in the fourth quarter.

The next question comes from the line of Jason Tilchen with Canaccord Energy.

Wondering, in the prepared remarks you mentioned the product delays pushing out the sort of growth inflection by a quarter. You also mentioned that some of these issues caused you to miss the back-to-school season. I was just hoping you could maybe talk a little bit to the timing dynamic here and so I can better understand sort of what's giving you confidence that there won't be sort of a continued drag from missing that peak period as we move throughout the school year.

So the first thing should be that we've launched entirely new experiences across almost the entire website at this point. So by the end of the month, we're targeting nearly 100% of traffic will be on brand-new code bases, and you will be able to see that for yourself. So it will be our beautiful, what we're calling Luminex design style that kind of permeates the site, unifies the theme, and that is all on a modern react code base. And so that alone, frankly, has already accelerated our innovation capacity pretty significantly, separating it from many of our historical systems. Separately, though, we're just seeing sequential improvements in a bunch of different underlying metrics, including MRR growth. So some of those relate to product velocity, some of those relate to simplifying systems and centralizing how we're operating. But I think we're feeling positive about all of the trends as we sort of get deeper and deeper into the school year.

Great. That's really helpful. And then I was hoping maybe you could also just talk a little bit about some of the underlying issues of some of the funding delays, if it's purely related to sort of the government shutdown or it seems like given the timing, there's probably some other factors going on there. And then maybe also if you could share a little bit more about some of the benefits that you expect to be derived from the new end-to-end Varstity Tutors for Schools experience.

Yes. I'd say on Varsity Tutors for Schools, it's kind of what you're seeing in the market, just delays funding from federal and state levels to school districts is impacting the timing of bookings and then that on a downstream basis impacting the timing of program start launches. We still remain confident in our product, long-term potential of the market, the level of spend within Varsity Tutors for Schools in the Institutional business we believe supports durable and profitable growth. And then maybe just if you take a step back, the breadth of our Live+ AI offering, high-dosage tutoring and all of our AI-enabled teacher and administrative tools is pretty much unmatched in the market from our perspective. And as district leaders look to optimize learning outcomes, again, they all align with the MTSS framework and better support teachers. The strategic shift in schools toward embracing AI as a learning tool is happening. There's as an efficiency asset that's underway as school districts develop guidance on AI for high-quality learning materials, tutoring and classroom instructions. And then the last thing I'd say is students based on the latest NAEP scores, which were released in September, are still way behind. And so all of those 3 factors together give us a pretty significant opportunity to continue to grow that business.

The other thing I'd mention is there's an incredible insight since we first launched this business a few years ago. And there was certainly more complexity than we imagined, and we worked through a lot of that. But there were many, many different insights that we've loved to have acted upon and integrated into the product more deeply, but just couldn't due to resourcing constraints. And what's really exciting about this kind of new unified experience and modernized code base is we can now much more deeply integrate everything together in such a way where it's really actionable and really useful for schools. And so the holy grail in edtech is to have a proactive intervention platform where you can get the insights of which students are at risk and then can actually act upon those insights and take action. And that's what we're going to be able to bring to bear. And so we have the different forms of intervention with high-dosage tutoring and human chat tutoring and AI tutoring and different forms of live classes for academic support enrichment and test prep and diagnostics but to actually be able to thread them together in a way consistent with schools and how they work, which we have done in high-dosage tutoring, but had not done with all of these ancillary forms of intervention, that's what we're going to be able to unify and that's what will allow for us to have a much, much broader impact in the quarters ahead. And so we'll make great progress there, and we'll finish all that work and ship it in the coming weeks, but we're excited about just how much better it is than I think we ever kind of envisioned.

The next question comes from the line of Yi Fu Lee with Cantor Fitzgerald.

I guess circling back in the new flagship Live Learning Platform, like you guys mentioned a couple of KPIs, 50% less audio/video errors, 40% cost saving per sessions and 50% growth in consumption. So I guess my question, Chuck, to you and Jason is how will this translate into revenue growth in the future and better cost savings? We just want to see from an investor standpoint, the ROI of this investment. We understand you're going to finish the code base by the end of this month. So just want to get the timing of the ROI.

Sure. So as we move over volume, you're going to see -- and we are seeing the cost of any given session, which is some marginal costs associated with it, progressively drop. The bigger immediate win that is already occurring as folks move over is that it's just more reliable. And like with any product or service, the more reliable you can make the platform, particularly like an audio-video-based platform, the better it is for ultimately customer retention. And so that alone is a big win. And then importantly, this already integrates with hundreds of subjects worth of content and tools, hundreds and hundreds and hundreds of thousands of practice problems and diagnostic tests and flash cards and you're able to drive just a way more delightful experience. So if your 6-year-old daughter wants to turn the Live Learning Platform pink or green or purple, you can do that, which is exactly what mine did the second she got access to it. And so it's going to be an incredibly interactive experience. We can build new functionality that, frankly, was just completely like out of the realm of possibility. And you're going to find just a much more interactive experience. So relating it back to your question, the cost of operating the platform already is going down significantly. And then separately, our ability to reduce customer service costs will also go down because we can fully integrate in-line experiences in the actual platform itself such that nobody needs to call, in addition to the fact that it's so much more reliable. And then lastly, I would expect that the biggest win of all is actually on the retention side because it will be so much more reliable.

Got it. And then follow-up is, okay, appointment of the COO, John and the 13 or 14 senior executives, Chuck. So I just want to get a sense of like the first 100-day plan that you have with them. I understand that in the Consumer side, you're driving better ARPU but however, the Active Members gone down. What is the game plan to, I guess, increase those metrics?

Sure. So it's all about product velocity and collapsing decision-making. And I think what we're broadly already seeing is that we are solving problems that historically were hard to solve. That is certainly aided by the fact that we're getting to net new code bases, but we are, in fact, making that leap. And in doing so, we are able to then drive a whole host of different improvements to the funnel that historically might have otherwise been harder. So we're just progressively improving the kind of predictability of the performance, rooting out inefficiency and improving reliability. And so there's a whole host of different functional specific ways that we are going about doing that, but they ultimately ladder up to a more reliable, efficient and then eventually from a sequencing perspective, delightful operation. And I think we're making good progress across all 3 fronts.

Yes. The only thing I'd add that in the third quarter, we delivered… I was just going to add that in the third quarter, the new team helped us deliver a nearly 1,000 basis point improvement year-over-year in adjusted EBITDA margin by improving the operational efficiency and cost reductions across nearly every single P&L line item. These cost- set initiatives are ahead of targets, they're ahead of schedule. We believe all these recent advances in AI provide us and the team with the opportunity to drive further levels of productivity as we continue to scale. And the enhanced operational execution that this team is bringing to the table, all the systematic process improvements, those provide us the confidence in the near-term path to profitability, which we think is key.

That's exactly my follow-up question, Jason, to you on the financial side is, obviously, you guys have the term loan, $50 million during 2020 already, but it is high yield in nature. Just want to get your take. I understand you drove almost 1,000 points of improvements in EBITDA. I'm not looking to guide in 2026 yet, right, because we haven't even finished this year, right? How confident are you with the new liquidity in place that we're going to reach free cash flow EBITDA breakeven going forward? Like when will that be on a consistent basis? So that's it for me.

Yes. Good question. So look, the term loan with that and the cash on the balance sheet, we're well capitalized. We remain confident in the ability to deliver profitable growth in 2026. We've got ample liquidity to operate against our plan. With the debt, we had the opportunity to work with the prior partner we had a great relationship with. And then when I think about like the opportunity to cost out, it's very substantial. I mean 1,000 basis point improvement in Q3 that's going to carry into Q4. Last year in Q4, we were negative $6 million. This year, we've guided negative $2 million to 0 with every opportunity to become profitable. All of that will continue to benefit 2026 and provides us the opportunity to drive substantial leverage in the business. And we're seeing that.

So those are completely independent things. So we thought it's a good idea to have access to just more liquidity in general. We don't anticipate actually utilizing that. And the objective remains to be profitable, but we believe it's been pushed out slightly due to product delays that we're very, very quickly trying to make up ground on, and we think ultimately will lead to a significantly better product, better platform, better business.

The next question comes from the line of Greg Gibas with Northland Securities.

Apologies if I missed this, but did you kind of comment on ARPM and member growth assumptions implied in your Q4 guidance?

We have not. From an ARPM perspective, in the third quarter, we were at $374, which was up 24% year-over-year, which is a continuation of the changes we saw throughout the first half of the year where customers are switching to higher frequency Learning Memberships, and that was coupled with some pricing changes in the first quarter. And then from an Active Member perspective, we would look to end the year with 32,000 members, which is consistent with like the Active Member change that we've seen year-over-year in Q2 and Q3. But what I would also mention is we continue to focus on higher-value customers that have higher LTV. We're seeing that in the business today. Active MRR is up 7% at the end of Q3. New MRR continues to improve as we move throughout the back-to-school selling season, and you've got all the new operators in place driving improvements. And so net-net, that's how we're thinking about the fourth quarter.

Yes, we were able to drive almost 1,000 basis points of EBITDA margin improvement. And as revenue inflects with that improved efficiency, we feel pretty good about the ability to drive significant operating leverage next year. So kind of thinking about like the sequence of the year and the back-to-school period, it has gotten like significantly strengthened as we've gotten a little bit deeper into the school year, thanks to a bunch of those operational improvements. And we would expect that a lot of the product improvements that we're shipping now contribute to further strengthening. And so that is occurring at the same time that we've also been able to optimize marketing spend, and it's ultimately going to be lower year-over-year, which will drive a lot of operating leverage. So we kind of feel good about that dynamic between being smarter on the customer acquisition side, what was positive MRR growth in Q3 and thus far, at least kind of as of this call. And so we're kind of feeling good about those trends. We recognize we want to drive significant growth inflection and profitability, and there's work to be done there, but the progress is like the actual efforts are pulling through in real life.

Got it. Very helpful. And if I could follow up regarding the delays in product launches. You mentioned weren't able to kind of capitalize on the back-to-school week as a result of that. Could you maybe characterize the response to learning member trends you've seen since those launches despite missing that critical period?

Sure. So some of those are kind of independent, right? So they impact like existing customers and their satisfaction with them like once you become an active customer, then you get a better experience on our new Live Learning Platform. And we'll continue to do work to pull up funnel so that people actually become more and more aware of it prior to joining. But I think we've seen the products that have launched and they're concurrent with that occurring. And keep in mind, we're also improving a whole host of different aspects of the platform. One of the big wins this quarter was AI vetting and actually using it to have conversational interviews with tutors to better vet them at a much, much lower level. But kind of in combination, that's driving improvements to retention year-over-year, which is already up and is strengthening. And then one of the big benefits of this unified platform will be beyond kind of the first, call it, month or two where we've long seen this year improvements year-over-year in retention, our ability to effectuate much more significant retention trends that oftentimes require much deeper relationships and the leveraging of more different modalities, so live classes and diagnostics and AI tutor and a whole host of other things, our ability to actually drive discovery in a thoughtful way that is cohesive and easy and good for the customer, that becomes so much easier. And that's something that we would expect to actually happen, call it, from now and on on a sequential basis as we both roll out these experiences to more customers and then separately, as we continue to enhance them.