Nerdy Goes Public via SPAC - Tutoring Marketplace IPO

A consumer education technology company utilizing a gig economy model is preparing for a listing on the New York Stock Exchange.

Edtech company Nerdy, the parent organization of the well-known tutoring service Varsity Tutors, intends to become a publicly traded entity via a special purpose acquisition company, commonly referred to as a SPAC.

Nerdy will combine operations with TPG Pace Tech Opportunities (NYSE: PACE), a publicly listed SPAC since 2015. Completion of this transaction is anticipated during the second quarter of the current year.

This agreement establishes Nerdy’s enterprise value at $1.7 billion. As a result of this transaction, the company anticipates generating up to $750 million in capital, including $150 million through private investment in public equity (PIPE) funding secured from Franklin Templeton, the Healthcare of Ontario Pension Plan, Koch Industries, and Learn Capital.

Nerdy’s primary service, Varsity Tutors, operates as a platform connecting students with tutors for instruction in various settings – large classes, small groups, or individual sessions. The platform provides learning resources across more than 3,000 different academic areas. Similar to other companies in the education technology sector, Varsity Tutors leverages artificial intelligence and data analysis to optimize the pairing of students and qualified instructors. Furthermore, in August, Varsity Tutors introduced a comprehensive homeschooling program designed as an alternative to conventional schooling, recruiting 120 full-time teachers from public and charter schools and offering them competitive compensation.

Financial performance

TechCrunch has analyzed the investor presentation for Nerdy’s SPAC deal, which is available for review here.

Nerdy is one of several consumer education technology companies that experienced significant expansion and opportunity as a result of the increased demand for remote learning during the coronavirus pandemic. By the latter half of 2020, Nerdy’s revenue on an annualized basis exceeded $120 million. During the final quarter of 2020, the company reported an 87% increase in online revenue, a 59% rise in online paid active learners, and a 169% growth in paid online sessions, all when compared to the same period in the previous year.

Examining the company’s actual results, rather than the more positive annualized figures from the third and fourth quarters of 2020, Nerdy’s estimated revenue for the year was $106 million, representing a 16% increase from its 2019 performance.

This growth rate is slower than the 26% growth achieved in 2019 and is approximately half of the anticipated 31% growth for 2021. However, Nerdy forecasts even more substantial growth for 2022, projecting revenues of $198 million, a 43% increase from its 2021 expectation of $138 million.

The realization of these goals remains uncertain; companies going public through SPAC mergers are permitted to make forecasts that are broader in scope than those allowed for companies pursuing traditional IPOs.

Despite revenue growth, the company has not yet achieved profitability and continues to experience losses. Nerdy estimates a net loss of $23 million for 2020, which is greater than the loss in 2019 but less than the deficit recorded in 2018. Based on last year’s growth, the company projects its net loss will decrease to $8 million in 2021 and anticipates achieving profitability by 2023.

Why didn’t Nerdy reduce its losses last year despite increased revenues? The company’s expenses experienced mixed changes, with the exception of sales and marketing. Spending in this area increased from $38 million in 2019 to an estimated $44 million in 2020.

Although Nerdy’s net losses remained relatively stable in 2020, its estimated net margin improved from -24% in 2019 to an estimated -22% in 2020. While still operating at a loss, the company’s financials suggest it believes net income is within reach in the coming years.

Nerdy anticipates needing $267 million in revenue by 2023 to reach profitability, representing 35% growth from 2022 and gross margins that are five percentage points higher than the 67% it estimated achieving last year.

A detailed review of Nerdy’s business raises a common question during the SPAC boom: Are reverse mergers being utilized to bring companies with less compelling short-term growth prospects to the public market that might otherwise be unable to do so? Several edtech startups, including Skillsoft, Meten International, and now Nerdy, have chosen the SPAC route.

Following a strong year for edtech in 2020, sector investors predict further exits as startups surpass the $100 million ARR milestone. Deborah Quazzo, managing partner of GSV, stated to TechCrunch in December that “capital markets are liquidating” within the edtech space. The ability to seamlessly transition between private and public ownership is a hallmark of tech sectors with robust capital markets, a contrast to edtech’s earlier period where exit options were limited.