Chegg, Inc. (CHGG) on Q1 2023 Results - Earnings Call Transcript

Operator: Greetings, and welcome to the Chegg First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tracey Ford. Please go ahead. Tracey Ford: Good afternoon. Thank you for joining Chegg's first quarter 2023 conference call. On today's call are Dan Rosensweig, Co-Chairperson and CEO; and Andy Brown, Chief Financial Officer. A copy of our earnings press release, along with our investor presentation is available on Investor Relations website investor.chegg.com. A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our media center website at chegg.com/mediacenter. We encourage you to make use of these resources. Before we begin, I would like to point out that during the course of this call we will make forward-looking statements regarding future events, including the future financial and operating performance of the company. These forward-looking statements are subject to material risk uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements. In particular, we refer you to the cautionary language included in today's earnings release, and the risk factors described in Chegg's annual report on Form 10-K filed with the Securities and Exchange Commission on February 21, 2023, as well as our other filings with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and the investor slide deck on our IR website investor.chegg.com. We also recommend you review the investor data sheet, which is also posted on our IR website. Now, I will turn the call over to Dan. Dan Rosensweig: Thank you, Tracey, and welcome everyone to our 2023 Q1 earnings call. Chegg had a solid quarter, ending Q1 above our guidance on total revenue and adjusted EBITDA. As we shared with you during our last call, we believe that generative AI and large language models are going to affect society and business, both positively and negatively. At a faster pace than people are used to. Education is already being impacted. And over time, we believe that this will advantage Chegg. In the first part of the year, we saw no noticeable impact from ChatGPT on our new account growth, and we were meeting expectations on new sign ups. However, since March, we saw a significant spike in student interest in ChatGPT. We now believe it's having an impact on our new customer growth. Fortunately, we continue to see very strong retention rates, suggesting that those students who already understand the value of Chegg continue to choose us and retain us at high rates. We are also expecting a positive recovery in enrollment trends, which historically would be good news for Chegg. Because it's too early to tell how this will play out. We believe that it's prudent to be more cautious with our forward outlook. Therefore, we intend to provide only the next quarter's guidance at this time and Andy will walk you through those details shortly. We can all see that AI technology is evolving at a very rapid pace. And at Chegg, we are embracing it aggressively and immediately. Throughout my career, I've witnessed the most significant technology platform shifts from the creation of the Internet to the explosion of mobile and the movement of software to the cloud. And we believe that AI is the next big shift. Several months ago I met with Sam Altman to discuss the future of AI in education. And coming out of those discussions, we quickly reoriented our company to focus and prioritize on the utilization and incorporation of AI into Chegg services. The first big step is the introduction of CheggMate, which we recently announced in cooperation with OpenAI. CheggMate will harness the power of ChatGPT paired with our proprietary data and subject matter experts to make learning more personalized, adaptive, accurate, fast and effective, all in an easy to use and conversational manner. The combination of Chegg's experience over the last 13 years of improving student outcomes and our proprietary learning taxonomy to 150,000 subject matter experts in our network and the billions of pieces of unique learning content that Chegg owns, when coupled with the real time conversational nature of ChatGPT will establish CheggMate as a powerful and distinctive learning tool offered exclusively from Chegg. Based on our research, 85% of students would prefer to have human experts involved in their study support. Which is why we believe that the future of learning is a blend of AI technology with human based support to build trust and ensure accuracy and relevancy. Ultimately, we believe the introduction of CheggMate will lead to an increase in the size of the market we serve and strengthen our relationship with our users, while reducing content costs. Large language models are currently used horizontally, similar to search, but history suggests that over time focused and category leading verticals are where enduring value is created. CheggMate is being designed for learning and tailored to an individual studies -- individual students learning style and needs. It will offer personalized assessments, practice tests and instant feedback along with Chegg's proprietary step-by-step solutions. We are moving very fast with a beta launch of CheggMate later this month. And as we test and iterate, we will expand access throughout the year. As with all Chegg services, our goal is to deliver improved outcomes and overwhelming value, with our recently introduced partner offerings from DoorDash and Calm, we are seeing the benefits of adding non-academic content to our subscriptions with improved retention. These value added partnerships are creating more value for our subscribers and strengthening the Chegg brand and we expect to add more offers in the future. Our partnership with Guild also continues to perform extremely well. And we see an even bigger opportunity ahead for us in our skilled business. We are introducing new offerings, including Busuu, our award winning language learning product as we expand the catalog of course offerings through Guild. Other new additions include UX Design and Frontline Leadership programs, while future courses will focus on the latest advancements in artificial intelligence to meet both student and employer demand. To improve learning outcomes even more, we expect to add real time conversational support to all of our skills based courses, which we believe will improve completion rates. While we are talking about skills, I want to take a moment to acknowledge the recent news that John Fillmore, President of our skills business will be leading Chang after 10 years. Don is ready to take another big step in his own career, one which we wholeheartedly support. John served in a variety of key roles at Chegg during his tenure and I cannot thank him enough for his friendship, counsel, wisdom and leadership over the last decade. I also want to take the opportunity to welcome Colin Coggins, who joins us today as our Senior Vice President of Chegg Skills. Our priorities outside of North America are to make our services more personalized and accessible to everyone and to localize content and pricing so we can expand it to new geographic markets. To that end, in Q3, we plan to roll out a new payment system for India to capture customers during the peak back to school season and in countries like Turkey, Mexico, India and South Africa, we continue to see our rollout of local subscription pricing or localized content and user experiences as a growth lever. In fact, Q1 2023 was an all-time high for app acquisitions in Mexico where we recently rolled out our localized app. We are excited and optimistic about the future and are moving fast to leverage the best of AI to advantage the students. Our unique position in the industry coupled with our deep expertise in learning enables us to make this future a reality and will enable us to grow our business for the benefit of our customers and our shareholders. These transitions don't happen overnight and are rarely smooth at the start. Our position as a category leader and are focused exclusively on the needs of students has led to great brand recognition and incredible customer loyalty for Chegg. With 13 years of experience educating students, our proprietary improving learning taxonomy, our billions of pieces of unique learning content created by more than a 150,000 subject matter experts. Combined with exciting benefits of AI will propel Chegg into the future. We are embarking on a new chapter for our industry and certainly for Chegg. And we are making the adjustments we need to meet this opportunity head on. We are confident we have the brand, platform, balance sheet, operating model and experience to make the appropriate investments needed for the future and enhance our position as a leader in the industry. And with that, I will turn it over to Andy. Andy? Andy Brown: Thanks, Dan, and good afternoon, everyone. Q1 was a solid quarter as we met or exceeded our revenue and adjusted EBITDA guidance and delivered strong cash flow. Total revenue was $188 million, driven by subscription services revenue of $168 million. During the quarter, we had approximately 5.1 million subscribers on the platform. Skills and other revenue was $19 million, driven by strong growth in skills, offset primarily by the change in required materials model, which is now a revenue share. Gross margin came in slightly higher than expected, which contributed to adjusted EBITDA beating guidance, which came in at 58 million or 31% margin and free cash flow was $56 million as a result of a strong operating performance and higher interest rates. With interest income contributing $11 million in the quarter, an increase of $10 million from the year ago quarter. Looking at the balance sheet, we ended the quarter with $1.2 billion of cash and investments. During the quarter, we entered into an accelerated share repurchase agreement of $150 million, which we expect will reduce outstanding shares by approximately 7% and will be completed during Q2. We continue to believe the combination of our operating model, balance sheet, and cash flows are among the strongest in the education industry, which will allow us to continue to drive long term shareholder value. Moving on to guidance, while we continue to have confidence in our ability to forecast the current quarter, given recent industry developments, our visibility beyond that is less certain. As such, we will be guiding to the current quarter only, while these conditions exist. Given this limited visibility, we are also evaluating areas to reduce existing expenses and CapEx to maintain industry leading margins and cash flow even as we lean into important investments in AI. For Q2, we expect total revenue to be between $175 million and $178 million with subscription services revenue between $159 million and $162 million, gross margin between 72% and 73% and adjusted EBITDA between $53 million and $55 million. In closing, we expect our investments in AI will drive long term shareholder value as we believe embracing this technology allows us to better serve students, and we believe there is nobody better equipped to meet the current or future needs of students than Chegg. With an industry leading brand as well as a strong operating model and balance sheet that allows for investments. All while driving best-in-class margins and cash flows. With that, I'll turn the call over to the operator for your questions. Operator: Thank you. We will now be conducting a question-and-answer session. Your first question comes from Jeff Silber with BMO Capital Markets. Please go ahead. Jeff Silber: Thanks so much for taking my question. I'm just really curious what happened in March. I know on the last call, you really weren't seeing much of an impact. You repeated it today in terms of ChatGPT. But what changed in March? What do you think? Dan Rosensweig: As we said in the prepared remarks, we're beginning to see on the margin. It's not substantial yet. It's just on the margin that based on our research that people normally who would have pay for us around mid-terms are closer to finals that were reluctant to pay or be longer term subscribers are now have a new free site to go try. And we've defeated all the free sites in the past pretty handily over time and we expect that with CheggMate we will have great success going forward. But on the margin, these customers manner in subscription businesses and given the fact that -- and as we put in the thing in our prepared remarks that, obviously, it's the fastest usage of a product ever do $150 million fastest growing product. And obviously, students are the first to try these things. So, we're just being prudent in the short term as we roll out CheggMate in the long term. We're still bringing in millions of new customers. It's not about that we're not bringing in new customers, just not at the level that we expected or wanted right now. And until we come out with CheggMate and build that product and get it out, we're just being prudent and careful. What we saw was what you've seen, which is a tremendous uptick in interest and in usage and the good news for us is that, we're still bringing in millions of new customers a year and our renewals are extraordinarily high and the take rate for Chegg Study is high. So all those things were good news, but when ChatGPT came out in March, it just did another bump of usage and we're just being smart because we really won't know anything until the end of August early September, because this summer doesn't really reveal anything. So that's it. Jeff Silber: Okay. Appreciate that. Andy, you talked about evaluating areas to reduce expenses and CapEx even though you're still going to be spending in AI. Can we talk a little bit about that? I don't know if there's any color. How much are you planning on spending in AI or CheggMate? And what are your goals in terms of maintaining margins? Andy Brown: Yes. So, I mean, our clear goals on maintaining margins is to continue industry leading margins and cash flows like we have for the past many, many years. As far as areas where we're planning on making changes, I mean, there will be -- I'll call it resource reallocation to -- on AI. And making sure we have those resources there. But it's still a little bit early. Dan -- as Dan mentioned, the product comes out -- the initial product, the beta product comes out this month and we'll continue to make incremental investments in -- shift investments to AI and we do expect over the long term that will have a moderating impact, particularly on our CapEx. But once again, it's early and we'll make the appropriate adjustments over the next several quarters to ensure that we have high margins and strong free cash flow. Jeff Silber: All right. Appreciate the color. Operator: Thanks. Next question Doug Anmuth with JPMorgan. Please go ahead. Doug Anmuth: Thanks so much for taking the questions. Maybe just a follow-up on AI and some of the investments. I guess just curious what -- not just what kind of costs you might need to incur around CheggMate, but what kind of investments do you need to make just from a hiring perspective or personnel, do you feel like you have the right team and everything that you need in place to become more of an AI business going forward? And then second, just hoping you could talk a little bit about the Skills business with new leaders in place? Just more about the strategic vision and product roadmap and how we should think about some of the guideposts in that business going forward? Thanks. Dan Rosensweig: Yes. Thanks, Doug. So on the on the AI side, we've been fortunate that we've been working with AI technology for the last many years. So in terms of skill sets and the core team, we have all that and that's good. However, we are shifting and have been shifting immediately and aggressively, our team to be faster and more nimble about getting CheggMate out because it's an exciting time for us, to be honest with you. We think the combination of what they can do, our content, our data, our learning taxonomy is the special sauce that will differentiate us. And so we're actually very excited about and very motivated to move quickly, not just for the competitive reasons, but because of the size of the opportunity reasons. So we'll likely be continuing to shift personnel that we have and adding personnel and we'll be refocusing our priorities on AI and Skills, as you mentioned, because those are the big growth areas of the company. And we're excited about those. In terms of the cost, given our CapEx budget, we believe that the better part of this year that our CapEx will actually be similar, if not, better than what it's been, even as we invest aggressively in AI. One, because the timing of the rollout, but also because this cost of AI for us is a replacement of other content costs. And so, this will actually be more efficient, allow us to get the content actually cheaper on a per unit basis and more content overall. So we're very much in control of that. Also, once we start building ChatGPT for it into CheggMate, that once the content is asked and the sponsor asked, we will have those and we'll only have to pay for them one time. So we think this is going to be really, really, really efficient for us and very clarifying and very finding for us. So we think over time, we'll get a lot bigger and even more profitable than we've been despite the fact that we've been the most profitable company or amongst most profitable companies in the states. As it relates to Skills, it's another area where we're doubling down because it's working. So the relationship with Guild has been very positive. That's a business that we believe can be quite substantial over the next couple of years. As Guild evolved its business with its existing customers like Walmart, Chipotle, biggest customers in the business, it's also adding new customers, but most interesting and very much to our advantage is these companies are focusing more now on skilling their employees than they were before, even though they continue to offer paid college education through Guild, the skills area is much more interesting to these companies now than it's ever been because of the change in technology and because of AI. So we launched those feature there and that's having some good traction. And then on top of that, we're building a lot of courses in UI and design and creative is going to be very important to go with AI and on AI itself. So what we're offering to shipping, but we're offering more of it, and business is going quite nicely. And for those people who want to track that because we break out our business in two areas other and Chegg subscriptions. You have to take into consideration that we plan for ads to be down. But the growth in that business is coming all from skills. So it's making up for that whole and we're very excited about it. Andy Brown: Yes. And just for clarity there, all the growth -- Dan is 100% correct, all the growth is in skills and the risk headwinds in adds and of course the change -- the changing requirement materials from being 100% recognizing revenue to revenue. Dan Rosensweig: Yes. So you really can't look at it year-over-year, you just have to look at it quarter-by-quarter. So we're really fired up about what was going on in Skills. And the reception to CheggMate is as big as you might think it would be, which is the combination of AI technology, the conversational nature, the real time nature, the reduction in the content cost that will expand our ability to do all of things. But one of the reasons that we were able to partner with them and have Sam be part of our announcement and interview Sam on stage at largest education conference, could they recognize that they can't do what we can do? And it's our content, our data, our learning technology. Yes, you can use ChatGPT to get some answers, which is what the customer that didn't come to us are doing, but they actually learn it, you need to use Chegg. And so we're really excited about the future. But as I said, Doug, in the prepared remarks, whether it's a platform shift like it was for the Internet, like there is for mobile or what's for mobile, like it was for cloud that the first period of time is very lumpy and very bumpy and very uncertain. But in the end, the companies that invest and utilize the technology and -- are the in their vertical, win bigger in the long run and that's all we're focused on right now. So the short term is less important than the long term, but we will continue to make sure we're very profitable in generate a lot of cash because the business model allows us to. Doug Anmuth: Thank you both. Appreciate that. Operator: Next question, Eric Sheridan with Goldman Sachs. Please go ahead. Eric Sheridan: Thanks so much. Maybe two questions if I can. First, not to belabor the ChatGPT point, but would love to get a little more granularity. I know your comments were for March, but even looking out to April where you might have some data. Just to better understand, does it act as a gross addition headwind when you see these consumption choices? And or are you already seeing the potential for change consumption habits among your existing user base? That would be number one. And then I know CheggMate is in beta. Can you contrast anything you've learned in beta about the behavior or consumption habits of folks who are beta testing CheggMate versus more traditional Chegg users just so we have a bit of benchmark there? Thanks so much. Dan Rosensweig: Yes, excellent question. The second one, the answer is, it's too soon because we're not -- it's launching this month. And so on the next call, I think it's probably a good idea to contrast what we're learning in terms of our behavior and how they're using it. Because it's interesting. It's exciting for us, but it's interesting. On the first one, the question was -- repeat it, the first question? Eric Sheridan: Yeah. It's really just elements of what you've seen in March, maybe then a comment of how April. And gross adds versus consumption? Thank you. Dan Rosensweig: It is 100% of gross adds issue. It is not at all a retention issue. Retention is not a take rate issue. We're actually seeing record numbers in take rate of people that taking the $19.95 take study path. So that number continues to elevate. I think we said it was over 40% on our last call. It continues to elevate. So we know that we still have pricing power, we know that people really value us if they know Chegg that we are still bringing in millions of new customers over the course of the first six months. This is -- it's a gross add impact on the margin. But as a subscription business, we need to figure out what that means before we start forecasting longer term. So that's really where it's focused almost exclusively at this point. And we just have to be aware of it because it's so new. So we're very comfortable in forecasting next quarter -- done after the last six quarters have been right, including the last one. But because this summer comes now and we really won't learn that much until next August to September, we're taking a quarter off just to be able to make sure that we really understand the impact. It can answer the other questions as it relates to CheggMate and new behavior. But retention has been phenomenal and take rate . So this is not a sky falling thing. It's just an acknowledgement that there's been a technological shift. And we need to prepare for it and adjust our company and go after it aggressively and adjust our cost structure to do so. And we're doing all of that now. Operator: Next question, Ryan MacDonald with Needham and Company. Please go ahead. Ryan MacDonald: Hi. Thanks for taking my questions. Dan, maybe first off on CheggMate as you're starting to do the beta testing and really grow the awareness of CheggMate offering. I think one of the things we hear from students is that, their questions around ChatGPT are lack of accuracy today, which Chegg has always been sort of trusted brand from that perspective. But in this market dynamics, how do you sort of rebuild the brand awareness for a new offering like CheggMate that is -- that sort of building GPT in so that you can ensure that retention and sort of, I guess, reacceleration of gross subscriber adoption going into the fall? Dan Rosensweig: Yes. It is exactly the correct question and the one that we're working on impressively. I don't know if you had a chance to see our video launch. That video launch is an example of what we're doing. So, an offset of benefits sitting on the Adobe Board and with Fireflies. So I've had a lot of insight into how to think about all of this. So right now, the goal is to make sure that we continue to have extraordinarily high retention than we are. And that goes for exactly the reason that you said, our accuracy and our learning taxonomy to actually understand the subject, not just copy it, which is what you do with ChatGPT. Those people, we are very, very solid with, continue to perform extraordinarily well with. And over time, we will be reminding them of the benefits to Chegg inside the product experience itself. That's really essential. CheggMate will be an all new user experience that will point out to the user what part is ChatGPT or any other AI because the brilliance of how we're building this thing is, it's not going to be tied to just one AI environment. If one is better, we can shift it. If our own like we have with Mathway is our own large learning model, we use our own. But we will be showing what the capability of AI it is and what the capability of Chegg is to let students know that if they shouldn't use Chegg, this is everything they're going to lose. That is contemplated and built into the learning experience itself so that students will appreciate the value that we bring to the user experience. That if they leave Chegg, they won't get. So that is essential in terms of the way we are building the product and the user experience is to make sure students understand the value of each, but it's the value of the combined that you can't get anywhere else and you can't get what you get in Chegg anywhere else. So as an essential part of it. So the marketing is going to be in product, very viral, use of TikTok. I mean, you'd be surprised that we have 55 million views on TikTok. Chegg is a beloved product for the reasons that you understand and appreciate. This is a challenge at the moment that's on the margin and we want to go aggressively after it and we think this is an opportunity to expand our market and we're going aggressively after that. So we're all in and making sure students understand the value of us and the value of the combined together and why it's in their best interest to pay the $15.95 or $19.95. Ryan MacDonald: Helpful color there. Maybe as a follow-up. I want to touch on the localization efforts. You talked about some good success that you're seeing in three countries where you're starting to do localized pricing in the apps here. I think on the last quarter, I think you're -- I think testing in maybe nine or 10 countries. But how should we think about sort of the ramping of the localization efforts and when sort of you should have sort of that localized pricing generally available more broadly across the country that you've been testing in? Dan Rosensweig: There's about nine that we are focused on. Some of them I think we mentioned in prepared remarks. But honestly for the second half of the year, the focus is on getting a payment system right in India. The demand in India for Chegg is extraordinarily high. Meaningfully high. Our ability to accept their payments is meaningfully low. That was a mistake. We took credit cards as we worked with the partner that did credit cards rather than the way they like to pay, which is debit cards. And so, that will be ready for the fall. So our big focus for the fall internationally is going to be CheggMate and obviously the UK, Australia, and Canada and India for the biggest growth area of focus. But Mexico, Philippines, places like that, where it's based on the logic of --what you'd imagine, it’s based on top of the funnel is really high. Conversion is really low. So that's about pricing and then it's about the payment system. One of the really cool things about, by the way, AI is going to allow for instant translation at no cost. These things will play to Chegg's advantages over time. Initially though, we got to deal with the challenge initially. Ryan MacDonald: Makes sense. Thanks for the color. Operator: Next question Josh Baer with Morgan Stanley. Please go ahead. Josh Baer: Great. Thanks for the question. I guess wondering how fast you can go with CheggMate. I think there's a lot of potential there to improve the platform, obviously, the longer it takes you risk missing out on some of those cohorts of new students in the meantime. And I guess, thinking back to Study Pack bundle or international, describe it as sort of methodical, a lot of testing and in some cases, waiting until the next semester to not disrupt auto renewal, for example. So how fast can you go? How will the rollout of CheggMate compare? Dan Rosensweig: Yes. Again, these are really great questions because they're exactly the questions we're asking internally. So the methodical nature of how we've done things has worked to our advantage. In this particular case, speed is going to work to our advantage. And so, a lot of the resource reallocation, a lot of our focus -- we're talking about it now much more aggressively, but it really started after the launch of ChatGPT and the chance that I was very fortunate to be able to sit down and talk to Sam for a couple of hours about where they were going and where we are going and how we could work together and the value of each of the components together. So we've been the last couple of months working on this. What you saw at the GSV Conference was sort of visual example of it. And again, I encourage everybody to watch the video to see how special this product can be. So our goal is to ramp it up. This is going to be constant daily iteration. We're going to get the feedback. We're going to train the models. We're going to retrain the models. We're going to rewrite the prompts. I mean we are going as aggressively as we are physically capable of doing. We are holding nothing back from this. So the answer is, it will ramp at the speed that is good. And hopefully, that's really fast. Josh Baer: Thanks, Dan. And another sort of higher-level question for you on competition. Like obviously, there are other vendors out there that ignoring AI and ChatGPT, Chegg performs really well against. But then there are vendors like Quizlet, Brainly, Khan Academy, who have also announced AI tutors or AI solutions built on ChatGPT using the open API. So is like the competitive dynamic the same in that -- Chegg has the advantage because of all the data that your models trained on and all those other things? Or does like the competitive environment get more intense because everyone gets to leverage ChatGPT going forward? Dan Rosensweig: Yes. Not everybody gets to leverage at the same way, though. So let's be clear. The data set matters, the content matters, the learning taxonomy matters. This is going to come down to user experience, brand quality, brand reputation and your capital structure, which ours is superior to everybody else's. Every one of those companies that you mentioned -- well, most of the companies you mentioned have tried to defeat us with free and ad models. They have been unsuccessful, dramatically unsuccessful. So they're launching chatbots on top of their content, does not change the dynamic in any way, shape or form in their favor. And we think we'll exemplify why what we're doing is far superior to anything they're capable of doing or . So they -- our perspective and we've, of course, torn apart every one of the products that they've launched, as you can imagine. So this is speaking from our own view of what we see in our dynamics in our marketplace. The issue for us is going to be students on the margin who just want an answer. And if they can get some version of that, that is the short-term challenge for us. So long-term opportunity is just much bigger. The ability for Chegg to be in your pocket instantly in any language, in any subject anywhere with our learning taxonomy, simple user experience, brand reputation, quality reputation, accuracy reputation is what we're focused on. So we're on our toes, not on our heels. I think the rest of them will be more on their heels because what do you need a flashcard for in a world where ChatGPT can create the flashcard. So that dynamic works in our favor, but in the short term, we got to take it as seriously as anything we've taken seriously. It reminds me of when Amazon entered the text book market. Everybody says Chegg can't beat them, we beat them, because this is all we do. This is not all AI sites are going to do. So it's really clarifying, it's really focusing. It's intense. In a lot of ways, it's fun, but we're up for the challenge. Josh Baer: Great. Thank you. Operator: Next question, Brent Thill with Jefferies. Please go ahead. Brent Thill: Dan, if you set aside actual team, you look at internal execution and consumer behavior, do you pin any of this to those other issues? Or is this 100% blamed on ChatGPT. Dan Rosensweig: We were doing exactly what we were hoping to do until around March. So the variable to change was the launch of four, because we had taken into consideration to some degree, three. And the time that with four and then you time it around midterms. And so that's when we saw on the margin. Again, this is not a sky-is-falling thing. This is just a company who's been around for a long with management that's been around through every economic cycle since 1987 and every launch of technology cycles since the PC, believing that this is one of those shifts. We did not fall for -- you never saw us launch well, we'll take Bitcoin payments, right? We're launching our own coin or let's do NFT. This is -- we didn't see those as real or important or as threats. We see this one as a real transformational change where the way people will do work, learn things and access things. We're betting very big on the fact that people are going to need to learn how to use these things and the impact of these things and they're going to have to learn what the output means. And we're going to be in a world more of greater assessment and that works to Chegg advantage in the long run. So the rest of the business in terms of renewals breaks. Take rate of Chegg Study Pack, record levels. Launch of the app in Mexico, set records for us. This is the thing that we believe is the biggest challenge ahead of us, and we're taking it on from day one head on. And if other companies don't want to do that, that's their business. We just believe, and I've been around long enough to know that there was the Internet, and there was mobility and then there's this. And so, we are very excited about the possibilities for the future, but we're going to have to go after it from day one, and that's what we're doing. So nothing else that we saw, it's this and it's on the margin right now. Brent Thill: Yes. And on the (ph) business, when you think about the size of the business today as a percentage of revenue to where you think this could be three to five years out, how do you frame that things -- if the headwinds continue to move in on Study Pack, can this offset? Or is it still -- is it still about the Study Pack? Dan Rosensweig: Well, they thought about Study Pack setback is doing fine. It's just about the top of the funnel conversion on marginal customers. I'm sorry, did you talk about Skills? Brent Thill: Yes. Just on the Skills business, I think today and then where you think it could be three to five years as a percentage of your total revenue? Dan Rosensweig: So everybody is looking me like I shouldn't give the number away, but substantial. Look, here's -- the simplest way to do the math is, we get on average, $17 a customer for a subscriber per month on Chegg Study, Chegg Study Pack. On Skills, the average price right now is closer to $5,000. And so, when we keep 100% of that revenue and then we give X percentage of that to Guild. So we'll have high gross margins. It's really the cost of the content for us. It's not the cost of distribution, it's not the cost of marketing. They take all that and we pay them for that. So for us, the bigger they get and the deeper we get and the more people get excited about learning things like AI and UX design. And the more corporations focused on skills rather than higher education, the better it is for that business. And that business is growing really, really -- it's never grown this fast and it's on top of an increasingly higher base. So without giving the number away, I think it could be pretty substantial as a percentage of our overall revenue. Andy Brown: Yes, Brent, I mean, just to be clear, it's our fastest growing business. So by definition, it's going to be a different percentage of our business over time. We're obviously not going out any further than this current quarter. But yes, we're super excited about Skills, and we think it will continue to grow at a pretty rapid rate. Brett Thill: Okay. Thank you. Operator: Next question, Jason Celino with KeyBanc. Please go ahead. Jason Celino: Great. Dan, Andy, thanks for taking my questions. With CheggMate -- sorry if I missed it, but how much will that cost? And -- or will it be part of the bundle? Dan Rosensweig: Yes. That's something we have yet to announce, and it's something truthfully we get to decide. So there is always several views on this. We believe and we know from all of our testing that we could take prices up and we could charge more for it. And our internal research that we announced initially was that something like 40% of the audience would agree already to pay more for it. Having said that, we want to return to growth as fast as possible on the new subscriber side. And so this will likely be embedded within Chegg initially, and then we'll determine what the smartest way for getting a higher ARPU is and those range of options are exactly what you think it would be, which is at one point, right now, we have $15.95 and $19.95, we could go on in $19.95 tomorrow, and that would be a substantial increase in revenue and EBITDA. We could go to all to $19.95 in the month a version of $24.95. The options are ahead of us, but they've yet to be decided. We just -- right now, it's making the product great, getting the brand awareness out there, getting people addicted to the new product, the way they've been addicted to the whole product. And then those opportunities are all ahead of us. Jason Celino: Okay. No, that's helpful. And then you've kind of alluded to what it might look like in the beta. I'll be sure to watch the video after this that you keep mentioning. But from a student's perspective, how does CheggMate look, feel and differ than if a student just go to ChatGPT directly? Dan Rosensweig: Yes. The video will highlight where we're going. But to give you some data points on it. First, it will look a lot cooler. I know that doesn't really matter a lot of people, but for some reasons, the students have done. Two, it will be much more conversational. So rather than just having to put in a particular question, you can ask it anything. And once you ask if anything, it will know because it knows who you are, and this is what the free chat does not do, that will not personalized at all. And every time you go back in, it doesn't remember you unless you want to pay the $20 a month. For us, we already know who you are. We know your class, we know that the textbook you're interested in because we know based on the question that you've asked, we'll also know all the other questions that people have asked around this and we'll be able to write the prompts for you. So we'll also be able to know what particular part of the question you're struggling with. So it's one thing to say you're not doing well on the assessment, which we can automatically now build a relevant assessment for you, which we couldn't do before. But we can actually build an assessment based exclusively on your weaknesses, because we understand the way the question was created and the way you've answered the question. These are all things that we'll be able to uniquely and exclusively do inside of Chegg. And you can do it all conversationally in whatever language that you want or however you choose to ask it the question. It might say -- you could say, I suck in write before questions just on the parts in . We'll be able to do that now, even if you write it that way. So it's literally going to feel like a live tutor that is working on your side. We're also going to play into the gamification and things that Chegg has never had it done before. Which is like, hey, you're doing great. Do you want more of this? Or it looks like you're struggling here, would you like us to build you this or you might need to look at this as well. We'll also be able to program in advance what you're likely to have to know based on the things you're knowing now because we have the history of 10 years of that particular class. These are all things uniquely be able to be doing inside of CheggMate, not in ChatGPT. And this is where the real differentiation is in that user experience and certainty around accuracy. Jason Celino: Perfect. Thank you. I'm sorry, watch the video because it really does give you an example of just how amazing this thing has the chance to be. Operator: Next question, Alex Fuhrman with Craig Hallum. Please go ahead. Alex Fuhrman: Hi, guys. Thanks for taking my question. Wondering, you mentioned in your prepared remarks there are signs that you could be starting to see improved enrollment later this year. Curious what you -- what are some kind of opportunities or how you plan to go about capitalizing on that? And is there a thinking that you want to have this new product out in some way that could be sellable ahead of the fall semester? Dan Rosensweig: We are not ahead of it. I mean we're going to be testing it aggressively over the summer months. So the indications are always based on what we begin to see in the summer. If you remember last year, we began to see signs of strong summer school, which led to short fall and we're seeing the beginnings of those signs again, plus there's public numbers that talk about enrollment say the same thing. So that should all be good news in mitigating to some degree in the short term. But we intend to very aggressively market this through the channels that are very efficient for us. So remember, over 80% of all of our traffic today is organic. So we've been redeveloping the site to make sure people understand there'll be fewer things to do, more focus on AI. The impact on AI, we'll be using all the social channels that we have to make sure that we use all of our -- the people that advocate for Chegg, influencers to explain what it is and what the difference is. So in some ways, it's a very challenging time because it's new technology, and it's coming faster than anybody thought. And you got to jump on it as quickly as you can. And if you don't, you're going to end up losing. The flip side is, it's really exciting because the dreams that we always have for Chegg to be that companion in your pocket to not only be with you in high school or college. But beyond that, as we build in capabilities to be able to help you code and other things that we couldn't do it quickly or as efficiently as before. So we're going to be very, very, very aggressive because this is our future. There's no reason it about in the past. It's all about the future right now. Alex Fuhrman: Okay. That’s really helpful. Thanks, Dan. Operator: Next question, Brian Peterson with Raymond James. Please go ahead. Unidentified Participant: Hi. This is Jessica Wong on for Brian. I just want to ask -- I know you're not guiding by OpEx line items, but I just want to see like give a sense of your asset investment posture given this current changing environment. Have there been any changes to how you're approaching to LTV and CAC especially as you're rolling out CheggMate and other initiatives? Dan Rosensweig: Yes. LTV and CAC is really important to many consumer businesses because the cost of customer acquisition is so cheap, it's not been one of the variables that we've had to overly focus on. But resource allocation, reduction in things that are not about CheggMate or growing our new customer base or growing our skills business are things that will become deprioritized in comparison to those things. So we've already taken a lot of constructive steps on investment choices because we intend to remain very profitable and generate a lot of free cash flow. On the LTV to CAC really, the areas to think about as it relates to Chegg in that is over what time frame do you want it to return positively. So we can have people -- we can spend money on customers that return profitably three years from now, two years now, one year or in year. In the short term, we're focused on in-year and within 12 months and that is an adjustment down in terms of the spending, but that is because all of our efforts are going to go into CheggMate when we're ready. Unidentified Participant: Got it. Thanks. And just one more quick question. So follow-up earlier, we're talking about the signs you are seeing already for summer usage trends. How have you also been seeing the role of your partnerships with like Calm and DoorDash helping with retaining subscribers over to school breaks? Thanks. Dan Rosensweig: Yes. Well, it's too early to now over the school break. But what we've been focused on there and thank you for asking that question, because it's really an important part of our strategy, which is to provide both overwhelming value in Study Pack to the people pay for the $19.95 and we've seen the success in that because that number has been going up. So we can partially attribute that to bundling these two things into Study Pack rather than the base. The second thing is we've been positively surprised by the number of existing customers that had already been customers that have signed up, particularly for DoorDash. So as we get more aggressive with that and as that continues to take up, we have seen at least early on, customers that are existing Chegg customers that also sign up for DoorDash, they cancel on a much lower percentage than those they don't. So the signs are indicating it will be very positive, but we haven't had the summer yet. Okay, operator, I think we have one last question. Operator: Next question, Arvind Ramnani with Piper Sandler. Please go ahead. Arvind Ramnani: Hi. Thanks for the question. I just wanted to ask, certainly like a big change, and I appreciate you all kind of recognizing that and taking our head on, but as a public company, where you've got to make these investments, how are you thinking about sort of making these investments, these changes? And some of it will include like pricing models so there's a lot of change that you're going to have in the business and the way you operate, the way you price. Sort of what's some of the kind of measures you have in place that things don't kind of move sideways while you're making that change, which is an important one to make. Dan Rosensweig: Yes, fair question. We've been through model changes before. And of course, sitting on the Adobe Board, we went through model changes. I don't think there's any doubt. If there's doubt in anybody's mind that AI is going to be meaningful, and meaningful in the education space, then I don't know how to explain it to you more than the world has already explained to you, which is going to be . So the first thing was to make the commitment to do it. That's what we've done. The second thing was to recognize inside the company that we're going to have to reprioritize our expenses and our personnel to be much more aggressive. Third was to take a look at our capital structure in terms of CapEx and recognize that this is an offset in our content costs and understand the cost of GPUs and CPUs and all of those things and to be able to work structurally within that without discounting our investment in the future of the company. All of those things are things that we have been working on and have already done. We have -- we can monitor our business every 15 minutes and know exactly where we are against new customers and retention rates versus our expectations. So we have a lot of guardrails inside the company to know the impact of all the choices we made. As one of the questions that came up earlier is we've been very methodical about the decisions that we've had to make because we have the ability to test a lot of things. So I understand as a public company, people want you to move faster and have greater certainty despite the fact that it's probably the biggest technological shift we've seen in the last 20 years. We are going to take it the way that we always succeed, which we believe our brand, our reach, our data, our capability, the user experience, focusing on the needs of the student. And we monitor every aspect of that business that we're capable of monitoring so we don't get surprised by our existing customers. It's the customers on the margin and the new customers that have yet to use us that we're really focused on first. So that model is pretty straightforward. It's not the same complexity that you've articulated. We will, over time, though, be able to track usage and how people change their behavior and how much they use the CheggMate part of the service versus the other part of the service. And those things will inform whatever future pricing increases that we choose to take or pricing models that we choose to take. So we don't -- we try our best not to guess. We try our best to test rather than guess, and that's not going to change in our philosophy because we'd rather take a little bit longer than you'd like, but be right. So when people ask us for years when we're going to take a price increase, when we took it, we lost 7,000 customers out of 8 million. And so we -- those are the things that we know because we monitor and test things. So we'll be very diligent and careful about that. But the goal is always the same, overwhelming value to the student that once they subscribe, they love us and they stay in and they stay longer, and that is still the case. This is really about new customers that have another toy to play with now, and we want to go win that battle. Arvind Ramnani: That's very helpful. And just one quick follow-up. As kind of investors who are sitting external to the company, and we don't have as much access to sort of the real-time data. Like how should we kind of think of evaluating Chegg during this interim period? I mean fast forward 3 years and you'll have adopted Chegg, I get that scenario, right? But like in a scenario where during the interim, in the next like six months, 12 months, 18 months, what's the best way to sort of like track and measure like Chegg in this transition quickly. Dan Rosensweig: I don't know that you'll be able to track and measure it between now and the end of the year. I think you're going to have to wait to see how CheggMate is. You'll evaluate it for yourself. A lot of the people on this call have done and shared with us, and thank you for that. Your own research that shows that student clearly prefer Chegg over ChatGPT. So I think there will be an external ways to monitor it. Internally, we're going to monitor -- the only way we do, which is we're going to watch usage, we're going to watch engagement, we're going to watch retention, we're going to look for redemption in cancel rates, length of time that people stay on, willingness to pay more and top of the funnel continuing to stay large and conversion rates staying high. Those are things that we track regularly inside the company. Externally, we don't expect to be in a situation where we'll never have annual guidance again. And what we're just saying now in the short term is because it's summer and because this new giant thing is out there that we could tell you what's going to happen in the second quarter. We had a very good first quarter, but we're really not going to understand the impact of CheggMate or ChatGPT in the fall until the fall. And so trying to predict it when new technologies come out, it's been a futile effort for us, and so we don't want to do it. So I think we're just going to have to wait until we report what we learn over the next six months. And I think we'll all be able to track it a lot better as we go into 2024. But the goals that we seek are obviously returned to a higher rate of growth, continued excellent retention, continued take rates, continued willingness to pay more, continued length of time and then having the funnel increase globally faster. Those are the things that we expect this to do for us over time. But if you try to check that in the short term, I'm not sure that will be much healthier. Operator: Thank you. There are no further questions. I would like to turn the floor over to Dan for closing remarks. Dan Rosensweig: Thank you, everybody. Thanks for the great questions. This is both a very interesting and very exciting time for companies. I had my experience at Ziff Davis , where I was publisher of the largest computer matinee where we saw people go to the Internet first. We see that same similarities now where we see younger people going to adopt AI before older people do. And so, we are moving aggressively and positively and with our eyes wide open and very excited. We do think in the long term this is in our best interest, but we recognize in the short term, we need to meet that challenge head on. We also believe that it's going to be rocky for a while until we're able to answer a lot of those questions. But we have been successful in all the transitions we've done. This one actually opens up a bigger market for us. And so, we're just going to keep our head down, execute and report out on what we learn and continue to communicate as aggressively as we have done to date. So we thank everybody for dialing in. Thank you. Operator: This concludes today's teleconference. You may disconnect your lines and thank you for your participation.
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Chegg Inc. (CHGG) Price Target Adjusted by BMO Capital Analyst

Analyst Adjusts Chegg Inc. (CHGG) Price Target

Jeffrey Silber of BMO Capital has recently adjusted the price target for Chegg Inc. (CHGG), setting it at $7, which is a notable change from its previous target. This adjustment was made on May 1, 2024, and suggests a potential upside of about 35.4% from the stock's price at the time of the announcement, which stood at $5.17. This new price target is a reflection of the analyst's updated view on the company's future performance and potential growth. For those interested in the detailed analysis behind this new target, the full report is available on TheFly.

Chegg has been through a rough patch recently, with its stock price experiencing a significant drop of 27.49% over the past four weeks. Despite this downturn, there are signs that the stock might be ready for a rebound. Currently, Chegg's stock is considered to be in technically oversold territory. This indicates that the intense selling pressure that has driven the stock's price down might be easing up, setting the stage for a potential recovery. This perspective is supported by the fact that Wall Street analysts have been revising their earnings estimates for Chegg upwards, suggesting a growing optimism about the company's financial outlook.

On a more granular level, Chegg's stock has shown some signs of recovery, with a recent increase of approximately 3.09% to $5.33. This uptick, albeit modest, is a positive sign against the backdrop of its recent performance. The stock has seen fluctuations, trading between a low of $4.96 and a high of $5.37 during the trading day. This volatility reflects the uncertain environment Chegg is navigating but also highlights the potential for recovery as indicated by the recent price movement.

Over the past year, Chegg's shares have seen a wide range of trading prices, from as high as $13.11 to as low as $4.96. This volatility underscores the challenges the company has faced, as well as the potential for significant price movements. With a current market capitalization of approximately $548.72 million and a trading volume of about 1.91 million shares, Chegg remains a notable player in its sector. The company's market position, combined with the recent adjustments in analyst expectations and the technical indicators of a potential turnaround, suggests that Chegg could be on the path to recovery, aligning with Jeffrey Silber's revised price target.

Chegg Shares Drop 13% on Weak Guidance

After releasing its Q3 results, Chegg (NYSE:CHGG) shares experienced a more than 13% decline intra-day today. Although the company reported an EPS of $0.18 and revenues of $157.9 million, surpassing the Street estimates of $0.17 and $152.18 million respectively, its outlook for Q4 appeared weak.

Subscription services, which formed 89% of the total net revenues, decreased by 4% year-over-year, reaching $139.9 million.

CEO Dan Rosensweig emphasized Chegg's potential, stating the company's vision to create a powerful, AI-driven personal learning assistant, aiming to serve more students efficiently and at a lower cost.

For the upcoming Q4/23, Chegg anticipates revenue to hover between $185 million and $187 million, with Subscription Services revenue projected between $164-$166 million.

Chegg Shares Drop 13% on Weak Guidance

After releasing its Q3 results, Chegg (NYSE:CHGG) shares experienced a more than 13% decline intra-day today. Although the company reported an EPS of $0.18 and revenues of $157.9 million, surpassing the Street estimates of $0.17 and $152.18 million respectively, its outlook for Q4 appeared weak.

Subscription services, which formed 89% of the total net revenues, decreased by 4% year-over-year, reaching $139.9 million.

CEO Dan Rosensweig emphasized Chegg's potential, stating the company's vision to create a powerful, AI-driven personal learning assistant, aiming to serve more students efficiently and at a lower cost.

For the upcoming Q4/23, Chegg anticipates revenue to hover between $185 million and $187 million, with Subscription Services revenue projected between $164-$166 million.

Chegg Stock Jumps 20% Following Q2 Earnings Report

Chegg (NYSE:CHGG) exceeded expectations for its second-quarter revenues and outlined its intentions to further expand into generative artificial intelligence. This move is aimed at directly competing with ChatGPT in the AI space. Chegg's stock surged by over 20% pre-market today.

Chegg's adjusted EPS stood at $0.28, coupled with a revenue of $182.9 million. These figures outperformed Street predictions of $0.29 EPS and $176.5 million in revenue. Notably, the company observed improvements in year-over-year customer acquisition and retention rates in the quarter, a trend that followed the launch of its initial generative AI experience in May.

Looking ahead to Q3, the company anticipates revenue between $151 million and $153 million, compared to the Street estimate of $152.4 million.

Chegg Shares Up 8% on Busuu Acquisition Announcement

Chegg, Inc. (NYSE:CHGG) shares closed more than 8% higher Tuesday, following the company’s announcement, according to which it is going to acquire Busuu, an online language learning platform targeting both students and professionals in the workplace.

The $436 million cash acquisition is expected to help diversify Chegg’s business model and provide it with a strong foundation of users internationally (90% of Busuu’s subscribers are outside of the U.S.).

The company also announced a proposed $300 million accelerated share repurchase transaction under the previously announced $1 billion securities repurchase program.

Chegg Shares Up 8% on Busuu Acquisition Announcement

Chegg, Inc. (NYSE:CHGG) shares closed more than 8% higher Tuesday, following the company’s announcement, according to which it is going to acquire Busuu, an online language learning platform targeting both students and professionals in the workplace.

The $436 million cash acquisition is expected to help diversify Chegg’s business model and provide it with a strong foundation of users internationally (90% of Busuu’s subscribers are outside of the U.S.).

The company also announced a proposed $300 million accelerated share repurchase transaction under the previously announced $1 billion securities repurchase program.