Chegg Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2023

There are 11 speakers on the call.

Operator

Greetings, and welcome to the Chegg's Third 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, Traci Ford, Vice President of Investor Relations and ESG.

Operator

Please go ahead.

Speaker 1

Will be recorded. Good afternoon. Thank you for joining Chegg's Q3 2023 conference call. On today's call are Dan Rosenzweig, Co Chairperson and CEO will be available on our Investor Relations website, will be available on our website. We routinely post information on our Web will be recorded on our media center website at chegg.com/mediacenter.

Speaker 1

We encourage you to make use of these resources. Will be recorded. 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, will be recorded, including the future financial and operating performance of the company. These forward looking statements are subject to material risks and 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.

Speaker 1

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 ks 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. Will be recorded. During this call, we will present will be recorded in both GAAP and non GAAP financial measures. Our GAAP results and GAAP to non GAAP reconciliations can be found in our earnings press release in the investor slide deck found on our IR website, investor.

Speaker 1

Chegg.com. We also recommend you review the investor data sheet, which is also posted on our IR will be recorded. Now, I will turn the call over to Dan.

Speaker 2

Thank you, Tracy, and welcome, everyone, to our 2023 Q3 earnings call. Chegg had a good quarter, delivering better than expected results as we saw stabilization in new accounts and increases in overall retention and in the take rate of Chegg Study Pack. In addition to our academic services, we continue to invest in skills where we are seeing very strong growth, will be available for the future of Chegg. 6 months ago, leveraging the breakthroughs of artificial intelligence, We began to completely reinvent what we offer, how we offer it and to whom we offer it. New technology platforms create a lot of hype and noise.

Speaker 2

But as the height gives way to facts, we believe Chegg is in a great position to build the most impactful, Scalable AI enabled personal learning assistant, which will expand our opportunities to serve more students will be in more ways and at a lower cost per customer. The history of the Internet has shown us that verticals win. Leading companies with a strong brand, category expertise, scale and resources can invigorate growth will create new opportunities when they move quickly and embrace change. In the world of AI, SEG has particularly valuable and proprietary assets for education and learning, including our Student First brand, a reputation for quality and accuracy and our unique content and data set. Chegg also has a proven track record for improving student outcomes.

Speaker 2

Will be available. And now by combining the best of what Chegg has to offer with the advancements in artificial intelligence, we are creating new opportunities to better serve our students. It has been nearly a year since Chat GPT launched. We have all learned a lot and are experiencing how AI is impacting our lives. We know that students are using Chegg GPT, but what is interesting is that they are using it for a variety of things in addition to education.

Speaker 2

Because Chegg is verticalized for learning, what isn't surprising is that when students try us and compare us to more general AI solutions, Chegg outperforms. That has led to incredibly high retention rates and we are maintaining high customer satisfaction, such as 91% of students report that when they use Chegg, they get better grades, 89% say Chegg helps them learn their course material and 90% say they work more efficiently when using Chegg to understand their coursework. And we are now introducing new AI capabilities and features, which we expect will do even more for students. We are excited about what we are building and we are moving quickly and rolling out the first phase of our new user experience. Will be recorded.

Speaker 2

In September, we started to show our 1st cohort of users the updated capabilities with a new simple interface and a unified asking experience. This means Chegg can provide answers from our proprietary database, our more than 150,000 subject matter experts will be recorded. We are focused on usage, quality, accuracy and speed and are on track to introduce our own large language learning models trained on SED's unique data. Will be available. In the coming months, you will see us offer more features, including multi turn chat, which will create a simple and conversational experience will introduce personalized AI enhanced learning aids such as practice tests, assessments, study guides and flashcards.

Speaker 2

We also plan to let students connect to each other and share content. Over time, all of this is designed to expand our TAM will increase our relevancy to millions more students than we serve today. It's truly an exciting time at Chegg. We are executing well against our plan and we are on track to roll out even more features to more students in Q1 of 2024. We have only one agenda will be subject to the student.

Speaker 2

What we do is incredibly hard to replicate, giving us a powerful note. The combination of our successful learning taxonomy, will be available for over 100,000,000 solutions generated by Chegg Subject Matter Experts and now the ability to leverage artificial intelligence means we can do what generic AI platforms cannot do. Our vision for a truly personalized learning assistant is coming to life. Will make it easier for you to see what we are building. We've created a video for you that is available on our IR website, where you can see how the product is evolving.

Speaker 2

We believe this will give you a sense of just how powerful Chegg can become, including our ability to blend our academic support and skills efforts by integrating career pathways into the student experience. We are beginning to see the investments we've made in skills pay off. By leveraging the latest advances in AI to accelerate our program development, we are able to create relevant, customized, high impact programs will be faster and at a lower cost. We will also be releasing a suite of AI training programs over the coming months. Through our B2B partnership and direct to student efforts, we continue to see Chegg's skills grow and expect it to become a meaningful contributor in the years ahead.

Speaker 2

We are widening the aperture for Chegg and we hope to reach a much larger audience of learners, one that historically we have been unable to serve before. This is where much of the future growth will come from and our plan is to continue to execute each quarter will be recorded towards this vision. And before I turn it over, I want to acknowledge Andy as he plans to retire once we hire his replacement early next year. I am deeply grateful for the incredible contributions Andy has made during his 12 year tenure at Chegg. Will be available.

Speaker 2

Under his leadership, we have grown from a physical textbook rental business to a global online learning platform that has supported more than 22,000,000 students over the last decade. He guided us through our transition to a fully digital business and in doing so will grow our digital revenue from 0 to over $700,000,000 annually. In fact, when Andy took on the role of CFO, was unprofitable. But today, Chegg is profitable and is expected to generate nearly $220,000,000 will be in adjusted EBITDA and approximately $170,000,000 in free cash flow this year. These are remarkable accomplishments and none of them would have been possible without Andy's leadership and vision.

Speaker 2

On a personal note, I want to thank Andy for his partnership, will be a key driver for the company and will forever be part of the Chegg and Rosenzweig family.

Speaker 3

Will be available. Thanks, Dan, for those kind words. It's been an amazing journey over the past 12 plus years, will be available for you and the Chegg team and proud of what we have collectively accomplished. Also a big shout out to Tracy and Diana. Will be recorded.

Speaker 3

You are the best IR team I've had the pleasure to work with. You guys are just awesome. Our company has become an industry leader, will be a cherished brand that is loved by millions of students worldwide with a future that is incredibly exciting. Having the opportunity to work for a mission driven company that is integral to helping students learn has been super rewarding and I thank you. Now back to business.

Speaker 3

Will be recorded. Q3 was a good quarter, exceeding our revenue and adjusted EBITDA guidance. And as Dan mentioned, we are encouraged by the continued positive trends, will be recorded in the Q3 of 2019. Total revenue was $158,000,000 was driven by subscription services revenue of $140,000,000 where we had 4,400,000 subscribers during the quarter. Will be subject to the financial results.

Speaker 3

Skills and

Speaker 4

other revenue was $18,000,000 driven

Speaker 3

by strong growth in skills, offset primarily by the change in the required materials model, which is now a revenue share as well as some advertising softness. We remain disciplined on the expense side, will be aligned investments with our AI focused strategy, which supported another adjusted EBITDA beat this quarter versus guidance, will be coming in at $39,000,000 or 25 percent margin. We had 2 onetime items that impacted our will be recorded in the quarter. 1st, during the design of our new generative AI experience, will be recorded. We determined that certain content and system types were no longer necessary.

Speaker 3

As a result, we have taken a charge of $41,800,000 of which approximately $38,200,000 was included in cost of goods sold, which impacted gross margin and $3,600,000 included in G and A. The second item is we recorded a gain of $32,100,000 from the repurchase of some of our outstanding convertible debt will be recorded at a discount during the quarter, which was recorded in other income. We have a strong balance sheet and drive significant free cash flow, which we expect will continue and for full year 2023, we now expect free cash flow to be approximately 170,000,000 will be recorded. We have opportunistically retired both convertible debt and equity, returning approximately $1,200,000,000 $800,000,000 respectively will be recorded to investors through repurchases over the last 3 years. We ended the quarter with $674,000,000 of cash and investments with total convertible debt outstanding of $603,000,000 at par value.

Speaker 3

We continue to believe that the combination of our operating model, balance sheet and cash flows sets us up to deliver on our mission to serve students across the world, leverage AI to expand our offerings will be recorded and ultimately return to growth while maintaining strong profitability. Now moving on to guidance. For Q4, we expect will be between $185,000,000 $187,000,000 with subscription services revenue between $164,000,000 160 will be $6,000,000 gross margin between 73% 74% and adjusted EBITDA between $62,000,000 $64,000,000 or 34% margin. Will be in the range of $1,000,000,000. In closing, we expect the development of AI will allow Chegg to embrace a much larger opportunity over time.

Speaker 3

We believe there is nobody better equipped to meet the current or future needs of students than Chegg. We have an industry leading brand, will be a proprietary beta, strong operating model and a balance sheet to extend our leadership in the future. With that, I'll turn the call over to the operator for your questions.

Operator

Will Your first question comes from Jeff Silber with BMO Capital Markets. Please go ahead.

Speaker 3

Thanks so much for taking my question. In your prepared remarks, Dan, you talked about the new user experience and how you started with the 1st cohort in September. I was hoping you can tell us a little bit about that cohort, how large it is and what's the planned rollout from here to reach your entire user base?

Speaker 2

Yes. Thanks. So the rollout goes to 2 groups. Obviously, it goes to existing customers and it goes to new customers. So, we started at 1% rollout.

Speaker 2

We went to 10% rollout. We're already now at 25% rollout. So it continues to go up because the response has been really positive. So you can expect Well, what we've done, and we have a video coming out for you to be able to see it. What we've done is we've improved will be 2 things to begin with, which is the user interface is much simpler, much more intuitive and easy to use.

Speaker 2

And then we are now also able to generate answers to questions using generative AI in addition to the 150,000 experts in our database of over 100,000,000. So that is what we are rolling out now. The next big phase where the user experience will change even more dramatically when we do multi turn chat, which will be coming closer to the end of this year and then to the Q1 of next year. So it's been really positive. Feedback has been really positive, which is why we've gone to from 1% to 25%, and we think it's going to make a massive difference in future growth and we're incredibly excited about it.

Speaker 2

Hello?

Speaker 3

Yes, I'm sorry. I must have lost you there. So Thanks. I'll just read the transcript. You don't have to repeat anything.

Speaker 3

So actually, let me just ask my follow-up question. I apologize. Sure. You mentioned in terms of Existing and new customers, I just was wondering if we can get a little bit more color from a subscriber perspective. I know initially when ChatGbt was kind of called out, it was Are you seeing any difference between existing and new customer signing?

Speaker 2

Well, what we said in the prepared remarks was we're seeing record retention. So when students use Chegg and they use generative AI, Chegg PPT and others, We win handily, and that is because we have a proven experience that actually improves outcomes, teaches the student, doesn't just give the answer and is designed specifically and exclusively for the learning experience. And so when students see that, Plus you combine with the accuracy and quality, we win handily and that's why our retention is doing extraordinarily well. So the battle is going to be messaging for new customers. And we're already seeing, from the rollout test that you talked about earlier, we're We've seen very positive response from new customers, as they start to see the new user interface and the first part of the will be answered.

Speaker 2

So we're extraordinarily optimistic right now because really it's just a matter of getting the message getting the product out, executing well on that, getting it communicated and then we continue to improve all of our metrics including getting close to where we wanted to get will

Speaker 1

be due to new account growth, so we

Speaker 2

can start to expand new account growth and grow again. So we're really excited about where we are and the plan seems to be working so far.

Speaker 1

All right.

Speaker 3

Thanks so much for the color.

Operator

Yes. Next question, Kunal Madkar with UBS. Please go ahead.

Speaker 5

Hi, thanks for taking my question. A couple if I could. 1, on the international side, could you give us a sense of what you're will be on the international front in terms of growth. And second would be, again, on the international side would be competition. So how is your content relevant to customers or students internationally?

Speaker 5

And what kind of competitive

Speaker 2

will be. Sure. So on the international front, as you recall, In 2019, we really didn't have an international business. Now it's over 10% of our business. So we've made substantial progress.

Speaker 2

Similar to the U. S, when COVID came and we peaked COVID, we almost doubled the number of new accounts that we would be doing in the course The year during peak COVID and of course, as COVID has gone away, those numbers have gone down. And so we are now beginning to start to look to return to growth of new accounts and we're seeing great progress in that. And international is actually one of the places where we're really seeing great progress. The relevancy goes up because of AI.

Speaker 2

We're able to translate better, translate less expensive, And we're able to build out more categories faster, so that's a really positive step. And we're also finding the right pricing. So will

Speaker 1

be in the range of $1,000,000,000. As cost per customer

Speaker 2

goes down, margins will go up even if we reduce pricing internationally. So that's all been really positive. And so I would say we're making really great progress in international, even more so than the U. S. Right now and the U.

Speaker 2

S. Is making really good progress.

Operator

Will be answered. Next question, Ryan MacDonald with Needham and Company. Please go ahead.

Speaker 6

Hi. Congrats on a nice quarter and thanks for taking my question. Andy, best of Dan, maybe just can you dig into the subscriber trends and what we're seeing on a quarter over quarter basis more? And maybe just sort of clarify on what you mean on the retention side versus what you're seeing in terms of net new subscriber growth. And when you think maybe we start to see that subscriber number or count sort of trough and start to show growth as we look over the next few quarters here?

Speaker 2

Yes. So Andy has coined the phrase subscription math, so in his honor upon his retirement. I'll sort of walk us through this a little bit, which is when an account comes up for renewal, What we mean by we've seen incredibly high renewal rates is of those that come up for renewal, they are renewing at a much higher rate and staying on longer than they ever have. And we're also seeing a significant improvement in take rate, which is almost 1 out of every 2 new customers now is taking the more expensive version and they're retaining at the same rate as the less expensive So those mechanisms are all extraordinarily positive and is why we're able to improve Our profitability and generate a lot of free cash flow and it's really positive for the business. So the opportunity is to will start to sell more new accounts.

Speaker 2

We are selling significantly more new accounts in 2023 than we did in 20 will be in the range of $1,000,000 more a year. So we still generate millions of new accounts a year. What we wanted what we have to do is overcome The incredible rise that we took in COVID and then hit the trough, as you point out, which we think we're approaching that trough on new account growth And with the new product and the new marketing messages and The new capabilities that we're going to have in it, we think that we're somewhere around the trough. I can't pick the particular day or moment. On a given day, we're at the trough.

Speaker 2

Some days, we're above the trough. Some days, we're a little bit below the trough. But we're where we wanted to get to first. And then from there, we start to grow again. And so that is the entire effort of the company is to invigorate growth again.

Speaker 2

We have a lot of variables in which we need to execute on, but as we're executing on it, we expect that's exactly what's going to happen.

Speaker 1

Will be

Speaker 6

helpful color. Thanks. Maybe on international, last quarter you talked about rolling out a new payment infrastructure in India as part of the international growth and I think that was supposed to come online in August and it seems like in some of our survey work that you're Trying to see more of an uptick there, but can you just talk about India and how big that opportunity is and if you're starting to see some of that Stronger momentum from the new payment infrastructure? Thanks.

Speaker 2

Yes. I'll start with the second part first. Yes, we are seeing it's not just The payment infrastructure that we had to do, you're right, we did that, but it's also getting the appropriate pricing in India, which we've been able to do. So what's interesting and really positive is when we lower prices internationally, we obviously see an increase in conversion, which is exactly what you want. But we're also seeing an uptick in people that take the more expensive version of what we have.

Speaker 2

So when you take The increase in conversion and the higher take rate of the more expensive product, the margins on the product are remaining very similar right now to what they were before, which is a really positive step. Now in terms of the size of what we think India can be, we actually think it could be 1,000,000. That's our objective is in India. It's got the largest English speaking community outside of America. There's Huge focus on learning, a huge focus on STEM and an increasing awareness of Chegg.

Speaker 2

And as we roll out the AI capabilities, we think that's even going to expand well beyond that. Also, As we mentioned that we're starting our expectations over time to build community and we think sharing of Chegg will also be a great viral way to accelerate growth. So I would say India is a real highlight of what we're seeing right now and again your survey work I think backs that up.

Speaker 3

Appreciate it. Thanks again. Yes.

Operator

Next question, with Doug Anmuth with JPMorgan. Please go ahead.

Speaker 7

Hey, it's Brian Smiley on for Doug. Thanks for taking my questions and congrats on the retirement, Andy. Just to start, can you just walk us through results from the back to school season and how it shaped up versus your expectations? And then I guess, Secondly, just shifting a bit, can you elaborate more on the skill strategy and what are the levers, the drivers of success that you're seeing there so far? Thank you.

Speaker 2

Yes. So back to school has gone well. I mean, look, it's the Q3 in a row now where we've beaten our own both on the top line and on the bottom line and quite substantially. So, all of those are reflections of excellent execution that our team has been doing and you see them in the results. So we would say that it's going very well versus our original expectations were ahead of where we thought we would be in the number of subscribers we have, in our retention numbers.

Speaker 2

And so All of this is good news. The opportunity for Chegg, as I said, is to expand the aperture, open it up Because we can use AI now, we have more ways to add more content and a lower cost per content and make it relevant to a much larger group of people. And that is really exciting and really the one of the biggest growth opportunities that we've seen in years. So we're fired up about that. On the skill side, We've made an investment over the last couple of years to really change the way we do skills to make them lower cost, Higher quality, greater completion rates and work through our B2B partners, particularly GIL, And we're seeing excellent growth.

Speaker 2

So year over year growth of skills is quite high. And if it continues this way, we will be a very meaningful part of our business in the years to come, because we're expanding not just through GIL, but we're expanding direct will be recorded to corporations where we signed our first customer, Indeed, rather than lay people off that they are going to use us to retrain their employees. So this is exactly the kind of investments that we wanted to make in businesses that have high ARPU. I mean the average ARPU of our Chegg Study takes StudyPack customers $17 These are as much as $5,000 So, we are really bullish on where we're going with skills. Now the next big opportunity is, as we talked about in the prepared remarks, and as you can see in the video, if you take a look at it, is we're building skills taxonomy.

Speaker 2

So what we want to do is help college kids assess where they really are with the kind of skills that they need to be employable on top of their academic learnings and then help them master will ensure those skills so that they can in fact be employable. These are all things that are now possible that we've always wanted to do that are made Much more possible because of the combination of Chegg and AI. And so this is the direction that we will be in the range of 2nd to go, which is B2B through GIL, B2B Direct to the Corporations and Direct to Student through Chegg. So these are all future growth opportunities that we're building now. Will

Speaker 1

be available.

Operator

Next question, Josh Bair with Morgan Stanley. Please go ahead.

Speaker 4

Great. Thanks for the question. And Andy, congratulations on your planned retirement. You mentioned the Pretty large charge on the GAAP basis related to the content and systems no longer necessary. I was hoping you could just provide some color On what that means, the types of content and systems that you're referring to and then what it means from a cost savings perspective looking forward?

Speaker 3

Yes. It's actually not that large, truth be told. When you look over the last, call it, 10 years or so, we will spend literally 100 of 1,000,000 of dollars on content. So relatively speaking, it's small and it's a hodgepodge of a whole bunch of different things will be included in that. So yes, it's something that as the team went through and looking at what the new Chegg experience is going to be and we're To roll that out, there were certain aspects that the team decided wasn't going to be part of the, as I'll call it, the new Chegg.

Speaker 3

And as a result, we took the charge. And like I said, it's like I said, relatively small. From an impact going forward, it does most of that, as I said in my prepared remarks, rolls through the cost of goods sold. So it does have a couple of 100, maybe upwards of 300 basis point impact on the gross margin. But nonetheless, it was necessary and relatively small in the scheme of things.

Speaker 4

Okay. Thank you, Andy. And then

Speaker 3

go ahead.

Speaker 2

Go ahead. I was going to say just to clarify that point, it's a positive impact on the gross margins.

Speaker 3

Yes, I'm sorry. I'm sorry. Thank you.

Speaker 4

No, That was clear. And then, wanted to just get, just a quick update on StudyPack. Trends in a couple of way, pretty positively. Just wondering, like overall, are you still thinking about ARPU and study pack adoption as a growth driver, like is there more room to go? And then in relation to GenAI and the new customers coming on board, is it sort of consistent behavior with other alternatives out there?

Speaker 4

Thank you.

Speaker 2

Yes, you're going to have to explain the last part of that question again, but let me just address the first will be part of it. So, when we first started rolling out Chegg Study Pack, we had about a 13% take rate and we're now up to over 50%. So yes, We continue to see it as a driver, but I think what ultimately is going to happen now, I'm not sure People have really understood the level of change that we are doing with our product. So in less than a year, We are completely reinventing the Chegg user experience to be much broader, much more relevant to a bigger group of people and much more global in its nature. And so the new experience will likely will end up maybe with just one SKU rather than 2, but with 2 different price points, depending on the capabilities that students are going to want access So, we think between AI and skills and the other issues that we're helping will be on testing messaging and pricing.

Speaker 2

I wouldn't expect that anytime soon. I think the single most important thing that we need to do is to get the new product And user experience out there and if we continue to see the positive feedback that we're getting now, then I think you're going to see that just as we've laid out, over the course of the rest of this year and the Q1 of next year. And then we'll keep adding and adding and adding. The key is just creating overwhelming value so that students see the value in the pricing. And every time that we have done that, we've been able to be successful.

Speaker 4

Great. Thanks, Dan.

Operator

Next question, Brent Thill with Jefferies. Please go ahead.

Speaker 3

Andy, great working with you over the years. One of the questions I've asked you guys for kind of multiple years is just You've had a really high margin and given a lot of the AI components that you have to build out, why not Spend a little more to kind of get the right infrastructure in for the next 5 years. Can you do AI infrastructure and keep your margins Where they're at, you obviously guided to a pretty strong margin for next quarter. If you could just update The trade offs that you're thinking through here.

Speaker 2

Yes, I'll start and let Andy end with the Flourish. This is a highly profitable business. I mean, we have 70% plus gross margins. We have EBITDA margins that we believe will continue to grow as we grow. And as Andy has pointed out over the years, we'll likely approach 40% EBITDA margins as we get even bigger and bigger, which we are working very hard to return to that growth path.

Speaker 2

So the spending is We've increased our spending in each of the categories over the last bunch of years as we see opportunities to invest. I can tell you as the CEO, we have not held back on investing things that we think are valuable to students and valuable to investors. We're just fortunate that our business model can produce as much as $170,000,000 in free cash flow this year as an example. So, I think When people look how to value this company, we've got a company that's going to do nearly $220,000,000 in EBITDA, dollars 170,000,000 in free cash flow with a big growth opportunity ahead of it. And as we see those opportunities like we did in skills, we invested in it, like we transformed the company will be subject to all digital.

Speaker 2

We invested in it like we are doing now with AI. We're not holding anything back from AI. We're just able to repurpose A number of the costs of things that were higher cost of content creation to now more efficient cost of content creation. So I will tell you that when we see opportunities to move faster and grow, we will. It's very hard to replicate what Chegg does.

Speaker 2

These are complicated systems and processes and learning taxonomies, and we want to get it right. So we don't have the situation that AI has where students don't trust it. We want to be in a situation where our accuracy and relevancy and user experience are designed the way students will be affected and that's why we continue to get such high results and such high retention. I'll let Andy sort of address any other parts of that.

Speaker 3

No. Dan, I think you nailed it. And I think the key thing here is we're not starving the business at all. We're making massive investments. We made a big investment in Scale AI that we talked about last quarter, and it's something I remind our team frequently and that is to Dan's point, we're driving more EBITDA and free cash flow Many of our competitors are doing in revenue.

Speaker 3

And so when we need to deploy capital, we can do it and we will do it and we are doing it in our new generative AI product. So we're absolutely beating the business and we our goal, like Dan said earlier, is to get back on will be a growth track and we'll make the appropriate

Speaker 1

investments to

Speaker 3

do that.

Speaker 1

Thank you.

Operator

Will be available. Next question, Jason Celino with KeyBanc Capital Markets. Please go ahead.

Speaker 8

Great. Thanks for taking my questions. Just a couple for me. Nice to hear the initiatives on the skill side. Can you just talk about the go to market there, particularly as you try to target some corporate customers like Indeed?

Speaker 2

Yes. So, I think it's sort of fascinating. One of the things that I'm not sure that we even understood the value of was that over the last bunch of years, we've had as many as 22,000,000 students subscribe to will be used for free versions of our writing product and others. So we've had tens of millions of students that have gone into the workplace. So our brand is actually quite And so as we were working with Guild and as we saw that Guild business grow And then we saw that our completion rates got beyond 50%, which is really hard to do with online courses.

Speaker 2

We began to be approached by people like, well, can you do this for us? But we don't necessarily want to take the whole situation with GIL because GIL does online education as well as GIL's. And so that prompted us to build a with Tiger team that is going into corporations that know Chegg, that have a lot of employees that have used Chegg, that value Chegg. And so that is, how How we got started. We hired Colin Coggins, who is now running that group.

Speaker 2

And so he's responsible for all of those efforts And he's making immediate progress to be honest with you. Indeed, it's just the first of what we imagine will be many over time. There's a lot of large companies. The difference that we do versus, other companies out there that do skills. So if you take some companies, they have a marketplace of skills and they package it and they sell what they have.

Speaker 2

Other companies have a very limited scope of what they build their content for and that content may or may not be updated regularly. Chegg has become A bespoke content creator in the skill space because we're creating for students as well as for Guild, which is frontline workers and now as well as for corporations. The corporations come to us and they say, look, the single most important thing that we need to reeducate or train our employees on is this. Originally, these skills businesses grew B2B because it was a benefit being offered, come to our company and you can train on this stuff. Now it's becoming an imperative where the corporation is saying this is exactly what we need to do.

Speaker 2

And one of the benefits of AI has been we've gone from 13 weeks of creating a course in 100 of 1,000 of dollars to 5 or 6 weeks and maybe 40 was $1,000,000 So our ability to do it at a much greater speed and much bigger scale, personalized specifically to the needs of those corporations has improved. And so that's why we're starting to make real good progress on our own corporate B2B.

Speaker 8

Okay, great. Helpful. And then when I think about the stabilization you're seeing on the retention side, how much of partnerships will come into play. And then when we think about future partners, like what are

Speaker 3

the types of characteristics or

Speaker 8

Things you look for in that. Thanks.

Speaker 2

Just you broke up a little bit. You're talking about retention and partnerships. Is that what you were asking about?

Speaker 8

Yes, yes.

Speaker 2

So look, we have really great partnership so far with Calm and now Tinder and DoorDash are examples And others are looking to work with us. We use it in 2 different ways. One of them is to help increase conversion and the other is to help improve retention. Because the way the deals work is the students can't get access to the free DoorDash or the free Tender or the free time if they don't retain Onchegg. And as you've seen, our retention numbers are going up.

Speaker 2

It's for a whole host of reasons, Quality being the single most important thing, but the overall value of which these partnerships are adding to it. So yes, We are being approached by and we are in discussions with a number of people and different ways to offer a Chegg premium pack and other things that we can do because students value the ability to get access to the things that they want through Chegg. And These partners really value the ability to reach college students more efficiently than they ever have before. And so it's It's been a positive surprise for us to be honest with you. Perfect.

Speaker 2

Thanks, Dan. Yes.

Operator

Next question, Brian Peterson with Raymond James. Please go ahead.

Speaker 9

Hi. Thanks for taking my question. This is Jessica on for Brian. I just want a little bit of follow-up from an earlier question. In terms of headcount, what kind of investments are you considering for a hiring strategy like in areas like AI and skills, which are great growth areas for you.

Speaker 9

Are you looking for more personnel or you having are you looking for more partnerships like Scale AI that helps cover the talent you need.

Speaker 2

Yes. One of the things that we did earlier this year, which was very unfortunate, but back in June, We really began to understand the magnitude of what we wanted to invest in. And then we made the difficult decision will be able to eliminate almost 90 jobs in the company, so that we have the headway to be able to add jobs into our AI space. So We have moved the majority of the personnel that we plan to move. We've opened up room to be able to add people as we need to add them.

Speaker 2

In terms of AI partnerships, one of the things that we built is something internally is called the orchestrator, which allows us to work with any and all AI partners depending on which is the most efficient and relevant to produce the best result at the best price for us for our students if we choose to do that. So we're not looking for we don't need many more partnerships in order to build what we want to build. It's really about execution right now. So We've always been judicious about adding heads. We don't really add all that many heads per year.

Speaker 2

But the ones that we will add will be focused On getting all of these services rolled out the way we've discussed it on the call.

Speaker 1

Great.

Speaker 9

That's great. That's good to hear. Also as a quick follow-up, so as you're rolling out further capabilities with your AI tools, Are students receptive to having AI on track being like a coach in their lives beyond study help? Like could AI connect

Speaker 2

Yes. The answer is absolutely yes, and that's precisely what we're building. So in the short term, the first step is to convert all the academic support. That is the single most valuable thing that we do and most obvious thing that we do. From there, we are building The skills pathways, which is the ability to assess, do you have the skills necessary?

Speaker 2

So just envision the following scenario. You go School A, we know that students that go to School A that major in finance end up going into the following 10 companies in your state, and the skills that you need outside of academics to be proficient in these things, we'll be able to tell all the students that. Then we'll be able to assess you versus your other classmates or against an assessment test, and then we'll be able to offer you the ability to learn those skills. Those kinds of things will be not only make Chegg more valuable while you're at school, but also be able to stay with you once you're outside of school. The second area that we're working on are the areas that originally were Chegg Life, which is financial literacy, mental health, those kinds of things.

Speaker 2

And so the ability to use a coach precisely as you say, it's internally it's called the coach. Will not only encourage you to do things academically and skills, but also acknowledge when you're not getting enough sleep or when you may want to talk to So it's precisely the kind of things that we want to do. When I joined the company 14 years ago, we said we wanted to go from 4 days a year rent return, rent Return to 365 days a year, well, we've gotten halfway there or a third of the way there, I should say. And we think these new capabilities will continue to expand the region to just stay annually on Chegg. We really have not offered an annual Subscription in ages, but one of the things that once we roll out these perks and roll out these other capabilities, we do think there's going to be an interest in an annual subscription because you will use Chegg more and more each day for things beyond just academic support.

Speaker 2

You use it for mental support, you'll use it for skill support, for coaching, for time management. There's a whole host of things that we'll be able to do that

Operator

Thank you. Next question, Alex Fuhrman with Craig Hallum Capital Group. Please go ahead.

Speaker 2

Hey, thanks very much for taking my

Speaker 10

question guys. I wanted to ask about Marketing strategy, has your marketing needed to change at all over the past couple of quarters as AI has emerged as a little bit of a Competitive threat, and as you look into next year, is it pretty much the same playbook? Or are there any differences in how you go to market with

Speaker 2

You could expect to see differences in the messaging And differences in the format and differences in the vehicle. So I'll take each one. The first one and the most important one is we will be able to start to message the new capabilities. Remember, we get millions of students that come in a month, but because you come up against the paywall from day 1, We will now have more valuable messaging and differentiated messaging that we think will improve conversion. That's worth a fortune to us without even bringing in any other customers into the funnel.

Speaker 2

But of course, we want to expand the funnel and we should be able to expand the funnel because the kinds of things that we can do will now be relevant to students well beyond just the STEM B categories. And that is one that we intend to use that increased messaging in other environments. The environment that I'm not I don't think will surprise you will be in environments like TikTok. So it might surprise you to know that Chegg produces a lot of videos for TikTok No. The ones that don't do very well get to 100,000 people.

Speaker 2

The ones that do very well get to over 1,000,000 people. So, our ability to show the product in video and message it through influencers on college campuses, that you see in terms of Chegg's effort to get the message out once the product is rolled out more fully, which will be next year.

Speaker 10

Okay. That's really helpful. Thank you very much.

Speaker 2

Yes. By the way, we've seen really positive response from TikTok already and we've seen really responsible we've seen the beginning of positive response on conversion for the customers that are getting the new version of Chegg. So these things are things that we hope to work and expect to work, and we're seeing, good first signs of them working.

Operator

Will be available. Next question, Eric Sheridan with Goldman Sachs. Please go ahead.

Speaker 2

Maybe 2 if I can. One big picture, Dan. How should we be thinking about pricing power longer term with respect to AI? I know there's sort of this debate out there among investors about whether AI is something that is inflationary, deflationary sort of offense versus defense. So we'd love to Think about how you think about AI capabilities feeding back broader to sort of pricing in the platform over the medium to long term.

Speaker 2

And then second, more shorter term question, just as we exit this year and go into next year, any updates on your strategy with respect to language And more language capabilities on the platform. Thanks. Yes. A lot of really good questions there. Let me try to unpack them.

Speaker 2

So the first thing is, let me just get to the Language 1. On the Language 1, We have said that, we acquired busuu and the initial execution and integration of BOSU did not go as planned. And we are now seeing that turn around and get into positive territory again. And so that is a really good scenario. There are 3 places for the language areas to grow.

Speaker 2

Obviously, we're in Europe where it's much more prominent direct to the consumer. Believe it or not, B2B on its own and with Gild are also growth areas for us as more corporations want English language. And because we have the partnership with GIL, that's one that we think will continue to expand. And then the ultimate one is the premium model in the U. S.

Speaker 2

All of those things are in flight now. And internally, we expect to see the results of those efforts over the course of this semester So we think that whole category is a growth category for Chegg even starting now. So on the ARPU area and pricing power, we have shown that we have pricing power when we rolled out the bundle. We also, last year when we took the dollar increase, we said that the dollar increase was designed to increase the number of people that took the bundle. So that actually did so by 5 or 6 points, which is what our estimate was.

Speaker 2

Going forward, I don't really see charging extra for AI As a good decision for businesses, I think it's an opportunity for the company to do it better to pick up market share and retain their pricing. And I sit on the Board of Adobe, so we have lots of these conversations there as well. For Chegg, as I mentioned earlier, I think ultimately we get to one SKU that has all of this, has the academic support, has the skills will be the best way to access to the price point will go up. But there's always got to be, particularly for college students, a smart price point to get them started out. Will be available.

Speaker 2

And so I think we see being able to improve ARPU by adding and improving the amount of things that we can provide and the number people that are willing to pay for the higher SKU once they become Chegg customers. So yes, we know we have pricing power. We've taken that power. We could take more of that power now, but the goal is to return to new account growth, which we're getting closer and closer to every day. And so that is more of our primary focus right now than pricing.

Speaker 2

Great. Thank you.

Speaker 1

Will be available.

Operator

There are no further questions. I would like to turn the floor over to Dan Rosensweig for closing remarks.

Speaker 2

Yes. Listen, let me start again by thanking Andy. Without his friendship and partnership and leadership, Chegg would not be nearly as successful as it's been. We love who we serve. We love the ability to serve them.

Speaker 2

And working with Andy has been one of the professional honors of my career. As we go forward, What we realize is the opportunity to do more for students and do it for more students is now opened up again because of AI. And so as we come out of the COVID accelerated growth rate that was not sustainable, We are hitting that troughs, as one of you mentioned earlier and getting to the point where retention is growing and length of Time that people are growing and ARPU is growing and it really is about adding new accounts. And as we get closer to where we want will be the first and then roll out the new product and new service. We see ourselves serving tens of millions more students a year will be over the next bunch of years.

Speaker 2

So the future at Chegg, really does look exciting. The investments that we're making now are ones that we anticipate will make a big difference in our future growth. And we're really excited about the business and we're proud of our team and the execution they did for the Q3 in a row to beat will be subject to the results and I think you're going to be very excited over the years to come. So thank you, Andy, and thanks everybody for joining.

Speaker 1

Will be recorded. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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Key Takeaways

  • Chegg delivered Q3 revenue of $158 M with 4.4 M subscribers and $39 M adjusted EBITDA (25% margin), beating guidance, and sees Q4 revenue of $185–$187 M and adjusted EBITDA of $62–$64 M.
  • Building an AI-enabled personal learning assistant by combining Chegg’s unique content/data and generative AI, with a simplified interface now rolled out to 25% of users and features like multi-turn chat and personalized study aids coming in Q1 2024.
  • Achieved record subscription retention and a rising take rate of Chegg Study Pack (now over 50%), with 91% of students reporting better grades and 89% saying Chegg helps them learn.
  • Skills segment is growing strongly, leveraging AI to cut program development time and cost, partnering with Guild and corporate clients like Indeed, and offering high-ARPU programs (up to $5,000) as a future growth driver.
  • International revenue now exceeds 10%, with India showing rapid traction after new payment infrastructure and optimized pricing, driving higher conversion and maintaining margins in a market with ~1 M-subscriber potential.
AI Generated. May Contain Errors.
Earnings Conference Call
Chegg Q3 2023
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