Chegg Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 29, 2024

There are 11 speakers on the call.

Operator

Greetings. Welcome to Chegg Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

Please note this conference is being recorded. I will now turn the conference over to Tracy Ford, Vice President of Investor Relations and EFG for Chegg. Thank you. You may begin.

Speaker 1

Good afternoon. Thank you for joining Chegg's Q1 2024 Conference Call. On today's call are Dan Rosensweig, Co Chairperson and CEO Nathan Schultz, Incoming President and CEO and David Longo, Chief Financial Officer. A copy of our earnings press release along with our presentation is available on our Investor Relations website, investor. Chegg.com.

Speaker 1

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 risks and uncertainties that could cause results to differ materially from those in the forward looking statements.

Speaker 1

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 ks filed with the Securities and Exchange Commission on February 20, 2024, 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 financial measures.

Speaker 1

Our GAAP results and GAAP to non GAAP reconciliations can be found in our earnings press release and the investor slide deck found 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.

Speaker 2

Thank you, Tracy, and welcome everyone to Chegg's Q1 2024 earnings call. It's a truly exciting day for Chegg and I'm thrilled to announce that Nathan Schultz is being promoted to Chegg's President and CEO effective June 1. The Board and I have been focused on succession planning for the last several years to put Chegg in the best position to continue to drive the future of education. Nathan has spent the last 16 years helping build Chegg into the leading global online learning platform that it is today. From our earliest days as a textbook rental company to leveraging AI today, Nathan has been at the core of our success.

Speaker 2

Nathan has always led with a student first mindset and a passion for innovating how, when and where people learn. I will be stepping into the role of Executive Chairman and working with Nathan and the Board during the next exciting phase of the company. Over the last few years, Nathan has worked to bolster our leadership team by adding a new Chief Marketing Officer, a new SVP of Business Operations and a new Chief Product Officer to work alongside Chuck Geiger, our Chief Technology Advisor. The Board and I are excited about this management team and the future of the business under Nathan's leadership. We see the proliferation of AI and our ability to uniquely harness its potential in education as a transformative moment for Chegg.

Speaker 2

We've embraced AI and have completely rebuilt our user experience and services, rolling out a multi year product led growth plan to emerge from the post COVID period and return to revenue and profit growth. The transition will take time, but we are already seeing encouraging signs of how our new AI enabled platform will serve more students in more ways than ever before. This makes this the right time for Nathan to step into this new role and write the next chapter of the Chegg story. So with that, I will turn it over to Nathan. Congratulations, Nathan.

Speaker 2

Thank you, Dan. I want to take a moment to acknowledge the tremendous impact you have had over the last 14 years, both on Chegg and on me personally. I'm grateful for your leadership, your wisdom and your counsel as we rebounded the company so many years ago. Expanding the vision for how Chegg could serve learners around the world from print textbooks to our IPO, from homework help to becoming a fully digital learning platform. You have helped steer us through so many critical transitions and we would not be where we are today without you.

Speaker 2

And where we are today is a company that is truly revolutionizing how we serve students around the world. We have rolled out a new interface for Q and A and developed a proprietary AI platform, including our own 26 large language models uniquely verticalized for education. We are only just starting to realize our vision for Chegg as a personalized learning assistance and will continue to iterate and develop how we bring a best in class learning experience to our customers. We had a productive first quarter continuing to roll out and improve upon our AI enabled experiences that will strengthen our product market fit in 24th and beyond. Executing against a multi year product roadmap is essential to returning to subscriber growth as we continue to cycle through the customer expansion we experienced during the pandemic.

Speaker 2

We are focused on increasing our relevancy with students and getting Chegg back to consistent positive growth in total revenue, adjusted EBITDA and free cash flow. We are already seeing encouraging trends in 2 important and early indicators. Retention rate, which for Q1 is up over 100 basis points year over year and engagement. We have designed the Chegg platform with students at the center, focusing on providing a learning experience that capitalizes on immediacy, accuracy and quality.

Speaker 3

To give you a sense

Speaker 2

of how quickly this is scaling, in Q1 of this year, we had over 9,000,000 questions asked compared to 3,900,000 questions asked at the same time last year. And as more questions are asked, we generate more content, which drives more traffic, which we believe will lead to new customers in future quarters. This is the power of the Chegg flywheel. In fact, the increase in questions asked in Q1 has already driven a return to growth in the U. S.

Speaker 2

New customer funnel or Chegg Study. There is a growing opportunity to reach more customers with our new and expanded user experience made possible by proprietary AI technology that is resonating with students in delivering real value. As we develop an education focused AI platform, we believe it is essential to own our large language models and quality assurance layer. This allows Chegg to verticalize our AI for education specifically and is essential in our pursuit to control quality and accuracy at a lower cost leveraging generic AI platforms. It was built for this moment.

Speaker 2

Our unique assets such as our 100,000,000 pieces of education content, our reach with learners around the globe and our 150,000 subject matter experts come together to deliver the most effective learning experience possible. Over the next few quarters, we are focused on rolling out enhancements and features that will deliver an even richer personalized learning experience. Whether that means real time conversational support with our AI tutor generating flashcards, generating practice problems or creating a focused study guide, our platform is designed to anticipate, generate and deliver personalized solutions, which we expect will increase our value to students and expand the audiences we can serve in a cost efficient way. We have been testing pricing and packaging in the U. S.

Speaker 2

And internationally. In the U. S, we'll continue to test different options throughout 2024. Outside the U. S, where we have tested for almost a year now, our pricing and packaging strategy has solidified.

Speaker 2

We are focused on 7 key markets for education that represent an incredible opportunity for Chegg with an addressable market larger than the United States. In these priority markets, we've seen an increase in new accounts, which grew 2.3% year over year. Internationally, we will continue to roll out pricing and packaging optimizations as well as strengthen our product market fit through continued content and product localization. As we look ahead, I could not be more excited for the future and the path Chegg is on. Reimagining and reinventing how we can best serve learners around the world is our mission at Chegg and the opportunity to deliver a truly personalized learning experience has never been bigger nor more critical.

Speaker 2

And I am grateful to have this opportunity to expand where, when and how we serve learners because of Dan's leadership. On behalf of our employees, the Board and our leadership team, I want to take a moment again to thank you, Dan, for everything you've done for Chegg over the last 14 years. Your legacy will always be the way you care deeply for people around you and how you always rooted for their success. Whether that is championing an employee to reach their potential or encouraging a student to realize their dreams, you have changed many lives during your tenure at Chegg, including mine. And we are all deeply indebted.

Speaker 2

And with that, I will turn it over to David.

Speaker 4

Thank you, Nathan, and congratulations. Dan, I also want to thank you and I look forward to your continued guidance as you transition to your Executive Chairman role. Today, I will present our financial performance for the Q1 of 2024 as well as our outlook for Q2. As Nathan mentioned, we had a very productive quarter. We were acutely focused on delivering our new AI driven experience to global learners and making progress on crucial metrics like engagement and retention.

Speaker 4

We believe these actions will support both revenue and adjusted EBITDA growth over time. We continued to deliver strong profitability and cash flows in the quarter and our balance sheet remains very healthy. We are prioritizing creating shareholder value and emphasizing prudent expense management as we navigate the path back to growth. Focusing on our Q1 performance, total revenue was $174,000,000 down 7% year over year, including subscription services revenue of $154,000,000 We had 4,700,000 subscribers in the quarter, with 25% coming from international. Skills and other revenue was $20,000,000 an increase of 6% year over year.

Speaker 4

1st quarter adjusted EBITDA of $46,700,000 represented margin of 27%. We maintained a prudent approach to expense management and offset some of the year over year revenue decline with lower expenses. We are working on aligning our expense base relative to the current revenue trends. We expect to accelerate our efficiency efforts as we progress through the year with the goal of stronger margins in the second half, leading to 30% or greater adjusted EBITDA margin for 2025. Free cash flow was $25,300,000 in the 1st quarter, representing a 54% conversion from adjusted EBITDA.

Speaker 4

As a reminder, while interest income continues to contribute positively, adding $7,000,000 in the quarter, we are comping against higher cash balances in 2023. Looking at the balance sheet, we ended the quarter with cash and investments of $612,000,000 and a net cash balance of $12,000,000 During the quarter, we completed the previously announced $150,000,000 accelerated share repurchase with approximately 86% of the shares delivered back to us in the Q4 of 2023. Our end of quarter share count was down 15% year over year as we have continued to return capital to shareholders. In 2023 alone, we returned over $300,000,000 to investors through equity repurchases and $597,000,000 through convertible debt repurchases. The progress we are making with the product experience and refueling the flywheel starting with automated solutions and engagement will take time to build our new account acquisitions and renewal base before we see a positive impact on total subscribers and revenue.

Speaker 4

As a reminder, our unique subscription business model is reliant on 2 large customer acquisition periods, Q1 and Q4, as well as the student life cycle. Meanwhile, as previously mentioned, we will increase our focus on efficiently managing expenses to maintain strong profitability and cash flows. With respect to Q2 guidance, we expect total revenue between $159,000,000 $161,000,000 the subscription services revenue between $144,000,000 $146,000,000 gross margin to be in the range of 70% and 71% and adjusted EBITDA between $38,000,000 $40,000,000 In closing, we are seeing encouraging signs in the business and are excited about the continued development of our personalized and interactive student interface. We believe we are well positioned to meet the current and future needs of learners. The opportunity ahead for Chegg is tremendous, and I am confident in our team and our ability to execute.

Speaker 4

With that, I'll turn the call over to the operator for your

Operator

Our first question is from Brian Shmielik with JPMorgan. Please proceed.

Speaker 5

Great. Thanks for taking the question guys and congrats Nathan as well. Can you just talk a bit more about the next steps in your strategy across the application layer for generative AI and potentially across both product and marketing and how it can translate the subscriber growth? And then just more near term too, the 2Q guide was a bit below where we had expected. So can you just help us with some puts and takes around anything that stands out there, especially as you see good momentum on return to new sub growth within the U.

Speaker 5

S. TEG study pack? Thank you.

Speaker 2

Great. I appreciate the question. I'll take the first part of it and let David follow-up maybe at the end. Around the product, we're on a multiyear journey with our product, really a product led growth strategy that we've been planning for a while. Really around expanding the value that we can offer our students by expanding the relevancy of what we're building.

Speaker 2

We are super excited with the first steps that we've taken in our AI vision. You've seen that in the language models that we've deployed. You've seen that in the growth in our Q and A with questions growing also 150% year over year just in Q1 alone. That's a strong sign that what we are building is resonating with students. We're finding value in it and they're continuing to engage in our service.

Speaker 2

So we're going to continue to kind of push the pedal on the innovation that Chegg is really getting stride with. And we see a lot more opportunity being created for us through the use, through the thoughtful integration of AI throughout our products and really the ownership of our AI platform is a big part of that strategy. On the marketing side, 1st and foremost, you've got to get the product right. You've got to deliver on the promise that you are that our customers are buying. That is a service that helps save them time, that helps them get smarter, that helps them truly be efficacious in their studies and that's what we're delivering to them.

Speaker 2

So first, we're going to deliver for our customers. Then we can start to build that jet drumbeat beyond Chegg. The great news is Chegg gets some over 30 over the last several months, over 30,000,000 visitors to our site, users to our site, to our platform and that gives us a huge opportunity to amplify what we're doing for students and amplify the value that we have for students.

Speaker 4

And hi, Brian, this is David. With respect to the question on the Q2 guidance, a quick reminder, the math on our revenue for any quarter is a component of how many subs you have at the beginning of the period plus how many you add in the current periods. And we began Q2 with lower subs than we did in the prior year. So as Nathan mentioned before, we're super excited about the product direction that we're heading. It's just going to take some time for us to fill up that funnel to get back to sub growth.

Speaker 4

And over time, we're optimistic that we'll get there as an entire company.

Operator

Our next question is from Eric Sheridan with Goldman Sachs. Please proceed.

Speaker 6

Maybe just following up on those 2 with a single question about the coming months. When you think about the education cycle going into the fall of this calendar year, what do you guys see as the most critical investments to make and positioning of the product as you think about that education cycle for September through the remainder of the calendar year and into the 1st part

Speaker 4

next year? Thanks so much.

Speaker 2

I appreciate the question, Eric. I love that you're tracking the cycles. We've got kind of our 2 big opportunities a year, obviously, in January and beginning of semester and in August and beginning of the fall semester. We've been working hard in the development of our language models, which is the bedrock of our proprietary AI platform. We're going to continue to roll those out.

Speaker 2

We're going to continue to make advancements in our the accuracy and the quality and the completeness of those models. And you're going to start to see us roll out some more personalization features, particularly around the conversational ability that we see within the Q and A moment to really take that moment where the student has a question, expand the value we can deliver for them, so to build more content for them, That value of anticipating what the student is really there for and what they need allows us to generate that experience for them and become a highly personalized. We're going to continue to roll it out and make sure we're getting that ready for the rest of this year.

Operator

Our next question is from Ryan McDonald with Needham and Company. Please proceed.

Speaker 7

Hi, thanks for taking my questions. Really wanted to ask around the pricing strategy and you talked about sort of already solidified the plans there internationally in the 7 key markets, but still testing domestically. Can you give us a sense of sort of the magnitude on the pricing discounts you're testing? And then when we should start to see that layer into ARPU assumptions as we go into the remainder of the year? Thanks.

Speaker 2

Thanks, Ryan. I appreciate this question. Pricing and packaging in general, I think of it as an important leverage to understand, something that we at Chegg have always taken a strategic stance on and always have looked to optimize and understand. As you know, internationally, we tested for a little over a year. We got to a place before we got to a place, we felt the pricing and packaging was solidified.

Speaker 2

You're starting to really see that in some of our new customer growth numbers there. Domestically, I look at the goal remains how do we expose our service to the widest number of customers we possibly can. We'll continue to use pricing and packaging to do that, Whether that means testing up, testing down, we're going to be testing all around really and that's the goal there is to think of pricing and packaging strategically when to use it, what the right segments to use it against at the right times of year to use it. So we're going to continue to just optimize and test that throughout 2024.

Operator

Our next question is from Josh Baehr with Morgan Stanley. Please proceed.

Speaker 8

Great. Thanks for the question and congratulations Nathan and Dan on your new roles. I wanted to follow-up on engagement. You have some interesting data points around the number of questions asked. What about the time spent on the platform from an engagement perspective?

Speaker 8

And also curious about the time that like an average student might have the subscription turned on in the given in the period in the month or quarter?

Speaker 2

Thanks, Joshua. It's just two questions. As you would imagine, the first steps in our path to get back to a place where we've got durable programs around new acquisition, total subscribers and positive revenue growth starts with our engagement on our platform. Just in the fact that we're seeing more questions that's not that it's coming from more students being engaged on the platform and those students asking more questions themselves, which is driving up total time on the platform. So overall, encouraged, we think that next step around that conversational component is the one that really starts to elongate those sessions even more and tries to generate more value for the students.

Speaker 2

So today, we're really driving a use of what we are known best for, which is for adding high quality learning solutions that are tailored to the student. That is the that's the flywheel we were built off of. That's the flywheel that's spinning faster than ever. That's the flywheel we're very encouraged by and we're going to continue to see that engagement elongate with students usage.

Operator

Our next question is from Brent Thill with Jefferies. Please proceed.

Speaker 9

Thanks. I guess, Dan, the question of why now? And I guess just as a quick follow-up. Having covered tech for a long time, given the deceleration of revenue growth, few companies are preserving margins maybe at

Speaker 2

the same level. Why not choose to make some more investments in a broadening the platform and adding additional modules on rather than focus on just margins? Brad, great question. This is Nathan. I'll take it.

Speaker 2

We're going to actually we're continuing to invest in our platform. I want to make sure that that's all understood. We've built into our financials already the investments that we're making in AI, that's already built into it and we're going to continue to expand those with the traction we're seeing. We're looking to go even faster with the rollout of our personalization platform. So no one's taking no one's putting the brakes on.

Speaker 2

What we're all we're saying in our prepared remarks is that we understand that this is a transition we're going through. We understand that we're on a multiyear path to regrow the company. And that takes time. And during that time, we want to be prudent and aligning our expenses with our current performance. And Brent, hi, it's Dan.

Speaker 2

I just want to again congratulate both David and Nathan. The why now is pretty easy. The company is ready. The company is ready for this transition, which is Nathan and I have been working together for a long time with the Board on a really well prepared transition, with David stepping into the role as the CFO and with the hiring of all the senior leadership team, now is the right time. In addition to that, the company has gone through a series of transformations since we've been here for the last 14 years from almost going bankrupt several times to a point where we're profitable and generate free cash flow.

Speaker 2

The AI opportunity is so is exactly is exactly what we want to have happened because the TAM should expand, the margins can expand. And so we want this new team to really take this in private. And after 14 years, I thought this was the exact right time, so did the Board. And I couldn't be more proud of Nathan. I mean, I'm really excited about the company's future and I will be remaining involved with Nathan.

Speaker 2

And so let's go.

Operator

Our next question is from Devin Au with KeyBanc Capital Markets. Please proceed.

Speaker 3

Great. Thanks for taking my question. David, with the 2nd quarter EBITDA margin guide implying, I think, 24% at the midpoint. In your remarks, you kind of talked about the expectations of second half margins to be stronger through accelerating efficiency efforts. Could you just elaborate on what these efforts are?

Speaker 3

And without the top line leverage, what's giving you the confidence that you can protect your margins in the second half? Thanks.

Speaker 4

Sure. Thanks, Devin. We believe we've always been efficient with our spend. If you look at our spend Q1 this year versus last year, we were $10,000,000 better this year than last year. The full year 2023 was better than the full year of 2022.

Speaker 4

We expect that we're going to look under every rock we can find and keep being efficient so that we keep driving EBITDA and cash flow to create shareholder value. And I look forward to continuing to report that later this year.

Operator

Our next question is from Alex Schuyler with Raymond James. Please proceed.

Speaker 2

Thank you.

Speaker 9

I want to follow-up on Ryan's question around the pricing and packaging test internationally. It sounds like you found the right balance there. And I was just hoping you could elaborate a little bit more on how that average pricing and conversion rates look like now relative to a year ago. And you also talked about 7 markets. Any new countries you're investing behind or pulling back on relative to the euro as well?

Speaker 9

Thank you.

Speaker 2

I appreciate the question, Alex. I'll start off on the markets. No new markets here. The ones that we have identified, we see a lot of leverage in. We see a lot of similarities between the student experience, all of that, a lot of leverage between what we need to build for each country as we begin to localize, even though some of them will be in different languages, the actual students' job to be done and why they're coming to the Chegg platform allows us to get a lot of leverage with the technology we're building.

Speaker 2

I don't want to have you walk away and say we are done on the pricing and packaging side. We have found a lot of we have some goodness there, obviously, with new customer growth up 2.3% year over year. But we are not selling on the pricing and packaging side internationally. We're going to continue to optimize that to make sure we can capture widest net with customers as possible.

Operator

Our final question is from Alex Fuhrman with Craig Hallum Capital Group. Please proceed.

Speaker 10

Hey guys, thanks for taking my question. Just wanted to kind of drill into the target for 30% EBITDA margins a little bit more. How exactly should we expect to get there as we think about potentially pulling back on sales and marketing or G and A or research and development? Is there some level of growth internationally or elsewhere that you would need to hit that target for next year? And then I think you alluded to seeing some cost cuts in the back half of this year that should get the margins going?

Speaker 10

Are we going to see kind of a path to that 30% by the end of this year? Or is that really more something that we'll see when we get farther into next year?

Speaker 4

Sure. Thanks, Alex. Appreciate the question.

Speaker 2

It's really going to be

Speaker 4

a function of us continuing to do what we've always done, which is being prudent on how we manage our expenses. We're optimistic that we can return the company to growth. Growth will certainly be one way to get there, but we've demonstrated consistent cost containment. And while I can't give specifics around that now, because we're only giving guidance in the next quarter, When I report back in August on how we did in Q2, I think we'll have a better vision on how that materializes for the rest of the year. Thanks, Alex.

Operator

We have reached the end of our question and answer session. I will now turn the call over to Nathan Schultz, Incubbing's CEO for closing remarks.

Speaker 2

Thank you very much for your questions today and warm wishes on the job ahead. I want to thank you all for the time. Questions are great. I am honored that the Board has given me the opportunity and I am incredibly excited about the power of the platform, about the proprietary AI that we're building and the opportunity that's in front of us. I'm very excited to do it with my partner, David Longo, and I wish you all the best of the day.

Speaker 2

Have a great day.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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