Chegg, Inc. (NYSE:CHGG) Q1 2024 Earnings Call Transcript

Chegg, Inc. (NYSE:CHGG) Q1 2024 Earnings Call Transcript April 29, 2024

Chegg, Inc. beats earnings expectations. Reported EPS is $0.26, expectations were $0.24. CHGG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Chegg, Inc.’s 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 Instructions] Please note, this conference is being recorded. I will now turn the conference over to Tracey Ford, Vice President of Investor Relations and ESG for Chegg. Thank you. You may begin.

Tracey Ford: Good afternoon. Thank you for joining Chegg’s first quarter 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 investor presentation is available on our 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 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. 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 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. 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.

Dan Rosensweig: Thank you, Tracey, 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 1st. 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. 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. 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.

Nathan Schultz: 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 re-founded 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. And where we are today as a company that is truly revolutionizing how we serve students around the world. We have rolled out a new interface for Q&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 assistant, 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 ’24 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. 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 two 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. To give you a sense of how quickly this is scaling, in Q1 of this year, we had over 9 million questions asked compared to 3.9 million 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. new customer funnel for 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 than leveraging generic AI platforms. Chegg was built for this moment. Our unique assets, such as our 100 million 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. 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. We are focused on seven 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 optimization 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. 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 have done for Chegg over the last 14 years. Your legacy will always be the way you care deeply for the people around you and how you always root 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.

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

David Longo: 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 first quarter 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. 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 first quarter performance, total revenue was $174 million, down 7% year-over-year, including Subscription Services revenue of $154 million. We had 4.7 million subscribers in the quarter, with 25% coming from international. Skills and Other revenue was $20 million, an increase of 6% year-over-year. First quarter adjusted EBITDA of $46.7 million represented a 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 $25.3 million in the first quarter, representing a 54% conversion from adjusted EBITDA. As a reminder, while interest income continues to contribute positively, adding $7 million in the quarter, we are comping against a higher cash balance in 2023. Looking at the balance sheet, we ended the quarter with cash and investments of $612 million and a net cash balance of $12 million. During the quarter, we completed the previously announced $150 million accelerated share repurchase, with approximately 86% of the shares delivered back to us in the fourth quarter 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 million to investors through equity repurchases and $597 million through convertible debt repurchases.

The progress we are making with the product experience and re-fueling 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. As a reminder, our unique subscription business model is reliant on two large customer acquisition periods, Q1 and Q4, as well as the student lifecycle. Meanwhile, as mentioned previously, 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 million and $161 million, with Subscription Services revenue between $144 million and $146 million; gross margin to be in the range of 70% and 71%; and adjusted EBITDA between $38 million and $40 million.

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. With that, I’ll turn the call over to the operator for your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Bryan Smilek with JPMorgan. Please proceed.

Bryan Smilek: 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, could 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.S. Chegg Study pack? Thank you.

Nathan Schultz: Great. Appreciate the question. I’ll take the first part of it and let David follow up near the end. Around the product, we’re on a multi-year 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. 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&A with questions growing almost 150% year-over-year just in Q1 alone. That’s a strong sign that what we are building is resonating with students. They’re finding value in it, and they’re continuing to engage in our service.

So, we’re going to continue to kind of push the pedal on the innovation that Chegg is really getting to strive 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, a cornerstone, if you will, of that strategy. On the marketing side, first and foremost, you’ve got to get the product right. You’ve got to deliver on the promise that you’re — 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. So, first we’re going to deliver for our customers, and then we can start to build that drumbeat beyond Chegg.

The great news is Chegg gets some over 30 — over the last 12 months, over 30 million 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.

David Longo: And hi, Bryan. 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 period. 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, 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.

Eric Sheridan: Maybe just following up on those two 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 investment to make and positioning of the product as you think about that education cycle through September, through the remainder of the calendar year and into the first part of next year? Thanks so much.

Nathan Schultz: I appreciate that question, Eric. I love that you’re tracking the cycles. We’ve got kind of our two big opportunities a year, obviously in January in the beginning of semester, and in August in 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. 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&A moment to really take that moment where the student has a question, expand the value we can deliver for them, 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 highly personalized. We’re going to continue to roll it out, make sure we’re getting that ready for the rest of this year.

Operator: Our next question is from Ryan MacDonald with Needham & Company. Please proceed.

Ryan MacDonald: Thanks for taking my questions. I really wanted to ask around the pricing strategy, and you talked about sort of already solidified the plans there internationally in the seven 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.

Nathan Schultz: Thanks, Ryan. Appreciate this question. Pricing and packaging, in general, I think of it as important levers to understand something that we at Chegg have always taken 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. And 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 packing 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 ’24.

Operator: Our next question is from Josh Baer with Morgan Stanley. Please proceed.

Josh Baer: 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? 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.