Operator: Next question, Josh Baer with Morgan Stanley. Please go ahead.
Josh Baer: Great. Thanks for the questions. And Andy, congratulations on your planned retirement. You’ve 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?
Andy Brown: Yes. It’s actually not that large, truth be told. When you look over the last, call it, 10 years or so, we spent literally hundreds of millions of dollars on content. So relatively speaking, it’s small, and there is a hodge-podge of a whole bunch of different things that are 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 starting to roll that out, there are certain aspects that the team decided wasn’t going to be part of the, as I’ll call it, the new Chegg. 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 hundred, maybe upwards of 300 basis point impact on the gross margin. But nonetheless, it was necessary and relatively small in the scheme of things.
Josh Baer: Okay. Thank you. And then – go ahead.
Dan Rosensweig: I was going to say, just to clarify that point, it’s a positive impact on the gross margins.
Andy Brown: Yes, yes. I’m sorry, I’m sorry. Poor choice. Yes. Thank you.
Josh Baer: I know. That was clear. That was clear. And then I wanted to just get just a quick update on Study Pack. Sort of talked about adoption trends in a couple of ways 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 gen AI and the new customers coming on board, is it sort of consistent behavior with other alternatives out there? Thank you.
Dan Rosensweig: Yes, you’re going to have to explain the last part of that question again, but let me just address that first 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 end up maybe with just one SKU rather than two, but with two different price points, depending on the capabilities that students are going to want access to.
So we think between AI and Skills and the other issues that we’re helping students address, there is a real opportunity to continue to improve our ARPU on a per customer basis. And so we are focused on testing messaging and pricing. 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, that 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 first quarter of next year. And then we will keep adding and adding and adding. The key is just creating overwhelming value so that students see the value and the pricing. And every time that we have done that, we’ve been able to be successful.
Josh Baer: Great. Thanks again.
Operator: Next question, Brent Thill with Jefferies. Please go ahead.
Brent Thill: 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 had 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 are 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.
Dan Rosensweig: Yes, I’ll start and let Andy end with a 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 will likely approach 40% EBITDA margins as we get even bigger and bigger, which we are working very hard to return to that growth path. 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 million in free cash flow this year as an example.
