Q4 2022 Chegg Inc Earnings Call
Speaker 2: The fe.
Speaker 3: All.
Speaker 4: Thank.
Speaker 5: Thank you for standing by. This is the conference operator. Welcome to the CHAG-INC 4th Quarter 2022 Earnings Conference call.
Speaker 6: As a reminder, all participants are in listen-only mode, and the conference is being recorded.
Speaker 7: After the presentation, there will be an opportunity to ask questions.
Speaker 8: To join the question queue, you may press star, then one on your telephone keypad.
Speaker 9: Should you need assistance during the conference call, you may signal an operator by pressing star and zero.
Speaker 10: I would now like to turn the conference over to Tracy Ford, VP of Investor Relations and ESG.
Speaker 11: Please go ahead.
Speaker 12: Good afternoon. Thank you for joining CHAG's fourth quarter 2022 conference call.
Speaker 13: On today's call, our dad rose and flag co-chair person in CEO and Andy Brown Chief Financial Officer.
Speaker 14: 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 slash media center.
Speaker 15: We encourage you to make use of these resources.
Speaker 16: 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. Before we begin would like to point out that during the course of this call we will make forward looking statements regarding lighting future events including the future financial on operating performance of the company.
Speaker 17: 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 statement.
Speaker 18: We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statement. 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 Exchange Commission on February 22, 2022.
Speaker 19: GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings press release in 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 website. Now I will turn the call over to GAAP.
Speaker 20: Thank you, Tracy, and welcome everyone to our 2022 Q4 earnings call.
Speaker 21: Chegg ended the quarter and the year on a strong note, beating the high end of our guidance, with services revenue growing 10%, finishing the year with over 8 million subscribers, and generating over $150 million in free cash flow.
Speaker 22: The last few years we saw significant headwinds in higher education.
Speaker 23: including the loss of nearly 1.5 million students during COVID.
Speaker 24: Through it all, the check team executed very well, positioning us for a much bigger future.
Speaker 25: In the second half of the year, we saw significant improvements in new subscriber growth increase take rates for Cheg Study Pat, which is now 40 percent and retention for CSP is now nearly equal to that of Cheg Study.
Speaker 26: In addition, we also saw increased demand over the year for check skills to our partnership with Guild.
Speaker 27: We believe that this positive momentum will continue and lead to accelerating revenue growth in the second half of 2023.
Speaker 28: After the initial wave of the COVID pandemic, as students returned to campus, we saw fewer of them enroll and those that did took fewer classes.
Speaker 29: There was also less of an emphasis on academic rigor from both students and professors.
Speaker 30: This created a reduction in the demand for higher education support services and ultimately a substantial loss in our subscriber base.
Speaker 31: particularly in the first half of 2022.
Speaker 32: Since August higher education has begun to normalize.
which has helped us start to climb out of the COVID hole and helped us increase our new subscriber growth.
This shift, along with the strong execution from our team, led to better performance and predictability.
As a result, we see new opportunities for growth. Domethically, we have continued to expand our content offerings with initiatives like University, which adds professor-creative content and new subjects and formats to our platform, allowing us to be relevant to millions of students that we historically have ensured.
We also invested in improving the quality of our existing experiences with our new structured Q&A platform.
which enables our experts to create better and clearer learning solutions for students.
Early feedback has been very positive.
Students tell us they prefer this format and believe it is more helpful to understand the topic and learn the concepts, so they can solve the problems on their own.
Our new Ask and Learn platform provides students with richer and more personalized learning experience from CHEC.
We will continue making smart investments in content, technology, and AI to improve our value, quality, and relevance to even more students around the world.
Internationally, we've also made progress localizing our content.
We created new apps for Turkey and one in Spanish initially targeting students in Mexico.
We launched local pricing in four countries, and we are currently testing and optimizing pricing in nine other countries.
All of these efforts make our services more personalized and accessible to learners everywhere, and we are expanding into new markets to reach more students.
To expand into new growth categories, we invested in our language learning platform Busuu.
We are making great strides with the launch of our premium version for the United States and have already seen increased registration and engagement.
which we believe will lead to future revenue growth.
We also invested in one of the hottest growth areas in education, skills-based learning.
We expanded our partnership with Guild, growing significantly faster than we expected, which suggests that this is a big opportunity for Che.
Outside of the US, we launched a pilot program in Africa with Nexford, as the demand for skilling frontline workers is now global.
As the opportunity grows, we are expanding our range of courses from technology fundamentals to cybersecurity.
We are also excited for all that is ahead, and in 23, we will continue making strategic investments for that growth.
The opportunity to better serve learners continues to evolve and expand and now includes helping students solve some of their biggest non-academic challenges.
That is why we now provide free access to Calm, the world's number one app for sleep, meditation, and relaxation through Chegg, and we just announced a partnership with DoorDash to offer Dashpads for students for free to our subscribers.
These offerings help students deal with their mental health and help them save money. We believe these partnerships not only increase our TAM, but will also increase conversion and retention, allowing us to improve our poo over time.
These types of initiatives are designed to deepen engagement, accelerate growth, strengthen brand loyalty, and importantly, help learners by delivering overwhelming value.
Our ability to partner with these companies also validates how valuable our audience is to some of the biggest brands.
The hot topic right now is AI and machine learning.
We've all seen that large language models such as ChatGPT have captured the attention of many people.
We believe AI will have a significant effect on human capabilities and humanity overall.
But AI and machine learning models are not new to Chegg.
We have been leveraging these technologies within our platform for years, and we believe these continued advancements will benefit CHEG and students.
As an example, we've been using GPT2 inside of our writing products, improving our ability to provide support with grammar, paraphasing, and set instruction.
We also use it to increase speed.
and quality while reducing the cost of content development.
We will continue to build and leverage AI tools, including those from OpenAI and others, allowing us to expand our content capabilities, increase the number of ways students can learn through our platform, and increase our efficiency.
importantly
We believe that best learning experience for students will leverage AI, will use a combination of vertical experts to utilize data, MO models, and AI on a user platform designed specifically for learning.
The last several years have been very challenging for everyone. However, the best, most innovative companies come out of difficult times and are able to improve their market position.
We are very excited about the next chapter for Chegg and are energized by the scale of the opportunity in front of us.
We believe there is significant growth ahead for our business.
both domestically and internationally, and that we are in the best position to drive some of the most transformative trends to shape our industry.
The investments that we've been making in our priorities in 2023 are all designed to return to double-digit growth. And with that, I'll turn it over to Andy.
Thanks Dan, and good afternoon everyone.
Today, I will discuss our financial performance for the fourth quarter and full year 2022, as well as our outlook for 2023.
As Dan mentioned, we ended the year on a positive note, with revenue, adjusted EBITDA and free cash flow all coming in above the high end of our expectations.
And while the beginning of the year did not transpire as we initially thought due to external factors, including reduced enrollments and uncertain economic conditions, the CHEG team performed well, demonstrating the strength and resiliency of our operating model, where we continue to grow CHEG services revenue.
drive profits and cash flow while many others struggle.
Looking more specifically at our 2022 performance, total revenue was $767 million, with CHEC services growing 10% to $734 million, with 6 points of growth coming from BUSU.
which we acquired in January of 2022.
We increased our total services subscriber base to 8.2 million with 2.1 million coming from international.
This increased the diversity of our revenue streams as international represented 15% of total revenue in 2022 and increased from 11% in 2021.
We were very pleased that we were able to deliver an adjusted EBITDA margin of 33% or 255 million and free cash flow margin of 20% or 155 million.
which represented 61% of adjusted EBITDA above the high end of our expectations.
As we survey the broader learning landscape, it's clear we have best-in-class margins and free cash flow, and we expect to increase free cash flow margin in 2023.
Looking at Q4, total revenue was $205 million, driven by better than expected Chegg Services revenue growth of 7% to $201 million, which led to adjusted EBITDA of $74 million, the high end of our expected range.
Looking at the balance sheet, we ended the year with cash and investments of 1.3 billion. This was bolstered by the aforementioned free cash flow of 155 billion.
We believe our balance sheet and operating model that generates significant cash flows represent a competitive advantage that can drive shareholder values.
whether that be through adding assets or prudent security repurchases.
both of which we did in 2022.
During the year, we demonstrated the power of our balance sheet by opportunistically buying back $500 million in principle of our convertible securities for approximately $400 million.
As a reminder, as of December 31st, we had 643 million remaining under the Securities Reproaches Program.
As we enter 2023, we no longer have significant revenue from required materials. Required materials is now 100% revenue share base and we expect it to represent less than 5 million of revenue for the full year.
Therefore, we are changing the way we report revenue to better represent what Chegg is now, predominantly a large subscription service with several other smaller product offerings that while important have yet to reach scale.
As such, our revenue breakouts moving forward will be subscription services, which includes all of our subscription offerings.
including Check Study, Check Study Pack, Math Way, Check Writing Subscriptions and Doosu.
The other bucket will be called Skills and Other, which today represents skills, skills, and other skills.
advertising, and the required materials revenue share.
We believe this new breakout will allow our investors to better monitor and evaluate our business trends.
To provide full transparency, we have provided additional details on both the new and historical red-new breakouts in the data sheet and in the Invested Deck, which are available on the Investor Relations website.
Before I go into specific 2023 guidance, I want to provide a little bit more context on the numbers.
As we discussed last year, the issues of low enrollment, a strong labor market, and inflation impacted the higher education industry and led to reduced traffic to education support sites.
While the business executed well with stellar retention
While the business executed well with stellar retention, record check study pack take rates.
MAPROF headwinds negatively impacted our new subscriber growth.
As Dan mentioned, new subscriber growth turned the corner in mid-2022, and that improvement has continued.
Our plan reflects this momentum continuing through 2023, where the benefits become more evident in our revenue starting in the second half of 2023 and into 2024.
On the non-substruction side of the business, we expect continued growth in skills.
offset by a decline in required materials.
and we have fully transitioned out of textbook ownership.
and we are forecasting reduced advertising revenues due to the well-documented headwinds in the macro advertising environment.
We also expect to see a meaningful increase in free cash flow in 2023, resulting from both strong operating performance, including a reduction in CapEx for the year, and a higher interest rate in bonds.
Also, to assess with modeling, we have added a slide to the Invested Act of our Investor Relations website that includes expected revenue and adjusted e-method seasonality of 2023.
Specifically, for 2023, we expect total revenue to be in the range of $745 to $760 million.
with subscription revenue in the range of 675 to 690 million.
gross margins to be in the range of 71 to 73%.
Adjusted EBITDA to be in the range of $240-$250 million with free cash flow increasing to $185-$195 million or approximately 80% of Adjusted EBITDA.
And finally, we expect CAPEX to be in the 80 to 85 million range.
which as a reminder is mostly content.
Moving to Q1 of 2023, we expect
Total revenue to be between 184 and 186 million with subscription revenue between 166 and 168 million.
Gross margin to be in the range of 72 to 73 percent and adjusted EBITDA to between 53 and 55 million.
And finally, in addition to building a great business, we are also building a great company.
and that can only be done by building a strong culture and being a good citizen in our community.
I want to acknowledge our ESG team, led by Tracy.
for some recent accolades CHEC has received.
We were thrilled to be upgraded to AAA by MSCI, their highest rating.
And we also recently added to SustainEllidics, 2023, top ESG company list.
All of this took a tremendous amount of work from our team, and we couldn't be more proud of the progress we have made.
With that, I'll turn the call over to the operator for your questions.
Thank you. We will now begin the question and answer session.
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We will pause for a moment as callers join the queue.
The first question comes from Jeff Silver with BML Capital Markets.
Please go ahead.
Can you hear me?
Hello. We can hear you in the eye canning now, yes.
Okay, sorry about that. I wanted to start with subscriber growth. You talk about your new subscribers growth turning corner.
specifically in the US are your US subscribers growing and do you expect that to continue to grow into 2023?
And you're on mute. I'll take it I'll take it first.
Yes, the answer is yes, both are growing and we expect both to continue to grow.
growing and we expect both to continue to grow.
What Andy referred to in the prepared remarks was there were hundreds of thousands of subscribers that did not come back from that million and a half group.
And because students, if you recall in our earnings calls...
A year ago, there was no academic rigor. So we had a double whammy hit us at the beginning of the year. But as you saw, over the year, things progressed for us, and it began to reveal themselves in our numbers. So we are seeing continued growth in new accounts both domestically and internationally. In international, in some of the countries, we're seeing it.
because they're coming back, but also because of the choices that we made, which is we lowered the prices in a number of countries, and that's making a big deal in subscriber growth. We've also invested in the Turkish app and the Mexican app. We're seeing not only increased renewals, but also substantial increased conversion. So the choices and investments we've made have been working. In the U.S., we've seen a lot of changes in the market.
It's not simply the return to school. It's because of the investments we've made in content, in expanding the content, in the relationships that we've done with COM, and we're beginning to see the impact of DoorDash. We'll see whether or not it continues to improve retention or not. It's too soon around that.
but also the investments we're making in the quality and personalization of the site. All those things are helping, and again, as Andy said in his prepared remarks, began to see in the summer school time an increase in new accounts, and we're seeing that through the first five weeks.
this year. So we have a large hole to dig out of but as you see from the way the seasonality works as we dig out of it we exit the year and substantially higher growth and go into 24 with an expectation of return to double-digit growth and that's a combination of the investments we've made, the expansion of the TAM, the growth of new accounts plus continued improvement in
check study pack, take rate, and renewal. So those things are beginning to show promise. We just have to spend the year digging out of that hole, and we are.
Okay, appreciate that. And I also appreciate the dialogue about AI and machine learning. It's really helpful that you guys pointed out what you've been doing all along.
But I'm just curious, again, there's been a lot of media speculation about Chat GBT and what it's been doing. And I know the product is in its infancy. Are you seeing any impact on your business in terms of new subscribers growth or returning subscribers this quarter?
No, nothing at all that is noticeable and obviously we're going to track it but we've seen nothing. We've seen continued really powerful renewals and reduction in cancellations. We've seen continued high take rates of checked study back.
The fact that we crossed 40% at the end of last year and we continue to see that, I think is a very powerful statement. But I mean, look, it's early with that, but no, nothing that we've seen right now. But our expectation, and I think you're going to see it from a lot of companies, remember Chet.
They've already said that they do not plan to keep it free. They can't run it if it's free. So it's going to be an API based business where we will be participating and using it to enhance our product. And we think it's going to be a big opportunity to say you get everything from them, plus what you get from us, plus all the expansion. So.
At the moment, we feel like the plan we have in place is the right plan and it's pretty exciting. The more these things develop, the more the companies who are the leaders in the space use them to their advantage and that's our plan. At the moment, we see no degradation of anything.
Okay, thanks so much. Appreciate the color.
Thanks so much. Appreciate the color. Yep.
The next question comes from Doug Enmuth with JP Morgan.
Go ahead.
Hey, it's Brian Smilik from JP Morgan on for Doug. Thanks for taking my questions today. Just to start, thinking about the 2023 guide, what gives you confidence that growth will meaningfully continue to reaccelerate as you enter the back half of 2023 and into 2024? And then can you just discuss the roadmap to achieving higher normalized growth rates longer term? Please keep in touch with our Patrons. We have no over- Tall Jim reiterated yet, and you can maintain confidence on paper,
Yeah, so when we look at our guide, particularly as the first question was on the new subscriber growth, we're already on the trajectory. So we're not expecting anything dramatically different than what we're on. And just to a great extent, it's kind of it's kind of what I call.
It's kind of called subscription math, right? It takes a while to refill the renewal base, which is what we're dealing with right now. And the chief director we saw starting in the second half of last year, we just expect to continue not to dramatically.
increasing any way for us to meet our numbers. God, I think so.
Okay, okay, I just thought we lost something. Okay. Operators, another call, I assume there's more questions. If I could just sort of, while the operator's figuring this out, just sort of add a little color to what Andy just said there.
which is our plan...
If we achieve it, and obviously we wouldn't put it out if we expected not to, but things can happen over the course of the year, shows a constant progress of growth, which here's
When you exit the year at that number with the new subscriber growth, the base being filled back up, the rollover of the subscription map, as Andy pointed out, the continued take rate of Chegg Study Pack and the
Renewal near equality between check studying and check study path.
The company returns to substantial growth over the course of 23 at the end of the year.
and then into 24. And we have all the leverage in the model in terms of you're already seeing increased free cash flows in the company. So we feel like this is a year that we've got to get through to refill that hole. And it's the hole that we talked about last year when we had to change the guidance because...
literally a million and a half kids didn't show up. So but our confidence in what we're seeing is very strong and it's very positive and we're seeing also growth in skills. So we feel like the next several years you'll see that sustained growth because the businesses and the choices that we made to invest are returning in that direction and it's very positive what we see right now.
All right, our next question comes from Steven Sheldon with William Blair. Please go ahead. Thanks so much because that is extremely funny because,
Hey thanks. Seems like one of the bigger potential growth drivers here is keeping students on the platform longer. So just curious how you're thinking about what's a realistic expectation for that? How do things like COM and the Doordash memberships kind of play into that and other forms of student support.
How optimistic are you that you can extend that student retention and what would the financial implications be?
Yeah, great question and the goal has been to go from
historically two days a year to 365 days a year. We've done an incredible job getting close to five plus months per student and the goal is to keep them
over the summer or in the December January period before school starts. And so these are examples of the kinds of things that we're doing. So if you take a look, for example, at the Comm Dele and the Door-Dash deal, students get them for free. It's a value, the two of them together equals a value greater than the price of what they pay for a check.
And so the hope is that they continue to use it over the summer because they get other benefits outside of the academic support. And so the way to look at it is for each month that they stay on it's on average another $17.00.
So, you know, it's a 15 or 20% increase depending on when that starts to work and how well that works. So, the deals are designed to do that to increase conversion and increase the take rate and increase retention. What we've seen so far is, yes, it's helping on conversions. So, you see new accounts growing and you see take rates now being over 40%, which I think is...
pretty remarkable. So the next way we'll take a look at it is over the summer and we'll see the impact on retention.
We still know you have because it's too early. We just launched them. But that is the vision and the goal for adding these things.
And eventually to become a 12 month service, which goes from academic support to non-academic support to skills-based support. So just adding more and more value to our services to students so that they stay on for much longer periods of time. So the economic impact will be quite substantial when it works. Thank you.
to become a 12 month service which goes from academic support to non-academic support to skills based support. So just adding more and more value to our services to students so that they stay on for much longer periods of time. So the economic impact will be quite substantial when it works. Great, thank you.
The next question comes from Josh Baer with Morgan Stanley . Please go ahead. Great. Thank you for the question. I was hoping you could talk a little bit about your subscriber base and the composition of it and how it breaks.
down between STEM versus humanities or literature.
Yeah, so three to four years ago.
The way college students broke down was there were more humanities and non-stem be than there were stem. Now it's more STEMB than it is non-stemB. So our sprake down 90% STEMB with humanities users using us within a quarter or semester where they have to take a class.
That is what we've been talking about for the last few years. That's what we mean by the expansion of the TAM, the 5 million students that we historically have not been the primary learning service for. But with the use of AI, chat AI, as well as Uversity, we're expanding that content. We think that's going to help a lot and help us grow in those areas.
So we see, the difficulty is this year we got to get through that hole. But if you saw the inside of the company, you see the hole is getting filled up very fast.
And so if it continues to get filled up very fast, you'll see the growth return and sustained because the investments we've made are paying off at least internally in the company. It's just that's a hole that was just.
something nobody would have expected. A million and a half students left. Once your professors didn't assign anything, and that's hundreds and hundreds of thousands of subscribers. What I'm really excited about is if you look back before COVID, we only had about three million subscribers. Now we have almost twice as many.
And even though we lost a bunch, we're still more 2x what we were just in 2019. So we see ourselves returning to growth. We still have to fill that hole and that's what we're doing now. And when we do, you'll see double-digit growth return and all of that fall to free cash flow and improving margins. So we've got to execute, execute, execute this year.
And I'm very excited we're able to do it with increasing our free cash flow substantially. So a lot of good news happening on top of the fact that we're just not growing that fast externally in the first half of the year.
Thanks, Dan. I was hoping I could ask one on the study pack reaching around 40% of all subscribers. I guess really like where can this go? And then I'm also just wondering if from a linearity perspective, like does this consistently trend higher? And I'll
multiple semesters renewal periods and we've been able to improve the investment. So, look, we know we have additional pricing power.
So we took the dollar increase and we said by taking that dollar increase We would also be able to move more people to study pack and we did so more people are when you know Almost we're almost at one out of two willing to pay 1995 rather than 1595
The expectation is as we add more value, we'll be able to not only move people in there, but then check study pack will become the base.
So, these are all steps that we're taking in terms of to get us to much higher, our proven much higher profitability per customer. But in difficult times, the last thing we want to do is use that pricing power. We want them to volunteer for it and for at a tender doing that now. So that's a very big step for us. And...
something that we think is going to yield investors a great return. In terms of what's happened, every semester since we launched it there's been a higher take rate and every semester since we've launched it we've been able to improve retention and we're almost at Perry. I mean it's within two points of parity right now and that's a huge step for us. So ultimately though you can imagine.
The base price of Chegg being closer to $19.95 and $15.95, and the PAC being higher because we keep adding more value. But our view is you need to take each step at a time. You need to confirm that this is accurate. We only saw about 7,000 loss of customers out of 8 million customers when it came to taking the price increase. So we know we have substantially more price increase.
And we're just not leveraging it beyond getting people to take study path right now.
not leveraging it beyond getting people to take study path right now. Great.
Next question comes on by McDonald with Meadham and Tubmanine. Please go ahead.
Hi, thanks for taking my question. Dan, I wanted to ask about the localized pricing initiatives. You talked about that you're testing in nine additional countries right now, and as we think about how that's being factored into the fiscal 23 revenue outlook, how should we start to think about when those nine countries where you're testing and go officially live and...
And what sort of impact you expect that to have on our trends in the near term. Yeah, so we expected to have. So remember we have to deal with semesters. The actual school year is late August through May.
So we're in the spring of this year. So any any increase in enrollment any increase in change of behavior Isn't going to happen to the second half of the year and that's the way our business works So again, that's that's a variable in the front half of the year about why you don't see a big jump up in the first half of the year because you're dealing with the same subscriber pool that we had in the fall of the year which we did take a step up
in the spring of this year. So any increase in enrollment, any increase in change of behavior isn't going to happen to the second half of the year and that's the way our business works. So again, that's a variable in the front half of the year about why you don't see a big jump up in the first half of the year because you're dealing with the same subscriber pool that we had in the fall of the year, which we did take a step up.
We expect to continue to, what we've seen in every country that we've done it is substantial improvement in conversion and with retention remaining where it was. So we're seeing improvements across the board. We're rolling them out over the course of this year. All nine additional ones will be rolled out by the second half of the year.
So we'll start to see that impact and subscribe. We're going to the second half of the year. A lot of the R-approved decline that might come from charging less in those will be offset by the fact that so many people are taking study back and renewing at higher rates in the
Super helpful. And maybe just a follow-up question in regards to Busuu. So you talked about you're rolling out the freemium model and you're starting to see more engagement there. Just curious how you're thinking about the cross-cell strategy potential between Busuu and the core check study user base.
And what you're doing, if there's anything you can do around promotional pricing to kind of continue to drive that motion, thanks. Yeah, great question again. We're testing the promotional pricing to existing Chegg customers because remember part of the premise of why we bought it was that 55% of US college students said they need or want to learn a language. But we didn't have the right product for them.
So offering one with an automatic paywall when there's one with a premium model, we knew wasn't going to work. So that's why we invested in the premium model. We're beginning to see positive results from doing that. I think you'll see the cross promotion in the fall semester, which is the first semester of the year.
Everything right now is to keep our growth that we've been seeing since last August of new accounts continuing to go and adding more value into StudyPak with COM and with DoorDash. And those are our priorities right now. So, and they're working. So we're pleased where we are right now to be able to achieve the numbers that we put out, which would lead us to
exiting the year at a much, much higher growth rate. Thanks for taking my questions. Thanks for asking. The next question comes from Mike Brondel with Northland Securities. Please go ahead.
Hey guys, thanks. I don't know if I heard how the dollar price increase to existing subscribers in October went and kind of the retention related to that. Yeah, we only lost about 7,000 customers.
So what it says is we have extraordinary pricing power because the value of check continues to go up. The investment in personalization, utilizing AI to make the user experience better, utilizing it to be able to get more content in for lower prices. These are all things.
that allowed us to take it really with absolutely no disruptions whatsoever. At the same time, you can see the pricing power we have by the fact that 4 out of 10 are taking the $19.95 product. So students are willing to pay more for value, and we are adding that value. So.
We know that we could do more sooner. We don't think it's a good idea to do more sooner. But the ultimate goal, Mike, is to move everybody to $19.95 and then have the study pack be at a higher price. And adding DoorDash now and adding Calm now, and you'll see other announcements coming out over the course of the year.
puts us in the position to do that, but we're very careful about picking the right times to do these for students because that's the relationship that wins us all this business.
Got it. And then you mentioned CALM and DoorDash. And I think you – so can we expect like a third, a fourth, and a fifth over the next year? I mean, do you plan to build up those perks or benefits, you know, a couple more, several more? Yes.
Yeah, I don't want to put a number around it because I'm not sure what it would suggest to people, but the answer is yes. You will see more over the course of the year. You'll see more potentially in the base. You'll see more in the study path. You'll see more opportunities outside of those things because the demand to have access to our audience is only increasing and we have the most efficient access to the audience.
The next question comes from Jason Zolino with K Bank Capital Markets.
Please go ahead. Hey guys, just one question for me. You know, even with the savings that we're getting from the textbook transition and you know the benefits from the price increases and the higher take rate study pack, you know, it's disappointing to see the margins still compress this year.
Is this just a function of lack of top-line growth? And then are there any leverage drivers we can think about outside of just revenue growth accelerating? Thanks. That's awesome, combo.
Yeah, that's a good question. Yeah, you know, we can still continue to drive pretty stellar margins. And if you particularly take a look at cash flow, you know, cash flow margin is actually increasing this year, or at least we're forecasting to increase this year. As far as the levels go, I mean the big levels are revenue growth. When you think about it, you know, incrementally when you think about adding a subscription.
have to do that. But that's going to be the real driver.
But it's just sort of a follow-on to that question. The leverage comes with obviously revenue growth.
So we could be a lot more profitable at any time, but the things that we're investing in again, it's hard because it gets masked by the big hole. But we think that they are working and as the company grows, the margins will grow. So I think as Andy has said multiple times, we're nowhere near fixed data margins. We expect this company to be.
closer to 40% than where we are now. And really, it is the gross margins of the company allow these things to fall to the bottom line over time. You know, we're still investing in skills and language and those continue to improve dramatically year over year. But it's really a function right now of just executing on our plan and the margins automatically get higher.
The next question comes from Bread Phil with Jefferies.
The next question comes from Brad Fill with Jeffries. Please go ahead. Hey.
Dave, thanks for taking the questions. Two, if I may, but to start, you guys talked a little bit about the subscription path and adding more value and increasing the pricing of Checked Bloody Pack over time. Just curious if you guys have thought about the optionality to do annual subscriptions for a slight price decrease, or even create a higher price bundle that includes things like Busuu and Skilled Baseload.
testing what the right price would be for an annual subscription but yes and now we have reasons for people to want to stay annually.
Right, initially, without something over the summer like Commodore Dash or the other things that we'll be adding, it just, a matter of sort of discounting with the hope that people will stay on longer to save the credit card. We wanted to actually give them real reasons to do it, real value to do it. So yeah, you can expect to see that from us eventually.
And just as a reminder, on some of our other subscription products, we do have annual subscriptions. So for example, Mathway and Doosu both do annual subscriptions. In fact, Doosu is predominantly an annual subscription. So just wanted to give you that information also. Yeah, no that's super helpful. I appreciate the color. And then.
beyond that, you guys plan to increase your investments around AI and maybe some of that complement house that you guys continue to partner with some of the leading AI that Yeah, you'll see both. So we've been using machine learning. We've been using for five, six, seven years. Those are the algorithms. Those are the things that we do to match people to the light content, to match the right experts.
As AI has been getting better and we've been using our own plus external, we've really focused on getting the efficiency of the question answering and the scale and the speed and the quality up a lot, which is why you can see a substantial reduction we have in CAPEX. It's because the cost to get a solution is now substantially less than it used to be.
based on the investments we've made in technology like ML and AI. We've been able to reduce duplication. We've been able to get better quality answers, to get them answered faster. All of those things have saved us a tremendous amount of money and improve the quality of the product over time. That's never going to end.
What you will see for the first time later on in the year will be user-based experiences that will be more obvious to the consumer. So think about a scenario where we have, the AI companies don't have, we have the hundred plus million questions that are asked and answered. What we can use
AI technology to be able to do is to be able to say something like, so you've gone through this solution, do you want us to build you a sample test, a multiple question test? We can make the question you've asked.
easier for you to understand if you're not understanding the concept. Everything that we'll be using for on the user side will be able to have the user be more engaged and expand the ways that they can learn at the level that they're more capable of learning at. So we're actually really, really, really excited. You know, I think we, like everybody else, was impressed. I have the good fortune of sitting on the Adobe board, so I've seen...
all the AI investments that they're making on images and other things. So it was less of a surprise for us. But it's really impressive. It just, it doesn't do what we do yet. So I think we discovered there's maybe 6% overlap in what they can provide versus what we provide. And of the 6%, I think that currently 50% of them were wrong. So we have time.
to work with them, but we expect a number of vendors. We expect to work with whoever the best vendor is to do the things that we want to do to help students be able to learn better through us. So it's actually a very exciting time. It's a real substantial platform shift, and I don't think there's been one of this magnitude probably since mobile. And my experience...
is that the companies that utilize this, these are companies that are building APIs for companies like ours to do exactly these things. But the verticality, the experts that we have, the knowledge, the user experience designed specifically for learning is going to be our moat and our dam.
what we have plus what they are. Got it. The next question comes from Brian Peterson with Raymond James.
plus what they have. God. The next question comes from Brian Peterson with Raymond James. You go ahead.
Hi, this is Jessica Ong for VIAIN. Thanks for taking my question. I just got a high-level question. As we start the spring semester in the U.S., is there a certain time that it started with semester where you typically see adoption rates really increase with your different subscription?
And when is that for the spring? Has there been any deviation so far from the pattern in 2023? Thanks. I'm sorry. You broke up just a little bit. Do we see what in the spring, which?
I'm not repeating it. Yes, so I'll have a question. Is there certain kind in the start of semester where typically see adoption rates really increased for your subscriptions? And when did that in spring? And has there been ADVAsians from that pattern in 2023?
Oh, okay. So it's sort of the timing. You know, we've been at this a long time. So our timing is pretty good. Textbooks was always harder, but the subscription services are easier now. Once it returned to some form of normalcy in the middle of last year, beginning of last year was nearly impossible, because we just didn't expect so many people not to show up.
But now that we're back to understanding the size of these markets, each semester has its own world like September is the biggest month of the year for us. But in this case for the spring semester, the biggest days for new account growth have had passed us, meaning we're we're.
When Andy says that we like what we see, it's because we passed the three biggest days of new account growth. So it is, it's really the second, third and first, second, third week of January and the first week of February . And then it's September , October leading up to midterm. So the second half of the year is always substantially bigger than the first half of the year.
And but the rollover that we expect to get from the first half the year filled that base that we lost a year ago So that's that's how we build back to growth and that's the path. We think we're on right now Thank you, is that yeah, did that answer it for you Yeah, okay good The next question comes from Eric Sheridan with Goldman
the product side, did you think you'll set the company up well for that landscape? Is you seeing it now? I know someone asked you earlier about annual plans. How do you see the broader pricing matrix for the company evolving, not only just into the next school year, but on a multi-year use? So you're striking the right balance between value provided and value received from your basic users. Thanks.
the study pack, the rate increase we took. So probably the newest area of focus, or the only additional area of focus, it's more just executing on what we've been executing on.
which is creating more content, expanding the TAM in the United States, getting the pricing right from outside the United States, building into the bundles, get the higher take rate, will be now that these AI products are released.
our teams have been working feverishly with them to be able to incorporate them into the user experience. And so that's probably the only priority that is one that we haven't already been working on in a substantial way. So the priorities of last year are the priorities of this year with that.
addition. Those will set us up, we think, very well. In terms of the pricing scenarios.
The plan has been, we have a multi-year plan, which is the first plan was to put out a bundle, get people to use the bundle, get retention near equality, and then take a raise in the base that was very small but one that we could capture with losing almost nobody and push conversion more towards the bundle. Those things have worked.
So, the next step is to be able to build an annual subscription plan, which becomes an annual membership plan.
And in addition to that, ultimately the first package of 1595 will probably be the base at 1995. These are all over the next couple of years. So we're very judicious about when we take it. We test these things. The reason we were so successful is because we knew the outcome before we did it because we tested it for a year.
So we have to make sure that unlike other companies, we have basically six loops out of the year where all our growth comes from. We can't afford to make a mistake. So we take our time with these things. But you will see us move towards more in the bundle, higher take rate. Once we get over...
It's just not what you should expect to see in 23. 23 is the year that we want to return to excellent subscriber growth because we've already gotten ourselves to really excellent retention growth. So taking price increases now will hurt us from filling that base that we lost a year ago. That's our view. Great. Thank you so much. Yep. This concludes the question and answer session. I would like to turn the conference back over to Dan Rosenzweig for any closing remarks.
Okay, thanks everybody. So. Go.
This has been a very challenging time over the last couple of years. But the edtech space.
We're growing. We're the only company that's profitable. We're increasing our margins on free cash flow. The investments we've made are returning our new subscribers to growth and our retention continues to go up. And we believe that the execution is what's critical to us to achieve these numbers and return to much more substantial growth and higher profitability. We couldn't do all of this.
without the incredible employees that we have. Andy pointed out, you know, the ESC categories, you know the number of awards that we want for inclusion and for the balance of growth and the quality of employees to be able to attract the right kind of people who care about the mission that we're on. You might have also seen today that we announced a very important partnership.
the United States government and the Vice President and the United States. So we announced today that we'll be working with the Vice President along with other people to help skill up and provide academic support in Honduras with the expectation and hope to train thousands of people who instead of immigrating here will become much more productive employees in their own country.
I want to thank everybody for joining the call and I want to send our thoughts and our prayers to the people in Turkey. We have a lot of students there and we have a lot of contractors there and we're checking on them. None of this is easy, but all of this is worth doing. So we're grateful for our employees and thank you everybody for dialing in. Talk to you next quarter.
This concludes today's conference call. You may disconnect your lines.
Thank you for participating and have a pleasant day.
But.