Q2 2023 Chegg Inc Earnings Call
Greetings and welcome to the second quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Tracey Ford Vice President of Investor Relations and ESG.
Good afternoon. Thank you for joining Chegg second quarter 2023 conference call on today's call are Dan Rosensweig, co chairperson, and CEO and Andy Brown, Chief Financial Officer.
A copy of our earnings press release, along with our Investor presentation is available on our Investor Relations website Investor Chegg Dot 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 changes Dotcom Slush Media Center.
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 changed annual report on Form 10-K filed with the Securities and Exchange Commission on February 21 22.
'twenty three as well as our other filings with the U S D C.
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 on the Investor Slide deck found on our IR website investor Chegg Dot Com. We also recommend you review the Investor data sheet, which is also posted on our website now I will turn the call over.
Dan.
Thank you Tracy and welcome everyone to our 2023 Q2 earnings call our team executed well outperforming guidance for both revenue and adjusted EBITDA.
The second quarter progressed, we saw a year over year trends for customer acquisition and retention rates improved which drove which drove the upside in our results.
We are entering an exciting new chapter for Chegg catalyzed by the advances in artificial intelligence to take advantage of these new opportunities Chegg, it's rapidly pivoted because we believe the category defining companies with strong brand loyalty sought after services and highly valuable datasets can leverage.
AI to grow and will create outsized returns.
It is still early and since we last reported we've gained greater insight into students shoes and perception today and how it relates to check.
A recent survey shows students see chat G. P T.
As complementary with very different use cases.
The latest why pulse survey states that while Gen Z students are using AI to improve their education. They are not comfortable with the exact information chat G. P T cell.
And it's become clear to us that is simple high quality accurate personal learning assistance is needed and we feel we are uniquely positioned to deliver a world class personal learning system.
We are moving fast and launched the beta version of our initial generative experience in that.
Feedback has been very positive specifically our students like a simple user interface, which is conversational and they have always trusted the quality accuracy and relevance of our proprietary step by step solutions are.
Our research also shows that 86% of students.
They prefer study health that is reviewed by human subject matter experts and 85% say they wanted to be personalized to their individual learning needs.
So it's no surprise that engagement from our beta testers is extremely hot.
We're interacting more with each question and are staying for significantly longer sessions.
We appreciate that speed and execution are critical to our success.
Cargo ship with scale AI announced today will allow us to accelerate our ability to deliver the new chegg experience starting in the fall and rolling out over the course of the next two semesters.
The new Chegg will combine the best of generally they are with checks proprietary high quality solutions and.
Demonstrated ability to improve student outcomes and can expect to see a much simpler conversational user interface personalized learning pathways more in depth content and the ability to transform it automatically into innovative study tools such as practice test study guides and flash products.
Order to further enhance our competitive moat and lower our costs, we are building our own large language models.
It gives us the ability to train them specifically for education.
L. L M will be trained with our unique datasets.
And with the help of 150000 subject matter experts.
We expect to deliver a significantly enhanced and differentiated learning experience for students compared to the generic models that are available today.
And this is just the beginning.
I want to give you a sense of how big we believe the Tam expanding opportunity can be and how we plan to capture it.
We intend to build the largest connected community of learners around the world with a truly scalable affordable adaptive learning system like <unk>.
In the tools pathways and I'm curious accuracy that students depend on.
Chegg is prove it learning taxonomy, along with our deep history of data from schools classes and professors sets us apart.
We have said for years that students challenges go way beyond the academic market and now by leveraging investments in artificial intelligence. We believe we can make a significant impact on reducing the nearly 40% of students who dropped out of the higher education system.
And the more than 50% they've never enter.
Increasingly students are connecting their academic journey with their skills based needs in order to be employable in today's economy.
It's developing integrated skills pathways that will help students.
Assess their current proficiency identify their caps and then help them acquire those skills.
We are in a great position to do this by leveraging our skills offerings, where we continue to see excellent Cook.
We also appreciate that students today takes a wide variety of personal challenges that you get in the way of graduating on time or at all.
No, but if we can connect students the solutions that address some of these issues such as mental health food insecurity and financial barriers, we can improve their chances of finishing their education and thriving.
We have created a concept video for you, which illustrates how this may all come together, which you can review within our investor deck posted on our IR website.
More than 50% of the world's population is below the age of 30 and they are increasingly turning to online to advantage themselves of academically and professionally now aided further by the proliferation of AI the opportunity for Chegg to serve them is bigger than ever and with that I'll turn it over to Andy.
<unk>.
Thanks, Dan and good afternoon, everyone.
Q2 was a good quarter as we exceeded our revenue and adjusted EBITDA guidance and also delivered strong cash flow.
Total revenue was $183 million driven by subscription services revenue of 166 million.
During the quarter, we had approximately $4 8 million subscribers on our platform.
Skills and other revenue was $17 million driven by strong growth in skills.
Primarily by the change in the required materials model, which is now a revenue share.
Gross margin of 74% came in slightly higher than expected.
This along with the revenue beat contributed to adjusted EBITA, beating guidance, which came in at 60 million or 33% margin.
Free cash flow was 56 million. The result of strong operating performance and higher interest rates with interest income contributing $10 7 million in the quarter, an increase of $8 7 million from last year.
We had several items that impacted our GAAP net income for the quarter. These included a gain of $53 8 million from the repurchase of some of our outstanding convertible debt.
This was partially offset by a restructuring charge of $5 7 million, we announced during the quarter.
They lost some synthesis at 7 million, we accrued related to a previous game taken on an equity investment.
We continue to have a strong balance sheet and drive significant free cash flow. We ended the quarter with 808 million of cash and investments with total convertible debt outstanding of $773 million at par value, representing 35 billion net cash as well.
Mentioned earlier, we repurchased 400 and 420.
$27 million of our outstanding convertible debt for $369 million and use some of the net savings to retire two 4 million shares of our common stock for approximately 35 million.
We continue to believe the combination of our operating model balance sheet and cash flows are among the strongest in the education industry and will allow us to deliver attractive results to our shareholders.
As Stan mentioned, we are rapidly realigning our resources around.
Including partnering with scale AI to develop large language models required for students that have to have a fully generous compensation like spring rolling out over the next two semesters.
We believe our approach at the bell developing and owning these models versus solely relying on third party providers will create a truly differentiated and better experience for students at a lower cost.
Now moving onto guidance for Q3, we expect total revenue to be between 151 and $153 million with subscription services revenue between 135 and $137 million.
Gross margin between 68%, 69% and adjusted EBITDA between 30 or $36 million.
It is worth noting that we typically experience seasonally lower revenue and margins in Q3.
We also have an elevated level of content depreciation from recently acquired professor let material, which is impacting gross margins. We expect the impact of this to moderate in Q4 and margins improved.
In closing, we expect the development of AI will allow chegg to embrace a much larger opportunity all the time.
We believe there is nobody better equipped to meet the current or future needs of students in check we have an industry leading Brian .
Terry data strong operating model and our balance sheet to extend our leadership into the future.
With that I'll turn the call over to the operator for your questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue. We ask that you limit yourself to one.
So that others may have an opportunity to ask questions.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please I'll we poll for questions.
Our first question comes from Doug Anmuth with J P. Morgan. Please proceed with your question.
Thanks for taking the questions.
Just talk about how the new AI experience with with scale, a I will differ from Chegg mate and kind of the path that you've been going down and then I.
Second if you could also just talk about the drivers do you think of the QQ improvements around customer acquisition and retention as you went through the quarter is that just just since you think from the chat G. P T launch or more of the.
Students recognizing perhaps on the deficiencies on that side. Thanks.
Yeah, No great question I'll take the second question first.
Which is I think it's what you said, which is in the research seems to indicate that which is one students.
Recognize if they do very different things and that what we do they can't do and what we do is actually what they need because it's been built directly and specifically for students.
That they will use chat G P T, but theyre not going to try to use it for things that they use chegg for and our current research seems to indicate that the overwhelming majority of that those that use both plan to remain with chegg.
So I think that's very good news and you know, it's an update on what we've seen and I think the results seem to suggest that so that's really good news for us.
The second thing I. The first question that you.
I asked which is how does it differ really what it is is instead of building a separate product where we have in our ripping check down to its done and completely rebuilding the user experience so that it's available to everybody.
That is a C. S N C. S. P. So ah. It is it has the same vision and that's why we supplied a concept video for people to really get an understanding of just how great that this can be and how different it is from the existing experience how much more conversational Alex simple.
User interface, a conversation in nature and one of the really cool things that we'll be able to do differently than anybody else would be able to do is take the 100 million plus questions that we have and all the data we've been able to collect and create completely personalized learning experiences on a per user basis base.
Not knowing not only the history of that particular student, but others that have gone to that school that classroom would that professor so that is not something that any generalist AI can do or frankly anybody else in the education space can do because we have the largest direct to consumer.
List, So that's pretty exciting and then to take the way they learn best and actually build study tools out of the content, they're using without them having to do anything so I think our ease the abuse and the difficulty in using chat G. P. T. The fact that it's overwhelmingly for writing and not for learning I think.
Those things were.
Pretty pretty significant and affecting those trends to the positive which is great for us and great for our shareholders.
And then you know instead of it just being checkmate, it's just going to be Chegg. What scale AI does is something very different we continue to work with CECI P. T. Just as we announced and that's all the conversation on nature, and the descriptions and explanations and things of that nature, which is what it does well what scale.
Hi, guys is allow us to use what chegg uniquely has which is our data our history, our user information our content and create very specific and unique learning experiences for each student. So this is a differentiator we were always.
Janet on building this working with scale AI will allow us to do all of the categories. We have much faster. So instead of launching with just a few we will be doing a rolling launch and get to all 26 of them in a much a much more rapid period of time. So it's a great deal there an extraordinarily great partner they work with CECI P T. They work with.
But we will continue to work with all the relevant generalists that can supply value inside of our system, but what scale AI does is allow us to leverage what we uniquely have that no. One else has it everybody else wants.
That's very helpful. Thank you Dan Yeah. Appreciate the question let me just.
Let me just fill in here Dan mentioned earlier in the answer to that question C. S. C. S. P. A just so everybody's aware on the call that he's referring to Chegg study and Chegg study pack, that's our internal lingo that he was using thank you.
Our next question comes from Jeff Silber with BMO capital markets. Please proceed with your question.
Thanks, So much I'm, just wondering if you're seeing any different trends in your subscribers between the U S and some of the larger markets that you serve overseas.
Yeah.
Well the summer school is really a U S experienced more than it is outside the U S and most of the data we have over the last few months in terms of actual user behavior.
Is U S based so I really can't speak to outside the U S. What I can say for those that we have outside the U S that have been testing our new experiences. The results have been very very similar which is significantly increased engagement length of time using it because they're getting access to more information and.
And asking more and more questions that we will have in the system already so.
But it's too early to give international lands versus the U S. I think we'll be able to do a lot more of that on the next call because really the the.
The semester picks up in about two weeks, so sort of the last week or two of August through the first two weeks of September is the overwhelming majority of one of the good stuff happens.
Okay. That's helpful.
I know I'm sorry.
Brian in the past you've in the past you've talked about the strong visibility in your business and I'm just curious.
What do you need to see before you think you'll start talking about annual guidance again.
Yeah, we ask ourselves that same question and then I'm sure Andy is going to have some perspective on this but I think for the moment given.
Given the volatility of how people are reacting to.
Information.
Our lens right now is to focus on what's right ahead of us, which we have really great confidence in and as we build a few of those I think it it it leads us back to where you're asking what I will just.
Add to what I said earlier is as the semester evolves third fourth week of August 1st couple of weeks in September that gives us a really good lens into.
Obviously to Q4 and since Q1 is a rollover from Q4, I think we're getting closer to that but I think we're just going to stay with what we're doing now because it's just a more conservative approach to things and I think we learned.
The impact of the volatility if people just my opinion overreacting to information that we provided Andy I don't know if you have more to add to that no no. Dan I think you nailed. It I think you know Jeff Youre aware, obviously the season starts to pick up like Dan said in the next couple of weeks Alright, if we continue to see the trends we've seen over the last few months.
That will certainly give us more confidence, but we need we need to we need a few more periods before we get to that point.
Okay fair enough. Thanks, so much.
Yep.
Our next question comes from Eric Sheridan with Goldman Sachs. Please proceed with your question. Thanks.
Thanks, so much for asking the <unk>.
Allow me to ask two questions. If I could quickly one would just be the cost question. So when we talked three months ago, you laid out a strategy around checkmate and open AI with this new strategy, how different is the potential cost or investment implications for this approach versus the prior approach and how should we sort of bring that back and reflect that in.
In cadence of either margin or needed to invest in the business and then I'm just a little bit unclear. So the second will be a follow up when when when people go back to school over the next month. This will be a solution that builds in its momentum as you get deeper into the year and the solution you're talking about today would be more fully implemented towards the end of it.
This calendar year and the beginning of next calendar year or will it be deployed over the next one to two months just one would be timing and one would be depth of investment. Thank you.
Yeah, I'll I'll handle the second one first and then I'm sure Andy is going to want to hear it all the the.
The depth of investment, which I think youre going to be happy with the answer because we are but on the on the second one consider it just a forever rollout, which is the product is just going to get better every day.
That students use it so depending on what subjects they use what they use it they will see the product evolves. So it really is that way to think about it which is they'll start to.
Experience certain aspects of the conversational nature, and degenerative AI kind of content.
Depending on the on the subject matter, they're doing they'll start to experience that the Paul So it's a little bit like rolling Thunder and Ah.
And we expect a word of mouth viral nature of it all of the things that are built chegg over the years to start to spread over that period of time and I think right now what has spread is the quality of our content and the accuracy of our content, which are essential for people trying to alert so I'll, let Andy.
Talk about the cost structure and the cost, but I think again, I think youre going to find that to be.
Constructive and positive.
Yeah. So so so when we talked about this on the last call. There was a lot of moving parts and there still is to some extent, but but as we evaluated the multiple options that we had as far as having a fully generative conversational generative experience for our students.
When we evaluated the option of of partnering with scale AI became that became by far.
Things wanted it accelerates it made us get to market sooner and it was the lowest cost.
Birthdays.
Sleekly Library Kit third party.
Technology and so as we look at this this is by far the least cost effective way.
As soon as we can get the lease cost effective way, yeah, I believe the most cost effective way.
All right.
And and and like I said, we've said in the past we think that this will allow us to maintain or even potentially over time increased margins.
And we believe over time will allow us to actually deploy less capex.
As we implement these solutions. So this is a it was a really big win for us and and is it as it rolls out over the next two semesters great.
Great. Thank you.
Yep.
Our next question comes from Stephen Sheldon with William Blair. Please proceed with your question.
Hey, Thanks for taking my questions.
Yes on the improvement that you talked about during <unk> and customer acquisition and retention, but would love some more detail there, especially how you're measuring that improvement if theres any kind of rough quantification you can provide and also did you see some of those trends continue into early third quarter, you know thinking about July .
Yeah, So what what we're referring to are obviously everybody.
Runs the company should know the levers in their business and he has explained subscription math multiple times and.
So it really is what is your retention rate.
And in retention rates, you look at a lot of different variables, which is what's up for renewal what cancelled what percentage renewed those kinds of things. So we have been seeing.
Decrease in cancels, which is excellent.
And we have been seeing an increase in.
People that are up for renewal that renewed so those metrics are basically we're seeing higher retention rate, which is great.
The.
Second one is new accounts, which is really where all of this challenge.
Challenge It started because we used to do.
Before Covid, we used to do about $3 2 million new accounts a year. When we peaked at peak Covid about $5 8 million now we have remained above 5 million. So we're really so far ahead of where we were.
Before COVID-19 that the company has just accelerated so it always surprises me when people.
I don't really understand how big we become compared to what we were just a few years ago, but what we're referring to now is the trend in in new account growth. So we were seeing declining new account growth and it was pretty.
Pretty substantial and that is improving each and every month, including in July so we're getting closer to our objective of returning to growth.
Very helpful. Good for getting here one quick follow up I, just noticed that you didn't use chegg mate branding. It all in the press release prepared remarks was that intentional and I guess are you considering changing potential branding there at all.
Yes, I mean it is at the point, we're trying to make here is it's no longer going to be a separate product, it's check and when I say chegg. Initially it's chegg study and Chegg study pack, obviously, a Y AI will be integrated into everything including skills and writing and math.
But as we got deeper and as we really understood the depth and the quality and the differentiation that we have versus chat GPT are bart or anybody else even in the education space in terms of what we could know and the value it could create for students.
Yeah, we made the decision to just make it all of check.
And you know as we think about how additional value gets created the more value that we create for students. The more that we add the more sticky that it becomes the more things we can do for them in it and if as you watch the video of the concept here that we put out you'll see the other areas that we can address we believe our pricing power, which has always been strong well.
Even get stronger and over time as we roll it out to everybody, we can imagine continuing to increase our output.
And our yield so it's a bigger move than the one we had before.
So dear thank you yep.
Our next question comes from Josh Baer with Morgan Stanley . Please proceed with your question.
Great. Thank you for the question I wanted to ask one on competition I think historically, you had a pretty favorable competitive landscape as the clear leader in.
And maybe students used a few different solutions sort of in a complementary fashion I'm just wondering how to think about the new competitive landscape, maybe ignoring chats E V. T for a moment how does the future chegg compare to other education specific companies that are leveraging similar language models are open AI a P I.
As I'm thinking about ton mego, or quizlet or what might come from learn you know like any thoughts on the new competitive landscape.
These education vendors use AI as well yeah, no great question, and I think from our perspective.
They don't.
We have.
Such a big moat.
And the motor is only going to get stronger.
Because really what we're learning is the speed of the computing you know Nvidia. Thank goodness for everything that they have done it really have sort of changed the game here and then sort of a conversational nature of that your analysis that chat chat GPT has shown but at the end of the day.
The next set of value is being created by companies that already exists that already have very big brands incredible loyalty are known for doing something and are able to leverage against their own datasets and their own customers. So nobody in the education space from our perspective.
<unk> has a more relevant or better dataset than we do we're learning it's running the AI against the data that creates a differentiated experience not the AI itself on its own without the data. It's irrelevant. That's why these generalists can't do what we do and so by keeping it proprietary.
And as Andy said building our own L. L. Ams, we think our moat gets only bigger the second thing is it does take capital to invest and none of them really have it I think we generate more free cash flow than most of them generate revenue in total so the actual size of these companies is insignificant versus what <unk>.
<unk> has in terms of the business the datasets and.
And the capabilities to do what you've seen is mostly just sort of chat bots.
First is.
What we're building and I think you'll be able to compare our concept video is where we're going with what you see from them I think you'll I think you'll leave with similar perspective that we do which is our moat only get bigger and it was already big.
Thanks, Dan that's helpful. And then one quick one for Andy on Capex. So.
The lowest quarterly level since 2018, I think just wondering how much of that was lower engagement or Q&A from students versus leveraging Jenny I for your own content creation essentially like is this level that we saw are sustainable or how should we think about capex going forward. Thanks.
It was it was fairly seasonally low without a doubt.
And you know as you know we have it's probably that is the quarter, where we had the fewest students actually in school and writing some school while it.
It seems seemed to have gone well for us it's still a small a small period of time. So no. We wouldn't expect that but we do expect capex efficiencies beyond this.
We do believe that as we start implementing some of these dates and some of our AI solutions that will have a benefit on capex as we move into <unk>.
All it into 'twenty 'twenty four for sake of argument at this point.
And so the way the reason for that by the way I think Andy explained it perfectly the reason for that is the cost of content. Each particular piece of content should get less for us.
Being able to leverage.
AI versus everything always being human so.
The cost of content will actually be able to answer more questions than we've ever answered before at a lower rate on a per question basis, and therefore overall spending so I think some of the other areas that we were investing in like professor led content and things of those nature become much less important in this new world and the ability.
To leverage the data, we have with chat CPT and scale AI to create unique learning paths is really going to be the differentiator and so.
And that's the reason for what Andy was saying.
Mhm.
Great. Thanks Yep.
Our next question comes from Ryan Macdonald with Needham <unk> Company. Please proceed with your question.
Hi, Thanks for taking my questions I have two separate ones and this on the first one is just a clarification Dan in terms of your commentary around retention rates and sort of the new accounts are sign ups improving should we expect then you know second quarter subscriber counts to sort of trough here in Q2 and start to see improvements as we can.
Go into the back half of the year and then separately I'm just curious to get your thoughts you know there are some research out I think Stanford and Berkeley and in mid July about sort of potentially the maybe declining or lack of efficacy from GPT for on math problems and just wondering if you're using that at all when you think about that.
Additional rollout of checkup.
Into that math use case more in sort of the functionality you have with the math way to further differentiate yourself.
Yeah, a good question, let me take the second one first.
One of the things about the college market that we've learned over the years is.
It's very viral in nature in terms of students communicate to one another and I think that's to our advantage. It was when we were building the company and I think people got very excited about.
About chat and we are too by the way and AI in terms of helping education. I mean, if you go to apply AI to anything how great would it be if it could help people of all backgrounds all walks of life.
The ability to elevate themselves.
Both with academic support and skills based support I think we'd all route for that that's what Chegg is building and I think that's why a lot of people are rooting for our success that would surprise you in terms of the people that have been calling too.
Two.
To be interested into and to help so.
That message gets out on it solid and it takes one person getting the wrong information to destroy their semester and so that happened pretty quickly and I think we're known for our accuracy. So there's really nothing more to lean into it because were great and getting better.
To be honest with you I think I forgot. The first question would you mind re asking it.
Yeah, Yeah. It was around the commentary and in one of the previous Q&A around retention rates in that you're seeing sort of fewer cancellations and more subscribers are up for renewal actually renewing. So as you think about sort of that dynamic what do we expect sort of second quarter subscriber count to be sort of a trough level here and you start to see.
Growth in that metric as we get into the back half of this year.
I think I'm sure Andy will will add to this from our perspective, I think we're going to stick to the one quarter at a time like we mentioned earlier because we've had you know we've had false promises before in terms of what we see and.
But we if current trends continue.
And we'll find out if current trends continue as the year goes on then.
I think you'll see a very different and a very positive trend that we're all looking for and I'll expect to happen. We do expect to return to growth from our perspective, we think the launch of the new products will be.
Very valuable to that we think the fact that the Stanford research that you pointed to also acknowledges that it isn't really good for what we do and what we do is more valuable to students than what they do which is writing papers, which we don't do.
So we expect to be a growth company again and when that happens.
We're just gonna have to wait and see but the trends are moving in the direction that we were hoping for.
Our next question comes from Alex Fuhrman with Craig Hallum. Please proceed with your question.
Hey, guys. Thanks, very much for taking my question I was hoping you could talk a little bit about your business in emerging markets and specifically, India I think in the past you you said that maybe you hadn't handled the rollout of our payments so well in India can you give us a little bit of an update on the timeline.
Card acceptance in India, and when you could start to see that market move the needle.
Yeah. The latter one is hard for me to say and I don't want to predict it yet because I think in the world that we've lived in in the last three or four years, making predictions has not really resulted in a good outcome for us or anybody else for that matter, but the first one I cant answer very specifically which is.
We are rolling out this month.
The new payment.
Payment capability of the unified payment platform, which will allow for debit cards. So that's kind of start to happen this month and Oh.
When we start seeing the impact of that.
We'll find out over the next few months, but it's it's.
It's going live this month, so thats very exciting for us.
Okay. That's really helpful. Thank you I appreciate the question.
Our next question comes from Brent Thill with Jefferies. Please proceed with your question.
Dan just on the tone of demand you saw in Q2.
And going into <unk>.
Later summer can you just bring us up to speed and ultimately.
Hi.
Anything new in the playbook, and then going back to school season here that that youre seeing that they may be working or contemplating. Thanks.
Yeah, No look I.
To give you a sense to your question of the scale.
You know.
Master winds down school starts we have summer school and then the school semester. It really picks up so the volume will double than triple.
And then go up by about 50% again, all within a three and a half to four week period.
That period will start.
In about two weeks from now and I think will peak around the first 10 days of September in terms of what we're.
Expected in terms of when our wheel are.
New account volume happens.
And we're prepared for that now in terms of the go to market with.
Always been really good at go to market I think you've seen that no one else really no. One else has anything near the size that we do a paid subscribers I mean in the education space others have tried no. One else has succeeded as I said, we generate more EBITDA than most companies do in revenue.
So we're very good at it but I think the channels that had been working.
Obviously tictoc is it is it channel over the last couple of years. It has become much more significant to us in terms of us being able to use clips and influencers.
Who are using our content to teach people and thats been.
Really effective for us so I would say that's the only new one on the horizon that we're leading into more than we have in the past.
And sorry on the tone of demand and demand continued to strengthen week over week and did you see that going into at the beginning of Q3 as well.
As I mentioned earlier.
We began to see a.
Positive trends versus what we were expecting a really beginning of June and all through June .
And you know through the first month of this quarter.
And that you know that gives us confidence to give the guidance that we have given.
You know things can change because as I say the last two weeks of August are as big as the first three weeks of the first two to three weeks of August so.
One week will be larger one day will be larger than a week in the in the.
In the peak season versus the trough season so.
As Andy said to me. This weekend. He said you have to do something youre not the best at which is be patient. So I like the rest of you are just going to be patient as we go through it but what we were hoping to see now we are seeing and what we were seeing in terms of the positive trends have continued.
Thanks, Dan.
Our next question comes from Brian Peterson with Raymond James. Please proceed with your question.
Hi. This is does it go on for Brian as companies are exploring new use cases with AI and in the light of your partnership with Gilead are you considering any other M&A opportunities in this space and more broadly how are you thinking about overall capital strategy I think stand today. Thanks.
Yes, I'll do the first part let Andy do the second part of our capital strategy because I think.
I think people should see.
See the work that they've done and recognize.
What he's done with the debt and buying back stock has been really effective for shareholders.
Which is why we.
I think people were confused that we werent net cash positive to our debt, but we are and that's really Andy and his team's great.
In terms of M&A.
It looks the thing that you want.
Net debt that companies are going to need is the data.
And the database and the customer list, we have all of that.
So.
You know it.
For us to achieve what we're trying to achieve in this space right now it doesn't feel like M. A M&A is the answer.
Because the moat that we have actually gets amplified as a result of AI because what we can do with what we have will be so much more than anybody can do with what they have today or what they'll be able to do simply because of the way our data structures have been built and the over 10 years of understanding.
Student behavior, and our content and behavior by each school and each class and each professor ease of things and the way. The questions are crafted informed and even you know even our ability to take them through images, which others can't do which light years ahead of where other people or so.
No there really isn't an obvious need in the short term.
For us to be able to do what we need to do.
You know Theres always there may always be something that will just accelerated or speed it up but right now that's not a priority I think Andy has better uses for the cash so Andy.
Yeah. So I mean, when you look at capital allocation I mean, you mean in the ideal world you'd use your capital to dry it and grow the business.
Those opportunities as Dan had mentioned that really don't exist and don't make sense for us at this point in time, but we're what we have been doing over the last several quarters, just being very opportunistic with respect to some of our securities buyback last quarter for example.
We retired debt at a sizable discount almost $54 million you saw that.
And we will continue to be.
Call, it opportunistic and potentially active depending upon.
The value, but we are we've got a very strong balance sheet like Dan said, we're driving significant free cash flow. So we've got the ability and competence.
To make those moves.
Should she had the opportunity does exist.
Yeah.
Got it thank you.
Yep.
Our next question comes from Jason <unk> with Keybanc capital markets. Please proceed with your question.
Great. Thanks. This is Devin congregation today, thanks for taking my question.
You know a nice beat on the revenue and EBITDA results I just wanted to dive in on on the subscriber number a little bit more I think in the quarter to $4 8 million subscribers came in a little bit lighter than expected and also represent b cell there.
But any additional color you can provide on what drove the diesel in the quarter is it mainly on the softer new account side of the house or did you see higher expected churn in the quarter.
Aye.
I'll, let Andy give more detail.
That's not our read on what we did I mean, we beat revenue and we'd be EBITDA substantially which is very hard to do on a $17 product.
In a low and a lower season, particularly as the season, yet so I don't know that we felt that we were light at all.
And I think what we saw was better than what we expected so I'm not sure what you're comparing it to but Andy.
Yeah. Yeah. So first thing is we don't guide you to net paying subscribers to be clear.
It's what I call subscription Matt we're in a period right now that Q2 was a period, where it was and to some extent Q3, where it's dominated by renewals, which is from prior periods, where we had steeper declines in new subscribers.
Dan is talking about is the fact that we're digging ourselves out of that hole is improving relative to what we expected and in fact, when you look at the quarter as a whole are both from a like Dan said from a from a retention standpoint and from a new subscriber standpoint, it was better than we expected but.
Once again, that's it was even better.
Okay.
Got it.
And then just one more question for me.
Last quarter, you called out areas like Mexico, with really high top of funnel interests, but low conversion I'm. Just curious if there's any additional initiatives that went in in the quarter to kind of drive that convert up thank you.
Yeah. These are these are real interesting questions here, which is <unk>.
As we have adjusted the entire company to leverage what AI is capable of doing.
The prioritization of the country's hasnt changed so Mexico, the Philippines, Canada, Australia.
The U K, Turkey places like that remain the places where our initial efforts are focused on what has changed to the better is what AI allows us to do is do these things better and faster.
In some cases simultaneously. So for example, AI in terms of being able to do instant translation is much better for us to be able to add localized content faster and less expensive than we would've done before so we're really just going to take advantage of with the new capabilities allow us to do on behalf of Steve.
And we'll continue to do all the price testing that we've been doing but during a slow season, you know that doesn't give off the right signal in terms of knowing really what's going to happen because particularly USA. It's high Summer school most other places don't.
There are no further questions at this time I would now like to turn the floor back over to Dan Rosensweig for closing comments.
Thank you everybody. Thanks for your questions, we're really proud of the team and the results.
As the.
The information in the awareness of AI evolves and its capabilities evolve we believe.
That.
History is a good guide here, which is the players that have really big brands really unique and proprietary assets that are valuable can leverage new technology and new capabilities to the advantage of their customers and therefore, the advantage of their business models and I think you're beginning to see that whether it's adobe or Microsoft or.
Google or service now or any of these companies that have built really strong.
Relationships and loyalty and expectations of quality with their audiences are going to be able to do things faster and we believe at a lower cost over time and differentiate themselves from their competitors. So we we are excited about the momentum that we are seeing right. Now we are gonna take things one quarter at a time.
Until we get comfortable that this is sustainable.
Sustainable we expect to return to growth and and as we do you know you'll see the margins continue to improve we have remained over 30% margins.
For the last several years, so we have the capital necessary or the business model to get it right and this proprietary dataset, but others wished if they could get access to that we are not giving it to them, we're going to use it and build our own L elements to our advantage.
And so the next six months are going to be super exciting pre check in with just head down working so thank you all for joining the call. So are the rest of your summer.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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