Q3 2023 Chegg Inc Earnings Call

[music].

Greetings and welcome to the Chegg third 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 at E. S. G. Please go ahead.

Good afternoon. Thank you for joining Chegg third quarter 2023 conference call on today's call are Dan most implied co chairperson and CEO and Andy Brown, Chief Financial Officer.

A copy of our earnings press release, along with the industrial presentation is available on our Investor Relations website, Investor Chegg Dot Com a.

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 Dot Com Flash Media Center.

We encourage you to make use of these resources.

Before we begin I would like to point out that during the course of this call. We will make forward looking statements regarding future events, including the future financial and operating performance of the company.

These forward looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward looking statements in particular, we refer you to the cautionary language included in <unk>.

Today's earnings release, and the risk factors described in the annual report on Form 10-K filed with the Securities and Exchange Commission on February 21st 2023.

As our other filings with the U S. We see.

Any forward looking statements that we make today are based on assumptions that we believe to be reasonable as of this date.

We undertake no obligation to update these statements as a result of new information or future events.

During this call we will present, both GAAP and non-GAAP financial measures, our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and the industrial 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 IR website.

Now I will turn the call over to Dan.

Thank you Tracy and welcome everyone to our 2023 Q3 earnings call Chegg had a good quarter delivering better than expected results as we saw stabilization in new accounts and increases in overall retention and then the take rate of Chegg study pack.

In addition to our academic services, we continue to invest in skills, we're where we are seeing very strong growth all of which is good for the future check.

Six months ago, leveraging the breakthroughs of artificial intelligence, we began to completely reinvent what we offer how we offer it and to whom we offer new technology platforms create a lot of heightened noise, but at the highest gives way to facts. We believe chegg is in a great position to build the most impact.

Full scalable AI enabled personal learning assistant, which will expand our opportunities to serve more students in more ways and at a lower cost per customer.

The history of the Internet has shown us that vertical is wet.

Leading companies with a strong brand and category expertise scale and resources can invigorate growth and create new opportunities when they move quickly embraced change and the world of AI chat gets particularly valuable and proprietary assets for education and learning, including our students first.

Brand, our reputation for quality and accuracy and our unique content and dataset.

She has also has a proven track record for improving student outcomes and now by combining the best of what Chegg has to offer with the advancements in artificial intelligence, we are creating new opportunities to better serve our students.

It has been nearly a year since CECI P. T launched we've all learned a lot and they're experiencing how AI is impacting our lives. We know that students are using chat G. P. T. But what is interesting is that they are using it for a variety of things in addition to education.

Because chegg is verticalizing for learning what isn't surprising is that when students try us and compare us to more general with AI solutions Chegg outperforms.

That is why two incredibly high retention rates and we are maintaining high customer satisfaction, such as 91% of students report that when they use sheds they get better grades, 89% say chegg helps them learn their course material and 90% say they work more efficiently when using <unk>.

To understand their coursework.

And we are now introducing new AI capabilities and features which we expect will do even more for students.

We are excited about what we're building and we are moving quickly and rolling out the first things of our new user experience.

In September we started to show our first cohort of users the upgraded capabilities with a new simple interface and a unified asking experience.

This means chegg can provide answers from a proprietary database of more than 150000 and subject matter experts and now with generally.

We are focused on usage quality accuracy and speed.

It's on track to introduce our own large language learning models trained on says you need data.

In the coming months, you will see our software more features including multi churn shot which will create a simple and conversational experience and introduced personalized AI enhanced learning AIDS such as practice test assessments study guides and flash sites.

I also plan to let students connect to each other and share content.

Over time all of this is designed to expand our Tam and increase our relevancy to millions more students than we serve today, it's truly an exciting time at Chegg.

We're executing well against our plan and we are on track to all I'm, even more features to more students in Q1 of 2024.

We have only one agenda served as to.

What we do is incredibly hard to replicate giving us a powerful about the combination of our successful learning taxonomy of over 100 million solutions generated by Chegg subject matter experts and now the ability to leverage artificial intelligence means we can do what generic AI platforms cannot do.

Our vision for a truly personalized learning system is coming to life and make it easier for you to see what we're building we've created a video for you that he said.

<unk> on our IR website, where you can see how the product is evolving.

We believe this will give you a sense of just how powerful check them become including our ability to blend our academic support and skills efforts by integrating career pathways into the student experience.

We are beginning to see the investments we've made in skills paths by leveraging the latest advances in AI scopes.

To accelerate our program development.

We're able to create relevant customized high impact programs faster and at a lower cost.

We will also be releasing a suite of AI training programs over the coming months, who are beta be partnership and direct to student efforts. We continue to see chegg skills grow and expect it to become a meaningful contributor in the years ahead.

We are widening the aperture for Chad.

Hope to reach a much larger audience suppliers, one that historically, we have been unable to serve before.

This is where much of the future growth will come from and our plan is to continue to execute each quarter towards this vision.

And before I turn it over I want to acknowledge Andy as he plans to retire once we hire his replacement early next year.

I am deeply grateful for the incredible contributions Andy has made during his 12 year tenure at Chegg under his leadership.

Leadership, we have grown from a physical textbook rental business to a global online learning platform that has supported more than 22 million students over the last decade.

He guided as to our transition to a fully digital business and in doing so through our digital revenue from zero to over $700 million annually.

In fact, when Andy took on the role of CFO said was it was unprofitable, but today check it's profitable and is expected to generate nearly $220 million and adjusted EBITDA and approximately $170 million in free cash flow this year.

These are remarkable accomplishments and none of them would've been possible without Andy's leadership ambition on a personal note I want to thank Andy for his partnership guidance and friendship over the last decade is truly left an indelible mark on this company and will forever be part of the Chegg and resin slides family and with that I will turn it off.

Over to Andrew.

Thanks, Dan for those kind words, it's been an amazing journey over the past 12, plus years and I'm extremely thankful to you and the check team and proud of what we have collectively accomplished also a big shout out to Tracy and Diana you you are the best IR team I've had the pleasure to work with you guys is just awesome.

Our company has become an industry leader a cherished brand that is loved by millions of students worldwide with a future that is incredibly exciting having the opportunity to work for a mission driven company that is integral to helping students learn that's been super rewarding and I. Thank you.

Now back to business.

Q3 was a good quarter exceeding our revenue and adjusted EBITDA guidance and as Dan mentioned, we are encouraged by the continued positive trends such as increasing retention rate and Chegg study pack take rate.

Total revenue was 158 million driven by subscription services revenue of 149, where we had $4 4 million subscribers during the quarter.

Skills and other revenue was $18 million driven by strong growth in skills offset by park, primarily by the change in the required materials model, which is now a revenue share as well as some advertising softness.

We remain disciplined on the expense side aligning investments without AI focused strategy, which supported another adjusted EBITDA beat this quarter versus guidance coming in at $39 million or 25% margin.

We had Q1 time items that impacted our GAAP gross margin and net income for the quarter first there.

The design of our new generative AI experience, we determined that certain content and system types were no longer necessary.

As a result, we have taken a charge of 41.8 million of which approximately $38 2 million was included in cost of goods sold which impacted gross margin and $3 6 million included in G&A.

The second item is we recorded a gain of $32 1 million from the repurchase of some of our outstanding convertible debt at a discount during the quarter, which was recorded in other income.

We have a strong balance sheet and drive significant free cash flow, which we expect will continue and pork full year 2023 we now expect free cash flow to be approximately $170 million.

We have opportunistically retired convertible debt and equity returning approximately $1 2 billion and 800 million respectively to investors through repurchases over the last three years. We ended the quarter with 607 4 million of cash and investments with total convertible debt outstanding of six.

$3 million at par value.

We continue to believe that the combination of our operating model balance sheet and cash flows sets us up to deliver on our mission to serve students across the world leveraging AI to expand our offerings and our camp and ultimately return to growth what meetings maintaining strong profitability.

Now moving onto guidance for Q4, we expect total revenue to be between 185 and $187 million.

Subscription services revenue between 164 and $166 million.

Gross margin between 70, 374% and adjusted EBIDTA between 60 to 64 million or 34% margin.

In closing, we expect the development of AI.

Well I'll check to embrace a much larger opportunity over time.

We believe there is nobody better equipped to meet the current or future needs of students in check.

We have an industry, leading brand proprietary data strong operating model and our balance sheet to extend our leadership in the future.

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

Thank you we will now be conducting a question and answer session.

I would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is that the question queue. You May press Star two if you would like to remove your question from the queue.

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Your first question comes from Jeff Silber with BMO capital markets. Please go ahead.

Thanks, So much for taking my question in your prepared remarks, Dan you talked about the new user experience and how you started with the first cohort in September I was hoping you could tell us a little bit about that cohort how large it is and what's the planned rollout from here to reach your entire user base.

Yes.

Thanks.

So the the rollout goes to two groups, obviously, it goes to existing customers and it goes to new customers. So we started at 1% rollout we went to 10% rollout we're already now at 25% rollout. So it continues to go up because the response has been really positive.

So you can expect well what we've done and we have a video coming out for you to be able to see it. What we've done is we've improved two things to begin with which is their user interface is much simpler much more intuitive easy to use and then we are now also able to generate answers too.

Questions.

Using generative AI. In addition to the 150000 experts in our database of over 100 million. So that is what we're rolling out now the next big phase, where the user experience will change even more dramatically when we do multi turn chat, which will be coming closer to the end of this year and then the first quarter of next year. So it's been.

Really positive feedback has been really positive which is why we've gone to from 1% to 25% and we think it's going to make a massive difference in our future growth and we're incredibly excited about it.

Hello.

Yeah, I'm, sorry, I must have lost you there.

Thanks, Tom I'll, just read the transcript on therapy anything so actually let me just ask my follow up question I apologize.

You mentioned in terms of existing and new customers. I. Just was wondering if you can get a little bit more color from a subscriber perspective I know initially when when chat GBT was kind of a called out he was hitting new customers are you seeing any difference between existing and new customer signing.

Well, what what we said in the prepared remarks was we're seeing record retention. So when students use chegg and they use a generative AI CECI P T and others we.

We win handily and that is because we have a proven experience that actually improves outcomes teaches the student doesn't just give that answer and is designed specifically and exclusively for the learning experience since so when students see that plus you combine with the with the accuracy and quality.

David Longo: David Greetings and welcome to the Chegg's third quarter 2023 earnings conference call. At this time all participants aren't a listen only mode. A brief question and answer session will follow the formal presentation.

Unknown Executive: If anyone should require operator assistance throwing the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

The we win handling and that's why our retention is doing extraordinarily well.

So the battle is got to be messaging for new customers and we're already seeing from the rollout test that you talked about earlier, we're already seeing very positive response from new customers as they start to see the new user interface and the first part of the experience. So we're extraordinarily optimistic right now.

Tracey Ford: It is now my pleasure to introduce your host Tracey Ford, Vice President of Investor Relations and ESG. Please go ahead. Good afternoon.

Tracey Ford: Thank you for joining Chegg's third quarter 2023 conference call.

Tracey Ford: On today's call, our dad Rosensweig co-chairperson and CEO in 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.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. We encourage you to make use of these resources.

Really it's just a matter of getting the message out getting the product out executing well on that getting communicated and then you know we we continue to improve all of our metrics, including getting close to where we wanted to get to a new account growth. So we can start to expand your account growth and grow again. So we're really excited about where we are.

And the plan seems to be working so far.

Alright, thanks, so much for the color.

Tracey Ford: Before we begin, I would like to point out that during the course of this call, we will be 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 certain issues 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.

Yep.

Next question Qunar armoured car with UBS. Please go ahead.

Hi, Thanks for taking my question a couple if I could one on the international side.

Can you give us a sense of what you're seeing on the international front in terms of growth and second would be again on the international side would be hub competition.

So how is your content relevant to customers.

You didn't say internationally and what kind of competitive landscape do you face in places like Brazil, and Mexico. Thank you.

Tracey Ford: In particular, we refer you to the cautionary language included in today's earnings release. In the risk factors described in chegg's annual report on form 10K filed with the Securities and Exchange Commission on February 21st, 2023, as well as our other filings at the SEC. Any forward looking statements that we made today are based on assumptions that we believe to be reasonable as of the state. We undertake no obligations to update the statements as a result of new information or future events.

Sure. So on the international front as you recall in 2019, we really didn't have an international business now it's over 10% of our business. So we've made substantial progress.

Similar to the U S.

When Covid came and we peak Covid, we almost doubled the number of new accounts that we would be doing in the course of the year during peak Covid and of course. He has covered is the has gone away.

Tracey Ford: During this call, we will present both gap and non-gap financial measures. Our gap results and gap to non-gap reconciliation can be found in our earnings press release and the investor slide deck found on our IR website, investor.chag.com. We also recommend you review the investor data sheet, which is also posted on our IR website.

Hey, those numbers have gone down and so we are now beginning to start to look to return to growth of new accounts and we're seeing great progress in that and international it's actually one of the places where we're really seeing great progress.

The relevant C goes up because of AI, we're able to translate better translate a less expensive.

Daniel Rosensweig: Now, I will turn the call over to Dan.

Daniel Rosensweig: Thank you, Tracy, and welcome everyone to our 2023 Q3 uns call. Cheg met a good quarter delivering better than expected results as we saw stabilization in new accounts and increases in overall retention and in the take rate of Cheg study pack. In addition to our academic services, we continue to invest in skills where we are seeing very strong growth, all of which is good for the future. Six months ago, leveraging the breakthroughs of artificial intelligence, we began to completely reinvent what we offer, how we offer it, and to whom we offer it.

And we're able to build out more categories faster. So that's a really positive step and we're also finding the right pricing so as cost per customer goes down.

<unk> will go up even if we reduce our pricing internationally. So that's all been really positive and so I would say, we're making really great progress.

In international even more so than the U S. Right now in the U S is making really good progress.

Next question, Ryan Macdonald with Needham <unk> Company. Please go ahead.

Hi, Congrats on a nice quarter and thanks for taking my question Andy Best of luck Tim.

Daniel Rosensweig: New technology platforms create a lot of hype in noise, but as the hype gives way to facts, we believe Chegg is in a great position to build the most impactful, scalable AI-enabled personal learning assistant, which will expand our opportunities to serve more students in more ways and in a lower cost per customer. The history of the Internet has shown us that verticals with leading companies with a strong brand, category expertise, scale, and resources can invigorate growth and create new opportunities when they move quickly and embrace change.

And then maybe just can you dig into the subscriber trends and what we're seeing on a quarter over quarter basis, more and maybe just sort of.

To clarify what you mean on the retention side versus what Youre seeing in terms of net new subscriber growth and when you think maybe we start to see that a subscriber number or account sort of trough and start to show growth as we look over the next few quarters here.

Yeah. So you know Andy has coined the phrase subscription math so in his honor upon his retirement.

Daniel Rosensweig: In the world of AI, Chegg is particularly valuable and proprietary assets for education and learning, including our student first brand, our reputation for quality and accuracy, and our unique content and dataset. Chegg also has a proving track record for improving student outcomes, and now, by combining the best of what Chegg has to offer with the advancements in artificial intelligence, we are creating new opportunities to better serve our students. It has been nearly a year since Chegg GPT launched.

I'll sort of walk us through this a little bit which is.

When an account comes up for renewal.

What we mean by we've seen incredibly high renewal rates is of those that come up for renewal, they're renewing at a much higher rate and staying on longer than they ever have and we're also seeing a significant improvement in take rate, which is you know almost.

One out of every two new customers now is taking the more expensive version and they're retaining at the same rate as the less expensive version. So those mechanisms are all extraordinarily positive and it's why we're able to improve our profitability and generate a lot of free cash flow.

Daniel Rosensweig: We have all learned a lot and are experiencing how AI is impacting our lives. We know that students are using Chegg GPT, but what is interesting is that they are using it for a variety of things in addition to education. Because Chegg is verticalized for learning, what isn't surprising is that when students try us and compare us to more general AI solutions, Chegg outperforms. That is led to incredibly high retention rates, and we are maintaining high customer satisfaction, such as 91% of students report that when they use Chegg, they get better grades, 89% say Chegg helps them learn their course material, and 90% say they work more efficiently when using Chegg to understand their coursework.

And it's really positive for the business. So the opportunity is to start to sell more new accounts, we are selling <unk>.

Difficult any more new accounts in 2023 than we did in 2019 before Covid I mean, it's millions more years. So we still generate millions of new accounts a year. What we wanted what we have to do is overcome the incredible rise that we took in Covid and then hit the trough as you point out, which we think were.

Noting that trough by new account growth, where and and with the new product and the new marketing messages and the.

Daniel Rosensweig: And we are now introducing new AI capabilities in teachers, which we expect will do even more for students. We are excited about what we are building, and we are moving quickly and rolling out the first things of our new user experience. In September, we started to show our first cohort of users the updated capabilities with a new simple interface and a unified asking experience. This means Chegg can provide answers from our proprietary database are more than 150,000 subject matter experts, and now with gendered AI.

The new capabilities that we're going to have in it we think that we're somewhere around the trop I can't pick a particular day or a moment on a given day. We're at the trough. Some days we're above the trough. Some days, we're a little bit below the Tropic, where we're where we wanted to get to first.

And then from there we start to grow again, and so that is the entire effort of the company is to invigorate growth again.

We have you know a lot of variables in which we need to execute on but as we're executing on and we expect that's exactly what's going to happen.

Helpful color, Thanks, and maybe on international you know last quarter, you talked about rolling out a new payment our infrastructure and in India as part of the international growth and I think that was supposed to come online in August and it seems like in some of our survey work that you're starting to see more of an uptick there but can you just talk about you know India and.

Daniel Rosensweig: We are focused on usage, quality, accuracy, and speed, and our on track to introduce our own large language learning models trained on Chegg's unique data. In the coming months, you will see us offer more features, including multi-turned-chat, which will create a simple and conversational experience and introduce personalized AI-enhanced learning aids, such as practice tests, assessments, study guides, and flashcards. We also plan to let students connect to each other and share a contact with each other and share a contact with each other.

How big that opportunity is and if you're starting to see some of that stronger momentum from from the new payment infrastructure.

Yeah, I'll start with the second part first yes, we are seeing it's not just the payment infrastructure that we have to do but you're right. We did that but it's also getting the appropriate pricing in India, which we've been able to do so what's interesting and really positive is when we lower prices internationally. We obviously see an increase in conversion, which is exactly what you want but we're all.

Daniel Rosensweig: Over time, all of this is designed to expand our TAM and increase our relevancy to millions more students than we serve today. It's truly an exciting time of change. We are executing well against our plan and we are on track to allow even more features to more students in Q1 of 2024.

Also seeing an uptick in people that take the more expensive version of what we have so when you take the increase in conversion and the higher take rate or the more expensive product.

Daniel Rosensweig: We have only one agenda to serve this field. What we do is incredibly hard to replicate, giving us a powerful mode. The combination of our successful learning taxonomy over 100 million solutions generated by Chegg Subject Matter experts and now the ability to leverage artificial intelligence means we can do what generic AI platforms cannot do. Our vision for a truly personalized learning system is coming to life. Make it easier for you to see what we are building.

The margins on the product are remaining very similar right now to what they were before which is a really positive step.

Now in terms of the size of what we think India can be we actually think it could be millions.

That's our objective is in India. It's got the largest English speaking community outside of America. There's a huge focus on learning a huge focus on stem and an increasing awareness of chegg.

And as we rollout the AI capabilities, we think that's even going to expand well beyond that also is as we mentioned that we're starting with our expectations over time to build community and we think sharing of Chegg will also be a great viral way.

Daniel Rosensweig: We've created a video for you that is available on our IR website where you can see how the product is evolving. We believe this will give you a sense of just how powerful Chegg can become, including our ability to blend our academic support and skills efforts by integrating career pathways into the student experience. We are beginning to see the investments we've made in skills path by leveraging the latest advances in AI to accelerate our program development.

To accelerate growth. So I would say India is a real highlight of what we're seeing right now and as you're getting your survey work work I think backs that up.

I appreciate it thanks again.

Yep.

Daniel Rosensweig: We are able to create relevant, customized, high impact programs faster and at a lower cost. We will also be releasing a suite of AI training programs over the coming months, who are a B2B partnership and direct to student efforts we continue to see Chegg skills grow and expect to become a meaningful contributor in the years ahead. We are widely the aperture for Chegg and we hope to reach a much larger audience of learners, one that historically we have been unable to serve before. This is where much of the future growth will come from and our plan is to continue to execute each quarter towards this vision.

Next question.

Doug Anmuth with J P. Morgan. Please go ahead.

Hey, it's Bryan Smiley contract, Doug Thanks for taking my questions and congrats on the retirement, Andy you know just to start can you just walk us through results from the back to school season, and how it shaped up versus your expectations and then I guess secondly, just shifting a bit you know can you elaborate more on the skilled strategy and you know whatever the lever the drivers of success that you're seeing there so far.

Thank you yeah. So.

Back to school has gone well I mean look at the third quarter in row, now, where we beat our own expectations. Both on the top line and on the bottom line and quite substantially so.

All of those are reflections of excellent execution.

Daniel Rosensweig: And before I turn it over I want to acknowledge Andy as he plans to retire once we hire his replacement early next year. I am deeply grateful for the incredible contributions Andy has made during his 12 year tenure at Chegg. Under his leadership, we have grown from a physical textbook rental business to a global online learning platform that has supported more than 22 million students over the last decade. We have guided us through our transition to a fully digital business and in doing so grew our digital revenue from zero to over $700 million annually.

That our team has been doing and you see them in the results so far.

We would say that it's going very well versus our original expectations. We're ahead of where we thought we would be in the number of subscribers. We have in our retention numbers and so all of this is good news the the opportunity for Chegg as I said is to expand the aperture open it up because we can use AI now we have more.

More ways to add more content at a lower cost per content and make it relevant to a much larger group of people and that is really exciting and really the you know one of the biggest growth opportunities that we've seen in years. So we're fired up about that on the skilled side. We've made an investment over the last couple of years to really.

Daniel Rosensweig: In fact, when Andy took on the role of CFO, Chegg was unprofitable, but today Chegg is profitable and is expected to generate nearly $220 million in a just to do the job and approximately $170 million in free cash for this year. These are remarkable accomplishments and none of them would have been possible without Andy's leadership and vision.

Change the way, we do skills to make them.

Lower cost higher quality greater completion rates and work through our <unk> partners, particularly guild and we're seeing excellent growth so year over year growth of skills is quite high.

Daniel Rosensweig: On a personal note, I want to thank Andy for his partnership, guidance and friendship over the last decade. He has truly left an indelible mark on this company and will forever be part of the Chegg and Rose and Swag family.

And if it continues this way we expect it to be a very meaningful part of our business in the years to come because we're expanding not just through Gil, but we're expanding direct to corporations, where we signed our first customer indeed, rather than lay people off that they are going to use us to retrain their employees. So this is exactly.

Andrew Brown: And with that, I will turn it over to Andy. Thanks, Dan, for those kind words. It's made an amazing journey over the past 12 plus years and I'm extremely thankful to you and the Chegg team and proud of what we have collectively. He's a big shout out to Tracey and Diana. You are the best IR team I've had to pleasure to work with. You guys are just awesome. Our company has become an industry leader, a cherished brand that is loved by millions of students worldwide with a future that is incredibly exciting.

The kinds of investments that we wanted to make in businesses that have high RPC I mean, the average of our pool of our of our Chegg study Chegg study pack customers 17 bucks easier as much as $5000. So.

We are really bullish on where we're going with skills now the next big opportunity is as we talked about in the prepared remarks and as you can see in the video if you take a look at it is we're building skills taxonomy. So what we wanted to do is help college kids assess where they really are with the kind of skills that they need to be implemented.

Andrew Brown: Having the opportunity to work for a mission driven company that is integral to helping students learn that's been super rewarding, and I thank you. Now, back to business, Q3 was a good quarter, exceeding our revenue unadjusted ebbed our guidance, and as Dan mentioned, we are encouraged by the continued positive trends, such as increasing retention rate and check study pack take rate. Total revenue was 158 million, driven by subscription services, revenue of 140 million, where we have 4.4 million subscribers during the quarter.

<unk> on top of their academic learnings and then help them master those skills. So that they can in fact be employable. These are all things that are now possible that we've always wanted to do that I made much more possible because of the combination of Chegg and AI.

Andrew Brown: Skills and other revenue was 18 million, driven by strong growth in skills, offset by primarily by the change in the required materials model, which is now a revenue share, as well as from advertising softness. We remain disciplined on the expense side, aligning investments with our AI focus strategy, which supported another adjusted ebbed dot beat this quarter versus guidance, coming in 39 million or 25% margin. We had two long time items that impacted our gap growth margin and net income for the quarter.

And so this is the direction that we tend to go which is b to b through gilby to be directed at corporations and direct to students through check. So these are all future growth opportunities that we're building now.

Next question, Josh Baer with Morgan Stanley. Please go ahead.

Great. Thanks for the question and Andy Congratulations on your planned retirement, you mentioned that the pretty large charge on the GAAP basis related to the content and systems no longer necessary I was hoping you could just provide some color on what that means the types of content and systems that you're referring to and then.

Andrew Brown: First, during the design of our new generative AI experience, we determined that certain content and system types were no longer necessary. As a result, we have taken the charge of 41.8 million, of which approximately 38.2 million was included in cost of goods sold, which impacted growth margin, and 3.6 million included in GNA. The second item is we recorded a gain of 32.1 million from the repurchase of some of our outstanding convertible debt at a discount during the quarter, which was recorded in other income.

And what it means from a cost savings perspective looking forward.

Yeah.

It's actually not that large truth be told when you look over the last call. It 10 years or so we spent literally hundreds of millions of dollars on content. So relatively speaking, it's small and it's a hodgepodge of a whole bunch of different things.

Or that are included in that so yes, it's something that as the team went through and looking at what the new Chegg experience is going to be and it was starting to roll that out there were certain aspects that are that the team decided it wasn't going to be part of the as I'll call. It the new check.

Andrew Brown: We have a strong balance sheet and drive significant free cash flow, which we expect will continue and for the year 2023, we now expect free cash flow to be approximately 170 million. We have opportunistically retired both convertible debt and equity, returning approximately 1.2 million and 800 million respectively to invest us through repurchases over the last three years. We ended the quarter with 607.4 million of cash and investments, with total convertible debt outstanding of 603 million at par value.

And as a result, we we we took the charge and.

Like I said, it's it's like you said relatively small from impact going forward. You know it does most of that was as I said in my prepared remarks rolls through the cost of goods sold.

So it does have you know a couple of hundred maybe up maybe upwards of 300 basis point impact on the on the gross margin.

But but nonetheless, it was necessary and.

Andrew Brown: We continue to believe that the combination of our operating model, balance sheet, and cash flows set us up to deliver our omission to serve students across the world, leverage AI to expand our offerings and our camp, and ultimately return to growth while maintaining strong profitability.

Relatively small in the scheme of things.

Okay. Thank you Andy and then.

But I was going to say just to clarify that point, it's a positive impact on the gross margins.

Yeah, Yeah, Yeah, and I'm, sorry, I'm, sorry, but unfortunately, yes. Thank you.

Andrew Brown: Now moving on to guidance for Q4, we expect total revenue to be between 185 and 187 million, with subscription services revenue between 164 and 166 million, growth margin between 73 and 74% and adjusted EBITDA between 62 and 64 million of 34% margin. In closing, we expect the development of AI will allow Chegg to embrace a much larger opportunity over time. We believe there is nobody better equipped to meet the current all future needs of students in Chegg. We have an industry leading brand, proprietary data, strong operating model, and a balance sheet to extend our leadership in the future.

[laughter] Oh, I know that that was clear that was clear and then wanted to just get a quick update on study pack.

Sort of talked about adoption trends in a couple of way pretty positively just wondering like overall are you still thinking about <unk> and study pack adoption as a growth driver like is there more room to go and then in relation to Gen AI and the new customers coming on board is that sort of consistent behavior with other alternatives out there.

Thank you.

Yeah, you're going to have to explain the last part of that question again, but let me just address the first part of it so you.

You know when we first started rolling out Chegg study pack, we had about a 13%.

Take rate and we're now up to over 50%. So yes, we continue to see it as a driver, but I think what ultimately is going to happen now.

Unknown Executive: With that, I'll turn the call over to the operator for your questions. Thank you.

Unknown Executive: We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. In confirmation, total indicate your line is in the question queue.

I'm not sure people have really understood the level of change that we are doing with our product so in less than a year.

Unknown Executive: You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hands up before pressing the star keys.

We are completely reinventing the chegg user experience to be much broader much more relevant to a bigger group of people.

And much more global in its nature.

Jeffrey Silber: Your first question comes from Jeff Silver with BMO Capital Markets. Please go ahead. Thanks so much for taking my question. In your prepared remarks, Dan, you talked about the new user experience and how you started with the first cohort in September. I was hoping you can tell us a little bit about that cohort, how large it is, and what's the plan roll out from here to reach your entire user base? Yes, thanks.

And so.

The new experience will likely.

And up maybe with just one SKU rather than too, but with two different price points, depending on the capabilities that students are gonna want access to so we think between AI and skills and and the other issues that were helping students addressed is a real opportunity to continue to improve.

Our our food on a per customer basis.

Jeffrey Silber: The rollout goes to two groups. Obviously, it goes to existing customers and it goes to new customers. We started at 1% rollout. We went to 10% rollout. We're already now at 25% rollout. It continues to go off because the response has been really positive. You can expect what we've done, and we have a video coming out for you to be able to see it. What we've done is we've improved two things to begin with, which is the user interface is much simpler, much more in two of these if you use, and then we are now also able to generate answers to questions using generative AI in addition to the 150,000 experts in our database of over 100 million. That is what we are rolling out now.

And so we are focused on testing messaging and pricing.

I wouldn't expect that any time soon I think the single most important thing that we need to do is to get the new product and user experience out there and if we continue to see the positive.

Feedback that we're getting now that I think you're going to see that just as we've laid out over the course of the rest of this year in the first quarter of next year, and then we'll keep adding and adding and adding the key is just creating overwhelming value. So that students see the value in the pricing and every time that we have done that we've been able to be successful.

Great. Thanks, Dan.

Next question, Brent Thill with Jefferies. Please go ahead.

Andy a great working with you over the years you know one of the questions that I've asked you guys for kind of multiple years is just.

Jeffrey Silber: The next big phase where the user experience will change even more dramatically when we do multi-turn chat, which will be coming closer to the end of this year and then to the first quarter of next year. It's been really positive. Feedback has been really positive, which is why we've gone from 1% to 25%. We think it's going to make a massive difference in future growth and we're incredibly excited. Hello. I'm sorry.

You've had a really high margin and given a lot of the AI components, you have to build out why not spend.

Spend a little more to kind of get the right infrastructure in for the next five years can you do AI infrastructure and keep your margins.

You know where they are I E. You, obviously guided to a pretty strong margin margin for next quarter.

If you could just update.

The trade offs that you're thinking through here.

Jeffrey Silber: I must have lost you there. I'll just read the transcript. You don't have to repeat anything. Actually, let me just ask my follow-up question, I apologize. You mentioned in terms of existing and new customers. I just was wondering if we can get a little bit more color from a subscriber perspective. I know, initially, when Apache VT was kind of called out and was hitting new customers, are you seeing any difference between existing and new customers signing?

Yeah, I'll start and let Andy and let Andy and with a flourish.

This is a highly profitable business.

I mean, we have 70% plus gross margins, we have EBITDA margins that we believe will continue to grow as we grow and as Andy has pointed out over the years will likely approach, 40% EBITDA margins as we get even bigger and bigger which we are working very hard to return.

Jeffrey Silber: Well, what we said in the prepare remarks was we're seeing record retention. So when students use check and they use generative AI, Apache PT and others, we win handily. And that is because we have a proven experience that actually improves outcomes, teaches the student doesn't just give the answer and is designed specifically and exclusively for the learning experience. And so when students see that, plus you combine with the accuracy and quality, we win handily.

To that growth path.

So.

So the B b spending.

As we can we've increased our spending in each of the categories over the last bunch of years as we see opportunities to invest.

I can tell you as the CEO, we have not held back on investing things that we think are valuable to students and value valuable to investors were just fortunate that our business model can produce as much as $170 million in free cash flow. This year as an example.

Jeffrey Silber: And that's why our retention is doing extremely well. So the battle gets to be messaging for new customers. And we're already seeing from the rollout test that you talked about earlier, we're already seeing very positive response from new customers as they start to see the new user interface and the first part of the experience. So we're extraordinarily optimistic right now because really it's just a matter of getting the message at getting the product out, executing well on that, getting it communicated and then we continue to improve all of our metrics, including getting close to where we wanted to get to a new account growth so we can start to expand new account growth and grow again. So we're really excited about where we are and the plan seems to be working so far. All right, thanks so much for the call.

So.

Thank you know when people look how to value. This company. We've got a company that's gonna do nearly $220 million and EBITDA of $170 million in free cash flow.

Where the big growth opportunity ahead of it and as we see those opportunities like we did in skills, we invest in it like we transformed the company to all digital we invested in it like we are doing now where they are we're not holding anything back from them.

We're just able to repurpose a number of the cost of things that were higher cost of content creation to now more efficient cost of content creation. So I will tell you that when we see opportunities to move faster and grow we will it's very hard to replicate what chegg does.

These are complicated systems and processes and learning taxonomies, and we want to get it right. So we don't have the situation that AI has where students don't trust. It we want to be in a situation, where our accuracy and relevancy.

Kunal Madhukar: Next question, Kunal Madhukar with UBS, please go ahead. All right, thanks for taking my question. A couple of side quote.

Kunal Madhukar: One on the international side, could you give us a sense of what you're seeing on the international front in terms of growth and second would be again on the international side would be competition. So how is your content relevant to customers or students internationally, and what kind of competitive landscape do you face in places like Brazil, let me say, makes it up. Thank you. Sure.

And user experience are designed the way students expect it and that's why we continue to get such high results and such high retention.

I'll, let Andy sort of address any other parts of it.

No Dan I think you nailed it and I think that the key thing here is we're not starving the business at all.

We're making massive investments we made a big investment in scaling that we talked about last quarter.

It's something I remind our team.

Daniel Rosensweig: So on the international front, as you recall, in 2019, we really didn't have an international business. Now it's over 10% of our business. So we've made substantial progress. Similar to the U.S, when COVID came and we peak COVID, we almost doubled the number of new accounts that we would be doing in the course of the year during peak COVID and of course is COVID has gone away. Those numbers have gone down and so we are now beginning to start to look to return to growth of new accounts and we're seeing great progress in that and international is actually one of the places where we're really seeing great progress.

Frequently and that is to Dan's point, we're driving more EBITDA and free cash flow than many of our competitors are doing in revenue.

And so when we need to deploy capital we can do it and we will do it and.

And we are doing it.

And our new generative AI product so.

We're absolutely feeding the business and we you know our goal like Dan said earlier is to get back on.

Growth tracks, and we'll we'll make the appropriate investments to do that.

Thank you.

Next question, Jason <unk> with Keybanc capital markets. Please go ahead.

Great. Thanks for taking my questions just a couple from me nice to hear the initiatives on the skin.

Daniel Rosensweig: The relevancy goes up because of AI, we're able to translate better translate less expensive and we're able to build out more categories faster. So that's a really positive step. And we're also finding the right pricing. So as cost per customer goes down margins will go up even if we reduce pricing internationally. So that's all been really positive. And so I would say we're making really great progress in international, even more so than the U.S, right now and the U.S, is making really good progress.

Syed.

Can you just talk about the go to market there, particularly as you try to target.

Corporate customers like indeed.

Yeah. So.

I think it's sort of fascinating one of the things that I am not sure that that we even understood the value of what that over the last bunch of years, we've had as many as 22 million students subscribe to Chegg and many more use free versions of our writing product and others. So we've had tens of millions of students who have gone into the workplace.

So our brand is actually quite popular.

Ryan Macdonald: Next question, Ryan McDonald would need a company. Please go ahead. All right, congrats on a nice quarter and thanks for taking my question and the best of luck. Dan maybe just can you dig into the subscriber trends and what we're seeing on a quarter or a quarter basis more and maybe just sort of clarify on what you mean on the retention side versus what you're seeing in terms of net new subscriber growth. And when you think maybe we start to see that subscriber number or count sort of trough and start to show growth as we look over the next few quarters here.

And so as we were working with killed and as we saw that killed business grow and then we saw that our completion rates got beyond 50%, which is really hard to do with online courses.

We began to be approached by people like what can you do this for us, but we don't necessarily want to take the whole situation, we killed because Gil does online education as well as skills and so that prompted us.

To build a.

Our Tiger team that is going into corporations that no chegg that have a lot of employees that have used chegg that value chain and so that is how.

Daniel Rosensweig: Yeah, so you know Andy has coined the phrase subscription math so in his honor upon his retirement. I'll sort of walk us through this a little bit which is. When an account comes up for renewal, what we mean by we've seen incredibly high renewal rates is of those that come up for renewal, they are renewing at a much higher rate and staying on longer than they ever have. And we're also seeing a significant improvement in take rate, which is, you know, almost if one out of every two new customers now is taking the more expensive version.

How we got started we hired Colin Coggins, who is now running that group and so he's responsible for all of those efforts and he's making.

Immediate progress to be honest with you. Indeed is just the first of what we imagine will be many over time, there's a lot of large companies. The difference that we do versus other companies.

He's out there that do skills. So if you take some companies they have a marketplace of skills and they package it and they sell what they have.

Other companies have a very limited.

Daniel Rosensweig: And they are retaining at the same rate as the less expensive versions. So those mechanisms are all extraordinary positives and is why we're able to improve our profitability and generate a lot of free cash flow and it's really positive for the business.

Scope of what they build their content for and their content may or may not be updated regularly chegg has become a bespoke content creator in the skilled space, because where we're creating.

For students as well as for Guild, which it's frontline workers and now as well as for Corporation. So corporation come to us and they say look the single most important thing that we need to reeducate or train our employees on this originally.

Daniel Rosensweig: So their opportunity is to start to sell more new accounts. We are selling significantly more new accounts in 2023 than we did in 2019 before COVID. I mean, it's millions more a year. So we still generate millions of new accounts a year. What we want it, what we have to do is overcome the incredible rise that we took in COVID and then hit the trough as you point out, which we think we're approaching that trough on new account growth.

These skills businesses grew b to B, because it was a benefit being offered come to our company and you can train on this stuff now it is becoming an imperative for the corporation is saying this is exactly what we need to do and one of the benefits of AI.

Daniel Rosensweig: And with the new product and the new marketing messages and the new capabilities that we're going to have in it, we think that we're somewhere around the trough. I can't pick the particular day or moment. On a given day, we're at the trough, some days we're above the trough, some days we're a little bit below the trough, but we're where we wanted to get to first. And then from there, we start to grow again.

It's been we've gone from 13 weeks of creating a course in hundreds of thousands of dollars to five or six weeks and maybe $40000. So our ability to do it at a much much greater speed and much bigger scale personalized specifically to the needs of those corporations have improved and so that's why we're starting to make real good progress on our.

One corporate BC.

Okay, Great helpful. And then when I think about the stabilization you're seeing on the retention side, how much ink partnership come into play.

Daniel Rosensweig: And so that is the entire effort of the company is to invigorate growth again. We have, you know, a lot of variables in which we need to execute on, but as we're executing on, we expect that's exactly what's going to happen.

And then when we think about future partners like what are the textbook characteristics R. R.

Yeah. Thank you look forward in that.

I, just you broke up a little bit you're talking about our retention in partnerships is that the is that what you were asking about.

Ryan Macdonald: It's a helpful color. Thanks.

Ryan Macdonald: Maybe on international, you know, last quarter, you talked about rolling out a new payment infrastructure in India as part of the international growth. And I think that was supposed to come online in August and seems like in some of our survey work that you're starting to see more of an uptick there. But can you just talk about, you know, India and helping that opportunity is. And if you're starting to see some of that stronger momentum from the new payment infrastructure.

Yeah Yeah.

So look we have we have really great partnerships, so far with com and now Tinder <unk> and door Dash are examples and others are looking to work with US we use it in two different ways.

One of them.

Is to help increase conversion.

Daniel Rosensweig: Yeah, start with the second part first. Yes, we are seeing it's not just the payment infrastructure that we have to do, but you're right, we did that, but it's also getting the appropriate pricing in India, which we've been able to do. So what's interesting and really positive is when we lower prices internationally, we obviously see an increase in conversion, which is exactly what you want, but we're also seeing an uptick in people that take the more expensive version of what we have.

And the other is to help improve retention.

Because the way the deals work is the students can't get access to the free door dash or the free tender or the free Tom if they don't retain on check in as you've seen our retention numbers are going up it's for a whole host of reasons quality being the single most important thing, but the overall value of which these partnerships are adding to it. So yes, we are.

Daniel Rosensweig: So when you take the increase in conversion and the higher take rate of the more expensive product, the margins on the product are remaining very similar right now to what they were before, which is a really positive step. Now in terms of the size of what we think India can be, we actually think it could be millions. That's our objective is in India. It's got the largest English speaking community outside of America.

We are being approached by and we are in discussions with a number of people and different ways to offer a chegg premium packaging and other things that we can do because students value the ability to get access to the things that they want through Chegg and these partners really value the ability to reach college students more efficiently than they ever had before.

And so it's been it's been a positive surprise for us to be honest with you.

Perfect. Thanks.

Daniel Rosensweig: There's a huge focus on learning a huge focus on stem and an increasing awareness of Cheg. And as we roll out the AI capabilities, we think that's even going to expand well beyond that. Also, as we mentioned that we're starting, you know, we are expectations over time to build community, and we think sharing of Cheg will also be a great viral way to accelerate growth. So I would say India is a real highlight of what we're seeing right now, and again, you're serving with work, I think, backs that up.

Yep.

Next question, Brian Peterson with Raymond James Please go ahead.

Hi, Thanks for taking my question.

On for Brian.

I just want a little bit follow up on earlier question in terms of head count what kind of investments are you considering for hiring staci like in areas like AI skills, which are great growth area. For you are you looking for more person. Now are you have you are you looking for more partnerships like scale AI that helps cover his talent you need.

Yeah, one of the things that we did earlier this year, which was very unfortunate but back in June.

Ryan Macdonald: Appreciate it, thanks again.

Brian Smilek: Next question. Doug and Moose with JP Morgan, please go ahead. Hey, it's Brian Smiley, concerted.

We really began to understand the magnitude of what we wanted to invest in and then we made the difficult decision to.

Daniel Rosensweig: Thanks for taking my questions and corrects on the retirement Andy. You know, just a start. Can you just walk us through results from the back to school season and how it shaped up versus your expectations? And then I guess, secondly, just shifting a bit. You know, can you elaborate more on the skill strategy and you know, what are the levers? The drivers are success that you're seeing there so far. Thank you.

To eliminate almost 90 jobs in the company. So that we have the head ways to be able to add jobs into our AI space. So we have moved the majority of the personnel that we plan to move we've opened up room to be able to add people as we need to add them.

In terms of AI partnerships, one of the things that we built this something internally, it's called the Orchestrator, which allows us to work with any and all AI partners, depending on which is the most efficient and relevant to produce the best result at the best price for us for our students if we choose to do that so.

Daniel Rosensweig: Yeah, so back to school has gone well. I mean, look, it's the third quarter of a row now where we beat in our own expectations, both on the top line and on the bottom line and quite substantially. So all of those are reflections of excellent execution that our team has been doing and you see them in the results. So we would say that it's going very well versus our original expectations, we're ahead of where we thought we would be in the number of subscriptions we have and our retention numbers.

We're not looking for we don't need many more partnerships in order to build what we want to build it's really about execution right. Now. So we've always been judicious about adding heads we don't really add all of that many heads per year, but the ones that we will add will be focused on getting all of these services rolled out.

Daniel Rosensweig: And so all of this is good news. The opportunity for Chegg, as I said, is to expand the aperture, open it up because we can use AI now. We have more ways to add more content and a lower cost per content and make it relevant to a much larger group of people. And that is really exciting and really the, you know, one of the biggest growth opportunities that we've seen in years.

The way the way we've discussed it on the call.

Great. That's great. That's good to hear all sorts of quick follow up or so.

You're rolling out further capabilities with your AI towards our students receptive to having AI on check me like a coach and Theyre like E. On study help quit.

Daniel Rosensweig: So we're fired up about that on the skill side. We've made an investment over the last couple of years to really change the way we do skills to make them lower costs higher quality, greater completion rates and work through our B to B partners, particularly guild. And we're seeing excellent growth. So year over year growth of skills is quite high. And if it continues this way, we expect it to be a very meaningful part of our business in the years to come because we're expanding not just through guild, but we're expanding direct to corporations where we signed our first customer indeed, rather than lay people off if they are going to use us to retrain their employees.

Next year, it's two career guidance and Minto wellness device that helps keep them subscribe on chegg, even when they're done with classes.

Yes, the answer is absolutely, yes, and that's precisely what we're building so in the short term the.

The first step is to convert all the academic support that is the single most valuable thing that we do and most obvious thing that we do.

From there we are.

We're building the skills pathways, which is the ability to assess do you have the skills necessary. So just envision the following scenarios you go to school a we know that students that go to school a that major in finance end up going into the following 10 companies in your state are in there and.

Daniel Rosensweig: So this is exactly the kind of investment that we wanted to make in businesses that have high R poo. I mean, the average R poo of our of our tech study tech study pack customers 17 bucks, easier as much as $5,000. So we are really bullish on where we're going with skills. Now the next big opportunity is as we talked about in the prepared remarks. And as you can see in the video, if you take a look at it is we're building skills taxonomy.

The skills that you need outside of academics to be proficient in or these things will be able to tell all the students that they won't be able to assess you versus your other classmates or against an assessment tests and then we'll be able to offer you the ability to learn those skills those kinds of things will be not only make chegg more valuable wire at SKU.

Cool, but also be able to stay with you once you're outside of school.

Second area that we're working on are the areas that were originally where chegg life, which is financial literacy mental health.

Daniel Rosensweig: So what we want to do is help college kids assess where they really are with the kind of skills that they need to be employable on top of their academic learning. And then help them master those skills so that they can in fact be employable. These are all things that are now possible that we've always wanted to do that are made much more possible because of the combination of tech and AI.

Those kinds of things and so the ability to use a coach precisely as you say it's internally it's called the coach it will not only encourage you to do things academically and skills, but also acknowledge when you're not getting enough sleep or when you may want to talk to somebody so it's precisely the kinds of things that we want to do you know when I joined the company.

Daniel Rosensweig: And so this is the direction that we intend to go which is B2B through guild B2B direct to their corporations and direct to students through tech. So these are all teacher growth opportunities that we're building now.

14 years ago, We said we wanted to go from four days a year rent return rent return to 365 days a year well, we've got no halfway there or a third of the way there I should say and we think these new capabilities will continue to expand the reason to just stay annually on Chegg, we really have not offered in the annual.

Joshua Baer: Next question, Josh Baer with Morgan Stanley. Please go ahead. Great. Thanks for the question and Andy.

Subscription in ages, but one of the things that once we rollout these perks and rollout. These other capabilities. We do think there's going to be an interest in an annual.

Joshua Baer: Congratulations on your plan retirement. You mentioned the pretty large charge on the gap basis related to the content and systems no longer necessary. It was hoping you just provide some color on what that means, the types of content and systems that you're referring to, and then what it means from a cost savings perspective looking forward. Yeah, it's actually not that large to be told when you look over the last call it 10 years or so we spent literally hundreds of millions of dollars on content.

Subscription because you will use chegg more and more each day for things beyond just academic support you use it for mental support you'll use it.

For skilled support for coaching for time management, there's a whole host of things that we'll be able to do that we've never been able to do before that we're always on the original desire roadmap to do so yes.

Okay.

Thank you. Your next question, Alex forbid with Craig Hallum Cat and Cat with Craig Hallum Capital Group. Please go ahead.

Joshua Baer: So relatively speaking, small and it's a huge college of a whole bunch of different things that are included in that. So yeah, it's something that as the team went through and looking at what the new cheque experience is going to be and it was starting to roll that out. There were certain aspects that the team decided wasn't going to be part of the, as I'll call it, the new cheque. And as a result, we took the charge and like I said, it's relatively small.

Hey, Thanks very much for taking my question guys I wanted to ask about the marketing strategy. How has your marketing needed to change at all over the past couple of quarters. As AI has has emerged as a little bit of a competitive threat and as you look into next year is it is it you know pretty much the same playbook or are there any.

Differences and how you go to market with your customers that we should expect to see next year.

Joshua Baer: From an impact going forward, most of that, as I said, in my prepared remarks, rolls through the cost of good soul. So it does have a couple hundred maybe upwards of 300 basis point impact on the gross margin. But nonetheless, it was necessary and relatively small in the scheme of things.

You can expect to see differences in the messaging.

And differences in the format and differences in the vehicle so I'll take each one.

The first one of the most important one is we will be able to start to message the new capabilities.

Remember, we get millions of students that come in a month, but because you've come up against the paywall from day one.

We will now have.

Andrew Brown: Okay, thank you. And then, okay. Obviously, just to clarify that point, it's a positive impact on the gross margin. Oh, yeah, yeah, I'm sorry. I'm sorry. Yeah, thank you. Oh, no, that was clear. That was clear.

More valuable messaging and differentiated messaging that we think will improve conversion that's worth a fortune to us without even bringing in any other customers into the funnel.

Daniel Rosensweig: And then wanted to just get just a quick update on the study pack. Sort of talked about adoption trends in a couple of ways, pretty positively. Just wondering, like, overall, are you still thinking about our poo and study pack adoption as a growth driver? Like, is there more room to go? And then in relation to Gen AI and the new customers coming on board, is it sort of consistent behavior with other alternatives out there?

But of course, we wanted to expand the funnel and we should be able to expand the funnel because the kinds of things that we can do well now be relevant to students well beyond just the stand D categories.

And that is one that we intend to use that increased messaging in other environments the environment, but I'm not I don't think will surprise you will.

We'll be environments like tictoc. So it might surprise you didn't know they check produces a lot of videos for ticked up now the ones that don't do very well go to 100000 people the ones that do very well get to over 1 million people.

Daniel Rosensweig: Thank you. Yeah, you're going to have to explain the last part of that question again, but let me just address the first part of it. So, you know, when we first started rolling out cheque study pack, we had about a 13% take rate and we're now up to over 50%. So, yes, we continue to see it as a driver, but I think what ultimately is going to happen now, I'm not sure people have really understood the level of change that we are doing with our product.

So our ability to show the product and video.

And message it through Influencers oncology campuses, we think will expand who is aware of us and what they're aware of us for and that will be the big increase that you see in terms of checks effort to get the message out once the product is rolled out more fully which will be next year.

Daniel Rosensweig: So, in less than a year, we are completely reinventing the cheque user experience to be much broader, much more relevant to a bigger group of people and much more global in its nature. And so, the new experience will likely end up maybe with just one skew rather than two, but with two different price points, depending on the capabilities that students are going to want access to. So, we think between AI and skills and the other issues that we're helping students address, there's a real opportunity to continue to improve our ARPU on a per customer basis.

Okay. That's really helpful. Thank you very much.

Yep.

By the way, Washington, really positive response from tick tock already and we've seen really responsible we've seen the beginning of positive response on conversion for the customers that are getting the new version of check. So these things are things that we hope to work and expect to work and we're seeing good first signs of them working.

Next question, Eric Sheridan with Goldman Sachs. Please go ahead.

Thanks for taking the questions maybe two if I can one one big picture, Dan how should we be thinking about pricing power longer term with respect to AI I know, there's sort of this debate out there among investors about whether AI is something that is inflationary deflationary sort of offense versus defense. So we'd love to think about how you think about AI.

Daniel Rosensweig: And so, we are focused on testing messaging and pricing. I wouldn't expect that anytime soon. I think the single most important thing that we need to do is to get the new product and user experience out there. And if we continue to see the positive feedback that we're getting now, then I think you're going to see that just as we've laid out over the course of the rest of this year and the first quarter of next year.

<unk> feeding back broader to sort of pricing in the platform over the medium to long term and then second more shorter term question just as we exit this year and go into next year any updates on your strategy with respect to language and and more language capabilities on the platform. Thanks.

Daniel Rosensweig: And then we'll keep adding and adding and adding. The key is just creating overwhelming values so that students see the value in the pricing. And every time that we have done that, we've been able to be successful.

Brent Thill: Great. Thanks, too.

Yes, a lot of really good questions. There, let me try to unpack them.

Brent Thill: Next question, Brent Thill with Jeffries. Please go ahead. A&B, great working with you over the years.

So the first thing.

Is let me just get to the language.

Daniel Rosensweig: One of the questions that I've asked you guys for multiple years is you've had a really high margin and given a lot of the AI components you have to build out, why not spend a little more to get the right infrastructure in for the next five years? Can you do the AI infrastructure and keep your margins? You know where they're at? You obviously got it to a pretty strong margin for next quarter.

On the language one we have said that we acquired boost too and the initial execution and integration that boosts, who did not go as planned.

And we are now seeing that turn around and get into positive territory again.

So that is that is a really good <unk>.

Scenario there are three places for the language areas to grow.

Andrew Brown: If you could just update the trade-offs that you're thinking through here. Yeah, I'll start and let Andy and let Andy and with our flourish. This is a highly profitable business. I mean, we have 70% plus gross margins. We have EBITDA margins that we believe will continue to grow as we grow. And as Andy has pointed out over the years, we're likely approached 40% EBITDA margins as we get even bigger and bigger, which we are working very hard to return to that gross path.

Obviously, we're in Europe, where it's it's much more prominent.

Back to the consumer believe it or not be to be on its own and through the partnership with Guild are also growth areas for us as more corporations, one English language.

And because we have the partnership with Gil that's one that we think will continue to expand and then the ultimate one is the freemium model in the U S.

All of those things are in flight now.

And internally, we expect to see.

The results of those efforts over the course of this semester and then increasing next year.

Andrew Brown: So the spending is we can we've increased our spending in each of the categories over the last bunch of years as we see opportunities to invest. I can tell you is the CEO, we have not held back on investing things that we think are valuable to students and value valuable to investors. We're just fortunate that our business model can produce as much as $170 million in free cash flow this year as an example. So, you know, I think, you know, when people look at how to value this company, we've got a company that's going to do nearly $220 million in EBITDA, $170 million in free cash flow.

So those are are also growth opportunities just like skills. In fact, we consider language a skill. So we think that whole category as a growth category for chegg, even starting now.

So on the ARPA area and pricing power.

We have shown that we have pricing power when we rolled out the bundle.

We also last year when we took the dollar increase we said that the dollar increase was designed to increase the number of people that took the bundle. So that actually did so by five or six points, which is what our estimate was.

Going forward.

Daniel Rosensweig: We're the big growth opportunity ahead of it. And as we see those opportunities, like we did in skills, we invested in it, like we transformed the company to all digital, we invested in it, like we are doing now with AI. We're not holding anything back from AI. We're just able to repurpose a number of the cost of things that were higher cost of content creation to now more efficient cost of content creation. So, I will tell you that when we see opportunities to move faster and grow, we will.

I don't really see charging extra for AI as.

As a good decision for four businesses I think it's an opportunity for the companies that do it better to pick up market share and retain their pricing and I sit on the board of Adobe. So we have lots of these conversations there as well.

For Chegg as as I mentioned earlier I think I think ultimately we get to one SKU that has all of this has the academic support has the skills.

Andrew Brown: It's very hard to replicate what Cheg does. These are complicated systems and processes and learning taxonomies, and we want to get it right. So, we don't have the situation that AI has where students don't trust it. We want to be in a situation where accuracy and relevancy and user experience are designed the way students expect it. And that's why we continue to get such high results and such high retention. I'll let Andy sort of address any other parts of it.

Pathways and then has the support for the other areas of your life and I think depending on which of those capabilities you want access to the price point will go up but there's always gotta be particularly for college students a smart price point to get them started out and and so I think we see.

Being able to improve our approved by adding and improving the amount of things that we can provide and the number of people that are willing to pay for the higher SKU once they become check customers. So yes. We know we have pricing power, we've taken that power, we could take more of that power now, but the goal is to return to new account growth, which we're getting.

Andrew Brown: No, Dan, I think you nailed it. And I think the key thing here is we're not starving the business at all. We're making massive investments. We made a big investment in scale AI that we talked about last quarter. And it's something I remind our team frequently, and that is, you know, to dance point, we're driving more EBITDA on free cash flow than many of our competitors are doing in revenue. And so, when we need to deploy capital, we can do it, and we will do it, and we are doing it in our new generative AI product. So, we're absolutely feeding the business, and our goal, like Dan said earlier, is to get back on a growth track, and we'll make the appropriate investments to do that.

Unknown Executive: Thank you.

Closer and closer to every day.

And so that is more of our primary focus right now than pricing.

Great. Thank you.

Yes.

There are no further questions I would like to turn the floor over to Dan Rosensweig for closing remarks.

Yeah listen.

Let me start again by thanking Andy without his friendship and partnership and leadership Chegg would not be nearly as successful as it's been.

We love, who we serve we love the ability to serve them.

Jason Celino: Next question, Jason Celino with Keybank Capital Markets, please go ahead. Great, thanks for taking my questions, you know, just a couple from me, nice to hear the initiative from the skill side. Can you just talk about the go-to market there, particularly as you try to target, you know, some corporate customers, one can be. Yeah, so, I think, it's sort of fascinating. One of the things that I'm not sure that we even understood the value of was that over the last bunch of years, we've had as many as 22 million students subscribe to Chegg and many more use free versions of our writing product and others, so we've had tens of millions of students that have gone into the workplace.

And working with Andy has been one of the professional honors of my careers as we go forward.

What we realized is the opportunity to do more for students and do it for more students is now opened up again because of AI and so as we come out of the Covid.

Accelerated growth rate that was not sustainable we are hitting that trough as one of you mentioned earlier and getting to the point where.

Retention is growing and length of time that people are growing and <unk> is growing and it really is about adding new accounts and as we get closer to where we want to get too first and then roll out the new product and new service, we see ourselves serving tens of millions more students a year over the next bunch of years. So the few.

Jason Celino: So our brand is actually quite popular. And so as we were working with guild and as we saw that guild business grow and then we saw that our completion rates got beyond 50%, which is really hard to do with online courses. We began to be approached by people like, well, can you do this for us, but we don't necessarily want to take the whole situation with guild because guild does online education as well as skills.

And Chegg.

It really does look exciting the investments that we're making now are ones that we anticipate will.

We will make a big difference in our future growth and we're really excited about the business and and we're proud of our team and the execution. They did for the third quarter in road to beat.

And to increase the amount of cash flow that we're producing so we're just going to keep working hard and reporting out on those results and I think youre going to be very excited over the years to come. So thank you Andy and thanks, everybody for joining us.

Jason Celino: And so that prompted us to build a tiger team that is going into corporations that know Chegg that have a lot of employees that have used Chegg, that value Chegg, and so that is how we got to target. We hired Colin Coggins, who is now running that group, and so he's responsible for all of those efforts, and he's making immediate progress to be honest with you. Indeed, just the first of what we imagine will be many over time.

That concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

[music].

Jason Celino: There's a lot of large companies, the difference that we do versus other companies out there that do skills. So if you take some companies, they have a marketplace of skills and they package it and they sell what they have. Other companies have a very limited scope of what they build their content for and that content may or may not be updated regularly. Chegg has become a bespoke content creator in the skills space because we're creating for students as well as for guild, which is frontline workers and now as well as for corporations.

Jason Celino: The corporations come to us and they say, look, the single most important thing that we need to reeducate or train our employees on as this. Originally, these skills businesses grew B to B because it was a benefit being offered come to our company and you can train on this stuff. Now it's becoming an imperative where the corporation is saying this is exactly what we need to do. And one of the benefits of AI has been we've gone from 13 weeks of creating a course in hundreds of thousands of dollars to five or six weeks and maybe $40,000.

Jason Celino: So our ability to do it at a much much greater speed and much bigger scale, personalized specifically to the needs of those corporations has improved. And so that's why we're starting to make a little bit progress on our own corporate piece.

Daniel Rosensweig: Okay, great helpful. And then when I think about the stabilization you're seeing on the retention side, how much of partnership come in the play. And then when we think about future partners, what are the types of characteristics or, you know, things you look for in that. Thanks. You broke up a little bit, you're talking about retention and partnerships, is that the, is that what you were asking about? Yeah, yeah. So look, we have, we have really great partnerships so far with calm and now kinder and door dash our examples and others are looking to work with us.

Daniel Rosensweig: We use it in two different ways. One of them. One is to help increase conversion and the other is to help improve retention because the way the deals work is the students can't get access to the free door to ask you're the free tender or the free calm. If they don't retain on check and as you've seen our retention numbers are going up for a whole host of reasons, quality being the single most important thing, but the overall value of which partnerships are adding to it.

Daniel Rosensweig: So, yes, we are, we are being approached by and we are in discussions with a number of people and different ways to offer a Chegg premium pack and and other things that we can do because students value the ability to get access to the things that they want to reach. And these partners really value the ability to reach college students more efficiently than they ever have before. And so it's been, it's been a positive surprise for us, to be honest with you.

Daniel Rosensweig: Thanks, thanks.

Daniel Rosensweig: Next question, Brian Peterson with Raven James, please go ahead. Hi, thanks for taking my question. This is Jessica on for Brian. I just want a little bit of follow up for earlier question in terms of headcount. What kind of investments are you considering for a hiring strategy like in areas like AI skills which are great growth areas for you? Are you looking for more personnel or are you having, are you looking for more partnerships like scale AI that helps coverage talent union?

Daniel Rosensweig: Yeah, one of the things that we did earlier this year, which was very unfortunate, but back in June, we really began to understand the magnitude of what we wanted to invest in. And then we made the difficult decision to eliminate almost 90 jobs in the company so that we have the headway to be able to add jobs into our AI space. So we have moved the majority of the personnel that we plan to move.

Daniel Rosensweig: We've opened up room to be able to add people as we need to add them. In terms of AI partnerships, one of the things that we built is something internally called the orchestrator, which allows us to work with any and all AI partners, depending on which is the most efficient and relevant to produce the best result at the best price for us for our students that we choose to do that. So we're not looking for, we don't need many more partnerships in order to build what we want to build.

Daniel Rosensweig: It's really about execution right now. So we've always been judicious about adding heads. We don't really add all that many heads per year, but the ones that we will add will be focused on getting all of these services rolled out the way we've discussed it on the call. Great, that's good to hear. Also, as a quick follow-up, as you're ruling out further capabilities with your AI tools, are students receptive to having AI on check being like a coach in their slides beyond study help? Like could AI connect students to career guidance and mental wellness advice that helps keep them subscribed on check even when they're done with classes? Thanks. Yes.

Daniel Rosensweig: The answer is absolutely yes and that's precisely what we're building. So in the short term, the first step is to confer all the academic support. That is the single most valuable thing that we do and most obvious thing that we do. From there, we are building the skills pathways, which is the ability to assess do you have the skills necessary. So just envision the following scenario, you go to school A, we know that students that go to school A that major in finance end up going into the following 10 companies in your state and their and the skills that you need outside of academics to be proficient in these things will be able to tell all the students that then we'll be able to assess you versus your other classmates or against an assessment test and then we'll be able to offer you the ability to learn those skills.

Daniel Rosensweig: Those kinds of things will be not only make tag more valuable wire at school, but also be able to stay with you once you're outside of school. The second area that we're working on are the areas that originally were checked life, which is financial literacy, mental health, those kinds of things. And so the ability to use a coach precisely, as you say, it's internally called the coach. It will not only encourage you to do things academically and skills, but also acknowledge when you're not getting enough sleep or when you may want to talk to somebody. So it's precisely the kind of things that we want to do.

Daniel Rosensweig: You know, when I joined the company 14 years ago, we said we wanted to go from four days a year, rent return, rent return to 365 days a year. Well, we've gotten a halfway there or a third of the way there, I should say, and we think these new capabilities will continue to expand the region to just stay annually on check. We really have not offered an annual subscription in ages, but one of the things that once we roll out these perks and roll out these other capabilities, we do think there's going to be an interest in an annual subscription because you will use tag more and more each day for things beyond just academic support.

Daniel Rosensweig: You use it for mental support, you'll use it for skills support, for coaching, for time management. There's a whole host of things that we'll be able to do that we've never been able to do before that we're always on the original desire and roadmap to do. So yes.

Alex Fuhrman: Thank you, next question, Alex Furman with Craig Hallum's Cup, with Craig Hallum's Capitol Group, please go ahead. Thanks very much for taking my question, guys. You wanted to ask about the marketing strategy.

Daniel Rosensweig: Has your marketing needed to change at all over the past couple of quarters as AI has emerged as a little bit of a competitive threat and as you look into next year, is it pretty much the same playbook or are there any differences in how you go to market with your customers that we should expect to see next year? You could expect to see differences in the messaging and differences in the format and differences in the vehicle.

Daniel Rosensweig: So I'll take each one. The first one and the most important one is we will be able to start to message the new capabilities. Remember we get millions of students that come in a month but because you come up against the paywall from day one. We will now have more valuable messaging and differentiated messaging that we think will improve conversion. That's worth a fortune to us without even bringing in any other customers into the funnel.

Daniel Rosensweig: But of course we want to expand the funnel and we should be able to expand the funnel because the kinds of things that we can do will now be relevant to students well beyond just the STEMB categories. And that is one that we intend to use that increase messaging in other environments. The environment that I'm not I don't think will surprise you will be environments like TikTok. So it might surprise you to know that Chegg produces a lot of videos for TikTok now, the ones that don't do very well go to 100,000 people, the ones that do very well get to over a million people. So our ability to show the product in video and message it through influencers on college campuses, we think will expand who's aware of us and what they're aware of us for.

Daniel Rosensweig: And that will be the big increase that you see in terms of Chegg's effort to get the message out once the product is rolled out more fully, which will be next year. Okay, that's really helpful. Thank you very much. Yep. By the way, we've been really positive response from TikTok already and we've seen really responsible. We've seen the beginning of positive response on conversion for the customers that are getting the new version of Chegg. So these things are things that we hope to work and expect to work and we're seeing good first signs of them working.

Eric Sheridan: Next question, Eric Sheridan with Goldman Sachs, please go ahead. Thanks for taking the questions. Maybe two if I can. One big picture, Dan, how should we be thinking about pricing power longer term with respect to AI? I know this sort of this debate out there among investors about whether AI is something that is inflationary, deflationary sort of offense versus defense. And so we'd love to think about how you think about AI capabilities, beating back broader to sort of pricing and the platform over the medium to long term.

Eric Sheridan: And then second, more shorter term question, just as we exit this year and going in next year, any updates on your strategy with respect to language and more language capabilities on the platform. Thanks. Yep. A lot of really good questions. Let me try to unpack them.

Daniel Rosensweig: So the first thing is, let me just get to the language one. On the language one, we have said that we acquired BUSU and the initial execution and integration of BUSU did not go as planned. And we are now seeing that turn around and get into positive territory again. And so that is that is a really good scenario. There are three places for the language areas to grow. Obviously that we're in Europe where it's much more prominent direct to the consumer.

Daniel Rosensweig: I believe it or not, B to B on its own and through the partnership with guild are also growth areas for us as more corporations want English language. And because we have the partnership with guild, that's one that we think will continue to expand. And then the ultimate one is the premium model in the U.S. All of those things are in flight now. And internally we expect to see the results of those efforts over the course of this semester and then increasing next year.

Daniel Rosensweig: So those are also growth opportunities just like skills. In fact, we consider language a skill. So we think that whole category is a growth category for Cheg even starting now. Powell. So, on our pool area, pricing power, we have shown that we have pricing power when we rolled out the bundle. We also, last year, when we took the dollar increase, we said that the dollar increase was designed to increase the number of people that took the bundle.

Daniel Rosensweig: So, that actually did so by five or six points, which is what our estimate was. Going forward, I don't really see charging extra for AI as a good decision for businesses. I think it's an opportunity for the company to do a better to pick up market share and retain their pricing. And I sit on the board of Adobe, so we have lots of these conversations there as well. For Chegg, as I mentioned earlier, I think ultimately we get to one skew that has all of this, has the academic support, has the skills pathways, and then has the support for the other areas of your life.

Daniel Rosensweig: And I think, depending on which of those capabilities you want to access to, the price point will go up. But there's always got to be, particularly for college students, a smart price point to get them started out. And so, I think we see being able to improve our approved by adding and improving the amount of things that we can provide, and the number of people that are willing to pay for the higher skew, once they become Chegg customers.

Daniel Rosensweig: So, yes, we know we have pricing power, we've taken that power. We could take more of that power now, but the goal is to return to new account growth, which we're getting closer and closer to every day. And so, that is more of our primary focus right now than pricing. Thank you.

Unknown Executive: There are no further questions.

Daniel Rosensweig: Have we like to turn the floor over to Dan Rose's swag for closing remarks? Yeah, listen, let me start again by thanking Andy without his friendship and partnership and leadership. Chegg would not be nearly as successful as it's been. You know, we love who we serve, we love the ability to serve them, and working with Andy has been one of the professional honors of my career. As we go forward, what we realize is the opportunities to do more for students and do it for more students is now opened up again because of AI.

Daniel Rosensweig: And so, as we come out of the COVID, you know, accelerated growth rate that was not sustainable, we are hitting that trust as one of you mentioned earlier, and getting to the point where retention is growing and length of time that people are growing, and our poo is growing, and it really is about adding new accounts. And as we get closer to where we want to get to first and then roll out the new product, the new service, we see ourselves serving tens of millions more students a year over the next bunch of years.

Daniel Rosensweig: So, the future in Chegg really does look exciting. The investments that we're making now are ones that we anticipate will make a big difference in our future growth. And we're really excited about the business, and we're proud of our team and the execution they did for the third quarter in road to beat and exceed and to increase the amount of cash so that we're producing. So, we just kind of keep working hard and reporting out on those results, and I think you're going to be very excited over the years to come. So, thank you, Andy, and thanks everybody for joining us.

Unknown Executive: This concludes today's teleconference. You may disconnect your lights at this time, but thank you for your participation.