Q4 2023 Chegg Inc Earnings Call

Operator: Greetings and welcome to Chegg Inc.'s fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode.

Operator: A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Tracey Ford, Vice President of Investor Relations and ESG for Chegg. Thank you. You may begin. Good afternoon.

Tracey Ford: Thank you for joining Chegg's fourth quarter 2023 conference call. On today's call are Dan Rosensweig, Co-Chairperson and CEO, and Andy Brown, Chief Financial Officer. A copy of our earnings press release along with our investor presentation is available on our investor relations website, investor.cheggs.com. A replay of this call will also be available on our website.

Tracey Ford: We routinely post information on our website and intend to make important announcements on our media center website at cheggs.com slash 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, and can cause actual results to differ materially from those in the forward-looking statements. We caution you to consider important factors that could cause actual results to differ materially from those in forward-looking statements.

Okay.

Speaker Change: Greetings and welcome to Chegg, Inc. Fourth quarter 2023 earnings Conference call.

At this time all participants are in a listen only mode.

A 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 Tracey Ford Vice President of Investor Relations and ESG for Chegg.

Tracey Ford: In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg's Annual Report and Form 10-K filed with the Security and Exchange Commission on February 21, 2023, as well as our other filings with the FDC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and the investor slide deck found on our IR website, investor.chegg.com.

You may begin.

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

A copy of our earnings press release, along with our Investor presentation is available on our Investor Relations website, Investor Dot Chegg Dot com a replay of this call will also be available on our website, we routinely post information on our website and intend to make important announcements on our media center website at Chegg Dot Com Slash 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 and could cause actual results to differ materially from those in the forward looking statements.

Daniel L. Rosensweig: We also recommend you review the investor data suite, which is also posted on our IR website. Now, I will turn the call over to Dan. Thank you, Tracey, and welcome everyone to our 2023 Q4 earnings call. To start, I am pleased to announce the appointment of David Longo as our new Chief Financial Officer, effective February 21st, as Andy announced on the last call that he would be retiring. David has been our Chief Accounting Officer and Corporate Controller since coming to Chegg in 2021, and we look forward to his continued leadership in this new role. He's joining us on the vault today. So, welcome, David.

Caution you to consider the important factors that could cause actual results to differ materially from those in the forward looking statements in particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg annual report on Form 10-K filed with the security and Exchange Commission on February 21, two.

Daniel L. Rosensweig: Now back to the business at hand. Chegg had a good quarter and exceeded our expectations. The last few years have seen real challenges as we navigate the post-COVID world. Despite those challenges, it's actually an exciting time at Chegg, and I'm proud of the team and how they are navigating the complete reinvention of our company, leveraging the advancements in artificial intelligence and making it core to everything that we do. In less than a year, we redesigned our entire user experience, developed their own large language model, launched automated answering, built proprietary algorithms to optimize the quality and accuracy of our exclusive content, and we began to compete more aggressively for new customers around the world. While early, our packaging, pricing, and product strategy are yielding encouraging results for both students and our business. The process of embedding AI into every facet of Sheik's platform is ongoing and iterative as we build a truly personalized learning experience. A service that anticipates student needs, adapts to their strengths and weaknesses, and supports them academically, professionally, and personally.

23, as well as our other filings with the SEC.

Any forward looking statements that we make today are based on assumptions that we believe to be reasonable as of this date, we undertake no obligation to update these statements as a result of new information or future events.

During this call we will present, both GAAP and non-GAAP financial measures, our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings press release, and the Investor Slide deck found on our IR website investor Chegg Dot Com. We also recommend you review the Investor data sheet, which is also posted on the IR website now I will turn the call.

Over to Dan.

Thank you Tracy and welcome everyone to our 2023 Q4 earnings call to start I am pleased to announce the appointment of David long ago, as our new Chief Financial Officer effective February 21st as Andy announced on the last call that he will be retiring.

David has been our chief accounting officer, and corporate controller since coming to Chegg and 2021, and we look forward to his continued leadership in this new role he is joining us on call today. So welcome David.

Now back to the business at hand.

Chegg had a good quarter and exceeded our expectations. The last few years have seen real challenges as we navigate the post COVID-19 world. Despite those challenges, it's actually an exciting time at Chegg and I'm proud of the team and how they are navigating the complete reinvention of our company leveraging the advancements in artificial intelligence and <unk>.

Daniel L. Rosensweig: There are numerous ways we intend to aggressively market our new product experience because the data tells us that once a student tries us, they love us. Internationally, we focused our biggest effort on testing promotional pricing to convert the millions of students who have entered the funnel but did not yet subscribe. Additionally, we are building sharing into our service to increase word of mouth, expanding our presence on TikTok, and enhancing our SEO with increased questions from automated answers. Our business model benefits from more students asking more questions as we index those questions into search and other platforms to drive even more customers. Let me provide a little context.

Core to everything that we do in.

In less than a year, we reduce we redesigned our entire user experience developed our own large language models launched automated answering built proprietary algorithm an algorithm to optimize the quality and accuracy of our exclusive content.

And we began to compete more aggressively for new customers around the world.

While early our packaging pricing and product strategies are yielding encouraging results for both students and our business. The process of embedding AI into every facet of chips platform is ongoing and interim as we build a truly personalized learning system a service that anticipates that.

Daniel L. Rosensweig: Since introducing automated answers in late December, we've seen a significant increase in the number of students asking new questions, as well as the number of questions per student. This is because our new automated service is delivering quality and accuracy almost immediately, which is a huge benefit by building our own language model, along with our algorithms to check for quality. Students can feel confident in what they are learning on Chegg and get support in real time. The impact has been immediate and significant.

Student needs and adapt to their strengths and weaknesses and supports them academically professionally and personally.

There are numerous ways, we intend to aggressively market, our new product experience because the data tells us that once a student tries us they love us.

Internationally, we focused our biggest effort on testing promotional pricing to convert the millions of students who have entered the funnel, but did not yet subscribed.

Daniel L. Rosensweig: In January, Chegg's automated answers delivered more than 2.2 million solutions to..., which is three times the number of new questions asked and answered at the same time last year. Importantly, as we scale to ensure we meet our standards of accuracy and quality, we expect to launch the rest of our proprietary models by the end of Q1. These models are being trained on Chegg's data, and we are leveraging our 150,000 subject matter experts to optimize their solutions for learning. In education, students cannot afford the illusion of accuracy to learn.

Additionally, we are building sharing into our service to increase word of mouth, expanding our presence on tick tock and enhancing our S. E O with increased questions from automated answers our business model benefits for more students asking more questions as we index those questions into search and other platforms to drive.

I've, even more customers.

Let me provide a little context.

Since introducing automated answers in late December we've seen a significant increase in the number of students asking new questions as well as the number of questions per students. This is because our new automated services delivering quality and accuracy almost immediately which is a huge benefit to students.

Daniel L. Rosensweig: They need it to be correct, immediate, and personalized. We believe this is what Chegg can uniquely do for students, and it's a huge competitive advantage over generic AI models. The overall benefit of our new service to students is enormous, and there are also significant benefits to Chegg. As the hype of AI dies down,

By building our own language models, along with our algorithms to check for quality students can feel confident and what they're learning on chegg and get support in real time, the impact has been immediate and significant.

Daniel L. Rosensweig: Leaders in their verticals, like Chegg, are taking control of their own destiny by building their own models, which allow for higher quality and lower cost. As an example, the cost to answer a new question using our own AI models is already more than 75% less expensive, and we believe it will continue to decline over time. This means we'll be able to serve more students at a lower cost per student, faster, and in more subjects and languages. We are confident in the value of our new product, and because of that confidence, and to be more competitive, we began testing promotional pricing in international markets in the middle of last year.

In January Chegg automated answers delivered more than 2.2 million solutions to students, which is three times the number of new questions asked and answered at the same time last year.

Importantly, as we scale to ensure we meet our standards of accuracy and quality, we expect to launch the rest of our proprietary models by the end of Q1. These models are being trained on Chegg data and we are leveraging our 150000 subject matter experts to optimize their solutions for learning.

Daniel L. Rosensweig: We believe that if we could introduce our offerings to more global learners, they would find the value and benefit of Chegg and continue to choose us and stay with us. In Q4, we saw year-over-year new customer growth outside the U.S. for the first time in two years. And just as important for our business model, more of these users are taking the Chegg Study Pack, which is a higher-priced subscription, and remaining paying customers for longer periods of time.

And education students cannot afford the illusion of accuracy to alert they needed to be correct immediate and personalized.

We believe this is what chegg can uniquely do for students and it's a huge competitive advantage over generic AI models.

The overall benefit of our new service to students is enormous and there's also significant benefits to check.

Daniel L. Rosensweig: We developed this pricing and packaging to be revenue neutral this year, while we expand new account growth substantially. While it is still early, we are seeing encouraging results. Given the success of what we've seen internationally, we are now testing promotional pricing for new accounts in the U.S., which began in mid-January. As we've said, online learning, support, and skills-based learning are huge markets, and they're only getting bigger. AI is still in its infancy, and our product roadmap is ambitious and exciting. Throughout 2024, we are introducing more AI-driven capabilities, such as conversational chat, which continues to layer in personalization and interactivity for our learners. We also plan to integrate personalized learning tools such as practice questions, flashcards, and study guides into our conversational learning.

It's the hyperphagia I dies down.

Leaders in their verticals like Chegg are taking control of their own destiny by building their own models, which allows for higher quality and lower cost as an example, the cost to answer a new question using our own AI models is already more than 75% less expensive and we believe it will continue to decline over.

Got it.

This means we'll be able to serve more students at a lower cost per student faster and more subjects and languages.

We are confident in the value of our new product and because of that confidence and be more competitive we began testing promotional pricing in international markets in the middle of last year.

We believe that if we could introduce our offerings to more global orders they would find the value and benefit of Chegg and continue to choose us and stay with us in Q4, we saw year over year, new customer growth outside the U S for the first time in two years.

Daniel L. Rosensweig: Looking beyond 2024, as AI-based translation gets better and cheaper, we plan to expand the localization of our offerings to non-English. We also plan to build out more AI capabilities within Chegg Skills and integrate pathways for students with assessments and other tools. We are already seeing a reduction in the time it takes to launch new skills programs by approximately 40%, which allows us to offer new courses at greater speed and will significantly reduce our costs. And the importance of skills-based training has never been more critical.

And just as important for our business model more of these users are taking the Chegg study pack, which is our higher price subscription and remaining paying customers for longer periods of time.

We developed this pricing and packaging to be revenue neutral this year, while we expand new account growth substantially.

Well, it's still early we are seeing encouraging results given the success of what we've seen internationally. We are now testing promotional pricing for new accounts in the U S, which began in mid January.

Daniel L. Rosensweig: In fact, half of recent graduates are questioning how prepared they are to enter the workforce given the disruption of artificial intelligence. And employers agree, as 79% say that workers need more training to work with AI more effectively. So the opportunity for Chegg skills has never been greater or more important. There are a number of exciting opportunities ahead of us in 2024, and we remain focused on the following priorities. Returning to New Account Growth Globally, Maintaining Strong Margins in Cash Flow, rolling out the next phase of Chegg's enhanced AI services, and leveraging our momentum and skills for continued growth. Every decade or so, the pace of technological innovation accelerates, and new growth opportunities open up. The history of the internet has shown us that vertical players who know their customers, have access to proprietary content, and can provide a personalized user experience will win and win. Given the strength of our brand, with over 90% of our customers reporting they are satisfied with Chegg's service, we believe we are well positioned to do just that in our sector. Before I turn it over to Andy, I want to again thank him for all he has done for Chegg during his 12 and a half year tenure.

As we have said online learning support and skills based learning are a huge market.

And they are only getting bigger.

It's still in its infancy, and our product roadmap is ambitious and exciting throughout 2024, where we are introducing more AI driven capabilities, such as conversational chat, which continues to layer in personalization and interactivity for our learners. We also plan to integrate personalized learning tools such as practice questions.

Flashcards and study guides to our conversation a learning experience.

Looking beyond 'twenty 'twenty four is AI.

I automated translation gets better and cheaper we plan to expand the localization of our offerings to non English speaking users.

We also plan to build out more AI capabilities within chegg skills and integrate pathways for students with assessments and other tools. We are already seeing a reduction in the time it takes to launch new skill skills programs by approximately 40%, which allows us to offer new courses at greater speeds and will significantly reduce our costs.

And the importance of skills based training has never been more critical in fact half of recent graduates are questioning how prepared they are to enter the workforce given the disruption of artificial intelligence and employers agree a 79% say that workers need more training to work where they are more effectively so the opportunity.

Andrew J. Brown: Under his guidance, Chegg grew from a physical textbook rental business to a global online learning platform. But when Andy took the job, Chegg was in debt, unprofitable, and we had a single business model, renting tech. Andy guided us through our transition to a fully digital business and, in doing so, grew our digital revenue from zero to over 700 million dollars annually. In its final four years as our CFO, Chegg generated $222 million in adjusted EBITDA and $173 million. Thank you isn't enough to acknowledge the impact Andy has had on this company and on me personally. Andy, you leave quite a legacy at Chegg, and you will truly be missed. And with that, I will turn it over to you. Andy

For Chegg skills has never been greater or more important.

There are a number of exciting opportunities ahead of us in 2024, and we remain focused on the following priorities.

Returning to new account growth globally, maintaining strong margins and cash flow rolling out the next phase of Chegg enhanced AI services, and leveraging our momentum and skills for continued growth.

Every decade, or so the pace of technological innovation accelerates and new growth opportunities open up.

The history of the Internet has shown us that vertical players who know their customer have reach proprietary content and can provide a personalized user experience will win and win pig.

Given the strength of our brand with over 90% of our customers reporting they're satisfied with Chegg service. We believe we are well positioned to do just that in our sector.

Andrew J. Brown: Thanks, Sam, for those kind words, but more importantly, congratulations, David, on a well-deserved promotion, and I look forward to working with you as you transition into your new role over the next few months. Today, I will discuss our financial performance for the fourth quarter and full year 2023, as well as our outlook for the first quarter of 2024. As Dan mentioned, we ended the year on a positive note, with total revenue, addressed EBITDA, and free cash flow all coming in above the high end of our expectations. While the year had its challenges, we executed well on our plan to reinvent the way we help students navigate their learning experience by leveraging AI, and we continue to see strong profitability and cash flow.

Before I turn it over to Andy I want to again, thank him for all he has done for Chegg during his 12 and a half year tenure.

Under his guidance Chegg grew from a physical textbook rental business to a global online learning platform.

Whenever he took the job.

And that unprofitable and we had a single business model renting textbooks, Andy 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.

And its final full year's our CFO chegg generated $222 million and adjusted EBITDA and $173 million in free cash flow.

Andrew J. Brown: This, along with the strength of our balance sheet, gave us the confidence to extinguish a significant amount of our debt at a discount and re-purchase shares, which we believe have and will continue to enhance shareholder value. Looking more specifically at our 2023 performance, total revenue was $716 million, with subscription services declining 5% to 641 million. Total subscribers were 7.7 million, of which international subscribers were 2 million.

<unk> isn't enough to acknowledge the impact of Andy has had.

This company and on me personally.

Andy you leave quite a legacy of Chegg and you will truly be missed and with that I'll turn it over to you Andy.

Thanks, Dan for those kind words, but more importantly, congratulations David.

On a well deserved promotion and I look forward to working with you as you transition into your new role over the next few weeks.

Today, I will discuss our financial performance for the fourth quarter and full year 2023, as well as our outlook for the first quarter of 2024.

Andrew J. Brown: Since 2021, international revenue has increased from 11% of total revenues to 14% in 2023, or $100 million. And over time, we expect international revenue to be even more significant. Skillz and other revenue, at $76 million, declined 20% year-over-year.

As Dan mentioned, we ended the year on a positive note with total revenue adjusted EBITDA and free cash flow all coming in above the high end of our expectations.

While the year habits challenges, we executed well on our plan to reinvent the way we help students navigate their loading experience by leveraging AI.

Andrew J. Brown: While skills grew 55%, this was offset by the impact of exiting the textbook business in 2022. We continue to take a prudent approach with expense management. And we were very pleased that we were able to deliver an adjusted EBITDA margin of 31%, or $222 million, and a cash flow margin of 24%, or $173 million, which represented 78% of adjusted EBITDA. We expect interest income to contribute less in 2024 from a combination of lower interest rates and a lower tax balance as a result of the aforementioned re-purchase. Looking at Q4, total revenue came in above the high end of $1,000 at $188,000, which drove a better than expected adjusted EBITDA of $56. Subscription services revenue of $166 million declined 6% year-over-year.

And we continue to see strong profitability and cash flows.

This along with the strength of our balance sheet gave us the confidence to extinguish a significant amount of our debt at a discount and repurchase shares, which we believe have and will continue to enhance shareholder value.

Looking more specifically at our 2023 performance total revenue was $716 million with subscription services declining 5% to $641 million.

Total subscribers was $7 7 million of which international subscribers were $2 million.

In 2021 International has increased from 11% of total revenues, 14% in 2023, a $100 million and.

And over time, we expect international to be even more significant.

Andrew J. Brown: Driven by a decline in subscribers, which was partially offset by Chegg's study pack take rates and a continued increase in return, Skills and other revenue of $22 million declined 22% as growth in skills was offset by the impact of exiting the textbook business. Looking at the balance sheet, we ended the year with cash in investments of $580 million and net debt of $20 million. This is the result of repurchasing $597,000,000 of outstanding convertible notes during the year at a $92,000,000 discount to PARC, and initiating an accelerated share re-purchase of ASR in Q4 of $150 million, which reduces our outstanding shares by approximately 12%. We believe that student capital management will enhance shareholder value. We exit the year with 103 million shares outstanding, including the majority of benefits from our most recent ASR.

Skills and other revenue of $76 million declined 20% year over year.

While skills grew 55% this was offset by the impact of exiting the textbook business in 2022.

We continue to take a prudent approach with expense management and we were very pleased that we were able to deliver adjusted EBITDA margin of 31% or $222 million and free cash flow margin of 24% or 173 million, which represented 78% of adjusted EBITDA.

Uh huh.

We expect interest income to contribute less in 2020 floor from a combination of lower interest rates and a lower cash balance as a result of the aforementioned repurchases.

Looking at Q4 total revenue came in above the high end of our guidance at $188 million.

Which drove better than expected adjusted EBITDA of $66 million.

Subscription and services revenue of $166 million declined 6% year over year.

Andrew J. Brown: This represents a 90% reduction in shares at standing versus 2020. We believe our company is undervalued. As such, we will continue to look for opportunities to return value to our shareholders. Our business is somewhat unique given our subscription model and the life cycle of it, while we are seeing encouraging signs in the business. It is too early to speculate when we will return to revenue and margin growth. The Green Truth in Engagement, Acquisition, and Retention will take time to build our renewal base before we see a positive impact on total subscribers and revenue. In the meantime, we will continue to be prudent with expense management and prioritization while we continue to drive strong profitability and cash flows. With respect to Q1 guidance, we expect total revenue to be between $173 and $175 million, with subscription services revenue between $155 and $157 million. Gross margin is expected to be in the range of 73 and 74 percent and adjusted EBITDA between 43 and 45 million.

Driven by a decline in subscribers, which was partially offset by Chegg study pack take rate and a continued increase in retention.

[noise] skills and other revenue of 22 million declined 22%.

As growth in skills was offset by the impact of exiting the textbook business.

Looking at the balance sheet, we ended the year with cash and investments of $580 million and net debt of $20 million.

This is the result of repurchasing 597 million of outstanding convertible notes during the year at a $92 million discount to par.

And initiated an accelerated share repurchase or ASR in Q4 of $150 million.

Which reduces our outstanding shares by approximately 12%.

We believe this prudent capital management will enhance shareholder value.

We exited the year with 103 million shares outstanding including the majority of benefits from our most recent a S. R.

This represents a 19% reduction in shares outstanding versus 2022.

Andrew J. Brown: In closing, I am proud of what we have accomplished during my 12 and a half years at Chegg. This is, by a large measure, the best company I've worked for in my career. The mission, the culture, and especially the team are second to none, and I want to thank everyone who was with me on this journey. In particular, a special thanks again for your leadership, mentorship, and the special difference that we have developed. It means more than words can say.

We believe our company is undervalued as such we will continue to look for opportunities to return value to our shareholders.

Our business is somewhat unique given our subscription model and the lifecycle of a student.

Well, we are seeing encouraging signs in the business. It is too early to predict when we will return to revenue and margin growth.

The green shoots and engagement acquisition and retention will take time to build our renewal base before we see a positive impact on total subscribers and revenue.

Operator: Thank you. I can also say with confidence that the future is bright for Chegg. And as a long-term shareholder, I look forward to seeing the many future successes the team accomplishes. And with that, I'll turn the call over to the operator for your questions. Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

In the meantime, we will continue to be prudent with expense management and prioritization.

We continued to drive strong profitability and cash flows.

With respect to Q1 guidance, we expect total revenue to be between 173 and $175 million.

With subscription services revenue between 155 and $157 million.

Gross margin to be in the range of 73 and 74%.

Jeffrey Marc Silber: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from Jeff Silber of BMO Capital Markets. Please proceed with your question. Thanks so much.

And adjusted EBITDA between 43 and $45 million.

In closing I am proud of what we've accomplished during my 12 and a half years of Chad. This is by a large measure the best company I bought four during my career, the Michigan, the culture and especially the team are second to none.

Daniel L. Rosensweig: I just wanted to confirm something you said in your remarks about rolling out the new product experience to other subscribers. And forgive me if I misheard you. I thought you said in Q1, that would happen. Can you just confirm that? And is that included in your guidance also? Yeah, this is Dan.

And I want to thank everyone, who is with me on this journey.

In particular, a special thanks to Dan for your leadership, Mentorship and especially the friendship we have developed it means maldon, whereas can say thank you.

Daniel L. Rosensweig: I'm not, I'm not. Yes, we are. We are constantly rolling out new capabilities that AI presents. But the big one that we wanted for the quarter, we did roll out already, which is automated answers. And what automated answers does is it allows us to almost immediately answer questions that either we used to have to send to a human at a much higher price or answer questions immediately that students wouldn't ask because they didn't want to have to wait until we actually gave them the answer.

I can also say with confidence that the future is bright for chegg.

And as a long term shareholder I look forward to seeing many future successes the team accomplishes.

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

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If.

If you'd like to ask a question you May press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue you.

You May press Star two if you would like to remove your question from the Q.

Daniel L. Rosensweig: So we have seen a significant increase in the number of students asking questions and the number of questions pursued. So I think we answered over 2 million additional questions than we did last year at the same time this year. So that was the big move for this semester.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Our first question comes from the line of Jeff Silber with BMO capital markets. Please proceed with your question.

Thanks, So much just wanted to confirm something you said in your remarks about rolling out I think it was the new product experience.

Daniel L. Rosensweig: The other ones we'll roll out over the course of the year. But this is the one that we think has the most meaningful impact in the near term because not only will it improve retention, but it will improve traffic and overall conversion and growth rate. So it's the flywheel that Chegg built itself on, but this is a dramatic acceleration of that.

Two other subscribers and forgive me if I misheard you I thought you said Q1 that would happen can you just confirm that.

Is that included in your guidance and how so.

Yeah. This is Dan yes, we are constantly rolling out.

The new capabilities that AI presents but the big one that we wanted for the quarter, we did rollout already which is automated answers and what automated answers does is it allows us to almost.

Daniel L. Rosensweig: So I think what you may be thinking is when we said we were going to roll out promotional pricing in Q1 in the US as a test. That's probably what I was referring to, and that's actually my second question. Can you talk about the order of magnitude of the promotional pricing that you've already rolled out internationally and give us some framework of what we should be expecting in the U.S.? Yeah, so internationally, we started testing this last June. And our ambition, our belief, was that as more students tried Chegg... that they would love it and stick with it because, you know, for the first time, we were competing against a large named competitor, Chad CPP, which it turned out was less of a competitor than we were concerned with, and that's really good. And that is because... They give the illusion of accuracy, but it's not accurate.

Almost immediately answer questions that either we used to have to send to a human and a much higher price or answer questions immediately that students wouldnt ask because they didn't want to have to wait until we actually gave them an answer.

So we have seen a significant.

Increase in the number of students asking questions.

And.

The number of questions per students.

So we I think we answered over 2 million additional questions. Then we other than we got last year at the same time. This year. So that was the big move for for this semester.

The other ones will rollout over the course of the year, but this is the one that we think that's the most meaningful impact in the in the near term because not only will it improve retention, but it will improve traffic and overall conversion and growth rates. So it's the flywheel. The chegg built itself on but this is a dramatic acceleration of that so.

Daniel L. Rosensweig: And students cannot afford to have inaccurate, incorrect information. Plus, they don't go to school to learn. They actually come to Chegg to learn. And in order to actually master your subject, you have to learn it. So we're built specifically for this. They are not. And so the more students that came to us and tried us, the longer they started to stay. So we rolled out promotional pricing there because we wanted to compete more aggressively for students that never had a chance before. And that resulted in substantially higher conversion rates of people that were already in the funnel, which we have millions that come in and register but had yet to convert, and so this is beginning to pick up a number of them. Second, on average, they're staying substantially longer than they did before, so they're retaining longer. So all the things that we wanted to see, plus we're taking higher take rates of the more expensive products. So if we're outside the U.S., we've already returned to you a address.

I think where you may be thinking is when we said we were going to rollout promotional pricing in Q1 in the U S. As a test.

That's probably what I was referring to and that's actually my second question can you talk about the order of magnitude of the promotional pricing that you've already rolled out internationally and give us some framework of what we should be expecting in the U S.

Yeah. So internationally, we started testing this last June.

And our ambition our belief was that as more students tried chegg.

That they would that they would love it and retain because you know for the first time, we're competing against the large named competitor churn.

Daniel L. Rosensweig: And we expect to return to revenue growth much faster there because of just the volume of new accounts that we're able to bring in. So that gave us the confidence in the U.S. to want to test something similar to this. Now, the percentage of discounts outside the U.S. is higher than they are in the U.S.

C. P T, which is turned out is less of a competitor and we were concerned with and that's really good news and that is because.

They give an illusion of accuracy, but it's not accurate and students cannot afford to have internet inaccurate incorrect information plus they don't go there to learn they actually come to chegg to learn and in order to to actually master you're subject you have to learn it so were built specifically for their they are not.

Daniel L. Rosensweig: The U.S. discounts that we're testing are promotional prices. We're testing that with a percentage of our new customer audience, in the U.S. only. This does not affect any of the existing business or any of the existing revenue.

And so the more students that came to us and try to us the longer they started to stay so we rolled out promotional pricing there because we wanted to compete more aggressively for students that have never had a chance to do before and that resulted in substantially higher conversion rate of people that were already in the funnel.

Daniel L. Rosensweig: We have ways to block cannibalization. This is a new customer promotion only. And so the tests range from 25 to 35 percent, and it's only been three weeks, but the results so far in terms of what's measurable, which is conversion, are up. And take rate is up. The next big metric that we want to look at before we determine which of the tests makes the most sense, because we're running three different prices in five different variants because we like to do things and know the answer to them before we roll them out to the full audience. So right now, so far, so good, but we have a couple of weeks more to go to see how retention works in month one, month two, and month three. And then, depending on what that yields, we can determine if, when, and how much we want to roll out in new promotional pricing for the second half. So far, really good results, and outside the U.S., really good results. All right, thanks so much for the color, and Andy, again, thanks for all your help with that.

Of which we have millions that come in and register but had yet to convert and so this is beginning to pick up a number of them.

On average, they're staying substantially longer than they did before it. So they are retaining longer so all the things that we wanted to see pleasure, taking higher take rate of the more expensive product so for for outside the U S.

We've already returned to new account growth.

And and we'd expect to return to revenue growth much faster there because it just the volume of new accounts that we're able to bring it so that gave us the confidence in the U S. Do you want to test something similar to this now the percentage of discounts outside the U S are higher than they are in the U S. The U S did.

Speaker Change: <unk> that we're testing or promotional pricing.

Speaker Change: Well they range of about 25% to 35% and and we have the opportunity to raise them back to full price whenever we think it's appropriate if that makes the most sense to do so we're testing that to a percentage of our new customer audience in the U S. Only this does not affect any of the existing business and existing.

Jeffrey Marc Silber: Thank you. Our next question comes from the line of Doug Enlis with J.P. Morgan. Please take your question. Hey, it's Brian Smiley.

Doug Enlis: Thanks for taking my questions. Just to start on international, can you just talk a bit more about what drove the inflection back to growth there and what the next steps in international are? And I guess just on a market by market basis, did anything stand out in particular with the just broad-based recovery? Yeah, so what drove it there?

We have ways to block cannibalization. This is a new customer promotion only.

And so the tests range from 25% to 35%.

Speaker Change: And it's only been three weeks, but the results so far in terms of what's measurable which is conversion is up.

And take rate is the next big metric that we want to look at before we determine which of the test makes the most sense because were running three different prices in five different variance, because where we like to do things and no the answer to it before we roll it out to the full audience. So right now so far so good but we have a couple of weeks more to go to see how retention.

Daniel L. Rosensweig: was what drove it, and what's driving it are going to be, a combination of the brand new product experience. So the way our business grew initially and became so large, you got to remember only a few years ago, in 2019, total revenue for our subscription services was in the 200 million range. Now it's close to 700 million.

In month, one month two months three and then depending on what that yields we can determine if when and how much we want to rollout in new promotional pricing for the second half of the year.

Daniel L. Rosensweig: So we've grown quite substantially. The challenge was that we grew so much during COVID. And now we're coming back down to the realization of where the base is that we can grow from. And we believe that that's what we're experiencing this year. So outside the U.S., the new pricing promotion allowed people who were nervous about trying Chegg because we're not as well known there to cross the chasm and then ultimately subscribe. And because the promotional price is lower, they're actually staying on longer, which is exactly what we hope for.

So far really good result, and outside the U S really good result.

Alright, thanks, so much for the color and Andy again, Thanks for all your help them best of luck.

Thanks Jay.

Our next question comes from the line of Doug Anmuth with J P. Morgan. Please proceed with your question.

Hey, it's Bryan Smith on for Doug. Thanks for taking my questions just to start on international can you just talk a bit about more what drove the inflection back to growth there and what the next steps in international or and I guess, just on a market by market basis did anything stand out in particular or was it just broad based recovery.

Daniel L. Rosensweig: On top of that, the long-term flyaway is the way Chegg works: the more customers we have, and the more new questions that they ask, not ones that are in their existing database of a hundred million already, but new ones that they ask, they then get indexed into search around the world, depending on which country they come from. And then other students search for them, and they find them, and then they come into Chegg.

Yeah. So.

What drove it there.

Was what drove it and what's driving it are going to be.

Combination of the brand new product experience.

Daniel L. Rosensweig: So we're seeing an improvement in traffic, traffic from new questions, and then holding our conversion rate. So those two things together, which is promotional pricing and the ability to rebuild the flywheel, those are driving the new growth. And they're just driving it up faster outside the U.S. because it was a smaller base from which to start.

So the way our business grew initially and so large you got to remember only a few years ago in 2019 total revenue for our subscription services, whereas in the 200 million range now it's close to 700 million range. So we have grown quite substantially the challenge was we grew so much during COVID-19.

And now we're coming back down to the realization of where we were the bases that we can grow from and we believe that that's what we're experiencing this year so outside the U S.

Daniel L. Rosensweig: But we are anticipating that we'll see the same kind of success inside the U.S., the combination of the new product and when students ask questions, last January, a year ago January, we had about 500,000 new questions that we were able to answer on behalf of students. All of them went out to the U.S.

The new pricing promotion allowed people, who were nervous about trying chegg, because we were not as well known there to cross the chasm and then ultimately subscribed and because the price is promotional places lower they are actually staying on longer which is exactly what we hoped for on top of that the long term flywheel.

Daniel L. Rosensweig: This year we had the same number that went out to humans, but we had another 2.2 million that went out that we were able to answer through automated answering, which is our big AI move to start with high quality, and that's driving more traffic and more conversion to Chegg. So that's a bigger hole that we need to fill, but we're on our way to filling it. Got it. And did any markets spin out in particular, or was it just a broad-based recovery?

It is the way Chegg works is the more customers we have.

And the more new questions that they asked not ones that are in their existing database of 100 million of rate, but new ones that they asked they then get indexed into search around the world, depending on which country. They came from and then other students search and they find them and then they come into Chegg. So we're seeing an improvement in traffic traffic from new questions.

Daniel L. Rosensweig: Yeah, no, it's... Everybody has done a lot better outside the U.S., but we're starting on very different bases. So, the larger bases are the English-speaking countries because everything we initially did was in English. But one of the other real benefits of AI is that AI is moving from a headwind to a tailwind for us. Because it's allowing us to build a better product, allow students to ask more questions, answer them faster, index them, get more traffic, and convert more traffic. And because our quality is unique and we work with our own large language models rather than external models, the cost of it is substantially less. So, as more countries come online, and more students can ask questions in more languages, because translation will really be towards the end of the year and into next year because AI will allow for automated translation. So, you know, in terms of growth rates, you see countries like India finally taking off for us. But you see, the largest countries that Chegg has historically had, like Canada, Australia, and the UK, those are still our largest countries, and they are also growing. Great, thank you. Yep. Our next question comes from the line of Kunal Madhukar with UBS.

And then holding our conversion rate so that those two things together, which is promotional pricing and the ability to rebuild the flywheel those are driving the new growth and they're describing a SaaS or outside the U S. Because it was a smaller base on which to start from.

But we are anticipating that we will see the same kind of success inside the U S. A combination of the new product. When students are asking last January a year ago January we had about 500000, new questions that we were able to answer on behalf of students all of them went out to humans.

This year, we had the same number that went out to humans, but we had another two plus 2 million.

It went out that we were able to answer through automated answering which is our big AI moved to start with the high quality and that's driving more traffic and more conversion to check. So that's a bigger hold that we need to fill but we're on our way to filling it.

Got it and then any markets stand out in particular or was it just broad based recovery.

Yeah no. It's it's.

Everybody has done a lot better outside the U S, but we're starting on very different basis.

Kunal Madhukar: Please proceed with my question. On the new product rollout, I thought the new user experience rolled out in like three Qs of last year. So when you're talking about this new rollout in one Q of this year, what exactly has changed? That's one.

AI is moving from a headwind.

A tailwind for us because it's allowing us to build a better product allows students to ask more questions to answer them faster index them get more traffic and convert more traffic and because our quality is unique and we work with our own large language models rather than external models the cost debated substantially less so.

Daniel L. Rosensweig: And second, in terms of the promotional pricing, how long is the promotional pricing? So the 25% to 35% discount, is it just for the initial month, or is it for a few months? Thank you. Yes, good questions. I'll answer the first one. Let me answer the second one first, which is, "We." Outside the U.S.

As as more countries come online and more students can asking more languages cause translation will really be towards the end of the year and into next year, because hey, I will allow for automated translation.

You know in terms of growth rates, you see countries like India finally, taking off for us, but you see the largest countries that chegg has historically had like Canada, Australia.

Daniel L. Rosensweig: The promotional pricing, we expect to continue for the rest of this year and determine whether or not we want to raise the promotional pricing to the normal price and when we want to do that. That's all things that we are testing now. So right now, the promotional pricing is only for new accounts.

And the U K those are still our largest countries and they are also growing again.

Great. Thank you.

Yep.

Daniel L. Rosensweig: And it will go on as long as we determine that it makes sense for it to go on. So we don't really have a final answer on that yet. However, outside the U.S.

Our next question comes from the line of Kunal Madhu.

<unk> with UBS. Please proceed with your question.

Hi, Thank you for taking my questions.

On the on the new product rollout like all good news.

Daniel L. Rosensweig: The combination of the number of new accounts that we're getting versus what we were getting before, the higher take rate of the more expensive package, and the length of time means that we expect revenue to grow despite the fact that we're giving new accounts this promotional discount. Inside the U.S., we are really just at the beginning. We've got about five weeks of testing, as I said, and five different variants at three different price points. And all of them are performing as we would have hoped, and so, you know, we'll be able to determine if we want to roll it out to the full audience and, if so, for how long. Those are all testable things where the goal, obviously, is to grow as fast as we can from a revenue perspective and new account perspective.

He was very screens had rolled out in Q1 last year.

So when you were talking about this new rule out and once you have this year what exactly has changed.

That's one.

Second is in terms of the promotional pricing how long is the promotional pricing. So the 25% to 35% discount is it just for the initial month or is it for a few months. Thank you yes.

Yes. Good question. So I'll answer the first one let me answer the second one first.

Which is we.

Outside the U S.

The promotional pricing we expect to continue.

Daniel L. Rosensweig: So we'll look for that balance, but we have time to figure that out, because it's really early. No, the answer is we did not roll anything out in Q2 last year. We did roll out in the second half of last year was a very, very small beta test, where we tested the new interface, and we tested search and the search results and the quality of those search results.

For the rest of this year and determined whether or not.

Want to raise the promotional pricing to the normal pricing and when we want to do that that's all things that we're testing now so right now it's the promotional pricing is only for new accounts.

And.

And it will go on as long as we determine.

The combination of the number of new accounts that we're getting versus what we were getting before the higher take rate of the more expensive package and the length of time. It means that we expect revenue to grow. Despite the fact that we're getting new accounts. This promotional discount inside the U S. We're really just at the beginning.

Daniel L. Rosensweig: And then we made the determination to expand that from 1% to 10%, 10% to 25%, 25% to 50%. And then, at the very beginning of this year, we rolled it out to 100% of our audience, to new user interest, but it was not rolled out in Q2. We've tested a bunch of things since the inception. You gotta remember, we only really made this decision last February; it's only been a year since we did all of this.

<unk>.

Oh, passing it we've got about five weeks of testing as I said in five different variants of three different price points and all of them are performing as we would have hoped and so.

We'll be able to determine.

If we want to roll it out to the full audience and if so how long we wanted and promotional pricing those are all testable things, where the goal obviously is to grow as fast as we can from a revenue perspective, and new account perspective.

Daniel L. Rosensweig: So we announced things like our relationship with scale that allows us to build our own language models, and we've moved off open AI so that we can build our own and it's a lot cheaper and all those things. So a lot has happened between now and then. The big move started really with the testing of automated answers started towards the end of Q4, and then really rolled out in the first quarter of this year, really just in January now.

So we'll look for that balance, but we have time to figure that out.

It's really early on the question over product no. The answer is we did not roll anything out of Q2 last year, we we rolled out.

We rolled out in the second half of last year was a very very small beta test.

Daniel L. Rosensweig: And it's just been a spectacular success in terms of utilization and quality. And we have a lot more to go. And the hope is that by the end of 2024, the overwhelming majority of questions will go through automated answering rather than humans. And that will substantially lower our cost per question and reduce our overall cash effects over time on it. Thank you.

Where we tested the new interface and we tested search and the search results and the quality of those search results.

And <unk>.

And then we made the determination to expand that.

From 1% to 10%, 10% to 25%, 25% to 50% and then at the very big.

Josh Thayer: Our next question comes from the line of Josh Thayer with Morgan Stanley. Please proceed with your question. Thanks for the question. And Andy, congrats again on your retirement.

Beginning of this year rolled it out to 100% of our audience the new user interface.

It was not rolled out in Q2.

We've tested a bunch of things since the inception, you've got to remember we only really made this decision last February it's only been a year since we did all of this so we announced things like our relationship with scale that allows us to build our own well its language models and we'd love to open AI. So that we can build our own and it's a lot cheaper and all those things. So a lot has happened.

Andrew J. Brown: Wanted to ask about the trajectory of revenue per subscriber, just hoping we could kind of unpack some of the different factors. I mean, we've talked about some of them, but basically, you know, how are you thinking about the trajectory of revenue between the growing mix of international and promotional pricing, broadly? Is there still runway for the study pack bundle attach? And then also just thinking about the amount of time that a student has their subscription turned on in a given... Thank you.

Between now and then.

The big move started really in the testing of automated answers started it towards the end of Q4.

And then really rolled out.

In the first quarter of this you're really just in January now.

And it's just been a spectacular success in terms of utilization of it the quality of it and we have a lot more to go and the hope is that you know by the end of 2020 for the overwhelming majority of questions will go through automated answering rather than humans and that will continue to substantially lower our cost per question.

Josh Thayer: Yeah. All terrific questions. So when we're ready to give an actual answer, we can, what I can tell you is, outside the U.S. where the test is being, well, it's not a test now, it's been running now for about seven months. What we look for is, the first thing we look for is a conversion increase. And that happens or doesn't happen right away. In this case, it happened. Depending on the rate of discount in the country and where we were priced before, we saw different conversion rates. All of them.

And reduce our overall capex over time on an annual basis.

Thank you.

Yeah.

Our next question comes from the line of Josh Baer with Morgan Stanley. Please proceed with your question.

Great. Thanks for the question and Andy Congrats again on your retirement.

Daniel L. Rosensweig: Nicely, It's very hard to make up the promotional price and discounts just on conversion. So the next variable you look at is take rate, which is also measurable right away. And yes, there's room to grow on take rate, particularly as we start to differentiate the capabilities inside of Chegg and Chegg StudyPak more based on AI capabilities and other kinds of things that we can offer in the more expensive one that has not started yet and probably will not start the rest of this year, but yes, there's room to move because we still have more That's the second variable.

Wanted to ask about the trajectory of revenue per subscriber I was just hoping could kind of unpack some of the different factors.

Factors I mean, we've talked about some of them, but basically you know how how are you thinking about the trajectory of revenue between the the growing mix of international on the promotional pricing broadly.

Is there still runway for the study pack bundle attach and then.

Also just thinking about the amount of time that a student has their subscription turned on any given.

Daniel L. Rosensweig: The third one that has the greatest amount of impact because it starts with your next paying customers, your next subscribers, which have to do with your renewal base. We are seeing a very nice uptick in the length of time that students are saying, so in a perfect world, We would make up the revenue per customer and get as close to revenue per customer as we could, and over a multi-year period, we believe that's exactly what's going to happen. But in the short term, particularly outside the U.S., the volume of new customers, and those other variables together will generate revenue growth outside the U.S., even though on a per-customer basis it's still not equal yet. But it's very early yet.

Yeah. Thank you yeah.

O terrific questions are exactly why we test so that when we're ready to give an actual answer we can what I can tell you is.

Outside the U S, where the test is being well it's not a test now it's been running now for about seven months.

What we look for is.

First thing we look for is conversion increase that happens or doesn't happen right away. In this case it happens depending on the rate of discount in the country and where we are price before so a different conversion rates all of them up.

Nicely, it's very hard to make up their promotional pricing discount just on conversion. So that the next variable you look at is take rate, which is also a measureable right away and yes. There is room to grow on the take rate, particularly as we start to differentiate the capabilities inside of Chegg and Chegg study pack more based on AI capabilities.

Daniel L. Rosensweig: We have multiple retention periods to go through, a number of years to go through. And so that's what's been going on outside the U.S. has been really positive. Inside the U.S.

And other kinds of things that we can offer in the more expensive one that it's that's had not started yet and we probably will not start the rest of this year, but yes. There is room to move because we still have.

Daniel L. Rosensweig: The plan, what we are doing, is we are testing. And the first measurement, so it's not 100% of the new account, it's only a percent, but it's only new accounts, so it doesn't affect any of these businesses. Then, as I said, there are five variants with three different price points, and that has to do with the presentation of it, why there are five.

More than one out of one out of two they don't take it.

The second variable is the third one that has the greatest amount of impact because.

It starts from your net paying customers you know subscribers, which has to do with your renewal base.

We are seeing a very nice uptick in the length of time.

Daniel L. Rosensweig: And then what we do is we narrow down to the ones where we see the desired conversion, the desired take rate, and in a couple of weeks, we'll actually see how it improves retention, depending on how month one retention improves, and then month two, month three, and month four, all of those hopefully get us closer and closer and closer to a break-even on revenue per customer with a lot more. That's the objective. So we have lots of room to grow, and lots of optimization to do. And again, the test is now three weeks old.

That students are saying so in a perfect world.

We would make up the revenue per customer getting neutral as we could to revenue per customer.

And.

Over a multiyear period, we believe that's exactly what's going to happen, but in the in the short term, particularly outside the U S. The volume of new customers.

And those other variables together will generate revenue growth outside the U S. Even though on a per customer basis, it's still not equal yet, but its very early we have multiple retention periods to go through a number of years to go through.

Daniel L. Rosensweig: But the first two hurdles are really good, which is driving an increased number of overall customers versus what we would have done had we not. Because we believe that in a competitive market, we want to fight for market share because, frankly, nobody else is anywhere near as good as we are. And once students realize that, they stay on, and they use us more. And then when you launch new product stuff, which we have, with Automated Antitrust as an example, this is the highest engagement on a per-customer level we've ever had. And if it works as we hope, which is to regenerate the flywheel, more customers, more new questions, more new questions, go into search, more students that haven't used us, go to search, find it, or TikTok or wherever we All of those things so far have been positively impacted. But the overall objective is to get as close as you can to revenue breakeven on a per customer basis because you've got them. Then, in year two, or whenever we choose to get rid of promotional pricing, we raise the rate on those existing customers.

And so that's that's what's been going on outside of the U S has been really positive inside the U S.

The plan what.

What we are doing is we are testing.

And the first measurement so it's not to 100% of the new accounts, it's only to a percentage of them.

But it's only two new accounts, so it doesn't affect any of the existing revenue.

Then as I said, there's five variance with three different price points and that has to do with presentation.

Five.

And then what we do is we narrowed down to the ones, where we see the desired conversion.

The desire to take rate and in a couple of weeks, we'll actually see how it improves retention.

Depending on how a month one retention improves in that month to month, three and month for all of those hopefully get us closer and closer and closer to a breakeven on revenue per customer with a lot more customers. That's the objective.

So we have lots of room to grow lots of optimization to do.

Daniel L. Rosensweig: So the revenue on those customers goes way up, and we'll be testing that to determine translation rates and all those things. But the business model is very, very sound. But we have to do it one brick at a time.

And again the test is now three weeks old, but the first two hurdles are really good.

Which is driving increased number of overall customers versus what we would've done had we not done it.

Daniel L. Rosensweig: And we've done the first two bricks, which are conversion and take rate. The next one is retention. And then what can you raise it to when you want to come at it at our promotional pricing for the customers that take it?

Because we believe that in a competitive market. We want to go we want to go fight through the market share because frankly, nobody else is anywhere near as good as we are and one students realize that they stay on it and they use us more and then when you launched the new product stuff, which we have with automated answers as an example, this is the highest engagement on a per customer level, we've ever had.

Daniel L. Rosensweig: And how long do you want to keep promotional pricing for new customers? But right now, it's better to fight for market share and make sure people don't come away with the conclusion that Chess CPT is a better solution than us, because it's not. Great, thank you.

And if it works as we hope which is to regenerate the flywheel more customers more new questions more new questions go into search more students that haven't used us go to search find it or tick tock or wherever we put it.

Ryan Macdonald: Our next question comes from the line of Ryan MacDonald with Needham & Company. Please forward your question. Hi, thanks for taking my questions. Andy, best of luck in the future. And David, congrats on the promotion.

Driving customers all of those things so far had been positively impacted.

Daniel L. Rosensweig: Let me just start, Dan. Can you talk about sort of, it's great, it sounds like there are some real benefits here for the automated answers in terms of cost savings and how you're answering questions. Can you talk about the mix of, I guess, the overall questions that are being answered today by automated answers and then perhaps what we need to see that get to as a percentage of the total questions for that to start to translate into some margin expansion relative to sort of what the first quarter guidance implies? Yeah, that's exactly what we're looking for. So,

But the overall objective is get close as you can to revenue breakeven on a per customer basis, because you've got those variables then in year, two or whenever we choose to get rid of promotional pricing we raise the rates on those existing customers. So the revenue on those customers goes way up and that we'll be testing that determined.

Relation rates and all those things, but the business model is very very sound and but we have to do it one brick at a time, but we've done the first two bricks, which is conversion and take great. Next one is retention and then what can you raise it to when do you want to come back on our promotional pricing for the customers that took it and how long do you want to keep promotional pricing for new customers, but right now better.

Daniel L. Rosensweig: What you should be looking for, what we should be talking about, and what we will be talking about over the course of the year. We didn't really know where to start talking because we didn't know how popular automated answers would be and how quickly they would become this popular. But, um, as we articulated in the prepared remarks... Already, the cost of answering a new question is seventy-five percent less, simply based on the tailwind that we're getting from AI. We call it automated answers, but it's the result of us taking our own large language model and developing our own answers. We have a quality algorithm.

To fight for market share and make sure people don't come away with the conclusion that CECI P. T is a better solution than us because it's not.

Great. Thanks, Dan.

Okay.

Our next question comes from the line of Ryan Macdonald with Needham and company. Please proceed with your question.

Alright, Thanks for taking my questions Andy Best of luck in the future and David Congrats on the promotion.

Let me just start and can you talk about sort of it's great. It sounds like there's some real benefits here on the automated answers in terms of cost savings are and how you're answering questions can you talk about the mix of I guess, the overall questions that are being answered today by automated answers and then perhaps what.

Daniel L. Rosensweig: So, right now, you won't see much in the way of savings in the first part of the year because we haven't fully rolled out all of the different large languages. The expectation is that, over the course of this year and by the end of this year, the overwhelming majority of all new questions will go through automated answering, and there will be fewer and fewer going through human answering. So you should begin to see margin expansion towards the end of the year as a result of. You really see a CapEx reduction first, right, which is the amount of money that we've spent on content has been coming down, but it's going to come down again this year and then substantially in 2025, so we can answer ten times as many questions for the cost of one question. That's the way to think about it.

We need to see that get to as a percentage of total questions for that to start to translate into some margin expansion relative to sort of what the first quarter guidance implies.

Yeah, that's exactly what we're looking at so.

What you should be looking for what we should be talking about and what we will be talking about over the course of the year.

We didn't really know where to start talking because we didn't know how popular our automated answers would be and how quickly became popular.

But.

As we articulated in the prepared remarks already the cost of answering a new question is 75% less sick.

Simply based on the.

Daniel L. Rosensweig: But we have to get all the large language models out so that we can, and the quality of the level that students expect from Chegg that they don't get from Chegg TPT or BART or anybody else. And that will take the rest of this year to do, and we're very excited about it because it will be a meaningful improvement in our ability to pay for content and have super-high quality and, as I said, also generate prime. Well, the other real benefit is that the more questions that get indexed, the more people find us, and we don't have to pay for that traffic; it comes in. So that's the way Chegg was originally built when we first built it.

The tailwind that we're getting from <unk>.

We call it automated answers, but it's it is a result of us taking our own large language models.

And developing our own answers, we have a quality algorithms. So right now you won't see much in the way of savings in the first part of the year, because we haven't fully rolled out all of the different large language models.

The expectation is over the course of this year and by the end of this year.

The overwhelming majority of all new questions will go through automated ancillary and there'll be fewer and fewer going through.

Human answering so you should begin to see margin expansion towards the end of the year.

Daniel L. Rosensweig: Q&A. And it's just going to be a lot faster now because of the volume of questions that we can answer. I don't think we've ever answered 2 million questions in a month. And that's just the month of January, which really doesn't get started until mid-January.

As a result of.

You really see a capex reduction first right, which is the amount of money that we spend on content has been coming down, but it's going to come down.

Again this year and then substantially in 25, so we can answer.

10 times as many questions with a cost of one question.

Is the way to think about it.

But we just we have to get all the large language models out so that we can.

And the quality at the level that students expect from Chegg that they don't get from chat G P T or Bart or anybody else.

Daniel L. Rosensweig: Super helpful. I appreciate that, Dan. And then you talked about 24 and the team. Yeah, look, of course it has an effect, it's just not the biggest one, and I know people think that it is, and I can understand why they do, frankly.

And that will take the rest of this year to do it.

And we're very excited about it because it will be a meaningful improvement in and our ability to pay for content and have super high quality and as I said also generate the flywheel. The other real benefit as the more questions that get indexed more people find us and we don't have to pay for that traffic and it comes in so that's the way Chegg was originally built when we first built.

Daniel L. Rosensweig: But let me just, let me just criticize the U.S. to you just a little because outside the U.S., it is just, it's wild. Right. We jumped during COVID, then sort of stopped when things got out of COVID.

Expert Q&A.

And it's just going to be a lot faster now because just the volume of questions. We can answer I don't think we've ever answered 2 million questions in a month.

Daniel L. Rosensweig: Then ChatsCPT launched and had the beginning of an effect. But the new product, and the new automated answers, and the new indexing of the question to promotional pricing have reversed that course outside, outside the U.S. So, yeah, when you think about enrollment last year or on average in a given year, Chegg will have over 10 million students in the U.S. that will register for Chegg but not convert. And so we have that whole universe to go after that has nothing to do with Iran.

Speaker Change: And that's just the month of January which really doesn't get started until mid January.

Super helpful color I appreciate that and then you talked about in 'twenty, four and isn't going to do.

Okay.

Returning back to growth it sounds like the promotional pricing is going to obviously help with that but as you think about the macro how important is it sort of enrolment within colleges and universities to driving that returned to growth algorithm for chegg and sort of how do you. How are you sort of building that into your.

Daniel L. Rosensweig: So we think that, in the near term, the goal is to get those people to cross the chasm into becoming loyal Chegg customers. Because our retention rate is so high, and because our quality is so good. And now, with the immediacy of the responses at high quality, which no one else can give them, we think that's the key to growth. So enrollment will matter over time. But right now, there's a big group of people that are right in front.

Your sort of assumptions for this year.

Yeah look of course it hasn't it has an effect. It's just not the biggest one and I know people think that it is and I can understand why they do frankly.

But let me just let me just sort of size do you just U S. Because outside the U S. It is just it's wide open right we jumped during COVID-19.

And then sort of stopped when when things got out of Covid than chat G. P T launched and had.

At the beginning of an effect.

But the new products and the new automated answers and the new indexing or the question to the promotional pricing has reversed course outside that.

Brian Peterson: Our next question comes from the line of Brian Peterson with Raymond James. Please submit your question. Thanks for taking the question, and a well-deserved congratulations to Andy and David. So I just, I want to follow up on Ryan's question. You've done a lot with the platform this year, and you've done that with R&D dollars actually being down year-over-year. You know, I see the opportunity for automation, but I also mentioned scaling to different languages and time to roll out the RLMs. I'm just curious how we should think about the puts and takes for R&D intensity in 2024, maybe how that arc should look longer-term. Thanks, Mike.

Outside the U S.

So.

Yeah. So when you think about enrollment.

Last year or on average in a given year.

Chegg will have.

Over 10 million students in the U S that will register for Chegg, but not convert.

And so we have that whole universe to go after that has nothing to do with enrollment.

Daniel L. Rosensweig: Yeah, really, really good question. So hopefully, for people like you that have been tracking Chegg for a while, you see, we try to be very, very efficient with our capital. And so if you take a look at OPEX, OPEX has not grown substantially in the last couple years, and it's been relatively flat, we expect it to be relatively flat again this year.

So we think the near term the goal is to get those people to cross the chasm into becoming loyal chegg customers because our retention rate is so high because our quality is so good and now with the immediacy of the responses at high quality, which no one else can give them. We think that's the key to growth so enrolling.

It will matter over time, but right now there's there's a big group of people that are right in front of us.

Daniel L. Rosensweig: And yet, we have 250 people now working on AI. And that is because we have a history of reallocating resources against the things that have a priority and either stop doing the things that no longer matter as much or where they're at scale and can survive with the number of people that we have. The same thing goes through with our sort of capital expenditure, which is... The overwhelming amount of capital that we spent was on... So we're not, like, I think there's some confusion because we said last April that we had a partnership with OpenAI, and so it's easy to have made the conclusion, which is really on us, that, you know, we have big API costs, but we don't. We have moved mostly off, and we'll almost be completely off OpenAI in a short time because there are now a lot of different alternatives, and they're a lot cheaper.

Okay.

Speaker Change: Okay.

Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

Thanks for taking the question and a well deserved congrats to Indian David So I just I wanted to follow up on Ryan's question.

You've done a lot with the platform this year and you've done that with R&D dollars actually being down year over year I see the opportunity for automation, but also mentioned scaling into different languages and time to roll out the <unk> I'm just curious how we should think about the puts and takes to R&D intensity in 2024, maybe how that arc should look longer term. Thanks guys.

Yeah really really good question.

So hopefully for those people like you that had been tracking chegg for awhile you see we try to be very very efficient with our capital.

Daniel L. Rosensweig: But more importantly, so the real cost is sort of GPU cost and other things like that. It's not, and so the overwhelming cost that Chegg has in CapEx is always going to be content, and since the cost of content is dropping significantly, it's already down 75% based on automated answers versus human answers. So the next big step is to give out more human answers, which we hope to do mostly by the end of the year. So the way to think about it is that you can assume our capital this year will be much better, much more efficiently spent because AI is allowing us to spend it a lot cheaper on a per question basis than we ever could before. So we're not holding back investment; it's just we can get a lot more for our money now thanks to AI. It's one of the great benefits of having moved as quickly as we have. Operator, is there another question?

And so if you take a look at the Opex opex is not grown substantially.

In the last couple of years and it's been relatively flat, we expect it to be relatively flat again for this year and yet we have 250 people now working on.

AI and that is because we we have a history of reallocating resources against the things that have a priority and either stopped doing the things that no longer matter as much or where they are at scale and can survive with the number of people that we have on them.

Same thing goes through with our sort of capital expenditure, which is.

The overwhelming amount of capital that we spent was on content.

So we're not like they're there.

I think there's some confusion because we said last April that we have a partnership with open AI and so it's easy to have made the conclusion is really on us that we have big API costs, we don't where we have moved mostly often will almost be completely off open AI. Shortly because there's a lot of different alternatives and there are a lot cheaper, but more importantly.

Operator: Yes, our next question comes from the line of Alex Fuhrman with Craig Hollum. Please ask me your question. Hey guys, thanks for taking my question. Can you talk a little bit about your core customers today versus a few years ago? It sounds like the biggest change, given everything going on with AI, is maybe some of your more casual users at the margin who might, you know, pop in for a month or two around final or midterm exams as kind of, you know, maybe looking at other AI-powered options. Can you talk about the types of students who have stuck with Chegg? Are there any major call-outs, you know, now versus a few years ago, in terms of your core student, in terms of either age or, you know, full-time or part-time status or field of study or two-versus-four-year schools? Anything like that that you're focusing on a little bit differently versus a couple years ago? Yeah, it's an awesome question. So, you know, for those who haven't spent as much time on this as you have. The overwhelming majority of students in the U.S. go to state schools.

So the real cost is sort of GPU GPU costs and other things like that it's not.

And so the overwhelming cost of Chegg Hasnt Capex is always going to be content and since the cost of content is dropping.

Difficultly.

It's already down 75% based on automated answers first in human answers. So the next big step is to get off more human cancers, which we hope to do mostly by the end of the year. So the way to think about it is you can assume our capital this year will be much better much more efficiently spent because AI is allowing us to spend it.

A lot cheaper on a per question basis than we ever could before.

So we are not holding back investment. It's just all we can get a lot more for our money now thanks.

It's one of the one of the great benefits of having moved as quickly as we moved.

Speaker Change: Okay.

Operator is there another question.

Daniel L. Rosensweig: So, you know, we hear about the, you know, the schools that have them. But, you know, that's a couple of hundred thousand people versus 22 million. So they're not a big percentage. The overwhelming number of students in the schools go to state schools, and a very large percent of them go to community colleges. As an example, 10% of all students in this country go to just one community college system, which is in California. So over 2 million students go to community college. The average age of a student is about 25 years old, and about 25% to 26% of them already have children.

Yes. Our next question comes from the line of Alex Fuhrman with Craig Hallum. Please proceed with your question.

Hey, guys. Thanks for taking my question can you talk a little bit about your core customer today versus a few years ago. It sounds like the biggest change given everything going on with AI is that maybe some of your more casual users at the margin who might pop in for a month or two around the final.

Speaker Change: Midterm exams have have kind of maybe looking at other AI powered options can you talk about the types of students who have stuck with chegg are there any major call outs.

Daniel L. Rosensweig: The biggest growth area for Where Seasons Are Going is that they are shifting into three or four very large buckets, very big ones. So, one of them is online, and so our focus on making ourselves more visible to online students has been a focus for the last few years and one that we want to accelerate. And we really do believe that automated answers will help us with that because we'll be able to have a lot more things that people can be searching for. So, we're hoping for a boost through that. I think the largest school in this country that's a not-for-profit is an online school. I think it's Southern Manhattan University, of which Dr. Paul LeBlanc is on our board.

Now versus a few years ago in terms of your core student in terms of either age or full time or part time status or field of study or two versus four year schools anything like that that that you're focusing on a little bit differently versus a couple of years ago.

Yeah, It's an awesome question.

So you know for those who haven't spent as much time as you have on this.

The overwhelming percentage of students in the U S go to state schools. So we hear about that we hear about the you know the schools.

And.

Maybe you have lost now Theyre prestige.

Daniel L. Rosensweig: So, we know a lot about that. So, they've actually grown their enrollment substantially year over year because more people are not going to get degrees. They're going to get particular courses. The second big growth area that the country is seeing is a real move to giant state schools with incredible sports programs. So students are determining that the value of graduating from School A versus School B is not significant in their career path, so they'd rather go to a school where they can enjoy themselves.

But.

That's a couple of hundred thousand people versus $22 million.

They're not a big percentage of the overwhelming number of students in the school go to state schools and a very large percentage of them go to community colleges. As an example, 10% of all students in this country go to just one community College system, which is California. So over 2 million students go to.

It's a community college the average age of a student is about 25 years old and then about 25, 26% of them already have children the biggest growth areas.

Daniel L. Rosensweig: And that's exactly what they tell us, by the way. So we're not speculating on that. It's what the numbers show, and it's what they have told us. The third big area is students of color are gravitating, as you might imagine, to HBCUs. The reason is that they finally got funded by the government, and they're very much developing their programs, and they feel more culturally aligned there.

For where students are going.

They are they are shifting into three or four very large buckets and very big numbers. So one of them is online.

And so our focus on making ourselves more visible to online students has been a focus the last few years and one that we want to accelerate and we really do believe that automated answers will help us with that because we will we'll be able to have a lot more things that people can be searching for and search so we're.

Daniel L. Rosensweig: So those are three big areas now where we're spending more of our time trying to figure out how to reach students. The other thing is, even though more students every day are taking STEM-B classes... One of the other benefits of AI for us is that you can ask a question, increasingly so on Chegg, that it's outside of the standard. And as we build that, we will be able to expand our U.S. TAM even a little bit more. And then, of course, the giant TAM is outside the U.S., which is not what you asked about. But that is, you know, it's hard to imagine countries that are sort of bigger for growth opportunities than India, the Philippines, Mexico, places like that.

We're hoping for boost to that so I think that the largest school in this country. It's a not for profit as an online school I think its southern New Hampshire University, which which after part of the block is on our board. So we know a lot of information about that so they've actually grown their enrollment substantially year over year, because more people are not going to get degrees. They are going to get particular.

Horses, the second big growth area that the country is seeing is a real move two giant.

<unk> schools with incredible sports programs. So students are determining the value of graduating from school a versus school b is not significant in their career paths. So they'd rather go to a school where they can enjoy themselves and that's exactly what they tell us by the way. So we're not we're not speculating on what the numbers show and it's what they have told US the third big area.

Daniel L. Rosensweig: We already are seeing really good results as a result of promotion in those places, and we expect over the next several years to really try to optimize our growing in those countries. So that's what we're focusing on in terms of our messaging and where we're putting our. Hopefully, that helped. Our next question comes from the line of Eric Sheridan with Goldman Sachs. Please receive your question. Thank you so much for taking the time to answer the questions. Maybe two if I could.

As students of color are are gravitating as you might imagine to H B C use and the reason is they finally got funded by the government.

And those and they're very much developing their programs and they fear more cultural culturally aligned there. So those are three big areas, now where where we're spending more of our time trying to figure out.

How to reach them.

Eric Sheridan: On your own LLM, can you tell us a little bit about what you're most excited about in terms of how the LLM will evolve and what it means for product and roadmap on a multi-year view as opposed to just this sort of V1 of the LLM and sort of how it might get smarter, how it might change, how it might result in different elements of pricing dynamics on the platform. That would be number one. And then in terms of generating the flywheel effect that you talked about and referenced in the slides, can you just go into a little more detail of what we should be watching for of where the incremental investments will be made as you see some of those signals as we look out over the next couple of quarters? Thanks so much.

Other thing is even though more students every day are taking stem b classes.

One of the other benefit of AI for US is you can ask a question.

Creasing, we sell on Chegg that is outside of Stampede.

And as we build that out.

We will be able to expand our U S Tam even a little bit more and then of course, the giant Tam that's outside the U S, which is not what you asked about but that as you know it's hard to imagine countries that are sort of bigger for growth opportunities in India, The Philippines, Mexico places like that.

We already are seeing really good results.

Daniel L. Rosensweig: Yeah, those are two very substantive questions. Let me take the second one first because I can remember that one. What should you be tracking? So, as I said, Our expectations, and of course, expectations can change, and as we learn more, we always share more. Sometimes we share too much, like our concern that OpenAI will take away more customers than it has. But in this case, we have fought back, and we're battling back, and we think we've got the things in place to compete quite effectively. What we look at is how many students are asking questions, and how many and what kinds of questions they are asking, and do those questions resonate with other students that go into search or TikTok, and will they generate more traffic for us? That's the flywheel.

As a result of the promotion in those places and we expect over the next several years to really try to optimize around growing in those countries. So that's that's what we're focusing on in terms of our messaging in and where we're putting our our messages hopefully that helps answer it.

Yes.

Our next question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question.

Thanks, so much for taking the questions maybe two if I could.

On your own L. L. M can you talk a little bit about what you're most excited about in terms of how the L. L. M will evolve and what it means for product and roadmap on a multi year view as opposed to just this sort of the one of the L. L M in and sort of how it might get smarter how might change out might result in different elements of pricing dynamics on the Pla.

Form.

That would be number one and then in terms of generating the flywheel effect that you talked about and referenced in the slides can you just go into a little more granularity of what we should be watching for where the incremental investments will be made as you see some of those signals as we look out over the next couple of quarters. Thanks. So much yeah. Those are two very substantive questions.

Daniel L. Rosensweig: It'll be hard for you to look at expenses because they're going to be relatively flat in CapEx and relatively flat in OpEx because of the efficiency in which we move people into two different roles or move our capital expenditure to things that work better than the things that were working before. So, it won't be that obvious for you there, but... But I think you'll hear from us the number of students that are asking questions versus the past, the number of questions per student, and the overall number of new questions being asked and answered by automated questions. And the greater the percentage that are answered by automated questions, the better it is for our cost structure on CapEx. And then, you know, we expect as we get more comfortable with the certainty around these things that we're learning, that we'll be able to put out a long-term forecast against which we can be measured more readily.

Let me take the second one first because I can remember that one.

So.

What should you be tracking so as I said.

Our expectation and of course expectations can change and as we learn more we always share board, sometimes we share too much like our concerned at open AI.

We'd take more customers than it has.

So but in this case, we have fought back and we're battling back and we think we've got the things in place to two.

To compete quite effectively.

What.

We look at is how many students are asking questions.

Daniel L. Rosensweig: We're not there yet because all of this is so new, but as you saw in the last three quarters, we have beaten the expectations we put out there, and that's building more comfort for us. But I think automated answers and the new pricing and packaging, we'll learn a lot more in the first half. So you won't be able to see it sort of where the expenditures are, but the expenditures over time should be flat to down.

How many and what kinds of questions that they are asking and do those questions resonate with other students that go into search or ticked up and will they generate.

More traffic for us that's the flywheel.

It'll be hard for you to look at expenses, because theyre going to be relatively flat in capex and relatively flat in opex because of the efficiency in which we move people.

Into different roles or move our capital expenditure to things that work better than the things that were working before.

Daniel L. Rosensweig: The question on LOMs improving over time. Yeah, that is an amazing question. And I'm not even sure I understood just how much they can evolve and how quickly they can evolve and how useful they are.

So it won't be that obvious for there but.

But I think you'll you'll hear from us the number of gross number of students that are asking questions versus the past number of questions per student overall number of new questions being asked and answered by automating questions and the greater percentage that are answered by automated questions.

Daniel L. Rosensweig: So the speed at which we can answer a question, the types of questions that we can answer, and the cost of doing it, all of those things that the LLM learns. Yes, sir. The second thing is the personalization that we can do on a per-student basis. So there's data beyond just the question and the answer. There's data that gets mined; what school are you at? Who is your professor? How does that professor prepare?

Better it is for our cost structure.

On Capex and then we expect as we get more comfortable with the certainty around these things that we're learning that we'll be able to put out a longer term forecast, which we can be measured against more readily.

Daniel L. Rosensweig: So we have years of history of when the midterm is, when the final is. So imagine a scenario on a per-student basis, this is over time, this is not this quarter. I don't want to confuse anybody. It is what the LLNs will enable us to do and what we're working towards. We'll be able to go in like a coach and say to the students, We know your midterm's coming up in two weeks. Do you want us to build you a schedule of how to study?

Not there yet because we because all of these are so new.

But as you saw from the last three quarters, we have beaten the expectations, we put out there and that's building more comfort for us.

But I think automated answers and the new pricing and packaging.

We'll learn a lot more in the first half of this year. So you won't you won't be able to see it sort of and where the expenditures are.

But the expenditures over time should be flat to down.

Daniel L. Rosensweig: Do you want us to build you a unique practice test just for you? And we can do it not just based on the subject but based on the individual and the professor themselves, because we have all the data of what that professor does and when they do it, the kinds of things that they ask, because we have all these years of history already in our data. Those are the kinds of things that are unique to Chegg that can differentiate.

So.

The question on L O Ams improve over time.

That is an amazing question and I'm not sure that I understood just how much they can evolve and how quickly they can evolve and how useful they are when they evolve so the speed in which we can answer a question the types of questions that we can answer.

And the cost of doing it all of those things as the other lab.

Daniel L. Rosensweig: We think those things create value in terms of going back at some point to pricing power and, second, retention, and expanding out to the kinds of things that we can do. So, another example is things like, we know you go to this school, you go to the University of Arizona, and we know that students that take these classes major in this, and we know students that major in this generally tend to work for these 10 companies, and these 10 companies are looking for these skills. Would you like us to assess you on whether or not you have those skills, and then we can upsell them to you? Or would you like us to teach you those skills so you can get a certificate that shows that you're actually competent? These are things that our own LOMs and datasets will allow us to do that we believe no one else will be able to do. Our next question comes from the line of Brent Thill with Jefferies. Please respond with your question. Thanks. It's really just the Q1 guide.

Learn more.

Get better.

The second thing.

Is the personalization that we can do on a per student basis. So theres data beyond just the question and the answer there is data that gets mined what school you at who is your professor how does that professor prepared so we have years of history.

When the midterm is when the final is so imagine a scenario on a per student basis. This is over time. This is not this quarter I don't want to confuse anybody but it is what the <unk> will enable us to do and what we're working towards will be able to go like a coach and state of the student.

Hey.

We know your midterms coming up in two weeks do you want us to build you a schedule of how to study do you want us to build you a unique practice tests just for you.

And we can do it not just based on the subject, but based on the individual and the professor themselves because we have all the data of what that professor does and when they do with the kinds of things that they asked because we have all these years of history already in our dataset.

Brent John Thill: You're guiding EBITDA down 24% year-on-year, and I think revenue's guided down mid to high single digits. I think the question we're getting is, "You know, when do you return to health and growth on revenue and EBITDA?". Well, I'll answer the second part of that because I'll be here going forward, and Andy is already in retirement. But I think he can answer why the model is what it is in the first place.

The kinds of things that are unique to chegg that can differentiate we think those things create value in terms of going back at some point to pricing power and second retention and expand out to the kinds of things that we can do so another example.

Is things like we know you go to this school you go to the University of Arizona, and we know that students that take these classes major in there. So we know students that major and this generally tend to work for these 10 companies and these tech companies are looking for these skills would you like us to assess you on whether or not where you are on those skills and then we can upsell.

Daniel L. Rosensweig: So we are not prepared today to say when we will return to that. But we do feel comfortable saying we will return to that. And because of AI, going from a potential headwind to a tailwind, we think we'll be going to that sooner than we otherwise would have because of our ability to have more questions asked, have them indexed, drive more customers, plus promotional pricing. So, you know, in the next few quarters, we think we'll be more able to articulate when we think that happens, but we're absolutely currently on the path to do that. And, you know, we think we can return back to where our historical margins were. This is a company that should be able to grow, and it starts with the fact that we started with fewer net customers this year than last year because of the people that rolled off and the post-COVID and all the other stuff that we were dealing with. So, we have about 9% fewer customers this year than we did last year.

All of them to would you like to teach those skills that you can get a certificate that shows that you're actually competent in it. These are things that our own L. O M. Datasets will allow us to do that we believe no one else will be able to do.

Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.

Thanks.

As it relates to Q1 guide, you're guiding EBITDA down 24% year on year, and I think revenues guided to down mid to high single digit.

The question, we're getting is.

When do you return to health and growth on revenue and EBITDA.

Well I'll answer the second part of that because I'll be here going forward and Andy has already in retirement.

But I think he can answer why the model is what it is in the first quarter. So we.

Daniel L. Rosensweig: What you'll be able to track over time, because we report our net customers every quarter, is that gap, assuming we meet our guidance, will continue to close. And that's how you'll see and be able to estimate when we'll be able to return to growth, but we're on that path. Our next question comes from the line of Jason Salino with KeyBank Capital Markets. Please proceed with your question. This is actually Devon on for Jason today.

We are not prepared today to say when we will return to that we do feel comfortable in saying, we will return to that.

And because.

Because of AI going from a potential headwind to a tailwind we think will be going to that sooner.

Than we otherwise would have because of our ability to have more questions asked have them index drive more customers plus promotional pricing so what.

In the next few quarters, we think we'll be more able to articulate when we think that happens, but we're absolutely currently on the path to do that.

Jason Salino: Thanks for taking our questions. Just one quick follow-up on Ryan's question, also on automated answers. I think in terms of the questions being answered by automated answers, are these more within the STEM and business subjects? Or have you seen automated answers also having the ability to provide quality responses to maybe the non-STEM subjects, which I believe is an area that's a little bit less penetrated for Chegg?

And we are.

Our margins.

We think we can were returned back to where our historical margins worth. This is a company that should be able to grow.

And.

Starts with the fact that we started with fewer net customers this year than last year because of the people that rolled off in the post COVID-19 and all the other stuff that we were dealing with so we have about 9% fewer customers starting this year than we did last year.

Daniel L. Rosensweig: Yeah, terrific question. So let me start with the initial question. There are three parts to that question.

Daniel L. Rosensweig: The first one is, what are students already asking us? Because the people that are already with us are STEMD students, they're asking deeper questions that AI allows us to answer in the next phase. It's gonna be conversational in nature, which will be really fun and helpful for the students because we'll be able to ask them questions in addition to them asking us questions. So the first one is that they're going deeper into the categories that perhaps might have been really cost inefficient for us to try to answer them because they're deep into subjects. So that's the first thing.

What you'll be able to track over time, because we report our net customers every quarter is you'll see that gap.

Assuming we do our guidance, you'll see that gap continue to close and that's how you'll see and be able to estimate when we'll be able to return to growth, but we're on that path.

Our next question comes from the line of Jason <unk> with Keybanc capital markets. Please proceed with your question.

Daniel L. Rosensweig: The second one is, yes, we absolutely are building it to expand beyond STEMD as students ask that. The third part, though, is we have to be comfortable that we can answer it with the same quality and accuracy that we can answer other questions, and that's just going to take the course of this year to get ourselves more comfortable. We're focusing now first on the 26 subjects we have and the 52 LLMs that we're building for each of those subjects, and then we'll move outside of where we currently are. But that is absolutely part of our roadmap. It's just not part of the roadmap today.

Great. This is actually Devin on for Jason today, Thanks for taking our question.

Just one quick follow up on Brian's question also on automated answers I think in terms of the questions being answered by automate. The answers are these more within the stem and business subjects or have you seen.

Amit answered also having the ability to provide quality responses to maybe the non stem subjects that I believe is an area that's a little bit.

Less penetrated for Chegg.

Yeah terrific questions. So let me start with the initial questions two or three parts of that question.

Daniel L. Rosensweig: There are no further questions in the queue. I'd like to hand the microphone back to Dan Rosensweig for closing remarks. Thank you, everybody. Just to repeat. It's been a complex last several years with COVID, then post-COVID, then with AI, and other variables. But the company is in extremely strong shape despite that, which is that we generate a lot of profit, we generate a lot of cash flow, and we are moving back to net cash positive on our balance sheet. We've been really efficient with our capital, and we expect to continue to do so.

First one is water students already asking us.

Those are because the people that are already with us or 70 students, they're asking deeper questions.

Speaker Change: That AI allows us to answer in the next stage is gonna be conversational nature, which will be really fun and helpful. For the students because because we'll be able to ask them questions. In addition to them asking us questions. So the first one who theyre going deeper into the categories that debt.

Perhaps why they've been really cost inefficient for us to try to answer them because they're deep into subjects. So that's the first thing. The second one is yes, we absolutely are building it to expand beyond stem b as students asked that the third part though is we have to be comfortable that we can answer with the St <unk>.

Daniel L. Rosensweig: But the real opportunity is rebuilding the flywheel with a new product, new service, new automated answering, and AI moving from potential headwind to absolute tailwind on growth and cost. It is a very exciting time. It's not easy. These things are moving very fast, and the speed at which we're moving is faster than we've ever done.

<unk> and accuracy that we can answer other questions and that's just going to take the course of this year to get ourselves more comfortable we're focusing now first on the 26 subjects. We have in the 52 L. L. M that we're building.

For each of those subjects and then we'll move to.

To outside of where we currently are but that is absolutely part of our roadmap is just that part of the roadmap today.

Daniel L. Rosensweig: And so I just, I very much look forward to the rest of this year and the future because we've got a lot of good momentum ahead of us. It's just going to take time, and we have to rebuild the base of net new accounts. And like I said, you'll see that every quarter. And, of course, I want to welcome David Longo to the role. We brought David in a couple of years ago with the hope and expectation that he would fill Andy's role. Nobody can replace him.

There are no further questions in the queue I'd like to hand, it back to Dan Rosensweig for closing remarks.

Thank you everybody.

Just to repeat.

It's been a complex last several years.

With Covid and post COVID-19 than with AI other variables.

Daniel L. Rosensweig: And to Andy Brown, I say that I've never had a better partner, a better work friend, and Chegg would not be where it is today had you not joined, had you not made the decisions that you've made and backed the people that we've had and hired the people that we have. So your mark is indelible, and thank you, my friend. And thanks, everybody. Talk to you next quarter. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

The company has an extremely strong shape, despite that which is we generate a lot of profit we generate a lot of cash flow and we are well we are moving back to net cash positive on our balance sheet, we've been really efficient with our capital and we expect to continue to do so but the real opportunity is is rebuilding.

The flywheel with the new product New service, new automated answering and AI moving from potential headwind to absolute tailwind on gross.

And cost and so it is a very exciting time.

Not easy these things are moving very fast and the speed in which we're moving as fast as we've ever done and so I just I very much look forward to the rest of this year in the future because we've got a lot of good momentum ahead of us.

It's just going to take time, and we have to rebuild the base of net new accounts and like I said, you'll see that every quarter, if we execute well.

And of course, I want to welcome David long ago to the role who brought David and a couple of years ago with the hope and expectation that he would.

Fill andy's roll nobody can replace Andy and to Andy Brown, I'd say that I've never had a better partner a better work friend.

And Chegg would not be where it is today had you not joined had you not made the decisions that you've made in back the people that we've had and hired the people that we have so your mark his indelible and Ah. Thank.

Thank you my friend.

And thanks, everybody, who talk to you next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

Okay.