Q1 2025 Chegg Inc Earnings Call
Ara: Greetings and welcome to the check, 1st quarter, 2025 earnings call.
Speaker Change: At this time, all participants are in a listen-only mode, a question and an intercession 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. I'd now like to turn the conference over to your host, Tracey Ford, vice president and best relations for Czech. Thank you, you may begin.
Speaker Change: Good morning. Thank you for joining Chegg's first quarter 2025 conference call. On today's call are Nathan Schultz, President CEO and David Longo, Chief Financial Officer.
Speaker Change: A copy of our readings release along with our investor presentation is available on our Investor Relations website investor.Chegg.com.
Speaker Change: A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our Media Center website at chegg.com slash Media Center. We encourage you to make use of these resources.
Speaker Change: 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.
Speaker Change: These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.
Speaker Change: We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements.
Speaker Change: In particular, we refer you to the cautionary language included in today's earnings release, and the risk factors described in Chegg's annual report on form 10K, the year ended December 31, 2024, filed with the Securities and Exchange Commission on February 24, 2025, as well as our other filings with the SEC.
Speaker Change: Anyful relicking statements that we make today are based on assumptions that we believe to be reasonable as of the state. We undertake no obligation to update the statements as a result of new information or future events.
Speaker Change: Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release on the Investor Slide deck found on our IR website investor Chegg Dot com.
Speaker Change: We also recommend you review the Investor data sheet, which is also posted on our IR website.
Nathan Schultz: Now I will turn the call over to Nathan.
Nathan Schultz: Thank you Tracy Hello, everyone and thank you for joining checks first quarter 2025 earnings call.
Nathan Schultz: Q1 was a good quarter for Chegg, we surpassed our revenue and adjusted EBITDA guidance generating approximately $16 million or free cash flow and diversified our revenue in two key ways.
Nathan Schultz: First the expansion of our business institution effort, which has expanded from five pilots to 15 pilots from Q4 to Q1 is well on track to reach our goal of 40 by the end of the year.
Nathan Schultz: Licensing our question and answer pairs to language model companies, we signed two agreements and believe this is just the tip of the iceberg for this program David will address the financial details of these deals.
Nathan Schultz: Concerning our strategic review process, we made significant progress as a reminder, we undertook this effort last quarter with Goldman Sachs to explore the range of outcomes to maximize shareholder value.
Nathan Schultz: Being acquired undertaking a go private transaction or remaining a public Standalone company and continue to believe this is the right step to maximize shareholder value.
Nathan Schultz: To date, we've had dozens of meetings with interested parties ranging from strategic Tech and education companies to private equity firms early indications are positive and we are encouraged by the conversations and the value of these organizations see in our business, here's what's capturing potential acquirers attention.
Nathan Schultz: First is our core product Chegg study verbalize and personalized student support platform. As you may have seen we keep innovating on behalf of students for the recently released solution Scout, which allows students to compare multiple language models against checks proprietary content.
Nathan Schultz: And our practice service now has a new AI powered feature called create empower students to generate customized content directly from their own class materials, delivering highly customized and personalized experience.
Nathan Schultz: Next just boost U R language learning service, which continues to perform very well Q1 revenue increased 7% year over year driven by growth in both the BTC and <unk> businesses.
Nathan Schultz: The B the C business is seeing the benefits of AI driven product enhancements such as speaking practice, which is driving deep engagement and strong performance in customer acquisition and retention.
Nathan Schultz: The b to B business maintained strong double digit growth in Q1, achieving 29% year over year revenue increase driven by our strategic focus on retaining and growing large enterprise clients. We expect boost you to achieve approximately $48 million in revenue in 2025 and to be adjusted EBITDA positive by the.
Nathan Schultz: The first quarter of 2026.
Nathan Schultz: Our reinvented skills product is set up for what I believe will be a breakout year in 2025.
Nathan Schultz: <unk> provides skill building for the modern workforce, including foundational digital scaling and broad based AI training and is trending towards the highest outcomes we've seen to date.
Nathan Schultz: In Q1, we entered into a pilot program with edify online and noodle to provide AI programs that support our higher education initiative in India.
Nathan Schultz: In Q2, and Q3, we expect to further expand our business and add additional partners. We believe it skills is on a path to profitability and positive revenue growth in 2026.
Nathan Schultz: Oh, there's significant value in our library of proprietary and high quality questions and answer pairs and our network of subject matter experts, we continue to make improvements in our cost of operations with a new quality control rubric as we prepare for the content licensing opportunity I mentioned earlier as we have said many times continent, as the heart and soul of our Chegg study.
Nathan Schultz: And these improvements are QC rubric will serve both students and our new content licensing initiative.
Nathan Schultz: While we exceeded expectations in Q1 and see great value in the areas of the business I. Just went through we believe the macroeconomic trends will continue to put pressure on our company and business trends will worsen before they get better.
Speaker Change: You go on their expansion of AI overviews continues to keep track of traffic captive in the Google search experience and migrate search to Gemini. Additionally language model companies are turning to academia for validation with open AI recently, giving college students free access to G. P T plus anthropic launching a free education shirt offer.
Speaker Change: As a result, we are once again, taking proactive measures to align costs with our business outlook, we executed two restructurings in 'twenty 'twenty four and today, we are announcing further cost reduction plans.
Speaker Change: This restructuring will include expense reductions across our business, including closing physical offices in the U S and Canada by the end of the year limiting our upper funnel marketing, reducing new product development efforts and finally cutting our general and administrative expenses.
Speaker Change: Chegg skills and boost you are not affected as we are encouraged by the progress. These businesses have made and we are investing in their growth as a part of this we've regrettably will be parting ways with approximately 22% or 248 of our talented team members, which is a challenging decision and what I'm saddened by.
Speaker Change: The impact is concentrated in the U S and Canada and predominantly affects Chegg study and corporate services, which will result in a 66% reduction in these areas of our business.
Speaker Change: The actions today will drive $45 million to $55 million in savings in 2025 with full year savings of $100 million to $110 million. In 2026. This is on top of the 120 million of 2025 savings. We are on track to fully realize from our two 'twenty 'twenty four restructuring initiatives.
Speaker Change: These decisions continue to be challenging and we do not make them lately.
Speaker Change: Want to personally thank each talented team member for their contributions to check.
Speaker Change: To conclude I want to reinforce the key points for what I shared today, our strategic alternatives process is going well and is the best way to maximize shareholder value and keep chegg students first mission thriving.
Speaker Change: We believe the strategy for Chegg study, providing true learning outcomes for students is enduring and while our direct to student penetration normalizes, we're diversifying our revenue through two key opportunities and question and answer pair licensing and institutional direct contracts.
David Longo: We continue to make the hard decisions to align our revenue decline in Chegg study with her operating expenses as challenging as they are and finally, we are excited about their performance in Brazil, and the opportunity for skills, both of which are prime for a breakout year and expect it to be adjusted EBITDA positive in 2026 with that I'll turn it over to David.
David Longo: Thank you Nathan and good afternoon today, I will be presenting our financial performance for the first quarter of 2025, along with the company's outlook for the second quarter.
David Longo: We delivered a good first quarter, surpassing our guidance on both revenue and adjusted EBITDA and generated $16 million and free cash flow.
Despite ongoing industry headwinds, we remain committed to our students first strategy and prudent cost management in line with our business outlook.
David Longo: As part of this commitment we announced the restructuring today, which I will elaborate on shortly.
Additionally, during the quarter, we took further steps to enhance our capital structure by repurchasing $65 million of our 2026 convertible notes at a discount.
David Longo: In the first quarter total revenue was $121 million a decrease of 30% year over year. This includes subscription services revenue of $108 million.
David Longo: We had $3 2 million subscribers during the quarter, representing a year over year decline of 31% skill.
David Longo: Skills and other revenue was $14 million in the quarter, which included a new revenue stream from content licensing.
David Longo: So far we have executed two content licensing deals with two of the top 10 technology companies in the world generating $4 million of revenue in Q1, and we expect an additional $7 million in Q2.
David Longo: These deals represent.
David Longo: Less than 5% of our content library, and our nonexclusive, allowing us the opportunity to license the content to other companies. We are in discussion with other companies to expand licensing efforts even for that.
David Longo: In the first quarter gross margin was 56% during the quarter, we streamlined our product offerings and discontinued certain content and internal use software assets, resulting in a onetime charge of $16 $2 million of accelerated depreciation recorded in cost of revenues.
David Longo: Negatively impacted gross margin by 13 percentage points.
David Longo: non-GAAP operating expenses were $85 million in the quarter, a reduction of approximately $20 million or 20% year over year, driven by the execution of the restructuring we announced last year.
David Longo: We are on track to achieve our full year savings of $120 million from these actions the complete savings would be realized throughout this year, our first quarter adjusted EBITDA was $19 million, representing a margin of 16%.
David Longo: Free cash flow for the quarter was $15 $8 million, despite incurring approximately $8 million in cash outlays.
David Longo: Two employee severance from our restructurings.
David Longo: Capital expenditures for the quarter were $9 million down 69% year over year as we are now fully realizing the benefits of our investments in AI.
David Longo: As mentioned earlier in the first quarter, we opportunistically repurchased $65 $2 million in aggregate principal amount of our 2026 convertible note and a $7 8 million dollar discount to par.
David Longo: 2025 convertible notes matured in March and we repaid the full principal amount of $358 $9 million.
David Longo: Yeah.
David Longo: Looking at the balance sheet, we concluded this quarter.
David Longo: Cash and investments of $126 million and a net cash balance of $64 million.
Nathan Schultz: And Nathan outlined earlier, we are executing and additional restructuring and plan to continue to align our cost structure with our revenue as we navigate the continued industry challenges and a negative impact on our business.
Nathan Schultz: Restructuring will impact 248 employees or approximately 22% of the company. This restructuring will result in non-GAAP expense savings of $45 million to $55 million in 2025, and $100 million to $110 million in 2026 stemming from employee departures.
Nathan Schultz: Rationalizations and real estate savings.
Nathan Schultz: We have negotiated a penalty free agreement with our landlord to exit our Santa Clara lease prior to the exploration date as we seek a smaller office workspace.
Nathan Schultz: We expect to incur charges of approximately $34 million to $38 million related to this new structure, representing mostly severance payments of this charge, we expect $31 million to $35 million will be incurred in cash with the remaining amount representing noncash charges.
Nathan Schultz: That a substantial portion of the cash and noncash charges will be incurred in the second and third quarters.
Nathan Schultz: <unk> completing these activities and substantially all charges by December 31, 2025.
Nathan Schultz: The cost savings from the two fully implementing the restructuring was announced in 2024, coupled with the restructuring announced today.
Hilton: Hilton, our combined non-GAAP savings of $165 million to $175 million in 2025.
Nathan Schultz: Looking ahead industry challenges continue to cause a notable decline in traffic and subscriber acquisitions.
Hilton: Additionally, a source of continued pressure on our business and are impacting our financial outlook for.
Hilton: For Q2 guidance, we expect total revenue between 101 hundred $2 million with subscription services revenue between 80 $587 million.
Hilton: Imagine can be in the range of 64% to 65%.
Hilton: And adjusted EBITDA between 16, and $17 million in closing while ongoing industry challenges impacting Chegg study continue to affect our financial performance the opportunity to support and serve students remains we are taking the right steps to align the cost structure.
Hilton: At the same time, we continue to evaluate a range of strategic alternatives to ensure we are maximizing value for our shareholders.
Hilton: Average by the interest we have received with that I will turn the call over to the operator for your questions.
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Speaker Change: Our first question comes from the line of Ryan Macdonald with Needham <unk> Company. Please proceed with your question.
Ryan Macdonald: Hi, Thanks for taking my questions maybe to start wanted to get a little bit more color on the the licensing deals that you were able to sign during the quarter obviously.
Ryan Macdonald: Generating some some nice incremental revenue in first and second quarter here, but can you give us a sense of sort of the terms or if there's sort of the terms in terms of the timeframe of how long. These licensing agreements are typically last thing and then you know how are you thinking about the total size of this licensing opportunity. When you look at across all of the sort of large model <unk>.
Ryan Macdonald: <unk> is out there that you could license that's too thanks.
Ryan Macdonald: Okay. All right. Thanks very much for the question appreciate it I'll start off by just remind everyone. What we're licensing so.
Ryan Macdonald: So we're talking about here is the question and answer pairs Hunter.
Ryan Macdonald: 125 million question and answer parents within the Chegg archive.
Ryan Macdonald: And obviously constantly growing these are questions that are being created obviously through both our human and our accounting systems are there then verifying by humans, which as it comes back to your question.
Speaker Change: Why is this content so interesting.
Speaker Change: As Mark talked about we have a we feel like some of the highest quality created by qualified expert and trusted by millions of students data.
Speaker Change: That is very valuable in Hawaii, and Guam companies as they seek to continue to train their models.
Speaker Change: And as David pointed out and I pointed out in my prepared remarks, we are really early days in this.
Speaker Change: License very very very small set of our content at the moment as we kind of just.
Speaker Change: Hi.
Speaker Change: I would call kind of these agreements into for me the biggest tech companies in the World I do think that there is a nice business model here.
Speaker Change: Rich just getting started with this with this program.
Speaker Change: Got it and then maybe as a follow up great to see that the pilots with the universities are continuing to grow and you've got expected at 40 by year end can you just talk about sort of what the feedback youre getting from University partners, Thus far and then sort of the willingness to pay.
Speaker Change: Hey, and purchased the content library is that point of access for students.
Speaker Change: Yes, absolutely.
Speaker Change: We're very encouraged.
Speaker Change: Growth, obviously from Q4 of last year to Q1 this year.
Speaker Change: 15 pilots has is having momentum where we can see for you for this year.
Speaker Change: Could you remind everyone. What this is.
Speaker Change: It's about.
Speaker Change: Institutions on delivering our experience directly to the student, which we think it's really great obviously for CAG, but even better for students.
Speaker Change: <unk> gone through a fee based license model.
Speaker Change: So obviously the schools are buying number of seats.
Speaker Change: Honestly. This is one of those areas where were we just we see the inevitable, which is schools having to spend more time thinking about persistence.
No.
Speaker Change: You can probably I know theres almost 40% of students graduated college that causes a kind of a massive hall on tuition.
So.
Speaker Change: Now we see this as a significant opportunity as colleges simply just getting to kind of zero win on field success as it means really financial necessity.
Speaker Change: So very encouraged by what we see so far and.
Speaker Change: Again, getting very positive feedback from schools.
Speaker Change: Looking to take some of those pilots control kind of run for the next few months and then turning them into full contracts.
Speaker Change: Hello.
Speaker Change: Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad will pause a moment to allow for any other questions.
Thank you we've come to the end of our question and answer session and this concludes our question our call today.
Speaker Change: We'd like to thank you for your interest and participation you may now disconnect your lines.
Yeah.
Speaker Change: Goodbye.