Chegg, Inc. Price & Performance (CHGG)

A copy of our earnings press release along with our investor presentation is available on our Investor Relations website investor.chegg.com Chegg. 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 chehed.com/mediacenter Chegg. We encourage you to make use of these resources. Before we begin, I would like to point out that during course of this call, we will make forward looking statements regarding future events including the future financial and operating performance of the company. These forward looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward looking statements. In particular, we refer you to the cautionary language in included in today's earnings release and the risk factors described in Chegg's annual report on Form 10 ks for the year ended December 31, 2024, to be filed with the Securities and Exchange Commission. 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 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 on our earnings press release and the investor slide deck found on our IR website investor.chegg.com. We also recommend you review the Now, I will turn the call over to Nathan.

Thank you, Tracy.

Hello, everyone, and thank you for joining fourth quarter earnings call. Before I cover our twenty twenty four accomplishments and 2025 focus, I want to make sure the two announcements we are making are clear. First, we announced we are undertaking a strategic review process exploring a range of alternatives to maximize our shareholder value. Including being acquired undertaking a GoProver transaction, or remaining as a public standalone company. Second, we announced the filing of a complaint against Google LLC and Alphabet These two actions are connected as we would not need to review strategic alternatives if Google hadn't launched AIO reviews or AIO retaining traffic historically had come to Chegg materially impacting our acquisitions revenue and employees. KEG has a superior product for education. As evident by our brand awareness engagement and retention, Unfortunately, traffic is being blocked from ever coming to Chegg because of Google's AIO their use of Chegg's content to keep visitors on their own platform.

We retained Goldman Sachs as a financial advisor in connection with strategic review he softened Godfrey with respect to our complaint against Google. As the education industry at large continues to transform, Chegg has strengthened its commitment to serving students with a clear focus on those seeking to build knowledge and achieve success along their academic journey. Through focused investment over the past year in the integration of cutting edge technology We have advanced the Chegg product offerings to deliver a comprehensive personalized and verticalized learning experience for higher education. The Chegg today provides precisely what learners need and ensures that Chegg maintains a strong reputation for quality and trust. Into our product stack. We blended third party AI models with our proprietary student focused data and high quality content. Delivering more value to Alert. We are AI model agnostic seamlessly incorporating new frontier models like LAMA, Endropic, Mixtrel, GPT and new models as they become available. We use techniques like AB testing, multi shot prompting and retrieval augmented generation to improve how our AI learns retrieves information in real time delivers consistent results. With this work complete, are now building verticalized applications for education at a fraction of the time and cost while also increasing our level of personalization.

As we've mentioned before, our implementation of machine learning and multiple AI models has significantly reduced the cost of creating content by more than 70% while keeping our quality at high standards students expect. We stand by our quality of our content so much that in Q3, we implemented a satisfaction guarantee. On branded marketing last fall, we launched an innovative brand marketing campaign in Activation program that reinvigorated top of funnel traffic creating strong consideration bringing in new users ultimately driving conversion. As a result of our full funnel program, we've seen year over year [indiscernible] on this commitment in 2025.

With regard to TikTok specifically, we were able to able to capture a 16% increase in awareness among underclassmen. On the product, we have significantly advanced and differentiated Trig's AI powered question and answer experience. At the front end, we have simplified the question submission process allowed for more natural inputs and interaction. Learners now instantly receive step by step explanation and reinforcement adaptive and personalized based on their individual strengths and weaknesses. Finally, at conclusion, Chegg proactively offers students a variety of unique recommendations called next best actions to reinforce and further their learning. These product upgrades resulted in 66% more questions being asked in 2024 versus 2023. Adding nearly 26,000,000 additional solutions to our archive and contributing to 15 basis point increase in subscriber retention over the course of the year. Finally, I want to touch on Busu, our language learning service which has done a tremendous job transitioning to a freemium business model and integrating AI as a key product feature with the introduction of speaking practice.

The strategic refocus increased the first thirty day conversion rate to paying customers by 31% and led to a 9% year over year revenue growth for 2024. A trend we expect to continue in 2025. The enterprise part of this business is performing very well. With revenue up 46% in 2024, as we added an impressive set of enterprise customers including Total Energy and Care4. Enterprise business will continue to expand with additional organizations, reseller relationships and our successful partnership with Guild, specifically with their English language learning category. We have made significant headway on our technology, products and marketing programs, 2024 came with a series of challenges. Including the rapid evolution of the content landscape AIO, which as I previously mentioned, had a profound impact on Chegg's traffic, revenue and workforce. As already mentioned, we are filing a complaint against Google LLC and Alphabet Inc.

The U. S. District Court for the District of Columbia. Making three main arguments. First is reciprocal dealing. Meaning that Google forces companies like JAG to supply our proprietary content order to be included in Google search function. Second is monopoly maintenance or that Google unfairly exercises its monopoly power within search and other anticompetitive conduct to muscle out companies like Chek. And third is unjust enrichment, meaning Google is reaping the financial benefits of Chegg's content As we alleged in our complaint, Google's AIO has transformed Google from a search engine into an answer engine. Displaying AI generated content sourced from third party sites like Chegg Chegg. Google's expansion of AIO forces traffic to remain on Google limiting the The impact on Chegg's business is clear. Our non subscriber traffic plummeted to negative 49% in January 2025 down significantly from the modest 8% decline we reported in Q2 of twenty twenty four. We believe this isn't just about Chegg Chegg. It's about students losing access to quality step by step learning in favor of low quality unverified AI summaries. It's about the digital publishing industry It's about the future of Internet search. In summary, our complaint challenges Google's unfair competition is unjust harmful and unsustainable While these proceedings are just starting, we believe bringing this lawsuit is both necessary and well founded.

While the challenges we outline will persist, we are focused on the clear goals stabilizing the business through the course of 2025. We are driven by the core belief that the relevancy and need for comprehensive student success platforms offering an adaptive personalized experience to support learning will only increase over the coming years. Administrators and faculty are acknowledging the need to change their teaching and teaching models and assessments to better reflect the AI normalized environment we are now in. The dramatic disruption that came with the launch of generative AI platforms has started to stabilize as schools now understand the significant risk and impact of students GPT ing their way through their educational journey. This view is widely supported some recent studies. First, a study from the American Association of Colleges and Universities and Elon University explored the impact of generative AI on academic integrity with ninety two percent of faculty worried about AI undermining deep learning by overreliance on AI tools. And ninety five percent of these leaders saying the teaching models after school will be affected significantly or to some degree by generative AI. Second, the latest addition of Chegg's global student survey measured the insights of nearly 12,000 undergraduate students in 15 countries. 53% of undergraduate students who have used Generative AI voice concerns about receiving incorrect or inaccurate [indiscernible] Third, we conducted proprietary research on student personas and learned that at least eighty two percent of The U. S. College students wants more than what GPT offers.

These students need to develop knowledge, not just get grab and go answers. So as 2025 gets underway, here's where we are leaning in. In 2025, on brand and marketing, we are continuing to raise brand awareness and improve conversion rates.

In January, we debuted our Get a Grip brand campaign featuring our new amazing mascot, Ace the Octopus. Physical representation of Chegg allows us to connect with our audience fun way, clearly conveying how we are on and by students' side throughout the semester, In addition, we are continuing our expansion into new media channels including streaming platforms like Hulu and YouTube and social channels like Discord and Twitch. We also launched live office hours on social media channels to provide students with instant live course [indiscernible] We aim to provide an interactive community based learning opportunity while introducing our brand and value to new users. Our goal is to have more than 1,500,000 students attend our live programming this year. Diversification is key to funnel resiliency in taking a full funnel approach is necessary to making sure we bring in the right traffic and regrow our customer acquisitions. In 2025 on products, we [indiscernible] experiences where the variety and acquisition growth and retention and making these experiences as universally available as possible.

First is Solution Scout, a new product we launched earlier this month. As I mentioned earlier, students lack trust in generative AI and they've told us that they're spending too much time triangulating comparing verifying solutions across multiple platforms. This resulted This results in an incredible amount of wasted time that could be spent learning. Solution Scout allows students to see side by side answers from multiple LLMs along Chegg's solution. But what's most important is that Chegg Chegg our proprietary technology can compare and contrast the solutions providing students a massive time save and value in our early indications are very positive.

We're also excited to launch an updated feature set for practice and exam preparation personalized to each student in seventy one percent of students report that they do not have adequate practice resources when preparing for exams and Chen can help coach each student to confidence. Monthly, our platform collects more than 3,000,000,000 data interaction points. Enables us to customize and personalize this experience. Along with our personalization, students, can change the difficulty in format of questions, whether they want to learn via flashcards, multiple choice or word problems. Students need to gain competency in their studies and practice tailored specifically to their individual strengths and weaknesses is how they will do it. This is a check that exists right now. Our goal of our platform is simple. We want students to thrive. We want students to have a wow moment with Chang. Chegg! Chegg is not just a graph and go answer, Wowchegg is not just generative AI. That wow moment is when a student realizes Chegg understands me and my specific needs and is a platform I can use every day to succeed in my education educational journey. This wow moment is what will unlock our ability to stabilize our business.

Finally, on the expansion of our business model in 2020 I want to touch on our enterprise strategy, which enables us to diversify and generate recurring revenue streams. We're continuing to expand our business institution pilot program, which began in 2024. With five pilot programs active, we hope to work with approximately 35 of additional institutions by the end of the year.

There's a tremendous opportunity to support a broader range of students in achieving their academic goals and increase persistence and graduation rates which is a major issue in higher education today. We've seen early receptivity and positive feedback on how these pilots are already helping students and hope to move a number of them into full campus wide implementations by the end of the year. Before I hand it over to David, I want to what's most important from today's call. We announced that we are undertaking a process to review strategic alternatives and we filed a complaint against Google. In addition to this, here are the keys to our 2025 strategy to stabilize our business. Key number one, build brand awareness, drive more qualified traffic, increase conversion rates. Key number two, expand our product set to offer unique solutions for students that increases the frequency of use and creates clear and differentiated value per Chegg. Key number three, diversify our revenue streams with business to institutional programs and other enterprise offerings. We continue to have a strong and trusted brand customer base with millions of global subscribers, a large market opportunity and amazing employees to get the job done.

We believe 2025 will mark a turning point for Jank Chegg.

With that, I'll turn it over to David. Thank you, Nathan, and good afternoon. Today, I will be presenting our financial performance for the fourth quarter twenty twenty four along with the company's outlook for the first quarter of twenty twenty five.

We delivered a solid fourth quarter surpassing our Q4 guidance for both revenue and adjusted EBITDA.

While navigating industry challenges, we remained laser focused on executing our strategic plan enhancing our product market fit and continuing to prudently manage our expenses. We remain on track to achieve 2025 non GAAP savings of $100,000,000 to $120,000,000 from our previously announced restructuring activities. Additionally, we strengthened our balance sheet by repurchasing 117,000,000 of our 2026 convertible notes at a significant discount.

In the fourth quarter, total revenue was $143,500,000 a decrease of 24% year over year.

This includes subscription services revenue of $128,500,000 down 23% year over year. We had 3,600,000 subscribers during the quarter, representing a decline of 21%.

Subscription services ARPU decreased by 3% year over year.

Primarily driven by a temporary dip in our monthly retention rates November and December which has since returned to historical norms.

Skills and other revenue was $14,900,000 down 31% year over year due to the market shift away from traditional boot camps to lower cost short form programs, and a decline in advertising revenue from reduced traffic and sessions across our platform. We delivered adjusted EBITDA of $37,000,000 representing a margin of 25%. As mentioned earlier, in the fourth quarter, we opportunistic we opportunistically repurchased $116,600,000 in aggregate principal amount of our 2026 convertible notes at a $20,000,000 discount to par. Free cash flow for the fourth quarter was $4,800,000 despite incurring approximately $25,000,000 in cash out outlays related to employee severance from our two restructuring, which we laid off more than 700 employees as well as the Pearson legal settlement. As anticipated, we expect another $11,000,000 in cash restructuring payments with a significant portion to be incurred in Q1. Capital expenditures for the quarter were $13,000,000 down 52 and of which $8,700,000 were content costs. Leveraging the power of AI, CapEx content costs have decreased 56% year over year while the number of questions asked increased 2%. Looking at the balance sheet, we concluded the quarter with cash and investments of $528,000,000 and a net cash balance of $42,000,000 Looking ahead, as Nathan detailed earlier, However, as we work towards realizing the benefits of these initiatives, industry challenges are causing a notable decline in traffic and subscriber acquisition.

These factors are putting pressure on our business and impacting our financial outlook. For Q1 guidance, we expect total revenue between $114,000,000 and $116,000,000 with subscription services revenue between $104,000,000 and $106,000,000 Gross margin to be in the range of 66% to 67% and adjusted EBITDA between $13,000,000 and $14,000,000 In closing, despite the ongoing industry challenges that are putting pressure on our financial performance, we made significant progress in 2024 by building technology integrating AI and enhancing products. All while prudently managing expenses. We entered 2025 with a solid foundation and are focused on stabilizing business trends.

With that, I will turn the call over to the operator for your questions. We respectfully advise that we will not be taking questions related to the company's strategic review process.

Thank you. And our first question comes from Eric Sheridan with Goldman Sachs. Thanks so much for taking the question. Maybe I'll just ask one. With respect to to the Q1 twenty twenty five guidance, just want to understand if you can unpack a little bit the incremental op [indiscernible] can translate into in terms of incremental adjusted EBITDA when you measure against fixed versus variable costs in the business and or some of the key investment initiatives either brand, traffic or product that you see as pretty critical to make in 2025? Thanks so much.

Yes. Thanks. So this is David. Thanks for your question. And yes, our our model ends up being super efficient in terms of the gross margin and falling directly to the bottom line. So our Our overall [indiscernible] If we added an incremental $1,000,000 worth of sales, I think we're dropping $900,000 of that to the bottom line. It's just it's super efficient in that sense.

And then on the on the investment side for the all the product initiatives that we have, in the first half of the year, we're rolling out the the comparison tool and also the next best actions on tests and practice. [indiscernible] We're optimistic that that's going to drive more engagement, more higher retention, marketing. We're increasing our funnels to bring traffic back to the site, which will lead to acquisitions and both. So thank you. And our next question comes from Ryan MacDonald with Needham and Company.

Please proceed with your question. Thanks for taking my questions. Maybe just start curious to hear a bit more about this sort of shift into new revenue streams and sort of the enterprise offerings and business to institution programs. Maybe just with the pilot programs you have with the institutions right now, can you talk about how what the pricing model looks like that is in sort of the institutions sort of paying for access to Chegg and then sort of like including it or rolling it into tuition or how should we think about how these pilot programs kind of create monetization opportunities?

Thanks. I appreciate the question, Ryan. It's Nathan. Let me start back up a bit on the business institution side. Just remind everyone that program we started last year really for some inbound interest from schools. The [indiscernible] solution they're looking for is around the area areas of persistence and graduation, because we all understand the demographics in The U. S. We're going to have around 19,000,000 students in the system. The freshman class is going to be about equal size coming in year after year. We're dealing with graduation rates that are only the sixty percent range. And so you got students that are falling out of the system. And that's really a significant issue particularly when you look at some of the government policy that we're looking at, the [indiscernible] that we're watching. So schools are very interested in how do we serve students as a customer, how do we provide them with the right tools and the right services to help them not only conquer their academic journey, but also start to acquire skills that they're going to need as they leave college to get a job. So very excited about the program. We've got a number of pilots under belt right now.

I'm looking to have 35 more pilots throughout the course of this year. And more interesting looking to then take those pilots into full campus wide implementation.

The goal of the pricing model, it's pretty simple. It's a seat based pricing program We're trying to make sure that we can get every student into the platform and provide tools for every student. So excited about the early traction we've got there, excited about some of the early partners we've got going on, and we'll look to tell you more in future quarters.

And our next question comes from Brian Smith with JPMorgan. Please proceed with your question.

Great. Thanks for taking the questions. I guess, just to start, can you talk about churn throughout the quarter? I think you had mentioned, a slight dip in ARPU as well in November and December. So just curious in between ARPU trends and retention trends and how that may differ versus a sub Yes, sure. Thanks, Brian. This is David. I guess I'll start with the retention. We had a lot going on in the quarter as we rolled out our pricing sorry, our satisfaction guarantee. And we were dealing with the traffic issues that we talked about earlier on the call. So we did see we retention dip in November and early December. We're still dissecting a bit on on what happened. It did return to its historical level in the December and has flattened out in January and February. So far. So we're happy that it's kind of leveled that it has leveled off to our historical levels. It just was a funky time. We We were looking at it really closely. We never got an exact answer on it, but it could have been, as I think you were suggesting there is as users were playing with other tools and types of things, they could have, you know, popped in for a shorter period of time or left but it was only for five or six week period.

There was some lockiness with the calendar for when the final is came in versus the prior year because Thanksgiving fell trying to remember it now, it was two months back, but Thanksgiving was later this year than it had been in the year before. So there's a lot going on and we're trying to learn as we go, but we're happy that it's it's back to the levels we were looking for this year. So thanks Brian.

Thank you. Our next question comes from Josh Baer with Morgan Stanley. Please proceed with your question.

Great. Thank you. I have a couple on the Solution Scout. Just wondering is the strategy behind that to sort of showcase that Chegg's solutions are superior from the other LLMs? Or is it more about giving students choice and a bunch of different options. Hey, Josh. Nice to hear from you. It's Nathan.

To be honest with you, it's a little bit of both at the heart of it. One is we want to make sure we've always been kind of around this making sure we save students time. And we give them tremendous amount of value. When we talk to students, we see that they're triangulating a bunch Try and getting through a number of different sources, trying to figure out what the answers are, what the solutions are, what they're trying to learn from that. It's It's a terrible time waste. And on top of that, as you heard from the prepared remarks, about 53% of the college students that we have surveyed through our global student survey, which just covers about 12,000 students in 15 countries, over a long majority of them are questioning the accuracy of generative AI. And so we wanted to one, save students time and bring these our as we talked a little bit about our 2024 technology investments, We've built a really unique AI infrastructure that is kind of using multiple language models or or model agnostics or we're able to take a question, understand it against how Chegg answers it, understand it against the other frontier models that are out there.

We think that's a really valuable tool for students. But what's most important is then we're to kind of do some extrapolation on top of that, of our results versus someone else's results and start to pinpoint for students what the differences are, what the similarities are and really what should what could you be doing next with that question? That's where our like our next best actions start to come into play and we start to drive more and more engagement. Through that. So we're trying to mirror what we're seeing college students doing already and naturally, saving them time, being a value for them but also showcasing some of the really proprietary and cool tech that we have and learning science we have.

Thank you. Our next question comes from Brian Peterson with Raymond Please proceed with your question.

This is Jessica on for Brian. I just want to follow-up on a prior comment or question about the institutional initiative you have. When these schools are coming to inbound, what are some of the key factors that are also considering for partnership with Chegg. Chegg also kind of curious, are these institutions helping you build student awareness of Chegg's full value proposition? So it's not just about personalized homework help, but also about your partnerships that you have that address a full student life.

Yes, absolutely. I mean, so the primary reason set it up, I think I heard the question correctly and pause it if I didn't, These organizations are coming is around The area of persistence and ultimate graduation, right? Schools need students to persist in order for students to continue on and ultimately get to that graduation point. And so schools are recognizing that students are already using a host of services And we could be doing a lot more a lot better of a job to service the students if we bring those services closer to the course. So what I mean is when Chegg and the school are partnering together, we're working together to make sure that our services are kind of tuned for that institution. And for the courses they're teaching and for the student body that is engaging with it. So yes, there is a partnership in there that the school is going is making sure the students are aware of the service. And making sure that our services are aligned with it. And we're also working very hard to make sure that we're upholding the academic standards and honor codes of those schools, which is so important to the pathway, I think, or making sure that the assessments in America are authentic and students are really learning the content versus just passing off a grab and go answer that they can get off the Internet.

And our next question comes from Brent Thill with Jefferies. Please proceed with your question.

Thanks. For Q1 on the guide, embedding further acceleration in the business. I'm just curious if you can help us understand what you're embedding what are the assumptions underneath the guide for Q1?

Yes. Hi, Brent. It's David. So excuse me. It's basically the continuation of the trends that we saw in the December, the retention flattening back out to the levels we wanted and then baking in the traffic and acquisition that we've been able to achieve through basically two thirds of the way through the quarter already. So we have good visibility into the students right now that are in current semester, how they've been retaining historic [indiscernible] the overall decline in the traffic that we saw, which is continuing to eat into our acquisitions, hence the guide down even more in Q1 over Q1 versus the Q4 on the year over year. But those numbers are pretty well baked at this at this period of time. So we're just plugging away and the new product initiatives, pushing the new marketing initiatives that we have, so that we can eventually call the bottom here and see the improvements in the back half of the year. Thank you. And our final question comes from Devin Al with KeyBanc Capital Markets. Please proceed.

Great. Thank you.

Quick questions if I may. First one just follow-up on the temporary retention impact that you called out.

Any numbers you can share on how material that impact was to fourth quarter results? And secondly, just curious if you can talk about more about your promotional pricing. Strategy there in international. It's we could see any sort of moderation in headwinds or ARPU there in the near term? Yes. Hi, Devin. It's David again. So on that temporary dip, I don't have a number to pinpoint here. In the moment, but we're talking a couple of percentage points of retention. So if you kind of extrapolated that over the revenue in the quarter, you're putting myself on the spot here. Probably talking a couple of $3,000,000 worth of impact. And the bigger worry there was if that continued over time In addition to customer acquisition leakage year over year, it would be a double whammy for us. Whereas we've been very consistent and pleased with our retention rates historically and we believe that that's because the students who do eventually get to us and try us and pay for us, they they find the value in that and they'll keep paying. We're very happy that it's gone come back to its historical levels.

The promotional pricing on international, yes, promotional pricing, pricing leverage, pricing points, whatever we want to call it, Those are things that frankly, we're playing with playing around with all the time. We at this time last year, have been doing a ton of promotional pricing recognizing that internationally you could bring in more folks, keep them for longer periods of time. And then we we sort of started walking back from that a little bit earlier in the middle of last year. Just because we were seeing that totality of the total LTVs, it just wasn't there to to make up for the lower prices. So we have rolled back a lot of that promotional pricing through the back half of last year. But that said like we're now because we're always experimenting, we did kick back some of that promotional pricing in call it early February. As we were looking to jump start the total international sub number. So long way of saying we're constantly playing with it. We haven't it isn't that we've landed on one lower prices all the time strategy. We just we are adjusting as we go in terms of where we sit in the calendar year as a student calendar years especially.

So know that makes it hard to model. I apologize for that, but we're just trying to the best we can to optimize that LTV. For each student.

This does conclude today's teleconference. And our question and answer session. We thank you for your participation. You may disconnect your lines at this time. [indiscernible]