Chegg Inc. eported financial results for the three months ended March 31, 2023.
“As artificial intelligence technology continues to evolve at a rapid pace, we are embracing it aggressively and prioritizing our investments to meet this opportunity,” said Dan Rosensweig, CEO & President of Chegg in a prepared statement. “We believe we are in the best position to take advantage of the advancements in AI for the benefit of students, because we can leverage our proprietary data, our 150,000+ experts, and our decade-plus years of experience as we launch CheggMate.”
First Quarter 2023 Highlights
- Total Net Revenues of $187.6 million, a decrease of 7% year-over-year
- Subscription Services Revenues declined 3% year-over-year to $168.4 million, or 90% of total net revenues, compared to 86% in Q1 2022
- Net Income was $2.2 million
- Non-GAAP Net Income was $38.1 million
- Adjusted EBITDA was $57.6 million
- 5.1 million Subscription Services subscribers, a decrease of 5% year-over-year
Total net revenues include revenues from Subscription Services and Skills and Other. Subscription Services includes revenues from our Chegg Study Pack, Chegg Study, Chegg Writing, Chegg Math, and Busuu offerings. Skills and Other includes revenues from Thinkful, Advertising, and any other revenues not included in Subscription Services.
Business Outlook
Second Quarter 2023
- Total Net Revenues in the range of $175 million to $178 million
- Subscription Services Revenues in the range of $159 million to $162 million
- Gross Margin between 72% and 73%
- Adjusted EBITDA in the range of $53 million to $55 million
Prepared Remarks, Dan Rosensweig, CEO & President Chegg:
Thank you, Tracey and welcome everyone to our 2023 Q1 earnings call. Chegg had a solid quarter, ending Q1 above our guidance on total revenue and adjusted EBITDA. As we shared with you during our last call, we believe that generative AI and large language models are going to affect society and business, both positively and negatively, at a faster pace than people are used to. Education is already being impacted and, over time, we believe that this will advantage Chegg.
In the first part of the year, we saw no noticeable impact from ChatGPT on our new account growth and we were meeting expectations on new sign-ups. However, since March we saw a significant spike in student interest in ChatGPT. We now believe it’s having an impact on our new customer growth rate.
Fortunately, we continue to see very strong retention rates, suggesting that those students who already understand the value of Chegg continue to choose us and retain us at high rates. We are also expecting a positive recovery in enrollment trends, which historically would be good news for Chegg. Because it’s too early to tell how this will play out, we believe that it’s prudent to be more cautious with our forward outlook. Therefore, we intend to provide only the next quarter’s guidance at this time and Andy will walk you through those details shortly.
We can all see that AI technology is evolving at a very rapid pace, and at Chegg we are embracing it aggressively and immediately. Throughout my career, I have witnessed the most significant technology platform shifts - from the creation of the internet to the explosion of mobile, and the movement of software to the cloud - and we believe that AI is the next big shift. Several months ago, I met with Sam Altman to discuss the future of AI and education and coming out of those discussions, we quickly reoriented our company to focus and prioritize on the utilization and incorporation of AI into Chegg services.
The first big step is the introduction of CheggMate, which we recently announced in cooperation with OpenAI. CheggMate will harness the power of ChatGPT, paired with our proprietary data and subject matter experts, to make learning more personalized, adaptive, accurate, fast, and effective – all in an easy to use and conversational manner. The combination of Chegg’s experience over the last 13 years of improving student outcomes, and our proprietary learning taxonomy, the 150,000 subject matter experts in our network, and the billions of pieces of unique learning content that Chegg owns, when coupled with the real-time conversational nature of ChatGPT will establish CheggMate as a powerful and distinctive learning tool, offered exclusively from Chegg.
Based on our research, 85% of students would prefer to have human experts involved in their study support, which is why we believe that the future of learning is a blend of AI technology with human-based support to build trust and ensure accuracy and relevancy. Ultimately, we believe the introduction of CheggMate will lead to an increase in the size of the market we serve and strengthen our relationship with our users, while reducing content costs.
Large language models are currently used horizontally, similar to search, but history suggests, that over time, focused and category leading verticals are where enduring value is created. CheggMate is being designed for learning and tailored to an individual student’s learning style and needs. It will offer personalized assessments, practice tests, and instant feedback along with Chegg’s proprietary step-by-step solutions. We are moving very fast with a beta launch of CheggMate later this month and, as we test and iterate, we will expand access throughout the year.
As with all Chegg services, our goal is to deliver improved outcomes and overwhelming value. With our recently introduced partner offerings from DoorDash and Calm, we are seeing the benefits of adding non-academic content to our subscriptions with improved retention. These value-added partnerships are creating more value for our subscribers and strengthening the Chegg brand, and we expect to add more offers in the future.
Our partnership with Guild also continues to perform extremely well and we see an even bigger opportunity ahead for us in our Skills business. We are introducing new offerings, including Busuu, our award-winning language learning product, as we expand the catalog of course offerings through Guild. Other new additions include UX Design and Frontline Leadership programs, while future courses will focus on the latest advancements in artificial intelligence to meet both student and employer demand. To improve learning outcomes even more, we expect to add real-time conversational support to all of our skills-based courses, which we believe will improve completion rates.
While we are talking about Skills, I want to take a moment to acknowledge the recent news that John Fillmore, President of our Skills business, will be leaving Chegg after 10 years. John is ready to take another big step in his own career, one which we wholeheartedly support. John served in a variety of key roles at Chegg during his tenure and I cannot thank him enough for his friendship, counsel, wisdom, and leadership over the last decade. I also want to take the opportunity to welcome Colin Coggins, who joins us today as our Senior Vice President of Chegg Skills.
Our priorities outside of North America are to make our services more personalized and accessible to everyone and to localize content and pricing so we can expand into new geographic markets. To that end, in Q3 we plan to roll-out a new payment system for India to capture customers during the peak back-to-school season. And in countries like Turkey, Mexico, India, and South Africa, we continue to see our roll-out of local subscription pricing or localized content and user experiences as a growth lever. In fact, Q1 2023 was an all-time high for app acquisitions in Mexico, where we recently rolled out our localized app.
We are excited and optimistic about the future and are moving fast to leverage the best of AI to advantage the student. Our unique position in the industry, coupled with our deep expertise in learning, enables us to make this future a reality and will enable us to grow our business for the benefit of our customers and our shareholders. These transitions don’t happen overnight and are rarely smooth at the start. Our position as a category leader and our focus exclusively on the needs of students, has led to great brand recognition and incredible customer loyalty for Chegg. With 13 years of experience educating students, our proprietary and proven learning taxonomy, our billions of pieces of unique learning content – created by more than 150,000 subject matter experts – combined with exciting benefits of AI, will propel Chegg into the future. We are embarking on a new chapter for our industry and certainly for Chegg and we are making the adjustments we need to meet this opportunity head on. We are confident we have the brand, platform, balance sheet, operating model, and experience to make the appropriate investments needed for the future and enhance our position as a leader in the industry.
And with that I will turn it over to Andy…
Prepared Remarks: Andy Brown, CFO Chegg
Thanks Dan and good afternoon everyone.
Q1 was a solid quarter as we met or exceeded our revenue and adjusted EBITDA guidance and delivered strong cash flow. Total revenue was $188 million, driven by Subscription Services revenue of $168 million. During the quarter we had approximately 5.1 million subscribers on the platform. Skills and Other revenue was $19 million, driven by strong growth in Skills offset primarily by the change in Required Materials model, which is now a revenue share. Gross margin came in slightly higher than expected which contributed to adjusted EBITDA beating guidance, which came in at $58M, or 31% margin, and free cash flow was $56 million, the result of a strong operating performance and higher interest rates, with interest income contributing $11 million in the quarter, an increase of $10M from the year-ago quarter.
Looking at the balance sheet, we ended the quarter with $1.2 billion of cash and investments. During the quarter, we entered into an accelerated share repurchase agreement of $150 million which we expect will reduce outstanding shares by approximately 7% percent and will be completed during Q2. We continue to believe the combination of our operating model, balance sheet, and cash flows are among the strongest in the education industry, which will allow us to continue to drive long-term shareholder value.
Moving on to guidance. While we continue to have confidence in our ability to forecast the current quarter, given recent industry developments our visibility beyond that is less certain. As such, we will be guiding to the current quarter only, while these conditions exist. Given this limited visibility, we are also evaluating areas to reduce existing expenses and CAPEX to maintain industry-leading margins and cash flow, even as we lean into important investments in AI.
For Q2 we expect:
- Total revenue to be between $175 and $178 million,
- With Subscription Services revenue between $159 and $162 million,
- Gross margin between 72% and 73%,
- And adjusted EBITDA between $53 and $55 million.
In closing, we expect our investments in AI will drive long term shareholder value as we believe embracing this technology allows us to better serve students. And we believe there is nobody better equipped to meet the current or future needs of students, than Chegg. With an industry-leading brand, as well as a strong operating model and balance sheet that allows for investments, all while driving best-in-class margins and cash flows.