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spk06: Ladies and gentlemen thank you for your patience the teleconference will begin momentarily. Greetings and welcome to the Chegg first quarter 2023 earnings conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tracy Ford. Please go ahead.
spk04: Good afternoon. Thank you for joining Chegg's first quarter 2023 conference call. On today's call are Dan Rosenzweig, 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.chegg.com. A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our Media Center website at chegg.com slash Media Center. We encourage you to make use of these resources. 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 certainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements. In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg's annual report on Form 10-K filed with the Securities and Exchange Commission on February 21st, 2023, as well as 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 measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found on our earnings press release and the investor slide deck on our IR website. investor.chegg.com. We also recommend you review the investor data sheet, which is also posted on our IR website. Now I will turn the call over to Dan.
spk03: Thank you, Tracy, 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 signups. However, Since March, we saw a significant spike in student interest in CHAT GPT. 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 CHAT 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 CHAT. 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've 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 in 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 Chegnate 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 subscription 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 skilled 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 it to 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 rollout of local subscription pricing or localized content 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 students. 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 improving 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. Andy?
spk10: 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, offsets, 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 $58 million, 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 and increase of $10 million 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% 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. With that, I'll turn the call over to the operator for your questions.
spk06: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Jeff Silver with BMO Capital Markets. Please go ahead.
spk15: Thanks so much for taking my question. I'm just really curious, what happened in March? I know on the last call, you really weren't seeing much of an impact. You repeated it today in terms of jet GPT. But what changed in March? What do you think?
spk03: As we said in the prepared remarks, we're beginning to see on the margin. It's not substantial yet. It's just on the margin that based on our research that people normally who would have paid for us around midterms or closer to finals that were reluctant to pay or be longer-term subscribers now have a new free site to go try. And we've defeated all the free sites in the past pretty handily over time. And we expect with Chegmay we'll have great success going forward, but on the margin, these customers matter in subscription businesses. And given the fact that, and as we put in the thing in our prepared remarks, that obviously it's the fastest usage of a product ever to 150 million fastest growing product. And obviously students are the first to try these things. So we're just being prudent in the short term as we roll out Checkmate in the long term. We're still bringing in millions of new customers. It's not about that we're not bringing in new customers. It's just not the level that we expected or wanted right now. And until we come out with Checkmate and build that product and get it out, we're just being prudent and careful. So what we saw was what you've seen, which is a tremendous uptick in interest and in usage. And the good news for us is that we're still bringing in millions of new customers a year and Our renewals are extraordinarily high, and the take rate for CHEC study is high. So all those things were good news, but when CHEC CP4 came out in March, it just did another bump of usage, and we're just being smart because we really won't know anything until the end of August, early September, because the summer doesn't really reveal anything. So that's it.
spk15: Okay, appreciate that. Andy, you talked about evaluating areas to reduce expenses and CapEx. even though you're still going to be spending in AI. Can we talk a little bit about that? I don't know if there's any color. How much are you planning on spending in AI or Cheggmate? And what are your goals in terms of maintaining margins?
spk10: Yeah, so, I mean, our clear goals on maintaining margins is to continue industry-leading margins and cash flows like we have for the past many, many years. As far as areas where we're planning on making changes, I mean, there'll be – I'll call it resource reallocation to on AI and making sure we have those resources there. But it's still a little bit early. Dan, as Dan mentioned, the product comes out, the initial product, the beta product, I should call it, comes out this month. And we'll continue to make incremental investments in, shift investments to AI. And we do expect over the long term that we'll have a moderating impact, particularly on our CapEx. But once again, it's early, and we'll make the appropriate adjustments, you know, over the next, you know, several quarters to ensure that we have, you know, high margins and strong free cash flow.
spk02: All right. Appreciate the call. Thanks.
spk06: Next question, Doug Anmuth with JPMorgan. Please go ahead.
spk14: Thanks so much for taking the questions. Maybe just to follow up on AI and some of the investments, I guess just, I'm curious not just what kind of costs you might need to incur around Checkmate, but what kind of investments do you need to make just from a hiring perspective or personnel? Do you feel like you have the right team and everything that you need in place to become more of an AI business going forward? And then second, I was hoping you could talk a little bit about the skills business with new leadership in place, just more about the strategic vision and and product roadmap and how we should think about some of the guideposts in that business going forward. Thanks.
spk02: Thanks, Doug.
spk03: So on the AI side, we've been fortunate that we've been working with AI technology for the last many years. So in terms of skill sets and the core team, we have all that and that's good. However, we are shifting and have been shifting immediately and aggressively our team to be faster and more nimble about getting Chegg made out because it's an exciting time for us, to be honest with you. We think the combination of what they can do, our content, our data, our learning taxonomy is the special sauce that will differentiate us. And so we're actually very excited about it and very motivated to move quickly, not just for the competitive reasons, but because of the size of the opportunity reasons. So we'll likely be... continuing to shift personnel that we have and adding personnel. And we'll be refocusing our priorities on AI and skills, as you mentioned, because those are the big growth areas of the company. And we're excited about those. In terms of the cost, given our CapEx budget, we believe that for the better part of this year, that our CapEx will actually be similar, if not better than what it's been, even as we invest aggressively in AI. One, because the timing of the rollout, but also because this cost of AI for us is a replacement of other content costs. And so this will actually be more efficient, allow us to get the content actually cheaper on a per unit basis and more content overall. So we're very much in control of that. Also, once we start building ChatGPT4 into ShagMate, that once the content is asked and the prompts are asked, we will have those and we'll only have to pay for them one time. So we think this is going to be really, really, really efficient for us and very clarifying and very defining for us. So we think over time, we'll get a lot bigger and even more profitable than we've been, despite the fact that we've been the most profitable company or amongst the most profitable companies in the space. As it relates to skills, it's another area where we're doubling down because it's working. So the relationship with Guild has been very positive. That's a business that we believe can be quite substantial over the next couple of years. As Guild evolved its business with its existing customers like Walmart and Chipotle and the biggest customers in the business, it's also adding new customers. But most interesting and very much to our advantage is these companies are focusing more now on skilling their employees than they were before. Even though they continue to offer paid college education through Guild, the skills area is much more interesting now. to these companies now that it's ever been because of the change in technology and because of AI. So we're, we launched food suits through there and that's having some good traction. And then on top of that, we're building a lot of horses in UI and design because design and creative is going to be very important in the world with AI and on AI itself. So what we're offering is shipping, but we're offering more of it and the business is growing quite nicely. And for those people who want to track that, because we break out our business in two areas, other and, and check subscriptions, you have to take into consideration that we plan for ads to be down, but the growth in that business is coming all from skills. So it's making up for that hole, and we're very excited about it.
spk10: Yeah, and just for clarity there, all the growth, Dan's 100% correct, all the growth is in skills, and there is headwinds in ads, and of course, the change in required materials from being 100% recognizing revenue to revenue.
spk03: Yeah, so you really can't look at it year over year. You just have to look at it quarter by quarter. So we're really fired up about both what's going on in skills. And the reception is as big as you might think it would be, which is the combination of AI technology, the conversational nature, the real-time nature, the reduction in the content cost will expand our ability to do all things. But one of the reasons that we were able to partner with them and, you know, have Sam be part of our announcement and interview Sam on stage at the largest education conference, because they recognize that they can't do what we can do. And it's our content, our data, our learning taxonomy. Yes, you can use ChatGPT to get some answers, which is what the customers that didn't come to us are doing. But to actually learn it, you need to use Chat. And so we're really excited about the future. But as I said, Doug, in the prepared remarks, when there's a platform shift, like there was for the internet, like there is for mobile, or what's for mobile, like there was for cloud, that the first period of time is very lumpy and very bumpy and very uncertain. But in the end, the companies that invest and utilize the technology and are the verb in their vertical win bigger in the long run. And that's all we're focused on right now. So the short term is less important than the long term. But we will continue to make sure we're very profitable and generate a lot of cash because the business model allows us to.
spk02: Thank you both. Appreciate that. Yep.
spk06: Next question, Eric Sheridan with Goldman Sachs. Please go ahead.
spk01: Thanks so much. Maybe two questions if I can. First, not to belabor the chat GPT point, but we'd love to get a little more granularity. I know your comments were about March. but even looking out to April where you might have some data, just so we better understand, does it act as a gross addition headwind when you see these consumption choices? And or are you already seeing the potential for change consumption habits among your existing user base? That would be number one. And then I know Checkmate is in beta. Can you contrast anything you've learned in beta about the behavior or consumption habits of folks who are beta testing Cheggmate versus more traditional Chegg users, just so we have a bit of a benchmark there. Thanks so much.
spk03: Yeah, excellent question. The second one, the answer is it's too soon because we're not launching this month. And so on the next call, I think it'd probably be a good idea to contrast what we're learning in terms of our behavior and how they're using it because it's interesting. It's exciting for us, but it's interesting.
spk02: On the first one, The question was, repeated the first question?
spk01: Yeah, it's really just elements of what you've seen in March, maybe even a comment of how that's continued into April, and gross ads versus consumption. Thank you.
spk03: It is 100% a gross ads issue. It is not at all a retention issue. Retention is not a take rate issue. We're actually seeing record numbers in take rate of people that have taken the 1995 Take Study Pass. So that number continues to elevate. I think we said it was over 40% on the last call. It continues to elevate. So we know that we still have pricing power. We know that people really value us if they know Chegg. That we are still bringing in millions of new customers over the course of the first six months. This is a gross ad impact on the margin. But as a subscription business, we need to figure out what that means before we start forecasting longer term. So that's really where it's focused almost exclusively at this point. And, you know, we just have to be aware of it because it's so new. So, you know, we're very comfortable in forecasting next quarter. We've, you know, done that for the last six quarters and been right, including the last one. But because the summer comes now and we really won't learn that much until next August or September, we're taking a quarter off just to be able to make sure that we really understand the impact can answer the other questions as it relates to checkmate and new behavior. But retention has been phenomenal, and take rate has been phenomenal.
spk02: So this is not a sky-falling thing.
spk03: It's just an acknowledgement that there's been a technological shift, and we need to prepare for it and adjust our company and go after it aggressively and adjust our cost structure to do so.
spk02: And we're doing all of that now.
spk06: Next question, Ryan McDonald with Needham & Company. Please go ahead.
spk08: Hi, thanks for taking my question. Dan, maybe first off on ChegMate, as you're starting to do the beta testing and really grow the awareness of the ChegMate offering, I think one of the things we hear from students is that their questions around ChatGPT are lack of accuracy today, which Cheg has always been sort of trusted brand from that perspective. But in this market dynamics, how do you sort of rebuild the brand awareness for a new offering like Cheggmate that is sort of building GPT in so that you can ensure that retention and sort of, I guess, you know, reacceleration of gross subscriber adoption going into the fall?
spk03: Yeah. It is exactly the correct question and the one that we're working on aggressively. I don't know if you had a chance to see our video launch. That video launch is an example of what we're doing. You know, and also the benefit of sitting on the Adobe board and with Firefly, so I've had a lot of insight into how to think about all of this. So right now, the goal is to make sure that we continue to have extraordinarily high retention, and we are. And that those that know Chegg for exactly the reason that you said, our accuracy and our learning taxonomy to actually understand the subject, not just copy it, which is what you do with ChatGPT, those people we are very, very solid with continue to perform extraordinarily well with. And over time, we will be reminding them of the benefits to Chegg inside the product experience at Tufts. That's really essential. Cheggmate will be an all-new user experience that will point out to the user what part is chat GPT or any other AI, because the brilliance of how we're building this thing is it's not going to be tied to just one AI environment. If one is better, we can shift it. If our own, like we have with Mathway, is our own large learning model, we use our own. But we will be showing what the capability of AI is and what the capability of Chegg is so that students know that if they shouldn't use Chegg, this is everything they're going to lose. That is contemplated and built into the learning experience itself so that students will appreciate the value that we bring to the user experience that if they leave Chegg, they won't get. So that is essential in terms of the way we are building the product and the user experience is to make sure students understand the value of each, but it's the value of the combined that you can't get anywhere else and you can't get what you get in Chegg anywhere else. So that's an essential part of it. So the marketing is going to be in product, very viral, use of TikTok. I mean, you'd be surprised to know we have 55 million views on TikTok. Chegg is a beloved product for the reasons that you understand and appreciate. This is a challenge at the moment that's on the margin, and we want to go aggressively after it, and we think this is an opportunity to expand our market, and we're going aggressively after that. So we're all in and making sure students understand the value of us and the value of the combined together and why it's in their best interest to pay the $15.95 or $19.95.
spk08: A helpful color there. Maybe as a follow-up, I want to touch on the localization efforts. You talked about some good success that you're seeing in three countries where you're starting to do localized pricing in the apps here. I think on the last quarter, I think you were, I think, testing in maybe nine or ten countries, but how should we think about sort of the ramping of the localization efforts and when sort of you should have sort of that localized pricing generally available more broadly across the country that you've been testing in?
spk03: There's about nine that we are focused on. Some of them I think we mentioned in the prepared remarks. But honestly, for the second half of the year, the focus is on getting the payment system right in India. The demand in India for Chegg is extraordinarily high, meaningfully high. Our ability to accept their payments is meaningfully low. That was a mistake. We took credit cards because we worked with a partner that did credit cards rather than the way they like to pay, which is debit cards. And so that will be ready for the fall. So our big focus for the fall internationally is going to be Chegmaid and obviously the UK, Australia, and Australia. Canada and India for the biggest growth area of focus. But Mexico, Philippines, places like that, it's based on the logic of what you'd imagine it's based on. Top of the funnel is really high. Conversion is really low. So that's about pricing. And then it's about the payment system. One of the really cool things about, by the way, AI is going to allow for instant translation at no cost. These things will play to Chegg's advantages over time.
spk02: Initially, though, we've got to deal with the challenge initially. Thanks. Thanks for the color. Yep.
spk06: Next question, Josh Baer with Morgan Stanley. Please go ahead.
spk07: Great. Thanks for the question. I guess wondering how fast you can go with Checkmate. I think there's a lot of potential there to improve the platform. Obviously, the longer it takes, you risk missing out on some of those cohorts of new students in the meantime. And I guess thinking back to study pack bundle or international, describe it as sort of methodical, a lot of testing and in some cases waiting till the next semester to not disrupt auto renewal, for example. So how fast can you go? How will the rollout of Checkmate compare?
spk03: Yeah, again, these are really great questions because they're exactly the questions we're asking internally. So the methodical nature of how we've done things has worked to our advantage. In this particular case, speed is going to work to our advantage. And so a lot of the resource reallocation, a lot of our focus, we're talking about it now much more aggressively, but it really started after the launch of ChatGPT and the chance that I was very fortunate to be able to sit down and talked to Sam for a couple hours about where they were going and where we were going and how we could work together and the value of each of the components together. So we've been the last couple of months working on this. What you saw at the GSD conference was sort of visual example of it. And again, I encourage everybody to watch the video to see how special this product can be. So our goal is to ramp it up. This is going to be constant daily iteration. We're going to get the feedback. We're going to train the models. We're going to retrain the models. We're going to rewrite the prompts. I mean, we are going as aggressively as we are physically capable of doing. We are holding nothing back from this. So the answer is it'll ramp at the speed that it's good.
spk02: And hopefully that's really fast.
spk07: Thanks, Dan. And another sort of higher level question for you on competition. Like, obviously there are other vendors out there that ignoring AI and ChatGBT, you know, Chegg performs really well against. But then there are vendors like Quizlet, Brainly, Khan Academy, who have also announced AI tutors or AI solutions built on ChatGBT using the OpenAI API. So is like the competitive dynamic the same in that You know, Chegg has the advantage because of all the data that your model's trained on and all those other things, or does like the competitive environment get more intense because everyone gets to leverage ChatGPT going forward?
spk03: Yeah, not everybody gets to leverage it the same way, though. So let's be clear. The data set matters. The content matters. The learning taxonomy matters. This is going to come down to user experience, brand quality, brand reputation, and your capital structure, which ours is superior to everybody else's. Every one of those companies that you mentioned, well, most of the companies you mentioned have tried to defeat us with free and ad models.
spk02: They have been unsuccessful, dramatically unsuccessful.
spk03: So they're launching chatbots on top of their content, does not change the dynamic, in any way, shape, or form in their favor, and we think will exemplify why what we're doing is far superior to anything they're capable of doing or could afford to do. So they are prospective, and we've, of course, torn apart every one of the products that they've launched, as you can imagine. So this is speaking from our own view of what we see in our dynamics in our marketplace. The issue for us is going to be students on the margin who just want an answer, And if they can get some version of that, that is the short-term challenge for us. The long-term opportunity is just much bigger. The ability to be in your pocket instantly in any language, in any subject, anywhere with our learning taxonomy, simple user experience, brand reputation, quality reputation, accuracy reputation is what we're focused on. So we're on our toes, not on our heels. I think the rest of them will be more on their heels because what do you need a flash card for? in a world where JTPD can create the flashcards. So that dynamic works in our favor, but in the short term, we gotta take it as seriously as anything we've taken seriously. It reminds me of when Amazon entered the textbook market. Everybody said tech can't beat them, we beat them. Because this is all we do. This is not all AI sites are going to do. So it's really clarifying, it's really focusing, It's intense, in a lot of ways it's fun, but we're up for the challenge.
spk02: Great, thank you.
spk06: Next question, Brett Sill with Jefferies, please go ahead.
spk13: Dan, if you set aside ChatGPT and you look at internal execution and consumer behavior, do you pin any of this to those other issues, or is this 100% blamed on ChatGPT?
spk02: We were doing exactly what we were hoping to do until around March. So the variable to change was the launch of four, because we had taken into consideration to some degree three.
spk03: And you time that with four, and then you time it around midterms. And so that's when we saw on the margin, again, this is not a sky is falling thing. This is just a company who's been around for a long, with management that's been around through every economic cycle since, you know, 87 and every launch of technology cycles since, you know, since the PC. Believing that this is one of those shifts. We did not fall for the, you never saw us a launch. Oh, we'll take Bitcoin payments, right? Or we're launching our own coin or let's do NFTs. This is, this is, we didn't see those as, as real or important or as threats. We see this one as a real transformational change where the way people will do work, learn things, and access things. We're betting very big on the fact that people are going to need to learn how to use these things and the impact of these things, and they're going to have to learn what the output means. And we're going to be in a world more of greater assessment, and that works to take advantage in the long run.
spk02: So the rest of the business in terms of renewals, Great.
spk03: Take rate of tech study pack, record levels, launch of the app in Mexico, set records for us. This is the thing that we believe is the biggest challenge ahead of us, and we're taking it on from day one head on. And if other companies don't want to do that, that's their business. We just believe, and I've been around long enough to know that there was the internet and there was mobility, and now there's this. And so we are very excited about the possibilities for the future, but we're going to have to go after it from day one, and that's what we're doing. So nothing else that we saw. It's this, and it's on the margin right now.
spk13: Yeah. And on the business, when you think about the size of the business today as a percentage of revenue to where you think this could be three to five years out, how do you frame that? You know, if the headwinds continue to move in on study pack, can this offset or is it still about the study pack?
spk03: Well, it's not about study pack. Study pack is doing fine. It's just about the top of the funnel conversion on marginal customers.
spk02: I'm sorry, did you talk about skills? Yeah, just when you think the skills business.
spk13: Oh, no, I think – And then where you think it could be three to five years as a percentage of your total revenue.
spk03: Oh, so everybody's looking at me like I shouldn't give the number away. But substantial. Look, here's the – the simplest way to do the math is we get on average $17 a customer for a subscriber – month on check study check study pack on skills the average price right now is closer to $5,000 and so when we keep 100% of that revenue and then we give X percentage of that to Gil so we'll have high gross margins it's really the cost of the content for us it's not the cost of distribution it's not the cost of marketing they take all that we pay them for that so for us The bigger they get and the deeper we get and the more people get excited about learning things like AI and UX design, and the more corporations focus on skills rather than higher education, the better it is for that business. And that business is growing really, really – it's never grown this fast, and it's on top of an increasingly higher base. So without giving the number away, I think it could be pretty substantial as a percentage of our overall revenue.
spk10: Yeah, Brent, I mean, just to be clear, it's not a fastest-growing business. So by definition, it's going to be a bigger percentage of our business over time. We're obviously not going out any further than this current quarter, but, yeah, we're super excited about skills, and we think it will continue to grow at a pretty rapid rate.
spk02: Great. Thank you.
spk06: Next question, Jason Salino with KeyBank. Please go ahead.
spk11: Great. Dan, Andy, thanks for taking my questions. With Chegmate, sorry if I missed it, but how much will that cost or will it be part of the bundle?
spk03: Yeah, that's something we have yet to announce and it's something truthfully we've yet to decide. So, you know, there's always several views on this. We believe and we know from all of our testing that we could take prices up and we could charge more for it and Our internal research that we announced initially was that something like 40% of the audience would agree already to pay more for it. Having said that, we want to return to growth as fast as possible on the new subscriber side. And so this will likely be embedded within Chegg initially, and then we'll determine what the smartest way for getting a higher ARPU is. And those range of options are exactly what you think they would be, which is at one point, right now we have $15.95 and $19.95. We could go all to $19.95 tomorrow, and that would be a substantial increase in revenue and EBITDA. We could go to all to $19.95 and then launch a version of $24.95. The options are ahead of us, but they've yet to be decided. Right now it's making the product great, getting the brand awareness out there, getting people addicted to the new product the way they've been addicted to the old product. And then those opportunities are all ahead of us.
spk11: Okay. No, that's helpful. And then you've kind of alluded to what it might look like, you know, in the beta. You know, I'll be sure to watch the video after this that you keep mentioning. But from a student's perspective, you know, how does Checkmate look, feel, and differ than if a student were to just go to ChatGDT directly?
spk03: Yes. The video will highlight where we're going. But to give you some data points on it, First, it'll look a lot cooler. I know that doesn't really matter to a lot of people, but for some reasons, the students have done. Two, it'll be much more conversational. So rather than just having to put in a particular question, you can ask it anything. And once you ask it anything, it will know because it knows who you are. And this is what the free chat does not do. That's not personalized at all. And every time you go back in, it doesn't remember you unless you want to pay the 20 bucks a month. For us, we already know who you are. We know your class. We know the textbook you're interested in, because we know based on the question that you've asked. We'll also know all the other questions that people have asked around this, and we'll be able to write the prompts for you. So, we'll also be able to know what particular part of the question you're struggling with. So, it's one thing to say you're not doing well on the assessment, which we can automatically now build a relevant assessment for you, which we couldn't do before. But we can actually build an assessment based exclusively on your weaknesses because we understand the way the question was created and the way you've answered the question. These are all things that we'll be able to uniquely and exclusively do inside of CHECK. And you can do it all conversationally in whatever language that you want or however you choose to ask it the question. It might say, you could say, You know, I suck and you're right before questions just on the parts that I'm bad at. We'll be able to do that now, even if you write it that way. So it's literally going to feel like a live tutor that is working on your side. We're also going to play into the gamification and things that Cheggs never have done before. which is like, hey, you're doing great. Do you want more of this? Or it looks like you're struggling here. Would you like us to build you this? Or you might need to look at this as well. We'll also be able to program in advance what you're likely to have to know based on the things you're knowing now because we have the history of 10 years of that particular class. These are all things uniquely to be able to be doing inside of Checkmate and ChatGPT. And this is where the real differentiation is in that user experience and certainty around accuracy.
spk02: Perfect. Thank you.
spk06: Next question, Alex.
spk02: I'm sorry.
spk03: Watch the video because it really does give you an example of just how amazing this thing has the chance to be.
spk06: Next question, Alex Furman with Craig Howell. Please go ahead.
spk12: Hey, guys. Thanks for taking my question. You know, wondering... You mentioned in your prepared remarks there are signs that you could be starting to see improved enrollment later this year. Curious, what are some kind of opportunities or how you plan to go about capitalizing on that? And is there a thinking that you want to have this new product out in some way that could be sellable ahead of the fall semester?
spk03: Well, not ahead of it. I mean, we're going to be testing it aggressively over the summer months. So the indications are always based on what we begin to see in the summer. If you remember last year, we began to see signs of strong summer school, which led to strong fall. And we're seeing the beginnings of those signs again. Plus, there's the public numbers that talk about enrollment say the same thing. So that should all be good news and mitigating to some degree in the short term. But we intend to very aggressively market this. through the channels that are very efficient for us. So remember, over 80% of all of our traffic today is organic. So we've been redeveloping the site to make sure people understand there'll be fewer things to do, more focus on AI, the impact on AI. We'll be using all the social channels that we have to make sure that we use all of our, you know, the people that advocate for Che, influencers, to explain what it is and what the difference is. You know, in some ways, it's a very challenging time because it's new technology and it's coming faster than anybody thought. And you kind of jump on it as quickly as you can. And if you don't, you're going to end up losing. The flip side is it's really exciting because the dreams we always had for Chegg to be that companion in your pocket to not only be with you in high school or college, but beyond that, as we build in capabilities to be able to help you code and other things that we couldn't do as quickly or as efficiently as before. So we're going to be very, very, very aggressive because this is our future. There's no reason to bet on the past.
spk02: It's all about the future right now. Okay, that's really helpful. Thanks, Dan.
spk06: Next question, Brian Peterson with Raymond James. Please go ahead.
spk05: Hi, this is Jessica Wong for Brian. I just want to ask, I know you're not guiding by OPEX line items, but I just want to say, like, give a sense of your investment posture given this current changing environment. Have there been any changes to how you're approaching to LTV and CAC, especially as you're rolling out Checkmate and other initiatives?
spk03: Yeah, LTV to CAC is really important to many consumer businesses because their cost of customer acquisition is so cheap. It's not been one of the variables that we've had to overly focus on. But resource allocation, Reduction in things that are not about Cheggmate or growing our new customer base or growing our skills business are things that will become deprioritized in comparison to those things. So we've already taken a lot of constructive steps on investment choices because we intend to remain very profitable and generate a lot of free cash flow. On the LTD to CAC, really the areas to think about as it relates to Chegg and that is, over what timeframe do you want it to return positively? So we can have people, we can spend money on customers that return profitably three years from now, two years from now, one year from now, or in-year. In the short term, we're focused on in-year and within 12 months. And that is an adjustment down in terms of the spending.
spk02: But that is because all of our offers are going to go into checkmate when we're ready.
spk05: Thanks. And just one more quick question. So follow up to earlier, we're talking about the scientists seeing already for summer usage trends. How have you also been seeing the role of your partnerships with like Calm and DoorDash helping with retaining subscribers over the school breaks? Thanks.
spk03: Yeah, well, it's too early to know over the school break. But what we've been focused on there, and thank you for asking that question, Because it's really an important part of our strategy, which is to provide both overwhelming value in StudyPak so that people pay for the $19.95, and we've seen the success in that because that number has been going up. So we can partially attribute that to bundling these two things into StudyPak rather than the base. The second thing is we've been positively surprised by the number of existing customers that have already been customers that have signed up, particularly for DoorDash. So... As we get more aggressive with that, and as that continues to take up, we have seen, at least early on, customers that are existing check customers that also sign up for DoorDash, they cancel at a much lower percentage than those that don't.
spk02: So the signs are indicating it will be very positive, but we haven't had the summary yet. Okay, operator, I think we have one last question.
spk06: Next question, Arvind Ramnani with Piper Sandler. Please go ahead.
spk11: Hi. Thanks for the question.
spk09: You know, I just wanted to ask you, you know, certainly like a big change and, you know, we appreciate you all kind of recognizing that and taking it head on. But, you know, as a public company where you're going to make these investments, how are you thinking about sort of making these investments, these changes, And some of it will include like pricing models. So there's a lot of change that you're going to have in the business and the way you operate, the way you price. So what's some of the kind of measures you have in place where things don't kind of move sideways while you're making that change, which is an important one to make?
spk03: Yeah, fair question. We've been through model changes before. And of course, sitting on the Adobe board, we went through model changes. You know, I don't think there's any doubt. If there's doubt in anybody's mind that AI is going to be meaningful and meaningful in the education space, then I don't know how to explain it to you more than the world has already explained it to you, which is going to be difficult. So the first thing was to make the commitment to do it. That's what we've done. The second thing was to recognize that inside the company that we're going to have to reprioritize our expenses and our personnel to be much more aggressive. Third was to take a look at our capital structure in terms of CapEx and recognize that this is an offset in our content costs and understand the cost of GPUs and CPUs and all of those things and to be able to work structurally within that without discounting our investment in the future of the company. All of those things are things that we have been working on and have already done. We have, we can monitor our business every 15 minutes and know exactly where we are against new customers and retention rates versus our expectation. So we have a lot of guardrails inside the company to know the impact of all the choices we make. As one of the questions that came up earlier is we've been very methodical about any decisions that we've had to make because we have the ability to test a lot of things. So I understand as a public company, people want you to move faster and have greater certainty despite the fact this is probably the biggest technological shift we've seen in the last 20 years. We are going to take it the way that we always succeed, which we believe our brand, our reach, our data, our capability, the user experience, focusing on the needs of the student. And we monitor every aspect of that business that we're capable of monitoring. So we don't get surprised by our existing customers. It's the customers on the margin and the new customers that have yet to use us that we're really focused on first. So that model is pretty straightforward. It's not the same complexity that you've articulated. We will, over time, though, be able to track usage and how people change their behavior and how much they use the Chegmay part of the service versus the other part of the service. And those things will inform whatever future pricing increases that we choose to take or pricing models that we choose to take. So we try our best not to guess. We try our best to test rather than guess. And that's not going to change in our philosophy because we'd rather take a little bit longer than you'd like, but be right. So when, you know, people ask us for years when we're going to take a price increase, when we took it, we lost 7,000 customers out of 8 million. And so we're, those are the things that we know because we monitor and test things. So we'll be very diligent and careful about that. But the goal is always the same, overwhelming value to the student that once they subscribe, They love us, and they stay in, and they stay longer, and that is still the case. This is really about new customers that have another toy to play with now, and we want to go win that battle.
spk09: That's really helpful. And just one quick follow-up, as investors who are sitting external to the company, and we don't have as much access to the real-time data, how should we think of evaluating Chegg during this interim period. First of all, three years and you'll have adopted Chegg. I get that scenario, right? But in a scenario where during the interim, the next six months, 12 months, 18 months, what's the best way to track and measure Chegg making this transition correctly?
spk03: I don't know that you'll be able to track and measure it between now and the end of the year. I think you're going to have to wait to see how Cheggmate is. You'll evaluate it for yourself. A lot of the people on this call have done and shared with us, and thank you for that. Your own research that shows that students clearly prefer Chegg over ChatGTT. So I think there will be external ways to monitor it. Internally, we're going to monitor it the always way we do, which is we're going to watch usage. We're going to watch engagement. We're going to watch retention. We're going to look for reduction in cancel rates. length of time that people stay on, willingness to pay more, and top of the funnel continuing to stay large and conversion rates staying high. Those are things that we track regularly inside the company. Externally, you know, we don't expect to be in a situation where we'll never have annual guidance again. What we're just saying now in the short term is because it's summer and because this new giant thing is out there, that we could tell you what's going to happen in the second quarter, We had a very good first quarter, but we're really not going to understand the impact of Checkmate or ChatGPT in the fall until the fall. And so trying to predict it when new technologies come out has been a futile effort for us, and so we don't want to do it. So I think we're just going to have to wait until we report what we learn over the next six months, and I think we'll all be able to track it a lot better as we go into 24. But the goals that we seek are obviously return to a higher rate of growth, continued excellent retention, continued take rate, continued willingness to pay more, continued length of time, and then having the funnel increase globally faster. Those are the things that we expect this to do for us over time. But if you're trying to check that in the short term, I'm not sure that will be much help there.
spk06: Thank you. There are no further questions. I would like to turn the floor over to Dan for closing remarks.
spk03: Thank you, everybody. Thanks for the great questions. This is both a very interesting and very exciting time for companies. You know, I had my experience at Zip Davis where I was publisher of the largest computer magazine where we saw people go to the Internet first. We see that same similarities now where we see younger people going to adopt AI before older people do. And so we are moving aggressively and positively and with our eyes wide open and very excited. We do think in the long term this is in our best interest, but we recognize in the short term we need to meet that challenge head on. We also believe that it's going to be rocky for a while until we're able to answer a lot of those questions. But we have been successful in all the transitions we've done. This one actually opens up a bigger market for us. And so we're just going to keep our heads down, execute, and report out on what we learn. and continue to communicate as aggressively as we have done to date. We thank everybody for dialing in. Thank you.
spk06: This concludes today's teleconference. You may disconnect your line. Goodbye. And thank you for your participation.
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