Chegg, Inc.

Greetings and welcome to Chegg Incorporated third quarter 2024 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tracy Ford, Vice President of Investor Relations. Thank you. You may begin.

Good afternoon. Thank you for joining Chegg's third quarter 2024 conference call. On today's call are Nathan Schultz, President and CEO, and David Longo, 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 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 included in today's earnings release and the risk factors described in Chegg's annual report on Form 10-K filed with the Security and Exchange Commission on February 20th, 2024, Chegg's quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 12th, 2024, as well as our other filings with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and the investor slide deck found on our IR website, investor.cheg.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 Nathan.

Thank you, Tracy. Hello, everyone, and thank you for joining CHECK's third quarter earnings call. I'll start today by walking you through our Q3 results and then discuss important shifts in our competitive landscape and what they mean for our business going forward. In Q3, while the global education industry continues to experience tremendous change, we have shown early progress against the strategic plan we outlined in June. As a result of this work, in Q3, we delivered better-than-expected revenue of $137 million and $22 million in adjusted EBITDA. Engagement remained high, with the number of questions asked in the quarter up 79% year-over-year, and our Q3 Chegg study and Chegg study pack monthly retention rate increased 30 basis points year-over-year. However, technology shifts have created headwinds for our industry and Chegg's business specifically. Recent advances in the AI search experience and the adoption of free and paid generative AI services by students have resulted in challenges for TEG. These factors are adversely affecting our business outlook and require us to refocus and adjust the size of our business. Even in the face of adversity, there continues to be a large market of students looking for high quality proven learning experience that TEG provides. We continue to enthusiastically serve this audience, and I remain optimistic in the outlook for us to extend our brand, individualize our product, and weather these challenges. The first impact I'd like to discuss is Google's broad rollout of its AI Overviews Search Experience, or AIO, which displays AI-generated content at the top of a search results page. This experience keeps users on Google's search results page instead of leaving them onto third-party sites such as Chegg. This roll-up has been rapid, and while we've been monitoring the development of AIO all year, it was not until mid-August that the search experience significantly expanded. It's our belief that the prevalence of AIO will only continue to increase, and that Google, in an attempt to maintain market share, is shifting from being a search origination point to the destination point. disintermediating content sites like Check. Second, across our industry, there has been a continued increase in the adoption of free and paid generative AI products. It's been widely reported and substantiated in industry research that students are increasingly turning to generative AI for academic support, such as homework and exams. This issue impacts the education ecosystem at large, including universities and education technology companies broadly, where students see generative AI products like ChatGPT as strong alternatives to vertically specialized solutions for education, such as Check. These factors, the speed and scale of Google AIO's rollout and student adoption of generative AI products, have negatively impacted our industry and our business. We have seen a sharp decline in overall traffic and, therefore, a decline in our outlook on revenue. Global non-subscriber traffic to Chegg declined year-over-year 8% in Q2, 19% in Q3, and we exited Q3 with trends looking even more unfavorable at negative 37% year-over-year for the month of October. We've taken all this into account, and consequently, we do not expect to meet our 2025 goals of 30% adjusted EBITDA margin and $100 million in free cash flow. Earlier this year, we undertook a strategic restructuring based on the environment in which we are operating. Since then, these new factors have come into play with immense speed and impact. As a result, we are undertaking an additional restructuring to further manage costs and align with the market. Effective immediately, we are initiating a broad restructuring that will impact all groups across the company. We will reduce headcount by an additional 21%. We anticipate that these actions, along with additional operating expense savings will result in an annualized non-GAAP cost savings of $60 to $70 million in 2025. The cost savings from the restructuring announced in June, coupled with restructuring announced today, will result in a combined non-GAAP savings of $100 to $120 million in 2025. Even with this, we remain optimistic that there is an audience for check. While it's clear that some students will favor generative AI options, we believe there still is a large market of students who care about learning and are seeking products that improve their competency and outcomes. In an August 2024 quantitative study, we found that over 75% of high school and college students in North America show a high to medium willingness to pay for online educational tools if they significantly improve academic performance. Therefore, we believe there continues to be a student audience that's looking for high-quality content and proven learning expertise. This is what differentiates Chegg from other generative AI tools today and why millions of learners depend on Chegg to provide meaningful learning experiences with the highest quality content possible. Fifteen years of deep expertise in understanding students, applying advanced learning science to subjects and topics students learn, providing an archive of 132 million high-quality solutions, and human support output has created deep trust and awareness of CHEG. That's why students continue to come directly to CHEG, even as competitive environments evolve. We've taken steps towards the strategic plan we laid out in June. We remain committed to developing a verticalized and individualized experience for education and supporting students throughout the entire learning journey, starting with academic support and eventually functional support. Let me acknowledge the progress we have made on our strategic plan in the third quarter. We launched our small-step, big-win brand marketing campaign, which is showing early signs of progress with year-over-year improvements in click-through rate and conversion rate across many of our paid marketing channels. We introduced a content quality and satisfaction guarantee, differentiating our service against generative AI and building trust and loyalty with our subscribers. While it's still early, it is driving a lift in new subscriber conversion rates. We implemented an AI arena that allows us to evaluate and introduce new frontier AI models in real time to deliver the most accurate solutions for students and integrate AI into the full learning journey. We upgraded our Q&A experience to align with our drive towards providing an individualized and adaptive learning solution. This effort has already shown an improvement in user engagement and retention. We launched an app on Discord as well as an extension on Chrome to reach students where they're already spending time. These efforts connect student study activities across sites, engage them with our product, and create new pathways for product-driven growth, which we expect will reduce our reliance on SEO. We moved to a new vendor-based commerce platform, which will reduce our costs, provide flexibility, and allow us to move faster as we continue to evolve our pricing and packaging programs. And finally, we launched four direct institutional partnerships, providing access to Chegg Study, paid for by the institutional partner, These pilots allow us to gather valuable insights on how Chegg can enhance classroom learning, supporting our goal of diversifying our customer acquisition revenue streams while strengthening Chegg's role in improving student learning outcomes. As we head into the spring semester, you will continue to see our commitment to building and generating momentum with our brand, traffic, and product capabilities. We'll continue to raise brand awareness with a new spring brand campaign. Our creative strategy builds on Chegg's long legacy of empowering students and our unique, caring approach. The plan will activate across the full funnel, which we believe will bring new users in, create strong consideration and connection, and ultimately drive conversion. Based on what we learned this fall from the Small Steps, Big Wins program, we believe this strategy will bring both audience expansion and acquisition efficiency. On the product front, we will continue delivering individualized learning solutions, specifically focusing on expanding into two of the most highly relevant use cases, practice and solution comparison. These are durable needs and core learning behaviors that support learning. While we acknowledge the significance of the headwinds we covered earlier, Chegg has a deep legacy of serving students, and we believe our brand and product experiences are resilient. We remain optimistic and will continue to be there for students who have grown to rely on us. And as you've heard, we've already taken steps to strengthen our experience and increase efficiencies across the business. This is a multi-year plan and will require patience. We'll continue to manage our expenses prudently as the competitive landscape evolves. We will keep focused on doing the right things for our investors, our team, and the students we serve. Before I end, I want to thank our employees around the world for their hard work and dedication. Their efforts and talents have helped support students and bring learning to life. And while this is a trying time for us all, I'm confident we will get through it. With that, I'll turn it over to David.