Chegg, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Chegg, Inc.' 's first quarter 2026 Earnings Conference call. All participants will be in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please key in star and then zero on your telephone keypad. Please note that this event is being recorded. I will now hand over to Tracy Ford, VP of Investor Relations. Please go ahead.

Good afternoon. Thank you for joining Chegg's first quarter 2026 conference call. On today's call are Dan Rosenzweig, 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.cheggs.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 for the year ended December 31st, 2025, 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 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 Dan.

Thank you, Tracy, and thanks, everyone, for joining Chegg's first quarter 2026 earnings call. Q1 was a strong quarter. We exceeded our expectations for revenue, profitability, free cash flow, while significantly reducing debt, and we continue to optimize our cost base and capital expenditures. These results reflect the deliberate work we have done to re-architect CHEG. Our financials, our corporate structure, our product experience are all optimized around AI, and the results are showing. The business is leaner and better positioned for future growth with high margins. Leveraging artificial intelligence, we provide a differentiated experience as we personalize learning paths, identify where learners are struggling, and trigger targeted interventions from coaches or systems before a learner falls behind. AI also allows us to create and update curriculum fast enough to keep pace with how quickly skills, especially AI skills, are evolving. All of this allows us to deliver better outcomes without increasing costs. We continue to expect double-digit revenue growth in skilling for the full year 2026 with acceleration as the year progresses. We are seeing positive attraction broadly across Gilly, including the addition of new enterprise partners and channel partners and momentum in the global category leaders across manufacturing, consulting, and professional services and technology. Notably, we recently signed a partnership with Cornerstone, a leading learning and talent management platform. This is expected to open up a meaningful enterprise distribution channel for tech skills and connect us with customers at scale. And for the first time, We are expanding our skilling platform through accredited offerings. With Wolf, a partnership we announced last quarter, we are launching our first AI master's program, combining applied learning with recognized credentials. We take the same AI-first approach in our language learning offering, as we are moving beyond structured lessons towards real-time, in-workflow coaching, helping learners apply skills in the moments that matter the most. What differentiates our offering is that AI enables us to service skills performance data that HR and learning and development leaders can act on, shifting the conversation from reporting on learning activity to demonstrating measurable language capability in the workflow. Skilling is a large and growing market, and we believe we are building the most credible outcomes-driven platform in the space. In our 2026 Skills for Business Impact Report, More than two-thirds of graduates surveyed report applying their new skills immediately. 43% say they are working more efficiently, and 41% report improved quality of work. On AI specifically, 75% of graduates report increased confidence, and 43% are actively applying those skills on the job. The impact extends to employers as well. 80% of the graduates we surveyed report a positive career impact. and 92% remained with their employers 6 to 12 months after completing the program, with 62% citing employer-sponsored education as a key reason for staying. Our investments in skilling are funded by the strong free cash flow being generated by Chegg Studies, which outperformed our expectations in Q1. While search headwinds continue to impact traffic for Chegg Studies, retention remains strong, an indicator that students continue to find real value in our product. The financial foundation we have built is what makes everything we are building possible, and it reflects the kind of focus and discipline this team has. Six months ago, I returned to Chegg because I saw a company with all the ingredients to win, a trusted brand, proven curriculum, outcomes data that demonstrated a real return on investment for our customers, and an expanding global network of enterprise and institutional partners. What we needed was focus and clarity to lean into the opportunities ahead of us. In the last six months, this team has removed approximately 40% of our costs, put us on a path to zero debt, increased our free cash flow, retooled the business to be AI first, giving us a strong foundation to grow from. As a result, I am confident about the category we are in, the momentum in our skilling business, and the strength of our balance sheet. I feel confident about the opportunity in front of us and our ability to drive value for our shareholders and our customers, and I look forward to updating you on the next call. With that, I'll turn it over to David.

Thank you, Dan, and good afternoon. Today, I will review our financial performance for the first quarter of 2026, along with the company's outlook for the second quarter. Building on the progress outlined in our last earnings call, we delivered a strong first quarter, which exceeded expectations. Our results reflect continued execution on our priorities and increasing momentum in our businesses. Our strategic focus on the large and growing Skilling market positions us for long-term sustainable growth with strong margins while we leverage AI across the organization to improve efficiency and drive meaningful improvements in profitability and cash generation. In the quarter, Chegg Skilling generated $17.6 million in revenue, representing 9% growth as we continued to invest in the business. We also signed exciting new distribution deals, which we expect to contribute in the second half and help drive double-digit skilling revenue growth for the full year. Academic services revenue is $45.7 million. We continue to manage this business with a focus on maximizing cash generation, which exceeded our expectations this quarter. While traffic remained under pressure, Monthly retention rates were very strong in the quarter, further extending the operational runway of the business. Turning to expenses, non-GAAP operating expenses were $36.4 million, reflecting a reduction of $44.1 million, or 55% year-over-year. These results reflect our disciplined approach to expense management. We will continue to identify additional opportunities, including enhanced use of AI to drive further efficiency. Importantly, these actions are generating cash flow that we can invest in our future growth. Adjusted EBITDA for the quarter was $15.5 million, representing a margin of 24%. We also delivered positive net income in the first quarter for the first time in two years. First quarter CapEx was $1 million, down 88% year over year. For 2026, we are targeting a 60% reduction in CapEx, with approximately 90% dedicated to our growing, skilling business. Free cash flow in the quarter was $3.1 million, which includes approximately $12.9 million of severance payments related to prior restructuring actions. We expect an additional $2.1 million of severance payments in the second quarter. Despite these items, we expect to generate meaningful free cash flow in 2026. Looking at the balance sheet, we ended the quarter with $67.9 million in cash and investments and a net cash position of $34.1 million, providing us flexibility as we execute on our priorities. Looking ahead to Q2 guidance, we expect Chegg skilling revenue of $17.5 million to $18 million, total revenue between $49 and $50 million, gross margins in the range of 51 to 52%, and adjusted EBITDA between $5 and $6 million. In 2026, our capital allocation priorities remain focused on maximizing free cash flow, strengthening our balance sheet, and fully repaying our convertible debt by September. Additionally, we will continue to evaluate opportunities to deploy capital including through our remaining securities repurchase authorization with a disciplined approach aligned to long-term shareholder value. In closing, we have taken deliberate actions to position the company for long-term success. We are leaner, more efficient, and well-positioned for double-digit growth in our scaling business and meaningful free cash flow in 2026. putting us on a clear path to sustained growth, profitability, and increased shareholder value.

With that, I will turn the call over to the operator for your questions. Thank you, sir.

Ladies and gentlemen, we will now be conducting the question and answer session. Please note, for participants making use of speaker equipment, it may be necessary to pick up your handset before pressing the star keys. If you'd like to ask a question, please key in star and then one on your telephone keypad. A confirmation turn will indicate that Elan is in the question queue. You may key in star and then two to leave the question queue.

We'll pause a moment. Our first question comes from Ryan McDonald of Needham & Co.

Please go ahead.

Thanks for taking my questions. Dan, maybe on the Chegg skilling business and the trends you're seeing there, can you maybe unpack the two segments a bit in Q1? What were you seeing across B2B language learning versus Chegg skills? And then as you think about the back half of the year acceleration and growth and getting to the double digits, what kind of visibility do you have or do you get from the partners as you add those and those additional channels throughout the year?

Yeah, great question. It's exactly what we look at. So the trend in the first quarter was very strong because there were three things that we wanted to accomplish. On the cost side, we reinvented the way we are able to build content utilizing AI. And the user experience allowing us to scale at a lower cost with a higher quality using AI versus necessarily using humans. And we applied that across both what you would call the traditional skilling and the language skilling. We combine those businesses because whether we sell through channels in the U.S. or directly to corporations or businesses or corporates as they call them in Europe, they actually buy them both as skills. We are working to combine package and offerings to be able to offer both of those things. What you'll see going forward is some pretty exciting capabilities that AI allows us to have, which is real-time intervention inside the course or inside the use of language, which we think will make them extremely valuable. And we expect to be able to see increased retention and utilization of those products going forward. They're rolling out now. The question over how these accounts build. So before I came back, Peg had one channel of distribution, which was Guild. And we still have Guild, and Guild's still a terrific partner. However, we needed to renegotiate the contract with Guild to allow us to work with additional partners, which we didn't have the ability to do before. So what you've heard from us from announcements is that since the beginning of the year, we were able to renegotiate that and sign on a number of distribution partners for the combined assets of our skilling. So whether it be the skills, the skills in the language, in the language, all of those have yet to launch. We've signed those agreements, and we're building the courses, and we expect them to launch somewhere around, some of them somewhere in this quarter. and then to build over the course of the year. So the reason we feel very comfortable at this moment in time is because we expect each of those to build revenue over the course of the year and then really accelerate going into 27. So we're excited about that. So the first step was redesign the products and services to be more AI-centric, lower cost, better quality of outcome. for the students. Second one was liberate ourselves from a single deal to be able to sign more deals, then sign more deals, which we have. And you heard the cornerstone, which we signed, we announced today. You heard us announce Wolf on the last call. We have others signed that are not yet announced because our partners would prefer not to announce them until they actually watch because they don't want to confuse the people in their channel. So we feel good about the fact that we've signed a number of deals that should build over the course of the year. None of them have to build particularly large for us to achieve the 10% year-over-year growth rate target that we desire for this year. And we expect that they will roll out shortly and continually over the course of the year. So it's pretty exciting.

Really helpful. And then, you know, a trend and theme we've been hearing in sort of the enterprise skilling and learning market this year is, sort of more commentary about learning and the flow of work, essentially the concept of if I'm, you know, in my day-to-day role and whether I'm interacting with Salesforce or whatever, you know, system I'm in, it's sort of pushing more learning, you know, as I'm going through and using those tools. As you think about your sort of content catalog, Are you shifting or sort of what type of content you're building or the format you're building in to sort of meet this new kind of thematic demand, if you will?

Yeah, that is exactly correct. You've tapped into, you know, I'm used to three-letter acronyms, but this is the new terminology in terms of what people want to do. What does it really mean? It means that whatever you're teaching them, should be able to be used while they're actually using the capability inside their company. And agents allow for that to happen in particular. So I'll give you an example on the language side which may be easier to understand. Let's say you're using Busuu to learn a language to be able to negotiate deals because you're in business development or legal or something, business affairs or something of that nature. The capability that we are building in which goes to exactly what you said is something that we'll call pulse. And so you might be negotiating real time and pulse will be able to prompt you real time in the flow of work, what language or capabilities or techniques that you might need to do. So it goes beyond just the language, but into actually not only what to say, but how to say it. So yes, it is all gotta be inside the workflow. And within skills, even within our academic services, we're building some of those capabilities, which we think is some of the reason that we're able to slow down the decline and extend the length of time, which will generate more cash for us, is because you can go right inside and say, listen, do you want to learn how to do this while you're here? So think of it as just real-time intervention at the moment for what the person needs, where the technology can blend into what you're doing and what it's capable of doing. And yes, that is exactly why we retooled the company. In addition to that, listen, there are a couple of elements that I believe the AI is ushering in. They all seem pretty common sense, which is speed. How quickly could you do something? So some of our partners are requesting content every few weeks now rather than every quarter or every year. So speed. The other one is reduction of friction. which is what you're talking about, at least partially what you're talking about, which is how do you remove all friction from the experience from the users of it, as well as the creators of it, as well as the distributors of it, as well as the buyers of it. So every step that you can take out of the way or you can do for the person while they're in it is what you do. And then quality, the ability to do consistency of quality at scale, which is something difficult for humans to do, less difficult for machines to do. So all of that is at the core of what we're building. We think we're ahead of most people. And at least our partners here were ahead of most people, which is why we've been able to sign so many deals so quickly.

Awesome. Appreciate all the color there. Thanks for taking my question. You bet. Great question. Operator?

Apologies, sir. Ladies and gentlemen, with no further questions in the queue, we have reached the end of the Q&A. This concludes this event. Thank you for attending. Anyone else, connect your lines.