Chegg, Inc.

Greetings and welcome to Chegg, Inc.'s second quarter 2026 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. I would now like to turn the conference over to your host, Tracey Ford, Vice President of Investor Relations. Thank you. You may begin.

Good afternoon. Thank you for joining Chegg's second quarter 2026 conference call. On today's call are Dan Rosensweig, 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.

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 the 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 Chang'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. Thank you, Tracey, and thanks, everyone, for joining Chegg's second quarter 2026 earnings call.

We outperformed our expectations on revenue, adjusted EBITDA, and cash, reflecting our ability to execute against our priorities while investing for future growth. The goals remain the same. Return Chegg to growth with high margins and strong free cash flow. Starting last fall, we embarked on our next big chapter, re-architecting the company to be AI-first, building a sustainable cost structure, and strengthening our balance sheet so we can accelerate Our Bigger Vision. TEG's mission to put students first and help them move from learning to earning has never wavered. For almost 20 years, we have evolved to meet students' most important needs, from inventing textbook rental models to make higher education more affordable, then providing 24-7 learning support through TEG study, and then adding skills-based courses to help learners build the skills needed to advance their careers. Each transition has opened up a new chapter of growth for CHEG. And the foundation we have built across our products, technology, and data now positions us to expand our focus on employability. We will help students build the skills, confidence, and connections needed to graduate, find internships, and transition into the workforce. Higher education continues to evolve, but one thing will never change. After completing whatever path they pursue, For the nearly 20 million students entering today's job market over the next few years, that transition is filled with challenges and uncertainty. Beginning in Q3, we are soft-launching the next generation of CHEG. By combining our proprietary data, AI, and deep insight into how students learn and build careers, we will reduce the friction for students to get internships and then jobs. The new Chegg will help automate job search and matching while adding coaching that will help students pick the right major, the right courses, and evaluate the right skills. Our plan is to automate the search, the match, and coaching so students can build the right skills, take the right courses, and make the right connections. Chegg will handle the hard parts of applying, tailoring the resumes, drafting cover letters, auto-filling and submitting applications, and even initiating alumni outreach on behalf of the students. We will then add the ability for students to get company-specific interview prep, personalized feedback, and targeting skill-building courses to close any gaps standing between them and the job. The result is the platform that takes students from I need a job to I am prepared, applied, and connected all in one place. It's this convergence of everything we have built, our academic platform, our skilling business, and our language learning capability, into one service that addresses one of the most pressing needs students face today. We have already had more than 10,000 students use the beta and provide feedback, and we will begin rolling out the new service across both CHEG and our site, internships.com, starting in the third quarter and all throughout 2027. As we expand our focus on employability, our skilling business remains an important part of the opportunity ahead. By helping organizations build workforce capabilities and helping learners develop and apply relevant skills, we are creating a platform that connects learning, skill development, and career outcomes. Big Skills has been built as a multi-channel platform spanning enterprise, institutional, employer, and marketplace channels. to create a more diversified foundation for growth. We have already signed six new partners this year, including Open Sesame and Dale Carnegie, and those launches will take place over the second half of the year. We will continue to expand into enterprises and schools over the next few years, using AI and data to dramatically expand and personalize our catalog while making our courses even more affordable. Our language skills are an important component of employability, helping people expand career opportunities and communicate more effectively in an increasingly global workforce. As a result, we are transforming our language offerings from a language learning app into a performance platform, helping people communicate with confidence and impact in any language when it counts. Our new Ascended Coach, which understands each learner's goals and the context of each interaction, helped you prepare for the moments that matter, like a client call, a presentation, or an interview. Early next year, we plan to have a seamless integration of our Agenda Coach into the learner's actual workflow, learning that shows up exactly when and where you need it. We are also expanding our skills offering into Europe, combining language learning with broader workforce capabilities. Underlying all of this has been the restructuring of our workforce Thank you for joining us. AI created real headwinds for this company, and we responded by strengthening our balance sheet, rebuilding an AI-first cost structure, and expanding our vision towards a much larger opportunity. We are becoming an employability business, one that helps students develop skills, find internships, land jobs, and grows throughout their careers. That is a more durable market, and we are uniquely positioned to own it. The financial foundation David will walk you through is what makes that all possible, and we look forward to updating you on our progress next quarter. With that, I'll turn it over to David.

Thank you, Dan, and good morning. Today, I will be reviewing our financial performance for the second quarter of 2026, along with the company's outlook for the third quarter. Our second quarter results exceeded our expectations, reflecting continued execution against our priorities. We are excited to take Chegg into its next chapter by expanding our focus on employability, addressing students' evolving needs while helping employers build a more skilled workforce, creating what we believe is a significant opportunity for long-term profitable growth. As we execute on our strategy, AI is improving operational efficiency across the company and driving meaningful gains in profitability and cash generation. We also repurchased shares during the quarter, reflecting our confidence in the company's long-term value while maintaining a disciplined approach to capital allocation. In the quarter, total revenue was $51.8 million, exceeding our expectations. We expanded our distribution partnerships, which we expect to contribute more meaningfully later this year, while remaining focused on efficiently managing our academic services products to maximize cash generation. Chegg Study monthly retention continued to be very strong, reinforcing its long-term cash generation potential. Turning to expenses, Q2 non-GAAP operating expenses were $32.3 million, nearly cutting our expenses in half compared to the second quarter of last year. This significant reduction reflects our disciplined approach to expense management and enhanced use of AI to improve productivity and drive efficiencies across the company. We continue to identify opportunities to further optimize our cost structure. Adjusted EBITDA for the quarter was $9.1 million, representing a margin of 17%. Second quarter CapEx was $3.7 million, down by 49% year-over-year. For full year 2026, we are targeting a 60% reduction Free cash flow in the quarter was $6.4 million, which includes approximately $1.5 million of severance payments related to prior restructuring actions. In the first half of the year, we generated $9.5 million in free cash flow despite $14.4 million in severance payments. We expect to continue to generate meaningful free cash flow in the second half of the year. Looking at the balance sheet, we ended the quarter with $72.3 million in cash and investment and a net cash position of $38.5 million, providing us flexibility as we execute on our priorities. We've built a strong foundation for the future and are encouraged by the continued durability of our academic services products driven by strong monthly retention, the progress we are making leveraging AI to meaningfully improve our cost structure, The early traction we are seeing with new skilling distribution partnerships and the significant opportunity you see to expand through employability. Together, these reinforce our confidence in generating meaningful cash flow and creating long-term value. During the second quarter, we repurchased $1.7 million of our common stock and have $120.7 million remaining on our securities repurchase authorization. We believe our shares represent an attractive use of capital. Our strong balance sheet and continued ability to generate meaningful cash flow provide us with flexibility to allocate capital where we believe will create the longest long-term value for a shareholder. That includes investing behind our strategic priorities while also evaluating further share repurchases. In addition, we expect to fully repay the convertible debt in the third quarter. Further strengthening our balance sheet, increasing financial flexibility. Moving to guidance, as we execute on our expanded opportunity focused on building an employability platform, our academic services and change-skilling businesses are becoming increasingly integrated, and we believe total revenue and adjusted EBITDA are the most meaningful ways to measure progress. Beginning this quarter, we are providing guidance for total revenue rather than separate revenue guidance. Looking ahead to Q3 guidance, we expect total revenue between $43 million and $44 million, gross margin in the range of 48% to 49%, and adjusted EBITDA between $1 million and $2 million.

In closing, we have strengthened the business for long-term success.

The company is leaner, more efficient, and well-positioned to generate meaningful free cash flow in 2026. We are executing our strategy with focus and discipline while leaning into a large, New opportunity positioning us to drive sustainable growth, improve profitability, and create long-term shareholder value. We have a strong balance sheet which provides additional financial flexibility as we continue executing our strategy. With that, I will turn the call over to the operator for your questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd 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 two if you'd like to remove your question from the queue. One moment, please, while we poll for questions. Our first question comes from Ryan McDonald with Needham & Company. Your line is now live.

Thanks for taking my questions. Dan, great to hear about the sort of new vision for Chegg and sort of the priorities moving forward. Maybe starting with sort of the new experience on helping students, you know, connect and find new job opportunities and internship opportunities, can you just talk about sort of what you were seeing in the market, you know, that sort of pushed you in this direction? You know, are there specific gaps that you were seeing in a LinkedIn or an Indeed or a Handshake that you felt like that check could sort of take advantage of here and then As we think about growing this, how do you drive awareness amongst the student population? Will you leverage sort of career services relationships? We'd love to hear more there. Thanks.

Yeah, great question. And we've been working on this for quite some time. We just feel that now is the time to start talking about it because, you know, step one was make sure that the company should pay off the debt, which we'll be out of debt shortly. Second thing is to make sure our balance sheet, as David said, is really strong, which we're going to have substantial cash. We're going to see we have substantial cash net of debt, and that's only going to grow over the rest of this year and to next year. So, you know, the value of the company we think is undervalued, typically because of the amount of cash we're going to generate. The skills business continues to grow, but the real opportunity that we have always believed in is that We asked the Jeff Bezos question, which is rather than what's changing, what's never going to change? And at the end of the day, college students go to college for one reason, which is to get a better job. And the fear over employment and unemployment that relates to technology and AI is rampant. I'm sure you know that. And the biggest question that students have been asking us to solve for them is which classes do I take? What major do I take? If I take these classes, what skills am I actually going to have that will allow me to be employable? And then help me identify the companies. Help me build my network. LinkedIn doesn't help you build a network. Nobody does, but we will. So help me build a network. Help me connect to these people. Help me write my resume. Help me write my cover letter. helped me prepare for the interview. Nobody was putting all of this together in one place, and nobody was focused exclusively on the students. Handshakes existed, but as you know, Handshakes evolved its business to now be in the data business. And so we have huge legacy customers that still use check. You can see that in our numbers. You can see that in the amount of profits that we're generating. And so we have the ability to reach students in the millions. So awareness won't be difficult for us because we still get massive traffic and we still have a substantial customer base. On top of that, over 12, 13 years ago, we bought the site internships.com. We haven't used it in a bunch of years because of the difficulties that we've been facing, but we took it out of mothballs. The organic traffic that goes to there is quite substantial. And so we have been testing Shag is the front door. Internships is the front door. We very quickly got over 10,000 beta testers of the original product. We brought in a number of interns who would actually help us design and build the product because it's for them. And so we're excited. So just, you know, anybody that has a student in college or going to college, the number one fear of the student and the parent is, will my child get a job?

Where will they work?

How are they going to get the skills? And were the company that is going to solve many of those issues for them. And we couldn't be more excited. And so we think we have the assets to do it. We think we have the brand to do it. We think we have the data to do it. And so, you know, a couple of years ago, we got punched in the face by AI. Now we're using AI to punch back.

I like it. And then if you think about sort of this sort of all-in-one way to assist a student, you know, from, how to get the job or how to identify the skills they need to get the job. How is that sort of informing your content creation strategy with the skills business in terms of sort of the partners that you select? And at some point, do you start to maybe bring more of the content creation in-house yourself or use AI to create some of this content for the students? Thanks.

Yeah. Well, so if you think about it, What Chegg's legacy, Chegg was AI before there was AI. So we have a pristine hundred and something million pairs of Q&A that we built on our expert network. And all the data businesses now are trying to build an expert network in order to train their models. We already have it. So our ability to answer any and all questions around any subject matter has always been available when we focused on academics. Now we're going to focus on academics and job-related questions. So that's the advantage that we have that others don't have. But in terms of context creation, so that'll be one of the areas. But our FBO strategy will expand dramatically based on listings, based on the data that we have about students. Remember, we start with schools that students go to, the classes they take, the majors they have. We're able to identify people that took those classes and where they worked. And we're able to identify those alumni and try to build a relationship between the students and the alumni. But you point to a very exciting area, which will come later on down the line, which is one of the things that we're talking about that I mentioned in the ceiling part of our prepared march, is we're taking all the courses that we've developed, and we're basically going to turn them into 5,000 artifacts of content that will make them shorter, much more accessible, much more affordable, be able to assess the student on the skills that they think they have, and then be able to train them up on it at a very affordable rate. So that will come later, but it's not so much the partners we're picking, it's the content we're creating. And that content will constantly evolve, same as the answers and the questions did for students on academics, around the professional needs of students. And it will be led by what companies are actually recommending the necessary skills that students will have. and AI allows us to do all that quickly, affordably, personalize each experience. So, you know, when we look at the opportunity, the academic opportunity, I think at our peak, 25% of all students in the country had subscribed to TED. Unfortunately, another 25% have sold it. But it builds quite a large business. But if you ask me which TAM is bigger in the college market and even in the high school market, that doesn't go to college. Remember, 50% of the high school market never attends higher education. So we think it's a bigger camp, and we think the content creation will be around what do you need to know to be employable, but also what do you need to know about how to interview? What do you need to know about how to get over the first AI interview, if that's what's happening? You'll be able to rehearse in real time with our coach about, you know, what questions you're likely to get.

and we'll store all that content based on the experiences that we're able to monitor that students have with different employers.

So, you know, it's a multi-year effort to do it, but we thought because we're rolling out the first early version of it later on in this quarter, that now is the time to talk about it. So we couldn't be more excited.

Appreciate that. Maybe one for David. You know, can you talk about just maybe put a little more color around sort of expectations for free cash flow generation. It sounded like in the quarter that, you know, obviously some good cash generation, but there were some severance payments obviously outgoing. You know, how much more incremental severance payments are sort of there, and when should we start to see that sort of material ramp in the cash generation here? Yeah, sure.

So the severance payments are for the So, you know, almost all behind us at this point, and, you know, we got about $14, $15 million in the first half of the year. Q3 is a traditionally slower period for us, and then Q4 has always been our strongest cash generation period. So I haven't really guided for either the quarter or the full year, just there's some timing on payments and some annual contracts, which mine, we have payments in Q3, which is the, you know, one of the lower periods.

and many, many, many, many, many, many, many, many, many,

We're pleased with that, and we believe we can continue to do so this year and next.

Awesome. Thanks for taking my questions. All right. Thanks, Ryan.

Okay. We have reached the end of the question and answer session, and this concludes today's conference. You may disconnect your line at this time, and we thank you for your participation.