Chegg, Inc Q1 FY2023 Earnings Call

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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tracey Ford. Please go ahead.

Good afternoon. Thank you for joining Chegg's first quarter 2023 conference call. On today's call are Dan Rosensweig, 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 the 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/mediacenter. 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 risk 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 Securities and Exchange Commission on February 21, 2023, 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 measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in 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.

Thank you, Tracey, and welcome everyone to our 2023 Q1 earnings call. Chegg had a solid quarter, ending Q1 above our guidance on total revenue and adjusted EBITDA. As we shared with you during our last call, we believe that generative AI and large language models are going to affect society and business, both positively and negatively, at a faster pace than people are used to. Education is already being impacted, and over time, we believe that this will advantage Chegg. In the first part of the year, we saw no noticeable impact from ChatGPT on our new account growth, and we were meeting expectations on new sign-ups. However, since March, we saw a significant spike in student interest in ChatGPT. We now believe it's having an impact on our new customer growth. Fortunately, we continue to see very strong retention rates, suggesting that those students who already understand the value of Chegg continue to choose us and retain us at high rates. We are also expecting a positive recovery in enrollment trends, which historically would be good news for Chegg. Because it's too early to tell how this will play out, we believe that it's prudent to be more cautious with our forward outlook. Therefore, we intend to provide only the next quarter's guidance at this time, and Andy will walk you through those details shortly. We can all see that AI technology is evolving at a very rapid pace. And at Chegg, we are embracing it aggressively and immediately. Throughout my career, I'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 to 150,000 subject matter experts in our network and the billions of pieces of unique learning content that Chegg owns, when coupled with the real-time conversational nature of ChatGPT will establish CheggMate as a powerful and distinctive learning tool offered exclusively from Chegg. Based on our research, 85% of students would prefer to have human experts involved in their study support. Which is why we believe that the future of learning is a blend of AI technology with human-based support to build trust and ensure accuracy and relevancy. Ultimately, we believe the introduction of CheggMate will lead to an increase in the size of the market we serve and strengthen our relationship with our users while reducing content costs. Large language models are currently used horizontally, similar to search, but history suggests that over time focused and category-leading verticals are where enduring value is created. CheggMate is being designed for learning and tailored to an individual student's learning style and needs. It will offer personalized assessments, practice tests and instant feedback along with Chegg's proprietary step-by-step solutions. We are moving very fast with a beta launch of CheggMate later this month. And as we test and iterate, we will expand access throughout the year. As with all Chegg services, our goal is to deliver improved outcomes and overwhelming value. With our recently introduced partner offerings from DoorDash and Calm, we are seeing the benefits of adding non-academic content to our subscriptions with improved retention. These value-added partnerships are creating more value for our subscribers and strengthening the Chegg brand, and we expect to add more offers in the future. Our partnership with Guild also continues to perform extremely well, and we see an even bigger opportunity ahead for us in our skills business. We are introducing new offerings, including Busuu, our award-winning language learning product, as we expand the catalog of course offerings through Guild. Other new additions include UX Design and Frontline Leadership programs, while future courses will focus on the latest advancements in artificial intelligence to meet both student and employer demand. To improve learning outcomes even more, we expect to add real-time conversational support to all of our skills-based courses, which we believe will improve completion rates. While we are talking about skills, I want to take a moment to acknowledge the recent news that John Fillmore, President of our skills business, will be leading 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 and user experiences as a growth lever. In fact, Q1 2023 was an all-time high for app acquisitions in Mexico, where we recently rolled out our localized app. We are excited and optimistic about the future and are moving fast to leverage the best of AI to benefit 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 expertise in improving learning taxonomy, our billions of pieces of unique learning content created by more than 150,000 subject matter experts. Combined with the 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.

Thanks, Dan, and good afternoon, everyone. Q1 was a solid quarter as we met or exceeded our revenue and adjusted EBITDA guidance and delivered strong cash flow. Total revenue was $188 million, driven by subscription services revenue of $168 million. During the quarter, we had approximately 5.1 million subscribers on the platform. Skills and other revenue was $19 million, driven by strong growth in skills, offset primarily by the change in the 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 a 31% margin and free cash flow was $56 million as a result of strong operating performance and higher interest rates. With interest income contributing $11 million in the quarter, an 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 million and $178 million with subscription services revenue between $159 million and $162 million, gross margin between 72% and 73% and adjusted EBITDA between $53 million 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.

Thank you. We will now be conducting a question-and-answer session. Your first question comes from Jeff Silber with BMO Capital Markets. Please go ahead.

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 ChatGPT. But what changed in March? What do you think?

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, people who would normally pay for us around mid-terms are closer to finals, and they were reluctant to pay or be longer-term subscribers. They now have a new free site to try. We have defeated all the free sites in the past pretty handily over time, and we expect that with CheggMate we will have great success going forward. But on the margin, these customers matter in subscription businesses. And as we put in the prepared remarks, obviously, it's the fastest usage of a product ever to hit $150 million, the fastest growing product. Students are the first to try these things. So we're just being prudent in the short term as we roll out CheggMate. In the long term, we're still bringing in millions of new customers. It's not that we're not bringing in new customers; just not at the level that we expected or wanted right now. Until we come out with CheggMate and build that product and get it out, we're just being prudent and careful. 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 Chegg Study is high. So all those things were good news, but when ChatGPT came out in March, it just did another bump of usage. We're just being smart because we really won't know anything until the end of August, early September, because this summer doesn't really reveal anything. So that's it.

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?

Yes. So, our clear goals on maintaining margins is to continue industry-leading margins and cash flows like we have for the past many years. As far as areas where we're planning on making changes, I mean, there will be resource reallocation on AI. And making sure we have those resources there. But it's still a little bit early. As Dan mentioned, the initial product, the beta product, comes out this month, and we'll continue to make incremental investments and shift investments to AI. We do expect over the long term that will have a moderating impact, particularly on our CapEx. But once again, it's early, and we'll make the appropriate adjustments over the next several quarters to ensure that we have high margins and strong free cash flow.

All right. Appreciate the color.

Thanks. Next question, Doug Anmuth with JPMorgan. Please go ahead.

Thanks so much for taking the questions. Maybe just a follow-up on AI and some of the investments. I guess just curious what kind of costs you might need to incur around CheggMate, 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, just hoping you could talk a little bit about the Skills business with new leaders in place? Just more about the strategic vision and product roadmap and how we should think about some of the guideposts in that business going forward? Thanks.

Yes. Thanks, Doug. 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 CheggMate out because it's an exciting time for us. We think the combination of what they can do, our content, our data, our learning taxonomy is the special sauce that will differentiate us. So we're actually very excited about and very motivated to move quickly, not just for competitive reasons, but because of the size of the opportunity. 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. We're excited about those. In terms of the cost, given our CapEx budget, we believe that the better part of this year our CapEx will actually be similar, if not better than what it's been, even as we invest aggressively in AI. One, because of the timing of the rollout, but also because this cost of AI for us is a replacement of other content costs. This will actually be more efficient, allowing us to get the content cheaper on a per-unit basis and more content overall. So we're very much in control of that. Also, once we start building ChatGPT for it into CheggMate, once the content is asked, and the sponsor 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 efficient for us and very clarifying and finding for us. So we think over time, we will get a lot bigger and even more profitable than we've been despite the fact that we've been the most profitable company or among the most profitable companies in the States. As it relates to Skills, it's another area where we're doubling down because it's working. 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, its 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 to these companies now than it's ever been because of the change in technology and because of AI. We launched those features there, and that's having some good traction. We're building a lot of courses in UI and design, and creative is going to be very important to go with AI and on AI itself. We're offering more of it, and business is going quite nicely. For those people tracking this because we break out our business into two areas, other and Chegg 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. It's making up for that gap, and we're very excited about it.

Yes. And just for clarity there, all the growth, Dan is 100% correct. All the growth is in skills, and the risk headwinds in ads and of course the changing requirement materials from being 100% recognizing revenue to revenue.

Yes. You really can't look at it year-over-year; you just have to look at it quarter by quarter. We're really fired up about what's going on in Skills. The reception to CheggMate is as big as you might think it would be, which is the combination of AI technology, the conversational nature, the real-time nature, and the reduction in content costs that will expand our ability to do all of these things. One of the reasons we were able to partner with them and have Sam be part of our announcement and interview Sam on stage at the largest education conference is because they recognize that they can't do what we can do. It's our content, our data, our learning technology. You can use ChatGPT to get some answers, which is what the customers that didn't come to us are doing, but they actually need to learn it. You need to use Chegg. We're really excited about the future. As I said, Doug, in the prepared remarks, whether it's a platform shift like it was for the Internet, like it was for mobile or what's for mobile, like it was for cloud, 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 that are the leaders in their verticals 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.

Thank you both. Appreciate that.

Next question, Eric Sheridan with Goldman Sachs. Please go ahead.

Thanks so much. Maybe two questions if I can. First, not to belabor the ChatGPT point, but would love to get a little more granularity. I know your comments were for March, but even looking out to April where you might have some data. Just to 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 changed consumption habits among your existing user base? That would be number one. And then I know CheggMate 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.

Yes, that's a great question. For the second part, it's still early to tell since we're launching this month. In the next call, it would be beneficial to discuss what we've learned about user behavior and how they're engaging with it because it's quite interesting for us. As for the first question, could you please repeat it?

Yeah. It's really just elements of what you've seen in March, maybe then a comment of how April. Just so we can understand if it acts as a gross addition headwind when you see these consumption choices?

It is 100% a gross adds issue. It is not at all a retention issue. Retention is not a take rate issue. We're actually seeing record numbers in the take rate of people that are taking the $19.95 take study path. So that number continues to elevate. I think we said it was over 40% on our 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, we are still bringing in millions of new customers over the course of the first six months. This is a gross add 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 where it's focused, almost exclusively at this point. We just have to be aware of it because it's so new, so we're very comfortable in forecasting next quarter. The last six quarters have been right, including the last one. But because the summer comes now and we really won't learn that much until next August to September, we're taking a quarter off just to be able to make sure that we really understand the impact. I can answer the other questions as it relates to CheggMate and new behavior. But retention has been phenomenal and take rate is high. So this is not a sky-falling thing. It's just an acknowledgment that there's been a technological shift, and we need to prepare for it and adjust our company to go after it aggressively and adjust our cost structure to do so. We're doing all of that now.

Next question, Ryan MacDonald with Needham and Company. Please go ahead.

Hi. Thanks for taking my questions. Dan, maybe first off on CheggMate as you're starting to do the beta testing and really grow the awareness of CheggMate offering. I think one of the things we hear from students is that their questions around ChatGPT are the lack of accuracy today, which Chegg has always been seen as a trusted brand from that perspective. But in this market dynamic, how do you sort of rebuild the brand awareness for a new offering like CheggMate that is building GPT in so that you can ensure that retention and sort of, I guess, reacceleration of gross subscriber adoption going into the fall?

Yes. It is exactly the correct question and the one that we're working on impressively. 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. So, an offset of benefits sitting on the Adobe Board with Fireflies. I've had a lot of insight into how to think about all of this. Right now, the goal is to make sure that we continue to have extraordinarily high retention, and we are performing extraordinarily well with. That goes 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. Over time, we will be reminding them of the benefits to Chegg inside the product experience itself. That's really essential. CheggMate will be an all-new user experience that will point out to the user what part is ChatGPT 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 it is and what the capability of Chegg is to let 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. If they leave Chegg, they won't get. This is essential. So the marketing is going to be in product, very viral, and use of TikTok. You'd be surprised that 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 aggressively go 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 service and why it's in their best interest to pay the $15.95 or $19.95.

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, you were testing in maybe nine or ten countries. But how should we think about sort of the ramping of the localization efforts and when you should have that localized pricing generally available more broadly across the countries that you've been testing in?

We are currently focused on about nine countries. Some of these were mentioned in our prepared remarks. For the second half of the year, our main goal is to establish a payment system in India. The demand for Chegg in India is extremely high, but our ability to process payments is currently very low. This has been a misstep on our part as we initially accepted credit cards while our users prefer debit cards. We expect to have this resolved by the fall. Our primary international focus this fall will be on CheggMate, along with expansion efforts in the UK, Australia, and Canada, with India being our key area for growth. Additionally, we are looking at Mexico, the Philippines, and similar markets where we see high interest but low conversion rates. This is related to pricing and payment system challenges. One exciting aspect of AI is its potential to enable instant translation at no cost, which will benefit Chegg over time. However, we must first address the immediate challenges we face.

Next question, Josh Baer with Morgan Stanley. Please go ahead.

Great. Thanks for the question. I guess wondering how fast you can go with CheggMate. 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, you've described it as sort of methodical, a lot of testing, and in some cases, waiting until the next semester to not disrupt auto-renewal, for example. So how fast can you go? How will the rollout of CheggMate compare?

Yes, these are excellent questions because they reflect the inquiries we're making internally. The systematic approach we’ve adopted has been beneficial for us. In this instance, speed will also be advantageous. We've begun reallocating resources and intensifying our focus, especially after the launch of ChatGPT. I had the privilege of discussing our direction with Sam for a couple of hours, exploring collaboration and the synergy of our components. We've been working on this for the past few months, and what you witnessed at the GSV Conference was a tangible representation of it. I encourage everyone to watch the video to appreciate the uniqueness of this product. Our objective is to accelerate development. This will involve continuous daily iterations. We will gather feedback, train the models, retrain them, and refine the prompts. We are moving forward as aggressively as we can, leaving nothing to chance. The rollout will progress at a beneficial speed, and ideally, that will be quite rapid.

Thanks, Dan. Another sort of higher-level question for you on competition. Obviously, there are other vendors out there that, ignoring AI and ChatGPT, Chegg performs really well against. But then there are vendors like Quizlet, Brainly, and Khan Academy, who have also announced AI tutors or AI solutions built on ChatGPT using the open API. So does the competitive dynamic remain the same, in that Chegg has the advantage because of all the data that your models trained on and all those other things? Or does the competitive environment become more intense because everyone gets to leverage ChatGPT going forward?

Yes. Not everyone can utilize it in the same manner. It's important to emphasize that the data set, content, and learning taxonomy are crucial. The outcome will depend on user experience, brand quality, brand reputation, and our superior capital structure. Many of the companies you've mentioned have attempted to outpace us with free advertising models, and they have failed significantly. Their introduction of chatbots on their content does not alter the competitive landscape in their favor. We believe our approach is considerably better than what they can offer. We've analyzed their products thoroughly, reflecting our insights into our market dynamics. Our primary concern is students seeking quick answers. If they can find some version of that, that's our immediate challenge. However, the long-term potential is much greater. Chegg aims to be instantly accessible in any language and on any subject, supported by our learning taxonomy, straightforward user experience, reputable branding, and commitment to accuracy. We're proactive, while others may be more reactive, especially when the need for flashcards may diminish in an era where ChatGPT can generate them. This situation works to our advantage, but we must treat it with utmost seriousness. It reminds me of when Amazon ventured into the textbook market; many claimed Chegg couldn't compete, yet we succeeded because this is exclusively our domain, unlike what many AI platforms will focus on. This is both clarifying and intense, and while it poses challenges, we are ready to rise to them.

Great. Thank you.

Next question, Brent Thill with Jefferies. Please go ahead.

Dan, if you set aside actual team, 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?

We were performing as we expected until around March when the launch of ChatGPT occurred. We had considered the earlier version to some extent. The timing with midterms and finals was significant, and that's when we noticed some changes. This isn't an alarmist situation; it’s about a company with a long history and management experienced through various economic cycles since 1987, recognizing that this is one of those pivotal moments. We didn’t get caught up in trends like offering Bitcoin payments or creating our own cryptocurrency or NFTs, as we didn’t see them as substantial threats. However, we view this new development as a significant transformation in how people work, learn, and access resources. We strongly believe that there will be a need for people to learn how to navigate these changes and understand the implications of the output. This shift will lead to a greater emphasis on assessment, which will ultimately benefit Chegg in the long term. Additionally, our business has performed remarkably well in terms of renewals, take rates, and the app launch in Mexico, setting new records. We see this as the biggest challenge ahead and are tackling it head-on from the very start. If other companies choose not to engage, that’s up to them. Having witnessed the evolution of the Internet, mobility, and now this, we are incredibly excited about future opportunities and are committed to pursuing them actively. This is our main focus at the moment.

Yes. And on the Skills 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? If the headwinds continue to move in on Study Pack, can this offset? Or is it still about the Study Pack?

The thought about Study Pack setbacks is doing fine. It's just about the top of the funnel conversion on marginal customers. The skills business today is substantial, and here's the simplest way to do the math: we get, on average, $17 from a customer for a subscriber per month on Chegg Study, Chegg Study Pack. On Skills, the average price right now is closer to $5,000. When we keep 100% of that revenue, we take a percentage of that for Guild. We'll have high gross margins; it's all about the cost of the content for us. It's not distribution or marketing. They take all that, and we pay them for that. The bigger we get and deeper we get, the more people get excited about learning things like AI and UX design. The more corporations focus on skills rather than higher education, the better it is for that business. That business is growing really, really fast, and it's on top of an increasingly higher base. So without giving a specific number away, I think it could be substantial as a percentage of our overall revenue.

Yes, Brent. Just to be clear, it's our fastest-growing business. By definition, it's going to be a different percentage of our business over time, but we're super excited about Skills, and we think it will continue to grow at a pretty rapid rate.

Okay. Thank you.

Next question, Jason Celino with KeyBanc. Please go ahead.

Great. Dan, Andy, thanks for taking my questions. With CheggMate, sorry if I missed it, but how much will that cost? Or will it be part of the bundle?

Yes. That's something we have yet to announce, and it's something we get to decide. There are several views on this. We believe, and we know from our testing, that we could take prices up and we could charge more for it. Our internal research indicated 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. This will likely be embedded within Chegg initially, and then we'll determine what the smartest way for getting a higher average revenue per user is. Those range of options are what you'd expect, which is at one point, right now, we have $15.95 and $19.95; we could go to $19.95 tomorrow, and that would be a substantial increase in revenue and EBITDA. We could go to a $19.95 month or 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 whole product. Those opportunities are all ahead of us.

Okay. No, that's helpful. And then you've kind of alluded to what it might look like in the beta. I'll be sure to watch the video after this that you keep mentioning. But from a student's perspective, how does CheggMate look, feel, and differ from if a student just goes to ChatGPT directly?

Yes. The video will highlight where we're going. But to give you some data points on it. First, it will look a lot cooler. I know that doesn't really matter to a lot of people, but for some reason, students care about that. Two, it will be much more conversational. Rather than just having to put in a particular question, you can ask it anything. Once you ask it anything, it will know because it knows who you are. This is what the free chat does not do. It will not personalize at all. Every time you go back in, it doesn't remember you unless you want to pay the $20 a month. We already know who you are. We know your class. We know the textbook you're interested in because we know based on the questions you've asked. We'll also know all the other questions people have asked around this and we'll be able to write the prompts for you. We'll also be able to know what part of the question you're struggling with. It’s one thing to say you're not doing well on the assessment, which we can automatically 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 it. These are all things that we'll be uniquely able to do inside Chegg, not in ChatGPT. This is where the real differentiation is in that user experience and certainty around accuracy.

Perfect. Thank you. I'm sorry, watch the video because it really does give you an example of just how amazing this thing has the chance to be.

Next question, Alex Fuhrman with Craig Hallum. Please go ahead.

Hi, thank you for taking my question. I noticed in your earlier comments that there are indications of improved enrollment later this year. Can you elaborate on the opportunities you see and how you plan to take advantage of them? Also, are you considering launching this new product in a way that it could be available for sale before the fall semester?

We are not ahead of it. I mean, we're going to be testing it aggressively over the summer months. 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 a strong fall. We’re seeing the beginnings of those signs again, plus there are public numbers that talk about enrollment saying the same thing. That should all be good news in mitigating, to some degree, the short term. We intend to very aggressively market this through the channels that are very efficient for us. Remember, over 80% of all of our traffic today is organic. We've been redeveloping the site to make sure people understand there'll be fewer things to do and 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 our advocate influencers for Chegg, to explain what it is and the difference is. So in some ways, it's a very challenging time because it's new technology, and it's coming faster than anybody thought. But you’ve got to jump on it as quickly as you can. If you don't, you will be losing. The flip side is, it's really exciting because the dreams we’ve always had for Chegg to be that companion in your pocket to not only be there in high school or college but beyond that, as we build in capabilities to help you code and other things that we couldn't do it quickly or as efficiently as before. We will be very, very, very aggressive because this is our future. There's no reason to dwell on the past. It's all about the future right now.

Next question, Brian Peterson with Raymond James. Please go ahead.

Hi, this is Jessica Wong speaking for Brian. I would like to inquire about your asset investment strategy in light of the current evolving environment. Have there been any adjustments in your approach to LTV and CAC, particularly as you implement CheggMate and other initiatives?

Yes. LTV and CAC are really important to many consumer businesses because the cost of customer acquisition is so cheap. It's not been one of the variables we’ve had to overly focus on. Resource allocation, reductions in non-CheggMate or non-skills businesses will become deprioritized compared to those things. We've already taken many constructive steps on investment choices because we intend to remain very profitable and generate a lot of free cash flow. On the LTV to CAC, the areas to think about is over what timeframe do you want it to return positively? So we can spend money on customers that return profitably three years from now, two years from now, one year, or in a year. In the short term, we're focused on in-year and within 12 months. That is an adjustment down in terms of spending, but that is because all of our efforts are going to focus on CheggMate when we're ready.

Got it. Thanks. Just one more quick question. So follow-up earlier, we're talking about the signs you are seeing already for summer usage trends. How have you also been seeing the role of your partnerships with Calm and DoorDash helping with retaining subscribers over school breaks?

Yes, it's too early to determine the effects of the school break. However, we have concentrated on providing significant value in the Study Pack for those paying $19.95, and we've seen success in that area, as that number has been increasing. We can partially credit this to bundling the two offerings in the Study Pack instead of just the base. Additionally, we have been pleasantly surprised by the number of existing customers who have signed up, especially for DoorDash. As we become more aggressive in this area and as it continues to grow, we've observed that existing Chegg customers who also enroll in DoorDash tend to cancel at a much lower rate compared to those who don’t. The early signs suggest a positive trend, but we still need to see how summer unfolds.

Next question, Arvind Ramnani with Piper Sandler. Please go ahead.

Hi. Thanks for the question. I just wanted to ask, certainly a big change, and I appreciate you all kind of recognizing that and taking it head on. But as a public company, where you have to make these investments, how are you thinking about sort of making these investments, these changes? 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. What are some of the measures you have in place that things don't move sideways while you're making that change, which is an important one to make?

Yes, fair question. We've been through model changes before. Of course, sitting on the Adobe Board, we went through model changes. If there’s doubt in anybody's mind that AI is going to be meaningful and impactful in the education space, I don’t know how to explain it to you more than the world has already explained to you, which is going to be transformative. So the first thing was to make the commitment to do it; that’s what we’ve done. Second, we recognized inside the company that we're going to have to reprioritize our expenses and personnel to be much more aggressive. Third, we looked at our capital structure in terms of CapEx and recognized that this is an offset in our content costs, and understand the cost of GPUs and CPUs and everything else. We’ve been working structurally within that without discounting our investment in the future of the company. All of those things are things we have been working on and have already done. We can monitor our business every 15 minutes and know exactly where we are against new customers and retention rates versus our expectations. We have a lot of guardrails inside the company to know the impact of all the choices we've made. As one of the questions that came up earlier, we've been very methodical about our decisions because we can test many things. I understand as a public company, people want you to move faster and have more certainty. Despite that, it may be the biggest technological shift we've seen in 20 years. We'll take it the way 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’ll monitor every aspect of that business that we can. The customers on the margin and the new customers that haven't used us are our primary focus. The model is pretty straightforward. It's not the same complexity that you've articulated. We will, over time, track usage and how people change their behavior, and how much they use the CheggMate part of the service versus the other part of the service will inform whatever future pricing increases or pricing models we choose to take. We don’t guess; we test, rather than guess. We’d rather take a little bit longer than you might like but be right. When we took a price increase, we lost 7,000 customers out of 8 million. Those are the things we know because we monitor and test everything. 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 and stay with us. This is really about new customers that have another toy to play with now, and we want to win that battle.

That's very helpful. Just one quick follow-up. As investors who are sitting external to the company, we don't have as much access to real-time data. How should we think of evaluating Chegg during this interim period? Fast forward three years, and you'll have adopted Chegg; I get that scenario. But during the interim, in the next 6 months, 12 months, or 18 months, what's the best way to track and measure Chegg in this transition?

I don't know that you'll be able to track and measure it between now and the end of the year. You'll have to wait to see how CheggMate is performing. A lot of the people on this call have done their own research that shows that students clearly prefer Chegg over ChatGPT. Externally, we don't expect to be in a situation where we'll never have annual guidance again. Right now, we're saying in the short term is because it's summer and because a new giant product is out there, we can tell you what's going to happen in the second quarter. We had a very good first quarter, but we won’t understand the impact of CheggMate or ChatGPT until the fall. Trying to predict this when new technologies come out has been futile for us, so we don’t want to do it. We’ll 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 2024. But the goals we seek are obviously a return to a higher rate of growth, continued excellent retention and take rates, willingness to pay more, length of time and having the funnel increase globally faster. Those are things we expect to do over time. If you try to track that in the short term, I’m not sure that will be much healthier.

Thank you. There are no further questions. I would like to turn the floor over to Dan for closing remarks.

Thank you, everybody. Thanks for the great questions. This is both a very interesting and exciting time for companies. I had my experience at Ziff Davis, where I was the publisher of the largest computer magazine, and we saw people go to the Internet first. We see that same similarity now, where we see younger people going to adopt AI before older people do. We are moving aggressively and positively, 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 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. We're just going to keep our head 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.

This concludes today's teleconference. You may disconnect your lines, and thank you for your participation.