Chegg, Inc Q2 FY2023 Earnings Call

Greetings, and welcome to the Chegg Second 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, Vice President of Investor Relations and ESG.

Good afternoon. Thank you for joining Chegg's Second 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 at 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/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 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 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 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.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 Q2 earnings call. Our team executed well, outperforming guidance for both revenue and adjusted EBITDA. As the second quarter progressed, we saw year-over-year trends for customer acquisition and retention rates improve, which drove the upside in our results. We are entering an exciting new chapter for Chegg catalyzed by the advances in artificial intelligence. To take advantage of these new opportunities, Chegg has pivoted rapidly because we believe that category-defining companies with strong brand loyalty, sought-after services, and highly valuable data sets can leverage AI to grow and will create outsized returns. It is still early, and since we last reported, we gained greater insights into students' use and perceptions of AI and how it relates to Chegg. Our recent survey shows students see ChatGPT and Chegg as complementary, with very different use cases. The latest wire poll survey states that while Gen Z students are using AI to improve their education, they are not comfortable with the information ChatGPT could provide. It's become clear to us that a simple, high-quality, accurate personal learning assistant is needed, and we feel we are uniquely positioned to deliver a world-class personal learning system. We are moving fast and launched the beta version of our initial generative experience in May. Feedback has been very positive. Specifically, our students like our simple user interface, which is conversational, and they have always trusted the quality, accuracy, and relevance of our proprietary step-by-step solutions. Our research also shows that 86% of students say they prefer study help that is reviewed by human subject matter experts, and 85% say they want it to be personalized to their individual learning needs. So, it is no surprise that engagement from our beta testers is extremely high, and they are interacting more with each question and are staying for significantly longer sessions. We appreciate that speed and execution are critical to our success. Our partnership with Scale AI announced today will allow us to accelerate our ability to deliver the new Chegg experience starting in the Fall and rolling out over the course of the next two semesters. The new Chegg will combine the best of generative AI with Chegg's proprietary high-quality solutions and our demonstrated ability to improve student outcomes. They can expect to see a much simpler conversational user interface, personalized learning pathways, more in-depth content, and the ability to transform it automatically into innovative study tools such as practice tests, study guides, and flashcards. In order to further enhance our competitive moat and lower our costs, we are building our own large language models, which gives us the ability to train them specifically for education. Our LLMs will be trained with our unique data sets and with the help of our 150,000 subject matter experts. We expect to deliver a significantly enhanced and differentiated learning experience for students compared to the generic models that are available today. And this is just the beginning. I want to give you a sense of how big we believe this total addressable market expanding opportunity can be and how we plan to capture it. We intend to build the largest connected community of learners around the world with a truly scalable, affordable adaptive learning assistant by combining the tools, pathways, and the accuracy that students depend on. Chegg's proven learning taxonomy, along with our deep history of data from schools, classes, and professors, sets us apart. We have said for years that students' challenges go way beyond academic needs, and now by leveraging advancements in artificial intelligence, we believe we can make a significant impact on reducing the nearly 40% of students who drop out of the higher education system and the more than 50% who never enter. Increasingly, students are connecting their academic journey with their skills-based needs in order to be employable in today's economy. Chegg is developing integrated skills pathways that will help students assess their current proficiency, identify their gaps, and then help them acquire those skills. We are in a great position to do this by leveraging our skills offerings, where we continue to see excellent growth. We also appreciate that students today face various personal challenges that can get in the way of graduating on time or at all. We know that if we can connect students to solutions that address some of these issues, such as mental health, food insecurity, and financial barriers, we can improve their chances of finishing their education and thriving. We have created a concept video for you, which illustrates how this may all come together, which you can review within our investor deck posted on our IR website. More than 50% of the world's population is below the age of 30, and they have increasingly turned online to advantage themselves academically and professionally. Now aided further by the proliferation of AI, the opportunity for Chegg to serve them is bigger than ever. And with that, I will turn it over to Andy.

Thanks, Dan, and good afternoon everyone. Q2 was a good quarter as we exceeded our revenue and adjusted EBITDA guidance and also delivered strong cash flow. Total revenue was $183 million, driven by subscription services revenue of $166 million. During the quarter, we had approximately 4.8 million subscribers on our platform. Sales and other revenue was $17 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 of 74% came in slightly higher than expected. This, along with the revenue beat, contributed to adjusted EBITDA beating guidance, which came in at $60 million, or 33% margin. Free cash flow was $56 million, the result of strong operating performance and higher interest rates, with interest income contributing $10.7 million in the quarter, an increase of $8.7 million from last year. We had several items that impacted our GAAP net income for the quarter. These included a gain of $53.8 million from the repurchase of some of our outstanding convertible debt, which was partially offset by a restructuring charge of $5.7 million we announced during the quarter and a loss contingency of $7 million we accrued related to a previous gain taken on an equity investment. We continue to have a strong balance sheet and drive significant free cash flow. We ended the quarter with $808 million of cash and investments, with total convertible debt outstanding of $773 million at par value, representing $35 million of net cash. As mentioned earlier, we repurchased $427 million of our outstanding convertible debt of $369 million and used some of the net savings to retire 3.4 million shares of our common stock for approximately $35 million. We continue to believe the combination of our operating model, balance sheet, and cash flows are among the strongest in the education industry and will allow us to deliver attractive results to our shareholders. As Dan mentioned, we are rapidly realigning our resources around AI efforts, including partnering with Scale AI to develop large language models required for students to have a fully generated conversational experience rolling out over the next two semesters. We believe our approach of developing and owning these models versus solely relying on third-party providers will create a truly differentiated and better experience for students at a lower cost. Now moving on to guidance. For Q3, we expect total revenue to be between $151 million and $153 million, with subscription services revenue between $135 million and $137 million, gross margin between 68% and 69%, and adjusted EBITDA between $34 million and $36 million. It is worth noting that we typically experience seasonally lower revenue and margins in Q3. We also have an elevated level of content depreciation from recently acquired professor-led material, which is impacting gross margins. We expect the impact of this to moderate in Q4 and margins improve. In closing, we expect the development of AI will allow Chegg to embrace a much larger opportunity over time. We believe there is nobody better equipped to meet the current or future needs of students than Chegg. We have an industry-leading brand, proprietary data, strong operating model, and a balance sheet to extend our leadership into the future. With that, I'll turn the call over to the operator for your questions.

At this time, we will be conducting a question-and-answer session. Our first question comes from Doug Anmuth with JPMorgan. Please proceed with your question.

Thanks for taking the questions. Can you just talk about how the new AI experience with Scale AI will differ from CheggMate and kind of the path that you've been going down? And then, I guess second, if you could also just talk about the drivers you think of the 2Q improvements around customer acquisition and retention as you went through the quarter. Is that just distance, you think, from the ChatGPT launch or more of the students recognizing perhaps some of the deficiencies on that side? Thanks.

Yes, that's a great question. I'll start with the second part. Research indicates that once students realize that our offerings are distinctive and tailored specifically for their needs, they will continue to use Chegg instead of trying to replace it with ChatGPT. Our findings suggest that most users of both platforms plan to stick with Chegg, which is very encouraging for us. Regarding your first question about the differences, rather than creating a separate product, we are reworking Chegg to enhance the overall user experience for Chegg Study and Chegg Study Pack. This aligns with our vision, which we illustrated in a concept video to showcase the improvements in conversational style, simplicity, and user interface. One unique advantage we have is our vast database of over 100 million questions and user data, enabling us to create personalized learning experiences for each student based on their history and the experiences of others in similar academic settings. This level of personalization isn't something that general AI can offer, which sets us apart in the education sector. We're focused on making learning easier by providing study tools based on the materials students are already using. The contrast between our user-friendly approach and ChatGPT's complexity, which is primarily geared toward writing rather than active learning, significantly benefits our trends and is positive for our shareholders. Instead of just launching CheggMate, we're integrating these innovations directly into Chegg. Scale AI plays a different role; we will continue to collaborate with ChatGPT to maintain conversational elements and effective explanations. However, Scale AI enhances our ability to leverage our unique data and history to create personalized experiences for each student. This is our key differentiator. We were already planning to develop this, and partnering with Scale AI will speed up our process, allowing us to roll out categories more swiftly instead of launching just a few at a time. They are a strong partner and work with multiple platforms, but we will also engage with other relevant generalists to add value to our system. Scale AI helps us capitalize on our unique assets that are highly sought after by others.

That's very helpful. Thank you, Dan.

Let me just fill in here. Dan mentioned earlier in the answer to that question. CS and CSP, just so everybody is aware on the call, that he's referring to Chegg Study and Chegg Study Pack. That's our internal terminology. Thank you.

Our next question comes from Jeff Silber with BMO Capital Markets. Please proceed with your questions.

Thanks so much. I'm just wondering if you're seeing any different trends in your subscribers between the U.S. and some of the larger markets that you serve overseas?

Well, summer school is really a U.S. experience more than it is outside the U.S. So most of the data we have over the last few months regarding actual user behavior is U.S.-based. So I really can't speak to outside the U.S. What I can say for those that we have outside the U.S. that have been testing our new experiences, the results have been very, very similar, which is significantly increased engagement, length of time using it because they're getting access to more information and asking more and more questions that we will have in the system. But it's too early to give an international lens versus the U.S. I think we'll be able to do much more of that on the next call because really, the semester picks up in about two weeks. So sort of the last week or two of August through the first two weeks of September is when the overwhelming majority of when the good stuff happens.

That's helpful. I know you have previously mentioned strong visibility in your business. I'm curious about what you need to see before you start discussing annual guidance again.

Yes, we ask ourselves that same question, and I'm sure Andy is going to have some perspective on this. But I think for the moment, given the volatility of how people are reacting to information, our lens right now is to focus on what's right ahead of us, which we have great confidence in. As we build a few of those, I think it leads us back to where you're asking. What I will just add to what I said earlier is as the semester evolves, the third and fourth weeks of August, the first couple of weeks in September, that gives us a really good lens into obviously, to Q4. Since Q1 is a rollover from Q4, I think we're getting closer to that. But I think we're just going to stay with what we're doing now, because it's just a more conservative approach to things. I think we learned the impact of the volatility of people just, in my opinion, overreacting to the information that we provided. Andy, I don't know if you have more to add to that.

No, Dan, I think you nailed it. I think – and Jeff, you're aware, obviously, the season starts to pick up, like Dan said, in the next couple of weeks. If we continue to see the trends we've seen over the last few months, that will certainly give us more confidence, but we need a few more periods before we get to that point.

Our next question comes from Eric Sheridan with Goldman Sachs. Please proceed with your question.

Thanks so much for allowing me to ask two questions, if I could quickly: One would just be the cost question. So when we talked three months ago, you laid out a strategy around CheggMate and OpenAI. With this new strategy, how different is the potential cost or investment implications for this approach versus the prior approach? And how should we sort of bring that back and reflect that in the cadence of either margin or needed to invest in the business? And then I'm just a little bit unclear. So the second one will be a follow-up. When people go back to school over the next month, this will be a solution that builds momentum as you get deeper into the year, and the solution you're talking about today would be more implemented towards the end of this calendar year and the beginning of next calendar year? Or will it be deployed over the next one to two months? Just one would be timing and one would be depth of investment. Thank you.

Yes, I'll handle the second one first, and then I'm sure Andy is going to want to handle the depth of investment, which I think you're going to be happy with the answer, because we are. But on the second one, consider it just a forever rollout, which means the product is just going to get better every day, letting students use it. Depending on what subjects they use or how they use it, they will see the product evolve. It's really that way to think about it, which is they'll start to experience certain aspects of the conversational nature and the generative AI content, depending on the subject matter they're doing; they'll start to experience that in the fall. It's a little bit like rolling thunder, and we expect word of mouth and the viral nature of it, all the things that have built Chegg over the years to start to spread over that period. But I think what has spread is the quality of our content and the accuracy of our content, which are essential for those trying to learn. So I'll let Andy talk about the cost structure and the cost. But again, I think you're going to find them to be constructive and positive.

Yes. When we talked about this on the last call, there were a lot of moving parts. And there still are to some extent, but as we evaluated the multiple options that we had for having a fully generative conversational experience for our students, when we evaluated this, the option of partnering with Scale AI became by far the most cost-effective way to go; and it helped us get to market sooner. So as we look at this, we believe this will allow us to maintain or potentially over time, increase margins, and we believe over time will enable us to spend less CapEx as we implement these solutions. So this was really a big win for us. And as it rolls out over the next two semesters.

Great, thank you.

Our next question comes from Stephen Sheldon with William Blair. Please proceed with your question.

Hey, thanks for taking my questions. I guess on the improvement that you talked about during Q2 and customer acquisition and retention, I would love some more detail there, especially how you're measuring that improvement, if there's any kind of rough quantification you can provide? And also, did you see some of those trends continue into early third quarter, thinking about July?

Yes, what we're referring to are, obviously, everybody that runs a company should know the levers in their business. Andy has explained subscription math multiple times. It really is about retention rates, and in retention rates, you look at a lot of different variables, which is what accounts are up for renewal, what canceled, what percentage renewed, those kinds of things. We have been seeing a decrease in cancels, which is excellent, and we have been seeing an increase in people that are up for renewal, which have renewed. These metrics indicate that we're seeing a higher retention rate, which is great. The second one is new accounts, which is really where all of this challenge started. Before COVID, we used to do about 3.2 million new accounts a year, and we peaked during peak COVID at about 5.8 million. Now we have remained above 5 million. We are actually ahead of where we were before COVID, and the company has just accelerated. It always surprises me when people don't really understand how much we've grown compared to just a few years ago. But we're referring to the trend in new account growth. We were seeing declining new account growth, which was substantial, and this is improving each and every month, including in July. So we're getting closer to our objective of returning to growth.

Very helpful. Good to hear. One quick follow-up. I just noticed that you didn't use CheggMate branding at all in the press release or prepared remarks. Was that intentional? And I guess are you considering changing the potential branding there at all?

Yes. The point we're trying to make here is it's no longer going to be a separate product; it's Chegg. When I say Chegg, initially it's Chegg Study and Chegg Study Pack. Obviously, AI will be integrated into everything, including skills, writing, and math. But as we got deeper and as we really understood the depth, quality, and differentiation that we have versus ChatGPT or any other players in the education space in terms of the value it could create for students, we made the decision to just make it all part of Chegg. As we think about how additional value gets created, the more value we create for students, the stickier it becomes, and the more things we can do for them. As you watch the video – the concept video we put out, you’ll see the other areas we can address. We believe our pricing power, which has always been strong, will even get stronger. As we roll it out to everyone, we can imagine increasing our average revenue per user (ARPU) and our yield. So it's a bigger move than before.

Our next question comes from Josh Baer with Morgan Stanley. Please proceed with your question.

Great. Thank you for the question. I wanted to ask one on competition. I think historically, you had a pretty favorable competitive landscape as the clear leader, and maybe students used a few different solutions sort of in a complementary fashion. I'm just wondering how to think about the new competitive landscape, ignoring ChatGPT for a moment. How does the future Chegg compare to other education-specific companies that are leveraging similar language models or OpenAI APIs, thinking about Conmigo or Quizlet or what might come from learning? Like any thoughts on the new competitive landscape as these education vendors use AI as well?

Yes. I think from our perspective, we have such a big moat, and our moat is only getting stronger because really, what we're learning is that the speed of computing, particularly NVIDIA, has changed the game here. The conversational nature that ChatGPT has shown is certainly intriguing. But at the end of the day, the next set of value is being created by companies that already exist, that already have very big brands, incredible loyalty, are known for doing something, and can leverage their own datasets and their own customers. So nobody in the education space, from our perspective, has a more relevant or better dataset than we do. We're learning that running the AI against the data creates a differentiated experience, not the AI itself on its own. Without the data, it's irrelevant, and that’s why these generalists can't do what we do. By keeping our data proprietary, and as Andy said, building our own LLMs, we think our moat only gets bigger. It does take capital to invest, and many of our competitors don't have it. We generate more free cash flow than most of them generate in total revenue. So the actual size of these companies is insignificant compared to Chegg in terms of business, datasets, and capabilities. What you’ve seen from competitors is mostly just chatbots versus what we're building. I think you'll be able to compare our concept video with what you see from them, and I think you’ll see our moat only getting bigger.

Thanks Dan, that's helpful. And then one quick one for Andy on CapEx. The lowest quarterly level since 2018, I think. Just wondering how much of that was lower engagement or Q&A from students versus leveraging Gen AI for your own content creation. Essentially, is this level that we saw sustainable? Or how should we think about CapEx going forward? Thanks.

No, it was fairly seasonally low, without a doubt. And as you know, we have – it's probably the quarter where we have the fewest students actually in school, right? While we do have improvements, it's still a small period. So no, I wouldn't expect that to continue. But we do expect CapEx efficiencies beyond this. We believe that as we start implementing some of these AI solutions, we will see benefits on CapEx as we move into, call it, into 2024 for the sake of argument at this point.

And the reason for that, by the way, and I think Andy explained it perfectly. The reason for that is the cost of content for each particular piece should decrease for us, because we can leverage AI versus only relying on human effort. So the cost of content will reduce our ability to answer more questions than ever before at a lower rate on a per-question basis, thus decreasing overall spending. The other areas we were investing in, such as professor-led content, will become much less important in this new world, and the ability to leverage the data we have with ChatGPT and Scale AI to create unique learning paths will be the differentiator. That’s the essence of what Andy was saying.

Our next question comes from Ryan MacDonald with Needham & Company. Please proceed with your question.

Thanks for taking my questions. I'll have two separate ones in this. On the first one, just a clarification, Dan, in terms of your commentary around retention rates and the improvement in new account sign-ups. Should we expect the second quarter subscriber counts to sort of trough here in 2Q and start to see improvements as we go into the back half of the year? And then separately, just curious to get your thoughts. There was some research out, I think, Stanford and Berkeley, in mid-July about the declining or lack of efficacy from GPT-4 on math problems. I wonder if you're using that at all when considering the additional rollout of Chegg and leaning into that math use case more and the functionality you have with the math way to further differentiate yourself. Thanks.

Yes, good question. Let me take the second one first. One thing about the college market we've learned over the years is it's very viral in nature in terms of student communication. I think that's to our advantage; it was when we were building the company. And I think people got very excited about ChatGPT and AI helping education. If AI can elevate people academically and skill-wise, we all root for that. That's what Chegg is building. I think that's why many are rooting for our success; it’s surprising. It only takes one person getting the wrong information to destroy their semester, and that can happen quickly. We’re known for our accuracy. There's really nothing more to support our value proposition because we just keep getting better. I think I forgot the first question; could you remind me?

Yes, it was around your commentary in one of the previous Q&A around retention rates and that you're seeing fewer cancellations and more subscribers that are up for renewal actually renewing. So as you think about that dynamic, should we expect the second quarter subscriber count to be the trough level here and to start seeing growth in that metric as we get into the back half of this year?

I think, I'm sure Andy will add to this. From our perspective, we are going to stick to one quarter at a time, as we mentioned earlier, because we've had false promises before in terms of what we've seen. But if current trends continue, and we will find out if they do as the year goes on, then I think you'll see a very different and a very positive trend that we're all looking for, and I expect it to happen. We do expect to return to growth. We believe the launch of the new products will be very valuable, and we think that the research you mentioned from Stanford confirms it isn't optimal for what we do. What we do is more valuable to students than what they do, and we expect to be a growth company again. When that happens, we will just have to wait and see, but the trends are moving in the direction we hoped for.

Our next question comes from Alex Fuhrman with Craig-Hallum. Please proceed with your question.

Hi, guys. Thanks very much for taking my question. I was hoping you could talk a little bit about your business in emerging markets, specifically India. I think in the past, you said maybe you hadn't handled the rollout of payments so well in India. Can you give us a little bit of an update on the timeline for all debit card acceptance in India and when you could start to see that market move the needle?

Yes. The latter part is hard for me to say, and I don’t want to predict it yet, because I think in the world we've lived in for the last three or four years, making predictions has not resulted in a good outcome for us or anyone else, really. The first part I can answer specifically, we are rolling out this month the new payment capability of the unified payment platform, which will allow for debit cards. That's going live this month. We will start seeing the impact over the next few months, but it’s very exciting for us.

Our next question comes from Brent Thill with Jefferies. Please proceed with your question.

Dan, just on the tone of demand you saw in Q2 and going into later summer. Can you bring us up to speed on that and ultimately, anything new in the playbook in the going-back-to-school season that you're seeing that may be working or that you're contemplating? Thanks.

Yes. To give you a sense of the scale, investor winds down, school starts, we have summer school, and the school semester really picks up. The volume will double, then triple, and then increase by about 50% again, all within a three and a half to four week period. That period will start in about two weeks from now, and I think we'll peak around the first 10 days of September regarding what we expect in terms of when our real new account volume happens, and we're prepared for that. In terms of go-to-market, we’ve always been very good at it. As you've seen, no one else has anything near the size we do with paid subscribers. Others have tried to replicate what we've done – it hasn't worked. We generate more EBITDA than most companies do in revenue. So, I think the channels that have been working include TikTok, which has become significantly more important to us over the last couple of years in terms of using clips and influencers utilizing our content to teach people. So I'd say that's the only new avenue that we're leading into more than we have historically.

And sorry, on the tone of demand, continuing to strengthen week-over-week, especially into the beginning of Q3 as well?

Yes, as I mentioned earlier, we began to see positive trends compared to what we anticipated, beginning in June and throughout June and into the first month of this quarter, and that gives us confidence to provide our guidance. Things can change because, as I mentioned, the last two weeks of August are as big as the first three weeks in the peak season versus the trough season. So one week can be larger than a week in the current season. So as Andy said to me this weekend, you have to do something you're not the best at, which is to be patient. So, like all of you, I will be patient as we go through this period. What we hoped to see, we are seeing, and those positive trends have continued.

Our next question comes from Brian Peterson with Raymond James. Please proceed with your question.

Hi, this is on behalf of Brian. As companies look into new AI use cases and considering your partnership with Scale AI, are you exploring any M&A opportunities in this area? Additionally, how are you approaching your overall capital strategy at this time? Thanks.

Yes, I'll address the first part, and let Andy take the second part regarding our capital strategy because I think people should see the fantastic work Andy has done with the debt and stock buybacks, which has really benefited shareholders. In terms of M&A, the key element companies are going to need is the data – databases, and customer lists. We have those resources. For us to achieve what we're trying to accomplish right now, it doesn’t feel like M&A is the answer, since our moat actually gets amplified as the result of AI. Our data allows us to do far more than anyone else can do, given the advances in AI and machine learning. While there's always the potential for something to accelerate our progress, that isn't a priority right now; I think Andy has better uses for our cash. So, Andy?

When considering capital allocation, ideally, you'd use your resources to drive and grow the business. Those opportunities right now don't make sense for us. What we've been doing over the last several quarters has been very opportunistic with respect to some of our securities buyback. Last quarter, for example, we retired debt at a sizable discount, almost $54 million. We saw this, and we will continue to be, let's call it, opportunistic and potentially active depending upon the value, but we've got a strong balance sheet, as Dan highlighted, as we drive significant free cash flow. So, we have the ability and confidence to make those moves, should opportunities arise.

Our next question comes from Jason Celino with KeyBanc Capital Markets. Please proceed with your question.

Great. Thanks. This is Devin on for Jason today. Thanks for taking our question. Nice beat on the revenue and EBITDA results. I want to dive in on the subscriber number a bit more. I think in the quarter, 4.8 million subscribers came in a little lighter than expected and also represents a decline there. But can you provide any additional color on what drove the decline in the quarter? Was it mainly on the softer new account side? Or did you see higher churn than expected in the quarter?

I'll let Andy give more detail, but we did not read that as being light. We beat revenue, and we beat EBITDA substantially, which is challenging to do on a $17 product during a lower season, particularly as the season ends. So, I'm not sure what you're comparing it to, but Andy?

Yes, yes. To be clear, we don’t guide to net paying subscribers. But it's a matter of subscription math. In Q2, we were in a period where it was dominated by renewals from prior periods where we had steeper declines in new subscribers. What Dan is talking about is the fact that we're digging ourselves out of that pool. Relative to what we expected, our performance is improving. When you look at the quarter as a whole, both from a retention standpoint and from a new subscriber standpoint, it was better than we expected. However, that is it just didn’t meet the market's expectations.

Got it. Understood. And then just one more question for me. Last quarter, you called out areas like Mexico with really high engagement interests but low conversion. I'm curious if there are any additional initiatives that went in during the quarter to drive that conversion rate up? Thank you.

Yes. These are really interesting questions. As we adjusted the entire company to leverage AI's capabilities, the countries prioritized haven't changed; Mexico, the Philippines, Canada, Australia, the U.K., Turkey remain the focus. What's better now is AI allows us to perform these tasks faster, often at the same time. For example, AI's instant translation makes it easier for us to add localized content quickly and at a lower cost. We're really going to take advantage of these new capabilities for our students, and we'll continue doing all the price testing. During a slow season, it doesn't provide the right signal for knowing what's going to happen, particularly in the high summer, as most other places don’t.

There are no further questions at this time. I would now like to turn the floor back over to Dan Rosensweig for closing comments.

Thank you, everybody, for your questions. We're really proud of the team and the results. As the information and awareness of AI evolves and its capabilities evolve, we believe that history serves as a good guide; the players that have strong brands, unique assets, and the ability to leverage new technology for their customers' advantage will be successful. History indicates that companies like Adobe, Microsoft, Google, and ServiceNow that have built strong relationships, loyalty, and expectations of quality with their audiences will create more robust, faster, and lower-cost solutions over time. We are excited about the momentum we’re seeing. We will take things one quarter at a time until we get comfortable that this is sustainable. We expect to return to growth. As we do, you will see margins improve. We've maintained over 30% margins for the last several years, so we have the capital necessary, the business model, and the proprietary datasets that others wish they could access. We are going to use them to build our own elements to our advantage. The next six months will be exciting for Chegg, and we're working hard. Thank you all for joining the call. Enjoy the rest of your summer.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.