Greetings, and welcome to the Chegg, Inc. Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce Tracey Ford with Investor Relations. Thank you. You may begin.

Good afternoon. Thank you for joining Chegg's Fourth Quarter 2024 Conference Call. On today's call are Nathan Schultz, President and CEO; and David Longo, Chief Financial Officer. A copy of our earnings press release, along with our investor presentation, is available on our Investor Relations website, investor.chegg.com. A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our media center website at chegg.com/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 for the year ended December 31, 2024, to be filed with the Securities and Exchange Commission as well as our other filings with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and the investor slide deck found on our IR website, investor.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 Nathan.

Thank you, Tracey. Hello, everyone, and thank you for joining Chegg's fourth quarter earnings call. Before I cover our 2024 accomplishments and 2025 focus, I want to make sure the two announcements we are making are clear. First, we announced we are undertaking a strategic review process, exploring a range of alternatives to maximize our shareholder value, including being acquired, undertaking a go-private transaction, or remaining a public stand-alone company. Second, we announced the filing of a complaint against Google LLC and Alphabet Inc. These two actions are connected as we would not need to review strategic alternatives if Google hadn't launched AI Overviews or AIO, retaining traffic that has historically come to Chegg, materially impacting our acquisitions, revenue, and employees. Chegg has a superior product for education as evident by our brand awareness, engagement, and retention. Unfortunately, traffic is being blocked from ever coming to Chegg because of Google's AIO and their use of Chegg's content to keep visitors on their platform. We retained Goldman Sachs as the financial adviser in connection with our strategic review and Susman Godfrey with respect to our complaint against Google. As the education industry at large continues to transform, Chegg has strengthened its commitment to serving students with a clear focus on those seeking to build knowledge and achieve success along their academic journey. Through focused investment over the past year and the integration of cutting-edge technologies, we have advanced the Chegg product offerings to deliver a comprehensive, personalized, and verticalized learning experience for higher education. The Chegg of today provides precisely what learners need and ensures that Chegg maintains a strong reputation for quality and trust. Regarding technology in 2024, we integrated AI and machine learning into our product stack. We blended third-party AI models with our proprietary student-focused data and high-quality content, delivering more value to the learner. We are AI model-agnostic, seamlessly incorporating new frontier models like Llama, Anthropic, Mistral, GPT, and new models as they become available. We use techniques like A/B testing, multi-shot prompting, and retrieval augmented generation to improve how our AI learns, retrieves information in real time, and delivers consistent results. With this work complete, we are now building verticalized applications for education at a fraction of the time and cost while also increasing our level of personalization. As we've mentioned before, our implementation of machine learning in multiple AI models has significantly reduced the cost of creating content by more than 70% while maintaining the high quality students expect. We stand by the quality of our content so much that in Q3, we implemented a Satisfaction Guarantee. Last fall, we launched an innovative brand marketing campaign and activation program that reinvigorated top-of-funnel traffic, creating strong consideration, bringing in new users, and ultimately driving conversion. As a result of our full funnel program, we've seen year-over-year improvements in click-through and conversion rates, leading us to double down on this commitment in 2025. With regard to TikTok specifically, we were able to capture a 16% increase in awareness among underclassmen. On the product front, we have significantly advanced and differentiated Chegg's AI-powered question-and-answer experience. At the front end, we have simplified the question submission process and allowed for more natural inputs and interactions. Learners now instantly receive step-by-step explanations and reinforcement, adaptive and personalized based on their individual strengths and weaknesses. Finally, Chegg proactively offers students a variety of unique recommendations called next best actions to reinforce and further their learning. These product upgrades resulted in 66% more questions being asked in 2024 versus 2023, adding nearly 26 million additional solutions to our archive and contributing to a 15-basis-point increase in subscriber retention over the course of the year. I want to touch on Busuu, our language learning service, which has done a tremendous job transitioning to a freemium business model and integrating AI as a key product feature with the introduction of Speaking Practice. This strategic refocus increased the first 30-day conversion rate to paying customers by 31% and led to a 9% year-over-year revenue growth for 2024, a trend we expect to continue in 2025. The enterprise part of this business is performing very well, with revenue up 46% in 2024 as we added an impressive set of enterprise customers, including Total Energy and Carrefour. The enterprise business will continue to expand with additional organizations, reseller relationships, and our successful partnership with Guild, specifically within their English language learning category. While we've made significant headway on our technology, product, and marketing programs, 2024 came with a series of challenges, including the rapid evolution of the content landscape, particularly the rise of Google AIO, which has profoundly impacted Chegg's traffic, revenue, and workforce. As already mentioned, we are filing a complaint against Google LLC and Alphabet Inc. in the U.S. District Court for the District of Columbia, making three main arguments: First is reciprocal dealing, meaning that Google forces companies like Chegg to supply our proprietary content to be included in Google's search function. Second is monopoly maintenance, or that Google unfairly exercised its monopoly power within search and other anticompetitive conduct to push out companies like Chegg. And third is unjust enrichment, meaning Google is reaping the financial benefits of Chegg's content without having to spend a dime. As we allege in our complaint, Google's AIO has transformed Google from a search engine into an answer engine, displaying AI-generated content sourced from third-party sites like Chegg. Google's expansion of AIO forces traffic to remain on Google, eliminating the need to go to third-party content source sites. The impact on Chegg's business is clear. Our non-subscriber traffic plummeted by negative 49% in January 2025, down significantly from the modest 8% decline we reported in Q2 of 2024. We believe this isn't just about Chegg; it's about students losing access to quality, step-by-step learning in favor of low-quality unverified AI summaries. It's about the digital publishing industry. It's about the future of Internet search. In summary, our complaint challenges Google's unfair competition, which is unjust, harmful, and unsustainable. While these proceedings are just starting, we believe bringing this lawsuit is both necessary and justified. While the challenges we outlined will persist, we are focused on the clear goal of stabilizing the business through the course of 2025. We're driven by the core belief that the relevancy and need for comprehensive student success platforms, offering an adaptive, personalized experience to support learning, will only increase over the coming years. Administrators and faculty are acknowledging the need to change their teaching models and assessments to better reflect the AI-normalized environment we are now in. The dramatic disruption that came with the launch of generative AI platforms has started to stabilize as schools now understand the significant risk and impact of students relying solely on generative AI tools. This view is widely supported by some recent studies. First, a study from the American Association of Colleges and Universities and Elon University explored the impact of generative AI on academic integrity, with 92% of faculty worried about AI undermining deep learning due to over-reliance on AI tools, and 95% of these leaders indicating that the teaching models at their school will be affected significantly or to some degree by generative AI. Second, the latest addition of Chegg's Global Student Survey measured insights from nearly 12,000 undergraduate students in 15 countries. 53% of undergraduate students who have used generative AI voiced concerns about receiving incorrect or inaccurate information. Third, we conducted proprietary research on student personas and learned that at least 82% of U.S. college students want more than what generative AI offers. These students need to develop knowledge, not just get quick answers. So as 2025 gets underway, here's where we are leaning in: In 2025, on brand and marketing, we are continuing to raise brand awareness and improve conversion rates. In January, we debuted our Get a Grip brand campaign featuring our new mascot, Ace the octopus. This physical representation of Chegg allows us to connect with our audience in a fun way, clearly conveying how we are on the side of students throughout the semester. In addition, we are continuing our expansion into new media channels, including streaming platforms like Hulu and YouTube, and social channels like Discord and Twitch. We also launched Live Office Hours on social media channels to provide students with instant, live, course-specific instruction. We aim to provide an interactive community-based learning opportunity while introducing our brand and value to new users. Our goal is to have more than 1.5 million students attend our live programming this year. Diversification is key to funnel resiliency, and taking a full-funnel approach is necessary to ensure we bring in the right traffic and regrow our customer acquisitions. In 2025, on products, we are building experiences worthy of virality, acquisition growth, and retention, and making these experiences as universally available as possible. First is Solution Scout, a new product we launched earlier this month. As I mentioned earlier, students lack trust in generative AI, and they've told us they are spending too much time triangulating, comparing, and verifying solutions across multiple platforms. This results in a significant amount of wasted time that could be spent learning. Solution Scout allows students to see side-by-side answers from multiple large language models along with Chegg's solution. But what's most important is that Chegg, through our proprietary technology, can compare and contrast the solutions, providing students a massive time save and value, and our early indications are very positive. We're also excited to launch an updated feature set for practice and exam preparation, personalized to each student. 71% of students report that they do not have adequate practice resources when preparing for exams, and Chegg can help coach each student to confidence. Monthly, our platform collects more than 3 billion data interaction points, enabling us to customize and personalize this experience. Along with our personalization, students can change the difficulty and format of questions, whether they want to learn via flashcards, multiple choice, or word problems. Students need to gain competency in their studies, and practice tailored specifically to their individual strengths and weaknesses is how they will achieve that. This is the Chegg that exists right now. Our goal with our platform is simple: we want students to thrive. We want students to have a wow moment with Chegg. Wow Chegg is not just a grab-and-go answer; wow Chegg is not just generative AI. That wow moment is when a student realizes Chegg understands my specific needs and is a platform I can use every day to succeed in my educational journey. This wow moment is what will unlock our ability to stabilize our business. Lastly, on the expansion of our business model in 2025, I want to touch on our enterprise strategy, which enables us to diversify and generate recurring revenue streams. We're continuing to expand our business-to-institution pilot program, which began in late 2024. With five pilot programs active, we hope to work with approximately 35 additional institutions by the end of the year. There is a tremendous opportunity to support a broader range of students in achieving their academic goals and increase persistence and graduation rates, which is a major issue in higher education today. We've seen early receptivity and positive feedback on how these pilots are already helping students and hope to move a number of them into full campus-wide implementations by the end of the year. Before I hand it over to David, I want to summarize what's most important from today's call. We announced that we are undertaking a process to review strategic alternatives, and we filed a complaint against Google. In addition to this, here are the keys to our 2025 strategy to stabilize our business: Key number one, build brand awareness, drive more qualified traffic, and increase conversion rates. Key number two, expand our product set to offer unique solutions for students that increase the frequency of use and create clear and differentiated value for Chegg. Key number three, diversify our revenue streams with business-to-institutional programs and other enterprise offerings. We continue to have a strong and trusted brand, a customer base of millions of global subscribers, a large market opportunity, and amazing employees to get the job done. We believe 2025 will mark a turning point for Chegg. With that, I'll turn it over to David.

Thank you, Nathan, and good afternoon. Today, I will be presenting our financial performance for the fourth quarter of 2024, along with the company's outlook for the first quarter of 2025. We delivered a solid fourth quarter, surpassing our Q4 guidance for both revenue and adjusted EBITDA. While navigating industry challenges, we remained laser-focused on executing our strategic plan, enhancing our product market fit, and continuing to prudently manage our expenses. We remain on track to achieve 2025 non-GAAP savings of $100 million to $120 million from our previously announced restructuring activities. Additionally, we strengthened our balance sheet by repurchasing $117 million of our 2026 convertible notes at a significant discount. In the fourth quarter, total revenue was $143.5 million, a decrease of 24% year-over-year. This includes subscription services revenue of $128.5 million, down 23% year-over-year. We had 3.6 million subscribers during the quarter, representing a decline of 21%. Subscription services ARPU decreased by 3% year-over-year, primarily driven by a temporary dip in our monthly retention rate in November and December, which has since returned to historical norms. Skills and other revenue was $14.9 million, down 31% year-over-year due to the market shift away from traditional boot camps to lower-cost short-form programs, and a decline in advertising revenue from reduced traffic concessions across our platform. We delivered adjusted EBITDA of $37 million, representing a margin of 25%. As mentioned earlier, in the fourth quarter, we opportunistically repurchased $116.6 million in aggregate principal amount of our 2026 convertible notes at a $20 million discount to par. Free cash flow for the fourth quarter was $4.8 million, despite incurring approximately $25 million in cash outlays related to employee severance from our two restructurings in which we laid off more than 700 employees, as well as the Pearson legal settlement. As anticipated, we expect another $11 million in cash restructuring payments, with a significant portion to be incurred in Q1. Capital expenditures for the quarter were $13 million, down 52% year-over-year, of which $8.7 million were content costs. Leveraging the power of AI, CapEx content costs have decreased 56% year-over-year, while the number of questions asked increased by 2%. Looking at the balance sheet, we concluded the quarter with cash and investments of $528 million and a net cash balance of $42 million. Looking ahead, as Nathan detailed earlier, we have an exciting and ambitious agenda for product and marketing in 2025. However, as we work towards realizing the benefits of these initiatives, industry challenges are causing a notable decline in traffic and subscriber acquisitions. These factors are putting pressure on our business and impacting our financial outlook. For Q1 guidance, we expect total revenue between $114 million and $116 million, with subscription services revenue between $104 million and $106 million. Gross margin is projected to be in the range of 66% to 67% and adjusted EBITDA between $13 million and $14 million. In closing, despite the ongoing industry challenges that are putting pressure on our financial performance, we made significant progress in 2024 by building technology, integrating AI, and enhancing products while prudently managing expenses. We enter 2025 with a solid foundation and are focused on stabilizing business trends. With that, I will turn the call over to the operator for your questions. We respectfully advise that we will not be taking questions related to the company's strategic review process.

Our first question comes from Eric Sheridan with Goldman Sachs. Please go ahead with your question.

Thanks so much for taking the question. Maybe I'll just ask one. With respect to the Q1 2025 guidance, I just want to understand if you can unpack a little bit the incremental operating leverage in the business and how we should be thinking about dollar revenue growth and what it can translate into in terms of incremental adjusted EBITDA when you measure against fixed versus variable costs in the business and/or some of the key investment initiatives, either brand, traffic, or product that you see as pretty critical to make in 2025. Thanks so much.

Yes, thank you for your question. This is David. Our model is very efficient regarding gross margins and contributes significantly to our bottom line. For instance, if we generate an additional $1 million in sales, we would retain about $900,000 as profit. It's highly efficient in that regard. On the investment side, in the first half of the year, we're launching a comparison tool and enhancing our next best actions on tests and practice. We are hopeful that these initiatives will lead to increased engagement, better retention, and improved marketing efforts. We are also expanding our funnels to drive traffic back to the site, which should facilitate growth and customer acquisition.

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

Thanks for taking my questions. Maybe to start, I'm curious to hear a bit more about this sort of shift into new revenue streams and the enterprise offerings and business-to-institution programs. Perhaps with the pilot programs you have with the institutions right now, can you talk about what the pricing model looks like? Is it sort of the institutions paying for access to Chegg and then sort of including it or rolling it into tuition? Or how should we think about how these pilot programs create monetization opportunities? Thanks.

I appreciate the question, Ryan. It's Nathan. Let me start and back up a bit on the business-to-institution side. Just to remind everyone, this program we started last year has shown some inbound interest from schools. The key solution they're looking for is around the areas of persistence and graduation. I think as we all understand, in the U.S., we have about 19 million students in the system, with the freshman class about equal size coming in year after year. We're dealing with graduation rates that are only in the 60% range, which means students are falling out of the system. This is a significant issue, particularly when you look at some of the government policy, particularly around the College Cost Reduction Act that we're watching. So schools are interested in how to serve students as a customer, how to provide them with the right tools and services to help them not only conquer their academic journey but also acquire the skills they'll need as they leave college to get a job. So I'm excited about the program. We've got several pilots under our belt right now. We're looking to have potentially 35 more pilots throughout the course of this year and are interested in moving those pilots into full campus-wide implementations. The pricing model is quite simple. It's a seat-based pricing program to get every student onto the platform and provide tools for every student. I'm excited about the early traction we've got and the early partnerships we have going on, and we'll look to keep you updated in future quarters.

Our next question comes from Bryan Smilek with JPMorgan. Please proceed with your question.

Great, thanks for taking the questions. I guess just to start, can you talk about churn throughout the quarter? I think you had mentioned a slight dip in ARPU as well in November and December. So just curious about how ARPU trends and retention trends may differ versus a subscriber engaging with the generative AI feature versus a non-generative AI user?

Yes, sure. Thanks, Bryan. This is David. I'll start with retention. We had a lot going on in the quarter as we rolled out our Satisfaction Guarantee and dealt with the traffic issues we discussed earlier. We did see retention dip in November and early December, but it returned to historical levels in late December and has flattened out in January and February so far. We're pleased that it's leveled off to our historical levels. We were looking closely at this, and while we didn’t pinpoint an exact reason, it could have been due to users testing other tools. However, it was only a five or six week setback. There was some fluctuation due to the calendar; Thanksgiving was later this year than last year. There was a lot happening, but we’re relieved that retention is back to the levels we were aiming for this year. Thanks, Bryan.

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

Great, thank you. I have a couple of questions on the Solution Scout. Is the strategy behind that to showcase that Chegg's solutions are superior to those from other LLMs, or is it more about giving students choice and options?

Josh, it's great to hear from you. It's Nathan. Honestly, it's a bit of both. At the heart of it, we want to save students time and provide tremendous value. When we talk to students, they frequently triangulate through multiple sources trying to figure out answers or solutions, leading to wasted time. Additionally, about 53% of the college students surveyed through our Global Student Survey, which involved around 12,000 students in 15 countries, indicate they question the accuracy of generative AI. Thus, we aim to save students time and solidify our value proposition. We've built a unique AI infrastructure that uses multiple language models. We are model-agnostic, so we can compare how Chegg answers questions against those from other frontier models. This is a valuable tool for students, especially when we can highlight differences and similarities and guide them on what to do next with their question. Our next best actions feature further drives engagement.

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

Hey, this is Jessica on for Brian. I want to follow up on a prior comment about the institutional initiatives you have. When these schools approach you, what key factors do they consider for a partnership with Chegg? I am also curious if these institutions help you build student awareness of Chegg's full value proposition, so it's not just about personalized homework help but also about your partnerships that address full student life.

Absolutely, Jessica. The primary reason institutions are coming to us is around the areas of persistence and graduation. Schools need students to persist for them to eventually graduate. Schools realize that students already use various services, and we could do a better job of meeting their needs if we bring those services closer to their courses. When Chegg partners with a school, we ensure our services are tailored for that institution, the courses they offer, and the student body engaging with it. There is a partnership where schools work to build student awareness of the services while ensuring that our offerings align with their standards. We are also committed to upholding academic integrity and honor codes at these institutions.

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

Thanks. I see that for Q1 on the guidance embeds further acceleration in the business. Can you help us understand what you're embedding? What are the assumptions underneath the guide for Q1?

Yes, Brent, this is David. It's basically a continuation of the trends we saw at the end of December, with retention flattening back to the levels we wanted, and we've been able to achieve good visibility into the students currently in the semester and how they have retained historically. It really goes back to the overall decline we saw in traffic, which continues to eat into our acquisitions, hence the guidance down in Q1 versus Q4 year-over-year. But those numbers are well-established at this point, and we're pushing new product initiatives and marketing efforts to see improvements in the latter half of the year.

Thank you. Our final question comes from Devin Au with KeyBanc Capital Markets. Please proceed.

Great, thank you. Two quick questions, if I may. First one, just a follow-up on the temporary retention impact that you called out. Any numbers you can share on how material that impact was to fourth quarter results? And secondly, could you talk about your promotional pricing strategy internationally and if we could see any sort of moderation in headwinds to ARPU in the near-term?

Yes, Devin, it's David again. On that temporary dip, I don't have an exact number to pinpoint at the moment, but we're talking a couple of percentage points of retention, which, if you extrapolate over the revenue in the quarter, would be around a couple of million dollars’ worth of impact. The larger concern was the risk of continued decline, alongside customer acquisition losses, which would significantly affect us. Historically, we’ve had consistent retention rates, and we're pleased that it's returned to those levels. Regarding the international promotional pricing, we’re constantly experimenting. We did a significant amount of promotional pricing last year, which we gradually reduced because we found that the total LTV just wasn’t justifying the lower prices. However, we did reintroduce some promotional pricing in early February to stimulate international subscriber numbers. It's an ongoing adjustment process rather than a fixed policy.

Thank you. This concludes today's teleconference and our question-and-answer session. We appreciate your participation. You may disconnect your lines at this time.