Greetings, and welcome to Check Inc.'s second quarter 2025 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. If anyone should require operator assistance during the conference, please press star, then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tracy Ford. Thank you. You may begin.

Good afternoon. Thank you for joining Chegg's second quarter 2025 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 announcement on our Media Center website at Chegg.com slash Media Center. We encourage you to make use of these resources. Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of the company. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statement. 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 under Chegg's annual report on Form 10-K for the year ended December 31, 2024, filed with the Securities and Exchange Commission on February 24, 2025, as well as our other filings with the SEC. Any forward looking statements 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 on the investor slide deck on our IR website, investor.chag.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, Tracy. Hello, and thank you for joining Chegg's second quarter 2025 earnings call. Today's call will be structured in two areas. First, an update on the strategic review process, and second, deep in depth on our transformation to profitable growth, specifically within Skills and Busuu, which we believe will be the growth engines for Chegg going forward. As part of the strategic review process, in conjunction with our advisors, we have undertaken a comprehensive evaluation of both our internal operations in the broad market landscape to drive the best possible outcome for our stockholders and maximize long-term shareholder value. As a reminder, we are exploring a range of outcomes, including being acquired, undertaking a go-private transaction, or remaining a public standalone company. We continue to engage with a select group of parties.

Q2 is a good quarter for Chegg. We surpassed their guidance and delivered $105 million in revenue and $23 million in adjusted EBITDA.

I'm pleased by our continued focus on discipline and expense management, having identified an additional $17 million in capex and expense savings that will be realized in 2026. Additionally, I'm encouraged by the revenue growth in FUSU and the reinvention of Chegg's study into a personalized learning assistant that continues to get less expensive to run thanks to AI. We remain firmly on track to achieve the targets outlined in our previously announced restructuring efforts and reduce our non-GAAP expense by $165 to $175 million in 2025 and now expect the total non-GAAP expense savings in 2026 to be between $110 and $120 million. As we look towards 2026, CHEG is evolving into a skills-focused organization, investing in two large growth areas, language learning and workplace readiness and upskilling. These businesses, Busuu and Skills respectively, represent the future of our company and will serve as the primary growth engines while our core academic product, Chegg Study, will remain a valuable service for millions of students and generate meaningful cash that will support our investments in Busuu and Skills. Busuu is our language learning business that caters to adults who need to learn a new language to better their life or career. This is an enormous market of 78 million success-seeking learners with a $3.2 billion market opportunity. Our recent investments are paying off, and if you haven't tried Usu yet, now is a great time. We encourage you to explore the new AI-powered features, including our new Speaking Bytes product.

Usu continues on a strong path, achieving a 15% year-over-year revenue increase in Q2 with good performance in both the B2C and B2B segments.

Luce's B2C revenue increased 6% year-over-year, and in the second half of the year, B2C focus will be on product innovation with continued emphasis on AI as a driver for personalization. Luce's B2B business achieved an even more impressive 39% year-over-year revenue growth, continuing a robust double-digit growth trajectory, including retention improving by 22 percentage points year-over-year. Throughout H2, we will continue our rollout with Guild into the English language learning vertical and expand our offering with Learning Pathways, which offers personalized courses focused on key language and professional skills for specific roles in industries. We've had a significant B2B traction in the DOC region as well with new partners such as HSF Fenster and Turin and Hubert Berta Media. We remain confident that Busuu will achieve $48 million in revenue in 2025 and will be adjusted EBITDA positive in the first quarter of 2026. Our skills business focuses on the $40 billion market-serving workplace readiness and upscaling for professional adults looking to move ahead in their careers. We have spent the last 12 months modernizing our product offering and prioritizing three growth areas, AI programs, career fundamentals, and professional upscaling. We're really excited to see exactly what we want. Enrollments have increased 16% quarter over quarter and 11% increase in monthly active users across our new programs quarter over quarter. Looking ahead to Q3, we'll continue to invest in expand our go-to-market strategies for skills so here are the priorities we're focusing on growing our direct b2b presence as well as deepening our relationship with distribution partners such as guilt we are also pursuing ace credit recommendations for several of our skills programs for to count for college credits helping to support those seeking degrees and creating a bridge for us to monetize students as they transition from our academic services to our career services Finally, we are continuing to strengthen and broaden our programs, expanding our reach into the enormous upscaling market opportunity. For a complete view of our skills catalog, please reference our investor deck. We are optimistic about the potential for our skills business and believe it is on a path to profitability and positive double-digit growth in 2026. Chegg Study continues to serve millions of students and our investments in AI have transformed Chegg setting into a personalized learning coach that helps students succeed and improve their opportunity to graduate. Earlier this year, we launched Solutions Scout and AI-powered practicing flashcard generators. We're getting really positive feedback with students reporting a 23% lift in the statement, Chegg helped me learn today, and a 17% lift in students who intend to use Chegg in the next 30 days. Most importantly, our monthly retention rate is up 117 basis points in Q2. For the rest of 2025, we'll continue to push the differentiated and personalized nature of our product. Research from the Pew Center confirms that the freshman class of 2025 is expected to be the biggest, most diverse ever. This September, we'll introduce two new core capabilities into the existing user interface, pushing Chexeddy into a personalized learning coach for the modern learner first we are building a smart planning tool to help students set learning goals organize their work and stay on track with personalized step-by-step guidance second we are introducing a voice interface when combined with visual aids and a thoughtful ai agent will deepen learning across topics and disciplines voice matters for learning because it improves comprehension and memory clarifies thinking and increases engagement finally our business Institution Pilot Program continues to expand, moving from five active pilot programs at the start of the year to now 23. With many pilots in place, we are now focused on efficacy studies validating what we have always known. Students who use CHEG perform better academically. We believe there is a tremendous opportunity to support a broad range of students in achieving their academic goals while increasing persistence in graduation rates. To wrap us up, we We continue to make progress towards the strategic alternatives process and are pleased with the positive trends we are seeing in Busuu and Skills and the technology investments we've made in Chegg Steady to allow the business to run efficiently and be the investment vehicle for the company in 2026. 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 second quarter of 2025 along with the company's outlook for the third quarter. We delivered a good second quarter, exceeding our guidance on both revenue and adjusted EBITDA. We continue to prioritize disciplined cost management in line with our business outlook. We are on target to fully realize the non-GAAP expense savings objectives we previously announced of $165 to $175 million in 2025 and $100 to $110 million in 2026. As Nathan highlighted earlier, we are not stopping there. We have identified an additional $10 million of operating expense savings and $7 million in CapEx savings in 2026. Expense discipline is now in our DNA, and we are committed to unlocking each and every opportunity to strengthen cash flow and create shareholder value. In the second quarter, total revenue was $105 million, a decrease of 36% year-over-year. This includes subscription services revenue of $90 million. We had 2.6 million subscribers during the quarter, representing a year-over-year decline of 40% as we continue to feel the impact of lower traffic largely due to Google AI overviews. Despite the traffic trends, retention in ARPU increased year-over-year, demonstrating that when students find Chegg, they value the service and are retaining as well as ever. Skills and other revenue was $15 million in the quarter, which includes approximately seven million dollars of revenue from content licensing as we outlined last quarter these content licensing agreements are non-exclusive and for a small percentage of our content non-GAAP operating expenses were 64 million dollars in the quarter a reduction of approximately 31 million dollars or 33 percent year-over-year driven by the execution of our multiple restructurings our second quarter adjusted EBITDA was 23 million dollars representing a margin of 22%. Capital expenditures for the quarter were $7 million, a decrease of 60% year-over-year. We anticipate full-year 2025 CapEx of approximately $30 million, with a targeted further reduction of approximately 50% in 2026. Through innovative use of AI, we are on track to reduced content and software development capex by over $50 million in 2026 versus 2024, while still delivering a high-quality experience that our students expect from us. Free cash flow for the second quarter was negative $12 million, which was impacted by severance payments of $12.5 million related to our restructuring, as well as our annual prepayment for hosting expenses. Looking at the balance sheet, we concluded the quarter with cash and investments of $114.1 million and a net cash balance of $52 million. Looking ahead for Q3 guidance, we expect total revenue between $75 and $77 million, with subscription services revenue between $67 and $69 million. Gross margin to be in the range of 56% to 57% and adjusted EBITDA between $7 and $8 million. In closing, we have adapted our business in response to evolving consumer expectations and ongoing market turbulence. We are especially encouraged by the momentum we are seeing in Busuu as well as the strong potential of skills and for both to be significant growth drivers in our portfolio. We are investing in these platforms to accelerate growth and ensure they remain key drivers of long-term shareholder value. At the same time, we continue to align our cost structure to support our priorities of generating cash flow and maximizing value for shareholders. Finally, I am pleased to announce that we have successfully cured our stock price deficiency during the quarter and regained compliance with the NYSE's price listing requirements. With that, I will turn the call over to the operator for your questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star, then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star, and then two, if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question we have is from Ryan McDonald of Needham. Please go ahead. Hey, thanks for taking the questions.

This is Matt Shea on for Ryan. Maybe starting with Busuu, nice to see the strong growth there, particularly in the B2B segment. As we think about the durability of the B2B segment within Busuu, it seems like partners are key to driving further growth. Do you guys think you can continue to grow at this rate with your current set of channel partners, or how do you think about adding incremental partners versus going deeper with existing as you put together that growth algorithm?

Hey, Matt, thanks for the question. Missing your Ryan's voice, but nice for the question. Around the B2B side, I want to clarify a couple things on this. Our efforts around B2B and why we continue to grow is definitely a two-sided element there. There is our own direct and our sales force, which we're really proud of in the last 12 months, really growing that, getting that, I think, coming, getting the metrics going, getting the sales team cranking. So that's really driving a lot of that. And then it's also the great relationship that we have with Guild at the moment, growing from the foreign language category and now into the English language category. So we're not beholden to a reseller market to grow. We own a lot of our own destiny within our own sales structure. So really proud of what the team has done over there. And we're going to continue to see that grow. So do we think this growth is going to continue? Absolutely. The lever really is continuing to dive into the traditional kind of enterprise sales metrics, making sure those sales reps continue to drive in new leads and continue to convert those leads and continuing to convert renewals at a higher rate. So we own a lot of our own destiny in that. We're really excited to see what the future does there.

Okay, great. Yeah, it sounds like a lot of optimism there. And then maybe on the Chegg study side, nice to see the traction in the business to institution pilots increasing from that five to 23 programs now. As you look to the fall, is there potential for incremental partners to join before the fall back to school season? Or how do you think about incremental ads ahead of that? And then longer term, how do you anticipate these pilots evolving into more meaningful relationships? And what might a timeline for something like that look like?

Yeah, we're real pleased with the success of growing from five to 23. The secret to unlocking the institutional market is to prove your value. So with the 23 we have now, yeah, we're going to continue to add some logos as we go throughout the year. But the focus really is proving out what we believe we've always known, the students that use CHEG perform better in school. And the more we get schools behind us, the more that wave builds and builds and builds. And so turning this into a business that drives significant revenue in 26 and 27 really depends on us working with these schools. We've focused on getting these ethics to reports, which we plan on doing throughout the second half of this year. And so by the time we get into 26, we've got really, really verified and viable statistics around our performance in helping students stay connected to the classroom and ultimately perform better from a persistence and graduation rate. And so that's the key to unlocking more predictable growth within the B2B market.

Got it.

Thanks for all the color. Appreciate it.

The next question we have is from Devin Au of KeyBank Capital Markets. Please go ahead.

Hi, Nathan. Hi, David. Thanks for taking my questions. I also want to ask about Busuu as well, maybe on the B2C portion of the business. It seems like that's been kind of holding up nicely. Could you just talk about what's been driving that steady performance? Have you seen perhaps broad consumer sentiment improved quarter over quarter? or was the strength mainly driven by some of the new features you've been launching in the past couple quarters?

Yeah, it's two things I'll talk about. One is focusing on the right persona. We've talked about this a couple of times, I believe, in some past calls around this persona we call a success seeker. These are people who need to learn a language, not are just dabbling and interested in a language. They need to learn a language for their job, for their life. And by focusing on who should really be buying our product versus trying to go out after everyone in the general market and language learning has allowed us to identify the right people, drive them into the right conversion funnels, and convert, frankly. So, you know, that's a big driver. The second is our product enhancements. We've really focused on integrating AI to take away some of the fear that people have about speaking a language, because the best way to learn a language is to actually practice and to engage with speaking that language. AI gives us a great ability to do that in a non-threatening environment versus having to talk to another person who is a native speaker in that tongue. AI allows people to practice, make it very interactive, and it has been a great kind of driver. We call that the speaking bites and speaking practice within the product. We actually encourage everyone to go try it because we're really proud of it. And so it's those two categories, it's those two factors, really driving in on who should be buying their product and identifying them and then going and tracking them and getting them to the right conversion funnels and the innovation that the team has produced leveraging AI to make the product a lot stickier and get people, again, to get to a point of knowing why they should buy the product.

Got it. Appreciate the context. It seems like it's doing well for sure. I want to switch gears a little bit and ask about skills, just because there's news of their initiatives around AI education. I know it's still kind of early efforts by these large corporations, but curious to hear how do you view your skills business kind of position in that marketplace to maybe capture some of the spend coming down in the future? Thank you.

Yeah, great follow-up. You can still have some of our prepared remarks. So we're very optimistic about the skills business. We took a 12-month period of time to really think about what the skills business should be for us and transition it from traditional boot camps. If you recall, that market was red hot at one moment. It isn't so red hot these days, and now we're into the world of upskilling or reskilling that we're doing. We took that time to really transition the platform from one that was, I would call it long form in nature, really long hours, really long courses, to one that is more aligned to what people want today, which is kind of these micro learning moments. And so whether that is the AI fundamentals that we're working on or any of the other categories that we're building out, we really feel the package that we've built and the container that we've built for our courses is something that's very modern and something that very much meets the demand that's going to be in the market. So we're very excited to see where this is going to go in 26 and beyond.

Great. Thank you.

Thank you. We have no further questions at this time. And with that, this concludes today's conference. Thank you for joining us. You may now disconnect your lines.