Chegg Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2023

There are 12 speakers on the call.

Operator

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.

Speaker 1

Good afternoon. Thank you for joining Chegg's Q2 2023 conference call. On today's Call are Dan Rosenzweig, 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 our Investor Relations website, investor. Chegg.com.

Speaker 1

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.

Speaker 1

We caution you to consider the important factors that could cause actual Actual results should differ materially from those in the forward looking statements. In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chang's Annual Report on Form 10 ks 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.

Speaker 1

Our GAAP results and GAAP to non GAAP reconciliations can be found in our earnings press release on 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.

Speaker 2

Thank you, Tracy, and welcome, everyone, to our 2023 Q2 earnings call. Our team executed well, outperforming guidance for both revenue and adjusted EBITDA. As the Q2 progressed, we saw year over year trends for customer acquisition and retention rates improved, 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 rapidly pivoted 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.

Speaker 2

It is still early and since we last reported, we've gained greater insights into students' use and perceptions of AI and how it relates to Chegg. Our recent survey shows students see Chat GPT and Chegg as complementary with very different use cases. The latest YPOLL survey States that while Gen Z students are using AI to improve their education, they are not comfortable with the exact information And 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 assistant. We are moving fast and launched a beta version of our initial generative experience in May. Feedback has been very positive.

Speaker 2

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 that they prefer study help that is reviewed by human subject matter experts and 85% say they wanted 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.

Speaker 2

The new Chegg will combine the best of generative AI which takes proprietary high quality solutions and 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 mode 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.

Speaker 2

And this is just the beginning. I want to give you a sense of how big we believe this TAM 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, JEGS' prove it learning taxonomy along with our deep history of data from schools, classes and professors sets us apart. We have said for years The students' challenges go way beyond the academic need. 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% that never enter.

Speaker 2

Increasingly, students are connecting their academic journey with their skills based needs in order to be employable in today's economy. JEG 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 leveraging our skills offerings, where we continue to see excellent growth. We also appreciate that students today face a wide variety of 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.

Speaker 2

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 advance 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. Andy?

Speaker 3

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 $183,000,000 driven by subscription services revenue of $166,000,000 During the quarter, we had approximately 4,800,000 subscribers on our platform. Skills and other revenue was 17,000,000 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.

Speaker 3

This, along with the revenue beat, Contributed to adjusted EBITDA beating guidance, which came in at $60,000,000 or 33 percent margin. Free cash flow was $56,000,000 the result of strong operating performance and higher interest rates, with interest income contributing $10,700,000 in the quarter, an increase of $8,700,000 from last year. We have several items that impacted our GAAP net income for the quarter. These included a gain of $53,800,000 from the repurchase of some of our outstanding convertible debt, which was partially offset by a restructuring charge of $5,700,000 we announced during the quarter and a loss in synthesis At $7,000,000 we accrued related to a previous gain taken on an equity investment. We continue to have a balance sheet and drive significant free cash flow.

Speaker 3

We ended the quarter with $808,000,000 of cash and investments With total convertible debt outstanding of $773,000,000 at par value, representing $35,000,000 of net cash. As mentioned earlier, we repurchased $427,000,000 of our outstanding convertible debt for $369,000,000 and use some of the net savings to retire 3,400,000 shares of our common stock for approximately 35,000,000 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 generative conversational experience rolling out over the next 2 semesters. We believe our approach of developing and owning these models versus solely relying on third party providers We'll create a truly differentiated and better experience for students at a lower cost. Now moving on to guidance.

Speaker 3

For Q3, we expect total revenue to be between $151,000,000 153,000 With subscription services revenue between $135,000,000 $137,000,000 gross margin between 68% 69% and adjusted EBITDA between $34,000,000 $36,000,000 It is worth noting that we typically experience seasonally lower revenue and margins in We also have an elevated level of content appreciation 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.

Speaker 3

With that, I'll turn the call over to the operator for your questions.

Operator

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.

Speaker 2

Thanks for taking the questions. Can you just talk about

Speaker 4

how the new AI experience with Scale AI will differ from Chegg mate and kind of the path that you've been going down. And then,

Speaker 2

I guess second, if you could also just talk about

Speaker 4

the drivers. You think of the 2Q improvements around customer For acquisition and retention as you went through the quarter, is that just distance you think from the chat GPT launch or more of the Students recognizing perhaps some of

Speaker 2

the deficiencies on that side? Thanks. Yes. No, great question. I'll take the second question 1st, which is, I think it's what you said, which is and the research seems to indicate that, which is, 1, students Recognize that they do very different things, and that what we do, they can't do.

Speaker 2

And what we do is actually what they need because it's been built directly and specifically for students that they will use ChatCPT, but they're not going to try to use it for the things that they use ChatCFT for. And our current research seems to indicate that the overwhelming majority that those that use both plan to remain with ticks. So I think that's very good news. And it's an update on what we've seen, and I think the results seem to suggest that. So that's really good news for us.

Speaker 2

The second thing the first question that you asked, which is how does it differ? Really what it is, is instead of building a separate product, We have and are ripping Chegg down to its duds and completely rebuilding the user experience So that it's available to everybody, that uses CS and CSP. So, It is the same vision and that's why we supplied a concept video for people to really get an understanding of just how great that this can be And how different it is from the existing experience, how much more conversational, how much more simple, easy interface, conversational in nature. And one of the really cool things that we'll be able to do differently than anybody else would be able to do is take the 100,000,000 plus Based on knowing not only the history of that particular student, but others that have gone to that school, that class and with that professor. So That is not something that any generalist AI can do or frankly anybody else in the education space can do because we have the largest direct to consumer list.

Speaker 2

So that's pretty exciting. And then to take the way they learn best and actually build study tools out of the content they're using without them having to do anything. So I think our ease of use and the difficulty in using chat GPT, the fact that it's overwhelmingly for writing and not for learning. I think those things were pretty significant in affecting those trends to the positive, which is great for us and great for our shareholders. And then instead of it just being Chegg made, it's just going to be Chegg.

Speaker 2

What Scale AI does is something very different. We continue to work with ChatGPT just as we announced, and that's all the conversational nature and the descriptions and explanations and things of that nature, which is what it does well. What Scale AI does Allow us to use what Chegg uniquely has, which is our data, our history, our user information, Our content and create very specific and unique learning experiences for each student. So this is a differentiator. We were always planning on building this.

Speaker 2

Working with Scale AI will allow us to do all of the categories we have much Faster. So instead of launching with just a few, we will be doing a rolling launch and get to all 26 of them in a much more rapid period of time. So It's a great deal. They're an extraordinarily great partner. They work with ChattCPT.

Speaker 2

They work with everybody. But we will continue to work with all the relevant generalists that can supply value inside of our system. But what Scale AI does is allow us to leverage what we uniquely have That no one else has and everybody else wants.

Speaker 3

That's very helpful. Thank you, Dan. Yes. Appreciate the question. Let me just fill in here.

Speaker 3

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 Pat. That's our internal lingo that he was using. Thank you.

Operator

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

Speaker 5

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?

Speaker 2

Well, the summer school is really a U. S. Experience more than it is outside the U. S. So most What I can say for those that we have outside the U.

Speaker 2

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 already. So, but it's too early to give international Lens versus the U. S. I think we'll be able to do a lot more of that on the next call because really the semester picks up in about 2 weeks.

Speaker 2

So sort of the last week or 2 of August through the 1st 2 weeks of September is the overwhelming majority of when the good stuff happens.

Speaker 5

Okay. That's helpful. Yes. I know I'm sorry. Go ahead.

Speaker 5

In the past, you've talked about The strong visibility in your business. And I'm just curious, what do you need to see before you think you'll start talking about annual guidance again?

Speaker 2

Yes. We asked 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 really great confidence in. And as we build a few of those, I think It leads us back to where you're asking. What I will just, you know, add to what I said earlier As the semester evolves 3rd, 4th week of August, 1st couple of weeks in September, that gives us a really good lens into Obviously, to Q4 and since Q1 is a rollover from Q4, I think we're getting closer to that.

Speaker 2

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. And I think we learned the impact of the volatility of people just, In my opinion, overreacting to information that we provided. Andy, I don't know if you have more to add to that.

Speaker 3

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 Few months, that will certainly give us more confidence, but we need a few more periods before we get to that point.

Speaker 5

Okay. Fair enough. Thanks so much. Yes.

Operator

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

Speaker 6

Thanks so much for asking for allowing me to ask 2 questions, if I could quickly. One would just be the cost question. So when we talked 3 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 cadence of Margin or needed to invest in the business. And then I'm just a little bit unclear.

Speaker 6

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 in its momentum as you get deeper into the year. And the solution you're talking about today would be more fully implemented Towards the end of this calendar year and the beginning of next calendar year? Or will it be deployed over the next 1 to 2 months? Just one would be timing and one would be depth of investment.

Speaker 6

Thank you.

Speaker 2

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 is the products just going to get better every day, Let students use it. So depending on what subjects they use or what they use it, they will see the product evolve. So it really is that way to think about it, which is They'll start to experience certain aspects of the conversational nature and the generative AI kind of content, Depending on the subject matter they're doing, they'll start to experience that in the fall.

Speaker 2

So it's a little bit like rolling thunder. And we expect Word-of-mouth, viral nature of it, all the things that have built Chegg over the years, to start to spread over that period of time. And I think right now, What has spread is the quality of our content and the accuracy of our content, which are essential for people trying to learn. So, I'll let Andy talk about the cost structure and the cost. But I think again, I think you're going to find them to be constructive and positive.

Speaker 3

Yes. So when we talked about this on the last call, there was a lot of moving parts and there still is to some extent. But as we evaluated the multiple options that we had as far as having a fully generative conversational generative for our students. When we evaluated this, the option of partnering with Scale AI became by far 2 things. 1 is it made us get to market sooner and it was the lowest cost Versus completely leveraging 3rd party technology.

Speaker 3

And so as we look at this, this is By far, the least cost effective way, as soon as we can get the least cost effective way, yeah, The most cost effective way. And like I said, we've Said in the past, we think that this will allow us to maintain or even potentially over time increase margins. And we believe over time will allow us to actually deploy less CapEx as we implement these So this is it was a really big win for us and as it rolls out over the next 2 semesters.

Speaker 6

Great. Thank you.

Speaker 2

Yes.

Operator

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

Speaker 7

Hey, thanks for taking my questions. I guess on the improvement that you talked about during 2Q and Customer acquisition and retention, would love some more detail there, especially how you were 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 Q3 thinking about July?

Speaker 2

Yes. So 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. And so it really is what is your retention rates? And in retention rates, you look at a lot of different variables, which is what's up for renewal, what canceled, what percentage renewed, Those kinds of things.

Speaker 2

So 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 that Renewed. So those metrics are basically we're seeing higher retention rate, which is great. The second one is new accounts, which is really where all of this challenges started because we used to do Before COVID, we used to do about 3,200,000 new accounts a year. Then we peaked at peak COVID about 5,800,000.

Speaker 2

Now we have remained above 5,000,000.

Speaker 3

So we're really so far ahead of where we were,

Speaker 2

before COVID that the company has just accelerated. So it always surprises me when people Don't really understand how big we've become compared to what we were just a few years ago. But what we're referring to now is the trend in new account growth. So we were seeing declining new account growth and it was pretty substantial and that is improving each and every month, including in July. So we're getting closer to our objective of returning to growth.

Speaker 7

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. So is that intentional?

Speaker 7

And I guess, are you considering changing the potential branding there at all?

Speaker 2

Yes. I mean, as the point we're trying to make here is it's no longer It's Chegg. And when I say Chegg, initially, it's Chegg Study and Chegg Study Pack. Obviously, AI will be integrated into everything, including skills and writing and math. But as we got deeper And as we really understood the depth and the quality and the differentiation that we have versus Chat, TPT or BARDA or anybody else, Even in the education space in terms of what we could know and the value it could create for students that we made the decision to just make it all of Chegg.

Speaker 2

And as we think about how additional value gets created, the more value that we create for students, the more that we add, The more sticky that it becomes, the more things we can do for them. And as you watch the video, the concept video that we put out, you'll see The other areas that we can address, we believe our pricing power, which has always been strong, will even get stronger. And over time, as we roll it out to everybody, We can imagine continuing to increase our ARPU and our yield. So it's a bigger move than the one we had before.

Speaker 7

Good to hear. Thank you.

Speaker 5

Yes.

Operator

Our next question comes from Josh Bair with Morgan Stanley. Please

Speaker 8

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 landscape, maybe ignoring chat GBT for a moment, like how does the future, Chegg, compare to other education specific Companies that are leveraging similar language models or OpenAI APIs, thinking about Canmigo or Quizlet or what might come from Lernio, like any thoughts on the new competitive landscape As these education vendors use AI as well?

Speaker 2

Yes. No, great question. And I think, from our perspective, They don't we have such a big mode and the mode is only going to get stronger Because really what we're learning is the speed of the computing, NVIDIA, thank goodness for everything that they have They really have sort of changed the game here. And then sort of the conversational nature that the analysis The chat GPT has shown. So 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 are able to leverage against their own data sets and their own customers.

Speaker 2

So nobody in the education space from our perspective Has a more relevant or better data set than we do. We're learning it's running the AI against the data that creates the differentiated Not the AI itself on its own. Without the data, it's irrelevant. That's why these generalists can't do what we do. And so by keeping it proprietary and as Andy said, building our own LLMs, we think our moat gets only bigger.

Speaker 2

The second thing is, it does take capital to invest and none of them really have it. I think we generate more free cash flow than most of them generate revenue in total. So the actual size of these companies is insignificant versus what Chegg has in terms of the business, the data sets And the capabilities to do. What you've seen is mostly just sort of chatbots versus what we're building. And I think You'll be able to compare our concept video as where we're going with what you see from them.

Speaker 2

I think you'll leave with similar perspective that we do, which is our mode only gets bigger and was already big.

Speaker 8

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 and A from Students versus leveraging GenAI for your own content creation, essentially like is this level that we saw sustainable or how should we think about CapEx going forward?

Speaker 8

Thanks.

Speaker 3

No, it was fairly seasonally low, without a doubt. And as you know, We have it's probably the it's the quarter where we have the fewest students actually in school, right? Some school, while we went it Seems to have gone well, but it's still a small period of time. So no, wouldn't expect that, but we do expect CapEx efficiencies beyond this. We do believe that as we start implementing some of these some of our AI solutions that will have a benefit on CapEx As we move into, call it into 2024 for sake of argument at this point.

Speaker 2

So the way the reason for that, by the way, I think Andy Perfectly. The reason for that is the cost of content, the each particular piece of content should get less for us Being able to leverage AI versus everything always being human. So the cost of content We'll actually be able to answer more questions than we've ever answered before at a lower rate on a per question basis and therefore overall spending. So I think some of the other areas that we were investing in, like professor led content and things of those nature become much less important in this new world. And the ability to leverage the data we have with ChatCPT and Scale AI To create unique learning paths is really going to be the differentiator.

Speaker 2

And so, and that's the reason for what Andy was saying.

Speaker 7

Great. Thanks.

Speaker 2

Yes.

Operator

Our next question comes from Ryan MacDonald with Needham and Company.

Speaker 9

Just a clarification, Dan, in terms of your commentary around retention rates and sort of the new accounts sign ups improving, Should we expect then 2nd 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 Sort of potentially the maybe declining or lack of efficacy from GPT-four on math problems. Just wondering if you're using that at all when you think about the additional rollout of Chegga, leaning into that math use case more and sort of the functionality you have within Mathway to Further differentiate yourself. Thanks.

Speaker 2

Yes. Good questions. Let me take the second one first. One of the things about the college market that we've learned over the years is, it's very viral in nature in terms students communicate to one another. And I think that's to our advantage.

Speaker 2

It was when we were building the company and I think, people got very excited About Chatt GPD and we are too, by the way, and AI in terms of helping education. I mean, if you're going to apply AI to anything, How great would it be if it could help people of all backgrounds, all walks of life, have the ability to elevate themselves both with academic support and skills based support. I think we'd all root for that. That's what Chegg is building. And I think that's why a lot of people are rooting for our Success that would surprise you in terms of the people that have been calling to be interested into and to help.

Speaker 2

So That message gets out on its own and it takes one person getting the wrong information to destroy their semester. And so that's happened pretty quickly. And I think we're known for our accuracy. So there's really nothing more to lead into it because we're great in getting better. To be honest with you, I think I forgot the first question.

Speaker 2

Would you mind re asking it?

Speaker 9

Yes, yes. It was around the commentary in one of the previous and A around retention rates and that you're seeing sort of fewer cancellations and more subscribers that are up for renewal actually renewing. So as you think about sort of that Dynamic, would we expect sort of second quarter subscriber count to be sort of the trough level here and you start to see growth in that Metric as we get into the back half of this year?

Speaker 2

I think and I'm sure Andy will add to this. From our perspective, I think we're going to stick to the 1 quarter at a time like we mentioned earlier, because we've had false promises before in terms of what we see. And but we if current trends continue and we'll find out if current And if you look at the trends continue as the year goes on, then I think you'll see a very different and a very positive trend that we're all looking and all expect to happen. We do expect to return to growth. From our perspective, we think the launch of the new products will be Very valuable to that.

Speaker 2

We think the fact that the Stanford research that you pointed to also acknowledges that it isn't really good for what we do. And what we do is valuable to students than what they do, which is writing papers, which we don't do. So, we expect to be a growth company again. And when that happens, We're just going to have to wait and see, but the trends are moving in the direction that we were hoping for.

Operator

Our next question comes from Alex Fuhrman With Craig Hallum, please proceed with your question.

Speaker 10

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

Speaker 2

Yes. The latter one is hard for me to say and I don't want to predict it yet because I think in the world that we've lived in, in the last 3 or 4 years, making predictions has not really resulted in a good outcome for us or anybody else for that matter. The first one I can't answer very specifically, which is, we are rolling out this month The new payment capability of the unified payment platform, which will allow for debit cards. So That's going to start to happen this month. And when we start seeing the impact of that, we'll find out over the next few months, but It's going live this month, so that's very exciting for us.

Speaker 7

Okay. That's really helpful. Thank you.

Speaker 2

Yes. Appreciate the question.

Operator

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

Speaker 3

Dan, just on the tone

Speaker 7

of demand you saw in Q2 and going into later summer, can you just Line yourself up

Speaker 11

to speed on that. And ultimately,

Speaker 7

anything new in the playbook and going back to school season here That you're seeing that may be working or contemplating? Thanks.

Speaker 2

Yes. No, look, To give you a sense to your question of the scale, Semester winds down, school starts we have summer school and then the school semester really picks up. So The volume will double then triple and then go up by about 50% again, all within a 3.5 to 4 week period. That period will start in about 2 weeks from now. And I think we'll peak around 1st 10 days of September in terms of what we're expecting in terms of when our real new account volume Happens and we're prepared for that.

Speaker 2

Now in terms of the go to market, we've always been really good at go to market. I think you've seen No one else has anything near the size that we do of paid subscribers. I mean, in the education space, Others have tried. No one else has succeeded. As I said, we generate more EBITDA than most companies do in revenue.

Speaker 2

So we're very good at it, but I think the channels that have been working, obviously, TikTok is a channel over the last couple of years that has become much more significant to us In terms of us being able to use clips and influencers, who are using our content to teach people and that's been, really effective for us. So I would say that's the only new one on the horizon that we're leaning into more than we have in the past.

Speaker 7

And sorry, on the tone of demand, did the demand continue to strengthen week over week? And did you see that going into the beginning of Q3 as well?

Speaker 2

Yes. As I mentioned earlier, we began to see positive trends versus what we were expecting Really beginning of June and all through June and through the 1st month of this quarter, and That gives us confidence to give the guidance that we have given. Things can change because as I say, the last 2 weeks of August are as big as the first 3 weeks of the 1st 2 to 3 weeks of August. So, one week will be larger one day will be larger than a week In the peak season versus the trough season. So, as Andy said to me this weekend, he said, you have to do something you're not the best at, which is be patient.

Speaker 2

So, I like the rest of you are just going to be patient as we go through it. But what we were hoping to see now, we are seeing And what we were seeing in terms of the positive trends has continued.

Speaker 7

Thanks, Dan.

Operator

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

Speaker 1

Hi. This is Jessica on for Brian. As companies and startups are exploring new use cases with AI and in the light of your partnership with Scale AI, Are you considering M and A opportunities in this space? And more broadly, how are you thinking about your overall capital strategy as things stand today? Thanks.

Speaker 2

Yes. I'll do the first part, let Andy do the second part on our capital strategy because I think people should see the work that they've done and recognize What he's done with the debt and buying back stock has been really effective for shareholders, which is why we I think people were confused that we weren't net cash positive to our debt, but we are. And that's really Andy and his team's great work. In terms of M and A, Look, the thing that you want that companies are going to need is the data And the database and the customer list, we have all that. For us to achieve what we're trying to achieve in this space right now, doesn't feel like M and A is the answer, Because the mode that we have actually gets amplified as a result of AI, because what we can do with what we have will be so much more than anybody can do with what they up to date or what they'll be able to do simply because of the way our data structures have been built and the over 10 years of understanding Student behavior and content and behavior by each school and each class and each professor.

Speaker 2

These are things and the way that questions are crafted and formed and even our ability to take them through images, which others can't do, We're slight years ahead of where other people are. So there really isn't an obvious need in the short term For us to be able to do what we need to do. There's always there may always be something that will just Accelerated or speed it up, but right now that's not a priority. I think Andy has better uses for the cash. So Andy?

Speaker 3

Yes. So I mean, when you look at capital allocation, I mean, in the ideal world, you'd use your capital to drive and grow the business. Those opportunities, as Dan had mentioned, really don't exist and don't make sense for us at this point in time. But where what we have been doing over the last Several quarters has been very opportunistic with respect to some of our securities buybacks. Last quarter, for example, We retired debt at a sizable discount, almost $54,000,000 you saw that.

Speaker 3

And we will continue to be, I'll call it, opportunistic and potentially Active depending upon the value, but we've got a very strong balance sheet like Dan We're driving significant free cash flow. So we've got the ability and confidence to make those moves Should the opportunities exist.

Speaker 1

Got it. Thank you.

Speaker 2

Yes.

Operator

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

Speaker 11

Great. Thanks. This is Devin on for Jason today. Thanks for taking our question. Nice beat on the revenue and EBITDA results.

Speaker 11

I just want to dive in on the subscriber number a little bit more. I think In the quarter, 4,800,000 subscribers came in a little bit lighter than expected and also represents the decel there. But any additional color you can Provide on what drove the D cell in the quarter. Is it mainly on the softer new account side of the house or did you see higher expected churn in the quarter?

Speaker 2

I'll let Andy give more detail, but we that's not our read on what we did. I mean, we beat revenue and we beat EBITDA substantially, which is very hard to do on a $17 product in a lower season, particularly as the season ends. So I don't know that we felt that we were light at all. And I think what we saw was better than what we expected. So I'm not sure What you're comparing it to, but Andy?

Speaker 3

Yes, yes. So first thing is we don't guide to net paying subscribers, to be clear. But it's what I call subscription math. We're in a period right now that Q2 was a period where it was and To some extent, Q3, where it's dominated by renewals, which is 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 hole.

Speaker 3

It's improving relative to what we expected. And in fact, when you look at The quarter as a whole, both from a like Dan says, from a retention standpoint and from a new subscriber standpoint, It was better than we expected, but once again, that's it was better.

Speaker 11

Got it. No, understood. And then just one more question for me. I think last quarter you called out areas like Mexico with really high couple of funnel interest, but low conversion. I'm just curious if there's any additional initiatives that went in

Speaker 2

Yes. These are real interesting questions here, which is, as we Have adjusted the entire company to leverage what AI is capable of doing. The prioritization of the countries hasn't changed. So Mexico, the Philippines, Canada, Australia, the UK, Turkey, Places like that remain the places where our initial efforts are focused on. What has changed to the better What AI allows us to do is do these things better and faster, in some cases simultaneously.

Speaker 2

So for example, AI in terms of being able to do instant translation is much better for us to be able to add localized content Faster and less expensive than we would have done before. So we're really just going to take advantage of what the new capabilities allow us to do on behalf of the student. And we'll continue to do all the price testing that we've been doing. But during a slow season, those that doesn't give off the right signal in terms of knowing Really what's going to happen because particularly, US High Summer School, most other places don't.

Operator

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

Speaker 2

Yes. Thank you, everybody. Thanks for your questions. We're really proud of the team and the results. As the information and the awareness of AI evolves and its capabilities evolve, we believe That history is a good guide here, which is the players that have really big brands, really unique and proprietary assets You're beginning to see that whether it's Adobe or Microsoft or Google or ServiceNow or any of these companies that have built really strong Relationships and loyalty and expectations of quality with their audiences are going to be able to do things faster And we believe at a lower cost over time and differentiate themselves from their competitors.

Speaker 2

So we are Excited about the momentum that we are seeing right now. We are going to take things 1 quarter at a time until we get comfortable that this is Sustainable. We expect to return to growth. And as we do, you'll see the margins continue to improve. We have remained over 30% margins for the last several years.

Speaker 2

So we have the capital necessary, the business model To get it right and this proprietary data set that others wish to think you can access to that we are not giving it to them. We are going to use it and build our own LMS to our advantage. And so the next 6 months are going to be super exciting for Chegg, and we're just head down working. So thank you all for joining the call. Enjoy the rest of your summer.

Speaker 2

Thanks.

Operator

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

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Earnings Conference Call
Chegg Q2 2023
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