Release Date: August 05, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Chegg Inc (CHGG, Financial) exceeded its Q2 guidance, delivering $146.8 million in revenue and $44.1 million in adjusted EBITDA.
- The restructuring program is expected to generate non-GAAP expense savings of $40 million to $50 million in 2025.
- 70% of subscribers are engaging in conversational instruction, and the number of questions asked by students increased 74% year over year.
- Chegg Inc (CHGG) is integrating AI into its platform, enhancing student engagement and retention.
- The company is launching a fully localized experience in Mexico by the end of September, with plans for further international expansion.
Negative Points
- Total revenue for Q2 was $163 million, down 11% year over year.
- Subscription services ARPU was down 3% year over year, primarily due to international promotional pricing.
- Free cash flow was negative $3.6 million in Q2, driven by severance payments and an increase in net working capital.
- The company recorded $481.5 million in non-cash impairment charges and a $141.6 million non-cash valuation allowance on deferred tax assets.
- Q3 guidance indicates a revenue range of $133 million to $135 million, which is a decrease compared to previous quarters.
Q & A Highlights
Q: How are you feeling about the fall enrollment cycle as we progress through the summer, and what initiatives poise Chegg to recapture some of that student base?
A: Nathan Schultz, President and CEO: We use a number of external resources to look at the fall cycle, but much of that data is in arrears. Enrollment is expected to be flat through '27 and '28. Our focus is on extending the reach of our brand and value proposition to current students. Initiatives include our "Small Steps, Big Wins" marketing campaign and increasing our presence on platforms like TikTok, Instagram, and Discord.
Q: Can you give any color on what assumptions are embedded in the Q3 top-line guidance, particularly regarding retention and subscriber growth?
A: David Longo, Chief Financial Officer: Q3 is the toughest quarter to predict. We based our guidance on the trajectory of the business over the first half of the year, extending current retention rates and new customer acquisition rates. This is why the guidance is down year-over-year.
Q: Have you seen any improvements in the top of the funnel with the rollout of conversational features?
A: Nathan Schultz, President and CEO: The conversational instruction feature is a subscriber feature and less of a top-of-funnel driver. We are focusing on marketing campaigns like "Small Steps, Big Wins" to build on this over the quarter and into 2025. We are also launching more perk experiments to engage students.
Q: How should we think about the countervailing factors of investments and potential operating margin leverage as you implement product and platform evolution?
A: David Longo, Chief Financial Officer: The restructuring aims for a 30% adjusted EBIT margin and $100 million in free cash flow. The $40 million to $50 million in non-GAAP savings for next year includes necessary investments for product development. We are replatforming some back-office functions and have baked in expenses for this year to prepare for next year.
Q: Can you provide extra color on the Q3 EBITDA margin guide, which implies a significant step down?
A: David Longo, Chief Financial Officer: Q3 is the roughest quarter due to a fixed cost base and the restructuring efforts not fully kicking in until next year. Office closures and replatforming technology take time to work through the P&L.
Q: If the top line comes in lighter than expected, will you take further action to defend the 30% EBITDA margin and $100 million in free cash flow targets for 2025?
A: David Longo, Chief Financial Officer: Yes, we will make adjustments as needed to meet those targets. We have given ourselves headroom to adjust if the top line does not materialize as expected.
Q: Can you expand on the subscriber count in Q2 and the larger step down from Q1 to Q2 compared to previous years?
A: David Longo, Chief Financial Officer: It's a function of subscription math. We need to refill the funnel as subscribers churn out. Nathan Schultz, President and CEO: We are building towards a well-researched product vision and starting a new marketing program to rebuild the top-line funnel.
Q: How should we think about the pace of additional localizations after the rollout in Mexico by the end of September?
A: Nathan Schultz, President and CEO: We are focusing on six key markets: Canada, Australia, United Kingdom, Turkey, South Korea, and Mexico. Mexico will be fully localized on the web first, followed by native experiences. Based on performance, we will decide the speed of adding more countries or further localizing other experiences.
Q: How has the restructuring influenced your workforce and international strategy?
A: Nathan Schultz, President and CEO: Domestically, we aim to retain top talent. Internationally, we continue to apply our methodology and believe our results will improve. The restructuring has not significantly impacted our international outreach.
Q: How has the development and rollout of your AI platform influenced your competitive position in the market?
A: Nathan Schultz, President and CEO: We focus on enhancing education with AI rather than just applying AI to education. Our goal is to leverage innovations from AI to improve the value of education for students, which helps us maintain a competitive edge.
Q: How should we think about the price differential between US and international subscription services ARPU?
A: David Longo, Chief Financial Officer: International ARPU will remain lower due to purchasing power parity. Our automated solutions and AI integration allow us to serve international customers profitably at lower ARPU. In the US, we have better retention and higher price points.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
