CHEGG, INC Q3 FY2024 earnings call

Key Points

• Challenges from Google's broad rollout of AI overviews (AIO) which keeps users on Google search results instead of directing them to third-party sites like Chegg.
• Increased adoption of free and paid generative AI products by students negatively impacting traffic and revenue outlook.
• Undertaking an additional restructuring to reduce headcount by 21%, anticipating annualized non-GAAP cost savings of $60 million to $70 million in 2025, with combined savings from previous and current restructuring at $100 million to $120 million.
• Strategic initiatives: Launched Small Step Big Win brand marketing campaign, content quality and satisfaction guarantee, AI arena, upgraded Q&A experience, launched app on Discord and Chrome extension, moved to new commerce platform, and launched 4 direct institutional partnerships.
• Progress on strategic plan: Year-over-year improvements in conversion rate across paid marketing channels with the brand campaign, lift in new subscriber conversion rate from content guarantee, and AI integration into learning journey.

In the third quarter of 2024, total revenue was $137 million. Subscription services revenue was $120 million, down 14% year-over-year, with 3.8 million subscribers, a decline of 13%. Other revenue was $17 million, a decrease of 6% year-over-year. Adjusted EBITDA was $22 million, representing a margin of 16%. Subscription services ARPU was down 2% year-over-year but improved by 1 point from Q2 2024. Monthly retention rate for Chegg Study and Chegg Study Pack increased 30 basis points year-over-year.

Guidance

• Do not expect to meet 2025 goals of 30% adjusted EBITDA margin and $100 million in free cash flow.
• Anticipate annualized non-GAAP cost savings of $60 million to $70 million in 2025 from additional restructuring, with combined savings from previous and current restructuring at $100 million to $120 million.
• Q4 2024 guidance: Total revenue between $141 million and $143 million, subscription services revenue between $126 million and $128 million, gross margin in the range of 67% to 68%, and adjusted EBITDA between $32 million and $34 million.

Risks

• Impact of Google's AIO rollout on traffic and disintermediation of content sites like Chegg.
• Increased adoption of generative AI products negatively affecting the education ecosystem and Chegg's business.
• Unfortunate impact of restructuring on employees and their families.

Q: When looking out to Q4 and medium term, how to balance key investments in longer-term initiatives with reducing overall cost structure?

A: Priorities are refocusing to create differentiation against generic free AI products, with efforts like content satisfaction guarantee, brand campaign Small Steps Big Wins, and evolving product in areas like practice and solution comparison.

Q: About Google update, how much traffic from Google to replace and new marketing channels?

A: Organic listings are below Google's AIO review, but Chegg has strong direct channels and is using TikTok, Discord app, Chrome extension, and holistic marketing strategy.

Q: Reconcile subscribers down but questions asked up. How to monetize core users?

A: Questions up due to revamped Q&A experience focusing on learning journey. Need to amplify brand campaigns to get students as vocal advocates.

Q: Thoughts on retention rate and funnel loss?

A: Retention and product experience go hand in hand. Focus on establishing Chegg as the place for learning through brand campaigns and packaging programs to attract students looking to learn.

Q: Details on softening in nonsubscriber traffic through October and confidence in stabilization?

A: Softness due to Google AIO experience. Confidence comes from diversifying ways to reach students through Discord app, TikTok, and brand push to get students to choose Chegg.