Chegg, Inc. (NYSE:CHGG), the leading student-first connected
learning platform, today reported financial results for the three
months ended June 30, 2024.
“Q2 has been transformational for Chegg, completing our
restructure, outlining an exciting vision for the future, and
completing the rollout of conversational instruction capability and
automated solutions just in time for the back-to-school season,”
said Nathan Schultz, Chief Executive Officer & President of
Chegg, Inc. “We are executing our product vision to evolve Chegg
from a solutions-based study platform to one that supports students
holistically with 360 degrees of individualized academic and
functional support, which meets the needs of the modern
student.”
Second Quarter 2024
Highlights
- Total Net Revenues of $163.1 million, a decrease of 11%
year-over-year
- Subscription Services Revenues of $146.8 million, a
decrease of 11% year-over-year
- Gross Margin of 72%
- Non-GAAP Gross Margin of 75%
- Net Loss was $616.9 million
- Non-GAAP Net Income was $26.5 million
- Adjusted EBITDA was $44.1 million
- 4.4 million Subscription Services subscribers, a
decrease of 9% year-over-year
Total net revenues include revenues from Subscription Services
and Skills and Other. Subscription Services includes revenues from
our Chegg Study Pack, Chegg Study, Chegg Writing, Chegg Math, and
Busuu offerings. Skills and Other includes revenues from Chegg
Skills, Advertising, and any other revenues not included in
Subscription Services.
For more information about non-GAAP net income, non-GAAP gross
margin and adjusted EBITDA, and a reconciliation of non-GAAP net
income to net (loss) income, gross margin to non-GAAP gross margin
and adjusted EBITDA to net (loss) income, see the sections of this
press release titled, “Use of Non-GAAP Measures,” “Reconciliation
of Net (Loss) Income to EBITDA and Adjusted EBITDA,” and
“Reconciliation of GAAP to Non-GAAP Financial Measures.”
Business Outlook
Third Quarter 2024
- Total Net Revenues in the range of $133 million to $135
million
- Subscription Services Revenues in the range of $116
million to $118 million
- Gross Margin between 67% and 68%
- Adjusted EBITDA in the range of $19 million to $21
million
For more information about the use of forward-looking non-GAAP
measures, a reconciliation of forward-looking net loss to EBITDA
and adjusted EBITDA for the third quarter 2024, see the below
sections of the press release titled “Use of Non-GAAP Measures,”
and “Reconciliation of Forward-Looking Net Loss to EBITDA and
Adjusted EBITDA.”
An updated investor presentation and an investor data sheet can
be found on Chegg’s Investor Relations website https://investor.chegg.com.
Prepared Remarks – Nathan Schultz, CEO &
President, Chegg, Inc.
Thank you, Tracey. Good afternoon, everyone, and thanks for
joining Chegg’s 2nd quarter earnings call. I’m so very proud of how
Chegg shows up for students and of our teams’ endeavor to build an
unparalleled learning platform. Since assuming the CEO role 65 days
ago, I spearheaded a significant restructuring effort to create a
leaner, more efficient organization, which will allow us to move
faster, smarter, and make investments for the long term. In 2025,
our restructuring program will generate non-GAAP expense savings in
the range of $40-50 million and has allowed us to remain committed
to our goals of 30%+ adjusted EBITDA margin and at least $100
million of Free Cash Flow. Additionally, we have outlined a new
product vision to evolve Chegg from a solutions-based study
platform to one that supports the whole student with 360 degrees of
individualized academic and functional support. Our talented teams
are hard at work building the products and experiences that bring
our new vision to life. However, let’s start with Q2.
For Q2, we exceeded our guidance delivering $146.8 million in
revenue and $44.1 million in Adjusted EBITDA. We continued to
integrate AI into Chegg Study, completing several foundational
programs, and most importantly, the complete rollout of
conversational instructional capability and automated solutions—all
in time for the upcoming back-to-school season. As a result, we are
seeing positive reception, as demonstrated by an increase in
student engagement. I’d like to specifically call out two exciting
trends: first, 70% of subscribers are engaging in conversational
instruction; second, students are asking more questions. The number
of questions asked by students increased 74% year-over-year versus
Q2 2023, and in H1 ’24 alone, students asked a whopping 16.2
million questions, which is a 109% year-over-year increase.
While pleased with the product advancements we implemented in
Q2, we are only getting started. Our sights are fixed on
innovations that leverage both our key differentiators and the
generational technology shift in which we find ourselves. Speaking
of which, I would like to spend a few minutes highlighting three
key differentiators.
First, we are obsessed with studying students. With more than a
decade of insights into student needs, motivations, and behaviors,
we consistently work to evolve and align our services to the modern
student experience. We apply deep learning science from an in-house
team to create a verticalized user experience that reflects how
students learn best. For example, we provide step-by-step
solutions, jargon-free explanations, and simplified concepts to
make learning accessible. This deep understanding of students
culled from millions of learning interactions drives our product
innovation.
Second, we have been built from the bottom up to deliver
high-quality, accurate content at scale. Students care deeply about
accuracy and quality of instruction. In our study of more than
11,000 students globally, 47% of those who use Generative AI for
university study say receiving incorrect information is a top
concern. This lack of trust has led 67% of students to spend
additional time verifying the information they receive from AI
tools. This is inefficient, and we can do better. To that end,
Chegg will launch this fall a student-facing satisfaction guarantee
aligned to the quality and accuracy of our content, to better
support student success and differentiate Chegg.
Third, and finally, Chegg’s brand awareness remains high, with
75% of U.S. college students having heard of Chegg. We plan to
build on our strong foundation in Q3, launching our “Small Steps,
Big Wins” marketing campaign this back-to-school season. This will
extend our reach into channels where students are congregating,
such as TikTok, Instagram, and on campus, to increase our top of
funnel. Additionally, we will start to test services delivered on
Discord and through Chrome extensions, with the goal of making sure
Chegg is everywhere our current and future students are.
The differentiators we have built over the last decade have
positioned us for success as we execute our product roadmap and
dive headfirst into the generational technology shift ushered in by
AI. Our mission is to build from our foundation to support student
outcomes – not by delivering AI education but rather education
enhanced by AI. With that in mind, I would like to take you through
some examples of the AI architecture we have built.
First, we have created proprietary technology that allows Chegg
to deeply understand students' questions. When a question is asked,
we create a full picture: why they asked it, at what depth the
answer should be given, and most exciting, how we can use this
question to develop a series of next-best actions that creates an
individualized learning pathway, driving student engagement and
retention.
Second, our evolving architecture takes an innovative
multi-source approach, leveraging foundational and proprietary
language models, our industry-leading symbolic math engine, our
deep catalog of learning content, and our subject matter experts to
deliver the best learning solutions possible. To fully realize our
ground-breaking vision for integrating AI with our proprietary
content and computational models, we have built a sophisticated,
source-agnostic Orchestrator that intelligently selects the best
approach to assist each student. You can think of the Orchestrator
as an air-traffic controller. Using this approach, accuracy and
quality remain paramount. As such, we have also developed a
proprietary quality rubric that assesses all possible content
sources and language models. We believe this enables Chegg to take
advantage of any future innovations that foundational language
models will inevitably create while maintaining the quality that
has built our brand.
As always, we have developed our innovative approach to
servicing students with scale and cost in mind. Today, we produce
solutions at a 75% reduction per unit vs. human creation alone. The
bottom line is that we are now creating more content, of higher
quality, at lower cost. And as you know, content is the primary
driver of our acquisition flywheel.
Before I turn it over to David, I want to briefly talk about
what you can expect regarding product innovation in Q3 as well as
an exciting new partnership as we get set for our back-to-school
rush.
On the global product side, we are well underway in implementing
our iterative approach to product development. This fall, we will
be testing a variety of innovations. As an example, we have
developed a feature internally referred to as Starting Point, which
is meant to address the common issue of students simply not knowing
where to start, whether they are studying for a mid-term or writing
an important paper. This introduces a whole new way for students to
leverage Chegg on their learning journey. In addition to Starting
Point, we have developed two new applications, one that keeps
students on track and another that organizes students’ notes and
turns them into study tools. As we get more products into students’
hands through iterative development, you are beginning to see the
evolution of Chegg from a Q&A platform to one that delivers 360
degrees of support.
On the international front, we will be launching a fully
localized product experience in Mexico by the end of September. Our
end-to-end localization strategy adapts Chegg Study to meet the
cultural, linguistic, and user experience requirements of key
international markets. As our first fully localized market, Mexico
will serve as the playbook for future localization efforts. We
remain excited about the growth opportunities that international
expansion provides.
Finally, I’m excited to announce that we are expanding our Chegg
Perks program through a partnership with Max, one of the leading
global streaming services. Max delivers exclusive original series
and blockbuster movies as well as a library of beloved TV that our
U.S. subscribers will now be able to access with ads. Max joins our
other Perks partners, including Tinder, DoorDash, Calm, and others,
to enrich the value of a Chegg subscription.
In closing, we continue to execute the plan that we believe will
return our company to growth. The way back will take time and will
be accomplished through steady execution of our vision to serve the
whole student, thoughtful implementation of our unique AI strategy,
and building off our durable differentiators, which include a deep
knowledge of students, a content foundation built for quality and
scale, and a brand that students know and love.
Now, with that, I will turn it over to David…
Prepared Remarks – David Longo, CFO, Chegg,
Inc.
Thank you, Nathan,
Today, I will present our financial performance for the second
quarter of 2024 and our outlook for Q3.
Q2 was a solid quarter. We remained focused on delivering our
new AI-driven experiences to students around the world, made
progress on key metrics which we believe will support both revenue
and adjusted EBITDA growth over time, and continued to execute
prudent expense management to maintain strong profitability. We
exceeded our Q2 guidance on both revenue and adjusted EBITDA and
our balance sheet remains healthy.
Before I jump into the results of the quarter, in the
Shareholder Letter related to the restructuring, we committed to
sharing key metrics that would assist investors to understand and
model our company. Our earnings presentation on our investor
relations website includes these key metrics for Q2. These are the
metrics we review to understand the trends and health of our
business.
Moving on to our second quarter performance, we had 4.4 million
subscribers in the quarter, with 25% coming from international.
Total revenue was $163 million, down 11% year-over-year, including
Subscription Services revenue of $147 million. Subscription
Services ARPU was down 3% year-over-year, which was primarily
driven by the international promotional pricing we introduced last
year to bolster conversion and retention. Overall monthly retention
for Chegg Study and Study Pack remained strong and was up 23 basis
points year-over-year. Skills and Other revenue was $16 million, a
decrease of 4% year-over-year.
Second quarter adjusted EBITDA of $44 million represented a
margin of 27%. This is above our guidance due to the better than
anticipated revenue, as well as ongoing expense management to
preserve profitability and cash flows as we navigate the path back
to growth. As planned, the restructuring had a minimal impact on
our Q2 adjusted EBITDA, and the full financial savings will not be
realized until 2025.
We had a few notable GAAP items this quarter, specifically an
impairment charge and a large discreet item in our income tax
provision. As a result of continued industry pressure and declines
in our market capitalization, and as required by accounting rules,
we completed an impairment test on our goodwill, intangible assets
and property & equipment. The test resulted in $481.5 million
of non-cash impairment charges that were excluded from our Q2
adjusted EBITDA.
In addition, the goodwill impairment impacted our Q2 income tax
provision as we are now in three years of cumulative pretax losses
in the U.S. This triggered the necessity of a $141.6 million
non-cash valuation allowance recorded on all U.S. federal and state
deferred tax assets which is included in the Q2 income tax
provision.
Free Cash Flow was negative $3.6 million in the second quarter,
which was driven by severance payments related to our restructuring
and an increase in net working capital largely related to the
timing of accounts payable items. Capital expenditures were $17.8
million in the quarter, of which $13 million were content costs.
Content costs were down 7% year-over-year, even with an increase of
74% in the number of questions asked.
Looking at the balance sheet, we ended the quarter with cash and
investments of $605 million and a net cash balance of $4.5
million.
With respect to Q3 guidance, we expect:
- Total revenue between $133 and $135 million, with Subscription
Services revenue between $116 and $118 million;
- Gross margin to be in the range of 67 to 68 percent;
- And adjusted EBITDA between $19 and $21 million.
In closing, while these numbers are not where we want them to
be, like many companies in the ed-tech space, we are dealing with
the challenges of the changing landscape. As Nathan detailed
earlier, we are working to implement the vision to get us back to
growth, but it will take some time before we see the benefits. I am
committed to delivering our financial goals. We believe there is a
significant opportunity ahead for Chegg and I am confident in our
team and our ability to succeed.
With that, I will turn the call over to the operator for your
questions.
Conference Call and Webcast
Information
To access the call, please dial 1-877-407-4018, or outside the
U.S. +1-201-689-8471, five minutes prior to 1:30 p.m. Pacific Time
(or 4:30 p.m. Eastern Time). A live webcast of the call will also
be available at https://investor.chegg.com under the Events &
Presentations menu. An audio replay will be available beginning at
4:30 p.m. Pacific Time (or 7:30 p.m. Eastern Time) on August 5,
2024, until 8:59 p.m. Pacific Time (or 11:59 p.m. Eastern Time) on
August 12, 2024, by calling 1-844-512-2921, or outside the U.S.
+1-412-317-6671, with Conference ID 13747410. An audio archive of
the call will also be available at https://investor.chegg.com.
Use of Investor Relations Website for
Regulation FD Purposes
Chegg also uses its media center website,
https://www.chegg.com/press, as a means of disclosing material
non-public information and for complying with its disclosure
obligations under Regulation FD. Accordingly, investors should
monitor https://www.chegg.com/press, in addition to following press
releases, Securities and Exchange Commission filings and public
conference calls and webcasts.
About Chegg
Chegg provides individualized learning support to students as
they pursue their educational journeys. Available on demand 24/7
and powered by over a decade of learning insights, the Chegg
platform offers students AI-powered academic support thoughtfully
designed for education coupled with access to a vast network of
subject matter experts who ensure quality. No matter the goal,
level, or style, Chegg helps millions of students around the world
learn with confidence by helping them build essential academic,
life, and job skills to achieve success. Chegg is a publicly held
company based in Santa Clara, California and trades on the NYSE
under the symbol CHGG. For more information, visit
www.chegg.com.
Use of Non-GAAP Measures
To supplement Chegg’s financial results presented in accordance
with generally accepted accounting principles in the United States
(GAAP), this press release and the accompanying tables and the
related earnings conference call contain non-GAAP financial
measures, including adjusted EBITDA, non-GAAP cost of revenues,
non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating
expenses, non-GAAP income from operations, non-GAAP net income,
non-GAAP weighted average shares, non-GAAP net income per share,
and free cash flow. For reconciliations of these non-GAAP financial
measures to the most directly comparable GAAP financial measures,
please see the section of the accompanying tables titled,
“Reconciliation of Net (Loss) Income to EBITDA and Adjusted
EBITDA,” “Reconciliation of GAAP to Non-GAAP Financial Measures,”
“Reconciliation of Net Cash Provided by Operating Activities to
Free Cash Flow,” and “Reconciliation of Forward-Looking Net Loss to
EBITDA and Adjusted EBITDA.”
The presentation of these non-GAAP financial measures is not
intended to be considered in isolation from, as a substitute for,
or superior to, the financial information prepared and presented in
accordance with GAAP, and may be different from non-GAAP financial
measures used by other companies. Chegg defines (1) adjusted EBITDA
as earnings before interest, taxes, depreciation and amortization
or EBITDA, adjusted for share-based compensation expense, other
income, net, acquisition-related compensation costs, impairment
expense, restructuring charges, content and related assets charge
and transitional logistic charges; (2) non-GAAP cost of revenues as
cost of revenues excluding amortization of intangible assets,
share-based compensation expense, acquisition-related compensation
costs, restructuring charges, content and related assets charge,
and transitional logistic charges; (3) non-GAAP gross profit as
gross profit excluding amortization of intangible assets,
share-based compensation expense, acquisition-related compensation
costs, restructuring charges, content and related assets charge,
and transitional logistic charges; (4) non-GAAP gross margin is
defined as non-GAAP gross profit divided by net revenues; (5)
non-GAAP operating expenses as operating expenses excluding
share-based compensation expense, amortization of intangible
assets, acquisition-related compensation costs, restructuring
charges, impairment expense, impairment of lease related assets,
and loss contingency; (6) non-GAAP income from operations as loss
from operations excluding share-based compensation expense,
amortization of intangible assets, acquisition-related compensation
costs, restructuring charges, impairment expense, content and
related assets charge, impairment of lease related assets, loss
contingency, and transitional logistic charges; (7) non-GAAP net
income as net (loss) income excluding share-based compensation
expense, amortization of intangible assets, acquisition-related
compensation costs, amortization of debt issuance costs, the income
tax effect of non-GAAP adjustments, restructuring charges,
impairment expense, content and related assets charge, impairment
of lease related assets, gain on sale of strategic equity
investment, gain on early extinguishment of debt, loss contingency
and transitional logistic charges; (8) non-GAAP weighted average
shares outstanding as weighted average shares outstanding adjusted
for the effect of shares for stock plan activity and shares related
to our convertible senior notes, to the extent such shares are not
already included in our weighted average shares outstanding; (9)
non-GAAP net income per share is defined as non-GAAP net income
divided by non-GAAP weighted average shares outstanding; and (10)
free cash flow as net cash provided by operating activities
adjusted for purchases of property and equipment. To the extent
additional significant non-recurring items arise in the future,
Chegg may consider whether to exclude such items in calculating the
non-GAAP financial measures it uses.
Chegg believes that these non-GAAP financial measures, when
taken together with the corresponding GAAP financial measures,
provide meaningful supplemental information regarding Chegg’s
performance by excluding items that may not be indicative of
Chegg’s core business, operating results or future outlook. Chegg
management uses these non-GAAP financial measures in assessing
Chegg’s operating results, as well as when planning, forecasting
and analyzing future periods and believes that such measures
enhance investors’ overall understanding of our current financial
performance. These non-GAAP financial measures also facilitate
comparisons of Chegg’s performance to prior periods.
As presented in the “Reconciliation of Net (Loss) Income to
EBITDA and Adjusted EBITDA,” “Reconciliation of GAAP to Non-GAAP
Financial Measures,” “Reconciliation of Forward-Looking Net Loss to
EBITDA and Adjusted EBITDA,” and “Reconciliation of Net Cash
Provided by Operating Activities to Free Cash Flow” tables below,
each of the non-GAAP financial measures excludes or includes one or
more of the following items:
Share-based compensation expense.
Share-based compensation expense is a non-cash expense that
varies in amount from period to period and is dependent on market
forces that are often beyond Chegg's control. As a result,
management excludes this item from Chegg's internal operating
forecasts and models. Management believes that non-GAAP measures
adjusted for share-based compensation expense provide investors
with a basis to measure Chegg's core performance against the
performance of other companies without the variability created by
share-based compensation as a result of the variety of equity
awards used by other companies and the varying methodologies and
assumptions used.
Amortization of intangible assets.
Chegg amortizes intangible assets, including those that
contribute to generating revenues, that it acquires in conjunction
with acquisitions, which results in non‑cash expenses that may not
otherwise have been incurred. Chegg believes excluding the expense
associated with intangible assets from non-GAAP measures allows for
a more accurate assessment of its ongoing operations and provides
investors with a better comparison of period-over-period operating
results. No corresponding adjustments have been made related to
revenues generated from acquired intangible assets.
Acquisition-related compensation costs.
Acquisition-related compensation costs include compensation
expense resulting from the employment retention of certain key
employees established in accordance with the terms of the
acquisitions. In most cases, these acquisition-related compensation
costs are not factored into management's evaluation of potential
acquisitions or Chegg's performance after completion of
acquisitions, because they are not related to Chegg's core
operating performance. In addition, the frequency and amount of
such charges can vary significantly based on the size and timing of
acquisitions and the maturities of the businesses being acquired.
Excluding acquisition-related compensation costs from non-GAAP
measures provides investors with a basis to compare Chegg’s results
against those of other companies without the variability caused by
purchase accounting.
Amortization of debt issuance costs.
The difference between the effective interest expense and the
contractual interest expense are excluded from management's
assessment of our operating performance because management believes
that these non-cash expenses are not indicative of ongoing
operating performance. Chegg believes that the exclusion of the
non-cash interest expense provides investors with a better
comparison of period-over-period operating results.
Income tax effect of non-GAAP adjustments.
We utilize a non-GAAP effective tax rate for evaluating our
operating results, which is based on our current mid-term
projections. This non-GAAP tax rate could change for various
reasons including, but not limited to, significant changes
resulting from tax legislation, changes to our corporate structure
and other significant events. Chegg believes that the inclusion of
the income tax effect of non-GAAP adjustments provides investors
with a better comparison of period-over-period operating
results.
Restructuring charges.
Restructuring charges represent expenses incurred in conjunction
with a reduction in workforce. Chegg believes that it is
appropriate to exclude them from non-GAAP financial measures
because they are nonrecurring and the result of an event that is
not considered a core-operating activity. Chegg believes that it is
appropriate to exclude the restructuring charges from non-GAAP
financial measures because it provides investors with a better
comparison of period-over-period operating results.
Impairment expense.
Impairment expense represents the impairment of goodwill,
intangible assets, and property and equipment. Chegg believes that
it is appropriate to exclude them from non-GAAP financial measures
because they are the result of discrete events that are not
considered core-operating activities and are not indicative of our
ongoing operating performance. Chegg believes that it is
appropriate to exclude the impairment expense from non-GAAP
financial measures because it provides investors with a better
comparison of period-over-period operating results.
Impairment of lease related assets.
The impairment of lease related assets represents impairment
charge recorded on the ROU asset and leasehold improvements
associated with the closure of our offices. The impairment of lease
related assets is the result of an event that is not considered a
core-operating activity and we believe its exclusion provides
investors with a better comparison of period-over-period operating
results.
Content and related assets charge.
The content and related assets charge represents a write off of
certain content and related assets. The content and related assets
charge is excluded from non-GAAP financial measures because it is
the result of a discrete event that is not considered
core-operating activities. Chegg believes that it is appropriate to
exclude the content and related assets charge from non-GAAP
financial measures because it enables the comparison of
period-over-period operating results.
Gain on sale of strategic equity investment.
The gain on sale of strategic equity investment represents a
one-time event to record the sale of our equity investment in Sound
Ventures. We believe that it is appropriate to exclude the gain
from non-GAAP financial measures because it is the result of an
event that is not considered a core-operating activity and we
believe its exclusion provides investors with a better comparison
of period-over-period operating results.
Gain on early extinguishment of debt.
The difference between the carrying amount of early extinguished
debt and the reacquisition price is excluded from management's
assessment of our operating performance because management believes
that these non-cash gains are not indicative of ongoing operating
performance. Chegg believes that the exclusion of the gain on early
extinguishment of debt provides investors with a better comparison
of period-over-period operating results.
Loss contingency.
The loss contingency represents a one-time accrual in connection
with a demand for repayment of certain investment proceeds received
by the Company in its capacity as an investor in TAPD, Inc. (more
commonly known as “Frank”). The loss contingency is excluded from
non-GAAP financial measures because they are the result of discrete
events that are not considered core-operating activities. Chegg
believes that it is appropriate to exclude the loss contingency
from non-GAAP financial measures because it enables the comparison
of period-over-period operating results.
Transitional logistics charges.
The transitional logistics charges represent incremental
expenses incurred as we transition our print textbooks to a third
party. Chegg believes that it is appropriate to exclude them from
non-GAAP financial measures because it is the result of an event
that is not considered a core-operating activity and we believe its
exclusion provides investors with a better comparison of
period-over-period operating results.
Effect of shares for stock plan activity.
The effect of shares for stock plan activity represents the
dilutive impact of outstanding stock options, RSUs, and PSUs
calculated under the treasury stock method.
Effect of shares related to convertible senior notes.
The effect of shares related to convertible senior notes
represents the dilutive impact of our convertible senior notes, to
the extent such shares are not already included in our weighted
average shares outstanding as they were antidilutive on a GAAP
basis.
Free cash flow.
Free cash flow represents net cash provided by operating
activities adjusted for purchases of property and equipment. Chegg
considers free cash flow to be a liquidity measure that provides
useful information to management and investors about the amount of
cash generated by the business after the purchases of property and
equipment, which can then be used to, among other things, invest in
Chegg's business and make strategic acquisitions. A limitation of
the utility of free cash flow as a measure of financial performance
is that it does not represent the total increase or decrease in
Chegg's cash balance for the period.
Forward-Looking
Statements
This press release contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, which include, without limitation,
our endeavor to build an unparalleled learning platform, our effort
to create a leaner, more efficient organization, which will move
faster, smarter, and allow us to make investments for the long
term, our prediction that our restructuring program will generate
non-GAAP expense savings in the range of $40-50 million, our goals
of 30%+ adjusted EBITDA margin and at least $100 million of Free
Cash Flow for 2025, our new product vision to evolve Chegg from a
solutions-based study platform to one that supports the whole
student with 360 degrees of individualized academic and functional
support, our ability to build the products and experiences that
bring our new vision to life, our ability to leverage both our key
differentiators and the general technology shift in which we find
ourselves, our ability to evolve and align our services to the
modern student experience, our expectation that we can do better
regarding students spending time verifying the information they
receive from AI tools, the launch of our student-facing
satisfaction guarantee, our ability to support student success and
differentiate Chegg, our plan to launch our "Small Steps, Big Wins"
marketing campaign, our expectation that our marketing program will
extend our reach into channels where students are congregating and
that it will increase our top of funnel, our goal of making sure
Chegg is everywhere our current and future students are, our
ability to execute our product roadmap, our ability to support
student outcomes by delivering education enhanced by AI, whether we
can use our proprietary technology to develop a series of next-best
actions that creates an individualized learning pathway and whether
this will drive student engagement and retention, our ability to
deliver the best learning solutions possible, our Orchestrator's
ability to select the best approach to assist each student, our
ability to take advantage of any future innovations that
foundational models will create while maintaining quality,
producing solutions at a reduced cost per unit vs. human creation
alone, our content acting as the primary driver of our acquisition
flywheel, our product innovations for Q3 including Starting Point,
one that keeps students on track and another that organizes
students' notes, the evolution of Chegg from a Q&A platform to
one that delivers 360 degrees of support, the launch of a fully
localized product in Mexico by the end of September, our ability to
meet the cultural, linguistic, and user experience requirements of
key international markets, the ability of Mexico to serve as a
playbook for future localization efforts, the growth opportunities
that international expansion provides, our partnership with Max,
our belief that we will return to growth, that the work done in Q2
will support both revenue and adjusted EBITDA growth over time, our
ability to maintain strong profitability, our Q3 guidance,
including total revenue, Subscription Services revenue, gross
margin, and adjusted EBITDA, our ability to implement our vision to
get back to growth, our ability to deliver our financial goals,
that there is a significant opportunity ahead of Chegg, and our
confidence in our team and our ability to succeed, as well as those
included in the investor presentation referenced above, those
included in the “Prepared Remarks” sections above, and all
statements about Chegg’s outlook under “Business Outlook.” The
words “anticipate,” “believe,” “estimate,” “expect,” “intend,”
“project,” “endeavor,” “will,” “should,” “future,” “transition,”
“outlook” and similar expressions, as they relate to Chegg, are
intended to identify forward-looking statements. These statements
are not guarantees of future performance, and are based on
management’s expectations as of the date of this press release and
assumptions that are inherently subject to uncertainties, risks and
changes in circumstances that are difficult to predict.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results,
performance or achievements to differ materially from any future
results, performance or achievements. Important factors that could
cause actual results to differ materially from those expressed or
implied by these forward-looking statements include the following:
the effects of AI technology on Chegg’s business and the economy
generally; Chegg’s ability to attract new learners to, and retain
existing learners on, our learning platform; Chegg's innovation and
offering of new products and services in response to technology and
market developments, including AI; Chegg’s brand and reputation;
the uncertainty surrounding the evolving educational landscape;
enrollment and student behavior, including the impact of AI;
Chegg’s ability to expand internationally; the efficacy of Chegg's
efforts to drive user traffic, including search engine
optimization, social media campaigns, and other marketing; the
success of Chegg’s new product offerings, including 360 degrees of
individualized academic and functional support; competition in all
aspects of Chegg’s business, including with respect to AI and
Chegg's expectation that such competition will increase; Chegg’s
ability to maintain its services and systems without interruption,
including as a result of technical issues, cybersecurity threats,
or cyber-attacks; third-party payment processing risks; adoption of
government regulation of education unfavorable to Chegg; the rate
of adoption of Chegg’s offerings; mobile app stores and mobile
operating systems making Chegg’s apps and mobile website available
to students and to grow Chegg’s user base and increase their
engagement; colleges and governments restricting online access or
access to Chegg’s services; Chegg’s ability to strategically take
advantage of new opportunities; competitive developments, including
pricing pressures and other services targeting students; Chegg’s
ability to build and expand its services offerings; Chegg’s ability
to integrate acquired businesses and assets; the impact of
seasonality and student behavior on the business; the outcome of
any current litigation and investigations; misuse of Chegg’s
platform and content; Chegg’s ability to effectively control
operating costs; regulatory changes, in particular concerning
privacy, marketing, and education; changes in the education market,
including as a result of AI technology and COVID-19; and general
economic, political and industry conditions, including inflation,
recession and war. All information provided in this release and in
the conference call is as of the date hereof, and Chegg undertakes
no duty to update this information except as required by law. These
and other important risk factors are described more fully in
documents filed with the Securities and Exchange Commission,
including Chegg's Annual Report on Form 10-K for the year ended
December 31, 2023 filed with the Securities and Exchange Commission
on February 20, 2024, and could cause actual results to differ
materially from expectations.
CHEGG, INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
(in thousands, except for
number of shares and par value)
(unaudited)
June 30,
2024
December 31,
2023
Assets
Current assets
Cash and cash equivalents
$
133,068
$
135,757
Short-term investments
212,396
194,257
Accounts receivable, net of allowance of
$183 and $376 at June 30, 2024 and December 31, 2023,
respectively
20,964
31,404
Prepaid expenses
30,841
20,980
Other current assets
36,279
32,437
Total current assets
433,548
414,835
Long-term investments
259,925
249,547
Property and equipment, net
179,278
183,073
Goodwill
189,769
631,995
Intangible assets, net
12,848
52,430
Right of use assets
21,508
25,130
Deferred tax assets
2,287
141,843
Other assets
15,167
28,382
Total assets
$
1,114,330
$
1,727,235
Liabilities and stockholders'
equity
Current liabilities
Accounts payable
$
14,424
$
28,184
Deferred revenue
45,023
55,336
Accrued liabilities
68,001
77,863
Current portion of convertible senior
notes, net
357,838
357,079
Total current liabilities
485,286
518,462
Long-term liabilities
Convertible senior notes, net
243,079
242,758
Long-term operating lease liabilities
15,595
18,063
Other long-term liabilities
4,870
3,334
Total long-term liabilities
263,544
264,155
Total liabilities
748,830
782,617
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value per
share, 10,000,000 shares authorized, no shares issued and
outstanding
—
—
Common stock, $0.001 par value per share:
400,000,000 shares authorized; 103,360,633 and 102,823,700 shares
issued and outstanding at June 30, 2024 and December 31, 2023,
respectively
103
103
Additional paid-in capital
1,075,989
1,031,627
Accumulated other comprehensive loss
(39,915
)
(34,739
)
Accumulated deficit
(670,677
)
(52,373
)
Total stockholders' equity
365,500
944,618
Total liabilities and stockholders'
equity
$
1,114,330
$
1,727,235
CHEGG, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands, except per
share amounts)
(unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2024
2023
2024
2023
Net revenues
$
163,147
$
182,853
$
337,497
$
370,454
Cost of revenues(1)
45,411
47,412
91,908
96,562
Gross profit
117,736
135,441
245,589
273,892
Operating expenses:
Research and development(1)
43,651
52,872
88,086
99,779
Sales and marketing(1)
23,545
30,956
53,920
67,973
General and administrative(1)
54,016
70,309
109,550
129,282
Impairment expense
481,531
—
481,531
—
Total operating expenses
602,743
154,137
733,087
297,034
Loss from operations
(485,007
)
(18,696
)
(487,498
)
(23,142
)
Interest expense, net and other income,
net:
Interest expense, net
(651
)
(1,114
)
(1,301
)
(2,382
)
Other income, net
7,119
64,103
17,899
76,179
Total interest expense, net and other
income, net
6,468
62,989
16,598
73,797
(Loss) income before provision for income
taxes
(478,539
)
44,293
(470,900
)
50,655
Provision for income taxes
(138,345
)
(19,681
)
(147,404
)
(23,857
)
Net (loss) income
$
(616,884
)
$
24,612
$
(618,304
)
$
26,798
Net (loss) income per share
Basic
$
(6.01
)
$
0.21
$
(6.03
)
$
0.22
Diluted
$
(6.01
)
$
(0.11
)
$
(6.03
)
$
(0.08
)
Weighted average shares used to compute
net (loss) income per share
Basic
102,604
117,977
102,474
120,828
Diluted
102,604
132,944
102,474
137,416
(1) Includes share-based compensation
expense and restructuring charges as follows:
Share-based compensation expense:
Cost of revenues
$
466
$
560
$
979
$
1,087
Research and development
7,123
11,968
16,332
22,882
Sales and marketing
1,726
2,182
3,866
4,681
General and administrative
8,732
21,210
26,159
41,016
Total share-based compensation expense
$
18,047
$
35,920
$
47,336
$
69,666
Restructuring charges:
Cost of revenues
$
191
$
12
$
191
$
12
Research and development
2,082
1,692
2,082
1,692
Sales and marketing
906
1,228
906
1,228
General and administrative
3,549
2,772
3,549
2,772
Total restructuring charges
$
6,728
$
5,704
$
6,728
$
5,704
CHEGG, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
2024
2023
Cash flows from operating
activities
Net (loss) income
$
(618,304
)
$
26,798
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Share-based compensation expense
47,336
69,666
Depreciation and amortization expense
39,393
52,027
Deferred income taxes
141,032
20,142
Operating lease expense, net
3,141
3,009
Amortization of debt issuance costs
1,081
1,988
Loss from write-off of property and
equipment
1,657
450
Impairment expense
481,531
—
Gain on early extinguishment of debt
—
(53,777
)
Loss contingency
—
7,000
Impairment on lease related assets
2,189
—
Other non-cash items
82
(1,083
)
Change in assets and liabilities:
Accounts receivable
10,561
3,081
Prepaid expenses and other current
assets
(12,173
)
15,082
Other assets
(773
)
5,470
Accounts payable
(12,045
)
(671
)
Deferred revenue
(10,226
)
(3,634
)
Accrued liabilities
(4,057
)
(1,436
)
Other liabilities
(2,880
)
(8,205
)
Net cash provided by operating
activities
67,545
135,907
Cash flows from investing
activities
Purchases of property and equipment
(45,817
)
(33,864
)
Proceeds from disposition of textbooks
—
9,787
Purchases of investments
(123,669
)
(552,409
)
Maturities of investments
89,890
476,862
Proceeds from sale of investments
—
238,681
Proceeds from sale of strategic equity
investment
15,500
—
Purchase of strategic equity
investment
—
(9,604
)
Net cash (used in) provided by investing
activities
(64,096
)
129,453
Cash flows from financing
activities
Proceeds from common stock issued under
stock plans, net
2,190
3,081
Payment of taxes related to the net share
settlement of equity awards
(7,825
)
(11,068
)
Repurchase of common stock
—
(186,368
)
Repayment of convertible senior notes
—
(369,761
)
Proceeds from exercise of convertible
senior notes capped call
—
297
Net cash used in financing activities
(5,635
)
(563,819
)
Effect of exchange rate changes
(305
)
197
Net decrease in cash, cash equivalents and
restricted cash
(2,491
)
(298,262
)
Cash, cash equivalents and restricted
cash, beginning of period
137,976
475,854
Cash, cash equivalents and restricted
cash, end of period
$
135,485
$
177,592
Six Months Ended
June 30,
2024
2023
Supplemental cash flow data:
Cash paid during the period for:
Interest
$
224
$
517
Income taxes, net of refunds
$
2,729
$
6,171
Cash paid for amounts included in the
measurement of lease liabilities:
Operating cash flows from operating
leases
$
4,346
$
4,909
Right of use assets obtained in exchange
for lease obligations:
Operating leases
$
663
$
12,407
Non-cash investing and financing
activities:
Accrued purchases of long-lived assets
$
5,016
$
4,518
June 30,
2024
2023
Reconciliation of cash, cash equivalents
and restricted cash:
Cash and cash equivalents
$
133,068
$
175,368
Restricted cash included in other current
assets
540
60
Restricted cash included in other
assets
1,877
2,164
Total cash, cash equivalents and
restricted cash
$
135,485
$
177,592
CHEGG, INC.
RECONCILIATION OF NET (LOSS)
INCOME TO EBITDA AND ADJUSTED EBITDA
(in thousands)
(unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2024
2023
2024
2023
Net (loss) income
$
(616,884
)
$
24,612
$
(618,304
)
$
26,798
Interest expense, net
651
1,114
1,301
2,382
Provision for income taxes
138,345
19,681
147,404
23,857
Depreciation and amortization expense
19,706
26,484
39,393
52,027
EBITDA
(458,182
)
71,891
(430,206
)
105,064
Share-based compensation expense
18,047
35,920
47,336
69,666
Other income, net
(7,119
)
(64,103
)
(17,899
)
(76,179
)
Acquisition-related compensation costs
173
3,417
428
5,877
Restructuring charges
6,728
5,704
6,728
5,704
Impairment expense
481,531
—
481,531
—
Impairment of lease related assets
2,189
—
2,189
—
Content and related assets charge
729
—
729
—
Loss contingency
—
7,000
—
7,000
Transitional logistics charges
—
—
—
253
Adjusted EBITDA
$
44,096
$
59,829
$
90,836
$
117,385
CHEGG, INC.
RECONCILIATION OF GAAP TO
NON-GAAP FINANCIAL MEASURES
(in thousands, except
percentages and per share amounts)
(unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2024
2023
2024
2023
Cost of revenues
$
45,411
$
47,412
$
91,908
$
96,562
Amortization of intangible assets
(3,071
)
(3,382
)
(6,213
)
(6,721
)
Share-based compensation expense
(466
)
(560
)
(979
)
(1,087
)
Acquisition-related compensation costs
(5
)
(7
)
(11
)
(12
)
Restructuring charges
(191
)
(12
)
(191
)
(12
)
Content and related assets charge
(729
)
—
(729
)
—
Transitional logistics charges
—
—
—
(253
)
Non-GAAP cost of revenues
$
40,949
$
43,451
$
83,785
$
88,477
Gross profit
$
117,736
$
135,441
$
245,589
$
273,892
Amortization of intangible assets
3,071
3,382
6,213
6,721
Share-based compensation expense
466
560
979
1,087
Acquisition-related compensation costs
5
7
11
12
Restructuring charges
191
12
191
12
Content and related assets charge
729
—
729
—
Transitional logistics charges
—
—
—
253
Non-GAAP gross profit
$
122,198
$
139,402
$
253,712
$
281,977
Gross margin %
72
%
74
%
73
%
74
%
Non-GAAP gross margin %
75
%
76
%
75
%
76
%
Operating expenses
$
602,743
$
154,137
$
733,087
$
297,034
Share-based compensation expense
(17,581
)
(35,360
)
(46,357
)
(68,579
)
Amortization of intangible assets
(435
)
(2,977
)
(1,291
)
(5,888
)
Acquisition-related compensation costs
(168
)
(3,410
)
(417
)
(5,865
)
Restructuring charges
(6,537
)
(5,692
)
(6,537
)
(5,692
)
Impairment expense
(481,531
)
—
(481,531
)
—
Impairment of lease related assets
(2,189
)
—
(2,189
)
—
Loss contingency
—
(7,000
)
—
(7,000
)
Non-GAAP operating expenses
$
94,302
$
99,698
$
194,765
$
204,010
Loss from operations
$
(485,007
)
$
(18,696
)
$
(487,498
)
$
(23,142
)
Share-based compensation expense
18,047
35,920
47,336
69,666
Amortization of intangible assets
3,506
6,359
7,504
12,609
Acquisition-related compensation costs
173
3,417
428
5,877
Restructuring charges
6,728
5,704
6,728
5,704
Impairment expense
481,531
—
481,531
—
Impairment of lease related assets
2,189
—
2,189
—
Content and related assets charge
729
—
729
—
Transitional logistics charges
—
—
—
253
Loss contingency
—
7,000
—
7,000
Non-GAAP income from operations
$
27,896
$
39,704
$
58,947
$
77,967
Three Months Ended
June 30,
Six Months Ended
June 30,
2024
2023
2024
2023
Net (loss) income
$
(616,884
)
$
24,612
$
(618,304
)
$
26,798
Share-based compensation expense
18,047
35,920
47,336
69,666
Amortization of intangible assets
3,506
6,359
7,504
12,609
Acquisition-related compensation costs
173
3,417
428
5,877
Amortization of debt issuance costs
540
931
1,081
1,988
Income tax effect of non-GAAP
adjustments
129,937
7,671
130,650
(184
)
Restructuring charges
6,728
5,704
6,728
5,704
Impairment expense
481,531
—
481,531
—
Impairment of lease related assets
2,189
—
2,189
—
Content and related assets charge
729
—
729
—
Gain on sale of strategic equity
investment
—
—
(3,783
)
—
Gain on early extinguishment of debt
—
(53,777
)
—
(53,777
)
Loss contingency
—
7,000
—
7,000
Transitional logistics charges
—
—
—
253
Non-GAAP net income
$
26,496
$
37,837
$
56,089
$
75,934
Weighted average shares used to compute
net (loss) income per share, diluted
102,604
132,944
102,474
137,416
Effect of shares for stock plan
activity
310
273
513
433
Effect of shares related to convertible
senior notes
9,234
—
9,234
—
Non-GAAP weighted average shares used to
compute non-GAAP net income per share, diluted
112,148
133,217
112,221
137,849
Net (loss) income per share, diluted
$
(6.01
)
$
(0.11
)
$
(6.03
)
$
(0.08
)
Adjustments
6.25
0.39
6.53
0.63
Non-GAAP net income per share, diluted
$
0.24
$
0.28
$
0.50
$
0.55
CHEGG, INC.
RECONCILIATION OF NET CASH
PROVIDED BY OPERATING ACTIVITIES TO FREE CASH FLOW
(in thousands)
(unaudited)
Six Months Ended
June 30,
2024
2023
Net cash provided by operating
activities
$
67,545
$
135,907
Purchases of property and equipment
(45,817
)
(33,864
)
Proceeds from disposition of textbooks
—
9,787
Free cash flow
$
21,728
$
111,830
CHEGG, INC.
RECONCILIATION OF
FORWARD-LOOKING NET LOSS TO EBITDA AND ADJUSTED EBITDA
(in thousands)
(unaudited)
Three Months Ending
September 30, 2024
Net loss
$
(16,100
)
Interest expense, net
500
Provision for income taxes
(800
)
Depreciation and amortization expense
19,700
EBITDA
3,300
Share-based compensation expense
21,500
Other income, net
(6,800
)
Acquisition-related compensation costs
200
Restructuring charges
1,800
Adjusted EBITDA
$
20,000
* Adjusted EBITDA guidance for the three months ending September
30, 2024 represent the midpoint of the range of $19 million to $21
million, respectively.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20240805359231/en/
Media Contact: Tonya B. Hudson, press@chegg.com Investor
Contact: Tracey Ford, IR@chegg.com
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