Get kicked off here. My name is Josh Baer, software analyst at Morgan Stanley. We have the CEO of Chegg, Dan Rosensweig here. Thank you for joining us. First, research disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website, www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Dan, we'll jump right in. Wanted to ask you about what you're seeing in the higher ed environment in regard to student behaviors, enrollments, academic intensity. Maybe to start on the enrollment side, there was some data that showed some more modest declines year-over-year, thinking about the fall semester and actually improvement in the freshman cohort. Wanted to ask you how this impacts your business if enrollments do stabilize following, you know, the last few year period.
You know, should that help stabilize the Chegg Services business and return subscriber growth?
Yeah. The answer is we are seeing some version of return to normalcy. I have to just continue to remind people, the big issue wasn't so much that it was 1.5 million people leaving the higher education market almost all at once. You're all experiencing it now with inflation, which is this is the group that got wage inflation. This is the group that was being hired during COVID, where they could get two to three times what they were earning before. They're working at Starbucks, and Amazon, and Walmart. The higher education market in the U.S. is 70% state schools. Less than half of them graduate.
These are people that go to online schools, go to community colleges, or go to four-year schools, but will never likely get a degree of any kind, let alone a four-year degree. That's the hole that was dug. As COVID started to ease, the freshman cohort did stabilize. Our year is August to May, so the thing is, when people look to, is January gonna be better, January is never better than the fall because it's just an extension of the fall. The question's gonna be, what's gonna happen next fall? If we hit a recession, next fall will be higher than people think because during a recession, more people are unemployed, and more people go to college or go to school or go to online or whatever. They learn more.
If it doesn't, we'll see the continuation of the normal cohort that we've been seeing, which is, you know, sort of 0% to 4% on the freshman class. We are still cleansing all of that out, to your question. The issue around if there's a recession, what does it do historically? As I said, it grows our market, so those 1.5 million people that left, some percentage of them will have to come back because. That would help us. It's not what I'm rooting for as a human being, but that would help us. You know, because we're global now, we've got U.K., Canada, Australia. The English-speaking countries are our largest, and then we have growth in India and other places and those economies also affected it last year.
The good news about the resiliency of our company, which I don't think we have done the job necessary to explain it, is If you know another profitable company in the education space, let me know. We make a lot of money. We have a lot of EBITDA. We have 33% to 35% EBITDA margins, and we push through over 60% to free cash flow. We generate a lot of cash. That maintained even when the growth stopped. We have the resources, the capability, the profitability. We can control our costs, as we need to. That also gives us a lot of chance as things pick up to be more aggressive. That's part of the resiliency.
The second thing is, there was a giant leap from 2019 to 2020 in our new customer base, which we all experienced. 2021 sort of hit the peak. 2022 dropped from the peak, and that's what Chegg experienced. That drop was a drop of new accounts and people that dropped out and didn't go, and that is when we took our guidance down a year or so ago by, like, $50 million. That $50 million, if we had it, would've rolled over to at least half that this year. That's the hole that we talked about on the last call that we're making up from. As we continue to experience growth in new accounts again, that hole starts to get made up. You can look at 2024 and 2025 and you say, "Okay.
I can see how the growth returns and how the EBITDA margins expand. That's what's gotta happen, and that's what's happening. There's two parts to this year. This is the rollover from the H1 , I mean, from last year's, and then we have the H2 of this year. We're just being, hopefully, cautious and smart, and controlling the things in our control.
Great. Great intro. A lot to dig in there. One question. When you refer to Chegg as the only profitable edtech company, are you thinking about it on a GAAP basis?
GAAP basis, EBITDA basis, free cash flow basis, net income basis. Pick a basis.
Okay.
Right? You know, you've got, you've got the skills companies that are all losing $20 million to $25 million and we'll make over $200 million in EBITDA. It'd be nice if you wrote this stuff. From my perspective, if you think about what your big question's gonna be, I don't know if anybody's heard of ChatGPT? Is that on anybody's mind? You know, the big question is, who can compete in a world of AI where you have to have resources? We have them. You have to have audience. We have them. You have to have a dataset. We have them. If we execute, big fair question, we should be advantaged by it. I look at a lot of these companies and, you know, we've done the transition of our model. What we got to do is fill that hole.
That is really the core issue for us, is fill that hole of the drop of new accounts from the peak to last year, which we hope was the trough, and then grow it back again. If we do that, things will be great, and if we don't, then things will not be.
Got it. I will be asking the big question on ChatGPT. Just wanted to first.
You can ask ChatGPT. I did. I said, "Can Chegg compete with you?
Yeah.
It says, "I can." Mentions me by name. I did. Didn't you guys ask it?
Awesome. On the topic of academic intensity and student behaviors, are we normalized there? Are we past that?
Intensity is back, and has been back and I think there's so much noise in the education space right now for legitimate reasons. There's just a lot of noise. It's hard to focus on the different elements. We saw over the course of 2022 that begin to return.
Okay.
I don't see a scenario where it goes down. I do see a scenario where schools are finally gonna have to get the message that the internet is here and students will use it. ChatGPT-3 is just a good example of that. The way people assess will have to change. The way people learn will have to change. Like every institution or large institutions or government institutions, which most state schools are, it will take a long time for them to do it, but that's gonna be their focus more than intensity. It's how do you assess people? The intensity has to be there now.
Great. Chegg certainly can compete with ChatGPT, how do you think about ChatGPT as a competitive threat, has it impacted your business so far?
It is very early, there will be more than just them. I can't make the kinds of predictions I'd like to be able to make because I've been through. For those of you who don't know, I've been in the tech industry since 1983. I know when platform shifts come, this is one of them. Mobile's the last one. The internet was the one before that. All the other stuff like cloud computing is not a platform shift. For those of you, I mean, I ran Yahoo for five years. For those of you who ever used Yahoo Finance or Yahoo Mail, that was the cloud because you could access it from anywhere. It's just, you know, became a great thing to put a high multiple on. This one is going to be how people do things.
This current version is designed to be a tool. We have always been using it internally to increase the quality of our content responses and the speed of our answers and lower the cost. That's why you've seen our margins expand. We've always used machine learning and AI on the cost side. What we're seeing now is the consumer-facing version of it, and a very early one. It is a generalist site. It cannot sustain itself being free. It has really two models. It's going to either be a subscription or it's gonna be ads. It's gonna be hard for it to be ads like Google would've been hard for it to be ads if it didn't generate traffic to other people. The cost of building these things is astronomical. Without revenue coming in, they won't make it.
At the moment, it's impossible for me to know whether or not there's an impact. All I can do is compare what we thought was going to happen before we did, before it came out, to what's happening. What I said on the call is, it's not obvious to me yet because I would see it in retention, I would see it in cancellations, and I would see it in new accounts. That doesn't mean it isn't affecting me. It's just I can't see it in what I expected to happen versus what's happening. To some degree, it may. We survey our students. We know that a bunch of them have tried it. The overwhelming majority of students won't use it because it's not that easy to use. Maybe for all of you, but remember who the college students are.
It's not that they're technologically savvy or not, but would you rather go to a Chegg where you just put in the question or do you have to figure out all the prompts, and then do you have to guess if it's right? At the moment, it can't compete with what we do. It can do things that we cannot do. It just turns out that when we put in our top 200 questions into it, 96% of them it had no answer for. Of the 4% that it did, 50% of them were inaccurate. That's not where it's gonna stay. I'm not sitting here going, "Oh, this shit doesn't work." I can pray for that, but it will get better. It also needs to be trained on data sets.
The other thing that people don't give Chegg credit for is we have the largest learning data set in the world. We have over 100 million questions that have been asked and answered. We have 13 million to 15 million new ones a year. The scenario that we envision, the one that we believe wins. My experience, all of our visions are based on what we've experienced in life. Having run a giant portal, what I learned was verticals beat the generalist because you've got to tune it towards the specific needs. Very few of you use Google for travel, you still use the travel sites. Very few of you use Google for commerce, you use Amazon or Walmart or your favorite brand commerce site. Verticals ultimately win because they're tuned towards the specific action.
Our expectation is they'll have what they have, we'll have what we have and what they have, because that's their model. The difference is our stuff won't be available in their marketplace. Their capability will be able to be tuned against our marketplace, but only exclusively inside of Chegg. That proprietary data that we have, those 100 million plus questions growing at 13 to 15 million a year, is our competitive advantage. If you can come to Chegg and pay your subscription and get the best of Chegg and the capabilities of AI, the conversational real-time capabilities to take our solutions and ask it more questions, ask it definitions, ask it to do practice tests, these are things that we'll be able to do that generalist AI will not be able to do without our data set.
To some degree, we're actually really excited about it, because the vision has always been to be the ultimate learning tool, and this is the ultimate learning tool. The magic of Chegg is it's instantaneous and you can guarantee the quality. Their accessibility is a question, and quality is a question at the moment. If you can take what they dream of being, which is the conversational aspect, ask questions trained on our data set, we become the ultimate learning tool, and that's pretty exciting. We're jazzed by it. Our teams are working on it. We've seen four, right? We're in there early because as I said, a lot of other education companies won't have the capability or the resources to even attempt to do this.
They'll put out PR releases, but use the product and decide for yourself what is it. At the moment, we feel good, but there's no guarantees when there's a new platform. We'll see what happens. They can't guarantee it. They can't guarantee whether or not it's good for humanity or gonna eat us alive. In the short term, should be an advantage for us if we execute.
Okay. That's very helpful. Related to your use of AI, you mentioned the cost efficiencies. Any more context for, you know, how your content costs change?
At the moment, they don't. We've talked about expanding to the other 10 million students in the U.S. that we don't really serve with what we have. This is a much more efficient form of being able to do that because that's more essay-ish writing, political science, those things. Second is it should substantially increase engagement without us having to pay for those content costs. It's way too early for me to give you that level of specificity.
Got it. To that point on addressing the rest of the domestic market, you're over 6 million subscribers domestically so far. Between ARPU and subscriber growth domestically, how should investors think about the growth algorithm there?
I think it's smart for me to say, let us come through this year and fill that hole. If we fill that hole successfully, which is what our objective is and what we've articulated, that will be quite robust actual new account growth. That will show that that market is still there. On top of that, you have all the ARPU growth, which we've said for the first time, one out of every two new accounts is now taking the more expensive version, which is great. We took a price increase and lost 7,000 accounts out of 6 million. What that tells you is we have a lot more price elasticity. I think we're just got to just be smart and recognize we've got to get through this exit of COVID.
We feel very comfortable that we have that pricing capability. We feel very comfortable that we'll continue to see high renewals and high take rate of our more expensive package. Those all bode well for ARPU increases, yield increases. I just don't wanna get ahead of ourselves because, you know, we had 19 straight quarters of beat and raise, and then two out of four were like a mystery to everybody, including us. We just wanna get back to that rhythm before we start making any bold predictions.
Makes sense. On the ARPU, I think the last quarter, you mentioned 40% of all study subscribers were on the bundle.
Yep.
sort of.
We averaged that in Q4. That's good. That means it's way up.
In thinking about where that can go, like you just referenced closer to 50%. Like is that a good proxy for where the base could go or could it be higher?
Well, I think, let's combine two things together, which is what is our price capability and what is the value proposition that Chegg brings and what can we bring? One way to think about it is a higher and higher percentage will take it. The other way to think of it is it just may be the base price in the future.
One way to look at it is there'll just be one Chegg and it will all be $19.95, and then the bundle could be $24.95. I realize everybody's attention span is very short, but we think about these things in multiple years. The bundle's only been there for two years or two and a half years, and now one out of every two takes it. Where we can go would be when you start adding what AI can do and you start adding the things like we're doing with DoorDash or with Calm or with other people we're likely to announce with, the value of what we offer, both in terms of what people will pay to begin with and how long they'll stay on, both have the opportunity to increase. That's been the plan.
It just takes time to roll it through a whole system of 6 million U.S. customers, right? We don't want to screw the whole thing by trying to be in a rush to do it.
Great. Wanted to ask you on the partnerships. Right now, Chegg Study subscribers get access to the Calm Premium app.
Student DoorDash.
And DoorDash.
Student DoorDash.
DoorDash.
Yeah, DoorDash.
DashPass.
One of those things.
It seems like a win-win-
Yes
...for you and your partners. Two questions here.
The students.
Of course. A lot of value for students. Is that the core strategic rationale from your perspective, giving value to students, hoping to help with retention maybe through summer break so that you're not turning off the subscription?
Absolutely, yes. There's two parts. Why did we do Calm? We did Calm because there's a crisis in this country, student mental health, and that's why Chegg two weeks ago launched the first ever Global Student Mental Health Week. I lobbied Congress. I was very happy to know that all 10 congress people I saw, every one of their staffers had been a Chegg customer. We're good with the government. I'm not good with the government, but Chegg's good with the government. Calm was to test the concept. How could we market it? Could we get people to upgrade? How do we get people to activate it? Because there is this mental health crisis on college campuses that should scare everybody in this room and this country.
That led to our ability to do DoorDash, which is more one that should affect our business. DoorDash can affect it in a couple of different ways. It's way too early to know how many of those ways. First one is, since it's only in the bundle, did it help take rate? We believe that it has. The second one is, will it help retention? We're not gonna know that till we monitor those that activated it and what they do over the summer. I cannot tell you that I know the answer to that question, but it's absolutely part of the objective. The third thing is, will it increase overall conversion in the funnel? Don't know that yet. Know that it has affected take rate.
That's the first obvious one, because we can see, did we expect 40% to take it, and if 42% took it after we put it in, then we know that. It is too early to know which of all of those things that it can affect, but it is being activated by more people than we thought, and that should be good news for DoorDash for sure and for us.
Great. Right now, is it an a meaningful expense for you? Then the second part of the question is, when thinking about these types of partnerships, is there an opportunity to monetize, from your perspective to provide access to your valuable-
Yeah. I think.
... base?
I think at the moment there's no negative impact whatsoever on our costs. Zero. To your point, the value to DoorDash is, and companies like DoorDash, let's not just talk about DoorDash, but companies that wanna work with us is they get millions of dollars worth of value of being marketed to every college student in the country without them having to write a check. Therefore, we don't have to write a check. For us, the upside will become one of the following. It will either increase take rate, increase conversion, increase retention, or some of all of those things. That will have material impact. If it doesn't work, it won't, but it won't have cost us anything to do it. For them, it's millions of dollars worth of visibility and Chegg's endorsement versus somebody else who could have had that slot.
It is a win-win for both companies. Tony is a phenomenal CEO. Dara's a phenomenal CEO. I've known Dara longer than I've known Tony. They're very excited, we're very excited because it's very hard to reach college kids. This is a way for them to do it without them having to write a check, and the expense to them is well worth it because they now got an active customers ordering food. It's only the cost of the pass that they wouldn't get that they're not getting, but they're getting customers using it for delivery. At the moment, we all feel very good. For people wondering, like, are we buying them. Like, are we like Verizon buying them in bulk and paying them? The answer is no, we're not.
Okay. Very helpful. Wanna see if we can cover international and margins in about a minute each.
Sure. Let's go country by country.
On international, I guess we've seen the increase in revenue percent contribution to your company.
Yep
... and increase in subscribers. Some of that has been aided by the Busuu acquisition. I guess just the question is: How should we assess your progress expanding internationally?
Yeah. If you look at it as a whole, it's hard to do it. Let me break it down into different components. You have the developing world, and you have the three large English-speaking countries, Canada, U.K., and Australia. The same hole that we saw in the US market, we saw in those three markets because they behave the same as the US market. That hurt. That created a hole in international growth, but that doesn't mean the other parts of international aren't growing. That was unexpected and we're growing out of that too. That's good. The second thing is we made a technical error, if you will, on one of the largest growth opportunities, which is India. India should be and will be a very large country for us, strictly based on the numbers.
For those of you who follow it, they have a lot of people there. I don't even know if you knew that. On top of that, they have the largest English-speaking audience outside the U.S., as exemplified by The Times of India, right? Is, I think, the largest English-speaking newspaper in the world. There's a large even English-speaking, because there's like 120 different dialects. Very hard to do in all the different dialects. We said all along we were building technology that allowed us to present in local pricing. We have done that. That has been helpful. What we didn't do was recognize that in India, the overwhelming majority of people would rather pay by debit than credit. Our partners were credit, not debit. We've met with the Indian government who's trying to push this, you know, decentralized platform.
That is something that we are working on, and I expect that that will unleash India in a way that we just didn't do it with credit cards, but we still have to build that, and then we're working on it now, obviously. I would say that we are very confident over the long-term international. We have to dig out of the English-speaking holes in the more developed or the wider countries, if you want. The other countries, I mean. Here's a challenge. Turkey was going great. They had two earthquakes. Like, that's not something we can do anything about. One of the first apps that we built fully in a local language was Turkish. Like, hard. You know, that's a small blip for now, but won't be a blip forever. The second one we built was Spanish in Mexico.
That, of course, is not impacted by that. Just think, just you either believe in the inevitable like we do, which is that more people are gonna learn online and need more help, and we're gonna be that place to do it with what we do, plus AI, which is conversation. Just think of it as conversational capabilities to ask more real-time questions against our data set. If you believe that, then we are a very good bet. If you don't believe that, then we're not a very good bet. Nobody can predict the absolute future of these things right now, but for the moment, we feel good about ourselves and about the future. As I said, we have capital. We generate free cash flow. We generate EBITDA. We are GAAP profitable.
If you're looking for any existing competitor to take us on, it would be very hard to do.
Okay, great. We are over time. Really appreciate it, Dan.
Thanks everybody. I appreciate you coming.
Thank you.