Chegg begins to roll out the first phase of its
new AI-powered user experience
Chegg, Inc. (NYSE:CHGG), the leading student-first connected
learning platform, today reported financial results for the three
months ended September 30, 2023.
“Chegg is in a great position to build the most impactful,
scalable, AI-enabled, personal learning assistant, which will
expand our opportunities to serve more students, in more ways, and
at a lower cost per customer,” said Dan Rosensweig, CEO &
President of Chegg, Inc. “We are moving quickly and have already
started to roll out our new simple user interface and unified
asking experience, delivering faster and more relevant
solutions.”
Third Quarter 2023
Highlights
- Total Net Revenues of $157.9 million, a decrease of 4%
year-over-year
- Subscription Services Revenues of $139.9 million, or 89%
of total net revenues, a decrease of 4% year-over-year
- Gross Margin of 47% driven lower by a one-time content
and related assets charge of $38.2 million
- Non-GAAP Gross Margin of 74%
- Net Loss was $18.3 million
- Non-GAAP Net Income was $23.2 million
- Adjusted EBITDA was $38.8 million
- 4.4 million Subscription Services subscribers, a
decrease of 8% 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 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
Fourth Quarter 2023
- Total Net Revenues in the range of $185 million to $187
million
- Subscription Services Revenues in the range of $164
million to $166 million
- Gross Margin between 73% and 74%
- Adjusted EBITDA in the range of $62 million to $64
million
For more information about the use of forward-looking non-GAAP
measures, a reconciliation of forward-looking net income to EBITDA
and adjusted EBITDA for the fourth quarter 2023, see the below
sections of the press release titled “Use of Non-GAAP Measures,”
and “Reconciliation of Forward-Looking Net Income 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 - Dan Rosensweig, CEO
& President Chegg, Inc.
Thank you, Tracey and welcome everyone to our 2023 Q3 earnings
call. Chegg had a good quarter, delivering better than expected
results, as we saw stabilization in new accounts and increases in
overall retention and in the take rate of Chegg Study Pack. In
addition to our academic services, we continue to invest in skills
where we are seeing very strong growth, all of which is good for
the future of Chegg.
Six months ago, leveraging the breakthroughs of artificial
intelligence, we began to completely reinvent what we offer, how we
offer it, and to whom we offer it. New technology platforms create
a lot of hype and noise but, as the hype gives way to facts, we
believe Chegg is in a great position to build the most impactful,
scalable, AI enabled, personal learning assistant, which will
expand our opportunities to serve more students, in more ways, and
at a lower cost per customer.
The history of the internet has shown us that verticals win.
Leading companies with a strong brand, category expertise, scale,
and resources, can invigorate growth and create new opportunities
when they move quickly and embrace change. In the world of AI,
Chegg has particularly valuable and proprietary assets for
education and learning, including our student-first brand, a
reputation for quality and accuracy, and our unique content and
dataset. Chegg also has a proven track record for improving student
outcomes and now, by combining the best of what Chegg has to offer
with the advancements in artificial intelligence, we are creating
new opportunities to better serve our students.
It has been nearly a year since ChatGPT launched. We have all
learned a lot and are experiencing how AI is impacting our lives.
We know that students are using ChatGPT but what is interesting is
that they are using it for a variety of things in addition to
education. Because Chegg is verticalized for learning, what isn’t
surprising is that when students try us and compare us to more
general AI solutions, Chegg outperforms. That has led to incredibly
high retention rates and we are maintaining high customer
satisfaction, such as 91% of students report when they use Chegg
they get better grades, 89% say Chegg helps them learn their course
material, and 90% say they work more efficiently when using Chegg
to understand their coursework. And we are now introducing new AI
capabilities and features, which we expect will do even more for
students.
We are excited about what we are building, and we are moving
quickly and rolling out the first phase of our new user experience.
In September we started to show our first cohort of users the
updated capabilities, with a new simple interface and unified
asking experience. This means Chegg can provide answers from our
proprietary database, our more than 150,000 subject matter experts
and now with generative AI. We are focused on usage, quality,
accuracy, and speed, and are on track to introduce our own
large-language models trained on Chegg’s unique data. In the coming
months, you will see us offer more features including multi-turn
chat, which will create a simple and conversational experience, and
introduce personalized AI enhanced learning aids, such as practice
tests, assessments, study guides, and flashcards. We also plan to
let students connect to each other and share content. Over time all
of this is designed to expand our TAM and increase our relevancy to
millions more students than we serve today. It’s truly an exciting
time at Chegg. We are executing well against our plan and are on
track to roll-out even more features to more students in Q1 of
2024.
We have only one agenda - to serve the student. What we do is
incredibly hard to replicate, giving us a powerful moat. The
combination of our successful learning taxonomy, over 100 million
solutions generated by Chegg’s subject matter experts, and now the
ability to leverage artificial intelligence means we can do what
generic AI platforms cannot do.
Our vision for a truly personalized learning assistant is coming
to life. To make it easier for you to see what we are building,
we’ve created a video for you that is available on our IR website,
where you can see how the product is evolving. We believe this will
give you a sense of just how powerful Chegg can become, including
our ability to blend our academic support and skills efforts, by
integrating career pathways into the student experience.
We are beginning to see the investments we have made in skills
pay off. By leveraging the latest advances in AI to accelerate our
program development, we are able to create relevant, customized,
high-impact programs, faster and at a lower cost. We will also be
releasing a suite of AI training programs over the coming months.
Through our B2B partnerships and direct-to-student efforts we
continue to see Chegg Skills grow and expect it to become a
meaningful contributor in the years ahead.
We are widening the aperture for Chegg and we hope to reach a
much larger audience of learners – one that, historically, we
haven’t been able to serve before. This is where much of our future
growth will come from and our plan is to continue to execute each
quarter towards this vision.
And before I turn it over, I want to acknowledge Andy, as he
plans to retire once we hire his replacement early next year. I am
deeply grateful for the incredible contributions Andy has made
during his 12-year tenure at Chegg. Under his leadership, we have
grown from a physical textbook rental business to a global, online,
learning platform that has supported more than 22 million students
over the last decade. He guided us through our transition to a
fully digital business and, in doing so, grew our digital revenue
from $0 to over $700 million annually. In fact, when Andy took on
the role of CFO, Chegg was unprofitable but today Chegg is
profitable and is expected to generate nearly $220 million in
adjusted EBITDA and approximately $170 million in free cash flow
this year. These are remarkable accomplishments and none of them
would have been possible without Andy’s leadership and vision. On a
personal note, I want to thank Andy for his partnership, guidance,
and friendship over the last decade. He has truly left an indelible
mark on this company and will forever be a part of the Chegg and
Rosensweig family.
And with that I will turn it over to Andy…
Prepared Remarks - Andy Brown, CFO
Chegg, Inc.
Thanks, Dan, for the kind words, it’s been an amazing journey
over the past 12 plus years, and I am extremely thankful to you and
the Chegg team and proud of what we have collectively accomplished.
Also, a big shout out to Tracey and Diana, you are the best IR team
I have had the pleasure to work with. You are just awesome. Our
company has become an industry leader, a cherished brand that is
loved by millions of students worldwide, with a future that is
incredibly exciting. Having the opportunity to work for a
mission-driven company that is integral to helping students learn
has been super rewarding, and I thank you. Now back to
business.
Q3 was a good quarter, exceeding our revenue and adjusted EBITDA
guidance, and as Dan mentioned, we are encouraged by continued
positive trends, such as increasing retention rate and Chegg Study
Pack take rate. Total revenue was $158 million, driven by
Subscription Services revenue of $140 million, where we had 4.4
million subscribers during the quarter. Skills and Other revenue
was $18 million, driven by strong growth in Skills, offset
primarily by the change in the Required Materials model, which is
now a revenue share, as well as some advertising softness. We
remain disciplined on the expense side, aligning investments with
our AI-focused strategy, which supported another adjusted EBITDA
beat this quarter versus guidance, coming in at $39 million, or a
25% margin.
We had two one-time items that impacted our GAAP gross margin
and net income for the quarter. First, during the design of our new
generative AI experience, we determined that certain content and
system types were no longer necessary. As a result, we have taken a
charge of $41.8 million, of which approximately $38.2 million was
included in cost of goods sold, which impacted gross margin, and
$3.6 million was included in G&A. The second item is that we
recorded a gain of $32.1 million from the repurchase of some of our
outstanding convertible debt at a discount during the quarter,
which was recorded in Other Income.
We have a strong balance sheet and drive significant free cash
flow, which we expect will continue and for full year 2023, we now
expect free cash flow to be approximately $170 million. We have
opportunistically retired both convertible debt and equity,
returning approximately $1.2 billion and $800 million,
respectively, to investors through repurchases over the last three
years. We ended the quarter with $674 million of cash and
investments, with total convertible debt outstanding of $603
million at par value. We continue to believe that the combination
of our operating model, balance sheet, and cash flows sets us up to
deliver on our mission to serve students across the world, leverage
AI to expand our offerings and our TAM, and ultimately return to
growth while maintaining strong profitability.
Now, moving on to guidance. For Q4 we expect:
- Total revenue to be between $185 and $187 million,
- With Subscription Services revenue between $164 and $166
million,
- Gross margin between 73% and 74%,
- And adjusted EBITDA between $62 and $64 million, or 34%
margin.
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 balance sheet to
extend our leadership in the future.
With that, I’ll turn the call over to the operator for
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
Daylight Time (or 4:30 p.m. Eastern Daylight 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 Daylight Time (or 7:30
p.m. Eastern Daylight Time) on October 30, 2023, until 8:59 p.m.
Pacific Standard Time (or 11:59 p.m. Eastern Standard Time) on
November 6, 2023, by calling 1-844-512-2921, or outside the U.S.
+1-412-317-6671, with Conference ID 13741760. 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
Millions of people all around the world Learn with Chegg. Our
mission is to improve learning and learning outcomes by putting
students first. We support life-long learners starting with their
academic journey and extending into their careers. The Chegg
platform provides products and services to support learners to help
them better understand their academic course materials, and also
provides personal and professional development skills training, to
help them achieve their learning goals. 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 Income
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 print textbook depreciation expense and to
exclude share-based compensation expense, other income, net,
acquisition-related compensation costs, content and related assets
charge, restructuring charges, loss contingency, transitional
logistic charges, and impairment of lease related assets; (2)
non-GAAP cost of revenues as cost of revenues excluding content and
related assets charge, amortization of intangible assets,
share-based compensation expense, acquisition-related compensation
costs, restructuring charges, and transitional logistic charges;
(3) non-GAAP gross profit as gross profit excluding content and
related assets charge, amortization of intangible assets,
share-based compensation expense, acquisition-related compensation
costs, restructuring charges, 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, content and related assets charge, restructuring charges,
loss contingency and impairment of lease related assets; (6)
non-GAAP income from operations as (loss) income from operations
excluding share-based compensation expense, amortization of
intangible assets, acquisition-related compensation costs, content
and related assets charge, restructuring charges, loss contingency,
transitional logistic charges, and impairment of lease related
assets; (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 gain on early extinguishments of debt,
content and related assets charge, the income tax effect of
non-GAAP adjustments, restructuring charges, loss contingency, the
tax benefit related to release of valuation allowance, transitional
logistic charges, and impairment of lease related assets; (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, purchases of textbooks and proceeds from disposition of
textbooks. 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 Income
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.
Content and related assets charge
As part of the design and build of our new generative AI
experience, in August 2023, we streamlined our product experiences.
As a result, we elected to abandon certain content and software
assets that did not align with our AI strategy. The content and
related assets charge represents a one-time charge consisting
primarily of accelerated depreciation of certain content and
software assets of $34.2 million, the impairment of our
indefinite-lived intangible asset of $3.6 million, the impairment
of certain in progress software assets of $2.6 million and other
costs associated with abandoning these content and software assets
of $1.4 million. The one-time expense 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.
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.
Restructuring charges
Restructuring charges represent expenses incurred in conjunction
with a reduction in workforce to better position the Company to
execute against its AI strategy and to create long-term,
sustainable value for its students and investors. 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.
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.
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.
Income tax effect of non-GAAP adjustments.
In the periods following the release of our U.S. valuation
allowance, we utilize a non-GAAP effective tax rate of 24% 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
a non-GAAP provision for income tax adjustments provides investors
with a better comparison of period-over-period operating
results.
Tax benefit related to release of valuation allowance.
The tax benefit related to the release of the valuation
allowance on our U.S. and non-California state deferred tax assets
is a result of our expectation that it is more likely than not that
our operations will continue to be profitable. Chegg believes that
it is appropriate to exclude this 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.
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.
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 San Francisco office. The
impairment of lease related assets is a one-time 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 and
purchases of textbooks and including proceeds from the disposition
of textbooks. 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 and textbooks, 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,
statements regarding our future growth and the future of learning,
the impact of artificial intelligence (AI) technology on our
financial condition and results of operations, our great position
to build the most impactful, scalable, AI enabled, personal
learning assistant, which will expand our opportunities to serve
more students, in more ways, and at a lower cost per customer, our
ability to leverage the breakthroughs of AI and build and utilize
AI tools, the complete reinvention of what we offer, how we offer
it, and to whom we offer it, our beliefs that verticals win and
leading companies with strong brand, category expertise, scale and
resources can invigorate growth and create new opportunities when
they move quickly and embrace change, the value of our proprietary
assets for education and learning in the world of AI (including our
student-first brand, reputation for quality and accuracy and unique
content and dataset), our creation of new opportunities to better
serve students by combining the best of what Chegg has to offer
with advancements in AI, our views on what students use ChatGPT for
in addition to education, Chegg's verticalization for learning and
our outperformance of more general AI solutions, our ability to do
more for students and serve learners in new ways as we introduce
new AI capabilities and features, our ability to move quickly and
roll out the first phase of our new user experience, our focus on
usage, quality, accuracy and speed, the development and features of
new Chegg offerings, capabilities and experiences, the timeline for
the availability of our new offerings, capabilities and experiences
(including our ability to deliver them in the coming months and
fully roll-out our new generative product experience in Q1 of
2024), what the new Chegg will include, the features of the new
Chegg experience (including multi-turn chat to create a simple and
conversational experience, personalized AI-enhanced learning aids,
such as practice tests, assessments, study guides and flash cards,
and letting students connect to each other and share content), the
development of our own large language models (LLMs) and ability to
train them with our unique data, our ability to expand our TAM and
increase our relevancy to millions more students than we serve
today, our powerful competitive moat and the difficulty others face
in replicating what we do, the combination of our successful
learning taxonomy, nearly 100 million solutions generated by our
subject matter experts and ability to leverage AI allowing us to do
what generic AI platforms can't do, our vision for a truly
personalized learning assistant coming to life, our belief of how
powerful Chegg can become, our ability to blend our academic
support and skills efforts by integrating career pathways into the
student experience, our investments in Chegg Skills and the related
impact on growth and the future of Chegg, our ability to leverage
the latest advances in AI to accelerate our program development and
create relevant, customized, high-impact programs faster and at a
lower cost, our release of a suite of AI training programs over the
coming months and Chegg Skills growth through our B2B partnerships
and direct-to-student efforts, our expectation that Chegg Skills
will become a meaningful contributor in the years ahead, our
ability to widen the aperture for Chegg and reach a much larger
audience of learners we historically haven't been able to serve and
the related impact on our future growth, the size of Chegg's
opportunity to serve its students, the content of our concept
video, continued positive trends, such as increasing retention rate
and Chegg Study Pack take rate, our alignment of investments with
our AI-focused strategy, our determination that certain content and
system types were no longer necessary, expectations regarding
Chegg's execution against its strategic and financial objectives
and guidance, expectations regarding maintaining a strong balance
sheet and driving significant free cash flow, our belief that the
combination of our operating model, balance sheet, and cash flows
sets us up to deliver on our mission to serve students across the
world, leverage AI to expand our offerings and our TAM and
ultimately return to growth while maintaining strong profitability,
our expectation that the development of AI will allow Chegg to
embrace a much larger opportunity over time, our belief that nobody
is better equipped to meet the current or future needs of students
than Chegg, our ability to extend our leadership in the future
through our industry-leading brand, proprietary data, strong
operating model and balance sheet, our financial guidance, 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, and retain existing,
students, to increase student engagement, and to increase
monetization; Chegg’s brand and reputation; changes in employment
and wages and the uncertainty surrounding the evolving educational
landscape, enrollment and student behavior; Chegg’s ability to
expand internationally; changes in search engine methodologies that
modify Chegg’s search result page rankings, resulting in decreased
student engagement on Chegg’s website; the success of Chegg’s new
product offerings, including the new Chegg generative AI experience
and personal learning assistant; competition in aspects of Chegg’s
business, and Chegg's expectation that such competition will
increase; Chegg’s ability to innovate in response to technological
and market developments, including artificial intelligence; 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; 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, 2022 filed with the Securities and
Exchange Commission on February 21, 2023, 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)
September 30,
2023
December 31,
2022
Assets
Current assets
Cash and cash equivalents
$
94,419
$
473,677
Short-term investments
166,841
583,973
Accounts receivable, net of allowance of
$245 and $394 at September 30, 2023 and December 31, 2022,
respectively
30,480
23,515
Prepaid expenses
30,761
28,481
Other current assets
25,195
34,754
Total current assets
347,696
1,144,400
Long-term investments
412,541
216,233
Property and equipment, net
168,735
204,383
Goodwill
617,690
615,093
Intangible assets, net
56,638
78,333
Right of use assets
26,568
18,838
Deferred tax assets
145,807
167,524
Other assets
28,964
20,612
Total assets
$
1,804,639
$
2,465,416
Liabilities and stockholders'
equity
Current liabilities
Accounts payable
$
18,187
$
12,367
Deferred revenue
58,906
56,273
Accrued liabilities
73,133
70,234
Total current liabilities
150,226
138,874
Long-term liabilities
Convertible senior notes, net
599,291
1,188,593
Long-term operating lease liabilities
19,537
13,375
Other long-term liabilities
2,236
7,985
Total long-term liabilities
621,064
1,209,953
Total liabilities
771,290
1,348,827
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; 115,671,820 and 126,473,827 shares
issued and outstanding at September 30, 2023 and December 31, 2022,
respectively
116
126
Additional paid-in capital
1,151,697
1,244,504
Accumulated other comprehensive loss
(56,426
)
(57,488
)
Accumulated deficit
(62,038
)
(70,553
)
Total stockholders' equity
1,033,349
1,116,589
Total liabilities and stockholders'
equity
$
1,804,639
$
2,465,416
CHEGG, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands, except per
share amounts)
(unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023
2022
2023
2022
Net revenues
$
157,854
$
164,739
$
528,308
$
561,704
Cost of revenues(1)
83,575
45,203
180,137
145,972
Gross profit
74,279
119,536
348,171
415,732
Operating expenses:
Research and development(1)
46,202
45,426
145,981
150,321
Sales and marketing(1)
28,872
31,803
96,845
109,580
General and administrative(1)
57,075
53,742
186,357
154,547
Total operating expenses
132,149
130,971
429,183
414,448
(Loss) income from operations
(57,870
)
(11,435
)
(81,012
)
1,284
Interest expense, net and other income,
net:
Interest expense, net
(733
)
(1,525
)
(3,115
)
(4,738
)
Other income, net
40,492
97,258
116,671
105,247
Total interest expense, net and other
income, net
39,759
95,733
113,556
100,509
(Loss) income before (provision for)
benefit from income taxes
(18,111
)
84,298
32,544
101,793
(Provision for) benefit from income
taxes
(172
)
167,264
(24,029
)
162,987
Net (loss) income
$
(18,283
)
$
251,562
$
8,515
$
264,780
Net income (loss) per share
Basic
$
(0.16
)
$
1.99
$
0.07
$
2.07
Diluted
$
(0.16
)
$
1.23
$
(0.24
)
$
1.31
Weighted average shares used to compute
net (loss) income per share
Basic
115,407
126,132
119,001
128,166
Diluted
115,407
148,045
121,876
151,221
(1) Includes share-based compensation
expense as follows:
Cost of revenues
$
598
$
653
$
1,685
$
1,945
Research and development
11,027
9,172
33,909
30,954
Sales and marketing
2,435
2,771
7,116
11,176
General and administrative
17,870
21,574
58,886
54,266
Total share-based compensation expense
$
31,930
$
34,170
$
101,596
$
98,341
CHEGG, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
2023
2022
Cash flows from operating
activities
Net income
$
8,515
$
264,780
Adjustments to reconcile net income to net
cash provided by operating activities:
Share-based compensation expense
101,596
98,341
Other depreciation and amortization
expense
108,945
64,295
Deferred income taxes
20,929
6,376
Gain on early extinguishment of debt
(85,926
)
(93,519
)
Loss contingency
7,000
—
Operating lease expense, net
4,535
4,746
Impairment of intangible asset
3,600
—
Loss from write-off of property and
equipment
3,578
3,117
Amortization of debt issuance costs
2,610
4,084
Gain on foreign currency remeasurement of
purchase consideration
—
(4,628
)
Tax benefit related to release of
valuation allowance
—
(174,601
)
Print textbook depreciation expense
—
1,610
Impairment on lease related assets
—
3,411
Gain on textbook library, net
—
(4,976
)
Other non-cash items
(389
)
619
Change in assets and liabilities, net of
effect of acquisition of business:
Accounts receivable
(6,908
)
(2,259
)
Prepaid expenses and other current
assets
558
13,251
Other assets
8,671
15,926
Accounts payable
4,820
(1,728
)
Deferred revenue
2,539
11,434
Accrued liabilities
(6,149
)
(23,323
)
Other liabilities
(9,810
)
(5,240
)
Net cash provided by operating
activities
168,714
181,716
Cash flows from investing
activities
Purchases of property and equipment
(57,298
)
(79,242
)
Purchases of textbooks
—
(3,815
)
Proceeds from disposition of textbooks
9,787
2,503
Purchases of investments
(585,275
)
(534,008
)
Maturities of investments
561,197
783,912
Proceeds from sale of investments
238,681
—
Purchase of strategic equity
investment
(11,853
)
(6,000
)
Acquisition of business, net of cash
acquired
—
(401,125
)
Net cash provided by (used in) investing
activities
155,239
(237,775
)
Cash flows from financing
activities
Proceeds from common stock issued under
stock plans, net
3,108
4,558
Payment of taxes related to the net share
settlement of equity awards
(13,857
)
(12,776
)
Repurchases of common stock
(186,368
)
(323,528
)
Repayment of convertible senior notes
(505,986
)
(401,203
)
Proceeds from exercise of convertible
senior notes capped call
297
—
Net cash used in financing activities
(702,806
)
(732,949
)
Effect of exchange rate changes
(379
)
4,628
Net decrease in cash, cash equivalents and
restricted cash
(379,232
)
(784,380
)
Cash, cash equivalents and restricted
cash, beginning of period
475,854
855,893
Cash, cash equivalents and restricted
cash, end of period
$
96,622
$
71,513
Nine Months Ended
September 30,
2023
2022
Supplemental cash flow data:
Cash paid during the period for:
Interest
$
741
$
875
Income taxes, net of refunds
$
8,368
$
5,530
Cash paid for amounts included in the
measurement of lease liabilities:
Operating cash flows from operating
leases
$
7,037
$
6,908
Right of use assets obtained in exchange
for lease obligations:
Operating leases
$
12,407
$
7,603
Non-cash investing and financing
activities:
Accrued purchases of long-lived assets
$
5,879
$
4,101
September 30,
2023
2022
Reconciliation of cash, cash equivalents
and restricted cash:
Cash and cash equivalents
$
94,419
$
69,349
Restricted cash included in other current
assets
60
63
Restricted cash included in other
assets
2,143
2,101
Total cash, cash equivalents and
restricted cash
$
96,622
$
71,513
CHEGG, INC.
RECONCILIATION OF NET (LOSS)
INCOME TO EBITDA AND ADJUSTED EBITDA
(in thousands)
(unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023
2022
2023
2022
Net (loss) income
$
(18,283
)
$
251,562
$
8,515
$
264,780
Interest expense, net
733
1,525
3,115
4,738
Provision for (benefit from) income
taxes
172
(167,264
)
24,029
(162,987
)
Print textbook depreciation expense
—
—
—
1,610
Other depreciation and amortization
expense(1)
56,918
22,374
108,945
64,295
EBITDA
39,540
108,197
144,604
172,436
Print textbook depreciation expense
—
—
—
(1,610
)
Share-based compensation expense
31,930
34,170
101,596
98,341
Other income, net
(40,492
)
(97,258
)
(116,671
)
(105,247
)
Acquisition-related compensation costs
209
4,282
6,086
10,989
Content and related assets charge(1)
7,647
—
7,647
—
Restructuring charges
—
—
5,704
—
Loss contingency
—
—
7,000
—
Transitional logistics charges
—
628
253
2,197
Impairment of lease related assets
—
—
—
3,411
Adjusted EBITDA
$
38,834
$
50,019
$
156,219
$
180,517
(1)
The total content and related assets
charge is $41.8 million consisting of $34.2 million of accelerated
depreciation included within other depreciation and amortization
expense and $7.6 million of the remaining associated charges
included within content and related assets charge.
CHEGG, INC.
RECONCILIATION OF GAAP TO
NON-GAAP FINANCIAL MEASURES
(in thousands, except
percentages and per share amounts)
(unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023
2022
2023
2022
Cost of revenues
$
83,575
$
45,203
$
180,137
$
145,972
Content and related assets charge
(38,242
)
—
(38,242
)
—
Amortization of intangible assets
(3,138
)
(3,686
)
(9,859
)
(11,112
)
Share-based compensation expense
(598
)
(653
)
(1,685
)
(1,945
)
Acquisition-related compensation costs
(5
)
(7
)
(17
)
(29
)
Restructuring charges
—
—
(12
)
—
Transitional logistics charges
—
(628
)
(253
)
(2,197
)
Non-GAAP cost of revenues
$
41,592
$
40,229
$
130,069
$
130,689
Gross profit
$
74,279
$
119,536
$
348,171
$
415,732
Content and related assets charge
38,242
—
38,242
—
Amortization of intangible assets
3,138
3,686
9,859
11,112
Share-based compensation expense
598
653
1,685
1,945
Acquisition-related compensation costs
5
7
17
29
Restructuring charges
—
—
12
—
Transitional logistics charges
—
628
253
2,197
Non-GAAP gross profit
$
116,262
$
124,510
$
398,239
$
431,015
Gross margin %
47
%
73
%
66
%
74
%
Non-GAAP gross margin %
74
%
76
%
75
%
77
%
Operating expenses
$
132,149
$
130,971
$
429,183
$
414,448
Share-based compensation expense
(31,332
)
(33,517
)
(99,911
)
(96,396
)
Amortization of intangible assets
(2,935
)
(2,843
)
(8,823
)
(8,631
)
Acquisition-related compensation costs
(204
)
(4,275
)
(6,069
)
(10,960
)
Content and related assets charge
(3,600
)
—
(3,600
)
—
Restructuring charges
—
—
(5,692
)
—
Loss contingency
—
—
(7,000
)
—
Impairment of lease related assets
—
—
—
(3,411
)
Non-GAAP operating expenses
$
94,078
$
90,336
$
298,088
$
295,050
(Loss) income from operations
$
(57,870
)
$
(11,435
)
$
(81,012
)
$
1,284
Share-based compensation expense
31,930
34,170
101,596
98,341
Amortization of intangible assets
6,073
6,529
18,682
19,743
Acquisition-related compensation costs
209
4,282
6,086
10,989
Content and related assets charge
41,842
—
41,842
—
Restructuring charges
—
—
5,704
—
Loss contingency
—
—
7,000
—
Transitional logistics charges
—
628
253
2,197
Impairment of lease related assets
—
—
—
3,411
Non-GAAP income from operations
$
22,184
$
34,174
$
100,151
$
135,965
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023
2022
2023
2022
Net (loss) income
$
(18,283
)
$
251,562
$
8,515
$
264,780
Share-based compensation expense
31,930
34,170
101,596
98,341
Amortization of intangible assets
6,073
6,529
18,682
19,743
Acquisition-related compensation costs
209
4,282
6,086
10,989
Amortization of debt issuance costs
622
1,305
2,610
4,084
Gain on early extinguishment of debt
(32,149
)
(93,519
)
(85,926
)
(93,519
)
Content and related assets charge
41,842
—
41,842
—
Income tax effect of non-GAAP
adjustments
(7,081
)
—
(7,265
)
—
Restructuring charges
—
—
5,704
—
Loss contingency
—
—
7,000
—
Tax benefit related to release of
valuation allowance
—
(174,601
)
—
(174,601
)
Transitional logistics charges
—
628
253
2,197
Impairment of lease related assets
—
—
—
3,411
Non-GAAP net income
$
23,163
$
30,356
$
99,097
$
135,425
Weighted average shares used to compute
net (loss) income per share, diluted
115,407
148,045
121,876
151,221
Effect of shares for stock plan
activity
198
—
424
—
Effect of shares related to convertible
senior notes
10,280
—
10,378
—
Non-GAAP weighted average shares used to
compute non-GAAP net income per share, diluted
125,885
148,045
132,678
151,221
Net (loss) income per share, diluted
$
(0.16
)
$
1.23
$
(0.24
)
$
1.31
Adjustments
0.34
(1.02
)
0.99
(0.41
)
Non-GAAP net income per share, diluted
$
0.18
$
0.21
$
0.75
$
0.90
CHEGG, INC.
RECONCILIATION OF NET CASH
PROVIDED BY OPERATING ACTIVITIES TO FREE CASH FLOW
(in thousands)
(unaudited)
Nine Months Ended
September 30,
2023
2022
Net cash provided by operating
activities
$
168,714
$
181,716
Purchases of property and equipment
(57,298
)
(79,242
)
Purchases of textbooks
—
(3,815
)
Proceeds from disposition of textbooks
9,787
2,503
Free cash flow
$
121,203
$
101,162
CHEGG, INC.
RECONCILIATION OF
FORWARD-LOOKING NET INCOME TO EBITDA AND ADJUSTED EBITDA
(in thousands)
(unaudited)
Three Months Ending December
31, 2023
Net income
$
9,400
Interest expense, net
500
Provision for income taxes
6,300
Other depreciation and amortization
expense
21,300
EBITDA
37,500
Share-based compensation expense
33,000
Other income, net
(7,700
)
Acquisition-related compensation costs
200
Adjusted EBITDA*
$
63,000
* Adjusted EBITDA guidance for the three
months ending December 31, 2023 represent the midpoint of the range
of $62 million to $64 million, respectively.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20231030145164/en/
Media Contact: Tonya B. Hudson, press@chegg.com Investor
Contact: Tracey Ford, IR@chegg.com
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