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Greetings, and welcome to the Chegg, Inc. Fourth Quarter 2024 Earnings Conference Call. At this time all participants’ are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce Tracey Ford with Investor Relations. Thank you. You may begin.

Good afternoon. Thank you for joining Chegg's Fourth Quarter 2024 Conference Call. On today's call are Nathan Schultz, President and CEO; and David Longo, Chief Financial Officer. A copy of our earnings press release, along with our investor presentation, is available on our Investor Relations website, investor.chegg.com. A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our media center website at chegg.com/mediacenter. We encourage you to make use of these resources. Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of the company. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements. In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg's annual report on Form 10-K for the year ended December 31, 2024, to be filed with the Securities and Exchange Commission as well as our other filings with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and the investor slide deck found on our IR website, investor.chegg.com. We also recommend you review the investor data sheet, which is also posted on our IR website. Now I will turn the call over to Nathan.

Thank you, Tracey. Hello, everyone, and thank you for joining Chegg's fourth quarter earnings call. Before I cover our 2024 accomplishments and 2025 focus, I want to make sure the 2 announcements we are making are clear. First, we announced we are undertaking a strategic review process, exploring a range of alternatives to maximize our shareholder value, including being acquired, undertaking a go-private transaction or remaining as a public stand-alone company. Second, we announced the filing of a complaint against Google LLC and Alphabet Inc. These two actions are connected as we would not need to review strategic alternatives if Google hadn't launched AI Overviews or AIO, retaining traffic that has historically had come to Chegg, materially impacting our acquisitions, revenue and employees. Chegg has a superior product for education as evident by our brand awareness, engagement and retention. Unfortunately, traffic is being blocked from ever coming to Chegg because of Google's AIO and their use of Chegg's content to keep visitors on their own platform. We retained Goldman Sachs as the financial adviser in connection with strategic review and Susman Godfrey with respect to our complaint against Google. As the education industry at large continues to transform, Chegg has strengthened its commitment to serving students with a clear focus on those seeking to build knowledge and achieve success along their academic journey. Through focused investment over the past year and the integration of cutting-edge technologies, we have advanced the Chegg product offerings to deliver a comprehensive, personalized and verticalized learning experience for higher education. The Chegg of today provides precisely what learners need and ensures that Chegg maintains a strong reputation for quality and trust. On technology in 2024, we integrated AI and machine learning into our product stack. We blended third-party AI models with our proprietary student-focused data and high-quality content, delivering more value to the learner. We are AI model-agnostic, seamlessly incorporating new frontier models like Llama, Anthropic, Mistral, GPT and new models as they become available. We use techniques like A/B testing, multi-shot prompting and retrieval augmented generation to improve how our AI learns, retrieves information in real time and delivers consistent results. With this work complete, we are now building verticalized applications for education at a fraction of the time and cost while also increasing our level of personalization. As we've mentioned before, our implementation of machine learning in multiple AI models has significantly reduced the cost of creating content by more than 70% while keeping our quality at the high standard students expect. We stand by our quality of our content so much that in Q3, we implemented a Satisfaction Guarantee. On branded marketing, last fall, we launched an innovative brand marketing campaign and activation program that reinvigorated top-of-funnel traffic, creating strong consideration, bringing in new users and ultimately driving conversion. As a result of our full funnel program, we've seen year-over-year improvements in click-through and conversion rates, leading us to double down on this commitment in 2025. With regard to TikTok specifically, we were able to capture a 16% increase in awareness among under underclassmen. On the product, we have significantly advanced and differentiated Chegg's AI-powered question-and-answer experience. At the front end, we have simplified the question submission process and allowed for more natural inputs and interactions. Learners now instantly receive step-by-step explanation and reinforcement, adaptive and personalized based on their individual strengths and weaknesses. Finally, at conclusion Chegg proactively offers students a variety of unique recommendations called next best actions to reinforce and further their learning. These product upgrades resulted in 66% more questions being asked in 2024 versus 2023, adding nearly 26 million additional solutions to our archive and contributing to a 15-basis-point increase in subscriber retention over the course of the year. Finally, I want to touch on Busuu, our language learning service, which has done a tremendous job transitioning to a freemium business model and integrating AI as a key product feature with the introduction of Speaking Practice. This strategic refocus increased the first 30-day conversion rate to paying customers by 31% and led to a 9% year-over-year revenue growth for 2024, a trend we expect to continue in 2025. The enterprise part of this business is performing very well, with revenue up 46% in 2024 as we added an impressive set of enterprise customers, including Total Energy and Carrefour. The enterprise business will continue to expand with additional organizations, reseller relationships and our successful partnership with Guild, specifically within their English language learning category. While we have made significant headway on our technology, product and marketing programs, 2024 came with a series of challenges, including the rapid evolution of the content landscape, particularly the rise of Google AIO, which as I previously mentioned, has had a profound impact on Chegg's traffic, revenue and workforce. As already mentioned, we are filing a complaint against Google LLC and Alphabet Inc. in the U.S. District Court for the District of Columbia, making three main arguments: First is reciprocal dealing, meaning that Google forces companies like Chegg to supply our proprietary content in order to be included in Google's search function. Second is monopoly maintenance, or that Google unfairly exercised its monopoly power within search and other anticompetitive conduct to muscle out companies like Chegg. And third is unjust enrichment, meaning Google is reaping the financial benefits of Chegg's content without having to spend a dime. As we allege in our complaint, Google's AIO has transformed Google from a search engine into an answer engine, displaying AI-generated content sourced from third-party sites like Chegg. Google's expansion of AIO forces traffic to remain on Google, eliminating the need to go to third-party content source sites. The impact on Chegg's business is clear. Our nonsubscriber traffic plummeted to negative 49% in January 2025, down significantly from the modest 8% decline we reported in Q2 of 2024. We believe this isn't just about Chegg, it's about students losing access to quality, step-by-step learning in favor of low-quality unverified AI summaries. It's about the digital publishing industry. It's about the future of Internet search. In summary, our complaint challenges Google's unfair competition, which is unjust, harmful and unsustainable. While these proceedings are just starting, we believe bringing this lawsuit is both necessary and well-founded. While the challenges we outlined will persist, we are focused on the clear goal of stabilizing the business through the course of 2025. We are driven by the core belief that the relevancy and need for comprehensive student success platforms offering an adaptive, personalized experience to support learning will only increase over the coming years. Administrators and faculty are acknowledging the need to change their teaching models and assessments to better reflect the AI-normalized environment we are now in. The dramatic disruption that came with the launch of generative AI platforms has started to stabilize as schools now understand the significant risk and impact of students GPT-ing their way through their educational journey. This view is widely supported by some recent studies. First, a study from the American Association of Colleges and Universities and Elon University explored the impact of generative AI on academic integrity, with 92% of faculty worried about AI undermining deep learning by over-reliance on AI tools, and 95% of these leaders saying the teaching models at their school will be affected significantly or to some degree by generative AI. Second, the latest addition of Chegg's Global Student Survey measured the insights of nearly 12,000 undergraduate students in 15 countries. 53% of undergraduate students who have used generative AI voiced concerns about receiving incorrect or inaccurate information. Third, we conducted proprietary research on student personas and learned that at least 82% of the U.S. college student wants more than what GPT offers. These students need to develop knowledge, not just get grab-and-go answers. So as 2025 gets underway, here's where we are leaning in: In 2025, on brand and marketing, we are continuing to raise brand awareness and improve conversion rates. In January, we debuted our Get a Grip brand campaign featuring our new amazing mascot, Ace the octopus. A physical representation of Chegg allows us to connect with our audience in a fun way, clearly conveying how we are on and by students' side throughout the semester. In addition, we are continuing our expansion into new media channels, including streaming platforms like Hulu and YouTube, and social channels like Discord and Twitch. We also launched Live Office Hours on social media channels to provide students with instant, live, course-specific instruction. We aim to provide an interactive community-based learning opportunity while introducing our brand and value to new users. Our goal is to have more than 1.5 million students attend our live programming this year. Diversification is key to funnel resiliency, and taking a full-funnel approach is necessary to making sure we bring in the right traffic and regrow our customer acquisitions. In 2025 on products, we are building experiences worthy of virality and acquisition growth and retention and making these experiences as universally available as possible. First is Solution Scout, a new product we launched earlier this month. As I mentioned earlier, students lack trust in generative AI, and they've told us that they're spending too much time triangulating, comparing and verifying solutions across multiple platforms. This results in an incredible amount of wasted time that could be spent learning. Solution Scout allows students to see side-by-side answers from multiple LLMs along Chegg's solution. But what's most important is that Chegg, through our proprietary technology, can compare and contrast the solutions, providing students a massive time save and value, and our early indications are very positive. We're also excited to launch an updated feature set for practice and exam preparation, personalized to each student. 71% of students report that they do not have adequate practice resources when preparing for exams and Chegg can help coach each student to confidence. Monthly, our platform collects more than 3 billion data interaction points, which enables us to customize and personalize this experience. Along with our personalization, students can change the difficulty and the format of questions, whether they want to learn via flash cards, multiple choice or word problems. Students need to gain competency in their studies, and practice tailored specifically to their individual strengths and weaknesses is how they will do it. This is a Chegg that exists right now. Our goal with our platform is simple. We want students to thrive. We want students to have a wow moment with Chegg. Wow Chegg is not just a grab-and-go answer, wow Chegg is not just generative AI. That wow moment is when a student realizes Chegg understands me and my specific needs and is a platform I can use every day to succeed in my educational journey. This wow moment is what will unlock our ability to stabilize our business. Finally, on the expansion of our business model in 2025, I want to touch on our enterprise strategy, which enables us to diversify and generate recurring revenue streams. We're continuing to expand our business-to-institution pilot program, which began in late 2024. With 5 pilot programs active, we hope to work with approximately 35 additional institutions by the end of the year. There is a tremendous opportunity to support a broader range of students in achieving their academic goals and increase persistence and graduation rates, which is a major issue in higher education today. We've seen early receptivity and positive feedback on how these pilots are already helping students and hope to move a number of them into full campus-wide implementations by the end of the year. Before I hand it over to David, I want to summarize what's most important from today's call. We announced that we are undertaking a process to review strategic alternatives, and we filed a complaint against Google. In addition to this, here are the keys to our 2025 strategy to stabilize our business: Key number one, build brand awareness, drive more qualified traffic and increase conversion rates. Key number two, expand our product set to offer unique solutions for students that increases the frequency of use and creates clear and differentiated value for Chegg. Key number three, diversify our revenue streams with business-to-institutional programs and other enterprise offerings. We continue to have a strong and trusted brand, customer base of millions of global subscribers, a large market opportunity and amazing employees to get the job done. We believe 2025 will mark a turning point for Chegg. With that, I'll turn it over to David.

Thank you, Nathan, and good afternoon. Today, I will be presenting our financial performance for the fourth quarter of 2024, along with the company's outlook for the first quarter of 2025. We delivered a solid fourth quarter, surpassing our Q4 guidance for both revenue and adjusted EBITDA. While navigating industry challenges, we remained laser-focused on executing our strategic plan, enhancing our product market fit and continuing to prudently manage our expenses. We remain on track to achieve 2025 non-GAAP savings of $100 million to $120 million from our previously announced restructuring activities. Additionally, we strengthened our balance sheet by repurchasing $117 million of our 2026 convertible notes at a significant discount. In the fourth quarter, total revenue was $143.5 million, a decrease of 24% year-over-year. This includes subscription services revenue of $128.5 million, down 23% year-over-year. We had 3.6 million subscribers during the quarter, representing a decline of 21%. Subscription services ARPU decreased by 3% year-over-year, primarily driven by a temporary dip in our monthly retention rate in November and December, which has since returned to historical norms. Skills and other revenue was $14.9 million, down 31% year-over-year due to the market shift away from traditional boot camps to lower-cost short-form programs, and a decline in advertising revenue from reduced traffic concessions across our platform. We delivered adjusted EBITDA of $37 million, representing a margin of 25%. As mentioned earlier, in fourth quarter, we opportunistically repurchased $116.6 million in aggregate principal amount of our 2026 convertible notes at a $20 million discount to par. Free cash flow for the fourth quarter was $4.8 million, despite incurring approximately $25 million in cash outlays related to employee severance from our two restructurings in which we laid off more than 700 employees, as well as the Pearson legal settlement. As anticipated, we expect another $11 million in cash restructuring payments with a significant portion to be incurred in Q1. Capital expenditures for the quarter were $13 million, down 52% year-over-year, of which $8.7 million were content costs. Leveraging the power of AI, CapEx content costs have decreased 56% year-over-year, while the number of questions asked increased 2%. Looking at the balance sheet. We concluded the quarter with cash and investments of $528 million and a net cash balance of $42 million. Looking ahead, as Nathan detailed earlier, we have an exciting and ambitious agenda for product and marketing in 2025. However, as we work towards realizing the benefits of these initiatives, industry challenges are causing a notable decline in traffic and subscriber acquisitions. These factors are putting pressure on our business and impacting our financial outlook. For Q1 guidance, we expect total revenue between $114 million and $116 million, with subscription services revenue between $104 million and $106 million. Gross margin to be in the range of 66% to 67% and adjusted EBITDA between $13 million and $14 million. In closing, despite the ongoing industry challenges that are putting pressure on our financial performance, we made significant progress in 2024 by building technology, integrating AI and enhancing products, all while prudently managing expenses. We enter 2025 with a solid foundation and are focused on stabilizing business trends. With that, I will turn the call over to the operator for your questions. We respectfully advise that we will not be taking questions related to the company's strategic review process.

[Operator Instructions] And our first question comes from Eric Sheridan with Goldman Sachs. Please proceed with your question.

Thanks so much for taking the question. Maybe I'll just ask one. With respect to the Q1 2025 guidance, I just want to understand if you can unpack a little bit the incremental operating leverage in the business and how we should be thinking about dollar revenue growth and what it can translate into in terms of incremental adjusted EBITDA when you measure against fixed versus variable cost in the business and/or some of the key investment initiatives, either brand, traffic or product that you see as pretty critical to make in 2025. Thanks so much.

Yes, thanks. So this is David. Thanks for your question. And yes, our model ends up being super-efficient in terms of the gross margin and falling directly to the bottom line. So our overall -- if we added an incremental $1 million worth of sales, I think we're dropping $900,000 of that to the bottom line. It's just -- it's super-efficient in that sense. And then on the investment side, for the -- all the product initiatives that we have in the first half of the year, we're rolling out the comparison tool and also the next best actions on test and practice. We're optimistic that, that's going to drive more engagement, more higher retention, marketing, we're increasing our funnels to bring traffic back to the site, which will lead to acquisitions and growth.

So thank you.

And our next question comes from Ryan MacDonald with Needham & Company. Please proceed with your question.

Thanks for taking my questions. Maybe to start, curious to hear a bit more about this sort of shift into new revenue streams and sort of the enterprise offerings and business-to-institution programs. Maybe just with the pilot programs you have with the institutions right now, can you talk about how -- what the pricing model looks like? That -- is it sort of the institutions sort of paying for access to Chegg and then sort of like including it or rolling it into tuition? Or how should we think about how these pilot programs kind of create monetization opportunities? Thanks.

Appreciate the question, Ryan. It's Nathan. Let me start and back up a bit on the business-to-institution side. Just to remind everyone, this program we started last year, we're really showing some inbound interest from schools. The key solution they're looking for is around the areas of persistence and graduation. I think as we all understand, the demographics in the U.S., we're going to have our own 19 million students in the system, the freshman class is going to be about equal size coming in year after year. We're dealing with graduation rates that are only in the 60% range. And so you got students that are falling out of the system, and that's really a significant issue, particularly when you look at some of the government policy that we're looking at, particularly around the college reduction -- College Cost Reduction Act or CCRA that we're watching. So schools are very interested in how do we serve students as a customer, how do we provide them with the right tools and the right services to help them not only conquer their academic journey, but also start to acquire skills that they're going to need as they leave college to get a job. So very excited about the program. We've got a number of pilots under belt right now. Looking to have potentially 35 more pilots throughout the course of this year and more interesting looking to then take those pilots into full campus-wide implementation. The goal of the pricing model, it's pretty simple. It's a seat-based pricing program. We're trying to make sure that we can get every student into the platform and provide tools for every student. So excited about the early traction we've got there, excited about some of the early partnerships we've got going on, and we'll look to tell you more in future quarters.

Our next question comes from Bryan Smilek with JPMorgan. Please proceed with your question.

Great, thanks for taking the questions. I guess just to start, can you talk about churn throughout the quarter? I think you had mentioned a slight dip in ARPU as well, too, in November and December. So just curious between ARPU trends and retention trends and how that may differ versus a subscriber that perhaps could be engaging with the GenAI feature versus a non-GenAI user?

Yes, sure. Thanks, Bryan. This is David. I guess I'll start with the retention. We had a lot going on in the quarter as we rolled out our pricing -- sorry, our Satisfaction Guarantee and we were dealing with the traffic issues that we talked about earlier on the call. So we did see retention dip in November and early December, we're still dissecting a bit on what happened. It did return to its historical levels in the back half of December and has flattened out in January and February so far. So we're happy that it's kind of level -- that it has leveled off to our historical levels. It just was a funky time. We were looking at it really closely. We never got an exact answer on it. But it could have been, as I think you were suggesting there as users were playing with other tools and types of things, they could have popped in for a shorter period of time or left, but it was only for a five or six week period. There was some lumpiness with the calendar for when the finals came in versus the prior year because Thanksgiving fell -- trying to remember it now, it was a few months back, Thanksgiving was later this year than it had been in the year before. So there's a lot going on, and we're trying to learn as we go, but we're happy that it's back to the levels we were looking for this year. So thanks, Bryan.

Thank you. Our next question comes from Josh Baer with Morgan Stanley. Please proceed with your question.

Great, thank you. I have a couple on the Solution Scout. Just wondering, is the strategy behind that to sort of showcase that Chegg's solutions are superior from the other LLMs? Or is it more about giving students choice and a bunch of different options? A - Nathan Schultz Josh, nice to hear from you. It's Nathan. And to be honest, it's a little bit of both at the heart of it. One is we want to make sure we've always been kind of around this, making sure we save students' time, and we give them tremendous amount of value. When we talk to students, we see that they're triangulating a bunch -- triangulating through a number of different sources, trying to figure out what the answers are, what the solutions are, what they're trying to learn from that. It's a terrible time waste. And on top of that, as you heard from the prepared remarks, about 53% of the college students that we had surveyed through our Global Student Survey, which covers about 12,000 students in 15 countries, overwhelming majority of them are questioning the accuracy of generative AI. And so we wanted to, one, save students' time and bring these -- our -- we talked a little bit about our 2024 technology investments. We've built a really unique AI infrastructure that is kind of using multiple language models, we're model-agnostic so we're able to take a question, understand it against how Chegg answers it, understand it against the other frontier models that are out there. So we think that's a really valuable tool for students. But what's most important is then we're able to kind of do some extrapolation on top of that of our results versus someone else's results and start to pinpoint for students, what the differences are, what the similarities are. And really what should -- what could you be doing next with that question? And that's where like our next best action starts to come into play, we start to drive more and more engagement through that. So we're trying to mirror what we see college students doing already and naturally, saving them time, being a value for them, but also showcasing some of the really proprietary and cool tech that we have and learning science we have.

Thank you. Our next question comes from Brian Peterson with Raymond James. Please proceed with your question.

Hey this Jessica on for Brian. I just want to follow-up on a prior comment -- question about the institutional initiatives you have. When these schools are coming to you inbound, what are some of the key factors that are also considering for a partnership with Chegg? And I'm also kind of curious, are these institutions helping you build student awareness of Chegg's full value proposition. So it's not just about personalized homework help, but also about your partnerships that you have that address the full student life. Thanks.

Yes, absolutely. I mean so the primary reason, I said it, if I think I heard the question correctly, and apologize if I didn't, these organizations are coming is around the area of persistence and ultimate graduation, right? Schools need students to persist in order for students to continue on and ultimately get to that graduation point. And so schools are recognizing that students are already using a host of services. And we could be doing a lot more, a lot better of a job to service the students if we bring those services closer to the course. And so what I mean is when Chegg and the school are partnering together, we're working together to make sure that our services are kind of tuned for that institution, and for the courses they're teaching and for the student body that is engaging with it. So yes, there is a partnership in there that the school is going is making sure the students are aware of the service and making sure that our services are aligned with it. And we're also working very hard to make sure that we're upholding the academic standards and honor codes of those schools, which is so important to the pathway, I think, of making sure that the assessments in America are authentic and students are really learning the content versus just passing off a grab-and-go answer that they can get off of the Internet.

And our next question comes from Brent Thill with Jefferies. Please proceed with your question.

Thanks. You know, for Q1 on the guidance is embedding a further acceleration in the business. And I'm just curious if you can help us understand what you're embedding? What are the assumptions underneath the guide for Q1?

Yes, Brent, it's David. So it's basically the continuation of the trends that we saw in the end of December, the retention flattening back out to the levels that we wanted and then baking in the traffic and acquisitions that we've been able to achieve through basically two-third of the way through the quarter already. So we have good visibility into the students right now that are in current semester, how they've been retaining historically and in the current environment. It really goes back to the overall decline in the traffic that we saw, which is continuing to eat into our acquisitions, hence, the guide down even more in Q1 versus the Q4 on a year-over-year. But those numbers are pretty well baked at this period of time. So we're just plugging away and pushing the new product initiatives, pushing new marketing initiatives that we have so that we can eventually call a bottom here and see improvements in the back half of the year.

Thank you. And our final question comes from Devin Au with KeyBanc Capital Markets. Please proceed.

Great. Thank you. Two quick questions, if I may. First one, just a follow-up on the temporary retention impact that you called out. Any numbers you can share on how material that impact was to fourth quarter results? And secondly, just curious if you can talk about -- more about your promotional pricing strategy there in international, if we could see any sort of moderation in headwinds to ARPU there in the near-term?

Yes. Devin, it's David again. So on that temporary dip, I don't have a number to pinpoint here in the moment. But we're talking a couple of percentage points of retention. So if you kind of extrapolate that over the revenue in the quarter, you're -- putting myself on the spot here, we're probably talking a couple $3 million dollars’ worth of impact. And the bigger worry there was if that continued over time in addition to customer acquisition leakage year-over-year, it would be a double whammy for us, whereas we've been very consistent and pleased with our retention rates historically. And we believe that, that's because the students who do eventually get to us and try us and pay for us, they find the value in that, and they'll keep paying. But we're very happy that it's gone -- come back to its historical levels. The promotional pricing on international, yes, we -- promotional pricing, pricing leverage, pricing points, whatever we want to call it, those are things that, frankly, we're playing with -- playing around with all the time. We -- at this time last year, we've been doing a ton of promotional pricing, recognizing that internationally, you could bring in more folks, keep them for longer periods of time. And then we sort of started walking back from that a little bit earlier or -- in middle of last year just because we were seeing that, that totality of the total LTVs, it just wasn't there to make up for the lower prices. So we have rolled back a lot of that promotional pricing through the back half of last year. But that said, like we're now -- because we're always experimenting, we did kick back some of that promotional pricing in, call it, early February, as we were looking to jump start the total international sub numbers. So a long way of saying we're constantly playing with it. We haven't -- it isn't that we've landed on one lower-prices-all-the-time strategy. We just -- we are adjusting as we go in terms of where we sit in the calendar year, the student calendar year, especially. So I know that makes it hard to model. I apologize for that, but we're just trying to -- the best we can to optimize that LTV for each student.