Chegg, Inc. (CHGG) Earnings Call Transcript

Day 2 of the 27th Annual Needham Growth Conference. I'm Ryan MacDonald. I lead Needham's EdTech research efforts here. And I'm pleased to be joined in this session by Chegg's CEO, Nathan Schultz. Nathan, thanks for joining me today.

Thanks for having me, yes.

So this will be a fireside chat session. We've got about 40 minutes. I've got a list of questions for Nathan that we'll run through, and then we'll try to save the last 5 to 10 minutes for audience Q&A. So if you do have some questions, we'll make sure to get those asked and answered. But we've got a lot of interesting topics to talk about today. So let's dive in. Maybe just a quick overview of Chegg for those who might not be familiar of the business.

Absolutely. Happy to do it. So 17 years into this journey, February will be 18 for me. So deep love for education and what it can do for students. Chegg originally founded with this pretty simple mission, help students save time, save money and get smarter. And over the last few years, really thinking about how Chegg can be a coach in their corner. We do a global study every year, about 11,000 students, 15 countries to really deeply understand them. And what you find out is that about 30% of students are working 20 hours a week. About 1/4 of those students are above the age of 25. And so the idea that you're -- that -- the only way to kick your 17-year-old out of the house and send them to college isn't necessarily the truth anymore, and the modern student has a lot of different things being pulled upon them. When we do that study, what we find out for particularly the U.S. student, almost 70% of them say they deal with daily anxiety related to their education. They're incredibly sleep deprived, and they just have this feeling that college wasn't built for them. And so we at Chegg have really been striving to be that coach in their corner and really building a product and service that isn't designed to just help them at that one time that they may have a question, but really be this learning coach that is with them through the 130 days of a semester, 260 days of the year. And so it's this learning journey that we've put so much time and energy into that really makes our product something that students use, and we teach millions of students a year and have billions of learning interactions on our platform. So we're really excited about that. And we're excited about continuing that journey as we've kind of spent '24, I would say, thoughtfully but urgently introducing how we're going to use AI in our product, but now we're in '25, we're thinking about how do we actually build an application layer that leverages all that learning, all that learning science, all that personalization that we've been building over the last decade.

Excellent. Yes. I love the point about there's no such thing as a traditional student anymore. I mean you could see it in the fall data around enrollments. First year students were down, but overall enrollments were up quite a bit...

3%.

Yes, 3%. So like it shows that it's not only a 17-year-old graduating high school and going right into college.

Absolutely.

So you've been, like you said, with the company for over 17 years now, but for the last 7 now in the role of the CEO spot. We'll just be curious in a time where there's a great change going on with the company and in the industry, what's the last 7 months been like? What have you learned? And how is that informing your sort of strategic vision for the business moving forward?

Yes. I look at -- we -- the last 7 months, radical times called for some radical change. So we've done a number of things to make sure that we can kind of set ourselves up for success in '25 and '26, really getting to a place where we can stabilize the business and eventually start to regrow. Some great examples in '25. Obviously, had to make some tough choices on kind of rightsizing our expenses for the market. And for this year, we'll be able to reduce kind of the OpEx by around $100 million to $120 million. We completely converted our Q&A platform over from something that used to take hours to get a solution, cost a number of dollars to get a solution to something that's completely instantaneous and is coming in at costs that are 70-plus percent less than what it used to service -- cost to service a student. We really started to build out that personalization layer even more. And so students are starting to get akin to a flashcard to a practice problem. And we're starting to see as a result of that, driving much stronger engagement with our customer set. And we've done a bunch of things to upgrade our tech, particularly on the commerce side of things where we know we're going to have to lean into in '25 into new packaging and pricing programs in order to make sure the traffic that we're getting in is traffic that turns into traffic that starts to engage with the product starts to get that wow moment that we can create for the student and then starts to be much more relevant in the consideration. And finally, we've really been much more focused and directed with our marketing dollars and -- versus just only putting them into performance programs and leveraging SEO, we're starting to leverage a lot more of the brand. And so you saw in the fall of last year, we had this Small Steps, Big Wins program that started to really start to drive in more quality traffic, start to get us more relevancy with the student audience to make sure we're part of that consideration. We did a lot of work on TikTok. We started to do explorations on YouTube Shorts and Discord, all making sure that we're part of that consideration set where we're where the student is. And so whether one of those channels goes away or not, we'll let the Supreme Court figure that out over the next couple of days. But we're making sure we're relevant in the students' world so we can be at the top of the funnel. And you're seeing this year, we've already rolled out our latest marketing program called Get a Grip. We've got a new mascot, it's named Ace, it's an octopus, hence the grip. Students kind of need 8 arms and 8 legs to get through college. And so we want to be there to support them. That's getting a lot of fanfare on social. And it's really this march to be relevant. So you're seeing all these things, we're really pushing hard to making sure that we're just part of that. And that's been like -- that's been the drive. So we came in, we knew that there was headwinds in the business. You got to embrace that. You got to acknowledge it, you got to move on and you got to charge forward.

Absolutely. And from a product and services perspective, this is not the first time that Chegg has -- as a business has had to evolve its strategy, right? It started as an online textbook business and then moved to one that's focused more on products for driving student success. So I mean, you've talked recently about creating a more personalized, individualized experience. So maybe help us understand from a product perspective, some of the investments you're making there and what's to come on this next transition of the business?

Yes, absolutely. I mean we've always had competitors. And frankly, some of the competitors that we've had in the past have really validated our service. I still remember the day when Amazon came in home with Textbook Rentals and there was a moment of like, well, Amazon is coming into this. And well, the reality is all that did was make more students be attracted to Textbook Rentals. And so in the end, it was a good thing for the business. We pivoted at that point to become more of a student success company and a learning science company and through some acquisitions started to build the backbone of what you see Chegg Study is today, platforms, questions and answer platforms coming out. So we're -- this is another time where we see, obviously, with AI. I mean the ability to generate a solution, fine, we're leveraging it. Obviously, I talked about that just a minute ago. But it is this personalization that really matters to students. When you look at the stats when students are really around the thing that I focus a lot around, which is willingness to pay. 75% of students in the U.S. will say they're willing to pay for a platform that is going to effectively get them better grades, make them feel more competent, making them feel more confident. You look at our self-reported efficacy claims and you start to see 89% of students feeling more confident when they use our solutions, 87% saying that they're getting better grades as a result of using our platform. So our value props are very much aligned with what will drive with some willingness to pay from students. And so what we want to start to show students though is that as they move -- teachers are still -- there's population of teachers are still teaching in very much a pre-AI way, giving 50 problems for math exam, lots of homework. We're starting to see teachers sort of kind of change their grading rubrics and how they teach in the classroom, particularly how they grade in the classroom to a post-AI world where grading for homework isn't a thing. Homework is a thing, but there's no more grades. The grade isn't on the exam. And if you have just -- all you've done for the last 130 days is kind of phoned it in with solutions that you've generated from GPT for your homework, then you go into the classroom and you have to take an exam. Well, it's pretty much a fade to complete what's going to happen at that point. So what students are realizing, I've got to get to a level, okay, a student coming in, leveraging our platform by engaging in some questions and solutions. We're easily able to start to implicitly understand what subject you're studying. We're able to start to say, okay, well, these are the concepts you're learning. We've got a 15-year history of watching students in their semester. Well, if you're using this concept today, the likelihood of using this next concept is pretty darn good. They're able to automatically present that. We call that internally like our next best action. And so we're prompting these students both on the site in session and even more importantly, post session with sending some information back to the student, great job, Johnny today, you did this well. You didn't -- this is -- these are the areas where you need to improve. And now we're starting to leverage that in actually the creation of content for you. And so if you've used 4 or 5 solutions in your session, instantly, the next day you're getting a practice exam on those, you're getting them -- that into a study guide. So the more we start to be able to leverage personalization, not just to know your name and know your school and know your subject, but to really push you at the edge of what you're learning, where you get that in earnings statements around more students engaging in solutions, longer time on the platform, increased retention rate.

Absolutely. Yes. So as you mentioned, so the ChatGPT in general, is changing the way students learn, how teachers teach. And it's clear that there was a bit of an inflection point in '24 about the comfort, specifically students we saw in our data using ChatGPT, willingness to pay with ChatGPT. Can you talk -- you're obviously working on the personalization, but one of the interesting things I thought was an e-mail you sent to students yesterday about sort of what's to come in terms of product innovation. And one of the most fascinating components of it was this comparison tool that you're planning to show the dependability of Chegg relative to GPT, to Gemini to other tools. I'd love to hear more about that. And also, that's a lot of confidence to be able to say we're going to put our money where our mouth is and actually show how we stack up 1V1 versus some of these other solutions. So can you provide a little more color on that?

Absolutely. So remember the mission.

Yes.

And one of those things in there was save time. And students, they don't really have a -- frankly, they've got a lot on their plate. They don't have a lot of time. So we look at -- we know that students are going across multiple platforms when comparing solutions. They tell us this in our -- in all the work we do with students, we bring them into the office a ton. We interview them a ton. And it's an inefficient process. And they're really trying to do that not only to figure out like how does -- how are they getting this answer, but like what is this question trying to teach me? Why am I even learning this? Why is this question even being given to me? And so there's a lot of questions they're trying to do through this process of validation through multiple sources. And so they're using Chegg, they're using GPT, they're using Brainly, and they're like triangulating all over the place, and it just ends up in a waste of time. We spent the last basically 15 years understanding the learning science of questions and the learning science of how to best understand the concept, whether that's a procedural or a conceptual concept and how should you teach it and what type of learning materials should you build around it? Does this need a graph? Does this need a chart? Does this need to be turned into a flashcard because that's the best way to do it. And we said, well, we're very proud of that, and we see that -- and we see when we apply that into our customer base, well, they engage more, they've been retaining more. We've been talking about that quarter over quarter over quarter. So we said, well, like our job is and a part of our mission is to save the students' time. So let's bring it together in one single universe for them and not just about let's just show it on a page, let's actually take our science that we've built and our technology that we've built leveraging AI to instantaneously do it into solutions to help the student understand why this solution would be using this type of methodology versus that methodology. And we started to put that in front of students and they were just like, okay, like that's great. And so you'll see solution comparison coming out in Q1. I'm super excited about it, and we know it's just one of those things that our user base is already going to love, and then we're going to figure out, well, how do we use this as a growth loop so we can have our user base tell the rest of the student base about it. So very excited about that.

Absolutely. So there's obviously a lot of new functionality that's rolling out. I'm curious, as we try to translate this into the fundamentals of the business. Like how is this impacting whether it's student retention or how are you...?

So well, let's -- I think let's step back into '24 a little bit, and we'll talk a little bit more about '25 and the new products. And '24 was a big transition year from asynchronous answering to synchronous answering, lowering the cost, increasing the quality, rolling out a -- I think we've referred to it as a kind of a satisfaction guarantee, but it's a quality guarantee for students. It was kind of our first kind of pushout on saying like we're going to stand behind the quality of our content. It's been a nice kind of boost. And we were measuring that through our -- this is really mainly rolling out to our customer, where we're seeing kind of greater engagement rates, where we're seeing greater retention rates? And the answer is yes on that. So I look at customers and -- I said, in '25, sorry, before I get there, in '25 solution comparison we talked about. We've got a practice feature coming out that's all about creating content that's hyperpersonalized to the questions that you're already using on our platform. We know that generally, the questions used in our platform are also related to the ones that you're going to be using on an exam time. And so the ability to instantly press a button and get a practice exam and get step-by-step instruction on that practice exam are something that students really, really want as they get back to the job of learning. So we see a lot of the future -- that's a '25 improvement. How we're measuring it, 2 different ways. Let's talk about noncustomers first. Obviously, I talked about making sure we get the students to start to engage in these products. And so it's going to be -- I'm not really -- I'm not so obviously going to be looking at traffic, but I really look at kind of that monthly active users more from a user standpoint because I want these students to be coming back multiple times. I want them to be engaging in the product, and I want that monthly active user to become someone that engages in the product and ultimately converts. So that's on the user side. On the customer side, we're obviously looking also at the customer monthly active users, the frequency whether they're coming back into the depth of the use of the platform and retention rate. And so those are the 2 -- if I split those 2 audiences, that's how we'll be trending them in '25 to see is this -- are we getting to a place where -- we've always been -- we've been fairly stable in our -- kind of our current customer base in terms of its engagement rate and the retention rates have been improving. But on the -- obviously, on the acquisition side, we're going to be looking at how do we stabilize there and then ultimately, how do we grow there.

Excellent. That makes sense. Maybe shifting, so we covered ChatGPT. One of the other headwinds, obviously, has been Google AI Overviews, it had a pretty large impact on the web traffic to Chegg in third quarter and early fourth quarter. Can you just talk about how you're evolving the marketing strategy, either to buy better drive web traffic through this new AI search environment or shifting spend to new channels?

Yes. And this was -- talked a little bit about this earlier. So it's all -- some of this work started fortunately, before AIO really launched, which was about 2 years ago, we started to invest heavily in TikTok. Obviously, we see for those users who are on TikTok, and let's kind of be honest, just about every teenager is on TikTok. So everyone in college room pretty much is. And so those who are on TikTok, we see about a 17% greater awareness of Chegg and what Chegg stands for and the value that it has than those who are not on TikTok. So we've then used that learning overall in the second half of last year to start to explore new avenues on Instagram as well as YouTube Shorts. And we launched kind of our own Discord server and are starting to work with Discord in ways to integrate our products. So those who are customers of Chegg and have their own servers can actually leverage the product inside of it because Discord, actually, there's a lot of studying going on, on that platform. So another area. So we look at that as saying -- a kind of the theme there is like how do we be hyper relevant in the places that students already are if we're going to be slowly kind of eroding down the total number of SEO that will come to us. I don't think SEO stops. Google AIO, even though those AIO reviews happen, it doesn't stop the traffic from coming to us. It's just less traffic. And so we're just going to be relevant in the other places that students are going. And Google will figure out some monetization strategy eventually on AIO, and we're experimenting with what they have out there. So you're starting to see ads already appear on the right-hand side of AIO reviews. They're starting to do better citations inside of the overviews. And so I think that world will evolve in '25, but we're not going to wait for it. We're going to continue to push on how do we be in the places where students are. The second area is what we just talked about a minute ago around our own brand and getting out ahead of that and being full funnel in that program and the launch of the Get a Grip campaign this year and the small win -- Small Steps, Big Wins campaign in fall of last year, all are a sign of us using the marketing dollars in more than just performance, but in ways to kind of grow the funnel again.

I don't envy the role of a CMO this year it's with what's changing in social media bans, that makes her job very easy.

I think her job is actually great. I mean she's got -- I mean it's the time when you get to try so many apps, frankly, actually, the team is doing a wonderful job on that, yes.

Yes. And maybe just to maybe put a finer point on the additional channels. It was interesting early this week, for the I think the first time in I forget how long, Google's search traffic market share dropped below 90%. And obviously, we've seen search GPT come out with some of the others, are you doing anything to sort of explore some of these other search avenues outside of Google?

Other than the ones I've mentioned, I mean, those are -- that's kind of our focus because that's where we know the college students are, and we're getting a pulse from them of where they are going for these things and still like #1 in their world is TikTok for just about everything. YouTube is the second place. Discord is third. So for the off-channel stuff, obviously, that's where we've got to follow where they are, that's most important.

And then -- so then obviously, you're probably going to have to shift spend this year if whatever the TikTok ban goes into effect in the U.S. here?

I mean then this is why we started to fire up these other channels of Instagram and YouTube Shorts and Discord. I mean it's just a shift, right? Obviously, time will tell on that.

Yes. Yes, absolutely. All right. So maybe moving on. So as a part of your strategic plan earlier this year, you outlined sort of the Small Steps, Big Wins campaign you talked -- alluded to a little bit earlier as well as the Discord and Chrome Extension as a way to kind of continue to drive the brand awareness and meet the student where you are. Can you talk about those initiatives in particular, how they're progressing and then maybe what some of the KPIs you're looking at there?

Yes. So obviously, I want to see that traffic is coming to Chegg, traffic from those channels and that we're getting really healthy click-through rates. And so what we saw and what we continue to see and why we continue to invest is that those click-through rates are performing equal to, if not better than some of the SEO stuff and the conversion rates are improving on those channels. And so they're not going to function like a traditional performance channel, they're going to be a little bit different, but we're seeing healthy traffic. We're seeing, well -- and we're healthy awareness growth from the students who are on those platforms who know us. It's very important to be part of that consideration set. And so when students are thinking about sign of study, okay, where do I go? We want them to say, well, I use this thing on Chegg or this thing on TikTok and Chegg really helped me. And so we're part of that. So we're watching that metric, and I just gave you the stat earlier around the awareness increase we're seeing all 17% increase over those who aren't using those channels. On top of that, we're looking at that on that click-through rate from those channels and then ultimately, the conversion rate.