Education company Chegg (CHGG 3.20%), which provides products and services to support learners, spooked investors earlier this year when management warned that artificial intelligence (AI) chatbot ChatGPT was beginning to hurt the company's new customer growth rate. However, the reality is proving to be far less ominous than the stock's huge drop following Chegg's last earnings report implied things might become. While the company did take a hit from buzz surrounding ChatGPT during the quarter, it wasn't as bad as management had anticipated. Further, management emphasized in its second-quarter update this week that AI could become a tailwind for the company.
Here's what investors should know about the quarter and what management is saying about AI.
Chegg's second quarter by the numbers
The company's second-quarter revenue fell 6% year over year to $182.9 million. But that was a slower year-over-year decrease than the company's 7% decrease in revenue during Q1. Further, this top-line figure was well beyond analysts' consensus forecast for second-quarter revenue of $176.5 million. The company was also notably able to generate a profit of $24.6 million -- more than twice its profit in the year-ago quarter.
Subscription service subscribers decreased 9% year over year. While this may seem disappointing at first glance, investors should note that Chegg management said that its year-over-year customer acquisition and retention rates improved during the quarter. Specifically, management said it saw a decrease in cancellations and an increase in the number of people up for renewal renewing.
It's also worth noting that even though Chegg's subscribers are down year over year, Chegg is notably still up against tough comparisons. To illustrate the elevated demand during the COVID-19 pandemic, the company was doing about 3.2 million new accounts per year before the pandemic, and then annual new customers peaked at 5.8 million during it. While the company isn't attracting 5.8 million new accounts a year anymore, annual new accounts are still exceeding five million, management said in Chegg's second-quarter earnings call.
AI: A catalyst?
Investors should also note that Chegg is finding that AI may actually be good for its business. After surveying learners, management says it now has "greater insights into students' use and perceptions of AI and how it relates to Chegg." Overall, management seems convinced that information from ChatGPT will not be sufficient or personalized enough for an effective and trustworthy learning experience. Even more, Chegg believes it's well-positioned to benefit from AI.
"We're entering an exciting new chapter for Chegg, catalyzed by the advances in artificial intelligence," explained Chegg CEO Dan Rosenweig in the company's second-quarter earnings call. "To take advantage of these new opportunities, Chegg has rapidly pivoted because we believe that category-defining companies with strong brand loyalty, sought-after services, and highly valuable data sets, can leverage AI to grow and will create outsized returns."
The company has already launched a beta version of its generative AI learning assistant, and "feedback has been very positive," Rosenweig said. Specifically, the CEO said engagement from beta testers "is extremely high, and they are interacting more with each question and are staying for significantly longer sessions."
Putting icing on the cake, management said in its second-quarter update that it expects to return to growth at some point. Though management didn't put a timeline on this forecast. [W]e expect to be a growth company again. ... [As far as] when that happens, we're just going to have to wait and see, but the trends are moving in the direction that we're hoping for," Rosenweig said on Monday.
