Chegg Inc (CHGG) 2022 Q1 法說會逐字稿

Greetings and welcome to Chegg, Inc. First Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Tracey Ford, Vice President of Investor Relations at [NESG]. Please go ahead.

Good afternoon. Thank you for joining Chegg's First Quarter 2022 Conference Call. On today's call are Dan Rosensweig, Co-Chairperson and CEO; and Andy Brown, 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 filed with the Securities and Exchange Commission on February 22, 2022, 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 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 Dan.

Thank you, Tracey, and welcome, everyone, to our Q1 2022 earnings call. We started the year with a solid quarter. Chegg Services grew 14% year-over-year with 5.4 million subscribers. In addition, we are announcing a new partnership with an independent book reseller, enabling us to continue to offer print and e-textbooks to students, while our partner handles inventory and fulfillment. We expect this deal to improve our margins and growth rates over time.

As noted in our fourth quarter call, we entered the year with momentum. However, this trend has not continued at the level we expected. The issues of enrollment, the economy and now inflation have all impacted our industry. Students continue to take fewer classes, and those they do take are often less rigorous with fewer or more limited assignments.

With higher wages and increased cost of living, more people are shifting their priorities towards earning over learning, resulting in lower course load or delaying enrollment in schools at this time. In the U.S. alone, we have seen approximately 1 million students forgo or postpone higher education over the last 2 years.

The impact of these factors is evident in the reduced traffic to higher education support services. This is made forecasting at this time challenging. And while we expect many of these trends to be temporary, we are reducing our guidance to better reflect the current market conditions, which Andy will walk you through.

That being said, we are executing well against these current conditions, and indications are that we are outperforming our sector. With approximately 50% of the world's population under the age of 30 and technology impacting what we learn, how we learn, where we learn and when we learn, the global need for affordable, high-quality, dependable academic support and skills-based learning will only grow. Our goal during this time is to gain greater market share and invest in future growth.

Students who are using paid support services this semester are overwhelmingly choosing Chegg. We are experiencing strong engagement, our highest take rate for the Chegg Study Pack and outstanding retention rates. Along with the increased take rate for the Chegg Study Pack are continued efforts in the expansion, quality, discoverability and personalization of our content drove strong retention, which increased the ARPU of our business. These are powerful endorsements of the critical role Chegg plays in the lives of students.

We remain bullish on the post-pandemic era so we are staying focused on investments in our future, specifically international expansion, language learning, skills training and supplemental support services like soft skills and financial literacy. Our reach is expanding globally. And we are improving both our content library and technology platform to increase students' ability to discover our more than 100 million pieces of learning material, thereby improving student outcomes.

Domestically, we continue to be focused on our key priorities, including the student-facing launch of Uversity this fall, which will increase the breadth and quality of our content, deepen our relationships with academic institutions and expand the number of students who can learn from Chegg. To date, professors have uploaded over 140,000 approved pieces of instructional content, and Uversity will soon be rolling out to faculty in the U.K. and Canada.

Our international expansion continues to perform well, led by the adoption of Chegg Study and Chegg Study Pack and accelerated by the addition of Busuu. We continue to grow our subscribers and take market share, and we are now offering local content and user experiences in key markets. We are currently accepting local currencies in 5 countries and expect to expand to at least 3 new markets by the end of the year.

In addition, we are price testing in 8 countries to determine the optimal price-to-value equation, and we are excited to have recently launched our first fully localized app in Turkey. Our next localized app will be in Spanish, and that will increase our TAM in both the U.S. and other key countries like Mexico as well as emerging Latin America markets.

We are also building new B2B channels for both our skills and language services and are pleased with their early success. Busuu has direct relationships with over 500 companies. And our skills distribution partner, Guild, now reaches over 4 million frontline workers, which is an important channel for Chegg. We are proud to have graduated our first Guild cohorts from our new programs and technology fundamentals and advanced programs like cybersecurity.

With recent research showing that 82% of global workers polled plan to train a new digital skill for the next 5 years, we believe these kinds of programs represent a major opportunity for Chegg.

Beyond the academic and professional needs of students, there is an enormous opportunity to improve student lives beyond the classroom. 83% of U.S. students feel they need to learn more about money and finances, and half are struggling with their mental health. Chegg is investing in serving these vital student needs and will continually work to support them beyond academics and skills.

Given the current environment, we are very proud of how the Chegg team continues to execute. We will manage through the volatility and expect to return to higher and more predictable growth over time. Through all this, we will never lose sight of our mission: to put students first around the world.

And with that, I will turn it over to Andy.

Thanks, Dan, and good afternoon, everyone. Q1 was a solid quarter for Chegg with revenues coming in within the guidance range, while adjusted EBITDA continued to be strong and ahead of our expectations despite the volatility from the pandemic and unfavorable education industry trends. These conditions have made forecasting more challenging in the near term, and as a result, we are reducing our full year expectations. I will walk you through our updated guidance shortly, along with the changes to required materials from our new partnerships.

With that backdrop, let me walk you through the Q1 results. For Q1, total revenue grew to $202 million. This was driven by Chegg Services growth of 14% to $185 million as subscribers grew to 5.4 million during the quarter, which included approximately 600,000 subscribers from our newly acquired Busuu service. Gross margin came in slightly higher than expected as we continued to get benefits as we scale. All of this resulted in adjusted EBITDA margin of 31% or $62 million, exceeding our initial estimates even as we made significant investments for future growth.

Looking at the balance sheet. We ended the quarter with $1.6 billion of cash and investments. During the quarter, we used $422 million to purchase Busuu and $300 million for our accelerated share repurchase, which was completed in April. We continue to believe the combination of our operating model, balance sheet and cash flows are among the strongest in the education industry and puts us in an ideal position to grow organically, and should opportunities become available, through acquisition.

In early April, we entered into an agreement to sell our remaining textbook library and to offer both physical and digital textbooks through a partner, where we will receive a single-digit percentage commission. Being student-first, we have continued to offer textbooks even as it stopped contributing positively to our financials. This new relationship gives us the opportunity to continue to serve students and ultimately grow faster with higher margins. We have provided details in our earnings deck on the Investor Relations website regarding the transition, including the impact to both revenues and costs.

Starting in 2023, we expect this partnership will contribute approximately $7 million to $10 million in annual revenue, which given its size will be consolidated into Chegg Services revenue, and as such, we will only report a single revenue line.

Moving on to guidance. As we continued to navigate the evolving impacts of the economy and the pandemic, the historical patterns of our business, including seasonality and the intra-semester student behavior, have changed. While these factors have made forecasting more complicated, we believe over time, it will return to greater predictability.

As a result, for 2022, we now expect total revenue to be between $740 million and $770 million with Chegg Services revenue between $710 million and $740 million, gross margin between 73% and 74%, and adjusted EBITDA between $220 million and $235 million or 30% adjusted EBITDA margin.

For Q2, we now expect total revenue to be between $188 million and $192 million with Chegg Services revenue between $183 million and $187 million, gross margin between 76% and 77%, and adjusted EBITDA between $66 million and $68 million.

In closing, despite the turbulence in the industry, we continue to invest prudently in growth, such as international expansion, Uversity, personalization, expanding our nonacademic and skills offerings and language learning with Busuu, all while delivering best-in-class margins and generating significant cash flows. Along with the strength of our balance sheet, we believe this puts us in pole position when these industry headwinds subside.

With that, I'll turn the call over to the operator for your questions.

(Operator Instructions) We have a first question from the line of Doug Anmuth with JPMorgan.

It's Bryan Smilek on for Doug. Just 2 here. So how do you think about business-specific levers that Chegg can pull to help fasten the pace of recovery? And how does this slowdown compare to trends Chegg has seen during times of economic slowdown in inflation in the past?

And then just finally, is the slowdown more broad-based across U.S. and international? Or is it outsized domestically?

Yes. This is Dan. There have been challenges sort of globally for different reasons. Obviously, the war has affected parts of Europe. And COVID, believe it or not, has affected parts of Asia. So those are -- there are different variables there. There's just a lot of variables out of the control of companies right now. And from the U.S. perspective, the best thing to do inside the U.S. is to gain market share, which we believe we're doing; to grow the international business faster, which we are investing in; the acceleration of our skills business.

So we're investing in a lot of smart things that we think will return the company to much more significant growth as early as next year. But we just have to fight through the realities of all the variables that are affecting ours and other businesses. But in higher education, historically, I mean, look, we haven't seen this kind of inflation in a long time. It's hard to measure it versus anything that's happened in the past.

But with wage inflation and people paying a lot for people to switch jobs quickly or to work more hours versus going to school, you just see a lot of that portion of higher education leave. And they will come back. They generally -- education goes up during recessions, and it goes down during strong economic markets.

So this is a temporary situation in the U.S. We just have to fight through it. We're extraordinarily proud of the fact that we still expect to grow this year on the top line. We're profitable. We produce free cash flow. Our guidance, we just thought it was prudent to adjust it by 7%. And we just think that's a smarter decision at this point in time given the fact that every time we turn around, there's a new variable out of our control.

But the overall core business is growing. It's profitable. It produces free cash flow. We see great growth coming from outside the U.S. in the future. The addition of Busuu, we're super excited about. And our skills business is beginning to gain real traction with our partnership with Guild. So we have a lot to look forward to. Just got to get through this moment in time.

We have next question from the line of Jeff Silber with BMO Capital Markets.

Forgive me, I'm just trying to get a better understanding of what's going on. So if I remember correctly, on your October call, you talked about the issue of fewer students and less rigorous students. On the call in February, most of that, at least the less rigorous parts, seem to be behind you. And here we are 2 months later, and that's back.

What's changed to make this so volatile over the past 6 months or so? And why do you think this is just a transitory issue?

Well, nobody wants to say transitory now that we've understood the way the Fed's talked about inflation. Look, what's changed is the things that we put in the prepared remarks, which is inflation has really roared at the same time that salary inflation has happened, which has taken a lot of people from the 4-year schools, which people are not likely to graduate from anyway and are taking classes and community college students to choose to shift even more aggressively towards earning right now.

And you really shouldn't blame them, right? It's a smart prudent business decision for them at this moment, which is if their salaries are doubled and tripled, why not take that money and give more hours and take fewer classes or no classes?

That is absolutely representative in every data point that you can find in the higher education market and the ones that we shared today as examples. And you can look at all the higher education sites that students go to normally for help. We're actually gaining market share against them, but they're all down. These are sort of macro situations.

So what's changed is we did see a significant comeback as we got towards midterms and finals. And as we said in the prepared remarks, it didn't sustain itself, meaning when we came back from the new year, it originally started off very strong, and then you saw inflation come in. And then you saw wages even go up further. And you saw the demand of people trying to solve the supply chain issues.

That's a large portion of Chegg's audience. It's not all of our audience. Obviously, we're still growing. I mean we did grow 14% in the first quarter of the year. So all is not lost. This is simply a moment in time that it's just -- some of the variables are out of our control and very volatile. Every industry has something, whether it's China or supply chain or some other variable. These are ours.

Okay. That was really helpful. I really do appreciate that, Dan. And then as my follow-up question, if I look at your subscriber numbers, so if we take out the Busuu numbers, it looks like subscribers were flat on a year-over-year basis.

Can we bifurcate that between the U.S. and international? I'm assuming international is growing and the U.S. is falling. Is that correct? And is that something we should expect to continue? And when do you think U.S. subscriber growth will start again?

Yes. I'll start and let Andy finish, which is we sort of looked at it the other way, which is actually subscriber growth in Q1 is up over subscriber growth for Q4, not including Busuu. So we see ourselves rather than at the moment looking at the year-to-year comparisons because of both the COVID era as well as these other variables that we're talking about. What we're trying to do is figure out where that momentum returns at a significant inflection point.

We are pleased that Q1 has higher subscribers than Q4. And then, of course, then you'll add on Busuu, and Busuu is growing. So at the moment, if you look at it year-over-year, the U.S. market is the one that declined the most because that's where the million-plus students left the market.

And Chegg, we have very good penetration. So that's hundreds and hundreds and hundreds of thousands of subscribers that we otherwise would have gotten had they been participating in higher education market. So at the moment, we're just looking at Q1 grew faster -- grew more than Q4, then you add on Busuu.

Now as to when we expect it, look, clearly, forecasting is not something that is easy to do right now, and that's why 2 of the last 3 quarters, we're having these conversations. And -- but our expectation is, given when you lap COVID and lap all these things that '23 will be a much better year. But I'll let Andy talk through that.

No. I think you got it, Dan. And to Dan's point, we were somewhat north of 100,000 more subscribers in Q1 than we were in Q4. And we look at that as good news. And to Dan's point, I think we're -- I think that, hopefully, by the time we get to '23, there's more predictability and higher growth. But we're just at a point in time, as Dan mentioned.

We have next question from the line of Stephen Sheldon with William Blair.

Can you just talk some about the competitive environment? I guess, have you seen anything change there as you look back over the last few quarters for your core solutions? And how confident are you that the slowdown you're seeing is due to industry headwinds versus either -- or just competitors gaining traction with higher education students?

Yes. Look, we're in a unique position, which is despite all this tumult, we're still the only company in our sector that is profitable and has cash and produces free cash flow and, frankly, grew 14% in the first quarter. So we sit at a position that allows us to see a lot of the industry in ways that others can't.

We also -- as you can imagine, there's a lot of folks in our industry who are struggling, and you can see that in a few public companies. But we get a chance to get inside the companies of a lot of private companies for reasons that you can imagine as we survey the landscape. There is no competitor that we have seen, and we have seen most of them, that is gaining any traction on us. This is not Chegg losing share. We believe actually Chegg is gaining share.

And the simplest statistic that you can all look at is just looking at NOB on our website, the traffic site, that shows what our traffic has been during this period to what others have been. And you can see that the others have declined significantly more.

So no, I don't think it's a competitive issue. And of course, it's the first thing we check. We look at our own execution. We look at our own operations. It's a top-of-the-funnel issue in the U.S., and it's a pricing opportunity outside the U.S., all things that we're working on.

So we wish we weren't in this situation. We didn't cause this situation. We have to deal with this situation, and we are. But again, the company grew 14%. And on top of that, we continue to produce profits and profitability and get stronger as an entity. And we'll emerge from this even stronger because we have greater resources than any of our competitors do. And so we have the opportunity to continue to invest in future growth, like skills, like the international business.

So again, not a place that we enjoy being, but we're going to leverage the advantages we have and continue to distance ourselves from our competitors, not the other way around.

We have next question from the line of Ryan MacDonald from Needham.

Dan, sorry to keep harping on the subscriber counts. But as you look at fourth quarter to first quarter, you were up, minus Busuu, about, I think, 132,000 subscribers sequentially. As we think about domestic versus international, you showed pretty strong growth internationally.

Is it safe to say that those rates kept up in first quarter over fourth quarter and that the majority of those losses were domestically? Just curious if you can give us any more color, I guess, on that sequential increase, what the moving parts were there?

Yes. Look, I think if you were -- we're not going to give out the specific numbers for obvious reasons, but what I would say is that the U.S. market is challenged more than the international market. The international markets are continuing to see really strong growth. The U.S. markets are seeing headwinds as it relates to subscriber growth, but positive growth in terms of revenue and ARPU, which is something that we talked a lot about, which is the acceleration of our audiences taking Chegg Study Pack over Chegg.

So in the short term, we're focused on increasing the revenue and the ARPU of the U.S. market until it comes back. Outside the U.S., we're focused on growth, subscriber growth. So I would look at it at all the different angles, including subscriber growth. But for us, it's revenue and ARPU growth in the U.S. is our focus in the short term, while it's subscriber market share growth outside the U.S. So hopefully, that clarifies.

Yes. Shifting to Busuu. Obviously, great to see the business sort of fully integrated now, and that's sort of now starting to contribute to the subscriber side of things. as you look at integrating those businesses from a go-to-market perspective or marketing to that existing base, are you changing thoughts at all about how you're focused on sort of increasing sort of Busuu's brand presence or awareness within the core Chegg subscriber base?

Yes. So we're accelerating our efforts. Look, Busuu is a very good company, and it's growing at a very good rate. It's got a very good management team. And our vision always was to continue to invest in it outside the U.S. and continue on its growth path, which has been very strong, but bring it into the U.S. and bring it into the U.S. through our audience initially.

So we know that 55% of our U.S. audience wants or needs to take a language. We also know that they don't know the name of Busuu. It's like 3%. So we have very aggressive ambitions for the rest of this year to get the name recognition up because everybody knows the other language companies, which are good companies. But our audience should know Busuu and therefore should buy Busuu.

And interestingly enough, when our audience is surveyed, the #1 thing that they wanted was actually to speak to local language speakers. And that's the one thing that Busuu has that the other competitors don't have. So we're going to be obviously advocating for Busuu to our audience and the differentiation.

And we're seeing early signs of success. But we only closed January 13. It's very early. But we bought it for the -- we believe, for the right reasons. And we think we're going to continue to see really good growth in that company and then profitability from that company next year. So Chegg's going to be even more profitable next year than this year simply through the investments we're making. So I'm pretty excited about that.

We have next question from the line of Brent Thill with Jefferies.

Dan, I wanted to see if we could compare/contrast the fall to the spring. And I think in the fall, you had a late start, but it kind of came through. In the spring, did you -- it's kind of -- midterms and finals has now settled in. I just want to compare, if you can, and paint a picture what you're seeing, what the main differences that happened spring versus fall.

Well, we actually had a very good first quarter. What we're really talking about here is our outlook for the rest of the year. So overall, we're really pleased with the first quarter, and it was pretty close to our expectations, a couple of million dollars off maybe on the Chegg Services side, and some of that was not the subscriber businesses. Some of that was the ad business and some of the other smaller pieces of it.

The subscriber business was -- actually really did well in the first quarter. It's really just the play-through expectations of continuing to see muted attendance at college and muted focus on academic rigor right now.

So we're just trying to be more prudent about the second half of the year based on new information we see, which is the whole purpose of these earnings calls, which is to share the changes we see in the market. So I would say that we saw really good end of Q4 that rolled over really strongly into Q1, which is when we gave our report in February.

Now as we look out and we add things like inflation and then wage inflation, we just think the second half of the year, we just want to be more prudent. So it's a 7% change. It's not a 25% change. So it is -- we think we're in the ballpark of the things that make sense at this point in time.

We're preparing ourselves to be -- to go back to high growth or much higher growth when the market opportunity presents itself, and we'll even be more profitable as a company then. So I think we're doing the right things at the right time. We just cannot change the macro condition right now in higher education.

And if you look at what's going on with all the conversations about all the different variables and government and all these things, it's complicated time for higher education. We're there to support the students, and the students that are in the system love us and are using us and are using us in extraordinarily high rates, high retention, low cancel, high engagement, higher take rate for Chegg Study Pack, great renewals.

I mean all the things in our control are doing really well. We need the top of the funnel in the U.S. to come back a little bit, and it will. And then outside the U.S., we're seeing great growth.

I think that's maybe what investors are trying to grapple with right now. Are you seeing churn rates go higher? Or you're just making the assumption that the macro is getting harder and you haven't seen it yet and you're just implying in the guide a tougher macro, but you haven't seen it? That's what I think everyone's trying to understand.

Yes. No, look, I understand that question. It's fair. We try to approach these things with all the facts that we have at the day we need to report. And we think it's the #2, not #1. So the core strength...

Churn has not gone higher?

Absolutely not. It's the other way around. Absolutely not. It's gone the other way around. Retention is near record rates. Cancels are near -- the reduction of cancels is near record rates. That's -- like I said, the things in our control are performing extraordinarily well. Once you're in the funnel, conversions, all of those things, really, really, really strong. This is a return -- we needed to return to the top of the funnel, not what happens in the funnel.

And once students come on to Chegg, they stay on to Chegg. They stay the length of time they've been staying. And again, if you want the single best example of that, it's the take rates of Chegg Study Pack being so far ahead of what we ever imagined that we're in a situation where that just shows the power and the importance of Chegg to the student. They actually want more of us. We just need more U.S. students in while the international business continues to grow. Did that answer it clearly?

That was clear.

Okay. Thank you for asking the question that way. I appreciate it.

We have next question from the line of Josh Baer with Morgan Stanley.

Most of mine were already asked. So I just wanted to clarify a few things that you're seeing and hopefully get a little more context. So on the Chegg Study Pack take rates being well above expectations, any more -- any context that you can provide as far as where they are today and where you'd expect them to go?

Yes. We are -- the take rate for Chegg Study since we launched it has doubled. So we don't want to give away the exact percentages because things can fluctuate in a given quarter. And as we grow countries internationally, the overall number may change a little bit. And it seems like every little number that is slightly off from what we thought affects things. But it is twice what we thought it would be, and it is holding up at those rates. And it's renewing at really high rates, and it is both U.S. and international. So that is why you're seeing really great increase in ARPU each quarter for Chegg Study.

Okay. Great. And then on Busuu, just wanted to check in on how it actually performed so far, the contribution from Busuu in the quarter and what you were thinking for the year.

Yes. Yes. So yes, Josh, good question. So Busuu is performing exactly as we would -- or at least within the range of what we thought at the beginning of the year. Doing really well. And as you know, their business is a combination of both B2C and B2B. The B2B is clearly growing faster, and we knew that going in that -- but yes, it's performing as we'd expected in Q1, came in right in line with what we expected post the close on January 13.

We have next question from the line of Jason Celino with KeyBanc Capital Markets.

I did want to ask about international. So in the prepared remarks, you mentioned that you're currently offering localized content, user experiences in several countries. Any other details on what those countries are? And maybe did those launches coincide with the start of those school years?

Well, no. I mean some of them did not coincide with the start of the school year. So they will be more effective. over time. So that's an excellent point. But the countries that we have local pricing in now, for example, are Canada, Australia, U.K., Turkey, Mexico are examples.

We're testing pricing in 8 countries right now. And in those countries, they're a combination of what you'd imagine, which is ones that are very focused on tech and STEM like Hong Kong, and really huge countries in terms of population, where we're seeing very high top of the funnel, but not really good conversion because of the pricing.

And those countries include obvious places, India, Indonesia, Mexico, and places like Philippines and Malaysia, South Africa. These are places where we seem to be attracting a lot of audience and the conversion isn't what we would want it for yet. And that is for obvious reasons, which is charging U.S. prices in those countries is not going to yield a great result. But we've known that, but now we have the technological capability to change it. So we have price testing in those 8 countries, as an example.

Also in the prepared remarks, it may have been missed, which was we have our first fully localized app, which is in Turkey. Turkey has been a really great contributor for us. And they've wanted a local app and a local language. And the next one will be in Spanish, which will be relevant in Mexico, Latin America and, believe it or not, the U.S. So those are all really exciting opportunities for us, and we're investing in them now.

Okay. Perfect. No, that's very helpful color. And then, Andy, one quick one on the EBITDA margin guidance. By kind of exiting the textbook business, I would have thought the margin would have gotten a little bit better. Is it just timing-related from when -- related to that or, I guess, other investments you're making?

No. It's timing. I think you'll see the full power of us getting out of textbooks starting in next year. I think you'll see overall revenue growth rates increase and the EBITDA margins increase over time. We're kind of in a transitional period right now, as you can see. And in fact, if you need any more details on what's involved, I think it's Slide 12 on the Investor Relations website for those chiming in so you know where to find it.

But yes, it's -- but over time, clearly, we'll see higher margins as a result of the exit of -- not the exit of textbooks, but moving to this model on textbooks.

I also think it's just important to note that if you remember that we said when we acquired Busuu that Busuu was going to lose about $18 million this year and be approaching breakeven next year, and we're on a path to do that. And our skills business is moving increasingly faster and faster towards profitability.

So our margins will continue to improve over the next couple of years and add that to textbook. So we're really excited about that. We just have great leverage in the model.

We have next question from the line of Alex Fuhrman with Craig-Hallum Capital Group.

I wanted to ask a little bit about how inflation is impacting your business. Seems to make a lot of sense that if wages are going up, that impacts the learn-versus-earn equation. So not perhaps surprising that more of your students are spending more time in the workforce and not taking as many classes or perhaps not taking any classes.

But I'm curious if you're seeing any impact from inflation as it relates to just students' budgets and price sensitivity. Has there been any sensitivity to price? I'm curious if perhaps you've seen any of your users maybe trading back down from the Chegg Study Pack to just the regular Chegg Study membership.

Weirdly enough -- look, it's a very fair question. And we are a must-have for students that are taking their academics seriously. You would imagine that, that would be a scenario, and we looked at that scenario, but frankly, it's gone the other way, which is an increasing percentage of people are taking the Chegg Study pack. So they're actually paying $19.95 versus $14.95.

So of those that are focusing on their academics this semester, they overwhelmingly, as a paid service, use Chegg. And of those that are doing it, we're seeing extraordinarily high take rates that seem to be sustaining themselves over the period of time.

So I think what's happening is the first part of your description is what we see: choices to take fewer classes or wait to take classes. That is seen significantly at both community colleges and online schools. And there are 4-year schools where students take courses but don't -- but aren't on a path to graduate in 4 years if they're on a path to graduate. And those are the kinds of folks that are making those choices.

Within the spending, I do imagine they're making other choices with their money, but they're not cutting Chegg because of that.

We have next question from the line of Brian Peterson with Raymond James.

This is Jessica on for Brian. I just had a quick question about the progress with Uversity. So you've been talking about how it's been doing really great with faculty I'm just curious about how this product has been on this rollout with the student side of the (inaudible) market. And then also a quick follow-up, what kind of feedback have you been receiving from content creators and other early users?

Yes. No, fair question. You're just a little bit early on the timing because we are still acquiring the content now. We've not rolled it out to the students in a full manner yet or actually in a manner at all except for testing. We are way ahead in terms of the amount of content that professors are offering, way ahead. So there seems to be an incredible desire for professors to support Chegg in helping students learn better through higher-quality content. And so from a professor standpoint, it's been phenomenal.

The expectation is that we will be rolling out the user-facing later on this year. In between those periods of time, what we're doing with students is we're testing the quality of the content from a 0 to 5 scale. And we chose the words carefully there to say that this was the approved content from approved professors.

And on average, those are scoring between 4.6 and 4.7 out of a 5. So there seems to be real noticeable quality in the minds of the students that are part of the test groups. But the actual second side of the marketplace hasn't rolled out yet.

We have next question from the line of Arvind Ramnani with Piper Sandler.

I just wanted to go back to a comment you made earlier that kind of -- basically, visibility is kind of not very good, and it's difficult to kind of forecast. And I just want to make -- just clarify if that's what you meant because if it's difficult to forecast for you guys, then how do we forecast sort of sitting externally? But maybe that's not what you meant when you said it.

I'm not sure what -- I might not understand the question. Well, let me tell you what we said or you think we said, and maybe this will clarify it...

In one of the earlier Q&A sessions, you said kind of basically forecasting is kind of -- it's difficult to forecast at these -- with kind of the top-of-the-funnel movement. And I just wanted to kind of double-click on what do you mean by that. Like is forecasting really difficult in this -- just with the top-of-the-funnel movement?

Yes. Look, inside the funnel, we are seeing near record numbers, if not record numbers, for all the things that once a student is in. That's easy to forecast. What's hard to forecast is particularly in the U.S. and then when COVID closes down places in Asia and other things like that, it's hard to know those things.

And then the -- as Andy mentioned in his prepared remarks, the inter-quarter behavior of when schools start and when they offer midterms and when they're doing finals, all those variables are affected by a whole host of things that really have not affected higher education until COVID. And so now we're sort of working through what those changes are. And so that changes a little bit of the timing of when people come in. In some quarters, they're coming in earlier than we thought, which is good news. In other quarters, they're coming in later than we thought. So these are just all variables that affect our ability to forecast.

And we wanted to give a 2022 guidance, and we did. And we just wanted to put it more in line with things that we're concerned with but have yet to happen in the second half of the year. That was the question I was asked earlier, which is, are we seeing it? The answer is we're not seeing any erosion in any of the things that we can control. We're seeing really great results from those.

We're just imagining the second half of the year given every one of these variables and then the election is coming up. There's just -- there's so many things going on that may affect the day-to-day lives of students and the choices they made that are just not in Chegg's control at the moment. That's all.

Great. That's a positive. And then just very quickly on the free cash flow guide. I know you've provided free cash flow guidance when you provided guidance. How should we think of free cash flow guidance just given the revised numbers?

Yes. Well, we haven't changed our free cash flow guide. And we've said for many years, quite frankly, it's in that 50% to 60% range. We were a little higher than that last year for a variety of reasons. But yes, we would expect to be in that range.

We have next question from the line of Alex Paris with Barrington Research.

Most have been asked and answered. But I'm looking at Slide 12 for the Required Materials transition. And just so I understand it -- and then looking at the guidance and the implied guidance, Required Materials produced revenue of a little over $17 million in the first quarter. It looks like midpoint of guidance suggests $5 million in the second quarter and less than $8 million in the second half.

So a total of $30 million for the full year. BBA has taken over print textbook first, but eTextbook not until later this year. So what is the $5 million in revenue? Is that single-digit commission percentage in the second quarter?

Yes. Well, it's a couple of things. And it is a little crazy or whackadoodle, as I will call it, with respect to Required Materials this year. It's a combination of things. We still have deferred -- we have some of the deferred revenue from the eTextbooks that rolled through into Q2. We do get a small amount of commission because, as you know, Alex, textbooks aren't very large in Q2.

And then as we roll into the second half of the year, all of -- well, actually all of our physical textbooks are now on that percentage and then towards the end -- latter part of the year, the eTextbooks will. So it is a little -- like I said, it's a little whackadoodle, but once we get through to 2023, we expect it to be -- it will be 100% that way, and it will be in that, call it, that $7 million to $10 million range depending upon the volumes of textbooks.

All right. And then my follow-up would be, and then for the full year, $30 million in revenue, down from the previous implied guidance of $60 million, but the transition is here. And then next year, $7 million to $10 million of high-margin revenue as a result of the transition?

Yes. It's very high margin. I mean, if you go to this -- once again, to the Slide 10, it's a very different construct from when we had the last commission business with Ingram, right? We were doing a ton more things during that. We were setting the catalog. We were doing the pricing. We were doing the marketing. We were doing the customer support. We're doing none of that this time, right? That's all being done by our partners. So it's really kind of like an affiliate. High-growth margin, to your point.

Yes. Non-model perspective, we want to offer textbook rentals to students because had Chegg not invented it, publishers would still be taking advantage of students in a very significant way. And 25% of tuition when we first started was the cost of textbooks, which is ridiculous and unfair. So we invented that model. And we said way back then that we were going to convert the company from a textbook rental company to a pure digital company, being serious of support services for students on a global basis, and that's what we've done.

And I just -- as we think back through this, when we went public 8 years ago, we had about $20 million in digital revenue. And now we're talking about $0.75 billion in these businesses over the last 8 years. So we're very excited about what we're doing. But the textbook business, we want to continue to make it available to students as a service to them, not as something that represents any real value to us as a company anymore in terms of either revenue or profits. But it will be higher-margin business and none of the issues that we had to deal with in the past.

So this is sort of our exit strategy from a business that has been declining for the last couple of years. So once it's done, it becomes a fixed number small percentage of our overall revenue, our growth rates go higher. And we're excited about entering that next phase.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back to Dan Rosensweig, Chairman and CEO, for closing remarks. Over to you, sir.

Thanks, everybody. It's been a complicated year for people to run companies, for you guys to forecast companies. We appreciate how hard you've been working along with us to figure these things out. The good news about Chegg is the upside is still quite significant. The international growth, the skills growth, the movement from Chegg Study to Chegg Study Pack, an increase in ARPU, that we have a lot of growth vectors ahead of us. This is going to be a difficult transition year versus what we all would have hoped.

But the good news is our adjustment is simply the macro conditions, not anything that we're seeing at the moment. And it's only a small change in the guidance, and it's us just trying to be prudent with what we see and what we feel going on in the current market. But the future of Chegg is going to be huge, and we're excited, and we just appreciate you all joining us. Thank you.

Oh, and also, I want to congratulate Andy who became a grandfather this morning. So one more future Chegg customer to put into the subscriber base. Thanks, everybody. Talk to you soon.

Thank you very much. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.