Chegg, Inc. (CHGG) Earnings Call Transcript & Summary

It's Brent Thill from the Jefferies Technology team. Thanks for joining. We're really happy to have with us Andy Brown, Chief Financial Officer at Chegg. Andy and I will conduct a fireside chat. Your questions are important to us. You can e-mail me any questions at [email protected], and I'm happy to ask any questions from your perspective. So please feel free to jump in on the conversation, and I'll ask any of your questions, and I will not read your name. But Andy, thanks again for joining. Andy, for those of you that don't know, has been with the company for now close to 9 years, has a tremendous history in Silicon Valley in helping companies over many years. So Andy, thanks again, and congrats on all the great momentum.

Maybe just to jump in, Chegg's story is rapidly evolving. Maybe just bring us up to speed at a high level kind of where we're at today, and where you see the biggest opportunities going forward?

Yes. So just -- maybe just a little bit of kind of quick background here. I mean we clearly started out, what, 15 years or so as a textbook company. We're not a textbook company today even though we deliver textbooks. But the refounding of our company really happened about 10 years ago when our current CEO, Dan Rosensweig, came on board. His vision was very different. It was like, if you can deliver textbooks online, why can't you deliver any educational service online, right? And let's do that direct-to-consumer. So what Chegg is today is a direct-to-consumer platform that delivers educational services, subscription educational services online direct to the consumer. And we've -- what we've done over the last several years is we've really just created a massive brand, particularly in the U.S. and increasingly more so outside the U.S. with our subscription products. We exited last year with 3 million subscribers, 5 million customers, including the textbooks. And so we've become this very large subscription services brand, like I said, with students, particularly students in college and increasingly so, at younger ages, for example, our writing tools products, where we have 30 million users, not subscribers span all the way down through middle school. So what are we -- so -- then the question comes is, what have we been -- what are we focused on going forward? And there's a couple of really core things that we're focused on going forward. In the U.S., and we've talked about this before and I'm sure many of you are aware of that, and that is we have many more users to our core product Chegg Study than we do subscribers. In other words, we have a lot of cap shares. And so we're focused on developing technologies to try to either eliminate or at least reduce account sharing that's key in the U.S. The other big -- other 2 other big things is international. We've been investing heavily in international since the beginning of last year, and we are starting to see some really significant momentum internationally. And then the third thing is we're looking forward, and I'm looking just for the next 2 to 3 years, and that is we introduced a product called a Chegg Study Pack, our bundle earlier this year. And while it's not a significant revenue contributor yet, we are seeing a take rate that's materially better than we had originally anticipated through our testing. So there's -- so we're seeing some momentum across multiple areas of the platform.

And maybe just talk a little bit, you said this on the last call, the engagements got higher. The number of users signing up spiked up. It makes sense. Kids that are in college right now are trying to achieve their goal that without the centers open to get the help and without the direct people in the field, but they're turning to you. I think the big question we get is how sustainable is this momentum that you're seeing? It seems like some colleges are trying to go back in the fall, maybe it's just a tactic to get you to pay the tuition as a parent and get your kids going, but it sounds like a lot of these schools are going to pull back and probably go either mixed environment or back to full-time digital in the fall, which would seem to be a good thing for you guys.

Yes. Yes. So we've clearly been seeing tailwinds since the shelter-in-place and kids were learning off-campus. I think there's a couple of things there. One is, I mean, we've been talking about this for many, many, many years, and I've said this to shareholders 5, 6, 7 years ago. And that is -- if you're investing in Chegg, you've got -- you've got -- you're basically betting on what we call the inevitable, and that is the inevitable is that more and more educational services are going to go online. And that's what we've been betting on for many years. So we believe the COVID situation, as unfortunate as it is, and it really is, it's been devastating to many people personally and then obviously the economy. We do believe this is kind of a point where it's accelerating that inevitable, whether it's the same -- and so we believe that. And to your point, all of a sudden, people go off-campus and 2 things happen. One is they don't -- can't access on-campus help. And so now they're looking for companies like Chegg to help them out. And we believe that, in fact, that trend will continue for a couple of reasons. One is they built -- I think they like the service. But the second thing is, when we go back to schools, there's going to be less funding. We all know that and what gets cut, typically those on-campus services. We think that's one thing. I think the second thing that we've seen is that we -- I don't think we really comprehend it as a company, how big account sharing has been. And what we call -- we believe there's been a -- we believe, as we're dissecting this is that there had been a lot of what we call proximity sharing. And that is, you're in the same class and say, "Hey, can I share your Chegg password for a day or a couple of hours and things like that and get onto your phone?" And so we've certainly seen that. And what that has done for us is it clearly accelerated new subscriber growth, but what it's also done for us, it's also informed us that we needed to pull in some of our technology solutions around account sharing. So one of the things that you'll start to see in our subscriptions at least on Chegg Study, not across all of the subscriptions, that will happen later, but we're going -- we're in the process of developing device management capabilities inside our -- inside Chegg Study and MFA technology or multi-factor authentication. So those will start -- you'll start to see those roll out in the fall. So then we can control how many devices can access to the subscription. Gee, not a big surprise because today, right now technically, a subscriber could access a subscription with 20 devices in 3 different countries or 4 different countries, which is clearly somebody that's sharing something. So those are the things that we're anticipating implementing in the fall, which we believe continues to allow us to have tailwinds.

Yes. I think the way we've described this to investors, there's kind of multiple angles of growth. You talk about pricing. You haven't raised prices, but you have a new bundle. And now you have international. You have account management, the casual pirates turning them into paid users. You now have the skills-based learning. You have the onboarding for companies to effectively look at what candidates are coming out of school. There's just -- there's so many avenues of growth. And I guess, if you can just help us understand how you think about these call options and kind of when do you expect them to be part of the revenue stream for you?

Well, I think the -- when I -- so I'm going to define -- let me just make it define here, the short-term being the next 24 months and then longer-term being 3 or 5 years out. I think in the short term, account sharing and account sharing and the bundle, I think, in the next couple of years are going to be a fairly strong tailwind for us. International is becoming -- it is a tailwind for us, but I think the international is a long -- is both short-term and long term. We just started last year -- beginning last year, we just started making the investments, and we're now starting it really probably Q4 going into Q1, we started to see those tailwinds from international. And we do believe that there is a multi-year, and I mean multi-year growth strategy internationally. And we've just scratched the surface. I think 2020 will be the first year when -- where we can really say that international has become -- I'll call it -- we use the term inside our company called big enough to matter. It's becoming big enough to matter in 2020, and it's still relatively small. So we believe -- we started with the English speaking countries, then it will be the English learning countries and then potentially, I'll go -- so that was -- that's really more in the first 5 years and then potentially beyond that could be non-English speaking countries. But we see a very, very long-term growth strategy internationally, which we think -- I mean yes, I think that's -- so there's many things. And then to your point, while it's relatively small to date, Thinkful, that marketplace is huge. And it's one of those areas where we believe the costs should come down and we've reduced costs for those -- some of those classes. And we do believe that skills-based learning should, over time, not this year, not next year and probably not the year after, but should be a multi-hundred million dollar a year business if we get it right. And those are things that we're focused on.

That's great. There was a question from a client. And the question was, can you talk about the opportunity on Chegg Tutors? And how big a part of the Chegg service is that they could be going forward?

Yes. So Chegg Tutors is actually very small, believe it or not. We -- when we -- [ focus ] with Chegg Tutors has probably been around now, what, 5 years. And we thought it would be a large opportunity. The market for online tutoring just hasn't taken off the way we thought it would take off. And the medium, how students want to be tutored has changed. And so one, we thought it would be like we're doing right here, video-based tutoring, and that's how we started out the tutoring business. But what we've increasingly seen where we've made some investments is in what we call chat-based live help, CBLH, as we call it internally, where it's chat-based tutoring versus video-based tutoring. And we do believe that, that's more likely the way -- the primary way forward on tutoring. And so -- and then the question becomes with -- truth be told, we're asking inside our company, and that is, is it a stand-alone business or is it part of the subscriptions business? In other words, do we just provide like -- because there are times, and it's inevitable, there are times when you go to our self-help services, and then you're still stuck. And you just need that little bit of help from a human being, and you need that live help. And so I'm -- once again, we're debating it inside the company, but I'm more and more believing that, in fact, tutoring is really more as a part of our subscription services. In other words, it's -- for example, if you're in Chegg Study today, you can access a tutor versus it being a stand-alone -- a massive stand-alone business. So that's kind of where we're would be my guess. But today, it's a very small part of our overall revenue stream, very small.

Do you think -- does that change your long-term thinking about the revenue trajectory? Do you believe it's just mainly been kind of the way you go-to-market and package it, that just needs to change, and that could potentially open up the opportunity you set on?

On tutoring specifically?

Yes.

It could. It's not -- it's -- given -- but truth be told, given the magnitude of the other opportunities, particularly international, the investments we've made in the bundle, those seem to be more actionable in -- than making a significant investment in the tutoring platform right now. It's -- that's -- the tutoring platform hasn't been as large a focus as some of the other areas, like I said, international, account sharing and the bundle.

And you put that in the context of you have roughly 4 million users today, roughly. And you -- I think you've outlined there's $54 million in the TAM. So kind of just to put that into context, there's just so many more end users to go after with your core service?

Well, in the core service is -- the core of the content that we have in our core service is kind of like -- we get the question, for example, when are you going to address high school? And we're like -- well, we may, at some point but if you take a look at the core content that we have in Chegg Study, that's just as applicable to a Canadian student as a U.K. student and -- so there's a high degree of leverage there, you know what I'm saying? And so when we look at the opportunity set, the tutoring, while live help is important, don't get me wrong. It's not -- the leverage is more in those other areas where we're focused right now.

That makes sense. And on international, you've been careful to not get too carried away. We're not going to put numbers on our spreadsheet and say, up and to the right. But we don't want to make you nervous, but the rollout of international, it feels that you already have the platform to do it, and it's just a matter of now making that move. And so kind of when you think about between -- I think you guys have articulated, if you took the rest of the world, it looks similar to what the U.S. looks like. So you added all the rest of the world together to another kind of U.S. opportunity. How do you go after that? How do you basically prioritize between Australia and the U.K. and the other English speaking countries? What are your top priorities? What do you think you get to first?

Well, it's -- we're focused on all 3. So it's really kind of Canada, Australia and U.K. in that order, just to be clear. And what we're seeing, it's funny, an earlier discussion on one of my group meetings, and that is -- there was a question around how is your marketing changing, but how marketing has changed just in the last 18 months is we're actually -- we're actually marketing into international countries now where we weren't just 18 months ago. It was just kind of like -- we had subscribers internationally, but it was almost like -- you've heard Dan say this before, really by accident. They just showed up. But now we're actively marketing. We're actively putting in unique -- if there is unique content for those regions, we're developing that unique content, and it's paying dividends. There's no doubt that this -- that people are finding Chegg, we're marketing to them. And it's not just the English-speaking countries. It's the English learning and some non-English learning countries that were seeing students on our platform. It's been pretty amazing. And so international, like I said earlier, it's now big enough to -- even though it's small and growing extraordinarily fast, it's becoming big enough to matter, and we're putting not as the marketing resources, but we're -- there's -- I mean, significant -- we're not -- we're putting a significant amount of resources behind it internally because we just think it's a big opportunity for us. Yes.

You mentioned high school, and you've been very careful to say, look, we're really benefiting from the college undergrad market. But when you think about high school now, the Mathway acquisition kind of changes that, that lets those in high school, utilize that service. And as a parent of, I call it, middle age kid, middle school kids, it's certainly, I think the way we've been looking at math problems is on Google now, then we go to Mathway. But your opportunity now with that for the high school market with the global market, can you describe what Mathway brings to you?

Yes. So Mathway, for those of you that maybe don't know us as well, it's a leader in the math equation solver market. And we've been trying to acquire this company probably for the better part of 6, 7 or 8 years, almost since I've been at the company. We talked -- we had been talking to them maybe once every year or 18 months, knock on the door and say, hey, do you want to be acquired? Do you want to be acquired? And then all of a sudden, at the end of last year, late November, early December, we got a call from a banker saying, hey, Mathway has engaged us to sell the company. We're like, where did that come from? We've been asking you. Even when we made our small math acquisition a couple of years ago, we went to them and said, we're making a small acquisition. We prefer to buy you. They said, no, we're not interested. So what we believe we have in Mathway is the premier math product in the marketplace today. It's got a fabulous engine. It's international. It spans college through middle school. And so yes, we're super excited about that. We believe that on our platform, like we did with IES, our writing tools product, if you recall, we believe that it's a great opportunity to accelerate their business just like we did with, like I said, with writing tools. And so very -- I kind of look at it in that kind of mold. And yes, and it also gives us, obviously, the capacity to be able to integrate more capability into the bundle over time. That won't happen immediately. But yes, it opens up different demographics, opens up more international, couldn't be happier to have Mathway as part of Chegg.

Skills-based learning, you mentioned [ Thinkful ]. You want to broaden the applicability. Maybe just talk to us about the next leg for that move into what again was your foray into skills-based learning?

Well, skills-based learning is going to be a more important and a bigger part of learning across the globe, in our opinion. And there's 2 things that we're focused on -- when we bought Thinkful, there are 2 things that we knew had to have happened. We needed to accelerate their content development, which we are doing. And we needed to lower the prices. We need to make this more and more affordable for people to get the skills that they need to be gainfully employed. And we've started to do that. So it's -- and it's -- we're, what, 7 or 8 months into this. And there's always -- like any acquisition, once you get in, you see the things that are working, the things that aren't working, things like that. In my mind, an acquisition -- a typical acquisition like a Thinkful or an IES, which is our writing tools or even Mathway, it takes you 12 to 18 months to really figure out where the levers are. Typically, these small companies are not well instrumented. I mean Chegg is absolutely well instrumented. We have daily metrics, hourly metrics. And so until you get them instrumented, it's hard to understand which levers. And we're starting to understand that with Thinkful. But it's -- and we do believe that it's -- it can be a multi-hundred million dollar a year business over time, which just going to take a while for us to kind of figure out where the core levers are.

That's great. There were some kind of confusion around the $500 million buyback. I'm curious if you could just clarify why you chose that route?

Yes, yes. So yes, there was definitely some confusion. I've had a few questions from shareholders, does that change your capital allocation? Does that change the way you view acquisitions? Blah, blah, blah. The core of the buy back, and it was deliberately worded as a securities buyback, not a stock buyback, but it's securities. There's 2 securities that we have outstanding. One obviously is the stock, and I'm sure most of the people on this call are either shareholders, stockholders or potential stockholders. And the other one is our bonds, our convertible bonds. And we've got 2 convertible bonds outstanding, one due in 2023 and one that's due in 2025. And the economic cost to us and our shareholders, our dilution potentially on the first tranche of bonds gets economically worse, about $40.68. That's the upper cap call strike price. And so the purpose of the buyback was to give us the flexibility or additional tools in our tool bag to be able to, in times of market dislocation potentially buy those bonds back. They're not callable until next May. And so this gave us the opportunity to basically take them out at reasonable prices and be less financially dilutive to us. In other words, maybe let me just be more succinct. It's financial hygiene purposes more so than anything else. It doesn't change the way we view acquisitions. It doesn't -- it really doesn't change anything else. It was more to give us the flexibility to potentially buy back those bonds before the call period became due next May.

And the new price point with the Study Pack, I know it's still early, but any observations so far out of the gate here at the beginning of the year?

Oh, yes, we said on the call, the Study Pack is doing better than we thought. It's just really that simple. We went through 1.5 years of testing. We put it live to 100% of all new subscribers, and the take rate is much better than we thought. Pricing-wise, we're not testing any additional pricing on that. We always knew $19.95 was the likely sweet spot. Even 5 or 6 years ago, we potentially -- if we wanted to do, potentially, we could have taken just Chegg Study to $19.95, but we -- our first price move has been Study Pack, to your point, doing well. Super excited for the fall because we get many, many, many more new subscribers or resubscribers in the fall than we do in January. So as we go into the fall and then we go into next year, we're super excited about the momentum of being [ next year ] .

I think many are asking, if there is a vaccine, and suddenly, we have everyone go back-to-school, which is probably highly unlikely, many are concerned, would you see the continued momentum? I think what we said is it feels all-weather, meaning you benefit in a [ every ] back-to-school or a hybrid or I'll learn from home. It does not really matter kind of the environment. The digital tip has happened, and there's really no one else in the category. And I'm curious what you think in terms of how this would play out if suddenly we, actually, things kind of went back to normal?

Well, I think this has been a tipping point for digital learning, period. I mean we talk about betting on the inevitable. This, we believe, has accelerated the inevitable. We think there are other factors that we're now doing that are different. The momentum we're seeing in international, the Study Pack provides additional momentum, which really is still small. And then the other part of this, as we talked a little bit earlier, is being able to have a technological solution for account sharing. In other words, we can manage the number of devices for each subscriber. So we believe a combination of all 3 of those things continues to provide tailwinds beyond this kind of short-term period. And then the other factor, which is as kids go back-to-school, and we're seeing this in California. I'm sure you were seeing it across the country. They're reducing funding for schools. And if you're reducing funding for schools, that typically means there's less places on-campus for kids to go get help. And we believe that, once again, it's that tipping point as more and more stuff is going to go online. So yes, I think this is just a seminal point for online learning. And I think we're in a great position to disproportionately benefit from that because of our -- just our position in the marketplace with -- and the brand that we have with students.

Careers, an interesting opportunity for you going forward. You touched on it in the past but I think it's kind of maybe a longer-term caution. It feels really exciting. Maybe just any update there?

Well, the question on careers for us is are there synergies? And is there -- when we've got a skills-based business in Thinkful, I mean a big part of why we thought -- why Thinkful was interesting to us is that they -- 6 months after they've graduated from Thinkful, 85% of those students get jobs. In other words, we help them to get jobs. It's not -- we're not just giving them the degree from Thinkful and say have at it. There's -- a career counselor is with them. So we think there's likely to be some melding of what we're doing on our -- what we were doing on our careers front and Thinkful and particularly the data that we've -- and analytics that we have in our careers business, we think that is -- there's likely to be some synergies there in helping kids get job, yes.

That's great. Andy, I think we're out of time, but I really appreciate it.

I think we are.

I appreciate your time. And congrats on the ongoing success. Looking forward to staying in touch.

Okay. Awesome. Thanks, Brent. Thanks, everybody. Take care.