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

Hi, everyone. My name is Jason Celino. I'm the vertical software analyst here at KeyBanc covering Chegg and the broader ed tech universe. Joining me today is Andy Brown, the CFO of Chegg. Just before we begin, just want to mention that we do accept Q&A at the text box in the bottom of your screen, or if you want to send me an email at [email protected], we'll work those in as we can.

Let's kicked off here. First question for you, Andy. Chegg has benefited from remote learning due to COVID. Can you talk about where you're seeing the strength? And why it's happening?

Yes. Well, we -- one of the things we've talked about for many years is what we call the inevitable, right? And we believed it was inevitable that more and more educational services would be online, on demand and affordable. And what we believe we're seeing with COVID is just the acceleration of that. We were already growing very fast, as you know, prior to COVID, and what we've seen is an acceleration of that. Through -- really, kind of, I'll call it 3 areas, right? One is as kids went off-campus, those things, those math labs and the writing labs and the TAs and the -- were not available anymore. And so they had to go online to find ways to help support their learning and they found Chegg. The second one was as they went off-campus, one of the things that we -- you may ask this later, so I'll state it now, is account sharing, right? And so what we believe happened was a lot of the proximity account sharing that we've seen on-campus went away because they wanted to -- the students weren't together. They couldn't just share that Chegg account for a couple of hours. So that's the second one. And then the third one is in the international arena. As -- because this wasn't just a U.S. phenomenon. This was all kids around the globe went off-campus. And so what we have seen in our international business is a significant -- while it's small still, but a significant acceleration, particularly in those non-English-speaking countries, where they did exactly what every other student does, and they -- when they need support in their academic studies, they go online. And who do they find? They find companies like Chegg. So yes, we've disproportionately benefited from this, but we do believe it's just accelerating what we believe is evitable, and that is online and affordable education solutions.

And a little bit on the account sharing. I don't know how many of my traders or clients have told me that their son or daughter was in a frat or a sorority and they shared passwords. But on the earnings call, you talked about a road map for combating these shared accounts. Can you just talk about what this road map is, and maybe what you're doing in August in particular?

Yes. So it's -- yes, it's amazing how ubiquitous Chegg has become on U.S.-based college campuses. I mean it's just -- it's been fun to watch that transition. We've kind of gone from being a big brand to almost a verb: I Chegged it. But on the account sharing side of things, there -- we started to address account -- we knew account sharing was an issue several years ago. But part of our strategy, call it, 3 or 4 years ago, was we just wanted Chegg to be ubiquitous on campus, and we were willing to put up with a certain amount of account sharing just for that to happen. We've gotten there. And so now the question we asked ourselves at the beginning of last year, we didn't know exactly how big it was, but we did know that you would see -- for example, you'd see a single subscription being accessed by 20 different devices in a month. Nobody has 20 devices. At least -- I mean that's a really serious head case if you have 20 devices. And so what we started to do, we started to do what I'll call manual resets of people that were using our -- a subscription with multiple devices. The fraternity things is actually easy to solve. I'll get to that in a second. But it was those where you had multiple devices. And so we do manual resets and manual resets. And we get some spinoffs. And we started to see success from that, by the way, at the end of last year. In Q4 of last year, it was our highest growth rate from a subscriber standpoint, a 32% that we had all year. And we think part of -- a big part of that was the success we're doing with account sharing. But that kind of manual process of having -- looking at these things. Because within our subscription, we didn't have the ability to limit the number of devices that could access it. So as a result of COVID and the acceleration we saw there, what we also did accelerate, a technological solution that we were going to implement in 2021, into this year. And on Monday of this week, we rolled out device management into our subscriptions for Chegg Study. Now it's -- I call it rolling out. It's not everybody has it today. You kind of start with 5%, you then go to 10% and so forth. But we did notify our students over a month ago that we were going to a device management technology solution where we limit the number of devices you can access your subscription to, to 2. You can roll and you can take one out and add another one in during the month, so -- but only 2 simultaneously, but could rotate one in or one out. And so that started to roll out this Monday, the 17th -- I think the 17th is a Monday. I hope I got that right. And it's going to get rolled out over the next several weeks to most, if not all of our -- and we believe what that will allow us to do is to significantly control the number of kids that are account sharing. And so like I said, yes, we're moving -- definitely moving toward -- we've already -- we're moving to that more technological solution.

Okay. Great. And I do get a lot of questions on the opportunity in these type of conversions. But you roughly have 4 million paying users today. You talk about 2 freeloaders for every paid subscription. So if you're able to monetize this base, could you double or triple your subscriber count just from combating piracy?

Well, potentially, right? But the thing you don't know, and this is what we've debated internally. So there are people that are sharing Chegg Study, for example, that once they couldn't -- didn't have access to a shared account as it were, they subscribe. They clearly recognize the value. But the question we ask ourselves that there's likely to be some students that have been sharers, that they don't sign up, or their use case is such that they don't need a monthly subscription. And so the things that we will look at in the future. And I say future, so don't think of this, this year or next year. But there -- some of the things that we're thinking about, other different use scenarios for Chegg Study for the, I'll call that, the casual user, right? Versus the more immersive user. But yes, we do think -- we think the number of sharers of Chegg Study specifically, it's not hundreds of thousands, it's likely millions. And we believe we will benefit from implementing a technological solution to kind of -- you'll never eliminate account sharing, but minimize it at a minimum.

Okay. And very topical right now about going to college and enrollments as kind of an area of controversy. I know that Dan has been very forward that tools like Chegg could become more important, but we can't dismiss the idea that enrollments might be down. What percentage decline are you kind of building into guidance and your framework around that?

Yes. So when we went through our forecasting process for the second half of the year, which is really the fall semester, we looked at different scenarios. I do agree with you. I do -- we do believe, and as we've modeled our business, is that enrollments are likely to be down, call it in the 5% to 10% range. We've also modeled into what we're doing and recognizing that there's going to be some schools that are going to be 100% online, like the CSU system here in California as an example. And there's going to be -- and most of the rest of the schools are going to be a hybrid model, right? And there's different hybrids. One of the hybrid models like Stamford is doing up here, which is local, is where they're allowing 50% of their students on-campus in one quarter and then the other 50% the next quarter. And then there's other hybrid models where they're allowing kids onto campus. You've seen like Purdue or Notre Dame or some of these other schools, where if you've got a -- like a lecture class where there's 200 students, and that's online. And if it's less than 50, you can have it in person. So there's -- we've modeled in those types of things or those -- that type of thinking and also recognizing that, on most campuses, that those -- there's going to be limited access to things like study labs. There's going to be limited access to TAs and things like that. So we do believe that those things are also going to continue to exist. And so that's the environment that we believe we're going into in the fall. It may change in the spring, but that's what we think we're anticipating in the fall.

Okay. And for the students that do defer, not a whole lot of options with what they could do at their time. What's the likelihood they could do some independent study, use something like Thinkful?

Well, I'm not so sure of those that defer. I think those that defer are likely to be what would be incoming freshmen, right? They will decide to take a gap year. We've got a good example of that at our company. Nathan Schultz, who runs our learning -- all of our learning services, Chegg Study, Chegg Writing, all of that. His son was going to a school on the East Coast, but he just decided to take a gap year. Didn't want to travel out there, didn't want to be on campus for all of the reasons you would expect. And so the question then becomes is, in that gap year, what do you do? Right? And we actually believe it's more likely that kids will do 1 of 2 things. Either do an online course to get some of the, call it, the prerequisite stuff that you do as a freshman done, which are really, I hate to say this, because I even remember this when I was a freshman. I know I'm not old, but I can still remember back then, some of those classes were just why am I taking these classes? Just get them out of the way. I think -- so I think that will happen and likely be online. Or they will just stay and do something with the local community colleges. Right? So I do think one of the things you'll see as a result of this because those kids that don't go back to school or decide to take a gap year from their institution of choice are likely to go to do community college classes. So we think community colleges will disproportionately benefit from what we've seen. That's our view.

Okay. And we are getting some questions coming in, and I think I'll hit a couple of them. First question on the device management, pulling forward that in August 2020. Is this because you're seeing increased churn and now you're using device management to offset it? That's the question.

Well, we're certainly not seeing increased churn. That's not the case. We've -- that's certainly not the case. The reason we're pulling it in is just because we recognized when -- we believe COVID revealed what the real impact of account sharing was. And like I said, we'd anticipated implementing the technology. There's 2 technologies we're going to implement. First one was device management, the other one is MFA technology, in multi-factor authentication, which will also help us with students. But -- and that comes later, maybe later in this year or maybe early next year. But device management was always on the road map. We accelerated it. It just has to do with the fact that we've just got to start clamping down on account sharing. And I can't tell you, it's just -- I mean it was a -- we do weekly account sharing meetings as a team. And it's just -- it's amazing how egregious some of the stuff was, right? Where you'd have -- in just in 1 week, you'd have a subscription where it's being accessed from 4 different countries on 7 different devices, and you're kind of like, okay, clearly, somebody sold -- I'll sell you a Chegg subscription for $4 or something like that. So that's fundamentally what we're trying to clamp down on right now. Yes, it's just that simple.

Okay. And then going to Study Pack a little bit. College students don't like to spend money, and that's why we see them share accounts. But how do you get them to spend $5 more to get the bundle, to get Study Pack?

Well, it's the value you add, right? So the real thing on the on Chegg Study Pack versus the base model Chegg Study is what's in Chegg Study versus what's in Chegg Study Pack. And that's what we -- that's a lot of the testing we did in the year or 1.5 years prior to actually launching in January, right? What's in the base versus what's in the premium version? Do you -- we tested a lot. Do you have video capability in the base? Or is it better to be in the premium version? How many questions can you ask in the base versus the premium version? And so those are the types of things. And so if a student is taking the premium version, they see value in what the premium version offers, right? Whether it's the incremental questions or the incremental features, and that features could be writing or math or whatever that may be, practice tests and things like that. I do believe -- what we do believe will happen is the bundle will evolve over time, right? Right now, the bundle that the kids see on -- as they're subscribing today, it's the same as it was in January. But you will start to see us test other types of bundles. Potentially instead of having just 2 options, have 3 options. And you see that in a lot of subscription companies. So you may have a $14.95, $19.95 and whatever the premium is, option, is $24.95, $29. I don't know what the pricing will be, but that will have different features in it. So yes, so if I think about the bundle 5 years from now, so let's just go out that far, I think it will look very different than it looks today. And it will most likely look different internationally. Because one of the other things where we've accelerated technology development is our ability to offer different bundles in different regions or countries. That's not available today, but those are the types of things because when you look at -- even look at a Netflix, Netflix has different subscription offerings, for example, in India than it does in the U.S., right? It has a $4.99, but it's just for a mobile device, whereas the U.S. is very different. So there's a lot of things that we've got. I mean the bundle is in its very, very early stages, and we believe there's a lot of work we can do to extract value from the bundle, not just in the U.S. but around the globe.

Okay. And there's one question in the queue about the bundle. What was the impact to 2Q? I guess what was the contribution? Any way to think about that?

Well, relatively speaking, small. And so let's just be clear on the bundle. It's super important to us because it will increase ARPU over time. But we're only offering it to new subscribers in the first semester -- in the spring semester, right? And the spring semester is the semester that has the fewest new subscribers versus the fall because a lot of subscribers that subscribed in the fall just roll over into the spring. However, when you get to the fall, it's different. Because if you're in the spring semester and end in the middle of May, you cancel your subscription. So when you resubscribe in the fall, and along with new subscribers, you'll get an opportunity to then choose the bundle. So we believe the bundle actually has a bigger impact in the second half, much bigger impact in the second half of the year than in the first half of the year as a result of how -- the kids' behaviors.

Okay. And kind of on that same vein, with the Study Pack, software companies all have suites. They have different products that bundle things, and those are all big portions of their business. But why couldn't Study Pack be 30% penetration or 50% penetration over time?

Yes, I agree. It could. That would be that -- okay. If you want to market this for us? Yes, that's exactly it. We actually do believe. To me, success is when we're having this dialogue 2, 3 or 4 years from now, that is that some form of a premium-price product, whether it's the Study Pack or whether -- it likely will be other things, too. Success to me is it should be at least -- should be in the 30% to 50% range. If it's not 30%, that'd be -- to me, it wouldn't have been successful.

Okay. And are you running any promotions this fall to drive awareness of Study Pack?

Nothing different than what we've been doing. I mean, clearly, when a new subscriber or a re-subscriber comes on to the site to subscribe, they will be automatically offered the Study Pack. We did do a few things in the spring semester where we offered the Study Pack for free to some of our renewal customers. So it gave them an opportunity to potentially experience it. Maybe they will upgrade. But beyond that, nothing else.

Okay. And then we do have one product question that seems pretty interesting here. What trends do you expect to see in the tutor offering this fall? Do you feel the offering around tutor messaging is how you want it?

Well, the tutoring business is interesting, right? It hasn't grown as quickly as we thought it would 4 or 5 years ago. We thought online tutoring would have been a much larger business than it has become. And it's not -- and I just -- it's not just Chegg, it's just in general. But tutoring continues to be dominated by off-line, in-person tutoring. And so it has -- it just hasn't become as big as we thought it would be. We did introduce, over the last 12 months, chat-based live help, which is chat-based tutoring. And that has gone reasonably well. But still relative to the size of our core subscription business, study, writing and math, it's still relatively small. And it appears that tutoring, and particularly chat-based tutoring, is more -- it's more likely to become more of a feature within our existing subscriptions more so than a stand-alone business. But yes, it has -- certainly, the market has not developed as quickly as we had initially thought.

Okay. A lot of tutoring happens in person, and there won't be a lot of that this fall. Do you think tutoring could see an uplift?

I think what we're seeing is when tutoring is not available in person, I think where we're seeing it is actually in our core study product. Right? So if you're in our core study product, a lot of our expert Q&A, that is a little bit like tutoring. And so I think that's where we're seeing the benefit, is in that low relatively low-cost subscription model where kids can ask -- or students, I should say, could ask questions.

Okay. And I did want to touch international because I know that is a big opportunity for you. How much is international today? And then how should we think about the opportunity?

Yes. So we don't disclose the size of the international opportunity. It's something that we're likely going to be required to do at some point in the relatively near future because we're -- because if it becomes 10% of our consolidated revenues, we have to report it. The SEC makes me do that. So -- but to us, is, I think -- we always thought it was going to be a big opportunity for us when we started embarking on this beginning of last year. Even though we had international customers, we hadn't focused on it. But we started really investing in it last year, the technology, the content, the marketing. But I don't think until the spring of this year, with the onset of COVID, that we realized how much bigger it could be and how much sooner it could be, right? Because what we really started to see beyond the English-speaking countries as we start a significant uptick in those non-English-speaking countries. And it's not those non-English-speaking countries that are going to U.S. universities. These are non-English going to international schools. And so what that has informed us, and we talked about this on the last conference call, we're just leaning into this growth. And so we're making investments to capture this sooner than we maybe would have. And that is around content for international students, around incremental marketing for -- to international students, translations for international students. We talked about that. So there's things that we're investing in that we would likely have not invested in until maybe 2021 or 2022 that we're doing, accelerating now because we see a much larger opportunity.

Okay. And I think we have maybe 5 or 10 more minutes, but we are getting some good questions here. A popular one that seems to be showing up is, you recently did your convert. What is your kind of plans with use of cash?

So a couple of things. I would -- I'd love to joke with you, Tracey hates me saying this. I'd say executive bonuses, but no, that is not it. There are a couple of things. First thing is the terms were incredible. We were informed when we went through this that this is the first-ever 6-year convertible bond that was issued at 0% coupon. First ever, period. Now there's been 5-year bonds at 0%, and just did one last week. But this is the first 6-year bond. So net-net of this is the financing terms were incredibly company-friendly. And we have -- truth be told, we had contemplated doing something earlier in the year, but we just didn't like the terms. And the reason we were looking at doing things is, as I'm sure some of you investors are aware -- or our investors are aware, people on the line are aware, we've got a couple of other offerings out there that are deeply in the money, that one of the things we wanted to do was really cap the cost or cap the dilution. And as you will see, some -- one of the use of proceeds from this offering was, in fact, to buy back the 2023 bonds. We bought back about 50% of those. And what it allowed us to do with relatively inexpensive money is to prefund the ability to potentially call those -- the remaining bonds because there are limitations legally how much we can actually buy back. It helped allowed us to prefund, at very favorable terms, the ability to potentially call those bonds, the remaining bonds in May when we can do our -- when the call period starts. And so that's -- so it's basically pre-funding some of that stuff. And that was kind of the thought process behind it. And yes, so net-net of this is we -- we are going to park some of the proceeds, obviously, on the balance sheet. We can use that for a variety of purposes, the bond call or buyback is one of them. But we just felt like, with these types of terms, why wouldn't we do this? And yes, it was a great offering.

Okay. And kind of going back to international a little bit. The English-speaking countries like U.K., Canada and Australia, they seem like low-hanging fruit. I guess how has the traction been?

Really good, particularly Canada, I mean, right? So Canada is our #1 country. But their schooling system and the proximity to the U.S. obviously, makes it much easier. But one of the things that we're pleasantly surprised by, one of the -- yes, is how the brand is resonating in some of those countries. We've done for many years, brand surveys in the U.S. but now as we're starting to enter internationally, we started to do brand surveys internationally. And it's been very encouraging how the brand is starting to permeate Canada and Australia and the U.K. because there's no substitute for having a great brand. Because once you -- you've seen that in the U.S. I mean our level of marketing spend in the U.S. is minuscule because most of it's brand-related SEO, word of mouth. And obviously, our hope is that we get that type of brand awareness outside the U.S. because that makes -- truth be told, it makes for a very profitable business model versus having to do a lot of paid marketing.

Okay. And we do have about 3 minutes left. I thought maybe we could have one more question from the queue if we can. High school students have always been users but not directly monetizable. Do you think that is beginning to change and parents maybe are more willing to pay now?

Yes. It's always an interesting one for the high school because we -- I don't know how many high school students we have, but we've got 30 million-plus students on our writing tools and products, and a lot of those are high school and middle school. The question we've asked for -- it seems like year after year after year, when we do our strategy meetings here is, do we go after high school? Do we -- and it's always been that challenge because really, what you're trying -- what you're doing then is branding the parent, not branding -- because you're selling to the parent, not the student. And where we've done really well is selling directly to the consumer that is consuming the product. And so we haven't seen any change in the last few months, but we are starting to think about what's the best way to maybe address that marketplace? A good example of that, potentially consolidating brands. Because when you think about our brands in high school, a lot of that has to do with the math product. Mathway is deep into high school. And the second one is our writing tools product, EasyBib, Citation Machine, Cite This For Me, which are not Chegg-branded products. And we're asking ourselves, should we start to migrate to Chegg-branded and consolidate the brand, basically, right? Because we're right now, we're -- to some extent, outside of college, we're a house of brands, not a branded house. And we do think that if we are -- we're more a singular brand, that will certainly help us in high school -- well, younger than what I'll call AP students in high school and younger.

Okay. And maybe one final quick question since we have a minute left. Obviously, COVID, remote learning's what everyone is focused on today, but what do you think we're going to be talking about in 3 to 5 years for ed tech?

Well, I think, once again, I go back to it's the inevitable, right? We just believe -- we've believed for many, many years that it was inevitable that learning was going to be more online, more adaptive, affordable. And we just think what we're seeing now is just accelerating that. So when I look 5 years from now, I think you'll see significantly larger presence for online education, whether that -- I just -- we just don't -- we just -- I think it will be very different. I think people say, "Well, it will get back to normal in the middle of next year." I don't think -- I think that's going to be a new normal. I don't know what that new normal is going to look like. But there is going to be a new normal because you're going to have students that are now used to using online tools. They're used to having their education, their tools be not just online, but they're available anytime, right? I mean if you think about what Chegg is all about is 24/7, you can access Chegg. You don't have to worry about is the tutoring center open? Or is the mass center open? It's like 24 -- and that's what our students and expect for everything they do, is on-demand. And so I think this is a -- when we think about the new normal, I think online, on-demand, affordable is, yes, it's just going to be more prevalent than we've ever seen it.

Okay. Great. And with that, I want to thank Andy for joining us and everyone for submitting their smart questions. Got a lot of content over the next couple of weeks. Next week, we've got some more ed tech presentations. And with that, hopefully, everyone has a good rest of the day. Thank you.

Okay. Thank you.