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

Welcome back to the software conferences. This is Brent Thill at Jefferies. I'm really happy to have with us Andy Brown, Chief Financial Officer at Chegg. Andy and the company are coming off a 60-plus percent revenue quarter last quarter, fantastic momentum in the education space. Andy, thanks for joining. Not only is Andy an expert in education, but he's an expert, as I hear, in motorcycles. So if you need any advice, he can help you out.

Andy, look, this is completely unprecedented times. When you think about what you're doing for those to learn, earn, as you guys say, seems like an incredible opportunity, you're seeing great momentum. I think many investors are continuing to ask us about the sustainability of this momentum and what gives you confidence and not that everyone is expecting 60% every quarter, but the momentum that you've seen, maybe how you would describe to, kind of, carry forward the penetration opportunity and what you're seeing?

Yes. I mean, you've seen, obviously, even before COVID, we saw strong momentum, we were growing typically at 30% plus each quarter, as you are aware, on top of big bases, big base of subscribers. What we have seen as a result of COVID is really what we call, really, the acceleration of what we've always believed is inevitable. And the inevitable is, is that more and more educational services were going to go online. And if you think about just education in general, education, in general, has not really been disrupted like pretty much every other industry has, but technology, specifically the Internet. And so we believe we're seeing that, what we call the inevitable just accelerate. And so for us, what did that mean in March and April and then generally, the second quarter of this past year, we saw really 3 pronged effect, right? One was -- and this is the one that most people expect, and that is as kids went off-campus, those on-campus tools and services weren't available. And so they have to go online. And that is true. And we do believe -- and so there's very few companies out there that provide direct-to-student services. In fact, I think we're the -- certainly the only publicly traded company that does that, that I'm aware of, certainly outside of the Chinese companies. But they -- typically, they go online and they find Chegg. And so that was 1 thing. And we think as we think to the future and as kids get back onto campus, which is not -- even though they're getting back on the campus is, say, those help services are really not available because kids are not being allowed to really interact that much. But as we look to the future, we believe that as kids have understood: a, how effective it can be to have an on-demand service like Chegg. We believe they will continue to go there. And the second thing is we don't think, as we go back on to campus, funding will be decreased. And therefore, those online health capabilities will likely be decreased. But the other 2 factors that are -- that we believe that will allow us to continue to see the headwind is one was -- which was a big thing and you probably a question people would like to know about them that is account sharing, right? When kids went off-campus, that proximity sharing went away because they weren't around people. And so one of the things we implemented just about a month ago, a little -- yes, I guess it's right about a month ago was device management on our platform or at least specifically on the Chegg study platform, where kids can only access their subscription with 2 devices. And prior to about a month ago, they could access it with any number of devices. And so we had all of these account shares. And so we're taking that capability away. And the third element that gives us confidence is the fact that what COVID revealed to us was how big the international opportunity could be for us. We've typically been focused on primarily the English learning countries, Canada, U.K., Australia. But we saw a significant influx of students outside of those countries. Countries like Turkey, Saudi Arabia. And so kids outside of those -- outside of those core countries that we've started to focus on are accessing our platform. And what we've done is double down on working more expansively internationally. So we've gone from maybe 3 to 7 -- 5 to 7 countries that we are focused on to 20 because we believe that opportunity exists. So when I add all of those together, we believe the momentum that we've seen, whether -- not going to ask whether it's 60% or whatever it is, we believe that momentum will continue beyond what we've seen in Q2 of this past quarter.

Andy, one of the big questions we're getting just as it relates to enrollment and return of students to campus life. One of the management members from American Campus Communities, I believe, it's a publicly traded company. He had indicated that he didn't believe that enrollment was down materially and that people were returning to campus that the parents want the kids out, the students want to get out there. They want to go back, but maybe do they end up back at school in person may not, they may end up back at campus doing class work but probably need additional boost or help to get through it. I guess what are you hearing about the return of school, anything anecdotal? And I think you made a comment at our conference last night in Asia about companies even like CSU already committing to an online platform for the spring. So it seems like this extension to online is going out beyond even the fall?

Yes. Yes, exactly right. We -- CSU being California State University system announced just a couple of days ago that they were extending their classes into the spring to be online-only. But what we're seeing in general, we're seeing less of that and more of the hybrid model, i.e., where kids are going back on the campus, but they're not being allowed into the classroom or at least some of the classrooms, right? So there may be some of the smaller classes where you've got 20 or 30 kids that are being allowed in the classroom, but if you've got big lecture type classes, they're being asked -- they were not being asked, they've been told, that's got to be online from your dorm room or wherever you live. So it is this hybrid model. I think the other thing that we're seeing is that we're seeing in those, the online universities, the SNHU, Southern New Hampshire universities or in our Western governors, those online universities and the community colleges, we believe, are being disproportionately benefited from this because there are some kids that don't want to go back to campus, right? Or there are -- were incoming freshmen that decide they don't want to go to that residential base college and decide to take that first year at your community college or online. And a good example of that is just within Chegg, the gentleman, Nathan Schultz, who runs all of our learning services, all our subscription businesses. His son graduated high school this past year this spring. And he decided he didn't want to go back to the East Coast, the residential school and he enrolled in Southern New Hampshire University classes for freshman classes. So we think those forms of learning are being benefited where 4 year residential schools are likely to be disadvantaged as a result of COVID.

Yes. One of -- I think one of the angles, to -- when you look at your business model, which is users times price, I just want to drill in to both. I think you have 3.9 million users, but you said there's a potential pool globally of over 100 million users you could go after. So it seems like penetration is pretty low. And then on price, I know that you have never really intentionally raised prices, but you are offering another bundle with the study pack from $14.95 up to $19-plus. So if you can just describe both inputs here, it seems that both have room to grow and anything else we should consider on both users and price.

Yes. So a couple of the things. Up until really the beginning of last year, our primary focus was U.S.-based college students. And to some degree, at least from a subscriber standpoint and to some degree, high school students. And I'm talking about Chegg study. When you look at our writing tools products, we have 30 million people there, and that goes high school, middle school. But that's a freemium service. The vast majority of our subscribers still are on Chegg study, which is U.S. -- which was U.S. college based and, to some extent, AP students in high school. But what we've seen since the -- and that was just U.S. and so what we've seen as we've entered the international markets is that our TAM as increased just almost exponentially. We now believe the number of students that are available for a check subscription are something north of 100 million. And we really saw -- and while international continue -- is obviously still smaller than the U.S. base, it is the fastest-growing part of our business. And it accelerated significantly when COVID happened. And like I said, we saw countries that we didn't expect to see -- well, countries, we saw students in countries that we didn't expect to see engaging with the Chegg platform. I mean, one of the things that -- before each earnings call, we always sit down and take a look at how the business is doing. And we were just -- I was shocked at least how many students, for example, we had in Turkey and Saudi Arabia and South Korea. And so yes, we're seeing a significant acceleration there. So we believe there's a lot of runway ahead of us. There's even a lot of runway in the U.S. If you take a look at our subscribers last year around 4 million. Most of those were U.S.-based subscribers. We believe we've got a runway to at least 10 million subscribers in the U.S. So we've got a ton of runway on both sides. Regarding the bundle, a little different Chegg study pack, which is what we kind of call our bundle, introduced in January to all of our new and re-subscribers, the take rate is doing better than we thought. So basically, the people taking the $19.95 version doing better than we thought. It's even better outside the U.S. And so what is the Chegg study pack? For those that are not as familiar, Chegg study pack is taking our Chegg study, our flagship product and adding our writing subscription and our math subscription, bundling it together, the value is generally -- the value a la carte would be about $35, and we're offering in $19.95. So the take rate has been better. However, the -- but having said that, what you see in the bundle today isn't the end game for the bund. We anticipate that over time, we will offer different versions of the bundle. So you can anticipate that we will over the next few years, start testing different versions and different price points. So it wouldn't be unusual for you to see us test something like $14.95, $19.95 and $29.95 or some other number. And so we're just at the beginning of understanding what bundles work, and I would anticipate that over time, you'll see us have multiple bundles. And then potentially regionalize bundles as we put -- as we develop the technology to do regionalized bundles that we can't do today.

Why do you think this study pack has had such good traction outside the U.S.?

I would like to tell you, I knew, I don't. Most of the testing was -- in fact, all of the testing was done on U.S.-based students. And in fact, the study pack has done better inside the U.S., we're even asking ourselves the question, why is it doing better at volume than it did at testing? So -- but the take rate, as we call it, is doing better is doing better outside the U.S. That's something that our team is in on to better understand that. And as you can imagine, as we move forward, we'll be doing more testing with our international students, whereas the original test of the bundle was primarily U.S.-based.

So when you think about -- everyone talks about, kind of, the rule of 40. I think you were pushing the rule of 60 with 30% growth and 30% margin. Now you got to a 60% growth rate and 30%. So you got a 90 on your Jersey. We're not sitting here talking about sustainable growth rates, 60%, maybe in the short term. But just when you think about the margin and everyone says, well, are you going to lean in hard now given the growth. But I think you've been pretty clear there may be not you may not -- you may have a lot of the investments already in. And so therefore, we continue to see ongoing margin improvement going forward. Can you just clarify that statement? And is that your relief?

Yes, yes. We've -- and you've been with us a while, and I know many of our shareholders have been live a while. But if you went just back 5 years ago, we were a breakeven -- on an EBITDA margin perspective, we were just a breakeven company, and we made a strong commitment that we felt we'd be a 25% EBITDA margin company by 2018, and we exceeded that. We are now in a position where we -- and I often get the question, it's right. So what do you think your steady state EBITDA margin is going to be? And the truth be told is we're not even close to steady state as a company. So what we believe is that as we continue to grow the top line. And as you know, the incremental margin for incremental subscribers is very high. Our marketing costs are low. The content -- if I spend $10 million on content, whether or not I have 4 million subscribers or 10 million subscribers, that content cost doesn't change. So that incremental margin is super, super high. So as I think about our company for the next several years or at least the foreseeable future, I would anticipate that we continue to see margin expansion. I would continue to see us making some significant investments. We talked about -- on the last call about leaning in. We're actually leaning in and investing more now than we had anticipated in the first half of the year. We're leaning -- and where are we doing it. I've already talked about device management. We accelerated device management. We're accelerating some of the efforts that we thought about internationally, can we do individualized bundles, differential pricing, potentially adding more international content, certainly investing more in international marketing. And so there's a whole bunch of things decided to lean in, and yet, we still are anticipating expanding margins even in this year. And so yes, so our -- once again, I'll just reiterate. Our belief is we continue to see expanded margins. But we're certainly not starving the business. We are investing heavily in our future growth initiatives.

One of the larger deals, I think you've done is with Mathway. You had been, I think, trying to date them for quite some time and you pulled off a successful marriage. When you think about -- you had mentioned that math is a global language in a sense that Mathway can bring you into new global -- new international markets but also, kind of, brings you downstream into the high school market. And it seems like this is a real TAM enhancer, a big opportunity. Can you just talk to the -- what this means to you and the company?