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

Good morning, good afternoon, good evening, everyone. Thank you all so much for joining us today. My name is Nithin Pejaver. Along with my colleague, Tom Singlehurst, we are responsible for looking at the educational services sector at Citi. It is an absolute pleasure to welcome Andrew Brown, the CFO of Chegg, one of the companies that has probably had a ringside view of the ongoing COVID-driven disruption of the higher education space. Andy joined Chegg back in 2011. And before that, he's been the CFO of 3 publicly listed companies. In all, he has over 25 years of experience in the financial sector. Now before we dive into the Q&A, a couple of points to mention. First, although the session will be moderated by me, I do want to make sure that it's as interactive as possible. So if you do have any questions, please either enter them in the question box to the left of the video screen on the webcast. Alternatively, please e-mail them directly to me at nithin.pejaver@citi.com. That's N-I-T-H-I-N dot P-E-J-A-V-E-R. And I'll try to get through as many as I can. The second point I'd like to make is there are several disclosures that should appear at the bottom of your screen. If for whatever reason, you can't see them, please do reach out to us, and we'll try and e-mail a copy of those disclosures back to you. With that, let's dive in. Andy, thank you so much for joining us.

My pleasure.

So maybe we could start off with a little bit of a background about Chegg, and we could use that as a launchpad for Q&A.

Yes, that would be great. So if you think about Chegg, we are a very different company than most of the education companies that you'll see in -- certainly, in the public sector, right? Most of the traditional education companies and even some of the newer edtech companies pretty much drive all of their revenue, not direct to the student but through the institutions or something indirect, and then it gets directed to the student. What we state our claim to, and I believe we're the only publicly traded companies, we go direct to the student. And so when you think about Chegg, we've got 40 -- approximately 40 million students that we service across the globe, down 2 distinctly different paths: one is the academic path, which has been the traditional route that we -- which is how we started as a company, and then more recently, down the skills-based path. So let me kind of walk you down the core of our academic path, and we've got really 4 key services in that path. And it's -- and once again, everything is direct to the student. So you've got Chegg Study, which is our flagship product primarily for college-aged students. It's $14.95 a month. It's a subscription-based product. It allows students to access the platform. There's about 40 million pieces of uniquely curated content that we curate and develop ourselves that the student can access along multiple different -- for multiple different reasons, things like Textbook Solutions, Expert Q&A where they can actually ask questions on the platform. We have video-based content. Students that want to assess their skills or their competency can do assessments. They can also do practice tests in advance of their actual tests. And so that's our flagship product, Chegg Study, $14.95. We have -- also, we have what we call Writing Tools. And those -- the Writing Tools are multiple web-based properties where approximately 30 million students access on an annual basis. It's a freemium model, and so there's a part of it that is supported by ads, and then there's a subscription model. The subscription itself is $9.95 a month. And essentially what all of the properties do, it allows the student to upload a paper. They will identify the citations that are needed and create a bibliography. That's the free component. And then the student can upgrade if they want help with grammar, sentence structure, plagiarism, things like that. So that's the $19.95-a-month subscription along with the ads. And the third subscription business that we have or a business line that we have is what we call the Math Solver -- Chegg Math Solver or, more recently, the -- we made an acquisition in the space called Mathway. And that's primarily a subscription-based business. And once again, the bulk of the subscriptions there are $9.95 a month. We also take all of those subscriptions together, and we bundle them together, something that we call the Chegg Study Pack. So Chegg Study Pack takes all of those 3 subscriptions, bundles them together and offers them to the student for $19.95, so a very significant discount for taking the Chegg Study Pack. So that's the core of our company today. And then the fourth service that we have, which is our -- which is kind of the legacy service, it's how the company started, is around textbook rental. And we offer really 2 things there. We offer physical textbook rentals, and then we also offer eTextbooks rentals. And so those are the core 4 services that we have on our academic line. And more recently, we started -- we -- about a -- actually, about a year ago, we kind of tipped our toe into the skills-based learning, which we believe is going to be a very, very big market. And it is a big market today, but -- and that instead of helping somebody down that academic route, what we're helping students do there or learners do there is a specific skill that's employed -- a specific employable skill. And that -- while that's a small business today, we do believe over time, that is going to be a large business. But once again, we just started in that space with the acquisition of a company called Thinkful about a year ago. So that's Chegg, 40 million students across the globe. In the neighborhood of probably 6 or so million of those students are actually paying for a service, mostly subscriptions and some rental through our textbook business. So hopefully, that's -- it kind of gives you a sense for what we do.

That's great. That's a great introduction. So I'll get to Thinkful in a bit, but maybe we can start with the education services side of the business. Now Chegg has always been a prospering company, but the growth rate has been propelled to a different orbit in 2020. And there are a number of underlying drivers for that. So just sort of thinking about Chegg Study itself and particularly in the U.S., historically, account sharing has been an issue. And I suppose the first physical separation of students because of the pandemic has perhaps mitigated that issue in 2020. Can you talk about -- can you quantify how big an issue is it? How many people who are actually using the service without paying for it? And can you also maybe talk about some of the more proactive measures that you've worked on since August of this year?

Yes. So we've known for many years that students share accounts, and that's -- whether it's our subscription or other subscriptions. And one of the things we did intentionally many years ago was to decide, let's -- we wanted Chegg Study to just become ubiquitous on campus, and so we just didn't do anything about it. It's something that we've started to address last year, I guess it was, but on a manual basis. And the intent had been that we would have come with a more technological solution in 2021. And as far as how big it was going to be, I don't think we've realized how big it was until COVID came, the impact of COVID back in the middle of March. And what we believe we saw in the U.S. specifically was as students went off-campus, that ability to do what we call proximity sharing kind of went away because you're actually not around your fellow students, right? It was a lot easier when you're on campus to say, "Hey, can I use your Chegg Study account for an hour or tonight or something like that?" And so that went away. And it did -- we did see an acceleration in new subscribers as a result of that. What that also did for us was it also informed us that -- it informed us to accelerate the development of what we call device management and MFA, multifactor authentication. Because as kids go -- if when kids do go back on the campus, and they really haven't gone back on the campus at this point, is we wanted to take away that ability to proximity share again. And so we implemented device management in the middle of August, I think August 17. And that limits the number of devices that students can access on a monthly basis when they went with their subscription. And just to put it into context, we had subscriptions where we would see 10, 20, 30 devices access of subscription in a given month. I don't know any kids that have more than 3 devices, right? I mean 3 is a stretch. But when you got 10, 20, of course, they're sharing the accounts. And so we didn't have an ability until the middle of August to be able to limit that. We now have that ability to limit that. And we are doing that. And that -- like I said, that got implemented in August. And we believe that just pays dividends as we -- over the next several years because every time we get the new subscribers subscribing, they can't do what we've seen happen in the past where you can add -- do 5 or 10 or many -- we've seen many more devices accessing the account. So that got implemented in August. Yes. And so we have the things in place that we believe will eliminate the vast majority of account sharing that we have seen over the last several years.

But maybe just a couple of sort of ballpark number to the issue, so for example in 2019, you had about 4 million services subscribers, of which I would assume an overwhelming majority are Chegg Study subscribers. So in relation to that 4 million number, I mean what's your sort of guesstimate maybe?

Well, and that's a problem being it would be a guesstimate. We've had a couple of other folks out there make estimates. I think it's fair to say that it's millions and not hundreds of thousands, right? So I mean I don't know the exact number, but we're pretty certain it's millions. And the challenge you've always got with that, right, is -- and the way we looked at it internally was, you've got your subscriber base, kind of the core subscriber base, and you've got people that are active users that are not subscribers. Then you've got casual users. And my guess is the folks that we won't capture as part of the device management are those casual users that -- maybe they only used it once a semester or twice a semester around finals or midterms and things like that. But yes, I think there -- I don't think there's any doubt this was in the millions, not in the thousands or hundreds of thousands.

Understood. Then we have an investor question here, which is actually related to the Study issue. And the question essentially is, so impact of the proactive measures that you pushed in the third quarter for the incumbent nonpaying users, if I may, is the term. Is it going to be a slow trickle of people shifting over to paid users? Or is it going to be immediately that, "Look, I value the service. I'm not able to use it anymore," so you'll have like, X percent of the millions who are not paying for it immediately becoming Chegg subscribers?

Yes. I think you saw that in -- when you looked at our Q2 and Q3 results, I think you saw that. We were north of 60% subscriber -- year-over-year subscriber growth. So I think those people that were relying upon Chegg to help them through -- with their academic services, when I say relying, not the casual user, but relying on it and not paying for it, subscribed to this -- are now subscribing to the service. So yes, I do think that certainly happened and continues to happen. We will continue to -- as you've seen in our most recent results, we continue to see a pretty robust subscriber growth.

Got it. And I'll ask you a broader TAM question in a bit. But in the context of Chegg Study and what we're discussing right now, between your paying users and the nonpaying users, I mean is that -- I mean so have you sort of saturated the U.S. Chegg Study addressable opportunity or other people who are not yet exposed to the service?

No, we -- it's interesting, right? So we look at this a lot. And we believe -- when we believe this for some period of time that we see a clear path to at least 10 million subscribers in the U.S. And we're not close to there yet, as you know. I mean we have 3.7 million subscribers at the end of last quarter. So we believe the U.S. market, it continues to be a growth market for us. And part of it, and you've seen -- one of the things I didn't talk about in the intro was when you think about Chegg Study, I always like to call it, it's kind of like Amazon Prime, right? I mean we add more and more capability which makes it more and more attractive to a broad swath of students. There's more value. I mean Amazon Prime, when it first came out at least in the U.S., it was 2-day shipping, and it was great, right, get 2-day shipping on anything. But Amazon Prime today is much more than 2-day shipping. Everything -- they started doing reruns of TV shows, then original content, then movies, then original content, then Amazon Fresh, Amazon Music. So Prime has become this much, much more robust and bigger. And likewise, Prime got many, many more subscribers to it. Study is the same way. What I didn't talk about is Chegg Study started out as Textbook Solutions only. If you went to Chegg Study 7 years ago, it was Textbook solutions only. Then we added the ability to do Expert Q&A. Then we've had the ability to learn via video, if that's your modality of learning. Then we added the ability to assess yourself. Then we added the ability to do practice tests. So you kind of -- so we're doing the same thing with Chegg Study. And as we add more and more capability, we -- and more and more value for the same price, we haven't increased prices, we believe it attracts more students. And you can imagine that we will continue to add more and more capability to Chegg Study. So yes, I think there's a clear path to 10 million students in the U.S. We're not close to being fully penetrated there. And as you know, we more recently started to expand internationally, which opens up a whole -- even a bigger TAM than you've got in the U.S. And so we're -- we believe we've got a multiyear high-growth path ahead of us.

All right. And that leads very nicely to an investor question that we have here, which is essentially, obviously, international improvements. The international subscribers have been one of your growth drivers since the pandemic struck. So can you talk about which countries have been most promising and what you're doing over there?

Yes. So we started focusing on international at the beginning of 2019, right? So we're about 2 years into this. And while we had international subscribers prior to 2019, it was kind of a little bit by accident, right? We weren't actually doing anything to get them. They were just finding us because we're web-based. And it's -- if you're -- regardless of where you live, you can always -- you can access any website. And so I kind of -- it's a term we talked about internally, kind of a little bit brilliant by accident. But what we started at the beginning of 2019 has been intentional about our international opportunity. And it was everything from putting the right core technologies and systems in place, just simple things like being able to do multi-currency in our core systems to having unique content when there was unique content was needed for international customers, to investing in marketing, which we haven't done before. And we started to focus on what I'd call the English-speaking countries, right, Canada, Australia, U.K., with the thought being is that at some point in the future, we would go -- would expand beyond English-speaking, into English-learning and then non-English-learning countries. What we saw as a result of the pandemic is that as students went off-campus and they were looking for help because the help wasn't available on campus, and I'm talking international students now, is the first place you go to, you go into Google. I need help with this. I need help with mathematics, differential equations or physics. And we saw a significant acceleration in our international business, which is very small, by the way. It was very small. And what surprised us the most was it wasn't just the English-speaking countries, it was the non-English-speaking countries. And so countries like Turkey, Saudi Arabia, South Korea, we started to see tens of thousands of students access our site and subscribe from those countries. And so what that has done for us, and we talked about this more on our -- sorry, sure. It is a beautiful day, if you heard that. My phone -- is -- what that informed us, and when we talked about this more specifically on our Q2 earnings call, not Q3, was the acceleration of investments for international to be able to address that growth, capture that growth and things like -- and we don't have this in place now, but developing the technology platform to be able to have unique offerings or bundles on by country or by region, to have unique pricing by country or region or potentially to have unique websites that address that country or region. So you can imagine, in the future, we'd have a .ca site for Canada or a .co.uk site for U.K. and so forth. And so we're developing all of those technologies. And then on a more tactical level, we double down on marketing in many of the countries. And so that's what we have done. That's what we're seeing. We do -- while it's still a relatively small piece of our business, it is much bigger, much broader than we had imagined at the beginning of the year. And we are clearly leaning into the investment to be able to support those students.

I'd imagine in at least some of these international countries, in-campus, face-to-face instruction might have potentially started. Have you seen any evidence of stickiness of these subscribers once they've gone back to face-to-face learning?

Well, it's -- truth be told, it's too early to tell at this point. But what I do believe and what we believe we have seen as a result of COVID is just an acceleration of what we call the inevitable. And we've said this, you've been with us for many years and we've always had -- we always have believed that it's inevitable that more and more learning is likely to be enabled by technology versus just kind of that physical on-campus presence. And we believe that -- we believe COVID has accelerated that. And so if students have accessed our services, and the beauty of our services, it's 24/7, 365, you don't have to be at a certain office hour to get help. And so we believe that there's just been a fundamental acceleration of that. So we don't anticipate that as kids go back on the campus -- and certainly -- I can tell you, certainly in the U.S., that there's going to be -- there are funding issues for colleges in the U.S., and our -- we believe what's going to happen is the things that will get defunded are more likely to be the on-campus help versus the actual class itself. And so I think a combination of conversation -- the combination of the technology and the lack of help on campus is certainly -- we don't see that changing significantly as kids go back on the campus.

Got it. In fact, we had a company called to Studiosity based in Australia. They were on a conference yesterday. And this is something similar in terms of cost rationalization and [ university center ] and support services. So that's a point being taken. But just one last question on the international bit. I recall Dan sort of mentioning on the 3Q call that the profile of the international subscribers is not dissimilar to the U.S. subscribers. Is that broadly right in terms of take-up of study for [ something similar ]?

Yes, it's not so dissimilar. What we -- and we do track this, right? We track a lot of things. The -- what subject matters are more important. And we do see some -- it's kind of interesting for us, right? If you take a look at the top 5 subjects that students access our subscriptions for, the top 5 don't change in -- up the top 5. But what's #1 versus #2 changes. But no, we don't see a significant difference. What we are seeing, and we mentioned this on the last call, is we are seeing a bigger percentage, and this would -- this makes sense because they're newer, it's newer. It was seeing a -- a big percent of our newly asked questions on our Q&A platform coming from international. So over 25% of the new -- we already have a big archive, close to 40 million archive for the U.S., but we're now seeing a -- we're seeing international students ask unique questions, which is great for us because the beauty of our Expert Q&A is that we take those questions, and then we index them in the search engines. And it just -- it's got a flywheel effect as students go on to search for help. So yes, so we are seeing that.

Got it. And just maybe shifting over to Writing Tools, the other large educational service that you have. It's mostly advertising revenue sort of product. I think in the past, you sort of articulated an aspiration to bring the share of advertising revenue in Writing Tools [ to be ] 50%. Can you maybe talk about how far away you are from that target?

Well, it's interesting, right? So the genesis of our Writing Tools product was an acquisition we made about 5 years ago called Imagine Easy Solutions, or IES. When we acquired that company, and it was -- when we acquired that company, about 85% of the revenues came from advertising, and about 15% came from subscriptions because their subscriptions -- the subscriptions they had weren't that robust. We did -- we developed a brand-new subscription that was common across all of the properties about 4 years ago, I'm guessing, 3.5, 4 years ago. And as a result of that, we've seen a significant shift towards that the split of that business being getting much, much closer to 50-50 as far as ads versus subscriptions. And it's not that the ads aren't growing, they're just not growing as fast as the subscriptions. And what we found was, if you really give the student a robust subscription product, they're more likely to take that -- more likely to spend that $9.95 versus just doing the free citations and bibliography. So I would expect, as I look at the Writing Tools business, if we're having this discussion 5 years from now, I don't think there's any doubt that the vast majority of revenues coming from Writing Tools are likely to be from the subscription side versus the ad side. Yes, I don't think there's any doubt. It's certainly moving in that direction.

Understood. And that sort of leads me to an investor question that I have here. And the question essentially is, can you talk about your TAM, your addressable opportunity and how that has changed pre-COVID and as of today?

Yes. I don't think it's changed at all pre-COVID and post-COVID, right? I mean as we started to expand -- once we start -- once we made the decision to expand internationally at the beginning of 2019, the international -- we had about -- there's about probably addressable market in the U.S. from a paid customer standpoint, not a user, right? So I mean we have 30 million students that access our properties, mostly in the U.S., but I'm talking about paid students. It's really probably around, call it, 36 million students if you go all the way down into high school. And we do have high school students on our platform. And then when you add the international markets, you get slightly north of 100 million students that really legitimately could -- we could -- could be paying customers on Chegg. And so has that changed since pre- versus post-COVID? Not really. I'd say the ability to capture that market has certainly accelerated, right? We've made it very clear. The thing that has surprised us the most is, if you -- if we looked at the beginning of the year versus where we are today, it's been on the international side of the business. And in fact, if you look at the business in total from the beginning of the year to where we are today and where we're going to close based upon my guidance, we're probably about a year ahead of where we thought we'd be, right? We're about $100 million of revenue ahead of where we thought we'd be at the beginning of the year, and we're about 1 million subscribers. And so we're about a year ahead of where we thought we would be. And it's a combination of 2 things. We talked -- that we've already talked about. One is on the account sharing in the U.S. And the second thing really is the acceleration of our international business.

And just sort of going back slightly, when you talked about the 10 million subscriber opportunity in the U.S., was that specifically Chegg Study or the Chegg Study plus Writing Tools?

The vast majority is Chegg Study. It's not all Chegg Study, but the vast majority is Chegg Study. Yes -- or Chegg Study Pack, too. I mean I'd throw Study Pack in there, too.

Got it. So if we could maybe shift to another emerging driver of the top line, and that's the Study Pack and the potential there is for increasing the average revenue per user. Can you maybe talk about how you've been pleasantly surprised for the take-up of this bundle over the last few quarters?