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

Welcome, everybody. I'm Aaron Kessler, senior Internet analyst at Raymond James. Pleased to have with us for our next presentation, Chegg. And with us from Chegg today is Andy Brown, CFO. And Chegg has obviously been one of the big beneficiaries of COVID of -- and more of a shift to online learning, where we're starting to see a lot more of. So maybe just maybe a brief overview of Chegg, and then we can go into some of the questions. And obviously maybe just the first question would be how does the pandemic kind of change, if you have a sense, long-term consumer behavior in terms of online learning? I'd be interested to get your thoughts around that.

Yes. So maybe just a quick update on Chegg and for maybe some of you that are as not familiar with our company. If you kind of go back, there's really a founding and a refounding of Chegg, in my mind, right? The founding was the textbook business. Not planning on talking much about that. In fact, that was all I'm going to talk about it. And then the refounding of Chegg happened about 11 years ago when Dan Rosensweig came onboard. And his vision was, was to be able to deliver, direct to consumers, affordable online educational content and -- right? If you think through that just a little bit -- and create a platform and the brand that we have already -- that we have done. But when you think about that, it's very different than what the traditional education systems were, which were really through the institution. And so we really broke ground by going direct to the students. And so when you fast forward to where we are today, we really have 2 core -- well, one core business and one fledgling business. One is what we call academic learning, and that is a subscription business where we literally have millions of -- we have 40 million users and millions of subscribers around really 3 products, right, 3 subscription offerings. One is Chegg Study, which is $14.95, and that's the core of our company today, which involve -- which is -- to think about Chegg Study more like Amazon Prime. When Amazon Prime started out, it was 2-day shipping. If you think about Amazon Prime today, it's much more than 2-day shipping, but that's maybe the least thing a lot of people use. It's got video, original content, music and all of the things that go on. Chegg Study is the same way. We started out as textbook solutions. Then it became expert Q&A. Then it became videos. And then it became -- we added business content. And then we added practice test and assessment. So we -- that's how we built Chegg Study into this massive online affordable subscription. The second subscription is what we call Writing Tools. And that is we've got several Writing Tools properties out there that -- it's a freemium model. A part of it's for free. We've got about 30 million users on the combined properties. And then we offer a $9.95 upgrade if people want to upgrade. And then the third one is around math, and once again, $9.95. And we built out our own math product. More recently, we acquired a math product, which we decided to acquire for many, many years. And then the fourth thing we do is we bundled them together with what's called Chegg Study Pack for $19.95. And so that's the core on the -- I'm going to skip here, core on the academic side. When you flip to what we call the skills-based side of our business, we're just -- we're fledgling in that. We're starting out in that. We purchased a company called Thinkful a little over a year ago. You would expect to see what we did in the subscription side where we -- where if you look at our subscription side of our business, everything that's in our subscription side started out as some form of acquisition, where we've been able to build upon it and grow it and to where it is today. Same thing on the skills-based side. The first acquisition was Thinkful, but you can anticipate that we will add more and more assets to that over time, like we have over the last 10 years on the academic side. And so academic learning, skills-based learning. Academic learning is at scale. Skills-based learning is at the beginning.

Great. And then maybe just on the question of kind of how do you think the pandemic has shifted maybe longer-term consumer behavior in the online learning space. Obviously, you might have some tougher comps next year, but it doesn't seem like we're -- it seems like it's still going to be a long-term catalyst as well.

Yes, I -- what we saw as a result of -- first thing is I do believe, and we've said this before, that it was inevitable that more and more learning was going to go online. It was just -- to us, it was like a no-brainer. Do we believe that has accelerated as a result of COVID? The answer is yes. And it's not just us. It's other online education companies, mostly those that are in the private markets. But what we specifically saw as a result of COVID was 2 things. And you kind of have to bifurcate them between international and domestic, right? So if you think about Chegg up until a couple of years ago, we were just domestic-only. And we've expanded beyond that, and we started doing that a couple of years ago. But on the -- in the domestic market, what became very apparent to us, once students went home from school, was how big accounts are under the bus on our platform. And one of the things we had planned for 2021 was to address the account sharing and -- with a technological solution around device management and multifactor authentication or MFA technologies, implement those onto the platform. As a result of COVID, realizing how big that was, we accelerated those investments. So as you know, Aaron, we implemented device management capability on the platform in August, where we more recently rolled out MFA technology, and that will get rolled out between now and the end of the year. So as kids go back on -- as kids went back on to campus, that ability to do proximity sharing went away. So I think the dynamic we saw in the U.S. was more so around that account sharing, maybe some that were the -- because they didn't have the on-campus help. But I think the vast majority was account sharing. And that, to me, is those tailwinds continue into '21 and '22. Because anytime somebody signs up for a subscription, they can't share with one or 2 other people. The dynamic internationally is very different. The dynamic internationally is that what the outbreak of COVID revealed to us, as kids across the globe went home to learn, was how big the opportunity was outside of the countries we were focused on. And so we have focused on 3 or 4 countries, the countries you can imagine at the beginning of the year, U.K., Australia and Canada. But what we saw as a result of COVID as people went online to get help with their studies across the globe is that we saw a critical mass of students beyond just those 4. And so that 4 has become 15 for us at this point, right? It's 15 core countries that we are now focused on, where we weren't focused on at the beginning of the year when we were making those investments. And the story I like to tell people is Tracey and I sat down with our -- the lady that runs our international business, in May, and we were just floored with how many students, for example, we have subscribed from Turkey. I mean it wasn't just a few thousand, it was tens of thousands of students from Turkey, which we would never have imagined this quickly. So what that has resulted in for us is really leaning into that opportunity. What do I mean by that? I mean by making investments to make it easier for students outside the U.S. to access our content, to pay for that content, to potentially have different packages at some point in time or even at some point maybe unique websites to make it easier for them to access those educational materials. So for example, you can imagine potentially having a .co.uk site for the U.K. students or.au site. So we're absolutely leaning into that from an investment standpoint. And we believe it gives us the confidence that we've got not just a growth opportunity in the U.S., which we certainly have, but we've got a significant growth opportunity outside the U.S. And ultimately, if we are successful, I believe that in fact the U.S. -- excuse me, the international business -- and I don't mean a year or 2 years from now, but let me just give the 10-year view. 10 years from now, it should be bigger than our U.S.-based business. So that's what we have seen.

Yes. Okay. Great. [Operator Instructions] And back to kind of talking about the market sizing a little maybe just to back up a little bit. How would you frame kind of the opportunity both in the U.S. and internationally? I think we've generally talked about 20 million or so college students. And there are 16 million, I believe, in kind of lower grades. And then obviously you have the skills-based or post-college opportunities, both U.S. and international. Maybe just how would you frame kind of the opportunity then? Where we're at roughly, maybe U.S. penetration rates? Obviously international is still much earlier.

Yes. Yes. So one of the things we started to do at the beginning of the year, I think maybe it was the end of Q1 or Q2, Tracey started to -- we expanded our -- the TAM slide that we put in our investor deck. And if you look up until earlier in the year, we would have said 36 million students, to your point, 20 million college students, 16 million in high school. And we added the international component to that. And that basically tripled, essentially, something slightly north of 100 million, which gives me the confidence that, in fact, we would expect the international business to be bigger, ultimately, than the U.S. business. So yes, so we do believe that's -- that opportunity is there. Where we are in the U.S.? I mean we're still -- I still think we're fairly early innings in the U.S. I mean our view many years ago, and it hasn't changed, is that we believe we have an opportunity to have at least 10 million subscribers in the U.S. And if you just take a look at our total subscribers at this point in time, call it -- I'm going to round it up a little bit to 4 million from last quarter, it was 3, right -- and those includes the international students. And so we still think the opportunity in the U.S. continues to be large as far as acquiring more students. And then when you look outside the U.S., we're not at a point now where we're anywhere close to the scale of the U.S., although it's growing extremely rapidly as we're expanding into multiple countries. But I do think that there's many more years of growth in the U.S. And obviously, internationally, we're just -- we're in inning one at best.

Yes. And on the international side, obviously U.S., you had a big benefits word-of-mouth marketing, kind of students kind of sharing or talking about Chegg Study. You probably don't get that same benefit internationally. You had to rely on more search marketing, other forms of marketing. And how are you thinking about leaning in more advertising on the international side as well?

Yes. And what people don't -- kind of going back to the U.S., I mean that word-of-mouth in the U.S. didn't happen overnight. We have it today. I mean it's just -- it was just -- and as you know, our ability to actually spend in marketing is limited in the U.S. because of the word-of-mouth, the brand and everything like that. But 7 years ago, it wasn't near as prevalent as it is today. But it's really, to some extent, the same playbook that we had in the U.S., is outside the U.S. and it's -- to date, it's been very successful. And that is really going into -- and it's not just keyword search on Google, but it's going into things like Spotify and things like that to do marketing. And some of that is more brand-related than it is necessarily immediate term. But we are finding significant pockets of opportunity to use paid marketing to get into those markets where we didn't have those opportunities in the U.S. And the core way we -- the way we measure that, I should say, not -- the way we measure it is very -- is no really different than the U.S., in that, if you look at the LTV, you look at the incremental CAC, it all is about the incremental CAC. It's not about the averages. And we're more than willing to spend more and more in marketing if we're getting that -- if the LTV to the CAC is a right ratio. And so there's -- to some extent -- and I -- this just kind of sounds a little bit weird coming from a CFO, but there's kind of an open checkbook for marketing outside the U.S. as long as they hit that LTV-to-CAC ratio. Because I'll spend that marketing any which day to Sunday to do that. It's not just blindly spending, clearly, but -- and we've found some very profitable scenes outside the U.S., whereas in the U.S., it's been more challenging, to say the least.

Got it. Great. And then maybe just if you can provide an update on the Chegg Study Pack as well. I think you've talked about seeing some nice uptakes the previous couple of quarters here. And I think this is probably your first -- maybe one of the first quarters of maybe a stronger push for Chegg Study Pack. And then how should we think about also within that kind of Chegg Writing and Math kind of both as part of the Study Pack and also kind of maybe marketing those as separate products as well?

Yes. So we introduced the bundle on our platform post the testing period in January of this year. It has gone much better than we thought. We're getting a bigger take rate and a larger take rate in the U.S. than we had anticipated. And the take rate internationally is greater. And so and -- but the question we often get asked, well, is that it, and are you claiming success on the bundle, then the answer is no. We're just at the beginning of the bundle. The -- I'll call it the premium-priced offering cycle. And as we speak, we are testing a different type of bundle on our platform, and that's the beauty of an Internet business. You can test stuff with a small sliver of your users. You can take a 3% to 5% sell and see how the user reacts, both not just from a take rate, but from then a retention rate over many, many, many months. And so an example of -- is that we're testing a $29.95 option, where we're offering what we're calling a Chegg Study Pack Live, which offers a bundling feature to it on our chat-based tutoring offering. So -- but you -- my point being is you would expect us to test different things over time, because our view is success -- I define success in the bundle, and I don't mean this year or next year, but let's call it 5 years from now, it's 50% or more of our students are taking a premium-priced option, right? That to me is success. And whether or not it's Chegg Study Pack or whatever it may be at that point in time or whatever price point, by the way, is -- it could be different price points. Like I said, the current test has -- it really is a test of 3. It's $14.95, $19.95 lite we have and then $29.95. And so there's going to be a lot of development around the bundle. And we'll up most likely even not just the price point, but what's in a premium-priced bundle, what's not in a premium price. I mean there's those types of things going on and whether or not you include Writing or Math or whether it's videos or -- so there's this optimization of bundle that will take several years before we get to a point where we could potentially declare success.

Okay. And are you really thinking about kind of the Math and Writing as kind of the success -- based on the success of the bundle? Or are you also looking at those as separate stand-alone products at this point?

Without a doubt, separate stand-alone products They're -- in their own right, they are contributing significantly, particularly on the Writing side, which you know is a premium product. So there's -- we have it somewhere in the neighborhood of 30 million students accessing our Writing properties, and a small portion of those upgrade to the $9.95 subscription. On the Math side, we really -- the more recent acquisition of Mathway is a big deal, right? Because they had a good and thriving business there, where we were just kind of in the early stages of ours. And we're super-happy to have made that acquisition. So that in itself can be a thriving business. And understand, the beauty of the Writing business and the Math business, whereas Chegg Study in the U.S. is primarily a college-based subscription, Mathway and the Writing Tools going to high school and to middle school, right? I was -- it was interesting. I was interviewing a candidate just the other day for Chegg -- for one of our open positions at Chegg. And she was talking about that her freshman in high school is using Mathway. That's how he knows Chegg, and it's such a great solution. And so that's why they could be successful beyond the bundle is because they actually go deeper into the demographic than necessarily Chegg Study, which really is college and maybe seniors in high school. So yes, they -- as a stand-alone business, they're absolutely thriving stand-alone businesses.

Yes. Great. And then you talked a little bit about the kind of account sharing and kind of your progress in shifting more to digital management for kind of account sharing. Can you just provide an update maybe where we are against that? Is that still going to be a driver of maybe incremental users in '21 and '22? Or is that largely gotten through kind of the account sharing issues?

No, no, no. I think that when you think about account sharing, I think that benefits us, that the tailwinds there continue into '21. Because every new user that comes onto the platform that actually subscribes to Chegg Study doesn't have the ability to share anymore. So I think those tailwinds do continue. I think clearly we had a big tailwind as kids went off-campus and continuing, as we've implemented some of the technologies that I talked about earlier. But I do think those tailwinds continue as we get into '21 and '22 and as we potentially refine some of the conditions around those technologies.

Got it. Okay, great. And then maybe just shifting quickly to a skills-based learning as well. Obviously, you've acquired Thinkful. Obviously, there's a lot of other skills-based learning platforms out there. And we've seen some, I guess, multiple, obviously, expansion recently in this space for obviously other digital learning platforms. How are you thinking about the progression of your skills-based learning? And do you have the right assets? Or should we expect maybe some additional acquisitions or organic growth initiatives on the skill-based side going forward here?

Well, you'll certainly see organic growth as we start to expand the offerings that we have with our current offering, which is Thinkful. But I look at the skill space very much like I look at the academic space. And if you just kind of go back to the academic space, 11 years ago, we were a textbook business, right? That was -- that's all we did. We rented textbooks. And you kind of fast forward to where we are today, we're -- while we have textbooks, we are a subscription-based company. And all of those subscription basis came through some form of acquisition. So we kind of know this road map. And so as I look at that relative to skills-based, you would expect that it would -- 10 years from now, we're likely to have more than one skills-based offering; in fact, I would argue 2 years from now or 3 years from now. And it's almost certainly going to be through acquisition. I think that is something that we do really well, where we take a core business or technology and we're able to drive -- basically, I'll call it growth equity investing, as it were, versus VC investing. And so yes, I do believe what -- that when we have this dialogue 5 or 10 years from now, we'll have multiple offerings in the skills space at multiple different prices. If we're as successful as we expect to be, we'll be multi-hundred million dollar business, just like the academic space is. It's just that the skills space is 10 years behind where we -- where the academic space is -- where we've got scale in the academic space, we're just starting out in the skills space. So it's -- to me, this is -- I wouldn't even call it inning 1. It's year 1, whereas we're in year 10 on the academic side.

Got it. Okay. That makes sense. And then just maybe quickly also, we've got a question from an investor. When we think about kind of incremental EBITDA margins, you've talked about, I think, historically, some of your higher-margin digital services can be 80%-plus, maybe up to 90%...

Yes.

And yet maybe we're not seeing as much flow-through on EBITDA. Still nice flow-through. But maybe just what are some of the incremental investments you're making to the extent that we're not seeing maybe more flow-through on the EBITDA side?

Yes. So I mean there's always a balance when you're building a company, right? I mean there's -- if we were owned by a private equity firm today, my guess, it would be much more profitable, because we would make less investments, it would be more about cash flow. And so could -- would we see -- would our EBITDA margins be higher if we didn't make the investments we're making for those future growth opportunities? The answer is absolutely yes, we would. We maybe wouldn't have invested as aggressively on international. We maybe -- and so -- because we're not benefiting from some of the core investments yet, the technological investments that won't come out until '21 or '22. So the answer is yes, we could be more profitable. And it's always that balance. And I think the balance that we have achieved thus far, I think, is right on. And that is we do believe that there's many, many years of incremental EBITDA margin expansion. We're not even close to a steady state, trust me, not even close because of the incremental margins that we get on each new subscriber. And the challenge then as a management team and as an executive team and as a board is how much do you want to deliver in EBITDA margin expansion and how much do you want to be making sure you're investing so you can continue to expand EBITDA margins. And so we -- I believe that, that balance is right on. I think that we would be foolish if we didn't make those investments so we can go after 15 countries versus only 4 internationally. And I think, long term, truth be told, is our shareholders are going to benefit much more by this approach we're doing, where we're making those investments while those continued margin expansion. Like I said, I don't think we're even close to steady-state margins, and we've got many years of margin expansion.

Got it. Great. And then just maybe quickly on partnerships. Can you just talk about maybe the success of some of the partnerships such as Sallie Mae thus far? And maybe how are you thinking about partnerships in the international market as well?

Yes. So Sallie Mae has been really successful. You will recall, we did a 1-year deal to test it out with Sallie Mae. And then it became, I think, it's a 3-year deal. I'll correct myself if I'm wrong. I think we expanded that to an extra 3 years. So that's really gone well. And partnerships, we're more than happy to partner to distribute our -- particularly distribute our subscriptions because of the high-margin nature of those subscriptions. And we try to do that in other ways. Like I think I've mentioned -- yes -- if you were on an earlier call with me, Aaron -- and you remember back, I don't know, 5, 6 years ago, we did a partnership with Blackboard. And yes, truth be told, it just didn't work out as well. And so there are some that have worked out really well like Sallie Mae, and then some that haven't worked out so well. But yes, we will continue to look for opportunities to distribute our products just through partnerships. International scenario where, of course, if we could accelerate our deployment across the globe through partnerships, we would love to do that. Haven't seen a lot of opportunities yet on that and even potentially do acquisitions to help accelerate internationally. But once again, there's not a lot of assets out there in the education space, whether it's in the U.S. or whether it's globally that go direct to the student. I may say this, maybe the exception being China and India, where there are assets out there, but that's not -- those are not countries where we're -- where it's a big focus right now. But yes, if there were opportunities to partner or opportunities to acquire assets where we could accelerate our growth, we would do that. Just not seeing a lot of them right now, but that doesn't mean we're not open to it.

Got it. Great. And then just maybe one question, I'll try to limit to one on required materials, or maybe one and a second part. The -- if you can just provide an update on the -- maybe the status of the -- or how the FedEx relationship is going? And second, are we seeing accelerated adoption of more digital required reading materials as well?

Well, yes, a couple of -- yes, good questions, although required what? No, I'm kidding. I'm kidding. So FedEx has done really well. We actually -- we're ahead of where we felt we'd be with FedEx. And so it's -- that's -- that transition has gone exceedingly well. As far as the digital adoptive, absolutely, we're seeing -- this is an area where it kind of befuddled us for many, many, many years why we weren't seeing a larger adoption of digital content. And a big part of that was around pricing. One of the innovations we introduced in the last 12 months maybe, and I -- truth be told, I just don't recall exactly when, is where we did the monthly subscription, right? So you don't just have to -- you don't have to just get a subscription for the semester for 90 days or 120, you can do a monthly subscription. And that seems to have gone -- that -- not seems, it has gone well. And so we are seeing increased adoption of digital content, which is great, right? I mean there's just no reason that the required materials business...

Most of the publishers have brought down pricing to...

Well, that's the other thing, right? So one of the other innovations we did with the publishers, thank you for bringing that up, is that we went -- on the physical side, we went to a consignment model with publishers, right? And so they started to participate in the physical rental model. And for many of those titles that they gave to us for consignment, if they're going to price the textbook, call it, $35 for a semester, then they would price the digital book at $35. And so that -- so they brought that digital -- cost of that digital book down to be in parity with the physical rental, which was a very different model for them. Whereas we'd rent a textbook for $35, but the digital subscription would be $90. Well, of course, the student is not going to spend $90 when they can get a physical textbook for $35. And the dynamic of the consignment has helped that transition also. And that is -- that's a credit to the publishers for actually waking up and getting onboard and recognizing rentals around here to stay and then making the digital option more affordable. And once again -- and as a result, we are definitely seeing an uptick in digital adoption of textbooks.

Great. Anything we did not cover, Andy? I know we covered a lot.

No, I don't think so. I think -- like I said, I mean, I think we're in a great position. I mean, once again, we're a little bit unique in the education space in the sense that there's not -- there's very few direct-to-student companies. And if they are, they're typically private companies. And so we have that advantage of being at scale, direct to the student, and we're certainly benefiting from it.

All right. Great. Well, thank you, Andy from Chegg, for our presentation today. It's great.

Thank you.

All right. Talk to you soon.