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

Good day, everyone, and welcome to this next session at the Goldman Sachs Technology and Internet Conference. It is a pleasure to welcome back Dan Rosensweig, President and Chief Executive of Chegg, to this conference. Welcome back, Dan. Just a quick note before we get started. [Operator Instructions]

But Dan, perhaps if we start with a couple of questions to get us kicked off. For those in the audience that are new to Chegg, new to the Chegg story, can you start off by giving us a bit of a brief history of where the company has come from and also some of the key product offerings to its customers today?

Sure. I'll try to keep it brief, but it's been 11 years so a lot has happened, particularly in the last year. So Chegg is a platform company that uses technology to enhance students' ability to master their subjects, to learn, to get better grades, to graduate, to learn job skills, to get jobs, to get internships. So imagine a scenario where everything you think a university should be offering a student, but they're not. And our premise is to put the student first. So everybody in the education industry prior to Chegg arriving on the scene, focused on either the institution, the professors, sports teams, everything other than the student itself. So Chegg started out as a mission to put the student first. And so everything we offer is to help students master, deal with, get rid of giant pain points in their journey. We started out as a textbook rental company. Now it's a teeny part of our business, and we continue to offer it because students who value it, but it's not the real economics of our business. We have a series of products that are around homework help, in the largest writing product, largest math product, largest overall homework help product. We have a new bundle. So we try to keep a low price, incredibly high quality because it's all software. We have exceptionally high margins, and our growth continues to accelerate. A lot of people think that Chegg accelerated because of COVID. In some ways, we did. In some ways, we didn't. We've always bet on the inevitable, which is we believe that there are more students of every age who are going to need to learn more that are likely going to do it online, that are going to likely have to pay for it themselves and that they're definitely going to need help at scale and incredibly high-quality, on-demand because they're going to be using the internet. And so everything we do is with that in mind. And you can look at the results and see that the demand for what we do is extraordinarily high and only getting bigger and now becoming global.

Great. I think that was a great overview for what I think has certainly been quite a long journey over the last 11 years. Clearly, the education landscape has seen significant disruption from the pandemic. What are the reflections that you have on what the likely lasting changes are going to be to the market, perhaps differentiating between the different behaviors around the students, the professors, the institutions? And what does that mean for Chegg?

So it means good news for Chegg investors and Chegg itself. We hope that it means great news for students themselves. So think about the education industry, the way you would think about all industries that fought the transition from off-line to online. Every one of those companies suffer dramatically. Institutions are the same. They've been refusing to invest in technology, unless the technology was to make the professor's job easier, like Blackboard or like these learning systems that automate the tests that they do or automate the curriculum that they do or automate the grading that they do. Nobody is really focused on what is the needs of the student. Well, what the pandemic revealed was a lot and not a lot of it good, which is there's clearly 2 economies. There's the tech-enabled economy, and then there's the service economy. The service economy got crushed. The tech-enabled economy continued to grow. Companies sort of break into 4 buckets. Bucket 1 is business was terrible before the pandemic, and the pandemic just accelerated it. And you can think of those as retail stores that we don't think are going to come back. Then there are companies that were doing well, and the pandemic hurt them. But post pandemic, they're going to have a V-shaped recovery, and I'm on the Board of Rent-the-Runway and they're an example. Their growth was amazing, then of course, nobody could go out and nobody would use them. And then every time a city opens up, they -- you can see their growth spike. So it's an amazing company run by a phenomenal CEO. Then there's a category that Chegg falls into, which is we think is the best category. Obviously, as the CEO, that's the category you prefer to be in, which is companies that were doing really, really, really well before the pandemic, and the pandemic just accelerated their business proposition. So we were already growing greater than 30% a year. We were already doubling our EBITDA. We were becoming the largest direct-to-consumer company. We were scaling quite nicely. We were talking about going international. But then what happened during the pandemic was when every student had to leave campus, two things happened. One, the account-sharing efforts that we were working on actually showed up nicely in our business, which is when students couldn't proximity share, which is not the same dorm, not the same room, not the same campus, they ended up buying it themselves because they know the value proposition. So that was a lot of our domestic growth. Then we saw increased domestic growth on top of that because it became clear that students couldn't get any support from their schools. And what we know is the schools have no budgets, and that support is not likely to be back even when they come on campus. Then there was the international edition, which is students outside the U.S. didn't really have online tools to use. They weren't aware of it. Well, when they all had to leave campus, they went to the Internet and they discovered Chegg. And that's why you heard for the first time in our earnings call, we reveal just how big international is getting and how big we plan it to be. And it could ultimately be larger than our domestic efforts over the next couple of years. So -- and the last thing is that the need for people to have employable skills, and not just the kind of education they've been getting really became at the forefront. And so our efforts, everything that Chegg believe would likely happen was accelerated by the pandemic. And our belief is it was always inevitable, therefore, it's not going to go back. We're going to see students learning online. We're going to see hybrid. We're going to see remote only. During the pandemic, schools -- the only schools that grew their student base were the online not-for-profit schools like Southern New Hampshire University and Western Governors. While others were shrinking or staying flat, they were growing by 30%. So online learning is inevitable, on demand, high quality, lower cost. This is where the industry needs to go. It's where it's going to have to go. It's going to create a lot of pain for a lot of institutions that refused to invest in technology and didn't want to believe that this could happen. The same way newspapers didn't want to believe there was an Internet or black car companies didn't want to believe that there was going to be an Uber or Walmart or other retailers didn't believe there was going to be an Amazon or media companies didn't believe there's going to be a Netflix. This is inevitable. Just to ask yourself, are people going to need to learn more over the course of their life? Are they going to likely have to pay for it themselves? And are they going to have to likely do it online when it's convenient for them? And we believe, yes, and that's what Chegg is built to do.

Great. And just like delving one level deeper than that. Over the course of the pandemic, how did the way that students were engaging and using your products change over that course? And has that sort of driven you to rethink your business in any way? Or just sort of accelerated, I suppose, your existing kind of thoughts?

It definitely did the latter, which is the need for more content and for global content and for translation and for being more -- even more responsiveness with our return of answers, even though our database is in excess of 50 million recently asked questions. We got as many as, I think, 17 million new questions last year on top of the database that we already have. So really, all it did was accelerate the inevitable as opposed to change our business premise. Because this is what we built for from day 1. That's what software companies and platform companies can do. We can scale up when the opportunity present itself, and we did, fortunately. So I think the only other things that -- I don't think it's changed our mind, but it really has moved up the prominence of us being more aggressive in the skill space. The fact that 25 million people just domestically, forget globally, lost their jobs because there are industries that may or may not come back or technology has been replacing that, but we thought we had more time and being able to build out a leg of our business, which is really learning to earning. How do we do it where instead of 4 years or 6 years, where you have to go to it and take summers off, how do we make you employable in 6 months affordably, where you're ready to go and employers want to hire you? And that is the next big phase of growth and learning, we think.

Great. And I definitely want to delve into skills a little bit later. But maybe just to, I suppose, zone in on the Chegg Study Pack first. Can you talk about what momentum has been like here? And how we should think about the take rate and other kind of key metrics that you look at, specifically for the Chegg Study Pack?

Yes. So for those who haven't been following Chegg, the 2 primary services, we offer math service through Mathway, which was a great acquisition, which is growing faster under us than it was on its own. We have the largest writing product in the world called EasyBib, over 30 million free users. It used to be ad-based, now it's ad-based and subscription-based. And then the core business we have is Chegg Study, which has been $14.95 for 10 years. We have not raised the prices. So the plan was how do you raise the ARPU. And the way you raise the ARPU is you get higher renewal rates, you get them to stay longer and you get them to start earlier. And then when you've done that, the next step is instead of raising prices, which we know we have pricing power to do, but since students have been screwed every step of the process, we didn't want to add to that. So we created something called the Chegg Study Pack, which is a bundle of Chegg Study plus writing plus math for only $5 more a month and the ability to ask a few more new questions if you have them. And the plan was pre-COVID to slowly roll it out this year. But because of COVID, we actually accelerated in '20. And we're not marketing it to our existing customers. They will continue to do auto renew on the $14.95. But what has been a pleasant surprise is that a larger percentage of new customers are taking the Study Pack than we imagined, significantly larger. And it's not just domestic, but it's international. And so what you'll see over Chegg's business in the next few years is as they become a larger part of our base in renewals, they will be renewing at the higher number. So we'll have fewer people renewing at $14.95 and a larger percent is renewing at $19.95. So you'll see our revenue grow, our ARPU grow and our profits grow. So it has been a really great hit. The other thing, as I mentioned in an earlier call today, was the funny thing that changed was time of day. Usually, Saturday morning, you got a couple of nerds and then nobody did anything on Saturday. Sunday would build really slow and then Sunday at 9:00, you get the panic study. Now you see people working all day Saturday and all day Sunday because they have nothing to do and they're working during the course of the day. So they're coming off it earlier at night and working it over the course of the day. But the amount of content they're consuming is going up. The subjects that they're using us for, we continue to expand, so that's going up. Renewal rates have been going up. So all parts of the business are firing on the cylinders that we worked hard to do over the last 11 years, but we're seeing the success now.

Great. And perhaps just taking that one step further and also touching on the international expansion that you've articulated. How should we think about that in terms of the operating leverage that this provides for the business and the sort of potential for the margin improvement as you scale, I guess, in both those areas?

Yes. So I think anybody who's been following the Chegg journey knows a couple of things. One, Andy is the more conservative one than I am. So when Andy, our CFO, says on the call that there is significant room to expand our margins, you know that we must believe that. The second thing is every year, we've been taking our margins up by a couple of hundred basis points even as we invest at a company of much larger scale and hire a lot more employees and invest in new things like skills and the acquisitions of these other companies that aren't growing as fast when we originally bought them as we ultimately get them to be. So you know we have significant room for increased margins. But when our customers are -- when a higher percentage of them were paying $19.95 versus $14.95, and the incremental cost of that customer is 0, all of that becomes increased profitability over time. So we also mentioned on this particular call that we originally planned to take up our EBITDA expansion by 400 basis points. We took it up 200 basis points because our supplier hasn't -- our logistics partner hasn't been able to meet their SLAs in terms of shipping and cost of shipping, which ultimately they will get back to, hopefully, by the end of this year, but certainly by '22. Otherwise, our margin expansion would be even greater. So there's a lot of room to do that, but we want balance between great growth, great return to our investors and future growth, so we remain a high-growth company for many years ahead.

Great. And one question actually coming in from the audience on the international sort of subscriber question. Can you talk a bit more about the investments being made to drive that international subscriber base? I guess any thoughts on sort of customer acquisition cost, how that sort of compares to your domestic market? And maybe just picking out some examples of early successes that you're seeing.

Yes. All good questions. So most people think of subscription services as how -- what your -- how did Netflix do it and how did Spotify do it, now how is Disney doing it. And a lot of that makes sense but not necessarily for us. Us is more like how did Adobe do it, which is the product that we build is universal. So whereas Netflix needs to enter another country and make incredible new creative and local languages with local actors, Chegg doesn't need to do that. The 5 major publishers have basically been writing the curriculum for most of the world for years. And so most of the content that we have is translatable to the needs of students on a global scale. So we don't have the same kind of additional expenses to grow internationally that those companies do. Our expenses are answering more questions than we expected because we have more customers than we expected and they're in different countries. So translation is an investment that we are making, and it's already included in our costs. And the second one is where they're a country that needs sort of unique piles of content, we will build that content. And that is already included in our CapEx costs. So then the third one would be marketing. Well, the good news is we're extraordinarily good at SEO, and what we SEO is relevant in every country that gets searched on. So as students go to search engines, they discover us even without ads. But because so much of our domestic business is word of mouth, that we've been able to transfer our domestic-based advertising to international-based advertising, so we're actually running millions of dollars outside the U.S. already. It's just already built into our plan. It is unique from anything else that I've ever run, which is think of us as a cloud-based software, which is wherever you are in the world, you can access us. And the way you discover is by asking a question that you have around the subject matter of the class and the course, and we've indexed in excess of 50 million of them already. And then creating awareness is what we do on a global scale with our ads. But mostly, it's on social and on search so it's not particularly expensive. So we -- where we had early success is, so we -- 2 calls ago, we said for the first time, we already have customers in 190 countries. That was unexpected, honestly. On this call, what we said was that we expect to crest, as our CFO says, 1 million non-U.S. customers sometime over the course of '21. So you're beginning to see that it went from 0 to what will be over 1 million in less than 2 years' time. So you can see it's extraordinary growth. So we are seeing successes depending on how you look at it, which is there are -- the largest countries are the English-speaking countries because that's where we started first, so Canada, Australia and the U.K. But our growth in places as small as the Philippines, but as large as the collective Arab nations, the United Arab Emirates, Saudi Arabia, South Korea. We're starting to see growth in India. So I would say that what we're doing now is we're fielding what's coming to us, and we're moving more aggressively as to what we want to come to us, and that's how we think of that.

Great. And one of the other areas of focus for investors I know has been the sort of proportion of password or account sharing that you've seen sort of between students. I mean you sort of touched on some of the actions that you've taken to change this over the course of the pandemic. But can you -- is there more to do here? Or do you feel that, that issue is mostly addressed?

Well, for anybody who runs an internet company or anybody who's ever put any of their information on the internet, there's always more to do. We look at 3 large categories of what we were trying to solve for. The first ones were the most egregious ones, which were people that were stealing and reselling. And we started working on that over 1.5 years ago and made some really great progress. And you saw in Q1, even before COVID started, that our growth rate had accelerated 3 points just by eliminating that. The second one are people that would hack into other people's accounts and then sell someone else's account. So 2 people were accessing the same account with the same password. So we hacked that by making people reset their passwords a number of times, but that was obviously not a good user experience and not sustainable. So -- and that one, we have done a really good job with the 2 things we did, 1 in August, 1 in October, about different forms of -- 2 forms of authentication and other things. So that has been really helpful. We got -- it's terrible to use the pandemic and the connection to the world fortunate at the same time because it's not fortunate. It's horrible. And I would prefer that none of this goodness happened and the pandemic had never happened. But simultaneous to our efforts to block sharers, which are our actual students, who would do what we call proximity sharing. So when you share Netflix, it's often within your own family. When you share Spotify, it is within your own home. But when you share your Chegg, it's within your dorm, within your class, within your library friends, with who you're dating. And that was the one that was the most impactful on our business. And because of COVID, everybody had to go home, a lot of the proximity sharing ended. And what we did was we moved up our '21 investment into '20 to do 2-step authentication, which locked a lot of that ability so that when people went back to campus, they couldn't go back to those habits or when new people came on to campus, they couldn't start those habits. And so we think that the combination of what we've done in COVID is what helped us a lot in the U.S. growth and continues to help us in the U.S. growth. That and the fact that institutions are providing almost zero support to students off-campus, let alone back on campus when they get there. And then international affected it differently, which is they just discovered us. It had nothing to do with account sharing. And since they've gone back to school in every place, I think, but the U.K., we've seen the behavior continue. So we've been very fortunate in that way. But I think it's a forever situation. There's more to squeeze out of it. There will always be more to block, but we feel good about the efforts that we've made so far.