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

Good afternoon, everyone. My name is Brian Peterson. I'm the lead application software analyst over at Raymond James. So still apparently learning how to work remotely in these virtual times. But we're very happy to have Chegg with us today, CFO, Andy Brown. We're going to have a fireside chat. If you do have any questions, feel free to submit them on the upper left part of the screen. We'll try to get those questions answered or e-mail me at [email protected]. Happy to answer the question. So Andy, thank you for attending. I appreciate it. So I think a lot of people are familiar with Chegg. Obviously, there's been a lot of changes, especially if you look in the rearview mirror longer term. But maybe just spend a few minutes talking about what you guys have been up to for the last 2 years and some of the strategic priorities in Chegg.

Yes. So it's good to be here, Brian. Yes. So hello, everybody. I'm not sure how many people we have online at this point. But yes, I mean, if you think about Chegg today, and I won't go back into the history, but if you think about Chegg today and if you're investing in Chegg, you're investing in a direct-to-student subscription company. That's what we do. We're a very large platform, a very large brand with our end user, which is the student. And we deliver on-demand, affordable basically homework help on the academic side, right? So it's helping students master the subject matter, pass a test and just provide them tools that otherwise wouldn't be available to students. And where -- and we do it across -- we've got 3 main subscriptions. We got -- we talked about this on the conference call 3 weeks ago, and we've got -- we had about 6.6 million subscribers. Last year, 2020, about 40 million students using our platforms, as it were, across the globe, but 6.6 million paying for them. And we've got 3 main subscriptions. And I won't -- if somebody -- if you want to talk about required materials, a different story, but bottom line, we're a subscription company. And so we've got Chegg Study, which is $14.95, which is the largest subscription service we have, which helps mainly college students as they're going through their college experience and understanding things. We've got writing subscriptions, which is exactly what it sounds like, helping kids with writing, whether it be citations and bibliographies. It is free, and/or it is helping them with sentence structure and grammar and plagiarism, which is a subscription service, that's a freemium model. And then we've got our, what we call our math product, so Math Solver, help with solving math problems, and it's the step-by-step solution of how to solve them, not just 1 plus 1 equals 2. It's why does it, right? And so we've evolved into a very large service. Like I said, we service 40 million students across the globe. Strategically, what we've seen over the last couple of years is that we're -- if we'd have this dialogue 2 years ago, I would have said we're primarily a U.S. centric company, and we were starting to invest in international. Well, we started investing 2 years ago and now we've seen a very large growth arm for us going internationally. It's bigger than we would have anticipated just a year ago and serving more countries than we would have anticipated. And so that's a clear strategic thrust for us on the academics. And then that really is taking what we already have in the U.S. and then taking it outside the U.S. And so there's a lot of leverage there. And then the other key strategic thrust for us is going beyond academic, helping kids in the academic studies. It's then helping kids on the -- kids or students, or learners, I should say, in the skill side, what we call skills learning. And what's become increasingly obvious to us over the last 3 to 4 years is that the world is moving to skills-based learning. And it's a fragmented market. We dipped our toe in that market about 1.5 years ago with a small company called Thinkful. But we believe that if you get 10 years from now, which is about the same time we've been in the academic space, project 10 years from now, that there will be a leading player. We hope it's Chegg in the skill space. And you can imagine that we will add assets to the existing asset and our goal is to have a multi-hundred million dollar a year skills business along with what we have on the academic side. So that's kind of the -- I know it's maybe a little bit longer than you wanted, but that's kind of what we're at.

No, that's great. And so a lot of directions. So a lot of things that I can build on. I'll maybe put the long-term lens on in a second, but everybody's thinking about COVID and learning and remote learning and the ability to kind of work with students and learning kind of changing in a pandemic. So maybe if you take a step back and you think about what's happened over the last year, almost, I guess, to date, exactly. What would you say you've seen from the customer base? And then even operationally, like what's changed for you guys as you're learning to operate in the pandemic?

Well, yes, I mean it's clearly different than what we imagined just a year ago. But what I'd say that at a very super high level, what we've seen with COVID is that really what we predicted many, many, many years ago. Like from the get-go, our mantra was that more and more education was going to go online, it's going to be on-demand, it's going to be affordable. And if you think about traditional education, which is really what we're still dealing with is, at least before the pandemic and people had to learn online, is that it was here, it wasn't on-demand, and it wasn't online. It was -- you want your -- I'll take myself. I'm an accounting major. You go to the class at 9:30 Monday through -- Monday, Wednesday, Friday, or Tuesday, Thursday, you take that and you've got the TA that's available from 2 to 4 on a Thursday. But that's not on demand. And that's not how we, as a society anymore, and particularly, the demographic that we serve, does anything. Everything is on demand, whether it's consuming video, TV shows, purchasing things. And so what we believed was that technology would disrupt education just like it's disrupt pretty much every other industry. And we -- that's what we bet on. And we believed it was inevitable. What COVID did, interestingly enough, was just accelerated that more. We were already growing very fast. We were growing consistent growth at 3 -- 30% a year. But what COVID done is accelerate it. I think it's accelerated for a lot of people. I think when I envision our education 2 years from now when we can -- when we've got the vaccines there, and people can go back online, I think it's changed education forever. I don't -- not all classes will be in-person, right? What people are realizing they can be educated quite easily with technology. I'll tell you one of the largest institutions on the planet, or at least certainly in the U.S., Southern New Hampshire University. That's fully online and they're booming, because people know they can get a quality, accredited education online and what we've done is, like I said, it has accelerated that transition. We just said we just don't think there's any going back.

Yes. Okay. And it actually -- so if we think about that, Chegg Study adoption curve going forward, obviously, we've had a pickup in that versus maybe what we thought a couple of years ago. But what are some of the incremental drivers from here, right? Like if we think about how do we get that penetration up to the higher level? And is there a ceiling ultimately on what that penetration could be? How should we think about that?

Well, if there is a ceiling, you probably won't be talking to me when we get there, because I think I'll be too old. Just for what it's worth. I think I'll be retired by then. No. The thing is we're super early in the adoption. We're clearly a little bit further along in U.S. and so there's early -- I'll call it, 3 key drivers right now that we're -- that are actionable that we're working -- that we've been working on and continue to work on. The first thing is, what happened in the U.S. specifically, right, was what you've seen in our business in the U.S. is what's really driven it over the last, call it, 12 months or so is the fact that we've been able to clamp down an account here. Right? We have -- the bottom line is, for those of you that are not aware, we may have had, I call it, 4 million or so users at the end of 2019, but there was probably 2x that actually using our service. And so one of the things we did in 2020 is we said, okay, enough is enough. Right? So we put device management in place. We bought MFA Technology, multifactor authentication. And so what we were -- what it allowed us to do was to start getting people to pay for what they're already using. And that continues into 2021. So that was one driver. That was specifically to the U.S. Then secondarily, and I'm doing in the size of -- the order of magnitude. Even though we don't communicate the specific dollars. And then the second one was international. International, as students went off-campus across the globe, the first thing students do is they go to the Internet. They go into Google. I need help with math. I need help with writing. I need help with physics. And when you think it through, there's really nobody like Chegg across the globe, right? There's nobody out there that provides the type of service we provide for STEM students and business students and increasingly other subjects. And so what we saw is our international business explode, just really that simple. And one of the things we mentioned on our last conference call is we expect to have 1 million subscribers this year. But that's just kind of like -- that's still relatively small relative to the opportunity. There's -- when we look at the TAM, there's probably a TAM that's at least 2 or 3x more outside the U.S., and we're just starting. So we see the international opportunity as huge. And we're investing in it in a very heavy way from a technological standpoint and from a marketing standpoint. And then the third one, which is less about driving subscribers but getting more per subscriber, and that is essentially increasing ARPU. And one of the things we did starting beginning of last year was starting to do a premium-priced offering. We call it the Chegg Study Pack, where it takes all of our 3 subscriptions, bundled them together as a package. And so when I think about Chegg 3, 4, 5, 10 years from now, and that's just in the academic side, we haven't even scratched the surface on the skill side, but I saw there's a ton of runway on the academic side before we're -- before I get even remotely concerned about the growth opportunities for us.

Wanting -- so I want to double-click on international a bit. I know you mentioned some investments. So there's a couple of things there, but I wanted to understand what type of localization investments needed to be made? And it sounded like the diversity of the international growth really surprised you guys as this has kind of ramped up. And then just thinking about how you're looking at where to invest and the optimal marketing efforts, how do you think about balancing all those priorities?

Yes. So the beauty of the international -- so just let me just step back. When we started 2020, we thought our biggest opportunity in the short-term was 3 to 5 countries. The 3 that you can imagine are the Canada, U.K., Australia. And there was a couple of others that were -- had a significant amount of English learning people. But what COVID revealed to us as people went off-campus is there was really 10 to 15 countries that had an immediate need with critical mass. And so a given example is, Tracey, the person that leads our IRF, her and I sat down middle of last year with our -- the lady that runs international. And we were just floored by the fact that we had literally tens of thousands of students out of Turkey. Who would have thought Turkey, right? I mean so the opportunity it was clearly there. And the beauty of the model for us going internationally with what we've done in the U.S. is that the content is -- well, let's put it this way, STEM is STEM. It doesn't matter whether you're in Turkey, the U.K. or Canada or the U.S. STEM is STEM. Algebra is algebra. Physics is physics. You don't have to localize it; it's -- regionalize it. It's the same. So the beauty is that, that content is leverageable. And so while we have to make investments in our core technology for multicurrency capability, potentially more regionalized or country-specific packages and pricing and a whole bunch of those things. Yes, we're making those investments and we'll continue to make those investments. The core content's leverageable. And so it allows us to expand internationally and still be profitable. And you can see that, and we continue to see expansion of our margins while we're making that investment. So that's one of the beauties of international is -- there's a core that we've already paid for, if you know what I mean.

Right. So maybe on the marketing side a little bit. I mean, obviously, you have a lot of people that are familiar with the platform, may not be paid users, but how do you think about -- if you're thinking about driving market awareness, like I think Chegg's a very international brand. Do we see incremental marketing investments? Does that change? How do we think about that?

Oh, absolutely. One of the things that we have struggled with the years in the U.S., by the way. I mean, one of the beauties of our model is there's a lot of brand awareness, a lot of word of mouth. We're great at SEO, and we're really great at SEO. And so what has happened in the U.S. historically is we struggle to find seams of what I call profitable paid marketing, right, where you can invest $1 million, $2 million, $10 million even. There was -- but so much of our traffic came through organic forms. While that still happens internationally, it's -- there are more profitable seams. So we are definitely investing more internationally. The metrics that we use, the ROI that we use, hasn't changed. So it's all about that incremental subscriber. It's never about averages, right? Averages are -- they'll kill you. But it's the incremental -- what's the cost of that incremental subscriber, still -- we still have the same ROI as we would in any country. And we have found more profitable seams, where in the U.S. that has been -- that has been challenging.

Okay. And so one thing I wanted to hit on, and maybe this is a simple question. So feel free to punt on this, but just the idea of engagement, right? And so obviously, we can look at a lot of people follow subs, but if we think about the engagement trends on -- for some of the seams relative to kind of pre pandemic levels, I think it's important because I think that kind of shows retention and a lot of underlying fundamentals there. So anything on the engagement that you can share? And am I right in kind of connecting the engagement versus the retention? Any thoughts on that?

It's kind of interesting, right? So one of the things we haven't seen a big change in -- material change in is what we call our renewal rates. And that's retention. Right? They were already at a fairly high level in the U.S. We've still got some work that we can do internationally as we better understand that market. We do measure engagement on our platform. And it's not just how many people come on per day, blah, blah, blah. We actually measure it by what are they engaging with? Are they engaging with expert Q&A, are they engaging with Textbook Solutions, are they engaging on assessments or practice tests, are they engaging on video, ding, ding, ding, right? So we do that. And that actually informs us not just -- doesn't just give us a macro view of what the engagement is like, it also informs us of how we can then improve our product or add new offerings, right? I mean, one of the beauties of having a direct-to-student and a direct engagement with your audience is that you know what they want to consume. And so it's been -- it's a little bit like Netflix, right? I mean, Netflix knows, based upon my viewing habits, whether or not I would watch show X, Y and Z, which is very different than a movie -- it's just very different. And so yes, we do track that. I don't -- I can't say we've seen a significant change in what I'll call the engagement per subscriber. Part of that is it's kind of gotten a little bit mushed up in the sense that we started to -- as COVID happened, that's also when we started clamping down on account sharing. So you know what I'm saying? So we're making people where you may have had 3 people share an account and you think, wow, there's a lot of user engagement on that account. Now becomes 3 people, which is great for us. So it's...

Right, yes, better for monetization, but the engagements, [ upside down ], yes.

Exactly. So you may get -- they may engage in that one subscription that may engage in 100 pieces of data. Now you've got 3 subscriptions doing [ 30 ]. So it's a little...

I wonder if you thought you just really love the math, but maybe that -- maybe they're both true, I don't know. But so I do want to hit on the competitive moats. So the content, I think, is at a point of differentiation, but if you think about what are the real moats versus your business? And maybe you can look at that lens domestically and then internationally and think about where you feel like what you've built up is differentiated versus some competition?

Oh, yes, yes. So I'll start talking. I mean I think we're super early internationally. But we are seeing similar trends to what we've seen in the U.S., and I think they are applicable. So I think when you think about Chegg, the moats are actually massive. In no order of importance, but you can't underestimate having a great brand or having a brand that kids know. I mean I get it, there's probably going to be people on this call that know Chegg because it's a potential investment and have no idea how big the brand really is on -- with students. We're a massive brand. We've gotten to a point where we see it all the time on social media. I checked it. You should check it, right? You become the verb, right? When you become the verb, it's a big brand, right? You Googled it. I mean back -- I'll age myself here a little bit, because this is way back in the day, I TiVoed it. That was the original DVR, by the way, for those of you that are playing at home.

Yes, I'm aware. Yes.

Okay. TiVo, right? So we've become the verb. So don't underestimate brand. Brand is huge. It's a huge [ haircut ]. But the second -- and in no particular order, the ability to build an infrastructure where you've got 90,000 plus independent contractors that can generate content for you, and then we own the content. That is a huge moat. So we've got over 15 million pieces of user content. This isn't user-generated stuff. This is Chegg-owned content. And so -- and that doesn't happen overnight, right? That happens over years and years and years. And I think the third one that I'll point to is the fact that we have a -- it's an integrated platform where you can get -- we're not a vertical per se. We're not just doing grammar or we're not just doing Textbook Solutions. We've got a platform approach. And so when I think about that, there's nobody out there that does what we do. And I don't mean that as bravado. There's just nobody out there that does that. There are people that do some writing things like a Grammarly, which is more corporate, I get it, it's not really student centric. And there are some people that will do things like Flash Cards, you've got a Quizlet. Great company, don't get me wrong, but there's nobody that's developed an education platform, created a brand and uniquely creates all of their own content. So I -- it's -- I think we've got a massive moat relative to what the market we deliver to.

And so I do want to -- you've done this earlier, but is the skills-based opportunity. Obviously, that's something we hear a lot about. What are you thinking in terms of TAMs? And how do you kind of leverage the moat that you've built and kind of extend that potentially into the skills-based opportunity over time?

Well, one of the things that we are certain of and that is skills-based learning is going to become more relevant. There's just no doubt in our mind it's going to become more relevant. And it's a fragmented market today. I mean there are some larger players, and there's only one public player, it's about to go private, as you know, Pluralsight, but it's still fragmented. And we believe a natural extension to Chegg, because we are a learning company, is to go from academic to skills-based learning. And it becomes even more natural when you consider the fact that there's -- those students that have graduated Chegg, and those are tens of millions at this point, I couldn't have said that 10 years ago, but there's tens of millions and the brand affinity, we have created. Why wouldn't we want to extend our relationship with them? And it's more likely than not, even if you have a college degree and you go into an organization, you're going to need to reskill yourself or you going to have to pick up a new skill. Why wouldn't we to leverage that customer base that just loves Chegg? Once you -- like I said, we've become the verb and so we view that as a natural extension. Now we tipped our toe in skills about 1.5 years ago with a small company called Thinkful. And part of that was just to learn. But it's easy to think of -- when it's on a spreadsheet or it's theoretical, it's very different than when you're operating in it. So we've learned a lot over the last 1.5 years. And I do think that as I envision what our skills offering will look like 10 years from now, so if you think about Chegg today, we're about 10 years old from our subscriptions. And if you think about that pathway we've taken, it's really primarily been through acquisitions. So I -- all 3 of our major subscriptions were a result of an acquisition, and we've just grown them much faster. So I do envision that as we look at skills and look at Chegg skills 10 years now, it's likely to be mostly acquisitions where we've been able to grow it faster. And I envision a skill -- Chegg Skills being a multi-hundred million dollar business just like we've created a multi-hundred million dollar business on the academic side over 10 years. So yes, we're super excited about skills.

So I was going to ask you about this a little later, but I'll ask now, just on the M&A opportunity. I mean, we've seen some volatility in the market over the last year, so I guess, volatility in a lot of things. But as you look at M&A opportunities, what's attractive? What are you seeing in terms of maybe private company multiples, any thoughts on the M&A landscape?

Well, it's really been interesting. I get this question all the time, and I've had it -- I've had it for many years is what are the multiples like. And one of the challenges we've always had is that the multiples for -- we've only done private deals thus far. Multiples tend to be a little too high for us in the private markets. They tend to get a little frothy, as I will call it, which is -- and so it is a challenge. But on the flip side is we have been able to make some decent -- some really good acquisitions at the right price. I mean whether it be the last acquisition we made of Mathway, but we're always very judicious on what we will pay. And it's got to be synergistic beyond just is it going to be accretive from a revenue and a profitability standpoint over time, but it's also -- we've got to be able to leverage something that we do well. And so whether it's a $100 million acquisition or a multi-hundred million dollar acquisition, we look at it the same way. It's the same lens. And yes, I would certainly -- we've been -- you all have to take a look at us. We've been acquisitive over time. We will continue to be acquisitive, but we'll also use the same disciplines we've used for -- the historical acquisitions.

And so Andy, another area that -- I've discussed this with some investors, but the ability to expand kind of beyond college and address the high school student population, like, how do you think about that opportunity? You think in a lot of cases that with STEM, that's still applicable AP classes, things like that? So how do you look at that opportunity? And are there different ways to address that market? I'm curious to get your thoughts there.

Yes. So we do address the younger market as it were, right? We -- if you look at our writing properties, in particular, to some extent, on math, whether it's a freemium model. So we -- when we talk about 6.6 million subscribers, let's remind ourselves, we have 40 million students on our platform on an annual basis, and growing, right? So it's -- so there is a freemium aspect, and that's particularly -- a big portion of those are in the math -- excuse me, in the writing side, where we go deeply into the high school, middle school, in particular, and we always ask our question, can we monetize that group of learners more significantly? And it's always been a little bit of a challenge for us, right? Because if you think about what our DNA is, our DNA is going direct to the student and monetizing directly with the student. The younger you get, the more it's -- you're actually monetizing with the parent, right? So it's a different monetization model and a different marketing model and as a result of that, what we have opted to do is we've gone from kind of what I'll call the lower hanging fruit, which is why -- why wouldn't we go international with what we do and go direct to those students? And you're seeing the results with the 1 million students we're projecting for this year. Or on the flip side, on the skill side of the business, once again, it's going to be direct to those people that can pay. So we've tended to go in that direction to expand the demographic to be older. But I'll never say never going younger, but we haven't -- it's not an area where -- it's an area where we talk -- we -- when we do our strategic planning annually, we always talk about it, but we always find lower-hanging fruit to go either -- to go in a different direction at this point.

Okay. And so I did get a question from the audience. And I think I know the answer to this, but I want to get your thoughts. Just the opportunity to potentially partner with academic institutions. How do you see the pros and cons of that? I can see both sides, but I'm curious to get your thoughts. And do you ever see that as a major distribution channel for you or not?

Potentially in the skill side, if they want to get into skills, and we started to do that with ASU. If you looked at the ASU announcement, now it's a trial project. But there's this fine balance. We have created a brand with our students that they know we're looking out for them. And we want to help them. It doesn't -- and we don't have the DNA to go institution by institution, if you know what I mean. I mean it's just a different go-to market. And it doesn't mean we wouldn't at certain times. And by the way, we often get inbounds from institutions to be able to potentially do things. Whether it's -- ASU is an example of that on the skill side, but in the past, we've had wanting to help with tutoring. So we will respond to inbounds, but it's not a strategic focus of ours right now. We're maniacally focused on do we help the student learn the materials, get through the test, get a better job. That is our focus.

Okay. Okay. And that's kind of what I thought you said. But all right. So last one for me, just on the packaging in the elasticity. I know the Chegg Study Pack, we're kind of newer in that evolution. But always thinking about elasticity and the balance of monetization versus value. Anything you can share there? And how should we think about the mix of Chegg Study Pack longer term?

Well, I'll answer that one real quickly. I mean, we've said consistently, ultimately, Chegg Study Pack should be 50% or more of our subscriptions base, right? We should be able to be providing enough value where at least 50% of our students. We're not there yet. We're -- now it's interesting. Compared to where we thought we would be a year ago, we're doing much better on the Study Pack penetration, but to me, success is 50% or greater of our students are taking -- our students are taking the Chegg Study Pack. So we continue to iterate and test, and iterate and test. The beauty of the Internet model, as you're aware, is you can test stuff. You don't have to just flip -- switch to 100% of people, you can test a 5% cell or a 10% cell and do it with AB testing. And so yes, so we'll continue to iterate and test the Study Pack with the ultimate goal that we've got more than 50% of those students taking the premium-priced option.

Great. All right. Andy, I think that's all the time we have. Thank you so much, and everyone, thank you for listening in.

Okay. Thank you, Brian. Take care. Thank you, everybody. Bye.