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

All right. Good morning, or good afternoon, I guess, depending on where you are. Welcome to the session with Chegg. I'm Stephen Sheldon, and I cover vertical technology at William Blair, including education technology. I'm required to inform you that a complete list of research disclosures and potential conflicts of interest is available at our website at williamblair.com. Great to have Chegg here at our conference for the first time. Always fun to spend some time with Andy Brown, the company's long-time CFO. So thanks for joining us today, Andy.

So I assume that means you think I'm old.

Chegg has continued to grow and scale nicely here over the last few years, and it seems like it's still in the earlier innings for -- of a few key multiple growth drivers, so we'll certainly dig into that. But just to start here, Andy, first time at the conference, can you just start with a high-level overview of the solutions that you're providing across the education landscape?

Yes. I -- thanks, Stephen, and thanks for the invite to the conference, and good afternoon, or good morning to everybody. It's morning here in California, still. Yes, let me kind of again give a quick overview of Chegg. For those of you that are not familiar with us, but I suspect most of you are, so I'll try to do this quickly. In real simple terms, when Chegg was originally founded, we were a textbook company. We're no longer a textbook company, even though we offer textbooks, right? And so I look at Chegg, as you see Chegg today, Chegg was re-founded about a little over 11 years ago when our current CEO, Dan Rosensweig, was -- came on board. And he had this -- and then he -- and then obviously brought most of the management team on. As a long-time CFO, I'm coming up on 10 years here in October as the CFO of Chegg. But Dan had this vision that was started -- kind of kernel started with the original founders, where their vision was, well, let's -- we just want to go direct to the student with textbook rental, very much like Netflix. And they created this platform and the beginning of a brand. Dan's vision was a little different. He was like, okay, well, if you can do that with textbooks, and you're really distributing somebody else's content, not your own content, why couldn't we do that for any education material and go direct to the student, which is -- was a novel premise at the time because all student services really went through the institution for the most part. And so what we've done over the last 10 years or 11 years is built a set of services, primarily subscription service, not exclusively, but primarily subscription services, where we provide online, on-demand help to students, anytime, anyplace, anywhere, right? And so basically, 24/7, pretty much what they expect from everything they do in their lives today. Everything is on demand, right? Whether it's purchasing things, whether it's videos or music, everything is on demand. And so we have done that for the education space, gone directly to the student and created a massive brand in the U.S. and increasingly outside the U.S., and we can get into that. But if you're investing in Chegg, the 3 -- I'll call it the 3 core products or maybe 4 core products that we have, our subscription services we have, these. And I'll go through them in the order of size. We don't break out the size, but the order of size. The first thing is what we call Chegg Study. It's $14.95. It started out 11 -- 10 years ago as just textbook solutions. And much like Amazon has done with Prime, where they started out as 2-day shipping, and have added a ton of components to it, we've done the same thing with Chegg Study. And so over the years, with Chegg Study, we've added -- we went from just textbook solutions for 400 textbooks to textbook solutions for 35,000 textbooks, for example. But we've added other services. We've added Expert Q&A, we've added things like practice tests and assessments, we've added video-based learning. And we will continue to add, like I said, much like Prime has done. Unlike Prime, which has increased its price over the years, we're still at $14.95. So it hasn't changed. And so that's what we call Chegg Study. There are 2 other services that we've -- we offer also that are, one being what we call our writing tools service, and it's not just writing tools, it's a set of web properties that offer writing services. And so for example, what -- they all do the same thing, and that allows the student to upload a paper, and then for free what we'll do is identify the citations and then create a bibliography in many formats for that student. And then if the student wants to get additional services like grammar, sentence structure, plagiarism checks, they can upsell or up subscribe to our $9.95 subscription product. And so that's a product, where a big part of it's ad based. So we've got programmatic advertising. But the bigger -- the faster growing part of it is the subscription side. And then the third element is our math service. And primarily now it's what we call Mathway, an acquisition we made just a year ago, even though we had a math product before this. And that, once again, $9.95 is a math solver, solves equation, solves not just math equations, but scientific equations. And that is primarily -- once again, primarily subscription-based, but we do get some ad revenue from that, and it's $9.95 a month, but they also do offer an annual subscription, which we don't offer on the other 2 services for $39.95 a month, which should be told is a screaming deal. And so those are the 3 core. And we had approximately -- and then maybe just to wrap it all up, we also -- about 1.5 years ago or so, we introduced what we call the Chegg Study Pack, which is taking Chegg Study, adding and -- adding, writing and then adding math as a bundled product, and that is for $19.95. And so when you look at the core of our company -- if you're investing in our company today, that's at the core of what you're investing in. There's some other ancillary services that we've had over a period of time, but that's the core. And that constitutes of the 6.6 million subscribers we had last year, pretty much all -- is in that category. And just as a -- to kind of round out the subscription side of the business, and we probably have about -- we have about 40 million students across the globe that access our sites. And then I guess maybe the last part of this, and this is a small piece of our business today, but it's a big piece of our future. And that is, we tipped our toe in this, what we call skills-based learning. If you think about what I just articulated before, that was academic learning. That's going after that academic user, whether it's college, high school or middle school. Skill space is typically -- it's different. It's outside the academic space, but it's still learning. So we're still addressing learners, and so we tipped our toe in that space a little -- 1 year, 1.5 years ago, with a small acquisition of a company called Thinkful. And what you can expect from us in the future is that we would add to that asset base, and we do anticipate that, in fact, skills-based learning is -- should be a big growth driver for us over the next, call it, 3 to 5, 10 years. So with -- I know that was a pretty long winded, but I'll leave it at that.

Yes. No, no, that was great. I appreciate that. I think maybe starting on with -- on the content side, I think, the value of the subscription seems like it's gone up as you continue to add content you made. An interesting announcement last night with a new form of content, I think, your Uversity, I believe that's how you say it. But -- so can you talk more about that offering, what it might add to your platform? And maybe any detail on how it could drive monetization?

Yes. So we're super excited about Uversity. That is something that's been in the development for a long period of time, both from a research standpoint. Did it make sense, right? Did it makes sense from a student standpoint, did it make sense from a professor standpoint. And then the development of the capability. And so let me explain to folks what this means. And that is what we announced yesterday is that we have now added the capability to our platform to -- for professors to be able to generate content, upload it on to Uversity as we're calling it, Uversity, and get paid for that content. So pretty much like we do with every other piece of content. We pay experts to generate content for us. What we're doing is we're adding the professor to that. Because what we've heard from students is this, is they would like course level type material. And so what we're offering to professors is to pay them for course-level material. And so the professor -- and it's -- right now, it is U.S.-based professors only, to be clear, for right now. And what it does is it allows the professor to register on our site. We verify that, in fact, they are a professor from the school, which they say they're from. And then it will allow them to upload content that they have developed, their IP, and they own that IP, and we will pay for it. And it would be things like, it could be class notes, it could be study guides, it could be practice tests, it could be video-based content, various types of content, and we have a rate card that we will pay professor if that content as they do it. And so we'll be doing that for the next several months. And so it won't be exposed to the students at this point in time. But we want to get a critical mass of content from professors. And then sometime in the fall, we haven't picked a date yet, but sometime in the fall when we believe there's a critical mass of content from the professors, we will then allow students to access that through our Chegg Study and Chegg Study Pack subscriptions. And so what we believe is that if you get that type of course level type material, it can attract, a, new -- potentially new students to our platform. And then the second part is, hopefully, it would retain students longer on our platform. And so there's -- we believe there's a lot of benefits. We've done a lot of research behind this. And like I said, we announced that yesterday, super excited about it. And to some extent, it piggybacks on if you think about it, to announcement we made earlier in the year around Honor Shield, right, engaging the professors around academic integrity. And so what we're trying to do is engage the professors, make it a win-win, and also providing our students with additional forms or modality of content that they certainly have expressed that they want, and we're a perfect platform in a vehicle to deliver it to them.

Got it. And that makes sense. As you think about -- I guess, 2 follow-up questions on that. One, would you expect the focus still be in areas like -- I think you focused heavily on STEM subjects before you maybe expanded a little bit beyond that. But is this going to be -- would it be kind of more content focused on where you're already focusing? Or would there be a -- would you be looking at potentially adding content in new verticals? And then second, I guess when you're paying, is it like a revenue share that you'd be paying with for these professors? Or is it more like a fixed fee? I mean you talked about a rate card...

Yes, yes, yes. Good questions. And so the answer is on the content side of things. We're -- currently, the platform is primarily what we call STEM-B, not just STEM, but STEM-B, being business -- quantitative business, accounting statistics and things like that. But what I'm going to limit ourselves to what gets onto the platform, why wouldn't we help students with literature, why wouldn't we help them with geography? Why wouldn't we, right? And this may be an opportunity to accelerate our ability to get into some of those areas. So we're not going to limit that. On the rate card, as I called it, the answer is, initially, it's a fixed fee, kind of like -- the same way it's a fixed fee when we pay our experts that answer -- do the Expert Q&A, or do the textbook solution. So it's a fixed fee. Having said that, that may vary over time. As you probably know, when you start things out, you think one thing is going to happen, and then it could evolve into something else. But right now, it's a fixed fee for the professor as they upload content. And yes, we're excited about it, and we hope we get a lot of professors engaged on the platform.

Got it. It's really helpful. I think a lot of investors have asked recently about the boost you've seen from the pandemic and whether there could be a reset in subscribers as more students move back to in-person education, hopefully, this fall. I think there could also be a counterargument that more higher education students have been exposed to the ROI of your solution. So if you think about this topic, kind of, one, how much risk you see in terms of a larger percentage of students canceling their subscription than you would normally see? And two, have you seen anything change in the cancellation rate so far?

The answer is -- so the answer to the last question is no. And it's been an interesting time for us because it's really not just about COVID, right? So we've really got 3 elements that are -- that have happened over the last 12 months at the company that we're -- better use of term is, we're kind of lapping, right? You've got really -- if you add COVID, it's 4, interestingly enough. But I think about it more from what we've been doing in the business versus the COVID. So we've got account sharing. We've got math, right? So account sharing, we implemented technology around account sharing August of last year and then incremental addition in October of last year. Well -- this month, we're lapping Mathway acquisition. And then the third thing that we're lapping, which is more -- most likely more COVID-related, this is certainly COVID-related, and that is the lapping of the acceleration, particularly of the international student base, where kids went off-campus, not just in the U.S., but across the globe. And where did they go? They go to the internet. And we're one of the few direct-to-student internet help services on the academic side. So whether or not you're in the U.S. or Turkey, you found Chegg. So those are the 3 elements that were -- that are different this year as we're lapping those. And so I don't think it's just a one thing. As far as -- as we look at students, first thing is we expect students to be on campus in the fall. We absolutely expect that. When you think about how we forecast things, why wouldn't you? I mean, you can already see it. We do anticipate that the declines that we saw in the fall and then the additional declines that we saw in the spring, I think spring depend upon who surveyed it, but enrollments were down 9% to 13%. I think those probably stabilize in the fall, but I don't think they increase. So that's kind of our anticipation. And as kids go back on to campus -- those kids that came to Chegg -- the few kids that came to Chegg maybe because they couldn't access campus help. There's nothing to indicate in the surveys that we have done with our students to suggest that why wouldn't they want 24/7 help. That's -- I call it on-demand help. That's -- everything they do in their life is on demand, except education, if you think about it, right? On-demand TV shows, on-demand videos, on-demand music, on-demand buying, right? You can buy anything on Amazon at 3:30 in the morning for goodness sakes. And so I don't see that changing, and those folks that were exposed just because they couldn't get on campus, I don't -- there's nothing that we've seen that would indicate that their behaviors on Chegg would change. Now one of the things that has been interesting for us around account sharing, and it has helped with the strength on Chegg Study and Chegg Study Pack is that we've seen our cancel and our renewal rates actually improve. And it's -- what's interesting is because as kids couldn't share, even though they were using our platform and not paying for it, when they went to subscribe, unlike brand-new subscribers, they already -- it's almost like they were resubscribing, and therefore, we've seen our -- interestingly enough, we've seen our renewal rates, they don't spike because renewal rates don't spike. But if you can get 10 basis points or even 50 or 100 basis points, it's a massive win. And so we have seen our renewal rates benefit as a result of not allowing kids to share the -- we believe, to share passwords and things like that.

Got it. A lot to dig into there. And maybe on the account sharing side, just because we were talking about it. I guess -- and I think some investors have perceived this as potentially a onetime boost, where you had a certain population of students that didn't use -- that used the platform, but weren't paying for it. They were using piggybacking on other people's accounts. And so if you had a population there, you probably converted some of those people. But is there a multiyear growth impact here? And I guess the question would be, you're seeing higher brand awareness, you're seeing early brand awareness in international markets. If 5 people -- new people learn about the platform now, maybe before you had 1 convert into a paid sub and 2 or 3 piggybacking on it, maybe now you have 5 new people to learn about the platform and 4 -- 3 or 4 sign up, I guess. Do you view the account sharing as kind of a onetime boost to growth? Or do you think there's going to be a multiyear benefit from this?