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

Good afternoon and good morning, everyone. Thank you for joining us for this fireside chat. Very excited to be hosting Andy Brown, Chegg's CFO, today. My name is Didier Scemama. I'm the Head of European IT Hardware at Bank of America. And I'm helping here David Amira, the analyst covering Chegg here at BofA Securities. He's on paternity leave. I am very excited today as we are hosting a very innovative company, Chegg. And thank you so much, Andy, for making yourself available and the whole Chegg team as well. Maybe as we have a fireside chat, let me to remind everyone the way we're going to proceed. Today, we have a 50-minute conversation. If you wish to ask any question to Andy, please use the Veracast system in front of you. You can input your question, and then we will ask them after the small exchange we'll have together. So Andy, first of all, very warm welcome.

Let me ask as your first question, Chegg Study has done very well in the U.S. and your Chegg Services division now is around 6.6 million subscribers as of fiscal year 2020, which is getting to be quite a meaningful proportion of the U.S. college student market. Where do you think your penetration of college students could get to longer term?

Yes. So well, first thing is good morning or good afternoon, everybody. I'm not sure exactly where everybody is located at this point, but it's certainly morning here in California -- Northern California. And it's good to be on the call today, Didier, and it's nice to meet you. But yes, so when you look at the 6.6 million, it's not just college students. So I think that's something that is -- some people think, well, it's all Chegg Study. It's not all Chegg Study. We do have -- in that number, there are subscribers on our math product, there are subscribers on our writing product. And those products go to -- while we do have college students that access those subscriptions, they actually also go through high school and to middle school. But to answer your question directly -- so not all of the 6.6 million are college students. Let's be clear on that. I mean a lot of them are but not all of them. But as we thought about the college market, there's an easy glide path to something north of 10 million, easy, and probably closer to 15 million students as we continue to add subject matters, capabilities and things like that. But what we're also seeing, like I said, in our products and even Chegg Study, we see high school students accessing Chegg Study because there's a lot of relevant content, particularly for juniors and seniors in U.S. colleges that -- U.S. high schools, excuse me, that are taking what they call AP or advanced placement classes, which are kind of like freshman classes in college. So if you add those folks in there, you could approach at least 20 million in the U.S. for just Chegg Study. Then you add on Mathway and then you add on our Writing Tools product. So we think we've got a lot of runway in the U.S. And not to mention the fact that -- and I'm sure you're likely to ask a question about this, is our expansion going outside the U.S. So when you look at the 6.6 million students, not all of those were U.S.-based students. There were several -- many hundreds of thousands that were actually students that access our properties outside the U.S. And so a lot of runway in the U.S. and just beginning outside the U.S. and also going deeper in the U.S. beyond just college students.

Yes. Perfect. So that's a good segue into actually the international opportunities, if you could maybe expand a little bit on that. You touched on it. And specifically, I think questions are being asked about the diversity of curriculums overseas and well, languages can be sometimes different. So how do you address those concerns?

Yes. So just to kind of replay back, up until about 2 years ago, the vast majority of our subscribers and therefore, revenue, came from the U.S., just to be clear. We did have several -- a few hundred thousand students that were accessing particularly Chegg Study outside the U.S. But -- we use a term inside our company brilliant by accident, and that was a little bit brilliant by accident because being an online Internet-based company, you can access our sites from anywhere in the world. And people -- and students that needed help access it from across the globe without us really attempting to address outside the U.S. But 2 years ago, we decided that, in fact, there was a big opportunity outside the U.S. In fact, we believe that the opportunity outside the U.S. is, in fact, larger than the U.S. And so we started making investments. We decided early on that we'd focus on -- the immediate focus was the 3 English-speaking -- the major English-speaking countries. That was Canada north of us, obviously, the U.K. and Australia. And we started doing things like starting technology development for foreign currency presentment, things like maybe customizing some of the content and a bunch of things. However, what happened about a year ago is we saw -- as COVID hit, what we saw was as students across the globe went off campus, we saw an explosion of students beyond the 3 that we had anticipated. And so what we've really seen -- we've expanded what we believe we want to address in the near term to more like 10 to 15 countries because what you -- what people don't realize is there's a lot of countries where their native language isn't English but much of their education system is in English, right? And so we're addressing -- there's probably 10 to 15 markets like that. And there's countries that you wouldn't expect where we've got tens of thousands of subscribers to date, a country like Turkey, right? Like who would have thought that a couple of years ago? So what we did last year once we realized this, we leaned into that opportunity and doubled down on the investment. So we doubled down on our technology investments. And now they're not showing fruition right now, but it's making those investments and having the capability at some point in time to have unique packaging by region or by country; to have unique pricing by region, by country, which we can't do today; to potentially stand up a country-specific website. Like if you're in the -- if you're in Canada, it could be a .ca site or if you're in the U.K., where I come from, it could be a .co.uk site, things like that. So we're investing in that. And we also really, I'll call it, doubled down -- I'm not sure that's the right number, but doubled down on our marketing and not just the marketing that gets an immediate customer but our brand marketing. So what we've seen over the last 12 to 18 months is a really large expansion of the brand recognition of Chegg outside the U.S. Whereas, in the U.S., it's almost become a verb, right? I Chegg-ed something. But -- and so we've started to invest in that brand, and we're starting to see the benefits of that as we see our international business expand very rapidly.

Fantastic. Double-clicking on the international opportunity. As you said, potentially very large. You're targeting over 1 million subscribers in 2021. As we are seeing a number of countries coming out of lockdowns, how confident are you in achieving that objective? And in other words, how do international trends look in markets that are reopening relative to those being locked down?

Yes. So it's really interesting, right? We started making the investments in international a couple of years ago. We made a statement on our Q1 earnings call that we expected at least 1 million subscribers outside the U.S. And it was interesting. A lot of people thought, "Man, that's pretty aggressive. You just started making that investment in international." We didn't think it was aggressive. We reiterated it on our last earnings call, if you listened to it. And so we clearly felt confident enough at that time to reiterate the fact that we'd have greater than 1 million subscribers. So yes, we're -- the international business is going well. It's -- truth to be told, it's larger than what we would have anticipated just a couple of years ago at this point in time. It's ahead of where the U.S. was 2 years into our business. If you understand the U.S. subscription business, at least Chegg Study, it's really about 10.5 years old. When I look at it 2 years into Chegg Study versus -- in the U.S. versus where we are internationally, it's -- clearly, we're ahead of where we were in the U.S. And once again, it's -- when you look at the available market outside the U.S., whether it's -- and when you add the English learning and the non-English learning, which we would expect to address at some point in time, the market's bigger. And therefore, our anticipation is if you kind of fast forward 10 years from now, the international subscribers and revenue should be bigger than the U.S. just because the available market is there. And truth be told, as we look into whether it's the U.S. or whether it's outside the U.S., we don't have a lot of competition, right? There's not a lot of companies out there that are going direct to the student, right? Where we differentiated ourselves compared to almost every other education company of scale is that we are going direct to the student. We are -- we've created a brand, we've created a platform, we've created massive amounts of content. Whereas, if you think about it, most of the other companies the investors on this call think about in the education space, they go through the institution, right? So -- and so we've really defined ourselves as a direct-to-student platform. And so yes, we think international ultimately is bigger than the U.S. business.

Fascinating. One of the very recent initiatives that you've announced is university. This is a platform for educators and faculty to share education content with learners via the Chegg Study product. This seems like a very interesting development. How do you think investors should view this in terms of its potential to enhance the Chegg Study app?

Yes. So yes, it is new. And it's a -- if you think about it, it's a continuation of us adding different forms of content to our platform. So I'll kind of go back in history for a few folks here. When Chegg Study originally started, it was textbook solutions only. That was it, right? So if you know what a textbook solution is, you read the chapter in the textbook. You get to the end of the chapter, there's -- and then the author typically has several problems that they want you to solve to see if you understand the concepts. What Chegg Study did originally was take those questions at the back of the textbook and do the step-by-step solution to solve the problem, not the answer because if you only want the answer, Google it, it's free. But what students want to know is the step-by-step solutions. That's how Chegg Study started. You kind of fast-forward, Chegg Study has evolved. I would like to compare it to Amazon Prime, right? So if you think about Amazon Prime, Amazon Prime started out as just 2-day shipping. Think about Amazon Prime today. It's much more than 2-day shipping. It's TV reruns, movies, original content, music, grocery stores at least in the U.S. And so they've just added -- and so Chegg Study is the same way. And so we've added a whole bunch of content, whether it's Expert Q&A, whether it's video-based learning, whether it's practice test, assessments. And this is just another form of content that we know students want, right? They would like the professor-generated content. And so this isn't something that we came up with overnight. This has been in process for the better part of 2 to 3 years, everything from the initial research to the user quals, both on the student side and then on the professor side. And it became very clear from both parties that there was [ demand ] there, right? That's -- the professors would like to provide that content and make money because we're paying them for this content, just like we pay for all of the other forms of content that we develop. And it was clear that students wanted this type of maybe course-focused content on our platform. And so it's been -- the hold -- it's been in development for 2 years or so. What we introduced a couple of weeks ago was this. And once again, as you said, it's called university but we only introduced the portal for the professor. And so what it allows the professor to do is to sign up. It allows them to then upload content, and it can be multiple forms of content. It can be class notes, it can be study guides, it can be video-based content, it can be even practice tests. So it allows the professor to upload multiple forms of content, and then we pay them for that content. Now like I said, the portal for the professor is currently open. And when we get a critical mass of professor content, then we will open it up to the student. But we want to make sure we get a critical mass. It could be as early as the fall of this year, the fall semester of this year. But to us, it's just adding more and more capability to our platform, once again, kind of like what Amazon has done with Prime, just adding more and more capability. The only difference between Prime and our subscription is our subscription price for Chegg Study was $14.95 10 years ago or 10.5 years ago. It's still $14.95. So -- but nonetheless, that's what university is.

In terms of new initiatives or recent initiatives, you also who have the Honor Shield feature working now, which is aimed at curbing cheating on the platform. How's the take-up or acceptance of that product been like with faculty in the U.S.?

Yes. So just -- once again, just so everybody is on level playing ground here. One of the things we introduced earlier this year was -- like you said, was called Honor Shield. And what it was, was 1 more step for us to be able to help the professor guard against those folks that -- and it's a very small group of folks that would potentially want to cheat on the platform. And so what Honor Shield does, it allows -- and what we saw as a result of COVID is as kids went off campus and then the tests were being given off campus, there's -- there can be some issues regarding cheating. And so we -- what we decided to do, once again, to help the professor out because they're giving those tests out is that the professor can upload their test on to our platform and we block the ability for those questions on the test to be asked on our platform during that testing period. And so it's just one more way of many ways that we -- on our platform where we have things in place to discourage and really not allow cheating for those students that decide they want to do that.

The issue of account sharing and the steps you've taken to address it has been one of the key features of the past year. Can you help us quantify how significant this factor has been in terms of your growth?

Yes. So account sharing, that's -- there's really been -- it's interesting. There were really 3 significant things that happened in 2020 from Chegg's perspective. Account sharing was one of them. The expansion and being international was the other. We've already talked about that. And then the addition of an acquisition we made last year -- early last year called Mathway. Of the 3, the largest really was on the account sharing. And just to kind of make sure everybody knows what we mean by account sharing, up until really last year, last August, if you subscribe to Chegg Study or Chegg Study Pack, you could access that subscription on as many devices as you want, which basically means you could share the account. So it wasn't unusual. Once again, these are fringe cases. It wasn't that unusual where you have a subscription where it was accessed by 5 different devices or 10 different devices or in extreme cases, 20 devices in a week. And it's not likely a single person is using 20 devices. Let's face it. And we saw things on Twitter and things like that where people would sell access to Chegg Study, right? Or they get a $14.95 subscription and then give you -- let you access it for $5. So -- and we've known that for some period of time. And early on, when we were much smaller, we were okay with that because what we were trying to do was to get Chegg Study ubiquitous on the U.S. campuses. We just wanted to be -- once again, getting back. We wanted to be the verb, we Chegg-ed. And -- but it was something that we were aware of, and in the middle of last year, August specifically, we really started to clamp down on that. So we instituted 2 pieces of technology. One was device management, which gets into you could only use 2 devices on an account. And the second one -- and that was in August. The second one was in October where we started rolling out what we call MFA technology, so multi-factor authentication, which we're all familiar with and even students are familiar with. And so we're now at a point where a student can access it only on 2 accounts (sic) [ devices ], and there's MFA also involved in if they wanted to maybe switch out a device because it's not unusual that they may want to -- maybe they've upgraded a phone or something like that where they need to then do that. So we -- that was implemented in -- like I said, in the second half of last year. It seems to have been very successful. And it continues to be a benefit for us because if we have a student today that subscribes to Chegg Study today -- 1 year ago, they could have shared it with somebody. Today, they couldn't. And so that -- so our -- it makes it very hard to do it, let me put it that way. And so we saw the benefits last year. We're continuing to see the benefits of the fact that we've done this. And all of the things that we thought would be viewed as negative when we implemented these technologies, right? We were concerned, right? We're concerned about the brand image, right? So you can -- one of the things we're concerned about was, well, students would say, "Well, I can't believe Chegg did that." They're -- all of the backlash. Truth be told, we didn't get that. All of those fears we've got there -- we saw a lot of social media posts saying, "Oh, man, Chegg did this. They limited it to 2 devices. They caught us." So it was more -- so all of the things that we thought could potentially have a negative impact on the brand didn't occur. And so it's gone as well as we could have expected, and we continue to see those benefits.

Before I move on to the next question, I just want to remind everyone, if you've got a question for Andy, please feel free to input your question into the Veracast system that you've got in front of you, and we will ask those questions when they get received. So let me move on to the next question, Andy. Skill-based learning is a vast opportunity. It feels like Chegg is still in the early stages of exploiting that market. So what's the strategy here? And how do you scale your existing offering under the Thinkful brand?

Yes. So if you think about Chegg 2 years ago, we were academic-based learning almost. Let's be clear. And what we've talked about this whole time is what we call academic-based learning. For many -- for several years, we had been doing a lot of work in our corporate development and business development organization regarding understanding the skills market because we felt strongly that one of the areas where we would want to expand at some point in time would be in the skills-based lending. Why wouldn't we? Because what we saw in the marketplace was more and more employers are more focused on what skills an employee has versus whether or not they have an education from whatever school. It could be Eastern Illinois, where I came from, or it could be Harvard, but it was less relevant. What was more relevant to employers was that you had the specific skill that was needed to do the job. And what you've seen in the marketplace over the last many years is many skills companies out there, right? Some small, some that address skills broadly like a Pluralsight and then -- or a Udemy or some companies that go down deeply in verticals. And so we did a lot of research behind all of that, and it became very clear to us that it was an area where we needed to get into at some point in time. So kind of get to a point where, where are we today. Well, we made a very small acquisition of a company called Thinkful, very small, about $100 million. Why did we make that acquisition? Well, first thing is we wanted to get into the skills market. And the second thing, it became available. And it wasn't that expensive, and it gave us an opportunity to participate in a market that we weren't participating in. And there's no substitute for actually being in a market participating versus doing research, right? You can research all you want, but unless you're actually participating in the market, it's hard to really understand. And so we made a fairly small purchase. It's small today, so -- but it's allowed us to learn and understand the skills market. We do believe that over the next several years, we will expand both our existing offering and into new offerings, very much like we have in the academic space. If you think about our academic learning that we just spoke about, every one of those subscriptions came from some form of acquisition, every one of them. So you talk about Chegg Study. What I remember 11 years ago is a company called Cramster, which nobody knows about. But that's what I remember. It was the seed of what Chegg Study became, right? And so I would anticipate that over the next several years, we're likely to make acquisitions to add to the portfolio of skills. And our goal is to have a multi-hundred million dollar skills business over time. It's -- truth be told, it's a fragmented market today. And we believe, given our balance sheet, given our user base, that we're somewhat of a -- it's a natural extension for us. I mean I always like to remind people, we literally have tens and tens and tens of millions of students that have graduated Chegg. It's more likely than not a large percentage of those are going to need to be upskilled, to be reskilled. And if we have products that allow them to do that, why wouldn't they come back to Chegg, given the affinity they've had for Chegg? And so we believe it's a natural extension of the demographics. And like I said, we've just started with a small acquisition. You would anticipate that we would do more in this space over time.

Perfect. Actually, I was going to ask you a question on M&A since you got a significant cash balance and you touched on it. But just to finish up on that subject, could you do anything substantial or maybe more transformational than just bolt-on?

Yes. Well, one of the reasons we have the balance sheet we have, right -- to your point, we have a nice cash balance. What the cash balance allows us to do and just our overall capital structure allows us to do is to potentially make larger acquisitions, whether it's on the academic side or the skills side. Now having said that, whether or not it's a $100 million acquisition or a $1 billion acquisition, what's more important for us is that we follow the same process that we've used for the smaller acquisitions. And that is we're very focused on keeping any acquisition that -- I'm a golfer so I'll call it the ball stays in the fairway. Whether it's a pitching wedge or a driver, it doesn't matter, a driver probably being a very large acquisition. But we use the same -- it's the same process, it's the same criteria, whether it's small or large. And truth be told, have we looked at larger acquisitions in the past? The answer is yes. And the beauty of our capital structure today versus where we would have been just even 4 years ago is we get invited into every conversation because of our capital structure, and that's part of the reason we have the capital structure in place. So I brought up -- there's been a -- I brought up a company just a couple of minutes ago called Pluralsight. They just recently got purchased by a private equity firm in the skills space, by the way, but we were invited into that discussion. It wasn't the right acquisition for us. It wasn't a matter of price so much as it just wasn't the right acquisition, but that would have been a multibillion-dollar acquisition. But for a variety of reasons, we decided that wasn't right for us. But yes, we do have that ability today. But once again, we're using the same criteria and process as we would, whether it's a $100 million acquisition or $1 billion acquisition.

Perfect. I've got a few more questions, but I'll remind everyone, if you've got a question, feel free to use the Veracast system to ask your question. Let's talk numbers and financials. Chegg offers a fairly rare combination of both high growth and crucially high profitability. So your EBITDA margins are in the 30s or low 30s. Now where do you think they could get to in the longer run?

Well, yes, we get that question asked quite often. In fact, I think it was the last question I got asked on our last earnings call, and I'm going to repeat exactly what I said. And that is we're not close to a steady state at Chegg at this point. We recognize and we are in a unique position relative to a lot of companies out there where our model, it's -- you get a lot of leverage out of our model, right? And the thing is, when you think about it, much of the content that we have, that we've got in place over the last many years for really primarily U.S.-based students is applicable outside the U.S. So STEM is STEM. It doesn't matter where you are. So that content for science or math or whatever it is, is applicable outside the U.S. So we don't have to create a lot of unique content, so it's expandable outside the U.S. And the second thing is whether -- even outside the U.S., as we go -- we don't spend a lot of money on paid marketing relatively speaking. If you look at our sales and marketing line, it's relatively small compared to companies like ours. So in other words, much of our traffic and much of our subscribers come from unpaid sources. Part of it's brand, particularly in the U.S., where people just know. They Chegg-ed it. A lot of it's word of mouth. A lot of it's SEO. So SEO is relatively free. And so we don't do a lot of paid marketing. So as we think about the future, we think -- we believe that we will continue to be a high growth on the top line. We continue to believe that there's continued expansion for many years, EBITDA margin expansion on the bottom line. Last year, I think we were -- we increased EBITDA margins 200 bps. This year, based upon my guidance, it's 300. And so we continue to expand our EBITDA margin, and we just don't see that stopping in the near term.

Fantastic. It sounds like there is no shortage of growth here. But in your view, as a sort of concluding point, what's the single biggest opportunity for Chegg?

Well, it's hard to pinpoint one, right? I think there are several axes of growth for us. There's certainly significant growth opportunities in the U.S. as we expand subject matters, as we -- as our Chegg Study Pack, which we didn't talk about, continues to penetrate. I think that when we look at international, we're just at the very beginning of international. We've talked about 1 million -- more than 1 million subscribers this year, but that should be millions and millions of subscribers as we continue to think beyond just the next 2 or 3 years. And then the skills space, once again, at the very beginning of skills, where if we're having this conversation 5 years from now, if we don't have a multi-hundred million dollar skills business, I would argue we failed. And we don't plan on failing. So that's another massive growth area for us. So I'd say those are the 3 key growth areas for us. And in many of them, we're still very -- in the very early innings. So we're super excited. We -- bottom line is I actually think -- as good as people think the past has been for Chegg, I think the future is much better.

Great. I'm out of questions. It doesn't look like there is any question from the audience. But Andy, do you want to have any closing remarks? Any points that should have been broached?

No, I think you nailed it, Didier, and it's nice meeting you. And thank you, everybody, that joined the call this morning. Thank you.

Thank you, Andy, and thanks to the Chegg team. And thanks, everyone, for calling in. And have a great day.

Okay. Thank you.

Thank you, Andy.