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

Hello, everyone. My name is Jason Celino and I'm the ed tech and vertical software analyst here at KeyBanc. I am more than pleased to welcome Chegg's CFO, Andy Brown with me today. First off, earnings are still pretty fresh. They were this week. It was only a couple of days ago. Maybe that's an appropriate place to start.

And maybe the first one. I know you don't manage to ARPU but it is a metric that a lot of people track, and it bounced back very nicely in the second quarter. Maybe start there and what drove that outperformance.

Yes, yes. So I mean, we don't guide to it and we don't provide that information to you folks. But obviously, I'm sure a lot of our investors, and I know a lot of our investors, take our services revenue divided by subscribers and come up with an ARPU number, which in itself is -- I get it, but there's a lot of stuff that goes in there, right? And what we did see, if you do that metric, obviously, we saw a nice uptick in Q2. There was really 2 key reasons for that. One is the fact that we've got many, many more subscribers that are in our, what I'll call, our renewal base for our Chegg Study Pack, which is our premium-priced offering, which is at $19.95 versus the $14.95. And so as a reminder to those folks on the Chegg Study Pack, when we introduced it in, what, early 2020, it was only being offered to our -- either our new subscribers or re-subscribers, not to the existing renewal base. And we're now at a point where we've got a fairly significant component of our renewal base that continues to renew at the $19.95. So that had an impact. And it's showing itself, I should probably say that. And the second one is that we actually lapped the acquisition of Mathway, an acquisition we made about a year ago. And when you take a look at the last 3 or 4 quarters, that's been, I'll call it, that inorganic growth and adding Mathway, which is a lower-priced subscription, right? It's at $9.95 a month or $39.95, we've kind of lapped that. So it allows us to see the core -- what's happening on the Chegg Study Pack, which is a big -- with the biggest part of -- Chegg Study and Chegg Study Pack, which is the biggest part of our subscription. So net-net is we'd anticipate that as we continue to get more and more Study Pack subscribers on the platform and therefore into the renewal base, that we would see our ARPU gradually increase over many quarters.

Okay. And then maybe relative to the guidance raise because the service has raised was -- by a good amount, calling for, call it, 33%, 34% services growth or whatever the number is. What gave you the confidence to do it now versus waiting until you saw that first couple of months of the school year?

Well, yes, that's a fair question. We -- one of the things that if you kind of just go back 15 months ago, there was certainly a lot less visibility, particularly around what was happening with account sharing, what was -- and particularly things like that. And as we've kind of rolled through where we are, we've kind of lapped some of the key events that we've had, right? So certainly on the account sharing side, certainly on the Mathway side. And as we started to look at the momentum we saw, a, in Q2 and then as it was going into Q3, we felt very comfortable not just taking the beat that we had in Q2 and then you're just adding it on to the year but adding on top of that. And just as a reminder, right, since we initiated our guidance for 2021, which was in November last year, we've effectively increased our guidance about $40 million. So we're starting -- what really tell -- what it should tell you and our investors is we're certainly seeing more clarity around what the future looks like versus where it would have been just 12 months ago. And truth be told, when you get more clarity, you have more confidence, and that allows you to be more confident with your forecast and your guidance.

Okay, perfect. And one question on kind of this new discovery uptick, greater personalization announcement. I was talking to my colleague, Devon, who works with me on my team. And what might this look like? Because you talked about a shift from textbook-based search. Is this going to be student searching based on their school, their courses? I mean, give us a preview here.

Yes. So just really, just for everybody else on the phone, just a little bit of history here. When you look at Chegg Study and Chegg Study Pack just as a service, when it started out over 10 years ago, it was just textbook solutions. So the whole orientation of the search was organized around, you would imagine, textbooks, right, because it was textbook solutions. And if you take a look at the progress that we have done with Study and Study Pack, it's much more than textbook solutions. In fact, if you take a look at the underlying content, less than 10% of it is textbook solutions. You've got Expert Q&A, you've got instructional videos, you've got practice tests and assessments. And we just recently introduced the fact that we're adding content from professors, things like class notes and study guides and other things. So as we looked at that and, as you can imagine, we also -- we were pretty engaged with our students as far as asking what they want. And so this isn't -- this is something that we realized a couple of years ago through our quals and our studies with our students where instead of it being more around the textbook, which is becoming less relevant, truth be told over time, organizing the data and how we present it to the student around either the class or the subject matter made much more sense. And so what we're now -- what we've been developing over the last, call it, 18 months is that type of view on our platform. We started to roll it out to a small subset of our students a week or so ago, and we would anticipate that we'll kind of turn that up. So by the end of -- certainly by the end of the fall semester, hopefully sooner, that is what we -- all of our students have that. And our hope being is that we get more engagement, we can help better predict what students want. And as a result, they stay on the platform longer. And if they stay on the platform longer, obviously, that drives a -- it obviously drives retention but that also drives incremental revenue opportunities for us.

Okay, perfect. And I do want to hit other topics like international, account sharing and Study Pack. But I do want to ask an important question because we've been getting this quite a lot. It has to do with your subscribers. So maybe kind of level-setting it and then I'll ask my question. If we look at Chegg pre pandemic, in 2019, on a quarterly average, subscribers were like 2.3 million. And you're adding, call it, 500,000 to 600,000 net adds, growing somewhere 30%. That was 2019. Fast forward to 2021, the 2Q that you just reported, you've got double the amount of subscribers, 4.9 million in the quarter. You've doubled the amount of these yearly adds to like 1.1 million. And you're still seeing the same 30% growth rate. So my question is, help me unpack where these incremental subscribers might be coming from and the sustainability of it.

Well, wow, that's a loaded question. That could take a while. But let's kind of go back on a couple of things, right? So if you go back to 2019 and -- well, no, 2019 or even early 2020. We had -- if you looked at the -- well, just go back to 2019. I think we had -- in Q2 of 2019, we had 2.2 million subscribers. The question you got to ask yourself is how many people were using the subscription, right, because we had no account sharing measures in place. And so one of the things we put in place early last year, or at least middle of last year, was account sharing measures. And just for folks that are not as educated on Chegg, up until middle of last year, we had -- somebody that subscribed to Chegg could share that account with almost anybody. And so we knew at that time, we had more people using our subscriptions versus the people that were subscribing. We put 2 things into place last year. One was device management and the second thing was multifactor authentication or MFA technologies. And as a result of that, what we know has happened, right, is those people that were using Chegg are now subscribing to Chegg. So that certainly had an impact over the last, call it, certainly during 2020. So then question is where are we getting the new subscribers post that, all right? And a lot of that has to do with the type of content that we're putting on to our platform, right? So if you -- once again, I look at Chegg Study very much like Amazon Prime. Amazon Prime started out as 2-day shipping way, way, way back when the same way, way back when Chegg started out as textbook solutions. Amazon Prime has added much more -- many more capabilities to it, whether it be video, music, fresh, whatever they add. And today, kind of 2-day shipping is an afterthought. Same thing with Chegg Study, right? Textbook solutions, a little bit of an afterthought. I mean still used but it's less than 10% of our total content. So as we've added new forms of content, new subject matters, new modalities, we're picking up more and more subscribers. And so that's one area. And the second area that I'm sure you'll want to talk about is international. So starting early last year, 2020, we started focusing on international. And the beauty of our model is this, is that much of the content that we have developed for the U.S. base is relevant to the international base because STEM is STEM, right? Physics is physics, math is math. And so as we're rolling through this year and into 2022, we continue to believe, given the -- I lost you? Okay. Given the dynamic of new content, new subject matters, international growth, we will continue to be a high-growth, high-leverage company. Jason, did I lose you? Are you okay, Jason?

Yes, sorry.

Okay. I'm sorry. I lost you. It's like all of a sudden, it was like The Brady Bunch, which...

Okay. So I appreciate it. I think that was a good answer. Moving on to international. You did talk about it. So you're on track to exceed this 1 million international subs this year. Can you remind us what your expansion story is here and perhaps where you're seeing the most growth? Is it English-speaking countries? Is it the English -- or is it truly broad-based?

Yes. So we started -- we've -- just for everybody else, we've had international students come to our platform before we started to focus on it. And we started focusing really on international in the beginning of 2020. We made what some people thought was a bold statement at the beginning of this year, saying we'd have more than 1 million students on our -- subscribers on our platform. We reaffirmed that on the most recent earnings call saying we thought it would be more than that. So what are we doing? We initially thought early 2020 we'd be focusing on the 3 English-speaking countries, right? Imagine -- who they are, Canada, Australia, U.K., in that order. What we found out really quickly and particularly as COVID came across not just in the U.S. but across the globe is we started to see fairly significant growth from other countries that are not English-speaking but there's a very large contingent of English learners that were always on our radar but they weren't a focus. The middle of last year, we decided to start to be more aggressive in our investments against those countries. And so instead of 3 countries that we were focused on, we're now focused on, call it, 8 to 10 major countries. And so there are countries that, I think, most people wouldn't realize are: a, we're starting to see literally tens of thousands of subscribers in, for example, Turkey, right? Not something that you would have intuitively thought of just 12 or 18 months ago. And so what we're doing is we're investing into that. And what do I mean by that? I mean, the fact is when you look at the subscription that has -- an international subscriber gets today, it's essentially the U.S. subscription other than the fact that they can pay in the local currency. What we are investing in is technologies that would allow us to package the product, price the product regionally, like a lot of other subscription companies do. We're not there yet but we're making those investments. We're clearly investing in marketing. So we -- if you looked at our marketing budget, call it, 24 months ago in 2019, it'd be almost exclusively based -- U.S.-based right, whether it be Google, Spotify, Facebook, whatever it may be. But we now have marketing programs across multiple countries. And it's working. And we are starting to see -- and while we're investing more in those -- marketing in those countries, we're still seeing the vast majority -- still the majority, not of those subscribers coming through unpaid sources, but we're -- but those are the things that we're doing. We think we're very early. And I can't say that enough, very early. While 1 million subscribers outside the U.S. sounds like a lot, it's small relative to the opportunity. We fundamentally believe that if you look at Chegg 10 years from now, I know that's a long time, but if you look at Chegg 10 years from now, if we are as successful as we believe we can be, international should be larger than the U.S. for Chegg Study and Chegg Study Pack. That's our belief.

Okay. So the localization efforts, those are important for the international story?

Well, the -- yes, the ability to offer unique packaging and the unique pricing is important. Yes.

Okay. Maybe moving on a little bit, just touching on the account sharing piece. The initiatives that were implemented seem quite effective, but maybe what's giving you confidence that these initiatives will prevent the users from going back and widespread sharing like we saw before, especially as they return to classes?

Yes. Well, they started to return to classes in the spring, right? And so we've got some clear evidence that what we put in place is working. And I think many, many folks on this call will have been through what it's like to happen, certainly multifactor authentication, right? Whether you've been through device management, don't know, but certainly multifactor authentication, where if you're signing on to an account or you're moving an account or you're changing a device, you've got to verify that, in fact, that is you. And so we've already seen that be effective in, like I said, the spring semester, there were a ton more people on campus than it was in the fall semester. There'll be more likely than not more on the campus in this fall. So it is working. It is difficult but not -- I'm never going to say -- never say we're going to do 100%, right? Students can get smart, but all evidence suggests that the measures that we have put in place, which limits the number of devices to 2 and the MFA technologies that we also implemented in the fall of last year are working and continue to work.

Okay, perfect. And then maybe touching on Study Pack here. It's -- I'm curious because it's been over a year now since you've had it, so I'm sure you've got more data, et cetera. But how does the retention look for the average Study Pack user versus the regular Chegg Study subscriber?