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

Good morning. It's Jeff Silber. I'm the business industrial services and education analyst with BMO Capital Markets and really thrilled that you're all here to join us at the 2021 Technology Summit. Had a great lineup so far, and it continues with a company that I've been covering for a while called Chegg. CHGG is the ticker. We're thrilled to have Andy Brown, who is the CFO of the company, with us. This is going to be a fireside chat format. I've got a list of questions, but there's also an opportunity for you to ask questions from the audience. I think you'll see on your screen, there is an icon there where you could ask questions. And I'm monitoring the questions, and I'm more than happy to ask them on your behalf. And they will all be anonymous, unless somebody wants to let us know who they are, but we'll keep it flowing that way. So Andy, again, really appreciate you being here and everybody in the audience as well. Thanks so much.

You're welcome. It's great to be here.

Great. So I'm assuming that most of the audience is familiar with your company. But just in case, can we just get a basic understanding of what Chegg is all about?

Yes. Well, it's -- and you've been with the company, I think, as long as anybody on the analyst community. So you go back to the IPO days, and we were -- back in the IPO days, we were a textbook company that had the dream of being a digital services company. And that dream, truth be told, has come to fruition. So we're no longer a textbook company. Even though we still offer textbooks, it's a very small part of our business, and we have become a -- basically a subscription services business going direct to students. I'd say if you go back -- let me think now, it's, what, 8 years since the IPO coming up in October? I think it is 8 years. We had this dream, we had this vision, and we had certain financial things we thought could happen. But I would say that if you fast-forward to where we are today, I'd say we're ahead of where we thought we'd be at this point. And a big part of that is just the need for students to be able -- to help them through their schoolwork. And so when you look at our company today, we've got, what, about 30 million monthly active users on our platforms, and I use the word platforms because we've got multiple brands out there. And we've -- we had almost 5 million subscribers just last quarter alone. So it's -- we've become a de facto standard on campus. I mean, I think the best -- the biggest compliment we get from our students is we often see things on social media where people say they Chegg-ed it. So we've become that verb, as it were. So let me just walk through, for those that are not as educated, really the services that we have. We have 3 main services -- subscription services on our platform today, and I'll go through kind of in the size -- kind of in the order of magnitude. One is called Chegg Study, and Chegg Study is a $14.95 a month service that allows students to get essentially homework help. And it's a combination of several things within that service. And I like to use the analogy of Amazon Prime. And really, that's what Chegg Study is like or at least how we've built it, I should say. And if you recall, Amazon Prime started out as 2-day shipping, and Amazon Prime today, they've added many, many more things, whether it's TV shows, whether it's original content, whether it's music, whether it's Amazon Fresh. So they've added to the capability of Amazon Prime. We've done the same thing with Chegg Study. So it started out as textbook solutions many, many years ago, 11 years ago. And since then, we've added things like Expert Q&A, practice test, assessments, video learning and all of those things. And more recently, we're starting to add professor content with a program that we just introduced called Uversity. So that's Chegg Study, and we've literally got millions of students on Chegg Study. It's focused primarily on college, but it also -- we also have subscribers in high school, particularly for those students that are taking advanced placement classes because the content for those advanced placement classes are very similar to freshman classes, right? So that's Chegg Study. The second service is Writing Tools service, and that's a freemium business. There's a free part of it that is supported by ads, which is we allow students to get their citations and bibliographies for free. And then there's a component where you could upgrade to where you can get help with grammar, sentence structure, plagiarism and all those types of things. And that's a $9.95 subscription, once again, supported by ads on the free side. And then the third thing is in our math. We have a math subscription, and that is -- we've -- it's primarily through an acquisition called Mathway. We made that acquisition a little over a year ago, and that's really a solution provider for math problems, physics problems and things like that. And so that's what we have on the platform. And then we do bundle all of that together in what we call the bundle or what we call the Chegg Study Pack, so where we offer all 3 of those things, not a math solution, not necessarily Mathway, for $19.95. So that's the core who we are today. We go direct to students. We just recently or recently been, in the beginning of last year, starting to expand outside the U.S., and that's becoming a very -- it's becoming a bigger business for us, and it's one of our higher-growth areas. We believe -- we've stated this many times that we believe we'll have over 1 million subscribers outside the U.S. this year, and so we're not just confining ourselves to the U.S. anymore. We're heading outside with our academic services outside the U.S., and that's a high-growth area for us. And just, finally, because this -- and while it's not very big today, it is a very large strategic part of where we believe we'll grow over the next many years, and that is we expanded a couple of years ago, about 1.5 years ago, into what we call skills learning versus academic learning, which I just talked about. And so we bought a very small company about 1.5 years ago called Thinkful. We've expanded into skills, and we believe skills will be a big part of our growth over the next, call it, 5 to 10 years as we add more assets to that portfolio. So let me leave it there, and hopefully, that educated folks on who Chegg is today.

That was great, and I think you've answered all of my questions. So thanks for your time. So let me drill down a bit. We'll start with Chegg Services. So obviously, Chegg Services' growth, in terms of subscribers and any other metric you look at, has just been phenomenal. Can you talk about what's been driving that growth? And how sustainable is that as we return to some sort of normalcy this fall?

Well, I mean, if you -- we've been a consistent high grower, right? And whether it's pre-COVID, post-COVID, we've been consistently -- and I call a high grower in the kind of in the 30% range. And then we've been slightly below that, above that for a period of time. And so as we look at things, we feel like we've got growth across multiple areas. We still believe there's fairly significant growth here in the U.S. We -- when we look at the U.S., particularly when you look at college students, and then you look at maybe high school and junior students, we believe that -- and we said this, what, 5 years ago at an Analyst Day, we believe there was at least 10 million students in the U.S. that should be subscribing to Chegg. And today, we believe it should be higher than that. And so we're not close to there at this point in time. So we do believe there's opportunities in the U.S., particularly as we bring on this -- as what we've done on our platform is we brought on new -- we've added new subject matter to our platform, and we will continue to do that. And we add new forms of content, whether it be new modalities like we did a few years ago with video learning, right? So not everybody learns the same way, and so we added video learning. And then -- and more recently -- and while it's not being offered to the students yet, but we're adding the content to our platform, it's very clear that students want educator-based content, and so we've added that with the Uversity. And we'll probably open up -- it's more likely than not, we'll open up the platform either late this year or beginning into the spring semester once we have a critical mass of content there. So we believe that, that will add to the growth. And then the second part is, and this is where we're really early on, and that is offering our content outside the U.S. And that's an area where we embarked upon this journey at the beginning of '20 -- really, in 2020, maybe mid-2019, as far as doing some of the core technological stuff. And originally, we thought that was going to be -- initially going to be just -- would be Canada, U.K., Australia. And what we found is that, in fact, the content is more applicable beyond just those 3 English-speaking countries. And so we're -- we've expanded that to more like 8 or 10 countries, at least initially, and we've seen fabulous growth there. So we think there's significant growth in the academic space, both in the U.S. and internationally, for like many years to come.

Okay. That's great. So again, sticking with Chegg Services, and maybe we'll focus first on Chegg Study. What is unique about the Chegg Study platform versus some of the other online study tools that are out there? And what are you doing differently, either in terms of content or overall strategy, versus your competitors?

Well, the first thing is there's not a lot of platforms out there that have scale, right, or a significant brand like we do, right? So one of the things that I think that people don't realize because the folks on this call are not in school right now, well, most of them are not in school, is how pervasive the Chegg brand is, where students, just like I said earlier in the infill, they just Chegg it. right? So we have, over the past, call it, 15 years because the brand started brands started to get created when we were just a textbook company. And so I think that's a huge barrier -- one of the huge barriers. I think the other thing is where we're unique -- relatively unique to most companies in the education space and where we really broke ground was we went -- we decided to go direct to the student, right? If you think about a lot of other education companies, whether they're traditional education companies like the publishers or even some of the newer edtech companies, they -- most of them go through the institution. And so what we decided to stake our brand on was going direct to the student and recognizing that students need help, right? So as they go through their studies, they need help with their classwork. They need help with their -- as they're going into a test or an exam and things like that. And truth be told is there's not a lot of help services on campus today, and so we've become that help service. What we've also done, which is what students expect which they don't get on campus, it's -- really is a 24/7 service, right, anywhere, anytime, any -- it's online. And so if you think about how students live their lives today, it's with this, right? It's their mobile device. And they expect to have on-demand services, and that's what we do. It's -- everything we do is on demand, and so I think that's been a significant differentiator. And then the third one where we're different than maybe some of the competitors that are maybe in the private markets. You -- I'm sure you're -- Jeff, you're very familiar with the education market. But one of the things -- and we've got some competitors that allow students to upload content and then be able to download it. What we decided to do early on was that all of the content on our platform, and there's over 65 million pieces of content on our platform, that it was going to be content -- for the most part, 99% of the content is stuff that we have created and that we have verified that it, in fact, is correct, right? So it's our -- we own all of that content, and we've built this massive network of expert users out there, over 100,000 expert users that we contract with to help us generate that content. And that's a significant moat when you look at it compared to any competition that we have out there. So I think it's -- we're unique in that. And then I guess the third thing is when you wrap it all together -- and we're just talking Chegg Study. When you wrap it together with math, and you wrap it together with writing, I don't think there's anybody that has the breadth of a platform that we have. We may have certain smaller competitors that have small slices, but nobody has the breadth that we have direct to the student.

That was really helpful. A bit of a segue from one of your answers about competition. We've seen some efforts recently from some of the publishers, as an example, Pearson+ product, to roll out what I guess I would call Chegg-like products or services. What impact do you think things like that could have on your business?

Yes. So just -- so folks that are not as familiar with the education industry, so Pearson+, Pearson announced this, I think, I don't know, a month ago, a few weeks ago. I don't know exactly when. But they're going to start offering e-textbooks directly to students. That's what Pearson+ is right now. Cengage did something similar a couple of years ago but not the same, right? Theirs was at Cengage Unlimited, but it was e-books, plus supplemental education material. But the net-net of this is not a lot, right? So just to be clear, the -- Pearson+ is -- they're e-textbooks. But e-textbooks, as you know, Jeff, is maybe 15%, tops 20% of the market today. It's -- and I think we're a good proxy for that. So still the vast majority of what we call Required Materials are textbooks -- are physical textbooks, and we still offer textbooks from -- we offer textbooks from Pearson, all of the key publishers. And on top of that, as I've mentioned earlier, Required Materials or textbooks really isn't the biggest -- is not the real focus of our company today. We -- it's become -- it's something that we offer as a convenience to our students because it's still a pain point. It's not a growth business for us, and it's a business where it's -- I call it empty calories. And that is that it's no growth, and we try to run it at breakeven, plus or minus. And so we don't think that's going to have a massive impact. Like I said, Cengage Unlimited came out 2 years ago or so, and we saw negligible impact, but I don't recall seeing an impact. So I don't see that being a big impact on our business, particularly given the fact that we're not focused on Required Materials. Our core focus is Chegg Study, writing, skills, math and things like that.

All right. So that was really helpful. So I'm sorry, we got off on a segue there, so maybe we'll come back to discussion on Chegg Services. Andy, you talked earlier about rolling out the Study Pack, the bundle that combines a number of the services. Can you explain exactly how that works and what impact that's had on your business? Have you seen any cannibalization or anything like that from other products?

Yes. So on the cannibalization thing, no. So -- and we certainly wouldn't have rolled it out if we saw that in testing. So yes, what we've seen on the Study Pack, interestingly enough, when we started to -- we rolled it out to 100% of our new and resubscribers in January of 2020. And what we've seen -- we saw immediately and we've seen since then is that the take rate was higher than we thought. And so we've continued to see a better-than-expected take rate. And take rate is if somebody is offered Chegg Study at $14.95 versus Chegg Study Pack at $19.95, the take rate of the $19.95, just so everybody is clear. And we're seeing it much better than we'd anticipated. We've -- but on top of that, we continue to iterate the package, right? So we -- the beauty of the -- an Internet model like us is we can test things to a small slice of our consumers. So if a consumer comes onto our platform and is looking for Chegg Study, and we offered them to Chegg Study and Chegg Study Pack, we can carve out maybe 5% or 10% of them and offer them a different package to test how they react to those new packages. So we continue to test different things in the Study Pack, whether it be different offerings in the Study Pack or whether it be different ways to present it to the user to encourage them to take the Study Pack. But overall, it's done super well. Like I said, it's only being offered to new and resubscribers. And we often got the questions, "Well, why don't you offer it to the people that are renewing?" And the answer is, well, after a couple of years, you kind of get through most of the renewers because in our business, we're a little bit unique, unlike for a Netflix. Netflix, you have the -- you don't unsubscribe at the end of a semester to Netflix, right? There's no reason to. But at the end of our semesters, it's usual to unsubscribe. And if you unsubscribe and then resubscribe at the next semester, you actually -- you get the bundle offered to you. So we get a chance to offer that. It's not like -- it's just different. And so net-net, it's gone really well. We're starting to see a nice pace in our renewal base of Chegg Study Pack, and it's doing exactly what we thought. We anticipated that we'd start to see ARPU increase. It is increasing. It's hard for the external world to really see that because it's not just like Chegg Study -- we don't report Chegg Study out separately. There's a whole bunch of other things in there. But as we see things internally, we're continuing to see -- when we look at the study and Study Pack subscription services, we'll continue to see ARPU increase consistently quarter-over-quarter.

Okay. Why don't we shift over to international growth? You mentioned and maybe we can drill down a bit there. Where are your largest international markets? And do your international students differ at all from your U.S. customers?

Well, let's just be clear, Canada is our largest international market. Their education system is similar to ours, and it's -- and they're -- so that is our largest market. But what has surprised us about the international market is how vibrant the non-English-speaking markets have been. And I think we may have had this discussion before, but I -- we -- I continually am amazed that we've literally got tens of thousands of students subscribed from Turkey, right? Go figure, right? So -- but what you don't -- what people don't realize is while there's more non-English-speaking countries internationally than there are English-speaking countries, a lot of those countries have a very, very large contingent of English-learning students. And so we've expanded what we've done, like I said, to 8 to 10. What 8 to 10 -- the focus to 8 to 10 countries, even though we have literally over -- well over 100 countries where students are coming onto our platform for help. The beauty of how our business works is this: and that is the content that we've already generated for the U.S.-based students is applicable outside the U.S., right? Because STEM is STEM. It's not like it's -- or STEM-B is STEM-B, B being the business part of it. And so what's the -- whether it's physics here or physics in Turkey or Canada, Australia, it's the same. And so the beauty of our content is we can leverage it outside the U.S. We don't have to create unique content for -- mostly unique content for outside the U.S. And so when you start to look at our model, while we are investing heavily in international, whether it be systems capability, whether it be in the marketing arena, we continue to see leverage in our overall model because we do have -- we get a lot of leverage from the millions of pieces of -- tens of millions of pieces of content that we've already generated. So we -- and so that's what we see. As far as the user goes, yes, there are some differences in users. There are things that we, from a technological standpoint, will be -- will implement to make things better. For example -- and you know this with other subscription services. Right now, the -- if you think about right now, the subscriptions that we have in the U.S. is exactly what the international markets are getting, but the international markets are different. And so you can -- you would expect over the next several years, I'm not talking about the next several quarters but next several years, where we have the capabilities and we'll implement unique packages for international countries or regions, unique pricing for international regions or countries. And so those things you would expect us to do over time. We don't have that capability today. We're investing in the technology to have that capability, but that's why we're confident that as we look beyond this year and next year. But you think about Chegg 3, 5, 8 and 10 years from now, we've got a long growth trajectory in those areas.

Okay. That's great. Shifting gears a little bit, I want to talk about password sharing. Before COVID, this seemed to be an issue for the company. And to some extent, it really seems to have been mitigated over the past year, 1.5 years or so. Can you tell us what you did and how that's worked so far? What should we expect coming up in the fall?

Yes, yes. So I've got -- just a quick buddy story here. I played golf on Friday morning with our VP of Engineering, and we were paired up with a student that was giving us the riot act that he couldn't share his Chegg Study with his friends. And it was costing him more money because he couldn't share Chegg Study with him. So I just -- and I pointed to our VP of Engineering and said, "Blame him. He implemented the technology." So -- but nonetheless, yes, password sharing has -- it's something that we've known about for a long period of time, even 3, 4, 5 years ago. But our goal back then was to make Chegg and Chegg Study ubiquitous on campus. And so in real, simple terms, if we have 1 million subscribers on Chegg Study, we probably had -- I don't know how many more, but we had more users than 1 million. And so what we did last year, for those folks not as familiar, last year, we implemented 2 things to alleviate password sharing, and as a result, capture more of those people using Chegg Study, particularly those who were paying for it. One was device management. We did -- we implemented what we call device management in August. And what device management is, in very simple terms, it only -- on our platform only allows you to use Chegg Study on 2 registered devices, period. And so instead of being able to share your password with 10 other people, you can only do -- you can only have 2 devices, which is normal for students, right? I mean, I'm on a laptop right now. I'd want to use the laptop. And guess what? I'd want to use my mobile device. By the way, notice the Chegg branding. So -- and the second thing we implemented, which is later in the fall, was what we call MFA technology, or multifactor authentication, which most people are familiar with, students are familiar with. And so what we do believe is that the implementation of device management and MFA have had a big impact on clamping down on account sharing. And that's particularly relevant now that students are going back to campus. Because what we found was -- we believed there was a lot what we call proximity sharing, where if you're in a class, you just ask somebody, "Hey, can I share your Chegg account for a little bit?" Right? There was a lot of proximity sharing. As students go back on to campus, that -- the technologies that we've implemented solved basically 100% of that. So that is something we implemented last year. It's gone -- truth be told, the thing that was -- concerned us the most about implementing these things, and we had kind of heard it a little bit from the kid we played golf with on Friday morning, is we were concerned about the blowback and the brand reputation. And what we found was when we started implementing it, it wasn't -- it really wasn't a big issue. We saw a lot of stuff on social media saying, "Well, Chegg just implemented this, and, man, they caught us." And so it was more of a -- versus saying those just blasting Chegg. We didn't get a lot of that. So overall, the implementation has gone super smooth. And obviously, we're reaping the benefits of implementing those technologies.

That's great. And my next question is something connected to that in terms of how you interact with students. You rolled out what you call your Honor Shield to prevent students from using Chegg for the wrong reasons. Can you talk about how that works? And what impact has that had, not only from a student perspective, but even in terms of getting teacher and faculty support?