Chegg Inc (CHGG) 2020 Q3 法說會逐字稿

Greetings, and welcome to Chegg, Inc. Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Tracey Ford, Vice President of Investor Relations for Chegg. Thank you. You may begin.

Good afternoon. Thank you for joining Chegg's third quarter 2020 conference call. On today's call are Dan Rosensweig, Co-Chairperson, CEO; and Andy Brown, Chief Financial Officer. A copy of our earnings press release, along with our investor presentation, is available at our Investor Relations website, investor.chegg.com. A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our media center website at chegg.com/mediacenter. We encourage you to make use of these resources.

Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of the company. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements. In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg's quarterly report on Form 10-Q filed with the Securities and Exchange Commission on August 3, 2020, as well as our other filings with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and the investor slide deck on our IR website, investor.chegg.com. We also recommend you review the investor data sheet, which is also posted on our IR website.

Now I will turn the call over to Dan.

Thank you, Tracey, and welcome, everyone, to Chegg's Third Quarter Earnings Call.

First and foremost, we hope you and your families continue to be healthy and well as we all navigate these unprecedented times. It has become apparent to us that this terrible pandemic has only further highlighted the need for higher education to transition to a model that is more on demand, student centric, affordable and does a much better job of leveraging technology to the advantage of the learner. As evident in our Q3 results, students more than ever before are relying on Chegg as they navigate their semesters, whether they are back on-campus or not. And while our business continues to have an extraordinary year, more importantly, we are helping millions of students get through these uncertain times.

In Q3, we saw subscriber growth of 69% year-over-year, reaching 3.7 million students in the quarter. This yielded total net revenue growth of 64% year-over-year. The inevitable trend towards online learning, the clear need for high-quality online support and the momentum we are experiencing globally gives us the confidence to raise our guidance again for 2020 and provide our initial outlook for 2021. Andy will walk you through all of these numbers shortly, but I would like to take a moment to share with you why we believe our results will continue to perform at such a high level.

Millions of students around the world are now asking for a better return for their education and demanding a shift to the model we always knew it would become, increasingly online, on demand, adaptive, affordable, personalized and tailored to the modern learner. Chegg has been focused on these things for years. So we believe we are in the best position to not only expand academic support to students, but also expand the support to learners throughout their professional journey. We have tailored our efforts to reach students on different paths, including more at online schools and community colleges, and we are also seeing increasing demand for online learning support from students around the world.

Even before the global pandemic, there was a real question around the ROI of a college education. And students are demanding the ability to learn faster, have their education directly connect to their career path and accelerate their path from learning to earning. We know that the modern student also looks very different than they once did. They are older. Many have families. They are juggling work and school at the same time. So it comes as no surprise that they need more flexibility when it comes to their learning. More than ever before, like everything else in their life, entertainment, dining, banking, they expect education to come to them at the time that is most convenient for them, in the format that they want, at a price they can afford and that provides a real ROI. Chegg's online learning support platform is designed to serve the students in just this way.

As a leader in education, we believe Chegg has more direct-to-student relationships than any other institution. So we are often asked if what we are seeing and experience across the industry will continue. Our recent research shows that 2/3 of U.S. undergraduates who were asked about their experiences during the recent lockdown said they would welcome more online education after the pandemic ends. Recent studies also show that the majority of students feel their institution's main priority should be new ways of finding them a job or an internship.

We are seeing a change at the institutional level also as approximately half of professors now feel online education is an effective teaching method and feel better prepared to teach online, up from approximately 38% in May. We believe that as students get older and learn in different environments, their need for high quality online academic support will continue to grow. What this means for Chegg is there's an overwhelming need for the services we provide. And we see that, the increased demand and engagement, across all our platforms all over the world.

And as students rely on Chegg for more academic support, we continue to expand what we offer more recently with the acquisition of Mathway. These expanded offerings will also increase the value proposition for Chegg Study Pack, which is why we are seeing higher-than-expected take rate for that offering, including internationally.

Across our businesses, we are seeing extraordinary growth right now. In the U.S., we are seeing growth from many sectors, including students who are taking more courses online, increased penetration into online colleges and the impact of our technology efforts to reduce account sharing, which was first rolled out in August, and more recently, we began to launch multifactor authentification (sic) [authentication] across the platform as well.

Internationally, the sudden move off-campus created an immediate need for online support and introduced students to Chegg in record numbers, accelerating our growth around the world. When we look at the demographics outside of the United States, over 50% of the population is under the age of 30 and they are looking to improve their lives through education.

It is clear they need scalable, on demand support for their courses, which is why they are turning to Chegg. We now provide services to students in over 190 countries and in Q3 alone, we saw 25% of new questions asked and answered from students outside the United States. This indicates how powerful our model is and that it's a very cost-effective way for us to acquire local content and local audiences at scale.

Collectively, we saw 252 million content views in the quarter, an increase of 82% year-over-year. It is increasingly evident that in the mind of the students around the world, the need for Chegg is very real.

The other inevitable trend that we have identified is that students everywhere are seeking alternative, less expensive pathways to pursue their careers. That is why we invested in Thinkful and in skills-based learning. We think our strategy of increasing the curriculum to match to the most in-demand jobs, lowering our prices, offering income-sharing agreements and building in live chat support is a better model than anyone else has to offer.

And while we continue to navigate this complicated time in our history, while so many things have changed, some things remain the same. There will always be a need for students to learn new skills in order to improve their opportunities. There will always be institutional pathways, but they will now be both offline and online.

There has always been a need to connect academic to professional pathways. And we believe this moment in time will create a major acceleration of that trend. That is why we built Chegg from Day 1 to be an advocate for this transition in higher education and why we continue to invest in supporting anyone on their learning journey. This is why we are reinventing the model of learning to earning with lower priced, higher quality student support at scale, all exclusively online. And building a company like this can only be done by people who are dedicated to the mission of putting students first.

So on that note, I want to take a moment to congratulate the incredible Chegg team for once again being honored this year as one of Fortune Magazine's Great Places to Work for the third year in a row. It's a real Chegg three-peat. I could not be prouder of this incredible group of employees who have remained so focused and executed so brilliantly during this unusual time in the world. And I want to thank them for everything they do to make Chegg great.

And with that, I will turn it over to Andy. Andy?

Thanks, Dan, and good afternoon, everyone.

First and foremost, I hope you and your families are staying safe during these difficult times. As you can see from the results, Chegg had another great quarter with our business metrics and financials once again ahead of our expectations. During the quarter, we also executed a very well received convertible debt offering. The success we are experiencing both domestically and internationally gives us the confidence to raise our guidance again for 2020 and as we have been for the past 4 years, provide an early initial outlook for next year despite ongoing economic uncertainties.

Looking specifically at the third quarter, total revenue was $154 million, a 64% increase over Q3 2019, driven primarily by 69% subscriber growth to 3.7 million, as we continue to see significant growth opportunities in both domestic and increasingly in international markets. Adjusted EBITDA for the quarter was well ahead of what we expected at $32 million, as we continue to see strong leverage in the model, all while making incremental investments to build for the future.

We ended the quarter with approximately $1.8 billion of cash and investments. In the quarter, we completed a very issuer-friendly convertible debt offering, along with a concurrent exchange of approximately 50% of the outstanding principal on our 2023 notes that were deep in the money. We expect to use the cash on our balance sheet and future operating cash flows to fund our current business, including potential acquisitions, and to call or repurchase outstanding notes at opportunistic times to minimize shareholder dilution from these instruments. We continue to believe the combination of our scale, balance sheet, operating model and cash flows are the strongest in the education industry, which we believe provide a significant advantage to both our customers and our shareholders.

Moving on to guidance. Based on the strong results from Q3 and the continued momentum we are experiencing, we are increasing our guidance for 2020. For Q4, we now expect total revenue between $188 million and $190 million, with Chegg Services between $162 million and $164 million, gross margin between 72% and 73% and adjusted EBITDA between $82 million and $84 million. As a result, we are increasing our full year 2020 guidance and now expect total revenue between $626 million and $628 million, with Chegg Services between $507 million and $509 million, gross margin between 68% and 69% and adjusted EBITDA between $201 million and $203 million.

Turning to 2021. Our initial expectation for total revenue is approximately $775 million, with Chegg Services revenue growing to approximately $655 million. We expect gross margin to be approximately 70% and expect continued leverage in the model with adjusted EBITDA expanding to approximately $260 million, increasing adjusted EBITDA margin more than 150 basis points over 2020.

In closing, we had another strong quarter in Q3. We delivered above the high end of our expectations, giving us confidence to increase Q4 and full year guidance and provide a strong initial outlook for 2021. It is becoming increasingly clear that our model is the envy of the education landscape by serving students directly with high value, affordable services while improving their outcomes and helping them move from learning to earning.

With that, I'll turn the call over to the operator for your questions.

(Operator Instructions) Our first question comes from the line of Jeff Silber with BMO Capital Markets.

In your prepared remarks, you talked a little bit about the Chegg Study Pack. I'm just wondering if we can get a little bit more color in terms of how that's been going. You talked about higher-than-expected take rate, but I'm just curious how the momentum has been as you rolled it out.

Yes. This is Dan. The momentum has been great. And what do I mean by that? So it started earlier than we expected. And we are seeing a better take rate than we expected. On top of that, we are seeing a take rate outside the U.S. similar to that in the U.S., which surprised us because we weren't really sure how writing would do. But it's very clear that the more we can package and the overwhelming value that we can create for students that they're taking it. So we couldn't be happier to be honest with you.

And the impact on ARPU, I think people thought might have been a little bit higher. Can you talk a little bit about that?

Yes. It's hard to really break out ARPU the way we report because we report a full Chegg Services number, and that includes things like advertising, and now it includes things like Thinkful so -- but we do know that if you just look at the subscriber number and the revenue per subscriber that ARPU is up. Yield is up. So it's extraordinarily positive. You have to remember, we do have an advertising business that's much smaller compared to the rest of our businesses, but advertising has just been slightly weaker, which is why that may make up the balance. But if you were to just look at it apples-to-apples, you would be very pleased.

Yes. When we look at it internally for subscribers, we're seeing ARPU increase, like Dan said. Unfortunately, you've got the other businesses involved.

Our next question comes from the line of Stephen Sheldon with William Blair.

Congrats on another strong quarter. Can you talk some about top line trends you've been seeing at Thinkful recently, including funnel trends looking ahead? And additionally, can you maybe frame what you've included for Thinkful in terms of revenue and adjusted EBITDA within your 2021 guidance?

I'll start and turn it over to Andy, but what Andy is going to tell you is we don't break it out. Look, all parts of our business are performing better than our expectations and clearly better than a year ago when we gave out our guidance for this year. I mean, we're looking at doing $100 million more this year than we originally anticipated last November. So we're seeing sort of really just great take rates on all of our businesses.

In the case of Thinkful, we are seeing a real growth rate from, say, the trough of the year, which was February, to just take this month or last month. It's significantly higher. I just want to remind people, though, that we have Thinkful a little bit less than a year. It's really early in Thinkful's growth. And because our other businesses are growing so quickly, it's not a significant contributor yet, but it clearly will be at the rates of growth we're seeing.

Yes. And with respect to 2021, to Dan's point, Thinkful's still relatively small and it's not at scale yet. We've clearly accelerated investments in Thinkful with respect to the course development and some other things. And so as we look at 2021, once again, it's relatively small, continuing to grow at rates that we've anticipated when we made the acquisition and we think it will -- it certainly won't contribute to EBITDA next year, but we do believe at scale, it will definitely contribute to EBITDA.

Our next question comes from the line of Ryan MacDonald with Needham & Company.

Congrats on an excellent quarter. As we look into the fourth quarter guidance and the visibility you have in terms of usage and adoption, can you talk about any trends that may have been a bit different as students are more online? And Andy, as we look at the 4Q guide, is there any risk to the numbers built in for universities that are ending the semester early, say, at Thanksgiving or maybe there might be a risk to December revenues at all?

This is Dan. I'll take the first part and let Andy take the second part of your question. So in terms of surprises, look, there's been a lot of variables that we, like other companies have had to navigate. So start dates, end dates, total number of students that are attending, whether they were attending their original school or they're attending online.

And then there was one thing we didn't anticipate, which is scary, which is how many students would actually get COVID while they were on campus. So we actually are a barometer to tell you what's going on at those schools as it relates to COVID because we can see it in their behavior on when they subscribe or when they're using it. So that was just, that was something we didn't anticipate, probably should have, but I don't know how we would have done that because each school was doing it differently.

So we haven't seen any surprises except to the upside, which is that the things that we -- rarely, when you work on a bunch of initiatives like penetration into community colleges, penetration into more online schools, account sharing, global. I mean, for the first time, we mentioned just how many countries we're now in, which is 190 countries, which means we're well beyond just the English-speaking countries.

So all of the surprises are things that we believe should be happening and would happen. It's just picking the timing on them is very difficult to know, but all of them have been to the upside, which is why the numbers are as big as they are. And COVID has really just revealed how many people are dependent on what we do to help them navigate their curriculum, think about learning to earning. So in our case, the surprises have been good for the business side, it's just disappointing as to having to go through this as a country. But as a business, it's been great.

Yes. Yes. And Ryan, with respect to Q4 guidance, we're well into the semester, the fall semester right now. We have a pretty good handle on what schools are doing, what schools aren't doing. And so we incorporated all of that thinking into our guidance and we feel comfortable with where we're at.

Just by the way, just one last point on that. What's been interesting is we hear a lot about schools ending early. But the evidence and what we see is that, that's not the case. They may not come back after Thanksgiving, but that doesn't mean the semester is ending early. And the second thing is, given the outbreak of COVID, we're not sure people are going home for Thanksgiving. So in all circumstances, we're ready for those circumstances and Chegg is benefiting.

Our next question comes from the line of Douglas Anmuth with JPMorgan.

I was hoping you could just help us understand what kind of assumptions are included in your initial '21 outlook. Just kind of how you think about the international sub mix and Study Pack adoption and ARPU and anything on account sharing efforts. I know it may be tough quantitatively, but if there's anything qualitatively you can add there. And I'm sure there's initial conservatism in the '21 outlook, just trying to understand the revenue growth that you're seeing this year, the 50% plus and then into the mid-20s that you're initially guiding to for next year.

Well, yes, first...

Go ahead, Dan.

Yes. I'll start it, which is, I think the guiding is a little bit higher than that. And actually, when we look at it, we're actually guiding back to where we were when we started this year in terms of percentage of growth on top of a substantially higher number. But as you mentioned, it's early. I'm sure a lot of companies aren't giving guidance for Q4, let alone for '21, let alone this early. So I think it just shows how positive we are about the business and how big the opportunity is for Chegg going forward. And because we debated that question, should we give it at all. But we think given the momentum, we felt comfortable giving this guidance right now, which is 3 months before most companies would give it. So let me start with that, Doug.

The second thing is, the reality is, we'll continue to see substantial growth through the first part of the year. And then the question is, what happens after sort of the March 15 on the lapping of when students left the campus. As a reminder, it's our belief that domestically the majority of the growth that we saw domestically was a result not of COVID per se, but of the fact that we've done a really good job of our investment in account sharing. So we expect to be able to continue to reap the benefits of that.

What surprises to the real positive was outside of the U.S., which is the international business really just jumped out of nowhere because as students needed to leave campus, they became familiar with Chegg. As you may or may not know, they are back on-campus, and we are still seeing substantial, I mean, really substantial growth outside of the United States. So it's a mixture of us doing the best we can this early to estimate a number we can feel very comfortable with, but recognizing that there might be 2 halves to the year next year domestically and then continued substantial growth outside of the U.S. and with continued improvements on not just the take rate, but renewals and other things on Chegg Study Pack.

So it's, as you mentioned, it's a combination of what we could visualize minimally now in November of 2020 in a year where we're dealing with a pandemic and all of these changes. So we feel really good about the guidance, as you can imagine.

Okay. And just following up on that. Any more commentary you can just give around Study Pack adoption and uptake. I mean, clearly, above all of your expectations and you mentioned how you rolled it out earlier. But just as we think about modeling going forward in ARPU, I mean, are there any numbers that you can put toward that?

I'll let Andy talk to the specifics of the numbers. But just for those that haven't spent as much time, Doug, as you've had the opportunity to do, Study Pack is $19.95 versus Chegg Study at $14.95. So it's $5 more a month, but we'd be getting 90-plus percent gross margins. So it's both a real positive on the top line and a real positive on the bottom line, which is why we're not only expecting to grow substantially next year, but actually improving our EBITDA margin. So it all shows up here.

But the other thing I want to remind people is because we're doing so well and because we think there's such a massive opportunity ahead of us, Andy mentioned on the last call and the call before that we've pulled forward some investments to continue to invest in future growth. So it's all those balances. But what I would say is, over the next several years, we imagine and we expect that Chegg Study will make a significant impact on both top and bottom lines for us.

Our next question comes from the line of Brent Thill with Jefferies.

On the investment side, it's rare to see this type of growth and show margins improve at the same time. Can you just walk through what leaves you comfortable in this ongoing kind of dual engine model? Despite all these new things that you're unveiling, how you can make that happen at the same time?

Well Dan mentioned it earlier, right? Every incremental new subscriber at $14.95 and $19.95, pretty much 90 cents could drop to the bottom line. And what we have decided to do is invest in our future growth opportunities, right, whether it be -- you've been with us a long time, Brent, whether it be with the initial investments that we made in like Q&A. And then we made investments in Chegg Study Pack. And we're making investments in skills-based learning. We're making investments in international, which are not insignificant investments. They are significant investments. But what they do is they benefit our future growth. And so we've got a model that scales like that, where we can make that, have that, what I call, balance between driving incremental profits to the bottom line that benefit our shareholders immediately while increasingly investing in the future, which benefit shareholders both in the long term. So we've got this great model that we have that opportunity to do both things.

Yes. Look, I think the way I would sum up what Andy said, which is exactly right, is, we're blessed with a model that not only produces very high growth, 69% growth, 64% revenue growth, 69% subscriber growth, increase in EBITDA total plus percentage and then an increase of the ratio of EBITDA to free cash flow. And that does liberate us to make very smart investments at what we believe is the right time to do it. So international is one we started to make a few years ago, and it's really paying dividends now.

We made technological investments in the platform that allow us to grow internationally, but also to block account sharing. You're seeing the benefit of that now. And then, of course, Thinkful itself, which is, we lowered prices, we've increased the curriculum. And all of that is an investment to make that business very large. And sort of as we've done with Chegg, which has redefined the space and become the very obvious large leader, and that we think that will have a massive payoff down the road. So those are the areas that we're focused on. And the good news is, the model just allows for it in ways where it's hard for you to even notice it because we're so profitable on the core business.

Our next question comes from the line of Josh Baer with Morgan Stanley.

Congrats on a great quarter. I wanted to focus on international go to market as it relates to profitability and competition. So obviously, domestically, you have very efficient customer acquisition. Just wondering how this might differ internationally, levels of marketing or other investments needed. And then any insights into any differences in the competitive landscape in different geographies?

Yes. That's obviously a question that we're focusing on a lot ourselves given the significance of how quickly it grew. The things that are really good news for Chegg shareholders and of course, for those of us operating the business.

Currently, the international business is actually even more efficient than the U.S. business in that we have a very low-cost way to develop content, which is the Q&A network itself, which is similar to the U.S. Every question that gets asked, that gets moved, we pay to answer it, but then it stays in our database and attracts other customers and it becomes profitable right away. It's a very unique model and one that Chegg invested. And we're benefiting in it because in our prepared remarks, we said at least 25% of all new questions, and this is the most number of new questions we've ever gotten in a year in total. And even if you were to subtract the international. The international questions that are being asked now are about the size of the total questions that were being asked in terms of new questions just 3 years ago. So it is quite significant. So we have a very low-cost way to do it and we have a very low-cost way to acquire customers.

So similar in the U.S., where 84% of the people come directly to Chegg either through SEO or to chegg.com, we're actually seeing that same behavior outside the U.S. at this point. So our marketing expenses collectively for Chegg Services absent Thinkful, not only haven't they grown, they've just been shifted from markets that are getting bigger, faster. So the efficiency that you've come to experience with Chegg in the U.S., we're seeing the exact came efficiency outside the U.S., and that's really good for us.

I think people were probably surprised to see we're in 190 countries. And that's because we're relevant in English-speaking countries, non-English speaking countries. But the model is the same, which is students need help. And when they need help, they turn to the Internet now. And COVID really sort of accelerated that outside the U.S.

As for the competitive set, as you know, for the majority of the business in the U.S., we don't have a significant competitor set at this point. We do have point competitors for parts of our business. Outside the U.S., there is nobody with our size or scale or balance sheet. There are similar to what they've always been in the U.S., free sites, but their quality is uneven at best. They can't do the coverage that we do. Students can't depend on them for something that they need to depend on.

And so when we research those categories, when we look in those countries, when we do surveys, we don't see any significant competitors. We do it not only globally, but we do it country-by-country at this point. And so we're in very good position, similar to what we've seen in the U.S. Not a lot of people took this path to go direct to the consumer, and so that's been to our advantage.

Our next question comes from the line of Aaron Kessler with Raymond James.

Curious to get your updates on maybe what you're seeing with the password sharing that you've talked about maybe in Q3 and what type of impact we should expect for Q4? And then just when we think about maybe precollege offerings, has the pandemic and kind of the shift more on learning changed your thinking at all about maybe going more high school, middle school students additionally?

Yes. Great questions, as always. I'll take the second question, let Andy talk about the account sharing, how we account for that. We have always said that our model is primarily going to be direct to the student. And so when you go direct to the student, you actually go older, not younger. Because students in high school are younger, you have to go through the school, through the school system or through the parent. And there's real need for those things as you've seen, but they're much more difficult, they're much more expensive, they don't have the margins that our business has. They require sales forces that we think would not necessarily be that efficient. And each school district makes its own decision and sometimes each teacher makes its own decision.

So for us, we use high school through Mathway and through Chegg Writing to actually acquire customers, brand them to us and then sell them into our college. We're actually going older. The thing I want to remind people of is the average age of a college student in this country is now 25. It's not 18 to 22. Online students exclusively are even older. They are 30. Community college students are much older as well. They come in and out of the system. So we are going older. We are going down the clear path with Thinkful, and that has been paying off for us. So we don't really expect to go younger necessarily.

Yes. And with respect to password sharing is, we started to see the benefits of that starting in really Q2, as Dan had mentioned, particularly in the U.S. The U.S. is where it's particularly an issue. And as students went off-campus, that proximity sharing ability went away. And what we've subsequently done, kind of getting back into the prior question around investments, we accelerated our investment in device management. That got implemented in, what, the second week of August, if I recall correctly.

August 17.

August 17. The continued benefit of that is incorporated into our Q4 guidance.

Our next question comes from the line of Jason Celino with KeyBanc Capital Markets.

On the device management question from the previous question, what are some of the other details? I know the rollout happened in the middle of August, but was that to your entire installed base? And then with the multifactor authentification, what are the details on that?

Yes. Yes. So like Dan...

I was getting set up, like the answer that Dan's going to say. So it was a strange set of coincidences, which is we've been working on this. And as you know, last year, we focused all of our efforts in getting rid of really bad actors. And what do we mean by that? There were people stealing our accounts and reselling them. There were people sort of hacking into them.

And when we improved that, you saw our growth rate to the first part of the first quarter had already moved up to 32%. And then when COVID came, it moved up to 35%, and then you see we're at 64% now. A lot of that in the U.S. has to do with the fact that when students moved off-campus, it was more difficult for them to share. What we've done is make sure that when they get back on-campus, they still can't share. So we have done a lot of things leading up to it that were more hashed than they were total technology investments, but we pulled forward the full technology investment.

And so now you need to register your devices. So you can use 2 devices and you can swap to a third, which makes it very difficult. And we did the swaps to a third because when you do go on campus, some people don't have the money to own computers. They use computer labs or when they do, they don't want to carry their computer. And so we want to be very available to those students. The 2 factor means that we now can identify to make sure that it's your phone. And so these 2 things, they don't eliminate it 100%, but they have really made a substantial impact on the number of people who were sharing aggressively and people using aggressively. We used to draw concentric circles and say, who's using and who's paying, who is not paying but using, would pay if we block it and then who is a very, very casual user and probably just uses it onetime from a friend.

We feel that we've made like 85% of the progress along the way. So there's still more ways to go. And we feel that, that will block it for users coming in, in the future and block it from international sharing, which was even a bigger risk. So it's been a substantial effort by our security team, our privacy team, our technology teams, our engineering teams. And kudos to them because it's obviously been worth a lot to us.

I think people are confusing the fact that what COVID did was suddenly made Chegg relevant only if you weren't on campus. Chegg is relevant whether you're on-campus or off-campus. We can see those numbers. We now have proof. Look at the growth rates we're experiencing now when students are on-campus and off-campus. And we do track which location they are because now with device management, we know what location you are. We know if you're on campus. We know if you're not on campus.

It really was our, in the U.S., our efforts around account sharing that made such a big impact, which has been a really great thing. And then COVID really has made the major impact outside the U.S., which is the people just became familiar with us. And similar to what we saw in the U.S., it just was an explosion. And we're super excited about it because it's moved our efforts up years ahead of plan.

Our next question comes from the line of Alex Fuhrman from Craig-Hallum Capital Group.

I'd love to follow up on what you've been talking about with the international students. I mean, it seems like you've had quite a bit of success there the last couple semesters. Can you comment a little bit on how those students are behaving as customers compared to the American students? I guess it might be too early to know how long they're going to stick around for. But in terms of when they've been signing up and perhaps how they interact with free trials before converting to paid memberships. Has that been similar to your U.S. customers? Just curious how that plays out over the next few semesters.

Yes. Let me -- a set of phenomenal questions. Let me go back and just start with what you said, which is, in some cases, it's too soon to know, particularly with sort of the LTV of a customer. But here's what we have seen since January 1 and what has sustained. So the behavior in first quarter and the behavior in second quarter has been very similar. It's just a lot more people came in after the second quarter than were coming in, in the first quarter. So that was the acceleration of the growth rate. But the behavior that we've seen, which has been good, is the conversion funnels look very similar to the U.S.

The second thing is the Q&A use looks very similar to the U.S. Actually, it's more so because we have less relevant local content. This is the way we're building it. And so that's been a really positive thing, which means international growth should be a big grower for many years to come because it's not only white space, but as our database gets filled with more content from each individual country, more and more and more people will find us. So that's good news.

What did surprise us was the percentage of them taking Chegg Study Pack actually was not just equal to the U.S., but actually a little bit better, which is a really good sign.

Usage in terms of how often did they use it, very similar. The difficulty for us has been in the forecasting because we didn't expect to be in 190 countries this quickly. And second, so we had to figure out when start dates are, when midterms are, when finals end, when they take their breaks, do they behave similarly on those breaks. And so these are all things we are learning as we go. But the core things that we care about, which is conversion, cost to convert, usage, Study Pack takers and early retention are all extraordinarily positive and something that we are all very familiar with in the U.S. The rest are things that we'll learn as we get to scale in each unique country.

That's a big -- part of your question, there's no doubt about it. I mean it's a lot bigger than people think. I mean, outside the U.S., not including China, we expect that market to be just as big as the U.S. And we don't see any business obstacles over the next several years to [catch] --.

Our next question comes from the line of Mike Grondahl with Northland Securities.

Yes. Anything to call out in the textbook rental business?

To call out? No. Honestly, it's gone as planned. We don't expect it to grow next year. For those of you who may not recall, when we switched from Ingram to FedEx, we took a onetime sort of step-up in the revenue that we recognize because we own the books versus not own the books. But in terms of -- it's pretty much what we expected on volumes and prices and margins. It is a decreasing percentage of our business for all the reasons that you know, that we've been articulating, that you've been very constructively covering for the last several years. We use it to attract customers. We use it to provide overwhelming value. We use it to be able to upgrade customers to the other Chegg Services. And we run it. It's pretty much flat growth and breakeven. And that's exactly what we expect in our guidance that Andy put out for '21.

Our next question comes from the line of Eric Martinuzzi with Lake Street.

Yes. So a backward-looking question on the Q3 outperformance. If I look at the Chegg Services as we stood at August 3, you were talking about then $112.5 million, that was the midpoint of the Chegg Services expectation for September. And of course, that was pre account sharing project. And then we wind up for the quarter where you do roughly $119 million. So just in broad strokes, that $6 million of outperformance in Chegg Services in Q3, can you break that apart? Is this kind of 80-20 account share versus Study Pack or account share versus international, take me a little deeper on the outperformance in Q3?

Well first thing is yipee for us, we outperformed. So we're certainly happy about that. So thanks for pointing that out to us. But yes, the net-net is, it really has to do with what Dan talked about earlier. We're seeing significant growth internationally. And just that's just come out faster than we had anticipated. And then the second part is what you just talked about. And that is, we are starting to see a bigger capture of those kids that may have -- in the U.S., that may have shared an account and we're having more of those kids pay. And just in general, it's those 2 things that gave us the overperformance that you just mentioned.

One of the things that makes it hard to break out is that it's really early for all these things. I mean, there's a lot of future growth left in these businesses, which is, again, why I think we'll beat those later companies that gave guidance for '21 and higher than people expected. So there's a lot of things that are moving in the direction of where Chegg believes the industry was going to go. And they're going faster now. And we think that's good for students. And we think it's great for Chegg shareholders. And we'll just keep executing.

Our next question comes from the line of Brett Knoblauch from Berenberg.

Could you maybe just update us on the go-to-market strategy with Thinkful and maybe what is, I guess, what is driving customer acquisition there? And have you seen any inflection point in demand due to maybe the remote learning challenge that you're seeing in your core business?

Yes. Again, really good questions. We only closed the company a little less than a year ago or about a year ago. It's hard for us to go -- they did not build all the historic stuff and reporting that Chegg likes to have that we've now built into the business and the analytics. So what we know is that the growth is faster. What we know is that when we offer more curriculum, we get more students. What we know is we've been able to bring down the cost of customer acquisition. And what we know is, of the big differentiators that we've built is, we've employed chat-based tutoring inside of Thinkful. So there is no other competitor that where a student that gets stuck in the middle of it can ask a question anytime day or night and get unstuck.

So the go-to-market strategy is really what you would imagine it would be, which is, we're utilizing the Chegg list and focusing on seniors because those are the ones who are beginning to realize they have a lot of debts, looking to kind of help him get a job. The question about what's the impact of the pandemic on Thinkful is difficult to know, which is, to some degree, you would say that a lot of people have more time to take it now. And so they're taking it. But what we're seeing is, we're seeing growth from people who are still currently employed, and they're looking to upgrade the quality of the opportunity they have with their company or go find a job at another company because these are all technological skills.

So the go-to-market has been -- they had a very good go-to-market strategy. We've just grown it faster under the way we do things and the ability for us to invest in the company. But it's going to continue to be lower prices, greater curriculum, support that no one else can offer, which is the chat-based support as well as career placements, ISAs. I mean, I can't point to one thing and say, that is working and the others are not. Everything that we're doing right now is designed to make Thinkful a very large business in the future. And so far, the signs are that it can be.

Our last question comes from the line of Arvind Ramnani with Piper Sandler.

Yes. Just a little bit of a longer-term question. When students go back online, how do you expect to change demand? Have you seen a permanent reset in how students and educators look at digital learning and will that kind of sustain when we kind of go back to a more normal environment?

Yes. Look, it is, I think if you just look at the perspective and say, the bigger the student base gets, the older that it gets, the more diverse that it is, the different income backgrounds that people come from, the different support levels that people come from, the more support they need. And Chegg is in position to capture that, and we've been capturing it. I mean, we went public 7 years ago and look how far we've come as a business. And I think that's an indication of just how much the world has already shifted in the direction that Chegg is going.

What we can feel comfortable in saying from this semester is that usage is agnostic to geography. If you're at the school or if you're not at the school, you subscribe and use Chegg very similar ways. Those that are at school and not at school are taking the same take rates of Chegg Study, whether they're in school physically or not in school.

So for us, we see this as a permanent situation, but we've always believed that, that was going to be the case. What COVID did was sort of reveal how much need students have and allowed us to accelerate our account sharing efforts and accelerate our growth internationally. I mean, not a lot of companies that grow 69% in their seventh year as a public company in terms of subscriber growth. So we don't see any evidence that things will go backward. If anything, we're going to see, as schools go more hybrid, we're going to see more students in the system, not fewer, which means they're going to need more of support, of the things that Chegg does.

As students start to seek in a much more aggressive way better ROI, shorter time to enroll and acceleration of learning to earning, what we do at Thinkful will have a much more meaningful impact because it's very clear, again, one of the things that COVID has revealed is that those who don't have the skills to work in technology-enabled environment. It doesn't mean you're a coder, right? You need to understand and utilize technology. Those are the ones that were most susceptible to furloughs and to layoffs. And so you're seeing a rush of people who now get it without any equivocation that they need these skills. And that's going to be into Thinkful and others in that space.

And by the way, you're seeing universities trying to do that now because they recognize that students don't have 4 or 6 years to take off. They don't have $80,000 to spend. They have jobs when they're trying to learn. They have families when they're trying to learn. So we think we're positioned exactly where, the person who helps define and when the category should be. And this confidence is built by the fact that we're seeing, not by anything else.

That concludes the Q&A session. I'd like to hand it back to management for closing remarks.

Okay. Well thank you, everybody, for joining.

Look, almost 7 years ago, Chegg went public with a mission to put students first, a strong vision to support the future of learning and a small team of committed employees who believe that students needed and deserved help. While the journey has not been easy and has certainly not been a straight line, we believe, given the millions of students that we have helped and the strength of our business, it has been worth it. What is truly remarkable is that the more success we have, the more opportunities we see ahead of us.

What Chegg provides has never been more critical. And given there are more students than ever before with more diverse backgrounds, ages and needs, Chegg sees a bigger future than even we first imagined. Higher ed institutions were already struggling to provide services and support to their students prior to the pandemic. Now as many colleges and universities face an uncertain financial future, their ability to provide needed academic support is even further strained. This is why students are turning to Chegg in record numbers.

And as online learning is being embraced around the globe, with more and more students expecting a hybrid model in the future as we've talked about, Chegg will only play a more critical role in students' academic success and now in their professional journey. We are proud to be here to serve them. No matter their needs, no matter how they prefer to learn, no matter the pathway they choose and no matter where they are in the world, we will continue to always put the student first.

And we want to thank you all for joining us. We want you all to stay safe. And we look forward to talking to you next time, and we'll see you on the other side.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.