Chegg Inc (CHGG) 2020 Q2 法說會逐字稿

Greetings and welcome to Chegg, Inc.

Second 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 Second Quarter 2020 Conference Call.

On today's call are Dan Rosensweig, Co-Chairperson and 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 to 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 May 4, 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 found 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 second quarter earnings call.

First, we hope that you and your families are all healthy and safe.

As we continue to navigate the pandemic and the rising social issues, we are grateful that our employees are healthy, that our business is stronger than ever, and that we have been able to support our employees, our communities and our students through this challenging time.

Also, I'm proud to work with our Chegg teammates as they continue to make meaningful and positive impact wherever possible.

While students' lives were disrupted, the one constant was that Chegg was there to provide high-quality expert on-demand support from any device in any location, which resulted in accelerated growth across our services.

Students turned to Chegg in record numbers, and we experienced unprecedented engagement with subscriber growth of 67% year-over-year, including our new Mathway subscribers, reaching a record 3.7 million students.

This yielded net revenue growth of 63% year-over-year in Q2 alone.

To put that in perspective, we had more subscribers in Q2 of this year than we had in all of 2018.

As schools and millions of students wrestle with how best to handle a return to campus, we know that some are supporting a full in-person return, while others are offering a fully online experience, and still others are planning a hybrid version of online and off-line.

Regardless of which experience a student has, Chegg will be there to support students this fall and beyond.

In fact, students are increasingly turning to Chegg for support to navigate this uncertain time.

And we expect this trend to continue post the pandemic.

Regardless of where or how someone learns, Chegg will be there for them.

From day 1, Chegg was built on the inevitability that people would need to learn more often, increasingly online, and need greater support.

Long before the global pandemic, we believed the digital transition was coming and education would have to fundamentally change.

In fact, in 2013 at the annual ASU GSV Summit, the premier education technology conference, we addressed the need to leverage data to personalize the learning experience to better serve students.

Three years later, our keynote, entitled The Class of 2020, predicted that higher education was the next bubble to burst and that institutions would experience irreversible decline if they continued to raise prices while delivering an antiquated product.

We made impassioned and specific recommendations to aggressively transition to a model that moves higher education online to leverage technology to make learning available to students 24/7 and to expand and modernize their content to be more relevant to the modern workforce.

Our research shows that the majority of students now feel online learning can be as legitimate, effective and rigorous as in-person instruction.

In fact, half of the students surveyed who had no prior online earnings experience now want the option of hybrid or fully online education, and 72% of students who had already had online experience expect the same.

We remain optimistic that this pandemic will end soon.

And when it does, one of the legacies will be that the door is permanently open to the promise of online learning, affordable, scalable, on demand and designed to support whatever the student's primary goals are, whether it's academic learning, professional development or both.

If anything surprised us, it was the speed in which students outside the United States have come to embrace Chegg with the same passion of those in the U.S. Similar to the United States, colleges and universities around the world were forced to shut down and lack scalable, on-demand, high-quality support for students.

And as a result, more international students have discovered Chegg.

In addition to meeting online support for academic, we are also seeing global trends towards self-learning and alternative pathways for students to gain the skills they need to compete in the global economy.

We believe that the fact that the services we offer are so universal in nature is in large part why we are seeing a record demand engagement outside the United States.

It's always been clear to us that realigning education with its most important constituent, the students, is a massive opportunity.

And we feel our brand, scale, service offerings and our balance sheet gives Chegg a great opportunity to make a positive impact on global education.

We continue to believe that platform companies that have a direct relationship with their customers who own the transaction, the data, the channel of distribution, and own their content will create disproportionate value for their customers and their investors.

That is why we have fast tracked investments on several key initiatives in the second half of the year.

First, we are increasing our investment in international growth and development.

Second, we continue to invest in the Chegg study pack with future enhancements, like the addition of Mathway to provide overwhelming value to our subscribers.

Third, we are implementing systems to address account sharing and investing in device management control.

Fourth, we have increased our investment in skills-based learning by expanding the curriculum to cover more in-demand skills and by significantly reducing the price because we know skills-based learning needs to map to the most in-demand jobs and be affordable and accessible to students.

With all the uncertainty facing students over the next year, the one thing that they can count on is the high-quality, affordable, personalized, adaptive and on-demand services that Chegg provides.

That is why Chegg has become even more critical to students' success both academically, and increasingly professionally.

And our team has never been more enthusiastic about the opportunities ahead of us.

On that note, I want to thank our incredible Chegg employees who continue to be relentless in providing world-class learning products and services to support students around the globe.

I want to thank our Board of Directors who have been so supportive of our work over the last decade to be in this position in this moment to have a profound impact on the future of learning.

And I want to thank the millions of students who invited us on their learning journey.

And I hope that even with all the unknowns in the year ahead, they know that the Chegg team is always here, cheering for their success and building a company that has always and will always put them first.

With that, I will turn it over to Andy.

Andy?

Thanks, Dan.

And good afternoon, everyone.

As Dan mentioned, we hope you and your families are doing well during this difficult time.

While many traditional companies are unfortunately being hurt as a result of the global pandemic, direct-to-consumer companies like Chegg that are digital and serve an essential need are seeing increased levels of growth.

As such, Q2 was a fantastic quarter for Chegg.

We experienced unprecedented growth in our subscription services as students around the globe turned to Chegg to help them master their subject matter and get better grades.

During the quarter, we also accelerated investments for our future growth, and we acquired a leading math company, Mathway.

Let me give you some color.

Total Chegg Services subscribers grew 67% during the quarter, including the addition of Mathway subscribers.

Chegg Services subscriber organic growth was 58%, an acceleration of 23 points from Q1, far exceeding our expectations, and we expect this momentum to continue into the fall semester.

While Mathway contributes to our subscriber growth, it had little revenue impact as it occurred late in the quarter, but we do expect it to contribute approximately $9 million for the year, which is included in our guidance.

The momentum we are seeing in the business, accentuated by the pandemic, is likely to continue for the foreseeable future.

And we expect to be a high growth, high-margin company for years to come.

As such, we have decided this is a moment in time where we need to lean in and reach more students globally with our high-quality, low-cost services.

Thus, we have decided to accelerate incremental investments to build for our future.

These include investing in international growth and development, the Chegg Study Pack, device management technologies and our skills-based learning service, Thinkful, along with additional infrastructure and resiliency investments that will allow us to scale rapidly.

It's important to note that we expect to be able to make these investments in future growth opportunities while still delivering stellar bottom line results.

With that said, let me summarize our Q2 performance and then update our guidance for the remainder of the year.

For the second quarter, total revenue was $153 million, a 63% increase year-over-year with both Chegg Services and Required Materials exceeding our expectations.

This strong revenue performance drove a 79% increase in adjusted EBITDA to $55 million while gross margin moderated slightly as a result of the change in textbook ownership and its overperformance.

Looking at the balance sheet.

We ended the quarter with cash and investments of approximately $1 billion.

And we continue to believe the strength of our operating model, balance sheet and capital structure are the strongest in the education industry and put us in the best position to grow organically and should opportunities become available like Mathway through acquisitions.

Moving to the second half of the year.

The strength we saw in Q2 has continued into Q3.

As a result, we are substantially increasing our revenue and adjusted EBITDA guidance for the remainder of the year.

For full year 2020, we now expect total revenue to be between $605 million and $615 million, with Chegg Services revenue between $490 million and $500 million, gross margin between 68% and 69%; and adjusted EBITDA between $190 million and $195 million.

Before I get into the Q3 guidance, as a reminder, the seasonality of both gross margin and adjusted EBITDA margin have changed as a result of owning textbooks.

Therefore, we expect seasonally stronger margins in Q2 and Q4 and lower margins in Q1 and Q3.

Looking specifically at Q3.

We now expect total revenue to be between $140 million and $145 million, with Chegg Services revenue between $110 million and $115 million; gross margin between 56% and 57%; and adjusted EBITDA between $21 million and $23 million.

In closing, the Chegg team continues to deliver above the high end of our expectations under difficult circumstances, giving us the confidence to both provide and increase full year guidance, all while taking the opportunity to increase our investments for future growth across the globe.

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

(Operator Instructions) Our first question comes from the line of Jason Celino with KeyBanc Capital Markets.

One for you, Dan.

Thanks for your comments on Chegg being there no matter what model we have in the fall, but there's been a lot of focus on enrollments.

But if students do decide to wait the semester out, to stay sharp and productive, could you see some of those students scale up using Thinkful?

Great question, and thank you.

I think what we're likely to see, and I think we've been seeing it which is what gives us the confidence to sort of raise our guidance, is whether or not they go to the school that they were originally intended to go to in the fall.

One way or another, they're going to be going to school.

And whether it's their school in person, their school partial in person, or their school online, or in the case of the folks you're talking about, more likely to be people that will take a local online class at a local community college.

So they're going to be going to school because there's really no gap here.

There's no place to travel.

There's no job or internship to have.

So they're going to be taking something, and Thinkful could be one of those things.

And I think that's very early days with us.

We only, I think, closed it in October, announced it last September, but it is running in the path that we were hoping for.

So our plan to increase the curriculum, lower the cost and create greater support using chat-based tutoring inside it, which differentiates it from any other competitor, we think those things are already starting to pay off.

So I wouldn't be surprised if we were somewhat a beneficiary of that trend.

Great.

And then one quick follow-up for Andy.

Even when you back out the Mathway contribution in the third quarter subscriber guidance, still very impressive.

Maybe you can talk about the visibility and the confidence you have kind of on the subscriber trends you're seeing maybe towards kind of the end of July, maybe what you've been seeing so far?

Yes.

So we -- when we gave guidance 90 days ago, we had limited visibility as to the impact of COVID.

90 days further on, we see much greater visibility.

We continue to see the strong new subscriber trends all the way through the summer school.

So yes, so we feel very confident that we're seeing the momentum will continue into the fall, and that's contemplated in our guidance.

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

Congrats on the results.

First, any way you can quantify how much your plans for strategic investments have been increased relative to the plans you had entering the year?

And then beyond the areas you discussed, I wanted to ask about your plans to invest back into core content for Chegg Study.

How are you thinking about using the momentum you have in an opportunity to expand breadth and depth of content there, including areas like videos or other studying resources that increase the value of the course description?

Yes.

No, this is Dan, and then I'll turn it over to Andy.

So the good news is everything we're doing, we expected to do.

We just accelerated it by moving it up.

So this is something that will benefit us not only short term but in the long term, both from a revenue growth area and profitability area.

So we're super excited about that opportunity.

We are and always have been and always will be investing in content, to answer your question specifically.

So we've been increasing our investment in content.

Obviously, our Q&A network has exploded in a good way.

In fact, we not only have record numbers domestically, but almost 30% of all new questions being asked that haven't been asked before come from international.

So we're seeing real growth there.

So we are always going to be investing.

We are focusing on investing in content in 3 areas that are included in what Andy had to say.

So when we said we're investing in international, we're investing not only in translation, which we think will extend us beyond just the English speakers, but also in local content, which is now being asked in local questions.

So that will beef us up successfully internationally.

The acquisition of Mathway was a way to beef up the core product Chegg Study Pack, which we mentioned last time, and continues to grow faster and sooner than we expected quite noticeably, and you're seeing them in our results now.

And then we are focused domestically on a few growth vectors, like online colleges where we're specializing the content because you may not realize this, but the largest college or university in the United States of America that is a not for profit is actually either Southern New Hampshire University or Western Governors, which are exclusively online or almost exclusively online, have over 130,000 customers.

Plus we are significantly improving our discoverability of content and investment in content for community colleges because to the question that was asked earlier, a lot of people are going to be taking online community college courses, and we're going to make it easier for people to find them.

But more importantly, we're going to make it easier for users to discover that we have the content that helps to support them.

So as an example, just the community colleges in the state of California alone are almost -- are over 2 million users, which is 10% of the entire college audience base.

So we are making real investments in content always and we'll continue to do so.

So Andy, I don't know if you want to talk about just how much costs will be accelerated?

Yes, yes.

So when I look at this, I look at it over the next 18 months.

And we're literally -- we're talking about tens of millions of dollars between adding capabilities, like Dan had said, things like the device technology that we talked about, the infrastructure improvements that we're doing, the going international, and then the incremental content that we're investing in, combination of accelerating classes to Thinkful, accelerating content types that we can use both in the U.S. and internationally.

So yes, it's a fairly significant acceleration, like I said, in the tens of millions of dollars range.

But we think it's the right thing to do and still while providing significant leverage in our model, as I mentioned earlier.

We anticipate that we're going to be a high-growth, high-margin company for years to come.

And we want to lean in and invest in our future growth.

So yes, it's been fairly significant, but it's coming with significant profitability at the same time.

Yes.

No.

It's hard to notice because our profitability is so high and continues to improve and including the ratio of EBITDA to free cash flow.

We have one of those great models that allow us to do both right now.

Yes.

That's impressive, and that was really helpful.

A quick follow-up, just wanted to ask on the guidance, how you're incorporating changing university time lines since the guidance, including like some are starting the year earlier and potentially ending the semester sooner.

So anything to call out there in terms of Q3 to Q4 seasonal dynamics?

Not really.

That's all incorporated into our guidance.

We've seen the same things that you're seeing.

Some schools are starting a little bit earlier.

Some schools are -- will likely finish by Thanksgiving.

So -- and it varies between school.

And there's -- some are online, some are going to be partial.

So that's all incorporated into our guidance.

Our next question comes from the line of Jeff Silber with BMO Capital Markets.

Congrats on the stellar results.

You've mentioned a few times your focus internationally.

Can we get a little bit more color?

Can you quantify how large your international student market is?

And to clarify, these are folks that live overseas and are studying overseas, not necessarily folks that are coming to the U.S. or studying online at U.S. universities.

Yes.

I'll start, and I'll let Andy talk about how we want to think about international growth.

International growth is stellar right now.

It's -- and to your very specific question, only 1% of our international customers actually went to school in the U.S. So these are all new customers to us.

So I know there's been some speculation as to whether or not these were international customers that went home and then subscribed at home.

But we obviously monitor those things, and frankly we are picking up brand-new customers around the world and over 99% of them are brand-new to Chegg.

And what's fascinating about it is it's not in any one specific country.

It's really a global phenomenon.

And as a result of colleges having to close down, students who historically have not had a service to go to actually discovered us the way we were discovered originally in the United States, which is through search and then word of mouth.

So in the United States, it's word of mouth and search now.

And then internationally, it's search and then word of mouth.

But it's been really wonderful to see, and it really shows that the content that we have, our focus on STEM and our business courses really does translate, no pun intended, on a global scale.

So we're seeing countries that you would imagine, Canada, Australia, U.K. But we're also seeing great growth from places like Turkey and Saudi Arabia and South Korea.

So it's universal right now, and we expect that to continue to grow for years to come.

All right, great.

Shifting gears a bit.

You talked a little bit about what you're doing to mitigate password sharing.

Obviously, a lot of students having to leave their campus going online probably made it a little bit more difficult.

But can you talk about once we get past the pandemic and the students come back to campus, what changes will be made to mitigate this issue?

Well, I appreciate the forecast that you're giving that we're actually going to get past the pandemic.

I think that would be just a nice step.

But in Andy's prepared remarks, we focused as one of the 4 major areas of accelerating our work, we had, had on our road map to do device blocking.

And so we've moved that up.

That will be launched in August.

So to the degree that students go back on campus and to the degree that they would try to go back to the normal habits, it just won't be available to them anymore.

So step 1 will be to limit the number of devices you do device authentication.

And then there's a step 2 and step 3. And we'll continue to do that.

And so we feel very good about having moved that way up, and it'll be launching mid-August

(Operator Instructions) Our next question comes from the line from Doug Anmuth with JPMorgan.

I guess 2. Just given the various scenarios in the fall, can you just talk about how your marketing strategy changes?

And how do you replicate some of the word-of-mouth benefits that you would normally get on-campus?

And then secondly, can you just give us an update on Study Pack in terms of the rollout, how broad it is, and what kind of benefits you're seeing thus far?

Yes.

No.

Thank you, Doug.

So in terms of marketing, it's sort of fascinating because in the United States, we don't actually spend much money on marketing anymore.

In fact, I don't think we've increased our marketing budget in over 5 years, not just as a percentage of overall revenue, which would have made it very large, but just in general because we had an 87% brand recognition.

Where we don't have as strong brand recognition in the United States really focuses on 2 areas.

One, our community colleges, which we're seeing extraordinary growth now.

And a lot of that has to do with some of the things that we did to get more visible, like the Verizon deal or things of those nature, which let families and other people know that we existed for what they do.

And then in offline schools.

And so we've started to test a number of things with Southern New Hampshire University because it's easier with a not-for-profit online schools to go directly through the school as opposed to a regular school, we have to go to a professor -- professors.

So I would say we're doing exactly what we've been doing in the United States, but with an increased emphasis on community colleges in online.

And then outside of the United States, it really is the best way to get to word of mouth is to index globally and get more content locally, which is why we're going to translation and why such a large percentage of the questions we're answering now come from outside the United States.

Then that turns into word.

And so when we actually watch the growth, we look at it not only by country and by subject, but by actual school itself.

And so you can see it's been up and in schools.

So once 1 or 2 people start to use it, they tell people, and then it just grows like crazy.

I mean look, we experienced 58% organic growth on top of the number that are already huge.

So I think for us right now, it's just making sure that we direct the investments.

And to your point about Study Pack, what we've seen is that the Study Pack is behaving very similar to what Chegg Study did just a few years ago, which is people use it, they're signing up for it in numbers that were bigger than we expected.

Their renewal rates are very high.

Their usage has been high.

And it's not only domestically, but outside the United States.

So we will have even greater rollout in the second half of the year, but they're finding it before we expected them to.

So we're seeing upgrades from existing customers.

Remember, all we really were doing, we're focused on new customers but we did a test in March because of COVID, which allowed them to get a free upgrade.

And so we expect that to help us even transition more in the coming years.

So I think we're in really phenomenal shape.

And I think the thing that we're most excited about is, on a global scale, just the engagement, the usage, the discovery, the value that we're creating for students and the fact that this sustains well past COVID, because Chegg just becomes a way of life for anybody going to college right now.

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

I would like to touch on Mathway a bit and just understand the opportunity there better.

It seems like they've got great penetration, both domestically with high school students and internationally.

What sort of investments can you make quickly to sort of really capture that opportunity in a relatively new segment, particularly as we look into the fall and more K-12 schools moving online?

Yes.

No, it's a great question.

And so what did we see in Mathway that got us successful.

One, a company of Chegg's scale and size.

When we acquired something, we want to acquire something -- the traditional thing we said, which is can we accelerate it?

Can we make more money out of it?

Can we improve the product?

Can we extend it?

And then on top of that, Mathway was #1 in the category by far.

They have spent 20 years investing in it and it's just a brilliant product.

Having said that, they built it on a shoestring budget.

They took no outside capital.

So we've been accelerating the investment in the math categories and on expanding it outside the United States and in more categories in high school, which will attract students younger, which will make the transition into college for us even better.

So all of those things are critical to its success.

But it's only been a really short period of time, but it's already showing -- experiencing similar things to what we're experiencing to COVID, which is greater discovery and usage.

And then its biggest benefit, however, is going to be putting it inside the bundles because this solidifies the Chegg bundle as having the #1 homework help product.

It's the #1 writing product and the #1 math product.

And all of that for $19.95 a month.

And so I think as we start integrating it in, that's going to improve conversion.

It's going to improve retention, awareness.

So we're unbelievably excited about it and really grateful that of all the people that they could have sold to, they chose us.

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

Yes, Dan, congrats on quarter.

It seems like there's 4 big tailwinds, kind of online learning and support, what you're doing with password, the bundled, and international.

Which one of those kind of surprised you the most in the quarter?

Well, the fact that all of them did well did not surprise us.

It is rare to be -- to operate a company that has everything do well in a quarter.

And that did, in fact, happen.

So maybe that's a little bit of a surprise.

But as we sort of referred to in our prepared remarks, really it's international, which is the diversity of the countries are relevant this soon.

And the fact that it's not concentrated on 1 or 2 customers but it's across the board, and every one of them is seeing substantial growth and great retention and take rates in the bundle that are greater than we had anticipated, I would say of all the things that surprised us, everything that surprise us is good, the concept of these surprises.

But I just think just the willingness of people outside the United States to discover Chegg and really use it is such a pleasant surprise that happened this quickly.

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

A question on with kind of increasingly students obviously moving to more online learning, Dan, how are you thinking about make additional online learning solutions beyond kind of what you're in today, for either college or kind of the younger grades as well, especially kind of the younger kids?

So we'll probably need more and more online solutions for busy parents.

Yes.

No, this is -- I've been around for a while, and one of the things you really rarely get is too many choices of where you could grow.

This is not a company -- I mean I'm coming up on my 11th year, somewhere into my 10th year.

And we're actually finding more and bigger opportunities to grow.

And that is a rare situation and I think happens really only to platform companies, which is whether it's a Netflix or Microsoft or an Adobe or a Facebook.

Once you're a platform company and you create a category and you become the verb, which Chegg has become in education, you start to -- the benefits start to accrue to you faster.

And so when we look at the opportunities, we continue to believe that the best place for Chegg to play is direct to student.

We feel that -- that means that we're likely to go older rather than younger.

As a reminder, the average age of a college student in this country is not 18 to 22.

In fact 25.

They're already parents.

They already have jobs.

If you look at where people are going increasingly online those numbers are just going through the roof, that those -- they're even older than 25.

There are people who are in the middle of careers trying to finish -- change their careers.

They are people that got partial degrees, and they want to finish those degrees.

So I think for us, it's going to be extending the number of schools that we serve, extending internationally, extending into not just academic pursuits but the actual pursuit of certain industry verticals that people want to go into, nursing and engineering.

There's a lot more support work for that, that can be done.

And then of course investment in Thinkful, which is skills.

The demand for skills is only going to accelerate.

The demand for them to be higher quality, actually have support, be lower priced, less risk for the student, more relevant to their career is exploding.

And our goal is for people to own the same position in people's minds that Chegg currently has.

So we just see growth area after growth area after growth area, and that's a rare situation and I'm grateful for it.

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

Yes.

I wanted to dive a layer deeper on the content views.

I saw the 375 million.

Obviously a huge number and sequentially up versus Q1.

I was wondering if you could help me kind of pick that apart.

What's your normal seasonality Q1 to Q2?

And then what was specifically going on in Q2 that was new with the -- with COVID?

The seasonality, I think Andy can address in terms of sort of the cost structure in the quarters because of textbooks.

But the seasonality of usage, I think the way we would think about it is the real school year for Chegg, the real business year, we're going into now.

So we just finished a quarter that -- where people, their finals are done in May and June at the latest.

And so this fall season we're going into Q3, but it's starting actually already.

But really end of August, September, October, November, phenomenal.

And then it rolls into next year because the school year is actually August until say, mid-May or June.

So the calendar year isn't the Chegg year.

The Chegg year is that period of time.

So we're entering a big growth season coming up ahead of us.

And -- but the fact is more students need more help than they've ever needed before.

They have no support from their campuses.

Even if they go on to those campuses, the things that historically they had, which weren't very good and were not 24/7 and were not across all subjects, won't even be funded because schools are having to cut their budgets.

And they're going to cut their support to budgets before they cut the class.

So the need for Chegg is only increasing, plus the fact that we're adding more -- we're adding more subjects, we're adding more formats.

Somebody mentioned earlier video, but we're also adding practice tests, which we never had before, which is one of the most popular categories people can have.

In writing, we're improving everything from writing style and writing structure and plagiarism checker and same thing with Mathway.

So I think everything just got a lot bigger, and Chegg has now got a new base that is much higher.

And we're going to continue to see great growth from a higher base because we've not gotten anywhere near the penetration into our markets.

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

Dan, you called out international as a top priority in the back half of the year.

I guess it seems like you already have a lot of investments.

And maybe if you could just articulate what what's left there to show increased adoption?

It seems like you already have a lot of the rails built, if you will, for the foundation.

Just curious if you could dive in a little bit on that.

And I think the follow-up to that is just some concern of saturation in the U.S. It doesn't feel like that's the case, but just speak to the international push versus the opportunities left in the U.S.

Yes.

I think to both, we'll start with the international one, which is international even when you remove China, which we do for obvious reasons, the opportunity outside the U.S. is actually larger than the opportunity in the U.S. it's just collectively.

I think we view the example in the past that just the big 3 English-speaking countries are about 50% of the size of the U.S. college market.

Then when you add every other country, it's just bigger.

They're more likely to come online.

They're more likely to want to study STEM.

And we -- I think your description is right.

We did rails and plumbing, which is we now could do commerce.

We can now take credit cards in those countries.

We can now change the availability of -- we will be able to change the availability of how many questions you can ask in country A versus country B. So we can personalize it more.

But the other things that we're spending our time on are accelerating the amount of content that is relevant in each local market, starting with the largest markets first.

Translation software.

So what we're starting to do is get the English-speaking STEM students in those countries, and those will be massive.

What we want to add on top of that and do in parallel are the non-English speaking countries and then the non-English-speaking students studying whatever it is they're studying.

The same way we built Chegg in the U.S., we think we can build -- and the evidence suggests that we're right on this one.

So very fortunate, it's what we've been saying for years.

It's not like Netflix where we need to make movies, or Spotify where we need to license content in those countries.

We're in very good shape because of our expert Q&A network.

And if you took the 30% of the questions that are being asked outside the United States, that's twice the size of the number of questions we used to get in the United States just 3 years ago in terms of real numbers.

So it's getting big.

I mean this is a real thing, and this is going to propel Chegg for many years.

Domestically, as we mentioned earlier, we have so many vectors of growth left.

We're nowhere near penetration, as you point out.

But there are some interesting stats just worth saying.

So the number of people in just 3 years, the number of students taking STEM in the U.S. has actually grown by 50%.

The number of students taking business, still the same, around 21%.

And the number of people taking sort of the social sciences is actually dropped by 50%.

Chegg gets them all.

But our greatest strength is obviously STEM.

So we're benefiting from all the micro changes that are going on based on what students want to learn and what colleges are starting to keep them.

Plus, we're going into a much older adult market because people are trying to go back and finish their degrees.

So you're seeing the smart schools like Southern New Hampshire University accepting more credits than they've ever done before.

Instead of trying to double book you to take a class again, they'll say, no, we'll take whatever you have, and then we'll let you finish.

They're even now because of the deal we did with them.

If you take the [same full] class, that counts as credit.

So those kind of conversations are going on all over the place now with Chegg and Thinkful.

So the vectors just keep growing.

And then if you think of profession, think of accounting, think of finance, think of engineering, think of nursing, think of lawyers, think of doctors.

There's academic and then there's learning the actual industry you're in.

So the format of content, video, expert Q&A, chat-based tutoring, all of that works regardless of the subject.

The ubiquity of the IP of what we own gives us a competitive advantage over anybody.

And so we're just going to keep building.

We'll just keep executing, executing, executing.

And we're excited about it.

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

Congrats on a great quarter.

I was hoping to get some more insight on skills-based learning.

Wondering how many courses you're looking to add?

If you could talk a little bit about how much that costs to create a course, how long does it take?

Are the expanded offerings going to be in place to benefit from the uptick in demand this semester?

And any update on just the growth or the size of Thinkful at this time?

I'm not sure we'll break that out right now.

I think I'll let Andy speak to that.

But let me just say that when we acquired Thinkful, it had 5 classes.

Now it has 7. We expect to add 7 to 10 classes a year at the minimum.

There's a lot more classes, sub-classes.

So there's a lot more categories than we can earn.

I won't share the cost of doing them for competitive reasons, but suffice it to say that you're -- we've all accounted for that.

We've accounted for the next 7 classes in the numbers we've already given you.

As it relates to the timing of it, here's the interesting thing we're learning.

Obviously, there's a bump in the short term in that people are losing their jobs and they're looking for skills in much more affordable areas.

Well, one of the things that we learned now that we own Thinkful is their infrastructure could not handle the demand they already had.

And So Chegg, there's already more demand than we can handle, not because we can't scale it, but because it takes admissions and it took technology and reporting and financial reporting, things that they didn't have the capital to build.

So we're going to see a great pipeline for a long time now.

I mean it's -- we're not out there begging for demand at this moment.

It's quite the other way around.

So I don't know that we can take more than we already have planned.

But this is a great business, and I'm thrilled that we bought it because the timing is right, as you point out.

But also the need for people to get skilled or reskilled to jobs that will be around, the beautiful thing is unlike a college who may or may not change their curriculum, we can always have the most relevant curriculum for the most in-demand jobs.

And that's what Thinkful's all about.

So we're super excited about the future of Thinkful right now.

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

Congrats as well on the quarter.

As you look at the Q3 gross margin guide, I was wondering if you can just break down that impact maybe compared to last year.

It looks like the guide's about 1,000 basis points lower.

I guess if you break down between the impact from the textbook business and maybe what other impacts from the incremental investments you guys are making?

The first thing is it's 100% textbook, period.

It has nothing to do with the incremental investments that we're making.

It's the fact that as you recall starting January 1 of this year, we started to own textbooks and then record the gross revenue.

It has -- what you'll see is the change in the seasonality where you see higher gross margins in Q2 and Q4 and slightly lower gross margins in Q3 -- excuse me, in Q1 and Q3.

So that's it exclusively.

And what I said earlier, right?

We also outperformed in textbook.

So it kind of compounded itself a little bit.

But I guess that's the good news.

So we haven't talked about textbooks, but textbook continues to do actually really well.

We believe we're gaining share there, too.

So that's the reason for the seasonality in the gross margin.

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

Congratulations to a nice start to the school year here.

I want to ask about the -- if I could follow up on the international business.

Your experience with international so far, does it tend to follow similar patterns of the rush at the beginning of this semester and then the final exam schedule?

Can you kind of just give us a sense of how that pace of business might play out over the balance of the year?

And then just in terms of pricing, should we expect that pricing will generally be about the same in international as in the U.S. as you go forward?

Or are there maybe opportunities to reconfigure bundles and tweak prices in individual markets?

So I'll start, and I'll turn it over to Andy.

So it's premature to know all the answers to a very good question.

Meaning the international growth is substantial enough now where we'll be able to track the patterns in a way.

The things that we do know is the engagement they have is very similar to the U.S. The way they discover it, very similar to the U.S. Their renewal rates are very similar to the U.S. a couple of years ago and continue to grow every day as we more localize the content and as they get more familiar with it.

And they also came on at the end of the semester.

So that's a big opportunity ahead of us, but it's already well ahead of where it was when we started Chegg Study in the United States.

Their interest in the bundle is even higher than it is in the United States, and that's a big deal.

That bundle renews really well similar to the [CS].

So that's a big deal.

Seasonality is a little bit different, depending on which countries get large [win].

So for example, Australia's season is a different season.

And so it's just a little premature for us to be able to break that out.

Now as to your other question about pricing.

At the moment, and we expect for the near term, the pricing will be identical to what it is in the U.S. It will just be put in local currency now, which is new.

We didn't have that capability before, and we do now.

So it's the equivalent of $14.95 in the U.S., and 19.95, whatever the local currency takes it to.

So that's been helpful, and that's improved conversion once they sought local currency because they began to feel like it's a little product.

But your other question is really interesting and a thing that we're going to start to play with, which is we will be able to technologically starting probably early next year, to be able to change what's in a bundle in country A versus country B. And it could be as simple as countries where we want more questions asked.

We can say you can ask 20 questions instead of 10, or 10 instead of 5. So we have ways to accelerate the creation of content, relevance, local language content.

We can do things like you can have access for an hour rather than subscribe for months.

So technologically, we're going to be in a position to experiment with a lot of things, and international is getting big enough where we're going to want to do those experiments.

But right now, it has just been a fabulous upside for Chegg.

There are no further questions in the queue.

I'd like to hand the call back to Mr. Rosensweig for closing remarks.

Okay.

So first of all, like we said at the beginning, we hope everybody is safe.

The pandemic is much more difficult than people thought.

And we're trying to communicate with our students to help them do better and smarter things as it relates to their lives.

Obviously, Chegg is seeing unprecedented growth on top of a much higher number, and that the opportunities that we have are just increasing.

And we're really enthusiastic about what we do.

We, like everybody else, wish it wasn't the pandemic that accelerated the inevitable, but it has.

And so we feel an obligation to improve the quality of our content, improve our services, to localize internationally, to focus on Thinkful and make it more available, more affordable, attract more diverse audiences.

And we're in a position of strength to do so, which is we're seeing more customers, better renewals, better engagement, more diversity across our product line than we've ever seen.

And the additions of both Mathway and Thinkful are very big upsides and just continue to establish Chegg as the #1 student-first company.

We're going direct to the students, and we're benefiting from that.

It is a high-growth, high-margin business where we can afford to make significant pull-forward investments and still have our net margins increase.

So we're really excited about our future, and we look forward to November and updating you for not just the fourth quarter, but for the future because things are getting very exciting to Chegg.

So stay healthy.

Thank you very much for listening in, and we'll talk to you next quarter.

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.