Chegg Inc (CHGG) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Chegg conference call discussing third-quarter financial results. During the presentation all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded Monday, November 3, 2014.

I would now like to turn the conference over to Alex Hughes, Head of Investor Relations for Chegg. Please go ahead, Mr. Hughes.

Good afternoon and thanks for joining Chegg's third-quarter fiscal year 2014 conference call. On today's call are Dan Rosensweig, Chairman and CEO, and Andy Brown, Chief Financial Officer. In terms of the structure, Dan will open with a discussion of Chegg's business and Andy will follow with a review of our operating results and our outlook for the remainder of the year.

A copy of our earnings press release 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 www.chegg.com/mediacenter and 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 and the future financial performance of this Company. These forward-looking statements are subject to material risk and uncertainty that could cause actual results to differ materially from those in the forward-looking statements.

We caution you to consider important risk factors that could cause actual results to differ materially from those in the forward-looking statements. In particular we refer you to the risk factors described in Chegg's annual report on Form 10-K filed with the Securities and Exchange Commission on March 6, 2014, and our other filings with the SEC. Any forward-looking statements that we make during 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 also 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.

Now with that, I will turn the call over to Dan.

Good afternoon and welcome to Chegg's third-quarter earnings call. We are very pleased with our third-quarter results where we experienced strong customer engagement and revenue growth while continuing to improve profitability and cash flow.

On today's call we will highlight the success of our partnership with Ingram, discuss the expansion of Chegg's digital businesses including the strength we are seeing in our subscriber business and the slower than expected growth in our advertising business; discuss the progress we are making broadening and deepening our platform for students; discuss our significant new relationship with Blackboard; and highlight some key engagement numbers that show the strength of our new services.

Last quarter we announced an important partnership with Ingram that enables Chegg to continue to offer our popular textbook service while significantly reducing our use of cash. We began to see the benefits of this partnership in Q3 where we experienced 10% unit growth during the print rush period adding more than 500,000 new customers to this part of our business and significantly improving our free cash flow. This is directly related to the success of our partnership with Ingram, the power of our brand and stronger pricing.

The partnership is working extremely well for both parties and as expected we will continue with through our January rush and our joint expectation is to expand it further in 2015. We believe this will lead to greater free cash flow over time.

Textbooks continue to be a huge asset for expanding our brand, acquiring new customers and growing our digital businesses while now using a lot less cash. For example, this quarter we saw accelerated benefits from our textbook customers where we experienced 43% year-over-year growth in our digital attach rate now expanding to 12% of our textbook customers.

Our digital businesses are made up of two components, advertising and learning services. Our advertising business now includes enrollment marketing, brand partnerships, Chegg deals and revenue from commerce partners like Ingram and our new partner, Fanatics.

Learning services is comprised of our subscription businesses including Chegg Study, eTextbooks and InstaEDU. The popularity of our digital offerings is highlighted by the fact that nearly 70% of our members in Q3 use Chegg for a service other than print. This shows how valuable our services are to students and has resulted in our digital businesses growing to 32% of our overall revenue.

To give you greater insight into our digital businesses, today's digital learning services represent approximately 70% of our total digital revenue and are growing at about twice the rate of our ad business. Collectively, our total digital revenue typically grows more than 60%. The advertising business which represents 30% of our digital revenue and 10% of our overall revenue while growing very nicely, is growing about half the rate than we had originally expected which is reflected in our Q4 guidance.

Because our reach has increased, our sales team has been asking for larger and longer-term deals. It is taking longer to close these sized deals than we expected. As an example in enrollment marketing the average contract size has increased over 300% in just the last three years.

On the brand side we are looking to sign larger and longer-term contracts like we just did with Fanatics. Although our advertising business is approximately 30% of the digital revenue, we think it should be larger and we are not satisfied with our execution.

On the flip side, our learning services portfolio experienced outstanding growth in paid subscribers to nearly 650,000 or 50% year-over-year growth in the quarter. We believe each of these businesses are in the very early stage so we expect continued strong growth.

As one example, more than 750,000 students this year already used our popular Chegg Study service and over 50% of them have become paying subscribers. We offer this service both monthly and annually and the quality of our service is reflected by the fact that over 70% of our monthlies renew each month during the quarter and over 50% of Chegg Study users have renewed again this year. Our research shows that 70% of students say it has improved their grades and 88% say it has helped them master the concept better. So we are helping improve student outcomes and helping them get better grades.

It is early but we see some of the same dynamics with InstaEDU that we saw when we acquired Chegg Study. We believe tutoring is an $8 billion market in the US alone and will very rapidly move online in the next several years. We have been very pleased with the adoption of InstaEDU so far and in fact we have seen an increase in the subscriber growth since it became part of the Chegg platform.

We recognize that we are starting from a very small base but what excites us is the year-over-year growth in the key levers of the business. For example, new student sign ups have increased by over 700%. Paying customers grew by over 200% and the number of tutors also grew by nearly 200%. So we believe we are very rapidly becoming the marketplace for online tutoring.

It is an exciting time in the education space and we are seeing increased opportunities to build, buy and partner in the digital learning services area.

You have seen some of the success at Chegg Study and now the early success of InstaEDU, the power of our brand and our reach to quickly build high growth, high-margin businesses.

Brand and reach are critical to success in this space so today we announced a major new distribution deal with Blackboard, the leading learning management software company in higher education. Blackboard will begin offering Chegg Study, Chegg Tutoring and our Career Services site through its Blackboard learn page in 2015 which is used by more than eight million students, thousands of colleges and substantially increases our opportunity to reach students directly through institutions. All of this points to a very exciting 2015.

Early in Q4, we acquired internships.com to extend our reach and the opportunity into the %5 billion college recruiting market. Internships.com has more than two million registered students, 80% of which are new to Chegg, 380 university relationships that offer nearly 90,000 internships from 60,000 companies.

We know from research that internships are critical yet an underserved step in the higher education process which is why this is such a powerful acquisition for Chegg. 82% of hiring managers state it is important for recent grads to have an internship experience and 65% make full-time offers to their interns. So owning the leading internship site for students is a very powerful acquisition for Chegg.

We had a very good quarter and we are really excited about our future. It was just a few years ago when we could only offer one service for students. Today we help students pick the right college, select the right classes, get matched to scholarships, get required materials for less, improve their grades with Chegg Study and InstaEDU and now with the acquisition of internships.com and the launch of our career services site we help them define and achieve their path to future employment. Each of these significantly expands our business opportunity going forward while improving the lives of students.

With that I will turn it over to Andy to offer more detail on the quarter and for our outlook for Q4. Thank you.

Thanks, Dan, and good afternoon, everyone. As a reminder, my comments today are on a non-GAAP basis as I review our fiscal third-quarter results and then provide our outlook for Q4.

For Q3 we saw strong year-over-year growth across our business. Total revenue grew to $81.5 million, up 32% driven by growth in our digital businesses and the timing of the fall textbook rush.

Digital revenue grew 102% to $26.2 million despite the fact our advertising business underperformed our expectations. Overall digital contribution expanded to 32% of total revenue, more than a 50% increase from Q3 of 2013.

On the print side of the business, revenue grew to $55.3 million up 14% year-over-year with bookings coming in line with our expectations for the fall rush.

While we recognized more revenue in Q3 than we had originally expected, overall revenue from print in the second half is expected to be in the range we previously communicated.

Total gross margin for the quarter came in higher than expected at 16% driven by greater leverage in our business model including digital gross margin coming in at 61%. Third-quarter operating expenses were $31.8 million lower than expected due to greater organic traffic associated with the popularity of our brand. This resulted in less spending on paid marketing. We were also able to get better prices for books we liquidated off our site which improved the profitability of our textbook business.

Adjusted EBITDA came in ahead of our expectations at a loss of $16.8 million and was driven by higher gross margins and lower operating expenses.

Looking at the balance sheet, we ended the quarter with cash, cash equivalents and investments of $97 million with no debt on the balance sheet.

As we look to Q4, we anticipate our overall 2014 revenues to be at the lower end of our range due to lower bookings from our advertising business. However, due to the overall improvements in our business model, we still anticipate free cash flow to be in the $5 million to $10 million for the year.

Specifically with respect to the fourth quarter we expect total revenue to be between $82 million and $87 million with digital revenue between $27 million and $30 million, up from $17 million last year. We expect overall gross margin to be approximately 47% and we expect adjusted EBITDA to be between $12 million and $15 million.

While it is too early to offer formal 2015 guidance especially given the discussions we are having with Ingram, let me share with you our preliminary thoughts.

Our digital businesses are expected to grow better than 60% in Q4 and we anticipate similar growth in 2015. This reflects our expectation that our digital learning services businesses will grow at twice the rate of our advertising businesses.

As we near completion of our first year as a public company, it is worth taking a step back and looking at the progress we have made against our strategic financial objectives. Since going public we have increased overall revenue by approximately 20% with digital revenue growing approximately 70%. We set a goal of becoming free cash flow positive for the first time in Chegg's history and we expect free cash flow to be between the range of $5 million to $10 million, up from a negative $28 million in 2013. This is the result of driving growth from our more profitable digital businesses while growing our print business more efficiently through our partnership with Ingram.

And finally, we have expanded our value to students beyond textbooks to important new offerings including InstaEDU and internships.com leading to increased engagement and monetization.

In addition to strong digital growth and improved free cash flow, we believe this positions us for profitability in 2015.

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

(Operator Instructions). Douglas Anmuth, JPMorgan.

Great. Thanks for taking the question. A couple of things I wanted to ask. First, just on the advertising front if we are thinking about this right, the enrollment marketing business plus kind of the brand and sponsorships businesses may be about a quarter or so of digital revenue. Can you just provide some more color there on what is going on in those businesses in terms of why they are lighter now and what the strategy really is going forward to get the growth rate up as you are heading into 2015?

And then secondly, can you give us an update on Ingram if the numbers came in as you expected in terms of the percentage of business that they would be doing during this fall rush? And then how we should think about the timing going forward, when we will hear more, how long actually (inaudible) the textbook business for (inaudible)? Thanks.

Doug, it is Dan. I will take the first part which is the ad question. So the ad business is growing certainly faster than the industry overall. So we had a good quarter in terms of what we expected but it grew at about half the rate that we anticipated and mostly we believe that is due to what we talked about in the prepared remarks which is as our reach has now got to 15 million which has grown pretty dramatically and particularly after you buy internships.com, and that added 1.8 million new customers to it -- or enrollment where we are focusing our effort on the top schools because when we originally went up to the enrollment business, we were buy us also in addition to what you are buying. Because our reach now is 75% of all college kids who intend to go to college, we're in there trying to replace the bigger contracts that were there. And so these things are taking a lot longer than we had anticipated because it is hand to hand combat on every meeting on the ad sales side.

As you know, we added Mitch Spolan later on -- earlier this year and we think he has done a phenomenal job in terms of the number of meetings that he has had and who he is meeting with and the kind of contracts that we are looking for and big contracts with big agencies. And so we feel very good about now that Chegg is almost 50% of all college students being able to be a very big advertising business delivered over time and we are on that path. It is just slower than the path we had expected. Fortunately the subscription businesses are growing faster than we expected and those have really sort of taken off. They have less revenue in the quarter and more deferred revenue so there is a balance that we are getting used to as both of those businesses are generally nascent.

So on the ad side, much of the work is focused on more calls to bigger clients asking for bigger orders and trying to close down faster. They take more than just one meeting to do when you are asking for a $15,000 contract versus $100,000 or when you are asking for a multi-million contract on the brand side, they just take a lot longer to do. But we feel very comfortable those are going to be very big businesses for us.

Let me turn it over to Andy to talk about Ingram.

Yes, Doug, on the Ingram side of the business, in general I think that the fall rush with super well for us and that includes the Ingram side of the business. We pretty much met all of our objectives, maybe exceeded in some areas from both a units, revenue, revenue from a GMV standpoint plus the fact of the matter the teams are working super well together and we are excited about the January rush because we are starting to see some additional efficiencies around the relationship particularly that we will be able to start shipping on multiple warehouses.

That gives a significant advantage particularly on the West Coast where -- well two things, one is we have seen reduce shipping costs but then secondarily, students get their books sooner versus going through our Kentucky warehouse.

With respect to going beyond the January rush, that is something where we will be spending time with the Ingram team post the January rush. Both parties expect to move forward. We will have probably better insights into that come mid to late February and maybe early March. But right now all signs are super positive on both sides of the equation.

And in terms of how did it hit on our expectations? It hit right on our expectations which is what we had planned for. So the volume of books that we moved, which books came from Ingram, which books came from us was exactly as both sides had planned and so we have been working jointly on a lot of engineering work so we can start shipping out of their warehouses as Andy said for the December and the January rush and then books will start to come back. So everybody is moving forward as if this deal is a deal that is going to not only continue but expand going into next year.

But you also saw the benefits of it in this quarter where we had 10% unit growth, we had over 0.5 million new customers to just that part of the business alone. We did so with significantly less cash and so it is a transformational deal and it really does change the business. So when you go forward to look at our Company, if you look at the size of our digital businesses which were zero just a few years ago and will do over $90 million this year growing as Andy said somewhere in the neighborhood of 60% next year, the whole Company next year, the digital businesses will be almost the size of what the print business was just a year ago. So that is how fast those businesses are growing.

So you asked how long we wanted to stay in the textbook business, our objective is to continue to offer it because it is the number one pain point for students. We are picking up a lot of customers, we are building our brand, we are getting the data, we are getting the credit cards. You saw the attach rates are now up to 12% growing 43% year-over-year. Everything is working as we had expected and we desired in terms of helping us build the rest of the business.

So we want to offer them forever but our goal has been to continue to offer the service but not use our cash. That is something that we are well on our way to do and we expect next year will be even better than this year as it relates to our relationship with Ingram.

And can I just follow up on 2015, the 60% digital growth number that you mentioned. Does that [preclude] and make some assumption for a part of the business that is of course moving over to Ingram and those revenues getting booked in digital?

No, Doug it doesn't. As we don't know exactly how the relationship is going to expand with Ingram, we made the assumption that in fact the business that we have defined at this point is what it would be for next year. We fully expect as you can imagine, that that relationship would expand. So -- but we thought it would be prudent not to make any guesses at this point. It would be quite frankly guess work at this point.

But as Dan said, we've got a digital business right now that just a few years ago was 0% of our revenue particularly when Dan came on board last year it was $52 million, this year it is going to be $90 million, it is going to grow 60% next year. And anything that Ingram has would just add to that total. So we would like to think we can give you a more definitive update in February but none the less it will be beyond what the 60% is.

Thank you. The next question is from Brian Fitzgerald, Jefferies.

Great. Thanks. With the partnership of Blackboard first of all, congrats. Anything particularly unique with the path to integration there? Is there something you can do relatively easily? How should we think about the ramp going into the January and the fall semester?

And then maybe some color around overlap with respect to institutions, courses or students that you currently have? The thought there is as we think about those overlaps of synergies at Blackboard or even at internships or InstaEDU, do you see that helping to kind of close the things like enrollment, marketing deals, closing those large deals faster because you are having the overlap with the institutions, students and courses?

Yes, thank you. It is a great deal. This is one that we have been working on for many, many, many years actually. There has been a change in leadership at Blackboard. The new CEO sees the world very much like we do which is student first and self-directed learning and they have been working very hard. For those of you that don't know a lot about what Blackboard is doing, they are in thousands of institutions that represent over half the student population. And what students use Blackboard for consider it like their internal portal so they will go on there and get their class assignments, they will get their homework, they might submit their homework. They will have dialogues with their professors and so the opportunity for us to be integrated right in that front door.

And then you asked about what it takes to integrate. One of the reasons that we are really not going to start rolling it out until 2015, early in January, is because there is technology work that has to be done because the objective is taking what Blackboard knows which is your school, your class, your actual syllabus, your curriculum and your professor and your homework assignments and when they are due and then taking the right piece of Chegg Study, the particular textbook that is related to what you do or the exact correct tutors that are relevant to your subject matter or your textbook. That is us combining our data together to build a personalized experience for each student that comes in.

We believe their reach is approximately eight million students. It is not going to all roll out on January 1. We are going to roll it out starting with their largest schools first and we are going to make sure that it is integrated correctly, that it doesn't slow down the site, that it is relevant, all the good things that you want to do. It is one of the reasons that this is a three-year deal because we wanted to make sure -- both companies wanted to make sure that we integrate it right on behalf of the students.

What this does however is really does endorse the same way Ingram endorsed Chegg as the textbook rental company, the relationship with Blackboard who is the biggest in its space, really endorses Chegg's learning services products and career services products as invaluable for students.

Now students won't have to come find Chegg. There will be students on campus who will be integrated into what they do every day. And so we think this is a very big distribution deal for us and we are really excited about it. It is going to take some time over 2015 to roll it out entirely but we expect to start seeing some of the benefits in 2015.

What it does for the institutions which is a really great question, the more institutions see their students using Chegg whether it is renting our textbooks or now using Chegg Study, using Chegg tutors, using our Career Services site, using internships, the more integrated we are into the institution itself, the easier it is for admissions officers to see Chegg as a very large partner.

We are already able to fill almost entire classes now and so what we are working on with the biggest schools, the 1000 schools represent 52% of all students in the country and that is where our effort has been. We are doing very well. It is just as I said, hand to hand combat. Each sales call is a call that takes a lot of time. They are all over the country. But we do think that it adds additional credibility to what Chegg is offering to students and services directly through the institution so we are really excited about the Blackboard deal. It is a major deal for us.

Great. Thanks, Dan.

Aaron Kessler, Raymond James

A couple of questions. First, the 10% number, is that overall print unit growth or is that just from Ingram? And then, do you disclose a print GMV this quarter? Did not see that. Finally, on the Chegg Study, I believe you said 750,000 year to date, do you have a comparable number what that was, maybe at this point in 2013? Thank you.

Yes, this is Dan. I will take the Chegg Study question and turn the print questions and the Ingram questions over to Andy.

Just to clarify, Chegg Study, the 750,000 students are year to date students that have used the service. We are seeing about 50% of those students that trial the service become paying subscribers to the service.

What we are seeing is customer growth has maintained a 50% a year customer growth year over year even as the denominator gets bigger. So our customer growth rates are staying about 50% and then the revenue is actually increasing faster than 50% because of two things.

First of all, students are staying on longer and so the average revenue per student is actually going up because they are really valuing the services, we have expanded these service, we have improved it, improved the content. I mean the satisfaction rates are the highest we have ever seen for this product. And so students are coming on early and they are staying longer and that has been a big deal.

We are also seeing that half the customers that we have now are renewals from previous semesters or previous years. So we are actually seeing great renewal rates but we see about a 50% customer growth year-over-year even as the base gets bigger.

So Aaron, to answer your question on the textbook business and Ingram, yes, we saw about 10% growth across the textbook business. And as Dan had mentioned earlier which I think is as important, is we added 500,000 new textbook customers during the fall rush. So that was the overall business. And obviously includes Ingram. Right?

As far as the GMV goes, that is a good question. We did about $110 million of GMV during the quarter which is right in line with our expectations if you recall what we talked about on the last call was GMV somewhere between 120 and 130 and about 85% of that occurring in Q3 which is the fall rush. I think that is pretty much where we were. I think actually the $110 million gets you to 86 or 87 but the bottom line is the print textbook rush went super well for us. We saw nice strength in pricing like Dan has mentioned and we saw nice growth in units and overall GMV.

Great, thank you.

Mike Olsen, Piper Jaffray

Good afternoon. So as we look into 2015 and you said expect 60% digital growth, within that assumption are you now expecting higher growth in learning services than maybe what you were thinking say three to six months ago? In other words, to kind of guide towards the 60% overall digital growth rate, are you now getting a bit more aggressive with your learning services assumptions than again maybe you were several months ago?

Secondly regarding Blackboard, can you tell us if they have other partners that are offering a similar offerings to Chegg or is what Chegg is adding to the site something unique and new to Blackboard?

So, Mike, once again this is Andy and you absolutely nailed it there. We are seeing super strength in our digital learning products, the subscription services, that is Chegg Study, InstaEDU and our eTextbooks. So we saw strength there. We saw strength in Q3 and we are continuing to see strength in those businesses so they are growing super, super well and we anticipate that continues as we go into 2015.

Like I said, we expect those to grow at twice the rate of our ad businesses at this point in time.

This is Dan. Just to put an exclamation on that, we've been extraordinarily pleased with the subscription growth and the revenue per subscriber and particularly the early adoption of InstaEDU which is being very well received by our customers. We just think that market is enormous and we think we can capture that market because of the growth rates not only of the subscribers but in the number of tutors that want to participate. It is going to be a winner take most online market and we feel we are very well positioned to do that.

As it relates to Blackboard, we imagine Blackboard is going to offer other kinds of services but they have nothing like the services that we have so they do what any good partner does, they are going to be held accountable for improving student outcomes in the institutions and so they went out and looked for the best possible products and services.

I am not sure if people fully understand the popularity of our Chegg Study service in particular, just how many students are using it and how much they think it improves their grades. It took us a long time to get this deal but we have the exclusive position to be able to offer the study product and the tutoring product inside the Blackboard platform. So that is why we think it is just such a big deal going into thousands of schools, millions of students, the majority of which even if we have them we don't have them every day through their student portal which is really what the advantage of Blackboard is and that is why we have been moving so aggressively to mobile and going to eTextbooks.

Just as an example when a student uses an eTextbook from Chegg, the take rate of Chegg Study is 2X what it is when we use a print textbook. So the integration into where students go on a daily or weekly basis to go get their homework, turn in their homework, look at their syllabus we think is just a home run for us. We are the only ones of this kind of product that they are going to be offering.

All right. Thank you.

(Operator Instructions). Jeff Silber, BMO Capital Markets.

Thanks so much. Congratulations on the Blackboard deal. Did you discuss any of the economics of this relationship?

We have not discussed the economics as they are a private company and they want those to be kept confidential. But what we did see in the release or what we did in an article that Wall Street Journal covered it, is that there is very little money changing hands from Chegg to Blackboard up front. It is a nominal integration fee that wouldn't even be noticed in our annual number let alone over the course of three years. So this is basically a performance-based opportunity for both companies where they are highly motivated to promote the service in the right place to the students to grow their revenue from it.

And as you know from previous conversations and what Andy said about our collective gross margins on these businesses which is 67%, there is a lot of opportunity for a partner to make a lot of money distributing Chegg Study and InstaEDU.

All right, great. That is very helpful. I'm not sure if you can answer this question exactly but if I look at your digital business, is there some way of looking or measuring what I guess the organic growth was meaning the businesses or the products and services that you had a year ago at this time, how much did they grow?

Andy again. So when we had the call back in July, one of the things we articulated was how much we expected our acquisitions and Ingram to add to our digital businesses. We said $4 million to $6 million in Q3 and $8 million to $10 million for the second half and we are right in those ranges at this point.

Nat Schindler, Bank of America.

Hi, guys. Thanks. Wanted to follow-up on Aaron Kessler's questions and see if I understand something. You were saying the GMV was strong and unit growth was strong on the book business and your revenue growth in the quarter was strong. But if I take the midpoint of your guidance for the Q4 and using the midpoint of the guidance for the digital business, it assumes that basically print is going to be flat year-over-year for the semester by very slight increases. Is that what you are seeing in unit volumes or is that -- am I calculating this incorrectly?

Nat, this is Andy. We believe when we look at our GMV and once again we measure the GMV because obviously we didn't have any Ingram in our print revenue last year so we are anticipating that our GMV will be up in the second half of the year because once again timing between quarters is somewhat difficult depending upon the timing of the fall rush. It would be up somewhere between 5% and 8%. And as we talked about earlier, the units where plus 10%.

And one of the things, Nat, this is Dan, to keep in mind is there is a lot of variables and ways revenues have to be recognized so there's rental revenue gets recognize over the course of the rental period. If we do a sale, if we do a JIT sale to the student it gets recognized in the quarter. If we do a liquidation, which we are doing phenomenally well, Andy mentioned just how what that has been as a contributor to cash back into the Company. So the textbook rental business unlike some of the people out in the market is actually working very well for us. But all of those transactions where we sell a book that we own directly to a student don't even get counted as revenue.

So what we are trying to do is use GMV as an example of just how robust the textbook rental business remains with us. It is why we wanted to highlight that we saw 10% unit growth and 500,000 plus new customers added to us.

So whatever anybody is doing out in the marketplace it is just helping Chegg's overall textbook business and what we have been focusing on is how to not use our cash. That is why the partnership with Ingram is so powerful to us and it is why we are going to be cash flow positive this year for the first time in the Company's history after using $28 million last year.

So we see unit growth, we see customer growth, we see revenue growth. It just remains a robust business but the future business for us is our digital business which is growing extraordinarily well, has very high margins and will start producing lots of cash for us as we go forward.

Great. Just one follow-up on what the competition is doing. In the past you have seen Amazon have kind of thin inventory and matching them early became a problem because they would run out quickly and then you would have a low price for the rest of the rush. Is that what you saw this quarter or similar or did you just see them run out of inventory quickly and not have to follow them down in price?

Actually it is not bad at all. We saw them have more inventory than they have ever had before and yet despite that, we were able to maintain our pricing ratio the way that we wanted. We were able to have strong pricing this semester. So if you actually went back and traced our pricing versus theirs over the semester, it wasn't that we waited until the end so they ran out and then we raised our prices. It was quite the other way. We started with higher prices at the beginning of the semester.

Because we have -- 80% of our customers renew with us and 50% of our customers that come into Chegg come as a referral from a another student. And now that 70% of our customers are using something more than textbooks, we just have so many more efficient ways to bring in new people to the site that we are doing very, very well on our own. So it was interesting this semester because a year ago as you all recall, they dropped their prices, we followed them down and that didn't go so well.

This semester we stuck to our game plan. We were very clear that we intended to be cash flow positive this year as a Company and that Amazon was going to do what it was going to do. But I think what they discovered this semester was it is not an easy business and understanding inventory, inventory management, turns, demand, customer acquisition, transitioning from people that were paying to rental was not as easy as they had thought. We were to be honest with you, amused that they were surprised that more people would want to rent than buy when they could get it for 80% cheaper if they rented than buy it.

So we were strong on pricing from day one of the semester and we were able to maintain it the whole time.

I would now like to turn the floor back over to Mr. Rosensweig for closing remarks.

First of all, thank you everybody. As you can imagine we are very excited about a number of the things that we talked about today, the growth of our digital business, the deal with Blackboard which we think is a big deal, and the early success of InstaEDU.

But as we look out to the long term, we see a dramatic shift in the economy and particularly in education, something that we refer to as self-directed learning. Increasingly tech savvy students and institutions are leveraging technology to expand, personalize and improve learning. We believe that students increasingly use the Internet to expand their knowledge and their skills to bridge the gap between what they are learning in institutions and what they need to build a productive career. Chegg has established itself clearly as the student's first hub with a reach of now over 15 million students and with an expanded portfolio of services focused on the individual needs of each student and we believe this positions Chegg as the key player in the self-directed learning economy and we are very excited about the future because nobody has more students, knows more about those students and is trusted more by those students to help them make better choices and improve the outcome of their lives.

So as we go into 2015, Andy and I could not be more excited about the transformation that we have been able to do in just such a short period of time in the business where we imagine our digital revenues which were zero just a few years ago and 32% of our revenue now and we believe to be over 40% of our revenue next year, that the plan that we put in place is working. Students have embraced us and we see so much more opportunity to bring them new services using data and relevance to match it to them.

So we look forward to talking to you all again in February. Thank you very much.

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