Chegg Inc (CHGG) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Chegg's conference call discussing third-quarter financial results.

(Operator Instructions) As a reminder, this call is being recorded Monday, November 2, 2015.

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 conference call.

On today's call are Dan Rosensweig, Chairman and CEO; and Andy Brown, Chief Financial Officer.

In terms of 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 fourth quarter and fiscal year-end 2015.

A copy of our earnings press release is available at our Investor Relations website, investor.

Chaig.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.Chaig.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 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 annual report on Form 10-Q filed with the Securities and Exchange Commission on August 6, 2015, and 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 also present both GAAP and non-GAAP financial measures.

Our GAAP results and GAAP to non-GAAP financial reconciliations can be found in our earnings press release.

Now I will turn the call over to Dan.

Good afternoon, everyone.

We are pleased to report that we had a very successful start to the school year.

Students continue to embrace Chegg in record numbers, and the Ingram transition is right on plan.

As a result, we are reaffirming our outlook for the second half of the year with respect to GAAP revenue, digital revenue, total gross margins, adjusted EBITDA, and free cash flow.

On today's call we will discuss key metrics from the fall semester indicating the strength of Chegg's brand of business; our continued progress towards an all-digital business, which we expect to complete no later than the end of 2016; and Andy will discuss our financials in greater detail.

He'll review how we will chart our progress during the transition and how the model will work going forward.

The fall semester was a very successful one across our key metrics.

We had a record number of customers in the quarter, with customers increasing nearly 9% year-over-year and exceeding 2 million customers for the first time.

In addition, our digital service customers also reached an all-time high, now comprising over 40% of our customer base.

This is particularly exciting because Q3 is our seasonally high quarter for print.

Our print business, which we measure in gross merchandise value, or GMV, is also on plan for the second half of the year.

This is very important because it was our last semester operating our own warehouse and highlights how well the transition is going with Ingram.

I want to thank our entire Kentucky warehouse team for putting students first through the entire transition.

We couldn't be more proud of them and the work that they have done to help millions of students save over $1 billion in the last two years alone.

Pretty phenomenal.

Along with our good financial results, we drove very strong user and customer engagement during the quarter.

We continue to benefit from the power and ubiquity of our brand, with 80% of our audience coming organically.

Our internal funnel also continues to improve, as we grew our print-to-digital attach rate by 14% year-over-year, which we believe reflects just how popular our digital services are becoming with our print customers.

Key to that success, we are also investing in improving our services to make them even more relevant to a broader base of students.

For example, we've expanded the number of textbook ISBNs enabled for Chegg Study to nearly 17,000 and have improved our Q&A network.

We're now on track to answer nearly 1.5 million questions through our network of experts on the Chegg Study platform by the end of this year.

The more content we include, the more engagement increases and the better customer satisfaction become.

As just one indication of that satisfaction is that user engagement for Chegg Study was approximately 1.5 times per week on average in the month of September, which is when students come back to school.

In addition, 90% of Chegg Study users surveyed report that it helped them get a better grade.

Chegg's overall business benefits enormously from the popularity and reach of our brand, as well as from the number of quality services that we're able to match students to.

Our proprietary data platform allows us to more effectively match students to scholarships, colleges, textbooks, homework help, tutoring, and now careers.

Our brand, reach, and data create huge opportunities to continue to grow these existing services, as well as offer valuable new ones to the platform.

On the last call we noted that we would launch SAT and ACT test prep starting in Q4.

In the United States, standardized testing is an estimated $8 billion market, ripe for disruption, because it historically has catered to wealthy families at a high price point and limited to in-person tutoring.

Keeping with Chegg's vision and philosophy, our service will be online, interactive, adaptive, and offered at an affordable price for everyone.

For those of you not familiar with the test prep market, the SAT and ACT exams alone are taken over 3.5 million times per year.

We believe affordable online test prep represents a huge opportunity for the next several years.

We will release our product in beta to students at no charge this quarter, which enables us to gather valuable feedback from thousands of students and improve the product before our commercial launch next year.

We are really excited about this launch, and we expect more opportunities like this over the next several years to leverage our brand, reach, and data to deliver new, high-margin services that students value.

Our current digital marketing services, which include college matching, brand partnerships, and career matching, continue to see positive traction.

In the future, we will commercialize our internship matching service, which we believe will be another huge opportunity for Chegg.

For now, however, we continue to invest in the quality of the service, where in the third quarter alone students viewed nearly 25 million jobs and submitted over 280,000 applications.

Our current offerings and marketing services continue to perform well, with enrollment marketing growing revenue per lead by 40% year-over-year, and brand partnerships increasing the number of brand partners by 29% year-to-date.

We said that this year would be about focus, execution, and improving the quality of our digital services.

We are extremely pleased with how this year has gone so far, and I believe our user and financial performance reflect that.

The higher education market represents an enormous opportunity.

Chegg is one of the leading brands in this space, and we believe it is clear that our transition to digital is working.

We expect our platform to continue to grow as we expand our existing products and add valuable new ones.

And with that, I'll hand it over to Andy.

Andy?

Thanks, Dan, and good afternoon, everyone.

My comments today are on a non-GAAP basis, as I discuss our financial performance and our 2015 outlook.

As expected, Chegg's financial profile continues to improve, with revenue mix increasingly shifting to higher-margin digital revenue.

We're very pleased with our Q3 performance.

We had a solid rush with second-half GMV tracking to plan and digital revenue expanding.

There were a few factors that caused more of our second-half revenue to occur in Q3 than previously thought, including our partner Ingram exceeding expectations in the number of books they fulfilled, resulting in more commission-based revenue recognized in Q3 than previously planned.

We also saw a higher proportion of textbook purchases, which are recognized upfront, versus rentals that are recognized ratably.

For those of you new to the story, the partnership with Ingram is a significant shift in our business model.

Instead of buying and shipping textbooks ourselves, our partnership enables us to collect a commission of approximately 20% on the GMV of books ordered by students through our platform but owned and shipped by Ingram.

Some books continue to be owned by us, but we are no longer buying any new inventory and we expect to fully liquidate our textbook library by the end of 2016.

This means Chegg is no longer spending its own capital on owning or warehousing textbooks.

We expect this to allow us to save more than $100 million in working capital annually, which we are investing in new digital services.

We believe these services represent a much bigger opportunity, driving higher growth, higher margins, and profitability.

Meanwhile, the partnership allows us to maintain all the benefits of offering students textbooks, including control over the size of the catalog, the direct-to-student relationship, the ability to market all of our other digital services, and of course the ability to deliver, surprise, and delight in shipments, which helps further build our brand.

As Ingram owns a greater share of books offered on our platform and fulfills an increasing number of orders, higher-margin commission-based revenue will replace lower-margin print revenue from our legacy business model.

Also, as noted on previous calls, during the transition we will experience a decline in print revenue until the end of 2016, at which point we will no longer own any of our print inventory and emerge as a 100% digital Company.

As you can imagine, measuring Chegg's textbook revenue during the next few quarters is complicated, as the ownership composition of the catalog changes over that period.

Given this complexity, we will continue to guide print revenue by GMV, because we believe this is more indicative of the health of our textbook business.

Also, in 2016 we will guide the Company on pro-forma revenue, which treats the transition as if it were complete and better reflects Chegg's business model going forward.

Returning to our Q3 results, overall Q3 digital revenues grew by 45% year-over-year, driven by our digital learning portfolio and from commission-based revenue received through our Ingram partnership.

Digital revenue comprised 47% of total revenue in the third quarter, an increase of nearly 15 points year-over-year.

As expected, third-quarter print revenue declined 22% year-over-year to $43 million.

This reflects the ongoing transition of the print textbook business to a commission-based model with more print textbook orders being fulfilled by our partner Ingram.

Overall, GMV was approximately $113 million in the third quarter, up from about $110 million in the third quarter last year.

We're already seeing the positive impact on gross margins and profitability as a result of our new business model and higher digital mix.

Third-quarter gross margin continued to expand, improving 11 points year-over-year to 27.5% on stronger digital mix.

In addition, EBITDA losses were cut nearly in half to $8.9 million from $16.8 million in the third quarter.

Through the transition, keep in mind that gross margin and profitability are seasonally low in the third quarter, as we incur the costs related to the fall rush period but must recognize much of the print revenue ratably over the semester.

Looking at the balance sheet, we ended the third quarter with cash, cash equivalents, and investments of approximately $105 million.

We expect to finish the year with over $100 million.

In addition, we finished the third quarter with about $45 million in textbook inventory, down from $80 million at the beginning of the year, and we remain on track to exit our Kentucky warehouse by the end of the year, per our plan.

With that let me turn to our outlook.

Overall, we are reaffirming the following guidance.

For the full year we continue to expect: total revenue between $295 million and $310 million; digital revenue between $137 million at $145 million; and print GMV of approximately $230 million; gross margins between 36% and 38%; adjusted EBITDA of breakeven to $5 million, turning the corner to profitability for the first time in the Company's history.

And finally, free cash flow of $15 million to $20 million.

As I indicated earlier, we did see a slight timing shift of revenue into Q3, which impacts Q4; but the second half remains the same.

Based on this, in the fourth quarter we expect total revenue to be between $68 million and $74 million, and digital revenue between $38 million and $42 million; gross margins between 56% and 58%; and adjusted EBITDA between $10 million and $15 million.

We are having a very good year, and we remain very enthusiastic about the future.

We expect to emerge as a 100% digital business at the end of 2016; and during 2017 we expect to reach our target model of 25% revenue growth, greater than 60% gross margins, and 25% EBITDA margins, along with strong free cash flow.

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

(Operator Instructions) Brian Fitzgerald, Jefferies.

Want to know what trends you're noticing for new students on the Chegg platform for the new school year for the first time.

I.e., are students who engage with Chegg prior to choosing college more apt to remain engaged throughout the school year?

Are they engaged more than older cohorts?

Then similar question, but any broader color on how engagement trends tend to pan out within cohorts?

So either students or cohorts or campuses.

Thanks.

Yes, some detail there we probably won't get to on this call, but -- yes, the high school business, first of all, the high school business is doing very well on its own.

Then the fact that we're able to get more students earlier in their lifecycle -- it's difficult to measure the cohort because those cohorts are so new.

But what we have seen is, as you can tell by our growth, that despite the fact that we have graduations from last year, the fact that we were able to grow at the rates we were hoping for suggests that we're being able to pick up market share of younger customers and sell the existing customers, the existing cohorts we have, other services, which is what we're beginning to see.

So yes, we are seeing increased engagement across the platform.

We noted some of the engagement that we're seeing in specific products, particularly Chegg Study because September is a big Chegg Study month.

We also referenced the fact that we saw an increase of about 14% in attach rate.

So we're seeing the system that we designed picking up additional traction, absolutely.

Great.

Thanks, Dan.

Douglas Anmuth, JPMorgan.

Hi, this is Diana on for Doug.

I was wondering if you could give a little color on the increase in the attach rate?

What specifically is driving that, where you're seeing more success in cross-sell?

And maybe how you're using some of the data you mentioned on the call to better target people for tutors and Chegg Study?

Thanks.

Yes, there are probably three variables that are helping us.

The first one, Diana, is the fact that we're able to target more efficiently.

For those people who are new to the story, the way we're building the platform for the future, which allows us to launch new products at very low cost -- so we are expecting high growth rates and very high gross margins, which has been the case with the services we've launched so far -- is the fact that we know your school; we know your textbook; we know your class.

We oftentimes can then guess your major.

We know when your midterms are, your finals are.

And if you're on an eTextbook, we actually know if you are struggling with that pace.

That allows us to bring the right service to the right student at the right time.

So that is, of course, a very big factor in the fact that we've been able to keep our marketing costs lower even as we've added more services.

That is because we get over 80% of our traffic organically, and then we get to use the internal funnel, as you've just referenced.

So that's been a huge boost to that.

The second thing which I referenced on the prepared remarks is the fact that we've expanded the amount of content that we've had.

We have over -- I think we've doubled the amount of content in the last two years that's available through Chegg Study, and we're nowhere near finished.

By adding more content we not only get vertically deeper in a particular subject but we get horizontally wider, which means we're available for more subjects.

So the ability to offer solutions to a broader array of students and target them better is really a big deal and a big growth opportunity domestically for that product and then ultimately internationally.

Thanks.

Aaron Kessler, Raymond James.

Thanks; a couple questions.

First, I may have missed it, Andy, but did you disclose pro-forma revenues this quarter?

Second, just an update on Chegg Tutors, how that's going in terms of -- both from a tutor standpoint, user perspective, and revenues there and timing.

Third, just thoughts on maybe spending more dollars on marketing some of the newer services such as test prep when you start the launch that.

Thank you.

Yes, Aaron, why don't I handle the first one?

Yes, on the pro-forma revenue, it came in as we expected at a little bit north of $45 million; I think $45.3 million, $45.4 million.

Like I said, as expected, as you can imagine from the results that we demonstrated during the quarter.

On Tutors, I think, Dan?

Yes, I'll take the Tutor question.

We're seeing increased -- our tutoring business is going really well.

We think -- well, we know today it's our best fastest-growing business; of course it's off a smaller base, but it is growing as we would have -- as we hoped when we acquired it.

Remember, we only bought it a year ago June, so we haven't had it that long.

What we're learning through our A/B testing and actual student usage is really helpful for the future as we grow.

It's a two-sided marketplace: the more tutors, the more subjects; the more subjects, the more students will come in.

So you can just imagine the positive network effect that we're already building that we expect over the next couple years.

So we expect this to be a very big business several years out from now, because we're the first one to really go exclusively online with tutoring.

As we've said, it's the Uber for tutors which means you should be able to get a tutor in any subject, anytime, anywhere, day or night, for as little as $0.50 a minute and any language.

That's what we're building.

That takes a lot of time to build, but it's going very, very well.

What we've learned in terms of expressing the number of tutors, active number of tutors, it's a little bit like a dating site.

They don't care whether there is 1 million people to date; they care how many people they can date 12 miles from their home.

Here we learn through A/B testing that conversion rate goes up by not getting the total number of tutors -- the number of total active tutors of course continues to go up, because we're adding more subjects, more within each subject, and so that's working very well.

But what we've learned is what they really care about is how many tutors are available right now, at 2:00 in the morning or whenever they go on, in the subject that I have, and what are their ratings and rankings in their profile.

So when we show it on the site now, we show the number of tutors that are available at that moment -- because, frankly, that's all they care about, particularly college students.

High school students generally tend to behave a little bit more differently because their parents are involved.

A lot it has to do with test prep at the moment.

So it's going very well.

We're very happy about that.

Then your question on marketing in test prep it's -- we expect -- what we've seen over the last couple of years, and you can see it in the numbers that we've produced, is we get more and more efficient every quarter in marketing.

The reason we're able to do that is because our brand is now becoming ubiquitous.

If you go on a college campus, students know the name Chegg.

The younger students -- somebody asked earlier about newer cohorts -- newer cohorts know us more for our other services and not just textbooks, where the older cohorts knew us exclusively for textbooks, so that means our credibility in those spaces is going up.

And then, as I think I mentioned on an earlier question, over 80-some-odd-% of our traffic is organic.

That helps a lot.

Then the data matching, that helps a lot.

So we've been able to shift our marketing funds that we have to the newer opportunities where we're building our brand, where we're going to bring in new students.

The way we're building the test prep is it's going to be similar to other products, different than others, which is: it's going to be online only, it's going to be interactive, it's going to be adaptive, and it's going to be affordable.

So because it's adaptive and because it's interactive, and new content gets created all the time through the system, we will be a very big SEO participant because we'll have unique content that's fresh all the time.

So yes, of course, we're going to market it.

But our best marketing is going to be what it's always been, which is SEO and then once you're on the site.

So we don't expect any big bump from that, but we do expect to market against it from the funds that we're able to shift as we get more efficient, particularly in the textbook business.

Great.

Thank you.

Mike Olson, Piper Jaffray.

Hey, good afternoon.

You guys continue to add new services that are somewhat related to the core and have significant addressable markets.

Are there any new categories that we should think about that you might be interested in pursuing from here?

That's one.

Then the second one is -- this is maybe just a slight nuance in the language, but I feel like before you were saying that you were targeting revenue to be all digital sometime in early 2017, and it sounds like now you're saying late 2016.

Are things maybe moving slightly faster than you expected with the digital transition?

Is that true, or am I just reading too much into it?

Thanks.

Yes, so, Mike, why don't I give you clarity on the second question first?

And I'll be super clear here: we expect to be a 100% digital Company by the beginning of 2017.

Let me be real clear about that: by the beginning of 2017.

If we've confused it in our language that's on us.

But nonetheless, the sooner we can get there the better, because it takes out all of the confusion that you've talked to -- that we've talked about.

But right now we're on plan to be a 100% digital Company in 2017.

There will be no pro forma by the time we get there.

It will be Chegg.

And that's why we've decided starting in 2016 we will guide to pro forma because we believe that better represents the future of the Company versus the past.

Yes, I'll answer the second question, but just a little bit more color on that.

We expect to be -- we are progressing on plan or faster than plan.

So actually, yes.

The difference is some of the books that we will rent in the fourth quarter of next year we won't liquidate until January 2017, because we get more value out of them.

So it would be a very small percentage of the numbers that will be left in our catalog.

But that's really it, so it will be insignificant, we expect.

So yes, we are moving as planned or a little bit faster, and that's good news for us, because, as you can see, there's a lot of complexity in explaining it.

So the pro forma should make it much simpler for people to follow the trends in our business, as the GMV will as well.

On the categories, so just keep imagining the kind of categories that people use in Chegg Study and use in Tutors, that there's a lot more services that we can make available to students in writing, in math, in languages.

So subject matter-specific categories and opportunities are available to us in the future.

We said at the beginning of this year we're going to focus on executing on what we have, and that's essentially what we've done, and we've gotten really good performance out of those things.

But there is not a lack of opportunity.

The goal is to build the brand, build the platform, get the data, get the credit cards, launch new services, show these digital services could grow.

And remember, just a couple years ago they were zero.

So you can see how successful a large platform with the matching data can be.

And then we go into the career space.

Right now you've heard the numbers, which are pretty huge in our opinion in terms of the number of job views, the number of resumes posted.

And that will turn in the future also into a huge business opportunity, because you can imagine: if you know your high school, you know your college, you know your interest, you know your grades, we help you get a better grade; we then match you to an internship; now we know your career interest.

The logical next step for us is to start matching you to categories like skills, which is another big vertical eventually to get in, which is the things you don't get to learn at your school.

And then ultimately have employers pay us to match you to your job.

This was the premise of Chegg several years ago, and it's beginning to come to fruition.

It's just one step at a time, so that each thing we build builds the trust of the student, and that we launch something that's unique, Internet-centric, less expensive than they've ever seen, and more valuable on the B2B side because of the data we have for matching.

So we just see lots of opportunities going forward.

We're just trying to do them one at a time and really well when we do them, so that we can please the student and get great results.

Got it.

Thanks a lot.

Nat Schindler, Bank of America.

Yes, hi; this is Ryan Gee calling in for Nat.

Just real quickly, following up on Aaron's question, what was the pro forma revenue?

Have you guys disclosed that for 3Q last year, and maybe the growth year-over-year?

That's the first one.

Then secondly, on gross margins, it looks like rental gross margins were down year-over-year, the drivers behind that.

But on the other hand, services was up nicely.

So what was the biggest driver in your digital business that drove that nice gross margin expansion year-over-year?

Thanks.

Yes.

Thanks, Ryan.

A couple of things here.

Like I said earlier, the Q3 pro-forma revenue was $45 million, I think $45.3 million, $45.4 million.

Our expectations are that for the full year we're going to be growing in the growth rate that we've got in our longer-term model.

I don't have the other specifics in front of me, but I can give them to you later.

With respect to the gross margin, think about it this way.

I think when you look at our gross margins, they've continued to expand.

You would expect them to continue to expand, and particularly when you think about our largest business, Chegg Study.

That is our largest digital business and, as we've spoken about in the past, that content that we have is fixed.

So think about it.

You generate a piece of content.

Whether or not I have one subscriber or 1 million subscribers, that content cost is fixed.

And yet we're continuing to grow subscribers, so that is driving much of the expansion of our gross margins along with, obviously, the transition from a physical rental base model to a commission-based model.

As a reminder for those of you that are new to the story, typically our print textbook business historically has had low to mid teens margins, and that is being -- as we go through this transition, when we get the 20% commission, that goes to a 20% commission with in-the-50%s margin.

So that is also impacting the overall gross margins; and it will continue to do so as we go into 2016, as we get through this transition into 2017 when we hit our target model.

Great.

Thank you, guys.

Corey Greendale, First Analysis.

Hi, yes; this is Ken Wang on for Corey.

First off, congratulations on a great quarter.

Let's see; first, I'm just wondering -- so you mentioned before that it sounds like your revenue per lead for the enrollment marketing business was up 40% year-on-year.

Does this mean that you're in the process of increasing pricing for the leads at this point?

Yes, great question.

We said at the beginning of the year -- and the process we're executing on is fewer schools and at higher concentration in the bigger schools.

So there's about 4,000 colleges; about 1,000 of them represent 52% of all the students.

So what's happening is we bought the business four years ago and many of those companies were on grandfathered subscription-based businesses that we've taken several years to come off.

So effectively it's been large rate increases for those companies where they are now paying market; and in other categories, as we're able to take prices up for people that had bought earlier but weren't on the subscription services but had multiyear contracts.

So the answer is yes.

Effectively we're taking people who were on before that continue to renew up to what's the current market-based pricing.

So it's a combination of more leads and more revenue per lead, so yes.

But it's because when we bought the company there were multiyear contracts, and we switched over from a subscription business to a lead-based business.

So we're working on bringing those rates up to market, and we've been very successful doing so.

Okay, perfect; that's very helpful.

Then just another quick one.

I may have missed this before, but did you mention that you've now expanded outside of STEM subjects for Chegg Study?

We've expanded deeper into STEM subjects and a little bit wider into subjects that are on the border of STEM subjects, if you will.

But we are not yet -- we have not yet gone beyond that category.

But as you can imagine, we will.

There are lots of categories that are -- there are some categories we'll never get in.

But there are categories that you can imagine that go into like quantitative businesses, those kinds of categories, our logical next concentric circle, if you will.

So we're little by little going out there.

But there was a lot of STEM for us to catch up with also.

We've doubled the number of content categories to a pretty substantial number, but there is a long way to go.

There's more way to go in STEM and then more way to go on the quantitative businesses that act like that, where they're factually-based.

And then we do believe there is an opportunity to go into ones that are more discussion based.

If you've never had a chance to use Chegg Study, what you may not know is there is a huge engagement effort in there which is our Chegg Expert -- network of experts.

There we expect to be answering over 1.5 million questions this year alone which is, for us, we believe it becomes the largest Q&A network of expert answerers inside the subscription service.

And many of those -- we learn from those the categories that we can expand into, and then we start building the content for those.

So that's the way we're able to grow in a much more effective way.

Great.

Thank you.

Congratulations.

Matt Blazei, Lake Street Capital Markets.

Good afternoon.

My question is on the test prep business that you talked about.

My curiosity is -- you mentioned that it's going into beta this quarter.

I'm wondering if you think it's going to have a similar timeline to the buildout of the tutoring business where it's been about a year, a little over a year, in terms of learning how to best access that market.

Yes, it's a great question, and we're going to find that out together, to be honest with you.

Remember, when we bought the tutoring business it was a business already.

It was very small, but there were things that were already known.

What we were learning from is: How do we expand beyond the high school market into the college market?

And how do we present it as we get more tutors and get more categories?

And how do we price it?

And how does it work with Chegg Study?

And how can we connect it as an attach rate to the textbooks?

We still have a ton of learning to do in that category as well as pricing.

Because we've been very deliberate to keep our pricing very low, particularly for Chegg Study, but there's lots of opportunity in that space going forward.

In the case of test prep, the reason to launch it in beta and the reason to launch it for free is because we want to get thousands and thousands and thousands of users into the system to watch the way they use it, to watch the sections that they like, to find all of the bugs, and to actually watch them go through test and test prep and see how it improves their grades, and then actually get them to report back on what grades they got in actual SATs.

So we don't have a timeline yet for when we imagine it to become a business of note.

But we're going to be doing a very aggressive beta at the end of this quarter to go into next year.

Then the real test prep season will go starting after August next year, because remember students start to apply early in November, November 1, November 15; and they apply in December and January; and they hear back in April.

So it really is going to be -- we'll be able to see how quickly it can scale really starting in the second half of next year, as we use the fourth quarter to get the beta back and the first quarter to be able to target those that are taking tests in the first quarter.

But about 3.5 million students take tests every year, so it's a very big market and we're really enthusiastic.

And we're excited about what we're building, because no one else has it, which is, as I said, it's online, it's interactive, it's adaptive.

But also we'll have tutors plugged into it, so if you ever need human help, you can get human help.

And it will learn from you and learn from the others in the network, and it will be very affordable.

So we think we actually can expand the market for test prep, because most of it has been $1,500 for a wealthy student to pay.

And it's been a smaller market than it should be.

Thank you.

This is a question for Andy.

Can you comment a little bit on the significant growth in cash quarter-over-quarter?

I think it's nearly $40 million.

Yes, (inaudible) first, that's a great question and thank you for asking it, because it does show you -- it does indicate the dynamics of our business.

It's a business where we take a lot of bookings in the September time frame as students come into school.

And much of that revenue in fact, while we take the cash in much of that revenue actually gets recognized in Q4.

So it's a dynamic that we've seen over the last several years.

However, once we get through the transition, that dynamic will change, right?

The revenue and the cash generation will actually come much closer together, because under the -- when we get through the transition we get all of the cash in; we recognize all of the revenue.

So the matching of revenue, profits, and cash become much closer.

But in this model, we take a lot of cash in and we recognize a lot of the revenue, particularly for the rental, in Q4.

But good question.

Thank you.

Thank you.

Henry Chien, BMO.

Hi, good afternoon.

I just had a question -- I'm sorry if I missed this -- but it looks like on your cash flow statement there's an outflow or a purchase of a strategic equity investment.

I don't believe any acquisitions or investments have been spoken for.

I wonder if you could explain what that is.

Yes, this is Dan.

I can answer that.

One of the things we're looking at is eventual international expansion.

When we were just in the textbook business there really wasn't an opportunity for us to bring print textbook rental business outside of the US.

Now that we have Chegg Study, now that we have test prep, now that we have so many relationships with major colleges where international students want to apply to US colleges, and test prep, and we have the technology and tutors, we see an opportunity to start to take those kinds of businesses and test non-US markets.

One of the things we did was we made an investment in the leading platform for high school and college students for learning in Brazil.

So we made a small cash investment.

We took a percentage of the company.

What we are doing with them is we are going to use their platform; it reaches over 50% of the Brazilian market.

And we are going to start testing some of these services over the course of 2016 to learn from that market what services makes sense, how we'll integrate them, how we'll price them.

So yes, we did make an investment because it's time for us to start looking in a risk-free way at how to take advantage of the services we have globally.

Got it; okay, that's interesting.

So is Brazil -- I'm assuming it's a target market for you internationally at this point?

Are you looking (multiple speakers)?

Yes, look, there are some obvious markets.

We're already in the Chinese market with a small business helping Chinese students come to the US, and we have a relationship with Baidu there which makes it a valuable asset.

Obviously, the Indian market is very large; the UK market is very large; and the Brazilian market is very large.

We happen to -- we do a lot of work before we make investments or before we partner or buy companies, and we found a company in Brazil that we met with for a long time.

They came and visited us many times.

They have built a free version of their platform that reaches a huge percentage of college kids.

Very few of the kids in that country go to the premier schools; the rest go to the public school, and so there's a big opportunity to help them do better test prep, learn the subject matter they're in, get better grades.

So yes, Brazil is a market that we're obviously looking at, because anywhere students are going online or are self-directed to learn, the Chegg business model we believe can expand there one day.

But we're trying to do it very efficiently, without any distraction to the core business in the US.

And the opportunity to take these products can put them in Portuguese and Spanish is something that's not complicated for us to do and use their platforms to drive all the traffic to it.

Got it; okay.

Just a quick question on Career Center.

You mentioned plans to monetize that service.

Would you be able to talk a little bit more detail on what that plan is?

Not at this time obviously, for competitive reasons.

But our view is this.

We have more college students than anybody that are active on a regular basis in our network.

We know more about them, in our opinion, than anybody does.

And we know their career interests because we see such a huge engagement, not only in their majors but on the internship side itself.

So we're going from it being purely internships to internships and first jobs out of college.

So the models are pretty well known at this point.

But the first focus, like everything else we do, is to make the products great before we start to monetize for them.

Because if we can get more students in it and have the students depend on it, and then have corporations see the success that we're driving to them for internships and then for jobs, then that's a big market opportunity for us going forward.

But we want to build it slowly and make sure that we earn the market share before we start charging for it.

But it's going very well, as you heard from some of the numbers that we released on the call.

Got it; okay, great.

Thanks so much.

(Operator Instructions) There are no further questions at this time.

I would like to turn the call back over to Dan Rosensweig, CEO, for closing comments.

Okay, thank you.

Thanks, everybody, for joining the call and thanks, everybody, for your great questions today.

As you can see, the transition is going very well.

We had -- the Ingram transition worked as well as, if not better than, we expected.

We are now closing down our warehouse.

The books have been shipped to Ingram, and the only thing left in execution of the textbooks we own versus Ingram will be accounting treatment.

'

So that the most difficult part, which was getting the deal signed, getting it done, getting the warehouse closed, and shipping the books over, has been done and using all the technology to be able to account for this stuff.

So that has been a great amount of work on our team, and I want to congratulate our team for doing it and the Ingram team for doing it.

You can see our digital businesses are having great success in grade traction, and we believe are a great indicator of opportunities to come.

We really believe that the Company is just a few years old because of the transition of the model, and by building a huge brand, making it ubiquitous, being able to bring out successful learning services -- instead of just products that are created and that we resell for somebody else -- and see that success gives us real enthusiasm for the future.

So we're very excited about the rest of this year, going into 2016 and beyond.

I think we're all looking forward to the day where we can say we're done with the transition officially, and that's about a year away, so only two more rushes really.

So we're very excited about that.

The last thing I want to say is I want to thank Barry McCarthy, our Board member.

As you may have read that Barry has left our Board because he's become a few months ago the CFO of Spotify, one of our great partners.

Barry was a phenomenal Board member, the first Board member I asked to join the Board.

But we appreciate the fact that he moved out of the country and is trying to get that company to do the things that it needs to do.

So unfortunately for us he had to move on.

But he's been an extraordinary friend and Board member and one of the architects of helping us really understand the transition from the print world to the digital world, as he did when he was at Netflix.

And we wish him great success at Spotify.

We look forward to talking to you guys at the end of the fourth quarter, and thank you very much.