Chegg Inc (CHGG) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Chegg's conference call discussing fourth-quarter and fiscal 2015 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, February 22, 2016.

I would now like to turn the conference call over to Alex Hughes, Head of Investor Relations for Chegg.

Please go ahead, Mr. Hughes.

Good afternoon and thanks for joining Chegg's fourth-quarter and fiscal year-end 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 first quarter of fiscal year end 2016.

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 I 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 dramatically from those in the forward-looking statements.

In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg's quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 5, 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 present financial measures on a non-GAAP basis.

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

We also make reference to information included in the IR deck and investor relations data sheet posted on our IR website at investor.

Chegg.com.

With that, I will turn the call over to Dan.

Thanks, Alex, and good afternoon, everyone.

2015 was a very successful year for Chegg.

We met our revenue targets, exceeded our profit targets and for the first time, became adjusted EBITDA profitable for a full year.

We successfully grew our digital services and launched some exciting new products positioning us for strong growth in 2016 and beyond.

We had four priorities in 2015.

Priority one was to accelerate the transition of Chegg to an all-digital business by the end of 2016 and we are on track to do so.

All that is left is for us to liquidate the remaining textbooks in our inventory which we expect to complete by the end of the year.

We are very pleased with our partnership with Ingram.

Our second priority was to invest even further in our digital future which is headlined by our subscription businesses, Chegg Study and Chegg Tutors.

Together these two popular services crossed over the 1 million subscriber mark in 2015.

Chegg Study is rapidly becoming as popular a service on Chegg as textbook rental.

We have been able to achieve this by expanding the number of textbook ISBNs covered to 21,000 and through the size and the quality of our proprietary expert Q&A network where we answered more than 1.5 million questions in 2015.

Our network is a huge differentiator and its effectiveness is evident by the 136% growth we saw year-over-year in the questions answered.

We continue to see incredible engagement with users who access Chegg's service weekly on average.

The importance of Chegg Study is directly connected to its ability to impact student outcomes with over 90% of users reporting it helped them get a better grade.

As widely used as this help hub service is, many students need human help which is why Chegg Tutors was our fastest-growing service in 2015.

We see the world as moving towards more high quality, on-demand learning and our goal is to build the largest on-demand marketplace for learners and educators.

We are off to a great start.

However, one of the key lessons we learned about building a two-sided on-demand marketplace is that it is not good enough to have a large number of high quality tutors but we also must have tutor availability at the moment a student needs them.

The good news is that we were able to create significant demand.

The challenge that we experienced is that we were unable to meet all of that demand within the quarter.

Although this cost us some short-term revenue in Q4, we know this to be a very fixable problem and one we have already started to address.

Our third priority was to invest in and launch new services that address big opportunities such as Test Prep and Careers.

We successfully released the beta version of our Test Prep product at the end of last year and have already had over 18,000 students engaged with it which is twice as much as we originally expected and we believe that offering a high quality adaptive online Test Prep service at an affordable price is a very big opportunity for Chegg.

In the Career space, our anchor service, internships.com, is the largest online student focused internship database.

We are making product improvements daily that have already led to record usage.

New student registrations grew 29% year-over-year, new internships listed grew 68% year-over-year and over 1.4 million job applications were submitted on the platform.

Clearly there is a need for a national career services site for students and employers.

Finally as I noted earlier, we had a goal to be adjusted EBITDA profitable for 2015 without sacrificing our future and we are proud to report that we achieved that milestone for the first time in our Company's history.

As strong as 2015 was, we are even more excited about 2016.

For those of you new to Chegg's story or continue to think of Chegg as a textbook rental business, it is important to understand just how much the Company has evolved in the last few years.

We have gone from a Company that used to use significant cash and lost money each year offering only textbook rental to a Company now that generates free cash flow and makes money from a full suite of student first digital services.

As we move ahead, our textbook business by design will become a smaller part of our overall Company and we are still able to glean great value from it.

Our strategy is to use our required materials business to build our brand, grow our reach and acquire customers profitably enabling us to more efficiently introduce our higher growth and higher margin services that students love and as you can see from our results, it is working.

Our most used (technical difficulty) today is Chegg (technical difficulty) which is a self-help service that lets students master STEM and quantitative business subjects through step-by-step solutions and our proprietary expert Q&A network.

In 2016, we will continue to expand our content categories even further and continue to go about our network for more subjects.

For Chegg Tutors, our time and attention will be spent on building out our on-demand tutoring network.

The key is for us to meet student requests within a five-minute window on all subjects 24/7.

It is becoming clear that on-demand tutoring is going to be a very big business with only a few winners so we are making sure to invest appropriately into the quality of our service and grow demand as we improve supply.

We are very excited about on-demand tutoring.

We see a lot of runway with our current services and at the same time, we are making strategic investments in new areas such as Test Prep which is an $8 billion market and matching of students to their first job which is a $5 billion market.

We expect these businesses to begin to contribute to our P&L in 2017 and become a meaningful part of our future.

In our marketing services group, our focus within enrollment marketing is to expand the number and the value of student relationships by improving our proprietary data platform which we call the student [graph].

Our goal is to better match students to the right schools and eventually to their first jobs, significantly improving their outcomes.

Our brand partners play two very important roles for us.

They help grow profitable revenue and they really differentiate us with students who love the surprise and delight from key partners such as Red Bull, Tide and Starbucks, when they open our iconic orange boxes.

We are very proud of the transition that we've made and we are very excited about how our brand has evolved in the minds of students from a textbook rental company to a student hub.

This has helped Chegg become one of the two most recognizable online brands on campus when students are asked which brands helped them with their studies and college life.

We are proud to say that we grew our score by 12% year-over-year.

Serving students' needs is a very big business especially in today's economy.

We believe we can grow our current offering while adding new services with big opportunities and doing so profitably.

2016 is the last year of transitioning our model and we couldn't be more excited about finishing the transition.

Of course more importantly, about our future, the needs for Chegg services continues to grow and we are really excited about what we can do to help students improve their outcomes.

With that, I will hand it over to Andy to discuss our performance and our outlook in greater detail.

Andy?

Thanks, Dan, and good afternoon, everyone.

As a reminder, my comments today are on a non-GAAP basis as I discuss our 2015 financial performance and our outlook for 2016.

We had a great 2015 and are very pleased to report our first full year of profitability on an adjusted EBITDA basis.

I am very happy to say that we are in the final year of a multiyear transition to an all-digital business.

Although Chegg has become simpler to run, we appreciate how challenging it has been to understand our business especially during this transition period.

Given we are in the last year of the transition, we will be giving guidance consistent with how we are now operating the Company.

In addition, there have been changing dynamics in the textbook industry that will be important to understand for our 2016 guidance.

There are a lot of moving parts and our goal is to make this easier to understand.

As such, I encourage you to review the financial slides in the investor presentation and the investor datasheet on our IR website.

Let me first start with more detail on Q4.

We had an excellent quarter overall.

Digital revenue grew 34% to $38.1 million which was at the low-end of our guidance range while adjusted EBITDA was at the top end.

Here is why.

First, there was a trend away from e-textbooks towards print because publishers increased the price of eTextbooks and print rental prices continue to decline.

This doesn't affect Chegg's long-term business model.

It does however impact our topline revenue because when we rent an eTextbook, we recognize 100% of the revenue versus when we rent a physical book, we recognize approximately 20% of the rental price.

In addition, eTextbooks are priced approximately twice as much as a print rental.

Effectively, we are getting approximately 10% of the revenue from a print book through Ingram as we would from an eTextbook.

Fortunately this does not have a material impact on the bottom line.

We experienced similar trends in our recently completed winter semester and have factor this into our outlook for 2016.

The second factor as Dan mentioned was that in Q4 we drove significant demand to our tutoring business but unfortunately were unable to meet approximately 50% of that demand during peak periods.

Although tutoring remains our fastest-growing business, this constrained revenue for the quarter and consequently we are now being more cautious how we model the rate of growth in 2016.

Turning to fourth-quarter profitability, we saw gross margins increase to 61.5% better than expected.

This was driven primarily by high incremental margins from our subscription services.

This resulted in Q4 adjusted EBITDA of $15.3 million and more importantly, adjusted EBITDA of $5.4 million for the full year, Chegg's first profitable year, which is a significant improvement from the $13 million adjusted EBITDA loss we recorded in 2014.

Looking at the balance sheet, we ended the year with $89 million in cash and investments as well as a $29 million receivables balance with Ingram.

This receivables balance is slightly higher than we had originally anticipated and is directly connected to the shift from eTextbooks to print that I just discussed.

To meet increased print demand, we went into the market and bought more print books on Ingram's behalf.

Through our contract with Ingram, these funds will be paid back to us later this year.

We also ended the year with less than $40 million of textbook inventory compared to $81 million the previous year and we expect this to be close to zero as we exit 2016 and become an all-digital business.

With that, let me turn to discussing how we are running and reporting the business in 2016.

As we are now at the tail end of our transition to Ingram, we are changing how we report and guide revenue to reflect how our business will look once this transition is complete.

We will also start guiding all print revenue on a pro forma basis which assumes it is all commission-based revenue.

In addition, we will guide pro forma gross margin guidance on an annual basis so that you can track our progress to our longer-term model.

We believe the core value of our Company and where shareholder should focus is on our high-growth products which we now call Chegg Services, which includes our subscription services such as Chegg Study, Chegg Tutors and Test Prep and marketing services, enrollment marketing, brand partnerships and careers.

We also believe they represent the future growth of revenue and profitability of our company and where most of our focus and investments will occur.

We will also be reporting and guiding separately on total required materials which includes revenue from print textbooks, eTextbooks as well as the Ingram commission.

We are doing this to increase transparency into our slow growth business but more importantly, it matches the way students come to Chegg to search for textbooks and our goal is providing students the textbooks they need in the format they want.

Also as a reminder we will report and guide required materials on a pro forma basis as there will be Ingram transition more complete.

We believe this construct gives shareholders greater visibility into how big and fast our Chegg Services are growing and less the [monitor] the required materials business separately.

For modeling purposes, we have provided historical revenue break [abouts] in the appendix of the investor deck on the IR website along with expected seasonality for 2016 as we move through this transition.

Looking more specifically at 2016, we expect to see strong revenue growth in Chegg Services which has consistently been growing above 30% annually.

In required materials, where we ship more than 6 million units annually, we expect unit growth in this market which right now is slightly down due to trends in admission.

As recently as 2014, we saw eTextbook unit growth of over 60%.

We now believe given the shift in student preference for lower-priced print, that eTextbooks will decline by a small amount in 2016.

This of course will impact topline revenue but will have no meaningful impact on our profitability.

We also plan on making important investments in 2016 in the areas that Dan articulated as our 2016 objectives while continuing to improve profitability.

With that let me turn to our outlook.

As previously communicated when we announced the Ingram partnership a year ago, GAAP revenue for 2016 will decline year-over-year as we finish the last year of this transition.

As a result for 2016, we expect total GAAP net revenue between $230 million and $250 million, pro forma revenue between $170 million and $185 million, with Chegg Services revenue between $115 million and $125 million while growing approximately 30%.

Gross margin between 48% and 50% on a GAAP basis and 64% to 66% on a pro forma basis with adjusted EBITDA of $10 million to $20 million.

While the first quarter of 2016 we expect total GAAP revenue to between $60 million and $65 million, pro forma revenue to between $44 million and $47 million and Chegg Services revenue between $24 million and $26 billion, gross margin between 38% and 40% on a GAAP basis and an adjusted EBITDA loss of $2 million to break even.

Looking further out, we continue to expect to exit 2017 at an EBITDA margin of 25% and to operate at this level for all of 2018.

As a result of the eTextbook dynamic that I discussed earlier, it is less clear on the timing of total revenue growth.

However, we believe Chegg Services which excludes required materials will drive our growth and should be able to grow at approximately 30%.

We are very excited about the progress we have made in fully transforming Chegg's business.

In a short period of time, Chegg has gone from a textbook company that lost money to a digital platform that offers a suite of student first services and is growing profitably.

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

(Operator Instructions).

Douglas Anmuth, JPMorgan.

Hi.

It's Diana Kluger on for Doug.

Thanks for taking the question.

I would love to hear a little bit more about how the Test Prep test is going?

When you are thinking of putting more of the content behind a pay wall and when we should think about monetization becoming more material?

And then I would also love to hear a little bit about the supply demand on the tutoring business and if you think there is potentially any impact on churn from the students who didn't have a match in the window that they were looking for?

Thank you.

Thanks, it is Dan.

On Test Prep, we launched the beta version in December and we were hoping to get between 9000 and 10,000 students.

We got twice that much so we feel like we have the ability to drive demand and get students engaged with it.

It is very hard to get high school students to engage over the Christmas holiday with a Test Prep product, particularly one they hadn't heard of so we were really boosted by not only the number but their level of engagement with it.

We are focusing now on taking all of their feedback and then improving the quality of the product.

Given the timing of when students take these exams, we are not likely to start charging until the second half of the year which was our original expectations.

So in 2016, we really don't have much of anything in our forecast as it relates to revenue.

But we expect the pay wall to go up in the second half of the year as we start getting to the big test prep season.

As it relates to the tutors, we are sort of fascinating.

We had focused a lot on volume and quality in tutors and had done really an excellent job on that reaching well over 10,000 tutors in the system and have a five part system in which to evaluate their quality.

And what we learned was we really needed to learn the timelines of when students not only what subjects they are interested in but what days of the week and what time of day for those subjects and now we can more aggressively recruit tutors.

We don't think there is any significant impact negatively on the brand and in fact once we understood that that was the problem, we changed our recruiting process.

It really addressed in January and the early part of February this year and we are getting really good feedback from students on the quality.

So we are really excited.

It remains our fastest-growing business and we don't think it has any long-term impact.

We do think that it makes it more of a moat for us to be able to not only be able to drive as much demand as we ultimately want but to acquire tutors and be able to know when the tutors are actually going to get business.

So right now there is no negative implication.

The biggest issue as students wanted it, we couldn't match them with one.

A bad implication was we would have tried to match them with one that wasn't qualified.

So we don't see any long-term impact of it so far starting out this year.

Great.

Thank you so much.

Brian Fitzgerald, Jefferies.

Thanks, guys.

I want to know if you are seeing any change in dynamics around the seasonality of the digital products?

Is there any degree of seasonality shifting for tutors, it feels like that would always come in at the latter part of a quarter or school season?

And then for that matter, with Test Prep, I guess it is kind of seasonally weighted to right around now, Q4s, Q1s.

So any color there.

And then any color on the branded marketing offerings, how are renewals going with them?

Are the sales cycles for those changing in any regard?

Thanks.

So on seasonality, we have on the investor deck, we have a layout of how we think seasonality has really evolved from what it used to be in the textbook business.

But the way we think about it is Chegg Study which is our largest product by far really just a fabulous product and it will be and is becoming extremely profitable, it really begins to take off its subscription season somewhere towards the end of January, early part of February and then does it again in the April/May timeframe.

And that has to do with your first two weeks in the semester when you go oh my goodness I don't get this and we get midterms and then we get finals.

Tutors to your point, tutors the big quarters for tutors will be more like Q2 and Q4 which is why we noted that because we had basically 50% more demand in Q4 than we could meet in terms of tutor supply.

And that really did start to come in after Thanksgiving and in the month of December.

Really right around finals.

So if tutors has a different -- tutors is later in each semester, Chegg Study begins to really evolve earlier in the semester and then has a revival as you get toward finals.

As it relates to Test Prep, it is too early for us but the time of the year when they match up SAT and ACT, eventually a year from now we will have another additional suite of subjects that will be around nursing school and LSAT and MCAT.

So it is too early for us to be able to give you any indication of seasonality because it will depend on the product suite and when we roll those out.

Plus it is not a revenue producer in 2016.

We really want to make the product incredibly great because nobody has one that can compete.

We are going up against the likes of the Kaplans of the world and Princeton Reviews of the world and those are multi-hundred million dollar revenue businesses.

So we are very excited about it.

But I think as you think about seasonality, it really is Chegg Study sort of second to third week of January through the end of the semester with the majority of it coming early on and then Tutors later in the semester.

As you say, it is really on demand.

We also get really large days on Tuesdays which is when homework gets assigned.

So those that do their homework right away, we get them on Tuesday night so we have learned that about the tutoring business.

And you asked about the brand business.

We said last year and we will continue to say that the subscription businesses really are the bulk of the growth rate right now of the Chegg Services business.

They are becoming big and they are becoming very profitable and really meaningful in our overall numbers now.

We couldn't be more excited about them.

On the marketing services businesses, they will continue to grow, they will grow nicely but they will grow slower and in the brand business, we have really focused last year and this year on a small group of people who will spend more and do more with us because the surprise and delight and the differentiation is with the students.

So the renewal rates, we have had Red Bull actually skipped a quarter or two and then actually have come back because the demand was so high.

Starbucks continues to renew.

Tide Pods continues to renew.

So we get a very high renewal rate.

But I would say right now as you think about the growth of our business it is really the subscription services that are making up the bulk of where we are going right now and those are the fastest-growing and the highest profitable ones and really what Chegg is working to become over the next couple of years.

Great.

Thanks, Dan.

Aaron Kessler, Raymond James.

A couple of questions.

First, just Chegg Services, the guidance implies about 22% to 33% growth.

Can you just give us maybe the factors going to that range?

And second, Andy, for gross margins for required materials versus services, can you give us a sense for those ranges?

Thank you.

So why don't I hit the first one first.

If you go to our slide deck, we actually have some information for our investors regarding our gross margin profile.

We are looking at -- been fairly consistent over the last two to three years, 8 points of gross margin for Chegg Services so it is not just a high-growth business.

Chegg Services is not just a high-growth business, it is a high-margin business with the residual being obviously the required materials business.

So that is in the deck but I would encourage anybody listening to go to that.

The second question was -- the first question sorry, that is the second question I went backwards here.

So on what is driving the growth, as Dan had mentioned earlier the bulk of our growth over the next, over this year is Chegg Services, our subscription services which is Chegg Study Tutors drive that significantly.

We are not looking at Marketing Services.

While it is growing, it continues to be a low growth business and as you can see once again, we have provided this on a pro forma basis that we have experienced consistently 30 points or better relative to our Chegg Services business over the last few years.

So one part of a question, Andy may have missed when he was answering the gross profit one was what is the difference in the range between 22% and 33% in terms of the growth rates?

It really is just early in the year like we are in the middle of February.

It is unlike textbooks which we are already through a season and we only have thank goodness one season left of owning any textbooks and that will be done with that business and then everything is really about Chegg Services.

So we are being cautious about just the rate that we want to grow Tutors, Chegg Study is off to a great start so I think it really is just more time in the year to be able to sort of condense that range a little bit but since we are coming out so early and we've got 10 months to go or 9.5 months to go, we are just putting out a range there we think that we feel comfortable but historically we have been able to grow that business in excess of 30%.

And just to clarify quickly on the accounting, are you going to continue to disclose kind of a higher GAAP revenues and do you encourage analysts maybe to shift to the pro forma in the disclosures?

Aaron, absolutely.

We have been talking about pro forma revenue for the better part of two quarters now and our intent is to be able to get analysts to move to that because that is the company when we get to 2017.

So there is no pro forma once we get to 2017.

This is the company as we see it today.

So yes, we would definitely encourage analysts to do that.

We will continue to provide GAAP revenue guidance in the meantime but GAAP and pro forma become the same when we get to 2017 so there won't be any difference.

It will be just GAAP only.

There are probably three things that we really want to direct everybody to think about.

The future of the Company is Chegg Services and the required materials business really is just what we have said for a year after we announced the Ingram deal.

Where when we went public two years ago, it was 80% of the business and now it is less than 25% of the business and will be an decreasingly important part of the business in every capacity.

And right now we use it to build our brand, acquire customers, drive users to the other services and that is why other services are growing so fast and have such high margin.

So that part is working out.

The second thing we just want to direct people to is on the pro forma side, it is because how we run the Company.

It is just that is the way we think about it internally and it won't be pro forma after we liquidate the last book.

It will simply be -- that will be the total company revenue.

So we will always report on GAAP as Andy points out just so you guys can have it.

The third thing that we talked about on the call but it is very important to note as you think about your models is just the difference in an eTextbook and then Ingram textbook rental which is there is really very little -- no meaningful impact on the bottom line which is what we have been striving for which is to make required materials just the brand builder, traffic driver, positive cost to customer acquisition so we can build the transition on top of that.

But the difference in eTextbooks and an Ingram commission is as much as 90% difference on the top line revenue recognition even though there is really no significant difference on the bottom line profitability recognition.

And it is because when we resell eTextbooks, it is on an agency model, not a wholesale model.

So we have to buy it at the price they sell it and then we have to mark it up the way they want us to and that is no different than Amazon or anybody else.

So that makes a difference in our overall revenue growth rate but not on our bottom-line growth rate and has zero impact on the future of the Company which is the Chegg Services.

So I want to make sure that we cover all of that because it is a change over what -- I mean eTextbooks used to be growing at 60% a year and then now are a negative growth rate.

But we don't lose the customer and we don't lose the profits because we just convert that customer from moving to eTextbooks to an Ingram textbook rental from.

So it is not bad for Chegg at all.

Great, thank you.

Mike Olson, Piper Jaffray.

Good afternoon.

Just on that topic when you talk about less interest in eTextbooks, is that eTextbook rentals, purchases or both?

Why do think interest in textbooks has changed or maybe isn't showing the upward trajectory that was previously expected, is it expense or just something else [but do you find] eTextbooks to be less user-friendly?

Secondly, at the end of Q3, you reported digital subs I think it was 825,000.

This quarter you reported 1 million Chegg Services subs and 1.4 million digital subs.

Is the apples to apples number with the 825,000 last quarter, the 1 million or the 1.4 million?

Thank you.

So let me cap off the numbers questions there before Dan maybe talks a little bit about the eTextbook business.

So when you look at the 1.4 million digital subs and $1 million Chegg Services subs, we will be moving to Chegg Services subs going forward.

We gave both this quarter because of the way we are breaking out the business.

That is for the full-year.

So when you look at the digital subs of 1.4 million that is digital subs for the full year, the numbers that we gave in Q1, Q2 and Q3, the ones you just referenced are actually for the quarter, not -- it wasn't a year-to-date number.

If you recall maybe recall last February when we talked about digital subs, we talked about having 1 million digital subs at the end of last year.

That is comparable to the 1.4 million we did this year so it is a 38% or so increase.

But as we move forward, we are going to focus on how we run the business today and we will be talking about Chegg Services subs which is their subscription service business.

And we no longer include eTextbooks in the subscription services business.

So all you are getting now is Chegg Study and Tutors and then when Test Prep comes online, you will Test Prep, so anything that we charge a subscription for.

But we are basically thing that textbooks is a testbook is a textbook because that is the way the students look at them so we are no longer counting that as our subscription gross.

So you are seeing close to 40% growth year-over-year in just those two businesses on subscriber growth.

So you can see just how big Chegg Study is beginning to get and that will have a meaningful contribution in profitability in the out years.

I mean meaningful.

So the question on eTextbooks is very interesting because if you follow the publishing world, Pearson has had a great deal of difficulty and they have made some major cuts and major announcements.

Cengage positively emerged from bankruptcy but they are owned by a private equity shop.

McGraw-Hill is also owned by a private equity shop and was expected to go public in December and January and didn't do so.

And a lot of that, almost all of that has to do with what is going on in the domestic US textbook market.

So a couple of dynamics to just realize.

The US population demographic is one where there are just fewer students in college right now and you have seen that on Barnes & Noble's earnings calls and in the earnings calls.

And to us we don't really care because for us we really want that to be a flat market where we hone the size of the catalog, make it smaller every year and focus on only those books that help drive students to the other services and not all of them do.

In fact less than 50% of them do.

So we will continue to hone that group and make that part of the company smaller.

The reason for the dynamic on eTextbook is sort of fascinating which is you would have expected by now for significant investment to have gone into the quality of making eTextbooks more of learning than there are just PDFs of the existing textbook.

But today the eTextbooks that exist out there and we have -- (inaudible) licensed to market 178,000 different ones, they are just PDFs online.

And so when the price of the average -- here is an example of the most dramatic example of the most popular textbook which is Campbell Biology.

Our rental price of Campbell Biology is $20.

An eTextbook price of Campbell Biology is $107 so if you are a student and the whole goal is to save money, why would you do that?

On average it is more like -- the average eTextbook is 50% more expensive and since they don't have anything in particular that makes the learning from them better or more convenient and it is not cheaper, students just rejected it.

Publishers, we have been able to tell the publishers what price they should sell them at if they want to move more of them because we were sort of hoping for a faster transition.

But right now the way their businesses work they have a lot of print inventory and they need to market their print inventory as they start investing in other kinds of digital services for education for the high school [regs], all the K-12 regs as well as higher education.

So it was a business that was growing at 60% year-over-year and now will actually decline in growth and that has nothing to do with Chegg, that has everything to do with just the industry standard that is going on right now because we are in communication with everybody in the industry.

Fortunately for Chegg, it doesn't affect negatively the bottom line and fortunately because we have zero debt and we have a strong balance sheet, we can actually acquire the customers we want and we went into the market and bought used books for those customers so we can meet the demand.

But it was a very interesting trend that literally started at the end -- started at the end of the first quarter last year and we really didn't know what to make of it until the end of year because the next big season was the end of the year.

Got it, thank you.

Jeff Silber, BMO Capital Markets.

Thanks so much.

Just wanted to go back to the difference -- the way you are going to be reporting revenues going forward just so I make sure that I understand it.

So if I look at what you reported in the fourth quarter on your data sheet of about $12.4 million in required materials pro forma revenue, that is just the commission from Ingram, is that correct?

So Jeff, no, that is not correct, Jeff.

So what is in the required materials is this.

It is all of the Ingram commission, all of the print books that we deliver and all of the eTextbooks.

And so essentially what this has done -- let me put it in a different format.

If you take what our digital revenue was last year, take out the Ingram commission and take out eTextbooks and put it with our print, that gets you required materials.

Right?

That is how it works and that is how we are running our business today and that is how students look at particularly in required materials, they are just looking for their textbook.

We deliver it either physically or digitally but that is how the construct is going forward.

Does that make sense?

Yes, I think so.

And then you had mentioned the disclosure on the gross margins and I know you have done that on an annual basis in terms of Chegg Services gross margins.

I haven't done the math to back that out but required materials gross margin (technical difficulty)

His line just dropped.

I will move on to the next question.

Alex Paris, Barrington Research.

This is Chris Howe sitting in for Alex Paris.

I just had a few questions here.

On the 2016 GAAP revenue outlook, is that reflective of any acceleration in the exiting of the print business?

And the second question is how did Chegg Study grow specifically year-over-year?

Yes, yes.

When you look at the outlook on a GAAP basis, that absolutely includes that and that was 100% expected as we went into this.

We talked about this when we entered into the partnership with Ingram in February that we anticipated that we would see revenue declines on a GAAP basis in 2016 and then we start to see it pick up again in 2017 and 2018.

So this is pretty much as expected.

It maybe even a little bit more because we are liquidating faster.

That is true.

We are having trouble with the line so we apologize but on the Chegg Study growth rates, we don't break out the individual subscription services.

But as you saw since we crossed the 1 million mark, we are just Chegg Study and Chegg Tutors.

you get an indication that the overwhelming majority right now continues to be Chegg Study but Tutors is growing the fastest and getting to the point where by the end of 2016 it will be pretty significant.

Okay, thank you for taking my questions.

Corey Greendale, First Analysis.

This is Ken Wang on for Corey.

Thanks for taking my questions.

So just two quick ones for me.

I know there had been some talk before on monetization around Career.

So I just wanted to see if you had any updates on that?

Secondly, any other commentary around potential product introductions or what we can expect to see as an area of focus going into 2016?

So we are seeing very focused to the priorities that we articulated on the call because those are very, very, very big markets and we are having really great success with our subscription services right now and that gives us the opportunity to continue to invest carefully and diligently in our Test Prep business and our Careers business as you just asked about.

So we have modeled this year with zero revenue from either one of them because product quality is the key and for us to be able to ultimately charge and be very successful in them.

So in the Career space, we released some numbers today on internships.com that have just been fantastic.

We only took over the product ownership.

We bought the company over a year ago but we only took over the product ownership in October and already began to see huge impacts on user and student experience and corporation experience to the tune of I think it was close to 1.5 million or 1.4 million job applicants went through it last year.

So you can see it is very meaningful.

Our expectation is not to begin charging until 2017 and the model will be pretty straightforward which is we will have more students than anybody.

We will know more about them than anybody.

We will have their college, we will have their major, we will have their professional interests and we are growing the number of corporations quite dramatically, you can see in the prepared remarks that we have.

And we will begin to give corporations and companies and small businesses access to student and student data to be able to do their recruiting and that will essentially be a subscription based business.

So we are focusing on our new efforts which are Test Prep, getting the first ones out and starting to charge and expanding the number of categories and then focusing on the Career space and those are two huge spaces for us.

And so I don't imagine we will veer far from that over the course of this year.

Thank you.

Mitch Bartlett, Craig-Hallum.

I know you don't want to break out Chegg Services subscriber base, that 1 million between the different subscriptions but maybe if we could just focus on Chegg Study for a second and just help us understand the acceptance of Chegg Study within the student population?

How the repeats are -- if they are improving over the years with better product or what it looks like from a cohort basis, from an individual subscriber basis, what that might look like going forward?

Anything there?

Yes, it is a great question and there is a lot there.

So every cohort gets better so this is one of those that looks like a venture capitalist pitch which is everything is up and to the right.

So renewal rates are at a record high and that is a renewal rate that really is about monthly which is the average student is staying on in excess of five months and their usage continues to increase -- I think we mentioned on the call that there were 136% increase in the number of questions asked and answered over the course of last year.

And there was 1.5 million questions and we see that just continuing to grow rapidly.

Inside the subscription service, there is a Q&A network that is proprietary that no one else can compete with because no one is even nearly the size of expert answers to the students.

So it is very vibrant with the average student using the service weekly on average.

And so every metric in terms of conversion, renewal, length of time, engagement has been better with each cohort.

We have not taken up the price of Chegg Study since we bought it from $14.95 a month.

We have taken up the annuals and even if we take up the annuals, the only shift we see if more people doing monthly which is a better ROI for us because they all come back on and renew in the second half of the year anyway.

So I would just say that that business in and of itself is a monster business for us right now.

Very good.

Thank you.

By the way it has well in excess of 80% gross margins as well so it is one of those businesses that at scale just keeps getting better.

(Operator Instructions).

Matt Blazei, Lake Street Capital Markets.

A couple of questions on the balance sheet.

You ended the year with $89 million in cash I think.

I know your goal was $100 million.

You obviously pinned some of it on the Ingram receivables balance.

A couple of questions there.

Was it, was the delta pretty much all of Ingram receivables balance given the strong profitability you had in the quarter?

Where is that on the balance sheet, is it under other current assets?

Okay, Matt, that is a good question so the answer is yes for the most part, most of that has to do with the Ingram receivable.

There are cats and dogs around the other working capital areas, but nothing really material.

And you are absolutely right, it is in other assets for a variety of accounting reasons, it is not in receivables but that $29 million is in there and was up for the reason we have articulated on the eTextbook to print transition.

We bought more books and therefore we have a larger receivable, a larger receivable in other current assets with Ingram.

And I know your goal was to wind that down to 2016, is that still the plan?

Yes, so just as a reminder, I just want to make sure everybody is aware how the Ingram deal works is that in 2015 the way the transaction works is we buy books on behalf of Ingram for example through our book buy back which is very vital program and it helps us acquire customers and it helps Ingram get relatively speaking inexpensive books they can put into their rental catalog.

But as far as the transaction, we said Ingram would pay us back for those transactions 50% in 30, 50% in 360.

That represents the 360 that we agreed to with Ingram.

In 2016 the year we are in right now, that latter 50% goes to net 180 and then we go to regular payment terms in 2017.

So you will really see the cash flow associated with moving out of the textbook business -- really you see will it in its full force when we get into 2017 when we kind of collect the whole receivable balance from Ingram which will be really in the first quarter of 2017.

So by the time the Q1 of 2017 comes around, that number which is approaching $30 million should be back to a more normalized -- I don't know $5 million or $10 million is what you are saying?

Yes, you kind of nailed it.

I don't think it will be quite as high as $10 million but you actually nailed it.

It will be back to a very normal level, correct.

Thank you guys.

If there are no further questions I would like to turn the call back over to the Chegg Inc.

CEO, Dan Rosensweig, for closing comments.

Thanks everybody for joining the call.

We are obviously very happy with 2015, continuing to see our new businesses really beginning to sprout and become meaningful parts of our P&L.

Finishing the year EBITDA positive was a big milestone for us because only 24 months ago we were a Company that used cash and lost money and now we think we have long-term sustainable profitability and more profitability each year based on the margin profiles of our new businesses.

That Chegg Services in our minds effectively is Chegg which is those new businesses that are growing on average 30% a year, high-growth, high-margin, are becoming significant contributors and actually for the first time in our Company's history, those collective businesses will be a bigger percentage, substantially bigger percentage of the top line than our textbook business.

So that is another big milestone in our business.

As you think out in the future, we continue to see the demand for Chegg's brand, Chegg Services growing and growing at a very nice rate.

It has been very difficult to go through this transition.

It has been even harder for those of you not inside the Company to model the transition.

There are too many moving parts between which books we own, which books Ingram own, eTextbooks and other things.

We believe that the new way of reporting gives complete transparency into the slow growth, past businesses which are everything related to textbooks and the new company and the growth part of the company which is Chegg Services which we believe in the next few years will be very big and very profitable.

So we thank you all for continuing to stay with us through this transition.

We like you cannot wait for our last textbook rush season which will be at the end of this year and then we will be a clean 100% pure digital business which we believe will have high growth and high margin.

And thanks again for joining us on the call.

We will talk to you soon.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.