Chegg Inc (CHGG) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Chegg, Inc.

Second Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Tracey Ford.

Thank you.

You may begin.

Good afternoon.

Thank you for joining Chegg's Second Quarter 2017 Conference Call.

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

A copy of our earnings press release, along with our investor presentation, is available at our Investor Relations website, investor.chegg.com.

A replay of this call will also be available on our website.

We routinely post information on our website and intend to make important announcements on our media center website at chegg.com/mediacenter.

We encourage you to make use of these resources.

Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of the company.

These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statement.

We caution you to consider these important factors that could cause actual results to differ materially from those in the forward-looking statements.

In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg's quarterly report on Form 10-Q filed with the Securities and Exchange Commission on May 1, 2017, as well as our other filings with the SEC.

Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date.

We undertake no obligation to update these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP financial measures.

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

We also recommend you review the information included in the slide deck and investor data sheet posted on our IR website, investor.chegg.com.

Now I will turn the call over to Dan.

Thank you, Tracey, and welcome, everyone.

We had another great quarter and it's been a great first half.

In a few minutes, Andy will walk you through our Q2 numbers in more detail as well as our updated guidance.

We are clearly pleased with our financial results and our new outlook, and we're even more excited about the strength of our brand, the relationship we are building with students, and we believe that Chegg is becoming the largest direct-to-student platform in the country.

This has allowed us to accelerate our growth, add new services and extend relationships with key partners, all of which should benefit Chegg, our investors and of course, students.

The education sector is massive.

It's a $1 trillion market on an annual basis that involves 15% of the total U.S. population.

It represents 7% of our GDP and is clearly ripe for disruption.

And as big as the education market is, we believe it's actually expanding, particularly for the type of products and services that Chegg offers, and the many formats in which we offer them.

The more subjects we cover, the more services we offer, the more way students can consume the content, the larger the market opportunity gets for us.

And the power of the Chegg platform is that each of these services contributes to the success of the others.

Chegg students and our investors benefit from the size of our network, the interconnectivity of our services, the strength of our brands and our proprietary data, which we call the student graph, all of which contributes to a very large moat around Chegg's offering.

With that in mind, we entered 2017 focused on our key 3 priorities.

First, to execute on our financial objectives, and as we noted, we are off to a great start.

Second, given the size of our market and the expanding opportunities that we see, we continue to make strategic investments in our core Chegg Services: Chegg Study, Chegg Writing and Chegg Tutors.

Third, as we believe the education industry is being disrupted right now, we continue to make investments in new opportunities to take advantage of our reach, brand and student graph.

We believe that the education industry is rapidly moving to a learn-to-earn philosophy, and we are very excited with our investments in our internships and career sites.

Because of the student graph and our relationships to students, our strategy is to know more about them than anyone else, that we are in the best position to get them their first job.

From the beginning, Chegg has believed that because of the changes in the economy, globalization and technology, that more people will be looking to learn for longer periods of time across their careers.

And that technology, as it has for so many other industries, will allow for more people to learn more things, from more locations, at more convenient times, at a lower cost and with higher quality.

And it won't be limited to just subject matter or degree-based learning.

It's already evolving into a skills-based learning around STEM and other categories that are best served online.

Our company has been built around meeting the evolving needs of the modern learner and we are proud of the success we are seeing as we have transitioned to a pure digital business, with nearly 1.2 million Chegg service subscribers in Q2 alone, up 54% year-over-year.

We are continually making enhancements to both the depth and breadth of what we offer across our platform, expanding the number of students that our services are relevant to, and increasing the number of ways students can learn and consume content.

As examples, we increased our total number of addressable ISBNs in Chegg Study in this quarter to nearly 27,000, and we are excited to announce that we are adding video content to Chegg Study.

Now students can learn through step-by-step solutions, our proprietary Q&A network and now video.

And we expect to substantially increase the number of videos we roll out over the next couple of years, both licensed content and those we create on our own.

Chegg Study is the center of our flywheel, as students rely on it to better understand their work and improve their grades.

To give you a sense of just how important it's becoming, students viewed almost 98 million pieces of content in the quarter, bringing our total content views to nearly 200 million in the first half of 2017 alone, which is an outstanding growth of more than 60% year-over-year.

Our proprietary Q&A network, powered by over 35,000 experts, answered over 1 million new questions in the quarter, bringing our database to a record 10 million questions asked and answered in Chegg Study.

Considering our extensive library, step-by-step solutions, our proprietary Q&A and now the addition of video, we think it would be very difficult for anyone to replicate the size, scale and quality of our content and experience.

And as strong as Chegg Study has become, we are seeing similar momentum with Chegg Writing Services.

We knew this business would be big, and we believe that it's only getting bigger.

All students are required to write, but unfortunately, over 25% of students must take a remedial writing class prior to getting any credits in college.

This makes the writing category a big opportunity for Chegg as we expand beyond helping students cite to helping students learn to write.

Chegg Writing has shown impressive user and engagement growth in this quarter.

Students spent over 8 minutes per session on the site and over 290 million new citations were created by users in the first half of 2017.

We believe the modern student sees the future learning the way they see many other services they are using today.

They expect them to be online, on-demand, personalized, adaptive, and most importantly, when needed, backed by human help.

With about 40% of students working 30 hours a week or more, coupled with continued cuts to higher education funding, the need for high-quality, low-cost human help is significant, and we believe it's only getting bigger.

That's one of the many reasons why Chegg Tutors is a core service on its own and a key to our overall product strategy.

Our services are all designed to work together to help a student improve their learning, get a better grade, and ultimately, master a subject.

Each time we add a service, we are able to drive users from one service to the next, and with Tutors, it continues to be the case, as over 50% of all of our tutoring customers come directly from our other existing Chegg users.

So we are able to grow the business faster, for lower cost and expand the amount of time and money students are spending with us, all to improve their outcomes.

And students continue to be highly engaged with Chegg Tutors, receiving lessons in over 180 subjects in the first half of this year, with average lesson hours per student increasing about 4% year-over-year.

These are all powerful indicators of why we believe Chegg Tutors could one day be our largest business.

As Chegg gets bigger, and our collective brands are now recognized by 78% of U.S. college students, we are becoming a primary partner and distribution channel for education products and services.

We entered into 3 significant partnerships this quarter that reflect the power and importance of Chegg in the market.

In Q2, we announced the partnership with Sallie Mae, who is a leading provider of loans for both undergraduate and graduate students.

Their objective in working with us is to differentiate their offering from others and ensure that when they give a loan, the student is more likely to learn the subject, pass the class and graduate so, ultimately, they can pay that loan back.

Through this partnership with Chegg, every student who takes out a Sallie Mae Smart Option Loan or Sallie Mae Smart Option Graduate Loan, gets free access to Chegg Study and our network of Chegg Tutors, sponsored by Sallie Mae.

This is a phenomenal endorsement of the quality of Chegg Services and highlights our importance in the market.

Further reinforcing our position in students' learning experience, we announced the partnership with Cengage, the second largest publisher in the country, in which Chegg Tutors will be integrated into Cengage's WebAssign Online Learning Platform, opening up our service to over a million students that use WebAssign.

This allows Cengage to expand the capability of their online learning by partnering with Chegg to bring the scale, quality and technology we have to support the volume of students at the level they want for on-demand human help.

We are also pleased that we extended our partnership with McGraw-Hill Education and expanded the content we have for learning services, as they are another partner who shares our mission to improve student outcomes.

We could not be happier with our financial results, the engagement with our Chegg Services and our improving position in the learning landscape.

We believe our core businesses are very early in their growth and are driving our current financial success and will be for the foreseeable future.

But we are also making important long-term investments in our career and internship services, because we believe there's going to be an increased emphasis on learning to earning.

We are currently focused on getting our products out in the market to both students and employers, getting the user experience right and using AI and computer learning to increase the quality of our matches.

We believe Chegg is uniquely positioned to be at the very center of how people are going to learn.

We remain dedicated to our mission to improve student outcomes and will continue to stay focused on bringing students the highest quality content and services.

This is what drives our success of our business and what drives our team every day at Chegg.

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

Andy?

Thanks, Dan, and good afternoon, everyone.

Today, I will discuss our financial performance for the second quarter as well as our improved outlook for the remainder of 2017.

Chegg had a great first half of the year, with both Q1 and Q2 ahead of our expectations.

The team is executing well and the investments we are making in our platform, brand and student graph are paying off, as our revenue and adjusted EBITDA came in at the high end of our expectation, which gives us the confidence to increase our full year guidance.

For the second quarter, total revenue was $56.3 million, driven by Chegg Services revenue growth of 50%.

We continued to see strong subscriber growth and engagement, with growth rates similar to what we experienced in 2016, but on top of a much larger base.

Q2 gross margins of 70% were at the high end of our expectation.

And notably, much of the incremental revenue goes straight to the gross margin line, as services like Chegg Study and our Writing Tools have a relatively fixed cost structure.

Therefore, as these services grow and achieve scale, we expect our margins to continue to increase.

This led to an adjusted EBITDA of $10.1 million, above our expectations, demonstrating the leverage and impact of our all-digital model.

Looking at the balance sheet, we ended the quarter with cash of $66 million after payments to the founders of Imagine Easy of approximately $21 million.

These deferred payments were part of the original purchase agreement.

And over the next 2 years, we have additional payments of approximately $11 million.

Based on the strength of our performance in the first half of the year and the momentum we see in the business, we are increasing our outlook.

For the full year 2017, we now expect total revenue between $241 million and $243 million, with Chegg Services revenue between $180 million and $182 million; gross margin greater than 65%; adjusted EBITDA between $41 million and $42 million or almost double what we achieved in 2016; with CapEx remaining between $20 million and $25 million; and we now expect free cash flow to be between $18 million and $22 million.

For Q3, we expect total revenue between $56 million and $58 million, with Chegg Services revenue between $37 million and $39 million, gross margin between 60% and 62% and adjusted EBITDA between $3 million and $4 million.

In closing, we had a great first half of 2017.

We continued our strong execution and delivered above the high end of our expectation, all while continuing to invest in both the content that powers our existing services and building out new services like careers, which we expect to contribute to our growth in 2019 and beyond.

As a result, we have increased our outlook for 2017 and have greater confidence in reaching our long-term model of approximately 30% growth for Chegg Services revenue, greater than 65% gross margin and approximately 25% adjusted EBITDA margin.

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

(Operator Instructions) And our first question comes from Corey Greendale from First Analysis.

This is Ken Wang on for Corey.

Dan and Andy, congratulations on another strong quarter.

So first off, I'm just wondering whether you can speak to growth trends, either quantitatively or qualitatively, by user type, so for instance undergrad or high school.

Yes, this is Dan.

We're seeing growth in all categories.

To be frank with you, we -- it's sort of ubiquitous.

Chegg Study in particular is becoming sort of a de facto place for students to learn online.

But I would say for the second quarter, it would lean more heavily towards college, because that is sort of finals and midterms week.

And they both sort of come in the same quarter, so it'll skew heavier towards college during that period for sure, but we're seeing nice growth across the board in all the demographics, big schools, small schools and increasingly, high school.

Very helpful.

And secondly, can you offer any commentary on whether you're still expanding the types of data you collect on students?

And maybe more specifically, are there any data points you aren't currently collecting that you plan to collect in the future?

Yes, so we -- the beauty of the network and the platform overall, and just to remind people that we currently reach about 40 million visitors a year, about 10 million a month, we have over 8.5 million registered users.

And so we collect data either because people provide it directly or because we are able to track their behavior.

So if you rent a textbook, we know your college, we know your address, we know your class, we can estimate what your major is as a result of it, depending on your year and other books that you get, and we know your address and of course, we have your credit card.

When you use Chegg Study, we have a lot of that, but in addition to that, we know when you're studying, we know what time of day, what time of night that you study.

We know which subjects are harder for you and easier for you.

We know your preference in terms of whether or not you'd rather ask a question or now watch a video, or whether or not you do step-by-step solutions.

And of course, as mobile continues to just naturally increase, we have geography information.

So it just keeps expanding every time we offer services.

In the case of writing, we increasingly now are able to tell whether you're high school or college.

We can start to determine what your classes are based on the paper that you're writing.

So this is all information that we are starting to get now that we didn't get before.

And of course, internships.com, and then internship.com becoming careers, we now know your interests, should you choose to provide it or use it, and over 2 million students use the internships site.

We have a much better understanding now, as we get more and more employers in the system, of what job descriptions are, what skills people need.

And then what we're doing with all of that is we're able to actually determine, based on your school, based on your class, based on your major, we're parsing out exactly the skills that you're getting based on the classes that you're taking.

So the number of data points that were available to us 3.5 years ago when we went public were just textbook information.

So now it just keeps expanding.

So yes, we are collecting more and more and more data.

And it's a question of scale, of course, but in our case, you think of LinkedIn being the -- your professional graph, you think of Facebook being your social graph and us being the student graph.

So any and all information that we're able to gather, your high school, your college, your year, your graduation, your gender, your major, your subject, working with Sallie Mae, we now have a better indication of whether or not you're taking out loans, what kinds of loans, so it just keeps expanding and making everything we do work better together.

Our next question is from Doug Anmuth from JPMorgan.

I had a couple.

Dan, just wanted to hit first, I guess, on your comment about Chegg Tutors potentially being the biggest business over time.

And my understanding now is obviously Study is, far and away, the biggest of course within services.

So I just wanted to understand better on kind of what gives you some of those thoughts on how big that can be over time.

And then if you could comment a little bit about how the economics work through the Sallie Mae partnership as well.

Sure.

Well, the reason that we can imagine one day Tutors being the largest is because to us, the need for office hours or human help 24 hours a day in any language at any time, with an expertise on any subject, we just feel is a logical direction that the world's going to have to go as institutions are investing less and less and less on those things.

And there really are no limits to the subject matter, there's no limits to the border, there's no limits to language.

And so because of all of those things, you can imagine one day just us being the largest human help educator, and the Internet allows for that and marketplaces get extraordinarily big.

Now we will readily admit that we're years away, and part of that is because Chegg Study is just a beast.

The more we invest in Chegg Study, the more content we put in, the more modalities we use, like adding video now, the deeper we go in Q&A, the more questions we're able to answer, the faster we're able to answer them.

Chegg Study just keeps growing at the rate that it's been growing and we see no slowdown in that business.

So we can imagine -- the point we're trying to tell people is that the need for human help is not going to go away.

It's only going to expand, and as consumers and students and parents get more accustomed to doing it online, where you can do it at any time, day or night, when it's most convenient and you can do it much less expensively with the same high quality, we just imagine it being huge.

But for the foreseeable future, Chegg Study is really going to be what continues to drive the flywheel of Chegg, which is why we constantly call it out.

But it's just what Chegg Study is doing, with 200 million pages of content consumed in the first 6 months of the year, with the growth rates that we're seeing, with the engagement that we're seeing, with the renewal rates that we're seeing, the confidence in that product just continues to expand.

And the TAM just keeps growing, because every time we add a new subject, we expand the number of users that it's relevant for.

So we may have to -- I guess, really, the issue is just about a matter of time line, but right now for the foreseeable future, Chegg Study is just a beast.

And any color on Sallie Mae?

Yes, so on the Sallie Mae, thanks for bringing that up.

We will probably have a lot more to comment on in the next call, because it really does start to -- all we have now is summer school, and we're testing it and it's going very well.

So the economics are the student gets a chance to get it for free.

They can either use a certain number of minutes for Chegg Tutors or they can use a certain number of months for Chegg Study.

And then, Sallie Mae, should those students choose to activate it, Sallie Mae remits it to us.

So we benefit because it expands our market, it expands our brand and we get payments from the partner directly.

And more students know about it.

And then, the student benefits because, obviously, with 90% of students who use Chegg Study self-reporting that they get a better grade and 77% saying that they master the subject better, this really helps students get through college better.

And Sallie Mae benefits and the reason that they really wanted to do it is because this allows them to differentiate their offering.

But frankly, just on the bottom line basis, they need students to graduate and to pass their classes and learn new subjects so that they pay back the loan.

And so we're all really excited about the partnership, and summer school, if summer school is an indication, we think this is going to be very powerful for everybody.

Yes, and just to fill in some details here.

This is actually a super synergistic deal for us.

And just so you understand the economics, the student can either get 4 months of Chegg Study for free, 2 hours -- or 2 hours of tutoring for free, or -- so it's kind of a ala carte deal here, or 2 months of Chegg Study for free and 1 hour of tutoring.

So that's how it works.

And like Dan said, once the student activates, we get paid by Sallie Mae.

Andy, if I could just follow up with one more, can you just talk about the share count a little bit?

It looks like it was up around 4% or 5% sequentially on the fully diluted number.

I know in the -- in your comments or in the press release, you talked about some of the earnout related to Imagine Easy, I'm just curious if that's tied together, if there's something else going on there.

Yes, so the Imagine Easy has actually nothing to do with it.

The earnout from Imagine Easy was completely cash-based.

It's all cash-based, the $21 million, it was a combination of 17 and 4. When you look at the fully diluted, that primarily has to do with the dilutive equivalents.

And as you can imagine, as the stock price goes up, then you'll have more dilutive equivalents just naturally.

So that's really the primary reason behind that.

Our next question is from Brian Fitzgerald from Jefferies.

A couple of quick ones.

On Chegg Study and video, any color on kind of beta programs?

How should we think about the affinity for video or engagement around that.

If you can't talk to that, maybe it's too early or strategically, you don't want to, how quickly do you anticipate rolling out your video product there?

And then maybe more of a nuanced question, but as you look at cohorts of students, as you run the business over the years, have you seen any inflection in terms of affinity for other Chegg Services?

So are you generally finding cross-sell opportunities easy for you as you scale and improve services, both up and down the student life cycle?

Yes, so this is Dan, I'll take them both.

On the case of video, so video is sort of fascinating because -- let me answer your first question, which is we expect to be fully deployed with video sometime by the end of '18, meaning that we'll have the level of coverage that you currently see with us with the solution set and with the Q&A network.

But video works differently, which is we can be much more efficient, which is you can use the same video across many textbooks.

So the videos are agnostic to the specific question.

They're more about the concepts.

So our strategy is we know from testing, and we know from talking to hundreds of thousands of students, that video, in particular, the ability to watch and listen to a video on your phone, is critically important to them.

And what we know is that no 2 students learn the same way.

Any parent that has more than one kid knows that they don't learn the same way and they don't learn the same subjects the same way, so we think the video is going to be massive for us.

And we just started to deploy it starting in June, to make sure that they run, that they don't slow the site down.

They're -- we're basically going almost 50-50 to start, which is licensed video, and then videos that we make on our own.

And the more we learn about the types of videos, the length of videos, the more we'll fine-tune it, but we expect it to be another reason to expand the number of people that Chegg Study is relevant for, so make the TAM even bigger, and increase engagement, increase time spent, increase, frankly, the quality of the ability for the student to learn the subjects.

So we're fired up about it.

As it relates to the other Chegg Services, the answer is absolutely yes.

Look at our growth rate.

So we've been able to continue to keep our marketing costs essentially flat for the last several years because 85% of our traffic is organic, and we are more easily moving a student from product A to product B. And frankly, with 78% name recognition of Chegg Services and an 80% NPS, what we're really seeing is an inflection point in students recommending our services to others.

We were never really sure.

We always knew that was going to happen with textbooks, but we were never really sure that students would want to tell other students or their friends that they were getting homework help or tutoring or writing help.

But that's clear that they are very fast to inform their friends and other students.

So you see our penetration, particularly at the large schools, just getting larger and larger and larger and larger for lower and lower and lower cost to customer acquisition, which is why I think for the first half of this year, we have as much EBITDA in the first half this year as we did for all of last year.

And one of the reasons we're able to raise not only our guidance, but our cash flow number, is because it's getting less expensive for us to scale.

And these -- so that newer -- these products, as they get to scale, they really are incredibly efficient in terms of their growth.

So yes, we are seeing that level of inflection point.

Our next question is from Mike Grondahl from Northland Securities.

The first one is just on Chegg Writing.

How are the subscription programs coming along?

Any update on those?

Yes, so Chegg Writing, just to remind people, we acquired Imagine Easy a little over a year ago.

And it's been even a bigger success than we had hoped, even at the high end of our own thinking, which is their free services is being used, used more often, 292 million new citations created in the first half of the year alone.

That's just massive, when you think about that volume of use.

And the subscription business, we are still currently working with the subscription business that we acquired.

We simply cleaned it up, made pricing consistent across the 5 sites, they had different pricing, they had annual pricing, they had lifetime pricing, so we cleaned all that up.

And since we've done that, we've seen a tremendous acceleration in the subscription business overall.

And we are still in the alpha testing of the new Chegg Writing Service.

But as you can imagine, the results are really promising.

And for those who don't know exactly what we're talking about, what will ultimately you'll be able to do as a student is, say, you're using Google Chrome, you've saved your paper, you'll be able to automatically download it right into the system, we will read your paper and do all of your citations, but then we'll also identify for you citations that you should have cited that perhaps you haven't and it will explain why, so that you can actually learn.

We'll also identify your grammar issues, your spelling issues and your sentence structure issues in line, tell you how many you have, how does that compare to other students that are writing similar paper and then show you how to fix it, if you want to fix it.

So we're moving from citations to cite to write.

So we believe that with 25% of students having to take remedial writing before they get any college credit, and the fact that in 2021, 25% of the U.S. population, English will actually be their second language, that Writing is just another massive opportunity and it's already reflecting that in the numbers.

So the subscription business is still the one that we inherited, we've just substantially improved it and it is growing a lot faster than we expected.

Got it.

Maybe just a quick follow-up.

Any early thoughts on Cengage?

And you're getting exposed to, it looked like, 1.2 million users there, what -- how are you kind of thinking about that?

So the beauty of marketplace businesses when you're successful is that most marketplace businesses are winner take most if not winner take all, and we've seen that around the world.

So the marketplace that has the most demand by students is going to attract the most and the best tutors.

What each of the publishers has come to understand, and there's 5 of them that really represent 80% of the market share of required books, is that building their own was very expensive, very inefficient, disparity of quality and availability.

And so Cengage, being willing to partner with us, was a real endorsement of the quality of our service and the scalability of our service, which we've been able to fix over time.

So the chance for a Cengage student to be involved in their online learning system, over 1 million of them, and then when they have a question on a specific subject, simply be able to click a button and get human help for as little as $0.50 a minute, these kinds of things we think are going to help the next generation of students come along, understand that this is modern-day tutoring, this is modern-day office hours.

So for us, it's customer acquisition, it's branding, it's an endorsement and it allows us to continue to separate ourselves from anybody else who wants to try to compete in that category.

And so it was a very big win for us.

Our next question comes from Jeff Silber from BMO Capital Markets.

I'm not sure if that's a technical term or not, but I'm assuming it's also the highest margin business within Chegg Services, is that correct?

Your first part of your question didn't come through, if you wouldn't mind repeating it.

No worries.

Chegg Study, I'm assuming that it's also your highest margin business within Chegg Services, I know it's the largest.

Yes, so we actually, Jeff, you know we don't actually talk about margins by our services, but as you can imagine, given the fixed cost nature or fixed cost structure of Chegg Study and Writing Tools, they are the highest margin businesses, certainly, the highest incremental margin businesses that we currently have.

Great, and that makes sense.

So as Tutors gets larger, and I'm assuming since Tutors is a bit more of a people-intensive business, you don't get those kind of incremental margins.

It will obviously have an adverse impact on gross margin.

I'm just curious what you think the impact from that mix shift will be on adjusted EBITDA over time?

Let me start and then let Andy calculate the numbers, which is it's going to be a very, very, very long time before it has any significant or noticeable impact in the numbers because of the size of Chegg Study and Chegg Writing.

And so -- and that when it becomes profitable, because we said it's an investment product, it will be contributing incremental profitability and cash flow, but I'll let Andy walk you through the other numbers.

And our focus -- my focus, Jeff, is how much profitability does it drive, how many gross margin dollars and how many EBITDA margin dollars does it provide.

And that's the focus that we have on that business.

But to your point, yes, it is a variable -- it's more of a variable cost model than the other 2 businesses.

But like Dan said earlier, we believe Chegg Tutors has the potential to be our largest business, and therefore, it's more likely to be our largest contributor.

And I'm not talking 1 or 2 or 3 years, I'm talking about, push out, push it out, it's more likely -- it would likely at that point be the largest contributor to overall profitability, but that's a ways out, like Dan said.

And just to verify that fact, you've seen our gross margins continue to expand.

I mean, the level of profitability that we're seeing overall is quite exciting.

Yes, and that make sense.

Again, I know we're looking over a long time period, but we're building our models over a longer time period, so I'm curious how the business will change over that.

Going back to the present, do you disclose what percentage of your subscribers buy more than one service?

And I'm just curious how that's been tracking over time.

We do not disclose that, for several reasons, competitive reasons, but also, it can be confusing for people to model.

And also, the way we look at the business is overall subscribers and ARPU and then yield per subscriber, and all of those, number of subscribers, growth rate, revenue per subscriber and then profitability per subscriber, continues to expand each and every quarter, and it's just getting better.

And it gets us really excited for '18.

What we have pushed out in terms of information is the fact that we see increased attach rates from textbooks to Chegg Study each and every quarter, and then we see over 50% of our tutoring customers come from someplace else in the Chegg network.

And one of the reasons tutoring will be more profitable than most other people's businesses is because the customer acquisition will be relatively low compared to everybody else, because we've already acquired the customer in some other way.

But if you take the Cengage deal or you take the integration into Chegg Study or later on this year and in 2018, the integration of Tutors into Writing, you will see that those numbers just get bigger and bigger and bigger.

It's -- the whole point is we are a platform in a network that each service can function on its own, but contributes to each other service.

And it's been a big win for us.

And again, that's why you see just massive increase in the leverage in the business in such a short period of time.

Our next question is from Alex Paris from Barrington Research.

This is Chris Howe sitting in for Alex Paris.

I had a question in regard to the video content.

That's just caught my attention as just a great way to increase student knowledge retention.

And as you move forward with rolling this out, do you anticipate this to, I guess, be as a free service?

Are there any monetization opportunities that could arise around this service?

And then, I guess, leading me to my last question in relation to that is, how do you see this impacting the attach rates from video content to a service like Chegg Tutors?

All great questions, so let me sort of take a step backward.

The models that we see that are being tremendously successful overall are really simple models, like Netflix, like Spotify, Pandora, other things, where the more content you put in the service, the more people value the service, the more, over time, you can charge for the service, the earlier they come on, the higher they engage with it, the longer they retain with it, and so we -- what we are doing with video and we will likely do with other services over time, is not have a series of 20 individual services that people can buy, but rather, we'll just expand what is in the Chegg Study bundle.

Because we look at Netflix, and first, they started with old TV content, and now they do everything from old to new to movies to their own.

And we're doing the exact same thing with Chegg Study.

And frankly, it's at a different scale at the moment, but the take rate is extraordinarily high.

So every time that we add more content or more ways to view that content or more devices to view that content on, our growth rate, on top of a much higher base, and it's all about the base, that just sustains itself.

So we look at video not as a like over-the-top media business, but rather as another way to consume and learn content.

And we do think that video will be a great driver to things like tutoring because, obviously, if you like watching things, it's easier for you to watch and talk to a human being.

So we do imagine all of these things will benefit each other.

Our next question is from Alex Fuhrman from Craig-Hallum Capital.

I wanted to ask a little bit about your technology and development expenses.

Certainly, it sounds like as you've been expanding into more products and adding more content such as video, we've obviously seen that in the numbers, that you've been sending a little bit more in that area.

And I guess what I'm wondering is that if you think back to last year, at the time of your big investor event, is this kind of what you were envisioning in terms of the number of subjects and the depth of the content?

Or have you seen since then that as you've added more content and your addressable market has expanded, that maybe you're adding a little bit more than that because the opportunity is bigger?

And I'm just trying to size up, as you talk about getting into your long-term operating model of a 25% EBITDA margin, is that still something that could be in the sights for 2018?

Or as you build out the product maybe more, does that perhaps push that out a little bit further?

So I'll take the first part.

This is Dan.

I'll let Andy do the numbers part.

But what we've seen -- so yes, this is precisely the kind of thing that we imagine when we talked in our Analyst Day, because what is becoming increasingly clear to us, and I think to investors now, certainly to students, is that the market opportunity for Chegg continues to expand.

The number of subjects, the way they want to learn them, the devices, all of those things, similar to the way Netflix exploded, the more screens, the more people had screens to consume things on, the more things they consume.

Well, the same thing's going on in the college market and the high school market with students.

What you've seen, though, is we kept our CapEx expenses relatively the same and we're actually producing more free cash flow so what that means is we're actually not spending more, but we're able to be more efficient at the content we're able to produce, because it gets less to produce each thing over time, not more.

And that it's generating better results and better ROI from each piece of content that we produce because, remember, each one of those things is unique content that we can index in the search engines, which drives more and more traffic.

So it's almost as if the cost -- it's not almost, it is, that each one of the -- each content piece that we produce actually has an ROI plan for us, it's just actually doing better than we thought, not worse.

So it's been a really positive for us, and I think you reflect it -- we see it reflected in our increased guidance.

But Andy, I'll let you tell it.

Yes, and so when you're talking about our long-term model, nothing has changed since the Analyst Day.

We're making the types of investments that we anticipated to make.

When you take a look at our -- how we've progressed over the last couple of years with respect to profitability, we turned profitable in 2015.

I think we were about 8% EBITDA margin last year.

At the midpoint of the range this year, I think actually to around 16% or 17%.

So we continue to feel confident that we're going to hit that model that we had talked about, really, for several years now for 2018.

So nothing has changed.

It's very consistent with what we articulated or I articulated at Analyst Day in November.

Our next question is from Aaron Kessler from Raymond James.

Couple of questions.

First, any update on just maybe Test Prep, thoughts on kind of monetization timing?

Also, just on Tutors, I know you've talked about it, I think you've given minutes growth before.

Anything this quarter?

And just I think you've rolled out kind of relatively recently the new e-commerce platform, just thoughts on kind of how you can use that going forward?

I'll take the last one first.

We haven't rolled out -- I think I know what you're referring to with the e-commerce program, new platform, which is NetSuite, and I'll let Andy speak to that.

Yes, just let me kind of put -- because that's kind of in my bailiwick.

So we did roll out ERP for NetSuite.

we have not rolled out our e-commerce platform.

That will be early next year.

But everything is going as planned at this point in time.

And that's why, to one of the other good questions that was asked earlier, we just see bundling as a really big opportunity.

Students would rather buy one thing with as many things in it is possible, because the cost efficiency for them is pretty remarkable.

And so this -- that the new platform will allow us to make Chegg -- just keep expanding Chegg Study and get more value out of it, and therefore it will be more valuable to students, and we can think about the future of pricing and all of those things.

As it relates to tutoring minutes, what we said is that we grew the minutes per student by 4%, meaning -- we're adding, obviously, a lot more students.

And then the average time that the students, including the new ones and the old ones, is up a net 4%, which to us suggests what we would have hoped, that the more students that come in, the more often they get tutored and the more time they spend on each session, and all of those things are what's accelerating the growth of that business.

We really don't give other statistics other than the 185 subjects that we covered over the course of the year.

What we're seeing is there's a top 10 concentration against the subjects that you can imagine.

Surprisingly to us, but not anymore, is that computer science is really the top end.

And then other math-related classes and economics classes, but the number of things that students are now testing out with us, continues to expand.

And that's why we're up to 185 subjects already.

Great.

And just any thoughts on a Test Prep update, sorry if I missed that.

Yes.

No, you didn't miss it, I didn't say it.

So Test Prep is in the same place that it's been over the course of the year, which we've had over 0.5 million users of Test Prep.

What we are finding is Test Prep goes to high school audience, the high school audience, particularly with Test Prep, involves the parents.

And so we are taking our time to continue to improve and be able to have proof positive to parents that this will actually raise people's scores.

But I know I've said this on a previous call, what we're imagining in the Test Prep category is we will have not just ours, but we will have others, because parents do really want choice in this category, and they are much more comfortable with brand names that they're familiar with, as opposed to in the college market, where we are the brand name for learning.

So in the Test Prep category, we are delighted with the quality of the product.

We are very happy with the number of people that have used it, but it really has not become yet a monetization opportunity for us.

But it will as the years go on.

(Operator Instructions) And our next question comes from Bruce Goldfarb from Lake Street Capital Markets.

Could you -- in the partnerships that you guys mentioned, Sallie Mae, Cengage, McGraw-Hill, how many incremental students does that -- do you think that brings you?

Or does it just kind of lower your acquisition cost?

Or kind of a mix?

Yes, well, it does those 2 things, plus a third.

I think I'd rather just take a step backwards and rely on people that maybe were -- or help people who are sort of newer to the story.

Years ago, we couldn't even get a meeting with the publishers.

They wanted to put us out of business.

And you can see the impact that Chegg's had on their economic models, which has been challenging for them.

Where we're seeing all of the growth, they are not.

And that's -- so what's happened is the major creators of learning content are seeing Chegg as the largest and most efficient distribution channel that they can work with.

And so what we're seeing is them give us more content, enter into more agreements with us that are mutually beneficial, obviously, and then use our services as part of their own services.

These are meaningful changes in just the last few years.

For us, it extends our brand, it helps us acquire more customers and it helps them acquire for less.

Now we anticipated closing these deals.

And our guidance reflects what we think those deals will do in the short term.

But make no mistake about it, these are really big endorsements of Chegg as a primary distribution and learning platform.

And as you see, the bookstores, in particular, Barnes & Noble College, Follett, they are really no longer sources for educational content in any significant way.

So it's Chegg or they're not going to get to the student.

And being what we believe to be the largest direct-to-student platform, 54% growth in paying subscribers over the course of the year on top of much higher numbers, really is an indication of the power we are now being able to get in the marketplace.

So our numbers reflect what we think these things will do this year, and I think what you're seeing is we constantly, last 2 quarters, we not only beat our numbers, but we've raised our guidance because the things that we're doing, the uptake, the cost of customer acquisition, all of those are moving in the positive direction that I think we hoped that they would.

And then in terms of investment in Chegg Study, other, can you give us more color on content that you're going to be adding, both for organic and license?

Well, the first thing that we're doing is it turns out that the deeper we get into the 22 major subjects that we're currently in, that is much more efficient in terms of customer acquisition, retention and efficiency than necessarily adding more new categories faster than we get deeper into the categories we're in.

We do both.

That's why you heard us say that we're now up to nearly 27,000 ISBNs.

But the video that we're offering are going to be going deeper into the categories we have.

Mostly around STEM, we're starting in the 2 big subjects that students really do want it for it first.

And so for us, we look at this as horizontally, over time, video will expand the ways we cover the existing subjects and in some cases, be a new subject that we hadn't covered before, because they lend themselves more to video than say, other ways.

But you will always see us, it's -- a couple of years ago, people kept asking us how big is the TAM for Chegg Study, and I think we sized that for people, saying that if you just took the STEM subjects and we just took at the time only 23,000 ISBNs, it would be 10 million students.

But what we're realizing is Chegg Study is going to be for all students, because we're going to expand what it can cover.

And that as the curriculum continues to evolve, students are going to need the collection of what we have to offer, so it just keeps getting bigger.

So we're going to expand the subjects, but we're going to be going deeper into each of the subjects, because learning is about that one thing that you didn't know that unlocks your ability to get the rest of the answer.

So we've talked, over time, about deeper into the sciences, deeper into math, all of those things, and you can imagine that we are going to do that.

This concludes the question-and-answer session.

I'd like to turn the floor back over to management for any closing comments.

Okay.

Well, thank you, everybody, for joining the call.

As our first half year as a full digital company, we've been able to exceed our own expectations, and that's the direct result of the employees that we have that are focused on the mission to help students improve their outcomes.

The industry and the current is moving in the direction of more online for longer periods of time, with more ways to learn at a lower cost and much more personalized, much more on-demand, much more adaptive and backed by human help.

And when we look at the competitive landscape, Chegg is squarely in the pole position now, where a couple of years ago, people didn't know who we were and didn't know we can expand.

But with 78% name recognition and 80% NPS and over half of all college students using us for a service, we are really excited about the rest of this year and next year.

And the numbers are reflecting the quality of the products and services that our teams are putting together and the way students are using them, and we just couldn't be more excited.

So we look forward to seeing you all on the November call, have a great summer and we'll see you after the big school rush.

Thank you.

Thank you.

This concludes today's teleconference.

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