Chegg Inc (CHGG) 2017 Q3 法說會逐字稿

Greetings and welcome to the Chegg, Inc., third 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 our host, Tracey Ford, VP of Investor Relations.

Thank you; you may begin.

Good afternoon.

Thank you for joining Chegg's third 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 statements.

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 on the risk factors described in Chegg's quarterly report on Form 10-Q filed with the Securities and Exchange Commission on July 31, 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.

$ years ago, Chegg went public, viewed as a textbook rental company, as nearly all our revenue came from print textbooks.

But even then we had a much bigger vision: to serve the modern generation of students by building an all-digital education platform.

We saw a huge $1 trillion education industry, representing 7% of the GDP, and that 15% of the U.S. population was participating in on an annual basis.

At the same time, it was an industry that was experiencing significant pressure, was cutting investment and was increasingly misaligned with its customer.

We understood that even though today's students were more diverse than ever, they all had been raised on technology and the Internet.

We saw more students on their own with little or no learning support who were taking on huge amounts of debt, taking longer to graduate--if they graduated at all--and failing to find jobs that were worthy of a degree.

To address this, we have been building a platform of interconnected learning services that focuses on helping students pick their classes, get better grades, master their subjects, pass their classes and then start their career, delivering all of our services in the manner students expect: online, on-demand, adaptive, personalized, affordable and, of course, all backed by human help.

In just 4 years the results have been dramatic, with Chegg now serving nearly 10 million visitors in a month according to comScore, and we expect to have around 4 million paying customers in 2017.

Further, we expect to have more Chegg Services subscribers than textbook customers for the first time in our history.

Our Chegg Services revenue has grown from just $25 million in 2012 to what we expect will be over $180 million in 2017.

And given our new adjusted EBITDA guidance today, we will go from a company who was losing $16 million in adjusted EBITDA right before our IPO to a company that is now forecasting nearly $45 million in adjusted EBITDA for 2017.

This turnaround has helped us go from a company using over $100 million in cash each year to support a slow-growth textbook business to a high-growth, high-margin learning company that now produces free cash flow.

It's been a successful transition, and we feel like we are just getting started.

Our growth is built on top of the powerful Chegg platform, leveraging our brand, proprietary data, and our significant reach.

Our key services--Chegg Study, Tutors and Writing--are all high-quality, low-cost learning services that address students' biggest pain point, and Chegg is becoming the brand students turn to for help as the industry undergoes massive and rapid disruption.

Our momentum is evident in the numbers of users across our platform, in our engagement metrics and, once again, in our financial results.

Andy will walk you through those results in detail, but it's clear Chegg's all-digital model is leading to even faster growth than we had anticipated, with Chegg Study subscribers growing in Q3 37% year-on-year on top of a much higher base.

What's becoming clear to us is the more we invest in solving students' biggest pain points with more content, capabilities and format, the bigger the opportunity gets for Chegg.

As an example, the investments in Chegg Study have led to record results in subscribers, engagement and renewal.

Chegg Study now has 11 million questions and expert answers archived, more than 6 million textbook solutions and the students are turning to help in more subjects.

We expect to add over 5 million new questions to our archive this year.

We believe this has led to an impressive 63% year-over-year growth in engagement, resulting in 74 million contents used this quarter, a Q3 record.

The depth and breadth of our learning material has created a giant competitive mode, and we believe Chegg Study is now considered indispensable for an increasing number of college students.

As powerful as Chegg Study is already, we believe the service will become even more relevant to an increasing TAM as we continue to expand its content and capability.

To that end, we recently announced the acquisition of Cogeon, the developer of app MATH 42, and adapted AI-driven math application, which has been downloaded, which has been downloaded over 2 million times.

Math is a universal need and, unfortunately, a universal problems, as 64% of U.S. students are not prepared for college-level math, and over 40% of U.S. students take at least 1 remedial math course.

Adding this technology into our suite of products has applications not only for primary path subjects, but also across every discipline in STEM.

We couldn't be more excited about adding math to Chegg's suite of services, and we believe it will deepen our relationship with existing subscribers and extent our reach into new audiences like high school.

We are already seeing how technology can address an individual student's learning needs at scale through Chegg Writing.

Beyond support for bibliographies and citations, of which we saw 63 million new citations this quarter, students are now using our platform to learn how to cite and how to write, spending nearly 8 minutes per session on the platform.

And with our most recent beta launch, students can use our services to learn the most critical and foundational components of writing, including grammar, sentence structures and spelling.

Even as students look to AI-driven tools to help augment their learning, we know that one-on-one human help will continue to be critical in the learning process, which is why we continue to invest in Chegg Tutors.

In the third quarter we saw the time students spend on the site increase, with and average student now spending 188 minutes in tutoring sessions throughout the semester in key subjects like computer science, calculus, statistics, finance and accounting.

Our extensive network of human experts allows students to learn on their own time with educators in whatever subject they need help with.

The power of our interconnected platform is evident as more than half of our Chegg Tutor customers come from other Chegg services.

And as we integrate tutors into our Chegg Writing product in 2018, we expect to see the attach rate continue to increase.

Now with the strength of our brand and popularity of our Chegg Services, we are seeing momentum in our Required Materials, as Chegg Services subscribers are also coming to us for rental.

This is one of the big reasons we saw a strong quarter for Required Materials, including a record Q3 for eTextbooks, representing over 10% of total textbook units.

We have also deepened our relationship with Ingram, the publishers and students, as we have standardized on the eTextbook experience, utilizing the e-reader from VitalSource, or VST, which is the ed tech arm of Ingram.

Standardizing with VST makes using Chegg eTextbooks easier for students and for publishers.

Our textbook business also continues to provide our marketing partners with a great in-person connection point with students, as we have nearly 7.5 million samples and inserts included in box this quarter, surprising and delighting students as they opened our iconic orange boxes.

Chegg's direct-to-student model is becoming not only big, but also what we believe is the most efficient way to teach and reach students at scale with high-William Logan, low-cost learning products.

Our philosophy of online, on-demand, personalized and adaptive services backed by human help has attracted millions of students, and our transformation to an all-digital business model has created increased value for our students and our shareholders.

As we continue to grow and drive needed change in the education industry, we believe we will be one of the most valuable resources for students, parents and educators and employers in one of the most important stages of a student's life.

We could not be more excited about our future and grateful for the incredible contribution of our team to help students achieve better outcomes.

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

Andy?

Thanks, Dan, and good afternoon, everyone.

Chegg had a great third quarter, with all key metrics and financials ahead of our expectations.

These strong results and the continued momentum give us confidence to raise our guidance again for 2017.

In addition, we are providing our initial outlook for 2018 that meets or exceeds our previously discussed long-term financial targets.

We are extremely proud of what the Chegg team has accomplished over the past 4 years since our IPO, as students are increasingly relying on Chegg's integrated platform of connected educational services to improve their outcomes.

For the third quarter, total revenue was $62.6 million with both Required Materials and Chegg Services revenues exceeding our expectations.

All indications suggest we gained share in Required Materials during the fall rush, and we continue to see growth rates for our subscription services in line with prior years.

This resulted in gross margins coming in higher than we expected, reaching 64.3% because much of the incremental revenue from Chegg Services goes straight to the gross margin line due to its relatively fixed cost structure of the business.

This led to an adjusted EBITDA of $5.7 million, well above our expectations, demonstrating the leverage of our all-digital model.

During the quarter we significantly strengthened our balance sheet, adding approximately $148 million in cash from our follow-on offering, bring our cash and investments balance to $220 million.

This, along with the power of our operating model which generates cash, puts us Institutional Markets position of strength as we continue to invest in and grow the business.

Based on the results of the fall semester rush and continued momentum into Q4, we are increasing our guidance for the remainder of the year.

We now expect total revenue for Q4 to be between $70 million and $71 million, with Chegg Services revenue between $58 million and $59 million, gross margin between 69% and 71% and adjusted EBITDA between $19 million and $20 million.

For the full year 2017, we now expect total revenue to be between $251 million and $252 million, with Chegg Services revenue between $183 million and $184 million; gross margin to be greater than 65%; adjusted EBITDA to be between $44 million and $45 million, which will be more than double what we achieved in 2016; CapEx to be $27 million, which is slightly above the high end of our previous expectations.

As Dan mentioned earlier, the more we invest in content, the bigger the market opportunity becomes, which now includes math as well as the expansion of our Q&A network to more subject matters which have been requested by students.

And we expect free cash flow to be approximately $18 million.

2017 has been a watershed year for Chegg.

This is our first full year of 100% digital revenue, our business is much more predictable than just a few years ago and we continue to demonstrate the leverage in the operating model.

As such, we are confident in achieving or exceeding our 2018 financial objectives that we laid out 3 years ago.

Our initial expectations for 2018 are for total revenue of approximately $295 million, with Chegg Services revenue growing over 30% to approximately $240 million.

We now expect gross margin to be greater than 70% and adjusted EBITDA margin to be approximately 25% or $74 million.

While we expect revenue seasonality to be similar to 2017, our quarterly adjusted EBITDA cadence in 2018 will be different due to the growth of Chegg Services and the elimination of liquidation gains from our legacy textbooks.

We have provided these details in the press release in the investor deck on the IR website.

As most of you are aware, publicly traded companies have to adopt a new revenue recognition standard called ASC 606, which for Chegg begins on January 1, 2018.

We have provided a summary of this standard and its implications to Chegg in the investor deck.

While we expect it will have little to no impact on Chegg Services, we do expect it will reduce both revenues and expenses or Required Materials but will have no impact on profitability and is contemplated in our 2018 guidance.

In closing, we continue to see strong execution from our team, delivering above the high end of our expectations, all while continuing to invest and best in both the content that powers our existing services and building out new services like Careers and Math, which we expect to contribute to our growth in 2019 and beyond.

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

This is Christopher Howe sitting in for Alex.

Congrats on the quarter.

My first question is just thinking back to the Kaplan partnership that you had previously announced, could you provide an update on how that's going?

And my follow-up to that would be, would you consider something like this for perhaps some of your other businesses such as Careers?

So Chris, this is Dan.

On Kaplan, Kaplan doesn't really roll out until December, so we've spent a year working on them, building the cobranded products.

And again, for those you who don't know what it is, this will be the least expensive that you can get from Kaplan.

It's cobranded and co-created by Kaplan and Chegg.

It will utilize Kaplan's 75 years of history of creating premier test prep, but do so at an affordable rate exclusively online, uniquely through Chegg and then integrating in other Chegg products and services.

So we're very excited about our launch later on this year.

So there's nothing else to report on that except all the plans are going the way expected them to go, and it should be launching some time at the end of this year.

And would we consider doing it for other things?

So the answer is we wouldn't do it for Careers because there's nobody who does careers in the way that we're capable of doing it.

The magi of what we're building is the ability to have access to millions and millions and millions of students and their records and their history, all the data about them that's in our proprietary student graph and then the ability to do matching based on that, uniquely done by how we're capable of doing it versus others.

So we've met with all the players in this space.

Obviously, everybody would like access to the Chegg audience.

But we believe what we're working on is going to be special and unique and has the opportunity to be huge.

We're just taking our time, as we've done with everything.

We need people to just understand that when you're dealing with people's lives and their grades and their careers, we've got to make sure the things we do are right before we roll them out en masse, so we always take our time with these things.

So we're very excited, though, and I think you're going to see some examples of that in 2018 about the employer side as well as the student side.

So for Careers, absolutely not.

But for other things, we see ourselves as--we did it essentially for the publishers with textbooks and eTextbooks, as an example.

So whatever the best way is, most efficient way to leverage our brand, our reach and our data to bring students a better outcome, we'll consider.

Our next question is from Brent Thill with Jefferies.

Please proceed with your question.

A question for Dan on just kind of the next leg of the Tutor business.

If you could just at a high level walk through how you see that business unfolding over the next year.

And adding just a couple of quick follow-ups for Andy.

Sure.

So the Tutor business we remain extraordinarily excited about.

We see those things that we're looking for happening.

The magic of it becomes the ability to match the exact right tutor at the exact right moment, and that is what we have been working on since we started building the company.

We've rebuilt the tech platform, we're rebuilding the matches platform to be able to do it at scale because it's getting to the point where we have to think about how to make sure that it can and then eventually be global.

You won't really see much new except features like the ability to schedule now in advance.

So if you're in high schools or if you're in college and you want to schedule the same tutor or you want to schedule a specific time, the ability to do that.

Most of what we're working on this year, which will bleed into next year, are the tools for the tutors themselves: the ability to get access to the student.

It's faster if you get access to the question that the student is working on faster, to be able to do the match better, to rebuild the whiteboard and the learning space inside of Tutors, and then to build tools that allows Tutors to work even more effectively with students.

So we're on track to doing the things that we want.

We're extraordinarily excited about it and, of course, as we had in our prepared remarks, that part of '18 is to start really rolling it out and integrating it into the writing product, which we haven't been able to do yet.

Great, thanks.

And for Andy, just on the 2018, you mentioned 606 will effectively slow part of the revenue growth.

I think at the midpoint, you're close to 17% growth.

If you kind of add in that back in, what type of impact is that having for '18?

And if you could also just talk a little bit about the CapEx.

You mentioned you're going to come in a little higher end on '17, at $27 million.

Is that the run rate that we should look at going forward into '18, or do those capital needs start to fade as you shift into '18?

Yes, so a couple of things.

I think it's super important to understand that when you look at 606, it has no impact on Chegg Services, period, end of story.

We had mentioned that earlier.

It does have a small impact, both on the revenue and expenses in the Required Materials business, but no impact on the business in itself in the sense that we've said for several years that we believed Required Materials would be $50 million to $60 million of--$60 million on an annual basis to break even and somewhere between 5 million and 6 million units.

So we don't see anything changing in that.

It's just accounting changes only.

As far as CapEx and some of the other things around 2018, we'll get more details around 2018 when we get into the February call.

So yes, so look forward to that in February.

Our next question is from Douglas Anmuth with JP Morgan.

Please proceed with your question

I lined a couple, guys.

First, we've seen the acquisitions over the last couple of years in Writing and then more recently in Math.

I was just hoping you could talk a little bit about whether you think there are other subject-specific opportunities where you can expand.

And then, Andy, could you give any color on what M&A might be adding into the '18 revenue, just kind of how you're thinking about the contribution?

And then could you just clarify on the higher CapEx in '17?

It sounds like from the last question you're not ready to give an '18 CapEx number, but if you could just talk about the higher number in '17.

And is that strictly for more study content, basically?

Thanks.

Yes, so this is Dan.

I'll probably take most of those because although you can't tell, Andy's actually sick.

But he's been a trooper and came in for the call.

So he'll chime in, hopefully.

So on the M&A side, one of the things that we've actually done, Doug, is we've actually slowed it down a lot over the last couple of years.

So we didn't make a significant--we did Writing a year and a half ago and Math is the only thing that we've done this year.

And it's technology and a small team of geniuses in this subject, and it's going to be integrated into Chegg Study and our other services, and we're extraordinarily excited about it because it's such a big vertical.

And in many cases, the M&A opportunities are always going to be available because, given our reach and our brand and our ability to execute and grow businesses faster at a lower cost, we're always going to look at things.

But we don't have a need to do anything other than execute on what we're doing in order to achieve the numbers next year.

So you asked what the impact of M&A would be on the numbers next year; the answer is 0 because it's an expense, but a moderate expense.

And we've assumed that into our guidance going forward.

So when we give guidance, it's all about the organic businesses that we have.

And any time we've ever added anything, we've broken it out and, "This is what it adds onto."

And on the CapEx, it's--well, we've said all along that it doesn't take that much capital to run the company, that what we do is when we see opportunities to invest to grow faster, then we take them.

So the slight increase--and it's a couple of million bucks in the fourth quarter--has to do with the acquisition of Math.

And the fact that in the Q&A side, you're seeing students are actually using us more and more often for more things, and the volume of questions that they're asking on a daily basis in all the different ways, like 800,000 questions a day.

Now, the majority of them are ones that we already have indexed and catalogues, and that's been great.

But what we don't want to do is miss the opportunity to grow into new verticals and new subjects that they're interested in using Chegg Study for, because we believe that expands the TAM.

So s we think about next year's CapEx, it won't be significantly different than what you would expect it to be.

It's not like there's suddenly a brand-new CapEx charge that changes what we've been doing.

But whenever we see an opportunity to grow and invest in content, we do it.

Yes, I think, Doug, just to reiterate what Dan said, when you look at M&A for 2018, bottom line is Math isn't contributing to the revenue, but it will contribute to the expense.

But it is included in our 2018 guidance.

And then with respect to CapEx, you would anticipate that our overall Chegg Services revenue growth would be much, much higher than any type of CapEx growth.

And Doug, just overall, what you're seeing is just great organic growth of the company.

The fact is that the businesses are hitting on all cylinders.

And as we said in the prepared remarks, it's actually doing better than even we anticipated.

They're growing faster; they're more profitable.

And we just couldn't be more excited about having essentially completed the transition, and going into next year already.

So it's exciting time for us--big difference.

Curious.

Can I just follow up on one thing?

On (inaudible), if we look at pricing now, just curious to get any of your thoughts on what you think pricing trends or pricing power could be over time, how you'd balance that with growth.

Yes, and that's the magic question, which is we use sophisticated AB testing and price testing all the time, every day.

As much as 15% of the audience will get a different price on a given day with different messages.

So we are abundantly aware of what price we could be charging, and we're choosing to stay with the current price because we've not actually seen a decrease in the growth rate.

So even though Chegg Study has been around a long time, even though it's getting a lot bigger, even though the base is a lot bigger, we haven't really seen any significant reduction in the growth rate.

In fact, we're seeing it really come into its own.

So we don't see a reason, with such high gross profit margins, to change the price.

But we do know we have significant pricing power, given the fact of not only the test results, but you can just look at the usage.

We have record usage in terms of how often they use, how many pages they consume, what they use it for, the number of questions that they're asking the number of the subjects that they're asking it in.

Chegg Study has become a beast, and we just--what we want to do is be able to grow it as big as we can and invest in it as much as we can and continue to increase the TAM.

So we don't have to think about pricing at this point, but we do know we have pricing power.

Our next question is from Corey Greendale with First Analysis.

Please proceed with your question.

Thank you.

This is Ken Wang on for Corey.

Dan and Andy, congrats on a very strong quarter.

So just wondering, thinking about the Coegon acquisition, any additional color you can offer us, just on how it was valued?

Yes, I'll start and if Andy feels well enough, I'll have him chime in, which is it really was valued on the quality of the technology, which we looked at I cannot tell you how many math companies we've looked at over the last 2 years, how many we've engaged in, how many we've evaluated, and we've done it on a global basis.

We love the team.

It's a family.

They're chess champions.

They're math geniuses.

They built a technology that's newer than everybody's else, can scale and can be global and, for us, can not only be math as a vertical, but math--the technology they build actually allows Math to be an underpinning in all the other STEM categories where math has become essential.

So for us, it was the right company at the right time.

Ad the price--and sometimes when you buy a startup like his, the price is what the clearing price will be.

So it was not particularly expensive, but we had to make sure that we were able to secure it so others didn't.

And when we looked at all the other choices, we felt like this was by far the best technology and capability we've seen and the best team.

They're located in Berlin.

We already have an office in Berlin, so we're combining those offices together, and we're really excited about it.

Thanks, that's helpful.

And then I was also wondering if you can kind of give any additional color, whether it's quantitative or qualitative, just anything on the number of products your average user is utilizing.

We don't give that number out, but what we have given out is the increase in the attach rate.

So we're seeing increased attach rate everywhere.

So initially it was textbook to our digital services, particularly Chegg Study.

Now it's actually Chegg Study and our additional services back to textbooks because we believe for the first time, it's very likely by the end of this year we'll have more digital subscribers than we do textbook customers.

That's a big change in such a short period of time.

We continue to see huge attach between Chegg's other digital services and Tutors.

And so we don't release the numbers, but it continues to grow all the time.

We have a team whose only job it is to do increased attach rate.

We haven't fully integrated Writing in yet, so we think it's just going to increase.

But the collective network of 78% of people knowing Chegg by at least one of our brand names, the NPS being over 80 and the facts that over 85% of our traffic comes in organically, I think tells a better story.

Perfect.

Thank you and congratulations again.

Our next question is from Michael Grondahl with Northland Securities.

Please proceed with your question.

Congratulations on a very nice quarter.

Two things.

One, any update on Chegg Video and kind of the services there that you talked about last quarter?

And then maybe secondly, how did the opportunity got with Sallie Mae, kind of that they were going to make a loan and that student could get a couple of months of Chegg Services for free.

Any update there?

Yes on both.

Well, a limited update in terms of what we can give.

On the videos, I think we articulated last time, but if we didn't, let me just be clear.

We're rolling it out very slowly.

We only have about videos currently rolled out.

Where they're seen, they get excellent usage.

But what we said was by the end of '18, we expect to have it fully deployed.

We think it's about 14,000 or 15,000 videos that will do that.

But where we tested them and where they're deployed, the feedback has been extraordinarily positive.

And what we're learning is what should their length be, what should the format be to get them right.

Because we can both license them, which is what the original 500 are for, and then we can do them ourselves through our subject matter experts, of which we have 35,000, as you may recall.

And through our Tutor network, which we have tens of thousands available to us.

So we're really just testing length of video, format of video--those kinds of things.

But where it's being seen, it's being picked up as just as you'd expect, which is they love it, particularly on mobile devices.

As for Sallie Mae, Sallie Mae's been really great.

That deal goes all the way through the middle of next year.

And so there were 2--we want to get through 2 full semesters to see how it works.

But I think we've all been extraordinarily happy with the fact that it's something the students really wanted.

It's something they've taken us up on.

And we'll really know the impact of it, one, after the first quarter is complete, where sort of first half of next year is complete, and when the people who have taken it for 4 months or whatever, whether or not they renew.

And we haven't reached that point yet because the school year's third quarter just started, the school year.

So we don't know, but I would say that we--both sides are really, really happy with the take-up rate and with the communications and with students' feedback about it.

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

Please proceed with your question.

Congratulations on a great quarter.

I did want to ask a little bit about the guidance for next year and particularly as it relates to Required Materials.

I know you've kind of spoken in the past about that eventually settling into about a $50 million to $60 million business.

Obviously, based on your guidance for this year, it looks like it's going to be quite a bit higher than that.

Can you give us a little bit of sense on why that business was strong this year and why you expect it to settle into a lower rate?

And then just from a larger picture perspective, obviously, the Required Materials, it sounds like that's becoming a much smaller of your user base.

But historically, I would imagine that was a very important channel in terms of lead generation for Chegg Study.

How important is that still today for you?

So I'll take most of it, but I'll let Andy talk about '18.

So why did we have a really great quarter?

First of all, we have a great team, and they worked very hard to understand the industry.

If you just watch the trends, it's our belief that we picked up 3 points of share based on independent research that's been done.

Predominantly, it's come from where you would think, which is the traditional channels that students use to get these books.

And I think we've just done extraordinarily great execution.

On top of that, other things have worked very much in our favor of things that we made happen.

So, for example, consignment: consignment makes a big deal in this business because it allows us to expand our catalogue without utilizing any cash, which means what we do with Ingram allows us to buy more books that are lower priced because we get the newer books at no price, which gives us the brand-new books which historically we haven't necessarily had because we didn't want to pay the $90 or $120 to get them.

Now we get them on consignment.

So it expands the catalogue and what we have.

And not everybody signs those deals.

One of the things that we did was we worked with the publishers over the last many years to be a partnership.

And whether that was on the fraud stuff, which we were first to sign and work through, which we had very little at all.

But we were able to help make the rules with them.

Or on consignment, the same thing.

So because we were out of the chutes first, the publishers see us as a partner.

You saw our distribution deals last time.

There will be more of those coming in the future and expansions of them.

That improved the catalogue and improved our pricing.

And third, we do believe there's a halo effect of Chegg Digital Services back to textbooks.

Because as we've always said, we've been really happy with what you asked about, which is the number of textbook subscribers that became Chegg Study or Chegg Tutors or Chegg Writing customers.

But since 85% of our traffic for the Chegg Services side comes in independent of the textbooks, it's actually starting to work backwards.

So what we found is textbooks continues to be very valuable in terms of the brand, the reach, the data and all of those things and driving leads, but it's also something we can drive back.

And it's been great for our brand, and Ingram's been a phenomenal partner in working the publishers.

You even saw it on eTextbooks, which is really--we gave the number of eTextbooks being 10%.

That's really the first time in a large quarter that it's been that high.

And it's because we're working with the publishers and with Ingram on VitalSource to make sort of a unified experience so the students don't have to use multiple versions of eTextbook readers.

It allows us to get more content in there.

We've worked with the publishers on lowering the pricing because we're able--we're the only direct-to-student environment other than Amazon, and we have more data, so we're able to tell them what the prices are.

It's just really smart execution by our team, good relationships with the publishers and with Ingram.

And so it's turned out to go from something that was a big concern a couple of years ago to a really wonderful benefit that we provide students and our shareholders.

As it relates to '18, I'll let Andy to get into the detail.

But mostly, look, it's only October, so next year is a little bit far away, particularly for textbooks, which isn't a subscription business.

And the 606 stuff brings that top line down even though it doesn't affect the bottom line at all, and that's just an accounting change.

But I'll let Andy give you more detail.

Yes, Alex, it's just a couple of things I think is important to understand, is we're anticipating that our overall volume of textbooks will be about what they were this year.

And when you consider that--I think most people consider enrollments coming down in college, and that would also indicate the right of keeping or gaining share again.

To Dan's point and what I had mentioned earlier in the prepared remarks, the biggest impact for next year really I the 606 impact, which has no impact on profitability.

And then, obviously, you've got the--as we've seen over the last few years, we continue to see slight declines in pricing of textbooks.

But other than that, it's really pretty much business as usual for textbooks.

Our next question is from Eric Martinuzzi with Lake Street Capital Markets.

Please proceed with your question.

Yes, I wanted to ask about subscriber retention.

As I look here at Q3, we're at 1.2 million, roughly flat.

I know it's a little bit dangerous to compare sequentially on the subscribers, given the seasonality of your business, but I was wondering if you could take us a layer deeper there on the subscriber retention versus past trend.

Yes, I'll start and let Andy go on the first one.

It's not only a little dangerous, it's apples to frogs.

The quarters have no connection to each other as it relates to the time of year.

Because remember, we're coming off the summer.

Now it's different if you made that connection between the fourth quarter and the first quarter.

So really, although we do the financial years in calendar year, the real year is August through middle of May is really the college year.

So our retention has been phenomenal, best we've ever seen.

The fact of the matter is Chegg Study, the more we invest, the more content, the more formats, the more subjects, more questions that we let them ask and that we answer, the bigger the TAM gets, the earlier they come on and the longer that they stay.

And that formula is working, and you see it working in other business models, whether it's Spotify or Netflix.

This generation really wants easy, low-priced, high-quality, overwhelming value subscription services, and Chegg Study is clearly becoming one of them when you calculate what the likely growth is over the rest of the year.

It's pretty big.

Andy?

Okay, I think we got it covered.

I think we got it covered, yes.

When you say it's been phenomenal, what metric is phenomenal measured on?

Well, first of all, just look at the results.

So if you look at our year-over-year growth rate, if you look at the revenue, if you look at the margins, you look at the (inaudible), you look at the organic traffic, if you look at its ability to drive into Tutors, but also the reason the numbers get that good is because students are starting earlier than they had because they're familiar with the product, they know they want it and they start signing up when they first get their textbooks.

That gives us a longer period of time with them.

If you look at the monthly renewal rates, if you look at the pause, the number of people that paused and then came back on, all of those things are key drivers to accelerated growth, which is what we've seen.

So it's--I'm struggling to find a metric that doesn't look good as it relates to Chegg Study, because honestly, it's become, for millions of students, it's really become a necessary product.

And if you just look at Twitter and see how they respond to it, they love it.

But if you just looked at the volume of 74 million content views as an example, it just shows you--and that's 63% growth year-over-year.

I don't know if we could find a better metric.

Just one housekeeping item.

Given the equity raise in August, I was warning Andy, and maybe I missed it in some of the materials, but do you have a basic shares outstanding for quarter end and then kind of a diluted shares outstanding to go along with that?

Yes, so I can get that for you, yes.

So the basic shares outstanding at the quarter end--excuse me, the average weighted shares outstanding were 103 million.

The actual shares outstanding, I think-I don't have that right up at the top of my head, but I think it was right around 108 million.

Our next question is with Alexander Paris with Barrington Research.

Please proceed with your question.

You (inaudible) acquired it.

You're going to have to start again.

You broke up.

We did not hear the beginning of the question.

Oh, okay.

No, I was just thinking back to Imagine Easy when you had first acquired it.

You had mentioned that it had not reached its full potential in monetizing its customer base through subscriptions.

And I just kind of wanted to get an update on how the monetization process is going and as much as you can share, perhaps plans for further monetization.

Yes, so great question, and we do still believe today, even though it's well outperformed our own expectations, clearly we're having a year that even we did not anticipate, and Imagine Easy's been a big part of that.

And it's because that's another team that has executed quite brilliantly.

And here's what they've executed on; so more people using it; sessions are about the same time, but the pages that they consume are more in the frequency in which they consume it; and that allows for creation of additional ad inventory, because part of the revenue comes from ad inventory.

In addition to that, the application of our data, first-party data, to their programmatic advertising has actually not only increased the amount of inventory but the revenue per inventory.

So that has been a real positive because that's pure profit and makes the ads more relevant and contextually better for the students, which is always good.

And then on the subscription side, what's been really interesting is we continue to perform at or above our expectations in the subscription business.

And this is even prior to us launching the beta product, which is out there being tested on BibMe, which is a small percentage of the BibMe audience is getting the new product, and the new product is the ability to help them with plagiarism, help them with spelling help them with grammar, help them with style.

And we're rolling it out just a little bit more each day.

There's a clear path to doing that.

And even see improved conversion on that, as we expected to see.

So we just feel like people need to understand that when you're talking about education, it's 15% of the U.S. population at any time, that the demographics of U.S. education environment is, by 2021, about 25% of people will be English as they second language, that there isn't enough financial support our tutoring support in most of our communities to be able to help people learn and write and do those things.

And so we just see all of these markets getting bigger for this capability.

And one of the things we learned from Writing, which helped us drive buying our Math product and the specific one we bought is that technology, backed by human help, can actually teach people at scale at a really low cost.

And that is the Chegg mantra, and so we just--we don't see any of our products at a point where we're thinking about them slowing down, but quite the opposite.

Does that help?

That helps a lot.

Thanks so much, Dan.

Our next question is from Aaron Kessler with Raymond James.

Please proceed with your question.

A couple of questions.

Maybe just a lot of time we get the question just on sizing the Chegg Study potential.

I think you've talked about, obviously, 10 million, roughly, students.

What's a reasonable number, do you think, longer term, to get to kind of in the Chegg Study (inaudible)?

I mean, you're probably at 1.5 range plus today.

Thank you.

Yes, so that number, 10 million, we put out a year ago November for our first Analysts Day.

And really, what we were trying to do was make the math really easy for people to understand because most people don't participate in the education space, whether you're an investor or an analyst.

And so it was really sort of difficult to size for people.

And what we said was the smallest possible number it could be is if we only stayed in STEM and we only stayed at that point at 24,000 ISBNs, which we're now in excess of 27,000 ISBNs, and if Q&A didn't expand to different subjects, that there were 10 million students that were obligated to subscribe or to buy those textbooks that we had covered.

So we said that has to be the smallest of the possible TAMs, just to size it for people because we had only reached--we had already or only, depending on who you are, 15% of that market.

As you can see, we continue to grow at the same rates that we've been growing on top of a much higher base.

We actually believe, and we tried to say this on the last couple of calls, which is the more we invest in the product--the more content, the more formats that we deliver that content, the more subjects, the greater the Q&A that we add--that the TAM is probably 2x to 3x the size just in the U.S. alone of that original number we gave out.

And that's because it will cover the other 50% of subjects that we don't cover.

And it will go deeper in the subjects that we do cover.

So we went wide at first; now we're going deeper.

So we're having freshmen all the way through to seniors on key majors, and that was not, a year ago, the plan.

And we believed through concept AI, which is the ability to build for students a high school math freshman year, a high school math sophomore year, these are all things that the technology and the content we have is allowing us to build.

So we actually see a scenario where every student will want Chegg Study as their companion as we continue to add more capability to it.

So we've been pleasantly surprised that the more we invest, the bigger the market opportunities gets, and that's why we don't think we've seen any slowdown.

Great, thanks, Dan.

And just to Andy real quick, can you just made the stock comp outlook for Q4, maybe how we should think about that going into 2018?

Yes, so when you look at stock comp for Q4, it's a little bit higher than we had originally expected.

And just as a reminder to folks, when you look at the stock grants to the execs, 50% of those are based on performance based.

And as we performed much better this year, we've had to slightly increase our stock comp expense.

As far as looking forward into 2018, once again, we'll get more into 2018 when we get to the February call, so stay tuned.

Our next is with Jeff Silber with BMO Capital Markets.

Please proceed with your question.

It's Henry Chan calling for Jeff.

Just had a question on the subscription growth and the revenue growth.

Just curious--how should we think about the difference between those 2 growth rates?

And more broadly for the quarter, I was wondering if you could add a little bit more color on what products drove revenue growth or any way that you look at it.

Thanks.

I'll take the second one first and let Andy answer the first one.

The second one is they've all grown.

We believe that we're very early in all of these, particularly early in Tutors because we're building a market that has never been built before, which is an online expert market of human help at an affordable price.

So obviously, we see growth there.

Writing, we talked about earlier the fact that it's just performing better than we had originally expected, and all credit goes to that team and what they're building and how they're executing.

And Chegg Study also outperformed.

And those are the 3 big services that we see, and we don't see a reason for them to slow any time in the near future, that we can see.

So I think as it relates to the question over sub growth versus revenue, it used to be the other way around and it's reversed, and I'll let sort of Andy take you through that detail there.

Yes, I think when you look at the sub growth versus the revenue growth, if you take a look over the last few years, we've seen variances between sub growth and rev growth, primarily because not all of our--remind everybody, not all of the revenue that we have in Chegg Services is actually subscription based.

So there will be variances between quarters and even between years, and we've seen that.

But we're very confident that--we've talked about our longer-term model of plus-30% revenue r for Chegg Services, and we would anticipate that we would see subscription growth--subscriber growth--at least that.

Got it, okay, that makes sense.

And in terms of your expectations for 2018, are you assuming contribution from any of the new products, or just curious how much impact or how much you're expecting that the new products to contribute to the growth rate in 2018.

Yes, we're anticipating--we're anticipating little to no contribution from the new products.

So when you think about 2018 and, really, much of 2019, think about Chegg Study, Writing, Tutors as the key drivers for our growth.

When we look at the investment side--I think I had mentioned this earlier--when you look at the newer products--the Math, the Chegg Careers--those are growth drivers that we think will contribute in 2019 and beyond.

One of the great benefits to having a majority of our revenue now coming from subscription businesses or businesses that act that way is it's much more predictable, and it's just an exciting time.

It's been a lot of hard work, but we appreciate all the feedback.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

I would now like to turn the call back over to Daniel Rosensweig for closing remarks.

So thanks, everybody, for joining our call.

As you can see, the financial results are mirroring what we hoped that hey would do, if not better, based on the Vision we laid out several years ago, which is to be an all-digital education platform serving the modern student in the way that they feel comfortable learning in the subjects that they need to learn, available on-demand and inexpensively but incredibly high quality.

And the Internet and technology and AI and computer learning--all of those things--should be and need to be applied to education.

In the last 4 years, Chegg has gone from a small company to a company that we believe is driving needed change in the industry, and that is because we have an incredible committed team of people all over the world who are working day and night to improve the outcomes of students.

And I just want to congratulate and thank them on what's been a great year to date and sets us up for a phenomenal 2018.

And we look forward to catching up with all of you after next quarter's earnings.

Thank you all very much for joining the call.

This concludes today's conference.

You may disconnect your liens at this time.

Thank you for your participation.