Chegg Inc (CHGG) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Chegg, Inc.

Fourth 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, Tracey Ford, VP of Investor Relations for Chegg, Inc.

Please go ahead.

Good afternoon.

Thank you for joining Chegg's Fourth Quarter and Full Year 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 on 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 the important factors that could cause actual results to differ materially from those in the forward-looking statements.

In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg's quarterly report on Form 10-Q filed with the Securities and Exchange Commission on October 30, 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 in the Investor slide deck found on our IR website, investor.chegg.com.

We also recommend you review the Investor data sheet which is also posted on our IR website.

Now I will turn the call over to Dan.

Thank you, Tracey, and welcome, everyone.

2017 was a breakout year for Chegg, and I am thrilled by the way our team executed.

We successfully completed our first year as an all-digital company, positioning us to be a high-growth, high-margin, more predictable business.

We have always believed that there was a huge opportunity to realign the education industry with the needs of the modern student by building an interconnected, digital, learning platform with services that are online, on demand, personalized, adaptive, affordable and backed by human help.

Our results speak for themselves, as we have succeeded in delivering record engagement, record subscribers, record digital revenue and record profitability, all while becoming increasingly more valuable to more students, and of course, our shareholders.

As we start a new year, it's always good to reflect back on what we said we would do in the prior year.

In 2017, we laid out 3-key priorities: first, to execute on our financial objectives; second, to focus on improving and expanding the opportunities with our existing services; and third, to strategically take advantage of new opportunities that leverage our Student Graph and accelerate our growth rate.

I am proud to say we successfully delivered on all of our priorities, and our numbers clearly reflect that.

For the full year of 2017, our Chegg Services subscribers grew 45% to a record 2.2 million, including 47% growth in Q4 alone.

Chegg Services revenue grew 44% and more than doubled our adjusted EBITDA from 2016, truly highlighting the leverage in our model.

Even as profitability dramatically improved, we dedicated significant investments towards our future.

We have said that the more we invest in content and modalities, the larger that our opportunities get.

So we invested in subject expansion inside Chegg Study with subjects like chemical engineering, nursing, anatomy, physiology, and made investments in new modalities like video.

We also made important investments in our new writing service, focusing on teaching students how to improve their writing.

And with the acquisition of MATH 42, we expect to expand our coverage of math significantly in 2018.

We also continued our investment in our Career Services, as over 70% of students say they go to college to get a job.

We remain focused on helping students not only in their academic pursuits but their professional endeavors as well.

We are able to make these investments because the opportunities to improve education is massive.

It's a $1 trillion a year industry in which 44 million Americans have borrowed over $1.4 trillion to participate in a system that unfortunately can no longer support them.

The entire industry must adjust to the modern student, as we believe over the next 10 years, there will be even more people who need to learn not only in the United States but globally, who are increasingly dependent on online, personalized learning that is more convenient, more affordable and more relevant to improve their outcome.

Technology and the Internet, like it has in every other industry, should enable this change, and we believe we are in the best position to leverage it to realign the industry.

We continue to be focused on solving the biggest pain points of students, and it should come as no surprise that today's student is still frustrated by the high cost of textbooks.

This is why we continue to see success in our Required Materials service, which drives customer acquisition, brand awareness and provides critical data and insights.

In 2017, Required Materials delivered beyond our expectation, bringing over 2 million customers to Chegg.

And importantly, not only are students continuing to come to Chegg to buy and rent physical textbooks, but we are finally also beginning to see more of an industry shift from print to digital material.

Chegg is capturing the benefit of that shift, and this creates even greater daily engagement with our platform, expands our data on what students are studying, gives us greater insights into what material they are struggling with, enabling us to offer more relevant products and services at the right time for almost no cost of acquisition.

And the core of Chegg is, of course, Chegg Services, as it is most closely aligned with the needs of today's students, to master the subject, get a better grade, go on to graduate and pursue their career.

In 2017, Chegg Services grew 45% year-over-year to 2.2 million subscribers, reflecting just how important Chegg has become to college students.

Chegg Study specifically has become a student mainstay, as is reflected in our engagement metrics.

We continue to add more value to Chegg Study, which now includes nearly 7 million textbook solutions from 28,000 ISBNs and more than 13 million unique questions that have been asked by students and answered by our network of over 35,000 experts.

We now have a library of over 20 million unique, proprietary expert answers and textbook solutions, an increase of nearly 6 million this year alone.

Chegg Study content use, which is how we measure engagement, surpassed 440 million in 2017, up more than 60% year-over-year.

That means 440 million times, students had a question and came to Chegg Study for help.

It's clear that our investment in new content and expanded modalities has deepened engagement and brand affinity, which has resulted in higher retention, lower customer acquisition costs and increased subscribers.

This creates an incredible competitive mode, and we believe it would be very difficult for anyone to replicate the volume and quality of these questions and answers on our platform.

As we continue to expand, we believe 2 of our most important growth areas are math and writing, as over 40% of students require remediation in Math and English, or both.

As a reminder, we acquired MATH 42 at the end of last year and have plans to expand that capability.

We expect to begin beta testing of math service later in 2018 and think it's a huge opportunity for us in the coming years.

Also, developing writing competency is critical for students, not only in school but as well as well into their careers.

We believe Chegg is uniquely positioned to meet this need because students already come to us today when writing papers.

To give you a sense of the scale of our current writing service, we have over 100 million visits from students on an annual basis, who created over 150 million citations in Q4 alone, bringing our total number of citations in 2017 to over 0.5 billion.

But even at that scale, what really gets us excited is the launch of our new writing subscription service, which takes us from citing to writing.

We think this product is a game changer because with our ability to leverage our data, along with AI and machine learning, we will be able to help students understand not only what they want to cite, but what they should have cited and why, how to structure a sentence, learn and improve their grammar, spelling and much more.

We believe the expansion of this service positions us to become the largest educator in the writing space.

Although we see writing and math as subjects that can be taught at scale using technology, we still believe in the power of human help.

This is why we are building the largest online marketplace for tutors and highlights the importance of integrating it into our other services.

We continue to see 50% of our current Chegg Tutor customers coming from Chegg Services, which shows the power of our interconnected platform and the importance of human help to students.

In 2018, we plan to expand our integration of Chegg Tutors into our writing products, and our primary focus over the next year will be to improve tutor quality and tutor matching as we scale.

2017 marked the beginning of a much bigger opportunity for Chegg.

The momentum and receptivity of our brand, with awareness of Chegg Services now exceeding over 80% of all college students, means we entered 2018 in our strongest position ever.

Our reach is at an all-time high, the number of students who can benefit from our service continues to expand, our pain customer base has grown substantially year-over-year and our knowledge in student and their needs is at an all-time high.

On top of that, our balance sheet is stronger than it's ever been, with no debt and over $200 million in cash, which Andy will discuss later on this call.

As you can imagine, given the momentum we are seeing, we couldn't be more excited about the next phase of our growth.

Our priorities for 2018 will build on the success we have seen in the last year, so we will focus on: first, meeting our 2018 financial goals; continuing to expand our TAM, through the addition of new subjects, products and services; and, as always, we will invest in opportunities that we believe will leverage our brand, reach and student graph to grow faster at lower costs.

Chegg focuses on solving the biggest problems facing today's students by helping them pick their best-fit school, identify the right major, pass their classes, lower their costs, master the subject, develop skills and, ultimately, pursue the right career path.

And the deeper we get into this market, the clearer it is that Chegg can play critical role to the over 36 million high school and college students in the United States and eventually around the world.

If we continue to focus on making education more accessible, affordable, efficient and relevant, while delivering the outcome students desire, it's hard to imagine any company being more valuable for people between the ages of 15 and 30.

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

Andy?

Thanks, Dan, and good afternoon, everyone.

Today, I will discuss our financial performance for the fourth quarter and full year 2017 as well as our increased outlook for 2018.

2017 was a great year for Chegg.

We met or exceeded all of our financial targets, made key investments in our existing and future services, expanded our offerings organically and through acquisition, and strengthened our balance sheet with a very well received follow-on offering.

We believe we entered 2018 in a stronger position than we did entering 2017 and expect to have another great year.

For the full year 2017, revenue came in at $255.1 million.

This is an increase of 28% over the comparable non-GAAP revenue in 2016 and represents our first year-over-year revenue growth on a GAAP basis since transitioning to an all-digital model.

More importantly, Chegg Services revenues grew 44% to $185.7 million and hit a record 2.2 million subscribers for the year, a net increase of 700,000 over 2016.

This drove gross margin to 69% up from 53% in 2016, resulting in adjusted EBITDA of $46.4 million, up 123% year-over-year.

We ended the year incredibly strong, with Q4 revenue of $73.5 million, which was driven primarily by 37% year-over-year growth of Chegg Services revenue to $60.5 million.

Q4 gross margins were higher than expended at 74% as a result of strong top line growth, particularly in Chegg Services, where much of the incremental revenue dropped to the bottom line due to their relatively fixed cost structure.

This led to adjusted EBITDA of $21.1 million, an increase of 52% year-over-year.

Q4 free cash flow came in above our expectations at $15.5 million.

As we expanded our consignment partnerships, we needed less capital outlay for textbook purchases for our partner, Ingram, and there were timing differences of payables and receivables in December.

Looking at the balance sheet.

We ended the year with cash and investments at $229 million, almost triple the balance we had at the end of 2016, this the result of the proceeds from the successful offering we completed in Q3 and improved cash flows from our all-digital model.

We remained confident we will achieve the 2018 financial model targets we articulated 3 years ago, most notably to achieve 25% adjusted EBITDA margin while growing Chegg Services revenue greater than 30%.

In addition, as a result of our transition to an all-digital model, the business has become more predictable, as the majority of our revenue comes from subscription, giving us much greater visibility.

With that, and based on the strength of our performance in Q4, we are raising our guidance for 2018.

As a result, we expect total revenue for 2018 to be between $295 million and $300 million, with Chegg Services revenue between $240 million and $243 million; gross margin to be between 72% and 74%; adjusted EBITDA to be between $74 million and $76 million; and CapEx, which reflects investments in future growth, to be in the range of $30 million to $35 million, of which approximately 80% is investment in content to fuel growth of our subscription services, with the remainder being ongoing capital for systems and infrastructure to support our growth.

Moving to Q1 2018, we expect total revenue between $73 million and $75 million, with Chegg Services revenue between $54 million and $55.5 million; gross margin between 71% and 73%; and adjusted EBITDA between $14 million and $16 million.

In addition, we expect a healthy 40% to 60% conversion of adjusted EBITDA to free cash flow over the next several years.

We expect 2018 conversion to be towards the lower end of this range and lower than 2017 due to the contractual timing of payments we received from Ingram for textbook purchases we make on their behalf.

Many of you have asked about the impact of the new tax bill, which got signed into law late last year and is effective for 2018.

As with most companies, we believe the new law will be positive for Chegg.

Once we become profitable on a GAAP basis, we expect our federal tax rate will be lower, resulting in greater net profits and increased cash flows versus the old law.

At that time, we expect our federal tax rate will be closer to 21%, subject to certain deduction limitations contained in the new law.

And as you can imagine, there are still open items that require clarification.

As such, we may refine our estimates as further information and interpretations become available.

In closing, 2017 was a great year for Chegg.

The Chegg team executed at a high level and has positioned us for more success in 2018.

It's an exciting time at Chegg, and we are glad you are with us for this journey.

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

(Operator Instructions) Our first question comes from the line of Brent Thill with Jefferies.

Dan, you saw one of the best sequential growths in subscribers that you've seen in quite some time.

I'm just curious if can you provide a little more color around where you saw that.

And any onetime events that you saw that may be an anomaly in this quarter.

Yes, it's -- we've seen sustained good growth.

Fourth quarter is always a very big time for us because it contains both midterms and finals in the same 3-months period, so that's always going to be probably our fastest-growing quarter.

But the fact is, we have over 80% name recognition now.

All the relationships we have with the content, the 7 million solutions to 13 million questions, they all get indexed and site-searched.

Therefore, 85% of our traffic is organic.

If you have a question as a student, there's only one place to go, and it's Chegg.

Word-of-mouth has been extraordinarily because students report that you get a higher grade and you master the subject better.

And we continue to expand the number of categories that we cover, which makes Chegg Study more relevant and the rest of our services more relevant.

So it's just really good execution on the plan that we laid out, much better name recognition, word-of-mouth.

And as we said in our prepared remarks, if you walk on any college campus today, Chegg is known by just about everybody.

And Chegg Study, in particular, is becoming a mainstay of whatever student, whether you're freshman or senior, feels like they can benefit from.

So things are going very well in that category.

So nothing particularly unique.

Just good execution, a really valuable product, where we offer overwhelming value, and the student numbers are reflecting it.

And just a quick follow-up.

The opportunity set is obviously pretty rich inside the U.S., but there are even several questions about how you think about the international market and how you also weigh strategically the decision potentially go downstream, how you're potentially weighing both of those parts, if you could talk a little bit about that.

Clearly, both are part of our future, but prioritization, execution, not getting out ahead of ourselves is something we focused on a lot in the last several years to make sure that whatever we produce is the things that the students love, which drive that growth that you saw.

And so yes, we see opportunities to continue to go into high school.

I'll just remind you that between writing and test prep, we are already -- in the high schools we're already acquiring those customers earlier, and that's helping us as they come into college, get them earlier for both textbooks and for our subscriber businesses.

And then we see international growth now that we're all-digital.

We see international growth for things like Chegg Study, Chegg Tutors and in English-speaking countries, Chegg Writing and Math globally, as something we think could be huge.

So if you just look at 3 of the larger English-speaking countries, Canada, the U.K. and Australia, combined their student base is similar to the size of the United States, and we look at those as places to distribute rather than places we would have to remake the product because STEM is STEM.

So this isn't politics or religion or history.

The majority of what we cover today are STEM-based products, which are the same around the globe.

So we see them both as very big opportunities.

We're being very diligent about making sure that if we -- when we move to something that we're prepared to move to something.

And our numbers this year reflect just continued great execution in the U.S.

Our next question comes from the line of Doug Anmuth with JPMorgan.

As to -- just first, Dan, can you talk a little bit about just how you're thinking about the potential bundling of Study and Tutors?

What has to happen from a tech perspective?

And as you go through '18, how big of a priority is this for you?

And then, secondly, Andy, maybe on the investments in Chegg Study and CapEx in particular, can you just give us some more color on the kind of investment that you're talking about?

Is it more of the same in terms of building out ISBN that much further?

Is there anything different in there?

And any other color on coming to the low end on the long-term free cash flow conversion beyond the Ingram payment dynamic?

I'll take the first one, and I'll turn it over to Andy.

So we've talked -- we've indicated that we are looking at things like bundles.

So what do we mean by bundles?

So now that we have acquired math, which we'll roll out later this year, we have writing, we have Chegg Study, we do think that down the road, there's an opportunity to create even more value by combining all of them into a package if students prefer to buy them all.

And from a technical standpoint, which was the question that you asked, we have been implementing that suite.

I think we've said in the past that the financial side has already been done.

And so this year, it's building that commerce platform.

For us, it's not expected in the '18 numbers at all, and that is because the way our years work is there's 2 halves.

So the first time we'll be able to test a bundle with the commerce system won't be until the second half of this year anyway.

But the research that we have done suggested students really do value what we offer each independently.

And that if they could afford them all at a really great price, they would do it.

Because the fact of the matter is, I think we said in our prepared remarks, 40% of students either take remedial math or remedial writing; in some cases, both.

But as you move on into your career, math has become increasingly important for almost any job, and writing certainly is.

So we think we have the right assets and we think we have an unbelievable value proposition today, but we think we can improve upon that, which would be really valuable for the students and really valuable for Chegg and our shareholders going forward.

But I wouldn't expect, Doug, anything noticeable this year because good technology will be ready to go in the second half, and we'll be testing it more then and making sure that it works the way we want it to work.

But it's one of the reasons we bought math at the end of last year, so we can invest in it over the course of this year as well.

So we're very, very, very excited about that priority.

And I think for Andy, you wanted to talk about Capex and future conversion of free cash flow?

Yes, so Doug, as Dan talked about in his prepared remarks, we see a direct relationship between the growth in subs, the growth in engagement with our Capex, particularly the content spend.

Like I said, about 80% of CapEx is actually content.

And so when you look at that content, it's a combination of several things.

We continue to invest in the ISBNs.

We continue to invest heavily in expert Q&A, and that's been a huge driver for us.

But more importantly, we're also investing in new modalities right?

So we started investing in video, for example in the second half of this past year.

We'll continue to invest in that.

And we're investing in math.

Dan just mentioned that.

So we have a lot of things that we're investing in.

But from my perspective as the CFO, what I'm focused on, is it a positive ROI?

And the second thing I focus on is, is it growing faster than our revenues are growing?

And the fact of the matter is when you look at our investment in content and capital period is that we're investing at a slower rate than we're actually growing our revenue.

So those are the things that are important to me.

Future free cash flow conversions?

Yes, sorry.

I missed that.

Sorry.

On the free cash flow conversion, like I said, we anticipate it to be somewhere between 40% and 60%.

It will be at the lower end of the range for this year, and we anticipate that it will grow over the next several years as we continue to see leverage.

Our next question comes from the line of Aaron Kessler with Raymond James.

A couple of things.

First, just on back to Chegg Study, if you can talk about maybe what you've learned kind of from some pricing studies.

I know we talked in the past about maybe people are sharing passwords.

How are you thinking of pricing and maybe bundling going forward as you talked about?

And then just with kind of increased cash position now, if you can talk about what you're thinking from an M&A perspective and what you're seeing in the -- just for prices out there as well.

Yes, this is Dan.

I'll take them both, I guess.

So Chegg Study, it's very similar to the history of Netflix, which is the more content we add, the more screens that you can view it on, the more value that's in there, the more subjects we cover, the bigger the TAM gets.

And the more modalities we put in, we've added video, now you can do the Q&A and you can do step-by-step solutions, now we're adding math, there's a lot that continues to add extraordinary value.

And so we do -- and many of you follow us very closely so you know this, we do price testing.

There's huge volumes that comes in, so we're able to set up a series of cells that are projectable samples.

So we know -- we're very comfortable in our belief, based on all the tests we've done over 5 years now, that we have pricing power.

And we just don't see a reason to use it now when we're seeing this growth rate because we want to continue to grow our market share as much as we can.

There is actually an incredibly powerful network effect.

The more students we have in there, the more we can know which subjects they're interested in.

The more questions they ask, the more we can index those questions in search, which drives in even more customers.

So we're really comfortable where we are.

And as we think about pricing for the future, it's more in the context potentially of what Doug was asking about earlier, the bundle, which is we do know that students want this and are willing to pay for it and need it and see it as insurance for all the money they have invested in their curriculum.

In terms of password sharing, yes, it was something that we did not worry about much as we were growing because we wanted more people to use it, we wanted more questions to be asked, and we wanted to make sure we were certain on the value and the pricing and all of those things.

We are, however, because we do know and some of you have put out your own studies, so you know as well, we have incredibly high usage of our service beyond just our subscription numbers.

And so we are looking at ways now.

We've already taken some steps, things like -- and this is meant to sound funny, but it is what we did.

We said, "Gee, you must be the hardest working student because you've now accessed your 100th book this semester?

And so maybe it's time for you to slow down." And then we limit it.

So we do limit the number of questions that you can ask to 20.

We do limit the number of books you can access to approximately 5, but a lot of people in the same class can access the same book.

So we are looking at technology now to help us reduce that.

I wouldn't expect us to do anything dramatic this year.

I would expect us to keep chipping away at it because we think right now we're benefiting more than not by having more students use it.

But it is something that we're focused on.

And the third question was M&A priorities and pricing.

So let me go to the pricing thing.

What you're seeing in our space is not unlike what I think you're seeing in the really big spaces, which is if you become the de facto channel and you own proprietary content, you're in the best position.

So we're in a very large $1 trillion vertical.

We own the student; no one else does.

We own proprietary content, as we've articulated in the study, and a network of tutors and our writing products.

And so we're in a very strong position.

And so what we're seeing in terms of the M&A space in general is increasingly more companies are coming to us because if they have great content, they can afford to reach the audience.

And so we think that there are just a myriad of opportunities ahead, but we will remain really, really, really careful in making sure that we don't bite off more that we can chew, it's additive to what we do, it could leverage our brand, our reach, our customers, our data, and we should be able to grow it faster and at a lower cost.

And so our priorities will be to make sure that these -- we continue to answer the big questions that students have.

So we only want to do things that are going to be at scale because that's really where we play best.

And we're seeing that in everything we bought in the past.

We've accelerated the growth of every product we've ever bought.

And so it's an exciting time for us.

And now that we have the capital and no debt, we have more capacity, but we're still going to make sure that it follows our principles, which is a big student problem, can leverage our brand, our reach, our data, our technology to be able to grow it faster at a lower cost.

Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets.

Just curious on MATH 42, the number of subscribers you picked up in Q4 attributable to the core acquisition?

Yes, I -- let me just make sure that we're all clear on it, which is we acquired it at the very end of Q4.

We don't have any paying subscribers for it now.

It has mostly been distributed in Europe, where it's had over 2 million downloads.

And that we are investing in it now, and you really will not see a subscription launch until much later this year.

But the organic free app of MATH 42 continues to be available and continues to grow.

It's just our focus is on building the product that we want to build and building the subscription service that we want to build, and that won't come until later this year.

Okay.

Understand.

And then just a question on the guidance for 2018.

If I compare it to the guidance that you had coming out of Q3 and what you have now coming out of Q4, it looks like we're up at the midpoint about $2.5 million.

I don't know how much to read into it given that we're still early on in the year, but it looks like there is some potential.

Obviously, the Chegg Services, being at the midpoint there, is up $1.5 million.

But the counterpoint to that would be that the Required Materials is up about $1 million.

What's behind that potential increase in Required Materials?

Well, like you said, it's super early in the year.

We just came through what we call our January rush.

Dan had mentioned earlier that we've seen nice momentum in Required Materials, and that along with what we saw in Q4 for Chegg Services, is what went behind the thought process for the guidance for 2018.

And just in the Required Materials space, let me just remind everybody or people who may be new to us because there's a lot more people following us now, which we're greatly appreciative, is we see running that as a breakeven business.

We acquire the customers, we acquire the data, and it's critical data -- the school, the major, the subjects.

We're able to use that for attach rate into other products and services.

But also it's an enormous pain point that students really value.

And effectively -- and the overwhelming majority of online transactions now are us and Amazon.

So we're in a really good position.

You've also seen -- we even did an announcement last week.

McGraw-Hill put out an announcement about increased consignment.

What's happened is because we are the largest direct-to-student channel that publishers are now looking to us to distribute more and more of their content.

So what consignment lets us do is expand the catalog at no cost because we're not putting out any capital on behalf of Ingram and Ingram doesn't have to pay us back.

That allows us to have bigger catalog and more effective pricing.

So that's all working to our advantage.

Our next question comes from the line of Corey Greendale with First Analysis.

This is Ken Wang on for Corey.

So just wondering, if you can offer any commentary.

For your subscriber base as a whole, can you offer something qualitative on subscriber growth kind of within your various segments, so college, high school, middle school?

Yes, I can.

The best way I can describe it is this, which is where we're big, we're big.

And so if you think about it, there's something -- people estimate there's about 4,500 colleges and universities in the country.

About 1,000 of them represent over 50% of all students.

Chegg Study, Chegg Tutors, they do extraordinarily well in those environments.

They're mostly state schools.

They're all schools that you've heard of.

It's Ohio State, it's Penn State, it's Arizona State University, it's University of Texas, it's all the Florida schools, UCF, Florida, Florida State.

The large state schools that unfortunately do not have the support systems for the volume of students they have, these are the students that are generally working 30 hours a week while they're attending college full-time.

Chegg Services overall does best with them because of the way we build the products: credibly affordable, multi-ways to access it, it's all in the cloud, screens, it gets personalized.

So those are the students that are really driving our growth.

What we've always said is, at the schools that you all know or probably all went to, those are schools that use Chegg Study to confirm their work.

And the schools that have the biggest populations are the schools that use Chegg Study and Chegg Tutors to learn their work.

And so we're distributed well everywhere, but the big schools, we just keep going deeper because of word-of-mouth.

And it's been really effective and our cost of customer acquisition has gone down.

As it relates to high school, we're incredibly strong with the writing products at high school.

When you look at just the numbers, 100 million visitors this year alone, 20 million to 30 million in a given moment, you realize that we are highly penetrated in middle school and high school as well as college for that product.

So we've got tentacles in all of these things now, and that's really helped accelerate our business.

And then just wondering if you can offer some commentary on uptake trends for your more recently introduced videos on Chegg Study?

Yes.

So again, just to make sure everybody is on the same page.

We announced last year that we were going to be adding over the course of 2018, so we're very early in 2018, videos that cover -- something like 15,000 videos we intend to roll out.

When we roll them out, people love them.

So we've got a lot of work to do to get them rolled out.

Those are all included in our CapEx cost that was asked earlier.

And then once we have them, we have them.

But students really welcome them.

And the way to think about is this, if any of you have any kids -- and I have 2 and they learn very differently, different kids learn different subjects different ways.

Some of them will just go step-by-step solutions.

Some of them need QAs.

Some of them need human help, and that human help maybe live video, live audio or actually chat-based, right, which is a big growth segment for us.

And then some of them, like they do with Khan Academy or used to, they just want to watch the video to get themselves grounded in it.

In our case, what we rarely see is somebody just watch the video and not use the rest.

What we see is kids using all the modalities we have to really grasp the subject.

So it's been absolutely additive where we put it out.

It's just not big enough to make a big number yet.

But overall, if you go back and look at the prepared remarks of our overall engagement, it's incredible how dependent students are becoming on Chegg Services to be able to really get a grasp on their subjects and pass their class.

Our next question comes from the line of Jeff Silber with BMO Capital Markets.

I just wanted to go back to the McGraw-Hill announcement that you had mentioned.

Is this something you have in place with the other major publishers like Pearson or Cengage?

And if not, is this something you're going to be pursuing with them?

Yes, so what happened was last year, middle of last year, Pearson came to visit with us.

It's the first time that a CEO came to visit with us.

We welcomed him.

It was really a wonderful meeting because we've developed our partnerships and they keep expanding.

And they talked to us about going to consignment and going to pure rental.

And so they really led the industry.

Since then, both Cengage and McGraw-Hill have followed.

You're seeing it now.

So 3 of the publishers probably represent 50% of all the ISBNs that matter in volume.

Five of them represent 80%.

So everybody is moving in that direction.

The challenge is not all of them have the capability to do it for all their ISBNs at once.

It's their infrastructure that's the challenge, not ours.

So yes, we have one in place with everybody that has been placed.

And whenever it's in place, it continually gets expanded.

And what I mean by that is Pearson started with 100 ISBN, and now they're moving to thousands of ISBNs.

The way to think about it as a Chegg shareholder is this means that every new textbook, which used to cost the most amount of cash that Ingram would put out -- Ingram would pay for but we would put it out initially, no longer has to be used on that, which means we can buy more books in the used market that are older books, which expands our catalog and really creates value.

At the same time, you're also seeing -- Pearson started it, Cengage has been really strong in this, is you're seeing digital pricing go down, which is also really good for Chegg because the more people take digital textbooks, the more day-to-day relationships we have.

So where this went from being a nightmare a few years ago, textbook is really just a great opportunity for us at this point.

All right.

That's great to hear.

And you had mentioned the potential impact of tax reform.

I'm just curious just coming out of Washington.

I know there's been some proposals about the Higher Education Act re-authorization and even the federal budget that might impact education.

Do you see anything, either positive or negative, coming out of those discussions?

Well, it's a loaded question.

What we've done is, we built the company to be student-first, which means whatever the impact is on students, Chegg is going to be there to help them.

And what I mean by that is, where we're focused is the 2 areas that honestly the government has nothing to do with, which is whatever system they're in, we have the support material that helps them learn it and get a better grade and get through it and do it for less.

The second thing is our focus on careers means that wherever you are, the data that we've gathered, the 100 million resumes that we've looked through, the 100-plus million job descriptions that our AI and computer learning is working on, it doesn't matter what you go through in terms of what school system you go through.

Chegg will be there to support you.

So we're staying out of those things because we're not really sure which way they're going to go.

But whatever way it goes, whatever students are in, whatever system they're in, Chegg has support systems for them.

Our next question comes from the line of Mike Grondahl with Northland Capital Markets.

Two quick questions.

One, could you talk a little bit about engagement at Chegg Study and Chegg Writing?

Maybe how long the average student is on each website?

I think we've got some of the volume numbers.

And then secondly, an update sort of on the new Chegg Writing subscription.

I think as of late fall, they were live on one of your 5 bibliography sites.

Just kind of how you see that rolling out over 2018?

Yes, so I'll talk about engagement.

So engagement is a very interesting thing.

When I was at Yahoo!, the measure of engagement was how many visits, how many page views and how long we could keep you there because that's how we made money.

Then along came Google, who's like how many times did you come and how quickly can you get off?

And that's how they made money.

In our case, time is -- the less time that you -- that we can allow you to spend, meaning the faster we can make the product, the more relevant, the more personalized, the less steps you have to take, the faster you can grasp it, the better it is.

Having said that, our time spent continues to either stay the same or go up, and that is because the amount of things they're doing there is increasing.

So if you take, for example, the increase in the number of subjects that we're covering in Chegg Study or the number of ways that you can get tutored, it all varies.

So the engagement level for us is we look at how often do you come, how frequently do you come, how many things do you consume?

And those are the things that are all up into the right.

And that has been very, very powerful for us.

As it relates to the subscription service, we did roll it out, as you said, at the end of last year on the smallest of the sites, which is called BibMe, and anybody is welcome to test it.

And those of you that have, I think you've duly been impressed and have written great notes about it, so thank you.

So we expect to roll that out slowly over the others, ending with the EasyBib, which is by far the biggest.

So the relative size of EasyBib is 80%, and the others make up 20% collectively.

But like we say all the time, we want to make sure that it works, that students value it, that we have the necessary feedback, that we can handle the load, all those kinds of things.

But what we have seen from the BibMe subscriber is when they understand what it is when they use it, they love it because for those of you who have necessarily been following along, what these sites did was they helped you cite what you thought you needed to cite much faster.

The new subscription service will not only do that and even better, but it will also identify things that you should have cited because 10 years ago, everything that was cited, 80% of it where from research works.

Today it all comes off the Internet.

So we have the greatest reach and calling and all that data already in our system.

No one else can really match it.

So we tell you what you should have cited and why and we give you the chance to do it.

We also help you with grammar, similar to Grammarly, and spelling and structure.

So what we're really doing is using AI and computer learning to actually teach people to write as opposed to just help them cite.

So the citation side, you heard the numbers are going through the roof.

But the engagement, once you're inside the new writing product, has been spectacular.

And we'll see once we roll it out to the broader audience, but we're really excited about it.

Our next question comes from the line of Alex Paris with Barrington Research.

Just kind of following up on the last question about the Writing subscription service and its integration or the attach rate we should expect for it with Tutors.

And I guess how would you characterize where it is now and your hopes for this attach rate to grow as we move forward?

Yes, it's a really good question and probably the easiest one for me to answer.

Because right now it's not integrated anywhere.

And the reason is because we're focusing on tutor quality, we're focusing on the ability to scale.

And so before we integrate it into such a giant product, we want to make sure all the systems can handle that kind of growth.

So we're spending this year integrating it.

And we expect by the end of the year for it to be fundamentally in over 50% of the -- it's not just the subscribers.

It's the free users that it gets integrated into.

So you can expect that to roll out over the course of the year.

That's very helpful.

And I have one follow-up question.

Just thinking about Chegg Tutors and what's on the horizon.

How should we think about the potential for a foreign language integration with the Tutors service as it pertains to perhaps international students or global expansion?

Yes, it's again another really good question, which is -- so we've always seen the future of Tutors down the road as being -- having the ability to get you an expert in whatever you're interested in, in whatever language you do it in best, in whatever modality you do it in best.

And some people like to do it live, some people like to do it audio, some people like to do it asynchronous written lesson, and increasingly, students like to do it over chat.

And so for us, we've always believed that, that was a big part of our future.

At the moment, the majority of things that we are torturing, and the big volume is not in -- is still in the United States and it's not in foreign language speaking.

It's in statistics and computer science and all of those -- they're more in job skills kind of things -- and it's really great for us.

But we absolutely see the same vision that you do, and there's a lot -- look, as we expand outside the U.S., we'll be able to acquire tutors around the road.

Maybe tutors around the world want to get into our system.

We have to slow all that down to make sure the quality was good.

You may have seen that we're making every tutor requalify.

We're giving them video tests.

We really want to make it spectacular.

But we don't think there will any challenge recruiting people in subjects in different languages because there are students all over the world.

So we're excited about that as being part of our future.

Our final question comes from the line of Alex Fuhrman with Craig-Hallum Capital Group.

I wanted to ask a little bit about the learnings you have at this point from your partnership with Sallie Mae.

If you have a sense of how many students signed up through that program?

And now I imagine a lot of your fall semester sign-ups have probably hit the either 2 or 4-month mark, at which their free trial would have expired.

So if you have a sense of -- or certainly what you could share with us of how many of those students have been converted to paid subscription?

And also just as a follow-up, Dan, I think you mentioned on the last quarter call, the number of minutes that your tutors' customers have had averaged on the platform.

I'm wondering if you could share that with us again in the fourth quarter.

Yes, I'll give you a sense of it.

I don't know the exact number, but I'll give you a sense of it.

Let me start with Sallie Mae.

For those of you who weren't around when we made the Sallie Mae announcement, because we are the biggest direct-to-student network, because we have 100 million visits in the course of the year, obviously, the student loan and the student refinance areas are potentially big opportunities for Chegg going forward.

We do not expect to enter as a principal, right, to compete with SoFi or anybody like that.

That's not our business.

But the more students we have, the more we know about them, the more our data is able to tell, to predict what class you're in, what major you're taking, what jobs you're likely to get, how much you're likely to get paid.

The more that data can really help students get better financing or better refinancing than they can get.

And that's a lot of what our career side continues to work on.

As part of that, Sallie Mae, who does some of the largest in-school, not refis, but in-school, something like 400,000 or something a year loans, approached us and said they have done a bunch of research and determined that -- what they wanted to do is differentiate themselves and offer more value to the student.

And of all the things they could have offered, Chegg Study came up as something students really value.

Sallie Mae really valued it because students who were going to use it were more likely to pass their class and more likely to graduate and pay back their loan.

So there was method behind their madness.

And so we embarked on a test that was a 1-year test, which is now beginning the second part of its first year.

So you're right.

We completed the first year.

And they are extraordinarily pleased.

The students are extraordinarily pleased.

We are extraordinarily pleased.

And everything -- we're not breaking up the numbers because they're their numbers and they don't want us to.

But on top of that, our philosophy is we build all of those things into our forecast and so our forecast will change if we buy something but not likely if we launch something or announce a partnership because we bake those into what we assume our growth rates will be.

Having said that, it wouldn't surprise me if this relationship continues and eventually expands in terms of not just Chegg Study or Chegg Tutors.

And you're right, you could get Chegg Study for either 4 months or 2 months, and you can get Chegg -- a certain number of Chegg Tutor hours.

So students predominately went to Chegg Study, not a surprise.

And so we're very pleased with the outcome of that.

And I think that's reflected in why we continue to think we're going to be a high-growth company.

But it's been a really positive relationship.

And I think if you ask both sides, they would -- I think we'd both agree we look forward to a future together.

Oh, and in tutor minutes.

Yes, so tutor minutes it's flat to down a little bit.

The reason is it's deliberate.

And the reason it's deliberate is because one of the things that we focused on in Q4 was moving more towards live lessons.

So if any of you have used the platform, you see we're directing more and more students to live lessons.

And so live lessons are long.

They're over 50 minutes, but they're shorter than the asynchronous written lessons, which the student might be billed an hour or something like that.

So it's -- in the areas of apples to apples, it's the same to up.

In the written lessons, it's down because we're starting to move more towards live lessons because that's really where we think the future is.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to management for closing remarks.

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

We couldn't be more pleased that the execution of our team and our employees around the world, their dedication and commitment to the mission of helping students have a better opportunity to have the future that they deserve and improve their outcomes through learning and through career growth is something that is -- it's unique and it's special.

We came out of the year stronger than we had imagined.

We're incredibly excited about the future.

And we just keep seeing the opportunities being the largest direct-to-student network, who's offering the products and services that students value, built the way they need them and at a cost they can afford, where it's really clear, overwhelming value to the students.

We see the opportunity only getting bigger for us to reach more students, to be more relevant to students and to one day go around the globe.

And so we're just going to go back to work and continue to execute.

But it was a really good year, and we're really excited how this year is getting started.

And the only other thing I would say is as a shout-out to 2 of Chegg's ambassadors, Chris Long and Zach Ertz of the Philadelphia Eagles, I would be remised if I didn't say congratulations and fly Eagles, fly.

And so thank you, everybody, for joining the call.

We'll see you on the next conference call.

Thanks.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.