Chegg Inc (CHGG) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Chegg First Quarter 2018 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, Vice President of Investor Relations.

Good afternoon.

Thank you for joining Chegg's First Quarter 2018 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 the important factors that could cause actual results to differ materially from those in the forward-looking statements.

In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg's annual report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2018, 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 investors 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.

Chegg is off to a strong start in 2018.

In Q1, we achieved 37% year-over-year revenue growth for Chegg Services, driven by 44% growth in subscribers.

We are proud of our momentum in our financial performance, which gives us the confidence to raise our guidance for both revenue and EBITDA for the remainder of the year.

As always, we remain focused on execution and set out 3 priorities for 2018: first, to meet our financial goals, and Andy will walk you through a more detailed view of our results and improved guidance; second, as we see the education space being a trillion-dollar market, we continue to prioritize expanding our TAM, so we're making smart investments and adding new subjects, new content, new formats and new services; third, when the opportunity presents itself, we plan to add new capabilities that leverage our brand, our reach, our Student Graph and our balance sheet.

Our team couldn't be more motivated because we're having a huge impact on millions of students.

As a result, they have been executing across our priorities, and I couldn't be more pleased with both our financial results and our user engagement metrics.

Students are increasingly benefiting from and depending on Chegg during their educational journey.

We think our growth rates reflect the power of Chegg's brand, which now has more than 80% brand recognition on college campuses.

We believe the strength of our brand reflects the quality of our services, which is positively impacting our engagement and retention.

We also believe it reflects the power of our model, which, as it scales, will become even more profitable.

For the past 8 years, we have been on a journey to make education more affordable, relevant and more accessible.

Given the positive student response and the size of the opportunity, we feel like we are just getting started.

As we watch the trends and changes that are impacting every other industry, we believe that Chegg and the education industry are poised to drive broad changes in the next few years.

Right now, many businesses are going through transitions to do the advancement in technology and the power of the Internet.

Whether you are a disruptor or an incumbent in an industry, the ones that leverage technology to evolve their business and their model are able to increase their relevance by personalizing and simplifying the user experience and, as a result, it creates overwhelming value for their customers.

When that happens, companies that drive that change and focus on their customers win big.

We think it's clear that platform companies are distancing themselves from others because they are better able to serve their customers and their models are more sustainable, predictable, and profitable.

Across industries, the key elements that distinguish these platform leaders are that they own their customer and the data, are not dependent on other channels of distribution except their own and they own proprietary content, allowing them to know what their customer wants, when they want it, how they want it and efficiently and effectively respond to their customers' needs.

As a result, we see that these companies are able to provide more personalized services, growth factor, acquire customers for less, therefore, creating great value for their customers, the company and their shareholders.

Our team has put Chegg in a position to those same things within our industry.

According to comScore, we have a reach of over 35 million unique visitors on an annual basis, as many as 10 million in a month, with 85% of that traffic coming organically.

And as we own the vast majority of our content, we are able to have a deeper relationship with our customers, better understand their needs, create relevant content and services for them, which we can distribute more efficiently and affordably and do it all at scale, and as you can see, do it all profitably.

You can see the results and the continued growth of our Chegg Services business, where we serve a record 1.6 million subscribers in Q1.

This was led by Chegg Study, which is the center of our flywheel.

We measured the success of Chegg Study not just by financial results but also by user engagement and retention, all of which has seen and continues to see strong growth.

We continue to add value to Chegg Study by increasing our catalogs of textbook solutions, which now covers almost 30,000 textbook ISBNs.

We now have a library of nearly 22 million proprietary expert answers and textbook solutions, which is an increase of 43% in the past year.

Our proprietary content helped drive 158 million Chegg Study content views in Q1, which is up 59% year-over-year.

So we're adding more content, which increases our engagement.

We believe this reflects the tremendous value students see in having an online, on-demand learning service that needs them where they are, in the form that they want, at the time they need it most.

We believe that the more content and formats we add, the more we increase the quantity and quality of our services, the more valuable and popular Chegg becomes.

And as popular as Chegg Study is, Chegg Writing is also seeing great momentum.

75% of 12th graders lack the proficiency in writing, and we believe subjects like writing can be taught at scale using machine learning and AI to meet a student at their current level and improve their competency.

Not only are students turning to us to create citations, having created almost 130 million in Q1.

But with our newest writing subscriptions, they are now able to learn spelling, grammar, sentence structure and more.

We continue to see a major opportunity in writing because we're able to improve the outcomes for students both academically and ultimately, professionally by teaching them how to write more effectively.

One of our core competencies is the ability to not only build businesses but to acquire and grow businesses that students value.

When we see a service that solves big student problems, where we can grow the business, reduce the cost and improve the quality, we add it to our network.

We have done that several times, including with both Chegg Writing and Chegg Tutors, which have both leveraged our brand, our reach and our network to build experiences that better serve students and accelerate our growth.

That power is demonstrated as of this quarter, we continue to see our -- that over 50% of our Chegg Tutor customers attach from other Chegg Services.

Because we have a direct relationship with our students, we can see new trends early and capitalize on them.

In writing, we saw the need to build a product that teach students to write.

And in Tutors, there's a real trend towards chat-based tutoring.

As technology becomes more prolific in education, we continue to believe in the importance of on-demand, expert human help.

Chegg is in the best position to take advantage of that because of our interconnected platform, where we have the immediate insight into what students are studying, where they got stuck and connect them to the right tutor at the right time.

We're clearly early in the growth of our current products, so we will continue to make investments in them, but we also see huge opportunity for the future.

As we know, math is one of student's biggest pain points, as 64% of U.S. students are not prepared for college-level math.

We believe Chegg math, which will be launching later this year, will be a powerful part of the Chegg Services offering.

Another area we are making significant investments in is identifying and developing career paths, which will connect the student from learning to earning.

Our data team will help students identify the impact of the choices they make, including the school they go to, the classes they take, the major they graduate with and the pathway that leads to, including the companies they are likely to get a job with, the salaries they are likely to earn and how those paths can be altered by taking different classes or acquiring different skills.

We are uncovering incredible insights into career paths that we think will make a meaningful difference in the lives of students and employers.

Our industry is evolving.

We see that the companies that own their customer, own the data, own the channel of distribution, own the content and who can be responsive to their customers' needs are in the best position to succeed, particularly those that are doing it under a subscription-based model like Chegg.

Increasingly, it's not about offering one product or service to your customers, but offering them as a bundle, which we believe can create overwhelming value for our customers and help drive continued subscriber growth, expand the TAM and increase overall profitability.

It's been a great start to the year.

And with all the opportunities in front of us, our team is excited, energized and looking forward to the year ahead.

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

Andy?

Thanks, Dan, and good afternoon, everyone.

It has been a great start to 2018, with all key metrics and financials ahead of our expectations.

In addition, early in the second quarter, we were able to strengthen our balance sheet, raising 345 million via a convertible debt offering on very favorable terms, which puts us in a position of increased strength for future growth and extends our position as a leader in the direct-to-student market.

The strong results we achieved in Q1 and continued momentum into Q2 give us the confidence to raise our full year guidance again for 2018.

For the first year quarter total revenue was $76.9 million, a 23% increase year-over-year, with both Chegg Services and Required Materials exceeding our expectations.

Chegg Services revenue grew 37% year-over-year as we continue to see growth rates for our subscription services in line with prior years, and all indications suggest we gain share in Required Materials during the spring semester.

As a reminder, we continue to offer Required Materials because we solve a significant pain point for students.

It also increases our reach, provides data and builds our brand on campus.

This resulted in gross margins coming in higher than we expected, reaching 73.7%, as much of the incremental revenue from Chegg Services go straight to the gross margin line due to its relatively fixed cost structure.

Our strong performance in both revenue and gross margin drove adjusted EBITDA of $16.7 million, which was above our expectations, and more than a 75% increase from Q1 of 2017, demonstrating the power of the model and the leverage of our subscription-based offerings.

Adjusted EBITDA margin was 22% for the quarter, putting us well on our way to reach our goal of over 25% for the full year.

We ended the quarter with cash and investments of $200 million, not including the recent capital raise that closed in early April.

This, along with free cash flow generated from the business, puts us in a strong financial position, with approximately $0.5 billion dollars on the balance sheet, allowing us to invest in and grow the business.

Based on the results of the spring semester rush and continued momentum into Q2, we are increasing our guidance for the remainder of the year.

We expect total revenue for Q2 to be between $69 million and $71 million; with Chegg Services revenue between $58 million and $60 million; gross margin between $74 million and 75%; and adjusted EBITDA between $17 million and $18.5 million.

For the full year 2018, we now expect total revenue to be between $300 million and $305 million, with Chegg Services revenue between $243 million and $246 million; gross margin between $72 million and 74%; adjusted EBITDA between $77 million and $79 million; and finally, we expect CapEx to remain in the $30 million to $35 million range, with approximately 80% being used to fuel expansion of content and add new modalities such as video for our subscription services.

We believe these investments increase engagement on our platform and expand our TAM.

In closing, it's been a strong start for the year.

We delivered above the high end of our expectations, giving us confidence to increase guidance, all while continuing to invest in both the content that powers our existing services and building out new services like Careers and Math, which we expect will contribute to our growth in 2019 and beyond.

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

(Operator Instructions) Our first question comes from Brent Thill, Jefferies.

A question for Dan and one for Andy.

Dan, you've done a great job in the U.S., and there's a lot of questions around the international opportunity or the potential to move downstream.

Can you walk through how you're balancing both those opportunities as you move forward?

And with -- for Andy, if you could just talk maybe a little bit about the balance of taking a lot of these products and bundling?

I think you've alluded to that there are some steps that you're putting into place to get ready to do more advanced bundling going forward.

Can you just bring us up to speed in where you sit right now?

Yes.

This is Dan.

I'll take the international expansion and the high school expansion.

So on the high school expansion side, remember that we own EasyBib and we reached about 30 million users with that product alone.

So we probably have somewhere in the neighborhood of 70% reach into high school, but we don't have yet our products that we're selling to high school students.

But we are able to monetize increasingly high school students through the problematic part of our ad business, which offers debt services.

But we do believe there are series of services that will make sense for high school students over the next couple of years.

And writing is one of them, math is another, which we haven't launched yet, but we're very excited about it.

On the international expansion, what we said and what we're keeping to is that 3 of the largest English-speaking countries: Canada, U.K. and Australia, are on our targets, probably Canada going first.

It turns out, through all of our research, that there's a lot of pent-up demand from Canada for Chegg.

And the 5 major publishers in the U.S. are the same publishers.

And in the STEM-based categories, it's the same content.

So we see a very straightforward positive growth opportunity starting in Canada.

We will be testing it this year.

Really, it's just about building the sites and being able to take Canadian currency and pay Canadian tax.

And so we're working on all those things.

But as a reminder, unlike Netflix or Spotify, where they have every day, they can do something, we have seasons based on semesters.

And so we're -- this year ends somewhere in about middle of May, early June, depending on the school, so really won't be doing much outside the U.S. until starting at the end of this year, and then really focusing on it more in 2019.

But we believe there's a really great incremental opportunity for us.

Those 3 countries combined have about 50% of the reach of the U.S. market.

And so that's pretty substantive given the fact that in the U.S., I think our subscriber growth was in the neighborhood of 44%.

So we're seeing great organic growth domestically without any of that opportunities so we're very excited about it.

And on the bundle question, Andy?

Yes.

Brent, on the bundle question, one of the things that we're becoming to realize is what customers are looking for is simplicity, less complexity and overwhelming value, which we clearly delivered with our existing products like Chegg Study, Writing and Tutors.

And as we evolve down that path and as we start to add services, for example, like math, we believe there's a great opportunity here to have -- at some point in time, to have a bundle or an all-in-one type subscription.

Today, we've been doing a lot of, I'll call it, work behind the scenes, looking at what that could look like.

We're also putting systems in place that we can actually deliver bundles.

We would anticipate that some time later this year, we'd do some testing around that.

With the thought that maybe some time in 2019, we could probably roll out something more comprehensively.

But for the time being, certainly through 2018, it would be primarily testing.

Our next question comes from Corey Greendale, First Analysis.

This is Ken Wang on for Corey.

So first off, you mentioned in your prepared remarks that you're moving toward chat-based tutoring.

Just wondering, can you elaborate a little bit more?

And maybe specifically any implication for student to usage though?

Yes.

It's really fascinating to watch this space.

So the tutoring business is great and we see an increasing need for chat-based or human help from experts.

What we have learned is that if the student could choose their desired way to get tutors, or we'll call it coaching for now, it seems to be chat based.

So 70% of all of the relationships that we have with students now have shifted to chat based, and it makes sense.

On the weekends when they have more time, they absolutely use video and audio as well.

But during the week, when they're overwhelmed with work -- because you've got to remember, 70% of students in this country go to state schools, 40% of students are working 30 hours a week or more while they're going to school full-time.

And if you've not seen the latest information, 36% of students say they're hungry while they're at college.

And so what we're trying to do is make our products more available; more mobile by its nature, which chat based is; more coaching, which is helping students through the tough issues that they're having.

That's not to say every single one will do it that way.

Of course, we'll continue to offer a video-based tutoring and audio-based tutoring.

But the idea is to expand our capabilities within the chat-based category by having tutors being able to do multiple windows when that's appropriate.

It's not always going to be appropriate, but more and more services today from customer service to actually counseling, to crisis hotlines are all allowing experts to be able to work with more than one person at a time.

And that makes it much more efficient for everybody in the process.

You can actually pay the tutor more, you can actually keep the price to the student low.

And so our expected implication is growth because right now, they don't all have the time to sit down, log into a laptop and get tutoring the way that they clearly want it, which is much more chat based.

So we're -- it's obviously taken some engineering work.

All of this is assumed in our business and -- but we're really excited about where we think it can lead to in the future.

Got it.

That's really helpful.

And then any update on your thinking as it relates to the Chegg Study central pricing increases?

Yes.

This is Dan again, and then Andy can chime in, if he likes.

So you see the growth rate, which is 44%.

I think we're 47% last fourth quarter, which is -- these are 2 of our biggest quarters, obviously.

So we're not looking to, in any way, shape or form, slow down the rate of growth that we're seeing because the bigger the product, the bigger the moat, the more the questions that are asked, the more difficult it is for anybody to compete, the more valuable and relevant the product becomes.

And it's already got 85% plus gross margin so we're in really good shape and growing the business.

Now we do know because for the last 5 years, we have used Adobe software to be able to build testing -- A B testing, every single day of the quarter for the last 5 years.

So we know that we have pricing power.

And we know that pricing power is actually improving each year because the more content we add, the more value students find, the more they're willing to pay.

But that's just not a bullet we want to shoot right now because really, Andy answered it a little while ago that we're going to be focusing more on adding more things and creating a bundle, which will be at a different price point.

But each of the capabilities in it, we'll all have the same gross margin profile.

So we think that's a way to continue to increase ARPU and profit while not slowing the growth because I don't see any reason right now to pull that trigger because the growth is too strong.

Our next question comes from Brian Essex, Morgan Stanley.

Either Dan or Andy, I wonder if you could touch on -- I think in your prepared remarks you noted that 50% of Chegg Tutors attach from another service.

Could you comment generally on attach rates?

And some of the stackers at play when we're looking at ARPU, I know you've got a number of different things.

If you kind of look at monthly revenue services per subscriber, what affects that number but just so maybe we can help us reconcile it.

It seems a little bit disconnected with the better gross margins.

So I'm just looking for a little bit of clarity on that.

Yes.

I will try, and then I'll let our numbers guru, Andy, because it should be easier to answer once Chegg's Math is built.

But -- so remember, inside Chegg Services revenue, it's not just a subscription revenue.

There are other forms of revenue streams.

So if you actually look at just the subscriber revenue and just the revenue generated from subscribers, which we don't report out, ARPU is actually increasing on its own.

And that's a direct result of students coming on longer, using more than one service and staying on longer.

And so the attach rate is just one of the variables that raises ARPU.

But if you heard us earlier, I'm talking about the bundle.

We think that more and more of these things will be included into a single price and so that you won't be able -- we won't be able to say this is because it is, just simply because it is, because we already know inside Chegg Study that almost everybody who uses expert Q&A also uses the publisher Q&A.

And we see an incredible increase.

Every day we keep adding videos and more videos.

So for us, we look at it as what is it that we can provide, sort of like a Netflix, of overwhelming value so whichever format or modality or piece of content you want to use, when you want to use it, it will be available to you.

So from our standpoint -- now the specific answer to your question without giving a number, as we always see increased attach rates every quarter.

We used to report out on that, but it's not part of our -- the bundle is more of a future plan than an attach rate.

But we've always seen an increase of the number of students using more than one service.

That's both paid services and free services.

So the interconnected network that we're building is actually quite successful.

And this year, we're actually doing a lot more of integrating things into the writing product because the writing product is 30 million free users on it as well as the growth of the subscription business.

So it's a pretty exciting time, but clearly, when you look at the number of services that students use overall, if you look at the number of visits, the number of visitors, I think, we're over 10 million visitors a month right now.

You can take a look at we're going to have a substantial increase in paying customers year-over-year.

Our growth rates are already higher than even we anticipated.

And so students are using more than one service all the time.

Got it.

And then maybe just a follow-up on, I think, some previous commentary around going up and down market.

What are your thoughts around future road map to kind of unify the brand?

You have a lot of different brands, but as an example, my daughter is a happy EasyBib user but she has no idea who Chegg is or didn't before I told her.

So what are your thoughts of like kind of tying everything together and unifying the brand at some future point in time?

Yes.

We were thinking first of calling all the analysts and having them call and tell their children, but we're not sure that will scale.

But actually, it's a fantastic question and one that we wrestle with all the time, which is it's company that house a brand or brand to house.

But what you're going to see increasingly, these are not major onetime product releases.

You're going to see over the course of this year integration of further design, integration of a common toolbar.

So for example, right now, we don't even have the writing tabs on the homepage of Chegg and that has to do with SEO reasons, no other reasons.

We're going to, as we go more and more and more into the paid product into writing, it will be very clear that it's a Chegg Service.

And so we are working on that, but it's hard and we don't want to.

EasyBib is 15 years old and, is by far, the most definitive asset in the space.

So you don't want to lose the value of a brand.

It's like Facebook's not losing the value of Instagram and they're not losing the value of WhatsApp.

And so in our case, it's a balance.

But what we now have is 80% brand recognition of Chegg Services on college campuses.

And every year, we do measure that specific question that you ask.

And increasingly, the Chegg name is becoming more common even with high school students.

So you can't do it overnight.

We don't want to hurt the EasyBib brand, which is such a magnificent brand for 15 years.

But if you go on, and you will see it says EasyBib, a Chegg Service, all the services data, including BibMe, which is BibMe and Chegg Services, which apparently is a global meme now.

Not really sure why but people are into BibMe and Chegg Services.

So we are working on that.

The design is working on that.

We have a lot of great work going on.

And what we've learned to be patient, which is the numbers grow every year because we always get a new crop of users, and those crop of users are seeing the Chegg name more clearly on every piece of software that they use.

Our next question comes from Aaron Kessler, Raymond James.

Question.

First, can you talk about the uses of potential cash in case I just got it wrong, roughly $500 million.

With the recent rate, obviously, you don't need that for your kind of daily operations.

Should we think about potential M&A longer term?

And just if you can give us an update also on maybe the Chegg Study partnerships with Sallie Mae?

And kind of how you're you thinking about other partnerships potentially like that or maybe in consumer partnerships longer term for Chegg Study as well?

Yes, yes.

So Aaron, this is Andy.

Yes.

So when you look at the capital -- the recent capital raise early in the quarter, that was clearly opportunistic.

It hasn't changed how we view potential acquisitions.

What we've talked -- when we talk about potential acquisitions, it's got to really leverage the core of who Chegg is today, and that is our brand and our reach, and any acquisition we make would need to be able to accelerate its growth as a result of that.

So nothing has changed how we view acquisitions.

Having said that, we're not anxious to make acquisitions either, right?

It's -- as we look out over the next couple of years, we've got the assets to meet our financial goals, and so we're simply a patient acquirer.

I guess it's the way -- the best way to look at it.

So yes.

So nothing has really changed with how we look at acquisitions.

We just so happen to have more fuel in the rocket as they were if things meet those criteria.

Sorry, this is Dan.

On the Sallie Mae question.

So Sallie Mae has actually been great.

And I think it's a little premature to announce anything, but I would say that the relationship has gone really well from our side as well as on our expectations on their side I think better than their expectations.

It's -- and I think we'll have more to say on that in the coming weeks.

But it's been a great partnership because for those of you who don't know what it is, Sallie Mae, which is one of the biggest, if not the biggest in-school loan provider, not the refinancers like SoFi and other folks, but in-school loan providers, research their student base.

And I think they do several hundred thousand loans a year in school, and we're deciding what they could give students as an incentive for signing up with Sallie Mae versus the competitor of theirs.

And it turned out that Chegg Study was the preferred asset.

And so we worked out a 1-year partnership to learn because we don't want to associate ourselves with the brand until we're very comfortable that the students value it.

But Sallie Mae gives to students that request it 4 months free of Chegg Study or tutoring.

The majority of students take Chegg Study, and we haven't cycled through even the first year of the partnership.

So waiting to learn about the renewal rates, but the activity and usage of Sallie Mae customers versus the standard Chegg Study customers is reasonably similar, which is great.

So Sallie Mae gets the real benefit by offering their student something that they really want, and Chegg gets the benefit of Sallie Mae helping us acquire customers for the future.

So it's really exciting.

Our next question comes from Mike Grondahl, Northland Capital Markets.

Look, Chegg Study sure remained a beast with 44% sub growth.

That was nice to see.

It was nice to do.

Yes, I couldn't believe it.

Any update kind of on the timing and how you're thinking about the Chegg Writing subscription rollout?

Yes.

Well, the update remains very similar to what we've said.

We told everybody sort of in the middle of last year what our plan was.

And just to remind folks or there are new folks on the call, we say we'll be rolling it out in the second half of this year to the larger sites.

We've been rolling it out to the smaller sites.

We take our time with it.

We want to make sure that it can scale.

We want to make sure that we have the messaging right.

We want to make sure that everything works the bigger it gets.

But the initial feedback we get from students on the smaller sites is all positive, which is it has better conversion, it has better engagement than the current version of the paid service, which is exactly what we were looking for.

And to be honest with you, we're really only at the beginning of what we can build for.

This is really going to be -- this and Math are going to be 2 of our biggest AI and machine learning-driven products.

So we're going to be able to teach writing at scale not just help people with citations and bibliographies but really help them understand what they should have cited, what their grammar issues are, spelling issues are, sentence structures use are, tell them how many they have, show them why there are mistakes, show them what the right version would look like and then help them correct it if that's what they want to do.

So we're really bullish on the future of that product because the free audience is so large.

So -- but the timing has not changed.

They will be later on this year, we'll have it fully rolled out and I think it will be all assumed in whatever we put out for 2019 in November.

Got it.

And then, Dan, what 1 or 2 items are you really focused on for the rest of '18?

Well, it would be nice if there were only 1 or 2. But honestly the financial performance of the company, we put in the prepared remarks the 3 priorities that we have, which is to make sure we execute on what we say and this is, I think, our ninth straight quarter of being able to do that.

And then second is to continue to find ways to feed the beast, if you will, which is to expand the TAM.

So everything that we're doing in terms of our CapEx, in terms of investing, it isn't like machines.

It's all content.

The difference between us and others that are investing is content is ours is proprietary and has a long evergreen, which is fantastic but also helps generate immediate growth.

So the more that we can invest in the number of categories, verticals, subcategories, and then as somebody asked earlier, other countries, these things will all continue to help us continue to grow the rate that we've been growing.

So that's really the primary focus, is making sure that we organize ourselves around the key priorities we set for the year, that we finance them correctly, that we don't overextend ourselves, that we don't lose discipline.

As Andy said, we now have $0.5 billion dollars available for cash, but that isn't because we expect to use it all right away.

It's because the opportunity presented itself to strengthen our balance sheet and make it very difficult for anybody to compete with us at this point in the education space.

So I think we're going to continue to focus on what we've been focused on for the last 2 years, which is execution, execution, execution, expanding the TAM, creating more values for the students and then when it's appropriate, rolling the bundle out.

Our next question comes from Eric Martinuzzi, Lake Street Capital Markets.

I wanted to focus on the content investments.

You talked about a pretty substantial investment here over the course of the year, basically reiterating that $30 million, $35 million.

What is the mix percentage-wise between the original and the licensed content investment?

Yes.

So when you look at the guidance that we gave, $30 million to $35 million, once again, about 80% of that is content related.

Most of that 80% is actually content that we generate ourselves at our India facility, with our 35,000 contractors that we do.

A small component of that is actually purchase -- what I call purchase content like from the publishers like -- and when I say content, what we actually purchase are the questions, right?

So we're licensing the questions from the publishers that will -- and that allows us to index them in the search engines and get the SEO dues.

But that's the smaller part of the overall content budget.

And if you usually look at that, if you look at the amount of new questions that are being asked and you realize that 3 years ago, almost every -- all the questions we had were from publishers now 3 quarters -- almost 3 quarters are questions asking being asked by students on their own, the publisher portion has gone from being the primary way to being less than 1/3, and on a dollar amount, it's even less than that.

So most of these that we paid this year have to do with deals we signed a few years ago and spread out the payment just because it was in our best interest to do so because they didn't have the bill at the time.

And I'm looking at the CapEx for this quarter, what's behind the decline?

Talk about growing that, but what explains the anomaly of this $4.9 million CapEx investment in Q1 compared to the $6.1 million CapEx investment a year ago?

Yes.

So when you look at the CapEx this quarter, it's pretty much in line with what we expected, although we don't guide, as you know, the quarterly CapEx.

We did have some publisher payments in there last year.

But as we look at the overall CapEx budget for the year, like I said, what we saw in Q1 was what we expected.

And we still believe that it will be somewhere between $30 million and $35 million for the full year.

Our next question comes from Alex Paris, Barrington Research.

I had a question just kind of following up on the very first question you received and then another one in regard to the downstream opportunities.

As you see these students move up the funnel or progress in their education, what are you seeing as far as retention rates?

In other words, being able to pull a student from middle school to high school all the way to college along the Chegg Services?

Yes, it's -- that's obviously the goal.

It's difficult for us to give you that answer now because our real foray into high school was EasyBib, which we've now owned for a little less than 2 years.

And so we have to track those students.

We also may or may not realize that those students didn't register at the time, they could come into free so it was nearly impossible to go back historically and measure.

We're now creating increased incentives for them to register, which is why we're in an all-time high for the registered students, not just paying customers that we have for the site.

But what we see, based on the question you heard earlier, once they're using EasyBib, we have the ability to communicate with them on the site and increasingly, as they register through e-mail and text and other ways that they ask us to communicate.

And so you -- you can see it -- and believe it or not, the continued success and the market share pickup of our Required Materials business because the first thing they do when they go to college is they get textbooks.

So that's before they get Chegg Study.

So it's difficult to know Chegg Study until either later on in the first quarter or in the second quarter at the earliest.

But you can see that we have picked up share in textbooks and that has a lot to do with the fact we're doing better with incoming freshmen.

And so we believe there's a connection to that.

But as you know, we're going the other way as well, which is, to us, really significant, which is our investment in career.

So we want to be able to help you not only pick the right school, pick the right classes, but building our pathways that let you decide if I go to this school and I take this class or I take this major, I've got new skills, and my pathway is likely to end up at one of these 6 companies paying me this much money.

Or if I change my path, this is the potential future outcome.

And then getting them in their first job.

So for us, we're actually going in both directions in terms of extending the amount of time that we can spend with them.

Helpful.

And then I have one last question.

It's been incredible how you been able to build the economic mode of the business, strengthening the balance sheet as you mentioned, the 80% brand recognition.

Can you provide some additional color on how you measure brand recognition and how to, perhaps, get even stronger and get beyond 80%?

What areas would need to be focused on moving forward?

Yes.

All great question.

So we obviously use independent research because obviously, we can't just survey our own customer list.

So there's multiple forms of research that are available third party and that we use to help us understand that.

And we're constantly doing that, as well as using our internal surveys.

If you recall, we have about 17,000 students or so that we call Cheggheads that we regularly communicate with them and we're able to measure things over time with our existing customer base as well as the external customer base.

The need to go from 80 to 100, mostly that is incoming freshmen at this point.

So the bigger we get, the more our brand recognition is, the fact that 85% of our customers are organic one way or the other and that still, in textbooks the overwhelming majority of students, the overwhelming majority of students that go textbooks for the first time, they come in as a recommendation from somebody else.

So we feel like that that's just the natural evolution.

We don't have to spend more money to do that.

Our next question comes from Alex Fuhrman, Craig-Hallum.

I had a few things I wanted to ask.

One is as you look at the Tutors business, it looks like over the last couple of months, there's been a lot of turn, a month to the actual Tutors themselves.

And I'm curious if that's something that you plan to given some of the changes that were made with written lessons and giving better access to the top tutors, if those are natural kind of consequences of those decisions?

Do you view that as a concern?

Or was that part of the plan?

And then kind of going forward, as you make these changes, do you envision a greater share of the tutoring session's being done by smaller share of the tutors, just wondering how we should think about that network going forward?

Really fair questions.

I would say the second one is too early for me to even give you a decent answer.

I think the trend is going to be depending on how many students a tutor can handle at one time, depending on the subjects that they do.

So that's all common terms information for us and not something that we could tell you now.

The flip side is yes.

I think we stand almost last summer, that we were undergoing a very big change in our tutoring business, which was we were going to reduce the number of written lessons because we felt like tutors were charging the students too much for it.

So we actually gave up some temporary revenue for that because we want to be the pristine site that puts the student first.

And so that was very important to us.

And as a result of that, believe it or not, I mean, we always knew we had demand.

That was never going to be an issue.

But we really didn't know when we started building out the business, how big of the tutoring business can be.

But at one point, we had reached as many as 60,000 tutors that wanted to be part of the network.

So right.

Exactly.

So from us, it was a quality issue.

We decided to -- and I think we said some of this previous calls we decided to cut many of them out, focus on what we believe were only the tutors who were getting A ratings from students and the ones that were being most responsive and available at the times in the subjects that we needed the most.

And so we cut that down pretty dramatically.

So the fact that you didn't hear more about is a good thing.

And then what now each tutor needs to be once again subject tested on whatever they claim to be an expert in.

And we're also having them video themselves so that we can actually see how they do in terms of presenting the information.

You can be a genius and not have any ability to communicate it on the video.

We see a lot of that in Silicon Valley.

And so on those, we would direct those to just chat-based as opposed to video-based.

So there's a whole lot of work that we will continue to be doing at all of our services to constantly improve the quality, but that's why you saw that.

And so that's all good and planned.

Okay.

That's very helpful.

And then just a housekeeping matter.

I think a couple of months ago in your fourth quarter report you had guided, as part of your guidance of EBITDA to free cash flow conversion rate in the kind of 30% or 60% range over the next 3 years, I don't recall hearing that in the prepared remarks this time.

Is that still how you're thinking about free cash flow over the next few years?

Yes.

Yes, exactly.

And actually -- and so for everybody on the phone, it's 40% to 60%, and that has not changed yet.

Our next question comes from Doug Anmuth, JPMorgan.

This is Ashwin on behalf of Doug.

One quick clarification.

Could you quantify the impact of 606 accounting change in the quarter on Required Materials revenue?

And then my question is on really about your -- or I was just wondering if you could comment about your thinking on seasonality and for the rest of the year on services subscribers, particularly as you launch these new services plan like the Math and Writing in the second half of this year?

Yes.

So a couple of things and I'll hit the first one.

First thing on 606.

We haven't articulated specifically on 606, the impact across our businesses because it didn't just impact actually Required Materials, it also impacted a small impact on other of our revenue streams.

But needless to say, it was fairly de minimis, and you can even take a look at the impact on our retained earnings which we had to do a onetime retained earnings impact, and it was very, very minor.

With respect to seasonality on Chegg Services, it's not really going to be dramatically different than last year.

And in fact, when you think about Math and even on our writing tool subscription, we're not anticipating significant changes as a result of those in this year.

Math, for example, we said is going to be is going to be introduced some time in the second half of the year.

It will -- it's most like to going to be part of the bundle and not really anticipating any material either revenue or subs probably until 2019 or 2020.

So when you look at seasonality, think about seasonality with respect to what it looks like over the last 12 months last year, that is.

But a great way to think about everything we do is the school year starts 3rd week of August and goes through somewhere around June -- maybe the middle of June for the longest length.

So our big quarters connect to those.

So August really through now.

Q3 is going to be our smallest because there's really nothing going on in the summer months as it relates to education except summer school.

So we continue to do well but nowhere near their normal size.

So we have the best opportunities.

In this quarter's coming up, which is why we feel very comfortable about raising our guidance for this year because really, the only raise we did was in second quarter plus what we achieved in the first quarter.

So seasonality for us is Q4 has both a midterm and a final, and Q1 has a midterm but doesn't have a final.

So that's the way we think about the year.

Our next question comes from Brent Thill, Jefferies.

Dan, just a quick follow-up.

My kids are in grade school and they were, unfortunately, their service Amazon TenMarks was shut down last week.

They're going to cancel that service in the middle of 2019.

I'm just curious what your observations and thoughts were on Amazon getting out of the business?

Yes, no, we saw that too.

And I think the best way to think about what we do versus what others have tried is most others try to sell through the institution themselves.

And that requires a sales force that does not have the same sort of economics.

They're SaaS models if you're successful at lower grades, you can sell to either entire schools or school districts.

We do most of our work in college and high school and soon to be sort of early career.

And those go directly to the student themselves.

So it's a very, very, very different model.

And what you're seeing whether it was Fox getting out of its business or the publishers sort of selling pieces of their assets, it's -- those are much more difficult businesses now that they're not protected.

They've been protected by the government, which is they were always able to sell learning material in, raise their prices on an annual basis, and then Chegg invented the rental model.

And very fortunately, all the current management of the publishers understand that, they work with us, we're great, positive partners that's why we're in consignment in all those things.

But we have just found that to grow at the rate that we think we're capable of growing and to have the gross margins that we want to have and affect more students that we're better off going directly to the student and solving their biggest pain points because the institutions can't.

So you've seen transactions of whether Edmodo is bought.

You've seen a number of these things being shut down.

You see a lot of these assets trading and becoming things where they're levered up with debt and they just kick out cash flow.

That's not who we are.

We're going to be a high-growth, high-margin company, go directly to the students.

Now why do people get out of it?

They got out of it for the reasons I said, plus why did Amazon get out of it?

Really, almost everything Amazon does and they clearly do it well, is everything is designed to acquire a customer and they really weren't acquiring customers that way, right, except the school, which really doesn't help them.

So it's no surprise.

What's been fascinating to me is all the players the people assume would be very big in education have either abandoned it or are partnering with us, and it's a really great opportunity for Chegg and our students and our shareholders.

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

And I would like to turn the call back to Dan Rosensweig for closing remarks.

So a couple of things.

First, I want to congratulate Andy, that his son is getting married tomorrow, which is why we move the call up to a Thursday instead of a Monday.

So for those of you wanted to be on the Amazon call and Starbucks call, we apologize, but we're grateful that you joined us.

Look, we're really excited.

We worked very hard for 8 years to put ourselves in the position to serve millions of students at scale very profitably, invest in our business and grow it.

We really do believe that our mission matters.

We're seeing decreased turnover here at the company.

I think we're at an all-time low, enthusiasm has been an all-time high, student feedback has been phenomenal.

And we do fundamentally believe that in the Internet space, the companies that are distancing themselves from their competitors are the ones that own their own customer, which we do, own the data and can use it, which we do.

Depend on no other channel of distribution, we have our own and own proprietary content or software, which we have both, that we can immediately change to the benefit of the student.

And we've built a giant moat with content and brand and experience.

And we expect to continue to make smart investments.

Our balance sheet is as strong as it's ever been.

And so we're really excited about the year.

And we thank everybody who's been on this journey with us for a long time.

We look forward to continuing to perform well, and we'll talk to you in the next quarter.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.