Chegg Inc (CHGG) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Chegg's Third Quarter 2018 Earnings Conference Call.

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

It is now my pleasure to introduce your host, Tracey Ford.

Thank you.

Tracey, you may begin.

Good afternoon.

Thank you for joining Chegg's Third Quarter 2018 Conference Call.

On today's call are Dan Rosensweig, Co-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 quarterly report on Form 10-Q filed with the Securities and Exchange Commission on July 30, 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 and 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.

As we close out another back-to-school season, we are excited about the continued growth of our business.

Our team remains focused on our goals: to lower the cost of education and accelerate the path from learning to earning.

As a result, Chegg Services revenue grew 37% in Q3 on 45% subscriber growth year-over-year.

The strength of our brands is as powerful as ever with over 80% brand recognition amongst college students.

This has led to great financial results, which Andy will walk you through shortly.

As we approach 2019, we are even more excited about our future.

It is clear to us that the more we invest in content and services that address students' biggest pain points, the larger the opportunity will be for Chegg.

The education industry is $1 trillion market, of which over 15% of the U.S. population participates on an annual basis, representing over 7% of the U.S. GDP.

This is a giant market that is going through dramatic change.

And we believe we are one of the driving forces behind that change as we are pushing the industry to realign with its most important constituent, the student.

Modern students lead busy and demanding lives.

3 out of 4 college students are working while they're in school.

And over 25% of college students are parents themselves, which is not surprising given that 40% of today's students are over the age of 25.

They are also being asked to take on more debt than any generation before them to pursue their education without a clear path showing their investment will yield the ROI that they seek and they need.

That is why we remain focused on putting the needs of the students first.

And in doing so, we are seeing strong demand for the products and services we offer and the way we offer them: online, on-demand, adaptive, affordable, personalized and backed by human help.

We continue to expand the number of offerings, the depth, breadth and quality of our services all to improve student outcomes.

We believe this expands the TAM, increases engagement and positively impacts the business model.

This is evident in the results that we have seen thus far this year.

And I want to walk you through the highlights as well as some of the updates on our most recent initiatives.

Chegg Study remains the center of our flywheel.

We continue to invest in expanding the content modalities to serve students, and as a result, we now have over 34,000 ISBNs and almost 25 million questions answered and archived.

That represents 41% growth year-over-year in our proprietary catalog of expert answers and solutions.

This drove over 110 million content views in Q3 alone, up 51% year-over-year.

We will continue to invest in Chegg Study because when we do, we have seen increased engagement, higher retention, lower cost-to-customer acquisition, which has yielded increased subscribers and higher margins.

While we are investing in our core, we are also investing in our future.

We are seeing strong initial demand for our new subscription services, Chegg Math, and an enhanced version of Chegg Writing.

With over 40% of college students requiring remediation in Math, English or both, these are key subjects where we are starting to leverage AI and machine learning to expand our product offerings and provide greater support to a broader range of students.

Last quarter, we launched our Math product on mobile to provide students increased access to help when and where they want it.

Chegg Writing now addresses more pain points around the subject of writing, including plagiarism, grammar, sentence structure and more.

With our recent acquisition of WriteLab, we are now expanding the types of writing support we offer in a more personalized and adaptive way.

In Q3, students uploaded over 1 million papers to our new writing service, and they continue to rely on our citation and bibliography services, creating over 64 million citations in this quarter alone.

While technology and AI allow us to accelerate and improve the learning experience for many students, they have also made it clear that they benefit from human help.

That is evident as over 60% of our Tutor customers come from other services across the Chegg platform.

They are increasingly turning to chat and other text-based solutions to get them -- to get help at the time and in the format that works best for their demanding schedules.

We expect to introduce new chat-based capabilities on the platform for both students and tutors in the second half of 2019.

As we look to the future of our business, our mission remains the same: to save students' time, save them money and help them get smarter.

We believe the more content, products and services we offer students, the more we can increase their opportunities to learn new skills and master their classes.

This is why we recently began testing the Chegg Study Pack, a bundle that offers overwhelming value to students and includes Chegg Study, Chegg Writing and Chegg Math, all for one affordable price.

In addition to saving money and improving their grades, research shows that 85% of students say they are in college to get a better job.

So we feel that Chegg CareerMatch will be an important part of their future.

We are excited about our first on-campus launch of Chegg CareerMatch in Q3 as our team hosted events at the University of Central Florida.

We interacted with thousands of students on campus, and we're delighted by the feedback we received.

Our team is hard at work incorporating the insights we gather into our product experience, and we are enthusiastic about the impact Chegg CareerMatch can have on students' abilities to go from learning to earning.

We are very proud that we have built a mission-driven company.

And we think the industry is being influenced by the work our team is doing and is moving increasingly in a direction that we believe will benefit students.

We couldn't have gotten to this point without an ambitious, creative and amazing team, which is why we were thrilled to place in the top 50 of Fortune's Top 100 Best Medium Sized Places to Work list in our first year of applying for this distinction.

We want to take a moment to thank our employees, and we are deeply grateful for their commitment and dedication to increasing access to education by lowering the cost, improving the outcome and always putting the student first.

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

Andy?

Thanks, Dan, and good afternoon, everyone.

Chegg had a great third quarter with our business metrics and financials ahead of our expectations.

These strong results give us the confidence to raise our guidance again for 2018.

We are also providing our initial outlook for 2019, which represents continued growth and leverage in the model.

We are extremely proud of what the Chegg team has accomplished as students are increasingly relying on Chegg's integrated platform of connected educational services to improve their outcomes.

For the third quarter, total revenue was $74.2 million, with both Required Materials and Chegg Services revenues exceeding our expectations.

This strong top line performance drove gross margins to 73.2%, a significant increase over the 64.3% we achieved in Q3 of 2017.

This resulted in adjusted EBITDA of $12.5 million, more than double of what that -- more than double of what we achieved in Q3 of 2017 and well above our expectations, demonstrating the leverage of our model.

We ended the quarter with approximately $475 million of cash and investments on the balance sheet.

We believe the strength of our balance sheet and our operating model, which generates cash, is one of the strongest in the education industry.

Based on the great results of the fall semester rush, we are increasing our guidance for 2018 even after incorporating the anticipated costs associated with responding to the data incident that we announced in late September.

For Q4, we now expect total revenue between $90 million and $92.5 million, with Chegg Services revenue between $78 million and $79.5 million; gross margin between 75% and 76%; and adjusted EBITDA between $33 million and $34 million, which represents approximately 60% growth year-over-year.

As a result, we are now increasing our full year 2018 guidance.

We now expect: total revenue between $315 million and $318 million, with Chegg Services revenue between $250 million and $252 million; gross margin between 74% and 75%; and adjusted EBITDA between $81.5 million and $82.5 million or approximately 26% EBITDA margin, growing more than 75% year-over-year.

And finally, we expect CapEx to be between $32 million and $35 million, 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, expand our TAM and create more value for students.

Turning to 2019.

Our initial expectation for total revenue is approximately $388 million, with Chegg Services revenue growing approximately 30% to $326 million.

We expect Chegg Services revenue and subscriber growth rates to be more closely aligned in 2019 as the subscription portion of our revenue becomes a larger contributor.

We expect gross margin to be approximately 75% and adjusted EBITDA margin to expand 3 points to 29% or $112 million.

For those of you modeling 2019 by quarter, we expect Chegg Services and Required Materials revenue to be seasonally similar to 2018.

However, our quarterly adjusted EBITDA cadence will shift slightly due to expenses associated with the acquisitions of WriteLab and StudyBlue.

Details of which have been provided in the earnings press release and the investor deck on the IR website.

In closing, we had another strong quarter in Q3.

We delivered above the high end of our expectations, giving us confidence to increase full year guidance and provide initial strong -- a strong initial outlook for 2019, all while continuing to invest in both the content that powers our existing services and building out our new services to improve student outcomes.

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

(Operator Instructions) Our first question comes from Jeff Silber with BMO Capital Markets.

I hate to bring this up right at the beginning since you guys had a good quarter.

But can you give us a little bit more color on what happened with the security breach?

What you found so far?

And what your plan is to make sure this doesn't happen again?

Yes.

It's okay.

I mean, it happened.

We wish that it hadn't.

And we're grateful to our team on how quickly they rallied.

We don't really have much to add to the question of what happened.

That's all in the 8-K that we filed.

But any results of that are reflected in our guidance, in our forward-looking guidance, which, I think, you can see, meaning there really wasn't anything significant one way or the other as it relates to our business.

So we don't really have much to add, with the exemption of we acted very quickly.

Once we found out what the situation was, we reacted very quickly.

We made sure that we communicated as aggressively as we could, as quickly as legally as possible.

We notified everybody on our list, whether they were current customers or not, just out of our courtesy.

And our students responded incredibly quickly and incredibly well.

And it's a shame that we live in a world where they're used to this, but there's a lot this going on in the Internet.

And so we don't have much to add other than what we already filed in the 8-K for all the reasons that you can imagine.

But I'm proud on the way our team responded.

And you could see the results are, what they are, which have been really great results.

And you don't think it's had any impact on subscriber growth since then?

I -- again, I -- when I look at what we -- where we finished and when I look at what our guidance is, I would suggest that we've not seen anything meaningful one way or the other.

To be honest with you, we didn't expect that, that would be the case because, in this particular case, what they got access to was no credit cards, no financial information, none of that stuff.

So there was no change in anybody having to change their credit card.

There was no change in any of their behavior that they needed to do, with the exception of changing their password.

And that is something that we regularly do, anyway, for security reasons.

So over the course of the period, between now and then, it's been business as usual over the spectrum of time.

On given day, there were different things that had to happen.

We mailed out.

We got responses, those kind of things.

But overall, we are very comfortable with our guidance.

Okay.

Fair enough.

Can we shift back to the business?

Can you help a little bit about what you found in terms of the pilots with Study Pack so far?

Yes.

Very, very, very early.

Let me walk everybody through the process because I know everybody is excited about it as are we.

Step 1 was to make sure that we could get the necessary assets.

And that was part of when we acquired Writing and we acquired Math.

Step 2 is to make sure that we actually launched the Math product in the United States: first, on the desktop; and in our prepared remarks, we mentioned that it was now on mobile, and we're super excited about that.

Part of the steps along the way were to get NetSuite in place and working.

I'm satisfied that NetSuite overall because it was for the whole company, but it allowed us to be able to do things like bundles.

So that is in place.

And we have been testing pricing and messaging.

And we are where we thought we'd be in the process.

And I would just want to remind everybody that we really don't anticipate any impact to anything, even in the course of '19 because remember, the way our business works versus other people's businesses is we have semesters.

So our business period is basically mid-August to mid-June.

Then we have a lot of building periods.

We work very hard in the summer.

Our teams work their butt off to clean up anything, add anything, develop the new features, get all the bugs out of things.

So we have semesters right now going on where we're able to test certain things.

And then any significant changes that we want to make won't happen until after June and before August.

So we have deliberately said we're doing this.

We deliberately said that you won't see any impact on our numbers, so our numbers for next year don't reflect these.

So that's all good news.

Our next question comes from Doug Anmuth with JPMorgan.

First, can you just talk a little bit about gross margins?

I know you're looking for 74% to 75% this year and I think 75% in '19.

I guess, just trying to understand if there's a way to those gross margins can be higher.

I know you did point to the EBITDA, the 300 basis points of leverage there for next year.

And how tied is that to the Study Pack, the bundled products rolling out later next year?

And then, I guess, just secondly, can you just talk about Required Materials a little bit in terms of the decline that we saw?

And then how we should think about that going forward?

I know you pointed out the $50 million to $60 million.

Yes.

So Doug, when you look at our gross margins, they have expanded, as you're aware, as we've continued to see more and more of our business go to the subscription side of the business, which is highly leveraged.

And that's contemplated in our model going into 2019.

As far as the Study Pack goes, as Dan has mentioned earlier, the Study Pack isn't contemplated in 2019.

We believe that, as Dan mentioned, we're by semesters.

We -- the earliest they will really start to roll out is late next year.

But it's more of a 2020 event than it is a 2019.

With respect to Required Materials, it's -- Required Materials is doing exactly what we thought it would you, right?

I mean, we said for a period of time that it would be in that kind of $55 million to $60 million range.

We're clearly exceeding that at this point in time.

And I think part of it is that we continue to see that business do slightly better than we anticipated.

I mentioned that in the prepared remarks for this past fall semester.

So there's nothing particularly unusual in the Required Materials business.

Yes.

And there -- I'm a little lost there.

What you mean by going down which is we're picking up market share, and we're seeing growth.

We didn't expect to see growth.

But that part of the business, like the whole business, has been overperforming.

I think a lot of that has to do with just the brand recognition we have, the execution, the benefits that we offer and most of the other people failing in our space.

So we're actually very satisfied with the execution of our Required Materials team.

And that business is actually getting even stronger for us because of the increase in consignment and the continued gradual shift to eTextbooks.

All of those things are to the advantage of Chegg and our students and our shareholders.

So that business has actually been better for us than we anticipated.

Our next question comes from Brent Thill with Jefferies.

Just as it relates to the guide for next year, I was just curious if you could walk through what you're baking into that guidance and any of these new initiatives playing a role there.

Yes.

So the guidance -- well, the initial guidance for next year, and as you can tell, it's fairly early.

We're only in October right now.

So there's -- but when we look at next year, we anticipate continued strength in our core products, right?

So for instance, at Chegg, the core products are subscription services, which is Chegg Study, Writing and then the emergence of Math, as we introduced that in this fall.

It doesn't include things -- and once again, I'll just reiterate, it doesn't include the Study Pack.

We believe the Study Pack is a bigger -- is the biggest distributor as we get into '20.

It's more important for us during this period of time.

In 2019, particularly early 2019, is to continue to test the right messaging and pricing and so forth.

But it doesn't anticipate anything new.

So for example, it doesn't anticipate anything from CareerMatch.

We think that is going to be more of a 2020, '21 event.

So it's the core of our business, which is -- which I -- like I said is Study, Writing and Math.

But it does include the cost side of the investing in those things.

Oh, good point, Dan.

Thank you.

So we don't -- we're not expecting -- we don't put risky revenue in our guidance.

And so we've been very careful about articulating that they're investments we're making now for the future, which, by the way, we're incredibly excited about.

I mean, these investments are things we're making, and we're not guessing, which is we've done a lot of work to understand what students need and what they want.

And one of the great benefits to owning the customer, owning the data, owning the channel and owning proprietary content is that we can and should be able to create overwhelming value for students at a lower cost than anybody else can.

And I think you're seeing that show up in our model.

So the fact that we can increase gross margins, increase our EBITDA by 300 basis points and do all those things while investing in our future, I think, really shows you just how strong the core of the business has become.

And real quick, Dan, just as a follow-up.

Obviously, the market has become a little more defensive.

And if growth starts to roll over a little bit, can you just talk through the sensitivity to your business?

And it feels like you're more insulated than most.

But just talk through, to Dan, also, just about you potentially going more on offense with being blessed with $475 million of cash, would you be willing to move a little quicker on even some larger deals as we saw this downdraft continue?

Yes, terrific question.

Interesting times we live in.

So the good news for the Chegg business, our model is Brexit, tariffs, all those things, tax cuts, not tax cuts, who wins the election, who doesn't win the election.

None of those are variables in our business.

They are variables in lots of people's businesses.

We don't have currency exchanges or any of those things.

It's very clean, very straightforward and, thanks to the work that the team and Andy have done, a very much more simple business to run, very important business and we think has a huge upside opportunity.

So from our standpoint, even we had a breach, we have these markets turmoils, those are all things that we're very fortunate for working for a lot of years that we -- they don't affect our business negatively.

So that's a good news.

The question you asked, which was, does this encourage us to do things faster?

We very deliberately raise the capital the second time because anybody who has been alive long enough, and I'm 57, knows that rainy days come.

You don't know when they're going to come, you don't know what's going to cause them, but you want to be armed with as much capital as you can at the lowest cost of that capital.

And our capital is extraordinarily low cost, thanks to Tracey and Andy and the work that they had done to go raise it at almost 0 interest rate.

So we do have that capital.

We are always looking for assets that we believe students would benefit from, that solve very large pain points, that leverage our brand, our reach, our data and our business model, so that we could grow them faster and at a lower cost and create more value for students, not only in the U.S. but over time, eventually, different places in the world.

I don't know that we'll move faster or I don't know that we'll buy more expensive things as a result of this.

They're all going to have to have the necessary ROI for us to want to be able to do it.

They have to create value for students.

They have to be assets that can leverage what we have, add to what we have, be accretive to what we have over time and fill very big spaces.

And so we are constantly looking at that marketplace.

But to your point, what ends up happening in tumultuous times like this is weaker companies in terms of either their balance sheet or the amount of runway that they have, they do become available earlier than they otherwise might.

And so we are prepared if those situations do arise.

But they're going to have to go through the same criteria that we've gone through, which got us things like Chegg Study and got us things like Chegg Writing and Math.

So we're enthusiastic about having a strong balance sheet and having a great business that kicks off free cash flow and is growing at this rate because it's very clear to the industry that the direct-to-student model can work, and that we're the leader in that space.

Our next question comes from Corey Greendale with First Analysis.

This is Ken Wang, on for Corey.

So just wondering, anything you can offer, maybe just qualitatively, on retention?

I think you mentioned that you've seen some improvement.

But can you speak to that any more, add any more detail on that?

Yes.

So when most people think of retention, they're obviously thinking about our subscription services as they should.

And the premise that we have believed in and that we're executing on is the more content we have, that expands the top of the funnel but also goes deeper into the funnel and horizontally within the funnel.

Meaning the adding of videos isn't different content or deeper content; it's supporting content for people who learn that way.

All 3 of those things not only increase the TAM, but they continue to allow us to have this great growth.

And it does positively affect retention.

And so what we continue to see is that students are starting earlier and staying on longer.

We also know, through our testing of prices, some of you from time to time might see a $19.95 price point for Chegg Study because you found yourself in one of our test cells.

We test comps and pricing over the last 5 years.

We also know that we have pricing strength.

And what has been most notable to us about that pricing strength is when we look at the -- our ability to have -- raise prices 4 years ago, 3 years ago, 2 years ago and this year, for example, the gap gets much closer.

And that is because students are seeing the overwhelming value because we continue to add content.

If you just focus on the growth of the utilization of the services, I think that suggests just how much value we're creating for them.

It's a very interesting thing.

We're more expensive than Spotify.

We're more expensive than Netflix.

We're more expensive than any one of their model -- any one of the consumer products that they use, but our retention on a month-to-month basis is extraordinary.

And those are the reasons for it.

Again, I'd just go back to the fact that in the modern-day Internet world, if you have a platform that where you own the customer, you own the data, you own the channel and you own the content, these are the kinds of things that you should be able to do more efficiently and effectively than other companies, which helps us build a giant moat.

Just the Q&A alone is a great example of that.

So hopefully, Ken, that answers it for you.

Yes, that's helpful.

And then just also going off your prepared remarks.

You mentioned continuing improvements in customer acquisition cost.

Anything you can offer just on whether you see the potential for meaningful further efficiencies or whether you might be reaching some sort of plateau in the future?

It's a very fair question.

And what I would say is we think we can find -- we think we can continue to improve upon that efficiency based on our brand, based on the redesigns we're doing to the commerce flows, to redesigns we're doing parts of the channel, to new top-of-the-funnel things like StudyBlue, like Writing, like Math.

There's a whole lot of things that will bring us more organic traffic.

So that alone will be helpful.

And it's not that the percentages will get substantially bigger in any given quarter.

But at the scale we're at now, I think people forget that we're on target to do over 3 million paying subscribers this year.

That's a giant number compared to where we were just a few years ago and compared to some of these media companies that are announcing that they have 3 million subs on their new all-access businesses.

So I think at that scale, these CPAs add real meaningful impact on the margins and EBITDA margins.

Our next question comes from Chris Howe with Barrington Research.

This is Chris Howe, sitting in for Alex Paris.

Just had a few questions remaining for you.

The first one is in follow-up on Ken's first question, just about the utilization rate length of stay and how often students are returning to use, specifically the Tutor service.

You mentioned that you're adapting and adding the text-based tutoring in the near term.

Just wanted to see your inputs on what you're seeing there as far as student-specific trends.

Yes.

It's sort of -- it's, again, terrific question.

From our standpoint, we spent a lot of time early on in Tutor, really building the site to take offline tutoring and put it online in the same format, which meant we really did build the site and the service designed to drive people into video-based tutoring.

And so we eliminated a lot of the capabilities in written and in chat-based.

So over the course of this year, as we roll them back out in their older format, we see great results.

And that is another reason that we're certain that this is a better model to go through than the other one.

As I've said on earlier calls from time to time, the weekends are interesting because the weekends, we get a lot more video calls because they have a lot more time and they have a lot more privacy.

During the week, they have less time and less privacy.

But during chat, they can do it from their phones, anywhere they are, on the bus or at work or wherever they may be, in the library.

So the -- it takes time to rebuild the entire platform to be able to do at scale.

But whenever we open up capabilities that allow them to utilize tutoring that way, the business goes up.

That's helpful.

And then one last one for me.

Just as it relates to Writing, Math as well as EasyBib, can you perhaps share some additional color on the different things that you're seeing within middle school and high school as far as penetrating those markets and what you're seeing out of those students and how that eventually funnels into that attractive incoming freshmen group?

Yes.

It's an area that we obviously look at.

Just to clarify for people, EasyBib is 1 of the 4 brands that we have at Writing.

It's the biggest.

And when we talk about expanded writing or enhanced writing, that's the subscription service.

That is at the bottom of each of those things.

So it's a freemium funnel that goes into it.

So we don't generally see the paid stuff down in the lower grades because that would require a parent rather than the student themselves.

So you're absolutely right, not only Writing and Math but also StudyBlue, they're all designed to get us audiences -- ingrained in audiences we don't really have -- we didn't have services for yet.

So that includes going deeper into high school, but it also includes going more global because all of those capabilities are ones that people need in different countries around the world.

So it's a long-term play.

Fortunately, these are great assets.

And fortunately, Writing was a great asset before we got it, but we've been able to expand it, accelerate it and grow it faster and make it more profitable under the 2 teams coming together in Chegg.

So we feel like those are kind of the opportunities that are going to be available to us, which is we get incredible assets, we figure out how to make them better, we invest in them more, but we grow them faster, we make them more profitable, and it picks up new audiences for us.

So I don't really have a number for middle school.

What I can tell you is if you look at the collective writing number, it's about 30 million visitors use -- users use Writing over the course of a year.

And so when you take a look at the U.S. college market and the U.S. high school market, that's about 36 million.

So we feel like we've got extraordinary penetration, but we want more tentacles into the younger people to bring them into.

And we see that, by the way.

A lot of the benefits of those things can be seen in the reduction of cac, which we talked about earlier, because it's cheaper for us to acquire them when they're freshmen now because we don't really have to pay for them because we already have them in our network.

And we see it on the fact that textbooks have accelerated.

And we see it on the fact that Chegg Study continues to grow.

And one of the challenges we have with Chegg Study was how do you get a first semester or second semester freshman to know it exists?

So all of these assets contribute to the success we're having.

Next question comes from Eric Martinuzzi with Lake Street Capital Markets.

A 2-part question from me.

It's regarding the CapEx.

For 2018, we bumped it up at a little bit here.

The old range was $30 million to $35 million.

And now we're talking $32 million to $35 million.

Historically, when you've done that, it's been around kind of ask and answer, building up that database.

Just curious to know what is that, in fact, the case here for 2018?

And then the second part of the question has to do with expectations for CapEx in 2019, if you have that.

Yes.

So Eric, when you look at CapEx for this year, it's a combination of 2 things, right?

One is the content that you talked about.

And what we -- over the last 12, 15 months we've been expanding that content.

For example, about this time last year or maybe a little bit earlier than this time last year, we started to do videos, right?

We talked about and we'll have upwards of 14,000 videos by the end of this year.

So that was an added new -- it's the new modality like Dan have talked about.

So that was part of the additive there.

And the second part is that we don't get into a lot of details on this, but it's -- we've been adding to our facilities.

We've been growing as a company.

We've got almost up -- we've got over 1,000 employees now, and we're -- and so we're adding to our facilities across the globe and including in Santa Clara.

So that -- those are the larger components for this year.

As we look into next year, it's a little early.

We gave you the operating model, obviously, for 2019, but we're continuing through our planning process.

And we'll be as rigorous as we've always been when it comes to content.

We've got specific ROI objectives for content, whether it be textbook solutions, whether it be Q&A, whether it be videos, whatever it may be.

And we'll give you more details on that when we come on to the February call.

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

Congratulations on 45% sub growth.

That's another nice number.

Can you update on Canada, the U.K. or Australia, kind of where you're thinking internationally?

Yes.

So it's increasingly an area that we imagine will be additive to us over the next many years.

As a reminder, as to why it's a really great question, is if you combine those 3 countries together, they're about 50% of the market size of the U.S. market alone.

And as a reminder, a substantial percentage of the content that we already have licenses for are from the exact same publishers in this country that published in those countries.

However, we are prioritizing bundles and other things.

And we are seeing organic growth in those markets.

We are investing now as part of our CapEx and other things in terms of making sure that they localize content that we want to add, we are beginning to add.

And that we just expect -- we don't expect any big announcements about it any time this year or first part of next year.

We are still debating whether or not it requires a .ca site or a .uk site or a .au site as opposed to making sure we can localize some of the content and localize the pricing and the way we charge.

So those are all sort of strategic things that we're working on now.

But we are very -- we feel those are going to be very robust markets for us over time.

And we're already beginning to see students find us independent of our own actions.

So we are really bullish on those things.

That's a good sign.

Anything to call out on the marketing effort during the back-to-school season for Chegg Study or even the textbooks?

Well, what I can do with is sort of list you the areas that we spend our time on that have to do.

So as a reminder, 80-plus percent of our traffic is organic.

We have incredible word of mouth.

We have incredible referrals.

A substantial percentage of all of our customers come as a result of finding out about it from another customer.

We are world-class in SEO, the Sallie Mae deal, the Cengage Unlimited deal and then what we do in paid marketing, what we do things like Music101.

These are all things that contribute to our brand recognition, our brand validation and bringing direct traffic into the site.

On the paid side, we don't -- we spend the majority of our money on the paid side exactly where you would imagine we would spend it.

We spend it on Pandora and Spotify and Facebook and search.

And when we do that, every one of those things has a specific ROI and a cac number that we want to do and a lifetime value number that we have historically.

So I don't think you'll see anything uniquely special.

But the things that we know work.

And the more efficient they are, the more we invest in them; the less efficient they are, the less we invest in them.

And we're blessed by such a great brand and great word of mouth that is for the last 3, 4, 5 years, it's a decreasing percentage of our revenue that we spend on paid marketing but also an actual decreasing number.

And that is the result of us -- it's a result of us becoming more efficient and finding partnerships and distribution channels and 80-plus percent recognition in terms of our brand.

These are the things that are really driving our business.

Next question comes from Brian Essex with Morgan Stanley.

I think Dan, you may have just touched on one of the questions I wanted to hit, which was on sales and marketing efficiency.

What are your assumptions embedded?

I mean, you've got some nice incremental leverage there.

How sustainable is that rate of leverage?

And I think, Andy, you made a note that you're expanding your facilities, but G&A costs came down.

I guess, just in general on those couple of points as tech and development increase year-on-year, how do you think about the leverage points for incremental operating leverage?

And obviously, you're going to invest more in tech and dev, but just a little bit color on that.

Brian, it's Andy.

You kind of hit on it, to be honest with you.

The fact of the matter is we are seeing leverage, particularly on the sales and marketing line and then on the G&A line.

You would expect to see that.

On the G&A line, specifically, it was really what drives G&A costs.

It's really not revenue growth; it's complexity.

And our businesses -- we don't anticipate our business getting any more complex next year.

We -- but we are invest -- continuing to invest in both our current products and our future products, whether it be Study, Math and Writing, as far as the current products and tutoring or whether it be Careers and international and things like that.

So that's why you're seeing the investments there.

But the net-net of it is, we're seeing 300 bps expansion, or at least that's our initial estimate for 2019.

And like you said, marketing and SG&A are the big areas.

And I wouldn't be me, if I didn't chime in.

That includes us making significant and important investments for future growth.

So we're not optimizing around this.

It's just the core business is so strong that we are given this opportunity to not only grow our margins but invest in future assets like StudyBlue, invest in things like CareerMatch.

There's a lot going on here that we think will be very meaningful in the future.

So we're beyond enthusiastic about the future opportunities at Chegg.

And how much of that, particularly on sales and marketing side was, I guess, scale as usual and strength of the brand versus new initiatives like Sallie Mae?

In terms of spend, we don't spend on Sallie Mae; they spend on us.

They spend on us.

Yes, but that partnership's driving the traffic to your site, right?

So dollar-wise, you keep coming down.

But I'm just wondering, in terms of new initiatives relative to greater leverage and brand building, what would be driving that incremental leverage?

Yes.

No, I appreciate the question.

I'm not sure that we're -- I think it's very early for us with Cengage Unlimited and Sallie Mae to really understand the long-term impact of them versus other paid initiatives.

When we do our forecasting, we make assumptions on how each of these things is going to perform, and they're all assumed in how we built the business.

And so we constantly reprioritize and redirect capital towards things that work better and eliminate things that don't work better, and that's why I think our company is very efficient.

But I can't really speak to -- I mean, it's a fair question.

I just can't -- it's too early for us to be able to make that determination.

Got it.

And can I sneak one in?

On services revenue, is subscription revenue per subscriber still growing?

And is there any way we can get a handle on magnitude of other revenue in that services line?

So the answer is yes.

When you look at our subscription-based businesses, the ARPU is growing.

And as I've mentioned in the prepared remarks and, in fact, what we're seeing is the subscription component of our business is becoming a larger percent of the overall business.

And so in other words, it's growing faster than the other components.

Which is by design.

Next question from Alex Fuhrman with Craig-Hallum Capital Group.

A couple of things I was hoping to ask about regarding the investment you're making in content and how your students are interacting with the content.

Just looking at the views -- the number of content views that you've alluded to on some of the last conference calls, it looks like the usage of the content and the number of content views has been growing a lot faster than your actual Chegg Services revenue.

It's been growing a little bit faster than your subscriber base, which, I imagine, we could probably interpret that your students are getting increasing value over the product over the last couple of years, if they're using it more and paying the same for it.

Just wondering how we should think about those numbers evolving over time.

Noticed that this most recent quarter, it looks like content views were up about 50%, which is still a huge amount and outpacing your user base but a little bit less than that 60% we've seen for the last year or 2. Are those numbers you would expect to converge over time?

Or whether maybe some kind of onetime events here in the quarter related to either the database breach or some of the extreme weather events going on in the fall, beginning of the semester?

Just curious why that content view number has come in a little bit and if you think that's kind of a blip on the radar or if that's just sort of the natural evolution of your product as you build out a larger user base.

Yes.

I -- you're very thoughtful about the question.

I'm not sure we'll be as thoughtful about the answer.

Meaning, I don't think we'd look at it that way.

And maybe we can, which is we see on a per user basis is their engagement has not declined at all.

It continues to go up.

A lot of the engagement has to do with when they start in a given quarter, right?

So we're reporting on Q3.

And so Q3, our subscription businesses don't really start until later in September, whereas the textbook business starts in August.

So there are, of course, seasonality variables.

Also, the growth rate is extraordinary on top of massive numbers.

And the goal isn't necessarily to get them to use more and more and more content.

The goal is to make sure we have the content that they actually want and need.

So we're not trying to -- I remember the old days when we were -- when I was at Yahoo!

where we would try to create environments for them to stay longer, create more ad pages and put more ads on it.

That's not our business model.

Our business model here is can we achieve the goal that they came into subscribe for us to achieve, which is do we have what they want?

Is it in the formats that they benefit from?

Do we have the right modality?

Do we have it in the cloud?

Do we have it online?

I mean, do have it on desktop as well as on mobile?

Is that stuff ubiquitous?

And are we covering more and more of the classes that they may have at a given time?

So it -- there really isn't a desire necessarily to have them consume things that they won't want to consume.

It simply is the quality really good?

Is the speed in which we can supply it really good?

Is the searchability really good?

So we've not connected those dots, except to say that because of the increased engagement, we know how much they value us and we know exactly what they like and what they don't like.

We can improve what they don't like and have more what they do like.

That makes sense?

That does make sense.

And then, just kind of building on and thinking about the Q&A expert answer database that you have.

You obviously added a tremendous amount to that database this year.

Can you give us a sense of where that investment has gone in terms of either building out new subjects or going deeper into existing textbooks and existing subjects or some combination of all those things?

Just curious where those extra millions of answers have primarily found a home.

Yes.

That is where we do spend a lot of time on because, first of all, we spend a lot of time on technology to avoid duplicate questions because that's the money we spent for no incremental for value.

So by its nature, the overwhelming majority of these questions are questions that haven't been asked before, which means that they're a combination of either newer version of books, the online learning system of the publishers that they may sell into institutions as well as brand-new subject matter for textbooks that we don't cover.

All 3 of those are areas that we continue to see growth.

I mean, I'm as surprised as many people that the rate of growth in terms of the questions where we're almost doubling the number of questions each year that we answer, it's almost the question is do -- are they going to run out of questions.

And the answer is they don't because lots of things happen to get new subjects.

The courses change.

The professors change.

You need to understand that there's 1.2 million adjunct professors in this country.

Colleges are filling things with TAs and adjunct professors, and a lot of them have different curriculums.

So we are relevant across the board no matter what subject you want to study or who is teaching it.

And then increasingly, I expect that, that will remain a similar kind of growth as we move into some of the other countries where we start getting more questions from Canada, the U.K. and Australia.

So I -- this is an incredible differentiator and insanely powerful moat versus anybody else.

And one of those assets that when we came up with it, we knew it had value.

I don't think we understood it would have this much value.

So we just love it because every one of those questions has a positive ROI because it gets reindexed in search, and then it drives other people who have similar questions.

So this is a core competency of our company and a real powerful differentiator versus anyone else.

Next question comes from Aaron Kessler with Raymond James.

A couple of questions.

First, on Chegg Study, I know you talked about kind of expanding beyond STEM as well as maybe kind of beyond 4-year colleges.

Can you just give us an update maybe on progress against those initiatives?

Also, just in terms of eTextbooks, it sounds like maybe you're starting to get a little more penetration.

Just give us maybe the latest color around kind of eTextbooks adoption and what you expect going forward here.

Yes, I'll start with the eTextbooks first.

For many years, it was sort of anchored at 68%.

And then, I think, when rental became such a differentiator in the industry and such a disruptor in terms of the cost of college textbooks that the publishers embrace the rental model themselves, and that's what got us into consignment.

And as we got into consignment, that also allowed us to show the publishers how, if they place eTextbooks correctly, that students would increasingly take up eTextbooks.

For us, we were agnostic in that we get the same amount of gross margins relatively, particularly with the consignment now.

So for us, it really was helping the publishers to understand how they can recapture more and more of their market.

But the benefit to Chegg was the more students we have on digital, the more that we can monitor what they do and supply our services and be able to directly connect our services right into them when they're online.

So that is an area where we are now seeing noticeably above 10% in terms of penetration each semester.

And we're seeing nice growth in that area.

And that's been good for our investors, good for students, good for us and good for the publishers.

So the eTextbooks is an area that we're not going to predict any dramatic change because that really -- it's really determined by the publishers' current business situations.

I think we're going to see that the publishers are going to continue to struggle for a while.

Chegg is the beneficiary of that struggle, not the other way around, whereas the bookstore may not be, as an example.

The question of beyond STEM in college, I think it goes back to the other comment that we made earlier, which is we're filling a lot of those gaps because we're being asked a lot of those questions.

So we always debate how much new content we want to add in a year.

Do we want to do it to expand the top of the funnel?

Do we want to do it to expand the length of time that a student stays with us to get deeper into their major?

We try to balance each one of those things.

I think we've just said we have 34,000 -- over 34,000 ISBNs now.

So we continue to increase by a couple of thousand.

And it's always a mixture of new categories and deeper into majors.

The reason it goes deeper into majors is because you get a lot of the big classes for freshmen and a lot of the smaller classes for seniors.

But once we get to you as the freshmen into Chegg Study, we want to have something all the way through even the deepest majors.

And that gives us a financial benefit of the lifetime value of the customer, not just the top of the funnel.

So we are always looking at that.

So a wild card in a good way, not a bad way but in a good way, is Q&A, which is if we have students that are taking the courses that we have but they start -- want to start using us for other classes that they're taking that we don't have, they ask questions, and we expand our TAM, and then that helps drive in new customers.

And that's why we continue to see this extraordinary rate of growth.

It's a really positive virtuous cycle.

I'd like to turn the floor over to Dan for closing comments.

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

We're grateful that you've been following along on our journey and our story and for the support the investors have been giving us, particularly last couple of years.

But I really want to give a shout-out and gratitude and appreciation to the employees of this company and Tracey.

Entering the first time to the Fortune Top 100 Places To Work for a small company at Silicon Valley that is surrounded by behemoths was really a wonderful example of the culture that our teams have been building, our HR department has been building, the employees bring to this company.

They love the mission.

They love the vision.

They bring their hard work and dedication every day, and they're focusing on better outcomes for students.

And that's resulted in a very unique positive place to work.

And to be able to have applied in our first year and then broke into the top 50 was beyond our wildest dreams and our expectation.

But it really does show how smaller companies like ours in a town like Silicon Valley can continue to attract the best and the brightest because the mission matters and people who are mission-driven come here.

And I think you'll continue to see great execution as a result of that.

So thanks, everybody, for joining the call.

And thanks to all our employees for everything that you continue to do for students and for Chegg.

And we'll see you next semester.

Thank you.

This concludes today's teleconference.

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