Chegg Inc (CHGG) 2019 Q1 法說會逐字稿

Greetings, and welcome to the Chegg, Inc.

First Quarter 2019 Earnings Conference Call.

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

It is now my pleasure to introduce your host, Tracey Ford, Vice President of Investor Relations for Chegg.

Thank you, Ms. Ford.

You may begin.

Good afternoon.

Thank you for joining Chegg's First Quarter 2019 Conference Call.

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

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

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

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

We encourage you to make use of these resources.

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

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

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

In particular, we refer you to 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 25, 2019, 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.

Chegg is off to another great start to the year, and we couldn't be more excited for the future.

In Q1, we had 27% year-over-year revenue growth, driven by 31% year-over-year subscriber growth, leading to 34% year-over-year revenue growth for Chegg Services.

As a result, we exceeded our profit expectations, given the increased leverage we see in our model.

Given our financial performance, we feel confident, once again, in raising our guidance for both revenue and adjusted EBITDA.

We remain focused on executing our top 3 priorities for 2019: one, to deliver on our financial goals and to continue to provide overwhelming value for our learners; two, to expand our TAM by expanding the subjects we cover and the modalities and formats of content we offer, including coverage of other countries; three, to continue investing in opportunities that leverage the strength of our brand, reach and customer base and provide opportunities for meaningful growth in future years.

We believe our growth rates reflect the strength of our brand and the quality of our execution.

We are proud that Chegg has become a trusted resource to help students navigate the difficult journey from learning to earning.

The goal of any platform company is to become "the verb", the first thought for the user in a category.

With 87% brand awareness and 85% organic traffic, Chegg is rapidly becoming the go-to destination for learners.

The more content, modalities and services we offer, the more we strengthen our position in a very big market.

The education industry is undergoing dramatic, long-term restructuring.

As in other industries, there is a chance for a platform company to distance themselves from others in their space.

We feel Chegg has become this leader.

We own the relationship with our customer.

We are not dependent on other channels of distribution.

We own proprietary content and we own the customer data.

So we are able to know what they want, when they want it and how they want it and efficiently and effectively respond to their needs.

As a result, we believe we can provide more personalized services, grow faster and acquire customers for less, making our business model more predictable, sustainable and profitable, thereby creating greater value for our customers and shareholders.

With learners increasingly benefiting from online education services, we believe Chegg is best suited to meet the needs of the modern learner.

We remain hyper focused on making education more affordable, relevant and accessible.

For years, we have said that education is ripe for realignment and needs to be more focused on the student and their needs: online, on demand, more affordable and personalized.

Students need expert, authoritative, trusted content that supports their efforts to graduate and master the subject from the institution of their choice.

This is what Chegg does.

We are now seeing this realignment happening across our industry at increasing speed.

We see huge growth in online undergraduate courses offered by schools, with more and more online classes provided by not-for-profit institutions and new partnerships continue to be formed with companies focused on continuing education as well as an increased effort on skills-based training and retraining by corporations themselves.

As these trends grow, so does the number of learners that Chegg -- for Chegg to support, which expands our TAM.

As the education industry evolves to become more relevant to its primary audience, the student, we expect to see further consolidation.

We believe that the largest players have the opportunity to grow the fastest, and we have positioned Chegg to continue to grow our core services and add new ones as these opportunities arise.

Our ability to organically grow, while at the same time, acquire new, high-growth, high-margin services, where we can accelerate their growth, has become a core competency.

Chegg has always been prudent in deciding whether to build, buy or partner to deliver our services.

But we are now better capitalized than we have ever been to take advantage of the opportunities in the market as they arise.

At the same time, we believe our core business remains incredibly strong.

Chegg Study remains our largest service and is operating at scale.

We now have a library of 28 million proprietary expert answers and textbook solutions, and we now cover 36,000 textbook ISBNs.

Our investment in proprietary content, including video, helped drive 200 million Chegg Study content views in Q1, and we expect the addition of even more formats and subjects will deepen our user engagement.

We believe this reflects the tremendous value students see in having an online, on-demand learning service that provides high-integrity content in the formats they need that meets them at their academic level at the time when they need it most.

We see more opportunities to invest in Chegg Study with added content, modalities, subjects, and of course, through international expansion.

Our second-largest service is Chegg Writing, which is also seeing great momentum.

Chegg Writing is an essential aspect of the paper writing process for millions of students every year.

This quarter alone, students created 126 million citations and submitted 1.9 million original papers to Chegg for review.

Students across America continue to struggle with writing, and there is a tremendous opportunity to help them succeed.

This is why we are making important investments in AI for our writing subscription service, so we are better able to help students improve their writing competency at scale.

With our partnership with Purdue OWL, the world-renowned online writing lab from one of the country's leading academic institutions, we are thrilled to see more students using our subscription writing service and get the help they need in grammar, sentence structure, avoiding plagiarism and more.

Students today are more diverse than they have ever been, and it's clear the curriculum needs to be expanded, adjusted and tailored to equip them for the modern workforce.

They are different ages, many are parents, they are working, they speak different languages, many have come from different countries and they come from various economic backgrounds.

They learn from different institutions, at different times of day, across a wide variety of subject matters.

Chegg is building a platform with the goal to support them all.

Our industry is clearly evolving faster than many institutions can adapt.

There is more of a need for the services Chegg provides than ever before.

There will be more opportunities for students to learn in different ways.

They will need more of the expert, authoritative, trusted tools that can support their ability to master the subject, pass the class and gain the necessary skills to accelerate the path from learning to earning.

I'm thrilled we're off to a great start, but more importantly, we see the opportunity is bigger than it's ever been.

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

Andy?

Thanks, Dan, and good afternoon, everyone.

We had a great Q1, with all key metrics and financials ahead of our expectations.

The strong results and continued momentum into Q2 give us the confidence to raise our full year guidance again for 2019.

In addition, late in the quarter, we strengthened our balance sheet by raising $700 million via a convertible debt offering on very favorable terms, which we believe puts us in a position of increased strength for future growth and extends our position as a leader in the direct-to-student market.

For the first quarter, total revenue was $97.4 million, a 27% increase year-over-year, with both Chegg Services and Required Materials exceeding our expectations.

Chegg Services revenue grew 34% year-over-year as we continued to achieve robust growth rates off a large base for our subscription services and all indications suggest we gained share in Required Materials during the spring semester.

We continue to offer Required Materials because we solve a significant pain point for students, and it also increases our reach, provides data and builds brand on campus.

And as you would expect, with that performance, gross margin exceeded our expectations at 76%.

Our strong performance in both revenue and gross margin drove adjusted EBITDA of $23.9 million, a 43% increase from Q1 of 2018, demonstrating the power of the model and the leverage of our subscription-based offering.

Looking at the balance sheet, we ended the quarter with cash and investments of $997 million, which includes the $700 million capital raise.

We are pleased to notify you that in early Q2, the banks exercised the over-allotment option of $100 million, bringing the aggregate raise to $800 million.

We believe our balance sheet, along with a strong business model that generates cash, puts us in a position to accelerate our growth and relevance with students as opportunities become available.

Based on the results of Q1 and the momentum we saw in the spring semester rush and the continued leverage as we scale, we are increasing our guidance for the remainder of the year.

We expect total revenue for Q2 to be between $91 million and $93 million, with Chegg Services revenue between $79 million and $80 million, gross margin between 76% and 77% and adjusted EBITDA between $27 million and $28 million.

For full year 2019, we now expect total revenue to be between $393 million and $398 million, with Chegg Services revenue between $329 million and $332 million.

And similar to last year, we expect Chegg Services revenue and annual subscriber growth rates to be closely aligned, gross margin between 75% and 76% and adjusted EBITDA to be between $117 million and $120 million, increasing the year-over-year margin by approximately 400 basis points, demonstrating the leverage of the core subscription business.

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

The Chegg team delivered above the high end of our expectations, giving us the confidence to increase guidance, all while continuing to invest in both the content that powers our existing services and building out our new services and capabilities, which we expect to contribute to our growth in the future.

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

(Operator Instructions) Our first question comes from the line of Brian Essex with Morgan Stanley.

Congratulations on the results, solid quarter.

Just a question on the services revenue.

So second quarter in a row where you've posted service revenue per subscriber growth.

Maybe could you unpack what's underlying that number a little bit?

If you have the enrollment business now out of that, what other noise can we expect in that number?

And how much visibility do you have in terms of your ability to grow that number for the rest of the year?

And then I have a quick follow-up.

Yes.

So Brian, good question.

And I think you've kind of asked the question appropriately, the noise that has been in the system for some period of time, for -- really, for a couple of years.

For the past several years, we've seen our overall ARPU increase for our subscription services, but there was some noise around some of the services that weren't subscription-based.

Some of those have gone away, like the enrollment marketing business that we wound down over the last couple of years.

But more importantly, it's like you said, we have seen that base grow.

And as we move beyond 2019 and then we start to offer more robust offerings, things like the bundle, we would anticipate that ARPU will continue to increase, as like I said, we've seen it for a period of time.

But to your last question, we have excellent visibility into this.

Oh, yes, thank you, Dan.

Right, right.

And I guess as we look to the guidance of the year of 30% growth at the midpoint for services revenue, I guess, could you maybe speak to the balance of how much of that you expect to come from subscriber growth versus pricing growth?

And maybe should we be looking at subscriber growth on a year-on-year number of subscribers added as opposed to growth rate?

Yes.

So first thing is the answer is yes.

And the primary growth of our growth, it really is the subscriber growth.

We mentioned that in the prepared remarks.

We said that subscriber growth and revenue growth are going to be closely aligned.

That may change if -- once we start deploying the bundle, which is more likely a 2020, 2021 event, or if at some point we raise prices, but the vast majority of our growth today is, and will continue to be in 2019, the fact that our subscriber base is growing as rapidly as it is.

And just to put that in perspective, it's an astonishing number when you think about how much we have grown and how much we can grow, which is we had, in this quarter, the same number of subscribers as we had for all of 2017.

So just to put it in perspective, we don't take for granted this level of growth and this level of profitability and the increase in margins.

Chegg has become a very powerful brand on college campuses.

It's got 87% name recognition.

And we just see so many opportunities to add value to the existing products, to have a product on top of that, that we refer to on these calls as the bundle, to offer new services.

I mean you're seeing a lot of movement in our space, and we are in the -- we believe we're in the best position.

And now thanks to Andy and Tracey, incredibly well financed to be able to take advantage of those opportunities.

So we're super excited about the future.

Our next question comes from the line of Alex Fuhrman from Craig-Hallum.

I'd love to ask a little bit more about the Writing service that you have.

Dan, I was surprised to hear you say that, that's actually the second-largest service in your portfolio right now.

And I guess, I'd just be curious, first, to get a little more clarification.

Is that the second-largest service you have in terms of paid revenue?

Or is that maybe more just in terms of the number of students that interact with that product?

And then would just be curious to hear a little bit more of your thoughts about how you use Writing as part of the funnel to get people into the Chegg brand.

I mean are most of the people coming into Writing then becoming converted to paid subscribers elsewhere?

It certainly seems like a huge opportunity.

Just curious on kind of how you view students sort of walking through that Writing product and interacting with the other Chegg products.

Yes, so let me answer the first question first and then sort of go into the bigger vision, which we think is pretty enormous, which is, writing is actually the largest used service that we have, which we believe -- depending if you look at external numbers, our numbers are, of course, higher, as most companies' are, would be 30 million users or so on annualized basis use our Chegg Writing product.

So that is, by far, the most used, but it's also free, and that was by design.

As a revenue business, yes, it is -- we have said for the last couple of years, it's been an extraordinary grower.

We've added a new revenue stream to it, which is the subscription service.

We've acquired a company to help add to that by investing in AI, which is going from being a paper where 30 million users can use it for free to cite their paper to a real service that can help them learn to actually write a paper.

So it's not a service where you can just download someone's paper, it's a service where you have to write your own, and then we help you understand do you know how to write or what level are you writing at.

And that's what technology can do at scale, and so we think we're helping hundreds of thousands of people learn how to write, in addition to millions of people that we're helping cite.

And that's -- so it's an amazing service that we've now had for a couple of years, which is significantly larger in the last 3 years than it was in the first 15 years of its life.

And that's what Chegg does.

We take products, we reinvest in them, we accelerate their growth and we accelerate their profitability.

And yes, when we originally acquired it, and still today, we see it as sort of the front end of what Chegg ultimately would like to build, and is building, which is sort of a very large free array of services that build the brand, build the reach, create incredible overwhelming value for students and then allow those students who need increased help, whether it be increased help in writing, or increased help in math, or increased help in homework, or increased help in test prep.

Whatever it may be, we want to be able to funnel large groups of people into Chegg.

You see the benefit of that, based on the rate of growth, which has been extraordinary, over -- I've been here 9 years now, so we're talking about -- we're still growing at over 30% a year on Chegg Services and almost 30% a year, actually, on the collective company, including the textbook.

So we're seeing incredible growth, but you're also seeing increased profitability of each customer and service.

And a lot of that is because we have this free funnel that allows us to acquire customers.

So if you look at our paid marketing line, it's essentially been flat for several years now, which means it's down as a percentage of revenue, but actually down as a dollar amount.

And so we've said for quite some time, we have 85% organic traffic and 87% name recognition.

So all of these have been part of an overarching strategy that we believe in, which is big brand recognition, being free and then really valuable, low-cost, high-quality, highly-integrity assets that students can learn, because whether we like it or not, most of these students in this country have no other support system except Chegg.

And so we're proud to be able to offer it, and they're really benefiting from it.

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

This is Dylan Haber on for Doug.

Just wanted to ask first about the international business.

Can you talk about the investments you're making there?

Any updates on the rollout and localization efforts?

And then in terms of the study bundling offering, can you provide any update on the timing of its launch?

Or any results you are seeing from the experimentation you've been doing so far?

Yes, so I'll answer the second question first and [Sally Shin] this is for you, not today, which means that we are, as we've said, we're investing in all of the necessary product reconfigurations, testing and messaging around the bundle.

And for those that are sort of new to the Chegg story, we believe that we're very confident, based on significant price testing over the last several years, that we have great pricing power in Chegg Study and the Chegg businesses.

However, we want to continue to grow at as a high a rate as we can to build market share, to increase the moat, make it more difficult for others to compete.

That's why our balance sheet is so strong now.

It keeps people out of the market.

And so we like the strategy that we're executing on, but we do know that there are more services that can be bundled in together that students will pay more for, at least a large enough percentage to make it worthwhile, and as Andy articulated earlier, will increase not only our subscriber growth but our ARPU over time.

So we have -- we are not uncertain about our ability to execute on a bundle plan.

What we're doing, though, is we're focusing on making sure that the messaging is right, the configuration is right, what goes in the base unit.

And so we said about a year ago that this -- we would be doing this all through this year, that none of our revenue reflects any bundle rollout and won't really be reflected, and we'll tell you sort of when in November when you can expect it, because we'll be putting out our '20 guidance back then.

But we're very excited about that and the tests seem to reflect that we should be.

And then the first question was international investment.

So we are making them now.

And one of the amazing things about this business that I did not experience at Yahoo!

or at other places that I was is just the margins that are in this business.

We have the ability to make significant investments on an annual basis for things that we've talked about with all of you.

I think people continue to be surprised that we can do it by adding content and that our marketing spend just don't go up, and yet we're able to grow, add these services, build these services and increase our growth and increase our margins.

And that is because the business model itself is, unlike others that I've dealt with, it's high-margin, it's high-growth.

And when we add content, which is what it really takes to grow an international business, localize the content, that content returns incredibly profitably, just like the U.S. does on Q&A and other areas.

We are -- we have been seeing, and we've been talking about now for quite some time, that we are seeing growth in international business.

And that's why we continue to believe, to the first question that was asked, that we have confidence that we can continue to grow around the 30% or more number for quite some time because we are not only adding domestic opportunities, but we're adding international opportunities in Canada and Australia and the U.K. and Saudi Arabia and Korea.

So Chegg will be, over the next many years, a very large global business and not really constricted to the U.S., and we're already seeing that in the numbers that we're doing today.

We just built it into our current plan.

So you're not going to see a day where we raise a flag in a country, because we're one of those few businesses that actually doesn't have to do that.

It really can be built where Chegg is building it now.

We have offices in India, we have offices in Israel, Berlin, Portland, New York, San Francisco and Santa Clara, and we can do most of that work out of those offices.

Our next question comes from the line of Brent Thill with Jefferies.

Dan, I'm curious if you can give us an update on the career product as well as you're now fortunate to have close to a $1 billion cash position.

I think historically, the largest deal you've done is $60 million.

Does this signal a new cycle for you in terms of how you think about transactions?

Or maybe if you could just talk through how you think about -- what you see from an inorganic perspective, at a high level, would be helpful.

Yes, but let me first have Andy sort of address the why we did it, why we did it now and why we did it at this scale.

And then I will answer the second part of the question, which is so what does this mean as we look forward?

Yes, so Brent, yes, so when we did the transaction a few weeks ago, I guess it was about a month ago now, the reason we did the transaction was because it was very favorable terms, like I'd mentioned earlier.

And we truly believe that there are going to be opportunities that we can take -- with our current capital structure, not just the cash, but the overall capital structure, will allow us to do transactions that we just couldn't have done just even 2 or 3 years ago.

And you're absolutely right, it was actually 3 years ago, I think, in May when we did the deal, the I.E.S.

transaction.

So it does open up bigger opportunities for us, but it doesn't change how we evaluate the opportunities.

That's the most important thing.

And one of the things that we've focused on ever since I got here, every transaction we've done, right, does it leverage some of our core assets, our brand, our reach, our platform, our data, you name it.

And then one of the big things is: is it affordable?

Does it makes sense from a financial standpoint?

And every one that we have done has done that.

And so that's, once again -- don't -- it's the same evaluation, just gives us a bigger opportunity.

And Dan, you want to hit the...

Yes.

So just I'll close on that and then answer the career product update question that you asked.

So we -- I think we have demonstrated to those that have -- that provided capital in the last few rounds, that we will remain very disciplined and very patient.

The good news is Chegg's core business is outstanding.

We see great momentum.

You can see it in our results.

You can see that we continue to grow very fast.

You continue to see that even with new things that we do and things that we buy that don't make money, that we're actually increasing our EBITDA margins and our ratio of EBITDA to free cash flow.

It's -- so the core business is in very good position.

So we're not in a position to have to take an action for any reason other than we think it's the right one at the right time, at the right price.

We do believe, and we said in our prepared remarks, that the industry is going through a significant sort of disruption now, with -- and that will free up a lot of interesting assets that Chegg will potentially be interested in.

But if they don't leverage our brand and leverage our reach and we don't think we can grow it faster and be more profitable than they've been in a reasonable period of time, then we're not likely to do it, because there's nothing we have to do to be successful in our direct-to-student model that we have today.

We just think there is plenty of things that we want to do that students would benefit from.

So we're fortunate to have a very strong balance sheet, but the best balance sheets are ones built when you don't need to build them, and that's what Andy and Tracey have done for us.

So we're very thankful for that.

On the career product update, as we said on the last call, in order to expand the number of users going through it, the amount of data going through it, which allows us to use AI and machine learning to really focus on matching the skills, we've really focused our efforts on internships.com, because that already has millions of users.

So where a couple of million people are looking for jobs when they graduate, tens of millions of people are looking for internships, so we think it'll have a much bigger impact and a much bigger benefit to students.

So we are shifting over now to the new technology platform, which is what we've been building for quite some time.

And so you can expect more feature upgrades.

And we'll provide probably next year, a lot more insight into the things that'll be most important there.

But as you all know, when you're working with a technology company, when you're building something or rebuilding something, it takes time, and we've planned for that.

But we're really excited about it because we continue to see increased usage of people really wanting internships.

Internships and apprentice opportunities are really transformational in the lives of young people, so they can really understand what it means to be in a business or an industry or how they can translate skills they are getting at school.

So we're super excited about it.

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

I had a follow-up on the last question.

Dan, you had mentioned that the company is remaining disciplined and patient regarding acquisitions.

Are you seeing multiples creep up, given the amount of activity that we've seen in the space?

Well, it's -- like everything else, just when you think that people are getting rational, people make investments and minority investments in non-profitable companies.

And so I can't really tell you that I know, when you live out here, that things will ever settle down.

I think it's like the NFL Draft, which is if there's a run on a position.

So if there's a run on a company or a category, people will do it.

But we can just play through that noise.

I mean one of the great things about having both the stock and cash, and cash at such a low cost, is if we see a great -- if we see the best player in the Draft and we want it, we can afford to do it.

So I -- we saw it going down, and we got a couple of really incredible assets at very reasonable prices, StudyBlue being one of them, and WriteLab.

So on those where we saw unbelievable teams, great vision, great assets, just underfunded, we were able to do those transactions.

But on the bigger ones, whose names you know, where you see vast multiples for e-commerce companies, we're not likely to participate in those things till they calm down.

Okay, great.

That's helpful.

Just shifting gears a bit.

About a month or so ago, I guess there was a report out there with some accusations about some of your products potentially being illegal in a number of states.

And I'm just wondering if you can address that publicly.

Yes, there's not much to say.

Believe it or not, it was a report that came out that talked about other people's products and used our name.

So I don't really have much to say on it, because it really wasn't about us.

We don't let people download papers.

That's not one of Chegg's businesses.

It's actually a business that's owned by a competitor of ours that's another public company.

We don't let people upload or download quizzes or tests.

That's not what Chegg does.

We are actually a learning tool.

We -- if you look at the number of pages that have been consumed in a quarter, anybody can get an answer anywhere.

That isn't what we built for.

That isn't why we spend $35 million or $40 million a year on content.

And that's not why people come to us, and that's not why they pay us.

They pay us to help them teach them, because many of these people are 25 years old, they're at work, they have children, they can't make every class, they can't make after hours, if there are any at all, or teachers' hours.

There is no tutoring services for them on campus, or they can't get to it, and they depend on Chegg to help them really master the subject.

And one of the statistics that we've often talked about is 77% of students say they mastered the subject as a result of using Chegg.

So short-sellers will do what they want, when they want to do it, and they have a whole opportunity unto themselves.

We just play through that because we know the facts.

We are absolutely confident in what we do, we love what we do.

There's been no pickup from any school or anything as a result of it.

So I think most people saw it for what it is.

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

First, maybe just on Required Materials, saw some decent growth there, about 7% year-over-year.

Just your thoughts maybe on the kind of growth outlook for the remainder of the year on Required Materials?

And kind of what's driving the maybe the better-than-expected growth?

And two, with the Writing product having so much of a -- such a big user base, how are you thinking about potentially cross-selling potentially some of the other solutions into Chegg Writing or the EasyBib solution?

Yes, terrific questions.

So on Required Materials, it's one of those things that's a gift that keeps on giving, which is we invented the model.

Everybody copied us.

Most people failed miserably and either went out of business or lost a lot of money because they didn't understand what it took to be successful in that business.

And because we had no other choice, we had to become successful in that business early on, and we were able to do it.

Then with a partnership with Ingram, which was done almost 5 years ago, which has been of real benefit to our shareholders, to students, to Ingram and to us, that really transformed our abilities to expand the catalog, to keep prices low, and that put us in a different relationship with the publishers.

When the publishers realized that what we had done was transformational in the mind of students, it really helped democratize a little bit more the cost of education.

After some changes at their companies, the current leadership, which most of them are really terrific, have focused on how to partner with Chegg.

And what I mean by that is we now do consignment.

So the Ingram deal, which was absolutely critical back several years ago, is increasingly unimportant or less important to us going forward, because so many of the textbooks in print that we still use now come directly from the publishers to us at no cost because they do it on consignment, which benefits the student, the publisher and Chegg.

It's just not something that Ingram participates in, expect the 3PL business just pick, pack and ship.

So as a result of that, we're just able to execute in a way that most haven't been able to.

And I think when Amazon realized they weren't going to put us out of business, I think it became less of a priority for them.

And we've been able to just be increasingly successful, and that drives the rest of our business, and it's been wonderful for students and wonderful for us and our shareholders.

On the question of Writing.

We are beginning -- the first thing we needed to do was to consolidate the Writing Services under -- sort of under one technology.

We've done that.

The second thing we needed to do was start to build the Writing technologies to not only be their independent site but also on Chegg, under the name Chegg Writing, and a lot of that's for SEO reasons, more than anything else, but that is what needs to be done and that takes some time.

The third thing was we acquired WriteLab to be able to really start to apply AI as a subscription business, and that's why we're seeing great growth in Chegg Writing as a business overall, not just the ad business, which the team is, I think, second to none, but the subscription business is really beginning to make an impact in people's lives, and I think that word of mouth gets out there.

And then the next step is to take Writing and Math and other things and put it into the bundle going forward.

Then the last step will be on the free version, how do we use that to drive more successfully into our other businesses as we're able to use the data and know more.

So it's a systematic plan that we have.

We have a multiyear plan on every one of the things that we do, and we try our best to stick with it when we think it continues to make sense.

And for us, getting the Writing product on the right platform, getting Chegg Writing built, getting the subscription business built and then now building the bundle, they are more of the priorities.

And then we'll be able to use that increased traffic to drive more and more to other Chegg Services.

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

Yes, congratulations, guys.

Could you just talk a little bit kind of an update on Chegg Tutors?

Just kind of what you're thinking there and what we should be watching for in 2019?

Yes, it's -- well, what you'll be able to see, sort of now, I think we said on the last call that the last week in April, you would, if you wanted to look closely, start to see, if you were in one of our cells, start to see Chegg chat tutors being tested.

So that took a lot of technology.

It takes -- and so there is 2 sides.

There's tool sets for each side.

There's tool sets for the tutors themselves, which allow them to tutor more than one student.

There's the matching to make sure that they're not distracted by students in different subjects, that you really want to get the matching done right.

Then there's the students themselves, which is learning to do chat-based tutoring rather than oral- or video-based tutoring.

And then you want to make sure that it all works.

You want to make sure that you know how many students the average tutor can take on, so you don't book them more.

And then you want to figure out the pricing.

And that's the stage where we're just starting now.

And that is right on time of what we expected.

And we're now sort of at the midterm stage and the final stage, which is when Tutors really does boost up.

But we are -- we are not uncertain about the impact of what chat-based expert help will be.

We've built all this technology to make sure that we're actually teaching and not letting students use it for anything else.

Tutors get booted off, students get booted off.

So we're building those things.

But most importantly, what we realize is very -- is when students bail, and they bail on a class or when they bail on school, it's because they're stuck and they don't have any help.

And obviously, money is a big part of it.

But if they could fight through it, and so when you can imagine being able to, at any time, at any hour, be able to get just that little bit of coaching, that little bit of understanding, that little bit of confidence that you need, we think is just going to be enormous.

And whether that is likely as a standalone as well as embedded into a future bundle that we do, we just see these kinds of things being absolutely necessary, which is -- we don't see a world where human help, human professors, human educators, human experts won't be essential.

We're just building the technology to be able to do it.

And you could start to see the testing probably this week on the site, and we'll test it throughout the year and make sure that we have it right, be prepared for later on this year and 2020.

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

I have a question about the content views.

Those were up 27% year-on-year.

I'm curious to know if, if you do analysis to sort of gauge the age of the content that's being accessed, and if you could give me some insights on the views that you saw in Q1 perhaps versus the content that was licensed in 2018.

Yes, so let me see if I -- I will give you the answers, but let me see if I can interpret it, which is how valuable is the content that we pay to build, whether we do it through Q&A, or whether we build it through our team in India, or whether we even license the questions from the publishers, which as a reminder, is all we get from the publishers is the questions.

We own 100% of all the answers.

Now what we see, and particularly interestingly enough, because the publishers are under tremendous economic change right now, is that they're not changing the content as much, which is the value of the content's actually extended.

So we depreciate it over however many years and -- 5 years, but it can last far longer than that.

We still have content that we've been doing for years, depending on what the subject matter is.

And I think that part of the reason that you see that even CapEx as a percentage of our overall revenue is not really rising, even though we're able to spend more, because we don't have to replace existing content nearly as much as we're able to expand the categories that we're in, because there are basic mathematical formulas and chemistry formulas and physics formulas and accounting formulas that don't change unless the United States government, on accounting.

But the length of time that it lasts is much more significant than we originally had anticipated.

Now to your question about why the views.

Well, views grow because users grow.

Views grow because users use more subjects than they've been using before, and sometimes, views grow because there are new subjects that we talked about a few calls ago, which were like nursing or business law, more professional categories, so I think you're going to see us investing more in professional categories, which are -- you can call them vocational if you want, you call them career pathing if you want.

For us, we work with a substantial number of nurses in the academic side of the business, and then they started asking Q&A on the nursing side of the business.

So as we respond to the needs of our students, which is one of the great things about being direct-to-student, owning the customer, owning the data, being able to watch what they do, we're just expanding into categories we don't have to guess about.

So I don't see a scenario where there is not going to be continued growth in subjects or in categories or even in global over the next many years, because they're all very large growth opportunities.

So if we were to look at it from kind of a bond duration perspective, the duration over time of the content being accessed continues to extend?

Do you know what I'm saying?

I do.

I would say that content that we have already created lasts longer than originally had anticipated.

And some of it, I think you could argue, will be evergreen.

The new content that we do is deliberate, based on 2 things, which is actual answering the Q&A, which is what we do.

That's the easiest and most valuable and most profitable facet, and the rest is when we keep adding ISBNs and subjects and categories, which we do, based on what we know the demand is likely to already be and we expect all of that to last way more than the 5 years that we put it out.

Our next question comes from the line of Brett Knoblauch with Berenberg Capital Markets.

Just to sort of touch on international.

I think one of your big reasons for your competitive advantage in the U.S. is just that brand recognition and brand awareness.

How is that in the international countries that you're currently making investments?

Is that like the key target that you're trying to achieve, is to build that brand awareness?

Yes, but let me flip it around, which is you're absolutely right.

We have 87% brand recognition, 85% organic traffic and incredible word of mouth.

That didn't come overnight, and it also didn't come because we spent oodles of money on marketing or branding effort.

This happens to be one of the categories, one of the businesses, one of the giant subject categories where you build it based on being the best at what you do, making yourself incredibly easy to find in the environments that students are likely to look for you, and that is search for us.

And having proprietary, new, relevant content all the time and because of the Q&A that's happening, we see an increase in that, because we have now recognized that we see significant upside outside the U.S. and because students have been finding us despite the fact that we weren't looking for them.

We are making the experience easier.

We are a making it more relevant.

We are acknowledging if you come in from Australia or Canada or another country.

We are adding content that makes it more local, even though overwhelmingly, the content in the -- in certainly the English-speaking countries is identical, there are things that will make it feel more Canadian or more Australian or more whatever the country that there is.

We also will be able to do things that we haven't been doing, like take local currency, right, and take local credit cards.

Despite the fact that we didn't offer all that, we kept seeing incredible increased demand.

And so my point is I don't see scenarios where we're going to spend lots of branding money to build the brand.

What ends up happening with Chegg is we build a brilliant service that's incredibly affordable; that students are grateful exists; that helps them learn with high integrity and high certainty; that they can learn it in a format which they do best.

So whether it's by an expert answer or whether it's by a step-by-step solution or whether it's by watching one of our, what would be at the end of this year, more than 20,000 videos, or reaching a tutor.

What ends up happening is you start to get a student, then it penetrates into -- a subject in school, then the school itself and then they tell their friends when they go home and then what happens is we grow that way.

And that's the way Chegg has always grown, and that's the way we expect, and we are already seeing Chegg growing internationally.

Students find us.

I realize parents don't or adults don't, but we're not built for them.

Okay.

No, that helps.

And then...

[Which has actually been phenomenal.]

Okay.

And then just a question on the bundle.

You say you're expecting that to be a 2020, 2021 story.

Just wanted to clarify that.

Well, we're -- what we're saying now is we don't know the actual date.

We'll make the final decision on the launch date, which we've always said, that we were going to use all of '19 to learn that.

One of the great things about our business and one of the challenging things about our business when you build new things is we actually work in semesters.

And so the real semester for Chegg is third week of August through the middle of May.

So during those times, we need to deliver well over 5 million textbooks.

We need to deliver millions and millions and millions of -- as close as we can get to 99.999% or 99.99% of cloud-based services that are all personalized around education.

We also need to test pricing, messaging, new products and new services without affecting the business within the quarter.

And so the decision we made years ago, which we are going to -- we're going to do these things on our own schedule, we're going to build a business that doesn't require sort of rush things to make a particular number or quarter.

And so everything we do is designed to get to the right conclusion in a right period of time without putting unnecessary pressure on the business.

And so I only say that because we had a really good testing period in the first half of the year.

Now we're going to build a lot over the summer, because this is when you can build without affecting all the other things you need to deliver.

Then we will be testing again in August and September and October.

And in November, we think we'll have enough information to really provide for you: What the bundle will be?

What the bundle pricing might be?

When we are likely to roll it out?

Are we going to grandfather in existing -- and there's so many good questions to be answered.

But we're increasingly confident that we'll know the answers to those questions, and we are very positive about students' response to wanting things in one place under our brand, which they can trust, that are accessible and high integrity, that help them.

And so the test results we're seeing all point to we've been right about our thinking.

But we won't know until we finish the test.

And that will -- by the way, the definition of success for us is we'll continue to see similar growth rates and a large enough percentage of those taking bundle, which will mean we'll see increase not only in subs but increase in ARPU and increase in profitability and yield and all of those things, but most importantly to Chegg and our brand, overwhelming value for students, that they are grateful that they can get it at such a low price.

Okay.

And then do you think the bundle will help, I guess, lengthen the average subscription length?

Is that a possibility?

Or have you seen, I guess, anything there?

I think we'll know that when we know that.

I don't think that, that is its primary purpose.

Its primary purpose is to create overwhelming value for students at a price that they are comfortable paying.

And the result for you as shareholders or analysts or for Chegg is that we'll have as many people subscribing but paying more per month on average than they were for as many months as they would be paying, and that would almost all drop to the bottom line.

So it's a big win for everybody involved, big, okay?

There are no further questions in the queue.

I'd like to hand the call back to Dan Rosensweig for closing comments.

Well, thank you, everybody.

Thank you to the Chegg team for now, I think, our 13th consecutive quarter of really magnificent execution.

What seems to be true about the education space is it's getting bigger.

The opportunities are increasing and as we said in our prepared remarks, the company that builds the platform, that becomes the verb in this space, the one that people expect to continue to add more services to, that are -- that provide overwhelming value for them and do so in a way that really helps them move from learning to earning, which is really what education has got to increasingly become, we think will disproportionally outperform anybody else in this space.

And I think in the last couple of years, you're seeing Chegg at the beginning of the journey.

And so as we look to the future, not only the rest of this year, but the longer term, Chegg is in the best position it's ever been in to provide incredible value to students and incredible value to shareholders.

We thank you all for joining the journey.

And we'll talk to you on the next call.

Thanks.

Ladies and gentlemen, this does conclude today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time, and have a wonderful day.