Chegg Inc (CHGG) 2019 Q3 法說會逐字稿

Greetings.

Welcome to Chegg, Inc.

Third Quarter 2019 Earnings Conference Call.

(Operator Instructions) Please note, this conference is being recorded.

I would now like to turn the conference over to your host, Tracey Ford, Vice President of Investor Relations for Chegg.

Thank you.

You may begin.

Good afternoon.

Thank you for joining Chegg's Third 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 our 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 29, 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 in the investor slide deck 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.

We are delighted to report another great quarter, exceeding both our business and financial expectations, delivering 27% year-over-year revenue growth and 84% adjusted EBITDA growth.

Our teams continue to execute against our key priorities, which are to meet our financial goals, expand our TAM and invest in opportunities that leverage our reach, our Student Graph and the strength of our brand.

We are pleased with our performance thus far, which is why we are confident to once again raise our 2019 guidance, which Andy will walk you through in greater detail.

We continue to see incredible growth and strength in our academic services, and we believe we can leverage all of that as we enter the skill space through the acquisition of Thinkful.

After spending years analyzing the category, it was clear that skills-based learning was a natural extension of Chegg's offerings.

We chose Thinkful because it is a leader in the direct-to-student skills-based training for some of the most in-demand jobs for the modern economy.

We have always helped students succeed on their academic journey.

And now we can extend our reach by helping them throughout their professional journey.

Thinkful and Chegg are synergistic in that we both provide high quality, affordable, online learning, which improves students' academic and professional outcomes.

And just like Chegg, Thinkful has a direct-to-student model, which means we will own the customer, the content, the channel and the data.

This allows us to accelerate the addition of new curriculum, increase the quality and relevance of the content, grow the business faster and more efficiently and ultimately, make it more profitable.

I want to take a moment to welcome the Thinkful team into the Chegg Family of Services and I will walk you through that in greater detail momentarily.

Our academic services, led by Chegg Study, continued to provide students with high integrity, expert content in multiple formats to serve the growing diversity of students' needs.

As we continue to expand our offerings, we can help more students up-level from where they are to where they need to be and support them wherever they are studying in the world.

Within Chegg Study, our library of content now has a record 32 million proprietary expert answers, textbook solutions and videos, which allowed students to access over 138 million content views in Q3 alone, and it just keeps adding to our moat.

In addition to helping students master their subjects, millions of students now turn to us to improve their ability to write.

Chegg Writing is another powerful service, helping students learn grammar, sentence structure, check for plagiarism and more.

In Q3 alone, students generated over 72 million citations and submitted over 1.2 million original papers for review.

It's increasingly clear as more students are trying to make their way to the middle class through higher education that the system needs to evolve to support the needs of a modern student.

Students today are more diverse than ever before.

They are older, come from different socioeconomic backgrounds and have entered the system in various states of preparedness.

And for many, English is their second language.

So the need for high-quality, high integrity, adaptive academic services that can support them 24 hours a day at an affordable price has never been more critical.

That's why Chegg exists, to increase access and opportunity for students.

We will continue to invest in adding more content and features to our services and add more services to our platform as we have with the Chegg Math Solver, Chegg Prep and Chegg Tutors.

We see an opportunity to integrate these services and bundle them together, providing even more value to a significant subset of our subscribers.

Our goal will always be to keep prices low, but also to increase our ARPU by offering overwhelming value and a choice for our students.

As we have shared on previous calls, we have been testing an upgraded bundle, which we call Chegg Study Pack, and we are pleased with the responses we have seen so far.

The Study Pack rollout will focus on new customer acquisitions.

Given the seasonality of our business, we, of course, want to be careful not to interfere with our current customer base in the middle of the school year.

So the bundle will be rolled out over the course of 2020, but the largest push will be in the second half of the year during the August, September back-to-school time frame.

And all of this is reflected in our guidance, which Andy will detail shortly.

Our textbook business continues to address a critical pain point for millions of students and helps us drive our brand, extend our reach and build strong relationships with our customers.

Our partnership with Ingram expires in May of next year, and we are thrilled to announce today that we have an exciting new agreement with FedEx, one of the world's premier shipping and logistics companies.

Ingram has been a wonderful partner, and we want to convey our gratitude to their CEO, John Ingram and his entire team.

When we signed that deal with Ingram in 2014, we needed a partner who could finance the acquisition of textbooks, warehouse the product and handle logistics and the relationship with Ingram was a game-changer for Chegg.

For those of you who are new to the story, the deal with Ingram allowed us to invest in the transition of our company to become the high-growth, high-margin digital business you see today.

When we look to the future, our needs have evolved.

And we wanted a provider who could serve our students better and provide world-class shipping and logistics experience, and that is why we are excited to announce our agreement with FedEx.

FedEx can meet the size, scale and speed of our business.

This new agreement, in place for at least 5 years, will over time be more cost-effective for Chegg and better serve the needs of our students as we anticipate 1 day faster delivery for over 70% of our customers.

Supporting the academic journey is essential.

But the facts are that 85% of students report they pursue higher education for the primary purpose of increasing their job opportunities.

We have consistently said that skills-based learning to prepare students for the workforce is increasingly more important for the economy, for employers, for institutions as well as the students.

We feel we are uniquely positioned to deliver this service to our current customers as well as bringing an entirely new customer base to the Chegg family.

We are excited to add another high-growth service to the platform that we believe will scale into a high-margin business over time.

Our plan is to utilize not only our audience to expand Thinkful's opportunities, but to take advantage of our core learning assets like chat-based tutoring and expert Q&A to provide on-demand support 24 hours a day for any student in any academic and now skills-based subject.

This will not only provide a better experience for students, but will differentiate us similar to what we did with Chegg Study and create a strong competitive moat.

The need for low cost, high-quality skills training is at an all-time high.

And while we are initially focused on some of the current biggest growth areas like software, data and digital jobs, we envision rapidly expanding our curriculum over the next several years to address the ever-changing needs of the modern workforce.

Chegg continues to move the industry to align by putting the student first, which means to meet the needs of the modern-day learner.

Our goal is to support students, whether it's to get a degree, accreditation or simply get a better job in their communities.

I am proud of our team and what we have achieved over the last decade, but I'm even more excited for what is ahead of us.

We have stayed focused on our mission of putting students first and that has not only grown our business but is reflected in our culture.

In addition to our strong business performance this quarter, we were once again honored to be named one of Fortune Magazine's 100 Best Medium-Sized Workplaces in America for 2019.

I cannot thank our team enough for making Chegg such a great place to work, and I'm thrilled to be part of this incredible company.

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

Thanks, Dan, and good afternoon, everyone.

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

These strong results give us the confidence to raise our guidance again for 2019.

We are also providing our initial outlook for 2020, which represents continued strong growth off a much larger base and continued leverage in the model.

It also includes the addition of our skills-based offering, Thinkful and our expected changes to Required Materials as a result of the move to our new logistics partner, FedEx.

While we are extremely proud of what the Chegg team has already accomplished, we are even more excited about the future as we continue to increase our offerings to accelerate the time from learning to earning.

Looking at the third quarter, total revenue was $94.2 million, a 27% increase over Q3 2018 with both Required Materials and Chegg Services exceeding our expectations.

This strong top line performance drove gross margins to 76%.

This resulted in adjusted EBITDA of $23.1 million, an increase of 84% over what we achieved in Q3 2018 and well above our expectations, demonstrating the continued leverage of our model at scale.

We ended the quarter with more than $1.1 billion of cash and investments.

We believe the combination of our scale, balance sheet, operating model and cash flows are the strongest in the education industry.

Along with our direct-to-student model, we believe this provides us a significant competitive advantage as the education landscape evolves and continues to move in our direction.

Before I get to the guidance, let me walk you through our expectations as we transition to our new logistics partner FedEx, which is in our outlook for 2020.

As Dan mentioned, the rental landscape has changed dramatically in 3 years.

Consignment of eTextbooks, which require no capital, have become approximately 40% of Required Materials units and continue to grow.

Along with lower textbook prices, these factors have significantly reduced capital needs to keep a full portfolio of textbooks.

During this ongoing transition, we will need to deploy small amounts of capital to own print textbooks for student rental.

As a result, in 2020, we plan to spend approximately $50 million on textbook inventory, net of liquidations and expect this number to decline dramatically in 2021 to $15 million and decrease each year thereafter as the transition to consignment and eTextbook continues.

We expect the transition to FedEx to be complete by the end of 2020, at which time they will handle all print textbook logistics.

While the fundamentals of the Required Materials service are not expected to change, how revenue gets recognized will.

Therefore, Required Materials revenue will increase in 2020 and 2021 and then likely stabilize in 2022, and we expect it to continue to operate as a breakeven service.

We do not anticipate a change to our total company gross profit or adjusted EBITDA dollars as a result of this change, but it will slightly reduce gross margin.

These changes have been provided in the earnings press release and the investor deck available on our IR website.

Based on the strong results from Q3, we are increasing our full year guidance for 2019.

For Q4, we now expect total revenue between $122 million and $124 million; Chegg Services revenue between $107 million and $108 million, which includes approximately $2 million from Thinkful, which closed on October 1, and takes into consideration the later fall -- semester start date that we mentioned on the last earnings call; gross margin between 77% and 78%; and adjusted EBITDA between $43 million and $45 million, which includes a $4-million loss from Thinkful.

As a result, we are increasing our full year 2019 guidance.

We now expect total revenue between $407 million and $409 million with Chegg Services revenue between $332 million and $333 million, gross margin between 76% and 77% and adjusted EBITDA between $121 million and $123 million.

Turning to 2020.

Our initial expectation for total revenue is approximately $520 million, with Chegg Services revenue growing to approximately $437 million.

We expect Chegg Services revenue and subscriber growth rates will continue to remain closely aligned over the course of the year.

We expect gross margin to be approximately 72%, slightly lower than 2019, exclusively the result of the revenue recognition and cost of revenue changes that will result from our ownership of textbooks.

At the same time, we expect continued leverage in the model with adjusted EBITDA expanding to $163 million, increasing adjusted EBITDA margin 100 basis points over 2019.

But those of you modeling 2020 by quarter, we have provided expected seasonality as a result of these changes 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 a strong initial outlook for 2020.

It is becoming increasingly clear that our model is the envy of the education landscape by serving students directly with high value, low-cost services while improving their outcomes and helping them move from learning to earning.

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

(Operator Instructions) Our first question comes from the line of Alex Paris with Barrington Research.

Congrats on the quarter.

And before I move to my questions, I'd like to highlight that FedEx partnership, and that looks promising for the intangible value of the business.

Starting off with Thinkful.

There's been some recent news, as you may know.

Can you comment on that news and where that played as far as the timing for the acquisition, whether you knew of the data breach prior to the deal?

And on a positive note, in regard to Thinkful, can you characterize -- you may have already done so.

But can you characterize the competitive environment for Thinkful?

More specifically, can you gauge how they've done historically in taking market share?

And was the acquisition of Thinkful reflective of student needs you observed in the Chegg platform?

So this is Dan.

Thank you.

Let's start with the news.

So it was -- so no, we were not cognizant ahead of the announcing of the data breach.

We obviously were made aware, the moment that they knew.

And fortunately, similar to ours, which, as you know, amounted to nothing.

There was no personally identifiable information, no credit card information.

And they don't have -- their customer base is much smaller than ours, obviously, and they charge a lot more.

So it was a nonvariable as best as we can tell.

And everything that we looked at afterwards, we've asked them to follow the exact same protocols that we did, which was complete and open transparency, communicate immediately, notify everybody.

Openly notify people because, unfortunately, it's a fact of life in technology that these things are going to happen.

But fortunately, neither one of us has the PI or the credit card information.

And we all did that deliberately years ago to avoid any situations as it relates to this.

So on the acquisition in terms of the competitive space.

So when we spent a better part of 2 years looking at every single player in the space and although to the outside person, they may look similar.

These companies are extraordinarily different.

Some of them are very good at content.

Some of them are very good at partnerships.

Some of them are good at graduation rates.

We chose the one that we felt was the closest to our mission, which was to put the student first to sell direct to the student, which allowed the price to be lower because you didn't have to split the revenue with anybody.

Second, somebody who was focused on extraordinarily high-quality content, which led to really high graduation rates, which was about 85% of their customers were graduating and finding jobs.

And so it's -- the reality is it's a very nascent space.

What you hear about is a lot of the companies who are selling these things into corporations.

We're not doing that.

We're going directly as we've always done to the person that needs it the most, values it the most, is willing to pay for it the most, and that's why they pay for it.

That's why they complete it, that's why they renew and that's why they graduate.

All the rest of them are chasing corporate dollars, that's not really what we're planning on doing.

We want to plan to go direct.

So in that space, they were sort of alone and growing quite nicely.

What they needed was a distribution channel, what they needed was a support system to help educate the people better, which our chat-based tutoring and our expert Q&A plugged into their system can actually help people get unstuck at any time, day or night.

And the ability to expand their curriculum faster and then take it global.

And so the marriage was -- made perfect sense to both sides, and we couldn't be more excited and very early, but the early starts are really good.

So I think it's too early to talk about market share because those spaces are so nascent.

They're going to be huge.

Everything you know.

And so the answer to your last question, Alex, is exactly why we acquired it, which is we survey our students all the time.

As some of you may know, we have tracking polls, which is why we're the premier place to people to find election information as it relates to college students.

We also do surveys.

We also have focus groups.

We also go meet with students.

And so we try not to make mistakes by just saying, hey, we think.

Rather, we go in and find out.

We're not a big speculator.

We actually have the ability to go find out.

And the 2 things that students wanted, more than anything else was in Education and Personal Finance, and the second one was to be able to tie their academic learning to skills-based capability to get them a job.

So yes, this is an absolute response to the overwhelming feedback from our students.

That's wonderful color and that highlights the potential for low-hanging fruit student acquisition with the addition of Thinkful.

My last question is just in regard to Study Pack, provide -- perhaps you can provide some additional commentary into what you're learning and how the rollout is going?

And to satisfy my curiosity, there will be one Study Pack offered for one price.

Has there been any external thoughts to offering different versions of a study package?

And will current students be incentivized to upgrade bundle versus a new customer?

So to try to answer that very detailed question and really a good question, we are really, really, really excited about the responsiveness of students to wanting more in their integrated learning experience.

And we feel very comfortable that a very good-sized percentage of students will opt for it as we roll it out.

And all the research that we've done over the course of last year, confirming that.

So we think that it's going to be a very big contributor starting really the end of '20, as we said earlier last year or this year that we said that was likely going to be the case through the academic school year more than anything else.

But then, we'll add a lot of value over time.

And so the responsiveness has been great actually.

And anybody who's used the site can see that we've been testing it.

So it's called Chegg Study Pack, the pricing at $19.95, which should increase our ARPU over time and continue a very high rate of subscription growth as we continue to see.

As to whether or not we will do others, over time, Alex the answer is yes.

What we see is huge growth opportunities.

So for example, there's over 1 million students now online going to online not-for-profit schools.

There's over 25% of all community college students go to school in the state of California alone, and we are organizing content that will be developed directly for them.

Because we think those are huge domestic growth opportunities.

So there's going to be multiple versions of learning from Chegg over time.

We're just not in a rush to do anything because the core business is growing so well.

We want to make sure that everything we do is adding value, and we're going to execute really well.

Make sense?

(Operator Instructions) Our next question comes from the line of Corey Greenwall (sic ) [Greendale] with First Analysis.

Craig Greendale.

So I guess, I'll allow myself to one question, one follow-up.

I'll start with Thinkful, which is -- well, maybe I'll try a 2-parter which is just, could you give us a sense of what revenue you're assuming in 2020?

And then, I understand kind of the synergy with your existing funnel, but I think one of the questions about that space generally has been barriers to entry.

I know so maybe you could just elaborate on what you see as the moat for Chegg plus Thinkful specifically?

Yes.

So Corey, this is Andy.

On -- with respect to the revenue that we're expecting, we articulated that when we announced Thinkful in September.

Their last full year as an independent company, which was 2018, they did approximately $14 million of revenue.

And they were growing about the same rate that we've been growing at which is about 30%.

So I think that's a good baseline for you to start with.

But as we move forward, the anticipation is it will just be consolidated into Chegg Services.

As you can tell, even though we believe that the skills-based learning will become a much, much larger business over time, it's still relatively small, relative to the overall -- the Chegg Services business.

So it will get consolidated in there.

But that's the way to think about it.

And I'd say the moat question, yes.

Look, we don't like to own anything in a highly competitive space and without a moat.

And so I think the misunderstanding is that people are comparing this to companies that focus on either corporate training, which we are not doing or to getting corporate dollars to pay to go through a local school, which we are not doing, which those are very expensive.

They use the brand name of the school, they split the revenue and the profits 50-50.

And so as a result of that, they're very expensive, and they're not particularly unique.

The path that we've chosen is exactly what we did with Chegg Study, and people were curious back then, whether or not we could build a product that would be incredibly high-value, high-quality and have a moat.

And the answer is yes.

And the secret is going to be the pricing, which we know we can price lower than anybody else and still make a significant margin because we don't have to split the revenue.

And because it's all online, the costs are very different than having to work in a piece of real estate or hire professors to be in every single location, plus there is no barrier to how many people can take the class at the same time.

Those in and of itself are just business model advantages that online has over all the other models that were created.

Because they were created, it seems to me, for fast trades.

This one was not.

This one was created to actually help people get the skills to get a job.

The other area that we feel very confident in as being a moat is the chat-based tutoring and the expert Q&A.

So imagine a scenario where today, anybody who goes to those versions of competitors, if you want to call it, they have to get office hours or they have to go at a scheduled time or at 2:00 in the morning, they have nobody to talk to or they're scheduled to talk to somebody once a week.

Well, what makes Chegg so unique and so different in our other study services is the ability to get live, high-quality instant help to anything that you're stuck with.

And so that will lower cost, improve quality, increase graduation rates and increase employability, and nobody else has them.

Every other company has tried to do it.

If you look at most of the online universities and other things, they have giant call centers because they're trying to keep people in the school and from dropping out.

We're trying to teach people so that they desire to stay in and graduate.

And it's a very big difference in the model.

It makes it much better, much more robust, much more relevant, much more personalized.

And so it's going to be a significant moat because no one else has even begun to think about the technology let alone already have it.

Great.

So just a quick follow-up on that, Dan.

If I understand, the concept is that high quality, given the way it's designed, plus, which I agree with, by the way, plus some of the things you're adding like the chat would also provide a cost advantage plus the funnel you already have.

If that's right, just want to make sure I understood.

Are you suggesting -- are you saying that you expect to lower the cost of the programs relative to what they are today?

And if that's right, what's the timing of that?

So we expect to be able to have courses with multiple costs, and we are going to be introducing a much lower cost level because we can make a lot more money than anybody else can doing it.

The amazing thing about these products when you do them online, we've already built the entire infrastructure for expert Q&A.

We've already built the entire infrastructure for chat-based tutoring.

So these are all small incremental costs to be able to support these students.

So we will be rolling out multiple versions of these at different price points and different curriculum to advantage students, and that's a big advantage that Chegg has that no one else has.

And it's very clear that the Thinkful students love Thinkful.

They graduate at higher rates, they get jobs.

But there are going to be people who're going to want to learn faster, they're going to want to learn on demand.

They're going to want to pace differently.

They're going to have different capabilities.

And that's the thing that Chegg has mastered that other companies haven't yet.

So we're very fired up about it.

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

Just a question on the guidance.

Your guidance next year looks to match what you're going to look like putting up this year in terms of growth, high 20% growth.

I think there are a lot of questions how you would break that down to the underlying drivers for that growth next year, when you take in the acquisitions and you take in the price increases and some of the other drivers.

I don't know if there's an easy way to break those drivers apart to give us a sense of the additions for next year?

Yes.

So Brent, why don't -- I'll take that one.

So when you look at next year and the guidance that we've given, particularly on the Chegg Services line, what I talked about earlier was that we anticipate that our overall subscriber growth will be approximately about the same as the revenue growth.

So what's really -- while we're adding Thinkful, it's still relatively small at this point in time relative to the Chegg Study, Chegg -- and the Writing business.

So really what is driving the top line next year, primarily is our core business, and that would be Chegg Study.

Obviously, the Study Pack will be part of that.

But more towards the latter part of the year, as Dan had mentioned, when we deploy it more broadly starting the new school year.

But that -- those are the core drivers on the Study side of the business.

And that's driving the continued margin expansion.

Andy, just if you could clarify.

There are no international included in that number for next year?

No.

We've been international for some time, right?

And so it's been relatively small for a period of time.

But we are -- we started being much more intentional with respect to our investments and how we were handling international this year.

And we've talked about that for some time.

And localizing the content, which is a fairly small cost, incremental marketing, multicurrency.

And we just introduced multicurrency capability for Canadian customers a couple of months ago, if I recall correctly.

So we're making all of those investments within the guidance for 2019, continues to be in the guidance for 2020.

We believe international over the next 1, 2, 3, 4 years is going to continue to be a bigger and bigger driver for future growth.

Yes.

And so the way to think about it, this is Dan, is that domestically, we've got online not-for-profit schools, which are now over 1 million students do that.

We've got community colleges and those are all opportunities to continue to grow subscriptions nicely as we have been for the next several years, because those are all places where we are under-penetrated by a lot.

And we see opportunities to go after that.

And then international, we'll continue to add countries, and then the bundle comes after.

So it's not just for '20, but when you think about the opportunities for '21, '22, we see great growth ahead of us for many years to come.

Yes.

Our next question comes from the line of Stephen Sheldon with William Blair.

I wanted to ask a little bit more about international.

You talked about this some, but can you just talk about the cadence of international investments as we think about 2020, 2021?

When would you expect to really ramp those investments and push the pedal I guess, internationally?

And what are the challenges or risks that you think you'll face as you try to drive international adoption even in English-speaking countries?

So I think -- let me start by separating out the really important questions that you asked, which is I think a lot of people say, okay, consumer subscription business must be like Spotify, must be like Netflix.

Which is there's significant capital investments that need to be made.

Perhaps you need to buy a thing in other countries.

The content is completely different.

You have to have licenses that are completely different.

The education space is not like that.

The same 5 publishers that dominate the U.S. dominate the majority of the world.

And so we have an advantage now that others don't.

The second thing is we don't have to make massive investments.

We don't have to say in the year, whatever, we're going to be investing in this country or that country.

Everything we do is assumed in the guidance and everything we do is incremental to what we have because we know the rollout path.

The really -- the only obstacle, it's not whether or not we have take rate.

We're seeing really great response.

It's not whether or not there'll be significant investments.

That's not actually what it requires.

As Andy mentioned, it requires things like being able to take local billing and local taxes.

And those -- and local credit cards and those kinds of things.

It's more engineering work than it is content work.

So we're not having to go get local movies or local music.

We're just a different bear, and that makes our model actually a lot easier and a lot better, a lot more capable to roll out.

So you asked the question, which is, what are the difficulties or what are the risks?

It's really just that we've got to be able to make sure that we price it right in each country, that we make sure that we add whatever small amounts but relevant amounts of local content, we want to make sure that we work with Google to be able to index these things as we've successfully done in the U.S., want to make sure we bill it correctly.

And then, it's really understanding the school year and the best channels so we -- to roll out 10 countries at one time, it's very difficult to do to do it right.

So we're very systematic.

Canada is, by far, the most important for us to start with.

Followed by Australia, followed by the U.K. surprisingly, followed by places like South Korea and believe it or not, places like Saudi Arabia.

There's real demand because everything we do inside Chegg Study can be localized with the Q&A and with the expert answer and the content comes from 80% the same publishers.

So it's unique to other companies that have had to do this, and it's really to the benefit of our shareholders and our company to be able to do it.

So it's not that we see a major obstacle ahead, except we've just got to do the work.

And so what we try not to do is to do too many things at one time to put anything we have at risk because the model itself is so strong, it's growing very fast.

It has high margins, and the urgency is in doing it right, not doing it fast.

Got it.

That makes sense.

And then just wanted to ask on an update -- for an update on the tutoring business, how are trends going there?

I think you talked about that being the fastest-growing business over the last couple of quarters?

And then, how much more integration do you need between Tutors and kind of the core Chegg Study solutions?

Yes.

It's -- so it's very interesting because as we said several years ago, and this is what I mean by it takes time to do the technology.

It's not so much content, which is the chat-based tutoring platform has now started to roll out.

It is getting very good response.

The model now is where you can use it one-time and you can subscribe for a month rather than necessarily just pay for the minute.

And then -- so that is something that we will -- we have started to roll out.

It's actually beginning to have a good impact, a nice impact, not huge yet.

But the real value that we discovered is what I mentioned earlier, which is the ability not only to put inside a study or things like the Study Pack.

But to put it up to back up things like Thinkful, where we're getting thousands of dollars per class.

We have the ability to put live human help, who are experts in any subject, to help somebody master that subject and get through it faster and have a better chance to graduate.

And so a lot of our efforts right now are -- have already started, actually, to integrate it into the new Thinkful curriculum.

And we're really excited about it because its real value is going to be to make sure that anybody that's stuck can talk to a human no matter what country you're in and no matter what category you're in.

So if it's a job skills, great.

If it's an academic skill, great.

So yes, it's rolled out.

It's rolling out now as a stand-alone service, but its real value is going to be supporting students as we add more curriculum.

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

Given you just recently closed the Thinkful acquisition, and you still have, I think, over $1.1 billion in cash on your books, what areas should we expect you to focus on for future M&A?

Yes.

I mean, our focus is really pretty simple, and it hasn't changed from, well, you've known us for 6 years now, Jeff.

It hasn't changed from 6 years ago to today.

And that is we look at opportunities that can leverage our brand, leverage our platform, leverage our data and that can provide overwhelming value to students at low cost.

And I don't think it makes sense to get into specific details, but we have a team that continues to look at the education space.

And like Dan said, we were 2 years or more into looking into the skill space.

So we're very thoughtful about what we do and then we pull and then, if we find something that we believe meets all of those criteria and at the right price, and as you can see, we -- I think the value we paid for Thinkful was good.

And so we look at those things when we look at across the education landscape.

And we do believe that there's going to be future opportunities for us.

As you know, in the private markets, there's been some pretty high valuations over the last several years.

We believe those valuations are likely to reduce.

And when they reduce, we have the capital that if we decide it's the right fit for Chegg, we have the capital that would allow us to make an acquisition.

So I know that's not a specific area, but those are the things that we look at internally when we look at acquisitions.

And sorry, go ahead.

Please ask your next question, go ahead.

Sorry, I wanted to switch gears just back to Thinkful.

I'm just wondering what the thought process was why Thinkful is going to be, I guess, combined within Chegg Services.

Is there going to be a way for us on the outside to kind of measure the progress of Thinkful going forward?

I'll let Andy answer the second question in a second.

In terms of the thought process on the business is pretty clear, which is 88% of all students go to college for the purposes of getting a job.

Unfortunately, the cost of college has gone up so substantially, student debt is at a crisis level.

And students are looking for 2 things.

If they're in the system, they're looking for ways to turn that investment into something that can actually get them a job and Thinkful is going to be there for them.

And we have a direct channel to every student knowing every student at -- all 6 million students in our network that are paying us for something, we know their school, their class, their major.

We have the ability to go directly to them at no cost.

And provide them an opportunity, helping them understand which jobs are available and which skills they need.

So that alone is a significant advantage and a reason to do it at all.

The other thing is that more and more people at every age group are looking for ways to educate themselves to get specific jobs.

So there's multiple layers of skilling.

There's pre-skilling, there's skilling, there's up-skilling.

We chose the skilling space because right now, it's extraordinarily affordable to be able to learn things online with our chat-based tutoring and our expert Q&A that can actually lead to a direct job in your local community.

And there are millions and millions of unfilled jobs, and we have the ability to make a major impact there.

So if you think of all the students that are going to community colleges, there's academic tracks.

There are professional tracks, but a lot of them can't even do that.

Or they go to more than one at a time because the scheduling is a conflict between reading and eating.

And so we have the opportunity to change the game in that space, and we just couldn't be more excited about it.

And we're seeing very good response.

It's not a surprise.

Like I said, or like Andy said, we did 2 years' worth of work.

And investigated just about everybody in the space.

And these were the right -- this is the right company with the right model, with the right curriculum and super pumped.

Yes.

And I might add 1 other thing to that, by the way, is -- and you can't underestimate this is the culture, right?

We found a team that we felt fit our culture really well, just like we did with -- when we got into writing.

So there's a very strong cultural fit between the 2 companies, which is super important.

Our next question comes from the line of Ryan MacDonald with Needham & Company.

I guess regarding the Thinkful acquisition, can you talk about sort of the pricing model here?

I've noticed that Thinkful, obviously, you offer -- it offers a number of different plans, including pay upfront versus all the way to income-sharing agreements.

What's the general mix there as students are taking those courses?

And how does that -- especially if students are taking the income share agreement, how does that affect your ability to sort of scale the profitability in that business over time?

I'm going to answer the ISA question, and I'll let Andy sort of fill in details of the rest.

So it's a very interesting thing.

If you're in a classroom, and you have a limited number of seats, and you give a seat to somebody who may or may not pay, it's like an airline that leaves with the seat empty, which is you could lose all your money and affect your profitability.

And it's a very big risk.

But when it's online and you have an unlimited number of seats, you don't have that concern at all.

So the incremental cost of adding a customer and taking a risk on an ISA, is very different when you do it online than when you do it off-line.

And the fact that we have a $1-billion balance sheet, which means that we have the ability to not go out and charge interest and we have the ability to take risks because there's really not a risk.

There's no capital being used to add a student to the classroom.

If you were doing it in a college, and you gave a seat or a dorm room to somebody on an income share agreement and that student didn't succeed or didn't pass or didn't graduate, you lose not only that person's money, but the opportunity to fill that seat with somebody who can pay.

Online, not the same scenarios, an unlimited number of seats.

So it is a unique opportunity for Chegg to really sort of recreate how to help students in low-income areas, underrepresented areas, who should be able to get a chance to learn things that others can learn and then ultimately pay for it.

So there's -- that was 1 of the reasons we love the direct-to-student model as it related to the skills-based space.

So very different than anybody else has.

And that puts us in a great position.

Yes.

Awesome.

And then, I guess just as a follow-up and a clarification on the Chegg Study comment.

Is the intent to offer Chegg Study for Thinkful students included -- will that be included in the tuition they pay for that program?

Or is there a separate sort of charge as well for that?

Let's -- very fair question.

We don't plan to offer a Chegg Study for Thinkful students.

The capabilities that we built inside Chegg Study, which is a network of over 70,000 experts that can answer any question at any time with proven expertise plus chat-based tutoring, which means we can bring a human at 3:00 in the morning or 2:00 in the afternoon, when you're at work or you're at home or after you fed your baby, nobody else has that.

It's an extraordinary moat.

But that will be part of the tuition, which is, again, a significant advantage to why somebody would come work with Chegg.

We'll have better content.

We'll have better support systems.

We'll have lower costs and we'll be able to support you in a way that no one else has ever been able to support you before.

As I said, most of these companies, their job was to get telemarketers at a very high cost to convince you to stay in so that you paid.

Ours are going to be actual educators who are going to help you learn the subjects so that you can finish what you came there to do.

And I'm so confident in that because that has been the feedback that we've already seen.

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

Great.

Looks like really nice growth expected in 2020 for Chegg Services.

I'm just wondering if you can unpack that a little bit for us just in terms of how we should expect to see that play out in terms of your number of subscribers versus revenue per subscriber?

Certainly seems like there's a lot of opportunities between the bundle and some other initiatives you have to really be getting the revenue per student up.

Just curious kind of how we should be thinking about the way that you'll get to that number for 2020 that you put out today?

Yes.

So Alex, this is Andy, again.

And yes, the way we're looking at it right now, given the size of the business, particularly the Chegg Study business and, to some degree, the Writing business.

What's really going to drive the top line of those 2 businesses.

And like I said in the prepared remarks, we said that subscribers are likely to be very close to what the overall Chegg Services growth rates that we're projecting for 2020.

With respect to ARPU, we will start deploying the bundle to new subscribers only, like Dan said.

And then, over time, potentially offer it to existing subscribers.

But the big push is going to be in the fall semester.

The bottom line is our school year starts in August, and it goes through the end of May.

And so the big push will be in August.

So we're likely to see as far as ARPU increases, we may see some ARPU increases, but not significant in 2020 until it gets fully deployed towards the end of the year and then rolling into 2021.

So that's how we're seeing things right now.

But really looking for -- looking -- it's looking like a really, really nice year for 2020.

Setting up quite nicely for '21, as Andy said, because exiting the year, we'll not only see great subscriber growth, but we'll begin to see noticeable ARPU growth.

That's the expectation.

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

Just real quick, the Math Solver and Chegg Writing, how are those performing?

This is Dan.

So I'll start with the most obvious one, which is Chegg Writing is performing extraordinarily well.

I mean, it's used by over 30 million people.

It's seeing -- remember, when we acquired it, it was a 15-year-old company.

And what we've been able to do in 3.5 years is basically change the game by expanding what its capabilities are.

Which was it went from just being able to do citations and bibliographies, which it does better than anybody.

And you can see the numbers, in fact, we included in the prepared remarks.

But the ability to do grammar checker and plagiarism checker and sentence structure and all of those things have allowed us to actually create a very profitable subscription business.

So that business is only a couple of years old, but it's seeing wonderful growth, and we expect that to continue.

Because people, unfortunately, what we have because this country has not invested enough in a lot of education at different levels of the country and in different cities, there's a lot of people who need to learn how to write and haven't been able to be supported or taught or tutored.

Chegg does that at high quality and low cost.

So we're, in fact, I'm in the Writing office right now.

And people here are really excited about what AI can do and helping people learn how to write.

And so that's been extraordinarily powerful.

On Math, again, it grows quite nicely, but I just want to remind everybody, we acquired Math so that we can build a bundle.

And so Math has a value.

It grows, people subscribe to it.

That's great, but its real value is to be able to include it in the Chegg Study pack, so we can add writing and math along with videos and more questions.

And again, you can see all the creative that we put on the site to test.

And that has led to a nice chunk of existing -- of new subscribers beginning to look at that and opt for that.

And so that's why we think it's going to be a big deal as we start to exit '20 because we're going to start with only the new customers at the beginning of the year because the school year doesn't start till August or September.

So Math is doing really, really well.

It's global, but its goal was to be inside the Study Pack.

That's why we acquired it.

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

Yes, my question has to do with the Required Materials, the new relationship with FedEx and actually, the departure from Ingram.

Strategically, I am going back a few years here, but the thought was, hey, we don't want to be owning -- we don't want to be buying the books, right?

The new model is we'll take a commission on the rental [fee --] the rental fee of the books.

And now it seems like we've reversed that, and we're going to own books again.

What was the strategic thinking behind that?

Well, there's a lot of strategic things behind that.

For those of you who date back to the beginning, remember Amazon entered the market, we were spending over $120 million a year on textbooks.

Amazon lowered the price.

We only had one warehouse.

And people believed we were going to go out of business.

We believed we weren't, and we believed we had a plan, and we built a relationship with Ingram.

But back then, the biggest problem we were solving for was having somebody to help us capitalize the expense of textbooks because we had to buy 100% of them, and they were very expensive.

Today, that's not a problem.

The #1 issue is logistics.

We want a world-class logistics that can serve the student better.

And the reason for that is because, first of all, the price of textbooks has dropped precipitously, right?

They cost very little.

The second thing is consignment and eTextbooks have become nearly 50% of the whole market, which means in just a few years, no one is going to be put capital out for textbooks anyway.

Because as it gets -- we don't pay anything upfront for eTextbooks.

And the whole point of consignment is they give us the books.

So in this case, the total value of the textbooks we buy, they're cheaper.

We can get a better return for all of you and for ourselves.

And what we really want is world-class logistics and so the strategy was, how can we get a longer-term partner.

This one is at least 5 years and has the ability to extend several times.

We're going to use very little cash.

Overwhelming majority of the books are still not going to be owned by us.

But we can get a better return on the ones that we do buy than on the deal that we would have had on the table from Ingram.

And so we solved all of our problems.

It's just a different company at a different stage now.

Okay.

So is the situation, it really does come down, hey, we can service the students better, faster.

We can get the books in their hands faster.

Ingram didn't allow us to do that so we sought out a partner that we felt could do that.

And the cost and the amount of money we used to have to invest in textbooks was substantial 5 years ago.

And today, it's almost nothing.

I think Andy pointed out that in 2021, we might've spent a total of $15 million.

We have a balance sheet of over $1 billion.

This is -- it went from being the overwhelming problem for the company to insignificant on our balance sheet, but get a better return for our investors and it is a better delivery service for our students.

Our final question comes from the line of Brett Knoblauch with Berenberg.

Just to kind of talk about that FedEx relationship.

Looking at 2020 free cash flow, you said you're going to spend about $50 million on textbooks next year?

Is there any guidance for the CapEx besides what you would spend on textbooks?

Yes, we typically guide to CapEx for 2020 or we would in the February call.

But obviously, we are going to be adding that $50 million in textbook.

Sans those textbooks, we would anticipate that our free cash flow conversion will be right at where we've been saying for some period of time, 50% to 60% of EBITDA, adjusted EBITDA.

Well, obviously, it will be a little bit -- it would need a little bit more than that for the initial purchase of textbook, so maybe it's going to be somewhere to 40% to 50%.

But that's just a 1-year temporary blip, but still we're anticipating strong free cash flow in 2020 and certainly beyond 2020.

Okay, great.

And then maybe just on competition.

I've seen a lot of [borrow B] ads recently.

And I just maybe want to get your thoughts on -- as you get ready to launch this new bundle for roughly $20 and borrow B is offering their platform for $9.99.

Has that affected your business or your strategy at all?

Is there maybe anything you're doing internally to try and combat that?

I don't know the best way to say this without sounding a little too confident.

They don't even appear on the radar.

So you can see our growth rate, I think it speaks for itself.

So no, we -- it just doesn't show up for our students and for us.

Since there are no further questions in the queue, I would like to turn the call back over to Mr. Dan Rosensweig for any closing remarks.

Well, first of all, thank you, everybody, for joining us.

Believe it or not, our journey started with textbook rental business 10 years ago, and we recognized early on, we need to transition our business model and our offerings if we were going to help students solve their biggest pain points and succeed in their academic journey.

In a short period of time, Chegg has achieved 87% brand recognition, is growing globally, and we continue to expand the quality and quantity of services we offer students.

The addition of Thinkful, as we mentioned today, is critical in today's global economy as Chegg can now help students both during their academic journey and their professional journey by helping them master the critical skills needed to both academic success and now their careers, which is very exciting.

And as we have grown, we now see ourselves as a platform constantly adding more services, capabilities and content, always adding increased value for our customers and expanding the number of customers we can serve.

That's always been our goal: to expand the TAM and create more value for the students.

Although it's interesting that the end of this year marks my first 10 years at Chegg, the journey seems to be just getting started and the opportunities look bigger and more important than ever before.

So we couldn't be more excited.

And as we look ahead to 2020, we are truly excited about the next chapter of Chegg's story.

And I really want to thank all of you who've been on the journey with us.

And I think you can see it's early, but we're super excited about next year.

And we look forward to talking to you on the next call.

So thank you all very much.

This concludes today's teleconference.

You may now disconnect your lines at this time.

Thank you for your participation, and have a wonderful day.