Q3 2019 Earnings Call
Greetings welcome to check incorporated third quarter 2019 earnings conference call. At this time, all participants are in listen only mode.
A question answer session will follow the phone presentation, if any what's required operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now like turn the conference over to your hosts Tracey Ford Vice President Investor Relations for Chuck. Thank you you may begin good afternoon. Thank you for joining Cheggs third quarter 20.
He 19 conference call.
Today's call again, rosensweig co chairperson, and CEO and Andy Brown, Chief Financial Officer.
Copy of our earnings press release, along with our Investor presentation is available at our Investor Relations website, Investor Dot Chegg Dot com.
Replay of this call will also be available on our website.
We routinely post information on our website and intend to make important announcement Otter Media Center website. It Chegg Dot Com Flash Media Center, we encourage you to make use of these resources.
Before we begin I would like to point out the 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.
Washington, you'd 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 Cheggs quarterly reports on Form 10-Q filed with the Securities and Exchange Commission on July 20 920.
19, it's wells or other filings with the FCC.
Any forward looking statements that we make today are based on assumptions that we believed to be reasonable as of the state. 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 measure.
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 Dot Chegg Dot com.
We also recommend you review the Investor Datasheet, which is also posted our IR website.
No I will turn the call over to Dan.
Thank you Tracy and welcome everyone. We're delighted to report another great quarter exceeding both our business and financial expectations.
<unk>, 27% year over year revenue growth and 84% adjusted EBITDA growth.
Our teams continue to execute against our key priorities, we're trying to meet our financial goals expand our Tam and investing opportunities that leverage our reach our student graph and the strength of our Brett.
We're pleased with our performance, thus far which is why we are confident to once again raise our 2019 guidance, which Eddie will walk you through in greater detail.
We continue to see incredible growth and strengthen our academic services and we believe we can leverage all of that as we after the skill space. So the acquisition APIC pool.
After three years analyzing the category it was clear that skills based learning wasn't that's real extension of checks offerings.
We chose people because it is a leader in the director students skills based training some of the most in demand jobs for the modern Academy.
We have always helps students succeed on their academic journey and now we can extend our reach by helping them throughout the personal journey.
Thankful and check or synergistic and that we both provide high quality affordable online learning, which improves students' academic and professional outcomes.
And just like Chegg think will actually director 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 increased the quality and relevance to the content grow the business faster and more efficiently and ultimate.
They make it more profitable.
I want to take a moment to welcome to think we'll team into the check families 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 and multiple formats to serve the growing diversity of students need.
As we continue to expand our offerings, we can help more students up level from where they are so 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 allows 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 turned to us improve their it to improve their ability to right.
Check writing is another powerful service, helping students learn grammar set structure check for plagiarism and more in Q3 alone students generated over 72 million citations and submitted over 1.2 million original papers for you.
It's increasingly clear as more students or try to make their way to the middle class through higher education that the system needs to evolve to support the needs of the modern students.
Students today are more diverse than ever before they are older cover a different socioeconomic backgrounds and have entered the system in various various states are 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 I check exist to increase access an opportunity for students.
We will continue to invest in adding more content features to our services and add more services to our platform as as we have with a check mass solver check prep and Chegg tutors.
We see an opportunity 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've shared on previous calls we've been testing and upgraded bundle.
Which we call Chegg study pack and we're pleased with the responses we have seen so far.
The study pack rollout will focus on new customer acquisition.
Given the seasonality of our business we of course wants 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 at 2020.
But the largest bush will be in the second half of the year. During the August September back to school timeframe and all of this is reflected in our guidance, which Eddie 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 built strong relationships with our customers.
Our partnership with Ingram expires in May of next year, and we're thrilled to announce today. So 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 sign that deal with Ingram in 2014, we needed a partner who can finance the acquisition of textbooks warehouse the products and handle logistics and their relationship with anyone with a game changer for check.
For those of you who are new to the story.
The deal with Ingram allowed us to invest in that 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 evolve and we wanted to provider who could serve our students better and provide world class shipping and logistics experience and that is why we're excited to announce our agreement with Fedex.
[noise] Fedex can meet the size scale and speed of our business.
This new agreement.
In place for at least five years, well overtime and be more cost effective for chegg and better serve the needs of our students as we anticipate one day faster delivery for over 70% of our customers.
Supporting the academic journey is essential.
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're uniquely positioned to deliver this service to our current customers as well as bring an entirely new customer base to the check family.
We're excited to add another high gross service to the platform that we believe will scale into a high margin business overtime.
Our plan is to utilize not only our audience to expand people's opportunities, but to take advantage of our core learning assets like chat base tutoring and expert QNX 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 mater workforce.
Check continues to move the industry throat 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 accreditations or simply get a better job in their communities.
I'm 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 the has and that is not only grown our business.
What is reflected in our culture. In addition to our strong business performance. This quarter. We were once again honored to be name one a fortune magazine's 100 best medium sized workplaces in America for 2019.
I cannot think our team enough for making check such a great place to work and I'm thrilled to be part of this incredible company.
And with that I'll turn it over to Andy.
Thanks, Dan and good afternoon, everyone check had another great quarter without business metrics and financials ahead of our expectations. These strong results give us a confidence to raise our guidance again for 2019.
We're 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 thankful and are expected changes to required materials as a result of the move to our new logistics partner Fedex.
Well, we're extremely proud of what the check team has already accomplished.
Even more excited about the future as we continue to increase our offerings to accelerate the time from learning to Arnie.
Looking at the third quarter total revenue was 94.2 million a 27% increase over Q3 2018 with both required materials and check services exceeding our expectations.
This strong topline performance drove gross margins to 76%.
This resulted in adjusted EBITDA of 23.1 million, an increase at 84% over what we achieved in Q3, 2018, and well above our expectations demonstrating the continued leverage up 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 at 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 three years consignment that E textbooks, 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 with textbooks.
During this ongoing transition we will need to fully deployed 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 two declined dramatically in 2021, the 15 million and decrease each year thereafter as the transition to consignment then eat textbook 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 stabilizing 2020 too.
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 reduced gross margin.
These changes have been provided in the earnings press release and Investor deck available on our IR website.
Based on the strong results from Q3, we're increasing our full year guidance for 2019.
For Q4, we now expect told him revenue between 122, and 124 million check services revenue between 107, and 108 million, which includes approximately 2 million from thinkable, which closed on October 1st and takes into consideration laid up also Boston semester start dates that we.
You mentioned on the last earnings call.
Gross margin between 77 at 78% and adjusted EBITDA between 43, and 45 million, which includes a 4 million loss from thinkable.
As a result, we're increasing our full year 2019 guidance. We now expect total revenue between 407, and 409 million would check services revenue between 332, and 333 million gross margin between 76, and 77% and adjusted EBITDA between 120.
One and 123 million.
Turning to 2020 , our initial expectation for total revenue is approximately 520 million with check services revenue growing to approximately 437 million.
We expect check services revenue and subscriber growth rates will continue to remain closely aligned over the course of the yet.
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 leveraging the model with adjusted EBITDA expanding to 163 million, increasing adjusted EBITDA margin 100 basis points over 29 team.
But the other those if you modeling 2020 by quarter, we've 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 provides a strong initial outlook for 2020.
It is becoming increasingly clear that a model is the M. B 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.
Thank you at this time, we will be conducted a question and answer session. If you like to ask questions. Please press star one on your telephone keypad [noise].
So I understand your line is and the question Q.
You mean first start to feel lunch or move your question from the Q for participants using speaker equipment, and maybe necessary to pick up your hand said before person Starkey.
Our first question comes on line of Alex Paris with Barrington Research. Please proceed with your question.
Good afternoon, Dan and Andy Congrats on the quarter and before I moved to my questions I I'd like to highlight that Fedex partnership and that looks promising for the intangible value of the business.
[noise] starting off with big full.
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 within the <unk> for the acquisition whether you knew.
Of the data breach prior to the deal and on a positive note in regard to think full can you characterize a.
You may have already done so, but can you characterize the competitive environment or think full.
More specifically can you gauge how they've done historically and taking market share and was the acquisition of the full reflective of student needs you observed in the Czech platform.
So this is Dan.
Thank you, let's start with the news so it was.
So no we were not cognizant and ahead of the announcing Oh 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 you know there their customer base is much smaller than ours, obviously and they charge a lot more so so it was a non variable as best as we can tell and everything that we've looked at afterwards, we asked them to follow the exact same protocols that we did which was complete.
Nope and transparency communicate immediately notify everybody over notified people because unfortunately to factor like and technology, but these things are going to happen, but fortunately neither one of us.
Has the p. or the credit card information and we all do about deliberately years ago to avoid any situations as it relates to that so.
So on the the acquisition in terms of the competitive space. So when we spent.
The better part of two years looking at every single player in the space.
And although today to the outside person. They may look similar to these companies are extraordinarily different some of them are very good a content. Some of them are very good partnerships. Some of them are good at graduation rates.
We chose the one that we felt was the closest to our.
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 a split the revenue with anybody second somebody who was focused on an extraordinarily high quality content, which led to really high graduation rates, which was about 85.
For some of their customers were graduating in finding jobs and so you know it's the reality is it's a very nascent space. What you hear a lot as a lot of the company's there were selling these things into corporations, we're not doing that we're going directly as we've always done to the person that needs into most valued at the most willing to pay for it the most now.
It's why they pay for it that's why they completed 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 what the distribution channel what they needed was a support system to help educate the people better which are chat base to vary and our expert Q and a plugged into their system can actually help people get on stuck at any time day or night.
And the ability to expand their curriculum faster and then take a global and so the marriage would make perfect sense to both sides, we couldn't be more excited and and you know 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 gonna be huge everything you know and so to answer your last question. Alex It's exactly why we acquired it which is we survey our students all the time as some of you may know we have we have tracking polls, which is why where the premier placed.
People are fine election information as it relates to college students. We also do surveys. We also focus groups, who asked to go meet with student and so we try not to make mistakes by just saying Hey, we think rather we go and find out we're not a big speculator, we actually have the ability to go find out and the two things that students want it more than anything else wasn't education and personal finance.
And the second one was to be able to tie there 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 in that.
Highlights the potential for low hanging fruit student position with the addition of think full.
My last question is just in regard to study pack provide.
Perhaps you can provide some additional commentary into a what you're learning and how the rollout is going and to satisfy my curiosity.
We will be one study pack offered for one price has there been the external thoughts to offering different versions of a study package and we'll current students be incentivized to upgrade bundled versus a new customer.
So.
We try to answer that very detailed question I don't really good question. We are really really really excited about the responsiveness of students to wanting more in their integrated learning experience and we we feel very comfortable that age.
Very good size 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 confirmed.
So we think that it's going to be a very big contributors starting really ever 20, as we've said early last year or this year that we said that was likely going to be the case do the academic school year [noise] anything else.
Dan will add a lot of value overtime, and so that responsiveness, it's been great actually in anybody who's use. This I can see that we've been testing. It. So it's called Chegg study pack the prices 1995, which should increase our ARPU overtime and continue very high rate of subscription growth, we continue to see as to whether.
We will do others overtime hours. The answer is yes, what we see is huge growth opportunities. So for example, there is over a million students now online going to online not for profit schools. There is over 25% of all community College students go to school in state of California alone and we're organizing.
Okay that will be developed directly for them because we think those are huge domestic growth opportunity. So there's going to be multiple versions of learning for chegg overtime. We're just talking a rush to do anything [laughter] core business. So well just want to make sure that everything we do value.
Thank you really well.
Makes sense.
[laughter].
Perfect sense, Thanks, Dan and Andy I'll hop back into queue.
Thanks, Alex.
As a reminder, please limit yourself to one question and then re queue up for further questions. Our next question comes on line of core agreements with first analysis. Please proceed with your question.
Hi, I Corey Greendale, So I guess I'll, let myself to one question one follow up the.
Start with.
Thankful, which is well maybe I'll try to part which is just can you give a sense of what revenue you're assuming in 2020 and then.
I understand kind of that the synergy with your existing funnel, but.
I think you know one other question thought that space generally have been barriers to entry you know something he just elaborate on what you see as the moat for Chegg plus thankful specifically.
Yeah. So Corey this is Andy on <unk> with respect to the revenue that we're expecting we articulated that when we announced thing full in September a their last full year as a independent company, which was 2018. They did approximately 14 million of revenue when they were growing about the same right that we've been growing up.
It's about 30% so I think that's a good baseline for you.
To start with but as we move forward or the anticipation as it will just be consolidated into Chegg services. You know as you can you tell even though we believe the skills based learning will become a much much larger business over time, it's still relatively small.
Relative to the overall the check services business, so it'll get consolidated in there, but that's the way to think about it.
Oh seven mode question, Yeah look we don't like the or anything in a highly competitive space and without a mode and so I think the misunderstanding is that people are comparing this to to companies that focus on either corporate training, which we're not doing or.
Getting corporate dollars to pay to go through a local school, which we're not doing which those are very expensive. They use the brand name of the school. They split the revenue in the profits 50, 50, and so as a result is that they're very expensive and they're not particularly unique the past. The 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 mode. The answer is yes in the secret is gonna 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.
The state or higher 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 enough itself or 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 trade. This one was not this one was created to actually helped people get the skills to get a job.
The other area that we that we feel very confident as being a mono is the chat base tutoring and ER and the experts una so imagine a scenario where today anybody it goes to those those are you know as versions of competitors. If you want to call. It they have to get office hours or they have to go to schedule time or too.
Lock in the morning, they have nobody to talk to or their schedule to talk to somebody once a week well what makes chegg, so unique and so different in our in our other studies services is the ability to get like high quality in Stan.
So anything that you're stuck with and so that will that will lower costs improved quality increase graduation rates and increase employee ability and nobody else has done 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 in from dropping out we're trying to teach people so that they desire to stay in graduate and it's a very big difference in the model. It's makes it much better much more robust much more relevant much more personalized and so it's going to be a significant mode. Because no. One else is even begun to think about the technology, let alone already.
Got it.
Great. So just a quick follow up on that Dan if I, if I understand that the concept is that high quality given the way, it's designed to plus which I agree with by the way plus some other things you're adding like like the Chad.
We also provide a cost advantage plus the funnel you already have if if that's right just to make sure I understood. I you suggest they are you, saying that you expect to lower the cost of the programs relative to what they are today in it 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're going to be introducing a much lower cost level, because we can make a lot more money than anybody else can doing it you know they the amazing thing about these these products when you do them online and you are we've already built the entire infrastructure for expert QNX Liberty Bell.
The entire infrastructure for for Chafee's tutoring. So these are all you know 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.
You know, it's very clear that's a big school students Love thing full they graduated high rates they get job, but they're going to be people, who don't want to learn faster, they're going to want to learn on demand, we're going to want to pace differently, they're gonna have different capabilities and that's the thing that checkers mastered that other companies haven't yet so we're very fired up about.
Thanks very much.
Our next question comes on line of Brent, though with Jefferies. Please proceed with your question.
Oh.
Good afternoon, Jim just a question on the guidance. Your guide next year looks to match what your.
Going to look like putting up this year in terms of growth a high 20% growth.
There are a lot of questions, how you would break that down to.
No that the underlying drivers for for that growth next year. When you can you take into the acquisitions you've taken the price increases in some of the other drivers I don't know if there's an easy way to shoot to break those drivers apart or you get a sense of the.
Additions for <unk> for next year. Thank you.
Yes, so so Brent what I'll take that one so when you when you look at the when you look at next year and the guidance that we give them, particularly on the check services line, what I talked about earlier was that we anticipate that are overall subscriber growth will will be approximately about about the same as the revenue growth. So what's really.
Well, we're adding thankful, it's still relatively small at this point in time relative to the Chegg study check and and the writing business. So really what's driving the top line next year primarily.
Is that it is our core business and that would be a check study. Obviously the study pack will be part of that but but but more towards the latter part of the year as Dan mentioned when we when we deployed more broadly are starting the new school year, but that that those the court drivers on the study side of the business and that's driving the.
You'd margin expansion.
Indeed, just a quick Clint could clarify there's no international included in that number for next year.
No well, we weeping international for some time right and so it's it's been relatively small you know.
<unk> for a period of time, but we are we have 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, you know and localizing the content, which is a fairly small cost the incremental marketing Oh God Multicurrency, a and we just introduced multi.
Currency capability for Canadian customers couple of months ago, if I recall correctly. So we were making all of those investments within the guidance for 2019 continues to be in the guidance, but 2020, we believe international over the next you know 1234 years is going to its gone continue to be.
A bigger and bigger driver the PUC for future growth yeah.
And so the way to think about to Brent. This is Dan is that domestically, we got a online not for profit schools, which are now over a 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 will 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 20 122, we see great growth ahead of us.
For many years to come.
Yep.
Thanks to the out.
Our next question comes on line of Stephen Sheldon with William Blair, You see with your question.
Hey, good afternoon, and congrats on the results when I wanted to ask a little bit more about international you talked about the some but can you just talked about the cadence of international investments as we think about.
2020, 2021, you know when would you expect a really ramp those investments and push the pedal I guess internationally and what are the challenges or risk that you think you'll face as you try to drive international adoption, even in English speaking countries.
[noise] so.
I think there let me start by separating out the there are 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 are significant capital investments that need to be main perhaps need to buy 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 five publishers that dominates the U.S. dominating 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 a man.
Asset investments, we don't have to say in a year or whatever we're gonna 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 of the really the only obstacle, it's not whether or not but if you take rate. We're seeing really great response, it's not whether or not.
There will be significant investment that's not actually what it requires as Andy mentioned it requires things like being able to take local billing in local taxes and those in 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 in that makes our model actually a lot easier in a lot better.
A lot more capable to roll out. So you asked the question which is.
What are the what are the difficulties or what are the risks.
It's really just that we 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 with Google to be able to index. These things as we successfully done in the U.S. wanting me up but it makes.
Sure we believe correctly and then it's really understanding the school year and the best channels. So you know we to rollout 10 countries. At one time is 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 UK surprisingly followed by places like South.
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 acuity and with the expert answer and the content comes from 80%. The same publishers. So you need to other companies that had to do this and it's really too.
The benefit of our shareholders at our company to be able to do it. So it's not that we see a major obstacle ahead, except we just got to do the work and so what we try not to do is do you 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 a high margins and there.
Agency isn't doing it right not doing in fast.
Got it that makes sense and then just wanted to ask on an update for an update on the tutoring business.
How trends are going there I think you're talking about that being the fastest growing business over the last couple quarters and then how much more integration do you need between tutors and kind of the core Chegg study solutions.
Yeah. It's so it's very interesting because as we said several years ago and this is what I mean by takes time to do the technology, it's not so much content.
Which is the Japanese touring platform has now started to roll out. It is getting very good response, a the model now it's where do you can use a onetime or you can subscribe for a month rather than necessarily just pay for the minute and then so that is something that we you know we will we have started to roll out its actually you know beginning to have a good.
The 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 it inside of study or things like the study pack, but to put it up to backup things like painful where we're getting thousands of dollars per class. We have the ability to put lives human help core experts in any subject to help somebody master that subject can get through it fast.
Third and have a better chance to graduate and so a lot of our efforts right now and what our have already started actually.
Integrated into the new faithful curriculum and and we're really excited about it because it's real value is going to be to make sure that anybody that stuff can talk to human no matter what country, you're in and no matter what category right. So it's a job skills great. It's an academic skill great. So yes, it's rolled out it's rolling out now.
As a standalone service, but it's real value is gonna be supporting students as we add more per door.
Great. Thank you.
Our next question comes on line of Jeff Silber BMO capital markets. Please see what's your question.
Hi, Thanks, so much.
Given you just recently closed the single 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.
Yeah, I mean <unk> are our focus is really pretty simple and it hasn't changed from well you've known us for six years now Jeff It hasn't changed from six years ago today and that is we look at opportunities that can leverage our brand leverage our our platform.
A leverage our data and and that can provide overwhelming valued the students at low cost and and you know I don't think it makes sense to get into specific details, but we we have a team that continues to look at the education space and and and like Dan said, if we were a two years.
Our 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 I think the value. We paid for thankful was was was was it was but was good and 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 a future opportunities for US yes. As you as you know in the private markets. The there's been some pretty high.
While you wait actions 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.
To make a make that 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.
[noise] and are now.
Oh No government. Please ask your next question Brian .
Okay, I, sorry, I wanted to switch gears just back to thing called I'm. Just wondering what the thought process was why simple is going to be gets combined within Chegg services is they're gonna be away for us on the outside to kind of measure the progress I think we're going forward. Thanks.
I'll, let Andy answer the second question in a second in terms of the thought process on the businesses, it's pretty clear, which is 88% of all students go to college for the purposes is getting a job.
Unfortunately, the cost to college has gone up so substantially student debt is that a crisis level and students are looking for two 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 thinks it's going to be there for them and we have a direct channel to every student knowing every student all 6 million students.
In our network that are paying us for something we know their school their class. There are major we have the ability to go directly to them at no cost and provide them an opportunity helping them understand.
What's jobs are available would skills. They need so that alone is a significant advantage in a reason to do it at all the other thing is that more and more people. In every age group are looking for ways to educate themselves to get specific jobs. So there's multiple layers of scaling there's preschool in their skillings Upskilling, we chose the skilling space because right now.
It's extraordinarily affordable to be able to learn things online with our chat base tutoring and our expert you would have that can actually lead to a direct job in your local community and you know 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 you know there's.
Academic tracks, there's professional tracks, but a lot of them can't even do that are they go to more than one of the time because the scheduling is a conflict between reading anything and so we we have the opportunity to change the game in that space and we just couldn't be more excited about it and you know we're seeing very good response is not a surprise like I said are like Andy said, we did two years.
With the war and investigated just about everybody in the space and these were the right. This is the right company with the right model of the right curriculum and Super pump.
Yeah, and I might add one other thing to that by the way is and the then you can't underestimate. This is the culture right. We found a team that we felt that our culture really well just like we did with that when we got into writing.
So there's a very strong cultural fit between the two companies that which is super important.
Our next question comes on line of Bryan Mcdonald with Needham and company. Please see with your question.
Hi, Thanks for taking my questions I guess regarding the thankful acquisition can you talk about sort of the pricing model here I've noticed that things will obviously you offer it offers a number of different plans, including you know pay upfront versus all the way to income sharing agreements, what's what's the general mix there as students are taking us.
Of course is and how does that.
Especially if students are taking the income share given how does that affect your ability to sort of scale the profitability in that business overtime.
I'm going to answer the I asked a question and I'll, let Andy sort of.
<unk> details the rep. So it's very interesting thing if you're in a classroom and you have a limited number of seeds and you gave it seemed to somebody who may or may not pay it's like an airline that leaves with the seed empty, which as you can lose all your money in effect your profitability and it's a very big risk, but when it's online and you have an unlimited number of seats.
Don't have that concern at all so the incremental cost of adding a customer and taking a risk on it I say is very different when you do it online than when you do it offline and the fact that we have a billion dollar balance sheet.
Which means the we have the ability to not go out in charge interest and we have the ability to to take risks because it's really not a risk there's no capital being used to attitude into the classroom. If you were doing it in a college and you gave a seat or dorm room to somebody on an income share agreement and that student didn't succeed or didn't pass or didn't gradual.
Thank 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 in unlimited number of seats. So it isn't is unique opportunity for chegg to really sort of you know recreate how to help students in low income areas underrepresented areas.
To be able to get a chance to learn things and others have can learn and then ultimately pay for it. So there is there is that was one 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.
Yeah.
Awesome and then it gets this as a follow up and a clarification on the Chegg study comments are is the intend to offer Chegg study for thankful students included in it will that be included in the tuition. They pay for that program more or is there a separate sort of charges or for that thanks.
Yes.
Very very fair question, we don't plan to offer a chegg study for thing posting the capabilities that we built inside check cutting Chegg study, which is a network of over 70000 experts that can answer any questions at any time with a proven expertise plus chat base tutoring, which means we can.
Bring a human three o'clock in the morning or two in the afternoon, when you're out worker, you're at home or after you've had your baby nobody else has that it's an extraordinary mode. So no that will be part of the tuition, which is again a significant advantage to why somebody would come worked for Chegg will have better content will have a better so.
Fourth systems will have lower costs, and we'll be able to support you in a ways that no one else has ever been able to support your 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 this.
Subject. So you can finish what you came there to do and I, so confident and that because that has been the feedback that we've already seen.
Our next question comes on line of Alex from with Craig Hallum. Please proceed with your question.
Great. Thanks, very much for taking my question I'm looks like really nice growth expected in 2024 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 up subscribers versus revenue per subscriber certainly.
Seems like there's a lot of opportunities between at the bundle and some other initiatives you have to really be getting that the revenue per student up just just curious kind of how we should be thinking about you know the way that you'll get to that number for 2020 that you put out today.
Yes, so Alex its Andy again, and yeah. The way we're looking at it right now given the given the the size of the business, particularly the Chegg study business and to some degree the writing business, what's really going to drive the topline are those two businesses and like I said in the prepared remarks, we said that subscribers a likely to be.
Very close to what the overall check services growth rates that we're projecting for a.
For 2020 with respect to ARPU.
You know, we we will start deploying the bundle to new subscribers only like Dan said and then over time you know you know you know potentially offer it to existing subscribers, but the big push is going to be in the fall semester. You know what <unk> bottom line is our school year starts in August and it goes through the end up.
Okay, and so so the big picture will be in August so we will likely to see as far as ARPU increases. The you know 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 booking is looking like a really really nice year 2020.
[noise], our next when setting up quite quite nicely for 21, as Andy said, because exiting the year well not only see great subscriber growth, but we'll begin to see noticeable ARPA growth that's the expectation.
Our next question comes on line, a Mike Grondahl with Northland Capital markets. Please proceed with your question.
Hi, yes, thanks, guys and congratulations on the quarter. He just real quick the math solver Chegg, writing how are those performing.
This is Dan so I'll start with the most obvious one which is check writing is performing extraordinarily well I mean, it's used by over 30 million people.
Seeing remember when we acquired it was a 15 year old company.
And the what we've been able to doing three and a half 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 your prepared remarks, but the ability to do grammar check.
Sure and plagiarism checker ads and sent structure and all of those things have allowed us to actually create a very.
Profitable subscription business. So you know that business is only a couple of years old, but it seems it seemed a wonderful growth and we expect that to continue because people. Unfortunately, what we have is because this country is not invested enough in a lot education at different levels of the country any different cities, there's a lot of people who need to learn.
I had a REIT and haven't been able to been supported her taught or tutor chegg does that at high quality and low cost. So so were in fact I'm in a writing off is right now and.
You know people here are really excited about what AI can do and helping.
People learn how to right and so that's been extraordinarily powerful.
Now I get it grows quite nicely, but I just want to remind everybody. We acquired map. So that we can build the bundle.
And.
And so map has a value it grows people subscribe to it thats, great, but it's real values to be able to included in the Chegg study packs that we can add writing and mouth, 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 or new subscribers are beginning to look at that an 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 in here because the school units and start to August or September . So math is doing really really well its global but its goal was to be inside the study pack. That's why we acquired.
Our next question comes on line up Eric Martinuzzi Lake Street Capital markets. Please state your question.
Yes. My question has to do with the required materials the new relationship.
And actually the departure from.
From a strategically you know I'm going back a few years here, but the thought was hey, we don't want to be owning we didn't want to be buying the books right. The new model is well take commission on the rental.
Rental fee the books and now it seems like we've reversed that and we're gonna books again.
What was the strategic thinking.
Well, there's a lot of strategic behind us contingencies for those who date back to beginning remember Amazon has the market, we were saying over $120 million on textbooks.
Price, we only had one warehouse.
And people believe we were going to go out of business. We believe we weren't and we believe we had a planning we built the relationship with Ingram, but back then the biggest problem. We were solving for a long time, we hope to capitalize on these experts, but we have to buy a 100% of them and they were very excited.
Hey.
Number one should we just want a world class logistic services.
And the reason for that is because first of all the present Tesobonos has dropped precipitously right they cost.
Very little the second thing is consignment and eat textbooks have become nearly 50% of the whole market, which means in just a few years no. One is gonna be putting capital out the textbook anyway, because as it gets we don't pay anything upfront for you textbooks them, all pointing consignment and they give us the books.
So in this case.
The total value of the textbooks, we buy their cheaper we can get a better return for all of you and for ourselves and what we really want to its world class logistics and so the strategy was how could we get to a longer term partner. This one's at least five years and has the ability to extend several times, we're going to use.
Very little cash overwhelming majority the books are still not going to be owned by us, but we can get a better return on the ones that we Dubai.
Then on the deal that we would've had on the table from Ingram and so we solve all of our problems just a different companies different stage now.
Okay. So was the situation it really does come down a weakened serves the students better faster we can get the books in their hands faster Ingram didn't allow us to do that so we sort of a partner.
We felt could do that.
And the cost and the amount of money, we used to have to invest in textbooks was substantial five years ago and today, it's almost nothing I think Andy pointed out that in 2021, we might spend a total of $15 million, where the balance sheet of over 1 billion is 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 a better delivery service for our students.
Our final question comes in light of Brett, though with Bamberg. Please proceed with your question.
Hi, guys. Thanks for taking my question, just it's kinda talk about that.
Ah Fedex relationship looking at 2020 free cash flow you figure to spend about 50 million on textbooks next year is there any guidance for any capex decides what you it's been a textbooks.
Yeah, we typically guide to capex or for that for 2020, or we would end the February call, but yet, but obviously you know we aren't going to be.
Adding that $50 million in a textbook sands those textbooks, we would anticipate that our free cash flow conversion would be right out where we we've been saying for some period of time, you know 50% to 60%.
<unk>.
EBITDA adjusted EBITDA.
Well, obviously, it'll be a little little bit would need a little bit more than that for the the initial purchase of textbook. So maybe it's gonna be somewhat to 40% to 50% but.
That's just a one year a temporary blip, but still we were anticipating strong free cash flow in 2020, and certainly beyond 2020.
Okay, Great and then maybe just on competition.
A lot of bar will be ads recently and I. Just you know maybe want to get your thoughts on as you get ready to won't just be a bundle for roughly $20 and BARDA is offering their platform for 999 has that affected your business or your strategy at all is there maybe if 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.
Hey, good speaks for itself.
So no we.
It just doesn't show up for our students and for us.
Since our no further questions up in Q I would like to turn the call back over to Mr., Dan Rosensweig for any closing remarks.
Well first of all thanks, 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 exceeding their academic journey.
In short period of time take is achieved 87% brand recognition is growing globally and we continue to expand the quality and quantity in services we offer students.
The addition of thing Paul as we mentioned today is critical in today's global economy. It's chicken now help students both during their academic journey and their professional journey by helping them Masters a critical skills needed to both academic success and now their careers, which is very exciting.
And as we've grown we now see ourselves as a platform constantly adding more services capabilities and content always adding increase value for our customers and expanding the number of customers. We conserve that's always been our goal to expand the Tam and create more value for the students.
Although it's interesting that ended this year marks my first 10 years at Chegg. The journey seems to be just getting started and the opportunity from a bigger and more important than ever before so we couldn't be more excited as we look ahead to 2020, where it's really excited about the next chapter I'll check story and I really want to thank all.
All of you have 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 todays teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and I've a wonderful day.
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