Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by our conference will begin momentarily.
Once again, thank you for standing by our conference will began momentarily.
[music].
Greetings and welcome to the check Inc. fourth quarter 2019 earnings conference call.
This time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
I'll now turn the conference over to your host Tracey Ford Vice President of Investor Relations for Chegg Tracey you maybe get.
Good afternoon. Thank you for joining Cheggs fourth quarter 2019 conference call on today's call or Dan Rosensweig, co chair person 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 investors Dot Chegg Dot 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 announcement on or media Center web site at Chegg Dot Com less media Center. We also 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 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 these 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 report on form 10-Q filed with the Securities and Exchange Commission on November 4th 20 night team as well as our 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 do information or future that.
During this call we will present, both GAAP and non-GAAP financial measures our GAAP results in GAAP to non-GAAP reconciliations can be found in our earnings press release on Investor Slide deck found at her IR website investor Dot Chegg Dot Com. We also recommend do you review the Investor Datasheet, which is also posted in our IR website.
No I will turn the call over to Dan.
Thank you Tracy and welcome everyone to our 2019 Q4 earnings call.
I'm delighted to report that we had another great quarter ending the decade on a high note.
We supported a record number of students generated record revenue record margins and record adjusted EBITDA I.
Hi, I'm incredibly proud of all the work our team has done to serve the needs of students and it's clearly paying off as you will see when Andy walks you through the numbers.
Our 2019 priorities were to deliver our financial goals and continue to provide services to create overwhelming value for learners.
To expand the subjects, we cover and the modalities in formats of content, we offer including coverage of other countries and to continue new best in opportunities to leverage the strength of our brand reach their customer base and provide opportunities for meaningful growth in future years.
Our team executed brilliantly across our priorities and exceeded all of our objectives for the full year, we achieved 5.7 million paying customers Chegg subscribers grew 29% year over year, reaching a record three point.
9 million, resulting in 28% net revenue growth.
Throughout the year, we continue to invest in academic content and services. So students could learn their course materials.
At the same time, we expanded into our biggest growth categories that are one of the biggest grow categories in the industry skills based training for workforce development.
Offering more services the students at every stage of their learning journey. We believe we are well positioned to help students get the education and the skills needed to compete in the global economy over the length of their careers.
As our platform expands serving the increase needs. The students. We have also been able to improve our competitive moat.
And through the through personalization, we are entering new growth vectors for our existing assets.
2019 was a big year, particularly for engagement.
We averaged over 15 million unique visitors each month, serving 2.2 million pages of content through just Chegg study alone each day totaling an incredible 810 million content views for the year.
We believe this reflects just tell a central check is becoming the mines of students.
As learners are increasingly more diverse older and come from various social socio economic background. The number of people that need learning support both academically and professionally continues to increase.
And the types of support they need all syllable.
As many are working full time, raising families and juggling multiple priorities all while pursuing their education.
So we continue to invest in services that will meet them, where they are and when they need it.
Whether that's through 24, seven life human health or with offerings like Chegg study pack.
As a reminder, the Chegg study pack is being rolled out in stages over the course of 2020 initially.
It is being offered to new subscribers only and we expect to start rolling it out to the broader customer base in the second half of the year.
The bundle offers overwhelming value to our students and give them even greater support across a device a diverse range of academic needs.
We also learned that those needs aren't isolated to students in the United States.
The Chegg brand continues to expand domestically and globally. It is clear the needs of students are similar around the world.
This gives us Trump a tremendous foundation to expand internationally, because our content significantly overlaps in most countries because of our focus on business and step, which we call stem b.
Which have become universal in a technology driven world.
The top concern of global employers is the future of workforce education across the board. There's consensus that more people will need to learn more things more often throughout their career and what they need to learn is evolving as we see continuous advancements in technology.
As a student population of workforce ages, we're seeing that more people are taking matters into their own hands, and making decisions about where to invest their time and their money to get the greatest return on their investment in themselves.
Both academically and professionally.
We believe it's important for Chegg to lead in this space to support students throughout their entire learning journey.
And like all Chegg services, we continue to focus on going directly to the student the person who is making the decisions on their future who will invest the most in themselves and can get a positive return on their investment.
Going directly to the student also allows us to make the quality of our costs had higher more relevant while keeping prices low because we continue to own the relationship with our customer owned the content and own the channels of distribution.
All of the success, we have seen over the last decade is they see the fantastic work are amazing employees and 2019. Our team was once again recognize was several awards as one of fortunes greatest places to work, including our second year on the best small and medium workplaces and are.
First dog for being a great place to work for parents that it's an honor that is particularly meaningful to us as we have worked hard to develop an inclusive.
Family friendly culture.
It's also a reflection of how we have built our team to mirror, our customer base as 40% of students are working 30 hours, a week or more and 26% of them are already parrots.
We are proud of the recognition our team has received this year and I want to thank them for continuing to make chegg, such a great place to work.
As we entered the second decade, Chegg, our priorities haven't changed.
One to deliver on our financial goals and continue to provide services that create overwhelming value for academic and professional learners to to continue investing it opportunities that leverage the strength of our brand reach and customer base, providing opportunities for meaningful growth in future years.
And three to continue to invest.
In content and our technical infrastructure to allow us to take advantage of those opportunities not only faster, but also at a greater global scale.
I would like to take a moment to thank all of you who have been on this journey with us whether for a few months or for many years and I want to thank the incredible check family, who have worked relentlessly over the last decade to put students first it's their passion and commitment to our mission that will fuel us over the next decade, NBR and with that.
I will turn it over to Andy Andy.
Thanks, Dan and good afternoon, everyone today, I will discuss our financial performance for the fourth quarter and full year 29 team as well as our increased outlook the twentytwenty.
2019 was another great year for check we exceeded all of our financial targets and key operating metrics.
Made significant investments in our existing services expanded our offerings organically and through acquisition and strengthened our balance sheet with a very well received convertible debt offering early in the year.
As such we believe we enter Twentytwenty, an E and even stronger position than we entered 2019 and expect to have another great year.
For full year 2019, total revenue grew 28% to 411 million.
This was driven by subscriber growth of 29%, resulting in check services revenue of 332 million, an increase of 78 million year over year.
The strong topline growth growth gross margin to 78% up 300 basis points from 2018.
This resulted in adjusted EBITDA margin of 30% or 125 million up 50% year over year, demonstrating the continued leverage of our subscription services model at scale.
We ended the year on a high note with Q4 revenue growing 31% to 126 million with check services growing to 107 million, marking the first quarter check services revenue has exceeded 100 million.
This was driven by continued strong growth in our subscription services demonstrated by 32% subscriber growth.
Which was partially offset by headwinds in the industry wide programmatic advertising rates, which impacted AD revenue for a check writing service, which has already been incorporated into our 2020 guidance.
The strong subscription services growth drove gross margin to 79% and resulted in adjusted EBITDA of 47 million both exceeding our expectations.
Looking at the balance sheet, we ended the year with cash and investments of 1.1 billion.
More than doubled the balance we had at the end of 2018.
This is the result, the proceeds from the convertible debt offering we completed in Q2 and improved operating cash flows.
Free cash flow from 29 team came in at the higher end of our expectations at 71 million of 57% of adjusted EBITDA.
We believe the strength of our balance sheet and our operating model are the strongest and the education industry.
2020 is off to a good start and winter, we are increasing our total revenue and adjusted EBITDA guidance.
We continue to see leverage in the model all while increasing investments such as the technology platform to support future growth initiatives that Dan talked about earlier.
As such we expect total revenue to be between 522, and 527 million or approximately 27% growth at the midpoint of the range.
With check services revenue between 435 and 437 million.
Gross margin to be between 71 and 72%.
Adjusted EBITDA to be between 162, and 164 million or over a 30% increase year over year.
Capex to be between 105, and 115 million, which includes approximately 50 million net textbook purchases as we move to our Newport and Fedex.
As a reminder, approximately 80% of our non textbook library Capex is for content development, which includes among other things investments in future growth areas, such as localized content for our international subscribers expand expanding into assessments and practice tests and accelerating course development for our skills.
Based offering.
And finally as a result of the initial investment in textbooks, we expect adjusted EBITDA to free cash flow conversion to be between 40, and 50%. We expect it will return to the 50% to 60% range in 2021 post this transitional year.
Moving to Q1 2020, we expect total revenue to be between 122, and 125 million with check services between 99 and 100 million.
Gross margin between 67 and 68%.
Adjusted EBITDA between 27.5 and 28.5 million.
In closing 29 team was another great year for check our team executed at a high level and we positioned ourselves for continued success in twentytwenty.
As the education industry is undergoing significant disruption it has become increasingly clear that checks model of putting the student first I'd going direct to the student is the envy of the education landscape.
It is an exciting time of Chegg and we are glad you are with us for the journey.
With that I'll turn the call of what are the operator for your questions.
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Our first question comes from the line of Alex Paris with Barrington Research. Please proceed with your question.
Good afternoon. This is Chris how sitting in for Alex Paris.
Few questions here I appreciated the color that you shared on the increasing engagement levels and the success that you're seeing there is there a way to parse that out you talked about the global opportunity.
That's out there for the company, Norway to view it globally versus domestically in the different trends that you're seeing as far as user engagement.
Hi, Chris This is Dan.
So.
The answer is.
We are able to view it and.
What has been remarkable for us in such a great way is the user behavior now remember, it's early and the growth but it's.
The coming really good.
Is the trends seem to be the same and what I mean by that is based on what we can tell the only thing that's really significantly different is the international growth rate is higher than the domestic growth rate because it's on a much much much smaller base, but engagement renewals a cost of customer acquisition or the way we do it.
In the countries that we're seeing traction in has been almost identical and that's why we.
Put in our prepared remarks, the fact that we are essentially saying the same behavior now maybe it's because where we're seeing the fastest growth earliest as English speaking countries.
And so if that changes significantly as we get into other countries smaller countries, perhaps we'll break it out there for the moment there is actually nothing to break out that would suggest that their behavior is any different.
That which is a great thing for Chegg and for our shareholders and we've talked about in the past, but there's a good opportunity to mention it now which is what's different about our international expansion.
Versus the companies that most of you cover which are the media companies is unlike them. We can write contents want content onetime and it's relevant in every country. We don't have to spend a lot of money per country to enter that country. Because the content is almost identical STEMI and because the major publishers.
As are the major publishers and all the largest countries and regions in the world to begin with so we have subsys such a substantial head start that we're able to include all of that and our annual capital investment.
And so we see the trends being same and renewals same engagement, which is really really really positive for our growth for the future.
That's great that's exciting and then just following up on that I.
I wanted to follow up on Chegg study pack as it relates to your guidance.
Or your expectations for this fiscal year and perhaps next.
How should we think about your expectations for the study pack as it relates to your launch cadence.
And et cetera.
I will remind people of the launch cadence amylin, Andy talk about anything relating to the financials.
So so people understand we have new customers every year and you can see the growth rate in Q4 was really high.
And that as a result of new vectors in the U.S. that we're seeing and global expansion. So that's all really good news.
As we think about the bundle.
Think about the bundle first initially domestic second it's we're only making it available to new customers that haven't subscribe to chegg in the past, which means our existing customer base isn't even seeing the offer at this point right and we're doing that because.
The way our business works in terms of seasonality the real year for Chegg is August through mid May and we don't want to Miss anything up between now and then as we learn about the businesses. So we've been very tactical and very smart, we believe about rolling it out testing. It we now know the price we now know the offering we're now improving message.
King and every time, we improve messaging the take rate gets better. So we are extraordinarily optimistic about what we think will be the future demand for the bundle, but the way we think about it. This year is this year the smallest group of people, we'll see it then.
In the second half the year, we'll take the learnings from the first half the year more people see it and then and 21, you will see probably more of the existing base of customers begin to see it because the business is so strong there's no urgency on doing it to make a number.
So we feel very blessed because of that so I'll, let Andy turnover yeah yeah.
On the financial side, the ex you know our our expectations for 2020, a fairly moderate to because of what Dan just said right. We're only offering the study Pat to new subscribers at this point and the and the fact that we're in a subscription our subscription base business. The vast majority of our subscribers are actually renewals not new subscriber.
And so.
So what I would expect from the bundle is fairly moderate from a financial standpoint in 2020, but increasing over the next several years.
As we have more and more people being exposed to the bundle.
So yeah I think the bigger impact is 20 120 to 23 than it is 2020.
Very helpful as always thank you.
Thank you.
Our next questions come from the line of Corey Greendale personality. Cory. Please proceed with your question Hey, Good afternoon, congratulations on the good results.
Hi, but two questions. The first is bigger picture and Dan I know you are highly committed to the direct to student model.
You know there's always some conversation in the.
Oh that on the space generally how much ultimately of the cost of educating people is going to fall ultimately to employers persist two individuals and are you sort of inherently making a batch that individuals will going forward have any disproportionate burden there or like are you opened two overtime to having they get corporate pay model as well.
Yeah, Great question, and let me break it out for the people who don't policy as closely as you do so there's the academic path, which is what Chegg is best known for which is our support to help students that are currently enrolled at some form of institution, whether it be a four year to year online whatever it may be.
That will continue to be for decades to come the primary way students get their academic a credit accreditation the shift there will be more online which is why that's one of our big growth factors going forward, particularly in North America. The second one in this probably relates to the acquisition of thankful is.
That there are companies that work directly with the with employers to provide programming. So they can provide into their employees or whether it's linda or whether its plural side or other companies like that.
We believe there is a role for those things. We also believe though that the people that we serve best the people that really care about what they learned the people who are trying to advance their own academic why for their own professional skillsets. Other people that are willing to invest in themselves.
Because the price continues to fall and Fortunately the margins go up it's a very weird dynamic, but because when you're at scale you have the ability to provide not only the content.
But you also have the ability to provide the support level, which is what our chat based tutoring does and what our expert Q and eight could advance not just from academics, but into skill side and so as a result of that we don't see any reason in the near term to think about hiring sales force.
We're competing in what seems to be a very regional or niche way that those businesses are breaking out.
We think if we go directly to employees and directly to students in directly to our current customer base that the road ahead is really really really big and it just seems that everybody who's chosen the b to b market.
Is re imagining how their business model has to work and we're seeing.
Extended growth extended high margins. So we do have a bias towards the better business model and to the students that are willing to raise our hands by themselves.
Very helpful. Thank you and then my follow up I think is for Andy which is.
Maybe for those of US you come more from the human capital Tech into Education perspective, then the media perspective can you just give us.
So too on the.
Programmatic advertising trend you mentioned, then is that separately or revenue impact or is that impact your cost of customer acquisitions. If you could just follow up on that thank you. Yeah. This would be more Dan because I've had the good and then misfortune of being any advertising business most of my career [laughter] and.
Look I think you saw a little bit in the Facebook results and other things, which is it really it really doesn't affect chegg much at all it's not a particularly big part of our business.
The reason it affected I think Q4, a little bit was because as you know there are lots changing there's california laws that are changing and Google is changing the way it uses cookies and other things.
And that started a little bit more in Q4 earlier in Q4 than we had anticipated, but it's it's fully through our guidance for 20. So we don't expect any hiccups to that.
But what it really means is that targeted ads.
The revenue per or whatever you want to call it whether its revenue per search or other revenue per unit show.
Well not see increases in the near future until technology sort of Invensense way around these new policies.
And so it's not a matter of of volume. It's just a matter of what you're able to charge per Adam when you do programmatic advertising, it's a it's a bit format and it comes from third parties and because there is because those cookies stuff is not available anymore. The value just goes down a little bit and it just happened a quarter. So earlier than we expected because of.
Laws really didn't change until January onest, and so if you are covering the industry you should just be cognizant of the fact that advertising other than the strongest players has been and we'll continue to be under pressure as it relates to chegg, it's really almost insignificant.
And is assumed in all of our guidance.
Very helpful. Thank you.
You bet.
As a reminder, please limit yourself to one question.
Our next question comes from the line of Stephen Sheldon of William Blair. Please proceed with your question.
Hi, Thanks.
Wanted to ask about efforts to reduce accounts sharing.
How much of a focus will that be this year and could efforts there maybe have a bigger boost.
Two subscriber growth relative to what it has been in the past.
There's a lot of attention paid to it every subscription company should and has to pay attention to it and you know it breaks out into a bunch of different camps and nobody really wants to get the full education about companies like ours has to go to want to call like this but suffices to say the account there there's account brothers counts daily, but the one year to.
How about as account sharing.
And.
We chegg historically have not focus that much on it until sort of the end of last year and have made a primary focus on it this year.
The way, we think about it is we have students that have been with us for a long time and they will eventually roll off because they'll finish using school.
And hopefully the move over to think one other services that we plan to have but as they roll off what we're really focused on now is how to focus on new customers coming in which makes it more difficult for them to share an account and so you won't see the impact.
Significantly as you would if we just decided to do it to all accounts all at the same time of sort of feel like that may be two jarring for our long term vision of how we treat students.
But you can see over the next couple of years, two things that will make it really positive impact in our business. Our belief is the bundle right, which is significantly higher ARPU per customer with no additional costs to chegg.
And then second is the fact that as we get into focusing on the device.
Rather than the account then we will be able to reduce future accounts sharing of new customers that come on so yes. It will have a positive impact over time in our business, but everything that we plan to have a positive impact for any given year is always in our guidance.
Great.
Thank you.
Our next question comes from the line of Mike Grondahl of Northland Securities. Please proceed with your question.
Hi, Yes, thanks, guys and congratulations Mike My question just on the bundle.
Can you explain again why you're waiting to the second half of 20 to kind of roll that out to your broader customer base.
Yeah, It's just an abundance of caution to be honest with you. It's nothing more than that so because the business is going extraordinarily well just look at the Q4 growth rate of over 30% of subscriber growth I think probably surprised a few people because I think people are are just under estimating that we still have cigna.
It's a good growth not only in North America, but globally.
And so the abundance of caution is the difference is when you are a new subscriber you come in through the desktop or notebook and you sign up and we have an opportunity to presented to you when you're in existing subscriber you automatically renew.
And so interfering with that relationship enforcing a student to take an action.
From our perspective.
Is may be more disruptive than we want to experience over the course of a quarter, where we add you know where we are adding close to a million new subscribers a year. So we don't want to mess up anything in the multimillion current subscribers. So it really is just an abundance of caution about how to execute on it because the differences one comes in and signs up and you can present it.
And the other is auto renew and you have to communicate with that person, let that person know how to make a decision. The beauty of Cheggs businesses every year. We have people go off a new people come in so overtime, a 100% of that people will see it. It's just a matter of who sees it went.
Got it got it. Thank you bye thanks, Mike.
Our next question comes from the line of Ryan Macdonald of Needham and company. Please proceed with your question.
Hi, Thanks for taking my question just wanted to talk about thankful for a minute.
I know, it's obviously the first quarter. Since you made the acquisition include an integrated into the business or is just still doing that process can you talk about what the contribution was though during fourth quarter in terms of revenue in subscribers and how should we start to think about that for 2020 as well. Thanks.
Yes. So so first thing is Ryan we don't breakout our businesses right. So that's one of the things.
We look at ourselves as a platform and at some point in time is.
I think blue.
Likely will be more integrated onto the platform, but when you look at the financial contribution certainly for the first six months. So Thats October really through kind of like the middle of this year, it's fairly muted because it under acquisition accounting, we're not allowed to.
A lot of the deferred revenue goes away, but when you look at the operating metrics.
That we've seen certainly through the first 90 or 100 days, it's basically right not right on what we expected.
And there's really not a lot, but us and prices with respect to that business, so weren't super happy and we.
We expect it will be a significant contributor forum for many years.
Our next question comes from the line of Brent Thill of Jefferies. Please proceed with your question.
Good afternoon, you took the midpoint of the saw your 2020 guide up Taphorn half million I'm, just curious if you could.
Talk through the strengths and what's causing you to have the confidence to adjust.
That so early in and just as a quick fall into that EBITDA guidance.
It is flat any reason why the revenue isn't flowing through to the bottom line. Thanks.
Yes. Good question, Yeah first thing is based super early in the year [laughter].
And as we rolled into the year with some very positive trends the subscriber.
Scripts and businesses were up clearly did.
Quite well in Q4, 32% growth.
Then we'd been surprised truth be told by the required materials business, it's kind of like the you know it just continues to just do a little bit better than we do we had originally thought.
And you know combination of both of those gave us the confidence to to raise guidance on the on the revenue line.
As far as adjusted EBITDA once again early in the year.
And we're confident with our guidance and it's up slightly yeah.
Thank you.
Our next question comes from the line of Doug and Doug Anmuth of JP Morgan. Please proceed with your question.
Thanks for taking the question I, just one follow up on all on declared materials anymore or commentary or color. You can give just on the transition from Ingram too so Fedex and how that's going how we should expect that to play out year and then.
Just on the early study pack.
Rollout here there anymore.
So you can give just on kind of what you're seeing early on in terms of adoption rates or anything.
Supporting the confidence that.
What you're seeing in the early results. Thanks.
So this is Dan it up on the transition.
It's going great and.
The best way I can explain that is if you follow any of the boards or anything we have had zero complaints from students over textbooks. So to the students. Our goal was to have it be invisible. The teams are working incredibly well together the relationship with Ingram is ending a on a high note both companies got exactly what they wanted out of that.
Relationship.
And so surprising.
We did not seem a hiccup yet now fortunately were mostly through.
Were better than 90% through the textbook rush, So I would say that it's as good as it could be and it was great.
So thats the best I can tell you on the textbook transition on the study pack early results.
So what we look at is.
Who we show it to and what percentage of those people when given both options, we'll take the study pack over Chegg study.
And.
That involves everything from what we put in APAC, what we put in the base what the message is what the pricing is and that was all the testing we were doing over the course of last year and a lot more in Q4, and what we still do today. So for those people who go to decide you will occasionally see the testing what has been really positive.
It's all been positive, but what has been really positive is the percentage that are likely to take the bundle of our new customers that have never seen either offer are taking the bundle.
Greater numbers than we thought and that is a really good sign for that we put together the right package at the right price and we're improving our messaging through our great marketing department everyday.
And that should only get better and its starting on top of the base that gives us the confidence that we've been saying.
And just one follow up.
The timing is gonna be different for new subscribers and existing I just wanted to clarify on rejoins.
So I was a subscriber a year ago 18 months ago, and I'm looking to come back now I see it or I will not see the offer yes. If you. If you do not currently have an active accounts.
You have to re sign up to restart your account and to do so you will see that offer but there are things like and again I just want people to understand that we're doing this we think really smart not to affect any create any challenge in the operating of the business because the business is doing really well.
The urgency is getting it right not on doing it faster.
Is that you'll see it when you come to the desktop if you come to mobile you may not see it because because that is a much smaller environment to see it. However, if you come from mobile and then go to the desktop to sign up you will see it if your somebody that was a former subscriber 12 months ago, you will see so the answer is absolutely, yes, and everyday we're finding new.
More efficient ways in which the communicate remember this zero cost and marketing to us, it's really just not interrupting the conversion flow and the renewal flow and so far we're very we feel the choices, we made where the right ones and it's been very positive for the business.
Great. Thank you.
Thanks.
Our next question comes from the line of Eric Martinuzzi of Lake Street Capital markets. Please proceed with your question.
Yes, I wanted to follow up on the transition from Ingram two Fedex just wondering if.
There's any you know you historically have been talking you run the required materials business at breakeven I think is.
You've characterized that business given the investment that you have to make on the capital side into into floor.
Just wondering if thats still the goal will you be looking to get some margin out of that business.
Yeah, Yeah Eric.
You're right you're absolutely right. We've stated that we you know our overall gold has required materials, just the folks that maybe haven't being with us for a while was basically flat units.
And to be basically breakeven.
Eight changes a little bit this year, there isn't a little bit of an investment in the business. This year. So it's not quite as positive as we would want but as we as we look beyond 2020, because we are making investments in systems and all of the types of things. We got you know, we're we're supporting Ingram and Fedex at the same time as we're making the transition but as we as we look beyond 2020, we answer.
The fact that it will be a big basically plus or minus a breakeven business. That's the goal. If we can do a little bit better well, obviously little bit better.
But that's that's the net if you're modeling it.
Assume that it's basically a breakeven business.
Got it thanks.
Our next question comes from the line of Alex Fuhrman of Craig Hallum. Please proceed with your question.
Great. Thank you for taking my question, Dan I think in their prepared remarks, you mentioned that there you saw about 15 million unique visitors each month to your your family of sites can you help put that in context, a little bit for us and obviously that's a much larger number then then your number of paid subscribers me you're at a lot of those people using.
Some of the more AD supported products like the writing products you do you view a lot of those 15 million unique page views as you know your funnel for future subscriptions or maybe some of the people who.
Don't have paid subscriptions, but but have been using some of your services. Just just curious how we can kind of think about that 15 million as it relates to your your portfolio.
Good question and so.
Each thing is actually part of our strategy. So when we acquired are writing tools product.
It was an AD only business and now.
In the next year or two it's likely to be 50, 50 AD business and subscription business. So we built a subscription business had another thing that has the incredibly hard margins that you see would chegg study and that's been a great business decision in execution a lot of you occasionally ask us about our penetration in the high school and so the acquisition of the rights.
Products gave us massive penetration into the high schools.
But in order to do that since high school students don't pay.
That's the free version of our riding products. So a great deal of our monthly traffic depending on the month, maybe the riding products. That's why we also mentioned in the prepared remarks on a daily basis, how many content views you actually see of Chegg study alone, which is independent of the writing services, So you're seeing over 2 million a.
So the point being that we have funnels to your point and funnels. The writing funnel does two things there's three things AD revenue driving into subscription and then also helps us improve our.
Required materials business, because we're able to get high school students to become checks check customers earlier in their college career and it's been spectacular a great acquisition and continues to grow beautifully.
And then with our paid products. Obviously the goal is to get people to subscribe more we grew 32% or so in Q4, which is great on top of a very large base in the base is getting much larger no one else in education space as anything close to the number of customers. No College is weak we educate more people than the entire stated.
California does just to give you. An example of how big Chegg is becoming and yet our growth rates continue to do really well so when you're in the homework help season and overwhelming percentage of the visitors are likely going to being people, who are asking and using chegg study. So it depends on the time of the year, what the composition of the 15.
Million a month is.
But thats the that's the average on the given month, but it's been really really really good.
And we wanted to give people a sense of our size because I think people are they don't spend a lot of time education space, just don't realize how big this market is and how big is going to get globally for check.
But that's really helpful. Thank you.
Yes.
Our next question comes from the line of Brett and I block of Bamber capital markets. Please proceed with your question.
Hi, guys. Thanks for taking my question.
First one on thankful could you maybe outline that growth strategy. There is there maybe a number of course as you plan on offering new course, if I don't offering each year and then maybe the average cost going into one of those courses.
Yes, so I won't lay out our entire strategy because it's obviously a competitive market, but the way to think about think pull is.
The way Chegg has stayed relevant is constantly evolving the content that we have.
And we've been able to do that by by having expert today and.
And having.
Our.
It's an organization that creates the content and step by step solution in the creation of videos in the skills based worlds.
The skills.
We'll always evolve, but there are always be around technology. So what was hot four or five years ago isn't hot now the cost to actually create the curriculum is not very much. It historically has for other companies not chegg cost it's been on acquiring the customer and then supporting the customer once you get the men most.
Most companies don't understand that a great deal of the number of employees and a lot of these kinds of companies are telemarketers or mentors that sort of help people subscribe welcome to the process Chegg is much more think was much more self serve so our cost of customer acquisition is less and our cost to support the student is much less.
Yes.
But the quality is much more immediate much better and thats, what our expert today in chat based solutions that were in the academic side are going to doing the skill set so you're going to see us go deeper into the ones that are doing very well right now and they're nowhere near the end of their runway.
And we're constantly going to update and add deeper into verticals and wider into new categories. As technology continues to evolve. So we just get to follow the industry and we're very fortunate that we live out here. So we have a pretty good sense of where it's going given the fact that where in the middle of where Cisco and Adobe and Microsoft and Google and all those people are and they were.
US to educate people on how to use their products and services because it helps them selling into business. So.
That's the best way I can describe it but you know we've had it for just a few months and right now we're really satisfied with the curriculum behalf.
Thank you.
Our next question comes from the line of Josh pair of Morgan Stanley. Please proceed with your question.
Thanks for the question, Dan you mentioned, new vectors for subscriber growth than we already talked a little bit about international. So I was wondering if you could touch on domestic factors whether its online are also not for profit schools community College any sense for the size of those incremental opportunities and how you're.
Addressing them.
Yes, obviously, we spend a lot of time studying that space and of the many fortunate decisions that we made one of them wants to add Paula Black Who's the president of Southern New Hampshire University to our board and Southern New Hampshire runs the largest not for profit online University. So.
We have very good insight into the growth rates of that market.
So I think.
What many folks don't understand is the makeup of what is a student in today's world. We're used to 18 to 22 four year colleges to your colleges that is not America.
Overwhelmingly if students graduate at all it takes them six years or longer that the age is over 25, there often have children, which makes online a really wonderful opportunity because they don't have to leave either their child or their job and so you're seeing phenomenal growth.
In older people going back mostly women with children overwhelmingly.
And better and so that vector in of itself as probably crossed over a million students in that category that don't often even get counted when you look at the students going into colleges. The second one is you know its community colleges. The state of California alone has 2.25 million community colleges students, they often don't get too.
Agrees because they offer and aren't going for the purpose of getting a degree they're going through the purposes of getting a skill in a certain things that make them employable that is one of the reasons that we think thankful is going to be really strong as a competitor to that market because it should be higher quality and lead to a job with a specific skill and won't require you to miss a half a day at work.
To get it so we're very enthusiastic about that vector for thankful, but the other one is.
We really have not focus until this point of creating curriculum that is specifically for states that have large community College organization, So whether it's new York or whether its.
Illinois, or whether its texas or whether its California, nobody has really focused on supporting them and because there's very little word of mouth I would like there are in residential institutions. We just haven't spent a lot of time on it until now so those are two very large growth vectors for Chegg North America.
Great. Thank you you bet.
Our final question comes from the line of Henry Chan of BMO Capital markets. Please proceed with your question.
Hey, good afternoon.
I just sort of follow up till the last question strategically.
In terms of the cash on your balance sheet. Just wondering if you could apply that strategic vectors of higher looking in and if so what what potentially you might be doing for M&A using your your cash balance. Thanks.
I will start in Atlanta, Andy finished because he and Tracy has sort of been the master of creating a balance sheet, which we believe is the strongest in the entire education sector and if you actually look at what's going on the education sector now other than the for profit colleges given the fact that most of the companies in the public.
Space are.
Selling themselves or parts of themselves are going private it's possible that by the ended the year it'll be chegg and Pearson might be the two that are left given what's going on in the industry that has created the opportunity that we had always hope for which is as a company who is growing very fast who has.
Great EBITDA margins and great conversion of EBITDA to free cash flow, we have talked about free cash flow in this call, but as Andy mentioned, it's going to be going back to 50% of all EBITDA by 21, which is very fast moved back after we buy the textbooks, we have an incredibly strong balance sheet, what we have been.
And I think you guys. Appreciate as we've been very patient, which is we want assets that we can accelerate their growth second leverage our brand leverage our reach leverage our data and leverage our commerce platform leverage our subscription platform.
That we can accelerate its growth and where we could make it much more profitable than it would have been on its own.
What we're seeing is an avalanche of of private companies and public companies who are now.
Having to decide whether or not to change their business models or to do some other form of transaction and we're seeing smaller startups, who are recognizing that there aren't many outlets for them, if they're not going to go public.
Other than check so we're being very diligent that they must pass all those factors can it grow greater than 30% of year can they have very high EBITDA margins will that EBITDA convert into free cash flow can our brand our reach.
Accelerated its growth and lower its cost greater than it could on its own and most importantly will it solve a big student problem, it's got to be big enough to matter. It's got to be a problem students are grateful that chegg has to offer that has been our strategy and thats. The one that's why I think will fit all of those.
Categories. So I think we're just going to be smart and patient and not be in a rush to make a a decision simply because something is up for sale.
Yeah, I think Dan I think Dan nailed it we put we put ourselves in a position to win.
It's really that simple that's why we raised the capital we raised and but we're patient buyers.
And and you know what we've seen truth be told and certainly in the private marketplace valuations still seem to be extraordinarily high and enough, but if an asset comes along that meets all of the requirements. Dan said at the right price we're in a position to be able to take advantage of it up.
Got it that's a that's great. Thanks, so much.
Thank you.
We have reached the end of the question and answer session I will now turn the call back over to CEO, Dan Rosensweig for any closing remarks.
Thank you everybody.
As our team enters our second decade at Chegg, which is really remarkable we want to take a moment to reflect on the incredible journey. We've been on over the past 10 years, we've expanded from the beloved textbook rental business that we talked about today to become a powerful online on demand education platform that students.
On their path from learning to earning that help students on their patent learning turning while much has changed over the last decade Chegg what hasn't changed is that from day, one we focused on putting the student first.
That is what motivated us to make the digital transition and it's why we have always prioritize having direct to student relationship, which we talked about earlier.
While the market has evolved over the years the number of people defining their own education path looking for high quality online on demand personalized support continues in our opinion to dramatically expand in both academics and increasingly in skills based learning and while we built the company to create overwhelming value for our customers we.
We're also proud that we've created value for our shareholders and our employees with 87% brand awareness across our services the power of the brand just keeps growing.
Which means our opportunities keep growing and when you look at the strength of our balance sheet that that Andy and I, just went through and though and the leverage in our model. It's clear we have a tremendous opportunity ahead of us to realign the global education industry to better serve the students for the 21st century, we're really excited about 20 M.B.
Beyond and we thank you all for being on this journey with US and we'll see you soon thank you all.
This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.