Q2 2020 Chegg Inc Earnings Call
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All participants are in listen only mode.
My question answer session will fall the formal presentation.
If anyone should require operator assistance started conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Tracey Ford Vice President Investor Relations for Chegg. Like you you may begin good afternoon. Thank you for joining Chegg second quarter 2020 conference call on today's call or Dan Rosensweig go chairperson, and CEO and Andy Brown, Chief Financial Officer.
<unk> earnings press release, along with our Investor presentation is available at our Investor Relations website, Investor Dot Chegg Dot com a replay of this call will also be available on our website, we routinely coast information on our website and intend to make important announcement on our media Center web site at Chegg Dot Com slush.
Yes.
We encourage you to make use of these resources.
Before we begin I would like to point out that during the course of this call. We will make forward looking statements regarding future events, including the future financial and operating performance of the company.
Forward looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements.
We caution you to consider the important factors that could cause actual results to differ materially from those and the forward looking statements in particular, we refer to you to the cautionary language included in todays earnings release and the risk factors described in Cheggs quarterly report on form 10-Q filed with the Securities and Exchange Commission.
A major sports 2020, as well as <unk> 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, due information or future events.
During this call we will present, both GAAP and non-GAAP financial measures, our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release in the Investor Slide deck found on our IR website investors Dot Chegg dot com.
We also recommend you reviewed the Investor Datasheet, which is also posted on our IR website.
Now I will turn the call over to Dan.
Thank you Tracy and welcome everyone to check second quarter earnings call.
First we hope that you and your families are all healthy insight.
As we continue to navigate the pandemic in a rising social issues. We are grateful that aren't boys are healthy that our business is stronger than ever.
And that we had been able to support our employees our communities and our students through this challenging time.
Also I'm proud to work with our check teammates they continue to make meaningful and positive impacts wherever possible.
Well students' lives were disrupted one constant what does that check was there to provide high quality expert on demand support from any device in any location, which resulted in an accelerated growth across our services.
Students turning to check in record numbers, and we experienced unprecedented engagement, which subscriber growth of 67% year over year, including our new map waste subscribers, reaching a record 3.7 million students.
This year old <unk> net revenue growth of 63% year over year in Q2 alone.
To put that in perspective.
We had more subscribers in Q2 this year than we had in.
Oh 20.
2018.
At school and millions of students wrestle with how best to handle a return to campus.
We know that some are supporting a full in person return.
Others are offering a fully online experience and still others are planning a hybrid version of online and offline, regardless of which experienced a student has chegg will be there to support students this fall and beyond.
That students are increasingly turning to check the support for support to navigate these uncertain times and we expect this trend to continue post the pandemic <unk>.
Regardless of where or how someone learns check will be there for them.
From day, one check was built on the inevitability that people would need to learn more often increasingly online and need greater support.
Long before the global pandemic, we believe the digital transition was coming and education would have to fundamentally change.
In fact in 2013 it'd be annual EPS, you GSV summit.
For beer Education Technology conference, we address the need to leverage data to personalize the learning experience to better serve students.
Three years later, our keynote entitled the classic Twentytwenty predicted that higher education, what's the next bubble burst and that institutions would experience irreversible declines if they continue to raise prices, while delivering an antiquated product.
We made him passion and specific recommendations to aggressively transition to a model that move higher education online leverage technology to make learning available students 24, seven and to expand and modernize their content to be more relevant to the modern.
Our research shows that the majority of students now feel online learning can be as legitimate.
Yeah, and rigorous as in person instruction and that have helped to students surveyed who had no. Prior online learning experience now want the option of hybrid or fully online education and 72% of students who had already had online experience expect missing.
We remain optimistic this pandemic warrants.
And when it does one of the legacy will be that the doors permanently open to the promise of online.
Affordable scalable on demand and design to support whatever the students primary goals or whether its academic learning professional development for both.
If anything surprised us.
It was the speed at which students outside the United States have come to embrace check with the same Palestinians those in the U.S.
Similar to the United States colleges and universities around the world for shutdown and Black scalable Ondemand high quality support for students and as a result more international students have discovered check.
In addition to needing online sport for academics we.
We're also seeing global trend towards self learning and alternative pathway for students to game the skills they need to compete in the global economy.
We believe.
That's a factor the fact that services, we offer our so universal in nature.
In large part why we're seeing a record demand engagement outside the United States.
It's always been clear to us that realigning education with its most important constituents the student.
He is a massive opportunity and we feel our grand scale service offerings, and our balance sheet kids Chegg, a great opportunity to make a positive impact on global education.
We continue to believe that platform companies that have a direct relationship with their customers who own good transaction. The data the channel of distribution and own their content will create disproportionate value for their customers and their investors that is why we have fast track investment on several.
The initiatives in the second half of the.
First we're increasing our investment in international growth and development.
We continued to invest in the Chegg study pack with future enhancements like the addition of map way to provide overwhelming value to our subscribers.
Sure, we're implementing systems to address the count sharing and investing in device management control.
Before we have increased our investment skills based learning by expanding the curriculum to cover more in demand skills.
And by significantly reducing the price because we know skills based learning needs to map to the most in demand jobs and be affordable and accessible to students.
With all the uncertainty pacing students over the next year.
One thing that they can count on the high quality affordable personalize adaptive and on demand services that check provides.
That is why cheggs become even more critical to student success, both academically and increasingly professionally and our team has never been more enthusiastic about the opportunities ahead of us.
On that note I want to thank our incredible Chegg employees, who continued to be relentless in providing world class learning products and services to support students around the globe.
I want to think our board of directors, who have been so supportive of our work over the last decade to being a could be in this position in this moment dabbled profound impact on the future of learning.
I want to think the million ups millions of students who invited us on their learning journey and I hope that even with all the unknowns into your.
They know that the check team is always here cheering for their success and building a company that has always and we'll always put them first with that I'll turn it over to Andy Andy.
Thanks, Dan and good afternoon, everyone.
As Dan mentioned, we hope you and your families are doing well during this difficult time.
While many traditional companies are unfortunately being hurt as a result of the global pandemic.
Direct to consumer companies like Jude I set our digital and serve an essential need are seeing increased levels of growth.
Such Q2 was a fantastic quarter for check.
We experienced unprecedented growth in our subscription services as students around the globe turned to check to help them master the subject matter and get better grades.
Quarter, we also accelerated investments for future growth and we acquired leading Matt Company math way.
Let me give you some color.
Total check servers services subscribers grew 67% during the quarter, including the addition of Bath weight subscribers checked service just subscriber organic growth was 58% an acceleration of 23 points from Q1 far exceeding our expectations and we expect this momentum to continue into the fall.
Semester.
Well not wait contribute to our subscriber growth it had little revenue impact as it occurred late in the quarter. What we do expect you to contribute approximately 9 million for the year, which is included in our guidance.
The momentum we are seeing in the business accentuated by the pandemic is likely to continue for the foreseeable future.
We expect to be a high growth high margin company for years to come.
As such we have decided this is like moment in time, what we need to leaving and reach more students globally with a high quality low cost services.
We have decided to accelerate incremental investments to build for our future.
Include investing in international growth and development. The Chegg study pack device management technologies.
And our skills based learning services thankful, along with additional infrastructure and resiliency investments.
That will allow us to scale rapidly.
It's important to note that we expect to be able to make these investments in future growth opportunities, while still delivering Stella bottom line results.
With that said, let me summarize our Q2 Q2 performance and then update our guidance for the remainder of the year.
Well the second quarter total revenue was 153 million, a 63% increased year over year with both check services and required materials exceeding our expectations.
The strong revenue performance drove a 79% increase in adjusted EBITDA to $55 million.
While gross margin moderated slightly as a result of the change in textbook ownership and it's over performance.
Looking at the balance sheet, we ended the quarter with cash and investments of approximately 1 billion.
And we continue to believe the strength of our operating model balance sheet and capital structure are the strongest in the education industry.
But isn't the best position to grow organically and shut off what's unique opportunities become available like map way through acquisition.
Moving to the second half of the year. The strength. We saw in Q2 has continued into Q3.
As a result, we are substantially increasing our revenue and adjusted EBITDA guidance well the remainder of the year.
For full year Twentytwenty, we now expect total revenue to be between 605, and 615 million with check services revenue between 490 and 500 million.
Gross margin between 68 and 69%.
And adjusted EBITDA between 190, and 195 million.
Before I get into the Q3 guidance as a reminder, the seasonality of both gross margin and adjusted EBITDA margin change as a result of owning textbooks. Therefore, we expect seasonally stronger margins in Q2 in Q4 and lower margins in Q1 and Q3.
Looking specifically at Q3, we now expect.
Total revenue to be between 140, and 145 million would check services revenue between 110 and 150 million.
Gross margin between 56, and 57% and adjusted EBITDA between 21 23 million.
In closing the check team continues to deliver above the high end of our expectations under difficult circumstances.
Giving us the competence to both provide and increased full year guidance, all while taking the opportunity to increase our investments for future growth across the globe.
With that I'll turn the call over to the operator for your questions.
Thank you well what I'll be conducting a question and answer session. If he'd like to ask a question do My press Star one on your telephone keypad confirmations <unk> King. Your line is any question kills you May press star to if he would like to remove your question from the Q.
For participants using speaker equipment, and maybe not started to pick up your handset before pressing the star case. Our first question comes from the line of chasing still you know with Keybanc capital markets. Please proceed with your question.
Hi, Thanks for the questions. One for you Dan you know thanks for your comments on you know check being there no matter what model we have in the fall, but there's been a lot of focus on enrollment, but if students do decide to wait. This mess route you know to stay sharpen productive could you see some of those students scale up using thing Paul.
Oh, Great question and thank you what I think what we're likely to see he and I think we've been seeing it which is what gives us confidence can sort of raise our guidance is a whether or not they go to the school that they were originally intended to go to in the fall one way or another they're going to be going to school.
And whether it's their school in person their school partial one person to their school online or in the case or the pokes you're talking about more likely to be people that will take a local online class at a local community college, so they're gonna be going to school, because there's really no gap year, there's no place to travel there's no job or internship, perhaps they're gonna be taking something.
Okay, and thankful could be one of those things and you know think those very early days with us we only.
Closed in October now after last September but it is running in the past that we were hoping for so you know our plan to increase the curriculum lower the cost.
And creates greater support using chat base tutoring inside which differentiates it from any other.
Competitor, we think those things are already starting to pay off so I wouldn't be surprised if we were.
Somewhat a beneficiary of that trend.
Great. Thank you and then you know one quick follow up for Andy you know, even when you back out the math way contribution in the third quarter subscriber Guy and you know still very impressive or maybe you can talk about you know the visibility in the confidence you have I'm kind of on the subscriber trends you're seeing maybe toward kind of the end of July maybe what you've been seeing so far.
Yes. So we you know when we gave guidance 90 days ago. We had you know we have limited visibility as to the impact of cold. It Oh, you know a 90 days further on we see much greater visibility.
We continue to see the strong new subscriber trends you know all the way through the all the way through the summer school. So yes. So we we you know we feel very confident that we're seeing monk momentum will continue.
Into the fall and we that's contemplated in our guidance.
Great. Thanks, both I'll get back in Q.
Our next question comes from the line of Stephen Sheldon with William Blair. Please proceed with your question.
Thanks, and congrats on the results.
First of all the way you can quantify how much your plans for strategic investments have been increased relative to plan do you had entering the year.
And then beyond the area you just got wanted to ask about your plans to invest back into core content for Chegg study. How are you thinking about using the momentum you have an opportunity to expand breadth and depth content, there, including areas like videos or for other studying resources that increase the value of course description.
No I. This is Dan and then I'll turn it over to Andy.
So the good news is everything we're doing we expected to do we just accelerated get by moving it up.
So.
Yes. This is something what will benefit us not only in short term, but in the long term both from a revenue growth area and profitability area. So we're super excited about that opportunity. We are and always have been and always will be investing in content. You ask your question, specifically, so we've been increasing our investment accounts and obviously our culinary.
Network has exploded in a good way.
In fact, we not only habit record numbers domestically, but almost 30% of all new questions being asked that haven't been asked before come from international So we're seeing real growth. There. So we're always going to be investing.
We are focusing on investing in content three areas that are included in what have you have to say so when he said we're investing in international word busting not only in translation, which we think will extend us beyond just the English speakers, but also in local content, which is now being asking local questions. So that will keep us up a successful.
Internationally, the acquisition about where it was a way to beef up the core core product I'll check study packed which we mentioned last time and continues to grow faster and sooner than we expected a quite noticeably and you're seeing there then our results now.
And then we are focused domestically on a few growth factors like online colleges where were specializing in content. Because you may not realize is much larger college or university in the United States of America that is it not for profit is actually up either southern New Hampshire University or western <unk>.
<unk>, which are exclusively online or almost exclusively online have over 130000 customers.
Yes, we are significantly improving our discoverability of content and investment in content for community colleges because actually the question that was asked earlier a lot of people are going to be kicking online community College courses and we're going to make it easier for people to find that but more importantly, we're going to make it easier for users can discover that we.
The content that helps to support them. So as an example, just the community colleges in the state of California alone.
Our almost are over 2 million users, which is 10% of the entire college audience base. So we're making real investments in content always and we'll continue to do so so Andy I didn't know if you want to talk about just how much cost we accelerated yes, yes. So so so you know that when I look at this.
Look at it over the next 18 months and we were literally you know we're talking about tens of millions of dollars between.
Adding capabilities like Dan said things like that the device technology that we talked about the infrastructure improvements. We're doing the you know going international and then the incremental content that were that we're investing in combination of accelerating classes for think fall accelerating content types that.
That we can use both both in the U.S. and internationally. So yeah, it's it's a fairly significant acceleration.
Like you said in the tens of millions of dollars rank, what we think it's the right thing to do.
And it's been still while providing significant leverage in our model as I'd mentioned earlier, we anticipate that we're going to be a high growth high margin company for years to come.
We want to lean in and invest in that future growth. So yeah. It's it's this is being fairly significant but but it's a it's coming with a significant profitability at the same time, yeah, no jot. It it's hard to notice because our profitability is so high and continues to improve and.
Putting the ratio of EBITDA and free cash flow. We just had one of those great model that allows us to do both right.
Yeah, it's impressive and that was really helpful. Quick follow up just wanted to ask them to guide.
Operating changing university timeline, the guidance, including like some are starting the year earlier and potentially Indian but semester sooner so anything to call out there in terms that.
Three to Q4 seasonal dynamics.
No not really that's all incorporated into our guidance, we seem to saying things that you're seeing some school just starting a little bit earlier. Some schools will like you know will likely finished by Thanksgiving. So you know one and it varies between school and you know the it there's a there's this summer online some are going to be you know partial so that's all incorporated into our guidance.
Great. Thank you.
Our next question comes on the line Jeff Silber.
With BMO capital markets.
Please proceed with your question.
Great. Thank you so much and not congrats on that stellar results. He's mentioned, Oh, I'm, sorry, [laughter] a few times your focus internationally can we get a little bit more color can you quantify how large your international shouldn't market isn't and clarified. These are folks that leave overseas that are studying overseas not necessarily.
What's that are coming to the U.S. are starting on line at U.S. universities.
Yeah, I'll start and all in costs about how we want to take about international growth International property stellar right now it's good and to your very specific question.
Only.
1% of our international customers actually went to school in the U.S.
So these are all new customers to us so I know there's been some speculation as to whether or not these were international customers that went home and that subscribed at home.
But we obviously monitor those things and frankly, we are we are picking up brand new customers around the world in overnight I presented them are brand new to Chegg and whats fascinating about it is it's not in any one specific country, it's really a global phenomenon and.
As a result of college is having the close down students, who historically have not had a service to go too.
Absolutely discovered us the way we were discovered originally in the United States, which is to research and then word of mouth. So in the United States. It's word of mouth and search now and then internationally its search and then word of mouth, but its.
It's been really wonderful to see I didn't really shows that the content that we have our focus on stem and our business courses really does translate no pun intended on a global scale. So we're seeing countries that you would imagine Canada, Australia UK, but we're also seeing great growth from places like Turkey.
Saudi Arabia in South Korea, So, it's it's universal right now and and we expect that to continue to grow for years to go.
Alright, great.
Shifting gears, a big you talk a little bit about what you're doing two to mitigate password sharing obviously a lot of students having to leave their campus going on line, probably made it a little bit more difficult, but can you talk about you know once we get passed a pandemic any students come back the campus what changes will be made to mitigate this issue.
Well I appreciate the forecast that you're giving that we're actually going to get passed a pandemic I think that would be nice step, but in andys prepared remarks.
We focused as one of the four major areas and accelerating our work we had had on our on our roadmap to do device.
Rocky and so we've moved that off that will be walk in August so to the degree that students go back on campus in to the degree that they would try to go back to the normal habits. It just won't be available to them anymore. So step one will be to limit the number device and you divide in South Africa patient and then there's it's got to step.
Three and we'll continue to do that and so we we feel very good about having moved that way up and they'll be watching it off.
Alright, great. Thanks, so much of the call it.
[noise] Thanks, Jeff.
Ladies and gentlemen, as reminder, if you could please limit yourself to one question. So we may get you everyone's questions.
Our next question comes on the line from Doug Anmuth with JP Morgan. Please proceed with your question.
Great. Thanks, David a question I guess to just given the various scenarios in the fall.
Talk about how you're marketing strategy changes and heavy replicate some of the word of mouth benefits that you would normally get on campus and secondly can you just give us an update on a study pack.
In terms of the rollout you know how broad is [laughter], you're seeing thus far thanks.
Yeah, no. Thank you Doug so.
In terms of marketing.
It's sort of fascinating because in the United States, we don't actually spend much money on marketing anymore. In fact, I don't think we've increased our marketing budget and over five years, not just as a percentage out overall revenue, which would have made it very large but just in general because we have an 87% brand recognition.
Where we don't have a strong brand recognition or are in the United States really focuses on two areas, while I'm sure our community colleges, which we're seeing extraordinary growth now and a lot of that has to do with some of the things that we did you get more visible like debridement deal or things that those natures, which let families in other people.
No that we existed for what they do.
And and then well I'm schools and so you know we've started to test a number of things with southern New Hampshire University, because it's easier, which we did not for profit online schools to go directly through the school as opposed to a regular school you have to go professor.
So I would say we're doing exactly what we've been doing in the United States, but with an increased emphasis on community colleges and online and then outside the United States are it really is the best best way to get to word of mouth is to index globally and get more comp.
Locally, which is why we're going to translation and why such a large percentage of the questions were answered now come from outside the United States, then that turns into work and so when we actually watch the growth we look at it not only by country by subject, but perhaps the school itself and so you can see enough.
In school. So once once people start to use a tell people that are just grows like crazy I mean look we experienced 58% organic growth.
On top of the number that already huge so I think I think for US right now, it's just making sure that we direct investments and to your point about Chegg study Peck, what we've seen is that the study pack.
It is it's behaving very similar to what Chegg study did just a few years ago, which is people use it they're signing up for in numbers that were bigger than we expected their renewal rates are very high tier, yeah, hi, and it's not only domestically, but outside the United States. So we will.
I have an even greater rollout in the second half of the year.
But they're finding it before we expected them too.
So you know we're seeing upgrades from existing customers remember all we really focused on new customers, but we did we did a task in March because it covidiens allowed us to give a free upgrade and so we expect that can help us even transition more [laughter], Scott I couldn't really phenomenal shaping and you know I think the thing.
That we're most excited about as it is on a global scale just age Murphy usage. The discovery the value that we're creating for students in the fact that this sustains well pass code it because check just becomes aware of luck.
For everybody go to college.
Okay. Thank you Dan.
About.
Our next question comes from the line of Ryan Macdonald with Needham and company. Please proceed with your question.
Hey, good afternoon, Dan and Andy Thanks for taking my question would like to touch on mass way a bit just understand the opportunity there better it seems like they've got great penetration, both domestically with high school students going internationally.
I wouldn't sort of investments can you make quickly just sort of really capture that opportunity in a relatively new segments, particularly as we look into the fall in more K through 12 schools moving online. Thanks.
No. It's a great question and so what did we see in math way that got US excited we're one.
The company of Cheggs scale and size.
When we acquire something we want to acquire something that fits the traditional thing we said, which is can we accelerate it can we make more money out of it can we improve the product and we extended.
And then on top of that math way was number one in the category by far less than 20 years investing it and it's just a brilliant product having said that they built up turn budget. They took no outside capital. So we've been accelerating the investments in the math categories.
And on extending it outside.
And the more categories in high school, which will attract students younger which will make the transition into college for us better so all those things.
Our critical to its success, but but its you know it's only been really short period of time, but it's already showing them.
Experiencing similar things to what we're experiencing.
I hope to covert which is great discovery and usage and then its biggest benefit however is going to be putting any insight.
Because this solidifies the check bundle, what's having done a number one homework help product the number one lighting product and that number one that brought up and all of that for 1995 month. So I think as we start integrating it and that's going to improve conversion, it's going to improve retention a awareness. So.
We're unbelievably excited about it and really grateful that have all the people that they could have sold two they chose us.
Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.
[noise], Yeah, Dan Congrats on the corner.
It seems like there's four big Tailwinds kind of online learning and support what you're doing with passwords, the bundle and international.
Which one of those kind of surprised me the most in the quarter.
Well the back that all of them did well did not surprise us it is rare to be shopper property.
Anything do well in a quarter and that I did in fact happy to maybe that's a little bit a surprise, but as we as we sort of referred to in our prepared remarks.
But.
Really the international which is the diversity of the countries our relevance this soon.
And the fact that it's it's not concentrated on one or two but it's across the board and every one of them is seeing substantial growth in great retention and take rates are the bundle that are greater than we had anticipated.
I would say of all the things that surprised does everything surprises to the good.
The concept student surprises, but I just think.
The the willingness of people outside the United States to discover Chegg and really use it it's such a pleasant surprise that happened this quickly.
Our next question comes from a line of Aaron Kessler with Raymond James. Please proceed with your question.
Great. Thanks, Thanks, guys a question on what kind of increasingly students I would say moving to more online learning how are you thinking about maybe additional online learning solution.
Sean kind of what you're in today for either college or the younger grades as well, especially I'm kind of younger kids, who are probably a more and more online solution on the parents. Thank you.
No. This is you know I've been around for awhile and at least one of.
Things you really are rarely get is too many choices of where you could grow there's not a company I mean I'm coming up on my 11 theater somewhere into my 10th year, and we're actually finding more and bigger opportunities to grow and that is a rare situation and I think.
Happens really only to platform companies, which is whether it's in depth clicks or Microsoft or Adobe or Facebook, What's your platform company and you create the category become the bird, which check has become an education.
You start to the benefits start you accrued you faster and so when we look at the opportunities. We continue to believe that the best place for Chegg to play.
Since director student.
We feel that that means that we're likely to go older rather than younger as a reminder, that the average age of a college student in this country is not 18 to 22 isn't that 25, there already parents. They have jobs. If you look at where we're going increasingly on not line, which those numbers are just going through the roof.
That those there even older than in 2005, there are people who are in the middle of careers trying to finish start change there are people that got partial degrees and want to finish those degrees. So I think for us it's going to be adding the number of schools that we serve extending.
Really.
Lending into not just academic pursuits, but the actual pursuit of certain industry verticals that people want to go into nursing. Its generic there's a lot more support work for that that can be done and then of course investment anything for which it skills demand for skills is only going to excel.
Demand for them to be higher quality actually have support the lower price less rich for the student more relevant to their career is exploding and you know our goal is for thankful to own the same position in People's minds. The Chegg. Currently so we just see growth area after growth area after growth.
And.
That's a rare situation and I'm grateful for.
Our next question comes the line of Eric Martinuzzi with Lake Street Capital markets. Please proceed with your question.
Yeah, well into data layer deeper on the content views. So the 375 million obviously a huge number.
Sequentially versus Q1, I just wondered if you could help me kind of picked at apart.
What's your normal seasonality Q1 to Q2, and then what with the.
If we going on in Q2 that was new with the with Covance.
Hi, I dared the seasonality I think Eddie can address in terms of sort of the cost structure in the quarters because of textbooks, but the seasonality of usage.
I think the way we would think about it is the real school year for Chegg, the real business year, we're going into now. So we just finished a quarter that where people. They are finals are done and may and June at the latest.
So this slow season, we're going into Q3, but start starting actually already.
Really end of August September October November phenomenal and then it rolls into next year, because the school years actually August until say mid may or June. So you know the calendar year isn't that check check there is that period of time. So we're entering a big growth season coming up ahead of us.
And but the fact is.
More students need more help than they've ever needed before they have no support.
From their campuses, even if they go on to go campuses the things that historically, they had which worked very good and we're not 24, seven and we're not across all subjects won't even be funded because schools are having a cut their budgets and they're gonna Tucker sport and budgets before they cut the class. So the need for Chegg is only increasing.
Plus the fact that we're adding more.
Adding more subjects were any more format somebody mentioned earlier video, but we're also adding practice chest, which we never had before which is one of the most popular categories people can tap in writing, we're improving everything from grant writing style, writing structure and plagiarism checker.
And same thing with map way. So I think I think everything just got a lot bigger and Chegg has now got a new base that is much higher and we're going to continue to see great growth from a higher base, because we have not gone anywhere near the penetration into our markets.
Our next question comes from the line of Brent thrilled with Jefferies. Please proceed with your question.
Thanks.
Dan you called out international as a top priority in the back half a year I guess it seems like you already have a lot of investments and maybe if you could just articulate what what's left there too.
The show increased adoption and it seems like you already have a lot of.
The rails built if you will for the foundation I'm just curious if you could dive into whether or not and I think the follow up to that is just.
Just some concern of saturation the U.S. it doesn't feel like that's the case, but just speak to the international push versus what the opportunities left in the U.S.
Yeah, I think to to both we'll start with the international which is international even when you remove China.
Which we do for obvious reasons.
The opportunity outside the U.S. is actually larger than the opportunity in the U.S.. It's just collectively.
I think we've used the example in the past that just a big three English speaking countries or about 50%, 50% of the size of the U.S. College market. Then when you add every other country. It's just bigger they're more likely to come on line, they're more likely to want to study stem.
And we I think your description is right, we did rails and plumbing, which is we now can do commerce. We can now take credit cards and those countries. We can now changed the availability are we will be able to change the availability of how many questions. You can ask in country versus country Beach. So we can personalize it more but the other things that we're spending.
Time on our accelerating the amount of content that is relevant and each local markets starting with the largest markets first translation software. So what we're starting to do we get the English speaking stem students in those countries and those will be massive what we want to add on top of that are doing parallel are the non English speaking stem students and then or not.
English speaking students studying whatever it is their study the same way we built chegg in the U.S.. We think we can build and the evidence suggests that we're right on.
Very unfortunate it's what do you wouldn't same for years, it's not like Netflix, where we need to make movies or start if I remember license hot getting those countries weren't very good shape because of our expert Una networks and.
[laughter], 30% of the questions that are being asked outside the United States. That's twice the size of the number of questions used to get in the United States. Just three years ago in terms of real numbers are getting big I mean, this isn't real thing. This is going to propel check for many years domestically as we mentioned earlier, we have so many vectors of growth like we're nowhere near pennant.
But as you pointed out but there are some interesting stature sourcing so the number of people just three years the number of students taking stem in the U.S. has actually grown by 50% the numbers students taking business still the same around 21.
Okay, and the number of people, taking sort of the social sciences is actually dropped.
Just a percent.
Chegg gets them all.
But our greatest strength is obviously step so we're benefiting from all the micro changes that are going on based on what students want to learn and what colleges are starting to teach them plus we're going into a much older adult market because people are trying to go back and finish their degrees. So you're seeing the smart schools like Southern New Hampshire University. Thanks.
Definitely more credit than they've ever done before instead of trying to doubled book you to make you take a classic and they'll say no will take whatever you have and then well and then we'll let you finished there even now because of the deal we did with them. If you take a painful class that counts as credit. So those kinds of conversations are going on all over the place now with Chegg and thankful. So the vectors just keep.
Growing and then if you think of professions I think of accounting and finance think of engineering <unk> nursing pickup lawyers, because doctors, there's academic and then there's learning the actual industries or.
So the format of content video expert Q and a chafee's tutoring all of that works regardless of the subject ubiquity of of the IP of what we own gives us a competitive advantage over anybody and and so we're just trying to keep building well just keep executing executing execute.
We're excited about it.
Our next question comes on the line of just bear with Morgan Stanley. Please proceed with your question.
Hi, Congrats on a great quarter I was hoping they got some more insight on skills based learning wondering how many courses you're looking to add if you could talk little bit about how much that cost to create a course, how long to take.
Our the expanded offerings going to be in place to benefit from the uptick in demand this semester.
And any update on just the growth or the size of thankful at this time. Thanks.
I'm not sure we'll break that out right now I think I'll, let him speak to that but let me. Let me just say that when we acquired thankful that had five classes that we have seven.
We expect to add seven to 10 classes geared.
At the minimum there's a lot more classes subclasses says a lot more categories that we can are.
I won't share the cost of doing them for competitive reasons, but suffice it to say that you're we've all accounted for that we've accounted for the next seven classes in the numbers we've already given you.
As it relates to the timing of it should be interesting thing. We're learning obviously, there's a bump in the short term in that people are losing their jobs and they're looking for skilled in much more employable areas.
Well one of the thing that we learn now that we own thankful is their infrastructure could not handled the demand they already had and so chegg is already more demand than we can handle not because we can't scaled up but because it takes admissions and took it took a technology and reporting.
Okay, and financial reporting things that they didn't have the capital to build so.
We're going to see a great pipeline for a long time now I mean, it's worth we're not out there begging for demand at this moment is quite the other way around so I don't know that we can take more than we already have planned.
But this is a great business. It I'm thrilled that we bought it because the timing is right as you point out but also.
The need for people to get skilled or re skill to jobs that will be a route beautiful thing is unlike a college, who may or may not change their curriculum. We can always have the most relevant curriculum for the most in demand jobs and that's what thankful is all about so we're super excited about the future thankfully.
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Our next question comes from a line of breast Knobloch with Bamberg capital markets. Please proceed with your question.
Hi, guys it right well.
Yes.
Slippage or the Q3 gross margin guide I was wondering just breaks down that impact maybe compared to last year looks at the Geismar 1000 basis points lower I guess, you break down between the impact from the textbook business and maybe what other impacts from the incremental investments you guys are making.
They had first thing is it's 100% Texas period.
Has nothing to do with the incremental investments that we're making it's the fact that as you recall starting January 1st at this year, we started to own textbooks and then record the gross revenue.
It has you know it it what you see is the change in the seasonality, where you see high gross margins in Q2 in Q4 and slightly lower gross margins in Q3 or excuse me in Q1 in Q3. So that's that's it exclusively and you know what I said are looking right. We also hope on the textbook so it kind of compounded itself.
A little bit Ah, but I guess that that's the good news. So if you know we have talked about textbooks textbooks continues to do actually really well, we believe we're gaining share there too so.
That's the reason for the seasonality and the the gross margin.
Our next question comes from the line of Alex Fuhrman with Craig Hallum Capital Group. Please proceed with your question.
Hey, guys. Thanks for taking my question again, congratulations to a nice starts to the to the school year here.
Ask about B, if I could follow up on the international business.
Your experience with international so far you did because it tends to follow similar patterns.
A rush at the beginning of this master and then the final exam schedule. It can you kind of just give us a sense of how you know that paces business might might play out over the balance of a year and then just in terms of pricing should we expect that pricing will generally be about the same international as in the U.S. still forward are there maybe opportunities to reconfigure bond.
Hold on and tweak prices in individual markets.
So I'll start and I'll turn it over to Andy.
So it's premature to know all have those very good question.
Meaning the international growth is substantial enough now where we'll be able to track the patterns going away. So things that we do know is being gauge where they have is very similar to the U.S. the way they discover it very similar to the U.S. their renewal rates are very similar to the U.S. a couple of years ago and continue to grow every day as we.
More localized content as we get more familiar with it and they also came on at the end of the semester. So so that's the that's a big opportunity ahead of us, but it's already well ahead of where it was when we started Chegg study.
In the United States their interest in the bundle is even higher than it is in the United States and that's a big deal.
That bundle news really well similar to the to see yes.
So that's a big deal.
Seasonality is a little bit different depending on which countries get large ones. So for example, Australia Susan is your different season.
And so just a little premature for us to be able to break that out now as to your other question about pricing.
At the moment.
And we expect for the for the near term the pricing will be identical to what it is in the U.S. it'll just be put in local currency now which is no. We didn't have that capability before and we do now so it's it's equivalent a 49 five in the U.S. in 1995 or whatever the local currency takes into so that's been helpful and that's improved conversion.
They saw local currency because they began to feel like it's a local product.
What's your other question is really interesting and thing that we're going to start to play which is we will be able to technologically starting probably early next year.
To be able to change what's in a bundling country abramson contribute and it could be a simple is countries, where we want more questions. As we can say you can ask 20 questions instead of 10 or 10 instead of five.
So we have ways to accelerate the creation of content relevance local language content.
We can do things like you can have access for an hour rather than subscribed for months. So technologically we're gonna be it a position to experiment lot of days and internationally is getting big enough, where we're going to want to do those experiments, but right now it it's just in a fabulous upside for church.
There are no further questions into Q I'd like to hand, the call back to Mr. rosensweig for closing remarks.
Okay.
So first of all like we said at the beginning we hope everybody assays. The pandemic is much more difficult than people thought and.
We're trying to communicate with our students to help them do better and smarter things as it relates to.
Their lives.
Obviously, shagun Singh unprecedented growth on top of a much higher number and actually opportunities that we have our just increasing.
And we're really enthusiastic about what we do we like everybody else wish it wasn't the pandemic that accelerated the inevitable, but it has and so we feel an obligation to improve the quality of our content improve our services to localize it internationally to focus on thankful to make it more available more affordable attract more diverse audiences.
And we're in a position of strength to do so which is we're seeing more customers better renewals better engagement.
More diversity across our product line than we've ever seen needs.
In addition to both Mount plant thankful are very big upsides in and just continued established Chegg is the number one student first company, we're going direct to the students that we're benefiting from that it has a high growth high margin business.
Where we can afford to make significant pull forward investments and still have our margins are net margins increase.
So we're really excited about our future and we look forward to November and updating you for not just to fourth quarter, but for the future because things are getting very exciting to check so stay healthy. Thank you very much for listening in and we'll talk to you in next quarter.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.