Q3 2020 Chegg Inc Earnings Call
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Time, all participants are in listen only mode of course, you're going after.
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Well her categorize your host Christine <unk>, Vice President of Investor Relations for check.
You may begin.
Thank you for joining Cheggs third quarter 2020.
On todays call are Dan wrote.
<unk> culture, chairperson, CEO, and Andy Brown, Chief Financial Officer.
A copy of <unk> earnings.
Yes, really along with our Investor presentation is available at our Investor Relations website, <unk> Dot Chegg Dot com.
Replay of this call will also be available on our website.
We routinely post information on our website and intend to make important to note that our media center website at <unk> Dot com maybe.
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.
And 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 on those in the forward looking statements.
We caution you to consider the important factors that could cause actual results to differ materially those in the forward looking statements.
In particular, we refer 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 on August 10, or 2020, it's well on your phone.
Let me see.
Any forward looking statements that we make today are based on assumptions that we believe to be reasonable as of this date.
We undertake no obligation to update these statements as a result of new information or future events.
During this call we will present, both GAAP and non-GAAP financial measure.
Our GAAP results GAAP to non-GAAP reconciliations can be found in our earnings press release, an industry like Jack on <unk>, IR website, investor Dot Chegg Dot com.
We also recommend you review 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 Cheggs third quarter earnings call first and foremost we hope you and your families continue to be healthy and well as we all navigate these unprecedented times.
It has become apparent to us that this terrible pandemic has only further highlighted the need for higher education to transition to a model that is more on demand student centric.
Portable and does a much better job of leveraging technology to the advantage of a learner.
As evident in our Q3 results students more than ever before are relying on chegg as they navigate their semesters, whether they are back on campus or not.
Well our business continues to have an extraordinary year more importantly, we are helping millions of students get through these uncertain times.
In Q3, we saw subscriber growth.
69% year over year, reaching 3.7 million students during the quarter.
This yielded total net revenue growth up 64% year over year.
The inevitable trend towards online learning.
The queer need for high quality online support and the momentum we are experiencing globally gives us the confidence to raise our guidance again for 2020 and provide our initial outlook for 2021, Andy will walk you through all of these numbers shortly.
To take a moment to share with you why we believe our results will continue to perform at such a high level.
Millions of students around the world are now asking for a better return for their education and demanding a shift to the model. We always knew it would become increasingly online on demand adaptive affordable personalized and tailored to the modern learner.
Chegg has been focused on these things for years.
So we believe we are in the best position to not only expand academic support to students, but also expands its support to learners through out their professional journey.
We have tailored our efforts to reach students on different paths, including more at online schools and community colleges and we're also seeing increasing demand for online learning support from students around the world.
Even before the global pandemic there was a real question around the ROI of a college education and students are demanding the ability to learn faster habit for education directly connect to their career path and accelerate their path from learning term.
We know that the modern students also looks very different than the ones that they are older. Many have families. They are juggling work in school at the same time. So it comes as no surprise that they need more flexibility when it comes to their learning.
More than ever before like everything else in their lives entertainment dining banking, they expect education to come to that at the time that it most convenient for them in a format that they want at a price they can afford and that provides a real oh.
Cheggs online learning support platform is designed to serve the students in just this way.
As a leader in education we.
We believe check is more direct to student relationships than any other institution. So we are often asked if what we are seeing an experience across the industry well continue our recent research shows that two thirds of U.S. undergraduates, who asked about their experiences during the recent locked down said they would welcome more.
Online education after the pandemic, yes.
Recent studies also show that the majority of students from other institutions main priority should be new ways of finding them a job for an internship.
We are seeing a change at the institutional level also adds approximately half full professors now feel online education is an effective teaching.
And feel better prepare to teach online up from approximately 38% net.
We believe better students get older and learning different environments their need for high quality online academic support will continue to grow.
What this means for Chegg is there's an overwhelming need for the services, we provide and we see that being.
Increased demand engagement across all our platforms all over the world.
And as students rely on check for more academic support we continue to expand what we offer more recently with the acquisition of math with.
These expanded offerings will also increase the value proposition for Chegg study.
Which is why we are seeing higher than expected take rates for that offering including internationally.
Across our businesses, we are seeing extraordinary growth right now.
In the U.S., we are seeing growth from many sectors, including students who were taking more courses online increased penetration into go into online colleges.
And the impact of our technology efforts to reduce accounts Europe, which was first rolled out in August more recently, we began to launch multi factor authentication across the platform as well.
International.
Sudden move off campus, creating an immediate need for online support and introduce students to check in record numbers accelerating our growth around the world when.
When we look at the demographics outside of the United States over 50% of the population is under the age of 30, and they're looking to improve their lives through education.
It is clear they need scalable on demand support for their courses, which is why they are turning to check.
We now provide services to students and over 190 countries and in Q3 alone we saw 25% new questions asked and answered from students outside the United States.
This indicates how powerful our model is and that is very cost effective way for us to acquire local content and local audiences at scale.
Secondly, we saw 252 million continues in the quarter, an increase of 82% year over year.
It is increasingly evident.
In the mind of the students around the world the need for Chegg is very real.
You know the other inevitable trend that we have identified is that students everywhere are seeking alternative less expensive pathways to pursue their careers that is why we bucket. They go and then skills based one.
We think our strategy of increasing the curriculum to match to the most in demand jobs lowering our prices operating income sharing agreement and building them live chat support it's a better model than anyone else has to offer.
And while we continue to navigate.
It's complicated time in our history.
Well, so many things have changed some things remain the same.
There will always be a need for students to learn new skills in order to improve the Robertson.
There will always be institutional pathways, let's.
Let's say well now be both offline and online.
As always bidding to connect academic to professional pathways and we believe this moment in time, we'll create a major acceleration of that trend.
That is why we build chegg from day one.
An advocate for this transition.
And why we continued to invest in supporting anyone on their learning journey.
This is why we are reinventing the model that learning to earnings with lower priced higher quality human support at scale all exclusively online and.
Building a company like kids can only be done by people who are dedicated to the mission of putting students first so on that note I want to take a moment to congratulate the incredible chegg team for once again being honored this year as one of Fortune magazine's great places to work for the third year in a row, it's a real chegg threepi.
I could not be prouder of this incredible group of employees, who have remained so focused and executed so brilliantly. During this unusual time in a while I don't want to say thanks.
Thank them for everything they do.
To make check great and with that I will turn it over to Andy Andy.
Thanks, Dan and good afternoon, everyone.
First and foremost I hope you and your families are staying sake during these difficult times.
As you can see from the results check had another great quarter with our business metrics and financials. Once again ahead of our expectations.
During the quarter, we also executed a very well received convertible debt offering.
The success the success, we're experiencing both domestically and internationally give us the confidence to raise our guidance again for 2020 and as we have been for the past four years provide an early initial outlook for next year, despite ongoing economic uncertainties.
Looking specifically at the third quarter total revenue was 154 million a 64% increase over Q3 2019 different primarily by six cents subscriber growth to 33.7 million as we continue to see significant growth opportunities in both domestic and increasingly in it.
International markets.
Adjusted EBITDA for the quarter was well ahead of what we expected at 32 million.
We continue to see strong leverage in the model, all while making incremental investments to build for the future.
We ended the quarter with approximately 1.8 billion of cash and investments in.
In the quarter, we completed a very issuer friendly convertible debt offering along with a concurrent exchange of approximately 50% of the outstanding principal on our 2023 notes that were deep in the money.
We expect to use the cash in our balance sheet and future operating cash flows to fund, our current business, including potential acquisitions and to call or repurchased outstanding notes at opportunistic times to minimize shareholder dilution from these instruments.
We continue to believe the combination of our scale balance sheet operating model and cash flows other stump strongest in the education industry, which we believe provide a significant advantage to both our customers and our shareholders.
Moving on to guidance based on the strong results from Q3 and the continued momentum we are experiencing we are increasing our guidance for 2020.
Well Q4, we now expect total revenue between 188, and 190 million would check services between 162 and 164 million.
Gross margin between 72, and 73% and adjusted EBITDA between 80 to 84 million.
As a result, we are increasing our full year 2020 guidance and now expect total revenue between 626, and 628 million with check services between 507 and 509 million.
Gross margin between 68, 69% and adjusted EBITDA between 200 mall and 203 million.
Turning to 2021.
Our initial expectation for total revenue is approximately 775 million.
Check services revenue growing to approximately 655 million.
We expect gross margin to be approximately 70% and expect continued leverage in the model with adjusted EBITDA expanding to approximately 260 million.
Increasing adjusted EBITDA margin more than 150 basis points over 2020.
In closing we had another strong quarter in Q3, we delivered above the high end up our expectations getting as complements to increase Q4 and full year guidance and provide a strong initial outlook the 2021 it.
It is becoming increasingly clear that our model is the envy of the education landscape by serving students directly with high value affordable services, while improving their outcomes.
And helping them meet from learning to Bernie.
With that I'll turn the call over to the operator for your questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is any question queue.
You May press Star two if you would like to remove your question from the Q4 participants your speaker equipment. It may be necessary to pick up your handset before pressing the star case any insist upon please limit yourself to one question. So that we can get to everybody's questions.
Our first question comes from the line of Jeff Silber with BMO capital markets. Please proceed with your question.
Thanks, So much in your prepared remarks, you talked a little bit about the Chegg study Tech I'm. Just wondering we can get a little bit more color in terms of how that's been going you talked about higher than expected take rates, but I'm just curious you know.
Other momentum has been as you rolled it out thanks.
Yeah do you should this is Dan.
The momentum has been great.
And what do I mean by that so it started earlier than we expected.
And.
We are seeing a better take rate than we expected on top of that we are seeing a take rate outside of the U.S. similar to that in the U.S., which surprised us because we weren't really sure how writing would do.
But it's very clear that the more we can package and the overwhelming value that we can create for students that they're.
They're taking it.
So we couldn't be happier to be honest with you.
In India the impact on ARPU I think people thought might have been a little bit higher can you talk a little bit about that.
Yeah, it's hard to it's hard to really breakout ARPU. The way we report because we report a full chegg services number and that includes things like advertising and now it includes things like a big pool, so, but we do know that if you just look at.
Subscriber number and the revenue per subscriber that ARPU is up year old is up.
So it's extraordinarily positive you know you have to remember we do have an advertising business, it's much smaller compared to the rest of our businesses, but you know advertising has just been slightly weaker which is why that make up the balance but if you were just look at it apples to apples you'd be very pleased.
Yeah, Yeah, so I've looked at Intertanko, yeah, when we look at it internally for US subscribers were seeing ARPU increase like like Dan said, Unfortunately, you've got the you've got the other businesses involved.
Okay, great. Thanks, I'll get back in queue.
Our next question comes from the line of Stephen Sheldon with William Blair. Please proceed with your question.
Thanks, and congrats on another strong quarter <unk> can you talk some about topline trends you've been seeing a thankful recently, including final trend now looking ahead and Additionally continue maybe frame what you've included thankful in terms of revenue and adjusted EBITDA within your 2021 guidance.
Well I'll start and turn it over to Andy for what and he's going to tell you is we don't break it out [laughter], but well, but what we look the b.
All parts of our business are performing better than our expectations and clearly better than a year ago.
Our guidance for this year I mean, we're looking at doing a $100 million more this year than we originally anticipated last November so we're seeing we're seeing sort of [laughter].
Really just great take rates on all of our businesses.
The case I think so.
We are seeing.
A real growth rate from say the trough for the year, which was February to just take this month or last month, it's significantly higher I just want to remind people, though that weve had thinks a little bit less than year, it's really early and samples growth and because our other businesses are growing so quickly.
A it's not a significant contributor yet, but it clearly will be great.
The rates of growth we're seeing.
Yeah, Yeah with respect to 22, only want to Dan's point think whole still relatively small and it's not at scale yet we.
Clearly weve clearly accelerated investments in think full with respect to the course development and as well and some other things.
And so as we look at 2021.
Once again, it's relatively small continuing to grow at rates that we anticipated when we made the acquisition and.
And we think well it certainly won't contribute next year, but we do believe ASC.
Gail it will definitely contribute to EBITDA.
Great. Thank you.
Our next question comes from the line of Ryan Macdonald with Needham and company. Please proceed with your question.
Yes, good afternoon, congrats on an excellent quarter as we look into the fourth quarter guidance and what the visibility you have in terms of usage and adoption can you talk about any trends that may have been a bit different as students are more online and Andy as we look at the Fourq you guys are there any risk.
It's in the numbers are built in.
For universities that are ending the semester early said Thanksgiving or maybe there might be a risk to December revenues at all thanks.
I'll take this Dan I'll take the first part let Andy took the second part of your question [noise]. So.
So in terms of surprises look there's been a lot of variables that we like other companies have had to navigate so start dates and dates.
Total number of students that are attending whether they were telling their original school or they're attending online.
And then there was what we Didnt anticipate which is scary, which is how many students would actually get co bid while they were on campus.
And so we've actually you know we we actually are barometer to tell you what's going on at those schools as it relates to co because we can see it in their behavior.
And when they subscribe or when they are using it.
So that was just I was something we didnt anticipate I, probably should have but I don't know how we would have done that because you know each school was doing it differently. So.
So we haven't seen any surprises except to the upside which is that and things that we were you know rarely when you work on a bunch of initiatives like penetration to community colleges penetration into more online schools account sharing global I mean for the for the first time, we mentioned just how many countries. We're now engaged.
190 countries.
Which means were well beyond just the English speaking countries. So all of the surprises are things that we believe should be happening and would happen. It's just picking the timing I'm up it's very difficult to know, but all of them into the upside which is why the numbers are as big as they are and it's it's or it's.
You know its covert has really just were deal.
How many people are dependent on what we do to help them navigate their curriculum think about learning to earning.
So you know.
In our case the surprises have been good for the business side, it's just disappointing as to not having to go through this is a country, but it's a business that's been great.
Yeah.
Yeah, and and Ryan with respect to Q4 guidance you know we were well into the semester. The fall semester right now we have a pretty good handle on what schools are doing what schools aren't doing and so we we incorporated all of that thinking into our guidance and we feel comfortable with.
With where we're at.
Great. Thank you.
[laughter].
Our final question just on the one.
By the way just one last point on that.
What's been interesting is we hear a lot about schools ending early but the evidence of what we see is that that's not the case they may not come back after Thanksgiving, but that doesn't mean, the semesters ending early and the second thing is given the outbreak of covered we're not sure people are going home for Thanksgiving. So in all circumstances were ready for those circumstances.
And check is benefiting.
Yes.
Next question comes from the line of Douglas Anmuth with JP Morgan. Please proceed with your question.
Thanks for taking the question.
I was hoping you could just help us understand what kind of assumptions are included in your initial 21 outlook I'm just kind of how you think about the international sub next and study pack adoption and ARPU and anything on account sharing efforts I know it may be tough quantitatively, but if there is anything qualitatively you can.
And there are many I'm sure there's no initial conservatism and the 21 outlook just trying to understand the revenue growth that you're seeing this year that 50% plus and then into the mid twentys that you're initially guided to for for next year. Thanks.
Well well first.
Yeah, No I'll start it which is I think our team so the guidance a little bit higher than that and actually when we look at it. It's we're actually guiding back to where we were when we started this year in terms of percentage of growth on top of a substantially higher number but what.
Its fears as you mentioned, it's early on I'm sure a lot of companies aren't giving guidance for Q4, let alone for 21, let alone. This early so I think it just shows how.
How positive we are about the business and.
And how big the opportunity is for check going forward <unk> and because we debated that question should we give it at all but we think given the momentum we feel comfortable giving this guidance right now which is you know three months before most companies would give it.
So let me start with that got.
The second thing is you know we we.
The reality is we will continue to see substantial growth.
Through the first part of the year and then the question is what happens after sort of the March 15th on the lapping up when students left the campus.
As a reminder, it's our belief that domestically.
The majority of.
The growth that we saw domestically was a result not of Cobiz per se, but the fact that we've done a really good job of our investment account share. So we expect to be able to continue to reap the benefits of that what's your cards is a real positive was outside the U.S., which is the international business really just jumped out or no.
Where because its students.
So we have to say became familiar with <unk> as you may or may not know they are back on campus and we are still seeing substantial I mean really substantial growth. So it's.
It's a mixture of OCC.
Shifting to batch we add this early to estimate a number we can feel very comfortable with but recognizing that there might be two halves of the year next year domestically and then continued substantial growth outside of the U.S.
And with continued improvements on not just the take rate, but renewals and other things on.
On Chegg study pack. So it's as you mentioned its a combination of what we could visualize minimally now in November 2020 in a year, where we're dealing with a pandemic and all these changes so we feel really good about the guidance as you can imagine.
Okay and just following up on that any any more commentary you can just give around study pack adoption and uptake I mean, clearly above all of your expectations. And then you mentioned have you rolled it out earlier, but just as we think about modeling going forward and.
ARPU I mean are there any numbers that you can put toward that.
All right I'll, let Eddie Tuscan just specific to the numbers, but just for those that haven't spent as much time, Doug as you had the opportunity to do so the Packers 1990, Cyberseal Chegg study had 14 95, so it's $5 more a month, but we'd be crazy 90, plus percent gross margins. So it's both a real.
Positive on the topline in a real positive on the bottom line, which is why we're not only expecting to grow substantially next year, but actually improving our EBITDA margins. So it all shows up there, but the other thing I want to remind people is because we are doing so well and because we think there's such a massive opportunity ahead of us Andy mentioned on the last call on the call before that we pull.
Forward some investments to continue to invest in future growth. So it's it's all those balances, but what I would say is over the next several years, we imagine and we expect that Chegg study will make a significant impact on both top and bottom lines for us.
<unk>.
Yeah.
Our next question comes from the line of Glenn Farrell with Jefferies. Please proceed with your question.
Thanks on the investment side, it's rare to see this type of growth and and show margins improve at the same time can you can you just walk through.
I know what leaves you comfortable in this ongoing kind of dual engine model what what.
This despite all these new things that you're on Dowling, how you can make that happen at the same time.
Well Dan mentioned it earlier right every every incremental new subscribers 14, 95, or 90 95 pretty much 90 cents could drop to the bottom line and what were what we have decided to do is invest in our future growth opportunities right whether it be.
You being with US a long time brand whether it be with the initial investments that we made in like Q anyway, and then we made investments in Chegg study actually.
And skills based learning, what making investments in international which are not insignificant investments. They are significant investments, but what they do is they benefit our future growth and so we've got a model that scales like that where we can make that have that what I called balance between driving incremental profits to the bottom line that Ben.
If it all shareholders immediately while increasingly.
Testing in the future, which which benefit shareholders. Both in the long term. So we've got this great model.
That we have that opportunity to do both things.
Yeah look I think the way I would sum up what Andy said, which is exactly right as we're blessed with a model that not only produces very high growth 60, 90% grow 64% revenue growth, 69% subscriber growth increase in EBITDA, our total plus percentage and then increase.
The increase of the ratio down to free cash flow and that does liberate us to make very smart investments and what we believe is the right time to do it. So international is one we started to make a few years ago, and it's really paying dividends now.
We may technological investments in the platform that allow us to grow internationally, but also to block account, Jerry you're seeing the benefit of that now.
And then of course staple itself, which is we lowered prices we've increased the curriculum and all of that is in investment to make that business very large and.
And sort of as we've done with Chegg, which has redefined the space become very obvious large leader and that we think that'll have a massive pay off down the road. So those are the areas that we're focused on.
And the good news is the model just allows for it in ways, where we.
Where it's hard for you to even notice it because we're so profitable on the core business.
Our next question comes from the line of Josh Bear with Morgan Stanley. Please proceed with your question.
Thanks, and congrats on a great quarter.
Wanted to focus on international go to market as it relates to profitability in competition. So obviously domestically are very efficient customer acquisition. Just wondering how this might differ internationally levels of marketing or other investments needed and then.
Any insights into any differences in the competitive landscape in different geographies.
Yeah. That's obviously a question that we're focusing on a lot ourselves get any significance of how quickly. It grew the things that are really good news for check shareholders and of course, most of us operating the business.
Currently the international business actually even more efficient than the U.S. business.
That we have a very large low cost way to develop content, which is the Q and a network itself, which is similar to the U.S. Every question that gets asked that gets knew we pay to answer it but then it stays in our database and attracts other customers and it becomes profitable right away. It's a very unique model and want to check invested and.
Oh, we're benefiting here because I I you know in our prepared remarks, we said at least a 25% of all new questions and this is the most number of new questions we've ever gotten year in total and even if you were to subtract the international the international questions that are being asked now are about the size of the total question that we're being asked.
In terms of new questions just three years ago. So it is quite significant so we have a very local low cost way to do it and we have a very low cost way to acquire customers. So similar in the U.S., where 84% of the people come directly to chegg either through SCR to Chegg Dot com, we're actually seeing that same behavior.
Outside the U.S. at this point, so our marketing expenses collectively for Chegg services Absinthe people not only havent they've grown they've just been shifted.
From markets that are getting bigger faster. So the efficiency that you come to experience with chegg in the U.S., we're seeing the exact same efficiency outside the U.S. and that's really good for US you know I I think people were probably surprised to see weren't 190 countries.
And that's because we're relevant in English speaking countries non English speaking countries, but the model is the same which is students need help and when they need help they turn should the internet now uncovered really sort of.
Sort of accelerated that outside the U.S. as for the competitive set as you know for the majority of the business in the U.S., we don't have a significant competitors, but at this point, we do have point competitors per parts of our business outside of the U.S.
There is nobody was our size or scale or balance sheet. There are similar to what they've always been in the U.S. free sites.
But there are quality is uneven if passed it can't do the coverage that we do students can't depend on us or something that they need to depend dog and so were you know when we research those categories. When you look in those countries, where we do surveys.
We don't see any significant competitors, we do it not only globally, but we do a country by country at this point and so were in very good position.
Similar to what we've seen in the U.S. not a lot of people took this path to go direct to the consumer.
And so that's been to our advantage.
Our next question comes from the line of Aaron Kessler with Raymond James. Please proceed with your question.
Great. Thanks, guys I'm curious to get your update the maybe what you're seeing with the password sharing that you've talked about maybe in Q3 and what type of impact we should expect for Q4 and then just when we think about a pre college offerings that has that pandemic and kind of the shift to more on learning and your thinking at all about maybe going more high school and Middle School students.
Additionally, thank you.
Yes, great questions as always I'll take the second question, let Andy talk about accounts you know how we account for that we have always said that our model is primarily going to be directives.
And so when you go direct to the student you actually go older not younger because students in high school and younger you have to go through the school through the school system or through the parent and there's a real need for those things you've seen but they're they're.
They are much more difficult they're much more extensive they don't have the margins that our business has they require a salesforce and that we think would not necessarily be that efficient and each school district makes its own decision and sometimes each teacher make some decisions. So for US we use high school through math way.
To mask way and.
Check writing to actually acquire customers brand them to us.
And then sell them into college, we're actually going older. The thing I want to remind people of is the average age of a college student in this country is now 25, it's not 18 to 22 online students.
Exclusively or even older. They're 30 community college students are much older as well they come in and out of the system. So we are going older. We're going down the career path with same pool and that has been paying off for us. So we don't really expect to go younger necessary.
Yeah, and with respect the password sharing or or is is you know we started to see the benefits of that starting in really Q2 as Dan had mentioned, particularly in the U.S. The U.S. is where it's been particularly an issue and as kids students went off campus that proximity sharing.
Ability went away.
We subsequently done kind of getting back into the prior question around investments, we accelerated our investment in device management that got implemented in the second week of August if I recall correctly August 17th all of August 17, and that is not all that the continued benefit of that is.
Is incorporated into.
Into our Q4 guidance.
Our next question comes from the line of Jason So we know with Keybanc capital markets. Please proceed with your question.
Hi, Thanks, guys. Thanks for taking my question.
On on the on the device management question from from the previous question.
You know what are the some of the other detailed and other rollout happened in the middle of August.
Was that to your entire install base and then with the multi factor authentication and what are the what are the details on that.
Yes, so like like Dan Oh.
No I would get instead of like Ed said Theyve got such so.
You know we it was.
It was a strange stead of coincidences, which is we've been working on this and as you know last year, we focused all of our efforts in getting rid of really bad actors and what do we mean by that there were people stealing our accounts and reselling that there were there were people sort of hacking incidents and when we proved that you saw our growth rate to the first part of the.
First quarter had already moved up to 32% and then when when co. It came it moved up to 35% and then you see we're at 64% now a lot of that in the U.S. has to do with the fact that when students moved off campus. It was more difficult for them to share.
What we've done is make sure that when they get back on campus. They now still can't share. So you.
You know we get done we have done a lot of things leading up to it that were more happy than they were told technology investments, but we pulled forward the full technology investment.
And so now you need to register your devices. So you can use to devices and you can swap to a third which makes it very difficult and we did the swaps or third because when you do go on campus some people.
Don't have the money don't computers. They used computer labs are when they do they don't want to carry their computer and so we want to be very available to the students. The two factor means that we now can you identify to make sure that it's your fault and so these two things you know they don't eliminated 100%, but they they have really made a substantial impact.
On the number of people who were sharing aggressively.
And people using aggressive we used to we used to draw concentric circles, and say who is using who's paying who's not paying but using words would pay if we block and then who is it very very casual user probably gets uses at one time from a friend we feel that we've made like 85% of the progress along the way so there's still more ways to go.
And we feel that that will block it's for users coming in in the future and blocked from international sharing which was even a bigger risk. So it's been a substantial effort by our security team our privacy team our technology teams, our engineering teams and kudos to them because it's obviously been worth a lot to us I think people are confused.
And the fact that what Kogut did was suddenly makes chegg realm.
Relevant only if you weren't on campus check is relevant whether you are on campus or off campus. We can see those numbers. We now have proved look at the growth rates. We're experiencing now when students are on campus and off campus and we do track, which location. They are because now weve device management. We know what location you are we know if you're on campus. We hope you're not on campus. It really was our.
In the U.S. our efforts around accounts sharing that made such a big impact which has been a really great things and then Kobin really has made a major impact outside the U.S., which is the people just became familiar with us and similar to what we saw in the U.S.. It's just with an explosion when we're super excited about it because it's moved our efforts on years ahead of plan.
Okay.
Correct.
Our next question comes from the line of Alex Fuhrman from Craig Hallum Capital Group. Please proceed with your question.
Great. Thanks, very much for taking my question I wanted to follow up on what you've been talking about with the international students and it seems like you've had quite a bit of success. There. The last couple semester, how can you comment a little bit on how those students are behaving as customers compared to the American students I guess it it might be too.
Early to know how long they are going to stick around for but you know in terms of when they think signing up and perhaps how they interact with free trials before converting to paid membership has that been similar to your U.S. customers. Just curious how that plays out over the next few semesters.
Yeah, Let me [laughter] it Didnt set a phenomenal questions. Let me go back and just start with what you said, which is in some cases, it's too soon to know, particularly with sort of the LTV of a customer but here is what we have seen since January onest and what has sustained so the behavior in first quarter and the behavior.
In second quarter has been very similar it's just a lot more people came in after the.
The second quarter and were coming in the first quarter. So that was the acceleration of the growth rate, but the behavior that we've seen which.
Which has been good is.
The conversion funnels look very similar to the U.S. The second thing is.
The Q and eight news looks very similar to the U.S.
Actually it's more so because we have less relevant local content and this is the way we're building it and so thats going to really positive thing, which means international growth should be a big grower for many years to come true not only white space, but as our database that sold with more content from each individual country more and more and more people will find.
So that's good news.
What did surprise us was the percentage of them, taking Chegg study patch Act.
Actually was not just equal to the U.S., but actually a little bit better.
Which is a really good sign.
Usage in terms of how often do they use it very similar the difficulty for US has been chanda forecasting because we didnt expect to be at 190 countries. This quickly and second you know so we have to figure out when starts then sorry mid terms are on finals and when they take their breaks.
Do they behave similarly around those breaks and so.
No. These are all things we are learning as we go but the core things that we care about which is conversion cost to convert usage study pack takers and early retention are all extraordinarily positive and it's something that we are all very familiar with less.
The rest are things that we'll learn as we get to scale and into new countries.
That's a big part of your question no doubt about it I mean, it's it's it's a lot bigger than people think I mean outside the U.S. not including China, we expect that market to be just as big as the U.S.
And we don't see any business obstacles over the next several years the cap.
Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.
Yeah, Thanks, guys anything to call out in the textbook rental business.
Good call out no [laughter] Oh no.
[laughter] honestly it is it's Don as planned we don't expect you to grow next year for those of you laid out recall when we switched from Ingram to Fedex.
You know we took a one time sort of step up in the revenue that we recognized because.
We own the books versus not on the books, but in terms of its pretty much what we expected on volumes and prices in margins.
It is a decreasing percentage of our business for all the reasons that you know that we've been articulating that you've been very constructively covering for the last several years, we use it to attract customers will use it to provide overwhelming value.
We use it to be able to upgrade customers.
So the other Chegg service and we run it.
30 months Flash Roseanne breakeven.
And that's exactly what we expect in our in our guide just maybe put out for 21.
Got it thank you.
Uh huh.
Our next question comes from the line.
Eric Martinuzzi with Lake Street. Please proceed with your question.
Yes, it's a backward looking question on the acute through AD performance, if I looked at the Chegg services as you know as we stood at add this third you were talking about.
<unk> hundred 12.5 EPS.
Mid point of the Chegg services expectation for September of course that was pretty account.
Account sharing.
The project and then we will end up for the quarter, where you do let's say 119, so just in broad strokes that $6 million of outperformance in Chegg services. In Q3 can you can you break that apart. There's this kind of 80 20 account share versus steady Pat.
Or account shows versus international take me a little deeper on the outperformance in Q3.
Well first thing is yet to be for us we outperformed so certainly happy about that.
So thanks for pointing that out too as I, but yet the net net is it really has to do with what Dan talked about early there. There's no we're seeing significant growth internationally.
And just just that's just come out as faster than we had anticipated.
And then the second part is what you just talked about and that is we are we are starting to see.
You see a big a capture of those kids that may have in the U.S. that may have.
A shared an account and we're having more more of those kids pay.
And just just in general it's those two things that gave us the slight the the Overperformance that you just mentioned.
No one of the things that makes it hard to breakout is that it's really early for all these things.
There's a lot of future growth left.
Left in these businesses, which is again why we you know I think will be those rare company that gave guidance.
Guidance for 21 them higher than people expected so.
There's a lot of there's a lot of things that are moving in the direction of where Chegg believe the industry was going to go and we are growing faster now and we think that's good for students and we think its great for shared checked shareholders.
And.
We'll just keep executing.
Our next question comes from the line of Bret Knobloch from Berenberg. Please proceed with your question.
Hi, guys. Thanks for taking my question can you maybe just update us on a on a go to market strategy was thankful and maybe what is I guess, what is driving customer acquisition, there and have you seen any inflection point in demand due to maybe the remote learning talents that you're seeing in your core business.
Yeah.
So again really good questions. We've had the we only closed the company a little less than a year ago or about a year ago. So you know we did.
It's hard for us to go they did not build all the historic stuff in reporting that check like to have that we've now built into the business.
The analytics. So what we know is that growth is faster what we know is that when we offer more curriculum, we get more students. What we know is we've been able to bring down the cost of customer acquisition and what we know is out of the big Differentiators that we built.
His we employed cafes tutoring inside a painful so there is no other competitor that were student that got stuck in the middle of it can ask a question anytime day or night and get on stuff. So the go to market strategy.
It's really what you would imagine it would be which is we're utilizing the check list.
And focusing on seniors.
Because those are the ones who are beginning to realize good a lot of the circle and this is going to help or get a job.
The question about what's the impact of the pandemic I'm thankful, it's difficult to know which is to some degree you would say that a lot of people have more time to take it down so they are taking it but what we're seeing is we're seeing growth.
From people, who are still currently employed and they're looking to upgrade the quality of the opportunity. They have at their company or go find a job at another company because these are all technological skills.
So the the go to market has been they had a very good go to market strategy. We've just grown that faster under the way, we do things and the ability for us to invest in the company, but it's going to continue to be lower prices greater curriculum.
Support that no one else can offer which is the choppy support.
Well as career placements I assays I.
I mean, I can't point to one thing and say that is working and the others are not everything that we're doing right now is.
It was designed to make simply very large business in the future and so far the signs are that it can be.
Our last question comes from the line of Arvind Ramnani with Piper Sandler. Please proceed with your question.
Hi, Thanks for squeezing in on.
Yes, just a little bit of a longer term question when students go back on line.
How do you expect to change their mind now have.
Have you seen a permanent reset and how students and educators took at the digital learning.
And with that kind of sustained when when we kind of go back to a more normal environment.
Yeah look it is.
I think if you just look at the perspective and say.
Students more the the bigger the student base gets the older that it gets more diverse than it is the different income backgrounds that people come from the different support levels that people will come from the more support they need.
And check is in position to capture that and Weve been capturing it I mean, we went public seven years ago and look how far we've come as a business and I think that's an indication of just how much the world is already shifted in the direction that.
Chegg is going what we can feel comfortable in saying from this semester is that usage is agnostic to geography.
If you're at the school or if you're not at the school you subscribe and use chegg very similar ways I would say were at school and not at school are taken the same take rates of Chegg study, whether they're in school physically or not in school.
So for US we see this answer.
And permanent situation, but we've always believed that that was going to be the case, what cobra did what sort of reveal.
How much new students have and allowed us to accelerate our accounts hearing yesterday and accelerate our growth internationally. I mean, you know not a lot of companies that grow 69% or seventh year as a public company in terms of subscriber so.
We don't see any evidence that things will go backwards. If anything we were going to see a schools go more hybrid we're going to see more students interested not fewer which means you're going to need more support of the thing that check does as students.
Start to seek in a much more aggressive way better ROI shorter time to enroll and acceleration of learning to earning what we do at thankful, we'll have a much more meaningful impact because it's very clear again, one of the one of the things that code it's revealed.
With that those who don't have the skills to two working and in technology enabled environments. It doesn't mean, you're coder right.
Right you need to understand and utilize technology and those are the ones that were most susceptible to furloughs and to layoffs and so you're seeing a rush of people, who now get it without equivocation that they need the skills and that's been a boon to thankful and others in that space and by the way you're seeing University trying to do that now because.
They recognize that students don't have for six years to take off they don't have $80000 to spend there have jobs when they're trying to learn they have families. When they're trying to learn so we think we're positioned exactly where.
The person who helps define and when the category should be.
This confidence is built by the fact that we're seeing not buy anything else.
That concludes are today, so I'd like to hand, it back to management for closing remarks.
Okay, well. Thank you everybody for joining look almost seven years ago Chegg went public with a mission to put students first strong vision to support the future of learning and a small team of committed employees, who believed that students need and deserve help well. The journey is not been easy and it's certainly not a straight line.
Really given the millions of students that we have health and strength of our business. It has been worth it what is truly remarkable is that the more success. We have the more opportunities we see ahead of us.
Well check provides has never been more critical and given there are more students than ever before with more diverse backgrounds ages and needs Chegg sees a bigger future than even we first imagined higher Ed institutions were already struggling to provide services and support to their students prior to the pandemic now.
Now as many colleges and universities face an uncertain financial future their ability to provide needed academic support is even further strength. This.
This is why students are turning to check in record numbers and as online learning is being embraced around the globe with more and more students expecting a hybrid model in the future as we've talked about Chegg will only play a more critical role in students' academic success and now in their professional journey.
We are proud to be here to served up no matter their needs no matter, how they prefer to learn no matter the pathway. They choose in no matter, where they are in the world. We will continue to always put the student first.
And we want to thank you all for joining US we want you all to stay safe.
And we look forward to talking to you next time and we'll see on the other side.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.