Q3 2021 Chegg Inc Earnings Call
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Greetings and welcome to the Chegg, Inc. Third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to your host Tracey Ford Vice President of Investor Relations and ESG for Chegg. Thank you you may begin.
Oh.
Good afternoon. Thank you for joining Chegg third quarter 2021 conference call on today's call are Dan Rosensweig, co chairperson, and CEO and Andy Brown, Chief Financial Officer.
A copy of our earnings press release, along with our Investor presentation is available on our Investor Relations website, Investor 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 announcements on our media center website at Chegg Dot Com bust Media Center, 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.
These forward looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements.
We caution you to consider the important factors that could cause actual results to differ materially from those in the forward looking statements in particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in <unk> annual report on Form 10-K filed with the Securities and Exchange Commission on February 22nd.
2021 as well as our other filings with the SEC.
Any forward looking statements that we make today are based on assumptions that we believe to be reasonable as of this date.
We undertake no obligation to update these statements as a result of new information or future events.
During this call we will present, both GAAP and non-GAAP financial measures, our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release, and the Investor Slide deck found on our IR website investor Chegg Dot com.
We also recommend you review the Investor data sheet, which is also posted on our IR website now I will turn the call over to Dan.
Thank you Tracy and welcome everyone to church Q3, 2021 earnings call.
Over the last year and a half we experienced extraordinary growth and in the midst of a strong year had a solid third quarter.
However in late September it became clear to us that the education industry is experiencing a slowdown that we believe is temporary.
This industry wide dynamics were unanticipated and it's direct result of the COVID-19 pandemic.
A combination of variance increased employment opportunities.
Compensation along with her team have all led to significantly fewer enrollments for unexpected this semester.
Those students who have enrolled are taking fewer and less rigorous classes and are receiving less graded assignment.
We believe this is the post pandemic impact that will affect this school year, but it's not sustainable for higher education long term.
Learning sites and apps, both free and paid to the U S and Canada have experienced significantly reduced traffic since the fall semester began.
Despite these trends our team continues to execute at a very high level. In fact check has experienced year over year increases in retention and adoption of Chegg study pack, which has positively impacted our RP five 5% in Q3.
And the rest of the World, we continue to see very robust subscription and revenue growth while still early international is clearly becoming a meaningful part of our business and we have already exceeded our target of 1 million international subscribers.
We believe that it'll time international will be larger for us than the U S.
This is why we are investing in key areas such as localization of content in language as well as our e-commerce and pricing platform.
These infrastructure investments will allow us to take local currency and offer both variable and local pricing and we believe these capabilities will help increase penetration in large untapped markets, where pricing is a major variable for success.
We should be ready to leverage these investments by the fall of 2022.
At a global level students are increasingly returning to the internet and chegg to improve their learning and outcomes domestically personalization expanding beyond the textbook two courses and supporting additional non stem subjects remain our focus to increase our domestic parents.
Chegg is uniquely positioned to personalize each student's learning journey and bring them additional services because we have so many subscribers so much data and so.
Such relevant content.
Therefore, we have the ability to personalize and expand the value we offer existing customers and create new value for our new customers are.
A great example of this is our investment in University, which is off to a very strong start.
Although early and not yet live for students. We have already received over 20000 pieces of content in stem and non stem subjects for practically at over 700 schools, including many of the most prestigious schools in the world, who will help students learn while earning more from yourselves.
This offering has been so popular with faculty that we've already paid over $4 million to educators.
We are excited for the future of diversity, which is building stronger relationships with institutions and professors.
We are grateful for the passion he's educators from around the world are showing to furthering education and support for students through check.
The degree based pathway will continue to be very large in the United States and we expect that it will grow again after the pandemic.
But one of the lessons we see is just how much technology influences and empowers the world.
Therefore, we are increasing our investment in digital skills training, which is important to an increasing percentage of the population around the world.
Within this space one of the key trends as more employers, providing skilling and reskilling and upskilling to their current employee base and usually this benefit to attract new employees that is why we are excited to announce our new partnership with skills, which will launch next year.
<unk> is a leader in serving large corporations, where the employers offering to pay for the employees undergraduate degrees as well as provide skilling and upscaling curriculum.
So of course is will be offered to employees at relevant companies through the guild platform, creating a new opportunity for domestic growth.
As we look ahead.
We remain strong believers in the growth of online education support and skilled services around the world.
As we manage through this moment in time, we will remain focused on building long term value for both learners and our shareholders.
The last two years have created the situation nobody could've anticipated and have clearly temporarily affected the higher education industry.
It is also clear.
That more people are going to learn more things, especially online and that will only create more opportunity for chegg.
We remain the market leader with a beloved brand a strong moat and our services continue to help millions of learners all around the world.
Since rely on us to run their course material and better understand concepts, which improves their outcomes.
We are in a great position to come out of this temporary slowdown stronger than ever and take advantage of the opportunities before us and through it all we remain focused on our long term mission of putting students first in everything that we do and with that I'll turn it over to Andy Andy.
Thanks, Dan and good afternoon, everyone.
As Dan mentioned earlier, we had a good Q3.
Most of our financial and business metrics came in at or above our expected ranges despite industry headwinds in our north American markets that emerged late in the quarter.
As a result, we're reducing our guidance for Q4 and full year 2021.
In addition, given the timing and nature of these uncertainties and the fact that the school year is seasonal we will provide our initial full year 2022 guidance in February.
When we will have additional data to better inform our forecast.
We believe in the long term opportunity and as such we will continue to invest in our tech and engineering capabilities.
Arsenal Ization of our platform and the breadth depth and delivery of our content.
As the leader in the category that continues to grow we believe these investments will put us in an even stronger position.
Looking specifically at the third quarter total revenue came in at $172 million driven.
Driven by a 23% year over year increase in Chegg services.
This was offset by a decrease in required materials, which was impacted by low enrollment and the nationwide worker shortages.
Created longer lead times.
Gross margin came in at the high end of our forecast at 61% as our highest margin Chegg services revenue contributed more to total revenues than we expected, resulting in adjusted EBITDA of $46 million, increasing 45% year over year.
We ended the quarter with approximately $2 6 billion of cash and investments and as such we are navigating the current environment from a position of strength.
We'll use our balance sheet to create shareholder value, which includes buying back securities during times of value dislocation and to that end, we announced today that we have increased our securities buyback program by $500 million.
In addition, we believe the combination of our balance sheet and cash flows put us in the pole position to acquire assets should they become available at the right price.
Moving on to guidance for Q4, we now expect.
Total revenue between 194 and $196 million.
With Chegg services revenue between 175 and $177 million.
Gross margin between 70% and 71% and adjusted EBITDA between 67 and $69 million.
As a result for full year 2021, we now expect total revenue between 762 and $764 million with Chegg services revenue between 657 and $659 million.
Gross margin between 65, and 66% and adjusted EBITDA between 255 and $257 million.
In closing, we had a solid third quarter and while we are navigating this temporary industry slowdown we are more excited than ever about the opportunities ahead of us and the future of our business.
We have a great brand with students an incredible business model with a strong balance sheet, we are executing well and we are increasing investments to expand our services and capture growth opportunities.
With that I'll turn the call over to the operator for your questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question you May Press star two if he would like to remove your question from the queue for participants using speaker equipment it may be necessary.
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We ask that you please limit yourself to one question per person.
One moment, please I'll be poll for questions.
Our first question is from Jeff Silber of BMO capital markets. Please proceed with your question.
Thank you so much.
I appreciate the color you gave in the prepared remarks, but if you could just give us a little bit more color what exactly happened between the last time, we heard from you and when we heard from you today to cut costs such a shortfall.
Yeah.
So just catch students didn't go back to school, so you're seeing people not go back to their workforce.
And youre seeing commute.
Community Colleges look if you look at Pearson in and many of the other companies that have reported.
They have been saying that enrollment is significantly down the reality is when you look at it it's down three years in a row normally during a recession, which was last year enrollment goes up but because it was COVID-19. It didnt students didn't go physically to schools schools Werent ready online schools Werent prepared.
So enrollment went down last year.
Nobody could have anticipated.
Just the robust nature of the low end economy, where.
Our kind of students community college students for year students in schools that most of you don't know about chose to go earn an income.
Or stay at home, where their child versus going back to school. This semester and it was completely unanticipated and it will come back.
But the reality is that's a large part of our student base or students that need the most help.
And they just didn't come back to school it became clear to us in mid September towards the end of September that.
That day.
They just werent going and then our research shows that of those that did go 16% of them are taking pass fail significant percentages of them are not taking their required classes are taking easier classes professors are assigning less and on average they're taking fewer courses. Obviously this is not sustainable.
This is this is a post COVID-19 hangover of mental exhaustion and the opportunity to earn more money are reassessing of their lives not unlike what you hear going on in the corporate workplace. It just all came together at one time, we didn't see it happening and it happened.
And.
The good news is through that we've been executing really really well. So the numbers that we're in control over like renewal rates are improving cancellation rates declining.
Conversion rates up take rates.
Chegg study pack of 1995 versus 14, 95, Oh, the renewal numbers, they're up outside of North America, which is Canada and the U S subscription growth is up and great.
This is really something that happened and in Canada, and the U S or they're acting identically.
And if you look at any of the external traffic numbers and reports that you could from any free or paid sites, you'll see there even all down more than we are so weirdly enough, we're gaining market share.
This is this is a situation that we did not anticipate it is what it is and we're dealing with it but at least we're executing within it really really well I mean this is a company who.
His growth has great profit has great EBITDA has great cash flow has growth factors outside the U S. The deal with Gilead is strong. This is just something that came and we didn't see it and didn't really notice it until now.
We noticed that we wouldn't have known it until end of September.
Okay, that's fair and I do understand it let me play Devil's advocate here and look out longer term demographics.
Demographics continue to decline students and parents are asking why they should pay this much for a college education, we're not getting the funding from the federal government that you might have thought.
Why don't you think this would continue for the next year or so.
Well I don't think this I think what's happening what you've described I think is accurate, but that's not what's happening now what's happening now is just millions of students just didn't go back I mean, just even in community colleges alone the bigger issue in the bigger opportunity frankly for Chegg as we've said all along.
They were building a very large platform for high School College and near graduates that we see growth factors outside the U S. On the businesses that we have to deal with Guild is a really great growth opportunity over the next several years to use their sales force and to reposition our skills business into that space and some of the biggest employers in the world like wall.
Mart and target and Chipotle in the U S. The plan has always been.
That we are going to expand the amount of content that we have to expand the tam to non stem users and expand the number of services outside of academic support to the audiences that we have so this just happened probably two years earlier than our plan anticipated and we do think it's going to come back Mike.
Guess is it.
It won't come back and the earliest until next fall because remember the school years not the calendar year. So you know well we'll have a January similar to what we're seeing now in terms of enrollment, but we have a we have so much to grow and so much to do that I think if youre seeing that simply is the academic support to the current U S College market than we have.
Done the right job of articulating just how big we think the opportunity is to bring more and different things to.
Two students.
I really appreciate the color I'll get back in the queue, yeah, great questions I appreciate it. Thank you.
Our next question is from Stephen Sheldon of William Blair. Please proceed with your question.
Hey, thanks.
Yeah, I guess I just wanted to ask you. If you think of kind of thinking about the biggest unknowns that you see as we think about the setup for 2022, that's keeping you from providing guidance at this point would be more about the second half of the year enrollment trends for next fall or how big of a range of outcomes do you think there could be as we think about the.
The upcoming spring semester.
Yeah, I'll, let Andy give more color on that in a second but but you know we've debated it.
It's there really it's just we don't know what's going to happen next August and September and just the opportunity to wait till now I mean, where we were the weird company that gave full year guidance with no. One else gave me from quarterly guidance during COVID-19, because we could see what the trends were them. Here. This is a trend that really didnt become visible to us until about 30 days ago.
Oh.
And you.
You know, even though even though things.
Are getting stronger as the quarter gets on we just don't know how it plays out in the second half of next year and so we think we have time to listen and learn and research and do surveys and be better positioned to give numbers that we feel comfortable in giving we just feel like there's no reason to give them now when they when it's just too big of an unknown, we don't know what happened.
The economy after the after the Christmas season, and supply chain issues get resolved just too many things out of our control that they were in our control we give it.
Got it and then maybe just a follow up I guess what types of trends have you seen in international markets is I would assume you're still seeing strong growth there and I know youre, not providing guidance, but could international become a big enough growth driver in 2022 to maybe offset some of the weakness or.
Continued uncertainty that you're seeing on the upside.
Well over time, the answer is 100% yes.
It's hard to know in 'twenty, two because we really don't know what the U S trends in Canada trains are gonna be.
You took the international subscriber growth, so international subscriber growth not Canada, and the U S being great.
Take rate of the bundle been great.
Conversion renewal increases all have been Super strong. So we know what we have is very valuable as we've said on previous calls, but it's worth reminding. So I really appreciate the question. There's a lot of technology that we've been working on to Bill We did not expect our international business to be this big this soon we just announced in this call that we've beaten our.
All of the million.
Through Q3, instead of waiting for the year and so we what we're building now is the ability to price differently.
And large countries, we see tremendous traffic.
And some of the biggest countries in the world outside of China, where we don't intend to be.
Where our conversion isn't what we'd like it to be and that's because the local pricing isn't good enough. So we have a lot of things to build so I don't know that 'twenty two is the year that that that certainly.
Certainly, it's offsetting it but how much it offsets it I don't know, but I do imagine 'twenty three 'twenty four 'twenty five that international will just be.
It's meaningful now will be very meaningful.
Got it thank you.
Yep.
Our next question is from Doug Anmuth of Jpmorgan. Please proceed with your question.
Thanks for taking the questions.
Dan I know you talked a little bit about this but.
Just in terms of trying to understand.
I guess, where you thought expectations were kind of what you were thinking for enrollment as youre heading into the semester and then where do you think they've actually come in for the fall semester and then how does that impact your thinking about duration of this effect I mean, it sounds like.
January semester look similar because you're kind of pointing to.
August September of 'twenty two.
A little bit and saying kind of not knowing exactly what would happen then.
And then just separately any updated thoughts around the.
Pearson situation and any potential timeline or anything else to point out there. Thanks.
No great questions. Doug. Thank you I would say the duration is we just frankly don't know where we're 30 days into seeing this and it's not that it's 30 days 60 days 90 days. It's just this semester.
It could be limited to this semester, we could see a whole bunch of people come back in January that just took all the money that they could for the Christmas holidays, because Starbucks is tripling their salaries and even though again, we don't have enough people in the workforce the kinds of people that come to Chegg are self starters self motivators. That's why they go to school, that's why they get checked so there.
Obviously in hindsight the kinds of people that would go capitalize on the income because most of them are working 30 hours a week or more anyway. So good for them and I'm happy for them to be honest with you not so happy for us today.
So you know who knows what will happen in January because community colleges are not like four year schools that start on the semesters community colleges. You can go wherever you want to go over the semester starts whenever you go so we could see an uptick in January we just don't know enough to predict that because we really don't know what's going to happen with the economy supply.
Chain government stimulus all the things out of our control. So what we're focused on right now Doug is just executing at a very high level against the opportunity that has presented itself.
For the long term, we feel really good we feel really good about international subscriber growth, we feel really good about the deal we just announced with killed we feel really good about the personalization efforts that we launched this fall.
Take rate has been very high we already see of those that are using it that they engage more the goal of the personalization efforts is to help those that are already using us to find more things we have that they haven't used it would help them, but also to become a channel a conduit to things that we don't yet have that we will be.
Adding to the Czech network, so that they can find that as well that should keep them longer and allow us to create more value and have different prices overtime and attract new people. These are all things that we still firmly absolutely believe in and this is just an enrollment issues. So I just I can't pick the timing.
We don't want we don't want to be wrong more than once right. This was already a big surprise to us and so we're not in a hurry to make a bigger mistake and so we just decided.
The business will execute we're doing really well within our expectations and we will just.
No more by the time, we come out in February as to the question over Pearson.
Very straightforward copyright infringement case.
We feel extraordinarily good about our position we have yet to respond and respond by the date.
For those people who are not as familiar with it as you are Doug in terms of.
What it is.
The issue for US with this particular publisher is.
It's it's a like I said, it's a straightforward copyright infringement case, but there are parts that should worry investors don't really affect the piercing cases, much which is we don't have a deal with them. We haven't had to deal with him since may than what we had in may was half of what it was a year ago that was really just for the questions that were in their textbooks, but I think youre seeing textbooks.
Becoming much less an important part of higher education, they are becoming empty they've been insignificant for checks business in fact.
Our quote unquote sort of within the range guidance here is because textbooks are down Chegg services actually did extraordinarily well during the quarter and that is really the core of our business.
And then we have something like nearly 70 million questions in our database of which piercing is is a teens percentage to maybe 2%. So it's not significant to us.
You know we can't.
We can't predict the outcome, but we feel very good about our position and will be responding shortly and you'll see it. So it's unrelated to what we're seeing now.
Thank you.
Our next question is from Brian Peterson of Raymond James. Please proceed with your question.
Oh, hi, Thanks for taking the question. So so Dan I wanted to follow up on maybe a prior question, but just the idea of enrollment kind of being down over the last few years and look more broadly like in person everything is kind of down. So I'm. Just curious as you think about your content and your partnerships and thinking about maybe hybrid education models are there new part.
Ships or areas that you need to work on you got to see how this new kind of hybrid learning model evolves over time, just curious to get your thoughts on them.
Yeah, it's a it's a really excellent question.
Students have told US 75 per cent of more students told us they would prefer a hybrid environment, that's up from like 25% a year ago.
So I think you know the same way employees would tell us they like the hybrid environment, which is management comes to the office, but they don't.
In the case of students I think that they they met most students want the benefit of both some students can't afford to do both they just wanted to do online they have families. They remember the average age of a college students 25 years old and so its a real situation for them where.
Where access really depends on whether or not they have to come in person or not so.
So I absolutely do believe that that is the trend we have been building towards that trend. That's why we've said in the past that we're focused on support services for community colleges and for online universities and actually it was doing incredibly well, which is one of the reasons. We were hit so badly right now because its community colleges and people who are either taking online or <unk>.
Into the four year schools that you haven't heard of that are working that were affected. The most those are really the kind of new customers that chegg has been working aggressively are getting and I think that's one of the reasons that we were hit now we were hit less than other people in our space, but nonetheless, it's pretty significant so so.
So yes in terms of partnerships if you take a look at the relationship with example with guilt.
Our relationship right now is we think full and skills based classes at boot camps and other things that corporations are doing but most of the things like Guild and N strike and companies like that they are helping corporations pay for undergrad education.
So these are also conduit for us to get to know these companies to be able to have these companies supply things like Chegg study and Chegg study pack in math way in writing to their employees. So I do think that there are new partnerships that will develop out of there. So I think those are the kinds of ones that we're currently looking at now.
Thanks, Dan.
Yeah, Great question.
Our next question is from Ryan Macdonald of Needham and company. Please proceed with your question.
Hi, Thanks for taking my questions.
I don't know if this is a and enrollment issue, but would love to hear some color on maybe the impact.
Account sharing could've played or even.
Growing competition in this space, obviously, you know earlier this year Quizlet buying Slater course, youre getting aggressive in expanding our platform by acquisition, you're seeing any any difference in sort of trends, whether it's around usage going to other platforms or maybe pricing pressure from some of the lower cost offerings I would love to hear about that thanks.
Yeah.
So great questions and as you can imagine when they start starting to reveal itself late in September we took a look at all of that so let me tell you. What we have learned what we've learned is that free sites or ones with premiums are not taking our traffic at all.
But they are in fact down more than we are and our audience is not leaving us to go to that so I can I can tell you from our own internal research.
We ask that question as you imagine we should just like you asked it and we're very satisfied with the answer that we're not losing customers to anybody else.
At this point in time so.
That just isn't the case in terms of others getting more aggressive they're all trying to copy our model and it's been explained to me when chegg catches a cold theyre going to get pneumonia, so theyre going to be in a more challenging situation that we're in we believe.
Over this next period of time and you know this was this kind of thing is inevitable. It happens in every industry not for these reasons I've never seen these this combination of reasons before.
But from a competitive standpoint, I think as Andy mentioned in his prepared remarks, even though we're doing an aggressive.
Stock or you.
You know.
Dr Securities buyback securities buyback, because that's because we have that too and the lawyers around the time, they make me say it the right way.
We still believe that Chegg is the single best buy in the education space by far and look forward to owning more of it.
Having said that we still have an additional $2 billion on our balance sheet to be able to go grab some of these assets. As you know is there pricing has become much more in line with what they should be.
We were not thrilled about this situation for obvious reasons, but we're executing really well the opportunity outside the U S is what we would've hoping you expect it to be.
And we're executing well against what is currently available in the U S and we expect it to come back, but we're also in a stronger position from a balance sheet.
EBITDA free cash flow. So, we'll just continue to execute and look for these opportunities when they present themselves.
Great and just as a quick follow up you mentioned are executing well internationally. As you you talked about stepping up your localization efforts, but how should we think about maybe pace of of country.
Do you think about international versus us.
Thank you for your time today.
Yeah.
Up a little bit, but I think I heard the question about how should we think about focusing on international.
And what should you see from us so what do we mean by localization.
In the case of localization every one of these things, we think will expand the Tam and our growth rate for years to come in some way similar to what it did in the U S. Which is think of international is three concentric circles. There's English speaking stem students, that's where all our growth is coming from now.
And it doesn't matter what country, you're in if that's what you're doing you're coming to check.
The second one are not as good of English speaking students, but also taking steps.
So from their localization is by putting the content and local language.
Which is translation.
It's allowing them to ask questions not just in English, but in their local diet dialect and then answering it not just in that dialogue, but in every dialect. So that every new question over time gets answered in multiple languages. So we don't have to redo it more than once and then the third category would.
<unk> is a big part of it in the U S. But its also global is expanding beyond stem, which is into other subjects, where we're getting professor provided content and you know that also again, it's just a huge fun interesting opportunity, which is the creator economy, we've already paid out over $4 million, we're in over 700 schools.
Yes.
Which is pretty huge considering there's only 4500 in the U S and we have over 20000 pieces of content, so localization and the last part of localization as being able to present in the local currency, which were only able to do and I think two countries right now and then actually localize the price so.
Somebody on the last call. After a really good question to say could you lower the prices in other countries. The answers we will we can't yet and all of those things are things that we are aggressively working on now which should be ready for the fall sometime in the fall of next year and so you can just imagine we're getting huge volumes of traffic from places like India, and Mexico and Indonesia.
The other places that have large populations.
But really can't afford the price we're at so we're harnessing what's available to us in those countries at these price points, but we expect to get a lot more and a lot faster growth. Once we're able to do that so that's what we mean by localization.
Thanks, I'll hop back in the queue.
Thank you for the question.
Our next question is from Brent Thill of Jefferies. Please proceed with your question.
Dan If you can just bring us back to September it was everything tracking kind of to what you had normally seen in normal seasonality and then it just it just didn't come through in the last couple of weeks and I would assume given the guide obviously October doesn't come back can you comment has there been any any rebound in October.
Yeah.
Well, yeah, I mean, yeah I mean, we've obviously completed October so it's November 1st in and I think Andy would kill me, if I gave out numbers, but here's what I will tell you that.
For July and the first part of August we were ahead of our plan.
So we had an aggressive plan, we felt very comfortable taking guidance up but the interesting thing is we're actually going to end up somewhere around the original guidance. We put out last November after all is said and done so.
I just found that curious but.
What what generally happens is textbooks.
<unk> earlier than homework help because people get the textbooks, we have never been smart about the timing of tests, which we've always been a week or two behind and we always say it's timing. So we really didn't think much of it early in late August and early September when textbook season starts and then it didn't come back and that was the first Canary in the coal mine that maybe this is a different kind of semester.
So we.
We started to look at all the trends of competitors traffic trends ourselves, we started to look at our funnels internal funnel.
And we were asking ourselves is timing is there something that we did wrong is there something wrong with the systems and the answer was no we're actually executing and if you just look at our.
Traffic alone was probably 25% down in the month of September versus what our internal plan was.
No.
That's what we saw and batter of course changed our perspective on the quarter and.
As soon as we knew that we.
The end of September early October.
<unk> communicated with the board, let them know.
The good news is we had we had to protect service as we had a really good Q3, we'd beat on every metric there, but textbooks is a zero calorie business for us which means it does not matter in our earnings it does not matter in our numbers.
We had predicted for years at textbooks, we're gonna go away. They will continue to get smaller we offer it literally as a service to the industry because we're certain if we got rid of it publishers would would raise their prices again and that's not fair to the students. So we continue to offer it but but it should not be considered.
Anything in terms of value that we're able to produce in terms of earnings or anything like that and we said that years ago. When we switch the model. So nothing has changed there except there's just fewer of them. This semester because there's fewer students that was the first time and it really was just it never bounce to the numbers that we thought it was gonna bouts two in September October.
Is stronger.
But you know, we still have November and December and so.
It's difficult to know, but we just didn't what was the guidance. We put out is what our expectations are in there and that's based on all the information we have right up until last week.
Okay. That's super helpful. So you're you're just as just this is not really competitive. This is more an industry headwind that that that everyone's facing them and it's.
It's tough to dock underneath that that win that you are seeing in the industry right now.
I think that's exactly right. It's the person. We're we're full of people who would normally assume when something doesn't go well we have to have done something wrong. That's the kind of personalities. We have we're paranoid that way. So we looked at every single every single number every everything in the funnel every competitor called frankly every competitor.
We're looking at a number of companies that we always look at we saw the exact same trends got worse.
And so this is what it is for the moment it is unsustainable unless you're betting against their students ever going back to higher education, but it's three semesters in a row go.
Go ahead.
It's quite clean quick fall a quick follow up again on that is it's kind of just assuming assuming that engine stays off in the short term that some of these new initiatives that you've been lean into or are you going to lean harder into that or is your belief.
We're going to wait them, we're gonna wait them evenly when do you think about you know skills based learning University in the career Onboarding Theres a lot of other initiatives you have underway everyone's asking is there something youre going to do differently in terms of how you you you weigh into those.
I think that we are.
Again, a very fair question, we are leaning in very hard to all of them.
We have been we are the core business is extraordinarily profitable.
We are investing a great deal of money and personalization and University in the International E Commerce platforms localization content all of those platform issues the relationship with Gill of expanding and tripling the amount of content that we offer.
The work has been going on and is going on.
The timing of the results take time, because we live in a world by semesters, we don't live in it by you offered that day and it is relevant that we really just got a plan by the semester. So we are leading in hard like we've been leaning in hard in international and it's paying off there's a lot that we're doing that is going to pay off and in the domestic market will come.
Back stronger at some point and so for US it is not business as usual because nobody's ever seen anything like this but it is.
The usual business of expanding our Tam, adding more content, creating greater value for the students finding new channels of distribution.
And creating overwhelming value and seeing growth there as a result, as a result of it I mean, the things that we just love about the business's conversion is up renewals or better take rate is really high international growth is really high outside of North America.
And their take rate for the bundle is really high so.
So the business will be a growth business.
As soon as we sort of clear. This this moment in time you also have to remember we grew a 100% over two years.
So combined that with this and this is what this is what we see but it's absolutely not a competitive situation you can look at the exact same numbers that we're looking at.
Great. Thank you.
Really appreciate all of these questions.
Our next question is from Mike Grondahl of Northland Securities. Please proceed with your question.
Yeah, Hey, Dan have you broken out your subscribers are from two year colleges and four year colleges lately, just so we could get a sense of that mix.
We break them out, but we don't share them.
But yes, we know four year colleges two year colleges online universities, you asked Scott, we actually know it by college by University and as our personalization efforts rollout, Mike We now know it by courses.
That's part of how we know that in surveys that people are not taking the more demanding courses right now they're taking the easier of courses, they're easing their way back into going to school.
They are mentally exhausting you've seen an increase in all the negative things and everybody's lives, but particularly students like mental health issues are just huge right now so but if you look at any external thing any anybody that's reported in the education space anywhere any external numbers, there's a great article that was out.
This weekend it just talks about the fact that enrollment, particularly in community colleges and certain online schools not all of them and then.
Four year colleges that are sort of on the friends they sort of service community colleges and their communities just are massively down and they just nobody expected it.
Got it got it I think I understand where we're more of the pressures coming from sort of two year in online and then more localized four year schools.
Yeah, and I think I think that's exactly right and so if you look at all the colleges that you all know by now.
They are really small.
About 25% or 50 colleges make up a couple of hundred thousand people out of $20 million.
10% of all students in this country go to just one singular community College system the state of California.
And you can imagine how far down that is.
So this is it's a localized problem it will and it just didn't end now.
Got it okay.
Yeah.
Our next question is from Josh Baer of Morgan Stanley. Please proceed with your question.
Thanks for the question.
Yes, Dan could you expand a little bit on the types of services and solutions outside of the academic study that you could provide to your students I'm sort of mentioned it a couple of times I'm just thinking about you know what what types of solutions that you could sell to your existing customer base over the year.
Yes.
Yeah also great question, So I don't want to be too specific for obviously for competitive reasons and other things, but we've said many times and that's one of the reasons. We've launched check like is there are areas that students depend on so if we wanted to support the student not the 180 degree.
That's just an academic but the rest of the students what do they need they need adulting as they call it they need them.
Our financial health and information they need mental health and information.
They need soft skills, they need hard skills, they're getting none of this through the existing free education system called K through 12 or free community College or a four year schools. These are all things with our massive reach.
We have the ability and that's again part of the reason we were building the platform to be personalized.
So.
The right students can find the right thing for them at the right moment over time will know, we obviously know what classes urine will know what majors youre and well know the industry that you're likely to go into well know whether or not you'll have alone whether you felt like the fast before you can just imagine all the benefits that we can bring to students and so we will have the opportunity to do two things bring them.
More things and charge them for it and create chegg into much more of a membership service rather than a subscription service, which is really based around the semesters, where we've done an extraordinarily excellent job of optimizing around that and we continue to do so but we see it we see a reason for chegg to be with you younger with you older and.
You longer over the course of the year than we see now and so there's a lot of overwhelming value that we can bring from partners in terms of access to things discounts on things all things that you'll see over the next several years that chegg will likely be bringing to the students and so we you know we just see the opportunity for Chegg is getting bigger.
Had this moment in time not happen.
We wouldn't have had to talk about all these these additional things because.
The core business is so strong and even even with the situation. We're in the core business profitability EBITDA EBITDA margins free cash flow all extraordinarily strong as has the balance sheet. So you know this.
This is not something that we expected or that we're enjoying for obvious reasons, but it is.
It is going to be us focusing on what we've been focusing on.
Thank you.
Yep.
Our next question is from Jason <unk> of Keybanc capital markets. Please proceed with your question.
Great. Thanks for letting me ask my question here.
You know maybe it'll be the person asking about the Q4 guidance here.
It looks like services growth is roughly flat year over year.
With the Q4 guidance does it assume we see any change in trends.
From the September.
<unk> trends that you've been referencing.
Yeah.
Yes, Jason this is Andy.
That needs a little bit of a break there but no it.
We saw the trends as Dan mentioned in the Middle of September through the end and then obviously, we thought we'd come through October the.
The trends haven't materially changed.
Plus or minus so we've incorporated those into our guidance.
Yes. So that's that's that's basically what we're expecting through the through the end of the year and as you can imagine really the vast majority of our revenue comes from subscribers at the end of September through October.
The vast majority of the subscribers are already onboard and.
Much of the next couple of months is more about renewals it than it is new acquisitions.
Okay, and if I could maybe I'll sneak in a quick capital allocation strategy question. It sounds like you're leaning into the buyback how should we think about capital allocation.
Well I mean, you nailed it we're leaning into the buyback Dan mentioned it earlier.
We're going to use capital to buy companies why not by ourselves. We think you know we think we're an extraordinary value.
So we're going to do both one is the buyback the securities buyback.
One thing is as I mentioned in the prepared remarks.
We're always looking at opportunities to add to our portfolio.
Now whether it be content, whether it be services whatever it may be.
And we want to make sure we've got sufficient capital to be able to execute on those if they become available and.
And so it will be most likely a combination of both.
Perfect. Thank you.
Right.
Our next question is from Alex Fuhrman of Craig Hallum. Please proceed with your question.
Great. Thanks, very much for taking my question.
The app further on on the enrollment decline that Youre seeing this year is there anything material.
Materially different about the declines you're seeing this year compared to the decline you're seeing that you know we all thought nationwide last year you mentioned your students in particular.
You know might be one that really gravitate towards kind of the employment opportunity better coming out with that you know obviously that that wasn't the case last year when enrollment that were declining.
But are you seeing anything in particular about anything we can kind of keep our eyes on it sounds like you know whether it two year or four year state or private schools, you know anything about the makeup of it.
<unk> for this academic year that that is materially different from what we saw last academic year.
Yeah, It's I don't know that I could articulate it and in terms of.
Last year I can tell you what we see happening this year.
I will say that last year people didn't enrollment was down but a lot of that had to do with international students because they werent allowed back in the country.
And.
So you have that.
Plus overwhelmingly this is two year colleges.
And four year schools that act similar to two year colleges, which is people take a lot of classes.
There at the end because they are local.
As we've said in the past the average age of a student is 25, 26% of them already have a child that 40% of them are working 30 hours a week or more that's the group that we think is most dramatically affected of course theres going to be issues with people, who are going to the wealthy schools and a four year schools.
All of those kinds of schools or even the big football schools, where we see all of those people in the stands.
These are people that are that are of lower income that are working with that don't have much support highly immigrant oriented.
Two year schools and are hopefully unexpectedly based on our surveys capitalizing on the income that is available to them and these are not people that are taking sort of subsidies and doing nothing that's a whole different conversation. These are people that are self motivated.
<unk> been working and going to school and have chosen to capitalize on the income and then there's a subset that are that are going just taking fewer classes, either because they're working or just absolute fatigue.
Okay that makes a lot of sense. Thank you.
Yeah.
And by the way we've research these things we've surveyed these things we've looked at competitive data that we spoken to competitive Ceos you spent a lot of time preparing for this call as you can imagine because.
We knew you wouldn't have expected it because we didn't expect it.
And.
But through it all.
We're executing against the opportunity that is available domestically at this moment and we're building lots of really big fun things for future growth, both domestically and outside the U S and our non North American numbers are growing as fast as we would have hoped.
We have reached the end of the question and answer session I will now turn the call back over to Dan Rosensweig for closing remarks.
Yeah.
Well, we appreciate everybody dialing in.
Obviously.
There's a lot of work to be done here and we will do that work I couldnt be more proud of our team for executing through Covid, we experienced massive growth at the beginning of Covid over 100% for two years and so we're going to lap big numbers anyway, but on top of that just the fact that.
So much has happened in the economy that is out of chase control on higher Education's control right now that were being affected by a temporarily.
Or are in the best position with the best balance sheet, we feel like whatever we're experiencing others are experiencing it worse and worse and we're still in really great position for revenue growth and subscriber growth outside of the U S.
And and EBITDA growth and cash flow growth and we have $2 billion on the balance sheet. So we're in really good position to deal with the situation. We just don't know how long it's going to be and we will update you all in February but I really appreciate you.
Joining the call and asking all the questions. So we get a chance to sort of articulate what we've seen.
Thanks, everybody.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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