Q2 2019 Earnings Call
Greetings welcome to Chegg Inc. second quarter 2019 earnings conference call.
At this time all participants are in a listen only mode. A brief question 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.
Now I'll turn the conference over to your host Tracey Ford Vice President of Investor Relations for Jay you May begin.
Good afternoon. Thank you for joining Cheggs second quarter 2019 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 at our Investor Relations website, Investor Dot Chegg Dot com.
Replay of this call will also be available on our website.
We routinely post information on our website and intend to make important announcements on our media center website at Chegg Dot Com Flash 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 todays earnings release and the risk factors described in Cheggs quarterly report on Form 10-Q filed with the Securities and Exchange Commission on April 29 to 2019 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 on the Investor Slide deck found on our IR website investor debt Chegg Dot com.
We also recommend that 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. It's been an incredible first half of the year and we are delighted to report another great quarter.
We delivered 26% year over year top line growth, yielding a record 2.2 million paying subscribers in the second quarter alone.
Our team continues to execute against our key priorities, which are to meet our financial goals to expand our Tam and to investigate opportunities that leverage our reach our student graph and the strength of our brands.
Our strategy continues to pay off.
Which is why we have the confidence to once again raise our 2019 guidance, which Andy will walk you through in greater detail.
We see a lot of opportunities.
To continue the expansion of our Tam across academic products and services international opportunities and through the evolution of new categories like skills based learning.
We believe the power of the Chegg platform puts us in a pole position to support students in a broad variety of ways on the path from learning to earnings.
The strength of the Chegg brand remains at an all time high which is exciting as we enter the back to school season.
Chegg study remains our largest service and serves as the center of our growth model.
It provides students with the essential support through their academic journey and does so online with high integrity content in multiple formats.
That meets them at whatever academic level they are at.
Our goal is to up level students from where they are to where they need to be as it helps students better understand their course material and master their subjects.
We continue to expand the subject matter, we cover thereby increasing the number of students who can use the platform. Our library of content now has a record 30 million proprietary expert answers in textbook solutions, which has doubled in just the last two years.
It's not only the amount of content, but the quality of content that drives our value as is evidenced by the 200 million pieces of content students accessed via Chegg study this quarter.
And video is becoming a much more important component of our learning services.
Along with the addition of practice test problems.
For the second half of this year, we will continue to expand the amount of video content. We offer an increase the categories of practice and self assessment capabilities. So students can better understand where they need help to be successful in their courses.
In addition to Chegg study Chegg, writing has become a mainstay for both high school and college students and it's very quickly become our second largest service.
Because of the popularity and the value of our writing services students submitted nearly $2 million original papers for review this quarter alone.
Generating nearly $137 million citations.
But we're not stopping there as we've done with all of our services, we are expanding the content as well as the capabilities of our writing services to grow with the student's needs.
We enhanced our grammar and plagiarism checker as well as expanded how we help students with foundational writing concepts like sentence structure and thesis development. Our goal is to fundamentally improve students' writing abilities.
As we continue to solve the biggest pain points for students in the United States. We have seen that many of these issues are global in nature.
Which is why we are focused on expanding our customer base outside the United States, We're already seeing the benefits from international expansion as we move into other English speaking countries. We believe international expense. It creates a long runway for chegg to be a high growth high margin company.
Each of our products.
Stand on their own but to better serve students needs and to create more value for our shareholders.
We have been testing our Chegg services bundle the Chegg study pack.
The results over the first half of the year have been positive and we will update you in the third quarter conference call with our plans for the remainder of this year and for 2020.
We are in a trillion dollar industry that continues to grow evolve and realigned to serve the needs of the modern student.
With 85% of students reporting they go to school to get a job focusing on career based skills developments to prepare for the workforce is increasingly more important for our students employers and institutions. So naturally it is for check.
We see a large opportunity to expand our Tam and our product offerings by helping students develop a critical skills that employers are looking for we will continue to invest when we see opportunities that will improve student outcomes, both in the classroom and beyond.
The education industry seems to be at an inflection point and we believe there are significant opportunities ahead for us.
Like we have seen in other industries the companies that are operating at scale.
Have brand awareness own their customer have proprietary content and own the data, we'll be able to disproportionately take advantage of those opportunities for the benefit of their customers and their shareholders. We are excited about the months in years ahead, and I'm grateful to our incredible team of Chegg. We remain unwavering in our mission is to always put students first and with that I'll turn it over to Andy.
Thanks, Dan and good afternoon, everyone.
We ended the first half of the year on a high note with Q2 metrics and financial results ahead of our expectations.
These strong results and continuing momentum give us the confidence to raise our guidance again for 2019.
While the second quarter total revenue was 93.9 million, a 26% increase year over year.
Check services revenue and subscribers grew 30% year over year as we continue to achieve robust growth rates on top of a very large base.
While Q2 is a relatively quiet period for required materials. The team has been diligently working on our next contract for delivering physical textbooks to students.
We ended the negotiations in a position of strength.
And with an industry that has shifted over the past five years to more publish a consignment for physical rentals and more digital course materials like E textbooks.
Our priorities in our negotiations reflect this ongoing shift and we believe the outcome will benefit students and shareholders alike.
And we expect to have more clarity on this by our next earnings call.
Turning back to Q2, we exceeded our gross margin expectations at 78% as we continue to see leverage in the model with incremental margin from our subscription services driving the expansion.
Due to the relatively fixed cost nature of the business.
Our strong performance in both revenue and gross margin drove adjusted EBITDA of $31.1 million.
A 61% increase from Q2, 2018 and more than double our revenue growth rate demonstrating the power of our model and the leverage of our subscription based offerings.
Looking at the balance sheet, we ended the quarter with cash and investments of 1.1 billion.
Which includes the $100 million over allotment option the banks exercised in the convertible debt offering.
We believe our balance sheet, along with a strong business model that generates cash puts us in a position to increase our relevance with students and us cheggs influence in the industry continues to grow we are seeing more and better opportunities come our way.
As we move to the second half, we expect to maintain high revenue growth and gain leverage that will continue to drive adjusted EBITDA margin expansion.
All while investing in our current subscription services and future opportunities like bundles and international.
As such for the full year 2019 were raising both our revenue and adjusted EBITDA guidance, reflecting the strength of our business.
We have also aligned our seasonality to reflect later school start dates for the fall semester.
For the full year, we now expect total revenue to be between 398 and $402 million with Chegg services revenue between 330 and 332 million.
Gross margin between.
76, and 77% and adjusted EBITDA of between 121 and 124 million.
Looking specifically at Q3, we expect revenue to be between 88 and $90 million with Chegg services revenue between 68, and 69 million gross margin between 74, and 75% and adjusted EBITDA between 19 and $20 million.
In closing it's been a great first half the Czech team continues to deliver above the high end of our expectations.
Giving us the confidence to increase guidance, all while continuing to invest in both the content the powers, our existing services and building out our new services and capabilities, which we expect to contribute to our future growth.
With that I'll turn the call over to the operator for your questions.
Thank you if you would like to ask a question. Please press star one on your telephone keypad.
For me should tell indicate your line is in the question queue. You May press star two if he would like to remove your question from the Q and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question is from Alex Paris with Barrington Research. Please proceed.
Good afternoon, everyone. This is Chris are sitting in for Alex great quarter.
Thank you.
At some.
More questions, specifically about the writing product.
If you could share some more granularity into what you're seeing from the user base.
That's learning from this product in other words, what percentage of users.
Our using the writing product to learn versus perhaps last quarter or last year.
And of these writing letters what percentage are converting to other chegg services or what you're seeing as far as cross selling potential.
From this learner base.
Yes, so our interesting question.
The way, we think about it is a little bit different which is.
We don't break out each of the products individually, particularly as we start moving towards the bundle in 2020, where we're starting to connect more and more of these things, but what we know is the subscription part of the writing service continues to grow quite nicely.
And as a result of that.
Those are all people, who are looking to do something more than what we offer for free which is to do your citations in your bibliographies. So.
We are seeing an increasing percentage of people convert to the paid product.
Which has been a great boon to that business, which is why it's rapidly become our second largest service.
Largest for users, but second for revenue.
And that is because it has both a robust AD business now for the free service and a robust paid product. So it's been great as to convert to other products.
Our goal has been to create the bundle and allow people to buy them all at once rather than to sell them individually, but the writing service has been a real boon for us, particularly in the textbook part of the business because from a large percentage of the users that use or writing service are in high school. We have we have significant reach above high school and college, that's how we get $30 million out of the 36 million that are go to those too.
Both go to college and high school. So it's been great for us to build our brand and to onboard people earlier on to both Chegg textbooks and then Chegg study, but we don't break out the numbers, but it's been a real big win for US. It's been an incredible addition to our services.
It's very interesting and then looking at this high school base.
Within the writing products.
As you analyze the data and you're able to see student improvements.
Through the usage of this service.
Has it or should I think of it as an external opportunity that there could be.
Potential for reversing the funnel in other words with the improvements that you are showing within student writing.
Could.
Hi schools integrate this into their enrolled students.
So the answer is that's entirely possible what I can tell you is that.
It's recommended across the board at many high schools, because it's a free service at least a free partners and most high school students don't have the money to pay for it.
But we do see increasingly institutions like Purdue and others look to work with us about the potential integration of our services we have focused.
Mainly almost exclusively on going direct to the student.
Because sometimes working with institutions can be more difficult its a matter of who owns the data. It's sometimes it can be a load like a millstone hanging around your neck.
But whenever institutions approach us we are welcoming those conversations.
Okay.
And then one more question if I may on just squeeze it in as far as.
International opportunity.
Any additional comments, you're able to share in regards to what you're seeing as far as Canada, Australia and the UK.
Has anything changed there or the trends are still moving in the right direction any friends or absolute trends are absolutely moving in the right direction, what we said about international as the way we're thinking about Chegg is is as we move as we get bigger and bigger and I think people are beginning to finally understand how big This company has a chance to be we're sort of looking towards a one revenue number.
Growth rate number ARPU number a yield number of free cash flow number all who are moving significantly up into the right and as we think about international expansion that all just adds to it. So now its already adding it's not significant yet, but each year, we'll get more and more significant particularly as we spent this year investing in the technology that allows us to actually do local pricing local taxing.
And local marketing so those are things that we haven't even had available to us yet and are already growing quite nicely. So there's we see significant demand internationally already particularly in English speaking countries, but frankly not limited to those so we think thats going to be a big growth runway for us for years to come.
And thank you for your question.
Our next question is from Jeff Silber with BMO capital markets. Please proceed.
Thank you so much.
You finished the quarter similar to last quarter with a sizable amount of cash on the balance sheet.
Im just wondering.
What your thoughts are in terms of use of the cash.
I've had folks ask you know.
Is there anything holding you back from putting your cash to use thanks.
Yes, so why don't I start with this maybe Dan you can chime in too I mean, just as a reminder for everybody I mean, if you just go back two years ago, our cash balance was about 62 million if I recall at the end of the quarter.
So yes, we have raised capital over the last couple of years, and we believe that that having a.
A well and patent good capitalized company makes a ton of sense for us because we believe like David said in the prepared remarks that the opportunities floors are almost endless now having said that we're also very disciplined about how we look at things.
We would anticipate that and as you've seen we've we have made acquisitions in the past, we'll likely to make them in the future.
This is the the capital that we have on the balance sheet allows us to do that and to continue to.
To grow the company and increase shareholder value.
Okay.
If I could shift gears actually to the required materials segment I know, it's not an area that you talk about as much but we're seeing a lot of changes in the college textbook market, whether it's the pending merger of segregation Mcgraw Hill Pearson, making the announcement to go digital strip first how do you think those kind of changes are going to impact that component of your business.
Hi, This is Dan we we think we've it's fascinating to us.
How long this is all taken.
We predicted that print would have gone away five years into the business and this is our 10th year in the business and here. They are and we're still doing millions and millions and millions of textbooks, but the faster. They go digital the better it is for US the thing that I think.
Most people don't really understand yet about our business because it really isn't another one like us in the education space is.
Regardless of whatever the publishers do.
The need for a affordable high quality interactive adaptive learning product that allows them to learn it in whatever modality on whatever device 24 hours a day that has nothing to do with the school or their professor.
It's really what students are seeking which is why you keep seeing extraordinary growth for us both in the number of subscribers that we have.
But also in the number of questions that are asked on an annual basis that are not necessarily even in the textbooks at all because they're really trying to master the subject.
So what we see is we see as you point out we see Mcgraw Hill and Cengage. So looking to merge we think that's to our advantage we have a great relationship with both companies.
And they are looking for low cost distribution channels for digital as well as print where that piercing basically saying, what they've been saying they have more money to cut than any other companies. So they are cutting cutting cutting and they're not investing in new additions and so it's easier for them to go digital but that's to our advantage we distribute all there.
Digital techs in textbooks so for us it's all the entire industry is moving in our direction and we're benefiting from it as are our students and our shareholders.
Okay. Thanks for the color.
Thank you. Thank you.
Our next question is from Corey Greendale with first analysis. Please proceed.
Hey, good afternoon. Thank regulations on the good quarter, Dan I think your question for you and in your at your prepared remarks, you made a comment about career based skills development and I think you said at the end in the classroom and beyond that so I was hoping you might elaborate on that generally I think your business has sort of followed the traditional side.
Education system trajectory. It is that sort of suggesting you might start doing some things that would be almost competitive with nutritional education system or adjacent to it.
Yes fantastic question and.
So here's how we think about it we think about our job is to support students on the journey, regardless of what institution. They go to or if they go to an institution, but whenever they are trying to learn something to improve their outcomes or.
Whether its academic which is which has historically been known for or now skills, which are necessary because academics are not enough in a whole host of categories.
We are following what our students are asking us to do and so one of the great things about our business model, which is so unique is we don't have to guess we know based on the kinds of questions that are students are asking our expert answers.
Area, which by the way, we have 30 million pieces of content now 25 million of them are ones that come directly from students only 5 million of the publisher question. So even that is getting smaller we are here to help the students or whatever it is they think they need to learn to advance themselves, whether it's to pass their academic curriculum or whether or not it's to learn the basics of what they need to do to get a job or enhance their job skills. Because I think a lot of people also to understand the average age of a college students 25 years old.
And our own a lot of them have jobs and a lot of them have children and so we are following the direction that they are leading us. So we do not expect to to be competitive with an institution, we intend to support institutions, whether they're traditional ones are on traditional ones that are really trying to educate people to the skills that they need to be employable and earn more money. So we think thats just a very large very important near term opportunity for chegg to continue to support people, who are going down that path.
Great I'll turn it over thanks very much.
Thank you Cory.
Our next question is from Aaron Kessler with Raymond James. Please proceed.
Great. Thanks for the question before on some of the changes in the publishers are how they are evolving just to the extent that affects chegg study at all in terms of license cost can you just mentioned to get your thoughts there and then second just for Andy I think you probably mentioned it before but just the can you clarify the payment of taxes related to the net share settlement I think its 89 for the first six months just how should we think about that longer term. If you just clarify what that is to make sure. Thank you.
Yes, So let me let me handle that one first you're absolutely right on the net net share settlement.
Typically those going to be more of a balloon payment in Q1.
Because we do have annual cliffs on the way our R.R.R. Susan issues vest.
And then it tapers off for the latter three quarters.
Predicting what that will be as we get into into future periods is difficult because it is a function of the share price. So if the share price goes higher than it is going to be more if the share price is less it's going to be less but there was a there is a kind of a balloon payment in the Q1 period.
As to the question Aaron about publishers and impact on licenses for questions.
A couple of things that I think are very much in our favor first.
All the publisher agreements that we started years ago.
All the significant ones have already been renewed for many years to come and they are still exclusive to us and each one of them was about a similar price that we paid five years ago, but for more content or for longer periods of time because.
The value really this strengthened in those discussions really was on chegg side versus the publisher side. In addition to that.
As I just mentioned earlier the breakdown of content of the $30 million. The publisher content used to be 7 million, it's down to five and our internal content used to be zero, and it's up to $25 million, but the answers to every one of them. All 30 million are owned by us to our proprietary to us. So the publishers are becoming increasingly important in this equation. Because this is really about learning not just a question in the textbook, but actually learning the subject and so we're getting all sorts of questions and all sorts of categories and I I think that.
Once people fully understand the mode that we built with our expert answer network, which is well over 100000 expert answers answering millions of new questions. A year I think they will begin to understand that chegg is really an independent.
Company in terms of serving the needs of the students on the questions and issues. They have as it relates to their academics and eventually an increasingly skills. So.
None of the things that are happening in the publishing world. The Mcgraw Hill and the Cengage thing will take at least a year to close we have great long term agreements with each one of them we have great relationship with both companies they value us for distribution and for the.
For the licensing agreements so.
The best I can explain it has everything that's happening is moving in our favor.
Got it great. Thank you for the update.
Thanks Sam.
Our next question is from Mike Grondahl with Northland Securities. Please proceed.
Hi, yes, congratulations on the quarter guys.
Thanks.
Dan.
A question over the medium to longer term.
What do you think is a more important market for Chegg the high school market.
Or kind of his professional market kind of nursing accounting various certificates and whatnot.
Everybody has done their homework. These are all good question.
So.
As a business.
The older. They are the better it is for the business because we go direct to the student and these are people, who whether they're trying to pass our academics.
We're trying to get licensed or certified or trying to get a skill. It's all in the vision of learning to earning nobody goes through any of those funnels.
Unless their desire is ultimately to earn.
And get an ROI on whatever they paid to do it and Chegg is really.
In that space significantly with no real significant competitors right now.
High school students are very valuable, but not necessarily economically as a high school student, but rather as a funnel into the rest of the services. So in the near term I think I gave you your answer in the long term remember that 50% of high school students go directly into the workforce and as we get more into solving the pre skilling and skilling and Upskilling markets. We think will have really wonderful opportunities for that group as well.
But at the moment, we're still focused on the fact.
Our people that are paying for their own education right now.
Got it that's helpful and then a quick follow up.
You talked about the addition of some practice tests some practice problems.
Is it a large new offering can you just kind of shed some light there.
Yes so.
The interesting thing is what chegg doesn't the academic space better than anybody in our opinion is homework help we really help people who are on their own who.
Don't understand the subject, who want to interact and get high quality.
Hi, integrity content that helps them the other area and some of it goes to the professional space and the things that you were referring to earlier have to deal with.
There are categories, where an order to crossed the chasm from learning to earning you need to be licensed or do you need to be certified and a lot of that is based on standardized tests and serve our students have been asking us to build.
Automated practice tests that Ken.
Analyze their strengths and their weaknesses and then help them overcome their weaknesses to improve the likelihood that they are going to pass the test. So we're very specific with the words that its assessment as well as practice tests.
And those are all things that we can do generated by the fact that we have more content about every subject than anybody else does and we can automate those things and build real practice test environments for them.
And expand the kinds of things that we can do for them and expand the value and expand the length of time that we stay with them. So this is a really big initiative for us.
That we have been and will continue to work on.
Well start to roll out.
A little bit at the end of the year as part of the tests finalizing test we're doing for the bundles in a bigger part of all of that going into 2020. So it's a big initiative for us.
Everything we do by the way has been assumed at the beginning of the year when we laid out our numbers. So all the color.
Whether it had been associated all year. So this is going to be a really valuable asset and more than half the people.
Use services are wanting services that help them pass the test.
Not just for academics, but for professional stuff. So we think this is a big opportunity for us as well.
We just keep seeing more opportunities Mike to just.
Solve big needs of the students.
Great. Thanks, a lot.
Thanks, Mike.
Our next question is from Doug Anmuth with Jpmorgan. Please proceed.
Thanks, I appreciate you guys squeezing me in here.
Dan you talked about writing as the second largest service can you just help us understand a little bit about.
Breakdown between subscriptions and advertising in that business and then how should we think about tutors and the progress that you are seeing there and then Andy just want to be clear on for Q I don't I don't think you're building in any study pack impact there on the topline, but just wanted to clarify that thanks.
I'll take the first part and Andy can answer the second part.
So we don't break it out but what I can say is that when we acquired the company several years ago.
It only had one business, which was advertising now it has two businesses that are growing.
Very well as a percentage obviously subscriptions is growing faster because it's off a lower base, but both of them are contributing to this significant growth you're seeing of our overall learning services. So they are holding up their end of the bargain.
And it's that Tam for the sub side can be global so we just we just continue to invest in and continues to return on our investment way more than we are investing in it. So it's been great for the students and for our shareholders.
The tutors update yes, so we have launched chat based tutoring we are.
We are really enthusiastic about it.
We are learning many things that we needed to learn which is why we've launched in sort of in stages, which is how many tutors and how many students can a tutor on chat based tuner at one time and still do a professional job at it what are the different price points will students want to buy per session or subscription. Those those are all the work we are doing now and we're getting lots of good data and good feedback.
The two things that were very confident in is that the need for is overwhelming which is if you. If you understand that there is a need particularly as students are going more online.
There are more undergrad.
Not for profit schools going online that are adding hundreds of thousands of students on an annual basis, where there's probably close to a million students that you would never consider in the traditional side that are just online alone.
Who need not only what we do but need human help to help them intervene and so we are seeing it really is something that is going to be integrated into the background of every one of our products. So it's going to be something where you can get it on video you can do step by step you can.
You can ask expert una, but if you needed interactive dialogue for five minutes or an hour or even longer this will be the way you do it so.
The way, we're really investing in it now is to eventually integrated into the back of writing into the back of study.
Into the back of every one of the services that we offer or will offer as well as being a front end standalone. So.
It is we're doing hundreds of thousands of tutoring sessions, we've chosen to keep the price very low to make it available to as many students as can possibly need it because we want to be affordable. So we're seeing really great results from it but its overall value is going to be to support the other services because we want to be able to serve a student any way they need to be serve regardless of what the subject is.
And Doug the question on study Pat.
Like debt like Dennis said, we continue to test study pack all the bundle.
In the in the fall semester or the second half of the year. So yeah. There may be some very de minimis amounts of revenue in there, but it's going to be our expectation is is that it will be more broadly deployed in 2020.
And we'll include that in our guidance on the next call.
Okay, and then just to clarify on on writing when you said that.
That's your second largest.
Services business is that on a subscriber basis or on a dollar basis.
Well.
Look at it I suppose on an audience basis, its probably number one Chris is over 30 million users.
On its on a revenue basis, yet revenue basis.
Great. Thank you.
Yep.
Our next question is from.
Brent Thill with Jefferies. Please proceed.
Thanks, just a question on the margin you actually hit a record high in your operating margin expanding 700 basis points year on year.
I'm just curious if you could talk to.
Some of the investments that you're making do you feel.
Good about the investments are on marketing I think was flat year over year or there are other things you need to see that you could actually accelerate on the expense side.
Help help on the revenue side is revenue growth is now starting to fade and can you just talk about that balance and in how you approach that going forward.
Yes, so I'll I'll I'll start on this one.
The first thing is yes, we love the model.
We love the model.
It's you know as we've as we've gotten to scale. It shows great leverage on really really high revenue growth.
As far as the marketing side that you brought up.
Ill remind you that over 85% of our our our people that come onto our platform and our subscribers come through through unpaid sources are organically.
So our team really does a great job, particularly on as CEO and a very small portion of that is through is through paid marketing and we are always looking for opportunities to spend more on paid marketing to drive the topline growth.
But yes, we love the model Hi, Dan Hi, It's a high growth. We're also investing very heavily in a lot of things right. So we've got bundles, we've got international Dan just talked about.
The assessments and practice test. So it's we got a model that allows us to both see leverage on the bottom line and make investments for future growth opportunities.
So I don't know where the word fading comes from I think it's the other way, which is we set records not only in margins, but we set records in new customer.
So.
The thing is we're growing really really really fast.
And we expect to continue high growth rates for quite some time, we don't see.
A lack of opportunities to grow with the assets we have in assets we plan to have.
But andy's right, which is.
This is a rare business where.
It's almost like an old software business, where you can get to 90% gross margins on some of these things because you are right. Once use many times, we don't have to speculate as to what content to create because of students actually ask it we have an 87%.
Name recognition, we have 85% organic traffic that comes in.
We're not we're not trying to not invest we just don't see reasons to waste money.
On things that we know that won't work, we're making significant investments in lots of things inside the platform, both technology as well as content as well as new services. So the one thing we won't do is reduce investments for any particular short term decision.
But we are extraordinarily fortunate that this model is very high growth I mean, it's 30% growth, where a 10 year old company.
And the margins just keep getting better because our effectiveness is getting better our efficiencies getting better the amount of content. We have is getting better and global expansion is getting better so were really great shape for years to come.
Great. Thanks, and then just a quick update on the Kerr Onboarding now 40 stand and any any any color there would be helpful. Thanks again.
Okay did you say careers.
The current Onboarding up yeah, okay.
So it's.
Weve merged internships are common our careers efforts, because we have two and a half million students that go through our internship site and what's been really really really exciting.
And I think we'll have more stuff to talk about either later this year early next year of companies who are approaching us.
Because what they're looking for is is high quality students that can be vetted and assessed.
And nobody has the size audience that we have in the data that we have and so there's a number of companies all whose names you will know.
Who are coming to us and trying to understand best how to utilize that funnel that we have from students going into the workforce.
We are so thats. It for example, one of the investments that we've been making as we have.
All the data that data scientists that technology and the resources necessary to build its going to be a build over a long period of time because.
It's not an easy area to tackle but I think you'll be very encouraged as are we when we start to talk about the players that have approached us to work with us on onboarding students to their first jobs.
Thank you.
Thank you. Thank you.
Our next question is from Eric Martinuzzi with Lake Street Capital markets. Please proceed.
Yes, a question on the.
The required materials side I know, it's not a primary focus for you guys, but based on my own model. It's definitely outperformed here over the last two quarters, we've got required materials up about 8% could you refresh my memory there what what is the the business model now is commission space, but I would assume the study side. The services side is a higher margin but.
So question number one is just refreshment my memory on how that business model works and then question number two.
I think you're anticipating based on the guidance you would anticipate negative comps here in the back half just want to confirm that.
I'll start and let Andy do the comps.
I don't know what your model is so I don't know for underperforming Overperform me, but I will say that we believe that we are gaining market share yet and that we are over performing our own estimates and the reason for it is very simple which is.
Most of the competitive set of gone away, it's really us and Amazon at volume.
The the overwhelming reason that students continue to rent through the bookstore and all is because one of the things that I think should be banned which is if you get financial aid from the school year required to use that financially to get your textbooks at the bookstore, which means they are generally paying more for an asset that shouldn't cost them that much and it's a waste of financial aid.
So we're working very hard to get rid of that but other than that it's really us and Amazon.
And so we continue to see great results. The model will has evolved and will evolve again in our favour more things are going E textbooks that requires zero capital.
More publishers actually all the publishers are doing consignment with us something three years ago that would have been unheard of and they are expanding the catalog to not only new books, but to the older catalog.
And so when Andy referred to in his prepared remarks that.
Things are moving in our favor as it relates to the next.
Deal that we do for textbooks.
It's because the amount of capital necessary is going down and so we've always said we wanted to run this business at close to breakeven as possible.
And Thats, what we continue to do.
And as it relates to take services, you're right. The margins are extraordinarily high and for the textbook business. You should just think of it as a way to grow our business to grow our data to get more customers to get more of those customers to use our digital services and we've been made way more effective than we thought we would be.
And we think in the future that textbooks will continue to be a major advantage for us.
The way, we expect to operate them.
Yes, as far as far as the second half of the year guidance.
I think the best way to look the way I the way I would ask you to look at it is we and we've said this in the past and that is that its a.
Where it's basically like Dan said, a breakeven business in itself and we've said in the past $55 million to $60 million business, obviously doing better than that.
But we tend to we tend to look at it as a flattish business.
We've outperformed that over the last really.
Three rushes or so like Dan said, we believe we're taking share.
But we're not we're not planning for something that's.
A significant growth, let's put it that way, but but the nice thing is we've been taking share what we will see what happens in the fall rush.
And by the way, we we think we are outperforming in all of our lines of business, which is why I think this is the 14th.
Quarter in which we.
Been able to raise our guidance more than we beat and it's because this is an extraordinarily.
Good business.
Where.
I think students really welcome it and value it and they're making it easy for us to acquire students and stay on longer and.
We couldn't be more proud of it.
And our team.
Thanks.
Our next question is from Alex Fuhrman with Craig Hallum Capital Group. Please proceed.
Great. Thank you very much for taking my question.
I wanted to ask about international growth I mean, it certainly sounds like you've had some some traction with customers outside the U.S. without really given that you've been putting much marketing effort behind that and now it certainly sounds like we're getting a little bit closer to a more.
Intentional thoughtful launch in in some of these other English speaking countries I'm, just kind of trying to understand how how high is the sense of urgency here and it sounds like you know also just just loosely talking about here on the conference call. Some some other non English speaking countries as potentially.
Being a target you know it certainly seems like maybe you know market like Korea, where were English is widely taught in schools and there's more understanding of the English language. There I mean is it is it kind of one thing at a time you know you want to take care of some of these English speaking markets first and then before kind of looking out at the next set of markets in the next that after that or or is there a little bit more of a sense of urgency where you might be perhaps looking to utilize some some partnerships and some non English speaking countries to really accelerate your market share there.
So I'll try to answer it in chunks.
We have a sense of important but not a sense of urgency and what I mean by that is we think the international markets will be very important to us and are already becoming.
Very interesting to us on the verge of becoming very important to us and we think we're in a great position to capitalize.
On more than just the three English speaking countries, but we have always been a company that's been conservative about not launching things until we know that the market was ready and the product was ready and the service was ready and and so we take our time to investing and we have the luxury to do that because the core business is so strong.
We've been talking on this call about both textbooks outperforming our services business outperforming our EBITDA up 700 Bips.
And these are all things that I think people are beginning to understand just how big and how powerful this business can be so we're not in a rush to make mistakes by doing things before we're ready to do them.
Having said that Youre right, which is these are the services that we have are not going to be limited to English speaking countries. You are also right about countries like South Korea as an example, where we do have South Korea clients.
And we have not focused on it at all.
The fact of the matter is the content that we have and because of the unique proprietary Q in a network, which is that anybody can ask a question in any language on any of their subjects academic or skills wise, we're not going to be limited by language translation is relatively easy and the subject matters in the developed countries, our universal which is they're mostly stem based or business space, which is the core of what Chegg offers since we're not spending a lot of time on the controversial issues like politics, or religion or things of that nature.
We don't seem to have any trouble in any countries.
And in fact, we are being sought out by students. So.
I just I stay away from the word a sense of urgency because.
We won't give up markets to anybody, but where nobody is in a position to take those markets. The way we are.
And so we feel very comfortable about our smart rollout strategy of having started with Canada, Australia and the UK and then investing in the technology to allow us to market more directly to them and with less friction and local pricing and then each semester, we will be adding more and more opportunities because they are available to us for sure. We feel very comfortable about what some of those markets can do for us because we're finding students coming in over the transom, even though we're not in a in a position to really do it the way they want us to so that's a really good time.
That's great. That's really helpful. Thank you very much. Thank you.
And our next question is from Ryan Macdonald with Needham and company. Please proceed.
Hi, Dan and Andy Thanks for taking my questions I guess first starting off I guess, adding on to the previous question with the International expansion. You mentioned your you try not to go into markets until you are really ready and take more of a conservative approach there as you've been exploring some of these additional markets are you seeing any changes or differences compared to the U.S. markets from subscribers and students in terms of either usage or adoption trends.
From what you've historically seen.
Another very interesting question. So here is where we've seen the same thing the subjects are overwhelmingly the same.
That's really good news for us because it means it's really about translation and it's really about investing in small amounts of local content.
That are unique to each country and that is relatively straightforward for us to do we also know that this is really about not only the step by step solution and videos and videos translate well in any language, but the Q and a network is an incredible differentiator from us because no one else has it and because we already have 30 million questions. In there we start strong in every country.
And then we can start to take a local content what is different.
Which goes to something that we mentioned in the script and was asked earlier as one of the questions which is about.
Practice test and assessments in certain countries, it's more about the test than it is about the homework.
And it's more about standardized tests.
In countries not necessarily in the UK, Canada, Australia, but in some of the countries.
But you can imagine that our larger those are very important aspects of the business and so we are preparing to be able to serve those students in a way that their schools want them served and.
But other than that its theres not those are things that we now know and those are things that we can certainly do and executing well there is there's nothing mysterious about it at this point, it's really just about the timing content.
The the branding of ourselves in those places through the ways. We normally do and then the execution and every day, that's what we work towards so we.
As we look towards the future.
It's not just the line, where we say we are excited about the second half in our future. We actually really excited about the enormity of the opportunity it's rare.
To have a business that is 10 years old where you think the future is larger than the current or in the past, but thats the opportunity that we find ourselves in right now and we intend to capitalize on it we're just going to do it in smart ways, we have a stronger brand than we've ever had more content than we've ever had more proprietary content. We had we have more employees and incredible ones.
And and we have more capital.
Than we've ever had so we're in the best position to capitalize on this growth opportunity on a global basis.
Got it and then as a follow up.
I noticed from the call here that just seems to be a bit of a lack of emphasis on the mass solver.
Solution and it was just kind of wondering sort of what are your expectations and how is that solution tracking to external expectations and and as you look out into as we approach the new school year here, what sort of investment initiatives are really behind that solution. Thanks.
Yes, I don't know what the external expectations are I know in the internal expectations aren't meeting and exceeding all of them.
As a reminder to folks.
We got into that business about a year and a half ago and we got a very specifically one there's huge demand for it and were able to fill that with both the free service and then.
The paid service, but really this was about being able to position us to have other assets to differentiate the bundle and so math will become an increasingly more important part of cheggs offerings as a bundle rolls out because when you include.
Practice tests. When you include videos. When you include math. When you include writing and other things that we'll be able to continue to offer there.
The ability for us to to have an overwhelming value proposition in a very low proposition at a very low price and extraordinarily high margins is why we did it.
And so thats, what weve been working toward and its met our expectations for sure.
And we continue to make significant investments in expanding the number of subjects to be able to be both for high school students College students and real academic professionals and researchers and that's going to be an on everything that we have we make ongoing investments into to go deeper into the subjects into the majors into masters and all those things so.
Is right on plan for us and what we wanted it for.
Thank you very much.
All right. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Dan for closing remarks.
Oh, Thank you everybody I want to first thank the Czech team, because we had another extraordinary quarter and actually an amazing first half of the year and were positioned really well.
For the second half the year and well beyond I also want to welcome our two new board members.
Dr., Paul Leblanc, who is the president of Southern New Hampshire University, we could not be more honored to have Paul who is been pioneering online education I think they are the largest and most successful and.
As we continue to serve students that you call non traditional that we're starting to believe or traditional having paul onboard will be huge value add to us and we are grateful that he said, yes, given all his other choices and Melanie willing the CEO of soul cycle.
We could not be more grateful because somebody who's built or building a global brand, who is transforming online and offline.
And really understands the customer base and how to build a business that people worship and love Melanie has already been extraordinarily helpful.
So we want to welcome those too and on a on a Saturday. So we want to pass along our thoughts to our head of HR Jenny.
Brand annual and her family.
Her husband was in you may have read her husband was in a plane crash about a month and a half ago.
And they are doing everything they can for him.
So our thoughts and prayers go out to them.
And we lever and we miss or but overall.
We are really excited about our future we have the team we have the resources. We have the brand we have the data and as we said in our prepared remarks.
A company that owns its customer owns its data owns this distribution channel owns all of its content.
And can very rapidly serve the needs of its customers those kinds of companies. Our disk are in a disproportionate position to be advantaged and advantage there their customers and their shareholders and we are very rapidly becoming one of the larger platform companies certainly in the education space. So there's going to be a lot going on here all good and we want to thank you for joining and we'll talk to you all on your November have a great rest of the summer. Thank you.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.