Chegg, Inc. (CHGG) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Chegg's Conference Call discussing Fourth Quarter Financial Results. During the presentation all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded Monday, February 23, 2015. I'd now like to turn the conference call over to Alex Hughes, Head of Investor Relations for Chegg. Please go ahead, Mr. Hughes.

Good afternoon and thanks for joining Chegg's fourth quarter fiscal year end conference call. On today's call are Dan Rosensweig, Chairman and CEO; and Andy Brown, Chief Financial Officer. In terms of structure, Dan will open with a discussion of Chegg's business and Andy will follow with a review of our operating results and our outlook for the first quarter and fiscal year end 2015. A copy of our earnings press release along with our investor presentation is available at our Investor Relations website, investor.chegg.com. A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our media center website at www.chegg.com/mediacenter and we encourage you to make use of these resources. Before we begin, I'd like to point out that during the course of this call we will make forward-looking statements regarding future events, including the anticipated expansion of our partnership with Ingram and its impact on our business and financial models and the future financial 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 Chegg's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 7, 2014, and 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 also present GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release. Now, I'll turn the call over to Dan.

Welcome to Chegg's fourth quarter earnings call. We are very excited about 2015 particularly given our strong finish to 2014 and the agreement in principle we announced earlier today with the Ingram content group. With this agreement, we expect that 100% of Chegg's revenue will be digital by 2017. Ingram is the world's largest B2B distributor of physical and digital content and is known for having world-class inventory, logistics and distribution capabilities. Last year, we entered into a test partnership with Ingram to determine the feasibility of outsourcing the logistics and inventory financing of our textbook business. Today, we are moving forward with a five year partnership in which Chegg will maintain the front-end direct student relationships, as well as the sizing and pricing of the textbook catalogue. Ingram will be responsible for purchasing all future inventory, as well as managing all backend logistics. This is a transformative deal for Chegg and its shareholders. We will no longer use Chegg's working capital to buy textbooks, and since the price of textbooks remains a huge pain point for students, we are pleased to continue offering them the most competitive textbook rental service in the industry. This partnership will liberate our balance sheet, take the textbook business from a cash user to a cash producer and allow us to expand the number of new offerings to students going forward. Textbook rental is a complex business and this will dramatically simplify our model allowing our team to focus on the much bigger opportunity that our digital platform presents. Chegg's vision has always been to be the leading connected learning platform for students. We see a trillion dollar education market that is under-pressure from all sides really for the first time in its history. It is being forced to make significant changes in how, what and who it educates for the first time in 200 years. At the same time, technology has enabled students to take their future and learning into their own hand. These generations of students are self-directed learners which means they expect to use technology and the Internet to make better decisions, learn new skills, explore and build careers, all at a price that they can afford. We believe we are well-positioned to drive this mega trend, as we continue to improve our platform. Learning services is already a big driver of our growth, helping students learn on their own time and when necessary connect directly with high quality tutors anytime, anywhere, and for any subject on any device. We expect our learning services portfolio to improve in both quality and reach while we also deliver new services to help students improve their outcomes and their career opportunities. 70% of students go to college to increase their opportunities for better career. Colleges and employers spend billions of dollars per year trying to recruit the right student to the university or their company. And with our enormous reach and our proprietary data which we call the student graph, Chegg is uniquely positioned to reshape both these sectors by making the right match at the right time. We believe these will become very big businesses for Chegg in the coming years. We've already made big product improvements heading into 2015. Last month we executed on our plan to integrate our high school service into Chegg for seamless student experience. And we have just completed our first phase of integration for InstaEDU right on schedule across all platforms and rebranded it Chegg Tutors. Chegg is now one continuous ecosystem helping students from the time they enter high school, all the way through their first job. Our most important task remains expanding our reach, relationships, and value with high school and college students. We've made great progress towards these goals. We already reached nearly 50% of all college students and 75% of all college-bound high school students. And in 2014, we added nearly 1 million new active users to our platform. Paying customers accelerated 22% to a record 3 million. After for the first time in our history, Chegg had over 1 million paying digital subscribers which equates to 54% year-over-year growth. Additionally, one powerful indicator of our value to students is that subscribers are using our Chegg Study service every single week and we are very proud of the impact we are having on student outcomes. At the beginning of last year, we set goals for the end of 2016. One, to reach more than 50% of all our U.S. college students. Two, to reach more than 50% of all U.S. college-bound high school students and three to generate more than 50% of our revenue from digital. We are well on our way to reach these targets particularly with today's announcement. Our brand is stronger than ever and our latest research shows that Chegg already ranks as one the top two sites that college and college-bound students consider helpful to their studies. The research also shows that younger students are more likely to consider Chegg for its newer services in addition to textbooks. These stats really punctuate, how today's student see and use Chegg. It's very good news but not surprising because we've launched the series of great new students first services particularly tutoring and internships. As a result, more than 70% of our students use Chegg for something other than textbook rentals. Some other fun facts that represent the scale of Chegg's position in the industry. In 2014, we delivered over 6 million textbooks to students, saving them and their families over $500 million last year alone. Students who participated in our book buyback or worked as tutors on our platform, collectively earned $28 million. So students see us a way to increase their opportunities and earn extra money. On the academic front, over 87% of those surveys said Chegg's study helped them better understand their homework and 75% said it better prepared them for exams. Chegg Tutors, especially since the acquisition has seen great uptick with both customers and tutors growing at over 200% and minutes per tutor nearly doubling. As a reminder, Chegg Tutors is like Uber for tutors providing human help on demand, 24x7, play a voice, video or chat at a fraction of the cost that traditional tutors and at an extraordinarily high quality. It's clear that Chegg is building a very powerful platform for students. As learning increasingly moves to digital, Chegg’s brand reach in relationships with students puts us as - and one of the most enviable positions with the ability to positively impact the educational and clearer outcomes of every student. We will also continue to improve the quality and relevance of our products by accelerating our integration and use of data, enabling each student to get a personalized experience with the ability to discover relevant services from Chegg, colleges, employers and advertisers. This includes finishing the integration and distribution of Chegg learning services through the blackboard network. And today, we posted a new video that shows the new integrated Chegg experience and since some of you have probably finished college more than just a few years ago, we encourage you to take a look. 2015 is going to be a watershed year for Chegg as we complete the transition from textbook rental to full digital student hub. And with that, let me turn it over to Andy to walk you through Chegg's new financial model and how we emerge as a high growth, high margin digital company. Andy?

Thanks Dan, and good afternoon everyone. As a reminder my comments today are on a non-GAAP basis when I discuss our financial performance, the impact of the plan partnership with the Ingram content group and provide our 2015 outlook. In addition, as I get into my prepared comments, I will be referring to the financial charts posted on our IR website which should help you better understand how to model our business going forward. We ended 2014 focused on our financial objectives to significantly expand Chegg’s digital revenue, enhance our margin profile and generate free cash flow. On all these fronts, 2014 was an excellent year. Our digital businesses produced very strong growth and expanded as a percentage of our overall business. In the fourth quarter, digital revenue grew 71% year-over-year, accounting for 34% of Q4 revenue. This is an important revenue mix shift for Chegg, since our digital businesses command a much higher gross margin than our print businesses. And this new partnership will significantly accelerate this. Chegg's business also drove much higher cash generation in 2014 which we expect to accelerate under the new textbook model. Free cash flow finished the year at $9 million, a $37 million improvement from the prior year. This improvement resulted from expansion of our digital business and from successfully completing the first phase of the Ingram partnership. As we head into this multiyear period of growth, our balance sheet which is already strong with cash and investments of $91 million will become stronger. Turning to margins, Chegg's overall gross margin and EBITDA margin finished the year strong. But more importantly, we are well-positioned for significant expansion. Gross margin in the fourth quarter our seasonally high quarter was 54%, up two points year-over-year. The improvement resulted from a higher mix of digital revenue and a greater operational discipline within our print business. Reflecting seasonality and these improvements, Q4 adjusted EBITDA was 18.8 million much better than anticipated. Expanded partnership announced today with Ingram, marks a defining shift in our business model and earnings power going forward. So let's discuss this new model. During 2014, we articulated our plan to become a digital centric business. This included plans to accelerate the growth of our higher margin digital businesses while maintaining our leadership in textbook rental, without using our working capital to do so. Our expanded partnership with Ingram provides a clear path to accomplish these goals. In addition, we believe it will simplify our operating and business model along with substantially strengthening our balance sheet. Let me outline the key elements of this partnership and then explain how this will positively impact our financial performance over the next few years. On May 1 of this year, Ingram will take over all future rental textbook purchases. While Chegg will continue to own the branding and customer experience around textbook rental, Ingram will be responsible for the logistics and funding new inventory. In order to minimize the average source cost of textbooks for Ingram, Chegg will continue to buy used books on Ingram’s behalf including books through our buyback program and invoice Ingram at cost. As part of the deal, we have provided Ingram with extended payment terms, which will initially result in an accounts receivable balance with Ingram of approximately $25 million at the end of 2015 and 2016, before they move to normal payment terms in 2017. With respect to Chegg's existing inventory of books, there are three important points. First, we expect to move this inventory to Ingram's warehouses this fall, enabling us to close our Kentucky facility by the end of 2015, one year earlier than planned. This will result in a one-time $5 to $7 million exit charge but will eliminate $6 to $8 million in annual net warehousing cost for Chegg. Second, while we own this inventory, we will rent and liquidate it over the next several semesters. Over this period, rental revenue generated from this inventory will be recorded as print revenue as reflected on Chart 17 in the IR presentation. The value of this inventory will be reduced by approximately 50% by the end of 2015 and is expected to be less than 10 million by the end of 2016 due to our liquidation schedule. This transition is also reflected on Chart 17. And finally, we will also continue to offer books for sale on a just in time basis, but transfer this responsibility to Ingram in 2016, at which time we would record this revenue as digital. In 2017, we anticipate that all of our revenue will be digital. This will all have a positive impact on our business model. Let me walk you through, how we plan to report this during the transition period. We will continue to report two revenue lines, one for print and one for digital. For all of Chegg's textbook activity, Ingram fulfills, Chegg will receive a commission of approximately 20% of the rental or sale price from Ingram, which we will record as digital revenue. As a result, our print revenue will come down while our digital revenue will increase. In addition, similar to the deal currently in place, we'll share in the upside and downside of mutually agreed upon targets. We anticipate the gross margin from the Ingram commission to be in the 50% to 60% range versus the low-to-mid teens currently experienced with print revenue. We anticipate that this will result in us reaching our overall gross margin target of greater than 60% by the end of 2016. As a result of this transition, overall revenue growth will be slower in 2015, decline in 2016 and reaccelerate in 2017, when virtually all of our revenue is digital. You can see this expected transition on Chart 17 of the presentation. During this transition, we will be focused on digital revenue growth, gross profit dollars, adjusted EBITDA and free cash flow. The shift to a commission based revenue model with Ingram will bring with it a shift in the seasonality of our business. This revenue will be recognized immediately compared to readable revenue recognition over a semester for print based revenue to help you with our expected seasonality in 2015 refers to Chart 21 of the presentation. We expect this transition to begin in Q2 of 2015, so you will not see its effects reflected in our Q1 guidance for 2015. We expect this transition to be complete by the end of 2016 after which point, our financial profile will be revenue growth of greater than 25%, gross margins of greater than 60% and EBITDA margins greater than 25%. Let me now give you the guidance for 2015 that takes this transition into account. For fiscal 2015 we expect total revenue to be between $288 million and $312 million. Digital revenue to be between $133 million and $143 million. Overall gross margin is expected to be between 33% and 35% and we expect adjusted EBITDA to be between a loss of $5 million and a profit of $5 million which includes duplicated cost associated with warehousing fees from Ingram and running our own warehouse through the end of 2015. We expect free cash flow in the range of $15 million to $25 million, although this is a large increase over 2014, we expect to see an accelerated benefit to cash flow to 2016 and beyond as a result, the payment terms to Ingram and the freeing of our capital from being tied up in new inventory. For the first quarter we expect total revenue to be between $76 million and $80 million, digital revenue to be between $29 million and $31 million with overall gross margin between 25% and 26%. And we expect adjusted EBITDA dollar loss to be between $4 million and $6 million. In summary, we ended 2015 as a student first leader in a trillion dollar market with a clearly defined path to becoming a digital company. Our long term partnership with Ingram will allow us to complete this transition into a digital platform that is high growth, high margin and high cash flow. This will allow us to focus our capital and energy on improving and growing our digital services for students, while dramatically simplifying our business and model for investors. With that, I'll turn it over to the operator for your questions.

[Operator Instructions] Our first question comes from the line of Douglas Anmuth with JPMorgan. Please proceed.

Thanks for taking questions and congrats on the Ingram deal. A couple of questions, first just on Ingram, can you help us understand in terms of the guide, what you're thinking about the existing business, how much of the revenue in terms of what you’re looking for for digital could be coming from commission, from Ingram? That's my first question. And then second on the 2015 EBITDA, can you [just go over those duplicative] [ph] cost, I think you said $5 million to $7 million, is there anything else that can bring EBITDA around that breakeven level in 2015. And then Dan if you get the free cash flow back to your - can you talk about how you are thinking about the uses of capital going forward. Thanks.

Doug, I'm going to handle the first couple here. First thing is on the Ingram digital, we’re not going to get into specifics on that but I think it’s important that everybody knows that when you look at the Ingram - the Ingram commission is about 20% commission, we had provided information in the IR deck which does the pro forma for you. So for example, if we had $200 million of prints about $40 million of digital, but the important thing here is when we get to 2017, it's essentially all digital at that point in time, it's all commission based both rental and our [indiscernible] sales.

Doug, I will take the free cash flow question and use of cash. I think you asked - the other question you asked Andy was on the EBITDA which is other charges this year. So the charge - we’ll take 5 to 7 on the warehouse this year and that affects this year's cash flow and EBITDA, so let me let Andy talk about.

I'm sorry, I missed that, so on the EBITDA guidance that we gave you for 2015, it doesn't include the charge we will be [pro-forming] [ph] that out but it is included in the free cash so our free cash flow would have been much higher, if we weren't taking this charge and you'll start to see that in particularly as we get into’15 and ’17 while you’ll start to see free cash flow accelerate beyond where it is in 2015.

And on the use of cash question Doug, so we always believe that this is a $1 trillion market that is only at the very beginning initial stages of its disruption. So the generation of students that are in college now like my own daughters, who are 21 and 19 and the generation that is coming after them, they expect that technology and the Internet will increase the way they learn, the number of hours they can learn, and the number of services that will either be provided by their school or more importantly that they can get on their own. So, whenever we see an opportunity to use our brand, our reach, our millions of customers that we have, we announced today on the call that we already have over 1 million paying digital subscribers for the first time in the company's history in 2014, if we see opportunities like that, like we did with tech tutors which was InstaEDU or Cramster which is now Chegg Study, that we will potentially use our capital to buy others services like that. But what we expect for this year is the year of execution, execution, execution. But we do see more and more companies that are building amazing technologies and amazing learning capabilities but don't have the ability to reach or get the scale on their own because we are the gateway to students, we reach over half of them. So if we see an opportunity to leverage our reach, our brand, our technology to grow business faster we are likely to consider buying it.

Okay, great. Thanks guys.

Thank you. Our next question comes from the line of Brian Fitzgerald with Jefferies. Please proceed.

Hi, guys this is Corey on for Brian. I haven't had a chance to watch the video on the IR site, so I’ll have to do that after but can you just give us any color on the Blackboard integration and what you see from the initial takeaways there. Do you any clear picture on how easy that integration is going to be and what the potential ramp is going to look like through 2015. Thanks.

Great question. So we said when we announced the deals that we would start the integration in January of this year and that we expect that it will start to have an impact in the second half of the year for the integration would take some time in January, February and then of course the semester ends, around May or June for the summer. So we are absolutely on track to do that. We've already done a substantial amount of integration, so we’re available at almost all of their schools now. The next phase of the integration is to be able to match the syllabus to the actual tutor or to the Chegg Study learning page and so we are working on all those data matches now, so we expect that it will start to have an impact in the second half of the year. We’re working through Blackboard's technology. So we've already built our APIs and we see by the way potential for more of these kind of deal in the future. So we expect that any impact to Blackboard will be in the second half of the year, which is something that we've said from the day we announced the deal. But the integration initially - the hardest part of the technical integration has been done and now it's a matter of using the data to match it, so that the right tutor, the right homework help page comes up at the right time to the right student and that's just – that's going to take the first part of this year.

Great. Thanks a lot.

Thank you. Our next question comes from the line of Aaron Kessler with Raymond James. Please proceed.

Congrats on the deal. Couple of questions, first any updates on the advertising services and learning services growth in the quarter, any metrics around that. Second GMV, Andy can you give us Q4 and may be thoughts on that for 2015 and if you have the gross margins for digital and print in the quarter. Thank you.

So on the advertising, the advertising side of the business relative to digital learning it's not significantly different than what we talked about on the last call. We talked about that as being about 70, 30 with the digital loading growing about twice as fast as the advertising business, and it was fairly consistent with that. GMV for the year was right around 230 million, which is pretty consistent with what we had anticipated. We expected to be may be slightly better than that, as we roll into 2015, so once again pretty strong there and I just missed the last question.

Gross margins for the digital and print in the quarter.

So, gross margins, yeah, so print continues to be in the mid teens and digital continues to be in the mid 60s, we don't see - we don't see that changing dramatically. What we do see is the overall gross margin changing. So, as we start to get through '15, '16 and '17, you will start to see the gross margin approaching, certainly as we exit '16 at greater than 60% as we start to layer in mode of the commission based revenue from Ingram.

Going back to the advertising services, Andy, I think you noted some headwinds last quarter, sounds like those continued; any thoughts when you may see a turnaround there?

This is Dan. We wouldn't characterize it as headwinds. We would characterize it as we – we misread the speed in which that business would grow initially. The fact that it’s growing at 40% a year, is not exactly a headwind. It's just that the subscription businesses are growing much faster and so we thought that we would just indicate that on the last call, so that people could understand the subscriber businesses, tutoring, eTextbook Chegg Study, the ones that had deferred revenue, all of those business are doing extraordinarily well. The advertising business which is the recruitment business, which is careers, employers recruiting students for their first job, colleges recruiting students to apply to their school and then brands, they're also growing extraordinarily well and growing faster than our long term model suggest, they just weren’t growing as fast as we initially had anticipated it. So we’re seeing really terrific progress in those areas and we expect big things from them.

Great. Thank you.

Thank you. By the way the, the other thing on the gross margin, the thing about the model that when you get a chance to watch, see the investor presentation is that, we begin to see a pretty significant positive impact on gross profit dollars, gross profit margins much sooner than we see the revenue turn around because we actually grow the whole way through it and the print margins go from 10% to 12% to more like plus 50 and the other the businesses already plus 60 and they’re becoming a bigger part of the mix. So that's why you see a significant improvement in 2015 and 2016, even before we get to 2017 of our gross margin percentage gross profit dollars, EBITDA and cash flows. So, pretty exciting time for us. Next question?

Thank you. Our next question comes from the line of Mike Olson with Piper Jaffray. Please proceed.

Good afternoon. Thanks for all the detail on 2015 and I realize you’re not going to give specifics on 2016 guidance but just in general how would you expect the transition away from physical to trend through 2016. Should it be fairly linear of the decline in print revenue throughout the year just trending for the all revenue by year end in footprint? And then secondly, you mentioned digital subs use Chegg Study every week. Does the engagement changed over the last year or so, in another words is using Chegg Study at least once per week different from what it has been in the past? Thanks.

Mike this is Andy. So first thing on the transition, I would refer you to Slide 17 that we have on the website that gives you a very pretty good look at how we anticipate the transition to occur. I had mentioned earlier that we would have about half of our inventory that we currently have at the end of - at least at the end of this past year, would be half of that by the end of 2016 and then it will be something less than 10 or pretty close to zero by the end of 2016. So I would ask you to go to that I’d say but at this point what's probably more important is, the fact that we have a clear size to be a 100% digital company. When we get to that point, will be high growth, high margin, and as you can probably see also from the Chart on 17 is, very, very high cash flow. So I think those of are the things that takeaway that I will have for you as we go through 2016.

And also just before I get the engagement question, remember the prick part, is to have for the year. So we've already done the first half of the year under the old terms so we really only have the second half this year to do the next part of the transition and then we have all of 2016 and it's laid out in the presentation that we expect to cut our inventory ownership in half this year and then pretty much down to zero by the end of 2016. So I don't know whether it's linear or half to half, but we look at it over the course of the whole year. Now on your question on engagement, it's substantially increased. So when we first acquired Cramster and then made significant investments in the quality of the product, the amount of content that's in there, the rebranding, the weighted service works, all of those things what we were looking for was not only increase subscribers, but increase lease of time that they choose to subscribe frequency in which they access the sites and number of pages they consume. And we don't want to end up giving numbers every semester on these things. But we've seen substantial improvements in all of those metrics. So, Chegg's Study is really, it becoming a break out product for us. So it's a big deal that they access it every week. They access it more than one time every week. They continue to consume more textbooks when there in there, more pages per textbook. So, we also mentioned in the prepared remarks that 87% of them actually credit Chegg for helping them improve their knowledge of the subject and in the high-70s actually improve them for getting a better grade. So, we really feel like we’re in a position to not only contribute other people's services, but really build some fantastic ones and our own like Chegg Study, and Chegg Tutor. So that is a big uptick for us. So thank you for that question.

Thank you.

Thank you. Our next question comes from line of Jeff Silber with BMO Capital Markets. Please proceed.

Thanks so much. If I look at your digital revenue that you generated this year of about $91 million, can you just remind us what the components of that were. If you can give us percentage of revenues, a rough percentage of revenues that will be great. And how that will compare to your business in 2017, do you expect to be a 100% matured?

Jeff, this is Andy. We don't break it out in that level of detail, but we have indicated in the past about 70% of our business comes from digital learning. Digital learning is just as a reminder is Chegg Study, Chegg Tutors, and eTextbooks primarily. And then on the advertising side, [indiscernible], that's our enrollment business, that’s our brand partnership business primarily. But when you look into 2017, what you need to do there is layer on the Ingram commission. If you do the math on that about 25% of our business would be Ingram commission. And the remaining portion of that about 75% to 70% would be the super high growth digital businesses. So we basically got big buckets, you got he Ingram commission which is a slow growth business, which would have been the print textbook business today. And then you got the higher growth digital business to be about 75% of the total business.

Yeah it's a complete reversal where trade was 70% or 80% of the business. Now the print commission, which will have 55% gross margin instead of 10% or 12% gross margins, will only be about 20% or 25%. So, it will be slower growth, but we'll produce a lot of cash. And the other businesses will overwhelm it in terms of growth and so we have collectively high growth number. And so it’s a really big transformational deal for us.

That's great to hear. And my follow-up question, just lost my [indiscernible], I will follow up offline. Thanks so much.

Thank you. Our next question comes from the line of Matt Blazei with Lake Street Capital Markets. Please proceed.

I have a couple of questions on your guidance. If I look at your annual guidance, it looks like you are looking for your digital revenues to go for approximately 30% of revenues in 2014 up to about 50% of revenues in 2015 which would suggest significant gross margin expansion and yet your guidance for gross margins is relatively muted. Can you tell me why that is?

I agree with you that we anticipate that our overall gross margins will be at least the - as we get through 2015 will be 50%. But as far as the gross margins goes, I just want to remind you, the duplicated cost that we have associated with the Ingram deal otherwise is margins and the cash flows would have been much more robust I have mentioned that in my earlier remarks. So we’re dealing with essentially we've got a commission, we're dealing with two things, we've got a warehouse that's still fully functional through the end of this year. And then we have the transaction cost with Ingram because we're moving our inventory to Ingram are in there, those kind of duplicated deposit, that goes away in 2016, which is why we anticipate obviously accelerated margin expansion in 2016 and accelerated free cash flow.

And also just as a reminder, the new deals doesn't take place until May 1. So the first quarter this year, which is one of the two big rushes we've done under the old deal. So, when you put those two things together we’re carrying substantially more cost this year, which will be eliminated a year earlier than expected. So, 2015 is the transition year, which is why we tried our best to lay it out in the investor presentation. So thank you for the question.

And then one last question, is that transitions with cash flow, you mentioned to having to extend - extended terms with Ingram content up to the maximum you said $25 million. Is that also why free cash flow is muted on top of the charges here in 2015?

That’s exactly right Matt, you nailed it. You get the muting of the effect of free cash flow to 2015. But more importantly you actually get all of the full benefit in 2016. So we get a full benefit free cash flow in 2016 and then into 2017 when we go to normal payment term. So it’s just a very, very short period of time where you get the muting of free cash flow. Even though I think you would agree our free cash flow guidance is pretty robust.

Just to people understand, if we’re not using our capital for textbooks why would Ingram be writing us Chegg’s, it’s because -- and we mentioned this, but I just want to make sure for people who may not have heard the prepared remarks. We’ve become really, really good at sourcing, and we do a substantial amount of sourcing directly from students, because the students that we buy from also become customers of ours. So we feel it's a really big opportunity to grow our business and make money doing it. So we have agreed to continue to source thorough our low cost sources to lower the cost of textbook as we’ve been doing and then it’s just 100% pass-through the Ingram. So that's really the only component that Ingram will be paying us on all other books coming from all other sources, Ingram pays them directly. And so it's good to understand that.

And just so everybody where, that's super important for us too, because it's a way for us to acquire customers on Chegg book buyback. So it’s a win-win for both Ingram and Chegg.

Thank you.

[Operator Instructions] Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed.

Thanks so much, somebody watching on your finance question. But I do remember my question. In terms of what this company will look like in a few years, what are you missing in your portfolio now like what's there over the next couple of years?

So that's a terrific question obviously we don’t want to tip our hands to other people in the industry. Today we’re really at the beginning of the kinds of services that we can offer. So, in the high-school category all we are today is scholarship database, and now we’re starting to offer a version of Test Prep and Tutoring through Chegg Tutors but there are more adaptive learning that we can be offering on top of the human help, which we offer through tutors and more sale. Over 2 million students a year take Test Prep as an example. So there is markets like prints and review and capital and other peoples - that market is yet to be transformed online, we have begun to do that through things like Chegg Study and Chegg Tutors. But we think there are just more learning services for high school students. There are more kinds of capabilities that college students are requesting from us that we have don’t have today in other subject matter vertical. So everything would be sort of right down the fair way in terms of the kinds of things that you would expect students to want. And then ultimately all of the numbers that we’ve given you, is have been towards domestic. Now that we are going to be a 100% digital and can get out of the warehouse and no longer have to use our capital for textbooks and we will book a become a big cash producer, we do believe there are enormous opportunities for us to take parts of this portfolio to other places in the world. And so we've got long term growth prospects that fill out some of our gaps here. Again in the investor presentation, we’ve identified the businesses we’re in about $80 billion but we think we can go deeper, more vertical, other languages, there are just a whole lot more that we're capable of offering. We may not choose to buy them, we may build some of them, like we did with the career services center and also we just may offer them in conjunction with partners. So the beauty of having our brand, in our reaching out, reaching 50% of all students and the data and the graph is the ability to do the right matching at the right time. So our focus for ’15 is really going to be a execution, execution, execution, really building up the data platform for careers and for college matching which we just think are billion dollar opportunities that we are the first person that we really address. So I think that's the way I would ask you to think about it without giving to too many specifics to, we don’t want to tip our hands to anybody else in the industry.

Perfect. Appreciate the color. Thanks so much.

Thank you. This concludes our question-and-answer session. I'd like to return the call over to Dan Rosensweig, CEO for closing remarks.

Okay. Well, thank you everybody. As you can see this is a transformative day for Chegg, the Company looks it as almost as the [reopening] [ph] of the business which is, this is the Company that we came here to build and we feel today's announcement plus the success we saw over ‘14 and the opportunities that we see for ‘15, really are just dramatically different and better position than we've ever been before. The market is such that students increasingly see Chegg as a place to solve their problems. Chegg is focused on building the leading student first platform. It serves students from high school to college, all the way through their first job. We believe our platform is best position, it helps students throughout the entire lifecycle and today's self directed students increasingly take their futures in their own hands. And with the new textbook model that we talked a lot about today, we think we're in a better position then ever to achieving. We have a high growth, high margin business that has plenty of cash on the balance sheet and we’ll just be adding a lot more cash to the balance sheet. And for us as operators and as you people that model it, it's just dramatically simplifies the business. One digital company going forward, two large buckets of digital learning services and advertising in the Ingram commission. And so we think that this really does give us the opportunity to go after this trillion dollar market and continue to serve the needs of students first domestically and then ultimately around the world. So we hope that you join us on this journey. We very much appreciate your joining the call today and we'll see on road. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.