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,…

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…

[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.