Ladies and gentlemen, thank you for standing-by. Welcome to the Chegg’s Conference Call discussing Third Quarter Financial Results. During the presentation, all participants are 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, November 02, 2015. I would now like to turn the conference over to Alex Hughes, Head of Investor Relations for Chegg. Please go ahead, Mr. Hughes.

Good afternoon and thanks for joining Chegg’s third quarter conference call. Today’s call are Dan Rosensweig, Chairman and CEO and Andy Brown, Chief Financial Officer. In terms of structure, Dan will open with the discussion of Chegg’s business, and Andy will follow with a review of our operating results and our outlook for the fourth quarter and fiscal year-end 2015. A copy of our earnings press release 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 tend 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 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 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 risk 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 annual report on Form 10-Q filed with the Securities and Exchange Commission on August 5, 2015, and our other filings with the SEC. Any forward-looking statements that we may 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 both GAAP and non-GAAP financial measures. Our GAAP results, GAAP to non-GAAP financial reconciliations can be found in our earnings press release. Now I’ll turn the call over to Dan.

Good afternoon everyone. We are pleased to report that we had a very successful [indiscernible] year. Students continued to embrace Chegg in record numbers and the Ingram transition is right on plan. As a result we are reaffirming our outlook for the second half of the year with respect to GAAP revenue, digital revenue, total gross margins, adjusted EBITDA, and free cash flow. On today's call we will discuss key metrics from the fall semester indicating the strength of Chegg's brand of business, our continued progress towards an all digital business which we expect to complete no later than the end of 2016 and Andy will discuss our financials in greater detail. He will review how we will chart our progress during the transition and how the model will work going forward. The fall semester was a very successful one across our key metrics. We had a record number of customers in the quarter with customers increasing really 9% year-over-year and exceeding 2 million customers for the first time. In addition our digital service customers also reached an all time high, now comprising over 40% of our customer base. This is particularly exciting because Q3 is our seasonally high quarter footprint. Our print business which we measure in gross merchandise value or GMV is also on plan for the second half of the year. This is very important because it was our last semester operating our own warehouse and highlights how well the transition is going with Ingram. And I want to thank our entire Kentucky warehouse team for putting students first through the entire transition. We couldn’t be more proud of them and the work that that they have done to help millions of students save over $1 billion in the last two years alone, pretty phenomenal. Along with…

Thanks, Dan, and good afternoon everyone. My comments today are on a non-GAAP basis as I discus our financial performance and our 2015 outlook. As expected Chegg’s financial profile continues to improve with revenue mix increasingly shifting to higher margin digital revenue. We are very pleased with our Q3 performance. We had a solid [rush] [ph] with second half GMV tracking to plan and digital revenue expanding. There were a few factors that caused more of our second half revenue to occur in Q3 than previously thought, including our partner Ingram exceeding expectations in the number of books they fulfilled, resulting in more commission-based revenue recognized in Q3 than previously planned. We also saw a higher proportion of text book purchases, which are recognized upfront versus rentals that are recognized ratably. For those of you new to the story, the partnership with Ingram is a significant shift in our business model. Instead of buying and shipping text books ourselves, our partnership enables us to collect a commission of approximately 20% on the GMV of books ordered by students through our platform, but owned and shipped by Ingram. Some books continue to be owned by us, but we are no longer buying any new inventory and we expect to fully liquidate our text book library by the end of 2016. This means Chegg is no longer spending its own capital on owning or warehousing text books. We expect this to allow us to save more than 100 million in working capital annually, which we are investing in new digital services. We believe these services represent a much bigger opportunity, driving higher growth, higher margins, and profitability. Meanwhile the partnership allows us to maintain all the benefits of offering students textbooks, including control over the size of the catalogue, the director-student relationship,…

Thank you. [Operator Instructions]. Our first question is from Brian Fitzgerald of Jeffries. Please state your question.

Wanted to know what trends you are kind of noticing for new students on the Chegg platform for the new school year for the first time i.e., students who engage with Chegg prior to choosing college more apt to remain engaged throughout the school year or engage more than all the cohorts, and then similar question but any broader color on how engagement trends tend to pan out within cohorts of either students or cohorts or campuses? Thanks.

Some detail there we probably won’t get to on this call but, yes, the high school business, first of all the high school business is doing very well. And then the fact that we are able to get more students earlier in their lifecycle it is difficult to measure the cohort because these cohorts are so new. But what we have seen is you can tell by our growth that despite the fact that we have graduations from last year, the fact that we are able to grow at the rates we are hoping for suggest that we are being able to pick up market share of younger customers and so the existing customers, the existing cohorts we have other services which is what we are beginning to see. So yes, we are seeing increased engagement across the platform, we noted some of the engagement that we are seeing in specific products particularly Chegg Study because September is a big Chegg Study month. We also referenced the fact that we saw an increase of about 14% in attach rate. So we are seeing a system that we’ve designed picking up additional traction absolutely.

Great, thanks, Dan.

Thank you.

Our next question comes from Douglas Anmuth with JP Morgan. Please state your question.

Hi, this is Diane on for Doug. I was wondering if you could give little color on increase in the attach rate, what specifically is driving that, where you are seeing more success in cross sell and maybe how you are using some of the data you mentioned on the call to better target people for tutors and Chegg Study? Thanks.

Yes, so there are probably three variables that are helping us. The first one, Diane, is the fact that we’re able to target more efficiently. For those people who are sort of new to the story, the way we’re building the platform for the future which allows us to launch new products at very low costs, so we are expecting high growth rates at very high gross margins, which has been the case with the services we’ve launched so far, is the fact that we know your school, we know your text book, we know your class, we [offer test] [ph] and then guess your major, we know when your mid-terms are, your finals are, and if you have any text book we actually know if you are struggling with that page. That allows us to bring the right service to the right student at the right time. And so that is of course a very big factor and the fact that we’ve been able to keep our marketing cost lower, even as we’ve added more services. So that is because we get over 80% of our traffic organically and then we get to use the internal funnel, as you’ve just referenced. So that’s been a huge boost to that. The second thing which I referenced on the prepared remarks is the fact that we’ve expanded the amount of contents that we’ve had. So we have over a – I think we’ve doubled the amount of content in the last 2 years that’s available through Chegg Study and we’re nowhere near finished. By adding more content we not only get vertically deeper in a particular subject but we get horizontally wider, which means we’re available for more subject. So the ability to offer solutions to a broader array of students and target them better is really sort of a big deal and a big growth opportunity domestically for that product, and then ultimately internationally.

Thanks.

Okay. Thank you.

The next question comes from Aaron Kessler with Raymond James. Please state your question.

Thanks. Couple of questions, first, I may have missed it Andy, but did you disclose pro forma revenues this quarter? Second, just an update on Chegg Tutors, how that’s going in terms of both from a tutor standpoint, user perspective, and kind of revenues there and timing? And third, just talk to maybe spending more dollars on marketing from some of the newest services, especially as Test Prep, when you start to launch that? Thank you.

Yes. So Aaron, why don’t I handle the first one, yes, on pro forma revenue, it came in as we expected at a little bit north of 45 – I think 45.3, 45.4. Like I said, as expected, as you can imagine from the results that we demonstrated during the quarter. On Tutors, I think, Dan.

Yes, I’ll take the Tutor question. So we’re seeing increase – so our tutoring business is going really well. We think -– what we know today it’s our fastest growing business. Of course it’s off a smaller base but it is growing as we would’ve - as we’ve hoped when we acquired it. Remember we’ve only - we only bought it a year ago in June, so we hadn’t had it that long. What we’re learning through our A/B Testing and actual student usage is really helpful for the future as we grow, it’s a two-sided marketplace. The more tutors, the more subjects, the more subjects, the more students will come in and so you can just imagine the positive network effect that we’re already building and that we expect over the next couple of years. So we expect this to be a very big business several years out from now because we’re the first one really to go exclusively online with tutoring. As we’ve said it’s the Uber for tutors, which means you should be able to get a tutor in any subject, anytime, anywhere, day or night for as little as $0.50 a minute in any language. So that’s what we’re building. So that takes a lot of time to build but it’s going very, very well. What we’ve learnt in terms of expressing the number of tutors, about the number of tutors, it’s a little bit like a dating site which they don’t care whether there’s a million people to date, they care how many people they can date 12 miles from their home. So here, we learn through A/B Testing that conversion rate goes up by not getting the total number of total tutors. The active -- number of total active tutors of course continues to…

Great, thank you.

Thank you.

Your next question comes from Mike Olson with Piper Jaffray. Please state your question.

Hey, good afternoon. You guys continue to add new services that are somewhat related to the core and how significant addressable markets, are there any new categories that we should think about that you might be interested in first doing from here? That’s one and then the second one is just maybe just a slight nuance in the language but I feel like before you were saying that you were targeting revenue to be all digital sometime in early 2017 and it sounds like now you are saying late 2016. So I think maybe moving slightly faster than you expected for digital transitions that through or might reading too much into it? Thanks.

So, Mike why don’t I give you clarity on the second question first. We now be super quick here -- we expect to be a 100% digital company by the beginning of 2017. Let me be real clear about that, by the beginning of 2017 if we confused it in our language that’s on us but nonetheless the sooner we can get there the better because it takes out all of the confusion that we talked about and so -- but right now we are on plan to be a 100% digital company in 2017. There will be no pro forma by the time we get there. It will be checked and that’s why we decided starting in 2016 we will guide the performance because we believe that better represents the future of the company versus the past.

Yes, I like to Chegg growth but just a little bit more color on that. We expect to be – we are progressing on plan or fashion a plan. So actually yes, the difference is some of the books that we will rank in the fourth quarter of next year we won't liquidate until January 17 because we get more value out of them. So it would be very small percentage of the numbers that will be elected on our catalog, but that’s really -– they will be insignificant we expect. So yes, we are moving as planned or a little bit faster in that business for us because as you can see there is a lot of complexity in explaining it and so the pro forma should make it much simpler for people to follow the trends in our business as the GMV will as well. So all the categories so just keep imagining the kind of categories that people use in Chegg Study and use in Tutor that there is a lot more services that we can make available to students in writing, in Math, in languages so subject matters specific categories of opportunities are available to us in the future. We said at the beginning of this year we are going to focus on executing what we have and that’s essentially what we have done and we got really good performance out of those things. But there is not a lack of opportunity. The goal was to build the brand, build the platform, get the data, get the credit card, launch new service to show these digital services could grow, and remember just a couple of years ago they were zero. So you can see how successful a large platform with the matching data can be. And…

Got it, thanks a lot.

Okay.

Your next question is from Nat Schindler with Bank of America. Please state your question.

Yes, hi, this is Ryan Gee calling in for Matt, just real quickly following up on Aaron's question, what was the pro forma revenue, have you guys disclosed that for 3Q last year or maybe the growth year-over-year, that's the first one? And then secondly on gross margins, looks like rental gross margins were down year-over-year, kind of the drivers behind that but on the other hand services were up nicely, so what was the biggest driver in your digital business that drove that nice gross margin expansion year-over-year, thanks?

So thanks Ryan. So, couple of things here, so like I said earlier, these -- the Q3 pro forma revenue was 45 3.54 [ph] and our expectations are is that for the full year we are going to be growing kind of in the growth rates that we have got in our longer-term models. I can give you -- I don’t have the other specifics in front of me but I can give you it to you later. With respect to the gross margin, I mean think about it this way, I think when you look at our gross margins they have continued to expand. We would expect them to continue to expand, in particular when you think about our largest business JSW. That is our largest stable business and as we have spoken about in the past that content that we have is fixed. So, think about it. You generate a piece of content, whether or not one subscriber or million subscriber that content covers its base. And yes, we are continuing to grow subscribers. So that is driving much of the expansion of our gross margins along with obviously the transition from a physical rental based model to a commission based model. And as a reminder for those of you that are new to the story, typically our print textbook business historically has had kind of low to mid teens margins. Now that it is being -- as we go through this transition when we get to 20% commission, that gross margin -- to a 20% commission with kind of in the 50s margin. So, that is also impacting the overall gross margin. And we will continue to do so we go into 2015 as we get through this transition into 2017 when we fit our target model.

Great, thank you guys.

Good bye.

Your next question is from Corey Greendale with First Analysis. Please state your question?

Hi, this is Ken Wang on for Corey. First off congratulations on a great quarter and let's see, first, I am just wondering, so you mentioned before that it sounds like your revenue per lead for the enrolment marketing business was up 40% year-on-year. Does this mean that you are kind of in the process of increasing pricing or leave it at this point?

Yeah, so great question. So, we said at the beginning of the year and the kind of process we are executing on is fewer schools and higher concentration in the bigger schools. So there is about 4000 colleges, about 1000 of them representing 52% of all the students. So, what is happening is we bought the business four years ago and many of those companies were on grandfather subscription based businesses that we have taken several years to come up. And so effectively it has been large rate increases for those companies where they are now paying market. As in other categories as we are able to take prices up for people that had bought earlier but weren’t on subscription services but had multi-year contracts. So the answer is yes, effectively we are taking people who were on before that continue to renew up to with the current market base pricing. So, it is a combination of more lease and more revenue per lease, so yes. But we -- it is because when we bought the company there were multiyear contracts and we switched over from the subscription business to a rebase business. And so we are working on bringing those rates up to market and we have been very successful doing some.

Okay, perfect, that’s very helpful and then just another quick one I may have missed this before but did you mention that you now expanded outside of them subject for Chegg study? Unidentified Company Representative: We’ve expanded deeper into STEM subject and a little bit wider into subjects that are on the border of STEM subjects if you will but we have not yet gone beyond that category but as you can imagine we will. And there are a lots of categories there are some categories we will never get in. But there are categories that you can imagine that go into like quantitative businesses those kinds of categories, a logical net consensus circle if you will. And so we are little by little going out there but there was a lot of STEM for us to catch up with also. So we have doubled the numbers of cuts in categories to a pretty substantial number but there is a long way to go so there is more way to go in STEM and then more way to go in the quantitative businesses that sort of act like data where they are factually based. And then we do believe there is an opportunities to grow the ones that are more discussion based. And if you never have the chance to use Chegg Study which you may not know because there is a huge engagement effort in there which is our Chegg Expert, network of experts and there we expect to be answering over a million and a half question this year alone which is for us we believe we have come to the largest Q&A network of expert answers inside the subscription service and many of those we learn from those, the categories that we can expand into and then we start building the content for those. So that’s the way we are able to grow in a much more effective way.

Great, thank you. Congratulations.

Thank you.

Your next question comes from Matt Blazei with Lakestreet Capital Markets. Please state your question.

Good afternoon. My question is in the test prep business that you talked about. My curiosity is you mentioned that it's going to the date of this quarter and I am wondering if you think it is going to have a similar timeline to build out of the tutoring business towards its been above a year, a little over a year in terms of sort of learning how to best access that market?

It’s a great question and we are going to find that out together to be honest with you. Remember when we bought the tutoring business it was a business already which was very small but there were things that we already know. And what we were learning from is how do we expand beyond the high school market into the collage market and how we present it as we get more tutors and get more categories and how do we price it, how does it work with Chegg Study, and how can we connect it is attached rate to the text book. And we still have a ton of learning to do in that category as well as pricing. And because we been very deliberate to keep our pricing very low particularly for Chegg Study but there is lots of opportunity in that space going forward. In the case of test prep, the reason to launch it in beta and a reason to launch it for free is because we want to get thousands, and thousands, and thousands of users into the system to watch the way they use to it, to watch the sessions that they like, to find out about the bugs, and to actually watch them go through test and test rep and see how it improves their grades then actually get them to report back on what grade they got in actual SATs. So we don’t have a timeline yet for where we imagine it to become a business of note but we are going to be doing a very aggressive data in -- at the end of this quarter to go into next year and then the real test prep season will go starting after August next year. Because remember students try to apply early in November 1st, November 15th and they apply in December and January and they hear back in April. So it really is going to be -- will be able to see how quickly you can scale really starting in the second half of next year as we use the fourth quarter to get the beta back and the first quarter to be able to target those that are taking test in the first quarter. But about 3.5 million students take test every year. So it’s a very big market and we’re really enthusiastic and we are excited about what we are building because no one else has it which is as I said its online it's interactive, it's adaptive but also we’ll have tutors plugged into it. So if you ever need human help you can get human help and it will learn from you and learn from the others in the network and it will be very affordable. So we actually think we can expand the market for test prep because most of it has been $1500 for wealthy students to pay and it’s been a smaller market than it should be.

Thank you. And now this is a question for Andy, can you carve in a little bit on the significant growth in cash quarter-over-quarter? I think it’s nearly $40 million?

Yes. So first, that’s a great question and thank you for asking it. Because it does show -– it does indicate the dynamics of our business. It’s a business where we take a lot of bookings in Q – in the September timeframe as students come into school, and much of that revenue, in fact while we take the cash in, much of that revenue actually gets recognized in Q4. So it’s the dynamics that we’ve seen over the last several years. Now however, once we get through the transition that dynamics will change, right? So the revenue and the cash generation will actually come a much closer together, because under the -– when we get through the transition, we get all of the cash-in, we recognize all of the revenues so that those -– the matching of cash revenue, profits and cash become much closer. But then in this model we take a lot of cash in, and we recognize a lot of the revenue for the – particularly for the rentals in this – in Q4, but good question. Thank you.

Thank you.

Our next question comes from Henry Chien with BMO. Please state your question.

Hi, good afternoon. I just had a question, I’m sorry if I missed this but it was like in your cash flow statement there’s an outflow or purchase of CJ [ph] Equity Investments and I don’t believe any sort of acquisitions are best disclosed for it. What you feel playing with that as it is?

Yes, this is Dan, I can answer that. One of the things we’re looking at is eventual international expansion. So when we were just in the text book business there really wasn’t an opportunity for us to bring print text book rental business outside of the U.S. So now that we have Chegg Study, now that we have Test Prep, now that we have so many relationships with major colleges where international students want to apply to U.S. colleges and Test Prep, and we have the technology and tutors, we see an opportunity to start to take those kinds of businesses and tap non-U.S. markets. One of the things we did was we made an investment in the leading platform for high school and college students for learning in Brazil. And we -- so we made a small cash investment, we took a percentage of the company and what we are doing with them is we’re going to use their platform that reaches over 50% of the Brazilian market and we are going to start testing some of these services over the course of 2016, to learn from that market what services make sense, how we’ll integrate them, how we’ll price them. So yes, we did make an investment because it’s time for us to start looking in a risk-free way at how to take advantage of the services we have globally.

Got it. Okay, that’s just saying if Brazil comes to me with a bit of target market eventually? Are you…

Yes, look there are some obvious markets. We’re already in the Chinese market with a small business helping Chinese students come to the U.S. And we have relationship with Baidu there which makes it a valuable asset. Obviously, the Indian market is very large, the U.K. market is very large and the Brazilian market is very large. And we happen to -– you know we do a lot of work before we make investments or before we partner or buy companies. And we found a company in Brazil that we met with for a long time, they came and visited us many times, and they have built a free version of their platform that reaches a huge percentage of college kids, and very few of the kids in that country go to the premier schools, the rest go to the public school. And so there’s a big opportunity to help them do better test prep, learn the subject matter therein, get better grades. So yes, Brazil is a market that we’re obviously looking at because, anywhere students are going online they’re self directed to learn, to check this model we believe can expand there one day. What we’re trying to do is very efficiently, without any distraction to the core business in the U.S. and the opportunity to take these products and put them in Portuguese and Spanish is something that’s not complicated for us to do and use their platforms to drive all the traffic to it.

Got it, okay. And just a quick question on trade center, you mentioned plans to monetize that service. Would you be able to talk a little bit more detail on what that plan is?

Not at this time for obviously for competitive reasons. But our view is this, we have more college students than anybody that are active on a regular basis in our network. We know more about them in our opinion than anybody does and we know their career interest because we see such a huge engagement not only in their majors but on the internship side itself. So we are going from it being purely internships to internships and first job data college. So the models are pretty well known at this point but the first focus like everything else we do is to make the products great before we start to monetize because if we can get more students in it and other students depend on it and then have corporation see the success that we are driving students for internships and then for job then that’s a big market opportunity for us going forward. But we want to build it slowly and make sure that we earn the market share before we start charging for it. That’s going very well as you heard from some of the numbers that we released on the call.

Got it, okay, great. Thanks so much.

Alright, thank you.

[Operator Instructions]. There are no further questions at this time. I would like to turn the call back over to Dan Rosensweig, CEO for closing comments.

Okay, thank you. Thanks everybody for joining the call and thanks everybody for your great questions today. As you can see the transition is going very well. We had the inner transition work as well as not better than we expected, we are now closing down our warehouse, the books have been shipped to Ingram, and the only thing left in execution of the textbooks we own versus Ingram will be accounting treatment. So that’s the most difficult part which was getting the deal signed, getting it done, getting the warehouse closed, and shipping the books over has been done and using all the technology to be able to account for this stuff. So that has been a great amount of work on our team and I want to congratulate our team for doing it and the Ingram team for doing it. You can see our digital businesses are having great success and great traction and we believe are a great indicator of opportunities to come. We really believe that the company is just a few years old because of the transition of the model and by building a huge brand, making it ubiquitous, being able to bring out successful learning services instead of just products that are created and that we resell for somebody else and see that success gives us real enthusiasm for the future. And so we are very excited about the rest of this year going into 2016 and beyond. I think we are all looking forward to the day where we can say we are done with the transition officially and that’s about a year away. So only two more rushes really and so we are very excited about that. And the last thing I want to say is I want to thank Barry McCarthy, our Board Member. As you may have read that Barry has left our Board because he has become a few months ago the CFO of Spotify, one of our great partners. Barry was a phenomenal Board Member, the first Board Member I asked to join the Board and -- but we appreciate the fact that he moved out of the country and is trying to get that company to do the things that it needs to do so. Unfortunately for us he had to move on but he has been an extraordinary friend and a Board Member and one of the architects of helping us really understand the transition from the print world to the digital world as he did when he was Netflix and we wish him great success with Spotify and we look forward to talking to you guys at the end of the fourth quarter. And thank you very much.