Chegg, Inc. (CHGG) Q1 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Chegg’s First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Tracey Ford. Thank you. You may begin.

Good afternoon. Thank you for joining Chegg’s first quarter 2017 conference call. On today’s call are Dan Rosensweig, Chairman and CEO; and Andy Brown, Chief Financial Officer. A copy of our earnings press release along with our investor presentation is available at our Investor Relations website at 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 chegg.com/mediacenter. We encourage you to make use of these resources. Before I begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of the Company. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements. In particular, we refer you to the cautionary language included in today’s earnings release and the risk factors described in Chegg’s annual report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2017 as well as our other filings with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release. We will also include revenue comparisons that our GAAP to non-GAAP which we believe best reflect our actual growth rate. Since our non-GAAP revenue prior to 2017 reflected adjustments to our textbook business as if our transition to a fully digital model were complete, which was complete as of January 1, 2017. We recommend you review the information included in the slide deck and investor datasheet posted in our IR website, investor.chegg.com. Now, I will turn the call over to Dan.

Thank you, Tracey, and welcome everyone. 2017 has started out very strong. Through great execution we continue to see excellent momentum in our business. We are extraordinarily happy with our financial results and equally pleased in the relationships and engagement we are building with students who are using more of our services more often than ever. We set out three priorities for the year and the team is executing across all of them. First is to hit our financial objectives, and in a few minutes Andy will walk you through our financial results as well as our raised expectations for the year. Second, we said we would focus on improving our existing services and expanding those opportunities even further. And we believe our investments in Chegg Study, Chegg Writing, and Chegg Tutors are making a big TAM even bigger, while our subscribers and engagement growth are daily indicators of just how much students value what we offer them. Because we see the education category only getting larger our third priority is to invest in new services that leverage the Student Graph, and we are continuing to make important investments in our data platform with an increased focus on Internships and Careers. We are very excited about these investments because they help reconnect the critical link between learning and earning. If we can help students make better education choices, save them money, get better grades, develop career skills, find them an internship and ultimately land them the job they want, we believe that Chegg will become the indispensable student brand with millions of deep customer relationships spanning a decade or more. What’s increasingly evident is that our strategy of delivering direct-to-the-student, high quality, low-cost, educational products and services that are online, on demand, personalized, and backed by human help is the future of education. It’s an enormous industry that represents 7% of our GDP and engages about 15% of the entire U.S. population. It’s under tremendous and increasing pressure right now from students, governments, administrators, parents, taxpayers and others. Most importantly, we know through our interactions with students that they have never felt more stressed, never needed more help, and it’s never been more-clear that the relationship between an education and a good job is increasingly important. And our subscriber and engagement metrics demonstrate that there is a strong connection between what Chegg offers and what students want and need. So, let me give you a little more color on our three core Chegg Services, starting, of course, with Chegg Study, which we believe is already the largest direct-to-student subscription learning service and the center of Chegg’s business flywheel. What we continue to see only reinforces our belief that the more we invest in Chegg Study, the bigger the TAM gets, and the more valuable the services becomes to students. Today, our catalog of proprietary content now includes over 26,000 ISBNs which represents more than 6 million unique solution sets. Building on our advantage, we added about 75,000 new and unique solution sets in Q1. We also continue to see a dramatic expansion of our proprietary expert Q&A network, which already has more than 9 million questions asked and answered, meaning students often find what they need almost instantly. And it just keeps growing as students asked and our experts answered over 1 million new questions in the first quarter alone, an increase of 44% year-over-year. To spotlight our engagement and to show just how valuable a tool Chegg Study has become for modern students, our subscribers also engaged with a record number of content views in the quarter, almost 100 million, which is an increase of more than 60% year-over-year. A year ago, almost to the day, we significantly expanded the reach and capabilities of our connected learning platform with the acquisition of Imagine Easy, which continues to exceed our expectations. What we saw then and continue to see now is a student body that desperately needs writing help. 25% of all students require remedial writing instruction at an estimated cost of more than $3 billion dollars annually. And it isn’t just an academic problem, as 73% of hiring managers overwhelmingly agree that recent grads lack proficiency in written communications. So, we see a huge opportunity here because we think we can change the outcomes for literally millions of students by teaching them how to write more effectively. In 2016, over 30 million unique visitors came to Chegg for writing assistance, and as an integrated part of the Student Graph, we are continually investing in, expanding, and improving the service on behalf of those students, which is exemplified by the 30% year-over-year growth in the number of citations created by students on our connected learning platform. As an ongoing example of how the connections made on our platform work to the benefit of both students and investors, Chegg Study is continuing to drive about half of Chegg Tutors’ paying customers. The reason for this is simple: Through Chegg Study, we’re able to know when a student is online, when they are studying, when they need help, the subjects they’re on, the actual page or question they are stuck on, and from there, our data science consistently matches them to the right tutor within five minutes on average. We believe that this is something no other company can do. And these students are more engaged than ever, receiving lessons in now more than 175 subjects in the quarter with average lesson hours per student increasing about 5% year-over-year. And we’re not done, as you will see in the second half of this year, we plan to closely integrate Chegg Tutors into Chegg Writing so that students can immediately connect to someone with the skills, availability, and relevant context to help them right now. And just as our early investments in Chegg Study are being validated today, we believe Chegg Tutors is also on the right side of the technology curve. We see the fullness of the opportunity as globally delivering on-demand, live human help from experts in any subject, at any time, in any language, and at an affordable price. Chegg’s strategy has always been to put the student first. We see the education industry at an inflection point. Students are demanding change. They want education to be more affordable, more relevant, more personalized, and with a closer relationship between the curriculum and their careers. And they want to be able to access that education at any time through any format. As an all-digital business focused on the needs of the students, we believe that we are very well-positioned at the center of these trends, which are becoming more powerful tailwinds for our business. And with that, I will turn it over to Andy. Andy?

Thanks, Dan, and good afternoon, everyone. Today I will discuss our financial performance for the first quarter, as well as our outlook for 2017. Chegg has had a great start to the year and we are really excited about the momentum we see in our business. The investments we are making in our platform of services, brand and student graph, as well as our strong execution, are paying off as our revenue and adjusted EBITDA came in above the high-end of our expectations, which gives us confidence to increase our full year guidance. Total revenue in the quarter was $62.6 million, driven by Chegg Services revenue growth of 61%. We continued to see strong subscriber growth and engagement, with growth rates similar to what we experienced in 2016, but on top of a much larger user base. Gross margins of 66% were higher than expected, resulting from higher topline growth and increased synergies from Chegg Services. Notably, much of the increased revenue goes straight to the gross margin line, as services like Chegg Study and our Writing Tools have a relatively fixed cost structure. Therefore, as these services grow and achieve scale, we expect our margins will continue to increase. In Q1, our non-GAAP operating expenses grew 15% year-over-year, while revenue grew 34%, yielding significant leverage, which led to an adjusted EBITDA of $9.5 million, more than 30% above the high-end of our expectations demonstrating the leverage and impact of our all digital model and notably, this represents the first profitable quarter, first profitable Q1, on an adjusted EBITDA basis, in the Company’s history. Looking at the balance sheet, we ended the quarter with cash of $70 million and as expected, we completed the liquidation of the remainder of our textbook library during the quarter, completing our transition to an all-digital business. Based on the strength of our performance in Q1 and the momentum we see in the business, we have increased our financial outlook for the year. For the full year of 2017 we now expect total revenue between $235 and $240 million, with Chegg Services revenue between $175 and $180 million; gross margin greater than 65%; adjusted EBITDA between $38 and $40 million, almost doubling from what we achieved in 2016; CapEx between $20 and 25 million; and free cash flow will remain between $15 million to $20 million; and we anticipate our year-end cash balance to be approximately $80 million, which includes $24 million in acquisition related payments to Imagine Easy Solutions we expect during the year. For Q2 2017 we expect total revenue between $52 and $54 million, with Chegg Services revenue between $42 million and $44 million; gross margin between 68% and 70%; and adjusted EBITDA between $7 and $9 million. In closing, Q1 has been a great start to the year. We continued our strong execution and delivered above the high-end of our expectations. As a result, we have increased our outlook for 2017 and have greater confidence in reaching our long-term model of approximately 30% growth for Chegg Services revenue, approximately 25% adjusted EBITDA margin and we now believe gross margin will be greater than 65% for the foreseeable future. With that, I’ll turn the call over to the operator for your questions.

[Operator Instructions] And our first question comes from Corey Greendale with First Analysis. Please go ahead.

Thank you. This is Ken Wang on for Corey Greendale. First off, congratulations on a very strong start to the year, guys.

Thank you.

So, just thinking about your comment on the integration of Tutors and Writing, I am just interested in learning a little bit more about your thoughts on -- your thinking on in the long-term whether Writing could contribute a similar number of students as study does today for Tutors?

It’s a great question and it’s a little early to tell. On one hand, Writing has substantially more uses overall than Chegg Study does. On the other hand, there are a lot more subjects, I think we mentioned on the call, we had over 175 different subjects. Writing however consistently is in the top 10 of categories that we tutor in. So, because we haven’t done the integration yet, it’s too early to know if it can contribute as much or potentially even more, but obviously we think it’s going to be a large contributor because so money students have trouble with writing and the new technology some of it which we sort of previewed a little bit at analyst day is really going to start to not only do citations and bibliographies but really highlight challenges students have in sentence structure and in grammar. And when no things become more-clear to students, we think that it could be a really great integration and a really great traffic driver. It’s just way too early to know because we haven’t rolled it out. But we believe it will be a meaningful contributor.

And then, just one more quick one for me. Do you think you could give any update on your thoughts around Chegg Study’s expansion? I know that more recently the idea’s been to try to pick up kind of adjacent quantitative subject write outside of TAM but any additional thoughts on even potentially expanding further outside of that subject area?

Yes. Look, what’s becoming very clear to us based on actual usage of the service. And I think when we start to use numbers like a 100 million page used within a quarter, it’s somewhat 40% or 50% increase in the number of page used per student. So, Chegg Study is clearly the center of the Company, clearly the flywheel, it’s growing on its own as fast this year -- almost as fast this year that it had last year and the previous year on top of much bigger numbers. And that has a lot to do with the three significant variables which is within the subjects that we cover, we are investing and it’s getting better. Within the subjects that they want us to cover that are adjacent, we have added them. So, you heard us go from 24,000 ISBN to 26,000 ISBN and then total number of solution continues to go up and that’s the adjacency and that will continue to grow for years to come. And then third category which is the part that I think most people don’t understand just how powerful of a mote it is, is the a expert answered Q&A network that has over 9 million questions that are already asked and answered, and the fact that we are seeing millions and millions and millions of new ones ask each year, the majority of them are from subjects that we haven’t covered with ISBN, which means students are driving the network broader coverage than just a coverage that we have. And so, what’s beautiful about it is there is no wasted money on our side because we are only asking questions that they are interested in. And as a result of that, we are expanding the number of categories faster than we otherwise would because we haven’t had to connect it to a textbook. So, we’ve always believed this is very early on. We have about 15% have about 15% penetration into the TAM we thought we had last November, that TAM is only getting bigger and it’s getting broader and then eventually there’ll be global expansion. So, we’re really thrilled that Chegg Study has become the center piece of the Company.

Our next question comes from Douglas Anmuth from JP Morgan. Please go ahead.

Great, thanks for taking the questions; I had a couple, guys. First is, you talked about services subscribers using more services and their duration increasing, so just hoping you could help us understand some of the numbers there, if you’re able to disclose anything and then maybe some thoughts on how that changes your view of lifetime value of a subscriber. And then, Dan, I was hoping you could talk a little bit about the Pearson deal around textbooks and e-books and the efforts there of increased affordability of textbooks and what that means for your business. Thanks.

Sure, I’ll take the second one first because I was just in London last week and met with the CEO John Fallon in London for a good hour and a half, because as those companies Pearson, McGraw Hill, Cengage are trying to do what we have been able to do, which is transfer from a traditional business to an all digital business, we’re obviously ahead of them and thrilled that we are now a 100% digital. We had a lot of conversation about what’s happening to content, what’s happening with the institutions where we thought it was going to go, where the Chegg is. And we have become a very significant distributor of content in the education industry. I mean frankly, you’ve got Amazon who does not do the digital stuff like we do, things like Chegg Study, Tutors, internships. They don’t offer the value proposition to students; it’s just retail that they offer. And so, we have become the most efficient, most direct largest distribution channel for students. So, as they’re growing up new content and new prices, Chegg was the first to sign the agreement both on consignment and on the lower price of e-textbooks. Their goal which we absolutely embrace is to lower the cost of textbooks, of brand new textbooks, new editions that are going to students. So, it’s starting only with 50 but they intend to expand it to 1,000s as they go through. And what’s that done is that’s lowered the cost of a brand new edition of a textbook by about 60%. That’s great. On top of that, they’re pricing their e-textbooks at about 85% of the price of that book. So, that brings both of them down. That advantages the student and therefore advantages Chegg because we have them, others don’t; and two, every time somebody goes to an e-textbook, we actually have a better attach rate for other services because we know when you’re studying, we know what page you’re on, we know what questions you’re dealing with and we can bring up a tutor or study your writing right in the middle of that experience. And so that’s a really big advantage and another mote that Chegg has that others don’t have which is we can offer value add. So, the reality is the higher ed industry is going through dramatic change. And what we have done is positioned ourselves where we think it has the greatest impact, which is directly with the students. So, we have more students doing more things with us, more often and getting more value out of us. So, going to your second question about lifetime value, what’s difficult Doug is it’s so premature in terms of the earliness of our services and the earliness of the number of services we have that what we’ve seen is the lifetime value continuing to increase, not only on the top line but at the yield. So, we imagine years from now the Company focusing on the number of members, number of visitors, number of members and number of subscribers. And with those subscribers, what we’re currently seeing is more of them coming on and more often, staying longer, and then adding more services. So, we do have a sense of what the current value is versus the lifetime value because we’re setting the length of time that we’re with the students and the number of things we can offer them. And so that’s why you’re seeing the bottom line gets so robust so quickly is because the yield, it’s not only the revenue growth, it’s the yield that’s getting better per student because the customer acquisition, because of the textbook business and Chegg Study is so low. So, we don’t want to give specifics because what we’re realizing is it’s a highly competitive market and a lot of people are trying to go after pieces of what Chegg does. Nobody is doing the completeness. And so rather than reveal some of the things that create greater competition, what we can say is Chegg Study obviously -- everything we’re doing, is it a record, it should be because they’re still so nascent. But they are getting really big and they are growing quite nicely, and each one is contributing to each other. So, the fact that even if Chegg Study continues to grow about the same pace it has sort for last two years on top of a much bigger number and that fact that its contributing Tutors at the same ratio, shows you the Tutors is getting that much bigger. So, it’s pretty exciting time for Chegg and the transition has made it so much easier to execute.

That’s great. Thanks for the color. Maybe if I could just ask Andy one as well. It looks like everything is going up here on a full year 2017 guidance basis. But, I think your free cash flow is unchanged at the $15 million to $20 million range. So, I hope you can just add a little color on that and why maybe that wouldn’t be higher going forward. Thanks.

I think long-term when you think about our Company long-term and the leverage that we’re seeing in the model, I certainly think long-term you’re going to see some pretty significant free cash flow from the Company. But once again, just remember that we’re continuing to invest in both our current businesses and our future businesses, particularly fueling Chegg Study and writing tools as we’re developing content but overall we’re pretty comfortable with the way free cash flow is shaping up for this year.

Our next question is from Brian Fitzgerald from Jefferies. Please go ahead.

Maybe two and than one follow-up, and the first two may be kind of related, but we’re seeing some leverage with your acquisition costs it seems and coming down nicely over the past year, while you’re still maintaining strong subscriber growth. Can you talk about those drivers? And then, maybe related to as you look at new collage students on Chegg are the ones that you’ve used that have used you to help apply for colleges and get into colleges? Are they more engaged than those that discover your products when you’re in college, may be thee engagement patterns differ? I guess the question is are you cross-selling products, is that driving discovery and is that cutting down acquisition cost? And then, I have a follow-up.

Okay. I’ll take the first part and then will the take the follow-up, which is they are connected. So, you’re right, which is the total growth of Chegg users is growing quite substantially. We have 78% name recognition on college campuses now. So, if you think back to just a couple of years ago when you started covering us, we basically had one business, which was textbook rental. So, that was one business and it was new, and it was hard to get freshmen to come in direct to textbook when they had been on campus; we had nothing for high school yet. And so fast forward today, where we have huge name recognition; in addition to that we have great NPS. So, we have an 80 -- NPS which means they are -- not only would they recommend but they actually are recommending to their friends. That is transferred over quite nicely to Chegg Study, which has become the center piece of the Company. In fact, I think I saw a statistic for the first time that searches for Chegg Study at its peak outdid searches for textbooks on Chegg at its peak. And so, what we are seeing is in the minds of the students versus the minds of the investors which we’re working to try to educate, the minds of the students, they see us as a learning company; they see as an internship company; they see us as a job company. And so, yes, the cost to customer acquisition has dropped, because our search engine optimization has gotten better, the number of things we can optimize is better; it’s a life content; it’s a real content. Every single question that gets asked in Q&A can immediately be indexed as fresh new content on Google bingo or whatever. So, if you were to search on any subject matter plus if you recall when we did those deals, the multiyear deals, exclusive deals with the publisher to actually get the questions and solutions in the book, we own them for three to five years depending on the publisher. Anytime a student cuts, or pastes it or types it in the search, it immediately goes to the Chegg. So, 85% of our traffic is organic. We have actually increased the amount of marketing we spent because we found new opportunities to actually grow faster, very efficiently. So, because of brand recognition, because of SEO, because of the number of things that we offer and because of the funnel that one you once come on, you learn the rest of the product and then add products to your cart, all of those things have contributed to higher growth and higher margin. And I think first quarter is just a reflection of what’s to come.

And my second question was just, as you think about the overall goal of expanding the student graph, are you seeing equal traction from your newer services on both ends of the spectrum? So, maybe would Test Prep and writing tools at one end and then courier services for recent grads at the other end? Are you addressing both flanks at the same time to an equal degree?

I would say that we are sequencing them, where what you have now for the core business is just execution, execution, execution, increase their TAM which we are doing, increase the conversion which we are doing, increase the yield which we are doing and increase the ability for each one to contribute to the other, and that’s driving the core business. On the investment side, you’ve got Test Prep, internships, careers and of course the data platform. Each of those has their own team, each of those is being invested in properly, but it’s really the sequencing. So, on some products, we are already into product and its out testing. If you look at Test Prep, we have had 500,000 students interact with it already. And with all those products, none of them are expected to generate revenue in 2017 or really even 2018 and we still feel very comfortable about the growth of the business because the core businesses are growing at the levels that we were hoping for. And so, I would say that we are -- with the learning services, they come faster than the career side, because the career side really about investing in the data, making sure that we are using both data science, AI, computer learning, all of those things to parse resumes, parse job descriptions and match better. And that’s getting better and better every day but that’s a longer term project. So, that’s the way we think about it. Hopefully, that helps to answer the question.

Yes, it does. Thanks, Dan.

The next question is from Mike Grondahl from Northland Securities. Please go ahead.

The first one just on Chegg tutors. Have you made any progress with college campuses and potentially getting them to sign up and use your tutoring in a lieu of on-campus tutoring?

It’s a great question and a category we are looking at with some real seriousness because we have been contacted by a number of significant, not only individual colleges but collective of colleges. And what we have for each of them is the data on the students from their schools, what subjects they get tutored in, how many students get tutored in it and the time of day. And what your -- I think what you are suggesting and what we believe is true is there is no way that college campus tutoring centers can scale to meet the needs of students. Even junior colleges or community colleges, some of the lessons that you learn, if you take a look at like the CUNY system, the average commute time, just to get to the tutor area is another hour, hour and a half on the subway and these are people that not only have to go to school but have full time jobs. And so, even if they could meet the time, it’s expensive and very difficult. So, we are in discussions with a number of institutions, frankly the demands from the consumer side is large enough and continues to get better that we’ve prioritized because the one thing that we learned a year and a half ago was to make sure that we match the demand and the supply appropriately. So, yes, we are looking into it; yes, we are working on technology that would allow us to support schools that want to do that, but our priority is to grow as direct to the student because that is the most efficient way to it for right now and the demand -- there is plenty of demand there; we don’t want to mess up the supply demand ratio. But yes, it’s an area that we are taking a serious look at, because the demand forward is increasing.

Got it. Secondly, with Chegg Writing, it seems like nearly every junior high student or high school student I talked to has used citation EasyBib Citation Machine. How can you further monetize all those students, what are some of your near to mid-term plans?

Well, you are right. I mean, it’s really certainly. First, I was a textbook guy, then I was a Chegg Study guy. And when you are dealing with families with younger kids, I’m the EasyBib guy. So it’s about to be given 30 million people use our citations and bibliographies, and you saw the increase the 30% year-over-year; it’s pretty extraordinary. What we talked about last November and what we have been working on and what you’ll start to see a little bit later this year and then into next year are services that really -- what they do is they use computer learning and then use AI and they -- not only can we help to cite things better, but we can evaluate whether or not you’ve cited all the things that you should side. And then, on top of that we evaluate you understand sentence structure, you understand grammar. So there is a lot more capability that we are building into the service on top of this enormous base. And so, two areas of potential monetization increases happen, the more page use we have, the more are ads increase. And we’ve seen two things, one is increase in number of availability inventory and that’s why the writing product is doing so well financially; and two, because we’re using Adobe, Analytics, we are better able to identify who that is, which means the CPM goes up. So that’s two parts to that. Third part is the subscription side which I imagine once institutions at the younger age see these things for what they are which is the ability to actually improve a writing skill at scale that we think that opens up not only consumer and parents, but eventually school districts themselves. So that’s our longer term place, but in the short term, the monetization increases by pages, by better understanding who the consumer is, so we can target better rates to CPM and then the improvement in the subscription business for older students in college. That’s the short term, but the longer term play is available to us as well.

Got it. And then, lastly quick, in Chegg Study, the ISBNs up to 26,000, the questions up to 9 million. Do we think of the flywheel as just kind of continuing, should you be pouring on the marketing gas, I mean what’s next for Chegg Study?

There’s a lot next. Obviously we don’t want to reveal a lot of it, but here’s what you can -- here is what you’ve seen and what you’ve seen is what you’re going to continue to see. More content, more subjects, better integration with the other services and a greater investment in the way we deliver the content, meaning today it’s all text base. So, you can imagine that we can expand the categories, the way we teach, because are teaching tool now by using more modern mediums, if you will, rather than just text. Plus the Q&A network which as you rightly point out is 9 million questions which means we answer tens of millions of questions within a millisecond across categories that most people never heard of. And that will expand the number of categories and then of course there’s international expansion. We talk a little bit about bringing it down to the high school level more by subject matter than by textbook. So, we’re seeing many, many, many ways to increase it and its growth rate has sustained itself, even though the product’s around on long time and it’s on a much, much higher number. What I would say is we did test new marketing channels in March and a little bit in April, so you might have seen we did a Jimmy Kimmel integration in April for Chegg Tutors and we increased marketing in March. And what we’re seeing is the more we market in certain channels, the right way to the right targets, the faster it grows and the better the conversion is because it increases brand recognition which increases breakthroughs, which increases the number of searches and the conversion rate. So, what we don’t want to do is just blow out because we can, rather we’re extraordinarily data centric. So, we look at everything we do, we test. And so, we’re very excited about the growth opportunities for the next couple of years. People have predicted a slowdown, it hasn’t happened; and we don’t see a reason for it to happen anytime soon.

Our next question is from Alex Fuhrman from Craig-Hallum. Please go ahead.

Great, thanks for taking my question. I wanted to ask a little bit about marketing and lead generation. And specifically, as you’ve been building out more products and services within the Chegg Services umbrella, I’m curious how many of your customers for tutoring and as you start Test Prep, how many of these customers are coming from the existing base of Chegg Study users? And as you build out more of these services, have you found that that each subsequent service is trending a little bit more or less in terms of where the customers are coming from? Are they already within the Chegg family, be curious to where we should expect most of your new customer generations to come from?

Yes. Again, great question. And we look at it this way, which is given the base that we have, how do we constantly improve the attach rate. And so what we see is every single quarter that we have done that, the attach rate has gone up at least 15% higher than it was the previous quarter. So, we are better and better and better at taking customer from point A to point B to point C. But we only have a few services right now where we can do that. As we add services, they will get more and more and more. So, the yield per customer will continue to go up and the revenue per customer will continue to go up. But we don’t actually just look at it that way. What we look at is what percentage of the customers do we have to pay to come to us. And what percentage of customers come either direct by typing in chegg.com or what most business do which is go to Google first or Bing first but mostly Google first and then type in Chegg and then click through to us. And in those places, what we continue to see is 85% of our traffic is organic in one way or another. And so, we continue -- every time we do another question inside Chegg Study, every time we get another ISBN inside Chegg Study, every one of those increases our search engine optimization and our brand awareness. So, it’s hard to attribute it to one thing or the other because there is a lot of students that don’t take a textbook at all but they get Chegg Study. We already know that 50% of the student customers already come from Chegg Study. So, we’re seeing it positively and organically happen and we’re deliberately making it happen by bringing the right service at the right time. So, it’s just getting better and better and better. Again, I think you see it reflected in just how quickly the Company has increased its EBITDA year-over-year.

That’s really helpful. Thank you. And if I could ask one follow-up and thinking about your $20 million to $25 million of CapEx for this year, if you could parse that out, how much of that ball park is for things that are really driving the EBITDA that’s talked about, your 2017 guidance versus how much of this is building things that won’t really contribute EBITDA for 2, 3, 4 years? Just trying to get a sense of how much CapEx in the model is really needed to drive the results you’re guiding to this year?

This is Andy, Alex. The vast majority of our CapEx is really to drive the businesses. So, if you think about traditional CapEx, people think about it as buildings and machines and storage and all of that type of stuff. Much of our CapEx is building content. Dan has mentioned a little bit earlier about the investments that we’ve made in the questions, for example and this allows us to index those questions and it improves our SEO. So, the vast majority of that and that drives both the top line for this year and next and in future years. So, yes, most of it is to drive the business.

It’s also becoming a smaller and smaller percentage of the overall revenue, even though we’re able to take it up. And that’s the kind of leverage we were looking for.

Our next question is from Eric Martinuzzi from Lake Street Capital Markets. Please go ahead.

I had a question about the restructuring that you’ve done. I think you announced it coming out of Q4, but it was regarding the National Research Center for College and Universities. Just wondering how that handoff went. I know you’re working with a partner now, but have you been able -- have the renewal rates been similar to when you guys were handling that relationship directly?

Yes. So, the handoff has gone very well. For those who are not familiar with your addressing, Chegg continues to narrow its focus to the learning services and to careers. One of the businesses that we had were what we refer to as the EDU business, which is the college recruitment business and the enrollment business, I think we refer to it as. And what we saw was that these were the coming in increased commodity and what we wanted was the access to students in high schools. In previous question sort of addressed that are we able to get high school students earlier and the answer is yes we are. And we were able to maintain that relationship. The renewals for the schools upon our hand on went very, very, very well because that’s what NRCCUA does very well. They have a bigger sales team; they have more tentacles with these schools than we had. And so it’s growing very well but that was not a revenue stream for us. That’s a revenue stream for them. The revenue stream for us that comes from that is not only access to the student at no cost which is really beneficial to us, but the software that we were helping install into these campuses that help track these leads better and that’s gone very well. So, you haven’t heard of it because the handoff has gone great. And we kept what we want which is access to the students, access to the data and the ability to market to those students earlier and bring in them to the Chegg network. And what they got was the relationships with the schools, the contracts, the leads. So, everybody got what they want, similar to our AEN [ph] deal which is we both do what we are great at but our revenue is not dependent on those renewal rates.

And I am still trying to get a sense of the organic growth here. I know you talked about some. For competitive reasons you don’t want to reveal all metrics. But I am just trying to get a sense on same-store sales or maybe on ARPU basis if you got about just students that were Chegg Study a year ago and you are looking at those 10,000 students that came on board in Q1 of 2016 on a -- is there -- are you analyzing those as the management team even though you are not revealing them to us as investors?

We evaluate every cohort that comes on. So, yes, we are evaluating whether or not a customer we acquired from different channels at different mugs. So there is a customer from, beginning of January, react the same way if somebody comes on the end of January or for example right now they are in final are these people who just come on for the one month, or do they sustain themselves. So, yes, we are a very deep data driven company where we have -- I have on my phone a dashboard of every single business, every 15 minutes of every day and we have -- we know exactly what we want to do with each business, through each channel every day before we ever enter a year or quarter, and we evaluate it every day and we are able to make decisions in today on every one of those businesses if it becomes necessary. Fortunately it isn’t necessary because we are very good at forecasting now, because we have enough time under our belt with these businesses. But when we see opportunities, we are able to accelerate them.

And then, one for Andy. The timing of the Imagine Easy payments, can you give us that?

Yes. So, if you recall, for those of you who maybe are little bit newer, but the Imagine Easy transaction closed last May, and we have deferred payments, we have a large payment that goes out, actually went out I should say, went out in April. So, that was timed, if you recall, timed to match with how the Ingram receivables would have been collected and that’s exactly what happened, as planned. And then, we have some smaller payments that go out through the remainder of the year.

And next year.

Yes, this year and next year, and the payments then in the first half of 2019.

But out of the 42, we have remitted the majority of the original 42 at this point. So, we made the payment about April 15th.

It was right around April 15th, the payment was due.

It was the $24 million?

Yes.

Our next question is from Aaron Kessler from Raymond James. Please go ahead.

Couple of questions. First on Chegg Study, I think you mentioned high school as opportunity that’s coming up there. Also on the quarter, maybe for the annual guidance, should we think about some early upside on the Chegg Study side or is that across Chegg Services in general?

I’ll take the first one, let Andy take the second one which is for Chegg Study, it is increasingly like Netflix, which is net Netflix is a center for entertainment. So, you want a movie, you want television, you want new stuff, you want old stuff that you pay a subscription fee and there is value and it’s for you even if not everything is as valuable to you. And as we continue to expand the subject matter and the level of that subject matter, then you can expand higher or lower. So, you can go into grad school, business school, law school and you can also go lower which is the logical next step would be around AP related subject matter, because it’s very close to what Chegg Study currently offers today. The difference between college and high school is our focus in college has been around the textbook itself and around high schools can be more around the subject matter. But as I’ve said repeatedly, we are very delicate, slow and deliberate with the way we do these things because, it takes a long time to earn the creditability to these students and we don’t want to do anything that doesn’t. What we see is we see the TAM increasing for two reasons, for all reasons that we have said. We have got more ISBN; we have got people of different age groups now utilizing it and the Q&A network expands the number of subjects. So, we are being very smart about everything that we add. We don’t want to add more than we need to add at a time, want to make sure the quality is good, but you are going to continue to see the TAM for Chegg Study just expand.

And Aaron, regarding the momentum in Q1 and going forward, it really is all around Chegg Services, particularly our subscription services like Chegg Study and writing tools that have a very high incremental margin which you saw in our bottom line and in our forecast going forward. So, we continue to see nice momentum across our subscription services and that’s translated into a great quarter like you said and us being able to increase our guidance for the year and for Q2.

I don’t think anyone answered yet, but Test Prep, just any update there, how that’s progressing?

Yes, it’s progressing nicely. What we see with Test Prep is I think I mentioned it earlier that we have something close to 500,000 students who have utilized it, both SAT and ACT. But what we have again said from the very beginning is there is seasonality around Test Prep, and the next base season is October. And so, each time we roll out and upgrade to the service, we go back to the students to understand, not only how frequently do they use this service, what parts of the service do they like, how much it is getting better. But then, we want them to self report back how they did on their grade. So, it’s going to take multiple semesters for this to become a business for us, but we knew that from the beginning and it’s not in any of our 2017 or 2018 numbers deliberately for that reason. But it’s progressing nicely. We think it’s a big category for Chegg to offer in a lot of different ways and for a lot of different reasons including greater access to high school students earlier and then bringing them into the Chegg network and helping them learn.

[Operator Instruction] Our next question comes from Jeff Silber from BMO Capital Markets. Please go ahead.

Thanks so much. I know it’s late, but Dan, many times during this conference call you’ve alluded to greater TAM. How much greater can the TAM be?

So, that’s a question we’ve been working on. So, you think about it and you say, alright there are 20 plus million college students and then there are 16 million or so high school students. So, there’s something like 36 million students in the United States alone. And then, you start to think about the fact that now that we’re all digital, we can expand outside the United States at some point because it’s not as if these same issues aren’t relevant around the world, which is there’s more people who need to learn stem, there’s more people who need to learn writing. So, there’s two things that increase, which is the categories we’re in. We’ve only got about 15% penetration, which is extraordinary that we have that much. I mean, we’re going to have more digital subscribers at the end of this year than we are going to have textbook customers for the first time in our history. These are businesses that we were barely in four years ago if in at all, and that really says something about where the market is going. So, what you’re going to find is that more and more people, if you take a look at what Purdue just did. So, Purdue just bought Kaplan. We have said, if you look at the GSV speeches that we do, if you look at the things, the basis on which Chegg is built, we believe that institutions are going to have to expand the number of students that they can reach by getting rid of geography, time of day, classroom, it’s not to say that in person earning will go away. If you can expand the number of people who are constantly going to need to learn and every time more of them come on line to learn, then Chegg can have a support product for them whether or not it’s classroom based, whether it’s textbook based, whether it’s skill based. So, that is the magic of what we think Chegg can offer, which is the combination of self help, on demand, low cost, high quality learning backed by human help. It’s hard to pick what the TAM is. We just picked -- last November we said, we don’t think people really appreciate that there’s 10 million students getting those 24,000 ISBNs; now of course it’s more than, it’s 26,000 ISBNs. So, as we invest more, the number of people who were relevant for, first within college, then within high school and global, and then older learners. I mean, this is not going to be about how do you learn to knit or to cook, which are also valuable but there is going to be a lot more older learners who are going to need to come back in and learn skills in order to get a job or advance their careers. We think Chegg is a companion for all of those in the future. Now, it’s going to take time and none of those are things that we’re counting on in the next couple of years to grow our business but we don’t see any reason why that won’t be future growth to our business.

This does conclude the question-and answer-session. I would like to turn the floor back over to management for any closing comments.

Well, thank you everybody for joining the call. As you can imagine, we’re ecstatic about how the year has started and how the momentum that we ended last year with and our first quarter as an all digital business really does set up a wonderful future for what we have to offer. Our employees have worked really hard for the last several years to turn us into an digital company and their commitment to the mission of building better products at a lower costs that are available to more students is beginning to pay off, not only for students but for investors and we’re really excited about that. The trends in the industry are clear, online, on demand, self help backed by human help are the future of education and education support. The direct to student and student first model that Chegg has, puts us in the lead in that category. And we believe that we’re in the best position to really expand what the market can do and build a huge business around it. And we look forward to talking to all of you after the next quarter. Thanks for joining in. We will see you on the road. Thanks.

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