Chegg, Inc. (CHGG) Q2 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Chegg Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tracey Ford, Vice President of Investor Relations for Chegg.

Good afternoon. Thank you for joining Chegg’s second quarter 2018 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 Web site, investor.chegg.com. A replay of this call will also be available on our website. We routinely post information on our Web site and intend to make important announcements on our media center Web site at chegg.com/mediacenter. We encourage you to make use of these resources. Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of the Company. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements. In particular, we refer you to the cautionary language included in 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 April 26, 2018, 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 and the investors slide deck found on our IR website, investor.chegg.com. We also recommend you review the investor datasheet, which is also posted on our IR Web site. Now, I will turn the call over to Dan.

Thank you, Tracey, and welcome everyone. It has been an exciting first half of 2018 and we are thrilled to report another great quarter. And as a result, we are once again raising our guidance for the full year. We outlined three key priorities for the year. Meeting our financial goals, expanding our TAM, and adding new capabilities that leverage reach, our student graph and the strength of the Chegg brand. Our team has stayed focused on executing against these priorities, and in a moment Andy will you walk you through our financial results in greater detail. In Q2, we delivered outstanding growth across our business, reaching 32% total revenue growth year-over-year and 38% Chegg Services growth driven by 45% subscriber growth. As our number suggest, the power of the Chegg brand is at an all time and we enter the fall semester with significant momentum. Chegg Study remains the center of our flywheel and we continue to expand the depth and breadth of the content capabilities we offer students, which expands both the TAM and the engagement. In Q2, we increased our catalogue of textbook solutions to over 30,000 ISBNs and our library of proprietary, expert answers and solutions is now nearly 24 million, an increase of 42% year-over-year. And students seem to be valuing Chegg Study more than ever, as evidenced by an increase in usage. We had over 315 million Chegg Study content views in the first half of the year, which is up 60% year-over-year. We believe the more content and modalities that we add, the more popular and indispensable Chegg will become We will continue to invest in ways to create greater value for our students, as we have with our writing service. Writing is one of the most underserved areas in education, with 75% of high school seniors lacking proficiency in writing competencies. We are already providing help to students in this category and we have over 100 million annual visits to our writing sites and 130 million citations were added in Q2 of this year. We have always had the view that technology can speed up the process of citing sources and creating bibliographies but, more importantly, we believe that technology can be used to teach people how to write. Our acquisition of WriteLab, an A.I.-enabled writing platform, which we announced in Q2, allows us to provide more personalized writing tools to students, helping address their specific pain points and academic challenges for grammar, sentence structure, writing style, and more. This accelerates our ability to take students from citing to writing. And as powerful as A.I. technology is, we know that every one of our services is enhanced when it is backed by integrated expert human help. Students continue to validate our strategy as over 60% of our Tutor customers come from other services across the Chegg platform. In addition, we have learned that students prefer chat-based tutoring, versus live video-based tutoring. So, we continue to re-architect our system to build more capabilities, allowing more students and tutors to leverage chat, enabling us to provide high quality, personalized tutoring at a very low cost. Math is another subject area where students struggle. As 33% of high school graduates in the U.S. lack basic math skills and 64% of students are unprepared for college-level math. To meet this need, in June we launched a desktop version of the Chegg Math Solver subscription. This service helps students understand math by providing guided, step-by-step explanations to help them learn difficult concepts in subjects like pre-algebra, pre-calculus, calculus, and linear algebra. It is designed to increase comprehension and understanding of the subject matter and accelerate learning in high school and college. We will continue to increase the number of subjects we cover in the months and years ahead, and plan to expand from the current desktop service to mobile in the back half of this year. With the addition of math to our growing suite of Chegg Services, we have started testing our first bundle, the Chegg Study Pack, which we anticipate launching in the fall of 2019. This combines Chegg Study, with Math Solver and EasyBib Plus, our math and writing subscriptions, into a single subscription offering. Students will have access to all three services, for the first time, seamlessly integrated and for a substantial discount. Students trust Chegg to provide services that help them master their academic experience and we feel that we are in the very early stages of services we can provide to help students to improve their outcomes. As such, we will continue to expand the products and services we offer when we see an opportunity to address key pain points. Our most recent example is our exciting acquisition of StudyBlue. And, in that spirit, we couldn't be more thrilled to add StudyBlue to the Chegg family of services, as research shows that 37% of students are using flashcards to accelerate their learning online. Our vision is to make our flash tools the most comprehensive and easy-to-use study tools. With nearly 500 million pieces of user-generated content already, we plan to grow that and pair it with the professional content including content that is currently available on Chegg. We believe this will create the most useful and robust free flashcard service available. By making it free, we expand our funnel deeper in to high school and the college market and open up more opportunities to serve students around the world. Even as we continue to expand in the learning space, we know that 85% of all students say they go to college to get a better job. So, we are investing in our CareerMatch platform which utilizes our reach and our proprietary data to help match students to the best job opportunities for them. We just expanded our beta test, which will enable us to learn and adapt the services even better to the demands of both students and employers. Chegg reaches a huge and valuable audience, which has led more brands to approach us to find creative and impactful ways to connect with students. The extension of our partnership with Sallie Mae is one such example. We will now be able to offer the Study Starter benefit, which gives borrowers with new Sallie Mae Smart Option Student Loan or a Sallie Mae Parent Loan, access to a suite of study support services from Chegg platform and now for the next three years. As we look to the future, our team's passion for our mission is at an all-time high. For the first time in Chegg's history, we participated in the Great Place to Work Survey and, thanks to the responses of our employees; we were honored with the distinction of being certified as A Great Place to Work. By building a company that is committed to its mission, focused on putting students first, and leverages the talents of our employees to improve student outcomes, we have seen growth across our key business metrics while building a culture that attracts and retains top talent. We are incredibly optimistic about the path ahead of us. We see tremendous opportunity to utilize technology and the internet to transform learning, making it online, on-demand, personalized, adaptive, affordable, and backed by human help. Our goal is to accelerate the time it takes for a student to go from learning to earning. And we feel like we're just getting started. And with that, I will turn it over to Andy.

Thanks Dan and good afternoon everyone. It's been a great first half of the year for our company, with all key metrics and financials ahead of our expectations. The strong results we achieved in the first half and the momentum we carry into Q3, gives us confidence to raise our guidance again for 2018. Specifically, for the second quarter, total revenue was $74.2 million, above the high-end of our guidance and a 32% increase year-over-year, with both Chegg Services and Required Materials exceeding our expectations. Chegg Services revenue increased 38% year-over-year, driven by continued strong demand for our subscription services. Required Materials first half revenue was comparable to the prior year, indicating we continue to take share in a declining market. This resulted in gross margin coming in higher than we expected reaching 76%, as much of the incremental revenue from the subscription services goes straight to the gross margin line due to its relatively fixed cost structure. Our strong performance in both revenue and gross margin drove adjusted EBITDA of $19.3 million. Adjusted EBITDA margin for the quarter was 26%, and 24% for the first half of the year. We ended the quarter with cash and investments of $482 million, bolstered by a very successful convertible debt offering early in the quarter. We believe we now have one of the strongest operating models and balance sheets in the education industry. As we look to the second half of the year, we are increasing our guidance based on Q2 results and continued strong demand for our subscription services. The updated guidance takes into account the recent acquisitions of WriteLab and StudyBlue. These acquisitions will not contribute to revenue or subscribers in 2018 but will add several million dollars of operating expenses. The momentum of our subscription services has allowed us to absorb these additional costs, while still raising adjusted EBITDA guidance for the year. As a result, for Q3 we expect: Total revenue to be between $68 and $69.5 million, with Chegg Services revenue between $52 and $53.5 million; gross margin between 71% and 73%; and adjusted EBITDA between $10 and $11 million. For full year 2018, we now expect: total revenue to be between $306 million and $311 million, with Chegg Services revenue between $248 and $251 million; gross margin between 73% and 75%; and adjusted EBITDA between $79 and $81 million or approximately 26% margin. And finally, we expect CapEx to remain in the $30 million to $35 million range, with approximately 80% being used to fuel expansion of content and add new modalities such as video to our subscription services. We believe these investments increase engagement on our platform and expand our TAM. In closing, it's been a strong first half. We delivered above the high-end of our expectations, we strengthened our balance sheet, we made acquisitions that extend our market opportunity and add overwhelming value to our students and we see this momentum continuing into the second half of the year. With that, I'll turn the call over to the operator for your questions.

[Operator Instructions] Our first question comes from Jeff Silber, BMO. Please proceed with your question.

Thank you so much. I was wondering if you can give us a little bit more color the Chegg Study pack announcement the bundling for next year. I know it's still early and I know for competitive respect you'd probably not going to talk about pricing, but I am just curious what do you think the impact will be on your business overall and why you just started to pick the products you did for this bundle? Thanks.

Okay. Hey, Jeff, it's Dan. So we know from -- we know from testing five years worth of price testing also at the different prices what the value of Chegg Study stand is and we've said on previous calls when asked we think we have significant pricing color with the current Chegg Study. But when you are starting to see 44% -45% growth even with this many years into it realize that we are expanding market share quite significantly. So in our case, we are starting to test it now, all the technologies in place, the e-commerce capabilities in place, the reporting in place. We will be testing different price point, but I think we've indicated that we don't expect to be much higher than $20. And the idea is to be able to either Chegg Study for 14.95 or all of it for something closer to 19.95 although that could change between now and next year. But what we believe is that it will not only continue to sustain the kind of growth that we've seen, and continue to help with what are already very high renewal rate, and you see on our subscription business our ARPU continues to go up into the right. That's not because of pricing. That's literally just because people are coming on early and staying longer because we keep adding more value. So if successful, we think the bundles will continue to sustain great growth but have significantly high ARPU depending on what percentage take the bundle over Chegg Study. But the ideal would be that is would be instead of raising prices we can actually offer the student more significant overwhelming value for only a slightly higher price. So we think this is a best way to go and so we are very excited about it.

Okay, great. And then just turning back for the quarter that you just reported. I am just curious from your perspective what stood out in the quarter, specifically? I know you went through a lot, but where would be upside relative to your guidance?

Where would be upside, it sort of cut out so much I heard the question.

In 2Q what drove the upside versus your guidance?

So I'll start, I'll let Andy go into which is we've 84% name recognition on college campuses today. We put together a strategy several years ago. First go out digital and that's working. Second to continue to invest in content and modalities that expands our TAM. And so what we're not seeing is any significant slowdown in growth even as we get bigger. And that's a result of having more subjects, more categories, I think we said we've got over 30,000 ISBNs, and we're over 17 million questions now. And if the questions expand; the content expands; so the flywheel that we were hoping to build several years ago has started to see significant traction just two years ago continues to see even greater traction now. So it's a combination of brand recognition, high quality of the content, expanded TAM and word-of-mouth, and what's beginning to happen in our opinion, and it's pretty significant way on certain campuses is you need to have Chegg Study or you will feel behind other students in the class. And it's just becoming one of those things where the more recognition we get, the more people think that they need to get it and they get it sooner and that's been playing to our strengths because if they're relatively fixed costs, they are very high margins on this business, and that's given us the opportunity to invest in other businesses. So the flywheel is just working better than we thought.

Our next question comes from Corey Greendale, First Analysis. Please proceed with your question.

Hey, thank you. It's Ken Wang on for Corey. First of all, congratulations on another great quarter. So just wondering anything you can offer may be qualitative commentary just on what you saw during the quarter in regards to just growth within maybe outside of the core college population, maybe high school, middle-school anything you can offer?

Yes. So it's a great question. So on the free services which are essentially writing now and the free funnel on math and what we now believe with the acquisition is StudyBlue is we are going to get deeper and deeper and deeper in our penetration into high school, and interestingly enough global. So we see two expansions. We imagine the one that will be more subscription-based revenue sooner, over time will be international versus going down to high school, but we --but we imagine being able to use the great ad technology we have when we acquired EasyBib, to be able to apply that for example over time to StudyBlue. So our market penetration in terms of our awareness and our reach is getting pretty high, but in terms of monetization you still --we still have a long way to go, which is great news because we see a lot of growth ahead of us.

Perfect, very helpful. And then also just on StudyBlue can you talk about the kind of the content development model a little bit? Just wondering maybe at a high level how it differs from study and can you kind of control the rate of content growth?

Yes. So StudyBlue, we've had a great deal of success over the years buying companies who are led by terrific founders, who have a commitment to this space. And StudyBlue has been around for nine years, and what we've been looking to do is find great assets that have different kinds of capabilities, different kinds of content led by terrific team who have been under funded, and where we can accelerate their growth and their value. And this is what we discovered with StudyBlue, which is -- they have 500 million pieces of UGC user-generated content. So think about it this way. You're in a class; you create class notes which automatically turn into flash cards, and then those flash cards can be cut a thousand different ways, what particular subject, by the day, all the different ways that students may want to do that. And of course, the proliferation of mobile devices and as we get this to be more successful on mobile versus on the desktop, which will be one of the things that we have the capital to invest in, we think it'll just be one of those tools you have to have on your phone all the time and use it all the time. If we marry that incredible content of 500 pieces of content with professional content which we have the rights to and they did not, and with the content that we have from our network of expert answers of 68,000 network plus around the world, the goal is to have the most comprehensive, highest quality most robust free flashcard service which becomes a real big top of the funnel, which over time we can monetize through our advertising systems. We just don't want to do that now but there's certainly upside to that when we decide to turn that stick it on, but the idea is that students learn through flashcards. They always have but this will allow you to cut it any conceivable way you want by a specific day, by specific subject. So instead of the current leaders out there that say this is world war one, you'll be able to cover World War one by specific event because we'll just have more, more and more content. And the model is users give it for free which is wonderful. And our content we have our network of expert answers they're already answering it, plus we have professional content that we've either created or relicense. So for us, it's a fix the category until we accelerate growth with really high margins and leverage our brand and our content. And the answer is yes. So we're super excited. I mean almost everything we ever buy we've been looking at for years before we do it. And we are very fortunate at this time that Chris was willing to become part of something bigger.

Our next question comes from Aaron Kessler, Raymond James. Please proceed with your question.

Yes, hi, guys. Congratulations on the quarter, couple questions. First, maybe just update on tutor growth. I think you mentioned during the remarks students preferred chat based tutoring just how specifically are you looking to change the platform there? And maybe just an update on kind of the longer-term outlook on capitalized software? I think there are about 30 or I guess total CapEx around 35 but just thoughts how we should think about that going forward over the next few years? Thank you.

Hey, Aaron, it's Dan. I'll start and Andy will talk about the CapEx. On the tutor side, so it's no surprise anybody who has kids that they would prefer not to talk to you on the phone, or over video or necessarily if they do it has to be something more like snapchat or Instagram stories where it's not live. And what we discovered that the first objective was to take the very large offline tutoring market and start to put it online, and so the idea was could we mirror it by doing live video, live audio as well as chat based, but the system was built to monetize around more the live video, which is one tutor one student at a time. What we discovered was they really prefer written lessons in chat meaning they wanted to either be asynchronous or they plan to be multitasking, while they're getting guidance from a tutor they treat them more like a TA or like a friend or a coach than they do with actual let me give you my exclusive time. Often times they're in their dorm, it's noisier, and they are in library. They're not in a place where they can actually talk and they're used to typing. Kills me --my thumbs are killing me. But for them that's sort of the way that that they do it. So we've opened up more channels which have accelerated that part of the growth quite significantly because now 80% or so of the tutor led sessions are chat based, but to your really important question which is how does that change our model over time. So it's going to take us a while to rebuild the architecture which will allow for a single tutor to be able to tutor multiple students at the same time via chat. That will also over time make the margins significantly higher because the students still values it at $0.50 a minute. The tutor can take on four or five six students rather than one and we can pay the tutor a little bit more but not as if they were tutoring five at a time. So the ultimately we think this opens up a much bigger growth stream, the much more profitable growth stream, much more valuable growth streams to both the students and one that's much more lucrative for tutors. And it's just -- it takes time to build the necessary tools for a tutor to have a dashboard where they can have more than one student at a time, and keep track of all that. And so that's what we've been working on building and our year really is August till May 15 or so. So we don't really build a lot during that period because we execute a lot, so we build a lot in the summer which is what we're coming off of now. But we don't imagine that to be fully robust until sometime in starting next fall semester. But we're really excited about it because it's driven by student demand and actually tutors love it because they can make more money doing it this way because they can take on more students at a time.

Okay, yes, so Aaron, this is Andy. On the CapEx question, just as a reminder when we look at CapEx, there are two components to our CapEx. One is content which is approximately 80% and the 20% is what you would typically term as CapEx in historical sense, but as far as looking forward, and first thing I'm not going to get guidance beyond where we are in 2018. But if you do -- as we do look forward one of the things that we focused on with the companies do we have an ROI on every piece of content that we invest in. Whether it's video content, whether it's textbook solutions, whether it's Q&A. And that's something that we were very diligent about. Having said that, as we look into the future and if you take a look at the past, our total CapEx has actually has grown at a lower rate than our total revenue. We'd anticipate that as we move into the future, but having said that, content does drive subscribe as it does drive retention, it does rise value to our students, So, yes, we would anticipate continued growth but at a lower rate than revenue.

Our next question comes from Doug Anmuth, J.P. Morgan. Please proceed with your question.

Okay, thanks for taking questions. I had a couple. First is on the bundling testing can you talk about anything that you're seen early there and then can you just walk us through the path for us what was the back half 2019 roll out maybe it's one of the questions there kind of why did they take that long to actually get comfortable and you guys kind of a year out from that. And then second, as you go into this school year starting early in a few weeks how do you think about cross selling between required materials and learning services and obviously years ago required materials driving noting to study but how much are you seeing kind of be opposite of that at this point as well. Thanks.

Yes, good detailed questions. Let me start with the cross sell first and get into the bundles. So the cross sell is always been a good and every quarter it gets better in terms of being able to integrate better, be able to get higher conversion, and be able to get --it's usually been between 10% or 15% each quarter improvement on what we call the attach rate. And, yes, you're right starting about a year ago when study- I think the end of last year, there was many study or subscription -- Chegg Services subscribers as there were textbook customers overall. And that's without textbook customers going down, and so it's becoming across sell that goes both ways. It's easier when we have the digital bundle, and so it's always been a strong opportunity for us because now that so many people take study early because they know if they --we get to close them earlier, which gives us greater confidence to do things well, that's why our subscription ARPU continues to go up because they get on earlier and they stay longer, and most of the ones that get on earlier are direct result of either those -- the pause over the summer or those that get it at the same time as they get their textbook because they just know they're going to want it. So that's always been a very effective for us, and it's going both ways now, which is why I think Andy in his prepared remarks that we're actually growing share in the textbook business. And a lot of it has to do with brand recognition, our technology and the ability to cross-sell. Now on the question of the bundles you asked two questions early learnings and why so long. And so the early learnings are its very early meaning the most important thing that we learned is that our technology and the ability to monitor it, and financial reporting and all of those things so far. Knock on wood is working. I'm sure I just jinx it and if the Russians are listening I was just kidding. But so that in order for us to even do a bundle we needed to do that. The second thing is how do you integrate the product, meaning what's the user experience. And so we're finding out, we will find out shortly whether or not the way we've designed the product meets the optimal way for the students to be able to leverage all the different aspects of the bundle instead of just throwing three things in at once which is not the plan a fully integrated bundle is the plan which is one of the reasons it takes longer. The third thing as you test-- we're testing pricing and then we're testing renewals. So one of the reasons that it takes longer to formally do it is because whatever we are able to transact with over the next quarter, we find out whether or not they renew come January. And so we're just taking our time because our model and our growth rates don't assume that we need this to be successful to continue to see significant growth because the core business is doing phenomenally well right now. And so we want to make sure that the user experience is right. That the pricing is right. That we really understand the model in terms of when they convert, how long they stay on, when they renew. And that just takes at least two semesters. So if you start in the fall and then you roll over to January that's why we're not really going to declare formal roll up until the following next year because we want to be able when we talk to folks like you have greater clarity on it. So it's not a technology issue. It's just a reality of how our business works. It's not like the Netflix where you sell that day or Spotify and you sell forever. Our test semesters associated with it.

Got it, that's helpful. Follow up and ask you one more as you think about 2019 is international in the roadmap? Roll out --

Yes. The answer is yes. And I feel like everything I say is second half 2019 it's because if it isn't in the roadmap for fall of this year, it's not likely in the roadmap for January because we literally go August through May is our execution season. So now everybody's heads down focused getting the software ready, pushing out, getting all the pricing ready, all the marketing messages where our lists are so huge right now that we can -- there because we're growing so fast. It's been phenomenal. So the interesting thing about international is organically we are already seeing real interest from more than just English-speaking countries. Now we don't currently have any dot anything sites around the world, which makes it difficult for folks to get access to us, and certainly at the prices that would be around their local currency. So we are going to work on that first. And so yes, sometimes in 2019 you'll start seeing dot whatever site dot CA for Canada, dot UK you can imagine Australia. There are a number of countries where students are finding us on their own and they're coming in, and that's been really exciting and interesting because we don't really have to adjust the product much. It's really just the presentation, make sure the content is all localized and then making sure we take their credit cards, we can account for and pricing. So it's one of the things about being growth companies. We don't want to take too many things on at once. And all of them represent future growth which is exciting.

Our next question comes from Brent Thill, Jeffries. Please proceed with your question.

Good afternoon. Dan your back-to-school approach this year versus the past can you give us a sense of how your --you're changing your approach and maybe if you can also spend a little time, it looks like you just went live on the paid for product for math. I know it's super early but your expectations going on the fall. And I had a quick follow up for Andy.

Sure. So our back-to-school approach every year the part that's consistent is we want to make sure that we are focusing all of our messaging, using the data that we have. So we have the least amount of messaging so we don't disturb the greatest amount conversion, and so everything we do or in the off season which is what we're coming out of is to make sure that our lists are in good shape, and our data is in the way we wanted. That our messaging is in the right position, and what's really changed in the last two years is it's really become almost non-existent about textbooks and almost exclusively around the Chegg Services. And in some cases like with the launch of map that you just articulated, it's going to be how we add some of the messaging in for the new services. So for example, some of the changes this semester and writing will be what writing can do now versus it have done in the past because we have so many users. We have 100 million visitors alone just to the writing product over the course of the year. And so you could realize how big that is, and most of them assume they already know what the product can do. And so the fact that it's doing new things is really important that we get the messaging. So everything we're doing now is about executing on how many messages, the content of the message, the timing of the message where we don't overload them with too many messages because what happens when you do that. So it's really all about execution, execution, execution. The plans have been in place. We're on the textbook side. I think we've got about 30 days before it starts to get interesting around here. Its good news for Chegg and for our shareholders is that tech study season starts now. As for Doug's question earlier in terms of the attach rate. So we're --we got about 30 days before its super fun to be here. But it's really going to be about messaging, the approaches to messaging, all the SEO done, all the content is done, all the products is done, the technology has been pushed. So now it's literally about messaging, frequency of messaging, conversion, making sure the product stay up, all those kinds of things, monitor engagement. So it's an exciting time but it's just heads down approach. And math you asked about math. So when we bought math what I said was part of the main reason to buy math was the obvious reason is other than writing it's probably the subject that students struggle the greatest with and the most number of students struggle with it. And everybody has to take it, and so few are proficient enough at any level high school or college. Plus math is a global thing. And so for those reasons alone big opportunity to expand our reach and our TAM, as well as create more value for students. We said we would take our time at launch with the desktop. First we said we do that may, we did, so this is exciting. The response has been really quite great because of our brand recognition and our NPS of being 80 and above that students desire us to bring them more tools and more ways to learn and put our brand on it, but the goal was never really to sell individualized math subscriptions although we will. The goal was to be able to identify a math product in a writing product that those two each at 9.95 included in the Chegg Study bundle, the Chegg Study pack for an overwhelming value would cause more people to subscribe to something, and it's a higher end of the price range. So for us, it's going to be about explaining what it does, it's positioning, its value and whatever subscribers we picked up individually for it will be great, but this really is all about getting the study pack right by the end of next year. And we're confident our execution is something that that goes the way we expect. It's really a significant positive impact on the business in the out-years

Real quick for Andy. Thanks Dan. Just like Q3 guide, you're up 10% year-over-year at the midpoint and then down 7% sequential when you're up 11% I think last year. So just want to be clear are there any anomalies in the third quarter we should consider or is this just good old-fashioned conservatism?

Okay. So none of this C word okay. So, no, it's pretty much business as usual, Brent. We -- as you know as we enter into the second half of the year, that's the time we -- the way the fall semester goes is how the --is how the spring or the winter semester goes, and we're at a point now where we're just right in advance of the fall semester. We get more data as we get into September. So we we're treating it just the same way we treated last year and the year before that, no change.

Our next question comes from Mike Grondahl, Northland Capital Markets. Please proceed with your question.

Sure, hey, thanks guys. Do you think StudyBlue is a big part of your strategy and you can be successful moving into high school and junior high? How are you thinking about that?

Well, yes, for sure. This is Dan. It's a huge part of our strategy or obviously we wouldn't have acquired it, and the primary reason we acquired it is because if you ask and we do all the time and we have surveys all the time that the single most prolific tool that students use are flash tools of some sort. And so our vision for these things when you can imagine having their 500 million pieces of the content which will continue to grow and stay relevant on a per class basis. The professional content of the ad, ability to put this on mobile. How this goes as things like voice become much more important technologies that we're working on for the future that we just think that this is too important of a category for us not to be the leading player. And we think over the next few years that we will be. It also is something that takes as global. So we're -- if for no other reason that in it itself incredibly value for the students. For us, yes, all the things that we offer that allow for technology to automate them to your level or that can be cut by the way you think about the content and not just a way a card pack that used to be bought would be allow this thing to go up and down on the age limit. And so yes I mean the overarching goal of Chegg is to be the brand that students most know when it comes to the things that they need to do to master the subject, pass the class, learn and advance themselves, be more competitive, learn the necessary skills and get a job. So, yes, all of those things that you articulated are part of the reason that we think it was incredibly valuable for us to acquire this tremendous team. I mean nine years of doing these things where you have something like 80 million users is a pretty good example of how important it is, and particularly where they were forced to do an artificial business model which actually started the growth. Once we liberate the content, we think that the growth will be significantly higher. So we're super fired up about it.

Got it and then just a quick question on the Chegg Study pack. You kind of mentioned, hey, someone can get Chegg Study for 14.95 or all of it for 19.95, is it possible or still open to testing that the price could be higher? I mean it seems like a value at 29.95. I mean how open is that to testing?

Well, how does one answer that? So we just rolled it out. We have been testing the concept of this for greater than a year. We have been testing the pricing through surveys for greater than a year. But we only just got the desktop version of math out, and we've only almost rolled out writing to all of the site. So the answer to that question is it will be what it should be, but it's not necessarily going to be the highest price that it could be. The view that we've taken same with Chegg Study, we already know that we can do a much higher price of Chegg Study and growth will slow, but not that significantly and revenue and profits will be much higher. We know that through actual testing over years after years after years after years. And we've seen that the more content we have, the more modalities that we have, the more that these technology gets adaptive, the faster we clean up mistakes that we might have in the system, all of those things allow us to have higher price points because the value becomes super clear. We are still in the significantly fast growth pace of our business. So we're not looking to optimize around price at this point. We're looking to optimize around value to the students and acquiring as many students as we can, and not giving anybody else the opportunity to compete with us in this space, because right now it's a space that we are the leader in by far.

Our next question comes from Alex Paris, Barrington Research. Please proceed with your question.

Hi, guys, congratulations on the quarter. I'm looking forward to the new school year but actually as a result of this call, I'm starting to get excited about 2019 if I were not in a kind of outline it, you got bundling being launched next fall, you got --at least your initial foray at the international with the more directed approach. You got a reposition tutor, you're building the infrastructure to focus more on chat and then you mentioned you're expanding that the beta test market on career match.

I sort of feel Alex but you should run our call.

So I guess I got a couple of follow-up questions on unbundling. Are there bundles you're considering besides the study pack?

So it's a very interesting question and the answer is at this time, no. So I don't want to be misleading in any way shape or form. Everything we've done and you've been very close to the company, and we appreciate that in terms of really focusing on learning how we do and what we do. We like to get it right before we go to the next step. We don't want to take on too many things at one time. The good challenges to having the ones that we have which is our model are now very strong. Our balance sheet thanks to Andy and Tracy is super strong. Our growth rates are high. Students really love our brand. We have a clear vision for the company. We're executing extraordinarily well. So the thing that we worry about most is trying to do too much at one time. So at the moment, we really want to get this bundle out since it's not even 2019 yet and we're telling you guys a year in advance because you're going to see us testing these things in different price points on the site. And so we rather just be transparent. So there are always opportunities to package different things depending on other assets that we launch or that we have or countries that we are in, and the desire for those countries. We have a whole lot of things that we're working on, but my old boss Terry Semel used to say don't tell anybody what you're going to do until after you've done.

All right, fair enough. On the change on tutor is particularly exciting because even though it's one of the fastest-growing segments within Chegg overall, it never has the margin potential of some of the subscription services, and given this ability to leverage the tutor could create a much more profitable and fast-growing division.

We have to agree with that and it's interesting because we spent a lot of time with a lot of different companies outside the tutoring space, but all do live chat based interactions. And we have gotten very close to a lot of them because we're all sharing information back and forth about how best to do it, and that's exactly right which is it makes it more accessible to more people and you can pay the tutor more and you can actually charge the student the same or less, and have a much higher growth much higher margin business assuming it's successful. But we have a lot to go between here and there, but what's really clear is there's great demand for human coaching, human TAS if you want to call. There's technology that's being created now that allows you to do things to chat BOTS through voice. So the number of things in the number of ways that Chegg can do and the way we can get to students very fortunately continues to expand which we think will be big opportunities for us down the road.

Okay. Let's two real quick. Career match, what are you doing in this beta test? What is career match today and where do you envision it? Is It going to be a paid for subscription-based service or pre service?

Well, it will be free of students and pay to businesses which are a pretty standard model in the recruiting space, and it's likely to be a subscription service. But as Andy said, a year ago and I will repeat again today, what we do is we put the investment cases for all these businesses in our business model just not the revenue yet. So when you look at how well our business performs this year. We are able to make these investments and still exceed our numbers and take our guidance up including the fact that we were able to acquire two other companies and absorb their cost. So the core business is working extraordinarily well. And that's a good thing. On the career match, we launched the original alpha or early beta two quarters ago. And we focused on Silicon Valley companies mostly in the tech space, very large --very companies you know all know by brand names, who are all interested in recruiting college students because it's a very, very, very muddled, very inefficient, very expensive space for a high turnover at the end. And so we think that through our data and through our matching we'll be able to fix that. And so we're incredibly excited about that. This version of the new version of the beta now instead of going on the corporate side is going to specific state and in this case it'll be Florida and specific school within Florida is now we're working on the student side. It's a two sided marketplace and so we are learning all the nuances of each side before we try to put too much volume through it. But I think we've said in the past, we've used computer learning and AI. We've already read over a 100 million resumes over the last ten years with the objective to be able to tell a student if you go here, take these classes live in this state you're likely to work for these six companies and get paid this much money. And if you want to alter that path, here are the things that you can do. And for employers what we want to be able to do is help them understand which majors which school which job functions actually or skills actually are successful when they hire them out of college. So that they can make a better hire and reduce turnover which actually allows them to pay the student more. So these are the things we're looking to accomplish. It takes time because you got to run a lot of the data through the system. And that's what we're working on now.

Great. And then last one now Sallie Mae extension. What's different between the extension and the first year contract? Are you offering more services? Obviously, it's a longer term.

Yes. Well, that's the most important thing for us, what it's three more years and what's better is clearly it work for both parties. Clearly, they wanted to do and we are grateful to have a partner like them because they really did satisfy the students. And we learned a lot from how to execute even better and so that is a very positive thing. The three-year extension is a positive thing and in terms of what will be different is as we offer more subscription services like math or the new writing service or the bundle over time, these are things that we can also mark it through with Sallie Mae to do so they can have their choice at whichever service they want.

Our next question comes from Mark Rosencrantz, Craig Hallum. Please proceed with your question.

Okay, great, thanks for taking my question guys, and I'll add my congrats, another stellar quarter. On the revenue guidance with regards to exhibitions is that taking a more measured approach because you'll only have a partial year with your acquired assets? Or do these assets actually not generate revenue now and you'll be kind of billing them more from the ground floor?

No, no. So I want to be super clear on the two acquisitions, WriteLab and StudyBlue. There is no revenue coming with those acquisitions. If you recall from Dan's prepared remarks, he said that while StudyBlue was a revenue-generating company, we're actually taking down the payroll to make it free. So there will not be but we are however absorbing the cost as we continue to build out those capabilities. And that's where you clearly to see the leverage of the model that we are --where we can do that, while taking up our EBITDA guidance, but want to be really clear, no revenues coming from those acquisitions.

Okay, great, that's helpful. Then kind of shifting gears you discussed throughout the call two of the main problems faced, start of writing sections and the math sections, and you put a lot of work in each subject over the years. How developed would you view your current offerings to reach those buckets compared to where you want them to eventually?

Yes. Good question. It's -- we live in an extraordinarily dynamic time where what people need and what you can offer when they match up his terrific. And the needs are greater than what technology historically has been able to offer, but with the increase in the capabilities of computer learning and AI that's going to catch up pretty quickly. And in writing and math is two most obvious places where you can teach at scale so if you actually were to go into the math product today, it would not only show you like it does on studies, the actual step-by-step solutions, but actually there's a button that you click that explains why that's the solution. And why you choose to do it this way. So it's not just here it is and what it is, it's why it is and then why other things are not what you think they're supposed to be. So the idea here is to be able to use technology to do that, and as we get just a significantly higher robust Q&A network where we've got 7 million publisher questions. We've got 17 million questions asked by students as that expands globally over time, and you can use things like voice and chat bot, it just it keeps getting better and better and better about what you can offer students directly, and using technology. So my answer is if you look at writing on citations and bibliographies were the best by far, and I think it would be difficult for anybody to compete with us. If you ask us now on sentence structure, grammar, punctuation all of those things, I would say that we have more work to do, but we're already of a very high quality, but we have a lot more work to do. As you think about the subject matters that we're still in none of the soft subject matters. We're still not in any of the job skill subject matters. There are areas like personal finance, if you were to ask a student today what is the one thing they wish they have learned at school that they have --that nobody taught them. Whether it's a recent grad or a near grad, 26% of them say its personal finance because none of them know how to manage money. So the beauty of the internet, the beauty of technology, the beauty of all this incredible investment that others are making in terms of capabilities, our ability to use that for our content and our user experiences to span not only how many things we can help students with, but the depth and the differentiation in terms of adaptive behavior of somebody at a seventh grade level versus 12th grade level. We want to meet them at the level they are and level them up. So we are far from being able to do that but know how to do that because the technology is making it easier to do it. So for us, I feel as if we feel with enthusiasm that we have so much more that we can offer and make each thing even better as technology and the content and the data allows for it. So we're plugging along.

Ladies and gentlemen, we have reached the end of the question -and -answer session. And I would like to turn the call back to Dan Rosensweig for closing remarks.

Well, thank you everybody for joining us on our second quarter earnings call. As you can tell by our results and by our prepared remarks, and hopefully through our Q&A that we could not be more enthusiastic about the mission that we're working on. About the things that we offer today and how to improve them; the number of things that we believe can be offered over time. That the core of our business model is working significantly better than even we imagined where we can take on even new companies and raise our guidance. And all of that gives us confidence going into the second half here on the financial side of the business. But it really is the mission that rallies this company. And I want to thank all of our employees because this was the first year that we submitted ourselves for great places to work. And you never know how that's going to work out, but we were selected to be one of those great places to work. And we believe it's because people here believe in three things. They believe in the mission. They believe in the upside of the company if we deliver on that mission. And they believe in their and their colleagues' ability to deliver on that mission. And so I just want to express my gratitude to them and thank all of you for continuing to follow the company. The future is just getting started for us. We feel like we're in a really good position now. Strong balance sheet, strong operating model, our assets are getting more and better. And so with that we look forward to the second half year, and we'll talk to you at the end of Q3. Thanks.

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