Chegg, Inc. (CHGG) Q4 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Chegg's Fourth 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 fourth quarter and full year 2018 conference call. On today’s call are Dan Rosensweig, Co-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, 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 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 quarterly report on Form 10-Q filed with the Securities and Exchange Commission on October 29, 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 posted on our IR website. Now, I will turn the call over to Dan.

Thank you, Tracey, and welcome everyone to our 2018 Q4 earnings call. It was another incredible year for Chegg, as we exceeded all of our expectations, realizing the benefits of being a high-growth high-margin business, with increasing leverage as we scale. We continue to believe that the education industry is in the midst of a necessary realignment, to more closely associated with the needs of its most important constituent, the students. For years, we have been strategically building Chegg as an online on-demand personalized and adaptive platform to serve the needs of the modern student. Students whose average age is older than ever before, who often have children of their own, are working part-time or even full-time jobs and juggling many priorities. And these students have grown where the world comes to them, on their devices 24 hours a day. Chegg has been built from day one to serve the needs of this audience and that is why we are seeing such powerful results. With 87% awareness of services on the Chegg platform, our brand recognition is at an all-time high. For 2018, we've generated record revenues, record subscribers, record engagement and record profitability, demonstrating the overwhelming value we bring to our students and our shareholders. This success wouldn't have happened without our incredible team around the globe and I couldn't be prouder of the recognition they received this past year, as we were acknowledged as one of Fortune's top 50 best workplaces in technology, top 100 best workplaces for women, and top 100 small and medium sized companies. Our team's focus, effort, and passion for improving student outcomes has made Chegg a truly great place to work because our north star continues to be putting the students first. In 2018, we articulated three key objectives for Chegg. One, to meet our financial goals; two, to expand our TAM by making key investments in new content, adding new subjects, new formats, and new services; and three, to add new capabilities to the platform that leverage our brand, our reach, our student graph, and our balance sheet. We successfully exceeded all of our objectives and we believe the results reflect the power of our model. For the full year we had 5.1 million paying customers and grew Chegg Services subscribers 38%, to a record 3.1 million; resulting in total revenue growth of 26% and Chegg Services revenue growth of 37%. All while we made important investments for continued growth. We enriched our content offering, added new subjects, strengthened our writing tools with advancements in AI, which improves our ability to help students go from citing to writing, and extended our flash tools offering with the acquisition of StudyBlue. We believe that the more we invest in different formats and modalities, and the more content we can offer students, the larger the opportunity gets and we will continue to focus on investments that increase our addressable market, by providing students an expanded platform of services to help them go from learning to earning. The core of Chegg remains Chegg Study, where we have made significant investments in content and capabilities throughout 2018. We now have a catalog of 26 million questions that have been answered by our proprietary network of subject matter experts, including textbook solutions for 35,000 ISBNs. We increased the number of modalities, to meet students needs at whatever level, in whatever format they learn best, including expanding our video offering by adding 15,000 new videos. We continue to invest deeper in STEM related subjects. However, we also added ISBNs and Q&A content from outside of the STEM category. This increases our TAM and our value, and we are doing it to meet the increased student demand in subjects such as business, law, and nursing. The best indicator of the value of Chegg Study to our users is the significant increase in engagement every year, which we measure by content views. We reached 650 million views, which is a 48% increase from last year. We also made important investments in our writing service, which included the integration of WriteLab, and the very exciting announcement of our exclusive agreement with Purdue OWL. For those of you who don't know, Purdue OWL is a world renowned online writing lab from one of the country's leading academic institutions. Through our partnership, Chegg's Writing Tools will be integrated in to Purdue OWL to support students on-demand, whenever and wherever they need it. We want to take a moment to thank the Purdue team and we believe, together, we are creating the world's premier writing service. The need for writing support is massive, as students continue to struggle in subjects with 75% of high school seniors deficient in writing competencies. We see an enormous opportunity to help them develop writing skills and the earlier we can help, the more impactful we can be. And the more users that we have and the more content users upload, the better the service gets. Last year alone, we had five million papers submitted to Chegg and nearly 0.5 billions citations were created on our platform. Chegg was created to support the students at any school, in any subject, in any system to level the playing field which is more important than ever because of the changing demographics of our country. The people entering the education system today are from different backgrounds, cultures, socioeconomic status with different educational experiences and different educational goals. But all of them benefit from online learning tools that adapt to their needs increasing their chances for success both academically and professionally. That's why we have built our platform online to serve students on-demand in a personalized adaptive and more affordable way. This allows student to choose the way they learn best because with Chegg Services, they can access textbook solutions, expert Q&A, video-content or connect with a live subject-matter expert 24/7. We are always adopting our technology and our services to best serve the leaner. Even with the many advancements in technology, many students still prefer and benefit from live help. So we are excited about our continued investment in chat-based tutoring which will allow students to get the additional support they need from live experts just one click away. Education is a $1 trillion where the pace of change is accelerating, and Chegg is a big part of that change. We are proud of all the accomplishments of our team in the past year and are even more excited about the year ahead. As we head into 2019, our priorities remain the same: to deliver on our financial goals and to continue to provide services that create overwhelming value for our learners. To expand the subjects we cover and the modalities and formats of content we offer, including coverage of other countries. And to continue investing in opportunities that leverage the strength of our brand, reach, and customer base and provide opportunities for meaningful growth in future years. Many believe that our country is at a crossroads, but the one thing almost everyone agrees on is the importance of improving our education system, making it more accessible, more affordable, and more relevant, for an increasingly diverse student body. This fuels us to put the student first and guides us on what we build, how we build it. We believe the momentum behind Chegg is accelerating because we remain focused on serving the needs of the modern-day student and we are excited for what this New Year will bring. And, with that, I will turn it over to Andy.

Thanks Dan and good afternoon everyone. Today I will discuss our financial performance for the fourth quarter and full year 2018, as well as our increased outlook for 2019. 2018 was another great year for Chegg. We exceeded all of our financial targets, made key investments in our existing and future services, expanded our offerings organically and through acquisition, and strengthened our balance sheet with a very well received convertible debt offering early in the year. As such, we believe we enter 2019 in an even stronger position than we entered 2018 and expect to have another great year. For full year 2018, total revenue grew to a record $321 million, a 26% increase over 2017. More importantly, Chegg Services' revenue grew 37% to $254 million and hit a record of 3.1 million subscribers for the year, a net increase of 850,000 or a 38% increase over 2017. This drove gross margin to 75%, up from 69% in 2017, resulting in an adjusted EBITDA margin of 26% or $83 million, up 80% year-over-year demonstrating the leverage of a subscription services model where the unit economics get better as we continue to scale. Reflecting back for a minute, three years ago, we laid out our long-term goals for 2018 of 30% Chegg Services' revenue growth, 65% gross margin, and 25% adjusted EBITDA margin. We are very proud we exceeded all of those expectations and believe our model will only get better as we continue to grow. We also ended the year on a high note, with Q4 revenue of $96 million, which was driven primarily by 35% year-over-year growth of Chegg Services' revenue to $82 million. And as you would expect, with that performance, gross margin exceeded our expectations at 77%. This led to adjusted EBITDA of $35 million, an increase of 65% year-over-year. Looking at the balance sheet, we ended the year with cash and investments of $484 million, more than double the balance we had at the end of 2017. This is the result of proceeds from the convertible debt offering we completed in Q2 and improved operating cash flows. Free cash flow for 2018 was $44 million or 53% of adjusted EBITDA, exceeding our expectations due to higher adjusted EBITDA and the timing of cash outlays at year end. For 2019, we are increasing our revenue guidance due to the fact that we exited the year with more momentum than expected. In addition, we are raising our adjusted EBITDA margin guidance to reflect our anticipated leverage as we scale. As such, we now expect total revenue for 2019 to be between $390 million and $395 million, with Chegg Services' revenue between $327 million and $331 million and as similar to last year, we expect Chegg Services' revenue and annual subscriber growth rates to be closely aligned; Gross margin to be between 75% and 76%; adjusted EBITDA to be between $115 million and $118 million, an increase from our prior guidance of $112 million or approximately 350 basis points higher than the 26% margin we achieved in 2018 as we continue to drive leverage in the model, while investing in both our current and future services. CapEx to be between $40 million and $50 million, which includes an upfront payment for a recently completed contract extension with a major publisher where we increased the licensed content, doubled the timeframe, all for a similar annual cost. The increase in CapEx also includes investment in localizing content for our international customers as well as expanding our video catalog. In addition, we expect non-content CapEx to be larger than it has historically been, because we are expanding several offices this year to accommodate our growth. And finally, we now expect adjusted EBITDA to free cash flow conversion to be a healthy 50% to 60% ahead of our previous guidance of 40% to 60% as we believe the model just gets better as we continue to scale. Moving to Q1 2019, we expect total revenue between $93.5 million and $95.5 million with Chegg Services revenue between $72.5 million and $74.5 million. Gross margin between 74% and 75% and adjusted EBITDA between $22 million and $23 million. In closing, 2018 was another great year for Chegg. Our team executed at a high level and we have positioned ourselves for more success in 2019. It's an exciting time at Chegg and we are glad you are with us for the journey. With that, I'll turn the call over to the operator for your questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed with your question.

Thank you so much. On the prior quarter's call, I believe you talked a bit about the strategy to bundle some of your products I think in the upcoming fall if I remember correctly. Can we revisit that or how is that going? Are you doing any pilots, I'm just curious if you can talk about the momentum we have? Thanks.

Yeah, so as you can see in the business, we have great momentum overall and we continue to grow Chegg Study and Chegg Services quite nicely. We've been testing different configurations in a bundle as we said we would. And just as a reminder, we don't have any revenue associated with the bundles. In 2019 we have costs associated with but no revenues. So these are all -- our numbers are all based on our current business. The concept of the bundles is if we can package more things into Chegg Study, which students pay more to be able to get Chegg Study plus Writing plus Map plus other things. So we have been testing since the end of last year and into the first quarter, we really won't have much to report on it until the second of, of this year because we need to go through several iterations of quarters. We do it by every month, we do it by different messaging, different price points. But overall you can see by just a demand for Chegg and what we offer that there is just a huge appetite for what we do. And so we feel very good about the future of Chegg and the ability to do Chegg bundles. As we've said in the past, we also believe we have significant pricing power. But as long as we continue to grow like this, we want to continue to pick up as much market share as we can.

All right, that's great. And the announcement of Purdue looks really interesting; I just was wondering if you can give us a bit more color on it.

I'm sorry, did you say the announcement with Purdue?

Yes, the announcement -- the Purdue OWL announcement.

Yeah, no, look it's pretty significant for a lot of reasons and I'm glad you brought it up. First of all Purdue is one of the great institutions in the country. They've been one of the most advanced -- they recognized what we have seen for years, which is that there is something like 88 million Americans at a partial degree, so they bought capital and now they go online degrees, they go off-line degrees. But one of the things that they provide for themselves for a long-term is having, we would argue, I think pretty easily that they have the best online writing lab, which is what OWL stands for. And the opportunity combine their information, their content, our AI technology that we are building and that we acquired, we think together we can build seriously the world's premier writing service first in the U.S. and then on a global basis. So if you look at the number of people that use Purdue OWL, and you look at the number of people that use Purdue OWL and you look at the number of people that use EasyBib, for us you're talking about tens and tens and tens of millions of people. And so, as we said on the prepared remarks, the more content you get, the more users you get, the more you're able to read and do machine learning and use AI, the better we can teach people actually how to write, not just be able to help them cite. So we couldn't be more excited and it's an endorsement of the quality of Chegg and the quality of our services and the power of our education platform.

All right. Great. I'll jump back in the queue. Thanks.

Okay. Thanks.

Our next question comes from the line of Alex Paris with Barrington Research. Please proceed with your question

Hi, guys. Congratulations on the quarter and the raise.

Thanks Alex.

I have a follow-up question on OWL. So how does it work financially? Are you going to combine some elements of Chegg Writing with Purdue OWL? That bolsters the Purdue OWL offering? Does that bolster also the Chegg Writing offering that you have a subscription service?

Yes. Both services benefit. There will be integration on both sides. This will actually help Purdue OWL monetize a system that they really haven't been able to monetize in the past. And for us remember that you see we continue to exceed our own expectations in our business. And particularly with textbooks, a lot of it is because we are continue to reach into high schools and Writing is probably our largest product and Math is the second one now, going into high schools. So the ability to get students younger with a high-quality advanced writing tool allows us to grow our current core business, as well as other monetization opportunity that really have to do with our programmatic adds, so we couldn't be more excited.

Great. And correct me if I'm wrong. Historically, the OWL offering was offered to Purdue students free of charge?

Correct. And so, it will continue to be -- what will happen, as you can now go from Purdue OWL into Chegg Writing, if you want to. So it creates another funnel for us, as well as the fact that we're going to help them figure out how to monetize so they can invest more inside of their own product and services. Because as you know, institutions need revenue streams and this gives them the opportunity. So it will help us on the subscription side as well as the ad site and we will help them with revenue and monetization through the programmatic advertising.

Great. Thank you. That helps. And then a question about Required Materials, I guess. We have the Ingram arrangement for print textbooks. My question is eTextbooks and then consignment, are those outside of the Ingram relationship? Are they pushed through the Ingram agreement?

Well, they're both. And what I mean by that is, for those of you aren't as familiar with the Ingram deal, when we signed the Ingram deal several years and it's got another year-and-a-half to go, by the way, that we use Ingram to help finance the buying of textbooks and we only recognize the net revenue. And to that degree, Ingram is not involved, which is all books that come from consignment, there's no capital that changes hands, so that's all to the benefit of Chegg and Chegg's shareholders. On eTextbooks, that's all on our own. So we do use VitalSource, but we pay them a small fee to be able to use VitalSource, so we don’t have to build our own reader and there could be ubiquity in the readers that students use, because I think we'd argue that between VitalSource B2B business and Chegg's consumer business, we're probably the largest on the consumer side and they're largest on the B2B side, that gives students sort of ubiquitous reader platform to use. But other than that, the only monetization that Ingram makes on our consignment business is just the fact that we pay them to pick back and ship, which is a pretty standard cost. So it's a lot cheaper for us to do it that way than to have our own warehouse and do all the logistics. So it's been a phenomenal deal for both parties, but the more consignments the more eTextbooks, the more the business, the next term gets in the favor Chegg, because we don't really need capital anymore.

Great. And then, could you give us a little bit of update on what's going on the eTextbook business? I realize eTextbooks was kind of slow to take-off given the pricing model of the traditional textbook publisher has that been changing?

It has. And we have now a great relationship with all the significant publishers. And as a result of that, we've been working with them for several years to encourage them to move faster to eTextbooks. And the best way to do that is to give them data based on what the pricing should be for each one versus say a rental or a new textbook. So we provided that the pricing back to the publishers, so they can make better economic and business decisions, which is being good for the publishers, but more importantly, good for the student who've just brought the price of everything down. So we've actually seen significant upswing in eTextbooks. We don't share what the number is, but obviously every quarter and every year it's a record and its pretty significant growth. It used to be way below 8% in terms of what eTextbooks was it's now significantly above 10%. So directionally it's moving in that direction. So every one of the eTextbooks, we don't have to put out cash for. Every consignment, we don't have to put out cash for. So the amount of money that Ingram used to have to put out, when we first did the deal was like $100-plus million a year. We expect by the time the deal ends and we assume that we'll continue a working relationship you're talking about maybe $15 million or $20 million a year. So it's really changed dramatically in the favor of Chegg's business model and we help drive that and the publishers have been great.

Great. Thanks so much for the additional color. I'll get back in the queue.

Yes.

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

Hi, guys. Congrats on the quarter. A couple of questions. One, just on the international, I think you noted that in your shareholder letter. I think talk about maybe the timing there how we should expect the rollout? And second, just the brand awareness maybe among the middle school/high school age groups and opportunities to further penetrate that category as well? Thank you.

Yeah. So, this is Dan. Let me talk about just the penetration number. So on our prepared – in our prepared remarks, I think we said we're now up to 87% brand recognition in college. It's lower than that but significant – I mean, it's almost double every year in the last couple of years into high school, a lot of that is because of the acquisition of EasyBib and now the launch of Chegg Math. Those two products and with the acquisition of StudyBlue we now have three free products that can be used by students at any age. Don't expect us to put much of an effort into middle school. Of course, middle school parents and students can use it. It's much more difficult to target parents of students to have students use something. So we go directly to the student. That's always going to be our model that's been our model. And so with that in mind, what we're trying to do is build free services that students are likely to find and so now with the leading flashcards service and the leading writing service and emerging leading math service, we feel really good about a penetration into those categories. Also all of them are relevant on a global basis, because math and writing and learning are all consisting everywhere in the world. So the subject matter doesn't matter, when use a flashcard you can use it for anyone if you want. And STEM products like math are relevant everywhere. So the way we think about international is, as we talked in the past is that, three first countries that we'll spend time on are; Canada, U.K. and Australia for obvious reasons. The top publishers in the U.S. are the top publishers in those countries. You won't see -- I've mentioned this several times in the past, you won't see us make any big flasher announcements because what we're doing is, we continue to add content that is relevant to those countries. We're improving the capability of our expert answers to not only be able to answer questions from books that are not from the U.S., but also in different languages and we're working on translation capabilities to be able to go even bigger, global and other places. And so, you will see us start to launch mobile apps in those countries where they're more likely to use those and they already use the desktop and we'll continue to invest in the content which is included in the CapEx that Andy mentioned earlier. And we believe that we continue to invest in those things, you'll see consistently see growth over 30% which is what our objective has been and because those markets will just keep getting bigger for us and we are excited about it.

Got it, great. Thank you.

Our next question comes from the line of Doug Anmuth with JPMorgan. Please proceed with your question.

Thanks for taking the question. Of course Dan, if you can talk a little bit -- just curious about how you're thinking about expanding into other verticals and areas of education? I guess -- more depth about how you think about kind of the build which is by scenarios as you're looking for things? And then second, Andy you talked about the higher free cash flow conversion going to 50% to 60%. Can you just elaborate on that a little bit and just give us a little more sense of what gives you the confidence there? thanks.

Yes so, I didn't catch the last part of your question, could you just repeat it?

Just on free cash flow conversion that's 50% to 60% what gives you the confidence in the higher number there?

I'll let Andy answer that one. Let me talk about the first part of your question which is sort of the important question in verticals. So as you saw we specifically called out in the prepared remarks things like nursing and business law. What's happening is the students are driving us in the direction they want us to go. One of the great benefits of the giant moat we have with the Expert Q&A in the 26 million questions is, there is no governor on what the students asked. So when they start asking questions in categories, we are able to answer them and then we know the kind of content to add, whether it be video content, or students in that category, or step-by-step solutions that we can add over time. What’s really clearly happening at the community college level and at the boot camp level is they are looking for more job-related skills. So for kids who are in – into college a 4-year college now, if you want to call them that, their programming parallel to the curriculum they have in addition to using us for the curriculum that they were assigned. So you can see things. Then they're moving more into professional categories. So we're just going to keep moving where the jobs are, where the students are, where the questions are? And so, we don't actually have to guess which is the nice part of the business. On the build by our partner, our philosophy has been that no matter where student goes to school, no matter where they choose to learn, we're going to be with them every step of the way. So we are programming to support them in the institutions that they're in, as well as overtime we're going to have content that their institutions should have and don't currently have because they can't move fast enough. So you'll see us support a student no matter where they go to school or where they're learning from with the kinds of progress and services we have with tutors and Chegg Study in writing in math and those things and we'll build out more professional content. And then you're going to see us ultimately start the program courses that aren’t necessary in institutions they are going to but they need to get jobs. As it relates to build by our partner, I think we've been very judicious because of the success that Andy and Tracy had in raising its capital, we have nearly $$0.5 billion to be able to buy things should we see things at the right value that we could grow faster, leverage our brand, leverage our network, and leverage our data. And so you'll see us do a balance of both over time because we think there are certain things that we can build out better like content areas and then there would be capabilities that we might acquire like we did with StudyBlue or like we did with Math. So, I'll let Andy talk about the free cash flow conversion.

Yes, Doug on the free cash flow, I mean, if you think about our model, as our topline scales and its primary scaling as a result of our subscription business, the economics just get better for us. And as a reminder, every incremental subscription is super-high margin to us. We're kind of a -- when you think about our proprietary content, it's write once and read many. And its content that doesn't -- really doesn't get old. And so our view is that as we continue to scale and as we continue to drive our EBITDA margins, which we talked about earlier on the call, up again -- up 350 basis points this year 2019, we believe that we will continue to drive free cash flow in that 50% to 60% range and if you think about what we do this past year 2018, it was 53%. So, we have a high degree of confidence that we can drive 50% to 60% and that's really driven by our subscription model that's driving our growth.

Okay, great. Thank you, both.

Thank you.

Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.

Yes, thanks guys and congratulations on the quarter. Could you just kind of update us your thoughts on the Math subscription? How that's kind of performing against expectation?

Yes, so Math as -- we acquired an amazing team in Berlin, Germany to help us build out Math because it's a global language. And whether you need Math to just learn math for math's sake and become proficient in it or whether you need it for scientists or whether you're going to be a Math Major, you're going to be an engineer, math us ubiquitous and global and that was a big part of our thinking. The second thing is we acquired it in essence to create a value for us so that we can put it inside of Chegg Study or the Chegg Study Bundle so that people would either pay more or we get higher conversion rates. We also do sell it as a spend-off à la carte like we do for Writing and its super early because we don't -- we haven't even had it for a year, but it's performing very well unexpectedly, meaning that we really didn't acquire, choose to have standalone subscription. But it's a great product and people are really responding to it well, so we're seeing really good uptakes early on. I mean it's not big enough to affect the numbers the way some of the other businesses are, but over time, it will be.

Great, great. And then with Chegg Study, are you seeing any change in retention or duration of the students? Is that lengthening at all?

Yes. So, the best way to think about Chegg Study, it's been more difficult than the past to really look at our subscription businesses and our ARPU, because it's enhanced by all the other businesses that we have that we no longer have like our enrollment business. And as that has worked its way off you can get a much clearer view of really what's going on with our subscription services. So you'll see that it's more clear than it's ever been that our ARPU actually went up. So that's a reflection since we haven't changed the pricing that's actually a reflection of more subscribers we get, they are coming on earlier and they're staying longer and then they are renewing faster. And so all of those are really positive signs and that's why you continue to see Andy authorize us to make really strong investments in some of the Chegg Study because more content, more modalities the earlier they come on the longer they stay. And so that's been a really great formula for us. You can actually see it in the subscription numbers now, which you haven't been able to in the past that our ARPU is actually rising and since it's not about price at this point, it's really a reflection of renewals and longevity.

Great to hear. Great. Thanks, guys.

You bet.

Thank you.

Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.

This is Alex Giaimo on for Brent. Two questions, first for Dan. Can you first provide your updated thoughts on the Careers business? We know it's the investment in way up last quarter, so just curious on the thought process there and how you see the Carrier business developing over the next few years. And then for Andy similar to a previous question, but on the 2019 guide and the 300 basis points of margin expansion, can you talk about the main puts and takes that are driving the expansion whether it's anything other than the continued shift to subscription revenue that we should be aware of especially given the investments you're making throughout the year on subjects and content? Thanks.

Well, I'll take the first one and turn it over to Andy. So on the question of careers, the bigger the Chegg platform gets, the more become we become an educator, the more content that we're actually providing that are around things that are not only academic but are professional. The more logical it is for us to help students prepare for and then ultimately get and then stay with their jobs and improving their upscaling and their job. It's a long journey to do that and we're making really good progress in our opinion. We have more data we believe than anybody else. And part of the reason for the investment way up is of course they have a great team and great brand and they have a great CEO. And it allows us to utilize our data to help match and improve skill matching in platforms other than our own. And so we think the two of us working together will be very good, because the goal really is to get student job and the right job and that job they can get paid for, and help them pay back their same college loans, which will be a subject for another day. And so that was the reason for the investment and we are more proud of that, they are a great team and Lewis [ph] has been terrific to work with. As it relates to what we’re doing its very clear that there are multiple steps along the way internships and the first job. And so we're taking a lot of the content and technology that we've been building a lot of the data a lot of the skills matching and remember we've read over 100 million resumes over the last 10 years to be able to predict where students -- given where they've gone to school, given what they take, and what they majoring where they likely to end up working and where theoretically to get up -- end up getting paid. And then we want to be able to apply that to helping students not really get a job, but also get an internship. So you're going to see us continue now to make that investment, but also in internships.com to be able to expand because we million of students that go through that and it’s becoming increasingly clear, the path to a great job, starts with an internship, so we want to do both. And that's one of the reasons we acquired that asset. So we think it's a very big and important and necessary opportunity for Chegg and it's one of those that we're doing a combination of organic and true investments and acquisition. And we'll continue to invest in and we think we're making great progress in it.

Yes. So, Alex, your question on the EBITDA margin expansion and I just want to make you're aware, its 350 basis points, not 300. That's the first thing. But nonetheless, yes, really what's driving our financial performance and has driven our financial performance for the last few years, really has been Chegg Study and Chegg Writing. Having said that, we're now at a point where when you look at our business model, it has great balance to it. So while we continue to drive margin expansion like we talked about in 2019, we're also making the necessary investments to put ourselves in the continued growth path in 2020, 2021, 2022. Things like Dan already talked about them, talked about investments in Math, flash tools, Chegg tutoring, the international investments that we're making this year for the future and the bundles. And so, we've got this great balance where we're making investment, while continuing to deliver value to our shareholders.

Great. Thank you, both.

Thank you.

Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Please proceed with your question.

Yes. I had a question on seasonality. You didn't redo the slide that you put up in Q3, but in Q3 you talked about some seasonality to the revenue and adjusted EBITDA for 2019. I assume that remains unchanged?

Yes. Yes, Eric. Absolutely, we didn't see a reason that we needed to change the seasonality relative to what we had talked about in Q3 and so that would still be applicable, based upon the new guidance.

Okay. And then, just diving into the cash flow statement, the $10 million strategic equity investment, what was that?

Actually, Dan just talked about it. That was the investment that we made in a company called WayUp. Dan just talked about that with Alex on the last question.

So what we're seeing is, Eric, is that a number of companies are coming to Chegg, because of our scale. I mean, remember, we have over 13 million registered users now, combined last year in 2018 I think we had over 5 million people paying us for something. We've become very large. We have a lot of data. We have the CRM systems. We have the ability to message and communicate and build relationships with students. And so, there's a number of companies that are approaching us about partnering, whether it's an investment in them, or whether it's to leverage the Chegg platform, like Sallie Mae did. And so, we're just seeing more opportunity like that and we want to make sure that we invest in our ecosystem whenever it's appropriate to be able to extend the opportunities for students and Chegg.

Understood. Thank you.

Our next question comes from the line of Alex Fuhrman with Craig-Hallum. Please proceed with your question.

Great. Thanks very much for taking my question. Dan, I wanted to ask a little bit about what you were talking about with moving into some of the more skills-oriented subjects. I think you'd mentioned that law and nursing on the call. Just wondering, is it fair to assume that most of that focus will be on postgraduate students? And then, just thinking more broadly as your demand from student tends to migrate more towards skills, as you say. Is it possible that there could be an offering down the road, catering towards students who aren't necessarily customers of an accredited university, but maybe more self-study or just self-starter getting on to the job market?

Yes, to all of that. And what I mean by that and you'll have to forgive me, I'm in the New York office and the heat is starting to act up. So, yes, different coast, different heater. So look credited, non-credited, for-profit, not for profit all those things are labeled that may or may not matter anymore. And I really point you to read a great article on need is by Rob Manuel about, how to change the education system. So article always – whatever student needs to learn or wants to learn, we are going to support them in the ability to do it. So we are either going to support them in the system therein or we are going to help them find the content, the experience that can help them learn it, or we'll provide those services. So in the case of nursing and business law and statistics and accounting, those are currently today to help people that are currently going in the credited systems. But you seen increasingly, a number of products and services being used that I think people are return after dead years ago, but aren't, which has moved another category. So you're beginning to see students even our own employees are coming to us for non-credited content, because it shifts better sometimes. It's been more relevant. It been updated. So Chegg's goal is to support you whatever you take, from whomever you take it from, but also to provide you overtime with content that will help you be better in getting a job, be better at your job and be better at finding a new job. And I also just want to point out that 70% to 80% of all students go to the state school 43% of them don't finish. And so there's a whole lot of students out there with partial degrees that may or may not get a degree, but they absolutely need to get a skill. And the 50% of high school students that graduate, but don't go onto further education they also need skills and clear passing. So the opportunities for Chegg to program to support people and the systems they go into, or create a content programming for them directly just keeps getting bigger for us. So I think we're going to stop using the labels of four year and two year and community college and vocational. I think we're going to start just focusing on how does a student accelerate their path from learning to earning and that's been something Chegg's has been now for nine years now, and I think we're driving the industry to move in that direction and we think that just creates great opportunity for students to be more accessibility, lower-cost, higher-quality, more relevant, on-demand and then much more affordable and that's the role that Chegg is going to play.

Great. That's really helpful. Thank you very much.

Our next question comes from the line of Brian Essex with Morgan Stanley. Please proceed with your question.

Hi, good evening. Thank you for taking the question. Congrats on the results guys.

Thank you

Thank you

Dan, I think in your prepared remarks you noted an increase in engagement with students and maybe if you could unpack that a little bit in addition to absolute engagement? How is that on a per subscriber basis? And then maybe rank order that contributes to that whether it's content or cap rate or both?

Yeah. So it's not attach rate meaning what we focus on is one-third in the service, are they using the service more or less than they have in the past? And the numbers are just staggering when you take a look at the fact that in Q4 there was something like 224 million content views. And so when you take the number of subscribers we have in the quarter, you take the amount of views that they have, they're going steady or up. It's a little bit interesting for me is somebody who worked at Yahoo! for a long times, the goal was to get them to consumes as pages as you could, because that's was the business model. Then Google came along and say consumes as few pages as you and then click off in the ad and that's how they make money. In the case of us, what we really look for is the content consumption which is are they using us to ask more questions they have in the past? And they are using us to consume more content, more categories they have in the past. Because that really shows the expansive nature and the value and shows the pricing power of Chegg Study and I think that's what we're seeing.

That's super helpful. And then maybe just on the services revenue per subscriber, you inflected a positive growth in spite of some of the elements within that category, there are headwinds, maybe a little bit of color on that? I mean are you seeing the, kind of promotional-related revenues deteriorate to levels that might are much less and now as subscription's growing faster and is that sustainable the case going forward?

Yes. I mean we've been -- and you guys have been great, but you guys have just told to join the story in the last year. So in previous years, we had assets that we ultimately shutdown or shed because they weren't right for the future. And so the one we’ve been referring to has been our enrollment business which was a company that we had called Zinch in which we did a partnership and then we shed that and that was revenue that we had, that was beginning we believe was going to ultimately decline. And so we've been rolling off that revenue and we're rolling off that revenue, so we essentially have our subscription revenue and our programmatic advertising revenue, are the two biggest parts of that revenue stream. And so yes, you are seeing subscriptions to be worth a lot more as Andy is pointed out in the past, they are lot easier to model. We know all the key levers which is, how many do we have? What’s the cost to acquire them? How long do they stay on? How much do they renew? How much can we charge them? What’s the yield? All of those variables are moving up into the right and you're seeing it's reflected in our business model. Look, it's not that easy. It's taken us nine years to get to this point. But you're really seeing since we did the Ingram deal, changed our model to all-digital and put ourselves in position to do this and investments that we’ve made are really showing that they have great leverage and great value to students.

Helpful. Thank you very much.

You bet.

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.

Close enough, I'll take it. So, first of all, Happy New Year anybody that's celebrating. Second of all, I just want to have a shout out from my team to Heather Morris, who just had a beautiful baby girl and so we hope she takes a long a valuable maternity leave, but we can't wait for her to come back. But on top of that, look Chegg -- we closed the year in a very strong position. We have a great relationship with students. We're known for creating extraordinary value for very low costs and we found a way to be able to do that and create a high-growth, high-margin business where we can continue to invest, but return a lot in the form of free cash flow to our investors. And so, we're really excited about the business model, the future of the business. As we look out, we just see non-traditional becoming more traditional which is we believe the industry's got to move and is moving towards being able to be on-demand, more affordable, more relevant, more contextual to the students personalized, adaptive and then ultimately help the students to accelerate from learning to earning. And we think we're in the best position of anybody in the Ed-Tech space to be able to support students in the current system, while add our own programming to help them, if they're not able to complete those systems to be able to accelerate from learning to earning, and do so at a much lower cost than they've historically had to do it. We've got $1.5 trillion in college debt and we've got to end that. And Chegg is in a position to really help millions and millions and millions of students and then expand on a global basis. So we're thrilled that all of you are aboard for the ride and for your support and we look forward to talking to you on the next call. Thanks everybody.

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