Chegg, Inc. (CHGG) Q2 2019 Earnings Report, Transcript and Summary

Greetings. Welcome to the Chegg Inc. Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Tracey Ford, Vice President of Investor Relations for Chegg. You may begin.

Good afternoon. Thank you for joining Chegg's second quarter 2019 conference call. On today's call are Dan Rosensweig, Co-Chairperson 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 April 29, 2019, 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 on investor 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 website. Now, I will turn the call over to Dan.

Thank you, Tracey, and welcome, everyone. It’s been an incredible first half of the year and we are delighted to report another great quarter. We delivered 26% year-over-year top-line growth, yielding a record 2.2 million paying subscribers in the second quarter alone. Our team continues to execute against our key priorities; which are to meet our financial goals, to expand our TAM, and to invest in opportunities that leverage our reach, our student graph, and the strength of our brand. Our strategy continues to pay off, which is why we have the confidence to, once again, raise our 2019 guidance, which Andy will walk you through in greater detail. We see a lot of opportunities to continue the expansion of our TAM across academic products & services, international opportunities, and through the evolution of new categories, like skills-based learning. We believe the power of the Chegg platform puts us in the pole position to support students, in a broad variety of ways, on the path from learning to earning. The strength of the Chegg brand remains at an all-time high, which is exciting as we enter the back-to-school season. Chegg Study remains our largest service and serves as the center of our growth funnel. It provides students with the essential support through their academic journey and does so online, with high-integrity content, in multiple formats, and meets them at whatever academic level they are at. Our goal is to up-level students from where they are to where they need to be, as it helps students better understand their course material and master their subjects. We continue to expand the subject matter we cover, thereby increasing the number of students who can use the platform. Our library of content now has a record 30 million proprietary, expert answers and textbook solutions, which has doubled in just the last two years. It's not only the amount of content, but the quality of content, that drives our value, as is evidenced by the 200 million pieces of content students accessed via Chegg Study this quarter. And video is becoming a much more important component of our learning services, along with the addition of practice test problems. For the second half of this year, we will continue to expand the amount of video content we offer and increase the categories of practice and self-assessment capabilities, so students can better understand where they need help to be successful in their courses. In addition to Chegg Study, Chegg Writing has become a mainstay for both high school and college students and has very quickly become our second largest service. Because of the popularity and the value of our writing services, students submitted nearly 2 million original papers for review this quarter alone, generating nearly 137 million citations. But we are not stopping there. As we've done with all of our services, we are expanding the content, as well as the capabilities of our writing services to grow with the students' needs. We enhanced our grammar and plagiarism checker, as well as expanded how we help students with foundational writing concepts, like sentence structure and thesis development. Our goal is to fundamentally improve students' writing abilities. As we continue to solve the biggest pain points for students in the United States, we have seen that many of these issues are global in nature, which is why we are focused on expanding our customer base outside of the United states. We are already seeing the benefits from international expansion as we move in to other English-speaking countries. We believe international expansion creates a long runway for Chegg to be a high-growth, high-margin company. Each of our products stand on their own, but to better serve students' needs and to create more value for our shareholders, we have been testing our Chegg Services bundle – the Chegg Study Pack. The results over the first half of the year have been positive and we will update you in the third quarter conference call with our plans for the remainder of this year and for 2020. We are in a trillion-dollar industry that continues to grow, evolve, and realign to serve the needs of the modern student. With 85% of students reporting they go to school to get a job, focusing on career-based skills development, to prepare for the workforce, is increasingly more important for our students, employers, and institutions so, naturally, it is for Chegg. We see a large opportunity to expand our TAM, and our product offerings, by helping students develop the critical skills that employers are looking for. We will continue to invest when we see opportunities that will improve student outcomes, both in the classroom and beyond. The education industry seems to be at an inflection point and we believe there are significant opportunities ahead for us. Like we have seen in other industries, the companies that are operating at scale, have brand awareness, own their customer, have proprietary content, and own the data, will be able to disproportionately take advantage of those opportunities for the benefit of their customers and their shareholders. We are excited about the months and years ahead and I am grateful to our incredible team at Chegg. We remain unwavering in our mission to always put students first. And, with that, I’ll turn it over to Andy.

Thanks Dan and good afternoon everyone. We ended the first half of the year on a high note with Q2 metrics and financial results ahead of our expectations. These strong results and continuing momentum, give us the confidence to raise our guidance again for 2019. For the second quarter, total revenue was $93.9 million, a 26% increase year-over-year. Chegg Services revenue and subscribers grew 30% year-over-year, as we continue to achieve robust growth rates on top of a very large base. While Q2 is a relatively quiet period for Required Materials, the team has been diligently working on our next contract for delivering physical textbooks to students. We entered the negotiations in a position of strength and with an industry that has shifted over the past 5 years to more publisher consignment for physical rentals and more digital course materials like eTextbooks. Our priorities in our negotiations reflect this ongoing shift and we believe the outcome will benefit students and shareholders alike. And we expect to have more clarity on this by our next earnings call. Turning back to Q2, we exceeded our gross margin expectations at 78%, as we continue to see leverage in the model, with incremental margin from our subscription services driving the expansion, due to the relatively fixed cost nature of the business. Our strong performance in both revenue and gross margin drove adjusted EBITDA at $31.1 million, a 61% increase from Q2 2018 and more than double our revenue growth rate, demonstrating the power of our model and the leverage of our subscription-based offering. Looking at the balance sheet, we ended the quarter with cash and investments of $1.1 billion, which includes the $100 million over allotment option the banks exercised in the convertible debt offering. We believe our balance sheet, along with a strong business model that generates cash, puts us in a position to increase our relevance with students and as Chegg's influence in the industry continues to grow, we are seeing more and better opportunities come our way. As we move to the second half, we expect to maintain high revenue growth and gain leverage that will continue to drive adjusted EBITDA margin expansion, all while investing in our current subscription services and future opportunities, like bundles and international. As such, for the full-year 2019, we are raising both our revenue and adjusted EBITDA guidance, reflecting the strength of our business. We have also aligned our seasonality to reflect later school start dates for the fall semester. For the full-year, we now expect: Total revenue to be between $398 million and $402 million, with Chegg Services revenue between $330 million and $332 million. Gross margin between 76% and 77%. And adjusted EBITDA between $121 million and $124 million. Looking specifically at Q3, we expect revenue to be between $88 million and $90 million, with Chegg Services revenue between $68 million and $69 million. Gross margin between 74% and 75%. And adjusted EBITDA between $19 million and $20 million. In closing, it's been a great first half, the Chegg team continues to deliver above the high-end of our expectations, giving us the confidence to increase guidance, all while continuing to invest in both the content that powers our existing services and building out our new services and capabilities, which we expect to contribute to our future growth. With that, I'll turn the call over to the operator for your questions.

Thank you. [Operator Instructions] Our first question is from Alex Paris with Barrington Research. Please proceed.

Good afternoon everyone. This is Chris Howe sitting in for Alex. Great quarter.

Thank you.

So, I have some more questions specially about the writing product. If you could share some more granularity into what you are seeing from the user base that is learning from this product? In other words, what percentage of users are using the writing product to learn versus perhaps last quarter or last year and of these of these writing learners, what percentage are converting to other Chegg services? Or what you are seeing as far as cross-selling potential from this learner base?

Yes. So, interesting question. The way we think about it is a little bit different, which is we don’t breakout each of the products individually, particularly as we start moving towards the bundle in 2020 where we are starting to connect more and more of these things, but what we know is the subscription part of the writing service continues to grow quite nicely and as a result of that those are all people who are looking to do something more than what we offer for free, which is to do your citations and your bibliography. So, we're seeing an increasing percentage of people convert to the paid product, which has been a great boon to that business, which is why it has rapidly become our second largest service, largest for users, but second for revenue; and that is because it has both the robust ad business to help with the free service and robust paid product. So, it’s been great. As to convert to other products, our goal has been to create the bundle and allow people to buy them all at once rather than to sell them individually, but the writing service has been a real boon for us, particularly in the textbook part of the business, because a large percentage of the users that use writing service are in high school. We have significant reach to both high school and college that’s how we get 30 million out of the 36 million that go to those – go to college and high school. So, it’s been great for us to build our brand and to on-port people earlier on to both Chegg textbooks and Chegg study. So, we don't breakout the numbers, but it’s then a real big win for us. It’s been an incredible addition to our services.

That’s very interesting. And then looking at this high school base within the writing product, as you analyze the data and you are able to see student improvement through the usage of the service, should I think of it as an external opportunity that there could be potential for reversing the funnel? In other words, with the improvements that you're showing within student writing could high schools integrate this into their enrolled students?

So, the answer is, that’s entirely possible, but what I can tell you is that it’s recommended across the border at many high schools because it’s a free service, at least a free part of it and most high school students don't have the money to pay for it, but we do see increasingly institutions, like Purdue and others, look to work with us about the potential integration of our services. We have focused mainly almost exclusively on going direct to the student because sometimes working with institutions can be more difficult, it’s a matter of once the data, it is sometimes it could be like a millstone hanging around your neck. But whenever institutions approach us, we are welcoming those conversations.

Okay. And then one more question if I may, just squeeze it in. As far as international opportunity, any additional comments you were able to share in regards to what you're seeing as far as Canada Australia and the UK? Has anything changed there or the trends are still moving in the right direction, any further details?

Trends are absolutely moving in the right direction. What we said about International, the way we are thinking about Chegg is as we move – as we get bigger and bigger and I think people are beginning to finally understand how big this company has a chance to be. You know, we're sort of looking towards a one revenue number, growth rate number, ARPU number, yield number, free cash flow number all who are moving significantly up into the right. And as we think about international expansion, that all just adds to it. So, now it’s already adding. It’s not significant yet, but each year we will get more and more significant, particularly as we spend this year investing in the technology that allows us to actually do local pricing, local taxing, and local marketing. So, those are things that we haven't even had available to us yet, and they are already growing quite nicely. So, there is, we see significant demand internationally already, particularly in English-speaking countries, but frankly not limited to those. So, we think that’s going to be a big growth runway for us for years to come. And thank you for your question.

Our next question is from Jeff Silber with BMO Capital Markets. Please proceed.

Thank you so much. You finished the quarter similar to last quarter with a sizable amount of cash on the balance sheet. I'm just wondering what your thoughts are in terms of the use of the cash? I had folks ask, is there anything holding you back from putting your cash to use? Thanks.

Yes. So, why don't I start with this and maybe Dan you can chime in to. I mean, just as a reminder for everybody, I mean, if you just go back two years ago, our cash balance was about 62 million if I recall at the end of that quarter. So yes, we have raised capital over the last couple of years and we believe that having a well, in fact a good capitalized company makes a ton of sense for us because we believe like Dan had said in the prepared remarks the opportunities for us are almost endless. Now, having said that, we’re also very disciplined about how we look at things. We would anticipate that and as you’ve seen, we have made acquisitions in the past. We are likely to make in the future. This is the capital that we have on the balance sheet, allows us to do that and to continue to grow the company and increase shareholder value.

Okay. If I could shift gears actually for the Required Materials segment. I know it’s not an area that you talk about as much, but we’re seeing a lot of changes in the college text book market whether it’s pending merger of Cengage and McGraw Hill, Pearson making the announcement to go digital first. How do you think those kind of changes are going to impact that component of your business?

This is Dan. We think – it’s fascinating to us how long this has all taken. We predicted that print would have gone away five years into the business and this is our tenth year in the business, and here they are, and we’re still doing millions and millions of textbooks, but the faster they go digital the better it is for us. The thing that I think most people don't really understand yet about our business because there really isn't another one like us in the education space is, regardless whatever the publishers do, the need for an affordable high-quality interactive adaptive learning product that allows them to learn it in whatever modality and whatever device 24 hours a day that has nothing to do with the school or their professor is really what students are seeking, which is why you keep seeing extraordinary growth for us both in the number of subscribers that we have, but also in the number of questions that are asked on an annual basis that are not necessarily even in the textbooks at all. Because they are really trying to master the subject. So, what we see is, we see – as you point out we see McGraw-Hill and Cengage looking to merge. We think that’s to our advantage we have a great relationship with both companies and as they are looking for low-cost distribution channels for digital, as well as print, we’re there. Pearson basically is saying what they’ve been saying, they have more money to cut than any other companies, so they are cutting, cutting, cutting and they are not investing in new editions. And so, it’s easier for them to go digital, but that’s to our advantage. We distribute all their digital e-textbooks. So, for us it’s all – the entire industry is moving in our direction and we’re benefiting from it as our students and our shareholders.

Okay. Thank you for the color.

Thank you.

Thank you.

Our next question is from Corey Greendale with First Analysis. Please proceed.

Hi, good afternoon. Congratulations on the quarter. Dan, a question for you. In your prepared remarks you made a made comment about career-based skills development, and I think you said at the end in the classroom and beyond, so I was hoping you might elaborate on that. Generally, I think your business has sort of followed the traditional education system trajectory, is that sort of suggest that, you might start doing some things that would be almost competitive with international educational system or adjacent to it?

Yes. Fantastic question. So, here is how we think about it. We think about our job is to support students on the journey regardless of what institution they go to or if they go to an institution, but whenever they’re trying to learn something to improve their outcomes or whether it’s academic, which is what Chegg has historically been known for or now skills, which are necessary because academics are not enough in a whole host of categories. We are following what our students are asking us to do. And so, one of the great things about our business model, which is so unique is we don't have to get. We know based on the kinds of questions that our students are asking in our expert answers area, which by the way we have 30 million pieces of content now, 25 million of them are ones that come directly from students, only 5 million of them publisher questions. So, even that’s getting smaller. We are here to help the students whatever it is they think they need to learn to advance themselves whether it’s to pass their academic curriculum or whether or not it’s to learn the basics of what they need to do to get a job or enhance their job skills. I think a lot of people also don't understand the average age of a college student is 25 years old. And a lot of them have jobs, and a lot of them have children; and so, we're following the direction that they are leading us. So, we do not expect to be competitive with an institution. We intend to support institutions whether they are the traditional ones or untraditional ones that are really trying to educate people to the skills that they need to be employable and earn more money. So, we think that’s just a very large, very important near-term opportunity for Chegg to continue to support people who are going down that path.

Great. I’ll turn over. Thanks very much.

Thank you, Corey.

Our next question is from Aaron Kessler with Raymond James. Please proceed.

Great. Thank you. A follow-up to the question before on some of the changes in the publishers or how they're evolving. Just to an extent that that affects Chegg’s study at all in terms of license cost, can we mutually get your thoughts there? Then second, just for Andy, I think you probably mentioned it before, but can you clarify this payment of taxes related to the net share settlement? I think it’s 80 million for the first six months, just how should we think about that longer term, if can you just clarify what that is to make sure? Thank you.

Yes. So, let me handle that one first. You are absolutely right. On the net share settlement, typically, there was going to be more of a balloon payment in Q1 because we do have annual question on the way our RSUs and PSUs best, and then it takes us off for the latter three quarters. Predicting what that will be as we get into future periods is difficult because it is a function of the share price. So, if the share price goes higher than it’s going to be more. If the share price is, it is going to be less, but there is a kind of a balloon payment in the Q1 period. As to the question Aaron about publishers and the impact on licenses for question. A couple of things that I think are very much in our favor. First, all the publisher agreements that we started years ago, all the significant ones have already been renewed for many years to come and they’re still exclusive to us. And each one of them was about a similar price that we paid 5 years ago, but for more content or for longer periods of time because the value really is strengthening in those discussions really is what's on Chegg's side versus the publisher’s side. In addition to that, as I just mentioned earlier, the breakdown of content of the 30 million, the publisher content used to be 7 million, it’s down to 5, and our internal content used to be zero, and it’s up to 25 million, but the answers to every one of them, all 30 million are owned by us, they are proprietary to us. So, the publishers are becoming decreasingly important in this equation because this is really about learning, not just a question in the textbook, but actually learning the subject. And so, we’re getting all sorts of questions and all sorts of categories. And I think that once people fully understand the mode that we build with our expert answer network, which is well over 100,000 expert answers answering millions of new questions a year, and if they’ll begin to understand that Chegg is really an independent company in terms of serving the needs of the students on the questions and issues they have as it relates to their academics and eventually and increasingly skills. So, none of the things that are happening in the publishing world, the McGraw-Hill and the Cengage thing will take at least a year to close. We have great long-term agreements with each one of them. We have great relationships in both companies. They value us for distribution and for the licensing agreement. So, the best I can explain it is, everything that’s happening is moving in our favor.

Got it. Great. Thank you for the update there.

Thanks Aaron.

Our next question is from Mike Grondahl with Northland Securities. Please proceed.

Oh, yes. Congratulations on the quarter guys.

Thanks.

Dan, a question, over the medium to longer-term, what do you think is the more important for Chegg? Is it the high school market or kind of this professional market kind of nursing, accounting, various certificates and what not?

Everybody has done their homework. These are all good questions. So, as a business, the older they are, the better it is for the business because we go direct to the student and these are people who, whether they are trying to pass their academics are trying to get license to certify or trying to get a skill, is all in the vision of learning to earning. Nobody goes through any of those funnels unless their desire is ultimately to earn and get an ROI or whatever they are paid to do it, and Chegg is really in that space significantly with no real significant competitors right now. High school students are very valuable, but not necessarily economically as a high school student, but rather as a funnel into the rest of the services. So, in the near term, I think I gave your answer. In the long-term, remember the 50% of the high school students go directly into the work force as we get more into solving their pre-skilling and skilling and up-skilling market. We think we will have really wonderful opportunities for that group as well, but at the moment we’re still focused on the fact people that are paying for their own education right now.

Got it, that’s helpful. And then a quick follow-up, you talked about the addition of some practice test, some practice problem, is that a large new offering. Can you just kind of shed some light there?

Yes, the interesting thing is what Chegg does in the academic space better than anybody in our opinion is homework help. We really help people who are on their own, who don’t understand the subject, who want to interact and get high quality, high integrity concept that helps them. The other area and some of it goes to the professional space and the things that you were referring to earlier had to do with, there are categories where in order to cross the chasm from learning to earning, you need to be licensed or you need to be licensed or need to be certified and a lot of that is based on standardized test. And so, our students has been asking us to build automated practice test that can analyze their strength and their weaknesses, and then help them overcome their weaknesses to improve the likelihood if they are going to pass the test. So, we are very specific with the words that it’s assessment as well as practice test and those are all things that we can do, generate about the fact that we have more content about every subject than anybody else does, and we could automate those things and build real practice test environments for them, and expand the kinds of things that we can do for them and expand the value and expand the length of time that we stay with them. So, this is a really big initiative for us that we have been and will continue to work on. We will start to roll out a little bit at the end of the year as part of the finalize test we are doing for the bundles and the bigger part of all of that going into 2020. So, it’s a big initiative for us, everything we do by the way has been assumed at the beginning of the year when we laid out our numbers, so all the cost with that had been associated all year. So, this is going to be a really valuable asset and more than half the people use services or want to use services that help them pass the test, not just for academics but for professional stuff. So, we think this is a big opportunity for us as well. We just keep seeing more opportunities Mike to just solve big needs of the student.

Great, thanks a lot.

Thanks Mike.

Our next question is from Doug Anmuth with JPMorgan. Please proceed.

Thanks, I appreciate you guys squeezing me in here. Dan you talked about writing as the second largest service, could you just help us understand a little about breakdown between subscriptions and advertising in that business and then how should we think about tutors in the progress that you’re seeing there? And the Andy, just want to be clear on 4Q, I don’t think you’re building in any study pack impact there on the top line, but just wanted to clarify that. Thanks.

I’ll take the first part and Andy can answer the second part. So, we don’t break it up, but what I can say is that, when we acquired the company several years ago, it only had one business, which was advertising, now it has two businesses that are growing very well as a percentage, obviously subscriptions are growing faster, because it is off a lower base, but both of them are contributing to the significant growth you are seeing of our overall learning services. So, they’re holding up their end of their bargain and TAM for the subside can be global. So, we just continue to invest and continues to return our investment way more than we are investing it. So, it’s been great for students and for our shareholders. The tutors update, yes, we have a launched chat-based tutoring. We are really enthusiastic about it, we are learning many things that we needed to learn, which is why we’ve launched it sort of in stages, which is how many tutors and how many students connect to tutor on chat-based tutor at one time and still doing professional job at it. What are the different price points where students want to buy per session or subscriptions? Those are all the work we are going now, and we are getting lots of good data and good feedback. There are two things that we’re very confident in, is that the need for it is overwhelming, which is if you understand that there is a need, particularly as students are going more online, there are more undergrad not for profit schools going on line that are adding hundreds of thousands of students on an annual basis, where there is probably close to a million students that you would never consider in the traditional side, but are just online alone who need not only what we do, but need human help to help them intervene; and so we are seeing it really as something that is going to be integrated into the background of every one of our products. So, it is going to be something where you can get in on video, you can do step-by-step, you can as expert Q&A, but if you need an interactive dialogue for five minutes or an hour or even longer, this would be the way you do it. So, the way we are really investing it now is eventually integrated into the back of writing, into the back of study, into the back of every one of the services that we offer or will offer as well as being a front-end sand alone. So, we are doing hundreds of thousands of tutoring sessions. We’ve chosen to keep the price very low to make it available to as many students that can possibly need it because we want to be affordable. So, we’re seeing really great results from it, but its overall value is going to be to support the other services, because we want to be able to service students any way, they need to be served regardless of what the subject is.

And Doug the question on study pack, like Dan had said, we continue to test study pack or the bundle in the fall semester or the second half of the year, yes this may be some very de minimis amounts of revenue in there, but our expectation is that that would be more globally deployed in 2020 and will include that in our guidance on the next call.

Okay, and just to clarify on writing when you said that it’s your second largest services business, is that on a subscriber basis or on a dollar basis?

Well, it depends on how you are looking at. On an audience basis, it is probably number one, because it is over 30 million users, on – it’s on a revenue basis.

Great. Thank you.

Our next question is from Brent Thill with Jefferies. Please proceed.

Thanks, just a question on the margin; you actually hit a record high and your operating margin extending 700 basis points year-on-year. I’m just curious if you could talk to some of the investments that you are making, do you feel good about the investments from marketing, I think was flat year-over-year, there are other things you need that you could expect to accelerate on the expense side help on the revenue side, revenue growth is now starting to fade. Can you just talk about that balance and how you approach that going forward?

I will start on this one. The first thing is, yes, we love the model. As we’ve gotten to scale, it shows great leverage on really high revenue growth. As far as the marketing side that you brought up, remind you that over 85% of people that have come on to our platform and our subscribers come through unpaid sources or organically, so our team really does a great job particularly on SDL and a very small portion of that is through paid marketing, and we are always looking for opportunities to spend more on paid marketing to drive the top line growth. Yes, we love the model and its high growth. We’re also investing very heavily in a lot of things right. So, we have got bundles, so we’ve got international, Dan just talked about assessment and practice test. So, we’ve got a model that allows us to both see leverage on the bottom line and make investments for future growth opportunity.

I don’t know where the word fading comes from. I think it’s the other way, which is, we set records not only margins, but we set records in new customer heads. So, the things is, we’re growing really, really, really fast and we expect to continue high growth rates for quite some time, we don’t see lack of opportunities to grow with the assets we have and the assets we plan to have, but Andy is right, this is a rare business where it is almost like an old software business where you can get 90% gross margins on some of these things, because right ones you use many times. We have to speculate as to what content to create, because the students actually ask it. We have an 87% name recognition, with have 85% organic traffic that comes in. We’re not trying to not invest. We just don’t see reasons to waste money on things that we know that won’t work. We’re making significant investments in lots of things inside the platform, both technology as well as content, as well as new services. So, the one thing that we won’t do is reduce investments for any particular short-term decision, but we are extraordinarily fortunate that this model is very high growth, I mean it is 30% growth for a 10-year-old company and the margins just keep getting better because our effectiveness is getting better, our efficiency is getting better, the amount of content we have is getting better and global expansion is getting better, so we are really in great shape for years to come.

Great and thanks. And Dan, just a quick update on the career onboarding app, where do you stand, any color there would be helpful? Thanks again.

Do you say careers?

Career onboard app, yes.

We merged internships.com in our career effort, because we have 2.5 million students that go through our internship site and what’s been really, really, really exciting and I think we will have more step to talk about later this year or early next year of companies who are approaching us, because what they are looking for is high quality students that can be vetted and assessed. And nobody has the size audience that we have and the data that we have and so there is a number of companies, all whose names you will know, who are coming to us and trying to understand best how to utilize the funnel that we have from students going into the workforce. So, that would be for example one of the investments that we have been making as we have all the data, the data sciences, the technology, the resources necessary to build it, it’s going to be a build over a long period of time, because it’s not an easy area to tackle, but I think you’ll be very encouraged as are we when we start to talk about the players that have approached us to work with us and on-boarding students to their first jobs.

Thank you.

Thank you.

Our next question is from Eric Martinuzzi with Lake Street Capital Markets. Please proceed.

A question on the Require Materials side, I know it is not a primary focus for you guys, but based on my own model, it’s definitely outperformed here over the last two quarters, we’ve got Required Materials up about 8%, could you refresh my memory there, what is the business model now, commission based, but I would assume the study side, the services side is the higher margin, so question number, one is just refresh my memory on how that business model works? And the question number two, I think you are anticipating based on the guidance you would anticipate a negative comp there in the back half, just want to confirm it.

I’ll start, and let Andy do the comp. I don’t know what your model is, so I don’t know if we are underperforming or over-performing, but I will say that we believe that we are getting market share and that we are over-performing our own estimates and the reason for it is very simple, which is most of the competitors that have gone away is really us and Amazon at volume. The overwhelming reason that students continue to run to the bookstore at all is because one of the things that I think should be banned, which is if you get financial aids from the school, you are required to use that financial aids to get you text books at the bookstore, which means they are generally paying more, for the asset that shouldn’t cost them that much and it is the way to financial aid. So, we’re working very hard to get rid of that, but other than that it’s really us and Amazon and so we continue to see great results, the model has evolved and will evolve again in our favor. More things regarding e-textbooks that requires zero capital, more publishers, actually all the publishers are doing consignments with us, something three years ago that would have been unheard of and they are expanding the catalogs and not only new books, but to the older catalog and so when Andy referred to in his prepared remarks that things are moving in or favor as it relates to the next deal that we do for text books, it is because the amount of capital necessary is going down and so we have also said we wanted to run this business as close to breakeven as possible and that’s what we continue to do. And as it relates to Chegg Services you’re right, obviously margins are extraordinarily high and for the textbook business you should just think of it as a way to grow our business, to grow our data, to get more customers, to get more of those customers to use our digital services and we’ve been way more effective than we thought we would be and we think in the future that textbooks will continue to be a major advantage for us the way we expect to operate them.

As far as the second half of the guidance, I think the best way to look, the way I would ask you to look at it is, and we have said this in the past and that is that it is, we basically, like Dan said, a breakeven business and we’d said in the past, you know $55 million to $65 million, obviously doing better than that. But we tend to look at it as a flattish business. We’ve outperformed that over the last really three rushes or so. Like Dan said, we believe we're taking share. But we're not planning for something that’s a significant grower, let’s put it that way, but the nice thing is, we’ve been taking share, we'll see what happens in the fall rush.

And by the way, we think we’re outperforming in all of our lines of business which is why I think this is a fourteenth quarter in which we’ve been able to raise our guidance more than we did and it is because this is an extraordinarily good business where I think students really welcome it and value it and they are making it easier for us to acquire students and stay on longer. We couldn't be more proud of it and our team.

Thanks.

Our next question is from Alex Fuhrman with Craig-Hallum Capital Group. Please proceed.

Great. Thank you very much for taking my question. Wanted to ask about international growth, I mean it certainly sounds like you’ve had some traction with customers outside the U.S. without really, you’ve been putting much marketing effort behind that and now it certainly sounds like we’re getting a little bit closer to a more intentional thoughtful launch in some of these are the English-speaking countries. I am just trying to understand how, how why is the sense of urgency year and it sounds like also just loosely talking about here on the conference call, some other non-English speaking countries as potentially being a target, it certainly seems like maybe you market like Korea where English is widely taught in school and there is more understand of the English language there. I mean is it kind of one thing at a time, you want to take care of some of these English-speaking markets first and then before kind of looking at the next set of markets in the next set up to that or is there a little bit more of a sense of urgency where you might be perhaps looking to utilize some partnerships in some non-English speaking countries to really accelerate your market share there?

I’ll try to answer it in chunk. We have a sense of importance, but not a sense of urgency. And what I mean by that is, we think the international markets will be very important to us and are already becoming very interesting to us on the verge of becoming very important to us and we think we are in a great position to capitalize on more than just the three English-speaking countries, but we have always been a company that has been conservative about not launching things until we know that the market was ready and the product was very and the service was ready, and so we take our time in investing and we have the luxury to do that because the core business is so strong. Right. We have been talking on this call about those textbook outperforming, our services business outperforming, our EBITDA [up 700 bips] and these all things that I think people are beginning to understand just how big and powerful this business can be. So, we’re not in a rush to make mistakes by doing things before already to them. Having said that, you are right, which is these are – services that we have or not going to be limited to English-speaking country. You are also right about countries like South Korea, as an example, where we do have South Korea clients and we have not focused on it at all. The fact of the matter is, the content that we have and because of the unique proprietary Q&A network, which is that anybody can ask a question in any language on any of their subjects academic or skills wise, we are not going to be limited by language translation as well relatively easy and the subject matters in the developed countries are universal, which is they are mostly stem-based or business-based, which is the core of what Chegg offers. Since we're not spending a lot of time on the controversial issues like politics or religion or things of that nature, we don't seem to have any trouble in any countries and in fact we’re being sought out by students. So, I just, I stay away from the world of sense of urgency because we won’t give up markets to anybody, but when nobody is in a position to take those markets way, we are. And so we feel very comfortable about our war smart rollout strategy of having started with Canada, Australia, and the UK and then investing in the technology to allow us to market more directly to them and with less friction and at local pricing and then each semester we will be adding more and more opportunities because they are available to us for sure. We feel very comfortable about what some of those markets can do for us because we’re finding students coming in over the transom, even though we're not in a position to really do it the way they want us to. So, that’s a really good time.

That’s great and really helpful. Thank you very much.

Thank you.

And our next question is from Ryan MacDonald with Needham & Company. Please proceed.

Hi Dan and Andy. Thanks for taking my questions. I guess, first starting off, I guess, adding on to the previous questions with the international expansion, you mentioned you try not to go into markets until you are really ready and take more of a conservative approach there, as you’ve been exploring some of these additional markets, are you seeing any changes or differences compared to the U.S. markets from subscribers and students in terms of either usage or adoption trends from what you have historically seen?

Another very interesting question. So, here is where we’ve seen the same thing. The subjects are overwhelming the same. That’s really good news for us because it means it’s really about translation and it’s really about investing in small amounts of local content that are unique to each country and that is relatively straightforward for us to do. We also know that this is really about not only step-by-step solution in videos and videos translate well in any language, but the Q&A network is a differentiator from us because no one else has it, and because we already have 30 million questions in there. We start strong in every country and then we could start to take local content. What is different, which goes to something that we mentioned in the script and was asked earlier as one of the questions, which is about practice test and assessment. In certain countries, it is more about the test that it is about the homework, and it is more about standardized test in countries not necessarily in the UK, Canada, and Australia, but in some of the countries that you can imagine that are larger. Those are very important aspects of the business, and so we are preparing to be able to sort of those students in the way that the schools want them served. But other than that, it is, there is not, those are things that we now know and those are things that we can certainly do and executing well. There’s nothing mysterious about it when it’s really just about the timing, the content, the branding of ourselves in those places through the ways we normally do and then the execution and every day that is what we work toward. So, as we look towards the future, it’s not just the line where we say, we are excited about the second half in our future. We actually are really excited about the enormity of the opportunity. It’s rare to have business that’s 10 years old where you think the future is larger than the current or the past, but that’s an opportunity that we find ourselves in right now and we intend to capitalize on it. We're just going to do it in smart ways. We have strong brand that we have ever had. More content than we have ever had. More proprietary content we had. We have more employees and incredible ones. And we have more capital than we have ever had. So, we are in the best position to capitalize on this growth opportunity on a global basis.

Got it. And then as a follow-up, and also on the call here there seems to be a bit of for lack of emphasis on the Math Solver solution and we're just kind of wondering sort of what are your expectations and how is that solution tracking to external expectations and as you look out into – as we approach in new school here, what sort of investment initiatives are really behind that solution? Thanks.

I don't know what the external expectations are, I know what the internal expectations are, and it’s meeting and exceeding all of them. As a reminder to folks, we got into that business about a year-and-a-half ago and we got it very specifically one there seems demand for rate and we’re able to fill that with both the free service and then the paid service, but really this was about being able to position us to have other assets to differentiate the bundle. And so, math will become an increasingly more important part of Chegg's offerings as the bundle rollout because when you include practice test, when you include videos, when you include math, when you include writing and other things that we’ll be able to continue to offer there. The ability for us to have an overwhelming value proposition in a very low price and extraordinarily high margins is why we did it. And so that is what we’ve been working towards and it’s met our expectations for sure and we continue to make significant investments in expanding the number of subject to be able to be both for high school students, college students and real academic professionals and researchers and that’s going to be an – everything that we have, we make ongoing investments into – to go deeper into the subject, into the majors, into masters and all those things. So, it is right on plan for us and what we wanted it for.

Thank you very much.

Alright, thank you.

This concludes our question and answer session. I would like to turn the conference back over to Dan for closing remarks.

Thank you everybody. I want to first thank the Chegg team because we had another extraordinary quarter and actually an amazing first half of the year and we are positioned really well for the second half of the year and well beyond. I also want to welcome our two new Board members, Dr. Paul LeBlanc, who is the President of Southern New Hampshire University. We could not be more honored to have Paul who has been pioneering online education. I think they are the largest and most successful, and as we continue to serve students that you call non-traditional, but we are starting to believe they are traditional, having Paul on board will be a huge value add to us, and we are grateful that he said yes given all his other choices. And Melanie Whelan, the CEO of SoulCycle. We could not be more grateful because somebody who has built or building a global brand who is transforming online and offline and really understand the customer base and how to build the business that people worship and love. Melanie has already been extraordinarily helpful. So, we want to welcome those two and on a sadder note, we want to pass along our thoughts to our Head of HR, Jenny Brandemuehl and her family. Her husband was in a – you may have read, her husband was in a plane crash about a month and a half ago, and they are doing everything they can for him. So, our thoughts and prayers go out to them. And we love her, and we miss her. But overall, we are really excited about our future. We have the team. We have the resources. We have the brand. We have the data. And as we have said in our prepared remarks, a company that owns its customers, owns its data, owns its distribution channel, owns all of its content and can very rapidly serve the needs of its customers, those kind of companies are in a disproportionate position to be advantaged and advantage their customers and their shareholders and we are very rapidly becoming one of the larger platform companies, certainly in the education space. So, there is going to be a lot going on here, all good. And we want to thank you for joining and we will talk to all near November. Have a great rest of the summer. Thank you.

Thank you. This concludes today’s conference. You may disconnect your line at this time and thank you for your participation.