Chegg, Inc. (CHGG) Q3 2019 Earnings Report, Transcript and Summary

Greetings, welcome to Chegg Incorporated Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note, 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. Thank you, you may begin.

Good afternoon. Thank you for joining Chegg's third 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 our 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 July 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 in the investor slide deck 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. We are delighted to report another great quarter, exceeding both our business and financial expectations, delivering 27% year-over-year revenue growth and 84% adjusted EBITDA growth. Our teams continue to execute against our key priorities, which are to meet our financial goals, expand our TAM, and invest in opportunities that leverage our reach, our student graph and the strength of our brand. We are pleased with our performance thus far, which is why we are confident to once again raise our 2019 guidance, which Andy will walk you through in greater detail. We continue to see incredible growth and strength in our academic services. And we believe we can leverage all of that as we enter the skills-space through the acquisition of Thinkful. After spending years analyzing the category, it was clear that skills-based learning was a natural extension of Chegg’s offerings. We chose Thinkful because it is a leader in the direct-to-students skills-based training for some of the most in demand jobs for the modern economy. We have always helped students succeed on their academic journey. And now we can extend our reach by helping them throughout their professional journey. Thinkful and Chegg are synergistic and that we both provide high quality, affordable online learning, which improves student’s academic and professional outcomes. And just like Chegg Thinkful has a direct-to-student model, which means we will own the customer, the content, the channel and the data. This allows us to accelerate the addition of new curriculum, increase the quality and relevance of the content, grow the business faster and more efficiently, and ultimately make it more profitable. I want to take a moment to welcome the Thinkful team into the Chegg family of services and I will walk you through that in greater detail momentarily. Our academic services led by Chegg study, continue to provide students with high integrity, expert content in multiple formats to serve the growing diversity of student's needs. As we continue to expand our offerings, we can help more students up-level from where they are to where they need to be, and support them wherever they are studying in the world. Within Chegg study, our library of content now has a record 32 million proprietary expert answers, textbook solutions and videos, which allows students to access over 138 million content use in Q3 alone, and it just keeps adding to our moat. In addition to helping students master their subjects, millions of students now turn to us to improve their ability to write. Chegg writing is another powerful service, helping students learn grammar, sentence structure, Chegg for plagiarism and more. In Q3 alone, students generated over 72 million citations and submitted over 1.2 million original papers for review. It's increasingly clear as more students are trying to make their way to the middle class or higher education that the system needs to evolve to support the needs of the month students. Students today are more diverse than ever before. They are older, come from different socio-economic backgrounds and have entered the system in various states of preparedness and for many, English is their second language. So, the need for high quality, high integrity, adaptive academic services that can support them 24 hours a day at an affordable price has never been more critical. That's why Chegg exists to increase access and opportunity for students. We will continue to invest in adding more content and features to our services and add more services to our platform as we have with the Chegg Math Solver, Chegg Prep, and Chegg Tutors. We see an opportunity to integrate these services and bundle them together, providing even more value to a significant subset of our subscribers. Our goal will always be to keep prices low, but also to increase our ARPU by offering overwhelming value and a choice for our students. As we shared on previous calls, we have been testing an upgraded bundle, which we call Chegg Study Pack. And we are pleased with the responses we have seen so far. The Study Pack roll-out will focus on new customer acquisition, given the seasonality of our business. We of course want to be careful not to interfere with our current customer base in the middle of the school year. So the bundle will be rolled out over the course of 2020. But the largest push will be in the second half of the year, during the August, September, back-to-school timeframe. And all of this is reflected in our guidance, which Andy will detail shortly. Our textbook business continues to address a critical pinpoint for millions of students and helps us drive our brand, extend our reach and build strong relationships with our customers. Our partnership with Ingram expires in May of next year and we are thrilled to announce today that we have an exciting new agreement with FedEx, one of the world's premier shipping and logistics companies. Ingram has been a wonderful partner and we want to convey our gratitude to their CEO, John room and his entire team. When we signed that deal with Ingram in 2014, we needed a partner who could finance the acquisition of textbooks, warehouse the product and handle logistics, and the relationship with Ingram was a game changer for Chegg. For those of you who are new to the story the deal with Ingram allowed us to invest in the transition of our company to become the high growth, high margin digital business you see today. When we look to the future, our needs have evolved. And we wanted a provider who could serve our students better and provide world-class shipping and logistics experience and that is why we are excited to announce our agreement with FedEx. FedEx can meet the size, scale and speed of our business. This new agreement in place for at least five years will overtime be more cost effective for Chegg and better serve the needs of our students as we anticipate one day faster delivery for over 70% of our customers. Supporting the academic journey is essential. But the facts are that 85% of students report they pursue higher education for the primary purpose of increasing their job opportunities. We have consistently said that skills-based learning to prepare students for the workforce is increasingly more important for the economy, for employers, for institutions, as well as the students. We feel we are uniquely positioned to deliver this service to our current customers, as well as bringing an entirely new customer base to the Chegg family. We're excited to add another high growth service to the platform that we believe will scale into a high margin business over time. Our plan is to utilize not only our audience to expand Thinkful’s opportunities, but to take advantage of our core learning assets like chat-based tutoring and expert Q&A, to provide on demand support 24 hours a day for any student in any academic and now skills-based subjects. This will not only provide a better experience for students, but will differentiate us, similar to what we did with Chegg Study, and create a strong competitive moat. The need for low cost high quality skills training is at an all time high. And while we are initially focused on some of the current biggest growth areas, like software, data, and digital jobs, we envision rapidly expanding our curriculum over the next several years to address the ever changing needs of the modern workforce. Chegg continues to move the industry to align by putting the student first, which means to meet the needs of the modern day learner. Our goal is to support students, whether it's to get a degree, accreditation or simply get a better job in their communities. I am proud of our team and what we have achieved over the last decade. But I'm even more excited for what is ahead of us. We have stayed focused on our mission of putting students first and - that has not only grown our business, but it's reflected in our culture. In addition to our strong business performance this quarter, we were once again honored to be named one of Fortune Magazine's 100 Best Medium Sized Workplaces in America for 2019. I cannot thank our team enough for making Chegg such a great place to work, and I'm thrilled to be part of this incredible company. And with that, I will turn it over to Andy.

Thanks Dan, and good afternoon everyone. Chegg had another great quarter with our business metrics and financials ahead of our expectations. These strong results give us the confidence to raise our guidance again for 2019. We are also providing our initial outlook for 2020, which represents continued strong growth of a much larger base and continue to leverage in the model. It also includes the addition of our skills-based offering Thinkful, and our expected changes to required materials as a result of the move to our new logistics partner FedEx. While we are extremely proud of what the Chegg team has already accomplished, we are even more excited about the future as we continue to increase our offerings to accelerate the time from learning to earning. Looking at the third quarter, total revenue was 94.2 million a 27% increase over Q3, 2018 with both required materials and Chegg services exceeding our expectations. This strong topline performance drove gross margins to 76%. This resulted in adjusted EBITDA of 23.1 million an increase of 84% of what we achieved in Q3, 2018 and well above our expectations, demonstrating the continued leverage of our model at scale. We ended the quarter with more than 1.1 billion of cash and investments. We believe the combination of our scale, balance sheet, operating model and cash flows are the strongest in the education industry. Along with our direct-to-student model, we believe this provides us a significant competitive advantage as the education landscape evolves and continues to move in our direction. Before I get to the guidance, let me walk you through our expectations as we transition to our new logistics partner FedEx, which is in our outlook for 2020. As Dan mentioned, the rental landscape has changed dramatically in three years. Consignment and e-Textbooks, which require no capital have become approximately 40% of Required Materials units and continue to grow. Along with lower textbook prices these factors have significantly reduced capital needs to keep a full portfolio of textbooks. During this ongoing transition, we will need - to deploy small amounts of capital to own print textbooks for student rental. As a result in 2020, we plan to spend approximately 50 million on textbook inventory net of liquidations, and expect this number to decline dramatically in 2021, to 15 million and decrease each year thereafter. As the transition to consignment an e-Textbooks continues. We expect the transition to FedEx to be complete by the end of 2020 at which time they will handle all print textbook logistics. While the fundamentals of the required Required Materials are not expected to change, how revenue gets recognized will. Therefore Required Materials revenue will increase in 2020 and 2021 and then likely stabilize in 2022 and we expect it to continue to operate as a breakeven service. We do not anticipate a change to our total company gross profit or adjusted EBITDA dollars as a result of this change, but it will slightly reduce gross margin. These changes have been provided in the earnings press release and the investor deck available on IR website. Based on the strong results from Q3, we are increasing our full year guidance for 2019. For Q4, we now expect total revenue between 122 million and 124 million Chegg Services revenue between 107 million and 108 million, which includes approximately 2 million from Thinkful which closed on October 1, and takes into consideration later fall semester start dates that we mentioned on the last earnings call. Gross margin between 77% and 78% and adjusted EBITDA between 43 million and 45 million, which includes a 4 million loss from Thinkful As a result, we are increasing our full year 2019 guidance, we now expect total revenue between 407 million and 409 million, with Chegg Services revenue between 332 million and 333 million, gross margin between 76% and 77% and adjusted EBITDA between 121 million and 123 million. Turning to 2020, our initial expectation for total revenue is approximately 520 million with Chegg Services revenue growing to approximately 437 million. We expect Chegg Services revenue and subscriber growth rates will continue to remain closely aligned over the course of the year. We expect gross margin to be approximately 72%, slightly lower than 2019 exclusively the result of the revenue recognition and cost of revenue changes that will result from our ownership of textbooks. At the same time, we expect continued leverage in the model with adjusted EBITDA expanding to 163 million, increasing adjusted EBITDA margin 100 basis points over 2019. But those of you modeling 2020 by quarter we have provided expected seasonality as a result of these changes in the earnings press release and the investor deck on the IR website. In closing, we had another strong quarter in Q3. We delivered above the high end of our expectations, giving us confidence to increase full year guidance and provide a strong initial outlook for 2020. It is becoming increasingly clear that our model is the envy of the education landscape by serving students directly with high value, low cost services, while improving their outcomes and helping them move from learning to earning. With that, I'll turn the call over to the operator for your questions.

[Operator Instructions] Our first question comes from the line of Alex Paris with Barrington Research. Please proceed with your question.

Good afternoon, Dan and Andy, congrats on the quarter. And before I moved to my questions, I'd like to highlight that FedEx partnership and that looks promising for the intangible value of the business. Starting off with Thinkful, there has been some recent news as you may know, can you comment on that news and where that played, as far as the timing within - for the acquisition, whether you knew of the data breach prior to the deal. And on a positive note, in regard to Thinkful can you characterize, you may have already done so but can you characterize the competitive environment for Thinkful. More specifically can you gauge how they've done historically, in taking market share and was the acquisition of Thinkful reflective of student needs you observed in the Chegg platform?

So, this is Dan, thank you. Let's start with the news so, it was - so no, we were not cognizant ahead of the announcing. Of the data breach, we obviously were made aware, the moment that they knew and fortunately similar to ours, which as you know, amounted to nothing. There was no personally identifiable information, no credit card information and they don't have, their customer base is much smaller than ours, obviously, and they charge a lot more. So it was a non-variable as best as we can tell and everything that we looked at afterwards, we asked them to follow the exact same protocols that we did, which was complete and open transparency, communicate immediately, notify everybody, over notify people because unfortunately the fact the life in technology that these things are going to happen but fortunately, neither one of us has the PII or the credit card information. And we all did that deliberately years ago to avoid any situations as it relates to this. So the acquisition in terms of the competitive space so - we spent a better part of two years looking at every single player in the space, and although to the outside person, they may look similar. These companies are extraordinarily different, some of them are very good at content, some of them are very good at partnerships, some of them are good at graduation rates. We chose the one that we felt was the closest to our mission, which was to put the student first to sell direct to the student, which allowed the price to be lower because you didn't have to put the revenue with anybody. Second, somebody who was focused on extraordinarily high quality content, which led to really high graduation rates, which was about 85% of their customers were graduating and finding jobs. And so, the reality is, it's a very nascent space. When you hear that a lot of the companies who are selling these things into corporations, we're not doing that we're going directly as we've always done to the person that needs it the most, values it the most, willing to pay for it the most, and that's why they pay for it, that's why they complete it, that's why they renew, and that's why they graduate. All the rest of them are taking corporate dollars that's not really what we're planning on doing. We want to plan to go direct. So in that space, they were sort of alone and growing quite nicely. What they needed was the distribution channel, what they needed was a support system to help educate the people better, which are chat-based tutoring and our expert Q&A plugged into their system can actually help people get unstuck, at anytime day or night, and the ability to expand their curriculum faster, and then take it global. And so the marriage was make perfect sense to both sides. We couldn't be more excited and, very early, but the early starts are really good. So I think it's too early to talk about market share, because those spaces are so nascent, they're going to be huge. Everything you know, and so to answer to your last question Alex, is exactly why we acquired it, which is, we survey our students all the time. And some of you may know we have tracking polls, which is why we're got premier place to people to find election information as it relates to college students. We also do surveys, we also have focus groups, we also go meet with students. And so, we try not to make mistakes by just saying hey, we think, rather we go and find out we're not a big speculator, we actually have the ability go find out. And the two things that students wanted more than anything else was an education and personal finance, and the second one was to be able to tie their academic learning to skills-based capability to get them a job. So yes, this is an absolute response to the overwhelming feedback from our students.

That's wonderful color and that highlights the potential for low hanging fruit student position with the addition of Thinkful. My last question is just in regard to Study Pack, perhaps you can provide some additional commentary into what you're learning and how the rollout is going and to satisfy my curiosity, will be one Study Pack offered for one price. Has there been any external thoughts to offering different versions of a study package? And will current students be incentivized to upgrade to bundle versus a new customer?

So to try to answer that very detailed questionnaire and really good question, we are really, really, really excited about the responsiveness of students to wanting more in their integrated learning experience and we feel very comfortable that a very good size percentage of students opt for it as we roll it out. And all the research that we've done over the course of the last year confirmed that. So we think that it's going to be a very big contributor and starting really at the end of the 20th we've sent early last year or this year that we said that was likely going to be the case to the academic school year anything else, but then we'll add a lot of value over time. And so the responsiveness has been great actually in anybody who's used this, I can see that we've been testing it. So it's called Chegg Study Pack, the pricey at 1995 which should increase our ARPU over time and continue a very high rate of subscription growth as we continue to seat. As to whether or not we will do other overtime outs the answer is yes. What we see is huge growth opportunities. So for example, there's over a million students now online going to online, not for profit schools. There's over 25% of all community college students go to school in the state of California alone. And we are organizing content that will be developed directly for them because we think those are huge domestic growth opportunities. So there's going to be multiple versions of learning for our check over time. We're just not in a rush to do anything because the core business is growing so well. I want to make sure that everything we do in value and we're going to execute really well. Makes sense?

[Operator Instructions] Our next question comes from the line of Corey Greendale with First Analysis. Please proceed with your question.

Hi, Corey Greendale. So I guess I limit myself to one question, one follow up, the - to start with Thinkful, which is well maybe I'll try it, two part of which is just, can you give us a sense of what revenue you're assuming in 2020? And then, I understand kind of the synergy with, your existing funnel but I think one of the questions about that space generally has been barriers to entry. I know some you could just elaborate on what you see as the moat for Chegg plus Thinkful specifically?

Yes. So Corey, this is the Andy, with respect to the revenue that we're expecting, we articulated that when we announced Thinkful in September, there are last full year as an independent company, which was 2018. They did approximately $14 million of revenue and they were growing about the same rate that we've been growing at, which is about 30%. So I think that's a good baseline for you to start with. But as we move forward, the anticipation is it will just be consolidated into check services, you know, even though we believe that the skills based learning will become a much, much larger business over time. It's still relatively small, relative to the overall the Chegg services business. So it'll get consolidated in there, but that's the way to think about it.

And to your moat question, yes, look, we don't like to own anything in a highly competitive space and without a moat. And so I think the misunderstanding is that people are comparing this to two companies that focused on either corporate training, which we are not doing, or to getting corporate dollars to pay to go through a local school, which we are not doing, which those are very expensive. They use the brand name of the school, they split the revenue in the profits 50-50. And so as a result of that, they're very expensive and they're not particularly unique. The path that we've chosen is exactly what we did with Chegg study and people were curious back then whether or not we could build a product that would be incredibly high value, high quality and have a moat, the answer is yes and the secret is going to be the pricing, which we know we can price lower than anybody else and still make a significant margin because we don't have to split the revenue and because it's all online, the costs are very different than having to work in a piece of real estate or hire professors to be in every single location plus there is no barrier to how many people can take the class at the same time. Those in and of itself are just business model advantages that online has over all the other models that were created, because they were created it seems to me for fast trades, this one was not. This one was created to actually help people get the skills to get a job. The other area that we feel very confident in is being a moat is the chat-based tutoring and the expert Q&A. So imagine a scenario where today anybody who goes to those versions of competitors, if you want to call it, they have to get office hours and they have to go to schedule a time or 2 o'clock in the morning. They have nobody to talk to or they are scheduled to talk to somebody once a week. Whether what makes Chegg so unique and so different in our other study services is the ability to get live high quality instant help to anything that you're stuck with. And so that will lower costs, improve quality, increase graduation rates and increase employability and nobody else has them. Every other company has tried to do it. If you look at most of the online universities and other things, they have giant call centers because they're trying to keep people in the school and from dropping out. We're trying to teach people so that the desire to stay in and graduate and it's a very big difference in the model. It makes it much better, much more robust, much more relevant, much more personalized and so it's going to be a significant moat because no one else has even begun to think about the technology, let alone already have it.

Great. So just a quick follow-up on that, Dan. If, I understand the concept is that high quality, given the way it's designed plus, which I agree with by the way, plus, some of the things you're adding like the chat would also provide a cost advantage plus the funnel you already have. If that's right - if I’m sure I understand it, are you suggesting, are you saying that you expect to lower the costs of the programs relative to what they are today and if that's right, what's the timing of that?

So we expect to be able to have courses with multiple costs and we are going to be introducing a much lower cost level because, we can make a lot more money than anybody else can doing again. You know, the amazing thing about these products when you do them online and we've already built the entire infrastructure for expert Q&A. We've already built the entire infrastructure for chatting tutoring. So these are all small incremental costs to be able to support these students. So we will be rolling out multiple versions of these at different price points and different curriculum to advantage students. And that's a big advantage that Chegg has that no one else has. And, it's very clear that the Thinkful students love Thinkful, they graduated high rates, they get jobs, but they're going to be people who are going to want to learn faster. They're going to want to learn on demand, they're going to want to pace differently, they're going to have different capabilities and that's the thing Chegg is master's at other companies haven't yet. So we're very proud of that.

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

Just a question on the guidance. Your guidance next year looks to match what you're going to look like putting up this year in terms of growth, a high 20% growth. I think there are a lot of questions how you would break that down to the underlying drivers for that growth next year when you take into the acquisitions you've taken the price increases in some of the other drivers. I don't know if there's an easy way to break those drivers apart to give us a sense of the additions for next year. Thank you.

Yes. So Brent, why don't I'll take that one. So when you look at the next year and the guidance that we've given particularly on the Chegg services line, what I talked about earlier was that we anticipate that our overall subscriber growth will be approximately about the same as the revenue growth. So what's really, while we're adding Thinkful, it's still relatively small at this point in time relative to the Chegg study - Chegg - and the writing business. So really what's driving the top line next year primarily is our core business. And that would be a Chegg study. Obviously the Study Pack will be part of that, but more towards the latter part of the year, as Dan had mentioned, when we deploy it more broadly starting the new school year, but those are the core drivers on the study side of the business and that's driving the continued margin expansion.

Andy, just to quick clarify. There is no international included in that number for next year.

No, we've been international for some time. Right. And so it's been relatively small for a period of time, but we started being much more intentional with respect to our investments and how we were handling international this year. And we've talked about that for some time, you know, localizing the content, which is a fairly small cost incremental marketing, multi-currency, and we just introduced multi-currency capability for Canadian customers couple of months ago, if I recall correctly. So we're making all of those investments within the guidance for 2019, continues to be in the guidance for 2020, we believe international over the next one, two, three, four years is going to continue to be a bigger and bigger driver for future growth, yes.

And it's the way to think about Brent, this is Dan, is that domestically we got online not for profit schools, which are now over a million students do that. We've got community colleges. And those are all opportunities to continue to grow subscriptions nicely as we have been for the next several years, because those are all places where we are under penetrated by a lot, and we see opportunities to go after that. And then international, we'll continue to add countries and then the other will comes after. So it's not just for 2020, but when you think about the opportunities for 2021, 2022, we see great growth ahead of us for many years to come.

Our next question comes from the line of Stephen Sheldon with William Blair. Please proceed with your question.

Wanted to ask a little bit more about international, you know, you talked about the some, but can you just talk about the cadence of international investments as we think about, 2020, 2021, when would you expect to really ramp those investments and push the pedal, I guess internationally and what are the challenges or risks that you think you'll face as you try to drive international adoption even in a English speaking countries?

So I think, let me start by separating out the really important questions that you asked, which is I think a lot of people say, okay, consumer subscription business must be like Spotify, must be like Netflix, which is - there's significant capital investments that need to be made, perhaps you need to buy thing in other countries the content is completely different. You have to have licenses that are completely different. The education space is not like that. The same five publishers that dominate the U.S., dominate the majority of the world. And so we have an advantage now that others don't. The second thing is we don't have to make massive investments. We don't have to say in the year whatever we're going to be investing in this country or that country. Everything we do is assumed in the guidance and everything we do is incremental to what we have because we know the rollout path, the really the only obstacle, it's not whether or not there'll be a take rate. We're seeing really great response. It's not whether or not there'll be significant investment. That's not actually what it requires it to. Andy mentioned it requires things like being able to take local billing and local taxes and those in local credit cards and those kinds of things. It's more engineering work than it is content work. So we're not having to go get local movies or local music. We're just a different bear. And that makes our model actually a lot easier and a lot better, a lot more capable of a roll out. So you asked the question, which is what are the difficulties or what are the risks? It's really just that we going to be able to make sure that we price it right in each country, that we make sure that we add whatever small amounts, but relevant amounts of local content. We want to make sure that we work with Google's to be able to index these things as we've successfully done in the U.S. I going to make sure we bill it correctly? And then it's really understanding the school year and the best channels. So to roll out 10 countries at one time, it's very difficult to do, to do it right. So we're very systematic. Canada is by far the most important for us to start with, followed by Australia, followed by the U.K., surprisingly followed places like South Korea. And believe it or not, places like Saudi Arabia, there's real demand because everything we do inside check study can be localized with the Q&A and with the expert answer. And the content comes from 80% the same publishers. So it's unique to other companies that have had to do this and it's really to the benefit of our shareholders and our company to be able to do it. So it's not that we see a major obstacle ahead except we just going to do the work. And so what we try not to do is, to do too many things at one time to put anything we have at risk because the model itself is so strong, it's growing very fast. It has a high margin and the urgency has been doing it right, not doing it fast.

And Dan just wanted to ask for an update on the tutoring business, how trends are going there. I think you talked about that being the fastest growing business, over the last couple of quarters and then how much more integration do you need between tutors and kind of the core Chegg study solutions?

Yes, it's - so it's very interesting because as we said several years ago, and this is what I mean by it takes time to do the technology. It's not so much context, which is the chat-based hearing platform has now started to roll out. It is getting very good response. The model now is where you can use it one time or you can subscribe for a month rather than necessarily just paid for the minute. And then, so that is something that we have started to roll out. It's actually beginning to have a good impact nice impact, not huge yet, but the real value that we discovered is what I mentioned earlier, which is the ability not only to put it inside a study or things like the study pack, but to put it up to backup things like Thinkful where we're getting thousands of dollars per a class. We have the ability to put live human health core experts in any subject to help somebody master that subject and get through it faster and have a better chance to graduate. And so a lot of our efforts right now I've already started actually to integrate it into the new Thinkful curriculum and we're really excited about it because it's real value is going to be to make sure that anybody that's stuck can talk to a human, no matter what country you're in and no matter what category you're in. So if it's a job skills, great. If it's an academic skill, great. So yes, it's rolled out. It's rolling out now as a standalone service, but its real value is going to be supporting students as we add more curriculum.

Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed with your question.

Given you just recently closed that simple acquisition and you still have I think over $1.1 billion in cash on your books, what areas should we expect you to focus on for future M&A?

Yes, I mean our focus is really pretty simple and it hasn't changed from - well you've known us for six years now, Jeff. It hasn't changed from six ago to the day. And that is we look at opportunities that can leverage our brand, leverage our platform, leverage our data, and that can provide overwhelming value to students with low cost. And, I don't think it makes sense to get into specific details, but we have a team that continues to look at the education space and like Dan said it, we were two years or more into looking into the skilled space. So we're very thoughtful about what we do and then we pull, and then if we find something that we believe meets all of those criteria and at the right price and as you can see, I think the value we paid for Thinkful was good. And so we look at those things when we look at across the educational landscape, and we do believe that there's going to be a future opportunities for us. As you know in the private markets there, there's been some pretty high valuations over the last several years. We believe those valuations are likely to reduce and when they reduce, we have the capital that if we decide it's the right fit for Chegg, we have the capital that would allow us to make that make an acquisition. So it's not a specific area, but those are the things that we look at internally when we look at acquisitions…

Jeff please ask your next question. Go ahead.

Okay. I wanted to switch gears just back to Thinkful. I'm just wondering what the thought process was, why Thinkful is going to be - I guess combined within Chegg services. Is there going to be a way for us on the outside to kind of measure the progress of Thinkful going forward? Thanks.

I'll let Andy answer the second question in a second. In terms of the thought process on the business is pretty clear, which is 88% of all students go to college for the purposes of getting a job. Unfortunately, the cost of college has gone up so substantially. Student debt is at a crisis level and students are looking for two things. If they're in the system, they're looking for ways to turn that investment into something that can actually get them a job and Thinkful it's going to be there for them. And we have a direct channel to every student knowing every student and all 6 million students in our network that are paying us for something. We know their school, their class, their major, we have the ability to go directly to them at no cost and provide them an opportunity, helping them understand, which jobs are available and which skills they need. So that alone is a significant advantage and a reason to do it at all. The other thing is that more and more people in every age group are looking for ways to educate themselves to get specific jobs. So there is multiple layers of skilling, there is pre-skilling, there is skilling, there is not skilling. We chose the skilling space because right now it's extraordinarily affordable to be able to learn things online with our chat-based tutoring and our expert Q&A that can actually lead to a direct job in your local community. And there are millions and millions of unfilled jobs and we have the ability to make a major impact there. So if you think of all the students that are going to community colleges, you know there is academic tracks, there is professional tracks, but a lot of them can't even do that and they go to more than one at a time because the scheduling is a conflict between reading and eating. And so, we have the opportunity to change the game in that space and we just couldn't be more excited about it. And we're seeing very good response. It's not a surprise, like I said, or like Andy said, we did two years’ worth of work and investigated just about everybody in the space. And - this the right company with the right model with the right curriculum and super pump.

Yes, and I might add one other thing to that by the way is - then you can't underestimate this is the culture, right. We found a team that we felt fit our culture really well just like we did with the - when we got into writing. So there is a very strong cultural fit between the two companies and which is super important.

Our next question comes from the line of Ryan MacDonald with Needham & Company. Please proceed with your question.

I guess regarding the Thinkful acquisition, can you talk about sort of the pricing model here. I have noticed that Thinkful obviously - it offers a number of different plans including, pay up front versus all the way to income sharing agreements. What is the general mix there as students are taking those courses and how does that especially if students are taking the income share agreements. How does that affect your ability to sort of scale the profitability in that business over time?

I'm going to answer that ISA question, and I'll let Andy sort of fill in the details the rest. So it's a very interesting thing. If you're in a classroom and you have a limited number of seats and you give seat to somebody who may or may not pay, it's like an airline that leaves with a seat empty, which is you could lose all your money and affect your profitability and it's a very big risk. But when it's online and you have an unlimited number of seats, you don't have that concern at all. So the incremental cost of adding a customer and taking a risk on an ISA is very different when you do it online then when you do it offline. And the fact that we have $1 billion balance sheet, which means that we have the ability to not go out and charge interest and we have the ability to take risks because there is really not a risk. There is no capital being used to add it to the classroom. If you were doing it in a college and you gave a seat or dorm room to somebody on an income share agreement and that student didn't succeed or didn't pass or didn't graduate, you lose not only that person's money, but the opportunity to fill that seat with somebody who can pay online, not the same scenarios and unlimited number of seats. So it’s unique opportunity for Chegg to really sort of recreate how to help students in low income areas, underrepresented areas to be able to get a chance to learn things that others can learn and then ultimately pay for it. So - that was one of the reasons we love the direct to student model as it related to the skills-based space. So, very different than anybody else has and that puts us in a great position.

Yes awesome and then I guess this is a follow-up and a clarification on the Chegg Study comment, is the intent to offer Chegg Study for Thinkful students included - will that be included in the tuition they pay for that program or is there a separate sort of charge as well for that? Thanks.

Yes let’s - very fair question. We don't plan to offer a Chegg Study for Thinkful students. The capabilities that we built inside Chegg Study, which is a network of over 70,000 experts that can answer any question at any time with a proven expertise plus chat-based tutoring, which means we can bring a human at 3 o'clock in the morning or 2 in the afternoon when you're at work or you're at home or after you fed your baby. Nobody else has that. It's an extraordinary mode. So no, that will be part of the tuition, which is again a significant advantage to why somebody would come over to Chegg will have better content, will have better support systems, will have lower costs, and we'll be able to support you in a way that no one else has ever been able to support you before. As I said, most of these companies, their job was to get telemarketers at a very high cost to convince you to stay in so that you pay. Our are going to be actual educators who are going to help you learn the subjects that you can finish what you came there to do, and I so confident in that, because that has been the feedback that we've always seen.

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

Looks like really nice growth expected in 2020 for Chegg Services. I'm just wondering if you can unpack that a little bit for us just in terms of how we should expect to see that play out in terms of your number of subscribers versus revenue per subscriber. Certainly seems like there's a lot of opportunities between the bundle and some other initiatives you have to really be getting the revenue per student up. Just curious kind of how we should be thinking about - the way that you'll get to that number for 2020 that you put out today?

Yes so Alex it’s Andy again and yeah, the way we're looking at it right now, given the size of the business particularly the Chegg Study business and to some degree the writing business. What's really going to drive the topline of those two businesses and like I said in the prepared remarks, we said that subscribers are likely to be very close to what the overall Chegg Services, growth rates that we're projecting for 2020. With respect to ARPU, we will start deploying the bundle to new subscribers only like Dan said. And then over time potentially offer it to existing subscribers, but the big push is going to be in the fall semesters, as you know, bottom line is our school year starts in August and it goes through the end of May. So the big push will be in August. So we will likely to see as far as ARPU increases - may see some ARPU increases, but not significant in 2020 until it gets fully deployed towards the end of the year and then rolling into 2021. So that's how we're seeing things right now, but really looking for - it’s looking like a really nice year for 2020.

And setting up quite nicely for 2021, as Andy said, because exiting the year we'll not only see great subscriber growth, but we'll begin to see noticeable ARPU growth. That's the expectation.

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

Yes thanks guys and congratulations on the quarter. Just real quick the Math Solver and Chegg Writing, how are those performing?

This is Dan. So, I'll start with the most obvious one, which is Chegg Writing is performing extraordinarily well. I mean, it's used by over 30 million people. It seeing - remember when we acquired it was a 15-year-old company. And that - what we've been able to do in three and a half years is basically change the game by expanding what its capabilities are, which was, it went from just being able to do citations and bibliographies, which it does better than anybody. And you can see the numbers which have been included in the prepared remarks, but the ability to do grammar checker and plagiarism checker and sentence structure and all of those things have allowed us to actually create a very profitable subscription business. So, that business is only a couple of years old, but - it seen wonderful growth, and we expect that to continue because people, unfortunately what we have is because this country is not invested enough in a lot of education at different levels of the country and in different cities. There is a lot of people who need to learn how to write and haven't been able to been supported or taught or tutored Chegg does that at high quality and low cost. So we're and in fact and then writing off this right now and people here are really excited about what AI can do and helping people learn how to write. And so that's been extraordinarily powerful. On Math, again, it grows quite nicely, but I just want to remind everybody we acquired Math, so that we can build the bump and so Math has a value. It grows, people subscribe to it, that's great. But its real value is to be able to include it in the Chegg Study Pack, so we can add writing and Math along with videos and more questions. And again, you can see all the creative that we put out on the site to test and that has led to a nice chunk of existing of new subscribers beginning to look at that and opt for that. And so that's why we think it's going to be a big deal as we start to exit 2020 because we're going to start with only the new customers at the beginning of the year because the school year doesn't start till August or September. So Math is doing really, really well. It's global, but its goal was to be inside the Study Pack. That's why we acquired it.

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

My question has to do with the required materials, the new relationship with FedEx and actually the departure from Ingram, strategically I'm going back a few years here, but the thought was, we don't want to be owning the - we don't want to be buying the books, right? The new model is we'll take a commission on the rental fee of the book, and now it seems like we've reversed that and we're going to own books again. What was the strategic thinking behind that?

Well, there's a lot of strategic thinking behind it. For those of you who gave back to the beginning, remember Amazon entered the market. We were spending over $120 million a year on textbooks. Amazon lowered the price. We only had one warehouse and people believe we were going to go out of business. We believe we weren't, and we believe we had a plan and we built a relationship with Ingram. But back then the biggest problem we were solving for capitalize the textbooks because we had to buy 100% of them and they were very expensive. Today, that's not a problem, the number one issue is logistics. We want a world class logistics that can serve the students better. And the reason for that is because first of all, the price of textbooks has dropped precipitously, right? That costs very little. The second thing is consignment and E-textbooks have become nearly 50% of the whole market, which means in just a few years, no one's going to be putting capital out of textbooks anyway because as it gets - we don't pay anything up front for E-textbooks and the whole point of consignment is they give us the books. So in this case, the total value of the textbooks we buy, they're cheaper. We can get a better return for all of you and for ourselves. And what we really wanted was world class logistics. And so the strategy was how we get a longer-term partner. This one's at least five years and has the ability to extend several times. We're going to use very little cash. Overwhelming majority of the books are still not going to be owned by us, but we can get a better return on the ones that we do buy, then on the deal that we would have had on the table from Ingram. And so we solved all of our problems, just the different companies at different stage now.

So with this situation, it really does come down to, we can service the students better, faster, we can get the books in their hands faster. Ingram didn't allow us to do that, so we sought out a partner that we felt could do that?

And the cost and the amount of money we used to have to invest in textbooks was substantial five years ago and today it's almost nothing. I think Andy pointed out that in 2021 we might spend a total of $15 million. We have a balance sheet of over a billion. It went from being the overwhelming problem for the company to insignificant on our balance sheet, but get a better return for our investors and it's better delivery service for our students.

Our final question comes from line of Brett Knoblauch with Berenberg. Please proceed with your question.

Just to kind of talk about that FedEx relationship. Looking at 2020 free cash flow, you said you're going to spend about 50 million on textbooks next year. Is there any guidance for any CapEx besides what you'd spend on textbooks?

Yes, we typically guide to CapEx for 2020 or we would in the February call, but obviously, we are going to be adding that $50 million in a textbook. As same as those textbooks, we would anticipate that our free cash flow conversion will be right out where we've been saying for some period of time, 50% to 60% adjusted EBITDA. Well, obviously it would need a little bit more than that for the initial purchase of textbooks, or maybe it's going to be somewhere to 40% to 50%, but that's just a one year temporary blip. But still we were anticipating strong free cash flow in 2020 and certainly beyond 2020.

And then maybe just on competition, I've seen a lot of Bartleby ads recently and I just maybe want to get your thoughts on as you get ready to launch this new bundle for roughly $20 and Bartleby is offering their platform for 99. Has that affected your business or your strategy at all? Is there maybe anything you're doing internally to try and combat that?

I don't know the best way to say this without sounding a little too confident. They don't even appear on the radar. So you can see our growth rate. I think it speaks for itself. So no - it just doesn't show up for our students and for us.

Since there are no further questions left in the queue, I would like to turn the call back over to Mr. Dan Rosensweig for any closing remarks.

Well first of all, thank you everybody for joining us. Believe it or not, our journey started with textbook rental business 10 years ago and we recognized early on we'd need to transition our business model and our offerings if we were going to help students solve their biggest pain points and succeed in their academic journey. In a short period of time, Chegg has achieved 87% brand recognition is growing globally and we continue to expand the quality and quantity of services we offer students. The addition of Thinkful, as we mentioned today is critical in today's global economy as Chegg now help students both during their academic journey and their professional journey by helping them master the critical skills needed to both academic success and now their careers, which is very exciting. And as we have grown, we now see ourselves as a platform constantly adding more services, capabilities and content. Always adding increased value for our customers and expanding the number of customers we can serve. That's always been our goal to expand the TAM and create more value for the students. Although it's interesting that end of this year marks my first 10 years at Chegg, the journey seems to be just getting started and the opportunity to look bigger and more important than ever before. So we couldn't be more excited. And as we look ahead to 2020, we're truly excited about the next chapter of Chegg story. And I really want to thank all of you who've been on the journey with us, and I think you can see its early, but we're super excited about next year and we look forward to talking to you on the next call. So thank you all very much.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.