Chegg, Inc. (CHGG) Q2 2020 Earnings Report, Transcript and Summary

Greetings and welcome to Chegg, Inc. Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tracey Ford, Vice President of Investor Relations for Chegg. Thank you. You may begin.

Good afternoon. Thank you for joining Chegg's second quarter 2020 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 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 and Form 10-K filed with the Securities and Exchange Commission on May 04, 2020, 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 found on our IR website, investor.chegg.com. We also recommend you review the investor data sheet, which is also posted in our IR website. Now, I will turn the call over to Dan.

Thank you, Tracy, and welcome everyone to Chegg's second quarter earnings call. First, we hope that you and your families are all healthy and safe. As we continue to navigate the pandemic and the rising social issue, we're grateful that our employees are healthy and our business is stronger than ever and that we have been able to support our employees, our communities and our students through this challenging time. Also I am proud to work with our Chegg team as they continue to make meaningful and positive impact wherever possible. While students lives were disrupted, the one constant was that Chegg was there to provide high quality, expert on demand support from any device, in any location, which resulted in accelerated growth across our circle. Students turn to Chegg in record number and we experienced unprecedented engagement with subscriber growth of 67% year-over-year including our Mathway subscribers reaching a record 3.7 million students. This yielded net revenue growth of 63% year-over-year in Q2 alone. To put that in perspective, we had more subscribers in Q2 of this year than we had in all 2018. As schools and millions of students wrestle with how best to handle a return to campus, we know that some are supporting a full in-person return while others are offering a fully online experience and so others are planning a hybrid version of online and offline. Regardless of which experience the student has, Chegg will be there to support students this fall and beyond. In fact, students are increasingly turning to Chegg to -- or support to navigate these uncertain times and we expect this trend to continue post the pandemic, regardless of where or how someone learn, Chegg will be there from them. From day one, Chegg was built on the inevitability that people would need to learn more often increasingly online and need greater support. Long before the global pandemic, we believe the digital transition was coming and education would have to fundamentally change. In fact, in 2013 at the Annual ASU-GSV SUMMIT [indiscernible] Education Technology Conference, we address the need to leverage data to personalize the learning experience that better serves team. Three years later, our [indiscernible] class of 2020 predicted that higher education was the next bubble to burst and that institutions would experience irreversible decline if they continue to raise prices while delivering an antiquated product. We made impassioned and specific recommendation to aggressively transition to a model that with higher education online, leverage technology to make learning available to students 24X7 and to expand and modernize their content to be more relevant to the modern workforce. Our research shows that the majority of students now feel online learning to be as legitimate, effective and rigorous as in person instruction. In fact, half of the students surveyed who had no prior online learning experience now want the option of hybrid or fully online education and 72% of students who had already had online experience expect the same. We remain optimistic that this pandemic will end soon and when it does, one of the legacy will be that the door is permanently open to the promise of online learning. Affordable, scalable, on-demand and designed to support whatever the student's primary goals are whether it's academic learning, professional development or both. If anything surprised us, it was the speed in which students outside the United States to come to embrace Chegg with the same passion as those in the Europe. Similar to the United States colleges and universities around the world are forced to shut down and like scalable, on-demand, high-quality support for students and as a result, more international students have discovered Chegg. In addition to meeting online support for academic, we're also seeing global trend for adult learning and alternative pathways for students to gain the skills they need to compete in the global economy. We believe that the fact that the services we offer are so universal in nature and in a large part why we're seeing record demand engagement outside the United States. It's always been clear to us that realigning education with its most important constituent for students is a massive opportunity and we feel our brands, scale, service offering and our balance sheet gives Chegg a great opportunity to make a positive impact on global education. We continue to believe that platform companies that have a direct relationship with their customers on the transaction, the data, channel of distribution and own their content will create disproportionate value for their customers and their investors. That is why we have fast-track investments on several key initiatives in the second half of the year. First, we're increasing our investments in international growth and development. Second, we continue to invest in the Chegg study pack with future enhancements like the addition of Mathway to provide overwhelming value to our subscribers. Third, we are implementing systems to address account sharing and investing in device management control. Fourth, we have increased our investment in skill-based learning by expanding the curriculum to cover more in-demand skills and by significantly reducing the price because we know skills-based learning needs to map to the most in-demand job and be affordable and acceptable to students. With all the uncertainty facing students over the next year, the one thing that they can count on is the high quality, affordable, personalized, adaptive and on-demand services that Chegg provides. That is why Chegg is becoming even more critical to students success both academically and increasingly professionally and our team had never been more enthusiastic about the opportunities ahead of us. On that note, I want to thank our incredible Chegg employees who continue to be relentless in providing world-class learning products and services to support students around the globe. I want to thank our Board of Directors who have been so supportive of our work over the last decade to be in this position in this moment to have a profound impact on the future of learning and I want to thank the millions of student who invited us on their learning journey and hope that even with all the unknowns in the year ahead, they know that the Chegg team is always here cheering for their success and building a company that has always and will always put them first. With them, I will turn it over to Andy. Andy?

Thanks Dan and good afternoon, everyone. As Dan mentioned, we hope you and your family are doing well during this difficult time. While many traditional companies are unfortunately being hurt as a result of the global pandemic, direct to consumer companies like Chegg that are digital and serve an essential need are seeing increased levels of growth. As such, Q2 was a fantastic quarter for Chegg. We experienced unprecedented growth in our subscription services as students around the globe turned to Chegg to help them master their subject matter and get better grade. During the quarter, we also accelerated investment for our future growth and we acquired a leading math company, Mathway. Let me give you some color. Mobile Chegg services subscribers grew 67% during the quarter, including the addition of Mathway subscribers. Chegg services subscribers organic growth was 58%, an acceleration of 23 points from Q1 far exceeding our expectation and we expect this momentum to continue into the fall semester. While Mathway contribute to our subscribers growth, it had little revenue impact as it occurred late in the quarter, but we do expect it to contribute approximately 9 million for the year, which is included in our guidance. The momentum we are seeing in the business accentuated by the pandemic is likely to continue for the foreseeable future and we expect to be a high growth, high-margin company for years to come. As such, we've decided this is a moment in time where we need to lean in and reach more students globally with our high quality low cost services. Thus we have decided to celebrate incremental investment to build for our future. These include investing in international growth and development, the Chegg study pattern, device management technology and our skills-based learning service Thinkful along with additional infrastructure and resiliency investment that will allow us to scale rapidly. It's important to note that we expect to be able to make these investments in future growth opportunities while still delivering stellar bottom-line results. With that said let you summarize our Q2 performance and then update our guide for the remainder of the year. For the second quarter, total revenue was $153 million, a 63% increase year-over-year with both Chegg Services and required materials exceeding our expectations. This strong revenue performance drove a 79% increase in adjusted EBITDA to $55 million. While gross margin moderated slightly as a result of the change in textbook ownership and it's over-performance. Looking at the balance sheet, we ended the quarter with cash and investments of approximately $1 billion and we continue to believe the strength of our operating model, balance sheet and capital structure are the strongest in the education industry and put us in a best position to grow organically and should opportunities become available like Mathway through acquisition. Moving to the second half of the year, the strength we saw in Q2 has continued into Q3. As a result, we are substantially increasing our revenue and adjusted EBITDA guidance for the remainder of year. For full year 2020, we now expect total revenue to be between $605 million and $615 million with Chegg Services revenue between $490 million and $500 million. Gross margin between 68% and 69% and adjusted EBITDA between $190 million and $195 million. Before I get into the Q3 guidance, as a reminder the seasonality of both gross margin and adjusted EBITDA margin have changed as a result of owning textbook. Therefore, we expect seasonally stronger margins in Q2 and Q4 and lower margins in Q1 and Q3. Looking specifically at Q3, we now expect total revenue to be between $140 million and $145 million with Chegg Services revenue between $110 million and $115 million. Gross margin between 56% and 57% and adjusted EBITDA between $21 million and $23 million. In closing, the Chegg team continues to deliver about the high-end of our expectation under difficult circumstances, giving us the confidence to both provide and increase full year guidance, all while taking the opportunity to increase our investment of future growth across the globe. With that, I'll turn the call over to the operator for your questions.

[Operator instructions] Our first question comes from the line of Jason Celino with Keybanc Capital Markets. Please proceed with your question.

One for you Dan. Thanks for the comments Chegg being there, no matter what model we have in the fall but there's been a lot of focus on enrollment but if students do decide to wait the semester out, to stay sharp and productive, could you see some of those students scale up using Thinkful?

Great question and thank you, I think what we're likely to see and I think we've been seeing it, which is what gives us the confidence to raise our guidance is whether or not they go to the school that they were originally intended to go to in the fall, one way or another they're going to be going school and whether it's there school in-person their school of partially in-person or their school online or in the case of the folks you're talking about, more likely to be people that will take a local online class and a local commute to college. So they're to be going school because there it really no gap here. There is no place in travel, there is no job or internship to have. So they're going to be taking something and Thinkful could be one of those things and Thinkful is very early days with us. We only closed it in October and now last September, but it is running in the past that we were hoping for. So our plan to increase the curriculum, lower the cost and create greater support using chat-based tutoring inside it which differentiates it from any other competitor, we think those things are already starting to pay off. So I wouldn’t be surprised if we were somewhat a beneficiary of that trend.

Great. Thank you and then one quick follow-up for Andy. Even when you back up the Mathway contribution in the third quarter subscriber guidance still very impressive maybe can talk about the visibility and the confidence you have kind of on the subscriber trends you're seeing maybe towards the end of July maybe what you’ve been seeing so far.

When we gave guidance 90 days ago, we had limited visibility as to the impact of COVID. On 90 days further on we see much greater visibility. We continue to see the strong new subscriber trends all the way through the summer schools. So yes, we feel very confident that we're seeing the momentum will continue into the fall and that's contemplated in our guidance.

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

First any way you can quantify how much your plan for strategic investment have been increased relative to the plan you had entering the year and then beyond the areas you discussed wanted to ask about your plan to invest back into core content for Chegg study. How are you thinking about using the momentum you have and an opportunity to expand the breadth and depth of content there including areas like videos or other study resources and that increase the value of the core subscription.

This is Dan I'll turn it over to Andy. So the good news is everything we're doing, we expect it to do, we just accelerated by moving it up. So this is something what will benefit us not only in the short-term, but in the long-term both in the revenue growth area and profitability area. So we're super excited about that opportunity. We are and always have been and always will be investing in content to answer your question specifically. So we've been increasing our investment in content. Obviously, our Q&A network has exploded in a good way. In fact, we not only had record numbers domestically but almost 30% of all new questions being asked that hasn’t been asked before comes from international. So we're seeing real growth there. So we are always going to be investing. We are focusing on investing in content in three areas that are included in what Andy has to say. So when he says we're investigating in international, we're investigating not only in translation, which we think will extend us beyond just the English speakers, but also in local content which is now being asked in local question. So that will beef us up successfully, internationally. The acquisition of Mathway was a way to beef up the core products of Chegg study pack which we mentioned last time and continues to grow faster and sooner than we expected quite noticeably and you're seeing them in our results now. And then we are focused domestically on a few growth sectors like online colleges where we're specializing the content because you may not realize this, but the large college or university in the United States of America that is a not for profit is actually either starting to enhance university or Western governors which are exclusively online on almost exclusively online have over 130,000 customers. Plus we are significantly improving our discover ability of content and investment in content for community colleges because the question that was asked earlier, a lot of people are going to be taking online community college courses and we're going to make it easier for people to find it, but more importantly we're going to make it easier for users to discover that we have the content that helps to support them. So an example, just the community college in the State of California alone are almost -- are over 2 million users which is 10% of the entire college audience. So we are making real investments in content always and will continue to do so. So Andy, I don’t know if you want to talk about how much cost we accelerated?

Yes, so when I look at this, I look at it over the next 18 months and we're literally -- we're talking about tens of millions of dollars between adding capabilities like Dan has said. Things like either the device technology that we talked about, the infrastructure improvements we're doing, going international and then the incremental content that we're investing in combination of accelerating classes to Thinkful, accelerating content types that we can use both in the US and internationally. So yeah it's a fairly significant acceleration like is aid in the tens of millions of dollars range, but we think it's the right thing to do and it's been a while providing significant leverage in our model as I mentioned earlier. We anticipate that we're going to be a high growth, high margin company for years to come and we want to lean in and invest in that future growth. So yeah it's been fairly significant but it's coming with a significant probability at the same time.

It's hard to notice because our profitability is so high in continues to improve and including the ratio of EBITDA to the cash flow, we just have one of those great models that allows to do both right there.

Quick follow-up just wanted to ask on the guidance how you're incorporating, changing University timelines since the guidance including summer starting the year earlier and potentially ending the semester center. So anything to call out there in terms of Q3 and Q4 seasonal dynamic.

No not really, that's all incorporated into our guidance. We're seeing the same things that you're seeing. Some schools are starting a little bit earlier, some schools are a little likely finished by Thanksgiving and it varies between school and some are online, some are going to be partial. So that's all incorporated into our guidance.

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

You mentioned a few times your focus internationally. Can we get a little bit more color, can you quantify how large your international student market is and clarify if these are folks that live overseas and are studying overseas not necessarily folks that are coming to the US or studying online at US universities.

I'll start and I'll let Andy talk about how we want to think about international growth. International growth is stellar right now and to your very specific question, only 1% of our international customers actually went to school in the US. So these are all new customers to us. So I know there has been some speculation as to whether or not these were international customers that went home and them subscribe at home, but we obviously monitor those things and frankly we are picking up brand-new customers around the world and over 99% of them are brand new to Chegg. And what's fascinating about is not in any one specific country. It's really a global phenomena and as a result of colleges having to close down new school historically have not had a service to go to, actually discovered us the way we were discovered original in United States, which is through research and then word of mouth. So United States it's word of mouth and search now and then internationally it's search and then word-of-mouth, but it's been really wonderful to see and it really shows that the content that we have, our focus on salary [ph] and our business courses really does translate no unintended on a global scale. So we're seeing countries that you would imagine carried us to Australia, UK, but we're also seeing great growth in places like Turkey and Saudi Arabia and South Korea. So it's universal right now and we expect that to continue to grow for years to come.

Shifting gears a bit you talked a bit about what you're doing to mitigate passport sharing. Obviously, a lot of students having to leave their campus going online, probably made it a little bit more difficult, but can you talk about once we get pass the pandemic any students come back to campus, what changes will be made to mitigate this issue?

Well, I appreciate the forecast that you're giving that we're actually going to get pass the pandemic I think that would be not to scale up, but in Andy's prepared remarks, we focused as one of the four major areas of accelerating our work, we had had on our roadmap to do device blocking and so we moved that out, that we wanted in August. So [indiscernible] students go back on to the degree that they would try to go back to the normal habit, it just won't be available for them anymore. So step one will be to limit the number and device of our education and then there is a step two and step three and we'll continue to do that and so we feel very good about having moved that way up and we'll be launching that up.

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

I guess just given the various scenarios in fall, can you talk about your marketing strategy changes and then how do you replicate some of the word of mouth benefits that you would normally get on campus? And secondly, call you just give us an update on study pack in terms of the rollout, how broad it is and what kind of benefits you're seeing thus far?

So in terms of marketing, it's sort of fascinating because in the United States, we don't actually spend much money on marketing anymore. In fact, I don't think we've increased our marketing budget in over five years, not just as a percentage of overall revenue which would have made it very large, but just in general because we have an 87% brand recognition. Where we don't have a strong brand recognition in the United States really focuses on two areas, one our community colleges, which we're seeing extraordinary growth now and a lot of that has to do with some of the things that we did to get more visible active variety in people or things of those natures which let families and other people know that we exist for what they do. And then in online schools and so we've started to test a number of things which enhance the university because it's easier with online schools to go directly through the school as opposed to a regular school. We have to go to professors. So I'd say we're doing exactly what we've been doing in the United States but with an increased emphasis on community colleges and online. And then outside the United States, it really is the best way to get to word of mouth is to index globally and get more content locally which is why we're going to translation and why such a large percentage of the questions were answered now comes from outside the United States then that turned into work and so when we actually watched them go, we were getting it not only by country, but by subject but by actual school itself and so you can see it in each school. But once people start to using they tell people that are just those like crazy. Look we experienced 58% organic growth on top of a number that's already huge. So I think for us right now is just making sure that we direct the investments and to your point about study pack what we've seen is that the study pack is behaving very similar to what Chegg study did just a few years ago, which is people using, they're signing up for numbers that were better than we expected. Their renewal rates are very high, their usage is very high and it's not only domestically, but outside the United States. So we will have an even greater rollout in the second half of the year, but they're finding it before we expected them to. So we're seeing upgrades from existing customers. Remember all we really were doing to focus on new customers, but we did a test in March because of COVID allowed us to give a free upgrade and so we expect that to help us even transition more. So we're really in phenomenal shape and I think the thing that we're most excited about is on a global scale just the engagement, the usage, the discovery, the value that we're creating for students and the fact that it just sustains well pass COVID because Chegg just become a way for life for study go to college right now.

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

Would like to touch on Mathway a bit and just understand the opportunity there better. It seems like they get great penetration both domestically with high school students and internationally. So what sort of investments can you make quickly to sort of really capture that opportunity in a relatively new segment particularly as we look into the fall and more K-12 schools moving online? Thanks.

No, it's a great question and so what did we see in Mathway that got us started was one, a company Chegg scale and size when we acquired something, we want to acquire something that's just the traditional thing we said which is when we accelerated, can we make more money out of it, can we improve the product and we extended and then on top of that Mathway was number one in category by far. They spent 20 years investing in it and it's just a brilliant product. Having said that, they build it up through the budget. They took no outside capital. So we've been accelerating the investment in the Math category and on extending it outside and more categories of high school which will attract students younger which will make the transition into college for us even better. So all those things are critical to its success but it's only been really short period of time but it's already showing, experiencing similar things to what we're experiencing which is greater discovery and usage and then it's biggest benefit however is going to be putting it inside the bundling because this solidifies the Chegg bundle as having them number one homework product, the number one writing product and then number math product and all of that for $19.95 a month. And so I think as we start integrating it in, that's going to improve the conversion, it's going to improve retention, awareness. So we're unbelievably excited about it and really grateful that of all the people that could sold to each other.

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

Yeah Dan, congrats on the quarter. It seems like there's four big tailwinds kind of online learning and support, what you're doing with password, the bundle and international. Which one of those kind of surprised you the most in the quarter?

Well the fact that all of them did well did not surprise us. It is rare to operate a company that has everything do well in the quarter and that did in fact but it surprised, but as we were virtually in our prepared remarks, really it's international which is the diversity of the countries which are relevant this soon and the fact that it's not concentrated on one or two countries across the board and every one of them it seems substantial growth and great retention and take rate and see the bundle that are greater than we had anticipated. I would say that all the things that surprised us, everything surprised us to be good, the concept that it surprised us but I just think just the willingness of people outside the United States that discovered Chegg and really use it is such a pleasant surprise that happened this quickly.

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

A question on with increasingly students obviously moving for more online learning, how are you thinking about maybe additional online learning solutions what you're in today to either call it or kind of the younger grade as well especially younger to be more and more online solutions. Thank you.

I've been around for a while and one of the things you really rarely get is too many choices of where you could go. This is not a company. I'm coming up on my eleventh year somewhere into my tenth year and we're actually finding more and bigger opportunities to grow and that is a rare situation and I think that is a rare situation and I think happens really owned platform companies,, which is whether it's Netflix, or Microsoft, or Adobe, or Facebook. Once your platform company create the category and become which Chegg has become in education, you start -- the benefits start to improve to you faster and so when we look at the opportunities, we continue to believe that the best place for Chegg to play is direct to student. We feel that that means that we're likely to go older rather than younger as a reminder that the average age of a college student in this country is not 18 to 22. It is in fact 25. They already have jobs. If you look at where people are going increasingly online as those numbers are just going through the roof that those they're even older than 25. There are people who are in the middle of careers trying to finish their -- change their careers. There are people that got partial degree and want to finish their degree. So I think for us it's going to be extending the number of schools that we serve, extending internationally, extending into not just academic pursuit but the actual pursuit of certain industry verticals that people want to go into in nursing and engineering. There is a lot more support work for that, that can be done and investment in Thinkful which is skills. The demand for skill is only going to accelerate. The demand for them to be higher quality actually we have support, the lower price, less risk than of the student, more relevant to their career is exploding and our goal is for Thinkful to own the same position in people mark the Chegg currently. So we just see growth area at the growth area, as a growth area and that's a rare situation and I am grateful for it.

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

Wanted to dive a little deeper on the content use. So the $375 million obviously a huge number and sequentially up versus Q1. I was just wondering if you can help me and pick that apart what your normal seasonality Q1 to Q2 and then what was specifically going on in Q2 that was new with COVID-19.

The I seasonality I think Andy can address in terms of cost structure in the quarter is because of text book, but the seasonality of usage I think the way we would think about it is the real full year for Chegg, the real business year we're going into now. So we just finished a quarter that where people make their bottles are done in May and June at the latest and so this, those season we're going to Q3 but starting actually already, but really end of August, September, October, November, phenomenal and then it rolled into next year because this full year is actually August until say mid May or June. So the calendar year isn’t that Chegg use. The Chegg there is that period of time and we're entering a big growth season coming up ahead of us, but the fact is more students need more help then they never needed before. They have no support from their campuses even if they go on to the campuses the things that historically they had which weren’t very good and were not 24X7 and we're not across all subject, won't even be funded because schools are having to cut their budget and they're going to cut their support budget before they cut the class. So the need for Chegg is only increasing plus the fact that we're adding more subject, we're adding more format. Somebody mentioned earlier video but we're also adding the factors that which we never added before, which is one of the most popular categories people can have. In writing, we're improving everything from writing style, writing structure and checker and stating with Mathway. So I think everything just got a lot bigger and Chegg has not got a new base that is much higher and we're going to continue to see great growth from a higher base because we've not got anywhere near the penetration into our market.

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

Thanks, Dan you called out international as a top priority in the back half of the year. I guess it seems like you already have a lot of investment in maybe if you could just articulate what's left there to show increased adoption and it seems like you already have a lot of the rails built if you will for the foundation, just curious if you dive in there or not and I think the follow-up to that is just some concern of saturation in the US that doesn't feel like that's the case just speak to the international push versus what the opportunities left in the US?

Yeah I think I'll start with international which is international even when you remove China, which we do for obvious reason the opportunity outside the US is actually larger than the opportunity in the US is just collectively. I think we've used the example in the past that just the big three English speaking countries are about 50% of the size of the US college market. Then when you add every other country, it's just bigger, they're more likely to come online. They're more likely to want the study stem and we I think the description is right. We did rails and plummet, which is we now can do commerce. We can now take credit cards in those countries. We can now change the availability of the -- we'll be able to change the availability of how many questions you can in country A versus country B. So we can personalize it more. The other thing that were spending our time on are accelerating the amount of content that is relevant to each local market starting with the largest markets for, translation software. So what we're starting to do to get the English speaking stem students in those countries and those will be massive. What we want to add on top of that is doing parallel are the non-English student and then the non-English speaking students study whatever it is their study. The same way we built Chegg. In the US we think we can build -- and the evidence suggest that we're right on this one. Very fortunate what we've been saying for years. It's not like Netflix make movies or StarterFLY where we need to license content in those countries. We're in very good shape because of our expert Q&A nearly and it's just a 30% of the questions that are being asked outside the United States, that's twice the size of the number of questions you get to get in the United States just three years ago in terms of real numbers. So it's getting big. This is the real thing and this is going to propel Chegg for many years. Domestically as we mentioned earlier, we have so many vectors of growth left. We're nowhere near penetration as you pointed out, but there are some interesting stats just we're seeing. So the number of people in just three years, the number of students taking stem in the US has actually grown by 50%. The number of students taking business still the same around 21% and the number of people taking the social sciences has actually dropped by 50%. Chegg gets them all, but our greatest strength is obviously them. So we're benefiting from all the micro changes that are going on based on what students want to learn and what colleges are starting to keep them plus we're going into a much older adult market because people are trying to go back and finish their degree. So you're seeing the smart schools like southern [indiscernible] University accepting more credits than they've ever done before instead of China double booked to take the class again. They’ll say we'll take whatever you have and then we'll let you finished. They're even now because of the deal we done, if you take a class, that counts the strength. So those kind of the conversations are going on all over the place now would say again Thinkful. So the vectors just keep growing and then if you think of profession, you think of accounting, think of finance, think of engineering, think of nursing, think of lawyers, think of doctors, there is academic and then there's learning the actual industry you're in. So the format of content video expert Q&A, the tutoring, all of that works regardless of the subject, the ubiquity of the IP of what we own, gives us a competitive advantage over anybody and so we're just going to keep building, we'll just keep executing, executing, executing. We're excited about it.

Our next question comes from the line of Josh Baer with Morgan Stanley. Please proceed with your question.

I was hoping to get some more insight on skills-based learning. Wondering how many courses you're looking to add if you could talk a little bit about how much that cost to create a course, how long does it take, are the expanded offerings going to be in place to benefit from the uptick in demand this semester and any update on just the growth or the size of Thinkful at this time?

I am not sure we'll break that out right now. I think I'll let Andy speak to that but let me just say that when we acquired Thinkful it had five classes, now it has seven. When you expect to add seven to 10 class a year at the minimum there is a lot more classes, subclasses. There is a lot more categories here. I won't share the cost of doing them for competitive reasons, but suffice it to say that we've all accounted for that. We've accounted for the next seven classes and the numbers we've already given you. As it relates to the timing of it, should be interesting in things we're learning. Obviously there is a bump in the short term in that people are losing their jobs and they're looking for skill in much more affordable areas, but one of the things that we learn now that we own Thinkful is their infrastructure could not handle the demand they already have and so Chegg there is already more demand than we can handle not because we can't scale because it takes admissions and it took technology and reporting and financial reporting, things that they didn't have the capital to build. So we're going to see a great pipeline for a long time now. We're not out there begging for demand at this moment. It's quite the other way around. So I don't know that we can take more than we already have planned, but this is a great business and I am thrilled that we bought it because the timing is right as you point out, but also the need for people to get skilled or re-skilled to jobs that will be around. The beautiful thing is unlike the college you may or may not change their curriculum, we can always have the most relevant curriculum for the most in-demand jobs and that's what Thinkful is all about. So we're super excited about the future of Thinkful right now.

Our next question comes from the line of Brett Knoblauch with Berenberg Capital Markets. Please proceed with your question.

As you look at Q3 gross margin guide, I was wondering if you can just break down that impact may be compared to last year, it looks like the guide of a 1,000 basis point lower. I guess to weigh down between the impact from the textbook business and maybe what other impact from the incremental investments you guys are making.

First thing is it's a 100% textbook, period. It has nothing to do with the incremental investments that we're making. It's the fact that as you recall starting January 1 of this year, we started to own textbooks and then record the gross revenue. It has -- what you'll see is the change in the seasonality where you see high gross margins in Q2 and Q4 and slightly low gross margins in Q3, excuse me, in Q1 and Q3. So that did exclusively and what I said right we also hope we'll perform in textbook. So it kind of compounded itself a little bit, but I guess that's the good news. So we have to talk about textbook because textbook continues to do actually really well. We believe we're gaining share there too. So that's the reason for the seasonality and the gross margin.

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

Hey guys. Thanks for taking my question and congratulations to nice start to the career here. Ask about the I guess follow-up on the international business, in your experience with international so far you did tens of follow similar patterns, the rush at the beginning of the semester and then the final exam schedule can you kind of just give us a sense of how that pace of business might play out over the balance of the year? And then just in terms of pricing, should we expect that pricing will generally be about the same international as in US to go forward or are there may be opportunities to reconfigure bundles and tweak prices in individual market.

So I'll start and I'll see if Andy, so it's premature to know all the answers to very good question meaning the international growth is substantial enough now where we'll be able to tract the patterns in a way to things that we do know is the engagement they have is very similar to the US, the way they discover it, very similar to the US. Their renewal rate are very similar to the US a couple of years ago and continue to grow every day as we more localize the content and they get more familiar with it and they also came on at the end of the semester. So that's the big opportunity ahead of us but it's already well ahead of where it was when we started Chegg Study in the United States. Their interest in the bundle is even higher than that of United States and that's the big deal. That bundle we're going to use really well similar to the CS. So that's the big deal. Seasonality is a little bit different depending on which countries get large win. So for example, Australia season is a different season and so it's just a little premature for us to be able to break that out. Now as to your other question about pricing. At the moment and we expect for the near-term, the pricing will be identical to what it is in the US. It will just be put in local currency now which is new. We didn’t have that capability before and we do now. So it's the equivalent $14.95 in the US to $19.95 whatever the local currency takes it to. So that's been helpful and that's improved converging once they sort local currency because they began to feel like a local product, but to your other question is really interesting and thing that we're going to start to play with, which is we will be able to technologically starting probably early next year to be able to change what's in a bundling country A versus country B and it could be as simple as countries where we want more questions asked, we can say you can ask 20 question instead of 10, or 10 instead of five. So we have ways to accelerate the creation of contact relevant, local language content. We can do things like you can have access for an hour rather than subscribe for months. So technologically we're going to be in a position to experiment a lot of faith and internationally is getting big enough where we're going to want to do those experiments, but right now it has just been a fabulous upside project.

There are no further questions in the queue. I'd like to hand the call back to Mr. Rosensweig for closing remarks.

Okay. So first of all like we said at the beginning, we hope everybody is safe. The pandemic is much more difficult than people thought and we're trying to communicate with our students to help them do better and smarter things as it relates to their lives. Obviously Chegg has been unprecedented growth on top of a much higher number and that the opportunity that we have are just increasing and we're really enthusiastic about what we do. We like everybody else wish it wasn't the pandemic that accelerated the inevitable, but it has and so we feel an obligation to improve the quality of our content, improve our services to localize it internationally to focus on Thinkful to make it more available, more affordable, attract more diverse audiences and we're in a position of strength to do so, which is we're seeing more customers, better renewals, better engagement, more diversity across our product line than we've ever seen and in addition to both Mathway and Thinkful, are very upsizing and just continue to establish Chegg as the number one student first company. We're going direct to the students and we're benefitting from that. It is a high-growth, high margin business where we can afford to make significant pull-forward investments and still have our margin, our net margins increase. So we're really excited about our future and we look forward to November and update for not just the fourth quarter but for the future because things are getting very excited for Chegg. So stay healthy. Thank you very much for listening in and we'll talk to you in the next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.