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Chegg, Inc. (CHGG) Q3 2018 Earnings Conference Call Transcript

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Chegg, Inc. (NYSE: CHGG)
Q3 2018 Earnings Conference Call
Oct. 29, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Chegg third quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the call, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Tracey Ford. Thank you. Tracey, you may begin.

Tracey Ford -- Vice President, Investor Relations

Good afternoon. Thank you for joining Chegg's third quarter 2018 conference call. On today's call are Dan Rosensweig, Co-Chairman and CEO, and Andy Brown, Chief Financial Officer.

A copy of our earnings press release, along with our investor presentation, is available at our investor relations website, investor.chegg.com. A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our media center website at chegg.com/mediacenter. We encourage you to make use of these resources.

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Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of the company. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements.

In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg's quarterly report on Form 10-Q filed with the Securities and Exchange Commission on July 30, 2018, as well as our other filings with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and the investor slide deck found on our IR website, investor.chegg.com. We also recommend you review the investor datasheet, which is also posted on our IR website. Now, I will turn the call over to Dan.

Dan Rosensweig -- President and Chief Executive Officer

Thank you, Tracey, and welcome, everyone. As we close out another back-to-school season, we are excited about the continued growth of our business. Our team remains focused on our goals to lower the cost of education and accelerate the path from learning to earning. As a result, Chegg Services revenue grew 37% in Q3, on 45% subscriber growth year-over-year. The strength of our brand is as powerful as ever, with over 80% brand recognition among college students. This has led to great financial results, which Andy will walk you through shortly.

As we approach 2019, we are even more excited about our future. It is clear to us that the more we invest in content and services that address students' biggest pain points, the larger the opportunity will be for Chegg. The education industry is a trillion-dollar market, of which over 15% of the U.S. population participates on an annual basis, representing over 7% of the U.S. GDP.

This is a giant market that is going through dramatic change, and we believe we are one of the driving forces behind that change, as we are pushing the industry to realign with its most important constituents, the students. Modern students lead busy and demanding lives. Three out of four college students are working while they're in school, and over 25% of college students are parents themselves, which is not surprising, given that 40% of today's students are over the age of 25.

They are also being asked to take on more debt than any generation before them to pursue their education without a clear path showing their investment will yield the ROI that they seek and they need. That is why we remain focused on putting the needs of the student first. And in doing so, we are seeing strong demand for the products and services we offer and the way we offer them -- online, on demand, adaptive, affordable, personalized, and backed by human help.

We continue to expand the number of offerings; the depth, breadth, and quality of our services, all to expand student outcome. We believe this expands the TAM, increases engagement, and positively impacts the business model. This is evident in the results that we have seen thus far this year, and I want to walk you through the highlights, as well as some of the updates on our most recent initiatives.

Chegg Study remains the center of our flywheel. We continue to invest in expanding the content and modalities to serve students and, as a result, we now have over 34,000 ISBNs and almost 25 million questions answered and archived. That represents 41% growth year-over-year in our proprietary catalog of expert answers and solutions. This drove over 110 million content views in Q3 alone, up 51% year-over-year. We will continue to invest in Chegg Study because when we do, we have seen increased engagement, higher retention, lower cost to customer acquisition, which has yielded increased subscribers at higher margins.

While we are investing in our core, we are also investing in our future. We are seeing strong initial demand for our new subscription services, Chegg Math, and an enhanced version of Chegg Writing. With over 40% of college students requiring remediation in math, English, or both, these are key subjects where we are starting to leverage AI and machine learning to expand our product offering and provide greater support to a broader range of students. Last quarter, we launched our Math product on mobile to provide students increased access to help when and where they want it.

Chegg Writing now addresses more pain points around the subject of writing, including plagiarism, grammar, sentence structure, and more. With our recent acquisition of WriteLab, we are now expanding the types of writing support we offer in a more personalized and adaptive way. In Q3, students uploaded over 1 million papers to our new writing service, and they continue to rely on our citation and bibliography services, creating over 64 million citations in this quarter alone.

While technology and AI allow us to accelerate and improve the learning experience for many students, they have also made it clear that they benefit from human help. That is evident, as over 60% of our tutor customers come from other services across the Chegg platform. They are increasingly turning to chat and other tech-space solutions to get help at the time and in a format that works best for their demanding schedules. We expect to introduce new chat-based capabilities on the platform for both students and tutors in the second half of 2019.

As we look to the future of our business, our mission remains the same. To save students time, help them save money, and help them get smarter. We believe the more content, products, and services we offer students, the more we can increase their opportunities to learn new skills and master their classes. This is why we recently began testing the Chegg Study Pack, a bundle that offers overwhelming value to students and includes Chegg Study, Chegg Writing, and Chegg Math, all for one affordable price.

In addition to saving money and improving their grades, research shows that 85% of students say they are in college to get a better job. We feel that Chegg CareerMatch will be an important part of their future. We are excited about our first on-campus launch of Chegg CareerMatch in Q3, as our team hosted events at the University of Central Florida. We interacted with thousands of students on campus and were delighted by the feedback we received. Our team is hard at work incorporating the insights we gathered into our product experience, and we are enthusiastic about the impact Chegg Career Match can have on students' abilities to go from learning to earning.

We are very proud that we have built a mission-driven company. We think the industry is being influenced by the work our team is doing and is moving increasingly in a direction that we believe will benefit students. We couldn't have gotten to this point without an ambitious, creative, and amazing team, which is why we were thrilled to play in the Top 50 of Fortune's Top 100 best medium-sized places to work in our first year of applying for this distinction. We want to take a moment to thank our employees, and we are deeply thankful for their commitment and dedication to increasing access to education by lowering the cost, improving the outcome, and always putting the student first. With that, I will turn it over to Andy. Andy?

Andrew Brown -- Chief Financial Officer

Thanks, Dan, and good afternoon, everyone. Chegg had a great third quarter, with our business metrics and financials ahead of our expectations. These strong results give us the confidence to raise our guidance again for 2018. We are also providing our initial outlook for 2019, which represents continued growth and leverage in the model. We are extremely proud of what the Chegg team has accomplished, as students are increasingly relying on Chegg's integrated platform of connected educational services to improve their outcomes.

For the third quarter, total revenue was $74.2 million, with both Required Materials and Chegg Services revenues exceeding our expectations. This strong top line performance drove gross margins to 73.2%, a significant increase over the 64.3% we achieved in Q3 of 2017. This resulted in adjusted EBITDA of $12.5 million, more than double of what we achieved in Q3 of 2017, and well above our expectations, demonstrating the leverage of our model.

We ended the quarter with approximately $475 million of cash and investments on the balance sheet. We believe the strength of our balance sheet and our operating model, which generates cash, is one of the strongest in the education industry. Based on the great results of the fall semester rush, we are increasing our guidance for 2018, even after incorporating the anticipated costs associated with responding to the data incident that we announced in late September.

For Q4, we now expect total revenue between $90 and $92.5 million, with Chegg Services revenue between $78 and $79.5 million; gross margin between 75% and 76%; and adjusted EBITDA between $33 and $34 million, which represents approximately 60% growth year-over-year. As a result, we are now increasing our full-year 2018 guidance. We now expect total revenue between $315 and $318 million, with Chegg Services revenue between $250 and $252 million; gross margin between 74% and 75%; and adjusted EBITDA between $81.5 and $82.5 million, or approximately 26% EBITDA margin growing more than 75% year-over-year.

And finally, we expect CapEx to be between $32 and $35 million, with approximately 80% being used to fuel expansion of content and add new modalities, such as video for our subscription services. We believe these investments increase engagement on our platform, expand our TAM, and create more value for students.

Turning to 2019, our initial expectation for total revenue is approximately $388 million, with Chegg Services revenue growing approximately 30% to $326 million. We expect Chegg Services revenue and subscriber growth rates to be more closely aligned in 2019, as the subscription portion of our revenue becomes a larger contributor. We expect gross margin to be approximately 75%, and adjusted EBITDA margin to expand 3 points to 29% or $112 million.

For those of you modeling 2019 by quarter, we expect Chegg Services and Required Materials revenue to be seasonally similar to 2018. However, our quarterly adjusted EBITDA cadence will shift slightly due to the expenses associated with the acquisitions of WriteLab and StudyBlue, details of which have been provided 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 2019, all while continuing to invest in both the content that powers our existing services, and building out our new services to improve student outcomes. With that, I'll turn the call over to the operator for your questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * keys. Our first question comes from Jeff Silber with BMO Capital Markets. Please go ahead.

Jeffrey Silber -- BMO Capital Markets -- Analyst

Thanks so much. I hate to bring this up right at the beginning. You guys had a good quarter. But can you give us a little bit more color on what happened with the security breach, what you found so far, and what your plan is to make sure this doesn't happen again? Thanks.

Dan Rosensweig -- President and Chief Executive Officer

Hi, it's OK. It happens. We wish that it hadn't. We're grateful to our team on how quickly they rallied. We don't really have much to add to the question of what happened. That's all in the 8-K that we filed. But any results of that are reflected in our guidance and our forward-looking guidance, which I think you can see means there really wasn't anything significant one way or the other as it results to our business, so we don't really have much to add. With the exception of, we acted very quickly. Once we found out what the situation was, we reacted very quickly.

We made sure we communicated as aggressively as we could, as quickly as legally was possible. We notified everybody on our list, whether they were current customers or not just out of a courtesy. Our students responded incredibly quickly and incredibly well. It's a shame that we live in a world where they're used to this. But there's a lot of this going on the internet. We don't have much to add other than what we already filed in the 8-K, for all the reasons that you can imagine. But I'm proud of the way our team responded, and you can see the results are what they are, which are really great results.

Jeffrey Silber -- BMO Capital Markets -- Analyst

You don't think it's had any impact on subscriber growth since then?

Dan Rosensweig -- President and Chief Executive Officer

Again, when I look at where we finished, and when I look what our guidance is, I would suggest that we've not seen anything meaningful one way or the other. To be honest with you, we didn't expect that would be the case because in this particular case, what they got access to was no credit cards, no financial information, none of that stuff. So there was no change in anybody having to change a credit card.

There was no change in any of their behavior that they needed to do, with the exception of changing their password, and that is something that we regularly do anyway for security reasons. Over the course of the period between now and then, it's been business as usual over the spectrum of time. On given days, there were different things that had to happen. We mailed out. We got responses. Those kinds of things. But overall, we are very comfortable with our guidance.

Jeff Silber -- BMO Capital Markets -- Analyst

Okay, fair enough. Can we shift back to the business? Can you talk a little bit about what you found in terms of the pilots with the Study Pack so far?

Dan Rosensweig -- President and Chief Executive Officer

Yeah, very, very, very early. Let me walk everybody through the process because I know everybody is excited about it, as are we. Step 1 was to make sure that we could get the necessary assets. And that was part of when we acquired Writing, and we acquired Math. Step 2 is to make sure that we actually launched the math product in the United States first on the desktop. In our prepared remarks, we mentioned that it was now on mobile, and we're super excited about that.

Part of the steps along the way were to get NetSuite in place and working. I'm satisfied that NetSuite overall because it was for the whole company, but it allowed us to do be able to do things like bundles. So that is in place. We've been testing pricing and messaging. We are where we thought we'd be in the process. I just want to remind everybody that we really don't anticipate any impact to anything, even in the course of '19 because remember, the way our business works versus other people's businesses is we have semesters.

So our business period is basically mid-August to mid-June. Then we have a lot of building periods. We work very hard in the summer. Our teams work their butts off to clean up anything, add anything, develop the new features, get all the bugs out of things. We have semesters right now going on where we're able to test certain things. Then any significant changes that we want to make won't happen until after June and before August.

We have deliberately said we're doing this. We've deliberately said that you won't see any impact on our numbers. Our numbers for next year don't reflect this. That's all good news.

Jeff Silber -- BMO Capital Markets -- Analyst

Okay, great. I'll jump back in the queue. Thanks so much.

Dan Rosensweig -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Doug Anmuth with J.P. Morgan. Please go ahead.

Douglas Anmuth  -- J.P. Morgan Securities -- Analyst

Thanks for taking the questions. First, can you just talk a little bit about gross margins? I know you're looking for 74% to 75% this year, and I think 75% in '19. I guess just trying to understand if there's a way that those gross margins can be higher. I know you did point to the EBITDA on the 300 basis points of leverage there for next year. How tied is that to the Study Pack, the bundled product rolling out later next year?

Then I guess just secondly, can you just talk about Required Materials a little bit in terms of the decline that we saw, and then how we should think about that going forward? I know you pointed out the $50 to $60 million. Thanks.

Andrew Brown -- Chief Financial Officer

Doug, when you look at our gross margins, they have expanded, as you're aware. We continue to see more and more of our business go to the subscription side of the business, which is highly leveraged. That's contemplated in our model going into 2019. As far as the Study Pack goes, as Dan had mentioned earlier, the Study Pack isn't contemplated in 2019. We believe that, as Dan mentioned, we're by semesters. The earliest it'll really start to roll out is late next year, but it's more of a 2020 event than it is 2019.

With respect to Required Materials, Required Materials is doing exactly what we thought it would do, right? I mean, we've said for a period of time that it would be in that kind of $55 to $60 million range. We're clearly exceeding that at this point in time. I think part of it is that we continue to see that business doing slightly better than we'd anticipated. I mentioned that in the prepared remarks for this past fall semester. So there's nothing particularly unusual in the Required Materials business.

Dan Rosensweig -- President and Chief Executive Officer

I'm a little lost on what you mean by going down. We're picking up market share, and we're seeing growth. We didn't expect to see growth, but that part of the business, like the whole business, has been overperforming. I think a lot of that has to do with the brand recognition we have, the execution, the benefits that we offer, and most of the other people failing in our space.

We're actually very satisfied with the execution of our Required Materials team, and that business is actually getting even stronger for us because of increasing consignment and the continued gradual shift to e-textbooks. All of those things are to the advantage of Chegg and our students and our shareholders so that business has actually been better for us that we had anticipated.

Douglas Anmuth  -- J.P. Morgan Securities -- Analyst

Okay. Thank you.

Dan Rosensweig -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Brent Thill with Jefferies. Please go ahead.

Brent Thill -- Jefferies -- Analyst

Good afternoon. Just as it relates to the guidance for next year, I was just curious if you could walk through what you're baking into that guidance and any of these new initiatives playing a role there?

Andrew Brown -- Chief Financial Officer

The initial guidance for next year, and as you can tell, it's fairly early. We're only in October right now, but when we look at next year, we anticipate continued strength in our core product. The core products are our subscription services, which is Chegg Study, Writing, and then the emergence of Math, as we introduce that this fall. It doesn't include things like, and once again, I'll just reiterate, it doesn't include the Study Pack.

We believe the Study Pack is a bigger contributor as we get into '20. It's more important for us during this period of time in 2019 particularly, 2019 is to continue to test the right messaging and pricing and so forth. But it doesn't anticipate anything new. So, for example, it doesn't anticipate anything from Career Match. We think that is going to be more of a 2020-2021 event. It's the core of our business, which like I said is Study, Writing, and Math.

Dan Rosensweig -- President and Chief Executive Officer

But it does include the cost side of the investing in those things.

Andrew Brown -- Chief Financial Officer

Good point, Dan. Thank you.

Dan Rosensweig -- President and Chief Executive Officer

We don't put risky revenue in our guidance. We've been very careful about articulating that there are investments we're making now for the future, which by the way, we're incredibly excited about. These investments are things we're making, and we're not guessing, which is we've done a lot of work to understand what students need and what they want. One of the great benefits to owning the customer, owning the data, owning the channel, and owning proprietary content is that we can and should be able to create overwhelming value for students at a lower cost than anybody else can. I think you're seeing that show up in our model. The fact that we can increase gross margins, increase our EBITDA by 300 basis points, and do all those things while we're investing in our future, really shows you just how strong the core of the business has become.

Brent Thill -- Jefferies -- Analyst

Real quick, Dan, just as a follow-up, obviously the market has become a little more defensive. If growth starts to roll over a little bit, can you just talk through the sensitivity to your business? It feels like you're more insulated than most, but just talk through that. And also, about you potentially going more on offense with being blessed with $475 million in cash. Would you be willing to move a little quicker on even some larger deals if we saw this downdraft continue?

Dan Rosensweig -- President and Chief Executive Officer

Yeah, terrific question. Interesting times we live in. So the good news for the Chegg business, our model is Brexit, tariffs, all those things, tax cuts, no tax cuts, who wins the election, who doesn't win the election, none of those are variables in our business. They are variables in lots of people's businesses. We don't have currency exchanges or any of those things. This is very clean, very straightforward and thanks to the work that the team and Andy have done are a much more simple business to run. A very important business. We think it has a huge upside opportunity.

From our standpoint, even though we had a breach, we had this market turmoil, these are all things that we're very fortunate for working for a lot of years that they don't affect our business negatively. So that's the good news. The question which you asked, which was, does this encourage us to do things faster? We very deliberately raised the capital the second time because anybody who's been alive long enough, and I'm 57, knows that rainy days come. You don't know when they're going to come. You don't know what's going to cause them. But you want to be armed with as much capital as you can at the lowest cost of that capital. And our capital is extraordinarily low cost, thanks to Tracey and Andy, and the work they have done to go raise it at almost zero interest rates.

We do have that capital. We are always looking for assets that we believe students would benefit from that solve very large pain points that leverage our brand, our reach, our data, and our business model, so that we could grow them faster and at a lower cost, and create more value for students, not only in the U.S. but over time eventually different places in the world. I don't know that we'll move faster or I don't know that we'll buy more expensive things as a result of it. They're all going to have to have the necessary ROI for us to want to be able to do it. They have to create value for students; they have to be assets that can leverage what we have; add to what we have; be accretive to what we have over time; and fill very big spaces.

So we are constantly looking at that marketplace. But to your point, what ends up happening in tumultuous times like this is weaker companies in terms of either their balance sheet or the amount of runway that they have, they do become available earlier than they otherwise might. So we are prepared if those situations do arise, but they're going to have to go through the same criteria that we've gone through, which got us things like Chegg Study and got us things like Chegg Writing and Math. We're enthusiastic about having a strong balance sheet and having a great business that kicks off free cash flow and is growing at this rate because it's very clear to the industry that the direct-to-student model can work, and that we're the leader in that space.

Brent Thill -- Jefferies -- Analyst

Thank you.

Dan Rosensweig -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Corey Greendale with First Analysis. Please go ahead.

Jianyu Wang -- First Analysis Securities -- Analyst

Okay, thanks. This is Ken Wang on for Corey. First off, congratulations on another very strong quarter.

Dan Rosensweig -- President and Chief Executive Officer

Thank you, Ken.

Andrew Brown -- Chief Financial Officer

Thanks, Ken.

Jianyu Wang -- First Analysis Securities -- Analyst

Just wondering, anything you can offer, maybe just qualitatively on retention? I think you mentioned that you've seen some improvement, but can you speak to that any more, kind of any more detail on that?

Dan Rosensweig -- President and Chief Executive Officer

When most people think about retention, they obviously think about our subscription services, as they should. The premise that we have believed in and that we're executing on is the more content we have that expands the top of the funnel, but also goes deeper into the funnel and horizontally within the funnel, meaning the adding of videos isn't different content or deeper content, it's supporting content for people who learn that way. All three of those things not only increase the TAM, but they continue to allow us to have this great growth, and it does positively affect retention.

What we continue to see is that students are starting earlier and staying on longer. We also know through our testing of prices, some of you from time-to-time might see a $19.95 price point for Chegg Study because you found yourself in one of our test cells. We test constant pricing over the last five years. We also know that we have pricing strength. What has been most notable to us about that pricing strength is when we look at our ability to have raised prices four years ago, three years ago, two years ago, and this year, for example, the gap gets much closer. That is because students are seeing the overwhelming value because we continue to add content.

If you just focus on the growth of the utilization of the services, I think that suggest just how much value we're creating for them. The very interesting thing, we're more expensive than Spotify; we're more expensive than Netflix; we're more expensive than any one of the consumer products that they use. But our retention on a month-to-month basis is extraordinary. Those are the reasons for it.

Again, I just go back to the fact that in the modern-day internet world, if you have a platform where you own the customer, you own the data, you own the channel, and you own the content, these are the kinds of things that you should be able to do more efficiently and effectively than other companies, which helps us build a giant moat. Just the Q&A alone is a great example of that. I'm hoping, Ken, that answers it for you.

Jianyu Wang -- First Analysis Securities -- Analyst

Yeah, thank you. That's helpful. Then also going off your prepared remarks, you mentioned continuing improvements in customer acquisition costs. Anything you can offer just on whether you see the potential for meaningful further efficiencies or whether you might be reaching some sort of plateau in the future?

Dan Rosensweig -- President and Chief Executive Officer

It's a very fair question. What I would say is, we think we can continue to improve upon that efficiency based on our brand, based on the redesigns we're doing to the commerce flows, to redesigns we're doing to the channels, to new top-of-the-funnel things like StudyBlue, like Writing, like Math. There's a whole lot of things that will bring us more organic traffic. That alone will be helpful. It's not that the percentages will get substantially bigger in any given quarter, but at the scale we're at now. I think that people forget that we're on target to do over 3 million paying subscribers this year. That's a giant number compared to where we were just a few years ago and compared to some of these media companies, that are announcing that they have 3 million subs on their new all-access businesses. I think at that scale, these CPAs add real meaningful impact on the margins and EBITDA margins.

Jianyu Wang -- First Analysis Securities -- Analyst

Great. Thank you. Congratulations again.

Dan Rosensweig -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Chris Howe with Barrington Research. Please go ahead.

Christopher Howe -- Barrington Research Associates -- Analyst

This is Chris Howe sitting in for Alex Paris. Great quarter, guys.

Dan Rosensweig -- President and Chief Executive Officer

Thank you.

Christopher Howe -- Barrington Research Associates -- Analyst

Just had a few questions remaining for you. The first one is in follow-up on Ken's first question. Just about the utilization rate, length of stay, and how often students are returning to use, specifically the tutor service. You mentioned that you're adapting and adding to tech space tutoring in the near term. I just wanted to see your input on what you're seeing there as far as student-specific trends.

Dan Rosensweig -- President and Chief Executive Officer

Yeah. It's again, terrific question. From our standpoint, we spend a lot of time early on in Tutors really building the site to take offline tutoring and put it online in the same format. Which meant we really did build a site and a service designed to drive people into video-based tutoring. So we eliminated a lot of the capabilities in written and in chat-based. So over the course of this year, as we roll them back out in their older format, we see great results.

That is another reason that we're certain that this is a better model to go to than the other one. As I've said on earlier calls from time to time, the weekends are interesting because the weekends we get a lot more video calls because they have a lot more time and they have a lot more privacy. During the week, they have less time and less privacy. But during chat, they can do it from their phone anywhere they are on the bus or at work, wherever they might be, in the library. It takes time to rebuild the entire platform to do it at scale. But whenever we open up capabilities that allow them to utilize tutoring that way, the business goes up.

Christopher Howe -- Barrington Research Associates -- Analyst

That's helpful. Then one last one for me, just as it relates to Writing, Math, as well as EasyBib. Can you perhaps share some additional color on the different things that you're seeing within medical school and high school as far as penetrating those markets and what you're seeing out of those students, and how that eventually funnels into that attractive incoming freshman group?

Dan Rosensweig -- President and Chief Executive Officer

Yes, it's an area that we obviously look at. Just to clarify for people, EasyBib is one of the four brands that we have in Writing. It's the biggest, and when we talk about expanded Writing or enhanced Writing, that's the subscription service, that is at the bottom of each of those things. So it's a premium funnel that goes into it. So we don't generally see the paid stuff down in the lower grades, because that would require a parent rather than the student themselves.

So you're absolutely right. Not only Writing and Math, but also StudyBlue, they are all designed to get us ingrained in audiences we didn't have services for yet. That includes going deeper into high school, but it also includes going more global, because all of those different capabilities are ones that people need in different countries around the world. It's a long-term play. Fortunately, these are great assets. Fortunately, Writing was a great asset before we got it, but we've been able to expand it, accelerate it, and grow it faster and make it more profitable under the two teams coming together with Chegg.

We feel like those are going to be the opportunities that are going to be available to us, which is we get incredible assets, we figure out how to make them better. We invest in them more, but we grow them faster, we make them more profitable, and it picks up new audiences for us. I don't really have a number for middle school. What I can tell you is if you look at the collective writing number, it's about 30 million visitors, users use Writing over the course of a year. So when you take a look at the U.S. college market and the U.S. high school market, that's about 36 million. We feel like we've got extraordinary penetration, but we want more tentacles into the younger people to bring them in too.

We see that, by the way, a lot of the benefits of those things can be seen in those reduction of CAC, which we talked about earlier, because it's cheaper for us to acquire them when they're freshman now because we don't really have to pay for them because we already have them in our network. We see it on the fact that Textbooks has accelerated, and we see it on the fact that Chegg Study continues to grow. One of the challenges we had with Chegg Study was how do you get a first semester or a second-semester freshman to know it exists? All of these assets contribute to the success we're having.

Christopher Howe -- Barrington Research Associates -- Analyst

Thanks, Dan and Andy. Appreciate it.

Dan Rosensweig -- President and Chief Executive Officer

Thank you.

Operator

Next question comes from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

Yeah, a two-part question from me. It's regarding the CapEx. For 2018, we bumped it up a little bit here. The old range was $30 to $35 million, and now we're talking $32 to $35 million. Historically, when you've done that, it's been around asked-and-answered, building up that database. Just curious to know what is that, in fact, the case here for 2018? Then the second part of the question has to do with expectations for CapEx in 2019 if you have that.

Andrew Brown -- Chief Financial Officer

Eric, when you look at CapEx for this year, it's combination of two things. One is the content that you talked about. Over the last 12-15 months, we've been expanding that content, for example. About this time last year or maybe a little bit earlier than this time last year, we started to do video, right? We talked about, and we'll have upwards of 14,000 videos by the end of this year. It's a new modality like Dan had talked about. So that was part of the additive there.

Then the second part is that we don't get into a lot of details on this, but we've been adding to our facilities. We've been growing as a company. We've got over 1,000 employees now, so we're adding to our facilities across the globe, and including in Santa Clara. Those are the larger components for this year.

As we look into next year, it's a little early. We gave you the operating model, obviously, for 2019. But we're continuing through our planning process, and we'll be as rigorous as we've always been when it comes to content. We've got specific ROI objectives for content, whether it be technical solutions, whether it be Q&A, whether it be videos, whatever it may be, and we'll give you more details on that when we come onto the February call.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

Okay, thank you.

Andrew Brown -- Chief Financial Officer

You bet.

Operator

Our next question comes from Mike Grondahl with Northland Capital Markets. Please go ahead.

Michael Grondahl -- Northland Securities -- Analyst

Congratulations on 45% sub-growth. That's another nice number. Any updates on Canada, the U.K. or Australia, kind of where you're thinking internationally?

Dan Rosensweig -- President and Chief Executive Officer

Yes. It's increasingly an area that we imagine will be additive to us over the next many years. As a reminder as to why it's a really great question is if you combine those three countries together, they're about 50% of the market size of the U.S. market alone. As a reminder, substantial percentage of the content that we already have licensed for are from the exact same publishers in this country that publish in those countries. However, we are prioritizing bundles and other things, and we are seeing organic growth in those markets.

We are investing now as part of our CapEx and other things in terms of making sure that the localized content that we want to add we are beginning to add. We don't expect any big announcements about it any time this year, first part of next year. We are still debating whether or not it requires a .ca site or a .uk site or a .au site, as opposed to making sure we can localize some of the content and localize the pricing, and the way we charge. Those are all strategic things we are working on now. We feel those are going to be very robust markets for us over time. We're already beginning to see students find us independent of our own actions. We are really bullish on those things.

Michael Grondahl -- Northland Securities -- Analyst

That's a good sign. Anything to call out on the marketing efforts during the back-to-school season for Chegg Study or even the textbooks?

Dan Rosensweig -- President and Chief Executive Officer

Well, what I can do is for you is list for you the areas that we spend our time on. As a reminder, 80%+ of our traffic is organic. We have incredible word-of-mouth. We have incredible referrals. A substantial percentage of all of our customers come as a result of finding out about us from another customer. We are world-class in FEO. The Sallie Mae deal, Cengage Unlimited deal, and then what we do in paid marketing, what we do in things like Music101, these are all things that contribute to our brand recognition, our brand validation, and bringing direct traffic into the site.

On the paid side, we spend the majority of our money on the paid side exactly where you would imagine we would spend it. We spend it on Pandora and Spotify and Facebook and search. When we do that, every one of those things has a specific ROI and a CAC number that we want to do and a lifetime value number that we have historically.

I don't think you'll see anything uniquely special, but the things that we know work and the more efficient they are, the more we invest in them. The less efficient they are, the less we invest in them. We're blessed by such a great brand and great word-of-mouth. That is for the last 3-5 years; it is a decreasing percentage of our revenue that we spend on paid marketing, but also an actual decreasing number. That is a result of us becoming more efficient and finding partnerships and distribution channels and 80%+ recognition in terms of our brand. These are the things that are really driving our business.

Michael Grondahl -- Northland Securities -- Analyst

Great. Thanks a lot.

Andrew Brown -- Chief Financial Officer

Thanks, Mike.

Operator

Next question comes from Brian Essex with Morgan Stanley. Please go ahead.

Brian Essex -- Morgan Stanley & Co. -- Analyst

Hi, good afternoon. Thank you for taking the question. I think Dan, you may have just touched on one of the questions I wanted to hit, which was on the sales and marketing efficiency. What are your assumptions embedded? I mean, you've got some nice incremental leverage there. How sustainable is that rate of leverage? You may have noted you're expanding your facilities, but G&A costs came down. I guess just in general on those couple of points, as tech and development increase year-on-year, how do you think about the leverage points for incremental operating leverage? Obviously, you're going to invest more in tech and dev. But would just love a little bit of color on that.

Andrew Brown -- Chief Financial Officer

Brian, it's Andy. You kind of hit on it, to be honest with you. The fact of the matter is we are seeing leverage, particularly on the sales and marketing line and then on the G&A line. You would expect to see that on the G&A line specifically. Really what drives G&A cost is really not revenue growth, it's complexity. We don't anticipate our business getting any more complex next year. We are continuing to invest in both our current products and our future products. Whether it by Study, Math, Writing as far as the core products. And Tutoring, or whether it be Careers and international and things like that. So that's why you're seeing the investments there. But the net-net of it is we're seeing 300 bps expansion, or at least that's our initial estimate for 2019. Like you said, marketing and SG&A are the big areas.

Dan Rosensweig -- President and Chief Executive Officer

I wouldn't be me if I just didn't chime in. That includes us making significant and important investments for future growth. We're not optimizing around this. It's just the core business is so strong that we are given this opportunity to not only grow our margins but invest in future assets like StudyBlue, invest in things like CareerMatch. There's a lot going on here that we think will be very meaningful in the future. We're beyond enthusiastic about the future opportunities at Chegg.

Brian Essex -- Morgan Stanley & Co. -- Analyst

How much of that particularly on a sales and marketing side was scale as usual and strength of the brand versus new initiatives like Sallie Mae?

Dan Rosensweig -- President and Chief Executive Officer

In terms of spend, we don't spend on Sallie Mae; they spend on us.

Brian Essex -- Morgan Stanley & Co. -- Analyst

But that partnership driving that traffic to your site, right? So dollar-wise you keep coming down, but I'm just wondering in terms of new initiatives relative to greater leverage and brand building, what would be driving that incremental leverage?

Dan Rosensweig -- President and Chief Executive Officer

I appreciate the question. I'm not sure that we're -- I think it's very early for us with Cengage Unlimited and Sallie Mae to really understand the long-term impact of them versus other paid initiatives. When we do our forecasting, we make assumptions on how each of these things is going to perform, and they're all assumed in how we build the business. So we constantly reprioritize and redirect capital toward things that work better and eliminate things that don't work better. That's why I think our company is very efficient. I can't really speak to -- I mean, it's a fair question. It's too early for us to be able to make that determination.

Brian Essex -- Morgan Stanley & Co. -- Analyst

Got it. Can I sneak one in on services revenue? Is subscription revenue per subscriber still growing and is other any way we can get a handle on magnitude of other revenue in that services line?

Andrew Brown -- Chief Financial Officer

The answer is yes. When you look at our subscription-based businesses, the RPU is growing. As I have mentioned in the prepared remarks, in fact, what we're seeing is the subscription component of our business is becoming a larger percentage of the overall business as a result. In other words, it's growing faster than the other components.

Brian Essex -- Morgan Stanley & Co. -- Analyst

Very helpful. Thank you.

Operator

Your next question comes from Alex Fuhrman with Craig-Hallum Capital Group. Please go ahead.

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

Great. Thank you for taking my question, and congratulations on a strong start to the semester. A couple things I was hoping to ask about regarding the investment you're making in content and how your students are interacting with the content. Just looking at the views and the number of content views that you've alluded to on some of the last conference calls. It looks like the usage of the content, and the number of content views has been growing a lot faster than your actual Chegg Services revenue. It's been growing a little bit faster than your subscriber base, which I imagine we could probably interpret that your students are getting increasing value over the product over the last couple of years if they're using it more and paying the same for it.

I'm just wondering how we should think about those numbers evolving over time? I notice that this most recent quarter, it looks like content views were up about 50%, which is still a huge amount and outpacing your user base, but a little bit less than the 60% we've seen for the last year or two. Are those numbers you would expect to converge over time or were there may be some kind of one-time events here in the quarter related to either the database breach or some of the extreme weather events going on in the fall, beginning of the semester? Just curious why that content view number has come in a little bit, and if you think that's a blip on the radar or if that's just sort of the natural evolution of your product as you build out a larger user base?

Dan Rosensweig -- President and Chief Executive Officer

You're very thoughtful about the question. I'm not sure we'll be as thoughtful about the answer, meaning I don't think we look at it that way, and maybe we can. Which is what we see on a per-user basis is their engagement has not declined at all. It continues to go up. A lot of the engagement has to do with when they start in a given quarter. So we're reporting on Q3. So Q3, our subscription businesses don't really start until later in September, where the textbook business starts in August. So there are core seasonality variables. Also, the growth rate is extraordinary on top of massive numbers.

The goal isn't necessarily to get them to use more and more content. The goal is to make sure we have the content that they actually want and need. So we're not trying to -- I remember the old days when I was at Yahoo where we would try to create environments for them to stay longer, create more ad pages, and put more ads on it. That's not our business model. Our business model here is can achieve the goal that they came in to subscribe for us to achieve? Which is, do we have what they want? Is it in a format that they benefit from? Do we have the right modalities? Do we have it in the cloud? Do we have it on desktop, as well as on mobile? Is that stuff ubiquitous? Are we covering more and more of the classes that they may have at a given time?

There isn't really a desire necessarily to have them consume things that they don't want to consume. It simply is the quality really good? Is the speed in which we can supply it really good? Is the searchability really good? We've not connected those dots except to say that because of the increased engagement, we know how much they value us, and we know exactly what they like and what they don't like. We can improve what they don't like and add more of what they do like. Does that make sense?

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

That does make sense. Thank you for that. Just building on that, thinking about the Q&A expert answer database that you have. You've obviously added a tremendous amount to that database this year. Can you give us a sense of where that investment has gone in terms of either building out new subjects or going deeper into existing textbooks and existing subjects? Or some combination of all those things? Just curious where those extra millions of answers have primarily found a home.

Dan Rosensweig -- President and Chief Executive Officer

That is what we do spent a lot of time on. First of all, we spend a lot of time on technology to avoid duplicate questions, because that's money we spent for no incremental value. So by its nature, the overwhelming majority of these questions aren't questions that haven't been asked before, which means that they're a combination of either newer version of books, the online learning system of the publishers that they may sell into institutions, as well as brand-new subject matter for textbooks that we don't cover. All three of those are areas that we continue to see growth.

I'm as surprised as many people that the rate of growth in terms of the questions, where we're almost doubling the number of questions each year that we answer, it's almost the question is, are they going to run out of questions? The answer is they don't because lots of things happen. They get new subjects. The courses change. The professors change. You need to understand that there's 1.2 million adjunct professors in this country. Colleges are filling things with TAs and adjunct professors, and a lot of them have different curriculum, so we are relevant across the board, no matter what subject you want to study or who is teaching it.

Then increasingly, I expect that will remain similar kinds of growth as we move into some of the other countries, where we start getting more questions from the Canada, the U.K., and Australia. So this is an incredible differentiator, an insanely powerful moat versus anybody else, and one of those assets that when we came up with it, we knew it had value. I don't think we understood it would have this much value. We just love it because every one of those questions has a positive ROI because it gets reindexed in search, and then it drives other people who have similar questions. So this is a core competency of our company and a real powerful differentiator versus anyone else.

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

That's really helpful. Thank you.

Dan Rosensweig -- President and Chief Executive Officer

All right. Thank you.

Operator

Next question comes from Aaron Kessler with Raymond James. Please go ahead.

Aaron Kessler -- Raymond James -- Analyst

Yes, a couple questions. First on Chegg Study. I know you talked about expanding beyond STEM, as well as maybe beyond four-year colleges. Can you give us an update maybe on progress against those initiatives? Also, just in terms of e-textbooks, it sounds like maybe you're starting to get a little more penetration. Just give us maybe the latest color around e-textbooks adoption and what you expect going forward here? Thank you.

Dan Rosensweig -- President and Chief Executive Officer

I'll start with the e-textbooks first. For many years, it was anchored at 6% to 8%. Then I think when rental became such a differentiator in the industry and such a disruptor in terms of the cost of college textbooks, that the publishers embraced the rental model themselves, and that's what got us into consignment. As we got into consignment, that also allowed us to show the publishers how if they price e-textbooks correctly, that students would increasingly take up the e-textbooks.

For us, we were agnostic in that we get the same amount of gross margin relatively, particularly with consignment now. So for us, it really was helping the publishers understand how they could recapture more and more of their market. But the benefit to Chegg was the more students we have on digital, the more than we can monitor what they do and supply our services and be able to directly connect our services right into them when they're online.

That is an area where we are now seeing noticeably above 10% in terms of penetration each semester. We're seeing nice growth in that area, and that's been good for our investors, good for students, good for us, and good for the publishers. The e-textbooks that we're not going to predict any dramatic change because it's really determined by the publishers' current business situations. I think we're going to see that the publishers are going to continue to struggle for a while. Chegg is the beneficiary of that struggle, not the other way around, whereas the bookstore may not be, as an example.

The question of beyond STEM in college, I think it goes back to the other comment we made earlier, which is we're filling a lot of those gaps because we are being asked a lot of those questions. We always debate how much new content we want to add in a year. Do we want to do it to expand the top of the funnel? Do we want to do it to expand the length of time that a student stays with us to get deeper into their major? We try to balance each one of those things. I think we just said we have over 34,000 ISBNs now, so we continue to expand by a couple thousand. It's always a mixture of new categories and deeper into majors.

The reason to go deeper into majors is because you get a lot of the big classes for freshman and a lot of the smaller classes for seniors. So once we get you as a freshman into Chegg Study, we want to have something all the way through even the deepest majors. And that gives us a financial benefit of the lifetime value of the customer, not just the top of the funnel. So we are always looking at that. The wildcard in a good way, not in a bad way, but in a good way is Q&A, which is if we have students that are taking the courses that we have, but they want to start using us for other classes that they're taking that we don't have, they ask questions, and we expand our TAM, and then that helps drive in new customers. That's why we continue to see this extraordinary rate of growth. It's a really positive, virtuous cycle.

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

Got it, great. Thanks a lot.

Operator

Thank you. I'd like to turn the floor over to Dan for closing comments.

Dan Rosensweig -- President and Chief Executive Officer

Thank you, everybody, for joining the call. We're grateful that you've been following along on our journey and our story and for the support the investors have been giving us, particularly the last couple years. But I really want to give a shout-out and gratitude and appreciation to the employees of this company, and Tracey.

Entering the first time to the Fortune Top 100 places to work for a small company in Silicon Valley that is surrounded by behemoths was really a wonderful example of the culture that our teams have been building, our HR department has been building, the employees bring to this company. They love the mission. They love the vision. They bring their hard work and dedication every day, and they're focusing on better outcomes for students. That's resulted in a very unique, positive place to work.

To be able to have applied in our first year and then broken into the Top 50 was beyond our wildest dreams and our expectation, but really does show how a smaller company like ours in a town like Silicon Valley continue to attract the best and the brightest if the mission matters. People who are mission-driven come here. I think you'll continue to see great execution as a result of that. Thanks, everybody, for joining the call, and thanks all our employees for everything that you continue to do for students and for Chegg. We'll see you next semester.

Operator

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

Duration: 60 minutes

Call participants:

Dan Rosensweig -- President and Chief Executive Officer

Andrew Brown -- Chief Financial Officer

Tracey Ford -- Vice President, Investor Relations

Jeffrey Silber -- BMO Capital Markets -- Analyst

Douglas Anmuth  -- J.P. Morgan Securities -- Analyst

Brent Thill -- Jefferies -- Analyst

Jianyu Wang -- First Analysis Securities -- Analyst

Christopher Howe -- Barrington Research Associates -- Analyst

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

Brian Essex -- Morgan Stanley & Co. -- Analyst

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

Aaron Kessler -- Raymond James -- Analyst

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