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Edited Transcript of CHGG earnings conference call or presentation 11-Feb-19 9:30pm GMT

Q4 2018 Chegg Inc Earnings Call

Santa Clara Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Chegg Inc earnings conference call or presentation Monday, February 11, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew J. Brown

Chegg, Inc. - CFO

* Daniel Lee Rosensweig

Chegg, Inc. - Co-Chairman, CEO & President

* Tracey Ford

Chegg, Inc. - VP of IR

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Conference Call Participants

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* Aaron Michael Kessler

Raymond James & Associates, Inc., Research Division - Senior Internet Analyst

* Alex Joseph Fuhrman

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Alexander Joseph Giaimo

Jefferies LLC, Research Division - Equity Associate

* Alexander Peter Paris

Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst

* Brian Lee Essex

Morgan Stanley, Research Division - Equity Analyst

* Douglas Till Anmuth

JP Morgan Chase & Co, Research Division - MD

* Eric Martinuzzi

Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst

* Jeffrey Marc Silber

BMO Capital Markets Equity Research - MD & Senior Equity Analyst

* Michael John Grondahl

Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to Chegg's Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tracey Ford, Vice President of Investor Relations for Chegg.

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Tracey Ford, Chegg, Inc. - VP of IR [2]

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Good afternoon. Thank you for joining Chegg's Fourth Quarter and Full Year 2018 Conference Call. On today's call are Dan Rosensweig, Co-Chairman and CEO; and Andy Brown, Chief Financial Officer. A copy of our earnings press release, along with our investor presentation, is available at our Investor Relations website, investor.chegg.com. A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our media center website at chegg.com/mediacenter. We encourage you to make use of these resources.

Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of the company. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements. In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg's quarterly report on Form 10-Q filed with the Securities and Exchange Commission on October 29, 2018, as well as our other filings with the SEC.

Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release on the Investor slide deck found on our IR website, investor.chegg.com. We also recommend you review the investor data sheet, which is posted on our IR website. Now I will turn the call over to Dan.

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [3]

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Thank you, Tracy, and welcome, everyone, to our 2018 Q4 earnings call. It was another incredible year for Chegg as we exceeded all of our expectations, realizing the benefits of being a high-growth, high-margin business, with increasing leverage as we scale. We continue to believe that the education industry is in the midst of a necessary realignment to more closely associate it with the needs of its most important constituent, the students. For years, we have been strategically building Chegg as an online, on-demand, personalized and adaptive platform to serve the needs of the modern student. Students whose average age is older than ever before, who often have children of their own, are working part-time or even full-time jobs and juggling many priorities. And these students have grown where the world comes to them: On their devices 24 hours a day.

Chegg has been built from day 1 to serve the needs of this audience, and that is why we are seeing such powerful results. With 87% awareness of services on the Chegg platform, our brand recognition is at an all-time high. For 2018, we generated record revenues, record subscribers, record engagement and record profitability, demonstrating the overwhelming value we bring to our students and our shareholders. This success wouldn't have happened without our incredible team around the globe, and I couldn't be prouder of the recognition they received this past year as we were acknowledged as one of Fortune's top 50 best workplaces in technology, top 100 best work places for women and top 100 small and medium-sized companies. Our team's focus, effort and passion for improving student outcomes has made Chegg a truly great place to work because our North star continues to be putting the students first.

In 2018, we articulated 3 key objectives for Chegg: One, to meet our financial goals; two, to expand our TAM by making key investments in new content, adding new subjects, new formats and new services; and three, to add new capabilities to the platform that leverage our brand, our reach, our student graph and our balance sheet. We successfully exceeded all of our objectives, and we believe the results reflect the power of our model.

For the full year, we had 5.1 million paying customers and grew Chegg's services subscribers 38%, to a record 3.1 million, resulting in total revenue growth of 26%, and Chegg Services revenue growth of 37%. All while we made important investments for continued growth. We enriched our content offering, added new subjects, strengthened our writing tools with advancements in AI, which improves our ability to help students go from citing to writing, and extended our flash tools offering with the acquisition of StudyBlue. We believe that the more we invest in different formats and modalities and the more content we can offer students, the larger the opportunity gets, and we will continue to focus on investments that increase our addressable market by providing students an expanded platform of services to help them go from learning to earning.

The core of Chegg remains Chegg Study, where we have made significant investments in content and capabilities throughout 2018. We now have a catalog of 26 million questions that have been answered by our proprietary network of subject matter experts, including textbook solutions for 35,000 ISBNs. We increased the number of modalities to meet students' needs at whatever level, in whatever format they learn best, including expanding our video offering by adding 15,000 new videos. We continue to invest deeper in STEM-related subjects. However, we also added ISBNs and Q&A content from outside of the STEM category. This increases our TAM and our value, and we are doing it to meet the increased student demand in subjects such as business law and nursing. The best indicator of the value of Chegg Study to our users is the significant increase in engagement every year, which we measure by content views. We reached 650 million views, which is a 48% increase from last year.

We also made important investments in our writing service, which included the integration of WriteLab and the very exciting announcement of our exclusive agreement with Purdue OWL. For those of you who don't know, Purdue OWL is a world-renowned online writing lab from one of the country's leading academic institutions. Through our partnership, Chegg's writing tools will -- Chegg's writing tools will be integrated into Purdue OWL to support students on-demand whenever and wherever they need it. We want to take a moment to thank the Purdue team, and we believe together, we are creating the world's premier writing service.

The need for writing support is massive as students continue to struggle in subjects, with 75% of high school seniors deficient in writing competencies. We see an enormous opportunity to help them develop writing skills and the earlier we can help, the more impactful we can be. And the more users that we have and the more content users upload, the better the service gets. Last year alone, we had 5 million papers submitted to Chegg and nearly 0.5 billion citations were created on our platform.

Chegg was created to support the students at any school, in any subject, in any system to level the playing field, which is more important than ever because of the changing demographics of our country. The people entering the education system today are from different backgrounds, cultures, socioeconomic status, with different educational experiences and different educational goals. But all of them benefit from online learning tools that adapt to their needs, increasing their chances for success, both academically and professionally. That's why we have built our platform online to serve students on-demand in a personalized, adaptive and more affordable way. This allows students to choose the way they learn best because with Chegg Services, they can access textbook solutions, Expert Q&A, video content or connect with a live subject-matter expert 24/7.

We are always adopting our technology and our services to best serve the learner. Even with the many advancements in technology, many students still prefer and benefit from live help, so we are excited about our continued investment in chat-based tutoring, which will allow students to get the additional support they need from live experts just one click away.

Education is a trillion-dollar industry where the pace of change is accelerating, and Chegg is a big part of that change. We are proud of all the accomplishments of our team in the past year and are even more excited about the year ahead. As we head into 2019, our priorities remain the same:

To deliver on our financial goals and to continue to provide services that create overwhelming value for our learners, to expand the subjects we cover and the modalities and formats of content we offer, including coverage of other countries, and to continue investing in opportunities that leverage the strength of our brand, reach, and customer base and provide opportunities for meaningful growth in future years.

Many believe that our country is at a crossroad but the one thing that almost everyone agrees on is the importance of improving our education system - making it more accessible, more affordable and more relevant for an increasingly diverse student body. This fuels us to put the student first and guides us on what we build, how we build it. We believe the momentum behind Chegg is accelerating because we remain focused on serving the needs of the modern-day student, and we are excited for what this new year will bring. And with that, I will turn it over to Andy. Andy?

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Andrew J. Brown, Chegg, Inc. - CFO [4]

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Thanks, Dan, and good afternoon, everyone. Today, I will discuss our financial performance for the fourth quarter and full year 2018 as well as our increased outlook for 2019. 2018 was another great year for Chegg. We exceeded all of our financial targets, made key investments in our existing and future services, expanded our offerings organically and through acquisition and strengthened our balance sheet with a very well-received convertible debt offering early in the year. As such, we believe we entered 2019 in an even stronger position than we entered 2018 and expect to have another great year.

For full year 2018, total revenue grew to a record $321 million, a 26% increase over 2017. More importantly, Chegg Services revenue grew 37% to $254 million and hit a record of 3.1 million subscribers for the year, a net increase of 850,000 or a 38% increase over 2017. This drove gross margin to 75%, up from 69% in 2017, resulting in an adjusted EBITDA margin of 26% or $83 million, up 80% year-over-year, demonstrating the leverage of our subscription services model where the unit economics get better as we continue to scale.

Reflecting back for a minute, 3 years ago, we laid out our long-term goals for 2018: A 30% Chegg Services revenue growth, 65% gross margin, and 25% adjusted EBITDA margin. We are very proud we exceeded all of those expectations and believe our model will only get better as we continue to grow.

We also ended the year on a high note, with Q4 revenue of $96 million, which was driven primarily by 35% year-over-year growth of Chegg Services revenue to $82 million. And as you would expect, with that performance, gross margin exceeded our expectations at 77%. This led to adjusted EBITDA of $35 million, an increase of 65% year-over-year.

Looking at the balance sheet, we ended the year with cash and investments of $484 million, more than double the balance we had at the end of 2017. This is the result of proceeds from the convertible debt offering we completed in Q2 and improved operating cash flows. Free cash flow for 2018 was $44 million or 53% of adjusted EBITDA, exceeding our expectations due to higher adjusted EBITDA and the timing of cash outlays at year-end.

For 2019, we are increasing our revenue guidance due to the fact we exited the year with more momentum than expected. In addition, we are raising our adjusted EBITDA margin guidance to reflect our anticipated leverage as we scale.

As such, we now expect total revenue for 2019 to be between $390 million and $395 million, with Chegg Services revenue between $327 million and $331 million. And as similar to last year, we expect Chegg Services revenue and annual subscriber growth rate to be closely aligned. Gross margin to be between 75% and 76%, adjusted EBITDA to be between $115 million and $118 million, an increase from our prior guidance of $112 million or approximately 350 basis points higher than the 26% margin we achieved in 2018 as we continue to drive leverage in the model, while investing in both our current and future services; CapEx to be between $40 million and $50 million, which includes an upfront payment for a recently completed contract extension with a major publisher, where we increased the licensed content, doubled the timeframe, all for a similar annual cost.

The increase in CapEx also includes investment in localizing content for our international customers as well as expanding our video catalog. In addition, we expect noncontent CapEx to be larger than it has historically been because we are expanding several offices this year to accommodate our growth. And finally, we now expect adjusted EBITDA to free cash flow conversion to be a healthy 50% to 60%, ahead of our previous guidance of 40% to 60%, as we believe the model just gets better as we continue to scale.

Moving to Q1 2019, we expect total revenue between $93.5 million and $95.5 million, with Chegg Services revenue between $72.5 million and $74.5 million, gross margin between 74% and 75%, and adjusted EBITDA between $22 million and $23 million.

In closing, 2018 was another great year for Chegg. Our team executed at a high level, and we have positioned ourselves for more success in 2019. It's an exciting time at Chegg, and we are glad you are with us for the journey. With that, I'll turn the call over to the operator for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jeff Silber with BMO Capital Markets.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [2]

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

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [3]

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Yes, so as you can see in the business, we have great momentum overall, and we continue to grow Chegg Study and Chegg Services quite nicely. We've been testing different configurations to the bundle as we said we would. And just as a reminder, we don't have any revenue associated with the bundles. In 2019, we have costs associated with, but no revenues. So these are all -- our numbers are all based on our current business.

The concept of the bundles is, if we can package more things into Chegg Study, would students pay more to be able to get Chegg Study plus writing, plus math, plus other things? So we have been testing since the end of last year and into the first quarter; we really won't have much to report on it until the second of this year because we need to go through several iterations of quarters. We do it by every month, we do it by different messaging, different price points. But overall, you can see by just the demand for Chegg and what we offer that there is just a huge appetite for what we do. And so we feel very good about the future of Chegg, and the ability to do Chegg bundles. As we've said in the past, we also believe we have significant pricing power. But as long as we continue to grow like this, we want to continue to pick up as much market share as we can.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [4]

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

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [5]

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

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [6]

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Yes, the Purdue OWL announcement.

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [7]

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Yes -- no, it's -- look, it's pretty significant for a lot of reasons, and I'm glad you brought it up. First of all, Purdue is one of the great institutions in the country. They've been one of the most advanced. They recognize what we have seen for years, which is that there is something like 88 million Americans that have partial degrees, so they bought capital and they now go online degrees, they go off-line degrees. But one of the things that they prided themselves in for a long-term is having, we would argue, I think pretty easily that they have the best online writing lab, which is what OWL stands for. And the opportunity to combine their information, their content, our AI technology that we are building and that we acquired, we think together, we can build seriously, the world's premier writing service, first in the U.S. and then, on a global basis.

So if you look at the number of people that use Purdue OWL, and you look at the number of people that use EasyBib for us, you're talking about tens and tens and tens of millions of people. And so as we said in the prepared remarks, the more content you get, the more users you get, the more you're able to read and do machine learning and use AI, the better we can teach people actually how to write, not just be able to help them cite. So we couldn't be more excited, it's an endorsement of the quality of Chegg and the quality of our services and the power of our education platform.

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Operator [8]

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

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [9]

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

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [10]

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

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [11]

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

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [12]

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

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [13]

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

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [14]

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Well, they're both. And what I mean by that is, for those of you who aren't as familiar with the Ingram deal, when we signed the Ingram deal several years, and it's got another 1.5 years to go by the way, that we used Ingram to help finance the buying of textbooks and we only recognize the net revenue. And to that degree, Ingram is not involved at all, which is all books that come from consignment, there is no capital that changes hands, so that's all to the benefit of Chegg and Chegg's shareholders.

On eTextbooks that's all on our own. So we do use VitalSource, but we pay them a small fee to be able to use VitalSource, so that we don't have to build our own reader, there could be ubiquity in the readers that students use, because I think we'd argue that between VitalSource B2B business and Chegg's consumer business, we're probably the largest on the consumer side, and they're largest on the B2B side. That gives students a sort of ubiquitous reader platform to use.

But other than that, the only monetization that Ingram makes on our consignment business is just the fact that we pay them to pick, pack and ship, which is a pretty standard cost. So it's a lot cheaper for us to do it that way than to have our own warehouse and do all the logistics. So it's been a phenomenal deal for both parties, but the more consignments, the more eTextbooks, the more the business, the next term gets in the favor of Chegg because we don't really use capital anymore.

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Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [15]

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

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [16]

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It has, and we have now a great relationship with all the significant publishers. And as a result of that, we've been working with them for several years to encourage them to move faster to eTextbooks. And the best way to do that is to give them data based on what the pricing should be for each one versus, say, a rental or a new textbook. And so we provided that the pricing back to the publishers so they can make better economic and business decisions, which has been good for the publishers, but more importantly, good for the students because that's brought the price of everything down.

So we've actually seen significant upswing in eTextbooks. We don't share what the number is, but obviously, every quarter and every year, it's a record and it's pretty significant growth. It used to be way below 8% in terms of what eTextbook was, it's now significantly above 10%. So directionally, it's moving in that direction. So every one of the eTextbooks, we don't have to put out cash for, every consignment, we don't have to put out cash for. So the amount of money that Ingram used to have to put out when we first did the deal was like $100-plus million a year. We expect by the time the deal ends, and we assume that we'll continue a working relationship, you're talking about maybe $15 million or $20 million a year. So it's really changed dramatically in the favor of Chegg's business model, and we've helped drive that and the publishers have been great.

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Operator [17]

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

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Aaron Michael Kessler, Raymond James & Associates, Inc., Research Division - Senior Internet Analyst [18]

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

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [19]

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Yes, so this is Dan. Let me talk about just the penetration number. So on our prepared -- in our prepared remarks, I think we said we're now up to 87% brand recognition in college. It's lower than that but significant -- very -- I mean, it's almost doubled every year in the last couple of years into high school. A lot of that is because of the acquisition of EasyBib and now the launch of Chegg Math. Those 2 products, and with the acquisition of StudyBlue, we now have 3 free products that can be used by students at any age.

Don't expect us to put much of an effort into middle school. Of course, middle school parents and students can use it. It's much more difficult to target parents of students to have students use something. So we go directly to the student. That's always going to be our model, that's been our model. And so with that in mind, what we're trying to do is build free services that students are likely to find, and so now with a leading flashcard service and a leading writing service, and an emerging leading math service, we feel really good about a penetration into those categories.

Also, all of them are relevant on a global basis because math and writing and learning are all consistent sort of everywhere in the world. So the subject matter doesn't matter; when you use a flashcard you can use it for anyone that you want. And STEM products like math are relevant everywhere. So the way we think about international is, we've talked in the past that the 3 first countries that we'll spend time on are Canada, U.K. and Australia for obvious reasons. The top publishers in the U.S. are the top publishers in those countries.

You won't see, I've mentioned this several times in the past, you won't see us make any big splash or announcements because what we're doing is we continue to add content that is relevant to those countries. We're improving the capability of our expert answers to not only be able to answer questions from books that are not from the U.S., but also in different languages, and we're working on translation capabilities to be able to go even bigger, global and other places. And so you'll see us start to launch mobile apps in those countries where they're more likely to use those than they are to use the desktop, and we'll continue to invest in the content which is included in the CapEx that Andy mentioned earlier. And we believe that we continue to invest in those things, you'll see consistently see growth over 30%, which is what our objective has been, and because those markets will just keep getting bigger for us and we are excited about it.

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Operator [20]

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

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Douglas Till Anmuth, JP Morgan Chase & Co, Research Division - MD [21]

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

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [22]

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

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Douglas Till Anmuth, JP Morgan Chase & Co, Research Division - MD [23]

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

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [24]

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I'll let Andy answer that one. Let me talk about the first part of your question, which is sort of the build by or partner question and other verticals. So as you saw, we specifically called out in the prepared remarks things like nursing and business law. What's happening is the students are driving us in the direction they want us to go. One of the great benefits of the giant moat we have with the Expert Q&A in those 26 million questions is, there is no governor on what the students ask. So when they start asking questions in categories, we are able to answer them and then we know the kind of content to add whether it be video content or tutors in that category or step-by-step solutions that we can add over time.

What's really clearly happening at the community college level and at the boot camp level is they are looking for more job-related skills. So for kids who are into college, a 4-year colleges now, if you want to call them that, they're programming parallel to the curriculum they have in addition to using us for the curriculum that they are assigned. So you can see things. Then they're moving more into professional categories. So we're just going to keep moving where the jobs are, where the students are, where the questions are, and so we don't actually have to guess, which is a nice part of the business.

On the build by our partner, our philosophy has been that no matter where a student goes to school, no matter where they choose to learn, we're going to be with them every step of the way. So we are programming to support them in the institutions that they're in as well as over time, we're going to have content that their institutions should have and don't currently have because they can't move fast enough. So you'll see us support a student no matter where they go to school or where they're learning from, with the kinds of products and services we have with tutors in Chegg Study and writing and math and those things, and we'll build out more professional content. And then you're going to see us ultimately start to program courses that aren't necessarily in the institutions they are going to, but they need to get jobs.

As it relates to build by our partner, I think we've been very judicious because of the success that Andy and Tracey had in raising us capital, we have nearly $0.5 billion to be able to buy things should we see things at the right value that we could grow faster, leverage our brand, leverage our network, and leverage our data. And so you'll see us do a balance of both over time because we think there are certain things that we can build out better, like content-added areas, and then there'll be capabilities that we might acquire like we did with StudyBlue or like we did with math. So I'll let Andy talk about the free cash flow conversion.

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Andrew J. Brown, Chegg, Inc. - CFO [25]

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

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Operator [26]

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

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [27]

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Congratulations on the quarter. Could you just kind of update us on your thoughts on the math subscription, how that's kind of performing against expectations?

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [28]

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Yes, so maths, as -- we acquired an amazing team in Berlin, Germany to help us build out math because it's a global language. And whether you need math to just learn math for math's sake and become proficient in it or whether you need it for the scientists or whether you going to be a math major, you're going to be an engineer, math is ubiquitous and global, and that was a big part of our thinking. The second thing is, we acquired it, in essence, to create a value for us so that we can put it inside of Chegg Study or the Chegg Study bundle so that people would either pay more or we get higher conversion rates.

We also do sell it as a standoff à la carte, like we do for writing and it's super early, because we don't -- we haven't even had it for a year, but it's performing very well, unexpectedly, meaning that we really didn't acquire -- choose to have a standalone subscription. But it's a great product and people are really responding to it well, so we're seeing really good uptake early on. I mean, it's not big enough to affect the numbers the way some of the other businesses are but over time, it will be.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [29]

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

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [30]

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Yes. So the best way to think about Chegg Study, it's been more difficult in the past to really look at our subscription businesses and our ARPU because it's sort of been masked by other businesses that we had, that we no longer have like our enrollment business. And as that has worked its way off, you can get a much clearer view of really what's going on with our subscription services. So you'll see that it's more clear than it's ever been, that our ARPU actually went up.

So that's a reflection, since we haven't changed the pricing, that's an actual reflection of more subscribers we get, they are coming on earlier and they're staying longer and then they are renewing faster. And so all of those are really positive signs, and that's why you continue to see Andy authorize us to make really strong investments inside of Chegg Study because the more content, the more modalities, the earlier they come on, the longer they stay. And so that's been a really great formula for us. You can actually see it in the subscription numbers now, which you haven't been able to see in the past that our ARPU is actually rising, and since it's not about price at this point, it's really a reflection of renewals and longevity.

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Operator [31]

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

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Alexander Joseph Giaimo, Jefferies LLC, Research Division - Equity Associate [32]

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This is Alex Giaimo on for Brent. Two questions, first for Dan. Can you just provide your updated thoughts on the careers business? We noticed the investment in WayUp last quarter so just curious on the thought process there and how you see the careers business developing over the next few years. And then for Andy, similar to a previous question, but on the '19 guide and the 300 basis points of margin expansion, can you talk about the main puts and takes that are driving the expansion, whether it's anything other than the continued shift to subscription revenue that we should be aware of, especially given the investments you're making throughout the year on subjects and content?

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [33]

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Well, I'll take the first one then turn it over to Andy. So on the question of careers, look, the bigger the Chegg platform gets, the more we become an educator, the more content that we're actually providing that are around things that are not only academic, but are professional. The more logical it is for us to help students prepare for and then ultimately, get and then stay with their jobs and improve in their up skilling in their jobs.

It's a long journey to do that, and we're making really good progress in our opinion. We have more data, we believe, than anybody else. And part of the reason for the investment in WayUp is of course, they have a great team and a great brand, and they have a great CEO. And it allows us to utilize our data to help match and improve skill matching in platforms other than our own. And so we think the two of us working together will be very good, because the goal really is just to get a student a job, and the right job, and the job they can get paid for and help them pay back their insane college loans, which will be a subject for another day. And so that was the reason for the investment in WayUp and we are very proud of that, they are a great team and Liz has been terrific to work with.

As it relates to what we're doing, it's very clear that there are multiple steps along the way, internships and the first job. And so we're taking a lot of the content and technology that we've been building, a lot of the data, a lot of the skills matching, and remember, we've read over 100 million resumes over the last 10 years to be able to predict where students -- given where they've gone to school, given what they take, given what they major in, where they're likely to end up working, and where they are likely to end up getting paid. And we want to be able to apply that to helping students not only get a job, but also get an internship. So you're going to see us continue now to make that investment, but also in internships.com to be able to expand because we have millions of students that go through that, and it's becoming increasingly clear, the path to a great job starts with an internship, so we want to do both. And that's one of the reasons we acquired that asset.

So we think it's a very big and important and necessary opportunity for Chegg, and it's one of those that we're doing a combination of organic and through investment and acquisition, and we'll continue to invest in it, and we think we're making great progress in it.

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Andrew J. Brown, Chegg, Inc. - CFO [34]

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Yes. So, Alex, your question on the EBITDA margin expansion, and I just want to make sure you're aware. It's 350 basis points, not 300. That's the first thing. But nonetheless, really what's driving our financial performance and has driven our financial performance for the last few years, really has been Chegg Study and Chegg Writing. Having said that, we're now at a point where when you look at our business model, it has great balance to it. So while we continue to drive margin expansion like we talked about in 2019, we're also making the necessary investments to put ourselves in the continued growth path in 2020, '21, '22. Things like, Dan already talked about them, talked about the investments in math, flash tools, chat tutoring, the international investment that we're making this year for the future in the bundles. And so we've got this great balance, where we're making investments while continuing to deliver value to our shareholders.

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Operator [35]

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

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [36]

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

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Andrew J. Brown, Chegg, Inc. - CFO [37]

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

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [38]

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

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Andrew J. Brown, Chegg, Inc. - CFO [39]

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

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [40]

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

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Operator [41]

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

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [42]

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

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [43]

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Yes to all of that. And what I mean by that -- and you'll have to forgive me, I'm the New York office and the heater is starting to act up. So yes, different coast, different heaters.

So look, accredited, nonaccredited, for-profit, not for profit, all of those things are labels that may or may not matter anymore. And I really point you to read a great article on [need by Rob Manuel] manual about how to change an education system. So our goal is, whatever a student needs to learn or wants to learn, we are going to support them in the ability to do it. So we're either going to support them in the system they are in or we are going to help them find the content and the experiences that can help them learn it, or we'll provide those services.

So in the case of nursing and business law and statistics and accounting, those are currently today to help people that are currently going in the accredited systems. But you see increasingly a number of products and services being used that I think people have written off for dead years ago, but aren't, which is MOOCs and other categories. So you're beginning to see students, even our own employees, are coming to us for non-credited content, because it's just better sometimes. It's been more relevant, it's been updated. So Chegg's goal is to support you in whatever you take, from whomever you take it from, but also to provide you over time, with content that will help you be better in getting a job, be better at your job, and be better at finding a new job.

And I also just want to point out that 70% to 80% of all students go to a state school, 43% of them don't finish. And so there's a whole lot of students out there with partial degrees that may or may not get a degree, but they absolutely need to get a skill. And the 50% of high school students that graduate, but don't go on to further education, they also need skills in career pathing. So the opportunities for Chegg to program to support people in the systems they go into or create content programming for them directly just keeps getting bigger for us.

So I think we're going to stop using the labels of 4-year and 2-year and community college and vocational. I think we're going to start just focusing on how does a student accelerate their path from learning to earning, and that's been something Chegg's has been on for 9 years now. And I think we're driving the industry to move in that direction and we think that just creates great opportunities for students to more accessibility, lower-cost, higher-quality, more relevant, on-demand and then much more affordable, and that's the role that Chegg is going to play.

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Operator [44]

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

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [45]

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Congrats on the results, guys. Dan, I think -- yes, I think in your prepared remarks, you noted an increase in engagement with students and maybe, if you could unpack that a little bit in addition to absolute engagement? How is that on a per subscriber basis? And then maybe rank order of the contributors to that, whether it's content or attach rate or both?

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [46]

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Yes, so it's not attach rate, meaning what we focus on is once they're in the service, are they using the service more or less than they have in the past? And the numbers are just staggering when you take a look at the fact that in Q4, there was something like 224 million content views. And so when you take the number of subscribers we have in the quarter, you take the amount of views that they have, they're going steady or up.

It's a little bit interesting for me as somebody who worked at Yahoo! for a long time, the goal was to get them to consume as many pages as you could because that was the business model. Then Google came along and said consume as few pages as you can and click off on the ads, and that's how they make money. In the case of us, what we really look for is the content consumption, which is, are they using us to ask more questions than they have in the past? And are they using us to consume more content, more categories than they have in the past? Because that really shows the expansive nature and the value and shows the pricing power of Chegg Study, and we think that's what we're seeing.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [47]

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

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [48]

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Yes. I mean, we've been -- and you guys have been great, but you guys have just sort of joined the story in the last year. So in previous years, we had assets that we ultimately shut down or shed because they weren't right for the future. And so the one we've been referring to has been our enrollment business, which was a company that we had called Zinch, in which we did a partnership and then we shed that, and that was revenue that we had that was beginning, we believe, was going to ultimately decline. And so we've been rolling off that revenue and we're rolling off that revenue.

So we essentially have our subscription revenue and our programmatic advertising revenue, are the 2 biggest parts of that revenue stream. And so yes, you are seeing subscriptions be worth a lot more. As Andy has pointed out in the past, they are a lot easier to model. We know all the key levers, which is how many do we have? What's the cost to acquire them? How long do they stay on? How much do they renew? How much can we charge them? What's the yield? All of those variables are moving up and to the right, and you're seeing it reflected in our business model. Look, it's not been easy. It's taken us 9 years to get to this point. But you're really seeing, since we did the Ingram deal, changed our model to all-digital and put ourselves in position to do this and the investments that we've made are really showing that they have great leverage and great value to students.

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Operator [49]

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Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Dan Rosensweig for closing remarks.

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Daniel Lee Rosensweig, Chegg, Inc. - Co-Chairman, CEO & President [50]

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Close enough, I'll take it. So first of all, happy lunar new year to anybody that's celebrating. Second of all, I just want to have a shout out from my team to Heather Morris, who just had a beautiful baby girl, and so we hope she takes a long, valuable maternity leave but we can't wait for her to come back. But on top of that, look, Chegg is off, we closed the year in a very strong position. We have a great relationship with students. We're known for creating extraordinary value for really low costs, and we found a way to be able to do that and create a high-growth, high-margin business, where we can continue to invest, but return a lot in the form of free cash flow to our investors. And so we're really excited about the business model, the future of the business.

As we look out, we just see nontraditional becoming more traditional, which is, we believe the industry's got to move and is moving towards being able to be on-demand, more affordable, more relevant, more contextual to the students, personalized, adaptive, and then ultimately, help the student to accelerate from learning to earning. And we think we're in the best position of anybody in the ed tech space to be able to support students in the current system, while add our own programming, to help them, if they're not able to complete those systems, to be able to accelerate from learning to earning, and do so at a much lower cost than they've historically had to do it.

We've got $1.5 trillion in college debt, and we've got to end that. And Chegg is in a position to really help millions and millions and millions of students and then expand on a global basis. So we're thrilled that all of you are aboard for the ride and for your support, and we look forward to talking to you on the next call. Thanks, everybody.

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Operator [51]

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