Chegg, Inc.

Greetings and welcome to Chegg, Inc. Second Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tracey Ford, Vice President of Investor Relations for Chegg. Thank you. You may begin.

Good afternoon. Thank you for joining Chegg's second quarter 2020 conference call. On today's call are Dan Rosensweig, co-chairperson and CEO, and Andy Brown, chief financial officer. A copy of our earnings press release, along with our investor presentation, is available at our investor relations website, investor.chegg.com. A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our Media Center website at chegg.com. 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. Thank you. Thank you. Thank you. 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.cheg.com. We also recommend you review the investor data sheet, which is also posted on our IR website. Now, I will turn the call over to Dan.

Thank you, Tracey, and welcome everyone to Chegg's second quarter earnings call. First, we hope that you and your families are all healthy and safe. As we continue to navigate the pandemic and the rising social issues, we are grateful that our employees are healthy, that our business is stronger than ever, and that we have been able to support our employees, our communities, and our students through this challenging time. Also, I'm proud to work with our Chegg teammates as they continue to make meaningful and positive impact wherever possible. While students' lives were disrupted, the one constant was that Chegg was there to provide high-quality, expert, on-demand support from any device in any location which resulted in accelerated growth across our services. Students turned to Chegg in record numbers and we experienced unprecedented engagement with subscriber growth of 67% year over year, including our new Mathway subscribers, reaching a record 3.7 million students. This yielded net revenue growth of 63% year over year in Q2 alone. To put that in perspective, we had more subscribers in Q2 of this year than we had in all of 2018.

As schools and millions of students wrestle with how best to handle a return to campus, we know that some are supporting a full in-person return, while others are offering a fully online experience, and still others are planning a hybrid version of online and offline.

Regardless of which experience a student has, Chegg will be there to support students this fall and beyond. In fact, students are increasingly turning to Chegg for support to navigate these uncertain times, and we expect this trend to continue post the pandemic. Regardless of where or how someone learns, Chegg will be there for them.

From day one, Chegg was built on the inevitability

that people would need to learn more often, increasingly online, and need greater support. Long before the global pandemic, we believed the digital transition was coming and education would have to fundamentally change. In fact, in 2013, at the annual ASU GSD Summit, the Premier Education Technology Conference, we addressed the need to leverage data to personalize the learning experience to better serve students. Three years later, our keynote, entitled The Class of 2020, predicted that higher education was the next bubble to burst and that institutions would experience irreversible decline if they continued to raise prices while delivering an antiquated product. We made impassioned and specific recommendations to aggressively transition to a model that moved higher education online leveraged technology to make learning available to students 24-7 and to expand and modernize their content to be more relevant to the modern workforce. Our research shows that the majority of students now feel online learning can be as legitimate, effective, and rigorous as in-person instruction. In fact, half of the students surveyed who had no prior online learning experience now want the option of hybrid or fully online education. And 72% of students who had already had online experience expect the same. We remain optimistic that this pandemic will end soon. And when it does, one of the legacies will be that the door is permanently open to the promise of online learning. Affordable, scalable, on demand, and designed to support whatever the student's primary goals are, whether it's academic learning, professional development, or both. If anything surprised us, it was the speed in which students outside the United States have come to embrace CHECK with the same passion as those in the U.S. Similar to the United States, colleges and universities around the world were forced to shut down and lack scalable, on-demand, high-quality support for students. And as a result, more international students have discovered CHECK. In addition to needing online support for academics, we are also seeing global trends towards self-learning and alternative pathways for students to gain the skills they need to compete in the global economy. We believe that the fact that the services we offer are so universal in nature is in large part why we are seeing a record demand engagement outside of the United States. It's always been clear to us that realigning education with its most important constituent, the student, is a massive opportunity. And we feel our brand, scale, service offering, and our balance sheet gives Chegg a great opportunity to make a positive impact on global education. We continue to believe that platform companies that have a direct relationship with their customers, who own the transaction, the data, the channel of distribution, and own their content, will create disproportionate value for their customers and their investors. That is why we have fast-tracked investments on several key initiatives in the second half of the year. First, we are increasing our investment in international growth and development. Second, we continue to invest in the Chegg Study Pack with future enhancements like the addition of Mathway to provide overwhelming value to our subscribers. Third, We are implementing systems to address account sharing and investing in device management control. Fourth, we have increased our investment in skills-based learning by expanding the curriculum to cover more in-demand skills and by significantly reducing the price because we know skills-based learning needs to map to the most in-demand job and be affordable and accessible to students. With all the uncertainty facing students over the next year, the one thing that they can count on is the high-quality, affordable, personalized, adaptive, and on-demand services that Chegg provides. That is why Chegg has become even more critical to student success, both academically and increasingly professionally, and our team has never been more enthusiastic about the opportunities ahead of us. On that note, I want to thank our incredible Chegg employees who continue to be relentless in providing world-class learning products and services to support students around the globe. I want to thank our board of directors who have been so supportive of our work over the last decade to be in this position in this moment to have a profound impact on the future of learning. And I want to thank the millions of students who invited us on their learning journey. And I hope that even with all the unknowns in the year ahead, they know that the Chegg team is always here. for their success and building a company that has always and will always put them first. With that, I will turn it over to Andy. Andy?

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

Thank you. We will now be conducting your question and answer sessions. If you'd like to ask a question, you may press star 1 on your telephone keypad. Confirmation tunnel indicate your line is in the question queue. You may press star 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 star key. Our first question comes from the line of Jason Salino with KeyBank Capital Markets. Please proceed with your question.

Hi, thanks for the question. One for you, Dan. you know thanks for your comments on you know CHEG being there no matter what model we have in the fall but there's been a lot of focus on enrollments but if students do decide to wait the semester out you know to stay sharp and productive could you see some of those students skill up using Thinkful?

Great question and thank you what I think what we're likely to see and I think we've been seeing it which is what gives us the confidence to sort of raise our guidance is whether or not they go to the Thank you. Thank you. Thank you. Thank those very early days with us. We only, I think, closed it in October. Now it's the last September. But it is running in the path that we were hoping for. So our plan to increase the curriculum, lower the cost, and create greater support using chat-based tutoring inside it, which differentiates it from any other competitor, We think those things are already starting to pay off, so I wouldn't be surprised if we were somewhat a beneficiary of that trend.

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

Yeah, so we, you know, when we gave guidance, you know, 90 days ago, we had, you know, we had limited visibility as to the impact of COVID. You know, 90 days further on, we've seen much greater visibility. We continue to see the strong new subscriber trends, you know, all the way through the summer school. So, yeah, so we, you know, we feel very confident that we're seeing, you know, the momentum will continue. into the fall, and that's contemplated in our guidance.

Great. Thanks both. I'll get back in queue.

My next question comes from the line of Steven Sheldon with William Blair. Please proceed with your question. Thanks, and congrats on the results.

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

Yeah, no, this is Dan and then I'll turn it over to Andy. So the good news is Everything we're doing, we expected to do. We just accelerated it by moving it up. So this is something that will benefit us not only in the short term, but in the long term, both from a revenue growth area and profitability area. So we're super excited about that opportunity. We are and always have been and always will be investing in content to answer your question specifically. So we've been increasing our investment in content. Obviously, our Q&A network has exploded in a good way. In fact, we not only have record numbers domestically, but almost 30% of all new questions being asked that haven't been asked before come from international, so we're seeing real growth there. So we are always going to be investing. We are focusing on investing in content in three areas that are included in what Andy had to say. So when he said we're investing in international, we're investing not only in translations, which we think will extend us beyond just the English speakers, but also in local content, which is now being asked in local questions. So that will beef us up successfully internationally. The acquisition of Mathway was a way to beef up the core product of Czech Study Pact, which we mentioned last time and continues to grow faster and sooner than we expected, quite noticeably, and you're seeing them in our results now. And then we are focused domestically on a few growth factors. Like online colleges where we're specializing in content because you may not realize this, but the largest college or university in the United States of America that is a not-for-profit is actually either Southern New Hampshire University or Western Governor, which are exclusively online or almost exclusively online and have over 130,000 customers. We are significantly improving our discoverability of content and investment in content for community colleges. Because to the question that was asked earlier, a lot of people are going to be taking online community college courses, and we're going to make it easier for people to find them. But more importantly, we're going to make it easier for users to discover that we have the content that helps to support them. So as an example, just the community colleges in the state of California alone are over 2 million users, which is 10% of the entire college audience base. So we are making real investments in content always, and we'll continue to do so. So, Andy, I don't know if you want to talk about just how much costs we accelerated.

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

Yeah, no, it's hard to notice because our profitability is so high and continues to improve, and including the ratio of EBITDA to free cash flow. We just have one of those great models that allows us to do both right now.

Yeah, that's impressive, and that was really helpful. Quick follow-up, just wanted to ask on the guidance how you're incorporating changing university timelines into the guidance, including... I think some are starting the year earlier and potentially ending the semester sooner. So anything to call out there in terms of Q3 to Q4 seasonal dynamics?

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

Great, thank you. Our next question comes from the line of Jeff Silver with BMO Capital Markets. Please proceed with your question.

Great, thank you so much, and congrats on the stellar results. Thank you. You've mentioned a few times you're focused internationally. Can we get a little bit more color? Can you quantify how large your international student market is and and clarify, these are folks that live overseas and are studying overseas, not necessarily folks that are coming to the U.S. or studying online at U.S. universities.

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

All right, great. Shipping gears a bit, you talked a little bit about what you're doing to mitigate password sharing. Obviously, a lot of students having to leave their campus going online probably made it a little bit more difficult. But can you talk about, you know, once we get past the pandemic and these students come back to campus, what changes will be made to mitigate this issue?

Well, I appreciate the forecast that you're giving that we're actually going to get past the pandemic. I think that would be just a nice step. But in Andy's prepared remarks, we focused as one of the four major areas of accelerating our work. We had had on our roadmap to do device blocking. And so we've moved that up. That'll be launched in August. So to the degree that students go back on campus and to the degree that they would try to go back to the normal habits, it just won't be available to them anymore. So step one will be to limit the number of devices and do device authentication, and then there's a step two and step three, and we'll continue to do that. And so we feel very good about having moved that way up, and it'll be launching mid-August.

All right, great. Thanks so much for the call.

You bet.

Thanks, Jeff.

Ladies and gentlemen, as a reminder, if you could please limit yourself to one question so we may get to everyone's questions. Our next question comes from the line from Doug and Muth with J.P. Morgan. Please proceed with your questions.

Great. Thanks for taking the questions.

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

Yeah, no, thank you, Doug. So in terms of marketing, it's sort of fascinating because in the United States, we don't actually spend much money on marketing anymore. In fact, I don't think we've increased our marketing budget in over five years, not just as a percentage of overall revenue, which would have made it very large, but just in general because we have an 87% brand recognition. Where we don't have a strong brand recognition in the United States really focuses on two areas. One, our community colleges, which we're seeing extraordinary growth now, and a lot of that has to do with Some of the things that we did to get more visible, like the Verizon deal or things of those natures, which let families and other people know that we existed for what they do. And then online schools. And so, you know, we've started to test a number of things with Southern New Hampshire University because it's easier with the not-for-profit online schools to go directly through the school as opposed to a regular school where you have to go to a professor. professors. So I would say we're doing exactly what we've been doing in the United States, but with an increased emphasis on community colleges and online. And then outside the United States, it really is the best way to get to word of mouth is to index globally and get more content locally, which is why we're going to translation and why such a large percentage of the questions we're answering now come from outside the United States. Then that turns into word of And so when we actually watch the growth, we look at it not only by country and by subject, but by actual school itself. And so you can see it's been up in schools. So once one or two people start to use it, they tell people, and then it just grows like crazy. I mean, look, we experienced 58% organic growth on top of a number that's already huge. So I think for us right now, it's just making sure that we direct the investments. And to your point about study packs, What we've seen is that the study pack is behaving very similar to what Chegg's study did just a few years ago, which is people use it. They're signing up for it in numbers that were bigger than we expected. Their renewal rates are very high. Their usage is very high. And it's not only domestically, but outside the United States. So we will have an even greater rollout in the second half of the year. But They're finding it before we expected them to. So, you know, we're seeing upgrades from existing customers. Remember, all we really were doing was focus on new customers. But we did a test in March because of COVID, which allowed us to get the free upgrade. And so we expect that to help us even transition more. I think we're in really phenomenal shape. And, you know, I think the thing that we're most excited about is on a global scale, just the engagement, the usage, the discovery, the value that we're creating for students, and the fact that this sustains well past COVID because CHEG just becomes a way of life for anybody going to college right now.

Okay.

Thank you, Dan. You bet.

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

Good afternoon, Dan and Andy. Thanks for taking my question. I would like to touch on Massway a bit and just understand the opportunity there better. It seems like they've got great penetration, both domestically with high school students and internationally. What sort of investments can you make quickly to sort of really capture that opportunity in a relatively new segment, particularly as we look into the fall and more K-12 schools moving online? Thanks.

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

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

Yeah, Dan, congrats on the quarter. It seems like there's four big tailwinds. Thank you for joining us.

and that did in fact happen. So maybe that's a little bit of surprise. But as we sort of referred to in our prepared remarks, that really it's international, which is the diversity of the countries are relevant this soon. And the fact that it's not concentrated on one or two countries, but it's across the board and every one of them is seeing substantial growth and great retention and take rates in the bundle that are greater than we had anticipated. I would say of all the things that surprised us, everything surprised us to the good. The concepts didn't surprise us, but I just think just the willingness of people outside the United States to discover Chegg and really use it is such a pleasant surprise that happened this quickly.

Our next question comes from the line of Aaron Kessler with Raymond James. Please proceed with your question. Great, thanks. Thanks, guys.

Question on, with kind of increasingly students obviously moving to more online learning, how are you thinking about maybe additional online learning solutions beyond kind of what you're in today for either college or kind of the younger grades as well, especially kind of the younger kids who probably need more and more online solutions with busy parents? Thank you.

Yeah, no, this is, you know, I've been around for a while and one of the and many more. or Facebook, once you're a platform company and you create the category and you become the verb, which Chegg has become in education, the benefits start to accrue to you faster. And so when we look at the opportunities, we continue to believe that the best place for Chegg to play is direct to students. We feel that that means that we're likely to go older rather than younger as a reminder Thank you very much. the number of schools that we serve, extending internationally, extending into not just academic pursuits, but the actual pursuit of certain industry verticals that people want to go into, nursing and engineering. There's a lot more support work for that that can be done. And then, of course, the investment in Thinkful, which is skills. The demand for skills is only going to accelerate. The demand for them to be higher quality, actually have support, The lower price, less risk for the student, more relevance to their career is exploding. And, you know, our goal is for people to own the same position in people's minds that Che currently owns. So we just see growth area after growth area after growth area. And that's a rare situation, and I'm grateful for it.

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

Yeah, I wanted to dive a layer deeper on the content views. I saw the 375 million, obviously a huge number, and sequentially up versus Q1. I was wondering if you could help me kind of pick that apart. What's your normal seasonality, Q1 to Q2? And then what was specifically going on in Q2 that was new with COVID?

The seasonality I think Andy can address in terms of sort of the cost structure in the quarters because of textbooks. But the seasonality of usage, I think the way we would think about it is the real school year for Chegg, the real business year, we're going into now. So we just finished a quarter where people, their finals are done in May and June at the latest. and so this flow season we're going into Q3 but starting actually already but really end of August, September, October, November phenomenal and then it rolls into next year because the school year is actually August until say mid-May or June so the calendar year isn't the Chegg year the Chegg year is that period of time so we're entering a big growth season coming up ahead of us but the fact is More students need more help than they've ever needed before. They have no support from their campuses. Even if they go on to the campuses, the things that historically they had, which weren't very good and were not 24-7 and were not across all subjects, won't even be funded because schools are having to cut their budget. And they're going to cut their sports budgets before they cut the class. So the need for check is only increasing, plus the fact that we're adding more classes. We're adding more subjects. We're adding more formats. Somebody mentioned earlier video. But we're also adding practice tests, which we never had before, which is one of the most popular categories people can have. In writing, we're improving everything from writing style and writing structure and plagiarism checker. And same thing with math weight. So I think everything just got a lot bigger, and Chegg has now got a new base that is much higher, and we're going to continue to see great growth from a higher base. because we've not gone anywhere near the penetration into our market.

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

Thanks, Dan. You called out internationals at top priority in the back half of the year. I guess it seems like you already have a lot of investment, and maybe if you could just articulate what What's left there to show increased adoption? It seems like you already have a lot of the rails built, if you will, for the foundation. Just curious if you could dive in a little bit on that. And I think the follow-up to that is just some concern of saturation in the U.S. It doesn't feel like that's the case, but just speak to the international push versus what the opportunities left in the U.S. Yeah, I'll speak to both.

We'll start with the international one, which is international push. Even when you remove China, which we do for obvious reasons, the opportunity outside the U.S. is actually larger than the opportunity in the U.S. It's just collectively. I think we've used the example in the past that just the big three English-speaking countries are about 50% of the size of the U.S. college market. Then when you add every other country, it's just bigger. They're more likely to come online. They're more likely to want to study STEM. And I think the description is right. We did rails and plumbing, which is we now can do commerce. We can now take credit cards from those countries. We can now change the availability. We will be able to change the availability of how many questions you can ask in country A versus country B so we can personalize it more. But the other things that we're spending our time on are accelerating the amount of content that is relevant and each local market starting with the largest markets first. Translation software. So what we're starting to do is get the English speaking STEM students in those countries and those will be massive. What we want to add on top of that or do in parallel are the non-English speaking STEM students and then the non-English speaking students studying whatever it is they're studying. The same way we built Chegg in the U.S. we think we can build and the evidence suggests that we're right on this one. Very fortunate it's what we've been saying for years. It's not like Netflix, where we need to make movies, or Spotify, where we need to license content in those countries. We're in very good shape because of our expert Q&A network. And if you took the 30% of the questions that are being asked outside the United States, that's twice the size of the number of questions we used to get in the United States just three years ago in terms of real numbers. So it's getting big. I mean, this is a real thing, and this is going to propel check for many years. Domestically, as we mentioned earlier, We have so many vectors of growth left. We're nowhere near penetration, as you point out. But there are some interesting stats just worth saying. So the number of people in just three years, the number of students taking STEM in the U.S. has actually grown by 50%. The number of students taking business, still the same, around 21%. And the number of people taking sort of the social sciences is actually dropped by 50%. Chegg gets them all. But our greatest strength is obviously STEM. So we're benefiting from all the micro changes that are going on based on what students want to learn and what colleges are starting to teach them. Plus, we're going into a much older adult market because people are trying to go back and finish their degrees. So you're seeing the smart schools like Southern New Hampshire University accepting more credits than they've ever done before. Instead of trying to double book you to make you take a class again, they'll say, no, we'll take whatever you have. and then we'll let you finish. They're even now because of the deal we did with them. If you take a Thinkful class, that counts as credit. So those kinds of conversations are going on all over the place now with Chegg and Thinkful. So the vectors just keep growing and then if you think of profession, think of accounting, think of finance, think of engineering, think of nursing, think of lawyers, think of doctors, there's academic and then there's learning the actual industry you're in. So the format of content, video, expert Q&A, chat-based tutoring. All of that works regardless of the subject. The ubiquity of the IP of what we own gives us a competitive advantage over anybody. And so we're just going to keep building. We'll just keep executing, executing, executing, and we're excited about it.

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

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

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

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

Hi, guys. As you look at the Q3 gross margin guide, I was wondering if you could just break down that impact, maybe compare it to last year. It looks like the guide is about 1,000 basis points lower. I guess it's Can you break it down between the impact from the textbook business and maybe what other impact from the incremental investments you guys are making?

The first thing is it's 100% textbook, period. It has nothing to do with the incremental investments that we're making. It's the fact that, as you recall, starting January 1st of this year, we started to own textbooks and then record the gross revenue. It has, you know, what you see is a change in the seasonality where you see high gross margins in Q2 and Q4 and slightly lower gross margins in Q3, excuse me, in Q1 and Q3. So that's it exclusively. And, you know, what I said earlier, right, we also hope it performed in textbooks. So it kind of compounded itself a little bit. But I guess that's the good news. We haven't talked about textbooks, but textbooks continue to do actually really well. We believe we're gaining shares there, too. So that's the reason for the seasonality and the gross margin.

Our next question comes from the line of Alex Furman with Craig Hallam Capital Group. Please proceed with your question.

Hey guys, thanks for taking my question and congratulations to a nice start to the school year here. Ask about the, you know, if I could follow up on the international business. Your experience with international so far, does it tend to follow similar patterns of, you know, the rush at the beginning of the semester and then the final exam schedule? Can you kind of just give us a sense of how, you know, that pace of business might play out over the balance of the year? And then just in terms of pricing, should we expect that pricing will generally be about the same international as in the U.S. to go forward, or there may be opportunities to reconfigure bundles and tweak prices in individual markets?

I'll start, and I'll turn it over to Andy. It's premature to know all the answers to those very good questions, meaning the international growth is substantial enough now where we'll be able to track the patterns in a way. The things that we do know The engagement they have is very similar to the U.S. The way they discover it is very similar to the U.S. Their renewal rates are very similar to the U.S. a couple of years ago and continue to grow every day as we more localize the content and they get more familiar with it. And they also came on at the end of the semester. So that's a big opportunity ahead of us, but it's already well ahead of where it was when we started check study in the United States. Their interest in the bundle is even higher than it is in the United States. And that's a big deal. That bundle renews really well, similar to CS. So that's a big deal. Seasonality is a little bit different depending on which countries get large when. So, for example, Australia's season is a different season. And so it's just a little premature for us to be able to break that out. Now, as to your other question about pricing, at the moment, and we expect for the near term the pricing will be identical to what it is in the U.S. It'll just be put in local currency now which is new. We didn't have that capability before and we do now. So it's the equivalent of $14.95 in the U.S. to $19.95 whatever the local currency takes it to. So that's been helpful and that's improved conversion once they sought local currency because they began to feel like it's a local product. But your other question is really interesting and a thing that we're going to start to play with which is We will be able to technologically, starting probably early next year, to be able to change what's in a bundle in country A versus country B. And it could be as simple as countries where we want more questions asked, we can say you can ask 20 questions instead of 10, or 10 instead of 5. So we have ways to accelerate the creation of content, relevance, local language content. We can do things like you can have access for an hour rather than subscribe for months. So technologically, we're going to be in a position to experiment with a lot of things, and international is getting big enough where we're going to want to do those experiments. But right now, it has just been a fabulous upside for TEDx.

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

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

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