Chegg, Inc.

Greetings. Welcome to the Chegg Inc. Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Tracy Ford, Vice President of Investor Relations and ESG for Chegg. Thank you. You may begin.

Good afternoon. Thank you for joining Chegg's third quarter 2021 conference call. On today's call are Dan Rosenzweig, co-chairperson and CEO, and Andy Brown, chief financial officer. A copy of our earnings press release, along with our investor presentation, is available on our investor relations website, investor.chegg.com. A replay of this call will also be available on our websites. We routinely post information on our website and intend to make important announcements on our Media Center website at chegg.com slash Media Center. 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 annual report on Form 10-K filed with the Securities and Exchange Commission on February 22, 2021, as well as our other filings with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and the investor slide deck found on our IR website, investor.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, Tracy, and welcome everyone to Chegg's Q3 2021 earnings call. Over the last year and a half, we experienced extraordinary growth and in the midst of a strong year, had a solid third quarter. However, in late September, it became clear to us that the education industry is experiencing a slowdown that we believe is temporary. This industry-wide dynamic was unanticipated and is a direct result of the COVID-19 pandemic. A combination of variance, increased employment opportunities, and compensation, along with fatigue, have all led to significantly fewer enrollments than expected this semester. And those students who have enrolled are taking fewer and less rigorous classes and are receiving less graded assignments. We believe this is a post-pandemic impact that will affect this school year, but is not sustainable for higher education long term. Learning sites and apps, both free and paid in the US and Canada, have experienced significantly reduced traffic since the fall semester began. Despite these trends, our team continues to execute at a very high level. In fact, CHEG has experienced year-over-year increases in retention and adoption of CHEG study packs, which has positively impacted our ARPU by 5% in Q3. In the rest of the world, we continue to see very robust subscription and revenue growth. While still early, international is clearly becoming a meaningful part of our business, and we have already exceeded our target of 1 million international subscribers. We believe that, in time, international will be larger for us than the U.S. This is why we are investing in key areas such as localization of content and language, as well as our e-commerce and pricing platform. These infrastructure investments will allow us to take local currency and offer both variable and local pricing, and we believe these capabilities will help increase penetration in large, untapped markets where pricing is a major variable for success. We should be ready to leverage these investments by the fall of 2022. At a global level, students are increasingly turning to the Internet and Chegg to improve their learning and outcomes. Domestically, personalization, expanding beyond the textbook to courses, and supporting additional non-STEM subjects remain our focus to increase our domestic PAMs. Chegg is uniquely positioned to personalize each student's learning journey and bring them additional services because we have so many subscribers, so much data, and such relevant content. Therefore, we have the ability to personalize and expand the value we offer existing customers and create new value for our new customers. A great example of this is our investment in Uversity, which is off to a very strong start. Although early, and not yet live for students, we have already received over 20,000 pieces of content in STEM and non-STEM subjects from faculty at over 700 schools, including many of the most prestigious schools in the world who will help students learn while earning more for themselves. This offering has been so popular with faculty that we have already paid over $4 million to educators. We are excited for the future of Uversity which is building stronger relationships with institutions and professors, and we are grateful for the passion these educators from around the world are showing to furthering education and support for students through CHE. The degree-based pathway will continue to be very large in the United States, and we expect that it will grow again after the pandemic. But one of the lessons we see is just how much technology influences and empowers the world. Therefore, we are increasing our investment in digital skills training, which is important to an increasing percentage of the population around the world. Within the space, one of the key trends is more employers providing skilling, reskilling, and upskilling to their current employee base and using this benefit to attract new employees. That is why we are excited to announce our new partnership with Guild, which will launch next year. Guild is a leader in serving large corporations with employers offering to pay for the employees' undergraduate degrees, as well as provide skilling and upskilling curriculum. Thinkful courses will be offered to employees at relevant companies through the Guild platform, creating a new opportunity for domestic growth. As we look ahead, we remain strong believers in the growth of online education support and skills services around the world. As we manage through this moment in time, we will remain focused on building long-term value for both learners and our shareholders. The last two years have created a situation nobody could have anticipated and have clearly temporarily affected the higher education industry. But what is also clear is that more people are going to learn more things, especially online, and that will only create more opportunity for checks. We remain the market leader. With a beloved brand, a strong moat, and our services continue to help millions of learners all around the world. As students rely on us to learn their course material and better understand concepts, which improves their outcomes. We are in a great position to come out of this temporary slowdown stronger than ever and take advantage of the opportunities before us. And through it all, we remain focused on our long-term mission of putting students first in everything that we do. And with that, I'll turn it over to Andy. Andy?

Thanks, Dan, and good afternoon, everyone. As Dan mentioned earlier, we had a good Q3. Most of our financial and business metrics came in at or above our expected ranges, despite industry headwinds in our North American markets that emerged late in the quarter. As a result, we are reducing our guidance for Q4 and full year 2021. In addition, Given the timing and nature of these uncertainties and the fact that the school year is seasonal, we will provide our initial full-year 2022 guidance in February, when we will have additional data to better inform our forecast. We believe in the long-term opportunity, and as such, we will continue to invest in our tech and engineering capabilities, the personalization of our platform, and the breadth, depth, and delivery of our content. As the leader in the category that continues to grow, we believe these investments will put us in an even stronger position. Looking specifically at the third quarter, total revenue came in at 172 million, driven by a 23% year-over-year increase in check services. This was offset by a decrease in required materials, which was impacted by low enrollment and the nationwide worker shortages that created longer lead times. Gross margin came in at the high end of our forecast at 61%, as our higher margin check services revenue contributed more to total revenue than we expected, resulting in adjusted EBITDA of 46 million, increasing 45% year over year. We ended the quarter with approximately 2.6 billion of cash in investments, and as such, we are navigating the current environment from a position of strength. We will use our balance sheet to create shareholder value, which includes buying back securities during times of value dislocation, and to that end, we announced today that we have increased our securities buyback program by $500 million. In addition, we believe the combination of our balance sheet and cash flows put us in the pole position to acquire assets should they become available at the right price. Moving on to guidance. For Q4, we now expect total revenue between 194 and 196 million, with check services revenue between 175 and 177 million, gross margin between 70 and 71%, and adjusted EBITDA between 67 and 69 million. As a result, for full year 2021, we now expect total revenue between $762 and $764 million, with check services revenue between $657 and $659 million, gross margin between 65 and 66%, and adjusted EBITDA between $255 and $257 million. In closing, we had a solid third quarter. And while we are navigating this temporary industry slowdown, we are more excited than ever about the opportunities ahead of us and the future of our business. We have a great brand with students, an incredible business model with a strong balance sheet. We are executing well, and we are increasing investments to expand our services and capture growth opportunities. With that, I'll turn the call over to the operator for your questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will 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 keys. We ask that you please limit yourselves to one question per person. One moment, please, while we poll for questions. Our first question is from Jeff Silber of BMO Capital Markets. Please proceed with your question.

Thank you so much. I appreciate the color you gave in the prepared remarks, but if you can just give us a little bit more color, what exactly happened between the last time we heard from you and when we're hearing from you today to cause such a shortfall?

Yeah. So kids, students didn't go back to school. So you're seeing people not go back to their workforce, and you're seeing community colleges. Look, if you look at Pearson and many of the other companies that have reported, they have been saying that enrollment is significantly down. The reality is when you look at it, it's down three years in a row. Normally during a recession, which was last year, enrollment goes up. But because it was COVID-19, It didn't. Students didn't go physically to school. Schools weren't ready. Online schools weren't prepared. So enrollment went down last year. Nobody could have anticipated just the robust nature of the low-end economy where our kind of students, community college students, four-year students in schools that most of you don't know about, chose to go earn an income or stay home with their child versus go back to school this semester. And It was completely unanticipated, and it will come back. But the reality is that's a large part of our student base are students that need the most help, and they just didn't come back to school. It became clear to us in mid-September towards the end of September that they just weren't going. And then our research shows that of those that did go, 16% of them are taking pass-fail classes. Significant percentages of them are not taking their required classes. They're taking easier classes. Professors are assigning less. And on average, they're taking fewer courses. Obviously, this is not sustainable. This is a post-COVID hangover of mental exhaustion, an opportunity to earn more money, a reassessing of their lives, not unlike what you hear going on in the corporate workplace. It just all came together at one time. We didn't see it happening, and it happened. And, you know, the good news is through that we've been executing really, really well. So the numbers that we're in control over, like renewal rates are improving, cancellation rates declining, conversion rates up, take rates of Chegg Study Pack of 1995 versus 1495 up, the renewal numbers there up. Outside of North America, which is Canada and the U.S. subscription growth, is up and great. So this is really something that happened in Canada and the U.S. and they're acting identically. And if you look at any of the external traffic numbers and reports that you could from any free or paid sites, you'll see they're even all down more than we are. So weirdly enough, we're gaining market share. This is a situation that we did not anticipate. It is what it is and we're dealing with it, but at least we're executing within it really, really well. I mean, this is a company who, you know, his growth has great profits, has great EBITDA, has great cash flow, has growth factors outside the U.S. The deal with Guild is strong. This is just something that came and we didn't see it and didn't really notice it until we noticed it. We wouldn't have known it until end of September.

Okay, that's fair, and I do understand it. Let me play devil's advocate here and look out longer term. You know, demographics continue to decline. Students and parents are asking why they should pay this much for college education. We're not getting the funding from the federal government that you might have thought. Why don't you think this would continue for the next year or so?

Well, I don't think this – I think what's happening – what you've described I think is accurate. But that's not what's happening now. What's happening now is just millions of students just didn't go back. I mean, just – even in community colleges alone. The bigger issue and the bigger opportunity, frankly, for Chegg is we've said all along that we're building a very large platform for high school, college, and near graduates, that we see growth factors outside the U.S. on the businesses that we have. The deal with Guild is a really great growth opportunity over the next several years to use their sales force and to reposition our skills business into that space and some of the biggest employers in the world like Walmart and Target and Chipotle In the U.S., the plan has always been that we are going to expand the amount of content that we have to expand the TAM to non-STEM users and expand the number of services outside of academic support to the audiences that we have. So this just happened probably two years earlier than our plan anticipated, and we do think it's going to come back. My guess is it won't come back in the earliest until next fall because, remember, the school year is not the calendar year. So, you know, we'll have a January similar to what we're seeing now in terms of enrollment. But we have so much to grow and so much to do that I think if you're seeing us simply as academic support to the current U.S. college market, then we haven't done the right job of articulating just how big we think the opportunity is to bring more and different things to students.

All right. Really appreciate the call. I'll get back to you.

Yeah. Great questions. Appreciate it. Thank you.

Our next question is from Steven Sheldon of William Blair. Please proceed with your question.

Hey, thanks. Yeah, I guess I just wanted to ask, kind of thinking about the biggest unknowns that you see as we think about the setup for 2022 that's keeping you from providing guidance at this point. Would it be more about the second half of the year enrollment trends for next fall, or how big of a range of outcomes do you think there could be as we think about the upcoming spring semester?

Yeah, I'll let Andy give more color on that in a second. But, you know, we debated it. It's really just we don't know what's going to happen next August and September. And just the opportunity to wait. I mean, we were the weird company that gave full year guidance when no one else gave even quarterly guidance during COVID because we could see what the trends were then. Here, this is a trend that really didn't become visible to us until about 30 days ago. And, you know, even though things are getting stronger as the quarter gets on, we just don't know how it plays out in the second half of next year. And so we think we have time to listen and learn and research and do surveys and be in better position to give numbers that we feel comfortable in giving. We just feel like there's no reason to give them now when it's just too big of an unknown. We don't know what happens to the economy after the Christmas season and supply chain issues get resolved. Just too many things out of our control. If they were in our control, we'd give it.

Got it. And then maybe just a follow-up. I guess what types of trends have you seen in international markets? I would assume you're still seeing strong growth there, and I know you're not providing guidance, but could international become a big enough growth driver in 2022 to maybe offset some of the weakness or continued uncertainty that you're seeing on the U.S. side?

Well, over time, the answer is 100% yes. It's hard to know in 22 because we really don't know what the U.S. trends and Canada trends are going to be. If you took the international subscriber growth, so international subscriber growth, not Canada and the U.S., been great. Take rate of the bundle, been great. Conversion, renewal increases, all have been super strong. So we know what we have is very valuable. As we've said on previous calls, but it's worth reminding, so I really appreciate the question, there's a lot of technology that we've been working on to build. We did not expect our international business to be this big this soon. We just announced in this call that we've beaten our goal of a million through Q3 instead of waiting for the year. And so what we're building now is the ability to price differently in large countries. We see tremendous traffic. in some of the biggest countries in the world outside of China where we don't intend to be, where our conversion isn't what we'd like it to be, and that's because the local pricing isn't good enough. So we have a lot of things to build. So I don't know that 22 is the year that – certainly it's offsetting it, but how much it offsets it, I don't know. But I do imagine 23, 24, 25, that international will just be – it's meaningful now. It will be very meaningful then.

Got it. Thank you.

Yep.

Our next question is from Doug Anmuth of JP Morgan. Please proceed with your question.

Thanks for taking the questions. Dan, I know you talked a little bit about this, but Just, you know, in terms of trying to understand, I guess, where you thought expectations were, kind of what you were thinking for enrollments as you're heading into the semester and where you think they've actually come in for the fall semester. And then, you know, how does that impact your thinking about duration of this effect? I mean, it sounds like January's semester, you know, looks similar because you're kind of pointing to August, September of 22, a little bit, and saying kind of not knowing exactly what would happen then. And then just separately, any updated thoughts around the Pearson situation and any potential timeline or anything else to point out there? Thanks.

Yeah, no, great questions, Doug. Thank you. I would say the duration is we just frankly don't know. We're 30 days into seeing this, and it's not that it's 30 days to 60 days or 90 days. It's just this semester. It could be limited to this semester. We could see a whole bunch of people come back in January that just took all the money that they could for their Christmas holidays because, you know, Starbucks is tripling their salaries. And even though, again, we don't have enough people in the workforce, the kinds of people that come to Chegg are self-starters, self-motivators. That's why they go to school. That's why they get Chegg. So they're obviously, in hindsight, the kinds of people that would go capitalize on the income. Because most of them are working 30 hours a week or more anyway, so good for them. And I'm happy for them, to be honest with you. Not so happy for us today. So, you know, who knows what will happen in January? Because community colleges are not like four-year schools that start on the semesters. Community colleges, you can go whenever you want to go. The semester starts whenever you go. So we could see an uptick in January. We just don't know enough to predict that because we really don't know what's going to happen with the economy, supply chain, government stimulus, all the things out of our control. So what we're focused on right now, Doug, is just executing at a very high level against the opportunity that has presented itself. For the long term, we feel really good. We feel really good about international subscriber growth. We feel really good about the deal we just announced with Guild. We feel really good about the personalization efforts that we launched this fall. The take rate has been very high. We already see of those that are using it that they engage more. The goal of the personalization efforts is to help those that are already using us to find more things we have that they haven't used that would help them, but also to become a channel, a conduit to things that we don't yet have that we will be adding to the chat network so that they can find that as well. That should keep them longer and allow us to create more value and have different prices over time and attract new people. These are all things that we still firmly absolutely believe in, and this is just an enrollment issue. So I just can't pick the timing, and, you know, we don't want to be wrong more than once, right? This was already a big surprise to us, and so we're not in a hurry to make a bigger mistake. And so we just decided, you know, the business will execute. We're doing really well. within our expectations, and we will just know more by the time we come out in February. As to the question over Pearson, it's a very straightforward copyright infringement case. We feel extraordinarily good about our position. We have yet to respond. We'll respond by the date. For those people who are not as familiar with it as you are, Doug, in terms of what it is, the issue for us with this particular publisher is... Like I said, it's a straightforward copyright infringement case, but the parts that should worry investors don't really affect the Pearson case as much, which is we don't have a deal with them. We haven't had a deal with them since May. What we had in May was half of what it was a year ago. That was really just for the questions that were in their textbooks. But I think you're seeing textbooks are becoming much less an important part of higher education. They've been insignificant for Chegg's business. In fact, our quote-unquote business sort of within the range guidance here is because textbooks are down, check services actually did extraordinarily well during the quarter. And that is really the core of our business. And then, you know, we have something like nearly 70 million questions in our database of which piercing is, is a teeny percentage to maybe 2%. So it's not significant to us. You know, we can't, we can't predict the outcome, but we feel very good about our position and we'll be responding shortly and you'll all see it. So it's unrelated to what we're seeing now.

Thank you.

Our next question is from Brian Peterson of Raymond James. Please proceed with your question.

Hi, thanks for taking the question. So Dan, I wanted to follow up on maybe a prior question, but just the idea of enrollment kind of being down over the last few years and And look, more broadly, like, you know, in-person everything is kind of down. So I'm just curious, as you think about your content and your partnerships and thinking about maybe hybrid education models, are there new partnerships or areas that you need to work on to kind of see how this new kind of hybrid learning model evolves over time? Just curious to get your thoughts on that.

Yeah, it's a really excellent question. You know, students have told us 75% or more students told us they would prefer a hybrid environment. That's up from like 25% a year ago. So I think, you know, the same way employees would tell us they'd like a hybrid environment, which is management comes to the office, but they don't. In the case of students, I think that most students want the benefit of both. Some students can't afford to do both. They just want to do online. They have families. Remember, the average age of a college student is 25 years old. And so it's a real situation for them where access really depends on whether or not they have to come in person or not. So I absolutely do believe that that is the trend. We have been building towards that trend. It's why we've said in the past that we're focused on support services for community colleges and for online universities. And actually, it was doing incredibly well, which is one of the reasons we were hit so badly right now because it's community colleges, And people who are either taking online or going to the four-year schools that you haven't heard of that are working that were affected the most. Those are really the kind of new customers that Chegg has been working aggressively on getting. And I think that's one of the reasons that we were hit. Now, we were hit less than other people in our space, but nonetheless, it's pretty significant. So, yes, in terms of partnerships, if you take a look at the relationship with, for example, with GILD, Our relationship right now is with Thinkful and skills-based classes and boot camps and other things that corporations are doing. But most of the things like Guild and InStride and companies like that, they are helping corporations pay for undergrad education. So these are also conduits for us to get to know these companies, to be able to have these companies supply things like Chegg Study and Chegg Study Pack and Mathway and writing to their employees. So I do think that there are new partnerships that will develop out of this. I think those are the kinds of ones that we are currently looking at now. Thanks, Dan. Yep, great question.

Our next question is from Ryan McDonald of Needham & Company. Please proceed with your question.

Hi, thanks for taking my question. I know obviously this is an enrollment issue, but we'd love to hear some color on maybe the impact that account sharing could have played or even, you know, growing competition in this space. Obviously, you know, earlier this year, Quizlet buying Slater, Course Hero getting aggressive and expanding their platform by acquisition. Are you seeing any difference in sort of trends, whether it's around usage going to other platforms or maybe pricing pressure from some of the lower-cost offerings? I would love to hear about that. Thanks.

Yeah, also great questions. And as you can imagine, when this started to reveal itself late in September, we took a look at all of that. So let me tell you what we have learned. What we have learned is that free sites or ones with freemiums are not taking our traffic at all. They are, in fact, down more than we are, and our audience is not leaving us to go to them. So I can tell you from our own internal research, we asked that question, as you imagine we should, just like you asked it, and we're very satisfied with the answer that we're not losing customers to anybody else at this point in time. So I would say that that just isn't the case. In terms of others getting more aggressive, they're all trying to copy our model. And as it's been explained to me, when Chad catches a cold, they're going to get pneumonia. So they're going to be in a more challenging situation than we're in, we believe, over this next period of time. And, you know, this kind of thing is inevitable, happens in every industry, not for these reasons. I've never seen this combination of reasons before. But from a competitive standpoint, I think, as Andy mentioned in his prepared remarks, even though we're doing an aggressive stock or, you know, stock... Security buyback. Securities buyback, that's because we have debt too and the lawyers are on the call and they make me say it the right way. We still believe that Chegg is the single best buy in the education space by far and look forward to owning more of it. Having said that, we still have an additional $2 billion on our balance sheet to be able to go grab some of these assets as their prices become much more in line with what they should be. So we're not thrilled about this situation for obvious reasons, but we're executing really well. The opportunity outside the U.S. is what we were hoping and expected to be, and we're executing well against what's currently available in the U.S., and we expect it to come back, but we're also in a stronger position from balance sheet, EBITDA, pre-cash flow. So we'll just continue to execute and look for these opportunities when they present themselves.

Great. And just as a quick follow-up, you mentioned executing well internationally. You talked about stepping up your localization efforts, but how should we think about maybe pace of country expansion and think about international versus, I think, yourself that you're focused on today? Thanks.

Yeah. You're breaking up a little bit, but I think I heard the question about how should we think about focusing on international and what should you see from us. So what do we mean by localization? In the case of localization... Every one of these things we think will expand the TAM and our growth rate for years to come in some ways similar to what it did in the U.S., which is think of international as three concentric circles. There's English-speaking STEM students. That's where all our growth is coming from now. And it doesn't matter what country you're in. If that's what you're doing, you're coming to check. The second one are not as good of English-speaking students, but also taking STEM. So from there, localization... is by putting the content in local language, which is translation. Second, it's allowing them to ask questions not just in English but in their local dialect, and then answering it not just in that dialect but in every dialect so that every new question over time gets answered in multiple languages so we don't have to redo it more than once. And then the third category, which Uversity is a big part of in the US but it's also global, is expanding beyond STEM. which is into other subjects where we're getting professor-provided content. And that also, again, is just a huge, fun, interesting opportunity, which is the creator economy. We've already paid out over $4 million. We're in over 700 schools, which is pretty huge considering there's only 4,500 in the U.S. And we have over 20,000 pieces of content. So localization, the last part of localization, is being able to present in the local currency – which we're only able to do in, I think, two countries right now, and then actually localize the price. So somebody on the last call asked a really good question to say, could you lower the prices in other countries? The answer is we will. We can't yet. And all of those things are things that we are aggressively working on now, which should be ready for the fall, sometime in the fall of next year. And so you can just imagine we're getting huge volumes of traffic from places like India and Mexico and Indonesia and other places, that have large populations but really can't afford the price we're at. So we're harnessing what's available to us in those countries at these price points, but we expect to get a lot more and a lot faster growth once we're able to do that. So that's what we mean by localization.

Thanks. I'll hop back in the queue.

Yep. Thank you for the question.

Our next question is from Brent Till of Jefferies. Please proceed with your question.

Dan, if you can just bring us back to September. Was everything tracking kind of to what you had normally seen in normal seasonality, and then it just didn't come through in the last couple weeks? And I would assume, given the guide, obviously October hasn't come back. Can you comment? Has there been any rebound in October?

Well, yeah. I mean, we've obviously completed October, so it's November 1st, and I think Andy would kill me if I gave out numbers. But here's what I will tell you, that – For July and the first part of August, we were ahead of our plan. So we had an aggressive plan. We felt very comfortable about taking guidance up. The interesting thing is we're actually going to end up somewhere around the original guidance we put out last November after all is said and done. So I just found that curious. But what generally happens is textbooks – start earlier than homework help because people get the textbooks. We have never been smart about the timing of textbooks. We've always been a week or two behind and we always say timing. So we really didn't think much of it early in late August and early September when textbook season starts. And then it didn't come back. And that was the first canary in the coal mine that maybe this is a different kind of semester. So we started to look at all the trends of competitors, traffic trends, ourselves. We started to look at our funnels, internal funnels. And we were asking ourselves, is this timing? Is this something that we did wrong? Is there something wrong with the systems? And the answer was, no, we're actually executing. And if you just look at, you know, traffic alone was probably 25% down in the month of September versus what our internal plan was. So that's what we saw. And that, of course, changed our perspective on the quarter. And, you know, as soon as we knew that, we changed. You know, the end of September, early October, communicated with the board, let them know. The good news is, you know, for Chegg's services, we had a really good Q3. We beat on every metric there. But textbooks is a zero-calorie business for us, which means it does not matter in our earnings. It does not matter in our numbers. We have predicted for years that textbooks were going to go away. They will continue to get smaller. We offer it literally every, as a service to the industry because we're certain if we got rid of it, publishers would raise their prices again. And that's not fair to the students, so we continue to offer it. But it should not be considered anything in terms of value that we're able to produce in terms of earnings or anything like that. And we said that years ago when we switched the model. So nothing has changed there except there's just fewer of them this semester because there's fewer students. That was the first sign. Then it really was just it never bounced to the numbers that we thought it was going to bounce to in September. October is stronger. But, you know, we still have November and December. And so it's difficult to know. But the guidance we put out is what our expectations are, and that's based on all the information we have right up until last week.

Okay, that's super helpful. So your gist is just this is not really competitive. This is more an industry headwind that everyone's facing, and it's tough to duck underneath that wind that you're seeing in the industry right now.

I think that's exactly right. We're full of people who normally assume when something doesn't go well, we have to have done something wrong. That's the kind of personalities we have. We're paranoid that way, so we look at every single number, everything in the funnel. Every competitor called, frankly, every competitor. You know, we're looking at a number of companies that we always look at. We saw the exact same trends but worse. And so this is what it is for the moment. It is unsustainable unless you're betting against their students ever going back to higher education. But it's three semesters in a row. Go ahead.

A quick follow-up, Dan, on that is just assuming that engine stays off, in the short term, some of these new initiatives that you've been leaning into, are you going to lean harder into that or is your belief we're going to weight them evenly? When you think about skills-based learning and university and the career onboarding, there's a lot of other initiatives you have underway. Everyone's asking, is there something you're going to do differently in terms of how you weigh into those?

I think that we are, again, a very fair question. We are leaning in very hard to all of them. We have been. We are. The core business is extraordinarily profitable. We are investing a great deal of money in personalization, in university, in the international e-commerce platforms, localization, content, all those platform issues, the relationship with Guild, expanding and tripling the amount of content that we offer. The work has been going on and is going on. The timing of the results takes time because we live in a world by semesters. We don't live in it by you offer it that day, and it's relevant that day. We really just got to plan by the semester. So we are leading in hard like we've been leading in hard in international, and it's paying off. There's a lot that we're doing that is going to pay off, and the domestic market will come back stronger at some point. And so for us, it's not business as usual because, No one's ever seen anything like this, but it is the usual business of expanding our TAM, adding more content, creating greater value for the students, finding new channels of distribution, and creating overwhelming value and seeing growth as a result of it. I mean, the things that we just love about the business is conversion is up. Renewals are better. Take rate is really high. International growth is really high outside of North America. And their take rate for the bundle is really high. So the business will be a growth business as soon as we sort of clear this moment in time. You also have to remember, we grew 100% over two years. So combine that with this, and this is what we see. But it's absolutely not a competitive situation. You can look at the exact same numbers that we're looking at.

Great. Thank you.

Yep, really appreciate all these questions.

Our next question is from Mike Grondahl of Northland Securities. Please proceed with your question.

Yeah, hey, Dan. Have you broken out your subscribers from two-year colleges and four-year colleges lately just so we could get a sense of that mix?

We break them out. We don't share them. But, yes, we know four-year colleges, two-year colleges, online universities, U.S. colleges. We actually know it by college, by university. And as our personalization efforts roll out, Mike, we now know it by courses. That's part of how we know that and surveys, that people are not taking the more demanding courses right now. They're taking the easier courses. They're easing their way back into going to school. They are mentally exhausted. You've seen an increase in all the negative things in everybody's lives, but particularly students, right? Mental health issues are just huge right now. So, um, but if you look at any external thing, any, anybody that's reported in the education space, any, any external numbers, there's a great article that was out, uh, this weekend, um, that just talks about the fact that enrollment, particularly at community colleges and certain online schools, not all of them. And then, um, you know, four-year colleges that are sort of on the fringe that sort of serve as community colleges and their communities just are massively down and they just, nobody expected it.

Got it. Got it. I think I understand where more of the pressure is coming from, sort of two-year and online and then more localized four-year school.

Yeah, and I think that's exactly right. And so if you look at all the colleges that you all know by name, they're really small. Like the top 25 or 50 colleges make up a couple hundred thousand people out of 20 million. 10% of all students in this country go to just one singular community college system, the state of California. And you can imagine how far down that is. So this is, it's a localized problem. It will end. It just didn't end now. Got it. Okay. Okay.

Our next question is from Josh Baer of Morgan Stanley. Please proceed with your question.

Thanks for the question. Dan, could you expand a little bit on the types of services and solutions outside of the academic study that you could provide to your students? You sort of mentioned it a couple of times, just thinking about what types of solutions you could sell to your existing customer base over the years.

Yeah, also a great question. So I don't want to be too specific for obviously, you know, for competitive reasons and other things. But we've said many times, and that's one of the reasons we've launched Chegg Life, is there are areas that students depend on. So if we wanted to support the student, not the 180 degree that's just in academics, but the rest of the student, what do they need? They need adulting, as they call it. They need financial help. and information. They need mental health and information. They need soft skills. They need hard skills. They are getting none of this through the existing free education system called K-12 or free community college or four-year schools. These are all things with our massive reach that we have the ability, and that's, again, part of the reason we're building the platform to be personalized. the right student can find the right thing for them at the right moment. Over time, we'll know, we obviously know what classes you're in. We'll know what majors you're in. We'll know the industry that you're likely to go into. We'll know whether or not you have a loan, whether you fill out a FAFSA form. You can just imagine all the benefits that we can bring to students. And so we'll have the opportunity to do two things, bring them more things and charge them for it, and create Chegg into much more of a membership service rather than a subscription service, which is really based around the semesters. where we've done an extraordinarily excellent job of optimizing around that, and we continue to do so. But we see a reason for Chegg to be with you younger, with you older, and with you longer over the course of a year than we see now. And so there's a lot of overwhelming value that we can bring from partners in terms of access to things, discounts on things, all things that you'll see over the next several years that Chegg will likely be bringing to the students. And so we just see the opportunity for Chegg is getting bigger. Had this moment in time not happened, you know, we wouldn't have had to talk about all these additional things because the core business is so strong. And even with the situation we're in, the core business profitability, EBITDA, EBITDA margins, free cash flow, all extraordinarily strong as is the balance sheet. So, you know, this is not something that we expected or that we're enjoying for obvious reasons, but it is going to be us focusing on what we've been focusing on. Thank you. Yep.

Our next question is from Jason Salino of KeyBank Capital Markets. Please proceed with your question.

Great. Thanks for letting me ask my question here. You know, maybe I'll be the person to ask about the Q4 guidance here. It looks like services growth is roughly flat year over year. You know, with the Q4 guidance, does it assume you know, we see any change in trends, you know, from the September, you know, trends that you've been referencing. Thanks. Yeah. Yeah, Jason, this is Andy.

I think Dan needs a little bit of a break here. But no, you know, we saw the trends, as Dan mentioned, in the middle of September through the end, and then obviously we've gotten through October. The trends haven't materially changed, you know, plus or minus, so we've incorporated those into our guidance Yeah, so that's basically what we're expecting through the end of the year. And if you can imagine, really, the vast majority of our revenue comes from subscribers at the end of September through October. You know, the vast majority of the subscribers are already on board. And it's much, you know, the next couple of months is more about renewals than it is new acquisitions.

Okay. And if I could, maybe I'll sneak in a quick capital allocation strategy question. It sounds like you're leaning into the buyback. How should we think about capital allocation?

Well, I mean, you nailed it. We're leaning into the buyback. Dan mentioned it earlier. If we're going to use capital to buy companies, why not buy ourselves? We think we're an extraordinary value. So we're going to do both. One is the buyback, the securities buyback. The second thing, as I mentioned in the prepared remarks, we're always looking at opportunities to add to our portfolios. whether it be content, whether it be new services, whatever it may be. And we want to make sure we've got sufficient capital to be able to execute on those if they become available. And so it'll be most likely a combination of both. Perfect. Thank you. You bet.

Our next question is from Alex Furman of Craig Hallam. Please proceed with your question.

Great. Thanks very much for taking my question. You know, just to ask further on the enrollment declines that you're seeing this year, is there anything materially different about the declines you're seeing this year compared to the declines you're seeing that, you know, we all saw nationwide last year? You know, you mentioned your students in particular, you know, might be ones that really gravitate toward some of the employment opportunities. that are coming out with that. You know, obviously that wasn't the case last year when enrollments were declining. But are you seeing anything, you know, in particular about, you know, anything we can kind of keep our eyes on in terms of, you know, whether it's two-year or four-year or state or private schools, you know, anything about the makeup of the enrollment for this academic year that is, you know, materially different from what we saw last academic year?

Yeah, I don't know that I could articulate it in the terms of last year, I can tell you what we see happening this year. I will say that last year, people didn't, you know, enrollment was down, but a lot of that had to do with international students because they weren't allowed back in the country. And so you have that, plus overwhelmingly, this is two-year colleges, and four-year schools that act similar to two-year colleges, which is people take a lot of classes there because they're local. As we've said in the past, the average age of a student is 25. Twenty-six percent of them already have a child. Forty percent of them are working 30 hours a week or more. That's the group that we think is most dramatically affected. Of course there's going to be issues with people who are going to the wealthy schools and the four-year schools, all those kinds of schools, or even the big football schools where we see all those people in the stands. But these are people that are of lower income, that are working, that don't have much support, highly immigrant-oriented, two-year schools, and are hopefully and expectedly, based on our surveys, capitalizing on the income that is available for them. These are not people that are taking sort of subsidies in doing nothing. That's a whole different conversation. These are people that are self-motivated but have been working and going to school and have chosen to capitalize on the income. And then there's a subset that are going just taking fewer classes either because they're working or just absolute fatigue.

Okay, that makes a lot of sense. Thank you.

By the way, we've researched these things. We've surveyed these things. We've looked at competitive data. We've spoken to competitive CEOs. We spent a lot of time preparing for this call, as you can imagine, because we knew you wouldn't have expected it because we didn't expect it. But through it all, we are executing against the opportunity that is available domestically at this moment, and we're building lots of really big, fun things for future growth, both domestically and internationally. outside the US and our non-North American numbers are growing as fast as we would have hoped.

We have reached the end of the question and answer session. I will now turn the call back over to Dan Rosenzweig for closing remarks.

Well, we appreciate everybody dialing in. Obviously, there's a lot of work to be done here. And we will do that work. I couldn't be more proud of our team for executing through COVID. We experienced massive growth at the beginning of COVID, over 100% for two years. And so we were going to lap big numbers anyway. But on top of that, just the fact that so much has happened in the economy that is out of CHEGS control and higher education's control right now, that we're being affected by it temporarily. We are in the best position with the best balance sheet. We feel like whatever we're experiencing, others are experiencing it worse, and we're still in a really great position for revenue growth and subscriber growth outside the U.S. and EBITDA growth and cash flow growth, and we have $2 billion in the balance sheet. So we're in a really good position to deal with this situation. We just don't know how long it's going to be, and we will update you all in February. But I really appreciate you joining the call and asking all the questions. so we get a chance to sort of articulate what we've seen. Thanks, everybody.

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