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Chegg, Inc. (NYSE:CHGG)

Q2 2014 Earnings Conference Call

August 4, 2014 05:00 PM ET

Executives

Daniel Rosensweig - President and CEO

Andrew Brown - CFO

Alex Hughes - Investor Relations

Analysts

Douglas Anmuth - JPMorgan

Brian Fitzgerald - Jefferies & Co.

Aaron Kessler - Raymond James

Mike Olson - Piper Jaffray

Jeffrey Silber - BMO Capital Markets

Matt Blazei - Lake Street Capital Markets

Nat Schindler - Bank of America Merrill Lynch

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Chegg’s Conference Call discussing Second Quarter Financial Results. (Operator Instructions) As a reminder, this conference call is being recorded Monday August 4, 2014.

I’d now like to turn the conference over to Alex Hughes, Head of Investor Relations for Chegg. Please go ahead, Mr. Hughes.

Alex Hughes

Thank you, operator. Good afternoon and thanks for joining Chegg's second quarter fiscal year 2014 conference call. On today's call are Dan Rosensweig, Chairman and CEO; and Andy Brown, Chief Financial Officer. In terms of structure, Dan will open with a discussion of Chegg's business and Andy will follow with a review of our operating results and our outlook for the third quarter and fiscal year 2014.

A copy of our earnings press release is available at our Investor Relations Web site, investor.chegg.com. A replay of this call will also be available on our Web site. We routinely post information on our Web site and intend to make important announcement on our media center Web site at www.chegg.com/mediacenter and we encourage you to make use of these resources.

Before we begin, I’d like to point out that during the course of this call we will be making forward-looking statements regarding future events and the future financial 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 risk factors that cause actual results to differ materially from those in the forward-looking statements.

In particular, we refer you to the risk factors described in Chegg's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 6, 2014, and 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 also 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.

Now, with that, I'll turn the call over to Dan.

Daniel Rosensweig

Thank you, Alex. Good afternoon and welcome to Chegg's second quarter earnings call. We are very pleased to report strong Q2 financial results and significant progress in our plan to reach 50% as students in high school, and college and 50% of revenue coming from our digital businesses in 2016.

On today’s call we will share our Q2 highlights and financial guidance, continued growth in our recent engagement, the expansion in our addressable market through the acquisition of InstaEDU and finally we will discuss our partnership with Ingram content group, transforms our business model making us far more efficient with our cash, more competitive in the textbook business and accelerate our evolution to a digital company.

We continue to drive strong growth in revenue, members, customer’s engagement and model. Our success in these areas shows the power of our brand and the popularity of our new services. Our student hub now reaches $13 million students representing over 45% of U.S college students and through our network of partnerships 75% of college-bound high school students.

Overall, paying customers grew 21% with digital subscribers growing more than 60% year-over-year. Our print, textbook continues to be very competitive with unit scoring 21% in the first half of the year -- year-over-year. Our strong member and customer growth is matched by increased engagement in key services across our platform.

In the quarter, the number of members using two or more services grew 64% year-over-year, a reflection of how students increasingly rely on Chegg for their entire student career. We’ve been very pleased with the early success of our organic launch of Chegg Career Center, which includes internships and the Chegg career site.

With nearly half a million students already accessing it, we believe it is the largest College Career Center in the country and we’re just beginning our investment in this category. We believe the opportunity that match students to their first job is huge for Chegg.

Chegg continues to benefit from the transition to mobile. As our members increasingly use mobile screens, multiple screens to access our cloud-based content services. We believe that the more screen students use, the more Chegg content and services they consume. Having a daily connection with students will continue to drive growth.

In fact, our mobile orders of Print, eTextbooks and Chegg Study increase 94% year-over-year. This is translating into significantly improved customer satisfaction. As we add new services, our customer satisfaction continues to be very high with our Chegg Net Promoter Score staying above 80.

In the last four years, we’ve systematically transformed Chegg from textbook rental company to connected learning platform to address a bigger and more attractive market. When we started as textbook renter, our addressable market was only $10 billion. Today it is in excess of $100 billion in the U.S alone.

We serve students from high school, through college and into their first career with a growing suite of services, a more comprehensive set of student centric services which drive an increased engagement and monetization. In fact, we’re very pleased that 70% of our active members in the first half of this year used our network of services for something other than print textbooks.

Our strategy has been to leverage our huge reach and our unique data platform, which we call the student graph, to deliver the right products in the right service at the right time to each student. In fact, that we have more students and that we know more about them than anyone else, it’s our biggest competitive advantage. As an example of this, we acquired InstaEDU, adding an exciting new service to our platform, that as a global addressable market of we believe over $60 billion.

InstaEDU offers on-demand online high quality tutoring at a fraction of the cost of conventional tutoring. We view InstaEDU as the [ph] [Eber] for tutors. Students chose real time video, voice or text based tutoring in numerous subjects and languages anytime, anywhere from any device for little as $0.40.

Students appreciate the convenience of finding tutors whenever they need them, without having to go somewhere to meet them, or worry about whether the tutoring center on campus is currently open and staffed for the subject matter expert that they need. Our tutors, many of them colleging graduate students as well as professors, appreciate the ability to earn money and help [ph] [fabulous] students as their time and schedules permit.

To give you a sense of the scale, InstaEDU is already announced over 70,000 qualified tutors and coverage over 2,500 subjects and its only two years old. We see a remarkable engagement numbers for tutoring time, increasing 240% year-over-year, which we think reflects the enormous opportunity.

Before we acquired InstaEDU, we tested interest in the service. Over 70,000 Chegg students click through the InstaEDU in less than 90 days and since we close the transaction and added Chegg branding, we had seen an over 15% improvement in conversion to sign up for the Chegg brand really resonates with college students.

The online tutoring market has network effects. Brand and scale will matter, and therefore we bought it because we believe that it will be a winner take most of the market, matching InstaEDU supply of tutors with Chegg’s 13 million students, gives us a significant competitive advantage. We are very excited about this acquisition and expect it to benefit Chegg and its stockholders.

With that, let me turn to the exciting partnership we announced with Ingram. We believe it is the next big step in our transformation and acceleration to a digital company. We get the best of all worlds by combining our reach, brand and personalizing, merchandising capability with Ingram’s world class inventory, logistics, and distribution.

For those of you’re not familiar with Ingram, Ingram was founded in 1964, and is the world’s largest distributor of physical and digital content. In recent years, Ingram has entered the higher education market working with college bookstores. We expect this partnership to yield significant benefits to Chegg’s students, Chegg’s stockholders, and Ingram.

For students, this allows Chegg’s to maintain our large catalogue while utilizing Ingram’s distributed network of warehouses for faster delivery. For Chegg’s stockholders, we maintain all the benefits of being in the textbook business, such as brand building, acquiring customers, collecting data, marketing additional products and services as well as providing surprise into live products in all of our boxes.

The real benefit is that now we can do so using significantly less cash, reducing our inventory risk, and freeing up cash to invest and grow our digital businesses. For Ingram the partnership fuels profitable growth to a large and growing customer base. Collectively we believe we can offer better and more competitive service.

I will leave it to Andy, to discuss the financial details, revenue recognition and how we report the numbers in the future with increasing transparency. But to give you an idea of the initial size of the partnership, this semester the combination of both Ingram will acquire on our behalf and they wanted to go buy directly from us, will represent approximately 10% of our quarterly (indiscernible) which will free up between $10 million and $15 million of cash in Q3 alone.

In addition, we expect to use $25 million less in cash, than we normally would have used over the next six months to deliver the same unit growth. As you can see a lot of excited things have happened in just one quarter, we’re moving fast with Chegg. We see significant opportunity ahead and we believe that our extensive student reach, student graph, and improving business model, we’re well positioned to drive significant long-term growth and value for our students and investors.

With that, I’ll hand it over to Andy, to discuss the quarter and the Ingram agreement in more financial detail. Andy?

Andrew Brown

Thanks, Dan, and good afternoon, everyone. As a reminder, my comments today are on a non-GAAP basis as I review our fiscal second quarter results and then provide our outlook for Q3 and fiscal 2014 along with the impact of our partnership with Ingram.

We saw strong year-over-year growth across our business when compared with the same quarter last year. Total revenue grew to $64.5 million, up 15%, largely driven by growth from our digital businesses. In fact, digital revenue grew 54% to $18.7 million expanding to 29% of total revenue, up from 22% in the same quarter last year. This is the result of strong digital subscriber growth of 62% from the year-ago period.

Print revenue grew to $45.8 million, up 5% year-over-year while we saw units grow 21% for the first half of the year. This is important as our textbook business continues to drive customer growth, brand preference for Chegg and data that populates a student graph, which allows us to better serve students with additional offerings. Total gross margin for the quarter came in higher than expected at 14%, driven by greater efficiencies across our business lines and by digital gross margin coming in at 72%.

Turning to expenses. Q2 operating expense were $26 million, which included approximately $3 million in costs associated with our newly acquired companies, which had almost no revenue contribution during the quarter. Adjusted EBITDA came in up $1.6 million, which was at the higher end of our expectations and was driven by better margins and improved textbook liquidation costs recovery. We ended the quarter with cash, cash equivalents and investments of $79 million and with no debt on the balance sheet. During the quarter, we purchased InstaEDU and Campus Special from -- for an aggregate cash outlay of $45 million.

Before I get to our guidance for the second half of the year, I want to give you a sense for how the Ingram partnership will work. We expect Ingram will purchase approximately $25 million of textbooks over the next six months, some directly from Chegg and some in the open marketplace. This represents cash that Chegg would have otherwise spend on those textbooks that can now remain on the balance sheet or the use for opportunities with potentially better returns for our shareholders.

Under the agreement, we will continue to own the branding and customer experience for textbooks fulfilled by both Chegg and Ingram. As a result, the transaction will be seamless to our students. Ingram will be responsible for the back-end logistics for the books stay on, which includes sourcing, warehousing and shipping.

There are several benefits of this partnership to our financial model. First, for all textbooks order through Chegg that Ingram fulfils, Chegg will receive a commission of approximately 20% of the sale price from Ingram, which we will record as digital revenue. As a result, our print revenue will come down while our digital revenues will increase.

In simpler terms, for every $10 million of textbook orders that Ingram fulfils, will record digital revenue of $2 million at the time the order is fulfilled versus $10 million of print revenue on a ratable basis as was recorded previously. Second, we initially expect gross margins for these transactions will be in the 45% to 55% range once all costs were accounted for much higher than the 12% we’ve experienced footprint in the first half of 2014.

And, third, and most importantly, it frees up a portion of our balance sheet that would normally be tied up in textbooks and liberate into higher value opportunities. As a result of this partnership we expect our cash balance to increase $10 million to $15 million by the end of 2014 and continue to increase as we expand the relationship into 2015.

Ultimately we expect the relationship to enable Chegg to be more efficient from both an operating and a cash standpoint. To help you better understand the Chegg textbook business during this transition, we will provide the gross merchandise value or GMV of print textbooks along with our usual revenue reporting second quarter. This will help you track the progress of the textbook business regardless of who fulfils the order.

With respect to the guidance for the remainder of 2014, we have provided information on our Investor Relations Web site and in the press release that shows the combined effect of the acquisitions of Campus Special, instaEDU and the Ingram partnership since our last guidance.

Without the effect of these transactions, our guidance ranges would essentially a bit of unchanged for 2014. While the second half of 2014, we anticipate the Ingram partnership will reduce print revenues by $8 million to $12 million while the combined effect of Ingram and our two acquisitions will increase digital revenues by $8 million to $10 million and reduce our profitability by three to five million for 2014.

We also expect that combined, these transactions will be accretive on an annual basis from 2015 onwards. Specifically, with respect to the third quarter, we expect total revenue to be between $75 million and $80 million with digital revenue between $24 million to $28 million.

We expect overall gross margins of approximately 12% and we expect an adjusted EBITDA loss to be between $18 million and $22 million. While fiscal 2014, we expect total revenue to be between $305 million and $350 million with digital revenue between $94 million and $98 million are approximately 30% of total revenues.

We anticipate gross margin for the year to be approximately 29%. We expect our adjusted EBITDA loss to be between $14 million and $18 million. And we now expect to generate $5 million to $10 million of free cash flow for the year.

And finally, we expect GMV for the purpose this to be between $120 million and $130 million for the second half of 2014 would approximately 85% occurring during the Q3 (indiscernible).

This is an exciting time for Chegg as the acquisition of InstaEDU provides a powerful new service that we believe can scale quickly to provide a meaningful revenue stream as we move into 2015. We are also excited about the opportunities that the Ingram partnership provides, driving more and more business to higher margin digital revenue and liberating our balance sheet as we invest less in print textbooks (indiscernible) to the confidence that we will obtain our 50-50-50 goal sooner than originally evolve.

With that, I'll turn the call over to the operator for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Douglas Anmuth from JPMorgan. Please proceed with your question.

Douglas Anmuth - JPMorgan

Great. Thanks for taking the question. Can you first just talk about the timeframe of which you think you will be able to meet the (indiscernible) textbook business over to third-party (indiscernible) that will pick an entirety? And then, second, can you talk about how the textbook (indiscernible) is shaping up as we’re heading into the busy season here and then how the deal (indiscernible) sort of insulate to more potentially from some of the rest (indiscernible) as well? Thanks.

Daniel Rosensweig

(Audio break) in July that really doesn’t get big until about the third week of August. The rest is shaping up so far in the first 30 days as we’d expect. So no surprises, which is good. And the timing of the deal is the way you have to think about it, where we have to think about it is there is an August rush and then a January rush and then the next time we will move a higher percentage of books will be the next August and the next January. We will continue to move on a regular basis for the second quarter next year on summer rush. So we’re just going to take our time and do it in a way that makes sure that we improve the student experience by having a faster delivery time, everything will come in the Chegg box, so we think the timing of it is going to be a big chunk in the first August, January. Smaller chunk in -- additional chunk in the summer season and then another big chunk hopefully equal, not larger to this chunk in terms of additive in next August and next January. But we will not be going to work with multiple partners if we launch. So our objective has always been to get the benefits of the textbook business, build the brand, get the customer, get the data, get the credit card, market all of those products. So we never wanted to actually own the profits we didn’t have too. So the faster that we move to better, it’s just going to take a couple of rushers in order to be able to transfer the majority of our books to any given partner. And students have what mitigate this from -- first of all, we don’t use our capital, so we expect to be able to keep $25 million on our balance sheet that we authorize would have to put at risk. If you will, so that is a substantial improvement and we took a very big deal for us and for our investors. Second, the few of those that we own, the less risk we have in our ownership meaning that we predict well, do we have to liquidate that book faster, did that books lose value faster. Every time that we don’t own the book, it’s better for us at better for the shareholder. So again the faster that we could move the better, but we think this litigates us from a significant competition issue that people have been worried about. So just trying to (indiscernible) because we’re trying to the balance sheet reduces our exposure to actually owning the book, we get to pick the size of the catalog, we get to pick the price of the catalog, we get to own the customers. So this is really a dramatically positive move for us. And I will turn it over to Andy.

Andrew Brown

Yes. It just makes so much sense for us like that, I mean that kind of look at it into an operator. Its Dan gets everything to see once in that, the customer, the data; the branding and I get everything that I want right. I want more cash on my balance sheet, I want to derisk the balance sheet and derisk the business. So from our perspective its, like I said, it’s a no-brainer.

Douglas Anmuth - JPMorgan

Okay and can you talk about you anticipate (indiscernible) cash basically that you’re stating on the balance sheet?

Andrew Brown

Yes, so that’s real simple. We are in the mission of creating shareholder value. And whatever it takes to create shareholder value, we will use our balance sheet to do and that could be a multitude of things. It could be -- if you seen this quarter, we believe we provided significant shareholder value by purchasing Chegg deals and InstaEDU, but there are other things we can use the cash flow to create shareholder value all the time. And that’s all we’re about, is to create shareholder value.

Douglas Anmuth - JPMorgan

Okay. Thank you guys.

Andrew Brown

Thanks, Doug.

Operator

Our next question comes from the line of Brian Fitzgerald from Jefferies. Please proceed with your question.

Brian Fitzgerald - Jefferies & Co.

Thanks. Which was your first season for Chegg internships? Are you pleased with what you’ve seen so far in terms of student and employer interest, engagement, number of postings and in terms of sale et cetera? And then maybe any quick update on and color around textbook pricing specifically as we go into Q3? Thanks.

Daniel Rosensweig

Yes, this is Dan again. I’ll turn over to Andy. I’ll answer it in reverse. On the textbook pricing we are seeing exactly what we expected to see. So, anything can change over the course of the quarter, but we feel like the guidance we gave is reflective of the unit volume in the prices that we’re seeing which so far it’s very good. On Chegg internship’s and Chegg careers, yes, we had actually been pleasantly surprised by the overwhelming response particularly in the summer time. So, about half a million students have already used our internship site and our new Chegg career site just in the last few months. So, the fact that we really didn’t even announce the career portion until June, which is after the school year ended. I think we’re actually stunned by just the volume of these, and its really reflective about just the different between how some people see us in the outside world which is they see us as a textbook rental company whereas we said on the call today and Chegg careers and internships are an example of that. Over 70% of the use of our site in the first half of the year was something other than textbook rental. So, the more mobile we get the more day-to-day connection we get, the more services we get, the more they integrate into a unified experience similar to LinkedIn, the more the engagement goes up. So, it actually has been very, very high. So we’re pleasantly surprised just a quick update particularly when the career (indiscernible) didn’t even start to launch until June.

Brian Fitzgerald - Jefferies & Co.

Great. Thank you, Dan

Daniel Rosensweig

Thank you.

Operator

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

Aaron Kessler - Raymond James

Yes, thank you. A couple of questions. First, can you just talk about the -- I guess sales and marketing increased by few million in the quarter, is that purely M&A or is there any higher student acquisition costs? And then, in terms if you think about the role that InstaEDU made some of the integration that’s ahead over the next few months here. Thank you.

Daniel Rosensweig

Yes, Aaron, thanks for the question. So, when you look at the sales and marketing increase that was primarily due to a result of the acquisitions. And as you can imagine we actually didn’t forecast, we hadn’t anticipated InstaEDU at the beginning of the quarter. So, I think actually the team did a super job overall in expenses during the quarter and you see that reflected in our adjusted EBITDA which is clearly on the high end of our expectations. And on the integration, the integration has been great. I mean one of the smart things that we did, we looked at all other categories for over two years. We looked at the tutoring category, that with every player in the space, and actually did some marketing deals with a number of them prior to choosing to make an acquisition and which one we wanted to buy. And we were amazed that when we did just minor integration of InstaEDU into just Chegg Study in the first quarter of this year that we saw over 70,000 students click over. Since we acquired InstaEDU and we put our branding on it, we see a conversion increase of over 15%. So, the great thing, one of the reasons we bought InstaEDU is we believe its looking forward instead of looking backwards, its all online, audio, video, text space. As we said it’s an [ph] [Eber] for tutors and their technology is brand new. So it scales incredibly well, therefore it integrates incredibly well. So, integration is going very well, very fast. We haven’t hit very many glitches and we’re seeing really great responsiveness inside the company and from students.

Aaron Kessler - Raymond James

Great. And just quickly also on the gross margins, you made some nice leverage in the quarter or at least above the guidance range. Any thoughts under the -- actually given the guidance range there?

Andrew Brown

Yes, it was a super quarter. There was a couple of things to point out. The first thing is, our warehouse team did a super job keeping cost down. We did see some decrease in our overall shipping cost, and as you’re aware we’ve seen a significant increase in our overall digital businesses in almost 30% of our business, and they have 72 points of the margin. So, overall I’d say we’re hitting on all cylinders on that line.

Aaron Kessler - Raymond James

Great. Thank you.

Operator

Our next question comes from the line of Mike Olson from Piper Jaffray. Please proceed with your question.

Mike Olson - Piper Jaffray

Hi, good afternoon. To what extent do you think your digital segment growth is being driven off of print customers at this point? And you mentioned that 70% of students in the first half that that use services other than print textbooks, but were many of those also textbook customers I guess in other words. How do you see your digital mix shift as been tied to the continued growth of textbook customers if some of those digital services may be being up-sold to those customers?

Daniel Rosensweig

Yes, one of the big benefits for the Ingram deal is that we get our cake and eat it too, which is we get to stay in the business but not apply our capital to it. So, its pure digital business at that point because we offer it for sale, but we don’t take ownership of the inventory, we take responsibility for it which is a really big fundamental change in Chegg’s outlook for the next several years. But specifically to your question, it’s been really interesting which is, initially it shouldn’t surprise you that the majority of the customers that are using some of our newer services are our existing customers because we get to market it directly to them. But if you took something like Chegg Study even though our attach rate continues to double every quarter which is extraordinary, the overwhelming majority of Chegg Study users are coming from something other than our textbook network. So, we’re going to reach, now reaching 13 million students over 45% of every college student. We’re decreasingly dependant on the textbook business in any capacity which is because of the changes in the industry dynamics we are able to cut a deal with an extraordinary partner, a strategic alliance with Ingram because they see us as a huge growth opportunity and a profitable growth opportunity. So, we get to stay in the textbook business, but decrease our exposure to it. But to your point again, more a more and more of our customers are not necessarily renting textbooks because specifically with our high school students none of them are renting textbooks as an example. And we have in standard reach of now 75% graduating high-school seniors. So, I think we’re de-leveraging our relationship with the textbook business yet still able to offer it and get the benefits from it. So, we’re very, very happy.

Mike Olson - Piper Jaffray

Okay, that makes sense. And then, just following on what you were saying at the end there on the high school front. Can you remind us what the plan is for as mentioned, specifically if there was potentially a re-branding that would occur towards being more Chegg branded, and that would potentially help the hand-holding of students from high school to college while staying kind of under the Chegg umbrella?

Daniel Rosensweig

Yes, especially since we learned when we put the Chegg Study name on Cramster just how much that business started to accelerate its growth. And as I mentioned on the call, with InstaEDU, when we put the Chegg brand on that site where we’ve seen 15% improvement in conversion. So, we’ve really come to appreciate the power that our brand has with high school and college students. That re-branding effort is actually well underway. I’ve had a chance to see the new designs and mark ups that [ph] [reside] in here, and they’re pretty amazing. I would say that you’re probably not going to see it roll out on the side until the very end of this year or early next year, because we prioritize making sure we did all the engineering work for the Ingram deal, so that that deal would work seamless. So, when you get through (indiscernible) you could absolutely expect it to be re-branded Chegg. We are starting to re-brand it with the colleges already Chegg, their base comes from Chegg. So, that it’s underway, but you’re seeing it on the sites with the later part of the year and early part of next year it should be fully rolled out.

Mike Olson - Piper Jaffray

Okay. Thank you.

Daniel Rosensweig

Thank you.

Operator

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

Jeffrey Silber - BMO Capital Markets

Thank you so much. You had mentioned that you expect your, I think you told there’ll be gross merchandize value to be $120 million, $130 million in the second half of 2014. Can we get the comparable numbers what they were last during the second half of ’13?

Andrew Brown

Jeff, that’s a very good question. I don’t have that at my fingertips but we can certainly get back to you.

Daniel Rosensweig

I would say Jeff they were expecting our unit growth to be between 15% to 20% like we have seen, so -- but we can certainly get you the number.

Jeffrey Silber - BMO Capital Markets

Okay, I mean you expect it to be higher than last year?

Daniel Rosensweig

Yes.

Andrew Brown

Certainly. Yes.

Jeffrey Silber - BMO Capital Markets

Okay, I just wanted to double check that. And I’m just curious why the revenue from the Ingram deal is going to be categorized as digital as opposed to print revenue?

Daniel Rosensweig

Yes, well eventually we believe the whole business will be categorized as just one source of revenue which will be pure digital. But the reason is very simple, which is -- we understand it, we weren’t owning the book. So, it’s nothing more than us remarketing Ingram’s book and we’re getting a commission for it of approximately 20%. So, there’s no ownership to the book. We own the customer. We get paid to do it. And so, that’s no different than any other company selling anything online.

Jeffrey Silber - BMO Capital Markets

Okay, that makes sense. And is this one of the reasons you think you’re going to get that 50% digital a little faster than before?

Daniel Rosensweig

Yes, but I think it’s for a couple of reasons. I think first of all I think InstaEDU is going to be a really big success for us over the next couple of years. It’s the number of, it’s already got 7,000 tutors, it has 2,500 subjects. There’s unlimited number of subjects that we could do. It can be global. It could be in any langue. We think that’s going to grow very, very fast. We’re seeing great momentum in Chegg Study, and yes, this allows for that transition. But if you just take this quarter alone, I think Andy gave the range of something like $8 million to $12 million. So, basically a $10 million shift in print only adds $2 million on digital. So, I think the majority of why we think we’re going to get there faster is just we have really great digital businesses that we’re able to market more efficiently than we have every done before, and be more targeted because of the student graph.

Jeffrey Silber - BMO Capital Markets

Okay, great. Thanks so much.

Daniel Rosensweig

Thank you.

Operator

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

Matt Blazei - Lake Street Capital Markets

Hello guys. As to follow-up on the question that was just asked, you sort of touched on the fact that you’re -- you believe that you’re going to lower print revenues by $10 million-ish, $8 million to $12 million I guess, and add $8 million to $10 million more on the digital side. If I back out the $2 million contribution from the Ingram deal, can you infer that the other $7 million-ish is coming from the InstaEDU?

Andrew Brown

So, Matt, no -- when you look at that it’s a combination of as I said in my prepared marks it’s a combination of three things. It’s a combination of the Ingram partnership, and then the two other acquisitions which is Chegg deals -- its campus special I’ll call it, not branded Chegg deals by the way and InstaEDU. So, it will be those two and the organic businesses.

Matt Blazei - Lake Street Capital Markets

So those two businesses are adding $7 million in the back half of the year?

Andrew Brown

In that range. That is correct.

Matt Blazei - Lake Street Capital Markets

And is that a sort of a run rate we should use for those businesses?

Andrew Brown

No, that is not a run rate you should use. So, let me just step back a second. So, when you look at those businesses we acquired them they had, both of them had deferred revenues on the balance sheet that is part of acquisition accounting, I don’t get. So, when you look to the second half of the year, so I can't use that deferred revenue as revenue in Q3 and Q4. So in the run rate we would expect much higher contribution from those two businesses as we get into 2015.

Matt Blazei - Lake Street Capital Markets

And the $3 million you mentioned that you took -- you had $3 million in expenses with no revenues this quarter from those acquisitions. Is that included in the $3 million to $5 million reduction in profitability for the all of fiscal ’14?

Andrew Brown

Yes, that is included.

Matt Blazei - Lake Street Capital Markets

So, generally speaking the rest of the year those should be breakeven to a loss of a couple of million bucks?

Andrew Brown

Yes. You can conclude that absolutely, yes.

Matt Blazei - Lake Street Capital Markets

Okay, all right. Thank you very much.

Andrew Brown

You bet.

Daniel Rosensweig

Yes, Matt one of the things that we did in the call is breakout all the specifics the best we could because in fact we believe for Q2, Q3 and Q4 organically without these transactions we would have been breakeven for the rest of the year. So, it’s just a small amount that we’re investing in the second half of the year with the cost of buying them, but we expect them to as Andy said earlier to be fully accretive in 2015.

Operator

(Operator Instructions) Our next question comes from the line of Nat Schindler from Bank of America. Please proceed with your question.

Nat Schindler - Bank of America Merrill Lynch

Yes, hi guys. Thank you for taking my question. I actually want to talk a little bit about kind of life cycle of books that you have seen. I think there’s been some concern I’ve heard when people have looked up pricing on particular reference books, in this case Campbell’s 9th Edition Biology. The obviously answer of why the pricing was way down year-over-year is that there’s a 10th edition I just saw. So, if I look at that, what percentage when you see -- when you take a big reference book like that a very commonly priced book, what percentage of the new books purchased by students or rented by students in a term are going to be from the newest edition. And how many of the students will just go for the lower priced product that you’re basically on liquidation pricing.

Daniel Rosensweig

So, I appreciate the question, this is Dan. And what I would say is, those folks that publish they either look at the pricing in the middle of the semester just don’t understand the business, and so it’s good that you’re asking, so we can clarify. First of all, during certain times of the year the prices are lower because the rental period is shorter because its summer time. And we consider those in extra use of the book as opposed to in instead of use of the book, because summer schools are four weeks, six weeks, two weeks. So sometimes they’re priced semester based pricing and the summer schools are just lower. And to your very specific question, less than 10% in a quarter -- our experience has been less than 10% -- when the new edition comes out, less than 10% of the schools actually use the new edition. And so, it rolls out one of the benefits of being national, there’s really only two large national scale players that can do this now, is we have the ability to provide that book to whatever school wants it. So, if one school goes away from an edition, it doesn’t mean that school has lost value in another school. So, that’s the beauty of being a national wide provider. So, we had found that the average pricing that we expect is pretty much except a one time -- it’s pretty much held at what we anticipate at the beginning of the semester. So, throughout if you see a new edition come out, it really doesn’t affect us much even in our resources, because we don’t have to buy there are many other and in fact if we buy them at all what we call JIT, which means just-in-time, which means we only buy it if somebody has already placed the order from it. And one the great benefits of the Ingram deal is we will be buying fewer and fewer and fewer of those newer books because they will start to take risk on the newer books which will have a long-term lasting affect for them. So this issue sort of continues to not be an issue for us and actually goes away faster as a result of Ingram.

Nat Schindler - Bank of America Merrill Lynch

Great, thank you. And a second question, on your guidance you’re suggesting a pretty big step up in the second half in stock based comp. I’m assuming that’s mostly rebated to the acquisitions, but if they’re just an additional, I need to think about as a run rate here?

Andrew Brown

No, I wouldn’t be thinking about anything additional for a run rate. You actually, you picked up on that various (indiscernible) and that is we did achieve some incremental equity shares with the acquisitions and that’s the primary reason.

Nat Schindler - Bank of America Merrill Lynch

Great. Thank you very much.

Andrew Brown

Thanks, Matt.

Daniel Rosensweig

Thank you, Matt.

Operator

There are no other questions in the queue. I’d like to hand the call back over to management for closing comments.

Daniel Rosensweig

Okay. Well first off, thank you everybody for joining the call. As you can see today is a really important day in the next step in Chegg transition from what was four years ago a print textbook rental business which was truly all we were technically able to do and all we did. Fast forward four years later and we have a run rate of close to $100 million of digital businesses that have super fact growth and very high gross margins. The Ingram deal allows us to get the benefits of being in the textbook business with significantly reducing our exposure and our risk and our use of capital. And our new acquisitions are already hitting with really good momentum. And so, just think about us as being a student hub that now reaches 13 million students, and it’s the largest college site and high school site in the industry and our ability to match new products and services using our student graph directly to the 13 million reach means that Chegg has a huge future of high growth, high margin businesses and creating enormous value for those students and shareholders. So, today is a big day because we sized a lot of the issues that people have been talking about for a while and we get to focus primarily on the huge growth businesses ahead of us and where some people believe they say their industry is in the second or the third inning, we believe that our industry which is the (indiscernible) space is just coming up to the play. Signing now, can we start to see people sort of break away and we think we’re going to be one of them. So, we thank you very much for your interest in Chegg and for our investors for hanging with us, and we’ll talk to you next quarter. Thank you.

Operator

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.

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