Chegg, Inc. (NYSE:CHGG)
Q4 2015 Earnings Conference Call
February 22, 2016 4:30 PM ET
Alex Hughes - Head of Investor Relations
Daniel Rosensweig - Chairman, President and Chief Executive Officer
Andrew Brown - Chief Financial Officer
Diana Kluger - JPMorgan
Brian Fitzgerald - Jefferies & Co.
Aaron Kessler - Raymond James & Co.
Michael Olson - Piper Jaffray
Jeffrey Silber - BMO Capital Markets
Christopher Howe - Barrington Research
Kenneth Wang - First Analysis Corporation
Mitchell Bartlett - Craig-Hallum Capital Group LLC
Matt Blazei - Lakestreet Capital Markets
Ladies and gentlemen, thank you for standing-by. Welcome to the Chegg’s Conference Call discussing Fourth Quarter and Fiscal 2015 Financial Results. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. [Operator Instructions] As a remainder, this call is being recorded Monday, February 22, 2016.
I would now like to turn the conference call over to Alex Hughes, Head of Investor Relations for Chegg. Please go ahead, Mr. Hughes.
Good afternoon and thanks for joining Chegg’s fourth quarter and fiscal year-end 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 the discussion of Chegg’s business, and Andy will follow with a review of our operating results and our outlook for the first quarter and fiscal year-end 2016. A copy of our earnings press release is available at our Investor Relations website investor.chegg.com.
A replay of this call will also be available on our website. We routinely post information on our website and tend to make important announcements on our media center website at www.chegg.com/mediacenter. And 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, I will make forward-looking statements regarding future events, including 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 could cause actual results to differ dramatically from those in the forward-looking statements.
In particular, we refer you to the cautionary language included in today’s earnings release, and the risk factors described in Chegg’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 5, 2015, 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 present financial measures on a non-GAAP basis. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release. We also make reference to information included in the IR deck and Investor Relations datasheet posted on our IR website at investor.chegg.com.
With that I’ll turn the call over to Dan.
Thanks Alex and good afternoon everyone. 2015 was a very successful year for Chegg. We met our revenue targets, exceeded our profit targets and for the first time became adjusted EBITDA profitable for a full-year. We successfully grew our digital services and launched some exciting new products positioning us for strong growth in 2016 and beyond.
We had four priorities in 2015. Priority one was to accelerate the transition of Chegg to an all-digital business by the end of 2016 and we are on track to do so. Of all this left is for us to liquidate the remaining textbooks in our inventory which we expect to complete by the end of the year. We are very pleased with our partnership with Ingram.
Our second priority was to invest even further in our digital feature, which is headlined by our subscription businesses Chegg Study and Chegg Tutors. Together, these two popular services crossed over the 1 million subscriber market in 2015. Chegg Study is rapidly becoming as [popular-service] on Chegg as textbook rental.
We have been able to achieve this by expanding the number of textbook ISPNs covered to 21,000 and through the size and the quality of our proprietary expert Q&A network where we answered more than 1.5 million questions in 2015. Our network is a huge differentiator and its effectiveness is evident by the 136% growth we saw year-over-year in the questions answered.
We continue to see incredible engagement with users who access the service weekly on average. The importance of Chegg Study is directly connected to its ability to impact student outcomes with over 90% of users reporting and help them to get a better grade.
As widely used at this helped services many students need human help, which is why Chegg Tutors was our fastest growing service in 2015. We see the world as moving towards more high quality on-demand learning and our goal is to above the largest on-demand marketplace for learners and educators.
We are off to a great start, however, one of the key license we learned about building a two sided on-demand marketplace is that it’s not good enough to have a large number of high quality tutors, but we also must have tutor availability at the moment as student needs them. The good news is that we were able to create significant demand. The challenge that we experienced is that we were unable to mute our – that demand within the quarter. Although, this caused us some short-term revenue in Q4, we know this to be a very fixable problem and one we’ve already started to address.
Our third priority was to invest in and launch new services that address big opportunities such as test prep and careers. We successfully released the beta version of our test prep product at the end of last year and have already had over 18,000 students engaged with it, which is twice as much as we originally expected and we believe that offering a high-quality adaptive online test prep service at an affordable price is a very big opportunity for Chegg.
In the career space, our anchor service Internships.com is the largest online student focused internship database. We are making product improvements daily that have already led to a record usage. New student registrations grew 29% year-over-year, new internships listed grew 68% year-over-year. And over 1.4 million job applications were submitted on the platform. Clearly, there is a need for National Career Services site for students and employers.
Finally, as I noted earlier we had a goal to be adjusted EBITDA profitable for 2015 without sacrificing our future. And we are proud to report that we achieved that milestone for the first time in our Company’s history. As strong as 2015 was we are even more excited about 2016. For those of you new to Chegg story, we continue to figure Chegg as a textbook rental business.
It is important to understand just how much the Company has evolved in the last few years. We have gone from a Company that used to use significant cash and loss money each year offering only textbook rental to a Company now that generates free cash flow and makes money from a full suite of student first digital services.
As we move ahead our Textbook business by design will become a smaller part of our overall Company and we are still able gleam great value from it. Our strategy is to use our Required Materials business to build our brand, grow our reach and acquire customers profitably enabling us to more efficiently introduce our higher growth and higher margin services that student’s love and as you can see from our results its working.
Our most used [indiscernible] today is Chegg Study, which is a self-help service that led student’s master stem and quantitative business subjects through step-by-step solutions and our proprietary expert Q&A network. In 2016, we will continue to expand our constant categories even further and continue to build out our network for more subjects.
For Chegg Tutors, our time and attention will be spend on building our on-demand tutoring network. The key is for us to meet student request within a five-minute window on all subjects 24/7 is becoming clear that on-demand tutoring is going to be a very big business with only a few winners so we are making sure to invest appropriately into the quality of our service and grow demand as we improve supply. We are very excited about on-demand tutoring.
We see a large run rate with our current services and at the same time we are making strategic investments in new areas such as test prep, which is an $8 billion market and matching of students to their first job, which is a $5 billion market. We expect these businesses to begin to contribute to our P&L in 2017 and becoming meaningful part of our future.
In our marketing services group our focus within enrollment marketing is to expand the number and the value of student relationships by improving our proprietary data platform which we call the student graph. Our goal is to better match students to the right schools and eventually to their first jobs significantly improving their outcomes.
Our brand partners played two very important roles for us. They help grow profitable revenue and they really differentiate us with students who love the surprising to right from key partners such as Red Bull, Tide and Starbucks when they open our iconic orange boxes. We are very proud of the transition that we have made and we are very excited about how our brand as evolved in the minds of students from a textbook rental company to a student hub.
This has helped Chegg to become one of the two most recognizable online brands on campus. When students are asked which brands help them with their studies and collage life. We are proud to say that we grew our school by 12% year-over-year. Serving student’s needs is a very big business especially in today’s economy. We believe we can grow our current offerings while adding new services with big opportunities and dealing so profitably.
2016 is the last year of transitioning our model and we couldn’t be more excited about finishing the transition and of course more importantly about our future. The needs for Chegg Services continue to grow and we are really excited about what we can do to help students improve their outcome.
With that, I’ll hand it over to Andy to discuss our performance and our outlook in greater detail. Andy?
Thanks, Dan, and good afternoon everyone. As a reminder my comments today are on a non-GAAP basis as I discuss our 2015 financial performance and our outlook for 2016. We had a great 2015 and I’m very pleased to report on first full-year of profitability on an adjusted EBITDA basis. I’m very happy to say that we are in the final year of a multiyear transition to an all digital business.
Although, Chegg has become simpler to run we appreciate how challenging it’s been to understand our business especially during this transition period. Given we are in the last year of the transition, we will be giving guidance consistent with how we are now operating the Company.
In addition, they have been changing dynamics in the textbook industry that will be important to understand for our 2016 guidance. There are lots of moving parts and our goal is to make this easier to understand. As such I encourage you to review that financial slides in the investor presentation and the investor datasheet on our IR website.
Let me first start with more detail on Q4. We had an excellent quarter overall. Digital revenue grew 34% to $38.1 million, which was at the low end of our guidance range while adjusted EBITDA was the top end.
Here’s why; first there was a trend away from eTextbooks towards print because publishers increase the price of eTextbooks and print rental prices continue to decline. This doesn’t affect Chegg’s long-term business model, it does however impact our topline revenue because when we rent an eTextbook we recognize 100% of the revenue versus when we rent a physical book we recognized approximately 20% of the rental price.
In addition, eTextbooks are priced approximately twice as much as a print rental. Effectively we’re getting approximately 10% of the revenue from a print book through Ingram as we were from an eTextbook. Fortunately this does not have a material impact on the bottom line. We experienced similar trends in our recently completed winter semester and have factored this into our outlook for 2016.
The second factor as Dan mentioned was that in Q4 we drove significant demand to our tutoring business, but unfortunately we are unable to meet approximately 50% of that demand during peak periods. Although, tutoring remains our fastest growing business, this constrained revenue for the quarter and consequently we are now being more cautious how we model the rate of growth in 2016.
Turning to fourth quarter profitability, we saw gross margins increased to 61.5% better than expected. This was driven primarily by high incremental margins from our subscription services. This resulted in Q4 adjusted EBITDA of $15.3 million and more importantly adjusted EBITDA of $5.4 million for the full-year. Chegg’s first profitable year, which is a significant improvement from the $13 million adjusted EBITDA loss we’ve recorded in 2014.
Looking at the balance sheet, we ended the year with $89 million in cash and investments as well as a $29 million receivables balance with Ingram. This receivables balance is slightly higher than we’d originally anticipated and is directly connected to the shift from eTextbooks to print that I just discussed. To meet the increase print demand we went into the market and bought more prints books on Ingram behalf.
So our contract with Ingram these funds will be paid back to us later this year. We also ended the year with less than 30 million of textbook inventory compared to 81 million in the previous year and we expect this to be close to zero as we exit 2016 and become all digital business.
With that, let me turn to discussing how we are running and reporting the business in 2016. As we are now the tail end of our transition to Ingram, we are changing how we report and guide revenue to reflect how our business will look once this transition is complete. We will also start guiding all print revenue on a pro forma basis, which assumes it is all commission based revenue.
In addition, we will guide pro forma gross margin guidance on an annual basis so that you can track our progress to our longer term model. We believe the core value of our Company and where shareholders should focus is on our high growth products, which we now call Chegg Services, which includes our subscription services such as Chegg Study, Chegg Tutors and Test Prep and marketing services, enrollment marketing, brand partnerships and careers.
We also believe that represent the future growth of revenue and profitability of our Company and where most of our focus in investments will occur. We will also be reporting and guiding separately on total Required Materials, which includes revenue from print textbooks, eTextbooks as well as the Ingram commission. We are doing this to increase transparency into our slow growth business, but more importantly it matches the way students come to Chegg to search for textbooks and our goal is providing students the textbooks they need in the format they want.
Also as a reminder we will report and guide Required Materials on a pro forma basis as though the Ingram transition will complete. We believe this concept gives shareholders greater visibility into how big and fast our Chegg Services are growing unless they monitor the Required Materials business separately.
For modeling purposes, we have provided historical revenue break that’s in the appendix of the investor deck on the IR website along with expected seasonality for 2016 as we move through this transition.
Looking more specifically at 2016, we expect to see strong revenue growth in Chegg Services which has consistently being growing above 30% annually. In Required Materials where we shipped more than 6 million units annually, we expect unit growth market which right now is slightly down due to trends in admission.
As recently as 2014 we saw eTextbooks unit growth of over 60%. We now believe given the shift in student preference for lower price print that eTextbooks will decline by a small amount in 2016. This of course will impact topline revenue, but will have no meaningful impact on our profitability. We also plan on making important investments in 2016, and in the areas that Dan articulated as our 2016 objectives, while continuing to improve profitability.
With that, let me turn to our outlook. As previously communicated when we announce the Ingram partnership a year ago, GAAP revenue for 2016 will decline year-over-year as we finish the last year of this transition. As a result for 2016 we expect total GAAP revenue between $230 million and $250 million, pro forma revenue between $170 million and $185 million with Chegg Services revenue between $115 million and $125 million or growing approximately 30%. Gross margin between 48% and 50% on a GAAP basis and 64% to 66% on a pro forma basis with adjusted EBITDA of $10 million to $20 million.
For the first quarter of 2016, we expect total GAAP revenue to be between $60 million and $65 million, pro forma revenue to be between $44 million and $47 million and Chegg Services revenue to be between $24 million and $26 million. Gross margin between 38% and 40% on a GAAP basis and an adjusted EBITDA loss of $2 million to breakeven.
Looking further out, we continue to expect to exit 2017 at an EBITDA margin of 25% and to upgrade at this level for all of 2018. As result of the eTextbook dynamics that I discussed earlier it’s less clear on the timing of total revenue growth. However, we believe text services, which excludes Required Materials to drive our growth and should be able to grow at approximately 30%.
We are very excited about the progress we’ve made and fully transforming Chegg’s business. In a short period of time, Chegg has come from a textbook company that loss money to a digital platform that offers a suite of student per services and is growing profitability.
With that, I’ll turn it over to the operator for your questions.
[Operator Instructions] Your first question comes from Douglas Anmuth with JP Morgan. Please state your question.
Hi, it’s Diana Kluger on for Doug. Thanks for taking my question. I love to hear a little bit more about how the test prep test is going, when you’re thinking of putting more of a quantum behind a Paywall and when we should think about modulation becoming more material? And then I’d also love to hear a little bit about the supply demand on the Tutoring business and if you think there is potentially any impact on [churn from the students who didn’t have imagine] in the window that they are looking for? Thank you.
Thanks Diana. It’s Dan. On test prep, we’ve launched the beta version in December and we were hoping to get between 9,000 and 10,000 students. We’ve got twice that much so we feel like we have the ability to drive demand and get students engaged with it. It’s very hard to get high school students to engage over the Christmas Holiday for the test prep product particularly one they hadn’t heard off.
So we were really boosted by not only the number, but there are levels of engagement with it. We are focusing now on taking all of their feedback and then improving the quality of the product given the timing of when student take these exams, we are not likely to start charging until the second half of the year which was our original expectations so in 2016 we really don’t have much of anything in our forecast as it relates to revenue, but we expect to Paywall to go up in the second half of the year as we start get into the big test prep season.
As it relates to the tutors, we are sort of fascinating we had focused a lot on volume and quality of tutors and have done really an excellent job on that reaching well over 10,000 tutors in the system and have a [five part] system in which to evaluate their quality. And what we learned was we really needed to learn that timelines of when students not only watch subjects they are interested in, but what days of the week and what time of day for those subjects and now we can more aggressively recruit tutors.
We don’t think there is any significant impact negatively on the brand and in fact once we understood that was a problem we changed our recruiting process it really addressed it in January and early part of February this year and we are getting really good feedback from students on the quality.
So we are really excited. It remains our fastest growing business and we don’t think there is any long-term impact. We do think that it makes it a more of a mode for us to be able to not only be able to drive as much demand as we ultimately want, but to acquire tutors and be able to know when the tutors are actually going to get business.
So right now there is no negative implications. The biggest issue was students wanted it, we couldn’t match them with one. Our bad implication was we would have tried to match them with one that wasn’t qualified. So we don’t see any long-term impact of it still first starting up this year.
Great. Thank you so much.
Your next question comes from Brian Fitzgerald with Jefferies. Please state your question.
Thanks guys. I wonder if you are seeing any changing dynamics around that the seasonality of the digital products, is there any degree of seasonality shifting for tutors it feels like that would always coming in at the later part of quarters school season. And then for that matter would test prep I guess its kind of seasonally weighted to right around now Q4 versus Q1 so any color there and then any color on the branded marketing offerings, how renewals going with them or the sales cycles for those changing any regard? Thanks.
Okay. Got [indiscernible] so on seasonality we have – on the investor deck we have a layout of how we think seasonality has really evolved from what used to be in the Textbook business, but the way we think about it is Chegg Study, which is our largest product by far and really just a fabulous product and it will be and is becoming extremely profitable.
It really begins to take off its subscription fees and somewhere towards the end of January or early part of February and then does it again in the April, May timeframe and that has to deal with first two weeks in the semester when you go oh my goodness I don’t get this then we get mid-terms and then we get final.
Tutors to your point, tutors the big quarters for tutors will be more like Q2 and Q4 which is why we noted that because we had – we had basically 50% more demand in Q4 then we could meet in terms of tutors supply and that really didn’t start to come in after Thanksgiving and in the month of December really right around the finals. So tutors has a difference, Tutors is later in each semester, Chegg Study begins to really evolve earlier in this semester and then has a revival as you get towards finals.
As it related to text prep, it’s too early for us, but the times a year have do when they match up SAT and ACT eventually a year from now will have another additional suite of subjects that will be around nursing school and LSAT and MCAT. So its too early for us to be able to give you any indication of seasonality because it well depend on the product suite and when we roll those out plus it’s not a revenue producer in 2016. We really want to make the product incredibly great if there is no body has one that can compete, we are going up against the lights of the capital into the world and Princeton reviews of the world those are multi $100 million revenue businesses.
So we are very excited about it, but I think as you think about seasonality it really is Chegg Study sort of second to third week of January through the end of the semester with the majority of it coming early on and then tutors later in the semesters you say it’s really on-demand. We also get really large days on Tuesday’s which is when homework gets assigned. So those that do their homework right way, we get them on Tuesday night, so we [indiscernible] that about the Tutoring business.
You asked me about the Brand business, we said last year and we will continue to say that the subscription businesses really are the bulk of the growth rate right now of the Chegg Services businesses, they’re becoming big and they’re becoming very profitable and really meaningfully in our overall numbers now, we couldn’t be more excited about them.
On the Marketing Services businesses they will continue to grow, they’ll grow nicely, but they’ll grow slower. And if the Brand business we’ve really focused last year and this year on small group of people who will spend more and do more with us because the surprise and delight and differentiation is with the students. So the renewal rates, we’ve had Red Bull actually skipped a quarter or two and that actually has come back because the demand was so high. Starbucks continues to renew, Tide Pods continues to renew.
So we get very high renewal rate, but obviously right now as you think about the growth of our business it’s really the subscription services that are making up the bulk of where we’re going right now. And those are the fastest growing and the highest profitable ones and really what Chegg is working to become over the next couple of years.
Great. Thanks Dan.
Your next question comes from Aaron Kessler with Raymond James. Please state your question.
Great. Thanks a lot. Couple of questions guys. First is Chegg Services they’ve guided some size about 22% to 33% growth. Can you just give us maybe the factors go into that range? And second, Andy for gross margins for Required Materials versus services can you give us a sense for those ranges? Thank you.
Yes. So I want to hit the first one first, if you go to our slide deck we actually have some information for our investors regarding our gross margin profile. We are looking at [comparison] consistent over the last two to three years 8 points of gross margin for Chegg Service so it’s not just a high growth business. Chegg Service it’s not just a high growth business, it’s a high margin business with the residual being obviously the Required Materials business. So that is in the deck and I’d encourage anybody listening to go to that.
The second question was – the first question I’m sorry that’s the second question I went [back from here]. So on what’s driving the growth as Dan had mentioned earlier that the bulk of our growth over the next – over this year is Chegg Services, our subscription services which is Chegg Study, Tutors drive that significantly, when I look at marketing services its fast growing, continues to be a lower growth business and as you can see once again we provided this on a pro forma basis that we’d experience consistently 30 points or better growth in our Chegg Services business over the last few years.
One of the – part of the question that Andy made in his – when he is answering the gross profit one was, what’s the difference in the range between 22% and 32% in terms of the growth rates. It really just early in the year like we are in the middle of February, we got – its unlike textbooks which we are already through a season and where we have – goodness one season less of owning any textbooks and that will be done with that business and then everything is really about Chegg Services.
So we are being cautious about just the rate that we want to grow tutors, Chegg Study has been – is off to a great start. So I think it really is just more time in the year to be able to sort of condense that range a little bit, but since we are coming out so early and we’ve got 10 months to go or nine and a half months to go we are just putting at a range that we think – that we feel comfortable, but historically we’ve been able to grow that business in excess of 30%.
Okay. And just to clarify quickly on accounting unit continued to just close kind of the higher GAAP revenues and do you encourage analyst move to shift to the pro forma in the disclosures?
Yes. Aaron absolutely, we’ve been talking about pro forma revenue for the best part of two quarters now and our intent is to be able to get analyst to move to that because that is the Company when we get to 2017, right. So there is no pro forma once we get to 2017. This is the Company as we see it today. So yes, we would definitely encourage analyst to do that. We will continue to provide GAAP revenue guidance, in the meantime both GAAP and pro forma become the same, right when we get to 2017 so there won’t be any difference, it will be just GAAP only.
And probably three things that we really want to direct everybody to think about that the future of the company is Chegg Services and the Required Materials business really is just what we’ve said for a year after we announced the Ingram deal.
When we went public two years ago it was 80% of the business and now it’s less than 25% of the business and will be decreasingly important part of the business in every capacity and right now we use it to build our brand, acquired customers drive users to the other services and that’s why other services are growing so fast and have such high margin so that’s how its working out.
The second thing we just want to direct people to is on the pro forma side, it’s because how we’ve run the Company, right, it’s just that’s the way we think about it internally and it won’t be pro forma after we liquidate the last book it will simply be that that will be the total company revenue. So we’re always report out on GAAP percentage points just you guys can have it.
The third thing that we talked about on the call that it’s very important to note as you think about your model is just the difference in eTextbook and a Ingram textbook rental, which is – there is really very little no meaningful impact on the bottom line, which is what we’ve been striving for which is to make Required Materials just the brand builder, traffic driver, positive cost of customer acquisition. So we can build the transition on top of that.
But the difference in eTextbooks and in Ingram commission is as much as 90% difference on topline revenue recognition even though there is really no significant difference on the bottom line profitability recognition and it’s because when we resell eTextbooks, it’s on an agency model not wholesale model so we have to buy with the price they sell it and then we have to market at the way they want us to and that’s no different than Amazon or anybody else.
So that makes a difference in our overall revenue growth rate, but not in our bottom line growth rate has zero impact on the future of the Company which is the Chegg Services. So I want to make sure that we cover all of that because it’s a change over what people – I mean eTextbooks used to be growing at 60% a year and then now our negative growth rate, but we don’t lose the customer and we don’t lose the profits because we just convert that customer for moving to eTextbooks to an Ingram textbook rental from us. So it’s not there for Chegg at all.
Great. Thank you.
Your next question comes from Mike Olson with Piper Jaffray. Please state your question.
Hey good afternoon. Just on that topic when you talk about less interest in eTextbook is that eTextbook rentals purchases or both and why do you think interest in eTextbook has changed or maybe showing the upward trajectory that was previously expected is that expense or just something else that students find eTextbooks to be less user friendly?
And then secondly at the end of Q3 you reported digital subs I think it was 825,000 in this quarter, you reported 1 million Chegg Services subs to 1.4 million digital subs. Is that apples-to-apples number with 825,000 last quarter the 1 million or the 1.4 million? Thank you.
Yes, so Mike let me cap up the numbers question there before Dan can maybe talk a little bit about the eTextbook business. So when you look at the 1.4 million digital subs and 1 million Chegg Services subs and we will be moving to Chegg Services subs going forward, we take both this quarter because that’s the way we are breaking at the business, that’s for the full-year.
And so when you look at the digital subs 1.4 million that’s digital subs for the full-year that the numbers that we gave in Q1, Q2 and Q3 are the one you’ve just referenced actually for the quarter, not for the full-year, it wasn’t a year-to-date number.
If you recall – maybe recall last February when we talked about digital subs, we talked about having 1 million digital subs at the end of last year that’s comparable to 1.4 we did this year, right so it’s 38% so increased. But as we move forward we are going to focus on how we run the business today and we’ll be talking about Chegg Services subs which is their subscription service business.
And we don’t longer include eTextbooks in the subscription services business so all you are getting now is Chegg Study and Tutors and then when test prep comes online you’ll get test prep. So anything that we churn to subscription we are basically saying that textbook is a textbook is a textbook is that the way the students look at them.
So we no longer counting that as our subscription growth so you are seeing close to 40% growth year-over-year in just those two businesses is on subscriber growth. So you can see just how big Chegg Study is beginning to get and that will have a meaningful contribution in profitability in the out years, I mean meaningful.
So the question on eText which is very interesting because if you follow the publishing world Pearson has had a great year with difficulty and they’ve made some major cuts and major announcements to engage positively merge for bankruptcy, but they are owned by private equity shop McGraw-Hill is also owned by a private equity shop and was expected to go public in December and January, it didn’t do so and lot of that, almost all of that has to deal with what’s going on in the domestic U.S. textbook market, so couple of dynamic to just realize.
The U.S. population demographic is one where there are just fewer students in college right now and you’ve seen that on Barnes & Noble earnings calls and other earnings calls. And to us we don’t really care because for us we really want that to be a flat market where we own the size of the catalogue, make it smaller every year and focus on only those books that help drive students to the other services and not all of them do in fact less than 50% of them do, so we will continue to own that group and make that part of the company smaller.
The reason for the dynamic on eTextbook is sort of fascinating which is you would have expected by now for significant investments we brought into the quality of making eTextbooks more of learning than they are just PDFs of the existing textbook, but today the eTextbooks that exists out there and we have agreements that have rights to market 178,000 different ones. They are just PDFs online and so when the price of the average here is an example of it most dramatic example of the most popular textbook, which is Campbell Biology.
Our rental price of Campbell Biology is $20, a eTextbook price of Campbell Biology is $107. So if you are a student and the whole goal is to save money why would you do that? On average it’s more or like – the average eTextbook is 50% more expensive and since they don’t have anything in particular that make the learning from them better or more convenient and it’s not cheaper, students just rejected it.
Publishers we’ve been able to tell the publishers what price they should sell them if they want to move more of them because we were sort of hoping for a faster transition. But right now the way their businesses work they have a lot of print inventory and they need to market their print inventory as they start investing in other kinds of digital services for education. For the high school ranks, the K2 – in all the K12 ranks as well as higher education.
So it’s just done it was a business that was growing at 60% year-over-year and now will actually decline in growth and that has nothing to do with Chegg that is everything to do with just the industry standard that’s going on right now because we are in communication with everybody in the industry.
Fortunately for Chegg, it doesn’t affect negatively the bottom line and fortunately because we have zero debt and we have a strong balance sheet we can actually acquire the customers we want and we went into the market and bought used books to those customers so we can meet the demand, but it was a very interesting trend that literally started at the end of the first quarter last year and we really didn’t know it make of it until the end of the year because the next big season was the end of the year.
Got it. Thank you.
Okay, thank you.
Your next question comes from Jeff Silber with BMO Capital Markets. Please state your question.
Thanks so much. Just wanted to go back to the difference the way you’re going to be reporting revenues going forward just so I’ll make sure that I understand it. So if I look at what you reported in the fourth quarter on your data sheet of about $12.4 million in Required Materials our pro forma revenue that’s just the commission from Ingram is that correct?
So Jeff, let me – no that’s not correct Jeff. So what’s in the Required Materials its all of the Ingram commission, all of the print books that we deliver and all of the eTextbooks and so essentially what is done and let me put it in a different format if you take what our Digital Revenue was last year, right take out the Ingram commission and take out eTextbooks and put with our print that gets you Required Materials, right.
That’s how it works and that’s how we are running our business today and that’s how students look at particularly in Required Materials. They don’t really – they are just looking for their textbooks where we delivered either physically or digitally, but that’s how the constructed going forward. Does that make sense?
Yes, I think so. And then you had mentioned in terms of the disclosure on the gross margin then I know you’ve done that on an annual basis in terms of Chegg Services gross margins. I haven’t done the math to back that up, but Required Materials gross margin [Technical Difficulties].
I will move on to the next question. Our next question is from Alex Paris with Barrington Research. Please state your question.
Hi, this is Chris Howe sitting in for Alex Paris. And I just had a few questions here on the 2016 GAAP revenue outlook is that reflective of any acceleration in the exiting of the print business? And the second question is how did Chegg’s Study grow specifically year-over-year?
Yes, when you look at the outlook on the GAAP basis that’s absolutely includes and that was a 100% expected as we went into this. We talked about this when we enter this with the partnership with Ingram in February that we would anticipated that we would see revenue decline on a GAAP basis in 2016 and then we start to see it pick up again in 2017 and 2018. So this is pretty much as expected.
It maybe even a little bit more than because we’re liquidating faster.
Yes. That’s true.
And your second question about Chegg Study.
But on the Chegg Study growth rates we don’t break out the individual subscription services, but as you saw since we cross the million mark for Chegg Study and Chegg Tutors then you’ll get an indication that the overwhelming majority right now continues to be Chegg Study, but Tutors is growing the fastest and getting to the point were by the end of 2016 that will be pretty significant.
Okay. Thank you for taking my questions.
Your next question comes from Corey Greendale with First Analysis. Please state your question.
Hi, this is Ken Wang on for Corey. Thanks for taking my question. So just two quick ones for me, I know there’s been some talk before on monetization around career, so just wanted to see if there was any, you had any updates on that? And then secondly any other commentary around potential product introductions or what we can expect to see as an area of focus going into 2016?
Yes. So we are staying very focused to the priorities that we articulated on the call because those are very, very, very big market and we are having really great success with our subscription services right now and that gives us the opportunity to continue to invest carefully and diligently in our textbook business and our careers business as you just asked about. And so we have modeled this year with zero revenue from either one of them because product quality is the key and for us to be able to ultimately charge and be very successful in them.
So in the career space, we released some numbers today on internships.com that are just fantastic. We only took over the product ownership, we bought the Company over a year ago, but we only took over the product ownership in October and already began to see huge impact on our user and student experience and corporation experience. So the tutor I think it was close to 1.5 or 1.4 million job applicants went through it last year so you can see it very meaningful.
Our expectation is not to begin charging until 2017 and the model will be pretty straight forward, which is we’ll have more students than anybody, we’ll know more about them than anybody, we’ll have their college, we’ll have their major, we’ll have their professional interest and we are growing the number of corporations quite dramatically, you can see in the prepared remarks that we have and we’ll begin to give corporations and Company’s and small businesses, access the student and student data to be able to do their recruiting and that will essentially be a subscription based business.
So we are focusing on our new efforts which are Test Prep, getting the first one down to starting to charge and expanding the number of categories and then focusing on the career space and those are two huge spaces for us and so I don’t imagine we’ll be far from that over the course of this year.
Your next question comes from Mitch Bartlett with Craig-Hallum. Please state your question.
Hi, I know you don’t want to break-out Chegg Services the subscriber base that 1 million between the different subscriptions, but maybe if you could just focus on Chegg Study for a second. And just help us understand the acceptance of Chegg Study within the student population. How that repeats or if they are improving over the years with better product or what it looks like from a cohort basis from a individual subscriber basis, what that might look like going forward? Anything there?
Yes. It’s a great question and there is a lot there. So every cohort gets better. So this is one of those it looks like a venture capitalized pitch, which is everything is up into the right. So renewal rates are in a record high and that’s renewal rate that really is about monthly, which is the average student to stay on in excess of five months and their usage continues to increase.
I think we mentioned on the call there was 136% increase in the number of questions asked and answered. Over the course of last June it was a million and half questions then we see that just continuing to grow rapidly it is – see inside the subscription services, the Q&A network that’s proprietary that no one else can compete with this no one knows is even nearly the size of the expert answers to students.
So it’s very vibrant with the average student using the service weekly on average and so every metric in terms of conversion, renewal, length of time, engagement has been better with each cohort. We have not taken up the price of Chegg Study since we bought it from 14/95 a month we have taken up the annuals and even as we take up the annuals we don’t really the only shift we see is more people doing monthly, which is a better ROI for us because they all come back on in renew in the second half the year anyway. So I would just say that business in of itself is a monster business for us right now.
Very good. Thank you.
Thank you. By the way it has well over an excess of 80% gross margins as well so its one of those businesses that had scale just getting better.
[Operator Instructions] Our next question comes from Matt Blazei with Lakestreet Capital Markets. Please state your question.
A couple of questions on the balance sheet you ended the year with $89 million in cash I think I know your goal is $100 million you obviously pin some of it on the Ingram receivables balance. A couple of questions there was the delta pretty much all the Ingram receivables balance given the strong profitability you had in the quarter. And where is that on the balance sheet is under other current assets.
Yes, okay Matt that’s a good question. So the answer is yes for the most part – most of that has to do with the Ingram receivable. The cats and dogs around the other working capital areas but nothing really material and you’re absolutely right it is in other assets for a variety of accounting reasons its not in receivables but that $29 million was is there and was up for the reason we’ve articulated on the eTextbook the print transition we bought more books and therefore we have a larger receivable in other current assets with Ingram.
And does that I know your goal is to wind that down in 2016 is that still the plan.
Yes, so just as a remainder I just want to make sure everybody is aware how the Ingram deal works is that in 2015 the way the transaction work is we buy books on behalf of Ingram. For example through our book buyback, which is a very buy book program when it help us acquire customers and it helps Ingram get relatively speaking an expensive books that can put into their rental catalogue. But as far the transaction we said with Ingram would pay us back for those transactions 50%, 30%, 50% and 360% that represents the 360 that we agree to with Ingram.
In 2016, the year we are in right now that’s goes – that later 50% goes to net 180% and then we go to regular payment terms in 2017. So you’ll really see that the cash flow associated with moving out of the textbook business really you’ll see it in its full force when we get into 2017 when we kind of collect the whole receivable balance from Ingram, which will be really in the first quarter of 2017.
So by the time the Q1 of 2017 comes around that number which has been approaching $30 million should be back to a more normalized that $5 million or $10 million as we get in.
Yes. You kind of nailed it. It will get be quite a tight $10 million, but you actually nailed it, it will be back to a very normal level, correct.
Okay. Thank you guys.
End of Q&A
If there are no further questions I would like to turn the call back to over to the Chegg Inc., CEO, Dan Rosensweig for closing comments.
Thanks everybody for joining the call we’re obviously very happy with 2015 continuing to see our new businesses really beginning to spread out and becoming meaningful parts of our P&L finishing the year EBITDA positive was a big milestone for us because only 24 months ago we were company that used cash and loss money and now we think we have long-term sustainable profitability and more profitability each year based on the margin profiles of our new businesses.
That Chegg Services in our minds effectively is Chegg, which is those new businesses that are growing at on average 30% a year, high growth, high margin are becoming significant contributors and actually for the first time in our Company’s history those collected businesses will be bigger percentage substantially bigger percentage of the topline in our textbook business.
So that is another big milestone in our business. As you think out in the future we continue to see the demand for Chegg’s Brand, Chegg Services growing and growing in a very nice rate, it’s been very difficult to go through this transition, it’s been even harder for those of you not inside the company to model the transition.
There are too many moving parts between which books we own, which books Ingram owns, eTextbooks and other things we believe that new way of reporting gives complete transparency into the slow growth, past business which are everything related to textbooks and the new company and the growth part of the company which is Chegg Services, which we believe the next year’s will be very big and very profitable.
So we thank you all for continuing to stay with us through this transition. We like you cannot wait for our last textbook rush season, which will be at the end of this year and then we will be clean 100% pure digital business, which we believe or not high growth than high margins and thanks again for joining us on the call. We’ll talk to you soon.
This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
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