Greetings. Welcome to Chegg, Inc. Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Tracey Ford, Vice President of Investor Relations for Chegg. You may begin.

Good afternoon. Thank you for joining Chegg’s fourth quarter 2020 conference call. On today’s call are Dan Rosensweig, Co-Chairperson and CEO; and Andy Brown, Chief Financial Officer. A copy of our earnings press release along with our investor presentation is available at our Investor Relations website investor.chegg.com. A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our media center website at chegg.com/mediacenter. We encourage you to make use of these resources. Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of the company. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements. In particular, we refer you to the cautionary language included in today’s earnings release and the risk factors described in Chegg’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on October 26, 2020, 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 reconciliation can be found in our earnings press release and investor slide deck found in our IR website investor.chegg.com. We also recommend you review the investor data sheet, which is also posted in our IR website. Now, I will turn the call over to Dan.

Thank you, Tracey, and welcome everyone to our 2020 Q4 earnings call. Last year was a complicated time for the world, for our country, and particularly for students who are navigating the pandemic, rising social issues, and school closings. It was also an unprecedented time for Chegg, as we transitioned 1,900 employees out of our offices and into a remote working environment overnight. It was a year in which we increased our community support, committing over $1 million to local organizations, including food banks, which are rising to meet the increased need from students across the country. Like many, we had to meet these challenges head-on, but we never lost sight of putting students first and we are proud of our results, and that we outperformed even our most enthusiastic expectations. It has always been our operating assumption that the transition to online learning was inevitable, but we certainly didn’t know the catalysts would be COVID-19. We believe this massive shift to learning online, accelerated by the pandemic, is an irreversible trend and it’s actually more student-centric. With increased access to digital learning and support, more learners can learn more subjects on any device, anywhere, and anytime, with incredibly high-quality content and tools. Whenever there is a major platform disruption, there are new leaders that redefine the category, and as the largest direct-to-student online learning platform, Chegg’s products and services are increasingly critical to students’ success. Our results reflect the growing importance of Chegg’s learning support services to millions of students around the world. In 2020, we saw year-over-year annual subscriber growth of 67%, representing over 6.6 million subscribers and total revenue growth of 57%. The trends towards online learning are continuing, and as a result, it gives us the confidence to raise our guidance for 2021, which Andy will walk you through in more detail shortly. At the start of last year, we laid out our key objectives with no idea that a global pandemic was about to hit and the dramatic impact that it would have on our employees, students, our business, and the entire world. We entered 2020 with three core priorities: to deliver on our financial goals and continue to provide services that create overwhelming value for academic and professional learners; second, to continue investing in opportunities that leverage the strength of our brand, reach, customer base, and provide opportunities for meaningful growth in future years; and third, to continue to invest in content and our technical infrastructure to allow us to take advantage of those opportunities, not only faster but also at greater global scale. But within the first quarter, the world changed. Thankfully, as a software company that was built to scale online, we were able to meet the increased demand without missing a beat. However, the massive shift to online learning around the world did prompt us to reprioritize and accelerate efforts that weren’t on our roadmap at the start of the year, including our global eCommerce infrastructure, new and expanded international content, and our account sharing initiatives. We believe that our decision to expand our areas of focus in 2020 has set us up for continued strong growth in 2021 and beyond. As we think about the future of higher education, it is clear that the trends have accelerated what we have been talking about for years and will have a permanent impact on the future of education. This last year has reaffirmed that platform companies that serve the needs of their primary constituents, that own their customer, the data, the channel of distribution, and the content, will outperform their peer groups and disproportionately benefit their customers and shareholders. The pandemic has also revealed that there are two economies: the service economy, which was dramatically impacted by COVID-19 as 25 million people lost their jobs; and the technology economy, which saw a dramatic gain. It is clear that the need to re-skill for the modern workforce is here and this represents a tremendous opportunity for Chegg. Skills-based training and support is emerging as a very large category, especially when you consider the number of people globally that need to be up-skilled and re-skilled for the current job market. The reality is that the majority of college-age students don’t get a college degree and there is a real demand right now for students to find programs that are far less expensive, are more skills-based, and deliver a greater return on their investment. While we are still early in building out this part of our business, we expect to be a prominent player in skills-based learning and expect to expand our footprint in the space going forward. This is a highly disruptive moment in higher education’s history and it has been anything but smooth. As institutions had to make the transition to virtual learning overnight, it became clear that schools were underinvested in technology, online assessment, and digital support for students, and we believe it’s only going to get more challenging in the years ahead, as the shift to hybrid and online learning will be permanent. We also believe that higher education must acknowledge that the internet is here and is a permanent part of learning. As a result, educators must re-imagine how they teach, what the curriculum needs to be, how students are assessed, and how to best support them, and if that doesn’t happen, ultimately, it is the students that will suffer. As a leader in education, we take our role in this transition very seriously. That is why we invest millions of dollars every year building content, personalized learning experiences and technology systems to support learning at scale. As part of our responsibility, we are also working with institutions as they make this transition, including introducing new technology and tools that limit students’ ability to use Chegg during designated exam periods. We accelerated our efforts in this area due to the pandemic and recently launched Honor Shield, a free tool available to institutions and professors, and we will continue to find ways to support the millions of hardworking students and educators who use online resources to enhance their learning experience. In fact, in a blind study of students who used Chegg for more than two months, they found that 90% reported that Chegg Study helps them better understand their schoolwork. As we enter 2021, we have expanded our priorities to include an increased investment in international growth as, for the first time, we anticipate over more than a million subscribers outside the U.S. Because of its popularity, we will continue to invest in the Chegg Study Pack, by expanding our offerings to create even more overwhelming value for students and we are significantly increasing investments in our skills offering, as we believe there will be a lot of activity in this industry and see a huge opportunity to be a significant player, and a leader in this space. We have important and ambitious priorities this year, and despite the ongoing pandemic, I have never been more confident about the opportunities ahead of us. And with that, I will turn it over to Andy.

Thanks, Dan, and good afternoon, everyone. Today I will discuss our financial performance for the fourth quarter and full year 2020, as well as our increased outlook for 2021. By any measure, 2020 was our best year as a company. We far exceeded our initial expectations for revenue, adjusted EBITDA, and all key operating metrics. In addition, we significantly increased investments in our future growth opportunities such as international expansion and skills, we pulled forward technological investments such as device management and MFA to combat account sharing, and we purchased Mathway to expand our presence in the math category. And finally, we took advantage of favorable market conditions to raise capital, which creates additional opportunities for future growth. As such, we enter 2021 in an even stronger position than we entered 2020, and as a result, we expect to extend our position as the leader in the direct-to-student market. Moving on to 2020 performance, total revenue grew 57% to $644 million. This was driven by an almost $200 million year-over-year increase in Chegg Services revenue, which grew to $521 million and subscriber growth of 67% to 6.6 million for the year. This resulted in adjusted EBITDA margin of 32% or $207 million, up 66% year-over-year, demonstrating the continued leverage and power of our subscription model, which allowed us to increase our investments for future growth while improving our adjusted EBITDA margin. We ended the year on a high note, with Q4 total revenue growing 64% to $206 million, with Chegg Services growing to $176 million, which was above the high end of our expectations and more Chegg Services revenue than we achieved for all of 2016. Subscribers grew 74% in Q4, driven across all our subscription services as students continued to rely on Chegg for help to better understand their subject matter. This strong subscription services growth resulted in adjusted EBITDA of $88 million, an 87% increase over what we achieved in Q4 of 2019 and exceeded our adjusted EBITDA for all of 2018. Looking at the balance sheet, we ended the year with cash and investments of $1.7 billion. This was bolstered during the year by free cash flow of $104 million, or 50% of adjusted EBITDA, and the capital raise I mentioned earlier. We expect free cash flow to increase to 50% to 60% of adjusted EBITDA in 2021, as a result of increased profitability and a planned decrease in textbook purchases. Moving to guidance for 2021. Based on the momentum we experienced exiting Q4 and the strength we are seeing in subscriber growth in early Q1, we are raising our guidance. We expect continued strong growth in the U.S. and increased contribution internationally, where we expect to surpass 1 million subscribers in 2021. This will be slightly offset by reduced Required Materials revenue due to lower enrollments. We are increasing our 2021 adjusted EBITDA margin by 200 basis points, despite the fact that we are experiencing increased shipping and logistics surcharges for Required Materials from our third-party logistics provider. While we hope these costs will improve, we are currently forecasting this to continue into the fall semester, costing us approximately 200 basis points of gross and adjusted EBITDA margin for 2021. We have provided a guide for seasonality in the investor deck that incorporates this change. As such, for 2021, we now expect total revenue to be between $780 million and $790 million, with Chegg Services revenue between $665 million and $675 million, gross margin to be between 68% and 69%, adjusted EBITDA to be between $265 million and $270 million, and finally, we expect CapEx excluding textbook purchases to be between $90 million and $100 million, growing approximately 17% from $81 million in 2020, with the vast majority for content that fuels our global growth. Moving to Q1, we expect total revenue between $182 million and $185 million, with Chegg Services between $152 million and $155 million, gross margin between 65% and 66%, and adjusted EBITDA between $48 million and $50 million. In closing, 2020 has been our best year as a company. The trends we anticipated many years ago and built the foundation of our company on have accelerated; that is online, on-demand and affordable services that have resulted in tens of millions of students globally using Chegg as a trusted partner for their academic and skills-based needs. We couldn’t be more thankful to those students for trusting Chegg on their educational journey and to our employees who executed on our vision of being a company that puts students first. With that, I’ll turn the call over to the operator for your questions.

Our first question is from Jeff Silber with BMO Capital Markets. Please proceed with your question.

Thank you so much and let me congratulate you guys on a really stellar year in a tough environment. The numbers are really phenomenal. You spoke a bit about the international strength and expectations for that to continue. Can you give us a little bit more color, where are these international students coming from? Where do you expect them to come from over the next few years?

Yeah. Look, thank you very much. It’s truly a credit to our team, and I think people are pretty excited about just how positive we are in 2021 even this early in the year and even despite the pandemic continuing, because we’re going to come out of the pandemic stronger than we went in, and we were strong going in. And international is one of the reasons, frankly. It’s interesting; we’re in over 190 countries already. You can imagine that the big ones are the English-speaking ones first: Canada, Australia, U.K. And then, frankly, we’re seeing consistent growth from all countries that we're in. They’re just starting from different baselines, Canada started first and then Australia second, U.K. third, but we see incredible growth from the Mideast and from Asia. We are staying out of China to the best of our ability. So it’s hard for us to predict one country over the other in terms of growth rates, what we would say is the bigger countries will be bigger for us. Collectively, it’s our belief that the international opportunities are actually bigger than the domestic opportunity. So we’re pretty excited about what we see, and for those who don’t follow us that closely, we have a different model than, say, a Netflix or Spotify where they either need to create content or license content. We have this unique model where our content is ubiquitous across the world, because STEM is STEM and business is business, and there are some nuances and those nuances get asked and then answered by us afterwards. And so the model is incredibly high growth, extraordinarily efficient, and that’s why you continue to see growth in our margins. So international has been just a real positive surprise for us, and we’re not picking winners right now. We’re just going after all of it.

All right. That’s great to hear. My follow-up question is a different topic about a month ago, you guys launched Honor Shield, a way to support the integrity of online exams. I know there’s been some negative media stories about how students might have been abusing the Chegg product. Can you talk to us a little bit about this product and how you’re going to offset that issue going forward? Thanks.

Yeah. Look, it’s fascinating. I think, once again, reporters don’t understand what Chegg does and the way we do it. It’s sort of like traditional media defending traditional media versus actually looking at the changes and the advancements that are happening in every industry. Look, the internet is here to stay. Technology is here to stay. What happened for the schools, unfortunately, is they were woefully under-invested in technology. They didn’t prepare to teach online; they tried not to teach online. And then when push came to shove, they gave take-home tests. Often those tests were old questions or they’re auto-generated. Many of you may not know this, a lot of tests are auto-generated by tools that they licensed from the publishers. They don’t even develop their own test questions. And so they were not prepared for it. So we stepped in and we said, look, that’s not what Chegg was built for. That’s not what we want it for. The overwhelming majority, I mean, the overwhelming majority of students use us every week whether they have a test, they have a question or not, because they have no scalable support from their institutions. And frankly, overwhelmingly, none of them ever had it in high school. So we’re the first high-quality, affordable, on-demand support that they can use to master the subject, which is why we shared that research about just how much smarter and how much more comfortable they get with the data. But we said, look, we have a role to play here, too. And so the first thing is we doubled the number of people that we have that handle these kinds of issues almost overnight, because we saw our subscriber base double almost overnight, and not just domestically; outside the U.S. So that’s the first thing. So if we ever get contacted by schools, our policy is, we take it down first, and then we investigate it, and if we shift it, put it back up, we do. That’s the first thing. The second thing is we use technology and AI to actually build technology that blocks people from asking multiple questions. So you can’t submit a test all at once. There are other sites that do that. We’re not one of the ones that does that, because that’s not what we’re for. So actually, if you submit it either in text or you submit it in photos, we now use technology, AI, and machine learning to actually block it, asking which specific question you want to ask. And then the last thing we did was launch Honor Shield, which is what you asked about. In the case of Honor Shield, we said, look, what we want to do is provide a free tool that’s really robust, that can scale, that any professor, any school in the world can pre-submit their tests and give us the specific time that those tests happen, and then we block the ability for that question to be answered during that test time. And then we store them on a segregated server and then the plan is to delete them all and then they go back to the professor. So we stepped up and did that all within 90 days, because we saw the possibility for this. And fortunately, despite the press that, one of the articles was written by somebody who works for one of our competitors. So I think everybody understands that this was an unexpected time that everybody has a role to play. But it’s been our belief for years that if schools don’t realize the internet is here, they don’t invest in technology, if they don’t re-imagine what they teach, how they teach it, and how they assess students, then the students are going to continue to suffer. And so we’re all in this together, including Chegg, and we’re pleased that hundreds of institutions have already reached out, and we’re already working with them. So we’re excited about those things, but it’s going to be a never-ending battle, and we’ll continue to take it on, because that’s what leaders do.

All right. Great. Thanks so much for the color.

Yeah. Thanks for the question.

And our next question will come from Stephen Sheldon with William Blair. Please go ahead with your question.

Hi. Thanks. Great to see the increased revenue guidance for 2021, but just wanted to ask about assumptions for the second half of the year. In particular, it seems to assume based on the quarterly cadence you guys laid out, a pretty big slowdown in year-over-year revenue growth. I think you’ve noted some assumed headwinds in Required Materials. So can you help roughly frame what you’ve maybe assumed between the two segments in the second half of 2021, as I’m just curious about what you’re expecting, in particular for Chegg Services revenue growth? Thanks.

We are not divided into segments; we consider ourselves as one unified business. Our perspective on 2021 hasn’t changed significantly since November. As you know, there are some uncertainties as we navigate through COVID, but we believe we’ve addressed those concerns adequately. As Dan mentioned, education has undergone fundamental changes, accelerating trends we’ve discussed for years, and we expect the positive momentum we’ve seen over the past year to persist. The real question is not whether this momentum will continue, but rather how strong it will be. When we prepared our forecasts and guidance, we took this into account.

Yeah. And so, I guess, within Required Materials, I guess, are you assuming that the revenue in the second half is down a decent amount year-over-year?

Not really. If you look back at Required Materials, we have stated for many years that it tends to be a stable type of business, and that’s where we currently stand. If you examine the guidance we would provide, it falls within the range of what we’ve observed in previous years. Clearly, last year was a transition year as we shifted from Ingram, where they owned the textbooks, to us having ownership. Overall, Required Materials is a business that will experience slight fluctuations, so don’t expect significant growth or significant declines. It will vary by about $5 million or so.

Great. Thank you.

And our next question is from Ryan MacDonald with Needham & Company. Please proceed with your question.

Yeah. Good afternoon and congrats on an excellent quarter. Dan, I guess, the first one for you. You’ve made a lot of investment on the technology front to work on account sharing. Can you just talk about some of the early returns you’re seeing from that or any sort of differences in conversion activity from students that might have been abusing or using sharing an account that might have looked to now start paying for the solution, since you put those investments and technologies in place?

It's a great question and a bit complex to answer, but the news is positive. Many are curious about what happens post-COVID. As Andy pointed out, Chegg's success in the U.S. isn't dependent on whether people are on campus; it's simply because we excel at what we do. Additionally, we had a significant number of users sharing accounts. We were already working on technologies to address this issue several quarters before and had made substantial progress. There are three groups of users: those who steal, those who sell, and those who share, with sharing being the most common. We prioritized addressing the stealing and reselling issues first, as they required different technology solutions. As Andy mentioned, we accelerated investment plans from 2021 to 2020 because when students left campus, proximity sharing—like in dorms or libraries—came to an end, revealing a significant opportunity for us if we could address it quickly. We took two major steps, one in August and another in October. Interestingly, even with many classes online, students were still asked to return to campus, which is unusual in higher education, and we observed the results of this scenario. Regardless, we believe this had a notable impact and is why we're experiencing remarkable growth in Chegg Study, as the value proposition resonates strongly with students. They can access it anytime for $14.95, which they now find worthwhile since sharing is no longer an option. I can't provide a specific number since it coincided with the onset of COVID. Outside the U.S., we didn't face the same issues, but COVID allowed students to search online for help for the first time, and they discovered us. This trend has continued, as in most countries outside the U.S., schools have reopened and growth has persisted. Overall, it has been an incredible success for Chegg and our investors. We see that those who previously shared accounts are now purchasing their own, using the service just as frequently as original subscribers and renewing at the same rates. So, we’re very pleased with the results thus far.

Excellent. And then for a follow-up question, I want to ask about Thinkful. You recently announced a partnership with ASU to offer boot camps to those students. Can you discuss the structure of the partnership and do you expect to continue to look for additional universities to partner with or be more focused on sort of direct-to-student going forward? Thanks.

Yeah. It’s a great question. So we did not go seek that partnership. What has happened is, Chegg, when we acquired Thinkful, we expanded the curriculum, we lowered the prices, we increased ISAs to give people of diverse backgrounds the opportunity to take advantage of these things and change their lives. On top of that, we did something that no other competitor in the market has, which is we have 24x7 on-demand support from our chat-based tutoring, and as a result of that, we put ourselves in a position where we’re the best priced and the greatest support and the relevant curriculum, and that got noticed by a number of institutions who want students to finish into graduate. And so we’ve been contacted by a number of them. We’re testing it with ASU to see whether or not these are the kinds of partnerships that we want. ASU is a phenomenal university. They are forward-thinking and they see us as a great partner to be able to accelerate their path. And to what Chegg has been talking about for years, which is learning to earning is here. 75% of college-age students never get a degree. 43% of those that go on to college don’t get a degree. And so somebody’s got to make them employable, and ASU sees that opportunity and Chegg sees that opportunity. So it was a terrific partnership. I wouldn’t be surprised if you see a few more of them. But even there we’re going direct to the student; it’s just in partnership with ASU marketing it. And the way that deal works is, we do their content and we do the teaching, they use their brand and they use their marketing, and then there’s a revenue split that benefits both sides, but it eliminates the cost of marketing for us and eliminates the cost of curriculum creation for them, and we’ll see. I mean, we just announced it, so it’s too early to say whether or not this is a model we want to extend to other places. But it’s very clear that institutions see this as an opportunity and are interested in working with Chegg.

Excellent. Thanks very much.

Yeah.

And our next question is from Douglas Anmuth with JPMorgan. Please proceed with your question.

Great. Thanks for taking the questions. Dan, I just want to follow up on skills-based, obviously, elevated with the pandemic and a top priority into 2021. Just curious if you could talk more about how the product suite is going to expand both organically and then potentially through M&A? And I guess, how do you think about ranking kind of skills-based priority relative to the core more college-focused experience? Thanks.

Yeah. That is a phenomenal question, Doug. And that’s the right way to think about it in our mind and that’s how we’ve been thinking about it. And what’s very clear is in the academic support role, that business is doing phenomenally well. It’s seeing accelerated growth. It’s expanding globally. It’s getting more profitable each and every day and kicks off a lot of cash flow, and we’ll see a lot of growth for a lot of years. But what’s also clear is, the modern student doesn’t want to take on debt, that 50% of the world’s population is below the age of 30, that students around the world are trying to empower themselves and pay for themselves. So that needs to be affordable. Our view is to have the highest quality with the greatest support so that students are more likely to learn it and pass and become employable and that allows us to lower our prices and allows us to do other kinds of financing methods for the students so they take less of a risk, which institutions unfortunately don’t do on behalf of students. So when we look at the market and you realize that it’s actually a bigger market than the academic sport and the academic sport market is a massive market. And we look at the overlap when we say our brand is trusted. When you think about the number of years, I just passed my 11-year anniversary at Chegg. And when you think about the number of students that have come through and used our brand, it’s probably in excess of 70 million students who have used our brand and subscribed to something or use something over the course of that period of time. So they like us and they trust us. So we think there’s an opportunity to promote to the students that are currently in school, to students that have left us, and to the 25 million people who realize that if they don’t take a tech-enabled job, they’re in potential for a great deal of difficulty. So for us, organically it’s working great that we can expand the content and we can build our support at scale, which again, no one else in our opinion has tried to do or is able to do, and we spent a lot of time, energy, and money to do that. But the second thing is, it’s going to be one of those opportunities that there will be one, two, or three players that win big. As a platform company, with our brand and our reach and our eCommerce capabilities and our technology, and our balance sheet, we think we’re in the best position to do to skills what we’ve done with academic support, which is really define this space, grow it, make it very large and very profitable. And so we’re positioned to grow organically and non-organically if there’s an opportunity to find the right asset at the right price, like, we’ve always done. And I think if you look at the return on things that we’ve acquired, they’ve returned quite handsomely to our investors, and we think those opportunities in the next few years will be available. And we are in a position to do that, if that’s the right decision to make.

That’s great. Thanks. And just to follow up with one on Honor Shield. I mean, historically, you’re a D2C company, working directly with students and consumers basically, but with Honor Shield, I mean, this is a product targeted toward institutions and professors. Just curious if we’ll see more along those lines going forward.

It's a valid question. What's interesting is that in higher education, there are about 4,500 to 5,000 institutions, each composed of millions of individual professors who create their own guidelines. This aspect can be both a strength and a challenge, as it leads to a lack of consistency. There’s no straightforward way to prompt change in the curriculum or mandate the use of technology; it often requires individual negotiations with each professor. Therefore, we approach this as a direct-to-consumer opportunity by reaching out to as many professors as possible and sharing information through the media. They can engage with our SAT group, which serves as a customer service and student advocacy team focused on colleges. We've developed user-friendly technology available on our site where professors can list anything they need. They have the option to request a phone call or use chat for communication. Our strategy is to connect directly with each professor instead of working solely through individual schools, as higher education typically does not allow for top-down decision-making outside of for-profit institutions.

Got it. Okay. Very helpful. Thank you.

Yeah. Great questions.

And our next question is from Josh Baer with Morgan Stanley. Please proceed with your question.

Hi. This is Chris speaking on behalf of Josh. Congratulations on an outstanding quarter. I wanted to inquire about the various growth drivers you currently have. There’s clearly international expansion, bundles, skills, and account sharing. If any of these initiatives reach their maximum potential within the next two years, should we expect that, or should we consider a longer-term perspective on all four of these growth areas? Thank you.

I’ll start. This is Dan. I’ll turn it over to Andy because there are some modeling questions connected to that. The factor that has had the most immediate effect is account sharing. People seem to confuse this domestically as if it relates to being a stay-at-home company, which is completely irrelevant to Chegg. What matters is that students recognize who we are and want our services. We offer an exceptional service, and the numbers support that. So this will likely catch on first. As for international growth, as Andy mentioned, we only began discussing this two years ago, and we estimate that this year we’ll surpass 1 million non-U.S. subscribers. This indicates how quickly it’s growing and how large it may become. So that aspect is still very early. The skills area is even earlier. Thinkful was a small acquisition that helped us understand the market dynamics, pricing strategies, content requirements, and student support. It has provided an incredible learning experience and is performing very well for us. This area is also in the early stages of our development. Regarding the bundle, it depends on how you perceive it, and Andy can explain our model further. We’ve primarily marketed the bundle to new customers, and the uptake has exceeded our expectations, showing similar results both inside and outside the U.S., which is a pleasant surprise. This suggests that in the coming years, we’ll benefit from an increasing number of renewals. A larger portion of our renewal base, which is already very high, will renew at even greater rates. I’m not sure how to articulate this further, but we’re excited about the opportunities we have right now. Andy, do you want to add anything?

No. I think, Dan, nailed it. I mean, when you think about where we are as a company today versus where we were just a couple of years ago, where we were primarily U.S. college-based opportunity. I mean, we’ve vastly expanded, and truth be told the academic side has allowed us to do that. So we’ve got both the domestic side that continues to grow at a very fast pace, and then we’ve added on the other two growth factors that, as Dan said, are super early, right? International, we already started those investments in early 2019 and then more recently in the skills space. So I think when I think about our future, it is much brighter than our past, and our past has been pretty darn good.

Got it. Thank you.

Our next question is from Brent Thill with Jefferies. Please go ahead with your question.

Dan, you’ve grown extremely well while having great bottom-line growth as well. It’s pretty rare in tech, as you know. Many have asked, can you continue that pace and the cadence of top-line growth and bottom-line growth, or is there some point where you kind of have to hit the brakes a little bit, make some bigger investments and take a pause? Just curious your thoughts on the overall trajectory? Thank you.

That's a great question, and it's something any operator would consider. We've mentioned in our earlier remarks that we've designated 2020 as the year of plumbing, during which we made substantial investments in systems, analytics, and the capability for A/B testing internationally, not just in the U.S. This included enhancements to eCommerce and local pricing. 2020 was pivotal for these investments, and we've followed through. There are still a few details to finalize, but it's clear that companies that stop investing in their platforms will ultimately suffer. I've learned that lesson, and we intend to keep progressing. Fortunately, we aren't in a maintenance mode because we made those investments in 2020. Thanks to our team's rapid response to account sharing and other areas, we're now prepared for this level of growth. Currently, there are no technological barriers preventing us from managing this growth effectively, and we were lucky that 2020 set us up to handle it. Regarding growth rates, I'll let Andy address that as there are various factors to consider. Overall, we're feeling optimistic. We were one of the few companies bold enough to provide guidance for both Q4 and our 2021 plan back in November, and we feel confident enough to raise our expectations just five weeks into the new year. We don't foresee the obstacles that some other companies might be facing, but I'll let Andy discuss the rest of your question.

I believe Dan is spot on. The reality is that we have a highly scalable model with significant leverage. As Dan noted, STEM is universal; whether you're a college student in the U.S. or Turkey, the principles of STEM remain the same. This gives us considerable leverage from our content. Consequently, we don’t view ourselves as being anywhere near a steady state in terms of margins right now. We see a lot more potential in our model as we keep growing our top line, which we are confident will continue to expand quickly. Personally, I’m more optimistic about the future than about the past, although the past has been quite strong.

Thanks.

And our next question is from Jason Celino with KeyBanc Capital Markets. Please proceed with your question.

Hey, guys. Thanks for taking my question. The 1 million international subs by the end of the year, that’s a big number. How should we think about seasonality of this ramp? And then maybe quickly, are you adjusting the price of your products for a country?

I’ll address the second part of your question first. Currently, we are presenting prices in the local currency and language. We are also beginning to respond to inquiries made in languages other than English. This is a significant step stemming from our investment in technology last year, marking the initial phase of our translation efforts, and we have much more to accomplish in that area. Overall, I believe we're on the right track. Regarding the prediction of surpassing 1 million subscribers, I anticipate the actual number may be even higher, but we'll see. As for seasonality, I'll let Andy elaborate, but it's noteworthy that the start dates vary significantly. For instance, Australia has entirely different schedules and holidays compared to other regions, so we are still working through that, and I’ll allow Andy to share our thoughts on it.

Dan was right. My brother lives in Australia, and they just finished their summer break, which is quite different from what we see in the U.S. and other regions. The essence of this rule is, as a reminder, there’s a seasonality chart in the Investor Relations presentation. It's on slide 17, if I remember correctly, and all the anticipated seasonality, although still evolving as Dan mentioned, is detailed in that slide. So please take a look at it.

Okay. Thank you.

And our next question is from Mike Grondahl with Northland Securities. Please proceed with your question.

Yeah, guys. Congrats on the quarter. And if you just look at your CapEx ex the textbooks of $90 million to $100 million, is there any way you can kind of give us a rough range kind of find major growth driver sort of where that’s going or just sort of ranked by major growth driver?

A significant portion of our capital expenditure is allocated to expert Q&A. Currently, we have over 15 million questions that have been asked, answered, and archived on our platform, with 90% of these being expert Q&A. This is where most of our funding is directed. Of course, we also invest in other areas, including publisher contracts, but the bulk of our investment is in expert Q&A.

Got it. And then I’ll leave it at that. Thanks, guys.

Thanks, Mike.

And our next question is from Alex Fuhrman with Craig-Hallum Capital Group. Please proceed with your question.

Great. Thanks very much for taking my question. I just wanted to ask you about the tutors business, if you can tell us a little bit about why that business was unwound. And just can you give us a general sense of what that was contributing to the business? Obviously, it was lower margin. But from a revenue perspective, if you can give us a sense of what that was contributing and maybe any more insight into that decision would be great? Thanks.

I’ll begin with a decision. If Andy wants to discuss the numbers, he can. It's interesting to note how we were delivering real-time academic support through tutoring. Chegg Study has become incredibly comprehensive; we now have over 50 million questions available and can respond within a four-hour timeframe, though most responses come in under an hour. We are increasingly able to provide support in multiple languages, and users can access help via text or their smartphone camera. We also leverage AI to improve matching and have technology that reduces question duplication and groups similar questions together. This development has made Chegg Study so effective that it has essentially replaced our consumer tutoring product's purpose of providing real-time support. Our chat-based tutoring was designed to allow multiple students to connect with the same tutor outside of a traditional classroom. Instead of directing resources toward consumers, where we conducted a few hundred thousand sessions, we have shifted focus to Chegg Study, which offers even more capabilities. We've also redirected our chat-based tutoring into Thinkful. One major advantage for students looking to acquire job skills is the immediate support we now offer; if they encounter difficulties, they can simply click a button for help right where they are in their course material. This transition has positively impacted our growth rates, student graduation numbers, and overall student employability. Scaling this model is essential, and it's a more efficient use of technology compared to the consumer tutoring business, which generated limited revenue due to low pricing—remember, we charged only $0.50 per minute. While we could conduct millions of sessions, the revenue generated was minor, offering access to resources that many students couldn't obtain otherwise. However, Chegg Study has evolved more quickly and robustly than we anticipated, fulfilling that role effectively. That's the rationale behind our decision, and we are confident about it.

Great. That’s really helpful. Thank you.

Yeah.

And our next question is from Brett Knoblauch with Berenberg Capital Markets. Please proceed with your question.

Hi, guys. Congrats on the good quarter and thanks for taking my question. You ended the year with a rather big cash position. Obviously the acquisitions of past have been relatively small to that cash position. What is your capital allocation plan going forward? Is M&A still going to be the number one priority there? And if that is the priority, I guess, where would you look to further expand it? Would it be mostly on the simple side now that you have a taste for that market?

We have a solid capital structure that includes both our stock and cash, and this is by design. There are opportunities for us to grow either organically or through acquisitions, particularly in the skills sector, which positions us well. As for our approach to acquisitions, whether they are small or large, we maintain the same strategy. We operate within safe boundaries, similar to golf, and will continue to do so. Additionally, when we raised capital recently, part of the strategy was to pre-fund the potential buyback of some of our bonds that were advantageous, which could dilute our shareholders. This capital raise in August was aimed at providing us with flexibility for pursuing future opportunities or reducing dilution, ultimately benefiting our shareholders.

Perfect. And maybe if I can just ask one more just regarding maybe the international subscriber count that you guys put out there. Is there any way or for you guys tried the growth rate for that? Should we expect international account for more than 10% of revenues in 2021?

Yeah. So, once again, we talked about the 1 million subscribers in 2021 or at least 1 million subscribers in 2021. We’re not breaking out revenue at this point in time. But needless to say, international is important. It is growing extremely fast. And like, Dan said, we’re in 190 countries at this point, and many of those countries have some fairly significant scale.

Got it. Perfect. Thanks so much.

And our next question is from Eric Martinuzzi with Lake Street Capital Markets. Please proceed with your question.

Yeah. Just curious to hear where the headcount finished up for the end of 2020. And then looking at the Chegg Services growth for ‘21, you’re calling for about 29% growth there. Wondering where you think the headcount will need to get to support that by the end of ‘21?

As we ended the year, we had around 1,900 employees globally, with a large portion located outside the U.S., particularly in India and Israel. We do not expect to significantly increase that number throughout the year. Last year, we made substantial additions when we identified the opportunity to invest more internationally. We also discussed on the previous call our development of device management and MSA technologies. Although we made many of the investments in 2020 that were planned for 2021, I do not foresee us making as large an investment in headcount as we did this past year.

So would you say it grows but just nowhere near the level of revenue or it doesn’t grow at all?

It grows. We see leverage, and it's evident in our model where we’re forecasting a 200 basis points increase in our overall margins. A significant portion of our cost structure is tied to headcount, so we don't expect that it will grow, definitely not at a rate faster than revenue.

And our next question is from Arvind Ramnani with Piper Sandler. Please proceed with your question.

Hi. Thanks for taking my question and congrats on a terrific quarter. My first question is around international, which is incredibly exciting. You provided some color on international. But I want to ask, is there anything unique you’re doing in international to win against competitors, in terms of customer acquisition or product? I mean, what’s the unique angle to international that’s enabling you to see this level of success?

It's a great question, and unless you're deeply familiar with this space, it's hard to recognize. We don’t face much competition in the U.S.; no one is growing as quickly as we are, and we have a strong balance sheet. Very few companies, maybe one or two, are even profitable, while we are increasing our profitability and generating substantial free cash flow. What we do is difficult to replicate, even under ideal conditions, as competitors would need something better and more affordable. We haven't raised our prices in ten years, and our database already contains over 15 million Q&As, and it's growing. We have invested in the capacity to do translations, allowing questions to be asked in any language and translated to any expert's language. There are really no significant global competitors to us, including in the U.S. Country by country, most of the competition consists of bootstrap startups reaching out. What sets us apart is our quality, depth, speed, ability to offer low prices, and the continued expansion of our services. There will always be more subjects and content in whatever area you're in, creating a self-reinforcing network effect. As Andy mentioned earlier, our focus has been on the content we've developed over the years, translating it for non-English speakers. Initially, we attracted English-speaking users, and now we’re reaching non-English speakers participating in STEM. Our aim is to engage those who are not currently in STEM. Our comprehensiveness, quality, pricing, and even our brand recognition contribute to our success. We benefit from word-of-mouth promotion rather than significant advertising spends globally. Our content is nearly everywhere, given that five publishers create the curriculum for most institutions. Unlike other companies that have to innovate their approach in new countries, we have a unique opportunity that we are leveraging effectively.

It seems that internationally, over the medium term, could potentially become an even larger part of your overall revenue.

It will.

Yeah. Great. That’s exciting. And then from a tech perspective, you all have really been making some good strides using your AI analytics to improve your overall product. And of course, entering a product gets monetized appropriately. Are there any sort of factors from a tech perspective that are kind of limiting kind of the speed you’re moving at? Do you need to hire more of these specialized technology skills? Do you need from partnerships? Are you really sort of pretty well resourced from an overall tech perspective?

I believe every engineer and data scientist feels they’re never fully resourced, while CEOs often see it the opposite way. This ongoing debate is something I address during our budget season. The strength of our model lies in its centralized effort; we don’t require different technologies or data science methods across various countries, although we do need to adapt coding to local languages and contexts. As I mentioned earlier, we've made substantial investments in onboarding and supporting our teams in data analytics and AI. There will always be new technologies that enhance our efficiency, and we have an outstanding team dedicated to these advancements. Currently, our main focus is on translation due to the rapid growth of our international segment. We don’t need to create translation solutions from scratch, as others have developed effective options, and we collaborate with them on these initiatives.

Great. Thank you very much, and good luck for 2021.

Thank you very much for the question.

And we have reached the end of the question-and-answer session. And I will now turn the call over to Dan Rosensweig for closing remarks.

Thank you all for joining us and for your ongoing support. This year has been quite complicated for everyone, but we are focused on execution. I am truly excited about the potential impact Chegg can have. Our business is strong, but the influence we have on our employees and our ability to reach more students globally is unprecedented. It’s evident that what we do is vital, and many of you are starting to see that we have even greater opportunities ahead than we previously thought. We believe we can meet our goals and fulfill our mission thanks to our incredible Chegg team. I want to take a moment to acknowledge them for their achievements, which have been recognized with industry awards for culture, diversity, and the company they are building. Recently, they were honored by Fortune magazine as a great workplace and received multiple awards from Comparably for best culture and best company for diversity. We are dedicated to fostering an inclusive environment that encourages innovation and values our unique perspectives. Thank you to our entire team for all their hard work over the past year in supporting each other and our students. It's been a challenging time, and they have excelled. Thank you to our customers around the world who continue to rely on Chegg during their educational journeys. I appreciate everyone on the call, especially those new to our journey as well as long-time supporters. We are excited about what lies ahead and look forward to reconnecting next quarter. We are truly grateful for your ongoing interest in the company, so thank you, and please take care of yourselves.

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