Chegg CEO on Q1 earnings beat as number of online students surge

Education technology company Chegg released its first quarter earnings report on Monday, beating analysts estimates and showing a 35% increase in year-on-year subscribers. Chegg CEO Dan Rosensweig joins Yahoo Finance’s On The Move to address the latest earnings report and the future of education post-pandemic.

Video Transcript

ADAM SHAPIRO: A lot of young people are studying at home, college students especially. And we're going to invite into the stream Dan Rosensweig. He's the CEO at Chegg. You just had your previous quarter earnings in which sales were up $131 million. I want to read a quote in which you had said, "In every industry, a crisis often accelerates the inevitable. And that is what we see happening in higher education." Can you maintain, do you think-- going forward, once we conquer COVID-19 and social distancing, can you maintain this kind of sales growth?

DAN ROSENSWEIG: We're going to find out together. I think the difference, though-- I was listening to your show earlier about Pinterest or Netflixes. Those are companies that are benefiting because people are at home and have nothing to do and have more time to entertain themselves. We are something that exists when people have something to do, which is, they have to pass their class, they have to master the subject, they have to get better grades.

And so we believe, independent of COVID, that our usage, our engagement will stay extraordinarily high. Our subscriber growth will likely continue to improve. I'm not sure it will continue to grow at the same rate that it went, which was just astronomical. But we have one of those products that, once you use, it's difficult to stop using it because it's really terrific.

JULIE HYMAN: Hey, Dan, it's Julie here. Give us a little bit more background here. Because I know you have expanded not just-- you've expanded to high school students, as well as university students. And you've also expanded more to services for those university students.

DAN ROSENSWEIG: Mm-hmm.

JULIE HYMAN: What does the breakdown look like right now? And not just that, but what's the breakdown of digital versus physical textbooks, as well, in the business?

DAN ROSENSWEIG: Yeah, so we've expanded a lot over the last 10 years, and particularly since we've gone all digital about four years ago. And not only we've gotten college and high school, but now we're going global. And one of the most interesting things that we discovered during the crisis starting in mid-March was just how big we could become globally, how quickly we could do it. So we offer homework help. We offer tutoring. We offer internships.

So we have a site called internships.com. We acquired Thinkful, which allows people to get job skills which they desperately need. And we've seen a surge in students looking to do that. So much so that we actually are lowering the prices and adding scholarships because we recognize how many people are unemployed or might be unemployed. So we're doing everything we can to support the student. And obviously, they're rewarding us with it.

ADAM SHAPIRO: Are those things you just described, the other student services that you mentioned, and what percentage of the overall business do they truly represent?

DAN ROSENSWEIG: Well, it depends on usage. It's split quite nicely. For example, we have the largest writing product in the world called EasyBib. Over 30 million users use EasyBib. That's both college and high school. We probably have close to 70% reach into high school students just with that product alone. Our moneymaker is Chegg Study and Chegg Study Pack, which combines step by step solutions, expert Q&A, where we have over 40 million questions academically already in there. We can answer any new question, which we've seen a surge in because of different subjects and different countries. We'll probably answer close to between 9 million or 10 million new questions this year.

So it really depends on usage versus revenue. The revenue is driven predominantly by Chegg Study and Chegg Study Pack. And you asked the question about the breakdown between physical textbooks and textbooks. It's still overwhelmingly print textbooks. E-textbooks are now about 13%. They were 8% two years ago, so it's growing. But honestly, it's hard to beat the price of a print textbook that doesn't run out of battery, when we're renting it from anything from $10 to $30. So students are being very savvy and fiscally smart.

JULIA LA ROCHE: Hey, Dan, it's Julia La Roche. Thank you so much for joining us. You know, it's just so interesting, the times we're living in. It's really unprecedented. But you're also seeing some accelerations going on. And I can imagine you're probably seeing an acceleration within your own business. What do you think it will look like on the other side of this? And then to kind of add on to that, what is kind of the moonshot for you that you want to address, even getting to the other side?

ADAM SHAPIRO: Yeah, the latter question is where I'm spending almost all of my time now. Because we've worked hard to build a platform that has the ability to scale. We did-- we expected to see this kind of growth, just not this quickly. So we have been saying for years on our earnings-- quarterly earnings calls, that we expect to be able to expand the number of subjects, expand the number of countries, expand the age groups. And what we saw was a sudden shift up.

And thank goodness we had invested in our technology that allowed it to scale and meet the demand. I mean, we're literally answering twice as many new questions in a day as we did just a few months ago, and twice as many as we've ever done before. And our technology allows it to scale. And so that's been very good.

The moonshot that you're talking about is, we believe that 50% of the world's population is below the age of 30, and that more people are going to have to learn online, more frequently, more subjects, more academic and more skills-based. And we want to be that ubiquitous platform that supports your ability to understand, master, and learn, no matter what subject, how old, what language you speak. We still currently are only in English. And we're seeing a surge outside the United States of countries that don't speak a lot of English.

So we have so much more work to do and so much more growth ahead of us because we do believe that-- imagine schools are going to have less resources than they've ever had. You're hearing New York City is going to lay off 250,000 teachers, which is ridiculous. We know colleges, administrations, their budgets, even the mighty Harvard and Stanford, who have $27 billion and $41 billion in endowments are lowering their salaries to administration, which is also crazy with all that money. But what this means is, schools are going to be able to offer less support.

Students are going to be more on their own. They're older than people think. They're 25 years old. Predominantly, people learning online are women over 30, who have both jobs and both children. So we're betting on the inevitable. And so what comes out of this on the other side is more people learning more things online and needing more online sport.

JULIE HYMAN: And Dan, finally-- it's Julie again, just quickly-- you did post a net loss last quarter. And I'm guessing, hearing you talk, that it's because you're investing in growth. But what does that profitability trajectory look like?

DAN ROSENSWEIG: Yeah, we actually, on an adjusted EBITDA basis I think set a record for EBITDA. And I think in second quarter we said we could earn as much as $50 million in EBIDTA. And 50% of our EBITDA drops the free cash flows. We are absolutely profitable, with the exception of stock-based comp and the fact that we raised debt. And so that's about a $70 million a year. So without that, we would be even positive on a GAAP basis.

We're one of the few companies that has high growth, improving margins, a great ratio of EBIDTA to free cash flow, and could be GAAP positive, if we hadn't raised the money, because about a $70 million year expense. So we're-- we also have $1 billion on our balance sheet. We're as strong as we've ever been. Our growth is as fast as it's been in years on top of a much higher base.

So we are well-positioned in the education space. And I think investors finally understood after the call the other day, just how big this could be, as more people need more help mastering the subjects at scale. And frankly, we're the only ones doing it.

ADAM SHAPIRO: OK, Dan Rosensweig, he is not only the CEO of Chegg, but he is a big fan of Bruce Springsteen, as you can see.

DAN ROSENSWEIG: That I am-- 80 shows.

ADAM SHAPIRO: Thank you very much for being here.