Tracey Ford - Vice President of Investor Relations Dan Rosensweig - Chairman and Chief Executive Officer Andy Brown - Chief Financial Officer.

Brent Thill - Jeffries Ken Wang - First Analysis Brian Essex - Morgan Stanly Aaron Kessler - Raymond James Mike Grondahl - Northland Capital Markets Eric Martinuzzi - Lake Street Capital Markets Alex Paris - Barrington research Alex Fuhrman - Craig-Hallum Doug Anmuth - J.P. Morgan.

Greetings, and welcome to the Chegg First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Tracey Ford, Vice President of Investor Relations..

Good afternoon. Thank you for joining Chegg’s first quarter 2018 conference call. On today’s call are Dan Rosensweig, Chairman 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 Web site, investor.chegg.com.

A replay of this call will also be available on our Web site. We routinely post information on our Web site and intend to make important announcements on our media center Web site 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 Annual report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2018, as well as our other filings with the SEC.

Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures.

Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and the investors slide deck found on our IR Web site, investor.chegg.com. We also recommend you review the investor datasheet, which is also posted on our IR Web site. Now, I will turn the call over to Dan..

Thank you, Tracey, and welcome, everyone. Chegg is out to a strong start in 2018. In Q1, we achieved 37% year-over-year revenue growth for Chegg Services, driven by 44% growth in subscribers.

We are proud of our momentum and our financial performance, which gives us the confidence to raise our guidance for both revenue and EBITDA for the remainder of the year. As always, we remain focused on execution and set out three priorities for 2018.

First to meet our financial goal and Andy will walk you through a more detailed view of our results and improved guidance. Second, as we see the education space being a 1 trillion market, we continue to prioritize expanding our TAM to where we are making smart investments and adding new subjects, new content, new formats and new services.

Third, when the opportunity presents itself, we plan to add new capabilities that leverage our brand, our reach, our student graph, and our balance sheet. Our team couldn't be more motivated, because we are having a huge impact on millions of students.

As a result, they have been executing across our priorities, and I couldn't be more pleased with both our financial results and our user engagement metrics. Students are increasingly benefiting from and depending on, Chegg, during their educational journey.

We think our growth rates reflect the power of Chegg's brand, which now has more than 80% brand recognition on college campuses. We believe the strength of our brand reflects the quality of our services, which is positively impacting our engagement and retention.

We also believe it reflects the power of our model, which as it scales, will become even more profitable. For the past eight years, we have been on a journey to make education more affordable, relevant, and more accessible. Given the positive student response and the size of the opportunity, we feel like we are just getting started.

As we watch the trends and changes that are impacting every other industry, we believe that Chegg and the education industry are poised to drive broad changes in the next few years. Right now, many businesses are going through transitions due to the advancements in technology and the power of the Internet.

Whether you are a disruptor or an incumbent in an industry, the ones that leverage technology to evolve their business and their model are able to increase their relevance by personalizing and simplifying the user experience. And as a result, they create overwhelming value for their customers.

When that happens, companies that drives that change and focuses on their customers win big. We think it's clear that platform companies are distancing themselves from others, because they are better able to serve their customers and their models are more sustainable, predictable, and profitable.

Across industries, the key elements that distinguish these platform leaders are that they own their customer and the data, are not dependent on other channels of distribution except their own and they own proprietary content, allowing them to know what their customer wants, when they want it, how they want it and efficiently and effectively respond to their customers’ need.

As a result, we see that these companies are able to provide more personalized services, grow faster, acquire customers for less, therefore, creating great value for their customers, the company, and their shareholders. Our team has put Chegg in a position to do those same things within our industry.

According to ComScore, we have a reach of over 35 million unique visitors on an annual basis as many as 10 million in a month with 85% of that traffic coming organically.

And as we own the vast majority of our content, we are able to have a deeper relationship with our customers, better understand their needs, create relevant content and services for them, which we can distribute more efficiently and affordably and do it all at scale and as you can see, do it all profitably.

You can see the results in the continued growth of our Chegg Services business where we served a record 1.6 million subscribers in Q1. This was led by Chegg Study, which is the center of our flywheel.

We measure the success of Chegg Study not just by financial results, but also by user engagement and retention, all of which has seen and continues to see strong growth. We continued to add value to Chegg Study by increasing our catalog of textbook solutions, which now covers almost 30,000 textbook ISBNs.

We now have a library of nearly 22 million proprietary expert answers and textbook solutions, which is an increase of 43% in the past year. Our proprietary content help drive 158 million Chegg Study content views in Q1, which is up 59% year-over-year. So we are adding more content which increases our engagement.

We believe this reflects the tremendous value students see and having in online on-demand learning service that meets them where they are in the format they want at a time they needed most. We believe that the more content formats we add the more we increase the quantity and quality of our services, the more valuable and popular Chegg become.

And as popular as Chegg Study is, Chegg Writing has also seen great momentum. 75% of [job] creators lack the proficiency in writing and we believe subjects like writing can be taught at scale using machine learning and AI to meet a student at their current level and improve their competency.

Not only are students turning to us to create citations, having created almost the 130 million in Q1, but with our newest writing subscription they are now able to learn spelling, grammar, sentence structure and more.

We continue to see a major opportunity in writing, because we are able to improve the outcomes for students both academically and ultimately professionally by teaching them to how to write more effectively. One of our core competencies is the ability to not only build businesses, but to acquire and grow businesses that students value.

When we see services solve big student problems where we can grow the business, reduce the cost and improve the quality, we add it to our network.

We have done that several times, including with both Chegg Writing and Chegg Tutors, which have both leveraged our brand, our reach and our network to build experiences that better serves students and accelerate our growth.

That power is demonstrated as this quarter we continue to see that over 50% of our Chegg Tutors customers attach from other Chegg services. Because we have a direct relationship with our students, we can see new trends early and capitalize on them. In Writing, we saw the need to build a product to teach students to write.

And in Tutors, there is a real trend towards chat based tutoring. As technology becomes more prophetic in education, we continue to believe in the importance of on-demand expert human health.

Chegg is in the best position to take advantage of that, because of our inter-connected platform where we have immediate inside into what students are studying, where they got stuck and connect them to the right tutor at the right time. We are clearly early in the growth of our current product, so we will continue to make investments in them.

But we also see huge opportunity for the future. As we know, math is one of the students’ biggest pain-point as 64% of U.S. students are not prepared for college level math. We believe Chegg Math, which we’ll be launching later this year, will be a powerful part of the Chegg Services offering.

Another area we are making significant investments in is identifying and developing career path, which will connect the student from learning to earning.

Our data team will help students identify the impact of the choices they make, including the school they go to, the classes they take, the major they graduate with and the pathway that leads to, including the companies they are likely to get a job with, the salaries they are likely to earn and how those paths can be altered by taking different classes or acquiring different skills.

We are uncovering incredible insights into career path that we think will make a meaningful difference in the lives of students and employers. Our industry is evolving.

We see that the companies that own their customer, owns a data, own the channel of distribution, own the content and who can be responsive to their customers' needs are in the best position to succeed, particularly those that are doing it under a subscription-based model like Chegg.

Increasingly, it's not about offering one product or service to your customers but offering them as a bundle, which we believe can create overwhelming value for our customers and help drive continued subscriber growth, expand the TAM and increase overall profitability. It's been a great start to the year.

And with all the opportunities in front of us, our team is excited, energized and looking forward to the year ahead. And with that, I will turn it over to Andy.

Andy?.

Thanks, Dan and good afternoon, everyone. It has been a great start to 2018 with all key metrics and financials ahead of our expectations.

In addition, early in the second quarter, we were able to strengthen our balance sheet, raising $345 million via a convertible debt offering on very favorable terms, which puts us in a position of increased strength for future growth and extends our position as a leader in the direct-to-student market.

The strong results we achieved in Q1 and continued momentum into Q2, give us the confidence to raise our full year guidance again for 2018. For the first quarter, total revenue was $76.9 million, a 23% increase year-over-year with both Chegg Services and Required Materials exceeding our expectations.

Chegg Services’ revenue grew 37% year-over-year as we continued to see growth rates for our subscription services in line with prior years and all indications suggest we gain share in Required Materials during the spring semester. As a reminder, we continue to offer Required Materials, because we solve a significant pain-point for students.

It also increases our reach, provides data and builds our brand on campus. This resulted in gross margins coming in higher than we expected, reaching 73.7% as much of the incremental revenue from Chegg Services goes straight to the gross margin line due to its relatively fixed cost structure.

Our strong performance in both revenue and gross margin drove adjusted EBITDA of $16.7 million, which was above our expectations and more than 75% increase from Q1 of 2017, demonstrating the power of the model and the leverage of our subscription based offering.

Adjusted EBITDA margin was 22% for the quarter, putting us well on our way to reach our goal of over 25% for the full year. We ended the quarter with cash and investments of $200 million, not including the recent capital raise that closed in early April.

This, along with free cash flow generated from the business, puts us in a strong financial position with approximately $0.5 billion on the balance sheet, allowing us to invest in and grow the business. Based on the results of the spring semester rush and continued momentum into Q2, we are increasing our guidance for the remainder of the year.

We expect total revenue for Q2 to be between $69 million and $71 million with Chegg Services’ revenue between $58 million and $60 million, gross margin between 74% and 75% and adjusted EBITDA between $17 million and $18.5 million.

For the full year 2018, we now expect total revenue to be between $300 million and $305 million with Chegg Services revenue between $243 million and $246 million, gross margin between 72% and 74%, adjusted EBITDA between $77 million and $79 million.

And finally, we expect CapEx to remain in the $30 million to $35 million range with approximately 80% being used to fill expansion of content and add new modalities such as video for our subscription services. We believe these investments increase engagement on our platform and expand our TAM. In closing, it's been a strong start for the year.

We delivered above the high-end of our expectations, giving us confidence to increase guidance, all while continuing to invest in both the content as part of our existing services and building out new services like Careers and Math, which we expect will contribute to our growth in 2019 and beyond.

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

At this time, we’ll be conducting a question-and-answer session [Operator Instructions]. Our first question comes from Brent Thill with Jeffries. Please proceed with your question..

Dan, you've done a great job in the U.S., and there is a lot of questions around the international opportunity or the potential to move downstream.

Can you walk through how you're balancing both of those opportunities as you move forward? And for Andy if you could just talk maybe a little bit about the balance of taking a lot of these products and bundling.

I think you’ve alluded to that there are some steps that you’re putting in place to get ready to do while more advanced and more advanced bundling going forward.

Can you just bring us to speed on where you sit right now?.

So on the high school expansion side, remember that we own EasyBib and we reach about 30 million users with that product alone. So we probably have somewhere in the neighborhood 70% reach into high school, but we don’t have yet our product that we’re selling to high school students.

But we are able to monetize increasingly high school students through the programmatic part of our ad business, with software set services.

But we do believe there are series of services that will make sense for high school students over the next couple of year, and Writing is one of them, Math is another, which we haven't launched yet but we’re very excited about it.

On the international expansion, what we said and what we’re keeping to is that three of the largest English speaking countries Canada, UK and Australia, are on our targets probably Canada going first. It turns out through all of our research that there is a lot of pent-up demand from Canada for Chegg. And the five major publishers in the U.S.

are the same publishers. And in the stem based categories, it's the same content. So we see a very straight forwards positive growth opportunity starting in Canada. We will be testing it this year. Really it's just about building the site and being able to take Canadian currency and pay Canadian tax. And so we’re working on all of those things.

But as a reminder, unlike Netflix or Spotify where they have every day they can do something, we have seasons based on semesters, and so we’re this year and somewhere in about middle of May early June depending on the school. So we really won't be doing much outside the U.S.

until starting at the end of this year and then really focusing on it more in 2019. But we believe there is a really great incremental opportunity for us. Those three countries combined have about 50% of the reach of the U.S. market.

And so that's pretty substantive give the fact that in the U.S., I think our subscriber growth was in the neighborhood of 44%. So we’re seeing great organic growth domestically without any of that opportunity. So we’re very excited about it.

And on the bundle questions, Andy?.

Brent, on the bundle question, one of the things that we’re becoming to realize is what customers are looking for is simplicity, less complexity and overwhelming value, which we clearly delivered with our existing products like Chegg Study, Writing and Tutors.

And as we evolve down that path and as we start to add services breakdown for like Math, we believe there’s a great opportunity to have -- at some point in time to have a bundle or an all-in-one type subscription. To-date, we’ve been doing a lot of, I will call it, work behind the scenes looking at what that could look like.

We’re also putting systems in place that we can actually deliver bundle. We would anticipate that some time later this year, we do some testing around that with the thought that maybe some time in 2019, we could probably roll-out something more comprehensively. But for the time being and certainly through 2018, it would be primarily testing..

Our next question comes from Corey Greendale, First Analysis. Please proceed with your question..

This is Ken Wang on for Corey. First off, congratulations on a strong start to the year. So first off, you mentioned in your prepared remarks that you’re moving towards chat based tutoring.

Just wondering can you elaborate a little bit more and maybe specifically any implications for student usage growth?.

Yes, it’s really fascinating to watch the space. So the tutoring business is great and we see increasingly for chat-based or human health from experts. What we have learned is that if the student could choose their desired way to get tutors or we’ll call it coaching for now, it seems to be chat-based.

So 70% of all of the relationships that we have with students now have shifted to chat-based, so it makes sense. On the weekends when they have more time, they absolutely use video and audio as well.

But during the week when they’re overwhelmed with work, because you got to remember 70% of students in this country go to state schools, 40% of students are working 30 hours a week or more rather going school full time. And if you’ve not seen the latest information, 36% of students say they’re hungry while they are at college.

And so what we are trying to do is make our products more available, more mobile by its nature, which chat-based is more coaching, which is helping students through tough issues that they are having. That’s not to say every student would want to do it that way. Of course we’ll continue to offer video-based dealing, audio-based tutoring.

But the idea is to expand our capabilities within the chat-based category by having tutors being able to do multiple windows when that’s appropriate. It’s not always going to be appropriate.

But more and more services today from customer service, to actually counseling, to crisis hotlines, are all allowing experts to be able to work with more than one person at a time. And that makes it much more efficient for everybody in the process. You can actually pay the tutor more. You can actually keep the price to the student low.

And so our expected implication is growth, because right now they don’t all have the time to sit down, log into a laptop and get tutoring the way that they clearly wanted, which is much more chat-based. So it’s obviously taking some engineering work all of it is assumed in our business.

But we’re excited about where we think it can lead to in the future..

And than any update on your thinking as it relates to Chegg Study and potential pricing increases?.

So you see the growth rate, which is 44%, I think we were 47% last Fourth quarter, which is these are two of our biggest quarters obviously.

So we’re not looking to in any way shape or form slow down the rate of growth that we've seen, because the bigger the product the bigger the mode, the more the questions that are asked more difficult it is for anybody to compete, the more valuable and relevant the product becomes.

And it's already got 85% plus gross margin, so we’re in really good shape and growing the business. Now, we do know, because for the last five years we have used Adobe software to be able to build testing A/B testing every single day of the quarter for the last five years.

So we know that we have pricing power and we know that pricing power to actually improve in each year, because the more content we add, the more value students, the more they’re willing to pay.

But that's just not a bullet we want to shoot right now, because really Andy answered it a little while ago that we’re going to be focusing more on adding more things and creating a bundle, which will be at a different price point. But each of the capabilities in it will all have the same gross margin profile.

So we think that's a way to continue to increase ARPU and profits, while not slowing the growth, because I don’t see any reason right now to pull that trigger, because the growth is too strong..

Our next question comes from Brian Essex with Morgan Stanly. Please proceed with your question..

Maybe Dan or Andy, I wonder if you could touch on. I think in your prepared remarks you noted 50% in Chegg Tutors tax from another service.

Could you comment generally on the tax rates and some of the factors that play when we're looking at ARPU? I know you've got a number different things if we look at monthly revenue services per subscriber what affects that number -- but just so maybe if you can help us reconcile it. It seems a little bit disconnected with the better gross margin.

So I'm just looking for a little bit of clarity on that..

I will try and then I'll let our numbers do to Andy, because it’s easier to answer once Chegg's Math is built. So remember inside Chegg Services’ revenue, it's not just subscription revenue there are other forms of revenue stream.

So if you actually looked at just the subscriber revenue and just the revenue generated from subscribers, which we debt report out, ARPU is actually increasing on its own. And that’s a direct result of students coming on longer, using more than one service and staying on longer, and so the attach rate is just one of the variables that raises ARPU.

But if you heard this earlier talking about the bundle, we think that more and more of these things will be included into a single price. And so that we won't be able to able to say this is because of this, because of this, because we already know inside Chegg Study that almost everybody who uses expert Q&A also uses the publisher Q&A.

And we see an incredible increase, every day we keep adding videos and more videos. So for us we look at it is what is it that we can provide like a Netflix of overwhelming value, so whichever format or modality or piece of content you want to use when you want to use, it will be available to you.

So from our standpoint -- now the specific answer to your question without giving numbers, we always see increased attached rates every quarter. We use to report on that but it’s part of our -- the bundle is more of a future plan than an attach rate.

But we always see an increase of the number of students using more than one service, that’s both paid services and free services. So the interconnected network that we’re building is actually quite successful.

And this year, we’re actually doing a lot more of integrating things into the Writing product, because the Writing product is 30 million free users on it, as well as the growth of the subscription business. So it’s pretty exciting time.

But clearly, when you look at the number of services that students use overall, if you look at the number of visits, the number of visitors, I think we’re over 10 million visitors a month right now.

You can take a look that we’re going to have a substantial increase in paying customers year-over-year, our growth rates are already higher that even we anticipated. And so the students are using more than one service all the time..

And then maybe just to follow up on I think from previous commentary around going up and down market. What are your thoughts around future roadmap to unify the brand? You have a lot of different brands. But so as an example, my daughters are happy EasyBib user, but she has no idea which I guess or didn’t so I told holder.

So what are your thoughts of tying everything together and unifying the brand at some future point in time?.

We were thinking first of calling all the analysts and having call and tell their children, but we’re not sure that will scale. But actually it’s a fantastic question and one that we wrestle with all the time, which is as a company house brand or brand house. But what you’re going to see increasingly, these are not major one-time product releases.

You’re going to see over the course of this year integration of further design, integration of a common tool bar. So for example, right now, we don’t even have the writing tabs on the home page at Chegg and that has to do with SEO reasons, no other reasons.

We are going to -- as we go more and more and more into the paid product into Writing, it will be very clear that it’s a Chegg Service. And so we are working on that, but it’s hard and we don’t want to. EasyBib is 15 years old and is by far the most definitive asset in the space. So you don’t also want to lose the value of a brand.

It’s like Facebook is not losing the value of Instagram, and they’re not losing the value of Whatsapp. And so in our case it’s a balanced, but what we now have is 80% brand recognition of Chegg Services on college campuses.

And every year we do measure that specific question that you asked, and increasingly the Chegg name is becoming more common even with high school students. So we can’t do it overnight. We don’t want to hurt the brand, which is such a magnificent brand for 15 years. But if you go on it, you will see it says EasyBib, a Chegg Service.

All the services say that, including BibMe, which says BibMe, a Chegg Service, which apparently is a global name now. I am not really sure why, but people like the BibMe, a Chegg Service. So we are working on that. The design is working on that. We have a lot of great work going on.

But what we’ve learned to be patient, which is the numbers grow every year, because we always get a new croppy users and those croppy users are seeing the Chegg name more clearly on every piece of software that they use..

Our next question comes from Aaron Kessler, Raymond James. Please proceed with your question..

First, can you talk about the uses of potential cash, I think as you said, roughly $500 million was the recent raise. Obviously, you don’t need that for your daily operation.

Should we think about potential M&A longer term? And just if you can give us an update also on the Chegg Study partnership with Sallie Mae and how you’re thinking about other partnerships potentially unlike that or maybe consumer partnerships longer term for Chegg Study as well? Thanks..

So when you look at the recent capital raise early in the quarter that was fairly opportunistic. It hasn’t changed how we view potential acquisitions. When we talk about few potential acquisitions, it's got to really leverage the core of who Chegg is today and that is our brand and our reach.

And any acquisition we make with needs to be able to accelerate its growth as a result of that. So nothing has changed how we view acquisitions. Having said that, we're not anxious to make acquisitions either, right? As we look at over the next couple of years, we've got the assets to meet our financial goals.

And so we're certainly a patient acquirer, I guess is the best way to look at it. So yes -- so nothing has really changed with how we look at acquisitions. We just so happen to have more mode view in the rocket as it work, if things meet those criteria..

On the Sallie Mae question, so Sallie Mae has actually been great. And I think it's a little premature to announce anything. But I would say that the relationship has gone really well from our side well on our expectations and their side I think better than their expectations. And I think we’ll have more to say on that in the coming weeks.

But it's been a great partnership, because for those of you who don’t know what it is, Sallie Mae, which is one of the biggest, if not the biggest, in-school loan provider not the refinancers like [SoFi] and other folks, but in-school loan provider, research sales student base, and I think they do several hundred thousand loans a year in school.

And we're deciding what they could give students as an incentive for signing up with Sallie neighbors is the competitor of theirs. And it turned out that Chegg Study was the preferred asset.

And so we worked out a one year partnership to learn, because we don’t want to associate ourselves with a brand until we’re very comfortable that the students value it. But Sallie Mae gives to students that requested four months free of Chegg Study or tutoring, the majority of students take Chegg Study.

And we haven't cycled through even the first year of the partnership. So when you learn about the renewals rates but the activity and usage of Sallie Mae customers versus the standard Chegg Study customers is reasonably similar, which is great.

So Sallie Mae gets a real benefit by offering their students something that they really want and Chegg is the benefit of Sallie Mae helping us acquire customers for the future, so it's really exciting..

Our next question comes from Mike Grondahl, Northland Capital Markets. Please proceed with your question..

Chegg Study sure remains to be the 44% sub-group that was nice to see.

Any update on the timing and how you’re thinking about the Chegg Writing subscription roll-out?.

Well, the update remains very similar to what we've said. We told everybody the middle of last year what our plan was. And just to remind folks or new folks on the call we said we’d be rolling it out in the second half this year to the larger sites. We've been rolling it out to the smaller sites. We take our time with it.

We want to make sure that it can scale. We want to make sure that we have the messaging right. We want to make sure that everything works the bigger it gets.

But the initial feedback we get from students on the smaller sites is all positive, which is it has better conversion, it has better engagement than their current version of the paid service, which is exactly what we were looking for. And to be honest with you, we’re really only at the beginning of what we can build for.

This is really going to be, this and Math, are going to be two of our biggest AI and machine learning driven products.

So we’re going to be able to teach Writing at scale, not just help people with citations and bibliographies, but really help them understand what they should have cited, what their grammar issues are, spelling issues are, set and structure issues are, tell them how many they have, show them why their mistake, show them what the right version would look like and then help them correct it, if that’s what they want to do.

So we’re really bullish on the future of that product, because the free audience is so large. But the timing has not changed. It will be later on this year. We’ll have it fully rolled out. And I think all assumed in whatever we put out for 2019 in November..

And then Dan what one or two items are you really focused on for the rest of ’18?.

Well, it would be nice if they’re really one or two. But honestly, the financial performance of the company -- we put in the prepared remarks the three priorities that we have, which is to make sure we execute on what we say. And this is I think our 9th straight quarter of being able to do that.

And then second is to continue to find ways to feed the beast, if you will, which is expand the TAM. So everything that we’re doing in terms of our CapEx, in terms of investing, it is like machine, it’s all content.

The difference between us and others that are investing in this content is ours is proprietary and has a long evergreen, which is fantastic but also helps generate immediate growth.

So the more that we can invest in the number of categories, verticals, sub-categories and then as somebody asked earlier, other countries, these things will all continue to help us continue to grow at the rate that we’ve been growing.

So that’s really the primary focus is making sure that we organize ourselves around the key priorities we set for the year that we finance them correctly, that we don’t overextend ourselves, that we don’t lose discipline.

As Andy said, we now have $0.5 billion available for cash, but that isn’t because we expect to use it all right away, it’s because the opportunity presented itself to strengthen our balance sheet and make it very difficult for anybody to compete with us at this point in the education space.

So I think we’re going to continue to focus on what we’ve been focused on for the last few years, which is execution, execution, execution, expanding the TAM, creating more values for the students and then when it’s appropriate, rolling the bundle out..

Our next question comes from Eric Martinuzzi, Lake Street Capital Markets. Please proceed with your question..

I wanted to focus on the content investments. You talked about a pretty substantial investment here over the course of the year, basically reiterating that $30 million -- $35 million.

What is the mix percentage-wise between the original and the licensed content investment?.

So when you look at the guidance that we gave, $30 million to $35 million, about 80% of that is content related. Most of that 80% is actually content that we generate ourselves at our India facility with our 35,000 contractors that we do. A small component of that is actually purchased, what I’ll call purchase content right from the publishers.

And when I say content, what we actually purchase are the questions, right. So we’re licensing the questions from the publishers that will -- and that allows us to index them in the search engine and get the SEO choose. But that’s the smaller part of the overall content budget..

And if you actually look at that, if you look at the amount of new questions that are being asked and you realize it, three years ago almost all the questions we had were from the publishers, now three quarters -- almost three quarters are questions asking being asked by students on their own.

The publisher portion has gone from being the primary way to being less than a third, and on a dollar amount it’s even less than that. So most of these that we pay this year have to do with deals we signed a few years ago and spread out the payments just because it was in our best interest to do so, because we didn’t have half the build at the time..

And looking at the CapEx for this quarter, what sign the decline -- you talked about growing that.

But what explains the anomaly of the $4.9 million CapEx investment in Q1 compared to $6.1 million CapEx in the year ago level?.

So when you look at CapEx this quarter it’s pretty much in line with what we expected. Although, we don’t guide, as you know, the quarterly CapEx. We did have some publisher payments in there last year. But as we look at the overall CapEx budget for the year, like I said what we saw on Q1 was what we expected.

And we still believe that it will be somewhere between $30 million and $35 million for the full year..

Our next question comes from Alex Paris, Barrington research. Please proceed with your question..

I had a question, just following up on the very first question you received and then another one. In regards the downstream opportunities. As you see these students move up the funnel or progress in their education.

What are you seeing as far as retention rates? In other words, being able to pull students from middle school to high school all the way to college, along the Chegg Services?.

That’s obviously the goal. It's difficult for us to give you that answer now, because our real foray into high school was EasyBib, which we've now owned for a little less than two years. And so we have to track those students.

You also may or may not realize that those students didn’t register at the time they come into free, so it was nearly impossible to go back historically and measure. We're now creating increased incentives for them to register, which is why we’re all time high for the registered students not just paying customers that we have for the site.

But what we see based on question you heard earlier, once they’re using EasyBib, we have the ability to communicate with them on the site. And then increasingly as they register through email and text and other ways, did they ask us to communicate.

And so you can see it and believe it or not, the continued success and the market share pick up of our required materials business, because the first thing they do when they go to college is they get textbooks, so that's before they get Chegg Study.

So it's difficult to know Chegg Study, and so either later on in the first quarter or in the second quarter at the earliest. But you can see that we picked up share in textbooks, and that has a lot to do with the fact we’re doing better with incoming freshmen. And so we believe there is a connection to that.

But as you know, we’re going the other way as well which is to us really significant, which is our investment in career.

So we want to be able to help you not only pick the right school, pick the right classes but building our pathways that let you decide if I go to the school and I take this class or I take this major, I've gotten these skills and my pathway is likely to end up at one of these fixed companies, paying me this much money or if I change my path this is the potential future outcome, and then getting them in their first job.

So for us, we’re actually going in both directions in terms of extending the amount of time that we can spend with them..

And then I have one last question. It’s been incredible how you’ve been able to build the economic mode of the business, strengthening the balance sheet, as you mentioned, the 80% brand recognition.

Can you provide some additional color on how you measure brand recognition, and how -- perhaps get even stronger and get it beyond 80%? What areas would need to be focused on moving forward?.

So obviously, we use independent research, because obviously we can’t just survey our own customer list. So there is multiple forms of research that are available third-party and that we use to help us understand that. And we’re constantly doing that, as well as using our internal surveys.

If you recall, we have about 17,000 students that we call Chegg Heads that we regularly communicate with them and we’re able to measure things overtime with our existing customer base, as well as the external customer base.

The need to go from 80% to 100% mostly that is incoming freshmen at this point, so the bigger we get, the more our brand recognition is.

The fact that 85% of our customers are organic, one way or the other, and that still in textbooks the overwhelming majority of students that go textbooks for the first time come in as a recommendation from somebody else. So we feel like that that’s just a natural evolution we don’t have to spend more money to do that..

Our next question comes from Alex Fuhrman, Craig-Hallum. Please proceed with your question..

I had a few things I wanted to ask. One is, as you look at the Tutors business, looks like over the last couple of months there’s been a lot of churn amongst the actual tutors themselves.

And I am curious if that’s something that you plan given some of the changes that were made with written lessons and giving better access to the top tutors and so the natural consequences with those vision.

Do you view that as a concern or was that part of the plan? And then going forward as you make these changes, do you envision a greater share of the tutoring sessions being done by a smaller share of the tutors.

Just wondering how we should think about that network going forward?.

I would say the second one is too early for me to even give you a descent answer. The trend is going to be depending on how many students a tutor can handle at one time depending on the subject that they do. So that’s all on the common terms information for us, and not something that we could tell you now. The slip side is yes.

I think we said almost last summer that we were undergoing a very big change in our tutoring business, which was we were going to reduce the number of written lessons, because we felt like tutors were charging the students too much for it.

So we actually gave up some temporary revenues for that, because we want to be the first site that puts the student first. And so that was very important to us. And as a result of that, believe it or not, I mean always knew it would have demand that was never going to be an issue.

But we really didn’t know when we started building up the business, how big the tutoring business can be. But at one point, we reached as many as 60,000 tutors that wanted to be part of the network. So from us it was a quality issue.

We decided to -- and I think we said some of this on previous calls, we decided to cut many of them out, focused on what we believe were only the tutors who are getting A ratings from students and the ones that were being most responsive and available at the times in the subjects that we needed the most. And so we cut that down pretty dramatically.

So the fact that you didn’t hear more about it is a good thing. And then what now each tutor -- needs to be once again subject tested on whatever they claim to be an expert in, and we're also having them video themselves so that we can actually see how they do in terms of presenting the information.

You can be a genius and not have any ability to communicate it on a video. We see a lot of that in Silicon Valley. And so on those, we would direct those to just chat-based as opposed to video-based. So there is a whole lot of work that we will continue to be doing at all of our services to constantly improve the quality, but that's why you saw that.

And so that's all good and planned..

And then just a housekeeping matter. I think couple of months ago, your fourth quarter report you had guided as part of your guidance, EBITDA to free cash flow conversion rate in the 30% or 60% range over the next three years. I don’t recall hearing that in the prepared remarks this time.

Is that still how you’re thinking about free cash flow over the next two years?.

Yes, exactly. So for everybody on the phone, it's 450% to 60% and that has not changed..

Our next question comes from Doug Anmuth, J.P. Morgan. Please proceed with your question..

This is Ashwin on behalf of Doug. One quick clarification.

Could you quantify the impact of 606 accounting change in the quarter on Required Materials revenue? And then my question is on -- really about -- just wondering if you could comment about your thinking on seasonality for rest of the year on services subscribers, particularly as you launch this new services plan like the Math and Writing in second half of this year?.

Yes, so a couple of things -- just the first one, first thing on 606. We haven't articulated specifically on 606, the impact across our businesses because it didn’t just impact actually Required Materials, it also impacted -- small impacts on other of our revenues streams. But needless to say it was fairly de minimis.

And you can even take a look at the impact on our retained earnings if you have to do it one-time obtained earnings impact, and it was very, very minor. With respect to seasonality on Chegg Services, it's not really going to be dramatically different than last year.

I think in fact, when you think about Math and even our new Writing tool subscription, we're not anticipating significant changes as a result of those in this year. Math for example, we said is going to be -- is going to be introduced sometime in the second half of the year.

It's most likely going to be part of the bundle and not really anticipate any material, either revenue or sub, probably until 2019 or 2020. So when you look at seasonality, think about seasonality with respect to what it looks like over the last 12 months or last year that is..

But a great way to think about everything we do is the school year starts third week of August and goes through somewhere around June, maybe the middle of June for the longest length. So our big quarters connect to those, so August really through now.

Q3 is going to be our smallest, because there’s nothing going on in the summer months as it relates to education except summer school. So we continue to do well, but nowhere near their normal size.

So we have the best opportunities in these quarters coming up which is why feel very comfortable about raising our guidance for this year, because really the only raise we did was in second quarter plus what we achieve in the first quarter. So seasonality for us is Q4 has both a mid-term and a final and Q1 has a mid-term, but doesn’t have a final.

So that’s the way we think about the year..

Our next question comes from Brent Thill, Jefferies. Please proceed with your question..

Just a quick follow up. My kids are in grade school and they were -- unfortunately their service Amazon TenMarks was shutdown last week, and they’re going to cancel that service in the middle of 2019.

I am just curious what your observations and thoughts were on Amazon getting out of the business?.

Yes, we saw that too. I think the best way to think about what we do versus what others have tried is most others try to sell through the institution themselves. And that requires sales force, does not have the same economics, their SaaS models if you’re successful and at lower grades, you can sell to either entire schools or school districts.

We do most of our work in college and high school, and soon to be early carrier. And those go directly to the students themselves. So it’s a very, very, very different model.

And what you’re seeing, whether it was FOX getting out of its business or the publishers selling pieces of their assets, is those are much more difficult businesses now that they’re not protected. They’ve been protected by the government, which is they were always able to sell learning material in, raise their prices on an annual basis.

And then Chegg invented the rental model. And very fortunately, all the current management to the publishers, understand that they work with us, we’ve great positive partners, that’s why we’re in consignments and all those things.

But we have just found that to grow at the rate that we think we’re capable of growing and to have the gross margins that we want to have, and effect more students that were better off going directly to the student and solving their biggest pain-points, because the institutions can’t.

So you’ve seen transactions of whether Edmodo was bought, you’ve seen a number of these things being shutdown, you see a lot of these assets trading and becoming things where they are levered up with debt and they just kick out cash flow. That’s not where we are. We’re going to be high growth, high margin company and go directly to the students.

Now why do people get out of it? They get out of it for the reasons I said plus why does Amazon got out of it. Really almost everything Amazon does, and they clearly do it well, is everything is designed to acquire a customer and they really want acquiring customers that way, except the school which really doesn’t help them. So it’s no surprise.

What’s been fascinating to me is all the players that people assume would be very big in education have either abandoned it are partnering with us and it’s a really great opportunity for Chegg and our students and our shareholders..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Dan Rosensweig for closing remarks..

So a couple of things, first I want to congratulate Andy that his son is getting married tomorrow, which is why we moved the call to a Thursday instead of a Monday. So those of you who wanted to be on the Amazon call and Starbucks call, we apologize, but we’re great for that you joined us. Look, we’re really excited.

We’ve worked very hard for eight years to put ourselves in a position to serve millions of students at scale very profitably, invest in our business and grow it. We really do believe that our mission matters. We're seeing decrease turnover here as the company.

I think we’re at an all time low, enthusiasm has been all time high; student feedback has been phenomenal; and we do fundamentally believe that; and the Internet space the companies that are distancing themselves from their competitor are the ones that own their own customer; which we do, own the data and can use it, which we do; depend on no other channel or distribution, we have our own and own proprietary content or software, which we have; both that we can immediately change to the benefit of the student; and we built a giant mode with content and brand and experience; and we expect to continue to make smart investments.

Our balance sheet is as strong as it's ever been. And so we’re really excited about the year. And we thank everybody who has been on this journey with us for a long time. We look forward to continuing to perform well. And we’ll talk to you in the next quarter. Thank you..

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