Greetings and welcome to the Chegg Inc. Fourth Quarter 2019 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] 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. Tracy, you may begin. .

Good afternoon. Thank you for joining Chegg's fourth quarter 2019 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 also 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 these 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 November 4, 2019, 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 on the 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. .

to deliver our financial goals and continue to provide services that create overwhelming value for learners; to expand the subjects we cover and the modalities and formats of content we offer, including coverage of other countries; and to continue to invest in opportunities that leverage the strength of our brand, reach and customer base and provide opportunities for meaningful growth in future years.

Our team executed brilliantly across our priorities and exceeded all of our objectives. For the full year we achieved 5.7 million paying customers, Chegg subscribers grew 29% year-over-year, reaching a record $3.9 million, resulting in 28% net revenue growth.

Throughout the year, we continued to invest in academic content and services, so students could learn their course material. At the same time, we expanded into our biggest growth categories into a one of the biggest growth categories in the industry, skills-based training for workforce development.

By offering more services to students at every stage of their learning journey, we believe we are well positioned to help students get the education and the skills needed to compete in the global economy over the length of their careers.

As our platform expands, serving the increased needs of students, we have also been able to improve our competitive moat and through personalization we are entering new growth vectors for our existing assets. 2019 was a big year, particularly for engagement.

We averaged over 15 million unique visitors each month, serving 2.2 million pages of content through just Chegg Study alone each day, totaling an incredible 810 million content views for the year. We believe this reflects just, how essential Chegg has become in the minds of students.

As learners are increasingly more diverse, older, and come from various socioeconomic backgrounds, the number of people that need learning support both academically and professionally continues to increase.

And the types of support they need also evolve, as many are working full time raising families and juggling multiple priorities all, while pursuing their education. So we continue to invest in services that will meet them, where they are, and when they need it whether that's through 24/7 live human help, or with offerings like Chegg Study Pack.

As a reminder, the Chegg Study Pack being rolled out in stages over the course of 2020. Initially, it is being offered to new subscribers only and we expect to start rolling it out to the broader customer base in the second half of the year.

The bundle offers overwhelming value to our students and give them even greater support across a diverse range of academic needs. We also learned that those needs aren't isolated to students in the United States. As the Chegg brand continues to expand domestically and globally, it is clear the needs of students are similar around the world.

This gives us a tremendous foundation to expand internationally because our content significantly overlaps in most countries, because of our focus on business and STEM, which we call STEM-B, which have become universal in a technology-driven world. The top concern of global employers is the future of workforce education.

Across the board, there is consensus that more people will need to learn more things, more often, throughout their career and what they need to learn is evolving, as we see continuous advancements in technology.

As the student population of workforce ages, we are seeing that more people are taking matters into their own hands and making decisions about where to invest their time and their money to get the greatest return on their investment in themselves both academically and professionally.

We believe it's important for Chegg to lead in this space to support students throughout their entire learning journey and like all Chegg services we continue to focus on going directly to the student, the person who is making the decisions on their future, who will invest the most in themselves and can get a positive return on their investment.

Going directly to the student also allows us to make the quality of our content higher, more relevant, while keeping prices low, because we continue to own the relationship with our customer own the content and own the channels of distribution.

All of this success we have seen over the last decade is thanks to the fantastic work of our amazing employees. In 2019, our team was once again recognized with several awards as one of Fortune's greatest places to work including our second year on the best small and medium workplaces and our first nod for being a great place to work for parents.

That is an honor that is particularly meaningful to us as we have worked hard to develop an inclusive family-friendly culture. It's also a reflection of how we have built our team to mirror our customer base as 40% of students are working 30 hours a week or more and 26% of them are already parents.

We are proud of the recognition our team has received this year, and I want to thank them for continuing to make Chegg, such a great place to work. As we enter the second decade at Chegg, our priorities haven't changed.

One, to deliver on our financial goals and continue to provide services that create overwhelming value for academic and professional learners; two, to continue investing in opportunities that leverage the strength of our brand reach and customer base providing opportunities for meaningful growth in future years; and three, 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 a greater global scale.

I would like to take a moment to thank all of you, who have been on this journey with us whether for a few months or for many years. And I want to thank the incredible Chegg family who have worked relentlessly over the last decade to put students first. It's their passion and commitment to our mission that will fuel us over the next decade and beyond.

And with that I will turn it over to Andy.

Andy?.

Thanks Dan and good afternoon everyone. Today I will discuss our financial performance for the fourth quarter and full year 2019 as well as our increased outlook for 2020. 2019 was another great year for Chegg. We exceeded all of our financial targets and key operating metrics.

We made significant investments in our existing services, expanded our offerings organically and through acquisition and strengthened our balance sheet with a very well received convertible debt offering early in the year. As such we believe we enter 2020 in an even stronger position than we entered 2019 and expect to have another great year.

For full year 2019, total revenue grew 28% to $411 million. This was driven by subscriber growth of 29% resulting in Chegg Services revenue of $332 million, an increase of $78 million year-over-year. This strong top-line growth drove gross margin to 78% up 300 basis points from 2018.

This resulted in adjusted EBITDA margin of 30% or $125 million, up 50% year-over-year demonstrating the continued leverage of our subscription services model at scale.

We ended the year on a high note with Q4 revenue growing 31% to $126 million with Chegg Services growing to $107 million, marking the first quarter Chegg services revenue has exceeded $100 million.

This was driven by continued strong growth in our subscription services demonstrated by 32% subscriber growth which was partially offset by headwinds in the industry-wide programmatic advertising rates which impacted ad revenue for our Chegg Writing Service which has already been incorporated into our 2020 guidance.

The strong subscription services growth drove gross margin to 79% and resulted in adjusted EBITDA of $47 million both exceeding our expectations. Looking at the balance sheet we ended the year with cash and investments of $1.1 billion more than double the balance we had at the end of 2018.

This is the result of proceeds from the convertible debt offering we completed in Q2 and improved operating cash flows. Free cash flow from 2019 came in at the higher end of our expectations at $71 million or 57% of adjusted EBITDA. We believe the strength of our balance sheet and our operating model are the strongest in the education industry.

2020 is off to a good start and we are increasing our total revenue and adjusted EBITDA guidance. We continue to see leverage in the model all while increasing investments such as the technology platform to support future growth initiatives that Dan talked about earlier.

As such, we expect total revenue to be between $522 million and $527 million or approximately 27% growth at the midpoint of the range with Chegg Services revenue between $435 million and $437 million. Gross margin to be between 71% and 72% adjusted EBITDA to be between $162 million and $164 million or over a 30% increase year-over-year.

CapEx to be between $105 million and $115 million which includes approximately $50 million of net textbook purchases as we move to our new partner FedEx.

As a reminder approximately 80% of our non-textbook library CapEx is for content development which includes among other things investments in future growth areas such as localized content for our international subscribers, expanding into assessments and practice tests and accelerating course development for our skills-based offering.

And finally as a result of the initial investment in textbooks, we expect adjusted EBITDA to free cash flow conversion to be between 40% and 50%. We expect it will return to the 50% to 60% range in 2021 post this transitional year.

Moving to Q1, 2020 we expect total revenue to be between $122 million and $125 million with Chegg Services between $99 million and $100 million. Gross margin between 67% and 68% and adjusted EBITDA between $27.5 million and $28.5 million. In closing, 2019 was another great year for Chegg.

Our team executed at a high level and we positioned ourselves for continued success in 2020. As the education industry is undergoing significant disruption, it has become increasingly clear that Chegg's model of putting the student first and going direct to the student is the envy of the education landscape.

It is an exciting time at Chegg and we are glad you are with us for the journey. With that I'll turn the call over to the operator for your questions. .

Thank you. At this time we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from the line of Alex Paris of Barrington Research. Please proceed with your question..

Good afternoon. This is Chris Howe sitting in for Alex Paris. A few questions here. I appreciated the color that you shared on the increasing engagement levels and the success that you're seeing there. Is there a way to parse that out? You talked about the global opportunity that's out there for the company.

Is there a way to view it globally versus domestically and the different trends that you're seeing as far as user engagement?.

Hi, Chris, this is Dan. So the answer is we are able to view it. And what has been remarkable for us in such a great way is the user behavior -- now remember, it's early in the growth but it's becoming really good.

The trends seem to be the same and what I mean by that is based on what we can tell, the only thing that's really significantly different is the international growth rate is higher than the domestic growth rate because it's on a much, much, much smaller base.

But engagement, renewals, cost of customer acquisition, the way we do it in the countries that we're seeing traction in has been almost identical and that's why we put in our prepared remarks, the fact that we are essentially seeing the same behavior. Now maybe it's because where we're seeing the fastest growth early it is English-speaking countries.

And so if that changes significantly, as we get into other countries, smaller countries perhaps we'll break it out. But for the moment there's actually nothing to break out that would suggest that their behavior is any different, which is a great thing for Chegg and for our shareholders.

And we have talked about in the past but this is a good opportunity to mention it now, which is what's different about our international expansion versus the companies that most of you cover which are the media companies is unlike them we can write content one time and it's relevant in every country.

We don't have to spend a lot of money per country to enter that country because the content is almost identical it's STEM-B and because the major publishers are the major publishers in all the largest countries and regions in the world to begin with.

So we have such a substantial head start that we're able to include all of that in our annual capital investment. And so we see the trends being same in renewals, same in engagement which is really, really, really positive for our growth for the future. .

That's great. And that's exciting. And then just following up on that I wanted to follow-up on Chegg's Study Pack.

As it relates to your guidance or your expectations for this fiscal year and perhaps next, how should we think about your expectations for the Study Pack as it relates to your launch cadence and et cetera?.

I will remind people of the launch cadence and I'll let Andy talk about anything related to the financials. So people understand we have new customers every year and you could see the growth rate in Q4 was really high and that is a result of new vectors in the U.S. that we're seeing and global expansion. So that's all really good news.

As we think about the bundle, we think about the bundle first initially domestic. Second, it's -- we're only making it available to new customers that haven't subscribed to Chegg in the past, which means our existing customer base isn't even seeing the offer at this point.

And we're doing that because the way our business works in terms of seasonality, the real year for Chegg is August through mid-May. And we don't want to mess anything up between now and then as we learn about the businesses.

So we've been very tactical and very smart we believe about rolling it out, testing it, we now know the price, we now know the offering, we're now improving messaging and every time we improve messaging the take rate gets better. So we are extraordinarily optimistic about what we think will be the future demand for the bundle.

But the way we think about it this year is this year the smallest group of people will see it then in the second half of the year, we'll take the learnings in the first half of the year and more people will see it.

And then in 2021, you'll see probably more of the existing base of customers begin to see it, because the business is so strong there's no urgency doing it to make a number. So we feel very blessed because of that. So I'll let Andy turn over..

Yes. On the financial side, our expectations for 2020 are fairly moderate because of what Dan just said, right. We're only offering the Study Pack to new subscribers at this point. And the fact that we're in a subscription based business, the vast majority of our subscribers are actually renewals, not new subscribers.

And so what I would expect from the bundle is fairly moderate from a financial standpoint in 2020, but increasing over the next several years as we have more and more people being exposed to the bundle. And so, yes, I think the bigger impact is 2021, 2022, 2023 than it is 2020..

Okay. Very helpful as always. Thank you..

Thank you, Chris..

Our next question comes from the line of Corey Greendale of First Analysis. Corey, please proceed with your question..

Congratulations on the good results. I have two questions. The first is a bigger picture. And Dan I know you are highly committed to the direct-to-student model.

There's always some conversation in the solid development space generally how much ultimately of the cost of educating people who's going to fall ultimately to employers versus to individuals? And are you inherently making a bet that individuals will going forward have the disproportionate burden there? Or like are you open to over time having the corporate pay model as well?.

Yes. Great question. And let me break it out for the people who don't follow us as closely as you do.

So there's the academic path, which is what Chegg is best known for, which is our support to help students that are currently enrolled in some form of institution whether it be a four-year, a two-year, online whatever it may be and that will continue to be for decades to come. The primary way students get their academic accreditation.

The shift there will be more online, which is why that's one of our big growth vectors going forward particularly in North America.

The second one and this probably relates to the acquisition of Thinkful is that there are companies that work directly with employers to provide programming, so they can provide it to their employees, so whether it's Lynda or whether it's Pluralsight or other companies like that. We believe there is a role for those things.

We also believe though that the people that we serve best, the people that really care about what they learn, the people who are trying to advance their own academic life or their own professional skill sets are there people that are willing to invest in themselves.

And because the price continues to fall and fortunately the margins go up, it's a very weird dynamic.

But because when you're at scale, you have the ability to provide not only the content, but you also have the ability to provide the support level, which is what our Chegg-based tutoring does and what our expert Q&A could advance not just some academics but in the skill side.

And so as a result of that, we don't see any reason in the near-term to think about hiring a sales force or competing in what seems to be a very regional or niche way that those businesses are breaking out.

We think if we go directly to employees and directly to students and directly to our current customer base that the road ahead is really, really, really big. And it just seems that everybody who's chosen the B2B market is reimagining how their business model has to work and we are seeing extended growth, extended high margins.

So we do have a bias towards the better business model and to the students that are willing to raise their hands by themselves..

Very helpful. Thank you.

And then my follow-up I think is for Andy, which is maybe for those of us who come more from the human capital tech and education perspective than the media perspective, can you just give us a sentence or two on the programmatic advertising trend you mentioned? And is that purely a revenue impact? Or does that impact your cost of customer acquisition if you could just follow-up on that? Thank you..

Yes, this would be more, Dan, because I have had the good and then misfortune of being in the advertising business most of my career. And, look, I think you saw a little bit in the Facebook results and other things, which is, it really doesn't affect Chegg much at all. It's not a particularly big part of our business.

The reason it affected us in Q4 a little bit was because, as you know, there are laws changing, there's California laws that are changing and Google is changing the way it uses cookies and other things. And that started a little bit more in Q4 -- earlier in Q4 than we had anticipated. But it's fully through our guidance for 2020.

So we don't expect any hiccups in that. But what it really means is that, targeted ads, the revenue per, whatever you want to call it, whether it's revenue per search, or whether revenue per unit shown, will not see increases in the near future until technology, sort of, invents its way around these new policies. And so, it's not a matter of volume.

It's just a matter of what you're able to charge per annum. When you do programmatic advertising it's a bidded format and it comes from third parties. And because those cookies stuff is not available anymore, the value just goes down a little bit.

And it just happened a quarter or so earlier than we expected, because the laws really didn't change until January 1. And so, if you're covering the industry, you should just be cognizant of the fact that advertising, other than the strongest players, has been and will continue to be under pressure.

As it relates to Chegg, it's really almost insignificant and is assumed in all of our guidance..

Very helpful. Thank you..

Okay..

[Operator Instructions] Our next question comes from the line of Stephen Sheldon of William Blair. Please proceed with your questions..

Hi. Thanks. Wanted to ask about effort to reduce account sharing.

How much of a focus will that be this year? And could efforts there maybe have a bigger boost to subscriber growth relative to what it has been in the past?.

There is a lot of attention paid to it. Every subscription company should and has to pay attention to it. And it breaks out into a bunch of different camps and nobody really wants to get the full education of what companies like ours has to go through on a call like this.

But suffice it to say, the account -- there's account for -- there is account scaling, but the one you're talking about is account sharing. And we, Chegg, historically have not focused that much on it until sort of the end of last year and have made a primary focus on it this year.

The way we think about it is, we have students that have been with us for a long time and they will eventually roll off, because they'll finish using school and hopefully they'll move over to, I think, to another services that we plan to have.

But as they roll off, what we're really focused on now is how to focus on new customers coming in which makes it more difficult for them to share an account. And so, you won't see the impact as significantly as you would, if we just decided to do it to all accounts all at the same time.

I sort of feel like that may be too jarring for our long-term vision of how we treat students. But you can see over the next couple of years, two things that will make a really positive impact in our business, our belief, is the bundle, right, which is a significantly higher ARPU per customer, with no additional cost to Chegg.

And then, second, is the fact that, as we get into focusing on the device, rather than the account, then we will be able to reduce future account sharing of new customers that come on. So, yes, it will have a positive impact over time in our business. But everything that we plan to have a positive impact for in a given year is always in our guidance..

Great. Thanks..

Thank you..

Our next question comes from the line of Mike Grondahl of Northland Securities. Please proceed with your question..

Hi. Yes. Thanks guys and congratulations. My question is just on the bundle.

Can you explain, again, why you're waiting to the second half of 2020 to kind of roll that out to your broader customer base?.

Yes. It's just an abundance of caution to be honest with you. It's nothing more than that.

So because the business is going extraordinarily well, just look at the Q4 growth rate of over 30% of subscriber growth, I think, that probably surprised a few people, because I think people are just underestimating that we still have significant growth, not only in North America, but globally.

And so the abundance of caution is, the difference is, when you are a new subscriber you come in through the desktop, or a notebook, and you sign up and we have an opportunity to present it to you. When you're an existing subscriber, you automatically renew.

And so interfering with that relationship and forcing a student to take an action from our perspective is maybe more disruptive than we want to experience over the course of a quarter where we add -- where we're adding close to one million new subscribers a year. So we don't want to mess up anything in the multimillion current subscribers.

So it really is just an abundance of caution about, how to execute on it, because the difference is one comes in and signs up and you can present it and the other is auto renew and you have to communicate with that person, let that person now have them make a decision.

The beauty of Chegg's businesses is every year, we have people go off and new people come in. So over time, 100% of the people will see it. It's just a matter of who sees it when. .

Got it. Got it. Thank you..

You bet..

Thanks, Mike..

Our next question comes from the line of Ryan MacDonald of Needham & Company. Please proceed with your question..

Thanks for taking my question. Just wanted to talk about Thinkful for a minute. I know it's obviously the first quarter since you made the acquisition and integrated into the business or just still doing that process.

Can you talk about what the contribution was through during fourth quarter in terms of revenue and subscribers? And how should we start to think about that for 2020 as well? Thanks..

Yes. So first thing is Ryan, we don't break out our businesses, right? So that's one of the things. We look at ourselves as a platform and at some point in time Thinkful likely will be more integrated onto the platform.

But when you look at the financial contribution certainly for the first six months so that's October really through kind of like the middle of this year, it's fairly muted, because its under acquisition accounting, we're not allowed to -- a lot of the deferred revenue goes away.

But when you look at the operating metrics that we've seen certainly through the first 90 or 100 days it's basically right -- much right on what we expected. And there's really not a lot, but a surprises with respect to that business. So we're super happy and we expect it will be a significant contributor for many years..

Our next question comes from the line of Brent Thill of Jefferies. Please proceed with your question..

Good afternoon. You took the midpoint of your 2020 guide up $4.5 million. I'm just curious, if you could talk through the strength? And what's causing you to have the confidence to adjust that's so early? And just as a quick fall into that EBITDA guidance is flat. Any reason why the revenue isn't flowing through to the bottom line? Thanks..

Yes, good question. Yes. First thing is it's super early in the year and as we rolled into the year with some very positive trends subscription businesses were -- clearly, did quite well in Q4 32% growth. And then we've been surprised truth be told by the Required Materials business.

It's kind of like the -- it just continues to just do a little bit better than we had originally thought. And a combination of both of those gave us the confidence to raise guidance on the revenue line. And as far as the adjusted EBITDA, once again early in the year and we're confident with our guidance..

Yes. And it's up slightly..

Yes..

Thank you..

Our next question comes from the line of Doug Anmuth of JPMorgan. Please proceed with your question..

Thanks for taking the question. I just want to follow-up on Required Materials.

Any more commentary or color you can give just on the transition from Ingram to FedEx? And how that's going? How we should expect that to play out through the year? And then just on the early, Study Pack rollout here, is there any more detail you can give just on kind of what you're seeing early on in terms of adoption rates or anything supporting kind of the confidence that you have and what you're seeing in the early results? Thanks..

So, this is Dan. Hey, Doug, on the transition, it's going great. And the best way, I can explain that is, if you follow any of the Boards or anything we have had zero complaints from students over textbooks. So to the students our goal was to have it be invisible. The teams are working incredibly well together.

The relationship with Ingram is ending on a high note. Both companies got exactly what they wanted out of that relationship. And so surprising, we did not see a hiccup yet. Now, fortunately we're mostly through -- we're better than 90% through the textbook rush. So I would say that, it's as good as it could be and it was great.

So that's the best I can tell you on the textbook transition.

On the Study Pack early results so what we look at is -- who we show it to? And what percentage of those people when given both options will take the Study Pack over Chegg Study? And that involves everything from what we put in the pack, what we put in the base, what the message is, what the pricing is and that was all the testing we were doing over the course of last year and a lot more in Q4 and what we still do today.

So for those people who go to the site you'll occasionally see the testing. What has been really positive? It's all been positive, but what has been really positive is the percentage that are likely to take the bundle of our new customers that have never seen either offer are taking the bundle at greater numbers than we thought.

And that is a really good sign for -- that we put together the right package at the right price and we're improving our messaging through our great marketing department every day. And that should only get better and it's starting on top of a base that gives us the confidence that we've been seeing. .

And just one follow-up. I know that the timing is going to be different for new subscribers and existing. I just wanted to clarify on rejoins.

So if I was a subscriber a year ago, 18 months ago and I'm looking to come back now will I see it? Or I will not see the offer?.

Yes. If you do not currently have an active account, you have to re-sign up to restart your account. And to do so, you will see that offer.

But there are things like -- and again I just want people to understand that we're doing this we think really smart not to affect any challenge in the operating of the business because the business is doing really well. The urgency is getting it right, not on doing it faster; is that, you'll see it when you come to the desktop.

If you come to mobile you may not see it because that is a much smaller environment to see it. However if you come from mobile and then go to the desktop to sign up, you will see it. If you're somebody that was a former subscriber 12 months ago you will see it. So the answer is absolutely yes.

And every day we're finding new and more efficient ways in which to communicate. Remember there's 0 cost of marketing to us. It's really just not interrupting the conversion flow and the renewal flow. And so far we're very -- we feel the choices we made were the right ones and it's been very positive for the business. .

Thank you..

You bet..

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

Yes I wanted to follow-up on the transition from Ingram to FedEx. Just wondering if there's any -- you historically have been talking -- you run the Required Materials business at breakeven, I think is how you've characterized that business.

Given the investment that you've had to make on the capital side into books, just wondering if that's still the goal? Or will you be looking to get some margin out of that business?.

Yes Eric. You're absolutely right. We've stated that we -- our overall goal has Required Materials just the folks that maybe haven't been with us for a while was basically flat units and to be basically breakeven. It changes a little bit this year. There is a little bit of an investment in the business this year.

So it's not quite as positive as we would want. But as we look beyond 2020 because we are making investments in systems and all of the types of things, we've got -- we're supporting Ingram and FedEx at the same time as we're making the transition. But as we look beyond 2020, we anticipate that it will be basically plus or minus a breakeven business.

That's the goal. If we can do a little bit better? Well obviously we'll do a little bit better, but that's the -- if you're modeling it assume that it's basically a breakeven business. .

Okay. Thanks..

Our next question comes from the line of Alex Furman of Craig-Hallum. Please proceed with your question..

Great. Thank you for taking my question. And Dan I think in the prepared remarks you mentioned that there -- you saw about 15 million unique visitors each month to your family of sites. Can you help with that in context a little bit for us? I mean obviously that's a much larger number than your number of paid subscribers.

I mean a lot of those people using some of the more ad-supported products like the writing products.

Do you view a lot of those 15 million unique page views as your funnel for future subscriptions or maybe some of the people who don't have paid subscriptions but have been using some of your services? Just curious how we could kind of think about that 15 million as it relates to your portfolio..

ad revenue, driving into subscription and then also helps us improve our Required Materials business because we're able to get high school students to become Chegg customers earlier in their college career and it's been spectacular, a great acquisition and continues to grow beautifully.

And then with our paid products, obviously the goal is to get people to subscribe more. We grew 32% or so in Q4, which is great on top of a very large base and the base is getting much larger. No one else in the education space is anything even close to the number of customers, no colleges.

We educate more people than the entire state of California does just to give you an example of how big Chegg is becoming and yet our growth rate continued to do really well. So when you're in the Homework Help season an overwhelming percentage of the visitors are likely going to be people who are acting and using Chegg study.

So it depends on the time of the year what the composition of the 15 million a month is but that's the average on a given month but it's been really, really, really good.

And we wanted to give people a sense of our size because I think people are -- they don't spend a lot of time on the education space just don't realize how big this market is and how big it's going to get globally for Chegg..

That’s very helpful. Thank you..

Our next question comes from the line of Brett Knoblauch of Berenberg Capital Markets. Please proceed with your question..

Hi, thanks for taking my question. First one on Thinkful.

Could you maybe outline the growth strategy there? Is there maybe a number of courses you plan on offering, new courses you plan on offering each year? And then maybe the average cost going into one of those courses?.

Yes. So I won't lay out our entire strategy because it's obviously a competitive market but the way to think about Thinkful is the way Chegg has stayed relevant is constantly evolving the content that we have.

And we've been able to do that by having Expert Q&A and having our content organization that creates the content and step-by-step solution and the creation of videos. In the skills-based world, the skills will always evolve but there'll always be around technology. So what was hot four or five years ago isn't hot now.

The cost to actually create the curriculum is not very much. It historically has -- for other companies not Chegg, the cost has been on acquiring the customer and then supporting the customer once you get them in.

Most companies don't understand that a great deal of the number of employees and a lot of these kinds of companies or telemarketers or mentors that sort of help people subscribe welcome through the process. Chegg is much more -- I think was much more self-serve.

So our cost of customer acquisition is less and our cost to support the student is much less. But the quality is much more immediate much better. And that's what our expert Q&A and Chegg-based solutions that were in the academic side are going to do on the skill side.

So you're going to see us go deeper into the ones that are doing very well right now and they're nowhere near the end of their runway. And we're constantly going to update and add deeper into verticals and wider into new categories as technology continues to evolve.

So we just get to follow the industry and we're very fortunate that we live out here, so we have a pretty good sense of where it's going, given the fact that we're in the middle of where Cisco and Adobe and Microsoft and Google and all those people are.

And they want us to educate people on how to use their products and services because it helps them sell it into business. So that's the best way I can describe it. But we've had it for just a few months and right now we're really satisfied with the curriculum they have..

Thank you..

Our next question comes from the line of Josh Baer of Morgan Stanley. Please proceed with your question..

Thanks for the question. Dan, you mentioned new vectors for subscriber growth and we already talked a little bit about international. So I was wondering if you could touch on domestic vectors whether it's online or also the not-for-profit schools community college.

Any sense for the size of those incremental opportunities and how you're addressing them?.

Yes. Obviously we spend a lot of time studying that space and of the many fortunate decisions that we made. One of them was to add Paul LeBlanc, who's the President of Southern New Hampshire University to our Board. And Southern New Hampshire runs the largest not-for-profit online university.

So we have very good insight into the growth rates of that market. So I think what many folks don't understand is the makeup of what is a student in today's world. We're used to 18 to 22, four-year colleges, two-year colleges. That is not America. Overwhelmingly if students graduate at all, it takes them six years or longer that the age is over 25.

They often have children, which makes online a really wonderful opportunity because they don't have to leave either their child or their job. And so you're seeing phenomenal growth in older people going back, mostly women with children overwhelmingly and veterans.

And so that vector in and of itself has probably crossed over million students in that category. They don't often even get counted when you look at the students going into colleges. The second one as you know is community colleges. So the State of California alone has 2.25 million community college students.

They often don't get degrees, because they're offering aren't going for the purpose of getting a degree. They're going for the purposes of getting a skill in a certain thing to make them employable.

That is one of the reasons that we think Thinkful is going to be really strong as a competitor to that market because it should be a higher quality and lead to a job with a specific skill and won't require you to miss half a day of work to get it. So we're very enthusiastic about that vector for Thinkful.

But the other one is, we really have not focused until this point of creating curriculum that is specifically for states that have large community college organizations. So whether it's New York or whether it's Illinois or whether it's Texas or whether it's California, nobody has really focused on supporting them.

And because there's very little word-of-mouth like there are in residential institutions, we just haven't spent a lot of time on it until now. So those are two very large growth vectors for Chegg North America..

Thank you..

You bet..

Our final question comes from the line of Henry Chien of BMO Capital Markets. Please proceed with your question..

Hey, good afternoon. Just, sort of, follow-up to the last question. Strategically in terms of the cash on your balance sheet, just wondering if you could apply that strategic vectors of how you're looking? And if so what potential you might be doing for M&A using your cash balance? Thanks..

I will start and let Andy finish because he and Tracy has been the master of creating the balance sheet, which we believe is the strongest in the entire education sector.

And if you actually look at what's going on in the education sector now other than the for-profit colleges, given the fact that most of the companies in the public space are selling themselves or parts of themselves are going private, it's possible that by the end of the year it will be Chegg and Pearson might be the two that are left given what's going on in the industry.

That has created the opportunity that we had always hoped for, which is as a company who is growing very fast who has great EBITDA margins and great conversion of EBITDA to free cash flow, we haven't talked about free cash flow on this call but as Andy mentioned, it's going to be going back to 50% of all EBITDA by 2021, which is very fast.

Move back after we buy the textbooks, we have an incredibly strong balance sheet.

What we have been and I think you guys have appreciated is we've been very patient, which is we want assets that we can accelerate their growth that can leverage our brand, leverage our reach, leverage our data, leverage our commerce platform, leverage our subscription platform that we can accelerate its growth and where we could make it much more profitable than it would have been on its own.

What we're seeing is an avalanche of private companies and public companies, who are now having to decide whether or not to change their business models or to do some other form of transaction, and we're seeing smaller start-ups who are recognizing that there aren't many outlets for them, if they're not going to go public other than Chegg.

So we are being very diligent that they must pass all those vectors, can it grow greater than 30% a year? Can have very high EBITDA margins? Will that EBITDA convert into free cash flow? Can our brand our reach accelerate its growth and lower its costs greater than it could on its own? And most importantly, will it solve a big student problem? It's got to be big enough to matter.

It's going to be a problem students are grateful that Chegg has to offer. That has been our strategy and that's the one -- that's why I think it will fit all of those categories. So I think we're just going to be smart and patient and not be in a rush to make a decision simply because something is up for sale..

Yes. I think, Dan I think -- Dan nailed it. We put ourselves in a position to win. It's really that simple. That's why we raised the capital we raised and -- but we're patient buyers.

And what we've seen truth be told that certainly in the private marketplace valuations still seem to be extraordinarily high and -- but if an asset comes along that meets all of the requirements stands set at the right price, we're in a position to be able to take advantage of that..

Got it. That's great. Thanks so much..

Thank you..

We have reached the end of the question-and-answer session. I will now turn the call back over to CEO, Dan Rosensweig for any closing remarks..

Thank you everybody. As our team enters our second decade at Chegg, which is really remarkable, we want to take a moment to reflect on the incredible journey we've been on over the past 10 years.

We've expanded from the beloved textbook rental business that we talked about today to become a powerful online on demand education platform that students on their path from learning to earning -- that help students on their path on learning earnings.

While much has changed over the last decade at Chegg, what hasn't changed is that from day 1 we focused on putting the student first that is what motivated us to make the digital transition and it's why we have always prioritized having a direct-to-student relationship which we talked about earlier.

While the market has evolved over the years, the number of people defining their own education path looking for high-quality, online on-demand personalized support continues in our opinion to dramatically expand in both academics and increasingly in skills-based learning.

And while we built the company to create overwhelming value for our customers, we are also proud that we've created value for our shareholders and our employees. With 87% brand awareness across our services the power of the brand just keeps growing, which means our opportunities keep growing.

And when you look at the strength of our balance sheet that Andy and I just went through and the leverage in our model it's clear, we have a tremendous opportunity ahead of us to realign the global education industry, to better serve the students of the 21st century.

We are really excited about 2020 and beyond and we thank you all for being on this journey with us and we'll see you soon. Thank you all..

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