‘Students don’t understand money,’ Chegg CEO says

Chegg CEO Dan Rosensweig joins Yahoo Finance to discuss college enrollments, students opting for summer school, international student trends, and the need for financial literacy and mental health education.

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BRIAN SOZZI: Shares of Chegg are in focus as investors eye a 9% increase in the number of subscribers in the second quarter. The company also increased the midpoint for its full year revenue and adjusted operating profit guidance ranges. Joining us now to discuss is Chegg president and CEO Dan Rosenzweig. Dan, good to see you again here. Noted on your conference call, we're seeing an increase in summer school enrollments. What do you think is driving that?

DAN ROSENSWEIG: Well, what they tell us is driving is that over the course of the last year or two, they took fewer classes, and they took easier classes. And so this summer, they're making it up. And usually, strong summers indicate strong fall. And our research suggests that 83% of all students that we surveyed in summer school have already signed up for or intend to go to college in the fall. So that's all good signs. We're just reluctant to forecast it yet because things change a lot these days.

BRAD SMITH: Of course, for education, especially here in the US markets, it's been so reliant on international students as well that are enrolling in the US. Are you seeing any resurgence of international students who decided to step back from perhaps some of the US institutions during the early onset of the pandemic and even the year after that? Is that coming back, and what are you noticing within the data? What's that telling you?

DAN ROSENSWEIG: Yeah, no, it's a great question. And what we're noticing is that we're capturing them. They're just not necessarily coming to US schools. They're going to Canada. They're going to Australia. They're going to other places now. And they still subscribe to Chegg. So we're fortunate, but the US schools are facing a really difficult situation because of travel, travel bans, COVID, and the rest. And so it's going to be a difficult bumpy road for US colleges as it relates to international students.

JULIE HYMAN: And what about in terms of market share, Dan? Are you guys sort of expanding the institutions that you're affiliated with and publishers you're affiliated with?

DAN ROSENSWEIG: Yeah, so market share is something that we've always been the leader in. And even in the downturn, when 1 and 1/2 million students just didn't show up for college, and we've been digging out of that hole, and I think quite successfully and faster than we thought, that's all good news.

We've been picking up market share all the way because we serve every student at every school. It doesn't matter if you're a four-year college, two-year college, online, not online, we're there for every student everywhere, and that's been our advantage with the highest quality, lowest cost homework help.

So for us, it's a matter of, is the TAM growing, not our market share? Our market share has been great and continues to grow. What we expect is that our TAM in the US market will grow because we're adding content for about 10 million students that we didn't serve before through our new product university. So we're pretty excited about the future.

BRIAN SOZZI: Daniel, on the call, you teased some potential new services for next year. One, financial literacy, of course, hits home for us here are Yahoo Finance. What are you looking to launch in this arena?

DAN ROSENSWEIG: The three big areas, in addition to academics that students need help with, and job skills, of course, which we offer through tech skills, but it's really mental health, financial literacy, and soft skills. How do I interview? How do I write a resume? I mean, some of these people haven't even been to college in the last two years. They haven't really interacted with people.

The mental health has gone through the roof. The challenges that students have now interacting with people, balancing structure in their lives, and then, of course, financial literacy, which you guys know everything about, because students don't understand money. That's why you saw all this move into Bitcoin and into Robinhood. They think of the stock market like it's FanDuel. They don't understand how to do budgets. So we're going to be there to help round out the student, not just in academic support, but job skills, as well as life support.

BRIAN SOZZI: Yeah, what do you think they need to know to that end? If they're viewing investing like FanDuel, I mean, what skills do they need?

DAN ROSENSWEIG: Well, first-- well, they need to understand money. When I grew up, you had a bank account. You had a savings passbook. And yes, I'm from decades long gone by. But today, they don't even understand what they're spending. Everything's on the phone. It's just-- it's Apple Pay. It's Google Pay. It's PayPal. It's Venmo. So they're shifting money around, but they don't really understand how money works, how interest works for you, and how interest works against you.

So we were all taught about the benefits of compound interest. They're experiencing the opposite. They're experiencing college debt. 44 million Americans have $1.8 trillion in debt. That debt is going to have to start being repaid again in September. So they're going to be taking on huge expenses that they're not planning for. They just don't understand the way money works. No one's taught it to them in high school. No one's taught it to them in college, and that's a big mistake for this country. We're going to help them.

BRAD SMITH: And Dan, while we have you as well, if we were to see households really have to grapple with what a recession means for their educational spending as well, how would that impact enrollment from your perspective and thus that trickle through to your business?

DAN ROSENSWEIG: Yeah, what we're seeing-- again, another great question. What we're seeing now is that students are looking at college as a 12-month endeavor, not a two-semester endeavor. What most people don't understand is the average age of a college student is 25. 26% of them already have a child. Most of the people taking online schools are women with jobs and children. So we're helping them by being available for them 12 months a year in their support. So they're taking fewer classes during the semester so they can work.

And then they're working over the summer and taking classes to help catch up. And that seems to be a trend that would be really great for higher education and for Chegg. But we'll see if that trend continues in the fall. But the way they're handling it is they're working more hours and taking fewer classes each semester. But they're going to school for 12 months.

BRIAN SOZZI: Dan, you've been around tech for a long time. Since we last spoke at Davos a couple months ago, we've seen a lot of layoffs in tech. We're just seeing some breaking news now. Warby Parker laying off 63 employees. Allbirds laying off 8% of its workforce. Do you think we're at some type of bottom here or things can get worse?

DAN ROSENSWEIG: Well, look, you know, it's interesting. When this all happened in 2001, tech was not a big employer. So when all the layoffs happened, people didn't care or notice. Now tech employs people all over the country and all over the world for that matter. So it's not bottomed yet. I mean, we've heard it pretty much everywhere. It's the large tech companies that were growing extraordinarily fast.

Fortunately, Chegg is not in that situation. We are profitable. We produce cash flow. Our EBITDA margins are above 30% and growing. Our free cash flow is 50% of our EBITDA margins. So we're in a really strong position. We've always been judicious. But you're seeing it now with the largest companies are recognizing that consumer demand is going to slow down because prices are going up not just in their products, but in everybody's products.

And when you have to choose, fortunately, Chegg is a product people choose over more casual products, like music or video. They need homework help. If they're going to college, they need Chegg. But these other companies, I think you're going to see it a lot more in the fall once we start to see whether or not the recession kicks in and how deep it is and how long CEOs think it's going to go. So I think we're in for a very bad fall for the larger sort of enterprise companies and the consumer companies.

BRIAN SOZZI: Great insight as always. Always great to get some time with you. Dan Rosenzweig, Chegg CEO, we'll talk to you soon.