Chegg, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; financial comparisons are to the three and nine months ended September 30, 2014, unless otherwise stated. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Chegg operates as one segment, providing student-focused learning services, digital offerings and textbook rentals and sales.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $81.3 | $81.5 | $233.2 | $220.4 |
| Gross profit / margin | $19.6 / 24% | $13.3 / 16% | $69.8 / 30% | $48.1 / 22% |
| Operating loss | $(23.8) | $(32.6) | $(61.8) | $(67.9) |
| Net loss | $(24.2) | $(32.4) | $(62.8) | $(66.4) |
| Net loss per share, diluted | $(0.28) | $(0.39) | $(0.73) | $(0.80) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $18.1 | $68.0 |
Q3 revenue was essentially flat, while nine-month revenue grew 6%. Digital offerings revenue rose 45% in Q3 to $38.2 million and 63% for the nine months to $101.9 million; it represented 47% and 44% of revenue, respectively, versus 32% and 28% in the comparable 2014 periods. Print textbook revenue fell 22% in Q3 and 17% for the nine months, primarily reflecting the Ingram partnership and the shift to commission-based revenue. Rental revenue fell 42% and 27%, respectively; services revenue increased 43% and 59%.
Gross margin improved as digital offerings became a larger share of revenue and textbook-related costs declined. In Q3, sales and marketing expense fell 31%, while technology and development rose 16% and general and administrative expense rose 10%. For the nine months, total operating expenses increased 13%, including $3.3 million of restructuring charges; technology and development increased 22%.
Financial position, cash flow and debt
At September 30, 2015, Chegg reported cash and cash equivalents of $80.9 million, short-term investments of $21.4 million and long-term investments of $2.9 million—$105.2 million combined. Current assets were $151.2 million and current liabilities $97.7 million. Other current assets included a $31.6 million reimbursement balance due from Ingram for textbooks purchased on its behalf. The textbook library, net, declined to $44.6 million from $80.8 million at year-end 2014. Total liabilities were $102.0 million; the balance sheet reported no debt balance.
For the first nine months, operating cash flow was $18.1 million, down from $68.0 million. Investing activities provided $4.5 million, including $34.2 million in textbook liquidation proceeds; financing activities provided $2.2 million. Cash increased $24.8 million to $80.9 million. Management attributed operating cash generation despite net losses partly to substantial non-cash expenses and changes associated with the Ingram arrangement.
The revolving credit facility expires in August 2016. Chegg reported no borrowings and compliance with its financial covenants at September 30. The facility was amended in August 2015, including a reduction of its stated commitment to $30 million and revised covenant requirements; the filing also describes an accordion feature subject to criteria. Investors should confirm the precise borrowing availability after the amendment.
Outlook, commentary and notable items
- Ingram transition: Under the expanded partnership, Ingram funds new textbook inventory, handles fulfillment and logistics, and takes title and risk of loss for books it owns. Chegg stopped investing in additional library inventory in 2015, expects to liquidate its existing library by the end of 2016, and targets completion of the transition to a predominantly digital model by 2017.
- Management outlook: Chegg expects higher digital mix and reduced print-related costs to support improving gross margins, and says existing liquidity should fund operations and obligations for at least 12 months. It also expects continuing losses and significant investment in technology, products and growth. The filing provides no specific revenue or earnings guidance.
- Restructuring: Charges were $3.3 million for the first nine months, related to exiting the print coupon business and expected Kentucky warehouse closure. Chegg expected approximately $4.0 million of 2015 charges in total and anticipated warehouse cost savings beginning in Q1 2016.
- Seasonality and execution risks: Results are affected by the academic calendar, with peak activity around term starts. The company identifies risks involving the Ingram transition and fulfillment, textbook demand and inventory economics, competition, adoption and profitability of digital offerings, student engagement, technology availability, privacy and regulation, and its history of losses.
- Contingency: Kentucky’s Department of Revenue appealed a court ruling that set aside an approximately $1.0 million property-tax assessment relating to the textbook library. Chegg said a loss was reasonably possible but it could not estimate a range of potential losses. A $150,000 offer amount had previously been accrued.
- Other items: Chegg invested $2.0 million in a privately held business for strategic purposes. Share-based compensation was $31.8 million for the nine months. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Track digital revenue growth, its margins and whether it can offset continued declines in print rental revenue.
- Verify Ingram transition milestones, the recoverability and timing of the $31.6 million reimbursement balance, and any obligations tied to inventory returns or financial-return targets.
- Assess why operating cash flow declined substantially year over year and how seasonal working-capital movements affect cash generation.
- Confirm facility availability and covenant headroom following the August 2015 credit-facility amendment, and the plan to address its August 2016 expiry.
- Monitor restructuring costs and savings, the Kentucky tax appeal, and the company’s path toward sustained profitability and positive cash flow.