Chegg, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited results; amounts below are in millions of dollars except per-share data. Chegg operates a student-focused learning platform spanning textbook rentals, digital learning, tutoring, student deals, and marketing services.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $81.5 | $61.6 | $220.4 | $178.5 |
| Gross profit / margin | $13.3 / 16% | $3.2 / 5% | $48.1 / 22% | $41.0 / 23% |
| Operating loss | $(32.6) | $(24.9) | $(67.9) | $(42.5) |
| Net loss | $(32.4) | $(29.3) | $(66.4) | $(50.4) |
| Net loss per share | $(0.39) | $(2.27) | $(0.80) | $(4.04) |
- Q3 revenue rose 32%; digital offerings more than doubled to $26.2 million and represented 32% of revenue, versus 21%. Print textbook revenue increased 14% to $55.3 million.
- For the nine months, revenue grew 24%; digital offerings increased 75% to $62.7 million and represented 28% of revenue, versus 20%. Print textbook revenue rose 11% to $157.7 million.
- Q3 gross margin improved substantially, while nine-month gross margin declined by about 1 percentage point. Operating expenses increased 63% in Q3 and 39% for the nine-month period, including higher marketing, technology, administrative, and stock-based compensation costs.
- Cash and cash equivalents were $53.2 million at September 30, versus $76.9 million at December 31, 2013. Short- and long-term investments totaled $44.2 million; cash plus investments were $97.3 million. Current assets were $111.0 million and current liabilities $108.1 million.
- Operating cash flow was $68.0 million for the nine months, compared with $72.1 million a year earlier. Investing activities used $89.9 million, including $43.9 million for acquisitions and net $59.3 million invested in textbooks. Cash declined $23.7 million over the period.
- No revolving-credit balance was outstanding at September 30. The company had a $40 million facility available, with a conditional accordion to $75 million; it reported covenant compliance. The facility expires in August 2016.
Changes, outlook, and risks
- Net losses widened year over year for both the quarter and nine-month period. Nine-month stock-based compensation rose to $27.2 million from $11.9 million; accumulated deficit was $271.6 million.
- 2014 acquisitions included InstaEDU, Campus Special, and Bookstep, with $47.3 million of acquisition-date consideration recorded in total. Goodwill increased $37.1 million to $86.7 million. After quarter-end, Chegg acquired Internships.com for approximately $10 million cash and 160,000 shares; the filing says the financial effect was still being assessed.
- Management expects digital offerings to grow faster than overall revenue and plans continued investment in digital products, technology, and the textbook business. It expects existing liquidity to fund operations and obligations for at least 12 months. The filing provides no numerical earnings or revenue guidance and says future losses are expected.
- Management describes the print textbook business as capital-intensive and seasonal. Textbook write-offs were $10.1 million for the first nine months; the company cites demand forecasting, inventory recovery, competition, and the shift to digital as material uncertainties. A fulfillment partnership with Ingram had purchased approximately $18 million of textbooks by September 30 during an initial eight-month period.
- A Kentucky property-tax dispute concerns an assessment of approximately $1 million. On October 29, 2014, a court reversed the tax appeals board’s decision and vacated penalties and interest; the state could appeal. Chegg says a loss is reasonably possible but cannot estimate a range or financial effect.
- Other disclosed risks include continued operating losses, acquisition integration and goodwill, seasonal fulfillment and staffing challenges, competition and pricing pressure, publisher access, privacy and cybersecurity, and potential dilution from equity compensation.
Important facts for investors to verify
- Whether digital revenue growth and contribution margins continue as expected, and how much growth is attributable to acquisitions or the Ingram arrangement.
- Textbook inventory utilization, depreciation, write-offs, liquidation recoveries, and the cash required to sustain the rental business.
- The trajectory of operating expenses and stock-based compensation, including potential dilution from outstanding awards.
- Liquidity and covenant capacity if operating losses and textbook investment continue; operating cash flow includes substantial non-cash expenses and deferred-revenue effects.
- Resolution and potential financial impact of the Kentucky tax dispute, and the integration and financial contribution of the acquisitions, including Internships.com.