Chegg, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Comparisons are with Q1 2014 unless stated otherwise. Chegg operates as a single segment focused on student learning products and services.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / prior period |
|---|---|---|
| Net revenue | $84.9 million | $74.4 million; up 14% |
| Gross profit / margin | $19.4 million / 23% | $8.9 million / 12% |
| Operating loss | $28.3 million | $25.6 million |
| Net loss | $28.5 million; $0.34 per share | $25.8 million; $0.31 per share |
| Operating cash flow | $6.7 million provided | $29.1 million provided |
| Investing cash flow | $12.8 million used | $63.2 million used |
| Cash and cash equivalents | $50.0 million at March 31 | $56.1 million at December 31, 2014 |
| Cash, cash equivalents and investments | $78.9 million at March 31 | — |
At March 31, current assets were $102.2 million and current liabilities were $70.0 million. Chegg had no borrowings under its $40 million revolving credit facility, which expires in August 2016; it was in compliance with the facility’s financial covenants. The facility includes an accordion feature that could increase availability to $75 million subject to criteria.
Revenue mix shifted: digital offerings generated $33.5 million, or 39% of revenue, versus $17.8 million, or 24%, in Q1 2014. Print textbook revenue was $51.3 million, down 9%. Rental revenue fell 20% to $37.7 million, while services revenue rose 82% to $31.4 million and sales revenue rose 53% to $15.8 million.
Material changes and notable items
- Revenue growth reflected digital offerings, including Chegg Study, enrollment marketing, eTextbooks, acquired businesses and commissions associated with Ingram. The Ingram arrangement shifts rental commissions into services/digital revenue, contributing to lower reported rental revenue.
- Gross margin improved to 23% from 12%, while cost of revenues was nearly unchanged at $65.5 million. Management attributed the improvement to a greater digital revenue mix.
- Operating expenses rose 38% to $47.6 million. Share-based compensation increased to $15.0 million from $6.9 million, contributing to higher technology, sales and marketing, and general and administrative costs.
- Results included a $2.5 million restructuring charge for closing the print coupon business and preparing to exit the Kentucky warehouse, partly offset within operating expenses by a $4.2 million gain on textbook liquidations (versus $1.7 million in Q1 2014).
- Operating cash flow was positive but fell from $29.1 million to $6.7 million. Cash used in investing declined to $12.8 million from $63.2 million, including lower net textbook investment: $17.2 million in Q1 2015 versus $31.7 million in Q1 2014.
Outlook, strategy and risks
- Under an expanded partnership with Ingram, beginning May 1, 2015, Ingram is responsible for new textbook-library investment, fulfillment logistics, and title and risk of loss for rental inventory. Chegg expected to stop investing in its textbook library during 2015, liquidate existing inventory through 2016, and complete the transition toward a fully digital model by 2017.
- Management expects print textbook and rental revenue to continue declining during 2015 and to reach zero by the end of 2016 as Chegg liquidates its library and shifts to Ingram commissions. It expects digital growth and lower print-related costs to support improved margins and long-term cash generation, but did not provide formal quarterly or annual revenue or earnings guidance.
- Chegg reported cumulative operating losses of $298.4 million and expects further losses. Management said existing liquidity should fund operations, debt service and repayment obligations for at least 12 months; future funding needs depend on growth, investment, textbook transition and other factors.
- The filing describes restructuring charges of approximately $2.5 million recorded in Q1 and anticipates about $6 million in restructuring costs during 2015; descriptions vary on whether this is total plan cost or future/additional cost, so the amount should be verified.
- The business is seasonal, with academic-term peaks and significant quarter-to-quarter variability. Key risks include execution and reliance on Ingram, successful growth and monetization of digital offerings, competition and pricing, textbook demand and inventory recovery, peak-period fulfillment and technology disruptions, student-data privacy and security, and continued operating losses.
- A Kentucky property-tax dispute remains on appeal. A state court had reversed the tax assessment, but the Kentucky Department of Revenue appealed. Chegg said a loss was reasonably possible but it could not estimate a loss range or financial impact. The company had accrued approximately $150,000 for the audited years.
Important facts for investors to verify
- Progress, economics and contractual terms of the Ingram transition, including effects on revenue classification, gross margins, cash flows and any potential payments to Ingram.
- Whether digital-offering growth can continue to offset declining print revenue and support profitability; Chegg remained substantially loss-making.
- The expected restructuring-cost total and timing, given the filing’s differing descriptions of approximately $6 million.
- Operating cash flow sustainability, including the effects of seasonality, deferred revenue, textbook liquidation and working-capital timing.
- Outcome and potential exposure in the Kentucky property-tax appeal, for which the filing provides no estimable loss range.