Chegg, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited results; comparisons are with Q1 2013 unless noted. Chegg describes itself as a student-focused learning platform, with print textbook rentals and digital learning, advertising, and enrollment-marketing services. It reported one operating segment.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Revenue | $74.4 million | $61.0 million | Up 22% |
| Print textbook revenue | $56.6 million | $50.3 million | Up 13%; rental volumes rose 29%, partly offset by lower price per rental unit |
| Digital offerings revenue | $17.8 million | $10.7 million | Up 66%; 24% of revenue versus 18% |
| Gross profit / margin | $8.9 million / 12% | $11.6 million / 19% | Margin contracted as cost of revenue rose 32%, faster than revenue |
| Operating loss / margin | $25.6 million / (34%) | $16.2 million / (27%) | Loss widened |
| Net loss | $25.8 million | $17.8 million | Loss widened; net loss per share was $(0.31) versus $(1.48) |
| Cash from operations | $29.1 million | $29.6 million | Positive despite net losses; included $29.3 million increase in deferred revenue and substantial noncash expenses |
| Cash used in investing | $63.2 million | $20.7 million | Included $43.0 million of textbook purchases and $42.8 million of investment purchases |
| Cash and cash equivalents | $39.4 million | $76.9 million at Dec. 31, 2013 | Quarter-end cash decreased |
At March 31, 2014, cash, cash equivalents, and short- and long-term investments totaled approximately $130.5 million. Total assets were $332.8 million; total liabilities were $80.8 million. Chegg had no amount drawn on its $50 million revolving credit facility, which expires in August 2016, and reported covenant compliance. The filing says it believed available liquidity was sufficient for at least the next 12 months. Cumulative accumulated deficit was $230.9 million.
Changes and drivers
- Digital offerings grew faster than print textbooks, driven by Chegg Study memberships, eTextbook volumes, brand advertising, and enrollment marketing services. Management expected digital offerings to continue growing faster than overall revenue.
- Cost of revenue increased to 88% of revenue from 81%. Chegg cited higher fulfillment and payment-processing costs, textbook depreciation and write-offs, digital-content costs, just-in-time textbook purchases, and temporary labor.
- Operating expenses rose 24%. General and administrative expense increased 47%, including higher stock-based compensation and public-company readiness costs. Total stock-based compensation rose to $6.9 million from $4.2 million.
- Net loss per share is not directly comparable across periods: weighted-average shares were 82.2 million in Q1 2014 and 12.0 million in Q1 2013, following Chegg’s November 2013 IPO and earlier reverse stock split.
Outlook, risks, and unusual items
- Management planned continued investment in technology, digital offerings, and the print textbook business, which it viewed as supporting student acquisition and operating cash flow. It expected additional losses and noted that textbook investment could continue to use cash.
- Results are highly seasonal around academic terms; revenue is generally highest in Q4 and lowest in Q2, while fulfillment and marketing costs are concentrated in Q1 and Q3. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Key risks include continued losses and uncertain profitability; competition and pricing pressure; shifts from print to digital and possible impairment or reduced recovery of textbook inventory; reliance on publishers and shipping providers; peak-period operating disruptions; privacy, cybersecurity, and regulatory exposure; and acquisition integration risk.
- Chegg acquired Bookstep assets on March 7 for $0.5 million; a further approximately $2.5 million of payments over two years depended on continued consultant services and was treated as post-combination compensation. On April 9, it acquired Campus Special for about $14.0 million cash and 250,000 shares valued at $1.6 million; a further 250,000 shares may be earned upon performance milestones.
- A Kentucky property-tax dispute concerned an assessment of approximately $1.0 million for 2009–2010. Chegg had accrued approximately $150,000, excluding tax and penalties, and appealed an adverse tax-board ruling. It said a loss was reasonably possible but could not estimate a range or financial effect.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Most important facts to verify
- Whether digital growth and Chegg Study membership gains continue, and whether digital mix improves overall margins.
- Whether print textbook rental economics recover the substantial inventory investment, including depreciation, write-offs, liquidation proceeds, and utilization.
- How much operating cash flow depends on deferred-revenue timing and noncash expenses, compared with sustainable cash generation after textbook purchases.
- Whether the Campus Special acquisition and Bookstep-related payments deliver the expected strategic and financial benefits.
- The outcome and potential exposure in the Kentucky property-tax appeal, for which the filing provides no estimable loss range.