Chegg, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. The company operates a student-focused learning platform spanning textbooks, digital study services, tutoring, college enrollment marketing, test preparation, and internships.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $301.4 million | $304.8 million |
| Gross profit / margin | $111.5 million / 37% | $93.8 million / 31% |
| Operating loss | $57.7 million | $65.1 million |
| Net loss | $59.2 million | $64.8 million |
| Basic and diluted loss per share | $0.68 | $0.78 |
| Cash from operating activities | $(0.1) million | $68.5 million |
| Cash from investing activities | $8.3 million | $(87.4) million |
| Cash from financing activities | $2.7 million | $(1.9) million |
- FY revenue declined 1%. Services revenue rose 51% to $132.0 million, while rental revenue fell 34% to $120.4 million; sales revenue increased 37% to $49.0 million.
- Chegg Services grew to 31% of revenue from 22%; Required Materials declined to 69% from 78%.
- Fourth-quarter revenue was $68.2 million versus $84.4 million a year earlier. Q4 net income was $3.6 million, or $0.04 per diluted share, compared with $1.7 million, or $0.02 per diluted share.
- At year-end, cash and cash equivalents were $67.0 million, short- and long-term investments totaled $22.0 million, and total cash and investments were $89.1 million. Total liabilities were $60.3 million.
- No borrowings were outstanding under the $30 million revolving credit facility; qualifying conditions could permit capacity up to $65 million. The facility expires in August 2016.
Material changes and business transition
- Chegg expanded its Ingram partnership: from May 2015, Ingram funded new rental-book inventory and handled fulfillment, with Chegg earning commissions on Ingram-owned rental transactions. Chegg stopped investing in its own rental library and expects to liquidate remaining inventory during 2016.
- Revenue presentation shifted toward net commission revenue for Ingram transactions, contributing to lower reported rental and Required Materials revenue. Management expects the print-rental transition to be complete by 2017.
- Gross margin improved to 37%, with lower textbook depreciation and warehouse costs and a greater Services mix. The company recorded $4.9 million of restructuring charges, including costs to close its Kentucky warehouse and exit the print coupon business.
- Operating cash flow fell from $68.5 million to approximately break-even. Management attributed the change principally to working-capital effects, including a $28.9 million reimbursement balance due from Ingram and extended payment terms provided to Ingram.
Outlook, commentary, and risks
- No specific numeric revenue or earnings guidance is provided in the filing. Management’s stated long-term aim is to achieve profitability and positive cash flow through growth in Chegg Services, deeper student engagement, and operating efficiencies; achieving this remains uncertain.
- Management expects Ingram’s model to reduce Chegg’s textbook inventory and fulfillment capital needs and, over time, improve gross margins. It expects to move to normal payment terms with Ingram in 2017.
- Key risks include reliance on Ingram for textbook sourcing and fulfillment, possible additional payments if partnership return targets are missed, demand and pricing pressure in textbooks, uncertain adoption of newer digital services, competition, seasonality, and the company’s history of losses.
- Chegg reported a $59.2 million net loss for 2015 and a $329.1 million accumulated deficit. It cautioned that continued losses and future capital needs are possible, although it expects existing liquidity to fund operations and debt service for at least 12 months.
- A Kentucky property-tax dispute concerning the textbook library remained unresolved: the Kentucky Court of Appeals ruled for Chegg in March 2016, but the state could seek further review. Chegg said a potential loss was possible but could not estimate a range.
Investor verification priorities
- Confirm the pace and economics of the Ingram transition, including commission rates, return targets, payment terms, and the collection of the $28.9 million reimbursement receivable.
- Assess whether growth in Chegg Services can offset declining reported Required Materials revenue and support sustainable profitability.
- Reconcile near-zero 2015 operating cash flow with the large net loss and monitor working-capital and cash-flow trends.
- Review the revolving facility’s August 2016 expiration, covenant compliance, and refinancing or replacement plans.
- Track textbook-library liquidation, restructuring cash costs, and the outcome of the Kentucky tax matter, including any further appeal.