Chegg, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited results; comparisons are with the corresponding 2014 periods. Chegg operates as a single segment, offering student-focused learning, textbook, tutoring, admissions, internship, and marketing services.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $67.1 million | $64.5 million | $151.9 million | $138.9 million |
| Gross profit (margin) | $30.8 million (46%) | $25.9 million (40%) | $50.2 million (33%) | $34.8 million (25%) |
| Operating loss | $9.7 million | $9.6 million | $38.0 million | $35.2 million |
| Net loss | $10.1 million | $8.2 million | $38.7 million | $34.0 million |
| Basic and diluted loss per share | $0.12 | $0.10 | $0.45 | $0.41 |
- Revenue mix: Q2 rental revenue fell 22% to $32.8 million, while services revenue rose 57% to $29.3 million and sales revenue rose 38% to $5.0 million. Digital offerings were 45% of Q2 revenue, versus 29% a year earlier. For the first half, digital offerings increased 75% to $63.7 million and were 42% of revenue.
- Cash flow: First-half operating cash flow was negative $13.1 million, compared with positive $22.6 million in 2014. Investing cash flow was negative $10.2 million; financing cash flow was positive $2.2 million. Cash and cash equivalents declined by $21.0 million during the half to $35.1 million.
- Liquidity: Cash, cash equivalents, and short- and long-term investments totaled approximately $67.2 million at June 30. Current assets were $99.2 million and current liabilities $47.5 million. Management said liquidity was expected to cover operations and debt obligations for at least 12 months.
- Debt: No borrowings were outstanding under the revolving credit facility at June 30. The facility provided $40 million of availability at that date and expired in August 2016. An August 3, 2015 amendment—after quarter-end—reduced the facility to $30 million beginning in Q4 2015 and revised EBITDA covenants.
- Other balance-sheet items: Total assets were $287.6 million; total liabilities were $52.2 million; accumulated deficit was $308.5 million. The filing reports no funded debt outstanding at quarter-end.
Material changes and notable items
- Revenue grew 4% in Q2 and 9% in the first half, driven by digital offerings, including Chegg Study, eTextbooks, acquisitions, and Ingram-related commissions. Print textbook revenue declined as the Ingram partnership changed the business model and revenue classification.
- Gross margin improved year over year as digital offerings grew as a share of sales and print-related costs declined. However, losses widened, particularly for the first half, as operating expenses increased and Q2 textbook liquidation shifted from a gain to a loss.
- Chegg’s April 2015 agreement with Ingram provides that Ingram funds new textbook inventory and handles fulfillment and logistics for books it owns. Chegg stopped investing in its own textbook library beginning in May 2015, expects to liquidate its existing inventory through 2016, and aims to transition substantially to a digital model by 2017. Chegg reported a $14.8 million reimbursement balance due from Ingram at June 30 and expects extended payment terms for books procured on Ingram’s behalf through 2016.
- Q2 included a $2.4 million loss on textbook liquidations, versus a $2.1 million gain in Q2 2014. First-half restructuring charges were $3.0 million, related to the print coupon business and planned Kentucky warehouse closure; Chegg expected about $5.3 million of additional 2015 charges.
- Share-based compensation was $22.9 million in the first half, up from $15.4 million a year earlier. First-half net loss included a $0.7 million income tax provision, compared with a $1.2 million tax benefit in 2014.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management plans to invest in technology and digital products, and believes a larger digital mix and lower print-related costs can improve margins and support eventual profitability and long-term positive cash flow. These are objectives, not assured outcomes.
- Management cautions that results are seasonal and the second quarter is typically the lowest-revenue quarter; results for the period are not necessarily indicative of full-year performance. The filing also notes uncertainty in forecasting digital revenue and the fall academic-term “rush.”
- Key risks include executing the transition with Ingram, maintaining fulfillment and service quality during peak periods, demand and pricing changes in print and digital textbooks, competition, student engagement, and the ability to grow digital offerings enough to achieve profitability. Chegg has a history of losses and expects further losses and investments.
- The Kentucky Department of Revenue appealed a court ruling that set aside an approximately $1.0 million property-tax assessment, penalties, and interest. Chegg said a loss was reasonably possible but could not estimate a loss range or financial effect; approximately $150,000 had previously been accrued for the disputed years.
- Chegg reported disclosure controls and procedures were effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Ingram delivers the expected inventory, fulfillment, working-capital, and cost benefits—and whether the $14.8 million reimbursement balance is collected on schedule.
- Whether digital revenue growth and gross-margin gains persist as print revenue declines, and whether operating losses and cash burn improve.
- The actual amount and timing of remaining restructuring costs, warehouse exit costs, and savings beginning in 2016.
- The post-quarter credit-facility amendment, revised covenants, borrowing capacity, and compliance as the business transitions away from its textbook library.
- Developments in the Kentucky tax appeal and any resulting financial exposure.
- The effect of seasonality, share-based compensation, and potential share dilution on future results and per-share performance.