Chegg, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Chegg operates a student-focused learning platform spanning print textbooks, digital learning services, tutoring, and advertising.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $64.5 million | $55.9 million | $138.9 million | $116.9 million |
| Gross profit / margin | $25.9 million / 40% | $26.3 million / 47% | $34.8 million / 25% | $37.8 million / 32% |
| Operating loss / margin | $9.6 million / (15%) | $1.5 million / (3%) | $35.2 million / (25%) | $17.6 million / (15%) |
| Net loss | $8.2 million | $3.4 million | $34.0 million | $21.2 million |
| Net loss per share | $0.10 | $0.27 | $0.41 | $1.72 |
Revenue mix: Q2 print textbook revenue was $45.8 million, up 5%; digital offerings were $18.7 million, up 54%, and represented 29% of revenue versus 22%. For the first half, print revenue rose 9% to $102.4 million and digital revenue rose 60% to $36.5 million, or 26% of revenue versus 20%.
Cash flow and liquidity: First-half operating cash flow was $22.6 million, essentially flat with $22.5 million a year earlier. Investing cash outflow was $66.8 million, including $43.9 million for acquisitions and $52.8 million for textbook purchases, partly offset by investment maturities and sales and textbook liquidation proceeds. Cash and cash equivalents were $30.8 million at quarter-end; cash, cash equivalents, and investments totaled $78.5 million. Current assets were $74.6 million versus current liabilities of $54.0 million.
Debt: No revolving-credit balance was outstanding at June 30. The amended facility provides $40 million of availability, with an accordion feature potentially increasing it to $75 million subject to conditions; it expires in August 2016. Chegg reported covenant compliance.
Changes, developments, and management commentary
- Revenue grew 15% in Q2 and 19% in the first half, led by Chegg Study memberships, eTextbooks, and enrollment marketing, alongside modest growth in print textbooks.
- Profitability weakened: Q2 cost of revenue rose 30% and first-half cost of revenue rose 32%, outpacing revenue growth. Management attributed increases to textbook depreciation, write-offs and reserves, fulfillment costs, digital content, and higher textbook volumes. Gross margin contracted in both periods.
- Operating expenses increased 28% in Q2 and 26% in the first half. Higher sales and marketing, technology and development, and general and administrative spending included increased stock-based compensation. First-half stock-based compensation was $15.4 million versus $8.0 million.
- Textbook liquidation results improved: Q2 recorded a $2.1 million gain versus a $1.7 million loss; first-half gains were $3.8 million versus $0.6 million. Textbook write-offs were $6.8 million in the first half, compared with $2.3 million.
- Chegg acquired InstaEDU for consideration valued at approximately $31.1 million, Campus Special for approximately $16.0 million, and Bookstep assets for $0.5 million. The first two acquisitions added $37.1 million of goodwill; acquired businesses’ results were not material to reported results during the period.
Outlook, risks, and contingencies
- No specific numerical revenue or earnings guidance is provided. Management expects digital offerings to grow faster than total revenue, intends to continue investing in technology and student services, and describes long-term profitability and positive cash flow as objectives, not assured outcomes.
- Management expects liquidity to fund operations and obligations for at least the next 12 months, while noting that textbook purchases, growth, marketing, and technology spending could affect capital needs. The print textbook model is capital intensive; first-half textbook investment net of liquidation proceeds was $34.0 million.
- Results are highly seasonal: Q2 is typically the lowest-revenue quarter, while the fourth quarter is generally strongest. Peak academic-term demand creates fulfillment, staffing, and technology risks; sequential comparisons may be misleading.
- Key business risks include competition and price pressure, shifts from print to digital, uncertainty in newer offerings and acquisitions, textbook demand and inventory valuation, publisher licensing, reliance on shipping and technology providers, privacy and cybersecurity, and regulatory change. Chegg reported a cumulative deficit of $239.1 million and expects further losses.
- A Kentucky property-tax dispute concerns an assessment of approximately $1.0 million for 2009–2010. Chegg had accrued approximately $150,000; the state tax authority prevailed at an administrative stage, and the company appealed. Chegg says a loss is reasonably possible but cannot estimate a range or financial effect.
- The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting. It was still designing and testing controls for the forthcoming Section 404 management assessment.
Important facts for investors to verify
- Whether rapid digital growth can offset weaker textbook economics and restore gross margins.
- Textbook library utilization, write-offs, liquidation recoveries, and the expected effects of the Ingram fulfillment arrangement.
- Integration, performance, and revenue contribution of InstaEDU, Campus Special, and Bookstep, including contingent consideration and acquisition-related costs.
- Liquidity and capital requirements through seasonal peak periods, and continued compliance with credit-facility covenants.
- Outcome and potential exposure in the Kentucky property-tax appeal.