Chegg, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone Q4 filing; the filing also reports unaudited quarterly results for Q4 2014.
Business context
Chegg operates a student-focused education platform spanning college admissions and enrollment marketing, print and digital textbooks, study tools, tutoring, internships, and brand advertising. The company reported nearly 7.5 million students using its platform in 2014 and completed acquisitions of InstaEDU, Internships.com, Campus Special, and Bookstep.
Financial results and liquidity
- FY revenue: $304.8 million, up 19% from $255.6 million in 2013. Digital offerings revenue was $91.2 million, up 74%, and represented 30% of revenue versus 21% in 2013. Print textbook revenue was $213.7 million, up 5%.
- Profitability: Gross profit was $93.8 million, with a 31% gross margin versus 32% in 2013. Operating loss was $65.1 million and net loss was $64.8 million, compared with net losses of $51.0 million and $55.9 million, respectively, in 2013. FY 2014 basic and diluted loss per share was $0.78.
- Q4 results: Revenue was $84.4 million and gross profit was $45.8 million. Chegg reported net income of $1.7 million, compared with a $5.4 million net loss in Q4 2013. Q4 2014 revenue was up from $77.1 million a year earlier.
- Cash flow: Operating cash flow was $68.5 million, investing cash flow was negative $87.4 million, and financing cash flow was negative $1.9 million. Cash and cash equivalents declined by $20.7 million during the year. Textbook purchases, net of liquidation proceeds, used $54.7 million of investment cash flow.
- Liquidity and debt: Cash, cash equivalents, and investments totaled $90.9 million at year-end; current assets were $110.8 million and current liabilities were $66.7 million. No debt was outstanding. The company had a $40 million revolving facility available, with a potential increase to $75 million subject to conditions; it expires in August 2016.
- Balance sheet: Total assets were $318.1 million, total liabilities $71.1 million, and stockholders’ equity $247.0 million. Deferred revenue was $24.6 million.
Material changes and outlook
- Revenue mix continued shifting toward digital: digital offerings rose from 21% to 30% of revenue, while print textbooks fell from 79% to 70%. Rental revenue decreased 4%; service revenue grew 68% and sales revenue grew 145%.
- Management’s strategy is to grow higher-margin digital offerings and reduce the capital and operating demands of the print textbook business. In February 2015, Chegg announced plans to expand its Ingram partnership. The proposed arrangement was not yet definitive in the filing: Chegg expected Ingram to fund new textbook inventory and handle fulfillment beginning in 2015, with a transition toward focusing exclusively on digital offerings by 2017.
- Management said existing liquidity and expected operating cash flow should fund operations and obligations for at least the next 12 months. It expects digital offerings to grow faster than overall revenue and gross margins to improve over time, but noted that profitability and the transition depend on execution, student engagement, competition, and the Ingram arrangement.
- Results are highly seasonal: Q4 is typically the strongest revenue quarter, while shipping, fulfillment, and marketing costs are concentrated around academic-term starts. Management cautioned that sequential quarterly comparisons may be misleading.
Risks, contingencies, and unusual items
- Chegg has a history of losses; accumulated deficit was $269.9 million at year-end. FY 2014 net loss widened despite revenue growth, and management expects continued investment and possible further losses.
- Textbook library depreciation was $70.1 million and textbook write-offs were $10.5 million in 2014. The shift to digital and planned reliance on Ingram expose the company to inventory valuation, transition, fulfillment, and partner-performance risks.
- A $1.6 million impairment charge followed Chegg’s decision to exit its print coupon business. Acquisitions added $41.8 million of goodwill; integration and realizing expected returns remain risks.
- A Kentucky property-tax dispute concerning the textbook library remains unresolved. A court reversed the tax authority’s assessment, but the state appealed; Chegg said a loss was reasonably possible and that it could not estimate a loss range.
- Other disclosed risks include intense textbook and digital competition, privacy and data-security obligations, seasonal operating disruptions, dependence on publishers and shipping providers, and uncertain tax positions. Chegg also disclosed that several thousand textbooks had been fraudulently obtained.
Key facts for investors to verify
- Whether the expanded Ingram partnership became a binding agreement, on what terms, and whether the planned inventory and fulfillment transition proceeded as expected.
- Whether digital revenue growth and margin improvement offset declining print revenue and ongoing operating expenses.
- How textbook library liquidation, depreciation, write-offs, and recovery values affect cash needs and reported margins during the transition.
- The outcome and potential financial impact of the Kentucky tax appeal, as well as developments in tax audits and uncertain tax positions.
- Whether acquisitions and newly launched services achieve sustainable growth and contribute to profitability; FY 2014 results included a $1.6 million coupon-business impairment.