Chegg Reports Second Quarter 2015 Results

Digital Revenue Expands to 45% of Total Revenue Driven by 62% Year-Over-Year Growth in Digital Revenue

Aug 03, 2015, 16:05 ET from Chegg, Inc.

SANTA CLARA, Calif., Aug. 3, 2015 /PRNewswire/ -- Chegg, Inc. (NYSE: CHGG), the Student Hub, today reported financial results for the three months ended June 30, 2015. 

"Our team executed another great quarter. We delivered pro forma revenue growth of 37%, digital revenue growth of 62%, and more than doubled adjusted EBITDA," said Dan Rosensweig, Chairman and CEO of Chegg. "Our strong brand and organic traffic to our platform is driving Chegg's position as a premier destination for students in the $1 trillion education market. As education goes increasingly digital and students become increasingly self-directed in their pursuit of better outcomes, Chegg is with them every step of the way."

An updated investor presentation that highlights Chegg's transition to an all-digital platform can be found on Chegg's Investor Relations website http://investor.chegg.com.

Q2 2015 Financial Highlights:

  • Pro-forma Revenue of $32.7 million an increase of 37% year-over-year;
  • Digital Revenue of $30.2 million, up 62% year-over-year now comprising 45% of total revenue;
  • Total Revenue of $67.0 million;
  • Print Revenue of $36.8 million; 
  • GAAP Gross Profit of $30.8 million;  
  • Non-GAAP Gross Profit of $31.6 million; 
  • Adjusted EBITDA of $3.2 million, up 106% year-over-year;
  • GAAP Net Loss of $10.1 million; and
  • Non-GAAP Net Income of $1 million.

Pro-forma revenue and the related year-over-year percentage increase present total revenue as if the transition to Ingram Content Group (Ingram) of the textbook inventory investment, logistics and fulfillment functions for the print textbook business was complete and all print revenue was entirely commission-based digital revenue. For more information about pro forma revenue and a reconciliation of pro forma revenue to revenue, see the sections of the press release titled "Use of Non-GAAP Measures" and "Reconciliation of GAAP to Non-GAAP Financial Measures."

Q2 2015 Business Highlights:

  • 200,000: number of new Chegg customers added in Q2;
  • 700,000: number of digital subscribers on the Chegg platform in Q2;
  • 70%: percentage of Chegg members who use Chegg for something other than a textbook;
  • 84%: percentage of new Chegg orders brought in organically; and
  • 41%: percentage of Chegg customers who subscribe to a paid digital service.

Business Outlook:

Our outlook for the third quarter and fiscal year 2015 is comprised of two revenue lines, including print revenue, which consists of revenue that Chegg continues to derive from the rental or sale of textbooks directly to students, and of digital revenue, which consists of revenue from digital learning services, advertising, and commission-based revenue from our e-commerce partners such as Ingram.

Third Quarter 2015

  • Revenue in the range of $74 million and $80 million;
  • Digital Revenue in the range of $34 million and $38 million;
  • Total Gross Margin on both a GAAP and Non-GAAP basis between 23%; and 25%; and
  • Adjusted EBITDA loss of between $12 million and $9 million.

Adjusted EBITDA guidance for the third quarter includes approximately $9.1 million for textbook depreciation and excludes approximately $14.8 million for stock-based compensation; $1.1 million for amortization of intangible assets; $0.1 million for restructuring charges; $2.4 million for transitional logistic charges; and $0.2 million for acquisition-related costs. It assumes, among other things, that no additional business acquisitions, investments, restructuring actions, or legal settlements are concluded and that there are no further revisions to stock-based compensation estimates.

Fiscal Year 2015 

  • Revenue in the range of $295 million and $310 million;
  • Digital Revenue in the range of $137 million and $145 million;
  • Total Gross Margin on both a GAAP and Non-GAAP basis between 36% and 38%; 
  • Adjusted EBITDA of breakeven to $5 million;
  • Free cash flow in the range of $15 million and $20 million.

Adjusted EBITDA guidance for fiscal 2015 includes approximately $43.2 million for textbook depreciation and excludes approximately $52.4 million for stock-based compensation; $4.8 million for amortization of intangible assets; $5.3 million for restructuring charges; $5.8 million for transitional logistic charges; and $1.9 million for acquisition-related costs. It assumes, among other things, that no additional business acquisitions, investments, restructuring actions, or legal settlements are concluded and that there are no further revisions to stock-based compensation estimates. 

Conference Call and Webcast Information

The Chegg Second Quarter teleconference and webcast is scheduled to begin at 2:00 p.m. Pacific Daylight Time on Monday, August 3, 2015.  To access the call, please dial (877) 407-4018, or outside the U.S. +1 (201) 689-8471, five minutes prior to 2:00 p.m. Pacific Daylight Time (or 5:00 p.m. Eastern Daylight Time). A live webcast of the call will also be available at http://investor.chegg.com under the Events & Presentations menu. An audio replay will be available beginning at 8:00 p.m. Eastern Daylight Time August 3, 2015, until 11:59 p.m. Eastern Daylight Time August 10, 2015, by calling (877) 870-5176 or +1 (858) 384-5517, with Conference ID 13614866. An audio archive of the call will also be available at http://investor.chegg.com.

Use of Investor Relations Website for Regulation FD Purposes

Chegg also uses its media center website, http://www.chegg.com/mediacenter, as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD. Accordingly, investors should monitor http://www.chegg.com/mediacenter, in addition to following press releases, Securities Exchange Commission filings and public conference calls and webcasts.

About Chegg

Chegg puts students first. As the leading student-first connected learning platform, the company makes higher education more affordable, more accessible, and more successful for students. Chegg is a publicly-held company based in Santa Clara, California and trades on the NYSE under the symbol CHGG. For more information, visit www.chegg.com.

Use of Non-GAAP Measures

To supplement Chegg's financial results presented in accordance with Generally Accepted Accounting Principles (GAAP), this press release and the accompanying tables and the related earnings conference call present non-GAAP financial measures, including pro forma revenue, adjusted EBITDA, non-GAAP gross profit and margin, non-GAAP operating expenses, non-GAAP net loss and free cash flows. For reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures, please see the section of the accompanying tables titled, "Reconciliation of GAAP to Non-GAAP Financial Measures" and "Reconciliation of GAAP Net Loss to EBITDA and Adjusted EBITDA." 

The presentation of these non-GAAP financial measures is not intended to be considered in isolation from, as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies. Chegg defines (1) pro forma revenue as revenue as if it had already transitioned to a fully commission-based revenue model with Ingram for its print textbook business, (2) adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted for textbook depreciation and to exclude share-based compensation expense, acquisition-related compensation costs, restructuring charges, transitional logistic charges and other income, net, (3) non-GAAP gross profit as gross profit excluding share-based compensation and transitional logistic charges, (4) non-GAAP gross margin as non-GAAP gross profit divided by revenue, (5) non-GAAP net income (loss) as GAAP net loss excluding share-based compensation expense, amortization of intangible assets, acquisition related compensation costs, restructuring charges, transitional logistic charges and acquisition-related income tax benefit, and (6) free cash flow as cash flow from operations plus net book investment and investment in property, plant and equipment.  To the extent additional significant non-recurring items arise in the future, Chegg may consider whether to exclude such items in calculating the non-GAAP financial measures it uses.

Chegg believes that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding Chegg's performance by excluding items that may not be indicative of Chegg's core business, operating results or future outlook. Chegg management uses these non-GAAP financial measures in assessing Chegg's operating results, as well as when planning, forecasting and analyzing future periods and believes that such measures enhance investors' overall understanding of our current financial performance. These non-GAAP financial measures also facilitate comparisons of Chegg's performance to prior periods.

As presented in the "Reconciliation of GAAP to Non-GAAP Financial Measures" tables below, each of the non-GAAP financial measures excludes one or more of the following items:

-- Pro forma revenue adjustments.

Chegg is in the process of transitioning ownership of the textbook library and textbook logistics and fulfillment functions for its print textbook business to Ingram. Upon completion of that transition, all revenue from its print textbook business will be digital revenue representing an approximately 20% commission from each such transaction. During the transition, Chegg reports print textbook revenue for orders that are fulfilled with textbooks owned by Chegg and commission-based revenue for orders that are fulfilled with textbooks owned by Ingram. Chegg expects the transition to a fully commission-based model with Ingram to be complete in 2017. The pro forma revenue adjustments present revenue "as if" Ingram already owned all textbooks and managed all logistics and order fulfillment.  Management believes that presenting revenue as if Chegg had already fully transitioned to the commission-based model with Ingram provides investors with a better understanding of Chegg's results of operations in light of the ongoing changes to its business model by facilitating period over period revenue comparisons during the transition period.  The adjustments to GAAP revenue provided below reflect a number of estimates, assumptions and other uncertainties, and are approximate in nature. 

-- Share-based compensation expense.

Share-based compensation is a non-cash expense that varies in amount from period to period and is dependent on market forces that are often beyond Chegg's control. As a result, management excludes this item from Chegg's internal operating forecasts and models. Management believes that non-GAAP measures adjusted for share-based compensation provide investors with a basis to measure Chegg's core performance against the performance of other companies without the variability created by share-based compensation as a result of the variety of equity awards used by other companies and the varying methodologies and assumptions used.

-- Restructuring charges.

Restructuring charges primarily relate to expenses incurred in making infrastructure-related changes as a result of the transition of fulfillment obligations for the print textbook business to Ingram, as well as expenses related to the exit of Chegg's print coupon business. These restructuring charges are excluded from non-GAAP financial measures because they are the result of discrete events that are not considered core operating activities. Chegg believes that it is appropriate to exclude restructuring charges from non-GAAP financial measures because it enables the comparison of period-over-period operating results from continuing operations.

-- Transitional logistic charges.

Transitional logistic charges relate primarily to the expected closure of our warehouse and as we transition to Ingram's distribution centers, which results in duplicative logistic charges.  The duplicative logistic charges are expected to be incurred throughout 2015 until we complete the transition of our logistics and fulfillment obligations for our print textbook business to Ingram.  Chegg believes that it is appropriate to exclude transitional logistic charges from non-GAAP financial measures because it enables the comparison of period-over-period operating results from continuing operations.

-- Acquisition-related compensation costs.

Acquisition-related compensations costs include: (1) compensation expense resulting from the employment retention of certain key employees established in accordance with the terms of the acquisitions, (2) the remaining pay-out related to the Bookstep acquisition and (3) adjustments to previously recognized earn-out liability on contingent compensation expense related to acquisitions. In most cases, these acquisition-related charges are not factored into management's evaluation of potential acquisitions or Chegg's performance after completion of acquisitions, because they are not related to Chegg's core operating performance. In addition, the frequency and amount of such charges can vary significantly based on the size and timing of acquisitions and the maturities of the businesses being acquired. Excluding acquisition-related charges from non-GAAP measures provides investors with a basis to compare Chegg's results against those of other companies without the variability caused by purchase accounting.

-- Amortization of intangible assets.

Chegg amortizes intangible assets that it acquires in conjunction with business combinations, which results in non‑cash operating expenses that would not otherwise have been incurred had Chegg internally developed such intangible assets. Chegg believes excluding the accounting expense associated with acquired intangible asset from non-GAAP measures allows for a more accurate assessment of its ongoing operations.

In addition to the non-GAAP financial measures discussed above, Chegg also uses free cash flow. Free cash flow represents cash flow from operations less net book investment and investment in property, plant and equipment. Chegg considers free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of textbooks, property, buildings, and equipment, which can then be used to, among other things, invest in Chegg's business and make strategic acquisitions. A limitation of the utility of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in Chegg's cash balance for the period.

 Forward-Looking Statements

This press release contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which include, without limitation those regarding Chegg's business and financial outlook, long-term growth prospects and transition to an all-digital business model.  The words "anticipate," "believe," "estimate," "expect," "intend," "will," "should," "future," "transition," "outlook" and similar expressions, as they relate to Chegg, are intended to identify forward-looking statements. These statements are not guarantees of future performance, and are based on management's expectations as of the date of this press release and assumptions that are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those expressed in any forward-looking statement. Important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements include the following: Chegg's ability to attract new students, increase engagement and increase monetization; competitive developments, including pricing pressures; Chegg's ability to build and expand its digital services offerings; Chegg's ability to develop new products and services on a cost-effective basis and to integrate acquired businesses and assets; the impact of seasonality on the business; Chegg's partnership with Ingram and the parties' ability to achieve the anticipated benefits of the strategic alliance, including the potential impact of the economic risk-sharing arrangements between Chegg and Ingram on Chegg's results of operations; Chegg's ability to effectively control operating costs; changes in Chegg's addressable market; changes in the education market; and general economic and industry conditions. All information provided in this release and in the conference call is as of the date hereof and Chegg undertakes no duty to update this information except as required by law. These and other important risk factors are described more fully in documents filed with the Securities and Exchange Commission, including Chegg's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 8, 2015, and could cause actual results to vary from expectations.

 

 

CHEGG, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for number of shares and par value )

(unaudited)

June 30, 2015

December 31, 2014

Assets

Current assets

 Cash and cash equivalents              

$                    35,087

$                    56,117

Short-term investments

27,409

33,346

Accounts receivable, net of allowance for doubtful accounts of $261 and $559 at June 30, 2015 and December 31, 2014, respectively

12,131

14,396

Prepaid expenses                      

7,657

3,091

Other current assets                  

16,872

3,864

Total current assets                

99,156

110,814

Long-term investments

4,727

1,451

Textbook library, net                   

61,260

80,762

Property and equipment, net             

18,569

18,369

Goodwill

91,301

91,301

Intangible assets, net

10,629

13,626

Other assets                            

1,922

1,804

 Total assets                             

$                  287,564

$                  318,127

Liabilities and stockholders' equity

Current liabilities

Accounts payable                      

$                      3,832

$                    10,945

Deferred revenue                      

19,752

24,591

Accrued liabilities                   

23,903

31,183

Total current liabilities           

47,487

66,719

Long-term liabilities

Total other long-term liabilities

4,732

4,365

Total liabilities                        

52,219

71,084

Commitments and contingencies

Stockholders' equity:

Preferred stock, $0.001 par value –10,000,000 shares authorized, no shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively

Common stock, $0.001 par value – 400,000,000 shares authorized at June 30, 2015 and December 31, 2014, respectively; 87,560,103 and 84,008,043 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively

88

84

Additional paid-in capital 

543,789

516,845

Accumulated other comprehensive gain (loss)

14

(13)

Accumulated deficit

(308,546)

(269,873)

Total stockholders' equity           

235,345

247,043

 Total liabilities and stockholders' equity 

$                  287,564

$                  318,127

 

 

CHEGG, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

2015

2014

2015

2014

Net revenues:

Rental

$        32,782

$        42,257

$        70,496

$        89,113

Service

29,276

18,599

60,643

35,845

Sales

5,003

3,636

20,794

13,927

Total net revenues

67,061

64,492

151,933

138,885

Cost of revenues (1):

Rental

21,238

29,889

59,793

77,586

Service

9,975

4,912

21,812

12,568

Sales

5,043

3,795

20,144

13,927

Total cost of revenues

36,256

38,596

101,749

104,081

Gross profit 

30,805

25,896

50,184

34,804

Operating expenses:

Technology and development (1)

13,268

12,189

29,412

23,509

Sales and marketing(1)

12,382

14,817

33,774

29,844

General and administrative(1)

11,943

10,654

23,720

20,494

Restructuring charges

464

2,978

Loss (gain) on liquidation of textbooks

2,445

(2,122)

(1,740)

(3,800)

 Total operating expenses

40,502

35,538

88,144

70,047

Loss from operations

(9,697)

(9,642)

(37,960)

(35,243)

Interest and other income, net:

  Interest expense, net

(60)

(127)

(121)

(188)

  Other income, net

56

156

132

276

Total interest and other income, net

(4)

29

11

88

Loss before provision for (benefit from) income taxes

(9,701)

(9,613)

(37,949)

(35,155)

  Provision for (benefit from) income taxes

430

(1,367)

724

(1,150)

Net loss

(10,131)

(8,246)

(38,673)

(34,005)

Net loss per share, basic and diluted

$          (0.12)

$          (0.10)

$          (0.45)

$          (0.41)

Weighted average shares used to compute net loss per share, basic and diluted 

86,741

83,209

85,771

82,686

(1)Includes share-based compensation expense as follows:

Cost of revenues

$               81

$             134

$             215

$             312

Technology and development

1,273

2,635

5,980

5,017

Sales and marketing

1,034

2,263

6,088

3,595

General and administrative

5,443

3,449

10,568

6,487

$          7,831

$          8,481

$        22,851

$        15,411

 

CHEGG, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Six Months Ended June 30, 

2015

2014

Cash flows from operating activities

Net loss

$      (38,673)

$      (34,005)

Adjustments to reconcile net loss to net cash provided by operating activities:

Textbook library depreciation expense

27,476

38,130

Amortization of warrants and deferred loan costs

70

117

Other depreciation and amortization expense

6,413

4,544

Share-based compensation expense

22,851

15,411

Provision for bad debts

(269)

197

Gain on liquidation of textbooks

(1,740)

(3,800)

Loss from write-offs of textbooks

3,611

6,805

Deferred income taxes

(1,626)

Realized gain on sale of securities

(18)

Loss from disposal of property and equipment

918

Change in assets and liabilities net of effect of acquisition of business:

Accounts receivable

116

(2,211)

Prepaid expenses and other current assets

(17,405)

(1,774)

Other assets

(253)

(470)

Accounts payable

(6,150)

2,988

Deferred revenue

(4,839)

1,241

Accrued liabilities

(5,574)

(2,803)

Other liabilities       

389

(128)

Net cash (used in) provided by operating activities

(13,059)

22,598

Cash flows from investing activities

Purchases of textbooks

(31,275)

(52,781)

Proceeds from liquidation of textbooks

22,693

18,737

Purchases of marketable securities

(17,127)

(54,882)

Proceeds from sale of marketable securities

38,860

Maturities of marketable securities

19,690

29,600

Purchases of property and equipment

(4,146)

(2,496)

Acquisition of business, net of cash acquired

(43,872)

Net cash used in investing activities

(10,165)

(66,834)

Cash flows from financing activities

Proceeds from issuance of common stock under employee stock plans 

1,399

1,743

Proceeds from exercise of common stock under employee stock plans

10,530

Payment of taxes related to net share settlement of RSUs

(7,472)

(3,588)

Repurchase of common stock

(2,263)

Net cash provided by (used in) financing activities

2,194

(1,845)

Net decrease in cash and cash equivalents

(21,030)

(46,081)

Cash and cash equivalents at beginning of period

56,117

76,864

Cash and cash equivalents at end of period

$        35,087

$        30,783

Supplemental cash flow data

Cash paid during the period for:

Interest

$               50

$               31

Income taxes

$             571

$             445

Non-cash investing and financing activities:

Accrued purchases of long-lived assets

$          3,805

$          5,528

Issuance of common stock related to prior acquisition

$             825

$          1,585

 

CHEGG, INC.

RECONCILIATION OF GAAP NET LOSS TO EBITDA AND ADJUSTED EBITDA

(in thousands)

(unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

2015

2014

2015

2014

Net loss

$      (10,131)

$        (8,246)

$      (38,673)

$      (34,005)

Interest expense, net

60

127

121

188

Provision for income taxes

430

(1,367)

724

(1,150)

Textbook library depreciation expense

12,802

18,035

27,476

38,130

Other depreciation and amortization

3,241

2,509

6,413

4,544

EBITDA

6,402

11,058

(3,939)

7,707

Textbook library depreciation expense

(12,802)

(18,035)

(27,476)

(38,130)

Share-based compensation expense

7,831

8,481

22,851

15,411

Other income, net

(56)

(156)

(132)

(276)

Restructuring charges

464

2,978

Transitional logistic charges

707

3,190

Acquisition related compensation costs

660

208

1,455

262

Adjusted EBITDA

$          3,206

$          1,556

$        (1,073)

$      (15,026)

 

CHEGG, INC.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(in thousands, except percentages)

(unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

2015

2014

2015

2014

Net revenues, GAAP

$        67,061

$        64,492

$      151,933

$      138,885

Adjustments

(34,330)

(40,575)

(70,943)

(79,053)

Pro forma net revenues

$        32,731

$        23,917

$        80,990

$        59,832

GAAP gross profit

$        30,805

$        25,896

$        50,184

$        34,804

Share-based compensation expense

81

134

215

312

Transitional logistic charges

707

3,190

Non-GAAP gross profit

$        31,593

$        26,030

$        53,589

$        35,116

GAAP gross margin %

45.9%

40.2%

33.0%

25.1%

Non-GAAP gross margin %

47.1%

40.4%

35.3%

25.3%

GAAP operating expenses

$        40,502

$        35,538

$        88,144

$        70,047

Share-based compensation expense

(7,750)

(8,347)

(22,636)

(15,099)

Amortization of intangible assets

(1,437)

(1,003)

(2,997)

(1,604)

Restructuring charges

(464)

(2,978)

Acquisition related compensation costs

(660)

(208)

(1,455)

(262)

Non-GAAP operating expenses

$        30,191

$        25,980

$        58,078

$        53,082

GAAP operating expenses as a percent of net revenues

60.4%

55.1%

58.0%

50.4%

Non-GAAP operating expenses as a percent of net revenues

45.0%

40.3%

38.2%

38.2%

GAAP operating loss

$        (9,697)

$        (9,642)

$      (37,960)

$      (35,243)

Share-based compensation expense

7,831

8,481

22,851

15,411

Amortization of intangible assets

1,437

1,003

2,997

1,604

Restructuring charges

464

2,978

Transitional logistic charges

707

3,190

Acquisition related compensation costs

660

208

1,455

262

Non-GAAP operating income (loss)

$          1,402

$               50

$        (4,489)

$      (17,966)

GAAP net loss

$      (10,131)

$        (8,246)

$      (38,673)

$      (34,005)

Share-based compensation expense

7,831

8,481

22,851

15,411

Amortization of intangible assets

1,437

1,003

2,997

1,604

Restructuring charges

464

2,978

Transitional logistic charges

707

3,190

Acquisition related compensation costs

660

208

1,455

262

Acquisition related income tax benefit

(1,626)

(1,626)

Non-GAAP net income (loss)

$             968

$           (180)

$        (5,202)

$      (18,354)

 

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SOURCE Chegg, Inc.



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