Chegg(CHGG) - 2019 Q4 - Annual Report

Part I Business Chegg operates a direct-to-student learning platform, offering digital services and educational materials, expanding into professional courses and shifting textbook logistics - Chegg's core business is a direct-to-student learning platform offering digital services and required educational materials[12] Key Business Segments & Offerings | Category | Offerings | | :--- | :--- | | Chegg Services | Chegg Study (Expert Answers, Textbook Solutions), Chegg Writing (EasyBib, etc.), Chegg Tutors, Chegg Math Solver, Thinkful (skills-based courses) | | Required Materials | Print textbook and eTextbook rentals and sales | - Chegg Services subscribers grew to over 3.9 million in 2019, a 29% increase from 3.1 million in 2018[13] - In October 2019, Chegg acquired Thinkful, Inc., a skills-based learning platform, to expand its offerings into professional courses like software engineering and data science[13][21][56] - The company is transitioning its print textbook logistics from Ingram to FedEx, starting in 2020, and will resume purchasing and owning its print textbook library[22][62] - As of December 31, 2019, the company had 1,401 full-time employees[54] Risk Factors The company faces risks including limited operating history, net losses, cybersecurity threats, intense competition, regulatory changes, and challenges related to debt and tax carryforwards - The company has a history of net losses, reporting losses of $9.6 million, $14.9 million, and $20.3 million for fiscal years 2019, 2018, and 2017, respectively, with an accumulated deficit of $416.3 million as of December 31, 2019[69] - A significant business model shift is underway, transitioning from a partnership with Ingram back to owning print textbooks, with fulfillment logistics moving to FedEx in 2020, which introduces execution risks[62][65] - The company is exposed to cybersecurity risks, referencing a 2018 data incident where an unauthorized party gained access to user data, and a separate incident at Thinkful prior to its acquisition[115][119] - Competition is significant and fragmented across its service lines, including platforms like Course Hero, Quizlet, Grammarly, and online marketplaces like Amazon.com for textbooks[132] - The business is subject to evolving government regulations, particularly regarding data privacy (e.g., CCPA), marketing (CAN-SPAM, TCPA), and state-level oversight for its skills-based learning programs from Thinkful[155][161][162] - The company may not be able to utilize a significant portion of its net operating loss carryforwards ($591 million federal, $440 million state as of Dec 31, 2019) due to potential "ownership changes" under Section 382 of the tax code[211][213] - Servicing its convertible senior notes (2023 and 2025 notes) requires significant cash, and the company may not have sufficient cash flow to pay its debt or repurchase notes upon a fundamental change[235][239] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[246] Properties Chegg's corporate headquarters are in Santa Clara, California, with additional leased offices domestically and internationally - Corporate headquarters are in Santa Clara, CA, with a lease expiring in November 2023[248] - Additional offices are located in the U.S. (California, Oregon, New York) and internationally (India, Israel)[248] Legal Proceedings Two notable legal matters: a securities class action related to a data breach was dismissed, and a patent infringement lawsuit was dismissed but appealed - A securities class action (Shah v. Chegg, Inc.) related to a 2018 data breach was voluntarily dismissed by the plaintiffs in March 2019[250] - A patent infringement lawsuit (NetSoc, LLC v. Chegg, Inc.) concerning the Chegg Tutors service was dismissed in January 2020, but NetSoc filed an appeal later that month[251] Mine Safety Disclosures This item is not applicable to the company's business - Not Applicable[253] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities Chegg's common stock trades on the NYSE, the company has never paid dividends, and it issued $800 million in 2025 convertible senior notes in 2019 - The company's common stock is listed on the NYSE under the ticker symbol "CHGG"[255] - Chegg does not intend to pay any cash dividends in the foreseeable future[256] - In March and April 2019, the company issued an aggregate principal amount of $800 million of its 2025 convertible senior notes[257] Selected Financial Data Presents five-year selected financial data showing revenue growth, consistent net losses, and a significant increase in total assets driven by financing activities Selected Consolidated Financial Data (2015-2019, in thousands) | Fiscal Year Ended Dec 31, | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $410,926 | $321,084 | $255,066 | $254,090 | $301,373 | | Gross profit | $318,744 | $241,088 | $174,891 | $134,489 | $111,524 | | Net loss | $(9,605) | $(14,888) | $(20,283) | $(42,245) | $(59,210) | | Net loss per share | $(0.08) | $(0.13) | $(0.20) | $(0.47) | $(0.68) | | Total assets | $1,488,998 | $760,938 | $446,930 | $290,652 | $291,356 | | Total stockholders' equity | $498,829 | $410,634 | $391,062 | $221,939 | $231,075 | Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses FY2019 financial results, highlighting revenue growth driven by Chegg Services, improved gross margin, narrowed net loss, increased operating expenses, and strong liquidity Net Revenues by Segment (FY 2019 vs. FY 2018, in thousands) | Segment | 2019 Revenue | 2018 Revenue | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Chegg Services | $332,221 | $253,985 | $78,236 | 31% | | Required Materials | $78,705 | $67,099 | $11,606 | 17% | | Total net revenues | $410,926 | $321,084 | $89,842 | 28% | - Gross margin increased to 78% in FY 2019 from 75% in FY 2018, primarily due to the revenue mix shifting towards higher-margin Chegg Services[303] - Operating expenses rose 22% to $300.9 million in 2019, driven by increases in R&D (+$25.5M), Sales & Marketing (+$8.9M), and G&A (+$19.8M), largely from higher employee-related costs and technology investments[306][307][308][309] - Interest expense increased significantly to $44.9 million in 2019 from $11.2 million in 2018, mainly due to the amortization of debt discount and issuance costs related to the convertible senior notes[312] Cash Flow Summary (FY 2019 vs. FY 2018, in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $113,403 | $75,113 | | Net cash used in investing activities | $(703,425) | $(82,549) | | Net cash provided by financing activities | $603,509 | $256,418 | - As of December 31, 2019, the company had principal sources of liquidity totaling $1.1 billion in cash, cash equivalents, and investments[315] - Beginning in 2020, the company expects to purchase approximately $50.0 million of print textbooks as it transitions to owning its inventory, which will be reflected as a cash outflow from investing activities[317] Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate sensitivity affecting investments, while foreign currency risk is immaterial, and convertible notes have fixed rates - Foreign currency exchange risk is not considered material to historical results[350][352] - The primary market risk is interest rate sensitivity: a hypothetical 100 basis point increase or decrease in interest rates would change the fair value of the company's investment portfolio by $6.9 million as of December 31, 2019[353] - The convertible senior notes have fixed annual interest rates (0.125% for 2025 notes, 0.25% for 2023 notes), so there is no direct financial statement risk from interest rate changes, though the notes' fair value may fluctuate[354] Consolidated Financial Statements and Supplementary Data Contains audited consolidated financial statements for 2017-2019, including auditor reports, balance sheets, income statements, cash flows, and detailed notes on accounting policies and debt - The financial statements for FY 2019 and 2018 were audited by Deloitte & Touche LLP, who also provided an unqualified opinion on the company's internal control over financial reporting as of December 31, 2019[361][362] Consolidated Balance Sheet Highlights (As of Dec 31, in thousands) | Account | 2019 | 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $387,520 | $374,664 | | Total assets | $1,488,998 | $760,938 | | Liabilities & Equity | | | | Convertible senior notes, net | $900,303 | $283,668 | | Total liabilities | $990,169 | $350,304 | | Total stockholders' equity | $498,829 | $410,634 | Consolidated Statement of Operations Highlights (Year Ended Dec 31, in thousands) | Account | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total net revenues | $410,926 | $321,084 | $255,066 | | Gross profit | $318,744 | $241,088 | $174,891 | | Income (loss) from operations | $17,817 | $(6,220) | $(18,967) | | Net loss | $(9,605) | $(14,888) | $(20,283) | - Note 7 details the acquisition of Thinkful in October 2019 for a total fair value consideration of $79.2 million, resulting in $65.2 million of goodwill and $16.4 million of intangible assets[485][489] - Note 10 provides details on the two series of convertible senior notes: $800 million of 0.125% notes due 2025 and $345 million of 0.25% notes due 2023[508] - Note 16 discloses federal and state net operating loss carryforwards of approximately $591 million and $440 million, respectively, as of December 31, 2019[572] Changes in and Disagreements with Accountants On Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[603] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, excluding the recently acquired Thinkful - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[605] - Management concluded that internal control over financial reporting was effective as of December 31, 2019, with the assessment excluding the recently acquired Thinkful, Inc[606] - No material changes were made to the company's internal control over financial reporting during the fourth quarter of 2019[607] Other Information The company reports no other information for this item - None[608] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 proxy statement - Information is incorporated by reference from the Registrant's definitive proxy statement for the 2020 Annual Meeting of Stockholders[610] Executive Compensation Information concerning executive compensation is incorporated by reference from the 2020 proxy statement - Information is incorporated by reference from the Registrant's definitive proxy statement[612] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2020 proxy statement - Information is incorporated by reference from the Registrant's definitive proxy statement[612] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2020 proxy statement - Information is incorporated by reference from the Registrant's definitive proxy statement[613] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2020 proxy statement - Information is incorporated by reference from the Registrant's definitive proxy statement[613] Part IV Exhibits and Financial Statement Schedules Lists all documents filed as part of the 10-K, including consolidated financial statements, a financial statement schedule, and 31 exhibits - This section lists the consolidated financial statements and financial statement schedules filed with the report[617][618] - A comprehensive list of exhibits is provided, including the Restated Certificate of Incorporation, indentures for the 2023 and 2025 convertible notes, various stock incentive plans, and material contracts[619][620][623] Form 10-K Summary The company indicates that there is no Form 10-K summary provided - None[625]