Chegg(CHGG) - 2020 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents Chegg's unaudited condensed consolidated financial statements, reporting a $5.7 million net loss on $131.6 million revenues for Q1 2020 Condensed Consolidated Balance Sheet Highlights | Account | March 31, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :--- | :--- | :--- | | Total Assets | $1,495,004 | $1,488,998 | | Cash and cash equivalents | $359,101 | $387,520 | | Total current assets | $807,768 | $807,267 | | Goodwill | $214,323 | $214,513 | | Total Liabilities | $1,032,077 | $990,169 | | Convertible senior notes, net | $913,249 | $900,303 | | Total Stockholders' Equity | $462,927 | $498,829 | Condensed Consolidated Statement of Operations Highlights | Account | Three Months Ended Mar 31, 2020 ($ thousands) | Three Months Ended Mar 31, 2019 ($ thousands) | | :--- | :--- | :--- | | Net revenues | $131,590 | $97,409 | | Gross profit | $89,200 | $74,074 | | Income (loss) from operations | $3,276 | $(1,027) | | Net loss | $(5,713) | $(4,318) | | Net loss per share, basic and diluted | $(0.05) | $(0.04) | Condensed Consolidated Statement of Cash Flows Highlights | Cash Flow Activity | Three Months Ended Mar 31, 2020 ($ thousands) | Three Months Ended Mar 31, 2019 ($ thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $62,967 | $17,941 | | Net cash (used in) provided by investing activities | $(47,262) | $13,173 | | Net cash (used in) provided by financing activities | $(44,169) | $508,482 | | Net (decrease) increase in cash | $(28,464) | $539,596 | Notes to Condensed Consolidated Financial Statements This section details accounting policies, revenue recognition, convertible notes, and ongoing legal matters, including the transition to print textbook ownership - Beginning in January 2020, Chegg began transitioning back to owning its print textbook library, classified as a non-current asset and depreciated over an estimated four-year useful life using an accelerated method[32][33] Net Revenues by Product Line | Product Line | Q1 2020 ($ thousands) | Q1 2019 ($ thousands) | Change ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Chegg Services | $100,359 | $75,292 | $25,067 | 33% | | Required Materials | $31,231 | $22,117 | $9,114 | 41% | | Total net revenues | $131,590 | $97,409 | $34,181 | 35% | - The company has two series of convertible senior notes outstanding: $800 million aggregate principal of 0.125% notes due in 2025 and $345 million aggregate principal of 0.25% notes due in 2023[74] - The company is involved in a legal dispute with Ingram Hosting Holdings LLC, which is seeking $17 million in damages for alleged breach of contract[85] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2020 financial performance, noting a 35% revenue increase to $131.6 million and a $5.7 million net loss, with expected positive COVID-19 impact in Q2 Q1 2020 vs Q1 2019 Revenue Breakdown | Product Line | Q1 2020 ($ thousands) | Q1 2019 ($ thousands) | Change ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Chegg Services | $100,359 | $75,292 | $25,067 | 33% | | Required Materials | $31,231 | $22,117 | $9,114 | 41% | | Total net revenues | $131,590 | $97,409 | $34,181 | 35% | - The 41% increase in Required Materials revenue was primarily due to the transition to owning print textbooks, recognized at the total transaction amount rather than as a revenue share[109] - Gross margin decreased to 68% in Q1 2020 from 76% in Q1 2019, mainly due to higher order fulfillment fees, depreciation of the new print textbook library, and higher content amortization[110] - As of March 31, 2020, the company's principal sources of liquidity were cash, cash equivalents, and investments totaling $1.0 billion[118] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk were reported for the quarter ended March 31, 2020, compared to prior disclosures - No material changes in market risk were reported for the quarter compared to the year-end 2019 disclosures[139] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal controls - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures are effective at a reasonable assurance level[142] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[144] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section details two legal proceedings: a $17 million breach of contract claim by IHH and an appealed patent infringement lawsuit by NetSoc - Ingram Hosting Holdings LLC (IHH) filed a complaint against Chegg alleging breach of contract and seeking $17 million in damages as part of the wind-down of their business relationship[146] - NetSoc, LLC filed a patent infringement complaint regarding the Chegg Tutors service; the case was dismissed by the court, but NetSoc appealed the dismissal in January 2020[147] Item 1A. Risk Factors This section outlines significant risks including COVID-19 impacts, intense competition, cybersecurity threats, and business seasonality - The full effect of the COVID-19 pandemic is uncertain and could materially and adversely affect business and operations due to factors like school closures, disruptions to partners, and employee health[150] - The business faces significant competition from various online platforms (Course Hero, Quizlet), college bookstores, and eTextbook providers, with competition primarily based on price[209] - The company is subject to risks from cybersecurity attacks and data breaches, citing a 2018 incident where an unauthorized party gained access to user data for chegg.com and other brands[197] - The business is highly seasonal, with peak activity concentrated at the beginning of academic terms, making operations susceptible to disruption during these periods and financial results difficult to predict[211] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the current quarterly period - There were no unregistered sales of equity securities during the quarter[292] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including SOX certifications and Inline XBRL data files - The exhibits filed with the report include CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002 and various Inline XBRL documents[294]