Chegg(CHGG) - 2021 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements (unaudited) Unaudited financials show total assets at $3.19 billion, net income of $6.7 million for Q3 2021, and strong operating cash flow Condensed Consolidated Balance Sheets (in thousands) | | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Total current assets | $ 1,825,964 | $ 1,182,955 | | Total assets | $ 3,187,495 | $ 2,251,258 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $ 133,821 | $ 109,732 | | Convertible senior notes, net | $ 1,676,749 | $ 1,506,922 | | Total liabilities | $ 1,832,978 | $ 1,641,623 | | Total stockholders' equity | $ 1,354,517 | $ 609,635 | | Total liabilities and stockholders' equity | $ 3,187,495 | $ 2,251,258 | Condensed Consolidated Statements of Operations (in thousands, except per share data) | | Three Months Ended Sep 30, | Nine Months Ended Sep 30, | | :--- | :--- | :--- | :--- | :--- | | | 2021 | 2020 | 2021 | 2020 | | Net revenues | $171,942 | $154,018 | $568,798 | $438,617 | | Gross profit | $104,840 | $91,648 | $369,604 | $290,333 | | Income (loss) from operations | $361 | $(17,802) | $51,910 | $7,535 | | Net income (loss) | $6,651 | $(37,140) | $(25,764) | $(32,264) | | Diluted net income (loss) per share | $0.05 | $(0.29) | $(0.18) | $(0.26) | Condensed Consolidated Statements of Cash Flows Data (in thousands) | | Nine Months Ended September 30, | | :--- | :--- | :--- | | | 2021 | 2020 | | Net cash provided by operating activities | $208,123 | $168,655 | | Net cash used in investing activities | $(742,537) | $(750,942) | | Net cash provided by financing activities | $768,299 | $722,445 | - Financing activities were primarily driven by net proceeds of $1.09 billion from an equity offering, partially offset by $300.8 million in repayment of convertible senior notes[178] Notes to Condensed Consolidated Financial Statements Notes detail accounting policy changes, revenue, convertible notes, restructuring, and legal proceedings - The company adopted ASU 2020-06 on January 1, 2021, which simplifies accounting for convertible instruments. This resulted in an increase to convertible senior notes of $378.1 million, a decrease to additional paid-in capital of $465.0 million, and is expected to decrease interest expense in future periods[53][80] Net Revenues by Product Line (in thousands) | | Three Months Ended Sep 30 | Nine Months Ended Sep 30 | | :--- | :--- | :--- | :--- | :--- | | | 2021 | 2020 | 2021 | 2020 | | Chegg Services | $146,790 | $118,895 | $482,654 | $345,258 | | Required Materials | $25,152 | $35,123 | $86,144 | $93,359 | | Total net revenues | $171,942 | $154,018 | $568,798 | $438,617 | - In February 2021, the company completed an equity offering, selling 10,974,600 shares of common stock and generating net proceeds of $1.09 billion[109] - In September 2021, the company initiated a restructuring plan for its Thinkful product offering, impacting approximately 60 full-time and 120 part-time employees, with expected total costs of around $2.2 million[126] - The company is facing a copyright infringement lawsuit filed by Pearson Education, Inc. on September 13, 2021. Chegg disputes the claims and intends to defend itself vigorously[98] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 30% revenue growth, market slowdown, strong liquidity, and Thinkful restructuring Overview Chegg's mission is to improve education via Chegg Services and Required Materials, focusing on service expansion - Chegg's business is structured around two main offerings: Chegg Services (subscription-based learning support) and Required Materials (textbooks)[130][131][134] - The long-term strategy is centered on expanding Chegg Services to increase student engagement and drive long-term profitability and positive cash flow[133] Results of Operations Q3 2021 net revenues grew 12% to $171.9 million from Chegg Services, impacted by market slowdown - As students returned to school, a slowdown in the education market led to a decline in traffic to education technology services, resulting in lower growth rates for Chegg's services, which is expected to continue into fiscal year 2022[145] Revenue Change by Product Line - Q3 2021 vs Q3 2020 (in thousands) | Product Line | Q3 2021 | Q3 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Chegg Services | $146,790 | $118,895 | $27,895 | 23% | | Required Materials | $25,152 | $35,123 | $(9,971) | (28)% | | Total net revenues | $171,942 | $154,018 | $17,924 | 12% | - Sales and marketing expenses increased 24% for the nine-month period, driven by increased marketing spend, including expansion into international markets[155] - General and administrative expenses decreased 17% in Q3 2021 compared to Q3 2020, primarily because the prior-year period included a $10.0 million impairment charge on an an investment in WayUp[156] - Interest expense decreased significantly due to the adoption of ASU 2020-06, which eliminated the requirement to account for the debt discount on convertible notes as non-cash interest expense[158] Liquidity and Capital Resources Liquidity is strong at $2.6 billion in cash and investments, bolstered by a $1.09 billion equity offering - Principal sources of liquidity as of September 30, 2021, were cash, cash equivalents, and investments totaling $2.6 billion[164] - In November 2021, the board of directors increased the securities repurchase program by $500.0 million, authorizing up to $1.0 billion for repurchasing common stock and/or convertible notes[165] - A February 2021 equity offering raised net proceeds of $1.09 billion[166] Critical Accounting Policies, Significant Judgments and Estimates Critical accounting policies are unchanged except for share-based compensation, requiring judgment for PSUs - There have been no material changes to critical accounting policies, except for share-based compensation expense[184] - Management exercises significant judgment in assessing the achievement of performance targets for PSU awards, which can lead to volatility in share-based compensation expense period-to-period[188] Quantitative and Qualitative Disclosures About Market Risk No material changes in the company's market risk profile were observed during the reporting period - There were no material changes in the company's market risk profile during the reporting period[192] Controls and Procedures Management concluded disclosure controls and procedures are effective, with no material changes to internal controls - Management concluded that disclosure controls and procedures are effective at a reasonable assurance level[195] - No material changes to internal control over financial reporting were identified during the quarter[196] PART II - OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, with details in Note 8 of the financial statements - The company is involved in various legal proceedings. For detailed information, refer to Note 8, "Commitments and Contingencies," in the financial statements[198] Risk Factors No material changes have occurred in the company's risk factors since the last Annual Report on Form 10-K - No material changes have occurred in the company's risk factors since the last Annual Report on Form 10-K[199] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - There were no unregistered sales of equity securities in the period[200] Exhibits This section lists exhibits filed with Form 10-Q, including CEO/CFO certifications and Inline XBRL documents