CHEGG, INC. You should read the following discussion of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes included in Part I, Item 1, "Financial Statements (unaudited)" of this Quarterly Report on Form 10-Q. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See the section titled "Note about Forward-Looking Statements" for additional information. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q.
Overview
Millions of people Learn withChegg . We strive to improve educational outcomes by putting the student first. We support students on their journey from high school to college and into their career with tools designed to help them learn their course materials, succeed in their classes, save money on required materials, and learn the most in-demand skills. Our services are available online, anytime and anywhere. Students subscribe to our subscription services, which we collectively refer to as Chegg Services. Our primary Chegg Services include Chegg Study,Chegg Writing, Chegg Math Solver, Chegg Study Pack, Mathway, and Thinkful. OurChegg Study subscription service provides "Expert Questions and Answers" and step-by-step "Textbook Solutions," helping students with their course work. When students need writing help, including plagiarism detection scans and creating citations for their papers, they can use our Chegg Writing subscription service. Our Chegg Math Solver subscription service helps students understand math by providing a step-by-step math solver and calculator, and we expect to incorporate Mathway into Chegg Math Solver. We also offer our Chegg Study Pack as a premium subscription bundle of our Chegg Study, Chegg Writing, andChegg Math Solver services. Our Thinkful skills-based learning platform offers professional courses focused on the most in-demand technology skills. Required Materials includes our print textbook and eTextbook offerings, which help students save money compared to the cost of buying new. We offer an extensive print textbook library primarily for rent and also for sale both on our own and through our print textbook partners. We partner with a variety of third parties to source print textbooks and eTextbooks directly or indirectly from publishers inthe United States , includingCengage Learning , Pearson, McGraw Hill,Sage Publications , and John Wiley & Sons, Inc. During the three and nine months endedSeptember 30, 2021 , we generated net revenues of$171.9 million and$568.8 million , respectively, and in the same periods had net income of$6.7 million and net loss of$25.8 million , respectively. During the three and nine months endedSeptember 30, 2020 , we generated net revenues of$154.0 million and$438.6 million , respectively, and in the same periods had net loss of$37.1 million and$32.3 million , respectively. Our long-term strategy is centered upon our ability to utilize Chegg Services to increase student engagement with our learning platform. We plan to continue to invest in the expansion of our Chegg Services to provide a more compelling and personalized solution and deepen engagement with students. In addition, we believe that the investments we have made to achieve our current scale will allow us to drive increased operating margins over time that, together with increased contributions of Chegg Services, will enable us to sustain profitability and remain cash-flow positive in the long-term. Our ability to achieve these long-term objectives is subject to numerous risks and uncertainties, including our ability to attract, retain, and increasingly engage the student population, reduced traffic to our services, intense competition in our markets, the ability to achieve sufficient contributions to revenue from Chegg Services, and other factors, such as the COVID-19 pandemic, which continues to evolve and affect our business and results of operations. The COVID-19 pandemic subjects our business to numerous risks and uncertainties, most of which are beyond our control and cannot be predicted, including when colleges will resume in-person classes or how well they will overcome the impacts of the COVID-19 pandemic on enrollment and other factors. These risks and uncertainties are described in greater detail in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . We have presented revenues for our two product lines, Chegg Services and Required Materials, based on how students view us and the utilization of our products by them. More detail on our two product lines is discussed in the next two sections titled "Chegg Services" and "Required Materials." 26 -------------------------------------------------------------------------------- Table of Contents Chegg Services Our Chegg Services product line for students primarily includes Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Mathway, and Thinkful. Students typically pay to access Chegg Services on a monthly basis. We also work with leading brands to provide students with discounts, promotions, and other products that, based on student feedback, delight them. In the aggregate, Chegg Services revenues were 85% of net revenues during both the three and nine months endedSeptember 30, 2021 , respectively and 77% and 79% of net revenues during the three and nine months endedSeptember 30, 2020 , respectively.
Required Materials
Our Required Materials product line includes revenues from print textbooks and eTextbooks. Revenues from print textbooks that we own are primarily recognized as the total transaction amount ratably over the rental term, generally a two- to five-month period. Revenues from print textbooks owned by a partner are recognized as a revenue share on the total transactional amount immediately when a print textbook ships to a student. Additionally, Required Materials includes revenues from eTextbooks, which are primarily recognized ratably over the contractual period, generally a two- to five-month period. In the aggregate, Required Materials revenues were 15% of net revenues during both the three and nine months endedSeptember 30, 2021 , respectively, and 23% and 21% of net revenues during the three and nine months endedSeptember 30, 2020 . Seasonality of Our Business Revenues from Chegg Services, print textbooks that we own, and eTextbooks are primarily recognized ratably over the term a student subscribes to ourChegg Services, rents a print textbook or has access to an eTextbook. This has generally resulted in our highest revenues and profitability in the fourth quarter as it reflects more days of the academic year. Our variable expenses related to cost of revenues and marketing activities remain highest in the first and third quarters such that our profitability may not provide meaningful insight on a sequential basis. As a result of these factors, the most concentrated periods for our revenues and expenses do not necessarily coincide, and comparisons of our historical quarterly results of operations on a sequential basis may not provide meaningful insight into our overall financial performance. 27 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table summarizes our historical condensed consolidated statements of operations (in thousands, except percentage of total net revenues): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net revenues$ 171,942 100 %$ 154,018 100 %$ 568,798 100 %$ 438,617 100 % Cost of revenues(1) 67,102 39 62,370 40 199,194 35 148,284 34 Gross profit 104,840 61 91,648 60 369,604 65 290,333 66 Operating expenses: Research and development(1) 43,269 25 44,041 29 130,995 23 123,956 28 Sales and marketing(1) 27,239 16 24,625 16 75,139 13 60,621 14 General and administrative(1) 33,971 20 40,784 26 111,560 20 98,221 22 Total operating expenses 104,479 61 109,450 71 317,694 56 282,798 64 Income (loss) from operations 361 - (17,802) (11) 51,910 9 7,535 2 Total interest expense, net and other income (expense), net 7,037 4 (18,272) (12) (71,881) (13) (36,924) (8) Income (loss) before provision for income taxes 7,398 4 (36,074) (23) (19,971) (4) (29,389) (6) Provision for income taxes 747 - 1,066 (1) 5,793 (1) 2,875 (1) Net income (loss)$ 6,651 4 %$ (37,140) (24) %$ (25,764) (5) %$ (32,264) (7) % (1) Includes share-based compensation expense as follows: Cost of revenues$ 393 $ 262 $ 1,174 $ 644 Research and development 8,917 8,433 25,976 23,044 Sales and marketing 3,051 2,431 9,625 7,053 General and administrative 12,151 10,403 39,382 28,668 Total share-based compensation expense$ 24,512 $ 21,529 $ 76,157 $ 59,409 28
-------------------------------------------------------------------------------- Table of Contents Three and Nine Months EndedSeptember 30, 2021 and 2020
Net Revenues
The following table sets forth our total net revenues for the periods shown for
our Chegg Services and Required Materials product lines (in thousands, except
percentages):
Three Months Ended Change
September 30,
2021 2020 $ %
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
Nine Months Ended Change
September 30,
2021 2020 $ %
Chegg Services $ 482,654 $ 345,258 $ 137,396 40 %
Required Materials 86,144 93,359 (7,215) (8)
Total net revenues $ 568,798 $ 438,617 $ 130,181 30
Chegg Services revenues increased $27.9 million , or 23%, and $137.4 million or
40%, during the three and nine months ended September 30, 2021 , respectively,
compared to the same periods in 2020, primarily due to our efforts to reduce
account sharing, increased global awareness and penetration and the introduction
of enhanced offerings, including our acquisition of Mathway, which closed in
June 2020 . Chegg Services revenues were 85% of net revenues during both the
three and nine months ended September 30, 2021 , respectively, and 77% and 79% of
net revenues during three and nine months ended September 30, 2020 ,
respectively. Required Materials revenues decreased $10.0 million , or 28%, and
$7.2 million , or 8% during the three and nine months ended September 30, 2021 ,
respectively, compared to the same periods in 2020 primarily due to lower unit
volumes. Required Materials revenues were 15% of net revenues during both the
three and nine months ended September 30, 2021 , respectively, and 23% and 21%
during the three and nine months ended September 30, 2020 , respectively.
As students returned to school, we started to see a slowdown in the education
market, which resulted in a decline in traffic to education technology services,
such as the ones we provide. As a result, we are experiencing a decline in the
growth rates of our services and revenues that we believe will continue into
fiscal year 2022.
Cost of Revenues
The following table sets forth our cost of revenues for the periods shown (in thousands, except percentages):
Three Months Ended
September 30, Change
2021 2020 $ %
Cost of revenues(1) $ 67,102 $ 62,370 $ 4,732 8 %
(1) Includes share-based compensation expense of: $ 393 $ 262 $ 131 50 %
Nine Months Ended
September 30, Change
2021 2020 $ %
Cost of revenues(1) $ 199,194 $ 148,284 $ 50,910 34 %
(1) Includes share-based compensation expense of:
$ 644 $ 530 82 % Cost of revenues increased$4.7 million , or 8%, during the three months endedSeptember 30, 2021 , compared to the same period in 2020. The increase was primarily attributable to higher other depreciation and amortization expense of$5.4 million , higher net loss on textbook library of$5.2 million primarily due to increased write-downs, higher web hosting fees of$2.4 million , transitional logistics charges of$2.3 million incurred in conjunction with the transition of our print textbooks to a new third party logistics provider, partially offset by lower order fulfillment fees of$8.8 million and lower cost 29 -------------------------------------------------------------------------------- Table of Contents of textbooks purchased by students of$1.5 million . Gross margins increased to 61% during the three months endedSeptember 30, 2021 , from 60% during the same period in 2020. Cost of revenues increased$50.9 million , or 34%, during the nine months endedSeptember 30, 2021 , compared to the same period in 2020. The increase was primarily attributable to higher other depreciation and amortization expense of$16.4 million , higher net loss on textbook library of$10.8 million primarily due to increased write-downs, transitional logistics charges of$6.5 million incurred in conjunction with the transition of our print textbooks to a new third party logistics provider, higher web hosting fees of$5.1 million , higher cost of textbooks purchased by students of$4.3 million , higher payment processing fees of$4.0 million , higher employee-related expenses, including share-based compensation expense, of$3.1 million , and higher customer support fees of$2.5 million , partially offset by lower order fulfillment fees of$1.8 million . Gross margins decreased to 65% during the nine months endedSeptember 30, 2021 , from 66% during the same period in 2020.
Operating Expenses The following table sets forth our total operating expenses for the periods shown (in thousands, except percentages):
Three Months Ended
September 30, Change
2021 2020 $ %
Research and development(1) $ 43,269 $ 44,041 $ (772) (2) %
Sales and marketing(1) 27,239 24,625 2,614 11
General and administrative(1) 33,971 40,784 (6,813) (17)
Total operating expenses $ 104,479 $ 109,450 $ (4,971) (5) %
(1) Includes share-based compensation expense of:
Research and development $ 8,917 $ 8,433 $ 484 6 %
Sales and marketing 3,051 2,431 620 26
General and administrative 12,151 10,403 1,748 17
Share-based compensation expense $ 24,119 $ 21,267 $ 2,852 13 %
Nine Months Ended
September 30, Change
2021 2020 $ %
Research and development(1) $ 130,995 $ 123,956 $ 7,039 6 %
Sales and marketing(1) 75,139 60,621 14,518 24
General and administrative(1) 111,560 98,221 13,339 14
Total operating expenses $ 317,694 $ 282,798 $ 34,896 12 %
(1) Includes share-based compensation expense of:
Research and development $ 25,976 $ 23,044 $ 2,932 13 %
Sales and marketing 9,625 7,053 2,572 36
General and administrative 39,382 28,668 10,714 37
Share-based compensation expense $ 74,983 $ 58,765 $ 16,218 28 %
Research and Development
Research and development expenses decreased $0.8 million , or 2%, during the
three months ended September 30, 2021 compared to the same period in 2020,
remaining relatively flat. Research and development expenses as a percentage of
net revenues were 25% during the three months ended September 30, 2021 compared
to 29% during the same period in 2020.
Research and development expenses increased $7.0 million , or 6%, during the nine
months ended September 30, 2021 compared to the same period in 2020, which was
primarily attributable to higher employee-related expenses, including
share-based compensation expense, of $8.1 million . Research and development
expenses as a percentage of net revenues were 23% during the nine months ended
September 30, 2021 compared to 28% during the same period in 2020.
30
--------------------------------------------------------------------------------
Table of Contents
Sales and Marketing
Sales and marketing expenses increased by $2.6 million , or 11%, during the three
months ended September 30, 2021 , compared to the same period in 2020. The
increase was primarily attributable to increased marketing spend, including
expansion in international markets, of $1.6 million and higher employee-related
expenses, including share-based compensation expense, of $0.7 million . Sales and
marketing expenses as a percentage of net revenues were flat at 16% during the
three months ended September 30, 2021 and 2020.
Sales and marketing expenses increased by $14.5 million , or 24%, during the nine
months ended September 30, 2021 , compared to the same period in 2020. The
increase was primarily attributable to increased marketing spend, including
expansion in international markets, of $7.5 million and higher employee-related
expenses, including share-based compensation expense, of $4.8 million . Sales and
marketing expenses as a percentage of net revenues were 13% during the nine
months ended September 30, 2021 compared to 14% during the same period in 2020.
General and Administrative
General and administrative expenses decreased$6.8 million , or 17%, during the three months endedSeptember 30, 2021 compared to the same period in 2020. The decrease was primarily due to a 2020 impairment charge on our investment in WayUp of$10.0 million partially offset by higher employee-related expenses, including share-based compensation expense, of$1.4 million . General and administrative expenses as a percentage of net revenues were 20% during the three months endedSeptember 30, 2021 compared to 26% during the same period in 2020. General and administrative expenses increased$13.3 million , or 14%, during the nine months endedSeptember 30, 2021 compared to the same period in 2020. The increase was primarily due to higher employee-related expenses, including share-based compensation expense, of$13.2 million and higher professional fees of$4.5 million , partially offset by a 2020 impairment charge on our investment in WayUp of$10.0 million . General and administrative expenses as a percentage of net revenues were 20% during the nine months endedSeptember 30, 2021 compared to 22% during the same period in 2020.
Interest Expense and Other Income (Expense), Net
The following table sets forth our interest expense and other income (expense), net, for the periods shown (in thousands, except percentages):
Three Months Ended
September 30, Change
2021 2020 $ %
Interest expense, net $ (1,633) $ (17,468) $ 15,835 n/m
Other income (expense), net 8,670 (804) 9,474 n/m
Total interest expense, net and other income (expense),
net $ 7,037 $ (18,272) $ 25,309 n/m
Nine Months Ended
September 30, Change
2021 2020 $ %
Interest expense, net $ (5,263) $ (44,320) $ 39,057 n/m
Other income (expense), net (66,618) 7,396 (74,014) n/m
Total interest expense, net and other income (expense), net
$ (71,881) $ (36,924) $ (34,957) n/m
_______________________________________
*n/m - not meaningful
Interest expense, net decreased$15.8 million and$39.1 million during the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in 2020, due to the reduction in non-cash interest expense related to the debt discount as a result of the adoption of ASU 2020-06 onJanuary 1, 2021 . Other income (expense), net increased$9.5 million during the three months endedSeptember 30, 2021 , compared to the same period in 2020, due to the$7.2 million gain on the sale of our strategic equity investment and absence of the$3.3 million loss on early extinguishment of debt related to the partial exchange of the 2023 notes. Other income (expense), net, decreased$74.0 million during the nine months endedSeptember 30, 2021 , compared to the same period in 2020, primarily as a result of the$78.2 million loss on early extinguishment of debt related to the 2025 notes,$7.1 million net loss on the change in fair value 31 -------------------------------------------------------------------------------- Table of Contents of derivative instruments, and$5.2 million of lower interest income earned on our investments partially offset by the$12.5 million gain on the sale of our strategic equity investments and absence of the$3.3 million loss on early extinguishment of debt related to the partial exchange of the 2023 notes. See Note 7, "Convertible Senior Notes," of our accompanying Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, "Financial Statements (unaudited)" of this Quarterly Report on Form 10-Q for additional information on changes to interest expense, net related to the adoption of ASU 2020-06 and other income (expense), net related to the losses on early extinguishment of debt and the change in fair value of derivative instruments.
Provision for Income Taxes
The following tables set forth our provision for income taxes for the periods shown (in thousands, except percentages):
Three Months Ended
September 30, Change
2021 2020 $ %
Provision for income taxes $ 747 $ 1,066 $ (319) (30) %
Nine Months Ended
September 30, Change
2021 2020 $ %
Provision for income taxes $ 5,793 $ 2,875 $ 2,918 101 %
Provision for income taxes decreased $0.3 million , or 30%, during the three
months ended September 30, 2021 compared to the same period in 2020 primarily as
a result of releasing a portion of our foreign uncertain tax position reserve.
Provision for income taxes increased $2.9 million , or 101%, during the nine
months ended September 30, 2021 , compared to the same period in 2020 primarily
due to an increase in foreign profits and the withholding taxes related to the
March 2021 sale of our strategic equity investment.
Liquidity and Capital Resources
As ofSeptember 30, 2021 , our principal sources of liquidity were cash, cash equivalents, and investments totaling$2.6 billion , which were held for working capital purposes. The substantial majority of our net revenues are from e-commerce transactions with students, which are settled immediately through payment processors, as opposed to our accounts payable, which are settled based on contractual payment terms with our suppliers. InNovember 2021 , our board of directors approved a$500.0 million increase to our existing securities repurchase program authorizing the repurchase of up to$1.0 billion of our common stock and/or convertible notes, through open market purchases, block trades, and/or privately negotiated transactions or pursuant to Rule 10b5-1 plans, in compliance with applicable securities laws and other legal requirements. The timing, volume, and nature of the repurchases will be determined by management based on the capital needs of the business, market conditions, applicable legal requirements, and other factors. ThroughSeptember 30, 2021 , we have repurchased$57.4 million and$100.0 million of aggregate principal amount of the 2023 notes and 2025 notes, respectively, in privately negotiated transactions for an aggregate consideration of$149.6 million and$184.9 million , respectively.$665.5 million remains under the repurchase program, which has no expiration date and will continue until otherwise suspended, terminated or modified at any time for any reason by our board of directors. InFebruary 2021 , we completed an equity offering in which we raised net proceeds of$1,091.5 million , after deducting underwriting discounts and commissions and offering expenses (2021 equity offering). InAugust 2020 and March/April 2019 , we closed offerings of our 2026 notes and 2025 notes, generating net proceeds of approximately$984.1 million and$780.2 million , respectively, in each case after deducting the initial purchasers' discount and estimated offering expenses payable by us. The 2026 notes and 2025 notes mature onSeptember 1, 2026 andMarch 15, 2025 , respectively, unless converted, redeemed or repurchased in accordance with their terms prior to such dates. As ofSeptember 30, 2021 , we have incurred cumulative losses of$361.5 million from our operations and we may incur additional losses in the future. Our operations have been financed primarily by our initial public offering of our common stock (IPO), our 2017 follow-on public offering, our convertible senior notes offerings, our 2021 equity offering, and cash generated from operations. 32
--------------------------------------------------------------------------------
Table of Contents
We believe that our existing sources of liquidity will be sufficient to fund our operations and debt service obligations for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, our investments in research and development activities, our acquisition of new products and services, and our sales and marketing activities. To the extent that existing cash and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all. If adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, operating cash flows and financial condition. Most of our cash, cash equivalents, and investments are held inthe United States . As ofSeptember 30, 2021 , our foreign subsidiaries held an insignificant amount of cash in foreign jurisdictions. We currently do not intend or foresee a need to repatriate some of these foreign funds; however, as a result of the Tax Cuts and Jobs Act, we anticipate theU.S. federal impact to be minimal if these foreign funds are repatriated. In addition, based on our current and future needs, we believe our current funding and capital resources for our international operations are adequate.
The following table sets forth our cash flows (in thousands):
© Edgar Online, source
