99.01 - Q2'15

“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.”

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.”

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.

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.

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.

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.

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 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 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 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 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.

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.

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.



	June 30, 2015			December 31, 2014
Assets	(unaudited)			*
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 (Note 7)
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



	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
Services	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
Services	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⁽¹⁾:
Technology and development	13,268			12,189			29,412			23,509
Sales and marketing	12,382			14,817			33,774			29,844
General and administrative	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 expense and other income, net:
Interest expense, net	(60		)	(127		)	(121		)	(188		)
Other income, net	56			156			132			276
Total interest expense 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
Total share-based compensation expense	$	7,831		$	8,481		$	22,851		$	15,411



	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 businesses:
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 liquidations 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 businesses, 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 the 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, beginning of period	56,117			76,864
Cash and cash equivalents, end of period	$	35,087		$	30,783
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



	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 (benefit from) 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	)



	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, Non-GAAP	$	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 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 loss	$	968		$	(180	)	$	(5,202	)	$	(18,354	)


•	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;


•	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.


•	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.


•	Digital Revenue in the range of $137 million and $145 million;


•	Free cash flow in the range of $15 million and $20 million.