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CHEGG: Cashburn Accelerating And Using Stock Comp To Make Adjusted EBITDA

|Includes: Chegg, Inc. (CHGG)


Chegg games are getting worse.

More Stock Comp and More Cash Burn.

Business Model Will Struggle to Make Money.

In a world where no one reads anything but headlines, Chegg reports strong results.

Chegg Results Show Material Red Flags. Specifically, 

  • The EBITDA guide raise for the full year is really 1.3m. The rest is D&A and other
  • They missed Q1 EBITDA.
    • At the midpoint. EBITDA was expected to be 3.3m and with addbacks, Adj EBITDA was supposed to be 15m
    • EBITDA came in at 3.161m and with higher addbacks (stock comp mainly), Adj EBITDA was 16.7m.
    • They are missing numbers and playing more games
  • Not a new flag, but 9m of acq related comps this year and 43m of stock comp. This creates 52m of charges to get to 78m of EBITDA at midpoint
  • ARPU witnessed a sharp decline but that could be more seasonal

Below is a recap of Chegg Results. 

Q1 Results

Revs: 76.9m vs. guide of 73-75m and Street at 74.2m

Service revs: 56.3m vs guide of 54-55.5m and street at 55.2m

ADJ EBIDA of 16.7m vs guide of 14-16m and street of 15.7m

Q2 Guide

Revs: guide of 69-71m and Street at 68.1m

Service revs: guide of 58-60m street at 58m (some as high as 60m)

ADJ EBIDA guide of 17-18.5m and street of 17.2m

Revised 2018 Guide

Revs: guide of 300-305m and Street at 299m and prior guide of 295-300m

Service revs: guide of 243-246m street at 242m and prior guide of 240-243m

ADJ EBITDA: guide of 77-79m street at 75m and prior guide of 74-76m

Additional Q1 Notes

  • Service subs: growth of 44% vs. 47% last q. Unclear If Math24 is in this but if so, slowed materially
  • ARPU (Rev/ serv sub): declined 5% y/y and 18% sequentially, declined 7% y/y in prior q
  • Cash burn was actually $30m because they had to pay taxes on equity awards for mgmt.
  • 6.5m of cash from ops – 4.9m of capex = 1.6m of cash generated. Excl stock comp which is 11.6m here, they burned 10m. It’s important to consider stock comp since it’s nearly 13% of revenues
  • Capex should be higher going forward since timing of payments affected the q. They will spend 30-35m on capex which is 7-8m per q. Using that figure, there is no cashflow
  • 124m shares outstanding and a $300m convert takes this to 9.5x current year services revenues (trading the textbooks business for 1x revenues), 7x forward year assuming 30% growth

  • We believe Chegg is worth <$10 per share and fundamental misses will not be rewarded by Street much longer 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.