As detailed in our initial Chegg (NYSE:CHGG) report yesterday (here), we believe the Company's management team has concocted a stock promotion built on the disengenuous thesis of a business pivot. We believe our report idenified a plethora of financial shenanigans, manipulated business metrics that have been repeatedly altered to fit its narrative, and multiple financial inconsistencies/violations of SEC reporting requirements. Above all else, we believe Chegg has a structurally broken business model that destroys cash as evidenced by metrics that fail to reconcile with this new asset-lite, high margin story (we appreciate the material several individuals shared with us and are eagerly digging in as we consider our next report).
We understand why the sell-side has blindly supported Chegg: they burn cash and require serial acqusitions to obfuscate deteriorating organic performance... this makes for the perfect combination that results in future advisory and banking fees.
With that said, we believe most analysts will have at least skimmed the first 5 pages of our report prior to tomorrow's analyst day. There was plenty of ground covered, and while we do not expect the sell-side to ask overly challenging questions, we would hope independet research analysts would at least ask some questions that would not be characterized as "softballs." The sell-side will likely maintain its ebulient and bullish tone, but the following "mild-mannered" questions will at least create the perception of objectivity at Chegg's analyst day (on 11/16/16).
1. Why don't you provide a standard revenue reconciliation table for your "Adjusted Pro Forma Revenue" metric, which includes clean and consistent historical results for comparisons?
2. Reconciling Chegg Services with your prior Digital Revenue metric (normalizing for eTextbooks and Ingram Commissions inclusion in both) suggests Chegg Services growth is just 16%. Can you detail how your 60% figure is calculated?
3. Why does Mr. Rosensweig repeatedly state that Chegg generates a lot of cash when guidance for 2016 implies negative FCF? Excluding Ingram one-time catch up payments next year, what are the cash flow expectations for 2017?
4. How does Chegg account for its inventory transfers to Ingram? When CHGG buys a textbook on Ingram's behalf, how is the transaction captured in the financial statements?
5. What was the specific Imagine Easy revenue contribution in Q3'16?
6. Excluding Imagine Easy subscribers and the reclassification of eTextbook customers, what was the organic, apples-to-apples subscriber count for Chegg Services in Q3'16? How does this compare to Q3'15, again on a clean apples-to-apples basis?
7. You failed to disclose any details regarding the "strategic equity" investment in Q3'16 - What was this investment?
8. What is the gross margin for Chegg Tutors? Why do the publicly disclosed pricing metrics imply just a 33% gross margin?
9. Why does 2017 adjusted EBITDA guidance include $6 million of "acquisition-related compensation costs?" Are there additional acquisitions that have yet to occur included in your 2017 guidance?
10. What are 2016 executive compensation metrics?
Disclosure: I am/we are short CHGG.