4/24/2015
Consumer Goods
Chegg, Inc.
Ticker: CHGG
Recommendation: Outperform
Current Price: $7.97
Price Target: $9.78
Investment Thesis
Key Statistics
52 Week Price Range
An expanded partnership with Ingram Content Group will allow Chegg to
focus entirely on their high growth, high margin digital business.

Chegg is the market leader in the disruptive, higher education e-learning
industry that is experiencing rapid growth.

The recent acquisitions of Internships.com and InstaEDU will give Chegg
greater revenue diversity and allow them to penetrate new markets.
$8.21
50-Day Moving Average
Estimated Beta
0.89
Dividend Yield
0.00%
Market Capitalization

$4.82 - $8.85
673.47 mm
21.01%
3-Year Revenue CAGR
Trading Statistics
Diluted Shares Outstanding
84.50 mm
Average Volume (3-Month)
728,671
Institutional Ownership
27.90%
Insider Ownership
50.92%
$10.00
35.9x
$8.00
EV/EBITDA (LTM)
Margins and Ratios
Since-IPO Stock Chart
400,000,000
$12.00
350,000,000
300,000,000
250,000,000
200,000,000
$6.00
Gross Margin (LTM)
55.35%
$4.00
5.37%
$2.00
150,000,000
100,000,000
EBITDA Margin (LTM)
Net Margin (LTM)
-21.24%
Debt to Enterprise Value
Covering Analysts: Brian Van Pelt
50,000,000
$0.00
Nov-13
0
Jan-14
Mar-14
Volume
0.0x
1
May-14
Jul-14
Adjusted Close
Sep-14
Nov-14
50-Day Avg
Jan-15
Mar-15
200-Day Avg
University of Oregon Investment Group
4/24/2015
University of Oregon Investment Group
Business Overview
Figure 1: Revenue by Segment - 2014
Chegg, Inc. was created by three students at Iowa State University in 2001 and
later incorporated as a Delaware corporation in July 2005. In 2007, Chegg
launched their online print textbook rental service to serve as the foundation of
their growing business. Since 2010, Chegg has made a series of strategic
acquisitions to expand their digital offerings. The company splits revenues into
two reportable segments: print textbooks, and digital offerings.
29.91%
Print Textbooks
In their print textbook business, Chegg purchases textbooks then rents them out
to students at a substantial discount from the list price to increase volume and
help students save money. Orders are shipped from Chegg’s warehouse to
students in a distinctive orange Chegg box that usually arrives within three
business days. At the end of the term student are able to mail back the book in
the same box for free. Chegg is then able to realize the return on their
investment by renting out the same book over multiple terms. In 2014, Chegg
saved students over $500 million through their textbook rental business.
70.09%
Print Textbooks
Digital Offerings
Source: Chegg 10-K
Although the majority of their transactions are textbook rentals Chegg also
offers both new and used textbooks for sale through their website at a slight
markup from their acquisition cost. This allows Chegg effectively liquidate their
textbook library and generate a greater recovery on their textbooks compared to
bulk liquidations, while still providing students savings over the retail price of a
new book. Chegg sources both new and used books from publishers,
wholesalers, and students through Chegg buyback. Purchasing used books from
students allows Chegg to reduce the investments necessary to maintain their
textbook library while at the same time attracting students to their website.
Figure 2: How Chegg Makes Money
Purchasing textbooks and maintaining an adequate textbook library is a very
capital-intensive business. Chegg plans the purchase of their textbooks based on
numerous factors such as pricing, demand forecasts for the most popular titles,
estimated timing of edition changes, expected utilization and the planned
liquidation of their existing titles. In February 2015, Chegg announced an
expanded partnership with Ingram. Beginning May 1, 2015, Ingram will be
responsible for all new investments in the Chegg’s textbook library that is
required to support their rentals. Under this new arrangement Chegg will
continue market and use their brand to generate rentals while Ingram will be
responsible for funding all new textbook inventory and fulfillment logistics. As
a result, Chegg expect to cease making additional investments in their textbook
library in 2015, and to rent and liquidate their existing inventory in 2015 and
2016.
Source: Chegg Media Center
Figure 3: Print Textbook Revenue 20112019
Digital Offerings
Chegg’s digital offering segment is their fastest growing segment and the future
of their business. As a result of the Ingram partnership, Chegg expects to be
fully digital by 2017, allowing them to capture much higher margins and
produce significantly more free cash flows for investors. Chegg’s digital
offerings segment consists of a wide range of services and resources for students
to help them transition from high school to college to their careers, all while
enhancing their learning experience. Products and services for students include:
$250,000
$200,000
$150,000
$100,000
$50,000
$0
2011A
2013A
2015E
2017E
2019E
eTextbooks
Chegg offers eTextbooks and supplemental materials from approximately 120
publishers through their HTML5-web-based eTextbook reader. eTextbooks are
available as a rental-equivalent and for free for students who are awaiting the
Source: UOIG Spreads
UOIG 2
University of Oregon Investment Group
4/24/2015
arrival of their print textbook rental. Chegg’s eTexbook reader can be accessed
on any PC, tablet, or smartphone, and enables quick and easy navigation,
keyword search, the ability to highlight text and take notes, as well as the ability
to share notes and highlights and essentially create chapter-by-chapter study
guides.
Figure 4: Digital Offerings Revenue
2011-2019
$500,000
$450,000
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
2011A
2013A
2015E
2017E
2019E
Source: UOIG Spreads
Chegg Study
Chegg Study service helps students master challenging subjects on his or her
own. For high demand print textbooks, primarily in the more technical subjects
such as sciences, math, engineering, business and economics, Chegg offers stepby-step textbook solutions to the questions at the end of each chapter. For other
questions, Chegg offers a Q&A service where students can ask a question on
their website to be answered by their community of users or full-time subject
experts, or pull from an archived database of similar questions.
Tutoring
To complement Chegg Study student can access help online 24-7 from qualified
tutors in a wide range of subjects and pay as little a t $0.50 per minute. Students
have the option of subscribing to weekly or monthly packages, or using the
service as a pay-as-you-go basis.
Figure 5: The Student Hub
College Admissions and Scholarship Services
This part of Chegg.com aims to connect prospective high school seniors as well
as junior and community college students with their “best fit” possibilities based
on their interest passions and personalities. Students can also use the
“Scholarship Match” tool to find the best opportunities from a total database of
more than $1.0 billion is scholarship and merit awards. In 2014, Chegg received
11.7 million inquiries from students using their college admissions and
scholarship services.
Internships
In 2014, Chegg acquired internships.com to expand their digital offerings.
Chegg’s internships marketplace connects students to over 190,000 internships
with more than 65,000 employers across the U.S. Students can upload their
resumes, search and apply for internships directly through Chegg’s website.
Chegg currently offers this service for free.
Source: Google Images
Figure 6: Pro Forma Business Model
Digital Revenue
Ingram Comission
$160,000
$140,000
42% CAGR
$120,000
$100,000
Enrollment Marketing Services
Chegg works with approximately 750 colleges and universities to provide
admission and transfer support through their enrollment and marketing services.
Chegg helps colleges attract students and shape their incoming classes by
matching students’ general interest with college profiles. Colleges can pay for
these services on a subscription or per-student basis and by using Chegg’s
marketing services can typically realize recruiting costs of less than $100 per
student, rather than spending hundreds or thousands on traditional methods of
recruitment. In 2014, Chegg delivered more than 5.0 million paid inquiries for
interested college bound students.
$80,000
$60,000
$40,000
$20,000
$0
2011A
2012A
2013A
Source: Chegg Presentation
2014A
Brand Partnerships
Due to their substantial reach of the young student demographic, Chegg works
with brands to integrate their products and services into the Chegg platform.
Chegg’s brand advertising services include digital advertising, product samples,
white label integrations, discounts and other types of promotions. In 2014,
Chegg had advertising contracts with 68 consumer brands and thousands of
local merchants.
UOIG 3
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Industry
Overview
23.0
4%
22.5
3%
22.0
2%
21.5
1%
21.0
0%
20.5
-1%
20.0
-2%
19.5
The United States education industry is a trillion dollar a year industry that for
the first time in history, is under-pressure from all sides. Advances in technology
are changing the way people learn and have enabled students to take learning
into their own hands. As a result of the strong economic recovery and growing
employment prospects, the education market is projected to continue growing at
a 7% CAGR until 2017.
% Change
Number of College Students (mm)
Figure 7: Number of College Students
2010-2020
-3%
2010
2012
2014
2016
2018
2020
One of the segments that is likely to see the most change in the upcoming years
is the $14 billion college textbook industry. Textbook publishing has long been
viewed as an impenetrable, with the top industry players enjoying years of
unfettered pricing power. With the price of new printed textbooks rising by an
average of 6% per year over the past decade, and the shift to digital and open
access content, the average spending on course materials has declined in recent
years as debt-ridden students are become more cost conscious.
Source: IBISWorld
Even as print textbook revenue declines, eBooks have yet to really take off.
According to Student Monitor, eTextbooks made up only 8% of all textbooks
purchased. While this may seem like bad news for Chegg, eTextbooks are still
growing slowly and many publishers believe that learning platforms that provide
students with an interactive experience while learning the content from a
traditional textbook will drive sales in the near future.
58.5
1.0%
58.0
0.9%
57.5
0.8%
57.0
0.7%
56.5
0.6%
56.0
0.5%
55.5
0.4%
55.0
% Change
Number of K-12 Students (mm)
Figure 8: Number of K-12 Students 20102020
0.3%
54.5
54.0
0.2%
53.5
0.1%
53.0
0.0%
2010
2012
2014
2016
2018
Tutoring is a $9.3 billion dollar market in the U.S. alone that will rapidly move
online in the next few years. Over 2 million students a year take test prep, which
has yet to be transformed online. College recruiting is a $5 billion dollar market.
2020
Source: IBISWorld
Macro factors
The key external drivers of revenue in the education services industry are the
number of college and K-12 students and per capita disposable income.
Increased competition in the job market has resulted in more students pursuing a
college degree than ever before. As a result, the number of college student is
projected to increase over the next five years at an average rate of 1.1% per year
to 22.3 million (IBISWorld), which will increase the demand for many of the
services Chegg provides. Similarly, an increase in the number of kids in K-12
will boost demand for tutoring, test prep, and other college admissions services.
Figure 9: Per Capita Disposable Income
3.5%
$45,000
3.0%
$40,000
2.5%
$35,000
$30,000
2.0%
$25,000
1.5%
$20,000
$15,000
1.0%
$10,000
0.5%
$5,000
$0
0.0%
2012
2014
2016
2018
Source: IBISWorld
2020
% Change
Per Capita Disposable Income
$50,000
2010
Furthermore, Chegg has begun to transition away from their textbook business
to focus more on their high-growth digital offerings. One of the fastest growing
segments within the education industry is the e-learning market. The higher
education e-learning market is projected to continue to grow at a 38% CAGR
until 2017 while the K-12 eLearning market is projected to grow at a 50%
CAGR (GSV Advisors), indicating that the education market is only at the
beginning stages of its disruption.
Competition
Chegg does not have any competitors that compete with them across the entirety
of their business. However, they do face significant competition in each aspect
of their business and that competition is expect to increase. In the print textbook
business Chegg faces competition from college bookstores and online
marketplaces such as Amazon, eBay, and Half.com. Since many students are
highly price sensitive and will purchase from multiple providers, Chegg’s print
textbook business competes primarily on price. Chegg’s eTexbook business
competes on price, selection, and the functionality of their eTextbook readers.
UOIG 4
4/24/2015
University of Oregon Investment Group
Chegg’s primary competitors in this space are Apple (iTunes), CourseSmart,
BlackBoard, and Google.
Figure 10: Top Five Named Competitors
Competitor
Amazon, Inc.
Barnes & Noble, Inc.
Ticker
AMZN
BKS
Market Cap
181.1 B
1.47 B
eBay, Inc.
EBAY
71.27 B
Google, Inc.
GOOG
372.3 B
Apple, Inc.
AAPL
755.3 B
For their enrollment marketing services Chegg competes with traditional
methods of student recruitment such as radio, television, and internet
advertising, print mail marketing programs, and student data providers. Chegg
competes on the number of high-quality connections they can provide as well as
price. With respect to brands, Chegg competes with different offline and online
outlets that generate revenue from advertisers and marketers that target high
school and college students.
Strategic Positioning
Source: Factset
Technology and Platform Integration
Figure 11: Chegg Employee Ethnic
Diversity
33%
Sales and Marketing
Due to the high turnover of Chegg’s customer base, Chegg’s success is heavily
reliant on their ability to advertise and reach students. Chegg reaches students
through different direct marketing channels that are relevant to students. They
deploy search engine optimization techniques designed to increase their content
visibility in organic, unpaid result listings. These SEO efforts are complemented
by search engine marketing that uses keyword simulation and bid management
tools to optimize bidding, increase impressions and drive conversion.
56%
3%
3% 4%
Asian
Black
Hispanic
Other
Source: Chegg Media Center
Chegg’s technology is designed to create a connected learning platform that
provides students with a personalized learning experience. Personalization and
customization is accomplished as a result of the Student Graph and Chegg’s
search technology. The Student Graph is the accumulation of data on the
collective activity of students in Chegg’s network. Each time a student engages
with Chegg’s platform, they provide information that Chegg is able to collect,
organize and process to algorithmically create a personalized homepage. In
addition to student data, Chegg accesses data from public and private sources to
integrate into their platform.
White
Chegg uses display marketing to increase brand awareness by running display
ads on major online and mobile advertising networks. They utilize three types of
email marketing services designed to drive activation and retention, deepen
engagement, and increase sales. Through campus activation programs, Chegg
partners with brand to bring entertainment and other promotional events to
students. Chegg also acquires and engages student through content produced by
student bloggers around key student concerns and interests. But perhaps the
most advantageous sales and marketing tool that Chegg has is their textbook
business. Most students come to Chegg for their textbook rentals and then are
made aware of all of Chegg’s other services.
Figure 12: Blackboard, Inc. Logo
Strategic Partnerships
In the past year, Chegg has entered into three new strategic partnerships to
bolster their revenue growth and increase their reach. The most notable and
recent of these partnerships is with Ingram, which as previously stated will
allow Chegg to focus solely on their digital offerings. In the previous quarter
Chegg announced a major distribution deal with Blackboard, Inc., a leading
learning software management company. Later this year Blackboard will begin
offering Chegg Study, Chegg Tutoring, and Chegg’s career services through it’s
Blackboard learn page. Lastly, a new partnership with Fanatics, an online
retailer, will allow Chegg to sell officially licensed school-branded apparel on
their website.
Source: Google Images
UOIG 5
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University of Oregon Investment Group
Business Growth Strategies
Figure 13: 2014 Acquisitions
Company
Bookstep LLC.
Price
0.5
The Campus Special
14.0
InstaEDU, Inc.
31.1
Internships.com
10.0
Total
$
55.60
Source: Chegg 10-K
Organic Growth
As Chegg transitions toward becoming a digital centric business, management
plans to continue to invest in long-term organic growth initiatives, particularly
further investment in technology that improves their learning platform and the
student graph to provide a more compelling and personalized solution for
students. Chegg believes that expanded and deeper penetration of the student
demographic will drive further growth in their brand marketing and enrollment
services.
Chegg will continue to focus primarily on the United States and the rapidly
growing e-learning market. They have taken several steps, such as strategic
partnerships and new product offerings, to ensure that they will be able to
extract growth at a better rate than small rivals. At the beginning of 2014 Chegg
set forth three goals for the end of 2016: reach 50% of all U.S. college students,
reach 50% of all U.S. college-bound high school students, and generate more
than 50% of revenue from their digital business.
External Growth
Figure 14: Chegg Tutors App
In 2014, Chegg completed four acquisitions totaling $55.6 million, paid for in
cash, to expand their digital offerings and diversify their sources of revenue.
Internships.com
Research has shown that internships are step in the higher education process.
The acquisition of internships.com allows Chegg to increase their reach and
enter into the $5 billion College recruiting market. As the leading internship site
for students, Internships.com has more than 2 million registered students, 80%
of which are new to Chegg.
InstaEDU, Inc.
In June, Chegg acquired 100% of the outstanding shares and voting rights of
InstaEDU, Inc. for a total fair value of $31.1 million. Since the acquisition,
InstaEDU has been successfully integrated into the Chegg platform and
rebranded Chegg Tutors. New student sign-ups have increased by over 700%,
paying customers grew over 200%, and the number of new tutors has also grown
close to 200%.
Source: Google Images
Figure 15: Key Executive Compensation
Salary ($)
Dan Rosensweig
Total ($)
603,077
8,969,812
Management and Employee Relations
389,356
3,097,362
Dan Rosensweig – President and CEO
President and CEO
Andrew Brown
CFO
Chuck Geiger
CTO
Campus Special
Chegg acquired Campus Special to expand their offering to include coupon
specials on consumer goods and services. Campus Special is the nations leading
provider of free online ordering, mobile and printed coupon books, and other
discounts to college students.
381,000
Source: Chegg 10-K
3,369,171
Rosensweig has served as President and CEO of Chegg since going public in
2013. He earned a Bachelor of Arts in Political Science from Hobart College in
Geneva, New York. Dan brings years of high growth consumer business
experience having worked as President and CEO of Guitar Hero and Chief
Operating Officer at Yahoo. In addition, Rosensweig is a member of the
Executive in Residence program at Columbia University and is on the Board of
Directors of Adobe Systems, Inc. and Katalyst Media.
UOIG 6
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University of Oregon Investment Group
Anne Dwan – Chief Business Officer
Figure 16: 2014 Sales Guidance vs.
Actual
$90
$85
84.4
81.5
$80
$75
Andrew Brown – CFO
74.4
$70
Anne Dwan joined Chegg in 2011 with the Acquisition of Zinch and is
responsible for all of Chegg’s lines of revenue. She earned a Bachelors degree in
Marketing & International Management from Georgetown University and an
MBA from the Harvard Business School. Before joining Chegg, Dwan helped
cofound Military.com, which connects military service members and veterans to
benefits and career networking, and also worked in business development for
Paul Allen’s Interval Resource Corporation.
64.5
$65
$60
$55
Q1
Q2
Low
Q3
High
Q4
Actual
Source: Factset
Andrew Brown has over 25 years of experience within the financial sector and
has serverd as CFO of three public companies, the most recent being Palm, Inc.
He earned his Bachelor of Science in accounting from Eastern Illinois
University, where he also serves on the Business School advisory board. Andy
has the proven ability to help build organizations in high growth environments
and significant experience in the consumer technology space.
Management Guidance
Management provides quarterly and yearly guidance estimates for sales, gross
margin, and segment revenue. Since their IPO, management has been very
accurate with their guidance estimates, having never missed their low end
estimates. For 2015, management projects total sales in between $288 million
and $312 million.
Figure 17: 2015 Outlook
Revenue
Digital Revenue
Gross Margin
Q1, 2015
$76m to $80m
$29m to $31m
FISCAL 2015
$288m to $312m
$133m to $143m
25% to 26%
33% to 35%
Source: Chegg Earnings Call
Portfolio Strategy
Chegg is not currently held in any of the group’s portfolios. The Svigals’
portfolio is currently in line in consumer goods and heavily underweight small
cap. Given the blended investment strategy of Svigal’s portfolio and the dire
need for more small-caps, Chegg is an ideal fit for the portfolio.
Recent News
“Chegg to Announce First Quarter Financial Results”
Figure 18: Svigals’ Allocation vs.
Benchmark
50%
45.08%
45%
40%
35%
April 20, 2015
Chegg announced that it is scheduled to release earnings for the first quarter of
2015 on Wednesday, May 6th, 2015, after the market closes. Chegg will also
hold a conference call at 2:15 PT on the same day to discuss the first quarter
financial results.
Benchmark
29.88%
Portfolio
30%
25%
19.27% 19.56%
20%
15%
“Chegg and Ingram Content Group Sign Agreement”
April 6, 2015
Chegg announced that they have signed the agreement with Ingram that sets
forth the principal terms announced in February. Beginning May 1, 2015,
Ingram will be responsible for purchasing all new textbook inventories for the
Chegg catalog, while Chegg will continue to market its catalog, and manage the
front-end student relationships.
10%
5%
Catalysts
0%
Small-cap
Consumer Goods
Upside
Source: UOIG Spreads
UOIG 7
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University of Oregon Investment Group

Figure 19: Qualitative Comps
Multiple
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Price Target
Current Price
Overvalued
Implied Price
6.28
8.30
(22.54)
3.95
2.28
(82.25)
$6.28
7.97
(21.22%)
Weight
100.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Source: UOIG Spreads


The distribution deal with Blackboard Inc. will substantially increase
Chegg’s potential reach to students and make it easier for admissions
offices to see Chegg as a partner.
Large potential global market for online tutoring services.
Zero debt on the balance sheet and plenty of cash will provide
flexibility for pursuing new investments.
Downside



New legislative proposals about the collection and use of student data
could adversely affect Chegg’s business.
High turnover rate off Chegg’s customer base, primarily due to
graduation, requires continuous investment in marketing to the student
population.
Chegg’s core value of putting student first may conflict with the shortterm interests of their business
Qualitative Comparable Analysis
Figure 20: InterActiveCorp Logo
Source: Google Images
Due to Chegg’s high growth profile and unique product offerings, two sets of
comparable companies were used to derive a relative valuation. Qualitative
comparable companies were selected by focusing on companies with similar
product offerings, diversity of products, brand equity, and risk exposure.
However, since Chegg does not compete with any companies across the entirety
of its business, even finding good qualitative comparable companies was
difficult. Thus, the qualitative comparable analysis was only given a weighting
of 5%.
InterActiveCorp (IACI) – 30%
Figure 21: John Wiley & Sons Logo
“IAC/InterActiveCorp operates as a media and Internet company in the United
States and internationally. It operates through four segments: The Match Group,
Search & Applications, Media, and eCommerce.” – Yahoo! Finance
InterActiveCorp received the highest weighting because it had the most
comparable product offerings to Chegg. InterActiveCorp has a diverse portfolio
of digital offerings such as college test prep and admissions services, online
tutoring, and various websites such as Ask.com, Dictionary.com, and
Investopedia.
Source: Google Images
John Wiley & Sons, Inc. (JW-A) – 25%
“John Wiley & Sons, Inc. provides knowledge and knowledge-enabled services
in the areas of research, professional practice, and education worldwide. It
operates in three segments: Research, Professional Development, and
Education.” - Yahoo! Finance
Figure 22: GP Strategies Corp Logo
Source: Google Images
John Wiley & Sons was chosen as a comparable company because of the wide
range of educational products and services they provide. While they provide
similar products and services as Chegg, and serve similar end markets, John
Wiley & Sons received a slightly lower weighting than InterActiveCorp because
they are primarily a publishing company, and therefore do not have the same
focus on their digital offerings as Chegg does.
GP Strategies Corp. (GPX) – 25%
UOIG 8
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Figure 23: Amazon Inc. Logo
“GP Strategies Corporation provides customized training solutions focused on
performance improvement initiatives in the United States and internationally. Its
Learning Solutions segment delivers training, curriculum design and
development, e-learning, system hosting, and training business process
outsourcing and consulting services to electronics and semiconductors,
healthcare, software, financial, and other industries, as well as to government
agencies.” - Yahoo! Finance
Although they target a different demographic than Chegg, GP Strategies was
chosen as a comparable company because of their diverse portfolio of
educational services. In addition, GP Strategies also has a similar composition of
digital products and service as Chegg.
Source: Google Images
Amazon, Inc. (AMZN) – 25%
Figure 24: K-12, Inc. Logo
“Amazon.com, Inc. operates as an online retailer in North America and
internationally. It operates in two segments, North America and International.
The company serves consumers through retail Websites, such as amazon.com
and amazon.ca, which primarily include merchandise and content purchased for
resale from vendors and those offered by third-party sellers.” - Yahoo! Finance
Amazon was chosen as a comparable company because it is currently Chegg’s
biggest competitor. However, Amazon received the second lowest weighting
because textbook rentals and sales make up only a fraction of their total revenue.
K-12, Inc. (LRN) – 0%
Source: Google Images
Figure 25: Quantitative Comps
Multiple
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Price Target
Current Price
Undervalued
Implied Price
9.70
7.91
14.89
3.57
1.70
7.96
$9.70
7.97
21.70%
Weight
100.00%
0.00%
0.00%
0.00%
0.00%
0.00%
“K12 Inc., a technology-based education company, offers proprietary
curriculum, software systems, and educational services to facilitate
individualized learning for students primarily in kindergarten through 12th
grade. It manages virtual and blended public schools. The company also offers
curriculum and technology solutions; full-time virtual and blended programs,
semester courses, and supplemental solutions; teacher training, teaching, and
other support services to public schools, school districts, private schools, charter
schools, and early childhood learning centers.” - Yahoo! Finance
Although K-12, Inc. provides many of the same types of services to children in
primary and secondary education as Chegg does for college students, the
disparity between Chegg and K-12’s growth profile and trading multiples was
too substantial to assign them a weighting.
Quantitative Comparable Analysis
Source: UOIG Spreads
Figure 26: Lending Tree Corp Logo
Quantitative comparable companies were selected by screening for high growth
companies that were similar to Chegg in size, capital structure, and in the same
stage of the business life cycle. Comparable companies had to be located in the
United States, have a market capitalization between $450 million - $850 million,
2014 revenue growth between 15% - 30%, no long-term debt, and year over
year gross margin improvement. Additional parameter such as 2015 & 2016
revenue growth were also used but with more flexibility. Since all the
companies were based solely on the same quantitative metrics, an equal
weighting of 20% was assigned to each company.
Lending Tree, Inc. (TREE) – 20%
Source: Google Images
“LendingTree, Inc., through its subsidiaries, operates an online loan marketplace
for consumers seeking an array of loan types and other credit-based offerings in
UOIG 9
4/24/2015
University of Oregon Investment Group
the United States. The company operates in four segments: Lending, Auto,
Education, and Home Services.” - Yahoo! Finance
Figure 27: Form Factor Inc. Logo
FormFactor, Inc. (FORM) – 20%
“FormFactor, Inc. designs, develops, manufactures, sells, and supports
semiconductor probe card products and solutions worldwide. The company’s
probe cards are used to perform wafer test, which is the testing of the
semiconductor die or chips on the semiconductor wafer.” - Yahoo! Finance
Source: Google Images
Figure 28: Callidus Software, Inc. Logo
Callidus Software, Inc. (CALD) – 20%
“Callidus Software Inc. provides enterprise software and related services to
telecommunications, insurance, banking, and technology markets worldwide. It
offers Marketing Automation to generate sales leads by capturing intelligence
about buyers' behaviors and engaging them across multiple channels; Territory
and Quota to evaluate territory, quota distribution plans, and strategies for
meeting corporate sales goals; Enablement that provides sales content at each
step of the sales cycle; Litmos Learning Management System for training;
Litmos Content to create courses that can be published to desktop browsers and
mobile devices; and Sales Performance Manager to set targeted coaching plans
to the individual sales professional.” - Yahoo! Finance
LivePerson, Inc. (LPSN) – 20%
Source: Google Images
“LivePerson, Inc. provides online engagement solutions that facilitate real-time
assistance and expert advice in the United States, Canada, Latin America, South
America, Europe, the Middle East, Africa, and the Asia-Pacific. It operates in
two segments, Business and Consumer.” - Yahoo! Finance
Mobileron, Inc (MOBL) – 20%
“MobileIron, Inc. provides a purpose-built mobile IT platform that enables
enterprises to secure and manage mobile applications, content, and devices
while providing their employees with device choice, privacy, and a native user
Figure 29: LivePerson, Inc. Logo
experience. The company’s MobileIron platform offers mobile device
management capabilities that enable IT to securely manage mobile devices
across mobile operating systems and provide secure corporate email, automatic
device configuration, and certificate-based security; and mobile application
management functionality, which helps IT manage the entire apps lifecycle,
from making apps available in the enterprise app storefront, securing
applications on the device, enforcing user authentication, isolating them from
personal apps, and retiring them as necessary.” - Yahoo! Finance
Source: Google Images
Discounted Cash Flow Analysis
Revenue Model
Figure 30: Mobilron, Inc. Logo
Revenue was broken down into Chegg’s two main business segments and then
projected forward based off management guidance. The transition of Chegg into
a fully digital company is not expected to begin until the second quarter so its
effects were not reflected in their first quarter guidance. During the transition
period management anticipates total revenue to remain relatively flat in 2015,
decline in 2016, and then reaccelerate in 2017. Print revenue during that period
is expected to decline moderately in 2015, rapidly in 2016, and be zero in 2017.
Thus, print revenue for 2015 and 2016 was projected by solving for a negative
growth rate that linearly decreases revenue to arrive at fiscal year totals that
match management’s expectations of total revenue and print textbooks as a
percentage of revenue.
Source: Google Images
UOIG 10
4/24/2015
University of Oregon Investment Group
Digital revenue for 2015 and 2016 was also projected by solving for yearly
growth rates that bring segment revenue, total revenue, and digital offerings as a
percentage of revenue in line with management’s expectations. In 2017, digital
revenue (now total revenue) is projected to grow 40% as Chegg benefits from
the Ingram commission, before dropping to 28% growth in 2018 and 25% in the
terminal year.
Figure 31: Projected Transition Period
Revenue 2014-2017
$350,000
$300,000
Cost of Revenues
$250,000
Cost of revenues was also projected using management guidance. However, in
their guidance management does not use normalized COGS, so non normalized
COGS was projected out using guidance and then D&A was subtracted from
those numbers. For 2015, management expects gross margin to be between 33%
and 35%. This is expected to increase significantly in 2016 because the gross
margin from the Ingram commission is expected to be in the 50%-60% range
compared to the low-to-mid teens currently experience with print revenue. Thus,
gross margin is projected to increase to 60% by 2017, and be 63% going into
perpetuity.
$200,000
Print
Total
$150,000
Digital
$100,000
$50,000
$0
2014
2015
2016
2017
Operating Expenses
Source: UOIG Spreads
General and Administrative Expense
G&A expense increased significantly in 2013 and 2014 due to higher costs
related to Chegg’s IPO and acquisitions. During the transition period G&A is
projected to remain constant as a percentage of revenue while Chegg is in
transition and then recede back near pre IPO levels going into perpetuity.
Figure 32: Total Revenue and Gross
Margin 2011-2019
500,000
70%
450,000
Digital Revenue
400,000
Print Revenue
350,000
Gross Margin
60%
50%
300,000
40%
250,000
30%
200,000
150,000
20%
100,000
10%
50,000
-
0%
2011A
2013A
2015E
2017E
2019E
Figure 33: Operating Expenses 20112019
Depreciation and Amortization
Beta
General and Administrative
Sales and Marketing
Technology and Development
$200,000
Technology and Development
Technology and development expenses have decreased as a percentage of
revenue over the past four years as Chegg has been able to better leverage their
size and scale. This trend is projected to continue going forward but at a slower
rate.
Depreciation and amortization was broken out into three sub categories and
projected forward as a percentage of net PP&E. Chegg will stop making
investments in their textbook library beginning May 1 st, 2015. Over the next two
years they will begin to liquidate their textbook library. Management has said
that the value of their textbook inventory will be reduced by approximately 50%
by the end of 2015 and is expected to be less than $10 million by the end of
2016. Therefore, textbook depreciation expenses are meant to reflect these
changes.
Source: UOIG Spreads
$250,000
Sales and Marketing
Brand and reach are critical to success in the e-learning market. Therefore, as
Chegg continues to expand their digital offerings, sales and marketing expense
is projected to increase linearly as a percentage of revenue
Chegg’s beta was calculated by regressing the 1-year daily, and Since-IPO daily
excess returns against the S&P 500. However, given the high standard errors of
these betas, they were each only given a weighting of 5% and Hamada betas
were calculated using both sets of comps.
$150,000
$100,000
Tax Rate
$50,000
Chegg currently has a net operating loss carryforwards of $36.85 million. This is
expected to reduce Chegg’s provision for income taxes in 2016 and 2017 when
$0
2011A
2013A
2015E
2017E
2019E
Source: UOIG Spreads
UOIG 11
4/24/2015
University of Oregon Investment Group
EBIT becomes positive at which time they will be taxed at an effective tax rate
of 35%.
Figure 34: Beta Calculation
1-Year Daily
Since IPO Daily
Since IPO Weekly
Hamada - Quantitative Comps
Hamada - Qualitative Comps
Chegg, Inc. Beta
Beta
0.89
0.82
1.05
1.04
0.80
0.89
SE
0.30
0.26
0.55
NA
NA
Weighting
5.00%
5.00%
0.00%
35.00%
55.00%
Source: UOIG Spreads
Recommendation
At a current price of $7.97, both the discounted cash flows analysis and
quantitative comparable analysis indicate that Chegg is undervalued. Chegg is
the market leader in a rapidly growing industry that will be able to capture
significantly higher margins as a result of their expanded Ingram partnership.
Thus, I recommend a buy for the Svigals’ portfolio.
Final Price Target
Valuation Method
Discounted Cash Flows
Implied Price
Weighting
10.20
50%
Quantitative Comps
9.70
45%
Qualitative Comps
6.28
5%
Final Implied Price
$9.78
Current Price
7.97
Undervalued
22.72%
UOIG 12
Date of Presentation
4/24/2015
University of Oregon Investment Group
Appendix 1 – Quantitative Relative Valuation
Comparables Analysis
($ in thousands)
Stock Characteristics
Current Price
Beta
Max
$389.51
1.25
Min
$7.97
0.75
Median
Weight Avg.
$58.26
$122.68
1.03
0.98
CHGG
AMZN
Chegg, Inc.
Amazon
JW.A
John Wiley &
Sons, Inc.
IACI
InterActiveCorp
GPX
GP Strategies
Corp.
LRN
K12, Inc.
$7.97
0.89
20.00%
$389.51
1.25
25.00%
$58.26
0.75
30.00%
$71.43
1.03
25.00%
$35.13
0.95
0.00%
$16.33
1.21
Size
Short-Term Debt
Long-Term Debt
Cash and Cash Equivalent
Non-Controlling Interest
Preferred Stock
Diluted Basic Shares
Market Capitalization
Enterprise Value
100,000
8,265,000
17,416,000
19,801
464,384
180,882,188
171,731,188
14,541
17,218
603,987
555,203
18,255
588,111
260,215
50,428
3,479,726
3,907,622
33,533
2,130,139
3,849,011
357
134,391
38,918,102
37,233,120
89,463
95,271
676,810
587,347
8,265,000
17,416,000
464,384
180,882,188
171,731,188
100,000
588,111
260,215
50,428
3,479,726
3,907,622
1,080,000
990,405
1,189
82,010
5,735,788
5,826,572
34,132
24,444
14,541
17,218
603,987
648,022
18,255
14,109
124,234
19,801
38,412
627,272
555,203
Growth Expectations
% Revenue Growth 2015E
% Revenue Growth 2016E
% EBITDA Growth 2015E
% EBITDA Growth 2016E
% EPS Growth 2015E
% EPS Growth 2016E
15.20%
17.30%
43.40%
43.10%
36.00%
621.80%
-1.88%
-7.68%
-37.92%
-17.63%
-188.10%
-139.09%
4.32%
4.96%
9.06%
16.93%
10.49%
18.30%
6.04%
8.07%
11.58%
22.43%
-28.69%
141.23%
-1.88%
-7.68%
-37.92%
26.14%
-43.00%
-139.09%
15.20%
17.30%
43.40%
43.10%
-188.10%
621.80%
0.38%
4.96%
13.13%
16.93%
3.59%
18.30%
6.08%
4.73%
-8.83%
23.58%
18.04%
32.56%
4.32%
7.81%
9.06%
10.03%
10.49%
10.13%
2.53%
-6.96%
-0.18%
-17.63%
36.00%
-35.82%
71.96%
14.87%
20.42%
10.40%
18.35%
(12.59%)
6.89%
(12.34%)
37.82%
9.09%
11.56%
5.42%
50.30%
9.25%
13.56%
5.73%
55.35%
-12.59%
6.90%
-12.34%
31.15%
0.71%
6.89%
0.18%
71.55%
14.87%
20.42%
10.40%
71.96%
10.40%
14.40%
5.79%
18.35%
9.09%
11.04%
5.42%
37.82%
3.81%
11.56%
2.65%
$210,000.00
0.19
2.27
191.05
$317.00
191.05
$14,880.00
0.09
1.17
191.05
$62,820.50
0.13
1.62
191.05
$317.00
65.09
$210,000.00
0.05
1.17
33.63
$14,880.00
0.18
1.82
25.47
$56,310.00
0.19
2.27
8.44
$830.00
0.09
1.01
69.64
$570.00
0.06
0.30
191.05
$102,485,000
$31,927,000
$725,000
$7,063,000
$193,000
$5,673,000
$299,115
$96,100
($37,651)
$20,635
($36,913)
$4,000
$1,856,000
$1,328,000
$276,000
$379,000
$187,000
$64,000
$22,081,600
$7,453,625
$328,800
$1,664,300
$150,050
$1,173,050
$299,115
$165,554
($37,651)
$20,635
($36,913)
$16,992
$102,485,000
$31,927,000
$725,000
$7,063,000
$187,000
$5,673,000
$1,856,000
$1,328,000
$276,000
$379,000
$193,000
$73,000
$3,299,000
$2,374,000
$343,000
$475,000
$191,000
$64,000
$523,600
$96,100
$47,600
$57,800
$28,400
$4,000
$942,000
$356,300
$35,900
$108,900
$25,000
$23,400
2.11x
6.74
236.87
28.46
161.23
967.28
0.59x
1.56
(15.60)
5.10
6.49
(18.34)
1.68x
2.94
15.47
11.21
12.77
25.09
1.70x
4.23
59.41
13.92
35.17
212.29
1.96x
3.55
(15.60)
28.46
161.23
(18.34)
1.68x
5.38
236.87
24.31
123.55
967.28
2.11x
2.94
14.16
10.31
12.77
18.03
1.77x
2.45
16.99
12.27
14.18
30.03
1.24x
6.74
13.61
11.21
12.05
21.27
0.59x
1.56
15.47
5.10
6.49
25.09
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
Credit Metrics
Interest Expense
Debt/EV
Leverage Ratio
Interest Coverage Ratio
Operating Results
Revenue
Gross Profit
EBIT
EBITDA
Net Income
Capital Expenditures
Multiples
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Multiple
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Price Target
Current Price
Overvalued
Implied Price
6.28
8.30
(22.54)
3.95
2.28
(82.25)
$6.28
7.97
(21.22%)
Weight
100.00%
0.00%
0.00%
0.00%
0.00%
0.00%
UOIG 13
Date of Presentation
4/24/2015
University of Oregon Investment Group
Appendix 2 – Qualitative Relative Valuation
Comparables Analysis
CHGG
($ in thousands)
Stock Characteristics
Current Price
Beta
TREE
Chegg, Inc.
Max
$59.99
1.52
Min
$7.97
0.80
Median
Weight Avg.
$9.79
$20.39
1.12
1.17
FORM
LendingTree, Inc FormFactor, Inc.
$7.97
0.89
20.00%
$59.99
0.80
20.00%
CALD
Callidus
Software, Inc.
$9.30
1.33
20.00%
$13.44
1.52
LPSN
MOBL
LivePerson, Inc.
Mobileron, Inc.
20.00%
20.00%
$9.79
1.08
$9.45
1.12
Size
Short-Term Debt
Long-Term Debt
Cash and Cash Equivalent
Non-Controlling Interest
Preferred Stock
Diluted Basic Shares
Market Capitalization
Enterprise Value
163,837
26,267
95,271
736,736
639,610
36,966
12,430
535,514
371,677
104,928
56,930
665,499
628,533
94,652
5,253
50,831
645,319
555,921
89,463
95,271
676,810
587,347
104,928
12,430
736,736
631,808
163,837
57,582
535,514
371,677
36,966
49,806
665,499
628,533
49,372
56,930
557,348
507,976
118,156
26,267
77,407
731,499
639,610
Growth Expectations
% Revenue Growth 2015E
% Revenue Growth 2016E
% EBITDA Growth 2015E
% EBITDA Growth 2016E
% EPS Growth 2015E
% EPS Growth 2016E
28.72%
29.24%
53.52%
44.04%
78.57%
65.29%
-1.88%
-7.68%
-37.92%
13.98%
-43.00%
-139.09%
20.42%
15.78%
26.69%
31.80%
45.00%
31.80%
20.72%
17.74%
26.59%
28.35%
43.22%
37.38%
-1.88%
-7.68%
-37.92%
26.14%
-43.00%
-139.09%
17.62%
15.03%
29.82%
31.80%
-23.89%
65.29%
10.09%
9.10%
18.72%
13.98%
78.13%
29.82%
20.42%
19.57%
53.52%
44.04%
78.57%
60.00%
26.77%
15.78%
26.69%
18.93%
45.00%
-
28.72%
29.24%
4.20%
33.00%
38.30%
31.80%
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
95.33%
10.15%
18.88%
7.47%
34.88%
(39.75%)
(25.43%)
(40.87%)
76.25%
(1.73%)
13.25%
(1.80%)
70.43%
(5.41%)
6.37%
(7.38%)
55.35%
-12.59%
6.90%
-12.34%
95.33%
7.77%
14.63%
7.47%
34.88%
10.15%
18.88%
3.01%
63.95%
-3.47%
13.25%
-4.68%
76.25%
-1.73%
10.52%
-1.80%
81.74%
-39.75%
-25.43%
-40.87%
$510
65.09
65.09
65.09
$102
65.09
$317
65.09
-
-
-
-
$299,115
$202,900
$30,000
$55,800
$14,700
$16,992
$164,500
$103,100
($67,700)
($43,300)
($69,600)
-
$196,900
$139,200
($4,600)
$28,000
($4,800)
$5,000
$218,680
$147,620
($6,540)
$18,220
($11,700)
$5,580
$299,115
$165,554
($37,651)
$20,635
($36,913)
$16,992
$196,900
$187,700
$15,300
$28,800
$14,700
-
$295,600
$103,100
$30,000
$55,800
$8,900
-
$164,500
$105,200
($5,700)
$21,800
($7,700)
$7,900
$266,100
$202,900
($4,600)
$28,000
($4,800)
$15,000
$170,300
$139,200
($67,700)
($43,300)
($69,600)
$5,000
3.82x
5.97
41.29
28.83
161.23
60.17
1.26x
2.50
(110.43)
(14.77)
(13.24)
(116.11)
3.21x
3.61
(9.45)
18.14
21.94
(10.51)
2.79x
4.01
(35.29)
12.16
19.93
(20.55)
1.96x
3.55
(15.60)
28.46
161.23
(18.34)
3.21x
3.37
41.29
21.94
21.94
50.12
1.26x
3.61
12.39
6.66
6.66
60.17
3.82x
5.97
(110.27)
28.83
45.22
(86.43)
1.91x
2.50
(110.43)
18.14
39.08
(116.11)
3.76x
4.59
(9.45)
(14.77)
(13.24)
(10.51)
Credit Metrics
Interest Expense
Debt/EV
Leverage Ratio
Interest Coverage Ratio
Operating Results
Revenue
Gross Profit
EBIT
EBITDA
Net Income
Capital Expenditures
Multiples
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Multiple
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Price Target
Current Price
Undervalued
Implied Price
9.70
7.91
14.89
3.57
1.70
7.96
$9.70
7.97
21.70%
$510
42.75
Weight
100.00%
0.00%
0.00%
0.00%
0.00%
0.00%
UOIG 14
Date of Presentation
4/24/2015
University of Oregon Investment Group
Appendix 3 – Discounted Cash Flows Valuation
Discounted Cash Flow Analysis
($ in thousands)
2011A
2012A
2013A
2014A
Q1
Q2
Q3
Q4
03/31/2015E
06/30/2015E
09/30/2015E
12/31/2015E
2015E
2016E
2017E
2018E
2019E
Total Revenue
$172,022
$213,334
$255,575
$304,834
$80,963
$59,507
$77,445
$81,200
$299,115
$276,139
$286,888
$367,217
$459,021
% YoY Growth
-
24.02%
19.80%
19.27%
8.83%
(7.73%)
(5.04%)
(3.78%)
(1.88%)
(7.68%)
3.89%
28.00%
25.00%
63,564
75,906
97,678
129,492
43,465
24,008
33,571
32,516
133,561
85,699
95,955
121,914
151,666
36.95%
35.58%
38.22%
42.48%
53.69%
40.35%
43.35%
40.04%
44.65%
31.03%
33.45%
33.20%
33.04%
Gross Profit
$108,458
$137,428
$157,897
$175,342
$37,497
$35,499
$43,874
$48,684
$165,554
$190,440
$190,933
$245,304
$307,355
Gross Margin
63.05%
64.42%
61.78%
57.52%
46.31%
59.65%
56.65%
59.96%
55.35%
68.97%
66.55%
66.80%
66.96%
20,328
25,117
40,486
41,837
10,759
7,908
10,292
10,791
39,750
36,696
37,200
46,431
56,559
11.82%
11.77%
15.84%
13.72%
13.29%
13.29%
13.29%
13.29%
13.29%
13.29%
12.97%
12.64%
12.32%
Cost of Revenues
% Revenue
General and Administrative
% Revenue
Sales and Marketing
% Revenue
Depreciation and Amortization
% PP&E
Technology and Development
% Revenue
Loss (gain) on Liquidation of Textbooks
28,400
51,082
50,302
72,315
18,116
11,530
17,329
15,733
62,709
58,955
62,354
81,227
103,301
16.51%
23.94%
19.68%
23.72%
22.38%
19.38%
22.38%
19.38%
20.96%
21.35%
21.73%
22.12%
22.50%
63,448
69,763
77,382
81,493
16,852
16,297
13,644
11,492
58,285
38,563
18,800
12,575
16,445
-
-
72.08%
65.68%
17.00%
17.02%
16.97%
16.90%
58.80%
66.68%
79.16%
54.15%
54.15%
29,591
39,315
41,944
49,386
13,206
9,707
12,633
13,245
48,790
44,589
45,927
58,345
72,445
17.20%
18.43%
16.41%
16.20%
16.31%
16.31%
16.31%
16.31%
16.31%
16.15%
16.01%
15.89%
15.78%
2,785
(2,594)
(1,186)
(4,555)
(1,713)
(1,259)
(1,639)
(1,718)
(6,330)
(2,028)
-
-
1.62%
(1.22%)
(.46%)
(1.49%)
(2.12%)
(2.12%)
(2.12%)
(2.12%)
(2.12%)
(.73%)
-
-
Earnings Before Interest & Taxes
($36,094)
($45,255)
($51,031)
($65,134)
($19,723)
($8,684)
($8,384)
($860)
($37,651)
$13,664
$26,652
$46,724
$58,605
% Revenue
(20.98%)
(21.21%)
(19.97%)
(21.37%)
(24.36%)
(14.59%)
(10.83%)
(1.06%)
(12.59%)
4.95%
9.29%
12.72%
12.77%
3,558
4,393
3,818
317
84
62
81
84
311
287
298
382
477
2.07%
2.06%
1.49%
.10%
.10%
.10%
.10%
.10%
.10%
.10%
.10%
.10%
.10%
% Revenue
Interest Expense, Net
% Revenue
Other Expense (Income)
% Revenue
Earnings Before Taxes
% Revenue
-
(1,855)
(634)
359
(879)
(308)
(227)
(295)
(309)
(1,139)
(1,052)
(1,093)
(1,399)
(1,748)
(1.08%)
(.30%)
.14%
(.29%)
(.38%)
(.38%)
(.38%)
(.38%)
(.38%)
(.38%)
(.38%)
(.38%)
(.38%)
(37,797)
(49,014)
(55,208)
(64,572)
(19,499)
(8,519)
(8,170)
(635)
(36,823)
14,428
27,446
47,741
59,876
(21.97%)
(22.98%)
(21.60%)
(21.18%)
(24.08%)
(14.32%)
(10.55%)
(.78%)
(12.31%)
5.22%
9.57%
13.00%
13.04%
Less Taxes (Benefits)
(200)
29
642
186
48
21
20
2
90
-
1,760
16,709
20,957
Tax Rate
.53%
(.06%)
(1.16%)
(.29%)
(.25%)
(.25%)
(.25%)
(.25%)
(.25%)
0.00%
6.41%
35.00%
35.00%
Net Income
($37,597)
($49,043)
($55,850)
($64,758)
($19,547)
($8,540)
($8,190)
($636)
($36,913)
$14,428
$25,687
$31,032
$38,919
Net Margin
(21.86%)
(22.99%)
(21.85%)
(21.24%)
(24.14%)
(14.35%)
(10.57%)
(.78%)
(12.34%)
5.22%
8.95%
8.45%
8.48%
Add Back: Depreciation and Amortization
63,448
69,763
77,382
81,493
16,852
16,297
13,644
11,492
58,285
38,563
18,800
12,575
16,445
Add Back: Interest Expense*(1-Tax Rate)
3,539
4,396
3,862
318
84
62
81
85
312
287
279
248
310
Operating Cash Flow
$29,390
$25,116
$25,394
$17,053
($2,611)
$7,819
$5,535
$10,941
$21,684
$53,279
$44,766
$43,855
$55,674
% Revenue
17.09%
11.77%
9.94%
5.59%
(3.22%)
13.14%
7.15%
13.47%
7.25%
19.29%
15.60%
11.94%
12.13%
Current Assets
-
10,142
10,374
21,351
22,190
17,963
26,382
30,714
30,714
29,795
15,759
20,371
25,642
% Revenue
-
4.75%
4.06%
7.00%
27.41%
30.19%
34.07%
37.82%
10.27%
10.79%
5.49%
5.55%
5.59%
Current Liabilities
-
70,462
48,152
66,719
61,246
48,375
53,654
52,597
52,597
44,206
40,070
45,559
49,949
% Revenue
-
33.03%
18.84%
21.89%
75.65%
81.29%
69.28%
64.77%
17.58%
16.01%
13.97%
12.41%
10.88%
Net Working Capital
-
($60,320)
($37,778)
($45,368)
($39,056)
($30,411)
($27,272)
($21,883)
($21,883)
($14,411)
($24,311)
($25,188)
($24,307)
% Revenue
-
(28.27%)
(14.78%)
(14.88%)
(48.24%)
(51.11%)
(35.21%)
(26.95%)
(7.32%)
(5.22%)
(8.47%)
(6.86%)
(5.30%)
Change in Working Capital
-
($60,320.00)
$22,542.00
($7,590.00)
$6,312.46
$8,644.18
$3,138.98
$5,389.30
$23,484.93
$7,472.25
($9,900.49)
($876.64)
$880.56
76,801
119,666
129,616
117,897
13,456
964
1,255
1,316
16,992
4,475
4,649
5,951
7,439
44.65%
56.09%
50.72%
38.68%
16.62%
1.62%
1.62%
1.62%
5.68%
1.62%
1.62%
1.62%
1.62%
11,935
Capital Expenditures
% Revenue
Acquisitions
14,007
-
-
55,537
-
-
-
-
-
-
13,627
13,771
% Revenue
8.14%
-
-
18.22%
-
-
-
-
-
-
4.75%
3.75%
2.60%
$41,332
$36,390
$25,010
$35,421
35,979
29,555
18,952
25,042
Unlevered Free Cash Flow
Discounted Free Cash Flow
($61,418)
($34,230)
($126,764)
($148,791)
($22,379)
($1,789)
$1,141
$4,236
(21,995)
(1,728)
1,083
3,952
($18,792)
UOIG 15
Date of Presentation
4/24/2015
University of Oregon Investment Group
Appendix 4 – Revenue Model
Revenue Model
($ in thousands)
Print Textbooks
% Growth
% of Total Revenue
Digital Offerings
% Growth
% of Total Revenue
Total Revenue
% Growth
2011A
160,396
93.24%
11,626
6.76%
$172,022
-
2012A
185,169
15.44%
86.80%
28,165
142.26%
13.20%
$213,334
24.02%
2013A
203,077
9.67%
79.46%
52,498
86.39%
20.54%
$255,575
19.80%
2014A
213,657
5.21%
70.09%
91,177
73.68%
29.91%
$304,834
19.27%
Q1
03/31/2015E
50,963
(10.00%)
62.95%
30,000
68.84%
37.05%
$80,963
8.83%
Q2
06/30/2015E
31,155
(31.97%)
52.35%
28,352
51.65%
47.65%
$59,507
(7.73%)
Q3
Q4
09/30/2015E
12/31/2015E
37,618
38,056
(31.97%)
(31.97%)
48.57%
46.87%
39,828
43,144
51.65%
51.65%
51.43%
53.13%
$77,445
$81,200
(5.04%)
(3.78%)
2015E
157,791
(26.15%)
52.75%
141,324
55.00%
47.25%
$299,115
(1.88%)
2016E
71,219
(54.86%)
25.79%
204,920
45.00%
74.21%
$276,139
(7.68%)
2017E
2016E
2017E
286,888
40.00%
100.00%
$286,888
3.89%
2018E
367,217
28.00%
100.00%
$367,217
28.00%
2019E
459,021
25.00%
100.00%
$459,021
25.00%
Appendix 5 – Cost of Revenues
COGS
($ in thousands)
Total Revenue
Q1
2011A
$172,022
% YoY Growth
2012A
2013A
2014A
Q2
Q3
Q4
03/31/2015E 06/30/2015E 09/30/2015E 12/31/2015E
2015E
$213,334
$255,575
$304,834
$80,963
$59,507
$77,445
$81,200
$299,115
$276,139
2018E
2019E
$286,888
$367,217
$459,021
25.00%
24.02%
19.80%
19.27%
8.83%
(7.73%)
(5.04%)
(3.78%)
(1.88%)
(7.68%)
3.89%
28.00%
Cost of Revenues
127,012
145,669
175,060
210,985
60,317
40,306
47,215
44,009
191,847
124,263
114,755
134,489
168,111
% Revenue
73.83%
68.28%
68.50%
69.21%
74.50%
67.73%
60.97%
54.20%
64.14%
45.00%
40.00%
36.62%
36.62%
Gross Profit
$45,010
$67,665
$80,515
$93,849
$20,645
$19,201
$30,231
$37,191
$107,269
$151,877
$172,133
$232,728
$290,910
Gross Margin
26.17%
31.72%
31.50%
30.79%
25.50%
32.27%
39.03%
45.80%
35.86%
55.00%
60.00%
63.38%
63.38%
Normalized COGS
($ in thousands)
Total Revenue
Q1
2011A
$172,022
% YoY Growth
Cost of Revenues
2012A
2013A
2014A
Q2
Q3
Q4
03/31/2015E 06/30/2015E 09/30/2015E 12/31/2015E
2015E
2016E
2017E
2018E
2019E
$213,334
$255,575
$304,834
$80,963
$59,507
$77,445
$81,200
$299,115
$276,139
$286,888
$367,217
$459,021
24.02%
19.80%
19.27%
8.83%
(7.73%)
(5.04%)
(3.78%)
(1.88%)
(7.68%)
3.89%
28.00%
25.00%
63,564
75,906
97,678
129,492
43,465
24,008
33,571
32,516
133,561
85,699
95,955
121,914
151,666
36.95%
35.58%
38.22%
42.48%
53.69%
40.35%
43.35%
40.04%
44.65%
31.03%
33.45%
33.20%
33.04%
Gross Profit
$108,458
$137,428
$157,897
$175,342
$37,497
$35,499
$43,874
$48,684
$165,554
$190,440
$190,933
$245,304
$307,355
Gross Margin
63.05%
64.42%
61.78%
57.52%
46.31%
59.65%
56.65%
59.96%
55.35%
68.97%
66.55%
66.80%
66.96%
% Revenue
UOIG 16
Date of Presentation
4/24/2015
University of Oregon Investment Group
Appendix 5 – CAPEX, D&A
CAPEX
($ in thousands)
Purchase of Textbooks
% of Total
% Revenue
Purchase of PP&E
% of Total
% Revenue
Total CAPEX
% Revenue
D&A
($ in thousands)
Textbook Depreciation
% of Total
% Textbook Library
Amoritization of Warrants
% of Total
% PP&E
Other D&A
% of Total
% PP&E
Total D&A
% PP&E
2011A
74,094
96.48%
43.07%
2,707
3.52%
1.57%
$76,801
44.65%
2012A
104,518
87.34%
48.99%
15,148
12.66%
7.10%
$119,666
56.09%
2013A
122,247
94.31%
47.83%
7,369
5.69%
2.88%
$129,616
50.72%
Q1
Q2
Q3
Q4
2014A
03/31/2015E 06/30/2015E 09/30/2015E 12/31/2015E
112,814
12,144
95.69%
90.25%
37.01%
15.00%
5,083
1,312
964
1,255
1,316
4.31%
9.75%
100.00%
100.00%
100.00%
1.67%
1.62%
1.62%
1.62%
1.62%
$117,897
$13,456
$964
$1,255
$1,316
38.68%
16.62%
1.62%
1.62%
1.62%
2015E
12,144
71.47%
4.06%
4,847
28.53%
1.62%
$16,992
5.68%
2016E
4,475
100.00%
1.62%
$4,475
1.62%
2017E
4,649
100.00%
1.62%
$4,649
1.62%
2018E
5,951
100.00%
1.62%
$5,951
1.62%
2019E
7,439
100.00%
1.62%
$7,439
1.62%
2011A
56,142
88.49%
1,462
2.30%
5,844
9.21%
$63,448
2012A
57,177
81.96%
1,790
2.57%
10,796
15.48%
$69,763
2013A
65,759
84.98%
74.31%
1,545
2.00%
8.19%
10,078
13.02%
53.42%
$77,382
72.08%
Q1
Q2
Q3
Q4
2014A
03/31/2015E 06/30/2015E 09/30/2015E 12/31/2015E
70,147
14,240
13,870
11,425
9,410
86.08%
84.50%
85.11%
83.73%
81.88%
66.74%
17.63%
17.63%
17.63%
17.63%
187
34
32
29
27
.23%
.20%
.20%
.21%
.24%
.99%
.19%
.19%
.19%
.19%
11,159
2,578
2,395
2,190
2,055
13.69%
15.30%
14.70%
16.05%
17.88%
58.84%
14.03%
14.03%
14.03%
14.03%
$81,493
$16,852
$16,297
$13,644
$11,492
65.68%
17.00%
17.02%
16.97%
16.90%
2015E
48,945
83.97%
60.60%
123
.21%
.67%
9,217
15.81%
50.18%
$58,285
58.80%
2016E
31,005
80.40%
70.53%
46
.12%
.33%
7,513
19.48%
54.15%
$38,563
66.68%
2017E
12,957
68.92%
100.00%
5,843
31.08%
54.15%
$18,800
79.16%
2018E
12,575
100.00%
54.15%
$12,575
54.15%
2019E
16,445
100.00%
54.15%
$16,445
54.15%
UOIG 17
Date of Presentation
4/24/2015
University of Oregon Investment Group
Appendix 6 –Working Capital Model
Working Capital Model
($ in thousands)
Total Revenue
Current Assets
Accounts Receivable
Days Sales Outstanding A/R
% of Revenue
Prepaid Expenses
Days Prepaid Expense Outstanding
% of Revenue
Other Current Assets
Days COGS Outstanding
% of Revenue
Total Current Assets
% of Revenue
Long Term Assets
Net PP&E Beginning
Capital Expenditures
Acquisitions
Depreciation and Amortization
Net PP&E Ending
Total Current Assets & Net PP&E
% of Revenue
Current Liabilities
Accounts Payable
Days Payable Outstanding
% of Revenue
Accrued Charges
Days Charges Outstanding
% of Revenue
Deferred Revenue
% of Revenue
Current Portion of Long Term Debt
% of Revenue
Preffered Stock Warrant Liabilities
% of Revenue
Total Current Liabilities
% of Revenue
2012A
$213,334
2013A
$255,575
2014A
$304,834
Q1
03/31/2015E
$80,963
Q2
06/30/2015E
$59,507
Q3
09/30/2015E
$77,445
Q4
12/31/2015E
$81,200
2015E
$299,115
2016E
$276,139
2017E
$286,888
2018E
$367,217
2019E
$459,021
7,208
12.33
3.38%
543
7.89
.25%
2,391
11.50
1.12%
$10,142
4.75%
7,091
10.13
2.77%
2,134
19.24
.83%
1,149
4.29
.45%
$10,374
4.06%
14,396
17.24
4.72%
3,091
26.97
1.01%
3,864
10.89
1.27%
$21,351
7.00%
15,743
17.50
19.44%
3,294
27.55
4.07%
3,154
6.53
3.90%
$22,190
27.41%
13,796
21.10
23.18%
2,445
28.14
4.11%
1,723
6.53
2.90%
$17,963
30.19%
20,787
24.69
26.84%
3,213
28.72
4.15%
2,383
6.53
3.08%
$26,382
34.07%
24,969
28.29
30.75%
3,437
29.30
4.23%
2,308
6.53
2.84%
$30,714
37.82%
24,969
30.55
8.35%
3,437
31.64
1.15%
2,308
6.32
.77%
$30,714
10.27%
24,966
33.00
9.04%
3,568
35.49
1.29%
1,262
5.37
.46%
$29,795
10.79%
10,409
13.24
3.63%
3,937
38.63
1.37%
1,413
5.37
.49%
$15,759
5.49%
13,324
13.24
3.63%
5,252
41.28
1.43%
1,795
5.37
.49%
$20,371
5.55%
16,655
13.24
3.63%
6,754
43.59
1.47%
2,233
5.37
.49%
$25,642
5.59%
119,666
69,763
107,354
$117,496
55.08%
107,354
129,616
77,382
124,072
$134,446
52.61%
124,072
117,897
55,537
81,493
99,131
$120,482
39.52%
99,131
13,456
16,852
95,736
$117,926
145.65%
95,736
964
16,297
80,403
$98,366
165.30%
80,403
1,255
13,644
68,014
$94,396
121.89%
68,014
1,316
11,492
57,837
$88,551
109.05%
99,131
16,992
58,285
57,837
$88,551
29.60%
57,837
4,475
38,563
23,749
$53,544
19.39%
23,749
4,649
13,627
18,800
23,225
$38,984
13.59%
23,225
5,951
13,771
12,575
30,371
$50,742
13.82%
30,371
7,439
11,935
16,445
33,300
$58,942
12.84%
4,187
20.13
1.96%
20,230
293.98
9.48%
20,032
9.39%
19,386
9.09%
6,627
3.11%
$70,462
33.03%
4,078
15.24
1.60%
21,270
191.76
8.32%
22,804
8.92%
$48,152
18.84%
10,945
30.85
3.59%
31,183
272.05
10.23%
24,591
8.07%
$66,719
21.89%
6,295
13.04
7.78%
30,637
256.28
37.84%
24,314
30.03%
$61,246
75.65%
3,439
13.04
5.78%
20,900
240.50
35.12%
24,036
40.39%
$48,375
81.29%
4,757
13.04
6.14%
25,139
224.73
32.46%
23,759
30.68%
$53,654
69.28%
4,607
13.04
5.67%
24,508
208.95
30.18%
23,481
28.92%
$52,597
64.77%
4,607
12.63
1.54%
24,508
225.66
8.19%
23,481
7.85%
$52,597
17.58%
2,465
10.50
.89%
21,915
217.97
7.94%
19,827
7.18%
$44,206
16.01%
2,760
10.50
.96%
21,575
211.69
7.52%
15,736
5.49%
$40,070
13.97%
3,506
10.50
.95%
26,253
206.37
7.15%
15,800
4.30%
$45,559
12.41%
4,362
10.50
.95%
31,266
201.77
6.81%
14,321
3.12%
$49,949
10.88%
UOIG 18
4/24/2015
University of Oregon Investment Group
Appendix 7 – Discounted Cash Flows Assumptions
Discounted Free Cash Flow Assumptions
Tax Rate
Consid
35.00% Terminal Growth Rate
Risk Free Rate
3.00%
1.45% Terminal Value
Beta
1,544,534
0.89 PV of Terminal Value
Market Risk Premium
690,030
6.45% Sum of PV Free Cash Flows
% Equity
282,106
100.00% Firm Value
972,136
% Debt
0.00% Total Debt
0
Cost of Debt
0.00% Cash & Cash Equivalents
CAPM
7.18% Market Capitalization
972,136
WACC
7.18% Fully Diluted Shares
95,271
Terminal Risk Free Rate
2.66% Implied Price
10.20
Terminal CAPM
8.39% Current Price
7.97
Terminal WACC
8.39% Undervalued
28.03%
89,463
Final Price Target
Valuation Method
Implied Price
Discounted Cash Flows
Weighting
10.20
50%
Quantitative Comps
9.70
45%
Qualitative Comps
6.28
5%
Final Implied Price
$9.78
Current Price
7.97
Undervalued
22.72%
Appendix 8 – Sensitivity Analysis
Implied Price
Undervalued/(Overvalued)
Terminal Growth Rate
10
2.0%
2.5%
3.0%
3.5%
4.0%
0
2.0%
2.5%
3.0%
3.5%
4.0%
0.69
11.76
12.74
13.95
15.50
17.55
0.69
47.55%
59.79%
75.00%
94.45%
120.16%
0.79
10.23
10.95
11.82
12.89
14.26
0.79
28.34%
37.36%
48.28%
61.78%
78.88%
0.89
9.01
9.56
10.20
10.98
11.94
0.89
13.07%
19.91%
28.03%
37.81%
49.81%
0.99
8.02
8.45
8.94
9.52
10.22
0.99
0.66%
5.97%
12.16%
19.48%
28.24%
1.09
7.20
7.54
7.92
8.37
8.90
1.09
(9.62%)
(5.41%)
(0.58%)
5.03%
11.63%
Adjusted Beta
Adjusted Beta
Terminal Growth Rate
Implied Price
Undervalued/(Overvalued)
Terminal Growth Rate
Terminal Growth Rate
2.3%
3.0%
3.8%
4.5%
0
2.3%
2.3%
3.0%
3.8%
4.5%
6.18%
9.31
9.31
10.24
11.47
13.18
6.18%
16.80%
16.80%
28.48%
43.94%
65.35%
6.68%
9.29
9.29
10.22
11.45
13.16
6.68%
16.57%
16.57%
28.25%
43.71%
65.12%
7.18%
9.27
9.27
10.20
11.44
13.14
7.18%
16.35%
16.35%
28.03%
43.48%
64.90%
7.68%
9.26
9.26
10.19
11.42
13.12
7.68%
16.13%
16.13%
27.81%
43.26%
64.68%
8.18%
9.24
9.24
10.17
11.40
13.11
8.18%
15.92%
15.92%
27.60%
43.05%
64.46%
WACC
WACC
ibly consider doing an intermediate growth
10 rate 2.3%
Implied Price
Undervalued/(Overvalued)
Terminal Growth Rate
10
2.3%
2.3%
3.0%
3.8%
4.5%
0
2.3%
2.3%
3.0%
3.8%
4.5%
5.95%
10.14
10.14
11.27
12.81
15.02
5.95%
0.27
0.27
0.41
0.61
0.88
6.20%
9.69
9.69
10.71
12.09
14.02
6.20%
0.22
0.22
0.34
0.52
0.76
6.45%
9.27
9.27
10.20
11.44
13.14
6.45%
0.16
0.16
0.28
0.43
0.65
6.70%
8.89
8.89
9.74
10.84
12.36
6.70%
0.12
0.12
0.22
0.36
0.55
6.95%
8.53
8.53
9.30
10.30
11.65
6.95%
0.07
0.07
0.17
0.29
0.46
Market Risk
Premium
Market Risk
Premium
Terminal Growth Rate
University of Oregon Investment Group
Appendix 9 - Sources
Chegg Earnings Call Transcripts
Chegg Earnings Call Transcripts
Chegg Investor Presentations
Chegg SEC Filings
Factset
Google Finance
GSV Advisors
IBISWorld
Press Releases
Wikipedia
Yahoo! Finance
4/24/2015