What “Netflix for textbook” Chegg did (and didn’t) tell prospective investors in IPO filing

Delving into Chegg’s IPO filing

By Dan Primack August 14, 2013: 4:56 PM ET

What textbook rental company Chegg did (and didn’t) tell prospective investors.

FORTUNE — Textbook rental company Chegg Inc. today filed for a $150 million IPO, with expectations that it will list next month at a premium to the $800 million valuation it received in its latter rounds of venture capital funding. Chegg plans to trade on the NYSE under ticker symbol CHGG, with J.P. Morgan (JPM) and BoA Merrill Lynch (BAC) serving as lead underwriters. Obviously there is lots of data in the company’s registration statement, but two things jumped out in particular:

1. First half growth: If you look at Chegg’s financials between 2010 and 2012, it’s fairly uninspiring. Losses expanded at a faster clip than did revenue, and EBITDA kept slipping. But then comes the first half results for 2013, and you can understand why Chegg chose to wait until now to go public. The company reports $17.96 million in EBITDA for the first half of 2013, compared to just $2.15 million for the first half of 2012. Revenue grew by 26% (up to nearly $117 million), while losses decreased by 34% ($32 million vs. $21 million). And, remember, all of this includes Q2 — typically the company’s slowest quarter, since students are rarely seeking new textbooks between April and June.2. Digital? Chegg spends a lot of time talking about the risks of further textbook digitization, particularly if publishers begin offering deeper discounts for their electronic wares. And the company is trying to combat that future via a slew of digital offerings, including e-textbooks, online/mobile homework help and enrollment marketing services for colleges and universities. All together, Chegg says these digital services made up 20% of first half 2013 revenue, compared to 13% in 2012.

Unfortunately, there isn’t a more detailed quantitative breakdown. No info on operating costs for these products, or how they compare to one another. I’d think prospective investors are going to want such figures, given that the company’s ultimate future is unlikely to be print textbooks.

Textbook rental company Chegg files for IPO of up to $150 mln

12:55am IST

Aug 14 (Reuters) – Textbook rental company Chegg Inc filed with U.S. regulators on Thursday to raise up to $150 million in an initial public offering. The Santa Clara, California-based company provides homework help, textbooks, eTextbooks, scholarships and supplemental materials from publishers like McGraw Hill, Wiley and MacMillan.

Chegg plants a tree for every textbook it rents or sells and has planted more than 5 million trees to date, according to its website. The company, which offers more than 100,000 eTextbook titles, said it rented or sold over 4 million print textbooks and eTextbooks, and about 320,000 students subscribed to its proprietary Homework Help service in 2012. ()

Chegg expects to benefit from the growing education industry as the rising cost of tuition, fees, textbooks and declining public funding for higher education prompt students to switch to digital platforms like its Student Hub.

Chegg, originally called “the Netflix for textbooks,” started life as a website that allowed college students to save money on expensive text books by renting them.

The company, which has raised more than $200 million in venture funding and debt, counts Insight Venture Partners, Foundation Capital, Gabriel Venture Partners and Kleiner Perkins Caufield & Byers among its shareholders.

The company plans to list its common stock on the New York Stock Exchange under the symbol “CHGG” and listed J.P. Morgan and Merrill Lynch, Pierce, Fenner & Smith as lead underwriter to its offering. Reuters reported in June that JP Morgan and Bank of America will lead the offering.

The amount of money a company says it plans to raise in its first IPO filings is used to calculate registration fees. The final size of the IPO could be different.

August 14, 2013, 3:34 p.m. ET

Textbook Rental Firm Chegg Files for IPO

Co-Founder Steps Down From Board Amid Plans to Raise $150 Million


Textbook-rental service Chegg Inc. has filed plans to raise $150 million in an initial public offering, while separately disclosing a co-founder of the company will step down from its board. Chegg is planning to raise proceeds to obtain additional capital, as well as fully repay $21 million of outstanding borrowings under the company’s revolving credit facility, fund general corporate purposes and facilitate future access to the public equity markets. Separately, Chegg disclosed that Aayush Phumbhra, the company’s co-founder while a student at Iowa State, will step down from the company’s board.Chegg on Wednesday also announced the addition of four new board members, including Shutterfly Inc. SFLY -1.90% President and Chief Executive Jeffrey Housenbold, Facebook Inc. executive Marne Levine, San Francisco 49ers Chief Executive Jed York, and Kohlberg Kravis Roberts KKR -0.88% & Co. senior adviser Richard Sarnoff.

With those additions, the company now has seven board of directors.

Founded in 2005, Chegg launched its first online print textbook rental business in 2007. The company’s business model is built around the view that outside of tuition, fees, and room and board, print textbooks are one of the most burdensome costs of higher education.

Chegg’s strategy is to thus purchase textbooks and rent them to students for an academic term at a substantial discount from the list price of the book. The company then earns a return on the investment of the book by renting it out over multiple academic terms.

For the six months ended June 2013, Chegg’s revenue jumped 26% to $116.9 million, and the company swung to a narrower loss of $21.2 million from a loss of $31.9 million in the prior-year period.

Chegg has about 180,000 unique titles in its print textbook library available for rent and offers more than 100,000 e-textbooks. In 2012, students completed 3.7 million transactions on the company’s platform, and it rented or sold over four million print textbooks and e-textbooks.

As Chegg continues to invest in the company’s business, it doesn’t expect to be profitable in the near term.

Chegg intends to apply to list the company’s common stock on the New York Stock Exchange under the symbol CHGG.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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