New Venture Finance - Chegg - Case Study Example

New Venture Finance Introduction Chegg is an academic company located in Santa Clara, California. It was created by Iowa University students in 2005. The company rents books to students online. This involves both digital and physical formats, meaning that students can rent or purchase either physical or digital books. The company also specializes in homework help, course reviews, internship matching and scholarships. In course scheduling and reviewing, Chegg organizes, makes plans and rates various college courses and professors. Students seeking answers for some assignment questions can ask experts questions and get responses online, within two hours (Shaughnessy). It helps both high school and college students. Chegg serves more than 6,400 universities and community colleges, in terms of online textbook rental service (Crunch Base Par 2). This essay provides details about how Chegg was financed. It also discusses Chegg’s current financial situation and financial projections for the future of the company. Finally, this essay analyzes and discusses Chegg’s financial risks and opportunities. (a) How Chegg was financed Chegg has received funding from various organizations and individuals. For instance, in 2007, Mike Maples invested $500,000 in Chegg after he had met with Chegg’s co-founders Aayush Phumbhra (Levy Par 3). This funding was realized through the Floodgate Fund. Mike Maples renamed his funding venture Floodgate Fund. In addition, Gabriel Venture Partners funded Chegg with additional capital to realize a total of $2.2 million. Further funding for Chegg came from Kleiner Perkins and Foundation Capital. In 2008, Oren Zeev invested $4.7 million. Later, Primera Capital led the Series B round and raised a further $7 million, which included participation from prior investors Gabriel Venture Partners and Mike Maples. During the month of November, 2009, Chegg secured an equity funding worth $57 million (PR Newswire Services Par 1). This equity funding was led by Insight Venture Partners. On top of this, Insight Venture Partners organized for another funding of a $25 million credit facility (PR Newswire Services Par 1). This added to the debt facility worth $30 million that Chegg had secured from TriplePoint Capital and Pinnacle Ventures (PR Newswire Services Par 1). In 2010, November, Chegg raised finance worth $75 million from Ace Limited (Schonfeld Par 1). Ace limited is a Hong Kong Investment firm. It should be noted that previously, Chegg had been funded by Kleiner Perkins Caufield and Byers, Primera Capital, Gabriel Venture Partners and Foundation Capital (PR Newswire Services Par 2). These funds enabled Chegg to run its operations till it held its initial public offer (IPO) to acquire capital from interested shareholders in exchange of stock. Therefore, in 2013, Chegg had its initial public offer, whereby it sold 15 million shares, seeking to raise $150 million (Ausick). Chegg plans to use the capital that it has raised in funding its extraordinary growth and build on better relationships with major stakeholders such as wholesalers, colleges and publishers, through a committed customer service (PR Newswire Services Par 1). The company further projects to use the credit and debt facility finances that it has acquired to service its growth, which may be termed as extraordinary. (b) Current Financial Situation of Chegg Chegg realized total revenue of $77.1 million in 2013, compared to $68.3 million realized in 2012 (Google Finance). There was a net loss of $107.9 million, available to common stockholders, compared to an income of $8.1million that was available to common stockholders in 2012 (Bloomsberg Businessweek). The company’s EBITDA was $16.3 million for 2013, against $29.2 million for 2012. Chegg’s net revenue for 2013 was $255.58 million, compared to $213.33million realized in 2012 (Bloomsberg Businessweek). The company’s operating expenses have increased significantly to $ 85.6 million, compared to a figure of $58.2 million in 2012 (Google Finance). On the other hand, Chegg’s operating income has decreased to a negative value of $8.5 million, compared to a positive value of $10 million, which was recorded in 2012. In 2013, Chegg realized a net loss of $5.42 million, compared to a net income of $8.12 million, which the company realized in 2012 (Google Finance). As a result of this loss, there were negative earnings per share value of $2.33. This financial performance is much lower, compared to 2012, when the earnings per share were $0.12 (Google Finance). In 2013, Chegg’s stock fell by 22 percent. The company’s digital revenue had been growing by 70% year-over-year up to $16.7 million. This represents about 22% of total revenues, compared to 14%, which was realized during the fourth quarter of 2012 (Empson). On the other hand, Chegg’s print revenue was $60.5 million, indicating a 3% increase, as compared to what was realized during the last quarter of 2012. The company’s gross profit on GAAP basis was $39.5 million while gross profit on Non-GAAP basis was $40.3 million (Empson). Chegg’s gross margins declined to 51.3 percent from 57.7 percent, while adjusted EBITDA, without textbook depreciation, was $18.6 million and relatively flat, when compared to the last quarter of 2012. With a GAAP net loss of $5.4 million, Chegg had only $76.9 million in cash on company balance sheets at the end of the 2013 financial year (Empson Par 7). Though the company was likely to improve on its financial status and report better financial results, most investors doubt the company’s performance and future performance, especially in the stock market. Financial reports indicate that the company’s performance was so bad during the last quarter of 2013, but Chegg has a great task ahead of it in the future (Empson). In the recent years, Chegg participated in acquisitions, which involve various companies so as to expand into other student services. This indicates that the company is in a stage of rapid growth or early-maturity. (c) Chegg’s Financial Projections for the Future Currently, Chegg is not as profitable as expected by investors. The main reason for this current financial performance is the large depreciation expense that the company incurs from text books annually. The company carries out massive depreciation of its books annually, portraying a picture that the company may be a bad investment. This notion that Chegg is not profitable, based on negative earnings has led to the company’s IPO decline (Shaughnessy). However, the company’s net revenues are growing at pace that is much faster than its depreciation expense. In future, Chegg is expected to utilize its current finances to boost and invest on company growth. The company also plans to utilize its finances in creating superior relationships vital business partners. These business partners include publishers, universities and colleges and publishers. This is expected to be achieved through investment in customer care. In addition, Chegg plans to service its extraordinary growth through credit and debt facility finances (PR Newswire Services). In terms of earnings, Chegg projects to realize revenues of about $70 million to $72 million during the first quarter of 2014. This is projected to be 24% of the year’s total revenue. The company further expects revenues of about $310 million to 320 million for the 2014 financial year (Bloomsberg Businessweek). According to Chegg’s projections, gross margin on GAAP and Non-GAAP basis is expected to be at 7% or 9% while adjusted EBITDA is speculate to range between $22 million to $20 million. Therefore, adjusted EBITDA is expected to be in the range of $15 million to $10 million (Bloomsberg Businessweek). Chegg financial projections indicate further that the company expects to realize digital revenue in the tune of 27% to 29% of total revenues of 2014 (Bloomsberg Businessweek). The total gross margin on GAAP and Non-GAAP basis is projected to be between 25% and 27%. However, the company projects to have a negative free cash flow of $5 million to a positive free flow cash flow of $5 million (Bloomsberg Businessweek). Chegg projects to use its growth stage investments to fund innovators and solidify its market potential. Therefore, the company intends to form mergers with successful companies and those companies that have the potential of succeeding in future. Chegg projects to invest a sum of $10 million and $75 million in future so as to accelerate the achievement of its goals (Shaughnessy). With these projections, Chegg has great expectations of a bright future in terms of financial performance, whereby it will continue investing in print textbook business to acquire more student customers and generate operating cash flow. (d) Financial Risks and Opportunities for Chegg Chegg faces financial risks pertaining to seasonality of its business. For instance, the company’s revenues are highest during the last quarter of the year while the second quarter of the year records very low revenues due to few days of rentals (Yahoo Finance). On the contrary, variable expenses are incurred during the first and third quarters of the year. Therefore, the most concentrated periods of Chegg’s expenses and revenues do not coincide, making comparisons of quarterly operating results to provide an insight that is not meaningful into the company’s overall performance (Yahoo Finance). This may have an adverse impact on the company’s performance in the stock market. As a result, the company might miss out on crucial funding from investors. On the other hand, Chegg’s ability to attract, retain and engage the student population presents a financial challenge for the company. This is because there are other companies that offer the same services in the market. As a result, Chegg is required to use some funds to market its services and products. In case the company fails to attract and retain a sufficient population of students, its revenues will decline, leading to a threat in the company’s financial position. Failure to retain student customers and engage them to use the company’s products and services has a similar effect. Intense competition in the market poses a financial risk to Chegg. This is because the company’s ability to achieve adequate contributions from non-print products and digital services is adversely affected by competitors (Yahoo Finance). This implies that revenues are likely to decrease and in turn, profitability and financial performance will decline. This may lead to a financial risk because investors may not fund the company to assist it achieve its financial goals. Chegg’s new mobile deals platform creates a financial opportunity for the company (PR Newswire Services). This is because Chegg and its brand partners will be able to engage with students always and deliver value. Therefore, Chegg can expand rapidly by adding new colleges, more students to the platform and advertisers, gaining financially because of increased revenue. The company has an opportunity of using its ability to expand the number of student users of its products and services by increasing student engagement with the company’s connected learning platform (Yahoo Finance). This will enable the company to achieve profitability and maintain it. The company’s capability to provide personalized solutions to students and create deeper penetration of student populations will allow it to enroll and brand marketing services, which will enable the company to achieve its financial objectives. The company has an opportunity of using investments to achieve increased operating margins so as to achieve profitability and become a cash flow positive company for the long term (Yahoo Finance). Works Cited Ausick, Paul. "Chegg IPO Implosion, Duping Main Street." 13 November 2013. Web. 25 April 2014. Bloomsberg Businessweek. "Company Overview of Chegg, Inc." February 2014. Web. 25 April 2014. Crunch Base. "Chegg." 2014. Web. 25 April 2014. Empson, Rip. "Despite High IPO And Solid First Quarter, Chegg Plummets As Investors Worry Over Long-Term Prospects." 15 February 2014. Web. 25 April 2014. Google Finance. "Chegg Inc." 2014. Web. 25 April 2014. Levy, Ari. "Venture Capitalist Novice Maples Tops Veterans With Bets on Twitter, Chegg ." 24 May 2010. 25 April 2014. PR Newswire Services. "Chegg.com Secures $112 Million to Fund Explosive Growth in Online Textbook Rentals." 2009. 25 April 2014. Schonfeld, Erick. "Textbook Rental Juggernaut Chegg Adds Another $75 Million To Its Coffers." 26 September 2010. 25 April 2014. Shaughnessy, Tom. "Chegg: Read Now, Buy Later." 15 November 2013. 25 April 2014. Yahoo Finance. "Form 10-K for CHEGG, INC ." 6 March 2014. 25 April 2014. Read More