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Item 7. Management’s Discussion and Analysis

2023-02-21 compared with 2022-02-22 · 140 added, 139 removed, 209 unchanged (57% of the section changed)

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You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

We have omitted discussion of the earliest of the three years of financial condition and results of operations and this information can be found in Part I, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 22, 2021, which is available free of charge on the SEC's website at sec.gov and on our website at investor.chegg.com.

Aside from our discussion on net revenues, we have omitted discussion of the earliest of the three years of financial condition and results of operations and this information can be found in Part I, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 22, 2022, which is available free of charge on the SEC's website at sec.gov and on our website at investor.chegg.com.

In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs.

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Our mission is to improve learning and learning outcomes by putting students first.

We support life-long learners starting with their academic journey and extending into their careers.

The Chegg platform provides products and services to support learners to help them better understand their academic course materials, and also provides personal and professional development skills training, to help them achieve their learning goals.

Students subscribe to our subscription services, collectively referred to as our Chegg Services, which can be accessed internationally through our websites and on mobile devices.

Our primary Chegg Services include Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Busuu, Mathway and Thinkful.

Our Chegg Study subscription service provides “Expert Questions and Answers” and step-by-step “Textbook Solutions,” helping students with their course work.

When students need writing help, including plagiarism detection scans and creating citations for their papers, they can use our Chegg Writing subscription service.

Our Chegg Math Solver and Mathway subscription services help students understand math by providing a step-by-step math solver and calculator.

We also offer our Chegg Study Pack as a premium subscription bundle of our Chegg Study, Chegg Writing, and Chegg Math Solver services, which also includes additional features such as flashcards, concept videos, and practice questions and quizzes.

Our Thinkful skills-based learning platform offers professional courses focused on the most in-demand technology skills.

Required Materials includes our print textbook and eTextbook offerings, which help students save money compared to the cost of buying new.

We offer an extensive print textbook library primarily for rent and also for sale both on our own and through our print textbook partners.

We partner with a variety of third parties to source print textbooks and eTextbooks directly or indirectly from publishers.

We support life-long learners all over the world, starting with their academic journey and extending through their careers.

The Chegg platform provides products and services to support learners with their academic course materials, as well as their career and personal skills developments.

During the years ended December 31, 2022, and 2021, we generated net revenues of $766.9 million and $776.3 million, respectively, and in the same periods had net income of $266.6 million and net loss of $1.5 million, respectively.

We have changed our revenue disaggregation to Subscription Services and Skills and Other to better reflect the nature and timing of revenue and cash flows.

Subscription Services includes revenues from our Chegg Study Pack, Chegg Study, Chegg Writing, Chegg Math, and Busuu offerings.

Skills and Other includes revenues from our Skills, advertising services, print textbooks and eTextbooks offerings.

We no longer present our Required Materials product line separately as we no longer expect to have significant revenue from our print textbook and eTextbooks offerings due to recognizing a revenue share as a result of our partnership with GT.

In April 2022, we entered into definitive agreements with GT Marketplace, LLC (GT) such that we will continue to offer our print textbook and eTextbook offerings on our website and maintain relationships with the students, however, GT has purchased our existing print textbook library and will continue to make print textbook investments and provide fulfillment logistics for print textbook transactions.

Beginning December 2022, GT also began fulfilling eTextbook transactions.

We expect that our partnership with GT provides an opportunity to grow faster with higher margins as we will no longer incur significant costs of revenue such as order fulfillment fees primarily related to shipping and fulfillment, publisher content fees for eTextbooks, and print textbook depreciation and write off expense.

We will continue to incur costs of revenue such as payment processing fees and employee related costs as well as ongoing operating expenses such as platform infrastructure maintenance and transition costs.

In January 2022, we completed our acquisition of Busuu Online S.L.

(Busuu), an online language learning company that offers a comprehensive solution through a combination of self-paced lessons, live classes with expert tutors and the ability to learn and practice with members of the Busuu language learning community.

During the years ended December 31, 2021, and 2020, we generated net revenues of $776.3 million and $644.3 million, respectively, and in the same periods had net losses of $1.5 million and $6.2 million, respectively.

As students returned to school in the fall of 2021, we started to see a slowdown in the education industry as a result of the COVID-19 pandemic, which resulted in a decline in traffic to education technology services, such as the ones we provide.

A combination of variants, increased employment opportunities and compensation, along with fatigue, all led to significantly fewer enrollments than expected.

Those students who have enrolled are taking fewer and less rigorous classes and are receiving less graded assignments.

As a result, we are experiencing a deceleration in the growth rates of our services and revenues that may continue.

Our long-term strategy is centered upon our ability to utilize Chegg Services to increase student engagement with our learning platform.

We plan to continue to invest in the expansion of our Chegg Services to provide a more compelling and personalized solution and deepen engagement with students.

In addition, we believe that the investments we have made to achieve our current scale will allow us to drive increased operating margins over time that, together with increased contributions of Chegg Services, will enable us to sustain profitability and remain cash-flow positive in the long-term.

Our ability to achieve these long-term objectives is subject to numerous risks and uncertainties, including our ability to attract, retain, and increasingly engage the student population, reduced traffic to our services, intense competition in our markets, the

ability to achieve sufficient contributions to revenue from Chegg Services, and other factors, such as the COVID-19 pandemic, which continues to evolve and affect our business and results of operations.

The COVID-19 pandemic subjects our business to numerous risks and uncertainties, most of which are beyond our control and cannot be predicted, including when colleges will resume in-person classes or how well they will overcome the impacts of the COVID-19 pandemic on enrollment and other factors.

Our long-term strategy is centered upon our ability to utilize Subscription Services to increase student engagement with our learning platform.

We plan to continue to invest in the expansion of our offerings to provide a more compelling and personalized solution and deepen engagement with students.

In addition, we believe that the investments we have made to achieve our current scale will allow us to drive increased operating margins over time that, together with increased contributions of our Subscription Services, will enable us to sustain profitability and remain cash-flow positive in the long-term.

Our ability to achieve these long-term objectives is subject to numerous risks and uncertainties.

These include our ability to attract, retain, and increasingly engage the student population, reduced traffic to our services, and other factors, such as global macroeconomic conditions, which continue to evolve and affect our business and results of operations.

Further, the education industry has experienced a slowdown as a result of decreased enrollments, which have not returned to pre-pandemic levels.

Employment opportunities, compensation and other factors have led to steadily decreasing enrollments.

Moreover, those students who have enrolled have been taking fewer and less rigorous classes and receiving less graded assignments.

we are experiencing a deceleration in the growth rates of our services and revenues that may continue.

These risks and uncertainties are described in greater detail in Part I, Item 1A, “Risk Factors.”

We have presented revenues for our two product lines, Chegg Services and Required Materials, based on how students view us and the utilization of our products by them.

More detail on our two product lines is discussed in the next two sections titled “Chegg Services” and “Required Materials.”

Chegg Services

Our Chegg Services product line for students primarily includes Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Busuu, Mathway and Thinkful.

Students typically pay to access Chegg Services on a monthly basis.

We also work with leading brands to provide students with discounts, promotions, and other products that, based on student feedback, delight them.

In the aggregate, Chegg Services revenues were 86% and 81% of net revenues during the years ended December 31, 2021 and 2020, respectively.

Required Materials

Our Required Materials product line includes revenues from print textbooks and eTextbooks.

Revenues from print textbooks that we own are primarily recognized as the total transaction amount ratably over the rental term, generally a two- to five-month period.

Revenues from print textbooks owned by a partner are recognized as a revenue share on the total transactional amount immediately when a print textbook ships to a student.

Additionally, Required Materials includes revenues from eTextbooks, which are primarily recognized ratably over the contractual period, generally a two-to five-month period.

In the aggregate, Required Materials revenues were 14% and 19% of net revenues during the years ended December 31, 2021 and 2020, respectively.

We have presented revenues for our two product lines, Subscription Services and Skills and Other, based on how students view us and the utilization of our products by them.

More detail on our two product lines is discussed in the next two sections titled “Subscription Services” and “Skills and Other.”

Subscription Services

Our Subscription Services can be accessed internationally through our websites and on mobile devices and include Chegg Study Pack, Chegg Study, Chegg Writing, Chegg Math, and Busuu.

Students typically pay to access Subscription Services on a monthly basis.

Our Chegg Study subscription service provides “Expert Questions and Answers” and step-by-step “Textbook Solutions,” helping students with their course work.

When students need writing help, including plagiarism detection scans and creating citations for their papers, they can use our Chegg Writing subscription service.

Our Chegg Math subscription service, including Mathway, helps students understand math by providing a step-by-step math solver and calculator.

We also offer our Chegg Study Pack as a premium subscription bundle of our Chegg Study, Chegg Writing, and Chegg Math services, which also includes additional features such as flashcards, concept videos, practice questions and quizzes, and instructor-created materials through Uversity.

Our Busuu language learning platform offers a comprehensive solution through a combination of self-paced lessons, live classes with expert tutors and the ability to learn and practice with members of the Busuu language learning community.

Subscription Services revenues were 88%, 79%, and 71% of net revenues during the years ended December 31, 2022, 2021, and 2020, respectively.

Skills and Other

Our Skills and Other product line includes revenues from Skills, advertising services, print textbooks and eTextbooks.

Our skills-based learning platform offers professional courses focused on the most in-demand technology skills.

We work with leading brands and programmatic partners to deliver advertising across our platforms.

We also provide a platform for students to rent or buy print textbooks and eTextbooks, which helps students save money compared to the cost of buying new.

Skills and Other revenues were 12%, 21%, and 29% of net revenues during the years ended December 31, 2022, 2021 and 2020, respectively.

Seasonality of Our Business

Revenues from Chegg Services, print textbooks that we own, and eTextbooks are primarily recognized ratably over the term a student subscribes to our Chegg Services, rents a print textbook or has access to an eTextbook.

This has generally resulted in our highest revenues and profitability in the fourth quarter as it reflects more days of the academic year.

Our variable expenses related to cost of revenues and marketing activities remain highest in the first and third quarters such that our profitability may not provide meaningful insight on a sequential basis.

Revenues from Subscription Services are primarily recognized ratably over the subscription term which has generally resulted in our highest revenues and profitability in the fourth quarter as it reflects more days of the academic year.

Certain variable expenses, such as marketing expenses, remain highest in the first and third quarters such that our profitability may not provide meaningful insight on a sequential basis.

As a result of these factors, the most concentrated periods for our revenues and expenses do not necessarily coincide, and comparisons of our historical quarterly results of operations on a sequential basis may not provide meaningful insight into our overall financial performance.

Components of Results of Operations

We recognize revenues from our Chegg Services and Required Materials product lines, net of allowances for refunds or charge backs from our payment processors who process payments from credit cards, debit cards, and PayPal.

Revenues from our Chegg Services product line primarily includes Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Mathway and Thinkful.

Revenues from Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, and Mathway are primarily recognized ratably over the monthly subscription period.

Revenues from Thinkful are recognized either ratably over the term of the course, generally six months, or upon completion of the lessons, depending on the instruction type of the course.

Revenues from our Required Materials product line includes revenues from print textbooks that we own or that are owned by a partner as well as revenues from eTextbooks.

Beginning in 2020, our Required Materials product line includes operating leases with students for the rental of print textbooks that we own.

Operating lease income is recognized as the total transaction amount, paid upon commencement of the lease, ratably over the lease term or rental term, generally a two- to five-month period.

Additionally, we provide students the ability to purchase print textbooks and recognize

revenues immediately upon shipment.

Revenues from print textbooks owned by a partner are recognized as a revenue share on the total transaction amount of a rental or sale transaction immediately when a print textbook ships to a student.

Shipping and handling activities are expensed as incurred.

Revenues from eTextbooks are recognized ratably over the contractual period, generally a two- to five-month period.

We have concluded that we control our Chegg Services, print textbooks that we own for rental, purchase at the end of the rental term, or sale on a just-in-time basis, and eTextbook service and therefore we recognize revenues and cost of revenues on a gross basis.

In relation to print textbook rental and sale agreements with our partners, we recognize revenues on a net basis based on our role in the transaction as an agent.

We recognize revenues net of allowances for refunds or charge backs from our payment processors who process payments from credit cards, debit cards, and PayPal.

Revenues from Chegg Study Pack, Chegg Study, Chegg Writing, Chegg Math, and Busuu are primarily recognized ratably over the monthly subscription period.

Revenues from Skills are recognized either ratably over a six month course offering depending on the instruction type of the course, adjusted for an estimate of non-redemption.

Revenues from advertising services are recognized upon fulfillment.

Beginning in April 2022, revenues from print textbooks owned by GT are recognized immediately on a net basis based on our role in the transaction as an agent.

Prior to April 2022, revenues from our print textbooks offering included operating lease income from print textbooks that we owned recognized as the total transaction amount, paid upon commencement of the lease, ratably over the lease term or rental term, generally a two- to five-month period.

Beginning in December 2022, revenues from eTextbooks fulfilled by GT are recognized immediately on a net basis based on our role in the transaction as an agent.

Prior to December 2022, eTextbooks revenues were recognized ratably over the contractual period, generally a two- to five-month period.

Revenues from print textbooks owned by

a partner are recognized as a revenue share on the total transaction amount of a rental or sale transaction immediately when a print textbook ships to a student.

Cost of Revenues

Our cost of revenues consists primarily of expenses associated with the delivery and distribution of our products and services.

Cost of revenues primarily consists of content amortization expense related to content that we develop, license from publishers for which we pay one-time license fees, or acquire through acquisitions, web hosting fees, customer support fees, payment processing costs, amortization of acquired intangible assets, order fulfillment fees primarily related to outbound shipping and fulfillment as well as publisher content fees for eTextbooks, write-downs for print textbooks, the gain or loss on print textbooks liquidated, the net book value of print textbooks purchased by students at the end of the term or on a just-in-time basis, print textbook depreciation expense, personnel costs and other direct costs related to providing content or services.

Cost of revenues primarily consists of content amortization expense related to content that we develop, license from publishers, or acquire through acquisitions, web hosting fees, customer support fees, payment processing costs, amortization of acquired intangible assets, order fulfillment fees primarily related to outbound shipping and fulfillment as well as publisher content fees for eTextbooks, write-downs for print textbooks, the gain or loss on print textbooks liquidated, the net book value of print textbooks purchased by students at the end of the term or on a just-in-time basis, print textbook depreciation expense, personnel costs and other direct costs related to providing content or services.

In addition, cost of revenues includes allocated information technology and facilities costs.

As a result of our partnership with GT, we no longer incur costs associated with order fulfillment fees related to outbound shipping and fulfillment, write-downs for print textbooks, the gain or loss on print textbooks liquidated, the net book value of print textbooks purchased by students at the end of the term or on a just-in-time basis, and print textbook depreciation expense,

Operating Expenses

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In addition, general and administrative expenses include outside services, legal and accounting services, and depreciation expense.

Interest Expense, Net and Other Income, Net

Interest Expense, Net and Other Income (Expense), Net

Interest expense, net consists primarily of interest expense on the amortization of debt issuance costs related to the convertible senior notes.

Other income, net consists primarily of interest income, losses on early extinguishment of the convertible senior notes, loss on the change in fair value of derivative instruments and gains on the sale of our strategic equity investments.

Provision for Income Taxes

Provision for income taxes consists primarily of state income taxes in the United States, the withholding taxes related to the sale of our strategic equity investment, and income taxes in foreign jurisdictions in which we conduct business.

Due to the uncertainty as to the realization of the benefits of our domestic deferred tax assets, we have recorded a full valuation allowance against such assets.

We intend to continue to maintain a full valuation allowance on our domestic deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

Other income (expense), net consists primarily of interest income, gains/losses on early extinguishment of the convertible senior notes, foreign currency gain on purchase consideration, realized gains/losses on the sale of our investments, loss on the change in fair value of derivative instruments and gains on the sale of our strategic equity investments.

Benefit From (Provision For) Income Taxes

Benefit from (provision for) income taxes consists primarily of the United States valuation allowance release, partially offset by income taxes in foreign jurisdictions in which we conduct business.

Results of Operations

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Income from operations 8,957 1 78,107 10

Total interest expense, net and other (expense) income, net (72,368) (9) (57,614) (9)

Income (loss) before provision for income taxes 5,739 1 (861) —

Provision for income taxes 7,197 (1) 5,360 (1)

Net loss $ (1,458) — % $ (6,221) (1) %

Total interest expense, net and other income (expense), net 94,989 13 (72,368) (9)

Income before benefit from (provision for) income taxes 103,946 14 5,739 1

Benefit from (provision for) income taxes 162,692 21 (7,197) (1)

Net income (loss) $ 266,638 35 % $ (1,458) 0 %

(1) Includes share-based compensation expense as follows:

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Years Ended December 31, 2022, 2021 and 2020

Net revenues during the year ended December 31, 2021 increased $131.9 million, or 20%, compared to the same period in 2020.

The following table sets forth our total net revenues for the periods shown for our Chegg Services and Required Materials product lines (in thousands, except percentages):

The following table sets forth our total net revenues for the periods shown for our Subscription Services and Skills and Other product lines (in thousands, except percentages):

Years Ended December 31, Change in 2022

Change in 2021

2022 2021 2020 $ % $ %

Chegg Services $ 669,894 $ 521,228 $ 148,666 29 %

Required Materials 106,371 123,110 (16,739) (14)

Subscription Services $ 671,968 $ 616,817 $ 460,612 $ 55,151 9 % $ 156,205 34 %

Skills and Other 94,929 159,448 183,726 (64,519) (40) (24,278) (13)

Total net revenues $ 766,897 $ 776,265 $ 644,338 $ (9,368) (1) $ 131,927 20

Chegg Services revenues increased by $148.7 million, or 29%, during the year ended December 31, 2021, compared to the same period in 2020.

The increase was primarily due to our efforts to reduce account sharing, increased global awareness and penetration and the introduction of enhanced offerings, including our acquisition of Mathway, which closed in June 2020.

Chegg Services revenues represented 86% and 81% of net revenues during the years ended December 31, 2021 and 2020, respectively.

Required Materials revenues decreased by $16.7 million, or 14%, during the year ended December 31, 2021 compared to the same period in 2020.

Subscription Services revenues increased by $55.2 million, or 9%, during the year ended December 31, 2022, compared to the same period in 2021.

The increase was primarily due to an increased global brand awareness and penetration, including our acquisition of Busuu, which closed in January 2022, and increased students subscribing to the Chegg Study Pack.

Subscription Services revenues represented 88% and 79% of net revenues during the years ended December 31, 2022 and 2021, respectively.

Skills and Other revenues decreased by $64.5 million, or 40%, during the year ended December 31, 2022 compared to the same period in 2021.

The decrease was primarily due to lower revenues from print textbooks as a result of our partnership with GT beginning in April 2022 and lower unit volumes driven by decreased college enrollments, partially offset by an increase in revenues related to our Skills offerings.

Skills and Other revenues represented 12% and 21% of net revenues during the years ended December 31, 2022 and 2021, respectively.

Subscription Services revenues increased by $156.2 million, or 34%, during the year ended December 31, 2021, compared to the same period in 2020.

The increase was primarily due to our efforts to reduce account sharing, increased global brand awareness and penetration, including our acquisition of Mathway, which closed in June 2020.

Subscription Services revenues represented 79% and 71% of net revenues during the years ended December 31, 2021 and 2020, respectively.

Skills and Other revenues decreased by $24.3 million, or 13%, during the year ended December 31, 2021 compared to the same period in 2020.

The decrease was primarily due to lower unit volumes driven by decreased college enrollments and various print textbook logistics challenges.

Required Materials revenues represented 14% and 19% of net revenues during the years ended December 31, 2021 and 2020, respectively.

Skills and Other revenues represented 21% and 29% of net revenues during the years ended December 31, 2021 and 2020, respectively.

Years Ended December 31, 2022 and 2021

Cost of Revenues

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$ 2,484 $ 1,621 $ 863 53 %

Cost of revenues during the year ended December 31, 2021 increased by $49.5 million, or 24%, compared to the same period in 2020.

The increase was primarily attributable to higher other depreciation and amortization expense of $21.5 million, higher net loss on textbook library of $12.4 million primarily due to increased write-downs, higher web hosting fees of $7.5 million, transitional logistics charges of $7.3 million incurred in conjunction with the transition of our print textbooks to a new third party logistics provider, higher payment processing fees of $4.3 million, higher cost of textbooks purchased by students of $3.5 million, higher employee-related expenses, including share-based compensation expense, of $2.0 million, and higher customer support fees of $1.7 million, partially offset by lower order fulfillment fees of $5.4 million and lower print textbook depreciation of $4.5 million.

Gross margins decreased to 67% in the year ended December 31, 2021, from 68% during the same period in 2020.

As a result of our partnership with GT, cost of revenues decreased due to lower order fulfillment fees, net change in the gain on textbook library, lower print textbook depreciation expense, and lower cost of textbooks purchased by students.

Cost of revenues decreased $57.5 million, or 23%, during the year ended December 31, 2022, compared to the same period in 2021.

The decrease was primarily attributable to lower order fulfillment fees of $41.4 million driven by lower unit volumes, net change in the gain on textbook library of $15.9 million, driven by the sale of print textbooks to GT in April 2022 and lower write-downs, lower cost of textbooks purchased by students of $11.2 million, lower print textbook depreciation expense of $9.2 million, lower transitional logistic charges of $5.9 million, lower customer support fees of $1.5 million, partially offset by higher other depreciation and amortization expense of $18.4 million, incremental cost of tutors, as a result of our acquisition of Busuu, of $8.8 million and higher web hosting fees of $1.1 million.

Gross margins increased to 74% during the year ended December 31, 2022, from 67% during the same period in 2021.

Operating Expenses

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Share-based compensation expense $ 130,972 $ 107,225 $ 23,747 22

The increases in employee-related operating expenses noted below during the year ended December 31, 2022, compared to the same period in 2021, are largely driven by incremental employees from our acquisition of Busuu.

Research and Development

Research and development expenses during the year ended December 31, 2022 increased by $17.8 million, or 10%, compared to the same period in 2021.

The increase was primarily attributable to higher employee-related expenses, including share-based compensation expense, of $9.0 million.

The increase was primarily attributable to higher employee-related expenses, including share-based compensation expense, of $13.0 million and higher technology expenses to support our research and development of $4.7 million.

Research and development expenses as a percentage of net revenues were 26% during the year ended December 31, 2022 compared to 23% of net revenues during the same period in 2021.

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Sales and marketing expenses during the year ended December 31, 2022 increased by $42.2 million, or 40%, compared to the same period in 2021.

The increase was primarily attributable to increased marketing spend, including expansion in international markets, of $15.1 million and higher employee-related expenses, including share-based compensation expense, of $6.2 million.

The increase was primarily attributable to increased international marketing spend, including incremental marketing spend from Busuu, of $17.9 million, higher other depreciation and amortization expense of $9.5 million, and higher employee-related expenses, including share-based compensation expense, of $8.8 million.

Sales and marketing expenses as a percentage of net revenues were 19% during the year ended December 31, 2022 compared to 14% of net revenues during the same period in 2021.

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General and administrative expenses in the year ended December 31, 2022 increased by $57.2 million, or 36%, compared to the same period in 2021.

The increase was primarily due to higher employee-related expenses, including share-based compensation expense, of $23.9 million and increased professional fees of $11.9 million, partially offset by a one-time 2020 impairment charge on our investment in WayUp of $10.0 million.

General and administrative expenses as a percentage of net revenues were flat at 20% during the years ended December 31, 2021 and 2020.

Interest Expense, Net and Other Income, Net

The following table sets forth our interest expense, net, and other income, net, for the periods shown (in thousands, except percentages):

The increase was primarily due to higher employee-related expenses, including share-based compensation expense, of $44.5 million and impairment of lease related assets of $5.2 million.

General and administrative expenses as a percentage of net revenues were 28% during the year ended December 31, 2022 compared to 20% during the same period in 2021.

Interest Expense, Net and Other Income (Expense), Net

The following table sets forth our interest expense, net, and other income (expense), net, for the periods shown (in thousands, except percentages):

Years Ended December 31, Change in 2022

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Interest expense, net $ (6,040) $ (6,896) $ 856 (12) %

Other (expense) income, net (65,472) 8,683 (74,155) n/m

Total interest expense, net and other (expense) income, net $ (72,368) $ (57,614) $ (14,754) 26

Other income (expense), net 101,029 (65,472) 166,501 n/m

Total interest expense, net and other income (expense), net $ 94,989 $ (72,368) $ 167,357 n/m

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Interest expense, net decreased by $0.9 million, or 12%, during the year ended December 31, 2022, compared to the same period in 2021.

The decrease was primarily due to the reduction in non-cash interest expense related to the debt discount as a result of the adoption of ASU 2020-06 on January 1, 2021.

Other income, net, decreased by $74.2 million during the year ended December 31, 2021, compared to the same period in 2020.

The decrease was primarily due to the $78.2 million loss on early extinguishment of debt related to the 2025 notes, $7.1 million net loss on the change in fair value of derivative instruments, and $6.1 million of lower interest income earned on our investments partially offset by the $12.5 million gain on the sale of our strategic equity investments and absence of the $4.3 million loss on early extinguishment of debt related to the partial exchange of the 2023 notes.

See Note 10, “Convertible Senior Notes,” of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for additional information on changes to interest expense, net related to the adoption of ASU 2020-06 and other (expense) income, net related to the losses on early extinguishment of debt and the change in fair value of derivative instruments.

Provision for Income Taxes

The following table sets forth our provision for income taxes for the periods shown (in thousands, except percentages):

The decrease was primarily due to the partial extinguishment of the 2026 notes in 2022 as well as the full redemption of the 2023 notes in 2021.

Other income (expense), net increased by $166.5 million during the year ended December 31, 2022, compared to the same period in 2021.

The increase was primarily due to the $93.5 million gain on early extinguishment of a portion of the 2026 notes, $5.7 million increase in interest income, the $4.6 million gain on foreign currency remeasurement of purchase consideration related to our acquisition of Busuu, and the absence of certain items in 2021 including the $78.2 million loss on early extinguishment of debt of a portion of the 2025 notes and the $7.1 million net loss on the change in fair value of derivative instruments, partially offset by a $9.5 million increase in realized losses on the sale of certain investments primarily to align with our updated investment policy, and the absence of the $12.5 million gain on the sale of the strategic equity investments in 2021.

See Note 11, “Convertible Senior Notes,” of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for additional information on the gain on early extinguishment of a portion of the 2026 notes and 2025 notes.

Benefit from (provision for) income taxes

The following table sets forth our benefit from (provision for) income taxes for the periods shown (in thousands, except percentages):

Years Ended December 31, Change in 2022

2022 2021 $ %

Provision for income taxes $ 7,197 $ 5,360 $ 1,837 34 %

The provision for income taxes increased during the year ended December 31, 2021, compared to the same period in 2020.

The increase was primarily due to an increase in foreign profits and the withholding taxes related to the March 2021 sale of our strategic equity investment, partially offset by foreign deferred tax benefit.

Benefit from (provision for) income taxes $ 162,692 $ (7,197) $ 169,889 n/m

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*n/m - not meaningful

The change in benefit from (provision for) income taxes was primarily due to the release of the valuation allowance against a substantial amount of our U.S.

and certain state jurisdictions deferred tax assets.

See Note 17, “Income Taxes,” of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for additional information.

Liquidity and Capital Resources

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The substantial majority of our net revenues are from e-commerce transactions with students, which are settled immediately through payment processors, as opposed to our accounts payable, which are settled based on contractual payment terms with our suppliers.

In January 2022, we completed our acquisition of Busuu Online S.L.

In November 2021, our board of directors approved a $500.0 million increase to our existing securities repurchase program authorizing the repurchase of up to $1.0 billion of our common stock and/or convertible notes, through open market purchases, block trades, and/or privately negotiated transactions or pursuant to Rule 10b5-1 plans, in compliance with applicable securities laws and other legal requirements.

In June 2022, our board of directors approved a $1.0 billion increase to our existing securities repurchase program authorizing the repurchase of up to $2.0 billion of our common stock and/or convertible notes, through open market purchases, block trades, and/or privately negotiated transactions or pursuant to Rule 10b5-1 plans, in compliance with applicable securities laws and other legal requirements.

The timing, volume, and nature of the repurchases will be determined by management based on the capital needs of the business, market conditions, applicable legal requirements, and other factors.

During the year ended December 31, 2021, we entered into an accelerated share repurchase program for $300.0 million and repurchased $100.0 million of aggregate principal amount of the 2025 notes in privately-negotiated transactions for an aggregate consideration of $184.9 million.

During the year ended December 31, 2020, we repurchased $57.4 million of aggregate principal amount of the 2023 notes in privately-negotiated transactions for an aggregate consideration of $149.6 million.

As of December 31, 2021, $365.5 million remains under the repurchase program, which has no expiration date and will continue until otherwise suspended, terminated or modified at any time for any reason by our board of directors.

In February 2022 and December 2021, we entered into accelerated share repurchase (ASR) agreements with financial institutions for $600 million.

During the year ended December 31, 2022, we also repurchased 1,146,803 shares of our common stock for $23.1 million through open market repurchases.

Additionally, we've repurchased $500.0 million principal amount of the 2026 notes, $100.0 million principal amount of the 2025 notes and $57.4 million principal amount of the 2023 notes in privately-negotiated transactions for aggregate consideration of $734.4 million.

As of December 31, 2022, $642.6 million remaining under the repurchase program, which has no expiration date and will continue until otherwise suspended, terminated or modified at any time for any reason by our board of directors.

In February 2021, we completed an equity offering in which we raised net proceeds of $1,091.5 million, after deducting underwriting discounts, commissions and offering expenses (2021 equity offering).

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The 2026 notes and 2025 notes mature on September 1, 2026 and March 15, 2025, respectively, unless converted, redeemed, or repurchased in accordance with their terms prior to such dates.

As of December 31, 2021, we have incurred cumulative losses of $337.2 million from our operations and we expect to incur additional losses in the future.

Our operations have been financed primarily by our initial public offering of our common stock (IPO), our 2017 follow-on public offering, our convertible senior notes offerings, our 2021 equity offering, and cash generated from operations.

As of December 31, 2022, we have incurred cumulative losses of $70.6 million from our operations and we may incur additional losses in the future.

Our operations have been financed primarily by our convertible senior notes offerings, our 2021 equity offering, and cash generated from operations.

The following table is a summary of our contractual obligations and other commitments as of December 31, 2022 (in thousands):

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(1) Includes semi-annual cash interest payments of $0.4 million.

Our convertible senior notes are recorded on our consolidated balance sheets at the carrying amount of $1,678.2 million as of December 31, 2021.

Our convertible senior notes are recorded on our consolidated balance sheets at the carrying amount of $1.2 billion as of December 31, 2022.

(2) Represents contractual obligations primarily related to information technology services.

(3) Our offices are leased under operating leases, which expire at various dates through 2027.

(3) Our corporate offices are leased under operating leases, which expire at various dates through 2028.

In addition, our other long-term liabilities include $5.0 million related to uncertain tax positions as of December 31, 2022.

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Net cash provided by operating activities $ 255,736 $ 273,224

Net cash used in investing activities (365,768) (732,786)

Net cash provided by financing activities 466,722 588,627

Net cash provided by (used in) investing activities 104,891 (365,768)

Net cash (used in) provided by financing activities (744,803) 466,722

Cash Flows from Operating Activities

Although we incurred net losses during the years ended December 31, 2021 and 2020, our net losses were fully offset by non-cash expenditures, such as depreciation and amortization expense, share-based compensation expense, loss on extinguishments of debt, and amortization of debt discount and issuance costs.

Net cash provided by operating activities during the year ended December 31, 2022 was $255.7 million.

Our net loss of $1.5 million was offset by significant non-cash operating expenses including share-based compensation expense of $108.8 million, the loss on early extinguishment of debt of $78.2 million, other depreciation and amortization expense of $63.3 million, the net loss on textbook library of $11.0 million, which was primarily due to increased write-downs, print textbook depreciation expense of $10.9 million, the net loss on the change in fair value of derivative instruments of $7.1 million, operating lease expense, net of accretion, of $6.0 million, and amortization of debt issuance costs of $5.9 million, partially offset by the gain on sale of our strategic equity investments of $12.5 million.

Our net income of $266.6 million was adjusted by significant non-cash operating expenses including share-based compensation expense of $133.5 million, other depreciation and amortization expense of $90.0 million, realized loss on the sale of investments of $9.7 million, partially offset by the gain on early extinguishment of debt of $93.5 million and the tax benefit related to release of valuation allowance of $174.6 million.

Net cash provided by operating activities during the year ended December 31, 2021 was $273.2 million.

Our net loss of $6.2 million was increased by the change in deferred revenue of $12.9 million and accrued liabilities of $22.4 million.

Additionally, we had significant non-cash operating expenses including print textbook depreciation expense of $15.4 million, other depreciation and amortization expense of $47.0 million, share-based compensation expense of $84.1 million, the amortization of debt discount and issuance costs of $64.6 million, the loss from impairment of strategic equity investment of $10.0 million, and the loss on early extinguishments of debt of $4.3 million, partially offset by repayment of convertible senior notes attributable to debt discount of $20.4 million.

Our net loss of $1.5 million was adjusted by significant non-cash operating expenses including share-based compensation expense of $108.8 million, the loss on early extinguishment of debt of $78.2 million, other depreciation and amortization expense of $63.3 million, the net loss on textbook library of $11.0 million, which was primarily due to increased write-downs, print textbook depreciation expense of $10.9 million, the net loss on the change in fair value of derivative instruments of $7.1 million, operating lease expense, net of accretion, of $6.0 million, and amortization of debt issuance costs of $5.9 million, partially offset by the gain on sale of our strategic equity investments of $12.5 million.

Cash Flows from Investing Activities

Cash flows from investing activities have been primarily related to the purchases of investments, purchases of property and equipment, purchases of textbooks, and acquisition of businesses, offset by proceeds from the sale and maturity of investments and proceeds from the disposition of textbooks.

Net cash used in investing activities during the year ended December 31, 2021 was $365.8 million and was related to the purchases of investments of $1.7 billion, purchases of property and equipment of $94.2 million, purchases of textbooks of $10.9 million, and the acquisition of business of $7.9 million, offset by the maturity of investments of $1.2 billion, proceeds from sale of investments of $206.0 million, proceeds from the sale of our equity investments of $16.1 million and proceeds from disposition of textbooks of $8.7 million.

Net cash used in investing activities during the year ended December 31, 2020 was $732.8 million and was related to the purchases of investments of $1.0 billion, the acquisition of business of $92.8 million, purchases of property and equipment of $81.3 million, purchases of textbooks of $58.6 million, and the purchase of strategic equity investment of $2.0 million, offset by the maturity of investments of $539.9 million and proceeds from disposition of textbooks of $7.6 million.

Net cash provided by investing activities during the year ended December 31, 2022 was $104.9 million and was related to the maturity of investments of $884.9 million and proceeds from sale of investments of $458.5 million partially offset by the purchases of investments of $730.5 million, the acquisition of business of $401.1 million, and purchases of property and equipment of $103.1 million.

Net cash used in investing activities during the year ended December 31, 2021 was $365.8 million and was related to the purchases of investments of $1.7 billion, purchases of property and equipment of $94.2 million, purchases of textbooks of $10.9 million, and the acquisition of business of $7.9 million partially offset by the maturity of investments of $1.2 billion, proceeds from sale of investments of $206.0 million, proceeds from the sale of our equity investments of $16.1 million and proceeds from disposition of textbooks of $8.7 million.

Cash Flows from Financing Activities

Cash flows from financing activities have been primarily related to the issuance of convertible senior notes, net of issuance costs, issuance of common stock under stock plans, proceeds from convertible senior notes capped call instruments, offset by the purchases of convertible senior notes capped call instruments, payment of taxes related to the net share settlement of equity awards, repayment of a portion of our convertible senior notes, and repurchases of common stock.

Net cash used in financing activities during the year ended December 31, 2022 was $744.8 million and was related to the repayment of a portion of our convertible senior notes of $401.2 million, repurchase of common stock of $323.5 million, payment of $26.5 million in taxes related to the net share settlement of equity awards offset by the proceeds from the issuance of common stock under stock plans of $6.5 million.

Net cash provided by financing activities during the year ended December 31, 2021 was $466.7 million and was related to the net proceeds from our equity offering of $1,091.5 million, proceeds from 2023 notes and 2025 notes capped call instruments of $69.0 million, and the proceeds from the issuance of common stock under stock plans of $8.9 million, offset by the repayment of a portion of our convertible senior notes of $300.8 million, repurchase of common stock of $300.0 million, payment of $94.4 million in taxes related to the net share settlement of equity awards, and payment of escrow related to an acquisition of $7.5 million.

Net cash provided by financing activities during the year ended December 31, 2020 was $588.6 million and was related to the proceeds from the issuance of the 2026 notes, net of issuance costs, of $984.1 million, proceeds from 2023 notes capped call instruments of $77.1 million, and the proceeds from the issuance of common stock under stock plans of $15.5 million, offset by the payment of $80.7 million in taxes related to the net share settlement of equity awards, the purchase of capped call instruments related to our 2026 notes of $103.4 million, and the repayment of a portion of our convertible senior notes of $304.0 million.

Critical Accounting Policies, Significant Judgments and Estimates

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The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures.

These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources.

These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily

apparent from other sources.

We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances.

On an ongoing basis, we evaluate our estimates and assumptions.

The current COVID-19 pandemic has caused uncertainty and disruption in the global economy and financial markets.

We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities.

These estimates may change as new events occur and additional information is obtained.

Our actual results may differ from these estimates under different assumptions or conditions.

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For further information on all of our significant accounting policies, see Note 2, “Significant Accounting Policies”, of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Textbook Library

We write down textbooks on a book-by-book basis for lost, damaged, or excess print textbooks.

Factors considered in the determination of write-downs for print textbooks include historical experience, management’s knowledge of current business conditions, and expectations of future demand.

The consideration of these factors requires management to make significant judgments in the determination of our write-down for print textbooks in any given period which could have a material impact on our results of operations.

We depreciate our print textbooks, less an estimated salvage value, over an estimated useful life of four years using an accelerated method of depreciation, as we estimate this method most accurately reflects the actual pattern of decline in their economic value.

The salvage value considers the historical trend and projected proceeds for print textbooks.

The useful life is determined based on the estimated time period in which the print textbooks are held and rented.

We review the estimated salvage value and useful life of our print textbook library on an ongoing basis.

We review the accelerated method of depreciation to ensure consistency with the value of the print textbooks to our customers during their useful life.

Based on historical experience, we believe that a print textbook has more value to our customers and us early in its life and therefore an accelerated depreciation method best reflects the actual pattern of decline in economic value and aligns with the print textbooks’ deteriorating condition over time.

In addition, we consider the utilization of the print textbooks and the revenues we can earn, recognizing that a used print textbook rents for a lower amount than a new print textbook.

Should the actual rental activity or deterioration of print textbooks differ from our estimates, the gain or loss on print textbooks liquidated or the net book value of print textbooks purchased by students at the end of the term could differ in any given period, which could have a material impact to our results of operations.

In addition, we evaluate the appropriateness of the estimated salvage value and useful life estimates based on historical transactions with both vendors and customers and by reviewing a blend of actuals and estimates of the lifecycle of each print textbook.

Our estimates utilize data from historical experience, including actual proceeds from print textbooks as a percentage of original sourcing costs, channel mix and the projected value of a print textbook in relation to the original source cost over time.

As we continue to accumulate additional data related to our print textbook library, we may make refinements in the estimated salvage value, method of depreciation, or useful life.

Any potential refinements could impact our print textbook depreciation expense, the gain or loss on print textbooks liquidated, or the net book value of print textbooks purchased by students at the end of the term and could have a material impact to our results of operations.

Revenue Recognition and Deferred Revenue

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There are significant judgments involved in determining whether we control the specified goods or services prior to transferring them to the customer including whether we have the ability to direct the use of the good or service and obtain substantially all of the remaining benefits from the good or service.

We have concluded that we control our Subscription Services, print textbooks that we own for rental or purchase until April 2022, and eTextbook service until December 2022 and therefore we recognize revenues and cost of revenues on a gross basis.

Beginning in April 2022 for print textbooks and December 2022 for eTextbooks, we have concluded that GT controls the service and we recognize revenues on a net basis based on our role in the transaction as an agent.

In relation to print textbooks owned by a partner, we recognize revenues on a net basis based on our role in the transaction as an agent as we have concluded that we do not control the use of the print textbooks, and therefore record only the net revenue share we earn.

Some of our customer arrangements include multiple performance obligations.

We have determined these performance obligations qualify as distinct performance obligations, as the customer can benefit from the service on its own or together with other resources that are readily available to the customer, and our promise to transfer the service is separately identifiable from

other promises in the contract.

For these arrangements that contain multiple performance obligations, we allocate the transaction price based on the relative standalone selling price (SSP) method by comparing the SSP of each distinct performance obligation to the total value of the contract.

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When measuring the recoverability of these assets, we will make assumptions regarding our estimated future cash flows expected to be generated by the assets.

If our estimates or related assumptions change in the future, we may be required to impair these assets.

If our estimates or related

assumptions change in the future, we may be required to impair these assets.

We did not record any impairment charges related to acquired intangible assets or other long-lived assets during the years ended December 31, 2022 and 2021.

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As we continue to accumulate additional data related to our common stock, we may refine our estimates, which could materially impact our future share-based compensation expense.

Provision for Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our consolidated financial statements or tax returns.

In estimating future tax consequences, we generally consider all expected future events other than enactments or changes in the tax law or rates.

In assessing the realization of deferred tax assets, we consider whether it is more likely than not that all or some portion of deferred tax assets will not be realized.

The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

Valuation allowances are provided to reduce deferred tax assets to the amount that is more likely than not to be realized.

In assessing the need for a valuation allowance, we consider all available evidence including future reversals of existing taxable temporary differences, projected future taxable income, taxable income in prior carryback years if permitted

under the tax law, and tax-planning strategies.

In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of technical merits of the position and (2) for those tax positions that meet the more likely than not recognition threshold, we recognize the tax benefit as the largest amount that is cumulative more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

The calculation of tax expense and liabilities involves dealing with uncertainties in the application of complex global tax regulations.

We recognize potential liabilities for anticipated tax audit issues in the U.S.

and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due.

Significant judgment is required in determining our provision for income taxes and evaluating our uncertain tax positions.

To the extent that the final tax outcome of these matters may differ from the amounts that were initially recorded, such differences will impact the income tax provision in the period in which such determination is made.

As a result, significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis