The Bull Thesis For Chegg

With Our Proprietary Sum Of The Parts Valuation

Why Would I Invest In A Textbook Rental and Sale Company?

Disclaimer

• The analyses and conclusions of Diamond Technology Management, an unregistered investment advisor, contained in this presentation are based on publicly available information.

• Diamond Technology Management recognizes that there may be confidential information in the possession of the companies discussed in the presentation that could lead these companies to disagree with our analysis.

• Diamond Technology Management has a long position in Chegg. It is possible that there will be developments in the future that cause Diamond Technology Management to change its position regarding the companies discussed in this presentation. Diamond Technology Management may buy, sell, cover or otherwise change the form of its investment regarding such companies for any reason. Diamond Technology Management hereby disclaims any duty to provide any updates or changes to the analyses contained here including, without limitation, the manner or type of any Diamond Technology Management Investment. No representations, express or implied, are made as to the accuracy or completeness of such statements, estimates or projections or with respect to any other materials herein. Actual results may vary materially from the estimates and projected results contained herein. This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities. Individuals should conduct their own analysisprior to investing.

Business Overview

• Chegg is the leading student-first connected learning platform, empowering students to take control of their education to save time, save money and get smarter. Revenue streams include:

• Print Textbooks

• eTextbooks

• Chegg Study

• Enrollment marketing services

• Internships

• Brand Advertising

Chegg Has Been Ostracized By Investors$12.50 Initial

Public Offering

At Current Prices The Stock Looks Like An Appealing Turnaround Investment

$6.93: Closing Price(3/28/14)

Why CHGG Is Our High Conviction Long

• Chegg is transitioning away from the textbook rental and sale business to be a young professional educational and career network

• Growth and margin profile are significantly higher in non-print segments

• Valuation of a 100% non-print business justifies current stock price with investors receiving a high revenue print business they are not paying for

• Chegg has a history of making relevant acquisitions and has indicated interest in continuing to do so. Acquisitions will expedite the transition to an entirely digital business.

• Linkedin offers relevant data as to what Chegg could eventually become in its target market and returns investors could realize

• Sum of the parts valuation yields a $11 per share value consistent with where bankers priced initial public offering

• As a conservative investor we are looking for share price to return to $9 per share

U.S. Education Market

Huge And Expanding Market $1 Trillion Dollar Market

Source: National Associate Of College StoresSource: GSV Estimates; Education Sector 2012

Chegg Only Needs .1% market share to become billion dollar company and double its market capitalization

Chegg Well Positioned Within The Market

• Provides access to over 70,000 internship opportunities through their co-branded Internship service

• During 2013, students completed 3.8 million transactions on Cheggplatform, and Chegg rented or sold over 5.5 million print textbooks and eTextbooks

• In 2013, approximately 464,000 students subscribed to Chegg’s proprietary Chegg Study service.

• Received 7.6 million inquiries from students using our College Admissions and Scholarship Services

• During 2013, nearly 7.0 million students used Chegg’s platform and approximately 1.3 million students used their mobile applications

Chegg Has Nearly 30% of all U.S. college

students somewhere within their platform

http://www.cnbc.com/id/100391877

"When we took over the business three years

ago, it was clear that print textbooks and the

rental model wouldn't be around forever, as the

world goes increasingly digital,"

Dan Rosenweig Chegg CEO 2013 CNBC Interview

The Transition

Chegg FY 2013 Earnings Call

“Student have shown great interest in our new digital learning services and from us and our partners. So you can expect us to launch more of them in 2014. The success of Chegg study which grew 66% year-over-year and has climbed to 464,000 paying subscribers shows the opportunity we have to offer more digital services”

“Brand partnerships has seen significant growth. We are seeing growth in probably different ways. More overall advertisers, we have over 90% renewal rates and on average, each advertiser is right with us, increases the amount of money they spent on their new campaigns”

“So you can imagine over time the opportunity for Chegg to continue to provide services and now into the career area. So long term, we think it’s a very big money maker for us”

Dan Rosenweig Chegg CEO FY 2013 Earnings Call

But Chegg Is A Textbook Business

Why is Chegg talking about careers? Who else is in the career sector?

Linkedin Stock Price Since IPO

Chegg Is Highly Motivated To Grow Career Offerings

Source: http://www.chegg.com/app-preview/internships

“So today, what we have is expressions that where students want to go to school, what their gender is, what their

age is, what their majors are. Now that we have the opportunity to understand what they are interested in do

professionally, that opens up whole new opportunities in the categories of skills and ultimately careers and so

our next step in data collection will be around that area.”

Source: Dan Rosenweig Q4 2013 Earnings Call

What If Chegg Became Young Linkedin

Source: Linkedin 10-K Filings

Additional revenue stream Chegg may develop as

builds “Student Graph”

Premium Membership Revenue Stream

To apply a numerical context to our argument, we have modelled one of Linkedin’s revenue streams being applied by Chegg. Offering a premium job applicant membership would yield a strong revenue stream once Chegg sourced more employers to its platform(Could occur in 2016)

2013 2014 2015 2016 2017 2018

Number of Active Users 7,000,000 7,500,000 8,000,000 9,000,000 10,000,000 11,000,000

Percent Of Users Converting To Premium 0.00% 0.00% 0.00% 1.00% 2.00% 4.00%

Number of Premium Users - - - 90,000 200,000 440,000

Premium Membership Price(Monthly) $9.99 $9.99 $9.99 $9.99 $9.99 $9.99

Revenue From Premium Stream $0 $0 $0 $10,789,200 $23,976,000 $52,747,200

Cost of Sales(CPA) -$ -$ -$ 135,000$ 300,000$ 660,000$

Technology Expenses(Per User) -$ -$ -$ 90,000$ 200,000$ 440,000$

Net Profit $0 $0 $0 $10,564,200 $23,476,000 $51,647,200

Outstanding Shares 20,902,000 85,000,000 88,000,000 90,000,000 93,000,000 96,000,000

EPS 0.00 0.00 0.00 0.12 0.25 0.54

P/E 50

Per Share Value 27

Chegg can add substantial share value through its transition to careers. The illustrative

example of adding a premium membership at $9.99(Substantial Discount to Linkedin)

shows it adds $27 per share of value

History Of Relevant Acquisitions

• Acquisition of Cramster (1 million users at acquisition) facilitating expansion into Chegg study offering

• Acquisition of Zinch(acquisition of Zinch, with over 3.5 million members, $1.9 billion in scholarships and over 5,000 school profiles, will significantly expand Chegg’s customer base and its social education platform)

• Company is well capitalized to execute acquisition in FY 2014. As of December 31, 2013, Chegg’s principal sources of liquidity were cash, cash equivalents and investments totaling $138.3 million, which were held for working capital purposes. Chegg’s cash equivalents and investments are composed primarily of commercial paper, corporate securities and money market funds. Chegg has $50.0 million available for draw down under their revolving credit facility with an accordion feature subject to certain financial criteria that would allow them to draw down to $75.0 million in total, which expires in August 2016.

Many Potential Acquisition Opportunities

Rosenweig recently invested in

themuse personally. Career

profiling.

http://techcrunch.com/2014/02/

04/tyra-banks-and-more-put-a-

million-in-the-muse/

We believe management is actively searching for acquisition targets

with their sizable cash balance.

Acquisitions within the young recruiting space would align with

Chegg’s recent expansion into internships

Runs challenges for companies to screen

college applicants, already has revenue

stream. Strong technical development

team.

$650,000 unique student visitors a month

Sell Side Consensus

Sell-side projections offer meaningful

upside from current levels with no price

target below current market price

Firm Price Target Valuation Method Utilized Upside(Downside) From Current Price

J.P. Morgan 13.00$ DCF 88%

Bank Of America 8.00$ EV/EBITDA Multiple 15%

Jefferies 14.00$ N/A 102%

Raymond James 12.00$ N/A 73%

BMO 11.00$ N/A 59%

Average 11.60$ 67%

Diamond Technology Management $9.00 Blended 30%

Closing Price As Of 03/28/14: $6.93 6.93

Non-Print Digital Stand Alone Valuation

• The non-print business grew its revenue 86% over the past year. If Chegg was entirely a non-print and digital offering(impossible currently because the textbooks are instrumental in driving growth of digital offerings) what would the business be worth per share?

• Assumptions in our model include:

1-Digital Cost of Revenue Derived from Chegg’s historical financials

2-Technology and development estimated from Salesforce.com(CRM) a subscription company’s financials, given Chegg’s current digital revenue is subscription based.

3-Sales and Marketing estimated from Linkedin (LNKD) financials given consumer focus of Chegg and its transition to careers

4-General and administrative estimated utilizing Chegg’s historical rates

5- Utilize a 12% WACC, consistent with discount rates utilized for other high growth internet businesses

6- 7% profit margin in 2018 is in line with where Linkedin’s margins are anticipated to settle

Non-Print And Digital Support Current Stock Price

(values in thousands)

2011 2012 2013 2014 2015 2016 2017 2018

Non-print products and digital services 11,626$ 28,165$ 52,498$ 86,000$ 130,000$ 190,000$ 247,000$ 321,100$

y/y revenue growth 142.26% 86.39% 63.82% 51.16% 46.15% 30.00% 30.00%

Cost of Revenue* 4,069$ 9,858$ 18,374$ 29,240$ 42,900$ 58,900$ 74,100$ 86,697$

% of Sales 35% 35% 35% 34% 33% 31% 30% 27%

Gross Profit 7,557$ 18,307$ 34,124$ 56,760$ 87,100$ 131,100$ 172,900$ 234,403$

% of Sales 65% 65% 65% 66% 67% 69% 70% 73%

Technology and development** 1,860$ 4,506$ 8,400$ 13,760$ 20,800$ 30,400$ 39,520$ 51,376$

% of Sales 16% 16% 16% 16% 16% 16% 16% 16%

Sales and marketing*** 3,953$ 9,576$ 17,849$ 29,240$ 44,200$ 64,600$ 83,980$ 109,174$

% of Sales 34% 34% 34% 34% 34% 34% 34% 34%

General and administrative $1,860.16 4,506$ 8,400$ 13,760$ 20,800$ 30,400$ 39,520$ 51,376$

% of Sales 16% 16% 16% 16% 16% 16% 16% 16%

Operating Income -$117 -$282 -$525 -$1 $1,300 $5,700 $9,880 $22,477

interest and other expense,net (1,703)$ (3,759)$ (4,177)$ -$ -$ -$ -$ -$

Pre-Tax Earnings -$1,820 -$4,041 -$4,702 -$1 $1,300 $5,700 $9,880 $22,477

Provision(benefit) for income taxes -$ -$ -$ -$ -$ -$ -$ -$

Net Loss -$1,820 -$4,041 -$4,702 -$1 $1,300 $5,700 $9,880 $22,477

Profit Margin -15.7% -14.3% -9.0% 0.0% 1.0% 3.0% 4.0% 7.0%

Weighted Shares Outstanding(Basic) 8,453 11,183 20,902 85,000 88,000 90,000 93,000 96,000

EPS -$0.22 -$0.36 -$0.22 $0.00 $0.01 $0.06 $0.11 $0.23

12$

7$

Non-print products and digital servicesHistorical as of FYE December 31 Projected as of FYE December 31

$7 per share value of non-print and digital alone justifies current share price.

Investors are not paying to own the print business at current levels.

Print Valuation

(values in thousands)

2011 2012 2013 2014 2015 2016 2017 2018

Print Revenue 160,392$ 185,169$ 203,077$ 225,000$ 260,000$ 300,000$ 340,000$ 365,000$

y/y revenue growth 15.45% 9.67% 10.80% 15.56% 15.38% 13.33% 7.35%

Cost of Revenue* 126,710$ 146,284$ 160,431$ 175,500$ 200,200$ 228,000$ 255,000$ 270,100$

% of Sales 79% 79% 79% 78% 77% 76% 75% 74%

Gross Profit 33,682$ 38,885$ 42,646$ 49,500$ 59,800$ 72,000$ 85,000$ 94,900$

% of Sales 21% 21% 21% 22% 23% 24% 25% 26%

Technology and development** 12,831$ 14,814$ 16,246$ 18,000$ 20,800$ 24,000$ 27,200$ 29,200$

% of Sales 8% 8% 8% 8% 8% 8% 8% 8%

Sales and marketing*** 8,020$ 9,258$ 10,154$ 11,250$ 13,000$ 15,000$ 17,000$ 18,250$

% of Sales 5% 5% 5% 5% 5% 5% 5% 5%

General and administrative $22,454.88 25,924$ 28,431$ 31,500$ 36,400$ 42,000$ 47,600$ 51,100$

% of Sales 14% 14% 14% 14% 14% 14% 14% 14%

Operating Income -$9,624 -$11,110 -$12,185 -$11,250 -$10,400 -$9,000 -$6,800 -$3,650

interest and other expense,net (1,703)$ (3,759)$ (4,177)$ -$ -$ -$ -$ -$

Pre-Tax Earnings -$11,327 -$14,869 -$16,362 -$11,250 -$10,400 -$9,000 -$6,800 -$3,650

Provision(benefit) for income taxes -$ -$ -$ -$ -$ -$ -$ -$

Net Loss -$11,327 -$14,869 -$16,362 -$11,250 -$10,400 -$9,000 -$6,800 -$3,650

Profit Margin -7.1% -8.0% -8.1% -5.0% -4.0% -3.0% -2.0% -1.0%

Shares Outstanding 8,453 11,183 20,902 85,000 88,000 90,000 93,000 96,000

EPS -1.34 -1.33 -0.78 -0.13 -0.12 -0.10 -0.07 -0.04

Print ValuationHistorical as of FYE December 31 Projected as of FYE December 31

EV/Revenue 1X

Enterprise Value 225,000$

Cash and Equivalents 76,864$

Equity Value 301,864$

Shares Outstanding FY 14 85,000

4$

Utilizing a 1X revenue multiple (the low end of Amazon’s

range) on 2014 revenue yields a per share value of $4 for

the lower growth print business

Advertising As Revenue Stream

Chegg has ability to offer more relevant advertisements

than other advertising based businesses like Facebook

Actual Product Students Need, with free trial

Although I need food and insurance many of Facebook ads are more general, obtrusive, and less pragmatic

Short Thesis

• Non-print growth is lower than expected. Zinch and CheggStudy are relatively new offerings and there is uncertainty about what new services Chegg can offer.

• Textbook sale and rental is highly competitive and Amazon has started a pricing war. Currently Print textbooks are a majority of Chegg’srevenue.

We feel that given the multi-billion dollar market size, strong

management team, and strong balance sheet Chegg has amassed

that Chegg will be able to grow its non-print offerings through

internal development and acquisitions, making within the

longer time horizon the physical textbook aspect of the business

irrelevant

Major Risk Factors

• Limited operating history makes it difficult to evaluate current business and future prospects

• History of losses and may not achieve or sustain profitability into the future

• Business model is uncertain in both print and non-print segments

• Linkedin is a strong competitor and has executed very well within career sector