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Chegg (CHGG) Tops Q4 Earnings Estimates, Raises '19 View

Zacks Equity Research

Chegg, Inc.’s CHGG fourth-quarter 2018 earnings and revenues topped the Zacks Consensus Estimate, given higher-than-expected margins and strong contribution from Chegg Services. The educational technology company also lifted its guidance for 2019, helping Chegg’s shares to gain 10.1% in after-hour trading on Monday.

The company’s adjusted earnings of 25 cents per share came ahead of the analysts’ expectation of 21 cents by 19.1%. The reported figure also increased more than 66% from the year-ago profit level of 15 cents. The upside can be attributed to increased investments in new subjects, content, formats and services.

Net revenues of $95.7 million surpassed the consensus mark of $91.7 million by 4.3% and rose 30% year over year. The uptrend was primarily backed by an increase in Chegg Services revenues.

Chegg, Inc. Price and EPS Surprise

Chegg, Inc. Price and EPS Surprise | Chegg, Inc. Quote

Chegg Services Revenues & Subscription Details

Chegg’s total net revenues are derived from two streams, namely Chegg Services and Required Materials.

Chegg Services revenues (accounting for 85% of total net revenues) of $81.7 million increased 35% year over year. The upside was driven by an increased rate of subscription. The Chegg Services subscriber base totaled 1.9 million in the quarter, up 34% year over year.

Total Chegg Study content views surged 32% year over year to 224 million in the quarter.

Operating Highlights

Gross profit of $73.6 million in the quarter increased 36% from the year-ago level. Gross margin of 76.9% was higher than the prior-year quarter’s 73.6% and also surpassed the company’s expectation, courtesy of additional revenues from Chegg Services.

Adjusted EBITDA of $34.8 million reflects a substantial improvement of 65.1% from the year-ago level of $21.1 million.

2018 Highlights

Adjusted earnings came in at 55 cents, beating the consensus estimate of 50 cents and also improving 96.4% year over year. Total revenues increased 26% to a record $321 million, beating analysts’ expectation of $317.1 million.

Importantly, Chegg Services' revenues grew 37% to $254 million and hit a record of 3.1 million subscribers, reflecting an increase of 850,000 or 38% from 2017. Gross margin expanded 600 basis points (bps) to 75% from 69% in 2017, resulting in adjusted EBITDA of $83 million (up 80% from 2017) or 26% of total revenues.

Balance Sheet

Chegg had cash and cash equivalents of $374.7 million for the period ended Dec 31, 2018 compared with $126.5 million as of Dec 31, 2017.

First-Quarter 2019 Guidance

Net revenues are expected in the range of $93.5-$95.5 million, whereas Chegg Services revenues are anticipated in the band of $72.5-$74.5 million. Gross margin is expected between 74% and 75%, and adjusted EBITDA is projected within $22-$23 million.

2019 Guidance Raised

The company now expects net revenues in the range of $390-$395 million, higher than the previous expectation of $388 million. Chegg Services Revenues are projected in the range $327-$331 million, up from previous projection of $326 million.

Gross margin is expected between 75% and 76% for 2019 compared with 75% projected earlier. The company expects adjusted EBITDA in the range of $115-$118 million, up from previous projection of $112 million. Notably, this represents approximately 350 bps increase from 26% achieved in 2018.

Capital expenditure is expected within $40-$50 million.

Zacks Rank & Other Stocks to Consider

Currently, Chegg has a Zacks Rank #2 (Buy).

Other top-ranked stocks in the Computer and Technology sector include AudioEye, Inc. AEYE, Benefitfocus, Inc. BNFT and The Meet Group, Inc. MEET, each flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AudioEye, Benefitfocus and Meet Group’s earnings for 2019 are expected to grow 33.3%, 72% and 19.4%, respectively.

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