Chegg, Inc. CHGGis set to report first-quarter 2018 results on Apr 26, after the market closes.
In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate by 15.4%. Moreover, Chegg surpassed expectations in three of the last four quarters, the average being 55.1%.
Let’s see how things are shaping up prior to this announcement.
Factors at Play
The rising popularity of online, on-demand human help for different courses at high school and college levels bode well for Chegg. The company’s strategy of delivering high-quality and low-cost educational services is also a positive.
Chegg’s revenues comprise two streams — Chegg Services and Required Materials. The company’s strategic investments in Chegg Services are expected to drive the upcoming quarterly results. Chegg services subscribers rose 45% to a record 2.2 million in 2017. The trend is expected to continue in the to-be-reported quarter. The Zacks Consensus Estimate for Chegg services subscribers is pegged at 1.55 billion compared with 1.1 million in the prior-year quarter.
The company projects Chegg Services revenues in the band of $54-$55.5 million, showing a rise from $41 million in the year-ago quarter. The Zacks Consensus Estimate for revenues is pegged at $55 million, implying a 34% year-over-year increase.
Moreover, investments in Chegg Study (part of Chegg Services) have led to record results in subscribers, engagement and renewals. This has led to an impressive 60% year-over-year growth in engagement, resulting in 440 million views in 2017. The trend is expected to be reflected in the to-be reported quarterly result.
However, revenues in the Required Materials are expected to fall. The Zacks Consensus Estimate for Required Materials revenues is pegged at $19.4 million, implying a 10% year-over-year decline.
The company anticipates gross margin between 71% and 73%, higher than 66% in the prior-year quarter. Adjusted EBITDA is expected at around $14-$16 million compared with $9.5 million posted in the first quarter of quarter.
Overall, for the first quarter, Chegg projects total revenues in the $73-$75 million band, compared with $62.6 million in the prior-year quarter. Also, the Zacks Consensus Estimate for revenues is pegged at $74.4 million, implying an 18.8% increase.
A strong top-line growth owing to increased contributions by Chegg Services is expected to translate into higher earnings, given the relatively fixed cost structure. Earnings are expected at 9 cents per share, reflecting a 50% improvement, per the consensus estimate.
Zacks Model
Our proven model does not show that Chegg is likely to beat estimates because it does not have the right combination of two key ingredients.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is pegged at -0.38%. A positive Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Chegg has a Zacks Rank #3 (Hold).
Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates.
Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.
The combination of Chegg’s Zacks Rank #3 and -0.38% ESP makes us skeptical about an earnings beat in the quarter to be reported.