Study and tutoring innovator Chegg Inc. (NYSE:CHGG) released second-quarter 2018 earnings results on July 30. As has been the case in recent quarters, the company exploited strong demand for its suite of study tools among U.S. middle school, high school, and college students. Let's look at how the educational-services provider fared by first walking through summary numbers, then diving into the quarter's salient details:
Chegg Inc.: The raw numbers
|Metric||Q2 2018||Q2 2017||Year-Over-Year Growth|
|Revenue||$74.2 million||$56.3 million||31.8%|
|Net income (loss)||($3.9 million)||($6.0 million)||N/A|
|Diluted earnings (loss) per share||($0.03)||(0.06)||N/A|
What happened at Chegg this quarter?
The company's handsome 32% top-line advance was propelled by the Chegg Services division, which expanded year-over-year revenue by 38%, to $61.8 million. Chegg Services includes products such as Chegg Study, Chegg Tutors, Chegg Writing, and test preparation. The segment represented 83% of total quarterly revenue.
Subscribers to Chegg Services increased 45%, to 1.7 million users. The company reported 158 million content views during the quarter, an increase of 62% versus the second quarter of 2017.
Required Materials, Chegg's textbook sale and rental service (fulfilled through third-party textbook providers), improved revenue by 7%, to $12.4 million. Chegg CFO Andy Brown observed that through the first half of the year, Required Materials revenue is even with the prior year, which indicates that the company is gaining market share since the overall market for textbook sale and rental is in a downward trend.
Chegg's quarterly loss from operations declined to just $711,000 against $5.3 million in the second quarter of 2017. But new interest expense of $3.7 million tied to the company's $345 million convertible bond offering in April 2018 pushed the company to an ultimate net loss of nearly $4 million. As I discussed this spring, Chegg has steadily raised its cash coffers through equity and bond offerings, with an eye to expanding its capabilities via bolt-on acquisitions.
Speaking of this strategy, the company recently completed two acquisitions, putting its higher cash balances to use. Chegg snapped up artificial intelligence (AI)-powered writing platform WriteLab in May for $15 million in cash along with $5 million of future performance-based, contingent consideration. And just after quarter-end, Chegg purchased online flash-card specialist StudyBlue, for $20.8 million in cash.
Gross margin continued to improve, rising more than 6 percentage points against the prior-year quarter, to 76%, as higher sales of the company's cloud-based software services outran a relatively fixed cost structure.
Improving margins are contributing to better cash flow. During the first half of 2018, Chegg generated $23.5 million in operating cash flow versus $16.5 million in the first six months of 2017.
What management had to say
In prepared remarks on the company's earnings conference call, CEO Dan Rosensweig highlighted an emerging focus area that should expand Chegg's total addressable market (TAM). That area is one of the most vexing subjects for many high school and college students: math. Rosensweig relayed the following:
...[I]n June, we launched a desktop version of the Chegg Math Solver subscription. This service helps students understand math by providing guided, step-by-step explanations to help them learn difficult concepts in subjects like pre-algebra, pre-calculus, calculus, and linear algebra. It is designed to increase comprehension and understanding of the subject matter and accelerate learning in high school and college.
The CEO also put a date on a long-awaited feature by both consumers and shareholders of the company: the ability to purchase a bundle of the various Chegg Services products. Service bundling, common in the software-as-a-service (SaaS) market, should further bolster Chegg's subscription base and top line:
With the addition of math to our growing suite of Chegg Services, we have started testing our first bundle, the Chegg Study Pack, which we anticipate launching in the fall of 2019. This combines Chegg Study with Math Solver and EasyBib Plus, our math and writing subscriptions, into a single subscription offering. Students will have access to all three services, for the first time, seamlessly integrated and for a substantial discount.
Chegg's management was appropriately emboldened by strong subscription growth to raise full-year earnings guidance for the second time this year. The company now anticipates 2018 revenue in a range of $306 million to $311 million against last quarter's estimate of $300 million to $305 million.
Gross margin, previously forecast to land between 72% and 74% for the year, is presently projected to hit a band of between 73% and 75%. The revenue gains and higher gross margin inform a new adjusted EBITDA expectation of $79 million to $81 million. That's an incremental improvement on the target of $77 million to $79 million set three months ago, but don't be surprised if management makes one last upward tweak to the year's outlook when Chegg reports results next quarter.