Shares of online study resource provider Chegg Inc. (NYSE:CHGG) have been as fraught and volatile over the last five weeks as a college freshman's initial semester exam trajectory. Following the disclosure of a security breach on Sept. 26, Chegg stock gradually relinquished nearly 30% of its value but reversed course when the company's third-quarter earnings results were issued on Oct. 29.

The "CHGG" symbol has gained 18.5% in the two trading sessions following the report's release. Below, we'll review highlights from the quarter and the factors behind investors' renewed optimism on the content and tutoring organization's prospects:

Chegg Inc.: The raw numbers

Metric Q3 2018 Q3 2017 Year-Over-Year Growth
Revenue $74.2 million $62.6 million 18.5%
Net income (loss) ($13.7 million) ($11.5 million) (19.1%)
Diluted earnings (loss) per share ($0.12) (0.11) (9.1%)

Data source: Chegg, Inc.

Students walking in a gothic-arched university hallway.

Image source: Getty Images.

What happened at Chegg this quarter?

  • Chegg Services, which includes Chegg Study, Chegg Tutors, Chegg Writing, and test preparation, improved revenue by 37% against the third quarter of 2017, to $54.2 million. This segment comprised 73% of overall revenue during the quarter, with the balance falling to required materials, the company's outsourced textbook rental and sales division.

  • Chegg subscribers jumped 45% against the prior-year quarter, to 1.7 million. Content views this quarter totaled 110 million, representing a 51% year-over-year advance.

  • The organization continued to bulk up its content offerings, ending the quarter with 34,000 ISBNs (unique textbook catalog numbers) and 25 million questions archived and answered, which management estimates represents 41% year-over-year growth in proprietary content.
  • Gross margin expanded to 73.2% versus 64.3% last year as a higher proportion of digital revenue continued to boost profitability.

  • So far, the company isn't seeing a material loss of subscribers following the September data breach. On Chegg's earnings conference call, management observed that no sensitive data was stolen -- only passwords needed to be changed -- and that its young customers have experienced such breaches on other platforms and are likely to view the event as routine.
  • Chegg's net loss increased primarily due to higher research and development and general and administrative expenses. Shareholders should note that Chegg incurred $3.8 million of interest expense in the third quarter versus just $19,000 in the prior-year period, as it's now paying interest on a $345 million convertible note offering from April of this year.

  • Cash flow continues to improve steadily. Chegg generated $21.2 million in operating cash during the last three months, roughly equal to its operating cash flow total of the previous sequential six months.

Management's perspective

Chegg's management team is optimistic heading into 2019. CEO Dan Rosensweig confirmed that the company now is testing a long-awaited subscription bundle of various Chegg services that will likely increase both revenue and the company's total addressable market. In his prepared remarks on the third-quarter earnings call, Rosensweig also discussed the reception of new products and legacy enhancements:

While we are investing in our core, we are also investing in our future. We are seeing strong initial demand for our new subscription services, Chegg Math, and an enhanced version of Chegg Writing. With over 40% of college students requiring remediation in math, English, or both, these are key subjects where we are starting to leverage AI and machine learning to expand our product offering and provide greater support to a broader range of students. Last quarter, we launched our Math product on mobile to provide students increased access to help when and where they want it. Chegg Writing now addresses more pain points around the subject of writing, including plagiarism, grammar, sentence structure, and more.

Looking forward

Due to an extremely strong fall season, management increased both fourth-quarter and full-year guidance -- its third upward revision this year. For 2018, the company anticipates total revenue of $315 million-$318 million versus the range of $306 million-$311 million issued last quarter.

Gross margin is expected to land between 75% and 76% against a previous target of 73%-75%. Management also revised Chegg's adjusted EBITDA band, to $81.5 million-$82.5 million, up from the previous range of $79 million to $81 million.

Additionally, the company unveiled revenue and earnings targets for 2019. These include revenue of $388 million (18% growth beyond expected 2018 revenue at the midpoint of the current targeted range), which will be sustained through an expected annual growth rate of 30% in Chegg Services. Gross margin is pegged at 75% for the year, and adjusted EBITDA is expected to crest to $112 million. If 2019 follows the current-year pattern, these estimates simply may serve as starting points for eventually higher targets.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.