Chegg's (CHGG +27.44%) fourth-quarter 2018 results, released Monday after the close of trading, evidenced vital double-digit revenue expansion in "Chegg Services," the company's primary growth driver. Gross margin improved year over year, and the organization also added new subscribers at a brisk rate. Management increased 2019 earnings guidance, and shares responded in kind, rising as much as 11% in Tuesday's trading session. Note that in the discussion that follows, all comparative numbers are presented against the prior-year period, the fourth quarter of 2017.
Chegg: The raw numbers
| Metric | Q4 2018 | Q4 2017 | Year-Over-Year Growth |
|---|---|---|---|
| Revenue | $95.7 million | $73.5 million | 30.2% |
| Net income | $5.35 million | $3.66 million | 46.2% |
| Diluted earnings per share | $0.04 | $0.03 | 33.3% |
Data source: Chegg.
Image source: Getty Images.
What happened at Chegg this quarter?
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The company's flagship online study offering, Chegg Services (which includes Chegg Study, Chegg Tutors, Chegg Math Solver, and Chegg Writing), improved revenue by 35% to $81.7 million. The segment comprised 85% of total company revenue for the quarter; the remainder was supplied by the Required Materials textbook-rental and sales service.
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In my earnings preview, I noted that investors would expect year-over-year growth in Chegg Services subscribers in a range of 30% to 45%. Chegg Services users grew by 34%, and the segment ended the quarter with 3.1 million subscribers.
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Gross margin of nearly 77% exceeded management's fourth-quarter goal of 75% to 76%.
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After quarter-end, on Feb. 5 Chegg announced a partnership with Purdue University's Online Writing Lab (OWL). Chegg will supply its AI-powered Chegg Writing tools on the popular website, which notched 515 million global page views in the 2017-18 academic year.
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For the full year, higher profitability manifested itself in the company's cash flow. 2018 operating cash flow of $75.1 million improved by 46% over the $51.6 million in operating cash generated in 2017.
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Chegg incurred interest expense of $3.8 million in the fourth quarter against just $18,000 in the prior-year quarter, the result of its convertible debt offering last spring. For the full year, interest expense rose to $11.2 million, versus $74,000 in 2017.
Management's perspective
In his opening remarks on the company's earnings conference call, CEO Dan Rosensweig updated investors on metrics that illustrate Chegg's march to acquire market share -- and widen its lead on competitors -- in the education industry, which the company describes as a trillion-dollar market opportunity:
The core of Chegg remains Chegg Study where we have made significant investments in content and capabilities throughout 2018. We now have a catalog of 26 million questions that have been answered by our proprietary network of subject matter experts, including textbook solutions for 35,000 ISBNs [International Standard Book Number]. We increased the number of modalities, to meet students' needs at whatever level, in whatever format they learn best, including expanding our video offering by adding 15,000 new videos. We continue to invest deeper in STEM [Science, Technology, Engineering and Math] related subjects; however, we also added ISBNs and Q&A content from outside of the STEM category. This increases our TAM [total addressable market] and our value, and we are doing it to meet the increased student demand in subjects such as business, law, and nursing. The best indicator of the value of Chegg Study to our users is the significant increase in engagement every year, which we measure by content views. We reached 650 million views, which is a 48% increase from last year.
Check out all our earnings call transcripts.
Looking forward
The current earnings report marks the eighth consecutive quarter in which Chegg has positively revised its earnings guidance. Management adjusted Chegg's full-year 2019 revenue target from $388 million to a range of $390 million to $395 million. Chegg Services revenue is expected to land between $327 million and $331 million in 2019, against a prior estimate of $326 million.
As for profitability and earnings, gross margin, with a previous target of 75%, is now pegged at 75% to 76%, while 2019 adjusted EBITDA, first slated for $112 million, is now forecast at between $115 million and $118 million.
Chegg also provided the following estimates for the first quarter of 2019:
- Revenue: $93.5 million to $95.5 million
- Chegg Services revenue: $72.5 million to $74.5 million
- Gross margin: 74% to 75%
- Adjusted EBITDA: $22 million to $23 million
Shareholders embraced both full-year and first-quarter estimates, just as they have in past quarters. Chegg's stock leaped 74% last year, and as of this writing, including Tuesday's gains, shares have already ascended another 33% year to date.
