Chegg (NYSE:CHGG) once again provided its shareholders with breakneck growth and an upgraded forecast in its first-quarter 2019 results released April 29. Perhaps investors have become accustomed to a regular cadence of upward -- if sometimes slight -- earnings revisions. Though the company posted its ninth consecutive quarterly outlook tweak, shares have dipped roughly 10% in the trading sessions following the release to date. Stock in Chegg is still up roughly 25% year to date, though.
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||Q1 2019||Q1 2018||Growth (YOY)|
|Revenue||$97.4 million||$76.9 million||26.7%|
|Net income (loss)||($4.3 million)||($2.6 million)||(65.4%)|
|Diluted earnings (loss) per share||($0.04)||($0.02)||(100%)|
What happened at Chegg this quarter?
Chegg Services revenue expanded 34% to $75.3 million and comprised 77% of total revenue. This suite of services includes question-and-answer sets, live tutoring, and math and writing improvement programs. The remainder of the company's top line was furnished by its Required Materials textbook sales and rental service.
Chegg Services subscribers expanded by 31% year over year to 2.2 million.
Total Chegg Services content views grew 27% year over year to 200 million.
- The company claims that it has reached 87% brand awareness among students, and that 85% of traffic to its content properties comes via organic search.
While still generating a net loss, Chegg notched $17.9 million in operating cash flow and $3.9 million of free cash flow during the quarter.
- The company booked $23.9 million in adjusted EBITDA.
Interest expense from last year's debt offerings proved to be the biggest drag on net earnings this quarter. Chegg incurred $4.2 million of interest expense against just $20,000 of interest expense in the first quarter of 2018.
Interest expense is only set to increase, as Chegg raised an additional $700 million via a convertible debt offering late in the quarter. The oversubscribed deal expanded to $800 million just after quarter-end. As of March 31, 2019, Chegg had a war chest of nearly $1 billion in cash and short-term investments on its balance sheet from multiple debt and stock offerings over the last 12 months.
In its first-quarter press release, the company emphasized three strategic priorities in 2019. First, Chegg intends to hit its stated financial targets while delivering value to customers. Second, the company aims to widen its total addressable market by expanding content areas, methods of delivery, and country-specific coverage. Third, Chegg will invest in opportunities that extend its brand, customer base, and reach.
Investing in brand and customer base extension opportunities will almost certainly entail strategic acquisitions in the coming quarters. During the company's earnings conference call, CFO Andy Brown provided some color on Chegg's most recent capital raise and discussed management's favored deal criteria:
[W]e did the transaction ... because it was very favorable terms ... And we truly believe that there are going to be opportunities that we can take -- with our current capital structure, not just the cash, but the overall capital structure, [that] will allow us to do transactions that we just couldn't have done just even two or three years ago ... So it does open up bigger opportunities for us, but it doesn't change how we evaluate the opportunities. That's the most important thing. And one of the things that we've focused on ever since I got here, every transaction we've done, right, does it leverage some of our core assets, our brand, our reach, our platform, our data? -- You name it.
As Brown hints above, not only does Chegg hold a sufficient amount of cash for a large acquisition, it also can use its appreciated stock in one or several transactions. For shareholders who worry about the inevitable slowing of Chegg Services' growth, management is signaling that the company won't be hesitant to supplement revenue through strategic purchases of growing businesses.
Chegg bumped up its full-year 2019 guidance, albeit marginally, this quarter. The company now expects revenue to land between $393 million and $398 million, from an earlier range of $390 million to $395 million. Adjusted EBITDA is now anticipated in a band of $117 million to $120 million; previously, management had targeted adjusted earnings at between $115 million and $118 million.
Chegg outlined the following expectations for the second quarter of 2019:
- Revenue: $91 million to $93 million
- Chegg Services revenue: $79 million to $80 million
- Gross margin: 76% to 77%
- Adjusted EBITDA: $27 million to $28 million
While the company is still enjoying crisp revenue improvement, as I mentioned at the outset of this article, frequent if minor earnings revisions may be losing their wow factor with long-term shareholders. Given its huge cash position, investors shouldn't be surprised if Chegg chooses to bulk up its top and bottom lines later this year with a significant acquisition in the educational services market.