Educational services specialist Chegg (NYSE:CHGG) revealed third-quarter 2019 earnings on Monday that validated its recent expansion of educational content across its Chegg Services platform. The company also provided relatively ambitious guidance for 2020, while nudging its 2019 outlook in a positive direction. In the discussion that follows, note that all comparative numbers are presented against those of the prior-year quarter.
Chegg: The headline numbers
|Metric||Q3 2019||Q3 2018||Improvement|
|Revenue||$94.2 million||$74.2 million||27%|
|Net income (loss)||($11.5 million)||($13.7 million)||16.1%|
|Diluted earnings (loss) per share||($0.10)||($0.12)||16.7%|
Highlights from the quarter
- Chegg Services revenue expanded by 28% to $69.3 million; the balance of revenue was supplied by the Required Materials textbook rental service.
- Total Chegg Services subscribers of 2.2 million at quarter-end represented a year-over-year increase of 29%.
- Gross margin rose by 330 basis points to 76.5%, due primarily to the top-line increase.
- Adjusted EBITDA expanded by 84% to $23.1 million.
- Chegg cut its operating loss by more than half to $5.1 million, but higher interest expense translated into a smaller improvement in net loss and loss per share as seen in the table above.
- In September, Chegg announced the pending acquisition of online learning platform Thinkful for $80 million in cash, with an additional $20 million dependent on the achievement of certain performance outcomes.
- Alongside earnings on Monday, the company announced that it has inked a five-year deal with FedEx, which will function as Chegg's new logistics and shipping partner for the Required Materials segment. After a transition period over the next few months, FedEx will take over existing physical inventory and also be responsible for print-on-demand textbooks; in other words, the shipping and print giant will handle all of Chegg's non-online fulfillment. The new relationship is expected to improve Required Materials' margins while speeding textbook delivery by one day to over 70% of Chegg's customer base.
Management's comments on the Thinkful acquisition
Thinkful focuses on technology-centered curricula in fields such as data science, data analytics, and software engineering. The company's platform is oriented toward the acquisition of workforce skills, as opposed to degree programs. Chegg CEO Dan Rosensweig provided management's perspective on the pending merger in remarks released with third-quarter earnings:
We have consistently said that skills-based learning, to prepare students for the workforce, is increasingly more important for the economy, for employers, for institutions, as well as the students. We feel we are uniquely positioned to deliver this service to our current customers, as well as bring in an entirely new customer base to the Chegg family. We are excited to add another high-growth service to the platform that we believe will scale into a high-margin business over time.
Our plan is to utilize not only our audience to expand Thinkful's opportunities but to take advantage of our core learning assets, like chat-based tutoring and expert Q&A, to provide on-demand support, 24 hours a day, for any student in any academic and now skills-based subject. This will not only provide a better experience for students but will differentiate us similar to what we did with Chegg Study, and create a strong competitive moat.
Higher guidance heading into 2020
Chegg had issued an update to its financial outlook on Sept. 4 within the press release announcing the Thinkful transaction. The deal is expected to close early in the fourth quarter, and as a consequence, Chegg included a $2 million addition to sales, for a revised 2019 revenue range of $400 million to $404 million, as well as a $4 million drag on adjusted EBITDA, bumping the full-year target down to a range of $117 million to $121 million.
On Monday, Chegg raised its 2019 revenue outlook to a range of $407 million to $409 million, and recalibrated its adjusted EBITDA expectations to anywhere from $121 million to $123 million. And that restored the original targets shared with investors in the second quarter and effectively absorbed the earnings impact from the Thinkful acquisition.
The consumer discretionary services provider also issued preliminary 2020 guidance, which anticipates revenue of $520 million, or expansion of roughly 27% against forecast 2019 revenue. Chegg expects a slightly lower gross margin of 72% next year due to the Required Materials logistics transition to FedEx.
As for earnings, adjusted EBITDA is set to see another meaningful annual increase as revenue scales up: Management has set an initial target of $163 million for 2020. Shareholders responded to current-year and 2020 guidance with gusto, sending Chegg stock up nearly 14.5% during the Tuesday trading session.