Online education specialist Chegg (CHGG +0.40%) got a harsh lesson in meeting investor expectations. Following the release of its first-quarter results Monday shortly after market close, the company's stock price plummeted by nearly 35% in after-hours trading. Let's take a look at what made so many investors close their books on the company.
More students, more scratch
Chegg booked net revenue of $202.2 million for the quarter, which was slightly (2%) better than for the same period last year. It was also a little higher than the nearly $201.3 million average estimate from the analysts tracking the stock.
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Non-GAAP (adjusted) net income notched a more convincing beat, rising by 8% to just over $50 million. At $0.32 per share, that result comfortably exceeded the collective $0.24 prognosticator expectation.
Subscriber count -- a crucial operational metric for the company -- rose a sturdy 14% year over year to 5.4 million.
In a conference call discussing the results, CEO Dan Rosensweig said that while Chegg entered 2022 with momentum, this somewhat dissipated during the quarter.
"The issues of enrollment, the economy, and now inflation have all impacted our industry. Students continue to take fewer classes, and those they do take are often less rigorous, with fewer or more limited assignments," Rosensweig explained. "With higher wages and increased cost of living, more people are shifting their priorities toward earning over learning, resulting in a lower course load, or delaying enrollment in school at this time."
Guiding for disappointment
Since investors tend to look toward future performance, they were likely focused less on Rosensweig's grading and the solid earnings beat than on Chegg's guidance. And Chegg's guidance is best described as discouraging.
For its current (second) quarter, Chegg expects to book net revenue of $188 million to $192 million. That falls well short of the average analyst projection of slightly more than $209 million.
As for 2022 overall, the company has lowered its forecast; it is now guiding for $740 million to $770 million on the top line. That's well short not only of the previous guidance of $830 million to $850 million but also of the average analyst estimate of nearly $844 million.
Chegg doesn't provide net profit forecasts, so instead, it's proffering its expectations for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). The company believes this will come in at $66 million to $68 million for the second quarter. The annual estimate has (similar to revenue) been significantly lowered. It's now $220 million to $235 million for the year, down from the former $260 million to $270 million.
For comparison's sake, in 2021's first quarter, adjusted EBITDA was $57 million, while for the full year, it was nearly $266 million.
NYSE: CHGG
Key Data Points
Time to give up on Chegg?
So it's understandable that investors traded out of Chegg Monday night. Who likes deep cuts in annual guidance?
I don't think investors should give up on this company, though. Even if the current robust growth is slowing or even reversing at present, Chegg has a cost-light business model with a compelling product whose content is constantly increasing. In other words, this offering becomes more stacked, and thus more attractive to users, as time goes by.
The company also has plenty of opportunities for expansion in front of it. It can widen the range of that content (language instruction and financial literacy were two promising areas mentioned specifically by Rosensweig) and push harder into markets abroad, to name just two potential revenue generators.
Young companies tend to take hard punches when they reduce and/or whiff badly on guidance, but in my view, this one has a fine chance to get back on its feet again.
