Chegg (NYSE:CHGG) Q3: Beats On Revenue But Stock Drops

Petr Huřťák /
2023/10/30 4:32 pm EDT

Online study and academic help platform Chegg (NYSE:CHGG) reported results ahead of analysts' expectations in Q3 FY2023, with revenue down 4.18% year on year to $157.9 million. The company also expects next quarter's revenue to be around $186 million, in line with analysts' estimates. Turning to EPS, Chegg made a GAAP loss of $0.16 per share, down from its profit of $1.23 per share in the same quarter last year.

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Chegg (CHGG) Q3 FY2023 Highlights:

  • Revenue: $157.9 million vs analyst estimates of $152.1 million (3.76% beat)
  • EPS (non-GAAP): $0.18 vs analyst estimates of $0.17 (3.38% beat)
  • Revenue Guidance for Q4 2023 is $186 million at the midpoint, roughly in line with what analysts were expecting
  • Free Cash Flow of $9.37 million, down 83.2% from the previous quarter
  • Gross Margin (GAAP): 47.1%, down from 72.6% in the same quarter last year (71.3% excluding a one-time content and related assets charge of $38.2 million)
  • Services Subscribers: 4.4 million, down 400 thousand year on year

“Chegg is in a great position to build the most impactful, scalable, AI-enabled, personal learning assistant, which will expand our opportunities to serve more students, in more ways, and at a lower cost per customer,” said Dan Rosensweig, CEO & President of Chegg, Inc.

Started as a physical textbook rental service, Chegg (NYSE:CHGG) is now a digital platform addressing student pain points by providing study and academic assistance.

Consumer Subscription

Consumers today expect goods and services to be hyper-personalized and on demand. Whether it be what music they listen to, what movie they watch, or even finding a date, online consumer businesses are expected to delight their customers with simple user interfaces that magically fulfill demand. Subscription models have further increased usage and stickiness of many online consumer services.

Sales Growth

Chegg's revenue growth over the last three years has been unremarkable, averaging 11.2% annually. This quarter, Chegg beat analysts' estimates but reported a year on year revenue decline of 4.18%.

Chegg Total Revenue

Chegg is expecting next quarter's revenue to decline 9.35% year on year to $186 million, a further deceleration of the 1.1% year-on-year decrease it recorded in the same quarter last year. Before the earnings results were announced, Wall Street analysts covering the company were projecting revenue to decline -3.25% over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Usage Growth

As a subscription-based app, Chegg generates revenue growth by expanding both its subscriber base and the amount each subscriber spends over time.

Over the last two years, Chegg's users, a key performance metric for the company, grew 2.46% annually to 4.4 million. This is one of the lowest rates of growth in the consumer internet sector.

Chegg Services Subscribers

Unfortunately, Chegg's users decreased by 400 thousand in Q3, a 8.33% drop since last year.

Key Takeaways from Chegg's Q3 Results

With a market capitalization of $977.9 million, Chegg is among smaller companies, but its $261.3 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

It was great to see Chegg beat analysts' revenue and adjusted EBITDA expectations this quarter. Guidance for next quarter for revenue and adjusted EBITDA were also in line to slightly above. Those really stood out as a positives in these results. On the other hand, its user base fell and its revenue growth was quite weak. Overall, this was a mixed quarter for Chegg. The company is down 9.58% on the results and currently trades at $8.02 per share.

Chegg may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.