Chegg (NYSE:CHGG) Posts Better-Than-Expected Sales In Q4 But Stock Drops

Full Report / February 05, 2024

Online study and academic help platform Chegg (NYSE:CHGG) announced better-than-expected results in Q4 FY2023, with revenue down 8.4% year on year to $188 million. On the other hand, next quarter's revenue guidance of $174 million was less impressive, coming in 3.4% below analysts' estimates. It made a non-GAAP profit of $0.36 per share, down from its profit of $0.40 per share in the same quarter last year.

Chegg (CHGG) Q4 FY2023 Highlights:

  • Revenue: $188 million vs analyst estimates of $186 million (1.1% beat)
  • EPS (non-GAAP): $0.36 vs analyst expectations of $0.36 (small miss)
  • Revenue Guidance for Q1 2024 is $174 million at the midpoint, below analyst estimates of $180.1 million
  • Free Cash Flow of $51.73 million, up from $9.37 million in the previous quarter
  • Gross Margin (GAAP): 75.6%, in line with the same quarter last year
  • Services Subscribers: 4.6 million, down 400,000 year on year
  • Market Capitalization: $1.11 billion

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.

Today, the textbook rental part of the business has been deemphasized, and Chegg Services is the key product. Chegg Services, which is a subscription offering, includes Chegg Study, Chegg Writing, and Chegg Math. Chegg Study allows students to ask questions digitally and receive explanations from subject matter experts. Chegg Writing offers plagiarism detection scans, expert writing feedback, and citation generation. Chegg Math provides step-by-step problem solving so students can get the right answers but also can understand the problem solving process. Tutoring and language learning are emerging areas of focus.

Chegg addresses the high cost of educational resources. Originally, the company offered textbook rentals because the cost of buying, especially for budget-conscious college students, could put a dent in the wallet. From there, the company added subscription services to digitize the business and generate recurring touch points with customers rather than just when textbooks are acquired. The more subjects Chegg adds, the more it becomes a one-stop academic shop.

One growing priority for Chegg is to follow students beyond their educations. The company has begun offering career services such as internship resources and interviewing guides. It has also expanded into financial literacy and other life skills.

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.

Competitors offering streaming entertainment platforms include Coursera (NYSE:COUR), Udemy (NASDAQ:UDMY), and private company Khan Academy.

Sales Growth

Chegg's revenue growth over the last three years has been unimpressive, averaging 5.2% annually. This quarter, Chegg beat analysts' estimates but reported a year on year revenue decline of 8.4%.

Chegg Total Revenue

Chegg is expecting next quarter's revenue to decline 7.2% year on year to $174 million, a further deceleration of the 7.2% year-on-year decrease it recorded in the same quarter last year.

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 0.9% annually to 4.6 million. This is one of the lowest rates of growth in the consumer internet sector.

Chegg Services Subscribers

Unfortunately, Chegg's users decreased by 400,000 in Q4, a 8% drop since last year.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Chegg because it measures how much the average user spends. ARPU is also a key indicator of how valuable its users are (and can be over time). Chegg ARPU

Chegg's ARPU has declined over the last two years, averaging 4.2%. Although the company's users have continued to grow, it's lost its pricing power and will have to make improvements soon. This quarter, ARPU declined 0.4% year on year to $40.87 per user.

Pricing Power

A company's gross profit margin has a major impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Chegg's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 75.6% this quarter, up 0.7 percentage points year on year.

For internet subscription businesses like Chegg, these aforementioned costs typically include customer service, data center and infrastructure expenses, and royalties and other content-related costs if the company's offering includes features such as video or music services. After paying for these expenses, Chegg had $0.76 for every $1 in revenue to invest in marketing, talent, and the development of new products and services. Chegg Gross Margin (GAAP)

Despite declining over the last 12 months, Chegg still retains strong gross margins, averaging 67.6%. These robust unit economics, driven by the company's attractive business model and strong pricing power, are higher than most consumer internet peers and allow Chegg to make more investments in product and marketing.

User Acquisition Efficiency

Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like Chegg grow from a combination of product virality, paid advertisement, and incentives.

Chegg is quite efficient at acquiring new users, spending only 27.1% of its gross profit on sales and marketing expenses over the last year. This efficiency indicates that Chegg has a highly differentiated product offering, giving it the freedom to invest its resources into new growth initiatives.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

Chegg's EBITDA was $66.17 million this quarter, translating into a 35.2% margin. Additionally, Chegg has demonstrated extremely high profitability over the last four quarters, with average EBITDA margins of 30.8%.

Chegg Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Chegg's free cash flow came in at $51.73 million in Q4, roughly the same as last year.

Chegg Free Cash Flow

Chegg has generated $172.9 million in free cash flow over the last 12 months, an eye-popping 23.5% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Chegg's Q4 Results

It was good to see Chegg narrowly top analysts' revenue expectations this quarter. But that's where the good news ends. Its revenue and EBITDA guidance missed estimates as its subscribers fell short of estimates. That's on top of its subscribers shrinking this quarter. David Longo, who has been with the company since 2021 as its Chief Accounting Officer, was also promoted to CFO following the retirement of Andy Brown. Brown was a long-time executive, having joined the company in October 2011. Overall, this was a mediocre quarter for Chegg. The company is down 6.9% on the results and currently trades at $8.65 per share.

Is Now The Time?

Chegg may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

Although Chegg isn't a bad business, it probably wouldn't be one of our picks. Its revenue growth has been uninspiring over the last three years, and analysts expect growth to deteriorate from here. And while its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, the downside is its ARPU has declined over the last two years. On top of that, its growth in users has been lackluster.

At the moment Chegg trades at 5.1x next 12 months EV-to-EBITDA. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Chegg doesn't trade at a completely unreasonable price point.

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