American online education company Chegg Inc. (CHGG, Financial) reported third-quarter financial results on Nov. 2. Shares trended lower as the company noted that fourth-quarter financial results will be lower than expected because of the reopening of schools.
Chegg attracts students from diverse backgrounds with an integrated platform of connected services, including Chegg Study, Chegg Writing, Chegg Math Solver and Thinkful, which is an online skills-based course provider, and Textbooks, from which textbooks or e-textbooks can be rented or bought. With a variety of subscribers' data and relevant content, the company seems to be uniquely positioned to support students throughout their educational journey. Although the company is likely to come under a lot of pressure in the coming quarters as the pandemic boost wanes, Chegg could turn out to be a long-term winner because of the expected improvement in the long-term macroeconomic outlook.
Third-quarter earnings recap
Over the last year and a half, the company experienced extraordinary growth. However, in late September, it became clear the industry was experiencing a slowdown as a result of the reopening of the economy, which led to a substantial decline in website traffic. A fewer number of enrollments than expected for the semester was the primary reason behind the company's revenue miss for the third quarter. Students who have enrolled in courses are taking fewer and less rigorous classes and are receiving less graded assignments, but the company views the situation as temporary.
Chegg’s third-quarter revenue came in slightly below expectations at $171.9 million. Net revenue, which includes revenue from Chegg Services and Required Materials, increased 12%, while Chegg services revenue, which primarily includes Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Mathway, and Thinkful, grew 23%. Net income was $6.7 million for the quarter and the adjusted Ebitda margin was 27%.
The number of Chegg Services subscribers grew to 4.4 million, growing 17% year over year but down from the previous quarter's 4.86 million. Free cash flow improved to $38.5 million compared to $24.7 million a year before, but came in lower than the previous quarter's $45.4 million.
Outlook
The company's management team expects a small increase in total net revenue for the fourth quarter to between $194 million and $196 million. However, analysts were initially expecting the company to report revenue of $241.7 million, driven by holiday season sales. The lackluster guidance did not bode well with investors, but it makes sense to account for upcoming challenges without painting a rosy picture.
Supporting additional non-STEM subjects and expansion beyond textbooks to courses are the two focus areas of the company to increase the domestic total available market. According to Chegg, the international segment is seeing robust subscription and revenue growth and is already becoming a meaningful part of its business. The company has already exceeded its target of 1 million international subscribers and predicts the international market will be even larger than the United States. To make the most of this opportunity, Chegg is investing in key areas such as localization of content and language-related improvements.
Chegg’s Uversity is also off to a very good start, building strong relationships with institutions and professors from many prestigious universities, and has already received over 20,000 pieces of content in STEM and non-STEM subjects from over 700 schools. With many governments supporting online education, increased penetration of smartphones and the increased demand for adaptive learning, many people are likely to embrace online learning in the future. Chegg is well positioned to turn this favorable outlook into higher sales, but before then, the company and its shareholders will have to weather the expected financial headwinds.
Takeaway
Chegg's stock has fallen 62% in 2021 so far. Conditions are expected to only get more difficult throughout the remainder of the year. That being said, long-term investors should focus on what is in store for the company in the long run. Chegg seems to be well-positioned to report strong numbers in the next decade due to the favorable macroeconomic outlook for the online learning industry.
