Chegg (NYSE:CHGG) Reports Q4 In Line With Expectations But Stock Drops 22.6%
Online study and academic help platform Chegg (NYSE:CHGG) met Wall Street’s revenue expectations in Q4 CY2024, but sales fell by 23.7% year on year to $143.5 million. On the other hand, next quarter’s revenue guidance of $115 million was less impressive, coming in 16.4% below analysts’ estimates. Its non-GAAP profit of $0.17 per share was in line with analysts’ consensus estimates.
Revenue: $143.5 million vs analyst estimates of $143.8 million (23.7% year-on-year decline, in line)
Adjusted EPS: $0.17 vs analyst estimates of $0.18 (in line)
Adjusted EBITDA: $36.57 million vs analyst estimates of $32.87 million (25.5% margin, 11.2% beat)
Revenue Guidance for Q1 CY2025 is $115 million at the midpoint, below analyst estimates of $137.6 million
EBITDA guidance for Q1 CY2025 is $13.5 million at the midpoint, below analyst estimates of $33.51 million
Operating Margin: -19%, down from 7.1% in the same quarter last year
Free Cash Flow Margin: 3.4%, down from 17.3% in the previous quarter
Services Subscribers: 3.6 million, down 976,000 year on year
Market Capitalization: $149.2 million
"We made two important and connected decisions to maximize the future of our business and shareholder value. We are launching a strategic review process and filed a complaint against Google, which has unjustly retained traffic that has historically come to Chegg, impacting our acquisitions, revenue and employees,” said Nathan Schultz, CEO of Chegg.
Company Overview
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
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Chegg struggled to consistently generate demand over the last three years as its sales dropped at a 7.3% annual rate. This was below our standards and is a sign of lacking business quality.
Chegg Quarterly Revenue
This quarter, Chegg reported a rather uninspiring 23.7% year-on-year revenue decline to $143.5 million of revenue, in line with Wall Street’s estimates. Company management is currently guiding for a 34% year-on-year decline in sales next quarter.
Looking further ahead, sell-side analysts expect revenue to decline by 16.6% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and suggests its products and services will face some demand challenges.
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Services Subscribers
User Growth
As a subscription-based app, Chegg generates revenue growth by expanding both its subscriber base and the amount each subscriber spends over time.
Chegg struggled to engage its audience over the last two years as its services subscribers have declined by 10.3% annually to 3.6 million in the latest quarter. This performance isn't ideal because internet usage is secular, meaning there are typically unaddressed market opportunities. If Chegg wants to accelerate growth, it likely needs to enhance the appeal of its current offerings or innovate with new products.
Chegg Services Subscribers
In Q4, Chegg’s services subscribers once again decreased by 976,000, a 21.3% drop since last year. The quarterly print was lower than its two-year result, suggesting its new initiatives aren’t moving the needle for users yet.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for consumer subscription 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’s ARPU has been roughly flat over the last two years. This raises questions about its platform’s health when paired with its declining services subscribers. If Chegg wants to increase its users, it must either develop new features or provide some existing ones for free.
Chegg ARPU
This quarter, Chegg’s ARPU clocked in at $39.86. It declined 3% year on year but outperformed the change in its services subscribers.
Key Takeaways from Chegg’s Q4 Results
Chegg's number of users declined and its number of services subscribers fell short of Wall Street’s estimates. Looking ahead, both revenue and EBITDA guidance for next quarter came in below expectations. Overall, this quarter was mediocre, and with the market fearing that this company is toast due to AI, a big move makes sense. The stock traded down 22.6% to $1.23 immediately following the results.
The latest quarter from Chegg’s wasn’t that good. One earnings report doesn’t define a company’s quality, though, so let’s explore whether the stock is a buy at the current price. We think that the latest quarter is just one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.
