After a long stretch of range-bound trading post-IPO, shares of student-learning and educational aid Chegg (CHGG 11.12, +1.96) trade about 21.4% higher in reaction to the company’s strong Q1 performance and better than expected Q2 and FY17 guidance.
For those who may not be familiar with CHGG, the stock went public back in the winter of 2013. As a company, CHGG’s services include textbook purchase or rental, online tutoring services, study aid along with help for students to find internships and scholarships mainly for students at the high school or college level.
Getting back to the results, CHGG reported both a strong top and bottom line beat for Q1. Revenues came in at $62.6 million with earnings of $0.06 per share. Specifically, Chegg Services posted a strong period with subscribers up 51% compared to a year ago.
In all, Chegg Services subscribers totaled 1.1 million in the quarter. Services revenues were up 61% compared to a year ago to $41.0 million. Management commented that CHGG continued to see strong subscriber growth and engagement, with growth rates similar to what the company experienced in 2016, but on top of a much larger user base.
Further, gross margins were 66%, higher than expected, as a result of higher topline growth and increased synergies from Chegg Services. Notably, much of the increased revenue aided the gross margin line, as services like Chegg Study and the company’s Writing Tools have a relatively fixed cost structure. Therefore, as these services grow and achieve scale, management expects CHGG’s margins will continue to increase.
In light of the strength in Q1 and the momentum in the business, CHGG updates their outlook for FY17. Mainly, the company increased total revenue expectations to $235-240 million from $230 million and now sees EBITDA of $38-40 million compared to $35 million. Additionally, for Q2 the company sees better than expected revenue between $52-54 million on 68-70% gross margins and $7-9 million EBITDA.