Last night’s beat and raise report from education platform company Chegg (CHGG 19.24, +2.88 +17.6%) move the stock firmly higher on increased volume.
Starting with the Q4 report, CHGG reported an impressive non-GAAP net income per share of $0.15 on revenues which grew 16.5% compared to last year to $73.51 million. Of note, Chegg Services revenues were up 37% compared to last year to $60.5 million, or 82% of total net revenues, compared to 70% in Q4 2016.
Q4 gross margins were higher than expected at 74%, as a result of strong topline growth, particularly in Chegg Services where much of the incremental revenue drops to the bottom line due to the relatively fixed cost structure. The strong gross margin result led to adjusted EBITDA of $21.1 million in the quarter.
Chegg reported a 47% increase in Services subscribers to 1.4 million as total Chegg Study content views grew 79% to 169 million compared to a year ago. In all, Chegg ended FY17 with Services subs of 2.2 million, a 700,000 increase over 2016 levels.
Q4 free cash flow came in above our expectations at $15.5 million, as we expanded our consignment partnerships we needed less capital outlay for textbook purchases for our partner Ingram, and there were timing differences of payables and receivables in December.
As to guidance, Chegg now sees FY18 total revenues between $295-300 million – above the prior expectation of around $295 million. Chegg Services revenues are now expected in the range of $240-243 million for the year – above the prior expectation of about $240 million. Additionally, management now sees gross margins of 72-74% for the year – above the prior expectation of about 70% -- on adjusted EBITDA between $74-76 million.
In addition, Chegg expects a 40-60% conversion of adjusted EBITDA to free cash flow during the next several years. The company also expects 2018 conversion to be toward the lower end of this range, and lower than 2017, due to the contractual timing of payments Chegg receives from Ingram for textbook purchases it makes on their behalf.
Immediately ahead, in Q1 Chegg expects total revenues ahead of market expectations at $73-75 million with Chegg Services revenues in the range of $54-55.5 million. Gross margins are anticipated to come between 71-73% while adjusted EBITDA should land around $14-16 million.
In all, Chegg appears set up quite nicely for 2018 – and Q1 in the immediate future – as the company reaps the benefits of its plans to move to an all-digital platform.