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Chegg's (CHGG) Growth Initiatives to Drive Q3 Earnings

Chegg, Inc. CHGG is set to report third-quarter 2017 results on Oct 30, after market close.

The company’s strategy of delivering high-quality and low-cost educational services bode well. The rising popularity of online, on-demand human help for different courses at high school and college levels is also a positive. This is expected to contribute to the top line in the soon-to-be-reported quarter.

Chegg’s focus on three main areas for driving growth in 2017 is encouraging. First, the company is working toward meeting its financial objectives. Second, Chegg is making strategic investments in core Chegg Services, Chegg Study, Chegg Writing and Chegg Tutors. Third, the company is investing in new services. Chegg is also making key long-term investments in its career and internship services.

The company’s transformation to an all-digital business is expected to significantly boost Chegg Services revenues. With this plan in place, Chegg will not have to invest in physical textbooks, which will likely drive free cash flow and gross margin.

The company projects Chegg Services revenues in the band of $37 million to $39 million, higher than $29.7 million reported in the year-ago quarter. The Zacks Consensus Estimate for revenues is pegged at $38.32 million, implying a 29.1% year-over-year increase.

The company anticipates gross margin between 60% and 62%, higher than 45.8% in the prior-year quarter, while adjusted EBITDA is expected at around $3-$4 million, compared with $0.2 million posted in the third quarter of 2016.

Overall, for the third quarter, Chegg projects total revenue in the $56-$58 million band, compared with $71.3 million in the prior-year quarter. Also, the Zacks Consensus Estimate for revenues is pegged at $57.58 million, implying a 19.3% decrease. Also, earnings for the third quarter are expected to break even, reflecting a 90.5% improvement.

Here is what our proven model predicts:

Our proven model does not conclusively show an earnings beat for Chegg this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP is +100.0%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Chegg has a Zacks Rank #4 (Sell). Note that we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revision.

Chegg, Inc. Price and EPS Surprise



Stocks to Consider

Here are some companies in the Internet-Software industry that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter.

HubSpot, Inc. HUBS, with an Earnings ESP of +24.08% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Everbridge, Inc. EVBG has an Earnings ESP of +2.33% and a Zacks Rank #3.

Paycom Software, Inc. PAYC, with an Earnings ESP of +4.46% and a Zacks Rank #3.

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