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Can Chegg (CHGG) Spring a Surprise this Earnings Season?

Santa Clara, CA-based Chegg, Inc. CHGG is set to report second-quarter 2017 results on Jul 25, after market close.

Last quarter, the company posted a positive earnings surprise of 50%. Notably, Chegg surpassed estimates in all of the last four quarters, with an average positive surprise of 46.16%.

Let’s see how things are shaping up for this announcement.

Factors to Consider this Quarter

Chegg’s strategy of delivering high quality and low cost educational products and services bodes well. Also, the increasing popularity of online, on-demand human help for different courses at college and high school levels drives profits. This is also expected to contribute to the top line in the soon-to-be-reported quarter. Total revenue is projected in the $52–$54 million band, compared with $53 million in the prior-year quarter.

The company’s transformation to an all-digital business is expected to significantly boost Chegg Service revenues. The company projects Chegg Service revenues in the band of $42 million to $44 million, higher than $29.9 million reported in the year-ago quarter.

With this plan in place, Chegg will not have to invest in physical textbooks, which will likely drive free cash flow and gross margin. Gross margin is anticipated between 68% and 70%, higher than 59.7% in the prior-year quarter, while adjusted EBITDA is expected at around $7–$9 million, compared with $7.2 million posted in the second quarter of 2016.

Notably, for the second quarter, the Zacks Consensus Estimate for the bottom line is pegged at a loss of 5 cents, reflecting a 37.5% improvement. Meanwhile, the Zacks Consensus Estimate for revenues is pegged at $53.07 million, implying a 0.1% increase.

Earnings Whispers

Our proven model does not conclusively show a 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 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at a loss of 5 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Chegg, Inc. Price and EPS Surprise

 

Zacks Rank: Chegg has a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult.

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

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.

Alteryx, Inc. AYX, with an Earnings ESP of +6.25% and a Zacks Rank #3, will report earnings on Aug 2.

NIC Inc. EGOV is expected to release earnings on Aug 2. It has an Earnings ESP of +5.56% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Five9, Inc. FIVN, with an Earnings ESP of +10% and a Zacks Rank #1, is scheduled to release quarterly results on Aug 3.

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