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What's in the Cards for Chegg (CHGG) this Earnings Season?


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Santa Clara, CA-based Chegg, Inc. (CHGG - Free Report) is set to report third-quarter 2016 on Nov 7, after market close.

Last quarter, the company posted a positive earnings surprise of 11.11%. Notably, Chegg surpassed estimates in three out of the past four quarters, with an average positive surprise of 92.56%.

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

Factors to Consider this Quarter

In the second quarter, Chegg Services subscribers grew faster than it did in the first reaching a record 760,000 active subscribers in the quarter. As students return this fall, the company expects to see similar growth in the second half 2016.

Chegg Tutors (which provides live tutorials to students) grew over 65% in the previous quarter. This reflects the increasing popularity of online, on-demand human help for different courses at college and high school levels. It is expected to boost the top-line in the soon to be reported quarter.

For the third quarter, the company expects total revenue between $65 million and $70 million, non-GAAP revenue between $48 million and $52 million and Chegg Services revenue between $28 million and $30 million. Gross margin is anticipated in the 38% to 40% range and adjusted EBITDA is likely to range between a loss of $2 million to a breakeven.

CHEGG INC Price and EPS Surprise

For fiscal 2016, Chegg expects total revenue between $240 million and $255 million, non-GAAP revenues between $182 million and $192 million and Chegg Services revenue between $124 million and $132 million. Gross margin is projected in the band of 49% to 51%. Adjusted EBITDA is likely to come in between $16 million and $21 million, more than triple of what was achieved in 2015.

Notably, for the third quarter, the Zacks Consensus Estimate for earnings is pegged at a loss of 17 cents, reflecting a 26.96% year-over-year increase. Meanwhile, our estimate for revenues is pegged at $67.67 million, implying a 16.75% decrease.

Earnings Whispers

Our proven model does not conclusively show that Chegg is likely to beat estimates 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. However, 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 stand at a loss of 17 cents. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

Zacks Rank: Chegg currently carries a Zacks Rank #3 (Hold)

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 revisions.

Stocks to Consider

Here are some companies in the wider computer and technology sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:

SITO Mobile, Ltd. (SITO - Free Report) is slated to release earnings on Nov 14. It has an Earnings ESP of +100% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Asure Software, Inc. (ASUR - Free Report) , with an Earnings ESP of +14.29% and a Zacks Rank #2, will report earnings on Nov 21. International Business Machines Corporation (IBM - Free Report) , with an Earnings ESP of +0.20% and a Zacks Rank #3, is set to release quarterly results on Jan 17.

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