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

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Santa Clara, CA-based Chegg, Inc. (CHGG - Free Report) is set to report fourth-quarter 2016 results on Feb 13, after market close.

Last quarter, the company posted a positive earnings surprise of 23.5%. Notably, Chegg surpassed estimates in three out of the past four quarters, with an average positive surprise of 91.9%.

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

Factors to Consider this Quarter

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

In the third quarter, Chegg Services subscribers grew faster, scaling to a record of 800,000 active subscribers in the quarter. The trend is expected to continue in the quarter. For full-year 2016, Chegg service subscriber count is expected to be about 1.5 million.

For the fourth quarter, total non-GAAP revenue between $48 million and $52 million, less than $68 million reported in the prior year quarter.  Gross margin (on a GAAP basis)  is anticipated in the 65% to 67% range, more than 61.3% reported in the prior year quarter and adjusted EBITDA is likely to be between $12 million to $14 million, less than $15.3 million reported in the fourth quarter of 2015.

Notably, for the third quarter, the Zacks Consensus Estimate for earnings is pegged at a loss of 1 cent, reflecting a 108.6% year-over-year decline. Meanwhile, our estimate for revenues is pegged at $59.05 million, implying a 13.4% 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 1 cent. 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 broader 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.

Applied Optoelectronics, Inc.(AAOI - Free Report) is expected to release earnings on Feb 22. It has an Earnings ESP of +15.87% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Benefitfocus, Inc. (BNFT - Free Report) , with an Earnings ESP of +3.45% and a Zacks Rank #3, will report earnings on Feb 23.

NII Holdings, Inc. , with an Earnings ESP of +43.48% and a Zacks Rank #2, is expected to release quarterly results on Mar 2.

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