Fall 2021 Enrollment Drop: Chegg as a casualty

While there was a common expectation, or at least hope, that Fall 2021 would show stabilized enrollments after the Fall 2020 through Spring 2021 pandemic-driven reductions, the National Student Clearinghouse’s initial Fall Enrollment Estimates from early last week presented a wake-up call. US higher ed enrollments continued to decline in this new academic year, down 2.3% this year overall. The bigger drops were for undergraduate enrollment, which appears to be down a further 3.2% this year, with all sectors in decline. Graduate enrollment increased for nonprofit institutions but fell for the for-profit sector.

There are plenty of articles summarizing this data release, and I plan to dig in on the online education aspect later this week. But today, Chegg provided independent data in their earnings call, arguing that the unexpected Fall enrollment declines were causing huge drops in the company’s business forecast. From the Market Watch coverage of the Chegg Q3 earnings call:

“In late September, it became clear to us that the education industry is experiencing a slowdown that we believe is temporary and is a direct result of the COVID-19 pandemic,” Chegg Chief Executive Dan Rosensweig said in a statement Monday that included quarterly earnings information that showed a surprising decline in subscribers.

Chegg was more specific in an investor presentation prepared for Monday’s report, saying “some effects of the COVID-19 pandemic have begun to negatively impact enrollments, student course-loads and quantity of graded assignments,” and Rosensweig also offered more color in a conference call later in the afternoon.

“A combination of variants, increased employment opportunities, and compensation, along with fatigue, have all led to significantly fewer enrollments than expected this semester. And those students who have enrolled are taking fewer and less rigorous classes and are receiving less graded assignments,” he said. “We believe this is a post-pandemic impact that will affect this school year but is not sustainable for higher education long term.”

Chegg’s stock price dropped in after hours trading by as much as 21%, showing the surprise by investors and analysts. [Update 11/2 – stock is down by more than 46% this morning. This is not a financial analysis blog, but this turn of events is strategically important for Chegg and for the EdTech markets.]

The big impacts on Chegg’s business:

  • The number of Chegg Services subscribers dropped from 4.9 million in Q2 to 4.4 million in Q3; and

  • Chegg cut its forecast for FY2021 revenue by $47 million, from $810 to $763 million at the midpoint of estimates.

I don’t believe that Chegg’s problems are solely caused by reduced higher education enrollments, but the earnings call does present an interesting data point.

There is another aspect to consider. We’ve seen a frenzy of corporate finance moves over the past year, with many vendors going public and with several high-profile acquisitions. A lot of this increase in activity comes from one-time pandemic effects, such as the flight to online and hybrid education and the massive amount of government stimulus spending. For a lot of companies and investors, there is a feeling of let’s make a move while the getting is good, and we don’t really know how much of the pandemic-driven gains in business will continue as we enter a new normal.

Total enrollments have been dropping, and the offset in gains from shifts to remote or online, and from stimulus spending, cannot cover up the changes in student demographics and attendance in the mid- to long-term. I don’t expect today’s Chegg surprise to be the last one from EdTech providers in the next few months.