Chegg, Inc Q3 FY2025 Earnings Call

Ladies and gentlemen, greetings, and welcome to the Chegg, Inc. Third Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tracey Ford, Vice President of Investor Relations. Thank you. Please go ahead.

Good afternoon. Thank you for joining Chegg's Third Quarter 2025 Conference Call. On today's call are Dan Rosensweig, President and CEO; and David Longo, Chief Financial Officer. A copy of our earnings press release, along with our investor presentation is available on our Investor Relations website, investor.chegg.com. A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our media center website at chegg.com/mediacenter. We encourage you to make use of these resources. Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of the company. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements. In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg's annual report on Form 10-K for the year ended December 31, 2024, filed with the Securities and Exchange Commission on February 24, 2025, as well as our other filings with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and on the investor slide deck found on our IR website, investor.chegg.com. We also recommend you review the investor data sheet, which is also posted on our IR website. Now I will turn the call over to Dan.

Thank you, Tracey. Hello, and thank you, everyone, for joining Chegg's Third Quarter 2025 Earnings Call. Despite our current challenges, I'm honored to return as the CEO and Executive Chairman of Chegg. The Board and I believe the company is undervalued and see a significant opportunity to rebuild and reinvent Chegg and return it to a growing company with strong adjusted EBITDA margins and cash flow. We split the company into two units: Our growth business, Chegg Skilling, which we expect to have sustainable double-digit growth, and our legacy academic services, which will focus on generating cash. This new structure gives us the cash and the assets we need to rebuild, and I firmly believe we will create significant long-term value for our shareholders. It's clear that the rise of AI and the subsequent negative impact on traditional sources of traffic have disrupted almost every direct-to-consumer industry. We are dealing with these realities head-on. Two weeks ago, we took decisive action restructuring the company to enable our academic services to operate more efficiently and generate significantly more cash flow while repositioning Chegg Skilling to become a larger, more profitable B2B SaaS business. This was hard because of the impact on a large number of employees, but it was necessary and a positive decision for the future of Chegg. Our clarity of purpose and lower cost structure is energizing and gives us the ability to invest in our skilling business, which is experiencing tailwinds and already generating double-digit growth. We're now in the right categories with the right business model and are beginning to see momentum from our efforts. The impact of AI has resulted in a large number of companies needing to reskill their employees, especially around AI. The skilling market is already large, more than $40 billion today, and has turned its attention to workforce, AI, and language learning. We start from a position of strength. We have two valuable Skilling assets. The first is language learning with Busuu, and the second in skills with Chegg Skills. Busuu is helping the true language learner differentiated by its focus on speaking, not just translation. Chegg Skills already has a strong catalog of courses on in-demand topics, which will only get stronger. We are combining them, investing in them, and over time, will expand with additional assets. We plan to report them as a single unit called Chegg Skilling for external revenue reporting so you can track our progress and our growth. In that spirit, Chegg Skilling is ending 2025 with strong momentum, expecting a 14% year-over-year growth and a full year revenue of $70 million. Looking ahead, we expect the business to continue to grow at a double-digit pace. I've spent 42 years in the technology industry, and the one constant has been that platform changes bring both incredible disruption and opportunity. We reinvented Chegg and created a bigger, more valuable company, and we can do it again. We started as a textbook rental company, transformed it into an education technology company that helped tens of millions of students succeed. Our next chapter, Chegg Skilling, is in a very large and growing market. We have the ability to use our skilling assets and our balance sheet to build a great company, and we are excited about the opportunities ahead. I'm confident that Chegg will evolve and thrive, and I'm grateful for the opportunity to lead our team through the next chapter. With that, I'll turn it over to David.

Thank you, Dan, and good afternoon. Today, I will be presenting our financial performance for the third quarter of 2025, along with the company's outlook for the fourth quarter. We delivered a good third quarter, surpassing our revenue expectations and outperforming our adjusted EBITDA guidance by $5 million as a direct result of our cost cutting and restructurings. With our strategic shift toward the large and growing skilling market, we are now well positioned to enter the next phase of our growth. In the third quarter, total revenue was $78 million, a decrease of 42% year-over-year. Reduced traffic impacted our business in two key ways: First, it led to fewer subscribers and less subscription revenue; and second, within our skills and other, it led to fewer sessions, which significantly reduced advertising revenue. As Dan mentioned earlier, going forward, we will break out our skilling business, which only includes Busuu and Chegg Skills, so you can track our progress. Moving on to expenses. Non-GAAP operating expenses were $49 million in the quarter, a reduction of approximately $41 million or 46% year-over-year, driven by the execution of our restructurings. Our third quarter adjusted EBITDA was $13 million, representing a margin of 17%. To position ourselves for future growth, we overhauled our cost structure to be more efficient and allow us to invest in future growth. To put this in context, in 2024, our total non-GAAP expenses were $536 million, and we are on track to reduce them to under $250 million by 2026. Our investments in AI have enabled us to continue to reduce our CapEx, which was $6 million in Q3, down 63% year-over-year. We anticipate full year 2025 CapEx of approximately $27 million with a targeted further reduction of approximately 60% in 2026, while still delivering a high-quality experience that our students expect from us. Free cash flow for the third quarter was negative $900,000, which was primarily impacted by a one-time $7.5 million settlement payment to the FTC and $5.5 million in severance payments related to our restructuring. Our company will continue to generate strong cash flow, although it will be temporarily affected by $15 million to $19 million in cash expenditures for employee transition and severance costs associated with our recently announced restructuring. These payments will occur over the fourth and first quarters. Considering this, we are still on a path to generate meaningful free cash flow in 2026. Looking at the balance sheet, we concluded the quarter with cash and investments of $112 million and a net cash balance of $49 million. Looking ahead and using our new revenue breakout, for Q4, we expect $18 million of revenue from our skilling business, which represents an increase of 14% year-over-year. Total revenue will be between $70 million and $72 million, gross margin to be in the range of 57% to 58%, and adjusted EBITDA between $10 million and $11 million. In closing, the path has been difficult, but the outcome will be positive. We are now a more lean and efficient company with a skilling business that is expected to grow 14% in Q4. We believe we are turning the corner and are on a path to future growth and profitability. We look forward to sharing more detail on our February earnings call, including greater visibility into our multiyear growth plan for skilling and how we intend to drive additional value in the years ahead. With that, I will turn the call over to the operator for your questions.

Our first question comes from Eric Sheridan with Goldman Sachs.

Maybe two quick ones, if I could. In terms of skilling, can you talk through a little bit of what you see as the strategic product priorities to execute on the skilling side to capture the market opportunity? And across the legacy business and skilling, how should we think about the mix of resource allocation across those efforts looking forward?

I apologize for being on mute. I appreciate your question. All our growth resources will be directed towards the skilling business. Our recent decision to restructure the company is not a layoff but rather a complete overhaul. We have essentially divided the company into two segments: the legacy business, which primarily consisted of Chegg Study, and our new focus on the skilling market. Given the implications of AI and the current Google traffic challenges, we are concentrating on the expanding and more sustainable skilling market, transitioning from B2C to B2B. As noted, this segment has been growing at about 14% year-over-year in Q4, which is promising. We are particularly focusing on frontline workers through our partnership with Guild, as well as language learning, a domain traditionally tackled by Busuu. Despite AI's advancements in translation, companies still value actual language skills. We're also emphasizing job-related skills, especially those related to AI, which are currently in high demand. We've ensured we have the necessary resources, particularly after reducing our workforce by almost 400 employees. Our capital investments will be aimed at growing these new business areas, shifting focus away from what was traditionally Chegg.

Our next question comes from Devin Au with KeyBanc Capital.

Just first one, just a follow-up from the last set of questions. On the legacy academic business, what kind of support or like services are you going to continue providing for that unit? And I have a follow-up.

Yes, that business is quite intriguing because we invested early in AI due to the evolving situation and the technology's efficiency. We developed a remarkable service that we believe is the best available. The challenge we've faced is that our Google traffic has decreased by 50%, affecting our ability to attract the necessary visitors. Additionally, we've initiated legal action against them regarding this issue. However, the quality of our product remains indisputable. Remarkably, 90% of the questions we handle are already part of Chegg's database, which allows us to manage this transition using our existing resources while maintaining product quality. We are optimistic about this business generating cash for several years. Typically, businesses have longer lifespans than we anticipate. The recent sale of AOL for $1.4 billion, despite its long absence from the spotlight, is a testament to that. Our goal is to operate this business for as long as possible, supported by our valuable database, technology, and network developed over the years. We currently have over 130 million questions in our database, placing us in a strong position to generate cash. However, we do not expect growth due to the competitive landscape shaped by Google and the influence of OpenAI. We have repositioned the business within a $40 million growing market, transitioning over the last two years from a primarily B2C model to a B2B focus, which offers greater stability and security and is less vulnerable to market fluctuations. We are already witnessing success with this shift, anticipating over double-digit growth in the upcoming quarter and into next year. While this has been a prolonged and challenging process affecting many, including our shareholders, we believe we've reached a turning point with a growing business projected to be valued at $70 million. We expect it to continue growing at double digits next year, and we are restructuring the company with those resources in mind.

Understood. I appreciate the context there, Dan. Maybe just a quick follow-up. I know you touched on this a little bit. It seems like the Busuu business, the B2B side is doing well. Maybe if you could just kind of give us a little bit more color on the initiatives you're looking to make, some of the near-term product roadmap or milestones you're looking to reach in that business and kind of what's giving you the confidence that you can grow that business sustainably double-digit.

Yes, it's a great question, and I was happy to come back because I'm confident about this. Busuu primarily operates in Europe and plans to expand into Latin America, which is one of our initiatives. Over the last two years, we focused on repackaging our learning mechanisms, specifically for B2B rather than D2C, targeting what businesses need. AI is also a significant part of our strategy, with the main desire from users being a conversational method of learning the language. This conversational aspect is enhanced through voice technology, giving us a good opportunity. We will track the number of businesses that sign up, the number of seats, and engagement within these companies, as increased engagement will lead to more seats. Over the next few years, we will not be surprised by our metrics: the number of businesses signed up, the number of seats, and retention rates in those businesses, which will assure us to keep progressing. Busuu has been around for 15 years, and we've made a crucial shift from competing with Duolingo to focusing on B2B, which is now benefiting us. It's an exciting time as milestones will revolve around how AI enhances language skills, improves pronunciation, and simulates interaction with a human teacher. These are key elements that users seek when learning a language, beyond just picking up a few phrases.

Our next question comes from the line of Ryan MacDonald with Needham & Company.

Dan, welcome back. Regarding the skilling business, could you discuss Guild, which has been a positive channel for growth? Also, are there other investments or potential channels you are considering as you develop your go-to-market strategy? What do you anticipate will be the balance between direct sales and additional channels? Additionally, how does the internal sales capacity currently look for these initiatives?

Yes, a great question, and it's early on in that question. So here's where we are in our current thinking, which is we launched through Guild, and that has been incredibly successful, and we're grateful for that partnership. But obviously, nobody wants to be dependent on a singular channel. And so we are working very hard to be able to offer noncompetitive products to Guild in other channels. And I think as you track that part of the business, you'll probably hear over the course of the year, new partnerships. So think of it as all new distribution channels where they have the customer, we have the content, and there are marketplaces for that, and there are channels for that. And those channels are in the U.S. and they're in Europe. So we think that's where we're starting, which is what we know, which is how to put great content in places where people want that content. The second thing is we are building slowly a B2B sales force. And that B2B sales force is focusing on opening more of those channels. But also, one of the unfortunate realities of Chegg's existence was universities did not historically want to work with Chegg because of Chegg. Now that that part of the business is going away, a lot of people understand the quality of our content, the quality of the way we execute, and the value that it has for the students. And so we will be building new channels eventually direct to institutions. It's just going to start slow. So I don't want you to think in '26, we're going to announce a lot of universities because we're not. We are going to start with the other distribution channels similar to Guild that already have built-in audiences inside of corporations. But we have been contacted by a number of universities who now know the quality of our work. If you actually look at the success that we've had inside of Guild, I think we have amongst the highest retention rate and completion rate. And those things are examples of just how good our quality is. So those are the things that we are working on, but we're going to take it slow because we want to grow the business at double-digit growth. We want the businesses to become profitable. We want them to have sustainable growth. And we have a roadmap over the course of '26 that we're really excited about by adding more content, adding more channels, and starting with new partnerships.

I understand that you mentioned during David's prepared remarks that advertising revenue in the Skills and Other segment was lower than expected due to reduced traffic. How should we view the impact of traffic on the skilling business moving forward? Also, could you share some of the initiatives you're pursuing, such as investing in new marketing channels, to drive growth and offset declines from core Google?

Yes, that's a great question, and I'm happy to clarify. We're not removing any components from the Skilling segment. The "other" includes areas like advertising, which didn't contribute to Skilling but were part of Chegg Study, Chegg Math, and Chegg Writing. The decline in traffic and ad sessions is primarily seen in those areas. We don't anticipate any significant headwinds for Skilling aside from unforeseen challenges. Currently, our focus is on growth for those businesses. In recent years, they faced headwinds due to reduced investment as we concentrated on our core operations. Repositioning a business is always challenging, especially in public markets, but we've worked to balance our debt, cash flow, and initiatives while repositioning these businesses toward B2B. We now feel they're well prepared for this transition, and we're quite optimistic about it.

Ladies and gentlemen, at this time, there are no further questions. The conference of Chegg, Inc. has now concluded. Thank you for your participation. You may now disconnect your lines. Thank you.

Thanks, everybody.