Chegg's Q3 2025 Earnings Call: Contradictions in Skilling Business Growth, Advertising Impact, AI Integration, Legacy Academic Strategy, and Traffic Declines

Date of Call: None provided

Financials Results

• Revenue: $78M, down 42% YOY
• Operating Margin: Adjusted EBITDA $13M, 17% margin; outperformed adjusted EBITDA guidance by $5M

Guidance:

• Total Q4 2025 revenue expected $70–$72M.
• Q4 gross margin expected 57–58%.
• Q4 adjusted EBITDA expected $10–$11M.
• Q4 Chegg Skilling revenue expected ~$18M, ~14% YOY; full-year 2025 Skilling revenue ~$70M (14% YOY).
• Full-year 2025 CapEx ~ $27M; targeting ~60% CapEx reduction in 2026.
• Expect $15–$19M in severance cash spend over Q4/2026 Q1; on path for meaningful free cash flow in 2026.
• Target non-GAAP operating expenses < $250M by 2026 (from $536M in 2024).

Business Commentary:

* Company Restructuring and Skilling Market Expansion: - Chegg split its company into two units: Chegg Skilling and legacy academic services. - Chegg Skilling reported a strong momentum, expecting a 14% year-over-year growth and full-year revenue of $70 million. -

- The restructuring was driven by the rise of AI, negative impact on traditional traffic sources, and the growth potential in the skilling market.

• Q3 Financial Performance and Cost Reduction:
• Chegg's total revenue decreased by 42% year-over-year to $78 million in Q3.
• Non-GAAP operating expenses were reduced by approximately $41 million, or 46% year-over-year, driven by restructuring.
• The company achieved a Q3 adjusted EBITDA of $13 million, with a margin of 17%.

• Cost reductions were necessary to position the company for future growth and invest in the skilling business.

• Adjusted EBITDA Improvement and Free Cash Flow:

• Chegg outperformed its adjusted EBITDA guidance by $5 million due to cost-cutting and restructurings.
• Free cash flow for Q3 was negative $900,000, primarily affected by a one-time FTC settlement and severance payments.

• The company aims to generate meaningful free cash flow in 2026, supported by a leaner and more efficient cost structure.

• Skilling Business Growth and Strategic Investments:

• The skilling business is projected to grow at a double-digit pace, with $18 million of revenue expected in Q4, a 14% year-over-year increase.
• All growth resources are allocated to the skilling business, focusing on language learning, frontline worker training, and AI-related skills.
• The strategic investment in the skilling market is driven by the growing demand for AI skills, language learning, and workforce reskilling.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • "The path has been difficult, but the outcome will be positive." Management highlighted a company restructure, cost cuts that outperformed EBITDA guidance by $5M, a focused shift of growth resources into Chegg Skilling (expected to end 2025 at $70M and grow ~14% YOY), and a plan to generate meaningful free cash flow in 2026.

Q&A:

• Question from Eric Sheridan (Goldman Sachs): 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?
  Response: All growth resources will go to Chegg Skilling; legacy academic services will be run to generate cash while Skilling focuses on B2B frontline workers, language learning (Busuu) and job-related AI courses to drive double-digit growth.

• Question from Devin (KeyBanc Capital Markets): On the legacy academic business, what kind of support or services are you going to continue providing for that unit?
  Response: Maintain the core product, technology and 130M-question database to preserve quality and generate cash as a tail business while reallocating investment to Skilling.

• Question from Devin (KeyBanc Capital Markets): Maybe a little bit more color on the initiatives you’re looking to make, some of the near-term product roadmap or milestones for Busuu, and what’s giving you confidence you can grow that business sustainably double digit?
  Response: Busuu has been repackaged for B2B with AI-enabled conversational and voice/pronunciation features, targeting metrics of business customers, seats, engagement and retention; expanding geographically (e.g., Latin America) and leveraging strong retention to sustain double-digit growth.

• Question from Ryan McDonald (Needham & Company): Can you talk about other channels or go-to-market motions beyond Gill, the balance of direct sales versus channel partnerships, and how much of a headwind reduced Google traffic is for the skilling business?
  Response: Primary GTM is partners like Gill with plans for additional distribution partnerships and a slowly built B2B salesforce; skilling itself faces minimal traffic/headwind—traffic declines mainly hit legacy Study/ad sessions, not the Skilling businesses.

Contradiction Point 1

Focus on Skilling Business Growth

It highlights a shift in strategic focus and resource allocation, which is crucial for understanding the company's growth strategy and investment priorities.

What are the strategic product priorities for skilling, and how are resources allocated between legacy and skilling businesses? - Eric Sheridan(Goldman Sachs)

2025Q3: All growth resources will focus on the skilling business. It includes frontline workers, language learning, and job-related skills, especially AI. Resources, including cash, will be used to grow the skilling business. - Dan Rosensweig(CEO)

Can you discuss the sustainability of Busuu's B2B segment and whether growth is driven by existing or new channel partners? - Matthew Dineen Shea(Needham & Company LLC, Research Division)

2025Q2: Busuu and Chegg Study are B2B growth engines. 2026 will benefit from our focus on new product development, new partnerships, and greater sales execution. - Nathan Schultz(CEO)

Contradiction Point 2

Advertising Impact on Skilling Business

It involves the impact of advertising on the skilling business, which is important for assessing the sustainability of revenue streams and growth strategies.

How significant is traffic as a headwind for the skilling business, and what initiatives are in place to offset declines? - Ryan McDonald(Needham & Company)

2025Q3: Advertising decline is not an issue for the skilling business. The focus is on repositioning skilling to a growth-oriented B2B model. Initiatives include investments in content, distribution, and salesforce expansion. - Dan Rosensweig(CEO)

How does Chegg position its Skills business amid big tech's AI education initiatives? - Devin Au(KeyBanc Capital Markets Inc., Research Division)

2025Q2: B2C is 25% of revenue. Advertising is down slightly in Q2, but we expect it will continue to moderate through the year and into 2026. - Andrewempat (CFO)

Contradiction Point 3

AI Integration in Language Learning

It highlights the strategic approach to integrating AI in language learning, which is crucial for product innovation and competitive advantage.

Can you elaborate on the initiatives and product roadmap for the Busuu business? - Devin Au(KeyBanc Capital Markets Inc., Research Division)

2025Q3: Busuu is predominantly in Europe and expanding to Latin America. Key initiatives include enhancing language learning through AI, focusing on conversation and engagement. The goal is sustainable double-digit growth. - Dan Rosensweig(CEO)

What is driving the steady performance in B2C Busuu—improved consumer sentiment or new features? - Devin Au(KeyBanc Capital Markets Inc., Research Division)

2025Q2: We're focused on expanding our B2B partnerships. We continue to leverage AI with speaking bites, which is our conversational language learning feature. - Nathan Schultz(CEO)

Contradiction Point 4

Legacy Academic Business Strategy

It highlights a change in strategy for the legacy academic business, which could impact revenue and operational efficiency.

What support and services will be provided for the legacy academic business? - Devin(KeyBanc Capital Markets)

2025Q3: The legacy academic business will generate cash for several years, focusing on quality product and technology. It will operate primarily as a B2B business, adapting to new market realities. - Dan Rosensweig(CEO)

Can you share feedback from university partners on the pilot programs and their willingness to pay for the content library as student access? - Ryan MacDonald(Needham & Company)

2025Q1: Encouraged by the growth in university partnerships, with 15 pilots and aiming for 40 by year-end. These partnerships involve seat-based licenses, and schools are interested in improving student success, making these collaborations financially beneficial. - Nathan Schultz(CEO)

Contradiction Point 5

Impact of Traffic Declines on Skilling Business

The impact of traffic declines on the skilling business is presented differently in the two quarters, with initial concerns about advertising declines and later emphasizing repositioning the skilling business to a B2B model.

How significant is traffic a headwind for the skilling business, and what initiatives are in place to offset declines? - Ryan McDonald (Needham & Company)

2025Q3: Advertising decline is not an issue for the skilling business. The focus is on repositioning skilling to a growth-oriented B2B model. - Dan Rosensweig(CEO)

Regarding Q1 2025 guidance, can you clarify how dollar revenue growth translates into incremental adjusted EBITDA relative to fixed vs. variable costs, and what key investment priorities (brand, traffic, product) are critical for 2025? - Eric Sheridan (Goldman Sachs)

2024Q4: Marketing efforts aim to increase traffic, leading to more acquisitions and growth. - David Longo(CFO)