Q3 2025 Chegg Inc Earnings Call
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 chaise, annual report on form, 10K for the year. Ended December 31st 2024 filed with the Securities and Exchange Commission on February 24th 2025 as well as our other filings with the FCC.
Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable at this date.
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.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, Tracy. Hello, and thank you everyone for joining s****, third quarter 2025 earnings call.
We split the company into two units.
Our growth business checks, Skilling, which we expect to have sustainable, double-digit growth, and our Legacy Academic Services, which will focus on generating cash.
We are dealing with these realities head on.
2 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 checks gilding to become a larger more profitable, B2B SAS 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 ched.
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, which is Check Skills.
Busu is helping the true language learner, differentiated by its focus on speaking, not just translation.
Shake 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 Shake Skilling, for external revenue reporting, so you can track our progress and our growth.
In that Spirit. Check 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 Double Digit face.
I spent 42 years in the technology industry and the 1 convention 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 checks 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 Chad 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 IBA guidance by million dollars as a direct result of our cost-cutting and restructuring.
With our strategic shift towards 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.
Traffic impacted our business in two key ways. First, it led to fewer subscribers and less subscription revenue. Second, within our skills and other categories, 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 Buu and Chek skills, so you can track our progress.
Moving on to non-GAAP operating expenses, they were $49 million in the quarter. This represents a reduction of approximately $41 million, or 46% year-over-year, driven by the execution of our restructurings.
Our third quarter adjusted EBITDA is $13 million, representing a margin of 17%.
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 investment in AI has 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.
A company will continue to generate strong cash flow. Although it will be temporarily affected by 15 to 19 million in cash expenditures for employee transition, 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 can conclude a 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 dollars of revenue. From our Skilling business, which represents an increase of 14% year-over-year.
To revenue between $70 million and $72 million.
Gross margin to be in the range of 57 to 58%.
And adjusted ibida between 10 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 and to our multi-year 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.
Thank you.
Ladies and gentlemen, we will now be conducting a question-and-answer session.
If you would like to ask a question, please press star and 1 on your telephone keypad.
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Ladies and gentlemen, we will wait for a moment while we Poll for questions.
Our first question comes from the line of Eric Sheridan with Goldman Sachs, please go ahead.
Thanks so much for taking the question. 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 across the legacy business and Skilling? How should we think about the mix of resource allocation across those?
Efforts, uh, looking forward. Thanks so much.
I had a question, sorry about that. I was I was on mute, um, so I apologize for that because, you know, I haven't been on a call for a while, so I appreciate the question. And, um, very simply all of our growth resources are going to go into the scaling business. So we when we made the decision to restructure the company. So this is not a layoff. This is a completely structured.
We essentially put the company into 2 businesses or 2 units. Um, 1 is the Legacy business, which historically had been the majority of the company and that was Chegg study.
And growing market and more sustainable market for us, which is the scaling Market which is made up of B2B Now versus b2c. When we originally had the businesses, they were B to C. So we've made that transformation and they're growing as you saw released as we said about 14% year-over-year in Q4, that's our expectation. So we're excited about the fact that they're already growing. Those businesses are going to focus on Frontline workers, which is the deal that we already have with Guild. They're going to focus on language learning, which is what busu traditionally has done, Believe It or Not. Uh, even though AI is going to affect translation and instant translation in those things Corporation still want their people to learn how to actually speak the languages. And so we are seeing really great progress. In our B2B side,
Of the busu business and then um, a job related skills. Mostly around AI today which are extraordinarily popular. So our resources, we have the necessary resources because we have the necessary cash. Now by removing um almost 400 people from the company and our expectation, is that our Capital investments will be used to grow the growth businesses and come at the expense of what traditionally was checked.
Hey great. Thanks for taking my question. Uh just first 1 just to follow up um from the last set of questions.
On the Legacy economic um business. What kind of support or like services? Are you going to continue providing? Um for that unit and I will follow up.
Yeah. So that business it's very interesting because as we invested early in AI, um, because of what we saw the situation was becoming and also because the technology allows us to do things more efficiently. Um, we built an incredible service which we believe is the number 1 service. The issue for us is that um our Google traffic dropped by 50%. And so we weren't seeing the necessary traffic to come in and as you know, we've launched a lawsuit against them for that.
But the quality of the product is unquestioned.
So, believe it or not, 90% of all the questions that we get are already in checks database.
So we're able to make this transition on the resources and still have the quality product that we have before.
So we're we're actually fine in um, in that context. So um, we expect that business to generate cash for hopefully several years. Um, most companies, most businesses have tails longer than we expect. I mean, I just I I Marvel at the fact that AOL just sold for a billion 4 to bending spoons. Um, based on its historical model and no 1's heard of it in 10 years. So um, you know, our desire is to run that business as long as we can, we have the necessary resources on it, but the resources are mostly the database, the technology, and the network that we built over the years, we still have over 130 million questions that early in the database. So it's really in a good position to generate cash.
But our expectation is a future growth. They just we cannot compete with the situation that Google has caused and the fact that open AI is what it is. So we put the business into a bigger 40 billion growing market and of transition that business over the last 2 years from what was historically, a B to C Business or a DC business? I should say to now almost exclusively B2B, which is a better business, a more stable, business more secure business, less likely, to be impacted negatively, um, by the trends in the market and, um, already seeing some success on that, by being able to acknowledge that, we're going to grow more than double digits, um, in the quarter and then expectedly for next year.
So things, this has been a long process. It's been a painful process, it's affected a lot of people negatively. Um, so affected our shareholders. Um, but we finally feel like we've hit the bottom because we have business that's growing. That is 70 million. Our expectation is for 2025, and we expected to grow double digits next year, and we're rebuilding the company with those resources.
Understood, I appreciate the contacts there. Dan, um, maybe just a quick follow-up. I know you touched on this a little bit. It seems like the B2B side of the business is doing well. Um, maybe if you could just kind of give us a little bit more color on the initiatives you're looking to make, um, some of the near-term product roadmap or milestones you're looking to reach in that business, and what kind of what's giving you the confidence that you can grow that business sustainably double digits. Thank you. Yeah, yeah, it's a great question and part of the reason I was willing to come back is because I feel confident in that. Um, so
Is predominantly in Europe.
And um we'll also be moving into Latin America. So 1 of the initiatives will be Latin America as an example, the big initiative over the last 2 years was repackaging. Our learning mechanisms, not for the D Toc, but for the B2B, what are businesses want?
Actually, you know, with voice, it's scary. Um but it gives us a heck of a chance to be able to do that. So what we'll be looking at is is the number of businesses that sign up number of seats that we have but engagement with those that choose to use it inside the companies, because the more, they engage, the more seats. We'll have at those companies. So it won't be the the things we'll be looking at over the next year or 2 years, 3 years will not be surprising, it'll be the number of businesses that we sign up the number of seats in those businesses. Um, the retention that we have within those businesses and that gives us the confidence to keep moving forward. So um, you know, Busy has been around for 15 years. This is a very significant change for it. Um, you know, it started originally trying to compete in the world of of Duolingo, um, and we made the decision that that was not a market that we should compete in and we went B2B, and it's actually now working in our favor. It's um, it's exciting. But the, the Milestones on the product will be
Thank you.
Thank you.
Our next question comes from the line of Ryan McDonald with neim and Company. Please go ahead.
Thanks for taking my question. Dan, welcome back. Um maybe on the Skilling business. Can you talk about you mentioned? Guild already is obviously a a it's been a good channel for that business. As you've looked to grow, it can you talk about other sort of Investments or other potential channels? Uh you're kind of looking at or evaluating as you sort of build the go to market motion here and you know how much you you think is going to be sort of direct sales versus sort of additional channels. And you know where where does sort of internal sales capacity stand at um, at right now for, for those, uh, initiatives. Thanks.
Yes great a great question and it's early on in that question. So um 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, um, and so we are working very hard to be able to offer non-competitive products to get
Um, in other channels and I think, you know, 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, um, and those channels are, um, in the US and they're, um, in Europe. So we think we, that's where we're starting with is what we know which is how to put great content in place where people want that content. The second thing is we are building, um, slowly a B2B sales force, and that B2B sales force is focusing on opening more of those channels. But also, you know, 1 of the 1 of the unfortunate realities of ched's. Existence was universities, did not historically want to work with check because of checked. Um, now that that part of the business is going away. Um, there's a lot of people who understand the quality of our content, the quality of the way we execute.
The value that it has for the students. And um, 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. Um 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 um who 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 uh, retention rate and completion rate, and those things are are examples of just how good our quality is.
And starting with new Partnerships.
Helpful there, um, and then maybe just as a follow-up. Uh, so I think you mentioned in. I think it was in David's sort of prepared remarks that, um, you know, you saw a little bit slower than expect, or lower than expected, advertising Revenue within the sort of skills in other segments, you know, as a result of the reduced traffic, I guess, how should we think about? Um, you know, how much of a headwind uh, traffic can be in this Skilling business moving forward. And, you know, maybe maybe some of the initiatives you're undertaking to, you know, whether it's investing in new marketing channels, uh, to to sort of drive that top of the funnel in the business, uh, to sort of Offset, you know, the sum of the declines from just core Google. If you will,
Yeah, so actually, it's a really great question, and I'm glad you asked it because we should clarify this. Absolutely, which is...
Skilling and other.
It's not that it we're removing the other from Skilling.
So the other were things like advertising and Those ads didn't appear in the skills. Those ads appeared in check study, they appeared in check math, and check writing and
That's where the traffic is declined. And that's where the add sessions have gone away.
You will see no headwinds in Skilling, um, other than, you know, things that we don't expect or might pop up; but those businesses are about growth now.
So, um, and those businesses, the the the headwind that they have faced is over the last couple years, is a lack of investment because of what we were dealing with on the core side of the business. And it's not easy to, um,
to reposition the business in at all ever, but in the public markets, even more difficult. And so we've had to balance, um, our debt, our cash, um, our initiatives and, um, and reposition those businesses to B2B. And we now feel like they're in position to do that. And we're actually pretty excited about it.
Thank you.
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.