CHEGG, INC (CHGG)·Q1 2025 Earnings Summary

Executive Summary

• Q1 2025 revenue and adjusted EBITDA beat guidance, aided by $4M in new content licensing to two top-10 tech companies and disciplined cost execution; total net revenues were $121.4M (-30% YoY) and adjusted EBITDA was $19.3M, with free cash flow of $15.9M .
• Gross margin was 56% (vs 66–67% guided), impacted by a $16.2M accelerated depreciation charge tied to discontinued content/software assets, reducing margin by ~13 percentage points; non-GAAP gross margin was 57% .
• Management announced an additional restructuring: ~22% RIF (248 employees), $34–$38M charges (mostly severance), and $45–$55M 2025 non-GAAP savings ($100–$110M in 2026), with office closures and real estate savings; combined 2025 savings (2024 actions + new plan) now $165–$175M .
• Q2 2025 guidance: revenue $100–$102M, Subscription Services $85–$87M, GM 64–65%, adjusted EBITDA $16–$17M; macro/AI-search headwinds persist as Google AI Overviews depresses traffic and acquisitions, and free access to GenAI tools for students intensifies competition .

What Went Well and What Went Wrong

What Went Well

• Content licensing program launched: $4M revenue in Q1 from two top-10 tech companies; non-exclusive deals representing <5% of library, with $7M expected in Q2 and broader discussions underway .
• Institutional pilots ramping: expanded from 5 to 15 pilots QoQ, tracking to 40 for 2025; seat-based model aligns Chegg access to student success objectives across campuses .
• Busuu performance: Q1 revenue +7% YoY (B2B +29% YoY); expected ~$48M FY25 revenue and adjusted EBITDA positive by Q1 2026 .

What Went Wrong

• Gross margin miss: one-time $16.2M accelerated depreciation on discontinued content/software cut GM by ~13ppt, driving GM to 56% vs guidance of 66–67% .
• Demand pressure: subscribers fell to 3.2M (-31% YoY) amid traffic declines from Google AI Overviews and free/discounted GenAI offerings targeting students .
• Continued restructuring necessity: additional ~22% workforce reduction and curtailed upper-funnel marketing/new product development reflect sustained macro/competitive pressures (Google AIO, OpenAI/Anthropic education offers) .

Financial Results

Consolidated Metrics (oldest → newest)

Segment Breakdown (oldest → newest)

KPIs and Balance Sheet Highlights

Versus Wall Street Consensus (S&P Global)

Values retrieved from S&P Global.*

Context: Consensus EPS appears to track non-GAAP/normalized EPS; Chegg reported non-GAAP diluted EPS of $(0.06), below the slight positive consensus, while revenue beat consensus by ~6%.*

Guidance Changes

Why: Q1 gross margin miss driven by $16.2M accelerated depreciation charge on discontinued assets (-13ppt); sequential revenue guidance down reflects continued traffic/acquisition headwinds from Google AI Overviews and free GenAI student offers .

Earnings Call Themes & Trends

Management Commentary

• “We surpassed our revenue and adjusted EBITDA guidance, generated approximately $16 million in free cash flow, and diversified our revenue in two key ways… licensing our Question-and-Answer pairs to language model companies.” — Nathan Schultz, CEO .
• “So far, we have executed two content licensing deals with two of the top ten technology companies in the world, generating $4 million of revenue in Q1 and we expect an additional $7 million in Q2.” — David Longo, CFO .
• “We are once again taking proactive measures to align costs with our business outlook… parting ways with approximately 22% or 248… actions will drive $45–$55 million of savings in 2025, with full year savings of $100–$110 million in 2026.” — Nathan Schultz, CEO .
• “During the quarter, we… discontinued certain content and internally used software assets, resulting in a one-time charge of $16.2 million… negatively impacted gross margin by 13 percentage points.” — David Longo, CFO .

Q&A Highlights

• Licensing program scope and economics: Management emphasized the high-quality, human-verified Q&A dataset (~125M pairs), early-stage pilots with big-tech LLM providers, and non-exclusive licensing model with room to expand .
• Institutional pilots monetization: Seat-based licensing where schools purchase access; focus on improving student persistence and graduation, with pilots intended to convert to full-campus contracts .
• Headwinds and guidance cadence: Ongoing traffic/acquisition declines inform cautious Q2 guide; efforts on product/marketing to eventually “call a bottom” in back half of the year .

Estimates Context

• Q1 2025 vs consensus: Revenue $121.387M vs $114.607M (beat by ~$6.8M). Primary EPS $(0.06) vs $0.002 (miss), noting consensus tracks normalized/non-GAAP EPS; non-GAAP diluted EPS was $(0.06) . Values retrieved from S&P Global.*
• Implications: Sell-side revenue models likely raised for licensing and institutional pilots; EPS paths may be trimmed near-term given margin effects of one-time depreciation and continued acquisition headwinds, partly offset by restructuring savings .

Key Takeaways for Investors

• Revenue beat was quality-mix driven (content licensing + institutional pilots), but subscriber base contraction and Google AIO drag keep near-term growth challenged; watch for licensing expansion and B2I conversions as offsets .
• Gross margin miss was largely one-time (accelerated depreciation). Guide implies GM recovery to 64–65% in Q2; track recurring margin drivers vs restructuring execution .
• Restructuring materially increases 2025 savings ($165–$175M total); monitor severance cash timing ($24–$28M by Q2) and real estate exits (HQ lease termination yields $5.3M obligation reduction) .
• Capital structure de-risked: 2025 converts repaid; 2026 notes opportunistically retired at discounts; net cash $64M at quarter-end supports runway for transition .
• Busuu remains a bright spot (B2B growth, 2026 EBITDA-positive target), offering diversification away from core student Q&A exposure .
• Strategic alternatives underway (dozens of meetings across strategics/PE); any transaction could be a stock catalyst, but baseline operations must stabilize under AI-search dynamics .
• Near-term trading: Expect sensitivity to Q2 execution on GM and adjusted EBITDA, updates on licensing deal flow, and trajectory of traffic/acquisition under Google AIO; medium term thesis hinges on enterprise channels and monetizing proprietary content at scale .

Notes:

• All non-GAAP metrics per Chegg’s definitions and reconciliations in the press release/8-K .
• One-time depreciation charge details and impact disclosed by CFO .
• Institutional pilot details and seat-based licensing structure discussed in call Q&A .
• Content licensing revenues and expected Q2 contribution disclosed by CFO .