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CI

CHEGG, INC (CHGG)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 revenue and adjusted EBITDA exceeded guidance, but were down sharply year over year as Google’s AI Overviews (AIO) pressured traffic and subscriber acquisition; Chegg launched a strategic review and filed a complaint against Google, both potential stock catalysts .
  • Q4 2024 revenue was $143.5M (-24% YoY) and adjusted EBITDA was $36.6M (25% margin), both above prior guidance ($141–$143M revenue; $32–$34M adj. EBITDA). GAAP diluted EPS was -$0.06; non-GAAP diluted EPS was $0.17 .
  • Subscribers fell to 3.6M (-21% YoY), Subscription Services revenue fell 23% YoY, and ARPU declined ~3% YoY; management cited a temporary retention dip in Nov–Dec and continued traffic declines from AIO .
  • Q1’25 guidance implies further near-term pressure: revenue $114–$116M, Subscriptions $104–$106M, gross margin 66–67%, adjusted EBITDA $13–$14M .
  • Balance sheet remains strong: $528M cash and investments, net cash ~$42M after repurchasing ~$116.6M of 2026 converts at a ~$20M discount; FY24 free cash flow was $50.3M despite ~$25M restructuring and settlement cash outlays in Q4 .

What Went Well and What Went Wrong

  • What Went Well

    • Beat Q4 guidance on revenue ($143.5M vs $141–$143M) and adjusted EBITDA ($36.6M vs $32–$34M); CFO framed the operating model as highly efficient (≈$0.9M EBITDA per incremental $1M revenue) .
    • Strengthened balance sheet by repurchasing ~$116.6M of 2026 converts at a ~$20M discount; ended Q4 with $528M cash/investments and ~$42M net cash .
    • Product and AI execution: 66% more questions asked in 2024 vs 2023, step-by-step individualized Q&A enhancements, “Solution Scout” LLM comparison launched; Busuu up 9% in 2024 and +46% in enterprise, with better conversion under freemium .

  • What Went Wrong

    • Top-line and subscriber pressure: Q4 revenue -24% YoY; Subscription Services -23% YoY; subscribers -21% YoY; ARPU -3% YoY .
    • Traffic headwinds intensified: non-subscriber traffic was -19% YoY in Q3 and -37% in October; management cited -49% in January 2025 as AIO expanded .
    • Profitability mix and execution: GAAP gross margin declined to 68% (vs 76% in Q4’23); temporary retention dip in Nov–Dec weighed on ARPU and revenue by an estimated “couple” of million dollars .

Financial Results

MetricQ4 2023Q2 2024Q3 2024Q4 2024
Total Revenue ($M)$187.987 $163.147 $136.593 $143.484
Subscription Services Rev ($M)$166.313 $146.813 $119.804 $128.543
Skills & Other Rev ($M)$21.674 $16.334 $16.789 $14.941
GAAP Gross Margin (%)76% 72% 68% 68%
Non-GAAP Gross Margin (%)78% 75% 70% 72%
Adjusted EBITDA ($M)$66.170 $44.096 $22.266 $36.565
Adjusted EBITDA Margin (%)35% (66.170/187.987) 27% (44.096/163.147) 16% (22.266/136.593) 25% (36.565/143.484)
GAAP Diluted EPS$0.09 $(6.01) $(2.05) $(0.06)
Non-GAAP Diluted EPS$0.36 $0.24 $0.09 $0.17

Q4 vs Guidance (announced Nov 12, 2024)

MetricPrior Guidance (Q4 2024)Actual Q4 2024Result
Total Revenue ($M)$141–$143 $143.484 Beat (slightly above high end)
Subscription Services Rev ($M)$126–$128 $128.543 Beat (above high end)
GAAP Gross Margin (%)67–68% 68% At high end
Adjusted EBITDA ($M)$32–$34 $36.565 Beat

Segment Breakdown

Revenue ($M)Q4 2023Q2 2024Q3 2024Q4 2024
Subscription Services$166.313 $146.813 $119.804 $128.543
Skills & Other$21.674 $16.334 $16.789 $14.941
Total$187.987 $163.147 $136.593 $143.484

KPIs

KPIQ2 2024Q3 2024Q4 2024YoY/Context
Subscribers (M)4.4 3.8 3.6 Q4: -21% YoY
Sub Services ARPU——-3% YoY Q4 commentary
Questions Asked+74% YoY (Q2) +79% YoY (Q3) +66% for FY24 vs FY23 Product usage ramp
Non-Subscriber Traffic—-19% YoY in Q3; -37% Oct -49% Jan’25 (context) AIO impact

Cash Flow & Balance Sheet (selected)

MetricQ4 2024
Free Cash Flow (FY24)$50.252M
Q4 Free Cash Flow$4.8M
Capex (Q4)$13.0M ($8.7M content)
Cash & Investments$528M
Net Cash~$42M
Note Repurchase~$116.6M principal at ~$20M discount

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Total Revenue ($M)Q1 2025—$114–$116 Introduced
Subscription Services Rev ($M)Q1 2025—$104–$106 Introduced
Gross Margin (%)Q1 2025—66–67% Introduced
Adjusted EBITDA ($M)Q1 2025—$13–$14 Introduced

Note: Company previously guided Q4 2024 (revenue $141–$143M; Subscriptions $126–$128M; GM 67–68%; adj. EBITDA $32–$34M) and exceeded those figures .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2024 and Q3 2024)Current Period (Q4 2024)Trend
Google AIO/TrafficAIO expansion disintermediating content; non-subscriber traffic -8% (Q2), -19% (Q3), -37% Oct -49% non-subscriber traffic in Jan’25; Google complaint filed; AIO framed as core headwind Worsening headwind; legal escalation
Restructuring/CostsJune + Nov actions; cumulative 2025 savings targeted $100–$120M On track for $100–$120M non-GAAP savings in 2025 Execution on savings
AI Product & Q&AConversational instruction rollout; strong engagement; 70% usage (Q2); +79% questions (Q3) 66% more questions YoY; “Solution Scout” LLM compare; personalized practice Continued product velocity
Busuu/EnterpriseLocalization, partnerships; early B2I pilots (4 institutions) Busuu +9% FY rev; enterprise +46%; targeting ~35 more pilots in 2025; seat-based pricing Positive traction
Profitability & FCFQ2 adj. EBITDA 27% margin; FCF volatility (severance) Q4 adj. EBITDA 25% margin; Q4 FCF $4.8M despite ~$25M one-offs Resilient margins; near-term cash costs
Capital StructureBuyback authorization; intent to buy notes/equity Repurchased ~$116.6M 2026 converts; net cash ~$42M Deleveraging

Management Commentary

  • “We are launching a strategic review process and filed a complaint against Google… Google’s AIO… materially impacting our acquisitions, revenue, and employees.” — Nathan Schultz, CEO .
  • “We delivered a solid fourth quarter, surpassing our Q4 guidance for both revenue and adjusted EBITDA.” — David Longo, CFO .
  • “Our implementation of machine learning, and multiple AI models, has significantly reduced the cost of creating content by more than 70%… in Q3 we implemented a Satisfaction Guarantee.” — Nathan Schultz .
  • “Busuu… first 30-day conversion… +31% and led to 9% year-over-year revenue growth for 2024; enterprise revenue up 46%.” — Nathan Schultz .
  • “We concluded the quarter with cash and investments of $528 million and a net cash balance of $42 million.” — David Longo .

Q&A Highlights

  • Operating leverage: “If we added an incremental $1M of sales… dropping $900k… to the bottom line.” — CFO .
  • Enterprise/B2I model: Seat-based pricing; ~5 pilots active; targeting ~35 more in 2025; aim to convert pilots to campus-wide deployments — CEO .
  • Retention/ARPU: Temporary retention dip in Nov–Dec; ARPU -3% YoY; estimated ~$2–$3M revenue impact; trends normalized by late Dec/Jan — CFO .
  • “Solution Scout” intent: Save student time by comparing LLM outputs vs Chegg’s solution; build trust and next-best-actions engagement — CEO .
  • Q1’25 guidance assumptions: Continuation of lower traffic/acquisitions; retention stabilizing; pushing product and marketing to “call a bottom” later in 2025 — CFO .

Estimates Context

  • S&P Global consensus (EPS/Revenue/EBITDA) for Q4 2024 and Q1 2025 was unavailable due to access limits at time of analysis. As a result, we benchmarked actuals vs company-issued guidance.
  • Implication: Chegg exceeded Q4 guidance across revenue and adjusted EBITDA, but Q1’25 guide reflects continued top-line pressure (revenue $114–$116M; GM 66–67%; adj. EBITDA $13–$14M), likely prompting near-term estimate resets toward lower 1H’25 revenues/margins before potential stabilization from product/marketing initiatives .

Key Takeaways for Investors

  • Near-term fundamentals remain pressured by Google AIO-driven traffic declines and softer acquisitions; Q1’25 guide confirms continued headwinds .
  • Execution positive on controllables: Q4 revenue and adjusted EBITDA beat, tight expense control, and leverage (≈90% flow-through) position Chegg to benefit from any traffic or conversion improvements .
  • Product differentiation advancing: AI-personalized Q&A, “Solution Scout,” and tailored practice aim to increase engagement, retention, and perceived value vs generic LLMs .
  • Diversification optionality: Enterprise/B2I pilots (seat-based pricing) and Busuu enterprise growth (+46% in 2024) can add recurring revenue streams less reliant on SEO .
  • Balance sheet strength and deleveraging (note repurchases at discount, net cash) provide runway to invest and navigate volatility .
  • Strategic review and Google litigation are material catalysts; outcomes (M&A, go-private, settlement/behavioral remedies) could reshape the risk/reward .
  • Watch KPIs: traffic trend inflection, subscriber adds, ARPU trajectory, and retention stability; monitor Q2/Q3 2025 for evidence that marketing/product investments offset AIO headwinds .

Appendix: Additional Details

  • Q4 non-GAAP adjustments included share-based comp, restructuring charges, and other items; GAAP net loss of $(6.1)M vs non-GAAP net income of $19.0M ($0.17/share) reflect these exclusions .
  • FY24 free cash flow was $50.3M despite significant restructuring and legal payments; Q4 capex down 52% YoY with content costs -56% YoY, aided by AI-driven content efficiency .