Executive Summary / Key Takeaways

• Chegg is undergoing a significant transformation driven by the disruptive impact of AI, particularly Google's AI Overviews and the rise of generative AI tools, which have severely impacted its core Subscription Services traffic and subscriber acquisitions.
• In response, the company has implemented multiple aggressive restructuring plans, including substantial workforce reductions and office closures, targeting significant non-GAAP expense savings of $165 million to $175 million in 2025.
• Chegg is strategically diversifying revenue streams through Business-to-Institution partnerships and licensing its proprietary Q&A content to language model companies, with early traction in both areas.
• The company is leveraging its deep learning insights and AI expertise to build differentiated, verticalized products like Solution Scout and enhanced practice tools, aiming to provide value beyond generic AI and rebuild student engagement and acquisition funnels.
• Despite exceeding Q1 2025 guidance, the financial outlook remains pressured, with Q2 2025 revenue guided between $100 million and $102 million, reflecting continued industry headwinds, though management anticipates potential trend improvements in the latter half of 2025.

Chegg's Evolving Landscape: From Textbooks to AI Tutoring

Chegg, Inc., founded in 2005, has evolved from its roots in textbook rentals to become a prominent provider of individualized learning support for students. Its platform offers a suite of services under its Subscription Services segment, including Chegg Study, Chegg Writing, Chegg Math, and the language learning service Busuu, alongside its smaller Skills and Other segment encompassing professional skills courses, advertising, content licensing, and traditional textbook services. The company's long-term strategy centers on increasing student engagement through its Subscription Services, leveraging over a decade of learning insights and investing in technology to provide personalized academic and functional support.

The education technology landscape is currently experiencing profound disruption, primarily driven by rapid advancements and widespread adoption of artificial intelligence. This environment presents both challenges and opportunities for Chegg. Key competitive dynamics include the increasing prevalence of free and paid generative AI services, which students are utilizing for academic support, and the significant impact of major tech platforms like Google, whose AI Overviews (AIO) are altering how students access information online.

The AI Challenge and Chegg's Technological Response

The broad rollout of Google's AI Overviews, starting in mid-August 2024, has emerged as a significant headwind. This feature displays AI-generated content directly at the top of search results, often drawing from third-party sites like Chegg, but keeping users within Google's ecosystem rather than directing them to the original source. This shift has led to a sharp decline in Chegg's nonsubscriber web traffic, plummeting 49% year-over-year in January 2025, directly impacting new subscriber acquisitions. Concurrently, the increasing availability and adoption of generative AI tools like ChatGPT are seen by students as alternatives to specialized education solutions, further pressuring Chegg's core business.

In response, Chegg is banking on its technological differentiation and deep understanding of student learning to build a competitive moat against generic AI. The company has rapidly integrated AI into its platform, developing proprietary technology to understand student questions deeply and create individualized learning pathways. This includes a multi-source approach leveraging foundational and proprietary language models, its symbolic math engine, content library, and subject matter experts, orchestrated by a proprietary system to deliver optimal solutions. A proprietary quality rubric is used to assess content sources and language models, aiming to ensure accuracy and maintain brand trust, a key concern for students using generic AI (53% of GenAI users surveyed by Chegg expressed concern about accuracy).

Recent product innovations highlight this strategy. Solution Scout, launched in early 2025, allows students to compare Chegg's solutions side-by-side with those from multiple language models, with Chegg's technology providing comparison summaries to save students time and highlight differences. This directly addresses the student behavior of triangulating information across sources. The company is also developing enhanced practice and exam preparation features, personalized to individual student needs, and exploring new tools like "Starting Point" and note organization applications. These efforts are designed to evolve Chegg from a simple Q&A platform to a comprehensive, adaptive learning solution. Furthermore, AI integration has yielded significant operational benefits, with the per-unit cost of creating solutions reduced by 75% compared to human-only creation, allowing for increased content volume and quality at a lower cost.

Strategic Evolution and Diversification

Chegg's strategic response extends beyond product innovation to encompass significant business model adjustments and diversification efforts. Recognizing the pressure on its traditional direct-to-student acquisition funnel, the company is actively pursuing new revenue streams.

A key initiative is the expansion of its Business-to-Institution (B2I) effort. This involves partnering directly with educational institutions to provide Chegg's services to their students through seat-based licenses. This strategy is driven by institutions' focus on improving student persistence and graduation rates, a major issue in higher education. The program has grown from 5 pilots in late 2024 to 15 in Q1 2025, with a target of 40 pilots by the end of 2025, aiming to convert these into full campus-wide implementations.

Another promising diversification avenue is licensing Chegg's extensive library of proprietary question-and-answer pairs to language model companies. Chegg views its archive of over 125 million verified Q&A pairs as highly valuable for training AI models. The company signed two such agreements with major technology companies in Q1 2025, generating $4 million in revenue, with an additional $7 million expected in Q2 2025. These non-exclusive deals represent a small portion of the content library, suggesting potential for further expansion.

International expansion remains a focus, with efforts centered on six key markets. A fully localized experience in Mexico, launched in late 2024, serves as a playbook for future localization initiatives, aiming to adapt the platform to meet cultural, linguistic, and user experience requirements in key global regions. Brand and marketing efforts are also being revamped to rebuild the top of the funnel and improve conversion rates through new campaigns and expanding reach into channels where students congregate, such as TikTok, Instagram, Discord, and Twitch.

Financial Performance Under Pressure

The impact of the challenging market environment is evident in Chegg's recent financial performance. In the first quarter of 2025, total revenue was $121.4 million, a 30% decrease year-over-year. This decline was primarily driven by a 31% decrease in Subscription Services subscribers, totaling 3.2 million in the quarter, and a 32% decrease in Skills and Other revenue, partially offset by the new content licensing revenue.

Cost of revenues increased by 16% year-over-year in Q1 2025 to $54.0 million, primarily due to a $13.8 million increase in depreciation expense, including accelerated depreciation of $16.2 million related to streamlining product experiences and abandoning certain assets. This significantly impacted gross margin, which decreased to 56% in Q1 2025 from 73% in the same period of 2024.

Operating expenses, however, saw a substantial decrease, falling 26% year-over-year to $96.4 million. This reduction was primarily due to lower employee-related expenses and contractor spend resulting from restructuring actions undertaken in 2024. Despite the expense reductions, the decline in revenue and the impact of accelerated depreciation led to a loss from operations of $29.0 million in Q1 2025, compared to a loss of $2.5 million in Q1 2024. The net loss for the quarter was $17.5 million, or $0.17 per diluted share, compared to a net loss of $1.4 million, or $0.01 per diluted share, in the prior year period.

Liquidity and Capital Management

Chegg maintains a focus on managing its liquidity and capital structure amidst the operational challenges. As of March 31, 2025, the company held $126.4 million in cash, cash equivalents, and investments. This represents a significant decrease from $528.4 million at the end of 2024, primarily due to the repayment of the $358.9 million aggregate principal amount of 2025 convertible senior notes that matured in March 2025, and the early extinguishment of $65.2 million aggregate principal amount of the 2026 convertible notes for $57.4 million cash.

Net cash provided by operating activities was $24.5 million in Q1 2025, a decrease from $53.3 million in Q1 2024, influenced by the increased net loss and changes in non-cash adjustments. Net cash provided by investing activities increased significantly to $274.9 million, driven by higher proceeds from the sale and maturity of investments and fewer capital expenditures. Net cash used in financing activities was $417.0 million, primarily reflecting the convertible debt repayments. The company generated $15.8 million in free cash flow in Q1 2025, despite incurring approximately $8 million in cash outlays for employee severance related to restructurings.

Management believes its existing liquidity and operating cash flows will be sufficient to fund operations and debt service obligations for at least the next 12 months. The company has $62.5 million in convertible senior notes (net) outstanding as of March 31, 2025, maturing in 2026. A securities repurchase program, increased by $300 million in November 2024, had $150.1 million remaining as of March 31, 2025, providing flexibility for future repurchases of common stock or convertible notes.

Competitive Positioning and Market Dynamics

Chegg operates in a competitive edtech market alongside a diverse set of players. Direct competitors include platforms like Coursera (COUR), Duolingo (DUOL), Pearson (PSO), and Udemy (UDMY), which offer overlapping services in online learning, content, and skills development. Indirect competitors include free resources like Khan Academy and generic AI tools such as ChatGPT.

Quantitatively, Chegg's financial profile shows strengths in certain areas compared to peers. While its recent revenue growth (down 30% YoY in Q1 2025) significantly lags high-growth competitors like Duolingo (up 45% YoY in Q1 2025), Chegg has historically demonstrated strong gross margins (56% in Q1 2025, though impacted by one-time charges; 73% in Q1 2024), often comparable to or exceeding some peers like Coursera (55-60% gross margin in Q1 2024) and Pearson (50-55% in 2024). Chegg's operational efficiency, reflected in its ability to reduce operating expenses significantly through restructuring, is a key focus as it rightsizes the business.

Chegg's competitive advantages lie in its deep domain expertise in academic support, its extensive library of verified content, and its developing AI capabilities aimed at providing personalized, instructional learning experiences that go beyond simple answers. Student concerns about the accuracy of generic AI and the desire for more comprehensive learning support (82% of US college students want more than GPT offers) suggest a market need that Chegg is uniquely positioned to address.

However, Chegg faces challenges from competitors with strong B2B channels (like Coursera and Pearson) and those with viral growth models (like Duolingo). The shift in search behavior driven by Google AIO is a direct threat to Chegg's traditional traffic acquisition, forcing the company to diversify its marketing and distribution channels. The strategic shift towards B2I partnerships and content licensing represents a direct response to these competitive pressures, aiming to build more resilient revenue streams less dependent on direct-to-student web traffic.

Risks and Outlook

The primary risks facing Chegg are the continued negative impact of Google's AI Overviews and the increasing adoption of generative AI on its traffic and subscriber base. These factors have already led to significant revenue declines and necessitated multiple restructurings. The company also faces potential risks from ongoing legal proceedings, including the antitrust lawsuit against Google and other claims, which could be costly and distracting. Furthermore, the company received a notification from the NYSE regarding non-compliance with the minimum share price requirement, posing a risk of delisting if compliance is not regained by October 1, 2025.

In response to these challenges, Chegg announced an additional restructuring plan in May 2025, including a reduction of approximately 22% of its global workforce and office closures. This plan is expected to result in non-GAAP expense savings of $45 million to $55 million in 2025 and $100 million to $110 million in 2026. Combined with the two restructurings in 2024, total non-GAAP savings are projected to be $165 million to $175 million in 2025.

For the second quarter of 2025, Chegg provided guidance reflecting the ongoing headwinds, expecting total revenue between $100 million and $102 million, with Subscription Services revenue between $85 million and $87 million. Gross margin is projected to be 64% to 65%, and adjusted EBITDA between $16 million and $17 million. This guidance indicates a continuation of the challenging trends seen in Q1.

However, management expressed optimism about the potential for business trends to improve in the back half of 2025 as the benefits of restructuring, product innovation, and diversification initiatives begin to materialize. Busuu is expected to achieve approximately $48 million in revenue in 2025 and become adjusted EBITDA positive by Q1 2026. Chegg Skills is also believed to be on a path to profitability and positive revenue growth in 2026. The strategic review process, exploring various alternatives to maximize shareholder value, remains ongoing.

Conclusion

Chegg is at a critical juncture, grappling with the profound impact of AI on its traditional business model. The significant declines in traffic and subscribers necessitate a fundamental transformation. The company's strategic response, characterized by aggressive cost reductions through multiple restructurings, a focused effort on diversifying revenue via B2I partnerships and content licensing, and a commitment to leveraging its AI expertise and content library to build differentiated products, represents a credible plan to adapt to the new landscape.

While the near-term financial outlook remains pressured, as reflected in the Q2 2025 guidance, the investments in AI-powered personalization, the early traction in new business lines, and the substantial cost savings from restructuring provide a potential pathway towards stabilization and future growth. The success of Chegg's AI gambit hinges on its ability to effectively differentiate its offerings from generic AI, rebuild its acquisition funnels through diversified channels, and execute on its B2I and content licensing opportunities. Investors will need to closely monitor subscriber trends, the progress of diversification initiatives, the impact of new product launches, and the outcome of the strategic review process as key indicators of the company's ability to navigate this turbulent period and unlock future value.