Business Overview and History
Chegg, Inc. (NYSE:CHGG) is an online education company that has long been a go-to resource for students seeking academic support and learning tools. However, the company now finds itself navigating a rapidly evolving landscape, marked by both technological advancements and intensifying competition that have threatened its traditional business model.
Chegg was incorporated as a Delaware corporation in July 2005 with the goal of providing individualized learning support to students as they pursue their educational journeys. Initially, the company's core business focused on offering a platform for students to rent or buy print textbooks and eTextbooks, helping them save money compared to the cost of buying new textbooks. Over the years, Chegg has expanded its offerings to include a suite of digital learning tools and services, which have become integral components of its "connected learning platform."
In the early 2010s, Chegg launched Chegg Study, which gives students access to personalized, step-by-step learning support powered by AI, computational engines, and subject matter experts. The company later added services like Chegg Writing, which helps students with writing tasks including plagiarism detection and citation creation, as well as Chegg Math, a math solver and calculator. In 2019, Chegg further diversified its product portfolio by acquiring Busuu, a language learning platform that offers a premium service providing comprehensive language learning support through self-paced lessons, live classes with expert tutors, and a community for students to practice.
Despite these product expansions and diversification efforts, Chegg has faced several challenges over the years. In 2022, the company had to navigate the impacts of the COVID-19 pandemic, which disrupted the traditional education landscape. Chegg also encountered headwinds from rising competition, particularly in the content and AI space. These factors put pressure on the company's financial performance and necessitated restructuring efforts, including workforce reductions, to align expenses with evolving market dynamics.
Financials
In the fiscal year 2023, Chegg reported net revenues of $617.6 million, a decrease of 10% compared to the prior year. The company's subscription services, which accounted for 90% of total revenues, saw an 11% year-over-year decline, while its skills and other segment, comprising textbook rentals and advertising, decreased by 1%. Chegg's net loss for the year was $837.1 million, or $8.10 per share.
For the fourth quarter of 2024, Chegg reported revenue of $143.48 million, representing a 23.7% decrease year-over-year. This decline was driven by a 23% decrease in subscription services revenue and a 31% decrease in skills and other revenue. The net loss for the quarter was $6.10 million. Operating cash flow and free cash flow for the quarter were both $4.80 million.
Liquidity
Chegg's liquidity position remains relatively strong, with cash and investments totaling $528 million as of the most recent reporting period. The company's debt-to-equity ratio stands at 2.61, while its current ratio and quick ratio are both 0.83. However, the company's financial performance has been impacted by a decline in both subscriber numbers and average revenue per user (ARPU). In the fourth quarter of 2024, Chegg reported 3.6 million subscribers, a 21% decrease from the prior-year period, while ARPU fell by 3% year-over-year.
Navigating Technological Disruption and Competitive Threats
Chegg's challenges can be largely attributed to the rapid evolution of the education technology landscape, particularly the rise of artificial intelligence (AI) and the proliferation of AI-powered tools and services. The company has cited the launch of Google's AI Overviews (AIO) feature, which displays AI-generated content at the top of search results, as a significant factor contributing to the decline in website traffic and subscriber acquisition.
In response to these threats, Chegg has taken several strategic actions. First, the company has filed a lawsuit against Google and its parent company, Alphabet Inc., alleging that the AIO feature constitutes unfair competition and has unjustly retained traffic that would have historically come to Chegg's platform. This legal action is seen as a necessary step to protect the company's business model and intellectual property.
Additionally, Chegg has announced that it is undertaking a strategic review process to explore a range of alternatives, including a potential acquisition, a go-private transaction, or remaining as a public standalone company. This decision underscores the significant challenges the company is facing and its need to find a path forward that can maximize shareholder value.
Investing in Innovation and Diversification
Despite the headwinds, Chegg remains committed to innovating and enhancing its product offerings to better serve students. The company has integrated AI and machine learning technologies into its platform, enabling it to deliver more personalized and comprehensive learning experiences. For example, Chegg has launched a new "Solution Scout" feature, which allows students to compare answers from multiple AI models alongside Chegg's own solutions, providing them with a more comprehensive and trustworthy learning resource.
Chegg is also diversifying its revenue streams by expanding its business-to-institution (B2I) program, which aims to partner with colleges and universities to provide tailored learning solutions and support student success and persistence. This strategic initiative represents a promising avenue for Chegg to leverage its expertise and reach a broader segment of the education market.
Product Segments
Chegg's business is divided into two main segments: Subscription Services and Skills and Other.
The Subscription Services segment is the company's primary revenue driver, accounting for 88% and 89% of total net revenues during the three and nine months ended September 30, 2024, respectively. This segment includes Chegg Study, Chegg Writing, Chegg Math, Chegg Study Pack, and Busuu. During the three and nine months ended September 30, 2024, Subscription Services revenues decreased by 14% and 11% respectively, compared to the same periods in 2023. This decline was primarily driven by decreases in subscribers of 13%, 9%, and 8% during the three months ended September 30, 2024, June 30, 2024, and March 31, 2024, respectively, compared to the same periods in the prior year.
The Skills and Other segment includes revenues from Chegg Skills, advertising services, print textbooks, and eTextbooks. This segment accounted for 12% and 11% of total net revenues during the three and nine months ended September 30, 2024, respectively. During the three months ended September 30, 2024, Skills and Other revenues decreased by 6% compared to the same period in 2023, primarily due to lower enrollments in Chegg Skills. For the nine months ended September 30, 2024, Skills and Other revenues remained relatively flat, decreasing by only 1% year-over-year.
Scandals and Controversies
Chegg has faced several legal and regulatory challenges in recent years. On March 1, 2023, a shareholder derivative complaint was filed against Chegg's board and certain officers alleging breach of fiduciary duty, unjust enrichment, and waste of corporate assets. This matter is currently stayed. On February 14, 2023, a putative class action complaint was filed against Chegg's board alleging breach of fiduciary duty, but this matter was subsequently dismissed.
In 2020, Chegg received a Civil Investigative Demand from the Federal Trade Commission (FTC) regarding alleged deceptive or unfair acts or practices related to consumer privacy and/or data security. In 2022, the FTC published a consent order regarding Chegg's privacy and data security practices.
Additionally, in 2021, Pearson Education filed a copyright infringement lawsuit against Chegg, which is still ongoing.
Outlook and Conclusion
As Chegg navigates the challenging landscape, the company's near-term outlook remains cautious. For the first quarter of 2025, the company has guided for total revenue between $114 million and $116 million, with subscription services revenue expected to be in the range of $104 million to $106 million. Gross margin is projected to be between 66% and 67%, and adjusted EBITDA is expected to be $13 million to $14 million. This guidance reflects the ongoing industry challenges leading to a notable decline in traffic and subscriber acquisitions.
Despite the current headwinds, Chegg remains a trusted brand in the education technology space, with a large customer base and a history of innovation. The company's strategic actions, including its legal battle with Google and its exploration of strategic alternatives, suggest a determined effort to protect its core business and position itself for long-term success. Investors will closely watch Chegg's ability to adapt and evolve its offerings to meet the changing needs of students and educators in the rapidly transforming education technology landscape.
The education technology industry continues to see rapid changes driven by the growth of AI technologies, creating both opportunities and challenges for companies like Chegg. The proliferation of AI-powered tools, such as ChatGPT, has significantly impacted student behavior and the competitive landscape. Chegg's ability to successfully integrate new technologies, such as AI, into its platform and offerings will be crucial in driving long-term growth and maintaining its competitive position in this evolving market.