Chegg Inc. (CHGG) is a leading provider of online learning and academic support services, catering to students across the globe. The company has weathered significant headwinds in recent years, as technological advancements and the rise of AI-powered tools have disrupted the traditional education landscape. Chegg's ability to adapt and innovate in this rapidly evolving environment will be crucial to its long-term success.
Business Overview and History
Chegg was founded in 2005 with the goal of providing affordable and accessible educational resources to students. The company started as an online textbook rental service, allowing students to rent physical textbooks at a lower cost compared to buying them new. Over the years, Chegg has expanded its offerings through both organic growth and strategic acquisitions, evolving into a comprehensive learning platform.
In 2010, Chegg acquired CourseSmarts, an online platform that provided course materials and study aids, expanding its product suite and offering students more tools to support their academic success. In 2013, the company launched Chegg Study, a subscription-based service that provides step-by-step solutions to homework problems, textbook questions, and practice problems. This same year, Chegg went public, raising $187.5 million in its initial public offering.
Chegg continued its expansion in 2014 by acquiring Internships.com, a leading site for internship and career opportunities, diversifying its offerings beyond academic support and into the career development space. In 2016, the company made two significant acquisitions: Imagine Easy Solutions, the company behind the popular citation generator EasyBib, and WriteLab, an AI-powered grammar and writing assistance tool, further enhancing its suite of academic support services.
Despite its growth, Chegg has faced challenges. In 2019, the company experienced a data breach that impacted user information, prompting efforts to address the issue and strengthen its cybersecurity measures. Additionally, Chegg has had to navigate changes in the textbook market as more students have shifted to digital resources.
As of 2023, Chegg operated with a global workforce of over 1,500 employees, serving millions of students worldwide. The company's revenue has grown from $644.3 million in 2020 to $716.3 million in 2023, representing a compound annual growth rate (CAGR) of 11.1%. However, net income has been more volatile, ranging from a loss of $6.2 million in 2020 to a profit of $266.6 million in 2022.
Financials
Chegg's financial performance has been mixed in recent years. In the most recent fiscal year (2023), the company reported revenue of $716.29 million and net income of $18.18 million. Operating cash flow (OCF) was strong at $246.20 million, with free cash flow (FCF) of $163.15 million.
However, the most recent quarter (Q3 2024) showed signs of pressure, with revenue declining 13% year-over-year to $136.59 million. The company reported a net loss of $212.64 million, primarily due to a $195.71 million goodwill impairment charge. Despite the challenges, Chegg maintained positive OCF of $39.53 million and FCF of $23.69 million for the quarter.
Chegg's financial ratios paint a mixed picture. The company's current ratio and quick ratio both stand at 0.91 as of Q3 2024, indicating potential liquidity concerns as current liabilities exceed current assets. However, Chegg's debt-to-equity ratio of 0.66 suggests a relatively healthy capital structure.
In terms of profitability, Chegg's gross margin has remained strong, hovering around 68% in recent years. However, the company's operating margin has been more erratic, ranging from 8.9% in 2021 to -9.5% in 2023, reflecting the challenges it has faced in navigating the evolving education technology landscape.
Liquidity
Chegg's liquidity position remains relatively strong despite recent challenges. As of Q3 2024, the company had $631.24 million in cash and investments. Chegg also has access to a $300 million revolving credit facility, with no outstanding borrowings as of the latest report.
The company's annual operating cash flow has been consistently positive, reaching $246.2 million in 2023. Free cash flow, however, has been more volatile, fluctuating between $152.6 million and $179.0 million over the past three years.
Business Segments
Chegg operates through two primary business segments: Subscription Services and Skills and Other.
Subscription Services Segment
The Subscription Services segment is Chegg'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 core offerings such as Chegg Study Pack, Chegg Study, Chegg Writing, Chegg Math, and Busuu.
Chegg Study Pack is a premium subscription bundle that provides students with access to Chegg Study, Chegg Writing, and Chegg Math. Chegg Study offers personalized, step-by-step learning support powered by AI, computational engines, and subject matter experts. Chegg Writing helps students with writing tasks, including plagiarism detection and citation creation. Chegg Math, including Mathway, assists students with understanding math concepts by providing a step-by-step math solver and calculator.
Busuu is a premium language learning platform that offers self-paced lessons, live classes with expert tutors, and a community of members to practice alongside.
During the three and nine months ended September 30, 2024, Subscription Services revenue decreased 14% and 11% respectively, compared to the same periods in 2023. This decrease was primarily due to a decline in the number of subscribers who have paid to access Chegg's services.
Skills and Other Segment
The Skills and Other segment includes revenue from Chegg Skills, advertising services, print textbooks, and eTextbooks. Chegg Skills offers professional courses focused on the latest technology skills. The company also generates revenue from advertising services and partnerships, as well as providing a platform for students to rent or purchase print textbooks and eTextbooks.
During the three and nine months ended September 30, 2024, Skills and Other revenue made up 12% and 11% of Chegg's total net revenues, respectively. Skills and Other revenue decreased 6% during the three months ended September 30, 2024, compared to the same period in 2023, primarily due to lower revenues in Chegg Skills related to enrollments. For the nine-month period, Skills and Other revenue decreased 1%, remaining relatively flat.
Navigating the AI Disruption
The rise of AI-powered educational tools, such as ChatGPT and Google's AI Overviews (AIO) search experience, has posed significant challenges for Chegg. These advancements have allowed students to access free, AI-generated content and solutions, potentially reducing the demand for Chegg's paid services.
In response to these headwinds, Chegg has undertaken a series of strategic initiatives. In June 2024, the company announced a restructuring plan that included a workforce reduction and the closure of two international offices. This was followed by an additional restructuring announcement in November 2024, which aimed to further align Chegg's cost structure with the evolving market conditions. The November restructuring plan will result in a 21% reduction in headcount, with expected annualized non-GAAP cost savings of $60 million to $70 million in 2025. The total cost savings from both restructurings are projected to be $100 million to $120 million in 2025.
Despite these challenges, Chegg remains committed to developing a vertically integrated and personalized learning experience for students. The company has invested in integrating AI technology into its platform, with the goal of providing more accurate and adaptive solutions. Chegg has also focused on diversifying its customer acquisition channels, including the launch of a Discord app and a Chrome extension, to reduce its reliance on search engine optimization (SEO).
Outlook and Risks
Chegg's financial guidance for the fourth quarter of 2024 reflects the continued pressures it faces. The company expects total revenue between $141 million and $143 million, with subscription services revenue between $126 million and $128 million. Gross margin is expected to be in the range of 67% to 68%, and adjusted EBITDA is projected to be between $32 million and $34 million.
It's worth noting that Chegg no longer expects to meet its 2025 goals of 30% adjusted EBITDA margin and $100 million in free cash flow due to the rapid adoption of AI-powered search experiences and generative AI products by students.
The company's long-term success will depend on its ability to adapt to the rapidly evolving education technology landscape. Risks include further advancements in AI-powered educational tools, increased competition from both traditional and innovative players, and potential regulatory changes that could impact Chegg's business model.
Conclusion
Chegg's journey in the online education space has been marked by both growth and challenges. The company's ability to navigate the disruptive impact of AI-powered tools will be crucial to its future success. While the near-term outlook remains uncertain, Chegg's focus on innovation, diversification, and cost optimization may help it weather the current storm and position the company for long-term sustainability in the rapidly changing education technology industry.