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Nathan Schultz

Thank you, Tracey. Hello, everyone, and thank you for joining Chegg's first-quarter 2025 earnings call. Q1 was a good quarter for Chegg. We surpassed our revenue and adjusted EBITDA guidance, generated approximately $16 million in free cash flow and diversified our revenue in two key ways.
First, the expansion of our business institution effort, which has expanded from 5 pilots to 15 pilots from Q4 to Q1 and is well on track to reach our goal of 40 by the end of the year.
Second, licensing our question and answer pairs to language model companies. We've signed two agreements and believe that this is just the tip of the iceberg for this program. David will address the financial details of these deals.
Concerning our strategic review process, we've made significant progress. As a reminder, we undertook this effort last quarter with Goldman Sachs, to explore the range of outcomes to maximize shareholder value, including being acquired, undertaking a go-private transaction, or remaining a public stand-alone company and continue to believe this is the right step to maximize shareholder value.
To date, we've had dozens of meetings with interested parties ranging from strategic tech and education companies to private equity firms. Early indications are positive, and we are encouraged by the conversations and the value these organizations see in our business. Here's what's capturing potential acquirers retention.
First is our core product, Chegg Study, a verticalized and personalized student support platform. As you may have seen, we keep innovating on the behalf of students with the recently released Solution Scout, which allows students to compare multiple language models against Chegg's proprietary content, and our Practice service now has a new AI-powered feature called Create, that empowers students to generate customized content directly from their own class materials, delivering a highly customized and personalized study experience.
Next is Busuu, our language learning service, which continues to perform very well. Q1 revenue increased 7% year-over-year, driven by growth in both the B2C and B2B businesses. The B2C business is seeing the benefits of AI-driven product enhancements such as Speaking Practice, which is driving deep engagement and strong performance in customer acquisition and retention.
The B2B business maintained strong double-digit growth in Q1, achieving 29% year-over-year revenue increase, driven by a strategic focus on retaining and growing large enterprise clients. We expect Busuu to achieve approximately $48 million in revenue in 2025 and to be adjusted EBITDA positive by the first quarter of 2026.
Our reinvented skills product is set up for what I believe will be a breakout year in 2025. Chegg Skills provides skill building for the modern workforce, including foundational digital skilling and broad-based AI training and is trending toward the highest outcomes we've seen to date.
In Q1, we entered into a pilot program with EdifyOnline and Noodle to provide AI programs that support a higher education initiative in India. In Q2 and Q3, we expect to further expand our Guild business and add additional partners. We believe Skills is on a path to profitability and positive revenue growth in 2026.
And finally, there is significant value in our library of proprietary and high-quality questions and answer pairs and our network of subject matter experts. We've continued to make improvements in our content operations with a new quality control rubric, as we prepare for the content licensing opportunity I mentioned earlier.
As we have said many times, Content is the heart and soul of our Chegg Study business, and these improvements in our QC rubric will serve both students and our new content licensing initiative. While we exceeded expectations in Q1 and see great value in the areas of the business I just went through, we believe the macroeconomic trends will continue to put pressure on our company and business trends will worsen before they get better. Google and their expansion of AI Overviews continues to keep traffic captive in the Google search experience and migrate search to Gemini.
Additionally, language model companies are turning to academia for validation with OpenAI recently giving college students free access to GPT Plus, and Anthropic launching a free education offering. As a result, we are once again taking proactive measures to align costs with our business outlook. We executed two restructurings in 2024, and today, we are announcing further cost reduction plans.
This restructuring will include expense reductions across our business, including closing physical offices in the US and Canada by the end of the year, limiting our upper funnel marketing, reducing new product development efforts, and finally cutting our general and administrative expenses.
Chegg Skills and Busuu are not affected as we are encouraged by the progress these businesses have made and we are investing in their growth. As a part of this, we regrettably will be parting ways with approximately 22% or 248 of our talented team members, which is a challenging decision and one I'm saddened by.
The impact is concentrated in the US and Canada and predominantly affects Chegg Study and corporate services, which will result in a 66% reduction in these areas of our business. The actions today will drive $45 million to $55 million in savings in 2025, with full year savings of $100 million to $110 million in 2026.
This is on top of the $120 million of 2025 savings we are on track to fully realize from our two 2024 restructuring initiatives. These decisions continue to be challenging, and we do not make them lightly. I want to personally thank each talented team member for their contributions to Chegg.
To conclude, I want to reinforce the key points from what I shared today. Our strategic alternatives process is going well and is the best way to maximize shareholder value and keep Chegg's student-first Mission thriving.
We believe the strategy for Chegg Study providing true learning outcomes for students is enduring, and while our direct-to-student penetration normalizes, we're diversifying our revenue through two key opportunities in question-and-answer pair licensing and institutional direct contracts. We're continuing to make the hard decisions to align our revenue decline in Chegg Study with our operating expenses as challenging as they are.
And finally, we are excited about the performance of Busuu and the opportunity for Skills, both of which are primed for a breakout year and expected to be adjusted EBITDA positive in 2026.
With that, I'll turn it over to David.

David Longo

Thank you, Nathan, and good afternoon. Today, I will be presenting our financial performance for the first quarter of 2025, along with the company's outlook for the second quarter. We delivered a good first quarter, surpassing our guidance on both revenue and adjusted EBITDA, and generated $16 million in free cash flow.
Despite ongoing industry headwinds, we remain committed to our student-first strategy and prudent cost management in line with our business outlook. As part of this commitment, we announced the restructuring today, which I will elaborate on shortly.
Additionally, during the quarter, we took further steps to enhance our capital structure by repurchasing $65 million of our 2026 convertible notes at a discount. In the first quarter, total revenue was $121 million, a decrease of 30% year-over-year. This includes Subscription Services revenue of $108 million. We had 3.2 million subscribers during the quarter, representing a year-over-year decline of 31%. Skills and Other revenue was $14 million in the quarter, which includes our new revenue stream from content licensing.
So far, we have executed two content licensing deals with two of the top 10 technology companies in the world, generating $4 million of revenue in Q1, and we expect an additional $7 million in Q2. These deals represent less than 5% of our content library and are nonexclusive, allowing us the opportunity to license the content to other companies.
We are in discussion with other companies to expand licensing efforts even further. In the first quarter, gross margin was 56%. During the quarter, we streamlined our product offerings and discontinued certain content and internally used software assets, resulting in a onetime charge of $16.2 million of accelerated depreciation recorded in cost of revenues.
This negatively impacted gross margin by 13 percentage points. Non-GAAP operating expenses were $80.5 million in the quarter, a reduction of approximately $20 million or 20% year-over-year, driven by the execution of the restructurings we announced last year. We are on track to achieve the full year savings of $120 million from these actions. The complete savings will be realized throughout this year.
Our first quarter adjusted EBITDA was $19 million, representing a margin of 16%. Free cash flow for the quarter was $15.8 million despite incurring approximately $8 million in cash outlays related to employee severance from our restructurings. Capital expenditures for the quarter were $9 million, down 69% year-over-year as we are now fully realizing the benefits of our investments in AI.
As mentioned earlier, in the first quarter, we opportunistically repurchased $65.2 million in aggregate principal amount of our 2026 convertible notes at a $7.8 million discount to par. Our 2025 convertible notes matured in March, and we repaid the full principal amount of $358.9 million.
Looking at the balance sheet. We concluded the quarter with cash and investments of $126 million and a net cash balance of $64 million. As Nathan outlined earlier, we are executing an additional restructuring plan to continue to align our cost structure with our revenue as we navigate the continued industry challenges and a negative impact on our business.
This restructuring will impact 248 employees or approximately 22% of the company. This restructuring will result in non-GAAP expense savings of $45 million to $55 million in 2025 and $100 million to $110 million in 2026, stemming from employee departures, cost rationalizations and real estate savings. We have negotiated a penalty-free agreement with our landlord to exit our Santa Clara lease prior to the expiration date, as we seek a smaller office workspace.
We expect to incur charges of approximately $34 million to $38 million related to this restructuring, representing mostly severance payments. Of this charge, we expect $31 million to $35 million will be incurred in cash with the remaining amount representing noncash charges. We expect that a substantial portion of the cash and noncash charges will be incurred in the second and third quarters.
We anticipate completing these activities and substantially all charges by December 31, 2025. The cost savings from the two fully implemented restructurings announced in 2024, coupled with the restructuring announced today will result in a combined non-GAAP savings of $165 million to $175 million in 2025.
Looking ahead, industry challenges continue to cause a notable decline in traffic and subscriber acquisitions. These conditions are a source of continued pressure on our business and are impacting our financial outlook.
For Q2 guidance, we expect total revenue between $100 million and $102 million with the subscription services revenue between $85 million and $87 million, gross margin to be in the range of 64% to 65%, and adjusted EBITDA between $16 million and $17 million.
In closing, while ongoing industry challenges impacting Chegg Study continue to affect our financial performance, the opportunity to support and serve students remains. We are taking the right steps to align the cost structure.
At the same time, we continue to evaluate a range of strategic alternatives to ensure we are maximizing value for our shareholders and are encouraged by the interest we have received.
With that, I will turn the call over to the operator for your questions.

Question and Answer Session

Operator

(Operator instructions)
Ryan MacDonald, Needham & Company.

Ryan MacDonald

Hi, thanks for taking my questions. Nathan, maybe to start, I wanted to get a little bit more color on the licensing deals that you were able to sign during the quarter. Obviously, generating some nice incremental revenue in first and second quarter here. But can you give us a sense of sort of the terms in terms of time frame of how long these licensing agreements are typically lasting?
And then how are you thinking about the total size of this licensing opportunity when you look at across all of the sort of large model companies out there that you could license this to? Thanks.

Nathan Schultz

Ryan, thanks very much for the question. I appreciate it. Let's start off by just reminding everyone what we're licensing. So what we're talking about here is the question and answer pairs. The $125 million question and answer pairs within the Chegg archive and obviously constantly growing.
These are questions that are being created, obviously, through both our Human and our Agentic systems. They are then verified by humans, which comes back to the question, why this content so interesting. As we've already talked about, we have -- we sit on some of the highest quality created by qualified experts and trusted by millions of students data, that is very valuable to language model companies as they seek to continue to train their models.
We're -- as David pointed out, I pointed out in my prepared remarks, we are really early days in this. We've licensed very, very, very small set of our content at the moment as we kind of just pilot, I would call pilot these agreements into some of the biggest tech companies in the world. I do think that there's a nice business model here, and we're really just getting started with this program

Ryan MacDonald

Got it. And then maybe as a follow-up. Great to see that the pilots with the universities are continuing to grow, and you've got or expected to have 40 by year-end. Can you just talk about sort of what the feedback you're getting from university partners thus far and then sort of the willingness to pay and purchase the content library as a point of access for students? Thanks.

Nathan Schultz

Yes, absolutely. We're very encouraged. A lot of growth, obviously, from Q4 last year to Q1 this year, getting up to 15 pilots and just having the momentum where we can see 40 for this year. It's good to remind everyone that what this is, is about institutions delivering our experience directly to the student, which we think is really great, obviously, for Chegg, but even better for students. It's done through a seat-based license model.
So obviously, the schools are buying a number of seats. Honestly, this is one of those areas where we just -- we see the inevitable, which is schools having to spend more time think about persistence. I think you probably all know this, almost 40% of students don't graduate college. That causes kind of a massive hole in tuition.
So we see this as a significant opportunity as colleges simply to zero in on student success as a means of really financial necessity. So very encouraged with what we see so far and getting very positive feedback from the schools looking to take some of those pilots, which will run for the next few months and then turn them into full contracts.

Ryan MacDonald

Thanks for the color.

Operator

(Operator instructions) Thank you. We've come to the end of our question and answer session. And this concludes our call today. We'd like to thank you for your interest and participation. You may now disconnect your lines.

Tracey Ford

Goodbye.