Chegg (CHGG) Q3 2026 earnings review
Chegg pays off its debt, but fourth-quarter profit nears zero
Chegg, the online homework-help and career training company, finished paying off its debt while its original study business kept shrinking. Third-quarter sales dropped 40% to $47 million, beating the company's own plan, and steep overhead cuts produced $6 million of free cash flow. Chief executive Dan Rosensweig launched a job-search website for students, but the fourth-quarter outlook has sales falling 46% from a year ago by our math.
| Revenue | $46.5M -40% from a year ago |
|---|---|
| Gross margin | 52% 59% a year ago |
| Net cash after paying off debt | $43.6M convertible debt now $0 |
| Fourth-quarter revenue outlook | $38–40M middle of the range: -46% from a year ago |
⚖️ Verdict: 🔴 Bearish
The story got worse because the fourth-quarter plan shows the revenue drop speeding up again during the autumn college semester, pushing operating profit down to about $1 million. The good news: management paid off the last of its convertible debt, leaving $44 million in cash and removing bankruptcy risk while it builds new career tools.
The question now is whether corporate training and the job-search platform can grow fast enough to replace the shrinking homework service before gross margin compression eats the remaining cash flow. Either the new university pilots and corporate partners turn into paying contracts next year, or fixed hosting costs push the shrinking business into cash losses. The segment revenue table in the quarterly filing and the first-quarter 2027 outlook will show which way it breaks.
🐂 Bull Case
Convertible Debt Paid Off Leaving $44M Cash
Chegg has spent the past two years buying back and paying off its debt using cash from its shrinking homework-help service. "I am happy to report that the balance sheet reset is complete," chief executive Dan Rosensweig said. The education company paid off its remaining convertible notes — debt that can turn into shares — during the third quarter, bringing total debt down from $486 million at the end of 2024 to zero.
The California group ended September with $43.6 million in cash and short-term investments, having used $53.3 million of cash over the first nine months of 2026 to clear the last of the notes. Removing the debt eliminates bankruptcy risk for now and saves interest costs, so management can use future cash flow to build its new career services or buy smaller rivals.
What to watch: cash and investments at the end of the fourth quarter. A stable cash balance would show the business can fund its new products without burning through its reserves now that the debt is gone.
Cost Cuts Narrowed the Operating Loss
Chegg laid off nearly half its staff last October to shrink costs alongside falling sales. Finance chief David Longo said the company also used artificial intelligence "to streamline operations and improve productivity" across the business. Operating expenses excluding one-offs fell 36% from a year ago to $31.2 million, helping the company beat its own quarterly profit target for an eighth straight quarter.
- General and administrative cost (overhead and legal): 26.1% of revenue, down 16.7 percentage points from a year ago by our math
- Research and development cost: 17.2% of revenue, down 6.5 percentage points by our math
- Sales and marketing cost: 19.9% of revenue, up 5.0 percentage points by our math as revenue shrank faster than marketing spend
Those overhead cuts narrowed the operating loss from $17.1 million a year ago to $5.1 million, even though revenue dropped by $31.3 million. Lower spending keeps the business generating cash while it tries to build new products. What to watch: operating expenses in the fourth quarter, which by our math must fall by another $2 million to $3 million from this quarter for Chegg to hit its profit target.
🐻 Bear Case
Fourth Quarter Plan Points to Faster Revenue Drop
Students are using free artificial intelligence tools instead of paying for Chegg Study, the company's traditional homework-help subscription. Rosensweig acknowledged that "AI hit our business hard, and we had to reinvent the company" as the academic service winds down. Third-quarter revenue fell 40.2% from a year ago to $46.5 million, which was $3.0 million above the middle of the company's plan, matching its usual pattern of beating quarterly targets.
The relief in the year-over-year decline is temporary, because the third quarter of 2025 had already suffered a steep drop when Google changed its search results. For the fourth quarter, Longo set a revenue target of $38 million to $40 million. At the middle of that range, sales will fall 46.3% from a year ago and 16.1% from the third quarter by our math.
A 16% drop from the third quarter to the fourth is troubling because the fourth quarter covers the busy autumn college term. In 2025, fourth-quarter revenue fell only 6.5% from the third quarter by our math. What to watch: first-quarter 2027 revenue outlook next quarter, which will show whether subscriber losses in the spring semester are still worsening.
Falling Sales Push Fourth Quarter Profit Near Zero
Chegg carries fixed costs for web hosting, depreciation of past content investments, and software licences inside its cost of revenues — the direct cost of delivering its services. When subscription revenue shrinks, those fixed bills take up a larger share of every dollar customers pay. In the third quarter, cost of revenues rose to 47.8% of sales, up 7.1 percentage points from a year ago by our math.
That shift pushed gross margin down from 59.2% a year ago to 52.2%. The pressure worsens in the fourth quarter, where management plans for gross margin to fall to between 46% and 48%. As a result, Adjusted EBITDA — profit before interest, taxes, depreciation and stock pay — is set to drop from $5.4 million this quarter to about $1 million, or 2.6% of revenue by our math.
What to watch: fourth-quarter gross margin against the 46% to 48% target. Even with Chegg's habit of beating its own margin targets by 3 to 4 percentage points, fixed costs are squeezing cash generation toward zero.
Employability Launch Shows Traffic But No Revenue
Rosensweig is steering the group "from a homework help company into an employability company" that helps students find jobs. In September, Chegg launched its career service on Internships.com, offering "personalized job matching, resume tailoring, one-click apply, interview prep, skills assessment, and curated network connections". Rosensweig said "the foundation is live and the momentum is real", pointing to over 100,000 website visitors and pilot programmes at three colleges: College of Charleston, Salem College, and Radford University.
The numbers tell a quieter story. Website visits and university pilots are not bringing in noticeable sales yet, and Longo noted the platform will only "contribute more meaningfully in 2027". Meanwhile, the fourth-quarter outlook has total revenue dropping by $7.5 million from the third quarter at the middle of the range by our math, showing the new products cannot offset the shrinking study business this year.
What to watch: whether management discloses how much revenue Internships.com and the college pilots generate in the fourth-quarter results. Without a disclosed dollar figure, investors cannot tell if students or schools will pay for the service.
Risks this quarter didn't answer
Three standing concerns from prior quarters received no numbers in the third-quarter release or prepared remarks.
- Chegg Skilling revenue: Rosensweig said "our language learning product, in both our B2B and B2C channels, is returning to growth" and cited 11 new distribution partners including Power Train, but the release gave no segment revenue; the quarterly filing's footnote will show if growth beat the 2% rate from last quarter.
- Homework-help subscribers and retention: missing since the second quarter of 2025; without them, investors must use deferred revenue as a rough proxy.
- New York Stock Exchange delisting notice: listed only in the boilerplate risk factors, with no update on plans to regain compliance.
👓 Other Themes
Economic Uncertainty and AI Anxiety Hit Graduates
Rosensweig said economic uncertainty and anxiety around artificial intelligence have made finding a first job harder for college students. While generative AI hurts Chegg's homework business by giving students free answers, management argues that employer demand for AI job skills and student worry over entry-level hiring create demand for its career and corporate training tools. The company plans to add 70,000 early-career job listings to Internships.com soon.
💲 Other KPIs
Free cash flow — operating cash flow minus equipment and content purchases — turned positive from a $0.9 million outflow a year ago. Capital spending dropped 71% to $1.7 million, or 3.7% of revenue by our math, as Chegg cut spending on textbook solutions. Nine-month free cash flow reached $15.0 million, up from $2.8 million last year.
Deferred revenue — cash customers have paid upfront for subscriptions not yet delivered — fell 20.1% from a year ago and 3.3% from last quarter by our math. The $0.9 million quarterly drop is smaller than the $2.6 million drop in the third quarter of 2025, because multi-month corporate training contracts now make up a larger share of the balance.
Money owed by customers fell 38.1% from a year ago and 11.0% from the second quarter by our math, tracking the 40.2% drop in total revenue. Collecting $6.0 million from receivables over the first nine months helped support operating cash flow as the business shrank.
🔮 Guidance
New. The plan puts fourth-quarter sales down 46.3% from a year ago and down 16.1% from the third quarter at the middle of the range by our math. Chegg has beaten the middle of its revenue plan for eight straight quarters, by an average of 4.4% over the last four; if the pattern holds, revenue would land near $40.7 million by our math.
New. The forecast has gross margin dropping 5.2 percentage points from the third quarter and 10.3 percentage points from a year ago at the middle of the range by our math. Lower seasonal revenue against fixed hosting and depreciation costs drives the decline.
New. Operating profit before depreciation and stock pay is set to fall 81.6% from the third quarter and 92.2% from a year ago by our math, leaving a 2.6% margin at the middle of the revenue range. The company beat its third-quarter profit midpoint by $3.9 million.
Raised. Management tightened its full-year capital spending cut from about 60% to greater than 60% compared with 2025's $28.1 million. Having spent $6.4 million in the first nine months, the target leaves a ceiling of $4.8 million for the fourth quarter by our math.
❓ Key Questions
What was Chegg Skilling revenue in the third quarter?
Management said language learning returned to growth and cited 11 new corporate partners this year, but the release omitted the Skilling segment revenue. Investors need the figure from the quarterly filing to see if growth improved from 2% last quarter.
How will Chegg charge for the new employability platform?
Internships.com drew 100,000 visitors and signed three university pilots since September, yet management has not stated whether students, colleges, or employers pay, nor what the price per user or institution is.
Why does revenue drop 16% in the autumn school term?
The fourth quarter is normally a busy academic period, and sales fell only 6.5% from the third quarter to the fourth last year. A 16.1% sequential drop in the new plan points to heavier subscriber losses at the start of the school year.
What are management's criteria for buying other companies?
Chief executive Dan Rosensweig said Chegg is reviewing acquisition targets with strong intellectual property and customer bases. With $44 million in cash and fourth-quarter profit near breakeven, any cash acquisition carries high risk.