A switch in distributors for Chegg’s legacy textbook sales and rentals business reflects, in a way, how the more things change, the more they stay the same.
Back in 2014, more competition from Amazon had led the Santa Clara, Calif-based Chegg to a deal with book distributor Ingram Content Group. Ingram bought Chegg’s textbook inventory to sell and distribute, and the companies shared the revenues.
“People believed we were going to go out of business,” Chegg CEO Dan Rosensweig reflected during an earnings call this month, according to a transcript. “We believed we weren't. And we believed we had a plan. And we built a relationship with Ingram.”
The Ingram deal was framed as part of Chegg’s strategy to 100 percent digital revenue. Chegg has since moved most of its business into digital services for students—services that accounted for 79 percent of Chegg’s 2018 revenue and 74 percent of its revenue for the third quarter of this year, which ended on Sept. 30.
And yet, despite Chegg’s efforts to transform into a digital-first company, it can’t escape the legacy print business—for now, at least. The company will leave Ingram for FedEx, which has a larger delivery operation and can get packages to most students faster.
A change in distributors and the state of the textbook market aren’t the only nuggets gleaned from Chegg’s latest earnings.
Financial highlights
This was Chegg’s 15th consecutive quarter to top expectations, analysts from investment bank Barrington Research wrote in a report. Total net revenues for the third quarter rose about 27 percent year over year to $94.2 million, with most of the growth in Chegg’s digital services business.
Chegg’s digital services include Chegg Study textbooks solutions and expert answers for student coursework; Chegg Tutors online marketplace to match students and tutors; Imagine Easy Solutions online bibliography and research tools; its marketing and partnerships services aimed at universities and colleges; its careers services aimed at college students and the Chegg Test Prep service under development.
The company reported an 84 percent increase year over year in adjusted EBITDA to $23.1 million.
Chegg’s quarterly results pleased investors. The company’s stock rose 4 percent, from $33.56 at market close Nov. 5 to $34.81 at market close Monday.
Chegg raised expectations for its full-year financial performance, with expected total net revenues between $407 million and $409 million and expected fourth-quarter revenues between $122 million and $124 million.
Textbooks refuse to die
Chegg’s “required materials” business generated $24.8 million in the third quarter, a 24 percent increase year over year. The company expects the business to grow in revenue in 2020 and 2021. It should stabilize in 2022 and subsequently operate at break even.
Rosensweig told investors he expects Chegg to pay about $50 million in 2020 to build up its textbook inventory. It will pay $15 million in 2021, with the cost dropping each subsequent year.
FedEx will bring one-day faster delivery for 70 percent of Chegg’s customers, Rosensweig said. The deal with will last Dec. 1 to March 2025, with options to renew.
Rosensweig said the company will ditch Ingram because it has new needs for a distributor. “When we look to the future, our needs have evolved. And we wanted a provider who could serve our students better and provide world-class shipping and logistics experience,” he said.
Thoughts on Thinkful
Analysts sought more details on how Chegg will work with its latest acquisition, coding bootcamp Thinkful. The $80 million-plus deal closed on Oct. 1.
Rosensweig said the companies are still integrating Chegg tools with Thinkful’s curriculum. Eventually, Thinkful students will have the option to request live human help at any time for Thinkful’s brand of engineering, data science and other technology-focused classes.
The Chegg CEO also said that Thinkful will remain focused on direct-to-consumer training. The corporate training route some bootcamps have pursued is too competitive and not worth the profits, which are typically shared with a brand-name university supplying the curriculum, he said.
Corporate training has taken coding bootcamps by storm, with the number of corporate training graduates more than doubling year over year to about 17,000 graduates in 2018, according to Course Report, a research firm focused on the coding bootcamp industry. The number of corporate partnerships in the industry grew 44 percent year over year to 634 corporate partners in 2018.
“The secret is going to be the pricing, which we know we can price lower than anybody else and still make a significant margin because we don’t have to split the revenue,” Rosensweig said.
Helping Thinkful rise above the competition will also be the data Chegg has already collected from customers. That data includes students’ majors and schools, which will aid the company’s marketing efforts, he said.
But amassing all that data has come with risks and trouble. Chegg itself disclosed a data breach in September 2018 that revealed the usernames and passwords of 40 million users worldwide. Thinkful also disclosed it had suffered a data breach, days after the announced purchase by Chegg. Rosensweig said he didn’t know about it before the deal.
“We obviously were made aware the moment that they knew,” he said. “And fortunately, similar to ours, which, as you know, amounted to nothing. There was no personally identifiable information, no credit card information.”
He said Chegg is still interested in buying more companies. Chegg has more than $1.1 billion in cash.
International growth, domestic competition
Outside of Thinkful, Chegg has its eyes on two additional paths to growth: international presence and a $20 a month bundled package of its writing, math and study services.
Chegg’s international roadmap starts with Canada before expanding into Australia and the U.K. Chegg also sees potential in South Korea and Saudi Arabia. Because Chegg’s content is sourced from major publishing houses that sell books worldwide, that could make its path to international expansion easier.
But more work is needed at home, Rosensweig said. The company has room to grow among the one million U.S. students enrolled in online nonprofit schools and community colleges. And the company expects a major push of its $20 Study Pack around August.
An analyst asked Rosensweig if he felt concerned about a cheaper alternative from a competitor—a $10-a-month package of Barnes & Noble Education’s direct-to-student digital study offering, Bartleby.
Barnes & Noble Education, a spun off separate company from the Barnes & Noble bookstore chain, launched Bartleby textbook solutions in August 2018 and saw more than 50,000 customers subscribe following its first major in-store sales push. But Rosensweig waved off the competing service.
“I don't know the best way to say this without sounding a little too confident. They don't even appear on the radar,” he said. “You can see our growth rate, I think it speaks for itself.”
