Chegg Strikes Distribution Partnership With Ingram Books, Announces 15% Boost In Earnings From Digital Services

Student textbook resale site Chegg has struck a strategic partnership with Ingram Content Group today. Said to be the world’s largest distributor of books, Ingram will acquire a significant share of Chegg’s textbook inventory in the next coming months.

The partnership makes a lot of sense for Chegg. The site has been pushing more towards digital services in the last six months. Chegg is a well-known textbook sales and rental service among students but has rebranded in order to be considered more of a digital student hub. According to Chegg, only 30% of its users actually order physical textbooks. Two-thirds of students who log on to Chegg are ordering digital resources. It also acquired online tutoring company InstaEDU for $30 million in June.

This partnership is a significant change in direction for Chegg and will seriously reduce the overhead costs of handling storage and direct shipping. Ingram also offers a much faster way to ship textbooks with its much more plentiful distribution centers throughout the country. In return, the partnership gives Ingram a new area for growth in its distribution channels. Chegg currently distributes around 5-6 million textbooks to students per year.

Chegg has already started to transfer ownership of both current and new inventory to Ingram, equaling approximately 10% of Chegg’s anticipated textbook volume for the upcoming fall semester. Chegg expects this will result in a reduction in net cash expenditures on textbooks by $10-15 million in the third quarter, and by as much as $25 million in the next six months.

Chegg spokespeople say InstaEDU has already increased its digital sales by 15%. Chegg’s digital revenue is estimated to be about $315 million for the year. Approximately $100 million of that will be from digital revenue, according to Chegg CEO Dan Rosensweig.

Chegg will continue to market the books to students directly, as well as control pricing and catalog selection. Ingram will handle distribution, logistics and warehousing of the books. Chegg will get a commission for each rental or sale, which will be recorded as digital revenue. This means Chegg is going to see revenue go down materially, but profit margins and use of cash will reportedly become a lot more favorable.

“This is a long-term strategic growth opportunity,” said John Ingram, CEO of Ingram Content Group. “Together we can improve service and delivery speed for Chegg’s students, while leveraging the combined force of Chegg’s consumer brand and reach, and our expertise in distribution and logistics.”

Chegg will discuss this agreement in more detail on its earnings call today at 2:00 p.m. PDT. A live webcast of the call will be available online under the Events & Presentations menu.

Update: Chegg just released its earnings report. Key Highlights:

  • Revenue of $64.5 million, an increase of 15% compared to Q2 2013;
  • Digital Revenue grew 54% year-over-year to $18.7 million, or 29% of total revenues compared to 22% in Q2 2013
  • GAAP Gross Profit was $25.9 million
  • $60 million: the amount of money Chegg saved students and their families in Q2 2014
  • 64%: the year-over-year growth in the number of members using two or more Chegg services; and 62%: the year-over-year growth in the number of digital services customers
  • 18%: the growth in the number of mobile active users year-over-year.