Chegg Sheds Textbook Rental Business to Focus on Digital

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Chegg Inc., a textbook distribution company, has announced that Ingram Content Group will take over its textbook distribution service on May 1, 2015 while Chegg focuses on becoming a 100% digital student hub.

Ingram Content Group is one of the largest print material distributors and the announcement of the multi-year deal with Chegg caused the latter’s shares to go up by 27% on the day of the announcement.

Ingram will manage Chegg’s textbook rental and distribution business, but Chegg will continue to market Ingram-handled inventory under its own brand. It is expected that Chegg will complete its warehouse operations by the end of 2015.

Dan Rosensweig, Chegg’s CEO, said that the company’s 2014 fourth quarter and fiscal year results were encouraging.

 “We set a record in the fourth quarter for members, customers and digital subscribers, and with the planned partnership with Ingram we can complete our transition to digital student hub, where we grow faster, have higher margins and create more value for students and investors.”

This multi-year deal with Ingram lets Chegg expect that by the end of 2016 100% of the company’s revenue will be digital. Chegg is to be paid a commission by Ingram who will now fulfill and manage the print textbook rental business.

This deal doesn’t affect the process of textbook renting on Chegg.com. Students can rent books on the website as usual, only the process will be handled by Ingram.

The two companies’ boards are expected to ratify the final binding agreement between Ingram and Chegg before the end of the 2015 first quarter.

Shedding the textbook rental business should allow students to receive their textbooks faster. Rosensweig thinks that the focus on digital media will drive growth:

“is very positive news as it means Chegg will no longer invest our capital in physical textbooks, while maintaining all the benefits and leverage our other businesses receive from textbooks.”

Following the announcement by Chegg, the company’s shares rose by $1.85 and closed the day at $8.60. A report by TheStreet Ratings Team gave Chegg’s a C- rating and a HOLD score as they identify both weaknesses and strengths factors that does not provide a clear-cut direction the company could take. They justify their rating by saying that:

 “The company’s strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations and expanding profit margins. However, as a counter to these strengths, we find that net income has been generally deteriorating over time.”

According to WKRB News‘ Jim Brewer,  Chegg’s stock has a consensus rating of  “Buy” and a consensus price target of $7.92.