Chegg Expands into Online Education

Analyts expect the digital education market to quadruple in size to $450 billion over the next five years. Chegg (NYSE: CHGG) is moving away from its traditional textbook rental service to focus on this disruptive market.

Chegg’s Financials

Chegg recently reported second quarter revenue of $67 million. Net loss was $10.1 million and loss per share was $0.12, beating the analyst loss estimate of $0.16 per share. Adjusted EBITDA was $3.2 million, up 106% year-over-year.

Its digital business is currently comprised of two components, subscription and advertising. Subscription consists of Chegg Study, eTextbooks and Chegg Tutors, while advertising consists of enrollment marketing, brand partnership and commission-based revenue from partners such as Ingram.

During the quarter, pro-forma revenue grew 37% to $32.7 million. Digital revenue grew 62% to $30.2 million and now accounts for 45% of total revenue. For 2015, the split is expected to be approximately 70% subscription and 30% advertising.

They added 200,000 customers in the quarter and the total number of digital subscribers reached 700,000. About 70% of its subscribers use Chegg for something other than textbooks and 41% subscribe to a paid service. They ended the quarter with cash, cash equivalents and investments of approximately $67.2 million and no debt.

For the third quarter, they expect revenue in the range of $74 million and $80 million. Digital revenue is expected in the range of $34 million and $38 million. Adjusted EBIDTA loss is expected between $12 million and $9 million. For the fiscal year 2015, they expect revenue in the range of $295 million and $310 million with digital revenue between $137 million and $145 million.

Chegg’s Shift from Print to Digital

In February, print materials distributor Ingram Content Group agreed to take over the logistics of its textbook rental business. Students will still use the Chegg portal to rent textbooks and Chegg will receive a commission for each rental. This deal will help increase the margins for Chegg as it takes away the high costs of inventory management and fulfilment.

From a textbook rental service, Chegg has over the years transformed into an online education platform for high school and college students. It offers a series of subscription-based products like Chegg Study and Chegg Tutors for students. Through its platform, it also offers services like college search, internship, and career placement.

Chegg has achieved this transition via partnerships and acquisitions. Some landmark deals have been its multi-year deal with Blackboard to sell homework help, tutoring and career services and partnership with online career specialist InsideTrack for access to online workshops. Last year, it acquired Internships.com, which added two million users to Chegg’s user base, on-demand online tutor service provider InstaEDU, and Campus Special to add a popular summer internship program.

Continuing with this strategy, Chegg last month entered into an agreement with leading education company Cengage Learning to integrate Chegg Tutors into Cengage Learning’s leading calculus materials. Calculus students using Cengage Learning’s digital course solutions will receive one hour of free tutoring from Chegg and subsequent tutoring time will be billed at Chegg Tutors’ standard rate.

The market is pleased with Chegg’s Ingram move. It is currently trading at $7.50, close to its 52-week high of $8.85. It hit a 52-week low of $5.53 in October last year. Its market cap is $657.42 million. Chegg had listed on the NYSE in 2013 at a list price of $12.50 and a valuation of $1.1 billion.