Chegg 2013 Annual Report Download - page 93

books that typically have higher source cost recovery but also increased our available inventory of books for rent.
We source both new and used print textbooks for rental or resale from wholesalers, publishers and students.
Purchasing used textbooks allows us to reduce the investments necessary to maintain our textbook library while
at the same time attracting students to our website by offering them more for their textbooks than they could
generally get by selling them back to their campus bookstore. Through these refinements to our model, we have
achieved greater overall efficiency, enabling us to lower our per unit rental rates, which has driven revenue
growth and, to a greater extent, print textbook unit volumes beginning in 2012.
Our print textbook rental business is highly capital intensive. While we generate positive cash flows from
operations on an annual basis, this has been more than offset by the cash we use for our investing activities,
primarily due to the purchase of print textbooks. We expect this trend to continue in the foreseeable future. We
capitalize the investment in our textbook library and record depreciation expense in cost of revenues over its
useful life using an estimated liquidation value. In 2013, our investment in print textbooks, net of proceeds from
textbook liquidation, was $84.3 million.
Our Non-print Products and Digital Services Business
Building on the rapid adoption and high engagement of students with our print textbook offerings, in 2010
we set out to offer digital content and solutions and create our student-first connected learning platform to
address other critical aspects of the education process. With the advent of eTextbooks, we developed a web-
based, multiplatform eTextbook Reader and offer eTextbooks and supplemental materials from approximately
120 publishers both as a rental-equivalent solution and for free for students awaiting the arrival of their print
textbook rental. In the fourth quarter of 2010, we purchased Cramster, a company that provided online homework
help for college students. We further developed the offerings of Cramster to create our Chegg Study service,
which we fully integrated into our platform in the second quarter of 2012. In the fourth quarter of 2011, we
purchased Zinch, a company offering college admissions and scholarship services to students and enrollment
marketing services to colleges. We have continued to offer these services through Zinch.com and expect to
complete our integration of Zinch.com into Chegg.com in 2014. In addition, we offer enrollment marketing
services to colleges, allowing them to reach interested college-bound high school students that use our College
Admissions and Scholarship Services. We also work with leading brands, such as Microsoft, Red Bull and Serve
from American Express, to provide students with discounts, promotions and other products that, based on student
feedback, delight them. For example, for Red Bull, we inserted a free can of Red Bull in select textbook rental
shipments to students, and Microsoft sponsored a “Free Study Week,” which included free access to our Chegg
Study service as well as additional free study materials. All of our brand advertising services and the discounts,
promotions and other products provided to students are paid for by the brands.
For non-print products and digital services, students typically pay to access eTextbooks for the academic
term or subscribe for other services such as Chegg Study on a monthly or annual basis, while colleges subscribe
to our enrollment marketing services and brands pay us depending on the nature of the campaign. While none of
these offerings individually has amounted to more than 10% of our net revenues to date, in the aggregate these
offerings amounted to 21% of net revenues in 2013, up from less than 1% in 2010.
Seasonality of Our Business
A substantial majority of our revenue is recognized ratably over the term the student rents our textbooks or
has access to our non-print products and digital services. This generally results in our highest revenue in the
fourth quarter as it reflects more days of the academic year and our lowest revenue in the second quarter as
colleges conclude their academic year for summer and there are fewer days of rentals. The variable expenses
associated with our shipments of textbooks and marketing activities are highest in the first and third quarters as
shipping and other fulfillment costs and marketing expenses are expensed when incurred, generally at the
beginning of academic terms. As a result of these factors, the most concentrated periods for our revenue and
expenses do not necessarily coincide, and comparisons of our quarterly operating results on a sequential basis
may not provide meaningful insight into our overall financial performance.
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