Chegg 2013 Annual Report Download - page 95

under an accelerated method over the life of the textbook. We believe this method most accurately reflects the
actual pattern of decline in the economic value of the assets, resulting in higher costs earlier in the textbook
lifecycle. Changes in our cost of revenues may be disproportionate to changes in our revenue because
unrecoverable costs, such as outbound shipping and other fulfillment and payment processing fees, are expensed
in the period they are incurred while revenue is recognized ratably over the rental term. This effect is particularly
pronounced in the first and third quarters at the beginning of academic terms. As a result, we could experience
quarters in which our cost of revenues exceeds our revenue for the period.
Cost of revenues related to non-print products and digital services, in which we also group eTextbooks,
consist primarily of the depreciation of our eTextbook Reader software, publisher content fees for eTextbooks,
content amortization expense related to content that we develop or license, including publisher agreements for
which we pay one-time license fees for published content, enrollment marketing services leads purchased from
third-party suppliers to fulfill leads that we are unable to fulfill through our internal database, personnel costs and
other direct costs related to providing content or services. In addition, cost of revenues includes allocated
information technology and facilities costs. Changes in our cost of revenues related to non-print products and
digital services may be disproportionate to changes in our revenue because the publisher fees for eTextbooks are
expensed in the period in which such costs are incurred, while the associated revenue may be deferred and
recognized ratably over a future period.
Margins on non-print products and digital services are generally higher than margins on the rental or sale of
print textbooks. However, we experience substantially lower margins with eTextbook transactions than we do
with other non-print products and digital services. Overall, we anticipate that to the extent non-print products and
digital services revenue grows, our gross margins will generally improve over time.
Operating Expenses
We classify our operating expenses into four categories: technology and development, sales and marketing,
general and administrative and loss (gain) on liquidation of textbooks. One of the most significant components of
our operating expenses is employee-related costs, which include stock-based compensation expenses. We expect
to continue to hire new employees in order to support our anticipated growth. In any particular period, the timing
of additional hires could materially affect our operating expenses, both in absolute dollars and as a percentage of
revenue. Our costs and expenses contain information technology expenses and facilities expenses such as
webhosting, depreciation on our infrastructure systems, our headquarters lease expense and the employee-related
costs for information technology support staff. We allocate these costs to each expense category, including cost
of revenues, technology and development, sales and marketing and general and administrative. The allocation is
primarily based on the headcount in each group at the end of a period. As our business grows, we expect our
operating expenses will increase over time to expand capacity and sustain our workforce.
Technology and Development
Our technology and development expenses consist of salaries, benefits and stock-based compensation
expense for employees in our product and web design, engineering and technical teams who are responsible for
maintaining our website, developing new products and improving existing products. Technology and
development costs also include amortization of acquired intangible assets, webhosting costs, third-party
development costs and allocated information technology and facilities expenses. We expense substantially all of
our technology and development expenses as they are incurred. In the past three years, our expenses have
increased to support new products and services as well as to expand our infrastructure capabilities to support
back-end processes associated with our revenue transactions and internal systems used to manage our textbook
library. We intend to continue making significant investments in developing new products and services and
enhancing the functionality of existing products and services.
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