Chegg 2014 Annual Report Download - page 106

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based on competitor prices for similar deliverables when sold separately. Generally our go-to-market strategy differs from that
of our peers, and our offerings contain a significant level of differentiation such that the comparable pricing of services with
similar functionality cannot be obtained. As we have not established VSOE or TPE for our enrollment marketing services, we
have used ESP in our allocation of arrangement consideration. We have determined ESP by considering multiple factors
including, but not limited to, prices charged for similar offerings, sales volume, geographies, market conditions, the competitive
landscape, and pricing practices. We believe this best represents the price at which we would transact a sale if the services were
sold on a standalone basis, and we regularly assess the method used to determine ESP. Additionally, we limit the amount of
revenue recognized for delivered elements to the amount that is not contingent on future delivery of services or other future
performance obligations.
Revenue is presented net of sales tax collected from customers to be remitted to governmental authorities and net of
allowances for estimated cancellations and customer returns, which are based on historical data. Customer refunds from
cancellations and returns are recorded as a reduction to revenue. Deferred revenue primarily consists of advanced payments
from students related to rentals and subscriptions that have not been recognized, and marketing services that have yet to be
performed. Deferred revenue is recognized as revenue ratably over the term or when the services are provided and all other
revenue recognition criteria have been met.
Cost of Revenues
Our cost of revenues consists primarily of expenses associated with the delivery and distribution of our products and
services. Cost of revenues related to print textbooks include textbook depreciation expense, shipping and other fulfillment
costs, the cost of textbooks sold, payment processing costs, write-offs and allowances related to the textbook library, and all
expenses associated with our distribution and customer service centers, including personnel and warehousing costs. The cost of
textbooks sold, shipping and other fulfillment costs and payment processing expenses are recognized upon shipment, while
textbook depreciation is recognized 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. Cost of revenues related to digital offerings, 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 the content or services. In addition,
cost of revenues includes allocated information technology and facilities costs.
Technology and Development Costs
Technology and development expenses consist primarily of salaries, benefits and share-based compensation expense
for employees on our product and web design, engineering and technical teams who are maintaining our website, developing
new products and improving existing products. Technology and development costs also include web hosting costs, third-party
development costs and allocated information technology and facilities costs. We expense substantially all of our technology and
development costs as they are incurred.
Advertising Costs
Advertising costs are expensed as incurred and consist primarily of online advertising and marketing promotional
expenditures. During 2014, 2013 and 2012, advertising costs were approximately $22.4 million, $16.4 million, and $21.1
million, respectively.
Share-based Compensation
Share-based compensation expense for stock options and employee stock purchase plan, or ESPP, rights are accounted
for under the fair value method, which requires us to measure the cost of employee share-based compensation awards based on
the grant-date fair value of the award. share-based compensation expense for RSUs is measured based on the closing fair
market value of the Company’s common stock on the date of grant. We recognize compensation cost for all employee share-
based compensation awards that are expected to vest on a straight-line basis over the requisite service period of the awards,
which is generally the option vesting period. These amounts are reduced by estimated forfeitures, which are estimated at the
time of the grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Equity awards issued to non-employees are recorded at their fair value on the measurement date and are subject to
adjustment each period as the underlying awards vest or consulting services are performed.