Chegg 2014 Annual Report Download - page 51

Table of Contents
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in executing on our evolving business model, and if we cannot provide an increasing number of products and services that
students, colleges, universities or other academic institutions and brands find compelling, we will not be able to continue our
recent growth and increase our revenue, margins and profitability. For all of these reasons, the evolution of our business model
is ongoing and the future revenue and income potential of our business is uncertain.
Our business is highly seasonal and our reliance on a concentration of activity at the beginning of each academic term
exposes our business to increased risk from disruption during peak periods and makes our operating results difficult to
predict.
We derive a majority of our net revenues from print textbook rental and, to a lesser extent, sale transactions, which
occur in large part during short periods of time around the commencement of the fall, winter and spring academic terms. In
particular, we experience the largest increase in rental and sales volumes during the last two weeks of August and first two
weeks of September and to a lesser degree in December and in January. The increased volume of orders that we have to process
during these limited periods of time means that any shortfalls or disruptions in our business during these peak periods will have
a disproportionately large impact on our annual operating results and the potential future growth of our business.
As a result of this seasonality, which corresponds to the academic calendar, our revenue fluctuates significantly quarter
to quarter depending upon the timing of where we are in our “rush” cycle and sequential quarter-to-quarter comparisons of our
revenue and operating results are not likely to be meaningful. In addition, our operating results for any given quarter cannot be
used as an accurate indicator of our results for the year. In particular, we anticipate that our ability to accurately forecast
financial results for future periods will be most limited at the time we present our second quarter financial results, which will
generally occur midsummer and precede the “fall rush.” In addition, our digital offerings are relatively new and, as a result, we
have limited experience with forecasting revenues from them.
The fourth quarter is typically our highest performing quarter as we are recognizing a full quarter of revenue from
peak volumes in August and September and partial revenue from peak volumes in December, while the second quarter typically
is our lowest performing quarter as students start their summer vacations and the volume of textbook rentals and sales and
purchases of supplemental materials and Chegg Study decreases. Because of our reliance on the academic calendar, we expect
this seasonal fluctuation of sequential revenue decline from the fourth to the first then second quarters, followed by sequential
increases in the third and fourth quarters, to continue in future periods.
We base our operating expense budgets on expected net revenue trends. Operating expenses, similar to revenue and
cost of revenues, fluctuate significantly quarter to quarter due to the seasonality of our business and are generally higher during
the first and third quarters as we incur textbook acquisition, shipping, other fulfillment and marketing expense in connection
with our peak periods at the beginning of each academic term. Because our revenue is concentrated in the fourth quarter and
expenses are concentrated in the first and third quarters, we have experienced operating losses in the first and third quarters and
operating income in the fourth quarter. As a result, sequential comparison of our financial results may not be meaningful. In
addition, a portion of our expenses, such as office space and warehouse facility lease obligations and personnel costs, are
largely fixed and are based on our expectations of our peak levels of operations.. The planned expansion of our Ingram
partnership is expected to result in our operating expenses related to textbook acquisition, shipping and fulfillment and
warehouse facility lease obligations to decrease as a result of the transition of our logistical and fulfillment operations to Ingram
and for overall operating expenses to be more evenly distributed throughout the year. Nonetheless, we expect to continue to
incur significant marketing expenses during peak periods and to have fixed expenses for office space and personnel and as such.
We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. Accordingly, any shortfall in
net revenues may cause significant variation in operating results in any quarter.
If our efforts to attract new students and increase student engagement with our platform are not successful, our business
will be adversely affected.
The growth of our business depends on our ability to attract new students to use our products and services and to
increase the level of engagement by existing students with our connected learning platform. The substantial majority of our
revenue depends on small transactions made by a widely dispersed student population with an inherently high rate of turnover
primarily as a result of graduation. Many of the students we desire to attract are accustomed to obtaining textbooks through
bookstores or used booksellers. The rate at which we expand our student user base and increase student engagement with our
platform may decline or fluctuate because of several factors, including:
• our ability and our fulfillment partner's ability to consistently provide students with a convenient, high quality
experience for selecting, receiving and returning print textbooks;