Chegg 2015 Annual Report Download - page 107

Table of Contents
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connect colleges and graduate schools with students seeking admission or scholarship opportunities at these institutions. Brand
advertising offers brands unique ways to connect with students. Revenues are recognized ratably or as earned over the
subscription service, generally one year. Revenues from enrollment marketing services or brand advertising delivered on an a la
carte basis, without a subscription, is recognized when delivery of the respective lead or service has occurred. For these
services, we bill the customer at the inception, over the term of the customer arrangement or as the services are performed.
Upon satisfactory assessment of creditworthiness, we generally grant credit to our enrollment marketing services and brand
advertising customers with normal credit terms, typically 30 days.
Some of our customer arrangements for enrollment marketing services include multiple deliverables, which include the
delivery of student leads as well as other services to the end customer. We have determined these deliverables qualify as
separate units of accounting, as they have value to the customer on a standalone basis and our arrangements do not contain a
right of return. For these arrangements that contain multiple deliverables, we allocate the arrangement consideration based on
the relative selling price method in accordance with the selling price hierarchy, which includes: (1) vendor-specific objective
evidence of fair value (VSOE), when available; (2) third-party evidence of selling price (TPE), if VSOE does not exist; and
(3) estimated selling price (ESP), if neither VSOE nor TPE is available.
We determine VSOE based on our historical pricing and discounting practices for the specific solution when sold
separately and when a substantial majority of the selling prices for these services fall within a narrow range. TPE is determined
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. If we have not established VSOE or TPE for our enrollment marketing services, we
have used ESP in our allocation of arrangement consideration. Additionally, we limit the amount of revenues recognized for
delivered elements to the amount that is not contingent on future delivery of services or other future performance
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 revenues ratably
over the term or when the services are provided and all other revenue recognition criteria have been met.
We evaluate whether we are acting as a principal or an agent, and therefore would record the gross sales amount and
related costs as revenues or the net amount earned as commissions from the sale of third party products. Our determination is
based on our evaluation of certain indicators including whether we are the principal in the transaction, are subject to inventory
risk, have latitude in establishing prices and selecting suppliers, none of which is presumptive or determinative. We generally
operate as the principal and so in those instances revenues are recorded at the gross sale price. We generally record the net
amounts as commissions earned when such amounts are determined using a fixed percentage of the transaction price, we are
not subject to inventory risk or responsible for the fulfillment of the textbooks. We operate as an agent in our strategic
partnership with Ingram and therefore our revenues include a commission on the total revenues that we earn from Ingram upon
their fulfillment of a rental transaction using books for which Ingram has title and risk of loss.
We also present our revenues separately for rental, services and sales. Rental revenue includes the rental of print
textbooks for which we take title and bear the risk of loss; service revenue includes Chegg Study, brand advertising,
eTextbooks, tutoring, enrollment marketing, and commissions we earn from Ingram and other e-commerce partners; sale
revenue includes just-in-time sale of print textbooks and the sale of other required materials.
Cost of
Our cost of revenues consists primarily of expenses associated with the delivery and distribution of our products and
services. Cost of revenues include print textbook depreciation expense, shipping and other fulfillment costs, the cost of
textbooks sold, payment processing costs, write-offs and allowances related to the print 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 print 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 also includes 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