Chegg 2015 Annual Report Download - page 52

Table of Contents
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significant risks, including our ability to cost-effectively liquidate our remaining inventory of textbooks, Ingram's ability to
acquire textbooks and manage logistical and fulfillment activities for us, our ability to create a successful and profitable
partnership, the provision of extended payment terms to Ingram for the facilitation of textbook purchases beyond Ingram's
capital commitment, and that we and/or Ingram may elect to terminate the partnership sooner than anticipated.
We have added and plan to continue to add new offerings to our connected learning platform to diversify our sources
of revenues, which will require us to make substantial investments in the products and services we develop or acquire. New
offerings may not achieve market success at levels that recover our investment or contribute to profitability. Because these
offerings are not as capital intensive as our print textbook rental service, the barriers to entry for existing and future competitors
may be lower and allow for even more rapid changes to the market. Furthermore, the market for these other products and
services is relatively new and may not develop as we expect. If the market for our offerings does not develop as we expect, or if
we fail to address the needs of this market, our business will be harmed. We may not be successful in executing on our evolving
business model, and if we cannot provide an increasing number of products and services that students, colleges and brands find
compelling, we will not be able to continue our recent growth and increase our revenues, margins and profitability. For all of
these reasons, the evolution of our business model is ongoing and the future revenues 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 significant portion 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 and Ingram 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 and
Ingram have to process during these limited periods of time means that any shortfalls or disruptions in our operations 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 revenues fluctuate significantly quarter
to quarter depending upon the timing of where we are in our “rush” cycle and sequential quarter-over-quarter comparisons of
our revenues 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 other offerings are relatively new and, as a
result, we have limited experience with forecasting revenues from them.
The fourth quarter has typically been our highest performing quarter as we were recognizing a full quarter of revenues
on print textbooks that we owned from peak volumes in August and September and partial revenues from peak volumes in
December, while the second quarter has typically been our lowest performing quarter as students start their summer vacations
and the volume of our textbook rentals and sales and purchases of supplemental materials and Chegg Study decreases. With
Ingram fulfilling more of the print textbook rental orders through our strategic partnership, we now expect our first and third
quarters to be higher as we now recognize a commission immediately on the transaction of an Ingram owned print textbook
rather than recognizing the revenues ratably over the term the student rents one of our print textbooks. This will continue to the
point where all print textbook rental transactions are fulfilled by Ingram and our revenues are comprised entirely of a
commission earned on the transaction.
We base our operating expense budgets on expected net revenue trends. Operating expenses, similar to revenues 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 marketing expense in connection with our peak periods at the beginning of each
academic term. Because our revenues were historically 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 quarterly comparison of our financial results has not be meaningful. We expect our seasonality
to shift as a result of our strategic partnership with Ingram and our highest quarters for revenues and operating expense to
coincide. Further, 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 Ingram partnership has resulted in our
operating expenses related to textbook acquisition, shipping and fulfillment and warehouse facility lease obligations to decrease
and we expect that our 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