Chegg 2015 Annual Report Download - page 81

Table of Contents
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Strategic Partnership with Ingram
We expect our partnership with Ingram to accelerate the growth of Chegg Services products by allowing us to utilize
capital otherwise spent on the purchase of print textbooks, and at the same time allowing us to maintain our leading position
and high brand recognition through our iconic orange boxes. We entered into a definitive inventory purchase and consignment
agreement with Ingram that will allow us to focus exclusively on eTextbooks and Chegg Services. Under the agreement, since
May 1, 2015, Ingram has been responsible for all new investments in the print textbook library, fulfillment logistics, and has
title and risk of loss related to print textbook rentals. As a result of our strategic partnership with Ingram, our revenues include
a commission on the total revenues that we earn from Ingram upon their fulfillment of a rental transaction using print textbooks
for which Ingram has title and risk of loss. Additionally, we have ceased making additional investments in our print textbook
library during 2015 and expect to rent and liquidate our existing inventory of print textbooks during 2016. This new model will
allow us to reduce and eventually eliminate the operating expenses we incur to acquire and maintain a print textbook library.
As we transition to a fully digital company, we will continue to buy used books on Ingram’s behalf including books through our
buyback program and invoice Ingram at cost. We will also continue to provide Ingram with extended payment terms in 2016 as
we procure print textbooks on behalf of Ingram, before moving to normal payment terms in 2017.
Seasonality of Our Business
A substantial majority of our revenues are recognized ratably over the term the student rents our print textbooks and
eTextbooks or has access to our Chegg Services. Historically, this has generally resulted in our highest revenues in the fourth
quarter as it reflects more days of the academic year and our lowest revenues in the second quarter as colleges conclude their
academic year for summer and there are fewer days of rentals. The recognition of revenues from our eTextbooks and Chegg
Services will continue to follow this trend. As a result of our strategic partnership with Ingram, revenues from Ingram owned
print textbook rental transactions will now be higher in the first and third quarters as we recognize a commission on the
transaction rather than recognizing the revenues ratably over the term the student rents our textbooks. The variable expenses
associated with our shipments of textbooks and marketing activities are highest in the first and third quarters as shipping and
other fulfillment costs and marketing expenses are expensed when incurred, generally at the beginning of academic terms. We
expect these variable expenses to decrease for 2016 as we have completely transitioned the shipping and fulfillment activities
related to textbooks to Ingram. As a result of these factors, the most concentrated periods for our revenues and expenses do not
necessarily coincide and comparisons of our quarterly operating results on a sequential basis may not provide meaningful
insight into our overall financial performance. We expect our strategic partnership with Ingram to shift peak revenues in the
periods that a student rents a textbook as a result of our revenue sharing agreement such that our revenues will more closely
track the academic calendar as our expenses associated with the textbook rental business decrease.
Components of Results of Operations
Net Revenues
We derive our revenues from the rental or sale of print textbooks and eTextbooks, and from commissions earned from
Ingram from the rental of their textbooks and from Chegg Services, net of allowances for refunds or charge backs from our
payment processors, who process payments from credit cards, debit cards and PayPal.
We generate revenues from the rental of print textbooks and to a lesser extent, through the sales of print textbooks
through our website on a just-in-time basis. Rental revenues for textbooks that we own is recognized ratably over the term of
the rental period, generally two to five months. Commissions earned on rental textbooks owned by Ingram are recognized
immediately when a student places an order. Revenues from selling textbooks on a just-in-time basis is recognized upon
shipment and has comprised approximately 10% of our consolidated revenues on average over the three years ended
December 31, 2015. Our customers pay for the rental and sale of print textbooks on our website primarily by credit card,
resulting in immediate settlement of our accounts receivable. Net revenues from the rental or sale of print textbooks represented
54%, 70% and 79% of our net revenues in the years ended December 31, 2015, 2014 and 2013, respectively, reflecting
increasing growth in our Chegg Services. Similar to the revenue recognition from print textbooks rentals, revenues from
eTextbooks is recognized ratably over the contractual period, generally two to five months or at time of the sale, and our
customers pay for these services through payment processors, resulting in immediate settlement of our accounts receivable.
As a result of our strategic partnership with Ingram, we recognize less revenues from the rental of print textbooks and
our Required Materials, and services revenues includes 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.