Chegg 2015 Annual Report Download - page 82

Table of Contents
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We also generate revenues from Chegg Services that include our Chegg Study service, which we offer to students, online
tutoring, College Admissions, Scholarship Services, and Internship Services. We also offer enrollment marketing services to
colleges and advertising services that we offer to brands. Chegg Services are offered to students through weekly, monthly or
annual subscriptions, and we recognize revenues ratably over the respective subscription period. We primarily offer
subscriptions to our Chegg Study service and tutoring services.
When deciding the most appropriate basis for presenting revenues or costs of revenues, both the legal form and
substance of the agreement between us and our business partners are reviewed to determine each party’s respective role in the
transaction. Where our role in a transaction is that of principal, revenues are recognized on a gross basis. This requires revenue
to comprise the gross value of the transaction billed to the customer, after trade discounts, with any related expenditure charged
as an operating cost. Where our role in a transaction is that of an agent, revenues are recognized on a net basis with revenues
representing the margin earned. In relation to our partnership with Ingram and the rental of their textbooks, we recognize
revenues on a net basis based on our role in the transaction as an agent.
Marketing services include enrollment marketing services and brand advertising, which we offer either on a subscription
or on an a la carte basis. Enrollment marketing services connect colleges 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 period, generally one year. Revenues from enrollment marketing
services or brand advertising delivered on an a la carte basis, without a subscription, are 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.
Deferred revenue primarily consists of advance 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.
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 include 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 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. Changes
in our cost of revenues may be disproportionate to changes in our revenues because unrecoverable costs, such as outbound
shipping and other fulfillment and payment processing fees, are expensed in the period they are incurred while revenues are
recognized ratably over the rental term. This effect is particularly pronounced in the first and third quarters, corresponding to
the beginning of academic terms. As a result, we could experience quarters in which our cost of revenues exceeds our revenues
for the period. In addition, cost of revenues includes the depreciation of our eTextbook Reader software, publisher content fees
for eTextbooks and allocated information technology and facilities costs.
Cost of revenues also consists of 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 content or services. In addition, cost of revenues include allocated information
technology and facilities costs.
We anticipate that to the extent Chegg Services revenues grow and Ingram fulfills print textbook rental and sale orders,
our gross margins will generally improve over time.
Operating Expenses
We classify our operating expenses into five categories: technology and development, sales and marketing, general and
administrative, restructuring charges and gain on liquidation of textbooks. One of the most significant components of our
operating expenses is employee-related costs, which include share-based compensation expenses. We expect to continue to hire
new employees in order to support our current and anticipated growth. In any particular period, the timing of additional hires
could materially affect our operating expenses, both in absolute dollars and as a percentage of revenues. Our costs and expenses