Revenue Recognition

12 Months Ended

Jul. 31, 2019

Revenue Recognition and Deferred Revenue [Abstract]

Revenue Recognition

Note 2—Revenue Recognition

Modified Retrospective Method of Adoption and Cumulative Effect Adjustment

The Company adopted ASC 606 as of August 1, 2018, using the modified retrospective method. As this method requires that the cumulative effect of initially applying ASC 606 be recognized at the date of adoption, at August 1, 2018, the Company recorded an aggregate $9.1 million reduction to "Accumulated deficit" for the cumulative effect of the adoption. The cumulative effect adjustment included changes to the accounting for breakage and the costs to obtain and fulfill contracts with customers.

The adjustment for the change in accounting for breakage was primarily from the Company's BOSS Revolution international calling service, traditional calling cards, and international and domestic Mobile Top-Up. A customer's nonrefundable prepayment gives the customer a right to receive a good or service in the future (and obliges the Company to stand ready to transfer that good or service). However, customers may not exercise all of their contractual rights to receive that good or service. Those unexercised rights are referred to as breakage. Prior to the adoption of ASC 606, the Company recorded breakage revenue when the likelihood of the customer exercising its remaining rights became remote. The Company generally deemed the likelihood remote after 12 or 24 months of no activity (depending on the revenue stream). Per ASC 606, if an entity expects to be entitled to a breakage amount, the entity should recognize the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer, but only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the breakage is subsequently resolved. The Company determined that $8.6 million included in its opening balance of "Deferred revenue" would have been recognized as breakage revenue under ASC 606 in prior periods, and accordingly, as of August 1, 2018, recorded an $8.6 million reduction to "Deferred revenue", a $0.8 million decrease in "Deferred income tax assets," and an offsetting $7.8 million reduction to "Accumulated deficit."

ASC 606 changed the accounting for costs to obtain and fulfill contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers are deferred and amortized consistent with the transfer of the related good or service. The Company incurs incremental costs of obtaining a customer contract, it does not incur direct costs to fulfill contracts. The Company determined that the cumulative effect of initially applying ASC 606 to defer its incremental costs of obtaining a customer contract was $1.3 million, primarily related to its net2phone-UCaaS business. Accordingly, as of August 1, 2018, the Company recorded an increase in "Other current assets" of $0.6 million and an increase in "Other assets" of $0.7 million, with an offsetting reduction to "Accumulated deficit" of $1.3 million.

Breakage Revenue: Methods, Inputs and Assumptions

The Company's inputs for recording breakage revenue was its aging of the deferred revenue balance for its BOSS Revolution international calling service, traditional calling cards, Mobile Top-Up, and other revenue streams with deferred revenue balances. Upon the adoption of ASC 606, the Company's method changed to an estimate of expected breakage revenue by revenue stream recorded each month, based on inputs and assumptions about usage of the deferred revenue balances. The Company used its historical deferred revenue usage data by revenue stream to calculate the percentage of deferred revenue by month that will become breakage. The historical data indicated that customers utilize a very high percentage of minutes purchased in the first three months. The Company reviews its estimates quarterly based on updated data and adjusts the monthly estimates accordingly.

Contracts with Customers

The Company earns revenue from contracts with customers, primarily through the provision of retail telecommunications and payment offerings as well as wholesale international long-distance traffic termination. The Telecom & Payment Services segment markets and distributes the following communications and payment services: (1) retail communications, which includes international long-distance calling products primarily to foreign-born communities, with its core markets in the United States; (2) wholesale carrier services terminating international long distance calls around the world for Tier 1 fixed line and mobile network operators, as well as other service providers; and (3) payment services, such as Mobile Top-Up, domestic bill payment and international money transfer, and National Retail Solutions, the Company's merchant services offerings through point-of-sale terminals. The net2phone segment is comprised of cloud-based communications services, Session Initiation Protocol ("SIP") trunking, and cable telephony.

The Company's most significant revenue streams are from its BOSS Revolution international calling service, Mobile Top-Up, and wholesale termination provided by its Carrier Services business. The BOSS Revolution international calling service and Mobile Top-Up are sold direct-to-consumers and through distributors and retailers.

BOSS Revolution international calling service direct-to-consumers

BOSS Revolution international calling service direct-to-consumers is offered on a pay-as-you-go basis or in unlimited plans. The customer prepays for service in both cases, which results in a contract liability (deferred revenue). The contract term for pay-as-you-go plans is minute-to-minute that includes separate performance obligations for the series of material rights to renew the contract. The performance obligation is satisfied immediately after it arises, and the amount of consideration is known when the obligation is satisfied. Since the Company's satisfaction of its performance obligation and the customer's use of the service occur simultaneously, the Company recognizes revenue at the point in time when minutes are utilized, since the customer obtained control and the Company has a present right to payment. For unlimited plans, the Company has a stand ready obligation to provide service over time for an agreed upon term. Unlimited plans include fixed consideration over the term. Plan fees for unlimited plans are generally refundable up to three days after payment if there was no usage. Since the Company's satisfaction of its performance obligation and the customer's use of the service occur over the term, the Company recognizes revenue over a period of time as the service is rendered. The Company uses an output method as time elapses because it reflects the pattern by which the Company satisfies its performance obligation through the transfer of service to the customer. The fixed upfront consideration is recognized evenly over the service period, which is generally 24 hours, 7 days, or one month.

BOSS Revolution international calling service sold through distributors and retailers

BOSS Revolution international calling service sold through distributors and retailers is the same service as BOSS Revolution international calling service direct-to-consumers. The Company sells capacity to international calling minutes to retailers, or to distributors who resell to retailers. The retailer or distributor is the Company's customer in these transactions. The Company's sales price to retailers and distributors is less than the end user rate for BOSS Revolution international calling service minutes. The customer or the Company may terminate their agreement at any time upon thirty days written notice without penalty. Retailers may sell the BOSS Revolution international calling service on a pay-as-you-go basis or in unlimited plans. As described above, for pay-as-you-go, the Company recognizes revenue at the point in time when minutes are utilized, and for unlimited plans, the Company recognizes revenue over a period of time as the service is rendered. Retailers and distributors also receive renewal commissions when certain end users subsequently purchase minutes directly from the Company. Renewal commission payments are accounted for as a reduction of the transaction price over time as the end user uses the service.

Mobile Top-Up

Mobile Top-Up is sold direct-to-consumers and through distributors and retailers in the same manner as the BOSS Revolution international calling service. The Company does not terminate the minutes in its Mobile Top-Up transactions. The Company's performance obligation is to recharge (top-up) the airtime balance of a mobile account on behalf of the Company's customer. The Company has contracts with various mobile operators or aggregators to provide the Mobile Top-Up service. The Company determined that it is the principal in primarily all its Mobile Top-Up transactions as the Company controls the service to top-up a mobile account on behalf of the Company's customer. However, for a portion of its domestic Mobile Top-Up business where the Company has no customer service responsibilities, no inventory risk, and does not establish the price, the Company determined that, as the Company is not considered to control the arrangement, it acts as an agent of the mobile operators. The Company records gross revenues based on the amount billed to the customer when it is the principal in the arrangement and records revenue net of the associated costs incurred when it acts as an agent in the arrangement. The performance obligation is satisfied, and revenue is recognized when the recharge of the mobile account occurs. Accordingly, transfer of control happens at the point in time that the airtime is recharged, which is when the Company has a right to payment and the customer has accepted the service.

Carrier Services

Carrier Services are offered to both postpaid and prepaid customers. Postpaid customers are billed in arrears and typically consist of credit-worthy companies such as Tier 1 carriers and mobile network operators. Prepaid customers are typically smaller communications companies and independent call aggregators. There is no performance obligation until the transport and termination of international long-distance calls commences. The initial contract durations range from six months to one year with successive extensions. During the initial term, the contract can only be terminated in certain instances (such as bankruptcy of either party, damage to the other party's network, fraud, or breach of contract). However, no penalties are applied if the agreement is terminated in the initial term. After the initial term has expired, either party may terminate the agreement with notice of 30 days to 60 days depending on the agreement. The term of the contract is essentially minute-to-minute as there is no penalty for an early termination and no obligation to send traffic.

Each iteration is a separate optional purchase that is occurring over the contract duration (that is, minute-by-minute). The satisfaction of the performance obligation is occurring at a point in time (as the minutes are transferred) because the provision of the service and the satisfaction of the performance obligation are essentially occurring simultaneously. Revenue is recognized at the point in time upon delivery of the service.

The Company has not generally entered into contracts that have retroactive pricing features. Additionally, as the performance obligations are considered minute-by-minute obligations in the original contract, any modification of the original contract that leads to a conclusion that there is a new contract would not result in any adjustment related to the original contract's consideration.

The Company provides discounts to its larger customers based on the expectation of a significant volume of minutes that are consistent with that class of customer in the wholesale carrier market. The discounts do not provide a material right to the customer because the customer receives the same pricing for all usage under the contract.

Carrier Services' contracts may include tiered pricing based on minute volumes. The Company determined that its retroactive tiered pricing should be accounted for as variable consideration because the final transaction price is unknown until the customer completes or fails to complete the specified threshold. Currently, contracts with retroactive tiered pricing are not material. The Company estimates the amount of variable consideration to include in the transaction price only to the extent that it is probable that a subsequent change in the estimate would not result in a significant revenue reversal.

Carrier Services' NORT contracts include the promise of minimum guaranteed amounts of traffic. The performance obligation represents a stand ready obligation to provide the specified number of minutes over the contractual term. The initial terms of NORT contracts generally range from one month to six months. Since the Company's satisfaction of its performance obligation of routing calls to their destination includes a minimum guaranteed amount of traffic, the Company recognizes revenue over a period of time as the service is rendered. The customer simultaneously receives and consumes the benefits provided by the Company's performance as the Company performs. The Company uses an output method as the usage of minutes occur because it reflects the pattern by which the Company satisfies its performance obligation through the transfer of service to the customer.

Disaggregated Revenues

The Company's core operations are mostly minute-based, paid-voice communications services, and revenue is primarily recognized at a point in time. The Company's Telecom & Payment Services' growth initiatives and net2phone-UCaaS are technology-driven, synergistic businesses that leverage the core assets, and revenue in some cases is recognized over time.

The following table shows the Company's revenues disaggregated by business segment and service offered to customers:

Year ended July 31 (in thousands)	2019		2018		2017
Core Operations:
BOSS Revolution Calling	$	490,649	$	529,713	$	549,312
Carrier Services		514,202		639,028		599,934
Mobile Top-Up		271,995		253,524		219,763
Other		55,629		67,903		85,812
Growth		29,433		21,305		15,166
Total Telecom & Payment Services		1,361,908		1,511,473		1,469,987
net2phone-UCaaS		24,482		13,276		7,037
net2phone-Platform Services		22,782		21,581		22,413
Total net2phone		47,264		34,857		29,450
All Other		—		1,165		2,292
TOTAL	$	1,409,172	$	1,547,495	$	1,501,729

The following tables show the Company's revenues disaggregated by geographic region, which is determined based on selling location:

(in thousands)	Telecom & Payment Services		net2phone		All Other		Total
Year ended July 31, 2019
United States	$	901,997	$	33,857	$	—	$	935,854
Outside the United States:
United Kingdom		195,661		21		—		195,682
Netherlands		192,284		—		—		192,284
Other		71,966		13,386		—		85,352
Total outside the United States		459,911		13,407		—		473,318
TOTAL	$	1,361,908	$	47,264	$	—	$	1,409,172
Year ended July 31, 2018
United States	$	1,021,004	$	27,161	$	1,165	$	1,049,330
Outside the United States:
United Kingdom		220,257		3		—		220,260
Netherlands		191,076		—		—		191,076
Other		79,136		7,693		—		86,829
Total outside the United States		490,469		7,696		—		498,165
TOTAL	$	1,511,473	$	34,857	$	1,165	$	1,547,495
Year ended July 31, 2017
United States	$	1,009,194	$	22,309	$	2,292	$	1,033,795
Outside the United States:
United Kingdom		211,249		—		—		211,249
Netherlands		175,869		—		—		175,869
Other		73,675		7,141		—		80,816
Total outside the United States		460,793		7,141		—		467,934
TOTAL	$	1,469,987	$	29,450	$	2,292	$	1,501,729

Remaining Performance Obligations

The Company's revenue is generally recognized in the same period that its performance obligations are satisfied. The Company does not have any significant revenue from performance obligations satisfied or partially satisfied in previous reporting periods, or transaction price to be allocated to performance obligations that are unsatisfied (or partially unsatisfied) at the end of a reporting period.

Accounts Receivable and Contract Balances

The timing of revenue recognition may differ from the time of billing to the Company's customers. Trade accounts receivable in the Company's consolidated balance sheets represent unconditional rights to consideration. An entity records a contract asset when revenue is recognized in advance of the entity's right to bill and receive consideration. The Company has not identified any contract assets.

Contract liabilities arise when the Company receives consideration or bills its customers prior to providing the goods or services promised in the contract. The primary component of the Company's contract liability balance is the payments received for its prepaid BOSS Revolution international calling service, traditional calling cards, and Mobile Top-Up services. Contract liabilities are recognized as revenue when services are provided to the customer. The contract liability balances are presented in the Company's consolidated balance sheet as "Deferred revenue". The Company's revenue recognized in fiscal 2019 from amounts included in the contract liability balance at August 1, 2018 was $41.3 million.

Deferred Customer Contract Acquisition and Fulfillment Costs

ASC 606 changed the accounting for costs to obtain and fulfill contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers are deferred and amortized consistent with the transfer of the related good or service. The Company's incremental costs of obtaining a customer contract are sales commissions paid to acquire customers. For Telecom & Payment Services, the Company applies the practical expedient whereby the Company primarily charges these costs to expense when incurred because the amortization period would be one year or less for the asset that would have been recognized from deferring these costs. For net2phone-UCaaS sales, employees and third parties receive commissions on sales to end users. The Company amortizes the deferred costs over the expected customer relationship period when it is expected to exceed one year.

At July 31, 2019, the Company's deferred customer contract acquisition costs were $3.2 million, of which $1.5 million were included in "Other current assets" and $1.7 million were included in "Other assets" in the Company's consolidated balance sheet. For fiscal 2019, the Company amortized $1.8 million of deferred customer contract acquisition costs.