Revenue

Summary of Significant Accounting Policies

The Company adopted ASU 2014-09 effective on January 1, 2018. The Company has elected to apply the standard retrospectively to each prior reporting period presented. The cumulative effect of the adoption was a $0.6 million reduction to accumulated deficit on January 1, 2016. Other than the policies discussed below, no material changes have been made to the Company's significant accounting policies disclosed in Note 2, Significant Accounting Policies, in its Annual Report on Form 10-K, filed on March 2, 2018, for the year ended December 31, 2017.

Use of Estimates. The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and the accompanying notes. On an ongoing basis, the Company evaluates its estimates and assumptions, including, for revenue recognition, determining the nature of performance obligations, determining the standalone selling price (“SSP”) of performance obligations, and other obligations such as returns or refunds. Additional estimates include those related to the determination of the fair value of equity awards issued, fair value of the Company’s reporting unit, valuation of assets and liabilities acquired in purchase accounting, including intangible assets (and their related useful lives), certain components of the income tax provisions, including valuation allowances on the Company’s deferred tax assets, compensation accruals, allowances for bad debts, the useful lives of capitalized contract assets, and estimates used in software capitalization. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Despite the Company's intention to establish accurate estimates and reasonable assumptions, actual results could differ materially from these estimates and assumptions.

Revenue Recognition. The Company recognizes revenue under the five-step methodology required under Topic 606, which requires the Company to identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations identified, and recognize revenue when (or as) each performance obligation is satisfied. The Company evaluates multiple contracts entered into with the same customer as these contracts may need to be combined and accounted for as a single arrangement when the economics of the individual contracts cannot be understood without reference to the arrangement as a whole. All revenue recognized by the Company is considered to be revenue from contracts with customers.

The Company's primary revenue categories, related performance obligations, and associated recognition patterns are as follows:


•	Local marketplace - Local marketplace revenue includes (i) online listings, including preferred placement, (ii) digital banner advertisements, and (iii) direct e-mail marketing on TheKnot.com. In addition, local marketplace revenue includes listings revenue generated via GigMasters.com, an entertainment marketplace, and TwoBrightLights.com, a wedding photography syndication marketplace.

Revenue is recognized over time on a straight-line basis for online listings and digital banner advertisements as the customer contracts for a period of time and has the ability to benefit from these advertising services over the term that they are provided. The benefit received by the customer over the life of the contract is consistent on a daily basis. Revenue from direct e-mail marketing is recognized at a point in time when the obligation has been satisfied, which is the date on which the email has been sent. The Company invoices local advertisers monthly, quarterly, semi-annually, or annually on a designated bill cycle date, which is typically the date on which their advertising commences. E-mails are invoiced in advance of the scheduled delivery date.

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Transactions - The Company provides opportunities for its audience to purchase products and services by offering programs that enable vendors to sell through its online properties and their own branded websites and properties. These offerings include a registry service that enables users to create, manage, and share multiple store registries from a single source, and connects users with additional commerce products such as invitations, stationery, reception decor, and personalized gifts. Through GigMasters.com, users have the opportunity to find, research, and book the right entertainment vendor for them. The Company earns a percentage of sales, fixed fees, per-unit activity fees, or some combination thereof with respect to transactions revenue.

Commissions revenue is recognized after partners take a sales order or ship a sales order, depending on the contractual agreement with the partner, as the related commissions are considered contractually earned by the Company. The Company only records net commissions, and not gross revenue and cost of revenue associated with these products, since the Company is (i) not responsible for fulfilling the promise to provide the good or service, (ii) not subject to inventory risk, and (iii) generally does not have discretion in establishing the pricing for the goods or services. Fixed fees earned by the Company are recognized at a point in time upon successful completion of the associated transaction, which may be upon the creation of a registry or upon a successful booking between party planners/hosts (customers) and providers of entertainment and event services (vendors) on Gigmasters.com.

Transactions revenue is recognized net of a reserve for returns, refunds, or cancellations, which does not materially impact revenue. The Company generally invoices its transactions customers in the month following the successful satisfaction of the performance obligation.


•	National online advertising - National online advertising revenue includes, but is not limited to, (i) display advertisements, (ii) custom and brand-integrated content, (iii) lead generation marketing, including direct e-mails, and (iv) placement in online search tools.

National online advertising contracts often guarantee the delivery of a minimum number of impressions. Impressions are the featuring of a customer’s advertisement, banner, link, or other form of content on the Company’s sites. Display advertising revenue is recognized over time as performance criteria are met, which is typically as impressions are delivered. To the extent that minimum guaranteed impressions are not delivered, the Company often extends the period of the contract until the guaranteed impressions are achieved and revenue will be recognized when the impressions are delivered under the revised service period to mirror the benefit to the customer. Revenue generated from display advertisements that do not guarantee a minimum number of impressions is recorded on a straight-line basis as the customer receives a consistent benefit on a daily basis as the performance obligation is satisfied. Custom content revenue is recorded over time as the Company's performance obligations have been satisfied, which include developing and hosting custom and brand-integrated content solutions for its customers. Revenue from lead generation marketing, including direct e-mails, is recognized at a point in time when the obligation has been satisfied, which is the date in which the email has been sent to the contracted number of members. National advertisers are generally invoiced in the month after their advertisements have been delivered, though some advertisers are invoiced on a pro-rated flat fee monthly based on their total contract value.

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Publishing and other - Publishing revenue primarily includes print advertising revenue derived from the publication of national and regional magazines and the associated revenue earned from newsstand sales. Also included in publishing and other is revenue generated from royalties earned from the sale of books, revenue earned from sales of custom wedding website domain URLs, app purchases, and revenue generated from trade shows.

Publishing revenue is recognized at a point in time on the on-sale date of the related magazines, at which time all material services related to the magazine have been performed. Revenue from the sale of magazines is reduced by an allowance for estimated sales returns, which is immaterial in the periods presented. Billings for publishing revenue arrangements typically occur following successful satisfaction of such performance obligations. Other revenue is recorded as performance obligations are satisfied, which may be over time or at a point in time, depending upon the Company's obligation and is typically paid in advance of satisfaction of performance obligations.

The Company's contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The Company’s local and national contracts often include multiple-element deliverables, primarily online advertising via local marketplace or national online and print advertising. The arrangement consideration is allocated to the distinct performance obligations based on their standalone selling prices. The Company evaluates its standalone selling price by reviewing historical data related to sales of its deliverables, which is intended to represent the price at which it would sell the item regularly on a standalone basis. There were no material changes to the methods or assumptions used to determine the standalone selling price for the Company's performance obligations that would have a material effect on the allocation of arrangement consideration during the three and nine months ended September 30, 2018. The Company does not have any material open-ended subscriptions with its advertisers.

Contract modifications with multiple element arrangements in local marketplace, national online advertising, and publishing and other are accounted for (i) as new contracts if a new service was added that is both distinct and at standalone selling price, (ii) as the termination of the old contract and creation of a new contract (prospectively), or (iii) as if it were part of the initial contract (through a cumulative catch up) if the remaining services are not distinct, as the guidance requires.

Accounts Receivable and Allowance for Doubtful Accounts. The Company records trade accounts receivable for unconditional rights to consideration arising from its performance under contracts with customers. The carrying value of such receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. The Company estimates an allowance for doubtful accounts for specific trade receivable balances based on historical collection trends, the age of outstanding trade receivables, existing economic conditions, and the financial security, if any, associated with the receivables. Past-due trade receivable balances are written off when internal collection efforts have been unsuccessful.

Accounts Receivable, Unbilled. Accounts receivable, unbilled represents revenue that has been recognized in advance of billing the customer, which is common in customer contracts in the Company's business. The Company has an unconditional right to consideration as only the passage of time is required before payment of that consideration is due. The Company recognizes revenue from contracts as performance obligations are satisfied, and often invoices based on actual delivery in the month following satisfaction or based on a contractual billing schedule, as defined by contracts. Accordingly, revenue could be recognized in advance of billing the customer, resulting in an unbilled accounts receivable recorded to “Accounts receivable, net.”

Assets Recognized from the Costs to Obtain a Contract with a Customer. The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that certain sales incentive programs meet the requirements to be capitalized. Capitalized costs to obtain a contract are amortized over a two year useful life, and included in “Prepaid expenses and other current assets” and “Other assets” on the Condensed Consolidated Balance Sheets. Total capitalized costs to obtain a contract as of September 30, 2018 and December 31, 2017 was $1.0 million and $0.5 million, respectively. There were no impairment losses recorded during the three or nine months ended September 30, 2018 or 2017 related to these contract assets.

For sales incentive programs not capitalized, the Company applies a practical expedient to expense costs as incurred when the amortization period would have been one year or less and it has determined compensation is commensurate with initial and renewal sales activities.

Deferred Revenue. When the Company receives consideration, or such consideration is unconditionally due from a customer prior to transferring goods or services to the customer under the terms of a contract, it records deferred revenue, which represents a contract liability. The Company recognizes deferred revenue as net revenue after it has transferred control of the goods or services to the customer and all revenue recognition criteria are met. Deferred revenue increases due to billings or cash receipts in advance of revenue being recognized and decreases as the Company recognizes revenue. Changes in deferred revenue is not materially impacted by any other factors. Of the $13.9 million of deferred revenue as of December 31, 2017, $12.7 million was recorded into revenue in the nine months ended September 30, 2018.

The following table depicts the disaggregation of revenue according to category for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017

Local marketplace	$	23,383	$	19,851	$	67,576	$	57,408
Transactions	9,733		7,891		25,050		21,181
National online advertising	6,794		9,054		20,666		29,035
Publishing and other	3,147		3,813		11,224		12,727
Total net revenue	$	43,057	$	40,609	$	124,516	$	120,351

As part of the adoption of ASU 2014-09 in the first quarter of 2018, the Company has elected to use the practical expedient related to transactions completed within one year pursuant to which it has excluded disclosures of transaction prices allocated to remaining performance obligations and when it expects to recognize such revenue for all periods prior to the date of initial application of ASU 2014-09.

Adjustments to Previously Reported Financial Statements from the Adoption of ASU 2014-09

The following table presents the effect of the adoption of ASU 2014-09 on the Company's Consolidated Balance Sheet as of December 31, 2017 (in thousands):



	December 31, 2017
	As Reported			Adoption of ASU 2014-09			As Adjusted

Accounts receivable, net of allowance	$	16,399		$	976		$	17,375
Prepaid expenses and other current assets	5,102			225			5,327
Total current assets	127,593			1,201			128,794
Deferred tax assets, net	6,500			(376		)	6,124
Other assets	118			105			223
Total assets	204,120			930			205,050
Accrued compensation and employee benefits	6,490			121			6,611
Accounts payable and accrued expenses	5,271			2			5,273
Deferred revenue	14,113			(222		)	13,891
Total current liabilities	25,874			(99		)	25,775
Other liabilities	1,792			(16		)	1,776
Total liabilities	31,031			(115		)	30,916
Accumulated deficit	(7,864		)	1,045			(6,819		)
Total stockholders’ equity	173,089			1,045			174,134
Total liabilities and stockholders’ equity	$	204,120		$	930		$	205,050

The following table presents the effect of the adoption of ASU 2014-09 on the Company's Condensed Consolidated Statement of Operations for the three months ended September 30, 2017 (in thousands, except per share amounts):



	Three months ended September 30, 2017
	As Reported		Adoption of ASU 2014-09			As Adjusted
Net revenue	$	40,237	$	372		$	40,609
Cost of revenue	2,314		(7		)	2,307
Sales and marketing	12,220		(23		)	12,197
Total costs and expenses	35,040		(31		)	35,009
Income from operations	5,197		403			5,600
Income before income taxes	5,325		403			5,728
Income tax expense	1,984		164			2,148
Net income	3,341		239			3,580
Net income per share - basic	$	0.13	$	0.01		$	0.14
Net income per share - diluted	$	0.13	$	0.01		$	0.14

The following table presents the effect of the adoption of ASU 2014-09 on the Company's Condensed Consolidated Statement of Operations for the nine months ended September 30, 2017 (in thousands, except per share amounts):



	Nine Months Ended September 30, 2017
	As Reported		Adoption of ASU 2014-09		As Adjusted

Net revenue	$	118,223	$	2,128	$	120,351
Cost of revenue	7,009		124		7,133
Sales and marketing	39,732		29		39,761
Total costs and expenses	109,852		153		110,005
Income from operations	8,371		1,975		10,346
Income before income taxes	7,526		1,975		9,501
Income tax expense	2,432		793		3,225
Net income	5,094		1,182		6,276
Net income per share - basic	$	0.20	$	0.05	$	0.25
Net income per share - diluted	$	0.20	$	0.05	$	0.25

The following table presents the effect of the adoption of ASU 2014-09 on the Company's revenue categories for the three months ended September 30, 2017:



	Three Months Ended September 30, 2017
	As Reported		Adoption of ASU 2014-09			As Adjusted

Local marketplace	$	20,130	$	(279	)	$	19,851
Transactions	7,950		(59		)	7,891
National online advertising	8,842		212			9,054
Publishing and other	3,315		498			3,813
Net revenue	$	40,237	$	372		$	40,609

The following table presents the effect of the adoption of ASU 2014-09 on the Company's revenue categories for the nine months ended September 30, 2017:



	Nine Months Ended September 30, 2017
	As Reported		Adoption of ASU 2014-09			As Adjusted

Local marketplace	$	57,555	$	(147	)	$	57,408
Transactions	21,102		79			21,181
National online advertising	27,516		1,519			29,035
Publishing and other	12,050		677			12,727
Net revenue	$	118,223	$	2,128		$	120,351

The following table presents the effect of the adoption of ASU 2014-09 on the Company's Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2017:



	Nine Months Ended September 30, 2017
	As Reported			Adoption of ASU 2014-09			As Adjusted

Net income	$	5,094		$	1,182		$	6,276
Deferred income taxes	986			795			1,781
Decrease in accounts receivable	3,106			(1,415		)	1,691
Increase in prepaid expenses and other assets, net	(895		)	24			(871		)
Decrease in accrued compensation and employee benefits	(2,170		)	125			(2,045		)
Increase in accounts payable and accrued expenses	321			—			321
Decrease in deferred revenue	(1,731		)	(711		)	(2,442		)