Revenue from Contracts with Customers

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of that date. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company implemented internal controls to enable the preparation of financial information on adoption. The impact of the standard on the Company's financial statements relates to the Company's accounting for sales commissions. The Company previously expensed sales commissions as incurred. Under ASC 606, the Company is required to capitalize certain contract acquisition costs consisting primarily of commissions paid related to new business and upsells. Applying the practical expedient in ASC 340-40-25-4, the Company expenses commissions related to its contract renewals.

As a result of the adoption, the Company recorded an increase to retained earnings of $2.7 million as of January 1, 2018, which was the net cumulative impact associated with the capitalization of sales commissions. Additionally, the Company recorded a corresponding commission asset balance of $3.5 million and a related deferred tax liability of $0.8 million as of January 1, 2018. There was no impact to the Company's revenues as a result of adopting ASC 606.

Incremental direct costs of obtaining a contract, which consist of sales commissions primarily for new business and upsells, are deferred and amortized over the estimated life of the customer relationship if renewals are expected and the renewal commission is not commensurate with the initial commission. The Company amortizes the capitalized commission cost as a selling expense on a straight-line basis over a period of five years. The Company classifies deferred commissions as current or noncurrent based on the timing of when it expects to recognize the expense. The current and noncurrent portions of deferred commissions are included in prepaid expenses and other current assets and other noncurrent assets, respectively, in its consolidated balance sheets. Applying the practical expedient in ASC 340-40-25-4, the Company expenses commissions related to its contract renewals that have a contract term of one year or less.

Capitalized costs to obtain contracts, current and noncurrent are as follows (in thousands):



	December 31, 2018		January 1, 2018
Commission asset, current	$	1,480	$	704
Commission asset, noncurrent	$	4,692	$	2,819

For the year ended December 31, 2018, the Company recognized $1.2 million of commission expense from amortization of its commission assets. During the same period, there was no impairment loss related to the capitalized costs.

Contract liabilities (deferred revenue) balances are as follows (in thousands):



	December 31, 2018
	ASC 606		Operating Leases		Total
Deferred revenue, current	$	152,204	$	12,420	$	164,624
Deferred revenue, noncurrent	18,286		2,137		20,423
Total	$	170,490	$	14,557	$	185,047

	January 1, 2018
	ASC 606		Operating Leases		Total
Deferred revenue, current	$	130,579	$	12,607	$	143,186
Deferred revenue, noncurrent	15,419		1,717		17,136
Total	$	145,998	$	14,324	$	160,322

The Company records deferred revenue when cash payments are received or due in advance of its performance. The increase in the Company's deferred revenue balances is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations, offset by revenue recognized in the period. The Company recognized $141.3 million and $112.7 million of subscription revenue during the year ended December 31, 2018 and December 31, 2017, respectively, for amount that were included in the deferred revenue balance as of December 31, 2017 and December 31, 2016, respectively.

The Company's performance obligation is typically satisfied ratably over the subscription term as its cloud-based offerings are delivered to customers electronically and over time. In addition, the Company recognizes revenues for certain limited scan arrangements on an as-used basis. The Company recognizes revenue related to the professional services based on time and materials or completion of milestones stated in the contracts.

As the vast majority of the company’s offerings are subscription based, the company rarely needs to allocate the transaction price to all separate performance obligations. For contracts that include scanners and PCPs, the company recognizes revenue in proportion to the standalone selling prices ("SSP") of the underlying services at contract inception. If a SSP is not directly observable, the Company determines the SSP using information that may include market conditions and other observable inputs. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the size of the customer and volume purchased in determining the SSP. The Company's transaction prices typically do not include variable consideration and are

a fixed amount for a specific period of time, and the majority of contracts are twelve months with certain customers signing longer term deals. In general, the Company does not offer rights of return, performance bonuses, customer loyalty programs, payments via non-cash methods, refunds, volume rebates, incentive payments, penalties, price concessions or payments or discounts contingent on future events. Consideration is fixed at the time of the contract, and governed by the price list to which that particular customer is subject. The Company’s customer and partner-specific pricing is negotiated and agreed upon via individual customer contracts. In some of its contracts, the Company incorporates tiered pricing based on the number of IP addresses the customer can scan. As customers are required to purchase larger quantities to qualify for the lower-priced tiers, the Company does not grant its customers any material rights. When customers increase their purchased quantities, the Company accounts for the additional purchased quantities and related price change prospectively as the pricing does not impact subscription services previously provided. Physical equipment (scanners and private cloud platforms) are accounted for as operating leases and revenue is recognized over the subscription term.

Accounts receivable, net, consists of the following (in thousands):



	December 31, 2018			January 1, 2018
ASC 606 receivables	$	71,387		$	60,984
Operating lease receivables	5,121			4,244
Less: allowance for doubtful accounts	(683		)	(816		)
Total accounts receivable, net	$	75,825		$	64,412

The Company's payment terms vary by the type and location of its customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer.

The following table sets forth the expected revenue from all remaining performance obligations as of December 31, 2018 (in thousands):



	ASC 606 Expected Revenue		Operating Lease Expected Revenue		Total Expected Revenue
2019	$	46,682	$	5,067	$	51,749
2020	24,608		2,194		26,802
2021	10,730		1,071		11,801
2022	1,111		39		1,150
2023	348		9		357
2024 and thereafter	20		—		20
Total	$	83,499	$	8,380	$	91,879

Revenues allocated to remaining performance obligations represents contracted revenues that have not yet been recognized, which include deferred revenue from open contracts and the amounts that will be invoiced and recognized as revenues in future periods. Remaining performance obligations represent the transaction price of firm orders for which service has not been performed and excludes unexercised renewals. The Company applied the short-term contract exemption to exclude the remaining performance obligations that are part of a contract that has an original expected duration of one year or less.

From time to time, the Company enters into contracts with customers that extend beyond one year, with certain of its customers electing to pay for more than one year of services upon contract execution. For any discounts associated with these multiple year contracts, the Company concluded our contracts did not contain a financing component.

Revenues by sales channel are as follows (in thousands):



	Year Ended December 31, 2018
	ASC 606 Revenue		Operating Lease Revenue		Total Revenue
Direct	$	148,310	$	15,774	$	164,084
Partner	106,816		7,989		114,805
Total	$	255,126	$	23,763	$	278,889

Prior periods have not been adjusted under the modified retrospective method.



	Year Ended December 31, 2017
	ASC 605 Revenue		Operating Lease Revenue		Total Revenue
Direct	$	124,355	$	15,484	$	139,839
Partner	84,370		6,619		90,989
Total	$	208,725	$	22,103	$	230,828

The Company utilizes partners to enable and accelerate the adoption of its cloud platform by increasing its distribution capabilities and market awareness of its cloud platform as well as by targeting geographic regions outside the reach of its direct sales force. The Company's channel partners maintain relationships with their customers throughout the territories in which they operate and provide their customers with services and third-party solutions to help meet those customers’ evolving security and compliance requirements. As such, these partners may offer the Company's IT security and compliance solutions in conjunction with one or more of their own products or services and act as a conduit through which the Company can connect with these prospective customers to offer its solutions. For sales involving a channel partner, the channel partner engages with the prospective customer directly and involves the Company's sales team as needed to assist in developing and closing an order. When a channel partner secures a sale, the Company sells the associated subscription to the channel partner who in turn resells the subscription to the customer. Sales to channel partners are made at a discount and revenues are recorded at this discounted price over the subscription terms. The Company does not have any influence or specific knowledge of its partners' selling terms with their customers. See Note 11, "Segment Information and Information about Geographic Area" for disaggregation of revenue by geographic area.