3. Revenue Recognition

Our revenue is primarily earned from providing connectivity and entertainment services and through sales of equipment. Additionally, to a lesser extent, we earn revenue from providing ancillary services, including installation and Connected Aircraft Services (“CAS”).

We determine revenue recognition through the following steps:

•

Identification of the contract, or contracts, with a customer

•

Identification of the performance obligations in the contract

•

Determination of the transaction price

•

Allocation of the transaction price to the performance obligations in the contract

•

Recognition of revenue as we satisfy the performance obligations

For CA-NA and CA-ROW, pursuant to contractual agreements with our airline partners, we place our equipment on commercial aircraft operated by the airlines in order to deliver our service to passengers on the aircraft. We currently have two types of commercial airline arrangements: turnkey and airline-directed. Under the airline-directed model, we have transferred control of the equipment to the airline and therefore the airline is our customer in these transactions. Under the turnkey model, we have not transferred control of our equipment to our airline partner and, as a result, the airline passenger is deemed to be our customer. Transactions with our airline partners under the turnkey model are accounted for as an operating lease of space on an aircraft. See Note 11, “Leases,” for additional information on the turnkey model.

CA-NA and CA-ROW Service Revenue:

CA-NA and CA-ROW revenue consists of service revenue primarily derived from connectivity services, and, to a lesser extent, from entertainment services and CAS. Connectivity is provided to our customers using both our ATG and satellite technologies.

Airline-directed connectivity revenue:

As noted above, under the airline-directed model, the airline is our customer and we earn service revenue as connectivity services are consumed directly by the airline or indirectly by passengers.

Turnkey connectivity revenue (passenger connectivity):

Under the turnkey model, passenger connectivity revenue is generated by services paid for by passengers, airlines and third parties.

Passenger paid revenue represents point-of-sale sessions (which may be flight-based, time-based, multiple individual session packages (“multi-pack”) and subscriptions). Flight-based, time-based and multi-pack revenue is recognized when the sessions are used. Subscription revenue is recognized evenly throughout the subscription period, regardless of the number of times the customer uses the network.

Third party and airline paid revenue is generated by sales of connectivity services to airlines or third parties in sponsorship, wholesale, enterprise and roaming arrangements. Sponsorship revenue is recognized over the sponsorship term. Revenue from wholesale, enterprise and roaming arrangements is recognized as sessions are used by the passenger.

Entertainment revenue:

Entertainment revenue consists of entertainment services we provide to the airline for use by its passengers. Revenue is recognized as the services are provided to the airline.

CAS:

CAS includes, among other things, real-time credit card transaction processing, electronic flight bags and real-time weather information. Revenue is recognized as the service is provided.

BA Service Revenue:

BA service revenue primarily consists of monthly subscription and usage fees paid by aircraft owners and operators for telecommunication, data, and in-flight entertainment services. Revenue is recognized as the services are provided to the customer.

Equipment Revenue:

Equipment revenue primarily consists of the sale of ATG and satellite connectivity equipment and the sale of entertainment equipment. CA-NA and CA-ROW recognize equipment revenue upon acceptance by our airline customers. BA recognizes equipment revenue when the equipment is shipped to OEMs and dealers.

Equipment revenue also includes revenue generated by the installation of the connectivity or entertainment equipment on commercial aircraft, which is recognized when the installation is complete.

Contract price and allocation considerations:

Our CA-NA and CA-ROW airline-directed contracts contain multiple performance obligations, which primarily include the sale of equipment, installation services, connectivity services and entertainment services. For these contracts, we account for each distinct good or service as a separate performance obligation. We allocate the contract’s transaction price to each performance obligation using the relative standalone selling price, which is based on the actual selling price for any good or service sold separately to a similar class of customer, if available. To the extent a good or service is not sold separately, we use our best estimate of the standalone selling price and maximize the use of observable inputs. The primary method we use to estimate the standalone selling price is the expected cost-plus margin approach.

The contractual consideration used for allocation purposes includes connectivity and entertainment services, which may be based on a fixed monthly fee per aircraft or a variable fee based on the volume of connectivity activity, or a combination of both. Examples of variable consideration within our contracts include megabyte overages and pay-per-use sessions. We constrain our estimates to reduce the probability of a significant revenue reversal in future periods, allocate such variable consideration to the identified performance obligations and recognize revenue in the period the services are provided. Our estimates are based on historical experience, anticipated future performance, market conditions and our best judgment at the time.

A significant change in one or more of these estimates could affect our estimated contract value, and we regularly review and update our estimates and recognize adjustments under the cumulative catch-up method. Any adjustment under this method is recorded as a cumulative adjustment in the period identified and revenue for future periods is recognized using the new adjusted estimate.

As of June 30, 2018, the aggregate amount of the transaction price in our contracts allocated to the remaining unsatisfied performance obligations is approximately $966 million, most of which relates to our commercial aviation contracts. Approximately $187 million represents future equipment revenue that is expected to be recognized within the next one to three years. The remaining $779 million primarily represents connectivity and entertainment service revenues which are recognized as services are provided, which is expected to occur through the remaining term of the contract (approximately 5-10 years). We have excluded from this amount: all variable consideration derived from our connectivity or entertainment services that is allocated entirely to our performance of obligations related to such services; consideration from contracts that have an original duration of one year or less; revenue from passenger service on airlines operating under the turnkey model; and revenue from contracts that have been executed but under which have not yet met the accounting definition of a contract since the airline has not yet determined which products in our portfolio it wishes to select, and, as a result we are unable to determine which products and services will be transferred to the customer.

Disaggregation of revenue

The following table presents our revenue disaggregated by category (in thousands):


	For the Three Months Ended
	June 30, 2018
	CA-NA		CA-ROW		BA		Total
Service revenue
Connectivity	$	88,833	$	14,548	$	47,831	$	151,212
Entertainment, CAS and other		6,913		637		294		7,844

Total service revenue	$	95,746	$	15,185	$	48,125	$	159,056

Equipment revenue
ATG	$	2,254	$	—	$	20,497	$	22,751
Satellite		21,650		18,460		4,461		44,571
Other		—		—		1,080		1,080

Total equipment revenue	$	23,904	$	18,460	$	26,038	$	68,402

Customer type
Airline passenger and aircraft owner/operator	$	54,718	$	5,097	$	48,125	$	107,940
Airline, OEM and aftermarket dealer		49,141		26,311		26,038		101,490
Third party		15,791		2,237		—		18,028

Total revenue	$	119,650	$	33,645	$	74,163	$	227,458


	For the Six Months Ended
	June 30, 2018
	CA-NA		CA-ROW		BA		Total
Service revenue
Connectivity	$	170,873	$	28,197	$	95,223	$	294,293
Entertainment, CAS and other		13,656		1,233		552		15,441

Total service revenue	$	184,529	$	29,430	$	95,775	$	309,734

Equipment revenue
ATG (1)	$	47,016	$	—	$	35,918	$	82,934
Satellite (1)		31,926		23,384		8,719		64,029
Other		—		—		2,586		2,586

Total equipment revenue	$	78,942	$	23,384	$	47,223	$	149,549


Customer type
Airline passenger and aircraft owner/operator	$	107,642	$	9,826	$	95,775	$	213,243
Airline, OEM and aftermarket dealer (2)		126,567		39,005		47,223		212,795
Third party		29,262		3,983		—		33,245

Total revenue	$	263,471	$	52,814	$	142,998	$	459,283

ATG and satellite equipment revenue for the CA-NA segment includes the $45.4 million related to the accounting impact of the transition of one of our airline partners to the airline-directed model. Approximately $43.4 million was included in ATG equipment revenue and approximately $2.0 million was included in satellite equipment revenue.

2)	Airline, OEM and aftermarket dealer revenue includes all equipment revenue for our three segments, including the $45.4 million accounting impact of the transition of one of our airline partners to the airline-directed model.

Contract balances

Our current and non-current deferred revenue balances totaled $62.3 million and $61.1 million as of June 30, 2018, and January 1, 2018, respectively. Deferred revenue includes, among other things, equipment, multi-packs, subscriptions and sponsorships activities.

Our current and non-current contract asset balances totaled $44.4 million and $5.1 million as of June 30, 2018 and January 1, 2018, respectively. Contract assets represents the aggregate amount of revenue recognized in excess of billings for our airline-directed contracts.

Our STC balances were $13.6 million and $7.6 million as of June 30, 2018, and January 1, 2018, respectively. We recognized $0.2 million and $0.4 million, respectively, of deferred STC costs as part of our engineering, design and development costs in our unaudited condensed consolidated statement of operations during the three and six month periods ended June 30, 2018. As noted above, STC costs for our airline-directed contracts are capitalized and expensed on a straight-line basis over the life of the contract.

Impact of adoption of ASC 606

The following table presents the post adoption impact of ASC 606 on our unaudited condensed consolidated balance sheet and the statement of operations (in thousands):


	As of June 30, 2018
	As Reported			Impact of ASC 606			Balances Without Adoption of ASC 606
Assets
Prepaid expenses and other current assets	$	35,092		$	(907	)	$	34,185
Other non-current assets		70,739			98,567			169,306
Liabilities
Current deferred revenue		37,275			26,055			63,330
Other non-current liabilities		83,887			106,131			190,018
Equity
Accumulated deficit		(1,132,146	)		(24,165	)		(1,156,311	)


	For the Three Months Ended
	June 30, 2018
	As Reported			Impact of ASC 606			Balances Without Adoption of ASC 606
Revenue:
Service revenue	$	159,056		$	4,514		$	163,570
Equipment revenue		68,402			(31,362	)		37,040
Operating expenses:
Cost of equipment revenue		64,350			(25,144	)		39,206
Engineering, design and development		28,409			691			29,100
Net loss		(37,207	)		(2,395	)		(39,602	)

	For the Six Months Ended
	June 30, 2018
	As Reported			Impact of ASC 606			Balances Without Adoption of ASC 606
Revenue:
Service revenue	$	309,734		$	8,906		$	318,640
Equipment revenue		149,549			(82,019	)		67,530
Operating expenses:
Cost of equipment revenue		116,643			(64,294	)		52,349
Engineering, design and development		58,186			1,542			59,728
Net loss		(64,626	)		(10,361	)		(74,987	)